Smith & Nephew PLC (SNN) 2009 Q4 法說會逐字稿

This presentation contains certain forward-looking statements within the meaning of the US Private Securities Litigation Reform Act of 1995. In particular, statements regarding expected revenue growth and trading 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, claims and regulatory approvals, that could cause the actual results, from any future results, performance or achievements expressed or implied by such within the US Securities and Exchange Commission under the US Securities Exchange Act of 1934, as amended, including Smith & Nephew's most recent annual report on Form 20-F, for a discussion of certain of these factors.

All forward-looking statements in this presentation are based on information available to Smith & Nephew as of the date hereof. All written or oral forward-looking statements attributable to Smith & Nephew or any person acting on behalf of Smith & Nephew are 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.

Morning everyone and welcome to our 2009 full year presentation. I'm going to speak to you this morning about our performance for the fourth quarter and some of our achievements for the year and I will then hand it over to Adrian Hennah to take you through the numbers. As this is our full year results, when Adrian is done I'm going to come back and talk for a few minutes about our ongoing strategy that we have in the business, and give you some detail about how we plan on delivering this strategy.

So starting with the highlights for the year, we completed the year with a strong finish, revenues of $3.8b and underlying revenue growth of 2%. The fourth quarter was a strong one for us pretty much across the board with revenues of $1b and revenue growth of 4%. We continued to generate improved trading margin as a result of our continued actions across really all parts of the Company, manufacturing, sales, administration, you name it, as we institutionalize earnings improvement into our culture and our way of doing business.

We've improved margin by 230 basis points in the year and 60 basis points in the quarter. And this played out to give us a margin of 22.7% for the year and 23.8% for the quarter. Adjusted earnings per share were $0.66 for the year, an increase of 18%. And I'm going to let Adrian take you through the drivers of that increase.

We generated over $400m in cash, bringing our debt below $1b. In our businesses Orthopaedics saw stronger growth in the US and in the fourth quarter both hips and knees were growing pretty much in line with the market. Endoscopy saw its US sports medicine revenues improve for the third quarter in a row and the business outside the US made another excellent contribution where the repair segment was showing some strength. The market for capital equipment, I'll remind you that it continues to be tough. Moving on to Advanced Wound Management, we are very pleased with where we are in Advanced Wound Management and its performance. This business is growing ahead of the global marketplace.

All in all, a good finish to the year in tougher conditions than we've seen for a long while. But before I look at each of the businesses in turn, let me set some context for you. As our results flow from the delivery of our strategy, I think it's important to reiterate our areas of focus that drive our business. You've seen the slide before, but I just want to emphasize a few points.

First, customer led is the foundation of really all we do to drive out-performance in our business. It's all about innovation, it's about medical education, it's about customer service, it's about our unique customer front ends that we've built in our businesses and an intense desire to be serving our customers.

Efficiency. Efficiency is about using our assets and our time to improve the profitability of our business. And also, more -- as importantly, to liberate resources to invest in our business. Examples of this today are in biologics, they're in emerging markets, they're in adjacent technologies and also in the development of our people.

Alignment. Alignment is making sure that everyone in the Company knows the objectives and is incentivized to achieve them and that the first three pillars become second nature.

So let me move on and take a look at some of the achievements in our businesses in 2009 and the fourth quarter, starting with Orthopaedics.

In Orthopaedics market conditions were a bit less difficult in Q4 than earlier in the year and our own performance improved in several areas. In the US we achieved stronger growth this quarter. In reconstruction our hip business grew by 7% as products such as our new R3 cup drove revenues up. Our knee business grew by a full 10% in the United States, with LEGION making a strong contribution. VISIONAIRE, which is our patient-matched cutting blocks, continues to show good acceptance from surgeons. And our traditional products are performing very well through our active patients, although our active patient products continue to experience slower demand.

In Europe, where market conditions have been difficult this year, our revenues were 1% lower with Reconstruction falling by 2%, and Trauma growing by 3%. You'll have heard at our investor day, some of you will have heard, the ones that attended in November, that we are working to gain new customers in Europe and have plans to do so. And in fact 20% of our KLEOS customers, those are customers that we're currently training, are now new customers giving us an expanding base for future growth.

On the subject of training, I'm pleased to be able to tell you that in our new facility in Shanghai, China, we trained over 150 surgeons in the second half of 2009. And that's a great start to our activities in the China marketplace.

Trauma, as we explained at Q3, we had tough comparators in the second half of the year from the sizeable military orders in 2008. We're certainly making some progress with our sales force support, recruitment and training etc, and they continue to be a key priority in the business. But we do have a lot to do in this business. And we are on it, we're very, very happy with our product range. But we expect that progress will take some time to come through in the numbers.

In clinical therapies revenues declined by 4% in the quarter as this business grapples with reimbursement and product approval issues.

Turning to margins, margins were a very good story. Orthopaedics increased its trading margin by 70 basis points in the quarter and 150 basis points for the year, a great performance and has benefited from manufacturing improvements and also expense control in that business.

So moving on to Endoscopy, in Endoscopy the market conditions in sports medicine improved in the fourth quarter, contrasted by a continued weak capital equipment market. Our Endoscopy business mirrored the market with a stronger finish for the year, achieving overall revenue growth of 6%. And although capital equipment sales continued to be weak, our repair business continued on its strong path, growing by 15%. We also saw strong up-tick in consumables in the last quarter, sports medicine performed particularly well, FASTFIX was introduced for the knee, OSTEORAPTOR for the shoulder. And in Resection, specialty blades such as BONECUTTER and ELECTROBLADE, which gained traction in the marketplace.

In Europe the revenues grew by 10% in the quarter with good performance in many markets, including the UK. Outside the US revenues grew by 14% as emerging markets grew particularly well.

Margin in Endoscopy increased by a strong 260 basis points in the quarter, driven by improvements in manufacturing costs as global operations makes headway in this business. We've closed our facility at San Antonio and have made improvements in SG&A as well. Endoscopy did have some mix benefits from reduced capital equipment revenues and a weak comparator. These improvements have resulted in the highest margin for our Endoscopy business in the last five years.

So turning to Advanced Wound Management, although the market conditions for Advanced Wound Management were somewhat weaker, a 4% growth this quarter, our revenues grew by 8%, well ahead of the market and a very good performance. And although the US continues to be slower, slower than we would like, this is a great performance across the board for the business, particularly as we're experiencing continued pricing pressure in this market segment.

European revenues grew 9% and the rest of the world also performed well with 9% growth. And clearly there's some further potential in the United States.

Negative pressure wound therapy continued on its growth path, and we doubled our revenues in 2009, giving us a very clear market position. We put a lot into this business in 2009, in fact we put a lot of thought into this business in 2008 and 2009.

In the intellectual property area we've won a number of key cases, and are staying the course ahead of the US case which started last week. We've introduced many new products this year, including the RENASYS pump range. And we've expanded our dressings range. We've invested in our sales force. We've invested in customer training, and our market position reflects these investments.

Moving on, our strongly branded dressings, ALLEVYN and ALLEVYN Ag again drove growth this quarter. We had revenue increases of 10% and 14% for Exudate and Infection Management.

Advanced Wound Management achieved margin of 19.2% in the quarter, and 18.9% for the year. We are seeing the benefit of longer term improvements, including the closing of the Largo facility, back office changes in Australia, New Zealand, European logistics, and the list goes on. The new facility in China, it's running very well. I visited it personally and I'm happy to report that we have made 9.6m dressings in China in 2009, a great achievement for the whole team.

So in summary for 2009, the market conditions were weak for most of the year and then showed signs of improvement in the last quarter. Overall we are very happy with the outcome we've achieved and the signs of increased momentum in the business. Our employees have delivered a great result in many areas. Sports medicine globally, reconstruction in the US, negative pressure and wound care globally and our manufacturing and distribution teams have made great strides this year.

Where we do have work to do, such as reconstruction in Europe and trauma globally, we have actions in progress. We have really and truly embedded our efficiency programs in the business. We had an aggressive and full agenda in 2009 across all of our businesses.

Now I'm not going to go over this slide in detail. But I have it here and I'm going to leave it here as I change places at the podium with Adrian. And I think as a backdrop, just a few of our achievements in 2009. Adrian?

Thank you Dave. Thank you Dave and good morning ladies and gentlemen. If we could turn to the first slide, the income statement, slide number 12, I think it is. Revenue in the quarter was $1.07b. This represents underlying growth of 4%, after adjusting for exchange rates on quarter four last year, a reported growth of 11%. There was one extra sales day in quarter four this year than quarter four last year, increasing growth by about 1%. Trading profit in the quarter was $254m, giving underlying growth of 9%. Our trading margin was 60 basis points higher than quarter four last year and 230 basis points higher for the full year, all as Dave has already mentioned.

Amortization of acquisition intangibles and impairments includes two accounting impairments. One of $13m relates to the 2006 acquisition of OBI and it's due to some reduction in expected peak sales of TruFit. The other of $19m relates to the planned disposal of our small outpatient pain management business.

Interests costs are down on last year, reflecting lower borrowing.

Moving to the next slide, slide 13, and further down the income statement, the tax charge for the full year before exceptionals and amortization is 27.9%. This is lower than the rate we had signaled at quarter three as a result of favorable progress in various tax negotiations. We expect the tax rate in 2010 to be in the 31% to 32% range we had expected for 2009. Adjusting the year to date tax rate to the 27.9% rate for the full year gives a tax rate in quarter four of 25%.

Adjusted attributable profit for quarter four was $180m. Adjusted earnings per share were $0.203, which is 22% higher than quarter four last year. EPSA growth is higher than the underlying 9% growth in trading profit, principally due to the lower tax rate and the weakness of the dollar. For the full year sales were up 2% at constant exchange rates. Trading profit was up 15% and EPSA was up 18%.

Turning then to the next slide and an analysis of revenue by business segment, you've heard from Dave on the progress of each business. This schedule gives the growth rates in the quarter to which Dave referred. For the year as a whole the US dollar was stronger than the average of the currencies in which we operate, leading to a reported 3% translation loss on sales. In quarter four however the dollar was weaker, leading to a 7% reported gain. As in recent quarters the translation currency impacting Wound is larger than in the other segments due to the lower proportion of its business done in US dollars.

Turning to the next slide, slide 15, an analysis of revenue growth rates by business and by geography. As well as the numbers on this slide, we'll also refer to the growth rates of our main product types, which are included as usual in an appendix to the pack you have.

At constant currency, sales in our Orthopaedics business in the quarter grew 2% on quarter four last year. Hips grew at 3%, knees grew at 5%, trauma fixations fell by 2% and clinical therapies fell by 4%. Across Orthopaedics we have seen a very slight increase in like for like price reductions. Mix was slightly positive and stronger than in quarter three, but was still materially lower than the trend over the last couple of years.

In the United States, Ortho growth was 3%. In the reconstructive area, as Dave has mentioned we, like other companies, saw an improvement in volume growth, especially in our traditional products. US reconstructive sales grew at 9% in line with the market. Growth in our US knee business was 10% and US hip growth was 7%. Trauma fixation sales in the United States were 6% lower, materially below the market growth rate. As we mentioned a year ago, Q3 and Q4 2008 benefited from significant orders from the US military. This has not recurred this year. Excluding military orders, sales in the USA declined by 1%. Clinical therapy sales in the United States fell by 6%.

In Europe Orthopedic sales fell by 1%, slightly below a small market growth. We clearly saw the impact of the somewhat weaker market in these numbers. We believe that the impact of the integration disruption is now almost fully behind us and that the good work being done by our European Ortho management team will gradually become evident in the numbers for the coming quarters.

In the rest of the world Ortho sales grew by 3%. The positive underlying trends in the emerging markets continue. We saw very significant double digit growth in the emerging markets in the quarter. We continue however to see some impact from the macro-economic challenges in the more mature of our rest of the world markets, especially Japan and Australia.

Endoscopy sales grew by 6%. Arthroscopy sales, which include both Repair and Resection, grew by an encouraging 13%. We continue to see a significant fall in demand for capital equipment. Visualization and related sales fell by 21%, similar to the year to date decline though with a strong '08 comparative. Capital equipment sales accounted last year for about 20% of global Endo sales.

Wound sales grew by 8% in the quarter. This included a contribution from NPWT sales of 3%. Total Wound sales grew by 5% in the United States, by 9% in Europe and by 9% in the rest of the world. We continue -- we continued and continue to see clear signs of good progress with NPWT.

In Q1 of the current year, Wound are consolidating a number of their distributors in the United States, as they did in the UK in early 2009. We expect this to reduce sales modestly in quarter one and possibly also quarter two as the total level of inventory held by wholesalers reduces.

Turning to the next slide, this shows the usual analysis of trading profit by business segment -- this is slide 16. As we have already noted, the trading margin for the Group was up 60 basis points in the quarter on Q4 last year, and up 230 basis points in the full year.

The Ortho margin increased by 70 basis points in the quarter and 150 basis points in the year. We continue to benefit from our focus on a combination, tight budgetary discipline and investment in improving efficiency and effectiveness of our main processes. The main process changes that are delivering benefit now are in the cost of sales area, our focus on process change going forward in Orthopaedics is moving to include the SG&A area.

The Endo margin increased by 260 basis points in the quarter to an exceptional 28.2% and by 320 basis points in the year. This too reflects tight cost discipline, some specific projects and also a mix benefit. In 2010 Endo is increasing further its investment in new products and geographies.

Margin in Wound was 140 basis points lower in the quarter and 360 basis points higher in the year. The reduction in quarter four was signaled with our Q3 numbers and is due to the timing of investments. As in our other businesses, the full year increase has been due to a combination of budgetary discipline and process improvement. Our planned efficiency improvements are being delivered.

Turning to the next slide, which is the cash flow statement, number 17 in your pack, we generated $189m of free cash flow in the quarter and $401m in the full year. Capital expenditure in quarter four was $179m -- $117m, excuse me, with the largest part of this investment in Instruments. Restructuring spends continued in line with guidance. We include as usual an analysis of the total spend on the restructuring programs, the total cumulative spend on the restructuring programs in an appendix.

We have been pleased with the recent improvements in cash generation. We are focused on increasing capital efficiency in the business. Net debt decreased below $1b in the quarter, principally as a result of the free cash flow generation. Our Board has declared a 10% increase in our dollar second interim dividend, excuse me, in line with our policy.

Turning to the last slide in this section of the presentation and the 2010 outlook. In the Orthopedic reconstructive area, we believe that underlying global market growth increased slightly quarter-on-quarter to around 6% in quarter four. We expect our recon growth to be in line with the market rate in 2010. Within Orthopedic trauma, despite our disappointing performance in recent quarters in the United States, we continue to expect to return to a sustainable market growth rate, but this will take time. Within Orthopedic clinical therapies we expect competitive pressures to continue. The planned sale of our outpatient pain management business will also reduce clinical therapy sales by about $15m, in the full year.

Within Endo, we expect to grow at around market growth in the repair and resection markets. We expect total Endo sales to continue to be impacted by market weakness in the capital equipment area until the economy improves. Within Wound we expect good progress with NPWT sales to push growth ahead of the market.

On a more technical point, we have as usual included in the appendices a table setting out the number of business days in each quarter. There were the same number of days in 2010 as a whole as there are in 2009. There is however quite a lot of variation by quarter. In quarter one there are three more days in 2010 than in 2009. This variation will clearly impact the reported quarterly growth rates.

With regard to our 2010 margin target, there is no change from our position at quarter three or indeed at quarter two last year and earlier. More importantly for the way we run the Company, we continue to see significant opportunities to improve the efficiency of our business across a wide range of areas. The systemic efforts we have underway will deliver benefits over several years. How much will end up in new investment, how much in dealing with pricing pressures and how much in margin will be determined as opportunities and pressures develop. We do however see material further margin opportunity.

And with that outlook on 2010, I'll hand back to Dave.

Thank you, Adrian. Okay, thank you, appreciate that. I outlined the four pillars of our strategy at the start of the presentation. So I'm going to take a look at these in turn and give you some more detail about how these are helping us, not only helping us, these are absolutely critical for us to deliver on our strategy.

In a minute I'm going to look at the first of these. But before I do I want to talk about alignment because I think it is one of the most important things in our, of our strategic pillars. It really underlies everything we do. Alignment, simply put, is very much about one thing. It's about making sure that all 9,000 plus of our employees are one team, pulling on the same rope at the same time in the same direction. Sounds easy, but difficult to do. So that's why we have one plan, we have one company-wide score card which we're using to measure the whole Company's performance, and why the score card is a major part of our reward systems. And that's really what we mean by one company.

So let's move on to customer-led. Working closely with our customers is how we seek to differentiate ourselves and also to gain competitive advantage. As you can see, as you saw from the slide I put up about 2009 accomplishments, we had an aggressive agenda in 2009. We have no less an aggressive agenda in 2010.

We are investing substantial resources across our business in medical education. We're also investing substantial resources to build and expand our customer base. Innovation and product development is driven as much by customers as ourselves. VISIONAIRE is a great example of how we can achieve better outcomes for patients and surgeons. We are looking in depth at our US customer service model and our logistics systems to improve service to customers, and also our own asset utilization. This is a major process re-engineering undertaking.

We've also recently appointed a new Head of Healthcare Systems, President of Healthcare Systems, who will report directly to me. We are harnessing our business to work as one company for major accounts management and also to make ourselves much more customer friendly.

Turning to the area of efficiency, efficiency is fast becoming a way of doing business at Smith & Nephew thanks to the discipline that we've achieved through the earnings improvement program. And we have made substantial progress to date, but we're also ambitious for the longer term. For example, in using lean techniques in 100% of our factories, from Memphis to Aarau to Beijing.

In information technology, our information services teams have a number of substantial challenges to work through to deliver the global platforms that we need for even greater productivity in the future. These initiatives, by the way, tend to have a longer horizon, and will deliver benefits in the later years.

Our efforts in other areas to improve our margin will continue. For example, we're moving our Orthopaedics head office within Memphis this year to improve the services that we can offer to our customers.

We have also said that we're making Smith & Nephew more efficient, not just to improve our margins, but also to liberate resources to invest in our business. The appointment of our Chief, new Chief Scientific Officer this year is an example of this, as we look at the best approach for our biologics business.

But it's more than just people. As an example, we're investing significant resource in Endoscopy to improve the development to launch cycle for all of our new products. We continually strive to innovate across our product range. And we've identified several areas for range extensions, particularly in smaller joints.

And we continue to look for appropriate acquisitions. Emerging markets are a key part of our future, our future growth, and we're investing in China and other major markets aggressively.

This year we will start to develop Smith & Nephew Management University, a vital resource to strengthen the skills and the talents of our people, and build a strong platform for the future. These are but a few of the areas that will attract our focus in 2010.

So let me end with turning to our business outlook. Our business outlook is good. In terms of the market, we all know that healthcare systems are under pressure. However demographics will continue to drive underlying demand in this industry for the foreseeable future. We've seen very good growth in our emerging markets and we see undoubted potential in these emerging markets going forward. We have a clear objective to get close to our customers, and identify and then meet their needs better, faster and more economically. This we believe will differentiate us and help us win in the marketplace.

I'm also satisfied that we have the right disciplines in place now in this business. And more importantly, the right people to deliver on our strategy. And finally, our improvements in margin give us the ability to invest for the longer term.

In summary, we're very happy with where we are. We certainly have more challenges that we've accepted in 2010. But we have real momentum.

With that, I'm going to end the session and open it up for questions. I would ask that -- we're going to use the usual system for those -- a lot of familiar faces out there -- usual system of taking questions. I would ask that each person limit the number of questions to two each to allow as many people as possible the opportunity to participate. Can we first take some questions from our callers?

Thank you. Your first question today comes from the line of Matt Miksic, from Piper Jaffray. Please go ahead.

Good morning. Thanks for taking our questions. So first, I guess on Orthopaedics, looking at your outlook for 2010 in line with the market, wondering, does that -- and a couple of things on that, then I have one follow-up. One is does that include some risk, continued risk to the integration in Europe?

And also does it include some of the new products that you have in the pipeline for this year, like this bone-conserving stent we've heard about?

I think the, I think the simple answer is, yes, that we've factored in all of those things, Matt. That doesn't mean that those risks aren't there. But clearly we've tried to take those into account as we put our budgets together for the year and given our guidance.

We do feel like a lot of the heavy lifting issues that we had in Europe are behind us. We have new leadership there. We have -- we've really and truly started the integration because it took us some time to really begin that process. And we have consolidated facilities and we've done a lot of the hard work. So I think that we're pretty much thinking that's behind us. We still have some risk in Europe for a number of reasons, but we have tried to factor those in.

And on the new products side?

We've factored it all in.

Okay, so I guess given that that's behind you, it feels a little, it just feels a little conservative, given that you're launching some new products and you had some difficult comps in terms of the integration. Just any comments on that? On the one hand, it sounds like you're on the other side of it. On the other hand, it sounds like you're maybe being conservative.

I can see why you might think that, Matt. But I'll tell you, we have a lot of work to do in Orthopaedics. It is our -- it's a very complex business for us. We're going to be putting a lot of focus in 2010 and '11 and '12 in re-engineering a lot of the processes in that business so that we can sustain good performance in Orthopaedics. So we have to balance that. We have to balance that with how much focus we're going to be putting on driving the top line. And it's always a judgment call for us. We think that the balance is -- we've got it just about right. Adrian, do you --

No, I've nothing to add. It's spot on.

Okay, and then this follow-up.

Yes?

I'm sorry, follow-up on negative pressure. Wondering, there's been a fair amount of peer reviewed papers and abstracts circulating about the difference between gauze and foam and the difference between some of the systems and standards of practice out there in negative pressure. When -- what kinds of things I guess can we see from Smith & Nephew or from your clinicians to help start winning over the hearts and minds of prescribing physicians in that market in terms of peer-review papers or meaningful, a meaningful push on the clinical side?

Matt, I think the winning formula in negative pressure has several elements. The first is being able to give the customer a choice. Let them choose versus us telling them what they have to buy, is number one. And that's certainly a big piece of our strategy. Secondly is having a full range of applications. And it's taken us a while to build up our range of applications as we have developed these products. And we're still not 100% there but we're moving quickly in that direction. The third thing is making sure that you have the right type of service support and logistic support in place to be able to support the customer. And I think the fourth thing is proving, proving yourself, gaining credibility.

And we're well on our way to having those elements put in place. The credibility piece is an interesting one because we have a lot of credibility with the Wound Care professionals around the world because we treat more hard to heal wounds than any other company in the world. So we have credibility in that regard and I think it is more of a prove it to me that you are ready to support us. A lot of folks want a choice and a lot of folks are willing to give us a shot.

We are very happy with the growth in that business. We doubled our revenues last year. We have our growth plans I think right where they should be in terms of being reasonable. So that when we do grow that we will be able to support our customers properly. We're picking and choosing where we go now, based on where we have good support systems in place. So it's just a matter of how quickly we can ramp up and fill in those four factors.

And the clinical element of it? I'm thinking of things like this panel hosted by Professor Runkel recently. Anything, anything -- is that something you are going to -- is that an occasional once a year or is that something you expect to be pushing on over the next 12 to 18 months as well?

I think that in general -- forget about negative pressure for a second. I think in general that we as companies are going to have to have more proof statements in terms of clinical evidence because I just think the world is changing. And we are certainly thinking that we are going to have to have more clinical proof statements in place, in order to help us sell our products. So we as a business are focused in that direction. So my guess is you will see more of that in the future.

You do have to understand that up until a very short, very short time ago, 100% of the work that was being done in negative pressure was being done by one company. So there is a large -- there's a lot of things out there by that one company and it takes time for the others to catch up, but we're clearly going to focus on it.

Of course. Thanks very much.

Thanks Matt.

Thank you. Our next telephone question comes from the line of --

Good morning. Thank you for taking my question. I'm Ilan Chaitowitz from Redburn Partners. A couple of questions. With your innovation and the pace of innovation picking up from quite a muted level, do you foresee over the next 12 to 18 months that the mix benefit to your top line will offset or more than offset the slight increase in pricing pressure that you are seeing? That's the first question.

And secondly, with regard to your cost expectations for 2010, there may be a concern that with first signs of a recovering market that you increase your cost to invest -- to capture growth, that that could jeopardize you meeting your previous margin guidance for 2010. Can you give us some sort of feel as to what you expect to see your costs growing in 2010?

Okay, let me take the first half and you take the second half. First of all, that's an interesting way to try to get at a pricing forecast from us. I think that -- I don't know whether or not it is going to offset it completely or not, but I can tell you that we are focused on innovation that does deliver real and economic and clinical value to our customers. And I think that there is plenty of room for innovation in this industry and plenty of room to get mix uplift if the companies, and we are clearly focused on it, can deliver quantitative value proposition and better clinical efficacy for our customers.

And when we talk to our development engineers and our marketing teams now that's what we ask them. We're pounding it into them. Don't talk to us about products that don't have economic value associated with them and real clinical efficacy. So I think that -- it's not answering your question directly, but I can tell you that we are expecting an uplift in pricing as a result of doing those things well in the future. And that's part of our strategy.

And your second question Ilan, there's clearly all sorts of pressures that affect margin, mix and price and investment opportunities, and when you take them and all that sort of thing. But, other things being equal, higher growth is good for margin, not bad for margin, as I would suspect would be the norm in most companies and it's certainly the case for us.

I appreciate that but there is still a lot of uncertainty with regard to what the market's going to do this year and indeed pricing and mix. So one way for us to model your business would be to have a clearer idea of where you see costs growing and then we can take our own view on the top line. So what do you -- from your internal budgets, what do you see costs growing over 2010 versus 2009?

Unsurprisingly, Ilan, we are not going to share the full contents of our budget with you. Consistent with the approach we have been taking over the last few years on EIP, we are working very hard to make all our costs more efficient. And while there are some categories we are seeing particular growth, and medical education is one. You've heard us talk a lot about investments in new facilities for doctors and new training for doctors. So some areas are growing. Many areas are contracting in dollars, but we expect increasing in impact because that's a huge part of our focus. It's not just cutting. It's making the thing more efficient. So I'm afraid it's somewhat hard to give an answer to your question that you can feed into that model, Ilan, sadly.

Thank you very much.

Thanks.

We'll take one more here. Hans.

Morning. Hans Bostrom from Goldman Sachs. I have two questions on Wound Care, if I may. Firstly, I noticed you didn't mention ALLEVYN Gentle in your growth driver for Wound Care. Obviously it's silicone dressings being clearly a very hot market. Is that because it's not performing for you?

And how widely have you rolled this out? And how do you see the competitive landscape changing, now that Coloplast is entering this market as well particularly in Europe?

And secondly could you shed some more light on the weakness in performance in the United States. Is this purely a market issue or is it reflecting more competitive pressures from ConvaTec perhaps, which we hear is ratcheting up their pressure? If you could discuss that it would be helpful?

Let me flip it around this time. I'll take the second part Adrian and I'll let you take the first part. Let me answer the second part first. The -- I can take a shot at both, as well, but we are trying to split it up here.

The US for Wound Care, we've never been that strong, Hans, I guess is the bottom line. We -- it's an interesting phenomenon in companies, all companies -- most companies around the world, is that where you have your legacy and where you have your -- the heart of your business is typically where you are strongest. And we traditionally have been a UK based Wound Care company. So we are very, very strong in Europe. When we bring out new products and when we think about training programs and we think about sales collateral material, and we think about brochures and marketing material, it always is in Europe-speak. It's in UK-speak. It has a bias towards making sure that we are satisfying the needs of the UK and the European customers first.

And we do the same thing in Orthopaedics, by the way, when our Orthopaedics business is based in the US. We tend to be -- we tend to have more of a bias towards the US businesses. So we are naturally stronger and you have to work to be stronger in those other markets.

I think historically that's where we've been in Wound Care. And one of the things that we started trying to do several years ago was we realized that for us to win big in Wound Care globally we had to win in the biggest market in the world. And the biggest market in the world in Wound Care was in the US, mainly because there was one competitor that had built a segment into a $1b plus business that had made the available profit -- two thirds of the available profit was coming from the US market. So we strategically said we've got to shift that center of gravity as a business. And it's tough when your Headquarters are in Hull.

And so what we did is we said first of all we've got to get into negative pressure. That's going to be the first part of our strategy. That's going to help us shift that center of gravity and we are going to take on this competitor right there in their back yard. Second thing we did is we said we are going to have to bring in some management talent. I asked the then President of the business, Joe Woody, to spend half of his time in the US, which he did.

So those are the types of things that we are doing. It just takes time to change that culture. And as we keep getting critical mass and gaining critical mass in the US, I think we are going to get stronger and stronger and I think negative pressure will be a big, big part of that. And I think a lot of it's just legacy Hans.

On ALLEVYN Gentle, ALLEVYN's our flagship brand or one of our flagship brands in Wound as you well know and an important part of our strategy is to keep coming up with subsets of it. And ALLEVYN Gentle is one of them and is a very successful one I'm pleased to say. I'm not going to give you the precise numbers unsurprisingly, but among our recent launches within the ALLEVYN brand, it has been one of the most successful. We were late somewhat in that little segment, but we're in it and we are performing well. I'm not sure what else to say.

How widely has that been rolled out? Was it a global launch?

Yes, absolutely. I couldn't swear that it is in every single country but essentially, yes.

For all intents and purposes globally.

And from a sales, total sales count point, is it more important than the Ag version or --

Not going there. It's significant.

I don't even know if I have the --

No, we're not going there.

Actually, the first question was (inaudible - microphone inaccessible) commenting on your performance versus the market in the US, bearing in mind that's quite a considerable contribution to growth (inaudible - microphone inaccessible) NPWT. (inaudible - microphone inaccessible).

Right, right. No, we're not, we're not improving our position outside of NPWT currently. And we are working on it. We have plans in place. And the other thing is, Hans, that we -- there's only so many hours in a day and only so many, only so much gray matter for people to focus on a certain topic. And right now we have our entire team saying go after NPWT. So there is a lot of focus on NPWT in terms of brainpower and that makes a difference as well.

Yes, I think it's fair too --

It's an opportunity cost in the other area.

Which we've said over several quarters, there's no question that the launch of NPWT in the US cost us. It put us into reverse on AWC. There have been several quarters where you've seen it going the wrong way. There's no question they were connected and we are working our way, have worked our way through that.

But we're okay with that. We don't like it but we are okay with it. We understand it. It's worth the investment for us to do this and longer term is going to make sense for us.

Is one of the solutions that you are segmenting your sales force even more or what are remedies you are looking to implement?

Yes, we are moving in that direction.

Okay, thank you.

Do you want to take some more from the, from outer space?

Thank you. Your next question today comes from the line of Michael Matson from Wells Fargo Securities. Please go ahead.

Hi. I guess I just wanted to focus a little bit on your restructuring and acquisition expenses. We've seen these average about $40m each per year for the past two years and you've had them virtually every quarter. I believe that this is well above your peers. Shouldn't these either go away over time or really be considered part of your normal operating expenses?

Michael, it's a very good question. The -- they comprised two -- aside from amortization cancellation which everyone does and we really just give you for information, the restructuring ones they comprise the EIP program and they comprise the acquisition cost associated with Plus. And both of them are going absolutely in line with programs we set out, what, nearly three years ago now.

And in fact we give in the appendices to the presentation each quarter, if you look -- and I forget what the number of the appendix is, but in there you will see an analysis of restructuring and acquisition costs, which shows the total cumulative to date of the cash costs. And you can see under the EIP program, our original guidance was $125m total cash cost. The total to date at the end of last year was $100m. In terms of the P&L charge, the cash is $8m behind, [8.92] but that's just warp and weft.

In terms of the Plus integration, we said it was, originally we said our target was $60m to $80m, but then we incurred a significant amount of costs in getting money back from the vendors. And we said at the time that would cost us an extra $15m, which we had to put through P&L, so therefore you'd expect a total of up to $95m. It comes to $95m now so you can infer from that that you won't be seeing further costs under the -- from the Plus integration. They are now done.

So there's no question over the last couple of years, yes, they have been high because we've had those two programs. But we have no other programs in place which we expect to -- there's a bit more to go on the restructuring on the EIP program as you saw, but we have no other programs in place where we expect to be generating those costs.

Okay. Then just a question on NPWT, on the trial, is there anything that would change if you win the trail in the US? For example, have you been holding back on your foam rollout and would you launch foam more aggressively if you were -- if the court found that you were not infringing KCI's patent with your foam product?

Here's where we are on what we can say, based on the fact that we have an ongoing litigation in a jury trial in the US. We are going to say very little. So it's not going to satisfy you very much, I'm afraid, and you are just going to have to wait to get those questions answered.

What I can say is that we have had -- we've fought a lot of litigation battles in 2009 and we've won most of the battles. And we are currently selling products in just about, I think all the products that we've entered and so we are happy with what we've done thus far. We are in the middle of a trial. We can't say much and that's where we are.

Alright. And then just one quick question on European reconstructive market. It seems to be lagging the US. Do you have any thoughts there as to why that's happening?

Yes, your guess is as good as mine, I guess.

Exactly. Clearly it is. It is lagging. It's lagging by quite a lot and I think as we talked to you guys about 18 months ago, as the recession was coming our core expectation then was that there was going to be some volume softness through the recession and then we'd face price pressures after it. I guess what happened in the US is pretty much in line with our expectations.

We, and I suspect many other commentators, have been a bit surprised by the speed with which the European market has slowed down. And it does seem to be a combination of volume restrictions and some increased price intensity in various different forms around Europe. Perhaps coming faster than one would have expected from the deficit reduction timetable that we have had out there, but I think what we are seeing is pretty much in line with what you're hearing from other, other companies you are asking that question of.

I think the only other thing that I would add is that we -- as we talked about I think in the same forum a quarter ago, when we were trying to find out exactly what was happening. First of all the data that we get from Eucomed has a lag to it that makes it a little bit difficult and we don't quite have visibility on that information yet.

And I think the other thing is that we do believe that the queues are getting longer and I know that that's a tough one to really quantify. But if you slow the volume of the folks going through the pipeline then you can control the volumes that way. You may not be restricting the care, but you just make it longer to get the procedure done. And I think we are seeing that, we believe we are seeing that in several markets.

Alright. Thanks a lot.

Thank you. Okay, do you want to -- just you can, I'll let you do the choosing there, Chris.

Peter Cartwright at Fiske. On emerging markets, Smith & Nephew in the past has been quite dismissive in expensive products for advanced territories, but there's a renewed emphasis now. Is this just development or has there been a step change in the Company?

It's a good question. We have always believed that there was a significant opportunity in emerging markets for Smith & Nephew. It's been a matter of priorities, of how do we focus the resources in our Company. And I think right now we are very, very bullish on certain markets and we're trying to make sure that we get the attention and the resource and the focus in the right area.

And right now we're focused mainly on China. We have, we've established the China Board, which I'm the Chairman of. And we set our own strategy in that marketplace. We are working as -- all of our business units are working as one Smith & Nephew Company and our intention is to try to leverage the brand and build a significant brand in China. We have a factory that is up and running in Wound Care and we have a factory that is being built in Orthopaedics. And you might think that all that's doing is it's a manufacturing source to give you lower cost products. But that is only half the story. It may only be a quarter of the story.

The other three quarters of the story is that putting a factory in China means that we now have to start putting people in China. And we have to start hiring local people and we have to get to know the local officials. And we start getting to know -- we wake up every day reading the Asian Wall Street Journal versus the European Wall Street Journal. And it makes a huge difference in our ability to understand the marketplace and the customers.

So that when we are ready to make a commercial penetration into China, we have engineers, we have marketing folks, we have ex-patriot management teams that can actually go out and figure out what is necessary to win in the Chinese market. Because the last thing we want to do is take our products that we developed in England or the United States or Switzerland and run them up a flagpole in China and say don't you want to buy these? Because they are not going to buy them. They'll buy a few of them but that's not going to give us the competitive advantage.

So that's our strategy. Our strategy is -- we could have chosen a number of places to put low cost factories in place, but we chose China because it's such a strategically big opportunity for us that if we put the factory there, we get the people, we get the expertise, that we can -- we'll be much better at developing a commercial strategy when we want to penetrate it. So it's a long-winded answer to your question but I think it's an important answer because it is a key area of focus for us as a Business. We believe that China, for instance, and India, these are markets that are going to be a major part of our success and growth in the future over the next decade.

Yes.

Hi. Lisa Clive from Sanford Bernstein. I have three questions. First, you mentioned that the queues are getting longer in some countries in Europe. Could you maybe mention a few examples? I know waiting list reductions in countries like the UK and Spain have probably helped to drive growth over the last few years. Are those countries where maybe that trend is reversing? And then I can ask the other questions after.

I think I'm on a little bit of a -- I'm out a little bit on a limb with making this -- I tried to qualify the statement that we really don't know exactly what's happening with the queues, but we believe that that's what happening. I think it would be wrong for us to speculate on where exactly that is happening and to what impact it's having because we just haven't seen the information yet. But it's our best judgment that's what's happening.

You said you haven't seen the information yet. How much visibility do you think you could have because as waiting lists are going up by a month a year that actually could have a pretty meaningful impact on volumes? Is that something you are trying to --

Yes.

Gauge through your sales force? Okay.

Yes, but I don't -- we don't have it.

Okay.

I don't have enough to be telling you what the answer is.

Right.

I appreciate the question. It's a great question. In fact, if you get the answer first, please let me -- please give me a call.

I'll be sure to do that. And then another question relating to volumes. Really just trying to think of the role of adoption versus demographics. I think maybe BHR is a good example where do you think it's fair to say you may have pulled forward some demand in introducing a product that targets younger patients? In which case, is that a one-time impact on volume which, once you have already reached forward, you can't get a sustainable, higher growth rate out?

I think that's a good question. I'm not sure we did it exactly as you express it, but what I think probably did happen is that we over penetrated certain markets. Maybe the product was slightly over utilized. I know in the UK our penetration rate in hips was close to 15%, I think, wasn't it? Somewhere around 15%, where if you look at the developed markets around the world, it's somewhere around 7% or 8% in terms of utilization and penetration.

So you could argue, unless there is something very different about the UK market where they're able to target these younger patients, that it might have been over utilized and potentially used in patients that it didn't need to be used in. So I think that there is a -- there's always a little bit of equilibrium that is found in these markets. And I think that's what we are seeing in the UK with BHR.

Whether or not we pulled in demand I doubt it because think about it, you're talking about a major decision to go in and have a hip replacement. If you're 45 years old, it's not like you'd say 'hey, you know what, I think I'll just go get my hip replaced this week'. It's --

But that also is a patient who because they do it when they are 45 aren't available when they are 55 for the procedure?

Yes, yes. But they may be available when they are 65 for a revision.

For a revision. Okay, fair. And then my last question, there was a previous question about mix effect. I'd like to focus specifically on 2010. You said that you expect to grow in line with the market. I know you haven't launched any major products in the last few years so I assume your mix contribution will probably be lower than average this year. Do you think for the market as a whole it may be lower than average, perhaps because of the DOJ effect on R&D and product development?

If I can qualify this answer by saying that it's pretty -- it's not very granular, it's pretty rough -- I would say yes. I think that the industry did go through a phase where we weren't -- we didn't have a lot of aggressive innovation programs in the pipeline because of the other things that we were doing in compliance and working out the way that we were going to work with consultants, surgeons, etc. So I think, yes, that's a good observation. I think that probably is the case from if you take the whole picture and say what's the impact.

Thanks a lot.

Okay. I think we are going to have to -- okay. Yi-Dan this is the last question, so all of you who didn't get it will have to give us a call and we'll try to answer your individual questions.

Just two very quick questions actually. First of all on Negative Pressure, can you give us a sense of where your portfolio is in terms of its completeness, versus what's on the market today?

And I suppose you have been, as a later entrant to the market, you have been playing catch up. When you think we could see, start to see this business leading developments in this area?

And then secondly, on your resection business, it seems to, the performance of that business seems to have improved. It's quite a big book of your Endoscopy revenue, so if you could give us some commentary on where that business is currently and where do you expect that business to go moving forward? Presumably you have launched a lot of decent products, which will enable you to be more competitive in that area.

Okay, those are a couple of pretty good questions. On the front end let me take the negative pressure ones and take a shot out of that. I can't give you a numerical number on the where are we in negative pressure. I think it's a great question. We're substantially down the road. We are -- now here I go, I'm going to have to give you -- I think on a scale of one to 10, we are at about a 7.5. So we're making really great progress. We will have some applications that we are, that we are still yet to bring out to the marketplace that we are going to be bringing out in 2010.

I think we are going to be substantially there by the end of 2010 in terms of where we are with our product. That's the game plan. So I think you are going to see, you're going to see increased momentum throughout the year. That's probably as close as I can get to you there is that we're getting close. We think by probably the end of 2010 we are going to be substantially there on product.

And we've got longer-term plans that will take us ahead. There's things that are going to take longer to get to the marketplace, but absolutely we have in our pipeline stuff that will make us -- that a certain other player won't have.

But should we expect you to lead this market from 2011?

No, I don't know about 2011. But you should expect us to lead this market.

Yes, you jolly well should. Absolutely.

We're expecting our people to lead this market.

Absolutely.

So you should expect it of us. How long it takes us to get there I think is a function of a lot of things and some of them are not completely in our control. So I think you'll just, we'll have to wait on when we get there. But this is not a sprint for us. This is clearly not a sprint. This is a marathon and we are committed to it. We have trained, we have started the race and we are going to finish. So that's where we are.

Resection? Yes, Resection, 40% of the business, of the Endoscopy business, important question. You'll have seen that the uptake in sales in quarter four, from flat up to then to 5% growth in quarter four, was not down to the capital equipment market. We mentioned that the capital equipment sales have not really recovered for us in quarter four. They appear to have done for some competitors, but for us we were still at I think a 21% decline in capital equipment in quarter four. So by implication the improvement was in the sports medicine segment in repair and resection.

Within resection, I think maybe you are alluding to the fact Yi-Dan that we've talked over some years, certainly over some quarters, that that part of sports medicine has been more commoditized, has come under more pressure than the repair part, which has been growing extremely well. And we have been focused on looking at innovation to bring into resection to deal with what is greater price pressure in resection. And we are succeeding.

So, for example, this last quarter a new generation RF product was launched for us in resection, which we expect to be material. But also in the CORE metal blades, we have -- we started talking to you guys about this about a year ago when we were putting more focus back on innovation on blades. And we have, since then, begun to launch a series of more specialized blades. Don't ask me for them all. They have extraordinary names, like something and something cutters.

But they're niche products, but cumulatively these niche products are going to get more important. So we definitely see significant scope for fighting the commoditization of the resection part of the market, pretty successfully over time.

Right, thank you very much. We wish we could take more questions but we have some calls to get to and schedule to stay on. So thank you very much. Appreciate it.