Smith & Nephew PLC (SNN) 2012 Q3 法說會逐字稿

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Please refer to the documents that Smith and Nephew have filed with the US Securities and Exchange Commission under the US Securities Exchange Act of 1934 as amended, including Smith and Nephew's most recent annual report, Form 20-F, for a discussion of certain of these factors. Any forward-looking statement based on information available to Smith and Nephew, as of the date of the statement. All written or oral forward-looking statements attributed to Smith and Nephew are qualified by this caution. Smith and Nephew does not undertake any obligation to update or revise any forward-looking statement to reflect any change in circumstances, or in Smith and Nephew's expectations.

Good day ladies and gentlemen, and welcome to the Smith and Nephew, PLC, Q3 2012 Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Olivier Bohuon. Please go ahead, sir.

Good morning everyone, this is Olivier Bohuon, and I'm here with Adrian Hennah. Welcome to our third-quarter result call. I will cover the highlights, and then hand over to Adrian to take you through the numbers. As usual, we'll take questions at the end. Smith and Nephew has delivered another strong quarter, particularly given the further market deterioration in important regions to us, such as Europe. Once again, the strongest-performing business was advanced wound management. Here you see that our investments in growth areas like negative pressure wound therapy in the emerging markets are driving significant market out-performance.

Our Q3 revenues were up an underlying 1% to $952 million, and I will give more details on this in the next few slides. This revenue growth is after adjusting for the Bioventus transaction. Adrian will talk you through the adjustment. Trading profit increased 10%, underlying to $207 million, giving a strong 190-point improvement in our trading profit margin to 21.7%. You'll remember that the comparative quarter three last year was weak.

The important thing for me about the margin performance this quarter is that it clearly demonstrates that the structural improvements we have made to our organization are delivering benefits. In particular, the restructuring program in ESD, which is well advanced in the US, and is also fully underway in Europe. The program has allowed us to both improve our margin and invest more in the areas which will drive future growth.

Adjusted earnings per share were $0.166, an increase of 2% on the prior year. I am pleased that our cash generation remains excellent, a clear sign of healthy business, and the group now has net cash of $379 million.

This slide captures our underlying growth in the quarter on the left-hand side, and geographically and on the right by product franchise. In the US, we again grew at 2%. In the rest of our established market, the performance reflected a weaker macro environment, most notably in Europe. Growth in our emerging international market was 6%. The underlying markets are strong, and this performance is within our expectations of quarterly volatility. Growth in China, our largest market, continued at above 20%. On the right, across our product franchise, joint repair, enabling technologies, trauma, and advanced wound management all delivered similar growth rate to previous quarter.

I will now turn to the next slide to look at our hip and knee franchise, which together represents just over a third of our sales. Our global knee franchise declined by 1% compared to a market growth rate of 2%. This performance is a result of two trends. Firstly, we have seen a weakening of the over knee market in Europe, where we have a proportionally larger market position compared with the US. Secondly, as we have said before, this performance reflects where we are in our knee product cycle. During 2012, 2010, and 2011, when we materially out-performed the knee market, we benefited from the launch of our Visionaire and Verilast products. This benefit now has annualized.

Looking forward, our next major re-launch is Journey II. Journey II is designed to take the clinical feedback from the original kinematic knee and improve upon it, offering better motion, durability, and patient satisfaction. It is currently in clinical evaluation, will readily build towards full-level launch in late 2013 our early 2014. In addition, our Legion hinge knee system, which was launched in the US last quarter, will be expanded to Europe next year.

Excluding BHR, hip implant growth was flat on last year, which was improvement to last quarter. This compares to total hip market which was similarly flat. We continue to achieve very good growth in our product focused, such as Anthology stems, Oxinium bearing surface, (inaudible), and SMF stem. The negative commensurate on stem metal and metal to the lower hip continued, and sales of our BHR system were down by 36%. Finally, the full US launch of our new Redapt revision hip system, which significantly improves our hip revision product offering, is on track for later this quarter.

Turning to sports medicine joint repair, we continued delivering a good growth, up 8%. The US had a strong quarter, with double-digit growth. This was driven by new products, showing that payors are still willing to pay for more consumables, which are clinically proven. This quarter we launched a number of new products. These include two new anchors for using hip arthroscopy. Both products are first-to-market devices which support emerging techniques for hip arthroscopy. This further strengthens our position as a leader in this field. We also extended our leading Endobutton range to accommodate the popular anatomic technique for ACL knee repair.

Our trauma growth was 2%, which after adjusting for the impact for expiring US royalties, was the same as the overall market growth rate. We have started implementing our refined trauma commercial model as we increase our focus and resources to address the opportunities we see in the eye gross trauma and extremities market. In particular, we have started creating focused US sales teams to serve our trauma and extremities customers in their different requirements.

Turning to advanced wound management, advanced wound management grew at 4%, double the market rate of around 2%. The global market growth rate has again slowed slightly, due to the ongoing austerity measures in Europe. Growth from our negative pressure wound therapy portfolio was very strong. In August, we announced the introduction in Japan of Renasys negative pressure, and I was proud to be there at the launch, which coincided with the Fourth Congress of the World Union of Wound Healing Societies. We are the market leader in Japan and hence expect to gain significant market share in negative pressure.

In both Europe and the US in traditional negative pressure, we continue to win major hospital accounts. PICO is now making a meaningful contribution to our growth in sales. Globally, over 30,000 patients have been treated with PICO since it was launched. We continue our strong pattern of launching new line extension and products, with 10 this quarter. You will remember we launched Allevyn Life last quarter in the UK and Germany, and the initial feedback has been very positive, and we are rolling this out to more markets.

In the emerging markets we continue to register and launch more of our existing premium products. More importantly, we have been researching and assembling a portfolio of products targeting the middle tier in these countries, and we start launching these next year. Finally, we are pleased to have entered into a global settlement agreement with Wake Forest University that will resolve all existing negative pressure patent litigation between the two parties, on which Adrian will comment further. Now, I turn over to Adrian.

Thank you, Olivier. Good morning, ladies and gentlemen. Turning firstly to Slide 10 and the income statement. Revenue in the quarter was $952 million. As Olivier mentioned, this represents 1% underlying sales growth on quarter three last year, after exchanging for exchange rates and the Bioventus transaction. Trading profit in the quarter was $207 million, an underlying increase of 10%. The trading margin was 21.7%, 190 basis points higher than quarter three last year. Restructuring charges -- excuse me, restructuring costs charged in the quarter were $10 million. All relate to the efficiency program announced in October last year. This program continues to deliver in line with plan.

Moving to the next slide, Slide 11, and moving further down the income statement, the profit from Associates of $5 million that you can see here is the group share of the Bioventus profit in the quarter. In quarter two, you may recall this was a $1 million loss. We expect to continue to see some volatility in this number in the start-up phase for the new entity. We've again set out in the appendices to this presentation an analysis of the impact of the Bioventus transaction on the reported numbers for the group. The appendix shows a 3% EPSA dilution in Q3 from the transaction.

The tax rate for quarter three trading profit was 30.2%, in line with the rate in half one and the expected rate for the full year. EPSA in quarter three was $0.166, an increase of 2.5% on last year. This is below the underlying 10% growth in trading profit due mainly to the strength of the US dollar, a positive tax settlement in the prior year, and to the Bioventus transaction.

Turning to the next slide, Slide 12, and an analysis of revenue by business segment, the impact of currency was quite material in the quarter. In quarter three the value of the US dollar was 4% stronger year on year against the average of the currencies in which we operate. The effect in our wound business was slightly larger, due to its higher proportion of non-dollar, especially euro, sales. The Bioventus transaction reduced reported revenue growth by 5% in the quarter.

Turning to Slide 13, an analysis of revenue growth rates by division and by geography, Olivier has talked to the shape of our revenue. Details on sales growth by product franchise are set out in an appendix. I will therefore add only a few more detail points. Firstly on pricing, across our business as a whole, and in the USA and Europe individually, we saw essentially the same price picture in quarter three as in recent quarters. Across our reconstructive and trauma implant range, we again saw a like-for-like price reduction of around 2%. We continue to see this reduction partially offset by positive mix changes.

In sports medicine, the pricing environment continued to be slightly easier than in implants, with like-for-like pricing broadly flat. In wound, we continue to see modest price reductions across advanced wound care. Secondly, hip sales continued to be held back by the declining BHR sales, a full of 36% year on year. BHR sales now account for less than 7.5% of our hip sales, and just a little over 1% of our group sales. Thirdly, trauma sales growth was reduced by 1% by the end of the royalty income described in previous quarters. There will be smaller effect in Q4 before this issue fully annualizes.

Fourthly, in our worldwide wound business, sales grew by 4% in the quarter. Growth was reduced by about 1% by wholesale ordering patterns, particularly by the positive impact in quarter three last year of changes to the wholesaler arrangements in Canada. This gives an end-market growth rate for our wound business of 5%. NPWT sales again grew strongly, and contributed somewhat more than the total reported wound growth.

Lastly, growth in the emerging and international markets was 6%. This was lower than recent quarters, and lower than our expectations for coming quarters. As you are aware, the distributor channels used for a significant proportion of our sales in these markets, and the still relatively modest total level of these sales, mean that we do get some quarterly variation in the growth rate. In quarter three, reported growth was held back by a quite strong comparator, and by the timing of some quite large shipments to distributors in a couple of markets that fall this year in quarter four. The underlying picture in these markets remains very strong.

Turning to Slide 14, this shows the usual analysis of trading profit by business segment. As mentioned earlier, group trading margin in the quarter was 21.7%, 190 basis points above our low quarter three last year. Group trading margin in the year to date was 22.6%, 110 basis points above the prior period. We continue to see margin uplift from our efficiency programs. We continued to need to deal with modest but widespread pricing pressure, and we continued to invest in new products and in our capability to bring these products to customers.

Spend in the quarter in R&D remained at 4.2% of sales. Specifically, margin increased in ASD in quarter three by 330 basis points against that weak comparative. We saw improvement in gross margin and in SG&A from the actions taken since quarter four of last year under our restructuring program. Margin decreased in wound by 250 basis points in the quarter. This reduction was largely caused by a one-off charge in connection with the settlement with Wake Forest mentioned in the announcement and referred to by Olivier. While we are not contractually able to give details of this settlement, we can say that it does not change significantly our expectations for the future progression of NPWT or of wound, both in terms of sales and profit.

Turning to our next slide, Slide 15 and the cash flow statement, we had another good quarter of cash generation. Inventory levels indeed actually increased modestly in ASD. This was due to short-term operational requirements, and does not impact the long-term decrease that is firmly under way. Inventory levels in wound reduced in quarter three following the modest increase at the start of the year. We had net cash of $375 million -- excuse me, $379 million at the end of the quarter, up from $150 million net cash at the end of quarter two, and up from $196 million of net debt a year ago.

Turning briefly to the last slide in this part of the presentation, Slide 16 and the outlook. We do not see any change in the outlook for the group as a whole. We expect, however, to continue to see some variation in performance at the product franchise level. Among the franchises we're seeing excellent growth relative to the market in wound, driven by NPWT market share gains. Inversely, we have seen stronger and longer-lasting BHR headwinds than we had expected at the start of the year, and we're seeing a slightly lower knee growth relative to market than we had expected, ahead of the full launch of the Journey II range at the end of 2013 or early in 2014.

In terms of the markets served, we saw significant challenge in Europe, where we have 30% of our revenues. Judging from the pressures on the ground, we expect this to continue. We continue to expect a modest increase in margin for the full year. We have in quarter four one additional sales day as compared to last year, 61 days compared to 60 last quarter four. Given that the extra day falls around the new year holiday period, we are cautious on how large an impact this will have on reported sales growth.

Lastly on the outlook, if the exchange rates at end quarter three were to be sustained for the rest of the year, we would expect reported sales and profit to be reduced by about 2% by translation of exchange effects in the full year, and by about 1% in quarter four. Lastly, a rather technical point, some of you have asked about the impact on our numbers next year of adopting the new pension accounting standards IES 19. The impact is small, around a $7-million increase in the other finance cost line. We have set out an analysis of this in an appendix. On that rather technical note, I will hand it back to Olivier.

Thank you, Adrian. Turning to a summary of the third quarter. In summary, against a weak market, particularly in Europe, Smith and Nephew has completed a strong Q3. We again improved our trading margin. This demonstrates that we are consistently delivering our efficiency programs, which have allowed us to accrue our margins and start investing more in tomorrow's growth drivers.

In terms of revenue, the underlying growth dynamics are broadly unchanged. In knees, our performance reflects both the position in our product cycle and also our higher exporter to Europe. Our cash generation is strong, and our priority remains to use this to drive greater organic and inorganic growth. We have a number of exciting acquisition opportunities under review, and we're working in a very disciplined manner to ensure we move this ahead appropriately.

Smith and Nephew's strategic priorities are about making choices for the long-term benefit of our business by allocating resources to the areas where we can achieve the greatest return. I am confident that by following this strategy, we are shaping the group to respond to market conditions and opportunities we face. Just before we move to Q&A, I would like to remind you that we are holding a Capital Markets Event on November 28 to 30 in York and Hull. We hope to see you there.

Thank you, and that ends the formal presentation. We now are going to take questions. Please, can we ask each person to limit the number of questions to two to give as many people as possible the opportunity to participate. Can we please have our first question now?

Charles Weston, Numis.

Good morning. Thanks for taking the call. My two questions are on knees, to start with. You mentioned that your new Journey II is likely to be coming -- to be launched at the end of 2013, early 2014. Excluding the hinged knee, is there anything that you can do to protect that franchise over the next four to five quarters?

Secondly, you mentioned that you were likely to be splitting your sales force in the US to give some of them more focus on trauma. Can you just talk a little bit more about that, and how that might have differed from the current sales force structure? Thanks.

Okay, Charles, thank you for the question. Regarding the trauma first. Trauma growth you have seen was 2% after the minus-1% US royalty impact. It was the same on the estimated market growth, which is 3%. As you see, we have started to recover pretty well in this field, and we do see a very significant potential in this area. Again, it will take some time and we'll work on it very strongly.

We have started to create a focused US sales team to serve our trauma and extremities customers in their deferring requirement. That's what we have started to do. I don't know if you remember, I was mentioning that two quarters ago that I was having a good discussion with the teams up there to try to see what we can do to come back on track. And actually we are coming back on track. I'm very optimistic about our ability to be a significant winner in this field.

Regarding the knee, you're right, we have said that we are going to launch Journey II early 2014 or late 2013. At this stage, what can we do to protect our franchise? We do the best we can to do that. Actually it's investing in this field. It is refocusing the sales force on the right things and the right customers, and that's what we do. We don't expect to see a rebound in the knee market, and in the knee performance of Smith and Nephew in the next two or three quarters, but we are very confident in the fact that Journey will bring us a very good momentum.

Thank you. Sorry, one follow-up on that US trauma. I think I was under the impression that the sales force had been split into some sort of specialization with recon and trauma a few years ago. Has that been sort of re-merged, and now potentially splitting again?

No, there is no merger of recon. Adrian, you know what was the past situation, but I'm not aware of this.

Well, Charles, yes, you're quite right. If you go back far enough, there was a phase that we did split off some more dedicated trauma sales reps, and then did reverse that a little while later. I think it's absolutely fair to say that some of the lessons we learned from that phase are fully reflected in the changes we're making now. And they do very much go around about where, once you specialize, where you focus the sales force.

As you can appreciate, with a very big competitor out there in this field, you've got to be very targeted about where you put your efforts. You can't spread it around. There has been a lot of work going on about how best to focus resources, where best to target, where they can yield the best return. Yes, an awful lot of lessons have been learned from past history in these areas, for sure.

Okay, thank you very much.

Ed Ridley-Day, Bank of America

Thank you very much. First of all, Adrian, if I can ask you, given that you've done an extremely good job in terms of the cost control and improving margins over the recent years, can you give us a little bit of color. How much scope have you left any successor to further improve operating profitability?

I think we've discussed before, the framework from sort of five years, when we really started pushing seriously on cost in this Company, and now it's very different. Five years ago, the biggest catalyst, because we were very explicit about it at the time, was that we had margins that were materially shy of the average for our competitors. There was a need to do that as in around 2006, the mid-2000s, the market had turned down somewhat. It had gone from double-digit to mid-single-digit in broadly the markets we offer.

It's a different world now. We did largely catch up with the other companies as part of our effort. We are in a different world now, and I think Olivier set out extremely clearly since he's been arrived the absolute necessity to focus the business on areas of significant potential growth in the future. And to reconfigure the way you deploy your assets, your resources, your expenditure behind them. What we're -- that is exactly what we're engaged in here. There are reductions to be made in some areas, and there are investments to be made in others. That is very different program from the one we were engaged in, in 2005.

In some ways it's a tougher program, frankly, because you've got to be more thoughtful or more sophisticated in the way you redeploy the expenditure, rather than with an established benchmark out there of other peers reducing. But it's going very well. There is tremendous scope for improving the efficiency and effectiveness with which large parts of our Organization operate. Right from the way sales forces operate. The way one looks systematically at sales force effectiveness, and are targeting sales force effectiveness. We didn't get on to the more sophisticated things in that area in the first EIP push. They're there, and they're very much the areas we're dealing with now.

I think if I may, Ed, you're right, Adrian is a champion of cost-cutting. I'm very proud of what he has done, but there is still a huge scope, actually, for the successor. But don't believe that it's only a financial exercise. It's also an exercise that all the operational guys have to drive. Adrian was mentioning efficiencies. I think there is more in efficiency than in cost-cutting now, in improvement, in targeting, in sales force effectiveness as Adrian mentioned, in manufacturing. It's not only cost. It's a lot of improvement in the operation that we need to drive now. I tell you there is still a big scope here.

Thank you. Just a quick follow-up. In terms of particularly the knee franchise. Do you feel that you have enough invested through the sales force there, or do you feel that is a particular area where you might have to increase investments in the short term?

No, we feel completely comfortable with the level of investment upon there. There's two levels. One is the product portfolio, and I think we are at a stage where we are at the low point in that portfolio cycle. I'm being very explicit about that, and Journey II's coming, but there's tremendous investment going behind Journey II. We are very excited about the potential for that product. Equally, we're not going to rush it to market, because we want it to be extremely effective when it gets there.

In terms of the investment in the field force behind it, no, we're very comfortable that the levels of support for customers in the fields are as they should be, which isn't mean to say that you can't make the way you deliver that more efficient. That is a very large part of our focus. But we do not in any way feel that there's an inadequacy of SG&A dollars going behind customer support in that area.

Very good, thank you.

Jason Wittes, Brean Capital.

Thanks for taking the question. The first question, I wanted to asked about BHR and metal on metal. Is it fair to assume that that will continue to go down eventually, I guess, to zero -- especially given all the data that's been out there on metal on metal? I realize it's not all about your product, but it just seems as if when you talk to doctors, the appetite for using metal on metal has just declined significantly, even in the last six months.

Yes, you're right, Jason. Thank you for the question. BHR -- again, and you have seen that recently in the FDA [panel], it has been clearly stated that there was a difference between resurfacing and THA, that our product was different. We still believe that it needs implanted on the right patients, and well implanted, it's a great product to have. We are facing this adverse wind, which is a pity. I agree that when you see the trend that we're at minus 20%, 25% last year, we are now this quarter at about minus 36%, so it's not improving for sure. We still believe there is a potential for this product, but you're right. It's now about, what, 7%, Adrian, of our sales of hip, and less than 1% of our total business, so it's close to zero.

Okay.

The answer is we hope not. We firmly believe this thing has an important clinical role to play for the right patients with the right surgeons. The data hugely supports that, but the economics are a definite issue that is playing against it at the moment. Frankly, from a patient point of view and a clinical point of view, we very much hope that the economics can stay favorable enough for us to keep this on the market place.

One follow-up question on knees, and actually relates to hips, as well. If you look at your performance, you launch a product, you have above-market sales for about a year, and then you sort of fall in line with the market again. Is that kind of the way you guys think product launches work in orthopedics at this point for hips and knees?

It shows you how important innovation is in this field. Yes, I think that the rising, except if you have a very high level of investment, which from time to time is not the right thing to do. Either you go on the TV or you put additional reps. Again, it's a question of choice here. We believe that we have put the right level of investment in this knee business, whether it's marketing expenses or in sales expenses. As you know, we have also a number of growing businesses in the Company, so we have to make some choices.

We believe that the life of the product is what you just mentioned. Going first to market, and then coming at the market level, which is what we're facing now in the bottom of our cycle.

If I could just get a little more color on that. Is most of that -- those above-market performance you see for that year related to getting price increases amongst your own surgeons, or is there share gains mixed in with that, as well?

It's a bit of both. What we're seeing here is what I think the industry's seen for some significant period of time, is when some company brings out an innovation, it's typically a -- it's almost only ever been a small innovation compared to what they've got and what competitors have got, so there's a little bit of excitement around that. And you get a bit of movement at the margin because it gives reps a sort of following wind with which to go and talk to surgeons who might be moving anyway.

Yes, you clearly do typically get a little bit of price mix associated with that. You just get a little bit of noise around your product, which leads to a little bit of good news price mix, and potentially volume in the group. Then, you know what? Somebody else has a similar innovation, and it's their turn in the cycle. That's been the story of this industry for a very long time. Fundamentally, we see it as the story of the industry now.

Great. Thank you, guys.

Ingeborg Oie, Jefferies.

Good morning, I guess. Thanks for taking my question. Could you comment on the patent settlement, and what ongoing legal costs you've had over the last year or years that will no longer be there? Is there anything material we should think about?

Secondly, in terms of your strategy for mid-tier products for emerging markets, if I've understood it correctly, your strategy is to develop these products at your existing R&D facilities, and then manufacture them in China or in the local market, which seems to be a different strategy from what many others have chosen to do. Could you talk about why you believe that the separate R&D and production location there, why that is your strategy?

Finally, in Europe you very helpfully commented on which markets were particularly tough for wound. Could you make some more comments maybe in advanced surgical devices, so we get the sense of the dynamics between the different countries in Europe? Thank you.

Okay, thank you, Ingeborg. Again, there's three questions here, let me start by the emerging market one. Emerging market, we strongly believe in the value of our strategy, which is, again, launching premium products at premium prices in the high-tier segment. This is what we do. We have done that in all the segments, and we are following on this style. Again, I tell you that there is a significant amount of the population, whether it is in India, in China, or in Brazil, who are willing to pay for good premium products. Here it's a very easy [task].

The second one is what I strongly believe, which is entering the mid-tier portfolio and mid-tier market, bringing a specific portfolio of products dedicated to this mid-tier market. Again, we can do that in the US or in Europe. But again, the problem of this mid-tier, the prices are not the same. You have to bring a product which has a cost of goods which is low. Usually it means that you have to do that in low-cost countries. Then you can price the product appropriately, and get a good margin in this high-volume business. This is what we follow, and we are very consistent with what we're seeing, and we see a significant progress in this. In the portfolio definition, we start with a product -- I was mentioning the wound product that we register, and we expect to launch next year, the first round of product in this field.

Regarding the ASD European market, I was mentioning the wound in Spain. The markets in Europe are pretty weak in terms of volume, and that's true in the US, and that is true in (inaudible). In sports medicine, the market is slightly lower outside of the US, and you have seen that we have a growth worldwide, which is 8%. It's double-digit in the US. The market -- there's no market here, but we believe it's typically has a higher growth in the US than in Europe.

The price erosion is not changing. As Adrian has mentioned, it's about 2% now. We do not see [or] very light price erosion in joint repair, and in wound management about the same, at about 0%. That's what we see. I cannot give you specific examples. It depends of the markets. We're talking in Europe, but globally it's a lower volume and lower procedures than what we're used to seeing.

On the first question, Ingeborg, well, you're right. This patent litigation around the Wake Forest patents has been long and expensive, and it has been going on almost the entire time I've been here in the Group. We're very pleased that we've come to an agreement with Wake Forest that puts all that behind us. As we said in the statement, the agreement will resolve all existing negative pressure patent litigation between the two parties.

Frankly, there's not a lot more allowed to say under the contractual terms around it, Ingeborg. It will mean that future legal costs, to your question, won't be incurred. What we are able to say is that the settlement in the round, we do not expect to have any significant impact on our own expectations for the future dynamic for negative pressure, top or bottom line.

Great. If I could just follow up. What happened to legal costs last year associated with this litigation, so we know what we are kind of expecting to go away here?

Well, I don't have that number in front of me, Ingeborg, and I think it's probably best if you just stick with our guidance about no significant change from expectations as a result of this, because there are other elements, of course, [that can track], that we're not able to talk about. I think, even if I had that number in front of me, which I do not, I'm not sure it would be very helpful to you in getting to the right answer in a model.

I think I didn't get my question across clearly on the emerging markets. What I did mean is that most companies have found that it's more efficient to co-locate in a local country or in the local market. The development and design of the product, and also have someone suited in a completely different market environment designing it, also allowing them to tap into local talent pools. And it seems like you've chosen to not do that, but I wanted to understand what was underlying that decision?

I'm sorry, Ingeborg, I didn't get your question. You are right and I totally agree with this, actually, and that's what we do. We are building some scouting R&D in different emerging countries. We believe that the proximity of the R&D with the local customer is essential, and this will help us to bring also the right portfolio of product, not only for the country itself, but also to export in other emerging markets. I can tell you that this is really something we look at very strongly, and I'm totally aligned with your statement. This is what we do, actually, and there's no discrepancy between us and the others on this.

Great, thank you.

Tom Jones, Berenberg

I have two questions. One was on the infection management part of your wound business. That appears to be deteriorating a bit quicker than some of the other bits of your wound business. I just wondered if you could give us a bit more color on what specifically is going on within the infection management part of that business?

The second question was a more generic question about the upcoming med tech tax. In the past, you sort of stayed away from answering specifically how you might be approaching this, but it's getting pretty close now. Do you think this is now something you are just going to have to take on the chin, or have you identified or getting a sense that there might be some potential offsets within your business that you might be able to deploy to ameliorate the effects of that upcoming tax?

On the first question on the infection management, yes, we see definitely a market slowing in the advanced wound care. Infection is part of it, but I think there is nothing significant here, Tom. We don't -- we see that definitely is not the same growth as what we have in the rest of the businesses like negative pressure, but there is nothing alarming in this. We do okay, and we have a big ambition for this.

Is that market slow-down more volume related, or price related, would you say?

Volume related and price related.

And mix.

Okay, and then on the med tech tax side?

Well, you're right, Tom, it's late in the day, but you know what? There's a lot of uncertainty still in the regulations, and I'm sure you've heard there's some other people. There's a lot of people scrambling around to understand exactly how -- exactly what calculations will be done to which part of the portfolio, what date, and so on. Yes, we're still not able to give complete clarity, as frankly, I don't think anybody else is, either.

In terms of your point about, if you've just got to take it on the chin or are there ways to mitigate it, I guess there are two broad categories of mitigation. One is in the determination of the appropriate amount to pay. I know certain other people in the field have been talking about sort of intermediate companies within their organizations and wholesale prices versus end-market prices and so on and so forth. We're not able to talk about exactly where we're landing there, because I say there are details still being worked out by us. But yes, we are very alive to the issue of this tax is payable on the equivalent of a wholesale price and not an end-customer price, and what exactly does that mean. There's still some work to do to finally determine that, and to finally determine the position we and I suspect other companies will take on that, as to whether it can be less than 100% of the selling price to the customer.

In terms of the other area, I guess, you guys often ask about, are there ways to pass this on to the customer? Well, again, we're just going to have to wait and see as to how that dynamic plays out in the market place, in the face of the sort of low-single-digit reductions we're seeing, and we and much of the industry are seeing in orthopedics in the US. How will this tax play into the discussion and dynamic there? Again, that remains to be seen. Not, I'm afraid, a very specific answer to your question, Tom, but it's the reality of where we are at the moment.

Okay, that's better. I think when this tax was first highlighted, you were sort of steering us towards a kind of 3% to 4% impact on the bottom line. Is that kind of still roughly where you are at the moment, or do you think we should be maybe actually a little bit less than that now, given that there seems to be quite a bit of uncertainty about how this tax is going to be applied?

Well, we signalled that it should apply to most -- almost all of our US sales, which, when you've given the portion of our US sales that are -- the portion of our group sales that are in the US -- would equate to about 1% of revenue. That was the guidance we gave originally, Tom. That was assuming the charge was paid on 100% of the sales level. It might be prudent or appropriate to take a somewhat slightly lower number now, but frankly, we're not at liberty to, or not in a position to be more precise at the moment.

Okay, we'll wait and see.

To come back on your question on -- I'm thinking about on this infection and exudate management. The decline that you have seen also this quarter is against a very strong comparator period. You remember that we benefited from a distributory stocking in advanced wound care last year, which was about 1 point. That's one reason -- actually, we see a pretty big volatility on a quarter-to-quarter basis in this field. It's not only a trend in the market, it's also a strong compare to last year.

Yes, there's nothing remarkable in that infection -- there's nothing underlying in that infection management number. It does look pretty big, negative 6% when you look at it, but there is nothing systematic under that.

Okay, that's helpful. Thanks.

Michael Jungling, Morgan Stanley.

Yes, thank you for taking my questions. I have two. Firstly, if I look at your organic constant-currency sales growth for advanced surgical devices, we've seen a material deceleration in momentum if you adjust, sort of, for tough [or easier] comparisons. We've seen it in hips and knees and endoscopy. I'm wondering whether your cost savings program is starting to have a negative impact on your top line? I'd appreciate some comments as to why we shouldn't be concerned that this is more of a longer-term problem now than rather a shorter one.

When it comes to wound care, I'm still unclear about this Wake Forest settlement. Should we be thinking that Q3 was a slightly more difficult quarter for you because there were one-off elements in there? Or is the third quarter more of an indication of what the margin progression will look like going forward? Within that question, can we assume that wound care's margins in 2012 will be higher than they were in 2011? Thank you.

Let's do your second one first, because it's -- well, they're both straightforward, but the second one first, Michael. Yes, to be clear. Thank you for giving me the opportunity to clarify this. The reduction in the margin in wounds in the third quarter was the result of a one-off charge which was backward-looking in its nature, connected with the settlement with Wake Forest. We do not expect that to repeat going forward, period. Going forward, we don't think you need to make any adjustments to your views around the overall sales and profit levels for NPWT.

It sounds like, Adrian, it's more of a one-off with no future implications from royalties or things of similar nature?

Michael, that's not what I said. What I did say was that the reduction in the quarter was of a one-off nature. The charge of a one-off nature largely [breaking] to the past, point one. Point two, as you look forward in the round, and I'm sorry I'm moving slightly carefully, but there are contractual restrictions -- as you look forward in the round, there's no need to make any adjustments for total sales and total profit expectations for NPWT.

Great, thank you.

Regarding the first question, Michael, which is a very important one, do we suffer in revenue due to the fact that we are reorganizing and we are shrinking costs and so on? Well, the answer is no, actually. If it was the case, you would see exactly the same trend in wound or exactly the same trend in joint repair or in trauma, which is not the case. Again, the explanation of what is happening here in hip, which actually not much, because hip is actually recovering and growing at market. It's more the knee problem, and the knee problem, again, is due to a very weak Europe, and where we are pretty strong in terms of [weight], and the fact that we are at the bottom of the cycle.

Frankly, on this one, I don't think there is -- except maybe on an [irregular] basis. I mean, you see countries because we stop one account or whatever, that could be an impact on a temporary basis. But again, there is no link between the cost-saving program that we do -- again, which are not affecting the sales force, but affecting a de-duplication that we have started to stop. We don't see why this would affect, or could affect, the sales dynamic.

Okay, thank you.

Okay, should we take a couple more questions?

Yes, let's take two more people.

Julien Dormois, Exane.

Hi. Good morning, guys. I would also have two questions, please. The first one on knees. You said that you don't expect any meaningful rebound over the next few quarters. Does that mean that you plan to perform in line with the market, which is probably growing slightly, or do you think that you're going to have this 2 or 3 percentage points of difference going forward?

The second question relates to the development strategy in emerging markets of your own product portfolio targeting the mid-tier segment. Does that mean that your -- you have less appetite for emerging-market assets in terms of acquiring companies going forward, or are you still looking for assets abroad?

Thank you, Julien, for these two questions. Starting with the emerging markets. We don't have less appetite. The appetite we have is [close] in registering -- in England -- and registering the products for the mid-tier, as well as for the high-tier. I'm very happy with what is happening now. I think we did very good progress in both fields, and obviously, inorganic growth, whether working with distributors that we could acquire, or finding companies which could give us a base of development in these geographies. This has not changed at all, and we're following our path. It's not an easy path, as you can imagine, but we are confident to see soon some good results in this field.

Regarding the knee, well, again, I think that growing the market is good. I'm not believing that we will be at market or over market. I think it will be slightly lower than the market until we have the launch of our Journey II.

Okay, thank you.

Lisa Clive, Sanford Bernstein.

Good afternoon. One on the knee business. Could you talk about Verilast? It seems like you had gotten a huge amount of traction out of that product when you got the FDA approval for the 30-year wear claim. So, it's a bit disappointing to not see stronger growth in your knee division as a whole? If maybe you could just chat about the dynamics you've seen there?

Also, in sports medicine, your US growth was particularly good. I assume that's on the back of new products. Could you just talk about the competitive environment in that market, and maybe underlying growth rates that we should expect in the US? I understand that Europe is still relatively under-penetrated, so how that market is progressing as well?

Yes, Lisa, on the Verilast. Yes, you're right. There's no question that two years ago,18 months ago or a year ago, the combination of Verilast and Visionaire was driving our knee growth very strongly. Again, it is just the nature of this industry that there are these sort of product cycles that go through. And there's no question a couple of competitors have brought forward new offerings which have come against that, and we are working hard on our next cycle, the Journey II. We see it as a fairly natural evolution in this market. Would we have liked to have been able to continue to take benefit from the Verilast claim a little longer [what we worked hard to it]? The dynamics are just working out as they're working out. It's not a major surprise, as one steps back and look at the evolution of this market, frankly.

Regarding the joint repair, Lisa, we see double-digit growth in the US. This is a trend we expect to have. We have launched new products, as I said, especially this quarter. The two new anchors for hip arthroscopy -- and they are first-to-market devices, which is very important. We also extended the Endobutton range, and this has driven, definitely, a good momentum, and we expect to see this same momentum in the quarters to come.

Okay, thanks very much.

Okay. Well, thanks a lot, and have a good day, everybody. Thank you.

Bye-bye.

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