Smith & Nephew plc
Q2 2015 Earnings Call Transcript

Published: 30 Jul 2015

[Operator:]

Good day. Welcome to the Smith & Nephew 2015 Q2 and Half-Year Results Conference Call. Certain statements in this presentation are forward-looking statements. These statements are based on management's current expectations and are subject to uncertainty and changes in circumstances. Actual results may differ materially from those included in these statements due to a variety of factors. More information of about these factors is contained in the company's filings with the Securities and Exchange Commission. Today's conference is being recorded. At this time, you will hear ambiance, and then the conference begins.

[Olivier Jean Bohuon:]

(00

[Julie Brown:]

Thank you, Olivier, and good morning, ladies and gentlemen. I'll start with the financial highlights. As you know, we've changed our reporting from quarterly to half-yearly, and that this summary slide covers the six months to June 2015. Now, looking at our financial headlines, revenue is just under $2.3 billion with strong underlying growth of 4%. Trading profit grew ahead of this at 6% underlying, resulting in a trading margin of 22.5%, a 70-basis-point improvement over last year. EPSA was $0.391, a reported growth of 3% negatively impacted by currency, which I'll return to later. And completing the picture, cash improved. Trading cash flow was $382 million and a conversion rate of 75% compared with the 53% in the prior period. Finally, free cash generation was $329 million, including the receipt of a legal settlement of $99 million. I will now look at each of these areas in turn starting with revenue. This slide shows the adjustments between underlying and reported revenue for Q2. The business delivered a strong underlying revenue growth of 5%. This compares with 3% in the first quarter demonstrating improved momentum in the business. The ArthroCare acquisition added 6 percentage points to the reported growth rate, simply due to six months of ArthroCare sales being included this year compared with only one month in the prior period. And for the rest of the year, we will not see further acquisition impacts from ArthroCare. Sales growth in Q2 at constant exchange rates was therefore 11%, and currency was adverse by 9% due to the strengthening of the dollar. Hence, in reported terms, group revenue growth for the quarter was 2%. For the half year, the trends are similar. Underlying revenue growth of 4% translates to 2% reported growth due to the impact of acquisitions being offset – partially offset by adverse currency movement. To give you a bit more information about other deals we've completed recently, the results of our distributor acquisition in Colombia has been included in our financial results since March, and there is nothing yet included for either the distribution acquisition in Russia or the recently announced purchase of the ZUK uni knee from Zimmer. This will start to impact our results from July onwards. Next, the trading income statement. With additional detail shown in Note VIII to our announcement, our trading margin for the first half was 22.5%, an improvement of 70 basis points. Let's take a look at the components of this. On gross margin, we saw adverse pricing pressure in aggregate of 1% to 2%, similar to previous quarters. In addition, due to currency movements, we saw additional gross margin pressure in emerging markets. These factors have been partially offset by cost of goods improvements, and the overall gross margin is down 70 basis points to 75.1%. Moving to SG&A, our group optimization program has now delivered annualized benefits of $50 million through procurements, through standardization, and through a more focused single country management structure. For example, we now have one ERP system in Europe, and all major functions such as finance, HR, and IT are managed globally. This allows for a simpler and more cost-efficient organization. We've seen the impacts in our cost base. Our G&A expenses alone are now lower by an amount equivalent to 1 percentage point of sales compared with 2014. And ArthroCare synergies are also being delivered and our commitment of $85 million of total synergies by 2017 is on track. Finally, two final factors related to the margin. U.S. RENASYS continues to be a headwind. We estimate that the impact that this product holds is about 50 basis points on our first-half trading margin compared with the prior year. And in R&D, the lower level of spend this year reflects the closure of the HP802 program. Now, a review of our adjusting items between trading profit and reported IFRS profit in the statutory income statement. Acquisition-related cost is $13 million, related to remaining ArthroCare integration and emerging market deals. Restructuring cost of $19 million relate to group optimization. In terms of phasing, we expect higher restructuring cost in the second half. And amortization of acquisition intangibles is $78 million higher than last year, mainly as a result of the ArthroCare. And finally, within legal and other, there's some specific items to highlight. The largest item is an income of $45 million, recognized on the settlement of the Arthrex legal claims net of expenses and royalties. There's also a one-off curtailment gain relating to post-retirement healthcare benefits in the United States. And offsetting this, we have an additional $10 million charge related to final liabilities associated with RENASYS. Now, we review of the movement in EPSA for the first half. Given the significance of currency this year, we have included both reported growth and also growth at constant exchange rates. Trading profit grew 6% reported and 13% at constant currency. There are a number of movements to EPSA. First, the interest receivable reduced, as we no longer receive interest from Bioventus. And second, interest payable increased following debt associated with the acquisition of ArthroCare. And third, taxation. The forecast full-year rate on trading results is expected to be 27.2%. This represents a 50-basis-point improvement over the prior period, and almost 300-basis-point reduction than 2012. Adjusted EPS for the first half is $0.391, an increase of 3% reported and 10% at constant currency. Now turning to cash, here's the cash flow statement for the first half. We generated trading cash flow of $382 million, a trading profit to cash conversion ratio of 75%, compared with 53% in the prior period. In terms of working capital movements, we had $130 million outflow, largely due to inventory movements and payables. And although we've seen a net outflow from inventory, there's actually been an improvement in inventory churn of over 5% in the first half. Free cash flow was $329 million, including the legal settlement from Arthrex. Now, turning to capital allocation. We started the year with net debt of $1.6 billion and generated free cash flow of $329 million, or $490 million before CapEx. Capital expenditure was $161 million, reflecting investment in instrument sets, IT systems and expanding manufacturing facilities. Dividends were $166 million, being the cash payment of our final dividend for 2014. And for acquisitions, our net cash spend of $16 million relates to the distributor acquisition in Colombia. And, finally, within other, we include the repurchase of our own shares equivalent to shares issued under employee share schemes. At the half-year, we closed with net debt of $1.5 billion. This is equivalent to net debt to EBITDA of around 1.1 times. Finally, our outlook for 2015. Our previous guidance for the full year remains unchanged. On revenue, we will achieve higher underlying revenue growth in 2014, and in particular, regarding the second half, we will no longer experience a headwind on growth from RENASYS in the U.S., as there are no sales in the comparator period. And as a reminder for your models, we would not expect you to include any U.S. RENASYS sales for the remainder of 2015. As Olivier said, we expect a staged rollout of our next-generation products during 2016. On trading margin, we're pleased with the improved performance in the first half. We experienced some favorable cost-phasing, leaving our guidance for the full year unchanged. On EPSA, we expect to deliver the improvements in tax as guided, and further technical guidance on interest is included on slide 31 in the pack. Regarding exchange, we expect to see a headwind on revenue of 6% for the second half and 7% for the full year, based on exchange rates at the end of June. And with that, I'm very happy to take questions, and will hand back to Olivier.

[Olivier Jean Bohuon:]

Okay. Thanks, Julie. Thanks very much, Julie. Four years ago, actually, I was presenting – exactly four years ago, the strategy that we wanted to implement at Smith & Nephew. And we have been pretty strong in following the path. And I'm happy to see now that the choices we've made were good choices, including the – increasing the high growth (16

[Olivier Jean Bohuon:]

Yes?

[Ian Douglas-Pennant:]

Thank you very much. It's Ian Douglas-Pennant, UBS, here. First, on CCGR, thanks for your comments there. It's interesting to get your first take. Could you give us an indication of what pricing pressure you're seeing in BPCI hospitals versus those others? Have you had more success launching since they're into those hospitals that have chosen to stay part in that program? And then on another tack, on your Wound Care, some very good growth rates there from your ALLEVYN Life portfolio. Is this because of the reps that you've taken out of NPWT that's driving that growth? And if so, will you be hiring more reps when NPWT comes back to market? Thanks.

[Olivier Jean Bohuon:]

Okay. Thanks for the question. Let me start with the second question on ALLEVYN. No, we have not redirected (26

[Ian Douglas-Pennant:]

And just a quick follow-up on Syncera, I mean, we've heard in the market that some of your competitors have programs like this. I mean, can you comment on how frequently you see those when you're competing for this kind of accounts or are they much too early stage now?

[Olivier Jean Bohuon:]

I think they're very early stage. I haven't heard anything specific. As I said in Q1, the complexity of Syncera is it's not just selling a product. It's actually selling a complete solution and offering a solution, which I think will be the key for success tomorrow, going from a product offer to be able to offer a solution, not only to the payers, also to the surgeons. It took us two years to put that together. It took us two years, and as you know, the strength of the model is the product, the quality of the product that we have, the hip and the knee, and the quality of the registry we have. I mean there is a huge experience with this product. They are known. People trust them. They are able, which is also important, to cover the majority of the population – the potential population receiving a knee and hip. And also the quality of the model behind that we enhance pretty significantly on a regular basis. If you require, the S2, which is one of the acquisitions which is part of the model of Syncera, makes me think that if someone comes – and someone will come, because I think it's obvious that there is a need for a cheaper model – it would not be today. We see some events here.

[Ian Douglas-Pennant:]

Thanks very much.

[Unknown Speaker:]

You talked about the timing on the RENASYS relaunch, or rather I suppose you're waiting for the generation 3 to get approved. Do you have any clarity on that? Because obviously, the re-approval of RENASYS 2 just took a lot longer than expected.

[Olivier Jean Bohuon:]

No. It didn't, actually. It didn't. Thank you for the question, Lisa (29

[Unknown Speaker:]

The FDA takes their time, I know.

[Olivier Jean Bohuon:]

FDA is slow, but they come on track. And actually, the RENASYS is not just one device. It's a bunch of devices, actually. And we have a three 510(k), and two of them have been approved. We're expecting soon the third one. During the year, we don't plan to relaunch the RENASYS, as I said. In Q1, we plan, though, to just supply the existing customers, so that's while we're saying that there's no need to put any sales because we don't plan to make any sales with that. So the strategy now has been clearly to say, well, relaunching RENASYS will not bring anything. I mean, the cost of recapturing customers is very high. And if you bring a new product in a few months, it's much better to focus on this connected device that we plan to launch, which is really something different and really something better. And so we plan to have a launch between Europe and the U.S. during 2016. So that is the plan. So FDA has three 510(k), okay? There's no issue there.

[Unknown Speaker:]

Okay. So just for confirmation, you should expect all the components of that RENASYS 3 to be approved by, say, the end of 2015, positioning yourself for a launch?

[Olivier Jean Bohuon:]

Absolutely. Absolutely. Absolutely.

[Unknown Speaker:]

Okay. And then, the second question on Trauma. I understand, obviously, you had tough comps due to, I think, it was a tender in Saudi last year.

[Olivier Jean Bohuon:]

There was a big Saudi tender, yeah, and another one in the Middle East also. I mean, it was very high comparator last year.

[Unknown Speaker:]

Okay. And I suppose maybe more of a question for Julie, but if we strip that out, are you pretty much in line with the market in Trauma or is there still a bit of a lag for your performance versus the market?

[Olivier Jean Bohuon:]

Well, I think that – Julie, you can answer. But then, we have 2% growth, I think, for the Trauma business as a whole. Without the effect in like-for-like, what will have been the growth rate of the market, I think we'll be very close to the market. Yeah, very close.

[Julie Brown:]

I mean, U.S. Trauma growth was strong. So it was definitely impacted by a major market. Yeah.

[Unknown Speaker:]

Okay. That's helpful. And then third question and final question, PICO use. Could you give us an idea of where it's being used? Is it mainly in diabetic foot ulcers, venous leg ulcers? I know you've done some really interesting studies in obstetrics and I know you're working on one in knees. How much of...

[Olivier Jean Bohuon:]

It's hip, actually.

[Unknown Speaker:]

...that is – oh, in hip? Okay. How much – where is it coming from?

[Olivier Jean Bohuon:]

It now comes from a wide range of situations, actually. It came at the start for all this venous leg ulcer pressure, then all these difficult wounds to treat. We have now a very strong collaboration between ASD and Advanced Wound Management in the hip post-surgery treatment. In GYN also, we use it a lot. So we have different sizes and shapes of PICO. So it varies. Frankly, I think we open it more and more and we realize, I think, there is, we believe, an amazing opportunity for this type of devices. We invest also, it's important to say, in the clinical outcomes, so we drive clinicals, and they show good results.

[Unknown Speaker:]

Thank you.

[Olivier Jean Bohuon:]

Yes? Go ahead. Michael? Next.

[Yi-Dan Wang:]

It's Yi-Dan Wang from Deutsche Bank. Just couple of quick questions. The first...

[Olivier Jean Bohuon:]

A couple, huh?

[Yi-Dan Wang:]

A couple, yeah. I promise it will be a couple. The first one is on the U.S. knee growth versus the hip growth. Can you comment on how much of the knee growth is coming from the DTC campaign versus the benefits you're getting from Syncera? Because you've run DTC for both hips and knees in the U.S., but there seems to be a fair big difference between the performance of the two product lines. And then secondly, Julie, could you comment on the effect of the acquisition on your top line and trading profit? So these are the Russian acquisitions and the UNI knee business. Thank you.

[Olivier Jean Bohuon:]

On the U.S. knee saw, as you know, it's a very significant growth. I think the reason is not Syncera. Actually, it's purely the dynamic of the JOURNEY II, which is really good. Remember, we discussed at the stage launch, people were asking about, are you going to launch yet? Now, it's launched. And it's launched, and it works. We have great customer feedback on this one. So the campaign that we have based was a campaign based on the VERILAST technology. It has driven a lot of interest. I cannot give you the split, disclose between what is generated by the campaign and what is generated by our business. One thing I want to tell you also, and actually, we discussed it yesterday, the quality and the efficacy of our sales force is much, much better than what it was in the past. So you remember years ago, we said in the established markets, if you want to be successful, you have to bring new products, differentiated new products, because you want to get a price premium with this product and you want to keep this price, and you also need to have a better sales force effectiveness. We have worked two, three years on this. I think we have better reps, much more prepared than what we had in the past. And when you have good reps, well-trained, and good products, things are happening. So again, what I see is not an anecdote. What I see is a trend here, and you see the same. I mean the Recon business in the U.S. is improving; there's no doubt. There's no doubt. And it comes back, (35

[Yi-Dan Wang:]

So, in terms of the differential between your hip and knee business, can we imply from that, then, that your knee portfolio is more differentiated than hips, or is it more of a timing thing? So your sales force is focusing more of their attention on knees as we sometimes see, and then we should see the hip business pick up later on?

[Olivier Jean Bohuon:]

Hip business, we have at this quarter 1 percentage point of headwinds due to BHR (36

[Julie Brown:]

Okay. So returning to your question about the acquisitions, so ZUK, we expect to get sales in the second half of around $10 million, if you want to put that in. In terms of Russia, it's likely to be completely immaterial at this stage. We had quite a small Russian business to start with going through the distributor. It will take some time to set that up properly. So I think it would be immaterial for the purposes of modeling this time.

[Yi-Dan Wang:]

And the profit impact for the (37

[Julie Brown:]

Yeah, the profitability on ZUK is very strong; it's very strong. So, obviously, Recon is a strong part of our business anyway. So ZUK, we expect to be strong. And clearly, in emerging markets, and the case of the Russian deal, in emerging markets and when we're setting up from the start, it takes a while to get the profitability there. So you would expect low profitability from the Russian deal.

[Yi-Dan Wang:]

But it's not loss-making?

[Julie Brown:]

No, it's not loss-making.

[Yi-Dan Wang:]

Thank you.

[Julie Brown:]

We'll make sure it's not loss-making.

[Olivier Jean Bohuon:]

Yeah. ZUK was a great opportunity for us (38

[Ed N. Ridley-Day:]

Ed Ridley-Day, Bank of America. First of all, for Julie, great progress on your cost saving program, $50 million run rate, annualized. It seems to me you're a bit ahead of schedule, so should we start thinking more positively about the $120 million total savings or not? And on a related question, clearly you've reiterated the $85 million synergies from the ArthroCare deal. Can you give us an update on where you are on that?

[Julie Brown:]

Okay, sure. Yeah. So the group optimization program, we're really pleased with progress. We've got a comprehensive PMO around it, and it's meeting all the milestones. In terms of the slight margin beat in the first half versus consensus, I think it's just more to do with cost saving and timing rather than underlying delivery of group optimization or ArthroCare. So the program's on track. As you know, we've maintained the guidance; I think it's simply a phasing issue rather than anything else. ArthroCare, again, is going very well. The sales integration has gone well in the U.S. and the rest of the world. There's a real synergy with the reps now, because they've got both blades and COBLATION. So all that's working really well. At this stage, we're not changing the guidance there. We're maintaining the $85 million. We've owned ArthroCare now for one year only. So we're confident about it, but not upgrading the guidance.

[Olivier Jean Bohuon:]

I was, on the $85 million, you remember the split. It was $65 million for cost savings and $20 million in sales synergies. I'm more optimistic that our CFO on the sales – I think that synergies will happen because it's pretty mechanical. And it's the sales – more I see that the way that this integration is happening, the value – Julie mentioned the reps feedback that we get. I mean, it's very good. And the ENT business, which we forget sometimes, but let me remind you that this business when we took was a negative growth business; it was minus 5%, minus 4%. And we're now over – we have seen between the GYN and the ENT a 7% growth that I was mentioning. We see (40

[Ed N. Ridley-Day:]

That's very helpful. And just a follow-up on Arthro, can you detail how much benefit maybe you saw in the quarter from the Zimmer-Biomet, the synergies from that deal? How much do you expect you can be able to benefit, maybe, in the second half from the focuses around the integration?

[Olivier Jean Bohuon:]

I don't know, actually. It would be interesting today to see the results offer this company. And maybe I would be able to answer more – with more details there. I mean, we see the synergies; there's no doubt that its – integration like this is always pretty painful. So there will be certain opportunities, and it's why I cannot quantify them. I don't know. And actually, what – I think that what we have in our own plan takes this in consideration.

[Ed N. Ridley-Day:]

But you have been able to pick up potentially some salespeople from it?

[Olivier Jean Bohuon:]

Not much more than – we have seen these synergies for a while now because they have been working. We have seen, as I said last quarter, there are obviously these going on and people willing to join us. And so we see the opportunity. We see distributors in the U.S. saying, you know what – one was with Biomet; one was Zimmer. Now, there's only one, so one is available. So they come to you saying, well, can we work together? I mean, you find a number of opportunities. Now, I think they are integrated in our business now.

[Ed N. Ridley-Day:]

Great. Thanks.

[Olivier Jean Bohuon:]

Thank you, Ed. Sorry, there's four – if you will not be happy, we are all four people on the – and then we will (42

[Operator:]

Certainly. We will now take our first question from Mr. Tom Jones from Berenberg. Please go ahead, sir. Your line is now open.

[Tom M. Jones:]

Oh, good morning, and thanks for taking my questions. I had two, one on Syncera, and one on the AET business. On Syncera, I just wondered how your conversations with hospitals have changed since the publication of the CCJR proposals from CMS. The PPCI program that ran before that, that was a voluntary program, but this is different, being a compulsory program, and is perhaps, or my thought at least, forcing half the (42

[Olivier Jean Bohuon:]

Okay. Well, look. Phil, you want to take the Syncera or you want me to answer?

[Phil Cowdy:]

I'll take it. I mean, the Syncera one, Tom, very early days at the moment. But certainly, we have had inbound calls and obviously the topic does come up when we're doing pitches at the moment. But just to reiterate Olivier's comment earlier, we do see the opportunities around that broad across our portfolio. So it's not just focused on the implant. Hospitals are looking to be more efficient across that whole 90-day period. So for example, JOURNEY II, we believe, and we try to collect data, the point to faster recovery after surgery. Again, if you can prove that to a hospital, that reduces cost and hence should play well into these programs.

[Olivier Jean Bohuon:]

On the reaction of the competitors on Syncera, one thing, I really believe in and we have seen that now between the pilot, the pre-launch, and the launch phase, that it's not a question of dropping the prices. I remember that you were asking that question a year ago when we talked for the first time about Syncera about the risk of dropping prices in the industry because in reaction – that doesn't happen. I'm much more believing now that there will be models like this one developed by our competitor, because they will have to. And I think that the notion of tier of lower cost and higher cost is there. And so you have to answer not with the product price, which is short-term, but with a full solution. I mean, I'm convinced that the reconstruction business has to go through global solutions. I'm convinced that the implants per se will be commoditized in 5, 10 years. And if you do not come with something which can add value, you go nowhere. So whether it is intelligent implants, whether it is a solution like Syncera, whether it is – whatever we can imagine. But I mean, it's definitely what the trend that we'll see in the market. So that's what I believe. On the enabling technologies question, what is the dynamic? Actually, it's a much better dynamic for us than what it used to be. I think we have been growing at 1%, I think, Julie, during this quarter, and that was a mix between very strong COBLATION, which definitely has changed the dynamic of our own enabling technologies, because if you remember, when we were just having the blades (46

[Julie Brown:]

And we've actually – we've also got the ArthroCare royalties going through that line as well, which impacts the growth rate again by 1 percentage point negatively. So excluding that, there's real momentum in the business underlying those numbers.

[Olivier Jean Bohuon:]

Okay. Next question at the phone?

[Operator:]

We'll now have our next question from Bill Plovanic from Canaccord. Please go ahead, sir. Your line is now open.

[Kyle Rose:]

Great. This is actually Kyle on for Bill. Do you hear me all right?

[Olivier Jean Bohuon:]

Hi, Bill.

[Unknown Speaker:]

He's Kyle.

[Kyle Rose:]

Just wondered if you could remind us of your cash priorities, where do you think about M&A buyback and dividends, the different puts and takes between those two? And then also, when you think about M&A moving forward, you showed the slide of building out in the emerging market. I mean, how do we think about the balance in M&A from a distribution standpoint and the focus on the emerging, but then also new technologies you've seen in the marketplace?

[Olivier Jean Bohuon:]

So on the M&A, I mean it's still high on the agenda, not only in the emerging market where we continue to acquire what we believe is important to our distributors. We also look at companies which can help us to develop our mid-tier. You remember the mid-tier is the second growth lever of the acceleration of the emerging market in the future. And so that goes through (48

[Julie Brown:]

Yeah. So, our priorities for the use of the cash. First of all, organic investment. Secondly, the progressive dividend policy that we follow. Our third priority is M&A, as Olivier has mentioned. We've got a strong pipeline. And then fourthly, we'll distribute the cash, any remaining cash, surplus cash to the shareholders. So that's the sort of framework that we use that we've laid out. At the same time, we are looking to improve operational cash delivery and optimize the cash through the business. So, obviously, we look at days sales outstanding, purchase days, and inventory turn as the key measures that we use in the business to improve the momentum within the cash flow.

[Olivier Jean Bohuon:]

Okay. So, coming back to the room for one question, and then we'll go back to the phones, please.

[David J. Adlington:]

Thanks. David Adlington from JPMorgan. Just on your ENT and GYN businesses, that seems to be going very well. I'm just wondering if you see any scope for adding to that, sort of bulking that up from further acquisitions.

[Olivier Jean Bohuon:]

Yes. Well, we can, we could. That's one of the opportunities that we believe which could be interesting for us to develop more these businesses, or one of these businesses, or none of these businesses. No, it's a good question because, obviously, we have this in mind every day, saying what do we do? I mean, GYN is a business which is roughly $50 million, $60 million. ENT is about $110 million. It's obvious that we don't have the mass that we could – that we should have to really use the strength of the groups because there is a growth potential here. And they are mono-product businesses mainly. So adding products or product for – product to these businesses will definitely help us. So we are looking at that. Yeah. Going back to the phone.

[Operator:]

We'll now have our next question from Michael Jüngling. Please go ahead, sir. Your line is now open.

[Michael K. Jüngling:]

Hi. Good morning. Hopefully you can hear me. I have three questions. Firstly, on the sustainability of organic sales growth in the second half of this year. What are the sort of the key drivers that will allow you to grow at the same rate for the second half of the year as we've seen in the second quarter? Question number two, when it comes to Syncera, can you provide some guidance on the future growth contributions, the timing of it when Syncera will add noticeable growth to hips and knees? I'm not referring to a specific quarter but more about which half year would we see the first signs of a material contribution? And the final question is on RENASYS. For 2016, U.S. RENASYS launched – was relaunched. Should we expect a slow recovery in profitability due to launch costs, re-entry costs, and perhaps also free samples to re-engage with lost customers? That's all. Thank you.

[Olivier Jean Bohuon:]

Thank you, Michael. And so, let me answer the first question on the – I guess what you have in mind is that the sustainability of the growth for the second half. And my answer is yes, it's sustainable. And actually, we have said that at the end of last year, that H1 was improving. H2 should be also, I mean, even higher than H1. We believe this for a few reasons. And now, I'm more confident than I was before – six months ago, actually. The first one is mechanical impact. Obviously, RENASYS was not there in the second half of last year, so that will be a good comparable in terms of growth. The second thing is, when I see the value of the DTC campaign in the knee business in the U.S., I believe that – and you know that there's always a tail effect of this campaign. We have seen that in the past when we did launch these. I'm very confident that the Advanced Wound Care business is on a trend, and this trend is a good trend. I've said in my presentation that I'm expecting that we'll beat the market again on this business division. Then, Sports Medicine, I don't see why things would change. On the contrary, I think that we'll have more and more benefits with the time in terms of Sports Medicine, whether it's joint repair or in (54

[Julie Brown:]

Yeah, in terms of RENASYS. Yeah. There will be some investment associated with it, but what we're doing more and more is, we believe the market will start to move towards negative pressure in a disposable fashion. And so we're really putting a lot of emphasis behind PICO, which is really our great product. And then when we've got a connected version of RENASYS, we'll launch that next year. So there'll be some investment associated with it, but we don't think it will make a material impact on the profitability of the company overall.

[Michael K. Jüngling:]

Okay.

[Olivier Jean Bohuon:]

Another question on the phone, and then we'll go back to...

[Michael K. Jüngling:]

(57

[Olivier Jean Bohuon:]

That's a good question. Actually I'm surprised that we didn't get this question before, looking at what our competitors have been saying in the past. Yes, we see, in China, a reduction in the capital investment, and Philips has said that recently. But for us it's minimum, because we don't sell a lot of this. But we have seen a small drop in this; that's for sure. Now, we have more and more tenders in China, and so these tenders are obviously shrinking the prices. So there is certainly a higher price erosion than what we have seen in the past. (58

[Michael K. Jüngling:]

Thank you very much.

[Olivier Jean Bohuon:]

Thank you. So we go back now? One more? Okay.

[Operator:]

Thank you. We'll now have our next question from Veronika Dubajova from Goldman Sachs. Please go ahead. Your line is now open.

[Veronika Dubajova:]

Good morning. And thank you for taking my questions. I have three. The first one is just, Olivier, could you elaborate a little bit on the M&A comments that you've made? Reading between the lines, it sounds like maybe we might – you're not gearing up for big acquisitions, but you're looking more for bolt-ons. Is that a fair interpretation? And related to that, where do you see the biggest opportunities for acquiring disruptive technologies with part of your business? And then I have a couple of quick ones for Julie. The first one is just on the gross margin outlook. You've done a terrific job improving gross margins over the last number of years. Surprised to see the drop in the first half. If you can comment on how you're thinking about it for the full year and beyond, and if you still see some opportunities for gross margin to improve from here, that would be helpful. And the last one is Bioactives. Are you still comfortable with a low-teens growth for Bioactives for the full year, or should we be rethinking that assumption? Thank you very much.

[Olivier Jean Bohuon:]

Let me take two question of this. The first one, very quickly on the Bioactives, yes, we are confident the guidance is there. We plan to have double-digit growth in the Bioactives. In the M&A, first of all, Veronika, I'm very happy to have a question from you. I was anxious not to hear anything from you. So it's good to hear from you. The M&A, I've never said that I was not looking for ambitious acquisition. I just – I focus my talk on bolt-on acquisitions and small acquisitions because that's what we've done during the first half in acquiring these four small businesses. But again, first of all, what I want to do is to be sure that we have, and we see that, an improvement in the organic business. I just don't want to cover something which is not working well with something that we can acquire. I think that's not the right thing to do. So now, we have been able – and again, as I said before, I'm convinced that it's very sustainable – been able to accelerate the growth of this company, whether it's on sales and profit, and Julie will tell you about this in the second part of the answer. Now, yes, we can acquire things. Again, what? So this is the big question. So it's what? It could be a transformation, it could be another big company or a company of the size of (01

[Julie Brown:]

About the profit, yeah.

[Olivier Jean Bohuon:]

You're ambitious.

[Julie Brown:]

Very ambitious with regards to margin, as you know. So in terms of the gross margin, we saw this impact in the first half. We always expect to get price headwinds and we've always guided on this. It's between 1% and 2% for the company as a whole. Most are in Recon, but as a company, as a whole, it's between 1% and 2%. We've got a cost of goods improvement program running, which is through better procurement through using low-cost countries like China, for wound production. So we've got a cost of good improvement program running, which is tending to offset the two, the price impact. The new thing we noted this time and we mentioned in the presentation was that as the emerging market currencies have devalued, in some cases more seriously, and we've got some of our manufacturing still in established markets, you get an imbalance in terms of the currency impact between revenue and cost of goods. And therefore, that puts some additional pressure on the growth margins and emerging markets, and because we're growing strongly in emerging markets, that intensifies it more or so. So in terms of how we see this going forward, I would say that we still believe the gross margins will be broadly stable. There will be perturbation this quarter-to-quarter, half-year-to-half-year. But broadly we see the cost of goods programs offsetting it. In terms of the longer term, clearly the unknown is currency and what happens in terms of currency in emerging markets. And therefore, what we're doing is – obviously the biggest defense there is price in emerging markets. And we're looking at price impacts and what we can do in terms of price and recover those currency losses. So that's essentially where we are in terms of gross margin. If that answers your question Veronika – I think the other question was on Bioactive growth?

[Olivier Jean Bohuon:]

I've gone through this question...

[Julie Brown:]

Yeah.

[Olivier Jean Bohuon:]

(01

[Julie Brown:]

Yeah.

[Olivier Jean Bohuon:]

Thank you, Veronika. So we come back to the room, or we have no more questions.

[Julie Brown:]

It's unusual.

[Olivier Jean Bohuon:]

It's good. And everything is clear

[Olivier Jean Bohuon:]

Okay. Well, thanks a lot.

[Julie Brown:]

Okay.

[Olivier Jean Bohuon:]

And see you next half.