Smith & Nephew PLC Q2 FY2022 Earnings Call

I'll just draw your attention to the safe harbor statement on the slide that's about to pop up in front of us. So, it's a pleasure to be reporting the results of my first full quarter as CEO and also to be meeting many of you in person for the first time. So as you can imagine, I've been spending these last few months getting into the detail of the business and building up a picture of how we can drive greater performance and value. So, before we get into the quarter's numbers, I'd like to share my initial thoughts on Smith & Nephew's positioning, some of our early priorities and our expectations. Smith & Nephew has many exciting opportunities with a number of factors that are lining up for us to take it to the next level of growth. Innovation is a key driver of value in our industry and this is a company with innovation at its core. I've seen leading technology in every aspect of the business in established products, in recent launches, and in the depth of pipeline across our franchises. Secondly, the fundamental competitive positioning is strong. We have a clear right to win in all franchises. There are structural advantages that are distinct from our competitors and our proprietary platform technology with applications across multiple devices and procedures. And importantly, the delivery is good in two out of our three franchises that account for about 60% of our revenue base. So there's no systemic barrier to execution. The challenges won't be surprising to you. Strategic execution in orthopedics still needs to improve. And our manufacturing and supply chain are not yet where we need them to be. Both our growth and our margin recovery have been held back as a result. So I've spent some time addressing the root causes. Although, there's already some work underway, we have now developed a new structured program of execution with a deep level of oversight that I know is required to deliver this type of program and at pace. This work is already underway. Turning to our results, I would say our first half performance was mixed. Wound and sports medicine continued to be on track whereas orthopedics was held back by execution and supply chain challenges, and of course the impact of China VBP. We've adjusted our 2022 guidance reflecting these supply chain challenges and the difficult macro environment. Anne-Francoise will walk through the Q2 and H1 results. And then I will come back and talk in more detail about our comprehensive action plan for the future. Anne-Francoise?

Thank you, Deepak. I completely agree with you. It's truly great to be here in person for the first time in two years, so I appreciate everyone making the effort to attend. Let's begin by discussing the details of the second quarter. The growth in the second quarter was 1.2% on an underlying basis. The slower growth compared to the first quarter was mainly due to several known factors, including one fewer trading day than in 2021, the implementation of China's value-based pricing in hips and knees, and lockdowns in certain regions of China that particularly impacted our sports franchise. In terms of geographic growth, the U.S. was the fastest-growing region at 2% for the quarter. Emerging markets had a growth of 0.8%, which was affected by headwinds in China but balanced by strong growth in India, the Middle East, and Latin America. Other established markets experienced flat growth due to a slow quarter in the Asia Pacific region. Focusing on our franchises, overall orthopedics revenue declined by 1.1%. As mentioned earlier, the value-based pricing implementation posed a significant headwind. Excluding China, orthopedics saw a growth of roughly 2%. Specifics include a 2.7% growth in knees, while hips declined by 3.7%. Along with the value-based pricing impact on our revenues outside the U.S., the quarter reflected the need for better execution and supply chain management, which Deepak will address shortly. We are also in the process of rolling out our cementless knee in the U.S., and while it’s early to see significant growth this quarter, we anticipate more visibility in the second half. Other Reconstruction segments have returned to double-digit growth, and robotics grew faster than the overall segment. Our offerings continue to improve, as we completed the first CORI assisted hip and cementless knee procedures this quarter. In the second half, we expect to be the first company to provide robotic-assisted knee revisions. However, Trauma and Extremities saw a decline of 6% and were slow in most areas. We chose not to take part in the broader rollout of the provincial trauma tenders in China, contributing to part of the sales decline. Sports Medicine and ENT grew by 1.9%, with Joint Repair up by 2.1% and Arthroscopic Enabling Technologies down by 0.5%. As noted earlier, Sports Medicine was heavily affected by COVID outbreaks in China. Excluding China, the franchise growth would have been around 5%, with Joint Repair at 7% and Arthroscopic Enabling Technologies at 2%. The overall drivers were similar to those in the first quarter, as the recovery in the knee repair market continues to fuel our growth in established markets with a return to normal physical activity levels. Our recent launches, FAST-FIX FLEX and FASTSEAL, are tracking ahead of our plans and significantly contributing to growth. The availability of electronics remains a challenge and continues to hinder Arthroscopic Enabling Technologies. The 11.2% growth in ENT is due to the ongoing recovery post-COVID, aided by successful price increases in the U.S. Advanced Wound Management grew by 3.8%, with Advanced Wound Care increasing by 3.3%, supported by strong growth in our infection management portfolio and robust performance in the Asia Pacific region. In July, we launched the WOUND COMPASS Clinical Support App to assist healthcare professionals in assessing wounds and selecting suitable treatments, showcasing our digital capabilities and the value of our comprehensive evidence-backed portfolio. Bioactives grew by 2.4% this quarter, driven primarily by our skin substitutes portfolio, while Advanced Wound Devices increased by 7.9%, with ongoing double-digit growth in our PICO products. Now, I will move on to our financial results for the first half. Revenue reached $2.6 billion, reflecting a 3.5% increase on an underlying basis compared to the first half of 2021. Reported revenue remained flat, affected by foreign exchange headwinds of 350 basis points due to the strength of the U.S. dollar against other major currencies, with minimal impact from M&A. As depicted in the chart, Sports Medicine and Wound showed mid-single-digit underlying growth. The growth rates reflect one fewer trading day than in 2021. Turning to the summary P&L, the gross margin for the first half was 70.9%, an increase of 30 basis points. Various factors contributed to this, including inflation being offset by price increases and a beneficial timing effect from our hedging strategy in the first half. However, the trading margin was lower at 16.9%, down from 17.6% in 2021, primarily due to high SG&A costs stemming from inflationary pressures in freight and logistics seen across the economy. We have also ramped up commercial activity as customer engagement patterns return to normal. Additionally, in keeping with our strategic commitment to innovation, we have maintained an R&D ratio of 5.7%. Continuing with the P&L, adjusted earnings per share decreased by 2% to $38.01, which, of course, is still ahead of our trading profit due to a lower tax rate compared to the first half of last year. The interim dividend remains unchanged from 2021 at $14.04 per share. We generated $154 million in trading cash flow during the period, with a trading cash conversion of 35%, which is lower than in 2021. This decline was largely due to higher inventory levels resulting from increased purchases of raw materials and components to secure supply and mitigate shortages, alongside a phasing out of other working capital movements that we expect to reverse in the second half. Regarding the balance sheet, net debt stood at $2.4 billion at the end of the half, an increase of $355 million, with $89 million attributable to the acquisition of Engage Surgical in January and $133 million to share buybacks. Consequently, the leverage ratio was 1.9x adjusted EBITDA, remaining close to recent levels. Finally, our guidance for 2022 remains that we are targeting underlying revenue growth of 4% to 5% for the full year. For the first six months, growth was 3.5% on an underlying basis, even with COVID restrictions in China. We anticipate stronger growth in the second half of the year. Regarding the trading margin, we expect it to be around 17.5% for the full year, reflecting the ongoing higher impact of inflation on our business, especially in freight, along with continued external supply challenges. While we are managing input costs, we are also maintaining vital growth investments for the future, such as R&D, which may affect our margin. With that, I'll hand it back to Deepak to discuss our action plan.

Thank you, Anne-Francoise. So having covered our first half performance, I want to share with you my assessment of Smith & Nephew and how we are moving forward. I'll start with the opportunities. I talked about our right to win and that is critical because it gives us the confidence that we'll be able to deliver our growth aspirations as we improve our execution. In Orthopedics, that right to win comes from our portfolio and our technology. On the portfolio, we now have a full product range across hips and knees that we can offer to our customers. There were major gaps in the past, but they've now been closed and we're now starting to open a gap of our own against peers. For example, with the engage cementless Uni knee, and in some ways our product range is too wide, and I'll talk about that later. Our Implant Technology is unique and differentiated. We have the kinematic profile of the journey to a knee with motion closer to the natural knee than competitive systems. We have a proprietary materials technology in OXINIUM with applications across multiple devices and outstanding long-term outcomes. There's the OR3O hiccup that takes that material and applies it to the dual mobility approach. In Trauma, we're completing our highly competitive EVOS plating system with large plates. That gives us a comprehensive and easy-to-use system that addresses all fragmented surgical needs. There's also a robotic-enabling technology platform called CORI, as well as the economic and portability advantages of CORI. It was designed from the beginning to be able to work on a range of other hardware and in a range of indications. We're just still at the start of the plan functionality and you'll start to see unique indications and assets added as early as later this year. In fact, an update to what Anne-Francoise just mentioned, overnight, we got approval for an indication on the LEGION knee that you've telegraphed, so really good development for us as we continue the journey with CORI. In Sports Medicine, we also have a complete offering for our customers with joint repair, the arthroscopic tower, and customer service. Most competitors either have gaps or are just selling equipment without the deep relationships in this segment. We have leadership positions in the various segments, including being the number one company in enabling technologies and biologics. We also have scalable synergies with other areas such as through CORI and cross-selling opportunities in the Ambulatory Surgical Centers. In Wound, we have the deepest and broadest portfolio offering solutions across all key wound types, bringing together foams, devices, biologics, and I just heard from Anne-Francoise, digital. We're leading the negative pressure platform with huge potential for market expansion. We have a catalog of strong evidence across our categories, showing proven clinical outcomes and economic value, which sets us apart from the low-cost segment of the market. Let me turn to these two franchises, Sports & Wound. We're demonstrating that as a company, we're more than capable of capitalizing on the advantages we have. As a reminder, as I mentioned, 60% of our revenue comes from these two segments. Sports has been outperforming the market for many years, and when I look at why, I see commercial excellence built on a deep understanding of customers and a precise targeted approach for engaging with them. We also have a steady stream of innovation across procedures and a successful integration of the assets we've acquired. The Wound team has done many of the same things as that franchise has accelerated over the last few years. We've made good use of our structural advantages by focusing on portfolio strength, breadth, and evidence-based selling. We've also executed well on high growth acquisitions, like skin substitutes and leaf. Importantly, we've successfully driven margin improvement at the same time, so both are well placed to continue in the same way. In Sports Medicine, we've refreshed the capital equipment in the last two years and added a new innovation platform with biologics. In Wound, there's still an opportunity to deepen the penetration of advanced treatments, with wounds today either not being adequately treated or not being treated at all. I mentioned there's an exciting pipeline across these categories. Turning to Orthopedics, that's clearly where our key challenges are. It had been a long-term outperformer but has trailed the market certainly since 2020. A key priority for me has been to understand why that happened and what we need to do to get back to winning. The aim in orthopedics is to be a procedure innovator with best-in-class implants and, as I alluded to, paradigm-changing enabling technology on the CORI platform. As you know, we had a major product gap; not having a cementless knee hurt us for several years. The fix for this is in place with the cementless Lesion that's rolling out now, though it wasn't perceptible in the first half results. As Anne-Francoise mentioned, we expect that to start to register in the second half and going forward. There are more structural factors; however, and that's around execution and supply chain. In terms of execution, we've become more complex and less agile than our larger peers, both in terms of our portfolio and the ways in which we work. For example, we're still supporting multiple hip stems and knee systems in parallel when peers are increasingly focusing on just one, the one family. We also hadn't recognized that operations and commercial had become disconnected when they need to be working even more closely together for top-class execution. The result is that supply is not always well aligned with commercial needs. Lastly, capital management has not been efficient. Instrument sets are not always optimally placed with full sets at centers that may not need them, and not enough sets elsewhere. The financial effect is that asset turns are lower than they should be on an investment that's about half of our CapEx. Let me turn to supply challenges. In manufacturing and supply chain, like everyone else, we're feeling the effects of increases in raw materials and freight across our businesses. But it's also apparent that our current solutions to the Smith & Nephew specific issues, and that's in orthopedics, not in wound and sports, aren't working fast enough. We're addressing the root causes sufficiently. We've made good progress in addressing the operational issues in Memphis that hurt us in '21, for example, staffing shortages that we alluded to. The fundamental efficiency and reliability of our supply chain is not where it needs to be. The effect is not just the outright shortages we saw last year and continuing into this year, but also that representatives have spent far too much of their time managing existing customers rather than acquiring new business. For example, in trauma, the majority of our representatives are spending 40% or more of their time managing logistics and inventory. These challenges weren't always present. Some were made worse by COVID and for others, the disruption of the pandemic hit problems as they developed. We know the importance of fixing this, and the work is underway. Building on our previous efforts, the team has put together a comprehensive 12-point program of execution in the last two months that covers the biggest opportunities for our company. These are the highest-level regaining momentum in orthopedics, really fixing orthopedics, across reconstruction and robotics and trauma, improving productivity throughout the supply chain, and of course, further accelerating Sports & Wound. The elements have been worked out in quite some detail and are backed by robust structures for accountability and I'm taking personal oversight. I'll come back to that in a moment. I wanted to give you a bit more detail on orthopedics and some of the things we're working on that are picked out on the slide. First, we're rewiring our commercial delivery. There are a range of aspects to this, but examples are a greater focus on differentiated products and procedural innovation, aligned incentives, and more detailed customer segmentation. Secondly, we're going to streamline our portfolio by reducing the number of implant systems we support in a category. For example, in hips, we go from 11 systems down to 6 that will include renewing our sales efforts on the priority brands and will bring benefits from simplification and greater focus throughout the organization. We also will improve our asset utilization, particularly with instrument sets. We're establishing clear principles on where we prioritize placement, where we use consignment and where we use loaners, and rolling out analytical tools to support management. This work has started already. We're rebuilding the demand planning process. Closer collaboration between operations and commercial will address short-term tactical supply chain decisions and longer-term signals to better align production with market needs—there's a lot more behind this and I'll keep you updated on progress and provide additional detail in the coming quarters. So turning back to the program, as some of you know, I've driven this type of program successfully before. In my experience, a big part of the success of this work will be having the right governance and accountability to ensure that the plans are followed through and the changes become a normal part of how we operate. We already have refreshed leadership in commercial and operations with area-specific experience and track record. You already know Brad Cannon, our Head of Orthopedics and Sports, and of course, the orthopedics leadership team that reports into Brad. On the operations side, we have Paul Connolly, who's our Head of Operations. Last summer we brought in a new Head of Orthopedics Operations and are rebuilding other important areas. Our new Head of Orthopedic Operations has driven similar turnaround operations elsewhere, and our Head of Supply Chain, a new head of supply chain previously ran an optimization process in another orthopedics business. Our new site leader in Memphis also has deep orthopedics expertise. On the actual delivery, in terms of these programs, this program that I talked about, there's a responsible named owner for each area, and we've established a high cadence of interactions with the responsible teams. That's fortnightly meetings under my direct oversight. Each area also has specific action plans with meaningful forward-indicating KPIs to track progress and ensure accountability with and transparency reporting going all the way up to our board. Getting the full benefit of this work will take some time. We'll start to see operational benefits from some elements quickly, such as asset optimization, and further benefits will continue to accumulate over the next two years. As you've heard me say, there are more opportunities than challenges with Smith & Nephew. This is a great company with a great outlook, and I believe we're not far away from showing this externally in all aspects of our business. There are challenges we need to address, but things are starting to align, even in orthopedics where we're poised for an inflection. We have an outstanding portfolio already, and we're bringing the next wave of innovative implants to market, like the cementless knee, The Engage Uni knee, EVOS LARGE, and the next-generation shoulder. We have enabling technology leadership already with CORI and the unique platform extensions to come. I talked about one of those just now. We have a revitalized management team, and we're getting on with rewiring, literally rewiring our commercial delivery with energy and at pace. I see these initiatives as part of our transformation journey as an innovation-led portfolio medical device company. They're aligned with the strategic framework that we previously communicated to strengthen, accelerate, and transform. As these foundations are fixed in orthopedics, it will free up our people and capital to take much better advantage of our clear right to win. We'll keep investing in innovation and continue with M&A across our portfolio. Sports Medicine, ENT, and Advanced Wound Management are already showing what we can achieve when we combine leading technology and get the execution right. I'm truly excited about what's ahead and now we'll take questions. I think Patrick was first with his hand up, Charles.

Obviously, it's Patrick with Bank of America. Just three quick ones, I guess. Short term, the supply chain, let's call it the Q2 situation. It sounds like Memphis got better, so maybe a little bit of details in terms of the other hiccups outside of Memphis? That's the first one. Second one, I appreciate this might be a difficult topic, but midterm margins and any commentary there given a tougher jumping-off point, let's say, given the environment? And then last one, you touched on it in terms of the orthopedics work that you're looking to do. Am I taking the right sense here that you feel like you've got the right people in place, whether it's below the leadership team, like further down, and it's more about intensity and culture, or do you feel that further down the structure there might be a need for some new people coming in? How do you want to characterize the two there?

Thanks, Patrick, for the questions. So first, let me talk about the Memphis part of it. As I noted, in terms of product availability in orthopedics, we indeed made improvements in Memphis. The biggest issue we faced last year was around staffing, and we're largely on the other side of it, knock on wood, right? You never say you're on the other side of staffing anywhere ever in this environment, but we've lapped that. The issues, as I find in terms of product availability in orthopedics, supply is a piece of it, but the rest of it is in our hands. The connectivity between commercial and operations is not where it needs to be, which has led to product availability challenges and one of the highest levels of inventory in this business. So we've got stock to put it simplistically; it's in the wrong places and what we're doing. We didn't just get there overnight. It got there over a period of time because our wiring wasn't working as intended. We understand that problem now. We've got to fix it, continue to improve our Memphis operations, but we've got to fix this wiring. That's the work that's underway so that we can better connect demand at an account level to a production plan. In the near term, when I talk about how we improve asset utilization, we're going to embark on a structured program to move inventory and sets from low consumption accounts into higher consumption accounts. We've been doing this sporadically in certain places, but what we're taking is a step back, undergoing a structured program, and looking at this globally versus kind of optimizing locally. We believe over the next two quarters that will have a benefit by effectively putting stocks where they can be consumed. That will free up some of the time from our representatives. Related to that, what I believe we've underestimated, and we knew this at one point, but somehow we've lost our way on the importance of logistics, particularly last mile logistics in orthopedics. So, we are embedding logistics experts in our commercial teams at the right level of aggregation, let's call it metro areas. That's the change to how we've operated in the recent past. Regarding the challenges we face in the second half of this year, we had anticipated a certain level of inflation when we set our budgets and guidance. However, what we are experiencing is significantly above our worst-case scenarios. Considering this alongside other factors, particularly in freight and distribution, we recognize that there are additional impacts as well. Given the macroeconomic factors aligning, we believe it's prudent to address how we see the business progressing amid these risks, which is why we have taken our current stance. I also want to highlight some changes within our leadership team. Many of you have met Brad, who has recently taken on expanded responsibilities. He was initially in charge of sports but is now also overseeing orthopedics, although these remain distinct organizations. We have made significant and thoughtful changes in commercial, franchise management, and operations, not just within Brad's direct reports but also one or two levels below. Many of the new team members are just starting to adapt to their roles, with an average tenure of around 6 to 9 months. They are beginning to have the meaningful impact on the business that we anticipated. I believe we have assembled a competent and experienced team drawn from the industry, who understand our challenges and believe in our product portfolio. I was pleasantly surprised by the strength of our portfolio upon joining, as this was not what I expected from the orthopedic sector. We have attracted talent from leading companies who are motivated by our products and culture. I feel confident about the capabilities, temperament, and culture throughout the team, aiming to make a significant shift in orthopedics.

The mid-term guidance, which was also some...

Oh, yes. I apologize for focusing on the first half regarding the mid-term. The starting point is more challenging, and we are in an uncertain environment with unprecedented macro factors. We are concentrating on the necessary actions to secure the three-year plan that we previously outlined. Has it become harder? Absolutely, the starting point is different. However, the initiatives we have outlined in orthopedics involve improving productivity, expanding margins, and accelerating efforts in wound care and sports. I believe we are taking the right actions, and we will see how that unfolds.

On the Sports Med in China, is that more demand-side or manufacturing-side? This feels like a situation that probably won't improve without a change in the approach to COVID from the Chinese leadership. So are there any opportunities here to kind of get ahead of the game? Just another quick question coming back to the guidance. So what level of inflation is already baked into guidance, further or revised guidance for your year? And what specifically has worsened particularly in the last two quarters?

I'll take the first one. I'll tee off the second one, and I'll hand over to Anne-Francoise. Is that good? I'll give you the hard questions, Anne-Francoise. On the first point regarding Sports Medicine, the impact indeed is from the lockdown. It's not a manufacturing-related topic in terms of specific impact to China; it's a demand topic, right? In orthopedics, it's VBP. I wanted to contrast the impact of China across those businesses. But there are supply chain challenges in wound and in sports as well; they're related to mechanical components and chips. Those are supply chain, but they're not specific to China; they're just large across the enterprise. So that's the thing that addresses your China question. In terms of the inflationary pressures that we see, as I mentioned, we're seeing a higher level than forecast impact on freight and distribution. And that's not just us; it's the nature of our network. We feel it just as we do, but it is an industry-wide topic. If you wanted to comment more than that?

Just to give a little bit more color. I mean, clearly I had – we'd spoken about having done a range of scenarios, but things have tougher and since we've spoken – there's been various geopolitical tensions, as we know. Freight is a key element for freight on warehouses. Just to give you a feel, our costs have gone up by 40% year-on-year, so that bays one of the key elements. The other of course is people. I know we'd spoken about; we have done our salary using the beginning of the year, but there is a cost or link to cost of living. There is a cost as you retain people as you recruit, and that is flowing through although it's a smaller component. The smaller one, which I think that actually we've signposted quite well is raw materials. That is a smaller limit, but again, you were talking about the microchips just now; electronics have gone up by 38%. Those are significant shifts that many industries are facing, and that's what we have to adjust as well. We are working hard to offset as much as we can, but some of it will flow to the bottom line.

Our first question comes from Hassan Al-Wakeel of Barclays. Hassan, please go ahead.

Hi, and apologies if these questions have been answered. We've been on other management results calls this morning. Firstly, Deepak, thanks for your update. I wonder what you put the historic underperformance of the business down to. How do you think execution will change going forward? And should we expect a meaningful resumption in M&A activity? Secondly, where is cost inflation running at for the business? Where was it for the first half? What is your expectation for the second half? Could you break out the margin bridge for the year? Is it just the 125 basis points changing goal, or could it be anything else, perhaps VBP getting worse? Finally, just following up on the mid-term targets, could you walk us through the margin bridge to 2024, where you see the key opportunities and the key risks in light of what you've talked about today?

Sure. I'll call in Anne-Francoise for the second part of your question, but let me take the first here, Hassan. As I indicated in my presentation, the execution related issues have been in Orthopedics, in Sports and Wound. We have been executing, while we've got a great portfolio and we've got the results to demonstrate that. In Orthopedics, as I look back on it, fundamentally, we've had in the past portfolio gaps that have been set us and have impacted our commercial performance. As I mentioned, we've closed those gaps. We've got a full range in hips and knees across families, but we've got a full range. In CORI, we've got a platform that's still in the early stages in terms of functionality and indications, but we're adding to it, including most recently overnight. That's a change from the past where we now have a portfolio, and we've got enabling technologies to drive growth. The other piece is the connectivity between commercial and operations that account for the product availability challenges that we see. That really has hampered us. It's hampered our growth as our representatives focus on inventory and logistics challenges and serving existing customers rather than going out and acquiring new business. That's one example of the impact of that. The second is the fact that we've got high levels of inventory, with product in the wrong places. We haven't been good. We haven't had the process of ensuring that we're matching our supply and availability to customer needs. That's a process topic; it's an end-to-end topic that connects customer demand to a production plan, and we haven't gotten that right. I don't believe we were ever particularly good at it, but we were okay for the scale of business we had. COVID really impacted that. That's had a significant effect on us over the last couple of years. The good news for that is we know what the issue is. We've begun to work on addressing the issues. It's a process thing. There's not some big IT spend we've got to do. There's no big structural barrier to us improving that. So, we know what we need to do and are on a good path to getting there.

I guess in terms of there were two parts to your question, Hassan, and good morning. The first around the inflation in H1 and H2. As you can see, just looking at our trading margin, there’s an impact on the trading margin that's down year-on-year. When you look at the elements of the P&L, the inflation in the cost of goods line is not as apparent as you would think because actually, on the face of it, our gross margin is improving. There is inflation starting to flow through, as we are selling material that has been built on a higher cost base that's flowing through but is offset by the timing benefit of our hedging strategy from a foreign exchange perspective. But you can see the cost increase in SG&A, which I referred to earlier, which is significant. That's where we see the freight and warehousing costs we talked about. That has an impact on H1, and we expect that to continue to increase in H2, particularly through the COGs line. Pulling all of that together, to your question, what does that mean for the year? We had talked about three levers; clearly when we gave the initial guidance, we talked about the inflation being a headwind. You refer to the 125 basis points we talked about, and we talked about, quite rightly, as you said VBP, which we mentioned at 60 basis points. Our current estimate is about the same position; probably slightly better because of the delay in the first few months of the year. There's no material change in that for the full year. What has changed is really our assumptions around inflation, which is probably about a hundred basis points higher than we previously assumed. That’s really where we are and the reason for the change to our guidance. Now, offsetting that, we are, and we have taken price increases. So, prices delivered, we can push, but as we've always said, we cannot offset all of the price increases. We are also continuing the savings and the productive improvements we’d had planned. The real change is that macroeconomic environment and the inflationary pressure.

Now, in terms of M&A, we previously communicated in our strategic framework or strength, accelerate, and transform that M&A would be a component of that. I do see M&A being a component of it. As I mentioned, in some ways, we're a tale of two cities to invoke an analogy. We have to fix orthopedics. We know what the issues are, and we're working at pace to fix them. But then we have 60% of our revenue base—two out of our three franchises—that are actually working very well, where all of the elements are combining and working as they should. We see opportunities to further invest behind that.

That's very helpful. I guess, what I was trying to understand is the margin bridge between the 17.5% and the 21% by 2024. Are you able to unpack the key components of that, please?

Sure. I think this is something that, I mean, I'll give you a top-line answer, and maybe we can follow up with you later. The big contribution there is the impact of growth. As I mentioned, from orthopedics coming back to levels that we've targeted, we see us expect a step up in the second half of the year. Some of that is the seasonality of our business, right? But in general, on the back of not only seasonality but product launches, we expect to see a step up in growth. That's one part of it. We see that continuing as we see the full impact of things like our cementless knee getting traction in the market, CORI placements driving utilization and pull-through of implants as we bring that forward, Engage, our unique compartment knee, getting traction in the market. There’s quite a bit to be excited about; it's not any one factor that's particularly huge but the combination of these factors that, I believe, is going to drive the inflection point in orthopedics.

Morning guys, and also iterate my apologies that you may have covered this off already, but just with respect to that 24 target 21% and coming back to Hassan's note about the margin bridge. 17% this year, you sound like you've got 40 to 50 basis points headwind from currency next year to the margin. You obviously got some, probably some underlying inflation pressures next year as well, but put some offsets with respect to cost savings and probably less dilution from some of the acquisitions. The big question is, if you get to 18 - 18.5 next year, if we're kind of lucky, that leads you with a 300 basis points jump into ‘21. I've been doing this for 20 odd years, and I can't think of a company that's done that sort of margin improvement in one year in a mature company. Any sort of comfort you can give us around that?

Well, David, look, there's no question that there is a bigger jump-off point, whether you look at it from '22 to '23 or '23 into '24; we're facing, I would say, relative to when the plans were put in place and the scale of headwinds, macro headwinds that we're getting into are significantly higher inflationary pressures being one of them, and continued pressures on supply chains from all sorts of factors, significantly higher than anything we could have forecast in '20 when the plan was put in place. So, back when the plan was devised. There's no question that this plan is being executed in a different macro environment than was envisioned. Having said this, I indicated when I first got here that I have embraced the strategy and embraced the set of targets as my own. What I've done over the last hundred days, or 90 odd since the last time I was before you, is really dig into the business and understand how we're going to get there. The path we had thought about in December needed to be refined, needed to be rethought in order to achieve the target. That's been the focus of my work. I acknowledge the delta and the steps you've taken, but much of what we're doing are not incremental changes. In orthopedics, it's a fix, right? It was a conscious choice of words because it's not working as it should. It's not a linear path from here to '24; the fixes that we're expect to put in place will pay off in non-linear ways once we get the wiring right, get the commercial and operational teams working as they should, and put the processes in place that any orthopedics business should have. We've got the people who know what good looks like executing on these things. I expect to see non-linear jumps in terms of our performance in orthopedics that drives this. The portfolio piece of it is key again; we didn't have a full portfolio. We now have a full portfolio. We need to execute now with that full portfolio and the process in place. I expect the benefits from that to accrue in a non-linear fashion. In sports and in wound, it's a different story. It's, of course, building off of an already strong base. So there, it’s perhaps a bit more straightforward…

Thank you.