Full Year 2021 Smith & Nephew PLC Earnings Call

[music].

Hello, all and a warm welcome to the Smith <unk> nephew fourth quarter and full year 2021 results cool my.

My name is Lydia and OBO operated today.

Certain statements in this presentation are forward looking statements. These statements are based on management's current expectations and are subject to uncertainty and changes in circumstances.

Actual results may differ materially from those included in these statements due to a variety of factors.

More information about these factors is contained in the company's filings with the Securities and Exchange Commission.

If you'd like to ask a question at the end of the presentation. You may do so by pressing star followed by one on your telephone keypad.

It's my pleasure to now hand, you over to Alice Marlin, Dave Woman Chief Executive Officer. Please go ahead, when you're ready.

Thank you operator, and good morning, everyone.

And welcome to the Smith, <unk> nephew fourth quarter and full year 2021 results cool.

With me is unfortunate NIM, our chief financial Officer.

I'd like to make a few opening comments before we get into the details of the result.

Also.

So you will have seen announcements of me, leaving Smith <unk> nephew, and the appointment of Deepak net as new CEO and now of course come back to that.

We set out our strategy for growth in December to transform to a structurally higher growth company and rebuild our trading margin.

We've taken an important step already.

By delivering on the guidance, we set in April last year on both revenue and trading margin.

Renewed COVID-19 outbreaks meant that external conditions weren't always ideal so I'm really proud of the dedication of our team to speak to our financial commitments in 2021.

Yes.

Four fewer trading days and omicron waves made the fourth quarter complex to Unpick.

But when we look through all of that it was a solid close to the year.

2022 will be about progressing our strategy for growth and taking the next step towards the mid term goals that we set out in December .

You can expect to see us further strengthened our foundation by.

By continuing to optimize our operations and drive productivity.

And of course, we'll continue with a high cadence of innovation and product launches, which is a key component of sustainably accelerating our business.

Now moving to results and I'll begin with the highlights of our full year numbers.

Revenue was $5 2 billion.

That 10, 3% growth on an underlying basis.

It's almost back to 2019 level.

Reported growth was 14, 3% up.

And there was one trading day less than in 2020.

Trading profit was $936 million, which is an 18% trading margin and 300 basis points expansion.

We generated over $800 million trading cash flow and 88% inclusion.

Adjusted earnings per share grew 25% to 89.

And estimate attaining our dividend in 2020, we are again proposing 37 five.

2021.

Now looking specifically at quarter four revenue growth was one 5% reported and 3% underlying and.

A number of factors influenced the Q4 growth rate so.

There were as I mentioned, four fewer trading days than in the fourth quarter of 2020.

Which mathematically is more than 6% reduction.

And as you know that we renewed outbreaks of Covid.

Infection levels actually rose in Europe , and in the U S. As the quarter went on new restrictions and especially staff shortages in hospitals resulted in slowing elective procedures from November in Europe than December in the U S.

The effect on Smith <unk> nephew was that the typical December pickup in average daily sales didn't actually happened in 2021.

And that was across our surgical business with the weakness continuing into January .

And by region, you see that the effects in the year on year declines for the U S.

In other established markets wildly.

While emerging markets growth stayed relatively stronger at plus 8%.

There were some encouraging signs so firstly the trend of health care systems of being more resilient to new outbreaks has continued.

Compared to pre Covid levels average daily sales growth for the quarter were still broadly similar to the year as a whole.

And average daily sales for sports Medicine, and advanced wound management, we're still above 2019 levels.

And then importantly conditions are improving.

U S infection seem to have peaked in mid January and European countries have now also lifted many restrictions.

For the detail of the franchises in the courtroom I'll start with orthopedics, where sales fell by two 6% underlying.

As I mentioned, there was an impact from Omi krona outbreak across the surgical categories, particularly in hips knees and extremities.

Then also hip and knee sales into the channel in China continued to be slow ahead of the <unk> tender implementation. This march in total the China Destocking in provisions reduced revenue by about 25 million in the quarter and around $60 million for the full year.

And then supply constraints remain fluid a headwind.

Thing is around <unk>.

$30 million loss in the quarter similar to Q3.

Recapturing our previous momentum in orthopedics is a strategic focus.

And we're making good progress.

On the actions to improve performance.

The rollout of the Legion console up cement less knee is ongoing in the U S.

And as you know not having a tremendous competitive commenced this offering has been the primary drag on our knee business.

So filling this gap is another important strengthening of our foundation.

And then as I'll cover in a moment, we're going beyond that even with the acquisition of engaged physical.

Which makes us the only company with both the Mentalist total and union knees in the U S.

And of course this Corey.

We're continuing to build the platform up with another good quarter replacement and we also played obtained five 10-K clearance of the hip software, which we then launched commercially in January .

The sports Medicine, and E&P franchise grew two 4% underlying.

In Europe , I think orthopedics, we didn't see our usual December step up in sports medicine volumes with shoulder repair, particularly affected.

Again, though remember that these growth rates are affected by trading days.

So understate the strength in the franchise.

The contribution of new launch products really stood out in the quarter enjoined prepare fast fix flex and werewolf fast steel are tracking well ahead of our plan.

As our lens for K and flow once in AEP.

2021 launches already adding significantly to the franchise growth rates.

33% growth in E&P was very pleasing to see.

E&P has of course being one of the late two categories to rebound from Covid wave.

Our adult business is back to above pre COVID-19 levels, though.

And Theres further improvements still to come from recovery in the pediatric business and then the rollout of our <unk> system to la.

Yeah.

Advanced wound management grew two 4% underlying it was another solid quarter given the impact of trading days in the army corn with all segments still growing over 2020.

And for the full year, all three were above 2019 level.

Advanced wound care was a mixed picture with double digit growth in the U S and a slower quarter in Europe .

By category, our phone business continued to grow faster than the overall segment.

Advanced wound bioactive grew four 5%.

And just to remind you. This is a segment that was in decline up to 2019, but that we've turned around with combination of M&A and commercial execution.

We're now seeing consistent gross was central and that continued in Q4.

The skin substitute business is also making progress with.

With average daily sales accelerating over the third quarter.

And then finally advanced wound devices continues to grow above the broader franchise, even with the elective procedure exposure in negative pressure.

I'll now spend some time on the priorities for 2022.

Which I round advancing the strategy for growth that we announced in December .

And as a reminder, we made mid term commitments.

By concentrating our innovation and culture and customers will consistently deliver 46% organic revenue growth.

And rebuilt our profit margin.

And to get there will compound our outperformance and advanced wound management and sports medicine and regain momentum in orthopedics.

The strategy as you know is based on three simple imperatives, which you see in the pyramid in slide number 10.

First imperative is to strengthen the foundation of Smith, <unk> nephew, a solid base in commercial and manufacturing.

Will enable us to serve customers sustainably and simply.

And deliver the best from our core portfolio.

Secondly, we will accelerate our growth profitably through more robust prioritization of resources and investment.

And we have continuing customer focus.

And then we will continue to transform ourselves for higher long term growth.

Our investment in innovation and acquisition.

We will deliver these imperatives through our four key value builders, which our productivity from.

Commercial execution.

Innovation and M&A.

And our priorities for 2022 also read across these categories.

So on productivity and moving to the next page.

There are a range of activities ongoing to drive sustained improvement.

Some of these are around immediate challenges.

Such of course is addressing the internal and external supply pressures that we've talked about before.

And reduce cost in a new go to market model.

For the orthopedics business in China, which is already in place.

The longer term operations transformation program is also progressing.

This work on our manufacturing and distribution will move us to a structurally more efficient and resilient supply chain over time.

We have already moved to a specialist third party logistics provider in Europe and will make the transition in Memphis in 2022.

Also the new orthopedics facility in Malaysia is on track to supply this year already and it is already and it is ahead of schedule with multi sourcing making us more resilient.

Two future disruption at any one site.

And finally, there's the portfolio simplification work that we set out in December .

S SKU reductions and prioritizing key profitable growth market.

This work is underway and benefits should start to come through more significantly from 2023.

The second priority is commercializing our 'twenty, one pipeline by launching effectively and at scale.

We've shown already.

That where we bring meaningful innovation.

We can move the growth rate of our segment and we will build on this in 2022.

Some of the 'twenty one projects are making important gross contributions already.

As I mentioned for sports Medicine.

And then others were just starting to ramp up like the Legion console of cement less knee of course, Evo is large plates and trauma.

Both with first procedures in Q4 of last year.

From here, it's about execution.

<unk> been applying our improved launch processes more broadly and ultimately that will turn the increased R&D investment over the last few years into better financial returns.

Innovation remains a priority.

On slide 14 sets out some of the key projects for this year.

I'd like to point out some important features firstly this is continuing high cadence of new product.

That was the intent of the increased investment in R&D in recent years.

Secondly, it's a broad pipeline with gross opportunities across the entire Smith <unk> nephew portfolio.

And importantly, there's a good balance of project between incremental innovation and then disruptive technology.

And let me just pick out a few here.

In robotics and digital surgery, there are a range of additions to further differentiate the core platform.

Adding porous knee to Corey will help us in the rollout of the implant.

Corey you should also be the first robotic system to support new revisions.

And then we have attention as a really novel device for soft tissue balancing.

There is also the next generation shoulder, which is aligned with the trends towards one presentation and simply procedures.

And an important component of the value of the extremities acquisition.

And sports Medicine, we're continuing to innovate to extend our leadership in the Archrock arthroscopy power with further upgrades for mechanical resection and imaging.

And then in wound we have the next generation of negative pressure devices.

There's still a big opportunity here with our negative pressure portfolio, both from share gains and from market expansion in settings like surgical site complications.

And a new generation here will help us capture more of that upside.

We're also continuing to pursue external innovation and continued to transform the portfolio through bolt on M&A.

We did announce the acquisition of engaged surgical in January for up to $135 million.

Engage is a further example of our commitment to innovation.

And the particular opportunity we see incremental.

The deal also aligns very well with the strategy, we set out in December .

Then shift to standard of care.

This is what is the only cement was partially available in the United States.

We also expand in a high growth category.

Partial knees are expected to grow faster than the overall knee market.

An estimate with partial knee should grow faster than that again.

It's also a synergistic deal.

The ability of sales reps to see surgeons with something completely novel, we'll help them sell the whole of the knee portfolio.

Over time it can also be brought onto Corey.

And of course, it is an excellent solution for the ASC.

Okay.

And then the returns are also attractive.

We will focus on integrating the asset.

2022, then launch at scale in 2023 with ROIC than expected to exceed WAC in year four.

So those are our strategic priorities for the coming year.

Now I will pass you over to <unk> to take you through the full year 'twenty one financial.

And then the outlook for 2022.

Thank you Roland.

Let me talk to me the summary, P&L on Slide 17, you can see that we are recovering from the West Africa's leading 2020 at a high level. We have revenue at $5 2 billion and grew by 14, 3% on a reported basis and.

Trading profit grew by 57% to $986 million.

Yes.

10% trading margin.

I will give more details behind some of these P&L line in the next couple of slides.

On slide 18, we show the detailed at the full year revenue, that's rolling off very much okay.

All right. Thank you.

As I mentioned before total revenue was $5 2 billion up 10, 3% compared to 2021 on underlying basis reported revenue increased 14, 3%, including a foreign exchange tailwind of 210 basis points.

190 basis points from acquisition.

As you can see in the charter contribution to growth was balanced across our three franchisees.

The Phoenix grew by six 4% on an underlying basis to $2 2 billion for the year.

Maybe seen any en tea grew by 14, 6% to $1 $6 billion and advanced wound management grew by 11, 8% to reach $1 5 billion pounds for the first time.

When we compared to 2019, our sports may be seen in advanced wound management businesses return to great over the pre COVID-19 level.

<unk> from BNP ethanol can recover.

I thought it would be helpful to describe on slide 19, the leave is impacting the margin, which increased by 300 basis points over 2020.

As we have previously reported they were a headwind to kill the car, we still around 40 basis points of initial dilution from M&A.

The higher logistics freight and raw material costs are being felt across the whole economy impacted our margins by around 30 basis points in 2021, and there was another 20 basis point headwind from transactional effects.

And of course, he you know I'm not relating hampered we also invested behind new launches and as we are.

And as we see the reasonable cause on innovation coming right.

However, the positive leverage on cost of goods and SG&A expenses from recovering revenue more than offset those headwinds.

It's also a reminder, that there is leverage in our business model from high organic right as well as potential from efficiency gains, which we continue to try.

And importantly, I'd like to highlight that we maintained R&D investment of around 6% of them in line with our strategic commitment to innovation.

Looking further down the P&L adjusted earnings per share grew by 25% to 89 cents.

That's the hedges sounds great.

Trading profit due to a onetime tax provision release in 2020.

Our trading cash flow was again strong at $828 million for the full year.

Capital expenditure of seven 8% of sales, including the continued changes to our manufacturing base.

And also investments in instrument sets to support functions such as M&A.

The return to revenue growth in the period resulted in a working capital outflow of $77 million.

And as a result trading cash conversion returned to a more typical level of ATM.

Okay.

Given our strong cash flow our net debt ended the year at just over $2 billion as shown on slide 22.

That's an increase of $123 million in the year net of the $250 million acquisition of the extremity orthopedics skew things.

A recovering profitability meant that the leverage ratio came down to one six times adjusted EBITDA again, but yeah.

Giving us with significant balance sheet capacity within investment grade.

And that financing capacity and our strong cash generation means we can both continue to invest behind our growth strategy in 2022, and beyond and still be able to return additional capital to shareholders.

That's in line with our new capital allocation policy, we announced in December which include a commitment to a regular annual buyback.

The buyback will be gained in 2022, and we expect to return around $250 million to $300 million.

Yeah.

Now moving to the outlook for 2022.

2022, we are targeting underlying revenue growth of 42, 5% for the full year.

Within that we expect stronger birth in H T fun and there are a few <unk>.

Factors behind that timing.

Firstly, we expect our business to be affected by Covid in Q1 2022 as the effects of omicron outbreaks on established market that continued into the first half of the quarter our guidance assume that demand is not the unconstrained by COVID-19 outbreak for the rest of it yet.

Those tough questions with Kaki seen health care systems are likely to continue.

Also once we mitigated the external supply challenges on the dress line down the one they will clearly be unaffected in the first half.

Most significantly we expect momentum in orthopedics and Nancy to improve over the course of the yet.

<unk> volumes in those markets continue to recover.

Unless we see more benefits of our product launches, particularly the semi listening.

On the trading margin, we expect around 50 basis points of expansion and.

Headwinds from GBP in China, and cost inflation will be offset by operating leverage and productivity measures and improving our product technology.

And finally, we expect the tax rate on trading results to be in the range of 17% to 18%.

So I would now like to take a moment to go into more detail on the moving parts of the trading margin.

The China, EVP and Nintendo is due to be implemented and Mark as you know, resulting in a one time rebate of a mountain in 2022.

We've now concluded our discussions with distributors and we have better visibility on the impact and implications of anything being able to put into place.

Following our negotiation, we expect the pricing we receive to fall by around 50% in the affected categories, which is substantially more impact on the 80% headline reduction on prices.

Secondly, and importantly, we've taken steps to simplify our go to market model.

While we previously had multiple tiers of distributors engaged in both logistics and customer facing at TVT.

We've now seem to be falling into a single logistics partner.

Just one P of distributors involved in customer activity.

A simpler model reduces cost and produce commercial effectiveness for total contract with ECP branches.

Simply find inventory management.

The net of this is why we expect around 60 basis point gross margin headwind from Micron announced the PDP play.

In line with <unk>.

You May also have heard about our regional trauma tender from 'twenty, one where the outcome is now being applied to other provinces.

China remains a much smaller business.

He is only a fraction of a percentage point of Bridgetown.

However, no more input cost inflation is a further headwind.

Our assumption is on inflation headwinds will persist throughout the year and while we look for pricing opportunities and mix benefits from innovation, we expect to have limited ability to stick to your absolute like for like price increases in 2022 and.

And we expect higher cost inflation to be around 125 basis point headwind for that yet.

Uh Huh unimportant Lee.

Expect to offset these effects and drive margin expansion of around 50 basis points as I said before.

Operating leverage from revenue growth practice.

Practice productivity measures, we're taking and improving margin is all quite upset to absorb most of the headwind.

In the meantime, we're committed to our goal of a trading margin at or above 21% in 2024 and further improvements after that.

Term headwind should reduce.

We will continue with efficiency gains and we expect and homes positive operating leverage over time.

The higher revenue growth from promotional execution and innovation concentrate.

Now before I hand back to Ronan I would just like to say. Thank you ronen has been a great patient working with you and I wish you all the best in the future.

Thank you very much.

12.

So to sum it up I am pleased with the steps we've taken towards our mid term goals.

By delivering on our 'twenty one targets.

And that 2022 progresses, you should see this strategy continued to advance.

The efficiency and margin expansion will come will continue.

Even against the short term headwinds from BBB in China and from inflation.

We will advance the program to structurally improve supply chain resilience and we will commercialize the pipeline from 'twenty, one and deliver the next wave of innovation across the portfolio.

I'd like to finish on a more personal note.

It's been a privilege to lead Smith <unk> nephew over my time here.

Working through the pandemic has obviously been a challenge for us all.

I am proud of how the team is.

<unk> has really pulled it all together the team has stayed committed to our purpose and kept working to transform the company and continue to serve customers.

So when I look at Smith, <unk> nephew today, the company's truly prepared for the opportunities in the coming years.

We've acquired and integrated a range of new growth assets, we've put the commercial structures in place to serve the changing ways of delivering health care.

And I'm really proud of the deep pipeline of innovation that is now in place across the entire portfolio. I think this is truly impressive.

Yeah.

I'd like to wish my successor, all the best in leading this great company through its next chapter.

And finally I.

I'd like to thank you all our investors and analysts for our interactions over the last two years.

They have been much less frequent in face to face and I was hoping for but it's truly been a pleasure.

So with that thank you very much and we can now take your questions.

Thank you if you'd like to ask a question. Please press star followed by one on your telephone keypad now.

Your question. Please press star followed by <unk>.

Our first question today comes from Hassan Al <unk> with Barclays. Your line is open.

Thanks for taking my questions I have two please.

Firstly following up on margins could you help us a bit more with the margin bridge in 2022.

You mentioned I think a 125 bps this cost inflation, 60, bips or China, or what is being assumed for for FX and the M&A dilution that should be easy.

As well as operational leverage I'm, just trying to understand why the margin guidance is it higher and where you see potential upside risk here.

And then secondly could you talk a bit about what youre seeing in terms of cancellations as procedures hospitals.

How does it speak overall and how is the staffing situation that also particularly in the U S. Impacting this thank you.

Thank you Hassan let me take the second question first.

So what we're seeing is of course.

The infection rates coming down.

In the in the U S and Europe , we've seen quite a few restrictions being lifted in the in Europe , which will of course lead to elective procedures, increasing we feel that there is quite a bit of pent up demand in the marketplace now with short term, we continue to see some cancellations.

Differently than in the past because of the nature of omicron actually which is much often less symptomatic and what that leads to is actually cancellations closer to surgery because patients come to hospitals. They get tested eventually they test positive and then the surgery has to be cancelled. So these are more acute short term cancer.

<unk> that we see that it's been in previous ways, but we believe this should ease as of course.

<unk>.

As the number of infections continues to come down.

<unk> the world.

Yeah Hassan on the margin him as he as you correctly.

Crikey flipside with guidance.

At this point that expansion.

And I think the that headwinds are important to note in particular that as EVP of China, which is a one one time you know of a.

Are we facing of our margin for 2022 and.

60 of the 60 basis points inflation as well 825 E is materially significant having said that we all being proactive we've got teams looking at five and you know we monitor inflation and we really.

Hum.

As proactive as we can be.

Affecting that.

All of the actions, we're taking and in April .

It's important to note that in 'twenty.

'twenty one we saw margin expansion from revenue growth and from the operating leverage and the cost discipline that we have in the organization.

So clearly to drive our margin expansion and offset the headwinds we need to drive the revenue growth, which will come through as well from the recovery on new products, our commercial execution, and we want and need to drive our productivity and efficiency gains.

And that would drive you know about 235 basis points in Q2 to offset the headwinds now when you're putting on maybe that's the gist of your question Katie when you put that in the context of what we've achieved in 2021.

Cleaning so quite a large margin expansion of well over 300 basis points.

But we feel that well as we said the headwinds are actually more significant probably going into 2022. You also had a question on FX. That's the fan one because we have previously said that we would expect a small tailwind now as we move through the period.

Effectively we now are mostly fully hedged and we do not expect a significant transaction on exposure in 2022.

Very much.

Fully hedge as you say.

Basically can be.

The acquisition remains a continued to be a little bit dilutive in terms of integra in 2022. So.

Extremities acquisition.

Finally in 2022, but that's not something that any kind of material that we wanted to bring to the attention. So hall, we feel our guidance is.

You know our best view at this point in time.

Particularly in the world that remains stable.

Volatile around a global supply.

That's very helpful and if I could just please follow up on.

On the growth how should we think about the relative price within your guidance of the three franchises in 2022.

Yeah.

How about Q1, given your commentary around page two vessel H, one should we expect a small improvement sequentially versus the fourth quarter.

So we.

In terms of what we've seen in Q1, and I guess I'm gonna come you've almost a third of the way through clearly January continued to be impacted by Omi crawling and established market.

As I said I think the E. B infections peaks me January in the U S. A.

Many European countries have nowadays.

Restrictions. So we did see some continued disruption during the quarter and that's what we expected leading to into our revenue guidance.

Clearly.

For the rest of the yen, we would assume it's launching unconstrained by Covid outbreak.

The sensitivity will remain on the availability of staff and particularly in the U S rates and it'll be more acute with <unk>.

Shortly Jayson Vellore staff in terms of the franchises ICT.

We will now see orthopedic as.

Continuing to improve particularly as we have launched assignment listening and for Sun and Boonville continue their performance and again I want to reiterate we are very pleased to see that they are both 2019.

Hello, everybody.

That's right.

Thank you I appreciate it.

Thank you. Our next question today comes from Tom Jones of borrowing back Tom. Your line is open. Please go ahead.

Good morning, Thank you everyone.

Thank you guys for all that I had two questions really the first was just on your 2022 revenue guidance.

In the context of the business.

It has performed between 20 and 19 in 2021.

I guess, if I if I look at your underlying growth on the chart you put on page five.

You did minus 12, and all types of minus two three in the other divisions.

Covid you would have expected probably all tied to maybe 8% over that timeframe Sportsnet.

And I would probably be something in the double digit range Cumulus and when it might be mid single digits.

On the franchise, there's somewhere between kind of 10 and 20% of the revenue that you would otherwise have expected that has gotten somewhat.

How much of that do you think is just strike pent up demand how much did that do you think case Goldman forever because of Covid and how much of it do you think you've lost to competitors.

Im just trying to get a sense of kind of how much pent up demand release, you've you've baked in to your four 5% overall underlying growth guidance for 2020.

And then the second question is just on your guidance for 125 basis points of margin pressure from input cost inflation.

This should be somewhat surprised by that number.

Most of the way the it seems quite low to be honest I mean, if you look good.

Spice of kind of circa 4 billion on that on a fully loaded basis, you're talking 60, 70% 60 $70 million headwind at that level, which is sub 2%, which given the wider inflationary environment looks like quite a low number.

And even if I just looked at in a physical input costs, probably half that of your total costs.

Are you still Tokyo.

Single digit number so I guess, how confident are you in that 125 basis point headwind.

This is going to get because it does seem like quite a modest impact in the grand scheme of things the wider inflationary environment at the moment.

Okay.

Yes, Thank you Tom.

On your first question.

On the revenue and how we built the plan.

I would say definitely there is pent up demand in the system. The question is how much it is and that's very difficult to assess because we don't have patient specific information here, but what we know is of course that an elective surgery.

Many surgeries have been deferred and we know that joint replacements are amongst the first ones.

And every of those ways that were that were delayed or deferred. So there is a pent up demand there is.

Building of waiting list and particularly in the public sector and mostly in Europe , and I would say in the U S.

And there is of course, the underlining fundamentals, which are very much intact, which are the patient population continues to grow.

And was that there is a natural growth there.

Challenge will be to see how quickly those waiting lists will be worked against.

How quickly some of the hospital systems can return to full surgical volumes and in the U S. What is the impact of the staff shortage will be whether that's sustainable or more so acute.

<unk>.

I would say.

The.

Reconstructive business, the joint replacement hip and knees I do foresee that all of those patients at some time to come back.

Because the patients are not end of life stage patients. They have these surgeries for degenerative disease.

And so they do come back so we see very few loss patients in joint reconstruction. It's a different story of course in trauma or in sports medicine as well those patients don't come back because it's acute surgery based on accident sports injuries et cetera.

So the last point I'd make of course, when you look at when you compare some of our numbers against competition, we have been quite transparent about the fact that we have lost in these due to not having a cement less knee. This is now corrected so there's a level playing field, which we're really excited about and I think we've performed well in hips.

Bars, some of the supply challenges and we've certainly done very well in sports and also in wound in the different categories. So that's why we are confident in the numbers for 2022.

And before moving in platelets, sorry, Tom what are you going to follow up.

No no no that's fine I'll follow up on the site.

Okay.

Untested before moving to television from your inflation question, Joe just to build on what Roland I said clearly.

<unk>.

<unk> recovery will be more marketing in HQ and whether you look at a 2021 comparison.

We are.

Grace or a 19, well see acceleration of revenue in the second half of the year not moving to inflation.

We've done a lot of work around that and particularly the teams in our operation we've looked at the cost base.

On the <unk>.

Key raw materials.

Which I actually discussions are already ongoing and we know precisely where where inflation titanium just to give you a couple of examples.

Electronic controlling and has that increased by 20% and an element of them.

Forging at which might not be on most of People's list that I found 11 price increase.

Actively we all assuming as well that we are countering and offsetting some of the inflationary effect on that and that's all about is being very proactive on the team managing our purchases.

So the 125 basis points in the sensitivity, but I use baseball where way we know today the prices have been under discussion.

And indeed that represents about 8% of all that.

And I don't know chemo CAGR. It does not include Merit increase Oh, a wage increase that that's important to know the base fuel burn in Canada.

Okay perfect. That's good and then just a follow up is just kind of keep I mentioned, Android and did on the supply chain.

She said are affecting revenue I think you mentioned in the presentation, you expect to graduate improvement across each one but could you just give us a little bit more color on specifically beyond if there's any franchises beyond hips that are affected.

And kind of the trajectory of that recovery does it kind of if that's something that will resolve quickly or is it something that will just be a gradual improvement as the half progresses.

So I mean the.

Uh huh.

This is one of the key variable and I think every company finds it very difficult to do.

Do you see them.

The exact timelines on when global supply disruptions, we will stop I mean for them.

It has been clearly on some of the components, which are initiating impacted or so more but what we're seeing you know we use our electronics cheap and you can imagine in the town, we usually in the pump for wound.

So, earning or bucket, so plenty of being proactive in making sure that we think you'll supply is clean.

So you know.

We expect value.

Mm fab.

February 9th across it yet, but I just wanted to ask the element that we call faithful for sure because we depend on.

Our suppliers are on global conditions.

Okay.

Thank you.

We are also seeing some supply constraints on raw materials, and Francoise mentioned that earlier, you think of resins.

<unk>, which are being used for sterile packaging so it's our suppliers.

That I've seen that constraint, we will continue to see some short term impact, but we have been working very very hard and diligently on the on the mid term here and we already know that the situation will improve going forward.

Okay.

Very clear thanks, a lot and all the best for the future.

Thank you Tom.

Okay.

Thank you. Our next question today comes from Veronica <unk> of Goldman Sachs. Please go ahead. Your line is open.

Hi, guys. Good morning, and thank you for taking my questions I have two please one just wanted to come back to the margin guidance.

And frankly, if I look at total fleet of 125 basis points from from raw material cost inflation 60 Bips from.

Oh.

B P. You know you are calling for an underlying margin expansion of in excess of 230 basis points on the top line dynamic that frankly isn't too dissimilar from what we've seen you deliver in the past and in the past I think the operating leverage we would have seen in your business has been 30 to 70 basis points. This is quite a significant improvement I was just hoping you can decompose it show.

A little bit for us in terms of what you're assuming from an operating leverage perspective versus efficiencies and kind of what's your degree of confidence that these efficiencies come through what are they dependent on what are the risks to that because frankly it strikes me given the headwinds that you have in the business. This is a fairly aggressive underlying margin improvement against.

Against the top line, so I would just love to understand what's driving that.

And then my second question is just on the supply chain and at a point of clarification, maybe again to push it both on the edge.

I think the headwind this quarter was similar.

Last quarter.

You resolved all the issues that you had in Memphis and at the headwind this quarter coming from issues other than LIBOR availability.

Or is there still are there still some remnants just in terms of the labor headwinds.

You have seen in Memphis earlier in the year and then I guess, maybe just.

Related to that how are you thinking about wage growth in 2022. Thank you.

Uh huh very nature and in terms of the the the margin I mean, it's important to make sure your.

You all understand the components of that so it's a very valid question first I'll say that.

Statements were made.

We have about 195 basis points.

Headwind.

Need to drive around 230, Oh improvement to demolishing two to be around a 50 basis point expansion knife I take you to slide 19 in the presentation. You can see what we have been able to accomplish in 2021 not clearly he was on a higher revenue.

If I take your point, but we drove close to 400 basis points of improvement offsetting the headwind. So we see the operating leverage in the business and we see the efficiency gains now we will continue to see operating leverage improvement as we rebuild our revenue rebuild.

As we see.

Maybe the leverage from SG&A and cost of goods sold on manufacturing in.

Importantly, we also aim to drive our stay about $150 million of efficiency.

In the business and put them into three buckets to the extent that can of course, we've been very clear on prioritizing on project prioritization and I think you've heard US speak for instance, and meet the management time and focus on where we play.

The markets, we operate et cetera.

Then we are driving operational.

Operational efficiencies being manufacturing efficiencies, we are continuing our program of manufacturing efficiencies and as I said, we are assuming that we can offset some of the inflation you know in the prior discussion with Tom.

Third category about simply good cost discipline organizational efficiencies and that's what we're going to have how fast rising comprehensive.

Of achievement.

Of improvement sorry.

And clearly that's what we focus on Jaskiewicz defensive TVT.

All about execution.

Need to dry them the savings now in the business when we need to deliver the top line.

Now moving to your second question.

Our supply chain the current disruption, mostly driven by by the global supply situation, which Roland and I would just add.

Capping a movement ago main feedstocks that denies we've recruited we're working through we've done a lot working generally around on sales and operation planning, there's more to come and I'm not gonna faithful resolved and in particular as you know we are transferring to a new set tops and logistics. So there's more work to do to make sure. The network is resilient.

We are you know in a much more stable situation on that point.

Oh I'm sorry.

Sorry. Your final question the wage growth, it's not a number that we wanted to disclose them.

In public persistently.

A SKU.

Inflation.

In some of the countries isoprene in emerging market.

Got it. Thank you and can I just follow up the 125 basis points in terms of the inflationary headwinds that you're guiding for this year is that the assumption that you had in December when you gave the midterm guidance or has that changed.

Nothing has materially changed clearly.

A.

By December they were already inflationary pressures, we had worked through a bunch of ex us and nothing has changed I think the competition for raw materials is becoming a little bit a steeper.

It's in the we haven't been on that side as well, we're not changing importantly, omnichannel guidance.

You know we we all.

Committing to delivering on margin improvement.

Excellent. Thank you and all the best to you all in.

Thank you Veronika.

Okay.

Our next question today comes from Lisa Clive of Bernstein. Your line is open.

Hi, there.

Two questions on Cory I'm, good to see a strong uptick there can you comment on.

The sales U S versus outside of the U S and it was interesting I think it was at the December event that you were mentioning building out a robotics facility I think it is in Germany.

And.

I guess if you can.

Could just talk a little bit about how you see that business developing overtime robotics has historically really been focused on the U S that you clearly see potential beyond that.

And then also in terms of sales of Corey what proportion are burnt.

Smith and nephew knee customers versus competitor accounts, thanks very much.

Okay.

Hi, Lisa I'll try to answer we may not have all the data for you here, but.

Corey.

Obviously, we continue to be very excited about the technology.

The uniqueness of the technology and the ability to bring.

New products or new surgical techniques onto <unk>. So as I said, we're going to work on bringing the Legion consolo instrumentalist construct one to Corey.

And then also having the revision knee onto Corey and the future of course also bringing the new engaged surgical uni knee onto Cory so really to build out the entire franchise. There that's quite exciting as you said.

The trend has been strongest for robotics surgical use in the U S and we believe that we'll continue to do so or to be so, but we're seeing increasingly different markets very interested in robotic surgery of course.

Middle East, India, Asia, and in Europe , as well and we as you said we have.

Announced that we will build a medical education training and innovation facility in Munich.

We'll continue to support the use of robotics in Europe and that is also linked to the previous acquisition of the.

Assets for hip navigation from brain lap.

Back in 2019.

So this will this is a geographically we're very well placed there.

Was that team upcoming actually or being in Munich.

In terms of the sales breakdown I don't think we have disclosed these numbers so.

I'm afraid I can't I can't give you those while we do see though is of course, a growing number of usage in the U S and where we use Corey we see the accounts actually growing faster than the accounts that don't have a robotic system.

Great. Thanks, very much for that.

Thank you. Our next question today comes from David Adlington of Jpmorgan. Your line is open David. Please go ahead.

Great. Thanks, guys, yeah. So firstly just on the BP I just wondered what your thoughts were on how that might expand beyond orphan either this year or potentially beyond.

And then secondly, just in terms of the pricing environment.

Cost inflation, you're seeing on the cost side I just wanted to put you on your bill if he wants to.

I'll stop those price increases through in terms of the raised prices.

What are your what's your assumption is in your guidance.

Hi, Thank you. So in terms of GBP, we discussed about also a little bit more happening to them and you you may know that they were they were in there was a tender sorry in 2021 for <unk> some protein provinces that's being.

Extended to other provinces, although hold of China.

Loss from myself, all small it's a function of all of retail. So we don't see a big impact now the question to your question, where we need to go neck, we believe them.

You know, where we play than in China and of course for Suncor and we certainly believe that in for them you know basically bound not many local players it's not of the size yet that would fall under the criteria with edp. So we see a much longer runway and we don't anticipate any DVT.

The other categories, where we play in the short term.

And I'm moving to price them clearly we were being as proactive as we can in terms, but you know as I said in the presentation, it's really difficult to know industry are noncompetitive everyday and relate the same.

So you know well to pass on to customers like for like price increases, having said that we are reviewing our contracts and wherever we can you know Wheeler counties right.

Reviewing our contracts and being proactive, but it's not a lever in the meat in the short time, it will become a better even in the medium.

Longer term as we renegotiate tend to contract.

Great. Thank you sense that the pricing we should assume so typical historic sort of minus one ish to the price of this year.

Our current guidance.

Thank you very much and all the best for all of them.

Thanks, David.

Thank you and our final question today comes from Chris <unk> of Credit Suisse. Your line is open.

Yeah.

Okay. Thank you operator good morning.

On Fastweb.

Actually I just wanted to come back.

<unk> Zealand. So maybe you addressed this adobe getting but I was on another earnings call. So could you explain to me whats the rationale to change notice CEO right now after you adjusted no set out the strategic goals in December .

And what's actually kind of the risks that you know.

Puck coming in at all would.

Revised no such targets is it fully signed up to do some in all 24 topics.

That will be my first question.

So I'll, let I'll let.

Roland comment in a minute, but clearly first.

To your last question, we are committed to our midterm guidance.

Just reiterate today I'll meet some guidance actually.

Really both in terms of revenue growth of 46% on the improvement in margin you know by 2024.

It can be at least <unk>, 21%.

And it's all about execution, it's about focus and we have a clear strategic pillars articulate.

And those those strategic pillars will articulate all I can say you know me.

The management session in December .

And we're fully supported and endorsed by the board. So today very bold and Roeland I've agreed.

Mutually agreed that Roland.

Down for the focus on our strategy of driving revenue growth driving productivity driving inorganic innovation continuing acquisition bolt on acquisition is unchanged and I would also say to your point on meet the management clearly and he was also damaging the management and I hope so.

In December and you can see the strength of talent, we have been in the organization. So we remain focused on we will continue to execute them and as I said in the presentation. You know it was a pleasure to work with them.

Yes, Chris maybe just on a more personal note I think when I took over in 2019, those we're very particular circumstances.

Very soon thereafter, the global pandemic broke out that something that nobody could foresee.

And that turned this this ties into a very different one rates I mean initially we.

We were all in crisis mode. We were trying to see how we can continue to supply our customers.

To keep our employees safe and to continue to do the business I think we've all learned tremendously from this pandemic.

And at the same time, we continued the transformation of Smith <unk> nephew. During this very challenging time and I think that was that was the task Japan I feel that.

I am leaving behind an organization, which is in great shape with a great strategy you heard on Francoise, where everybody is committed to to the numbers, but also through the execution and when I look back I think is great that we were able to protect for instance, our innovation capabilities and we ring fenced R&D.

We're seeing the benefits now and they will continue to come through this ramp up in R&D, the continuation of the cadence of M&A.

The company's truly now at an inflection point, where where it's a I feel I feel confident and positive about turning this over to the next leader.

And for them to make two two.

To write the next chapter of Smith <unk> nephew.

Okay.

Okay.

We'll watch it with interest not definitely answer that.

Sheila divest an awful for the future and maybe just on my second follow up question is on the trading margin goal of 24 at all on the topic anyway.

Given the inflationary environment at all how much room for maneuver is actually baked into that and what you said basically assuming that you know kind of inflation normalizes again or can you cope with all the code and to note rate of inflation and still achieve these nose, 21% talk about 'twenty four.

I think I'll step back for a minute for the exact detail of the discussion.

Your question, sorry, I when you look at 2000, <unk>, we do need to drive consistent improvement in financial times, almost now three leavers one it's about the revenue growth you know being 46% rates about commercial execution, it's about new product launches they need.

About gross margin expansion sites about continuing our transformation and operations, it's about product rationalization O'brien rationalization and the final lever is really seeing the SG&A when you break it out in other.

Well, you know I'll I'll OPEC growing less than our revenue growth and that's about being very focused on where we compete.

How do we optimize supply all go to market model et cetera. Those all the episode the fever is when you look at a high level of a period of time that will drive our performance and I think that's where we need to place off bounds. When you we think about our guidance that the midterm guidance.

We knew the inflation as we were coming in on that that you know that that's the basis that was built in but I think it's important to step away. When you think about midterm guidance, a while deliveries that will help the recovery in each of our revenue growth gross margin expansion on leveraging our cost base.

Okay.

We just noticed that you know inflation seems to be a bit more stop and then it'll be all at once maybe.

I appreciate your comment.

Yes.

Thank you.

Thank you we have no further questions from the line so I'll hand back to the management team took place.

Well I think this ends our call. Thank you very much everyone and all the best to you all and thanks again.

Thank you.

This now concludes today's call. Thank you very much for joining you may now disconnect your lines.

Okay.

Okay.

Okay.

Yeah.

Thanks.

Thank you.

Thanks.

Okay.

Okay.

Yes.

Thanks.

Thanks.

[music].

Yes.

Yes.

Yes.

Yes.

Okay.

Yes.

Yes.

Okay.

Yes.

Yes.

Yes.

Okay.

Okay.

Yes.

Sure.

Okay.

[noise].