Good day, ladies and gentlemen, and welcome to the Smith & Nephew 2016 third 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 the 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 statements 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. Hello and welcome to our third quarter trailing update call. I am Olivier Bohuon, CEO, Smith & Nephew; and I'm here in the US with my colleague, Julie Brown, our CFO; and Mike Frazzette, our Chief Commercial Officer. I will start by covering the highlights of the quarter and then hand over to Julie for a brief financial update. I will conclude with a summary and some thoughts on the year to date. And as usual, we will take questions at the end. Before moving on to discuss the quarter, I want to thank you for all your best wishes during my leave for a long treatment. After eight months, I returned to business full-time in October, and I am now focusing fully on Smith & Nephew without any distraction. So turning to third quarter, as usual, this slide captures our underlying growth - on the left-hand side, geographically and on the right-hand side, by product franchise. In the third quarter, we have seen a continuation of many of the trends that we saw in the first half. We delivered 2% underlying revenue growth from the same number of sales days as in Q3 2015. It's a bit below my expectations, and I will comment on that later. The US, our largest market, grew 2%. In the other established markets, sales were flat. More positively, as expected, our emerging markets returned to positive growth, delivering 6% growth. And within this, China grew at a high single-digit percentage, in line with the pattern Mike outlined to you at our H1 results. Meanwhile, tender activity in the oil-dependent Gulf States remains very subdued, and we expect this to continue for at least the remainder of the year. Performance across other emerging market countries have remained very strong. Across our newer…

Thank you, Olivier. Olivier talked to weaker performance in AWB, and that aside, our guidance as a whole for the year remains unchanged. However, I thought it would be helpful to summarize some of the key points we made at half one. On revenue for the remainder of the year, we expect the positive trends in sports medicine and knees to continue. We expect a better half two to in China, as we outlined in half one. This is somewhat offset by the continuing weaker conditions in the Gulf States and in US AWB. Also on revenue, in Q4 we had 4 fewer sales days than last year. Regarding translational exchange, we expect the full year impact of negative 1% on our revenues in 2016. On margin, there are three factors to draw your attention. Firstly, there is no change to the adverse impact of transactional exchange and Blue Belt, totaling minus 180 basis points on the full-year margin. The gynecology disposal also impacts by minus 10 basis points, as previously guided. Secondly, we expect our group optimization programs to deliver annualized benefits of slightly more than $120 million by the end of the year. And thirdly, the second-half trading margin is expected to exceed that delivered in the first half, as usual, although held back by negative operational leverage resulting from the weaker than anticipated sales growth. Finally, we have reached an agreement with the IRS on a US tax issue and expect one-off benefits as a result of that this year, reducing our tax rate on trade results by around 200 basis points to around a 24.5% in 2016 tax rate, with no impact in future years. We have commenced the share buyback following the GYN disposal in August, and we have now completed $160 million of the $300 million total and expect to have substantially completed the buyback by the end of 2016. And with that, I will pass back to Olivier.

Thank you, Julie. As I look at the results of Smith & Nephew this year, I see many good things. Our sports medicine business growing from strength to strength as we continue to benefit from the acquisition of ArthroCare, the way PICO is transforming the use of the negative pressure and our world-class knee implant portfolio, reinforced by the acquisition of NAVIO, to name a few. However, I am also somewhat frustrated, as we have not reached some of our financial goals. In my mind, our progress has been held back by three factors; first, the macro situation has not been favorable. Market conditions in China and the Gulf States have together shaved 2 percentage points of growth of the Group so far this year. And the impact of FX will impact our trading margin for the year by 120 basis points. I am pleased we have got our arms around China and returned the emerging market to growth. The Gulf will remain weak, at least in the near term. The second reason - as you know, we have undertaken a fundamental restructuring of Smith & Nephew to improve both our efficiency and ability to serve our customers in the market. This has included changing the management structure in teams in every market to bring them under a single managing director, a process we completed in early 2016. It has not been easy, and in some markets - particularly some markets where we have also moved the locations; there has been some noticeable disruption. The changes are complete, and the new teams are largely in place embedding into their new role. Sometimes you have to take small steps backward to move forward at greater pace, and I see this as an important stage in our journey to transform the Company.…

[Operator Instructions] And our first question comes from Michael Jungling of Morgan Stanley. Please go ahead.

Thank you very much and good to have you back. So firstly - or two questions - on the European countries which you have flagged as being weak in the quarter, can you highlight which countries they are and what the challenges that you are trying to address? And then secondly, on the full-year EBIT margin, you've got more than nine months behind you. And I was wondering, Julie, whether you can become a little bit more precise as to what the margin may look like? I suspect you've got a fairly good sense now of what it should be. Thank you.

Thank you, Michael. I will take the first question and leave the second question for Julie. So yes, you're right; and you have understood that many - two countries in Europe have been difficult in the quarter, mainly in wound management, I would say. And those countries are UK and Germany. Germany, we have, unfortunately during the period, actually, Q2 lost the business unit manager of wound. And I do believe that execution has not been at all where we are expecting the execution to be. In the UK we have had also some difficulties in the wound management, mainly in devices and in wound care. We know why, and this will be addressed on a short-term basis.

Okay, thanks, Michael. In terms of the margin, as you say, we've have got the third quarter under our belts now; but the fourth quarter is always a sizable margin in terms of content. But I would just like to emphasize the guidance, which hasn't really changed in terms of - the foreign exchange headwinds will be 120 basis points. Blue Belt does dilute by 60 basis points. And offsetting this, of course, we've got the benefits of Group Optimization, which we have accelerated by more than a year. We are very confident that the second-half margin will be higher than the first half and if you look at the pattern over the last four years, you will have seen this consistently. Also, to remind you, we have got 4 less sales days in the fourth quarter. However, the foreign exchange headwinds was much harsher on the business in the first half. We had 190 basis points because of the hedging headwind in the first half; and in the second half, that is much less, because we've got 120 basis points for the full year. So hopefully that summarizes the key margin headlines sufficient to be able to build the model.

Okay. And Olivier, if I look at your comments about the UK, are you starting to see an impact from that that Convatec PICO copycat device that is impacting your device business - the wound care in the UK?

Not at all. Really not at all. And I - actually, you know, we have never heard about the product. And I know the drug has been launched, but we have never heard any rep telling us that there was a competitor in the market. So it's really very, very weak.

Okay, thank you.

Our next question comes from Veronika Dubajova of Goldman Sachs. Please go ahead.

Good afternoon. Veronika Dubajova here from Goldman. Thank you for taking my questions. I will limit myself to two as well. One, Olivier, I was curious to hear your comment about pricing in hips and knees. I think Zimmer also saw some sequential worsening in pricing. Is this anything that you were seeing in the market? Maybe CJR impact or something else that is going on that you think that pricing sequentially worsened in this market? And my second question is kind of a conceptual question on wound. Ever since you have done the country integration under a single manager, the wound business has really seen a meaningful slowdown. And I wonder to what extent you are reassessing, maybe, the incentives that you have for country management on a subdivisional basis or for the organization as a whole to try to re-accelerate that business? Thank you.

Thank you, Veronika. Two good questions, actually. The first one, the pricing of hips and knees, no, we have not seen any impact on CJR at this stage. I guess that's about the same on our competitors. There is no impact in the US at this stage. Regarding the pricing, the pricing has been pretty weak in - I mean, the erosion was very weak in Q2 and a bit stronger in Q3. Let me remind you what it was in Q2. It was minus 2% - the price, and Q3, minus 2.6%. And for the Company itself as a whole, we have had 0.8% price erosion in Q2 and 0.8% price erosion in Q3. So we don't see any change. You have some volatility quarter after quarter, but globally we do not believe that the price erosion will change in the future. Regarding the wound, that's a very interesting question. We have through - decided to put the organization under a single managing director. And that has started, actually, after all the - it was a complex thing to do - in January, actually, for the first time all the MDs were all together, with each of them running one country. We also have to, obviously, hire or name or promote business managers and directors very focused on the wound management. The incentive system has been changed. So everywhere we have a new system, which - and I said that, I think, last year that I want to change the system, which works well, actually, focusing on the main product, i.e., PICO and ALLEVYN LIFE or ALLEVYN. In the US, there's also the single MD, but we cannot sell the US when it's not working well. Advanced wound care in the US - the growth of advanced wound care in the US in the quarter has been 10%. So it works pretty well, and I can give you many examples of countries in Europe with extremely good results in wound care. Again, the global wound care dynamic is what it is because mainly of China and, as I said, Germany and the UK. The rest is doing well. And I'm extremely confident that with the new organization, the new incentive scheme, the new people we have on board, wound care globally - once China will be back on track, which is soon, will be excellent.

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

Hi. Good morning and good to have you back Olivier. Two questions, also, from my side. So the first one would relate to the bioactives, and then the slowdown we had in Q3 and the regional guidance for the full-year. What should we expect going forward for this division? It's been presented when you bought HealthPoint it was presented as a high-growth area. Now we have seen the growth slowing down very consistently for the past few years. Should we see that returning to the kind of same growth that you have across the Group? Or could it really become a high-growth area? And the second question relates to the margin in wound care. Because bioactives had been driven, I guess, also by a nice price increase, and now you are facing price pressure. Should we fear that this could become a structural issue and put pressure on the margin in the wound care business?

Thank you, Julien. Well, Mike is going to answer the question on the bioactive in Q3, and then Julie will address the margin one.

Sure, Julien. Thank you for your question. And just to remind everybody, so our advanced wound management business was made up of three categories, advanced wound care that Olivier talked about, which is our traditional dressings business, where we saw very good growth in the quarter, with the exception of China that we've talked about now for several quarters and that will persist into 2017. The advanced wound devices business, which we also saw very good growth with PICO that we launched about five years ago. We have now surpassed a 1 million PICO device sold in the quarter since its first generation. And advanced wound Biologics, which Julien's question was pointed towards. The revenue for AWB was down 3% in the quarter, and we now expect our revenue to be flat for the full year. And in advanced wound biologics, we've got really three headline products: OASIS, which is our skin substitute product - we have reimbursement headwinds, and we have talked about this now for several quarters, where we are reimbursed at a disadvantage to our competitors. So we don't see that recovering. REGRANEX, which we see relatively good growth in the quarter. We had some destocking, so there's some slight choppiness to it. But overall the underlying growth - the market growth rate, we are satisfied with. And SANTYL, which occupies about 80% of our sales in bioactives, which was also down in the quarter. What we are seeing there is we're seeing healthy volumes, actually; continued volume growth in SANTYL, but the mix of our customers in the US is changing towards more retail customers, less institutional customers. And so we are seeing this price impact by increased rebates, increased co-pay in SANTYL to maintain our high volume. So again, it's - the volumes on the SANTYL business are still healthy. They are growing. They are right where we want them to be. But we do have some price pressure as a result of the mix shift to more retail customers.

I would like to add something, Julien, on this one. So Mike has commented the growth and the issues of prices. And I think that most of the issues that we face are linked to a lack of enough health economic evidence to support further uptake of SANTYL. So what have we done? We have done a number of clinicals. We have actually three clinicals underway - one comparing SANTYL with the medicinal honey in pressure ulcer; the one also comparing SANTYL to silver dressing; and SANTYL clinical and economic outcome and accountable care organizations. We have three studies ongoing. They will be published soon, and I hope these will give us also some nice tools to support the price of SANTYL.

Okay. Just coming to the margin point, Julien, so in terms of bioactives, clearly we have - were expecting mid-single-digit growth, and we have now said flat for the year. So there is an impact on the margin overall in the fourth quarter, we expect, for the second half. Going forward, though, as Olivier mentioned, we have confidence in the prospects of SANTYL with the economic health, economic evidence that we are building. And because bioactive tends to be around 7% of our sales overall, we wouldn't expect this to have a structural impact on the Group's margin, because you always have a mix effect taking place. So no long-term impact from this.

Okay, thank you.

We will now take our next question from Tom Jones of Berenberg. Please go ahead.

I had two questions. The first, Olivier - and welcome back. I guess it's a fairly big picture question, and I'm not really after any detail, but just more kind of your big-picture thoughts - but if you look back over the last 3 to 5 years of your business, you had a clear strategy. You came in, you reorganized the business, you reallocated resources from slow growth to high growth areas, etc., etc. You reorganized a lot of things, particularly on the management side. That is kind of all done now. So how are you thinking about the next 3 to 5 years? What is the big-picture outlook? Is it just focus on execution? Are there bits of the business you want to improve? Really just some general thoughts as how you wish to steer this business over the next 3 to 5 years would be helpful, I think. And then, secondly, just a question for Julie: I know it's a bit early and that you are probably not going to be able to help us, but any indication of where, with FX rates currently sitting, that the marginal - or the impact on margins is likely to be with your current hedges from FX on 2017?

Thank you, Tom. Very interesting question, indeed. So how do I see the next 3 to 5 years, and what did we do in the past five years? Well, I think the first thing we have done is to transform a bunch of silos into one single Company. And that took time. The second thing we did was trying to focus the businesses on higher growth or high-growth businesses like sports medicine, like emerging markets, like acquiring companies like ArthroCare with potential of growth and synergy with our business, and so on. So this is done. We have built a structure, and that has not been easy. And it took a while, which is now ready and ready to support the strategy of the Company. And let me remind you what is the strategy, because we have not talked for a while about the strategy. The strategy is transform a sleeping beauty in a strong, growing business. Today we can say that about 50%, 52% of our business is high growth and 48% is low growth. Remember that five years ago it was 70% low growth and it was 30% high growth. Problem is that the high-growth businesses are growing less now than what they were growing five years ago, because the market is not growing as strongly. And low growth is the same in the other way; the markets are growing less than what they were used to it. So that has been also one of the issue we are facing. Now, how do I see the future? Well, it's pretty easy, actually. When I came back two or three weeks ago, the first thing that I did - and I had a lot of time, believe me, during my illness to think about what I wanted to do…

Yes, I will. Thanks. Thanks, Tom. So obviously our group profitability is impacted by exchange movement on economic sales and costs that the Group incurs. And as you know, we manufacture some of our products in the United States but sell them in other markets, and this has resulted in the headwind we've had this year as the dollar strengthened, because obviously it reduced dollar revenue, but there was no change to the dollar cost base in terms of cost of goods. So going forward, the impact of transactional exchange from 2017 - probably the most significant movement in exchange rates relating to this is the recent weakness of the pound following Brexit. And overall, the Group does have higher costs than sales in sterling. And this is obviously driven by the location of our Hull manufacturing facilities and also some Group head office functions. Now, the impact overall is reduced somewhat, because in Hull we also purchased some of the raw materials in foreign currencies. And we import products into the UK to sell it on. And therefore, based on the recent weaker sterling exchange rate, we would expect this to be a modest benefit, as the cost base is lower in dollar terms. However, it's important to say that this will primarily be a half-two 2017 benefit, as many of our transactions are hedged already at pre-Brexit rate. So what we'll do is we will update you further on this at the year-end, when we can look at the final exchange rate position and, obviously, where the hedges are.

Perfect. That was all very clear. Thanks for your comprehensive answer, Olivier. I'll get back into queue.

[Operator Instructions] Our next question comes from Chris Cooper of Jefferies. Please go ahead.

Just firstly on the recon business, can I ask at what point during the quarter you became aware of the supply issues with your competitor? And looking ahead, I guess, into the fourth quarter, do you expect the majority of any market shortfall to be met with excess inventory? Or are you or any of your competitors positioned to benefit in any way from this? And my second question, please: can I just ask how the growth in advanced wound care looks if we back out the effects of both China and the US during the third quarter?

Thank you, Chris. On the recon - the Zimmer Biomet issue, we have heard that on Monday. So it's incredible, but so far, there was no noise on the market. Our reps have not said anything special. Mike, if you want to comment on this? But I believe this is definitely an opportunity for us going further. So Mike, you want to add something?

No, I would agree. We have heard for certain on Monday, but there's been some anecdotal noise in the marketplace.

Yes.

On the growth, Julie, do you want to -?

Yes, on the growth in advanced - as it relates to advanced wound care, we don't separate that in the results individually, but advanced wound care overall in the US was a 10% growth rate. Other established markets, I think, grew 3%. And clearly the emerging markets was a significant drag on the advanced wound care result, only due to China. So this is a significant impact on the overall minus 2% result in advanced wound care. But OUS was positive at the 3% level.

And 10% in the US.

And 10% in the US.

So if I can just follow up on that, please, Julie: so is it fair to assume the regional exposure of advanced wound care is broadly in line with the Group average? Or is it more concentrated in a particular region?

No, no - it's more concentrated in China, actually. The issue we have faced - and that's why the growth is not where it should have been, is because China has been a big issue for us in wound management - wound care.

Okay. And just going back to the first question, can I just ask, given the phasing of performance during the quarter in recon - I mean, it sounded like July and August were a bit softer, and things got a lot better in September. Can I ask if that sequential improvement was more price or volume driven?

Well, it's both - price has been, as you know, what we have said in recon, which was 2.6. And volume was pretty good, actually.

Volume.

Yes, yes. I think most companies have reported that July and August were softer just generally in the market in the US, and September was stronger. And I think that's happened across the board. We see that as a market issue.

Got it. Thanks.

Our next question comes from David Adlington of JPMorgan. Please go ahead.

Most of my questions have been asked, but maybe just if you give us a - maybe some further color in terms of bioactives. Clearly that - your guidance returns a - implies a return to growth, I think, in the fourth quarter. I suppose what gives you confidence on being able to turn around a situation that quickly? What are the actual issues you are facing there in the end markets? And then secondly, just wondered if you had any updates on the CFO process? Thanks.

Okay, well, let me start by the - the CFO. So I think we are making very good progress with the recruitment. The search is going well. We are interviewing candidates. There's been many interviews since I came back. And we now have the short list, and things are pretty on track with our expectations. So we have good candidates, and - so now where there's just a few more interviews to make, and then we will decide.

Shall I take the bioactives point?

Oh, sure.

Yes, yes. So David, the reason we are confident about bioactives returning to growth is we do see in this business it behaves like a pharma business, and therefore we do see volatility in distributor stocking patterns. And we saw there is an impact here both on SANTYL and on REGRANEX, which we fully expect to resolve in the fourth quarter. And the fourth quarter is usually a very strong quarter for the bioactives generally. It's the way the market works. So we are on course to return to growth in the fourth quarter, no doubt.

Okay, thanks. And Julie, maybe you just sort of give us a bit further color in terms of what changed so quickly to move that business into negative territory? You have got effectively a monopoly position there. Like you say, it's a pharmaceutical. Just wanted to have the pricing action. You mentioned some mix earlier on in the call. Just some further color would be useful. Thanks.

Yes. In terms of - the headwind was serious, clearly from OASIS. So that's had a big impact on the overall bioactive performance, taking it negative, because the decline in the OASIS business has been quite serious this year, largely due to the reimbursement headwinds. REGRANEX And SANTYL were impacted by stocking patterns. And in the case of SANTYL, as Mike mentioned, it's a very fast-growing channel. Although we take price increases, as most pharma companies do in this area, the rebating level was higher. And that impacted the overall value delivery from this franchise. So net-net, we had a poor result in the third quarter. But we are confident of delivering a flat performance, taking everything into consideration for the full year.

And back to growth next year.

Back to growth, yes.

Great, thank you.

Our final question comes from Ines Silva of Bank of America. Please go ahead.

I was just - I just have one question. I was wondering if you could help us understand a little bit what have been your actions in the Gulf States from the last nine months since you started seeing some weakness - and also if anything has changed for better or worse in that region since you first pointed out the headwind?

Two things first. The Gulf States are not working. Business is good in retail in the Gulf States. The issue we face is tender business. You have GCC tender, and we won in December last year the GCC tender, which is big tender mixing a lot of products, particularly trauma and extremities is also a number of our products. And it was a big amount of money. And actually, we won it, but they have not ordered anything in 2016. So this is our situation. So now, are they going to order one day? I don't know. Will they order in Q4 a part of it? I don't know. So we are really in a - I would say blind situation for this. For the rest, we work well in the hospital. We have our private business going okay in many countries, UAE included. The tender is covering many countries in the Gulf. Actually, this covers Kuwait, Bahrain, the UAE, Oman, and Saudi Arabia, which is the biggest market in the region. So that's where we are. You know as I know the economic situation of the oil countries and gas countries in the region is not really nice. And we do not expect things to change. However, again, it is just a tender.

Thank you very much.