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UPDATE 2-S&N tackles tough European trading with cost cuts
November 1, 2012 / 11:36 AM / 5 years ago

UPDATE 2-S&N tackles tough European trading with cost cuts

* Q3 adjusted EPS 16.6 cents, in line with forecasts

* Q3 revenue $952 million (consensus $971 million

* Weak European markets offset by savings, wound management growth

By Paul Sandle

LONDON, Nov 1 (Reuters) - Artificial knee and hip maker Smith & Nephew posted a 10 percent rise in third-quarter underlying trading profit on Thursday after cost savings offset a worsening market in Europe.

The British company, which also has wound management and sports medicine units, reported trading profit of $207 million on revenue of $952 million, up 1 percent on a underlying basis.

Both numbers fell short of average market expectations, but adjusted earnings per share of 16.6 cents was in line.

Chief executive Olivier Bohuon has cut costs and reorganised the business to target emerging markets as demand in Europe and the United States remains lacklustre.

The savings delivered a 190 basis point improvement in trading profit margin in the quarter, keeping the company on track for its target of improving the margin for the full year.

“The benefits of our efficiency improvements have helped to offset the impact of on-going tough conditions in Europe, and we continued to make good commercial progress in the emerging markets,” Bohuon said on Thursday.

The orthopedic sector been hit in the downturn as patients delay elective procedures, such as knee surgery for sports injuries, either because they lack insurance, face higher out-of-pocket costs or are worried about taking time off work.

U.S. competitors Stryker and Zimmer both saw pricing pressures in the last quarter, they said last month.

S&N said U.S. revenue in orthopedics was flat year-on-year, while its other established markets fell 1 percent, reflecting weaker demand in Europe. Emerging and international markets saw a 3 percent increase.

“The trend in Europe is definitely challenging,” Bohuon said. “Austerity measures are in place in almost every country.”

Parts of S&N’s hip business have also been hit by longstanding concerns about metal-on-metal resurfacing technology, and its knee business also had a weaker quarter.

But orthopedics was broadly offset by a better-than-expected performance in advanced wound therapy, the company said.

CASH PILE

Shares in the company were trading 1.2 percent lower at 647 pence by 1315 GMT.

Analyst Tom Jones at Berenberg said the results were reasonable, with weakness in Europe and knees broadly offset by a stronger performance in wound management and sports medicine.

But what caught his eye was the $264 million in trading cash flow in the quarter, resulting in net cash of $379 million.

“In a slower growth environment Smith & Nephew is generating significant cash flows which, in our view, can only increase pressure on the company to deploy it in some way, be it into M&A or a buyback,” he said.

Acquisitions are part of Bohuon’s growth strategy, and he is looking in the areas of advanced wound therapy, minimally invasive surgery and in emerging markets.

“We are working hard trying to find the right fit,” he said.

Analysts on average were expecting S&N to report trading profit of $212 million on revenue of $971 million, resulting in adjusted earnings per share of 16.6 cents.

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