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The Smith & Nephew chief intent on making waves in tough times

When politicians say that Britain should have more upmarket, research intensive manufacturing businesses, what they really mean is that we need more Smith &amp; Nephews. Over the last five years, the firm, founded over 150 years ago, has grown its sales from &pound;1.39bn to &pound;2.3bn in 2008. It invests a very strong four per cent of that into research and development. And when the firm&rsquo;s amiable boss, David Illingworth, breezes into the medical supplies company&rsquo;s smart offices overlooking the Strand, 30 years of experience in the $26bn (&pound;15.8bn) medical supplies market follows right behind him.<br /><br />The heavy-set Canadian-born &ndash; but naturalised American &ndash; is full of friendly small talk. He likes to make his job look easy, but managing any FTSE 100 firm is tricky stuff. A keen golfer, he quips: &ldquo;I play off a 17 handicap, but when I started at Smith &amp; Nephew I was a 10.&rdquo;<br /><br />Illingworth began his career at the ruthlessly competitive General Electric Medical, where, under legendary group chief executive Jack Welch, the conglomerate cut the worst performing 10 per cent of staff annually. Illingworth held a variety of senior posts at GE Medical before leaving to head a number of smaller rivals. <br /><br />He joined Smith &amp; Nephew in 2002 as head of its orthopaedics division &ndash; the firm&rsquo;s biggest component &ndash; before being promoted to chief executive in July 2007.<br /><br />The group&rsquo;s orthopaedics unit, which makes items like knee and hip joints, accounts for 65 per cent of profits. Its endoscopy unit, which makes items like cameras used for keyhole surgery, and its wound management division, dealing in bandages, accounts for the rest of the group&rsquo;s sales. The US makes up 44 per cent of the firm&rsquo;s revenues.<br /><br />Illingworth was brought in as a sure pair of hands to the firm, which employs 10,000 in 32 countries, has a market capitalisation of &pound;4.2bn and is one of Britain&rsquo;s foremost manufacturers and research firms. It is smaller than US rivals Zimmer, Stryker and DePuy, however, and is often regarded as a takeover target.<br /><br />But Smith &amp; Nephew has performed well under Illingworth. In February, it posted full-year pre-tax profits up 20 per cent to &pound;342m for 2008 on higher sales and cost cutting. Sales rose six per cent to &pound;2.3bn. <br /><br />To conserve cash it consolidated its European logistics in one centre in Switzerland, streamlined its US customer service unit, and brought together back office functions &ndash; such as financing &ndash; under one division. Illingworth said at the time the firm had delivered a sound set of results despite 2008 being &ldquo;pretty darn tough&rdquo;.&nbsp; <br /><br />But by Smith &amp; Nephew&rsquo;s first quarter results in May the business was beginning to notice a slowdown in growth. Hardest hit was orthopaedics, where the recession is forcing US patients on private healthcare to delay hip replacement operations.&nbsp; <br /><br />Smith &amp; Nephew still reported a 12 per cent increase in operating profit to &pound;107m, but the rise was largely due to favourable currencies. Sales came in at &pound;524m, towards the bottom end of analysts&rsquo; expectations. Underlying growth was four per cent, much slower than the 22 per cent reported in the same period a year ago.<br /><br />Illingworth now says: &ldquo;People are delaying operations. But that still means they are living with debilitating pain. It is an issue they have to deal with eventually.&rdquo; He adds: &ldquo;We are somewhat resistant to what is going on in the general economy. But we are not immune.&rdquo;<br /><br />However, he also points out that the underlying trends for both the firm and the industry are still good. The company predicts it will continue to grow throughout 2009, keeping pace with the industry average of around six per cent. It expects an ageing population to continue to bolster demand for the next 20 years.<br /><br />Smith &amp; Nephew can forecast such growth because it is a high margin business &ndash; around 23 per cent &ndash; with strong intellectual property rights and with only four or five international firms able to compete with it around the world.<br /><br />Despite Smith &amp; Nephew itself being regarded as a takeover target, Illingworth is in no hurry to buy smaller rivals, after its experience of buying Swiss privately-owned rival Plus in March 2007 for &pound;460m under previous CEO Sir Chris O&rsquo;Donnell.<br /><br />Within a few months of the sale, Smith &amp; Nephew announced it had shut down the Greek operations of Plus because of &ldquo;unacceptable&rdquo; working practices. It added that the same problem had been found in a number of its other markets, and that correcting the matter would cost &pound;56m in lost sales. The firm has never said what the problem was but, it is generally understood that Plus&rsquo; sales force offered surgeons and doctors free holidays and other gifts to choose its supplies.<br /><br />Illingworth says: &ldquo;It&rsquo;s over. But all I will say is we were were not comfortable with these practices. We went through an arbitration process and got a very good deal.&rdquo; The firm&nbsp; clawed back&nbsp; &pound;91m.<br /><br />Illingworth says: &ldquo;We went through this process rather than court, because we wanted a quick settlement. We could not properly integrate the two firms with this issue outstanding.&rdquo;<br /><br />The whole thing has left a sour taste in his mouth. He says: &ldquo;We are more wary about acquisitions. We want to learn from what happened at Plus. We don&rsquo;t want to get into a situation where we are having to rely on the representations of vendors that prove not to be accurate.&rdquo;<br /><br />However, Illingworth points out that despite the problems with the Plus purchase, the deal still doubled the size of the business in continental Europe. <br /><br />The firm is now focused on organic growth in developing markets&nbsp; such as China, India, Mexico and Brazil where growth in these economies means increasing numbers will be able to afford the advanced medical supplies it sells.<br /><br />Illingworth launched a new plant in China in May after closing one in Florida. The Smith &amp; Nephew boss, who opened up factories in China for GE, says: &ldquo;We chose to site our plant in China even though there were cheaper options around the world. But we chose China, because when we come to sell products there we will have built a solid base, and shown long-term commitment.&rdquo;<br /><br />He adds: &ldquo;Some executives come to the region for three days, think they can strike deals and go home. That won&rsquo;t work in China. It&rsquo;s like running your hand through a bucket of water. You create ripples while you are there, but when you take it out, the ripples stop.&rdquo; <br /><br />Illingworth is clear that his firm must keep on cutting costs in mature markets as well as developing new territories to ensure that it to make a splash in these turbulent times. That seems to be a sound strategy, but whether it will be enough to fend off predators &ndash; and hence retain the firm&rsquo;s London home &ndash; remains to be seen.<strong><br /><br />CV DAVID ILLINGWORTH<br /></strong><strong>Age:</strong> 58<br /><br /><strong>Work:</strong> Illingworth began his career with General Electric Medical Systems where he held a variety of positions in sales and operations. <br />He also worked as president of Nellcor Puritan Bennett and VidaMed. <br />He served as president of XL Vision. <br />He joined Smith &amp; Nephew as president of orthopaedics in 2002, and became group chief executive in July 2007<br /><br /><strong>Education:</strong> Texas A&amp;M University. <br /><br /><strong>Family:</strong> Married, three grown-up children<br /><br /><strong>Lives:</strong> London and Florida<br /><br /><strong>Hobbies:</strong> Eating out, theatre and golf<br />