Smith & Nephew plc Q2 FY2025 earnings call

Management Statement and Operational Highlights

• Revenue Growth: Quarter revenue $1.6 billion, 6.7% underlying growth. Geographically, U.S. grew 8.7%, other established markets 7.4%, emerging markets excluding China grew 12.2%.
• Profitability: First half trading margin expanded 100 basis points, on track for full year margin 19%-20%. Trading profit grew 11.2% to $523 million with margin 17.7%, up 100 bps.
• Inventory and Cash: Days of inventory reduced, trading cash flow up 70%, free cash flow $250 million in first half. $500 million share buyback announced for second half of 2025.
• Cost Savings: Operational savings ahead of expectations, targeting $325 million-$375 million run rate savings by 2027, with $210 million cumulative delivered by 2024.
• Innovation: Product launches in Orthopaedics, Sports Medicine, and Robotics, with continued focus on R&D and clinical evidence milestones.

Segment Performance

• Orthopaedics: Grew 5.5% underlying. Total Reconstruction Robotics grew 5.2% (U.S. growth 4%, fourth quarter of sequential growth improvement). Global Knees grew 2.9%, Hips 3.4%. Trauma and Extremities grew 4.4%, with AETOS contribution increasing and EVOS plating system as key driver, expecting stronger growth in second half.
• Sports Medicine and ENT: Grew 5.7%. Joint Repair grew 8.4% (excluding China, 13.7% growth), driven by REGENETEN and Q-FIX KNOTLESS suture anchors. Arthroscopic Enabling Technologies grew 2.3%, ENT grew 3.6% with ARIS for turbinate reduction.
• Advanced Wound Management: Grew 10.2%. Advanced Wound Care grew 2.6%, Bioactives recovered with double-digit growth, Advanced Wound Devices grew 12.7% led by PICO and Leaf.

Guidance

• Revenue: Full year revenue growth target maintained, with Q3 expected to see step-up due to level trading days and reversal of China impacts.
• Margin: Expect margin expansion to pick up in second half, with Orthopaedics margins expected to exit north of 14% by year-end. Tariff impact expected to be $15 million-$20 million in 2025, mainly in second half.
• Share Buyback: $500 million share buyback planned for second half of 2025, fully funded by cash flow and existing balances.

Risks

• Tariff Uncertainty: Net headwind of $15 million-$20 million expected in 2025, with uncertainty around tariff settlement.
• China Impact: Volume-based procurement in China still a factor, though peak impact passed and expected to ease in second half.
• Medicare Reimbursement: Proposed changes to skin substitute reimbursement in outpatient settings pose headwind to Advanced Wound Management sales and profitability.
• Competitive Landscape: Intense competition in Orthopaedics, Sports Medicine, and Wound Management segments, affecting market share and growth.

Question and Answer

• Q: Jack Reynolds-Clark from RBC on revenue guidance, margin, and U.S. Knees A: Deepak and John noted confidence in full year guidance, with step-up expected in Q3, margin expansion driven by revenue leverage and cost savings, and U.S. Knees softness due to surgeon transitions, portfolio rationalization, and vacation-related procedure slowdowns.
• Q: Richard Felton from Goldman Sachs on operating savings and U.S. Knees A: John highlighted 51 initiatives mobilized under 12-Point Plan, with $120 million-$130 million savings expected in 2025, and U.S. Knees softness attributed to vacation schedules and surgeon transitions, with progress seen in account base churn turning favorable.
• Q: Graham Doyle from UBS on Ortho inventory and tariffs A: Deepak and John discussed inventory reduction progress and ongoing network optimization, with margin expansion from inventory health expected in second half, and tariffs being actively monitored with strategies like the Nairobi Treaty explored but impact still expected.
• Q: Veronika Dubajova from Citi on Joint Repair growth, skin subs, and buyback A: Deepak noted Joint Repair growth driven by Q-FIX and REGENETEN, skin subs posing headwind with Medicare proposal, and John emphasized capital allocation focus on organic growth, acquisitions, dividend, and then share buyback as last option.