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Smith & Nephew PLC (NYSE:SNN)
Q3 2021 Earnings Call
Nov 4, 2021, 4:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Certain statements in this presentation are forward-looking statements. These statements are based on management's current expectations and are subject to uncertainty and changes in circumstances. Actual results may differ materially from those included in those statements due to a variety of factors. More information about these factors is contained in the company's filings with the Securities and Exchange Commission.

I'll now hand you over to our host Roland Diggelmann, Chief Executive Officer; and Anne-Francoise Nesmes, Chief Financial Officer. Roland, please go ahead. Thank you.

Roland Diggelmann -- Chief Executive Officer

Thank you, operator, and good morning, everyone. Welcome to Smith & Nephew's Third Quarter Call. With me on the call is Chief Financial Officer, Anne-Francoise Nesmes. The third quarter was obviously still affected by resurgence of COVID infections in the United States. When we do lose that effect, the majority of our portfolio is performing very well. There are challenges in Orthopaedics, and we're working through this, and we've announced further steps today to enhance our positioning. Now there are a few points I'd like you to take away from today.

Firstly, two of our three franchises are above pre-COVID level and growing well. Around 60% of our revenue now comes from the Sports Medicine and Advanced Wound Management, and they're showing the performance that comes from both innovation and good execution.

Secondly, we know there are still issues in Orthopaedics, but we're addressing them. We've announced the launch of our new cementless knee, filling a major product gap, and we're working through the supply chain challenges.

And thirdly, we've taken a strategic step to strengthen our commercial model. Our Orthopaedics and Sports Medicine franchises will now be under a single leader. This aligns with some of the important growth opportunities in the market, namely a trend to decentralization and specialization and will better leverage Smith & Nephew's strength. I will cover those changes shortly.

But first, Anne-Francoise will take you through the details of the quarter. Over to you, Anne-Francoise.

Anne-Francoise Nesmes -- Chief Financial Officer & Executive Director

Good morning, everyone, and thank you, Roland. I will start with an overview of the third quarter. The revenue in the quarter was $1.3 billion, with 5.5% reported growth and 2.3% underlying growth. The number of trading days was unchanged versus prior year, which is different from Q1 and Q2, which had additional days. You can see on Slide four, our growth rate versus 2020 by franchise and regions.

The Advanced Wound Management was the fastest-growing franchise at 10.9%, and we also recorded positive year-on-year growth for both Emerging Markets and the Other Established Markets. The growth rates reflect in part differences in the prior year comparators.

For example, you may recall that the U.S. had returned to growth ahead of other regions in Q3 2020. Of course, the comparison to 2019 is more helpful, and you will find more details in our release. In the U.S., procedure volumes were impacted from August by outbreaks of the Delta variants, particularly in joint replacement. Increased COVID hospitalizations and healthcare staff shortages resulted in lower elective procedure volume. And growth versus 2019 was therefore slower than in quarters one and two, although it was improving as we exited the quarter despite the supply chain challenges.

Our business outside of the U.S., which represents around half of our revenue, continued to recover and move closer to pre-COVID levels. Europe accelerated and in Emerging Markets, India and Latin America returned to growth over 2019. And looking specifically at China, sales remained above 2019 with healthy end-market growth. However, as in previous quarters, our growth was still impacted by channel adjustments ahead of VBP implementation. The detailed financial planning and negotiations for implementation are still ongoing.

I'll now move on to the detail by franchise, starting with Orthopaedics on Slide five. The decline of 5.9% reflected the headwinds of the Delta variants in the U.S., the supply constraints we flagged to you in July and the channel adjustments ahead of VBP in China. The supply constraints meant we could not fully benefit from the Knee and Hip market rebound outside of the U.S., which you see reflected in the quarter's growth rate. We have a number of actions to address the challenges, and Roland will cover these shortly.

In Other Reconstruction, the launch of CORI continued with the European launch event held in August. And Trauma & Extremities declined by 4.2%. This segment now includes a U.S. Extremities business, which are more -- which is a more elective line. In Sports Medicine, joint repair grew by 9.5% even with the quarter impacted by Delta in the U.S. Recent launches of FAST-FIX FLEX and HEALICOIL KNOTLESS are both performing ahead of our plan, and it's encouraging to see knee repair recovering to close to pre-COVID level.

In AET, we announced the launch of the WEREWOLF FASTSEAL wand, which seals blood vessels during procedures such as total joint replacements. Importantly, the new wand bring our leading radio frequency technology from sports medicine to an orthopedic surgery application. This is an example of the portfolio leverage opportunities between our sports and orthopedic businesses, which Roland will cover more in a moment.

In ENT, growth was mainly driven by our tonsil and adenoid business in Asia Pacific region, and procedure volumes in the U.S. and Europe are still recovering. We are starting to see signs of an increase in the number of the infections in the U.S. as more children return to school, and we're expecting increased demand for tympanostomy procedures to follow and to drive demand for Tula.

In the Advanced Wound Management, we delivered above-market growth. And the strong performance of the franchise has been across the regions and across the brands in recent quarters, reflecting the broad-based improvement in commercial execution. In Advanced Wound Care, the acceleration in Europe continues, and the U.S. reached double-digit growth over 2019. Bioactives growth was largely driven by SANTYL in the quarter with lower surgical procedures in the U.S. affecting [Indecipherable] volume.

And finally, Advanced Wound Devices benefited from a market expansion strategy for PICO and continued share gains and hospital conversions for RENASYS in the U.S. We are pleased to see the performance of this franchise transform over the last two years. I'll finish with the outlook. You'll recall that in July, we reiterated our 2021 guidance of 10% to 13% underlying revenue growth and a trading margin of 18% to 19%. With three quarters of the year now gone, we are in a position to be more specific. We now expect both underlying revenue growth and the trading margin to be at the low end of the guidance ranges.

This reflects the revenue impact of the Delta variant on surgery volumes in Q3, which we expect to improve in Q4, the ongoing supply constraints and the margin impact of higher-cost inflation, partially offset by discretionary cost control. Clearly, the guidance implies a lower underlying growth rate in the fourth quarter than in the first nine months of the year. This is mostly due to the fact that there are four fewer trading days than in the fourth quarter of 2020.

And with that, I'll hand over to Roland.

Roland Diggelmann -- Chief Executive Officer

Thank you, Anne-Francoise. So when I look at the balance of the portfolio, there are clearly more positives than negatives. And this slide shows the contribution of each part of the business to our growth so far this year, and it compares to 2019. Sports Medicine and Advanced Wound Management are above their pre-COVID levels, which is great.

We're very confident that we'll continue to outperform. ENT is still a drag on growth, but that's largely a market effect, and it's starting to move in the right direction. Then the combination of commercial execution, innovation and also value-creating M&A is really delivering this profitable acceleration that we want.

In Orthopaedics, we aren't there yet, with Knees continuing to be the main headwind. Some of the difference in the market, joint replacement has proven more sensitive to the fluctuations of the COVID pandemic. And then we have VBP in China, which is an additional headwind, that's specific to the franchise. More optimistically, some new growth drivers are still in the early days of delivery, such as the rollout of CORI and the entry into the Extremities segment and then, of course, the launch of our cementless knee.

However, there's still execution factors that need to improve, and I'd like to talk about the actions we're taking to address this. So on the next page, first, we're attacking the supply chain challenges. We've made really good progress on the factors that are in our hands. Importantly, I've also appointed a new Head of Operations with direct experience in our markets who is leading the response, and he has a particular expertise in orthopedics. We felt these primarily in Orthopaedics indeed, although some aspects are also affecting other categories. So the initial challenge was of product supply from Memphis, which is our main global orthopedics facility.

The combination of our tight national labor market and specific local competition for people had created some temporary staffing shortages. That's improving now. We've significantly stepped up recruitment and retention with hiring fairs and additional incentives. Training and ramp-up of the new staff to full productivity takes a bit of time, but that's well underway.

Then the second challenge was around disruption to logistics to actually moving finished products around the market. This has also improved, although some bumpiness remains from global freight availability. IT system improvements are helping here, and we're in the process of moving to a specialized logistics partner in the U.S. as to doing that in Europe as well.

And then finally, and I think it's been widely reported, there are increase in global shortages and inflation in some raw materials and components, in particular, in electronics. These shortages are likely to persist for a while, but we're taking action to mitigate the impact. We've engaged with suppliers to understand the new lead times. We've adjusted our production schedules and ERP systems to work with that. And we're also looking in a broader context to protect supply by seeking prioritization for medical applications.

So in summary, I'm very confident in the team and in this plan. Secondly, moving to the next slide, we're strengthening our commercial model. As we slowly come out of COVID pandemic, I believe it's the right moment to make a change. And I've been thinking about this for some time. I've taken the decision to bring our Orthopaedic and Sports Medicine franchise together under a single leader. This change applies to our global marketing and to the U.S. commercial teams.

The changing customer and market dynamics have created new high-growth opportunities for us, and the new structure will leverage our leadership in Sports Medicine and our broad Orthopaedics portfolio and I believe position us to go after these targets more effectively. Just a couple of examples here. We know that care is becoming more decentralized.

I think this has been widely reported. More orthopedic procedures are moving to the ASCs or to outpatient settings. And we've seen that COVID has actually accelerated that. Our Sports Medicine franchise already has deep relationships with the centers that are starting to place hip and knees.

Then in Orthopaedics, we also see further specialization. Foot and ankle surgeons specialized in bone -- in both bone and arthroscopic repair. That gives us another opportunity. And then also on capital equipment, we can take more of an integrated approach to selling our digital surgical portfolio, including CORI and the updated arthroscopic tower. When the two sales forces work together to pursue opportunities like these, having both franchises under the same leadership will enable greater coordination, but also a more unified incentivization.

Enabling this combined surgical business will be led by our President of Sports Medicine & ENT, who has taken that franchise with strong profitable growth and leadership in many categories. As some of you know, Brad Cannon has been with us for nine years and previously successfully led Europe and also global marketing and also orthopedic -- has broad orthopedic experience.

Under his leadership, I expect the team to drive strong commercial excellence throughout and also identify efficiency over time. Now we've addressed the a large gap in our Orthopaedics portfolio, and I'm very pleased to announce that the launch of our cementless knee option is now underway. The first U.S. surgery with LEGION CONCELOC were performed in October successfully.

The CONCELOC technology uses 3D printing of titanium to generate a network of porous where initial bone fixation occurs, as you can see on the right side of the slide. This technology is already proven in use in hips with our REDAPT revision system. We're now bringing it to knees for the first time. Now this is just the initial step. We'll continue to develop the family of products. We plan to add the cementless implant to CORI, our next-generation robotic surgery system, in 2022. We're also working on bringing cementless to other parts of our Knee portfolio, of course, and we're initiating clinical studies to seek approval in other regions of the world.

In commercial terms, adding cementless gives us access to a key segment, more than $400 million in value in the U.S. and growing faster than the rest of the Knee market, growing at a double-digit rate, actually. Also, by filling the one gap in our offering, it better positions us to pursue new businesses with the portfolio as a whole. And on top of the organizational changes, this launch is really an important step in returning to -- the Knee business to market growth.

We expect the benefits to be visible in 2022. So in summary and looking at 2021 after nine months, I'm delighted by the performance of the Sports Medicine and the Advanced Wound Management franchises, which together are around 60% of our total business. We're showing that we can drive strong and profitable growth when we bring consistent commercial execution together with internal innovation and high-quality acquisitions. And I'm confident that this will continue. Turning to Orthopaedics. The supply chain challenges have been disappointing, of course. We've made good progress here on addressing the issues under our control, and there's more work to be done. And there's new operations leadership team is now fully engaged. The decision to strengthen our commercial model is something that I've been reflecting on for some time. It is playing to our strength. And with our end-market recovery, now is the right moment to make that change. This, I believe, is the right strategy to return to above-market growth.

On innovation, and I can't say this enough, I'm really excited about our pipeline. Starting to roll out cementless knee is an important milestone, of course, and there's more to follow across all the franchises. Finally, we look forward to talking more about the topics we've highlighted today and what we're doing to win in each part of the business. We have a Meet the Management event scheduled for December 16 and looking forward to engaging more with you then.

And with that, I'd be happy to take your questions now. Thank you.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question today comes in from Tom Jones of Berenberg. Tom, your line is open. Please go ahead with your question. Thank you.

Tom Jones -- Berenberg -- Analyst

Good morning. Thanks for taking my questions. I'll keep it to just two. The first thing, I just wanted to clarify on your kind of expected performance in Q4. Obviously, with you having done 14% growth in the first nine months and guiding to 10% for the full year implies quite some significant deceleration in Q4, maybe even just slightly more than the four selling days would account for. So I just wanted to make sure there was nothing beyond comp effects and the selling days that gives you any cause for concern across any of your franchises that would lead you to expect, perhaps looked out on an average daily sales basis, a deceleration in Q4 versus Q3.

And then the second question was just on the sort of logistics and raw material issues that are affecting your business. To what extent do you think these are things that are affecting everybody, and therefore, just the market that is kind of being restrained? Or are there some areas where you think you're being disproportionately impacted by these issues, and perhaps as a result, losing a little bit of share? I'm just trying to kind of tease out whether it's something that's affecting everybody equally, and therefore, unwind as and when these issues resolve. Or is this something specific to Smith & Nephew that, unfortunately, is affecting you disproportionately?

Roland Diggelmann -- Chief Executive Officer

Thank you, Tom. Thanks for your question. On quarter 4, I can make it very short. This is the four selling days. There's nothing else. Everything else we factored in. And we've also mentioned, obviously, there is the COVID variant, the Delta variant. There is the VBP in China. But as I said, everything is factored in. So nothing that we haven't covered. --

Tom Jones -- Berenberg -- Analyst

Okay.

Roland Diggelmann -- Chief Executive Officer

On the logistics question, I'll just give you a couple of examples of some of the raw material shortages that we're seeing. It's the resin, it's silicon, it's electronic components, it's some of the circuit boards, it's -- I think it's been widely reported. I can't speak for our competitors, but I would expect that they're seeing the same. Whether they're seeing it in the same context and with the same rigor, I cannot comment on. But these are mainly the areas where we're seeing global supply challenges, and we're seeing those also across different industries. So it didn't come as a surprise.

We're going -- we're very close with our suppliers and with the sub-suppliers. We're really trying to get ahead of this and looking at the lead times, factoring this into our manufacturing plans to try to absorb this.

Typically, we're small buyers in the big scheme of broader industries of these raw materials. We typically also have an ability to pay. So I think we're in good shape here in the broader context. We're also looking to seek for a priority for medical applications and medical products as an industry and as an individual company for raw materials shortages to be actually then prioritized to the medical device industry. So there's a lot going on here, quite a few moving parts.

Tom Jones -- Berenberg -- Analyst

Yes. Perfect. And maybe just a follow-up on the raw material side. If you had to kind of try and split the impact of the challenges you're seeing, how much of it is kind of a price effect? And how much of it is just simply is unavailable? And it doesn't matter what you pay, you can't get a hold of it.

Roland Diggelmann -- Chief Executive Officer

Yes. That's a good question, Tom. And I think you will appreciate that this is -- of course, these are moving targets. Initially, when there is a shortage, what you do is you pay for, you pay more. And then there are some elements where literally there is a bigger shortage and -- when raw material has to be allocated. So this is moving. I think we're going to see this for quite some time until the global supply chains actually ease again. But I believe, overall, we have a relatively good handle over this because we have -- as you would expect, we have long-lasting suppliers. They all need to be qualified and validated. So we know very well what the sources are.

Tom Jones -- Berenberg -- Analyst

Yes. And maybe just one final question on this before I get back in the queue, pricing. It's been -- I think the general message is that there's not much you can do on the pricing side. But is that starting to change at all? Or are there any areas of your business where you have been able to feed these cost pressures through into higher prices?

Roland Diggelmann -- Chief Executive Officer

Well, we've seen -- of course, we're seeing some inflation on the materials and on freight. On pricing, we haven't seen more to announce pricing pressure in this period. I think we -- what we're seeing, of course, now is that some of our customers, of course, are also affected based on supply issues. So I think price becomes actually the smaller part, and it's really availability that we had into the center of the discussion.

Tom Jones -- Berenberg -- Analyst

Okay. That is it. That is very helpful. Okay, back in the queue. Thanks very much.

Roland Diggelmann -- Chief Executive Officer

Thank you. Thank you, Tom.

Operator

The second question of today comes from Lisa Clive of Bernstein. Lisa, your line is open. Please go ahead. Thank you.

Lisa Clive -- Bernstein -- Analyst

Hey. Thanks. I just wanted to start with a question about very specific behaviors of U.S. surgeons. So given my understanding of surgeon, their practice patterns, they tend to be very loyal to their main manufacturer. So since you haven't had a cementless product in market, what have your lead surgeons been doing? Have they been using another manufacturer for that segment of their knee procedures? Have they been sticking with traditional cemented needs more than their peers? I'm just trying to understand whether this launch will lead to, I guess, regaining volumes so we can see some incremental volume growth versus the past year or two year or whether you just may benefit from the higher ASP of cementless models.

Roland Diggelmann -- Chief Executive Officer

Thank you for the question. Sorry, I missed the name. The line was a little bit blurred there. But now what we've seen so far in our customer base, some customers continue to use our products, and they just use the cemented option. They do this because they're very familiar with the product and the surgical technique and everything, and they like the products and the features. Some that then use cementless knees from competitors. And I think that's both where we see the opportunities going forward. We have two very well-established brands in the market in the U.S. with LEGION and JOURNEY II, both with cemented options only.

And as we move into cementless, that will give those surgeons the option to use cementless on the same known brand with the same product philosophy and surgical technique. And then in addition, it will allow us to actually compete in the cementless market, which we're not competing today, and that has prevented us from approaching some larger centers who would not take a system on board that doesn't offer both options. So we see opportunities with existing customers, and we see opportunities with new customers.

Lisa Clive -- Bernstein -- Analyst

Okay. And then just a follow-up. As we've seen the resurgence of cementless, I'm trying to understand sort of how to layer in the adoption of robotic surgeries versus the adoption of cementless. Are they sort of separate from one another? Or is most of the cementless use happening in procedures that are using robotics?

Roland Diggelmann -- Chief Executive Officer

Yes, very good question, actually. I think that in a way they can be separate, but they can also go hand-in-hand. I think the cemented option does not prevent the use from CORI or robotics, of course. And of course, these systems are all proprietary. So you can only use CORI with our implants. But what we've seen is with the advent of robotics, we've also seen that shift to cementless.

And the simple reason is that cementless surgery is quicker because you don't need to wait for the bone cement to harden intra-operatively. That gives you anywhere between eight to 10 minutes in the time advantage. And that's why the cementless knees have been used more in robotics. So again, here, we see opportunities as we bring the cementless option onto CORI.

Lisa Clive -- Bernstein -- Analyst

Great. And then one more just sort of high-level question. As we think about the shift to ambulatory surgery centers that's happening in the U.S., can you explain to me sort of where the incremental volumes in the ASCs is coming from? Is it a surgeon who would have been doing a procedure in a hospital who now has some sort of relationship with an ASC and has just shifted that volume out? In which case, it's not really much of an opportunity for a sort of market share shift because I assume that surgeon would stick with their sort of core manufacturers? Or is it more surgeons who have historically worked in an ASC setting, like sports medicine doctors doing more knee procedures?

Roland Diggelmann -- Chief Executive Officer

Yes. Thank you. That's a really good question. I think it's both, actually. There's some shifts from, obviously, the standard hospital to outpatient or ASCs. This has been accelerated to COVID. As you would expect, patients prefer to go to an outpatient setting. Same-day surgery, of course, is more attractive. What you're also seeing is a shift to, I would say, the younger, the easier-to-operate patients who actually can be operated on doing -- going for same-day surgery.

And what we have seen is actually the number of procedures done in ASCs without doubling in this period of COVID. So the trend is there, will continue to persist. And then, of course, that gives opportunities to physicians to operate in ASCs. And the number of ASCs has been growing really rapidly over the last several years. I think we now have the same amount of ASCs in the U.S. as we have hospitals. And we continue to see that shift from a low base, of course. We think that for total knees, the number of knees performed in ASC is probably between 10% and 15%. But we've seen this -- as I said, we've seen this number double.

And the big advantage for us is, of course, we know those ASCs for our Sports Medicine franchise. We're calling on those. These are our core customers for sports medicine interventions. And then in addition, I think we continue to see some specialization, which is also fostered by ASCs, where physicians continue to specialize on certain procedures and market their skills, and that also leads to a further shift into the decentralized environment.

Lisa Clive -- Bernstein -- Analyst

Great. Just a last follow-up. So obviously, there's just more procedures getting done. But are you sort of -- do you think you have a higher market share today in the ASC setting versus the hospital in knee replacement specifically?

Roland Diggelmann -- Chief Executive Officer

It's probably about equal at this stage. That's why we see opportunities to better leverage this through a joint approach and really leveraging the contacts and the relationships we have through the Sports Medicine franchise. So in summary, I'd say the market share is probably about equal, maybe even a bit less because, again, the ASCs tend to favor a cementless option.

Lisa Clive -- Bernstein -- Analyst

Okay. Thanks very much.

Roland Diggelmann -- Chief Executive Officer

Thank you.

Operator

Our next question today comes from Hassan Al-Wakeel of Barclays. Hassan, your line is open. Please go ahead.

Hassan Al-Wakeel -- Barclays -- Analyst

Thank you very much. I have two questions, please. So firstly, can you provide an update on your take from the recent China tender results? Where do you expect the impact to shake out for Smith & Nephew? And what drop-through do you expect from the cuts and any offsets that you have? And then to follow up on that one, what are your expectations around further national tenders, the trauma or indeed sports med?

And then secondly, could you talk a bit about your expectations around the backlog of procedures as we look into next year? And to what extent do you think supply challenges that you face this year will restrict your ability to fully realize this demand as things stand today? Thank you.

Roland Diggelmann -- Chief Executive Officer

Thank you, Hassan. On VBP, this is all continues to be quite fresh. So we'll certainly be able to give you a more detailed update at full year. So the expectation is and what we've seen is distributors' ordering patterns change in anticipation of lower prices. So the inventories have been reduced. We think that for now, this has been to the tune of about $20 million to $30 million for us. And then a bit -- of course, what we're doing now is engaging in negotiations with the distributors on how to move the business going forward. This is ongoing. We know that the tender will -- the VBP tender will come into effect next year in March.

So we have that time to negotiate new pricing with the distributors. We're obviously also looking at our go-to-market. We will certainly make adjustments there to reduce the cost to serve the market and then take it from there. National tender, there have been regional tenders on trauma. So my expectation is that this will indeed be rolled out with a national trauma tender in the same fashion. I do not expect that for Sports for the simple reason that it is a more complex business.

There is less national competition. And it is business that is made up both by arthroscopic, by the towers, the enabling technologies and then the joint repair, so it's a more complex business. So I don't see that for Sports at this stage, and it's also a smaller business overall, which probably won't lead itself to a tender. On the backlog, obviously, the backlog is there. It's difficult to quantify because we don't have access to individual patient data, but there is different studies here that probably -- that I'd summarize as follows. I'd say in the U.S., the backlog typically gets worked on quite quickly.

The incentives are aligned. It's a for-profit market. Hospitals, physicians are making money with total joint replacement. So the backlog typically is probably worked down in maybe two to three months. We're probably seeing a longer backlog in Central European markets, probably around maybe six to nine months. It's higher in the U.K. This has been published. It's probably in excess of 12 to even 24 months in the U.K. And then it's very difficult to look into the backlog in some of the Asian markets with different patterns. Maybe just one correction, sorry, on the VBP, the impact that we've seen in the third quarter is more to the extent of $10 million. Sorry, I said $20 million to $30 million. It's more to $10 million. So I want to correct that.

Hassan Al-Wakeel -- Barclays -- Analyst

That's really helpful. And maybe just to follow up. I mean, what are the offsets that you have in China? And what drop-through should we expect from the cut to EBIT? And I guess, in this context and also in relation to the supply constraints, what are the building blocks to your mind for 2022 in terms of margins and the pushes and pulls? And to what extent should we still expect meaningful margin expansion looking into 2022 based on what you know today?

Roland Diggelmann -- Chief Executive Officer

Thank you, Hassan. On VBP, this is all continues to be quite fresh. So we'll certainly be able to give you a more detailed update at full year. So the expectation is and what we've seen is distributors' ordering patterns change in anticipation of lower prices. So the inventories have been reduced. We think that for now, this has been to the tune of about $20 million to $30 million for us. And then a bit -- of course, what we're doing now is engaging in negotiations with the distributors on how to move the business going forward. This is ongoing. We know that the tender will -- the VBP tender will come into effect next year in March.

So we have that time to negotiate new pricing with the distributors. We're obviously also looking at our go-to-market. We will certainly make adjustments there to reduce the cost to serve the market and then take it from there. National tender, there have been regional tenders on trauma. So my expectation is that this will indeed be rolled out with a national trauma tender in the same fashion. I do not expect that for Sports for the simple reason that it is a more complex business. There is less national competition. And it is business that is made up both by arthroscopic, by the towers, the enabling technologies and then the joint repair, so it's a more complex business. So I don't see that for Sports at this stage, and it's also a smaller business overall, which probably won't lead itself to a tender.

On the backlog, obviously, the backlog is there. It's difficult to quantify because we don't have access to individual patient data, but there is different studies here that probably -- that I'd summarize as follows. I'd say in the U.S., the backlog typically gets worked on quite quickly. The incentives are aligned. It's a for-profit market. Hospitals, physicians are making money with total joint replacement. So the backlog typically is probably worked down in maybe two to three months. We're probably seeing a longer backlog in Central European markets, probably around maybe six to nine months.

It's higher in the U.K. This has been published. It's probably in excess of 12 to even 24 months in the U.K. And then it's very difficult to look into the backlog in some of the Asian markets with different patterns. Maybe just one correction, sorry, on the VBP, the impact that we've seen in the third quarter is more to the extent of $10 million. Sorry, I said $20 million to $30 million. It's more to $10 million. So I want to correct that.

Hassan Al-Wakeel -- Barclays -- Analyst

That's really helpful. Thanks, Roland. And maybe just to follow up. I mean, what are the offsets that you have in China? And what drop-through should we expect from the cut to EBIT? And I guess, in this context and also in relation to the supply constraints, what are the building blocks to your mind for 2022 in terms of margins and the pushes and pulls? And to what extent should we still expect meaningful margin expansion looking into 2022 based on what you know today?

Roland Diggelmann -- Chief Executive Officer

Yes, Hassan. I'll try to answer that relative to China. So obviously, there will be a drop-through, but as I said, it's too early to quantify. We will give you more details at full year. And once we're going through to the negotiations with our distributors, I think there is quite a few moving parts there. Certainly, the distribution channels will need to be adjusted, and we're working on this. The margin for the distributors will be adjusted. Our go-to-market will change, and we'll -- that's one of the levers that we have is how we actually market and sell in the market itself. What we've previously said, I think about [Indecipherable] drop-through is truly a modeling assumption at this stage. So we'll come back with more details there. Other opportunities, of course, is further investments and shift to more in Sports, which is going very well to further build out our Wound Management franchise, which is also performing. So we have opportunities in China.

And then last but not least, of course, the potential in China continues to be very large. The volumes are expected to continue to increase over many years as access to healthcare is continuously improved and also as we continue to see an aging population, not very different from other markets, but I think that will also continue to fuel the need for, in particular, joint replacement.

Anne-Francoise Nesmes -- Chief Financial Officer & Executive Director

And I guess -- can I pick up the question on margin and -- Roland, if I may?

Roland Diggelmann -- Chief Executive Officer

Yes. Go ahead, Anne-Francoise.

Anne-Francoise Nesmes -- Chief Financial Officer & Executive Director

Hi. Hassan, so clearly, it's too early for us in the year to give 2022 guidance. But it's fair to say when you look at 2021, and we've articulated how margin is impacted. We've talked about R&D investment, which will continue. We've talked about the dilution from M&A, which you should expect to start -- starting to lessen. Of course, there's the FX, which has been a headwind until now, should turn into a tailwind. And then of course, there's, as you were talking about the -- or as we were talking about earlier in the call, the effects of inflation on raw materials. So there's quite a lot of moving parts, and we look to mitigate as much as we can.

And we can certainly look to continue to drive margin improvement year-on-year. The one thing I'd add as well to the question on when do we return to pre-COVID margin. Clearly, we need to see a normalization of many factors, demand being one, the supply chain effect, the broader macro inflation that have resulted from the pandemic. And currently, as a result of all of these, we haven't seen the operating leverage that you would expect to drive. So we will get back to pre-COVID margin, but we need to also see the normalization coming out as we come out of the pandemic.

Hassan Al-Wakeel -- Barclays -- Analyst

Very helpful. Thank you, guys.

Operator

Kyle Rose of Canaccord, you have the next question. Please go ahead. Thank you.

Kyle Rose -- Canaccord -- Analyst

Great. Thank you for taking the question. So a lot has been asked, but I wanted to touch on two areas specifically. One, maybe could you just help give us some additional commentary around CORI and what you're seeing in the market in both what you're seeing now, but then maybe talk about how you see the market evolving. I'm just trying to understand, with J&J launching their system as well, we've got all the major ortho players with a robotic system on the market. Do you see true differentiation capable of shifting share from the robotic side?

And then number two is, maybe talk a little bit in the U.S. on the wound care devices side. Are you seeing early signs of pull-through from some of the tenders on the device side into the broader wound care business? Or is that something that we can expect in the future?

Roland Diggelmann -- Chief Executive Officer

Yes. Thank you. Thanks for the question. On CORI, we've seen good continued adoption, and it's really encouraging. I think we've now also launched in EMEA, in Asia. We've had sales in India as well. So we see some good adoption with CORI. And I think, absolutely, there is differentiation potential in robotics. Now first of all, as I mentioned, these systems are all closed. So every implant system or provider has its own robotics. So that makes it an interesting approach to the market because you can argue either through implants or through robotics capabilities. And I think that offers differentiation potential.

In our case, we have a very different approach in that we have a handheld system. We have a burying approach. Most importantly, I think also this doesn't require presurgery CT. And the start-up times in the OR are actually very, very short. So altogether, we believe we have a fully differentiated solution here. And with a cementless knee option, I think we also have now an additional asset to market. So more to come. And I think it's actually a good thing that all the four big players now have their own robotic system because robotics is here to stay, and I think the differentiation is clear. We will also continue to widen the gap to the smaller players who don't have robotics on halfway.

On Wound Care, I've been really, really very pleased with the development in Wound Care in the U.S., outside the U.S., a very strong focus on execution and focus on commercial activities, an enhanced focus on larger tenders, on C-suite and some distinct wins in some IDNs. So we're seeing that coming through. Not everything has been able to come through due to the circumstances. Some of the market is still depressed, like on devices, because of the lower surgical volumes. But overall, Wound is doing very well, and we're seeing some of that pull-through happening indeed.

Operator

Our next question comes in from Veronika Dubajova of Goldman Sachs. Veronica, your line is open. Thank you.

Veronika Dubajova -- Goldman Sachs -- Analyst

Excellent. Good morning. Hi, I am [Indecipherable]. Three questions for me, please. One, I want to push you a little bit on this reorganization of Ortho and Sports Medicine. For those of us on this call who've been covering your stock for a while, I remember that's how the business is structured. And actually, the decision was taken four, five years ago to undo that, which actually seemed to drive some improved performance in the business at the time. So I'm kind of curious why you are going back to that old structure and how you're thinking about the risks of disruption over the next 12 months or so as you integrate -- reintegrate the two businesses together? And if you can also just confirm that Skip Kiil is leaving, that would be great. So that's my first question.

My second question is to push you a little bit on the Ortho performance. Appreciate, obviously, the market softened. But if I look again, your performance comp-adjusted relative to where Stryker and J&J have reported, you are losing market share pretty substantially in all segments of Hips and Knees except for U.S. Hips. If you can maybe break out for us what impact do you think within that the supply issues have versus underlying momentum, that would be helpful. And just maybe a quick thought on why you think the Hip performance outside of the U.S. is still poor relative to what everyone else has reported?

And then my last question is just on VBP you're pulling back. I appreciate you guys are still trying to figure out the pricing dynamic, but maybe a quick comment on where you think your volume market share will settle out. Because from the data that we see, it looks like you have actually lost some volume share through the tendering process. So if you can confirm that or if I'm doing something incorrectly on that, let me know. Thank you.

Roland Diggelmann -- Chief Executive Officer

Thank you, Veronika. On the -- let me start with the reorg. I think you're absolutely right. There used to be a time when this goes together. I think the markets have evolved, the markets have changed. We continue to see that trend to decentralization that I mentioned, and it has actually accelerated quite remarkably through the pandemic. I don't think it will go back. If you talk to big healthcare systems, it's all about managing the patients in the appropriate setting. And whatever can be done in a decentralized setting will be done in a decentralized setting. I think there's also been big advancements in surgical techniques, improvements around the surgical procedures, smaller incisions, shorter lengths of stay, same-day surgery and then also improvements on the materials.

So altogether, I think joint replacement is now firmly moving into an outpatient or even the same-day setting. And I think that's one of the main reasons. We also see the specialization. And of course, that is different in different markets. But certain specialization, of course, happens around foot and ankle, around knees, around shoulders, where you see services performing only these surgeries in this anatomy but then across the different options, so doing ACL as well as the knee replacement. And so again, that also lends itself to a special address. And I think we have a great opportunity here because we are a very strong player in sports because we are calling on to the ASCs in the U.S.

Now I'd also make clear that this doesn't mean that we're combining the sales forces where there doesn't need to be. So I think the disruption will be actually very minimal, if none. It's really aligning where we can and providing common incentives, align on how we address common surgeons and common customers. On where the customers are still distinctly different, we will continue to run separate sales forces. Yes, Skip is leaving, that's correct. He has decided to pursue an opportunity outside of Smith & Nephew. And at this stage, I also wanted to thank him for his contribution in the last three years and really driving very different momentum through Orthopaedics.

The Orthopaedics performance in the quarter, I think it was a softer performance in the quarter. You're absolutely right. I would say Knees, what we see is -- what we've mentioned, no new issue. It's the cementless knee gap with a faster growth in that subsegment of cementless, where we, until today, have not been able to play. So that has cost us market share. On Hips outside the U.S., it is mainly a supply issue that we haven't been able to supply our customers as we wanted. So it's a mixed impact, and I would say probably half-half is portfolio and half is supply. Finally, on VBP...

Anne-Francoise Nesmes -- Chief Financial Officer & Executive Director

Sorry, if I may chip in here, Roland, just to quantify a little bit the supply impact. And please, that's not precise science and to build on volumes come in half and half. It's not a precise science. It's an estimate to the best that we can. We do believe the supply headwind was around $20 million to $30 million. And as Roland said, affected out from the U.S. particularly. So that's our ballpark assumption. Sorry to interrupt, Roland.

Roland Diggelmann -- Chief Executive Officer

No, no, not at all. Thank you, Anne-Francoise. Third question around VBP and the volumes, we have been awarded the volumes that we were expecting. I haven't seen this to be less than before. Now of course, we also have to think of these volumes as, in a way, a right to play. This has now been -- we've all been, in a way, validated as vendors, those who have been awarded the VBP tenders. And I think the volumes have yet to then shake out. But we look at this as minimum volumes and to the expectations that we've had prior. I don't see our volumes dropping through the VBP.

Veronika Dubajova -- Goldman Sachs -- Analyst

That's -- That's really helpful. And can I just quickly follow up, Roland, on the Knee sort of cementless issue? Obviously, that will be a huge help in the U.S., but not necessarily in the OUS what do you think you need to do outside of the U.S. to improve the Knee momentum? Or is that really just a supply issue? And as that resolves, do you think your OUS Knees momentum will also improve?

Roland Diggelmann -- Chief Executive Officer

Yes. I think it's a combination of two. I think we will have opportunities with cementless. But indeed, the trend to cementless is more pronounced in the U.S., and the pricing differential is also higher in the U.S. from cementless to cemented than, in particular, in Europe. But the option to have cementless will, of course, help us in Europe, especially around large centers and large public healthcare systems. Then supply, of course, is an element and that will help, and we need to get that right. And finally, we'll also be supported by the further rollout of CORI and the entire robotics platform because, of course, predominantly, this is being used for knees injury.

Veronika Dubajova -- Goldman Sachs -- Analyst

Got it. Thank you, both.

Roland Diggelmann -- Chief Executive Officer

Thank you, Veronica.

Operator

Our final question on the line comes from David Adlington of JPMorgan. David, your line is open. Please go ahead. Thank you.

David Adlington -- JPMorgan -- Analyst

Good morning. Thank you. Most of my questions have been answered, but maybe I'll just push it a little bit further. I know you don't want to give a lot of color around next year. But just maybe high level, you've got an 18% base from this year. And I think historically, you pointed toward FX tailwind for next year to 40 to 50 basis points. The first question, does that 40 to 50 basis points tailwind still stand where we are today?

And then, Anne-Francoise, you mentioned it, but you've pointed toward a return to low-20s margins if you get back to sort of 2019 volumes. I think we'll be there next year. Maybe you -- some high-level comments about whether you think you will be there next year or not? And even with the VBP, do you still think that stands, that sort of low-20s margin with those sort of volumes? Thank you.

Anne-Francoise Nesmes -- Chief Financial Officer & Executive Director

So I think the first question, you're right to say we're not giving guidance on 2022 yet. It's not our practice. And to reiterate what I said earlier, we -- there's quite a few moving pieces for next year in terms of the macroeconomic environment, the inflation pressures everybody is seeing, the supply -- the global supply challenges, which we look to offset. So what I said is you should expect to see continued margin improvement year-on-year, but we will not be back to pre-COVID levels. And in terms of getting back to pre-COVID levels, it's really dependent -- it's no longer a story of just getting back to volume.

The economy, the world has been significantly disrupted. So I think we all say, it's not just about the demand levels, it's also the normalization of trading conditions. And what will happen to inflationary pressure, we need to adapt our model as well to VBP, to your point. So there's a few moving pieces in terms of return to pre-COVID level, which remains our ambition, but we need to see some normalization and offset some of the pressures we see today. And then finally, in terms of the effect tailwind for next year. At this stage, it is softening slightly and probably looking a little less, but more to come on that.

David Adlington -- JPMorgan -- Analyst

Perfect. And maybe just one quick follow-up. I mean on the supply chain issue, if demand does come back, will your supply chain resolve quickly enough, do you think, in order to be able to meet that increased demand?

Anne-Francoise Nesmes -- Chief Financial Officer & Executive Director

So as we've outlined in the presentation, the -- there's almost three components to the supply chain issue, there was a labor, which Roland articulated -- the labor inventory, sorry, to be more precise, which Roland articulated. We're improving. We're making progress. There was our own sort of network distribution logistics which we're improving.

And therefore, the third component is raw material challenges, disruption to the supply chain. And that's a little bit harder to anticipate and forecast. Those impacts the global supply chain for many companies, and that's the one way it is hard to have a view. And as we articulated, we're working with our suppliers. We've bedded those in terms of our production planning, so it should adjust over time with some of that. We are doing what we can that is in our control in terms of working on suppliers, but there's an element that we cannot, unfortunately, decide.

David Adlington -- JPMorgan -- Analyst

Okay. Great. Thank you.

Anne-Francoise Nesmes -- Chief Financial Officer & Executive Director

[Indecipherable] for me.

Operator

[Operator Instructions]. We currently have no questions on the line, so I hand back over to the team for closing remarks. Thank you.

Roland Diggelmann -- Chief Executive Officer

Thank you, operator. And thank you, everyone, for dialing in. Thank you for your questions, and I wish you all the best, and we'll be in touch soon. Hopefully, we'll hear and see you all around our Meet the Management Day, December 16. Thank you very much.

Operator

[Operator Closing Remarks].

Duration: 56 minutes

Call participants:

Roland Diggelmann -- Chief Executive Officer

Anne-Francoise Nesmes -- Chief Financial Officer & Executive Director

Tom Jones -- Berenberg -- Analyst

Lisa Clive -- Bernstein -- Analyst

Hassan Al-Wakeel -- Barclays -- Analyst

Kyle Rose -- Canaccord -- Analyst

Veronika Dubajova -- Goldman Sachs -- Analyst

David Adlington -- JPMorgan -- Analyst

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