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Executives

Olivier Bohuon - Chief Executive officer, Director and Chairman of Disclosures Committee

Adrian Hennah - Chief Financial Officer, Executive Director, Member of Disclosures Committee and Member of Risk Committee

Analysts

Navid Malik - Cenkos Securities plc., Research Division

Martin Brunninger - Nomura Securities Co. Ltd., Research Division

Unknown Analyst

Matthew S. Miksic - Piper Jaffray Companies, Research Division

Veronika Dubajova - Goldman Sachs Group Inc., Research Division

Jason Wittes - Caris & Company, Inc., Research Division

Smith & Nephew plc (SNN) Q4 2011 Earnings Call February 2, 2012 4:00 AM ET

Olivier Bohuon

Good morning, everybody. So as you know, I'm Olivier Bohuon. I'm the Chief Executive Officer of Smith & Nephew, and I welcome you to our fourth quarter and my first full year result presentations. I will speak about our results for the fourth quarter and then hand over to Adrian to take you through the numbers. When Adrian is finished, I will come back and update you on the progress we're making against our new strategic priorities and some thoughts for 2012. As usual, we'll take questions at the end of the formal presentation.

So we finished 2011 well. For the year, our revenues were up 8% reported and 4% underlying to nearly $4.3 billion. All our business units contributed to this growth. In Orthopaedics, we led the market in knee growth and delivered a solid performance from our traditional hip portfolio. Trauma had a more mixed performance. I will talk more about what we're doing to change this in a few slides.

Our Endoscopy business performance reinforced my belief that minimally invasive joint repair is a good market to be in and a great market to lead. It offers scope for more innovation and obvious benefits to patients and payers. For the third year in a row, Advanced Wound Management is our fastest-growing business, exceeding this year $1 billion in revenues for the first time. Our successful entry into negative pressure market is a major driver, but we should not forget that our larger advanced wound care business contributes also significantly.

We finished the year with a good margin of 22.5%, and we're now well into our action plan to increase this. The generation of cash is a clear sign of a healthy business and we generated free cash flow of over $0.5 billion.

I joined Smith & Nephew in April last year. As its full year results demonstrate, the company has strong foundations. In August, I set out our strategic priorities. These are necessary to ensure we are growing faster, better balanced and are fit and effective for the future. 2011 was the start of this journey. 2012 would be a year of balancing the delivery of these priorities while managing our more immediate operational challenges and opportunities. Later in the presentation, I will provide an update on our actions against these priorities.

Our Q4 revenue were up 4% to $1.1 billion, an underlying improvement of 3%. The overall trading environment in Q4 was roughly similar to what we have seen in Q4 -- in Q3, I'm sorry. Our trading product margin was 25.2%, exceeding the 24% commitment we made last quarter. As I said then, we'll take the actions necessary to ensure all areas of our business maximize their growth in margin. Adjusted earning per share were $0.219, an increase of 1% on last year's $0.216. We have proposed a final dividend of $0.108 per share, up 10% on prior year. Adrian will give you a detailed analysis of our revenue and margin performance in Q4. I was just picking out the most relevant points.

On the first slide, on the Orthopaedic business. Ortho revenue in the quarter were flat on Q4 last year. This is a solid performance against a background of a challenging market and a tough comparative period. Market conditions, including pricing trends, are broadly consistent with those we saw in the previous period. Overall, we think the global reconstruction packet growth was, again, only marginally positive. Global knee growth was at plus 2%. This continues to be a market-leading performance, however, at a slower pace. The very strong full launches of our market-leading VERILAST and VISIONAIRE products are now annualizing.

Trauma growth declined 2%, and would have been flat excluding the U.S. royalty payment expiring. Some of this performance reflects a strong comparable. However, we believe we should do better, and during the quarter we appointed new management team charged with achieving this.

Turning to our Endoscopy business. Sales in Endo grew strongly as Europe delivered again another good performance. Growth in sports medicine repair sales was double digit. During Q3, we widened the launch of FAST-FIX 360, the next generation of our leading meniscal repair system. As anticipated, this received a positive response from surgeons and our knee franchise improved materially. Resection of blades also had a good quarter. Our new range of DYONICS PLATINUM blades are now making a valuable contribution to the growth.

Turning now to the Advanced Wound Management. Our Advanced Wound Management business grew revenue by 8% in the quarter, more than double the market rate at around 3%. One of the most pleasing things for me about the quarter has been the continuation of our rate of product lunches, 10 in the quarter after 11 launches in Q3 for a total of 35 new launches in 2011. This rate of new product introduction and line extensions will continue into 2012. Of the launches in Q3, DURAFIBER and PICO, in particular, contributed to the European performance as well as a weak comparative.

Our negative wound therapy franchise achieved strong revenue growth across all regions. In the U.S., we saw significant conversion activity at hospitals, such as Cleveland Clinic, Kaiser, and UAB. PICO gained the 510(k) approval in December and has been commercially launched in the U.S. in January this year.

So I'm going to give the floor to Adrian. I will come back then to talk about the strategic priorities.

Adrian Hennah

Well, thank you, Olivier, and good morning, ladies and gentlemen. We turn firstly to Slide, I think it’s 10, the income statement. Slide 10, yes, it’s Slide 10 and the income statement.

Revenue in the quarter was $1.106 billion. As Olivier mentioned, this represents 3% underlying sales growth after adjusting for exchange rates on quarter 4 last year. Trading profit in the quarter was $279 million, an underlying decline of 1%.

The reported trading margin of 25.2% was in line with the commitment that we gave last quarter and 80 basis points lower than quarter 4 last year. Restructuring cost charge in the quarter was $33 million. $26 million relate to the efficiency program announced with our last results -- with our results last -- our last results in October. Olivier will explain the goals, main content and shape of this overall program in a moment.

The legal charge of $23 million relates to the creation of the provision in connection with the previously disclosed investigation by the U.S. Securities and Exchange Commission and Department of Justice into potential violations of the U.S. Foreign Corrupt Practices Act in the medical devices industry. Based on information currently available, the group believes that it is possible to make a reasonable estimate of the losses expected. The group has not reached final agreement on a settlement on these matters, but believes that any additional material loss is unlikely. We cannot say more on these legacy issues as there is no final agreement. We can say that we believe that we have, today, an excellent compliance program across the business and we have enhanced -- which we have enhanced since these investigations began in 2007. Interest costs are down on last year, reflecting our lower debt.

Moving to Slide 11 and moving down the -- moving further down the income statement. The tax rate for the full year on trading profit was 29.9%. This is a slight reduction on the 30.2% rate we had been expecting and had provided for at quarter 3. Accordingly, the rate in quarter 4 is slightly lower at 29.3%. EPSA in the quarter 4 were 29 -- $0.219, an increase of 1.4% on last year. This is slightly stronger than the small underlying trading profit decline, due principally to the lower interest charge and a small exchange gain. EPSA for the full year also increased 1.2% on last year, stronger than the underlying trading profit decline and also principally due to the lower interest charge and the relative weakness of the dollar. Unadjusted earnings per share were 5.8% lower in the full year, impacted by the estimated cost of the FCPA settlement and by the restructuring costs.

There is no impact of the recently announced Bioventus transaction in these P&L numbers. In line with accounting requirements, we are treating the assets involved in the transaction as assets held for sale in the balance sheet. The impact on the P&L will commence on the closing of the transaction. I will touch on the details of this impact in a moment.

Turning to the next slide, Slide 12, and an analysis of revenue by business segment. This slide shows the reported growth rates by division and the impact of currency movements on those growth rates. The impact of currency was small, a small net gain as you can see in the quarter. And turning straight onto the next page, Page 13, which provides an analysis of revenue growth rates by business and by geography. Olivier has talked to the shape of our revenue and I'll have a few more -- I will add a few more detailed points.

Market conditions remained as we expected: challenging. Across our business as a whole, we saw essentially the same price picture in quarter 4 as in quarter 3. In our Orthopaedic business, we saw a like-for-like price reduction of around 3%, similar to quarter 3. Within Orthopaedics, you could see that the strong growth we achieved in recent quarters, especially in the U.S.A., has eased as in particular the very strong performance of VERILAST and VISIONAIRE in the United States annualizes. Headline Ortho growth in Europe was minus -- was a minus 7% decline. Sales were reduced by $5 million due to a negotiated return of some supply lines from a wholesaler in Spain due to credit issues. Sales growth has also reduced due to the ordering patterns of a couple of quite large distributors, who placed large orders in quarter 4 2010, which were much smaller this year. Without these items, Ortho growth in Europe is a 1% decline.

As noted last year, within our Trauma business, an agreement under which we receive about $8 million per annum in royalties expired in the middle of the year. This reduced worldwide Trauma sales growth by 2% in quarter 4 and U.S. Trauma sales growth by 3%. Ortho achieved a good 10% growth in the rest of the world with China and India again growing very strongly. Global hips sales declined 2%, which was similar to the previous quarter. Declining sales of BHR again offset good sales from our other hips, including the fast-growing OXINIUM bearing services. Clinical Therapies finished the year very strongly with an 8% growth. Endoscopy sales grew by 7%, with good performances across all regions.

In our wound business, sales grew by 8% in the quarter, again, well above the market rate. Within that 8%, NPWT sales again grew strongly and contributed over 4% of the total wound growth. Reported wound growth in the United States was low due to a strong quarter 4 in 2010. Conversely, wound growth in Europe and in the rest of the world was increased slightly by wholesale stocking patterns. On a net basis, reported wound growth was increased by 1% to 2% by wholesaler ordering patterns.

Turning to the next slide, Slide 14. This shows the usual analysis of trading profit by business segment. As mentioned earlier, trading margin in the quarter was 25.2%, in line with our guidance from quarter 3 and 80 basis points below quarter 4 last year. Margin increased in wound by 40 basis points, as we continue to drive efficiency and as NPWT sales grow strongly. Margin increased in Endo by 130 basis points. This showed the benefit of strong cost discipline, strong sales and the now lower proportion of Visualisation sales, which earned lower margins. It included a continued significant increase in the level of investment in biomaterial projects.

Margin decreased in Ortho by 220 basis points. Of the 3 pressures that reduced margins in quarter 3, one was not repeated, one abated and we have begun very seriously to address the third. Firstly, there was no repeat of the unusual bunching of periodic costs, which we experienced in quarter 3. Secondly, we continue to experience pressure on gross margin as a result of mix pressures. However, as you've heard, the annualization of the significant increases in VISIONAIRE and VERILAST sales in the U.S.A. has led to a reduction in top line growth. Correspondingly, it has also reduced the pressure on gross margins as these products are slightly dilutive to gross margin. Thirdly, we have begun to execute on our revitalize program to reduce the Ortho cost base in line with the market conditions in the established markets. We announced the elimination of around 150 positions in the new ASD division in the quarter. These reductions mainly took effect from toward the end of the quarter. Accordingly within quarter 4, bulk of the quarter-on-quarter improvement under this heading was from tighter cost control, and we will see the more structural changes benefit ASD margin progressively through 2012.

We've added a column on the right of the slide -- on the right hand of the slide which deducts for the full year numbers the $25 million BlueSky credit from last year's Wound and group margin. As you can see from this adjustment, the reported trading margin for the group, as a whole, was down 140 basis points in the full year.

Turning to the next slide, Slide 15, and the cash flow statement. We had a -- so turning to Slide 15 and the cash flow statement. We had another good quarter of cash generation. Free cash flow of $108 million in the quarter was after payment of $77 million in settlement of outstanding legal disputes, mainly in the IP area. The settlements were in line with provisions and did not impact profit. Part relates to future benefits and is included in the capital expenditure number you see here. In the full year, we generated $521 million in free cash flow, a trading cash conversion ratio of 87% despite the substantial legal settlements. Net debt at the end of the quarter was down to $138 million, down from $492 million a year ago.

Turning briefly to the next Slide, Slide 16, which provides a brief summary of the terms of the Bioventus transaction, which we announced on the 4th of January. I will not go through each of these terms as I expect that you are familiar with them from the announcement. We've included them – we include them here mainly for your convenience.

And on the next slide, Slide 17, we've also included some more financial details of our CT and Biologics business, which will transfer to Bioventus on the closing of the transaction. The details of this in the previous slide should allow you to model the impact of the transaction fully on our reported financials. The transaction will be modestly dilutive to earnings, as you know, by about 3% in a full year. This dilution derives principally from the low interest rate earned from the cash received and the higher level of investment in R&D planned by the new entity.

We have not disclosed the interest income on the $150 million loan note that will be payable to us from the new entity, but have said that it pays a premium to LIBOR appropriate to the nature of the Bioventus entity. We expect the gain on disposal to be in excess of $250 million before tax. This will be reported on the closing of the transaction.

Turning to the next slide, Slide 18. This slide and the next slide set out the segmental, geographical and product analysis that we will give on the business from quarter 1 2012 and also shows the indicative restatement of the 2011 full year numbers in the new format. These changes are being made to reflect the new organization arrangements in the group, which, themselves, reflect the -- affect and drive our strategic direction and priorities. On this slide, you can see the segmental analysis of sales, trading profit and margin. We will be replacing the 3 global business units that have been the way the group is run with 2 divisions: Advanced Surgical Devices and Advanced Wound Management. This will also be the segmental analysis driving the fuller disclosures on capital employed and other matters in the annual report.

And turning to the next slide, Slide 19. Here you can see the analysis we plan to give of revenue and revenue growth by geography and business segment. You can see that we will be moving the geographic analysis from United States, Europe and rest of world to the United States, other established markets and emerging and international markets. Within other established markets, we will include all the European economic area countries, Japan, Canada and Australia/New Zealand. With emerging and international markets, we will include sales in all other countries except those and in the U.S.A. You can see the indicative split of 2011 sales in this new format on this slide. This does provide new data on our sales in emerging and international markets. As you can see, these accounted for 11% of group sales at $454 million and grew at 20% in 2011. We will also be making a couple of small changes to the product growth analysis, which we provide in the appendix to the investor presentation each quarter. And we have set these out in the appendix to this presentation.

Turning lastly, in this part of the presentation, to Slide 20 and the outlook. Firstly, our revenue outlook for 2012 by product franchise. In Orthopaedic reconstruction, our sales growth exceeded market growth in 2011. We expect continued growth in the excellent products, which drove this 2011 outperformance. We do not expect, however, that they will drive market outperformance in 2012. Coupled with the continuing drag from market metal-on-metal perceptions, we expect our Reconstruction growth to be close to market growth. In Orthopaedic Trauma, we expect the 2% headwind of the reduction royalty income to lead to growth slightly below market growth. In Orthopaedic Arthroscopy, we expect to continue to grow at slightly above the market rate. And in Advanced Wound Management, we expect momentum in the NPWT area to lead to growth substantially ahead of the market rate. Secondly, our margin outlook for 2012. This is unchanged from last quarter. We expect to deliver a modest increase on the 22.5% delivered in 2011.

Turning to a few more detailed items lower down the P&L account. Firstly, exceptional costs. Olivier will give details on the restructuring program. He will mention that we expect around 1/2 of the $150 million per annum total benefit to arrive in 2012. This is incorporated in our margin guidance. It is challenging to predict exactly when progress on the various initiatives will reach the point when accounting rules require a P&L provision. We would, however, expect something over 1/2 of the costs to be booked by the end of 2012. We will include a page in the appendix to each quarterly investor presentation summarizing cumulative spends on this program so that you can easily track it.

As already mentioned, we expect to book an exceptional gain in excess of about $250 million when the Bioventus transaction closes, that's before tax. We still expect this to be in late quarter 1 or quarter 2. Secondly, we expect the charge for the amortization of acquisition intangibles to continue at about $10 a quarter -- $10 million a quarter, that is. Thirdly, we expect the net interest cost line to continue to reduce as debt is repaid, all other things being equal. Fourthly, we expect other finance costs of around GBP 5 million per annum. Fifthly, we expect a tax charge on profit, excluding exceptionals, at around the current year's level, i.e. around 30%. Sixth, on exchange rates, if the year-end exchange rates were to remain the same until the end of 2012, we estimate that reported full year sales and trading profit growth would both be decreased by around 2%, and this position is coincidentally the same for quarter 1. Lastly, we have, as usual, included a page in the appendix, setting up business days by quarter. There is one extra day in 2012, which falls in quarter 4. And finally, on phasing within 2012, we do not see major variation in the drivers of top line growth across the year. With regard to the bottom line, however, we do, as you would appreciate, expect the benefits of the restructuring program to build progressively through the year.

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

Olivier Bohuon

Thank you, Adrian. Thanks. So I’d like to remind you of the strategic priorities to drive the growth priorities I set out for Smith & Nephew and I would like to update you on the progress we have made so far.

I'd like to start with a reminder of these priorities. We have set out 5 priorities in August. The first one is to win in established market. What does it mean winning in established market? It means that we want to gain market share in established market because we cannot serve on the growth of the market, which is almost flat.

So what does it mean to win in emerging markets, in the established market? Well, it means to launch innovations. As an example I give to you, was the Wound Management that we won. The second one is to optimize the sales and services to help to gain market share. The third one is to improve the sales force effectiveness. And those are absolutely critical. And actually, there is a fourth one, which is also maximize the price and the premium prices linked to the innovative product that we launched. So those are really the main things that we want to achieve and we have now set up a number of things to be able to handle all these programs.

The second priority I was mentioning in August is develop the emerging markets. As you know, we have -- when I talk about emerging market here, I am talking about the BRIC countries, okay? We have been pretty strong in China and we are strong in China. Big growth, big base now, almost $100 million of sales in China. And we want to develop our sales in Brazil, in India and in Russia pretty strongly. So to do that, what do we do? We have, so far, now a top management in place. We have named, January 1, the president of the emerging market, of the BRIC market. We have also named a head of R&D who is a very strong person, I mean very competent. And this gentleman will be in charge of proposing the programs of development to develop the portfolio, specifically dedicated to the emerging markets.

Innovation remains core. And as I said to you, we are reinventing R&D. We have done our homework on this one: reallocating resources, looking at what is important to do in the future, changing the processes. And we also, as I was mentioning to you, plan to spend more money in the R&D field because we expect to spend something like $300 million additional money in the next 5 years in this R&D to form A, the established market innovation pipeline, and B, to form this portfolio of emerging markets.

The fourth priority was to simplify the improved -- and improve the operating model, to liberate resources, to be more agile, to be faster and to support and enhance sales force. We have also done that and we have, now, a lot of duplication that we took away. And Adrian was mentioning 150 job in the U.S. We have actually, to date, cut 220 jobs and most of them are coming from this de-duplication. There's a lot more to do on this, and I think it will be critical. And the last, but not least, is to supplement the organic growth with acquisitions. So here, again, we are working on these 3 items: bolt-on acquisition, emerging market platform and other acquisitions.

So turning to progress, we have been making again these priorities. I've mentioned a few of them, but this slide sets out some the actions we have taken in the last few months to deliver our strategic priorities. Needless to say, there's a lot ongoing. I've highlighted some of these actions elsewhere in the presentation, so I will only illustrate a few examples here. The uniting of Orthopaedic and Endoscopy to form our new Advanced Surgical Device division is progressing very well. In the U.S., we have substantially completed the work to form a single administrative structure to support our sales team. In Advanced Wound Management, we have refined our European sales model. This recognizes the trends in some countries for better tendering, the greater growth in the community sector and ensuring we have optimum share of voice in the marketplace.

In R&D, we appointed, as I was mentioning, an experienced head of emerging market R&D who is leading this critical initiative to develop the future requirement for these markets. Finally, as promised last quarter, we are now ready to give more details on the $150 million of structural efficiency improvement we intend to deliver in the next 5 years.

A quick reminder of the areas we are addressing to ensure we have the right cost structure and that the resources are focused on the growth drivers of our business. A, we are working to improve the cost of goods. We currently produce or source 10% to 15% of our products in low-cost countries. We continue to review opportunities to increase this, balancing the existing expertise we have, the potential to improve existing manufacturing plants and our need to produce new product lines for the emerging markets. Our Advanced Wound Management plant in Suzhou, China is an outstanding example of what we can achieve. We have just approved an extension of this plant in order to in-source more products and meet our ongoing capacity as we continue to grow our business.

Secondly, our G&A expense base. As we said before, we have started simplifying our operating mode in order to achieve greater effectiveness while continuing to support the sales team and the sales dynamic. This project is most advanced in the U.S., as I've already explained. In Europe, we now have confirmed the Advanced Surgical Device management structure, including a new European head office function and regional and country heads. This work has been carried out in conjunction with the review of our sales force productivity and the best and most efficient way to serve the European customers.

Turning now to the financial implication of these efficiency improvements. As we said last quarter, we expect to complete this program to generate savings of at least $150 million per year. Roughly, 3 quarters of the benefits will be to SG&A, mainly G&A, and the balance, cost of goods. We expect to get about half of the benefits by the end of this year. It remains our intention to deliver a sustainable trading margin of around 24% in the medium term. The pace at which we achieve this will reflect our ambition to maximize both growth and margin by being more efficient in established markets and investing wisely in the significant growth opportunities we see. I believe that this balanced approach is in the best long-term interest of our shareholders.

In order to deliver on this efficiency improvement, we expect to incur cash restructuring costs of about $160 million of which we incur $26 million this quarter. A substantial portion of this cost will be redundancy expenses and will include roughly a 7% reduction in our global employee base over the next 3 years, including about the 220 position I was mentioning we lost to date. There will also be a number of non-cash write-off, principally of plant and equipment, which we expect to be some $40 million over the program.

I set out in this slide the members of my executive staff. Of the 3 additional hires I've made, one was an open position, HR; and 2 are new roles, the President of Emerging Market and the Chief Technology Officer. The changes being made to improve our business are being driven by this team, which combines both a deep experience in Smith & Nephew and some new insight and experience from outside. To complete the team, we are hiring a Corporate Development Officer, actually mainly in charge of business development, acquisitions as we look for value-enhancing acquisition.

I've talked a lot today about financials, management efficiencies and G&A, but at the heart of the business are innovative products. They allow us to make market share in the established market and achieve high growth in the emerging market. I want to reinforce this message with you and what I mean by innovation over the next few years.

In sports medicine, the FAST-FIX 360, the new generation of our market-leading meniscal repair system has been rolled out. FAST-FIX 360 perfectly illustrate that the market will pay the right price for innovative premium products. This product quickly mends a torn knee meniscus in a cost-effective outpatient setting and potentially reduce the chance of an early total knee replacement in future years. And it is this type of sports medicine product that demonstrates why, I believe, that the minimally invasive surgery market will grow for many years.

PICO, our canister-free disposable negative pressure system is a good example of Smith & Nephew delivering innovative, even in this case, disruptive, new product to market. We launched it in Europe, Canada, Australia and New Zealand in May last year and have had excellent customer feedback in all launched markets. PICO builds upon our existing technical expertise and customer relationships. It is capturing the attention of patients, clinicians and payers by delivering on our pledge to reduce the human and economic cost of wound.

Meeting this agenda is another central part of how we are approaching our near-term product enhancement and our longer-term R&D planning. These are 2 examples of what I mean by innovation, which include, obviously, VISIONAIRE and VERILAST as well as many other advanced technology and devices.

So our business in 2011. This slide illustrates our 2011 revenue under the geographic and high-level product franchise analysis we'll provide from Q1 this year. It will allow you to measure the execution of our strategic priorities and moving to a direction we're taking at Smith & Nephew. Over the coming years, you will see us build a better, balanced company, both geographically and across our product franchise. Even today, we are too often referred as a just a hip and knee implant business, which only represent, by the way, roughly 1/3 of our business. It also fails to capture much of what we do and the excitement we feel about our faster-growing product franchises.

As I have said, I believe there are material opportunities in the emerging markets and we are setting the bar high in this market tradition [ph]. We also desire to increase our scale in Advanced Wound Management and minimally invasive surgery. And how would I summarize 2011? Well, I think it has reinforced all the conclusions I drew in the first 3 months as I went around the businesses. Smith & Nephew has good foundation, its innovation, its people, its culture of customer focus. And from my perspective, we made very good progress in 2011.

So what about 2012? Well, as Adrian gave you the detailed financial outlook guidelines, including reconfirming our margin guidance for 2012, which would be a modest increase versus 2011. It is a key year as we work to reshape the business through the liberation of resources and increased investment. We'll continue to do this without jeopardizing our day-to-day operational performance or relationship with customer. Our Advanced Wound Management and sports medicine businesses have great momentum, which I expect to continue. In Reconstruction and Trauma, we have a strong portfolio of products, although we are past the strong initial launch phase of our U.S. product. Adrian was mentioning the annualization of VERILAST and VISIONAIRE.

As we look out beyond 2012, we see a rich pipeline of innovation we'll bring to the markets. It is early days, but we are making extremely good progress and are very energized by the opportunity that we can see. We believe we can improve all areas of the company from product innovation to manufacturing to ensure Smith & Nephew is fit and effective for the future.

Thanks a lot, and that ends the formal presentation. And we'll now take questions. Thank you.

Question-and-Answer Session

Olivier Bohuon

Yes, first row.

Navid Malik - Cenkos Securities plc., Research Division

Navid Malik from Cenkos. Three questions. On the PICO, I know you tend not to want to break out your market share, for example, in Europe, but can you give us some idea of the quantum of sales, approximately of what you're seeing in Europe? Because obviously KCI has been taken private. PICO offers advantage in terms of austerity and convenience, et cetera. What impact is it happening -- is that having on market share? Trends perhaps would be a better metric. And in terms of hips, on BHR, obviously a big debate on metal-on-metal and iron toxicity, et cetera, and then the recalls of ASR. How are you differentiating clinically? What evidence are you able to produce to drive that catch-up, which we hope will occur over time that the procedures are obviously being offset? And on the M&A -- on the acquisitions column on Slide 23. It was conspicuously empty. What sort of acquisitions are you looking at potentially? What type of acquisitions, which will help drive your strategic objectives?

Olivier Bohuon

The first question was what? PICO, okay? Look, quickly on this one. The last one, acquisition, to make it quick. I've said in Q2, in Q3 and now again in Q4 that we are looking for a bunch of potential acquisitions. We have done a number of bolt-on acquisitions, first off. We are working hard now on emerging markets. My new President of Emerging Market has a very strong agenda, so we are moving fast on this one. So we look for mainly in Brazil and in India at this stage. In the rest, I reinforce what I've said to you previously, which is we're looking hard in Advance Wound Management and in minimally invasive surgery and in extremities because that's what we do. There's nothing else I can tell you at that at this stage. Regarding metal-on-metal, we are actually pretty disappointed that some commentators do not differentiate BHR than the global metal-on-metal. And I think it's for patient, I mean this could be a potential distress, which is not necessary. When I see the article I read on Sunday, when it said poisoning patient, it's a big anxiety. Actually, we know that BHR is a good product. We have been following this product for 10 years in a row. We do not see any problem. Actually, all the data we have received recently, independent data, one is the English and Welsh joint register is showing that BHR has the best survival rate after 8 years, which is roughly 98.5%. So we do not have any concern about the product. The problem that we have in face of us, these adverse winds, actually of metal-on-metal, which are a handicap for us. But we do not believe that there's any issue with BHR. On the contrary, we believe, for a number of patients, this the best product to implant. Now the BHR represent roughly 12% of our hip business. The adverse wind we see is regular. Actually, it's roughly minus 25%. So we are suffering about this, but not at a level which is crazy. And again, we don't think there is any issue here. Regarding PICO, I'm not going to tell you anything about the market share, as you can guess. But what I can tell you, I've been following this product very deeply because I love it. And I've been in Europe talking with physicians, talking with all our teams and it has a very good start, actually a very strong start. I was in the U.S. last week in our wound operations and so we have an extremely good feedback of the first days of launch, I would say, week. I mean good adoption. Again, the PICO -- the beauty of PICO, it is not supposed to replace the RENASYS. It is supposed to extend the market. So we don't foresee any type of cannibalization of the RENASYS, but we expect to really have a number of wound, not treated before by negative pressure, were now treated by negative pressure. So it's very encouraging, that's what I can tell you.

Navid Malik - Cenkos Securities plc., Research Division

Second question. Obviously, on the...

Olivier Bohuon

Last one.

Navid Malik - Cenkos Securities plc., Research Division

Yes, last one. So on venous leg ulcers and similar wounds, obviously, Shire has better Dermagraft now. What sort of -- what innovation can you bring into that part of the market to attack that because it's a very -- it's a large market opportunity, which Dermagraft has a small market share in currently, but has a lot of potential to grow in. It seems to be very complementary to, obviously, NPWT?

Olivier Bohuon

Are you going to AOS next week, no? You would have seen everything. So okay, next question.

Martin Brunninger - Nomura Securities Co. Ltd., Research Division

Martin Brunninger from Nomura. Just a question on margin improvement for this year. It seems like what you said on the cost savings and on the costs for restructuring, seems like almost margin-neutral this year, $80 million and $75 million. So where are the margin improvement coming from for this year? And how much is there from product mix and how much from geographical mix? And the other question I had on Spain. You said there was -- obviously, we've seen a margin contraction on the Orthopaedic side on Q4. Is Spain included there or is not?

Olivier Bohuon

Spain is included there.

Martin Brunninger - Nomura Securities Co. Ltd., Research Division

In the adjustment?

Olivier Bohuon

Yes.

Martin Brunninger - Nomura Securities Co. Ltd., Research Division

So what was the margin contraction driven by exactly?

Adrian Hennah

Well, I understand the second one. I'm sorry, I didn't catch the first question, maybe you...

Martin Brunninger - Nomura Securities Co. Ltd., Research Division

Well, the first question was, you gave -- on your outlook, you gave a margin improvement. For this year, how much is it and where does it come from? Because what you said on the cost savings and the cost for the restructuring program, it seems like it's neutral for this year. So where do the margin improvements come from?

Adrian Hennah

What about margin improvements? Going forward in 2012?

Martin Brunninger - Nomura Securities Co. Ltd., Research Division

Yes, just for this year.

Adrian Hennah

Okay, this year, 2012, okay. Well, in terms of Ortho, what's happening to the margin, I mean we went into some detail at quarter 3 as you may recall through what was impacting the Ortho margin and we identified there was a bunching of one-off costs in quarter 3, which hit us. But there were 2 more longer-term stuff that was hitting us in quarter 3. One was gross margin pressure because the products that were growing fastest had lower gross margins, and you've seen that actually happening all the way through the year. And we showed that, that has abated in quarter 4 because, as you know, VERILAST growth rates have come down. So therefore, the gross margin pressure from those growth rates have come down. But the most important thing we've been doing in quarter 4 is starting on this restructuring program. Now the actual -- the restructuring benefits, as in headcounts leaving and the associated process changes, frankly, only began to take -- to impacted earnings towards the end of the quarter. So those 150 positions that were eliminated in Orthopaedics and Endo during quarter 4 mostly happened at the end of the quarter. So most of the improvement you're seeing in Endo and Ortho in the quarter is not that. What it is, is a tough cost environment that we put in place coinciding with the start of that. Now some of that was cost reductions, which frankly are not sustainable. There are things that we have absolutely started again doing in January. But they were important to do at the start, if only to -- not if only. One of their benefits was to sort of accelerate the psychology that goes behind the structural changes. So that very tight control of discretionary costs is one of the elements you're seeing improving the margin, both in Endo and in Ortho in quarter 4. That, however, is not the core of what would improve the margins going forward in 2012, which is structural. And maybe to answer your second question, what are the sources of that, well, what it is not is sales force. We are -- the absolute focus of this program is to sustain and improve customer service, but lower the cost to serve and lower the cost to serve not by taking -- not by dealing the sales hits but by dealing everything that works behind that. So it certainly includes the platforms, which serve sales people, all the operational stuff that deals with getting the kit to the sales guy at the front and everything going backwards from that. Roughly, roughly, we see about 1/4 of the total benefiting cost of sales and about 3/4 in G&A in that stuff sitting between the front line sales force and the factory gate. The latter -- the G&A will be quicker because it's much more directly headcount-related and you can get after it quicker. The next wave of factory stuff will take a bit longer, but we're starting on it. We’re starting on it immediately, in fact. And Olivier mentioned we just got board approval for an extension to our Suzhou factory. Well, that kicks it off, but it will long for that to achieve flow-through into benefits. But that's what we're mapping in. That's the nature of the stuff we expect over the next couple of years, the flow-through as a result of the program.

Martin Brunninger - Nomura Securities Co. Ltd., Research Division

And you expect the price declines at the same pace as you've seen last year? That's part of your assumption then?

Adrian Hennah

Well, I don't know it's part of our assumption. It's a core scenario. It's been a core scenario for some time, that the environment will stay pretty much as it is for some significant time to come. We don't predict those sort of things. That's what people and economists think today [ph].

Olivier Bohuon

We have not seen any degradation of the price in Q4 versus Q3. They've been roughly the same trend, so we don't see anything worse actually in 2012.

Unknown Analyst

Great. I have 3 questions. Firstly, on restructuring. Who determines whether the $200 million really are restructuring charges or normal costs? Is it really the finance department or is it also the auditors who have to sign off on those charges? And question number two on -- also on restructuring, where is the main hit taking place? Are you -- is it more the Orthopaedic side or is it more the Endo side?

Olivier Bohuon

It's -- on this one, I will leave Adrian answering. I mean, on this for -- actually it's everywhere. It has been everywhere. But the 220 job that I was mentioning, 40 of them are in wound, for example. So it's not only Ortho or Endo. It's just all across. Most of the savings in accounts are coming from -- actually, they come from everywhere. I mean I think that's what we should say. It's a mix.

Unknown Analyst

And then the third question is if you look at your hip, your knee and your Trauma growth rates constant-currency, adjusted for comps, you've seen a very sharp slowdown in the fourth quarter compared to the previous 3 quarters.

Olivier Bohuon

In revenue you mean?

Unknown Analyst

Well, organic costs compared [ph] to sales growth. Does this sort of coincide with your restructuring efforts, meaning are your efforts affecting your growth rates?

Olivier Bohuon

I was expecting this one, that's a good one. But no, it's obvious. No, actually, the answer is no. And I give you 2 examples why no. Actually dynamic has been not so good in Ortho, and I'm going to come back on this one. It has been extremely good on Endo, extremely good on Wound. So if this would have been a problem, you would have seen an issue everywhere, actually not only in the Ortho business. Actually, the Ortho revenue, the first thing that you have to think about when you think Q4 is annualization of VERILAST and VISIONAIRE. They have been launched in the last quarter, so you obviously see a growth which is not as strong as this one. You had a very strong 2010 comparator, just 2 figures, it was 5% up in 2010 Q4 for the Recon business. It was 10% up for Trauma business. So you compare a Q4 with a very, very strong Q4 in 2010. Then the hip is constantly going down and I was mentioning the BHR impact is still here. So these are things which show you why -- I mean if you exclude this stuff actually, we'll do -- it's not -- we're not worried about that, so I don't think that's an issue. And do we have any issue with the restructuring program touching the dynamic of this? Not at all, not at all. And you know what, I was, last week again, when I was in the U.S., I’ve attended the big ASD sales force yearly meeting. 1,200 reps were here. And so I was talking to a guy, explaining what we're doing and obviously had many interactions. None of them have said to me, by the way, we have problem with your program because these can kill the sales dynamic. None of them. So I haven't heard any question, telling me, oh by the way, there's a problem. So they even don't feel it. So that's why it's not the point. Here, we talk about all the G&As. It’s been not S, it’s G&As and another thing is duplications that we have had with Ortho, Endo or a change of structure, business model, that we are looking for in wound, for example, where you have more tendering as well. That's...

Adrian Hennah

And on your first question, Michael, are we using these restructuring charges to prop up the trading profit line? Certainly not. I mean, it's -- we are very, very rigorous about -- I mean we’re very, very rigorous internally, but obviously it's subject to audit, too. And we have been 110% transparent with EY [ph] on it. I mean that's the cardinal principle of transparent accounting, which I stand fully behind absolutely. And we are going to be as transparent as we possibly we can on accounting.

Olivier Bohuon

So we'll have one question on the phone, I think, Phil, and then we'll come back to you, guys.

Operator

We'll now take our first question from Matt Miksic from Piper Jaffray.

Matthew S. Miksic - Piper Jaffray Companies, Research Division

I just -- if I could follow up on the question just asked just now on the Orthopaedic growth. I can see the modestly tempered comps in the prior year quarter. I guess I would drill down a little further into the hip and knee or the knee growth, specifically. To what degree would you attribute the slower sequential growth to an easing of any of the DTC campaigns that you have been running for VERILAST? And had you eased off on that? And then to what degree is that more VISIONAIRE, which -- and if VISIONAIRE, is it slowing due to competitive pressure or simply a slowdown in penetration or pricing in that sector? And then I have one follow-up.

Olivier Bohuon

Okay, on VISIONAIRE, yes, we have competition coming in that impact us potentially in market share, but you know what? Not much. And the boost given to the market growth linked to the arrival of new competitors is really pushing us, so I don't see any issue at VISIONAIRE level. Regarding the VERILAST DTC campaign, that's true, we have not done very active DTC campaign in Q4. We have done a number of -- and actually we don't know if we'll do or not next year. But we have done a number of exercises in DTC to see the value of DTC. Yes, you have a correlation between the DTC campaign and the revenue growth. Is it a good return on investment? I'm not so sure. So before starting any campaign, I want to know if it's just a fire and then coming down or it means something more structural and the value in terms of profit is good enough to follow up. So that's what I believe was in the second page. You want to take the other one, Adrian?

Adrian Hennah

That was -- that was it. I'd only heard the second question.

Olivier Bohuon

And you have a follow-up question, you said?

Matthew S. Miksic - Piper Jaffray Companies, Research Division

Yes, a follow-up question on you had talked a little bit about looking at acquisitions in emerging markets. And I'm wondering if you could be -- is it more specific around perhaps the lines of business that you're looking at, expanding lines of business in the emerging markets that you're in or is it more of a product line additions or distributor-type additions?

Olivier Bohuon

Yes, it's actually both. It's -- it could be products and we have some targets, it could be distributors, it could be manufacturing platforms or it could be companies. So we are looking at this on a pretty wide basis. So regarding the line of products, it's almost everywhere, actually Ortho, Endo and wound, yes, I think. So that's what I can tell you, but it's pretty general, yes.

Veronika Dubajova - Goldman Sachs Group Inc., Research Division

That's great. Veronika Dubajova here from Goldman Sachs. Three questions, if I can. First of all, on the margin guidance, midterm, I think you've put in the sentence in the presentation thing, it excludes the impact of the excise tax, which of course, brings me to the question we tackled last results, which is when you do think about the excise tax impact, do you think you can absorb it? And if so, how quickly? The second question I had was Negative Pressure Wound Therapy sales. If I remember correctly, a year ago you said the run rate was around $100 million. I was wondering if we can get an update on that? And the last one was in terms of product launches, AOS or otherwise. I think normally you include a slide in terms of the plan for the full year and I didn't see one in the presentation this year. So if you can run us through some highlights that you're planning for 2012, that would be really helpful.

Olivier Bohuon

On the Negative Pressure, did we really say $100 million?

Adrian Hennah

The run rate in quarter 4 last year was $100 million, significantly above $100 million now, I can tell you now.

Olivier Bohuon

Exactly. So it's much more than that actually. And so that's good, first question. Second question -- and actually we're very active with this Negative Pressure Wound Therapy, so that's what I can tell you. You take the rest, Adrian.

Adrian Hennah

Yes, I mean on the excise tax, I mean I guess there's 2 ways of absorbing it as you described, Veronika. One is what is going to happen to pricing. And one is what can you do about the costs to compensate. And pricing, who knows? I mean we're just going to see what happens. It's a marketplace issue. It's not a company-specific issue. And who knows? We're just going to have to wait and see. And as regards the cost absorption, well, you've heard our intent. But we're also not putting a date to that intent because there's a lot of variables that can happen, including this one. So we expect to have to fight hard to deal with this one. How much will be left after the price issue? We don't know, which is why we’re deliberately carving it out as an uncertainty framing. Not very helpful, Veronika, but it is what it is.

Olivier Bohuon

Nobody knows on this tax increase, that's -- it's very...

Adrian Hennah

Yes. And then lastly, on AOS, we do normally put in, as you say, a pipeline except for our quarter 1 numbers because it's usually just before AOS and then we say we won't do that. We'll do it when we get to AOS. So that's why there isn't one this time, Veronika, but there will be one next quarter after the AOS.

Veronika Dubajova - Goldman Sachs Group Inc., Research Division

[Indiscernible]

Adrian Hennah

No. Go to AOS.

Olivier Bohuon

Go there.

Unknown Analyst

Two questions relating to emerging markets. Firstly, on the costs, it looks like in the cost-saving program, there's relatively little of that coming from the cost of goods sold line, and you're also sourcing relatively little in low-cost countries and manufacturing and all that. Should we expect a sort of second part or another program starting later where you're addressing more the cost of goods sold line in addition to this $150 million savings? And what of timescale should we be thinking about here? The second question is on your target for sales in emerging markets to increase fivefold over 5 years, I think it was. How back-end loaded should we expect that to be?

Olivier Bohuon

On the sales, all will depend -- again, we sell $150 million in the emerging markets, in the BRIC countries, okay? Out of the $430 million, I think, that we have between international markets and emerging markets. So if I just keep the BRICs, we have a growth here, which is -- I mean the organic growth of the business is around 40%. Actually, a little bit less than that, but it's in China. India was almost 50%. So it is -- you can make a calculation out of the pace of growth of this. On top of this, everything which will be acquired will help mechanically to help that. So I'm very confident that things would move very quickly on this field. I don't think there is any risk, I tell you, at least fivefold, something which is a pretty easy to wait, actually.

Adrian Hennah

And in terms of the costs to emerging markets, it's not a question of another phase, it's in this phase. I mean, we -- around the quarter of the -- we expected the benefit of $150 million will be cost of sales and that is largely local sourcing, and we have -- I think we referred in the announcement to a recent approval of an extension to our Suzhou factory. The Suzhou factory had been tremendously successful in the wound business and we plan to build on it and build on it quickly.

Unknown Analyst

Just one quick follow-up there. So what percentage from low-cost countries would you then be sourcing and manufacturing at the end of this?

Adrian Hennah

We don't have a specific target for that now. But it'll be -- it'll go north. There are constraints on it. I mean there are practical constraints, things like – it’s a lot of [indiscernible] as you well know from other companies you follow. So we haven't got a -- we don't have a goal to get to. That doesn't seem like a sensible thing to have but it will clearly be north of where we are now, materially north of where we are.

Olivier Bohuon

We're at 10%, 11% -- 10% to 15% now, so I guess it will be much more than that, yes.

Unknown Analyst

I have 2 questions. First of all, on the manufacturing side again. Can you give us a sense of does it -- whether it makes sense for you to relocate some of the manufacturing for Ortho and Endo to lower-cost countries? And then for Wound Care, based on what you have at the moment, is there further scope to move that? And then the second question is you've provided your guidance relative to market for the different businesses. Can you give us your assumptions for the market?

Olivier Bohuon

No, we can't and we don't do that, actually. We don't give assumption for the markets, unfortunately. That's what we do. Regarding the changes in manufacturing, yes, potentially. But again, we believe at this stage that we have very strong and good facilities in Andover, in Memphis. There is a lot of things to improve there in terms of cost of good management, in terms of manufacturing productivity before thinking about moving these factories. However, when I'm talking about the emerging market development, we obviously have 2 ways of looking at it. A, the existing portfolio of products that we sell in the emerging markets and here we have to improve the cost of good, and we're not going to move these manufacturing at this stage, okay? We manage cost of good and we have a pricing policy in the emerging market for the high tier, which will change. B, for the new portfolio of emerging markets. Here, definitely we will [indiscernible] manufacturing of Ortho, Endo change the manufacturing footprint and manufacture much more locally as we do actually in China, in Beijing for the Ortho business, for example.

Unknown Analyst

A couple of questions. Firstly, just on the wound stocking, you put out the revenue impact. I just wondered what the impact on margins was from that stocking? Secondly, you saw a big increase in margin, particularly in Endo and wound in the fourth quarter. I just wondered how much of that was just early delivery of the cost-savings program that you were perhaps anticipating previously? And then finally, in terms of -- it looks like you're going to be reporting international revenues going forward. I just wondered what the margins, relative margins, were in those emerging markets compared to the rest of your business and whether you'd be reporting those going forward as well?

Adrian Hennah

Yes. Sorry, the first one was wound margin?

Unknown Analyst

Yes, the impact from the stocking. Is there any positive impact?

Adrian Hennah

Marginal, but not significant. I mean, yes, when you have a slightly extra sales that can sit one side or other appear depending on the customer wants is going to slightly affect the figures, but not materially, frankly. And then your second question was the margin improvement in Endo and Ortho in the quarter was that bringing forward the...

Unknown Analyst

Yes, was it actually early [indiscernible]. Did you manage to let go of more people than you were anticipating originally and therefore it's just a timing issue rather than...

Adrian Hennah

The people -- the positions that were eliminated in Endo and Ortho in quarter 4 absolutely are part of the program. There's no question about that. Most of those did not happen until towards the end of the quarter. So the movement you have seen in the quarter was only in small part attributed to that. It is simply because it was a phasing, which didn't happen till the end of the quarter. So actually, in the quarter, more of the benefit was around tough cost management, not all of which is sustainable. I mean some of it is just stopping things that you don't stop forever. You need to get back to it. They will not continue. We’re back to those now. But the stuff that was started towards the end of the quarter will continue to yield benefit and there'll be more of that, if that answers your question. And then the emerging markets, what are the margins? The -- I mean it’s -- we're very clear. Olivier mentioned 2 or 3 times in different context already that there are different types of product for emerging markets. And our goal, over time, is to very much tailor what we have to the different parts of the emerging markets in that seek to bring up the margin to a much more level closer to where it is for the corporation as a whole. Today, that is not the case. Today, both because we still mainly sell top-end product, both at top end in the emerging markets but also in the middle end, it drags down your margin. But also we are at a phase of investing in SG&A really quite heavily in the BRICs, which also brings down your margin. So today, in the BRIC countries, no, the margins are very low indeed. When you take together rest of the investment in SG&A and the fact that we do not have a complete range of mid-tier products, which will be designed to be -- will be designed for the price points that are in the mid-tier. Actually, in the other international markets, those parts of EM and IM, which we call without the BRICs, the margins are pretty good actually, but there we’re not as investing as strongly in SG&A. Does that make sense?

Operator

We’ll now take our next question from Jason Wittes from Caris.

Jason Wittes - Caris & Company, Inc., Research Division

Just another question on emerging markets. You're obviously spending -- refocusing a lot of effort there. What's a realistic outlook in terms of the percentage of your revenues that you would -- could expect to cover emerging markets in the mid and long term?

Olivier Bohuon

Well, I said that it will be more than $500 million in the next 5 years. What is the percentage? I leave you to make the calculation of what it means. It will be significantly higher actually than what we have now. And again, emerging markets here I'm mentioning -- when I say emerging market, it's BRIC. Don't be -- we still have a very high-growth expectation for the international markets, led by South Africa. We, by the way, we have a rich -- for the first time in South Africa, more than $100 million. That's a big operation for us, with very strong margin and 30% market share. So that's what – so we expect to do on this everywhere we can. So yes, but again it will be a good part of revenue. Again, I'm not pushing too strongly the pace of growth in the emerging market until I have the right basis to make a profitable growth. So it means manufacturing footprint and it means revisiting the price policy that we have for the high-tier products.

Jason Wittes - Caris & Company, Inc., Research Division

Okay. And also obviously, there's continued pressure on metal-on-metal. Did you guys provide what percentage of your hip revenues, U.S. and worldwide, are metal-on-metal at this point? Any idea of what your exposure is – where your exposure lies at the moment?

Adrian Hennah

It's 12% across the globe. We haven't split it between the U.S. and non-U.S. But global, it's 12%, or thereabouts, so that our hip revenue is in BHR and it's declining at, as Olivier mentioned, 20%, and has been for some time, sadly. But we see it as a great product.

Unknown Analyst

Yes, on the wound business, the durable medical equipment program has been expended this year in the U.S., and the bidding process we believe is going forward in the next couple of quarters. Can you give us an idea about how much the wound market in the U.S., the negative pressure wound market in the U.S. is going to be effectively up for tender? And how much an opportunity you believe there can be for you as you obviously tender against KCI?

Olivier Bohuon

It's a -- we have a few figures here. The negative pressure in the U.S. is $1.7 billion market, which is a big market. It's the biggest in the world, which mean that we in Europe and the rest of the world are very underdeveloped in negative pressure, which is a good sign, which means that we will have a huge number of opportunities here. The growth of our business in Wound in the U.S. has been roughly, I think, 6% and global with about -- market growing at about, I think, plus 3%, correct me, in the U.S. And when I was telling you that I think that we do great, and actually the negative pressure was very, very high growth within this part, we gained market share in negative pressure. We have about 60 people promoting negative pressure versus about 800, 900 with KCI. So this shows you gaining market share within this concept means how good is a product and how good we are in providing these products. So that's why when I'm telling you I want to reinforce our share of voice and our strength in the U.S. either through acquisitions or through reinforcement of our sales force, that's what I mean here. There is a huge potential. So I'm very optimistic about the future growth in the Negative Pressure Wound Therapy in the U.S. and the rest of the world.

Unknown Analyst

And just a quick follow-up. I mean, do you have a feeling of how much of the – of say, KCI's current business is effectively going to be up for tender? And what proportion of the U.S. market?

Adrian Hennah

No, we do not have a good feel of how that's going to place. It's still pretty fluid. And I would say compared to 18 months ago when we saw those tenders, there's definitely a good way to get in there. They still are, but actually as our offering has got much more complete and we've demonstrated our capabilities so much more effectively to customers, it's no longer as important a tool for getting KCI out as it used to be. If it happens, well, obviously, we'll be in there and using every ability which we can, obviously.

Unknown Analyst

I've got 3 questions but 2 of them are quite quick. Just on the repair business, you've turned in yet another quarter of very, very solid growth. It'd help if you'd give us a little bit color as to where the growth is coming from in terms of price mix and volume. And on the volume side, I mean how much share you're taking and how much is underlying market growth? I suppose what I'm really trying to drive at is how long can you continue to drive that business along with a double-digit rate? The second question is just a follow-up on Veronika's wound question. I think for – back to that 4% coming from NPWT out I get to a run rate of about $140 million and just a vague comment as to whether that's in the right ballpark or not would be helpful. And then the third question, a follow-up on Marcus' question about restructuring charges. Irrespective of where the bean counters telling you, you have to put it on your P&L. This will be the sixth, I think, consecutive year of restructuring charges, the eighth year in '11. Do you think it's about time as shareholders and investors we started to think of these as an ongoing cost for your business and start to factor that into how we think about the business and maybe we should think about some of these costs being more sustainable going forward?

Adrian Hennah

Good question. Well, first, in the first 2 -- well, no, the first one I think is a very positive answer. We absolutely see this business as sustainable. And that's why we're very keen to focus on the minimally invasive part of Orthopaedics. We’re very pleased that, that's the part of the broader orthopaedic market where we're most, in market share terms, strong. There is lots of innovation happening in that field. And there’s a second important driver, which we've talked and that is the Arthroscopy, minimally invasive approaches to the joint, they are the newest form of orthopaedics and the specialty has had its deepest roots and it's most established in the United States. That tends to happen with these things. In other parts of the world, it's less established. So you've actually got another driver as you get outside of the U.S.A. that more people are training in it. And I always find it interesting, if you look at young orthopaedic surgeons being trained generically as orthopaedic surgs now and ask where do they want to go? Well, more and more of them want to go the arthroscopic route. They see that as the route for the future. So for all those reasons, we are very comfortable that there is sustainable growth with technological advancement and a spread outside the U.S. of the specialty as it is today in the U.S. So we are very comfortable with that. We are -- to your narrow part of your question, we are seeing much less price pressure in the arthroscopic field than we are in implants for obvious reasons. And I wouldn't say we're seeing price increases, but we're not -- certainly not seeing the same price pressure. And the growth is coming very helpfully from volume and somewhat from mix. Your calculations in NPWT aren't too bad.

Olivier Bohuon

One day we'll disclose it. We'll make a...

Adrian Hennah

Yes. And your point about restructuring charges is a good one. And clearly, at the end of the day, this is shareholders’ money that's coming out wherever you put it in the books. We -- transparency's very important to us. So doing these programs, being very clear what the costs are, where they come from so the shareholders can make their judgment is very important. Clearly, as we look forward, we see this as a 3-year program. It is important, it will be important as you get to the end of this program well, where are we? What is the environment? Can one sustain that in the total environment without having to need more fuel like that. It's hard to predict precisely 3 years now. But that has -- that would be the -- that will clearly be the goal in the best functioning companies, wouldn't it? So you wouldn't have to do these things. But now isn't a question that makes sense. We have to do this that will be a significant benefit for shareholders from doing this. Good, I think we're done.

Olivier Bohuon

Done? Thank you.

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