Smith & Nephew PLC (SNN) 2014 Q2 法說會逐字稿

Good morning, everyone. I'm Olivier Bohuon. I'm here with Julie Brown, our Chief Financial Officer, and welcome to our second-quarter presentation.

I will cover the highlights and then hand over to Julie to take you through the numbers. We will then come back to the strategy. Stay tuned, it will be a long presentation. I'm going to spend a little more than usual. We have some interesting things to share with you. And, as usual, we'll take questions at the end of the presentation.

So we delivered underlying revenue growth of 3% this quarter after adjusting for currency and ArthroCare. This represents important growth of 7%. We also had one less sell day, reducing growth by just over 1%.

Our strong performance this quarter reflects the successful execution of our strategy. Our investments in emerging markets has delivered 17% increase in revenue and we drove good growth in bioactives and sports medicine joint repair.

In orthopedic reconstruction we saw an improved performance in both US knee and hips. These good global dynamics were especially offset by our performance in wound.

We also concluded the ArthroCare acquisition in the period. I am very confident in our ability to deliver. I'm very excited by the many prospects for our enlarged sports medicine business.

The trading profits was $255 million, giving a trading profit margin of 22.3%; an improvement of 70 basis points over the last year.

We achieved EPSA growth of 13%, reflecting the positive operational performance, the addition of ArthroCare and the result of a lower tax rate.

Today we also announce an interim dividend of $0.11, in line with our formula and [representing] a 6% growth.

I will spend some time on our strategy later in the presentation. It is three years now since we've announced here the strategic priorities. In that period we have been successfully rebalancing our business towards higher growth areas and today we share some exciting new initiatives as we seek to drive greater growth, like providing solutions for the unmet needs of our customers and our patients.

This slide captures our underlying growth in the quarter. On the left-hand side geographically; on the right by product franchise. One month of ArthroCare trading is included in this revenue and to represents $31 million.

In the US, revenue growth was up 4%, driven by our ASD franchise and by bioactives. In the other established market, sales decline by 3%, primarily due to a weak quarter in Europe. Emerging and international market grew by 17%, and we were very pleased with this performance across a majority of countries.

China continued its very strong growth trend, the Middle East benefited from a large trauma shipment, India performed very well and we are encouraged by the performance in Turkey. (Inaudible) remained weak, we expect stabilization of our business in Brazil to deliver a better second half.

Our other ASD segment now includes our ENT business, together with gynecology, and their combined underlying growth rate this quarter was 18%.

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

Our global reconstruction implant revenue was up 3%, which we estimated at the market growth rate. The market itself remains stable, showing a slight improvement over Q1.

We performed very well in the US where we outperformed the market in hips and in knees. We see strong traction in uptake of JOURNEY II. I remind you that this is a new platform which will drive growth for future quarters and the full global (inaudible) continues.

In US hips we delivered a 3% growth helped by a successful marketing campaign, which was started in March last year, actually March this year, and easing a headwind from BHR.

US remained challenging for us. As I said last quarter, we have reinforced the management team and moved to a single country general manager structure. This, combined with improving our IT and business intelligence platforms, means I am very confident that we will see the benefits of all these actions in the next quarters.

Turning to sports medicine, joint repair and enabling technologies, both of which include one month of ArthroCare sales, ArthroCare contribution was in line with our expectation.

Joint repair performed very well, growing at 9% in the quarter, we continue to see an excellent response to our new (inaudible) and (inaudible).

Enabling technologies, we have included the (inaudible) Coblation technology from ArthroCare.

Our trauma & extremities (inaudible) grew by 7% and we benefited from a tender win in the Middle East, as I mentioned earlier.

Looking at 2014 we had a strong pipeline of new product launches in all of these franchises, which includes extremity products, HAT-TRICK Lesser Toe, shown on the slide, and some extension to our futuristic ankle range.

Going now to advanced wound management, which was flat in the quarter, this, compared to the market, we grew up 2%.

Advanced wound care revenues were down 8%, due to a number of inter-related factors.

This includes some further destocking in our wholesale channel, as I guided to last quarter, as well as our own execution. This is weaker than I would like and it has been addressed strongly by reinforced management team, greater resources on profits of some products like PICO and ALLEVYN Life and developing a (inaudible) [line] within wound care, devices and bioactives.

Advanced wound devices grew at 1%. In negative pressure PICO rose particularly very strongly, although the patient-led negative pressure market remains difficult.

You have seen our RENASYS press release from June 23. We suspended the commercial distribution of our traditional negative pressure range in the US following receipt of a warning letter from the MDA.

We are working hard to return the product back to market, but this will impact the advanced wound devices growth for the rest of the year and Julie will cover the (inaudible) [back] letter in her presentation.

In advanced wound bioactives, we grew at 21% and I'm pleased we've improved on the trends of (inaudible).

The quarter also benefited from pull-forward sales ahead of an inflation-linked price increase. As we do not expect to see this type of volume growth during Q3 and we remain extremely confident in the guidance we gave, which is mid-teen growth for the full year.

So now I'm going to hand over to Julie to take you through the figures.

Thank you, Olivier, and good morning, ladies and gentlemen. So turning to the Q2 results, I will focus on four items. First, revenue and profitability analysis by business segment; secondly income statement; third cash flow and capital allocations; and fourth, the outlook for the second half of 2014.

My first agenda item is an analysis of revenue growth by business segment. But first to comment on the acquisition of ArthroCare. The results I'll run through today include one month of trading from ArthroCare and, to give you an idea of the scale, sales in the first month were $31 million.

Overall, Group revenue in the quarter grew by 3% on an underlying basis. And underlying growth rates have been adjusted to give a like-for-like year-on-year performance.

By division, advanced surgical devices grew by 4% and wound management was flat compared with the same quarter in the prior year.

Acquisitions added 3% to our growth rate. This includes the acquisitions in Brazil, India and Turkey and the recently-completed ArthroCare deal.

Currency impacted the growth favorably by 1% and in reported terms Group revenue growth in the quarter was 7%.

Finally, there were 63 days this quarter compared with 64 days in the same quarter last year and we estimate that if it had been the same number of days, our growth rate in the quarter would have been a little over 1 percentage point higher.

This slide shows the underlying revenue growth by geography and by business segment. Revenue is shown in the top half and the growth rate is shown in the lower section.

Turning to the bar chart in the lower section, ASD growth worldwide was 4% and notable was ASD growth in the US, driven by our recon business and sports medicine.

In emerging markets our ASD products grew by 19%, driven by China and the Middle East.

Looking at the right-hand side of the chart, our wound sales were flat in this quarter and there are a number of factors to consider here.

First, the US business delivered a strong performance with 7% growth, led by bioactives. Second, our other established markets were weak, with a decline of 8%. Destocking impacted this, partly as we chose to exercise more discipline on price and credit terms with our wholesalers. And third, emerging market growth was strong with wound performance at 13% growth.

Turning to profitability by business segment, the Q2 Group margin of 22.3% represents an increase of 70 basis points compared to last year. Our efficiency program has now delivered annualized benefits of almost $140 million.

The ASD margin was 23.7%; an 80 basis point increase compared with 2013. And while advanced wound management has a margin of 18.8%, an increase of 10 basis points.

Now to my second agenda item, the Group income statement.

Trading profit in the quarter was $255 million; a 6% increase on an underlying basis, driven by strong cost control. We had the same adjusting items as in previous quarters with one exception.

So taking each in turn. Restructuring costs. These relate to our Group optimization and efficiency programs.

Acquisition and integration-related costs and the amortization of acquisition intangibles has increased, following the acquisition of ArthroCare.

In legal and other there is a new item this quarter; a provision related to our RENASYS product in the US of $25 million. As you know, the commercial distribution in the US is now on hold and we've recorded a one-off charge to cover the expected costs of warranties and other contractual claims.

At the half year, our legal and other items is a positive $10 million as a result of the pension credit we received in the first quarter.

Finally, a reminder that, as per the last quarter, a full bridge of our adjusting items is shown in note 8 to our accounts.

Moving down the income statement, our expected tax rate for the full year has reduced to 28.0%. This represents approximately a 200 basis point reduction since 2012 and I will come back to tax in our outlook section.

EPSA has increased 13% in Q2 and this reflects underlying profit growth of 6% combined with the acquisition of ArthroCare, favorable currency movements, a reduced average share count and our lower tax rate.

I will now turn to my third agenda item, which is the free cash flow.

In the quarter, we generated trading cash of $179 million compared to $187 million in the same quarter last year.

Trading cash conversion was 70% higher than Q1 and, building on the comments we made at Q1, we are in an investment cycle and we've taken direct management action to continue to build inventory in support of our new launches.

We're building safety stock ahead of the Hull move to China and we're also supporting our growth and tender business in the emerging markets.

For the full year, we expect cash conversion to be slightly higher than the 70% you've seen this quarter.

Now an update on the cash flow and capital allocation for the half year.

We started the year with net debt of $253 million and we generated free cash of $233 million before capital expenditure. CapEx was $161 million in the first half, or 7% of sales. And the 2013 final dividend of $152 million was paid in May.

The most significant item for the half year was the $1.6 billion of net cash for acquisitions and this was predominantly ArthroCare.

We also spent $30 million on share repurchases during the period and this relates to our commitment to repurchase an equivalent number of shares to those issued under employee share schemes.

So at the end of June we closed with net debt of $1.9 billion and this represents reported net debt-to-EBITDA ratio of around 1.4 times. Given our debt structure, we now expect our interest rate to be around 3%, which is lower than previously guided.

Finally, our outlook for the remainder of 2014.

Our previous guidance for the full year remains unchanged, except for the impact of the distribution hold on RENASYS in the US.

This, together with other factors mentioned in the presentation, means that our wound performance for the full year is expected to be below market. For your models at this stage, it would be prudent to assume that it will take at least until the end of the year to resolve the situation in the US.

We expect a revenue impact for the second half of $30 million, with approximately 80% dropping through to trading profit.

Regarding trading margin, we're maintaining guidance; that we expect to be ahead of the prior year. We're working to offset the impact of the distribution hold through actions with US advanced wound management and our cost-savings program.

We have updated our tax guidance for the year. We're now expecting an effective rate of 28% for the full year and also, as a result of a number of operational and structural changes to our business, partly in response to the ArthroCare acquisition, we expect the effective tax rate to reduce by a further 150 to 200 basis points over the next two years, absent any changes to tax legislation.

To help you with the modeling of ArthroCare, we achieved monthly sales of $31 million during the first month and this is a good indication of the run rate for the rest of the year.

Moving on to considerations for your Q3 models, exchange rates are expected to be slightly positive in Q3 and neutral overall for the full year, assuming the rate prevalence at the end of the quarter continues.

In terms of cost phasing between Q3 and Q4, the cost of our HP802 trials will peak in the third quarter and this, together with the impact of US RENASYS, will weaken wound margins in Q3. We then expect to see a strong recovery in Q4 due to the seasonally higher revenues and our efficiency programs.

Finally, for your reference, we have summarized technical guidance on slide 36 in the appendix of this presentation. And, with that, I would like to hand back to Olivier.

Thank you, Julie. So three years ago we started a journey to make Smith & Nephew a different company, to become more fit and more effective. And I would like to highlight today the progress we have made by driving our strategic priorities.

So three things. Firstly, I will show how we are rebalancing the Company towards having a greater proportion of revenue from higher growth opportunities.

Secondly, I will show an example of the strategic priorities in motion, in action, by showing how we are focusing our resources in the reconstruction market to address unmet needs of customers. And this will cover new technologies and, importantly, a new commercial solution to meet the different needs of an expanding type of customer.

And, finally, I will update you on ArthroCare.

So you know the five priorities that drive our decision making and you are all aware of the actions we have taken over the last three years, from combining orthopedics and endoscopy to reintegrating our R&D programs, from major efficiencies in operational programs to significant acquisitions. I won't address the point.

An important result of this is the continued rebalancing of our growth towards areas of higher growth and let me put some numbers around these.

We often classify different parts of the Company as having the potential to grow revenue at different rates, depending on underlying market dynamics, geographic areas or a particular position that we can have.

In 2011 only 35% of the growth of the Company was operating in higher growth. Including the acquisition of ArthroCare, the performance proportion for H1 2014 is now 50% in higher growth; a clear indication that our strategy is working.

Where are we going on this journey to rebalance Smith & Nephew? Well, what I would like this ratio to be, I see at the next level as moving to two-thirds high growth and one-third low growth.

As an example of how our priorities are working in action, I want to show how we are focusing our resources in reconstruction. First let me be clear. We like to be in recon. I know that sometimes people believe we don't like. I like to be in recon and we have a robust strategy to maximize growth and value.

We believe we have sufficient skills to be successful and get great returns and good cash flow. And also it anchors our fast-growing emerging market business. We are also realistic and, to put it in perspective, it represents less than one-third of our revenues and less of our growth.

The recon market itself is complex and rapidly maturing in the developed market, with important customer needs, better outcome for patients, great access and lower cost.

There are also the geographic drivers. Emerging markets is a multi-tier established market with increasing proportion of admin payer rather than surgeon-led accounts.

We believe the global recon market will continue to grow in the low-single-digit percentages. It's something I said when I arrived three years ago, and which is now recognized by your peers, but there are still pockets within this market of very attractive growth.

We believe that being successful in recon is about making the right choices, identifying and investing in the faster growing areas of reconstruction. We identified them internally three years ago and I've addressed our R&D efforts and resources toward them.

Let me give you some examples. Under greater access we were early into the emerging market and now we are early focusing on the mid-tier within this emerging market.

In terms of better outcomes, patient satisfaction in knees is far lower than hips and our investment in JOURNEY II to address this unmet need. The advanced instrumentation to assist the surgeon, we led the way with VISIONAIRE, and we continue to develop and search for new technologies and techniques.

In knee implant platforms you are aware of our unique JOURNEY II knee and REDAPT hip revision systems, both launched in the last 18 months and both systems will be extended in the coming years.

We are now also combining VISIONAIRE, our patient-specific cutting blocks, with other disposable instruments. This reduced the estimated number of trays in the OR from eight to three, streamlining the procedure and obviously reducing costs, such as sterilization.

OXINIUM is another of our unique innovations. We have just received FDA approval to commence clinical trials on OXINIUM-on-OXINIUM hip implants. This is after successfully completing a two-year patient trial in another country. The benefits of a product which provides a robust (inaudible) surface are obvious. At the peak we think that 30% of hip implants will be (inaudible) on (inaudible).

Finally, we continue to seek out new proven technologies to support the surgeon. Sponsorship offers an efficient route. We solved the risk of an early stage development. This year we partnered with OrthoSensor to offer a soft tissue balancing sensor in the knee. And we've rebuilt the technology to allow our new knee to be implanted with a robotic assistant.

So the [strengthened] plan of exciting new technologies is only one area of our innovation and I would like to take you through what we call the commercial innovation, which is as important as the technical innovation.

So the traditional model for recon bundled all the elements of this service, implant, implementation, technical support, significant capital investment and logistics, into a single charge for the implant itself.

Given the pressure to reduce healthcare costs, we believe that it is now the right time to start offering an alternative solution; one with clinically proven products, better use of technology and proper support, offering customers different operating and financial models; one which generates attractive economics for the patient, for the payer and for the provider.

We have called our solution Syncera, powered by Smith & Nephew. Syncera offers three main elements. One, a clinically proven leading product from our current range; two, cutting-edge technology, which streamlines the supply chain and logistics operation; and three, technical support in the ORs with training and technology rather than a technician in the OR.

The natural place to launch this alternative solution is in the US and so let's look at the first element.

It will come as little surprise to you that the needs of the vast majority of patients are met by core primary hip and knee ranges. Under Syncera we're offering a reduced range of implants; our best-selling GENESIS II knee and our most common hip combination of a SYNERGY stem and a REFLECTION cup. And we believe that these two products are suitable for over 80% of procedures in the US.

Technology and the efficiencies it brings is a significant part of the solution. Those of you who have seen the procedure and talked with the (inaudible) specialists will realize the huge logistical complexity involved in hip and knee procedures. With Syncera this has all been streamlined from the OR through to automatic replenishment of products through a connected supply chain system.

Clearly, appropriate training and support are vital for surgeons and the OR staff. As that is where has been the traditional method of providing this for the last 20 years, I'm sure this will remain the preference for the majority of surgeons and it's extremely important in the most difficult cases.

However, our feedback from surgeons and SK providers firmly conclude that this is not the only way to provide adequate support. With Syncera we'll provide training at our state-of-the-art Memphis facility or on site, as well as a clinical clinician team.

And finally, there will be ongoing point of care support in the OR, all (inaudible) through technology.

Attractive economics. For the healthcare provider the cost savings are obvious, particularly by streamlining the supply chain, making it much more efficient.

The healthcare provider will enter into a multiyear contract. They purchase the instrument set and they also own the implant inventory they hold. This combination of technology and commercial model will allow the implant to be offered at a substantial discount to the US average price, which is now $5,500.

To illustrate the saving, I think that's a good way to show it, if you take a hospital that does 700 implants a year, over the three-year contract this hospital will enjoy a net cash flow benefit of well over $4 million.

So why is it attractive for Smith & Nephew? Well, we believe that this market represents at least 5% to 10% of the US accounts. Syncera allows us to provide a new group of customers, they are not existing customers we have, offering them a solution for their unmet needs.

Economically our sales and marketing costs are reduced, as is our working capital and fixed assets. Our logistics are made much more efficient through the use of technology and reduced implant (inaudible), which will support 80% of the primary procedures.

So let me be clear, this will not replace the existing business. As you have seen, we have a number of technologies in a number of niches and we believe strongly in the disruptive innovation. But there is a space for this one, which is a new set of customers, again 5% to 10% of the market and this is, what I believe, a great combination.

Economically you have seen it. So there is, I believe, still a space for the existing business. There will be still space for the commercial people, the reps. Again, it's not to replace one model by another one; it's just to have a combination of both offers to basically answer the needs of the customers.

We've been working on this project for over 18 months, understanding the customer needs, the technology required to deliver this efficiently and I'm extremely encouraged by the response. Healthcare professionals are clearly excited with this solution. We are finalizing a contract with a cross-section of new US customers and we'll start supplying the product very shortly.

This is a very exciting development and I look forward to updating you in the coming quarters.

Finally, I will talk about how we're expanding the organic growth through acquisition and this slide sets out the transactions we have announced since I arrived.

We have done 13 deals here for a total consideration of $2.8 billion. Virtually all these transactions are tracking at or ahead of our plans. The scale varies but you can clearly see our strategic intent. We have built a proven track record of delivering value through acquisitions.

So let me, talking about acquisitions, take you through ArthroCare, which has been completed at the end of May.

I've set out here on the left a reminder of the strategic rationale for the acquisition. It has only been two months but everything is on track and I believe we'll deliver strongly against all of these. I'm very impressed by the quality of the ArthroCare people and also pleased that many are taking up larger roles at Smith & Nephew.

To provide you with additional insight into ArthroCare and the sports medicine market, we'll be holding a Capital Markets event here in London in early November and I hope that you'll be able to attend.

So to conclude, this was a good quarter. I'm very pleased with the sales performance, notably across recon, trauma, sports medicine, bioactive and emerging market. I'm also pleased with our profit and growth. Even our tax rate has improved. Everything is right. I'm excited about the many opportunities we see at ArthroCare.

Of course, as those of you know me, I am not totally satisfied, as ever. Not everything was perfect in the quarter, for sure, and there are areas where I'm looking for a significant improvement.

Taking a step back in thinking of the third anniversary of the priorities, I see many things to be proud of; the successful rebalancing of the business and we are a (inaudible) Company.

So thank you very much for attending. We are now happy to answer any question.

Michael Jungling, Morgan Stanley. I've three questions. Firstly on the M&A side. Olivier, I think you mentioned recently in the press that (technical difficulty) [before] Smith & Nephew can go on and so there's no need for M&A. Is it -- are you categorically against M&A? Or is there a price where you would say absolutely would make sense for Smith & Nephew to be in the ownership of someone else?

And point number two, question number two, is on the cost savings of $120 million that were previously announced but have been re-emphasized. Have you decided how much of that will go to margins, compared to the past? That would be useful.

And thirdly, on the tax rate. Can you highlight what you are doing to reduce the tax rate? And whether there is actually incremental scope to be more than one or two points of incremental tax rate benefits?

I will leave the tax to Julie. On the first question, about M&A. Look, to be very clear. M&A, we like M&A. I don't say that we don't like M&A. You have seen we like M&A. We like to be in a position to acquire good growing businesses for Smith & Nephew.

My comment on M&A usually is that what I don't like in the M&A is the defensive M&A. This is not something we have been looking at and we are always try to -- and that's why, if you remember, I've mentioned biomass many times. Think it makes sense for us to be with biomass? No, it doesn't.

I'm not looking for any defensive deal here. We want aggressive deals, helping us to grow better.

And now all this inversion, all this noise around M&A, US companies acquiring European companies. Okay, this is what it is. I tell you, I'm not at all in this stuff. We are focused on making this business better. This is not my job, nor the job of the Company to make plans of what could happen and so on. So for the moment is not [instruction] for us, I tell you.

So we have a Board, we have an independent Board, that supports [matters]. For us, our job is to make this Company better and more effective. But again, things can happen. You never know.

Could you see a potential benefit for your orthopedics recon business to be owned by someone else and actually benefiting your shareholders, the current Smith & Nephew shareholders?

Recon, and maybe I was not very clear on what I've shown, but I see the recon business is (inaudible) [important].

First of all, 85% of the growth in the emerging market for Smith & Nephew is coming from this business. So it is the anchor of the growth of the emerging market. There's no doubt. And we have a great portfolio for that, plus what we do now for the [mid-year].

Second, we have all of these opportunities within the reconstruction to have a significant good growth. And you have seen the JOURNEY II dynamic is starting to -- despite many questions that we have had in Q1 about: Are you able (inaudible) to make something? Yes, we are.

Again, it takes time. It's a business which is not moving like this, quickly. It takes some time.

I think now we have found the right product. We have a great development of the JOURNEY II follow up, great development of the VISIONAIRE technology, these new instruments, disposable instruments.

And there's a number of things here that we are very proud of and I'm very confident. So I don't think that putting this business within other hands will be better. I don't think so.

Because again, when you -- and that's what I said about biomass and [doing a good] defensive deal because I don't believe that one plus one equals two. In terms of R&D, in terms of new product, I think that 1.1 will give me 1.3, one plus one, because what is happening? Usually you have a [shrink of] just to safeguard. And that is not the point for us.

So I don't think it will be [much better]. I think we have the tools to make this business a good business.

And again, as I said, it's important for our cash, it's important in terms of emerging market and we believe it could be also a (inaudible) [gross] (inaudible).

On tax?

I'll take tax and come back to margin. So in terms of tax, as you know, Michael, Smith & Nephew's tax rate has been 30% actually for the last four years. And the decisions that have driven that are obviously historical about where we've placed IP, manufacturing, strategic market and commercial execution.

So what we're doing is we -- tax is one of the considerations we're using now when we sight new assets or high-growth assets. But always we follow the economic realities of where the business is doing the activity.

So essentially what we've done, is we've looked at those value drivers and looked to improve the tax rate, as I mentioned to you I would when I joined Smith & Nephew.

So we've delivered a 200 basis point reduction in two years. And I see it as being 150 to 200 basis points over next two years. If you say: Are you happy with that? No. I would like it to be more. But, clearly, I will always work with the business and follow the economic realities of what we do.

In terms of how we're doing it, it's all based -- obviously, we've had the acquisition of ArthroCare. We've got some major assets in the portfolio, as you've seen. Olivier's talked about Syncera. We've got HP802. We've got a number of big assets in the portfolio and we're ensuring that they're sighted effectively.

But the pattern is that you'll be going towards a lower tax (inaudible). Is that what you are suggesting? Or --?

Only if it's consistent with the way we run the business and the way we want to run the business, in terms of where those activities are placed, yes.

And we'll also have the benefit of a more favorable change in UK tax legislation as well, of course, we're a UK-based company, in terms of the underlying rate now will be down to 20% and we've got the patent [box]. So there's a number of favorable things in terms of legislation as well.

I remember your question about what the hell is happening with the money you save? We don't see the return on this, which was a great question, actually. I think you're expecting a lot on this. (laughter)

Actually, we have said, you remember, we had a plan which was supposed to save $150 million. We have now reached $140 million of savings out of this first plan. And the savings have been used in three ways. A, more R&D. As you have seen, it went from 3.4% R&D on sales to something like 5.6%. I think it's still 4% (inaudible). So we have invested much more in R&D.

We've invested in the emerging markets, as you know. And we have invested also in some specific fields. Healthpoint was one of them, adding the number of [threads] (inaudible).

So this money has been and I remember you said: Well, the $120 million you announced in Q1, are we going to see that through the margin or are you going to invest again without showing us a good return?

We plan to show you that in detail, actually it's a bridge of the margin, in Q4. And we are going to give you also in Q4, and here we do not choose to do, a guidance for the margin on a medium-term basis. So you will see where the money goes. And if you want some highlights of this, a significant part of this will go in the margin. So this is what I can tell you now, but we will do that in Q4.

We'll bridge actually from 2011 to 2014 what has been done on the margin and how we think [they are moving]. Because, if you look at the margin we had in 2011, I think it was at 21.8%, the margin today would be 25% in H1. We have done all this investment.

So you will see how we bridge that and Julie will show that to you in detail. And then you'll see how the return of this investment will happen and what the consequence of this on the margin, [$120 million] of savings and what where we'll use it. So that will be disclosed in Q4.

So to be clear, the $120 million savings will be more of a cost-savings exercise going to margins than the previous $150 million?

No doubt, even if we keep the right to -- if we believe that there is an investment to do to take some of this money for doing that (inaudible). We are never driven by the margin itself, I have said many times. But it's not something which is (inaudible).

Veronika, Goldman Sachs. I had three questions as well. The first one's, Olivier, on your goal to have two-thirds of the business from the higher growth areas. Could you help us understand what the timeframe is for that? And how are you thinking about that from an organic versus acquisition perspective? So do you need to do another couple of deals to get there? Or can you do that organically?

No, (inaudible) make any (inaudible). I can answer the question. We plans, obviously, if we opportunities to buy other high-growth businesses to do that. But mechanically, the transformation of this organic business that we have now plus the acquisition of Healthpoint and ArthroCare, which are going to be both in high growth segments, will drive us to this.

And what's the timeframe for that?

I don't tell you, (inaudible) be sure.

Okay. The second --

It's better to be sure. It's good this way.

The second question is on the SANTYL price increase and Julie, I'm wondering if you can help quantify what the increase is heading into [Q3]. And as you think about the growth that you saw in Q2, what proportion of that you think was a pull forward, just so that we can think about how it would trend for the rest of the year.

And my last question is, are you seeing any signs of benefit to your business from the Zimmer Biomet transaction in terms of disruption in the sales channel?

On Zimmer Biomet, we have not seen yet a lot of disruption but I think that we start to see people leaving. We see that. Some disruption in distributors in the US, wondering when it was going to happen. So we don't see that in our figures but I think there will be an impact, as we mentioned in Q1, with no doubt.

So until, I think as Olivier mentioned, the SANTYL price increase this time was an inflation-based increase. It occurred in May, so we've had an element of pull forward that's occurred in the second quarter.

In terms of volumes, Veronika, your question about the volume growth, we've seen month-on-month improvement in SANTYL volumes, so sequentially we've improved.

And, basically, although we don't want to split out the exact figures in Q2, what we're very confident about is the mid-teens guidance we've given for the Healthpoint or bioactive business. So I think you can use that to guide the projection of that business.

Tom Jones, Berenberg. I was just wondering if you could change tack a little bit and talk a little bit about the wound care business. It's close to 20% of your revenues. It's the second biggest bucket of revenues. No one ever talks about it and it's come under some fairly significant pressure this quarter. So I was just wondering if you could give us a bit more color about what's going on there.

It's, obviously, a great question and something we monitor very strongly.

First of all, let me explain that the wound business is not one type of business, as you know. We have bioactive, and Julie has mentioned that we are very happy with our guidance as we feel this will happen. It's a US-only business at the moment and will become a worldwide business at the launch of HP802.

We'll certainly be able, by the way, to give you insights on 802 also and guidance starting January, because the (inaudible) will end after Christmas. So in Q4 you will have a pretty good knowledge of what is the potential of this (inaudible). That's important for you to know.

Second is the advance wound device. Here, we have, what do we say, price pressure. KCI is putting the prices down, no doubt. We have had this issue of RENASYS, as you know, and we have stopped to commercialize the product. It will take some months to come back. And this has been a significant hit.

You have seen the impact of this around $30 million, with the provision of $25 million for the bad debt in exceptional items this quarter. And this will take time to recover, no doubt.

Having said, the PICO, which is the portable negative pressure device, is doing extremely well and we are going to refocus because we have decided, actually, despite the stop of the consolidation, to keep all the people we have, which has an impact in the margin, obviously. But also we're going to reallocate these people on different products, PICO is one of them, and, potentially, on some wound care products.

We also have negative pressure on the potential of the emerging markets, and China is one of them. We have launched negative pressure in China a few months ago and it has a very slow start. We have launched also PICO in Japan in the month of June, and you remember we launched negative pressure there a year ago. Also, we have (inaudible).

So there is a dynamic of the US, which is what it is, but, also, a number of pockets of opportunities outside the US.

Now let's go to the wound care. Wound care, the growth of wound care has been 13% in the emerging markets in (inaudible), which is good. Starting to show that we put more interest on this in that way.

I am very disappointed, to be clear with you, at the dynamic in the US and in Europe of the wound care. It's not a structural problem. It is a temporary problem. The problem is as simple as this. There was no management and there was not enough focus on what matters. We're more technical bodies rather than marketing bodies.

At a stage when you have the best range, and I think we have the best range of products, you cannot be beaten by the competitors. You cannot do that. So we have to be much stronger.

So we have reinforced, the management, changed the management, reinforced it. We have a new President of the US now for advanced wound management. We have a new President of advanced wound management global in the division. And we are addressing this through a reallocation of our reps, a reallocation and a refocus of what matters.

What are the growth levers in wound care? We cannot promote everything. We have to say: This is 80% of the growth and this is where we have the potential (inaudible).

Take in Europe, in two countries it goes very well; in another it doesn't. And that's not Normal. So that's what we have done.

So I'm not anxious at all about this. I think we have addressed plainly and quickly this issue, which is (inaudible) knew. We knew that eventually (inaudible) had a problem for a while. Take some time over it.

And to be very honest, we had a slight dilution before the great results of Healthpoint in the US were a little bit hiding the issues in wound care. So now we have, and that's the beauty of splitting the business in the three parts, we can really see what happens.

Maybe if we could just take it a bit further, when would you expect that business to be, the wound care specifically, to get back into positive growth territory? Is it a project that's going to take six months to 12 months? Or is it something we (multiple speakers)?

It will take, I think, two months but not more than that.

And then a question on Syncera. When med-tech companies start talking about becoming solution providers I usually feel slightly sick. We've seen that in a lot of other companies and it's been a bit of a disaster. But I can see the rationale of what you're doing and why. In the bit of the market you're aiming at, it seems to make an awful lot of sense. My only concern is if it is successful, which we all hope it will be --

It will be.

What's the risk that it starts to cannibalize your other business model you have in recon? Or is that actually not a risk but rather an opportunity and you'd perhaps be happy if the whole market moved that way? And you, as one of the smaller providers, would be, therefore, relatively stronger, having adopted this marketing strategy a little bit earlier than the others.

I think first of all I am very happy to have started this journey 18 months ago because we have realized, at this stage, that there was a big unmet need and a big opportunity.

Again totally different customers. We are going to keep the business that we have. And we're going to develop in the niche I was mentioning. Here [5%] of the accounts in the US are not satisfied at all. And we cannot sell our products. Actually they are not customers for us. We have zero business in this type of customers.

What we have done recently and making the (inaudible) in the work, we have realized that we are extremely active with the offer of Smith & Nephew, of Syncera powered by Smith & Nephew. And I really believe that there is no cannibalization on this. They're totally different, different strengths.

Will that happen one day in the accounts? I think that the market was 70% surgeon-led accounts and 30% admin-led accounts three or four years ago. We know now it's roughly 50%/50%. So a lot of pressure from the surgeons to follow the admin guidelines and basically go cheaper.

I believe that this will happen in the next five years. We'll see more and more admin-led accounts and less and less surgeon-led accounts. So yes, the offer will totally take a part of the business one day.

And that's why it is very important to be prepared now as we are basically going to try and fine tune it and be prepared for the future if this happens. But I still believe -- it's like when you buy a car, you want to have a basic car or you can buy all the options around, the air conditioning or -- okay, it's the same. Here we sell the product. We sell the same (inaudible) but it's a different solution.

Just a very quick follow up. What would you say your market share, relative to your overall market share, in recon is? Between -- so, say, you're 10% or 11% overall, but what would you say your share is in surgeon-led accounts and your share in admin-led accounts at the moment?

I don't have the figures. But I would say it's much higher in surgeon-led accounts than in admin-led accounts.

That's roughly.

Yes. Let's take one or two questions by phone and then go this --

William Plovanic, Canaccord Genuity.

Two questions. The first is just any comment regarding your core knee and trauma business? You had one less selling day, yet that was very strong. Is there anything that has changed over the last three months or six months that's helped that reaccelerate? And then I do have a follow up. Thank you.

On the core knee and trauma, I think two things have changed. The development of the knee, of JOURNEY II, is definitely one of the key levers of the development. And if we beat the market growth in the US, there's no doubt this is why we have been working on this JOURNEY II BCS, and JOURNEY II CR.

And, as I said in my presentation, this is the start of a journey. It's the progressive launch and we'll see more and more, in fact, of this product in the future.

Trauma, you have two things. On a worldwide basis, you have the impact of the GCC tenders, which were significant orders in the trauma business. So this is basically something which has to be taken into consideration.

But in the US, though, the trauma business is working pretty well. As you maybe remember, last year we have added a number of specific dedicated trauma reps, I think it was around 80, 85 people, purely dedicated to trauma. And we start to see the impact of these professionals on our business.

So I think this is it. There's no (inaudible). It's just good products and better execution.

That's helpful, thank you. And then on the Syncera business model, I think you're definitely the first major player to vocally state you're doing this. Just some -- as we think about this, you've been very clear, new accounts. But is this -- they will have the technician. Mechanically how does this work?

Do they -- does the hospital pay for -- have its own internal technical people? Or are they your sales reps that will be in there? Is this only going to be US? Is it only going to be certain geographies to start or do you plan to really push very broadly in the US?

Your questions about the geography and the scope, we start in the US and we'll see. I believe there are other countries where we can benefit from this offer. Europe is certainly one of them. Australia and New Zealand, why not? We have to work but we want to start with something we believe we will have very good grip and knowhow of what is happening there and what are the needs, and of market potential.

The first part of your question regarding the technician in the OR, there is no technician in the OR with the Syncera model. We have a -- and I think we'll have still a presentation of this in September. Maybe we'll have a very specific presentation for you where you will see through a video and stuff how this works because this is the logistical part.

But we have no technician. The hospital has usually no technician that they pay themselves. We will train the doctors in our site in Memphis, or we train them onsite also for the moment, but then they just do it by themselves with the technology we give them, which are extremely sophisticated actually.

So there is no more a rep in the OR, to answer shortly your question.

And, as you said in your presentation, you're going with your older technologies, the GENESIS II and the SYNERGY, REFLECTION, rather than your newer technologies, correct?

Yes, because obviously, as you know, the JOURNEY II knee is not for everyone. So we wanted to cover at least 80% of the needs of the patients and between GENESIS II and the SYNERGY stem and REFLECTION cup we cover all these. So I think it was a much wiser way of covering the knees.

Great. Thank you for taking my questions.

(Operator Instructions). Chris Gretler, Credit Suisse.

I have also a follow-up --

Yi-Dan Wang, Deutsche Bank Research. Three questions. The first question is on Syncera. So you're clearly the first company to do this, or to announce it. Are you aware of where your competitors are in this area?

And secondly also on Syncera, by my calculations based on your comments, it seems that your hospitals will get about one-third of the price of the implants that they are paying at the moment. And the question is, clearly the cost for you will be lower, as you've indicated, but what will be the margin for you on these incremental revenues?

I'll start with that one and ask you the other --

Yes, your question is good.

Making up for Q1. (laughter)

So the margin. Obviously there will be a slightly dilution of the stock because we'll build up the stock, but not much actually. The idea of the Syncera model is to have a margin which is equivalent to the one we have, at least equivalent, to the one we have with the highest price product and more expensive (inaudible).

So here there's no doubt that this will be compensated by the lower discount. A higher discount, lower the price, lower SG&As, entering margin equivalent to the one we have.

What did you say about the strength?

Who are your competitors and --

The competitors. I don't know. The question is (inaudible). If you want -- take a company like Zimmer Biomet (inaudible) now than just doing things like that, but when you are number 1 it's not something you do, I think. I think it's great for us, as (inaudible) to do that. We bring here a destructive model.

Again, it's not a model which is something that you suddenly say: I'm going to sell my GENESIS II at a discount. No. And I would like you to see that in September when we'll do that. There's a huge technology behind this to avoid the technician in the OR, to make the logistics simpler and so.

So it's nothing you can decide like this. So I think that, from I've seen and what I know, and I don't know everything on this, I don't know anyone of the big competitors having started to do the work that we have (inaudible). We have a strong identity here and it will take a while for a new cover to build up such a model because, believe me, if you want to make it successful it's not an easy one to put in place. It's a lot of work.

And then how long would it take for us to fell the benefits of this? Is it like a usual ortho launch that will take you about a year to get people warmed up to it and then you'll start to see it after that? Or (multiple speakers) is it more immediate than that?

Well, it will be ramped up to the customers. So, for the moment, we have a number of customers starting to sign the contracts. Those are contracts which are usually three-year contracts, so it will take a while. You will see the result and the benefit of this, I think -- yes, in a year I think we can have a good understanding of the value of this model and what is the potential of it. Because one thing is what we do, one thing what is the potential? Are we talking about $500 million, $300 million, $1 billion? It's not something we have to see with the development of the operation.

Thank you for that. And then the second question on the mid-tier product --

Third question.

(multiple speakers) the second subject, let's say. So on your mid-tier strategy, where are you on that? Have you actually launched products there?

Yes, we have launched a number of products there. We are preparing also a number of launches in recon. Trauma, we also very happy with the acquisition of Sushrut-Adler in India. As you know, it's a trauma business and we now start to export in other mid-tier geographies. We have the first contract. Actually it's worked very well.

We have a new product launch also in wound management. We have this low-cost camera (inaudible) that are doing very well. We launched that six months ago, a year ago, in India. We extend that also.

So yes, we have a number of launches. The structure is built. We have a great team there. We have an R&D head dedicated to mid-tier.

We have all these hubs. You remember here and there, we have two in China, one in Shanghai, one -- you have met, I think, the guys there, one in Shanghai, one in Beijing. The trauma hub in India. So yes, there's good acceleration.

So what percentage of your portfolio have you launched already and how long would it take you to get to the 100%?

Of the portfolio it's never (multiple speakers) 100% mid-tier.

No, 80%. 80%/20% rule.

No, I think we have launched, I would say, maybe 15% of the potential of what is going to happen. So it ramps up.

We have development of specific products. For example, we develop specific knee for the mid-tier. As you know, developing the knee doesn't take two months; it takes a while. But we have a program, we have a portfolio, as serious as the one we have for the (inaudible).

(technical difficulty) profitability.

Profitability of what?

Mid-tier.

Exactly the profitability of Syncera business. Again, we sell the product cheaper (inaudible) what the customer needs for the mid-tier. But the model is also much, much cheaper. Same. We don't make medical (inaudible). We don't have to commission the OR. We don't do all of this so there's net-net margin. This is the margin of the rest of the business.

Thank you.

Lisa Clive, Sanford Bernstein. Three questions. How fast do you think the AWC market is going in the US today, given there's a lot more of a focus, it seems, on preventing infections? And how long do you think it will take to get your US AWC business up to those growth rates?

Number two. In negative pressure, do you think it will become harder to gain share in the canister-based market, given the disruption with RENASYS, even after you get that product back on the market? Obviously it's fairly inconvenient for your current customers not to have access to it for several months.

And then number three. Thinking about Syncera, my understanding is that in Europe it's already a somewhat lower touch business model where the rep isn't always there in the OR like they are in the US. Could you just remind us of how the EU versus US sales model differs?

And I guess I'm just really trying to understand how appealing Syncera would be to the European, seeing as Europeans already get a lot overpricing but also lower service.

Actually US and Europe, the same model. They work the same way. We have technicians in the OR at the same level. The cost of cooperation is the same. So there's no big difference on this one.

On the market, I was checking the figures, the question on the AWC market in the US, the market is 4%. The US also mid -- [25%].

So maybe you remember, I've always been disappointed by our wound care dynamic and I was maybe candidly thinking that it was just a question of size and mass in the US. And you certainly remember that I said that we are subsequently working in wound care.

Well, actually, the first thing is we're not good. And then we can be sub-skilled, but that's something else. We have to address first, as I said, the quality of the execution and the choices of the promotion of the product, which is what we have done during the last two or three months, very seriously; very, very seriously. And then we can think about adding scale. Scale is not the only problem, which is, I think, good news because it means that we can be much better in (inaudible). So I think that answers your question.

On the advanced wound devices and the stop of the commercialization of our classic negative pressure, I think there is definitely a place for the PICO-type of product, which will certainly take some place but will not replace totally the RENASYS.

So that's why I'm cautious in telling you that the RENASYS $30 million impact in revenue is there. We're going to try to fill the gap in resurfacing the rest on a few things, adding resources on PICO and so on, but that will not fill this gap and it will take a few months for the customers to be able to get back on track with the product.

Ed Ridley-Day, BofA Merrill Lynch. Just following up onto the earlier question. I take it absolutely that your position in terms of the defensive nature of the M&A being discussed in the sector at the moment, and also clearly your desire to remain independent.

Wouldn't there be a way of basically just getting past all of that by bringing forward or becoming more aggressive yourself in terms of additions? And, as you've just said, potentially there are good rationale for, let's say, expanding in, say, the US wound market. Could you talk a little bit to potentially what strategic potential deals you're thinking about in wound care? And also related to the wider question, would you consider using equity if the right deal was there for a transformative deal?

We could, to answer your question. We could do a transformational deal if there was something (inaudible). There is no reason why not to think about it. The question is do we finance the [bride]? That's another question.

On your question about adding new legs or thinking about what's next, adding strength in wound care, there is definitely a number of spaces, actually, where we can add business in acquiring [things]. I still believe that there is an opportunity in sports medicine, in extremities, where we can still benefit from an acquisition here, high-growth market.

Again, think about strategy is to go to high-growth business, okay? So it's really not going to a business which is not growing, because we don't need that.

So extremities is still -- sports med, we still have potential to be bigger, even if we have (inaudible), which is significant, because we almost switch, what, 30%, 29%, market share combined with ArthroCare. So it's significant. So maybe some micro spaces. You have seen the hammer toe type of thing, so some specific (inaudible).

In wound, no doubt there is potential for me in wound care to have more scale, because I believe in scale in wound care. I don't in recon but in wound care, I do believe in scale. So those are the places we look at.

Now, bigger deals, why not? Again, if it makes sense, it could be an option also.

Thank you.

Justin, Societe Generale. First question just on the $120 million. Apologies if I made a mistake here but I'd got the impression three months ago your bias was to try and reinvest that money. If things have changed --

No, no, no, no, no. Maybe I was not clear in Q1. In Q1, I recall we said that this $120 million will be used potentially to fund some opportunities if we need money to do that. Syncera was in my mind at this time; use some money of this for Syncera. But the idea has been to save. It's a cost-saving program, okay?

So, as usual, either it goes down or you can fix some of it to fund some opportunities. So this is what we have said and the same thing again. So most of it will go down.

So no change, then?

No.

And then the second and final question, just on Syncera.

I try not to change my views quarter after quarter.

Yes. And then just a second and final question on Syncera. I just wondered if you could put a bit more color on the working capital requirements and how that's going to be lower and how that might affect the terms going forward.

The good news is that it will be much lower in terms of working capital than the classic model because the customers buy the products and they carry the cost of it and we don't.

In terms of logistics, it's also much more efficient so it will be a much lower working capital.

Martin Brunninger, Jefferies. Just on wound care again. On slide 21 you have put wound care into the slow-growth bracket in established markets. And on slide 28 you show you have done almost mature of the deals in wound care. And you also said that 85% of your emerging market growth comes from recon. So computing all this -- because I remember two years ago you have labeled wound care as one of the big growth drivers.

Well, advanced wound management. I'm sorry. Again, I've never said wound care was a growth driver. Advanced wound management is a growth driver of the Company because of advanced wound devices, which have the potential of growth [significant]. Actually, it was 1% this quarter but the rate of growth of the advanced wound devices within the Company has been between 12%, 14%, roughly. So it's high-growth business potentially.

Advanced biological, this is a very high-growth business also and advanced wound care, as I was saying, it's 4% growth on a worldwide basis so it's not high-growth business. Even if it's high-growth business for us in emerging market because example of the quarter we grew 13%, mostly advanced wound care in the emerging market. So it depends where you are but on a global basis wound care is not a growth driver.

Okay, ladies and gentlemen. Well thanks a lot for attending this second quarter and see you at the third quarter. Thank you.

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