Ladies and gentlemen, welcome to the Smith and Nephew Second Quarter Trading and First Half twenty twenty one Results Call. My name is Nadia, and I'll be coordinating the call today. Please note certain statements in this presentation are forward looking statements. These statements are based on management's current expectations and are subject to uncertainty and changes in circumstances. Actual results may differ materially from those included in these statements due to a variety of More information about these factors is contained in the company's filings with the Securities and Exchange Commission.
Now I would like to hand the conference over to the speakers today, Roland Digelmann, Chief Executive Officer and Anne Francois Nezmers, Chief Financial Officer.
Thank you very much, operator, and a very good morning to all of you. Welcome to Smith and Nephew's first half results. And as mentioned with me on the call is our CFO, Anne Francoise Naim. I'm very pleased to report Good first half and another quarter of solid progress for the group, which sets us up well for the future. Firstly, we'll continue to recover from COVID.
More of our end markets are now approaching or in some cases actually even exceeding pre COVID levels Of activities and our business is recovering well with them. Secondly, we're on track to meet our 2021 guidance. And to remind you, we expect a 10% to 13% underlying revenue growth and a trading margin of 18% to 19%. And finally, we're delivering on our strategic priorities for the year. Our work in commercial execution and efficiency is progressing On growth, recent launches and acquired assets are performing well across the portfolio.
So in a moment, I'll take you through our performance in the quarter, then Anne Francois will cover the financials for the first half, and I'll update you on some of our strategic So turning to the next page, I'll begin with the highlights of our first half. For the first half, revenue was $2,600,000,000 that's 21.3% growth over the first half of twenty twenty on an underlying basis and 27.8 percent on a reported basis. This does include the benefit of 3 extra trading days. Now I'll talk about comparisons to 2019 as well in a couple of slides. Trading profit was $459,000,000 which is a 17.6 percent trading margin and adjusted earnings per share were 0.388¢.
We have preserved our dividend through the pandemic and the interim dividend for 2021 is again unchanged. Now shifting to the revenue by region, and let me start with some comments about the markets around the globe And especially also as they continue to respond to the COVID pandemic. So in the U. S, Procedure volumes have continued to recover, some categories now above pre COVID levels and with very few remaining formal restrictions at this time. Conditions also improved on balance in other established markets, although with a mixed picture by region.
In Europe, surgery volumes rose sequentially, but are still behind pre COVID levels. While then in Japan and Australia, the situation has weakened in the quarter as infection rates rose and that of course led to more postponements of surgeries. In China, end market volumes returned to growth as early as 2020 April And they have actually maintained the recovery since. In the Q1, we saw a headwind in hips and knees in China though. That is due to a change in ordering patterns by distributors ahead of the forthcoming volume based purchasing tenders of EVPs.
Now in many other emerging markets, procedure volumes remain significantly COVID affected and following recent outbreaks. Now on the next page, as you saw previously, our total revenue for the quarter was $1,300,000,000 With 40.3 percent underlying growth and Slide 6 shows the usual revenue split that we provide for you on the year on year growth rate By franchise. Now the growth rates actually largely reflect the trends in the prior year rather than the underlying development in the business, Certainly, because the peak impact of COVID on our business was in the Q2 of 2020. And if I move on, just to give you a little more color on the performance against 2019. So this gives you an additional perspective.
I'm moving to Slide number 7. Of the 3 franchise, 2 are now back to above pre COVID levels on an underlying basis. This is Advanced Wound Management, which was 5.1% above the Q2 of 2019, Again showing the benefit of the work to improve commercial execution and in Sports Medicine and ENT was 1.3 Ahead of the 2019 quarter even with a slower recovery in ENT procedures. And then Orthopaedics isn't there yet, 6% below 2019. I'd point out three factors here.
Not having a cementless knee, as you know, remains a relative drag. The headwinds I mentioned in China From the ordering patterns from distributors ahead of the VBP, and we've had some near term supply constraints in certain Product lines. Now specifically on the next page, let's look at the individual segments here, Orthopaedics. The higher growth that you can see for knees versus hips in the quarter, we believe reflects a greater COVID impact In quarter 2 of 2020 as the comparator, when we look through that prior year effect, the recent trend of a stronger hot tip business Has indeed continued and is supported by the great progress of our OR 3.0 dual mobility rollout. Denise, we continue to work towards cementless options as stated, and we remain on track to launch actually towards the end of this year.
Trauma and Extremities included strong growth from EVOS and from external fixation as case volumes returned. And then finally, on the Recon, the growth was driven by U. S. Sales of Cori, our next generation robotics platform. We're now expanding into new regions.
We have had launches in India and Australia, in the United Arab Emirates in the quarter. And we have regulatory approval in Japan. Now shifting to Sports Medicine and E and P. Joint repair delivered really good performance across both the meniscal and the shoulder categories with sales of the acquired products NovoStitch and REGENETEN More than doubling. In July, we also announced the U.
S. Launch of Fastfix Flex, the next generation of our leading meniscal repair family. This is a great device, gives better access to around 40% of tiers that are hard to reach with the currently available technology. AEC or arthroscopic enabling technologies also saw strong growth from the recent launch product with sales of both lens and flow wand More than doubling and as to 5 10 ks clearance in Q1, the Double Flow Fluid Management System also launched in the 2nd quarter. The E and C market, however, remains challenging despite the 45% year on year growth.
The tonsil and ear tube markets are showing Slow recovery, slower than other areas of surgery and in particular in pediatrics and procedure volumes remain well below historical levels. The focus with Tula is currently on training surgeons and targeting early opportunities in specific U. S. States. And then finally moving on to Advanced Wound Management, all three segments of the franchise showed growth over pre COVID levels.
Also within each segment, performance was strong across multiple brands as we continue to build on our improved commercial execution. In Advanced Wound Care, the recent acceleration in Europe continued and all other regions contribute to the overall growth. Bioactives growth came from both Santil and the Skin Substitutes portfolio, all returning to above pre COVID levels. And finally, Advanced Wound Devices returned to growth as well, helped by the ongoing recovery in elective surgery. Negative pressure remains the main driver of the segment with Renesys continuing to win business in the post acute setting.
And with that, I'll now hand over to Anne Francoise to take you through the first half financials.
Thank you, Roland, and good morning, everyone. As Roland has covered the Q2 revenue performance in detail, I will now move to the overview of H1. This slide shows the evolution of our revenue by franchise in the first half. And as you can see, All three franchises contributed to the recovery in our overall revenue, which was $2,600,000,000 Orthopaedics, our largest franchise, grew by 19.2% on an underlying basis to $1,100,000,000 for the half year and Sports Medicine and ENT grew by 28% to $800,000,000 Our Advanced Whirl business grew by 18% to $700,000,000 in part reflecting the greater resilience of the As you can see on the next slide, the picture by region is very similar. As we all know, the timing impacts in 2020 of COVID vary by market.
But when we look at the first half, the U. S, Other Established Markets and Emerging Markets all contributed to growth. As Roland said, we are pleased with our performance in H1, and you can see our improved position in our P and L. Our half year revenue was $2,600,000,000 up 21.3% compared to 2020 on an underlying basis. On a reported basis, revenue grew 27.8 percent, including a foreign exchange tailwind of 4 70 basis points and 180 basis points benefit from acquisition.
Trading profit grew by 166 percent to $459,000,000 resulting in a 17.6% trading margin. The margin expansion reflects improved trading compared to 2020, together with strong control of our discretionary cost. Compared to pre COVID levels though, we are still seeing headwinds, namely increased investment in R and D, M and A and new launches as expected and ongoing COVID related negative leverage from fixed costs and higher logistics and freight costs. Adjusted earnings per share grew by 189 percent to €0.38 with financial leverage driving growth above trading profit. And as we mentioned at the beginning, we're proposing to keep our interim dividend unchanged, having maintained it through 2020 in line with our progressive dividend policy.
Moving to cash flow. We generated positive trading cash flow of $404,000,000 in the period We're trading cash conversion at 88%. We continue to invest in capital expenditure in the first half as we progress changes to our manufacturing network. And you should expect that CapEx may increase further in the second half, both from the manufacturing investment and also from instrument sets to support expected product launches. The working capital outflow of $76,000,000 shown on this slide was primarily driven by higher receivables resulting from a return to revenue growth in the period.
Overall, our free cash flow was positive at $160,000,000 A significant improvement over the prior year. We continue to have a strong balance sheet with access to significant liquidity. Our net debt ended the period at $2,200,000,000 That is an increase of just over $250,000,000 CHF 237,000,000 of that came from the acquisition of the Extremity Orthopaedics business, which closed in January. Even with a higher net debt, our recovering profitability meant that the leverage ratio came down to 1.6 times adjusted EBITDA at the end of the period. Now finally, I'll move to our outlook.
The first half results are consistent with the view of the market we set out in April, And we are on track to meet our guidance for 2021. Our target remains for underlying revenue growth of 10% to 13% and the trading margin range of 18% to 19%. After a 17.6% margin in the first half, The range implies, therefore, less margin seasonality in 2021 that we normally see, and that's indeed what we expect. There are a number of factors contributing to that effect. First, the planned increase in step up in OpEx.
Some events like AAOS are taking place in the second half of the year, but would more typically come in earlier. There's also the marketing and promotional spend that we posed in 2020 and that is now returning as we see markets recover. And we're also expecting a greater effect in the second half from some inflation in costs such as higher global logistic and freight costs, for example, on products we ship between Asia and Europe. As before, we all know there's still unknowns and we've made around COVID We've made some assumptions about the course of the pandemic. Conditions improved in Q2 as we expected, and our targets continue to assume that surgery volumes are largely And with that, I'll hand back to Roland to cover the strategic progress.
Thank you, Anne Francoise. I'll now move on to update you on the priorities that we set out for 2021 at the start of the year. So these were, firstly, to return to top line growth and to recapture momentum, then to drive further operational improvement, And of course, to contribute to respond effectively to COVID. So moving to Slide 19. This shows the components of the first priority, which is growth.
Last quarter, we highlighted the wound franchise as a case study, Certainly in driving commercial excellence and the results from that have become more visible in numbers in the recent quarters. And as you've seen, they continued also in quarter 2. I'd like to spend a bit more time today though on the second component of our growth story, which is Delivering value from the acquired assets, we began a more intense period of M and A from the first half of twenty nineteen, Aiming at accessing external innovation, being in higher growth markets and also generating value through sales And cost synergies. So moving to the next page, as you know, we've been active across all three franchises. In Orthopaedics, the deals have increased our exposure to high growth segments.
The transaction with Integra brought us scale in the extremities business, While with Brainlab, Atraxis and other digital assets, we have built out our portfolio of digital surgery technologies. In Sports Medicine and ENT, we've added exciting new products that tuck into our existing offering That are building on successful strategy of commercial execution of Renigen REGENETEN for instance. Then we have Nova Stitch Pro from Ceterix, Tula from Tusker, which are at earlier stages. They also have the potential to change the standard of Care, in meniscal repair and in the placement of ear tubes, respectively. And then in wound management, The deals have extended our portfolio offering, again in high growth categories, bringing the Osiris Skin substitute product into our portfolio And that has enabled co selling with Oasis, while then Leaf is sold alongside our foam dressings And skin care offerings as part of our portfolio solutions in particular for pressure injury prevention.
We're still in the early stages of most deals as you can see on the next page. And like the whole industry, these segments have been affected by COVID in the last 12 months. However, we've still been accumulating evidence of operational and financial delivery. I'll start with Rotation Medical, Which has commercially been part of Smith and Nephew since early 2018 and is an important example of a tuck in acquisition where the business case has had time to play out. The operational steps we've taken to drive REGENETEN such as selling through a larger sales force and bringing it to new regions will also be repeatable with other acquisitions.
Importantly, This has translated into successful financial outcomes. REGENETEN was a key driver behind the acceleration of joint repair From the mid single digit growth to a double digit growth. When we acquired Osiris in 2019, an important part of that business case was co selling. Having completed commercial integration, both the existing Smith and Nephew Bioaxis products And the acquired products are now being sold by the combined sales forces. Finally, Osiris is at an earlier stage than rotation, of course, But we're now seeing the acceleration in buyout is that we expected.
The trading profit contribution is also ramping up with the transaction adding to the group margins for the first half. Brainlab was a very different type of acquisition of transaction With a value much more driven by technology, an important component of the deal was a development partnership around robotics and digital surgery, And that's also progressed really well. We have now key projects on track, such as bringing Brainlab's leading technology to the Corie Robotics platform and helping us move into new indications. The extremity orthopedics Assets are early in their time at Smith and Nephew of course, but there's good progress on integration. We've also started training the large sales teams on the new products And the existing Smith and Nephew sales force is now selling total shoulder and ankle replacements And former Entegra sales reps are selling Smith and Nephew technology such as EVOS small and spatial frames.
So when it comes to returns, rotation has already met the hurdle of ROIC exceeding WACC before the pandemic. Other transactions are at the different points of integration maturity of course and they have varied in how much COVID has affected the deal models and the timing. However, the majority including Osiris remain on track to meet our ROIC hurdle at the latest that is 5 years post acquisition. Now shifting to key pipeline progress in 2021 On the next slide, launching an expanded pipeline is, of course, another component of the growth strategy, and it's in line very much in line I earlier covered 2 of the launches in Sports Medicine, Fastfix Flex that launched in July And has had the first patients treated and then Double Flow launched in April, it's a further element of the systematic upgrade of our arthroscopic tower. We've also made progress with our robotic surgery system Cori, which we first launched in the U.
S. In 2020. We've now also launched in India, in Australia and in the Emirates. And then we expect to further develop the platform in the second half adding hip software and the digital tensioner, Which is a novel gap balancing device to work with Corie in knee surgery. Of course, this is all pending regulatory approval.
Then moving on, driving operational improvements was the second of our priorities for 2021. In February, we announced the new operations transformation and process efficiency plan targeting around CHF 200,000,000 of annualized cost savings. Optimizing our manufacturing network is an important work stream and we've now announced plans to sell or close 5 of our smaller factories, much of the production will ultimately be consolidated into other larger sites over the coming years as this process continues to complete. This rationalization will simplify the network And it will of course support greater efficiency and automation. At the same time, construction of our new Large scale and high-tech facility in Malaysia is almost complete and is planned to begin production in 2022.
Once it's in operation, we'll be able to support more of our future growth from a lower cost location and also increase our presence in a high growth region. This will also make our manufacturing supply chain more resilient to the types of challenges and supply constraints So to summarize my last slide, our progress in the second quarter shows that we're on track to achieve 21 guidance to deliver on our strategy and to recapture the growth momentum from before the pandemic. When I look at each franchise, the Wound business is showcasing our approach to growth with improved execution in Wound Care With value coming from M and A in bioactics and the long term success story of innovation in devices. Sports medicine was performing very well going into COVID and the signs are that we're picking up right where we left off as the market recovered. And in Orthopaedics, we believe we're in good shape in 2 of the 3 categories with hips and trauma, With more drivers then still coming like the next generation shoulder and of course the cementless knee.
So the effects of the pandemic have not gone away totally, but overall, we're emerging from COVID with the majority of our portfolio either Outperforming already, always important new drivers coming very soon. I believe we've shown the ability to convert these opportunities into improved growth. And of course, it's growth that ultimately drives our P and L leverage. So with that, thank you, and I'll take your questions.
Thank Our first question comes from Patrick Wood of Bank of America. Patrick, please go ahead. Your line is open.
Perfect. Thank you very much. I'll keep it to 3 please. Maybe just on the first one, very fast recovery on wound care. I guess I kind of saw hips and knees And Orthopaedics would be the first one to recover and then Wound Care would be a bit later.
Why do you think Wound Care has been so much stronger than At least in the short term than ortho. And then as a second question, could you give us a little bit of color maybe on how you saw things move through the quarter? I'm Guessing, obviously, everything has a lot of volatility. But towards the back end of the quarter, things were presumably generally picking up a little bit relative to the 1st part of the quarter. So Curious on the sort of general exit rate.
And then last one, just a sort of a small sort of technical one. I'm just curious, is there any ability for you guys Roughly, and apologies if I missed this, but to quantify the destocking effects that you saw in China, was that material in the quarter? Or was it just kind of a nothing? Thanks.
Thank you, Patrick. Thanks for your questions. On Wound Care, I think it's been a combination of factors. I think Obviously, wound has been quite resilient through the pandemic with a proportion of sales coming from the chronic Markus, I think we've had some early wins that we can really execute on that we're now seeing that we have really been able to convert. At the same time, I think it's also showing the ongoing execution, the focus on really on commercial execution.
And then lastly, there has been one shift in ordering patterns from late 2020 into early 2021 that also had an impact. You would have seen that mostly in the 1st quarters though. But overall, very pleased with our progress across the wound franchise. On the quarter, start to end of the quarter and the exit rates, indeed, we continue to see some improvements, Hard to quantify in the broader context, but I'd just say geographically, we continue to see the same trends. In the U.
S. Was a good and strong recovery in China with the volumes being up to pre COVID levels. And then with the slow recovery across the big European markets, the challenge going forward is, of course, that we have Limited visibility to potential further outbreaks to variants that have an impact. We know that elective surgeries are, of course, the first ones that get deferred and canceled. And we're seeing some of these effects Locally, like in Australia, like in Japan right now.
So that's where the external factors continue to have an impact on the pace of the recovery. And then finally the destocking effect in China, I think we've seen it in our numbers in China and our sales numbers. I think what it is really is distributors are anticipating the introduction of the VBP, so the volume based purchasing. And with that, they have withheld some of their orderings. When we look at the volumes in market, they're very robust, they're very strong.
They're at the level of the pre pandemic. So from that end, this is very positive. Now the VBP has been delayed a couple of times. We now expect the awards somewhere in the 3rd or 4th quarter. The impact will probably not be Material for us for the full year, but of course, we're seeing this in the ordering patterns.
Fabulous. Thank you.
If I may just add to Roland's last comment on China. Well, so it affects the ordering pattern and the value of the inventory in the channel. So that's what we see as well and impacts the margin.
Got it. Thank you.
Thank you, Patrick. Our next question comes from Chris Grechler from Credit Suisse. Chris, please go ahead. Your line is open.
Thank you, operator. Good morning, Roland and Francois. I have now two questions. First on the topic of supply constraints. You mentioned that This had an impact on some product lines.
Could you maybe elaborate a bit more on The magnitude of the impact you've seen and how that will likely kind of affect the second half?
Sure. Thank you, Chris. Thanks for your question. It's very hard for us to quantify the effect. So I don't have any hard Numbers for you at this stage, but of course it was important enough to call it out to you.
So what it is, it's essentially it's affecting Orthopaedics. We have experienced some delays in freight and in logistics along also with higher cost. And then we have encountered a labor shortage in one of our big hubs, namely Memphis, Which is where the majority of Orthopaedics products are being produced. We have addressed this. Obviously, this is of key importance to us.
But it's been I think it goes in line with other industries reporting labor shortages Across the United States and we expect that to improve of course going forward.
Okay. And the second question is just now with respect to your full year growth guidance of the 10% to 13%. If I Analyze now your first half performance, basically you're already kind of at the low end without anticipating any growth for the second half. Could you maybe elaborate kind of a bit more on kind of the assumption because I guess in some markets, you are still well below the 2019 level, particularly emerging markets, Europe, etcetera. So basically, do you anticipate that kind of the constraints continue in those markets?
Or Is it not the case?
Yes. And it's a great question, of course. So I think what we're going to continue to see here is a mixed picture relative to the external factors. Again, the U. S.
Doing well. Europe progressively picking up. China volumes being high. But the comps will get really difficult. So we have obviously, we've had a good quarter 3 last year And then a recovery and then a second wave in quarter 4, so the comparables will become difficult.
And then the other We're factoring in here is we have technically speaking, we have 4 fewer trading days in quarter 4 Then in 2020. So that will inevitably have an impact. So it's a combination of our scenario planning With respect to the recovery, the unknowns around the pandemic, the restrictions, the variance And then a lower number of 1,000,000,000 days in the 4th quarter.
Okay. Got it. Thanks. Appreciate your comments, particularly also on kind of the details on the acquisition performance or performance of the acquired businesses. Thanks.
Thanks, Chris.
Thank you, Chris. Our next question comes from from Tom Jones of Berenberg. Tom, please go ahead. Your line is open.
Good morning. Thanks very much. I had 2 areas I wanted to touch on. One was guidance and one was pricing. On the guidance front, I mean, your revenue growth guidance language Stated is including largely unconstrained surgery volumes.
How would you quantify the current Constraints on surgery volumes in the context of that largely statement. Are we sort of somewhat constrained, largely constrained, unconstrained? And then I guess If we look at sort of the outlook for H2, one would I think most of us would assume that U. S. And Europe continues to see An improvement in the pandemic situation, but some of the more emerging markets where vaccination programs are less advanced, potentially seeing some problems.
If we look at those smaller markets where there's a higher likelihood of the pandemic getting worse before it gets better, To what extent would that affect the guidance range? I mean, is it an order that would just push you towards the lower end rather than the higher end? Or Are those markets collectively big enough to have a more meaningful impact? And then the second question on guidance, Probably more one for Francois. It was on the current supply chain issues.
I mean, given that you're talking about it pretty openly now, these don't look like issues that have So suddenly popped up from nowhere, and that you've maintained your margin guidance. I mean, is it fair to assume that The supply constraint issues, both on a sort of availability perspective and the cost perspective, are fully factored into your existing guidance.
Thank you, Tom. I'll address the first part and then as you said, maybe Anne Francoise can take up the second part of your questions. Obviously, difficult when we get into the semantics of how constrained the markets are. But in a nutshell, I would say we feel Confident that we will hit the margin and that we will excuse me, that we will hit the guidance. We are expecting a further improvement of the environment with a further recovery.
That's what we're building in, but of course we have different scenarios. And when I look at our sales guidance of 10% to 13%, we of course also have I see the corridor. You're absolutely right when you talk about the regions. The U. S.
Market continues to do well. Europe, I think, will progressively improve. And then the emerging markets will have a slow recovery and that's just given, as you said, the vaccine program rollout, but just the general state of the healthcare The Healthcare markets. And of course, we have a good business in Emerging Markets, and we have factored this in. But In summary, we expect to meet the guidance on the sales and on the trading margin side.
So just to follow-up on that guidance on trading margin, I mean, we confirm our guidance. We are comfortable with it. And to your question, what is in, what is out? It's always based on a range of scenarios and we had signposted What will impact what flows down to bottom line? We've talked about the R and D investment, the M and A, the FX.
And we've also talked about negative operating leverage from COVID. And that's in part production levels not being impacted by the 2019 level Another cost inflation or pressures that we've seen in the channel or in our networks or in manufacturing network. So clearly, we believe and I can confirm that our guidance includes all the various elements that we can foresee at this point in time.
Perfect.
And then just kind of follow-up question on the cost side of things. The cost issues that you're currently facing aren't unique or specific to Smith and Nephew. They're largely macro driven issues. We're all just assuming that that feeds through to margin pressure and there's no compensatory pricing increase. But Why is that assumption necessarily correct?
The industry largely has the same structure as it did in the noughties, a period where it enjoyed quite significant positive pricing. So given that everyone in the industry is facing similar issues and similar price pressures, Why should we continue to assume that pricing is the usual sort of low single digit percentage negative? At what point Do you know is there some potential for you to start pushing prices back up, ending the kind of circa 10 year decline in pricing that we've seen?
So that's an interesting question actually because we have discussed in the last few calls Our concern and the risk of price pressures will increase given where governments find themselves. So our view is price pressure may increase in the future. We haven't seen so far Price erosion on the revenue line is continues to be at historical level. But when you look at the future of our market, It's very hard to drive price increase, except in the case of innovation when we launch new products, Which is why, again, it's one of the reason why innovation and cycle of innovation is very important in our industry. But apart from that, unfortunately, the COVID crisis will lead possibly to further price pressure.
And when you combine that with the cost inflation that any business sees, as you say, to your point, That's why revenue growth, volume growth is so important to drive leverage in the P and L as well.
Okay. That's an interesting answer. I'll get back in the queue. Thanks for that. It was all very helpful.
Thank you, Tom. Our next question comes from Kyle Rose from Canaccord. Kyle, please go ahead. Your line is open. Great.
Thank you for taking the question. I wanted to start on wound. I appreciate the incremental color from the earlier answer. I wondered if you could just Give us a little bit of a better sense of when you're looking at the wound business, particularly in the bioactive side, I mean, How much of that is truly the cross selling opportunity from Osiris and the sales forces, but being cross trained really playing out Versus just the natural market recovery. And then similarly on the devices side, Renesis, I think a few years ago, you talked about starting to see some contracting wins in the U.
S. Obviously, that was impacted by COVID as far as the ability to service and train. When we see that, are we starting to see those contracting wins fully play out in numbers? Are we Still going to see continued momentum there or has that been fully realized? Then secondarily, on the ortho side, When we think about the cementless launching, just can you help us understand when we should expect cementless to be available and usable on Cory?
And then any trends from Cory and the enabling technologies more broadly? We've seen some of your competitors talk about A shift towards utilization and earn out based commercial model. When you look at the market now, How are you seeing the purchase trends from upfront versus volume based agreements? Thank you.
Thank you, Kyle. Starting with wound, I think on the Biologics, it's clearly Many factors that contribute, which is a real positive. I think it's first, of course, the market recovery, which we're benefiting from. I think there is a cross selling, which just means more competence and more feet on the street. And then certainly, it's It's on the basis of a strong portfolio.
We have really good products there that are also differentiated. So I think we will continue to see good momentum there. Same on Renesas. I think we've had some contract wins. Not everything has been already converted.
This is an ongoing process. This is about execution. It's about tendering. So I think we have a great product with Renesis, And I'm very positive for the entire wound franchise. In Orthopaedics, we will Launched the first components for cementless for Legion at the end of this year.
And that is, of course, then a multi quarter introduction, many components on 2 on our 2 main brands, on Legion and on Journey. So the real impact will be in 2022 and beyond. And we will of course, we are working on then Providing this on the Corie platform as soon as possible. This is an integral part of our development and of our portfolio development. On the commercial models, I would just say that we've seen all different models in the marketplace.
We have the flexibility to offer all the models from an outright sale of the robotics platform of Corie To, of course, to connecting it to volume and to other means. I mean, There we're really as flexible as anybody because that's just a model that's continuing to drive adoption, Not different from other sectors in the industry actually. So I think overall, What we're seeing is the adoption of Corie is going well. And when Corie is brought in, we see an increase in the number of procedures. And that's actually just supporting our case, and that's exactly what we want to see.
Thank you very much. And just one final M and A related question. I really appreciate the incremental color on the M and A commentary there. Obviously, the team is doing well. Largely been tuck ins.
How should we think about The veracity and the appetite for perhaps transformative deals moving forward. And then we've also seen commentary from other players In the sector regarding divestitures and portfolio management, do you remain committed to the end markets you're currently in?
Yes. The short answer is yes. I think very pleased with the end markets we're in. I think naturally you see more of a convergence between Orthopaedics and Sports Medicine. You see this playing out in the So naturally, a very good position for us there.
And then, of course, wounded continues to be an attractive segment in itself, good growth rates, good margins, Less capital intensive. It's given us some good protection through the pandemic. So absolutely committed to the end market. With regards to M and A, yes, we want to continue to be active on the acquisition front. Of course, the focus is always on the known areas to invest.
That is naturally then tuck ins, That is technology driven. We're looking at differentiation potential and then at being able to leverage These tuck ins and as you've seen and the technologies through our commercial footprint and through complementing the existing portfolio. Now we also have a very healthy balance sheet, which potentially would put us in a good position for something larger. That's not the focus at this stage. But it's always good to be observing the market, the developments from a, I would say, comfortable position with a strong balance sheet.
Thank you.
Thank you, Kyle.
Thank you. Our next question comes from Michael Jungling from Morgan Stanley. Michael, please go ahead. Your line is open.
Great. Thank you. I hope you can hear me. So thank you for taking my questions. I have 3.
On the 2021 guidance, can you comment on how close you were to raising organic sales growth guidance for 2021? Question 2, Roland. I think in the last quarter, I asked you a question about why you think Smith and Nephew's share price has underperformed and Pretty material over the last 18 months. And I guess today's share price performance is not helping. What do you think You can do to help change things because right now it's not easy to get 1 to 0.
And then thirdly, on the divisions, do you think one of Then, whether it's ortho, endo or wound, are underappreciated by the market. And do you think it would be sensible to perhaps list 1 of them spin out separately with Smith and Nephew holding a material share. A number of companies have done that and it seems to have worked quite well. Just your thoughts about that sort of concept of you spinning out one of the divisions that may be the most underappreciated. Thank you.
Thank you, Michael. You're bringing in interesting questions here. So difficult for me to comment on some of them. Obviously, We had a really good look at the guidance. We felt that we were comfortable where we are today.
We have different scenarios that would play out One or the other way, but at the end of the day, looking at our performance, looking at where we are both in sales and on trading margin, we felt that We're very comfortable at confirming the guidance. And of course, we still continue to see uncertainty around The macro factors, the markets in general, which are outside of our influence. On the share price, I can't really comment on the share price. I probably have to throw that question back at you guys. I do think that it is about the execution.
It is about executing on our strategy. It's about delivering On the guidance, it's about progressing, continuing to transform this organization. It's about leveraging the potential of Smith and Nephew. And I think We've had we have a new management team, we have a new strategy, we have new structures. I think We are in a position to do all that.
And then finally, your questions on divestitures, That's not a consideration of us at this stage. I think the 3 franchises in their own Markets have a good position. They have growth opportunities. They have potential. And as I mentioned earlier, I think wound in itself It's an attractive business and Sports Medicine is where we really differentiate.
We have a great beachhead there. I think it will continue to serve us very well as the markets in general, both in And in sports continue to move to more decentralized settings, to more specialized settings. And then we are well positioned to leverage that. And finally, I would just say, this all is underpinned by our commitment to innovation and driving the portfolio forward. We have a great portfolio in the making, exciting products coming.
So I think we have the opportunity again to deliver and to execute.
Okay. Thank you.
Thanks, Michael.
Thank you. Our next question comes from Hassan Al Wakil from Barclays. Hassan, please go ahead. Your line is open.
Thank you. I have 3, please. Firstly, based on what you've seen year to date, how do you think about pent up demand going forward in some of your key markets and whether this could still provide Any upside in Q3 and Q4 relative to your expectations? Secondly, and another question on guidance. Assuming the recovery continues as per your base case, are you able to signal whether the top end of Guidance on sales is more likely.
Is this less likely on margins given your commentary around higher costs? And then finally, could you provide an update on the Kory performance and whether you think you're gaining good share in robotics Amidst an increasing competitive environment and how does this compare in the ASC versus the hospital setting? Thank you.
Thank you, Hassan. Let me start with the demand side and then I'll go on to Cory and maybe Anne Francoise and I, we can then tackle The guidance question together. So undoubtedly, there is pent up demand in the system. It is difficult to predict when that comes true. It is also difficult to identify on an individual basis What is pent up and what is just, I would say, organic, because we don't have access to that data.
We have anecdotal feedback from the customers, of course, to tell us Where their volumes have increased against pre COVID times and where they're adding capacity. Now I would say by and large, Again, this is a part of the recovery pattern, and it is driven by the system and by the health care in general. So Just to take an example, the U. S. Is a for profit healthcare market.
The recovery there has been quicker. It continues to be more dynamic. The public health care systems are lagging behind. The incentives are different ones. And then finally, what needs to be taken into consideration is, of course, The state of the healthcare system and the ability to increase capacity or not.
For instance, As another example, U. K, NHS, which has already flagged that there will be long waiting list For elective procedures because the system can just not absorb the pent up demand. So I would say Relative to Q3 and Q4, we continue to expect further recovery. We at the same time with the patterns that we've seen with the variant, with the slow The rollout of vaccine was and some challenges in emerging markets, of course, we don't expect a full recovery. But it will be a gradual recovery.
That's the pattern that we've seen, and there's no reason to believe it will be different going forward. Kori, the share of robotics, I think we're very pleased with certainly this first half in how we continue to roll out Kori In the adoption rates of Corie, as we mentioned earlier, it is a different system. It is image free, so you don't need a CT. It is Very well suited to be used in a decentral setting as it's versatile. It is it has a small footprint And it is a different system in that it is a handheld robotics system.
So that takes a certain training and education. But when I look at the markets, when I look at the feedback, I'm very positive. And when I look at the translation from Corie to higher Volumes in those sites, that's also something that is very positive. So I also believe Corio is very well For ASCs, as it is, of course, for central hospital settings, but in particular, On same day short term special logistics required ASC settings, I think it's very well suited. And then maybe on the guidance, difficult question to answer, just really Trying to, 1st of all, being very confident with our guidance, hence confirming it.
Obviously, we have our internal Scenarios that are also influenced by the overall recovery, but I didn't want to go into speculating whether we're going to be ending up at top end or at the low end. I think you've heard our comments on the cost side, which will influence the trading margin for sure. And then on top end, it will be our ability to really continue to benefit from the recovery. And that, as I mentioned, is to some extent, of course, dependent on external factors.
That's helpful. I wonder if I could just follow-up on the Kory point and really how adoption rates So differing between hospitals and ASCs and whether the feedback is more favorable in ASCs than it is in hospitals?
I think we believe we just have a great system here, right? It is very well suited for the hospital setting. But I'd say some of the advantages, the small footprint, the versatility, the short term short time To set up the system literally 5 minutes and in particular the ability to run the robotic system CT free Are particularly well suited for ASCs. That's how we see it. That's also the feedback that we're being given From our customers and from adopters and users.
Perfect. Thank you.
Thanks, Hassan.
Thank you. Our next question comes from David Adlington from JPMorgan. David, please go ahead. Your line is open.
Hey guys, thanks for taking the questions. So again, one on revenues, one on margin. So on the revenues, Ron, just sort of picking up on your Comment earlier where you said you've got tough comps in the second half. I mean, you're down 4% in the 3rd quarter and down 7% in the 4%. So Just sort of trying to square that circle.
I know a lot of commentary around emerging markets and COVID, but that just seems very conservative. And then secondly, just on the margins, particularly gross margin, where I think that's probably the most dependent on volumes. And it looks like Revenues are actually going to be above 2019 next year, and I know there's some acquisition impact. But even so, your gross margins look like they're going to be substantially down On 2019, I just wanted to sort of try and square that circle in terms of the cost pressures or whatever else we're seeing. Thanks.
Very good. Thanks, David. I'll start with revenues and then maybe on Francois's on the gross margin. Obviously, I mentioned the comp will come in for quarter 3 and quarter 4. I would say that relative to Q2, of course, Q3 was a much Later quarter in 2020, we had at the time seen actually very quick recovery at the end of the first wave Where elective surgeries were by and large allowed and permitted and scheduled.
And so the recovery was quite strong in the Q3 of last year. That's I said the comp is a more difficult one. But I think with everything that we're seeing, we will See also a continued recovery. Emerging markets remains a question mark to some extent. Of course, They are having generally more difficulties in recovery.
Many of the reemerging markets also are now in the winter period in the Southern Hemisphere. That is not helping the recovery overall. And then finally, just to reemphasize the fact that we will have 4 days Fewer in the Q1. So that's why we made the comments that we made. But again, Very confident that we will hit that guidance.
So hi, David. And to pick up on the gross margin point, it is clear there are headwinds on the gross margin Versus 2019 as you've picked up. And some of those are linked to what we've talked about, the FX And the M and A as well as the higher inflation, but the higher freight costs that we're seeing And the fact that we still have lower production volumes than 2019. And the final element that impacts the gross margin is the China VBP possibly that's factored into our guidance.
Maybe I can just pick up on that and think about how some of those headwinds could evolve as you go into next year?
So we know the exchange rate becomes a tailwind in 2022. I think total trading margin, not gross margin, about 40 basis points for memory. I think the cost inflation, we offset partly by our FX benefit sorry, Our program, our transformation in operations, but only partly offset some of the cost inflation. And then I guess the volume will depend on how efficient we want to be as well in terms of managing our supply chain, our inventory. So in a nutshell, I'd summarize what I've said.
Some will stay. Some we will manage and offset by the activities we're currently doing.
Understood. Thanks very much.
Thank you, David. Our next question comes from Kit Lee from Jefferies. Kit, please go ahead. Your line is open.
Yes. Good morning, guys, and thanks for taking my questions. First one is just on hips and knees. I think the performance gap you had versus peers in Q2 is a lot bigger compared to the last few quarters. So I'm just wondering if this is mostly related to the supply constraints you have or is there any other factor in play which explains the underperformance there?
And then my second question is on the trading profit margin as well. Just given there are quite a few moving parts, How should we think about the phasing of the margin in the second half versus the first half? I think in the past you have probably 200 bps to 200 bps of Seasonality between the first half and the second half, does that still apply for this year or is that going to be a different situation? Thank you.
Thank you, Keith. Just on the hip and knee performance, obviously, you have a lot of variability quarter to quarter. So that's I mean, yes, we looked at those numbers. We saw the comparisons. We also looked at it from a half year perspective, Which gives you a very different picture.
So if I look at the half year performance so far, I think we're right there With an I think a very good performance on the 20% growth for the half year. Yes, of it has to do with some short term supply issues around orthopedics in particular. Some I think have just got to do with the variability From quarter to quarter, some has to do with the fact that we are proportionately selling more in Europe and in emerging markets and in China. So that's also contributing to the mix. But overall, I think still the 40% on the quarter It's a good performance.
And then I look at the different segments, I think we're well positioned for the 3rd Q4.
So, Kipp, the question on profit margin is fair and a 17.6% Trading margin at H1 and when you link that with our guidance range of 18% to 19% implies less Margin improvement or seasonality that we've seen in the past. And there are a few reasons for that. The first one is the timing of the cost. It is very different from our historical pattern. In particular, in sales and marketing, I said during the presentation, some events have been deferred, but we also see our A and P, our advertising and promotion spend Increasing as we markets return to growth.
There's also a step up in our R and D spend, Particularly on the acquired assets. So that's the OpEx perspective with a A different pattern than usual. And then finally, there's also the impact of some of the cost factors we've talked about here in terms of inflation in freight costs And the impact of the channel inventory adjustments in China. So that's what leads to less Margin uptick in the second half. I would say though, it does assume an improvement in margins,
Okay. That's great. Thank you.
Thank you, Kit. Our next question comes from Veronika Dubajova from Goldman Sachs. Veronika, please go ahead. Your line is open.
Hi, guys. Good morning and thank you for taking my questions. I have 3, please. 1, just want to understand a little bit the sort of better the nature of the supply constraints that you're seeing. And I guess there seem to be 2 elements.
1 is obviously higher cost, The second is product availability. And especially on the second one, would love to understand whether you think the revenues that you lost in the second quarter, Are those recapturable as you look at Q3 and Q4? Or are those gone forever? And then just a confirmation that you are no longer sort of Product constrained and to the extent that you're getting orders, you are able to fulfill those. So that would be kind of my first question.
My second question is A quick one. There's been a little bit of debate among some of your peers around sort of the dynamics in the 3rd versus the 4th quarter, especially given sort of Maybe unusually pronounced summer vacation seasonality. I don't know, Roland, if you're willing to comment through on what you're seeing in July August and how you're thinking about maybe The timing of the ongoing recovery that you expect between those two quarters on the elective side. And then my last question is a question on ASCs. I No, you've kind of talked about this as a big competitive advantage for Smith and Nephew.
We're certainly seeing from our due diligence that there is a lot of growth on the Outpatient segment more broadly in the U. S. Can you just remind us from a pricing perspective and maybe a margin perspective from Anne Francois What that ASC shift means for you guys? Obviously, incremental volumes, but my understanding is that the pricing, might look a little bit different. So it would
Thank you, Veronika. Let me try to answer your questions. Firstly, on the supply, Not much more than what I said earlier. Of course, the challenges that we're experiencing are Some of them have been documented globally around freight and logistics, some challenges, some delays. Other are internal such as the labor shortage that we have had as a consequence of different factors especially in our largest Orthopaedics Health in Memphis.
So really hard to quantify, but wanted to call it out nonetheless. I think what we're seeing is of course that will come back. That will certainly come back as our supply capabilities continue to improve. Of course, the surgeries that haven't taken place now, they will not come back. But overall, We believe that this will come back.
We have had a huge effort in certainly Hiring in Memphis and ensuring that we have the capacity from a systems perspective, from a labor and resource perspective. And of course, you know that this is a complex supply chain when we look at all the sizes, when we look at the different Variations and features. So it is a complex operation, but it's something that we're going to get back on track. Quarter 3 versus quarter 4 or what we're seeing anecdotally, of course, What we're seeing is generally, I would say customers that have worked very, very hard that some of them are now Thinking about taking a bit more of a vacation. Others on the contrary say that now that they are able to perform surgery, they'll just push through and they increase their Capacity, so it's a very mixed picture.
But I think by and large, if you look at it from a broader society perspective, people are tired. People need a break. People want to take some time off, and that's what we're hearing from the different markets. So very, very difficult to really read A trend into that other than I would say that the recovery continues to go on, that it is real, that it is going well. And then at the same time, as I mentioned, that it is dependent on some external factors.
On ASCs, Indeed, a huge shift into ASCs, a massive shift into outpatient. I think that is It's really real and will continue to accelerate. And I believe it is because all the incentives are now aligned. You have the regulatory approval. You have The reimbursement behind it and of course, you have the technology advancements to allow for same day surgery.
So that shift is certainly there. We're seeing more volumes shifted into ASCs. We're seeing more ASCs being established. Some orphan patient excuse me, customer or surgeon physician owned, some In affiliation with hospital transfer. And so when it comes to pricing, the reimbursement envelope, of course, It's a lower one that has been widely publicized.
I don't have the numbers on top of my head, but those are available. And then of course, it's what you make with it. How can you compensate for some of that with volume, with mix, with the service? And there again, I think we have an opportunity given that we are also calling on these AUCs through the Sportsnet franchise, through the ENT franchise, And we can actually leverage our position in the AUC. I hope that answers your questions, Veronika.
That's really helpful, Roland. Can I just circle back to the supply constraints? When do you think you will no longer be supply strange. Is that a 3rd quarter event or a 4th quarter event?
Very difficult to tell you here. I think it will be a gradual improvement. Of course, that's not One measure that fixes everything at one time. As I mentioned, it is multifactorial. There is, of course, the freight and the logistics piece.
Then there is the in house labor piece. We have onboarded many of those operators now. We're On boarding them, training them. So it's a gradual improvement through the quarters. We have a team that's focused on this.
That's all they do. So I think we'll continue to see improvements through the course of this year.
And Let me just add very, very careful clarity. Our guidance we've concerned our guidance. So we are working through issues. We've been transparent, as Roland said, But that does not affect our guidance, which we've confirmed today. Understood.
Thank you both.
Thank you, Veronika. That was our final question. So today's Q and A session has come to an end. So I'll hand the call back over to Roden and Anne Francois for any closing remarks.
Well, thank you, operator. Thank you all for your interest, Smith and Nephew. Thanks for your questions. Wish you a great day here.