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.

Michael K. Jungling - Morgan Stanley, Research Division Veronika Dubajova - Goldman Sachs Group Inc., Research Division Thomas M. Jones - Berenberg, Research Division William J. Plovanic - Canaccord Genuity, Research Division Yi-Dan Wang - Deutsche Bank AG, Research Division Lisa Bedell Clive - Sanford C.

Bernstein & Co., LLC., Research Division Edward N. Ridley-Day - BofA Merrill Lynch, Research Division Justin Steven Barrie Smith - Societe Generale Cross Asset Research.

Good day, and welcome to the Smith & Nephew 2014 Q2 and Half Year Results. Today's conference is being recorded. [Operator Instructions].

Okay, good morning, everyone. So I'm Olivier Bohuon. I'm here with Julie Brown, our Chief Financial Officer, and welcome to our second quarter presentation. I will cover the highlights and then hand over to Julie to take you through the numbers. I will then come back to discuss strategies. Stay tuned to a long presentation.

I'm going to spend a little more time than usual. We have some interesting things to share with you. And as usual, we'll take question at the end of the presentations. So we delivered underlying revenue growth of 3% this quarter. After adjusting for currency and ArthroCare, this presents reported growth of 7%.

We also had 1 less sale day, reducing growth by just over 1%. Our strong performance this quarter reflects the successful execution of our strategy. Our investment in Emerging markets has delivered a 17% increase in revenue. And we drove good growth in Bioactives and Sports Medicine Joint Repair.

In Orthopaedic Reconstruction, we saw an improved performance in both U.S. Knees and Hips. This good global dynamic were partially offset by our performance in Wound. We also completed the ArthroCare acquisition in the period. I'm very confident in our ability to deliver and very excited by the many prospects for our enlarged Sports Medicine business.

The trading profit was $255 million, giving a trading profit margin of 22.3%, an improvement of 70 basis point over last year. We achieved EPSA growth of 13%, reflecting the positive operational performance, the addition of ArthroCare and the result of a lower tax rate.

Today, we also announced an interim dividend of $0.11, in line with our formula and representing a 6% growth. I will spent some time on our strategy later in the presentation. It is 3 years now since we have announced here the Strategic Priorities. In that period, we have been successfully rebalancing our business toward higher growth areas.

And today, we'll share some exciting new initiatives as we seek to drive greater growth by providing solution for the unmet needs of our customers and our patients. This slide captures our underlying growth in the quarter, on the left-hand side, geographically; and on the right, by product franchise.

One month of ArthroCare trading is included in this revenue, and it represents $31 million. In the U.S., revenue growth was up 4%, driven by our ASD franchise and Bioactives. In the Other Established Markets, sales declined by 3%, primarily due to a weak quarter in Europe.

Emerging & International Markets grew by 17%, and we are very pleased with this performance across the majority of countries. China continued its very strong growth trend. The Middle East benefited from a large Trauma shipment. India performed very well, and we are encouraged by the performance in Turkey.

Although Latin America remained weak, we expect stabilization of our business in Brazil to deliver a better second half. Our Other ASD segment now includes our ENT business together with gynecology, and their combined underlying growth rate this quarter was 18%.

I will now turn to look at each franchise in more detail, starting with Hip and Knee Implants. Our global reconstruction implant revenue was up 3%, which we estimate is up the market growth rate. And the market itself remains stable, showing a slight improvement over Q1.

We performed very well in the U.S., where we outperformed the market in Hips and in Knees. We continue to see strong traction and uptake for JOURNEY II. I remind you that this is a new platform, which will drive growth for future quarters as a full global rollout continues. In U.S.

Hips, we delivered 3% growth, helped by a successful marketing campaign which we started in March last year -- actually, March this year and easing headwind from BHR. Europe remained challenging for us. As I said last quarter, we have reinforced the management team and moved to a single Country General Manager structure.

This, combined with improving our IT in business intelligence platform, means I'm very confident that we will see the benefits of all these actions in the next quarters. Turning to Sports Medicine Joint Repair and Enabling Technologies, both of which include 1 month of ArthroCare sales. ArthroCare contribution was in line with our expectations.

Joint Repair performed very well, growing at 9% in the quarter. We continue to see an excellent response to our new bioabsorbable suture anchor HEALICOIL REGENESORB. Enabling Technologies now include the fast-growing Coblation technology from ArthroCare.

Our Trauma & Extremities revenue grew by 7% and benefited from a tender win in the Middle East, as I mentioned earlier. Looking across 2014, we have a strong pipeline of new product launches in all these franchises. These include extremity product to treat the lesser toe, shown on the slide, and some extension to our SUTUREFIX Anchor range.

Turning now to Advanced Wound Management, which was flat in the quarter. This compared to the market, which we grew at 2%. Advanced Wound Care revenues were down 8% due to a number of interrelated factors. This includes some further destocking in our wholesale channel, as guided to last quarter, as well as our own execution.

This is weaker than I would like, and it has been addressed strongly by a reinforced management team, greater resources on product -- on the focus of some products, like PICO and ALLEVYN Life, and definitely, a closer alignment within Wound Care, Devices and Bioactives. Advanced Wound Devices grew at 1%.

In negative pressure, PICO growth continued to be very strong, although the traditional negative pressure market remains difficult. You may have seen our RENASYS press release from the 23rd of June. We suspended the commercial distribution of our traditional negative pressure range in the U.S., following the receipt of a warning letter from the FDA.

We are working hard to return the product back to market, but this will impact the Advanced Wound Devices growth for the rest of the year, and Julie will cover the financial impact later in her presentation. In Advanced Wound Bioactives, we grew at 21%. And I'm pleased with the improving volume trend for SANTYL.

The quarter also benefited from a pull forward of sales ahead of an inflation-linked price increase, and hence, we do not expect to see this type of volume growth during Q3. And we remain extremely confident in the guidance we gave, which is midteens growth for the full year. So now I'm going to turn over to Julie for the financial figures..

first, revenue and profitability analysis by business segment; second, the income statement; third, cash flow and capital allocation; and fourth, the outlook for the second half of 2014. My first agenda item is an analysis of revenue growth by business segment, but first, to comment on the acquisition of ArthroCare.

The results I'll run through today include 1 month of trading from ArthroCare. And to give you an idea of the scale, sales in the first month was $31 million. Overall, group revenue in the quarter grew by 3% on an underlying basis. And underlying growth rates are being adjusted to give a like-for-like year-on-year performance.

By division, Advanced Surgical Devices grew by 4%, and Wound Management was flat compared with the same quarter in the prior year. Acquisitions added 3% to our growth rate. This includes the acquisitions in Brazil, India and Turkey and the recently completed ArthroCare deal. Currency impacted the group favorably by 1%.

And in reported terms, group revenue growth in the quarter was 7%. Finally, there was 63 days this quarter compared with 64 days in the same quarter last year. And we estimate that it if had been the same number of days, our growth rate in the quarter would have been a little over 1 percentage point higher.

This slide shows the underlying revenue growth by geography and by business segment. Revenue is shown in the top half, and the growth rates are shown in the lower section. Turning to the bar chart in the lower section, ASD growth worldwide was 4%, and notable was ASD growth in the U.S., driven by our Recon business and Sports Medicine.

In Emerging Markets, our ASD products grew by 19%, driven by China and the Middle East. Looking at the right-hand side of the chart, our Wound sales were flat in this quarter, and there are a number of factors to consider here. First, the U.S. business delivered a strong performance with 7% growth, led by Bioactives.

Second, our Other Established Markets were weak, with the decline of 8%. Destocking impacted this partly, as we chose to exercise more discipline on price and credit terms with our wholesalers. And third, Emerging Market growth was strong, with Wound performance at 13% growth. Turning to profitability by business segment.

The Q2 group margin of 22.3%, represents an increase of 70 basis points compared to last year. Our efficiency program has now delivered annualized benefit of almost $140 million. The ASD margin was 23.7%, an 80 basis point increase compared with 2013; and while Advanced Wound Management has a margin of 18.8%, an increase of 10 basis points.

Now to my second agenda item, the group income statement. Trading profit in the quarter was $255 million, a 6% increase on an underlying basis, driven by strong cost control. We have the same adjusting items as in previous quarters, with one exception.

So taking each in turn, restructuring costs, these relate to our group optimization and efficiency programs, acquisition and integration related costs and the amortization of acquisition intangibles have increased following the acquisition of ArthroCare.

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

For the half year, our legal and other items is a positive $10 million as a result of the pension credit we received in the first quarter. Finally, a reminder that as per the last quarter, a full bridge of our adjusting item is shown in Note 8 to our accounts. Moving down the income statement.

Our expected tax rate for the full year has reduced to 28.0%. This represents approximately a 200 basis point reduction since 2012. And I will come back to tax in our outlook section.

EPSA has increased 13% in Q2, and this reflects underlying profit growth of 6% compared -- combined with the acquisition of ArthroCare, favorable currency movements and reduced average share count and our lower tax rate. I will now turn to my third agenda item, which is the free cash flow.

In the quarter, we generated trading cash of $179 million compared to 170 -- $187 million in the same quarter last year. Trading cash conversion was 70%, higher than Q1. And building on the comments we made at Q1, we are in an investment cycle, and we've taken direct management action to continue to build inventory in support of our new launches.

We're building safety stock ahead of the whole move to China. And we're also supporting our growth in tender business in the Emerging Markets. For the full year, we expect cash conversion to be slightly higher than the 70% we've seen this quarter. Now an update on the cash flow and capital allocation for the half year.

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

The most significant item for the half year was the $1.6 billion of net cash for acquisitions, and this was predominantly ArthroCare. We also spent $30 million on share repurchases during the period, and this relates to our commitment to repurchase an equivalent number of shares to those issued under employee share schemes.

So at the end of June, we closed with net debt of $1.9 billion, and this represents reported net debt-to-EBITDA ratio of around 1.4x. Given our debt structure, we now expect our interest rate to be around 3%, which is lower than previously guided. Finally, our outlook for the remainder of 2014.

Our previous guidance for the full year remains unchanged, except for the impact of the distribution hold on RENASYS in the U.S. This, together with other factors mentioned in the presentation, means that our Wound performance for the full year is expected to be below market.

For your models at this stage, it will be prudent to assume that it will take at least until the end of the year to resolve the situation in the U.S. We expect a revenue impact for the second half of $30 million, with approximately 80% dropping through to trading profit.

Regarding trading margin, we're maintaining guidance that we expect to be ahead of the prior year. We're working to offset the impact of the distribution hold through actions with U.S. Advanced Wound Management and our cost savings programs. We have updated our tax guidance for the year. We're now expecting an effective rate of 28% for the full year.

And also, as a result of a number of operational and structural changes to our business, partly in response to the ArthroCare acquisition, we expect the effective tax rate to reduce by 150 to 200 basis points over the next 2 years, absent any changes to tax legislation.

To help you with the modeling of ArthroCare, we achieved monthly sales of $31 million during the first month, and this is a good indication of the run rate for the rest of the year. So moving on to considerations for your Q3 models.

Exchange rates are expected to be slightly positive in Q3 and neutral overall for the full year, assuming the rates prevalent at the end of the quarter continue. In terms of cost phasing between Q3 and Q4, the cost of our HP802 trials will peak in that third quarter. And this, together with the impact of U.S. RENASYS, will weaken Wound margins in Q3.

We then expect to see a strong recovery in Q4 due to the seasonally higher revenues and our efficiency programs. Finally, for your reference, we have summarized technical guidance on Slide 36 in the appendix to this presentation. And with that, I would like to hand back to Olivier..

one, a clinically proven leading product from our current range; two, cutting-edge technology, which streamlines the supply chain and logistics operations; and three, a technical support in the ORs with training and technology rather than a technician in the OR. Natural place to launch this alternative solution was -- is in the U.S.

And so let's look at the first element. It will come as a little surprise to you that the needs of a vast majority of patient are met by core primary Hip and Knee ranges. Under Syncera, we are offering a reduced range of implants. Our best-selling GENESIS II Knee and our most common hip combination of a SYNERGY stem and a REFLECTION cup.

And we believe that these 2 products are suitable for over 80%, 8-0, of procedures in the U.S. Technology and the efficiencies it brings is a significant part of the solution. Those of you who have seen procedure and talked with supply chain specialists will realize the huge logistical complexity involved in hip and knee procedures.

With Syncera, this has all been streamlined from the OR through to automatic replenishment of product through a connected supply chain system. Clearly, appropriate training and support are vital for surgeon and the OR staff. A sales rep has been the traditional method of providing this for the last 20 years.

I'm sure this will remain the preference for the majority of surgeons, and it's extremely important in the most difficult cases. However, our feedback from surgeon and healthcare provider firmly conclude that this is not the only way to provide adequate support.

With Syncera, we'll provide training at our state-of-the-art Memphis facility or on site, as well as a clinical transition team. And finally, there will be ongoing point-of-care support in the OR, all facilitators for technology. Attractive economics. For the healthcare provider, the cost saving are obvious.

Our technology package streamlined the supply chain, making it much more efficient. The healthcare provider will enter into a multiyear contract. They purchase the instrument sets, and they also own the implant inventory they hold.

This combination of technology and commercial model will allow the implant to be offered at a substantial discount to the U.S. average price, which is now 5 -- 1,500 -- sorry, $5,500. To illustrate the saving, I think that's a good way to show it.

If you take an hospital that does 700 implants a year, over the 3-year contract, this hospital will enjoy a net cash flow benefit of well over $4 million. So why is it attractive for Smith & Nephew? Well, we believe that this market represents at least 5% to 10% of the U.S. accounts.

Syncera allow us to provide a new group of customer, a new group of customer, they are not existing customer we have, offering them a solution for their unmet needs. Economically, our sales and marketing costs are reduced, as is our working capital and fixed assets.

Our logistics are made much more efficient through the use of technology and reduced implant tranche, which will support 80% of the primary procedures. So let me be clear, this would not replace the existing business. As you have seen, we have a number of technology, a number of niche, and we believe strongly in the disruptive innovation.

But there is a space for this one, which is a new set of customers, again, 5% to 10% of the market, and this is what I believe a great combination. Economically, you have seen it. So there is, I believe, still a space for the existing business. There will be still space for the commercial people, the reps.

Again, it's not to replace one model by another one. It's just to have a combination of both offers to basically answer the needs of the customers. We have been working on this project for over 18 months, understanding the customer need, the technology require to deliver this efficiently, and I'm extremely encouraged by the response.

Healthcare professional are pretty excited with this solution. We are finalizing contract with a cross section of new U.S. customers, and we'll start supplying the products very shortly. This is a very exciting development, and I look forward to updating you in the coming quarters.

Finally, I will talk you -- I will talk about how we supplement the organic growth through acquisition. And this slide sets out the transaction we have announced since I arrived. We have done 13 deals here for a total consideration of $2.8 billion. Virtually all these transaction are tracking at or ahead of our plans.

The scale varies, but you can clearly see our strategic intent. We have built a proven track record of delivering value through acquisitions. So let me, talking about acquisition, take you through ArthroCare, which has been completed at the end of May. I've set out here, on the left, a reminder of the strategic rationale for the acquisition.

It has only been 2 months, but everything is on track. And I believe we'll deliver strongly against all of these. I'm very impressed by the quality of the ArthroCare people. I'm also pleased that many are taking larger roles at Smith & Nephew.

To provide you with additional insight into ArthroCare and the Sports Medicine market, we will be holding a Capital Market event here in London in early November, and I hope that you will be able to attend. So to conclude, this was a good quarter.

I'm very pleased with the sales performance, notably, across Recon, Trauma, Sports Medicine, Bioactives and Emerging Markets. I'm also pleased with our profit and earning growth. Even our tax rate has improved, every single rights [ph]. I'm excited about the many opportunities we see at ArthroCare.

Of course, as those of you know me, I am not totally satisfied, as ever; not everything was perfect in the quarter, for sure; and there are areas where I'm looking for a significant improvement. Taking a step back and reflecting of the third anniversary of the priorities, I see many things to be proud of. We are successfully rebalancing the business.

And we're an active [ph] company, I think so. Thank you very much for attending. We are now happy to answer any question. Did I forget something or not? No, I don't think so. So yes, let me go back to my place and....

It's Michael Jungling from Morgan Stanley. I have 3 questions. Firstly, on the M&A side, and Olivier, I think you mentioned recently in the press that Smith & Nephew can go on it's own and there's no need for M&A.

Is it -- are you categorically against M&A? Or is there a price where you would say absolutely would make sense for Smith & Nephew to be in the ownership of someone else? And point number two or question number two is on the cost savings of $120 million that were previously announced but have been reemphasized.

Have you decided how much of that will go to margins compared to the past? That will be useful.

And thirdly, on the tax rate, can you highlight what you are doing to reduce the tax rate and whether there is actually incremental scope to do more than 1 or 2 points of incremental tax rate benefits?.

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

My comments on M&A usually is that what I don't like in the M&A is the defensive M&As. This is not something we have been looking at. I mean, we have always tried to -- and that's why, if you remember, I've mentioned Biomet many times. Think that makes sense for us to be with Biomet? No, it doesn't. I mean, I'm not looking for any defensive deal here.

We want for -- we want aggressive deal, helping us to grow better. And now all this inversion, I mean, all this noise around M&A, U.S. companies acquiring European company, okay, this is all his. I tell you, I'm not at all on this stuff. I mean, we are focused on making the business better.

This is not my job nor the job of the company to make it, plans of what could happen and so on. So for the moment, it's not a distraction for us, I tell you. So we have a board. We have an entire board. That's a board matter. It's -- for us, our job is to make this company better and more effective. So -- but again, I mean, things can happen.

You'll never know..

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

Recon, I -- maybe I was not very clear of what I've shown, but I see the Recon business with a number of opportunities. First of all, 85% of the growth in the Emerging Market of Smith & Nephew is coming from this business. So it is the anchor of the growth of Emerging Markets, there's no doubt, and we have a great portfolio for that.

For us, what we do now for the midtier. Second, we have all these opportunities within the Reconstruction to have a significant good growth, and you have seen the JOURNEY II dynamic starting to -- despite many questions that we have had in Q1 about -- are you able or can be able to make something? Yes, we are. Again, it takes time.

I mean, it's a business which is not a -- moving like this, quickly. It takes some time. I think now we have found the right products. We have a great development of the JOURNEY II follow-up, a great development of the VISIONAIRE technology. These new instruments, which are the disposable instruments.

I mean, there's a number of things here that we are very proud of, and I'm very confident. So I don't think that putting this business within other hands will be better. I don't think so because, again, when you -- and that's what I've said about Biomet and Zimmer.

I call it defensive deal because I don't believe that 1 plus 1 equals 2 in terms of R&D, in terms of new products. I think that 1.1 will be made 1.3, a 1 plus 1, because -- what is happening? Usually, you have a shrink of -- it's just to save costs, and that is not the point for us. So I don't think it will be much better.

I think we have the tools to make this business a good business. And again, as I said, it's important for our cash, it's important in terms of Emerging Market, and we believe it could be also a significant growth lever.

Julie, on tax?.

I'll take tax and then come back to you. The other question was margin..

On the margin, yes..

Yes, I'll take tax and then -- I'll take tax and come back to margin. So in terms of tax, I mean, as you know, Michael, Smith & Nephew's tax rate has been 30%, actually, in the last 4 years. And the decisions that have driven that are obviously historical about where we've placed IP, manufacturing, strategic marketing, promotional execution.

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

So essentially, what we've done is we've looked at those key value drivers and looked to improve the tax rate, as I mentioned to you I would when I joined Smith & Nephew. So we're now -- we've delivered a 200 basis point reduction in 2 years. I see it as being 150 to 200 over the next 2 years.

If you say, "Are you happy with that?" No, I would like to do more. But clearly, I will always work with the business and follow the economic realities of what we do.

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

So the pattern is said to be going towards a lower tax rate [ph] countries, is that what you are suggesting or....

Only if it's consistent with the way we run the business and the way we want to run the business in terms of where those activities are placed, yes. Yes. And we've also had the benefit of a more favorable change in U.K. tax legislation as well. Of course, we're a U.K.-based company.

In terms of the underlying rate, now it's down -- will be down to 20%, we've got a patent box. So there's a number of favorable things in terms of legislation as well.

Okay?.

Michael, I remember your question last quarter about "what the hell is happening with the money you save? We don't see the return on this," which was a great question, actually. I've been reflecting a lot on this. Actually, we have said, if you remember, we had a plan which was supposed to save $150 million.

We have now reached $140 million of saving out of this first plan. And the savings have been used in 3 ways. A, more R&D, as you have seen, went from 3.4% R&D on sale to something like 5.6%. I think, this is 4 [ph] this quarter, so we have invested much more in R&D. We invested in the Emerging Market, as you know.

And we have invested also in some specific fields. Healthpoint was one of them, adding the number of reps and so on. So this money has been spent.

And I remember you said, "Well, the $120 million you announced in Q1, what is going to happen? Are you going to see that through the margin? Or are you going to invest again without showing us a good return?" We planned to show you that in detail, actually, with a bridge of the margin in Q4.

And we are going to give you also in Q4 something that we're not used to do, a guidance for the margin on a medium-term basis. So you will see where the money goes. And if you want some highlights of this, a significant part of this will go in the margin. So this is what I can tell you now, but you will do that in Q4.

We'll bridge, actually, from 2011 to 2014 what has been done -- on the margin and how things are moving because if you look at the margin we had in 2011, I think it was 21.8%, correct?.

Yes, it is right. Yes..

Doing nothing, the margin today would be 25% now, in H1, okay? But we have done all these investments. So you will see how we bridge that, and Julie will show that to you in details. And you'll see how the return of this investment will happen and what the consequence of this on the margin, plus the $120 million of saving and what [indiscernible].

So that will be disclosed in Q4..

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

No doubt. No doubt, even if we keep the right to -- if we believe that there is an investment to do, to take some of this money to invest. We are never driven by the margin itself. Like I said many times, I don't want -- it's not something which is -- Veronika? I'm sorry..

No, that's great. Veronika here from Goldman Sachs. I have 3 questions as well. The first one is, Olivier, on your goal to have 2/3 of the business from the higher-growth areas.

Can you help us understand what the timeframe is for that? And how are you thinking about that from an organic versus acquisition perspective? Do you need to do another couple of deals to get there? Or can you do that organically?.

No, it should be mechanical. I can answer the question. We plan, obviously -- if we have opportunities to buy other high-growth businesses to do that.

But mechanically, the transformation of this organic business that we have now, plus the acquisition of Healthpoint and ArthroCare, which are going to be both in high-growth segments, will drive us to this..

And what's the timeframe for that?.

I don't tell you, but I mean it's an ambition, yes. You need to have ambition, let's put it this way..

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

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

On the -- I'll leave something with Julie, if you want. On Zimmer, Biomet, we have not seen yet a lot of disruption, but I think that we start to see people leaving, we see that; some disruption in distributors in the U.S., wondering what is going to happen.

So we don't see that in our figures, but I think there will be an impact, as we mentioned in Q1, with no doubt, no doubt.

So Julie, for SANTYL?.

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

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

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

Tom?.

Tom Jones from Berenberg. I'm just wondering if we could change tackle a little bit and talk a little bit about the Wound Care business. I mean, it's close to 20% of your revenues. It's the second biggest bucket of revenues. No one ever talks about it, and it's come under some very significant pressure this quarter.

So I just wondered if you could give us a bit more color about what's going on there..

Yes. It's obviously a good question and something we monitor very strongly. First of all, let me explain that the Wound business is not one type of business, as you know. We have -- so the Bioactive, and Julie has mentioned that we are very happy with our guidance of midteens. This will happen. It's a U.S.-only business for the moment.

It will become a worldwide business at the launch of HP802. We'd certainly be able, by the way, to give you insights on 802 also and guidance starting January because the clinical -- or the first clinical will end after Christmas. So in the Q4, you will have a pretty good knowledge of what is the potential of this product.

That's important for you to know. Second is the Advanced Wound Devices, okay. Here, we have -- what do we face? Price pressure. KCI is pulling the prices down, no doubt. We have had this issue of RENASYS, as you know, and we have stopped to commercialize the product. It will take some months to come back, and this has been significantly hit.

As you have seen the impact of this, around $30 million, with provision of $25 million for the bad debt in exceptional item this quarter, and this will take time to recover, no doubt. Having said that, the PICO, which is the portable negative pressure device, is doing extremely well.

And we are going to refocus because we have decided, actually, despite the stop of the consideration, to keep all the people we have, which it has an impact on the margin, obviously, but also, we are going to reallocate this people on different products. PICO is one of them, and potentially, on some Wound Care products.

We also have a negative pressure, all the potential of the Emerging Market, and China is one of them. We have launched negative pressure in China a few months ago, and it has a pretty strong start. We have launched also PICO in Japan in the month of June. Remember, we launched negative pressure there a year ago. Also, we are pretty happy with this.

So there is a dynamic of the U.S., which is what it is, but also a number of pockets of opportunities outside the U.S. Now let's go to the Wound Care. Wound care, the growth of Wound Care has been 13%, 1-3, in the Emerging Markets and international, which is good. Starting to show that we put more emphasis on this, and that works.

I'm very disappointed, to be clear with you, by the dynamic in the U.S. and in Europe of the Wound Care. It's not a structural problem. It is a temporary problem. The problem is as simple as this, there was no management, and there was no enough focus on what matters. We're more technical buddies rather than marketing buddies.

At a stage when you have the best range -- look, I think we have the best range of products -- you cannot be beaten by the competitor. You cannot do that. So we have to be much stronger, so we have reinforced the -- changed the management, reinforced it. We have a new President of the U.S. now for Advanced Wound Management.

We have a new President of Advanced Wound Management Global in the division. And we are addressing this through a reallocation of our reps, reallocation and refocus of what matters. What are the growth levers in Wound Care? We cannot promote everything. We have to soak it. This is 80% of the growth, and this is where are the potential.

So that's what we do. Same in Europe, in few countries, does very well in others, it doesn't, and that's not normal. So that's what we have done. So I'm not anxious at all about this. I think we have addressed pretty firmly and quickly this issue, which is not new. We knew that Advanced Wound Care had a problem for a while, but it takes some time always.

And to be very honest, we had a slight delusion because the great results of Healthpoint in the U.S. were a little bit hiding the issues in Wound Care. So now we have, and that's the beauty of splitting the business into 3 parts, we can really see what happened..

Maybe to take a step further, when would you expect that business to be -- the Wound Care specifically, to get back into positive growth territories? Is this a project that's going to take 6, 12 months? Or is it in week and months, it can bounce back quickly?.

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

And then a question on Syncera. When medtech companies start talking about becoming solution providers, I usually feel slightly sick. And Obviously, in a lot of other companies, there's been a bit of a disaster, but I can see the rationale of what you're doing or why. In the bit of the market you're aiming at, it seems to make an awful lot of sense.

My only concern is if it is successful, which we all hope it will be....

Yes, it will be..

What's the risk that it starts to cannibalize your other business model you have in Recon? Or is that actually another risk -- or rather an opportunity, and you'd perhaps be happy if the whole market moved that way, and you, as one of the smaller providers, will be therefore relatively strong by having adopted this marketing strategy a little bit earlier than the others?.

I think I'm -- first of all, I'm very happy to have started this journey 18 months ago because we have realized at this state that there was a big unmet need and a big opportunity. Again, it's totally different customers. We are going to keep the business that we have, and we're going to develop in the niche I was mentioning.

Here, 5% to 10% of the accounts in the U.S. are not satisfied at all, and we cannot sell our products. Actually, they are not customers for us. We have 0 business in this type of customers.

What we have done recently, I mean, making the service and the work, we have realized that they were extremely happy with the offer of Smith & Nephew, of Syncera powered by Smith & Nephew. And I really believe that there is no cannibalization on this because they are totally different, a different system.

Will that happen 1 day in the account? I think that the market, that was 70% surgeon-led accounts and 30% admin-led accounts 3, 4 years ago. We know now it's roughly 50-50. So a lot of pressure for the surgeon to follow the admin guidelines and basically go cheaper. I believe that this will happen in the next 5 years.

We will see more and more admin-led accounts and less and less surgeon-led accounts. So yes, the offer will certainly take a part of the business one day, and that's why I think it's very important to be prepared now. And we are basically going to try and fine-tune it and be prepared for the future if this happens.

But I still believe -- it's like when you buy a car, I mean, you want to have a basic car or you can buy all the options around, the air conditioning, all that stuff, okay, it's the same. Here, it's not the product that we sell because we sell the same, it's a different solution. That's all..

Just a very quick follow-up.

What would you say your market share relative to your overall market share in Recon is? Between -- so say you're 10%, 11% overall, but what would you share your share is in surgeon-led accounts and your share in admin-led accounts at the moment?.

I don't have the figure, but I mean, I would say it's much higher in surgeon-led accounts than in admin-led account, yes..

Right, that's what I thought..

Yes. We have -- let's take 1 or 2 question by phone, and then we'll go this way..

Our telephone question today will come from William Plovanic of Canaccord Genuity..

Two questions. The first is just any comment regarding your core Knee and Trauma business. You had 1 less selling day, yet that was very strong. Is there anything that has changed over the last 3 or 6 months that's helped that reaccelerate? And then I do have a follow-up..

Okay. Well, on the core Knee and Trauma, I think 2 things have changed. The development of the Knee -- of JOURNEY II is definitely one of the key levers of the development. And if we now beat the market growth in the U.S., there's no doubt this is why we have been working on this JOURNEY II BCS and the JOURNEY II CR.

And as I said in my presentation, this is the start of a journey. I mean, it's a progressive launch, and we'll see more and more impact of this product in the future. Trauma, you have 2 things.

I mean, on a worldwide basis, you have the impact of the GCC tender, which was a significant order in the Trauma business, so this is basically something which has to be taken in consideration. But in the U.S., though, the Trauma business is working pretty well.

As you maybe remember, last year, we have added a number of specific dedicated Trauma reps. I think it was around 80, 85 people purely dedicated to Trauma. And we start to see the impact of these professionals on our business. So I think this is it. I mean, this is not rocket science. It's just good products and better execution..

That's helpful. And then on the Syncera business model, I think you're definitely the first major player to vocally state you're doing this.

Just some -- as we think about this, you've been very clear, new accounts, but is this -- they will have the technician? Mechanically, how does this work? Do they -- does the hospital pay for -- have its own internal technical people? Or are they your sales reps that will be in there? Is this only going to be U.S.? Is it only going to be like certain geographies at the start? Or do you plan to really kind of push this very broadly in the U.S.?.

Okay. So many questions in your question. So about the geography and the scope, we start in the U.S., and we'll see if -- I believe there is other countries where we can benefit from this offer. Europe is certainly one of them.

Australia and New Zealand, why not? I mean, we have to work, but we want to start with something where we believe we have a very good grip and know-how of what is happening there and what are the needs and of market potential.

The first part of your question regarding the technician in the OR, well, there is no technician in the OR with the Syncera model. We have a -- and I think we'll have Phil, a presentation of this in September.

Maybe we'll have a very specific presentation for you, where you will see through videos and stuff how this works, this is the registerable [ph] part. But we have no technician. The hospital has no technician on -- that they pay themselves. We train the doctors in our site in Memphis or we train them on-site also for a moment.

But then they just leave by themselves. It was a technology we give them, which are extremely sophisticated, actually. So that's -- there is no more rep in the OR, to answer shortly your question..

Okay.

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

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

[Operator Instructions].

We didn't see you at Q1..

Q1? I was the one [indiscernible] remember what happened there. But I'm here now..

Good..

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

By my calculation based on your comments, it seems that your hospitals will get about 1/3 of the price of implants that they're paying at the moment.

And the question is, clearly, the costs for you will be lower, as you've indicated, but what will be the margin for you on these incremental revenues?.

Okay..

I'll start with that one, and I'll do the other....

Yes, the question is good..

Making up for Q1..

Yes, yes, yes, I know you. So the margin, obviously, there will be a slight dilution at the start because we'll build up the stock but not much, actually. The idea of the Syncera model is to have a margin which is equivalent to what we have -- at least equivalent to what we have with the highest-priced product and more expensive SG&As.

So here, there's no doubt that this will be compensated by the -- so it's lower discount, basically, and higher discount, lower price, lower SG&As and trading margin equivalent to the one we have. What do you say about the....

Competitors [ph].

What?.

Where are your competitors? And how long do you [indiscernible].

The competitors, I don't know. The question is if you want -- take a company like Zimmer and Biomet, what I think they -- what they seem to do now than just doing things like that. But when you are #1, it's not something you do, I think. I think it's great for us as #4 to do that. We bring here a disruptive model.

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

So it's not something you can decide like this. So I think that, for what I've seen and what I know, and I don't know everything on this, I don't know anyone of the big competitors having started to do the work that we have done, so I think we have a strong advantage here.

And it will take a while for a newcomer to build such a model because, believe me, if you want to make it successful, it's not an easy one to put in place. It's a lot of work..

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

Well, we need to ramp up with the customers. So for the moment, we have a number of customers starting to sign the contract. Those are contracts which are usually 3 year -- a 3-year contract, so it will take a while. You will see the results and the benefits of this.

I think, yes, in a year, I think we can have a good understanding of the value of this model and what -- the potential of it. Because one thing is what we do; one thing is, what is the potential? Are we talking about $500 million, $300 million, $1 billion? So that's something we have to see with the development of the operations..

And then my second question, on the midtier products....

Third question, yes..

Actually, if you're counting the questions, it's the fourth..

Yes, okay..

But the second subject, let's say..

Okay..

So on your midtier strategy, where are you on that? Have you actually launched products there?.

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

We have new products launched also in Wound Management. We have these low-cost cameras of visualization that are doing very well. We launched that 6 months ago or a year ago in India. We extend that also. So yes, we have a number of launches. The structure is built. We have a great team there. We have an R&D Head dedicated to midtier.

We have all these hubs. As you remember, here and there, we have 2 in China, 1 in Shanghai, where you have met, I think, the guys there -- 1 in Shanghai, 1 in Beijing; the trauma hub in India. So yes, it's a good, good, good acceleration..

Okay.

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

On the portfolio, it will never be 100% in midtier. We cannot put 100%..

Midtier. Or 80, 80-20 rule..

No, it's -- I think that we have launched and we say maybe 15% of the potential of what is going to happen, so it's a ramp-up. We have development of specific products. For example, we develop specific knee for the midtier. As you know, developing a knee doesn't take 2 months. It takes a while.

But we have a program, we have a portfolio, we have as serious as the one we have for the high tier..

And finally, profitability..

Profitability of what?.

Midtier products..

Exactly the profitability of the Syncera business, again, we sell the product cheaper to address the customer needs for the midtier, but the model is also much, much cheaper. Same, we don't make medical education. We don't have technician in the OR. We don't do all of this, so the net-net, the margin is the margin of the rest of the business.

Okay? Sorry. Yes? Sorry, you're next. I'm sorry. Ladies first. Go on..

Lisa Clive from Sanford Bernstein. Three questions. How fast do you think the AWC market is growing in the U.S. today, given there's a lot more of a focus, it seems, on preventing infections? And how long do you think it'll take to get your U.S.

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

And then number three, thinking about Syncera, my understanding is that in Europe, it's already a somewhat lower touch business model, where the rep isn't always there in the OR like they are in the U.S. So could you just remind us of how the EU versus U.S.

sales model differs? And I guess I'm just really trying to understand how appealing Syncera would be to Europeans, seeing Europeans already get a lot lower pricing but also lower service..

Yes, yes. Actually, U.S. and Europe is same model. It's exactly the work is the same way. We have technician in the OR, same level. The cost of operation is the same. So there's no big difference on this point. On the market, I was checking the figure, a question on the AWC market in the U.S., it is -- the market is 4%, the U.S.

is also mid-single, maybe 5%. Yes, so maybe you remember, I've always been disappointed by our Wound Care dynamic. And I was maybe candidly thinking that it was just a question of size and mass in the U.S. And you'd certainly remember that, I've said that we're subscale in the U.S. in Wound Care. Actually, the first thing is we're not good.

And then we can be subscale, but that's something else. We have to address first, as I said, the quality of the execution and the choices of the promotion of the product, which is what we have done during the last 2, 3 months very seriously -- very, very seriously. And then we can think about adding scale, that's it.

But scale is not the only problem, which is, I think, good news because it means that we can be much better in this business. So I think that answer your question.

On the Advanced Wound Devices and the stop of the capitalization of our classic negative pressure, I think there's definitely a place for the PICO type of product, which will certainly take some place but will not replace totally the RENASYS. So that's why I'm cautious in telling you that the RENASYS $30 million impact in revenue is there.

We're going to try to fill the gap in refocusing the reps on a few things, adding resources on PICO and so on, but that will not fill this gap. And it will take a few months for the customers to be able to get back on track with the product. There was one -- this one, and then it's you. Whatever. Well, okay. Next one, you are the one. Yes, I'm sorry..

Just following up on some of the earlier questions. I take it absolutely that your position in terms of the defensive nature of the M&A being discussed in the sector at the moment.

And also, clearly, your desire to remain independent, wouldn't there be a way of basically getting past all of that by bringing forward or becoming more aggressive yourself in terms of additions? And as you've just said, potentially, there are good rationale for if, say, expanding in, say, the U.S.

Wound market? Could you talk a little bit to potentially what strategic potential deals you're thinking about in Wound Care? And also related to the wider question, would you consider using equity if the right deal was there for a transformative deal?.

We could -- to answer your question, I mean, we could do a transformational deal if there was something making sense. There is no reason why not to think about it. The question is, do we find the bride [ph]? That's another question.

On your question about adding new legs or thinking about what's next, adding strength in Wound Care, there is definitely a number of places -- or spaces, actually, where we can add business in acquiring things.

I think, I still believe that there is an opportunity in Sports Medicine, in Extremities, where we can still benefit from an acquisition here. It's high growth market. Again, think about strategy is to go to high-growth business, okay? So it's really not going to a business which is not growing because that's -- we don't need that.

So Extremities is still -- Sports Med, we still have potential to be bigger even if we have market share now which is significant because we almost reached, what, 30%, 29% market share, combined with ArthroCare, so it's significant. So maybe some micro spaces. You have seen the hammertoe type of things or some specifics like this.

In Wound, no doubt, there is a potential for me in Wound Care, I mean, to have more scale because I believe in scale in Wound Care. I don't in Recon, but in Wound Care, I do believe in scale. So those are the places we will look at. Now bigger deal, why not? Again, if it makes sense, it could be an option also. Okay, 2 more questions.

You now, and then one more..

Justin from Societe Generale. First question, just on the $120 million, apologies if I've made a mistake here, but I got the impression 3 months ago, your bias was to try and reinvest that money. If things have changed....

No, no, no, I mean, maybe I was not clear in Q1. In Q1, recall we said that there is this $120 million will be used potentially to fund some opportunities if we need money to do that. Syncera was -- in my mind, at this time, use some money for this, for Syncera.

But the idea has been to save -- it's a cost saving program, okay? So as usual, as it goes down or you can pick some of it to fund some opportunities. So this is what we have said, and that's what I'm saying again. So it's -- most of it will go down..

So no change from....

No, no, no..

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

I'm trying not to change my views quarter-after-quarter, so it's -- yes..

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

The good news is that it will be much lower in terms of working capital than the classic model because they'd by -- I mean, the customer buy the products, and they carry the cost of it, and we don't. In terms of logistic, it's also much more efficient, so it will be a much lower working capital. Okay, one more question.

Is there anyone? There's one here..

Patrick Burnia [ph] from Jefferies. Just on Wound Care again. On Slide 21, you have put Wound Care into the slow growth market in Established Markets. And on Slide 28, you show you have done almost the majority of the deal in Wound Care. And you also said that 85% of Emerging Market growth -- of your Emerging Market growth comes from Recon..

Yes..

So concluding all this, because when I remember 2 years ago, you have labeled Wound Care as one of the big growth drivers..

Well, Advanced Wound Management. I'm sorry. Again, I've never said Wound Care was a growth driver. Wound -- Advanced Wound Management is a growth driver of the company because of Advanced Wound Devices, which has a potential of growth significant.

Actually, it was 1% this quarter, but the rate of growth of the Advanced Wound Devices within the company has been between 12%, 14% roughly. So it's high-growth business, potentially. Advanced Biologics, obviously, is a very high-growth business also.

And Advanced Wound Care, as I was saying, it's 4% growth on a worldwide basis, so it's not a high-growth business. Even if it's a high-growth business for us in Emerging Market because an example of the quarter, we grew 13%, mostly Advanced Wound Care in the Emerging Markets, so it depends where you are.

But on a global basis, Wound Care is not a growth driver. Okay, ladies and gentlemen, well, thanks a lot for attending this second quarter, and see you at the third quarter. Thank you..