Smith & Nephew announces cost-cutting programme to avert activist investor pressure; Q4 sales rise

Smith & Nephew announced Thursday alongside its fourth-quarter financial results, a cost-cutting programme designed to avert pressure to break up the company by activist investor Elliott Management. The initiative is expected to deliver $160 million in annual cost savings by 2022.

In October, a report suggested that Elliott Management, which holds a more than 2-percent stake in Smith & Nephew, urged the company to divest certain parts of its business. At that time, CEO Olivier Bohuon said "we are not thinking about asset disposal at this stage at all." On Thursday, while Bohuon declined to comment on Elliott Management taking a stake in the company, he said Smith & Nephew did not need to be broken up. "We are not newborn babies, we have worked on pipeline management for some time. If we have this set-up, then that's because we are happy with it," he added.

Smith & Nephew noted that the cost-cutting programme is expected to deliver three-quarters of the annual cost savings by 2020, for a one-off cost of up to $240 million, of which around $100 million is expected this year. The initiative involves reducing the company's manufacturing base and supply chain costs, while overhauling its revenue strategy and collecting more product data to help justify pricing levels, Smith & Nephew said.

Meanwhile, in the quarter, sales rose 5 percent year-over-year to $1.3 billion. Bohuon noted that "we delivered on our promises to improve the top and bottom line in 2017. Our knee implants franchise delivered a standout performance and we returned to double-digit growth in the emerging markets."

Smith & Nephew reported a 5-percent rise in sales from sports medicine, trauma and other products to $519 million. Reconstruction product revenue grew 6 percent year-on-year to $423 million, with knee implant sales up 8 percent to $266 million and hip products up 3 percent to $157 million. Meanwhile, the advanced wound management business recorded a 3-percent increase in sales year-on-year to $336 million.

On a regional basis, Smith & Nephew said US revenues increased 2 percent to $624 million in the quarter compared to the same period last year, while sales from other established markets, which include Europe, Canada, Japan, Australia and New Zealand, grew 4 percent to $445 million. The company reported sales of $209 million in emerging markets, up 16 percent from the year-ago period.

For the full year, sales rose 2 percent to $4.8 billion, in line with analyst estimates, with profit reaching $767 million, versus $784 million in 2016. Looking ahead, Smith & Nephew said it expects underlying 2018 sales growth of 3 percent to 4 percent, equating to a range of around 7 percent to 8 percent on a reported basis, which includes the impact of the Rotation Medical acquisition, which was completed in December. Bohuon noted that "in 2018 I expect Smith & Nephew to build on 2017 by delivering another year of improved performance driven by our strong product portfolio and pipeline of innovative products."

Jefferies analysts called the results "satisfactory," adding that its cost savings plan was a "sensible" target to close the performance gap to its peers.

Further, Bohuon, who is due to retire at the end of 2018, said the board was continuing search to find "the best possible person to lead this great company." He added that "I gave sufficient time for them to find the right candidate."

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