Full Year 2024 Smith & Nephew PLC Earnings Call
Okay.
Good morning, and welcome to the Smith, <unk> nephew, Q4, and full year 2020 for results presentation.
Speaker Change: NASA and the Chief Executive Officer, and joining me is our Chief Financial Officer, John Rogers.
Speaker Change: Looking at our full year numbers I'm pleased to be able to report that the 12 point plot is delivering financial outcomes are operational and commercial actions have combined with the high cadence of innovation to produce consistently higher growth than in the past.
Speaker Change: Margin expansion is beginning to follow driven by both operating leverage and productivity improvements, which are becoming more visible as macro headwinds ease.
Speaker Change: Better working capital discipline and asset utilization also mean that our profitability is coming with higher cash generation.
Speaker Change: Overall for 2024, we delivered 60 bps of margin expansion, 95% cash conversion, which is ahead of our target and higher ROIC at seven 4%.
Speaker Change: The fourth quarter was a good finish to the year with eight 3% underlying growth volumes were solid across most regions and the company is now setup operationally and commercially to benefit from better demand as we saw at the end of the quarter.
Speaker Change: That also meant we realize more of a benefit to our surgical businesses from the two extra trading days that we expected to see during the holiday season.
Speaker Change: Importantly, this growth did not dependent on improvement in China, which increased as a headwind just as we indicated with our Q3 trading update.
Speaker Change: Overall, China cost 280 basis points of group growth in Q4.
Speaker Change: We're now poised to deliver a further step up in returns in 2025, our outlook is unchanged, we expect revenue growth of around 5% and significant trading margin expansion to between 19 and 20%.
Speaker Change: This will come from continued operating leverage and that's the cost savings from the optimization of our manufacturing network begin to benefit the P&L.
Speaker Change: In the earlier so the 12 point plan savings, primarily went to offsetting macro headwinds from here higher savings and reduced headwinds means we can deliver meaningful margin expansion.
Speaker Change: And I want to emphasize that 2025 is not the end point.
Speaker Change: We expect continued margin accretion in 'twenty, six and 27 with many of the components of delivery that are already in place.
Speaker Change: I'll come back to these themes.
Speaker Change: So this next slide with the very familiar to you by now but that reflects how fully the 12 point plan has been embedded in Smith <unk> nephew.
Speaker Change: The plan is how we've been improving performance both for individuals teams and for the company as a whole.
Speaker Change: It also represents a more rigorous way of working that will continue beyond the specific initiatives.
Speaker Change: We're now at a point, where the outcomes are becoming more visible so before we get into the quarter's financials I'd like to set out some of our key achievements of the plant.
Speaker Change: Firstly, we have delivered a truly comprehensive program.
Speaker Change: The 12 point plan initiatives have covered all aspects of the business with Kpis and targets that have been defined for each.
Speaker Change: We've also moved the organization to a global business unit model further embedding a culture of accountability and helping us drive better commercial execution.
Speaker Change: At pace.
Speaker Change: While there's still more to do we're increasingly seeing the financial benefits come through across revenue profitability.
Speaker Change: Turn on capital and cash flow.
Speaker Change: On revenue, we have delivered four consecutive years of growth above our historical average that's backed up both by the operational improvements of the plant and also successive waves of innovation across our portfolio.
Speaker Change: On profitability, we have delivered 80 basis points of trading margin expansion since 2022.
Speaker Change: Even in the face of some profound external headwinds.
Speaker Change: We're set to deliver a step up in 2025.
Speaker Change: And the years beyond.
Speaker Change: On returns our ROIC is rising and should return to above our cost of capital in 2025.
Speaker Change: But on cash inventory days are down restructuring costs are down and free cash flow was up to more than half a billion dollars in 2024.
Speaker Change: We'll go into each of these in turn starting with revenue.
Speaker Change: If I look back to 2019 and before the company average around 3% underlying growth.
Speaker Change: That was largely steady over time, but we are growing below our markets and there was a clear opportunity if we could take that to a different level.
Speaker Change: Our priority was to reposition Smith <unk> nephew is a consistently higher growth business with the ability to drive leverage through the P&L.
Speaker Change: As I mentioned 2024 was our fourth straight year of growth above the historical average.
Speaker Change: We've had to deal with some significant headwinds such as supply chain challenges, our recon business, taking time to improve at GBP in our China Recon and joint repair businesses.
Speaker Change: Even with all of that we've delivered a clear acceleration and we expect that to continue in 2025 with our guidance of around 5% revenue growth.
Speaker Change: This step change has been underpinned by improvements from the 12 point plan, Firstly, we fixed the foundations of product and capital supply.
Speaker Change: Availability across our portfolio was at or above our target levels in 2024, having been below industry standards at the start of the plan.
Speaker Change: We've been able to bring down overdue orders by around 90% since 2022, and we're better placed to support our existing customers and pursue new business.
Speaker Change: We're also showing better commercial execution sports medicine, and mood had already moved to consistent good delivery.
Speaker Change: And I get into detailed a quarter of the quarter, you'll see that our U S. Recon business has also shown progressive improvement as we've gone through 2024 and is on track to be in line with the market by the end of 2025.
Speaker Change: And that's in line with our target.
Speaker Change: Also in orthopedics trauma, and extremities has been transformed into a high growth platform through execution on key launches across the Evo plating system at H O shoulder.
Speaker Change: Innovation more broadly remains a key component of our growth story in.
Speaker Change: In 2020 for more than 60% of revenue growth came from products launched in the last five years.
Speaker Change: That means for consecutive years around three 5% of group growth have come from innovation.
Speaker Change: New products alone are taking us to above our historical growth and.
Speaker Change: We're producing successive waves of technology that keep coming over multiple years.
Speaker Change: First we continued to add further legs of value to existing platforms, such as Corey and regenerative for.
Speaker Change: Corey we've already added 10, new features since 2022.
Speaker Change: The combination of unique functionality and the flexibility to support a range of surgeon preferences have helped us drive adoption with the installed base now exceeding 1000 units.
Speaker Change: We're now building towards a fully enabled hip platform on Corey with three D navigation as the next element to come through.
Speaker Change: Expansion to shoulder replacement is a further priority or the anatomy of the shoulder is particularly well suited to Korea handheld billing.
Speaker Change: Preop planning with choreograph will be the first step to come in 2025.
Speaker Change: For Regeneron, the new tender repair applications are already contributing and we believe more than 10% of use is now outside of rotator cuff.
Speaker Change: We're still looking to bring this technology to more groups of patients and we've recently received five 10-K clearance for use in extra articulate ligament repair.
Speaker Change: Second another wave of launch launches is already underway <unk> shoulder is a product we're very excited about.
Speaker Change: We've launched a short stent implant and plan to build out a complete platform.
Speaker Change: We have a stimulus implant that's targeted for 2025 and I have already mentioned our work to bring shoulder replacement to Corey.
Speaker Change: We've also added catalyst stem.
Speaker Change: In the third quarter of 2024. This is a new shorter stem hip system optimized for the direct anterior approach, which represents around half of the U S market.
Speaker Change: Drawing double digit.
Speaker Change: Early utilization has been running ahead of our plants with excellent customer feedback so far.
Speaker Change: You'll also see a further waves beginning to appear in 2025.
Speaker Change: At our capital markets day, just over a year ago, we talked about a number of exciting new platforms, including cross business unit digital capability.
Speaker Change: Planning to show our first next generation digital product at double AOS in San Diego, which will add video based navigation to the arthroscopic tower and bring the more consistent patient outcomes and more efficient decision, making that we've seen before and orthopedics.
Speaker Change: We're also developing a new generation of I M. Nails in trauma. This is a $1 3 billion dollar category globally, we already have a good process with inter tan and Tri Gen.
Speaker Change: We're working we're working on both tibial that hip fracture products and they'll come back with more detail.
Speaker Change: As we move towards launches.
Speaker Change: At the same time.
Speaker Change: This significantly reshaped our company both of our organizational structures and our cost base.
And 'twenty three we began the realignment of our commercial model from franchises and regions to global commercial business units with Verticalizing commercial teams for each of Orthopedics sports medicine.
Speaker Change: T and moved I believe this is a better way of doing business. It drives greater accountability faster decision, making and execution and increased customer focus in every area of our portfolio.
Speaker Change: We're now positioned to capture that Smith, <unk> nephew with a single point of leadership for upstream and downstream marketing and sales better alignment across regions and countries and dedicated presidents with full global P&L responsibility.
Speaker Change: We've been operating in this structure for a year now and have continued to enhance accountability by fully allocating attributable costs <unk>.
Speaker Change: John will give examples of what we're already seeing from these changes and I'm confident that the benefits will continue to accumulate.
Speaker Change: A second major changes, how we've addressed the cost base.
Speaker Change: We started with an initial program of $200 million of savings at the beginning of the 12 point plus.
Speaker Change: In 'twenty four we built on that by applying a zero based budgeting approach to identify further opportunities.
Speaker Change: Total gross cost savings are now expected to be between $325 million and 375 billion backed by a comprehensive and detailed set of plans across 40 different initiatives.
Speaker Change: The largest chunk is from manufacturing and procurement.
Speaker Change: But there are savings really right across all parts of the business.
Speaker Change: We've already made substantial cost savings since 2022 of around 410 basis points much of it was needed just to offset external headwinds, which were either greater than expected at the start of the plan.
Speaker Change: Or in the case of sports BBB not known at all.
Speaker Change: In particular, we faced above normal inflation that we were not entirely able to offset through leverage.
Speaker Change: Even with the higher level of revenue growth that we delivered throughout.
However, our intense focus on costs has enabled us to still increase our profitability in.
Speaker Change: In total we faced almost 700 basis points of headwinds and still delivered 80 basis points of trading margin expansion in 2000 and since 2022.
Speaker Change: 2025 is a key year of delivery would be should see the more significant margin step up that we've been working towards the elements of how we do that are largely in place with a further increase in cost saving and inflation naturally offset.
Speaker Change: By growth leverage on.
Speaker Change: On costs that includes the closure of four orthopedics facilities that will start to benefit the P&L in the second half of this year.
Speaker Change: We've also reduced our head count by around 9% overall with a significant portion coming in late 2024, so again flowing through to the P&L This year.
Speaker Change: Inflation headwinds are also less impactful than in the early years of the plan with a net of inflation to leverage being broadly neutral in 'twenty four and expect it to be in balance again in 2025.
Speaker Change: And importantly that is not the endpoint.
Speaker Change: We're well positioned for further expansion beyond 2025 enabled by better align supply and demand capacity reductions through our manufacturing coming through in our manufacturing network and the timing of lower cost as the pass through inventory and reach of our P&L.
Speaker Change: Another important.
Speaker Change: <unk> set of achievements is around our cash generation and returns profile, which is returning to a much healthier position.
Speaker Change: John will take you through the details, but overall, we're seeing clear improvement across multiple metrics metrics, we've had longstanding challenges and there's still more to come in 2025.
John Rogers: Although we wanted the detail of the fourth quarter before passing on to John to cover our full year financials.
John Rogers: Revenue was $61 $6 billion with eight 3% underlying growth with.
John Rogers: With seven 8% reported growth after a 50 basis point headwind from foreign exchange.
John Rogers: As I mentioned these growth rates reflect a strong.
John Rogers: December and include the benefit of two additional trading days.
The overall exploration was consistent across our business units, which all grew faster than in the first nine months of the year.
John Rogers: Looking by region. The U S was particularly strong with 11, 9% growth in the quarter, while other established markets grew by eight 2%.
John Rogers: The two 3% declining in emerging markets, primarily reflected the continued headwinds in China across both recon in sports Medicine joint repair.
John Rogers: For the business units I'll start with orthopedics, which grew at 6% in the quarter and eight 1% excluding China.
John Rogers: Our priority has been improving performance with U S recon and it's good to see that growth again improved sequentially in the quarter.
John Rogers: Two extra trading days helped the reported numbers, but if you normalize for that but looking at average daily sales growth still accelerated over Q3.
O U S recon growth reflects the expected slow quarter in China, our distribution partners have continued to reduce their holdings of implants, following slow and customer demand earlier in the year.
John Rogers: Inventory in the channel has come down significantly but is not yet at normalized levels. So as we indicated in November largely paused ordering is likely to continue through the first quarter of 'twenty five.
John Rogers: Excluding China, our O U S growth was much healthier at around seven points higher than it nice and six points higher.
John Rogers: Hips.
John Rogers: Other recon grew 23, 9% driven by robotics sales core continues to stand out for its flexibility and broad functionality and adoption is progressing well.
John Rogers: We had a record number of new core placements in the quarter and our global robots installed base robotics installed base was over 1000 systems by year end.
John Rogers: As you know our reporting practice in recon robotics has been.
John Rogers: Has been to recognize all of robotics capital services and consumables under other recon.
John Rogers: During 2025 will change this to be more in line with our orthopedic speirs.
John Rogers: Robotics consumables will move to being recorded under the procedure, where they're used capital in services revenue will remain as part of other.
There is still work to do first but the change this change will increase the comparability of both our implants and our other revenue growth.
John Rogers: Trauma and extremities grew nine 5%, which is a return to the segment's recent stronger growth profile.
John Rogers: After a slow Q3.
John Rogers: <unk> plating system continues to be the primary growth driver and there is an increasing contribution from the ramp of the eight O shoulder, which although still at an early stage provided around a quarter of the overall growth.
John Rogers: I'll take a moment to look more closely at U S recon growth.
John Rogers: Acceleration in consecutive quarters is what we what we said we expected with improved product availability and commercial execution under the 12 point plan.
John Rogers: The sequence of underlying growth rate is affected by trading dates with two more days in Q4 'twenty four than in the prior year quarter, one more in Q2 and one fewer in Q1.
John Rogers: The slide shows the growth in average daily sales as a way of adjusting for these trading day effects.
John Rogers: There are two points I'd like to highlight firstly, what the curve flattened so that'll there's still clear sequential improvement in both U S knees and hips.
John Rogers: Secondly, this average daily sales growth rates are more breath, a more representative measure for how the business exited 2024 compared to the unadjusted growth rates would therefore using them as a starting point for thinking about the beginning of 2025, when both Q1 and Q2 will have one fewer trading day that in.
John Rogers: 2024.
John Rogers: Moving onto sports Medicine, and E&P, which grew at seven 8% the segment as a whole continues to grow well and consistent performance over several years mean sports medicine now has a level of sales comparable to our recon and robotics business.
Joint repair grew five 3% overall and 15, 9%, excluding China with more than 10 percentage point headwind from the impact of BBB.
John Rogers: We will lap those price reductions in the middle of 2025 and.
John Rogers: And the rest of the World, we had a particularly strong finish in the U S probably benefiting from the end of year co pay effects.
John Rogers: Regenerative <unk> remains a key driver with strong double digit growth seven years into our ownership.
John Rogers: The broader segment is also starting to see a contribution for our development developing foot and ankle business. This is an attractive new category for us It was closer in scale to hit prepare that due to the largest shoulder knee category.
John Rogers: It Leverages, our existing sports medicine commercial organization and is synergistic with some of our specialist trauma products.
John Rogers: Autoscope, enabling technologies grew eight 5% with growth across auto Scopic tower and continued strong double digit growth from verbal fast deal.
John Rogers: However, we anticipate a year of slower growth for AEP in 2025.
John Rogers: China BBB process on mechanical resection blades and correlation wants is expected and likely to take effect in the second half of 'twenty five.
John Rogers: We expect to twenty-five sales headwind of around $25 million, including both the direct price impact I'd expected channel adjustments ahead of that implementation.
John Rogers: This means that while it will be noticeable in ADT. It should be a smaller factor at group level that the joint repair process and is reflected in the guidance that John will set out in a moment.
John Rogers: E&P grew 19, 4% with multiple factors behind the strong quarter.
John Rogers: Q4 had a normal prior year comp after a more difficult comp in Q3.
John Rogers: We saw some procedure value volume catch up after an unseasonably slow Q3, and our console and adenoid business and that's on top of the ongoing customer acquisitions that are part of the longer term growth story.
John Rogers: Growth has been volatile from quarter to quarter through 24, and I would take the full year growth numbers of seven 3% is more representative of the fundamental business performance.
John Rogers: I'll finish with the advanced wound management.
John Rogers: Segment, which delivered its highest growth quarter of the year at 12, 2%.
John Rogers: Advanced wound care grew one 9% consistent with the year as a whole.
John Rogers: Forms where again a high growth category within EWC, which was led by 11.
John Rogers: Overall business unit growth came mainly from bioactive and devices.
John Rogers: Bioactive growth of 23% was driven by skin substitutes and in particular, the launch of graphics plus.
John Rogers: The ramp is following quite a common pattern, it's getting skin substitutes with an initial period of rapid growth that then quickly normalizes.
John Rogers: We also saw strong growth in central late in the quarter, whereas we've said before we see volatile stocking patterns with all of that in mind, we expect bioactive to return to low single digit growth in 2025.
John Rogers: I know, there's a lot of interest in skin substitute lcd's.
John Rogers: Where implementation has been delayed and is now scheduled for April.
John Rogers: Our expectation is still that the overall effect on our business will be broadly neutral with the benefit of good coverage for our portfolio likely to be offset by a smaller overall market size.
We're not seeing the evidence of changes in the market in anticipation.
John Rogers: Advanced wound devices growth of 26% was mainly from our negative pressure wound therapy portfolio, we've talked more about that.
John Rogers: What we're doing with Radishes Pico acceleration is also a big part of our plans with the largest growth opportunities and surgical site complications and in chronic wounds.
John Rogers: This remains a high growth category I think we expect Pico momentum to continue into 2025, so with that I'll hand over to John to cover the full year financials John.
John Rogers: Thank you Deepak so coming to the full year 2020 full financials.
John Rogers: Full year revenue was $5.8 billion up five 3% versus 2023 on an underlying basis and up four 7% on a reported basis.
Note that excluding the headwinds from China growth would have been plus six 7% on an underlying basis.
John Rogers: Performance was broad based with all three reporting segments contributing significantly to the overall group.
John Rogers: As you can see in the chart orthopedics grew four 6% sports medicine, and Ian Tea grew six 2%, although again, excluding China growth would've been 10% and.
John Rogers: And AWS grew five 1%.
John Rogers: We beat our revised Q3 expectations for the full year as a result of a very strong December.
John Rogers: Where we had somewhat discounted the benefit of the two extra trading days, which turned out to be good across our surgical businesses.
John Rogers: We set out the challenges in the Chinese market for both our road, both the <unk> and sports businesses at our Q3 trading statement.
John Rogers: And the Q4, China performance was in line with these expectations.
Speaker Change: Overall, a good set of growth figures and particularly good to see that more than 60% of all grades is drawn from products launched in the last five years as covered by Deepak <unk>.
John Rogers: This gives us a degree of confidence coming into 2025.
John Rogers: Looking at the trading P&L gross profit was 4.09 billion with a gross margin of 73%, which is 40 basis points below 2023.
John Rogers: The gross margin pressure came in the second half of the year as we began to see the price impacted joint repair Pvp in China.
John Rogers: Trading profit was 1.05 billion up eight 2% year on year.
John Rogers: Hofmann trading margin expansion was 140 basis points in half two margin went back 20 basis points due to the China headwinds, resulting in 60 basis points of trading margin expansion for the year to 18, 1%, which is slightly above the guidance, we gave with our Q3 trading update.
If you unpack the 60 basis points of margin expansion, we saw a drag of 40 basis points on gross margin offset by a 100 basis points of positive leverage across our operating expenses as we benefited from operational savings.
John Rogers: 40 basis points of that came from slightly lower R&D costs at the half year. If you remember we were down 7% year on year on an R&D spend we expect it to catch up some of the shortfall in the second half, but ended broadly flat in half to do some efficiency savings being delivered.
John Rogers: We remain committed to our R&D spending continues to look for ways. We can drive efficiencies in this area, our new product pipeline for 2025 is very exciting and a testament to the hard work by our R&D colleagues.
John Rogers: Looking further down the P&L adjusted earnings per share grew by one 7% to 84 three.
John Rogers: That's below the growth in trading profit due to the higher tax and interest expense that we set out in our technical guidance for the start of the year. Our tax rate was 19, 1% in line with the guidance of 19% to 20%.
John Rogers: I first earnings per share of <unk> 47.2 cents grew significantly faster primarily due to the lower restructuring charges than in 2023, along with lower costs from the now completed EU MTR program and the provision release relating to metal on metal.
John Rogers: On restructuring charges for the full year were $123 million down from $220 million in 2023.
John Rogers: 12 point planned spend was $66 million, bringing spend to date to $253 million and leaving around 22 million of spend to come through in 2025 total the 275 million we guided to.
John Rogers: We also took a reduction in our head count in November in order to accelerate operational savings coming into 2025, and we also closed a manufacturing facility that wasn't part of our original 12 point plan.
John Rogers: Cost of all of these programs over 'twenty three 'twenty four 'twenty five is screened and $24 million and they deliver annualized benefits of $239 million. So about a one and a half year payback.
John Rogers: Overall, we expect restructuring costs in 2025 to be around $45 million, including the remaining $22 million on the 12 point plan and around a third of the spend in 2024.
The full year dividend is proposed to be unchanged at 37 and half cents per share.
Slide 21 shows a more detailed trading margin bridge, we absorbed headwinds of 130 basis points from input cost inflation and merit increases 10 basis points from FX and 90 basis points from China <unk> pricing.
John Rogers: There were these were more than offset by 130 basis points of revenue leverage from price and volume and 160 basis points of productivity improvements delivering 60 basis points of margin improvement for the year.
John Rogers: To help you reconcile what we said at the Q3 trading statement tore out turn.
The margin headwind from BBB price was around 20 basis points higher than originally expected.
John Rogers: With a further negative effect on volume leverage of about 10 to 20 basis points captured here in the revenue leverage ball and in line with the circa 40 basis points, we guided to at Q3.
John Rogers: However, the better finish to the year, particularly in our higher margin U S business has dropped three strongly to trading profit the resulting leverage combined with a little bit more upside on Forex has offset the predicted China effect, bringing us back to our original guidance of 80% plus for the full year.
John Rogers: The overall picture for the full years that revenue leverage is broadly offset input cost inflation, which means that BBB aside cost savings have been able to drop through to trading profit.
John Rogers: Drilling down into the details of these efficiency savings we are on track to deliver in line with what I set out at the entrance.
John Rogers: We have already made broad based savings across all areas of the group, including manufacturing procurement and operating expenses.
We finished 2024 at a gross saving run rate of $210 million and with significantly more to come in 2025 and beyond.
John Rogers: Our <unk> implementation is on track across all be used in central functions across our five work streams 51 initiatives, we mobilized of which nearly half are now complete.
John Rogers: Expected 2025 savings are slightly ahead of our initial diagnostics outlook, driven by amplifying and accelerating the head count savings I referred earlier in Q4 of 2024.
John Rogers: We are currently embedding our <unk> approach into our standard processes and the 2026 budgeting process design.
John Rogers: We've been working to reduce our head count for some time and we've made good progress. We finished the year with a total head count around 9% lower than that at the end of 2022 and with a bigger reduction in 24 and 23.
Speaker Change: Photo ready to the actions taken in November 24, with head count reducing from Q4 of 'twenty four into Q1 and Q2 of 2025.
Speaker Change: The associated cost savings were mainly through flow through to the P&L in Q2, and the second half in line with the flow through of savings from our manufacturing network optimization program supporting our margin expansion, particularly in the second half of the year.
Speaker Change: Our 2025 trading margin guidance is for 19% to 20%.
Speaker Change: Overall for the year, we are forecasting just over 100 basis points of headwind from China, Pvp as I said slightly higher in half one easing off ended in half two.
Speaker Change: This is more than I indicated at the Interims because of the volume impact like coupled with our Q3 trading statement and the additional headwinds in China Eiichi Pvp in half two.
Speaker Change: We expect input cost inflation and merit to be more than offset by revenue leverage supported by the significant cost savings driving margin expansion.
Speaker Change: As mentioned earlier these operating savings are weighted towards the second half the combination at this with the timing of the China Pvp effects, we expect nominal margin expansion half one with a significant step up in the second half delivering a margin of 19% to 20% for the full year.
Speaker Change: Going into 2026, we expect continued margin expansion as we annualized cost savings and continue to drive greater efficiencies in our business.
Speaker Change: Coming on now to our trading margin by business unit.
Speaker Change: As Deepak covered earlier, we have transitioned the organization to a global business unit model.
Speaker Change: Further embedding the culture of accountability, and helping us drive better commercial execution at pace.
Speaker Change: At the Interims, we committed to providing additional disclosure on the performance of our business units and to move to fully allocating attributable central costs.
Speaker Change: Slide 24 shows the margin by business unit under the new methodology.
Speaker Change: The effect of the change has been similar across the business with each segment's 2023 trading margin between 620, and 670 basis points lower than under the previous approach.
Speaker Change: All three business units delivered trading margin expansion in the year with a 20 basis point increase of orthopedics 120 basis points of sports medicine in E&P and 50 basis points for advanced wound management in.
Speaker Change: In each case, we would also have seen margin expansion onto the previous allocation approach.
Speaker Change: Broadly speaking expansion came from Opex savings and leverage across all three business units that.
Speaker Change: There was also some variation from mix effects, notably in orthopedics, where the higher margin U S business grew below the international business, particularly in the first half of the year.
Speaker Change: For 2025, you should expect the bulk of margin expansion to come from orthopedics.
Speaker Change: Over 200 basis points with accretion of over 50 basis points coming from both sports Medicine and AWS.
Speaker Change: Okay.
Speaker Change: With this fuller allocation in place only $52 million remained as truly central costs, and we anticipate <unk> to be broadly flat year on year in 2025.
Speaker Change: The purpose of the change was to create transparency accountability and that already positive behavioral changes as a result.
Speaker Change: We've seen greater scrutiny of spending plans lower demand for new projects and greater discipline and constructing robust business plans.
Speaker Change: <unk> investment.
Speaker Change: As an example.
Speaker Change: Accountability at the Bu level also arises at the balance sheet as well as the P&L in particular for our inventory balances, which as you know has been a priority under the 12 point plan.
Speaker Change: Slide 25 shows the development of DSI through the year, both for the group and for each of the business units.
Speaker Change: 507 overall inventory days at the end of 2024 with a 23 day improvement.
Some initial build in the year it was necessary to support launch launches, including a toxin renesys edge that as product shipments and set at home has ramped up we saw DSO I come down across all three business units in the second half.
Speaker Change: There was still an overall increase in inventory for launch products for the full year and this means that as well as group DSI improving our inventory mix has also improved with units at the slowest turning quartile of Skus down by 17% during the year.
Speaker Change: Longer term improvement will be down to improve forecasting and better alignment of production plants with the commercial needs of the SKU level enabled by the improved SIOP process under the 12 point plan.
Speaker Change: There is still more work to do including aligning our swipe process with our financial forecasting and a truly integrated business plan.
Speaker Change: Imagery reduction remains a focus and we expect further progress in 2025.
Speaker Change: The business is increasingly focused on driving improvement in capital returns.
Speaker Change: We have made solid progress in 2020 for delivering a 150 basis point improvement in ROIC to seven 4% at the group level and we expect to see that.
Speaker Change: It returned to a level above our cost of capital in 2025.
Speaker Change: For the last two years most of the ROIC improvement is being driven by operating margin expansion and particularly by restructuring charges coming down in orthopedics for the longer term growth set focus on driving better asset utilization and reduced inventory as I've already covered.
Speaker Change: We expect a doubling of returns in our orthopedics business in 2025 with further progress in 2006 and beyond and more measured progress in both our sports and wound business units in 2025.
Speaker Change: This work of course is made more precise by recent allocation of central costs of the business units and more granular allocation of capital and a greater focus on capital efficiency measures such as set turns.
Speaker Change: We also remain focused on more disciplined capital allocation across our businesses and greater focus on working capital with significant improvements delivered in 2024.
Speaker Change: Which is a useful useful segue to our cash flows for 2024.
Speaker Change: So moving on to cash flow trading cash flow was 999 billion for the year.
Speaker Change: 95% conversion was ahead of our target and well ahead of the 65% in 2023 the.
Speaker Change: The improvement came primarily from lower working capital costs, particularly from inventory and payables capital expenditure was also lower versus an elevated level of spend in 2023.
Speaker Change: Working capital remains a focus for 2025 free cash flow also improved to $551 million helped by $95 million improvement in the restructuring acquisition legal and other line reflect reflecting the lower paying a restructuring cost of $123 million a year that I mentioned earlier.
Speaker Change: We expect further improvement in free cash flow in 2025 to over $62 million driven by further improving trading profit and restructuring costs will be less than half of 2024 at around $45 million.
Speaker Change: Free cash flow will be an increasing focus in the business as evidenced by shift away from trading cash conversion to a free cash flow measure in the performance criteria used to incentivize our most senior people.
Speaker Change: Overall, our cash generation and returns profile is returning to a much healthier position.
Speaker Change: As I've set out we're already seeing clear improvements across multiple metrics. When we've had longstanding challenges and there's more still to come.
Speaker Change: As a result of our strong cash flow net debt came down during the year to $2 7 billion, which is a decrease of $67 million.
Speaker Change: We expect the trends behind our improved free cash flow to continue in 2025, including good growth in margin expansion lower working capital costs and significantly lower restructuring costs.
Speaker Change: Capital allocation will become a more active consideration as a result as a reminder, we are focused first on investing for organic growth followed by acquisitions paying a dividend and lastly, returning any excess capital to shareholders. We finished 2024 with a leverage ratio of one nine times adjusted EBITDA, which is within our target.
Speaker Change: <unk> of around two times for.
Speaker Change: For the use of excess cash will continue to look at tuck in M&A in line with our policy and growth strategy and I would note that at the current valuation of our equity the financial return on share buybacks is a very relevant hurdle for M&A.
Speaker Change: I'll finish with our outlook for 2025.
Speaker Change: For 2025, we expect underlying growth of around 5% that includes continued progress in U S. Recon on an ats basis, noting the swing from two extra days in Q4 to one fewer day in Q1 and Q2 of 2025.
Speaker Change: We also expect continued good growth in all of sports Medicine, ex China, E&C, and AWS, including bioactive returning to low single digit growth as the benefit of graphics plus launch phase.
Speaker Change: China will still be a significant growth headwind as Deepak highlighted our guidance includes a total headwind of around 150 basis points for the full year, but still results in solid.
Speaker Change: Underlying growth overall.
Speaker Change: As previously indicated we also expect a significant step up in profitability in 2025 with the trading margin between 19 and 20%.
Speaker Change: That step up will come from operating leverage further operating cost improvements and the benefits of network optimization program beginning to reach the P&L, particularly in the second half and these effects were more than offset the headwinds from China and inflation.
Speaker Change: There were also significant phasing considerations in 2025 on growth, we expect that some of the strong finish to 2024, particularly in U S. Sports Medicine was supported by yearend patient copay effects. It will normalize in Q1.
Speaker Change: Also China Recon will remain slow in the first quarter and the growth headwinds from joint repair the people roll off in the middle of the year.
Speaker Change: In addition, we will have one fewer trading day compared to 2024 in each of Q1 and Q2 and then one extra day in Q4, putting all of that together.
Speaker Change: We expect growth to be around 1% to 2% in Q1, and then accelerate for Q2 and the second half.
Speaker Change: We also expect the trading margin to be stronger in second half than the first as I've already commented, we expect greater margin seasonality than in 2024 with only nominal year on year expansion in the first half and for the full year margin expansion will be mainly driven by half two as.
Speaker Change: As we did last year, we'll give more specific margin face in detail with our Q1 trading update.
And now I'll hand back to Deepak.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Thank you John.
Speaker Change: So encouraged by how we are positioned coming out of 2024, it's good to have delivered on both growth and margin, but whats most.
Speaker Change: Encouraging is to see the trough quite planned benefits more visibly coming to fruition.
Speaker Change: We started out with a comprehensive program of actions, which first showed improvement and operational Kpis and is now delivering an inflection across the full range of financial outcomes.
We know that there is still much more to do.
Speaker Change: But we're well position for our key year of delivery and 25.
Speaker Change: On revenue, we're continue continuing to improve in U S recon.
We're delivering successive waves of innovation and we're demonstrating our ability to turn that into a level of growth that can drive natural leverage.
Speaker Change: We've also taken broad action on our cost base with.
Speaker Change: With the result that Theres, a step up in savings across manufacturing and operating expenses poised to flow through to our P&L and twenty-five.
Speaker Change: So I look forward to updating you through the year as we move towards our goals.
Speaker Change: But I'd like to finish today on a personal note.
Speaker Change: As you May know, Phil County has recently announced.
Speaker Change: That he will retire later this year.
Speaker Change: Phil came to Smith, <unk> nephew 17 years ago.
Speaker Change: He had more hair then.
Speaker Change: And that's been a pillar of the company across a number of roles.
Speaker Change: Most recently he served as a chief corporate development and corporate Affairs Officer.
Speaker Change: And for me.
Speaker Change: He has been an invaluable source of support.
Speaker Change: And advice.
Speaker Change: In my time as CEO.
Speaker Change: I'm sure you'll join me in wishing him all the best for retirement, Phil. Thank you very much for all your tremendous contributions to the company over 17 years.
And now we can move on to questions.
Speaker Change: Jack.
Thanks for the questions Jack Brennan Sklar from RBC I have three please first on China.
Speaker Change: And so you're going to what gives you the confidence the orthopedics she's going to recover towards the end of Q1.
Speaker Change: How much visibility do you have.
Speaker Change: Into on market and market demand.
Speaker Change: Also on China within sports are you seeing kind of volumes tick up as you had previously expected.
Speaker Change: Second question was just on U S hips and knees.
Speaker Change: So could you just remind us at this point kind of what gives you confidence that the.
Speaker Change: The geography will kind of now grow in line with the market come to come the end of June 25.
Speaker Change: Just to give a bit of confidence. There then the final question is on R&D.
Speaker Change: Obviously, you said that R&D would take off in NIH too and I think theres been a bit of kind of nervousness that R&D is being used perhaps to kind of manage margins could you just kind of give us a bit of confidence again that is not the case it won't be the case is 235, great. Thanks for the questions Jack So first with China.
Speaker Change: We had indicated in Q3 that we had seen a softening in end user demand. So there's in China just to remind you there is a tender business.
Speaker Change: Is it off tender business, it's the same price.
Speaker Change: But you've got committed volumes in the tender business at free float in terms of volumes in the off tender business.
Speaker Change: What we had seen a softening of demand in that office out of the business.
Speaker Change: So ordering it stopped because the inventories built up in the channel and as I indicated we're seeing inventories come down, but we expect in Q1 that some of that to continue and to recalibrate.
Speaker Change: And so as we commented Q4 of 24 played out as we had indicated that it would and nothing that we've seen so far indicates that Q1 will be any different so Q1 should be the low watermark in terms of inventories coming down to equilibrate from there on out it will be our ability to.
Speaker Change: Service the market and I'll remind you that we've got committed volumes for four tenders at a price that we know so that's how we expect the recon but to play out.
Speaker Change: With sports.
Speaker Change: In the first half of the year it will be essentially the sports VP on joint repair playing through.
Speaker Change: And then in the second half of the year that we will have lapped that what will come concomitantly is.
Speaker Change: The BP for ADT.
Speaker Change: Third we expect to kick into gear in the second half of the year as with the joint repair in house with orthopedics there'll be adjustments in the channel.
Speaker Change: As we lead up to that so.
Speaker Change: So putting all these effects together.
Speaker Change: We feel confident in a having pegged.
Speaker Change: How that's going to play out haven't been shaped by the experiences over the last few years and our guidance actually contemplates. The combination of these two effects just China do anything to agile, Washington, saying just in terms of the actual numbers that we've got assumed an all in our budget for 2025 for China.
Speaker Change: The the first half on orthopedics, we are predicting it's going to be down sort of 60 to 70 Central Hudson said, we're fully baking in the experience that we saw through at the end of the end of 2024, and we do expect to see some of that recovery come through in the second half. So I think we're being very sensible about the the numbers we're using.
Speaker Change: On sports Medicine, again, we're reflecting the Q3 Q4 performance of 24 coming through into 'twenty fives in the first half will be down almost 50% against our budget. So I think we've been sensible using the history that we've seen in the second half of 'twenty four to build that into our <unk>.
Speaker Change: Cost of the 2025, and that's fully baked in into our guidance for the full year.
Speaker Change: This is your second question about U S hips and knees.
Speaker Change: The confidence comes from us having executed multiple elements of our transformation program over the last couple of years. The first is improving supply which is a substrate to this whole thing as I've commented on previous calls.
Speaker Change: U S specific skus with Alaska recover we didn't plan it that way, but this is how things unfolded hips recovered before needs to from a supply standpoint, but as we commented in 'twenty four we're now back to our target levels. So thus the first part secondly, concomitantly.
Speaker Change: We've been improving our commercial execution, there's multiple facets to that its leadership.
Speaker Change: It's our organization of our selling organization, we've made some improvements in Howard setup, how weak performance managed and also the process will be used for performance management and orthopedics. We're just fine on the other parts, where we had improvements to make in those areas all of those we've been driving at the upshot of it is as I look at custom.
Speaker Change: Sure.
Speaker Change: Through 'twenty, three and 'twenty four the story was we lost more customers than the gate.
Speaker Change: Now as we exited 2024 that balances now in favor of us winning more customers than we've lost that gives us a more stable account base as we've reduced churn.
Speaker Change: And on the back of our portfolio.
Speaker Change: You know, we still have work to do to add to that portfolio, but we've got a portfolio and a strategy for commercializing that portfolio that I feel good about catalysts term b.
Speaker Change: A great growth driver because we are now able to fully participate in the direct anterior approach, which is the high growth part of hips they've.
Speaker Change: We've got core now that's got tremendous functionality truly setting the standard in terms of robotics.
Speaker Change: For knees and Theres more to come and hips. So I look at the growth drivers from a product standpoint.
Improvements, we've made to commercial execution and supplies of substrate all of those translate into confidence that I feel that we're going to continue this improvement trajectory that you clearly see that we've laid out just the U S question and maybe this is again just to build on the numbers I say as Deepak <unk> chart showed at the end of the year, we were exiting it.
Speaker Change: Circa 2% <unk> growth.
Speaker Change: We will deliver to the slightly ahead of that in Q1, not not much though but then we'll see that grow too.
Speaker Change: We're saying by the end of the year.
And therefore in line with the market, which is consistently with what we said now for the last 12 months I will say that we expect to get to market growth by the end of 2025.
Speaker Change: Regarding R&D.
Speaker Change: As I've commented.
Speaker Change: Multiple times, including today innovation is a key part.
Speaker Change: <unk> of our growth story, we've called out that 60% of our growth revenue growth came from new products. That's on top of nearly 50% in 'twenty three.
Speaker Change: Revenue growth came from new products. So this is an important part of what we do so I wanted to make our margin number by cutting R&D would have done that two years ago.
Speaker Change: Right.
Speaker Change: So that is not a level, we're looking at but when you look at year on year comparisons of course, R&D R&D looks down the road.
Speaker Change: Primarily primary part of that is onetime effects and those were related to some productivity.
Speaker Change: The measures that we took and actually EU MTR that was.
Speaker Change: Obviously, a one time thing that rolled off into 2024, we havent cut any programs in fact added programs. Despite the margin pressure that we feel so all of the shoulder.
Speaker Change: Programs on Corey that was added on top of when we started the 12 point plan program rounding out the portfolio of shoulder, what we had aspirations for that what we've actually done is accelerated our implant program and on the knee side, we've actually accelerated some programs within that as we look to.
Speaker Change: To make our portfolio more competitive so in terms of the substance of what we're looking to do in R&D, which is the programs.
Speaker Change: I feel very good about the level of funding that we've got and really the level of innovation that has gone into those programs and you can see the track record you can measure that in terms of revenue growth contribution that we can look at it in terms of number of products launch you can look at it and trumps a number of first.
Speaker Change: Terms of category, creating products, we've brought to bear all of those tell the story of innovation, where med Tech business innovation is key to us would be to punch above our weight class. So that's the reassurance that I hope I can provide around around R&D and then the 4% reduction year on year in there.
Speaker Change: In R&D, it's just a natural consequence of where the spend occurs within within our R&D programs, there isn't coming from cutting programs, but as we go through different milestone suspend level tends to vary so we aren't backing into the R&D number based on a margin target, but rather driven by what we think we need it to other programs to be successful.
Speaker Change: And also when you look at.
Speaker Change: The margin accretion for the year, the 60 basis points, we get 60 basis points of improvement coming through from our improved SG&A spend.
Speaker Change: So one would argue that the key leverage areas for cost savings that we deliberate coming through providing that margin accretion here and we'll see more of that of course in 2025.
Speaker Change: It's not it's not R&D is the SG&A reduction that's driving our margin expansion.
Speaker Change: Okay. Thanks, a lot.
Style Pound: Hi, This is a style pound from Bernstein and asking the question on behalf of Lisa Clive.
Speaker Change: So the first one is can you discuss your average rate. These sks in hips and knees is the significant reduction required to get orthopedics to structurally higher mid to high mid to high teens, EBIT margin or perhaps another way of saying it how much is your large number of platforms in both hips and knees contributing to the low margin profile.
Style Pound: The recon business.
Style Pound: And the second question related to margins. So most of your margin improvement is clearly coming from orthopedics can you give us a bridge in terms of rough proportion of uplift in this division.
Style Pound: It will be coming from a reduction in Cogs operating leverage or any particular areas of cost savings.
Style Pound: Shouldn't that sorry, and the last one.
Could you discuss the competitive dynamics in the Chinese market, specifically your Chinese recon business. So after the large decline in Q3 and Q4 have you lost shares in the market, especially to local players and have you seen like the buy local campaign. The trend is notably like accelerated or is just an aberration.
Style Pound: Thank you thanks for the questions. So I'll take the first and the third one I'll have John just the second part.
Style Pound: So I'll take those first first and third.
Style Pound: In terms of stool reduction that is an element of.
Style Pound: Our plan and actually he was one of the sub sub items. So the 12 point plan.
Style Pound: Where we have actually over the last few years significantly reduced the amount of Skus and those are primarily in Asia and certain emerging markets. We have seen the benefit of those right in terms of platforms.
Style Pound: That's a much trickier bit to execute because you've got a new customer account base that you've got to protect its not always easy to transition from one platform to the other the good news here is we've already made good progress it's important over the longer term, but in order to achieve where we need to get to 25 and 26% 27, it's not the.
Style Pound: The biggest lever that will get us there.
Style Pound: Does it have for challenges for us from a.
Style Pound: From a scale efficiency standpoint, yes, it does but.
Style Pound: But in the end you've got other levers we are pulling in order to deliver the margin expansion. So that's the that's a short answer to the skew story good progress.
Style Pound: Has deliberate we expected to deliver going forward. It's a part of the plan, but it's not the biggest part of the client types of margin expansion.
The third part it was China.
Style Pound: You asked about recon, but there's a little bit also in sports.
Style Pound: We have we have lost share.
Style Pound: Part of what we see the government doing is in addition to addressing the cost base or health care spend where V. B piece of your vehicle for controlling that there's clearly a push to support local manufacturers right and so we should expect that some of them will step in and start to play a bigger role in the market and we have seen.
Style Pound: That come through.
Style Pound: And largely our recon business or some of the the.
Style Pound: The volume impact of beef that we've talked about in the past really comes from local players being more competitive in that free float segment that I talked about earlier and recon. So it is true that that is a bigger factor of our losing share in sports.
Style Pound: Maybe the effect is not quite as pronounced but but it is the same dynamic nonetheless, so theres a price impact and we expect local players to come in and step in.
Style Pound: Two that I'd be under called out a bit and sports you'll be had but.
Style Pound: But we've been shaped by the experience of particularly as we discussed in Q3. So so that's the third question John you want to take the second question on with the margins, yes. So on margin expansion by business unit just to contextualize, obviously be out turned 24, letting the half percent margin for our orthopedics business.
Style Pound: 24% to sports in 23 separate for wound.
Style Pound: Now, we will expect both wound and sports to accrete by 50 basis points, plus so we will expect to see margin expansion come through there, but clearly starting at a very high level that will be more muted. However in our orthopedics business. We would expect at least a step up of 200 bps from 11 and a half so.
Style Pound: At least 30 in half hopefully getting towards 14, the key drivers behind that are twofold.
Style Pound: First of which is is obviously operational leverage coming through through growing our top line and recovery in our U S, who will say pdx business as we've already talked about and the second one which of course is is a big chunk of that will also come from savings, particularly the closure of the four manufacturing units that support that business and the benefits.
Style Pound: Those savings coming through in the second half of the year. So two big levers on orthopedics to deliver that 200 margin 200 bps of margin expansion operational leverage and manufacturing cost savings.
Robert Davies: Good morning, Robert Davies from Morgan Stanley two questions.
Robert Davies: One was just on the head count reductions Silversea being quota notable sort of stepped down I noticed your one off costs or not.
Robert Davies: Not quite so big and twenty-five was 24.
Speaker Change: Just maybe give us a bit of context from where you are in the head count reduction program, what's left where those people actually coming out of them.
Speaker Change: And then the second one was just around potential tariff risks across different parts of your business, perhaps you could give us a little color on that thank you.
Speaker Change: On head count.
Speaker Change: So.
Speaker Change: Most of the headcount reduction comes from the factory closures, which is part of the network optimization.
Speaker Change: So that's almost all in orthopedics.
Speaker Change: Had more capacity.
Speaker Change: Good.
Speaker Change: But as part of the broader cost savings programs, we've actually gone after efficiencies right of course.
The groups are significant and SG&A.
Speaker Change: Initially it was as we transitioned into the business unit model.
Speaker Change: That was back in 2023, but there's actually significant SG&A related head count savings as well.
Speaker Change: And so.
Speaker Change: And then in 'twenty four you noted that the the step up in reduction if you will we had to make some difficult decisions. There we've actually pull forward. Some of the things we had planned for and twenty-five into 'twenty four as we grappled with the additional headwinds so relative to where we started the trial. The 12 point plan inflation has been higher for longer.
At DVT impact.
Speaker Change: In sports, which we didn't have at the time, we announced the program and not only joint repair now coming into a T has meant we've had to go deeper than we originally set out to do in the 12 point plan. The zero based budgeting approach was one of the vehicles, we use to get there, but we've largely done the big bulk of what we set out.
Do 25 is the year when the benefits of those actions will flow through into the P&L such that the head count both in terms of where it is and how we're thinking about this phasing or sequence of it in terms of tariffs. Obviously the headline is it's a dynamic picture right. It's hard to know how things will actually settle out when you.
Speaker Change: Look at what's been announced so far.
Speaker Change: This is primarily on China that is within the realm of what.
Speaker Change: We had contemplated within the realm of what we've what we expect and ill also remind you that tariffs in China is not a new thing we've had to navigate that also in the past administration.
Speaker Change: The topic of reciprocal tariffs and the impact of that at this point, it's hard to know how that's actually going to play out.
Speaker Change: The headline for US is we've got we've got a team looking at looking at it in terms of the U S.
Speaker Change: The largest proportion of our U S business history through.
Speaker Change: Manufacturing plants in the U S.
Speaker Change: So we are reasonably well covered there but.
Speaker Change: But where we expect the impact to directly answer your question. It would be primarily in our balloon business. We've got a significant presence in China in terms of manufacturing.
Speaker Change: But having said that.
Speaker Change: All of our scenario.
Speaker Change: Analysis, we've done.
Speaker Change: Leads us to believe within the realm of the impact it will be the realm of what we expect but but the headlines.
Speaker Change: Again is this dynamic.
Speaker Change: It's hard to know how it's going to play out exactly.
Speaker Change: Just just a build for a second on the pass comment on that the head count.
Speaker Change: So we're not sort of.
Speaker Change: Planning any major sort of head count reduction plans in 2025 per se that that said.
Speaker Change: This whole philosophy of <unk>.
Speaker Change: B B that we've embedded in 2024, we want to make sure it becomes in our DNA and our way of working.
Speaker Change: And so as we set our budgets for the 2026 year and it will be we're always always looking for opportunities to make ourselves more efficient and they're also that there are still opportunities I believe in the business, where we can drive efficiency through but it will be done it through incremental continuous improvement as opposed to maybe step change.
Speaker Change: One off programs that we've done in 2024.
Speaker Change: Thanks.
Speaker Change: Question.
Speaker Change: I said, you won't say with a pantry of Liberum two questions. If I can just first of all just want to talk about pricing a little bit.
Speaker Change: And just wanted to get a sense of what you've baked into your forecast for pricing and some of the major markets kind of them, obviously be repair side and then secondly in terms of guidance, you're giving yourself quite a big window to drive through for this year.
Speaker Change: So I'm kind of wondering kind of water that leave us that might leave you at that kind of you know the bottom end or top end to that is that a is that a revenue outperformance story is that cautious guidance on cost savings just trying to get a handle on kind of where we are on that.
Speaker Change: In terms of pricing.
Speaker Change: You know historically, we're kind of a 1% to 2%.
Price erosion type of company and it's very fairly typical in the med tech sector over the last couple of years, we've been doing better than that.
Speaker Change: We've been flat to maybe a percent lower per cent per cent and that's largely because we've been able to pass through our inflation related cost increases into.
Speaker Change: To our customers and as you know in Med Tech historically is not something that you can you can easily do what I've commented in the past is we don't expect that to continue into the future. So our long term plan.
Speaker Change: Basically takes into account.
Speaker Change: Going back to normal levels of price erosion, which is around one to two no.
Speaker Change: Now, we're not going to get there all in one year, we already saw that 'twenty four.
Speaker Change: Was.
Speaker Change: Warsaw.
Speaker Change: I should use my my adjective correctly it was closer to normal than twenty-three was we expect 25 to be even closer to normal than that but not quite admirable right. So that's the way to think about think about that thought process.
Speaker Change: The dynamics in terms of within within Orthopedics how.
Speaker Change: The mix shift from.
Speaker Change: At a hospital into a season and so forth and how that.
Speaker Change: Plays out, but generally speaking our long term plan is based on based on going back to normal.
Speaker Change: Normal price levels, we probably get the second question would chime in John Yeah. This is just give you a little bit color on that say 2024.
Speaker Change: <unk> roughly half the group level was up around one and a half or so and if you strip out China roughly two so steep excise elevated levels for 2025.
Speaker Change: For the group level, we expect it to be roughly flat and ex China would be roughly about 50 bps. So as Deepak says, we're expecting that benefit from price to come off significantly in 2025, that's fully baked in to our forecast at all.
Speaker Change: Guidance for the year.
Speaker Change: So regarding margin I wouldn't anchor to either the low end or the high end of that of that range. So the intent here actually is not necessarily to be more conservative forecasts coming off of a.
Speaker Change: A margin target that we have over 25 is not an easily done thing. It was a very painful thing for me personally to have to come off of that.
Speaker Change: Having said that what you also don't want to do is put forward something and then have to revise it again right. So what we're dealing with is significant uncertainty around China bottom line. The reason for this range is is China.
Speaker Change: We've commented on how sports.
Speaker Change: Joint repair played out a little differently than that we had set out beef.
Speaker Change: So the range, we've provided takes that into account, but it also takes into account a tea, which is the other part of sports that's come through so that range gives us the ability to kind of deliver them that but like I said I wouldn't angry that low end of the high high end.
Speaker Change: Of that range and as we progress through the year certainly.
Speaker Change: At Q1 will be able to kind of tighten up that range for you recognizing what John said in his remarks, which is this will be another year, where for a variety of reasons. It's it's going to be a story of.
Speaker Change: Q2, or H, two kind of margin step up and that's been.
Speaker Change: Generally how the last two years have played out.
Speaker Change: Each one kind of looked kind of Ho hum year on year and the benefits come through in H. Two that's been the story of 'twenty three it was a story in 'twenty four factors a bit different and each of those years, but that'll be how twenty-five plays out as well.
Speaker Change: If you think about the three key levers for margin in 2025.
Speaker Change: In operational leverage.
Speaker Change: China reflects cost savings.
Speaker Change: Considers a scenario if we don't recover U S. Also to the extent that we have said we will that will mean, we're at the bottom end of our range. If we do recover or do better that would be the top end of our range on China, we baked in a 100 bps of margin dilution of 110 bps of margins at least in our bridge that reflects the.
Speaker Change: Both the sales reduction so I talked about earlier across both orthopedics and sports So I think we've.
Speaker Change: Baked that in but there's always uncertainty around that of course, it's very difficult to forecast, but we baked that in and then the cost savings.
Speaker Change: Feel pretty confident on the cost savings to the degree that we've got sort of 51 programs that drive cost savings half of which were already in.
Speaker Change: Embedded in complete got a half of which are close to because we've got pretty good visibility of the cost savings. So I think in order of risk you've got the the operational leverage piece than China, and then cost savings, where we've got pretty good visibility, but they will they will the mix of those will determine the bottom and the top end of the range.
Speaker Change: That's great. Thanks, Joe.
Speaker Change: So one or two more questions in the room, we've got a bunch of queued up over the phone.
Speaker Change: David.
Speaker Change: Okay.
Speaker Change: David and then I'll come back thanks.
Speaker Change: David Adlington JP Morgan just in terms of the <unk>.
Speaker Change: Inventory, so maybe for John any targets, you're willing to share in terms of how much she might reduce inventory. This year and then related to that how we should be thinking about free cash flow.
Speaker Change: Evolving from last year, because last year was also very good.
And then just on margins are the cost savings coming through getting some top line leverage.
Speaker Change: How are you thinking about margins beyond 25, and how much you might need to reinvest versus allowing it to drove III.
Speaker Change: Due to the inventory.
Speaker Change: Look our own inventory, we're not going to give specific targets I think we said we've made good progress this year he seen at both the group level and.
Speaker Change: More importantly, I think every single business unit level, we made good progress on Tsi.
Speaker Change: We also make the point that the quality of our inventory is better so we've had a buildup.
Speaker Change: Of inventory, obviously for new product launches, but that's meant that the stuff that doesn't turn very quickly we've actually reduced the number of those unions bought back 17%. So we're both improving the day sales inventory and also the quality of our inventory I think in terms of targets for 2025, we're not going to be specific on that but you've seen the direction of trap.
Speaker Change: And we want to try and maintain that traction that traveled through 2025 if.
Speaker Change: If you have that will impact on our free cash flow, while we said free cash flow will be north of 600 for the year versus the 551 in 'twenty four.
Speaker Change: I'd like to.
Speaker Change: To beat that.
Speaker Change: I think we've we've got built in there.
Speaker Change: A little bit of a step up in the Capex as a consequence of.
Speaker Change: Our new facility that we're in.
Speaker Change: Installing in Melton in northeast.
Speaker Change: But I think we should be aiming to try and drive driving north of 600, and maybe getting to $6 50 in terms of free cash flow for the year that should see our leverage reduced from the one nine times.
Speaker Change: We exited this year down to one six times at the end of at the end of 'twenty 'twenty four and that's the direction of travel that we're getting.
Speaker Change: And he said the margin beyond 25.
Speaker Change: Look we're not going to sit here in Q2.
Speaker Change: <unk> 26, and 27, but we said frequently that you saw the capture the cost savings come through for this year to 10 over the last two years, we should be trying to get back to close to <unk>.
Speaker Change: Three 300, north of 300 coming through in 2025, we said $3 25 to $3 75.
Speaker Change: Overall, so some of that will come through in 'twenty six 'twenty seven some will be a new savings some will be annualized 2025 savings, but we do expect our margin to accrete through 'twenty six 'twenty seven.
Speaker Change: Good morning, let's get Deutscher just on robotics, we haven't spoken too much about Cory I'm just wondering.
Speaker Change: You've obviously got makeover in Roseland of large footprint space, but just in the terms of any color you can share on the competitive landscape in the small footprint space where core plays.
Speaker Change: Whether it be J&J or think many of the other ones just just any sort of commentary that it sounds like you're gaining some decent momentum.
Speaker Change: First of all very pleased with the traction we're getting with Corey we're not dissecting the market into small footprint large footprint. That's the robotics market enables surgeons to implant knees or hips or or shoulder and.
Speaker Change: What I'm pleased about is not only.
Speaker Change: The gross number, but where we're actually placing corey.
Speaker Change: Replacing them with academic medical institutions, where historically, we've had we've been under indexed replacing them in the S. C. The slightly higher proportion than our overall share.
Speaker Change: Speaking to the value proposition the broad value proposition that Corey has but I'm also pleased with is the level of utilization, we could be running a place first type of strategy. That's not what we're doing we're actually placing them where there is demand.
Ed Burby police that placed them the utilization.
Speaker Change: Yes. It is.
Speaker Change: It isn't a nice is at a nice level. So very pleased with the traction that were that were getting and as we indicated since twenty-two beef we've invested in fully featuring Corey we started out for example.
Speaker Change: With a billing based approach we got feedback from the market the surgeon preferences run from cutting and range from cutting and billing. So we brought forward cutting functionality onto onto Cory, which we had originally not started off with.
Speaker Change: The only platform.
Speaker Change: That actually coming we've taken a step back Cory has some features that only it has a right of course, the only platform that's able to do revisions because we offer both image and imagery that color solutions right. These are the only platform that's able to do soft tissue balance before the surgeon ever cuts. So each one of these things.
Speaker Change: Aren't on their own are going to move the needle one way or another but the combination is what we're looking for is starting to play itself out that way.
Speaker Change: And as I commented on.
Speaker Change: Coreys applicability for shoulder.
Speaker Change: At the start of the 12 point plan, we Didnt think about having that program, but we actually pulled it in because we see the potential for the footprint that Corey has it's not a large installed base of handheld kind of thing it lends itself to the to the shoulder space. We are on the arthroplasty side are relatively small player.
Speaker Change: And children. So it's not just about having Corey, but we've got to have a full implant portfolio and as you know we're on a path right. We're in the early stages of launch of eight a shoulder and that's going to play itself out. So this is a platform that we expect to build on we've got great proof points already to build on it and so overall I feel good about how we're positioned.
Competitively with them quarterly rollout. Thanks, John just maybe a quick one for you just on slide 26 on the ROIC.
Speaker Change: You're probably not going went onto this post 'twenty five but just I mean, you haven't put the numbers in but it looks as if authors doubling its ROIC.
Speaker Change: That's correct yes.
Speaker Change: Sorry.
Speaker Change: Yeah, Yeah, we were just wondering we're expecting to double the ROIC.
Speaker Change: Assuming obviously, you're working your way up to market growth you haven't fully annualize that number clearly, but just 26, assuming you do get there.
Speaker Change: Should we assume that the ROIC will exceed WAC.
Speaker Change: Post year end sort of if it doesn't.
Speaker Change: How long do you give yourself, so I'm not going to get drawn on when will sort of cross the the cost of capital in line and we'll say.
Speaker Change: But our expectations would suggest is sometimes between 26 and 27. So we will see how we progress this year, but certainly a big step up in 'twenty five so a doubling in 'twenty five and with a view to getting to our cost of capital sometime in 'twenty six 'twenty seven.
Speaker Change: The key driver there is U S record performance.
Speaker Change: And so what you look for is contingent improvement and obviously use so the sequential improvement in 'twenty four we expect to build on that in 25, so that'll be the key kind of lead indicator. How are we going to do on the road. So we want to take on the phone. So I think we've got Graham Doyle on the phones.
Graham Doyle: Get them first.
Graham Doyle: Thanks, guys are moving and thanks for taking the questions just two for me one on China and on the.
Graham Doyle: The margin just on China in terms of the I suppose the ortho and sports Med business.
Graham Doyle: The question now is there.
Graham Doyle: Is there a path where you basically just should this business days, presumably were not margin accretive territory today.
Graham Doyle: Your thoughts on that what would be a go no go decision and then on the plant closure. So those are coming through and you're obviously seeing better profits coming through in U S. OIBDA. In particular is there anything we need to think about in terms of the cost of the inventory hold today.
Graham Doyle: This kind of better or lower Cogs into it comes through and then just.
Graham Doyle: Fair enough.
Graham Doyle: Profitable U S order given the fixed cost there because if we think about the Q4 benefit in the context of the guide.
Graham Doyle: It could either late October and obviously the change there.
Graham Doyle: And then we think about that momentum continuing into 2025, it's just to get a sense like how much more profitable than say <unk>.
Speaker Change: Some of the other businesses that had been growing in the last two or three years. Thank you very much okay.
Speaker Change: You were acoustically hard to hear the second part of the question. So I'll do my best in terms of what I understood it to be.
Speaker Change: But going to the first thing about China.
Speaker Change: So China.
Speaker Change: Orthopedics today at the BP price levels is not a profitable business for us.
Speaker Change: Well why are we in it.
Speaker Change: First it's giving ourselves the opportunity to see how the market <unk>.
Speaker Change: Evolves.
Speaker Change: And in particular, how robotics gets adopted in that market that in order for us to do that you need to maintain a certain level of presence and actually have.
Speaker Change: Direct some efforts in developing the robotics market.
Speaker Change: And so depending on how that develops.
Speaker Change: China could get back to not what it was in terms of attractiveness.
Speaker Change: Attractiveness from a profitability standpoint, but to a better place than it is today. So we're in orthopedics today to see how that market market actually develops and sports is a better picture from a profit goes down standpoint.
Speaker Change: You know post post the price cut.
Speaker Change: Obviously, it's a it is a straight impact to bottom line right. So there is no. Although we've adopted adapted the channel to take take BBB pricing into account is pretty much of a.
Speaker Change: Good fall through impact, but it's in a better place than that ortho is so that's how to think about the sports business versus your ortho business in China in terms of go no go decision.
Speaker Change: We decided to enter into the current round of the recon tender that was in March of 2024.
Speaker Change: Originally was intended to go for two years I mean.
Speaker Change: There are some indications that they may extend that out to three years. So the go no go decision would be essentially would be want to participate in the next round of tender right and that depends on how the market evolves between between now and that so that's the short answer to how we think about go no go.
Speaker Change: In terms of.
Speaker Change: The cost of inventory.
Speaker Change: As you know a significant part of the value.
The inventory or the inventory number is from the rebel of inventory.
Speaker Change: And it's a fairly complicated picture, but suffice it to say as we go into 'twenty six 'twenty seven.
Speaker Change: As inflation and the impact of inflation receipts, you should start to see what has been a significant headwind turn into.
Speaker Change: A more neutral picture as it comes into our.
Speaker Change: The P&L and I judge.
John Rogers: John did you catch his question on the twenty-five Guy I didn't I didn't catch the question.
Speaker Change: <unk> got to build on the on the last one just on the plant closures just to be clear.
Speaker Change: We're already starting to see in cash terms the benefit of those plant closures coming through in terms of our cost of production, but as Deepak says, there's so that's moving in a positive direction.
Speaker Change: At the moment is being offset by the inventory re Val and hence why the gross margin move backwards slightly year on year growth of the China pricing effects.
Speaker Change: Overtime.
It takes about a year or so and our real estate business for the benefits of those lower production costs to flow through that inventory.
Speaker Change: And that's why we were saying the second half of this year is when we're going to see that benefit come through so it's not like we're not enjoying the lower cost today, just takes about 12 months or so to flow through into the P&L. That's what gives us pretty good visibility on the numbers as we come through the second half. So I just want to make that point clear.
Speaker Change: Didn't catch the second question you don't have to okay.
Speaker Change: We'd get to another phone, but grabbed is a 32nd kind of repeat of your the second part of your question but.
Speaker Change: That's great. Thank you very much guys I appreciate it.
John Rogers: Thanks, John So we go to her son from Barclays.
Speaker Change: Hi can you hear me we can.
Speaker Change: Perfect. Thank you Hassan al <unk> from Barclays at three for me. Please.
Speaker Change: Firstly, just on Q1 and the lower growth here, what could this look like ex China and how should we think about group growth in Q2.
Speaker Change: And whether you expect that to be within the guidance range, just trying to understand how backend loaded the year rich from a growth perspective, and then secondly related to this on margins.
Speaker Change: Not unusual to have 300 basis points of margin differential between H, one H two but should we expect a expect a more pronounced.
Speaker Change: <unk> given the softer first half growth expectations.
Speaker Change: And then finally, just don't need additional EVP in AEP. Thank you for quantifying.
Speaker Change: Could you walk us through some of the underlying assumptions in terms of price reduction in volume changes that you've baked in.
Speaker Change: What is left in sports medicine in China that hasn't yet had PPP and how are you thinking about risks there overtime. Thank you.
Speaker Change: Okay. So maybe I'll take the last one first and then the next to last and John you can take the quarterly phasing.
Speaker Change: So in terms of a T. It's.
Speaker Change: It's a as we indicated in terms of the the topline impact race, we called out about $25 million of impact of.
Speaker Change: It is significantly smaller than our joint repair business.
Speaker Change: So for E T as a big part, but for a group level, it's not as big a portion, but once the VP gets hit with a T.
Speaker Change: It's a T. There's essentially that covers the range of.
Speaker Change: Uh huh.
Speaker Change: The impact of China for the China Sports Medicine business. So there's not really a lot left after this.
Speaker Change: There's a bit of capital, but but but that's about it.
Speaker Change: In terms of.
Speaker Change: The the type of margin step up H, one to H two that we're expecting what's implied in our.
Speaker Change: Models is not a.
Speaker Change:
Speaker Change: Unprecedented level of H, one to H two margin step up in order to deliver.
Speaker Change: The margin guidance that we've indicated and as you are.
Speaker Change: You can probably do the math you could go back to several years in terms of the delta between H, one and H two margins.
Speaker Change: What we were expecting and twenty-five is within.
Speaker Change: The range of what we've seen so you want to address the quarterly phasing I've just come very quickly to the to the last one just on the 25 million that we guided to on ADT. That's roughly split about $50 million of that is price and volume and about $10 million is channel adjustments. So that gives you a little bit of flavor as to the shape of that impact the half one half two split.
Speaker Change: Look to 2023, that's a good a good benchmark in terms of the level of step up and in terms of the question around.
Speaker Change: China say.
Speaker Change: If we looked at.
Speaker Change: If we look at our overall growth ex China.
Speaker Change: It is up.
Speaker Change: Obviously, there's about 140 bps of difference for the full year between Op, Inc, China and ex China crisis like China does have quite a big drag on the business.
Speaker Change: In terms of our Ats growth ex China, we should be looking at around 5% or so for Q1.
Speaker Change: And Q2, we should be looking at around 8% or so and similar for Q3, and then a little bit of a step down in Q4. So it's again, it's phased through the year.
Speaker Change: But we are expecting around 4% growth ex China in Q1.
Okay, I can see better color.
Speaker Change: Good so they will need to leave it here and the interest assignment. Thank you again for your interest and engagement and looking forward to coming back in a couple of months time to give you a sense for how Q1.
Speaker Change: Progress so thank you very much.
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Speaker Change: Okay.
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