Smith & Nephew’s earnings tumble on virus impact

The second quarter bore the brunt of the virus’s impact, with revenues tumbling by 29.3 per cent to $901m (£695m) as hospitals pressed ‘pause’ on non-urgent procedures. The group endured a more marked knock within its orthopaedics and sports medicine divisions, for which three-month sales declined by just over a third to $364m and $247m, respectively. Advanced wound management saw a less pronounced downswing of 17.6 per cent to $290m.

In turn, the group’s margin contraction reflected lower production volumes, as well as a “negative leverage effect” – with a reduction in revenues failing to occasion a decline in the fixed components of the cost base. Smith & Nephew also incurred charges of around $50m, pertaining to provisions for excess inventory and an increase in the expected credit loss allowance against trade receivables on the balance sheet. Without such write-offs, earnings would have come in closer to market projections.

That said, trading improved as restrictions eased – with elective surgeries restarting across the US and most European countries by the end of June. Having waned by almost a half in April, underlying revenues dropped by just over a tenth last month.

The group also said it was on track to achieve cost savings of up to $200m in 2020, targeted in response to the coronavirus outbreak, with roughly $150m already realised. But those efforts have not hampered R&D investment – allowing Smith & Nephew to make “significant new product introductions”, including a new robotics platform. The group cited good progress for its recently launched devices, with the ‘OR30 Dual Mobility Hip System’ now being made available beyond the States.

Management has kept its guidance withdrawn. Morgan Stanley expects full-year adjusted earnings before interest and tax (Ebit) of $752m, from $1.2bn in 2019.