Smith & Nephew PLC (SNN) 2012 Q1 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.

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Good day, ladies and gentlemen, and welcome to today's conference call. Today's conference is being recorded.

At this time, I would like to hand the call over to today's speakers, Mr. Olivier Bohuon, and Mr. Adrian Hennah. Please go ahead, sir.

Thank you. Good morning, everyone. I am Olivier Bohuon; I'm the Chief Executive Office of Smith & Nephew. And welcome to our first quarter results call.

I will cover the highlights, and then hand over to Adrian Hennah, our CFO, to take you through the numbers. When Adrian is finished, I will update you on the progress we are making to reshape Smith & Nephew, to deliver against our strategic priority. And, as usual, we'll take questions at the end.

Smith & Nephew has had a good first quarter of 2012, building on our achievements in Q4 last year. We saw the first results of our actions to make Smith & Nephew more fit and more effective. We grew revenue, increased profit, and improved our trading profit margin. We continued investing and maintain our high rate of product launches, while implementing the necessary efficiency programs.

Our Q1 revenues were up an underlying 3% to $1.079 billion. This was in line with our expectations.

Trading profit increased 5% to $252 million, giving a 50 basis points improvement in our trading profit margin to 23.3%. This reflects the initial results of the structure improvements we are making, as well as the benefits of a phasing of some costs from Q1 into Q2, and Adrian will talk more about this.

Adjusted earnings per share were $0.195; an increase of 6% on last year, $0.184.

We continue to generate good cash flow, and our net debt was $28 million at the end of the quarter; down from $351 million last year.

This slide shows our underlying growth in the quarter. It's a complex slide, but I will try to explain it. On the left-hand side, geographically; and on the right, by product franchise. There is a lot of information, but it provides a single snapshot of the quarter.

Looking at the left-hand side, we are now analyzing our geographic revenues between the established market, i.e., US, Europe, Canada, Japan, Australia, and New Zealand; and, in the other hand, our emerging and international markets. This is consistent with [2005] strategic priority. It should allow you to understand better and track our progress over the coming years.

For me, our geographic diversity is a clear positive, as we are not solely dependent on a single economy. About 40% of our global revenues come from the US, where revenues grew by 2%. Revenues from our other established market grew by 3%, while our growth in our emerging and international market was double-digit; specifically, the growth in the BRIC countries was over 20%.

We also have a broad product range. We are not just about hip and knee implants, which only account for just over one-third of our revenues. This is shown on the chart on the right. Here you can see the relative performance of our global product franchises. In particular, this clearly illustrates the good results in knee implants; sports medicine; joint repair; and Advanced Wound Management. I will now turn to look at each of these in more detail.

First, looking at knee and hip implants, our global knee implant growth was 6%; another strong performance relative to market, which was 3%. In the US, we're 3%, and the out-of-the-US growth was 9%. This was driven by a very strong performance in Australia, New Zealand, which was partly due to a weak comparative. We also delivered strong sales across our emerging and international market.

In hips, we saw the same performance pattern as last year. We continue to drive double-digit growth in our VERILAST for hips bearing surface, and we benefited from the launch of the POLARCUP Dual Mobility Hip System in the US. This product is designed for patients susceptible to dislocation and needing enhanced stability.

BHR continues to be impacted by the negative media and industry commentary on stem metal-on-metal total hip.

Turning to the other [performance side] within our Advanced Surgical Devices business, while in sports medicine joint repair we grew by 7%. Knee repair was particularly strong in the US, where our FAST-FIX 360, the new generation of our leading Meniscal Repair System, is attracting new surgeons.

Our innovation in the repair space continues with the launch of HEALICOIL, our new suture anchor. This offers greater pullout strength.

We also launched a new ACL repair drill and guide system, building on our strong position in ACL Repair.

In arthroscopic enabling technologies, which consists primarily of our resection and camera products, we continued the roll out of our innovative PLATINUM blade range.

Trauma growth was 1% down, and this was partly due to a competitive mild winter in the US. It would have been plus 2% excluding the expiring royalty payment in the US, and, hence, in line with the market.

Nevertheless, I'm not, as I said previously, very satisfied with this performance. And I do believe that I see much greater potential for trauma and I will be spending more time with the new management team, reviewing the strategy to ensure that we consistently achieve above market growth.

Advanced Wound Management grew revenues globally by 5% in the quarter; above the market rate of around 3%.

Our advanced wound care product range, including Exudate and Infection Management, achieved another solid quarter. We continued to deliver an impressive number of product launches and, through selective investment in our commercial sales organization, we are well placed to drive higher growth over time.

Our negative pressure wound therapy franchise continues to achieve strong revenue growth. Three years ago we introduced our RENASYS range; we believe we now have around 20% market share in Europe, and I see no reason why we shouldn't improve this.

PICO was launched in the US in the quarter. The customer feedback is very positive but, as expected, the formal adoption timetable in the US PICO remains very long.

Now, over to Adrian.

Thank you, Olivier, and good morning, ladies and gentlemen. Turning, firstly, to slide 10 in the presentation, and the income statement, revenue in the quarter was $1.079 billion. As Olivier mentioned, this represents 3% underlying sales growth after adjusting for exchange rates on quarter 1 last year.

Trading profit in the quarter was $252 million; underlying increase of 5%.

The trading margin was 23.3%, which is 50 basis points higher than quarter 1 last year.

Restructuring cost charge in the quarter was $6 million; all relate to the efficiency program announced in October, and Olivier will give you an update on our progress with this program in a moment.

Turning to slide 11 and moving further down the income statement, the tax rate for quarter 1 on trading profit was 30.1%; the expected full-year rate.

EPSA in quarter 1 were $0.195; an increase of 6% on last year. This is close to the underlying growth in trading profit as the impact of changes in currency rates, the interest charge, and the tax rate were all small.

We expect the Bioventus transaction, which we announced in January, to close in quarter 2.

The clinical therapies trading performance is included in quarter 1 as part of the overall Group's trading performance, and we are treating the assets involved in the transaction as assets held for sale in the balance sheet.

On closing, we will recognize a gain on disposal and we'll begin to account for our 49% equity interest as an associate. We give full details of the impact of this transaction on our numbers as part of the quarter 4 2011 presentation, and we have, for convenience, included the relevant slides again as an appendix to this presentation.

Turning to slide 12, an analysis of revenue growth rates by division and by geography, we are using the new segmental analysis explained with our full-year numbers in February. We have, for convenience, included the description of the new segmentation again in the appendices.

Olivier has talked to the shape of our revenue; I will add only a few more detailed points. Across our business as a whole, we saw essentially the same price picture in quarter 1 as in quarter 4 of last year.

Across our reconstructive and trauma implant range, we saw a like-for-like price reduction of around 2%. We continue to see this reduction, partially offset by positive mix changes.

The worldwide ASD growth of 3% comprised growth of 6% in knees; 2% decline in hips; a 1% decline in trauma; 7% growth in sports medicine; 1% growth in arthroscopic enabling technologies; and 6% growth in clinical therapies. All these numbers are shown in the appendix.

Hip sales continued to be held back by metal-on-metal concerns. BHR sales declined by 28% in the quarter and now account for less than 10% of our hip sales, and less than 2% of our Group sales.

As Olivier has mentioned, and as noted in previous quarters, sales growth in trauma was reduced by the expiry over the last three quarters of several agreements under which we received about $10 million per annum in royalties. This reduced worldwide trauma sales growth by 3%, and US trauma sales growth by 5%. There will be a similar level of impact in quarter 2, and smaller impact in quarter 3 and quarter 4, before the expiry is fully annualize.

In our worldwide wound business, sales grew by 5% in the quarter. We signaled last quarter that the 8% growth reported in quarter 4 was increased by around 1% to 2% by wholesaler ordering patterns. Growth in quarter 1 was, therefore, close to the level seen throughout last year.

NPWT sales again grew strongly and contributed most of the reported wound growth.

Growth in the emerging and international markets was 12%, compared to 20% in the full 2011 year. Because sales in these markets are still relatively small, this growth rate will vary from quarter to quarter as a result of quite small movements in the level of sales.

Sales in quarter 1 were reduced by lower shipments to a couple of specific country distributors. We do expect sales growth in 2012 to be somewhat lower than 2011, but still very substantial. In quarter 1, the growth in these markets contributed well over one-third of the Group's revenue growth.

Turning to slide 13, this shows the usual analysis of trading profit by business segment. As mentioned earlier, trading margin in the quarter was 23.3%; 50 basis points above quarter 1 last year.

Margin increased in ASD by 50 basis points, showing early benefit of the actions taken in quarter 4 of last year under our restructuring program.

The principal year-on-year improvement in the quarter was in cost of sales. Some of this was due to planned improvement, but some due to the later phasing of certain expenditures; a benefit which will unwind in quarter 2, and later.

Margin increased in wound by 70 basis points as we continued to drive efficiency, and NPWT sales grow strongly.

There was also some benefit in higher overhead recovery from a modest increase in wound inventory level; this too will reverse in quarter 2, and later.

Spend in the quarter on R&D increased in both divisions. It increased by 8% for the Group as a whole, from 3.8% to 4% of sales.

Turning to slide 14 and the cash flow statement, we had another good quarter of cash generation. Free cash flow of $96 million in the quarter was after payment of $22 million in respect of legal issues. These payments were in line with provisions and did not impact profit.

Inventory levels continue to improve in ASD but, as already mentioned, showed some increase in our wound business. We expect wound inventory levels to reduce during the remainder of the year.

We also saw a small increase in receivables, principally in Southern Europe.

Net debt, as Olivier mentioned, at the end of the quarter was down to $28 million; down from $351 million a year ago.

Turning lastly, in this part of the presentation, to slide 15 and the outlook, we do not see any change in the outlook for the Group as a whole for 2012 from the view which we set out with our full-year numbers in February.

With regard to Q2, we would note the comment from earlier in this presentation; that the increase in the Q1 margin was slightly flattered by the later phasing this year of some expenditure and the increase in wound inventory.

Lastly, if the exchange rates at end Q1 were to be sustained for the rest of the year, we would expect reported sales and profit to be reduced by about 1% by translation exchange effects in the full year.

With that, I will hand back to Olivier.

Thank you, Adrian. I would now like to briefly update you on the progress we have made delivering on our strategic priorities since I last spoke to you in February. Let me remind you what these are. First one is winning in established market; second one is accelerating development in emerging market; the third one is innovating for value; the fourth one is simplifying and improving the operating model; and last, but not least, supplementing organic growth through acquisitions.

So this slide builds upon the one I gave last quarter, setting out some of the recent actions we have taken. And I won't talk about them all, just illustrate some examples.

In executing our established market strategy, we are ensuring we've balanced investments necessary to drive growth, such as innovation, pricing, sales force effectiveness, talented people, and the processes which support them, with a need for greater efficiency. The following action in ASD Europe and the US illustrate this.

In ASD Europe, our senior management team is now in place. They are refining and streamlining our commercial and operational model across our territories to ensure to better serve our customers from a more efficient platform.

Also in Europe, we have commenced a significant process -- optimization project. Our European operations have a diverse range of processes and IT system. This multi-year project will standardize and simplify our key business processes. In addition, it will give us better management information, through common systems, to support faster and better informed [specializations].

In R&D, we have invested in a new training and innovation facility in Memphis in the US, which has just opened. This state-of-the-art center is multi-disciplinary, reflecting our belief that there is much to be gained by more closely sharing learning innovation experiences between specializations.

Finally, in the area of supplementing our organic growth, we are continuing to make/consider acquisition and strengthen our [executive] team.

In the last few months we have purchased three small complementary technology businesses. These include LifeModeler, whose software shortens the time taken to develop new orthopedic recon products; and the ADERMA Dermal Pads, which give us a leading position in the market to treat pressure ulcers.

The integration of Tenet, which was acquired last June, has proceeded to plan.

We also have just hired a Chief Corporate Development Officer, which completes my senior management team. He comes with global multi-sector experience, having spent the last 15 years at General Electric.

So, to summarize, we had a very strong start to 2012, building on our finish to 2011. Our revenue performance has started in line with our expectations. This is a good performance, given the underlying market remains, on the whole, challenging.

I am pleased with our trading margin improvement and that we're going on to liberate resources for investment to drive growth.

Even more pleasing is that we are achieving these efficiencies while maintaining a high pace of bringing innovation to our customers. Let me recap. This quarter, five new products in wound; the HEALICOIL anchor, initial system in joint repair; the US launch of POLARCUP Hip and PICO. We continue also the success of recent launches, such as FAST-FIX 360, VISIONAIRE, and obviously VERILAST.

2012 is a critical year for implementing our new strategic priorities. A start has been made on all aspects of our plan. This will be a year of transition as we'll progress the various work streams, structural changes, additional investment, and, of course, greater efficiencies. Throughout Smith & Nephew, at every level there is a clear sense of direction as we work to reshape the Group for future growth.

Just before we move to Q&A, a couple of varied points for you. Firstly, we will be holding a seminar on our hip and knee portfolio on the afternoon of July 3, in London. We are particularly pleased to welcome Billie Jean King, who won 20 titles at Wimbledon, to speak about her experience as a patient, having had bilateral LEGION knee implant with our VERILAST bearing surface two years ago.

Secondly, our Q2 results presentation on August 2, will be done by conference call and webcast given the potential travel restriction during the London Olympics.

So, thank you. And this ends the formal presentation, and we will now take question. Please can we ask each person to limit their number of questions to two to give as many people as possible the opportunity to participate? Thank you.

(Operator Instructions). Matt Miksic, Piper Jaffray.

I wanted to ask you, if I could, one question on the knee side. The growth in the quarter was stronger than expected in the US, for us anyway, and I'm wondering to what degree were there any extra selling days in the quarter, and if you could speak to, maybe, any sequential trends you're seeing from Q4 to Q1? And then I have one follow up.

No, we have not any more days in the Q1 so the result is just straight. We have a 3% growth for the knee business in the US, with a market growth of 2%, so we are gaining share.

Actually, I believe, and this for a while now, that our franchise is very strong; the quality of product is very strong. We still have very good momentum with our very last 30 years in VISIONAIRE. So we are very happy with the quarter dynamic, and we don't see anything changing this in the future.

Adrian, you want to add something on this?

I think that's it, Olivier.

Yes.

And then, that's helpful, one follow up. Just on the -- you mentioned pricing, I think stability was your comment, in your reconstructive business; I'm wondering whether it's in trauma, or in total joint reconstruction. If you could speak maybe to a little bit about the mix trends you're seeing. I know this was an issue throughout last year. Are you able to see any positive mix? Are you annualizing, maybe, the mix impact of BHR on the hip side? Any tone, and direction in terms of your mix would be great.

We had, around a year ago, obviously a very strong phase of mix when VISIONAIRE and VERILAST were growing particularly strongly. Of course, that pickup in the growth rate's now annualized so we're not having that level of push and positive mix, but mix is still positive, and it's still positive across the piece, just less so than it was in that particularly strong phase.

I'm not sure there's a lot more I can add. Maybe -- you highlighted the distinction between recon and trauma, we don't breakdown the price movements between those two, although I think it's pretty well known that the pricing in trauma is a little more positive than it is in implants. But, otherwise, I'm not sure there's a lot to add, Matt.

Would it be possible to quantify where mix is? Is this a low single-digit number positive? Is it just modestly positive? How would you frame it?

It's modestly positive and doesn't fully offset the price reduction.

That's fair. Thanks so much.

Michael Jungling, Morgan Stanley

I have two questions. Firstly, on the Q1 trading profit and the phasing into Q2, can you give us some more details on the degree of the phasing of the costs and what this means for the second quarter? Meaning, could Q2 be substantially weaker than Q1, or is it only slighter weaker, or could it be more in line?

And then the second question that I have is on the share buyback. I think, from my side, the investor feedback's been quite positive on the share buyback, and I believe a number of investors actually also have written to you. I'm just curious whether this is making you feel more positive about a share buyback program to be announced within the next 12 months? Thank you.

Thank you, Michael. So I'm going to ask Adrian to take the first question, and I will answer the second one.

Unsurprisingly, Michael, we're not going to give quarter by quarter precise margin forecast. It's not -- we strongly believe that is not a healthy and productive way to manage the business.

So, really, I would just reiterate what we said, which was there was an element of the improvement in margin in quarter 1, which there's an element that was to do with the underlying improvement, and there was an element to do with phasing. Part of that will -- you will see part of that appear as cost in quarter 2, and a little bit thereafter. We're not going to go into any more detail than that, Michael.

Okay, second question, Michael, on the buyback, are we going to announce buyback in the next 12 months, answer is, no.

We have said in Q4, and I re-insist on this, that we need a year to really look at the potential good acquisitions that the Company came make to deliver the best value for the shareholders. So we have a number of ideas at this stage and so, until we have not done that, nothing will happen.

Okay. Adrian, can I just follow up on the trading profit question, again? In Q1, did you have material savings from your restructuring program?

Yes.

And could you quantify that?

Not in -- no, not precisely. We're not going to give you numbers; again, it's not sensible to get onto that, the granularity.

But just to give you a feel, maybe one proxy we're sometimes asked about is headcount issues, and we're now materially over 300 headcount reductions into the program and well on track for the next 7% headcount reduction we announced at the start. But more precise than that, it doesn't make sense for us to go into, Michael.

Okay. Thank you.

Veronika Dubajova, Goldman Sachs.

I have two questions, actually. One is tangential to the one that Michael has just asked, and it relates to potential acquisition opportunities. Olivier, you've now been with the business for a little while, having looked at some of the assets out there, have your priorities changed? Or has the ordering of them changed as you think about acquisitions going forward?

And the second one, hopefully very straightforward, but, Adrian, I was hoping you could now break out the contribution to revenue growth from all the various small deals that you've done, including Tenet and ADERMA products. Thank you.

I am happy to answer your question regarding the acquisition. Nothing has changed, actually.

I remind you the three levers of this acquisition. Number one is the bolt-on. As you have seen, we've done three acquisitions during the last quarter, including LifeModeler, including ADERMA.

And regarding the second one, you remember it's related to the emerging market, so here also we are extremely active. I have now a full team, including the Head of PD. We have a number of people working on this, whether it is in India or in Brazil.

And for the third one, did I change anything, no, I did not actually. Advanced Wound Management remains the number one; and endoscopy field remains the second one. So there is no change here, Veronika.

Thank you, that's very helpful.

And in terms of the contribution at the revenue line of the acquisitions, the Tenet one you called out, the answer is zero because we distributed the Tenet product, well, 90-something, 99% or something of the Tenet product we were the distributor of before we acquired. So it was very small accretive to margin, but very small, but not -- it didn't impact revenue at all.

And in terms of LifeModeler and ADERMA, they are both very small. LifeModeler, nothing; it's essentially an internal set of software for assisting our design process.

And ADERMA is currently very small. We expect it to be a highly significant product, but we certainly expect useful growth from it, but, as at the moment, next to nothing. You're not seeing any distortion in the growth rate. If there was, we'd be calling it out, of course, Veronika.

That's great. Thank you very much.

Ed Ridley-Day, Bank of America.

Firstly, on the phasing of costs, Adrian, excuse me for playing devil's advocate, to an extent, but certainly I remember you -- there was an expectation at the previous results; you highlighted that, for example, fourth quarter we had seen a -- you'd done some additional cost savings that were a one-off and you had managed, as a result, to have a very strong quarter on the margin. And, forgive me for saying this, but are you really being too conservative here?

You've clearly had a good start in terms of your restructuring, and is the phasing really going to be so material for the second quarter? And shouldn't we actually be looking for a higher margin than we have previously expected through the rest of the year? That would be my first question.

Well, Ed, yes, the restructuring program has made a good start. We're absolutely serious about that program, and it has made a good start. But, as we've said on many times, there are also pressures the other way; you've got to deal with price, and we've got to invest in this business. We see significant opportunities to invest in R&D and in emerging markets, which are margin dilutive at their current phase.

So we do not believe, we believe our -- the guidance we have given, or we gave a quarter ago and we are maintaining now, is appropriately balanced. So, no, we do not think it is excessively conservative, or the other way around; we believe it's balanced.

Okay, thank you. And a question for Olivier, just a follow up on acquisitions. One of your competitors in the wound market highlighted that they had found it difficult to, perhaps, find the right deals for them and, as a result of that, had decided to, related also to previous questions, look at their capital structure and potentially return more cash to shareholders. Obviously you're working very hard on this, are you also finding it hard to find the right deals? Or is it just a question of time?

Actually, no. I think it's -- I know who you're talking about, but it's -- I think that's a question of size and a question of portfolio. And we don't find it difficult; we have a number of very interesting and good targets. And so I don't find it difficult; I just want to be sure that we do the right deal, and that's why we are not in a hurry to make it happen. Okay, so that's all.

Okay, fair enough. Thanks.

Thomas Jones, Berenberg Bank.

Thanks for taking my two questions. The first question I had was just on the knee business. I was particularly impressed by particularly the OUS growth in knees; I was just wondering if you could give us some idea of where that growth is coming from, and potentially what sustainability of that high single-digit number might be. Was there any kind of one-off effects or launch effects in there that might have driven that number?

And the second question, I'll ask in a minute, it's on acquisitions again.

Okay, on the knee business, you're right, it has been a very good out-of-the-US growth because we grew 9%, which is pretty strong. We have outperformed the market, no doubt on this one.

But you have to know that actually, specifically in Australia, in New Zealand, where we have shown a very strong improvement, again, we had a weak comparator last year due to the floods in Queensland; and, you remember, the earthquake in New Zealand; as well as the tsunami in Japan, actually, in the same period. So it was a weak comparator so it's difficult to say 9% is a real 9%, actually; it's compared to something which is very low the previous year.

So, despite this, we are pretty happy with what we have done in this geography.

Okay, great. And then just on the acquisition front, just to follow up, really, from the previous questions, the concern I have with the acquisition strategy is that there are people out there in the similar businesses with bigger balance sheets. Your balance sheet's strong but there are others out there with stronger balance sheets. And there are such companies out there whose wound businesses, in particular, are in a more desperate state than yours and more in need of acquisition-driven growth. So how can you give us and your investors some confidence that, when it comes to bidding for these assets, that even if they come up for sale, that you're likely to be the successful bidder for them?

Again, I cannot -- I don't know what our competitors are looking at, so I just cannot comment on these. What I can tell you, that I think that we are a very serious bidder for many companies. We have maybe done our homework more seriously. I don't know, frankly.

What I can tell you is that if we do a deal, and I hope to do a deal, this will be a good deal.

Fair enough. And then, in the absence, how long will you give this strategy? You vaguely mentioned not in the next 12 months, but if nothing is forthcoming in the next 12 months to 18 months should that be the time that we would expect you to start thinking about returning capital to shareholders in some way, shape, or form? Is that a reasonable expectation?

Tom, that's exactly right, actually. That's what we said in Q4. Where we are going to return the capital is not clear yet because we are focusing on something else at this stage. But it will be a dividend or buyback, we don't know yet and we will tell you that in due course.

Okay, perfect. Thanks, that's very helpful.

Ingeborg Oie, Jefferies.

Two questions, please. The first one is going a bit back to this phasing of costs, because it's the second time that we have a surprise cost phasing in the last six months on the margin; and also going back to the statement which you made at beginning of February, saying that the results of the restructuring should be progressively improving the margins throughout the year.

And here we're off to what seems like a very strong start, given that there -- well, you're not able to provide the breakdown between what's underlying and what is extra costs not being taken, maybe. So it's just one of those -- how good visibility do you have on when these costs will come and on the second quarter and then the third quarter, because it looks like the underlying improvement here is very strong, and your comment is that it should get stronger throughout the year?

Second question is on your strategy in Brazil. You point out that you've appointed a General Manager for the country, could you talk a bit about your progress here and what your thoughts are in terms of penetrating that market, given that you typically need to have local manufacturing in order to be successful there? Thank you.

Thank you. So, Adrian, take the first question?

Sure, Oli. Yes, Inge, thank you for this question, again. I think the fundamental difference between, perhaps, where we come from and a number of the questions we're receiving is we do not set out to manage quarter and on individual expense lines precisely quarter by quarter. We just fundamentally believe that is unhelpful to progressing the business.

If you got yourself into the phase where you got towards the end of a quarter and said, quick, spend a bit more, or spend a bit less so that we can get exactly the number we said to some analyst, it's not helpful to running a business. It really is not helpful to running a business, so we don't seek to do that.

Does that mean we have poor or inadequate visibility? No, it doesn't. It just means you're managing the business in a sensible way.

So, Inge, the guidance we gave a quarter ago for the year was based on a set of dynamics which we saw then, and which we still see now, so our guidance remains unchanged.

You will get quarterly variability. You happen to have pleasant surprises, in your eyes, for the last two quarters but, believe me, there will be quarters the other way round too. And we just -- it'll be what it is. We're not going to manage them away.

Thank you, Adrian. Regarding Brazil, yes, we have a new GM on board, actually. And it's actually critical to start the development of our operations. We are working, as you certainly know, in Brazil through a distributor; mainly, on the endo field. We roughly sell, what, about [$20 million], Adrian, in Brazil?

In market sales, they're a bit bigger than that.

Market is much bigger than to distributor, yes? So it's roughly we expect -- here, again, the potential of Brazil, according to us, is certainly over $150 million of potential revenue. So, here, you are right, manufacturing is a big plus when you can do it locally. So we work on that and, now that we have the GM, the strategy will start to happen.

Great, thank you. Just one follow up on the first question. I do appreciate that you wouldn't manage your business based on quarterly margin but just, maybe, checking that the statement about your expectation that the benefits of restructuring program should build progressively through the year, and that's how you communicated we should think about the bottom line development through the year, that that still holds, and that the first quarter was not so surprisingly strong on the restructuring so that we won't see this progressive development through the year?

Ingeborg, again, I'm going to answer this question. You remember, last quarter we announced a 22.5% 2011 profit margin. We said that we will expect in 2012 a modest increase; we remain on this. And I think Adrian was very clear on the fact that quarter-to-quarter basis we don't really look at that because this could vary for different reasons, cost phasing, whatever, okay?

At the end of the day, we need money to reinvest in the business. We have said that also clearly last year. We need more R&D, we need more SG&A, and in terms of marketing expenses, to beat the competition, especially in emerging market and in the established market. So there is no doubt that we are confident that this modest increase will happen, but we don't expect a huge increase in 2012; that's what we should know.

Okay, thanks for the clarification, Olivier. Thank you.

Navid Malik, Cenkos Security.

Thank you very much for taking the question. Really, the question relates to the emerging markets. We previously -- I think you've seen some great growth in China, and I'm quite interested to find out which particular country is driving the growth. And particularly in China, are you seeing any pricing pressures, or is there good demand from the products that you're launching there?

And just on negative pressure wound therapy, in terms of the 20% market share in Europe, which I think is the first time you've broken that out, for the austerity measures that are kicking in into Europe, what's the sort of feedback on PICO as a cost-efficient product in this market? And is that helping to drive the sales and penetration into the market against the competitors?

Thank you for your question. Regarding the growth in the emerging market, we report, and I think it's important to mention this, combined international market and emerging market. What we call emerging market is BRIC, yes? And we combine this because of the variation on a quarter-to-quarter basis of [small numbers]. You can have a delay in a tender, you can have a supply to a distributor which can be delayed, and then the growth rate doesn't mean anything.

However, to answer your question, the BRIC are growing more than 20%, and this is mainly driven by two countries; by China and India. We are very happy with the dynamic we have in these two countries. So those are really the growth drivers at this stage.

Brazil, as I was mentioning, is starting, so we expect also to see in the years to come a strong development in Brazil.

Regarding PICO, PICO is doing great. I've been, and Adrian has been also, in [Asian] countries; in the US, discussing with people. There is always a pretty long adoption time in the hospitals. However, we are very happy. We have gained negative pressure wound therapy, some very big accounts. We have won Cleveland Clinic, Kaiser, and we definitely have here the impression that this is a fantastic tool.

Actually, the feedback we have from our customer is amazing. They are happy with the price positioning; they are happy with the pharmacoeconomic of the product; they are happy with the way it treats patient. So, frankly, I think we can be pretty optimistic with PICO, which definitely is a great tool to enhance our innovative image among our customer.

Fantastic. Thank you very much.

Chris Gretler, Credit Suisse.

I have two questions; first now relates to the trauma business. You mentioned that you expect now to make certain changes and that you are unhappy with the performance there so, given that [CIMTI] now is in this merger process, and I'm surprised that you're not benefiting more of now this situation, could you elaborate a bit on your assessment of that business, and to what your intentions are here?

And the second relates to Europe as well. So could you get a bit more into detail how you see the current situation in hip and knee implant, in particular, in Europe, especially, also with respect the Southern European countries; whether you see what kind of behavior you see actually in these markets?

Okay, on the trauma business, first, the trauma sales in the US were disappointing, that is true. The weak performance, as noted in previous quarter, is definitely, and Adrian has mentioned that, exacerbated by the expiry over the last three quarters of several agreements under which we received about $10 million per annum in royalties. So this has definitely been impactful.

If you exclude this, the growth in trauma business in the US is around 2%, so which is aligned to the market growth, so not much to say about that.

I don't like this dynamic because I think that I've asked all the teams to perform better than the market in general so we are looking in-depth at the structure and the business model of trauma in the US, particularly. And what we are doing here, well, we are trying to redefine the model, actually, with what we call emergency trauma and, in the other hand, a team specialized in scheduled operating procedures.

So here we have a meeting in the next months with my team to finalize and decide on what is going to happen in the months to come, actually, and I do expect to see a strong improvement in the trauma dynamic in the months to come.

Another point on trauma, we have to say that we have had a very mild winter in the US so this has not helped in terms of dynamic. So that is the last point.

Regarding the European dynamic, well, here again I think that it's a market which is difficult. The ortho market in Europe is definitely not a strong market.

If you take -- let's call it out of Europe, that includes Japan because we don't have the pure breakout of what is happening in Europe, but if you take the hip business, in the -- including Japan, including Australia, including New Zealand, it's about 2%. So it's not a very strong market that we face here. We have growth which is slightly under the market in these geographies outside the US.

If you take now the knee business, I think Adrian has mentioned that we grow 9% outside the US in a market which is about 5%. So it's a pretty strong market, but we almost double the growth of the market.

So, net-net, in the recon business, we grow outside of the US 5%, in a market growing at 3%. So we are pretty happy with what we do there.

And regarding dynamic, price erosion is what is. There is not much difference between what we have now and what we have seen in the past. Again, even if it's slightly less, I don't expect to extrapolate on this anecdotal quarter to tell you that the market will recover and the price will be flat.

So that's what I can tell you on this ortho market in Europe. But for you, we have a -- it's strong again, and we believe that we have all the tools in hand to be successful.

Yes, okay. I was just wondering whether there is a substantial trading down or a price erosion acceleration happening in Europe at the moment, so --

No, no.

But it's not evident from your numbers and --

We don't have any acceleration of price erosion. Again, it's consistent with what has been shown in the previous quarters.

Thank you.

Julien Dormois, Exane.

Basically, two questions; two follow-up questions. The first one is on the sequential acceleration that we saw across the industry, so along with your US peers and yourself. Do you now have quite a lot of confidence that the inflection point in terms of procedures, and especially in the US, is behind and that you're heading for a more positive environment in terms of volumes?

And the second question is on the hip business. You're still suffering from the metal-on-metal issue with BHR. I think you previously mentioned that the year-on-year decline rate for BHR was to the tune of 20% and more, is it still the case? And do you have a more precise idea of how long this will continue to weigh on your overall hip business?

So on your first one, Julien, in terms do we see -- first of all, do we see in this quarter that there's been an acceleration in the overall reconstructive market and do we see this as the start of a trend, well, we certainly do see, when you look at our results and the results of our competitors, that you mention that there has been a slight increase in the rate of growth in the reconstructive market, particularly in the United States.

Do we see this as the start of a material trend or a bounce back? We're more cautious than that, frankly. You do see quarterly variation and, as we said repeatedly, frankly, repeatedly over many quarters, it is very hard to identify the drivers on quarter-by-quarter variation within the US, or within Europe.

So, yes, we note there's been a small increase; we are not extrapolating from that ourselves.

So on your question on the metal-on-metal, yes, we see a very strong adverse win, which is roughly, Adrian, correct me on this, basically the same than what we have seen. This trend is about the same.

Yes, mid-20% decline in BHR, yes.

Mid 20%s decline. Adrian has said that it is now roughly 10% of our hip sales, 2% of our business. Despite this, we still believe, and I think very important to understand, the patients' (inaudible), and has always been, actually is always our priority, and so we support any initiative to improve the clinical outcome for the patient, for sure.

We have been very disappointed by the press coverage, which, we believe, may have been more likely to alarm than inform the patients.

The MHRA, the UK regulatory body, has said that the majority of patients implanted with metal-on-metal hip replacements have well functioning hips and are at low risk of developing any serious problems, so it's important. Nevertheless, we know that a number of competitors have performed very poorly and have been withdrawn from the market.

So I think it's important that we should not misinterpret this as meaning all metal-on-metal hip implants are poor. We do believe that we have a product which is different and so we are very confident that we, basically, have the right product for the right patients with the right level of safety. So we are not really concerned, but we face this adverse wind, as all the other ones.

Okay, that's helpful. Thank you.

Yi-Dan Wang, Deutsche Bank.

I have two questions. First of all, on the knee business, can you give us a sense of how your business has been impacted by the competitive customized cutting instruments that have come onto the market? I believe now that all of them have been on the market, so if you could comment on that, and also to what extent the moderating outperformance of your knee business has been a result of that.

And then the second question is on the gross margin. Great to hear that the underlying gross margin has improved; can you give us a sense of what the gross margin opportunity is going forward? Clearly, not expecting you to give us a precise number, Adrian, but if you could give us some sense of, over the medium run, how we should think about that developing. Thank you.

So I will take the first question, Adrian, on this VISIONAIRE. Well, yes, VISIONAIRE is doing great actually. We're extremely happy, remember to have mentioned that in Q2, Q3, Q4, so that we're not very concerned about the arrival of the competition. Definitely, it's good news and bad news because you have competitors, that's the bad news; the good news, that it is really enlarging and enhancing the market growth in this field.

Actually, VISIONAIRE represents about 20% of the knee procedures in the US, so that's pretty important for us now. And we see a growth which is extremely encouraging so we don't, at this stage, see an impact of the competition on VISIONAIRE.

Yes, Yi-Dan, thank you for your question on gross margin. Bottom line, yes, we actually see significant opportunity for taking -- for cost improvement in the cost of sales. So significant improvement in terms of how we source, where we source from, geographical location of our sourcing.

We see significant improvement in better logistical arrangements. We see significant improvement in product design, to design cost out and rationalize the portfolio. So lots of actions, lots of initiatives, lots of focus on efficiency improvement and cost reduction in cost of sales, as well as SG&A.

Equally, we are realistic around the medium-term view of price that you've got to deal with in this marketplace. Our perspective on that and the outlook for that has not changed over several quarters now.

So balancing those, Yi-Dan, we see some potential, but you've got to be realistic. It's not huge. We, frankly, see as much, probably more, potential in the medium term in SG&A than we do in cost of sales but, in the round, our overall guidance for margin is what it is, Yi-Dan.

Okay. Just to follow up on the knee performance, if we look at your relative knee performance, the outperformance has been narrowing, can you give us a sense what's driven that narrowing? That will be great. If it's not VISIONAIRE; by the sound of it, VISIONAIRE is not the cause.

Well, I think your hypothesis is correct, that we did have a period of time in the United States where we were pretty much the only one approved, technically, there were others on with some restrictions on them, which was tremendous. And we also had this tremendous state in VERILAST; both of which, the rate of it -- or the level of that advantage has moderated. So, inevitably, that is a factor in the fact that our growth above market has declined. I think you're absolutely right on that.

Okay. So, going forward, shall we expect you to just keep your share of the market, rather than still outperforming the market?

Well, I think -- well, let's stick to the guidance we've given on the overall -- on overall reconstruction, Yi-Dan. I think to go down to the sub-levels of guidance, as you insistently ask us to do, is something we try and resist, as you know.

All right, thank you. We try.

Okay. Anyway, so we are confident. So, thank you, all, for your time today and we'll be happy to see you in July at our hip and knee seminar. So wish you a good day. Thank you.

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