Higher Revenues for Smith & Nephew - Analyst Blog

Smith & Nephew (SNN) reported an adjusted EPS of 16.1 cents (EPADS of 80.5 cents) during the third quarter of fiscal 2010, 4.2% lower than the year-ago quarter's 16.8 cents. However, the year-ago quarter benefited from a favorable tax rate. The Zacks Consensus Estimate (ADS) was 78 cents.

Smith & Nephew reported revenues of $941 million surpassing the Zacks Consensus Estimate of $934 million. However, revenues recorded an underlying growth of 4% (after adjusting for currency translation) compared to $915 million in the year-ago period.

Smith & Nephew derives revenues from three business units – Orthopaedics (consisting of Reconstruction, Trauma and Clinical Therapies), Endoscopy and Advanced Wound Management, the first one contributing the maximum (54%). These units recorded revenues of $510 million (2% underlying growth), $201 million (4%) and $230 million (7%), respectively.

Revenues derived from Orthopaedics were 1% lower due to the company's sale of its pain management business and termination of its spine distribution business in Germany. While the segment grew in the US by 2% and declined in Europe by 1%, in the rest of the world it saw a growth of 6%. Trading profit margin of the unit came down by 120 basis points (bps) to 22.2% due to additional expenses related to direct-to-consumer marketing in the US during the quarter.

Within the Endoscopy unit, revenues increased in Europe (6%) and rest of the world (10%) while it declined in the US (1%). Strong performance was witnessed in Japan and the emerging markets. Smith & Nephew witnessed a strong 8% growth in Arthroscopy (sports medicine) with repair franchise achieving double digit growth, in a situation where procedure volumes have declined.

Trading profit margin of the Endoscopy unit increased 40 bps due to favorable product mix. However, the company expects margins to decline for the full year as more investments are lined-up in this business.

Advanced Wound Management revenues increased in the regions of Europe (5%), US (8%) as well as rest of the world (12%). The revenue growth was driven by strong performance of Negative Pressure Wound Therapy (“NPWT”) and favorable progress in patent litigation. Apart from Japan and emerging markets, Smith & Nephew has recorded strong performance in Germany and France. Trading margin of this unit improved 280 bps to 24.6%.