Julie Brown - Chief Financial Officer Mike Frazzette - Chief Commercial Officer.

Lisa Clive - Sanford C. Bernstein Michael Jüngling - Morgan Stanley Alex Kleban - Barclays Capital Chris Cooper - Jefferies Veronika Dubajova - Goldman Sachs Tom Jones - Berenberg Ines Silva - Bank of America Merrill Lynch David Adlington - JPMorgan.

Certain statements in this presentation are forward-looking statements. The statements are based on management’s current expectations and are subject to uncertainty and changes in circumstances. Actual results may differ materially from those included in these statements due to a variety of factors.

More information about these factors is contained in the company’s filing with the Securities and Exchange Commission. At this time I’d like to hand the conference over to Ms. Julie Brown. Please go ahead..

Thank you very much. Good day, everyone. [Audio Gap] trading update call. I’m Julie Brown, CFO of Smith & Nephew. Olivier is not able to participate in today’s presentation due to his scheduled treatment. He is doing well and sends his regards. I will start by covering the highlights of the quarter.

I’ll then hand over to Mike Frazzette, our Chief Commercial Officer, who will provide more color on our first quarter trading by business area. I will conclude with a summary. And as usual we will take questions at the end. In the first quarter we’ve seen a continuation of the same trends that we saw in the first half of 2015.

And our outlook for the full year is unchanged. As usual this slide captures our underlying growth. On the left hand side geographically and on the right hand side by product franchise. We delivered 4% underlying revenue growth this quarter. And as a reminder, this is not adjusted for sales days.

Q1 2016 comprised 64 trading days, three days more than in Q1 2015. This typically benefits our Surgical businesses more than our Advanced Wound Management businesses and the established markets more than the emerging markets. The U.S., our largest market, continues to perform well with revenue up 8%.

Most franchises delivered good growth with Sports Medicine Joint Repair, Knees, Advanced Wound Care, and Ear, Nose, and Throat being the highlights. In our other established markets sales increased by 4%, as our European business sustained its improved performance with a fourth consecutive quarter of positive revenue growth.

Emerging markets declined 6%. And as expected our backdrop in China remains challenging. We first started to experience this mid-way into 2015. And during Q1 2016 the de-stocking patterns have tracked our expectations, but end market demand remains strong. We expect improvement in our growth rates when we lack the comparator in the second half of 2016.

In addition, in oil dependent Gulf States we have seen significantly reduced tender activity in sales. Combined, these two factors that negatively impacted group growth by about 3 percentage points. And the effects were particularly felt in our Sports Medicine, Trauma, and Wound Management businesses.

Performance across the other emerging market countries has been consistent with good double digit growth as recent quarters. And with that I’ll hand over to Mike, who will take you through each franchise in more detail..

Okay. Thank you, Julie, and good morning, everyone. I’ll start with Sports Medicine. We had another good quarter, growing at 11%. In particular, our comprehensive shoulder portfolio, including our recent product launches, contributed strongly to this growth. Enabling Technologies grew at 4%.

The good demand for our COBLATION technology has continued in quarter one. Our Trauma & Extremities business declined 7%. The significant reduction in tender activity in sales in the Gulf region, which Julie mentioned, mainly impacted our Trauma business, as did the anticipated continued destocking in China.

By comparison in the U.S., we grew Trauma 8%. Our comprehensive product offering was strengthened by our recent launch of the TRIGEN META-TAN Nail, which has been very well received. In our Other Surgical businesses, we had a good quarter in ENT with revenue overall up 19%. The Blue Belt Technologies acquisition was completed during the quarter.

And from this quarter on capital sales of our NAVIO robotics assistance surgery systems are included in our Other Surgical businesses line. Sales of implants used with the NAVIO system are reported within the Knee Implant line.

Globally, our Recon Implant revenue was up 7%, which when adjusted for the additional sales days in quarter one, reflects a continuation of the trend seen in the second half of 2015. Global Knee growth of 9% represents another good quarter. This was driven by continued strong uptake of JOURNEY II, our kinematic knee.

And I’m also pleased with the sales synergies we’re achieving from the ZUK acquisition. Global Hips grew at 4%. We expect new product launches in revision hip, including our 3D printed acetabular cup to contribute to growth later in the year. And geographically, we drove robust growth across the emerging markets in Recon. Moving on to Wound.

Advanced Wound Care revenues were flat. The sustained turnaround in the performance in the U.S. was masked by a more significant destocking effect in China. We continue to invest in clinical evidence around our Wound Care technologies. Our ALLEVYN brand grew strongly, particularly in the U.S. market.

During the quarter ALLEVYN Life, used in the prevention of hospital acquired pressure ulcers, with highlighted in a major scientific publication, the American Journal of Critical Care. Advanced Wound Bioactives had a slow start to the year with revenue down 4%. OASIS continues to be affected by reimbursement headwinds with sales down more than 30%.

SANTYL, our largest Bioactives product, is subject to volatile distributor stocking patterns. We have seen that this quarter as we did last year. Looking beyond the stocking patterns however, SANTYL prescription volumes are good and consistent with our forecast.

We continue to expect full-year revenue growth trends in Bioactives similar to 2015, when growth was 7%. Advanced Wound Devices grew 11%, continuing to display the strong underlying trend of PICO, our disposable negative pressure wound therapy device.

We see customers and payers increasingly recognizing the tremendous value which PICO brings to patients. And this is evidenced by increased reimbursement from the beginning of 2016 in the U.S. And we expect PICO to continue to grow strongly.

In Europe we successfully piloted our next-generation traditional negative pressure wound therapy device, RENASYS TOUCH. Feedback is very positive. And we expect to fully launch this product into this highly competitive market in Europe later in the year. I’ll now hand it back to Julie..

Thank you, Mike. So in summary many of the positive trends of 2015 have continued with good U.S. growth, and Europe sustaining its improved trend. Our entry into the fast-growing area of orthopedic robotic-assisted surgery with the acquisition of Blue Belt is off to a good start. The integration has been smooth.

And we’re excited about the prospects and our pipeline. Moving on to our outlook. Foreign exchange movements since the last update have been more favorable.

If rates were to continue as they are at the end of April, we would expect this to reduce our revenues by approximately 0% to minus 1% in 2016, compared to the minus 2% to minus 3% previously guided.

I remind you that movements in foreign exchange this year have a very limited effect on our 2016 margin guidance, due to having hedged the majority of our exposures. Next on phasing. Similar to recent years we are expecting a lower margin in half one compared to half two, as a result of the seasonality of our business and the timing of investment.

In addition, the transactional foreign exchange headwind, which we’ve previously guided to, compared to the prior year is expected to have a stronger impact in half one compared to half two. To conclude, our outlook for the full year is unchanged.

We expect good underlying revenue growth in 2016 as we delivered in 2015, benefiting from our investments in existing businesses, acquisitions, and pioneering technologies. We are pleased with our progress in transforming Smith & Nephew and focused on executing many of the exciting opportunities we see. Thank you. That ends the formal presentation.

And we will now take questions. Thank you, operator..

Thank you. [Operator Instructions] And our first question comes from Lisa Clive in Bernstein. Please go ahead..

Hi. Two questions on growth in orthopedics. It looks like the established markets ex-U.S. were pretty flat when adjusting for the extra trading days, which does seem to be a bit slower than what you’ve been doing recently.

Could you just comment on any trends there? And then second on your Hip business, are there any lingering headwinds from the BHR discontinuation that you did last year? Or is that finally sort of finished playing out?.

Hey, Lisa. Thanks very much for the question. If I take – maybe if I take the Hips question. And then Mike can take the overall orthopedics in established markets. So in terms of the Hip business, there is still a slight headwind from BHR.

It is relatively minor now, because it – in terms of the product, in terms of its materiality, it’s getting to the stage where it’s less than 0.5% of our global company sales. But there is still a headwind, because it’s still declining by around 20% per year. So broadly it impacts our growth rates by about 1 percentage point each time.

But, Mike, if you want to take the orthopedic?.

And the question again, Lisa?.

Just it appears given your growth rate when adjusting for the extra trading days that the ex-U.S. established markets were pretty flat.

So just wondering if there has been anything creating that headwind?.

Yeah. I think we’ve continued about at the same trajectory. If you go back to Q3 and Q4 of 2015 into Q1 in the established markets, Knees seems to be growing at, maybe even slightly ahead, of market. And Hips we are below market. And Hips are growing more slowly. But the growth rate seemed to be pretty consistent with the second half of 2015..

Okay. Then actually last question. Given the slowdown in the Gulf, are you expecting those tenders to come through later in the year? Or is this year sort of a write-off in that region? A - Julie Brown Yeah. The key thing with the Gulf really is we’ve had – first of all, we had a very strong comparator in Q1 2015.

So we actually had a growth rate of above 40% in that period. So the Q1 year-on-year comparator is a tough one. It is quite volatile. We often get the tenders being quite lumpy. And it has a particular impact on our Trauma number, as you’ve seen in the quarterly results this time. In terms of the medium term we expect this to resolve.

It’s clearly linked with the price of oil at the moment. And that has reduced their levels of ordering from the multinational companies. But we do – I mean this region is a growing region. It’s a region with unmet medical need.

So we do expect this to resolve, not necessarily in the next quarter, but certainly during the course of the year and into next year, we would have expected this to resolve..

Okay. Thanks for that..

Lisa..

Thank you. Our next question comes from Michael Jüngling, Morgan Stanley. Please go ahead..

Thank you and good morning, everyone. And I would like to ask three questions please. Firstly, on the China effect. If you look at the results from Stryker and Johnson & Johnson, the impact on their Trauma and Sports Med business has been far less significant than perhaps what you’ve been reporting.

What makes Smith & Nephew more vulnerable to the China effect? Secondly, on Syncera. Can you comment on the sales trajectory since the launch in the United States? And question number three is on Wound Devices.

Can you comment on how the rollout of RENASYS is doing in the U.S.? And also what you’re seeing on the pricing side for traditional NPWT devices? Thank you..

Okay. Thanks, Michael, very much. If I take China, Mike will take Syncera, and then I’ll come back on RENASYS and Wound. So China. China first of all, we’ve got a significant business in China. As you know we’ve been very successful in China. We’ve got a leading market position in Sports Medicine. We entered the market earlier than some of the competitors.

And therefore our exposure to China is slightly higher, just because of our strong position. I think as you know the Chinese end market slowdown affected the ordering patterns from our distributors. They started back in June 2015. And we’ve had an effect throughout the second half of 2015 and into 2016. The position has been quite marked this quarter.

But we do expect this to resolve, because by June 2016 we will have lapped this comparator issue. And we are seeing signs that this is resolving, because end market demand in China does remain strong.

So in terms of the answer to your question in terms of – I think our exposure is slightly higher, because we have a leading position in Sports Medicine and only fairly recently had we made a big entry into the Chinese Wound market that probably impacted those distributor holding levels.

So, Mike, do you want to touch on Syncera?.

Sure, sure. Yeah. Hi, Michael, thanks for the question on Syncera. So as you recall, we announced Syncera about 18 months ago. We’ve been active in the market now for about a year. Since we launched Syncera, we’ve established our reference account. And we’re achieving a good level of customer satisfaction with those accounts.

And I’ll just recall for you the parameters that we set out in terms of targets. We said that good targets would be about 5% to 10% of current customers in the U.S. in particular.

And this would be hospitals with a high degree of centralization, hospitals with sophisticated procurement, and also hospitals where physicians were aligned with the administration. And what we’re seeing is the level of interest from potential customers has actually exceeded our expectations. And so our customer pipeline is very strong.

However, it’s also clear that it’s taking significantly longer to convert those interested customers into Syncera customers. So obviously for commercial reasons we’re not going to comment on the particular customers. But as I said we’ve got a very strong pipeline of interested customers, very enthusiastic in fact.

I wouldn’t be overstating it if I told you that virtually every customer that we’ve engaged with this model is interested in it. So while the revenue results have been disappointing, on the other hand the model has been very well received. We still remain bullish. We think we’re probably a little ahead of the curve here. But we’ve got a talented team.

We’re being aggressive. And we’re going to stick to it..

Could I just follow-up? On your Knee and Hip growth in the U.S., is Syncera noticeable in the 10% growth rate for Knees and 6% for Hips? Or is it a rounding error?.

No, no. it’s not noticeable..

Okay, Michael..

And then please on the Wound Devices?.

So yeah. The question on Wound. So just in terms of RENASYS in the U.S., we are doing a rollout to a handful of existing customers, I think as we mentioned. The key thing that we’re doing is gearing up for the launch of TOUCH, which is the touch screen, which allows individual patient settings.

So as you know we’ve got two versions of RENASYS, new versions which are to be launched. One is this TOUCH one, and the other one is CONNECT.

And this will be a first in class device, allowing connectivity using Wi-Fi, which gives us the advantage of asset management in terms of location of the device, but also automatic billing to the hospital relating to patients. So in terms of just the status of those rollouts, TOUCH is already approved in Europe. It was approved in October 2015.

We undertook a pilot launch. And we’re now in full rollout in Europe. And we expect the U.S. – it’s already filed. We expect approval during the course of 2016. And then CONNECT obviously will follow. So our focus is very much on the new versions of RENASYS, both TOUCH and CONNECT..

And, Julie, if I could just add. With the focus on the new versions of RENASYS notwithstanding, the real focus for our commercial organization has been on PICO. And so we’ve seen very strong growth across all geographies in PICO. It continues to roll out in new markets. We’re pleased with the future sales trajectory.

We’ve got a number of independent studies ongoing, and some of the results are in on these things. And we’re seeing things like significant reductions in incidents of post-surgical infections, for instance, post Cesarean section in women who have used PICO. So it’s starting to develop into a very good healthcare economic story as well.

And again RENASYS notwithstanding, PICO is our primary focus..

Yeah..

Just a short follow-up on U.S. NPWT traditional.

Should we expect revenues to come through in a material way in the second half of this fiscal year?.

No. We’d expect a stronger impact on revenues in 2017. We’ll have some impact in Europe, as we do the rollout of RENASYS TOUCH. But I think it will be more material I think in 2017 overall..

So the launch of RENASYS TOUCH, when does this happen in the United States?.

So RENASYS TOUCH, like I mentioned it’s already filed. And we’re expecting approval in the second half. So clearly we’re going through the FDA process, approval process at the moment. What I would like to say there is the pilot in Europe has gone extremely well. The feedback is extremely positive. And now we’re in a full rollout in Europe.

Michael, just coming back on your point about pricing as well. You mentioned about negative pressure pricing. So it does remain a competitive – remains a very competitive situation..

Great. Thank you, Julie..

Thanks. Next question please..

Next question comes from Alex Kleban in Barclays..

Yeah, hi. Thanks for taking the questions. Just three from me. So some of your competitors had actually called for slightly better pricing in Recon in the quarter.

And just wondering if you’d seen something similar? Can you give a quick update on CJR and any feedback you’ve had in the past few months, just as things have progressed? And then last on China. Some of your competitors in Wound had talked about hitting the pause button maybe on a sales force expansion and a commercial investment there.

And just wondering given the pace that you’re seeing, the destocking and the underlying market conditions, is that something that you’re going to think about going forward? And could we maybe see a bit better margin toward the back half of the year as a result of something like that? Thanks..

Okay, great. So if I take the pricing, Michael takes CJR, and then I’ll come back with China. So in terms of pricing with Recon. A number of competitors have reported on an improved pricing position. For us it’s been very marginal. I mean there is a certain element of that. But we think it’s certainly too soon to call a trend on that.

I mean the good news in terms of pricing is we’ve seen absolutely no worsening of the situation now for several years. And overall in Recon we see in the U.S. about minus 2% to minus 3%. Much less at the group level. Recon tends to be the most challenged. So there has been a minor change.

But I really don’t think it’s right to call it a trend at this stage. And I understand our competitors have said something similar to that.

The CJR?.

Yeah, CJR. So in terms of CJR as you know, it’s still very early days. It started on April 1. It’s going to impact about 800 hospitals. And in the first 9 months there is no downside to the account. And the upside is also capped. So we’ve not noted any changes in our business during the quarter obviously with respect to CJR.

We have seen some pretty good customer engagement. Their desire to understand how the bundled payment system will impact them. And in particular the conversations are moving away from the Surgical products to the entire episode of care. So what it’s done for us, Alex, is it’s given us the opportunity to take a wider view of the episode.

And not just limit our discussion to some of the consulting toolkit that we have available in Recon. But also to look at what we may have to offer across our portfolio in Wound in reducing surgical site infections. And we’ve put together a pretty nice program with that – with respect to that. So it’s early days.

We’ve got great engagement from our customers on it, but it’s having little effect today..

So if I could just dive on that. So in other words you’re going almost with a package to the customer and saying, here is a few solutions we can offer on the Wound side and what we have on Recon to help you through this.

And are you getting some traction with that?.

Yeah. Without getting into too much information that would be competitive, we’ve got a program that addresses the episode of care. It’s [ph] an insurance (23:22) program combining our implant with our single use Negative Pressure Wound Therapy PICO and ACTICOAT, our antimicrobial dressing.

And with those three products we’re able to present that in a way that offers insurance against surgical site infection or implant failure for the first 90 days. And we’re getting very good traction with that proposal..

Okay. Alex, just coming back on your question on China and AWM. I mean basically the Chinese market remains extremely attractive to us. And the end growth in China is also very attractive to us, double-digit growth. And so what we’ve basically done is we have looked at levels of investments in China.

But because we see the long-term attractiveness of the market, we have actually prioritized – still prioritized investment in China overall. There is an impact on the margins half one to half two, because we’ve had this decline in China, which is obviously hitting our margins in half one. We expect that to recover in half two.

And the AWM margin itself in China is obviously not that material at the Group level, because the Surgical Devices businesses are far bigger in China for Smith & Nephew, just because of the level – the stage at which we entered those businesses. So I hope that answers your question..

Okay. Very good. Thanks a lot..

Okay..

Thanks. Our next question comes from Chris Cooper in Jefferies..

Hi. Good morning. Thanks for taking my questions. Just two left for me please. Firstly, on China again. It looks as though China fell around 16% in the first quarter.

Can you – first of all, can you confirm my math there? And secondly, can you give us your sense of how the end market demand is trending sequentially? You’ve said on this call that it remains strong.

Is that to say that conditions are stable? Or have you seen things either improve or deteriorate during the first four months of the year? And secondly, can you please give us a sense for how AWC performed at Group level, if we do exclude China as well? Thank you..

Okay. So in terms of the growth or the decline in China in the first quarter, yes, you’re broadly in line with what actually happened in terms of the decline in China. It’s important to say that we did have a strong comparator in the previous year in terms of our Chinese growth. Q1 in 2015 was one of the strongest quarters we had.

So yes, we had a serious decline in China in the first quarter of this year. In terms of end-market demand, we did see reduced levels of end-market demand during the course of 2015, and that started to really come through to us in June. But certainly we saw lower requirements for capital sales. We saw it first in Sports Medicine.

And a number of the other big medical device companies reported it in the second quarter. So that’s really when it started. In terms of what we see now, we closely track the end-market demand. And we’re closely tracking levels of inventory in all of our major distributors. And we are seeing strong end-market demand growth in the teens.

And that really – that remains. I think one of the changes that did take place though, is you’ve got demand from the big cities. And you’ve also got the regional expansion. So there is always two components to the growth rates in China. And I think the demand from the big cities is there.

But the extent of the regional expansion certainly slowed down during the course of 2015, because I think of the economic uncertainties. And then I think the second part of your question related to AWC. And the impact if you exclude China.

Was that the question?.

Correct, yes, please..

I mean we don’t give specifics in terms of just excluding China for one franchise. But the AWC growth in established markets was actually 4%. It was a good performance in established markets. That gives you an idea of the decline we had in emerging markets in AWC..

Which is consistent with market..

Yeah. So we were absolutely on market for the quarter..

Great. Okay. Thank you..

Thanks, Chris..

Next question comes from Veronika Dubajova in Goldman Sachs..

Good morning and thank you for taking my questions. I have just – I have two please. My first one is just, Julie, if you can give us an update on Blue Belt? And I guess the pace of robot placement? I suspect you might not be willing for competitive reasons to talk about how you did in the first quarter now that you own the business.

But when Stryker obviously did the MAKO acquisition, there were some teething problems that they had to work through on the capital sales front.

And I’m just wondering if you are prepared for that, anticipating that? And if you saw an impact in Q1? And then my second question is on the impact on margins from the weakness that you’re seeing in the Gulf States.

Can you just help us think through how profitable that business was for you before the declines that we’re going through? Thank you very much..

Thanks. So the Blue Belt obviously we only completed the acquisition this quarter. We closed the acquisition in January. We’re really pleased. The integration has gone extremely smoothly. We don’t disclose obviously the number of capital sales that we’ve made.

But the synergy we are getting with the UNI Knee and in particular now that we’ve got the ZUK Knee, we’re really pleased with how overall that’s going. We’ve got key talent, a really good pipeline. As you know we’ll be moving into the total knee indication as well as the partial knee. And we’ve actually made that filing already.

So overall, we’re extremely positive with Blue Belt and the move towards robotic surgery. Just coming back to the margin point, Veronika, there is an impact on margins. We’ll certainly see when we publish our half year results, there is an impact on margins due to the slowdown in the business in the Gulf states and China.

So we will expect – and this is one of the reasons we’ve guided towards the first half margin being softer than the second half, when we expect to annualize the issue in China. So, yes, we would see an impact on – actually on group margins. The business in China and in the Gulf states is reasonably profitable to Smith & Nephew.

So, yes, we will feel that loss in half one. Having said that we’re maintaining the guidance. We’ve maintained good underlying revenue growth. We’ve maintained the margin guidance. And we clearly see a recovery occurring in the second half..

That’s great, Julie. Thank you very much. And can I just confirm, just following up on Michael’s comment, just for the U.S. filing and approval timelines for RENASYS CONNECT and TOUCH, where you are with both of those? Thank you..

Absolutely. So in terms of the U.S., the 510(k) for TOUCH, if you take TOUCH first. And this is the touch screen with individual patient setting capability. The U.S. 510(k) was filed in October 2015. And we’re expecting approval later in 2016. In terms of CONNECT for the U.S., we expect this to follow Europe in a staged rollout.

As you know we did the pilot in Europe in terms of RENASYS TOUCH. It’s gone really well. And CONNECT for Europe we’re expecting approval in the second half of 2016. Launch is expected in CONNECT in Europe in 2017, and the U.S. is to follow..

Okay.

And have you filed the 510(k) for the CONNECT in the U.S.?.

At this stage, no..

Okay..

We’ve done it Europe..

Terrific. Thanks very much..

The next question is from Tom Jones in Berenberg..

Good morning.

Can you hear me all right?.

We can hear you clearly..

Perfect. I have two questions. One on the Syncera conversions and one on China. Sorry, Julie, to go back to that again. On Syncera I’m just wondering why you’re finding it so difficult to convert the level of interest into actual sales? It doesn’t strike me as a particularly difficult concept to get your head around.

You’re effectively cutting the price and getting rid of a sales rep. So where is the resistance coming from? Is it coming from the administrators? Is it coming from the nurses in the O.R. room? Is it coming from the surgeons? Some clarity there would be helpful. And then on China.

I’m just trying reconcile all the commentary that’s been made around China. And I’m struggling a little bit. If the end markets are indeed continuing to grow double digit, yet your sales are declining in the mid-teens, that suggests that the distributors are dropping their inventories by around 25%. It’s been that way for a couple of quarters now.

And that’s – if that carries on they’re going to have no inventory left at all. It does suggest that something else is going on or at least the indications are. I mean the end-markets [ph] might have based strongly (33:04) some price effects or some distributor changes.

I was just wondering if you could kind of help me reconcile this comment? And it’s also sort of feeds into your commentary that you expect a stabilization in the back half of the year, once this effect annualizes.

But why don’t you expect a recovery at some point? Surely the distributors have to rebuild their inventories? Or are you just expecting them to now carry very, very low levels of inventory ad infinitum?.

So, Tom, thanks for the question.

On Syncera the – again the three factors that we put up to categorize the accounts that were right for Syncera were hospitals with a high degree of centralization, hospitals where they had sophisticated procurement and influential procurement, and then hospitals where physicians were aligned with administration, either because they are physician employees or because there’s a gain sharing agreement in place or some other mechanism.

And what we’re finding is that that’s in fact the case. That the biggest inhibitor to conversion is the surgeon alignment with administration. And I think what we’re also seeing is even in accounts where they’re assuming that there’s alignment, Syncera may be the first opportunity for them to test that.

So they haven’t had to standardize on anything else yet. So they believe they’re aligned. And then when we approach them and present this, it needs to go through all the testing. And they need to get their colleagues on board. And it does require quite a bit of back and forth to get it approved.

The other thing I would remind you is we’ve – the offering is a very simple offering, a primary hip and a primary knee. So as they patient match, and they all patient match, this – the Syncera offering is good for anywhere from 50% to 80% of their patient population. They still need to cover the remainder of those patients.

And so there’s a little bit of difficulty in when they look at their patient load and the other company that they’re using, whether they’re Smith & Nephew or one of our competitors. There’s a lot of friction, a lot of competitive juices following in these situations. So it’s created a little bit a logger jam in some of these situations.

Does that help?.

Yeah. Do you think the rollout of the CJR and the BPCO, which started a little bit earlier – one of the key tenants of both of those programs is that they create mechanisms which allow hospitals and surgeons to align their financial incentives and in some quite powerful ways.

Do you think this is something that could have a meaningful impact on Syncera take up in the couple of quarters?.

We do, we do. We think the focus on cost obviously is helpful. The difference however, is that Syncera has focused on the DRG. So before CJR came out, Syncera was focused on the surgical cost, the implant cost. CJR now looks to expand that to the entire episode.

So in some respects it’s given these accounts a safety valve to look beyond just a surgical site – a surgical suite and into the 90-day episode for other savings. And in fact they’re finding those savings in the post-surgical rehabilitation for instance. So intuitively it’s helpful.

But when you start to peel this back, in some cases it actually gives the account a safety belt to look elsewhere and not tackle the cost of the implant upfront.

So having said that, where we see alignment and in particular where we see gain sharing agreements and where we see surgeons that have already done this in their facilities, and they’ve consolidated on maybe some other products, it seems to be working much better. But otherwise it is a very long conversion process..

Sure. Okay. Perfect.

And China?.

Okay, thanks, Tom. So in terms of China, clearly what’s happened is we’ve had a slowdown in the end market to start with. And we’ve also got big cities and regional distributors ordering stock. So there are multiple levels in the Chinese channel, which is important to mention.

The additional complexity with China is the way our business has responded to this varies by franchise. So just running through the major four franchises and how they’ve been impacted. So Reconstruction is a relatively mature area in China. A very well established market. And actually we just had stable growth broadly throughout.

So just to give you a sense of that, we don’t give Chinese numbers. But the emerging market growth in Reconstruction stayed at double-digit. So Recon has remained very stable throughout. We see good growth in China..

Sure..

In Sports Medicine, because it was a – it’s still a very fast growing part of market, Sports Medicine gets more – was more impacted by the slowdown in China and the stock held in the distributor channel, because they were stocking at high levels, because they were anticipating high levels of growth, which then in the end-market slowed down. Trauma.

The Trauma channel does hold a lot of stock. And the reason for that is just that by nature of the fact that they’re dealing with accidents. And therefore they don’t exactly know which SKUs they need. They will hold a lot of stock. And then finally AWM. Because it was again a relatively immature market in China. And we were growing.

And as you know we’ve recently launched Negative Pressure in China and VERSAJET, there was a considerable buildup of stock in the distributor channel. And sometimes we’re dealing with two and three levels in those channels before you reach to the end-market.

So net-net, we will definitely see a stabilization in the second half as you say, as we lap the comparator. And we are seeing signs of a recovery. But I think because you’ve got two to three levels of distributors, and because they have had a slowdown in the end market that occurred – started in 2015, this does take some time to run through.

I think the bottom-line is that we are fully, fully supportive of China. We’ve got a great business there. The unmet demand is still significant. The numbers of population to be treated with medical devices is still significant.

So we’re very much on the page of continuing to invest in China and just weathering this storm, which we see as being a relatively short-term position..

Yeah. Maybe I can ask a sort of follow-up question on a slightly different tack then. Given that the Chinese distribution infrastructure is so higgledy-piggledy, we’ve seen other med tech companies address their Chinese distribution infrastructure to quite some positive effect.

Is there anything you can or are planning to do to simplify your model in China and perhaps get a little bit closer to your customers, rather than being two, three, four distributors away from the actual end-user?.

Yes, I think it’s something that we’re looking at all the time in terms of the distribution model in China. We’ve also considerably improved see through visibility of inventory levels at each stage of the distributor. And clearly, we are looking at some of those key relationships.

But we’ve got some very strong distributors in China who’ve been very good partners with us. So we want to stay with those. But just maybe look at tightening some of the metrics that we get from them as part of their reporting cycles..

Okay. That’s all very helpful. Thanks..

Thanks..

Thanks. Our next question is from Ines Silva in Bank of America Merrill Lynch..

Hi. Thank you for taking my questions. I have two quick ones. First of all, just coming back to PICO. I just wanted to clarify the – you said that you’re seeing satisfactory growth in – continue to see good growth in this business.

Is this more through product rollout? Or are you seeing further growth in markets like Europe and the U.S., because of further adoption in other procedures that weren’t there before? And then my second question is just basically related with comments I have seen today in Newswire about acquisitions, possible acquisitions in emerging markets.

Are we seeing valuations on those markets more attractive? And are you looking at those markets more actively right now? Thank you..

Okay. Thanks very much, Ines..

You want me to take two?.

If you like. Yes..

Sure. So Ines, the question about PICO. So we’re seeing strong growth across all geographies. And in our established markets, supported by the clinical studies that I talked about, continue to drive growth organically. And then we’re also rolling out PICO on a consistent basis in our emerging markets, as we get registrations and regulatory approval.

So it’s a combination of the two. The thing that’s really, really encouraging with PICO is, I mentioned earlier that we’re seeing a favorable treatment in terms of coverage and reimbursement, for instance in the U.S. with the expanded coverage in the home care setting. And we’re also seeing quite a help to our economic story starting to develop.

We’ve done several different clinical studies. We’ve looked at the use of PICO in Cesarean section for instance. And we found that the incidents of post-surgical infections were reduced by nearly 80%, going from 12% to less than 3%.

And just to put that into context, the spend at NHS for instance on surgical site infections is north of £700 million annually. And the cost in the U.S. of a readmission because of a surgical site infection runs about $50,000 on average. So you can see that there’s quite a healthcare economic story here starting to develop.

And so we’re comfortable with the growth rates. We’re actually pretty excited about the growth rates of PICO. And we like the clinical data that starting to develop..

Okay. Thanks, Mike. Just turning to your question on M&A, Ines. So the mid-tier was really one of a number of interests that we have in M&A. As you know M&A remains one of our five key strategic pillars. There’s no change really in the level of interest.

Clearly, there are a number of areas that we’re focused on in terms of high growth areas in established markets. But we’re also interested in continuing to build out our presence, our legal entity presence in emerging markets. So no actual change.

And the key thing is that you mentioned about prices, are they more attractive? Clearly, we have seen a softening of prices in the M&A space. But our financial criteria remains very clear and very strict in the sense of we look for return on capital employed greater than by year three.

And we look for long-term investments in terms of the NPV and the IRR of the deal. So I think that the good news is we’ve developed a very strong track record now in M&A. I think the Healthpoint acquisition we’ve delivered returns greater than that that we expected in terms of what we modeled.

And similarly with ArthroCare we’ve turned a very low single digit growth business into double digits. So great success I think on the M&A front. And just a general continued interest in looking for M&A targets..

Thank you very much..

Thank, Ines. I think we can probably take one more question before closing..

Thank you. And we will take our last question from David Adlington in JPMorgan..

Morning, guys. Thanks for taking the question. Most of them have been asked. Just maybe on the full year guidance and on margins. Sounds like you’re not seeing an improvement on the margins, despite the FX environment turning a bit more positive. I think that’s probably due to hedging.

Maybe you could just talk to that? And then one just on the phasing, H1 versus H2. H1 is typically seasonally your lighter half with respect to margins. But also with the headwinds this year, sounds like you’re pointing towards a more – an even more loaded H2.

Maybe you could just give us some further color around the actual quantum H1 versus H2 in terms of margins this year?.

Okay. Thanks, David. So in terms of margins for the full year, because we hedge out 12 months – although we’ve seen an improvement in currency in the last couple of months. Because we hedge out 12 months we would really expect those types of benefits to be coming through in 2017 rather than 2016. There may be some impact in that final quarter.

But because of the hedging we’re basically cushioning the business against the volatility of exchange rates, which actually stood us in very good stead during the volatility during 2015.

In terms of our margin progression half one and half two, we always have a better margin in the second half, partly due to the seasonality of the business, partly due to the phasing of our investments. There are a lot of commercial activities that commence at the beginning of the year.

So we do always see this preference in terms of margin accretion in the second half. So there are a couple of other factors though that are occurring here. One is the – in particular the China and the Gulf state impact in half one 2016, where we’ve got negative growth in those businesses. They are depressing margins in the first half.

And then the second thing to note is if you’re comparing our margin this year with the prior year margin, then there is a tough comparative, because we had some sizable hedging gains going into our margin in the first half of 2015. So if you’re comparing year-on-year, the headwind in the first half of 2016 is more pronounced.

So I mean in terms of guidance, we don’t give pinpoint accurate guidance in terms of margins. But I would expect it to be more pronounced.

If you look at the pattern over the last 4 years in terms of our second half to first half margin distribution, this year I would expect that to be more pronounced for the purposes of your modeling than it has been previously..

Okay. Thank you very much..

Okay. Thanks. Okay. Thank you very much. So I think we’ll draw the call to a close. We’d like to thank everybody for attending. And thank you for your great questions. And look forward to you – speaking to you at the next event. Thank you..

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