Looks Like Restructuring Is Paying Off As Smith & Nephew Delivers Strong Financials

In short

We usually keep an eye on Smith & Nephew’s financials, so no reason to depart from that tradition when they have announced results for the second quarter ended 30 June 2012. In a nutshell the healthcare giant is sounding pretty chipper with revenues up 2% and trading profit up 6%, both on an underlying basis.

Background

Financial key performance indicators for the quarter, when set against the equivalent period a year ago show revenue of $1,029 million, up 2% on an underlying basis, trading profit of $234 million, up 6% on an underlying basis, with trading profit margin up 80 bps to 22.7% as Advanced Surgical Devices (ASD) division restructuring benefits come through.

Advanced Surgical Devices (ASD)

Looking at individual divisions, ASD delivered total revenue of $774 million in the quarter, up 2% on the same period last year on an underlying basis (excluding a -3% currency headwind and -4% impact from the Bioventus transaction). Revenue in the US grew by 2%, whilst other Established Markets in aggregate were flat. Emerging and International Markets showed a 10% increase albeit with some signs of market stabilisation in the US and a continued challenging picture in Europe.

“Restructuring” of the company’s ASD division, as covered on our pages here, effectively meant the bringing together of orthopaedics and endoscopy into one divisional entity, with consequent job losses and efficiency increases initially in the U.S. These changes were announced late last year and it seems the benefits are being felt now as the trading profit margin increased 22.8% (2011: 21.6%). Equivalent restructuring in Europe is well underway and the company says it’s proceeding to plan.

Like-for-like price pressure across Hip and Knee Implant and Trauma franchises remained similar to previous quarters, at around -2%, including the effects of the biennial price reductions in Japan. Price pressure was partially offset through mix gains.

S&N’s Knee Implant franchise grew at 3%, a good performance against a strong comparable, and in line with the global market,  performance while its Hip implants continued to feel the effects of negative commentary in the metal-on-metal total hip replacement sector, with the acclerated decline in sales of the BIRMINGHAM HIP◊ Resurfacing System

S&N’s Sports Medicine Joint Repair products returned to double-digit growth, with revenue up 10% in the quarter. Knee repair increase driven by the continued success of the FAST-FIX 360 Meniscal Repair System and other recent product innovations.

Revenue in the Arthroscopic Enabling Technologies franchise declined 4%, primarily due to customers reducing their capital spending on visualisation equipment despite the continued the roll-out of the DYONICS PLATINUM range of specialty blades during the period.

Trauma revenues increased 3%, or 5% when discounting the continuing effects of the previously disclosed expiring US royalties.

Advanced Wound Management Global (AWM)

AWM continues to outperform the market, with revenue growing at 4% in the period on an underlying basis (excluding a -5% currency impact) to $255 million (2011: $258 million). This was a good result set against a weaker market in both the US and Europe.

6% growth in U.S was driven by continuing strong performance from the company’s Negative Pressure Wound Therapy (NPWT) portfolio. The non-US Established Markets grew at 3%, with France, Germany, the Nordics and Australia all performing well. Emerging and International Markets grew 9%. Exudate Management grew at 4% and Infection Management was flat.

The AWM trading profit in the quarter was $57 million (2011: $59 million), giving a trading profit margin of 22.4% (2011: 23.0%) with further improvements likely as the company embarks on a proposed move of additional manufacturing to Suzhou, China.

NPWT is seemingly becoming mainstream, especially for S&N for whom sales of PICO are apparently gaining momentum. PICO, the newly FDA approved, single use NPWT device, covered on our own pages here, was named as one of the International Design Excellence Awards finalists in the Medical and Scientific Products category by the Industrial Designers Society of America in May. S&N’s NPWT platform was further boosted when it acquired Kalypto Medical, thereby securing innovative complementary technology.

Company comments

Olivier Bohuon, Chief Executive Officer, said:

“Smith & Nephew completed a good first half as we continued to generate top-line growth and delivered an improved trading profit margin. This demonstrates the early benefits of our actions to reshape the Group to provide the right commercial models, innovation and efficiencies required to win in our markets today and in the future.

“We have consistently delivered revenue and earnings growth and strong cash generation in the challenging markets of the last few years. This financial strength, and our confidence in delivering against our Strategic Priorities, has enabled us to increase substantially our dividend pay-out, whilst keeping the flexibility to meet our organic and inorganic growth objectives.”

Source: Smith & Nephew PLC