Sales Remain Flat Despite Rise in Q1 Profit at Smith & Nephew

First-quarter profit at Smith &Nephew plc jumped 8.3 percent but sales remained flat at $1.1 billion, meeting analyst expectations. Profit rose to $221 million from $204 million in 2013, boosted largely by a one-off gain of $35 million from the closure of its U.S. pension plan.

Investec analyst Nicholas Keher said results were weaker than even revised expectations. He noted that “revenues are in line with our forecasts and the miss is primarily due to the timing of overhead investment to support growth,” adding “for us, the weak first quarter was well flagged and the long-term outlook remains strong.”

In the quarter, Advanced Surgical Devices revenue was relatively unchanged versus the year-ago period at $758 million, with U.S. sales down 2 percent, as surgical procedures were brought forward into 2013 ahead of changes to the country’s health insurance system. Within the unit, revenue in other established markets was flat and sales rose 13 percent in emerging and international markets. Meanwhile, knee and hip implant sales were flat, versus market growth of 3 percent and 3 percent, respectively.

Smith & Nephew noted that quarterly revenue from Sports Medicine Joint Repair increased 5 percent compared with the same period last year. In February, the company announced a definitive agreement to acquire ArthroCare for approximately $1.7 billion, boosting its sports medicines business. Smith & Nephew also reported that three-month sales in its Advanced Wound Management segment were flat at $315 million, below market growth of 3 percent.

Advanced Wound Management revenue fell 4 percent in the United States and grew 3 percent in other established markets. Revenue was flat in emerging and international markets against a strong comparator driven by a large tender win last year. Trading profit was $55 million, down slightly from 2013 ($57 million), resulting in a trading profit margin of 17.6 percent (compared with 17.9 percent last year).

The company’s Advanced Wound Carerevenue was down 6 percent, while Advanced Wound Devices proceeds grew 13 percent, due mostly from a strong Versajet performance in China. In negative pressure wound therapy, the firm’s single-use portable system PICO experienced a good quarter, while the traditional canister-based market remained challenging.

Smith &Nephew’s Advanced WoundBioactives revenue expanded 8 percent.

“Our underlying revenue growth was 1 percent in the first quarter. We remain confident in our 2014 outlook as we roll-out our strong pipeline of new products, benefit from recent investments in marketing and the salesforce and see an increasing contribution from acquisitions,” CEOOlivier Bohuon said. “We are confirming the outcome from our review to optimise our group structure. The identified activities will support our strategic priorities by refining and simplifying our operational platform and delivering at least $120 million of annualised efficiency savings.”

Under a restructuring plan, Smith & Nephew will align and improve its corporate functions, simplify its operating model and optimise its facilities. The company said it intends to re-invest savings from the plan, which will take place over the next four years and cost $150 million, to drive further growth. Analysts at Berenberg noted that the new restructuring programme would be “helpful and supportive of future growth, but not a real game-changer.” Berenberg added that “in the company’s defence, having been in some kind or other of optimisation programme since 2006, it must be running out of things to optimize.”