Olivier Bohuon – Chief Executive Officer Graham Baker – Chief Financial Officer.

Veronika Dubajova – Goldman Sachs Douglas-Pennant – UBS Michael Jungling – Morgan Stanley Julien Dormois – Exane Tom Jones – Berenberg.

Good day, and welcome to the Smith & Nephew 2017 First Quarter Trading Report Conference Call. Today's conference is being recorded. Certain statements in this presentation are forward-looking statements. These 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 filings with the Securities and Exchange Commission. At this time, I would like to turn the conference over to Olivier Bohuon. Please go ahead, sir..

Thank you. Good morning, everyone, and welcome to our first quarter trading update call. I'm Olivier Bohuon, CEO of Smith & Nephew; and I'm here with Baker, our CFO. Graham joined us on the 1st of March, so I would like to welcome him to his first quarterly call.

Graham, as you know, has extensive international experience, holding a very wide range of senior finance role at AstraZenica, and more recently, was CFO at Alvogen, a private company. And, of course, he has handed down something which has been clear in his first months on the job. So we have very high expectation, Graham.

I will start by covering the highlights of the quarter and give you an update by business area. I will then hand over to Graham, who will talk you through our guidance, which is unchanged, and the points for you to bear in mind for the coming quarters. And we'll conclude with some closing remarks, and, as usual, we'll take questions at the end..

Established Markets grew revenue was plus 1%, most from Chinese continued trend seen in the last few quarters. In Europe, we are making progress in improving our execution, although slight headwinds seen last year in some European countries remain. I am pleased to see our Emerging Markets business returning to double-digit growth of 12%.

Within this, China grew at 14% and the Middle East returned to growth. Nevertheless, in both markets, due to distributors stocking patterns and timing of tenders, quarterly volatility in growth rate will remain a fact of life. I will now turn to each business area in more detail.

So we had another good quarter in Sports Medicine Joint Repair, growing at 7%. In particular, our comprehensive shoulder portfolio continues to drive strong growth alongside recently launched products, such our ULTRABUTTON for knee repair.

Enabling Technologies declined by 1% due to competitive pressure in our mechanical resection, the blades, and the legacy RF technology. COBLATION continues to perform well. LENS, our new camera system, is off to a good start, and the feedback on our next-generation COBLATION platform, is very positive..

We had a very good AAOS, with many new products being showcased. You can see some of our focus products on the slide. This includes our new all-in-1 visualization system, LENS, and the WEREWOLF COBLATION system, which sets a new standard of COBLATION technology.

INTERTAN, although a product we have had for some time, is supported by compelling evidence, demonstrating its effectiveness in treating hip It enables faster recovery, reduces the incidence of readmission and helps improve the quality of life.

Clearly, robotics was a highlight for us with a strong customer interest in the Total Knee Application on our NAVIO robotic systems. Having conducted an extensive interlaunch, we're now going to full commercial release for our 3 new platform, JOURNEY II, LEGION and GENESIS II. The NAVIO team has achieved this milestone in a very short period of time.

The Total Knee Application is a very exciting step in our strategy to expand the indications available on our NAVIO system and to rapidly grow our robotic footprint. We have also several more indication extensions in the pipeline, as NAVIO offers a very flexible platform for innovation. More importantly, NAVIO offers advantages to our customers.

It is very portable and cost effective, and therefore, highly attractive, both in the hospital and the ambulatory surgery centers steady. It does not require a CT scan, thereby saving time and cost. And of course, it is a robotic tool that assists the surgeon in precisely positioning beam.

NAVIO is very complementary to our JOURNEY II portfolio, but we also continue to innovate with the JOURNEY II XR, which is a novel knee replacement which allows the surgeon to preserve both of the cruciate ligament. So now turning back to our franchise Globally, our recon implant revenue was up 3%, growing at the market growth rate.

Global Knee growth of 5% represents another quarter of above market growth. This was driven by continued strong uptake of JOURNEY II, our kinematic Knee, and good performance across our comprehensive portfolio. The newest JOURNEY II product, our XR, is currently being used with a limited number of customers with excellent feedback.

We also have first extension to JOURNEY II family in the pipeline. Global Hips revenue was flat. We expect our recent product launches in Revision Hip to increasingly contribute to growth later in the year, and we're seeing a good uptake of our porous stem. Advanced Wound Care revenue grew 1%.

The continued strong performance in the U.S., where revenue grew 17% led by the ALLEVYN foam dressing range, was masked by tail end of destocking in China and continued weakness in certain European countries as expected.

After the quarter-end, we signed a worldwide distribution agreement for the MolecuLight i:X handheld device using fluorescent imaging to display potentially harmful concentration of bacteria in wounds in real time.

Wound Bioactives declined 8%, representing a slow start to the year, but this was in line with our projections and reflects the quarterly distributors' stocking patterns and seasonality.

We expect positive growth rate in second half of the year, driven our lead product, SANTYL, where a recently published analysis demonstrated its effectiveness in pressure ulcer treatment. Wound Devices grew 16%, continuing to display the good underlying trend of PICO, our disposable Negative Pressure wound therapy device.

During the quarter, we made a strategic investment and signed a distribution agreement with Leaf Healthcare, a developer of a unique wireless patient monitoring system for pressure ulcer prevention. Leaf is highly complementary to our pressure ulcer treatment portfolio including ALLEVYN Life.

Together, with MolecuLight, it represents a further step in our strategy to offer end-to-end solutions for the prevention and treatment of wound, our so-called owning the disease strategy. And I will now hand over to Graham..

Thanks, Olivier, and good morning, everyone. Let me start by saying I'm delighted to be here at Smith & Nephew and look forward to seeing as many of you on the call as possible at our half year meeting. As Olivier mentioned, I'll cover our outlook and I'll start on Page 10.

With the first quarter performance, we've reconfirmed the full year guidance announced in February. We continue to expect 3% to 4% underlying sales growth and 20 to 70 basis points of trading margin improvement for the full year.

foreign exchange rates prevailing at the end of April, and taking into account the effect of the disposal of our Gynaecology business, this translates into reported growth of 1.6% to 2.6%.

The reported growth is slightly better than previously guided as a result of more favorable foreign exchange rates at the end of April compared to the end of January. We now expect a headwind of 9.6% for the full year compared to 1% previously.

Foreign exchange rates remain, of course, subject to market movements, and we'll continue to update our expectations for reported growth as we go through the year. Moving then to think about our second quarter and first half results. I'd like to remind you that our second quarter comprises 1 fewer selling day compared to the prior year.

As usual, I'd expect that to impact our surgical businesses in the Established Markets more than our wholesaler and distributor-supported businesses. I'd also remind you that the divestment of the Gynaecology business took place in early August 2016, and therefore, the headwinds to reported growth rates will continue until then.

With regards to translational foreign exchange, and again, based on the rates prevailing at the end of April, we expect a headwind to Q2 April, we expect a headwind to Q2 reported sales of 1.4%. With that, I'll hand back to Olivier for some closing remarks..

Thank you, Graham. So in summary, I'm pleased with the start of 2017, which was in line with our expectation and puts us on track to deliver on our full year targets. In recent years, Smith & Nephew has fundamentally transformed in structure and focus. We are working to improve our execution and expect to see continued progress through the year.

We are in a strong and unique position and we have multiple growth drivers for midterm and a clear set of priorities and actions. I have no doubt our performance will continue to improve. Thank you. And this ends the call presentation, and we'll now be happy to take questions..

[Operator Instructions] And our first question comes from the line of Veronika Dubajova of Goldman Sachs..

Good morning, gentlemen and thank you for taking my question. I have 2, please. The first one is on the Negative Pressure Wound Therapy growth in the quarter. I believe, Olivier, I gave you a hard time last quarter, so really pleased to see the acceleration there.

Can you help us understand exactly what's driven it? And maybe to what extent you see the double-digit growth rate as sustainable for the rest of the year? That would be my first question. And then my second question is on the M&A comments that I saw on the tape from an interview this morning.

Can you clarify, for the benefit of everyone on the call, what you mean? And I guess how much time are you spending on M&A? To what extent is that a priority for 2017? And has that changed versus your view on M&A 3 or 6 months ago?.

Thank you, Veronika. Nice to talk to you. So M&A question, let me be very clear on this one. It is part of the company strategy. I've said that many, many, many times during the year -- the previous years. We are still very interested in acquisitions.

What I was saying is that my priority for the moment, and I said that also in Q4, is to focus on execution and commercial excellence on our own products and maintain and develop our organic business, improving the growth. So that's what I said. Having said that, we are always looking at potential interested companies to acquire or to make deals.

We have done actually 2, as you have seen during the first quarter with Leaf and MolecuLight. They are bolt-on acquisitions or bolt-on agreements. And that's what we do. That's our business. For the moment, my priority, believe it, is execution. Regarding the Negative Pressure Wound Therapies. Yes, we grew at 16%.

Is it a sustainable growth? Yes, I expect this to be a sustainable growth. A double-digit growth makes sense. sell more than 1 million -- we have sold 1.1 million PICO devices. We have a fantastic range to follow up on the PICO. The launches what we -- I was in Japan recently, and PICO is doing a tremendous job.

In every place where we have launched PICO, we are extremely satisfied with the feedback. So the answer is yes, we believe that PICO is a strong lever for the growth of the Negative Pressure Wound Therapy and for the company, even if it's small for the moment in terms of WIP for the company..

That's very clear.

The 1.1 million, is that since launch? Or is that in the quarter?.

Since launch. I wish within the quarter..

Okay.

And any update that you can give us on the RENASYS relaunch and how that's progressing?.

Well, RENASYS, I think I was clear when I said that in Q4 and let me reiterate the message here. RENASYS go easy on the market in the U.S. Remember, we have had these problems. The idea is not to make a big deal of RENASYS. We use RENASYS as a tool to sell our Negative Pressure Wound Therapy portable in the country.

So it's a sourcing effect, it's important to be in the hospital, we're not expecting RENASYS in the U.S., for example, to be a huge product for us. It's a growth -- it's a lever to accelerate the growth of PICO..

That’s great, thank you very much..

And our next question comes from the line of Ian Douglas-Pennant, UBS. Please go ahead..

So the first one is on SANTYL, just moving down Wound Care franchise. Could you comment on whether pricing was a factor in the negative growth that we saw this quarter? And what gives you confidence that, that destocking will result in restocking later in this year? So the second question is on China.

Again, great to see that coming back seeing some restocking after the destocking last year? Or is that double- digit growth rate as sustainable for this year, next year and over the medium term in your view?.

Thank you, Ian. Let me start with China. And no, it's not a restocking at all. It's actually with we -- they are still destocking a little bit, so I do believe that the 14% is a sustainable figure. Actually, I expect this to accelerate in the future, understanding that you have always stocking patterns in these up or down, depending on the quarter.

So there is still volatility, but I do believe that there are good things to hear about China. We know that the end-market demand is back and that's important. We know that we are almost at the bottom of our destocking.

We know that in wound care, there's still a number of issues, which are a handicap for the growth of wound care on the worldwide basis, by the way, but we expect the second half much better on wound care in China. So yes, I think that this year is a good sign and we're expecting this to continue.

Regarding SANTYL, I mean, again, let me just be clear on this one. Minus 1%, one can say it's a slow start. Well, yes, it's a slow start if you want, but it's exactly what we are in our books. That means, we're expecting this to happen.

And this reflects the quarterly distributors' stocking patterns, and this is -- the minus 8%, yes, the stocking patterns and seasonality. Digging deeper into the -- still, if you want, there's a number of factors at play. Most of our sales in wound biologics are through a small number of large distributors.

Their stocking patterns are driven by purchasing strategies and by buy-in around price increase, as you said. Secondly, we saw a stronger growth in our retail channel in 2016 compared to the other channels being inpatient and the long-term care.

And the retail channel is more seasonal and also more price pressure due to copaid insurance plan deductibles ratio. So we expect pretty growth rate in the second half, driven by SANTYL obviously.

And as you have seen, we have published, recently, a study demonstrating the effectiveness in pressure ulcer treatment, which I think will be also a good tool for the improved dynamic of SANTYL in the second half of the year..

So just to be clear, the prices or -- yes, the prices that you charge to your -- the small number of large distributors that you talked about have not changed? So it's not like there's some stocking at this stage.

No, no, no. There's no change..

Thank you..

And our next question comes from the line of Michael Jungling of Morgan Stanley. Michael Klaus Jungling of Morgan Stanley..

Thank you and good morning. I have 2 questions. Firstly, on NAVIO. Can you comment on what the specific NAVIO robot placement growth was in the quarter? And how many robots you now have installed in the United States? And question 2 is on OXINIUM.

The recent published, sort of, 2016 Australian Registry Annual Report shows that several of your Knee Implants with OXINIUM have been identified in quotation marks as having rate of revisions." Does this concern you? And what is causing this? Thank you..

Michael, obviously, I'm not going to comment you on what we sold exactly in NAVIO, but I can tell you that we're very pleased with the dynamic of NAVIO, not only in the U.S. but in the rest of the world. We have sold, for example, NAVIO in many countries like India, for example, Turkey, so we are extremely happy with the dynamic.

I'm expecting a lot from the approval of the Total Knee, which as I said in my presentation, will be used for all the range between JOURNEY, GENESIS II and LEGION. So we have super good feedback wherever we have implemented the product. So on the second question, I'm not sure I know the answer..

Yes, Michael. Thanks for the question, Michael. I think relative to the studies out of Australia, as you know, short-term results -- or short-term revision rates were driven by a lot of different things, not just Knee Implant but surgical procedures in patients, et cetera.

I'd say the benefit of OXINIUM is in the long term, in its wearability and which is why we've got a 30-year wear claim for OXINIUM. So we expect that over the long haul that OXINIUM will outperform cobalt chrome and other bearing surfaces. .

Okay. But, Mike, if I look at the table, it refers to up to 10 years of data for OXINIUM, and that's -- it seems it's a little bit more long term than just 1 or 2 years..

Yes, well, the standard would be 15 years and then outside of 15 years is where it gets interesting, and that's where our 30-year wear claim comes into play..

Okay, great. And quickly on Extremities. Did you recently make an adjustment to your Extremities heard it may have been dissolved.

And if so, why would that have been? I thought you liked the Extremities space?.

No, we have not done any adjustment in the R&D extremity team. I don't know where this comes from. It's a field which, yes, we still are interested in -- obviously, in this, but we have not done anything special..

Our next question comes from the line of Julien Dormois of Exane. Please go ahead..

Hi good morning all. Thanks for taking my questions. I have 2. The first one relates to the performance you have in the Knee and Hip franchise. Now it's been several quarters with outperformance in Knee, but underperformance in Hips. So I was just wondering whether there's any plan to restore the Hip growth and without hampering the Knee growth maybe.

So what are your thoughts on that side? And just I was looking for an update on the FX impact on the margin side, whether you can help us at the current levels to monitor.

And too, how should we think about the impact on the full year basis for on the margin?.

Good morning, Julien. So we'll start with second question and I'm going to ask Graham to answer, and then I will answer your question on the recon..

Sure, thanks for the question, Julien. I think a typical pattern for Smith & Nephew is for us to deliver a little over half of our sales in the second half of the year and a little under half, therefore, in the first half of the year.

And associated with that, there's typically something like a couple of hundred basis points of difference between the 2 halves in terms of trading margin, with the second half being higher. And our plans for the year are not inconsistent with that historic pattern..

Sorry, but I'm looking for the currency impact on the margin for the full year..

Sorry, forgive me, I misheard. The currency impacts on the margins, at this point, we are expecting there to be, as at the top line, a slight headwind, but I'm not specifying that at a particular level at this point..

Thanks, Graham. Julien, on the -- on your question on the reconstruction. So I think it's a great question. We grow at market in recon as a whole, worldwide basis 3%; for the market, at 3% that we estimate. And the up is a 5% on Knee, obviously. Will that continue? Yes, it will continue. As I said, we have the launch of the JOURNEY II XR, which is here.

I mean, the platform is still developing. We are accelerating this. So we are extremely confident in the dynamic of the Knee business in the U.S. and the rest of the world.

Now, what about the Hip business? As I said in my presentation, we expect to see the benefit of our investment in the REDAPT Revision System and for upsell, the cementless stem system, which will come through in 2017. And I do believe that this will definitely, I mean, enhance our global offer in Knee and accelerate our dynamic in sales.

Second, I see also the fact that we have less and less headwinds coming from the BHR, I mean, the metal-on-metal. So both these will certainly help us strongly in the acceleration of the Hip business.

I don't think this will have any impact on the dynamic of the Knee business, so I think it will be all good for Knee, without jeopardizing the growth of the Knee business..

And our next question comes from the line of Tom Jones of Berenberg. Please go ahead. .

I have 2 questions. One is just about the balance of growth in developed or U.S. and OUS markets versus Emerging Market. I mean, clearly the Emerging Markets are doing very well at the moment with 12% growth. But they're only 15% of revenues. The other 85% was basically flat or just very slightly positive in Q1.

I mean, I'm sure there are a lots and lots of moving parts to that, but my question really goes back to the longer-term strategy that Smith & Nephew has deployed over the last 4 or 5 years, to reallocate resources out of slower-growing developed markets and into faster-growing Emerging Markets.

If you could go back 3 or 4 years, do you think you would resource the developed markets a little more than the company did over the last 4 years? I mean, the question is, basically, do you think that the lack of growth in developed markets has anything to do with under-resourcing in those markets? And then, the second question, really just clarification on the Bioactives business.

Several times you've mentioned you expect an acceleration in growth in H2 no mention of Q2.

Should we read from that, given that we are halfway through, that the Q2 is also expected to be a weak quarter, which -- that business is volatile, but I don't think from we've had 2 consecutive weak quarters, so maybe just a bit of further clarification there will be helpful..

No, we don't expect Q2 to be a small quarter or bad quarter. We just say that H2 will be stronger than H1, and this, for many reasons. A, the new products that we have launched, which are going to really be more and more important during the year, so there will be an acceleration of this.

As you know, we have always seasonality in the second half which is a positive. We explained and I gave you the example of the biologics, for example, but not only biologics, it's the rest. And so I also expect to see, in H2, the benefits, and they're starting now actually, of what we have done in terms of tools to support the better execution.

You remember that was one of my main goals in Q4. Sales force excellence, with better performance data analysis, better sales competencies. We have changed the incentive systems. In many places, we have now a dashboard to monitor the performance in every single country. We have a new global pricing team also in place, which has started to deliver.

So I mean, a number of things that I was mentioning before, are going to expand during 2017, and that's why I always mention H2 as -- and China also, I was mentioning China in terms of full management that you will see the end of destocking effect certainly at the end of Q2.

So H2 will be stronger definitely, but Q2 is not supposed to be a bad quarter. So that's not -- don't misunderstand what I've said here. And by the way, there is -- just -- we have 1 delays in Q2 just for your information. In the U.S., I think it's a great question. I mean, U.S., you're right, 25% or 24%, 16% of the business.

Do I think that we should have allocated more resources in the Established Market in the past? No. I don't think so. I don't think it's a question of resources that we spend; it's a question of how do we spend the resource. And in the Established Market particularly, we have a pretty good amount of resource available.

The question is can we do better with what we have before thinking about putting more money behind the market. So I'm not at all believing here that we have done the wrong choice.

At the contrary; I think that what we have done in putting some money in the Emerging Markets was important, and we see that for even not only the mid-tier, which is starting now, but also for the high tier. So I really think that it is not the issue, it's just trying to do better. We have had a number of issues as you remember.

I mean, whether it was analysts in the U.S. or the German issue that we have had with -- where we were very strong market, but in reconstruction very bad. So I think it's not really the issue. But I'm confident that what we do now is improving the dynamic in the Established Markets.

I don't think there is any reason not to believe that we are going to be much better as soon as possible..

Okay, great. We'll look forward to that. And then just one quick follow-up question on the Hip business. You seem to be putting pretty much all your hopes on REDAPT driving acceleration of growth. But the product's been out for a while and hasn't really made a significant impact on the group overall.

Is that just that REDAPT is doing well and everything else is doing badly? Or -- and as the other bit's doing badly, annualized, maybe the REDAPT growth can come through? Or do you expect to have further acceleration from REDAPT? And if so, why?.

No, no. Not at all. I don't think that REDAPT is changing. REDAPT is starting actually. It's a very early stage, so we cannot say that this is -- so my view is that, that will accelerate the growth in the Hip business while we're going to continue on the trend for the rest. So the point in Hip is that we were missing this part of the revision.

So we now have the full range, which I think will help also globally on our Hip franchise as a whole in terms of dynamic..

[Operator Instructions] our next question comes from Richard Bilijovsky[Ph] of Bernstein. Please go ahead..

A bit of a follow-up to Tom's question, I think, about the growth rates in Established versus Emerging Markets.

Just interested to know whether or not the pattern in Q1 was in line with what you were expecting? And how you'd expect that to develop in Q2? And then just thinking about that in terms of how it impacts margins, what should we be thinking about as a margin headwind or tailwind from much stronger growth in Emerging Markets versus Established Markets?.

Well, I will leave that to Graham. But I can tell you something. The margin we have in the Emerging Market is not a bad margin. So I think this was what people were believing in the past. I mean the job and the work we have done in improving the profitability of the Emerging Market.

Actually, coming with the size of the Emerging Market, and as you know, bigger are the countries, closer we are from the margin that we have in the Established Markets. So I do not believe that the growth in the Emerging Markets would relatively change the margin profile in the first half.

So Graham, do you want to comment there?.

I think you've said the main things. There is a differential, but it's not as big as people might expect. Typically, those mix effects, while they do have an effect over time, they don't have a significant effect within a single year.

Overall, I think the key point is the one that Olivier made, that the Emerging Market businesses are good, profitable businesses..

Our next question comes from Ines Silva of Bank of America Merrill Lynch. Please go ahead..

Hi, good morning. I have 2 questions, please. So first, just a follow-up on the Knees discussion. Do you think that you can sustain this outperformance and would 5% for the full year be, in your view, a reasonable forecast? And then, the second question is you recently announced 2 distribution agreements with other technology suppliers.

So is there a strategy here of deploying less capital to acquire companies and instead, making partnerships? And if so, why?.

Okay. Well, on the second question -- I will come back to the first question. On second question, no, it's not at all. It's just the fact that we have had 2 great opportunities. Actually, we have with one of them, we saw, potentially, the ability to buy it later on.

So it's not a question of redistribution of capital, it's just a question of opportunity that we have had here, so that's all. Regarding the first question, I'm not sure I understood the question, Ines.

Could you repeat it, please?.

Yes.

I was just asking if 5% would be a reasonable estimate for full year growth in Knee?.

Well, yes, I think so. I mean, I don't see why we should not accept the market was suddenly crashing, but I don't see any change. very stable market, as you know. I mean, if you think about what we have seen during the last quarters in terms of market growth, it's a pretty stable market, and we have a pretty good momentum.

So I don't see why, especially with the launch of the XR full deployment, I don't see why we should have any type of anxiety regarding the growth of Knee. So I see it, yes, exactly on track..

Thank you very much..

There are no further questions in the queue..

Yes, so just to conclude maybe, I think that, again, I think it's a pretty good quarter for us. Exactly in line with our expectations. I am very confident for the rest of the year. Again, for the changes in the commercial excellence that we have put together, the improvement of the execution that we see on the daily basis.

I've been traveling all across the world during the first quarter, and I tell you, dynamic is very good. I'm also expecting benefit for our new product launches, LENS, WEREWOLF, REDAPT, NAVIO JOURNEY II XR, so I'm very excited for this 2017 and further. So I thank you for your participation to this quarter 1 announcement.

And, Graham, thank you very much. And see you in August, live. Thank you..

Thank you. That will concludes today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect..