Smith & Nephew PLC (SNN) 2015 Q2 法說會逐字稿

Anyway, good morning to you, (inaudible) results today, so try to be sharp.

Welcome to our first half-year presentation and I will start by covering the highlights from the first half and give you my views on the important progress that we have. Then I will give you details on our Q2 revenue performance, before handing over to Julie, to take you through the numbers. I will conclude with an update on our strategic priorities and then, as usual, we'll answer questions.

Well, I'm very happy and proud of what we have accomplished in the first half of 2015. As planned, we have accelerated the sales growth; improved the trading margin; and delivered improvement on the tax rate.

We've delivered underlying revenue growth of 4% in the first half of the year, with a stronger growth in Q2. Our strong performance in H1 reflects the successful execution of our strategy.

In advanced wound care the actions we started implementing last year resulted in a solid growth.

Our investment in emerging market has again delivered a double-digit increase in revenues.

In orthopedic reconstruction we saw improved performance driven particularly by knees. JOURNEY II continued to deliver a strong growth.

Our acquisition of ArthroCare one year ago significantly strengthened our sports medicine business.

In addition, we have made four small bolt-on acquisitions so far this year.

The trading profit was $512 million, giving a trading margin of 22.5%, an improvement of 70 basis points over last year.

Julie will highlight how our expense and tax optimization programmes leverage our revenue growth to deliver EPSA growth of 3%, which would have been a plus 10% excluding the FX.

Today, we also announced an interim dividend of $0.118 in line with our formula and representing a 7% growth.

Later in the presentation, I will highlight how we are successfully rebalancing our business towards high-growth areas and delivering against our strategic priorities.

First, I want to start with more details on the strong Q2 performance. As usual, the slide capture our underlying growth, on the left-hand side geographically; and, on the right, by product franchise.

We delivered 5% underlying revenue growth this quarter. In the US, the revenue growth was up 4%. In the other established markets, sales increased by 3%. In particular, we delivered better results in Europe and our plan to improve execution is on track.

Emerging market grew by 14%. I will talk later about the investment and six acquisitions we have made over the last two years, which underpin a continued double-digit growth.

I will now turn to look at each franchise in more detail.

Sports Medicine Joint Repair had another strong quarter, growing at 7%. One year, post-acquisition, the benefits of the combination with ArthroCare are increasingly evident. Our recent [tubular] launches from both from Smith & Nephew and legacy of ArthroCare pipelines are off to a promising start.

Enabling Technologies grew at 1% with the expected decline in ArthroCare royalties continues to impact growth, and within this coblation technology grew very strongly.

Our trauma and extremities revenue grew by 2% against a comparator core, which benefits from strong tender activity in the Middle East.

Our other surgical businesses delivered a combined underlying growth rate of 7%. This is primarily our ENT and GYN businesses. Our confidence in the performance of ENT continued to increase. We have successfully worked to improve the sales execution and deepen our understanding of the various segments of the ENT market.

Globally, our recon implant revenue was up 4%, and I will return to our recon strategy later in the presentation.

The global knee growth of 7% was driven by continued strong uptake of JOURNEY II, our kinematic knee.

Global hips grew at 1%, with BHR reducing growth by about 1 percentage point in the quarter.

In addition, our strong US recon performance reflects our differentiated VERILAST technology, which was highlighted in the campaign for hips and knees we ran in February and March.

At the end of the quarter, we acquired the ZUK Uni Knee, which extends our access to a fast-growing segment of the recon market.

I talked last year about our strategy to increase our emerging market mid-tier distribution portfolio. This quarter we implanted the first patient with our new internally-developed ANTHEM knee. This knee system is designed for smaller anatomies and, combined with its streamlined instrument set, provides better relative affordability. We target a full market launch in 2016.

Advanced wound care grew revenue by 12%. We delivered strong growth in the US and Europe, albeit again weak compared to last year.

In advanced wound bioactives we grew at 6% against a strong comparator. A good SANTYL dynamic was partially offset by the performance of our skin substitute product, OASIS, which faces reimbursement headwinds. We are confident in our full-year guidance of double-digit sales growth.

Advanced wound devices was up double digit outside of the US. It's the last quarter before we analyze the US distribution hold on RENASYS, which pushed global device sales down 9%.

We continue to work towards US approval for the full RENASYS range and expect to be in a position to support existing RENASYS customers later in the year. However, we'll focus our investment to re-enter in the US in traditional negative pressure market behind a staged roll-out of our next generation product in 2016.

PICO again delivered very strong growth, and we see this possible negative pressure becoming a more important part of the negative pressure market. This is driven by the increasing volume of compelling clinical data; strong healthy economic arguments; and the ease of use for customers and for the patients.

Overall I'm delighted to see that at 7% growth advanced wound management is again growing ahead of the market.

I will now hand over to Julie and I will come back later on.

Thank you, Olivier and good morning, ladies and gentlemen. I'll start with the financial highlights.

As you know, we've changed our reporting from quarterly to half-yearly and, now, this summary slide covers the six months to June 2015.

Now, looking at our financial headlines, revenues were just under $2.3 billion, with strong underlying growth of 4%.

Trading profit grew ahead of this at 6% underlying, resulting in a trading margin of 22.5%, a 70 basis points improvement over last year.

EPSA was $0.391, a reported growth of 3% negatively impacted by currency, which I'll return to later.

Completing the picture cash improved. Trading cash flow was $382 million and a conversation rate of 75%, compared with a 53% in the prior period.

Finally, free cash generation was $329 million including the receipt of a legal settlement of $99 million.

I will now look at each of these areas in turn starting with revenue.

This slide shows the adjustments between underlying and reported revenue for Q2. The business delivered a strong underlying revenue growth of 5%. This compares with 3% in the first quarter demonstrating improved momentum in the business.

The ArthroCare acquisition added 6 percentage points to the reported growth rate, simply due to six months of ArthroCare sales being included this year compared with only one month in the prior period. For the rest of the year we will not see further acquisition impact from ArthroCare.

Sales growth in Q2 at constant exchange rates was, therefore, 11%. Currency was adverse by 9%, due to the strengthening of the dollar. Hence, in reported terms, Group revenue growth for the quarter was 2%.

For the half year the trends are similar. Underlying revenue growth of 4% translates to 2% reported growth, due to the impact of acquisitions being offset -- partially offset by adverse currency movements.

To give you a bit more information about other deals we've completed recently, the results of our distributor acquisition in Colombia have been included in our financial results since March. There is nothing yet included for either the distribution acquisition in Russia, or the recently announced purchased of the ZUK Uni Knee from Zimmer. These will start to impact our results from July onwards.

Next the trading income statement, with additional details shown in note eight to our announcement.

Our trading margin for the first half was 22.5%, an improvement of 70 basis points. Let's take a look at the components of this.

On gross margin we saw adverse pricing pressure in aggregate of 1% to 2%, similar to previous quarters.

In addition, due to currency movements we saw additional gross margin pressure in emerging markets.

These factors have been partially offset by cost of goods improvements and the overall gross margin is down 70 basis points to 75.1%.

Moving to SG&A, our Group optimization programme has now delivered annualized benefits of $50 million through procurement; through standardization; and through a more focused single-country management structure.

For example, we now have one ERP system in Europe, and all major functions, such as finance, HR, and IT, are managed globally. This allows for a simpler and more cost-efficient organization.

We're seeing the impacts in our cost base. Our G&A expenses alone are now lower by an amount equivalent to 1 percentage point of sales compared with 2014.

ArthroCare synergies are also being delivered and our commitment of $85 million of total synergies by 2017 is on track.

Finally, two final factors relating to the margin, US RENASYS continues to be a headwind. We estimate that the impact of this product hold is about 50 basis points on our first-half trading margin compared with the prior year.

In R&D the lower level of spend this year reflects the closure of the HP802 programme.

Now, a review of our adjusting items between trading profits and reported IFRS profit in the statutory income statement.

Acquisition-related costs of $13 million relate to the remaining ArthroCare integration and emerging market deals.

Restructuring costs of $19 million relate to Group optimization. In terms of phasing, we expect higher restructuring costs in the second half.

Amortization of acquisition intangibles is $78 million higher than last year, mainly as a result of ArthroCare.

Finally, within legal and other, there are some specific items to highlight. The largest item is an income of $45 million recognized on the settlement of the Arthrex legal claim, net of expenses and royalties.

There's also a one-off curtailment gain relating to post-retirement healthcare benefits in the United States.

Offsetting this we have an additional $10 million charge related to final liabilities associated with RENASYS.

Now, a review of the movement in EPSA for the first half. Given the significance of currency this year, we have included both reported growth and also growth at constant exchange rates.

Trading profit grew 6% reported, and 13% at constant currency.

There are a number of movements to EPSA. First, the interest receivable reduced as we no longer receive interest from Bioventus.

Second, interest payable increased following debt associated with the acquisition of ArthroCare.

Third, taxation, the forecast full-year rate on trading results is expected to be 27.2%. This represents a 50 basis point improvement over the prior period, an almost 300 basis point reduction in 2012.

Adjusted EPS for the first half is $0.391, an increase of 3% reported and 10% at constant currency.

Now, turning to cash, here's the cash flow statement for the first half. We generated trading cash flow of $382 million, a trading profit to cash conversion ratio of 75% compared with 53% in the prior period.

In terms of working capital movement, we had $130 million outflow largely due to inventory movements and payables. Although we've seen a net outflow from inventory, there's actually been an improvement in inventory churn of over 5% in the first half.

Free cash flow was $329 million, including the legal settlement from Arthrex.

Turning to capital allocation. We started the year with net debt of $1.6 billion, and generated free cash flow of $329 million, or $490 million before CapEx.

Capital expenditure was $161 million, reflecting investment in instrument sets, IT systems and expanding manufacturing facilities.

Dividends were $166 million, being the cash payment of our final dividend for 2014.

For acquisitions, our net cash spend of $16 million relates to distributor acquisition in Colombia.

And finally within other, we include the repurchase of our own shares, equivalent to shares issued under employee share schemes.

At the half-year, we closed with net debt of $1.5 billion. This is equivalent to net debt to EBITDA of around 1.1 times.

Finally, our outlook for 2015. Our previous guidance for the full year remains unchanged.

On revenue, we will achieve higher underlying revenue growth in 2014. In particular, regarding the second half, we will no longer experience a headwind on growth, from RENASYS in the US as there are no sales in the comparator period.

As a reminder for your models, we would not expect you to include any US RENASYS sales for the remainder of 2015. As Olivier said, we expect to staged rollout of our next generation product, during 2016.

On trading margin, we're pleased with the improved performance in the first half. We experienced some favourable cost phasing, leaving our guidance for the full year unchanged.

On EPSA, we expect to deliver the improvement in tax, as guided. Further technical guidance on interest is included on slide 31 in the pack.

Regarding exchange, we expect to see a headwind on revenues, of 6% for the second half, and 7% for the full year, based on exchange rates at the end of June.

And with that, I'm very happy to take questions, and will hand back to Olivier.

Okay, thanks, Julie; thanks very much, Julie.

Four years ago actually -- I was presenting, exactly four years ago, the strategy that we wanted to implement at Smith & Nephew. We have been pretty strong in following the path, and I'm happy to see now that the things -- the choices we've made were good choices: increasing the high growth part of the Company; developing the emerging market; trying to find a disruptive model to succeed in the established market; and so on. So I'm going to take you through a few things about it now.

First, in the established markets, and I will focus on the advanced wound care and reconstruction. I will include an update on Syncera dynamic. I will then update you on the progress we have made in the last two years in the emerging markets.

So, the first priority of this strategy, in terms of Smith & Nephew, was win in the established market; be successful in the established market.

As we recall, we have been focused on improving our execution and our performance in advanced wound management.

In May last year Glenn Warner joined Smith & Nephew as President of advanced wound management, completing the new leadership team. Under him important changes have taken place.

We have put increased focus on our innovative products. The best example of this is ALLEVYN Life, which has delivered very strong growth in the first half of the year.

In the US, the sales teams have been restructured, and there is greater collaboration between our three franchises to optimize the customer coverage.

In Europe, the implementation of the new organization has helped to refocus the advanced wound care teams deliver a very improved performance.

The global growth in H1 demonstrates that these changes are delivering the expected improvements. I am confident that our advanced wound care business is now in a position to deliver growth above the market.

Turning to reconstruction, I'm excited about our current position in recon, which reflects our thoughtful choices and investments, over the last few years.

As you know, I do not believe that the big is always beautiful, and our performance in the last 12 months is clearly showing this.

For example, in the US, we estimate we have grown above the market, over the last 12 months, and this quarter we delivered our strongest global growth years.

We have pioneering products, and we're focused on re-innovation. OXINIUM surface has shown outstanding results in the registries, and during the quarter, the first patient was implanted with our ox-on-ox hip in the US trial.

The uniqueness of our products is what drives our very successful marketing campaigns focused on our VERILAST technology.

Having a strong business in the established market also provides the platform to develop our leading position in the emerging markets.

In 2014, we announced Syncera, a disruptive model, and I will now give you some more details on our early Syncera experience.

So we have reached a number of milestones in the first 12 months, which demonstrates our progress. We have strong reference sites.

Syncera is not just an idea; now, it has hospital and surgeon advocates. These reference sites are now trained, and are fully operational, with Syncera. So what does that mean?

Well, it means that they're using our solution; they have purchased instruments, and implant inventory, and they use our software.

Currently, we have customers who's potential to perform more than 3,000 analyzed Syncera procedures in line with our expectations.

Our progress has also given us confidence to push ahead with our plan, outside of the US.

The technology package is a key element in the Syncera solution. We have acquired assets and are continually looking for more technology, which we can use to improve our customer experience and efficacy.

So, what have we learned? Well, let me recap the first 12 months, because that's important. We have three phases; a pilot phase that we started last year, in September. The pilot was until January.

Then we pre-launched, and pre-launched on different centers. And now we have started the launch in -- at the end of the month of June.

So we have learned a lot of lessons, which have helped us refine the offering, and which, no doubt, will help us accelerate the growth, going forward.

For example, one of the key successful use of Syncera is having a close collaboration and full commitment not only with the payer of the hospital, but between the payer and the surgeons.

When we launched Syncera, many of you asked about the risk of cannibalization. We have not experienced any and, in fact, have been able to make some referrals to our traditional recon team.

The changes under the Affordable Care Act and recently announced CCJR, we believe, are making hospital groups more open to a different offering and Syncera plays very well to this.

All this makes me very confident that Syncera -- with Syncera, we have the right innovative offering, for this subset of our customers at the right time, whether it is in the US or in the rest of the world in selective countries.

As you know, accelerating our development in the emerging market is the second of our strategic priorities.

The line in this chart shows a portion of our Group sales coming from the emerging markets, from 8% in early 2010, to over 16% this quarter.

Our CAGR of sales has been over 15%. Our strategy to achieve leadership position in this market remains very clear, and pretty easy.

One, in our focus country we ensure we have a direct relationship with our customers, surgeons, nurses and other healthcare professionals. By having a direct presence we manage our own destiny, and ensure that capital constraint does not hold back market development.

Two, we offer our customers the right products. By that, we mean both our existing our premium product and also the development of our mid-tier strategy. The mid-tier is essential for future expansion of the market, and to widen access to our products.

Two years ago we highlighted these eight countries as our focus countries, where we see great future potential. Back in 2011, we had a mixture of direct and indirect sales team, and almost no mid-tier presence.

In the last two years, we have made six acquisitions, and significant organic investment. We are now directing all eight countries. For example, in Turkey, we required our Turkey distributor Plato. We saw this an opportunity to invest further in this large and great market.

In Mexico and Saudi Arabia, we choose the route of organic investments. We add sales rep infrastructure. In both markets this has resulted in an expansion of our share in important tenders.

Earlier this month, we acquired our Russian distributor of recon and trauma products. We have worked with this distributor for more than five years, and the acquisition was a natural next step in line with our strategy, and also provides, which is important in Russia, local manufacturing.

In terms of mid-tier entry, we're still at an early stage, but making steady progress. This is driven by acquisitions like in India, and now in Russia, in licensing and organic investments.

Finally, in China, we remain very well established, and we are a leading player in most franchises. China is tracking on a run rate of soon becoming our second largest country by revenue.

In conclusion, I'm very pleased with these results that demonstrate the positive effect of our action across the business. Notably, in the second quarter, we achieved the expected improvement in advanced wound care, where we deliver sales of double-digit growth.

The emerging markets also grew double digit. And, we achieved our best performance globally in recon for three years led by strong knee implants.

Our global optimization programme is on track, as you have seen. It is not only about saving, but about reinforcing and centralizing our functions of finance, HR, and quality and regulatory.

We have also made a number of acquisitions adding to our technology and product portfolio, and emerging market business.

Overall, in the first half of 2015, we delivered higher underlying revenue growth, trading, profit margin and earnings. Our guidance for the full year is unchanged.

Where we have invested to improve existing business, we're beginning to reap the benefits. I'm confident we're firmly on track with our strategy to invigorate the growth profile of Smith & Nephew.

Thanks a lot. That ends the formal presentation, and we'll now take questions, as usual. Thank you.

Ian Douglas-Pennant, UBS here. First, on CCJR, thanks for your comments there, interesting to get your first take.

Could you give us an indication of what pricing pressure you're seeing in BPCI hospitals versus those others? Have you had more success launching Syncera into those hospitals that have chosen to take part in that programme?

And then on another tack, on your wound care, some very good growth rates there from your ALLEVYN Life portfolio. Is this because of the reps that you've taken out of NPWT that's driving that growth? And, if so, will you be hiring more reps when NPWT comes back to market? Thanks.

Good questions. Let me start with the second question on ALLEVYN.

No, we have not redirect reps] from negative pressure to ALLEVYN per se. The reps that we used to have in negative pressure have been reallocated to PICO.

PICO is doing very well, as you can see, not only as a product, but we believe that having this type of disposable technology will help us dramatically in the future, because the disposable market becomes more and more important for different reasons. Obviously, it's more convenient. We have more clinical data than before. Also it is, in terms of outcome, pretty good for the patient and for the payers.

On the CCJR, yes, well no, we have not seen any more price pressure at this time. We believe that for us it's an opportunity, for different reasons.

Managing, for example, the infection rate down is important. I think that PICO, again, is a great opportunity in the hospital to reduce this ramification, because of the efficacy in post-surgical wounds.

We believe, and you ask me if we see more and more -- I'm not going to talk about the different centers for Syncera. But Syncera is definitely a very attractive offer if you want to reduce the cost, so it's absolutely -- as I said in my presentation, I think we are arriving at the right time, not only in the US, but also in the rest of the world. So, yes, it's for us an opportunity.

And just a quick follow-up on Syncera. We've heard in the market that some of your competitors have programmes like this. Can you comment on how frequently you see those when you're competing for this type of account, or are they much too early stages?

I think they're very early stage. I haven't heard anything specific. As I said in Q1, the complexity of Syncera is not just selling a product; it's actually selling a complete solution and offering a solution, which I think will be the key for success tomorrow. Going from a product offer, to be able to offer a solution, not only to the payers, also to the surgeons.

It took us two years to put that together. It took us two years and, as you know, we -- the strength of the model is that the product -- the quality of the product that we -- the hip and the knee, and the quality of the registry we have, and there is a huge experience with these products; they are known; people trust them.

They are able, which is also important, to cover the majority of the population -- the potential population receiving a knee and a hip.

Also, the quality of the model behind that we enhance pretty significantly on a regular basis that you require the S2, which is one of the acquisitions, which is part of the model offer of Syncera, makes me think that if someone comes -- and some will come, because I think it's obvious that there is a need for a cheaper model, it will not be today. We still have some advance here.

Thanks very much.

You talked about the timing on the RENASYS relaunch, or rather I suppose you're waiting for the Generation 3 to get approved. Do you have any clarity on that, because obviously the re-approval of RENASYS 2 just took a lot longer than we expected.

No, it didn't actually; it didn't. Thank you for the question, Lisa. FDA is slow, but they come on track.

Actually, RENASYS is not just one device, it's a bunch of devices actually. We have had three 510(k) and two of them have been approved; we're expecting soon the third one.

During the year we don't plan to relaunch the RENASYS, as I said in Q1. We plan, though, to just supply the existing customers, so that's why we are saying that there is no need to put any sales, because we don't plan to make any sales with that.

So the strategy now has been clearly to say, well, relaunching RENASYS will not bring anything. The cost of recapturing customers is very high. If you bring a new product in a few months it's much better to focus on this connected device that we plan to launch, which is really something different and really something better.

So we plan to have a launch between Europe and the US during 2016. So that is the plan.

But so, FDA is okay; 510(k) are okay; there is no issue there.

Okay, so just for confirmation, you should expect all of the components of that RENASYS 3 to be approved by, say, the end of 2015, positioning yourself for a launch?

Absolutely, absolutely.

Okay. And then the second question on trauma, I understand obviously you had the top comp, due to, I think, it was a tender in Saudi last year?

There was a big Saudi tender, yes, and there was one in Middle East also. It was a very high comparison last year.

Okay, and I suppose maybe more of a question for Julie. But if we stripped that out, are you pretty much in line with the market in trauma, or is there still a bit of a lag for your performance versus the market?

Well, I think that -- Julie, if you can answer. But we have 2% growth I think for the trauma business, as a whole. Without the effect, like for like, what would have the growth with the market? I think we'll be very close to the market, yes, very close.

We would. We would, yes.

Very close; very close.

US trauma growth was strong. So it was definitely impacted by emerging markets, yes.

Yes, it was very strong, yes.

Okay, that's helpful. And then third question and final question. PICO use; could you give us an idea of where it's being used? Is this mainly in diabetic foot ulcers, venous leg ulcers? I know you've done some really interesting studies in obstetrics, and I know you're working on one in knees. How much has that --?

In hip, actually.

In hips, okay. How much -- where is it coming from?

It now comes from a wide range of situation actually. It came at the start for all these venous leg ulcers, pressure and all these difficult wounds to treat.

We have now a very strong collaboration between ASD, and advanced wound management in the hip for surgery treatment and GYN also, we use it a lot. We have different sizes and shapes of PICO.

So it varies -- frankly, I think, we open it more and more and we realize that there is a -- we believe, an amazing opportunity for this type of devices.

We invest also, it's important to say, in the clinicals outcomes; so we drive clinical, and they show good results.

Thank you.

Yi-Dan Wang, Deutsche Bank; just a couple of quick questions. The first one is on the US knee growth versus the hip growth. Can you comment on how much of the knee growth is coming from the DTC campaign versus the benefits you're getting from Syncera, because you've run DTC for both hips and knees in the US, but there seems to be a fair -- a big difference between the performance of the two product lines?

And then secondly, Julie, could you comment on the effect of the acquisition on your top line and trading profit; so these are the Russian acquisitions and the Uni Knee business? Thank you.

On the US knee, it's a very significant growth. I think the reason is not Syncera. As I said, it's purely the dynamic of the JOURNEY II, which is really good.

If you remember we discussed that the staged launch people were asking about, are you going to launch? Yes, now it's launched. It's launched and it works. We have great customer feedback on this one.

So the campaign that we have based is -- was a campaign based on the VERILAST technology. It has driven a lot of interest. I cannot give you the split of this growth between what is generated by the campaign and what is generated by our business.

One thing I want to tell you also, and actually we discuss this yesterday, the quality and the efficacy of our sales force is much, much better than what it was in the past. You remember years ago we said in the established market if you want to be successful, you have to Bring new products, differentiated new products, because you want to get a price premium with this this product; you need to keep this price; and you also need to have a better salesforce effectiveness.

We have worked during two/three years on this. I think we have better reps; much more prepared than what we had in the past. When you have good rep, well trained, and good products things are happening.

And, again, what I see is not an anecdote. What I see is a trend here, and you see the same. The recon business in the US is improving, there's no doubt; there's no doubt. And it comes back to the point that you don't need to be big to be successful. Bring new products, bring good reps and bring innovative models, I think this is the recipe.

So, in terms of the differential between your hip and knee business, can we imply from that then that your knee portfolio is more differentiated than hips or is it more of a timing thing? So your salesforce is focusing more of their attention on knees, as we sometimes see and then we should see the hip business pick up later on?

Hip business, we have had this quarter 1.1 percentage point of headwinds due to BHR. So, the growth in the US is not bad, actually; it's a decent growth that we have had, especially if you add the fact that BHR was pushing down this product.

Do we think that the knee business has been more pushed by the DTC campaign than the hip? Maybe; maybe.

Again, the hip business is more complex than the knee business. So the hip is a satisfied market -- almost satisfied. Here you have 90% of patient satisfaction with existing products. You have about 70%/75% satisfaction with knee.

So there is a lot of things. When you bring an innovation in knee, you can make a difference. In the hip it's more marginal.

We have worked, as I said, on the ox-on-ox. We did a very strong study in South Africa. We have started a clinical trial in the US now, the first patients are on ox-on-ox has been implanted recently. So there are some things we can make, the product, but it's a satisfied market.

Okay, so returning to your question about the acquisitions. ZUK, we expect to get sales in the second half of around $10 million, if you want to put that in.

In terms of Russia, it's likely to be completely immaterial at this stage. We had quite a small Russian business to start with going through the distributor. It will take some time to set that up properly. So I think it will be immaterial for the purposes of modelling this time.

Okay. And a profit impact with the Uni Knee?

Yes, the profitability on ZUK is very strong; it's very strong. So obviously, recon is a strong part of our business anyway, so ZUK we expect to be strong.

Clearly, emerging markets, in the case of the Russian deal, in emerging markets and when we're setting up from the start, it takes a while to get the profitability there. So you would expect low profitability from the Russian deal.

But it's not loss making?

No, it's not loss making. We�ll make sure it's not loss making.

ZUK was a great opportunity for Smith & Nephew. We're very happy to have been able to get this product.

Ed Ridley-Day, Bank of America. First of all, for Julie, great progress on the cost saving programme, $50 million run rate annualized. It seems to be you're a bit ahead of schedule. So should we start thinking more positively about the $120 million total savings or not?

And on a related question, clearly, you've reiterated the $85 million synergies from the ArthroCare deal. Can you give an update on where you are on that?

Okay, sure. Yes, so the Group optimization programme, we're really pleased with progress. We've got a comprehensive PMO around it and it's meeting all the milestones.

In terms of the slight margin beat in the first half versus consensus, I think it's just more to do with costs saving timing rather than underlying delivery of Group optimization or ArthroCare.

So the programme's on track. As you know, we've maintained the guidance. I think it's simply a phasing issue rather than anything else.

ArthroCare, again, is going very well. The sales integration's gone well in the US and the Rest of the World. There's a real synergy with the reps now, because they've got both blades and coblation. So all that's working really well.

At this stage, we're not changing the guidance though. We're maintaining the $85 million. We've owned ArthroCare for one year only. So we're confident about it, but not upgrading the guidance.

It was on $85 million, you remember the split, and it was $65 million for cost saving and $20 million in sales synergies.

I'm more optimistic than our CFO on the sales. I think that synergies will happen, because it's pretty mechanical with the sales. The more I see the way that this integration is happening, the value Julie mentioned, the reps feedback that we get, it's very good; it's very good.

And the ENT business, which we forget some time. But let me remind you that this business, when we took it, was a negative growth business; it was minus 5/minus 4. We now have -- we have seen between the GYN and ENT a 7% growth that I was mentioning. We see a team that is much more focused on it. We believe there is a lot of things there, which are interesting in the emerging markets and in the established markets.

That's very helpful. And just a follow-up on ortho, can you detail how much benefit maybe quarter to quarter from the Zimmer Biomet dis-synergies deal? And how much you expect you can be able to benefit maybe in the second half from both the focus of Zimmer on the integration?

I don't know actually. It would be interesting, today, to see the results of these companies, and maybe I will be able to answer with more details there.

We see the synergies, there's no doubt, but it's -- an integration like this is always pretty painful. So there will be certainly opportunities, and it's true, I cannot quantify them; I don't know. Actually, what I think that what we have in our plan takes this in consideration.

But you have been able to the pickup, potentially, some salespeople from them?

Not much more than -- we have seen the synergies for a while now, because they have been working -- we have seen, as I said last quarter, a lot of CVs going on and people willing to join us. So, we see the opportunity; we see distributors in the US saying, you know what, one was with Biomet; one with Zimmer. Now, there's only one; so one is available. So they come to you saying, well, we can work together?

You find a number of opportunities. Now, I think they are integrating in our business now.

Great, thanks.

Thank you, Ed. Sorry, there's four people -- we have four people are on the -- and then we're with you.

Tom Jones, Berenberg.

I had two: one on Syncera, and one on the AET business.

On Syncera, I just wondered how your conversations with hospitals have changed since the publication of the CCJR proposals from CMS. The BPCI programme that ran before that, that was a voluntary programme. But this is looking like being a compulsory programme, and is perhaps, on my thought, at least, forcing hospitals to start thinking about your kind of business model. So wondered how that's changed the conversation?

And then the follow-on to that was, if Syncera does prove to be successful, which we all hope it will be, how would you expect the incumbents, the big three, to start to respond, because clearly they're not just going to roll over and let you take all their share. So they're going to do something. I just wondered how you've planned for that; and what do you expect to do about it?

And then on the AET business. It doesn't get a lot of attention, but it's as big as the sports medicine business. Once again, it didn't really do much in the way of growth. So I just wondered if you -- if there's anything you've got planned, or you have in the pipeline to try and improve matters in that business.

Well, look, Phil, you want to take the Syncera, or want me to answer?

I'll take that. The Syncera one, Tom, very early days at the moment. But, certainly, we have had inbound calls, and obviously the topic does come up when we're doing pitches at the moment.

But just to reiterate Olivier's comments earlier, we do see the opportunities around that broadly across our portfolio. So it's not just focused on the implants. Hospitals are looking to be more efficient across that whole 90-day period.

So, for example, JOURNEY II we believe, and are trying to collect data, the point to faster recovery after surgery. Again, if you can prove that to a hospital, that reduces cost, and hence you play well into these programmes.

On the reaction of the competitors on Syncera, one thing I really believe, and we have seen that now between the pilot, the prelaunch and the launch phase that it's not a question of dropping the price.

I remember that we were asking the question a year ago, when we talked for the first time about Syncera, about the risk of dropping prices in the industry, because in reaction that doesn't happen.

I'm much more believing now that there will be models like this one developed by our competitor, because they will have to. I think that the notion of tier, of lower cost and higher cost is there. So you have to answer not just the product price, which is short term, but with a full solution.

I'm convinced that the reconstruction business has to go through global solutions. I'm convinced that the implants per se will be commoditized in five/10 years, and if you do not come with something, which can add value you're going nowhere.

So whether it is intelligent implant, whether it is a solution like Syncera, whether it is whatever you can imagine. But it's definitely the trend that we see in the market, so that's what I believe.

On the enabling technologies question, what is the dynamic, actually? It's a much better dynamic for us than what it was -- used to be. We have been growing at 1%, I think, Julie, this quarter?

That was a mix between very strong coblation, which definitely has changed the dynamic of our own enabling technology. Because if you remember when were just having the blades and cameras, we are about minus 6%/minus 7% on a regular basis; it was always negative growth. Now we are off on the positive side of this, so we plan to see that continuing.

Yes, it would actually have -- we've also got the ArthroCare royalties going through that line as well, which impacts the growth rate again by 1 percentage point negatively. So excluding that, there's real momentum in the business underlying those numbers.

Okay, next question at the 'phone.

Bill Plovanic, Canaccord.

This is actually Kyle on for Bill. Just wonder if you could remind us of your cash priorities; where you think about M&A, and buyback, and dividends; and the different puts and takes between those two?

And then also, when you think about M&A moving forward, you showed the slide of you're building-out in the emerging markets. How do we think about the balance in M&A from a distribution standpoint and the focus on the emerging? But then also new technologies you're seeing in the marketplace?

On the M&A, it's still high on the agenda, not only in the emerging market where we continue to acquire, where we believe it's important to our distributors. We also look at companies, which can help us to develop our mid-tier. You remember, the mid-tier is the second gross lever of the acceleration of the emerging market in the future. And so that goes through a strong portfolio.

We have launched our own portfolio. We follow that, and that will happen in the years to come. But we believe that in licensing and acquisition our support of this; that will mean high on the agenda.

For the rest we still have a serious appetite for bolt-on for companies, filling gaps or adding the -- adding value to our existing businesses, could be a product like ZUK, which really is a gap filler for us, which is important.

It could be new technologies. Actually, we try to think about the new technologies more and more, and that's a complexity of the business; it's to be able to ask your R&D to make products for tomorrow, but also to think about what's next, which changes a lot.

When you think about the impact of going from a technology, which is really a molding and metal or stuff like that, to intelligent joints, it's not the same. So it has consequences on your manufacturing; it has consequences on your skills, the people. It has consequences on your R&D. And so on.

So I really believe that it's important to think short term and long term. To do that, we acquire a company, potentially, or we plan to acquire a company, which can help us to go further.

We also invest in some companies a bit of money, placing bets, on new technologies without having to do it ourselves the clinical, without having to take the risk of failure. So we just spread some things here in the different businesses where we are. So that's what we plan to do.

Cash wise, Julie, you want to --?

Yes, so our priorities for the use of the cash. First of all, organic investment.

Secondly, the progressive dividend policy that we follow.

Our third priority is M&A, as Olivier has mentioned, and we've got a strong pipeline.

And then, fourthly, we'll distribute the cash, any remaining cash -- surplus cash to the shareholders.

So that's the sort of framework that we use, that we've laid out. At the same time, we are looking to improve operational cash delivery and optimize the cash through the business. So, obviously, we look at days sales outstanding; purchase days, and inventory churn as the key measures that we use in the business to improve the momentum within the cash flow.

Okay, so we come back to the room for one question, then we'll go back to the phone.

David Adlington, JPMorgan. Just on your ENT and GYN businesses, that seems to be going very well. Just wondered if you see any scope for adding to that, sort of bulking that up from further acquisitions.

Yes, well, it's we can; we could. That's one of the opportunities that we believe which would be interesting for us to develop more these businesses, or one of these business, or none of these business (laughter).

No, it's a good question, because it's -- obviously, we have this in mind, every day think what do we do? GYN is a business, which is roughly, what, $50 million/$60 million. ENT is about $110 million. It's obvious that we don't have the mass that we could -- that we should have to really use the strength of the growth, because there is a growth potential here.

They are mono product businesses, mainly, so adding products or products to these businesses will definitely help us. So we are looking at that, yes.

Going back to the phone.

Michael Jungling.

I have three questions. Firstly, on the sustainability of organic sales growth in the second half of this year, what are the key drivers that will allow you to grow at the same rate for the second half of the year, as we've seen in the second quarter?

Question number two. When it comes to Syncera, can you provide some guidance on the future growth contributions, the timing of it, when Syncera will add noticeable growth to hips and knees? I'm not referring to a specific quarter, but more about which half-year would we see the first signs of a material contribution.

And the final question is on RENASYS. For 2016, US RENASYS launch/re-launch should we expect a slow recovery in profitability, due to launch costs, re-entry costs, and perhaps also free samples to re-engage with lost customers? That's all, thank you.

Thank you, Michael. Let me answer the first question on the -- I guess what you have in mind is the sustainability of the growth for the second half. My answer is, yes, it's sustainable. Actually, we have said that at the end of last year: that H1 was improving. H2 should be also even higher than H1. We believe that this 4Q is the same. Now, I am more confident than I was six months ago, actually.

The first one is mechanical impact. Obviously, RENASYS was not there in the second half of last year, so that will be a good comparable, in terms of growth.

The second thing is, when I see the value of the DTC campaign in the knee business in the US, I believe that -- and you know that there is always a tail effect of this campaign. We've seen that in the past when we did launch this.

I am very confident that the advanced wound care business is on a trend, and this trend is a good trend. I said in my presentation that I am expecting that we'll beat the market again on this, with this division.

Then sports medicine. I don't see why things should change. On the contrary, I think that we'll have more and more benefit with time, in terms of sports medicine, whether it is joint repair or in the enabling technologies when the royalties effect will disappear.

So Europe, which was a handicap for us, is now back on growth, so I think there is no reason why -- it is back on growth not because the markets are much better, because what we have done, changing the management; changing the MDs; changing the structure; changing the focus of the reps; bringing new products on the market and so on is there.

So I don't see any risk of having in the future -- it could happen every quarter. For a quarter basis it can happen, but on a trend it should not be a problem at all. We plan to have sustainable growth.

I reinforce what we said in terms of guidance: that if the market growth can plan for the future about 4%, we plan to grow better than the market.

On the second question on Syncera. When can we see the first results of Syncera; significant results? For me, maybe H2 next year. It should be a year after the launch, because we will launch the concept now, after all these pilot and prelaunch. So that's what I'm expecting to see.

Now, in RENASYS, there will be a recovery, obviously, next year in terms of sale. But during -- not the one in January. It will be step by step during 2016. You don't get the customer back very easily. However, again, as I said, the product is much better than what the other one was. So I'm expecting an investment, but not a crazy investment, to recapture the customers that we have lost with the distribution hold on RENASYS.

So profitability impact, Julie, you want to mention that or --?

In terms of RENASYS. Yes, there will be some investment associated with it. But what we're doing more and more is, we believe the market will start to move towards negative pressure in a disposable fashion.

So we're really putting a lot of emphasis behind PICO, which is really our great product. Then, when we've got a connected version of RENASYS, we'll launch that next year. So there'll be some investment associated with it, but we don't think it will make a material impact on the profitability of the Company overall.

Okay, another question on the phone, and then we go back to the room.

Okay. And maybe a follow-up question on the sustainability of organic sales growth in the second half. Are you concerned that perhaps the Chinese market may slow, as a result of the pressures that we're seeing in the news, the headlines? Is that a concern for you in the second half, given that emerging markets is your key growth driver?

That's a good question. Actually, I'm surprised that we didn't get this question before, looking at what our competitors have been saying in the past.

Yes, we see, in China, a reduction in the capital investment. Philips has said that recently. But for us, it's minimum, because we don't sell a lot of this. But we have seen a small drop in this, that's for sure.

Now, we have more and more tenders in China, and so these tenders are obviously shrinking the prices. So there is certainly a higher price erosion than what we have seen in the past. Having said that, you also benefit from more volume. We have coverage of population, which not covered before, so there is a better volume dynamic.

My view of China is that there will be a small drop, in terms of high-tier revenue in the year to come. However, for us, and that's why I was insisting in launching this mid-tier in China, this will be the second gross leverage to re-accelerate on this growth.

Having said all this, we plan to have double-digit growth in this geography in the future. That should not impact -- when you see their GDP, which is not really bad, the growth, when you see the level of healthcare on GDP, which is not extremely high either, you can really think that healthcare will remain an important part of the growth.

Thank you very much.

Thank you. We go back now -- one more, okay.

Veronika Dubajova, Goldman Sachs.

I have three. The first one is just, Olivier, could you elaborate a little bit on the M&A comments that you've made? Reading between the lines, it sounds like maybe we might -- you're not gearing up for big acquisitions, but you're looking more for bolt-ons. Is that a fair interpretation?

Related to that, where do you see the biggest opportunities for acquiring disruptive technologies, which part of your business?

And then, I have a couple of quick ones for Julie. The first one is just on the gross margin outlook. You've done a terrific job improving gross margins over the last number of years. Surprised to see the drop in the first half. If you can comment on how you're thinking about it for the full year and beyond, and if you still see some opportunities for gross margin to improve from here, that would be helpful.

And the last one is bioactives. Are you still comfortable with a low teens course for bioactives for the full year, or should we be re-thinking that assumption? Thank you very much.

Let me take two questions of this. The first one, very quickly, on bioactives, yes, we're confident; the guidance is there. We plan to have double-digit growth in the bioactive.

In the M&A, first of all, Veronika, I'm very happy to have a question from you. I was anxious not to hear anything from you, so it's good to hear from you.

The M&A, I've never said that I was not looking for an ambitious acquisition. I just -- I focused my talk on M&A, because -- on bolt-on acquisitions and small acquisition, because that's what we have done during the first half in acquiring these four small businesses.

But again, it's -- what we want -- first of all, what I want to do is to be sure that we have, and we see that, an improvement in the organic business. I just don't want to cover something which is not working well with something that we can acquire. I think that's not the right thing to do.

So now, we have been able -- and again, as I said before, I'm convinced that it's very sustainable, been able to accelerate the growth of the Company, whether it is on sales and on profit; and Julie will tell you about this in the second part of the answer.

Now, yes, we can acquire things again. What? This is the question. So, it's what could be transformation? It could be another big company or a company the size of ArthroCare, could be -- again, all the question is to find the bride and to marry the bride. For the moment, there is nothing here that we have clearly identified, which should make sense financially and strategically; both are equally important.

So don't worry, Veronika, it's still in my mind and in the mind of the management. So we look at that for both bolt-on and other type of acquisition.

Julie, about the profit?

About the profit, yes.

Julie is ambitious on profit.

I'm very ambitious with regards to margin, as you know. So in terms of the gross margin, we saw this impact in the first half. We always expect to get price headwinds, and we've always guided on this. It's between 1% and 2% for the Company as a whole; more so in recon, but as a Company as a whole, it's between 1% and 2%.

We've got a cost of goods improvement programme running, which is through better procurement, through using lower cost countries like China for wound production. So we've got a cost of goods improvement programme running, which is tending to offset the two -- the price impact.

The new thing we noted this time, and we mentioned in the presentation, was that as the emerging market currencies have devalued in some cases more seriously, and we've got some of our manufacturing still in established markets, you get an imbalance in terms of the currency impact between revenue and cost of goods.

Therefore, that's put some additional pressure on the gross margins in emerging markets. And because we're growing strongly in emerging markets, that's more -- it's emphasized it more so.

So in terms of how we see this going forward, I would say that we still believe the gross margins will be broadly stable. There will be perturbations quarter to quarter, half-year to half-year. But broadly, we see the cost of goods programmes offsetting it.

In terms of the longer term, clearly, the unknown is currency, and what happens in terms of currency in emerging markets. Therefore, what we're doing is, obviously the biggest defence there is price in emerging markets. We're looking at price impact, and what we can do in terms of price to recover those currency losses.

So that's essentially where we are in terms of gross margin, if that answers your question, Veronika.

I think the other question was on bioactive growth. Yes.

I've answered this one, so it's -- we confirmed the guidance of double digit.

Thank you, Veronika. We'll come back to the room, where we have no more questions.

It's unusual.

It's good. It means everything is clear.

It's unusual.

Okay. Well, thanks a lot, and see you next half.