Donald Trump’s tariffs have dragged markets on a merry dance for much of this year. Goods being shipped into the US are now subject to levies of up to 39 per cent and a new front targeting pharmaceuticals is anticipated to open up soon.
The trade war is piling pressure on companies to review their supply chains and manufacturing locations. Even with its significant base in the US, protective kit maker Avon Technologies expects tariffs to cost it $800,000. While acknowledging that this could be mitigated by moving more production stateside, the company, which has recently won a new $18mn order from the US military, says it won’t make a decision until there is more certainty. But for Avon Technologies, and every other UK company with an established presence in the US, such as Rolls-Royce, Melrose Industries and BAE Systems, the ability to do so is a boon. This should also provide a competitive edge over rivals that exclusively manufacture outside the country.
However, while none of these companies will need to take on the Herculean task of building facilities from scratch, they still face the challenge of tariffs on the raw materials they import. Medical technology business Smith & Nephew, led by chief executive Deepak Nath, which makes two-thirds of the products it sells in the US locally, still expects tariffs to cost it $15mn-$20mn this year.
UK pharmaceutical companies AstraZeneca and GSK, and Swiss rival Roche, have also committed to significant investments in their US plants. AstraZeneca, frustrated with the lack of support it receives in the UK, is ploughing $50bn into its US operations.
The benefits for all these companies extend beyond lessening the impact of tariffs. Bonuses include reduced tax, energy and logistics costs. There is little in any of this trend to comfort the UK government, anxious to drive growth and create high-quality, skilled jobs at home.
Medical services
Smith & Nephew (SN.)
Share buyback caps a productive half
Medical devices company Smith & Nephew impressed the market with interim results that showed the clear benefits of its self-improvement drive, writes Julian Hofmann.
Cost savings meant the company’s operating profits of $523mn (£393mn) were well ahead of analysts’ consensus. This also helped to support a new $500mn share buyback.
The shares were among the biggest risers on the FTSE on results day. The market noted that Smith & Nephew’s large US manufacturing base, selling into its most valuable market puts it firmly on the positive side of the tariff’s debate.
Management is also clearly having an impact when it comes to getting the best out of the balance sheet. For instance, the day sales of inventory numbers were down to 46 days, year on year, which meant that total inventory fell by $69mn on a constant currency basis.
This also had a knock-on effect for cash generation, with the conversion of operating profits to cash rising to 93 per cent (60 per cent in 2024) and with the operating margin increasing by 100 basis points to 17.7 per cent.
The 12-point improvement plan had a substantial impact on Orthopaedics, where the first half trading profit margin increased by 230 basis points to 12.7 per cent on the back of inventory reduction and improved capital efficiency. Meanwhile, one-off restructuring costs were just $8mn, compared with $62mn this time last year, with the impact flowing straight to the bottom line.
Industrial metals
Ferrexpo (FXPO)
Row over unpaid tax refunds
Ukrainian iron ore pellet producer Ferrexpo has done well to maintain operations since Russia’s invasion of the country, but recently the biggest threat seems to be coming from its own government, writes Michael Fahy.
Spats with the authorities are a long-running theme, but the latest one with the nation’s tax body is causing serious financial pain. VAT refunds that the company says its subsidiaries are entitled to worth $31.1mn (£23.3mn) for the first four months of the year have been refused. This figure will climb to $38.3mn if May and June refunds are also withheld.
A year ago, Ferrexpo was optimistically talking about reopening a third pelletiser line, depending on Black Sea port access, but the cash crunch it now finds itself in means it has had to halt one of its two lines. Production has fallen by 40 per cent and a third of its staff are either on furlough or reduced working hours.
Interim executive chair Lucio Genovese said Ferrexpo had paid $180mn in salaries and $340mn in taxes since the war started in February 2022, as well as spending $1.9bn on in-country goods and services.
Unsurprisingly, trading in Ferrexpo’s shares remains highly volatile. They are down 57 per cent since the start of the year and trade at just a fifth of their pre-invasion price. If the VAT issue is sorted, the share price could pop as capacity is restored, but there is also a very real risk that the business will run out of money and/or be nationalised.
Industrial services
Capita (CPI)
Mixed results for the outsourcer
Capita continues to lean on its public sector arm as it battles challenges in other parts of the business, writes Valeria Martinez.
Revenues in this division, which makes up 62 per cent of sales, rose 4 per cent in the first half due to new contracts and extensions. That helped lift total contract value by 17 per cent to just over £1bn.
But things were tougher elsewhere. The contact centre division, which brings in around a fifth of revenue, saw sales tumble 20 per cent due to lost contracts and softer volumes. Regulated services and pension solutions, around 14 per cent of group sales, were also in the red.
Adjusted operating profit fell by 22 per cent to £44.6mn, weighed down by the contact centre revenue hit, fewer one-offs and contract hand backs and the timing of the group’s pay award and the increase to national insurance. Margins dropped by 80 basis points to 3.7 per cent.
Capita is investing £55mn this year to unlock £250mn in annualised cost savings by December. Free cash outflow (excluding business exits) improved to £26mn from £53mn, helped by better cash conversion and reduced capex and lease payments. Net debt, including leases, has fallen slightly, but still stands at a chunky £410mn.
The company expects to be free cash flow positive by the end of the year and is sticking to its full-year guidance. There are early signs the turnaround is gaining traction, but progress is uneven. A forward price/earnings multiple of eight looks cheap, but patience is still required for now.
