Smith & Nephew Plc (SNN) Q4 2016 Results - Earnings Call Transcript

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Smith & Nephew Plc (NYSE:SNN) Q4 2016 Earnings Call February 9, 2017 4:00 AM ET

Executives

Olivier Jean Bohuon - Smith & Nephew Plc

Ian Melling - Smith & Nephew Plc

Michael G. Frazzette - Smith & Nephew Plc

Phil Cowdy - Smith & Nephew Plc

Analysts

Veronika Dubajova - Goldman Sachs International

Tom M. Jones - Joh. Berenberg, Gossler & Co. KG (United Kingdom)

Chris Cooper - Jefferies International Ltd.

Michael K. Jüngling - Morgan Stanley & Co. International Plc

Gunnar Romer - Deutsche Bank AG (Broker)

Lisa Clive - Sanford C. Bernstein Ltd.

Jimmy Muchechetere - Investec Wealth & Investment Ltd.

Julien Dormois - Exane SA (Broker)

Ines Duarte Silva - Bank of America Merrill Lynch

Olivier Jean Bohuon - Smith & Nephew Plc

Shall we start? Good morning. Big room, small audience. I think many colleagues are joining by phone today. So, good morning, ladies and gentlemen, and welcome to our Full Year Results Presentation. First, let me introduce my team here today. Sitting at the front, you have Graham Baker, our new CFO, who will start his role on March 1. So, Graham, welcome. You have also here on stage, Mike Frazzette, the Chief Commercial Officer, who I am sure you all know. Next to Mike is Phil Cowdy, head of many things. And then we have Ian Melling, our Group Controller. Ian has been with Smith & Nephew for many years and has successfully held a number of different role in our finance organization. He was in the U.S. before supporting the manufacturing operations.

So, I will start by covering the highlights of the full year, followed by a review of our fourth quarter trading performance. Ian will then take you through numbers and I will conclude with a look into the future. And as usual, we'll take the questions at the end.

The underlying revenue growth in 2016 was 2%. Currency reduced growth by one percentage point and the net effect of acquisition and disposal was neutral. How would I sum up 2016? Well, I would say, it was a mixed performance. We have many highlights. The strong growth in Sports Medicine Joint Repair franchise, continued at 8%.

Our robotic-assisted surgery platform, which we acquired with Blue Belt at the beginning of the year delivered growth in excess of 50% as we guided. And our Reconstruction business grew at 2%, led by Knees at plus 4%, with a strong growth of our JOURNEY II platform. And PICO is transforming and expanding the way negative pressure is used and its strong growth is continuing.

There were also some headwinds. Firstly, we faced microeconomic headwinds this year and excluding China and the Gulf States, our growth would have been around 3% underlying. Secondly, we have experienced disruption in certain countries where we have reorganized and relocated, and I will talk later about why we did this and why I expect this to improve in 2017. Thirdly, our own execution, which at times has not been as good as I expected and I know we can do much better, and I will come back also to this later to talk about what we are doing to improve the performance.

With this backdrop, trading profit was just over $1 billion, giving a trading margin of 21.8%. Significant headwinds from transactional exchange, Blue Belt and lower than anticipated sales have been partially mitigated by Group optimization to leave net decline in margin of 190 basis points.

Today, we also declare a total dividend of $0.308 consistent with our dividend policy. The declared dividend is maintained year-on-year despite a decline in adjusted earnings of minus 3%. For our UK shareholders, at current exchange rate, this translates into 24.8p per share, representing around 20% growth due to the weaker sterling.

So, turning now to our Q4 trading performance, as usual, this slide captures our underlying growth on the left-hand side geographically and on the right-hand side by product franchise. In the fourth quarter, we have seen a continuation of many of the trend that we saw in the first nine months. The impact of four fewer selling days hides these consistent trends when you look at the growth rate on this slide. The Group delivered minus 1% underlying decline in revenue, and we estimate this would have been closer to growth of 3% adjusting for days, a slight improvement on Q3.

Selling days impact our Surgical business more than our Wound business and more our Established Market than the Emerging Market. In the following discussion, the Q4 growth rate are not adjusted for selling days effect. So the U.S., our largest market, was flat. In the Other Established Markets, sales declined 3%. In contrast, we expected our Emerging Market posted another quarter of positive growth, delivering plus 3%. Within this, China grew at a high single-digit performance.

Our China business has been improving and tracking the guidance we provided our first half results. Going into 2017, we still have the tail end of destocking in Wound in China. In the oil-dependent Gulf States, we'll lap the comparator in Q1 2017, but we don't expect a strong rebound in activity at this stage. Performance across all other Emerging Market countries has remained very strong. Growth in Emerging Markets excluding the Gulf States has been 10%.

Across our individual franchises, our performance in Sports Medicine Joint Repair, robotics, and ENT were highlights and now turning to this in more details. Sports Medicine Joint Repair grew 5%. The growth is broad-based across our Shoulder, Knee and Hip product. In Enabling Technologies, good demand for COBLATION technology has continued and our next-generation WEREWOLF is in its launch phase opening up the large Knee Repair market to COBLATION technology.

Our new Surgical Imaging System, LENS, has been well received and with this important product launch in the way, we have an exciting year ahead. Our Trauma & Extremity business declined 4%, and the Emerging Market growth continued to be held back by reduced tender activity in the Gulf States while momentum in the U.S. remained good.

In our Other Surgical Businesses, revenue was up 15%, and we had another good quarter in ENT, and robotics is progressing well. In Q4, we sold our first NAVIO robot in India.

So, turning now to Reconstruction, globally, our Recon Implant revenue was down 2%, which when adjusting for fewer selling days in the quarter reflect growth around the market rate. Global Knee performance was driven by continued strong uptick of JOURNEY II, our kinematic knee, in a number of Emerging Market. ANTHEM, our Total Knee System, creating a fit-for-all ethnicities, has been rolled out.

Within our Hip franchise, we continue to focus on the rollout of our REDAPT Revision System for Hips, which nicely fills out our portfolio and which is starting to contribute to growth.

eCAP initiative for joint replacement procedures, where we offer a combination of our Wound and Recon products, have seen strong customer interest and we announced in November the adoption by a large U.S. provider network.

So, moving on to Wound Management, Advanced Wound Care revenue declined 3%, the sustained turnaround in the performance in the U.S. was again masked by destocking effect in China and ongoing weakness in a couple of European countries which we are addressing.

Advanced Wound Bioactive finished the year with 1% growth as expected, and performance continued to be impacted by ongoing reimbursement headwinds for OASIS. Prescription volume growth trends for SANTYL have remained consistent with the recent quarters.

Advanced Wound Devices grew at plus 2%, continuing the strong underlying trend of PICO, our disposable negative pressure wound therapy device. From 1st of January, PICO is reimbursed in the home health setting in the U.S., and we expect this good momentum to continue.

And I will now hand over to Ian, who will take you through the number, and I will come back to talk about the future at the end of Ian's presentations. Ian?

Ian Melling - Smith & Nephew Plc

Thank you, Olivier, and good morning, ladies and gentlemen. Just completing our Q4 commentary, this slide illustrates the adjustments between underlying and reported revenue performance for Q4 and the full year.

In Q4, the business delivered an underlying revenue growth of minus 1%. There were four fewer selling days in Q4 compared to the same period last year. As Olivier said, adjusting for days, we estimate our underlying growth would be in the region of plus 3%. The numbers on this slide do not adjust for that. Acquisitions and disposals reduced the reported growth rate by one percentage point. This is primarily due to the GYN disposal. Currency was adverse by 1% for Q4. And hence, in reported terms, Group revenue declined in the quarter by minus 3%.

For the full year, underlying revenue growth is 2%, with Established Markets growing by 2% and Emerging Markets flat year-on-year. The overall impact from our acquisitions and disposal was neutral. The full year currency headwind is minus 1%. And reported revenue, therefore, has grown by plus 1% for the full year.

Turning now to the financials, this slide shows you the financial highlights for the full year. Revenues were nearly $4.7 billion, and we have already talked about the moving parts around this. In the following slides, I will look at each of the other line items in turn, starting with the income statement.

First the trading income statement, with additional details shown in Note 9 to our announcement. Our gross margin for the full year was 72.8%, 250 basis points down on the prior year. On currency, as expected and previously guided, we have experienced transactional headwinds. The headwinds are higher than 120 basis points on the gross margin, with some offset in SG&A. On price, we faced similar pressures to last year of minus 1% to minus 2% overall.

Turning to SG&A, our selling, general and admin expenses reduced to 46.0% of sales, supported by our Group optimization efficiencies. R&D remains around 5% of sales, and now turning to our trading margin for the full year of 21.8%. The key drivers of the 190 basis points decrease in our trading profit margin are set out on the right-hand side of the slide.

Firstly, in line with our expectations, the margin was impacted by adverse transactional exchange and dilution from the Blue Belt acquisition, totaling approximately minus 180 basis points on the full year margin. The GYN disposal also impacted by minus 10 basis points, as previously guided. The impact of slower-than-anticipated sales growth on our leverage continued to hold back our margin. This has been partly offset by the benefits of the Group optimization program, for which substantially all cost and benefits are now incurred.

Now, a review of adjusting items between our trading profit result and reported operating profit. Acquisition-related costs of $9 million relate primarily to the Blue Belt acquisition. Restructuring costs of $62 million relate to previously announced structural efficiency programs, primarily Group optimization. Amortization of acquisition intangibles of $178 million is slightly higher than what we guided to. The reimbursement headwinds faced by our OASIS skin substitute have resulted in an impairment of $32 million. Legal and other includes a $44 million credit in the current year, related to the closure to future accrual of our UK-defined benefit pension scheme. The prior year included a one-off charge of $203 million relating to metal-on-metal claims.

After these items, Group operating profit for the year was $801 million. At the bottom of the slide, below the operating profit line, there is a meaningful adjustment that I would like to flag, the profits on disposal of our GYN business of $326 million.

Now a review of the movements in EPSA for the year, starting from trading profit of $1.02 billion. Net interest costs in our trading results were $46 million, compared to $41 million last year, due to the higher levels of net debt after the Blue Belt acquisition. Our tax rate on trading results for the year was 23.8%, 300 basis points lower than last year. We originally expected a tax rate of 26.5% or slightly lower for the year. As stated at our Q3 trading update, we reached an agreement with the IRS on a historical U.S. tax matter and received a one-off benefit.

Taking these factors into account, along with the impact of the share buyback in the second half of the year, EPSA for the year was $0.826, a 3% decrease on a reported basis. Reported EPS for the year was $0.881, representing a 92% increase. This includes the gain on sale of our GYN business in 2016, and the prior year period included the one-off metal-on-metal claim discussed previously.

Now turning to cash, here is the trading cash flow for the full year. We generated trading cash flow of $765 million. As expected, cash conversion improved to 95% in the second half of the year, with an overall cash conversion of 75% for the full year. In working capital and other, our inventory turn improved slightly, supported by the benefits from our global inventory transformation program. However, regarding debtors, days of sales outstanding deteriorated slightly. We continue to focus on improving working capital.

Capital expenditure has increased in the current year as we support the ongoing rollout of our JOURNEY II platform with additional instrument investment. Items outside of trading cash flow include cash flows related to our Group optimization program and one-off legal items. Overall, free cash flow for the year was $457 million.

Now turning to capital allocation, we started the year with net debt of $1.36 billion and generated free cash flow of just under $850 million before CapEx. Capital expenditure was $392 million, reflecting investment in instrument sets, as I just mentioned, IT systems, and manufacturing facilities. Dividends paid were $279 million.

Our acquisition spend, mainly relating to Blue Belt, was broadly offset by our net cash inflow from the disposal of our GYN business completed in August 2016. We completed the subsequent return of cash to shareholders via a one-off share buyback based on the consideration achieved. And at the end of the year, we closed with net debt of $1.55 billion at a net debt-to-EBITDA ratio of 1.2 times.

I'll now hand back to Olivier.

Olivier Jean Bohuon - Smith & Nephew Plc

Thank you, Ian. So, let me come back to the things I raised at the beginning of my presentation, and I want to put 2016 in the context of a journey of improving Smith & Nephew and making it prepared and fit for the future. Over the new few slides, I will remind you of what we have achieved over the last five years, where we are today, what I mean when I say that 2017 is a year of improving execution, and what you should expect going forward.

Our confidence in the future and the building blocks we have put in place means that we are moving away from our historical way of giving indicative guidance to a more concrete numerical format. First, I will start the summary of our strategy, which is unchanged. In mid-2011, I laid out our strategic priorities and this remains our priorities today. I continue to believe strongly that they are the right levers to achieve our ambition. Through executing on these priorities, we aim to shift the balance of the business from two-third in the lower growth segment to being two-third in higher growth segments in the future.

We have made significant progress and where we stand today, the balance of the Group is roughly 50%/50%. I firmly believe that operating in attractive faster growing markets with room for innovation will serve our company best for the long-term.

Turning now to a reminder of the key actions we have taken in five years. Firstly, investments. We have invested behind every one of our five strategic priorities, reinforcing our growth platform and simplifying and improving our infrastructure. We have increased spending on R&D and we have a very exciting near-term pipeline that we are rolling out, and I will talk more about it later.

Since I arrived, we have prioritized the Emerging Markets, investing in our people and infrastructure and making acquisitions. This has driven our Emerging Market to become about 15% of our sales, up from about 8% when I laid out the plan.

We have also built a strong M&A track record by executing and integrating on both the small and large acquisitions. We have (18:44) Healthpoint or ArthroCare always with rigorous focus on creating value.

Secondly, the significant changes in our organization, I am passionate believer that the successful implementation of strategy depends on having the right structure in place. And since 2011, we have completed a transformation of our structure with the last piece coming together in 2016.

Nevertheless, our performance has not been as consistent over the years as we expected. And let me now turn first to 2017 and give you some more details and few examples of how we'll deliver and improve performance going forward.

First, let me explain how our competitive (19:26) structure will enable us to drive better execution. The changes we have undergone have been profound and I recognize that this has caused some disruption. With the structural change in place, the focus of the whole organization is clearly on driving higher sales, greater productivity and meeting our goals. In this simple structure, we have three global organizations: the global commercial, the global operations and a single R&D organization. These are supported by global functions: HR, finance, IT, legal and so on.

This structure allows the organizations to focus only on what they need to deliver. Commercial needs to deliver faster uptake of new product, greater sales force effectiveness, better pricing management and better communication of our compelling clinical and health economic evidence to customers. Global operations must ensure uninterrupted supply and high consistent quality of our products, swift dealings with the regulatory authorities and improved productivity and inventory turns. And I will talk about R&D on my next slide.

We have also moved to a single-country manager model with one managing director rather than three or four per country. We have a single voice to the local market. We are able to collaborate and share resources between franchises and to focus and deliver on the strategy that really matters in the country.

One of the problems with our historic structure was that I could not drive the adoption of best practice tools and initiatives consistently throughout Smith & Nephew with different franchise silos that we had in the past.

Now, there is accountability and leadership focus on using these tools. What does it mean? It means improving our sales force training, customer segmentation, adoption of incentive program that are aligned to our goals. It means adding a more rigorous pricing structure and supporting it with more real life health economic and clinical data. It means adopting how we interact with our customer, market access, recognizing and meeting the needs of the increasingly influential procurement teams.

There are still investment to be made and first and foremost in our growth platforms and new products. We're still in an improvement phase when it comes to infrastructure and systems. We're investing in our supply chain, we're implementing our ERP system in the U.S. following the recent rollout elsewhere in the world. And we are also (22:01) the shared business services platforms.

Having complete structure in place will allow us to deliver better consistency and drive faster responses to headwinds, which is why I'm convinced you will see improvements in our performance in 2017 and beyond. This tells the story of how we are improving the execution, and clearly this would not be possible without (22:26) products and good platforms.

Talking about products and platforms, R&D is an area where we've increased our investment. The final piece has been our recent move to a global single R&D organization. And we're now in a better position to take Group-wise strategic decisions, for example, on what competencies we must build internally and in what areas it serves us better to use external resources.

We have been able to bring some of these competencies together and create stronger areas of excellence. One example is digital; from the potential benefits of connected product to the use of big data and robotics. Bringing this knowledge together from disparate R&D teams gives us the critical mass to invest further and make bigger and bolder investment in this area.

Under the structure, we'll spend even smarter and we'll make better decision for the Group about where we invest. We have some very exciting products in our medium-term pipeline and this is what makes me so confident in the medium-term and long-term outlook for the company. For the near-term, we have the strongest lineup of products we have ever had. For example, our JOURNEY II platform continues to expand with our groundbreaking XR bi-cruciate retaining system in the early evaluation with the customers.

In Hip Revision, in area where we have historically had a gap in our portfolio, the feedback from our early experience with REDAPT has been very positive. On the NAVIO robotics system, we're expanding indication and the Total Knee is just a start.

Our Joint Repair franchise has really benefited from the complete (24:04) solution that we rolled out. WEREWOLF and LENS are completely renewing our offering in Arthroscopic Enabling Technologies. Our evidence-based campaign for TRIGEN INTERTAN nail has helped drive an acceleration in sales. And PICO is powering ahead, supported by (24:24) evidence and improved reimbursement. And you will hear about all these at the AAOS and I look forward to seeing many of you there.

This brings me to our formal guidance for 2017. And as I said earlier, we have moved to a more concrete and numeric form of guidance reflecting our confidence in our own performance. In 2017, we expect to deliver high revenue growth of 3% to 4% underlying. This is before foreign exchange where we currently expect around one percentage point headwind and divestment of GYN was an impact of 0.8 percentage point.

Foreign exchange rates remain highly volatile and we will update our expectation for reported growth as we go through the year. On the trading margin, we expect to improve upon 2016 by 20 basis points to 70 basis points. Remember that the step change in the dollar exchange rate represents an ongoing change to our margin. On tax rate, we expect around 26% which will be a modest underlying improvement while adjusting out the one-off tax benefit that we had in 2016.

Please note that there is further technical guidance provided in the appendix of this presentation as usual. In the medium-term, our ambition remains to consistently outgrow the market we operate in.

With regards to trading profit margin by driving increased productivity in an organization that is more scalable, we expect ongoing and sustainable improvements. The exact number will depend on level of sales growth and where it is coming from and our level of investments in the future. Looking at our structure, we should deliver an average of 10-basis point to 15-basis point improvement per annum as we drive higher growth.

Finally, we will continue to focus on capital efficiency. And as you have seen us do this year, we focus on investing for the future organically and through M&A. And if we have excess cash, we're disciplined about returning it to our shareholders.

So, to conclude, I see a stronger Smith & Nephew in the future. And perhaps, I did underestimate the transformation required when I first set out the strategy or indeed the impact it could have had on our performance. But now we are here. Our Group's fundamentally transformed in structure, in focus. We are in a strong and unique position and we have a long list of growth driver for the near-term. And I'm delighted to be back full time also in the driving seat, and I'm very optimistic about the future for me and for the company.

That concludes my presentation. We'll now take questions. And please can we ask you to limit the number of question to two to give as many people as possible the opportunity to participate. So, thank you very much.

Question-and-Answer Session

Veronika Dubajova - Goldman Sachs International

Great. Good morning. Veronika Dubajova from Goldman Sachs. I have two questions, please. Olivier, the first one is a strategic one. I think you have previously said that you believe that this business can grow at around 5% organically.

Olivier Jean Bohuon - Smith & Nephew Plc

Yes.

Veronika Dubajova - Goldman Sachs International

I guess, can you give us your thoughts on how long until we see that 5%? Is that a question of 2018 or further than that? And related to that, how should we be thinking about operational leverage in that kind of environment? What would be the margin improvement that would come with that 5%?

And then my second question and that may be more for Ian than for you, Olivier, is do you have any general thoughts on the impact of any tax changes in the U.S. corporate tax rate system, either just an overall lowering of the tax rate and what'd that mean for you or a border adjusted tax rate? Thank you.

Olivier Jean Bohuon - Smith & Nephew Plc

Thank you, Veronika. Can you hear me? Yes. Thank you for your questions. So, on the first question, do I believe that this business can go to a 5% growth and when? Yes, I do believe this business could reach 5% growth. And there is no doubt, I mean, we have to have some luck with the market, obviously. And I think that what we can do in terms of growth is our organic business development will help us to reach this figure. When? I don't know. I mean, we gave you the guidance for next year which is 3% to 4%. Is it in 2018, is it in 2019? I don't know, and I'm not going to give you any views on this.

But, yes, I believe we can do that. I'd tell you, I did underestimate, and I have to be very honest about this, the disruption generated by the changes, big changes that we did in the company. It took us five years to make this happen. Why? Because I think it would have been a disaster without this time scale. We now have everything in place. We have the single managing director per country. We have this R&D which is now extremely well understood and managed, I mean there's number of things here which make me believe that this will be the real start of Smith & Nephew. And I will not tell you that if I was not totally confident. And that's why we give you now more data because we know that these things will happen.

So, 5%, 4%, I don't know. I mean the idea is to improve the trading margin as we said, I mean on a step-per-step basis. I think that we have been – if you think about the trading margin in 2016, 21.8%. I mean we have been – it has been impacted by three things basically, I mean 120-basis point of forex, 60-basis point of Blue Belt dilution and the GYN business divestment.

So, without these, trading margin would have been 23.7%, which is not bad actually. And so, I don't – I mean, I do expect that the company can for – because of the top line, because of management of the P&L, can grow year-after-year on the margin basis. And that's what we're going to do and that's what I'm going to be focusing on.

So, that is the answer to the question on growth and margin. Now, on the U.S., you want to take it?

Ian Melling - Smith & Nephew Plc

Sure. So, thanks, Veronika. As it relates to U.S., U.S. tax and what the Trump regime may or may not do, I wouldn't want to speculate exactly on that. But in terms of the U.S., we've been doing our modeling. We pay a lot of tax in the U.S. and so, lower tax rate would be a positive for us in terms of border adjustments. We're a net exporter from the U.S. at the moment, so that would probably be a good thing as well. Interest deductions, if there were changes to that, that would probably be a bad thing for us. So, we wait to see some more details as to how those things play together to work out the exact impact.

Olivier Jean Bohuon - Smith & Nephew Plc

Tom?

Tom M. Jones - Joh. Berenberg, Gossler & Co. KG (United Kingdom)

Thanks for taking my question. It is Tom Jones from Berenberg. First question on the guidance, I wonder if you could give us a little bit more detail on where you expect the 20 basis points to 70 basis points to come from. You gave us a nice breakdown of the factors that affected 2016 something similar in terms of FX, operating leverage, et cetera, will be helpful for your guidance for 2017.

And then the second question (32:27) or late last year, but I think it's probably appropriate to ask you again. One of Smith & Nephew's problems over the years has not been what you've done right; it's what's gone wrong. You just had kind of one headwind come after another. What can you say to us that can reassure your shareholders that you've put in place steps, procedures, whatever, to reduce the amount of missteps, to give it another word, because that's really been the fundamental problem over the years (32:55).

Olivier Jean Bohuon - Smith & Nephew Plc

It's true. It is true.

Tom M. Jones - Joh. Berenberg, Gossler & Co. KG (United Kingdom)

A good business at heart, but there's always something that takes the edge off the growth.

Olivier Jean Bohuon - Smith & Nephew Plc

Yes.

Tom M. Jones - Joh. Berenberg, Gossler & Co. KG (United Kingdom)

Stopping (33:02) that is kind of key to the outlook for the future, I think.

Olivier Jean Bohuon - Smith & Nephew Plc

Thank you, Tom. Let me answer the second question, the second part of the question. You're right. I mean, you're spot on. And we have always said that we're always working on three cylinders out of four. So, as I said to you last time, we have now six cylinders. So, when we work on five on six, it's better than three on four. So that we try to avoid the big issue.

Now, more seriously, I think that, yes, we have faced issues. We have faced metal-on-metal. We have faced RENASYS issue in the U.S. We have faced China. We have faced the Gulf tender. And those are big impact on the company. There's no doubt that there have been always bad surprises, and this has impacted dramatically, I'd say, our sales and our profit.

Now, I think that the business is more stable. I mean, the Emerging Markets, China is now recovering, with the exception of the Wound business, which is still more difficult, but globally it's a better business. The Gulf tenders, I don't think this will change dramatically positively in the short-term, maybe it will come back on near-term if the price of the oil goes up. So, this is behind us. I don't think this will happen again.

Now, we are in an industry which is always risky. We can always have a big recall. We can always have a big issue. We can always have – that happens. And I cannot predict it. What I can tell you is that we have built now a structure and a way of trying to get the right contingencies to avoid this type of issues in the future. If they are minor issues, I don't think it will be an issue anymore. If they are big stuff, who knows, I mean, I don't know.

I cannot promise anything, but what I can promise is that we have put everything together to avoid this to happen again, and I'm extremely conscious of what you have said always, actually, which is we have always a problem. Well, I hope that we'll not have any more problems in the future – and certainly not execution problems, because I think this is behind us also.

So, on the second part of your question, Ian, you want to take this, guidance on the margin?

Ian Melling - Smith & Nephew Plc

Sure. Yes. Thanks, Tom. In terms of the 20 basis points to 70 basis points, I don't think we're going to quantify specifically what's in there. Clearly, there a lot of moving parts in that margin number. Just a couple of things to bear in mind, GYN is – we have another half of that – of a year of that business to overcome, which is a similar headwind to what it was in 2016. FX, at this point, in terms of impact on the margin we see is broadly neutral, and there are no big one-offs to reverse from 2016. So, clearly, higher sales growth helps drive the operating leverage. So, that's where we are.

Olivier Jean Bohuon - Smith & Nephew Plc

Thank you, Ian. We are now going to get a question from the phone.

Operator

Okay. Thank you. We will take our first question today from Mr. Cooper from Jefferies. Please go ahead, Chris.

Chris Cooper - Jefferies International Ltd.

Morning. Thank you. Just firstly on the Wound business in China, perhaps you could just confirm my understanding here. I believe you're now saying the weakness is expected to continue through the first half. If I'm correct, I believe you were (36:45) by the first quarter. Can I just confirm my understanding there, and if there has been a change, can you confirm why. And I'll come back to the second question, if that's okay.

Olivier Jean Bohuon - Smith & Nephew Plc

Okay. Well, in China, we have said that, first of all, the business is showing significant improvement in China in general. We still have too much stock in the Advanced Wound Care business in the region. So, we expect this to remain as it is for the next four months, five months, six months and then to come back on a normal growth rate.

Chris Cooper - Jefferies International Ltd.

Okay. Just on manufacturing for the next one, can you just confirm how significant the new site in Costa Rica will be, and whether we can expect any meaningful cost advantages here? And how does any sort of proposed change in the U.S. tax legislation impact your plans there?

Olivier Jean Bohuon - Smith & Nephew Plc

Well, this has not been driven by U.S. tax. The move to – Costa Rica is a very important site for us. We have more than 1,000 employees in Costa Rica. This site comes from the acquisition of ArthroCare. It's a Sports Medicine site, which is state-of-the-art. We are transferring, it is true, some activities from the Boston area to Costa Rica. And again, this has for us a very positive impact. I mean the capacity that we have there is huge. We are going to do the WEREWOLF COBLATION System in Costa Rica in the future.

Chris Cooper - Jefferies International Ltd.

Okay. Thanks. I'll get back in the queue.

Olivier Jean Bohuon - Smith & Nephew Plc

Thank you. Are there question from the phone?

Operator

Yes. Our next question comes from Michael Jüngling from Morgan Stanley.

Michael K. Jüngling - Morgan Stanley & Co. International Plc

Yes. Thank you and good morning. I have two questions. Firstly, on the optimization program, what will be the incremental EBITA benefit that you have in 2017 over 2016? Second question is on RENASYS II. What are your expectations for a speed to recovery of the lost sales that you had previously? Are you able to collect 20, 30, (39:11) in recovered sales from that product? Thank you.

Olivier Jean Bohuon - Smith & Nephew Plc

Sorry, Michael. On the RENASYS, could you – I mean, are you talking about the U.S. here?

Michael K. Jüngling - Morgan Stanley & Co. International Plc

Yes. I'm talking about the U.S, because...

Olivier Jean Bohuon - Smith & Nephew Plc

Okay.

Michael K. Jüngling - Morgan Stanley & Co. International Plc

...in the past, I think you highlighted you lost around $40 million in sales.

Olivier Jean Bohuon - Smith & Nephew Plc

Yes.

Michael K. Jüngling - Morgan Stanley & Co. International Plc

And therefore the question is, as RENASYS II is rolled out in the United States, what is your ability to recapture those sales?

Olivier Jean Bohuon - Smith & Nephew Plc

Okay. Well, first, let me remind you that our negative pressure wound therapy strategy is driven by the market expansion of the portable negative pressure in the world, and not really on the traditional negative pressure. We have now received the regulatory approval of two devices, the RENASYS TOUCH and the RENASYS GO. And we're launching, actually, these products. We expect to have a launch which will not be an aggressive launch. The idea is not to get back on the competitors on this one, but really to have a sufficient base in the hospitals to generate more sales for our portable device negative pressure wound therapy.

And that has always been the case. And if you remember what we said when we have to stop RENASYS in the U.S., the idea was to say to you, well, we'll come back with TOUCH and GO and we'll not come back with the old RENASYS, so we had a gap at this time. And the idea was to come back slowly with this product, not to invest dramatically in the traditional negative pressure, but to invest much more in our portable device therapy.

Mike, you want to add something, Mike, on this?

Michael G. Frazzette - Smith & Nephew Plc

Just to reinforce, thanks for the question, Michael. I mean, our strategy in negative pressure has been from the get-go to focus on single-use disposable negative pressure and to further develop the market and shift the market to PICO which is our single-use disposable negative pressure.

We're reintroducing RENASYS TOUCH and RENASYS GO, as Olivier says. TOUCH, however, we do have a bit of an IP minefield to navigate through. So, we're being careful in the way that we're doing it. We do think that eventually those tabs (41:37) will be declared invalid. At the same time, we're looking at some workarounds from a design standpoint, but as Olivier said, we're not in a hurry to get back in the market with traditional negative pressure except to the extent that it helps us sell disposable PICO negative pressure which is doing quite well.

We've grown our negative pressure. Our PICO business doubled in size last year. We expect, as Olivier pointed out earlier, with the benefit of home health reimbursement in the U.S. to continue to drive that type of performance on an ongoing basis here.

Olivier Jean Bohuon - Smith & Nephew Plc

Thank you, Michael. On the optimization, Ian, you want to take this question?

Ian Melling - Smith & Nephew Plc

Sure. Thank you, Michael. Just in terms of Group optimization, as you know that program has been delivering ahead of plan and we're now substantially complete with all the cost of that program. There are some small benefits to annualize in 2017. But I would say the impact will be smaller than it was in 2016. And so, it will be a help towards our margin guidance.

Michael K. Jüngling - Morgan Stanley & Co. International Plc

Okay. Thank you. A follow-up question on RENASYS, I can't see why it would not be of interest to recapture the $40 million in sales that you had lost. Because initially the idea was to recapture the $40 million in sales and that's part of the reason, I guess, you also kept the sales force at its maximum force. So, why not recapture the $40 million?

Olivier Jean Bohuon - Smith & Nephew Plc

That's a good question. First of all, let me remind you that the traditional negative pressure market in the U.S. is not what it was used to be. If you remember, five years ago, this market was roughly a $1.6 billion market. We now have $1 billion market and even less than $1 billion market. So, the prices in this market are going south and south and south. So, again, it's less profitable. It's a lot of investment to do.

And here, I never said that we don't want to get back and to come back on this $40 million. I never said that. I said that we want to have a modest launch and we'll launch in the U.S. step by step because we have – and we believe more profitable return on investing in PICO around the world and in the U.S. included. And Mike was pointing out that we have doubled the sales of PICO, almost double, last year in the U.S. So, I mean, this works extremely well and we believe that on a long-term basis, the PICO and the portable devices are much more important or will be much more important than the traditional at-bed negative pressure instruments.

Michael K. Jüngling - Morgan Stanley & Co. International Plc

Thank you.

Olivier Jean Bohuon - Smith & Nephew Plc

So, we're going to take another question from the phone, because we have many people there.

Operator

Thank you. Our next question comes from Gunnar Romer from Deutsche Bank. Please go ahead.

Gunnar Romer - Deutsche Bank AG (Broker)

Gunnar Romer, Deutsche Bank. Thanks for taking my questions. The first one on PICO again. I think you said you almost doubled sales, I was wondering whether you can put an absolute number behind that and also share a bit your thoughts on the outlook in 2017 and how the competitive landscape is evolving.

Then secondly, on execution, I was wondering whether you can provide some more concrete examples around the pricing strategy and the sales force excellence that you've initiated. Thank you very much.

Olivier Jean Bohuon - Smith & Nephew Plc

Look, I'm going to answer pricing and the sales force excellence and maybe, Mike, you want to take the – Mike wanted to do both, but we'll share. So, I wanted to answer both, but I'm sure Mike will do a better job in answering the PICO question. Go ahead, Mike.

Michael G. Frazzette - Smith & Nephew Plc

On PICO?

< A – [063GWK-E Olivier Bohuon]>: Yes.

Michael G. Frazzette - Smith & Nephew Plc

I guess, the short answer on PICO is we don't provide the granular data on PICO. We do expect us to continue to grow. It's not a giant base, so doubling the (45:43). It's a good result for us. We expect to continue to grow at a pace similar to that. The competitive landscape, I mean, while we are very respectful of our competitors, we haven't seen anybody with a product in single-use disposable negative pressure that can compete with ours with PICO. We've got a pretty good pipeline of products. We're in limited commercial release right now of our 2.0 product. And we expect to launch that either at the end of this year or early next year, which will give us a whole another platform to launch many more derivative products in single-use disposable negative pressure. So, we're pretty confident about it. We like the position we're in.

If we can continue to move the market – remember that the vast majority of negative pressure patients that are using traditional negative pressure today can be moved to single-use negative pressure, which is why we're driving it that way, which is why going after the traditional business is not that important to us. It's important to be able to capture a piece of it because there's some of it that we can't move to single-use, but we like our position with PICO.

Olivier Jean Bohuon - Smith & Nephew Plc

Yes. And I would add, if I may, on PICO that few things make me extremely optimistic about the PICO development in the future. A, we continue to roll out on many countries, new countries, which is definitely a plus. Two, we have a number of independent studies that have been generated during the last two years, three years which are going now to arrive showing the value of PICO and not only on the classical Wound that we were used to have, but also on the GYN, on the Recon, on the all type of wounds. And I really believe that this is for me the future. And we have a great device, better device. We have also developments of this device that we expect to launch in the future.

So, I mean, nothing else and really big confidence in this product. And what Mike said is true. I mean it becomes, I would say, the basic use is now PICO instead of traditional negative pressure because the pumps are better, the quality of negative pressure is better. And so, it will be in the future – and price-wise, when you think about the price, it's also extremely interesting compared to the traditional negative pressure. So, all this makes me confident that this will be a great start.

On the pricing and sales force excellence, it's pricing actually, health outcome also and sales force excellence. Those have been badly managed in the past. And I can say that pretty clearly because we didn't have access to all the data that we wanted to have. And it can look stupid, but it is what it is when you have complex silos or complex organization, we don't have always the prices of one single product across the world and also within the country, the variation of – and it was difficult to put processes in place to make this happen.

So, what we have done and this is part of Mike's responsibility. We have said, okay, A, let's build a serious health outcome department, giving us data to support market access and to support pricing. And this early enough in the development of the product to be able to integrate this in the global marketing strategy of the product, and this is now operational.

The second thing is integrating the pricing early enough in the process, pricing, and thinking about the pricing, the pricing corridors, that we want to have for a specific product, and launch with a clear view of what should be the price. And also think about the price as a critical tool of margin improvement, which was not the case before. Sometimes, we have seen launches of product which were dilutive compared to previous product, which is ridiculous.

And that's why I'm so keen to bring disruptive innovations on the market is because if you are disruptive, you can give a good price to your product.

So, price early enough, pricing corridors, pricing visibility across the world to avoid issues. These are important things, and this is what the department newly created of Mike is going to give us in the future. And that's why I believe that this will help to control, manage and optimize the pricing all across the world for all our products.

Sales force excellence is the same story. Sales force excellence, I've been trying like crazy since the beginning to develop sales force excellence tools in the company, okay? Failure. Failure. And why a failure? Because, again, these silos were just incompatible with a sales force excellence process. One was saying, we have our own process. The other one was saying, well, we have a better one. And so, it was just a disaster.

So, now, we have a transverse and Mike, running the commercial operations as a department able to look at this on a global basis. That changed dramatically. And I'd tell you, I've been visiting two countries since early January. Both countries have shown to me, something I've never seen before, data on sales force excellence, including all the changes which are critical. And we did that in the past in the U.S. for the Wound, and it worked very well, of incentives. We have de-capped the incentive because we believe that a good rep should make a lot of money and a bad rep should leave. So, we have now systems all across the world, which are working better. So, this will bring up the good reps, will bring down the bad reps.

Sales force excellence is also some basic things. How many days do you work? How many days you see your customers face to face? And you realize that this question has never been asked, or if it has been asked, it has been forgotten. So, now, we have this on a regular basis. We have improvement, the CRMs, the number of days face to face, the days spent with the supervisor, and so on and so forth. I mean, it is well done now. And Mike, as someone in charge of this, which I think would, A, check; B, cross-fertilize, take the best of the countries and use it in other countries. It was impossible to do before. It is possible to now. And I believe this will change dramatically our ability to execute.

Gunnar Romer - Deutsche Bank AG (Broker)

Very comprehensive answer. Thank you.

Olivier Jean Bohuon - Smith & Nephew Plc

Thank you. Question from the – yes. And then (53:21) and then it's you.

Lisa Clive - Sanford C. Bernstein Ltd.

Hi. Lisa Clive from Bernstein. Could you give us an update on the U.S. traditional Wound market? What do you think the U.S. AWC market is growing roughly today given the broader trends towards (53:37)? And what is the interest in some of the risk-sharing initiatives you've put in place around preventable readmissions?

Second question on Syncera, we haven't heard about that in a while. The model itself is a pretty radical transformation, so perhaps not entirely surprising that the uptake has been perhaps more hesitant than you originally thought. But is it spurring other conversations around cost control? Is there more actual uptake signed contracts today? Just how does that overall influence the outlook for your U.S. Hip and Knee market?

Olivier Jean Bohuon - Smith & Nephew Plc

Thank you, Lisa. So, Mike, do you want to answer this question?

Michael G. Frazzette - Smith & Nephew Plc

Sure.

Olivier Jean Bohuon - Smith & Nephew Plc

Yes.

Michael G. Frazzette - Smith & Nephew Plc

Lisa, thanks. I'll answer Syncera, and then maybe, Phil, you can talk to some of the Wound dynamic. So, our Syncera model we still believe in. You're right, it is a disruptive model. We continue to make progress. We have not seen the inflection point that we'd planned when we first launched it and we've talked about that over the last several quarters. But we continue to make progress, and we did again in the fourth quarter. We captured some more business. Some more accounts moved our way. I think at the end of the day, we're just ahead of the curve on this model. It's a lower-cost model. It doesn't meet 100% of the patient population, but it does help deliver a health system a substantial savings if they're willing to do patient matching, which most of them do today, anyway.

Then, with the advent of CJR, what it's done is it's given us the ability to pivot slightly and take on a broader Smith & Nephew value solutions approach that you've heard our competitors come out with very similar type programs. So, we're looking at everything from surgery scheduling to help minimize the cost of instrumentation to patient matching. We've been out in the market now in a leadership position with VISIONAIRE and patient match instruments for a long time; we'll continue to drive that. And we're looking at other types of services to bolt on through an overall solutions approach that gets at the total 90-day episode and that bundled payment.

There was a question early on or at least a comment early on about U.S. and what's going on in the U.S. We're going to continue to pay attention. I think, irrespective of whether the new administration and the new Secretary of Health and Human Services continues to push the bundled payment approach in CJR, I think Tom Price has voiced an opposition to it. We still expect there to be continued price pressure. And at some point, whether you're looking at the entire bundle or you're back to just looking at fees in the way that the 90-day episode is broken up, that the pressure will return to the implant itself.

So, unless we're able to show clinical differentiation, then we're going to be in a competitive environment price-wise, and I think there, again, we're in a good place with Syncera. We've got a very good model. It's demonstrated effectiveness in the accounts that have converted to it, but like I said, it's been slow-go.

Phil Cowdy - Smith & Nephew Plc

Sorry, Lisa. So, just on the Wound Care market in the U.S., which I think you were asking. So, 2016 was very consistent with 2015 at sort of 4% or 5%. I think what you saw there as the penalties for hospital-acquired infections kicked in 18 months ago, two years ago. You saw that market increase. We don't break that out, or we don't give that number specifically, but we performed, I would say, very healthily against that market rate, particularly driven by our ALLEVYN and ALLEVYN Life range.

Olivier Jean Bohuon - Smith & Nephew Plc

Yes, I mean, U.S. is a good example of what the return actually. The Wound Care growth for the one were there (57:44) before. You remember it was not good for us, and we have now, as Phil said, a very strong growth actually. And we are beating the market in Wound Care. We have a superb portfolio. I think the global Wound Care, again, you will not see globally high growth in the first half of the year because, again, of the Chinese environment. But this doesn't mean that the U.S. is not performing very strongly. So, we are extremely happy with the Wound Care – and Wound Devices actually, in the U.S.

So, we have one question here (58:20). Front row.

Jimmy Muchechetere - Investec Wealth & Investment Ltd.

Thank you. Jimmy Muchechetere from Investec Wealth. A couple of questions. The first one is on the trading margin. I'm just wondering how the mix shift to higher growth products is going to affect the operational gearing?

And then secondly, the 10 basis points to 15 basis points per annum improvement, do you consider that a stretching target, or are you being very conservative, given that your margin is still way behind competitors'?

The second question is on Trump. And thank you for the comments you've made already, but I'm just wondering how repeal and replace or repeal and repair of ACA would affect Smith & Nephew and your end markets? And then secondly, whether the pricing debate would spill over from pharma to medical devices and how that would impact new pricing, getting paid for new innovations?

Olivier Jean Bohuon - Smith & Nephew Plc

Thank you. So, you take the first question, margin.

Ian Melling - Smith & Nephew Plc

Yes. I will try. So, I think your question was, does the mix shift to higher growth products drive our margin? I think it's hard to say. We have higher growth products in the Emerging Markets. We have higher growth products in the U.S. Margins are different in our different franchises and our different businesses. So, I wouldn't call out a significant movement in either direction driven by that.

And was there a second part to that question as well?

Olivier Jean Bohuon - Smith & Nephew Plc

10 basis points to 15 (60:00) basis points is stretch or not?

Ian Melling - Smith & Nephew Plc

I would say the guidance is the guidance. I wouldn't want to comment on whether it's stretching or otherwise.

Michael G. Frazzette - Smith & Nephew Plc

Jimmy, with respect to Trump and the ACA, if you recall, we didn't see a big increase when the ACA was initiated. We don't anticipate that there will be much of an impact with a repeal and replace. Again, depending on what type of reimbursement plan is put in place for seniors. We don't expect there to be too much difference from the current Medicare type of program that exists today, and for Hips and Knees, that's the majority of patients in the U.S.

Olivier Jean Bohuon - Smith & Nephew Plc

And pricing, the last part of the question, do we see these pharma issues rebounding on – we don't know. I mean, there is nothing announced on this. There was no clear announcement about what is supposed to happen in the medical devices, so I don't know.

So, we go back to the phone. There are some people waiting for questions at the phone.

Operator

Okay. Thank you. Our next question comes from Julien Dormois from Exane. Please go ahead.

Julien Dormois - Exane SA (Broker)

Hi. Good morning, gentlemen. Thanks for taking my question. It's actually about Blue Belt. Sorry if it's been answered already, but I joined the call lately. I was just wondering if you could give us more granularity about the performance of Blue Belt in 2016, for example, the level of sales or the number of systems that you have placed, typically in the U.S.? And maybe also on how the number of procedures per system is evolving?

Olivier Jean Bohuon - Smith & Nephew Plc

Thank you, Julien. We don't disclose precise numbers. What I can tell you is that we grew at 50%-plus, actually, the Blue Belt acquisition. We also have had the approval of the Total Knee, and you remember that we have started the year with Uni Knee only, and the Total Knee business obviously opens us a much bigger market than the Uni Knee. So, we are confident of the fact that this product and these robots will have a big success in the future. So we are – what we have seen so far is really good.

Mike, you want to add a few things or...

Michael G. Frazzette - Smith & Nephew Plc

Well, I mean, the integration is going well. We've hit all of our milestones that we set out to hit. We've accomplished the financial results, as Olivier said, that we shot for in our board plan. We received a modification to our 510(k) for Total Knee after a very successful limited commercial release. So, we're on track to launch Total Knee a little later in the year, as we suggested.

I think, relatedly, the ZUK Uni that we acquired from Zimmer if you recall, when Zimmer acquired Biomet, they disposed of their ZUK Knee. That's also performing quite well, and it's performing well in concert with Blue Belt. Because if you recall, Blue Belt robotics' first order of business was to help drive the Uni space.

So, again, good progress. We got a long ways to go. We're up against a very tough competitor in Stryker. But we like the market development that they're doing. It's helping educate the masses. And we think, going head-to-head, that we've got a favorable product.

As more procedures move from high-cost hospitals to lower-cost ambulatory surgery centers, they're going to look for mobile robotics, which we have. They're going to look for a lower cost, which we have. And they're going to look for something that isn't tied to other types, other modalities like CT scans, et cetera, which, again, we have. So, again good progress, we've got long ways to go, but we're making good headway.

Olivier Jean Bohuon - Smith & Nephew Plc

But having said that, Julien, I think it's also important to note that we are not changing our guidance on Blue Belt, so we still have a dilution expected in 2017 as I said before.

So, we have another question from the phone? Anyone there? Who?

Unknown Speaker

Anymore in the room?

Olivier Jean Bohuon - Smith & Nephew Plc

In the room? So – Veronika, what did we say? Two questions. Go ahead.

Veronika Dubajova - Goldman Sachs International

Just following up on, actually, NAVIO. Mike, can you talk about the, I guess, the (64:56) to the total new rollout commercially? How much training you have to do? What's the capital investment required for the robot to upgrade it to have the Total Knee capability? Your competitor was also coming out with a Total Knee this year. They've been doing a huge amount of training over the past 12 months. Do you imagine you're going to have to spend the next 12 months training before you actually are fully commercial? If you can just talk about that broadly, that would be great.

Michael G. Frazzette - Smith & Nephew Plc

I'll give you some really high level thoughts on it. I mean, it does require training because like any type of Enabling Technology or new Enabling Technology, at first, it's inefficient. And so, if it's going to slow down procedures and chew up OR (65:37) time, that's not good. So, it does require the training. When I hear that coming from the other guys, I can relate. So, we've got to invest in that. But the overall outlays for an account is far less with NAVIO than it is with our competitor. So, we think it's an attractive offering from an economic standpoint. And in terms of the rest of the instrumentation, it's not too different than typical in (66:06) reconstruction.

Olivier Jean Bohuon - Smith & Nephew Plc

Any more question from the room or the phone? If not, we will conclude.

Operator

Okay. We actually do have a question from Ines Silva. Sorry about that. Ines, you can go ahead.

Ines Duarte Silva - Bank of America Merrill Lynch

Thank you. I would just like to ask if you could highlight for 2017 what you feel are the most important products that are going to help drive growth, excluding whatever positive impact we get from Emerging Markets?

And then secondly, just coming back quickly on the (66:46 – 67:00)?

Olivier Jean Bohuon - Smith & Nephew Plc

I'm sorry. We could not hear your second part of the question. I mean, I can talk to you about the products, but the second part of the question, is it the CJR? What do you ask, please, if you don't mind to come back on the question?

Ines Duarte Silva - Bank of America Merrill Lynch

Sure. I just asked if you think that the CJR is going to continue to be a theme in 2017 when you have your pricing discussions with hospitals.

Olivier Jean Bohuon - Smith & Nephew Plc

Yes.

Ines Duarte Silva - Bank of America Merrill Lynch

Or if that's less of a theme now that maybe the program is not going to get expanded with Tom Price leading the HHS.

Olivier Jean Bohuon - Smith & Nephew Plc

Okay. Well, let me first answer the first question, and thank you because actually you helped me for my conclusion; I wanted to rebound on this thing, why do we believe that 2017 will be a good year for Smith & Nephew. Obviously, the product are number one in the list. And where do I believe that we are going to do good things, definitely in Sports Medicine, whether it is in Joint Repair where we are continuing high growth or in Enabling Technologies with the addition of two products I was mentioning: the WEREWOLF and the LENS, both products having shown a super adoption.

INTERTAN is also in Trauma will give us also a lot of satisfaction. We expect obviously to capitalize again on the JOURNEY II platform with the launch of the JOURNEY II XR, which is also a new addition to our JOURNEY platform.

So, the Knee business as a whole should be good. We expect also that the REDAPT Revision System in Hip will help us to fill the gap that we have in our portfolio and come back at a normal market growth in the Hip business. I expect PICO to continue to be a strong level of growth this for the product. And I'm expecting Europe to be back on track. We have two issues again this year in Europe. Slight issues linked to management, linked to the reorganization, linked to the fact that in the UK and in Germany, we have moved all the sites. As you know, we have closed Marl in Germany and moved everything to Hamburg.

In the UK, we have moved everything. And yesterday or the – no, it was yesterday – day before yesterday, I did make the grand opening of our new facility in Croxley Green in Watford. And this takes all the people we have in UK in Godmanchester, in Hull, I mean talking about the commercial people of Hull, in York. They are all now in Watford. Obviously, this changes obviously the picture and we have lost people. We have lost dynamic. We have now everyone in place, a lot of new people. This place is enabling us also to attract more talents.

It's easier to have a high level professional here in London than in other places in the country. We have seen that in France. We have closed our facility in Le Mans in the West and we have moved it to Paris also. We have lost behind unfortunately some people, but we have been able to hire new talents with amazing level. So, all this is done. So, it will change the way we operate. There's no doubt.

We have done that in Australia. We have closed Melbourne and this has generated some disruption in Wound Care. Now, everyone is set up. We have a new MD in Australia. We have a full organization. So, going back to your point, I think that all these issues that we had are behind. So, I trust that Smith & Nephew will be successful in 2017. There is no doubt about these products, organization, pricing management, sales force excellence, and I leave behind a number of things.

So, I'm so excited with that, I forgot your question actually.

Unknown Speaker

CJR.

Olivier Jean Bohuon - Smith & Nephew Plc

Yes. CJR. So, do we see a modification in the CJR or are things changing? Mike, you want to take this?

Michael G. Frazzette - Smith & Nephew Plc

Well, we have – as we've said several times in the past, we haven't seen any significant impact to the business. We've experienced a lot different conversations with the customers, but it hasn't gotten to the point to impacting our business today. And we've got a very small but good team in Washington for government affairs, that keeps us abreast to this and stays engaged with policymakers. And we'll continue to do so. We'll see how it takes shape in the coming weeks and months.

Olivier Jean Bohuon - Smith & Nephew Plc

Yes.

Olivier Jean Bohuon - Smith & Nephew Plc

Okay. That's all. Thank you very much, and we'll see you soon. Take care.

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