Good day, and welcome to the Smith & Nephew 2017 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 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, Chief Executive Officer; and Graham Baker, Chief Financial Officer. Please go ahead, sir.

Thank you. So good morning, ladies and gentlemen, and welcome to our third quarter trading update call. I am here with Graham Baker, our CFO, and Phil Cowdy, Head of Corporate Affairs. I'll start by covering the highlights of the quarter and give you an update on business area. I will then hand over to Graham, who will take you through our guidance and information about the cost review we are conducting. I will conclude with a summary and we'll take question as usual at the end. We had another quarter in Sports Medicine Joint Repair. As usual the first slide is capturing our underlying growth and 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 and we are making good progress on improving institution. We delivered revenue of almost 1.2 billion, representing 3% growth on an underlying and reported basis and there was no difference in trading days. The U.S. our largest market grew 2% and Other Established Markets were flat. In contrast, our Emerging Markets drove another quarter of strong growth at 9% and within this China continues to perform well. Growth in the U.S. and in the immerging markets was slightly impacted by natural disasters, we estimate reduce sales by about $5 million in Q3. Depending on location and speed of recovery, it may take some time for all procedures to be with scheduled. I would like thank our colleagues in the area have been effected for their dedication to supporting our customers through very difficult times. Now turning to our individual franchise in more detail. We had another good quarter in Sports Medicine Joint Repair growing at 8%. In…

Thanks Olivier. Good morning, everyone. I'll first given an update on our guidance and second, talk about the review of our cost base, which I refer to in our half year results. Based on the performance in the first nine months of the year, where we delivered underlying growth of 3%, we expect full year sales growth at the lower end of the guided range of 3% to 4%. Based on foreign exchange rates prevailing on the 31st October and taking into account the effect of the disposal of our Gynecology business, we expect reported sales growth 50 basis points lower than our underlying revenue growth. Given the expected underlying revenue growth guidance, we also expect our full year trading profit margin to be at the lower end of the guidance range of 20 to 70 basis points. Foreign exchange is expected to be broadly neutral to our margin this year. As regard to tax, I'd like to remind you that we expect a full year tax rate on trading results of around 22%. Excluding the onetime benefit which we announced in July, the full year tax rate would be around 25%. Our medium term guidance is unchanged. Now turning to our cost base, where we started a further review. This follows preliminary work which we've undertaken since I started as CFO with a re-met from Olivier and the board to look at fresh at the efficiency opportunities within the business. Today, I'll simply be highlighting some preliminary analysis and the further work we are undertaking to assess the opportunities. We have completed our assessment phase in time for year end result of February 2018, when I'll provide full detail. Looking at the three main areas I'll focus intern; firstly, manufacturing warehousing and distribution. Looking at our facilities and supply…

Thank you, Graham. So, in summary, Q3 was another positive step demonstrating our consistent and improving commercial and operational execution. We've remained fully focused on finishing the year strongly. We have transformed Smith & Nephew into a more focused, more efficient, more innovative business and we now one Smith & Nephew with under managing director in each country and we have single support functions spending all franchise and regions which is driving synergies within our portfolio. You would have seen the announcement about my retirement by the end of 2018 and till then I am as it remain as ever to be pushing the company for further success and to reach Smith & Nephew an even better company. Our focus on accelerating the top line expense change and we have multiple growth drivers to leverage. As Graham outlined, we also convinced there are further opportunities drive great efficiency. And report updating you on our progress across both these areas at our full year results next February. Thank you. And this ends my formal presentation. And we'll now take questions. So please can we ask each person to limit their number of questions to two to give as many people as possible the opportunity to participate. So, operator?

Thank you, sir. [Operator Instructions] Thank you. And now we'll take our first person from the queue, Veronika Dubajova from Goldman Sachs. Please go ahead, your line is now open.

Good morning, gentlemen, and thank you very much for taking my questions. I will keep it to two. One is a little bit of a business question, one of your competitors has made some comments about the recon market being somewhat softer both in the third quarter and the remainder of the year. I am looking at your performance, clearly you are doing very well, but I wonder whether if you can comment on how you are thinking about on hip and knee market demands both into the end of the year and maybe more conceptually on the medium term and that would be helpful. My second question is a bigger strategic question around the margin opportunity here. If I look at Smith & Nephew, you've been in a pretty lengthy continuous restructuring projects for a number of years now even preceding your ten year Olivier. And I think the interesting thing if you look at the margin profile of the business, it hasn't changed in spite of quite a lot of efforts to say it cost suggesting that there is some structural pressures across the P&L. Graham, how do you think about the opportunity for savings in the context of those pressure, is this project that you are looking at now in terms of cost opportunity, is really an underpinning of the medium term guidance that you've communicated already or do you think it could represent upside to the 10 to 50 basis points? Thank you.

Thank you, Veronika for your questions, which are a bit more than two, but I mean it's always great to answer your question. So the first question on the soft market, I think that yes, we can think who can say the market was softer, if you look at our estimate of the recon market in Q3, we definitely believe that the market has being close to zero worldwide which is not I would say the best growth that we have seen in the last two, three years. Actually I think it's one of the worst quarter where we have seen in course. This is due to many things. I think the fundamentals and I think that's what is important to think about are unchanged. And we know that the volume is there, we knew would have the price erosion is not worse than it has been before and we don't foresee any changing in the future. So I think it's more I would say a soft quarter. And we say a negative. Having said that we have had some issues in the quarter, I mean we have had the hurricane, I mean the disaster in not only in U.S. or so in the Americas and Puerto Rico, I mean which is U.S. but for us it's emerging market and in Mexico where we have had, India also where we have some price cuts and so on and so forth. So I think you can say that yes, it is a soft quarter and I do believe that this is not supposed to stay like this, but we certainly recover as usual in the normal growth rate. On the second question, before giving the floor to Graham, yes we have done restructuring. What I would like to tell you is if we have not seen a lot of bottom line improvement due to restructuring, it's for many reasons. A, the restructuring we did has been used to invest more in some areas and particularly as you know since I've joined in R&D and we now have a significant R&D on sales spend and as you know we have today and we believe very strongly that this is our best driver for the future, one of the best portfolio we have ever had. So this is important to consider. Second thing is the restructuring that Graham going to comment, it is not a sales force restructuring I mean, it is a cost saving program which is not going to change the dynamic of the business. So that's why you put restructuring, it's not the restructuring, it is a cost saving program which has nothing to do, which what we have been doing in the past. So we don't see an impact on the business at all actually and is just a simplification the process that we are dealing with. So Graham, would you mind to go on this one.

Sure. Thanks Olivier. I mean to come directly to your question, Veronika, as you will understand, we're working through the planning of the program which includes part of which includes the quantification of the benefits. So I'm not going to comment specifically on that at the moment. I just make a couple of general observations. Firstly, I will only count an efficient say as an efficiency program that if it drives real visible year-on-year improvement. So I'm certainly working on this is a program that will drive benefits that are visible to our shareholders at the bottom line and therefore drive year-over-year improvement in our margins. The second part of your question about whether those benefits fall into delivering our guidance or pushing beyond our guidance in the medium term, is actually a clever way of asking me and am I going to change our guidance for the medium term. And we have clearly stated that our medium term guidance is unchanged. The reality is some of the programs that we're going to be driving, as Olivier said none of them are about organizational change, we believe we've got a good organization in place and I actually I think it's really about using that organization to drive improvements in the business. But that means that some of these programs will take some time to come through. And so the exact balance between whether it's underpinning the guidance or whether in the longer term, it's sustaining it's or pushing it even a little bit higher. That's to be seen and I'll be a little bit player about it when we get to the new year.

Okay. Understood. Thank you very much.

Thank you, Veronika.

Thank you. And now we take a next person from the queue Ines Silva from BoA. Please go ahead. Your line is now open.

Hi, good morning. Thank you so much for taking my question. So my first question is, if you could comment on the impact of NAVIO to the extent that you feel comfortable to, on the recon volumes? And then if you could just give further comment on the capital equipment sales as well that would be great. And then the second question is just on the Artho business, how should we think about this business because it has - the revenue has been a little bit volatile, so could you just give us sort of an outlook for 2018? Thank you.

Sorry, which business you are talking about, sorry?

Arthroscopic.

Arthroscopic, okay, sorry. Okay. So, on the impact of NAVIO, the volume definitely has a positive impact. Actually it's excellent, because I think that the word to use growth of our new business in the third quarter is all across. We believe that the impact in volume is pretty small at this stage, but it has an impact and we believe and that's one of the reason why we did this acquisition that it will have a significant impact in the future. On the capital equipment sale, we do not disclose as you know the number of NAVIO sold. We have said again that we expect to grow more than 50% the revenue linked to NAVIO. This revenue actually is in the other Surgical Businesses, the NAVIO themselves. So we don't give much more than this. On Arthroscopic business, again you have two things in Sports Medicine Joint Repair, again I was mentioning 8% growth. On the Enabling Technologies, I think that we have been suffering from in the blades again of the new technique, so we are not growing in this field and we have solid competition on the RF COBLATION which we expect will be fully compensated by the development of our stronger range of products WEREWOLF and Leads.

Thank you. Just quickly, can you specify when you say that you think NAVIO would be relevant for the volume growth in recon, do you think that's from next year already?

Yes, we start to see some impact of this year, I mean it's very small of the stage but yes, we do expect to see a solid development. I mean again this is all about the robots.

Thank you very much.

Thank you. And now we'll take our next person from the queue Tom Jones from Berenberg. Please go ahead, your line is now open.

Hi, good morning. Thank you for taking my question. I wanted to ask a little bit more about the efficiency program you are instigating and what specifically, I'm climbing tree, this is thing I think the fourth program we had in 10 year. Are you - other things you just missed with the previous three efficiency programs that you've now discovered with the fourth look or are you kind of revisiting things that you looked at previously and decided for whatever reason where they were too risky or whatever there is might be you decided not to? I'm just step further by having a fourth program that's really that much new that you can do or I might completely wrong in that regard?

I started to answer and I'm sure that Graham will take behind. I mean Tom, thank you for asking this question because I would like to summarize what we have done in the past. We have done yes different programs and two big programs inside of joint. Those programs where we're restructuring programs to build the company which was I mean in a position to support the development of the implementation of the strategy. As you remember, the first one was putting together I mean the Orthopedic business and the Sports Medicine business creating as, that's has been a big program. Yes, we have done a number of thing and we have used, I said to Veronika this money to invest more in R&D business. The second program was the go program which was a program which was supposed to simplify the organization. As you remember, it was all about the single managing director per country which was actually the second phase of the first one. It was all about aligning the functions to be able to support the newly traded organization and it was also just to finish on concentrating the businesses in single location in many countries and I'm thinking about Australia, I'm thinking about Germany, I'm thinking about U.K., I'm thinking about all the places. And this has as you remember been - was essential but as created some disruption, because we've lost of talents, we've have lost a number of people and we have some disruption mainly in Germany, Australia and U.K. actually in the fields. Now, this new program is as you've seen not a continuation of this, is just because Graham and I are convinced that we can be more agile in the manufacturing footprint that can be less complex I would say. That we can be more efficient also in the G&A which is now appearing as potentially place where we can find some revenue. And last but not least, we are convince and have done that in the past actually starting this year, I have mentioned that in the first quarter. We are convinced that we still have a lot of flavors coming from business development. So, I'll give the floor to Graham to comment on this, but I just want to say that this not something which is certainly coming from nowhere. It is just a normal continuation of what we've done, the structure to make it happen and that is very important. And you could not do what you are planning to do now in the middle of restructuring. So this is important to say. So Graham, you want to comment on that.

Thanks, Olivier, and thanks, Tom. Actually it's a great question to help us clarify a little bit. You'll understand I'm probably a bit more positive than the tone of the question might imply. I think that there are probably actually three separate things here. I think in the manufacturing space, I don't know all the history but I think that actually we're looking into an area that has been relatively untouched in the past that I think having put a high quality leadership team and an operational team in. As a global manufacturing organization, we're now able to start on picking some of the complexity that drives some of the cost base in that space. On the G&A side, it's slightly different because clearly we haven't looked at that, but again I think we're building on the platform of some capabilities and structures that have been put in place already. I think there's plenty of opportunity still there for us to drive improvement, use those structures, make them better and take them to the next level. In the sales force effectiveness space, I think as Olivier has highlighted, the last few years has really been around organizational changes, again to put the capabilities and people in place who are capable of driving a presence in the marketplace. The future is about making sure that we use those structures to year-by-year incrementally, drive out the efficiency and effectiveness of those higher capability teams co-located are capable of driving. So, I think it's a combination of things but I think that there are good real opportunities in all three spaces.

So, just follow-up, would it be fair to think that this is perhaps a lower risk endeavor than the ones you've had before because one of the challenges with the various restructuring programs we've had before is that while that's driven cost savings/efficiencies that's have an unfortunate knock on effect on the revenues. And therefore, kind of what you gained in operating efficiency you've lost an operating leverage. It sounds to me like you're trading a little bit more carefully this time and going to go a little bit more slowly to make sure that doesn't happen again, is that a fair assessment you think?

Is a fair assessment. Sorry, Graham. It's a fair assessment actually and if we have not done before and because we want to do that slowly and to have the capability to do it. And actually this has not - is not supposed to generate in type of disruption. So this is something I want to insist on. It is not that all the purpose of this reorganization of whatever is called cost program or cost saving program or whatever you want to call it, it's not a total propose.

Yeah, I mean where those sort of knock on effects of come, they've been principally in the commercial space. And again to reemphasize, we're not talking about making any structural or organizational or locational changes in our commercial teams. This is primarily about leveraging those teams to work more effectively, target the right customers, continuously improve. Your comments are absolutely right say in relation to taking a measured approach to driving and delivering change in the manufacturing and operations basis. It's paramount that we focus on maintaining quality and service continuity and that will mean that we will take a measured pace in that space but it equally means that there is opportunity that are properly managed and paced program to deliver meaningful change for the business.

But you know the big one, I mean the one that we call sale force gives sales force productivity, put it the way you want. It is something that we have started to - this year you remember I have mentioned that at the announcement of the full year of 2016, explaining that the development of these as one of the pricing department that we are created will help us to maximize our efficacy in the field, working on incentives schemes, working on the days, that the reps are working in the field, working on the - time spent in training and so on and so forth. So this is for us the base of an improved execution and actually you've seen that in Q3, we are able to execute with no surprise and we expect this not only to continue but even better in the future.

Perfect. That's all I got there, I'll let someone else jump in.

Thank you, Tom.

Thanks.

Thank you. And now we take a next person from the queue Julien Dormois from Exane. Please go ahead, your line is now open.

Hi, good morning, gentlemen. I have two questions please about your various franchise. The first one relate to the knee franchise, so once again this is quite a great achievement in this business. Would it be possible for you to maybe help quantify the various factors that are behind it, so this good performance, I mean discriminating between what's coming from NAVIO, what's coming from the maybe the UNI Knee from Zimmer and so on and so forth. So all of the factors maybe that are driving this could be helpful to see whether that will be sustainable again in 2018? And the other question relates to Bioactives, it was a nice quarter as you indicated maybe driven by better demand for some deal. Does that mean that you all point that we could now turn a bit more optimistic about this business in the future or your comments about low growth, I mean it's pretty much valid for the foreseeable future?

Thank you, Julien. Nice to answer your question. On the first part of your question and what are the drivers of the knee business. First of all, I want to insist on one fact, I think it's one of the best quarter we're ever had in the knee business, despite an extremely soft market as I was explaining to Veronika. We have been growing at 6% globally. I would like also to mention the fact that despite issues in Puerto Rico and in Mexico, we have been able to grow 9% out of the U.S. in the Emerging Market, so it's a very strong performance that I want to mention here. What are drivers of these growth? Well, I think the first one is we was see our strong and innovative platform of JOURNEY and I think JOURNEY II is a very strong driver of these. And as I was mentioning last quarter, we do expect this to continue for a long time with the development the XR bi-cruciate knee. And we also have a second driver of this growth, which is the launch that we have done a few months ago now with ANTHEM, which is our Emerging Market Knee which is one of the responsible of the good growth that we are have in the Emerging Market. We have also the extra revision which is our new - the revision of knee which is helping us. And I will say last but not least is the impact of NAVIO, again which is not in this sales. I mean here we have the knees generated by NAVIO. And as we said before, it's today a pretty small impact but we expect these to be a strong driver of the future growth of the knee business. Second question?

It was in relation to Bioactives?

Yeah, on the Bioactives, yeah. Second one is on Bioactives. So Bioactives, again here we are pleased with 7% growth in the Bioactive. And I think that this is due to many different items. First of all, I think that we have the impact of all the clinic rolls that we have done on SANTYL which are showing. Actually we have published two papers recently, one is just accepted now showing the impact and the value of SANTYL compared to other procedures or with other procedures one of that with a mechanical type of product. So I think that's number one. Number two, we have put some more reps behind the product and retail market is actually one - of this growth in the quarter. So we are I would say very satisfied to see as expected by the way to see the recovery of the biologics compared to the first half.

Okay, thank you.

Thank you. Now we take our next person from the queue Kyle Rose from Canaccord. Please go ahead, your line is now open.

Great, thank you very much for taking the questions. So I had two questions on - a two part question on the knee and Orthopedic side and then one on the Emerging Markets. On the knees, your competitors record with the MAKO System about you are having a broader halo effect of making along the broader business, being that accounts that they robots in, they are outgrowing, they are seeing boarder across the business. I wanted to see, one, if you are still in early days of experience in NAVIO, is NAVIO helping drive knees but also can you think about some other categories through Orthopedics in Sports and Trauma? And then I also wanted to see, we've heard about some price cuts in some of the key emerging markets in knees in India or is about pricing with hips in China. I just wondered if you could comment there and then what if any impact those changes have on your long term thoughts about it about competing in any emerging markets.

Okay, thank you. Well, first of all on the growth of the knee of MAKO and the broader growth. And first of all MAKO has been launched much before us, so don't forget that. And we have been able to get full knee indication pretty recently. So we are very active with the development that we have in NAVIO. I believe there is huge opportunity to expand the use of robotic-assisted surgery into more indication, we have the total knee now, the knee, all the revision and we make number of progress on this front, we also expect the use of - not only in the knee but also potentially in the hip in the future. So I mean we are very pleased with what we have with NAVIO. I think it's a great tool. We work toward pretty well in the Emerging Market as well as in the Establish Market. So again there is no, not much to say, we are very happy with what we have here and we see a further development of this technology worldwide. Same question, the knee in India. Well, we have not seen for us in Q3, an impact of price in the knee business, why because we are working pretty well on the inventory actually in this country. So some of our peers have reported price issues in India in recon due to the new wish of the government to capital say the price of the implants. We are not seeing that for the moment. It is going to happen in future? Yes, certainly. Indian again is not one of the biggest countries for us in the Emerging Market. However you know we are working with the trade association to try to mitigate this problem in the future. So we don't foresee that as a negative in the plan this way. On the hip in China, well I believe you refer to the tender business that the Chinese have implemented, is it correct?

Yes.

No, it's in India.

No, it was hip in China. Does it hip in China?

Yes, yes, knees in India and hips in China.

That's right, so hip in China. So this is a tender business which has been implemented by the government which we believe is a one short tender for the moment. We have worked on this. As you have looked at this index and we don't see this as a problem at all for our hip and knee business in the country. So this is anecdotal.

Great, thank you for taking the questions.

Thank you.

Thank you. [Operator Instructions]

Okay, so this will end this session. So thank you very much for participating. And I look forward with Graham to seeing you in February for the full year announcement and wish to give you more full details on the cost saving programs we just mentioned. Thanks a lot.

Thank you. So ladies and gentlemen, that does concludes today's Smith & Nephew 2017 third quarter trading report conference call. Thank you for participation. You may now disconnect.