August 5, 2011 / 6:35 AM / 9 years ago

UPDATE 2-Knee joints help Smith & Nephew outrun rivals in Q2

* Q2 revenue $1.077 bln vs I/B/E/S consensus $1.058 bln

* Q2 adjusted EPS 18.1 cents vs I/B/E/S consensus 18 cents

* Revenue guidance for 2011 is unchanged

* Shares up 2 pct (Adds CEO And CFO comments, reaction, shares)

By Paul Sandle

LONDON, Aug 5 (Reuters) - Demand for its replacement knees helped artificial joint maker Smith & Nephew gain share from rivals in a flat orthopaedics market, although pricing pressure and more sales of lower-margin products took a toll on profit.

The company, which also has wound care and endoscopy units, posted second-quarter trading profit of $236 million, down 3 percent at the underlying level, as its margin was squeezed 160 basis points to a “disappointing” 21.9 percent. Sales, however, were up 5 percent to $1.077 billion.

Chief Executive Olivier Bohuon, who has been in the job for four months, said the group had a “strong quarter despite a difficult market”.

Smith & Nephew shares reversed early losses and were 2.2 percent higher at 576.5 pence by 0925 GMT on Friday, outperforming a 1.9 percent fall on the FTSE 100 index .

Numis analyst Charles Weston, who rates the shares an “add”, said sales were good in the quarter, but an adverse sales mix and increased pricing pressure negatively impacted gross margins.

“The sales mix, particularly in orthopaedics, was probably the key (to the lower margin)”,” he said. “The wound care business has turned into the driver of the group (...), but the whole orthopaedics market is struggling.”

Smith & Nephew’s orthopaedics division grew revenue by 4 percent, driven by its knee franchise, where it products offer a 30-year guarantee, and offsetting weakness in hips, which have been hit by controversy about metal-on-metal technology.

U.S rival Stryker said last month that demand for orthopaedic devices remained sluggish, hurt by the ongoing economic slowdown as patients, reluctant to take time off work, postpone procedures.

Zimmer , however, pointed to stronger growth outside the United States when it raised its outlook after second-quarter numbers.

Bohuon said pricing pressure in orthopaedics, which the company said turned slightly lower than the minus 2 percent seen in recent quarters, was “here to stay”.

He said he would tackle this by increasing productivity in markets such as Europe and the United States. “We must take market share in these markets to be successful,” he said on a call with reporters.

Smith & Nephew said it continued to expect revenues in orthopaedic reconstruction, sports medicine and wound management to grow at above the market rate.

Chief Financial Officer Adrian Hennah said the group was guiding to a slight reduction in its trading margin this year on higher sales of its knee products.

“(But) in terms of our medium-term outlook — absolutely no change,” he said. “We see plenty of scope for investment but also plenty of scope for efficiency improvement in this business, we believe anything beyond 2011 will see a broadly flat margin at around 24 percent.”

Smith & Nephew, which reported adjusted earnings per share of 18.1 cents, is paying an interim dividend of 6.6 cents a share, up 10 percent on the payout a year ago.

Analysts expected the company to report adjusted EPS of 18.0 cents on revenue of $1,058 million, according to a Thomson Reuters I/B/E/S consensus of 10 brokers. (Editing by Ben Hirschler)

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