Smith & Nephew plc Q1 FY2025 earnings call

Management Statement and Operational Highlights

• Operational Improvements: Building on the 12-Point Plan, achieving better product availability, commercial execution, and business unit focus. Innovation-driven growth in CORI, EVOS, REGENETEN, and Negative Pressure Wound Therapy portfolios.
• New Product Launches: Launches in high-growth categories like cementless knees, ALLEVYN Ag+ SURGICAL in the U.S., and LEGION Medial Stabilized Inserts cleared by 510(k).
• Clinical Evidence: OXINIUM shows 20-year survival rate in total hip arthroplasty at 94.1%; REGENETEN 2-year follow-up in rotator cuff repair shows lower re-tear rates.

Segment Performance

• Orthopaedics: Grew 3.2% in the quarter, 5.1% excluding China. Robotics consumable sales now recorded under procedure use. U.S. recon maintained improved performance, CATALYSTEM performing well. OUS growth: Knees 4%, Hips 7%, other recon 46.6% due to robotics.
• Trauma & Extremities: Grew 6.3%, EVOS Plating System major driver, AETOS Shoulder growing, stemless implant launch planned.
• Sports Medicine and ENT: Grew 2.4%, headwind from China, joint repair grew 2.9% ex-China, REGENETEN double-digit growth, Arthroscopic Enabling Technologies grew 3.3% ex-China, ENT grew 7.8%.
• Advanced Wound Management: Grew 3.8%. Advanced Wound Care 2.5%, foam dressings high single-digit growth; Bioactives down 2%; Skin substitutes slowing; SANTYL slow; Advanced Wound Devices 15.7% driven by Negative Pressure Wound Therapy.

Guidance

• Full year guidance unchanged on revenue growth and trading margin. Q1 had 3.1% underlying growth, expects sequential growth in remaining quarters. Tariffs expected to be absorbed within existing margin guidance. Growth expected to step up in remaining quarters with China headwinds peaking.

Risks

• Tariffs announced by U.S. government, impact on business mix. Foreign exchange volatility. China headwinds, though peaked, still a factor. Consumer dynamics and co-pay impacts on ortho growth.

Q: Two, please. The first one is on the phasing of growth through the year. On your full year call, you shared some reasonably detailed thoughts on how to think about phasing. Has anything changed in your view as you move through Q1? Can you maybe remind us of how you see top line growth progressing in Q2 and beyond. That's the first one. My second question is a product question on REGENETEN. I mean, could you maybe give us a little bit more color on what is driving growth within that product family? How big it is in your portfolio today? And then following the 510 clearance for the extra articular ligament repair at the end of last year, how much traction are you seeing there? And how big could that opportunity be over time?

A: I'll maybe take a quick shot at REGENETEN, and I'll turn to John to color. But generally speaking, Q1 was our lowest growth quarter as this is what we guided to at full year. And because of the receding impact of the headwind from China as we flow through the year and the unfavorable impact of trading days also falling away, we should have growth pick up sequentially in each of the quarters going through. So we expect in Sports for growth ex-China to continue at near double digits, and in Wound as well across all the categories to continue to build as we go through the quarter. In Orthopaedics, what we have guided to is specifically in the U.S. recon side for sequential improvement quarter-on-quarter as we get to market growth levels by Q4 of this year in recon, and we are on track to achieving that. So I'll let John cover further details beyond that, but you should expect sequential improvement as we flow through the year. In terms of REGENETEN, last year, most of REGENETEN utilization was in the shoulder. We've indicated that REGENETEN is a platform technology, and we expect to develop evidence for appropriate use of that in other joints. What we have found now is roughly 10% of our utilization of REGENETEN is actually in now foot and ankle, which is a change relative to where we were last year, and that points to increasing utilization of REGENETEN, not only with further penetration into shoulder to rotator cuff repair, but also now increasing adoption of other joints and foot and ankle is the second category. So we expect REGENETEN to be a meaningful growth driver as we called out that it's now a material part of the growth story.

Q: Next, we will have Julien Dormois from Jefferies. I have two. The first one relates to the performance of the recon business outside of the U.S. So it would be interesting if you could shed more light on what's going on outside of the U.S. So obviously, your performance in the U.S. is improving by the day, but maybe at the expense of what's happening outside of the U.S. So maybe if you could shed more light on what's happening there, that would be helpful. And the second question relates to more of a housekeeping question in light of the market swings in FX. Could you just remind us of what your expectations would be at this stage for the FX impact on your margin this year? I think you have a hedging policy in place that probably delays some of the potential benefits from a weaker dollar, but any color there would be helpful.

A: Yeah, so just on your last question on the margin impact. I think we said at the prelims, we expect the Forex to be broadly neutral. Obviously, since then, there's been a weakening of the dollar. And we think that's going to translate into a tailwind of 20, 25 bps related to the full year, of course that could change with the stepup and volatile market environment, but 20 to 25 bps or so. In terms of the question on the OUS Orthopaedics, I mean, we saw 2.7% growth for the quarter. So it seems reasonably healthy. Knees, slightly positive. Hips, a little bit more challenged, but certainly good growth in other recon, plus 46%. So good quality sales in the quarter. But overall, we're very comfortable with the trajectory. We should see Q2 be relatively similar to Q1 and then we should see a step-up in Q3 come through is the expectation. And OUS, just to remind you again on the slides, ex-China, it's 4% in Knees and 7% in Hips. Exactly and to your point, that explains the step-up as you go into Q3 as you see the China impacts starting to annualize through Q2, hence why there will be a step-up in Q3 and Q4.