Smith & Nephew plc (SNN) Q2 2015 Earnings Report, Transcript and Summary

Good day. Welcome to the Smith & Nephew 2015 Q2 and Half-Year Results Conference Call. 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 of about these factors is contained in the company's filings with the Securities and Exchange Commission. Today's conference is being recorded. At this time, you will hear ambiance, and then the conference begins. Olivier Jean Bohuon - Chief Executive Officer & Director: (00:36-02:40) So it seems that we've attracted a lot of people. Anyway, good morning to you. I know you have a number of results today, so I'll try to be sharp. Welcome to our first half-year presentation. And I will start by covering the highlights for the first half and give you my views on the work in progress that we have made. And I will give you details on our Q2 revenue performance before handing over to Julie to take you through the numbers. And I will conclude with an update on our strategic priorities. And then, as usual, we'll answer questions. Well, I'm very happy and proud of what we have accomplished in the first half of 2015. As planned, we have accelerated the sales growth, improved the trading margin, and delivered improvements on the tax rate. We delivered underlying revenue growth of 4% in the first half of the year with a stronger growth in Q2. Our strong performance in H1 reflects successful execution of our strategy. In Advance Wound Care, the actions we started implementing last year resulted in solid growth. Our investment in emerging markets have again delivered a double-digit increase in revenues. In orthopedic reconstruction, we saw improved performance driven particularly by knees; JOURNEY II continues to deliver a strong growth. Our acquisition of ArthroCare one year ago has significantly strengthened our Sports Medicine business. In addition, we have made four small bolt-on acquisitions so far in this year. The trading profit was $512 million, giving a trading margin of 22.5%, an improvement of 70 basis points over last year. Julie will highlight how our expense and tax optimization programs leverage our revenue growth to deliver EPS growth of 3%, which should have been plus 10% excluding the FX. Today, we also announced an interim dividend of $0.118 in line with our formula and representing a 7% growth. Later in the presentation, I will highlight how we are successfully rebalancing our business with our growth areas and delivering against our strategic priorities. First, I want to start with more details on the strong Q2 performance. As usual, this slide captures our underlying growth, on the left-hand side geographically and on the right by per franchise. We delivered 5% underlying revenue growth this quarter. In the U.S., the revenue growth was up 4%. And the other established markets, sales increased by 3% and in particular, we delivered better results in Europe, and our plan to improve the execution is on track. Emerging market grew by 14%. I'll talk later about the investment and six acquisitions we've made over the last two years, which underpin the continued double-digit growth. I'll now turn to look at each franchise in more detail. Sports Medicine Joint Repair had another strong quarter, growing at 7%. One year post acquisition, the benefits of the combination with ArthroCare are increasingly evident. Our recent two launches from both Smith & Nephew and legacy ArthroCare pipelines are off to a promising start. Enabling Technologies grew at 1% with expected decline in ArthroCare royalties continuing to impact growth, and within this, COBLATION technology grew very strong. Our Trauma and Extremities revenue grew by 2% against the comparative quarter, which benefits from strong tender activity in the Middle East. Our Other Surgical Businesses delivered a combined underlying growth rate of 7%. This is primarily our ENT and GYN businesses. Our confidence in the performance of ENT continues to increase. We have successfully worked to improve the sales execution and deepen our understanding of the various segments of the ENT market. Globally, our Recon implant revenue was up 4%, and I will return to our Recon strategy later in the presentation. The Global Knee growth of 7% was driven by continued strong uptake of JOURNEY II, our kinematic knee. Global Hips grew at 1% with BHR reducing growth by about 1 percentage point in the quarter. In addition, our strong U.S. Recon performance reflects our differentiated VERILAST technology, which was highlighted in the campaign for Hips and Knees we ran in February and March. At the end of the quarter, we acquired the ZUK uni knee, which expands our access to a fast-growing segment of the recon market. I talked last year about our strategy to increase our Emerging Market mid-tier distribution portfolio. This quarter, we implanted the first patient with our new internally developed ANTHEM knee. This knee system is designed for smaller anatomies and combined with streamlining instruments that provide better relative affordability, and we target a full market launch in 2016. Advanced Wound Care grew revenue by 12%. We delivered strong growth in the U.S. and Europe albeit again weak compared to last year. In Advanced Wound Bioactives, we grew at 6% against a strong comparator. Our wound SANTYL dynamic was partially offset by the performance of our skin substitute product OASIS, which faces reimbursement headwinds. We are confident in our full-year guidance of double-digit sales growth. Advance Wound Devices was up double-digit outside of the U.S. It's the last quarter before we analyzed the U.S. distribution all on RENASYS, which pushed global devices down 9%. We continue to work towards U.S. approval for the full RENASYS range and expect to be in a position to support existing RENASYS customers later in the year. However, we'll focus our investment to re-enter in the U.S. (05:56) negative pressure market behind a stage rollout of our next generation products in 2016. PICO, again, delivered very strong growth, and we see this possible negative pressure becoming a more important part of the negative pressure market. This is driven by the increasing volume of compelling clinical data, strong (06:16) economic arguments, and the ease of use for customers and for the patients. So, overall, I'm delighted to see that at 7% growth, Advance Wound Management is again going ahead of the market. And we'll now hand over to Julie, and I will come back later on. Julie Brown - Chief Financial Officer & Executive Director: Thank you, Olivier, and good morning, ladies and gentlemen. I'll start with the financial highlights. As you know, we've changed our reporting from quarterly to half-yearly, and that this summary slide covers the six months to June 2015. Now, looking at our financial headlines, revenue is just under $2.3 billion with strong underlying growth of 4%. Trading profit grew ahead of this at 6% underlying, resulting in a trading margin of 22.5%, a 70-basis-point improvement over last year. EPSA was $0.391, a reported growth of 3% negatively impacted by currency, which I'll return to later. And completing the picture, cash improved. Trading cash flow was $382 million and a conversion rate of 75% compared with the 53% in the prior period. Finally, free cash generation was $329 million, including the receipt of a legal settlement of $99 million. I will now look at each of these areas in turn starting with revenue. This slide shows the adjustments between underlying and reported revenue for Q2. The business delivered a strong underlying revenue growth of 5%. This compares with 3% in the first quarter demonstrating improved momentum in the business. The ArthroCare acquisition added 6 percentage points to the reported growth rate, simply due to six months of ArthroCare sales being included this year compared with only one month in the prior period. And for the rest of the year, we will not see further acquisition impacts from ArthroCare. Sales growth in Q2 at constant exchange rates was therefore 11%, and currency was adverse by 9% due to the strengthening of the dollar. Hence, in reported terms, group revenue growth for the quarter was 2%. For the half year, the trends are similar. Underlying revenue growth of 4% translates to 2% reported growth due to the impact of acquisitions being offset – partially offset by adverse currency movement. To give you a bit more information about other deals we've completed recently, the results of our distributor acquisition in Colombia has been included in our financial results since March, and there is nothing yet included for either the distribution acquisition in Russia or the recently announced purchase of the ZUK uni knee from Zimmer. This will start to impact our results from July onwards. Next, the trading income statement. With additional detail shown in Note VIII to our announcement, our trading margin for the first half was 22.5%, an improvement of 70 basis points. Let's take a look at the components of this. On gross margin, we saw adverse pricing pressure in aggregate of 1% to 2%, similar to previous quarters. In addition, due to currency movements, we saw additional gross margin pressure in emerging markets. These factors have been partially offset by cost of goods improvements, and the overall gross margin is down 70 basis points to 75.1%. Moving to SG&A, our group optimization program has now delivered annualized benefits of $50 million through procurements, through standardization, and through a more focused single country management structure. For example, we now have one ERP system in Europe, and all major functions such as finance, HR, and IT are managed globally. This allows for a simpler and more cost-efficient organization. We've seen the impacts in our cost base. Our G&A expenses alone are now lower by an amount equivalent to 1 percentage point of sales compared with 2014. And ArthroCare synergies are also being delivered and our commitment of $85 million of total synergies by 2017 is on track. Finally, two final factors related to the margin. U.S. RENASYS continues to be a headwind. We estimate that the impact that this product holds is about 50 basis points on our first-half trading margin compared with the prior year. And in R&D, the lower level of spend this year reflects the closure of the HP802 program. Now, a review of our adjusting items between trading profit and reported IFRS profit in the statutory income statement. Acquisition-related cost is $13 million, related to remaining ArthroCare integration and emerging market deals. Restructuring cost of $19 million relate to group optimization. In terms of phasing, we expect higher restructuring cost in the second half. And amortization of acquisition intangibles is $78 million higher than last year, mainly as a result of the ArthroCare. And finally, within legal and other, there's some specific items to highlight. The largest item is an income of $45 million, recognized on the settlement of the Arthrex legal claims net of expenses and royalties. There's also a one-off curtailment gain relating to post-retirement healthcare benefits in the United States. And offsetting this, we have an additional $10 million charge related to final liabilities associated with RENASYS. Now, we review of the movement in EPSA for the first half. Given the significance of currency this year, we have included both reported growth and also growth at constant exchange rates. Trading profit grew 6% reported and 13% at constant currency. There are a number of movements to EPSA. First, the interest receivable reduced, as we no longer receive interest from Bioventus. And second, interest payable increased following debt associated with the acquisition of ArthroCare. And third, taxation. The forecast full-year rate on trading results is expected to be 27.2%. This represents a 50-basis-point improvement over the prior period, and almost 300-basis-point reduction than 2012. Adjusted EPS for the first half is $0.391, an increase of 3% reported and 10% at constant currency. Now turning to cash, here's the cash flow statement for the first half. We generated trading cash flow of $382 million, a trading profit to cash conversion ratio of 75%, compared with 53% in the prior period. In terms of working capital movements, we had $130 million outflow, largely due to inventory movements and payables. And although we've seen a net outflow from inventory, there's actually been an improvement in inventory churn of over 5% in the first half. Free cash flow was $329 million, including the legal settlement from Arthrex. Now, turning to capital allocation. We started the year with net debt of $1.6 billion and generated free cash flow of $329 million, or $490 million before CapEx. Capital expenditure was $161 million, reflecting investment in instrument sets, IT systems and expanding manufacturing facilities. Dividends were $166 million, being the cash payment of our final dividend for 2014. And for acquisitions, our net cash spend of $16 million relates to the distributor acquisition in Colombia. And, finally, within other, we include the repurchase of our own shares equivalent to shares issued under employee share schemes. At the half-year, we closed with net debt of $1.5 billion. This is equivalent to net debt to EBITDA of around 1.1 times. Finally, our outlook for 2015. Our previous guidance for the full year remains unchanged. On revenue, we will achieve higher underlying revenue growth in 2014, and in particular, regarding the second half, we will no longer experience a headwind on growth from RENASYS in the U.S., as there are no sales in the comparator period. And as a reminder for your models, we would not expect you to include any U.S. RENASYS sales for the remainder of 2015. As Olivier said, we expect a staged rollout of our next-generation products during 2016. On trading margin, we're pleased with the improved performance in the first half. We experienced some favorable cost-phasing, leaving our guidance for the full year unchanged. On EPSA, we expect to deliver the improvements in tax as guided, and further technical guidance on interest is included on slide 31 in the pack. Regarding exchange, we expect to see a headwind on revenue of 6% for the second half and 7% for the full year, based on exchange rates at the end of June. And with that, I'm very happy to take questions, and will hand back to Olivier. Olivier Jean Bohuon - Chief Executive Officer & Director: Okay. Thanks, Julie. Thanks very much, Julie. Four years ago, actually, I was presenting – exactly four years ago, the strategy that we wanted to implement at Smith & Nephew. And we have been pretty strong in following the path. And I'm happy to see now that the choices we've made were good choices, including the – increasing the high growth (16:34) of the company, developing the emerging market, trying to find disruptive models to succeed in the established markets, and so on. So I'm going to take you through a few things about it now. First, in the established market, and I'll focus on the Advanced Wound Care and the Reconstruction, and I will include an update on Syncera dynamic. And I will then update you on the progress we have made in the last two years in the emerging markets. So the first priority of this strategic intent of Smith & Nephew was, win in the established market, be successful in the established market. And as we recall, we've been focused on improving our execution and our performance in Advance Wound Management. In May last year, Glenn Warner joined Smith & Nephew as President of Advance Wound Management, completing the new leadership team. Under him, important changes have taken place. We have put increased focus on our innovative products. The basic example of this is ALLEVYN Life, which has delivered very strong growth in the first half of the year. In the U.S., the sales teams have been restructured, and there's greater collaboration between our three franchises to optimize the customer coverage. In Europe, the implementation of a new organization has helped to refocus the Advanced Wound Care teams to deliver a very improved performance. The global growth in H1 demonstrate that these changes are delivering the expected improvements, and I'm confident that our Advanced Wound Care business is now in a position to deliver growth above market. Turning to Reconstruction, I'm excited about our current position in Recon, which reflects our thoughtful choices in investments over the last few years. As you know, I do not believe that the big is always beautiful, and our performance in the last 12 months is clearly showing this. For example, in the U.S., we estimate we have grown above the market over the last 12 months. And this quarter, we delivered our strongest double (18:42) growth in three years. We have pioneering products, and we focus on re-innovation. The OXINIUM bearing surface has shown outstanding results in the registries. And during the quarter, the first patient was implanted with our Ox on Ox (18:55) hip in the U.S. trial. The uniqueness of our products is what drives our various successful marketing campaigns, focused on our VERILAST Technology. Having a strong business in the established market also provides a platform to develop our leading position in the emerging markets. In 2014, we announced Syncera, a disruptive model, and we'll now give you some more details on our early Syncera experience. So, we have reached a number of milestones in the first 12 months which demonstrate our progress. We have strong reference sites. Syncera is not just an idea; now it has hospital and surgeon advocates. These reference sites are now trained and are fully operational with Syncera. So, what does that mean? It means that they're using our solution. They have purchased instruments and implant inventory, and they use our software. Currently, we have customers with potential to perform more than 3,000 annualized Syncera procedures, in line with our expectation. Our progress has also given us confidence to push ahead with our plan outside of the U.S. The technology package is a key element in the Syncera solution. We have acquired assets and are continually looking for more technology which we can use to improve our customer experience and efficacy. So what have we learned? Well, let me recap the first 12 months because that's important. We have three phases: the pilot phase that we started last year in September. The pilot was until January. Then we pre-launched, and we pre-launched on different centers. And now, we've started the launch at the end of the month of June. So we have learned a lot of lessons, which have helped us refine the offering and which, no doubt, will help us accelerate the growth going forward. For example, one of the key successful uses of Syncera is having a close collaboration and full commitment not only as the payer of the hospital, but between the payer and surgeons. When we launched Syncera – I mean if you asked about the risk of cannibalization, we have not experienced any and in fact have been able to make some referrals to our traditional Recon teams. The changes under the Affordable Care Act and the recently announced CCGR, we believe, are making hospital groups more open to a different offering, and Syncera plays very well to this. All this makes me very confident with Syncera; we have the right innovative offering for this subset of customers at the right time whether it is in the U.S. or in the rest of the world in selected countries. As you know, accelerating our development in the emerging market is second of our strategic priorities. The line in this chart shows a proportion of our group sales coming from emerging market from 8% in early 2010 to over 16% this quarter. Our CAGR sales have been over 15%. Our strategy to achieve this position in this market remains very clear and pretty easy. One, in our focus country, we ensure we have a direct relationship with our customers, surgeons, nurses, and other healthcare professionals, by adding a direct presence and manage our own destiny and to ensure that capital constraint does not hold back market development. And two, we offer our customer the right products. By that, we mean both our (22:21) premium product and also the development of our mid-tier strategy. The mid-tier is essential for future expansion of the market and to widen access to our products. Two years ago we highlighted these eight countries as our focus countries where we see great future potential. Back in 2011, we had a mixture of direct and indirect sales team and almost no mid-tier presence. In the last two years, we've made six acquisitions and significant organic investments. We are now direct in all eight countries. For example, in Turkey, we acquired a (22:56) distributor, Plato. We saw this as an opportunity to invest further in this large and great market. In Mexico and Saudi Arabia, we choose the route of organic investment. We added sales rep infrastructure in both markets. This has resulted in an expansion of our share in important tenders. Earlier this month, we acquired our Russian distributor of Recon and Trauma products. We have worked with these a bit for more than five years, and the acquisition was a natural next step in line with our strategy and also provide the important Russian local manufacturing. In terms of mid-tier entry, we're still at an early stage but making steady progress. This is driven by acquisitions like in India and now in Russia in licensing and organic investments. For Main China, we remain very well-established and we are a leading player in most franchises. China is tracking on a run rate of soon becoming our second largest country by revenue. In conclusion, I'm very pleased with these results that demonstrate the positive effect of our action in the course of business. Notably, in the second quarter, we achieved the expected improvement in Advanced Wound Care where we delivered sales at double-digit growth. The emerging market also grew double-digit and we achieved our best performance globally in Recon for three years led by strong earning plans. Our global optimization program is on track, as you've seen. It's not only about savings, but reinforcing and centralizing our functions with finance, HR, and quality and regulatory. We have also made a number of acquisitions, adding to our technology and product portfolio and emerging market business. Overall, in the first half of 2015, we delivered higher underlying revenue growth, trading, profit margin, and earnings. Our guidance for the full year is unchanged. Where we have invested to improve existing business, we're beginning to reap the benefits and confident we are firmly on track with our strategy to invigorate the growth profile of Smith & Nephew. Thanks a lot. That ends the formal presentation and we'll now take the question as usual. Thank you. Olivier Jean Bohuon - Chief Executive Officer & Director: Yes?

Thank you very much. It's Ian Douglas-Pennant, UBS, here. First, on CCGR, thanks for your comments there. It's interesting to get your first take. Could you give us an indication of what pricing pressure you're seeing in BPCI hospitals versus those others? Have you had more success launching since they're into those hospitals that have chosen to stay part in that program? And then on another tack, on your Wound Care, some very good growth rates there from your ALLEVYN Life portfolio. Is this because of the reps that you've taken out of NPWT that's driving that growth? And if so, will you be hiring more reps when NPWT comes back to market? Thanks. Olivier Jean Bohuon - Chief Executive Officer & Director: Okay. Thanks for the question. Let me start with the second question on ALLEVYN. No, we have not redirected (26:11) from negative pressure to ALLEVYN per se. The reps that we used to have in negative pressure have been reallocated to PICO. PICO is doing very well, as you can see, not only as a product, but we believe that having this type of disposable technology will help us dramatically in the future because the disposal market becomes more and more important for different reasons. Obviously, it's more convenient. We have more clinical data than before, and also it is in terms of outcome, pretty good for the patients and for the payers. On the CCGR, yeah – well, no, we have not seen any more price pressure at this time. We believe that for us an opportunity for different reasons. Managing, for example, the infection rate down is important. I think that PICO, again, is a great opportunity in the hospital to reduce the (27:48) indication because of the efficacy in post-surgical wounds. We believe – and you ask me if we see more and more, I'm not going to talk about the different centers for Syncera, but Syncera is definitely a very attractive offer if you want to reduce the cost. So it's absolutely – as I said in my presentation, I think we are arriving at the right time, not only in the U.S. but also in the rest of the world. So yes, it's for us an opportunity.

And just a quick follow-up on Syncera, I mean, we've heard in the market that some of your competitors have programs like this. I mean, can you comment on how frequently you see those when you're competing for this kind of accounts or are they much too early stage now? Olivier Jean Bohuon - Chief Executive Officer & Director: I think they're very early stage. I haven't heard anything specific. As I said in Q1, the complexity of Syncera is it's not just selling a product. It's actually selling a complete solution and offering a solution, which I think will be the key for success tomorrow, going from a product offer to be able to offer a solution, not only to the payers, also to the surgeons. It took us two years to put that together. It took us two years, and as you know, the strength of the model is the product, the quality of the product that we have, the hip and the knee, and the quality of the registry we have. I mean there is a huge experience with this product. They are known. People trust them. They are able, which is also important, to cover the majority of the population – the potential population receiving a knee and hip. And also the quality of the model behind that we enhance pretty significantly on a regular basis. If you require, the S2, which is one of the acquisitions which is part of the model of Syncera, makes me think that if someone comes – and someone will come, because I think it's obvious that there is a need for a cheaper model – it would not be today. We see some events here.

Thanks very much.

You talked about the timing on the RENASYS relaunch, or rather I suppose you're waiting for the generation 3 to get approved. Do you have any clarity on that? Because obviously, the re-approval of RENASYS 2 just took a lot longer than expected. Olivier Jean Bohuon - Chief Executive Officer & Director: No. It didn't, actually. It didn't. Thank you for the question, Lisa (29:49).

The FDA takes their time, I know. Olivier Jean Bohuon - Chief Executive Officer & Director: FDA is slow, but they come on track. And actually, the RENASYS is not just one device. It's a bunch of devices, actually. And we have a three 510(k), and two of them have been approved. We're expecting soon the third one. During the year, we don't plan to relaunch the RENASYS, as I said. In Q1, we plan, though, to just supply the existing customers, so that's while we're saying that there's no need to put any sales because we don't plan to make any sales with that. So the strategy now has been clearly to say, well, relaunching RENASYS will not bring anything. I mean, the cost of recapturing customers is very high. And if you bring a new product in a few months, it's much better to focus on this connected device that we plan to launch, which is really something different and really something better. And so we plan to have a launch between Europe and the U.S. during 2016. So that is the plan. So FDA has three 510(k), okay? There's no issue there.

Okay. So just for confirmation, you should expect all the components of that RENASYS 3 to be approved by, say, the end of 2015, positioning yourself for a launch? Olivier Jean Bohuon - Chief Executive Officer & Director: Absolutely. Absolutely. Absolutely.

Okay. And then, the second question on Trauma. I understand, obviously, you had tough comps due to, I think, it was a tender in Saudi last year. Olivier Jean Bohuon - Chief Executive Officer & Director: There was a big Saudi tender, yeah, and another one in the Middle East also. I mean, it was very high comparator last year.

Okay. And I suppose maybe more of a question for Julie, but if we strip that out, are you pretty much in line with the market in Trauma or is there still a bit of a lag for your performance versus the market? Olivier Jean Bohuon - Chief Executive Officer & Director: Well, I think that – Julie, you can answer. But then, we have 2% growth, I think, for the Trauma business as a whole. Without the effect in like-for-like, what will have been the growth rate of the market, I think we'll be very close to the market. Yeah, very close. Julie Brown - Chief Financial Officer & Executive Director: I mean, U.S. Trauma growth was strong. So it was definitely impacted by a major market. Yeah.

Okay. That's helpful. And then third question and final question, PICO use. Could you give us an idea of where it's being used? Is it mainly in diabetic foot ulcers, venous leg ulcers? I know you've done some really interesting studies in obstetrics and I know you're working on one in knees. How much of... Olivier Jean Bohuon - Chief Executive Officer & Director: It's hip, actually.

...that is – oh, in hip? Okay. How much – where is it coming from? Olivier Jean Bohuon - Chief Executive Officer & Director: It now comes from a wide range of situations, actually. It came at the start for all this venous leg ulcer pressure, then all these difficult wounds to treat. We have now a very strong collaboration between ASD and Advanced Wound Management in the hip post-surgery treatment. In GYN also, we use it a lot. So we have different sizes and shapes of PICO. So it varies. Frankly, I think we open it more and more and we realize, I think, there is, we believe, an amazing opportunity for this type of devices. We invest also, it's important to say, in the clinical outcomes, so we drive clinicals, and they show good results.

Thank you. Olivier Jean Bohuon - Chief Executive Officer & Director: Yes? Go ahead. Michael? Next.

It's Yi-Dan Wang from Deutsche Bank. Just couple of quick questions. The first... Olivier Jean Bohuon - Chief Executive Officer & Director: A couple, huh?

A couple, yeah. I promise it will be a couple. The first one is on the U.S. knee growth versus the hip growth. Can you comment on how much of the knee growth is coming from the DTC campaign versus the benefits you're getting from Syncera? Because you've run DTC for both hips and knees in the U.S., but there seems to be a fair big difference between the performance of the two product lines. And then secondly, Julie, could you comment on the effect of the acquisition on your top line and trading profit? So these are the Russian acquisitions and the UNI knee business. Thank you. Olivier Jean Bohuon - Chief Executive Officer & Director: On the U.S. knee saw, as you know, it's a very significant growth. I think the reason is not Syncera. Actually, it's purely the dynamic of the JOURNEY II, which is really good. Remember, we discussed at the stage launch, people were asking about, are you going to launch yet? Now, it's launched. And it's launched, and it works. We have great customer feedback on this one. So the campaign that we have based was a campaign based on the VERILAST technology. It has driven a lot of interest. I cannot give you the split, disclose between what is generated by the campaign and what is generated by our business. One thing I want to tell you also, and actually, we discussed it yesterday, the quality and the efficacy of our sales force is much, much better than what it was in the past. So you remember years ago, we said in the established markets, if you want to be successful, you have to bring new products, differentiated new products, because you want to get a price premium with this product and you want to keep this price, and you also need to have a better sales force effectiveness. We have worked two, three years on this. I think we have better reps, much more prepared than what we had in the past. And when you have good reps, well-trained, and good products, things are happening. So again, what I see is not an anecdote. What I see is a trend here, and you see the same. I mean the Recon business in the U.S. is improving; there's no doubt. There's no doubt. And it comes back, (35:37) that you don't need to be big to be successful. Bring new products, bring good reps, and bring innovative models. I think this is the recipe.

So, in terms of the differential between your hip and knee business, can we imply from that, then, that your knee portfolio is more differentiated than hips, or is it more of a timing thing? So your sales force is focusing more of their attention on knees as we sometimes see, and then we should see the hip business pick up later on? Olivier Jean Bohuon - Chief Executive Officer & Director: Hip business, we have at this quarter 1 percentage point of headwinds due to BHR (36:14). So the growth in the U.S. is not bad, actually. It's a decent growth that we have had, especially if you add the fact that BHR (36:25) was pushing down this product. Do we think that the knee business has been more pushed by the DTC campaign than the hip? Maybe, maybe. Again, the hip business is more complex than the knee business, because the hip is satisfied market, almost satisfied. We have 90% of patient satisfaction with the existing products. We are about 70%, 75% satisfaction with knees. So there is a lot of things. When you bring innovation in knee, you can make a difference. In hip, it's more marginal. We have worked, as I said, on the Ox on Ox (37:03). We did a very strong study in South Africa. We have started a clinical trial in the U.S. now. The first patient on Ox on Ox (37:10) has been implanted recently. So there are some things which can make the product, but it's a satisfied market. Julie Brown - Chief Financial Officer & Executive Director: Okay. So returning to your question about the acquisitions, so ZUK, we expect to get sales in the second half of around $10 million, if you want to put that in. In terms of Russia, it's likely to be completely immaterial at this stage. We had quite a small Russian business to start with going through the distributor. It will take some time to set that up properly. So I think it would be immaterial for the purposes of modeling this time.

And the profit impact for the (37:48)? Julie Brown - Chief Financial Officer & Executive Director: Yeah, the profitability on ZUK is very strong; it's very strong. So, obviously, Recon is a strong part of our business anyway. So ZUK, we expect to be strong. And clearly, in emerging markets, and the case of the Russian deal, in emerging markets and when we're setting up from the start, it takes a while to get the profitability there. So you would expect low profitability from the Russian deal.

But it's not loss-making? Julie Brown - Chief Financial Officer & Executive Director: No, it's not loss-making.

Thank you. Julie Brown - Chief Financial Officer & Executive Director: We'll make sure it's not loss-making. Olivier Jean Bohuon - Chief Executive Officer & Director: Yeah. ZUK was a great opportunity for us (38:19), actually. We're very happy to have been able to get this product.

Ed Ridley-Day, Bank of America. First of all, for Julie, great progress on your cost saving program, $50 million run rate, annualized. It seems to me you're a bit ahead of schedule, so should we start thinking more positively about the $120 million total savings or not? And on a related question, clearly you've reiterated the $85 million synergies from the ArthroCare deal. Can you give us an update on where you are on that? Julie Brown - Chief Financial Officer & Executive Director: Okay, sure. Yeah. So the group optimization program, we're really pleased with progress. We've got a comprehensive PMO around it, and it's meeting all the milestones. In terms of the slight margin beat in the first half versus consensus, I think it's just more to do with cost saving and timing rather than underlying delivery of group optimization or ArthroCare. So the program's on track. As you know, we've maintained the guidance; I think it's simply a phasing issue rather than anything else. ArthroCare, again, is going very well. The sales integration has gone well in the U.S. and the rest of the world. There's a real synergy with the reps now, because they've got both blades and COBLATION. So all that's working really well. At this stage, we're not changing the guidance there. We're maintaining the $85 million. We've owned ArthroCare now for one year only. So we're confident about it, but not upgrading the guidance. Olivier Jean Bohuon - Chief Executive Officer & Director: I was, on the $85 million, you remember the split. It was $65 million for cost savings and $20 million in sales synergies. I'm more optimistic that our CFO on the sales – I think that synergies will happen because it's pretty mechanical. And it's the sales – more I see that the way that this integration is happening, the value – Julie mentioned the reps feedback that we get. I mean, it's very good. And the ENT business, which we forget sometimes, but let me remind you that this business when we took was a negative growth business; it was minus 5%, minus 4%. And we're now over – we have seen between the GYN and the ENT a 7% growth that I was mentioning. We see (40:40) much more focus on it. We believe there's a lot of things there which are interesting in the emerging market and in the established market.

That's very helpful. And just a follow-up on Arthro, can you detail how much benefit maybe you saw in the quarter from the Zimmer-Biomet, the synergies from that deal? How much do you expect you can be able to benefit, maybe, in the second half from the focuses around the integration? Olivier Jean Bohuon - Chief Executive Officer & Director: I don't know, actually. It would be interesting today to see the results offer this company. And maybe I would be able to answer more – with more details there. I mean, we see the synergies; there's no doubt that its – integration like this is always pretty painful. So there will be certain opportunities, and it's why I cannot quantify them. I don't know. And actually, what – I think that what we have in our own plan takes this in consideration.

But you have been able to pick up potentially some salespeople from it? Olivier Jean Bohuon - Chief Executive Officer & Director: Not much more than – we have seen these synergies for a while now because they have been working. We have seen, as I said last quarter, there are obviously these going on and people willing to join us. And so we see the opportunity. We see distributors in the U.S. saying, you know what – one was with Biomet; one was Zimmer. Now, there's only one, so one is available. So they come to you saying, well, can we work together? I mean, you find a number of opportunities. Now, I think they are integrated in our business now.

Great. Thanks. Olivier Jean Bohuon - Chief Executive Officer & Director: Thank you, Ed. Sorry, there's four – if you will not be happy, we are all four people on the – and then we will (42:19).

Certainly. We will now take our first question from Mr. Tom Jones from Berenberg. Please go ahead, sir. Your line is now open. Tom M. Jones - Joh. Berenberg, Gossler & Co. KG (United Kingdom): Oh, good morning, and thanks for taking my questions. I had two, one on Syncera, and one on the AET business. On Syncera, I just wondered how your conversations with hospitals have changed since the publication of the CCJR proposals from CMS. The PPCI program that ran before that, that was a voluntary program, but this is different, being a compulsory program, and is perhaps, or my thought at least, forcing half the (42:59) to start thinking about your kind of business model. So, kind of wondering how that's changed the conversation. And then, sort of a follow-on to that was if Syncera does prove to be successful, which we all hope it will be, how would you expect the incumbent, the big three just to start to respond? Because clearly, they're not just going to roll over and let you take all their shares. They're going to do something. I just wondered kind of how you plan for that and what do you expect to do about it. And then on the AET business, this doesn't get a lot of attention, but it's as big as the Sports Medicine business. Once again, it didn't really do much in the way of growth. So I just wondered if you – there's anything you've got planned or you have in the pipeline trying to improve matters in that business. Olivier Jean Bohuon - Chief Executive Officer & Director: Okay. Well, look. Phil, you want to take the Syncera or you want me to answer? Phil Cowdy - SVP-Corporate Affairs & Strategic Planning: I'll take it. I mean, the Syncera one, Tom, very early days at the moment. But certainly, we have had inbound calls and obviously the topic does come up when we're doing pitches at the moment. But just to reiterate Olivier's comment earlier, we do see the opportunities around that broad across our portfolio. So it's not just focused on the implant. Hospitals are looking to be more efficient across that whole 90-day period. So for example, JOURNEY II, we believe, and we try to collect data, the point to faster recovery after surgery. Again, if you can prove that to a hospital, that reduces cost and hence should play well into these programs. Olivier Jean Bohuon - Chief Executive Officer & Director: On the reaction of the competitors on Syncera, one thing, I really believe in and we have seen that now between the pilot, the pre-launch, and the launch phase, that it's not a question of dropping the prices. I remember that you were asking that question a year ago when we talked for the first time about Syncera about the risk of dropping prices in the industry because in reaction – that doesn't happen. I'm much more believing now that there will be models like this one developed by our competitor, because they will have to. And I think that the notion of tier of lower cost and higher cost is there. And so you have to answer not with the product price, which is short-term, but with a full solution. I mean, I'm convinced that the reconstruction business has to go through global solutions. I'm convinced that the implants per se will be commoditized in 5, 10 years. And if you do not come with something which can add value, you go nowhere. So whether it is intelligent implants, whether it is a solution like Syncera, whether it is – whatever we can imagine. But I mean, it's definitely what the trend that we'll see in the market. So that's what I believe. On the enabling technologies question, what is the dynamic? Actually, it's a much better dynamic for us than what it used to be. I think we have been growing at 1%, I think, Julie, during this quarter, and that was a mix between very strong COBLATION, which definitely has changed the dynamic of our own enabling technologies, because if you remember, when we were just having the blades (46:31) and the cameras where that's minus 6%, minus 7% – on a regular basis, it was always negative growth – now we are on the positive side of this. So we're planning to see that continue. Julie Brown - Chief Financial Officer & Executive Director: And we've actually – we've also got the ArthroCare royalties going through that line as well, which impacts the growth rate again by 1 percentage point negatively. So excluding that, there's real momentum in the business underlying those numbers. Olivier Jean Bohuon - Chief Executive Officer & Director: Okay. Next question at the phone?

We'll now have our next question from Bill Plovanic from Canaccord. Please go ahead, sir. Your line is now open.

Great. This is actually Kyle on for Bill. Do you hear me all right? Olivier Jean Bohuon - Chief Executive Officer & Director: Hi, Bill.

He's Kyle.

Just wondered if you could remind us of your cash priorities, where do you think about M&A buyback and dividends, the different puts and takes between those two? And then also, when you think about M&A moving forward, you showed the slide of building out in the emerging market. I mean, how do we think about the balance in M&A from a distribution standpoint and the focus on the emerging, but then also new technologies you've seen in the marketplace? Olivier Jean Bohuon - Chief Executive Officer & Director: So on the M&A, I mean it's still high on the agenda, not only in the emerging market where we continue to acquire what we believe is important to our distributors. We also look at companies which can help us to develop our mid-tier. You remember the mid-tier is the second growth lever of the acceleration of the emerging market in the future. And so that goes through (48:11) portfolio. We have launched our own portfolio. We follow that, and that will happen in the years to come. But we believe that in-licensing and acquisition, our support of this – that will remain high in the agenda. For the rest, we still have a serious appetite for bolt-on or companies filling gaps or adding value to our existing businesses; could be a product like ZUK, which really is a gap filler for us, which is important. It could be new technologies. Actually, we try to think about the new technologies more and more. And that's the complexity of the business, is to be able to ask your R&D to make products for tomorrow but also to think about what's next, which changes a lot. When you think about the impact of going from a technology to which is really molding and metal or stuff like that to intelligent joints, it's not the same. So it has consequences on your manufacturing. It has consequences on your skills, the people. It has consequences on your R&D and so on. So I really believe that it's important to think short-term and long-term. To do that, we acquire a company potentially or we plan to acquire a company which can help us to go further. We also invest in some companies, a bit of money, placing bets on new technologies without having to do ourselves, the clinicals we serve, having to take the risk of failures. So we just spread some things here in the different businesses where we are. So that's what we plan to do. Cash-wise, Julie, do you want to... Julie Brown - Chief Financial Officer & Executive Director: Yeah. So, our priorities for the use of the cash. First of all, organic investment. Secondly, the progressive dividend policy that we follow. Our third priority is M&A, as Olivier has mentioned. We've got a strong pipeline. And then fourthly, we'll distribute the cash, any remaining cash, surplus cash to the shareholders. So that's the sort of framework that we use that we've laid out. At the same time, we are looking to improve operational cash delivery and optimize the cash through the business. So, obviously, we look at days sales outstanding, purchase days, and inventory turn as the key measures that we use in the business to improve the momentum within the cash flow. Olivier Jean Bohuon - Chief Executive Officer & Director: Okay. So, coming back to the room for one question, and then we'll go back to the phones, please.

Thanks. David Adlington from JPMorgan. Just on your ENT and GYN businesses, that seems to be going very well. I'm just wondering if you see any scope for adding to that, sort of bulking that up from further acquisitions. Olivier Jean Bohuon - Chief Executive Officer & Director: Yes. Well, we can, we could. That's one of the opportunities that we believe which could be interesting for us to develop more these businesses, or one of these businesses, or none of these businesses. No, it's a good question because, obviously, we have this in mind every day, saying what do we do? I mean, GYN is a business which is roughly $50 million, $60 million. ENT is about $110 million. It's obvious that we don't have the mass that we could – that we should have to really use the strength of the groups because there is a growth potential here. And they are mono-product businesses mainly. So adding products or product for – product to these businesses will definitely help us. So we are looking at that. Yeah. Going back to the phone.

We'll now have our next question from Michael Jüngling. Please go ahead, sir. Your line is now open. Michael K. Jüngling - Morgan Stanley & Co. International Plc: Hi. Good morning. Hopefully you can hear me. I have three questions. Firstly, on the sustainability of organic sales growth in the second half of this year. What are the sort of the key drivers that will allow you to grow at the same rate for the second half of the year as we've seen in the second quarter? Question number two, when it comes to Syncera, can you provide some guidance on the future growth contributions, the timing of it when Syncera will add noticeable growth to hips and knees? I'm not referring to a specific quarter but more about which half year would we see the first signs of a material contribution? And the final question is on RENASYS. For 2016, U.S. RENASYS launched – was relaunched. Should we expect a slow recovery in profitability due to launch costs, re-entry costs, and perhaps also free samples to re-engage with lost customers? That's all. Thank you. Olivier Jean Bohuon - Chief Executive Officer & Director: Thank you, Michael. And so, let me answer the first question on the – I guess what you have in mind is that the sustainability of the growth for the second half. And my answer is yes, it's sustainable. And actually, we have said that at the end of last year, that H1 was improving. H2 should be also, I mean, even higher than H1. We believe this for a few reasons. And now, I'm more confident than I was before – six months ago, actually. The first one is mechanical impact. Obviously, RENASYS was not there in the second half of last year, so that will be a good comparable in terms of growth. The second thing is, when I see the value of the DTC campaign in the knee business in the U.S., I believe that – and you know that there's always a tail effect of this campaign. We have seen that in the past when we did launch these. I'm very confident that the Advanced Wound Care business is on a trend, and this trend is a good trend. I've said in my presentation that I'm expecting that we'll beat the market again on this business division. Then, Sports Medicine, I don't see why things would change. On the contrary, I think that we'll have more and more benefits with the time in terms of Sports Medicine, whether it's joint repair or in (54:53) technologies, when the royalties effect will disappear. So, Europe, which was a handicap for us, is now back on growth. So I think there is no reason why – and it's back on growth not because the markets are much better, because what we have done, changing the management, changing the MDs, changing the structure, changing the focus of the reps, bringing new products on the market and so on, is there. So, I don't see any risk of adding in the future – it could happen every quarter; as you know, it's a four-quarter business. It can happen during – on a trend. It should not be a problem at all. And we plan to have sustainable growth. I reinforce what we said in terms of guidance, that if the market growth we can plan for the future is about 4%, we plan to grow better than the market. On the second question, on Syncera, so when can we see the first results of Syncera – significant results? For me, maybe H2 next year. It should be a year after the launch, because we relaunched the concept now after all this pilot and pre-launch, so that's what I'm expecting to see. Now in RENASYS, there will be a recovery, obviously, next year in terms of sale, but during – not the one in January. I think it will be step-by-step during 2016. You don't get the customer back very easily. However, again, as I said, the product is much better than what the other one was. So I'm expecting an investment, but not a crazy investment, to recapture the customer that we have lost with the distribution hold on organize other. (54:46) So, profitability impact. Julie, you want to mention that, or... Julie Brown - Chief Financial Officer & Executive Director: Yeah, in terms of RENASYS. Yeah. There will be some investment associated with it, but what we're doing more and more is, we believe the market will start to move towards negative pressure in a disposable fashion. And so we're really putting a lot of emphasis behind PICO, which is really our great product. And then when we've got a connected version of RENASYS, we'll launch that next year. So there'll be some investment associated with it, but we don't think it will make a material impact on the profitability of the company overall. Michael K. Jüngling - Morgan Stanley & Co. International Plc: Okay. Olivier Jean Bohuon - Chief Executive Officer & Director: Another question on the phone, and then we'll go back to... Michael K. Jüngling - Morgan Stanley & Co. International Plc: (57:22) organic sales growth in the second half. Are you concerned that perhaps the Chinese market may slow as a result of the pressures that we're seeing in the news, the headlines? Is that a concern for you in the second half, given that emerging markets is your key growth driver? Olivier Jean Bohuon - Chief Executive Officer & Director: That's a good question. Actually I'm surprised that we didn't get this question before, looking at what our competitors have been saying in the past. Yes, we see, in China, a reduction in the capital investment, and Philips has said that recently. But for us it's minimum, because we don't sell a lot of this. But we have seen a small drop in this; that's for sure. Now, we have more and more tenders in China, and so these tenders are obviously shrinking the prices. So there is certainly a higher price erosion than what we have seen in the past. (58:20) you also benefit from more volume. We have coverage of population which not covered before, so there is a better volume dynamic. My view of China is that there will be a small drop in terms of high-tier revenue in the year to come. However, for us – that's why I was insisting in launching this mid-tier portfolio in China. This will be the second growth leverage. It will re-accelerate on this growth. Having said all this, we plan to have double-digit growth in this geography in the future. That should not impact – and when you see their GDP, which is not really bad, the growth; when you see the level of healthcare on GDP, which is not extremely high either, you can really think that healthcare will remain an important part of the growth. Okay? Michael K. Jüngling - Morgan Stanley & Co. International Plc: Thank you very much. Olivier Jean Bohuon - Chief Executive Officer & Director: Thank you. So we go back now? One more? Okay.

Thank you. We'll now have our next question from Veronika Dubajova from Goldman Sachs. Please go ahead. Your line is now open.

Good morning. And thank you for taking my questions. I have three. The first one is just, Olivier, could you elaborate a little bit on the M&A comments that you've made? Reading between the lines, it sounds like maybe we might – you're not gearing up for big acquisitions, but you're looking more for bolt-ons. Is that a fair interpretation? And related to that, where do you see the biggest opportunities for acquiring disruptive technologies with part of your business? And then I have a couple of quick ones for Julie. The first one is just on the gross margin outlook. You've done a terrific job improving gross margins over the last number of years. Surprised to see the drop in the first half. If you can comment on how you're thinking about it for the full year and beyond, and if you still see some opportunities for gross margin to improve from here, that would be helpful. And the last one is Bioactives. Are you still comfortable with a low-teens growth for Bioactives for the full year, or should we be rethinking that assumption? Thank you very much. Olivier Jean Bohuon - Chief Executive Officer & Director: Let me take two question of this. The first one, very quickly on the Bioactives, yes, we are confident the guidance is there. We plan to have double-digit growth in the Bioactives. In the M&A, first of all, Veronika, I'm very happy to have a question from you. I was anxious not to hear anything from you. So it's good to hear from you. The M&A, I've never said that I was not looking for ambitious acquisition. I just – I focus my talk on bolt-on acquisitions and small acquisitions because that's what we've done during the first half in acquiring these four small businesses. But again, first of all, what I want to do is to be sure that we have, and we see that, an improvement in the organic business. I just don't want to cover something which is not working well with something that we can acquire. I think that's not the right thing to do. So now, we have been able – and again, as I said before, I'm convinced that it's very sustainable – been able to accelerate the growth of this company, whether it's on sales and profit, and Julie will tell you about this in the second part of the answer. Now, yes, we can acquire things. Again, what? So this is the big question. So it's what? It could be a transformation, it could be another big company or a company of the size of (01:02:12). It could be – again, all the question is to find the bride and to marry the bride. And for the moment, there's nothing here that we have clearly identified, which should make sense financially and strategically. Both are equally important. So don't worry, Veronika. It's still in my mind and the mind of the management. So we look at that, for both bolt-on and other type of acquisitions. So, Julie, about the profit. Julie Brown - Chief Financial Officer & Executive Director: About the profit, yeah. Olivier Jean Bohuon - Chief Executive Officer & Director: You're ambitious. Julie Brown - Chief Financial Officer & Executive Director: Very ambitious with regards to margin, as you know. So in terms of the gross margin, we saw this impact in the first half. We always expect to get price headwinds and we've always guided on this. It's between 1% and 2% for the company as a whole. Most are in Recon, but as a company, as a whole, it's between 1% and 2%. We've got a cost of goods improvement program running, which is through better procurement through using low-cost countries like China, for wound production. So we've got a cost of good improvement program running, which is tending to offset the two, the price impact. The new thing we noted this time and we mentioned in the presentation was that as the emerging market currencies have devalued, in some cases more seriously, and we've got some of our manufacturing still in established markets, you get an imbalance in terms of the currency impact between revenue and cost of goods. And therefore, that puts some additional pressure on the growth margins and emerging markets, and because we're growing strongly in emerging markets, that intensifies it more or so. So in terms of how we see this going forward, I would say that we still believe the gross margins will be broadly stable. There will be perturbation this quarter-to-quarter, half-year-to-half-year. But broadly we see the cost of goods programs offsetting it. In terms of the longer term, clearly the unknown is currency and what happens in terms of currency in emerging markets. And therefore, what we're doing is – obviously the biggest defense there is price in emerging markets. And we're looking at price impacts and what we can do in terms of price and recover those currency losses. So that's essentially where we are in terms of gross margin. If that answers your question Veronika – I think the other question was on Bioactive growth? Olivier Jean Bohuon - Chief Executive Officer & Director: I've gone through this question... Julie Brown - Chief Financial Officer & Executive Director: Yeah. Olivier Jean Bohuon - Chief Executive Officer & Director: (01:04:39) compute the guidance of double digit. Julie Brown - Chief Financial Officer & Executive Director: Yeah. Olivier Jean Bohuon - Chief Executive Officer & Director: Thank you, Veronika. So we come back to the room, or we have no more questions. Julie Brown - Chief Financial Officer & Executive Director: It's unusual. Olivier Jean Bohuon - Chief Executive Officer & Director: It's good. And everything is clear Olivier Jean Bohuon - Chief Executive Officer & Director: Okay. Well, thanks a lot. Julie Brown - Chief Financial Officer & Executive Director: Okay. Olivier Jean Bohuon - Chief Executive Officer & Director: And see you next half.