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Smith & Nephew (NYSE:SNN)

Q4 2012 Earnings Call

February 07, 2013 4:00 am ET

Executives

Olivier Bohuon - Chief Executive Officer, Director, Chairman of Disclosures Committee, Chairman of Executive Risk Committee and Member of Nominations Committee

Neil Taylor

Phil Cowdy - Group Director of Corporate Affairs

Analysts

Charles Weston - Numis Securities Ltd., Research Division

Michael K. Jungling - Morgan Stanley, Research Division

Ingeborg Øie - Jefferies & Company, Inc., Research Division

Veronika Dubajova - Goldman Sachs Group Inc., Research Division

Matthew S. Miksic - Piper Jaffray Companies, Research Division

Christoph Gretler - Crédit Suisse AG, Research Division

Martin Wales - UBS Investment Bank, Research Division

Edward Ridley-Day - BofA Merrill Lynch, Research Division

Thomas M. Jones - Berenberg Bank, Research Division

David Adlington - JP Morgan Chase & Co, Research Division

Olivier Bohuon

Good morning, everyone. I'm Olivier Bohuon, the Chief Executive Officer, Smith & Nephew. I'm here with Neil Taylor, our Group Financial Controller; Phil Cowdy; and I'm pleased to have here with us, Julie Brown, our new CFO. She will be in mute mode today. So don't even think about asking questions to her. So we're very pleased to have Julie on the board, and I'm also very pleased also to have here our Chairman, Sir John Buchanan, with us here. John is also very pleased to have a new CFO on board, and so welcome, Julie.

I will cover the highlight and then hand over to Neil to take you through the numbers. When Neil has finished, I will come back and update you on the progress we have made this year on implementing our strategic priorities and I will give you some results on 2013. As usual, we'll take the questions later.

Last year, I said 2012 would be a year of balancing the delivery of our strategic priorities while managing our more immediate operation challenges and opportunities, and so it has proved to be. I'm pleased with our performance this year, in particular how we have liberated resources where appropriate and started investing in growth drivers of the future. These investments include individual products like negative pressure, broader franchises such as sports medicine and Trauma and Extremities, geographic expansion in the emerging markets and acquisitions, like the recently completed Healthpoint acquisition. Financially, we have grown all our key metrics. Underlying revenue growth was up 2%. Our trading profit margin increased 80 basis point to 23.3%. Our adjusted earnings per share was up 2%, and we initiated a step change in our dividend payout, increasing it 50%. Added to this, our free cash flow is excellent at over $600 million this year. I will talk more about 2013 later in my presentation. In summary, I see it as a year of continuing to implement the priorities and building on the strong platform we established in 2012.

Now turning to the highlights of Q4. We delivered a strong final quarter 2012. Highlights include double-digit growth in the emerging markets, advanced wound management again growing at well above the market trade, and improved performance in the trauma market. Our Q4 revenue was up and underlying 3% to over $1 billion, only slightly flattened by an extra selling day. This revenue growth does not include any contribution from the acquisition of Healthpoint, which completed at the end of the year. Our trading profit was $272 million. This represents a margin of 25.3%, slightly ahead of last year achievement. Adjusted earnings per share was $0.216, similar to prior year. After paying the Healthpoint consideration of $782 million, we finished the year with net debt of around $300 million. In line with the announcement on our dividend policy we made this summer, we are increasing our final dividend by 50% and proposing $0.162 per share. Finally, we promised to provide more details on our capital allocation framework in the first half of this year. We'll do that with the Q1 result presentation in May.

This slide capture our underlying growth in the quarter, on the left-hand side geographically, and on the right by product franchise. In the U.S., we grew at 1%. In the rest of our established market, we grew at 2%, but the weak macro environment we continue to see in Europe was more than offset by strong results in Japan and Australia. Growth in our emerging and international markets was strong at 14%, our best quarter this year. Growth in China, our largest market, was particularly pleasing at plus 30%. On the right, across most of our product franchises, we delivered growth rate that was the same or better than the previous quarter.

I will now turn to the next slide to look at our hip and knee franchise. Our global knee franchise increased by plus 2%. The broad dynamics of our performance are unchanged. VISIONAIRE, our patient-match cutting instrument continued growing double-digit year-on-year both in the U.S. and elsewhere. Out of the U.S. volumes now represent over 20% of the total VISIONAIRE. This growth demonstrates more customers are coming to appreciate the benefits of such systems. Our LEGION Hinge System launched in the first half is now adding to growth. Also, we further extended our knee range by adding an OXINIUM option to LEGION Narrow. Excluding BHR, Hip Implant growth was up 3% on last year. This compared to total hip market, which was 2%. We continue to achieve good growth in our focus product and have a strong quarter in our ANTHOLOGY, R3 and POLARCUP systems. In addition, our new REDAPT Revision Hip System was launched in the U.S. this quarter, which significantly improved our hip revision offering.

Turning to Sports Medicine Joint Repair, we continued delivering a healthy growth at 7%. We saw our knee repair growth being driven by FAST-FIX 360. Our Trauma growth was 7%, which was ahead of the overall market growth of 3%. I'm encouraged by this performance, which I put down to 3 drivers. And you remember that this was one of the disappointment early this year, and we have done a lot of things to change these. It shows the early benefits of the actions we have taken to refine and reinvigorate the model in the U.S. We have created a focused sales team, serving Trauma and Extremities customers, and started hiring -- that will not be reflected in this quarter actually, hiring some new reps. In the emerging market countries, we delivered good double-digit growth in the quarter. And finally, we benefited from issues. One of our competitor had lost [ph] its nail portfolio, and you know who I'm talking about.

Advanced Wound Management grew at 4%, well above a flat market. Our expansion in negative pressure continues. As you know, we launched RENASYS in Japan back in August. Since then, we have invested in additional sales rep. And I'm very happy to report that December in Japan, we're already close to achieving a 20% market share in negative pressure. It's a similar pretty story in Europe, where we now have a 25% share. This is partly from further growth in our traditional Negative Pressure Wound Therapy and also as PICO sales continue to build. Our new product introduction momentum continues, with 6 more this quarter, bringing a total of 32 for the year. Also in the quarter, early introduction such as ALLEVYN Life and VERSAJET II are now contributing to ours [ph].

Now over to Neil, and I will come back to you for the strategic priorities. So really, another accent.

Neil Taylor

That's right. And it's not a French accent, apology.

Olivier Bohuon

At least I do understand.

Neil Taylor

Okay. Thank you for all of it, and good morning, ladies and gentlemen. As you're accustomed to in this section, I will talk through the result announcement by business segment. I'll also cover the financial implications of the Healthpoint acquisition, and we'll finish some technical guidance to help you model 2013.

Turning firstly to Slide 11, the income statement. First, for clarity, as the Healthpoint acquisition completed at the end of December, there was no impact on the group's trading results for the quarter. Acquisition-related costs of $11 million were incurred in the quarter and have been shown separately on the income statement. Revenue in the quarter was just under $1.1 billion. This represents 3% underlying sales growth on Q4 last year and after adjusting for exchange rates and for the Bioventus transaction. Trading profit in the quarter was $272 million, an underlying increase of 2%. The trading profit margin was 25.3%, in line with Q4 last year. Restructuring costs charged in the quarter were $35 million, and they're all related to the structural efficiency program previously announced. The program continues to deliver in line with plan. Turning to the full year, revenue was just over $4.1 billion, representing underlying growth of 2%. Trading profit for the full year was $965 million, an underlying increase of 6%. The trading profit margin was a healthy 23.3%.

Moving to the next slide, Slide 12, and further down the income statement. The full year results included $251 million profit on disposal of our Clinical Therapies business to Bioventus. The associate line shows our share of the profit from this venture. This is breakeven in the quarter and $4 million for the full year. We expect to continue to see some volatility in this number in the early phase of this new entity. We have again set out in the appendices of this presentation an analysis of the impact of the Bioventus transaction on the reported numbers for the group. The appendix shows a 2% adjusted earnings per share dilution in 2012. The final tax rate for the full year was 29.9%, resulting in a Q4 rate of 29.2%. This is a marginal reduction to the rate anticipated at the end of Q3. Adjusted earnings per share in Q4 were $0.216, a decrease of 1% on last year. This is below the growth in trading profit due mainly to the strength of the U.S. dollar, the Bioventus transaction and an increase in the number of shares in issue. Adjusted earnings per share for the full year were $0.757, an increase of 2% on last year.

Turning to Slide 13, an analysis of revenue by business segment. The impact of currency in Q4 was 1% as a consequence of the stronger U.S. dollar year-on-year. The Bioventus transaction reduced reported group revenue growth by 5% in the quarter. In addition, we had 61 sales days, 1 more than last year. The impact of this in an underlying sales and trading profit growth is estimated at less than 1% as this extra day fell around the festive period.

Turning to Slide 14, an analysis of revenue growth rate by division and by geography. Olivier has talked to the main drivers of our revenue growth. Details and sales growth by product franchise are set out in the appendix. I'd like to add a few further points. Looking at pricing across our business as a whole and in the U.S. and Europe individually, we saw essentially the same price environment in Q4 as in recent quarters. Hip sales continued to be held back by the decline in BHR sales, a fall of 40% against the quarter comparator. BHR sales now account for less than 8% of our hip sales and a little over 1% of our group sales. Trauma sales growth was reduced by 1%, relating to the previously earned royalty income described in recent quarters. This effect has now annualized out. In our global wound business, sales grew by 4% in the quarter. Growth was reduced slightly by wholesale ordering patterns. NPWT sales again contributed a vast majority of the growth.

Turning to the next slide, Slide 15, which shows the analysis of trading profit by business segment. As mentioned earlier, group trading margin in the quarter was 25.3%, broadly flat in a prior year comparator. Group trading profit margin for the full year was 23.3%, 80 basis points above the prior year. We dealt with modest but widespread pricing pressure with some margin uplift from structural efficiency programs. We continue to invest in new products and our capability to bring these products to customers. Spend in the quarter on R&D was 4.2% of sales, consistent with the full year. In ASD, margin increased in Q4 by 70 basis points, which are slight improvement in gross margin and in G&A from the actions taken previously under our structural efficiency program. In wound, margin decreased by 210 basis points in the quarter against a strong comparator. This reflected product mix, high levels of SG&A investment behind NPWT in Japan.

Turning to Slide 16, the cash flow statement. Trading cash flow was strong -- was a strong result for the full year and the quarter, with net debt of $288 million at the end of the year compared with $138 million net debt at the end of 2011. This is down from net cash of $379 million at the end of Q3 as a result of the cash outflow from the acquisition of Healthpoint.

Next, turning to Slide 17. As I mentioned previously, we were pleased when the Healthpoint acquisition completed late last year. In 2012, Healthpoint achieved revenue of $190 million, a growth of 26% against 2011. In terms of quarterly phasing, revenue was very roughly evenly spread with little seasonality. Estimated trading profit for 2012 was $12 million. Transaction costs of $11 million were incurred in the quarter. A summary of the provisional acquisition balance sheet has been provided in the appendix. The amortization of acquisition intangibles in Healthpoint will be in the range of $44 million to $48 million for the full year. We will receive our cash tax benefit in the U.S. on this amortization due to the structure of acquisition as an asset purchase. We will, of course, provide you with quarterly updates on revenues of this acquisition. Prompted by this, we are taking the opportunity to review the franchise reporting of our wound division. From Q1, we will report wound split by advanced wound care, advanced wound devices, primarily NPWT, and bioactives, being the Healthpoint-acquisition products. We will provide you with historic data on a revised basis well ahead of our Q1 report.

And turning to the last slide in this part of the presentation, Slide 18. In a minute, Olivier will provide you with our revenue and margin guidance. I want to pick up on some technical guidance to assist in your modeling. The anticipated expense for the restructuring program announced in 2011, as set out in the appendix, was $200 million with $160 million of this being cash costs. Of the remaining amount, we expect to expense the majority of this in 2013 in the range of $80 million to $95 million, with a similar level of cash outflow. The residual amount will be incurred in 2014. We expect the annual charge for the amortization of acquisition intangibles to be in the range of $85 million to $90 million. In 2012, our share of the profit from our associate, Bioventus, was $4 million. Going forward, in 2013, the income from the Bioventus associate will be reduced as a result of further levels in investment in the business and the amortization of acquisition accounting entries in their income statement. We therefore expect negligible income for the full year. The effective tax rate for 2013 and profit excluding exceptionals is expected to be just below 30%. In Q1, we will have 2 less sales days as compared to last year, 62 versus 64. The estimated impact of this on group sales is around 3%. This impact reverses in Q2 and Q4. Finally, as a reminder for Q1 exchange rates, if 2012 year-end rates were to remain the same until the end of 2013, we estimate the reported sales and trading profit growth would remain broadly unchanged in Q1 and the full year.

And after these rather technical items, I'll hand back to Olivier.

Olivier Bohuon

Thank you, Neil. Thanks. So 18 months ago, I announced in this room actually the set of new strategic priorities for the company to prepare Smith & Nephew to be fit and more effective for the future. I remain absolutely committed to these priorities and believe we have made good progress in delivering on them. We have created a simpler and more efficient organization, which is able to take faster and better decisions. We are beginning to drive greater value from magazine [ph] resources by investing in high-performing product and geographic areas. And we are building a platform for growth, including value-enhancing acquisitions in our chosen markets. I would like to give you a snapshot of each of the 5 priorities to assess our progress and our actions for 2013.

Established markets still represent 88% of our revenues, and we make good progress -- we made good progress in 2012. We worked hard to combat soft market conditions and continued to invest for the future. In Advanced Surgical Devices, we undertook a major restructuring, generating annualized savings of over $80 million. Our $150 million saving program efficiency is absolutely on track. In Advanced Wound Management, we have realigned increasing our flexibility to deploy our resources to meet customer needs. The spin-off of Bioventus was announced this time last year, giving us resources to invest elsewhere while maintaining access to their long-term R&D programs. Entering 2013, we are making -- targeting investments in our sales team to drive growth, in particular in Trauma and Extremities in the U.S., where we are adding new reps, and also in Japan, which is, by the way, one of the only growth place in the established markets. Our wound team is focused on integrating Healthpoint, and this has started very well. Across our business, we'll continue to refine our business models to serve our customers better and more efficiently.

Emerging and international markets are vital areas. We're achieving double-digit growth, and they contributed approaching half of our annual revenue growth in 2012. China was the first BRIC country we invested significant resources in, both organically and through acquisitions. In 2012, it delivered revenue of well over $100 million and grew at more than 20%. Globally, it is our third largest employee population, with over 800 people in China now. China is the standard and certification of what we can achieve elsewhere. We have appointed new country general managers in Brazil, in India and more recently in Russia. We have also reinforced to put functions such as operations, supply chains, compliance and marketing and business development. During 2013, we'll make additional investments in our sales team and supporting infrastructure in the BRIC countries. We'll also step up our focus on other countries, where we see high potential opportunities. We're increasing our R&D spend as we develop portfolios for the mid-tier, the first of these new ranges will be in wound management and will be launched next year. We are -- also, finally, we expect to further accelerate our growth with acquisitions. We have a lot of work ongoing in mid-tier acquisitions.

I'm pleased with the progress we have made this year in simplifying our operating model. We have improved our gross profit margin by -- partly by reducing our cost of good by around 3%. In manufacturing, we have refined our footprint especially in China. We closed our old Linhe orthopedic plant, moving it to the new one in Beijing ahead of schedule. We have now completed the extension of our wound factory in Suzhou on time and on budget and have started equipping the plant. Looking to 2013, we have many process improvement projects running. These range in size from a major European initiative to create a single IT and business intelligent platform to smaller projects aimed at improving such thing as forecasting and accuracy. We are also reducing the size of our product portfolio, retiring older lines and focusing on products that deliver the greatest clinical benefits.

During 2012, we have maintained our momentum of introducing new products. In Advanced Wound Management, we again launched more than 30 products, maintaining the pace set in 2011. In Advanced Surgical Devices, we had extension to our established LEGION knee and developed [indiscernible], a new hip revision system and further innovation in sports medicine. We also registered over 100 of our existing products in the emerging markets. I believe that medical training and innovation go hand in hand. And in April, we'll open our new state of the art medical training facility in Memphis in the U.S. Looking to 2013, we'll accelerate our R&D including our portfolio for the mid-tier in the emerging markets. Our recent acquisition of Healthpoint also include a substantial investment in the Phase III clinical trials for our products that treat venous leg ulcers.

Turning to acquisition, the fifth strategic pillar. I'm very confident that Healthpoint will prove to be a fantastic addition. We have just completed our first month of ownership and have been very impressed by the culture and drive I have seen. I'm looking forward to presenting the sales team at the end of the month in the U.S. We also made a number of small complementary technology acquisitions of -- such as LifeModeler, Kalypto and Aderma, in the first half of 2012. All have been integrated to plan and are performing at our expectations. Although we can never predict when acquisition opportunity arrive, I believe that we'll complete more deals in 2013. Our business development team is currently reviewing more opportunities than at any other time while I've been at Smith & Nephew. These are in a range of size and geographies. They all are our strategic focus, either supplementing and easing presence or will act as a platform to accelerate the growth.

Turning to our outlook for 2013. Neil has already covered some technical points. Let me talk you through our revenue and margin guidance. As in the past, it is our policy to give guidance focused on revenue trends compared to market growth rather than numerical ranges. In terms of the general market dynamics across our businesses, we're anticipating trends from 2012 to continue in 2013. We expect our Advanced Wound Management to continue growing ahead of the market, driven by further share gains in negative pressure and Healthpoint. In Trauma, we believe that our additional investment in both Trauma and Extremities, as well as the new model will help us to outperform the market. In the sports medicine and arthroscopy, we expect to grow around the market rate. In reconstruction, as we have said before, we expect to be below the market for the next few quarters. In knees, we are just about to enter our new product cycle with JOURNEY II expected to enter in a full commercial launch late 2013 or early 2014. Our core hip performance will continue to be masked by metal-on-metal headwinds. While we believe that this will stabilize, we cannot predict when. Turning to trading profit margin, during 2013, we'll gain the benefit of the structural efficiencies we achieved last year and the one we'll deliver this year. As I have outlined, we'll also continue investing for growth in new geographies, new products and on the existing portfolio. We also expect to see continued price pressure. The cost of the U.S. medical device excise tax is significant. While I believe we will be able to absorb it completely over time, as I've said during the Capital Day, it is a material headwind this year. Finally, as we have said, the Healthpoint acquisition is initially delivering a good margin. Taking all these factor together, I would expect our margin in 2013 to be below the 23.3% achieved in 2012. Finally, as I have said before, we're focused on creating an organization capable of delivering a sustainable 24% margin.

In summary, we exit 2012 with a much stronger platform than we entered this -- last year. In 2013, we remain focused on implementing our priorities. We're continuing to improve our efficiency. We're also increasing our investment in tomorrow's growth drivers in our existing portfolio, making geographic investment, R&D and potentially making further acquisitions. Nothing is easy about the choices we are making and the hard work we have to do, but I'm pleased at the progress we have made, excited about the opportunities and certain we'll deliver greater value for the companies and for the stakeholders.

So thank you very much. This ends the formal presentation, and we will now take question. Thank you very much.

Question-and-Answer Session

Olivier Bohuon

First question.

Charles Weston - Numis Securities Ltd., Research Division

Charles Weston from Numis. A couple of questions from me. First of all, in the U.S., you said that the wound management sales were flat. And I was wondering if you could give us a comment on why that seems to have slowed. And secondly, on your margin guidance for the full year to be below 23.3%, that's quite a wide guidance. And I was wondering if you could give us a sense of the order of magnitude of that. I suspect the answer is no, but I would like to know.

Olivier Bohuon

Okay, let me start by the second question, which is the one I was expecting. The problem is -- we said below. Last year, we said a modest increase. So you say, "What do you mean by modest?" Now we could say slightly below, a little bit below, somewhat below. I mean, I don't know. So it's below. And below -- and think about -- again, we improved a number of things but we have this Healthpoint dilution. We have $25 million of the medical device tax, which will cost us. And we still have the same market trends, the same market conditions. We still have the price erosion. So things are what they are. Again, I think the most important is not what is going to happen in 2013, which is a year of consolidation, but what is going to happen in the future. And as I was saying, I expect to deliver what has been said in the past, which is 24% margin for this company. Now going back on the wound market in the U.S. The wound market in the U.S. is not very strong. That's true. Actually, we do very well in this market. KCI, I don't know if you have seen that recently, has issued a bond in December and they were disclosing some of the revenues. And they were showing a minus 11% growth, which is significant. So -- I mean, we have a significant growth. So I think we do very well in the U.S. Now why the growth is not as we could have expected? Because we have a very strong competitor last year in the Q4, and that's the only mechanical reason why the growth is not there.

Michael K. Jungling - Morgan Stanley, Research Division

It's Michael Jungling from Morgan Stanley. I've got 3 questions. Firstly, on the medical device tax, can you comment whether you've raised prices in 2013? And also, if you read the Memphis Times, which I don't think is huge a newspaper, but it's...

Olivier Bohuon

That is a famous one.

Michael K. Jungling - Morgan Stanley, Research Division

Some of your management have made comments that you actually have reduced man count because of the medical device tax. So I'm trying to understand why the medical device tax is such -- suddenly such a huge headwind in 2013 when you see reductions in headcount, maybe that...

Olivier Bohuon

Okay. It's a mix of a lot of things. We have announced 100 layoff last week, 63 in Memphis, about 20 in Boston and something like 12 in Europe. This is just the follow-up of the value plan. So there is nothing new on this. This has nothing to do with the ObamaCare. This has to do with us willing to be fit and effective for the future. So this is nothing new. I mean, this is just a plan. So what folks, TV in Memphis or the Memphis Time has written is just wrong. It's just a mix of things in the environment that we have seen a year ago, having driven us to make the changes we are making. And this is why it is what it is. So I mean, the 63 people have nothing to do with the ObamaCare per se. It's just wrong.

Michael K. Jungling - Morgan Stanley, Research Division

And have you raised prices on the -- on your products because of the medical device tax?

Olivier Bohuon

No, actually. And I double checked that yesterday night with the our head of ASD because I wanted to be sure. We did not because -- I've seen a paper yesterday morning where -- saying that many companies have raised prices or have transferred the price on customers. And I've double checked that yesterday with our ASD [ph] organization and we have not done that.

Michael K. Jungling - Morgan Stanley, Research Division

And then a...

Olivier Bohuon

We have not, and -- I'm sorry. In -- the answer was we have not because we don't believe it's a plus to do that, and I think that patients will certainly go on something different so if there is such a transfer.

Michael K. Jungling - Morgan Stanley, Research Division

And 2 more questions. The margins in wound care, to us, were a little bit disappointing. How much of the margin impact was the investments in Japan? And will they continue in 2013 at a high level?

Olivier Bohuon

Well, you have a different mix here. Margin in -- sorry, investment in Japan, any investment in the rest of the world we have, have been accelerated this year. Why? Because we have launched, as you know, RENASYS and VERSAJET in September -- August actually. This year, we have added a number of reps in Japan, and this has been one of the drivers of the margin drop. The second one is the price situation on the negative pressure market. The market -- I mean, the prices have been slightly down, and this is also a fact. And we have not taken our prices down a lot but sometimes, we have been able -- we have been obliged to react. So it's a mix.

Michael K. Jungling - Morgan Stanley, Research Division

Great. And the third question is in relation to the cost saving. You mentioned half of the $150 million have now sort of been taken care of. Is that the run rate at the end of the year? Or would you say that's the $75 million for full year?

Olivier Bohuon

No, no. It's $80 million now. If you annualize this $80 million I took under the control of the Controller, it goes to about $100 million roughly annualized savings of this year. And then we'll reach what we're expecting last year -- next year, sorry, $150 million. Correct, Neil?

Neil Taylor

No -- yes.

Olivier Bohuon

Yes or no?

Neil Taylor

The -- probably yes with $100 million is correct. I mean, what we've seen is accumulated $91 million of cash, unknown cash and the benefits ahead of that. But the numbers you'll see, 2 to 3 [ph] years, is $91 million but ahead of -- with the $100 million ahead.

Olivier Bohuon

Yes?

Ingeborg Øie - Jefferies & Company, Inc., Research Division

It's Ingeborg Øie with Jefferies. Two questions, please. First, on the capital tie-up in the business, CapEx is coming down. And I was wondering if you could comment on what's been happening and whether this is the planned instrumentation manufacturing in China and whether this low level is what we should be expecting going forward. And then on the inventories and receivables as well, which seem to be going off the level there despite the Bioventus divestment, is it Healthpoint that's more capital intensive in that respect? Or is there something else going on? And then actually, I have a third question, which is on the competitive landscape in knees. A number of competitors are launching new products and have good momentum, whereas Smith & Nephew we still have to wait for about another year for the new knee product. I just wanted to see how you relate that to your comment that you're going to grow just slightly below the market given continued BHR headwinds as well.

Olivier Bohuon

You want to take the CapEx and receivable question, Neil?

Neil Taylor

Yes, please, Olivier. I think when we look at CapEx coming down, I mean, we see continued investment and the underlying dynamics haven't changed, the -- what makes it one-piece investment in infrastructure factories and so on. So as we've invested in some of our manufacturing facilities, we've seen that closed in lumps. I wouldn't read too much into it, the 2012 rate, as a new bench. We still got this 8%, rule of thumb that we've always looked to on CapEx. And turning to the inventory and receivables, I think we're looking -- the way we see the receivables as far as a readout, with strong end to the quarter, which invariably just stocks up the working capital. So again, that's what we have anticipated. On inventory, I think there is 2 stories here. When you look at the initiatives which we've had on field inventory, we've seen progress, and I think we've talked to that before. You've got to balance that with investing in new products and new businesses and new markets, where we've seen further investment. So there's a trend on what we've been working on, on this investment.

Olivier Bohuon

Thank you, Neil. On the question -- yes. On the knee question, yes, some companies are launching new products and we've obviously taken this in consideration in our expectations. We're pretty happy with what is happening with our products though. I mean, it's a nice thing that the development of the prelaunch of JOURNEY, where we want to showcase JOURNEY to -- at the AAOS -- I'm sure you will be there. So you would see that. And then the full launch is expected in the U.S. So I think it's reasonable to believe that we'll be slightly below the market on this new -- I'm not very anxious about this. Yes?

Veronika Dubajova - Goldman Sachs Group Inc., Research Division

Veronika Dubajova here from Goldman Sachs. Two questions, if I can. The first one is on M&A. And Olivier, you have said you're working on more deals than ever and given that you've already done a wound deal, I was wondering if you could maybe talk about how you think about M&A priorities now that you've kind of ticked off one of the boxes that you set out as a strategic priority. Is it more geographic? Is it more product expansion? And what do you see out there that's getting you excited without, of course, disclosing the names of the targets that you're looking at? My second question is about extremities. If I go back in your history, it's never been a big focus for Smith & Nephew. And listening to you today, you've brought it up a number of times, when you look at your footprint in that area, do you think your product offering and your competitive positioning is strong enough? Or in order to really be successfully in the extremities market, will this require inorganic activity from your part?

Olivier Bohuon

Thanks, Veronika. I don't think I've said that we work on more deals than ever. I think that we work more than ever on the deals. But I mean, it's true because they are more and more complex. And actually, again, let me just say that clearly. The first priority for us now is integration of Healthpoint and be successful with Healthpoint. On top of this, as you know, we have, on the agenda, a number of things to do in the emerging markets in terms of acquisition. As I said many times, there are small acquisitions, so kind of bolt-on acquisition as are distributors or small companies. So we are not targeting. And Julie is here now for 4 days. And it's obviously important to have the CFO involved in that. And so we do have a plan to make in the next quarter or whatever huge acquisitions. So don't worry about this. It's not the point. So we work a lot on small deals, which we believe will enhance our growth in the emerging international markets. Regarding your point on the extremities, we have a view of the business, which is pretty simple. The view is a significant part of the company is growing at a low single digit. And another part of the company is growing double digit. And the question is how can we maintain a decent growth on this core business, the company, while investing much more in the high-growth segments? What do I mean by high-growth segments? Obviously, negative pressure; obviously, the bioactives; obviously, the sports medicine; obviously, Extremities and Trauma. And so going back on your question, yes, we want to invest more. Now do we have enough share of voice in this field? Maybe not. So that's why we invest a little bit on this next year and we'll start in December. Do we have the right portfolio? Yes, we believe we do. And the offer we provide is, I think, pretty good. So this is really what I want to -- when I've said many times to you that we want to rebalance the company to make it higher growth company, that's what we work on and we really have some focus on this type of businesses. Yes, we need to take 2 callers from the phones if we may and then, Martin.

Operator

[Operator Instructions] We will now take our next question from Matt Miksic of Piper Jaffray.

Matthew S. Miksic - Piper Jaffray Companies, Research Division

I have one follow-up on the knee business, particularly in the U.S. You have this very strong label and data that was successful for you in the last couple of years in terms of the 30-year knee. Is that something that you're able to go back to? Can you talk a little bit about strategy for -- before the new knee arrives, the strategy for driving knee growth most strongly in the U.S.? And then I have one follow-up.

Olivier Bohuon

Okay. Maybe I would share this in to -- with Phil here on the knee business. The knee business, the OXINIUM 30 years claim, which has been given to us, what, 2 years ago?

Phil Cowdy

Right.

Olivier Bohuon

2 years ago. We have been very happy with it, and we are still very happy with the knee because when you talk about the knee business, you should really make a difference between some products we push, which is high growth, and some products which are not pushed and with a low growth. OXINIUM is for us, the 30-year claim, unchanged. We are the only with this claim. So we definitely have a high focus on this, and we're happy. I mean, the growth of this product -- Phil, I don't have the growth in hand.

Phil Cowdy

Yes. I mean, OXINIUM, the very last brand with the 30-year claim, comfortably double-digit growth.

Olivier Bohuon

Double digits. So you see, it's again a mix of big double digits. So we invest strongly on this one. That's a choice we make, and we're going to follow on this until the launch of JOURNEY II is coming and even when JOURNEY II will be there. This would an area of focus.

Matthew S. Miksic - Piper Jaffray Companies, Research Division

Okay, so within your knee portfolio that's growing quite well, I guess, and maybe could you help us understand what -- where the challenge has been? And as margins have come up nicely, but do you expect -- maybe where some of the pressures have been similar to the way maybe you talk about where some of the pressures are, which are on the hip side?

Phil Cowdy

I'm going to start with any portfolio you have a range of products and -- OXIDIUM is growing very well. The core LEGION range is growing very well. What you see is some of our legacy older products slowing down, some of the old [indiscernible] range that was being sold is now much lower, et cetera. We're just working through that, as Olivier keeps on saying. Our core range, LEGION -- the whole LEGION family absolutely believe and supported by VISIONAIRE. And as we look to JOURNEY II, we think there's a good dynamic across the whole portfolio there.

Olivier Bohuon

The thing with VISIONAIRE...

Matthew S. Miksic - Piper Jaffray Companies, Research Division

[indiscernible] on extremities, a follow-up on one of the earlier questions around adding in that area. Could you talk a little bit about maybe how important do that -- growing that business? How important is distribution direct or indirect U.S., o U.S. regions that's something that you can then build up yourself from scratch? Maybe talk about how you get there and how important it is?

Phil Cowdy

Yes. I mean, in terms of extremities, I think what we see ourselves offering is, first of all, our product range. I mean, as you all know, we have a very strong EXFIX platform, which is part of treating extremities. Certainly, if you look at foot and ankle, we have a strong plate range that we've added to this year. And then in addition to both of those, we obviously have a very strong sports medicine soft tissue repair range that's now being extended into extremities. So we feel we have a strong extremities range. And what we're being starting to do now is specializing some of our sales team to address extremities practitioners. And we're starting to add more reps to that team in the U.S. So it's more about the product and the sales team rather than the broader distribution channel you seem to be sort of referring to.

Olivier Bohuon

Outside the U.S., I think we're pretty happy with what is happening in Trauma and Extremities and the growth is very high. We have some big countries, South Africa, we have a share which has exactly one of the highest share in the world if it's not the highest. I think about 30% plus share in Trauma and Extremities. China is also starting pretty strongly. So we are happy with this. Other question on the phone?

Operator

We will now take our next question from Chris Gretler of Crédit Suisse.

Christoph Gretler - Crédit Suisse AG, Research Division

I just have a few small question. Olivier, just on a market environment in hip and knee in Q4, I mean, it looks like there was kind of an acceleration here, so -- and I was just wondering what was your view about the underlying cause of that? I mean, given your comments, it looks like you see pricing relatively unchanged on a sequential basis. So was there really such a volume uplift? And then basically, the second leg to that question is, it looks like in your numbers, it's showing up a bit less than maybe in some other competitors. Do you think that might be due to their raising prices in contrast to you and there basically was some pull in from Q1 on some of hospitals started to purchase in Q4 in anticipation of the price increases? I was just wondering what was your view on that situation.

Olivier Bohuon

Okay. On the market -- first part of the question, on the markets, yes, it's true. We have seen a rebound in the markets in Q4, whether it's in hip or knee. If you take the global hip market, it went from 0% growth in Q3 to 2% in Q4. Is it a rebound? You know what, it's the up and down of the market. And again, I personally do not believe we can extrapolate on a 2% growth, saying, "This will be even better next year." So I'm very cautious about the market growth on a quarter-per-quarter basis. If you take the knee, the knee -- global knee went from 2% in Q3 to 3% in Q4. Is it a rebound? Well for some optimistic people, yes. For me, I say, well, it's an anecdote. And I don't think that this could be extrapolated easily [ph]. So I think for the market, they are better. It's a fact. But I mean -- I don't mean that this will happen again in the same way next year and the market will certainly become a high-digit growth market. Regarding our own situation, I think you have to look at 2 things, think product range and geographic position of Smith & Nephew. Geographically, we are extremely important in recon in Europe. I talk under the control of Phil here, but I think we are about 30% of our business of recon which is in Europe, which the market average about 18%. So I think we are more exposed to the Europe austerity in the recon business than what the competitors are. That's number one. In terms of portfolio, yes, when you look at the dynamic of BHR -- sorry, of hip, one can say, well, it's not as good as the market. Actually, in Q4, when you exclude the BHR, instead of minus 3%, we grow, I think, 2%. Well, it's the contrary. It's minus 3%, minus 2% to 3%, I think.

Phil Cowdy

Yes.

Olivier Bohuon

Yes, minus 2% recorded. It's -- actually, it's 3% if you exclude the BHR impact, so -- and this is better than the market. So I think, Chris, it's not -- I don't think it's bad actually. Knee is slightly under, and we have mentioned that and I have explained it. But for the hip, it's not the case. And regarding the market, I think don't extrapolate anything on the market for Q4. I think it's -- we'll be disappointed.

Christoph Gretler - Crédit Suisse AG, Research Division

Okay. And then just quickly on the trauma business, how much reassurance can you give us now that basically, there is no broad-based underlying improvement and it's not just basically now that you benefited overproportionately from the things [ph] recall in the needle, and because I don't remember -- I think you had a very strong nailing business from my memories?

Olivier Bohuon

Well, yes, they have -- the recall is part of it. Actually, we don't know why it's really the part of nail. I said we have 3 items here, explaining the good dynamic, which again is 7% this quarter. The first one is, I do believe that the new model we have put in place -- and you remember that Q3 was much better than Q2 and than Q1. I was, at Q1, unhappy about the results. So now I'm now happy with what we have done, the way we have embraced that and what we have changed. So I think that's important. Now based on the new model that we have -- which I can remind you what it is. It's instead of looking at all the surgeon the same way, we have now a sales force calling for extremities, sales force calling for scheduled surgery and sales force calling for emergency trauma, different sales force, different customers, different offer. This works very well. The second part, I think out of the U.S., we have a very good development of the trauma business, which is helping. And then it's the recall of Synthes. How much does that give us per month? I don't really know. What I can tell you is that we have been able to supply the demand, which was existing, but it's a part out of the reason why we have 7% growth. But it's -- I cannot tell you how much it is. Going back to Martin.

Martin Wales - UBS Investment Bank, Research Division

Martin Wales, UBS. A couple of quick questions on the U.S. market. You gave us a global hip number x BHR. What would the U.S. number have been? Similarly, you gave us market share for Negative Pressure Wound Therapy in Europe and Japan. What's your U.S. share? And what impact do you expect to this upcoming tender? I know pricing is going to be tough but you're coming from a lower base, and -- but obviously, KCI, as you highlighted, has been struggling. Sorry, I'll start with those 2.

Olivier Bohuon

On the wound, you mean the negative pressure?

Martin Wales - UBS Investment Bank, Research Division

Yes.

Olivier Bohuon

Okay. On the negative pressure, the market in the -- we gave the exact number. The exact number of negative pressure, the quarterly growth of negative pressure has been minus 5% global. In the U.S., I don't have the figure. Do you have the figure of the negative pressure in the U.S.?

Neil Taylor

For negative, no.

Olivier Bohuon

No. I don't have the pure growth or actual drop of the negative pressure in the U.S.

Martin Wales - UBS Investment Bank, Research Division

And do you think this tender is going to make a big difference to your market share?

Olivier Bohuon

I don't know. Yes, I don't know. I mean, our share, what I can tell you is that we are en route for this 20% share in the U.S. and we have a pretty high goal here. PICO is doing very well in the U.S. Again, the growth that we show here, we have a lot of pump sold last quarter in -- last year, quarter Q4. That's why the comparator is not good this year. But I'm pretty optimistic of the dynamic of our business there. I mean, we gain share day after day, day after day. And again, the launch of Japan had been, for me, the proof that we know how to deal with that. I mean, gaining 20% share in 3 months in Japan is a good stuff. We are #1 in Japan. That helps. But still, I think it's a good set of results. But KCI is definitely a problem.

Martin Wales - UBS Investment Bank, Research Division

Sorry, on the U.S. hip market share expansion?

Olivier Bohuon

So the U.S. hip market was, in Q3, 1%; in Q4, 4%. That was the market, 4% growth in the U.S. market in Q4.

Neil Taylor

I think you're after net U.S. x BHR, which I think we're giving plenty data at the global level. BHR is now...

Olivier Bohuon

I'm not going to disclose this one. That's -- but my belief is that we do better than the market x BHR.

Martin Wales - UBS Investment Bank, Research Division

And a couple of quick Healthpoint questions. Firstly, you've owned this thing for a month now. It looks like potentially very good acquisition with a lot to come out of it. I mean, what have you learned so far? Also, given that you've highlighted, it's a big focus to get this thing integrated quickly, I guess that would suggest we -- and you did give a comment to that, we shouldn't expect another big deal in the next quarter. How quickly do you think you can free up at different time if there was another deal of that sort of size available in another area?

Olivier Bohuon

On the free-up, I think we have to discuss this with Julie when we have some time to discuss this because it's not right time to discuss it and to discuss with the board also. What we want to do and -- we have plenty of ideas about what we can do, but it's premature to discuss this, I think, Martin. Regarding Healthpoint, so far so good, extremely good integration. I'm very impressed by the people I've met in this company. We have a great retention of the talents in the company, which is very important. As you have seen, we have closed the year at 26% growth, which is significant. Q1 is a good signal of the same signal that we are not jeopardizing this business. So it is going well. I'm going to see all the sales force in the U.S. at the end of the month. So I will feel a bit the -- how they are. It's great. Actually, it's a very good stuff. The clinicals are doing well. We have started the Phase III, as you know. We have about 40 centers running. Clinical in the -- in Europe is starting also. So I mean, it's on track.

Edward Ridley-Day - BofA Merrill Lynch, Research Division

Edward Ridley-Day from Bank of America Merrill Lynch. On sports medicine, you've had a great run in recent years, market leadership and great technology. Your guidance are growing in line with the market this year. It seems to be a slightly more conservative guidance. Can you talk a little bit about your product launch profile there and anything that you can talk about today that you'll be bringing out later this year? That would be my first question. And then while we're on products, could you just confirm the exact launch dates in the U.S. and Europe of the JOURNEY II. You'll be showcasing it at the AAOS. Can that -- does that mean that we are looking at a second quarter or third quarter launch in the U.S.?

Olivier Bohuon

Phil will take these 2 questions. I think he will answer much better than.

Phil Cowdy

Thank you very much. So sports medicine, as you rightly say, we get good growth there based on high level of innovation. In terms of our guidance for this year, as we look at sort of the product launch profile, we're putting up more products towards the back end of the year being launched, but that falls rather in the first couple of quarters. I think to JOURNEY II exact launch dates, this is putting out the right venue to give the exact launch dates.

Edward Ridley-Day - BofA Merrill Lynch, Research Division

And you can't give us any more detail about the areas of your sports medicine launches?

Phil Cowdy

No.

Olivier Bohuon

So 2 more questions. Tom?

Thomas M. Jones - Berenberg Bank, Research Division

It's Tom Jones from Berenberg. Been quite a bit of focus this morning on your outlook for 2013, but I had a couple of questions about the outlook beyond that. The quid pro quo of the med-tech tax was the expected volume uplift that you might get beyond that. That's kind of why the industry signed up. So we wouldn't be in the first place to pay that tax although you do seem to be backtracking somewhat now. How much of your 24% margin target is dependent upon factors such as the potential volume uplift from ObamaCare or just general market recovery? Or do you think you can get that 24% target if all the markets that you currently operate in continue to trend as they are now? And then sort of a slight follow-up to that. I just wondered how you're thinking about your orthopedic business with CMS pushing much more towards bundled payments for orthopedics and what impact that might have on your portfolio and the pressure perhaps for down branding and how you might be thinking about addressing that going forward in your recon business.

Olivier Bohuon

24% in the market as they are now. As I said, we're absorbing this 24%, the medical tax. So that have been said and we are still on this path. There is no change versus the previous guidance we have done on this one except for 2013, actually. We didn't give any guidance in 2013. I was talking about 2014 when we met at the Capital Day and we're still there. And regarding the CMS, additional bundling, yes, it pushed the bundling. You remember that's one of the big question when the Synthes acquisition saying, "Well, don't you believe that there will be -- it would more difficult." It's not, actually. So we don't see a big issue in the bundling with CMS. CMS, the point is what they have announced on the price reduction, what's negative pressure on the pumps. This is -- seen the 48% price reduction of the CMS, which actually -- because dressings have about 6% price reduction, so for the pumps, about 41% price reduction net-net. That will not impact -- first of all, it's a very tiny part of the negative pressure business. And secondly, we believe that we are going to gain a lot of volume with this. So we are not very interested about this.

Thomas M. Jones - Berenberg Bank, Research Division

And just a quick follow-up on ObamaCare. Assuming there is some volume gain to come in 2014 from spend in insurance coverage, where within your business would you expect to gain the most from that volume uplift? And if I'm being slightly cynical about it, it does look like your ASD launch cycle is nicely timed to coincide with the potential rise in volumes. Is that just serendipitous? Or is that actually about planning? It's look like everything is kind of back-end loaded, so looks like you're launching into a rising market rather than stagnant markets.

Olivier Bohuon

Serendipity, I don't think so.

Phil Cowdy

I think, Tom, it's difficult to see or even measure how much benefit we'll get from that. As you know, the most hip and knee implants are people already in mid-60s. Trauma, you're pretty going to be covered anywhere. Maybe some sports medicine falls into that category and maybe better, wound. But it's not something we're budgeting for -- we're certainly not budgeting for presumed uplift from benefit from that. If we get it, that's great but...

Olivier Bohuon

I think that's the answer. Yes, last question.

David Adlington - JP Morgan Chase & Co, Research Division

David Adlington, JPMorgan. A couple of questions, firstly, you mentioned the portfolio rationalization. I just wondered if you could give us some further color in terms of which areas of the business and what percentage of sales you'd be looking at sort of taking out from that. And then second, on Bioventus, it doesn't look like it's going to be making sort of contribution that maybe we were looking for this year. I just wondered if you could you us some further color in terms of what's happening at that business.

Olivier Bohuon

Well, Bioventus, I think the answer is pretty simple, much more investment. And I think next year, we'll have also a number of investment. Next year, we'll generate nothing. Bioventus will generate -- our share will generate nothing. I think this year was about $4 million, something like that, yes. And this is due to the additional investments we do or they do, actually, because they have 51% of the share of the company, to prepare the portfolio for tomorrow. So that's the main reason why you don't see this result and profit coming out of the deal. So the second question was on the more rationalization. It's not win more, actually. It's more implementation of the program that we're supposed to do. So we have new things happening, the one with people. We -- actually, we have cut 500 people in the company since my announcement of the plan in November 2011, excluding the 100 people I just mentioned before. So that will be about 600 people. You remember that I've announced about 10% gross and 7% net of the company employees mainly in G&As. Actually, in sales, I don't think we have any type of cuts, some readjustment. And actually, we're increasing in 2013 the sales rep in trauma, in the emerging market and some other geographies. So it's nothing special, just the implementation of the plan.

David Adlington - JP Morgan Chase & Co, Research Division

I guess the more -- the question was more on product rationalization.

Olivier Bohuon

Oh, product. Okay, I'm sorry. So we have kept -- I'm sorry, I thought it was are there any newer program. In the product rationalization, we have cut in 2012 around 29,000 SKUs, 29,000 in ASD, a few thousand but few in wound management. So we have started a program, and this is not done. We still have a number of SKUs to rationalize and old products. Products we don't sell, simplifying a lot, manufacturing, simplifying the cost structure. So that's what we are doing now. Okay. Thank you very much.

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