High costs prove drag on Smith & Nephew trading profit

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Smith & Nephew, Europe’s largest artificial hip and knee maker, posted nine per cent lower third-quarter trading profit yesterday, saying its costs were too high for the subdued orthopedics market.

Shares in the group, which has an advanced wound management unit based in Hull, fell as much as 7.5 per cent to a 12-week low after the earnings fell short of market expectations.

Olivier Bohuon, who became chief executive in April, said he was “disappointed” with the margin.

“Our cost base in orthopedics was too high,” he said. “We have to adapt to meet market challenges.

“We are all seeing lower growth and greater pricing pressure. We have been addressing this issue but we did not do this fast enough.”

S&N, along with its competitors, has been hit by low demand for hip and knee replacements as people postpone elective procedures because of concerns about job cuts.

Mr Bohuon said he was reducing manufacturing costs, improving operations in established markets and simplifying management to save $150m a year.

There would be an unspecified number of job cuts, he said.

Broker Numis said the orthopedic margins were “nothing short of horrendous”.

Analyst Mike Mitchell, at Seymour Pierce, also said the margin performance would come under the spotlight, with the orthopedics business remaining the drag.

He said his full-year adjusted operating profit margin of 23.7 per cent was now looking optimistic.

“We expect the stock to come under pressure while the market assesses the ability of the recently-arrived CEO to address near-term costs,” he said.

Mr Bohuon said he was confident that the trading profit margin would rise above 24 per cent in the fourth quarter.

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