Smith & Nephew PLC (SNN) 2013 Q3 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 and welcome to the Smith & Nephew Q3 2013 results conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Olivier Bohuon, and Miss Julie Brown. Please go ahead.

Good afternoon and good morning to everyone here in the US. It's Olivier, and I'm here with Julie Brown. Welcome to our third quarter results call. I will cover the highlights, and then hand over to Julie to take you through the numbers. And as usual, we will take questions at the end.

Smith & Nephew produced a strong third quarter. The good implementation of our priorities has delivered a sequential improvement in growth.

Revenue increased 8% reported and 5% underlying. Our performance in hip and knee implants improved following successful new product introductions and a targeted increase in spend behind our business.

In addition, we delivered 20% growth across the emerging and industrial markets, and advanced wound management again strongly outperformed its segment. This was again a market background which remains challenging.

Our trading profit was $222 million, giving a trading profit margin of 21.6%, similar to last year. This is testament to the hard work of our team to make our business more efficient. Adjusted earnings per share were $0.171, a 4% increase year on year. Our share buyback is on track, and our outlook for the full year remains unchanged.

These slides capture our underlying growth in the quarter. On the left-hand side geographically, and on the right by product franchise.

In the US, we grew at 5%. Healthpoint, which we recently rebranded Smith & Nephew, was again a significant contributor to this, growing at 55%. Growth in the rest of our established market was slightly better than the first half of 2013, with revenue up 2%.

Our performance in the emerging and international markets was again strong, up 20%. And within this, the BRIC countries delivered combined growth of over 40% in the quarter.

Looking at our global product franchises, it was pleasing to see that all but one generated positive growth this quarter.

I will now turn to look at each franchise in more detail, starting with hip and knee implants.

Our global recon implant revenue grew by 2%, materially better than minus 3% seen in the first half. This compares to the market growth rate which we estimate to be 4%.

We have talked before about the three short-term headwinds we face, namely our position in the cycle, our exposure to metal and metal hips, and third, our disproportionate exposure in Europe.

We see our performance in this quarter, plus 2% in knees and plus 3% in hips, as early evidence that our actions are having the desired effect.

In knees, we said that we're accelerating the launch of our new JOURNEY II system. We are doing this by running more training courses and putting more instrument sets into the field. Surgeon response to the new system remains very positive.

In hips, our REDAPT revision system is selling very well, as are our ANTHOLOGY and R3 systems. In addition, the headwind from metal-on-metal continues to reduce, and including BHR, our global franchise grew at plus 4%.

Across recon, we have increased the marketing resources behind our differentiated products. For example, sales of knees with the VERILAST bearing surface have responded positively to DTC campaign we ran in the US.

Europe remains our most challenging region, especially in Germany, where the market continues to be very weak. In summary, while we still have some way to go to improve our reconstruction performance to a better level of growth, this quarter was, as expected, a step in the right direction.

Turning to sports medicine and joint repair, which continues to grow strongly up 7% in the quarter. FAST-FIX 360, our unique meniscal repair system, continues to drive strong growth in our new products.

Looking forward, for [suture] repair, we're expanding the HEALICOIL Suture Anchor range. The open architecture product design combined with bio-composite material results in outstanding fixation security. This is the first of a strong pipeline of products we have coming over the next 12 months.

Arthroscopic enabling technologies declined by 1%, broadly consistent with previous quarters; and in trauma, we grew at 2%.

As a reminder, our strategy is to increase the proportion of specialist trauma and extremities reps we have in the sales channel. In addition, we'll provide these reps with an increased flow of new products. The execution of this strategy will not be a quick fix. Trauma is a competitive marketplace, but the opportunities are very significant.

I am pleased with the progress we're making to improve our business in line with the strategy. Our new reps hire and strong product pipeline make me confident of an improved performance in 2014.

Turning to advanced wound management which had another strong quarter, growing by 12%, this is 4 times the market rate of around 3%. Advanced wound care grew at plus 2%, our best growth for many quarters. This was mostly in Europe, particularly with our core ALLEVYN foam range.

In advanced wound devices, we grew at plus 11%. This is mainly a reflection of a strong comparison. We grew at over 40% this time last year, and increased price pressure in the established market highlighted previously.

Advanced wound bioactives was again very strong at plus 55% growth. This continues to be driven by SANTYL, thanks to the additional sales reps we have added, and excellent communication from our commercial team.

Just after the quarter end, we re-launched Regranex, a platelet-derived growth factor therapy. Taking these factors together, I now expect bioactives to deliver over 40% growth for the full year.

And now over to Julie.

Thank you, Olivier. Returning to the Q3 results, I have four items to cover; revenue and profitability analysis by business segment, our income statement, the Group cash flow; and finally, the outlook for the rest of the 2013.

By way of explanation, when I refer to underlying growth rate, I am adjusting for the effects of currency translation and including the comparative impact of acquisitions and excluding disposals.

As Olivier said, Healthpoint was re-branded as Smith & Nephew in the quarter. However, I will continue to refer to Healthpoint in this presentation, and move to the new name with our year-end results.

Revenue in the quarter grew by 5% on an underlying basis. By division, advanced surgical devices grew by 3%, and wound grew by 12%. Bioventus reduced ASD segmental revenues by 1%.

The acquisition of Healthpoint increased reported Group sales growth over underlying growth by 5 percentage points. Currency impacted the Group adversely by 2% due to movements on exchange compared with the prior year.

And finally, in reported terms, the Group revenue in the quarter grew by 8%. Sales days did not have an impact on this headline performance, as sales days were the same as the comparative quarter in 2012.

And finally, if we were to exclude Healthpoint from our numbers, on an underlying basis, the Group grew by 3%, and advanced wound management at 4%, emphasizing the diversity of the growth drivers within our business.

This slide shows revenue and growth rates by division and by region. Revenue is shown in the top half, and growth rates are shown in the lower section. As Olivier mentioned, we had strong growth in emerging and international markets of 20% overall, and this part of our business is becoming increasingly important as it now comprises 13% of Group revenues.

The advanced surgical devices portfolio is a key driver of growth in emerging markets with $100 million, or 75% of sales, coming from the ASD product range. Advanced surgical devices grew by 3% worldwide, with no growth in established markets but 24% growth in emerging.

Advanced wound management grew by 12% worldwide, with the major growth driver being the US with 22% growth. Within the US specifically, there were offsetting factors. Bioactives grew by 55%, but advanced wound care and devices combined declined by 6%. There were a number of one-off items affecting this performance, but most notably, de-stocking in the quarter and a strong comparable in Q3 2012.

And finally, a word on price. Pricing pressure continues to be negative and is unchanged.

Turning to an analysis of trading profit by business segment, reported trading margin in the quarter was 21.6%, 10 basis points below the prior year margin. Last quarter, I highlighted a number of factors that are impacting our margin, and these have contributed during the quarter.

The ASD margin improved by [120 basis points] largely due to continued benefit from our structural efficiency program. The wound margin continues to be impacted by our decision to invest more in selling and marketing and R&D.

R&D as a percentage of sales in the quarter was 5.7%. Excluding Healthpoint, R&D would have been 4.9% of sales compared with 4.2% in the prior year, and this demonstrates our increased focus on innovation and our commitment to investing in R&D.

Turning to the income statement, trading profit in the quarter was $222 million, a 10% increase on an underlying basis. The lower increase in reported profits of 8% is primarily due to adverse currency movements.

Restructuring costs of $11 million were incurred during the quarter, relating to our structural efficiency program. This multi-year program is monitored on a monthly basis, and is on track to deliver benefit slightly ahead of plan.

During the quarter, we incurred an additional $9 million of acquisition and integration costs, and an increase in the amortization of acquisition intangibles of $12 million largely relating to Healthpoint. As a result, operating profit declined to $180 million.

Moving further down the income statement, our effective tax rate is 29.8%, the expected rate for the full year. Adjusted EPS in Q3 was $0.171, a 4% increase on the prior year. And the reason we see a 4% increase in EPSA but an 8% increase in reported trading profit is largely due to the decline in associate income from Bioventus.

Now turning to the detailed cash flow statement for Q3 and the year to date. Trading cash flow was $191 million in the quarter compared with $264 million in the prior year, and the main reasons are higher capital expenditure and an increase in working capital, both designed to support our growth strategy.

The increase in working capital is largely due to inventory and receivables. Inventory has increased to support our growth in emerging markets, the launch of JOURNEY BCS, and transfer of part of our wound production to China. Receivables have been impacted by the timing of Southern European government receipts. Notwithstanding this, our trading cash conversion was 86%.

Our net debt position decreased in the quarter from $281 million to $222 million, giving free cash flow of $125 million, in part (inaudible) [effect] by cash flow associated with the share buyback program. Share repurchases are exactly in line with target at $151 million year to date.

And finally, to guide your cash projections, please note that we expect cash outflows associated with the closure of our emerging market deals in quarter 4. To date, we have now closed two of the three previously announced deals.

Finally, our outlook for the rest of 2013. We see the outlook for the Group as a whole as unchanged. Exchange rates have impacted our first three quarters adversely; and if exchange rates at the end of Q3 were to be sustained for the rest of the year, we would expect reported sales and profit to be reduced by about 2% in Q4, and 2% for the full year.

In terms of full-year performance relative to market, there are two main changes in [various] segments. Healthpoint, with growth now expected to be above 40%; and trauma, where we now expect to be below the market. Our trauma performance will be adversely impacted by the strong comparable in Q4 2012 which benefited from a competitive product recall.

Finally, regarding Q4 revenue, our sales-day information is included in the appendix; and I would like to draw your attention to the fact that we will have an additional sales day in Q4 which typically adds about 1% of growth.

Our outlook for the trading margin is unchanged. We expect to be below the 2012 level that was previously highlighted and summarized on this slide.

I'll be happy to take any questions at the end. And with that, I will hand you back to Olivier.

Thank you, Julie. I'm pleased with the performance this quarter. The better results in hip implants in our established markets is evident in the Group result as new products build the momentum.

More broadly, I continue to see the evidence that implementing the priorities is delivering results. Our drive for a greater efficiency is allowing us higher levels of investment in the areas where we see the greatest opportunities for growth, while delivering our margin commitment.

I'm very encouraged that our near-term product pipelines have developed following our decision to increase the R&D spend two years ago. Our organic growth has clearly been supplemented by acquisitions. And also, as I demonstrated last quarter, our emerging international market strategy is well established. And you can see this in the consistent growth numbers we have been delivering all year.

In all, we are confident that our programs are reshaping the Group for further success.

And finally, we have today announced that Sir John Buchanan will step down as our Chairman at the AGM next year. I want to be the first to thank Sir John for his commitment to Smith & Nephew, and his [common] support and counsel to me as Chief Executive.

I'm delighted that Roberto Quarta has agreed to become our new Chairman. He joins the Board in December and succeeds Sir John next April. We are very pleased to have secured another excellent chairman.

Thank you; and this ends the formal presentation. We will now take questions.

(Operator Instructions). Lisa Clive, Sanford Bernstein.

Three questions; first your cash flow in the quarter. You mentioned some of the things that affected that, particularly inventory build. How much longer will that affect cash flows? Should we expect that to likewise be an issue in Q4 and beyond? Or are inventory levels now at about the level you need them to be at?

Second question in the trauma business. What is really holding you back from getting back to market growth rates here?

And then the third question on the US wound management side of things. What are the biggest opportunities for you to expand your business in the US? It seems an odd market where there's a very high end, negative pressure, and bioactives get a lot of traction. But then the rest of the market is gauze and tape. How can you promote traditional AWM products? And are you seeing any shift in views and use of these products?

I will take the question on wound management and trauma, and I will ask Julie to answer on the cash flow.

On wound management, you are right. There is no doubt opportunities in the US, and actually, we're trying to catch all these opportunities. The first one you have seen is the development of the bioactive market. We obviously are very involved in this. And you have seen the growth of 55% this quarter shows that we are catching every single opportunity we can in this big market.

Advanced wound cure is growing also. There is a good opportunity. I think it's -- certainly the next step for us is to capture more growth of this market. I've always said that we're slightly sub-scale, under scale on this market. Work on this, and I do expect that this will become one of the growth drivers also for the future.

And last but not least, on negative pressure field, there is still an important market for us in the US. We gain market share on a regular basis quarter after quarter, so I think that we are capturing here most of what we can capture. It's again a balance between what we want to do and the opportunities we have in front of us.

So, yes, it's a good market; and, yes, we'll be there to capture the growth of this market.

On the trauma field, it's a great question. Why are we slightly behind the market? Well, we are slightly behind the market because we have not finalized our strategic program for trauma.

We have a great portfolio. There's no doubt. We have reorganized the sales force accordingly. We have also built additional reps. We have hired more than 80 reps in trauma in the US. It takes, by the way, roughly a year to have a rep fully trained and fully operational in trauma. So it takes a while.

So those are the basics.

Now why we are slightly behind? Well, we are -- against the quarter, and I think we are on the right track, we have shown in the previous quarters that things were improving a lot. And I really believe that we are on the right [step].

Next quarter, while the comparator was very strong because we have had the Synthes recall last year, so we had a very important growth. So it will be difficult to compare, but I tell you, I'm very confident 2014 will be a good trauma year for Smith & Nephew.

So having said that, on the cash flow, Julie, you want to answer?

Okay. Thanks Lisa for the question. In terms of the components of the increase in inventory, as I mentioned, there are three major components. And I think one will resolve, and the other two are likely to continue for a while. So if we take each of them in turn.

The emerging markets, we will continue to support emerging markets with inventory. And as you've seen in the BRIC, we've had greater than 40% growth. So we will continue to support the larger emerging markets with inventory supplies to ensure we can meet requirements for tenders.

The second major reason for the increase in inventory relates to JOURNEY II and the launch, which we launched in the US at the beginning of the year and we're now rolling out across the rest of the world. So I do expect the inventory to support JOURNEY II, and in particular the instrument set, to continue towards the end of the year and into next year as we complete the rollout of the launch.

And then the final piece, which I do expect to resolve, relates to the move of some of our wound production from the UK to China. And this is clearly, as we're going through the transition, we've built stock in the UK to meet this transitional plan, and I do expect as the course of next year goes on that this will reduce over time.

So those are the major features.

Okay. Thank you.

Martin Wales, UBS.

Could you just comment on how much more money you're actually going to spend on restructuring and when you're going to spend it, given that you seem to be spending probably less than we were -- or you'd originally guided to this year?

And a second question on hips and knees, which obviously it's good to see that both segments have grown this quarter. Could you make some comments on what you're seeing in terms of pricing? Has that modified any? And some thoughts longer term on where you can take that business?

Thank you.

I'll take the restructuring one, Martin, first of all.

So in terms of our overall restructuring plan, we do see a change in the savings [spend]. However, for the full program, we do expect the program to deliver slightly more than the benefit originally anticipated of $150 million, but we do expect the costs to be over the course of the plan completely -- we expect the costs to be on track.

As you've seen, we are selling at a slightly lower rate to date, so for the full year, I would guide towards $60 million to $65 million rather than the $80 million to $90 million that we originally anticipated at the beginning of the year. But this is simply due to the phasing rather than the absolute amount.

So in terms of the total cost of the program, we said it would cost us $200 million, of which $160 million would be cash and $40 million would be non-cash. And we broadly expect that to be completely on track for the full program.

Should we expect the balance of that to be spent next year?

Well, the program will roll out in total into 2015, but the bulk of the costs I think will be borne during the course of 2014, yes.

Okay. Thanks.

On your question on hip and knee, yes, we're very happy to see -- actually, it's not a surprise. We were expecting this, and I've mentioned that during the last quarter announcement.

I think it's a combination of all different factors. I've mentioned in my presentation the fact that we had some headwinds, as you know; namely, the product cycle, the metal-on-metal adverse wind, and all these are starting to improve actually.

Metal-on-metal is decreasing. It was minus 18% this quarter, which is actually slightly less than what we have seen in the past. I can say it's almost plateauing.

And so if you exclude the metal-on-metal, the hip growth is roughly -- that market slightly lower. We have 4% growth. The market is I think at 5%. So we believe we are really on the right track. We have launched new products. Things are really going well.

On the knee business, I think that the launch of JOURNEY II BCS, the advertising we have done, DTC in the US, which seems to be excellent actually on VERILAST, has shown that it works. It has also given more morale to our people. And I think that the combination of more investment, whether it is in DTC or in medical education, more product put on the market, more [trial] within the market, I think rejuvenate sales force, all these I think is a recipe for future success.

So I'm confident that this knee growth will improve in the future, so I think it's not something which is not sustainable. It's actually sustainable and expected. So you will see, Martin, I hope in the quarters to come, a good trend in the hip and knee.

Okay. Thank you.

Michael Jungling, Morgan Stanley.

My first question is on the German market for orthopedics. In previous quarters, you mentioned that it was a very tough market, declining substantially. Can you give us an indication on what you are seeing in Germany?

Secondly, also on orthopedics on the DTC campaign, is this US campaign a one-off, or should we expect this now to be more of a permanent part of the strategy for let's say the coming years, given the success that you are seeing? And do you believe that the costs involved give you a decent commercial return?

And then the third question I have is on the capital structure. You don't really have much left in terms of a share buyback, $150 million or so. What are your thoughts going into 2014? Are you able to --? If you were to make an announcement of a share buyback of a high number, when would you expect to announce that?

As you know, the share buyback depends of many things. We have announced a very straightforward capital allocation program, so that depends of the investment we can do in M&A.

So at this stage, there is nothing to announce. We are following our buyback program as expected. We are about halfway now. And if something had to be announced, it's certainly not now that I will do it, but maybe at the announcement of Q4 early next year.

Having said that, coming back on your question on DTC, DTC, yes, we are pretty happy with the DTC campaign. The question is are we going to do others. Yes, maybe. Not now, because, again, you cannot do a permanent DTC campaign because this doesn't work this way. So you can imagine to have one/two campaigns per year. So that's something we'll certainly consider for next year and the team are working on this option for 2014.

On the German market; yes, German market, I've said for a while now the market was difficult. Actually, the market this quarter has been minus 13% in Germany, which is a significant drop again. It's more volume, actually. We have less and less recon implants. And it's a big exposure for us, Germany. We have a big operation there. So I do believe that this will remain a complex market for a while.

Okay. And then one last question, please, on 3D printing. You can see now there's a number of technologies out there which claim that they can reduce the costs of manufacturing by as much as 30%. Curious as to how far you are in terms of thinking about using 3D printing in your organization, both for production, but also for inventory management.

Well, I think that I've seen -- I knew you were going to ask this, Michael. I know you're a fan of 3D printing. We do already use 3D printing, as you know, in our VISIONAIRE cutting blocks. We also use it in some different R&D prototypes. We believe it's a very interesting technology and we look at it in every single place of the manufacturing applications.

It's not short-term stuff. It's medium term to long term. Some of the future applications like the printing patient-specific implants at hospital will happen maybe, but I think not today but maybe after tomorrow.

Having said that, VISIONAIRE is doing very well. We are very active with VISIONAIRE, actually. I just want to notice that. 20% of the knee business is now using the VISIONAIRE technology patient match; so just for your information.

So on a cost perspective, would you say that 3D printing is something that could benefit your P&L in the next two years, or is this more like a five-year type opportunity?

I think it's a long-term one, maybe two years, three years, four years; but certainly not next year.

All right. Great. Thank you.

Ingeborg Oie, Jefferies.

First one is on the strategy for bioactives in Europe, with a very good growth in the US. What --? Are you thinking to try and translate that into Europe?

Then the second question is on how you see the opportunities for acquisitions. Obviously, the prices in the public markets have gone up quite substantially. Do you still see opportunities and is it more attractive in the bolt-on sized acquisitions or larger acquisitions?

And then finally, just to tidy up on the ortho margin which was quite strong in the quarter relative to what we expected, and that's despite all the investments that you continue to make. Could you comment on where those savings were coming from particularly?

Thank you.

Okay. Let me start with the bioactives question. Yes, we're very happy with the dynamic of this business. Yes, we will develop these Smith & Nephew bioactives outside of the US. We have planned to do that, and especially when the HP802 will be launched. We believe there is a big opportunity for growth outside of the US. So this is in the plan.

Regarding opportunities for [BD], we still believe we have a number of potential opportunities in the BD field, whether they are in emerging market or in established market.

So as I've said, it's a significant part of the strategy of the Company to supplement the organic growth with acquisition, and with good acquisitions. So we are, as you can imagine, looking very seriously to every single good opportunity which can be in front of us.

On the ortho margin, yes, ortho margin situation is good because I think you have different factors here. The saving plan that I've announced two years ago now in Q3, exactly two years ago, is starting to pay off. We have less infrastructure, we have [de-duplicated] a number of positions.

And so it's just a consequence of I think good management of the expenses, and mainly the G&As. And I'm happy to see also the fact that these G&As have been cut and they have helped us to reinvest in the business while keeping a good margin.

Thanks very much.

Tom Jones, Berenberg.

I actually have three, but hopefully they're all quite quick. The first was just on your hip business in the US. Clearly, it's nice to see the global hip business bounce back, but the US was still fairly soft. So I was just wondering if you could give us an update of what's going on there and perhaps give us a bit of an update on where you might be with the 30-year wear claim for your VERILAST hip.

The second question is on your bioactives business. Again, very nice growth, but you also put through a very nice price increase earlier in the year, and so I was just wondering how the volume price dynamics play out for that product.

And the reason I ask is, obviously, the price hike will annualize out next year, so I'm just trying to get a feel for what kind of growth we should be expecting in that franchise in 2014 and 2015 and beyond, once the price increase you put through earlier this year annualizes out.

And then finally just on the advanced wound care business, the standard dressing business, maybe if you could just expand a little bit more on what's going on in that market. It's still pretty stagnant by the looks of it and growth is pretty slow. What, if anything, can you do to reinvigorate that, and when could we expect that?

Okay. Thank you, Tom. Let me start with the bioactives.

Yes, I think that you're right to say that we have had a price increase. This is true. It was a significant price increase. We don't disclose for commercial reasons this price increase, but it is a significant price increase.

Having said that, what we see, we see pretty good volume, actually, and a pretty good recovery of volume. And so we are extremely confident that it was the right thing to do for us. If this would have not been the case, I think that the situation today in bioactives would be very different.

So I think we have a great execution. We see our teams are working in the field every day, and the volume is doing okay. So there is no issue here. So it's a good mix between a price increase and a volume growth.

On the advanced wound care, yes, I think I've answered part of the question. I do believe that actually it's the best growth we have ever had for a while in advanced wound care. ALLEVYN in Europe is doing very well. We have a range of products that we are planning to launch.

Again, I think it's not new, but I do believe, and I say that very clearly that there is still opportunities in the US that we do not capture, and I'm expecting this to happen as soon as we can.

There is an opportunity. It's a good market. We have a very good portfolio there, so there is no reason why -- actually, we are growing better than the market. But there's no reason why we could not accelerate the growth in advanced wound care and serve on this potential market.

Has the worst of the price pressure in that market -- we saw some pretty significant pressure on silver pricing and some other standard dressings -- has that started to level out a bit, or is it still fairly significant in that part of the wound market?

It's significant, but nothing worse than what we have seen so far.

Sure. And then on the US hip business?

Yes. In the hip business, so in the US, we still have a negative. We estimate the market in the US with the hip at about 5%. We are minus at 3% dynamic, so it's not perfect, but it's better than minus 6% -- about a minus 8%, 5%, 6% that we have had in the previous quarters. So we believe that our launches are starting to pay off. I'm pretty optimistic with the hip business in the US.

BHR is still important in the US, so that's why also you see this dynamic. But I think that once we see this plateauing of BHR, the launch of new products in hip, and REDAPT is doing very well, so I'm very optimistic with the hip business in the US.

And anything you can say on the 30-year VERILAST [plan]?

What do you mean, on hip?

Yes.

No. I will tell you as soon as I know, but for the moment, I cannot tell you.

Okay, fair enough.

Ed Ridley-Day, BofA Merrill Lynch.

Firstly, could you give us an update on the Chinese business? Good to see overall emerging market numbers doing well. Have you seen any impact at all from the wider Chinese investigations into distribution in the healthcare and drug industries? Have they had any impact? And if you could also comment on Chinese pricing. That would be my first question.

And secondly, on the negative pressure business, the wound device business, could you give a little bit more color on the competition you're seeing there? That would be helpful.

Thank you.

Okay. let me start with the negative pressure. Actually, we have in the negative pressure still a big price fight. The competition is playing some games in price. As you know, this is not changing. We do not see any type of change. We do not foresee any type of change.

Having said that, it's still a very interesting business for us where we gain market share. I think the portfolio we have is great, and every time we go somewhere, we realize that quickly we get market share.

Japanese launch is doing very well now; it's almost a year. We capture share. It's a market which is in full development. We have launched negative pressure in China recently, and so far so good. So I really believe there is a lot of opportunity in this market.

And it's a growing market for us, so it's important that we do better than the market and we grow, and I think that we are going to grow in the future pretty significantly.

On the Chinese business what can I tell you? We are very happy with what is happening in China, as you can imagine. We grew 40% in China. So, no, we have not been [beaten] by the issues that some companies have faced during the past quarters.

Obviously, we are extremely careful. Obviously, [medical] compliance is our main priority there. Obviously, we check on a regular basis what's going on, whether internally or with external advisors. We believe we have a good business there, safe business, solid business and a great management team. So I'm confident to say this growth should be sustainable.

You never know, again, but I think it's really we do everything we can to make it as safe as possible.

Thank you very much.

David Adlington, JPMorgan.

Firstly, just wondered if you could give us your US growth, excluding Healthpoint, if possible.

And then just a follow-up on Regranex. Obviously, you've launched now. Just wondered if you could give an idea of what your expectations are for that, please.

Okay, Julie, you want to take the --?

So if we exclude Healthpoint in terms of the US picture, splitting out -- if we take devices and wound care together, then we're looking at a decline of 6% in the US market in the quarter.

Was your question directed towards wounds, since you were excluding Healthpoint?

Yes. But also overall, I think you did plus 5% for the US business overall. So just wondered if you had an overall US number ex --

Yes. So in terms of advanced surgical devices, it was flat in the US.

Great. Thank you.

Veronika Dubajova, Goldman Sachs.

I have three questions. The first one is, Julie, I don't know if you could clarify, but the growth outside of the developed world, what was that excluding the acquisitions that you've made? I'm sure they haven't moved the needle a lot, but it would be good to get that number and then relate it to that as you look into 2014 all the deals that you have completed to date and you expect to close in the fourth quarter. If you could give us a sense for the revenue benefit from those heading into 2014, that would be great.

My second question is on the market dynamics in the US. Clearly, the market has picked up in the recent quarter. I don't know if you have any views on what's driven that. And as you think about medium term on a three to five-year view, what do you think is a sustainable type of a growth outlook, the volume end value for the US hips and knees.

And my last question is on trauma, and I hate to be the one to bring this up, but you've been restructuring this business for a while with limited success to date, and I know that there's been a number of changes in strategy over the past five years here. But are you sure that this is a business that needs to fit in your portfolio? Or might you be open to reconsidering whether trauma belongs into ASD and into Smith & Nephew?

Thank you

Thank you, Veronika. Surprised by your last question. I think that I've been pretty clear for a while on the value of the trauma business for us. I believe it's a great business. I believe we have built a tremendous portfolio, and I believe we have the right strategy.

And I also see that after having had some issues two years ago, a year ago, actually, we're on the right track; we have a positive trend. And I tell you I think that we do everything we need to do to make this business a great business.

Regarding the growth of the emerging market, international market, yes, it excludes actually what I've announced; excludes any type of acquisitions or -- so the 20% is the figure without any type of acquisition.

And I'm afraid I cannot give you any more guidelines for next year on the value of the acquisitions we have done. We will give you that at the right moment.

Fantastic. Thank you.

And on the market dynamic, Veronika, you're right. US has been a good market. Is it sustainable? I don't think so. I think that will be always around 1%/2%. It's 5% for the market of the knee -- or the hip this quarter. Knee is also 5%.

It's true that it's certainly the best quarter we have had for a while, there's no doubt. It is sustainable? I don't see any green light there. I don't see why it's changing positively to give us the view that this will remain at this level or that it will be even better. I don't think so.

So I've always been pretty pessimistic on the potential of the growth. Again, every quarter which is better than the other one, we try to extrapolate; I don't. I wish I could, but I think that we'll remain in a difficult market with some ups and downs, and this is an up, for sure.

But I think that's what I can tell you, Veronika. Nothing wrong, nothing new and nothing exceptional.

No, that's very clear, Olivier. Do you have any thoughts on what's driven the uptick in the past couple of quarters? Is this the pent-up demand that we missed, or that the industry missed in 2008 and 2009 and 2010 coming back? Or do you think there's something else driving this tick-up in volume growth?

I don't know. I think it's maybe some recovery of some things that have not been done before, because the crisis is maybe a bit behind and people are willing to spend more on their health. I don't know.

But there is a number of explanation, as you know, and I'm sure you have seen and read all this. But I don't see a real rational explanation of why this happens and why this could be here for a while.

Terrific. Thank you very much.

Thank you, Veronika.

[Jason Waite], Brean Capital.

First, maybe a follow-up on trauma. Specifically, I know that you have a pretty rich portfolio, but strip out some of the dislocation with Synthes and J&J, it seems like the market for trauma is starting to reward players with a full-service approach in terms of their portfolio.

If you look at your portfolio, do you see holes in terms of some of your offerings that you need to fill to help that growth?

I think it's -- again, for us, trauma is trauma and extremities, as you know. So we are developing both, actually; the trauma portfolio and the extremities portfolio. We like it. I think there is the -- there's not much I can tell you except that we all believe, all the team and myself, that we don't need much more to be a strong player. So that's what I can tell you. Sorry not to be able to give you more details on that.

Understood, but just maybe a quick follow-up on that. If you -- can you just give us a little more detail on how you're breaking out your trauma and extremities sales force and I guess the feeling -- with the understanding that I assume that you have a full portfolio to support that specialization?

Extremities for us has become an increased focus. It's mainly in the US, by the way; and mostly, as you maybe know, in the foot and ankle field. So it's just small, though we don't have a specific sales force to do that. Maybe it will come. So there's not much I can tell you.

We have -- the sales force we have now, to be very clear, is a sales force which is a kind of hybrid sale force. We have sales force promoting trauma and recon. We have a specific, dedicated trauma sales force also. And what I can tell you, the 80 reps we have hired are purely dedicated to trauma, and among these reps the gross is very high, and much higher than what we have in average.

What I think has happened this quarter is the fact that we have been with the sales force, hybrid sales force, let's say, promoting the recon and the trauma; pretty busy in talking about the JOURNEY II BCS, the new launches. And it's certainly one of the reasons why among this hybrid sales force the dynamic has not been as good as within the fully-dedicated sales force.

So I hope I give you some (multiple speakers).

I think that's helpful. And just one follow-up. You were asked about trauma and its strategic value to Smith & Nephew, which I think you made very clear. For hips and knees, frankly, you have pretty consistently been negative on that market. Is that still going to be core to Smith & Nephew in the long term? Or how do you think about that?

No, it will be core. Again, it's a core business for us, and I've never said that I didn't believe that this was an important market. I've been pretty cautious in the fact that I believe it's a market which is a difficult market because of the price erosion, because of the limited innovation capability of the industry.

And so I still believe it's a great market. The volume is here. There is a price erosion for sure, but there is no issues. What I'm saying for right now is that for us, Smith & Nephew, we want to focus the R&D and our job on what could make a difference, what can make a difference.

I believe that JOURNEY II BCS makes a difference. It's great kinematics knees. I believe VISIONAIRE makes a difference. And so we try to -- not to invent [me-toos]. We try to go on specifics that can really bring value to the patients and obviously to the surgeons.

Okay, great. Thank you very much. Appreciate it.

As there are no further questions, I would now like to hand the call back over to your host for today for any additional or closing remarks.

Okay, ladies and gentlemen. So thanks a lot for your questions, and I think it's time now to close the call. Have a great day, or a great afternoon in Europe.

Thank you. Bye-bye.

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