Hello all and a warm welcome to the Smith & Nephew Fourth Quarter and Full Year 2021 Results Call. My name is Lydia and I will be your operator 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 those 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. [Operator Instructions] It's my pleasure to now hand you over to our host Roland Diggelmann, Chief Executive Officer. Please go ahead, when you're ready.

Thank you, operator, and good morning, everyone, and welcome to the Smith & Nephew fourth quarter and full year 2021 results call. With me is Anne-Francoise Nesmes, our Chief Financial Officer. I'd like to make a few opening comments, before we get into the details of the results. Also I'm sure you'll have seen the announcement of me leaving Smith & Nephew and the appointment of Deepak Nath as new CEO and I'll of course come back to that at the end. 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 outbreaks meant that external conditions weren't always ideal, so I'm really proud of the dedication of our team to stick to our financial commitments in 2021. Four fewer trading days and Omicron wave 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 strengthen the foundation 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's 10.3% growth on an underlying basis, taking us almost back to 2019 levels. Reported growth was 14.3% up and there was one trading day less than in 2020. Trading…

Thank you, Roland. So let me start with a summary P&L on slide 17, where you can see that we are recovering from the worst of COVID in 2020. At a high level, full year revenue at $5.2 billion grew by 14.3% on a reported basis and trading profit grew by 37% to $936 million for the full year, with an 18% trading margin. I will give more details behind some of these P&L lines in the next couple of slides. On slide 18, we show the details of the full year revenue as Roland has very much focused on the Q4 revenue. As I mentioned before, total revenue was $5.2 billion, up 10.3% compared to 2020 on an underlying basis. Reported revenue grew 14.3%, including a foreign exchange tailwind of 210 basis points and 190 basis points from acquisitions. As you can see in the chart, the contribution to growth was balanced across our three franchises. Orthopaedics grew by 6.4% on an underlying basis to $2.2 billion for the year. Sports Medicine & ENT grew by 14.6% to $1.6 billion. And Advanced Wound Management grew by 11.8% to reach $1.5 billion in sales for the first time. When we compare to 2019, our Sports maybe seen and Advanced Wound Management businesses returned to growth over the pre-COVID level, while Orthopaedics, and ENT have more to recover. Also, it would be helpful to describe on slide 19, the levers impacting the margin, which improved by 300 basis points over 2020. As we have previously reported, there were headwinds to overcome. We saw around 40 basis points of initial dilution from M&A. The higher logistics rate and raw material costs that are being felt across the whole economy impacted our margins by around 30 basis points in 2021. And there was…

Thank you, very much Anne-Francoise. So to sum it up, I'm pleased with the steps we've taken towards our midterm goals by delivering on our 2021 targets. And as 2022 progresses, you should see the strategy continue to advance. The efficiency and margin expansion will come, will continue, even against the short-term headwinds from VBP in China and from inflation. We'll advance the program to structurally improve supply chain resilience and we'll commercialize the pipeline from 2021 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 & Nephew over my time here. Working through the pandemic has obviously been a challenge for us all, but I'm proud of how the team 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 & Nephew today, the company is 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's now in place across the entire portfolio. I think this is truly impressive. I'd like to wish my successor all the best in leading this great company through its next chapter. And finally, I'd like to thank you all, our investors and analysts for our interactions over the last two years. They've been much less frequent in face-to-face than 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. [Operator Instructions] Our first question today comes from Hassan Al-Wakeel of Barclays. Your line is open.

Thanks for taking my questions. I have two please. So firstly, following up on margins, could you help us a bit more with the margin bridge in 2022? You mentioned, I think 125 bps of cost inflation, 60 bps for China. What is being assumed for FX and the M&A dilution that should be easing, as well as operational leverage? I'm just trying to understand why the margin guidance isn't higher and where you see potential upside risks here. And then secondly, could you talk a bit about what you're seeing in terms of cancellations of procedures at hospitals? Has this peaked overall? And how is the staffing situation at hospitals particularly in the US impacting this? Thank you.

Thank you, Hassan. Let me take the second question first. So, what we are seeing is of course the infection rates coming down in the US, in Europe. We've seen quite a few restrictions being lifted 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 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 canceled. So, these are more acute short-term cancellations that we see than in previous waves, but we believe this should ease as of course the -- as the number of infections continues to come down across the world.

Now, Hassan on the margin, as you've correctly said, we've guided to 50 basis points expansion. And I think the headwinds are important to note in particular the VBP China which is a one-time rebasing of our margin for 2022 and the 60 basis points inflation as well 125 is material, it is significant. Having said that, we are being proactive. We've got teams, looking at spot buys. We monitor inflation. And we're really being as proactive as we can be. Offsetting that is all of the actions we're taking. And it's important to note that in 2021, we saw margin expansion from revenue growth from the operating leverage and the cost discipline that we have in the organization. So clearly, to drive margin expansion and offset the headwind, we need to drive the revenue growth, which would come through as well from the recovery, our new products, our commercial execution. And we need to drive our productivity agenda and the efficiency gains. And that will drive about 235 basis points to offset the headwind. Now when you put that, maybe that's the gist of your question, clearly, when you put that in the context of what we've achieved in 2021, we clearly saw a large margin expansion of well over 300 basis points. But we feel that, as we've said, we -- the headwinds are actually more significant probably going into 2022. You also had a question on FX. That's a fair one because we have previously said that we would expect a small tailwind. And as we move through the period, effectively, we are now mostly fully hedged, and we do not expect a significant transactional exposure in 2022 as we're very much fully hedged at this stage to the best we can. The acquisition remains -- continue to be a little bit dilutive in terms of Integra in 2022. So the Extremities acquisition is dilutive in 2022, but that's not something that is that material that we wanted to bring to the attention. So overall, we feel our guidance is our best view at this point in time, particularly in a world that remains still volatile around global supply.

That's very helpful. And if I can just please follow up on growth. How should we think about the relative growth within your guidance of the three franchises in 2022? And how about Q1? Given your commentary around H2 versus H1, 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 you're going to tell me we're almost third of the way through, clearly, January continued to be impacted by Omicron in Established Markets. As I said, I think the infections peaked mid-January in the US. Many European countries have now lifted restrictions. So we did see some continued disruption earlier in the quarter, and that's what we've factored into our revenue guidance. Clearly, for the rest of the year, we were assuming it's largely unconstrained by COVID outbreak. And the sensitivity will remain on the availability of staff, particularly in the US, where it's a little bit more acute, with shortages of all our staff. In terms of the franchises, as you see, we will see Orthopaedics continuing to improve, particularly as we have launched the cementless knee. And Sports and Wound will continue their performance. And again, I want to reiterate, we are very pleased to see that they are above 2019.

Perfect. That’s all I have. And all the best, Roland.

Thank you, Hassan. Appreciate it.

Thank you. Our next question today comes from Tom Jones of Berenberg. Tom your line is open. Please go ahead.

Good morning. Thanks, everyone. I had two questions really. The first was just on your 2022 revenue guidance in the context of the businesses it's performed between 2019 and 2021. I guess if I look at your underlying growth on the chart you've got on Page 5, you did minus 12% in ortho, sort of minus two, three in the other divisions. Without COVID, you would have expected probably also to grow maybe 8% over that time frame Sports Med probably something in the double-digit range cumulatively. And Wound, maybe mid-single digits. So depending on the franchise, there's somewhere between kind of 10% and 20% of the revenue that you would otherwise have expected that has gone somewhere. How much of that do you think is just straight pent-up demand? How much of that do you think is gone forever because of COVID? And how much of it do you think you've lost to competitors? I'm just trying to get a sense of kind of, how much pent-up demand release you've baked into your 4% 5% overall underlying growth guidance for 2022. And then the second question is, just on your guidance for 125 basis points of margin pressure from input cost inflation. I'm actually somewhat surprised by that number, more in the way that it seems quite low to be honest. I mean, if you look at, your cost base of kind of circa $4 billion on a fully loaded basis, you're talking sort of 60% 70% $60 billion $70 billion headwind at that level, which is sub 2% which given the wider inflationary environment it looks like quite a low number. And even if I just look at physical input costs probably half one-third of your total cost you're still talking a low single-digit number. So I guess, how confident are you in that 125 basis point headwind being as bad as it's going to get? Because it does seem like quite a modest impact in the grand scheme, of the wider inflationary environment at the moment.

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 in elective surgery, many surgeries have been deferred and we know that joint replacements are amongst the first ones always in every of those ways that were delayed or deferred. So there is a pent-up demand. There is a building of waiting list in particular in the public sector and more so in Europe, than I would say in the US. And there is of course, the underlying fundamentals which are very much intact, which are the patient population continues to grow. And with that there's a natural growth. The 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 US, what the impact of the staff shortage will be whether that's sustainable or more so acute. Then, I would say, the reconstructed business the joint replacement hip and knees I do foresee that all of those patients at some time come back because the patients are not end-of-life stage patients. They have these surgeries for a degenerative disease. And so they do come back. So we see very few lost 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 knees due to not having a cementless 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 bar 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 – sorry, Tom are you going to follow up?

No, no that's fine. I'll follow up in a second.

Perfect. And just before moving to your inflation question, just to build on what Roland has said, is clearly the continued recovery will be more marked in H2. And whether you look at versus the 2021 comparison or growth or 2019 we will see acceleration of revenue in the second half of the year. Now 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, and the key raw materials, which actually discussions were already ongoing. And we know precisely, where inflation is hitting. And just to give you a couple of examples electronic components have increased by 20% an element of forging which might not be on most of people's list so that's an 11 point price increase. So effectively we are assuming as well that we are countering and expecting some of that inflationary effect and that’s being very proactive and are seeing managing our purchases. So the 125 basis points EBIT sensitivity for value space where we know today the prices are being under discussion and indeed that we prevent about 8% of all cost on key material. It does not include merit increase or wage increase. That’s important to know that is pure raw material.

Okay, perfect. That's clear. And then just a follow-up is kind of you mentioned Android and data. On the supply chain issues that are affecting revenues, I think you mentioned in the presentation you expect a gradual improvement in -- across H1. 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 the trajectory of that recovery. Is it kind of something that will resolve quickly, or is it something that would just be a gradual improvement as the half progresses?

So, I mean, the -- this is one that's the variable and I think every company finds it very difficult to see -- to give exact timelines on when global supply disruptions will start. I mean for us it has been clearly on some of the components, which initially impacted ortho more. But we use electronic chips in sports, you can imagine in the tower, we use it in the thumb for wound so -- and in robotics. So clearly being proactive and making sure that we secure supply is key. So we expect that it will stabilize across the year. But that is one of the elements that we can't say for sure because we're dependent on suppliers and global conditions.

I'll just add here. We've also seen some supply constraints on raw materials Anne-Francoise has mentioned that earlier. You think of resins, resins, which are being used for sterile packaging so it's our suppliers that have seen that constraint. We will continue to see some short-term impact. But we have been working very, very hard and diligently on the mid-term here and we already know that the situation will improve going forward.

Good. That's all very clear, and thanks for that. And all the best for the future Roland.

Thank you Tom.

Thank you. Our next question today comes from Veronika Dubajova 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. I just want to come back to the margin guidance. I think Anne-Francoise if I look at the 125 basis points from raw material cost inflation, 60 bps from the VBP, you are calling for an underlying margin expansion in excess of 230 basis points on the top line dynamic that frankly isn't too dissimilar from what we've seen delivered 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. So I was just hoping you can decompose this a little bit for us in terms of what you're assuming from an operating leverage perspective versus efficiencies. And what's your degree of confidence that these efficiencies come through? What are they dependent on? What are the risks, because frankly it strikes me given the headwinds that you have in the business this is a fairly aggressive underlying margin improvement against the top line. So I'd just love to understand what's driving that? And then my second question is just on the supply chain and the point of clarification maybe and again to push you both on this. I think the headwind this quarter was similar as last quarter. Have you resolved all the issues that you had in Memphis and the headwind this quarter is coming from issues other than labor availability, or is there still -- are there still some remnants in terms of the labor headwinds that you had 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.

Hi, Veronika. In terms of the margin, I mean it's important to make sure you all understand the components of that it's a very valid question. First, I'll say the statement is well made. If we have about 185 basis points of headwind, we need to drive around 230 of improvement to the margin to be around a 50 basis point expansion. Now if I take you to slide 19 in the presentation, you can see what we have been able to accomplish or achieve in 2021. Now clearly it was not on a higher revenue growth 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 gain. Now we will continue to see operating leverage improvement, as we rebuild -- as the revenue rebuild as we see the leverage from SG&A and cost of goods sold or manufacturing. Importantly, we're also looking to drive say about $150 million of efficiency in the business. And I put them into three buckets to the extent I can. Of course, we've been very clear on prioritizing on project prioritization. And I think you've heard us speak for instance in Meet the Management on being focused on where we play the market we operate et cetera. Then, we're driving operational efficiencies being manufacturing efficiencies. We're continuing our program of manufacturing efficiencies. And as I said, we're assuming that we can offset some of the inflation in the prior discussion with Tom. And the third category is about simply good cost discipline organizational efficiencies. And that's all going to help us drive the $150 million of achievement and -- of improvement sorry. And clearly, that's what we focus on. And you ask about the sensitivity. It's all about execution. We need to drive the savings now in the business. And we need to deliver the top line. Now moving to your second question, around supply chain, the current disruption, are mostly driven by the global supply situation which Roland and I were just discussing a moment ago. Memphis has stabilized we've recruited. We're working through we've done a lot of work internally around our sales and operation planning. There's more to come I'm not going to say it's all resolved. And in particular as you know we're transferring to our new third-party logistics, so there's more work to do to make sure our network is resilient. But we are in a much more stable situation on that front. Oh, I am so sorry, your final question. The wage growth is not a number that we want to disclose in public, but certainly, assume inflation in some of the countries particularly in the emerging markets.

Got it. Thank you. And if I can 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, we -- by December, there were already inflationary pressures. We had worked through our budget. So nothing has changed. I think the competition for raw materials is becoming a little bit steeper but certainly we haven't seen. And as far as well we are not changing importantly our midterm guidance.

Got it.

We are committing to delivering on margin improvement.

Excellent. Thank you and all the best to you, Roland.

Thank you. Veronika.

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

Hi there. Just a few questions on CORI, good to see a strong up-tick there, can you comment on the sales U.S. versus outside of the U.S.? And it was interesting, I think, it was at your December event that you were mentioning building out a robotics facility I think it was in Germany. And I guess if you could just talk a little bit about how you see that business developing overtime. Robotics has historically really been focused on the U.S. but you clearly see potential beyond that. And then also in terms of sales of CORI what proportion, are to current unique customers versus competitor accounts? Thanks very much.

Hi Lisa, I'll try to answer. We may not have all the data for you here, but on CORI 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 on to CORI. So as I said we're going to work on bringing the LEGION CONCELOC the cementless construct on to CORI. Then also, having the revision knee on to CORI and in the future of course also bringing the new Engage Surgical UNI knee on to CORI. So really to build out the entire franchise there and that's quite exciting. As you said, the trend has been strongest for robotics surgical use in the US and we believe that will 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 to 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 Brainlab back in 2019. And so this will -- this is geographically we're very well placed there with that team coming 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 give you those. What we do see though is of course a growing number of usage in the US. And where we use CORI 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.

Okay. Thanks, guys. Yes. Firstly, just on VBP. I just wondered what your thoughts were on how that might expand beyond ortho either this year or potentially beyond. And then secondly just in terms of the pricing environment or the pricing inflation that you're seeing on the cost side. I just wondered what your ability was to pass that -- those price increases through in terms of raised prices and what your price assumption is in your guidance. Thanks.

Hi, David. So in terms of VBP we discussed about ortho a little bit more at length. You may know that they were in -- there was a tender sorry in 2021 for trauma in some provinces that's being extended to other provinces or the whole of China. For us from our sales are small it's a fraction of our group sales. So we don't see a big impact. Now to your question where will it go next we believe that where we play then in China is of course sports and wound. We certainly believe that in sports -- there are not many local players. It's not of the size yet that would fall under the criteria of VBP. So we see a much longer runway and we don't anticipate any VBP in other categories where we play in the short-term. Now moving to price. Clearly, we're being as proactive as we can in terms of -- as I said in the presentation it's really difficult in our industry and our competitors have relayed the same, it's difficult in our world to pass on to customers like-for-like price increases. Having said that we are reviewing our contracts. And wherever we can we look at our list price, we're reviewing our contracts and being proactive. But it's not a lever in the short-term. It will become a better lever in the medium to longer term as we renegotiate tender contracts.

Great. Thank you. So pricing we should assume sort of typical historic sort of minus one-ish to the price this year?

Correct, Dave.

Thanks very much. And all the best Roland.

Thanks, David.

Thank you. And our final question today comes from Chris Gretler of Credit Suisse. Your line is open.

Thank you. Thank you, operator. Good morning, Roland Anne-Francoise. Actually, just wanted to come back on the change in CEO. And sorry maybe you addressed this at the beginning, but I was on another earnings call. Could you explain to me what's the rationale to change the CEO right now after you just set out the new strategic goals in December? And what's actually kind of the risk that the ePAK coming in would revise no such targets? And is it fully signed up to this '24 target? That will be my first question.

So I'll let Roland comment in a minute. But clearly, first to your last question, we are committed to our midterm guidance. We reiterate today our midterm guidance, clearly both in terms of revenue growth of 4% to 6% and the improvement in margin by 2024. Now that needs to be at least 21%. And it's all about execution. It's about focus and we have our clear strategic pillars articulated. And those strategic pillars were articulated and corrected in our Meet the Management session in December and were fully supported and endorsed by the Board. So today, the Board and Roland have agreed, mutually agreed that Roland should step down with a focus on our strategy of driving revenue growth, driving productivity, driving innovation, continuing acquisition bolt-on acquisition is unchanged. And I will also say to your point on Meet the Management clearly, he was also in our Meet the management and I hope you did so in December and you can see the strength of talent we have in the organization. So we remain focused and we will continue to execute. And as I said in the presentation it was a pleasure to work with Roland.

Yeah, Chris, maybe just on a more personal note. I think when I took over in 2019 those were very particular circumstances. Very soon thereafter the global pandemic broke out. That's something that nobody could foresee. And that turned this task into a very different one, right? I mean initially, we were all in crisis mode. We were trying to see how we could continue to supply our customers to keep our employees safe and continue to do the business. I think we've all learned tremendously through this pandemic. And at the same time, we continue the transformation of Smith & Nephew during this very challenging time. And I think that was the task at hand. I feel that I'm leaving behind an organization which is in great shape, with a great strategy you heard Anne-Francoise where everybody is committed to the numbers, but also to the execution. And when I look back, I think it was great that we were able to protect for instance our innovation capabilities; that 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. And I think the company is truly now at an inflection point where it's -- I feel confident and positive about handing this over to the next leader and for them to make -- to write the next chapter of Smith & Nephew.

Okay. Yeah. No. We'll watch it with interest. No definitely. And also wish you all the best for the future. And maybe just my second follow-up question is on the trading margin goal 2024 we are on the topic anyway. I mean given this inflationary environment, how much room for maneuver is actually baked into that? Is it basically assuming that kind of inflation normalizes again, or can you cope with the current rate of inflation and still achieve this 21% target by 2024.

I think I'll step back for a minute for the exact detail of your discussion -- or your question, sorry. When you look at 2024, we do need to drive consistent improvement. And in financial terms almost, there are three levers. One, it's about the revenue growth being 4% to 6%. So, it's about commercial execution, it's about new product launches. Then, it's about gross margin expansion, so it's about continuing our transformation in operations, it's about product rationalization or brand rationalization. And the final lever is really seeing the SG&A leverage. In other words our OpEx growing less than our revenue growth, and that's about being very focused on where we compete, how do we optimize supply our go-to-market model, et cetera. Those are the absolute levers, when you look at a high level over a period of time that will drive our performance. And I think that's where we need to place ourselves when we think about our guidance that's the mid-term guidance. We knew the inflation as we were coming in and that's the basic that was built in. But I think it's important to set the way when we think about mid-term guidance of what are the levers that will help deliver these. And it's about revenue growth, gross margin expansion and leveraging our cost base.

We just noticed that inflation seems to be a bit more stubborn than we all assumed maybe. I appreciate your comment Anne-Francoise.

Thank you.

Thank you. We have no further questions on the line. So, I'll hand back to the management team to close.

Well, I think this ends our call. Thank you very much everyone. 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.