Smith & Nephew profits shrink amid major fall in Bioventus shareholding

Smith & Nephew saw profits plunge by over $300million last year following a rise in inventory costs. 

The FTSE 100 medical products designer revealed attributable profits dived to $223million in 2022, having made $524million the previous year on a recovery in elective surgeries such as knee and hip implants.

Though underlying revenues continued to expand across all of the Watford-based firm’s divisions, its total turnover remained flat at $1.37billion, primarily due to a stronger US dollar.

Over the same period, earnings were impacted by a $109million charge from the slump in shares of Bioventus, in which Smith & Nephew is a major stakeholder, and the execution of its volume-based procurement programme in China.

Margins were further squeezed by higher restructuring costs and stock build-ups made to minimise disruption to raw material and component supplies. 

Despite weaker-than-expected results, Smith & Nephew shares were 5.3 per cent higher at 1,223.5p on Tuesday afternoon in response to a positive outlook.

Raw material inflation is anticipated to keep growing this year, yet the company expects sales growth, heightened productivity and cost-saving measures to result in a higher trading profit margin.

Beyond 2023, the group aims to achieve consistent underlying revenue growth of 5 per cent or above and a trading profit margin of at least 20 per cent by 2025. 

Core to achieving those goals is delivering on its 12-point plan, which includes fixing problems within its orthopaedics division and boosting growth in its various franchises like advanced wound management. 

Deepak Nath, the firm’s chief executive, said the strategy ‘is starting to deliver, and, as we progress through the two-year life of the plan, we expect further operational and financial benefits, including a reduction in inventory levels and cash conversion to return to historic levels.’

Smith & Nephew’s publication of its annual results comes four days after announcing that business heavyweight Rupert Soames had been appointed as its next chairman.

Soames, the grandson of wartime prime minister Sir Winston Churchill, helped transform the outsourcing giant during his eight-year tenure in charge.

When he arrived, Serco’s reputation had been sullied by numerous scandals, including one that involved overcharging the UK Government for an electronic tagging prisoner contract.

To turn things around, the business slashed costs, sold off struggling divisions, narrowed its focus to winning public sector contracts, and expanded its reach into North America and Asia.

Within six years, Smith & Nephew’s revenues were expanding again, and it had restarted paying dividends.

The Covid-19 pandemic then provided a rocket booster under the firm’s growth as it won contracts to run call-handling operations for the NHS Test and Trace scheme and about a fifth of all testing sites in England and Northern Ireland.