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EDITED TRANSCRIPTSN.L - Q4 & Full Year 2012 Smith & Nephew Earnings Conference Call

EVENT DATE/TIME: FEBRUARY 07, 2013 / 9:00AM GMT

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C O R P O R A T E P A R T I C I P A N T S

Olivier Bohuon Smith & Nephew plc - CEO

Neil Taylor Smith & Nephew plc - Group Financial Controller

Phil Cowdy Smith & Nephew plc - Investor Relations

C O N F E R E N C E C A L L P A R T I C I P A N T S

Charles Weston Numis - Analyst

Michael Jungling Morgan Stanley - Analyst

Ingeborg Oie Jefferies & Co. - Analyst

Veronika Dubajova Goldman Sachs - Analyst

Matt Miksic Piper Jaffray - Analyst

Chris Gretler Credit Suisse - Analyst

Martin Wales UBS - Analyst

Ed Ridley-Day Bank of America Merrill Lynch - Analyst

Tom Jones Berenberg Bank - Analyst

David Adlington JPMorgan - Analyst

P R E S E N T A T I O N

Operator

Good day, and welcome to the Smith & Nephew 2012 Q4 and full results' conference call. Today's conference is being recorded. You will now heara forward-looking statement, which may be followed by silence before the conference begins.

This document contains certain forward-looking statements that may or may not prove accurate. For example, statements regarding expectedrevenue growth, and trading margins, market trends and our product pipeline are forward-looking statements.

Phrases, such as aim, plan, intend, anticipate, well placed, believe, estimate, expect, target, consider, and similar expressions, are generally intendedto identify forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties, and other important factorsthat could cause actual results to differ materially from what is expressed or implied by the statements.

For Smith & Nephew, these factors include economic and financial conditions in the markets we serve, especially those affecting healthcare providers,payers and customers; price levels for established and innovative medical devices; developments in medical technology; regulatory approvals;reimbursement decisions or other government actions; product defects or recalls; litigation relating to patent or other claims; legal compliancerisks and related investigative, remedial or enforcement actions; strategic actions, including acquisitions and depositions; our success in integratingacquired businesses; and disruption that may result from changes we make in our business plans or organization to adapt to market developments;and numerous other matters that affect our markets, including those of a political, economic, business or competitive nature.

Please refer to the documents that Smith & Nephew has filed with the US Securities and Exchange Commission under the US Securities ExchangeAct of 1934, as amended, including Smith & Nephew's most recent Annual Report Form 20F, for a discussion of certain of these factors, anyforward-looking statement based on information available to Smith & Nephew, as of the date of the statement.

All written or oral forward-looking statements attribute to Smith & Nephew are qualified by this caution. Smith & Nephew does not undertake anyobligation to update or revise any forward-looking statement to reflect any change in circumstances or in Smith & Nephew's expectations.

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FEBRUARY 07, 2013 / 9:00AM, SN.L - Q4 & Full Year 2012 Smith & Nephew Earnings Conference Call



Olivier Bohuon - Smith & Nephew plc - CEO

Good morning, everyone, I'm Olivier Bohuon, the Chief Executive of Smith & Nephew. I am here with Neil Taylor, our Group Financial Controller;Phil Cowdy.

And I'm pleased to have here with us, Julie Brown, our new CFO. She will be in mute mode today, so don't even think about asking questions toher. So we are very pleased to have Julie on the Board. And I'm very pleased also to have here our Chairman, Sir John Buchanan with us here; Johnis also very pleased to have a new CFO on board. And so, welcome, Julie.

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

Last year I said 2012 would be a year of balancing the delivery of our strategic priorities, while managing our more immediate operational challengesand opportunities, and so it has proved to be. I am pleased with our performance this year, in particular how we have liberated the resources whereappropriate and started investing in the growth drivers of the future.

These investments include individual products, like Negative Pressure; broader franchises, such as Sports Medicine and Trauma and Extremities;geographic expansion in the emerging markets; and acquisitions, like obviously the recently completed Healthpoint acquisition.

Financially, we have grown all our key metrics; underlying revenue growth was up 2%. Our trading profit margin increased 80 basis point to 23.3%.Adjusted earning per share was up 2%. And we initiated step change in our dividend payout, increasing it 50%. Added to this, our free cash flowis excellent, at over $600 million.

I will talk more about 2013 later in my presentation. In summary, I see it as a year of continuing to implement the priorities and building on thestrong platform we established in 2012.

Now turning to the highlights of Q4; we deliver a strong final quarter to 2012. Highlights include double-digit growth in the emerging markets;Advanced Wound Management again growing at well above the market rate; and improved performance in the trauma market.

Our Q4 revenue was up and underlying 3%, to over $1 billion, only slightly flattened by an extra selling day. This revenue growth does not includeany contribution from the acquisition of Healthpoint, which completed at the end of the year. Our trading profit was $272 million; this representsa margin of 25.3%, slightly ahead of last year's achievement. Adjusted earnings per share was $0.216, similar to prior year.

After paying the Healthpoint consideration of $782 million we finished the year with net debt of around $300 million. In line with the announcementon our dividend policy we made this summer, we are increasing our final dividend by 50%, and proposing $0.162 per share.

Finally, we promised to provide more details on our capital allocation framework in the first half of this year, we'll do that with the Q1 resultspresentation in May.

This slide captures our underlying growth in the quarter; on the left-hand side geographically, and on the right, by product franchise. In the US wegrew at 1%. In the rest of our established market we grew at 2%, where the weak macro environment we continue to see in Europe was more thanoffset by strong results in Japan and Australia.

Growth in our emerging and international market was strong, up 14%, our best quarter this year. Growth in China, our largest market, was particularlypleasing at plus 30%. On the right, across most of our product franchises we delivered growth rates that were the same or better than the previousquarter.

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I will now turn to the next slide, to look at our Hip and Knee franchise. Our global knee franchise increased by plus 2%; the broad dynamics of ourperformance are unchanged.

VISIONAIRE, our patient matched cutting instrument, continued growing double-digits year on year, both in the US and elsewhere. Our US volumesnow represent over 20% of the total of VISIONAIRE. This growth demonstrates more customers are coming to appreciate the benefits of suchsystems.

Our LEGION [in] system launched in the first half is now adding to growth. Also, we further extended our knee range by adding an OXINIUM optionto LEGION Narrow.

Excluding BHR, hip implant growth was up 3% on last year. This compares the total hip market which was 2%. We continue to achieve good growthin our focused products, and had a strong quarter in our ANTHOLOGY R3 end product cup systems. In addition our new REDAPT Revision hip systemwas launched in the US this quarter, which significantly improves our hip revision offering.

Turning to Sports Medicine and Joint Repair, we continued to deliver -- delivering a healthy growth, up 7%. We saw our knee repair growth beingdriven by FAST-FIX 360.

Our Trauma growth was 7%, which was ahead of the overall market growth of 3%.

I'm encouraged by this performance which I put down to three drivers. And you remember that this was one of the disappointments early thisyear, and we have done a lot of things to change this. It shows the early benefits of the actions we have taken to refine and reinvigorate the modelin the US.

We have created focused sales team serving Trauma and Extremities customers, and started hiring; that will not be reflected in this quarter actually,hiring some new reps. In the emerging market countries we delivered good double-digit growth in the quarter. And finally, we benefited fromissues one of our competitors had with its [nail] portfolio, and you know who I'm talking about.

Advanced Wound Management grew at 4%, well above a flat market. Our expansion in negative pressure continued; as you know we launchedRENASYS in Japan back in August. Since then we have invested in additional sales reps. And I'm very happy to report that December, in Japan, weare already close to achieving a 20% market share in negative pressure.

It is similar positive story in Europe where we now have a 25% share. This is partly from further growth in our traditional Negative Pressure WoundTherapy, and also as PICO sales continues to build.

Our new product introduction momentum continues with six more this quarter, bringing a total of 32 for the year. Also in the quarter, earlyintroductions, such as ALLEVYN Life and VERSAJET II, are now contributing to our [ours].

Now over to Neil, and I will come back to you for the strategic priority; you will hear another accent.

Neil Taylor - Smith & Nephew plc - Group Financial Controller

And it's not a French accent, apologies. [laughter] Thank you for that, Olivier; and good morning, ladies and gentlemen.

As you're accustomed to in this section I'll talk through the results analysis by business segment. I'll also cover the financial implications of theHealthpoint acquisition. And we'll finish with some technical guidance to help you model 2013.

Turning firstly to slide 11, the income statement; first for clarity, as the Healthpoint acquisition completed at the end of December, there was noimpact on the Group's trading results for the quarter. Acquisition-related costs of $11 million were incurred in the quarter, and have been shownseparately on the income statement.

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Revenue in the quarter was just under $1.1 billion. This represents a 3% underlying sales growth on Q4 last year, and after adjusting for exchangerates, and for the Bioventus transaction. Trading profit in the quarter was $272 million, an underlying increase of 2%. The trading profit margin was25.3%, in line with Q4 last year.

Restructuring costs charged in the quarter were $35 million, and they all related to the structural efficiency program previously announced. Theprogram continues to deliver in line with plan.

Turning to the full year, revenue was just over $4.1 billion, representing underlying growth of 2%. Trading profit for the full year was $965 million,an underlying increase of 6%; the trading profit margin was a healthy 23.3%.

Moving to the next slide, slide 12 and further down the income statement, the full-year results include the $251 million profit on disposal of ourClinical Therapies business to Bioventus. The associate's line shows our share of the profit from this venture. This is break-even in the quarter and$400 million for the full year. We expect to continue to see some volatility in this number, in the early phase of this new entity.

We have again set out an appendix to this presentation an analysis of the impact of the Bioventus transaction in the reporting numbers for theGroup. The appendix shows a 2% adjusted earnings per share dilution in 2012.

The final tax rate for the full year was 29.9%, resulting in a Q4 rate of 29.2%. This is a marginal reduction from the rate anticipated at the end of Q3.

Adjusted earnings per share in Q4 were $0.216, a decrease of 1% on last year. This is below the growth in trading profit, due mainly to the strengthof the US dollar, the Bioventus transaction, and an increase in the number of shares in issue. Adjusted earnings per share for the full year were$0.757, an increase of 2% on last year.

Turning to slide 13, an analysis of the revenue by business segment; the impact of currency in Q4 was 1%, as a consequence of the stronger USdollar year on year. The Bioventus transaction reduced reported Group revenue growth by 5% in the quarter.

In addition we had 61 sales days, one more than last year. The impact of this in an underlying sales and trading profit growth is estimated at lessthan 1%, as this extra day fell around the first of period.

Turning to slide 14, an analysis of revenue growth rates by division and by geography; Olivier has talked to the main drivers are by revenue growth.Details in sales growth by product franchise are set out in the appendix. I'd like to add a few further points.

Looking at pricing across our business as a whole, and in the US and Europe individually, we saw essentially the same price environment in Q4 asin recent quarters. Hip sales continue to be held back by the decline in BHR sales of over 40% against the quarter comparator. BHR sales nowaccount for less than 8% of our hip sales and a little over 1% of our Group sales.

Trauma sales growth was reduced by 1% relating to the previously earned royalty income, described in recent quarters. This effect has nowannualized out.

In our global Wound business sales grew by 4% in the quarter. Growth was reduced slightly by wholesale ordering patterns. NPWT sales againcontributed the vast majority of the growth.

Turning to the next slide, slide 15, which shows the analysis of trading profit by business segment; as mentioned earlier Group trading margin inthe quarter was 25.3% broadly flat in the prior year comparator. Group trading profit margin for the full year was 23.3%, 80 basis points above theprior year. We dealt with modest but widespread pricing pressure, but some margin uplift from structural efficiency programs. We continue toinvest in new products and our capability to bring these products to customers. Spend in the quarter on R&D was 4.2% of sales, consistent withthe full year.

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In ASD margin increased in Q4 by 70 basis points. We saw a slight improvement in gross margin, and in G&A from the actions taken previouslyunder our structural efficiency program. In Wound, margin decreased by 210 basis points in the quarter against a strong comparator. This reflectedproduct mix, high levels of SG&A investment behind NPWT in Japan.

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

Next turning to slide 17; as I mentioned previously, we were pleased when Healthpoint acquisition completed late last year. In 2012 Healthpointachieved revenue of $190 million, a growth of 26% against 2011. In terms of quarterly phasing, revenue was, very roughly, evenly spread with littleseasonality. Estimated trading profit for 2012 was $12 million.

Transaction costs of $11 million were incurred in the quarter. A summary of the provision acquisition balance sheet has been provided in theappendix.

The amortization of acquisition intangibles in Healthpoint will be in the range of $44 million to $48 million for the full year. We will receive our cashtax benefit in the US from this amortization due to the structure of the acquisition as an asset purchase.

We will, of course, provide you with quarterly updates on revenues for this acquisition. Prompted by this, we are taking the opportunity to reviewthe franchise reporting of our Wound division. From Q1 we will report Wound split by Advanced Wound Care; Advanced Wound Devices primarilyNPWT; and bioactives, being the Healthpoint acquisition products. We will provide you with historic data on the revised basis well ahead of ourQ1 reporting.

And turning to the last slide in this part of the presentation, slide 18. In a minute Olivier will provide you with our revenue and margin guidance. Iwant to pick up on some technical guidance to assist in your modeling.

The anticipated expense for the restructuring program announced in 2011, as set out in the appendix, was $200 million with $160 million of thisbeing cash costs. Of the remaining amount we expect to expense the majority of this in 2013 in the range of $80 million to $95 million, with asimilar level of cash outflow. The residual amount will be incurred in 2014.

We expect an annual charge for the amortization of acquisition intangibles to be in the range of $85 million to $90 million.

In 2012 our share of the profits from our associate Bioventus was $4 million. Going forward, in 2013, the income from the Bioventus associate willbe reduced as a result of the further levels of investment in the business, and the amortization of acquisition accounting entries in their incomestatement. We therefore expect negligible income for the full year.

The effective tax rate for 2013, on profit excluding exceptionals, is expected to be just below 30%.

In Q1 we will have two less sales days as compared to last year, 62 versus 64. The estimated impact of this in Group sales is around 3%. This impactreverses in Q2 and Q4.

Finally, as a reminder for Q1 exchange rates, if 2012 yearend rates were to remain the same until the end of 2013, we estimate the reported salesand trading profit growth would remain broadly unchanged in Q1 and the full year.

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

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Thank you, Neil. So 18 months ago I announced, in this room actually, the set of new strategic priorities for the Company to prepare Smith & Nephewto be fit and more effective for the future. I remain absolutely committed to these priorities and believe we have made good progress in deliveringon them.

We have created a simpler and more efficient organization, which is able to take faster and better decisions. We are beginning to drive greatervalue from existing resources by investing in high-performing product and geographic areas. And we are building a platform for growth, includingvalue enhancing acquisitions, in our chosen markets.

I would like to give you a snapshot of each of the five priorities to assess the progress and our actions for 2013. Established markets still present88% of our revenues and we made good progress in 2012. We worked hard to combat soft market conditions and continue to invest for the future.

In Advanced Surgical Devices we undertook a major restructuring generating annualized savings of over $18 million. Our $150 million savingprogram efficiency is absolutely on track. In Advanced Wound Management we have realigned, increasing our flexibility to deploy our resourcesto meet the customer needs. The spinoff of Bioventus was announced this time last year giving us resources we invest elsewhere, while maintainingaccess to their long term R&D programs.

Entering 2013 we are making targeted investments in our sales team to drive growth. In particular in Trauma and Extremities in the US, where weare adding new reps, and also in Japan, which, is by the way, one of the only growth places in the established markets. Our Wound team is focusedon integrating Healthpoint and this has started very well.

Across our business we continue to refine our business models to serve our customers better and more efficiently.

Emerging and international markets are vital areas. We are achieving double-digit growth and they contributed approaching half of our annualrevenue growth in 2012.

China was the first BRIC country we invested significant resources in, both organically and through acquisition. In 2012, it delivered revenue of wellover $100 million and grew at more than 20%. Globally it is our third largest employee population with over 800 people in China now.

China is a standard, and set the expectation of what we can achieve elsewhere. We appointed a new country General Managers in Brazil, in India,and more recently in Russia. We have also reinforced support functions, such as operations, supply chains, compliance, marketing and businessdevelopment.

During 2013 we will make additional investments in our sales teams and supporting of infrastructure in the BRIC countries. We'll also step up ourfocus on other countries where we see high potential opportunities.

We are increasing our R&D spend as we develop portfolios for the mid-tier. The first of these new ranges will be in Wound Management and willbe launched next year.

Also finally, we expect to further accelerate our growth with acquisition. We have a lot of work ongoing in mid-tier acquisition.

I am pleased with the progress we have made this year in simplifying our operating model. We have improved our gross profit margin by -- partlyby reducing our cost of good by around 3%. In manufacturing we have refined our footprint, especially in China. We closed whole Linhe automaticplant moving into the new one in Beijing ahead of schedule. We have now completed the extension of our wound factory in Suzhou on time andon budget, and have started equipping the plant.

Looking to 2013 we have many process improvements projects running. These range in size from a major European initiative to create the singleIT and business intelligent platform to smaller projects aimed at improving such thing as forecasting and accuracy. We are also reducing the sizeof our product portfolio retiring all the lines and focusing on products that deliver the greatest clinical benefit.

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During 2012 we have maintained our momentum of introducing new products. In Advanced Wound Management we again launched more than30 products maintaining the pace set in 2011.

In Advanced Surgical Devices we had extension to our established LEGION Knee and PERI-LOC plate range, a new knee provision system and furtherinnovation in sports medicine. We also registered over 100 of our existing products in the emerging market.

I believe that medical training and innovation go in hand and hand, and in April we opened our new state of the art medical training facility inMemphis in the US.

Looking to 2013 we'll accelerate our R&D including our portfolio for the mid-tier in the emerging markets. Our recent acquisition of Healthpointalso includes a substantial investment in the Phase 3 clinical trials for our products to treat venous leg ulcers.

Turning to acquisition, the fifth strategic pillar, I am very confident that Healthpoint will be proved to be a fantastic addition. We have just completedour first month of ownership, and I have been very impressed by the culture and drive I have seen. I am looking forward to presenting to the salesteam at the end of the month in the US.

We also made a number of small complementary technology acquisitions such as LifeModeler, Kalypto and ADERMA in the first half of 2012. Allhave been integrated to plan and are performing at -- or as our expectation.

Although we can never predict where acquisition opportunities arrive, I believe that we'll complete more deals in 2013. Our Business Developmentteam is currently reviewing more opportunities than at any other time, while I have been at Smith & Nephew; these are in a range of sizes and ingeographies. They all have our strategic focus, either supplementing an existence presence or will act as a platform to accelerate the growth.

Turning to our outlook for 2013, Neil has already covered some technical points; let me talk you through our revenue and margin guidance. As inthe past it is our policy to give guidance focused on revenue trends compared to market growth rather than numerical ranges. In terms of thegeneral market dynamic across our businesses, we're anticipating the trend of 2012 to continue in 2013.

We expect our Advanced Wound Management to continue growing ahead of the market, driven by further share gains in negative pressure andhealth point.

In Trauma we believe that our additional investment in both Trauma and Extremities, as well as the new model, will help us to outperform themarket.

In the Sports Medicine and arthroscopy we expect to grow around the market rate.

In reconstruction, as we have said before, we expect to be below the market for the next two quarters. In knees we're just about to enter our newproduct cycle with JOURNEY II expected to enter in the full commercial launch later 2013 or early 2014. Our core hip performance will continue tobe masked by metal and metal headwinds. While we believe that this will stabilize, we cannot predict well.

Turning [strained] profit margin during 2013 will gain the benefit of the structural efficiencies we achieved last year and the one we will deliverthis year. As I have outlined, we'll also continue investing for growth in new geographies, new products and on the existing portfolio. We alsoexpect to see continued price pressure.

The cost of the US medical device excise tax is significant. While I believe we will be able to absorb it completely over time, as I said during thecapital day, it is a material headwind this year.

Finally, as we have said, the Healthpoint acquisition is initially dilutive to the Group margin.

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Taking all these factors together, I would expect our margin in 2013 to be below the 23.3% achieved in 2012. Finally, as I have said before, we arefocused on creating an organization capital of delivering a sustainable 24% margin.

In summary, we exit 2012 with a much stronger platform than we entered last year. In 2013 we remained focused on implementing our priorities.We are continuing to improve our efficiency. We're also increasing our investment in tomorrow's growth drivers in our existing portfolio, makinggeographic investment, R&D and potentially making further acquisitions.

Nothing is easy about the choices we are making and the hard work we have to do. But I'm pleased at the progress we have made, excited aboutthe opportunities and certain we will deliver great value for the companies and for the stakeholders.

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

Q U E S T I O N S A N D A N S W E R S

Operator

(Operator Instructions). Charles Weston, Numis Securities.

Charles Weston - Numis - Analyst

A couple of questions from me. First of all, in the US you said that the wound management sales were flat. And I was wondering if you could giveus a comment on why that seems to have slowed.

And secondly on your margin guidance for the full year to be below 23.3%, that's quite a wide guidance. And I was wondering if you could give usa sense of the order of magnitude of that. I suspect the answer is no, but I would like to know.


Okay, let me start by the second question, which is the one I was expecting. The problem is we said below; last year we said a modest increase, soyou say what do you mean by modest? Now we could say slightly below, a little bit below, somewhat below; I don't know. So, it's below and below--

And think about again we improve a number of things, but we have this Healthpoint slight dilution. We have $25 million of the medical device tax,which is a cost. And we still have the same market trends, the same market conditions; we still have the price erosion. So things are what they are.

Again, I think the most important is not what is going to happen in 2013, which is a year of consolidation, but what is going to happen in the future.And as I was saying, I expect to deliver what has been said in the past, which is 24% margin for this Company.

Now coming back on the wound market in the US; the wound market in the US is not very strong, that's true. Actually, we do very well in thismarket. KCI, I don't know if you have seen that recently, has issued a bond, in December. And they were disclosing some of their revenues and theywere showing a minus 11% growth, which is significant. We have a significant growth, so I think we do very well in US.

Now, why the growth is not as you could have expected? Because we are very strong compared to last year in the Q4, and that's the only mechanicalreason why the growth is not there.

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Michael Jungling - Morgan Stanley - Analyst

Michael Jungling, Morgan Stanley. I've got three questions. Firstly on the medical device tax, can you comment whether you've raised prices in2013? And also, if you read the Memphis [Times], which I don't think is a huge newspaper, but it's -- some of your management has made commentsthat you actually have reduced man count, because of the medical device tax. So I'm trying to understand why the medical device tax is suddenlysuch a huge headwind for 2013 when you see reductions in headcount? Maybe that's a question --


Okay, well, this is a mix of a lot of things. We have announced 100-layoff last week; 63 in Memphis, about 20 in Boston and something like 12 inEurope, I think.

This is just the follow-up of the value plan, so there's nothing new on this. This has nothing to do with the over (inaudible) here. This has to do withus willing to be fit and effective for the future. So this is nothing new; this is just a plan.

So what Fox TV in Memphis or the Memphis Time has written is just wrong. It's just a mix of things in the environment that we have seen a yearago having driven us to make the changes we are making and this is why it's -- it is what it is. So the (inaudible) has nothing to do with the over[market] per se, it's just wrong.


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


No actually and I double checked that yesterday night with our Head of ALD, because I wanted to be sure that we did not, because I've seen a paperyesterday evening, were saying that many companies have raised prices or have transferred the price on customers. And I've double checked thatyesterday with our US organization and we have not done that.


And then a --


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


And two more questions, the margins in Wound Care to us were a little bit disappointing. How much of the margin impact was the investment inJapan, and will they continue in 2013 at a high level?

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You have a different mix here. Margin in -- sorry, investment in Japan, and investment in the rest of the world actually, has been accelerated thisyear. Why? Because we have launched as you know RENASYS and VERSAJET in September -- August, actually. This year we have added a numberof reps in Japan, and this has been one of the drivers of the margin drop.

The second one is the price situation on the negative pressure of the market. The market -- the prices have been slightly down and this is also afact. We have not taken our prices down a lot, but sometimes we have been able to -- we have been obliged to react, so it's a mix.


Great, and the third question is in relation to --


The fourth.


The cost saving, you mentioned half of the $150 million have now been taken care of, is that the run rate at the end of the year or would you saythat's the $75 million for the full year?


No, it's $80 million now. If you annualize this $80 million, I talk under the control of the Controller, it goes to about $100 million roughly annualizedthe savings of this year, and then will reach what we're expecting last year -- next year, sorry, the $150 million.


Thank you.


Correct, Neil, yes or no?


Probably, yes; broadly, the $100 million is correct. What we've seen is cumulatively $91 million of cash and on cash, and the benefits ahead of that.But the numbers you'll see, to the tiers, is $91 million, but ahead -- $100 million ahead.

Ingeborg Oie - Jefferies & Co. - Analyst

Ingeborg Oie, Jefferies; two questions please. First on the capital tie up in the business, CapEx is coming down and I was wondering if you couldcomment on what's been happening and whether this is the planned instrumentation manufacturing in China and whether this low level is whatwe should be expecting going forward?

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And then on the inventories and receivables as well, which seem to be going up the level there despite the Bioventus divestment is it Healthpointthat's more capital intensive in that respect or is there something else going on?

And then actually I have a third question, which is on the competitive landscape in knees. A number of competitors are launching new productsand have good momentum, whereas Smith & Nephew we still have to wait for about another year for the new knee product. I just wanted to seehow you relate that; your comment that you're going to grow just slightly below the market given continued BHR headwinds as well?


You want to take CapEx and receivable question, Neil?


Yes, I think we will look at CapEx coming down. We see continued investment and the underlying dynamics haven't changed. What makes it lumpyis investment in infrastructure for factories and so on. So as we've invested in some of our manufacturing facilities we've seen that causing lumps.I wouldn't read too much into the 2012 rate as a new bench, we still go to the 8% rule of thumb that we've always looked to on CapEx.

Turning to the inventory and receivables, I think we're looking -- the way we see the receivables first is we had a strong end to the quarter, whichinvariably just sucks up a little bit of working capital. So again, that's what we would have anticipated.

On inventory I think there's two stories here, when you look at the initiatives which we've had on field inventory we've seen progress, and I thinkwe've talked to that before. You've got to balance that with investing in new products and new businesses in new markets, where we've seenfurther investment. So there's a trend on what we've been working on and there's investment.


Thank you, Neil. On the question on the -- on the knee question, yes, some companies are launching new products. We have obviously taken thisin consideration in our expectations.

We're pretty happy with what is happening with our product though. And I think the development of the pre-launch of JOURNEY we're going toshowcase JOURNEY II at the AAOS. I'm sure you'll be there so you will see that. And then the full launch is expected in the US. So I think it's reasonableto believe that we will be slightly below the market on this knee. I'm not very anxious about it.

Veronika Dubajova - Goldman Sachs - Analyst

Veronika Dubajova, Goldman Sachs; two questions, if I can. The first one's on M&A and, Olivier, you have said you're working on more deals thanever and, given that you've already done a wound deal, I was wondering if you could maybe talk about how you think about M&A priorities nowthat you've ticked off one of the boxes that you set out as a strategic priority. Is it more geographic? Is it more product expansion? And what doyou see out there that's getting you excited, without, of course, disclosing the names of the targets that you're looking at.

My second question is about extremities. If I go back in your history, it's never been a big focus for Smith & Nephew and, listening to you today,you've brought it up a number of times. When you look at your footprint in that area, do you think your product offering and your competitivepositioning is strong enough? Or, in order to really be successful in the extremities market, will this require inorganic activity from your part?

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Thanks, Veronika. I don't think I said that we work on more deals than ever. I think that we work more than ever on the deals. But it's true, becausethey are more and more complex, and actually, again, let me just say that clearly; the first priority for us now is integration of a list point and besuccessful with the list point.

On top of this, as you know, we have on the agenda a number of things to do in the emerging market in terms of acquisitions. As I said many times,they are small acquisitions; they are bolt-on acquisitions, either distributors or small companies. So we are not targeting.

And Julie is here now for four days and it's obviously important to have the CFO involved in that, and so we do not plan to make, in the next quarteror whatever, huge acquisitions, so don't worry about this; it's not the point. So we work a lot on small deals, which we believe will enhance ourgrowth in the emerging international market.

Regarding your point on the extremities, we have a view of the business, which is pretty simple. The view is a significant part of the Company isgrowing at a low single-digit, and another part of the Company is growing double-digit. And the question is how can we maintain a decent growthon this core business of the Company, while investing much more in the high growth segments?

What do I mean by high growth segments? Obviously, negative pressure; obviously, the bioactives; obviously, the sports medicine; obviously,extremities and trauma; and so, going back on your question, yes, we want to invest more.

Now, do we have enough share of voice in this field? Maybe not, so that's why we invest a little bit on this next year, and we've started in December.Do we have the right portfolio? Yes, we believe we do. And the offer we provide is, I think, pretty good.

So this is really what we want to -- I have said many times to you that we want to rebalance the Company, to make it a higher growth company.That's what we work on and we really have some focus on these type of businesses.

We need to take two callers from the phone, if we may, and then Martin.

Operator

(Operator Instructions). Matt Miksic, Piper Jaffray.

Matt Miksic - Piper Jaffray - Analyst

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


Maybe I will share this answer with [Phil] here on the knee business. The knee business, the OXINIUM 30-years' claim has been given to us, what,two years ago? Two years ago. We have been very happy with the [make] and we are still very happy with [their knee]. Because when you talk aboutthe knee business you should really make a difference between some products we push, which are high growth, and some projects which are notas pushed, and with a low growth.

OXINIUM is for us, the 30-year claim, a chance. We are the only one with this claim. So we definitely have a high focus on this, and we are happy.The growth of this product -- Phil, I don't have the growth in head.

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Phil Cowdy - Smith & Nephew plc - Investor Relations

Yes, OXINIUM, is a VERILAST brand with a 30-year claim, comfortably double-digit growth.


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


So, within your knee portfolio that's growing quite well. And maybe could you help us understand where the challenge has been, and as [Argent's] have come up nicely in orthopedics, but maybe where some of the pressures have been similar to the way maybe you talk about where are someof the pressures are, which are on the hip side.


Essentially, with any portfolio you have a whole range of products. And OXINIUM is growing very well; the core LEGION range is growing very well.What you see is some of our legacy older products are slowing down, some of the old Plus range that was being sold is now much slower, etc., andwe're just working through that.

And as Olivier keeps on saying, our core range, LEGION -- the whole LEGION family, absolutely believe in, supported by VISIONAIRE. And then aswe look to Journey II, we think there's a good dynamic across the whole portfolio there.


Talking about VISIONAIRE --


Perfect. Then on Extremities -- a follow-up on one of the earlier questions around Extremities [ending] in that area. Could you talk a little bit aboutmaybe how important to that is growing that business? How important is distribution, direct or indirect to US/no US regions? Is that somethingthat you can build up yourself from scratch; maybe talk about how you get there and how important it is?


In terms of Extremities, I think what we see ourselves offering is, first of all, our product range. As you will know, we have a very strong EX-FIXplatform, which is part of treating extremities. Certainly, if you look at foot and ankle, we have a strong plate range that we've added to this year.

And then, in addition to both of those, we obviously have a very strong Sports Medicine and soft tissue repair range that's now been extendedinto Extremities. So we feel we have a strong Extremities range.

And what we've been starting to do now is specializing some of our sales team to address extremities practitioners, and we're starting to add morereps to that team in the US. So it's more about the product and the sales team, rather than the broader distribution channel you seem to be referringto.

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And outside the US I think we're pretty happy with what is happening in Trauma and Extremities; the growth is very high. We have some bigcountries, South Africa. We have a share, which is actually one of the highest shares in the world, if it's not the highest. I think we've got 30%-plusshare in Trauma and Extremities. China is also starting pretty strongly, so we are happy with this.


Thanks so much. That's helpful.


Thank you. Another question on the phone?

Operator

Chris Gretler, Credit Suisse.

Chris Gretler - Credit Suisse - Analyst

I just have a Few small question; hi, Olivier. Just on the market environment in hip and knee, in Q4, it looks like now there was no acceleration here,and I was just wondering what was your view about the underlying cause of that. Given your comments, it looks like you see in pricing, relativelyunchanged on a sequential basis. So, was there really such a volume uplift?

And then basically, the second leg to that question is now it looks like in your numbers it's showing up for a bit less than maybe in some othercompetitors. Do you think that might be due to their raising prices, in contrast to you, and that there basically was some pull in from Q1, as someof hospitals started to purchase in Q4 in an anticipation of the price increases? I was just wondering, what was your view on that situation?


Okay, on the first part of the question, on the markets, yes, it's true we have seen a rebound in the market, in Q4, whether it's in hip or in knee. Ifyou take the global hip market it went from 0% growth in Q3 to 2% in Q4.

Is it a rebound? Well, it's the ups and downs of market. And again, I personally do not believe we can extrapolate on a 2% growth, saying this willbe even better next year. So I'm very cautious about the market growth on a quarter-by-quarter basis.

If you take the knee, the knee -- global knee went from 2% in Q3 to 3% in Q4. Is it a rebound? Well, for some optimistic people, yes. For me, I say,well, it's an anecdote, and I don't think that this could be extrapolated either.

So I think for the market, they are better, it's a fact. But I don't mean that this will happen again, in the same way next year, and the market willsuddenly become a high digit growth market.

Regarding our own situation, I think you have to look at two things here; product range and geographic position of Smith & Nephew. Geographically,we are extremely important in recon in Europe. I talk under control of Phil here, but we have about 30% of our business of recon which is in Europe,which -- the market average about 18%. So it means we are more exposed to the Europe austerity, in the recon business that's what the competitorsare. That's number one.

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In terms of portfolio, yes, when you look at the dynamic of BHR -- sorry, of hip, one can say, well, it's not as good as the market. Actually, in Q4, whenyou exclude the BHR, instead of minus 3%, we grow I think 2%, or this is a country. It's minus 2% or 3%, I think.


Yes, [plus] --.


Yes, minus 2% recorded. Actually, it's 3% if you exclude the BHR impact, so -- and this is better than the market. So I think, [Christian], it's not -- Idon't think it's bad actually. Knee is slightly under, and we have mentioned that and I have explained it, but for the hip it's not the case.

And regarding the market, I think don't extrapolate anything on the market for Q4. I think it's we'll be disappointed.


Okay, thank you. And then, just quickly on the Trauma business, how much reassurance can you give us now that basically there is no broad baseunderlying improvement, and it's not just basically now that you're benefiting over proportionately, from the [C&Ts]recall in the Netherlands.Because I remember, I think you had a very strong Netherlands business, from my memories.


Well yes they have. The recall is part of it. Actually we don't know what is really the part of (inaudible). I said we have three items here, explainingthe good dynamic, which again is 7% this quarter.

The first one is I do believe that the new model we have put in place, and you remember that Q3 was much better than Q2. And in Q1 I was -- atQ1 unhappy about the result of summer. I'm now happy with what we have done, the way we've embraced that, and what we have changed. SoI think that's important.

Now, based on the new model that we have, which I can remind you what it is. It's instead of looking at all the surgeons in the same way we havenow a sales force calling for extremities, sales force calling for scheduled surgery, and sales force calling for emergency trauma; different sales force,different customers, different offer. This works very well.

The second point I think, out of the US, we have a very good development of the Trauma business, which is helping. And then it's the recall of(inaudible).

How much does that give us per month? I don't really know. What I can tell you is that we have been able to supply the demand which was existing,but it's a part of the reason why we have 7% growth, but it's -- I cannot tell you how much it is.


Okay, good yes, thank you. Have a good day.


Thank you, Chris. So coming back to Martin.

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Martin Wales - UBS - Analyst

Martin Wales, UBS; a couple of quick questions on the US market. You gave us a global hit number, ex. BHR; what would the US number have been?Similarly you gave us market shares for Negative Pressure Wound Therapy in Europe and Japan, what's your US share, and what impact do youexpect of this upcoming tender? Well, I know pricing's going to be tough, but you're coming from a low base. But obviously KCI, as you highlighted,has been struggling. Sorry, let's start with those two.


On the Wound you mean; on Negative Pressure?


Yes.


Okay, on the Negative Pressure, the market in the -- let me give the exact number, the exact number of negative pressure -- the quarterly growthof Negative Pressure has been minus 5%, global.

In the US, I don't have the figure. Do you have the figure of the negative pressure in the US?


For Negative, no.


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


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


I don't know. Yes, I don't know. And again, our share, what I can tell you is that we are en route for this 20% share in the US. We have a pretty highgoal here. [Eco] is doing very well in the US.

Again the growth that we show here, we have a lot of pumps sold last quarter in -- last year quarter Q4. That's why the comparator is not good thisyear, but I'm pretty happy with the dynamic of our business there. We gain share day after day, day after day.

And again, the launch of Japan has been, for me, the proof that we know how to deal with that. Gaining 20% share in three months, in Japan, it'sa good story. We are number one in Japan; that helps. But still, I think it's a good set of results. But KCI is definitely a problem.

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Sorry, US hip market share, ex. BHR


So the US hip market was --


Sorry, growth ex. BHR; sorry.


Was in Q3, 1%; in Q4, 4%. That was the market; 4% growth in the US market, in Q4. Is that right?


I think you're after US, ex BHR, which I think we're giving you plenty of data at the global level. BHR is now less than 8% of the total.


No, I'm not going to disclose this one, that's -- but my belief is that we do better than the market, ex. BHR.


And a couple of quick Healthpoint questions. Firstly, well, you've owned this thing for a month now. It looks like potentially a very good acquisition,with a lot to come out of it. What have you learned so far?

Also, given you've highlighted it's a big focus to get this thing integrated quickly, I guess that would suggest we -- and, indeed, you've commentedit; we shouldn't expect another big deal in the next quarter. How quickly do you think you can free up management time if there was another dealof that sort of size available, in another area?


On the free up, I think we have to discuss this with Julie when we have some time to discuss it; this is not the right way to discuss it. And to discusswith the Board also what we want to do. And we have plenty of ideas about what we can do, but it's premature to discuss this I think, Martin.

Regarding Healthpoint, so far so good, extremely good integration; I'm very impressed with the people I've met in this Company. We have a greatretention of the talents in the Company, which is very important. As you have seen we've closed the year at 26% growth, which is significant, [P1]is a good signal of the things that we are not jeopardizing this business, so it is not going -- it is going well.

I'm going to see all the sales force in the US at the end of the month, so I will feel a bit how they are. No, it is great, actually. It's a very, very goodstaff.

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The clinical, also doing well, we have started the Phase 3, as you know. We have about 40 centers running. Clinical in Europe is starting also. So it'son track.


Okay, I know Ed's quite keen to ask a question.

Ed Ridley-Day - Bank of America Merrill Lynch - Analyst

Ed Ridley-Day, Bank of America Merrill Lynch. On Sports Medicine you've had a great run in recent years, market leadership and great technology.Your guidance of growing in line with the market this year seems to me a slightly more conservative guidance. If you talk a little bit to your productlaunch profile there and anything that you can talk about today that you will be bringing our later this year that would be my first question?

And then while we're on products, could you just confirm the exact launch dates in the US and Europe of the JOURNEY II. You'll be showcasing itat AAOS, does that mean we are looking the second quarter/third quarter launch in the US?


Phil will take the two questions; you will answer them much better than I.


Thank you very much. So Sports Medicine, as you rightly say, we get good growth there based on high levels of innovation.

In terms of our guidance for this year, as we look at the product launch profile we probably have more products towards the back end of the yearbeing launched, but just how it falls rather than the first couple of quarters.

I think to JOURNEY II, exact launch dates, this is probably not the right venue to give the exact launch dates.

Ed Ridley-Day - Bank of America Merrill Lynch - Analyst

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


No.


Two more questions, Tom. I'm surprised Martin that your question how much are you selling in Negative Pressure this quarter, I was almost readyto disclose a figure, but I put it down (laughter). It's too late.

Tom Jones - Berenberg Bank - Analyst

Tom Jones, Berenberg. Quite a bit of focus this morning on your outlook for 2013, but I have a couple of questions about the outlook beyond that.

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The quid pro quo of the med-tech tax was the expected volume uplift that you might get beyond that, that's kind of why the industry signed upso willingly in the first place to pay that tax, although they do seem to be backtracking somewhat now.

How much of your 24% margin target is dependent upon factors such as the potential volume uplift from Obamacare or just general marketrecovery, or do you think you can get to that 24% target if all the markets that you currently operate in continue to trend as they are now?

And then a slight follow-up to that, just wondered how you are thinking about your orthopedic business with CMS pushing much more towardsbundle payments for orthopedics, and what impact that might have on your portfolio and pressure perhaps for down-branding, and how youmight be thinking about addressing that going forward in your recon business?


24%, in the market as they are now. As I said we're absorbing this 24% medical tax, so that has been said and we are still on this path. So there isno change versus the previous guidance we have done on this one, except for 2013 actually we didn't give any guidance 2013. I was talking about2014 when we met at the Capital Day and we're still there.

Regarding the CMS, additional bundling, yes, it push the bundling, you remember then there was one of the big question when -- since thisacquisition saying why don't you believe that there will be -- it will be more difficult. It's not, actually; so we don't see a big issue in the bundlingCMS.

No, CMS, the point is what they have announced on the price reduction effort, Negative Pressure on the pumps, this is, I think, the 48% pricereduction of CMS, which -- actually, because (inaudible) have about 6% price reduction, so for the pumps about 41% price reduction net/net.

That will not impact. First of all it's a very tiny part of the Negative Pressure of the business. And secondly, we believe that we're going to gain a lotof volume with this, so we are not very anxious about this.

Tom Jones - Berenberg Bank - Analyst

Just a quick follow-up on Obamacare, assuming there is some volume going to come in 2014 from expanded insurance coverage, where withinyour business would you expect to gain the most from that volume uplift?

And if I'm being slightly cynical about it, it does look like your ASD launch cycle is nicely timed to coincide with the potential rise in volumes, is thatjust serendipitous or is that actually by planning? It looks like everything's kind of back end loaded, so it looks like you'll be launching into a risingmarket rather than stagnant market?


Serendipitously, I don't think so.


I think, Tom, it's difficult to see or even measure how much benefit we will get from that.

As you know most hip and knee implants are people already mid-60s. Trauma you're probably going to be covered anywhere. Maybe some SportsMedicine falls into that category and maybe a bit of Wound. But it's not something we're budgeting for a -- we're certainly not budgeting for anassumed uplift from benefit from that. If we get it that's great, but --

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

David Adlington - JPMorgan - Analyst

David Adlington, JPMorgan; a couple of questions. Firstly, you mentioned a portfolio rationalization, just wondered if you could give us somefurther color in terms of which areas of the business and what percentage of sales you're taking out from that?

And then secondly on Bioventus, it doesn't look like it's going to be making a sort of contribution that maybe we were looking for this year. Justwondered if you could give us some further color in terms of what's happening in that business?


Well, in Bioventus I think the answer is pretty simple; much more investment. And I think next year we'll have also a number of investments, nextyear we generate nothing. Bioventus will generate -- our share will generate nothing. I think this year was about $4 million something like that,yes.

And this is due to the additional investments we do, or they do actually because they have 51% of the share of the Company, to prepare the portfoliofor tomorrow. So that's the main reason why you don't see this result and profit coming out of the deal.

So the second question was on the more rationalization, it's not really more actually. It's more implementation of the program that we're supposedto do. So we have new things happening, the one with people we -- actually, we have cut 500 people in the Company since my announcement ofa plan in November 2011, excluding the 100 people I just mentioned before, so that will be about 600 people.

You remember that I announced about 10% gross and 7% net of the Company employees, mainly in [G&A]. Actually in sales I don't think we haveany type of cuts, some readjustment and actually we're increasing in 2013 the sales reps in Trauma in the emerging markets and some othergeographies. So it's nothing special, just the implementation of the plan.

David Adlington - JPMorgan - Analyst

The question was more around the product rationalization.


Products, okay, I'm sorry, so we have kept -- I'm sorry I talked about other new programs.

In the products rationalization we have kept in 2012 around 29,000 SKUs, 29,000 in ASD a few thousand, but a few in Wound Management. So wehave started a program and this is not done. We still have a number of SKUs to rationalize and old products, products we don't sell, simplifying alot the manufacturing, simplifying then the cost structure, so that's what we are doing now.

Okay, thank you very much.

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