Smith & Nephew plc (SN) Earnings Call Transcript & Summary

I can see we have a good number of people connected now, so we can make a start. I am Andrew Swift, Smith & Nephew, Investor Relations. Before we get into the presentations, I'll read out the Safe Harbor statement. Certain statements in this presentation are forward-looking statements. These statements are based on management's current expectations and are subject to uncertainty and changes in circumstances. Actual results may differ materially from those included in these statements due to a variety of factors. More information about these factors is contained in the company's filings with the Securities and Exchange Committee. I'm sure you've seen the press release that came out half an hour ago. And I'd also highlight there are supporting materials for today's event on the platform you're on now. You'll find the slide decks for this first session and for the breakouts in the Resources section of the portal. And now to start off the first session of the day. I'll hand over to Roland Diggelmann, Chief Executive Officer of Smith & Nephew. Roland?

Thank you very much, Andrew. Good afternoon, good morning to those of you calling in from the U.S. Welcome to the Smith & Nephew Meet the Management 2021. I'm actually really excited for the opportunity to present to you today, even if we have to do this remotely still. But the timing is right, and we have some positive news to share with you. But before we get into the opening session, let's take a quick look at the agenda. In the next hour, Anne-Francoise and I will be talking about the group's strategy for growth. You'll have seen in today's press release that we have announced midterm financial targets, and we'll be setting out how we'll deliver that performance. After a short break, we'll then move to a series of small group breakout sessions for the preregistered participants. You'll receive connection details for [indiscernible] group shortly. Over the course of the day, each group will have a Q&A session with me and Anne-Francoise and meetings with leaders from the 3 franchises to get into the details of actually how we'll drive each part of the business. I'm sure you'll find it an informative day and come away with a clear picture of how we're moving Smith & Nephew to the next level. Smith & Nephew is at an inflection point. In the last few years, we've added new growth drivers, we restructured our commercial model, and we've embedded a new culture. We're now at a point of transforming to a structurally higher growth company. And innovation is truly at the heart of it all. The technology at the company has been strong for a long time. And we're taking it further. We've built a pipeline of disruptive technology. We've established engines to keep adding internal and external gross assets. Delivery will be driven by our work on productivity and by commercial excellence. Optimized manufacturing and supply chain will provide a solid foundation. And on the commercial side, 2 of our 3 franchises, providing around 60% of sales, are already performing well. The aim is to sustain the strong profitable growth in Wound and in Sports Medicine, and to reestablish the momentum that we've actually had for many years in Orthopedics. Now we understand that you want to know what this all adds up to. We are committing today to a consistent 4% to 6% organic revenue growth by 2024. We'll maintain the higher R&D investment, enabling that while also rebuilding a trading margin to be at or above 21% in 2024 and with continued improvement after that. And we'll maintain discipline in capital allocation. We will continue to invest in R&D and tuck-in M&A. At the same time, the strong cash flow of the business will also enable us to maintain our progressive dividend policy. It will allow us to stay within investment-grade credit limits or metrics and newly announced today, we start the regular buyback with around $250 million to $300 million planned in 2022. So before I go into the detail of the strategy, I'd like to take a moment to remind you of where Smith & Nephew is today. We all know the disruptive effects of COVID, of course, on our industry. But then when I look beyond the short term, the long-term trends underpinning our markets absolutely remain intact, for instance, the prevalence of chronic health conditions. We also have the expectation of ever higher levels of activity later in life. The demographic shifts and the aging populations and expanding health care access in Emerging Markets, these trends are all unaffected by the pandemic. And now we can actually add a fifth trend, which is the shift to decentralized care, and this has been accelerated by COVID as both patients and providers look to move care actually away from the mainstream general hospital. With that comes new opportunities for innovation to meet the needs for simple procedures, for short-term recovery times and for new patterns of patient engagements. Slide 6 is a reminder of what Smith & Nephew is. We are a major global player in all of the key markets of Sports Medicine, of Orthopedics and of Advanced Wound Management. The portfolio is also an attractive mix, growth at or above the weighted average market growth rate of 4% can drive leverage for the whole of the P&L in normal conditions. And having the portfolio is actually a well-established and proven model in medical devices. It gives us scale to engage with customers and cover back office cost. It also gave us some resilience in the pandemic. It creates a range of opportunities for us to allocate capital for growth and returns. It also positions us to exploit cross-franchise commercial and technology opportunities such as ASCs, digital and biologics, and we'll talk more about these. And then by running the portfolio through our franchise-based commercial model, we retain the focus and the accountability to drive each area effectively. Slide 7 is a bit of a busy slide, but we wanted to be as transparent as possible. It does show where we are by franchise and some of the broad-based performance improvements over the last few years. The areas in green show where our segment has outperformed its market in a particular period. Performance relative to market has improved in more of our segments. And in 2021, actually, 2 franchises with around 60% of group sales at Sports Medicine and Advanced Wound management are clearly outperforming. When we look at the reasons for the better performance, it comes from delivery of our strategy. It comes from innovation, from improved commercial execution and from synergistic M&A. This performance comes from actions that we have taken rather than from external factors. And that gives us the confidence that we can repeat that success in the rest of the portfolio. Now as you know, there are still challenges in Orthopedics. But actually, they're quite narrow. What we need to fix are the short-term supply constraints, which have interrupted the progress that we've had in hips and trauma and in the current slow grossing [ knees ]. I think it's important to remember, that came after many years of outperformance, and where we fill in the portfolio gap with the rollout of cementless knees, we're going to be very successful. The next slide shows the background for our strategy for growth. By concentrating our innovation and culture on customers, we'll consistently deliver 4% to 6% organic revenue growth and we'll rebuild our profit margins. And to get there, we'll compound our outperformance in Advanced Wound Management and Sports Medicine and regain momentum in Orthopedics. The strategy is based on 3 simple imperatives, which you see on the pyramid on Slide #8. 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 a continued customer focus. And then we'll continue to transform ourselves for higher long-term growth through investment in innovation and acquisition. We'll deliver these imperatives through 4 key value builders. These are productivity, commercial execution, innovation and M&A. On each of these, we already have a track record of delivery. And in the next section, I'll spend some time on each of the 4 value builders and what we have planned for each one of them over the next few years. So I'll start with productivity. These measures are mainly aimed at strengthening our base and laying the ground for acceleration. I'll focus now on 2 of these areas: optimizing manufacturing and supply, and driving ongoing efficiencies for the business through simplification. The immediate priority on the optimization side is to resolve the current supply issues. Now I'm pleased to report that we've made further progress since the update we gave you together with our Q3 results. The initial challenge we had was of product supply from our main global Orthopedics facility in Memphis, largely as a result of staffing shortages. That's improving. We successfully stepped up hiring and are moving new staff towards full productivity towards leading, and that will lead to rising output and falling back orders. The second challenge has been around logistics, and that's improving further, too. There may be yet some bumpiness from external disruptions to freight and our backlog of finished goods that we need to get to customers is decreasing. Overall, I'm pleased to say we're making good progress on both of the Smith & Nephew specific challenges, and we do expect the full resolution in the first half of next year. Now what's a little harder to predict are the widely reported global shortages of some raw materials and components such as electronics, for instance. We're closely managing supply issues. That's on a case by case basis. And we have simplified our processes to be more opportunistic and move quickly when additional supply becomes available. I'm very confident in the team's handling of these usual circumstances. And here, too, I'm encouraged by the progress. The second aspect of optimization is our supply and manufacturing, and that's building long-term efficiency. An important part of that, we'll be delivering the transformation plan that we announced back in February. And on the supply side, we've continued to process the process, and we're moving to a specialist third-party logistics partner. The transition in Europe is now complete, and we're preparing for the Memphis transition in 2022. Eventually, our production facilities will ship directly to 3 global distribution centers. And they will in turn ship directly to the customers wherever possible. This will, of course, bring a range of benefits by simplifying the route from factory to customer we will bring down lead times, we will better manage inventory and we will reduce the cost and risk from freight. And then in manufacturing, the new Malaysia orthopedics facility is on track to supply in 2022. And also Costa Rica is getting ready to support [ wound ] as part of the shift to a multi-franchise facility. Again, cost efficiency is only one part of the rationale. Multi-sourcing in our network will actually make us more resilient to disruptions at any one site. These changes will all create a simpler, more efficient, more resilient network for supply to our customers. And then finally, on productivity on the next slide, there are opportunities from increased focus and simplification that can really be an ongoing process rather than to rely on major new restructuring [ programs ]. We have shown the ability here already to deliver savings from simplification. And our global business services organization is a great example. GBS was actually initiated in 2017 as a shared services and business process outsourcing organization, supporting the whole of Smith & Nephew from low-cost locations. Early savings came in the delivery of the APEX efficiency program, but then the benefits, of course, continued with more savings accruing from other transitions and hosted operations. Two of the opportunities we still have in front of us are shown on the right side of the slide. Firstly, we can more rationally focus on commercial resources to better balance growth and also margins. Smith & Nephew actually sells into more than 100 countries. [indiscernible][indiscernible] But over 80% of revenue comes actually from the 10 largest countries. The new launches will focus now more narrowly on the largest markets first. In some cases, there are even lines of business that are unprofitable in smaller countries. Some of these have strategic value to the rest of the portfolio, but we're also reviewing where it makes sense to just exit. And a second opportunity does come from simplifying the portfolio. [indiscernible][indiscernible] In some categories, we have multiple product lines serving the same clinical need, either as a result of [indiscernible] M&A or then just as all the product generations were never discontinued. This is particularly the case in Orthopedics. And one of the examples on the slide is that of UNI Knees. And clearly, this is one where we can consolidate 4 parallel systems into 1 and into the modern Journey II UNI platform. We're therefore reviewing the financial and strategic value of the tail of products. We're aiming to reduce commercial costs. We're aiming to simplify distribution and, of course, to better control inventory. I'll now move to the second value builder, which is commercial execution. And this is truly about maximizing the value of our really strong core portfolio and accelerating the business by aligning our approach to evolving customer needs. How do we do this? Well, I think it's important to recognize that we already have leading technology across the portfolio. Our Journey II Knee, for instance, and the InterTan nail in Orthopedics, our WEREWOLF COBLATION system in Sports Medicine and ALLEVYN Life dressings in Wound Care are just a few examples. These are well-established products that are truly differentiated in the marketplace. The Wound franchise has some very clear examples of what can be done by better driving this core portfolio even before the benefits of our pipeline. The left of the slide shows inflections that we have already delivered in established categories. European Wound Care, for instance, is one of our more mature end markets and with competition from low-cost regional players, that is a very particular feature there. And even so, the team has successfully returned the business to growth through better execution, through an enhanced tender approach, through a renewed focus on key account management and also improved employee engagement. All of these factors contributed to the sales growth that you see on the left side of the slide. In bioactives SANTYL also turned around a multi-year decline, detailed work on patient engagement, on clinical evidence and reimbursement first has stabilized and then started to grow another mature product line. And in the franchise sessions later, you will hear more about commercial execution and maximizing our already strong portfolio. I've just talked about Wound now, and you'll hear how selling the procedure rather than individual product has already been a core part of our successful Sports Medicine strategy under the Brad Cannon in recent years. Replicating that success in Orthopedics is absolutely critical. With our uncemented knee we now have a strong suite of primary and revision products. They are supported by a range of enabling technologies, so essentially everything necessary to support the surgeon and how they actually wish to approach a particular procedure. We've also strengthened the commercial model for Orthopedics. I did announce that change of the leadership structure in November as part of our Q3 results. And it's about bringing both the Orthopedics and Sports Medicine business unit under Brad Cannon. This does align our commercial structure much better with evolving customer needs and with new high-growth opportunity that we see in the marketplace. While the sales team remains separate, we can go after these targets with a more unified sales approach, and we can leverage our leadership in Sports Medicine and our broad Orthopedics portfolio. We all know that care is becoming more decentralized with joint replacement procedures and the volumes growing rapidly in ASCs. Our U.S. Sports Medicine franchise already generates 40% of its revenues in ASCs. And so it has existing deep relationship with the centers that are now starting to place hip and knees. Extremities, I think, is another real good example where we see foot and ankle surgeons often specializing in both bone and arthroscopic repair. And then in capital equipment we can take a more integrated approach to selling out a digital surgery portfolio which includes CORI, of course, and the updated arthroscopic tower. So when the 2 sales force work together to pursue such opportunities, having both franchises under the same leader, will enable greater coordination and also more united incentives, which I believe is also a key component. Now on to the third value builder, which is innovation, absolutely critical and key for us. We've stepped up our level of investment in R&D from 4.7% of sales in 2017 to around 6% expected for this year. And I think we're now at the point of starting to realize more of these returns. From here, we'll accelerate our business by launching flawlessly and to scale and transform our longer-term outlook with investments in truly disruptive platform technologies. Slide 18 shows some of the innovation that we've already delivered in 2021. Now I won't take you through every product in this session, of course. But there are a few points I'd like to highlight. First, there's the [ breadth ]. These projects have added new growth drivers across the franchise and across segments, including both consumables and capital equipment. Second, there is really a healthy mix of life-cycle management, like the new skin substitute versions that are introducing real differentiation, like FAST-FIX FLEX, which can drive significant expansion of the meniscal repair market by actually enabling more tears to be repaired. Both types of projects are important to having a fresher portfolio and to compete and to drive margins. And then thirdly, the impressive delivery in 2021 reflects only the early stages of the increased R&D investment. The output of most of the investments and the recent step-up in projects are still to come. Importantly, I think we've demonstrated that when you bring meaningful innovation to the market, it drives visible change in the commercial outcomes that we report to you. Now I showed this data earlier in the presentation. This is of underlining growth by segment over time and how we compare to the market. Hips, trauma, joint repair and arthroscopic enabling technologies have all improved their performance against the market since 2017. What you see on Slide '19 is that in all of these cases, the improvements actually followed major new launches, and it just underpins the importance of innovation. In hips, the launch of OR3O, the Dual Mobility system was followed by above-market growth within a few quarters and improved performance also followed the launch of EVOS SMALL and EVOS WRIST in trauma. Both segments were continuing to outperform before the supply disruptions earlier this year. And I believe we still have important growth drivers early in their life cycles as that situation then normalizes. In Sports Medicine joint repair, the addition of REGENETEN in late 2017 and a series of further launches across procedure types move that line to double-digit and actually to consistent above-market growth. Then the multiple launches in the arthroscopic tower from 2019 actually returned AET from a multiyear decline, first to growth and then consistent market outperformance. One of the factors of this success, I believe, are the improvements that we've made in launch excellence, particularly the ability to launch rapidly and at scale. OR3O provides an excellent case study for this as a launch that actually delivered quick returns with just a 2-year payback on our development cost. Firstly, we came with effective marketing. We had a very clear message, positioning OR3O as the only advanced bearing Dual Mobility Cup. We also identified the right customers and the right patients. That's high-impact teaching accounts, and those are revision patients at high-risk of the hip dislocating, and that is exactly what OR3O is designed to reduce. We also deployed more capital during the launch with rapid deployment of instrument sets, and we applied improved end-to-end processes with consistent coordination of product needs with operations. And importantly, we used evidence and medical education early and effectively leveraging the long clinical history of OXINIUM and running a series of virtual education events. We'll now apply these improvements to the next series of key launches either underway or expected, and those are the cementless knee, our next-generation shoulder, the full launch of Tula and our next-generation negative pressure wound devices. Our increased investments in innovation should result in a higher cadence of major launches into the future and consistent launch excellence that can really translate that into profitable growth. We're also investing now in more transformative projects for the future and particularly into platform technologies with cross franchise applications. Robotics, of course, is one with a further development of CORI, and you'll hear more about CORI later in the breakup session. New resection and knee surgery have been really excellent, and we're rolling it out globally. We've recently added regulatory clearance for hip surgery in the U.S. There's much more development, of course, as we add more indications and more devices to the CORI ecosystem. And then I really believe the differentiation of a CT free small modular platform will become even clear. We expect to be the first to actually add knee and hip revisions to our platforms, we're working on a novel soft tissue balancing device for knee replacement, and we're working towards shoulder replacement with CORI following our Extremities acquisition earlier this year. And then the unique ability to integrate our robotics platform with our arthroscopic tower will further support the expansion in Sports Medicine. Another platform is Biologics, which is a capability we've built up through acquisition in Wound and Sports Medicine. It's early to be talking about specific projects at this stage, but we're looking at applications across all 3 franchises in biologics. And then finally, there's digital as a true capability. We already have marketed products in all 3 franchises, such as data analytics and Orthopedics, then, of course, the Connected Tower and Sports Medicine and also wearables with the Leaf Patient Monitoring System. We'll continue to work on digital applications covering the whole cycle of care, both internally and with partners. And then potential applications for visualization and also artificial intelligence. The final of our value builders is M&A. We've-added assets over recent years that move a number of our segments to structurally higher growth potential, such as adding the Osiris skin substitutes for Bioactives, Tula to our ENT business and then adding Extremities to trauma. We'll continue to use both on acquisitions to enhance our portfolio and our pipeline. Our criteria for acquisitions are actually unchanged. We're looking for technology that can change the standard of care, like Tula, like REGENETEN, and we're looking for assets in high-growth categories that improve the mix of our portfolio. Assets will also be synergistic with our current portfolio, usually, where our existing sales teams are already visiting the right clinical call points for the new asset. And we'll stick with valuations that makes sense. We're looking at a range of metrics, but in particular, we look for the ROIC to exceed our WACC within reasonable time scale. Typically, it's 3 to 5 years, depending on the asset. So that's our strategy. In summary, the 4 value drivers that will strengthen our foundations, that will accelerate profitable growth and that will transform the long-term profile of the company. Now to take you through what that means in numbers, I'll pass you over to our Chief Financial Officer, Anne-Francoise Nesmes.

Thank you, Roland, good morning, good afternoon, everyone. In next few [indiscernible], I will cover our financial framework, trying to bring together all of the value builders that Roland has spoken about. I'll talk about the levers that underpin and drive our midterm commitments, and I'll also cover our updated capital allocation policy. But first, let me cover the short term where there's a number of external factors and influences that we've got to work through. On the positive side, there's more recovery to come from COVID. We know surgery volumes in joint repair -- and joint replacements, sorry, and ENT have not yet returned to pre-pandemic levels. For joint replacement, we're still expecting to see a benefit at some point of the pent-up demand when health care systems catch up. Although unfortunately, we all know that new variants of COVID are reminder of how difficult it is to predict the timing of the recovery. Our assumption is that waiting list will be addressed over time. But the speed will vary by market and will be generally very gradual. One of the headwinds for 2022 is from the volume-based procurement tender in China for hip and knee, which we expect will be implemented in the spring '22. We've been in discussion with our distribution partners around the future go to model market and our future terms of reference -- future terms of business, sorry. This process, the negotiations are well advanced but not quite finalized yet, but we expect to be able to share detailed financial impact with our full year results. And then finally, a factor that is well-publicized, widely reported as it affects mainly industries, is the inflation in raw materials and logistics as a headwind. Clearly, this loads a variation between categories for us, but it's quite clear that our overall materials inflation in '22 will be higher than we've normally experienced. And as Roland mentioned earlier, we are on the front foot with that and negotiating with our partners. But if I then move to what does it mean for the midterm? And how will we achieve our growth. Slide 22 shows you the levers of revenue growth that we expect from now until 2024 and sustainably thereafter. Now I can imagine, I can picture you, I can see you, I can imagine that you're already trying to measure the bar. So let me emphasize very quickly, these are directional and they're not to scale. They're here illustratively to represent where we're heading. And let me put very quickly to the side the fact that there will be a rebasing of our China business as a result to VBP in 2022. But then let's look forward, and let's look at how we're building our business. One of the major positive contributor will be from our improved commercial execution, and we're also including here taking part in market recovery. We've got great product, unique products that the franchise will cover with you later on, and that will drive growth. We would also see contribution from our innovation, particularly for the near-term projects such as [indiscernible] knee, the next-generation shoulder, Tula or the next-generation of negative pressure wound therapy products. And therefore, by 2024, we expect to be delivering sustainable 4% to 6% growth as a result. And I'd like to make it clear that this does not depend on the contribution from pent-up demand. And then commercial execution will continue to be a benefit in the long term. And of course, our sustained investment in R&D should mean that the innovation contribution continues as we have our next-generation of pipeline based on our platform technologies. Now what does it look by franchise? You can see on Slide 27 that the starting point for each franchise is a little different. In the near term, strengthening the foundations of supply and execution is key for Orthopedics. In Sport, we'll continue to drive the flow of new products. And in Wound, the continued improvements in commercial execution will create momentum. What's clear though is that over time, innovation will become a more important driver for all 3 franchises. Now I won't go into the fine details here. We've got great, talented team who are ready to speak with you in the breakout sessions. They'll talk you through their winning strategy. They're prepared to take your questions. So I don't want to steal their thunder here and you have [indiscernible] there's more to come. Now I turn my attention to trading margin. Clearly, our trading margin has recovered from the trough in 2020, but we recognize that it's not yet back to the pre-COVID level. Slide 28 shows the trading margin development up to 2021 with our guidance, which is at the low end of our previously stated 18% to 19% range. But importantly, you can also see here on this slide, the R&D step-up that we've talked about. We've made a choice, a conscious decision to invest behind innovation, maintain our investment through COVID, and you see that as a result, R&D is around now 60% of revenue, and it has impacted margin by about 100 basis point compared to 2019. As we've also spoken as well before, there's a further 150% basis point headwinds from the initial M&A dilution. But now clearly, those investments are laying the foundation for improved growth trajectory. They will both drive revenue and margin in the midterm. And then just to wrap up quickly on the margin, there are other elements in terms of the 2021 performance like inflation and FX, which we've spoken about, and some of that was offset by a combination of structural and discretionary cost savings. But again, if we turn our attention to the future and if we look at 2024, we expect trading margin to be at or above 21%. And Slide 29 shows you the levers that will take us there, including our continued -- maintaining our investment in our R&D. Again, there's some initial headwinds to absorb, VBP and input cost inflation, which I've talked about. But these will be more than offset by the tailwinds we see. Productivity improvements will provide efficiency gains, and the higher revenue growth from commercial execution and innovation will also enhance positive operating leverage. There have also been a benefit from our recent M&A acquisitions such as [ Tosca ] and Integra. As their profitability rise, as we drive the sales growth, we will see that flow through the bottom line. And clearly, that is the ambition of our M&A activity. So importantly, 2024 is not the limit of our ambition. We do expect further trading margin improvements beyond that, which will then give us choices of how much we invest in further growth or how much we allow to flow through to the bottom line. And to finish off, let me come to the capital allocation, where we're announcing today a revised framework for our use of cash. This new policy is aimed at supporting our strategy while also maintaining greater balance sheet efficiency with shareholder returns. Our first priority is to continue to invest in innovation and our sustainability agenda. And the second priority is acquisition. As you can see, these are in line with the strategic priority of revenue growth, but they're also essential for sustainable growth of earnings and free cash flow. And we will do that while maintaining our current commitment to our equity and bondholder with investment-grade credit metrics and also continuing our progressive dividend policy. But we're confident in our growth outlook, we're confident in our strong cash generation, and it means that even after these investments and commitment, we expect to have surplus cash available and we're therefore, making the new commitment today to return the surplus cash to shareholders in a form of regular annual buyback. We will start in 2022, when we expect around $250 million to $300 million to be returned to the shareholders. And amongst all of this in this capital allocation process, we're also committed to regularly review the opportunity to optimize our balance sheet and maintain efficiency whilst meeting our commitments and investment needs. So with that, I'll pass you back to Roland to sum up.

Great. Thank you, Anne-Francoise. You've heard our strategy. I will go about it and the financial outcomes we're committed to delivering. I also want to mention the real deep commitment to our culture that underpins all of our work, the billers of care, collaboration and courage and our Life Unlimited purpose, they unite the team in what we do and how we do it. I firmly believe that we will engage more when we're working for a purpose that we truly believe in. And that purpose is, of course, not just limited to doing business. Taking the limits of living also applies to a wider health, to the wider health of society, and we also keep challenging ourselves to continuously do more here. This year, we're proud to have committed to achieve net 0 emissions across our global operations by 2045. This adds to challenging long-term sustainability targets around impact on our communities, other environmental goals and also on sustainable product development. In this area, we look forward to updating you early next year on our progress, and that will be through our 2021 sustainability report. So I'd like to leave you with some of the reasons to be confident that we'll deliver on our commitment. Firstly, as mentioned, our market fundamentals are truly strong, and we're among the leading global players in all of our franchises. What gives me most confidence is our strong and innovative portfolio that enhance pipeline from our investments in R&D and also in M&A. We have a proven track record in driving improved performance from our existing portfolio, and 2 of the 3 franchises representing 60% of sales are delivering profitable growth already through execution of our strategy. In Orthopedics, we're filling the portfolio gap that has held us back. Now we have clear plans to drive growth with improved operations and an enhanced commercial structure to also pursue high-growth, cross-franchise opportunities. And the growth in margins will also be further enhanced through financial discipline and capital returns, as you just heard from Anne-Francoise. So with that, we'll take a few questions before then moving to the breakout sessions. Thank you very much.

Thank you, Roland. So for this session, you can enter questions through the messaging function on the right-hand side of your screens. We'll have time for a few now. And then when we get to the actual breakout sessions, preregistered investors and analysts will have plenty of time to ask questions in person then. And we've received some questions as the presentation has been going on. A few, Roland, around midterm growth and it being above the levels that the company has been able to sustain in the past and why that is and what's different now?

Well, I think it's a new team here at work. I think it's a very clear, simplified strategy. But I also believe that through the course even of the pandemic, we have made investments for future growth, we have ring-fenced some of the R&D. We have made investments in M&A. And I think some of these are coming through. Some of the evidence is coming through now. We see strong execution in 60% of our business in sports medicine and in wound. We also see the examples that when we bring true innovation to the market, such as OR3O in hips, we see fast adoption, we see growth coming through. So why now? I think we have a line of sight of the endemic. It's not over yet, but we feel this is the right time. I believe we are at an inflection point, and we will bring the innovation to fruition and to market growth.

We have quite a few questions about the trajectory of the margin and different performance between here and 2024, if it's a steady progression up to 21% or more back-end loaded?

I'm happy to take that. And if you want, Roland. Clearly, we're committed to a sustained margin improvement and a steady margin improvement, which we see between now and 2024. And we've talked about the levers in the presentation, some of them we've given example for, including commercial execution. If you take -- the wound performance to me is incredible, and we see that flowing through the Wound franchise. So productivity, we've done it. We shared services. So we know the levers we've got to pull. We know it's around revenue growth and it's around productivity, and that will flow through the bottom line. So we're committed to a steady margin improvement and maybe more to come in terms of specific 2022 margin guidance during our full year results in February.

And also connected to that and some of the questions when we think we'll get back to pre-COVID levels. .

Yes. Clearly -- Anne here, maybe happy, Roland and I, we can share the question. Clearly, as I said in the presentation, we are not back to that level, and we assign posting by '24 to be at or above 21% and continue to improve. So we are committed to driving margin improvements. For those of you who followed us for a little bit of time, you know that we need to improve our top line growth, and that's a top priority, driving revenue growth through innovation, through commercial execution is what we need to do, and that's where we're investing. And then once we have that revenue growth, then we have choices to look at where do we reinvest? Or does some of it flow through the bottom line? But if I may as well, I'd quite like to make a point that the margin is important. That is our focus. I know that's what you, shareholders, measure us on. But I guess, as a new CFO, I would like to take the opportunity to expand a little bit and think about earnings growth and total return to shareholders and cash conversion. Those are also measures of financial success, which I want the team to be focused on as well.

And a few people asking the views on 2021 guidance, if that's -- if we still stand by that.

We haven't mentioned it today because we stand, we remain on track, and there's no change to our guidance.

And also questions on opportunities in the different franchises and how we see those.

Yes, maybe I can take this one. Obviously, Anne-Francoise also showed on the slide how we view the different franchises relative to the strategic remain positioned. I think in orthopedics, clearly, we have a gap that we have filled with the pores, which is really exciting now that we are going into full launch. We have some homework to do around the commercial excellence and around operations and supply, and this should allow us then to get the Orthopedics franchise to the next level. We have everything it takes. We have the products. We have the reach. We have the innovation capabilities Sports Medicine is clearly more advanced because we've already been growing and outran the markets on the basis of a very complete portfolio, both joint repair and also the arthroscopic enabling technologies. So we expect sports medicine to outperform the market going forward. And in Wound, as mentioned, the -- a lot of the focus has been on execution. This is showing, but it is also combined with a very strong and growing portfolio. So Tier 2, I think we have come back, and we are in a very strong position to be able to outgrow the market going forward.

And a couple of questions we have about R&D priorities and strategy and the right level of spend going forward.

Well, you've seen that we have deliberately increased R&D. This was a choice that we made very deliberately. I am absolutely convinced that this industry is driven by innovation and this innovation comes internally and externally. We have increased our R&D spend from about 4.7% in 2017 to now about 6%, and I believe it's at the right level. So we're not thinking of a further step up in R&D. But what you will start to see is the R&D investments that we've made are coming into products that are coming to the market that will drive the sales line, and that is what we have mentioned and what Bananas also just mentioned, what's so important for us is that we get to a structurally higher sales level. And with the innovation, with the deliberate choices that we've made, I believe we will get there.

And questions on revenue growth from 2022 to '24, why we haven't guided to that. And if you're saying that it will be below the mid-single-digit growth that we guided for 2024.

Yes. So happy. So I'm very happy to say that that's the problem of not being in the same room as it. So clearly, when we look at revenue growth, again, it will be steady. I mean it's quite interesting to think about in the earlier stage, there will be a recovery from COVID. And then Clearly, the momentum has come more from the innovation. So whilst it's again, a steady revenue growth, don't expect a big bounce back, and therefore, everything will be within that guidance of 4% to 6%. There's very much almost 2 phases in the earlier year in COVID recovery and then you see the innovation accelerating and coming through. But again, it will be like margin, steady expansion of revenue.

Another question we have on capital allocation. Does the commitment to a buyback indicate that investment opportunities are becoming thinner or simply that the company thinks the shares offer a better return potential on the next 3 to 5 years.

So I think our capital allocation really reflects our strategy. First is innovation. Second is acquisition, and Roland has outlined the criteria for that. And then it's returned to shareholders via dividends or through the share buyback. Well, I think the share buyback reflects is our confidence in the business, but also the ability of the business to generate cash. And it's something we don't often talk about, unfortunately, but we generate cash. We have excess cash. We need to optimize the balance sheet and return funds to shareholders. So I think it's very much aligned with strategy and it's almost a natural logical consequence of the strategy we've outlined today. I think, Andrew, you've got on mute, I think.

I'm sorry. So one final question. The -- could you discuss the interaction of the growth and margin ambition by 2024? What the effect of trading margin would be at the different parts of the revenue range and how that relates to the 2021 target. So the -- not 21, the 21% target. Sorry.

So the -- as I said, the margin will be driven by the revenue growth. So first, it's looking for the operating leverage from getting momentum in our top line growth. And then secondly, driving the productivity. And with outlining the presentation some of the levers we will have. An example was the prioritization of the most profitable markets being super disciplined on where we launch, which also simplifies your business. The second, although it takes a little bit more time to achieve, but it's the portfolio rationalization. We've done some work already around the EU MDR but there's more to go after. And the example we know is in orthopedic franchise, 25% of SKUs generate less than 2% of revenue. Now clearly, some of those SKUs will be needed because you need your bag as the team tells me we need the complete tool to be able to perform a surgery for the surgeons to perform the surgery. But there is more we can do in terms of simplification, and that will all flow to the bottom line. And as our margin recovered, then it gives us the choices. Do we want to reinvest further? Or do we let it flow to the bottom line? And that is the position we need to be in.

I think given time, there are more questions that people have, but there'll be time to cover that in the breakout sessions as well. So we'll close this session. There's now a short break before we move to the breakout sessions, which will start at 1:45 p.m. U.K. time. So if you're registered, you will have received the personal link to connect to the breakouts in the last hour. When you do connect through that, you'll be moved to the right room by a moderator. So to make sure that runs smoothly, we'd ask that you log in 10 minutes before the session begins, and you can stay muted until the start time. And as a reminder, the materials for this session and to support the breakout sessions are in the Resources section of the portal and available to you. So thank you all for joining, and we'll speak again in a moment.

Thank you.