Smith & Nephew PLC (SNN) 2011 Q2 法說會逐字稿

This document contains certain forward-looking statements that may or may not prove accurate. For example, statements regarding expected revenue growth and 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 health care 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, our success in integrating acquired businesses, and disruptions that may result from changes we make in our business plans or organization to adapt to market developments, 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 20F, 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 [Technical Difficulty]

Good morning, everyone. Bad day for the announcement but it is what it is. So, okay, good morning. So, I'm Olivier Bohuon, I'm the Chief Executive Officer of Smith & Nephew, and I welcome you to our presentation for the second-quarter results 2011. I will speak about our achievements for the second quarter and the hand on to Adrian to take you through the numbers. When Adrian has finished I will come back and take you through my observations and findings about Smith & Nephew, our industry after my first months here. I will then talk about the changes I intend to make to better focus our priorities to deliver value for our customers and for our shareholders. As usual we will take questions at the end of the formal presentation.

So despite the difficult environment we have had another strong quarter of revenue growth. Overall, our revenues were up an underlying 5% to just over $1b, is another good performance as our market conditions tough.

Once again, orthopedic reconstruction has generated revenue growth at above the market rate, the highlight remains our US knee franchise which grew 10% compared to US knee market growth of minus 2%.

Trauma is now consistently delivering the good growth. Going forward we will now be challenging the team that seem to be from here.

Endoscopy grew 5%. In the US our growth rate was higher than for some quarters, but in Europe, we are now seeing the impact of austerity measures more clearly in our numbers.

Despite the difficult environment in Europe, Advanced Wound Management was our fastest growing business. Our growth continues at above the market rate in large part due to our negative pressure wound therapy product range which we continue to expand.

The trading profit margin was 21.9% and Adrian will talk you through the details behind this including some non-recurring factors.

Adjusted earnings per share were $0.181, an increase of 6% benefitting from the weak US dollar. We are declaring an interim dividend of $0.066 which is can increase of 10% and in line with our longstanding policy. Our cash generation continues to be strong and we have now net debt of $346m.

As I will explain later in the presentation, we are reorganizing our internal structure. For the moment we'll continue reporting the segmental figures as we have in the past.

Turning to look at the performance of each business in turn. First, the Orthopedic business. Again, revenues in the quarter were up 4% on Q2 last year and we achieved growth in all our geographic regions. Market conditions in Orthopedics were consistent with what we saw in the first quarter. Volumes remained subdued due to the pressures from macroeconomic background, against this market background our trading performance is good, and Adrian will give you more specific details on the impact of price and mix.

Orthopedic reconstruction continues to grow at above the market rate driven by our global knee franchise which grew at 7%. In particular, we grew knees by 10% in the US. Here our portfolio of VERILAST (inaudible) surface, VISIONAIRE [nylon] blocks and our long-established LEGION Primary knee system is proving to be a winning combination resurgence.

We continue to reinforce this message with patients with targeted direct to consumer advertising in the US. For instance, we have been running TV adverts featuring tennis legend Billie Jean King who is now Smith & Nephew's spokesperson. She had a successful double knee replacement last year.

Global hips sales were flat, the metal-on-metal headwinds remain and the (inaudible) back sales and our (inaudible) hip system. Excluding this our traditional hips continued to grow at above the market rate.

We had another good performance from the R3 cup system. In Europe we experienced renewed interest in SL our proactive product which is (inaudible). Finally, we have now extended the VERILAST brand that we have been successfully marketing with our knee range through our hip gearing (system.

Another good quarter, we believe our trauma business has now established consistent track record on which we can build further. We've extended our SURESHOT range by adding humeral nails to the existing tibial system.

In clinical therapies we grew at 6%, where EXOGEN again achieved a double-digit growth rate.

Turning to the Endoscopy business, sales in this business grew by 5%. Again this was an improved performance from our US sales team and a weaker Europe.

We have now launched products we highlighted Q1 and we're receiving positive feedback from surgeons, for example, we launched BIORAPTOR CURVED Suture Anchor for shoulder instability and a range of blades designed to provide secure resection and sharpness branded DYONICS platform. These contributed to a solid Arthroscopy performance with continued high growth in sports medicine repair.

Shoulder and hips sales again led with very strong growth and we expect to introduce some knee products later this year which will naturally benefit from this franchise.

Visualisation related sales growth down as we continue our strategy of focusing on those capital items most closely tied to our sports medicine business.

In June, we acquired Tenet Medical Engineering for an initial payment of $35m. Tenet markets leading-edge patient positioning systems. Smith & Nephew has been a longstanding distributor of Tenet and this is seen as complementary to our sport medicine business.

Turning to Advanced Wound Management, the Advanced Wound Management business grew revenues by 8% in the quarter, much above the market rate of 3%. The market continued to be tough particularly in Europe where we have a strong market share. This is most noticeable in key elements of advanced wound care such as foam dressing. We are also seeing hospitals reducing their use of products which combat infections such as silver to help mitigate short-term budgetary constraints.

To meet these austerity pressures we are making a series of targeted marketing investments. We launched several new products in the quarter including ALLEVYN GB Multisite --- sorry, against this background we delivered a resilient performance supported by continued strong growth in the negative pressure wound therapy.

A high point of the period for me was the launch of the new generation of negative pressure would therapies, PICO. I attended, I showed PICO, I will show at a lot of place, PICO. This was the old one, this is the new one, you see. It's a pretty good one, I will show it to you later. I attended the European launch in May and I will talk to you about my excitement later on today.

So with that I will hand over to Adrian and I will come back later to talk to you about the strategy.

Thank you, Olivier, and good morning, ladies and gentlemen. If we can turn first to slide nine and the income statement. Revenue in the quarter was $1.077b. As Olivier mentioned this represents 5% underlying sales growth, after adjusting for exchange rates on quarter two last year. We had one fewer sales day in quarter two this year than last year and growth in average daily sales was therefore about 1% higher.

Trading profit in the quarter was $236m, an underlying reduction of 3%. Reported trading margin up 21.9% was 160 basis points lower than quarter two last year. This margin was slightly lower than we had expected. The main driver of this reduction were in cost of sales, due principally to somewhat higher growth in lower margin sales than we had expected and to the normal quarter-by-quarter variation in SG&A spend with a small bunching of irregular expenditures. This quarterly fall in margin does not impact our intension to deliver a broadly constant margin in the medium term at around 24%.

We'll hear from Olivier in a few moments about the sharpening of our focus both on growth areas and on achieving significant available efficiencies to fuel that growth.

Interest costs are down on last year, mainly reflecting our lower debt.

Moving to the next slide, slide 10 and moving further down the income statement, the tax rate for quarter two is 30.8%, the rate we continue to expect for the full year. This is 60 basis points lower than quarter two last year. EPSA in quarter two were $0.181, an increase of 5.8%. This is higher than the trading profit growth principally due to the weaker dollar.

Turning to the next slide, slide 11 and an analysis of revenue by business segment. The impact of currency was quite material in the quarter. In quarter two the value of the US dollar was 7% weaker year-on-year against the average of the currencies in which we operate. The effect in our wound business was slightly large due to its higher proportion of non-dollar, especially euro, sales. If current exchange rate were to remain the same until the end of the year, we estimate that this would increase reported full year sales and trading profit growth by 5%.

Turning to the next slide, slide 12 and an analysis of revenue growth rates by business and by geography. Market conditions have, as we expected, remained challenging. Across our businesses we saw price pressure increase slightly in the quarter. In our orthopedic business we saw a like-for-like price reduction of around 2%, this was again, substantially offset by mix gains. In our Wound business we saw similar price pressure and in our Endo business we saw slightly less price pressure. At the top line we were able to offset much of the price pressure with mix gains.

In the United States, we saw a slight increase in price pressure and a continue strong performance from sales mix with VERILAST, VISIONAIRE and our NPWT range continuing to perform very strongly. In Europe we saw some further tightening of market conditions across all our businesses and across most of the continent.

In the Rest of the World, we saw similar market pressures to the last two quarters in the more developed economies. Our Rest of the World region includes, as you know, Japan, Australasia and Canada, as well as the emerging markets. The emerging markets continue to grow strongly, especially, again, in China and India.

Within Endoscopy, Olivier mentioned the small Tenet acquisition. This is a Canadian company which makes patient-positioning systems which we have sold on a near exclusive basis for some years. As we have been selling almost all their output there will be no material increase in sales as a result of the acquisition. There will be a small increase in profit commensurate with the purchase price. In addition to the $35m upfront payment, there are further payments, a first payment of $2.5m deferred for 18 months and then up to $14.5m dependent on future revenue milestones.

In our Wound business sales grew by 8% in the quarter, again, well above the market rate. Sales growth in the United States of 14% was increased slightly by wholesale inventory level fluctuations, but reflects mainly excellent growth in negative pressure wound therapy sales. Wound growth in the Rest of the World of 14% was increased slightly by a change to our distribution arrangements in Canada. Worldwide NPT sales, again, grew strongly in the quarter and contributed half, or 4% of the total wound growth of 8%.

Turning to the next slide, slide 13, this shows the usual analysis of the trading profit by business segment. As mentioned earlier, trading margin in the quarter decreased by 160 basis points, a little below our expectation. Why was this? Well, margins actually increased in wound by 160 basis points as we continue to drive efficient and as NPWT sales continue to grow strongly.

Margin decreased in Ortho by 260 business points and in Endo by 230 basis points. In Ortho, in contrast to sales where mix was strong, gross margin has been decreased by mix pressures, most of --- excuse me -- more of our growth than we expected has been driven by products or geographies where we currently achieve lower margins. Emerging market sales including in Eastern Europe, grew strongly and within US although sales of premium products, especially VERILAST and VISIONAIRE, are driving top line growth, they are slightly dilutive to Group margins.

SG&A spend was also a little higher than we had planned due to a number of small issues, including a loss on Greek bonds which we describe more fully in a moment and from above-plan costs on the program to improve the productivity of our inventory and instruments deployment.

In Endoscopy, margin was impacted by the planned investment in R&D capabilities focused on the many opportunities in minimally invasive joint surgery. Expenditure in quarter one in this area was a little lower than we expended and in quarter two a little higher. And in quarter two this will be accentuated by the weakness in Endo European sales.

We've added a column on the right which deducts for the half year the $25m Blue Sky credit from last year's Wound and Group margin. As you can see from this adjusted the reported trading margin for the Group was down 70 basis point in the half, on half one last year.

The next is slide 14 and cash flow statement. We had another good quarter of cash generation, with $136m of free cash flow in the quarter. Our trading cash conversion rate was strong at 103%. We continued to make steady progress in improving efficiency with which used our inventory and instruments.

Cash also benefited by $20m from the sale of some Greek bonds. We had received these bonds from effectively mandatory conversions of trade receivables. We have a further $22m of Greek debt, some of which the government have stated it will convert into bonds. We have a 28% average provision against this remaining Greek debt and we incurred a loss of $4m in the period on this Greek debt.

Lastly in this part of the presentation, turning to slide 15 and the outlook. Our revenue outlook for the full year is unchanged from last quarter and, indeed, from when we presented our full-year numbers in February. Our medium-term margin outlook also remains unchanged.

You'll hear from Olivier in a moment more detail around our priorities for the coming quarters and years. We see significant opportunities for organic growth and we will invest to take these opportunities. We also see significant opportunities for efficiency improvements and we will take these opportunities too. And we expect to continue to need to deal with the modest price pressures for a while. Netting these, a broadly constant margin of around 24% over the medium term remains our intent.

In 2011 we expect our planned investments, including some modest costs associated with the organizational changes and the slightly adverse gross margin mix trend in Ortho to exceed slightly our efficiency improvements.

Finally, a couple of more technical comments on future segmental reporting in the light of the changes in the organizational arrangements that we will be making. Firstly, we do not plan to make any changes in reporting until next year. Secondly, we will continue to provide the same level of visibility on Endo and Ortho top line as we do now, as well as an increased focus on emerging markets. And thirdly, we plan to provide with our Q4 numbers historic material to allow you to rebase your own analyses.

And on that rather technical note I'll hand back to Olivier for a rather broader picture.

Okay, I'm back. Well, Adrian, thank you. I would now like to talk to you through my observations and findings about Smith & Nephew and our industry.

Whenever a company gets a new CEO there is a lot of speculations about what he's going to change, what does he want to do, what will change in the strategy. Well, I do not believe in change for change's sake. Where I make changes it's because we see or anticipate changes in our environment, customers, markets, competition and we need to address these to be successful.

However I come here with a fresh pair of eyes as people keeping pointing out, me, I am the first non-internal CEO appointed in Smith & Nephew in Smith & Nephew's 150-year's history and certainly the first French one, which is also no doubt a challenge.

That means I can bring all my experience to this great company without any preconceived ideas. Much will stay the same; the values, performance, innovation, trust, the customer focus, the need for innovation, the importance of quality people. But what is clear is that we are operating in an increasingly changing environment and we have accepted this and we are adapting to it.

Over the next few slides, I'm going to take you through all those things and what I've seen at Smith & Nephew and its market, the challenges we face and the ambitious agenda in setting the Smith & Nephew future direction.

So what I've found or confirmed during my first four months at Smith & Nephew? Well, first of all, I have visit time, actually, as you might expect, I've been visiting all the largest sites in the UK, US and Europe, in Asia, and I've met all the senior management team, many of the employees around the globe to discuss the markets, to discuss the plans. I've met many of the customers to hear their needs and I've seen the R&D teams to understand our innovation pipeline.

I've asked a lot of questions, I've challenged the answers. Smith & Nephew is a great company, I tell you, I've been very impressed. The last four years have been tough and the economic climate has been difficult and Smith & Nephew has weathered them well.

It is consistently growing revenues, often outperforming its market segment, we've significantly improved the operating margin and in its present form, it's a [well-run] management business as you have seen earlier today.

The business is very healthy, something clearly demonstrated by the strong cash generation. It has maintained investment in R&D, innovations continues, there are results such as our VERILAST, VISIONAIRE, negative pressure wound therapy, to name a few.

The culture is a strong one. In many organizations customer service is just a label rather than a behavior. This is not the case at Smith & Nephew where the businesses are focused on delivering customer needs and have deep relationships.

Finally, the Group is well diversified. By this I mean it has a broad range of businesses providing plenty of growth opportunities. It is geographically diversified with strong positions in established markets of US, Europe, Japan and so on and Smith & Nephew has some presence in the largest emerging markets of China and to a much lesser extent to India. It also has a balance of franchises which contribute a consistency of the overall financial results.

In summary, there's plenty to be proud of and plenty to be optimistic about. But we have challenges. The market dynamics are evolving. Over the last 10 years there have been trend to market consolidation; we are now competing with larger peers with higher share of voice across multiple product lines.

Some of the recent changes in the market I'm convinced are cyclical in nature, for example, the low volume growth for hip and knee procedures in the US or the lower use of antimicrobial dressings in Europe, these are cyclical, they're not structural. However some are, however, structural. Price pressure is here to stay, it's just simple economics. Health care providers have less resources to deliver increasing demand from patients.

The outcomes of products, the actual outcomes over long term because multiple studies are becoming even more important, not just clinical outcome but cost savings as well. And I'm not sure that this industry has worked a lot on this.

Finally, by and large growth in the mature established markets has become harder. It's not impossible to grow, the knee 10% growth that you have seen today in the US shows it but it's our growth. Whereas once growth was simply a matter of growing with the market, growth now has to come from taking market share and this is done through innovation, customer service intensity and additional sales force efficiency.

On the other hand, the emerging market economies are becoming even more attractive and the strategic priorities will change to reflect that new reality.

So what are my conclusions? Well, the first thing that is certain in my mind is that nothing is fundamentally wrong at Smith & Nephew; we are well prepared to meet the challenges. However, for Smith & Nephew to deliver strong results to its shareholders and benefit from its wide stakeholders, I am setting an ambitious but I believe achievable agenda for growth.

Let me expand on the strategic priorities on this slide. We'll drive greater focus in our established markets by optimizing our sales and service regionally, delivering efficiencies through greater scale and best practice share. This is absolutely critical. We need to have the management focused on the geographies and on the common themes of the geographies. Someone taking care of the issues or opportunities of the established market. Someone taking care of the growth potential of the emerging markets. Someone taking care of the distribution market and having a real focus and not doing everything.

We'll drive greater focus in our established market by optimizing our sales force, I said that to you, in emerging markets we'll allocate greater resources, we're going to allocate greater resources in emerging markets and focus to capture the growth.

Innovation remains core. We'll increase our investment and ensure it is focused in the areas which offer greatest growth and value.

We are simplifying the operating model by streamlining our processes and functions so we can liberate resources to redirect them to highest growth areas. We'll also because more agile and faster in execution. The simplification includes uniting our Orthopedic and Endoscopy business unit under one single management which I will talk about further in a few slides.

Finally, we'll supplement and accelerate our organic growth with appropriate acquisitions. As well as significantly increasing our focus and our ability to capture new growth opportunities, the strategic priorities will liberate the resource to fund these opportunities. As I said, this is just our framework. Over the next few slides, I will give you a greater sense of direction of these priorities.

Key to our success in established markets will be our ability to take market share, that's pretty obvious, not only through sales efficiency but by continuing to develop and market innovative products. I think the example of VERILAST, the VISIONAIRE, the NPWT are good examples of why do we do better, because we're bring the good innovations on the market.

A great example of this is this one. So this one is the hospital NPWT, it is pretty heavy, believe me. This one is the homecare NPWT which is better, it's still big and this one is a new one. As you see, there is no canister and it's just like this. The device is very small which is amazing and this is a real innovation.

We entered this market four years ago and have learned a lot. We are always focused on what the customer wants; choice, ease of use, efficacy and cost. This focus on execution has increased our revenue more than threefold over the last three years. And this is just the start. In May at the European Wound Management Association Conference we unveiled the PICO as I've shown to you.

So as I said to you, there's no canister, it's easy to use, it delivers the efficacy and attractive price points that customers crave. For patients it is effective, comfortable and discreet. For healthcare providers it is simple to apply, clinically proven and cost effective. PICO is a fantastic product and feedback has been very, very positive. But it's also early days. Our customers will take time to become familiar with this novel extension of negative pressure and it's only the latest addition to a broader NPWT portfolio. This is just one example. There are many more. Our strong Q2 results are showing this.

It has always seemed to obvious the potential of the emerging market economies for the healthcare sector is big. You will be as aware as I am of the growing affluent middle class in these countries and the increase of GDP per capita) in all these geographies.

Culturally, Smith & Nephew has also held this view with a very strong priority and focus in China. These efforts have been successful; Smith & Nephew revenue from the usual definition of emerging market countries have grown consistently at about 20% per annum and now represent 9% of the Group sales. But I think China is clearly too narrow to focus. We need to secure a position and we need to capture the growth in the highest potential market.

So what are we changing? We are changing the nature of the approach. The management focus, as I mentioned. I want someone focusing on the four biggest markets that we have and market opportunities for growth. I don't want to have someone focusing on the complete world and looking at all the different opportunities not in the right order. Someone will now take care of Brazil, Russia, India and China. This is what I call the management focus.

And we are going to target also delivery of resources. We are going to split up the emerging market in two organization, one is called the emerging market, the BRIC, and this is due to the stability of this market, to the potential of growth, to the demographic, the growth potential and so on. The second is international markets; it's a large number of countries going from Argentina to Thailand or to some North African countries. I think there is one thing in common is they are usually distribution countries and we are here to work through a very specific system.

The management in our focused emerging markets and international markets team will now determine the appropriate product portfolio, sales structure and infrastructure. They will be responsible for marketing Smith & Nephew's entire portfolio of products in these countries. Which means that we are not going to enter in India through the Endo business, we are going to enter as a big Smith & Nephew promoting all the ranges of products of Smith & Nephew.

Decisions will be taken in Shanghai and Mumbai and not pushed from Memphis, Andover and Hull as in the past. There will be additional resources such as protected R&D spend. With that goes great expectations, for the four focused emerging markets where in 2010 the revenue was less than $100m we aspire to do more than $500m in the next five years.

Smith & Nephew has a good R&D reputation. Over the years we have invented and developed a wide range of technologies such as OXINIUM, various hip and knee systems, trauma nails, numerous sports medicine and repair and resection products, and extensive (inaudible). We are now going to build on this and invest further. During 2010 we invested around 4% of the revenue in R&D, it's $151m. Over the next five years we'll invest well over an extra $300m on R&D in total. So we're going to re-inject $300m in this R&D in the next five years. We'll be more disciplined about how we spend our R&D dollars, more rigorous in ensuring targeting of innovations to support our key markets and geographies.

So where are we going to focus this investment? I said more resources will be put forward to develop a product portfolio for the emerging markets. Secondly, we have already started investing more in the minimally-invasive sport medicine area, in particular this year in the biomaterials such as scaffold for cartilage, bioabsorbable anchors and -- in injecting suture. In reconstruction we believe patient matching [simulation] products will be a fruitful area while in advanced wound management, NPWT as I highlighted have good prospects. Innovation is and innovation remains more than ever at the heart of our business.

So what does our Group look like to deliver these priorities. Well, we have simplified the operating model. When I simplify, it's very difficult to explain so you will maybe find it a bit complicated but it is simple, believe me. It's very difficult to explain actually.

I've already spoken about how we are redefining our approach to broader emerging market countries. At the right-hand side of this slide shows by trading and organization with management who will just focus on China, India, Brazil and Russia. And another one whose management will focus entirely on other international markets which is -- on the slide. On the left-hand side of the slide the established markets of the US, Canada, Europe, Japan, Australia and New Zealand will be addressed by two divisions. The first, Advanced Surgical Devices, has been created by uniting our orthopedic and endoscopy business under one management team and the second, as already seen, Advanced Wound Management.

So in short, what does that mean? You have four managers reporting to me. One is in charge of the division Advanced Surgical Devices, one in charge of Advanced Wound Management, one is in charge of Emerging Markets and one International Markets. The first one, the two divisions, have a business focus on established markets but on top of this they serve for R&D purpose and global marketing purpose for the world according to demand coming from the Emerging Markets and International Markets. And the other guys, Emerging Markets and International Markets, this is the scope of the business and they decide their strategy, they decide their portfolio, they decide their marketing and we ring-fence, which was not possible in the past, some R&D money for these geographies.

By narrowing the focus in Established Markets, this division will lead with a renewed and targeted approach to our customers. They will streamline the process functions to deliver resources for the investment as highlighted in the earlier slide. In particular, the Advanced Surgical Devices and Advanced Wound Management division will support the Emerging Markets and International Markets through our new R&D model. This will also provide marketing and regulatory support.

We will also accelerate the speed and focus of the global process improvement by bringing several global functions under one single management. These functions will include manufacturing where we have a lot of work to do, distribution where we have a lot of work to do and IT systems and quality and regulatory.

This is much more than just a management reorg, it marks a fundamental change in how we interact with our customers and with one another.

Before I turn to the next slide I just want to reiterate how we are going to pay for this additional investment in emerging markets and R&D, I guess it's a question that you have. In addition to the efficiency gains from our simplified operating model, which are significant, we have identified further opportunities for us to reduce our cost of goods and lower our SG&A. We'll continue to improve our manufacturing efficiency and as you know we have many programs to improve our field-based logistics. We will also increase the productivity of the R&D and improve our return on investment. And last but not least, there are many opportunities to increase the productivity of the sales force.

Organic growth on its own will not satisfy our determination to build significant value for the stakeholders. I believe we have a strong platform from which to make acquisitions. We have the required management strength and capabilities; we also have the financial strength with our low net debt at $346m. A very cash generative business with a very strong balance sheet also.

We have made a couple of successful small bolt-ons in the last year, (inaudible) in Advanced Wound Management and more recently Tenet that Adrian was mentioning in Endoscopy.

So to preempt your question what are we looking for, firstly we are adding small pieces of technology to our portfolio or moving parts of our distribution channel from indirect to direct. This will continue. Tenet is a good example of what I mean by supplementing the existing portfolio.

Secondly, we are looking for appropriate acquisitions to supplement our organic growth strategy. This could be in fast-growing product segments such as our entry into Negative Pressure Wound Therapy through our BlueSky acquisition. Or they could be acquisitions which allow us to increase our scale geographically. We have a focus as we have said on the emerging markets where we'll certainly need to acquire platforms, companies to support the growth, the organic growth of this geography.

Then we have last but not least a strong appetite for more substantial acquisitions and in particular, in two fields, as you can imagine. One is the Advanced Wound Management and the other one is in minimally invasive surgery. We are actively looking for opportunities which meet both the strategic and financial criteria although it is always difficult to predict when such opportunities arise. We'll not forget our focus on organic growth and process improvement but I believe acquisitions will also be a significant additional growth driver for Smith & Nephew.

So to summarize, we have great foundations at Smith & Nephew but we can be better. We are going to do this by focusing our business to a greater extent than in the past, focus in management, focus in geographies, focus in resources, focus on efficiency and focus on the growth areas which will truly make a difference to our Company. This is just the start, this is just a framework of what we aspire to do.

Where do we want to end up? Well, it's about better financial, faster growth, liberating resources to invest further and generate better returns. And let me reinforce what Adrian said about margin outlook. It is our firm intention over the medium term to fund this additional investment by diverting resources from our business. It is also about truly being a single Smith & Nephew organization. On the whole I think we currently fail to take full advantage of our skill and breadth of relationship.

Over the coming quarters I will share with you the detail of what we are doing and the results of our actions. Smith & Nephew has achieved a huge amount over the last four years through a lot of hard work. They have good products, great people, healthy margins, strong balance sheet and has made steps into emerging markets. On the back of this foundation I have today laid out the agenda to do better and build create greater value for the stakeholders.

So thank you and that ends the formal presentation and we are going to open the room for questions.

We will take questions from the room and the phone alternately.

Hi, it's (background noise). First of all you're setting an aggressive agenda for growth. Could you share with us what sort of market growth you see in the medium term and also what opportunities Smith & Nephew has to outgrow it? If you could share some numbers or some -- so that we have a sense of what you're thinking.

Secondly, who are the managers you're putting in place in the International segment and in the Emerging Markets segment? Are these internal people? Have you already identified who they are?

And secondly, how do you assess Smith & Nephew's position in those markets, particularly in the BRICs countries relative to your competitors?

In which countries sorry?

In the BRICs market -- BRICs countries.

Okay, fine. Well, let me start first the growth. Again there is no one market. There is one world but there are three markets. You have the established market and the common themes you find in the established market are price pressure, government issue, strong economic issues. And the market, I can summarize it, it's in the low single digit and it will remain this way, I don't foresee any big bump on this market.

And here the name of the game is not to surf on the market because there's no market. The name of the game as you have seen here is to bring innovation, be more efficient and gain market share. That's what we are doing. And that's what we are going to focus on. And that's what I want the management to focus on.

The second type of market, here we can surf on the growth. At the same time you also have to capture share. And these are the emerging markets. They are the BRICs plus maybe Mexico, South Korea, Turkey, whatever. But again we have decided to focus on four geographies and not on eight or nine, just to be sure that we have enough resources to invest there and we are not diluting our efforts.

So here I think it's a question of surfing plus gaining share and being strong and find the right investment and having innovations also but the right innovations and the right portfolio because again if you want to be strong in the emerging markets it's not just be strong by launching high tech at a low price and deteriorate the margin. It is having the right cost of goods, the right price and then make a profitable growth in the emerging markets which is what we want to do.

And c) you have a bunch of markets in the world with pretty high growth but the tiny markets with no visibility of the future or pretty big risk of political risk or economic risk. So it's a patchwork. So here the common theme on this is they are distribution markets so we are focusing on improving the way we are in these markets. For example, avoiding to have three different distributors when we can have one for Smith & Nephew. And so this is what we do.

Your second question on the management, well, I'm not going to answer this question We are looking for the management now, it's not done especially for the one which is the Emerging Markets and International Markets. We have an interim solution at this moment.

And your last question, Smith & Nephew in the BRIC market. I told you, $120m of sales. So we are pretty good in China, I think, because that has been the focus. We are having a significant growth, we have a pretty big ambition in China but we do not exist in the rest of the BRIC countries. Brazil is almost zero, India we do pretty well but we have a small business there, about $25m, and in Russia we are not big either. So it's really a place where we can start to make sales.

This side then I will come back to this one.

Good morning. I have three questions. Firstly, on the new strategic framework, I'm just curious why you think it's necessary to make some changes. Smith & Nephew has done well in orthopedics, you're outgrowing the market, you're doing well in endoscopy and also in wound care. So why the need to make changes today? I'm concerned about what happened when previous management changes were made with orthopedic recon and trauma, there were changes and even after four or five years only then were some of these things corrected. I would say they probably failed initially so why make these changes?

Question number two is for Adrian on the EBIT margin guidance for 2011. Based on the simple math, you need a meaningful improvement in the second half. Why is the second half better than the first half when you're highlighting increased pressure in Europe from austerity, pricing pressure and so forth?

And then the third question is for Olivier again on the longer-term EBIT margin thoughts. You've made some comments about making more investments and there's some changes. Is it fair to say that you think margins will be flat longer term or do you think longer term margins can go up at Smith & Nephew with all these changes that you're proposing? Thank you.

Well, let me do the first one, then will answer Adrian and I will come back on the EBIT question. Why do we change? That's a good question. We change because we are [in peace]. That means that first of all it's the right time to change. There is nothing wrong, we do well as you are mentioning, we have the right management and we also believe that the market is changing totally. And what I've seen coming here is not enough focus, I'm sorry to use more the word focus, always that's exactly what I found. So people were going a little bit everywhere. And I wanted to have the top managers responsible and accountable for some specific markets. So that's why we have addressed the Wound and new Surgical Devices division on the established markets and create something else to avoid dispersion.

I think it's important to talk about why did we unite Ortho and Endo. Well, you're right, they do well, they do well. But what you don't see from the external world is the duplication of efforts, duplication of processes, the fact that we have very often common customers and they are seen by two different people who do not talk to each other. So this is something which is not something you can see when you are not inside and I tell you this is truly, truly obvious. And making these guys together will definitely help to save a lot, to be more efficient, to be more productive and to certainly divert some resources to do something else.

Adrian, go ahead.

Yes, your first question Michael, why do we expect margins to be stronger in the second half than the first half. I think the answer is threefold. One is seasonality. If you look absent last year where we had the BlueSky investment in the first half which will not repeat this year which, of course, is the second reason. And then thirdly there was some bunching of irregular costs which we highlight as small but meaningful in quarter two which we don't expect to go on for the rest of the year.

And on medium term margin?

Yes, I'd love to improve it but I think that if we keep it flat this will be a good achievement with what we want to do and what we want to fund, with the price erosion we have in the market, with the issues we face in the market. So the guidance I think is --

(multiple speakers).

We have a number of things to do as you have seen, R&D investment and this year again we invest a lot in the R&D business. And I told you that I want to inject $300m in R&D in the next five years. This year we are making new investments in the biomaterial, it's very significant. We have all these emerging markets investments to realize.

So you know what, I think it's a pretty good use of the money to prepare the future and invest in these businesses.

***

Thank you. Three questions if I can, one of the endo/ortho combination. Can you talk a little bit about how the roles of the sales reps will change going forward? Will they cross out, will they not? How are you thinking about getting that efficiency out of them that you've been talking about, at least in concept?

The second about emerging markets, and again thinking about the sales force, since you are not separating the business necessarily by business line more every rep sell every product, or how are you thinking about organizing that business?

And lastly the R&D approach and ring-fencing the investment, a lot of your competitors, a lot of your peers when they go into emerging markets the approach they take is instead bringing out some of the older product portfolios to get that cost of manufacturing advantage that you've discussed. So how is your approach going to be different? And what really are you thinking about when you say developing products specifically for emerging markets?

Okay. Coming back to the last point, which is the emerging market portfolio you have two ways of dealing with that, you have to either acquire a local manufacturer of products in the specific market and potentially export them actually in other places, which is one, at low cost but with quality with strong sales force efficiency which is something which is absolutely critical. It is not because it is not the high end of the tech that you do not want to have quality I think that's very important.

Second one is to work with our own engineers on developing specific products for this emerging market. But then the problem the cost of manufacturing is that we cannot do that in very high cost places, but we have to de-localize potentially to make them at low cost, and then the right price in the market.

Sales force, second point in the emerging market, if I've mentioned the focus of the management I have never said that sales force will be the same and it will not be the same. Potentially you can see in Ortho and Endo because the target are very often the same customers, but Wound is totally different. In one you have the nurses, you have some pharmacists, you have -- it's not all the same product nor the same distribution channel. So sales force is something that we are going to address locally, according to the market specificity, because they are different in India, in China and in Brazil, so we are going to work on this.

The efficiency, you are terrible, Veronika, because you asked me the question before the meeting, and my answer was I don't know. Putting together under one management ortho and endo, yes, we will have in many places common customers, and some reps can call the same surgeon, that's fine. But it's not general and so it will be again a case per case work that we have to do depending on the country, depending on the type of customers we have, depending on the system and so on and so forth. So I cannot answer to you now. But that's something we are going to look at very specifically, but that comes back again to my point on sales force efficiency and productivity.

Adrian, you want to add something?

No. I think that's right. This is not about putting sales forces together. That's a complete misunderstanding of this re-organization if that's on your mind.

Yes, sir. Mike -- next one.

Hi, thanks. David Adlington from JP Morgan. A couple of questions, firstly what are the headwinds you faced in the quarter on the margins at least as being from mix? Just wondered if you could give us some greater color on that and your expectations going forward given the sources of your growth would appear to be -- to present the same sort of mix headwinds, meaning the greater growth coming from potentially lower margin areas.

And secondly, for Adrian, the reporting lines going forward are we going to get our sets of sales numbers and four sets of trading profit numbers? I would seem to me that that's going to be very concentrated in the Advanced Surgical Systems. I just wondered if you could comment on that.

Yes, okay. The -- in terms of the headwinds on margins where are they coming from and will they continue. Yes, well, essentially we had faster growth in some products with slightly lower gross margins VERILAST and VISIONAIRE in particular, and similar in geographies.

Will they continue? Yes, they probably will. What does that mean? It means efficiencies will need to match it, so that's the way it is, David. It's a good news problem frankly the high growth. So absolutely we accept that, absolutely that's taken into account as we have our forward looking views on our margin.

In terms of the reporting lines going forward we haven't finally settled on what it will look like, David, frankly, although I'd repeat what I said in the prepared presentation that we won't change anything until next year. We will maintain, it's our intention to maintain visibility on the top line, so we won't stop distinguishing minimally invasive or endo sales from, trauma sales from reconstructive sales.

As you go down the P&L it will be more challenging frankly, because you know part of the purpose of this is that we manage them jointly. So exactly what the content of it is, don't know. We will develop that over the next couple of quarters and I'll share it with you when we are clear.

And similarly just how many segments we'll report, which is also -- you'll just have to wait and see because a couple of these segments are going to be quite small, so exactly what that will look like we'll work out over the next couple of quarters.

Here you are.

Thank you. Martin Wales, UBS. Firstly given this push into emerging markets what do you need to beef up your compliance organization to make sure that you're compliant with the US regulations for operating in international markets, given how important that market is to you still.

Secondly, given that you've had a look at the negative pressure would therapy whether you'd like to put some sort of long-term potential number on it, given that Adrian has being somewhat reluctant over the years.

And finally, if I look at your Advanced Wound Management organization in the US, clearly, negative pressure wound therapy has been -- is being more successful, excluding that, the US still looks like an outlier in terms of performance. And how do you improve the broader Advanced Wound Management performance in the US in particular.

Okay, well let's start from the Q1 and the compliance in emerging markets. Again, we have one way of operating in the world it's not two or three ways, we operate in the same way in the US, Europe and the emerging markets, compliance is absolutely critical. We have 17 compliance officers in the company working on this. We will certainly with the development of the emerging market increase this number of compliance offices in the business, but I tell you there is no two ways of looking at compliance in the company it is one way, which is being compliant, period. That's pretty simple.

Adrian, you want to take the --?

Yes, yes.

I can take the US one then if you want (multiple speakers).

Well, forecast sales on NPWT, the position is --

(microphone inaccessible).

No that's why I transferred that because I didn't know what he was used to say before so I prefer to hear him before I answer.

Exactly, (inaudible), no, we are as one on this. It's clearly going to be big but we are absolutely not putting a number on it. It's growing fantastically, it's -- we -- it's really --

You can make easily the calculation by the way, if you take the growth and what has been announced in the past, it's pretty easy --

No, Martin doesn't just want the sales now he wants the sales going forward. They are going to be big, Martin.

You can extrapolate also it's --- no, I tell you it's a big part of the business, and it's definitely a driver of growth of this, but we do not want to forecast on this until -- at least until it's clear in the forecast.

And the last one.

US.

Yes. Well, Martin, you're right, the growth in the US of our wound business is being driven by NPWT, the growth excluding that is -- has been for a significant period and still is pretty modest, pretty much flat. And that is a disappointment for us. It's been a disappointment for some time.

Frankly the focus on getting NPWT to grow has been the right place to focus in the recent past, because the potential as you've just got us to agree is, or say is very substantial. As that gets significantly bigger and significantly better established, yes, we would expect to see the rest of the wound business come back into something that is a growing organization. But just at the moment our priority is quite rightly on reaping the benefits of that NPWT investment.

Tom.

Tom Jones from Berenberg. Two questions, firstly on European austerity pressure. Now this is really the first quarter we've seen it wash over into your arthroscopy business. I was just wondering how you are feeling that manifesting itself. In the ortho business it's been a fairly level mix of price mix and volume, in wound it seems to be mainly price in the less advanced parts of your Advanced Wound Management business. So, just wondered how that split falls out in arthroscopy, particularly in Europe.

And the second question, a more general one, I just wondered if the events of the last few weeks have caused you to reassess your thoughts about how particularly -- well, how much and when you might be deploying some capital? I suppose if I'm being cheeky I'm asking about the buyback.

Buyback, no, there is no plan to buyback. I think that's a pretty simple answer.

In which case, the follow-up question is why not? Your stock is cheaper than it ever has been, your balance sheet is as unlevered as it has been. Debt for you is still reasonable cheap. Why isn't is a serious consideration?

Yes, the answer is you heard Olivier talking about the role of inorganic as well as organic growth. We believe that having a strong balance sheet at the moment is the right thing to do for shareholders. We do see opportunities, both smaller technology-oriented ones, smaller geographic ones and potentially slightly bigger ones in the wound and minimally invasive joint area. And that's the reason. It's as simple as that.

(multiple speakers) --- the same answer, by the way, I would say. So I'm glad you said.

Clearly, if in two years time it's proved that there haven't been opportunities that make sense for shareholders then clearly we'll look at it again. But just for the moment and that's (multiple speakers)

You've got the best part of $1b of available liquidity; you're throwing off free cash at a couple of a hundred million a quarter. Do you seriously think --- or you're trying to tell us that you can see $1b plus the cash flow of acquisition opportunities out there or you're just being super-conservative given what's going on in the wider market?

We can see significant --- we have --- there are a significant number of opportunities that we firmly believe that a strong balance sheet is the right thing to have for now. Again, if it turns out that those opportunities turn out not to crystallize and not be there, then we'll revisit it but this, for the moment, that seems to us the right place to be and the right thing to be doing for shareholders.

Fair enough. And on austerity?

Yes, on the first question, yes, you're quite right. This is the first quarter where we've seen in our Endoscopy business significant impact from the austerity measures. It is mainly not price. It is mainly mix and volume weighting this tight stuff around Europe. And mix and unwillingness to trade up and some degree of trading down. We're not seeing, and in fact, that applies to all of it, one might argue curiously but it is the case that we're not seeing significant changes in the like-for-like pricing pressure. It's there but it remains modest.

It's there and will remain (multiple speakers)

It's there and we expect it to remain there.

Great, thanks.

Sorry, Justin Smith, MF Global. Just to go back to the buyback question again, sorry to go back to it. Buying back stock was obviously a good investment so can you just share, gentlemen, both of your thoughts with regards to the acquisition criteria that you've both got, how those might change going forward just so we can understand why returns on acquisitions are going to be better than buying back the shares.

Sure, the --- fundamentally, two criteria. One is strategic fit, one is financial fit. The strategic fit you've heard a bit about and maybe Olivier would like to expand on that in a second. In terms of financial criteria, discipline is absolutely important to us. We haven't done that many acquisitions but those that we have done or have looked at we apply a range of financial criteria. The single most important to us is return on capital in year three, cash on cash return on capital. Dilution/accretion, one can play all sorts of games in that when you've got interest rates as they are now. So that's our three criteria. That's not the only measure but it's the single most important financial measure, I would say.

Coming back and I think that's consistent with what we discussed also, it's exactly this criteria is absolutely key. Regarding the strategic intent which is I also believe very important, I believe in size in the wound management so I thank that advanced wound can be bigger, much bigger than we have. And I believe that the potential in the minimally-invasive surgery is huge and I do believe that it's definitely an area of focus for us. And so, those two fields are keeping us busy

Yes, sir?

Thank you very much. I was just going to ask a variation on the same theme of the last two questions here really. When you described the business as you saw it, you mentioned consolidation number two, as a quite high priority yet when you gave the list of things you're going to do, you then mentioned more M&A and that was almost the last item. So you sort of described a dash for growth on the one hand yet do you really believe you have the critical mass in a consolidating industry to do it and shouldn't M&A be higher on the list, significantly higher on the list one way or the other?

Well, coming back on my first point which was the consolidation of the industry, I was referring the consequence of this for us in terms of share of voice. We are fighting against bigger players investing more money in absolute terms taking specific area. And so it means for us that it's a threat. So which means that we -- either to invest more SG&A and that's what also we can do through being more productive with resources, re-inject the money where it should be, or be more efficient and also being bigger which is the other part of the games which is why I mentioned consolidation as a key strategic intent for the company. I don't know if I answered your question but it's --

I suspect another variant to the question is do we think we are too small to prosper in the new world in reconstructive surgery, implants? No, we don't.

That's the corollary.

I suspected that was going to be. No, we absolutely don't. Is it necessary to do -- to merge in reconstructive surgery to survive or thrive, we do not believe that to be the case at all, period.

We believe, again, in innovation which is the driver. You know what, if you look at the statistics of who has spent money and what level of money has been spent in this industry in the past, I think that with what we have spent, we are extremely productive and extremely innovative. And I think this is the driver of the growth. It's one part solution. Then you can have innovations and be better on the market something different. So I think we have to do both and address both.

But size, it's a fact. We have a different market now, different players. They are bigger and more so you have to do everything.

We have one more question I think and then we have signals from the back.

Yes, miss.

I have three questions. The first question is regarding your management teams in your established markets. Do you now know who those teams would be?

And the follow on on that is with the combination of Ortho and Endo, how smooth do you expect that process to be? Should we expect to see some disruptions from that and how long do you think that would take.

The second question is --

That's your third, I think.

That was the first one. The second question is with regarding to your investments in emerging markets. You gave us some targets for what you expect the countries to deliver. Can you also provide some indications on the international markets?

And then, the final question is on your knee business, certainly fantastic performance there, however a number of your competitors are also coming out with products that have differentiators from Smith & Nephew. Can you give us some sense of how much of your knee outperformance is coming from the VISIONAIRE versus VERILAST. Clearly, VERILAST would be far more sustainable but VISIONAIRE perhaps will come under more competitive threats there?

Okay, let me start with the four first questions and the fifth one maybe Adrian will take it. So, established market management, first question. Yes, we have now announced the two heads of the established markets and (inaudible) divisions. It's Roger Teasdale, who is the head of Advanced Wound Management, based in Hull in the UK and Mike Frazzette, who is based in Andover running the Memphis and Andover facilities with Endo and Ortho facilities. So this is announced and this is official.

Will it be a smooth process? Yes, I do hope it will be a smooth process. We are now preparing the second line of management. It should be announced early September basically. And we have a very smooth process ongoing so I do not expect any business disruption. This has been since the beginning the target, no business disruption and we have objective of making it better and smoother.

Investment in emerging market versus investment in the international markets. So investment in emerging market, I cannot give you a figure. I gave you to be at least five times bigger in 2015 than what we are now. Your question is what about the rest of the markets. Well, the rest of the markets, I tell you I do believe we'll do better. If you exclude India and China, I think it's about $350m less than --

Less than $300m.

$300m in the international arena, compound growth rate is pretty good, I think, it's double-digit compound growth rate. So I do believe we'll have a slight improvement of this due to the focus of this management on improving the distribution channels and the sales force efficiency. Yes, I do believe that.

And on your 19th question which essentially was what is driving the knee growth, frankly both VISIONAIRE and VERILAST are major contributors to that knee growth. I wouldn't necessarialy agree with you that VISONAIRE is vulnerable. Yes, of course, the competitors are coming on but as we said before we see a whole area of patient matched, either instruments or potentially ultimately implants being a very fertile one as we head on into the future. I think that's it. Thank you.

Thank you very much. Have a good day.