Smith & Nephew hurt by tough markets in China and Gulf states

By Paul Sandle

LONDON (Reuters) - Smith & Nephew (SN.L), Europe's biggest manufacturer of artificial hips and knees, reported a 7 percent drop in full-year trading profit, missing analysts' forecasts, as tough conditions in China and Saudi Arabia kept growth in check.

The company has focused on emerging markets in recent years to boost sluggish demand in the United States and Europe, where it competes with Zimmer (ZBH.N) and Stryker (SYK.N).

However, a slowdown in China has been compounded by destocking by distributors, the company said, while trading in the oil-dependent Gulf states had been "very difficult".

Smith & Nephew reported trading profit of $1.02 billion (0.81 billion pounds) on revenue up 2 percent on an underlying basis at $4.67 billion.

Chief Executive Olivier Bohuon said the company had delivered growth, but not at the level it had wanted.

"Market conditions in China and the Gulf states together shaved more than a percentage point of growth off the group in 2016," he said on Thursday, adding that China had returned to growth in the second half.

Bohuon said he expects growth to improve in 2017 and that the company's forecasts, which were unusually precise for Smith & Nephew, underline his confidence.

The group expects underlying revenue to grow by 3-4 percent and the trading profit margin to improve by 20-70 basis points, based on a combination of efficiency and product innovation.

Robotic procedures would expand from partial knee reconstructions to the total knee, Bohuon said, and the company had launched new knee implants and sports medicine products.

Shares in Smith & Nephew, which also makes treatments for chronic wounds such as leg ulcers and pressure sores, fell as much as 4 percent to eight week lows after the results. At 1128 GMT they were down 2.4 percent at 11.72 pounds.

Analysts at J.P.Morgan Cazenove said the midpoint of the guidance would lead to a 1.6 percent downgrade in the consensus revenue forecast, which stood at $4.82 billion.

They said a downgrade could leave the shares trading nearer 11 pounds than 12 pounds in the short term.

Berenberg, meanwhile, said: "Expectations were fairly low running into these results, in our view, and the results did little to change that."

Analysts had on average expected 2016 revenue of $4.69 billion and trading profit of $1.04 billion, according to a company-supplied consensus.

(Editing by Keith Weir and David Goodman)