Profits Drop 4% at Smith & Nephew

LONDON -- Smith & Nephew  reported quarterly revenue of $1.1 billion, which is essentially flat from a year ago, while pricing pressures and higher expenses resulted in earnings slipping 4%.

The company's knee and hip replacement operations have been suffering from a combination of tough markets in the U.S. and Europe, and some product-specific issues. As a result, revenue for the company's Advanced Surgical Devices division -- which makes up 70% of the overall business -- was down 9% from a year ago.

There was, however, good news from the company's Advance Wound Management division -- which treats chronic wounds caused by diseases like diabetes -- as sales were up 5% as the company took market share.

Smith & Nephew also reported strong growth in emerging markets -- an area specifically targeted for investment in CEO Olivier Bohuon's growth strategy. As part of executing this strategy, the company announced the acquisition of a distribution company in India today following on from a similar acquisition in Brazil last month.

Despite the drop in earnings, Smith & Nephew reported a strong gain in cash flow thanks to better management of inventory and bill collection. Free cash flow for the first quarter was up 43%, to $137 million, as the company's focus on improving cash generation paid dividends.

Thanks, in part, to this strong cash flow, the company announced a new $300 million share buyback program. This announcement follows last year's new dividend policy, which resulted in a 50% increase in the full-year dividend.

While Smith & Nephew faces tough economic conditions and intense competition, it appears to be making progress on its new strategic focus on the higher-growth Advanced Wound Management division, cash generation, and expansion into emerging markets.

It remains to be seen, however, if these faster-growing, but still small, markets can offset the slow growth that characterises Smith & Nephew's traditional developed market joint replacement business.

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The article Profits Drop 4% at Smith & Nephew originally appeared on

Nate Weisshaar does not own any share mentioned in this article.The Motley Fool owns shares of Smith & Nephew. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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