Investment: Chief's job at stake at Smith & Nephew
Friday 26 February 1999
The news came as S&N said that it was planning a secondary listing in New York in an attempt to increase its rating and enlarge its shareholder base.
Mr O'Donnell pledged to increase margins by 3 per cent by 2001 and to push earnings per share growth into "high single digits" through a sweeping restructuring of the company's manufacturing operations.
The chief executive, who was appointed 18 months ago, said he could be forced out by the board and S&N's shareholders if the group missed the targets. "We are taking this seriously at every level. We will probably get fired if we don't deliver," he said.
His comments came as the maker of hip replacement and wound healing products reported a fall in profits for the second year in a row. Pre-tax profits fell 5 per cent to pounds 134.5m, largely due to a pounds 15m currency hit. S&N derives over 80 per cent of its sales from overseas and over the past two years has suffered badly due to the strength of the pound. Stripping currency out, profit grew 7 per cent despite difficult conditions in global healthcare markets, which were squeezed by budget cuts in many countries. The shares shrugged off the results to close 2.75p higher at 183p.
Mr O'Donnell said the company had had a tough year, marred by the rejection by the US regulatory authority of its star product, Dermagraft - an artificial skin derived from babies' foreskins used to treat diabetic foot ulcers.
However, he maintained that S&N was now "meaner and leaner". Last year, the company restructured under products, rather than geographical lines, making around 400 people redundant at a cost of pounds 18m. The changes will deliver a pounds 15m saving from this year, and S&N plans to spend a further pounds 53m to overhaul its manufacturing activities. It expects to close around 6 of its 35 worldwide plants in an effort to cut pounds 20m from the cost base by 2001 and focus its factories on its three core divisions of orthopaedic, endoscopy and wound management.
Mr O'Donnell said he expected S&N's four UK plants to remain open and ruled out large job losses among the group's 12,000 workforce. The shake- up would prepare the company for a secondary listing on the New York bourse next year.
The chief executive said he had no plans to transfer the company to the US, although he did not rule it out in the long term. "We take great pride in being a British company but price/earnings ratios are higher on the other side of the Atlantic," he said.
However, City analysts were sceptical of S&N's near-term prospects. One observer said that the shares - on around 18 times 1999 earnings forecasts of pounds 163m - should not be bought until S&N delivers on its promise of selling non-core businesses to buy a rival in the pounds 3bn-a-year orthopaedic market.
"We believe they don't deserve anything like the rating of their US rivals. They have an awful lot to prove before we can put them on our buy list."
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