Smith & Nephew PLC (SNN) 2011 Q1 法說會逐字稿

This presentation contains certain forward-looking statements that may or may not prove accurate. For example, statements regarding expected revenue growth, trading margins, market trends, and our product pipeline are forward-looking statements. Phrases such as aim, plan, intend, anticipate, well-placed, believe, estimate, expect, target, consider, and similar expressions are generally intended to identify forward-looking statements.

Forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause actual results to differ materially from what is expressed or implied by the statements.

For Smith & Nephew, these factors include economic and financial conditions in the markets we serve, especially those affecting healthcare providers, payers, and customers; price levels for established and innovative medical devices; developments in medical technology; regulatory approvals, reimbursement decisions, or other government actions; product defects or recalls; litigation relating to patent or other claims; legal compliance risks and related investigative, remedial, or enforcement actions; strategic actions, including acquisitions and dispositions and our success in integrating acquired businesses; and numerous other matters that affect us or our markets, including those of a political, economic, business, or competitive nature.

Please refer to the documents that Smith & Nephew has filed with 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.

Any forward-looking statement is based on information available to Smith & Nephew as of the date of the statement. All written or oral forward-looking statements attributable to Smith & Nephew are qualified by this caution. Smith & Nephew does not undertake any obligation to update or revise any forward-looking statement to reflect any change in circumstances or in Smith & Nephew's expectations.

Good day, ladies and gentlemen, and welcome to the Smith & Nephew Plc Q1 results conference call. For your information, today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Olivier Bohuon, CEO, and Mr. Adrian Hennah, CFO. Please go ahead, gentlemen.

Hello. Good morning, everyone. My name is Olivier Bohuon, and I am the Chief Executive Officer of Smith & Nephew. And welcome to our first-quarter results presentation. I joined Smith & Nephew a few weeks ago. So I will only mention a few highlights before relying on Adrian Hennah, our Chief Financial Officer, to take you through the rest of the first quarter's performance.

Firstly, a bit about my background, I spent my early career at GlaxoSmithKline, ultimately as Senior Vice President for European Commercial Operations. In 2003, I joined Abbott Laboratories and held a series of roles. My last role at Abbott was Executive Vice President in charge of the Pharmaceutical Division based in Chicago, and which had revenues of $16b in 2009. Most recently, I was the Chief Executive of Pierre Fabre.

Since I joined Smith & Nephew, I have spent much of my time meeting with senior management and as many of the employees as possible. As you would expect, I've visited a number of our major operating sites, and I've certainly been encouraged by the enthusiasm and commitment from the people I have met so far. And I'm very impressed by their achievements.

Our interim results meeting in early August will be the appropriate time for me to talk to you in detail about my observations on Smith & Nephew's business.

Turning to quarter one results, let me give you the key highlights. Overall, our revenues were up and underlying 4% to just over $1b. I think it's a good performance, given that market conditions have remained soft.

Orthopedics Reconstruction has generated revenue growth at above the market rate, driven by strong knee growth in the United States of 10%, where we are taking share from all our major competitors. Trauma has delivered another good performance, as the steady improvement shown over the past few quarters continues.

In Endoscopy, sports medicine continues to perform well, with our repair products achieving double-digit growth.

In Wound, Negative Pressure Wound Therapy again generated very strong growth. And this is enabling Advanced Wound Management to continue growing with revenues above the market rate.

Our trading profit margin was 22.8%, essentially flat on the comparing period after deducting the benefit gain last year on the settlement of BlueSky acquisition agreement.

Our cash generation continued to be strong this quarter, a clear sign of healthy business.

These results show Smith & Nephew is a quality company with strong foundations and a good momentum. My goal is to ensure that this good performance continues and that Smith & Nephew achieves even greater success for all its stakeholders.

That's all I'm going to say for now. So I will ask Adrian to take you through the detail of our results for the first quarter. We'll be happy to take your questions at the end of the presentation. Thank you.

Well, thank you, Olivier. We can pass onto the next slide, slide six, and the income statement. Revenue in the quarter was $1.055b. As Olivier mentioned, this represents 4% underlying sales growth after adjusting for exchange rates on quarter one last year. Trading profit in the quarter was $241m, an underlying reduction of 6%. After deducting the $23m BlueSky credit, trading profit rose to 3%. And reported trading margin of 22.8% was essentially the same as last quarter one. Interest costs are down on last year, reflecting our lower debt.

Moving to slide seven and moving further down the income statement, the tax rate for quarter one is 30.8%, the rate we expect for the full year, which is 80 basis points lower than in quarter one last year. EPSA in quarter one were $0.184, a reduction of 2.1% before, again, adjusting for the BlueSky accounting credit and 8% higher with the adjustment. This is slightly higher than trading profit growth, principally due to the weaker dollar and the lower tax charge.

Turning to the next slide, slide eight, and an analysis of revenue by business segment, the impact of currency was similar in each of our business segments. Quarter one, the value of the US dollar was 2% weaker year on year against the average of the currencies in which we operate. As we have mentioned in previous quarters the Ortho growth rate was reduced by 1% by the discontinuation of our spine activities last year. These were disposed of at around the end of quarter one last year. And therefore, there will only be a very small effect in quarter two.

Turning to slide nine, an analysis of revenue growth rates by business and geography, market conditions have, as we expected, remained challenging. We continue to manage the pricing pressures. We are focused on bringing clinical and economic value to our patient clinician and purchaser customers. And we are focused on making our operations more efficient.

In the United States, we saw no significant change in the level of price pressure and they continue to be largely offset by mix. In Europe, we saw some further tightening of market conditions with some increase in the impact of government austerity measures across the continent.

In the rest of the world, we saw similar market pressures of the last few quarters in the more developed economies. Our rest of the world region includes Japan and Australia as well as emerging markets.

In Japan, we were fortunate that we were not worse affected by the earthquake and related events. All of our employees were safe. Indeed, they have shown tremendous resilience and commitment to servicing our customers. We estimate that we lost about $3m revenue in the quarter, and slightly higher the number missed in profit.

Emerging markets grew strongly with highlights being China and India, albeit from a low base. Our Middle East business has been somewhat impacted by the troubles in that region that account for less than 1% of Group sales.

Turning now to the next slide, slide 10 and our Orthopedic business, constant currency sales in our Orthopedic business in the quarter were up 2% on quarter one last year. Across Orthopedics, we saw price pressure similar to the previous quarter. Like-for-like price reductions were steady at a little over 2%. We again achieved positive mix, largely offsetting the price reductions.

In the United States, overall Ortho sales were 5% higher, another good performance. US Reconstructive sales were up 4%. Trauma Fixation sales in the United States were up 7%. CT sales in the United States were up 6%, benefiting from some fluctuation in wholesale inventory levels.

In Europe, Orthopedic sales were 2% lower. The exit from our spine business reduced European growth by 1%. In the rest of the world, Orthopedic sales grew by 3%. And positive underlying trends in the emerging markets continue. Natural disasters impacted our sales in Japan, as we've mentioned, and marginally also in Australasia.

Globally, our knee sales grew at 5%. And hips were 2% lower. We saw demand for our knees continuing to be strong during quarter one, particularly in the US, where growth was 10%. This was again led by VISIONAIRE knee cutting blocks and VERILAST total knees.

United States hip sales were 4% lower. Sales of our traditional hips grew at above the market growth rate with another strong performance in the R3 cup and from OXINIUM heads. Total hip growth, however, was still held back by headwinds for our BHR product.

BHR sales accounted for around 14% of our hip sales worldwide. We remain very confident in the medium-term future of BHR sales but also expect it to be awhile before it emerges from the current turbulence around metal-on-metal implants.

Trauma Fixation grew at 6%, where our continued focus on operational delivery allowed us to achieve further steady progress.

In Clinical Therapies, we grew at 2%. EXOGEN continued to perform well. SUPARTZ continue to be under some pressure.

Turning now to the next slide, slide 11 and our Endoscopy business, sales in our Endoscopy business grew by 6%. In the United States, the transition of our sales force towards the mainly direct employees is nearly complete. And we're seeing good evidence to the benefits in the performance of our business.

Sales in Europe were 6% higher. This represents an improvement from the second half of last year and came despite the increased economic pressures evident in many European countries. Endo sales in the rest of the world were again strong, up 12% with good growth in emerging markets.

Our Arthroscopy sales again grew strongly at 8%. Within that, our Repair business grew in double digits. And Resection continued to grow in low single digits. Shoulder repair sales were especially encouraging as the various new products we launched last year performed well.

We have a number of products in the near-term pipeline, including BIORAPTOR Curved Suture Anchor for shoulder instability. In hip repair, we are introducing a new broader range of instruments. In Resection, we are launching a range of blades designed to provide superior reception and sharpness branded DYONICS PLATINUM.

Visualization and related sales were 7% lower, as we continue our strategy of focusing on those capital items most closely tied to our Arthroscopy business. Visualization sales accounted for 12% of global Endo sales.

Turning now to the next slide, slide 12 and our Wound business, our Wound business continues to perform well. Wound sales grew by 6% in the quarter, above the market rate. In United States, we grew at 6%, despite the modest headwind from distributor stocking in quarter four last year ahead of price rises.

In Europe, where we have a strong market share, market growth continued to be soft. And as you know, we expect these tough conditions to continue for some time. We are meeting this challenge with new products and a keen focus on reaching and serving our customers. New product introductions this quarter included ALLEVYN Gentle Border, barriers, and ACTICOAT Post-op. We're also benefiting from our NPWT Abdominal Kit launched in late 2010.

In the rest of the world, the majority of our operations in both developed and emerging countries performed well. Negative Pressure Wound Therapy again grew very strongly and contributed 4% of the total Wound growth or 6%.

With a complete product range and increasing numbers of positive reference customers, we're winning more and more major accounts. We will be launching further additions to our NPWT range in coming months. It is very pleasing, especially for our customers to see focus in this market turning from the courtroom to product development, quality, and customer service.

Turning to the next slide, slide 13, which shows the usual analysis of trading profit by business segment. We've added a column on the right, which deducts the BlueSky credit from last year's AWM and Group margin. As you can see from these adjustments, the reported trading margin for the Group was, as we said, essentially flat in the quarter on quarter one last year.

As you know, it is our intention in the short to medium term to reinvest the efficiencies we achieve and to drive future growth. As we do this, you should expect to see our margins fluctuate somewhat quarter by quarter, both at the Group and certainly at the business segment level.

This quarter, in Orthopedics, margin decreased by 140 basis points. In Endo, it increased by 120 basis points. And in Wound, margin effectively increased by 230 basis points.

In Orthopedics, focused work is continuing to capture the significant opportunities available to improve further the efficiency of our field processes. In Endo, our plans to invest in the substantial opportunities to grow our business are on track, though expenditure was somewhat lighter in this quarter, and we do expect it to increase in quarter two. In Wound, we continue to benefit from a lower cost in our China factory as well as some reduction in legal expenditures.

Turning to slide 14 and the cash flow statement, we had another good quarter of cash generation with $139m of free cash flow in the quarter. Our cash conversion rate was strong at 85%. Steady progress in improving efficiency with which we use our inventory and instruments is again reflected in the cash generation.

Restructuring expense continued in line with guidance and are now small as we come to the end of the program announced four years ago.

Finally, on slide 15, summarize the message today, we had a good start to the year across the business. Our outlook for the full year is unchanged from when we presented our full-year numbers in February. As you are aware, the market remains challenging, especially in Europe. But let me remind you of our achievements in this quarter.

In Orthopedics Reconstruction, we outperformed the market, driven by 10% growth in US knees, where we're taking share from all our major competitors. In Orthopedics Trauma, our business continued to demonstrate operational improvement. Endoscopy continues to drive good growth through the introduction of innovative new products. And in Advanced Wound Management, we're continuing to outperform the market, driven by our very strong NPWT growth.

And with that, we will move on to taking questions. Please, can we ask each person to try and limit the number of questions to two to give as many people as possible the opportunity to participate? And if we can now perhaps start with the first question?

Thank you. (Operator Instructions). We will take our first question today from Tom Jones from Berenberg. Please go ahead.

Good morning, gentlemen. I had two questions. First of all, just on the European markets, I wonder if you could give us a bit more granularity on where the weakness in Europe is coming from, which countries were good, which countries were bad.

And I just wondered -- you said you expect the pressures to continue. Is the situation in Europe prompting a kind of fundamental rethink about how you might be doing business in Europe? Or is it just a question of persevering with your current strategy and hoping that things improve at some point down the line? I just wondered how that baked into your thinking at the moment.

And then the second question I had was on your Resection growth. I just wondered what you thought a kind of sustainable long-term growth rate was in the Resection business and how long you think it'll take to get back to that level of growth.

Tom, good questions. Thank you. First of all, in Europe, where by country is the weakness? There's a strong correlation between countries dealing with the deficits or having deficits and dealing with them and where the pressure is greatest. So Southern Europe, United Kingdom are areas of particular toughness for us. And I'd say there's a very good correlation between governments dealing with deficits and the pressure.

How long will the pressures continue, and do we expect that to change our business model in Europe? We do expect the pressures to continue, Tom, simply because the drivers, the main drivers in our mind are those government deficits. And they're going to take awhile to deal with. So that's why we believe we're going to be with this sort of level of pressure for awhile.

Is it going to change -- cause us to change our business model? Not fundamentally is our view. We do not see anything, as we've said often, Tom, in the -- as we predicted this stage of the cycle and as we're now in this stage of the cycle, which is going to fundamentally change the way this business operates, so that's not the level of pressure we see.

But is it a catalyst for the speed with which we make the business more efficient and the way we look at business? Of course it is. It's a healthy catalyst and one that, as you know, we've been engaged in for some time in making the business more efficient, Tom.

As regards Resection, how do we see the long-term growth rate in Resection? You're right, Tom. Resection has been a fairly low-growth part of our business for some time, in fact, frankly all the four years I've been in the Company, fairly low growth. And the reason for that is that it's several fold. One is that there is a reasonable amount of competition in the area so that it does affect pricing. And we've seen essentially volume growth, at least in metal blades, grow in line with the volumes of procedures. On top of -- it has been the radio frequency resection growth, which has boosted growth somewhat.

So we do not see as we look forward Resection transforming greatly from that sort of moderate growth level. We do see innovation Resection. We've got -- we have been recently introducing important new blades. And they are contributing importantly. And we do see more of that. But we certainly don't see Resection becoming the sort of growth rate we've seen in the past.

Okay. That makes sense. And just circling back to Europe, I just wondered if you -- be helpful if you could give us some kind of color on exactly how the pressure is manifesting itself as regards price, mix, and volume. Obviously, price and mix you never get back, but volume you probably could at some point in the future. So I'm sure you're not going to give us precise numbers but just some qualitative idea about how those different aspects of the pressure in Europe are manifesting themselves at the moment and how those are developing.

Yes, Tom, the -- if we focus on the Orthopedic market, which it's easiest for us to get that data precisely on, the price, the level of price decrease, the like-for-like price decrease has been pretty constant and similar to the global number. We've felt similar pressures in the US and Europe. It's not been markedly different, certainly in Ortho.

The -- however, mix and volume have both been under material pressure. We do see trading down taking place, no question about it, within hospital or in hospital systems where budgets are squeezed. And we also do see volume going down. We do see the waiting list phenomenon happening in those parts of Europe, where the healthcare system elects that happens.

And as you say, the different components have different long-term outlooks. And I guess we regard it as good news that there's quite an emphasis on volume because sooner or later in our view, political pressures come into play. It can take awhile. But political pressures come into play. And those volumes will come back.

Okay. That's helpful. Thanks.

Thank you. We'll now move to our next question today from Michael Jungling from Morgan Stanley. Please go ahead.

Good morning. Thank you for taking my questions. Two questions, firstly, on the J&J and Synthes merger, I was hoping you could comment on how you think this will impact competition in the core markets. Do you think the market will become less or more competitive and perhaps also the reasons why you think that?

And question number two, in former Clinical Therapies, you've shown some great numbers. But are these numbers actually understated because they exclude in the 6% growth rate and the 2% growth rate the disposal for the spine and pain management business? And if they do, could you perhaps give us the give us the growth rates, excluding the impact for those disposals? Thank you.

Yes, good questions, Michael, as always. J&J-Synthes, well, first thing to say about J&J and Synthes is the deal isn't done yet. And we would certainly expect it to attract some significant antitrust attention in the course of the coming months. But if it completes in broadly the current shape, do we expect it to have a fundamental impact on the structure of the industry and the nature of competition? No, we don't, Michael, not least because certainly, in the segments we address, there aren't going to be fundamental changes in share. And we don't compete in spine, so that area doesn't affect us hugely.

And in former Synthes, that's really very large already. And post whatever happens in antitrust, the DePuy share doesn't hugely change that. And in the implant area, of course, Synthes doesn't have any sales. So we do not expect a dramatic change in industry structure or competition as a result of the J&J-Synthes developments.

As regards the spine business, we report the impact of spine business within CT, so there's no impact on the Trauma numbers. And there is impact on the CT numbers. It does understate them. I don't have the exact adjustments here. But we could find that for you. It's not material in understanding our business, really, Michael.

Great. Thank you.

Thank you. We now have a question from Veronica Dubajova from Goldman Sachs. Please go ahead.

Good morning. It's Veronica Dubajova here from Goldman Sachs. Thank you for taking my questions. Two questions if I can. One, thinking about BHR and your hip business, how are you thinking about when that impact, the negative impact from BHR will find -- will start to dissipate so we can actually start seeing the underlying above-the-market performance that you keep telling us about?

And the second thing I wanted to get a better understanding was, Adrian, I think you're quoted in Reuters this morning saying that you're thinking about bolt-on acquisitions. Which areas are of particular interest and any change in that strategy since we last discussed that? Thank you.

Thank you, Veronica. Yes, BHR, when will it turn? There's no question that we are under pressure in BHR at the moment. And that is as a result of the metal-on-metal headwinds. And there's also no doubt, and as you've alluded to in your question, Veronica, we remain very confident about the medium-term future of BHR. And I'll say again the reasons we've given before. But they are important reasons.

One is the clinical data out there from the registries is very powerfully in favor of BHR. Not only is it clearly the best resurfacing product -- and we don't just say that because we're Smith & Nephew, the data is abundantly clear on that. But also, when you compare the survivor rates of BHR to all total hips, it's right there in the middle. This is a clinically very strong product. And so we are -- that's the first reason.

And the second is, when we look at where we've been losing sales over the last year, it's -- the area we have lost least is in the very big users. The biggest users are the ones that have stayed with us most solidly. And that is to us also a very good reference to the quality of the product and the quality of it clinically. So we are confident in the medium term of this.

Just at the moment, Veronica, the headwinds are strong. There is a lot of debate out there on metal-on-metal. And while there certainly was a big downturn just over a year ago at last year's AOS, it's not going to be a clean annualization from that. We certainly would expect that to be some sort of inflection point or at least some sort of -- yes, some sort of inflection point, but not necessarily a turning point, so hard for us to put our finger on exactly when we're going to see a turning point. But we remain very confident in the role this has to play in the medium term in our portfolio.

In terms of bolt-on acquisitions, yes, we did mention to the newswires this morning what has been our position for a long time, is namely that if you look sort of over the three-year time horizon, we do see opportunity for bolt-on type acquisitions. And that very much guides our balance sheet policy in terms of cash at the moment.

And the areas we see of greatest potential are both Wound and Arthroscopy. And we will continue to look for those as ever. We're not going to do anything silly. We look for opportunities of prepared lines. We're not out there forcing things. And that has been our position for some time, Veronica. And that remains our position.

That's really helpful. Thanks. And can I quickly follow up on BHR. Just in terms of the biggest pressure, are you seeing pressure primarily in the US? Or are you seeing some signs of weakness in Europe as well?

Yes, it's across the (inaudible) and Australia. We see it in all the places. This is very much -- the surgeon community's reacting around the world, at least in the developed world as one on this.

Okay. That's very helpful. Thanks, Adrian.

Thank you. Ed Ridley-Day from Bank of America has our next question. Please go ahead.

Hi. Thank you very much. Firstly, a couple of just quick questions. Adrian, could you actually give us the European underlying growth number in knees, hips, and trauma? And also a quick question on Wound legal costs, could you just quantify the lower legal cost of Wound?

Sorry. What was your second question? Sorry. There was a bit of interference on the line here. I missed your second question.

Sorry. Yes, your -- you mentioned lower legal costs going forward in Wound Care.

What about that?

Could you just quantify how much lower they are going forward?

On the first one, Phil, have you got the European data there?

Yes.

I've only got the rest of the world here in front of me.

So in terms of hips, Europe was flat. Knees was minus one. Trauma was plus one.

Okay. Then in terms of lower legal costs, no, we're not going to quantify them, Ed. That's not helpful, frankly. But you can see and won't be surprised from the general development of the legal position between us and KCI in particular that we expect the legal cost to come down. But who knows? Who knows what surprises there may be?

Okay. And then if possible, I have a question for Olivier. I understand, obviously, you've just arrived and you don't want to talk about the plans, going forward. But, if you could talk a little to what led you to accept this role, what excites you about the role, and maybe what you feel you could bring with you from your experience in the pharmaceutical sector to a med-tech company?

Okay, thank you for the question. So, let me see, what was the attraction? I think the Company was very attracting. As I said, very strong foundation, great balance. And I do believe the sector is a great sector. When you look at the demographics, when you look at the overweight, when you look at the potential in the emerging market of the growth, I do believe there is a huge potential.

What do I bring, and what did I learn in the pharma business which could be used in this business? Well, basically, I think that everything that we have seen in the pharma business is happening in the devices business, which is more regulations, more quality compliance. So, basically, it's a healthcare business, and I do believe that the similarities are much stronger than one can be, actually.

Okay, fair enough. Thank you.

Thanks, Ed.

Thank you. We have a question, now, from Julien Dormois, from Exane BNP Paribas. Please go ahead.

Hi. Good morning, gentlemen. I just had a question on the strong growth you had in rest of the world, that plus 8%. I was just curious about which countries, or let's say regions, are driving this performance?

And, as a follow up, more specifically, could you just remind us of the share of emerging countries in your overall sales, and maybe give us some sense on what is the real growth rate in emerging countries? You've also been discussing, quite extensively, the investments that you plan to make in these countries, so maybe just give us a quick overview on where do you stand in terms of investments at the moment, and where do you plan to go?

Surely. Well, what's driving rest of the world growth? Well, you see, our total rest of the world growth is 8%. And, as your question implies, we include in rest of the world both most emerging markets, not actually Eastern European ones, but other emerging markets, and also the developed economies in Asia-Pacific, so Japan, Australasia, are in that number. And the growth drivers have principally been the emerging markets. We've seen the economic pressures that affect the developed world affect Australia and Japan. And, of course, Australia and Japan have had some of their own natural disasters to deal with in recent times, too.

So, the growth driver within our rest of the world number is certainly overwhelmingly the emerging markets. If you, -- within our total business, emerging markets account for around 8% of total sales and have been growing, as we have said, for some time, consistently at at least around the 20% mark, in aggregate. And, within that, we've called out China, on several occasions, and from a smaller base India. So, nothing has really changed on that; it continues to be an area of high growth. I'm quite sure that, as we look forward, -- one of the areas of Olivier's experience he didn't mention, but which he certainly has, from his prior life in Abbott and elsewhere, is indeed in emerging markets. So, I am sure we will see new and increased energy and vigor in that area, as we go forward.

Okay, thank you.

Thank you. We now have a question from David Adlington, from JPMorgan.

Good morning, guys. Thanks for taking the questions. Two, please. Firstly, on Trauma, you are seeing some nice, accelerating growth there. I wondered if you could just talk through the drivers for that continued acceleration, and how much further you expect it to accelerate from here?

And then, secondly, just in terms of ForEx, I just wondered if you could give us an update on your full-year expectations for tailwinds, if we stay where we are in terms of currencies now?

Okay. Trauma, why is it improving? It's been improving, principally, David, for the reasons we've been saying we've been working on, for getting on for two years now; i.e., operational improvement, principally in the field force in the US. It has taken longer than we originally expected, because some of the issues there just took time, in terms of the quality that was needed, the recruitment that was needed, the training that was needed. But it is showing through, and it is showing through clearly, sustainably now. There have been several quarters where we're back up there.

Is this the limit of our ambitions? No, it's not. We, certainly, referring back to an earlier question, can expect to see, perhaps, some turmoil in other competitors in the trauma field, in the near term. And we'd certainly see that as a moment to pay particular attention to opportunities. So, no, we are pleased to be back in the game in Trauma, after some years when we were not properly in the game. And we firmly expect to stay there, David.

In terms of ForEx, if you look forward at current exchange rates, we would see a headwind of around 3% to 4% for the full year, at current exchange rates.

Tailwind, I think.

Sorry, yes.

Thank you. And then just a quick follow up on the Trauma. If there are any forced divestments as part of this J&J Synthes transaction, would you be interested in those?

I think it's too early to say, on that. Obviously, we'll be keeping our eyes open, closely, to see what's happening, David, but too early to say anything specific.

Great, thank you.

Thank you. Lisa Clive at Sanford Bernstein has our next question. Please go ahead.

Hi, a few questions. Firstly, I remember a while back, at your Capital Markets Day, you talked about your recently established training platform, KLEOS. I just was wondering how this is doing? How many courses did you run in 2010, how many surgeons you trained, and how you see that developing? Also, what the split is between hip and knee procedures being taught versus Trauma?

Second question is around the Visualization business. You have continued headwinds there. I know you've been intentionally downsizing that business for a while. I was just under the impression that we were close to the bottom here, so I'm wondering how much longer you think that would be a headwind.

And then, third question, just focused on pricing pressure in Europe. How much of a long-term issue is this? My understanding is pricing in Europe is much lower than in the US, largely because European hospitals have been fairly aggressive, in terms of running public tenders, etc. Clearly, they've been squeezing a bit harder, given the environment, but is this something that you think, like the US, could go on for several years?

Good questions, as well. Well, the first one is so good, I'm afraid I don't have the level of detail you're seeking for. How many courses did we run on KLEOS, how many surgeons have been trained in knees, hips, I don't have that. In fact, Phil has just scribbled in front of me, we trained 2,500 surgeons in quarter one. So, assuming Phil has got good data, I can tell you that, but, the rest of it, I'm afraid I don't have the data to handle. But I should say, more broadly, we do see KLEOS as an important service we offer to customers. It is growing well. It does have good acceptance. It does work across our Orthopedic businesses; knees and hips and trauma are important services, all those areas. So this is an important tool, an important service we provide to customers. We are putting significant resource into it and we would expect to continue to do that, as it's very well-received by customers.

Turning to Visualization, yes, you're right, we have consciously been managing what was originally a digital operating room business, if you go back three or four years, down into a camera business that focuses very much in support of the joint, of our offering in arthroscopy. It has a little further to go, but it is nearing the bottom. And we feel very good about the opportunities in an area we -- it's not ready for the market yet, but we certainly have a significant interest in looking at Visualization as a mechanism through which you bring information in real time to surgeons, as they do procedures, minimally invasively. So we see opportunity for developing the Visualization business; as I say, not immediately, but over time. So, yes, it's nearing the bottom, but we're not completely there yet, Lisa.

Pricing in Europe; how long do we expect the pressure to go on? I think two points on this. The pressure is modest. The pressure -- the like-for-like price reductions have been at the 1% to 2% level for a while, and they remain at that level. We do see them continuing at that level for a while, again because governments have got deficits to deal with. Do we think that's going to change, fundamentally, the model? No. What it does do, as we mentioned in response to an earlier question, it does mean that players have to up the pace to deal with it. That's the way we look at it. We look at it as an incentive, as a pressure to improve the way we do things, not as a need to fundamentally change what happens in this industry. We don't see it at that level or type of pressure.

Okay, thanks.

Thank you. Martin Wales, from UBS, has our next question.

Good morning. I suppose, firstly, just to follow up on the previous question; 1% to 2% price declines, presumably individual hospitals are demanding rather more than that. I was just wondering what the variability in pricing pressure is across different countries, across different regions within Europe.

Secondly, I had a question on J&J Synthes. You said you don't expect it to fundamentally change the business. That would imply that you either don't believe they're going to attempt some kind of a super-orthopedic cross-sell, or that, if they do, you don't believe it will work. I was just wondering why?

And, thirdly, on negative pressure Wound Therapy, you're launching in Europe in Q2, US in Q3, according to your slide. Is it the same products, and where should be paying attention, in terms of the key composites of the rollout of products in Europe?

Three, as ever, good questions, Martin. What variability of price changes? Clearly there is some, but, throughout most of our businesses, and through most of all of our businesses, in fact, we're not dealing with national price reimbursement reductions or something. There are some small exceptions to that in our Wound business, where there's more pharma-like reimbursements. So, I think many were aware, when Spain did reductions in reimbursement rates last year, that impacted directly on our business across Spain, for a small part of our Wound business across there. But, mainly, these things operate, as you imply, at hospital levels, or occasionally regional levels.

So this stuff goes on continually, it goes on in tenders, it goes on in the way tenders are phrased, it goes on in policies within hospitals, for what proportion of patients can have higher-spec products and what proportion have lower. So, this stuff goes on, in a disaggregated way, across lots of hospitals, and that's the way it works. And it's hard, therefore, to give a specific answer to your question, Martin, because it works in a disaggregated way. And then we, like others, add up the total data.

Yes. I was wondering where, if you aggregate it, and look at where you're seeing the most pressure versus the least, and the disparagement between the two, you can presumably work out where you might expect further pressure to come from and then perhaps [screen that] for basis of your analysis for this modest pressure reduction to continue. I.e., certain hospitals, certain regions, will seek big price cuts, and this will continue for a number of years, until everyone gets to the floor level. Is that a reasonable way of thinking about it, or --?

I think it's even more distributed than that question implies, Martin. This thing happens in fairly small decision units around the place.

On your second question, J&J Synthes, I'm not sure we've got a lot to add to the last response. We don't want to speculate about what J&J and Synthes are going to do. You'll have to ask those about that. I think our answer would stand in the previous question.

In terms of NPWT launches, yes, you've obviously looked at the back appendix, to look at the launches. And, yes, the products that are referred to in quarter two and three, in different regions, are the same products, and we're very much looking forward to that. I'm not sure -- we'll give details of the launches at the appropriate time, from a commercial perspective. But, rest assured, we'll make sure you're not missed out on the distribution list, Martin.

I was confident of that bit. Thank you very much.

So, yes, if we could just have two more questions, please? Maximum, that is.

Thank you. We'll go to Charles Weston, from Numis. Please go ahead.

Good morning. On your US Knee business, clearly driving the Orthopedic growth very well there, but could you tell me what you're doing to sustain and accelerate that growth further, particularly with regards to direct-to-consumer advertising, and any other actions you're taking there?

And, secondly, I've also looked at that back slide, and I've seen that you're launching a DUROLANE product in the second quarter. This is a small-joint DUROLANE, I think. But could you tell me what you're doing with the main DUROLANE product in the US now, and what kind of regulatory timelines you're looking at for that, please?

Yes, okay. Sure. Thanks, a good question, Charles. Well, yes, you're quite right. The drivers of Knee growth in the United States are VERILAST and VISIONAIRE. And, clearly of great interest to us and others, is how long can that boost last us? We believe both of these are significant advantages that these products are bringing to the marketplace. If we take VERILAST first, the 30-year claim is an important claim and it's based on an important product. The cross-linked poly is available to others, but the OXINIUM clearly, is proprietary to us and it's an important element in this claim. And we see that whole advantage as having significant legs.

You highlight the DTC. DTC is certainly a method by which we have communicated that advantage to patients in particular, in parts through the newspaper -- excuse me, in part through the television adverts where you're seeing, but probably more powerfully through internet-based communications. And, yes, we expect that to continue. How long, how far, clearly we can't be certain on that. But we do see VERILAST as bringing the 30-year claim as an important advantage that's come to the marketplace.

In terms of VISIONAIRE, and patient-matched cutting blocks, again, clearly, we're not alone out there with patient-matched cutting blocks. As you know, another competitor had a complete approval in their last quarter. But we do believe that we have a very strong position in VISIONAIRE. We started doing this in-house, first, when others were still relying on third parties, and we believe that's important, in terms of the skills it's letting us build. And those skills are the basis of what we seek to make a sustainable advantage as possible. It's reinforcing those skills, both in terms of servicing the customers with the current product, but also with developing new products around the patient-matched direction, using the patient-matched technology. So, we see that as significant. We see that as a significant line of innovation that's going to actually last for some significant time into the future, as in years, Charles.

As regards DUROLANE, yes, indeed, we've had the DUROLANE small-joint approval in Europe and are very pleased about that. As regards the approach to DUROLANE in the US, we are in ongoing dialog with the FDA. The exact route we'll be going forward, yet, is not entirely clear. And we will be making that known, as it becomes clear. But it is possible it could be some while before we have a DUROLANE approval in the United States.

Thank you.

Thank you. We will take our final question, now, from Florian Gaiser, from Kepler. Please go ahead.

Good morning. My question is pretty much along the lines of the last one. If you look at your outperformance in the new markets, how much of that is volume-related, as you outperformed, let's say with the VERILAST [claim], and how much of that is creating a new market in individualized cutting blocks? If you could separate these two effects out for us, that would be great. And if you can please walk us through in a bit more detail, what happened to margins in Endo (inaudible). I didn't get those comments in the first time around.

Okay. Well, firstly, what exactly is driving the components of VERILAST and VISIONAIRE growth in the United States? Well, firstly, they both are significant contributors to the growth. It's not as if one dominates and the other's small. Both VERILAST and VISIONAIRE are important. In terms of, are they creating a new market, I don't think there are new procedures being done as a result of these technologies. I think, if a knee needs to be done, a knee needs to be done, and these are, both of them, alternative ways of doing it. And, clearly, there are a lot of surgeons who previously did not use any form of navigation, or any form of assistance in putting the cutting blocks in place, who now are. Because that is -- the world of cutting blocks is a new part --.

That's what I meant.

Well, okay. Well, that is clearly a new part of the market. There were forms of navigation before, and there, almost certainly, -- although I don't have any numbers for you here, -- is some degree of replacement of those fairly patchily used forms of navigation, software-based navigation that existed before, with this more tangible form of navigation. We don't have any data on that, but there almost certainly are -- well, there certainly are surgeons who are moving from the older forms of navigation, if you like, to these newer ones. But we don't see it as creating a new market for new knee procedures, per se. And, similarly, VERILAST. VERILAST is just a very good, long-lasting product, and a choice that the surgeons are going to use and patients are going to use.

In terms of margin, I'm not sure we didn't make huge comments, frankly. Our overall guidance for the Group is unchanged, in terms of expecting flat margins, reinvesting efficiency gains into growth and dealing with the modest price pressure. In Endoscopy, we are, as we've signaled now for some time, at least well over a year, do see particular investment opportunities. It just happened that the expenditure in quarter one wasn't particularly heavy on them in Endo. That doesn't mean any change in direction, and we will see some more in quarter two and the rest of the year.

In Wound, we see another good margin increase, when you strip out the effects of the BlueSky accounting issues. And, again, mainly driven by -- or in a large part driven by improved cost of sales, still stemming from the move of part of our production to China. Although there was also some benefit of reduction in legal costs, which -- another question had picked up on.

Good. Well, thank you very much.

Thank you very much.

And --.

And thanks for your time today. And we look forward to seeing you in person, at the second-quarter results meeting in early August. Thank you, and have a good day.

Thank you. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.