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 factors. 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 Diggelmann, Chief Executive Officer; and Anne-Francoise Nesmes, Chief Financial Officer.

Thank you very much, operator, and a very good morning to all of you. Welcome to Smith & Nephew's first half results. And as mentioned, with me on the call is our CFO, Anne-Francoise Nesmes. I'm very pleased to report a good first half and another quarter of solid progress for the group, which sets us up well for the future. Firstly, we 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 '21 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-Francoise will cover the financials for the first half. And I'll update you on some of our strategic progresses. So turning to the next page, I'll begin with the highlights of our first half. For the first half, revenue was $2.6 billion, that's 21.3% growth over the first half of 2020 on an underlying basis, and 27.8% 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 million, which is a 17.6% 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…

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 3 franchises contributed to the recovery in overall revenue, which was $2.6 billion. Orthopedics, our largest franchise, grew by 19.2% on an underlying basis to $1.1 billion for the half year. And Sports Medicine & ENT grew by 28% to $0.8 billion. Our Advanced Wound business grew by 18% to $0.7 billion, in part reflecting the greater resilience of the franchise in 2020. 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 varied 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&L. Our half year revenue was $2.6 billion, up 21.3% compared to 2020 on an underlying basis. On a reported basis, revenue grew 27.8%, including a foreign exchange tailwind of 470 basis points and 180 basis point benefit from acquisitions. Trading profit grew by 166% to $459 million, resulting in a 17.6% trading margin. The margin expansion reflects improved trading compared to 2020, together with strong control over discretionary costs. Compared to pre-COVID levels, though we are still seeing headwinds, namely increased investment in R&D, M&A and new launches as expected, and ongoing COVID-related negative leverage from fixed cost and higher logistics and freight costs. Adjusted earnings per share grew by 189% to $0.388 with financial leverage driving growth above trading profit.…

Thank you, Anne-Francoise. I'll now move on to update you on the priorities that we set out for '21 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&A from the first half of 2019, 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 3 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, Atracsys and other digital assets, we have built out our portfolio of digital surgery technology. In Sports Medicine & ENT, we've added exciting new products that tuck in to our existing offering that are building on successful strategy of commercial execution of REGENETEN, for instance. Then we have NOVOSTITCH 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…

[Operator Instructions] Our first question comes from Patrick Wood of Bank of America.

Perfect. I'll keep it to 3, please. Maybe just on the first one, very fast recovery on Wound Care. I guess I kind of thought Hips and Knees, and Orthopedics 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 first 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 to roughly, and apologies if I missed this, but to quantify the destocking effect that you saw in China? Was that material in the quarter? Or was it just kind of nothing?

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 to the pandemic with a proportion of sales coming from the chronic markets. 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 1 shift in ordering patterns from late 2020 into early '21 that also had an impact. You would have seen that mostly in the first quarter, though. But overall, very pleased with our progress across the Wound franchise. On the quarter, start to end of the quarter and the exit rate, 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. with a good and strong recovery in China with the volumes being up to pre-COVID levels and then with a slow recovery across the big European markets, the challenge looking 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 and 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, or the volume-based purchasing. And with that, they have withheld some of their orderings. When we look at the volumes in market, they are very robust. They're very strong. They're at the level of pre-pandemic. So from that end, this is very positive. Now the VBP has been delayed a couple of times. We now expect the award somewhere in the third or fourth 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.

If I may just add to Roland's last comment on China. So it affects the ordering pattern and the value of that inventory in the channel. So that's what we see as well and impacts the margin.

Our next question comes from Chris Gretler from Credit Suisse.

Roland and Anne-Francoise. I have 2 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 affect in the second half?

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 orthopedics. 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 with respect to your full year growth guidance of the 10% to 13%. If I analyze your first half performance, basically, you already are kind of at the low end without anticipating any growth for the second half. Could you maybe elaborate a bit more on the assumption because, I guess, in some markets, you're still well below the 2019 level, particularly emerging markets, Europe, et cetera. 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 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 than 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 restriction, the variant and then a lower number of billing days in the fourth quarter.

I appreciate your comments, particularly also on the details on the acquisition performance or the performance of the acquired businesses.

Our next question comes from Tom Jones of Berenberg.

I had 2 sort of areas I wanted to touch on. One was guidance and 1 was pricing. On the guidance front, your revenue growth guidance language is stated as 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 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. So 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 a have more meaningful impact? And then the second question on guidance, probably one for Anne-Francoise 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 suddenly popped up from nowhere and that you've maintained your margin guidance. I mean, is it fair to assume that these supply constraint issues both on 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 -- excuse me, and then 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 a certain corridor. You're absolutely right. When we 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 health care, the health care markets. And of course, we have a good business in emerging markets, and we have factored the same. But in summary, we expect to meet the guidance on the sales and on the trading margin side.

So just to follow up on the 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. As you know, we've talked about the R&D investment, the M&A, the FX. And we've also talked about negative operating leverage from COVID and that's in part production levels not being back quite to 2019 level, and other cost inflation or pressures that we've seen in the channel or in our network -- sorry, 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 a follow-up question on the cost side of things. The cost issues that you're currently facing aren't unique or specific to Smith & 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 Northeast, 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 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 that 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. So 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 reasons 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 said, to your point, that's why revenue growth, volume growth is so important to drive leverage in the P&L as well.

Our next question comes from Kyle Rose from Canaccord.

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, how much of that is truly the cross-selling opportunity from Osiris in the sales forces, but being cross-trained really playing out versus just the natural market recovery? And then similarly on the devices side, RENASYS, 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? And 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 CORI? And then any trends from CORI 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?

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 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 RENASYS. 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 RENASYS, and I'm very positive for the entire Wound franchise. In Orthopaedics, we will launch the first component for cementless, for LEGION at the end of this year. And that is, of course, then a multi-quarter introduction, many components on our 2 main brands, on LEGION and on JOURNEY. So the real impact will be in '22 and beyond. And we will -- of course, we are working on them providing this on the CORI platform as soon as possible. This is an integral part of our development -- of our portfolio development. On the commercial models, I would just say that we're seeing all different models in the marketplace. We have the flexibility to offer all the models from an outright sale of the robotics platform of CORI 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 CORI is going well. And when CORI 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.

And just one final M&A-related question. I really appreciate the incremental color on the M&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 ASC. So naturally in a very good position for us there. And then of course Wound 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 markets. With regard to M&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 top technology driven. We're looking at differentiation potential and then being able to leverage these tuck-ins and as you see in 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, I would say, comfortable position with a strong balance sheet.

Our next question comes from Michael Jungling from Morgan Stanley. Michael.

I have 3. On the 2021 guidance, can you comment on how close you were to raising organic sales growth guidance for 2021? And question to Roland, I think in the last quarter, I asked you a question about why you think Smiths & Nephew share prices underperformed, been 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 one to own. And then thirdly, on the divisions, do you think one of them, whether it's Ortho, Endo or Wound are underappreciated by the market? And do you think it would be sensible to perhaps list one of them and spin out separately with Smith & 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 your spinning out one of the divisions that may be the most underappreciated?

Michael, you bring 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 like 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'd probably have to throw that question back at you or 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 & Nephew. And I think 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 is an attractive business, and Sports Medicine is where we really differentiate. We have a great beachhead there. I think it'll continue to service very well as the markets in general, both in Orthopaedics 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 is always 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.

Our next question comes from Hassan Al-Wakeel from Barclays.

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 CORI 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, Hassan. Let me start with the demand side, and then I'll go on to CORI 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 health care 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 health care 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 a further recovery. We, at the same time, with the patterns that we're seeing, with the variant, with the slow rollout of vaccine, with -- and some challenges in emerging markets, of course, we don't expect a full recovery. But it will be a gradual recovery. That's compared and that we've seen, and there's no reason to…

I wonder if I could just follow up on the CORI point and really how adoption rates are 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 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 been given from our customers and from adopters and users.

Our next question comes from David Adlington from JPMorgan.

Questions. So again, 1 on revenues, 1 on margins. So on the revenues, Roland, sort of pick you up on your comment earlier where you said got tough comps in the second half. I mean you're down 4% in the third quarter and down to 7% in the fourth. So just trying to square that circle to your another commentary about 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 your 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 '19. And I just wanted to sort of try and square that circle in terms of the cost pressures or whatever else we're seeing.

Very good. Thanks, David. I'll start with revenues and then maybe Anne-Francoise 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 better 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 third quarter of last year. That's why 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 emerging 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 first quarter. So that's why we made the comments that we made. But again, very confident that we'll hit that guidance.

So 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&A as well as the higher inflation by 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, gross margin is about 40 basis points from memory. I think the cost inflation were offset partly by our OpEx benefit -- sorry, our program or 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 or inventory. So in a nutshell, I'd summarize what I've said, some will stay, some we will mine and offset by the activities we're currently doing.

Our next question comes from Kit Lee from Jefferies.

First one is just on Hip 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 you have probably 200 to 300 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?

Kit, just on the Hip and Knee performance. Obviously, you have a lot of variability quarter-to-quarter. So that -- 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, I think, a very good performance on the 20% growth for the half year. Yes, some of it has to do with some short-term supply issues around Orthopaedics, 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 is a good performance. And then I look at the different segments, I think we're well positioned for the third and fourth quarter.

So Kit, the question on profit margin is fair and a 17.6% trading margin in 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. But the first one is the timing of the cost. It is very different from our historical pattern, in particular in sales and marketing. As I said during the presentation, some events have been deferred, but we also see our A&P, our advertising and promotion spend increasing as we -- markets returned to growth. There's also a step-up in our R&D spend, particularly on the acquired assets. So that's the OpEx perspective with 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 cost, an impact of the China 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.

Our next question comes from Veronika Dubajova from Goldman Sachs.

I have 3, please. One, I just wanted 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. One is obviously higher cost, but the second is product availability. And especially on the second one, I would love to understand whether you think the revenues that you lost in the second quarter, are those recapturable if you look at Q3 and Q4? Or are those gone forever? And then just a confirmation that you are no longer sort of product constraint and to the extent that you're getting orders, you are able to fulfill those? So that would be kind of first question. My second question is just a quick one. There's been a little bit of debate among some of your peers around sort of the dynamics in the third versus the fourth quarter, especially given sort of maybe unusually pronounced summer vacation seasonality. I don't know, Roland, if you're willing to comment though on what you're seeing in July and August and how you're thinking about maybe the timing of the ongoing recovery that you expect between those 2 quarters on the elective side. And then my last question is a question on ASCs. I know you've kind of talked about this as a big competitive advantage for Smith & 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-Francoise, 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 be great to understand how that flows through the P&L.

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 hub 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. And you will -- 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…

That's really helpful, Roland. Can I just circle back to the supply constraints. When do you think you will no longer be supply constrained? Is that a third quarter event or a fourth 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. It is, of course, the freight and logistics piece and then there is the in-house labor piece. We have onboarded many of those operators now. We're onboarding 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.

Let me just add, Veronika, for clarity. We've confirmed 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.

That was our final question. So today's Q&A session has come to an end. So I'll hand the call back over to Roland and Anne-Francoise for any closing remarks.

Well, thank you, operator. Thank you all for your interest in Smith & Nephew. Thanks for your questions. Wish you a great day ahead.