Hello all, and a warm welcome to the Smith & Nephew fourth quarter and full year 2021 results call. My name is Lydia, and I'll 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. 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 our host, Roland Diggelmann, Chief Executive Officer. Please go ahead when you're ready.
Thank you, operator, and good morning, everyone. Welcome to the Smith & Nephew fourth quarter and full year 2021 results call. With me is Anne-Françoise 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 waves made the fourth quarter complex to unpick. 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 midterm 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. 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 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% conversion. Adjusted earnings per share grew 25% to $0.809. After maintaining our dividend in 2020, we are again proposing $0.375 for 2021. Now, looking specifically at quarter four, revenue growth was 1.5% reported and 0.3% underlying. A number of factors influenced the Q4 growth rate, though.
There were, as I mentioned, four fewer trading days than in the fourth quarter of 2020, which mathematically is a more than 6% reduction. As you know, there were 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, then December in the U.S. The effect on Smith & Nephew was that the typical December pickup in average daily sales didn't actually happen in 2021, and that was across our surgical business, with the weakness continuing into January. By region, you see that the effects in the year-on-year declines for the U.S. and other established markets, while emerging markets growth stayed relatively stronger at +8%. There were some encouraging signs, though.
Firstly, the trend of healthcare systems of being more resilient to new outbreaks has continued. Compared to pre-COVID levels, average daily sales growth for the quarter was still broadly similar to the year as a whole, and average daily sales for sports medicine and advanced wound management were still above 2019 levels. Importantly, conditions are improving. U.S. infections seem to have peaked in mid-January, and European countries have now also lifted many restrictions. For the detail of the franchises in the quarter, I'll start with orthopedics, where sales fell by 2.6% underlying. As I mentioned, there was an impact from Omicron outbreaks across the surgical categories, particularly in hip, knee, and extremities. Hip and knee sales into the channel in China continued to be slow ahead of the VBP tender implementation this March.
In total, the China destocking and provisions reduced revenue by about $25 million in the quarter and around $60 million for the full year. Supply constraints remained a further headwind, costing us around $30 million lost 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 CONCELOC Cementless Knee is ongoing in the U.S. As you know, not having a competitive cementless offering has been the primary drag on our knee business. Filling this gap is another important strengthening of our foundations. As I'll cover in a moment, we're going beyond that even with the acquisition of Engage Surgical, which makes us the only company with both cementless total and uni knees in the U.S. Of course, there's CORI.
We're continuing to build the platform up with another good quarter replacement, and we also obtained 510(k) clearance of the hip software, which we then launched commercially in January. The sports medicine and ENT franchise grew 2.4% underlying. As in Europe, as in 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 and so understate the strength in the franchise. The contribution of new launch products really stood out in the quarter. In joint repair, FAST-FIX FLEX and WEREWOLF FASTSEAL are tracking well ahead of our plans, as are LENS 4K and FLOW 1 in AET. 2021 launches are already adding significantly to the franchise growth rate. 33% growth in ENT was very pleasing to see.
ENT has, of course, been one of the later categories to rebound from earlier COVID waves. Our adult business is back to above pre-COVID levels, though, and there's further improvements still to come from recovery in the pediatric business and then the rollout of our tympanostomy system Tula line. Advanced Wound Management grew 2.4% underlying. It was another solid quarter, given the impact of trading days and Omicron, with all segments still growing over 2020. For the full year, all three were above 2019 levels. Advanced Wound Care was a mixed picture with double-digit growth in the U.S. and a slower quarter in Europe. By category, our foams business continued to grow faster than the overall segment. Advanced Wound Bioactives grew 4.5%.
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 growth for SANTYL, and that continued in Q4. The skin substitute business is also making progress, with average daily sales accelerating over the third quarter. 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 are around advancing the strategy for growth that we announced in December. As a reminder, we made midterm commitments that by concentrating our innovation and culture and customers, we'll consistently deliver 4%-6% organic revenue growth and rebuild our profit margin.
To get there, we'll compound our outperformance in Advanced Wound Management and Sports Medicine and regain momentum in Orthopaedics. The strategy, as you know, is based on three simple imperatives, which you see in the pyramid on slide number 10. The first imperative is to strengthen the foundation of Smith & 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'll accelerate our growth profitably through more robust prioritization of resources and investment and with continuing customer focus. We'll continue to transform ourselves for higher long-term growth through investment in innovation and acquisition. We'll deliver these imperatives through our four key value builders, which are productivity, commercial execution, innovation, and M&A. Our priorities for 2022 also read across these categories.
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 as, of course, addressing the internal and external supply pressures that we've talked about before, and reducing costs and a new go-to-market model for the orthopaedics 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 we'll make the transition in Memphis in 2022.
The new orthopedics facility in Malaysia is on track to supply this year ready, and it is already ahead of schedule, with multi-sourcing making us more resilient to future disruptions at any one site. Finally, there's the portfolio simplification work that we set out in December around SKU reductions and prioritizing key profitable growth markets. This work is underway, and benefits should start to come through more significantly from 2023. The second priority is commercializing our 2021 pipeline by launching effectively and at scale. We've shown already that where we bring meaningful innovation, we can move the growth rate of a segment, and we will build on this in 2022.
Some of the 21 projects are making important growth contributions already, as I mentioned, for Sports Medicine, and then others, we're just starting to ramp up, like the LEGION CONCELOC cementless knee, of course, EVOS large plates in trauma, both with first procedures in Q4 of last year. From here, it's about execution. We've been applying our improved launch processes more broadly, and ultimately, that will turn the increased R&D investment of the last few years into better financial returns. Innovation remains a priority, and slide 14 sets out some of the key projects for this year. I'd like to point out some important features. Firstly, there's a continuing high cadence of new products. That was the intent of the increased investment in R&D in recent years. Secondly, it's a broad pipeline with growth opportunities across the entire Smith & Nephew portfolio.
Importantly, there's a good balance of projects between incremental innovation and then disruptive technology. Let me just pick out a few here. In robotics and digital surgery, there are a range of additions to further differentiate the CORI platform. Adding porous knee to CORI will help us in the rollout of the implant. CORI should also be the first robotic system to support knee revisions. Then we have a tensioner as a really novel device for soft tissue balancing. There's also the next generation shoulder, which is aligned with the trends towards bone preservation and simple procedures, and an important component of the value of the Extremities acquisition. In sports medicine, we're continuing to innovate to extend our leadership in the arthroscopic tower with further upgrades to mechanical resection and imaging. 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 complication. A new generation here will help us capture more of that upside. We're also continuing to pursue external innovation and continue to transform the portfolio through bolt-on M&A. We did announce the acquisition of Engage Surgical in January for up to $135 million. Engage is a further example of our commitment to innovation and the particular opportunity we see in cementless. The deal also aligns very well with the strategy we set out in December. It can shift the standard of care with what is the only cementless partial knee 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, and the cementless 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 will help them sell the whole of the knee portfolio. Over time, it can also be brought onto CORI. Of course, it is an excellent solution for the ASCs. Then the returns are also attractive. We'll focus on integrating the asset in 2022, then launch at scale in 2023, with ROIC then expected to exceed WACC in year four. Those are our strategic priorities for the coming year. Now I'll pass you over to Anne-Françoise to take you through the full year 2021 financials and then the outlook for 2022.
Thank you, Roland. 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 detail 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 acquisition. 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 and ENT grew by 14.6% to $1.6 billion. 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 Medicine and Advanced Wound Management businesses returned to growth over the pre-COVID level, while Orthopaedics and ENT have more to recover.
I thought 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 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. Of course, you know, I'm not reiterating here, but we also invested behind new launches, as we see the result of our innovation coming through. 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 growth as well as potential from efficiency gains, which we continue to drive. Importantly, I'd like to highlight that we maintained R&D investment at around 6% of sales, in line with our strategic commitment to innovation. Looking further down the P&L, adjusted earnings per share grew by 25% to $0.809. That's ahead of sales growth, but below the growth in trading profit due to a one-time tax provision release in 2020. Our trading cash flow was again strong at $828 million for the full year. Capital expenditure at 7.8% of sales included the continued changes to our manufacturing base and also investment in instrument sets to support product launches such as cementless knee.
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 88%. 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 $236 million acquisition of the Extremity Orthopaedics business. Our recovering profitability meant that the leverage ratio came down to 1.6x adjusted EBITDA at the end of the year, leaving us with significant balance sheet capacity within investment grade matrix.
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 the new capital allocation policy we announced in December, which includes a commitment to regular annual buyback. The buyback will begin in 2022, and we expect to return around $250 million-$300 million in the year. Now moving to the outlook for 2022. For 2022, we are targeting underlying revenue growth of 4%-5% for the full year. Within that, we expect stronger growth in H2 than in H1, and there are a few 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 markets have continued into the first part of the quarter. Our guidance assume that demand is largely unconstrained by COVID outbreaks for the rest of the year, although staff pressures we currently see in healthcare systems are likely to continue. Also, while we mitigate the external supply challenges and address our internal ones, there will clearly be an effect on growth in the first half. More positively, we expect momentum in orthopedics and ENT to improve over the course of the year as procedures volumes in those markets continue to recover and as we see more benefit of our product launches, particularly the cementless knee. On the trading margin, we expect around 50 basis points of expansion.
Headwinds from VBP in China and cost inflation will be offset by operating leverage, productivity measures, and improving acquired asset margin. Finally, we expect the tax rate on trading results to be in the range of 17%-18%. I would now like to take a moment to go into more detail on the moving parts of the trading margin. The China VBP and e-tender is due to be implemented in March, as you know, resulting in a one-time rebasing of our margin in 2022. We've now concluded our discussion with distributors, and we have better visibility on the impact and the mitigations that we've been 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 smaller impact than the 80% headline reduction in prices.
Secondly, and importantly, we've taken steps to simplify our go-to-market model. Where we previously had multiple tiers of distributors engaged in both logistics and customer-facing activities, we've now simplified to a single logistic partner and just one tier of distributors involved in customer activities. This simpler model reduces costs, improves commercial effectiveness through closer contact with distributors, and simplifies inventory management. The net of this is that we expect around a 60 basis point gross margin headwind from our China orthopedic business in line with the yearly estimate. You may also have heard about a regional trauma tender from 2021, where the outcome is now being applied to other provinces. For us, China trauma is a much smaller business and is only a fraction of a percentage point of group sales. Higher than normal input cost inflation is a further headwind.
Our assumption is that inflation headwinds will persist throughout the year. While we look for pricing opportunities and mixed benefits from innovation, we expect to have limited ability to secure absolute like for like price increases in 2022. We expect higher cost inflation to be around 125 basis point headwind for the year. However, and importantly, we expect to offset this effect and drive margin expansion of around 50 basis point, as I said before. Operating leverage from revenue growth, proactive productivity measures we are taking, and the improving margin of our acquired assets should help us absorb most of the headwinds. In the meantime, we're committed to our goal of a trading margin at or above 21% in 2024 and further improvements after that. Short-term headwinds should reduce.
We'll continue with efficiency gain, and we expect enhanced positive operating leverage over time as the higher revenue growth from commercial execution and innovation comes through. Now before I hand back to Roland, I would just like to say thank you, Roland. It has been a great pleasure working with you, and I wish you all the best in the future.
Thank you very much, Anne-Françoise. To sum it up, I'm pleased with the step we've taken towards our midterm goals by delivering on our 2021 targets. As 2022 progresses, you should see the strategy continue to advance. The efficiency and margin expansion 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, how the team has stayed committed to our purpose and kept working to transform the company and continue to serve customers. 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 healthcare. 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.
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. 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. To withdraw your question, please press star followed by two. Our first question today comes from Hassan Al-Wakeel of 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, 125 basis points of cost inflation and 60 basis points 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. 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 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 U.S. and 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 less symptomatic. 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.
These are more acute short-term cancellations that we see than in previous waves. We believe this should ease as, of course, 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 a 50 basis point expansion. I think the headwinds are important to note, in particular the VBP China, which is a one-time, you know, a rebasing of our margin for 2022 and the 60 basis point. Inflation as well at a 125 basis points is material, it is significant. Having said that, we are being proactive. We've got teams looking at spot buys. You know, we monitor inflation, and we're really being as proactive as we can be. Affecting that is all of the actions we're taking.
It's important to note that in 2021, we saw margin expansion from revenue growth, you know, from the operating leverage and the cost discipline that we have in the organization. Clearly to drive a 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. We need to drive our productivity agenda and the efficiency gains. That would drive, you know, about 235 basis points to offset the headwind. Now when you put that, and 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 quite a large margin expansion of well over 300 basis points.
Well, as we've said, 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. Now, as we've moved through the period, effectively we're now mostly fully hedged and we do not expect a significant transactional exposure in 2022 as we are very much fully hedged at this stage to the best we can. The acquisition remains to continue to be a little bit dilutive in terms of Integra in 2022. The extremities acquisition is dilutive in 2022, but that's not something that is that material that we wanted to bring to your attention.
Overall, we feel our guidance is, you know, our best view at this point in time, particularly in a world that remains, you know, still volatile around global supply.
That's very helpful. 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? You know, how about Q1 given your commentary around H2 versus H1? Should we expect a small improvement sequentially versus the fourth quarter?
In terms of what we've seen in Q1, and I guess you're going to tell me we're almost a 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 U.S. Many European countries have now lifted restrictions. 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 assume it's largely unconstrained by COVID outbreaks, and the sensitivity will remain on the availability of staff, particularly in the U.S., where it's a little bit more acute with shortages of our staff.
In terms of the franchises, as you see, we will see orthopedics continuing to improve, particularly as we have launched the Cementless Knee. Sports and Wound will continue their performance. Again, I want to reiterate, we're very pleased to see that they are both above 2019 levels.
Perfect. Thanks a lot.
Now your question.
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. Thank you, everyone. Well, thank you both, rather. I had two questions, really. The first was just on your 2022 revenue guidance in the context of the business as it's performed between 2019 and 2021. I guess if I look at your underlying growth, on the chart you put on page 5, you did -12% in ortho, sort of minus two or three in the other divisions. Without COVID, you would have expected probably ortho to grow maybe 8% over that timeframe. Sports Med, you know, probably something in the double-digit range cumulatively, and wound maybe mid-single digits. You know, depending on the franchise, there's somewhere between kind of 10%-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? 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. Then the second question is just on your guidance for 125 basis points of margin pressure from input cost inflation. I've actually been 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, on a fully loaded basis, you know, 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, looks like quite a low number. And even if I just look at, you know, physical input costs, probably half, a third of your total costs, you know, you're still talking a low single digit number. I guess, you know, how confident are you in that 125 basis points 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.
Yeah. 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 among the first ones always in every of those waves that were delayed or deferred. So there is a pent-up demand. There is a building of waiting lists, in particular in the public sector and more so in Europe than I would say in the U.S.
There is, of course, the underlying fundamentals, which are very much intact, which are, you know, the patient population continues to grow, and with that, there's 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 U.S., what the impact of the staff shortage will be, whether that's sustainable or more so acute. I would say the reconstructive business, the joint replacements, hip and knee, 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. 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. The last point I make, of course, when you look at we 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 is a level playing field, which we're really excited about. I think we've performed well in hips, bar some of the supply challenges. We've certainly done very well in sports, and also in wound in the different categories. That's why we are confident in the numbers for 2022.
Oops, sorry, Tom. Were you going to follow up?
No, no. That's fine. I'll follow up in a sec.
Okay. 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. Whether you look at versus the 2021 comparison or, you know, growth or in 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, you know, key raw materials, which, actually, discussions were already ongoing. And we know precisely, you know, where inflation is hitting.
Just to give you a couple of examples, you know, electronic components have increased by 20%. An element of forging, which might not be on most people's list, but that's an 11% increase. Effectively, we are assuming as well that we are countering and offsetting some of the inflationary effect. That's part of us being very proactive and the team managing our purchases. You know, the 125 basis points is the sensitivity, so that is based on where we know today the prices have been under discussion. And indeed, that represents about 8% of all costs on our key materials. It does not include you know merit increase or a wage increase. That's important to note.
That is pure raw material.
Okay. Perfect. That's clear. Just to follow up. It's kind of, you both mentioned and Roland did on the supply chain issues that are affecting revenues. I think you mentioned in the presentation you expect a gradual improvement across H1. 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. Is it kind of something that will resolve quickly, or is it something that will just be a gradual improvement as the half progresses?
I mean, this is one of the key variable. I think every company finds it very difficult to give exact timelines on when global supply disruptions will stop. I mean, for us, it has been clearly on some of the components which initially impacted us also more, but what we're seeing, you know, we use electronics chips in sports. You can imagine in the tower, we use it in the pump for wound, so and in robotics. Clearly, being proactive and making sure that we secure supply is key. You know, we expect that it will stabilize across the year.
That is one of the elements that we can't say for sure because we're dependent on suppliers and global conditions.
Okay.
I'll just add here. We've also seen some supply constraints on raw materials, and Françoise has mentioned that earlier. You know, you think of 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 hard and diligently on the midterm here, and we already know that the situation will improve going forward.
Good. Super. 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. One, just want to come back to the margin guidance. I think upfront, as I look at sort of, you know, the 125 basis points from raw material cost inflation, 60 basis points from the VBP, you know, you are calling for an underlying margin expansion of in excess of 230 basis points on a top-line dynamic that frankly isn't too dissimilar from what we've seen you deliver in the past. In the past, I think the operating leverage we would have seen in your business has been 30-70 basis points. This is quite a significant improvement.
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 kind of what's your degree of confidence that these efficiencies come through? What are they dependent on? What are the risks to them? 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. Just love to understand what's driving that. Then my second question is just on the supply chain and a point of clarification maybe and again, to push you both on this. You know, 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 are there still some remnants in terms of the labor headwinds that you had seen in Memphis earlier in the year? I guess maybe just, you know, related to that, how are you thinking about wage growth in 2022? Thank you.
Hi, Veronica. In terms of the margin, I mean, it's important to make sure you all understand the components of that, so it's a very valid question. First, I'll say, you know, your statement is well made, that if we have about 185 basis points of headwind, we need to drive around 230 basis points of improvements to the margin to be around a 50 basis points 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.
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 rebuilds, 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 efficiencies in the business. I put them in those 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, I mean, the management on being focused on where we play, the market we operate, et cetera. We're driving operational efficiencies, being manufacturing efficiencies. We're continuing our program of manufacturing efficiencies.
As I said, we're assuming that we can offset some of the inflation, you know, in the prior discussion with Tom. 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. Clearly that's what we focus on. You ask a bit the sensitivity. It's all about execution. You know, 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 operations planning. There's more to come. I'm not going to say it's all resolved. In particular, as you know, we're transferring to our new third-party logistics. There, there's more work to do to make sure our network is resilient. We are, you know, in a much more stable situation on that point. Sorry, your final question. The wage growth is not a number that we want to disclose, you know, in public, but certainly, you know, assume inflation in some of the countries, particularly in the emerging markets.
Got it. Thank you. If I 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, 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 changed. That's why as well we're not changing importantly our midterm guidance. You know, we are committing to delivering our margin improvement.
Excellent. Thank you. All the best to you, Roland.
Thank you, Veronika.
Our next question today comes from Lisa Clive of Bernstein. Your line is open.
Just a few questions on CORI. Good to see a strong uptick there. Can you comment on the sales U.S. versus outside of the U.S.? 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. I guess if you could just talk a little bit about how you see that business developing over time. Robotics has historically really been focused on the U.S., but you clearly see potential beyond that. Then also in terms of sales of CORI, what proportion are to current Smith & Nephew knee 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 onto CORI. As I said, we're going to work on bringing the LEGION CONCELOC, the cementless construct onto CORI. Also, having the revision knee onto CORI, and in the future, of course, also bringing the new Engage Surgical uni knee onto CORI. 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 will continue to do so or to be so.
We're seeing increasingly different markets very interested in robotic surgery, of course, Middle East, India, Asia, and in Europe as well. 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. That is also linked to the previous acquisition of the assets for hip navigation from Brainlab back in 2019. 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 U.S. 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 J.P. Morgan. Your line is open, David. Please go ahead.
Great. 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. Secondly, just in terms of the pricing environment or yeah, the pricing inflation that you're seeing on the cost side, I just wondered what your ability was to pass those price increases through in terms of raised prices, and what your pricing assumption is in your guidance. Thanks.
Hi, David. In terms of VBP, we discussed about also a little bit more at length. You may know that 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, trauma sales are small. It's a fraction of our group sales, so we don't see a big impact. Now, your question, where will it go next? We believe that you know where we play then in China is, of course, sports and wound. We certainly believe that in sports you know there are not many local players. It's not of the size yet that would fall under the criteria of VBP.
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. You know, 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, you know, 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. The pricing we should assume sort of typical historic sort of minus one-ish into the price for this year.
Correct, David.
Thank you very much. All the best, Roland.
Thanks, David.
Thank you. Our final question today comes from Christoph Gretler of Credit Suisse. Your line is open.
Thank you. Thank you, operator. Good morning, Roland and Anne-Françoise. 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, you know, what's the rationale to change, you know, the CEO right now after you just, you know, set out the new strategic goals in December? And what's actually kind of the risk that, you know, the
... coming in, you know, would you know, revise now such targets. Is he fully signed up to this, you know, 24 target? That would be my first question.
I'll let Roland comment in a minute. 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%-6% and the improvement in margin, you know, by 2024, of at least 21%. It's all about execution, it's about focus, and we have our clear strategic pillars articulated. Those strategic pillars were articulated, as you correctly say, you know, with the management session in December, and were fully supported and endorsed by the board. Today, the board and Roland have agreed, mutually agreed that Roland should step down.
The focus on our strategy of driving revenue growth, driving productivity, driving innovation, continuing bolt-on acquisitions has not changed. I will also say to your point on meeting the management, clearly, it was also about meeting the management, and I hope you did so in December, and you can see the strength of talent we have in this organization. We remain focused, and we will continue to execute. And as I said in the presentation, you know, 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. 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, how to keep our employees safe and continue to do the business. I think we've all learned tremendously through this pandemic. At the same time, we continued the transformation of Smith & Nephew during this very challenging time. I think that was the task at hand.
I feel that, you know, I'm leaving behind an organization which is in great shape, with a great strategy. You heard Anne-Françoise, where everybody is committed to the numbers, but also to the execution. 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. I think the company is truly now at an inflection point where I feel confident and positive about handing this over to the next leader, and for them to write the next chapter of Smith & Nephew.
No, we'll watch it with interest. No, definitely. You know, I also wish you all the best, you know, for the future. Maybe just on, you know, my second follow-up question is, you know, on the trading margin goal 2024, you know, if we're on the topic anyway, you know. I mean, you know, given, you know, this inflationary environment, you know, how much room for maneuver is actually baked into that, you know? Is it basically assuming that, you know, kind of inflation normalizes, you know, again? Or can you cope, you know, with the current, you know, rate of inflation and still achieve this, you know, 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. In financial terms almost, there are three levers. One, it's about the revenue growth, you know, being 4%-6%. It's about commercial execution, it's about new product launches. It's about gross margin expansion. It's about our, you know, continuing our transformation in operations. It's about product rationalization or brand rationalization. The final lever is really seeing the SG&A leverage. In other words, you know, our OPEX growing less than our revenue growth. That's about, you know, 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 high level over a period of time that will drive our performance. I think that's where we need to place ourselves when we think about our guidance. That's the midterm guidance. We knew the inflation as we were coming in, and that's the basis that was built in. I think it's important to step away when you think about midterm guidance of what are the levers that will help deliver it. It's about revenue growth, gross margin expansion, and leveraging our cost base.
We just noticed that, you know, inflation seems to be a bit more stubborn than, you know, we all assumed maybe. You know, I appreciate your comment, Anne-Françoise.
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 line.