Smith & Nephew PLC (SNN) 2005 Q2 法說會逐字稿

Welcome to the Smith & Nephew second quarter 2005 interim results conference call. Today's conference will be hosted by Sir Christopher O'Donnell, Chief Executive of Smith & Nephew.

(Operator Instructions)

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 are 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 the 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 20F, 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 expressly 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 expectation 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.

Welcome everybody here in the conference room and those on the conference call to Smith & Nephew's quarter two and interim results presentation. Joining me today are Peter Hooley, our finance director, and Jim Dick, the president of our wound management division.

The order of play is going to be that we -- I'm going to just make a brief introduction here, then Peter is going to present the financial results. I'll talk about the business in general and Jim then is going to talk about wound management in more detail. We'll have a joint Q&A session afterward between the people here in the city presentation center in London and those participating on the conference call and we'll also take questions between the two.

So without further ado, let me just talk about the highlights as we see it for quarter two this year. First of all, our revenue growth in the quarter picked up just modestly to 12% in quarter two. Orthopedics turned in an outstanding performance to lead the market at 18% with a particularly strong performance in the U.S. Endoscopy, as predicted, had a lower quarter at 7%, really awaiting the launch of their new System 400 camera, and Advanced Wound Management improved to a 6% performance after a pretty tough first quarter.

So those are the key dynamics in the business. I would like to turn you now over to Peter Hooley to review the financial results in more detail. Peter?

Thank you, Chris. Good day, everyone. As you know, today we're covering Q2 and also half year UK interim results. As usual, I talk in revenue growth and underlying terms, that is exclusive of the effects of translational currency which has been marginally positive, and the extra sales day in Q2 relative to that in 2004.

Underlying revenue growth was 12% in Q2, making 12% for the half year. Operating margin progressed again up 3/4 of a percent, making 20% for the quarter and for the half year. EPSA growth was 16%, both for the quarter and the half-year. And having increased our dividend cover and through that financing capability over recent years, we are now increasing the interim dividend by around 10%.

And finally, just on this slide, we just announced the closure of one of Endoscopy's manufacturing facilities in the U.S. to further improve it's competitive position and cost base. This will cost 9 million sterling and be booked to the material items in quarter three.

Looking at our pro forma results, I'd like to remind you all before amortization of acquisition intangibles. You can see reported revenues increased 14% in Q2, and underlying revenue growth was 12%. And I come to the reconciliation of this two slides further on. A margin increase of 0.75% on 1.7% converts supported revenue growth into trading profit growth of 18%. EPSA growth is after slightly higher tax charge of 29.8 and 937 million shares in issue. As you see, this is basically all similarly reflected in the cumulative half-year figures where EPSA growth was also 16%.

These results were achieved after a translational currency benefit of 0.5% to Q2 revenues with the euro actually strengthening. The dollar was not quite flat but overall, it was flat. Had we done a U.S. dollar consolidation, our reported revenue growth and EPSA growth would have been 1% higher at 15 and 17% respectively for the quarter.

Here, we have the usual reconciliation of reported to underlying revenue growth, starting with the column on the left with 14% reported revenue growth in Q2. We need to correct this for 0.5% of positive currency and the one extra sales day in Q2. This gives underlying 12% sales growth. Note for the half year there's one less sales day because if you recall in Q1, we had two less sales days, so two minus one equals minus one. Underlying revenue growth is the same, therefore at 12%.

Orthopedics growth was tracked at 17% in Q1 and is now 18% in Q2. Endoscopy was 10% in Q1 and, as we predicted, it's slightly lower at 7% in Q2 and wound management improved to 6% in Q2 after 4% in Q1.

Turning now to the geographics, U.S. revenue growth was 13% in Q2, Europe 9% and the rest of the world 16%. Orthopedics revenue growth in the U.S. was again a very strong 22% in Q2. Endoscopy's revenue growth was slower in the U.S., reflecting lower visualization in the U.S. and, as Chris mentioned, the launch of a new camera, the 400 Series. Growth outside the U.S., you combine the numbers it was a strong 13%.

Wound outside the U.S. again delivered a steady market rate of growth of 8%. Inside the U.S., some stabilization of the third party distributor inventory levels reduced the decline in revenues which we saw in Q1 to 4% in Q2. And just to remind you that this decline continues to reflect a reduction in contract supplies of intermediate products to industrial customers, which we do see continuing into the second half. However, absent these two factors, in market sales tracing in the U.S. indicate end user purchasing growth of around 7% in the first half.

Sales pricing was positive by about 1.5% across the group as a whole in Q2 and in orthopedics the recon(ph) and trauma pricing was 4% positive globally. The principal product line revenues and their growth are provided in the appendix of this presentation and you can see more detail in that on our web site.

Profitability is up 1.7% in total in Q2 with stronger progressions at orthopedics and Endoscopy from leverage and some currency benefit. Wounds lower margin reflects it's lower U.S. business and just to remind you that this is stronger than it was in Q1 by about 1%. Looking to the second half, we see margin expansion of around 0.5% on H2 2004, taking a full year margin to approaching 21%.

Looking at cash flow, the conversion of trading profit into cash flow was 38% for the half year and just under that for H1 2004, whilst our inventory levels remained high at orthopedics and needed to fuel that growth. We are targeting to return to our 70% trading profit to cash conversion ratio for the full year. You can see that cash flow continues to finance settlements with patients in respect to their macrotexture revisions and this was 12 million in the first half and we expect this to be around 30 million for the full year.

Macrotexture revisions are running in the low 20s per month, a background rate that supports our provision basis. The number of revisions now stands at 897 at the end of July and an update on macrotexture is to be found in Note 4 to the accounts and in the appendix for this presentation. Suffice to say we are still in discussions with the insurers.

Interest and tax is high because of higher profits and because last year we had the benefit of a catch-up of Oratec NOLs. I use around 70 million for cash tax on interest for the full year. Currency line reflects the dollar at 1.77 and at this rate, net debt will be around 90 million sterling at the year-end. While it's not cash this year, Endoscopy's manufacturing plant closure will be taken in Q3 as a material item separately disclosed, costing 9 million. The cash cost will be 6 million and this will be spread over '06 and '07 and we expect the closure to deliver a margin benefit of around 1% to the Endoscopy business in 2007.

Turning now to 2005 as a whole, our strong momentum in orthopedics enables us to continue to target 18% revenue growth for orthopedics for the full year. Endoscopy has good prospects for visualization and digital OR in the second half and we continue to target 8% for Endo for the full year. Wound expects some pickup in the second half, but we are dropping revenue growth to 6% for wound for the year as a whole.

With the dollar at Q2's end rate of 1.77, which I think is the rate today, currency translation will be positive to the top line by around 1.5% for the full year. I said earlier we're looking for 0.5% of margin progression across H2, giving a full year margin approaching 21%. Interest less IFRS financing adjustments should net out at 1 million positive for 2005 as a whole. The JV, net of its interest and tax, remains at 60 million for 2005. The tax rate stays at 29.75 on group profits before the JV amortization and the Endoscopy restructuring charge. The number of shares in issue should average 940 across 2005. And suffice to say we remain on track to again achieve our underlying mid-teens EPSA growth goal for the year, this before Endoscopy restructuring.

And with that, I have the pleasure of handing it back to Chris.

Thank you very much, Peter. And I hope you'll agree those are good second results. The particular thing I liked about them is, and Peter may tell me I'm wrong, but I think this is the first set of results since I became Chief Executive about eight years ago, where for a combination of the restructuring we understood in the group and the adverse currency movements, where reported earnings are actually higher than underlying. And actually that makes the business model work a hell of a lot of better when you actually are in that situation.

So it's very, very encouraging. And there's no acquisition benefits taken into that either of any substance, it's a clean quarter with reported higher than underlying. So it's excellent.

What I'd like to do is to give you a slightly longer -- some views on each of our businesses and a view of the slightly longer term growth prospects for ortho and endo particularly and then really ask Jim, after some headlines from me, to do the same for wound management but in more depth.

So, just to remind you of our strategic position, we're looking to exploit the very positive market dynamics, the aging population, the baby boomers coming through into orthopedics, yet to show up in wound management, increased consumer and patient interest in healthcare and involvement in decision-making and payment.

We're looking to build on our technological leadership in each of our businesses to expand the markets, as well as take share. Our organic growth strategy has two components. One is to continue to fuel our innovative product pipeline, I'll touch on that later, and also to develop our sales force, both to increase the numbers and to improve the productivity of the sales people we have on the ground by better support, better education and more advanced technology.

Additionally, we look to pursue synergistic technology acquisitions and to add growth in our existing sectors. And overall we look to build on our Smith & Nephew brand, which is well respected, particularly by our customer base for its values of performance, innovation and trust.

Moving to orthopedics, the market growth continues out of 2004 into 2005 at 13% on an underlying basis, that is adjusting for currency. That's very encouraging because people have taken a pessimistic view on the orthopedic market. But the underlying numbers of patients coming through, particularly for hip and knee replacements, continues to be strong as surgical and technology advances make this a, I wouldn't say an attractive option but a very, very acceptable option for patients who want to maintain their quality of life.

Also we are seeing a pick up in the trauma market. We're taking initiatives, others are too. There's some polarization going on, but the growth in the trauma market is picking up, particularly in the US.

Our global revenue growth was 18% both in the quarter and the half year. We're very proud of that and you can see from the chart here that again in the quarter we led the marketplace for the quarter and for the year to date. This is the fifth straight year we've held that position. Other people have come up to be number 2 from time to time but dropped away, we've been very consistent in that position and we look to maintain that going forward. That's fueled by US growth, which is quite frankly a spectacular 22% and a very respectable and increased growth outside the US of 14%.

What's driving that? Well, our minimal incision surgery programs and Oxinium, the best offering on the market place are driving a knee and hip revenues. Our hip resurfacing program is a big lead in driving the hip and total growth outside the US. Peri-loc our locking compression plate which we introduced earlier this year is the big driver of our trauma numbers and trauma grew a spectacular 24% in the US. Particularly helped by Peri-loc and our new produce revenues overall with 17% in the first half. Those of you who've got great memories will note that that's lower than it has been in the last few years. The reason for that is that Oxinium drops out at the end of its 3-year term. So this growth number is without Oxinium. So that is a terrific performance.

What are the growth prospects for orthopedics going forward? Well, they're very good. We're continuing to invest in our sales forces, in trauma, in recon and in clinical therapies particularly focused on the US and Japan. Oxinium technology will be extended to revision knee and that will be launched in the second half. We expect continued growth from our hip resurfacing product program outside the US, and we're looking towards next year for an approval and launch in the US.

Our Peri-loc plating system, we launched the system in the first quarter. You can see on the picture here that we've now added a targeter which enables a much more minimal access approach which is faster and causes less damage to the patient to be implemented, so you can get the drill holes in the right place from outside the body. So this is a big step forward and it increases our advantage in ease and speed of surgery for the surgeons.

It's our aim to bring to the market an upper extremity program in 2006 and we're well on schedule to do that. And we have as we've noted in public, the aim of extending the indications for Exogen, our ultrasound bone healing product, which has a restriction on its sale removed in the US from the first of August, which is that no longer can it only be used on patients who previously had surgery for broken bones. So that's very encouraging. The prospects for orthopedics are very good to continue on the leadership track.

Moving to endoscopy. The global market growth here of 8% for endoscopy - sorry for arthroscopy we believe is continuing to be about the run rate. We were slightly below this in the second quarter but we're ahead for the half year and the second quarter was influenced principally by the news leaking out of our new System 400 camera and customers held off buying cameras until they could get the new system available to them. We launched this at the end of the June but it meant that the US growth was only 2% in the quarter, yet 8% for the half. Outside the US we're very, very pleased to get back into double digits and with a very strong 13% performance. Where the arthroscopy market is less penetrated outside the US. The main driver for growth is knee and shoulder repair and the camera launch will benefit the second half.

New products are outstanding 22% of revenues and we show here our elite suture shuttle system for shoulder use which is essentially a one handed suture knotting system inside the shoulder, very well except that the shoulder surgery enabling us to expand the market, get more surgeons to do more surgery endoscopically rather than through open surgery and actually to speed that operation, get better results. So - and I'll touch on the manufacturing restructure that Peter mentioned in a moment.

Before then though, I'd like to look at the longer term growth prospects for endoscopy and particularly we're focusing additional resource on a specialized procedure which is driving knee and shoulder repair. we have the new system 400 camera launched in June and in the first half and going out into the second half we expect continued excellent market acceptance of our digital operating room systems. We're particularly pleased as we've noted publicly that we have the exclusive agreement with Kaiser Permanente to supply them with upgrades to their endoscopic operating rooms over the next 3-year period. Which we regard as a real flagship win for Smith & Nephew endoscopy. We have a long-term growth opportunity in hip arthroscopy, which complements our repair program.

The new product we've chosen to show you here is a graft sleeve for encapsulating ligament replacements and getting better fixation to bone. It's shown not just here on the slide but on the paper many times magnified. It's actually very small, very accurate sleeves for trapping the ligament and improving the attachment to bone.

Turning to the manufacturing restructure, we're doing this for economic reasons. We have 3 US plants and those of you who are from the US may note that I don't have the geography quite right but that's the side of the slide that causes the problem. We have 2 plants in Massachusetts, we are going to close the Andover facility and move the high technology manufacturing processes to our Mansfield, Massachusetts plant. We're going to consolidate our warehousing and distribution on our Oklahoma City plant where we moved into new and larger premises last year and that will then be our global shipment center, and a number of assembly operations will move to be outsourced both nationally both national in the US domestically and globally.

So this will give us improved utilization of our Mansfield and Oklahoma City facilities and a 1% margin improvement in 2007. these are always difficult decisions to take and our endoscopic management team have worked very, very hard to analyze the right ways to improve their business further and have come to this conclusion and as Peter said we will take a restructuring charge of 9 million pounds in the third quarter.

I'm going to give you the head lines on wound management and then turn this over to Jim, the global market growth of the sector in which we compete is about 8% we think the same as 2004. but if you include KCI, which we usually do to give the broader picture, it's probably growing around 12%, it might be a shade less than that in 2005. global revenue growth for wound management was 6% in the second quarter, which was an improvement on the 4% in the first quarter. outside the US continued strong performance growing at at least the market rate of 8%. And, but in the US we were off the pace in terms of sales growth, but better than the first quarter at a 4% decline.

US end user sales, and Jim will talk to you about this, are up 7%. But the combination of distributor destocking and the lower intermediate products that we supply to non competitive companies if you will proprietary biomaterial type products which the picture for which has changed this year, actually gets subtracted from the total number in terms of geography and pulls the thing down from about flat to a minus 4% in the quarter. New products here, for a long, long product cycle business of 16% are good and here we're showing you one of the products Jim will talk about Acticoat moisture control. So I'll now turn this over to Jim to talk to you about the position and growth prospects for wound management. Jim?

Well thank you Chris, and good afternoon everyone and good morning to those of you listening in from the US. I'm going to talk about our advanced management business which we feel has strong growth prospects both in the short and the long term. I'll explain why we believe this as well as commenting on our half 1 results. And the key challenges to growth that we're focusing on. Now this business is all about providing innovative solutions to treat people with serious wounds and we always classify these as 2 main types.

Firstly, acute wounds, these include things such as post operative wounds, they're worst include serious burns which can often be life threatening and even if not life threatening can result in scaring and other complications subsequently. We have a very comprehensive range to address both these areas.

The other areas, the chronic wound areas which is approximately two thirds of our business and this includes wounds such as leg ulcers, pressure ulcers, diabetic foot ulcers. These ulcers are often very difficult to heal, they can take weeks, months, and in extreme cases, often years to heal. Because of that there are quality of life issues for the patient's concern and because of the consumption of nursing times involved in the healing them can have quite a high economic burden on health care systems.

We believe we have a sustainable growth opportunity for 2 principal reasons, firstly the long-term growth fundamentals in the business are very strong and secondly the underlying medical issues driving growth are increasing. Turning to the first point clearly the main fundamental drivers are the aging population, the increasing amounts of the elderly. That's related also to the increased amount of chronic wounds.

It's estimated for example that in the US that over the next 20 years the over 65s will increase by 60%, that's an extra 20 million people. Health care costs for the over 65 are 3 to 5 times greater than those for the under 65. and when we also consider that up to 40% of wounds around the world are still unconverted to advanced techniques then there's a lot of opportunity for trade up, particularly since technology is impacting outcomes. And I think because of the awareness of what technology can do there's a lot more patient expectation related to wound care.

People are aware that things can now be improved and are less likely to put up with a wound for over a year. as an example here as just one such patient who (inaudible) a program we're using in the UK, just to make the awareness of leg ulcers for example upper mind for people so they can know when to stop a leg ulcer and when to get treatment.

The underlying medical issues are also driving growth. We all know that diabetes is increasing, populations are becoming more obese and there's an increase in venous disease, which is driving growth in venous ulcers. There's also a much greater awareness nowadays of hospital acquired infections particularly the growth of MRSA and that gives us lots of opportunities for infection control in would management.

All of this means that there are really strong economic arguments behind our business in wound care. Top economic expertise underpins our strategic aim, which is to drive down the overall treatment cost of wound care while capturing a greater share of the remaining costs through development of advanced medical solutions and this chart graphically illustrates that with the gray area being the nursing time involved in treating a wound, the white area being the other associated costs and the orange area being the actual treatment costs for materials. And you can see that for a traditional treatment material costs are a very small part of the overall treatment. But as we reduce the overall costs with technology we can take a greater proportion of our reduced cost.

So health economics are really driving the use of technology and also we're using them increasingly as arguments in our marketing program.

We also are in a very strong market position, we have a very strong global reach around many many countries around the world and have strong positions, which enabled us to drive global sales. We have leading positions in phones, in silver products and in new technologies such as hydrosurgery or rapid debridement.

With a 19% over global market share, that gives us real global reach. As I mentioned increasingly technology has real potential to increase market value. a good example is the impact that KCI has had on the wound care market with its back product. We did an estimate, should be looking at the number of wounds and the potential for technology to actually trade up that value and we believe that KCI probably generating their revenues on maybe 2% of the total wounds available worldwide. It's a very good example how technology is increasing market size.

So we have strong market opportunities, one of the challenges that we're addressing to drive growth and I think I've listed 4 here. Firstly to leverage our superbrand growth. We have two (inaudible) products with Allevyn and Acticoat. Secondly, to accelerate our US growth. Thirdly to build Dermograft profitability and finally to continue our current planned improvement in margins and we're going to talk about each of these in turn.

Firstly the superbrands. In the first half Allevyn grew by 13% and Acticoat grew by 32%. Allevyn is our hydrocellular foam product and it's a leader in the marketplace. Acticoat is our nanocrystaline silver product and it's a leader in the treatment of infection. Together these brands represent 33% of our total business. The balance is a 66% is where we have strong shares but in lower growth product areas. As the proportion of our superbrands increases so will our overall growth, which is why we're placing so much emphasis behind our superbrands at the present.

Just to give you some highlights of what we're doing in that area. As we mentioned Allevyn is growing at 13%, this success is based on a broad therapy range, we have a very wide differentiated product range and it's available in all the treatment settings. Continue to take market share and we continue to strengthen it. Just recently in the first half we rolled out Allevyn plus which is a product which is designed to increase our exodate(ph) management. We also drive these brands very aggressively. We've got very experienced people on our central marketing. This particular brand is headed by an experienced person who was general manager of our Canadian business so we're putting very experienced people in the big brands to drive them globally.

Acticoat is performing strongly, in the first half we introduced a product, moisture control, which is a foam version with Acticoat on the surface. That's been very well received in the USA and in Canada where it's been launched. We're awaiting CE marking approval for Europe, which allows to launch it towards the end of the second half. We're also benefiting from this very high profile of Hodgkin's acquired infections, particularly MRSA and we've been producing data to show the effectiveness of Acticoat in preventing infection MRSA in wounds. and each month more and more support evidence is produced, so we're very confident in this brand and its future potential and again we've put very strong high caliber resources behind driving this worldwide.

If we turn to the US, as you see from the results our growth increased in quarter 2 to 6% and as Chris mentioned outside the US our growth was a consistent 8%, inline with the market, and we've seen some very good performance in there, particularly in Japan where we've been investing for a number of years and our growth is over 30% in Japan in the first half.

Our US sales overall declined. But when the intermediary sales were excluded the sales were flat, however demand in the US is measured by end user demand by our trace sales is how we measure it showed a growth of 8% and we expect that to continue in the second half. Although as the intermediary sales the growth will appear flat.

We've been taking some action in the US to drive our growth because it's a large unconverted market for us. Representing only 20% of our global revenues, you can see that the big opportunity for increased penetration here there's a significant upside potential for us in the business. As part of our succession planning with the new management team in place and they are energetically addressing the opportunity. We've invested in sales force expansion and in increased promotions and we've been concentrating our efforts in the three main segments; Allevyn and Acticoat, Dermagraft penetration, and establishing Versajet. And all of this has been driven on the back of strong brand driven strategy.

With regard to Dermagraft we continue to be extremely pleased by the clinical performance of the product. It is exceeding the expectations that we originally had for the product. On average, the number of pieces used to treat a wound and heal it is actually much less than we had in the original clinical trial data. And because of that, we have strong health economic arguments and continuous price improvement.

We've been concentrating on fewer accounts and driving theater penetration to sales force productivity and operational efficiency whilst we await Venous leg approval.

So those are some of the issues that are driving revenue growth, but we're also working hard to improve margins.

I've just talked about sales productivity. Dermagraft is one example. We have a number of other initiatives around the world where we're driving our channel efficiency and our sales course product efficiency. But we are also working on operational efficiencies. In Europe, we've been rationalizing our logistics to become more efficient. We've also been automating our manufacturing. For example, Allevyn automation in our Hull facility. And of course, driving Dermagraft profitability. So overall, we're targeting 17% margins for 2008.

While we have good growth prospects, the global rollout of some of these improvements I've talked about in 2005 and next year, the sales force investments, the full productivity of those investments, will come through. Japan will also continue to perform, and we've put up further investments into Japan.

We have forward product programs for our major brands. For example, in Allevyn, major product upgrades planned over the next two to three years, and on Acticoat further developments of the range and further developments of geographical penetration. And we also have the prospects of growth contribution from products such as Versajet. And I would just like to spend a couple of minutes explaining Versajet.

This was a product that we acquired last year and we've been selling it for just over one year in the U.S. it's a Hydrosurgery system based on the use of water technology, fluid technology. This is the handpiece, and we generate a fine but powerful vortex of water across this edge here, which creates a cutting edge to surgically debride wounds and prepare the wound bed for healing. It's very precise, and if you think about some of these chronic wounds, they are three-dimensional in nature. You try and debride them with the existing methods, which is a scalpel, you're trying to cut through a deep wound with a two-dimensional blade. It's very imprecise. Sometimes you cut away good tissue, sometimes you don't remove all the necrotic tissue. This is very much more precise. Very often, then is wounds usually are debrided in the operating theater, in the operating room, and many times the patients have to go back two or three times because it's an inefficient process.

This handpiece we're selling for $450. It links to a console that we sell for $10,000, but the health economics are so strong, in that patients are not returning to the OR for further treatment. So the use of this product can save a facility $900 on each application -- $1900 on each application. That's very strong health economics that we're using in the promotion. It's patented technology, and we're very encouraged with the momentum that we've generated in the first year. It's off a very small base at the moment, but as you can see, our sales are growing 10% month on month, and we believe this represents very strong potential for growth, not only in the U.S., but as we increasingly rolling out globally.

So in summary, we think the advanced wound management business has real opportunity for building value. We are operating in a market that has favorable market dynamics. We're leveraging a strong market position, we're providing innovative solutions for people with serious wounds. Our superbrands are driving growth, and will continue to do so as the proportion of our business increases. And we have clear margin progression plans. In short, we think this is a very attractive market with strong value creation for Smith & Nephew. Thank you very much.

OK. Thank you, Jim. Can you pass me the control of the -- right, what I'd like to do now is just briefly summarized where we stand and then we'll move to Q&A.

I think you heard that we are in growing and expanding markets, and that's enabling us to drive our sales revenue. The orthopedics market continues to be fundamentally strong, and we continue to lead orthopedic growth. We have improving growth prospects in both Endoscopy and in wound management, as you just heard and our new product launches are both taking share and expanding markets that we are in. Our sales force investments is now delivering, particularly noticeable in U.S. trauma, and we feel confident we are in a good position going forward to see sustained midteens earnings growth.

So I'd like to formally close the proceedings here. There are some appendices. I'm not going to go through those. They have new product schedules for 2005, where we've added some new products for this since last time around. Macrotexture statistics that Peter talked about, quarterly revenue breakouts by product component, quarterly phasing under your favorite topic IFRS, and other exciting schedules. So that's should give you hopefully enough information to draw investment conclusions on, and together with Peter's comments to construct investment models.

So with that, I'm going to open the meeting to questions. We've got two groups; we've got a group here, and we've got a group on the conference call and we're going to do this two by two, and anybody who can tell me what the crickets couriers can go up the question queue. Olive, are you there and can you introduce the question procedure to the conference call participants while we take to questions from the floor here. First, Michael.

Thank you sir. As a brief reminder, to ask a question ...

Good afternoon, it's Michael Jungling , Merrill Lynch, and I've got two questions. Firstly, could you please explain the reason for the drop in the gross margin in Q2 from Q1 of 2005? The second, what was the reason for the strong growth in hips and knees outside the U.S.? And then thirdly, it appears that there's a slightly more cautious stance on your margin guidance in Q2 then there was in Q1 and I'm just curious as to what has changed in the last three months that's perhaps given you a slightly more cautious stance on the margin?

Let me deal with the hip and knee question, and I'll ask Peter to deal with the other two. The biggest driver on our hip growth, I beg your pardon, outside the U.S. is the BHR. What is happening is this is a really good product, we are getting into leading accounts, which Smith & Nephew, with its heritage internationally, largely being trauma, have not historically been into, people are using the BHR, we're introducing our other hip products, Synergy, Spectron, Echelon 2 then, and we're getting good take up, particularly off Synergy.

So BHR is actually acting as a lead for us to expand our hip franchise outside the U.S. It's a very interesting precursor for when we hopefully get approval in U.S., because whilst we have a decent share of the hip market, around about 8%, we'd like to see that an awful lot more. And BHR could be very, very helpful in developing that, not just for itself, but the other systems that leads into the hospital. Peter, would you like to answer the margin question?

I'll do my best. I have to say we don't normally look at margins, sort of let's call it rolling Q, but if you look back last year, you'll see that Q1 was actually a particularly low margin year. I think there has been a little bit of mix, I'm just thinking, this time. You certainly got stronger trauma and stronger botanicals than a year ago, and there are low margins in knees and also Dermagraft volumes are lower, and therefore you've got obviously some under-recovery there. If you add all those things up at the margin, nothing seems to be behind that number. I mean ...

Does it represents a trend, do you believe, Peter?

No. I hope not.

I'll help you with the questions Peter. Anyway, right, does that give you a decent answer there?

It does, and also, the third question, just in relation to the guidance for the EBITA margin for the year. It seems it's a bit more conservative in Q2 than it was in Q1

I think we've shifted that ...

Not really, not really, not really. Hope to come in stronger, but I mean I'm not going to say that now.

Gee, you just said it.

You know, I'm not, so ...

I don't think we see any shifting in our position. I think we'll speedily move on to the next question. Someone here.

Don't take that as guidance.

Charles Weston, from Morgan Stanley. Two questions if I may. First all, on the U.S. knee growth, it appears that the growth has come down send -- well, since Q1, and Q4 and three of last year, whereas the hip growth went up. So I was just wondering if you could explain what happened in the U.S. knees. And secondly, first quarter you gave a breakout in terms of actual pounds for the wound management business, what actually you could attribute to the inventories and to the third party manufacturing. I wondered if you could do the same thing again for the second quarter.

Right, let me have a shot at the U.S. hips and knees. Broadly, we launched our ceramic-on-ceramic hip and the first -- or literally in January of this year and it has had a relatively small take up, but as part of that we've actually had our sales force focus more on hips than knees during the first part of this year and actually, we had some very good results on that. By definition, since it's our sales force if they spend more time on hips than they're spending somewhat less time on knees, and I think that's probably the answer.

So overall, as a blend position, we've done very well, but it's really much of a consequence of sales force focus. It's not a particular issue related to competition positioning per se, it's much more an issue of sales force focus. And I think we'd like to see the knee growth come up in the second half, and I think we'll rebalance that a bit, particularly in the fourth quarter, when we expect to have the Oxinium revision knee, which will clearly be a big focus. So it made sense to really strategically look at the sales force, focusing on hips in the first part of the year and then moving across to put some more focus on knees in the second half. But there will be some swings like that. What's encouraging to me is actually we did focus the sales force in there and we've got the growth , which is very encouraging. Peter?

We -- it's a major industrial product. Let's call it accounted for or not 5% of sales growth in wound in the U.S. so it's around 1% positive.

And roughly what is that in money?

18 million. That's 5%.

5% of 18 million?

Roughly.

So it's very small, it's about 1 million So the actual numbers are actually very small, but they influence the percentage. Now, I think that we'll work at the number for you.

(inaudible)

That's the quarter number?

(inaudible)

It's the number in the quarter, it's one million in the quarter.

Yes only in the quarter.

OK?

Yes.

Right. I'd like to take a couple of questions from the conference call please. Olive, can you put some questions through?

Thank you so. Our first question will come from Mr. Jason Wittes from Leerink Swann. Please go ahead.

Thank you. First question I guess a little bit, again, about the guidance you've given for the year. It looks like you are basically keeping the guidance the same and, as alluded to, it's also slightly lower margin but higher revenue due to currency, is that the right look? You're not actually changing what you said earlier, but the mix in terms of how you get there is a little different.

Well, if you are talking sort of in the -- you know, let's call it decimal places, I suppose the currency is marginally stronger, but we're just basically sticking to our highlight of mid-teens.

OK, I guess also looking at the 1% margin improvements you expect from the plant closures in 2007, I take it that is not on top of what you've said in the past. I think generally you've spoken to getting a 1% improvement in margin per year and I guess this just goes along with that, this is not an additional 1% you should be thinking about in 07 is it?

Jason, I think there are two points to make about that. First of all, it's a 1% improvement in endoscopy, not across the group as a whole.

OK, that's a little bit different.

And what we have said in endoscopy is because particularly we do have, if you will, some bought in products in that business, particularly screens and video accessories and the digital operating room and camera area, and it's actually a bit harder to drive the margin up in that business, but we've challenged the management team with this because it is an issue and they've taken this step forward, which will give us some more margin gain than we would have expected from endo and that really -- our view is the model we have is to try and move the margin up at the group level by 1% a year and that gives us a higher degree of confidence in the 2007 margin movement. So I think you should take that as being within the overall model guidance rather than additional to that guidance.

OK, understood. And also, I guess you talked about some overstocking last year in wound care I believe. Is that still going to be a drag for the rest of the year? I guess it reflected in guidance at this point. I guess another way to put that is has that's been worked through at this point or is that still going to be ...

That's now been worked through, accepting that the comparator in the fourth quarter of last year, when the overstock went in, is a very tough comparator evidently. So wound stepping up from a 5% growth in the first half of the year to 6% in the second half means they have to overcome that additional probably another 1% really, of stock that went into distributors who were changing their distribution systems over the back end of the year. So when we've taken that into account, and giving the overall guidance, OK?

Thank you.

Can we move to the next question please Olive?

Our next question will come from Mr. Mark Mulligan, from Piper Jaffray. Please go ahead.

Good afternoon.

Hi.

First I'd just like to talk about the hip resurfacing system. You seem pretty confident that you will be able to launch that in the U.S. in 2006, and I was just wondering what are your expectations for timing of a panel on that? And you know, ultimately a launch, and what gives you the confidence that you'll be able to launch it in 06?

Well, we've been consistent about guidance towards a 2006 approval, and we have no further information, much so we'd like to have it to give you on panel dates, timings, at all at this point in time. We guided really towards sort of median 18 months run rate from the time we put the submission in, which was almost a year ago, and so the median time would be sometime in the first quarter of next year, the first half, assuming no undue repetitive -- not repetitive, but loops in the system.

We believe our confidence is based on the quality of the clinical data, and the fact the FDA are working with it, but we actually can't give you any more firm guidance than we've had previously. In 2006, we would expect-- assuming we get clearance to launch the product, it's not going to be what I would described as an Oxinium type launch. This is a product where serious surgeon training is required, both in terms of the operating technique, and in terms of all the patient criteria for surgery, and therefore we will have to start from ground zero in the U.S. and train surgeons to use the product.

So it won't be a rocketship take off, and our view is it won't have a big effect on sales of the orthopedic group level in the orthopedic level as a business in 2006. So we would be looking for some significant impact in 2007. So that's the overall parameters. Clearly, that will depend on getting approval in the first place, and on exactly when it shows up. We kind of have a policy that while we will tell people we think we've got a very good submission, we don't really speculate on FDA timelines other than what they have in the published domain. So that's the best guidance I can give you.

OK, thank you. And then on the minimally invasive side, can you tell me how many instruments that you placed in hips and knees in the quarter?

A straight answer to that is not at the moment but we'll email you with it.

Okay, very good and just on the advanced wound management side, we appreciate the detail on that business there and in the US it seems like obviously you're facing some issues there and I was just wondering if qualitatively if Jim maybe you can discuss, is the issue internal as far as distribution, is it external, being driven by competition what's really hitting that business.

I think it's external, I think we're very confident that we've got a very good program gathering the mention. We've got good management that energetically addressing the priorities. And I think there is some evidence coming through that actually there has been an impact not just felt by ourselves but others in the market as well, so I don't think it is just us, I think it's a blip in some of the things that are in the marketplace so I'm very confident about the long term prospects of our business in the US.

Okay, and if I -

Can I just answer your previous question? And I'm -

Oh, sure!

going to cut you off. My email system works very effectively and we've placed 107 MIS hip sets in the second quarter and 275 knee sets.

Okay, very good, thank you.

Okay, thank you. Now I'll come back into the hall here, can I take any more questions. Hans you had your hand up before.

Hans Sedrick (ph) at Goldman Sachs. I had two areas of interest. First of all if you could expand on the banding of hip in terms of what the performance of sales has been outside the United States, you have been given figures for growth in the previous quarters and we hadn't anniversaried the (inaudible - coughing) but if you could give us a sense of that it would be helpful, maybe in procedure volumes or in revenue terms.

Secondly, on that could you give us first a sense of what data you actually have submitted to the FDA, whether this is a data dump of huge amounts of data which I'm sure you have very, what plenty of or where they just actually something that has been designed as a study outside the United States and then has been submitted with the FDA and the second area is with regard to Exogen and the improvement and reimbursement that you mentioned earlier.

Chris if you could comment on what type of revenue impact you expect that could have for the second half of the year or going forward in terms of what least give us a sense of how big this patient population that you have not previously been able to treat is in relation to the patient population you have been treating.

Right, okay. Peter can you answer the first part of the growth of BHR outside the US.

Yes, it's 25% plus, just above 25%.

Right. That's BHR by itself, outside the US.

Yes. Is about 25 to 30 then rather than 50% of (inaudible) 25 to 30.

I mean just to give, when you say 25% faster -

(inaudible-numerous speakers) 25 to 30.

The data we provided to the FDA was 2 principal clinical trial sets, one in the UK, one in Australia. It was a proper trial, it started the whole impact of the product and the outcomes with substantial follow up. I can't actually tell you what the length of the follow up is but the follow up is very comprehensive. In other words, very few patients were lost to follow up which is a key issue with orthopedic trials and I think there is a - there's a much bigger issue in the right data because I assuming the right data fits with what their chief investigator has published the follow up periods and proportions are lower and actually the proportions that we had were very, very high. So we think it's very good data and the FDA is working with that data.

Lastly in terms of the Exogen changes, the - I think the way we see this - there are 2 things here, first of all this is a specific change. It's something that we've worked very hard on and it's part of a program of looking for extensions of Exogen applications. And this is a serious program for us now because we have now established the mode of action of ultrasound in bone healing.

We're looking at this, the mode of action in other tissues, which is very interesting but long term, but this then gives us the basis for looking to regulatory and reimbursement authorities related to the extension of indications for Exogen. In terms of additional growth in the second quarter, say in the second half, I don't think that we're going to raise our targets, we're running at about 40% a year, we're gaining about 5 to 6 percentage points of market share a year and I think it will be a bit ambitious to shift that upwards. We might have some management discussions internally, we might, we might do that but I don't think we're going to do that in the external marketplace. But thank you for giving a prompt to our internal people.

Who've been listening.

Who've been listening.

Chris, could I just follow up with that, what is your actual market share, the way you measure it for Exogen.

Exogen is running at a $50 million business today and I think the market is about 200 million.

Yes, we're record we're trending up towards the 25% share, which would put us in number 2 position in the, in the bone healing market, which is ultrasound and electrostim.

What is the time horizon for these additional applications of Exogen in terms of commercialization?

We're, we're looking out into the future and that's one of the points that I wanted to make, I'm glad you asked me that question because we're looking to develop further applications over a multiple year time horizon. I mean if we could get one a year that would be great because clearly they all require, this is a PMA product, it's a PMA supplement if you want to document from the L traditionally. But there's serious effort behind this product program and our clinical therapist program which we don't talk about a lot but a business that is growing at these meteoric rates clearly needs sustaining and we're putting sustaining programs in place there.

I would assume that would be addressing all your business areas in types of application or -

We'd love to and we believe there's potential but the time lines for doing that are probably the 3 to 5 year time horizons, but we do believe that potentially Exogen can address other business areas.

And just one very last follow up question on the BHR, the actual trials in the UK and Australia, have they then been controlled against a normal hip stemmed, hip implant in terms of all the -

No, they really, they've been controlled against the, the literature standards if you will, because they've not been submitted on a randomized basis because the indications are different. The patient selection criteria are very important, so really what we're demonstrating is safety and efficacy of the procedure for the patient population, which should be selected.

So from that perspective they would be designed in a different way from a P, PMA -

We'd go by the classic route, yes.

Thank you.

Okay? Thank you. We'll take, sorry sir you had your hand up?

Cartwright Williams, Deberry(ph). The disparity between growth rates in orthopedics and your other two divisions is quite marked now and if anything it's got wider over the year, the past, when is your aspiration for that to close, in other words what's the medium term steer on wound and endoscopy? Is it just a pick up factor market or to exceed market, in 06 or 07?

That's a good question, I mean obviously the fundamental growth of the markets in endo and would is lower than orthopedics in the sectors that we're operating. Both businesses have the clear aim to get themselves into double-digit growth. Endo are probably going to be pretty close to that this year but may not quite make it in the full year but we would expect endo to be in double digits next year. Wound would like to be in double digits, I'm not sure it's entirely realistic for 2006 but it certainly is for 2007. and, and when I say double digits we're really looking in the - from a guidance point of view in the sort of 10 to 12% sales growth with continued margin enhancement and one of the values to wound for us is if you can hit that growth rate with significant margin enhancement then adding some of the value to the group. Thank you.

Okay, we'll go back to the conference call, can we take a couple of questions from there please.

thank you, our next question will come from Dhulsini De Zoysa from SG Cohen. Please go ahead.

Hi, this is David Clayton (ph) for Dhulsini. A quick question on the, the third party distribution in the US on the wound management side. You've mentioned that this is something you expect to come to a closure or resolve at the end of this calendar year and then we should see the growth rate start to normalize again for the US in '06 is that accurate?

Yes, that's absolutely the case, yes.

Okay, so we should be seeing mid single digit growth going forward. The second question on - again on the wound management is that it seems like you've got two big growth drivers right now and if we average out Acticoat and Allevyn, it looks like those 2 are a third of your revenue growing at 20+% year over year. Could you just explain a little bit about what's going on in the rest of the group and how that the entire group is still moving along at a mid to low single digit rate?

Yes, we got the proportion of those superbrands as they increase they're going to accelerate the growth. We've got other new products coming out like VersaJet and as that accelerates its momentum it's going to further increase the growth as well so we've got strong momentum coming through on the forward pipeline, the two thirds of the rest of the business, actually that, that - those shares, there's quite high shares in those products which are relatively low growth. So what we're doing as we accelerate our superbrands and introduction of new products our growth will accelerate.

Okay great, and - go ahead.

Why thank you David, can I take another question?

Thank you, our next question will come from Mr. Martin Hall from Eden (ph). Please go ahead.

Hello Chris, I just wanted to clarify something on the approval of the Birmingham hip. I feel that this schedule has clearly slipped and are you expecting to have an advisory committee meeting in '05, I believe there's one scheduled for September and another one in November and really coming back to what you mentioned, is the issue really down to the fact that you're trying to get approval without US data, which those go against FDA guidelines.

First of all, don't want to give any sense that we've slipped from the schedule that we've suggested to you. the implication of that is that we would expect to get to an FDA panel this year. I said as clearly as I possibly can, we have no information on that at all at the present time. We don't believe - we think this issue of non-US data is a complete red herring. The FDA rules do not say you can't have non US data, it related to the quality of the data and they are more comfortable with US data, but if you have high quality data from reputable sources and countries with strong reputations and surgeons with strong reputations then, then this really isn't the issue it's being cracked up to be. So we are broadly where we expect to be. We can't give you, because we don't have any, any specific guidance on panel dates. I'm sorry about that, but that's where we are.

Okay, thanks very much.

Okay, back into the hall, sorry, go ahead. No microphone Jim?

Hi Mike Severan(ph) from ING. Just a couple of questions. Firstly, I just wanted to get a better feel for the pricing environment going forward, obviously there's a lot of skepticism in the market about the potential outlook, longer term and I wondered if you could make some comments there, I know you mentioned about 4% positive pricing in the statements and then also just lot of talk on the Birmingham hip replacement. I wondered whether through resurfacing, I wondered whether you could give us a feel about how that's fairing out in the current markets, I know you've given us growth but just in terms of the trend's penetration of total procedures and the competing products.

Okay, let's start with prices Peter.

Taking the group in the round the pricing basically doesn't move around that much, I mean the, on recon the group is 4% into 1 on recon and trauma in 4% in Q2. I mean pricing is governed to some extent by the contracts which tend to roll so there is a deferral or delay in the whole process but we have pretty consistent pricing now in recon and trauma which is the issue of around 3 and 4% clearly in the next 12 months. And it's not on the subject to just wrap up the clip and you see the DRG come out it averages at 3.3, it failed at its revisions which is a growth area where we got revision knee coming out and having revision hip systems already in the marketplace, so I think that we're reasonably sanguine that this is going on what we've ever had gain sharing does not if you read informed comments it does not seem to be the issue which sort of it first appeared.

I think our view and obviously we've had the opportunity since we're the last of the group to report because the additional procedures we go through in the UK, the pricing environment has not turned out to be like the worst prophecies. As Peter said, our pricing has continued broadly along the same lines. Most other players who have had bigger price increases than us in the past have continued to report price increases, I think Zimmer was the only one that actually said their prices were lower and that was pretty marginal. So we see this being an ongoing dialogue with our customers but what we don't see a material shift in the pricing environment in the near future.

Right, second thing is DHR, DHR is the flagship product in the hip resurfacing market it's got the biggest market franchise, it's particularly strong in the UK and in Australia. It's got a decent foot print in most of Europe. We are seeing some competitors coming onto the market in the European sector and quite clearly the US is open because no body has resurfacing there. We still think we are, well there's no question we're still far and away the market leaders the interesting thing is at this stage of the developing market, other people coming into the market and encouraging this type of procedure is a good thing or a bad thing and I think our view is that right now it's pretty neutral and we've got some things that we're doing to the overall product package to maintain our leadership and we'll roll those out over the next couple of years and we've invested in additional facilities and training centers because training is a key part of this and they'll come on stream later this year so we've very confident, this is a very good acquisition for us and we're pleased with the 25% growth we're seeing.

Okay? Right, Yida?

I've got 3 questions. First of all, a question to Jim, if you could talk to us about the technologies that you're seeing coming through in the wound care market, obviously a lot of the products we're seeing now have been around for a long time, even your superbrands, so if you could touch on that that would be great.

A question to Chris about your sales force investments year to date, versus what you plan to achieve for the end of the year.

And then the, the third question is on orthopedics in terms of your new extentative sales from new products, the goal that you had previously I remember was probably 20 to 25%, whether that is still a realistic goal over the median term given that a lot of the innovation in the sector has already been commercialized. Thank you.

Okay, well, let's deal with them in that order, Jim will you deal with wound one?

Clearly, one of the reasons why I mentioned VersaJet is because that is clearly a new technology that is rolling out. we've very excited about that one, take us into the area of surgical debridement. Early results are very promising, they were only just starting in the US, few pilots around the world, there's a lot of momentum there for the future and that will take us into other areas and it's a very good product that takes other products with it, companion products if you debrided a wound very carefully having Acticoat on top is a logical thing, so I think that's very good.

The new indications for Dermagraft, and I think some of the nature of our roll outs, although we classify them under the big brand actually are really significant in terms of how we're changing those brands, it isn't just about Allevyn and extensions, some of those are actually quite significant which I'm not prepared to go into just at the moment for competitive reasons, but I've - they are more than just line extensions. But there are 2 or 3 other areas of R&D that are not so far away that actually also exciting and will actually again be technologies that will leverage up the market value so we're pretty confident we've got a pipeline there.

I think the other point I would make is that we do know that we're in business. The product life cycles are much longer and they take longer to get established so it's not about the number of new products that we launch, it's about the quality of them and establishing them fundamentally on a global basis and that's the approach we take and it's really built a very good long term sustainable business.

Okay? Good.

A follow up on that, would you care to touch on the areas where it, you think that new technologies would come through that kind of lift up the fiber market?

No, I think we've said, obviously what we don't want to do because there are degrees of patent protection on these things, is we don't want to give unnecessary competitive alerts out to be perfectly frank. So we've being a little - we're giving some strong guidance in the note that Jim has on what the program is for roll outs and the specific extensions on Acticoat and Allevyn in plus VersaJet, plus Dermograft indications which are really going to be the big drivers of the business in the period through 2008. Products introduced in 2006 and 7 because they've a slow build up wont be big business drivers but we're not going to give the competition lots of lead time by talking about them now, so sorry about that.

Investment in sales force Peter?

Okay, investment in sales force, total sales force is growing 7% as of June compared to the end of December, we would expect that to grow to about 9 to 10 for the full year, up obviously, up obviously orthopedics grow slightly stronger than the others, the other two.

Okay, and in terms of new products, yes you're absolutely right, our aim is to get the group performance up to about 25%, Oxinium dropping out of the calculation, it's a big product, obviously it makes a big difference, we expect the number to build up for orthopedics during the year, it probably wont get to 25% this year, but we do expect with the roll out of Peri-loc continuing into next year with the revision - Oxinium revision hip coming out, revision knee I beg your pardon, coming out and also some of the other new products we have coming out in the beginning of 2006, we do expect to be back on or over 25% next year. because that obviously has to be a long-term roll, okay?

(inaudible -microphone inaccessible)

Right so we'll take another question over here.

(inaudible -microphone inaccessible)

Okay, trauma outside the US. Quite frankly a bit disappointing to be flat. There are, there are 2 things going on there, first of all we really focus in what we're doing with trauma on divisionalization and sales force build up in the US ahead of the Peri-loc launch which again principally is in the US this year. we're now in the process of rolling that out into the rest of the world. We have a divisionalized sales force team here in the UK, we have a separate Euro - European trauma manager.

We have a - we're in process of sorting out the divisionalization program in the various European markets this year and next year. we've divisionalized Japan in the first half of this year but we still need some product approval clearances before we can really get that rolling. So I don't anticipate a particularly strong pick up in trauma in the second half but I would like to see a very progressive one in 2007 - that's in 2006, I beg your pardon. Obviously in 2007. so we expect the growth and the product launches in the US to be roughly a year ahead of progress in the European marketplace.

I'm not sure I've got a separate figure for the US trauma market per se, which -

I can talk to that.

You think you've got that, yes go ahead.

I mean absent our souls, the growth rates really do pop about between 60 and 50 and minus 32 and 19. but if you take it in the round, you've somewhere in the mid teens and that's basically really's been driving in the US by the Peri-loc. We've clearly popped that up. The global market is somewhere in trauma around - it seems to have popped up from Q1 to say about 14% in Q2 global, but it's somewhere around about 13%, which is a quite interesting that trauma is now actually at the recon number because you've got the total market.

I think the Q2 number, the only observation I would make is I think I'm correct in saying is J&J had a recall in this quarter last year and therefore that has a big ticker, they have a big growth number in trauma but I think that's the kick back from the recall they had in this, in one of the bigger products in quarter 2 2004. Okay now, you had another -

Yes, just some VersaJet, just if you give us some idea of actual sales.

Yes, it's very small, it's less than $2 million, but I think the point about it is we acquired it in the first half of last year, it was just really got onto the market, we then have to study sales force and develop clinical support, keep it in leader support and so forth. I think the important thing is the momentum that we're building up behind it which is very encouraging in particular the performance and reaction of doctors to it, so you know it's not the absolute which is very small, it's the potential that's there that we're excited about.

It's 2 million at the half year.

Yes, sure, thank you.

Okay, good, now we'll go to the conference call, we'll take 2 more questions from there.

Thank you sir, our next question comes from Milton Hsu from Bear Stearns, please go ahead.

Hi, just 2 quick questions. Peter the pricing of 4% you spoke about worldwide, is that price increase on existing products excluding makeshift?

Quickly, yes, as much as we can work it.

Excuse me?

The answer is yes, as best as we can work it out, I mean I do know it's specifically escalates next year because when I checked the number I pull out the mix myself, because I know you always ask me the question.

Okay, and then just from in the US, as a lot of the household systems are standardizing their vendors how is that playing out for Smith & Nephew being a, just by nature a smaller player in the market?

If you happen to pick on ortho only, then yes we are a smaller player, if you pick on Smith & Nephew, we're not a smaller player, we're as big as or bigger than most of the other companies and actually that's what we play on. Broadly in, in the hospitals where we are present, and the hospital systems were we are present, we quite frankly haven't found this to be a problem. The only interesting area that's going on at the moment clearly is HCA who wanted to work more with the top 3 vendors and has set a program in place to do so.

I guess we'll see how that works out. It would be my comment on that. But broadly as far as we are concerned this isn't really an issue we find particularly troubling at this stage, we have good relationships with virtually all of the buying groups and the major hospital systems through one of our other businesses, one of which will tend to lead the conversations.

Okay thank you.

Okay, can I have another question?

We have a follow up question from Mr. Jason Wittes from Leerink Swann, please go ahead.

It doesn't look as though we have Jason on. Do you have another question Olive?

We have no further questions at this time.

Okay? Right, I'll take another couple of questions in here and then we'll close the, close the session. Does anybody have any further questions? Anybody, you two guys get the vote, okay we'll go with you Michael.

Thank you just a couple more questions, looking at R&D divided - or R&D as a tenant of sales, it's declined since 2005 just curious as to what the expectations are for R&D as a percent of sales in the second half of this year.

Secondly, just on the sales force increase in the second quarter, perhaps you can divide this into recon and trauma. And then thirdly I'm just curious as to what the penetration rates are for Oxinium in the hips and knees in the US in the second quarter of this year versus the same time last year.

Right we'll see what we can do about that. I don't think you should read too much into the R&D, we have had some particularly big programs running, some of which resulted in products coming to the market place like Peri-loc, when you tend to get big programs like that then they - you can then get a bit of a sort of downturn at the end of it while something else builds up. So broadly our R&D we expect to run at 5% going forward and in future years it's more likely to rise than it is to decline as part of the mix.

Now the second question in terms of break out of Oxinium, can we do that, can we look at that? Yes, I think that, I don't think it's shifting much at all from the 40 to 45% penetration in both hips and knees so, so it's, that seems to be where it's settling out in the US.

On knees it's about 20% internationally and rising bear in mind we have yet to persuade the Japanese authorities to approve Oxinium and we're still somewhere away from that, in our view it's not going to happen in the short term. So I think the shift, there's no big material shift taking place, no further penetration.

I think another one was our sales force numbers.

Yes.

I think why do we think sales forces numbers are going to go in recon and trauma just going forth for the rest of this year, and there's no roughly -

Well, the aim is to take trauma in the US from up to 160 to 400 - to 200 by the end of the year. And we're about halfway through that.

(inaudible - microphone inaccessible) not quite there in that -

Yes, so -

I think it's another 20 on trauma and about another 20 on the recon. I'll have to get my numbers in there as to what we've got there, another 40.

So we've got about another 40 sales people in Japan for orthopedics and that's enabled us to accomplish the divisionalization. Okay? Hans?

I just had some quick financial questions for Peter, the 7% cash conversion ratio is that for the full year rather than -

Yes.

Rather than second half.

Right, full year.

Full year. and can you just explain again why that you've had such a strong financial nest in the first half that you wont have in the second half?

Basically it's IFRS, we hedge our interest rates at the beginning of the year so we know our interest rates costs are, the accountants require you to revalue this every quarter and we do actually alert you to this basically you have got a pull forward of what you would call interest into the first half, and we don't for the second half. Am I looking wrong with that? It's not big numbers but it's just enough to swing that interest rate. It is not anything fundamental, it's just that it's just basically sort of the requirement to revalue your hedges every quarter.

How can we track that I mean, how can we actually model that going forward?

Listen to what Peter has said.

If you listen to me really carefully I give you all the information so we don't have to have this sort of conversation okay?

I mean you can't model it independently, IFRS makes it impossible, they're bloody difficult for anybody to look at the PNL and balance sheet in my opinion if you don't mind my saying so, or whether you do mind my saying so or not.

And very lastly the rationalization costs of 9 million I believe, is that non-tax deductible?

We haven't worked out the tax on that yet, I'm sure it will be tax deductible, but what I didn't want to do is I didn't want to guide you guys to a number and then we haven't quite worked out the tax on that, I am sure the tax after all and until I circle it out I'm not going to give you guidance on that.

Thank you.

Good well thank you all very much, we're going to close the call now, thank you for your interest and your attendance and we look forward to seeing you again in person at the full year but we'll have a conference call at the third quarter which we will be doing actually from Memphis, our board is visiting Memphis and we have been looking forward to doing that for the third quarter results. Thanks very much.

That will conclude today's conference call. Thank you for your participation.