Smith & Nephew’s Resurgence: A Story of Restructuring and Growth

A Stellar Stock Surge Driven by Strong Financials

Smith & Nephew, a leading medical firm listed on the FTSE 100, made headlines on Tuesday as its shares surged by 9%, reaching £11.37 per share. This significant jump was fueled by the company’s impressive full-year sales and profits, which exceeded expectations. The strong financial performance underscores the success of its ongoing restructuring efforts, particularly its 12-Point Plan, introduced in 2022. This strategy was designed to boost revenues and improve operational efficiency, and the results are paying off in a big way.

Financial Highlights: Growth and Profitability

The company reported a 4.7% increase in statutory revenues for 2024, reaching $5.8 billion, with underlying sales growing by 5.3% year on year. The fourth quarter was particularly strong, with statutory and underlying revenue growth accelerating to 7.8% and 8.3%, respectively, totaling $1.6 billion. Trading profit for the year rose by 8.2% to $1 billion, bolstered by a 60-basis-point improvement in the trading profit margin, which now stands at 18.1%. Pre-tax profit also saw a massive 71.2% year-on-year increase, reaching $498 million.

Cash Flow and Cost Savings: A Testament to Efficiency

Smith & Nephew’s operational efficiency was further evident in its cash generation, which jumped 50.2% year on year to $1.2 billion. The company maintained its dividend at 37 US cents per share, defying analyst expectations of an increase. However, this decision likely reflects a strategic focus on reinvesting profits to fuel future growth. The 12-Point Plan has been instrumental in driving cost savings, delivering 410 basis points of incremental savings over the past two years. This restructuring effort also included a net reduction of 9% in the workforce, showcasing the company’s commitment to streamlining operations.

Innovation and New Products: Driving Revenue Growth

Innovation has been a key driver of Smith & Nephew’s success. Recent product launches have played a pivotal role in boosting revenues, with products introduced in the last five years contributing 60% of the company’s sales growth in 2024. Over the past three years, the firm has launched 50 new products, including 16 in 2024. This robust pipeline of innovation has set the stage for continued growth, with an “exciting pipeline” of new products slated for release in 2025.

A Promising Outlook for 2025

CEO Deepak Nath expressed confidence in the company’s transformation, stating that the 12-Point Plan is increasingly delivering improved financial performance. He highlighted that revenue growth is now consistently above historical levels, thanks to operational and commercial improvements. The restructuring of the organizational structure has also enhanced accountability at the business unit level. While Nath acknowledged that more work lies ahead, he emphasized the solid progress made so far and projected a significant step-up in returns for 2025, including substantial margin expansion.

Strong Fourth Quarter Performance and Challenges Ahead

The company’s fourth-quarter performance was particularly impressive, with strong contributions from its hip and knee replacement business in the US, which surpassed analyst expectations. However, challenges persist in China, where high inventory levels continue to weigh on sales. Despite efforts to reduce stock levels, the situation is likely to persist into the first quarter of 2025. Nonetheless, Smith & Nephew remains optimistic about its future. With underlying revenues expected to grow by 5% in 2025 (4.8% on a statutory basis) and a projected trading profit margin of 19-20%, the company is well-positioned to build on its momentum and achieve further efficiency gains beyond 2025.

In summary, Smith & Nephew’s recent performance reflects a company in the midst of a successful transformation. By combining innovation, operational efficiency, and strategic restructuring, the firm is driving growth and profitability, positioning itself for long-term success in an increasingly competitive medical industry.