Smith & Nephew PLC (SNN) 2006 Q2 法說會逐字稿

Good afternoon everybody in the City Presentation Center here in London and good morning to everybody on the conference call either in the UK and Europe or in the U.S. I am very pleased you could join us on our Quarter 2 results call for Smith and Nephew. I am also pleased to welcome my two colleagues, Dave Illingworth, who a lot of you know, who's our Chief Operating Officer, and Adrian Hennah, who's our new Chief Financial Officer, who joined us during the quarter.

What we would like to do is take you through our 2006 interim results. For people who are actually in the conference center here with us, I'll just draw your attention to the forward-looking statement. There will be a quiz on this at the end of the call.

What I'd like to do is to just talk through with you the introduction and business highlights. I'm going to ask Adrian to talk through the financial results. Dave, the chief operating officer, will review the business and I'll briefly summarize and chair the questions and answer session.

So, at the end of this quarter, we are very pleased that our financials are on track despite market conditions that have been tougher, really, particularly in Europe, than we expected and we're also pleased to see a progressive in our business in the quarter. We are focused on 4 growing markets where technology adoption is strong and our key new product launches are successfully driving growth.

I'm pleased to say that our full year earnings is maintained and what we are going to do today is to signal to you how we're going to manage guidance going forward. Adrian will be addressing this, but we are going to signal some changes today but I'd like to just emphasize that this does not have any impact on our 2006 full year earnings guidance.

Quite a lot has been going on in Smith and Nephew in this first half. I'm not going to go through each of these but we have got some new appointments bringing new energy to our group. We've signed a strategic partnership, a license agreement with Q-Med for Durolane, We acquired OsteoBiologics earlier this month and we also received a subpoena from the Department of Justice, which is had some publicity recently.

So it's been a busy half year. It's been a relatively tough half year and from a marketplace point of view, and therefore actually pleased to see our group revenue growth up 6%, to $686 million. We're pleased that the divisionalization of our orthopedics business into reconstruction and trauma is now showing positive effects with the successful launch of the knee products into the U.S. market and also the approval and first surgeries on BHR.

Trauma improved to 13% growth. Endo grew 6% and Advanced Wound Management, while its overall growth was low, was bang on track as they complete their exit from Dermagraft.

So those are very much the highlights. What I'm going to do is invite Adrian to come up and talk to you through the more detailed numbers. Adrian, over to you.

Thank you, Chris. Well, thank you very much, Chris, and good morning ladies and gentlemen. This financial presentation is in a very similar format to that use by Peter Hooley in prior quarters and you'll, hopefully, therefore, be familiar with the schedules. And to use your time efficiently, we've also got some additional slides in the appendices to the pack and obviously, we'd be happy to take questions on those slides in the appendix, too.

So moving to slide 8 and the income statement, as you can see, revenue in the quarter was $686 million and this represents a growth of 7% at actual exchange rates and 6% at constant exchange rates. This growth was marginally lower than we expected in April when presenting the quarter 1 numbers. The slightly weaker dollar in quarter 2 that saw 1% increase in reported revenue over underlying growth.

Trading profit in the quarter was $138 million. This represents a growth of 7% at actual rates and also at 7% of constant exchange rates. The margin was in line with the corresponding period last year.

Amortization of acquisition intangibles was $2 million in the quarter. Looking forward, we expect about $30 million of the purchase of OBI to represent acquisition intangibles with a 10-year life. The amortization of acquisition intangibles cost will therefore increase by about $3 million in a full year starting from quarter 3.

The $10 million upfront [inaudible - technical difficulty] for the Durolane license from Q-Med is within other intangible assets and will hence be amortized through trading profit.

Settlements of Macrotexture claims continued to proceed in line with our expectations. And so we see no need to change the provision.

Net interest income in the quarter was $3 million. The cost of the OBI acquisition will reduce interest income in the second half. We're looking at around $9 million net interest income for the full-year.

Moving to slide 9, I'm moving down the income statement, we have as usual determined the quarterly tax charge with reference to the expected charge for the full-year. We now however, expect the full-year tax charge to be 29.5%, down from the 30.5% expected at quarter one. The principle reasons for the reduction are an expected decrease in the proportion of profit in higher tax countries and some settlements of prior year liabilities on a more favorable basis than previously expected. Because we booked a 30.5% tax rate in quarter one, the tax charge in these quarter two numbers is 28.7% in order to achieve a 29.5% charge for the half.

Looking forward, we continue to see the upward pressures on the tax rate which Peter Hooley identified with the full-year numbers in February. However, we also see opportunities as a result of developments in the broader corporate tax arena. It remains likely that there will be a modest increase in the rate in coming years, but it is difficult at the moment to predict how far or our fast.

The numbers for discontinued operations relate to the joint venture wit BSN which was sold in quarter one, hence there's nothing in for quarter two.

Adjusted earnings or attributable profits increased by 2% in the quarter at actual and constant exchange rates, despite increase in shares in issue means that EPSA increased by 1% in the quarter. As you know, EPSA in the current year is negatively impacted by the disposal of our joint venture with BSN and by the loss of net interest income deriving from the dollar sterling interest rate differences and our former accounting in sterling. Together, these reduced EPSA by about 7.5% in the quarter. EPSA growth in the quarter was also positively impacted by just under 1% by the catch-up in the respect of quarter one in the reduction in the expected tax rate.

Turning, if I may, to slide 10 and here we have an analysis of revenue by business segment. You're going to hear from Dave Illingworth in a moment, more detail behind the numbers for each business. And I will therefore, only make a couple of financial points in respect of this and the next two slides. On this schedule, you can see the growth rates in this quarter for each of our business segments at actual exchange rates and at constant rates. Within advanced wound management, the sale of the Dermagraft business in 2005 reduced growth by about 4% in quarter two.

Turning to slide 11, a geographical analysis of the constant exchange rate revenue growth by business segment. Revenue growth in the quarter was 7% in the United States, 3% in Europe and 8% in the rest of the world. The slower growth in Europe was due to market issues in several European countries in the quarter. In addition, lower growth wound sales account for a higher proportion of the group sales in Europe than elsewhere.

Growth in the recon business in the USA improved on quarter one, but deteriorated in Europe, leaving net quarter two recon growth at 7%, equal to quarter one. Growth in trauma increased slightly on quarter one in all regions, especially in the clinical therapies business.

Growth in Endoscopy fell slightly overall, due to weakness in Europe. And in Advanced wound management, the growth in the USA was particularly impacted to the extent of 17% points of growth by the reduction in sales deriving from the exit from the Dermagraft business.

Turning to slide 12, and an analysis of trading profit by business segment. Trading margin for the group as a whole was the same as last year at 20.1%. Wounds margin increased by 1.5% on quarter two last year, due principally to the benefit of exit from Dermagraft. Margin and absolute trading profit in Endoscopy were below last year, due principally to increased levels of investment including in the digital operating room and to slower growth for the resection part of the business, especially in the USA.

Turning to slide 13, and an analysis of the free cash flow. We generated $36 million of free cash flow in the quarter. The capital expenditure of $72 million includes the $10 million paid to Q-Med in respect to the Durolane license. There was an increase of $28 million in working capital. As you know, the immediate availability of a wide range of inventory to customers is an important feature of our offering, especially in the orthopedic area. Quarter two saw several important launches for the company, with attendant inventory requirements. The restructuring expenditure was mainly in respect to the Dermagraft closure. The Macrotexture claims payments you can see here separately. Trading cash flow was just under 50% of operating profit in half two. We expect a significant improvement in this ratio for the full-year.

Turning then to slide 14 and the outlook. As Chris has mentioned, we do expect the form of the outlook to evolve in coming quarters. We will seek to move the emphasis to explaining how we see the markets we operate in and how we are performing in these markets. We will seek to put less emphasis on our own assessment of future short-term quarterly financial outcomes. We do intend this evolution to be gradual.

Looking to the rest of 2006, we can continue to see low, double-digit revenue growth for the year as a whole for the group's reconstruction and former businesses taken together. In Endoscopy, we see an improvement in half two sales leading to a higher single digit revenue growth for the full-year. In wound management, we continue to expect to grow in low single-digits for the full-year.

We confirm the EPSA guidance we gave with the Q2 results, except as you know, that we see a reduction of about 1% in full-year EPSA growth as a result of the OBI acquisition announced on the 11th of July. Reported EPSA growth this year is after an approximately 7.5% negative year-on-year impact with the BSN joint venture disposal and the loss of net interest income from interest rate differentials.

It is clear from these numbers that we continue to expect a stronger second half of the year. We expect our recent product launches to be the main driver of this. Especially the LEGION and JOURNEY knees and the BHR hip in the USA. We expect quarter three to show good growth, however, the benefit of recent launches will increase as we go through the year and therefore, have a bigger impact on quarter four.

As you also know, there is an underlying seasonality in our business, which makes quarter four stronger than quarter three. Quarter three in Europe is impacted by surgeon and patient summer holidays, quarter four in the USA and Europe benefits from a long stretch of uninterrupted work time and from the start of the various northern hemisphere contact sport seasons.

And with that, I'll hand over to Dave to tell us more behind the numbers.

Thank you, Adrian. Well, good morning. Let me see what we've got here. There we go. First, let's talk about the orthopedic recon and trauma areas. Based on what we've seen in the field, what I've seen in the field and what we've heard from competitors, it would appear that the recon market growth has stabilized. As growth is similar to the first quarter of '06.

Keep in mind that in the Q2 of 2005, the knee market was growing about 17% globally, 21% in the U.S, while the hip market was still growing in high single digits. Even trauma fixation was growing at 15% globally and 16% in the U.S. a year ago. This creates some very tough comparables for us as a company and an industry. This dynamic changes as we move through 2006 and I'm going to point that out, in a minute.

The Q2 market growth outside the U.S. has softened sequentially. Q2 experienced the first quarter of HMLW reductions in Japan, the effects of surgeon strikes and/or threatened strikes in Germany, Italy, Spain and a UK market that's really working through some funding issues. What we did see is a slight growth rebound in the U.S., which helped keep the global market growth consistent with Q1 and offering a stronger market outlook as we move into the second half of the year.

For Smith and Nephew, it really boils down to two things. First, our competitors really focus on our U.S. sales and marketing channel early in the year, as we divisionalized our business. And it clearly caused some disruption. We believe we've sorted this out and we're back on track with our stated plans to specialize and focus our efforts on unique customer segments. For most of 2005, secondly, for most of 2005 it really did not introduce any major new products in reconstructive. But that's all changed as I'm going to discuss in a minute.

Taking a look at our orthopedic reconstruction business, a year we reported global constant currency growth of 20% per knees and 16% for hips. Putting our global recon growth at about 17%, which far and away exceeded a strong industry growth of 13% and far and away exceeded the results of our competition. This also creates some tough comparables for us. For 2006, we estimate the Q2 global recon industry to growing at around 5 to 6% with 7% in the U.S. and slowing growth outside of the U.S. as we're absorbing the Japanese price cuts and other issues in Europe.

The U.S. market is consistent with Q1, but well off the pace of last year. Our global growth of 7% in the quarter is consistent with Q1 and slightly ahead of the market and puts us in a good position to resume our market out performance growth rates.

Our knee growth was 10% globally, which is up slightly from Q1. We grew 13% in the U.S., versus 4% in the first quarter, which is the clear positive sign we wanted to see as our new products roll out. Outside the U.S., growth was down mainly due to tough comparables and difficult market conditions in Europe. Our global hip growth was 2%. In fact, we are growing a couple of points below the market and experiencing some negative growth of around 2% in the United States. Some of this is a tough comparable and some of it results from competitive account losses. We think we've hit a trough here and coupled with our new products we expect a good rebound as we move through the year.

Growth drivers for recon are clearly our slate of new products in a market we expect to grow in high single digits. In knees, we are very pleased with the launch of the LEGION revision system as it puts us into the revision market where we previously were not a player. The acceptance has been very strong and a sequential uptick will continue to grow as we place more instruments sets and get surgeons trained.

The JOURNEY knee has similar sequential growth opportunity as it's the first new knee platform we've introduced in a long time, certainly, since I've been with the company. This knee is generating tremendous interest as the knee is ideal for the young active population and quite frankly, we cannot get the training done fast enough. I know we've got about 60 sets out in Q2 and we're moving as quickly as we can as we plan to get over 200 sets out by the year end.

On the hip side, we have the Birmingham hip approved in the U.S. which I'm going to cover in a bit more detail in a minute. I'm also pleased to note that we pulled up the launch of our Emperium revision hip system into Q3 versus Q4. Similar to the knee story, we have tremendous upside potential in the revision segment of the hip market given our current position and this new system is going to position us very well.

Okay, a couple of comments on the BHR product, we could not be more pleased with the launch of the BHR in the U.S. As all of you know, it's the only hip resurfacing product approved currently in the United States. We have 75 U.S. based surgeons trained. The first surgery was performed on the 5th of June; we selected and have agreements with 50 primary training sites. These are a mixture of existing and competitive accounts. And we plan on having 400 surgeons trained by the end of 2007. The acceptance of this product has truly exceeded our expectations.

On to trauma. We've been very consistent over time about our desire and plan to specialize our sales stance. Specialization in fixation and clinical therapies such that we could combine our innovative products with a unique customer experience. This model is working and we are going to continue on this path. For the quarter, we reported 13% global growth, which is up from Q1, as we are now past the divisionalization issues in our business where the impact in trauma was particularly acute.

Our fixation business grew 9%, up from 7% in the first quarter and is coming off very difficult U.S. comparable growth of 24% in Q2 of last year. Our clinical business continues to take share in both bone stimulation and joint fluid therapy, with growth rates exceeding 2 times the market growth rates.

Growth drivers in trauma will be a mixture of new products and a continuation of us adding to our direct sales channel. This year we expect low double-digit growth in this market. As we mentioned at the initial launch of Peri-Loc, as some of you will recall, we had a pipeline that included upper extremity version that not only completes the system, but opens up a broader market that is often performed by extremity specialist surgeons. Initial feedback on the extremity system has been excellent and we're excited about the potential.

We're also launching the inner cam version of our industry leading Trigen Intramedullary nail system. This nail is indicated for the treatment of femoral fractures or a break in the thigh bone. There are approximately 250,000 hip fractures a year in the U.S. alone. And hip fractures are expected to double in the U.S. to 500,000 by the year 2040.

We also announced a partnership with Q-Med recently, which gives us global rights to their single injection joint fluid therapy product, Durolane. We will immediately pick up some revenue outside the U.S. and are excited about the potential of this product and the broader relationship as we move forward.

On to endoscopy. I am very pleased to welcome Mike Frazzette as the new president of our endoscopy business. Mike has only been with us for a matter of days, but brings a wealth of experience and is quickly focusing in on the important key elements that are going to drive this business. For the quarter, we grew 6% globally, which is broadly in line with Q1. We continue to see accelerated growth in our repair business, which has been offset by slower growth in resection as pricing pressure continues.

After investing additional resources, we're seeing the acceleration in our digital operating room businesses and are building a strong backlog, which helps us as we move into the second half. We just launched the 660 high definition image management system for which we anticipate broad market acceptance as it can address a wide spectrum of needs all the way from the surgery center to the large integrated hospital requirements.

Growth drivers in endoscopy - it's slide 23. The overall growth in this business has been flat. We did have some good momentum building as we exited Q2 and this gives us some confidence that we will see this business in the high single digits, which we continue to forecast in line with the expected market growth. Hip arthoscopy procedures are growing and expanding this market. This is an area which Smith & Nephew is pioneering and we added to this product range in the second quarter with the launch of a hip positioning system that enables the surgeon to better access and treat the hip joint using arthoscopic procedures.

Additionally, the recent launch of our CONDOR express product positioned us ideally in the more price competitive surgery center. We recently announced our acquisition of OBI - OsteoBiologics - and will immediately start to see some revenue uptake in both the United States and Europe.

Let me make a couple of comments on OBI. We acquired this on the 11th of July for $72 million in cash. This represents a major long-term opportunity for the company with the potential of over 1 million treatable knees. Only 20% are being currently treated. OsteoBiologics is going to strengthen our leadership in arthroscopy, particularly in knee repairs. Our global distribution infrastructure is an excellent fit for these products, which will provide substantial leverage to grow this product range. It will be earnings enhancing in 2008 and the integration of OBI is already progressing well.

Turning to Advanced Wound Management. Revenues for this business are on track and with the additional resource we have for our existing products, since we exited Dermagraft, we're experiencing much stronger growth in U.S. revenues. Tougher market conditions outside the U.S., but particularly in the UK and Germany, reduced overall revenue growth and this is consistent with what we reported in the first quarter. We're pleased with the continuing strong growth of our two major wound management products. We had a successful European launch of Acticoat moisture control in the first quarter and a major improvement this last quarter to two lines of our Allevyn dressings.

Looking forward, the big opportunity for this business is making rapid progress in penetrating the U.S. market where less than half of hard-to-heal wounds are treated with advanced wound management techniques. We're developing the resources needed to make real gains into this market. Significant improvements to absorbency performance is the largest of our wound management products. Allevyn dressings as well as product line improvements for Acticoat is expected to improve growth in the second half.

This progress will be helped by the recent approval in the U.S. for our Versajet surgical debridement device to be used for burn indications, proving a very popular product and offers a major advantage over other surgical debridement techniques for both the doctor, due to its efficiency and accuracy, and the patient, as only dead and necrotic tissue is extracted from the wound.

With that overview, I'd like to hand it back over to Chris.

Okay. Thanks very much, Dave. What I'd like to do is summarize, but also talk for a couple of reflections on where we are today. Clearly, we made some major management changes earlier this year. We appointed Dave as chief operating officer. We have a new group of presidents, which was completed with the appointment of Mike Frazzette in endoscopy. And this is bringing some serious new energy and new dynamics to the way we're running the group.

And this has enabled us to think more deeply about strategic matters. And I think you've seen a couple of indicators on the way forward in terms of our group strategy and what's happened in this quarter. But in terms of performance, getting the delivery out of the separated orthopedic business and also in terms of some of our positioning in terms of investment in the future.

In particular, I'd like to address the issue of innovation in knees and where - what we've done in the first half of this year is take a combination of internally generated innovations in terms of the LEGION and JOURNEY knee systems which you've heard about. In terms of CALAXO, which is part of our endoscopy business, the Osteoconductive Interference Screw, which is a step ahead in terms of resorbable performance than any competitive product and is used for ligament fixation in the knee, particularly.

Still within endo, we've acquired the OsteoBiologics bone graft substitute range. And you hear Dave talk about how important we see that as being in the future market for cartilage repair, which is a very much underserved market and which will probably be - well, which we expect to be a major market in the next decade. This isn't a short-term investment. This is a long-term investment and we believe it's putting us in a leadership position there.

Additionally, we agreed a strategic partnership with Q-Med for the Durolane single-injection joint fluid therapy through our clinic therapies business, which gives us another major step up in or ability to deliver palliated relief for osteoarthritic conditions. So, what we're seeing here is we're seeing a combination of internal and external innovation. We're seeing our businesses, under Dave's leadership, starting to look at markets and work together to give a broad spectrum of solutions to the surgical community. And Smith & Nephew has a unique potential, in this respect, in the industry. And we're seeing our ability to exploit different channels in this way. So, it's an important step forward for us.

To then summarize before we go to questions. In terms of the business, we're seeing recon and trauma showing progressive improvement. We're seeing advanced would management on its expectations with particularly strong growth in the U.S. We're seeing in endoscopy changes in the business. We expect added impetus from new leadership and a strong repair and digital operating room offering and, obviously, we do have the potential, although it won't have a major effect on this year, of our new acquisition in OsteoBiologics.

We see continued focus across the business in a tighter market on operating efficiencies and the drive for new products to build our growth in the second half. So, we're looking for stronger growth in H2 and into 2007 and looking forward to dealing with challenges that we really enjoy, which is delivering new products and technologies into the market to help patients get their lives back. And very much, for Smith & Nephew, it is business as usual. After the first half, it was more difficult than we quite frankly expected.

So, that closes the formal part of the presentation. I'm now going to send it over to the questions part of the procedure and what we're going to do is take two questions from the room here and then two on the conference call, alternatively. So, with that, I'll take a couple of questions from here and then I'll go to the conference coordinator to deal with questions from outside. [Hans]?

Well, maybe I can be cheeky enough to ask two questions as well. Could you explain what you expect your cash conversion to be for the full year, given the - what seems to be a slight improvement compared to the last year's first half and whether this represents, shall we say, some form of new trend of improvement in cash conversion, given quite hefty investments in working capital over the past several years?

And secondly, could you also explain another financial question - what the other financial income was in the second quarter. You might have said, but I missed that and whether this will recur for the full year? Whether the 9 million full year guidance you get for net interest actually includes such items or whether that's just purely the interest side?

I have great pleasure in turning these over to Adrian who's obviously had a major effect on [tracking] as he joined us five weeks ago.

Tell you what. Let me take the second one first. The guidance of 9 million does include the other finance income. The other finance income is mainly the [IF 19], notional interest from the pensions deficit or pension service. So, now the 9 million is strictly in the net interest income line on this. Looking at the Treasurer to see if she's nodding. She is. Good. That one's okay.

The - on cash conversion, you will have heard Chris' and my observations about our approach to guidance philosophy going forward and I desire to be a little less specific in some of the numbers we give going forward than this company has been in the past. That philosophy will certainly extend to specific numbers around cash conversion. What we are happy to say is that the cash conversion in the second half should be better than in the first. The 50% conversion, if you take it, is the cash flow to the operating profit.

A little more broadly, though, on cash flow and I speak, obviously as someone who's only been here for five weeks, so please take it with that context. But it is abundantly clear to me that using capital is an important part of the business model in this business, indeed, in this area. There - a significant amount of inventory is needed when you make product launches in order to have the kit out with the doctors and so on. So, it's not a surprise in this phase, when there's a lot of product launches going on, to be seeing outflows. And the main outflows are, of course, under the working capital heading. And within that, they are mainly in inventory.

That said, one of the things Chris has asked me to look at over the coming months is that the efficiency with which this company uses capital, do we have the right decision making process embedded in the organization, the right tradeoffs between the cost of the capital recurring up and the benefit you're giving the customers. I can't predict how that's going to go. It's too early for me, frankly. But certainly, over coming months and quarters, it is an area where we're looking out to see if there is improvement. It is, I agree with you, quite marked how much additional money has gone into inventory over recent quarters. So, it's something we'll be looking at.

Okay. Thank you.

[off mic] and will this - I mean how do you forecast this notional interest from pension income? Is that possible at all?

Yes, it's completely regular. And again, I'm going to just check with my - the controller - as I say this. But actually, you look at the deficit all -- well, it's fairly predictable because it's driven from IF 19. You just look at the surplus or deficit and what you invest in within the pension fund and it's there. So, if you keep [holding] the same number for the current year, you're going to be near [balance]. If the deficit were to be a hell of a lot bigger, then you'd expect a deterioration in the number. If the deficit would have disappeared, you'd expect the number to come to zero.

So, 2 million per quarter is what we should--?

Yes, roughly, looking just for confirmation from those who know more about this than be but they're smiling.

We want to take another question, please.

Dan Mahoney, Morgan Stanley. Could you talk a little bit about the R&D investment you're making in visual operating theaters. Is that going to be a major upgrade or is it incremental? And in terms of endoscopy, could you talk about the outlook for customers right now because my understanding is, particularly, the DOR was being sold into more outpatient surgical centers. Is that customer base still continuing to grow and what do you think your outlook for DOR is, given - I presume it must positive or you wouldn't be making that investment. But what is a customer's need for you to drive that part of the business?

Well, I'll ask Dave to give you a shot on that one. It is an important part of our forward plan for endo.

Well, there's three questions there. I think, as far as the characterization of the investment, I think it's an incremental investment as we go along. We've put a lot of investment into this product over the last 12 to ...

Twenty-four months.

Twelve to eighteen, 24-months. So, we have a plan. We're on plan. We're going to continue to invest in this product in the second - in this product line in the second half of the year. It is growing at very healthy growth rates for us, so we're pleased with the - how the products are actually doing in the marketplace. We think we have some unique advantages in terms of customization and being able to package up different components for the - for our customers in a more flexible way. And that's allowing us to move into multiple areas, not only the large, integrated hospital operating room, but also the surgery centers. And really, we have the flexibility to package up systems, to really meet a wide range of needs. And so, I think the - it's - the program is on track. We're happy with the results and we will continue to see an investment in that area.

Okay. Fine. Can we take a couple a calls from the conference call?

[OPERATOR INSTRUCTIONS] And we'll take our first question from Milton Hsu from Bear Stearns. Please go ahead.

Hi. Good afternoon, everyone.

Afternoon, Milton.

Chris and Dave, maybe you can - can you just give us a better idea of the environment in Europe for orthopedics? We have a good idea of what's going on in the United States here, but it seems like over the last three - two to three quarters or so, the weakness there has offset some of the stability in the U.S. like you mentioned.

Well, let me have at shot of that and let Dave fill in on it. There are - the common issue, as we've remarked, is healthcare cost pressures. But they haven't worked quite the same way as in the U.S. In the UK, they very well publicized issues of the NHS and its deficits in a number of its hospital trusts has caused cutbacks in surgeries to the point where hospitals are operating with less than their total compliement of operating rooms, for example.

In Europe, it's a bit more [inaudible]. But there is a common trend that - there's downward pressure on what I'll describe as reimbursement for operative and other procedures, which has led to, in different ways, surgeons strikes, in Germany and Spain, to some extent in Italy. And there is a dispute going on in France, as we speak, where a threatened strike of surgeons seems to have been averted. But that may not - it's not totally resolved. And this is really the surgeons pushing back and saying, "We're just not getting enough funding for these procedures." So, they are market driven factors. The German one seems to be going around another loop. And so, it's market environmental factors, certainly, as far as we're concerned, that have provided the biggest single impact.

We are hopeful. The Spanish one is resolved. I think the Italian one. The German one not yet. But hopefully the French one will be. Is there anything - do you want to add anything else to that --?

With all due respect, I think you answered it very well.

Okay. Thanks. And ...

[inaudible] good. I've got [inaudible].

Yes, you do. Congratulations.

Just a quick second question on wound management. This business - maybe it's stabilizing where it is in growing of those single digits. What else besides new product launches are needed to get this back up to, really, where you guys were growing before - high single digits or so. Is it just - are there any issues of the sales force or - and then, also, on the operating margins, any cost issues that you have to address?

Yes. How are you doing, Milton? I think there are some things. We have it - I have my sights focused on a limited number of areas in the wound care business that I think and our new president Joe Woody believes are going to be key factors. I think, number one is that we're not as penetrated and successful in the U.S. market as we should be, given our global footprint and where we are in terms of global market share. So, that's an opportunity for us. We have some people on the team now that know how to win in that market and we're going to put some energy into it. So, I think that's factor number one.

I think the second thing is that we do need to take a careful look at our costs. The - it is a segment, a global market segment that is sensitive to costs and I think we need to take a very sharp look at it. We don't have the answers as to what's going - what ultimately is going to be the result of that. But I think we need to be able to control our own destiny in the area of he cost of the product. So, I think those are the two areas that I'm going to focus on, Milton.

Great. Thank you.

Thank you, can we take another question from the conference call please?

Thank you our next question is coming from Ed Ridley from Lehman Brothers. Please go ahead.

Good afternoon, thank you. Just on the subpoenas I heard from two of your peers, Zimmer in their release last night, actually Zimmer indicating there that there was just one hospital they believe is indicated by the DOJ anti-trust subpoenas and that investigation. I was wondering if you could give any more detail on what and how you think you've seen it narrow?

And also just in the Orthopedic sales force, how confident are you that the drain that you have seen with some of your people leaving to competitors in the first half has sort of been stopped and if you could give us a bit more detail on that? And just very quickly following up on the Wounds question from Milton, can you give some kind of time scale Dave on how quickly you think you can move those things through in Wound?

Right let me deal with DOJ. The only communication we've had from DOJ has been the communication which has somewhat narrowed the scope of the investigation by geography and by product area. We can't comment on what Zimmer has to say. It looks like they're further down the track, and I think there's an opportunity later today for you to ask them the question. So I really can't comment any further on that. We really don't have anything more to say other than we're cooperating with the Department of Justice.

Can I turn -- also on the Wound follow up over to Dave, please?

Yes let me take the sales force one first. Maybe, just take a couple of seconds here and give a little bit of context. We have been divisionalizing our business in Orthopedics into Recon and Trauma for the better part of 18 months we've been talking about this and actually doing it. We've been finessing our way through it, doing it measured, profitably and it's been actually paying extremely good dividends for us as we get focused sales forces out in the field.

I think the event of us having a hard divisionalization and me moving out of the position opened the door for some less than good behavior on the part of our competitors, and they focused on us. And we fought back and I think we are at a position now, I'm very confident, we're at a position now as we move through the second quarter that that's behind us. And we did make some mistakes. We underestimated some of the issues that we were going to have to deal with when we made that hard divisionalization. I think we've corrected for it and we're on a very, very good path. So I'm very confident about the position we are now as far as looking forward.

Turning to your question about the Wound Care business and how quickly you'll see the effects, I think you're seeing some of the effects now. We are -- if you look at what happened in the US and now one quarter doesn't make a trend, I guess, but clearly we've started to put some focus on the US markets. We're seeing some improved growth rates already and we plan on continuing that momentum.

As far as our cost initiatives we're at the very, very beginning of that. But clearly we understand the need to control our own destiny in terms of being competitive with the right cost profile of our products.

Okay?

Thank you very much.

Thank you, Ed. What, we'll return to the room here [Peter]. Can I just before you ask the question, Adrian would like to just modify something he said earlier in response to Han's question.

I partially mislead you on the financing [inaudible], I think, I'm sorry looking at my notes here. It is principally the financial charge from the pension gain surplus or deficit. But also know we've got a small amount of gains or losses on unmatched hedges. So the number in the quarter of two is not a number that will repeat itself in subsequent quarters. You should look in subsequent quarters at something just under one as coming from the ongoing IF 19 number. I apologize for that.

Okay so there you are. Good, sorry. You now.

This is Yi-Dan Wang from Deutsche Bank, a couple of questions. Would you be able to talk a little bit about the profitability of the Trauma business. the sales are coming stronger than expected, but in terms of margins that seems to be a tad weaker?

And then the second question relate to the training for BHR. Given that you started the first case in early June and you've already trained 75 people, would you be able to talk about why it takes so much longer to train the other 325 for the end of '07 whether you're constrained in any way that would lead you to provide that guidance? I thought that the ramp up would be much faster than that.

Well, let me take the -- that piece of it and maybe, in terms of if you want to take the pricing piece. Yi-Dan we've been very, very consistent all along that really the constraints on the launch of the BHR product are self-imposed constraints in order to have a successful launch and clinical successful launch of this product.

We think it is very much a training intensive procedure. As you know from talking with some of the other folks in this industry, we are the only ones with this product now and we have -- it's us against the world. And there's a lot of scrutiny on the technique and the product and it's very, very important for us to make sure that we do this in a way where we get good solid growth and the launch of this as a technique, introduction of the resurfacing as a technique in the United States.

So it's not limited by our availability of inventory, or sets or any of that. It's limited by our ability to get physicians certified to the level we think we need to get them certified in order to perform these surgeries properly. So we've been -- we've been very measured. We are ahead of plan. And like I said it's exceeded our expectations as far as the training and rollout of this procedure and this product. So we are -- we're actually quite pleased.

Okay I'm just discussing with Adrian. It probably would make more sense for me to just talk about the Trauma margin. Two things there, first of all, the sales development has been slower than we had planned for Trauma this year -- this year. Once we're seeing a margin improvement in the second quarter and the first quarter and we anticipate that trend continuing, it isn't going to entirely catch up with last year's rapid development in the second half. So we'll see -- we'll see margin improvement as the sales profile builds.

But some of the costs in the first half related to the divisionalization of the business, we actually have taken some one-off costs in there, which have slightly depressed the margins, so we'll see margin development in the second half.

And as a follow up for the BHR question, what proportion of the US hip volume do you think could be covered by the 400 surgeons that you could train by the end of '07?

I don't know. I haven't done that math. I'd be more than happy to talk to you later and try to figure it out. I haven't done the math on that question, sorry.

Great.

Okay another question? Oh we've got a question back there from a lady.

Elizabeth Klein from Bridgewell. I have a question on BHR as well. Could you give some idea as to the actual sales or the actual performance of BHR in Europe and particularly which countries have been doing very well for you?

And then I have a second question on the [France] wound management, could you talk a little bit more about the competition you're seeing in that and it's any relation to pricing pressure in particular countries? Thank you.

I don't know if I have the actual numbers for Europe.

I mean I think the issue with BHR, it's been very, very strong for us in the UK and Australia which were its original markets. It's doing quite well in some European countries. I think we've seen some increasing competitive intensity in Germany. I don't have exact numbers but the benefit we've seen from BHR is really in our total hip growth, which has been in double-digits broadly outside the US, since we acquired BHR. And it has certainly pulled through other hip business for us. We're not predicting that that is going to happen in the US in this year but there may be some prospects for doing that as we develop relationships with new centers with BHR going forward. So that's probably the best shot at that.

Now Wound competition, David?

Well, I missed the last half of the question but the piece on Wound?

I'm particularly interested in your competitive view on the Wound market in Europe and the US?

Want me to take a crack at it?

It's a price competitive market and price broadly is down a bit for the market as a whole but mix is positive so roughly it's an offset because the silver technology or more advanced technologies are higher ASP. It's not purely a features competition. There is price competition and that's -- it's a fact of life.

Our reaction to that is to emphasize our -- as Dave said, is to emphasize the strong features we have in our product. We've upgraded Allevyn and introduced a new version of Acticoat, the moisture control version which is a combined moisture control antimicrobial product. And we've priced competitively. But we believe we can take enough cost out on a running basis that that isn't adversely impacting our margins. Dave was dealing with the issue of can we take out more cost in the medium term to give ourselves further improvements to the margin over and above that which is coming through from the Dermagraft divestment. Okay?

Right, we're going to go back to the air and we'll take a couple more calls from the conference please, [Guy].

Thank you our next question is coming from Mark Mullikin from Piper Jaffray. Please go ahead.

Good afternooon.

Good afternoon.

I just wanted to start off with a question about the BHR. Can you give us a better sense of the ramp for that product in terms of revenues over the next 18 months, maybe either a contribution to growth or an actual revenue number for '06 and '07?

Well, we could give you the number for '06. The number that we have in our guidance has and continues to be $10 million for 2006 and we haven't given any guidance yet for '07.

Okay, and then the Trauma market looking at what you posted this quarter and what your competitors are doing it seems like that market is accelerating. First of all, is that accurate and if so what are the drivers of growth in that market?

Dave, you want to have a crack at that whether that's true?

Well, I think you're seeing some positive mix shifts. In Trauma there's some new products that have been introduced not the least of which is the Peri-Loc products line of products line of products that we have introduced along with some of our new nail products. The other thing that's helping us is some very strong growth in the area of clinical therapies that is included in our Trauma business. We are -- we are seeing a little bit of price in that market where we are not traditionally seeing the same thing on the recon side. I think those are the major factors.

All right, thank you.

Chris, do you have --?

No, I think that's fine. Well, the observation I was going to make is we've applied the same sort of thought process to our trauma products as we have to our recon products. Which is it's important for the surgeons to be able to do the surgery more quickly. So the speed of application of our nail products and the simplicity of our approach to putting in the Peri-Loc plates have gained us a number of customers.

The way we've designed those products has meant that it takes reduced surgical time. Now you argue that's even more important in the trauma set of circumstances than the recon set of circumstances from a patient point of view but it's also important from a hospital finance point of view because hospital funding for trauma is funded completely differently. So they really, really need to get good utilization. And so I think that is another driver which is helping the Trauma market grow. Okay?

Okay thank you.

We'll take another one from the conference please.

Thank you our next question is coming from Michael Jungling from Merrill Lynch. Please go ahead.

Good afternoon everybody. I've a couple of questions. Can you hear me?

Yes we can.

Great the first question is based on the second quarter results which again have seen no operational leverage with the EBIT margins pretty much flat compared to last year and it seems the chief culprit is SG&A and it appears it's becoming more expensive to achieve a sale. I was just wondering whether you could give us an outlook on what you expect on these future trends on the prospects for your business particularly in Orthopedics?

Secondly, a question for Adrian, how much of your time or focus is now spent on cost control at Smith and Nephew to perhaps close the EBITDA margin gap of between 8 and 10% to your peers, particularly [Bioven] which has got a similar size [inaudible] in the area of orthopedics?

And then secondly - thirdly, on the new product launches, specifically attract new investments and instrumentation sets and sales samples can you give us a guidance on the CapEx investments in 2006 and 2007 for those patients and sales samples?

Right, well, let's divide this up. Let me make a headline comment on what you're saying here, Michael, which is as we've said pretty consistently we have done two things which are pretty major in the first part of this year. One is we've launched a lot of new products and that's cost money. It's in the SG&A line.

Secondly, we have actually divisionalized the Orthopedic businesses into two businesses and we've also incurred some one-off costs which we're not splitting out because they're not that significant. But if you get into [80%] or a 1.5% of SG&A then you start seeing those numbers when they show up in the quarter or the half.

We've also identified particularly and enhanced investments in DOR. So, at the overall business level, we have consciously made some investments in the first half. We've taken those into the P&L. They've elevated the SG&A and we expect to get the leverage from those through -- in the second half both in terms of growth and in terms of improvements in margins so that there's a priming issue there.

Dave, is there anything in particular you wanted to answer that? Is there any other --?

Well, I think there is one additional point and Michael, one of the things you have to be careful of is that the competitors and Smith & Nephew, we have different ways to characterize SG&A. So it's not a true apples-to-apples comparison and I think in order to really ask the question and do the analysis we have to get some more of an apples-to-apples comparison.

For instanc,e some of our competitors characterize royalties and licensing in SG&A where we characterize it and account for it in R&D. So you have to take a careful look at how the numbers are laid out. So I think that would be the first thing to look at. But as a general principle, we don't want to be less efficient than our competitors in terms of operating leverage in any part of our business. So if there's an area for us to improve to move towards an industry best practice I'm sure that Adrian and I are going to be focusing our attention on it.

Well, Adrian you want to add anything? And specifically do you want to talk about CapEx in Smith & Nephew?

Yes, well to the second question specifically on how much time am I spending on the differences in margins, yes absolutely. It was clear coming into this conference there is a significant difference in operating margins between this company and some of its peers which obviously raises the question, why?

I think at first blush it is clear that some of the explanation is accounting and in particular, many of our US peers put royalties and the amortization of instrument sets within cost of sales whereas we put them within SG&A. However, that does not account for the whole difference. There is clearly a question there and yes, I suspect there are opportunities. It isn't probably surprising that the company has spent quite rightly many years focused on growing the top line. And when you do that you spend less time thinking about the effectiveness of the core processes. And again this is one of the things Chris has asked me to look at obviously in support of Dave in the early quarters in the company. So it is an area of attention, I can absolutely assure you.

How much of my time will go into it, it's a little early to say yet. But I'm sure in material proportions. I guess I didn't get the whole question on CapEx but what exactly was the question?

The question is can we give a CapEx forecast for this year and next year?

Well, again I come back to the sort of topical statement about the info that you gave, Chris. We are moving -- we wish to move, continue to move away from getting too granular, specific numbers looking forward. It is again when one looks at this underlying cash flows of this business we are in a place where capital spend even adjusting for payments and licenses where as for Durolane has been ahead of depreciation for some time. There's no question there is a build of capital going on in there for good reasons and reasons which I have been here only 5 weeks and I haven't had a chance to to fully get my brain around. So again it is an area which we will examine. I'm conscious I won't get away with this sort of -- for that one but after 5 weeks you'll have to bear with me.

Let me help you out. Broadly, I think our CapEx year-to-date is probably around 8% and our depreciation is about 5, that's a gap of about 3. Can you use that as a forecast, probably not, but that's roughly our business model because of the acceleration of the rate of new product introduction, there's probably a 3% gap or something of that nature, Michael. I think that's about as best a guidance that we can give you at this point in time.

All right. Thank you.

Thank you. Okay, we will come back to room here, the gentleman at the back. I can't quite see who it is.

Hi. It's Charles Weston from [inaudible]. I have two questions. First of all, on the Birmingham hip training, again, you mentioned that 75 surgeons have been trained, a mix of competitive accounts and your own. I wonder if you can give us an idea of how that mix flows out, is it primarily competitive or primarily yours and how that split could develop with the rest of the 325 surgeons?

And secondly, on the endoscopy margin, I am thinking you took a bit of hit this quarter and in light of the profitability improvements that you have got planned over the next year or two, that you talked about the last few quarters, and I wonder how you could, or if you could give us some guidance on how that might pan out in the next couple of quarters?

All right, let me try the BHR piece of it. I think the question was a split of competitive versus existing surgeons of the first 75. I think if you figure 50/50, you are close. I don't know what the exact number is. But it was our intent to try to have a balance between existing customers and competitive accounts. We could fill up the training schedules with either one of those populations. And so, we are promptly trying to have a balance and we will continue to do that.

Will it be 50/50 of the other 325, I don't know. But clearly our intent is to support our existing surgeons because there is a lot of interest in the product. But also use it to leverage ourselves in the new accounts. This is a great opportunity for us to take a product that has some unprecedented excitement around it, currently in the marketplace and get it into some competitive accounts. So, we are trying to get a balance. So, I think if you figure 50/50, you would be close.

Okay.

On the margins, as we said in the presentation, the main reason the margins had ended fallen year-on-year are investment principally in the Digital Operating Room. And that comes with it some mix issue too because the Digital Operating Room although it's relatively small sales at the moment, it's much lower margin than the average for endoscopy. But as they grow, there was a mix issue there.

But also in terms of the sales being somewhat low, the group being somewhat low, that has been rising from somewhat lower growth in resection sales within the endoscopy business, and then that clearly has a drop through effect on margins, which is what you are seeing in Q2. But again, looking forward to the remainder of the year, I don't think you should expect that to improve enormously in the rest of the year. Those dynamics are not ones which are going to reverse in the short-term dramatically, anyway.

And we have taken account of that within the overall guidance that we are concerned for the business. Okay. We'll take one more question here.

Hi, Martin Wales, UBS. Two questions for Adrain Hennah. Firstly, you have indicated you want to move to less granular guidance. Could you give us an example of what the H2 '06 guidance would have looked like or would look like under the new system, that you are aiming to get towards?

Second question, you have indicated you've some areas that Chris has asked you to focus on, cost control being one and capital utilization another, what else are you focusing on? In particular, what are your thoughts on the [inaudible] at Smith and Nephew currently?

Okay. Thank you for that. The -- guidance. First of all, obviously, just for the avoidance of doubt point that absolutely there is no question of being less transparent with investors. There is absolutely not the goal behind signaling a somewhat different approach to guidance. We absolutely understand the need to be fully transparent with investors. The question is the way you are fully transparent. And I think there is a desire, it isn't just my desire, by the way, although I am mouthing this as the CFO, this is very much the management team's desire, is to move the emphasis more on to describing the markets in which we operate and how we are doing in these markets, as well as obviously complete transparency retrospectively on performance and put less emphasis on the detailed financial guidance going forward.

And the reasons for that are exactly the reasons you read if you read Monday's FT and we are not reacting to Monday's FT, of course, there was in there the report from the US Roundtable talking about some of the harmful effects of going over the top in very short term, very detailed financial guidance. And I think we firmly believe that. And we are not however talking about dramatic change here. We are talking about evolutionary change. We are talking about listening as we make that change. So, I can't give you an exact answer for your first question. I can't say this is what it would have been if we were a year ahead. We want to do it in a more iterative and gradual way.

And in particular, wanted to divorce the guidance being given substantially today from the issue of guidance policy. Hence, we have reaffirmed the earnings guidance for this Company gave in Q1, full stock. And separately we are signaling guidance policy going forward. So, those two things should not be confused.

So, that's really it, we want to, I think, focus more on the markets, more on the way we are in the market as we look forward and less on giving you the precise numbers to put in your spreadsheets, I am afraid. Does that answer your question?

The second one, where am I focusing, apart from changing the guidance. The -- costs, you picked that up quite clearly, capital, you picked that up quite clearly. I think also -- and these perhaps connects with your points about the balance sheet. Obviously from time-to-time, we get off, are you going to buy back you shares. You have got net cash now [inaudible] and so on and so forth. Whether that's the appropriate thing for this Company to do in interest of shareholders, it seems to all of us depends principally on what are the level of opportunities to use that cash for buying things and in-licensing things as you look forward. So, that's the key nexus.

And as I come in, Chris has encouraged me very much to take a look at that pipeline, see how real it is, see how near term it is, see what sort of cash it will consume. I have seen the pipeline. I haven't had half a chance to get in and kick it and feel it and really breed it. But that absolutely is the nexus, taking a medium-term view, not taking a short-term, but taking a medium-term view.

That has been Smith & Nephew's position on this balance sheet. It's absolutely, it's my personal philosophy too. And I look forward to getting my mind much more clearly around what that pipeline holds in licensing and acquisition opportunities.

Okay, thank you.

And we will take a couple of more questions from the conference. We'll probably take these as closing questions from the conference. Guys, do you have any more questions?

Yes, sir. The next question is coming from Ilan Chaitowitz from Redburn Partners. Please go ahead.

Good afternoon. This is Ilan Chaitowitz here. Just two questions. The first is on the EBIT margin in Q2. It fell short, I think of your guidance by about 50 basis points and I was wondering if you could give a bit of detail as to -- go into a little bit of color as to why you think that came about and potentially what the outlook is for 2006? There was a noticeable omission from your guidance that you didn't refer explicitly to the EBIT margin in your guidance. And that's the first sort of query.

The second query is slightly related, it's also the tax rate. You are decreasing your expectations of the effective tax rate for this year. I wonder if you can go into a bit of detail as to why that is? But also, where the difference is coming in because your bottom line guidance is staying the same, but you are having an effective 1% boost from lowering the effective tax. So, if you could, did that imply that the EBIT margin for the full year is going to come down? If you could cover that, that will be great.

Adrian, do you want to answer that?

Yes, sure. So, I think the first part of the question is why is the trading margin in quarter two slightly less than the [guidance given], certainly, it is by about the number you quoted. But I think the answer is that lies in the -- the tough trading environment. There is no specific single reason for that. There is a number of reasons which basically [inaudible] Chris' introductory remarks about the nature of the market in the quarter.

What about the outlook for the trading margin for '06? Well, this is the first tangible example of the new guidance philosophy in operation. We specifically decided not to give a trading margin forecast for the full year. So, that's why there isn't one there. However that said, we do see improvement in the second half. Why do we see improvement in the second half, as you would expect, we are seeing these new products coming through with a mixed benefit that comes from the pricing that comes with them. You would expect to see that dropping through to some degree the trading margin, so do we. You have also read in the press release and David described, our focus on cost -- not any fundamental cost to structural margins, but cost discipline in the shorter term, you would also expect that to have some benefits. So, we do expect some improvement in the second half but we are not going to be putting numbers to it.

On the tax rate, why has it come down this year? Well, I repeat, there are two main reasons why it has come down this year. One is the mix by country of profit that we expect for the full year has a lower proportion in higher-tax rate countries than when the full year expectation was set earlier in the year. So, that brings down the average rate clearly. And secondly, as with any company, you are always dealing with things from prior years and negotiating them relative to your expectations around that for setting your provision. A few of them got better than expected and that means that the rate for the current year has come down to 29.5%. So, I think that's a fairly simple reason behind that and then we also said a few words about how that's likely to extrapolate going forward.

The last part of your question was why isn't that reflected in the guidance. Again, I think there is a little bit comes back to the philosophy again as guidance is in the round, obviously when you -- anybody gives guidance around earnings, there is a whole set of ups and downs that can fit within that. And hence the more, further you get, the more granularity you are getting. So, really, we regard that as in the round. There is no fundamental change to our expectations. And the tax rate is in the round basically, that's why it's unchanged.

Thank you very much.

We will take another question. Guy

Thank you. Our next question is coming from Jack Scannell from Sanford C. Bernstein. Please go ahead.

Good afternoon. We have been cautious on the orthopedic sector following some data that showed a substantial pricing dispersion]between similar US hospitals having very, different amounts for their hips and knees. And if that dispersion reduces it could have a negative drag on pricing. Now, do you see that amongst your customers and how do you expect pricing dispersions to develop over the next few years?

I'll let Dave talk a little bit about that. Jack, but you have taken -- certainly you have produced very well publicized documents in this area. Suffice it to say, we don't agree with your analysis and because actually, the issue around price narrowly measured obscures the issue of mix.

For Smith & Nephew, we don't see strong positive price development in reconstructive orthopedics. What we do see, though, is the opportunity as we introduce products which both expand the market like BHR and which actually intrinsically enhance our mix, particularly revision products which are priced higher. Then, we do see the opportunity for our average selling price, perfectly, legitimately and sensibly to actually rise in terms of favorable mix. We also think in terms of hospital information systems that they are, in many hospitals, not up to speed in terms of the way that they can deal with the topics that you all look at. And that's the evidence you've actually seen. So from our point of view, we don't take a bearish view on price in the marketplace. That's not an issue for us because we are really focused on mix. Dave, do you have any?

Well, you didn't leave me much to work with, because I agree with all those points. I mean, we are looking to expand the market in different segments, we are looking for some favorable mix shifts by getting into some areas that have attractive price dynamics with them and that's our model. And we are -- so, I think for like products, commoditized-type products, your standard products, clearly you are going to see some leveling out of pricing in the field. But, it's not what our business model is all about right now with going into products like JOURNEY knee and for the active younger patient the BHR and the resurfacing and some of these new products in the clinical therapies area with Durolane, et cetera, et cetera. So, that's -- I'm with you.

Just one last one, we did adjust the mix as far as we could in our survey. But I have a slightly more positive question, which is Floyd Landis recently won the Tour de France and needs a new hip. Have you any thoughts on the ideal hip for this young 32-year-old Tour de France winner?

I'm not an orthopedic surgeon, so I don't know if it would be ideal for him or not. But I guess that's between him and his surgeon.

Our view would be very simply. We think he should have a BHR. But the question is does his surgeon think he should have a BHR or not. So, we shall have to see.

Okay. Well, I'll be looking forward to the news.

Okay. Thank you.

Thanks very much.

I hope you won some money on betting on the Tour de France. Okay. Fine, we'll come here. So [Pete]--

Pete [inaudible] Capital International. With BHR, you are going to face tremendous pressure from your own sales reps, from your customers and frankly, from people like us to accelerate the availability to an increasing number of surgeons. What do you do in terms of both communication but also infrastructures to make sure that the organization pushes back to ensure that you don't roll it out too fast and have surgeons start doing the procedure in a less and optimal way?

I think we do the things like we are doing here today. When the questions are asked which are implicit -- implicit in the question is why can't you go faster? It's just being honest with our game plan and our strategy, and our strategy is very simple. This is a great technology. It has wonderful clinical results over 50,000 plus patients in Europe and we want to have those same type of results in the US. And the very basis of those great results in Europe and Australia with BHR was because of the intensive training programs that the surgeons were put through in order to get prepared to do the surgery and we plan on sticking to that. So, I think that's how we are going to do it.

We are going to be honest with ourselves about what's the right to do here. And yes, we will be under some pressure because we could ramp this product faster than we are currently planning to ramp it. But I think it would be the wrong thing to do. Now, if we can figure out a way, now don't get me wrong, I don't want to go slow just for the heck of it, but if we could figure out a way to increase the ramp and the training efficiency and things like that, then we will do it. And we are obviously looking at ways that we might be able to do that.

You absolutely right, pointed out that this is a significant pressure but it goes straight to values. We absolutely have to put the patients interest first. The surgeons have to go through the training program. It is different surgery. It takes time to do it, you need to observe it, you need to have a expert with you when you do your first few surgeries. It really, really is risky if that is not the case. And we have to put that first. Now, that coincides with the long-term value for the investor. What it doesn't coincide with is rapid short-term[ ramp] But I think you know where we stand on these things and our program takes that into account.

What I also wanted to try to sense out was are you doing -- because your commissioned sales reps are going to have accounts saying to them, "Well, we'll try your product if you let us have a short course." Are you compensating sales reps a little bit differently? Do you have an approval process that's a little bit different for doctors getting the courses for this product than for other products?

Yes, we do. I mean we have identified -- we have a very -- we have very closely identified and we pick the sites that we wanted to go into as primary training sites and we targeted them, and it's was very important for us to kick this product off with picking the 50 best sites that we could possibly find in the US as primary training sites. And that's different than other product introductions, for instance. And clearly, there is pull from the sales force, there's pull from the customers, there's pull from our investor base, there's pull from a lot of different angles on this product and we want to go as quickly as we responsibly can go. And we are keeping a close eye on it. And like I said, if we can find a way to go quicker, we will go quicker.

Okay. We'll take one more question and I think we'll close with all the questions. Do we have another question? Yes, gentleman in the back there, I can't see who it is.

It's [Daniel Gaswold] from UBS O'Connor. Someone asked you a question. You were talking about progressive improvement through the quarter on I think recon and trauma, in particular. Could you give any color on what the exit rates might have been in terms of growth rates and how it differed versus the beginning of the quarter?

We really don't want to go into monthly trends. I think you have to take it as read, with the new products coming in, that we have seen a pick up in the quarter. What you see, if you look at the two quarters growth rate at 6%, it looks as though the business has been flat. Actually, on the meantime, there has been some fluctuation on manufacturing, sales were lower in the March and April periods than they were in May and June. But, we are not going to go into specific numbers. Encouragingly, it was widely across all business, not just recon and trauma which gives us enhanced confidence going into the second half. But we really don't want to get into monthly exit rates, it would be probably misleading for you and for us, frankly. But, thank you for the question.

Ask one, just one further part on that. As you go into the second half of the year, what is your typical sort of order lead time? How much visibility do you have? And based on where we are today, do you -- is that what is giving you the confidence in the outlook for the future?

One of the challenges of this business in terms of forecasting is with the notable exception of DOR, we have no idea broadly what orders we are going to get next week other than history, trends, what our sales force [tell us]. So, we physically don't have a forward order book manifestly. So, we do have to watch the trends very carefully. We see those trends being very positive, particularly for the new products where we do know, as Dave was saying, we have got a queue of people who are in the training queue for JOURNEY as well as BHR in particular. We have to do our forward order book on Digital Operating Room and so we do have some good indicators, but the actual orders literally coming on a day-by-day basis. So, it's the indicators and the trends that we have faith in.

Hopefully, that's helpful.

Thank you. Well, thank you all for attending. Thank you all on the conference and we look forward to see you again in the next quarter. And, hope you enjoy and get safely back in all this hot weather before the thunderstorms start.