Smith & Nephew replaces guidance after weak quarter for hips

Smith & Nephew replaced its full year revenue guidance after a weak first quarter for hip replacements and wound-care, especially in the US and other emerging markets.

The FTSE 100 group, which will wave goodbye to chief executive Olivier Bohuon next week, reported quarterly turnover of $1.2bn that was flat compared to the same period a year ago on an underlying basis but boosted 5% by currency swings.

This weak start, down from the 2% underlying growth in the final quarter of last year and 3% for the year as a whole, saw the company trim its full year expectations for revenue growth in the range of 2-3% with a trading profit margin "at or above" the levels of 22.0% achieved in 2017. The mid point of 2.5% is 3% below the consensus forecast after Bohuon had two months previously said 2018 should see underlying revenue up 3-4% and profit margins improving.

Bohuon, who is to be replaced by former Johnson & Johnson man Namal Nawana on 7 May, acknowledged it was a "mixed performance" as the effects of some softer markets and a slowdown in the Advanced Wound Bioactives business made flat overall by a quarter of 9% underlying and 15% reported growth from emerging markets.

He said the new guidance assumed procedure volumes return to more normal levels for the rest the year, with sales growth expected to be stronger in the second half than the first. Trading profit margins are expected to improve likewise, albeit with margin lower in the first half of 2018 than in the same period last year.

"We expect trading conditions to return to more normal levels, which, combined with the continued rollout of new products and our sustained emerging markets performance, gives us confidence in delivering an improving performance trend during the remainder of the year," he said.

US sales of $545m were down 2% year-on-year, while other established markets, namely Europe, Canada, Japan, Australian and New Zealand, also contributed a 2% underlying decline and 9% growth at the reported level.

By product area, knee reconstruction implants were up 2% underlying, while hips were down 2%. Wound care was down 2%, and sports medicine and trauma up 1% as sports joint repair grew 6% helped by the acquisition of Rotation Medical.

SN shares fell 7% on Thursday to 1,300p.

Organic growth of -0.1% was 110 basis points below Goldman Sachs' forecast, with advanced surgical devices growth 80bps short and wound management 190bp. "The softness in the quarter was broad-based, with only sports medicine and advanced wound care meeting and/or exceeding our expectations."

The new guidance implies 3% downside to the consensus, Goldman said, with new reported revenue guidance of 5-6% well short of the 7.4% consensus, while trading profit margin compares to consensus of 22.4%.

"Net-net, we calculate that the revised guidance implies a 2-4% downside to consensus adjusted profit."