Half Year 2021 Smith & Nephew PLC Earnings Call
7 of the 3 franchised 2 are now back to above pre COVID-19 levels on an underlying basis.
This is advanced wound management, which was 5.1% above the second quarter of 2019.
Again, showing the benefit of the work to improve commercial execution.
And in sports Medicine.
T was 1.3% ahead of the 2019 quarter, even with a.
A slower recovery in E&P procedures.
And then orthopedics isn't there yet 6% below 2019, I'd point out 3 factors here.
Having estimates.
<unk> as you know remains a relative drag the headwinds I mentioned in China from the ordering patterns from distributions distributors ahead of the GBP and we've had some near term supply constraints in certain product lines.
Now specifically on the next page.
Let's.
Let's look at the individual segments orthopedics.
The higher growth that you can see for needs versus hits in the quarter.
We believe reflects the greater COVID-19 impact in quarter 2 of 2020 as the comparator.
When we look through that prior year effect of the recent trend of strong <unk> business has indeed.
<unk> continued.
And it's supported by the great progress of our <unk> dual mobility rollout.
They need we continue to work towards cement those options as stated and we remain on track to launch actually towards the end of this year.
Trauma and extremities, including strong growth.
You, both and from external fixation as case volumes returned.
And then finally other recon the growth was driven by U S sales of core our next generation robotics platform, we're now expanding into new regions.
<unk> had launches in India and Australia.
In the United <unk>.
Arab Emirates in the quarter.
And we have regulatory approval in Japan.
Now shifting to sports medicine, and E&P joined.
Joint repair delivered really good performance across both the municipal and the shoulder categories.
Yes.
From those of the acquired products novel stage, and regenerative and more than doubling.
In July we also announced the U S launch of fast fix flex the next generation of our leading Meniscal repair family.
This is a great device gives better access to around 40% of tears there are hard to reach.
With the currently available technologies.
Yeah.
AEP or arthroscopic, enabling technologies also saw strong growth from the recent launched products with sales of both length and flow once more than doubling.
And up to 5.10-K clearance in Q1, the double flow fluid management system also launched.
We said in the second quarter.
The E&P market, however remains challenging despite the 45% year on year growth, the Thompson and Youtube markets are showing slower recovery.
Lower than other areas of surgery, and in particularly in pediatrics and procedure volumes remain well below historical levels.
Levels the focus with tool is currently in training surgeons and targeting early opportunities.
In specific U S states.
And then finally moving on to advanced wound management.
All 3 segments of the franchise drove growth over pre COVID-19 levels.
Also within each segment.
Performance was strong across multiple brands.
As we continue to build on our improved commercial execution.
In advanced wound care. The recent acceleration in Europe continued in all other regions contributed to the overall growth.
Bioactive growth came from both central.
And the skin substitutes portfolio, all returning to above pre COVID-19 levels.
And finally advanced wound devices returned to growth as well helped by the ongoing recovery in elective surgeries.
Negative pressure remains the main driver of the segment.
With <unk> continuing to win business in the post acute.
And with that I'll now hand over to Amtrust loss to take you through the first half financials.
Thank you Roeland and good morning, everyone as Roland has covered the Q2 revenue performance in detail I will now move to the other view over H 1.
This slide shows.
Does the evolution of our revenue by franchise in the first half.
And as you can see all 3 franchises contributed to the recovery overall revenue, which was $2.6 billion.
<unk>, our largest franchise grew by 19, 2% on an underlying basis to $1.1 billion for the half year.
And sports may be seen on the anti grew by 28% to 0.8 billion.
Our advanced wound business grew by 18% to zero point $7 billion.
In part, reflecting the greater resilience of the franchise in 2020.
As you can see on the next slide the peak 2 by region is very similar.
Similar as we all know the timing impacts in 2020 of Covid vary by market, but when we look at the first half the U S of established markets and emerging markets all contributed to growth.
As Roland said, we're pleased with our performance in each 1 and.
You can see our improved position in our P&L.
<unk> revenue was $2.6 billion up 21, 3% compared to 2020 on an underlying basis on.
On a reported basis revenue grew 27, 8%, including a foreign exchange tailwind of 470 basis point and.
180 basis points benefit from acquisition.
Trading profit grew by 166% to $459 million.
Resulting in a 17, 6% trading margin.
The margin expansion reflects improved trading compared to 2020, together with strong control over discretionary costs.
Compared to pre Covid levels, though we are still seeing headwinds, namely increased investment in R&D, M&A, M&A and new launches as expected.
And ongoing COVID-19 related related negative leverage from fixed costs on higher logistics and freight cost.
Adjusted earnings per share grew by 189%.
<unk> 38.
With financial leverage driving growth of both trading profit.
And as we mentioned at the beginning we are proposing to keep our interim dividend unchanged having maintained it through 2020 in line with our progressive dividend policy.
Yes.
Moving to cash flow we generated.
It had positive trading cash flow of $404 million in the period, we trading cash conversion at 88%.
We continued to invest in capital expenditure in the first half as we progress changes to our manufacturing network.
And you should expect that Capex may increase further in the second half both from the manufacturing investment.
And also from instrument sets to support expected product launches.
The working capital outflow of $76 million shown on the slide was primarily driven by higher receivables, resulting from a return to revenue growth in the period.
Overall, our free cash flow was positive at $160 million are significant.
Significant improvement over the prior year.
We continue to have a strong balance sheet with access to significant liquidity. Our net debt ended the period at $2.2 billion.
Okay.
Kris of just over $250 million.
$237 million of that.
That came from the acquisition of the extremity orthopedics business, which closed in January.
Even with a higher net debt are recovering profitability meant that the leverage ratio came down to 1.6 times adjusted EBITDA at the end of the period.
Now finally, I'll move to our outlook. The first half results are consistent with.
The view of the market, we set out in April and we are on track to meet our guidance for 2021.
Target remains for underlying revenue growth of 10% to 13% on the trading margin range of 18% to 19%.
After a 17, 6% margin in the first half the range implies therefore.
For less margin seasonality in 2021 that we normally see and that's indeed, what we expect then that there are a number of factors contributing to that effect.
First the planned increase in our step up in Opex.
Some events like double AOS of taking place in the second half of the year.
Would more typically come in earlier, there's also the marketing and promotional spend that we posted in 2020 and that is now returning as we see markets recover.
And we're also expecting a greater effect in the second half from some inflation in costs, such as higher global logistics and freight costs for example in product.
Appreciate between Asia and Europe.
As before we all know the steel unknowns on we've made around Covid and we've made some assumptions about the course of the pandemic conditions improved in Q2, as we expected and our targets continue to assume that surgery volumes are largely unconstrained by COVID-19 in the second half.
I'll hand back to Roland to cover the strategic progress.
Yes.
Thank you Ron Farnsworth.
Ill now move on to update you on the priorities that we set out for 'twenty 1 at the start of the year. So these were.
Firstly to return to topline growth and to recapture momentum.
And we have been to drive further operational improvement.
And of course to contribute to respond effectively to COVID-19.
So moving to slide 19.
This shows the components of the first priority which is growth.
Last quarter, we highlighted the wound franchise as a case study.
Certainly and driving commercial excellence and the results from that have become more visible in numbers in the recent quarters.
As you've seen that continued also in quarter 2.
I'd like to spend a bit more time today, though on the second component of our growth story, which is delivering value from the acquired assets.
We began a more intense period of M&A from the first half of 2019.
Aiming at accessing external innovation being a hydrogen being in higher growth markets.
And also generating value suite sales and cost synergies.
So moving to the next page as you know.
We've.
We've been active across all 3 franchises.
In orthopedics with deal has increased our exposure to high growth segments.
The transaction was integra growth of scale and the extremities business, while it was very attractive and other digital assets, we have built out our portfolio of digital surgery technology.
In sports Medicine, and E&P, we've added exciting new product that tuck into our existing offering that building on successful strategy of commercial execution of religion regenerative for instance.
Then we have Noah stage programs at Terex, Tula from Tusker, which are earlier stage.
Ages. They also have the potential to change the standard of care in municipal repair and in the placement of your teams respectively.
And then in wound management.
Yields have expanded our portfolio offering again in high growth categories.
Bringing the osiris skin substitute products into our portfolio.
And that has enabled co selling with the oasis while in leaf as sold alongside our dressings.
And skincare offerings as part of our portfolio solutions in particular for pressure injury prevention.
We are still in the early stages of most deals.
As you can see on the next page.
Like the whole industry. These segments have been affected by Covid in the last 12 months. However.
We still been accumulating evidence of operational and financial delivery.
Star Wars rotation medical.
Which had commercial have been part of Smith <unk> nephew since early 2018.
It is an important example of a tuck in acquisition, where the business case has had time to play out.
The operational steps, we've taken to drive regenerative such as selling through a larger sales force and bringing it to new regions will also be repeatable with other acquisitions.
Importantly, this has translated into successful financial outcomes.
Jonathan that was a key driver behind the acceleration of joint repair from the mid single digit growth to double digit growth.
When we acquired Osiris in 2019 and important part of that business case with co selling.
Having completed commercial integration both the existing Smith <unk> nephew bioactive products and the acquired products are now being sold by the combined sales forces.
Finally, Osiris is at an earlier stage than rotation of course.
But we're now seeing the acceleration of bad actors that we expected.
The trading profit contribution is also ramping up with a transaction, adding to the group margins for the first half.
<unk> was a very different type of acquisition of transaction with.
With a value much more driven by technology.
An important component of the deal was a development partnership around robotics.
Total surgery.
And that's also progressed really well we have now key projects on track such as bringing bringing labs, leading technology to the core robotics platform and helping us move into new indications.
The extremity orthopedics assets are early in their time.
At Smith <unk> nephew of course.
But there is good progress on integration.
We've also started training the large sales teams on the new product.
And the existing Smith <unk> nephew sales force is now selling total shoulder and ankle replacements and former Integra sales reps are selling Smith <unk> nephew technologies such.
As evo small and spatial frames.
So when it comes to returns rotation add already met the hurdle of ROIC exceeding whack before the pandemic.
Other transactions are at different points of integration maturity of course.
And they have varied and how much COVID-19 has affected the deal models and the timing.
However.
The majority of including <unk> remain on track to meet our ROIC hurdle at the latest that is 5 years post acquisition.
Now shifting to key pipeline progress in 'twenty, 1 on the next slide launching an expanded pipeline.
Of course, another component of the growth strategy and its in line very much in line with our commitment to innovation.
I earlier cover 2 of the launches in sports Medicine fast fix flex that launched in July.
<unk> had the first patient treated and then double flow launched in April.
With element of the systematic upgrade of our arthroscopic tower.
We've also made progress with our robotic surgery system, Cory, which we first launched in the U S. In 2020, we've now also launched in India, and Australia, and India merits.
And then we expect to further develop the platform in the second.
Second half, adding hip software and the digital tension there, which is a novel GAAP balancing device to work with Corie in knee surgery.
Of course, this is all pending regulatory approval.
Now moving on driving operational improvements was the second of our priorities for.
For 2021 and.
In February we announced the new operations transformation and process efficiency plan.
We're getting around $200 million of annualized cost savings.
Optimizing our manufacturing work network is an important work stream.
And we've now announced plans to sell.
<unk> or close 5 of our smaller factories.
Much of the production will ultimately be consolidated into other largest sites over the coming years.
As this process continues to complete.
This rationalization will simplify the network.
And it will of course support greater efficiency.
<unk> and automation.
At the same time construction of our new large scale and high Tech facility in Malaysia is almost complete.
Planned to begin production in 2022.
Once in operation, we will be able to support more of our future growth from a low lower cost location.
And also increase our presence in a high growth region.
This will also make our manufacturing supply chain more resilient to the types of challenges and supply constraints that we currently see.
So to summarize my last slide.
In the second quarter shows that we're.
We're on track to achieve 2021 guidance to deliver on our strategy.
And to recapture the growth momentum from before the pandemic.
When I look at each franchise the wound business is showcasing our approach to growth with.
With improved execution and wound care with value coming from M&A in bioactive.
And the long term success story of innovation and devices.
Sports Medicine was performing very well going into Covid and the signs are that we're picking up right, where we left off as the market recovers.
And in Orthopedics, we believe we're in good shape in 2 of the 3 categories with hips.
And trauma.
With more drivers banfield coming like the next generation shoulder and of course with cement less knee.
Okay.
So the effects of the pandemic has not gone away totally but overall, we're emerging from COVID-19 with the majority of our portfolio either outperforming already.
Already always important new drivers coming very soon I believe we've shown the ability to convert these opportunities into improved growth.
And of course, it's growth that ultimately drives our P&L leverage.
So with that thank you and I will take.
Take your questions.
Thank you, ladies and gentlemen, if you would like to ask a question. Please press star followed by 1 on your telephone keypad.
You changed you withdraw your question. Please press star 2.
To ask a question please ensure that Youll finance Amit.
Our first question comes from Patrick Wood of Bank of America. Patrick. Please go ahead your line is.
Okay.
Perfect. Thank you very much.
Keep it to 3 please.
Maybe just on the first 1 very fast recovery on wound care, I guess, I kind of thought hips and knees and orthopedics would be the first 1 to recover and then wound care would be a bit later why do you think <unk> has been so much stronger than that at least in the short term then.
Then also.
And then as a second question could.
Could you give us a little bit of color maybe on how you saw things move through the quarter I'm guessing.
Everything is a lot of volatility but towards the back end of the quarter things were presumably generally picking up a little bit relative to the first part of the quarter. So curious on the sort of general exit rate and then.
Last 1 just to sort of a small sort of technical 1 I'm. Just curious is there any ability for you guys to roughly and apologize if I missed this but to quantify the destocking effect that you saw in China was not material in the quarter or was it just kind of a nothing.
Thank you Patrick Thanks.
Thanks for that.
Questions on wound care I think it's been a combination of factors I think obviously, 1 has been quite resilient through the through the pandemic.
With a proportion of sales coming from the chronic markets I think we've had some early wins that we can really execute on that we're now seeing that we have really.
Being able to convert.
At the same time.
It's also showing the ongoing execution of the focus on really on commercial execution.
And then lastly, there has been 1 shift in ordering patterns from late 2020 into early 'twenty..1 that also had an impact you would.
I've seen that mostly in the first quarter as those but overall very very pleased with our progress across the wound franchise.
On the quarter.
<unk>.
Start 2 ended the quarter in the exit rates. Indeed, we continue to see some improvements.
Hard to quantify.
<unk>.
In the broader context, but I'd, just say geographically, we continue to see the same trends.
In the U S was a good and strong recovery in China with the volumes being up to pre COVID-19 levels.
And then with the slow recovery across the Big European markets.
<unk>.
The challenge go looking forward is of course that we have limited visibility to potential further outbreaks too.
2 variants that have an impact we know that elective surgeries are of course, the first ones that can be deferred and canceled and we're seeing some of these.
Effects locally like in.
Australia like in Japan, right now so that's where the external factors continue to have an impact on the pace of the recovery.
And then finally, the Destocking effect in China.
We've seen it and we've seen it in our numbers in China in our sales numbers.
What it is really his district.
Distributors are.
Anticipating the introduction of the <unk>, so the volume base based purchasing.
And with that they have withheld some of their ordering when.
When we look at the volumes in market, they're very robust very strong.
They are at the level of pre pandemic.
So from that and this is very positive now.
<unk> has been delayed a couple of times.
We now expect the awards somewhere in the third or fourth quarter, the impact will probably not be material for us for the full year, but of course, we're seeing this in the ordering patterns.
Thank you.
If I may just add the TT volumes last comment on China.
It affects the <unk>.
<unk> patent and then 99 bunkering the channels so that that's what we see as well.
Impacts the market.
Got it thank you.
Thank you Patrick our next question comes from Chris <unk> from Credit Suisse quite Chris. Please go ahead. Your line is open.
Thank you operator good morning.
Rollout in front of us.
No.
2 questions first on it.
The topic of supply constraints.
You mentioned that.
That's not an impact on some product lines could.
Could you maybe elaborate a bit more on.
The magnitude of the impact you've seen in <unk>.
How would that we likely can also affect the second half.
Sure. Thank you Chris Thanks for the question.
Yeah.
It's very hard for us to quantify the effect. So I don't have any hard numbers for you at this stage, but of course it was important enough to call. It out to you. So what it is.
Essentially it's affecting orthopedics, we have experienced some delays in freight.
And in logistics.
Along also with how your cost and then we have encountered.
Labor shortage in 1 of our big hubs, namely Memphis, which is where the majority of orthopedics products are being produced.
We have addressed this.
Obviously this is.
Key importance to us.
But it has been.
I think it goes in line with other.
Other industries reporting labor shortages.
Across the United States, and we expect that to improve of course going forward.
Okay.
Second question is just to know really with respect to your full year growth.
Guidance of 10 to 13.
Annualized in all your first half performance Nowadays, if you already kind of at the low and without anticipating any growth for the second half could you maybe elaborate on what kind of loss a.
A bit more on you know kind of the assumption because.
I guess in some markets now you're still.
Well below the 2019 level, particularly emerging markets Europe et cetera. So basically do you anticipate that to know kind enough in all the constraints.
New in those markets or.
Is it.
Not the case.
Yes.
It's a great question of course, so I think what we're going to continue to see here is a mixed picture relative to the external factors again, the U S doing well Europe progressively picking up China volumes being being high.
But the comps.
We will get really difficult. So we have obviously, we've had a good quarters really last year.
In a recovery and then a second wave in quarter 4 so the comparables will become difficult and then the other.
We're factoring in areas we have.
Technically speaking we have 4.
Fewer trading days in quarter 4.
Then in 2020, so that will inevitably have an impact so it's a combination of our scenario planning with respect to the recovery the unknowns around the pandemic the restriction the variance.
And then.
The lower number of billing days in the fourth quarter.
Okay got that Tom. Thanks, I appreciate your comments, particularly also on kind of the details.
Acquisition.
Our performance or the performance of the acquired businesses.
Thanks, Chris.
Alright.
Our next question comes from Tom James L band back Tom. Please go ahead. Your line is open.
Good morning. Thanks, so much 2 sort of areas I wanted to touch on 1 with guidance and 1 was pricing.
On the guidance front I mean your revenue growth.
Right.
<unk> language.
Yeah.
Thank you this including largely unconstrained surgery volumes.
How would you quantify the current constraints on surgery volumes in the context of that that largely statement of we sort of somewhat constrained largely constrained unconstrained.
And then I guess, if we looked at.
Outlook for HD.
2.1 would I think most of us would assume that U S and Europe continues to see an improvement in the pandemic situation, but some of the more emerging markets where vaccination programs.
Unless advanced potentially seeing some problems so.
If we look at those smaller markets, where there's a higher likelihood of the pandemic and getting.
Getting worse before it gets better.
To what extent would that affect the guidance range. I mean is it an order that would just push you towards the lower end rather than the higher end or.
Those markets collectively big enough to have a more maintenance for them pads.
And then the second question on guidance.
1 from Francois was on the current supply chain issues.
I mean, given that you were talking about it pretty openly now these don't lock issues that have sort of suddenly popped up from nowhere.
And that you've maintained your margin guidance I mean is it fair to assume that.
The supply constraint issues, both on a sort of abated.
C perspective, and a cost perspective or fully factored into your existing guidance.
Thank you Tom.
I'll address the first part and then as you said, maybe Francois can take up the second part of your question.
Obviously difficult when we get into the semantics of how constrained.
<unk> the markets are.
But in a nutshell I would say, we feel confident that we will hit.
The margin.
And then.
Excuse me that we will hit the guidance.
We are.
<unk> and further improvement of the environment with a further recovery that's what we're building.
And but of course, we have different scenarios and when I look at our sales guidance of 10 to 13, we of course also have.
Certain corridor Youre absolutely right.
We've talked about the regions.
The.
U S market continues to do well in Europe.
Progressively improve.
Improve and then the emerging markets will have a slow recovery and that's just given.
You said the vaccine program rollout, but just the general state of the health care.
The healthcare markets.
And of course, we have.
We have a good business in emerging.
Markets and we have factored the same but in summary, we expect to meet the guidance on the sales and on the trading margin side.
Okay.
So just to follow up on the guidance on trading margin.
We confirm our guidance.
We are comfortable with.
And to your question raising lays out in 2.
Based on a range of scenarios and we had signed posted.
Impacting network flows down to bottom line.
We've talked about the R&D investment the M&A the FX and we've also talked about negative operating leverage from Covid on that.
Thanks.
Production levels not being perfect.
Client assets grew 2019 level.
Another cost inflation pressures that we've seen in the channel.
Networks, our manufacturing network so clearly.
We believe and I can confirm that our guidance includes.
<unk>.
Instead, we can foresee at this point in time.
Right.
And then just kind of follow up question on the cost side of things the cost issues that youre currently facing on unique or specific to Smith <unk> nephew, there's obviously macro driven issues.
We're all just assuming that that phase III to margin pressure and.
And it is now compensated the pricing increase but.
Yeah.
Why is that the assumption necessarily correct. The industry largely has the same structure as it did in the notice period, where it enjoyed quite significant positive pricing. So given that everyone in the industry is facing.
No issues in similar price pressures why should we continue to assume that pricing is you know the usual sort of low single digit percentage negative, but at what point do you know is there some potential for you to start pushing prices back up and that kind of circa 10 year decline and pricing that we see.
So that's.
Interesting.
And actually because we have.
Casting and all he called all kind of stand underneath that price crashes.
Inquiry and given <unk> government find them down so Saddam heavy price pressure.
May increase in the future and we haven't seen.
6 so far.
Price erosion on our revenue line east continues to be a historical level, but when you look at the feature of our market, it's very hard to.
To drive price increase.
In the case of.
Innovation, when we launch new products.
Which is why again, it's 1 of the the reason why innovation on cycle of innovation, so important in our industry, but apart from that.
Unfortunately.
The Covid crisis.
We'll lead possibly to further price pressure and when you combine that we.
The cost.
Inflation that any business as you say to your point, that's why revenue growth volume growth is so important to drive leverage in the P&L as well.
Okay.
Christiane.
I'll get back in the queue. Thanks, guys were very helpful.
Okay.
Thank you Tom our next question.
Comes from Kyle Rose from Canaccord. Please go ahead your line is open.
Great. Thank you for taking the question I wanted to start on wound I appreciate the.
Incremental color from the earlier answer I'm wondering if you could just.
Give us a little bit of a better sense of when youre looking at the wound business.
Particularly in the bioactive side I mean, how much of that is truly the cross selling opportunity for our promos Iris and the sales forces, but being cross trained really playing out versus just the natural market recovery.
Similarly on the devices side in <unk> I think a few years ago you talked about.
Western is recent contracting wins in the U S. Obviously that was impacted by Covid as far as the ability to service and train.
When we see that or are we starting to see those contract wins, you will fully play out in numbers.
Are we still going to see continued momentum there or has that been fully realized and then secondarily.
<unk>.
Ortho side, when we think about the cement with launching just can you help us understand when we should expect to mentalists to be available and usable on Corey and then any trends from from Corey and enabling technologies more broadly.
We've seen some of your competitors talk about.
Starting to shift towards utilization and earn out based commercial model. When you look at the market now how how are you seeing the purchase trends from upfront versus.
Volume based agreements thank you.
Yeah.
Thank you Kyle.
Starting with <unk>.
<unk>.
Okay.
On the biologics it's clearly.
Many factors that contribute which is a real positive.
First of course, the market recovery, which we're benefiting from I think there is a cross selling which just means more competence and more feet on the street.
And then certainly it's on the basis of our strong portfolio. We have really good products. There that are also differentiated so.
I think we will continue to see good momentum there same on Renaissance I.
I think we've had some contract wins not everything has been already converted this is an ongoing process.
This is this is about.
Execution, it's about tendering.
So I think we have a great product, which we emphasis in.
Very positive for the entire franchise.
In orthopedics.
We will.
Launched the first components.
For cement.
At the end of this year and that is of course than a multi quarter introduction many components to our 2 main brands in the region and in Germany.
So the real impact will be in 'twenty, 2 and beyond and we will of course, we are working on then providing this.
Poorly on the core platform as soon as possible. This is an integral part of our development in November.
Although our portfolio development.
On the commercial models.
Just say that.
We're seeing all different models in the marketplace, we have the flexibility to offer all the models from.
Right sale of the of the robotics platform of Corey too of course.
<unk>.
Connecting it to volume.
And through other means.
There, we really as flexible as anybody.
Because that's just a model that.
Continuing.
And that life adoption.
Not different from other.
Sectors in the industry actually.
So I think.
Overall, what we're seeing is the adoption of core is growing well and win Korea's has brought in we see an increase in the number of procedures and Thats actually just.
Turning to training, our case and Thats exactly what we want to see.
Thank you very much and just 1 final M&A related question I really appreciate the incremental color on the M&A commentary there.
Obviously, the team is doing doing well.
Largely been tuck ins.
How should we think about.
The voracity and the appetite for perhaps transformative deals moving forward and then we've also seen commentary from other players in the sector regarding divestitures and portfolio management do you remain committed to the end markets you're currently in.
Yes, the short answer is yes, I think.
Very pleased with him and markets we're in.
I think naturally you see a more of a convergence between.
Orthopedics and sports Medicine, you see this playing out in the ASC. So naturally a very good position for US there and then of course wounded continues.
To be an attractive segment in itself good growth rates good margins less capital intensive it's given us some good protection tuned through the pandemic, so absolutely committed to the end market.
With regard to M&A, yes, we want to continue to be active on the on the acquisition front.
Of course, the focus is always on.
On the known areas to invest.
That is naturally than tuck ins that is technology, driven where looking at differentiation potential and then being able to leverage these tuck ins and as you've seen in the technologies.
Through our commercial footprint and to complementing the existing portfolio now we also have a very healthy balance sheet.
Which potentially will put us in a good position for for something larger that's not our focus at this stage.
But it's always good to be observing the market developments from our primary.
I would say comfortable position with a strong balance sheet.
Thank you.
Thank you Scott.
Thank you. Our next question comes from Michael Jungling from Morgan Stanley. Michael. Please go ahead. Your line is open.
Great. Thank you I hope you can.
You can hear me.
So thank you for taking my questions I have.
3.
Army 2021 guidance can you comment on how close you were.
Raising organic sales growth guidance for 2021.
Question, 2 I think in the last quarter I asked you a question about <unk>.
Why do you think.
Smith <unk> nephew share prices on the pool.
Pretty material over the last 18 months.
I guess today share price performance is helped.
And what do you think you can do to.
To help change things because youre.
Right now it said it's.
Its not easy they want to and then thirdly on the divisions do you think 1 of them.
Well the weather.
And a wood.
Appreciated by the market and.
And do you think it would be sensible to perhaps list 1 of them spin out separately with Smith <unk> nephew holding.
A material share a number of companies have done that and it seems to have worked quite well.
Your thoughts about that sort of concept of you're spinning out 1 of the divisions that.
<unk> the most underappreciated thank you.
Thank you Michael.
Bring an interesting questions here so.
Difficult for me to comment on some of them. Obviously, we had a really good look at the guidance. We felt that we were comfortable where we are today, we have different scenarios.
It may be that would play out 1 or the other way, but at the end of the day looking at our performance looking at where we are both in sales and trading margin we felt that we.
We're very comfortable that confirming confirming the guidance and of course we.
We still continue to see uncertainty around the.
The macro factors the market's in general which are outside of our influence.
On the share price.
I can't really comment on the share price.
Probably a 2 to throw that question back.
Are you guys.
I do think that it is about the execution it is about executing on.
Our strategy, it's about delivering on the on the guidance, it's about progressing continuing to transform this organization, it's about leveraging the potential of Smith <unk> nephew, and I think we've had we have a new a new management team. We have a new strategy. We have any structures I think we are.
In a position to do all that.
And then finally on your questions on diverse divestitures.
That's not a consideration of us at this stage.
The 3 franchises.
In their own markets have a good position to have growth opportunities that have potential.
And as.
As I mentioned earlier I think in itself is an attractive business.
And in sports Medicine is where we really differentiate we have a great beachhead.
Beachhead, there I think it will continue to serve us very well as the markets in general focus in orthopedics and sports continue to move.
We're decentralized settings to more specialized settings.
And then we are well positioned to leverage that and finally I would just say.
This all is underpinned by our commitment to innovation and driving the portfolio forward.
Have a great portfolio in the making.
Exciting products coming so.
Move to have the opportunity again to.
To deliver and to execute.
Okay. Thank.
Thank you.
Thanks, Michael.
Thank you. Our next question comes from Hassan Al <unk> from Barclays. Hassan. Please go ahead. Your line is open.
Thank you I have 3 please.
I think firstly based on what you've seen year to date, how do you think about pent up demand going forward in some of your key markets and whether this could still provide any upside in Q3 and Q4 relative to your expectations.
Secondly, and another another question on guidance.
Assuming.
As recovery continues as your base case are you able to signal whether the top end of guidance on sales is more likely.
Is this less likely on margins given your commentary around tire costs.
And finally could you provide an update on.
The core performance and whether you think youre, gaining good sharing robotics amidst an increasing competitive environment and how does this compare in the ASC versus the hospital setting.
Thank you Hassan.
Let me start with the demand.
And size and then I'll go on to Korea and maybe.
<unk>, we can then tackle the guidance question.
Together so.
Notably there is pent up demand in the system.
It is difficult to predict when that comes true.
It is also difficult to identify on an individual.
Actual basis, what is pent up in what is just I would say organic.
Because we don't have access to that data, we have anecdotal feedback from the customers of course would tell us.
Where their volumes have increased against pre Covid times.
Where they are adding capacity now I would say by and large.
Again this is a part of the recovery pattern.
And it is driven by the system and by the health care.
In general So just to take an example, the U S. As a for profit healthcare market. The recovery. There has been quicker it continues to be more dynamic public health care.
As a lagging behind the incentives are different 1.
And then finally what needs to be taken into consideration is of course, the state of the health care system, and the ability to increase capacity or not.
For instance, as another example, UK NHS.
Which.
System already flagged that there will be long waiting lists for elective procedures because the system can just not absorb the pent up demand so I would say.
Relative to Q3 and Q4, we continue to expect further recovery we at the same time with the patterns that we've seen with the variance with the slow.
<unk>.
The rollout of vaccine with.
And some challenges in emerging markets of course, we don't expect a full recovery.
It will be a gradual recovery that's.
Thats the pattern that we've seen and Theres no reason to believe it will be different going forward.
Corey the share of robotics I think.
Slow we're very pleased with certainly the this first half and how we continue to rollout Corey any adoption rates with Corey.
As we mentioned earlier it is a different system. It is image free. So you don't need a cte is very well suited to be used in the central setting as its versatile.
While it is it has a small footprint and it is a different system in that it is a handheld robotics system. So that takes a certain training and education.
But when I look at the market when I look at the feedback I'm very positive and when I look at the translation from Korea to hire.
Volumes in those sites. That's also something that is very positive. So I also believe core use very well suited for <unk>.
<unk>.
As it is of course for central hospital settings, but in particular.
On the same day short.
Term.
Special logistics required ASC settings, I think it's very well suited.
Yeah.
And then maybe on the guidance.
Difficult question to answer just.
Really.
Trying to first of all being very confident with our guidance.
Hence confirming it obviously, we have our internal scenarios that are also influenced by the overall recovery.
But I didn't want to go into speculating, whether we're going to be ending up at the top end or at the low end.
I think you've heard our comments on the cost side, which will influence the trading.
The margin for sure and then our top end it will be.
Our ability to really continue to benefit from the recovery and that as I mentioned is to some extent of course dependent on external factors.
That's helpful I Wonder if I could just.
Follow up on the core point and really how how adoption rates.
Differing between hospitals and afcs and weather.
The feedback is more favorable than ASC today than it is in hospitals.
I think we have.
We believe we just have a great system here it is very well.
Suited for the hospital setting.
But I'd say some of the advantages the small footprint diverse utility the short term.
Sure time to set up the system literally 5 minutes.
And in particular, the ability to run their robotic system Cte free.
Particularly well.
Ill suited for Asp's, that's how we see it that's also the feedback that we are.
Been given from from our customers and from from adopters and users.
Patrick Thank you.
Thanks Hassan.
Thank you. Our next question comes from David Adlington from Jpmorgan. David. Please go ahead. Your line is open.
Hey, guys. Thanks for taking the questions again.
Again, 1 revenues went to Washington.
I've been sort of pick you up on your comment earlier, where you said tough comps in the second half.
You were down 4% in the third quarter and down 7.
In the fourth so just trying to square that circle on some of the commentary events emerging markets on Covid, but that just seems.
Very conservative.
And then secondly, just on the margins, particularly gross margin, but I think that's probably the most dependent on volumes and it looks like your revenues are actually going to be above 2019.
I know, there's some acquisition impact but.
Even say your gross margins look like they're going to be substantially down them.
19, I just wanted to.
Trying to square that circle in terms of the cost pressure still.
Thanks.
Very good thanks, David.
I'll start with revenues.
Next year and Francois on the gross margin.
Obviously, I mentioned the comp will come in for quarter, 3 and quarter 4.
I would say that relative to Q2 of course Q3 was a much better.
During 2020, we had at the time seen actually very quick recovery at the end of the first wave.
Maybe where elective surgeries were by and large allowed in permitting things scheduled and so the recovery was quite strong in the third quarter of last year and Thats why I said the comp.
It is a more difficult 1 but I think.
With everything that we're seeing we will we will see also continued recovery.
3 markets remains a question mark to some extent.
Of course.
They are having generally more difficulties in recovery.
Many other emerging markets also are now in the winter periods in the southern hemisphere that is not helping the recovery overall and then finally just to.
Yeah.
Emphasize the fact that we will have 4 days.
Fewer in the fourth quarter. So that's why.
We made the comments that we made but again.
I'm very confident.
That that we will we will hit that guidance.
Hi, David and to pick up on the on the gross margin point.
They all headwinds on the gross margin versus 2019 as you've picked up.
Some of those now being team what we've talked to that.
And the M&A as well as the high end.
And by the higher freight costs.
And that we've seen.
And the fact that we still have production.
Production volumes that 2019, and the final element that impacts the gross margin.
Yeah.
The China GDP proximity that factored in to our company.
Inflation and Sean maybe I can just pick up on that and think about how some of those headwinds.
So as you go into next year.
So we know the exchange rate becomes a tailwind in 2020 teen I think total trading margin not quite marking its about 40 basis.
Yes.
Memory.
On the cost inflation.
We offset partly by all apex benefit program.
Transformation.
In operations the earnings.
That's some of the cost inflation.
And then I guess the volume will depend on.
And how efficient we want to be as well in terms of managing our supply channel inventory.
So in a nutshell and summarize what I've said, some will say some we will manage and offset by the activities with currently doing.
Understood Thanks very much.
Thank you David Our next question comes from Kit Lee from Jefferies. Please go ahead. Your line is open.
Yes, good morning, guys and thanks for taking my questions.
My first 1 is just on Houston needs I think that the performance gap you have versus peers in Q2 is a lot bigger compared to the last.
Last few quarters. So I was just wondering if this is mostly related to the supply constraints you have or.
Is there any other effect same say, which explains the underperformance there.
Then my second question is on the trading profit margin as well.
Just given there are quite a few moving parts.
How should we think about the phasing of the margin in the second half.
Was this the first half.
I think in the positive.
The 200 to 200 bps of.
Seasonality between the first half into the second half.
That is to apply for this year or is that going to be a different situation. Thank you.
Thank you Ken just on the hip and knee performance.
Obviously.
You have a lot of variability quarter to quarter. So that's.
I mean, yes, we looked at those numbers we saw the comparisons.
Also looked at it from a half year perspective, which gives you a very different picture. So.
If I look at the half year performance, so far I think we're right there.
Obviously, I think a very good performance on the 2020% growth for the half year.
Yes, some of it has to do with some short term supply issues around orthopedics in particular, some I think have just got to do with the variability from quarter to quarter.
Some has.
To do with the fact that we are proportionately selling more in Europe and in emerging markets and in China. So that's also contributing to the mix.
But overall I think.
Still there.
40% on the quarter.
Is it good performance and then I look at the different segments I think we're well we're well positioned.
For the third and fourth quarter.
So keep the question on coffee launching E sand.
A 17, 6% trading margin H 1.
And when you link that with our guidance range of 18% to 19%.
<unk> clients.
Margin improvement will seasonality that we've seen in the past.
They are a few reasons for that the first 1 is the timing of the cost.
Very different from our historical pattern.
In particular in sales and marketing during.
During the presentation.
Income events have been deferred but we also see all A&P, all advertising and promotion spend.
You you know increasing as we markets return to growth.
It's also a step up in R&D spend, particularly on the acquired assets.
So that's that's the opex.
<unk> perspective, we the different.
Different pattern than unusual and then finally, there's also the impact of some of the costs. The factors. We've talked about here you know in terms of inflation and freight costs.
On the impact of the BD channel inventory adjustments in China. So that's that's 1.
Needs to lift.
<unk> uptake in the second half I would say, though it does assume an improvement in margins here.
Okay. That's great. Thank you.
Thank you. Our next question comes from Veronika <unk> from Goldman Sachs. Please go ahead your.
It depends.
Hi, guys. Good morning, and thank you for taking my questions I have 3 please 1 just wanted to understand a little bit to sort of better the nature of the supply constraints that you're seeing in I guess.
There seem to be 2 elements..1 is obviously higher costs, but the second is product availability and especially on the second 1 would love.
Your line is if you had and whether you think the revenues that you lost in the second quarter.
Those recap trouble if you look at Q3 and Q4 are those gone forever and then just a confirmation that you are no longer sort of product constrain and to the extent that youre getting orders you are able to fulfill those so that would be kind of my first question. My second question is just a quick 1.
There's been a little bit of debate among some of your peers around sort of the dynamics in the third versus the fourth quarter, especially given sort of maybe unusually pronounced summer vacation seasonality I don't know Roland if you're willing to comment on what you're seeing in July and August and how you're thinking about maybe the timing of the ongoing recovery that you.
Expect between those 2 quarters on the elective side.
And then my last question is a question on ASC.
You've kind of talked about this as a big competitive advantage for Smith <unk> nephew, we're certainly seeing from our due diligence that there is a lot of growth on the outpatient segment more broadly in the U S can.
Remind us from a pricing perspective, and maybe a margin perspective from Anne Francoise, what that ASC shift means for you guys, obviously incremental volumes, but my understanding is that the pricing might look a little bit different so it would be great to understand how that flows through the P&L. Thanks guys.
Thank you.
Can you just let me try to answer your questions Firstly on the supply.
Not much more than what I said earlier of course, the challenges that we're experiencing or some of them have been documented globally around.
Freight and logistics some challenges some delays.
There are.
Internal such as the labor shortage.
As a consequence of different factors, especially in our largest orthopedics hub in Memphis.
So really hard to quantify.
But wanted to co call it nonetheless.
I think what we're seeing is of course.
That will come back.
We'll certainly come back as our supply capabilities continue to improve.
You will of course, good as surgeries and haven't taken place now they will not come back.
But overall we.
We believe that this will come back we have had.
A huge effort.
Quarters.
And certainly hiring in Memphis, and ensuring that we have the capacity from a systems perspective from a from a labor and resource perspective and of course, you know that this is a complex supply chain. When we look at all the size of these when we look at.
The different variations.
So it is a complex operation.
But it's something that we're going to get back on track.
Quarter, 3 versus quarter, 4 or what we're seeing.
Anecdotally.
Of course, what we're seeing is generally.
And big customers that have worked very very hard.
Some of them are now thinking about taking a bit more of a vacation.
Others on the countries say that now that they are able to perform surgery, they'll just push through and they increase their capacity. So it's a very mixed picture, but I think by and large if you look at it from.
I Wouldnt photo society perspective people are tired people people need a break people want to take.
Some time off.
And that's what we're hearing.
From from the different from the different markets.
So very very difficult to really read.
Trends into.
Other than I would say that the recovery continues to go on that it is real that is growing well.
And then at the same time as I mentioned, but it is dependent on some external factors.
Yeah.
On ASC.
Indeed, a huge shifting to ASC.
Massive shifting too.
That patient.
That is absolutely real and we will continue to accelerate.
I believe it is because all the incentives are now rely on do you have the regulatory approval you have the.
The reimbursement is behind it and of course, you have the technology advancements.
To allow for same.
Julie.
So.
Shifting suddenly there we're seeing more volume shifted into ASC, we've seen more ASC is being established.
Some orphan patient excuse me customer or surgeon physician owned.
Some affiliation with hospitals.
<unk> transfer and so when it comes to.
On pricing the reimbursement envelope of course is a lower 1 that has been widely publicized.
I don't have the numbers on top of my head, but those are those are available and then of course, it's what you make with it.
Can you compensate for some of that was volume with mix.
Both.
The service.
And there again I think we have an opportunity.
Given that we're also calling on these AUC through the sports Smith franchise through the E&P franchise.
And we can actually leverage our positioning in the ASC.
I hope that answers your question.
<unk>.
That's really helpful and can I just circle back to the supply constraints. When do you think you will no longer be supply constraint is that a third quarter event or a fourth quarter event.
Very difficult to tell you here.
I think it will be a gradual improvement of course thats not 1.1 measure that fixes everything at 1 time.
As I mentioned it is there.
The multifactorial there is of course, the freight and the logistics piece and then there is the in house labor piece.
Have onboarding many of those.
Operators now onboarding them training them, so it's a gradual improvement through the quarters.
We have a team.
I'm focused on this.
That's all they do so I think we will continue to see improvements.
Through the course of this year.
Thanks, guys.
That may just not aware of any capital priority.
Oh Gosh, we've comes on long island, and so we are working pretty season being transparent.
That's as Roland said.
That does not affect our guidance, which was confirmed today.
Okay.
Understood. Thank you Beth.
Yeah.
Thank you for your Warnaco that was our final question for today's Q&A session has come to an end so I'll hand, the call back over to Brian and swap.
I think my marks.
Well. Thank you operator, and thank you all for your interest Smith <unk> nephew, Thanks for your questions, which is great to hear.
Thank you very much.
Okay.
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