Olivier Bohuon - Chief Executive Officer, Director, Chairman of Disclosures Committee, Chairman of Executive Risk Committee, Member of Nomination & Governance Committee and Member of Nomination & Governance Committee Julie Brown - Chief Financial Officer, Director and Member of Disclosures Committee.

Lisa Bedell Clive - Sanford C. Bernstein & Co., LLC., Research Division William J. Plovanic - Canaccord Genuity, Research Division Edward Ridley-Day - BofA Merrill Lynch, Research Division Michael K.

Jungling - Morgan Stanley, Research Division Christoph Gretler - Crédit Suisse AG, Research Division Charles Weston - Numis Securities Ltd., Research Division Thomas M. Jones - Berenberg, Research Division Alexander Kleban - Barclays Capital, Research Division.

These documents may contain forward-looking statements that may or may not prove accurate. For example, statements regarding expected revenue growth and trading margins, market trends and our products pipelines are forward-looking statements.

Phrases such as aim, plan, intend, anticipate, well placed, believe, estimate, expect, target, consider and similar expressions are generally intended to identify forward-looking statements.

Forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause actual results to differ materially from what is expressed or implied by the statements.

For Smith & Nephew, these factors include economic and financial conditions in the markets we serve, especially those affecting health care providers, payers and customers; price levels for established and innovative medical devices; developments in medical technology; regulatory approvals, reimbursement decisions or other government actions; product defects or recalls; litigation relating to patient or other claims; legal compliance risks and related investigative, remedial or enforcement actions; strategic actions, including acquisitions and dispositions, our success in performing due diligence valuing and integrating acquired businesses; disruptions that may result from transactions or other changes we make in our business plans or organization to adapt to market developments; and numerous other matters that affect us or our markets, including those of a political, economic, business, competitive or reputational nature.

Please refer to the documents that Smith & Nephew has filed with the U.S. Securities and Exchange Commission, under the U.S. Securities Exchange Act of 1934 as amended, including Smith & Nephew's most recent annual report on Form 20-F, for a discussion of certain of these factors.

Any forward-looking statements is based on information available to Smith & Nephew as of the date of the statement. All written or oral forward-looking statements attributable to Smith & Nephew are qualified by this caution.

Smith & Nephew does not undertake any obligation to update or revise any forward-looking statement to reflect any change in circumstances or in Smith & Nephew's expectations. Good day, and welcome to the Smith & Nephew Q1 2014 Results Conference Call. For your information, today's conference is being recorded.

And at this time, I would like to turn the conference over to Mr. Olivier Bohuon, Chief Executive Officer. Please go ahead..

In joint repair, we continue to launch new anchors. For example, we extended our unique HEALICOIL range. In extremities, we're starting to launch a more comprehensive hand and wrist range to complement our ALL28 foot and ankle offering. We started with a [indiscernible] planning system package for efficient operating room use.

We are also extending our leading FAST-FIX system to address cartilage repair in the wrist. In our DYONICS platform, we recently introduced a first-of-its-kind Hip Impingement Planning System. This 3D software system allows greater preoperative planning and is built on technology we acquired a couple of years ago.

In addition, we have a new REFLECTION [ph] access and video [ph] products all in the pipeline. Turning to Advanced Wound Management, which was flat in the quarter. This compares to a market which we estimate grew at 3%. The Advanced Wound Care revenues fell by 6%.

Our sales channel includes wholesaler distributors, and typically, stocking and destocking patterns roughly equal out. However, this quarter saw an unusual combination of distributor destocking in multiple countries, notably in the U.S., in the U.K. and in Japan.

In addition, there are some areas of wound care where I'm looking for improved performance, mainly in the U.S. and in the Emerging Markets. Both are areas where we can make much more of our very strong product portfolio in the positive market environment.

The Advanced Wound Devices grew at 13% and is now growing from a larger sales base of over $200 million a year. This quarter, we benefited from a stronger-than-normal VERSAJET performance as we launched in China. In negative pressure, PICO growth continues to be very strong, although the traditional negative pressure market remains difficult.

In Advanced Wound Bioactives, we grew at 8%, and I'm very satisfied with the improving volume trends for SANTYL. And our biotherapeutic business is absolutely on track for our 2014 mid-teens percentage growth expectation. We are over a year into the Healthpoint acquisition.

We have started the next phase of our integration, namely looking at ways of leveraging our broader sales channel. We are now selling some of the other smaller biotherapeutic products in Europe; in particular, ProShield, a skin protector and cleanser, made a contribution this quarter. And now I turn over to Julie..

We're reviewing our locations and optimizing our global facilities footprint. In terms of the financial implications of the program, the benefit will be at least $120 million in annual savings, with around half achieved by the end of 2015. The costs of implementation are expected to be $150 million, with around 85% incurred by the end of 2015.

And as mentioned in our Q4 announcement, our bias is to reinvest the savings to drive additional revenue where we can see a strong return on our investment. Next, our outlook for the remainder of 2014. Our previous guidance for the full year is confirmed, both for revenue and trading profit margin.

We expect the business to improve its trajectory during the course of the year, with the second half being stronger than the first. As you model the quarterly saving, please remember that Q2 has 1 fewer sales day than the same quarter last year and some investments are still annualizing through Q2.

Exchange rates, though a slight headwind in Q1, are expected to be neutral for the full year, assuming the rates prevalent at the end of the quarter continue. And regarding the number of shares, we intend to repurchase an equivalent number of shares to those issued for employee share schemes.

And this will keep the issued share capital broadly competent throughout 2014. Finally, we have signed a new 5-year committed $1 billion revolving credit facility with a maturity date of 2019. We now expect the average interest payable on our debt to be in the range 3% to 4%.

Finally, as some of you have started modeling the impacts of the ArthroCare acquisition, I want to remind you of the guidance we issued on the announcement. First, on synergies, we expect cost and revenue synergies to add approximately $85 million to the trading profit in 2017, with 3/4 derived from cost savings.

We expect net revenue synergies of more than $50 million in 2017, with around 40% dropping through to trading profit. As we said before, you would typically expect to see some disruptions in the early months of integration. On the cost side, we expect total integration costs of around $60 million and transaction costs of $40 million.

And overall, we expect the transaction to be broadly neutral in EPSA terms in 2014 and accretive thereafter. Our integration team is fully formed. It is led by one of our most experienced ASD leaders and complemented with a cross-functional dedicated global team.

Day 1 and Day 90 plans are being developed, as well as key milestones for the longer-term post-acquisition period. The team is now ready to go once the final shareholder and antitrust approval is obtained. And with that, I will hand back to Olivier..

Thank you, Julie. So turning to the summary of our first quarter, I would like to add a few comments to Julie's explanation of the actions we are taking to optimize the group structure. These programs reinforce all aspects of our strategic priorities. And I see them as very, very important for Smith & Nephew for 3 main reasons.

First, as a business, we must always strive to be more efficient. And for me, efficient is not just saving cost. It's about doing things differently and doing things better through behaviors, processes, structures and so on. And ultimately, it is due to being faster, more agile in responding to customers.

The second reason is this additional $120 million saving gives us flexibility to invest if and where we see opportunities. It will drive growth over the coming years. Much of the $150 million efficiency program supported our investment in the Emerging Markets and help us to have higher levels of R&D spend.

And thirdly, we have refined our management structure as part of the review. As we have said before, I believe that the management teams work best and more efficiently when they are focused on few priorities that make the most impact. To further simplify and focus our management structure, I am forming a single European team.

By having a single leader across all franchises and single country general managers, we will benefit from closer management of key markets and, with no doubt, realize greater efficiencies.

In addition, as many of you know, Roger Teasdale, our President of Advanced Wound Management, has announced his decision to leave Smith & Nephew a couple of months ago. And I want to thank him for his many contributions to the company. And I'd like to wish him also continued success as he takes the next step in his career.

Our new Advanced Wound Management President has been appointed and will join in June. To summarize our performance this quarter. I think we had a slow start to the year, as we anticipated. There was no surprise. But many of the underlying trends are positive.

More important than a single quarter's results, our investment over the last few years make me optimistic for 2014 as a whole and for the future in general. We have many new products coming out, several of which I highlighted this morning. We have been adding to our sales channels and marketing initiatives.

And finally, we benefit and will benefit from the acquisitions we've made in bioactives and in the Emerging Markets, and we look forward to the completion of ArthroCare. As a result of these investments and the many other changes we have made in support of our priorities, Smith & Nephew is a better business than it was 3 years ago.

We have better teams working in a better structure, delivering better products and better services. And fundamentally, it is this which makes me confident of further progress and ultimate success. So thank you. And that ends the formal presentation, and as usual, we'll now take questions.

[Operator Instructions] Can we please have our first question now?.

Our first question comes from Lisa Clive of Sanford Bernstein..

The big drop in AWC sales due to destocking, do you think this is a onetime effect, or will it affect Q2 and potentially beyond as well? And then third question, negative pressure. You mentioned the challenges in the traditional canister-based business.

Obviously, with the patents going off, there are a lot more competitors in that market, but are there opportunities in this market as well? My understanding is the EU market is still a lot smaller than the U.S. and it seems like there's the potential that, that can change.

So maybe just if you could talk about some of the growth prospects for the traditional negative pressure business..

a, because, I think, that the wholesalers have this trend; b, it could be a specific reason, like Japan where we have, as Julie mentioned, this biannual price cut, and so there is destocking of the Japanese wholesaler before this price decrease; and in some of the places, like in the U.K., you have a consolidation also of wholesalers, in the U.S.

also sometimes. So this has basically been the driver of this destocking for the quarter. Will that continue, or not? Well, I tell you, I don't really know if this will end in Q1 or if we will have still some effect in Q2. Frankly, it's difficult to stress, so we are cautious about this for the short term.

Regarding the Negative Pressure Wound Therapy business, first of all, it's a -- don't forget it's a 13% growth business, which basically is equivalent to the 14% we had in H2. So it's a good business for us. Second, we are very active with the PICO dynamic everywhere, actually.

It is beating month after month its peak, and we have launched a number of extensions to PICO and we are very active with what is happening there. The Negative Pressure Wound Therapy, the classic one, I would say, the -- is truly difficult in the U.S. and in Europe, actually, in some places, because of price and price war generated by KCI.

I think it's still a very interesting market. The volumes are growing. I don't believe that the prices will go to the bottom. And I also think that there is a number of opportunities all across the world, Japan is one of them. As you know, we have launched negative pressure in September 1.5 years ago. We plan to launch also PICO in Japan in the future.

We have launched negative pressure in China, and so far, we're pretty happy with what we see. We have launched VERSAJET also in China, which is not exactly negative pressure but a part of this. So yes, I do believe that there is a number of markets in the world where the opportunities of growth are strong. So this is what I can tell you, Lisa..

Okay, great. And one -- sorry, one very quick last question. On PICO, what's the patent situation like? And basically, I just want to understand when you may see a competitor.

I understand there's something similar in the market from a very small company that is not very good quality, but I'm really more interested in whether your very large competitor could bring up something similar..

Yes, well, it's -- we have seen some competitors coming here and there. Again, it's a market between 2 players, mainly. We have a very strong patent coverage. And as you can imagine, we launched a number of new PICO on a regular basis and with a very strong protection..

And we'll now take our next question from Bill Plovanic of Canaccord..

I'm going to keep this broader picture. So, obviously, a lot of news last week. How do you project that -- the purchase of Biomet by Zimmer, how do you think that's going to impact the global recon market? And then I have a follow-up..

Okay. Well, on the acquisitions front, it's true that we have been -- I mean, in the move during the last 6 weeks, we saw the healthcare mergers, acquisitions, deals and everything. There is with no doubt a consolidation in this market.

There is either you can see deals or deals like what we see in pharma, which try to bring growth where growth doesn't exist. So I think it's -- the Zimmer-Biomet deal, I cannot comment the deal per se because it's not my job to do that. But what I can tell you is, I see that it is a defensive deal.

It is not at all what we, Smith & Nephew, are looking for. We, as you know, are looking for growth opportunities. And I think that what we have done during the last 3 years has shown that whether it is ArthroCare or Healthpoint or small deals in emerging market, that we are looking for a development of the company and not focused scaling.

So this is what I can tell you. Now what that means for us? Well, I do believe that it's on the short term, it will bring us a number of opportunities. There is no doubt about this. Opportunities due to disruption. And second, on a more mid-term, long term, I do think -- I call it neutral, I don't think we change anything.

Big is not beautiful, I don't think this is really what matters. So my view of this is great on short, midterm and neutral then..

But -- and my follow-up on that is, I understand your positioning, but how do you compete in a recon market where the top 3 players are going to own 20%-plus share of that market, especially in the U.S., and you're sitting at a lower level with the consolidation of bundling -- the markets and bundling? I mean, how do you continue to compete in the U.S.

markets as that standalone kind of fourth tier -- fourth position player?.

The first good news, that we become -- we are fifth and we become fourth now, that's a good news for us. But the point is not size again. I mean, you guys talk about bundling every time.

Bundling, what does that mean? Well, you think Smith & Nephew cannot bundle? I mean, Smith & Nephew has more bundling power than an ortho company just doing bundling with hips and knee.

I mean, just look at the CMS communication yesterday night, what did it say? They said that they will extend actually the bundling to the different businesses of the company. So it means that for us, we have more bundling power than any other ortho company because of the Wound, because of Sports Medicine, and so on and so forth.

So I mean, it is not at all a concern. You guys were mentioning also this bundling when J&J has done the acquisition of Synthes, nothing is happening there. We don't see any issue with this. So it's not really a problem. For me and for Smith & Nephew, what matters is to bring on the market disruptive innovations. This is what matters.

It's not bringing me tools. It's just trying to bring products in like what I was mentioning with the JOURNEY II CR, where we can get premium prices, where we can avoid price erosion, where we can make a difference vis-a-vis our customers and our patients..

And Ed Ridley-Day of Bank of America has the next question..

Firstly, on bioactives. Olivier, can you talk a little bit more to those improving volume trends in that business, and what proportion sort of the volume versus price in the first quarter that we are seeing there, that would be helpful? And then, Julie, second question.

On the destocking effects globally, just really for modeling purposes, the 300 basis point headwind, was that just destocking or does the include the Brazilian effect as well?.

Okay. Thank you. I will answer the first question and Julie will take the second one. So Healthpoint, I was -- I mean, Smith & Nephew Biotherapeutics now, I was very happy with the dynamic. Actually, you remember that last year growth has been mainly due to the price increase. The volume of SANTYL last year was actually dropping a bit.

And what we have seen in Q1 is a good recovery of the volume of SANTYL, which makes me extremely confident that the product is doing extremely well. Price increase in 2014, this is a commercial discussion and I'm not going to talk about this, it's not the point.

I think what matters is that we have put everything together in the field to extend the coverage of Smith & Nephew Biotherapeutics. We have put resources, marketing investments, and it goes very well. I think Chronic is doing well, OASIS is doing well. So I'm very happy with what is happening there.

And I'm also very happy with the clinicals of the A22 [ph], isn't that the question? But I will, like that, preempt a question. We are in the Phase III, as you know, exactly on track with our expectations with the European clinical, so everything is doing good so far..

Okay.

And on the destocking?.

Yes. So in the destocking -- in the destocking, as we've had impact in 3 of the countries, U.K., U.S. and Japan largely. And the number I quoted, which was the 3 percentage point increase in the Wound performance, did include the impact that we had on Brazil due to the importation licenses..

That's clear.

And just to be -- so you talked about second quarter, but at this point in time, and looking at the numbers that you can see, should we assume that the destocking should stabilize in the second half or is it really going to be a full year effect year-on-year?.

I think, obviously, we can't prejudge what our wholesalers do. But what we've seen is, we've seen some structural changes in the U.S. market. We've seen a number of the leading wholesalers, McKesson, Cardinal and Medline, undertaking some consolidation, and therefore, running the stock days down as far as our business with them is concerned.

So we see that, that could be more of a structural change. We certainly see it impacting the second quarter. We can't really predict any further than that. Japan, clearly, we expect that to reverse following the price decrease taking effect at the beginning of April. And the U.K., again, we consolidated some of our wholesalers in the U.K.

and that caused the preservation. There may be some impact on that in Q2, but we expect not to see too much in the second half..

Okay, very good. And just a quick follow-up, just on ArthroCare. I mean, obviously, you've got German and U.S. approval, is there any reason why the U.K.

would be delayed or it is -- do you just think it's just a standard delay, if you will?.

But there's no delay actually. The U.K., I mean, have been part of the normal process and we don't have any delay so far nor expected delay..

We take the next question from Michael Jungling of Morgan Stanley..

Hips, 8 quarters below market growth; Knees, 8 quarters below market growth; Advanced Wound Care, probably at best market growth if not below.

And hence, so then the question is, do you feel your strategy of reinvesting as heavily is paying the dividends that you typically talk about? And then question #2, if I look at your Ortho business, at what point do you feel that the opportunity of growing in line with the market has been lost? Because if you look at Knees, you had now JOURNEY II in the U.S.

market probably since about Q1, Q2 of 2013. Even in Q1 in the U.S., you're growing below market, that's sort of 4, 5 quarters after introduction. It seems to me the opportunity is starting to fade that JOURNEY II is starting do what it was meant to do. That's all. Just those 2 questions..

Thank you, Michael. Those are good questions. Let me start with the strategy. You mentioned the 3 fields, which are mainly Ortho, Reconstruction and Sports Medicine. This is not where we have done the investment with the $135 million of savings that we have generated since the start of this job. We have invested heavily in R&D, #1.

Okay? And R&D is for the future. And I tell you, I have started to see the results of this portfolio. We have in our hands, and you have mentioned JOURNEY II -- if you give JOURNEY II, the CR, all the products I've mentioned, between HEALICOIL, and all this, here they are. So that's #1.

#2, the big investment have been in the emerging markets and in the, yes, international area. Whether in China, in India, in Brazil, Turkey, Middle East and South Africa, and I do believe that the results are here. Actually, the growth is extremely high. It will represent 25% of the sales of the company at the end of 2017, '18.

So I'm not like you, challenging the value and the return of the investments which have been done. They have been done in the right places, geographic or product franchises. Now we are proposing a new program, which is a must do, and you remember that this is not new.

It's actually aligned with one of the strategic pillars of the company, which is to simplify the organization, and we need to do things. So Julie has mentioned, I'm not going to come back on the 4 things that we are going to do. But it is clear that this will generate additional savings.

And we have mentioned more than $120 million of potential savings coming out of this. What are we going to do with this money? Well, I don't know, I don't know. We said reinvestment, yes. But again, I think it's maybe not clear enough, and I want to reinforce the message that reinvestment will be done if we have strong business cases.

If we do not have strong business cases, we're not going to reinvest this money. We are going to keep it and save it. So this is what I want to tell you. It is not -- don't believe that $120 million will be invested here and there without a very clear expectation of what it will bring to us.

So I think -- I hope this is clear and that there is no confusion about that. Now your second question, on the Reconstruction business. You mentioned JOURNEY II, first of all, it has not been launched in Q1 last year. It has been launched after the Academy. And it was just disclosed actually at the Academy.

So the relaunch of JOURNEY II BCS has been starting maybe in the May or June of last year. As you know, we have built a lot behind this. You don't launch it on a big scale without knowing the value of this. So we have done that on a small launch at the start, and then we accelerated this at the end of the quarter. And it goes extremely well.

I mean, we don't disclose the results of JOURNEY II BCS per se. But I tell you, they grew high, high and strong. Now we have also the CR, which has been presented at the Academy also this year.

And I'm extremely confident that the launch of JOURNEY II BCS in Europe just starts slowly, slowly because we wanted to make it slowly in the first quarter, we'll benefit. Again, if you look at this quarter, I think it becomes clear that the explanation of the quarter is not at all the problem with the products. We don't have.

I think the only product issue we have had this quarter, if any, is the core knee business, which was lower than Q4. Q4 having been pushed by the DTC campaign that we have done. So obviously, we have responded at the factors, Brazil and ObamaCare. This is why the situation has been like this, this quarter.

So I mean, believe me, the Reconstruction -- and I reaffirm the guidance, which is that we will grow at market in 2014 with the Reconstruction, and this is absolutely clear for us..

But maybe just one follow-up.

Olivier, when you came on board on 2011, did you think that your 3 largest divisions would underperform the market for so long? I mean, was that something that you think would happen?.

Michael, first of all, Wound division has never underperformed the market. It has always been over the market. So you talk here, Sports Medicine, which is second division, has been overperforming the market. The only division which has been lower than the market is Reconstruction and Orthopedic, okay? So I knew that, I said that.

And I said that this will take time because we are at a cycle product issue at this time. And until the new products will come on board, we'll not be in a position to grow better than the market. This has been very clear and said everywhere.

So now, what I tell you is that I'm happy because for the first time, and I said that in Q4, the Reconstruction business is going up. We all have issues, you remember the BHR, which is still a problem for us. I mean hip business, BHR is minus 14% this quarter again, so it drops 1 point, the growth of hip.

It is now lower and lower, so I'm confident again that the hip business, pushed also, and that's why we have done the DTC campaign and the relative in the first quarter. You will see the result of this. I am confident and I said that, I'll say it again, that this business is a strong business for us in 2014..

The next question comes from Chris Gretler of Credit Suisse..

Actually, I have now 2 questions. Now the first, I'm looking at your first quarter, what is actually now below with your internal budget? That will be my first question. And the second question relates to your optimization program.

And I think we have now seen another one, and I think a colleague, Tom Jones, did one, and the calculation, how many we've seen already over the last couple of years.

Do you think it's actually fair that we always take out the cost kind of as one-off cost and then basically keep the benefit kind of on the trading profit line? Or would it actually it would probably be more fair to reflect that for both sides in your underlying performance? And actually specifically, what's the cash portion of your -- the cash cost portion of your optimization program?.

Okay. Thank you, Chris. Well, first question is obviously a question that we do not usually answer, but I'm going to give you few -- a few answer, though. I mean, #1, I've tried to say that during my presentation. The quarter is as anticipated, just to make a guess of where we are versus our budget.

I think the only place -- and we knew that the Q1 will be low, and I said that clearly, I remember. I said don't extrapolate Q4. The market is not going like this on a permanent basis, we will see a reaction. It is happening. In -- the only surprise I would say I have had was the destocking, which maybe could be a surprise, that's all.

The rest, we knew that we had timing, we knew that Trauma will be low because of the strong competitor, we knew that the emerging market, what, would be a little bit handicapped by the Brazilian disruption that Julie has mentioned. We knew that we have -- had a tender very strongly, a strong tender last year in the Middle East.

And so we knew everything. So this is not a surprise for us. So we -- and that's why we are extremely confident in our ability to grow and to confirm the guidance we gave. So I hope I answer your question more or less.

I knew Chris will ask this question on under the line, because you asked me the same question 2.5 years ago when we did the first selling program. And my answer is the same. Well, I don't think we can afford to jeopardize the P&L with $150 million of cost. I think it would be a mistake.

It will handicap strongly our judgment and our ability to invest where we see opportunities in terms of investment and the return. So I think we have done the right thing in doing that. It's not something we are going to do every day. It is something which is called one-off actually because it's one-off.

It is the follow-up and I hope the last program that we do for a while of improvement of the company. And it's a long-term improvement. It's very important to do it. So what is the cash portion of this? Well, it's mainly cash, I would say. I don't want to give you a precise number, but it's mainly cash..

I mean, just for us, it's basically probably more fair to look at the reported number in that end, because, I mean, it looks like this is an optimization and I fully appreciate that you are doing it and I think that's completely correct.

But just for us, to evaluate the performance is probably be should take in both sides, because this is -- I mean, it's kind of one-time, but it's basically an ongoing optimization of the company over the years, isn't it?.

Chris, this is Julie. I think the key thing, we want a very, very major program for Smith & Nephew. This is the first time we've looked at the functions globally, and this is the transformation of 4 major supporter-enabling functions in this business.

And we're also moving to a single GN modeling Europe, which is a different model, a completely different model from where we've been. We do -- I would say, that we will make full disclosure of these amounts. So in the adjustments between trading and operating profit, EPS and EPSA.

So if you want to make the adjustments and put them back into the P&L, feel free to do so. It's entirely your choice. We have full disclosure of all these amounts. But we believe and very, very firmly believe that this a major program for Smith & Nephew. We want to be able to accelerate this program and move quickly.

You've seen that about 85% of the costs will be incurred in the first 2 years. So you can see the pace at which we plan to move this. And we feel it's better to treat this as a one-off exceptional item, but it will be fully disclosed to you..

We now take the next question from Charles Weston of Numis..

Two questions focused on your Knee business. First of all, again just focusing on the U.S. sub markets' growth. I understand you're saying that much of the weakness has come from the non-JOURNEY II knees.

And if JOURNEY II did really well, then these knees must have done really quite badly, which you seem to say is due to the positive effect of the DTC campaign. So I'm just wondering whether you could give us some sense of the bang for the buck that you get from DTC.

Is it worth doing more of this going forward? Obviously, you're doing some from the hips now.

But if it has a sort of 1 quarter effect and then falls back, are you getting the sustained benefit from the program? And secondly, on -- also on Knees, just referring back to the hazard alert in Australia for the JOURNEY I, I'm just wondering if you've seen any knock-on effect with any other regulatory bodies taking a look at that product in any other country?.

Okay. So regarding Australia first, I'll give a quick answer, the answer is no, we have not seen any issue with JOURNEY I on any other country. Your second question, on the Knee, so the Knee has been, in the U.S., growing at minus 1%.

And it's strange, obviously, if you look at what was the Q4 which was 11%, so it's a movement of 12 points between Q4 and Q1, when the market movement has been 7 points, which is going from 9% to 2%. First of all, I think you have to consider 2 things. A, the fact that Q4 was an exceptionally high quarter for us.

We had 1 extra day in Q4 last year and the competitors have 1 extra day in Q1. So make the calculation, it basically gives those 3 points between us and them. So having said that, I don't believe that it's different than what the market has done. So we are roughly at market.

Q4 was strong because, as you say, well, you are a little bit tough on us to say that DTC is just a quarter value. It is not actually. We have started. It is dynamic. We have started the campaign in May. It creates a momentum for sure, especially when the market is good, which is the case in Q4. We could see still some DTC impact now.

We don't, because the market has been a disaster in the quarter. But I do believe that this is a very important thing to do, and especially when you have new products. Actually, we are doing, as we said, the hip, which started in February. We expect to see at the end of Q2 the results and the impact of this VERILAST hip campaign.

We are also thinking about doing new campaigns in Knee, just to tell you that we believe that it's -- the payoff is good and the return is good. We monitor, as you can imagine, extremely closely the value of these types of investment, and all of the indicators are telling us that it's a good way of investing our money..

Okay.

Just -- so in terms of the timing, you haven't -- that's not set in the stone yet on the Knee side, you're still deciding?.

Yes, it's still under discussion..

The next question comes from Tom Jones of Berenberg..

I have 2 questions. The first is on the Wound business.

I'm not fully understanding except why the consolidation amongst your distributors is causing a bit of a stocking effect, but what's perhaps more concerning to me is why you're seeing consolidation amongst the distributors and what potential impact that might have on the Wound business downstream.

I mean, are they consolidating because conditions in the end-user markets are getting significantly more tough? And therefore, should we expect down the line more pressure to feed up the chain to you? So I suppose that's the first question. The second question is a little bit of a follow-up to Michael's question, really.

I noticed that the 24% trading margin target that you put out at the start of the last restructuring program is not the feature of the language around this current one. I do fully appreciate the arguments that you're -- what matters is the absolute amount of trading profit, not the margin.

But the problem we have is we have to build a model and stick a margin target and stick some revenue numbers in. So maybe you can sort of address that issue, perhaps with reference to way you expect returns to go over the next few years.

If you're investing and obviously it's paying off, we would have expected to start to see return on capital starting to improve. But in fact, return on invested capital has only deteriorated in the last 3 years.

So are we at the bottom now or is there going to be another couple of years of pressure on your return on invested capital before we start to see the benefit? And maybe, is it fair that we should focus more on the ROIC now rather than the absolute sales growth or trading margin that you produce? Is that a fair comment?.

No, I don't think so, Tom. I think it's -- the 24% margin has been said, has been announced and will happen. So what I said to you during the last quarter when answering question is that, we are not driven by this goal of 24%, but it will happen.

We have guided the Street last quarter in saying that the margin of 2014 will be better than the margin of 2013, and this is the case, it will happen. You cannot be guided by a Q1 which doesn't present at all what is the trend of the company. We expect and I expect with no doubt a permanent improvement of trading margin in the years to come.

That's why also we do this trading, this optimization exercise, they are important because they will help us to grow at 24% and further. So I don't see the point here because we have not changed anything. It's not like I was tell you, no, we are not -- never going to achieve 24%. That's not the case. We are on track, as expected, to reach 24%.

And we are on track of making a margin in 2014, which is better than 2013. So for me, there is no issue there. It could be 25%, 26%, 27%, I don't know. The point is, we are making the choices to either invest where we believe it makes sense to invest to protect the long-term revenue of the company and revenue will come also.

Again, the strategy of the company is clearly to go on higher growth businesses, you know that, and we go there, whether it is through acquisition or through organic investment in the right fields, geography or franchises. It doesn't come in Day 1. You need to have products and we start to have products to do that.

Now on the one question, the consolidation of the wholesalers. Well, when you have 2 players becoming 1, usually, you see a drop in inventory, and this is what is happening. Now is it going to be a trend, the consolidation? I don't think so. I think that it's something which is happening now.

It could have been the case last year or at the end of the year. I don't think this is a trend that you can, say, oh my God, this will happen again and again and again. No, it doesn't. It doesn't. What Julie was explaining that what we don't know yet is what visibility can we have for Q2 on this.

Again, we are extremely confident in the quality of our business and the quality of revenues for 2014, so that's what I would like you to keep in mind..

Okay. I was just a bit more interested in why they're consolidating, really, and what's going on in the end-user markets because they're a bit -- of all the markets you operate in, the wound care market is probably the hardest for us to have any visibility on..

Yes. I did not talk to them, so I don't know why you have had some consolidation. I actually just don't know. Is it a defensive stuff that they do like what is happening with Biomet consumer? I don't know, Tom, frankly..

And just if I may come back on the margin return target, I mean just to ask the question again, really, about the return side of the equation. Returns have been under pressure as you've invested both with through the P&L and through the balance sheet.

Are we approaching a floor in your return on invested capital and should start to expect that to increase in coming years or really, is it going to stay at this level for a period of time before it accelerates for some time in the medium term? I'm just trying to get a better reconciliation for how you expect your return profile to pan out..

Yes. It is with the return profile, as you mentioned, we've been through a period of investment. As Olivier said, we do expect our margin will improve, our plans are exactly on track.

So if we exclude any large acquisitions, then yes, the return -- the return on capital in the business will improve, and you also see the margin improve over the course of the next few years..

Our final question for today comes from Alex Kleban of Barclays..

Just one quick question on the Biomet and Zimmer.

Do you think you can benefit in any way from disruption in their business should the integration move forward? And do you have plans in place, and how aggressive do you think you can be in terms of maybe approaching some of the key talent that they have?.

I think this is exactly what is going to happen. I'm very, very happy actually to see this because it gives us huge opportunities here and there. Whether, as you said, in new talents leaving the company because jobs will be kept, so we have opportunities there.

Or business disruption, which is always happening in this kind of merger due to cost cutting, or distributors or whatever. I mean, it's a -- so I said, I think it's on a short term, mid-term, a very good opportunity for us, and on a longer term, it is neutral..

Any chance you could try to quantify that at this stage or maybe just too early to tell?.

It's too early. I mean, we are looking at that, obviously, as you can imagine in-depth, but it's too early to quantify that. Thank you very much, so this ends this Q&A session. Good day to everyone. Thank you..

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