Smith & Nephew PLC (SNN) 2005 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to today's Smith & Nephew quarter 1 2005 conference call. For your information, this conference is being recorded. At this time, I would like to hand you over to Ms. Courtney Winn (ph) for the Safe Harbor message. Please go ahead, Ms. Winn.

Thank you. Good morning. This presentation contains certain forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. In particular, statements regarding planned growth in our business and in our operating margins discussed under outlook are forward-looking statements, as our discussions of our product pipeline. These statements, as well as the phrases aim, plan, intend, anticipate, well-placed, believe, estimate, expect, target, consider, and similar expressions are generally intended to identify forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties, and other important factors including, but not limited to, the outcome of litigation and regulatory approvals that could cause actual results, performance, or achievements of Smith & Nephew or industry results to differ materially from any future results, performance, or achievements expressed or implied by such forward-looking statements. Please refer to the documents that Smith & Nephew has filed with the U.S. Securities and Exchange Commission under the U.S. Securities Exchange Act of 1934, as amended, including Smith & Nephew's most recent annual report on Form 20-F for a discussion of certain of these factors.

All forward-looking statements in this presentation are based on information available to Smith & Nephew as of the date hereof. All written or oral forward-looking statements attributable to Smith & Nephew or any person acting on behalf of Smith & Nephew are expressively qualified in their entirety by the foregoing. Smith & Nephew does not undertake any obligation to update or revise any forward-looking statement contained herein to reflect any change in Smith & Nephew's expectations with regard thereto or any change in events, conditions, or circumstances on which any such statement is based.

I will now pass you on to Sir Christopher O'Donnell, Chief Executive Officer of Smith & Nephew.

Good afternoon to everybody in Europe. Good morning to everybody in the U.S. Welcome to the Smith & Nephew first-quarter conference call on our first quarter results.

I'm pleased to say that we've had a very good first quarter in 2005 against a backdrop of continuing favorable market conditions for all of our businesses. What am I pleased about in the quarter? Well, I'm pleased about the performance of the Orthopedics, where we gained share and improved margin. I'm pleased about Endoscopy, which continued to develop momentum, driven by new product launches. I'm pleased with the overall margin performance. We got our margins up to 20%. Wound had a slower-than-expected start, particularly in the U.S. And we will talk a bit more about that later. But overall, our quarter puts us in good shape and on track to meet our targets for the year.

We would like to take the opportunity of going through the numbers with you. And I'm going to ask my colleague and the Group Finance Director, Peter Hooley, to do so. Peter, over to you.

Fine. Thank you, Chris. Good afternoon, and good morning, everyone. This is the first quarter our results have been reported under International Financial Reporting Standards. These, as you will recall, involve only a relatively minor accounting policy change for us. The main changes are in the format and in certain descriptors used in the accounts -- for instance, trading profit replaces operating profit, and the JV is shown after-tax. Comparative figures have been restated, and a reconciliation back to old UK GAAP is provided in the appendices to the announcement.

Reported revenues were Sterling 330 million for quarter 1. This is a reported increase of 9% on Q1 last year, and is after 1% of adverse currency translation and 3% for the effect of two less sales days in Q1 this year. We (ph) benefited from 1.5% from the revenues of MMT, acquired partway through Q1 last year.

The net of all of this is that the underlying revenue growth was 11.5%. All references hereafter to revenue growth are after adjusting for the fewer sales days, adverse currency, and MMT revenues not in Q1 last year. A reconciliation of reported to underlying revenue growth by division is set out at the foot of note 3 in the quarterly accounts.

Just to repeat, the group underlying revenue growth was 11.5%, of which Orthopedic's revenue growth was 17% -- again, demonstrating share gains in a market where we continue to see growth of around 13%. Revenue growth inside the U.S. was 23% for Orthopedics and outside the U.S., 8%. Sales pricing in Reconstruction and Trauma increased by approximately 4% inside the U.S.

Knee revenues grew 17%, 25% within the U.S. and 7% outside the U.S. Hip revenue grew 12%, 11% within the U.S. and 13% outside the U.S. These reconstruction growths reflect continuing strong market conditions, particularly in the U.S., and the benefits of the expansion of our reconstruction salesforce last year and the introduction of minimal incision procedures last year. The Birmingham Hip Resurfacing product acquired in March 2004 added 4% to Orthopedics' revenues in the quarter.

The creation of a dedicated U.S. trauma salesforce continues to benefit from our revenues, which increased 23% in the U.S., one ahead of the market. Revenue growth outside the U.S. is 4%, making 14% globally. Clinical therapy revenues grew 51% compared with the same quarter last year.

Just talking about the macrotextured knee product, revisions stood at 827 at the end of April, being 28% of the total implanted, with the three-month run-rate revisions being 21 a month. We continue to work with patients to reach mutually satisfactory settlements under the Japan (ph) -- and have achieved these in respect to 580 of the revisions. Total cost at the end of April amounted to 55 million, of which 23 million is disputed by certain of the public liability insurers, and is covered by the provision created at the end of last year.

Turning to Endoscopy, revenues increased 10% relative to the first quarter last year. Growth in the U.S. was 13%, with outside the U.S., 7%. The progressive scan camera, along with our enhanced image management capabilities, continue to drive visualization and the digital operating room revenues, which grew 21% in the quarter.

Repair revenues again grew 21% in the quarter, led by the shoulder products. Blade revenues increased 2%, whereas radiofrequency declined 1%, reflecting the continued effect of the competitive patent injunctive products.

Advanced Wound Management revenues increased 4% in the first quarter last year. Growth was 8% outside the U.S., but was negative in the U.S. This was partly as a result of distributed destocking, and partly due to reductions in third-party bulk supply revenues. Behind this, sales by distributors to end customers are at a high single digit in market growth rate for our products.

Our Allevyn and Acticoat superbrand revenues continued to grow strongly at 13% and 30%, respectively. Dermagraft salesforce is now concentrating its efforts on major accounts, and revenues grew 5% in the quarter as this change took effect.

Trading profit in the quarter grew 17% on that in Q1 a year ago to 65.5 million, helped by margins improving just over 1% to nearly 20%, reflecting the continuing momentum of last year. Interest income and IFRS finance adjustments come to 2 million positive. Taxation of 20 million amounts to 29-3/4 of the group results before amortization.

The share of the results of the BSN joint venture was 3 million. Attributable profit before amortization of acquisitions and intangibles was therefore 50.5 million, a 16% increased on the first quarter last year. The increase in EPSA was 15% on an average number of shares of 937 million. We anticipate this averaging 940 million for the full year.

Our revenue momentum in the first quarter, along with salesforce in new product initiatives planned for the remainder of the year, gives us the confidence to expect underlying revenue growth to increase modestly in the latter half of the year. For the full year, we expect to achieve around 18% revenue growth in Orthopedics and around 8% revenue growth at Endoscopy.

At Advanced Wound Management, we have shaded our revenue growth expectation back a little to 7% as a result of Q1. We expect revenue growth in Q2 will be slightly slower for Endo and Wound than their full-year growths, but then to pick up in the second half. Now remember, all these have been underlying gross and underlying terms.

We see translational currency continuing to adversely impact the revenue line by 1% across the year. And finally, to remind you, there will be one more sales day in Q2.

We expect to see the trading margin improved by roughly 1% across the remaining quarters to achieve 21% for the full year. Interest, net of IFRS finance adjustments, looks like being broadly flat across the remaining quarters to give 2 million positive for the full year. You should continue to use 29-3/4 for the good tax charge based on profits -- on good results before amortization, and continue to use 60 million for our share of the after-tax profits of the BSN joint venture for the full year.

We are expecting trading cash flow to exceed a 70% conversion of trading profit for the full year. We continue to plan on the basis of expending 40 million Sterling on macrotextured settlements in the full year. Thus, we expect closing net debt of around 40 million Sterling, assuming the dollar at 1.89. And with that, I have the pleasure of handing it back to Chris.

Thanks, Peter. Well, that's the run through the numbers, hopefully going up the announcement in front of you. And now, we're happy to take questions. And Kerry, can you organize the question process, please?

(OPERATOR INSTRUCTIONS). Jason Wittes, Leerink Swann.

Thank you very much. First off, in terms of the salesforce additions, do we expect more for the remainder of the year, or are you pretty much set at this point, and could you remind us the percentage increase that occurred last year, as well?

The percentage increase in Orthopedics last year, which was the main one, was about 22% in the U.S. And this year, we expect to see a lower number. And we also have added some salespeople in Wound and Endo. So in total, the number for this year will be sort of in the range of 10 to 12%. And Peter, do you want to be specific about where we sit today?

Yes. Our full-year forecast for the group as a whole is basically 9% sales increase for the full year.

Salespeople increase.

Sorry, salespeople, yes. Absolutely. We don't use the word "sales" anymore -- it's revenue. Salespeople, yes -- 9%. At Q1, basically the increase has been 3%.

Okay. And then secondly, in terms of oxinium and other mix drivers, was there any increase year-over-year in oxinium usage for hips and knees? Or is that -- and at what rate is it at at the current moment?

The usage is basically the change. There is nothing changed materially.

Could you remind us again what those numbers are?

Oxinium knees -- this is in the essentially in the U.S. Knee usage is 40%, and hip usage is just over 40%. And this is in the U.S. And that's of the products that can take oxinium.

So we're looking to do is we're looking now to see oxinium expand broadly at the same rate as the overall sales expansion.

And as far as ceramics, what percentage of sales represented ceramics?

We've actually seen a pretty low take up in ceramics, which was not unexpected, because we continue to believe and we continue to tell our users that we believe that oxinium and crosslinked poly are the superior solution for hips. So we have seen relatively low takeup.

Maybe in terms of ceramics, have you gained back any accounts as a result of having ceramics at this point, or is that --?

I don't think it's a question of gaining back accounts. There are some surgeons who have used mixed products. And what we've actually seen is where surgeons have said, no, I want to use ceramic-on-ceramic on this group of patients, and have historically, therefore, used a competitive product, that they are the ones that have come back to Smith & Nephew. But we have not actually gained in new accounts on this basis.

And then finally, could you give us an indication of price, mix, and volume for the U.S. and for Europe and Asia? (multiple speakers) for orthopedic and (multiple speakers)

Peter, you can do some of that.

I can do some of that. Basically, what we call metals price, which is on Recon and Trauma -- that price effect is 4% positive in the U.S. And the number I've got in front of me on global mix won't be that different -- it's about on the order of about 2% -- that is 1.5, 2%

That is additional to price.

That is additional to price, but it's --

But what about price outside the U.S.?

Outside the U.S., prices are flat. Some are up, some are down, as you know, Chris.

One last question. In terms of the trauma business, the new locking compression plates -- what should be the ramp up for the year? How should we be thinking about that in terms of --?

Well, (multiple speakers) as you know, we launched with the Orthopedic Academy, which was round about in the middle of February. But on -- I've got to get back out to the field. We have had some encouraging but not dramatic progress in the balance of the first quarter. The sort of numbers we are looking for for the full year are really going to depend on how the pickup goes and how our salesforce, our new trauma salesforce, allocates its time, because you're actually seeing some strong sales in the nail and external fixator sections as well.

So as a ballpark, I would give you a number of between 5 and 10 million for the full year for the PeriLoc system, which we would regard as being a very good start for a sophisticated system. And that and the other new products together are responsible for the very strong growth in trauma in the U.S. in particular, which is where the main rollout has occurred. The rollout has not yet taken place in the other international markets.

Max Herrmann, ING Financial Markets.

Just three questions. Firstly, can you give us an update on the macro -- sorry, on the Birmingham Hip in the U.S. and the approval process there?

And then secondly, just on the insurance, just an update -- I guess I'm still a little bit surprised on the rate of the patients. I know initially the expectations were by now, it would be panning (ph) off a little bit more than that.

And just can you give us an update on the subpoena that all the orthopedic companies have received in the U.S.?

And just a final question -- sorry about that -- on the interest income line or the net income, can we get a bit of a steer for that? Because obviously, given your net debt position, I know it's -- currency has a big (multiple speakers) play in that.

Okay, we will deal with those fairly promptly. On BHR in the U.S., there is really nothing more to add. Submission is with the FDA, and we have no further information at this point in time, which is not very surprising, given where it is. But that is where we stand. And I am going to ask Peter to deal with the macrotexture and the interest numbers.

With regard to the subpoena, also, we've got really nothing to add to what we've said before -- and we have received a request for information from the U.S. attorney in New Jersey. And we are complying with that request. And I really cannot add anything to that. Peter, do you want to talk about macrotexture and the rate?

Macrotexture, based on the published numbers we have given you guys, which is basically really the last sort of number which came out of the London market was really the one which came out with our prelims in February. The average on that basis is basically 21. I think when we put it out in December, it was running at about 23. And I think if you look at our 20-F and you backtrack, you will see on a three-month basis about 24.

So you can see that it's pretty consistent whichever way. And in fact -- I mean, I just have this comment -- the internal numbers, but I'm satisfied with the thing (ph) in slowly edging down. I think as we said at the time that we based our calculations -- is basically based on an average run-rate throughout the whole of '05 of 20. So we still feel comfortable with -- let's call it that entry assumption to our calculations.

As regards interest, you know that we benefit from an element of interest arbitrage in our numbers. Because of the -- let's call it, the way -- because we're still being reported that we borrow basically against our dollar assets. And that's basically giving us effectively an interest income figure for the year.

What has happened in Q1 is the IFRS accounting calls us to revalue our interest rate swaps, and that has put a small profit into Q1, which effectively gets itself amortized across Q2, 3, and 4. And that is why I'm giving you fairly explicit numbers. Effectively, interest is plus 2 in Q1; 0, 0, 0 for the next three quarters, to come out at plus 2 at the end of the year. And I'm talking round millions now. I hope, Max, that answer your question fairly -- let's call it briefly with that (multiple speakers)

That's fine. That is helpful. Thank you.

Mark Mullikin, Piper Jaffray.

Just a couple of housekeeping items. Could you breakout the Supartz and the Exogen growth within clinical therapies?

We will have a look at that. We are very pleased with clinical therapies. The growth at 51 process is absolutely outstanding. And has gained market share in both the bone stim (ph), and obviously also, in the joint fluid therapy market.

That basically grew at (indiscernible) at the same rate, 50% --

Both in the 50% range?

Yes.

And then could you just talk briefly about the impact of the recent reimbursement decision coming out of Medicare on Exogen? Does that basically level the playing field with the other companies out there? Did they already have the reimbursement, or does this give you an advantage?

Yes, they do -- essentially, you're right. It levels the playing field. Our reimbursement approval previously had a so-called surgical caveat that it could only be reimbursed if the patient had had previous surgery. That caveat is being removed. It essentially levels the playing field for long bone use of the product.

And what portion of the market would be Medicare?

The biggest part of this particular market is Medicare. There is some private payer, but a very significant part is Medicare. So it is quite significant.

Would you say greater than 50%, then?

I think that it is greater than 50%, but actually I can't give you an accurate percentage.

Okay. And within AWM and Dermagraft specifically, what sort of factors are impacting that business as far as the slower growth rate this quarter? Do you see competition intensifying in that area at all?

No, I don't see any intensification. We are still looking at the same competitors.

It would be worthwhile spending a minute on this. Product sales going into our end customers in the U.S. are broadly running at high single digits. What we have actually seen is a couple of factors affecting, if you will, the supply chain of getting those products to the customers. And it has caused us, as you have seen, to actually slightly lower our full-year guidance for Wound Management.

Basically, at the distributor level, the distributors made -- in the U.S. market we're talking now, made some changes to their structure -- a couple of changed warehouse locations and facilities, and actually took in more inventory in quarter four of last year. And they then rebalanced their inventories during quarter one. And they have now stabilized. What that means is we're not going to get a corresponding uptick in quarter two, because they're back to square one by comparison with their normal holdings. But as I say, during that period, the take-up in the marketplace seems to have gotten to the level we would have expected, which is in high single digits.

The other part of this is that we do supply some intermediate products from some of our factories. Well, we've got unique technology. And we're supplying essentially people who are not competitors. And it so happens that on a quarterly comparative basis, sales of these products in the U.S. from a couple of our plants dropped quite significantly -- not significant in total, but sufficient to be noticed on the radar screen. One of these customers will not reorder. The other one we expect to reorder.

If you take the distributor and the change in supply of one of these items, we have actually shaded our wound care sales forecast for the year down to 7% -- we were slightly higher than that in the previous guidance. That's why we're really drawing attention to it. We regard it as a blip and a slower start than we expected. But we do expect Wound Care to be back on strong (ph), driven substantially by Allevyn and Acticoat across the globe, with an increasing contribution from Dermagraft as the year goes on, as the salesforce, which was being restructured to deal with major customers, actually gets more business out of those customers, and we lose the effect of the loss of the odd peripheral customer we had in the past.

So I think we are seeing a solid picture of the customer. And we have seen some disruptions in the supply chain prior to the customer, which is what the blip in management is all about. Is that helpful?

So where would you see that Dermagraft growth rate going, maybe, through the course of the year? Would we see that go back up until the low double digits, or --?

We would expect Dermagraft to be in low double digits for the year.

Okay. And I don't know if you normally say this, but can you tell us how many instruments sets you placed in the quarter?

In the quarter? I know we've got 2,500 MIS instruments sets out there. Are you talking MIS instruments?

Yes, MIS.

(multiple speakers) I don't know whether we've got a quarterly number. We will just have a spin through and see if we can spot it? Liz, can you spot the quarterly number?

It just (ph) has the 300 knee sets.

300 knee sets.

Okay.

Total hip and knee --

My guess it would be about 200 hip sets.

200 on the hip?

Yes -- no, no, no -- about 100. Closer to 100.

Okay, and then just finally -- the second quarter Endoscopy growth rate being slower, is that due to anniversarying the progressive scan launch, or what is the driver behind that?

it is in the visualization OR. One of the things that has happened is an increasing part of our visualization business goes in at the same time as digital operating rooms. And they take -- the order cycle is a bit longer. But we have better visibility for it.

So looking out into the second quarter, we can see a slide shading downward of the growth in Endoscopy. But on the other hand, looking further forward, we do expect to see a pickup in quarter three and quarter four. So we have better visibility, which is enabling us to give better guidance.

Okay. Is some of that then a seasonality impact of the capital budgeting cycle, or is it (multiple speakers) --?

Principally, yes. It is really timing. (multiple speakers) It is hard to call it seasonality, per se. It's really timing of the tenders we have got out there, the business that is around. This is always higher in the fourth quarter of the year. You can say that for sure. In the other quarters, it tends to vary with what is around and exactly when the orders come in and the rooms are ready to take delivery.

Alex Fairla (ph), Merrill Lynch.

A couple of questions, one on trauma. The growth in the United States has been now above 20% for two quarters. Could you just tell us how much of that is price mix, how much is price and then volume?

And going then forward into the 2005, these growth numbers which are at about 20% actually don't include any benefit from PeriLoc. Could you go as high almost as 30% growth in one of the quarters -- in the upcoming quarters, once the PeriLoc effect comes into place?

Secondly, on the Advanced Wound Management, could you tell us -- just quantify, when you say high single digits end market, what would that be? Would it be high high single digits or low high single digits? Because this is now the second year, I think, where we are looking for growth I would say below 8% on the underlying basis in Advanced Wound Management business. I was just wondering if the underlying is at 7 or is it an 9 -- and we're expecting that to pickup?

Let me let Peter answer the Advanced Wound Management one. Let me talk about trauma, and then we will see what we can do to help you with your mix question.

First of all the trauma in the first quarter does include some PeriLoc -- not a large component. We are looking to grow the trauma business in the U.S. more than 20% on a rolling basis going forward. And the aim is to progressively move some of these products into the international markets and try and tick the international growth up.

Let me remind you what our based model is for the Orthopedics business -- we're looking to try and get our reconstructive business at or pretty close to 20% globally, and get our trauma business up to midteens globally, which will give us an 18, 19% growth rate in Orthopedics for the year.

It is hard to say -- we would get as high as 30%, quite frankly. So that is the model we are working on. And some quarters, because some of these things may be a bit lumpy -- you know, we will do better than other quarters going forward. In the round, those are what we would expect for the year. Peter, can you give any help on mix and price for trauma?

Well, I think that I'm (ph) sort of digging through, indeed, our sheets, it's not that different I think to Recon.

So you're saying 4% price and 2% mix?

I would say 4% price and -- I will dig around. I can answer for Wound (multiple speakers)

But the volume is clearly above 10%?

Oh, yes. (multiple speakers) It is mainly volume, it is not mainly price.

And that volume is also -- are you taking market share in unit terms, as well, then?

Oh, definitely. There's no question we're taking market share in nails, in explics (ph), and in -- albeit very small, in locking plate. It's the locking plate we expect to see expanding most going forward. Okay -- Wound Management, Peter.

I think we can say -- that if you adjust for the destocking and you adjust for the bulk supply that Wound Management -- its underlying the growth rate in the U.S. is 9 or 10%. And I think that we're satisfied that that's supported by the end market, let's call it, tracings, which are running at about 8 or 9%. So the numbers all point to, let's say, 8, 9, or 10. And I will give you literally all the facts I know.

Okay, and outside of the U.S., then?

Wound Management, you see, is growing at 8%, which is the beat rate which it had last year. And it goes up and it goes down around the country. But it's a steady beat rate. And that is why I think we are reasonably confident that in the second half of the year, that Wound will get itself back to a high single digit growth rate, which if you average it across Q1 -- a bit of a pickup in Q2, then you're going sort of into the back end of the year -- you come out to 7, which is supported by what's going on in the underlying markets -- let's call it, to date.

What we're signaling is, we're not going to catch back the quarter one shortfall. That is the clear a signal. The overall beat rate for the balance of the issue should be in the sort of the remaining quarters -- clearly needs to be more than 7%, and it's your choice of 8 or 9.

Just a final question on the guidance, on the margin expansion. Previously we were looking for about 50 basis points. You have done I think about 130 basis points just in the first quarter. And the guidance has increased about 100 basis point improvement. Could you just tell us sort of what has changed in your thinking to give us the new and improved margin guidance?

You saw that we had a decent margin momentum at the end of last year. We just wanted to be sure that that margin momentum actually would materialize this year. You don't need much to change the percentages. And I think now that we are satisfied that we will see a fairly uniform 1% pickup across last year's quarter one, quarter two, quarter three margins -- just add 1%, and you come out to a number which should come to 21 for the full-year. I stated (ph), coming from the benefit of leverage. And there is a bit of business mix in it, as well, because the Orthopedics business is a higher-margin business, and it is growing faster than the others.

So there isn't like a plan to reduce spending in terms of sales or anything like that?

No, no, no -- it has not come through what you call cost savings -- let's call it, in the conventional term. No, it is not. It is basically a bit of everything. It's a bit of leverage, it's a bit of the mix of Orthopedics. It's a little bit of currency. It's just -- they are just working our way, and I just wanted to be sure that they were not coming through before giving you the numbers. And I think I can now.

But let's just the clear -- we're not backing off investing in either increased selling capacity or continuing to invest in R&D. We will continue to -- now we're finding other areas to make savings in.

But we're very pleased by the margin improvement. The guys have really done an outstanding job to grow the business at this rate and kick in a 1% margin improvement, 100 basis points, which we are looking to continue for the balance of the year.

Mark Landy, Susquehanna Financial Group.

Probably a question for Peter. On the SG&A line, Peter, as a percentage of sales, the SG&A was up significantly over Q4 last year, and probably at the higher end of where I have seen your number. Should we think of it a little higher going forward for the remainder of the year, or would that come down as we trend out over the next couple of quarters?

What you're seeing is you're seeing the effects of business mix coming through. So I would say basically -- you will not see it come down materially going across the year. It might -- in the round ends (ph), it might come down a little bit, but it will be here or thereabouts.

In terms of absolute numbers then, the number then probably should increase as we go through the year on a sequential basis?

Yes.

But it will basically follow sales, because a large part of it is driven by the distributor commission structure in the U.S.

When do you hope to see leverage from the additional salespeople that you have added?

Well, I think we're seeing the sales leverage. And what we are doing is we are splitting the benefit of the business model going forward between the dropthrough to the bottom line and the 100 basis points, and the reinvestment model that is substantially going into sales.

And as we said, we plan to increase our sales heads up by about 9% this year. So we do intend to continue to invest in selling for the balance of the year. So as Peter said, you should not expect leverage this year. We'll take a view on where the growth rate opportunities are for next year, around the turn of the year, and figure out which is the right set of investments to place.

But right now -- I'm really pleased to say that Orthopedics in particular is in a sweet spot. The market is continuing to grow. A lot of gloom and doom that emerged post the second quarter results revenue but in (ph) last year, we don't believe -- and we have persistently said this, we do not believe the trends are negative. We believe they're consistent going forward.

And it makes excellent sense for us to invest in expansion of the selling and marketing capability, as well as R&D in Orthopedics, at a strong rate to take advantage of this opportunity. And that is what we're doing.

It is pretty much the same end Endoscopy. The digital operating room program is really a new program last year. We're putting specialized resources behind that. We're putting additional resources behind the repair sector. We're getting 20%-plus growth out of those -- great investments for the shareholders; builds long-term value in the business.

And similarly, in the U.S., although it is not demonstrated in the numbers in the first quarter, in Wound Management we are kicking along, as Peter said, at this sort of 9 to 10% product sales number into end customers, and it is our aim to get that up into low double digits. We believe we've got the right team there. They have added something like 20 net people by the end of this last quarter, between the fourth quarter and the first quarter. So we expect that is going to be good value investment as well.

So we believe that we're not aiming for leverage at this point in time, except insofar as were we are dividing the benefit between the bottom line and the continued investment rate and the opportunities that are there to drive long-term value.

Blades have increase nicely over the past three and four quarters. Should we see a similar sequential growth rate for the remainder of this year in blades, or do you think that will kind of tap out at a specific year-over-year growth rate?

Well, it is our aim to key blades modestly moving upwards. We have introduced a new blade product in this first quarter. We are continuing to focus our efforts to make people understand the difficult and dangerous consequences of reprocessing. Blade has (ph) stabilized now the U.S., and we are continuing to develop the business going forward. And we feel that is likely to continue at that procedure growth rate level.

So a 4% sequential growth probably for the first -- for the next quarter or two, and then that will flatten out?

No, I mean we grew 2% in this quarter. I'm not sure that it is going to get up as high as 4.

Sequential growth. You were up 2% year-over-year, but sequentially, in fact, there was actually more from the fourth quarter.

(multiple speakers) we don't do that sequentially.

(multiple speakers) I'm afraid we don't track our numbers like that. But I mean year-on-year growth is running about 2%.

You were better off using a 2 or 3% number if you want to go down to that level of detail. But we're looking more at how we see the overall evolution.

Just a quick clarification -- 940 million share count for the year -- is that right?

Yes, average shares for the year. Not the one at the end of the year -- it is the average.

Right, so you're going to be reducing share count as the year goes on, then?

No, it is 937. And the average will be 940. So at the end of the year, it will be, say, 942.

Wasn't this quarter 943, or did I misread something?

Not according to what we have got written down here. (multiple speakers) Unless I --

It is 937 quarter one average. The full-year average is 940.

But that's the ordinary shares. On a diluted basis, it is 943.

Diluted -- I haven't frankly got the number in my head, because it is tiny, the difference.

What (multiple speakers) think the diluted number for the year?

I haven't got it. I would have to look it up for you, frankly.

And the last question -- probably more of a qualitative than quantitative assessment. Do you think that the appetite for ceramic-on-ceramic has waned over the last year, now that you have introduced the product versus some of your other products that you have?

Well, I think if you look at -- at the time we started the ceramic-on-ceramic trial, we did see that as a product with some significant potential, because quite clearly there are patients who need -- active patients who are going to be long-life bearing service.

What has happened while the trial is going, getting pulled together, getting into the FDA, getting approved by the FDA -- is that we were able, through the way in which we were obviously (ph) developing our manufacturing competence, to come up with an oxinium hip component to work with our crosslinked polyethylene, which we believe to be a better product, as we said earlier. And therefore, what we're really doing is promoting that product. So I think we said pretty consistently we only saw ceramic-on-ceramic as an add-on. In total, I don't see other competitors talking about strong growth in it, at least as a percentage of their sales.

So I think that we are seeing in our oxinium a relatively stable component of the longer life bearing couples, which for us is principally oxinium and crosslinked poly, and we are seeing that expand as the sales expand, but not changing terms dramatically going forward of penetration.

So I think you could say that these sector has split itself out as to who is using the high-tech longer life bearings, and who is using standard bearings for the patients who have lower demands on their hip systems. So yes, to that extent, I think the market as a whole has matured -- only you'd probably do better asking other people specifically about ceramic-on-ceramic.

No, I just wanted to get a read, seeing that you're new to the market with reference to the positions advertised.

And just the last follow-up to that -- do you think that ceramic-on-ceramic as a percentage of the hard wearing (ph) surfaces is going to decrease as we go forward this year, or just relatively stay the same?

Well, insofar as we're gaining share in hips on both -- and we do not should not forget metal-on-metal here --

That is my point, right. Are we seeing a comeback with metal-on-metal versus ceramic?

Well, we're very excited about the Hip Resurfacing metal-on-metal program. Clearly, we have yet to get that approved in the U.S. And as we said, we have no new news on that. But internationally, all the figures that Peter has given you do not include the BHR growth, which is 4% of total Orthopedics. So probably outside the U.S. that something like doubles our hip growth outside the U.S. And we believe that that has a significant potential to continue growing outside the U.S., and hopefully when we get it approved in the U.S., we will be able to really establish that in the market.

So for us, our aim is to offer the surgeons the choice -- oxinium and crosslinked poly; metal-on-metal with a resurfacing and long-term is a straight metal-on-metal product, on a conventional primary hip; and obviously, ceramic-on-ceramic. So we will have the full range. And the surgeon can choose whichever he wants. And we think that that will be the offering there really helps surgeons and hospital chains.

Yi-Dan Wang, Deutsche Bank.

Several questions. In terms of Dermagraft, can you give us a sense of when you expect that product to break even, and whether that breakeven will be accelerated given the additional sales force additions you're making in that area?

The second question has to do with Exogen and the recent competitive DRG changes. What percentage of the stimulation market do you think are in patients who have had surgery versus those who have not? And what do you think your market shares in those areas?

And then in terms of MIS instrumentation, can you give us a sense of how you are extracting returns from this investment in terms of the fact that these investment obviously reduce this cost for hospitals, but how are you marketing that to those businesses?

Right. Well, let's have a shot at this. Overall, we believe that Dermagraft would be expected to break even as a "venture" sometime in 2007, 2008. We have not made any significant shift in that.

Just to correct the impression I may have given, the additions to the Wound Management sales force are to the general sales force, not at this stage to the specialized sales force that is handling Dermagraft. So we would expect the impact of the added salespeople in Wound Management to be principally on Acticoat and Allevyn, and the other Advanced Wound Care products rather than Dermagraft specifically.

With regard to Exogen, quite frankly, we don't have numbers that are as detailed as you are looking for. Broadly, the long bone market is on the order of 200 million. We think we are the number three player, if you look at that, behind two of the electrostim companies. And quite frankly, we would like to be the leaders in that market. And we're working hard to get there. And this is another step down that route.

Clearly, where we have got the strong representation now -- we've got 160 salespeople out there -- they are now able to service surgeons who are dealing with both types of patients -- those who have had surgery, and those who have not.

With regard to MIS, I think that the best way of talking about this is -- it is evident for the hospital that we are contributing to this process, because we are bringing the new instruments into the hospital. The financial benefit of that to the hospital is less rehab -- the surgery is not quicker. But the patient generally recovers faster, for obvious reasons. And therefore, there's less rehab, which of course the patient likes and the system likes. And the way we get recompensed for that, really, is we are still getting price increases.

And essentially it is benefit sharing, if you will, in that we're putting substantial capital investments in to enable the hospital to do a better job, and the patient to get better surgery, and we essentially get a price increase as a result. That is a slightly shorthand way of describing it, but roughly, that is what is happening.

I have a couple of follow-up questions. In terms of the Exogen product, how much off-label use do you think that there currently is in the nonsurgical areas?

We have a very strict policy on off-label promotion. We don't promote off-label. We don't provide information on it. And we certainly don't collect any information on it. So I really cannot help.

Okay. And then in terms of price increases to hospitals, how much overuse of premium end product do you think there currently is within the U.S. orthopedic market?

Well, I don't think I can answer that question. It is the surgeon's choice as to what is the appropriate products for the individual patient. There is a wider choice available in the U.S. than there is, typically, say, in the UK. And we think in the main that surgeons are dealing with this responsibly.

I think -- we were talking earlier about the penetration levels of oxinium and ceramic-on-ceramic, and are they maturing, and I think that is sort of part of the answer -- that surgeons are working out -- well, which are the patients that should have this technology, who need the longer lasting or more durable bearings -- and making those decisions. And the only way I could suggest if you wanted try and pull it, you would need to do a hospital survey. But we can't give you any indication there.

And last question -- in terms of the macrotexture knee revisions, the amount of settlements -- based on the figures you released, anyway, the average settlement per patient seems to have gone up quite a lot. Is there any reason for that? Or how should we be looking at this going forward?

I'm looking at Peter -- I'm slightly puzzled. I think there has been a very slight increase in the average settlement. But what it depends on most of all is the number of unilaterals and bilaterals. Obviously, bilaterals receive a higher level of compensation. Indeed, the surgical bill is higher. So maybe, it is a mix effect. But we track this split out, so we can look at that what is happening. But we don't see a significant upward shift (multiple speakers) when we're tracking it at that level.

I've got nothing to add. It is not -- it is not something that is on my radar in that respect, Chris.

Martin Hall, Eden (ph).

Peter, if my understanding is right, the big change in the amortization of intangibles between this quarter and the last quarter will not be consistent, or will not run through for the next three quarters, because it's associated with MMT. Can you confirm what the intangible was in the SG&A line for the full year 2004?

So basically, under IFRS -- I hope my people from my finance function (multiple speakers) they come rushing in, say no, no, no. (laughter)

Under IFRS, the bulk of all historic amortization fell away, basically. So all you are seeing -- we are talking -- all of our numbers are preamortization, because that's our basically -- policy. The small amount of amortization that you're seeing in the numbers is the MMT amortization. Don't ask me what it is for the full year. But within (ph) the quarter -- I don't really (multiple speakers)

But it would run on for the balance of the year, so (multiple speakers) it's not amortizing over the first four quarters.

No. It will run on forever.

Yes, I understand. But I was just trying to confirm that it was due to MMT (multiple speakers) will have jumped in the second quarter of last year as well in the same way as (multiple speakers)

Yes, it is the MMT number. Multiply it by four. If what I tell you is wrong, I will get in touch with you.

All right, we probably have time for one, or maybe two more questions, and I think we will close. Do we have any more questions?

Milton Hsu, Bear Stearns.

A couple of questions here. Peter, just the clarification here -- the hip revenue growth numbers you gave of 12%, 11 in the U.S., and 13 outside the U.S. -- is that inclusive of MMT, or is that separate?

That basically -- it excludes the benefit of the MMT sales, which we have got on the books in January, February, and half of March.

Okay, so it excludes that?

Yes.

Okay. And then just turning to perhaps your U.S. hip and knee business, when I look at the numbers you reported, the growth was roughly 18.5%, 19%. Can you give us a sense of -- I know you mentioned pricing was 4% of that. But maybe the volume and the mix components of that?

Well, I have not got it for the U.S. I've got it roughly for the whole world.

I will take that, too.

Okay, for the world, price -- the U.S. metals prices, as we said, is plus 4. And for (ph) the time, you've just got to dilute that down for the -- let's call it the breakeven price in the rest of the world, you have got a net 3 on a world basis. I then think mix is about 2. I then think volume is about 12. And all that adds up to 17, I hope -- 3, 4, 5, 6, 7 -- yes, 17. So it is basically 3 for global price, 2 from global mix. It might not be quite 2; it might be 1.5 -- volume, 12 --

Right. Okay.

Justin Smith, J.P. Morgan.

Just a very quick one. In clinical therapies, I could not find anywhere what the split of the U.S. and the non-U.S. growth was. I'm just trying to (multiple speakers) think about when Vioxx in the third quarter if we are going to see a slowdown in the U.S.?

Well, first of all, it's virtually all the U.S. There is a little amount of European business on Exogen -- and also, a little amount of Japanese. But you could take -- it is mainly U.S.

We're not convinced there's a Vioxx component to this, you know. I mean, it's really hard to tell. When the business is growing at this rate, we believe that's because of the rate at which we are adding some very dedicated salespeople, who really have a good sales model -- some great support, and some enhanced reinvestment. And of course, we are an orthopedic company. So we do understand orthopedic surgeons and how to sell to them. So in terms of the Supartz, in fact, we think this gives us a unique selling position.

So it is really hard -- we don't think the Vioxx effect is that significant. We have not been able to separate it out in 2004. I guess time will tell. But broadly, you should think of this as a U.S. model.

And just second question -- in terms of MMT outside the U.S.A., are you seeing any kind of pull-through effect of the other products -- in terms of is that benefiting the rest of the business, or is that yet to come through?

It is benefiting the rest of our hip line outside the U.S. -- very strongly in 2004 -- maybe a little less so far this year. But we would hope to do that, because MMT -- the bone and hip resurfacing product is used in major orthopedic centers around the world. Doctors are very enthusiastic. Quite frankly, our hip business in the rest of the world has not been that strong, and this has brought us into those centers, and they like what they see. We have a great hip line. And we're in a great position to talk to these leading centers as our customers, as opposed to somebody you've got to know (ph), and all the rest of it.

So it is having an additive effect on our hip sales internationally. So that's where the benefit is.

Okay, I think we will conclude the call on that basis. Thank you all for participating. There were some very good questions. I hope we have been able to help you with understanding our business. We have had a good start to the year. We're confident of hitting our targets for the balance of the year, and look forward to talking to you all again in roughly three months' time. Thanks very much. Bye.

Ladies and gentlemen, that will conclude today's conference. Thank you for your participation. You may now disconnect.