Colfax Corporation

Good day, and thank you for standing by. And welcome to the Colflex first quarter 2021 earnings call. At this time, all participant lines are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star, followed by the number one on your telephone keypad. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Mike Lasik. Please go ahead.

Good morning, everyone, and thank you for joining us. I'm Mike Masick, Vice President of Finance. Joining me on the call today are Matt Trelatola, President and CEO, and Chris Hicks, Executive Vice President and CFO. Our earnings release was issued this morning and is available in the Investors section of our website, colfaxcorp.com. We will be using a slide presentation to walk you through today's call, which can also be found on our website. Both the audio and the slide presentation of this call will be archived on the website later today. and will be available until the next quarterly earnings call. During this call, we'll be making some forward-looking statements about our beliefs and estimates regarding future events and results. These forward-looking statements are subject to risk and uncertainties, including those set forth in a safe, arbitrary language in today's earnings release and in our findings with the SEC. Actual results might differ materially from any forward-looking statements that we make today, The forward-looking statements speak only as of today, and we do not assume any obligation or intend to update them, except as required by law. With respect to any non-GAAP financial measures made during the call today, the company reconciliation information related to those measures can be found in our earnings press release and in today's slide presentation. With that, let me turn it over to Matt, who will start on slide three.

Thanks, Mike. Welcome, everyone, and thanks for joining our call today. As many of you know, we've had a very active quarter and we've made significant operating and strategic progress. We announced our intent to separate into two companies, complete an equity offering, and finalize several key acquisitions. I'm also pleased to report better than expected results in Q1 that sets us up for a great year ahead. Building off the momentum we have in each of our businesses, we delivered strong organic sales per day growth of 9% in Q1. As a reminder, Q1 2020 included several extra selling days, resulting in approximately a 5% headwind in our reported sales numbers. Despite this and continued challenges from COVID, we delivered adjusted EPS growth of 16% to 44 cents per share and above our guidance range of 35 to 40 cents per share. We also posted another strong quarter of free cash flow, continuing the improvements we saw last year. Our results and momentum strengthened throughout the quarter as we benefited from improving market conditions in both of our businesses. In early March, we announced our intention to separate into two independent, publicly traded companies with a target completion date of the first quarter of 2022. This separation will create a global leader in fabrication technology and a specialty medtech innovator. Both companies with tremendous focus, momentum, and opportunities. This decision is a result of a thorough strategic review undertaken by the board with management, and it reflects our ongoing commitment to create long-term value for all stakeholders. We're confident that the separation will position both companies for maximum flexibility for long-term growth and value creation. We successfully strengthened our balance sheet in March by completing an equity offering. This gives us continued flexibility to execute on our discipline strategy-driven acquisition process, while staying on the path to set both new companies up with strong balance sheets. Earlier this week, we announced another strategic acquisition for our MedTech business, which I'll touch on in more detail in a moment. Our pipeline of opportunities remains robust, and we expect to complete more this year. As you can see, we remain focused on executing our proven strategy for compounding value creation. Slide four dives into our MedTech business performance this quarter. Q1 core daily sales increased a bit over 5% year over year. Sales rates improved each month, helped by the ongoing rollout of the vaccine and loosening of COVID-related restrictions in many areas. Elective procedures accelerated through the quarter, contributing to recon double-digit growth in March and first quarter daily sales growth of 8%. with particular strength in shoulders and hips. We continued to outperform the market in our recon business across the portfolio. Profession and recovery growth was almost 5% in the quarter, also strong performance versus market indicators. All-in reported growth for the quarter was 7%, with our recent acquisitions contributing 5%. Adjusted EBITDA increased $3 million in the quarter to the $48 million and margins increased to 15.5%. Excluding our recent acquisitions, EBITDA margins increased 60 basis points year over year. Adjusted EBITDA margins were also up slightly in the quarter when excluding acquisitions. This puts us right on track versus the guidance we provided in Investor Day for MedTech EBITDA margins for the year. We expect the sequential improvement in market conditions to continue as we progress through the year. We continue to expect a strong sales recovery versus 2020 in line with our prior guidance levels of 14% to 16% organic growth for the year. Slide 5 highlights our April acquisition of MedShape, a great strategic fit in our growing foot and ankle business. As we've shared previously, the U.S. foot and ankle surgery segment is more than a billion dollars and grows high single digits. MedShape provides innovative and clinically differentiated solutions to foot and ankle surgeons using its patented technology based on super elastic alloys and polymers. On the slide, we show their breakthrough Dynanel product that has reshaped hind foot fixation. The superlastic properties of nitinol, a nickel-titanium alloy, are applied in the dynomail and many other med-shaped devices to create surgical solutions that actively participate in bone healing. Their products, which include devices for fracture fixation, joint fusion, and soft tissue injury repair, complement our existing portfolio, strengthening our value proposition to surgeons and our channels. Similar to our trillion acquisition earlier in Q1, MedShape's growth and gross margins are accreted to our recon business and will drive EBITDA margin accretion by year three. MedShape has grown almost 30% CAGR organically over the past five years. We're very excited to add their talented team and groundbreaking product portfolio to our MedTech business. Although our new foot and ankle business has come together quickly, over the past four to five months. It's been part of our strategy ever since we acquired DJL. We have a very disciplined acquisition process rooted in our business strategy and focus on value creation. MedShade complements our recent acquisitions of the Star Total Angle Replacement System and Trillium Surgical to form a very strong foundation which strengthens our leadership in extremities. We've invested $225 million to build a high-growth, high-gross margin platform that will accelerate the overall growth of the company. This business starts with annual revenues of approximately $65 million and is expected to grow rapidly to $100 million by year three, along with accretive EBITDA margins. Turning to Fabtech on slide seven. We had a very strong quarter at ESOP with sales per day growth of 11% and a record adjusted even day margins. Our emerging market regions grew sharply and most regions continue to show strong sequential improvement. Most product lines achieved solid growth in the quarter, highlighted by equipment and specialty gas control sales. All land reported sales increased 8%. Inflation drove significant increases in raw material costs during the quarter, which we effectively managed by passing along higher prices to our customers. For the quarter, prices increased 4%. We continue to expect a dynamic environment for the next few quarters and plan to use our proven processes to mitigate any earnings impact. Chris will touch on our pricing expectations for the year in a few moments. Q1 adjusted EBITDA margins. of 16.1% is an all-time high. The team continues to execute with excellence, effectively using CDS, innovation, and targeted restructuring efforts to drive improvements in the business. Slide 8 highlights some of ESOP's new products and innovation efforts. As we discussed in our investor day in March, this business has a great innovation engine that supports high product vitality and continuous share gain. The first quarter was no exception. We launched the Rogue ET, a high-performance portable machine for stick and tape welding with unique ESOP industrial design and welding performance DNA. We also expanded our robust feed offering with ABS, which adds the ability for customers to be able to connect our products to non-ESOP welders. We're very proud that the robust feed wire feeder has received the highly coveted Red Dot Award for product design in 2021. RobustFeed was designed for portability, durability, and productivity. It is the only portable feeder with IP44 protection class rating. In the first quarter, we added to our digital solutions offering with WeldCloud Fleet document management software that helps customers more efficiently manage their fleets of welding equipment. And we acquired Octopus OLP software, which specializes in offline robot programming. This user-friendly offline programming capability is critical to support penetration of robotic welding into the next wave of industrial applications. As I said earlier, we've made a tremendous amount of progress this quarter. Before I turn it over to Chris, I want to say thank you to our global team. I'm extremely proud of our team for the strong start to the year as we build momentum towards a great 2021 and an exciting future as two very strong and valuable companies. With that, I'll turn it over to Chris. We'll start on slide nine. Thanks, Matt. At our investor day last month, we highlighted our positive momentum and the opportunity to perform at the top end or even above our first quarter expectations. That revenue momentum did, in fact, continue through the end of the quarter, largely as a result of better industrial demand and an increased number of elective surgeries, and we delivered above our EPS guidance range. For the full quarter, sales grew 8% year-over-year despite 5% fewer selling days. Sales per day increased 9%, and we had two points of benefit each from both acquisitions and currency. Gross margins for the quarter were 42%. ESOP is again successfully passing its inflationary pressures to customers through pricing actions. Of course, when sales and costs each increase by roughly the same amount, Profit is protected, but margins are artificially compressed, as we've seen in the past. Our true underlying margin performance was an increase of 50 basis points from operating leverage, high gross margin acquisitions, and restructuring benefits. Restructuring benefits also kept core SG&A, that is SG&A excluding acquisitions, flat year over year. Our effective sales and operating execution led to a 50 basis point increase in EBITDA margins, and we finished the quarter at 12.2%. As mentioned earlier, we exceeded our EPS guidance by 4 cents, earning 44 cents, which is a 16% year-over-year increase. We generated $60 million of free cash flow in Q1, including a tax refund and a payment related to a divested business, neither of which are expected to repeat. Our treasury and business finance teams are leveraging robust processes to ensure that our growth translates into healthy cash levels. Slide 10 provides an update of our strengthened capital structure. As Matt mentioned, in March we completed a very successful $700 million equity offering, and in April we redeemed a like amount of our higher coupon bonds. This reduced our net leverage to under three turns. Our operating path of cash flow and profit improvement should have us closer to two turns by year end. We have more freedom to execute our M&A strategy and have already deployed some of this new capacity for the MedShape acquisition. Slide 11 outlines our updated 2021 forecast. We started the year with a 4-cent EPS guidance fee that we believe demonstrates less risk to achieve our full-year guidance. As a result, we are increasing the bottom end of the range by a nickel, and our full-year EPS guidance now stands at $2.05 to $2.15. These forecasted results include offsetting about 4 cents of net headwinds from the capital structure changes. The guidance details that we provided in February and March are largely unchanged, although we are clearly moving higher within those ranges. I do want to highlight one change. We now expect another four points of growth at ESOP to recognize the additional pricing that we expect to pass along in response to current inflation trends. We are not forecasting for this additional price to have any net profit effect. Our foot and ankle acquisitions are each off to a good start to achieve their high growth plans this year. We are investing in integration and adding targeted resources to ensure the attainment of our aggressive plans to organically grow to $100 million of revenue in three years. We expect the EBITDA margins of these acquisitions to grow from the current pre-scale low to mid-single digits to the segment average or higher over the three-year horizon. Our outlook for Q2 reflects the positive revenue momentum we had throughout the first quarter, and we expect our typically stronger seasonal performance. We are forecasting for these higher revenues to create sequential operating leverage and support adjusted earnings per share of 48 to 53 cents. Our strong start on cash flow in Q1 further strengthens our conviction for achieving at least $250 million for the full year at a healthy conversion level despite investments being made to support high growth levels. In summary on slide 12, our strong first quarter results demonstrate that we continue to execute effectively and are well positioned for strong growth this year in all metrics, sales, margins, EPS, and cash flow. Our confidence is reflected in our updated EPS guidance of 205 to 215. We continue to push forward on the separation activities and are on track at this early stage of the project. Our equity issuance created additional flexibility as we move closer to the expected separation in the first quarter of next year. By strengthening the balance sheet, we also created more capacity to support our M&A program. MedShape is just the latest example of attractive businesses that we can acquire to improve our company and accelerate our growth. We continue to have an active funnel of acquisitions and expect to complete more this year. With that, operator, let's go ahead and open up the call for questions.

My pleasure. As a reminder, if you'd like to ask a question, please press star followed by the number one on your telephone keypad. That is star one. Ask an audio question. We'll pause for just a moment to compile that roster. And your first question comes from Jeff Hammond with KeyBank Capital.

Can you hear me? Yeah, can you hear me?

Yeah, we got you. Good morning.

Okay, great. Just any surprises as you kind of went through the quarter, any surprises, positive or negative, in the trend line? I know the guide's unchanged in MedTech, but just as things kind of reopen, what are you seeing versus expectations on – on surgeries and activity levels. Maybe I'll start there.

Yeah, sure, Jeff. Thanks for the question. I would say a couple of changes as we went through the quarter. We certainly saw the U.S. elective surgery environment and mobility environment improve nicely as we moved through the quarter, and I would say it improved at least in line with our plan and probably a little bit better than our plan. And we saw outside the U.S., particularly Europe, was tougher. We had planned for it to be tougher, and it was tough, and I'd say was probably a little bit off of our plan. So as we've said, we had a good, strong start at MedTech, and we expect to be right on track with our plan going forward. I think we'll have a little more out of the U.S. in the second quarter than we planned for and a little less. the plant. So those are a couple of things that we saw on the MedTech side.

Okay. And then it sounds like you're managing price well in Fabtech. Can you just talk about inflation in the MedTech business and how you're managing pricing there? And then just across both businesses, anywhere that you're seeing any kind of emerging supply chain issues that would prevent some of this strong revenue momentum? Thanks.

Yeah, sure. So, as you said, certainly we're seeing a lot of inflation in fab tech. We're passing that through. You know, in med tech, we've got a lot higher gross margins. And so, you know, that makes the sort of product cost inflation, you know, a little less of an issue. And there are mechanisms to get that path through sometimes immediately, sometimes over time. But, you know, what I'd say is we've certainly seen, you know, other forms of inflation like freight inflation and, you know, things that we've been doing, you know, for the last quarter or so in terms of expediting in the supply chain to make sure that we serve customers well. And so, you know, I think, you know, we're expecting that some of those extra costs within the MedTech business will subside as we work through the year.

Okay. Thanks, guys.

And your next question comes from Joe Gordano with Cowan.

Hey, guys. Good morning. Hey, Joe. Hey, Joe. Hey. So can you just address the FDA warning on Star Portfolio that we got a little bit ago and talk about the timeframe for that, how it's been addressed, and how we should think about that going forward?

Yeah, sure.

Thanks, Joe.

So we acquired the Star Ankle as the step in to put an ankle for us because it's a tremendous product. It's got the best long-term outcomes data as a technology-advantaged product, and that's something that takes a long time to build. And that long-term outcomes data in terms of survivorship of the Star Ankle that is superior is outcome data that includes all forms of failures. We were well aware in the diligence that there was an ongoing dialogue between Stryker and the FDA about polymer cracking. We're also well aware that Stryker had made some changes a number of years back that they believe addressed the situation through some sterilization and packaging changes. And we're also aware that the market was fully aware of the situation, that even including these stress crack-related failures, the long-term outcomes were superior for the product. We had a plan from the start and have already moved on that plan to replace the polymer with ePoly that we use in our ePoly technology that we use in our other products. And so that plan is ongoing and we expect to work through and make that change. It's unfortunate that the FDA got frustrated with Stryker and made the the warning that they did. We've had to certainly do some hand-holding with customers to remind them of the great overall data for the product and to point to the limited sample size that was related in that warning. And the feedback from customers has been good. It's a product that the people that are using it are very attached to the product. They've liked it for a long, long time, and so we're confident we'll be able to to work through and move to the other side and it won't have any change on our plans for our foot and ankle business growth over time.

Perfect. That's really helpful. And a follow-up for me, I know we've talked about robotics several times as something you guys are interested in, in the right way for MedTech. Can you also talk about like ways of doing that? I mean, I know there's, we've talked to startup companies that have kind of like open source robotics platforms, essentially, where they can use kind of their free agents to use any kind of knee or anything like that, like being surgical, those kind of companies. Is that a preferred path or is that like a complementary path for you guys?

Yeah, you know, I think as we've talked about before, I think Brady talked quite a bit about it and Louie at our investor day. You know, we really think about surgical workflow overall, and that ranges from the planning on the front end to the guidance within the product and within the surgery and the use of robotics in various different ways to automate that. And we've had a strategy for how we can bring the right total solution for each of the parts of the anatomy. And we've got some already strong capabilities in the planning and already a terrific position in shoulder where that's the most important. We've also invested, as we've talked about, in a company in the guidance area that is going to be bringing us a capability to bring virtual reality guidance that we're excited about and our surgeons are very excited about. And on the robotics front, I think we've talked about before, we think there's going to be multiple ways of this as the technology becomes less costly and less bulky, and we've got a strategy for how we can bring a robotics solution that is the right solution for our value proposition, and in particular the right solution for the AFC, which is a more constrained environment through robotics. And that's something that we'll bring through partnerships as well as internal innovation over time.

Thanks, guys. I'll pass it along.

Your next question comes from Andrew Obin with Bank of America.

Good morning. Hello, Andrew. Hey, Andrew. Hey, just a question on your M&A strategy. You seem to have found a very good niche on extremities, you know, sort of a bunch of singles. Given your capital race, is there an opportunity for a larger deal in and the second question is you also highlight pet care. I think it's one of the adjacencies that you have entered. Is that something that the company could look down the line?

Yes, Andrew. First of all, we're really excited that we've been able to get the three great deals done in the foot and ankle space that establish that strong position that we can then build from I think it's been great timing in terms of stepping in as I think people are becoming more and more aware of how exciting and attractive that space is. We're in a position where we can now build the business organically plenty and have strong double-digit growth over time, but there's also other bolt-ons and tuck-ins within that space that we can take a look at. We certainly have more flexibility now, but I would say that most of the things that we're thinking about are in the small to medium-sized range versus big moves in the short to medium term. We'll always be considering the larger possibilities that we can consider, but we're spending the vast majority of our time and energy on you know, things that either, you know, greatly improve the strategies of our businesses, like some of the things that we've done in surgical, you know, like the light cure acquisition in recovery sciences. And there's, you know, there's other opportunities within surgical, within recovery sciences, and within bracing to do both on acquisitions that greatly advance the, you know, the strategy of our businesses. You know, we're looking at opportunities around global expansion and participating in more of the attractive parts of the global markets, you know, beyond the great U.S. market where we're so strong. And so, you know, I think that, you know, that's what you see. As far as your specific question about pet care, it's obviously a very attractive space. We were excited that Lycure gives us a position in that space and you know, there's certainly, you know, opportunities to think about, really, if you focus more on the rehabilitation aspects of pet care, you know, that'd be an area that we already participate and that there are other adjacent things to think about. There's obviously lots of other, you know, possibilities in pet care that we can think about over time. But in the short term, I think there's some more logical things that we can think about that are close in.

Gotcha. And just to follow up, in terms of, you know, folks getting vaccinated, and getting more active, should we think that there is this catch-up as older people actually catch up on all the procedures that they were not able to do in 2020? And does that mean that 2021 is relatively flat with 22, or can you grow off that base? Thank you. And this is a MedTech question, clearly.

Yeah. Um, so yeah, again, I think, uh, clearly it's been, it's been talked about a lot and, and, uh, we've talked about it that, uh, the vast majority of the demand drivers related to, uh, our, our surgery products, uh, didn't stop when COVID stopped. And so, uh, you know, the, the diseases that, that drive most of those surgeries continue to advance. And so there's, there's backlog that, uh, that, that's been created. And, and I think the, um, Certainly, a lot of the published things that are out there, as well as our perspective, is that it's not a quick catch-up in one year. If it were, this year would be meaningfully more than what we have forecast. But I think our expectation, I think the expectations of people that have published a lot of the space, is that there's going to be multiple years where we're working off some of the things that got delayed uh, during, during COVID. And that's going to create a little bit, a little bit elevated growth, uh, versus the norm, uh, for, for a couple of years. And, uh, you know, so again, what, you know, what the shape of that is, if that were really sharp, then maybe there would be a backside of it. But, uh, you know, I think our assumption in terms of the growth that we planned for this year, you know, what we've talked about is, you know, between one and two years of growth versus 19, which would say that there's, there's still additional catch-up opportunity there in, uh, in 2021 versus a flat backside, or sorry, 2022 versus a flat backside.

Thank you.

Your next question comes from Chris Snyder with UBS.

Check margin guidance for the rest of the year. Q1 EBITDA margins came in above the full year guidance, and it doesn't seem like you guys expect volume declines. So are the sequential headwinds just costs coming back to the business, or is the expectation that price costs will be a more substantial margin drag the rest of the year relative to Q1? And then also, is the $25 million to $30 million restructuring savings fully reflected in the Q1 run rate?

Yeah, hey, Chris, your question got caught up at the beginning, but I think it was about the sequential margin progression here in ESOP. Okay. Oh, it was within ESOP. Okay. All right. Specifically within ESOP.

Yeah.

Hey, so within ESOP, you know, let me answer the question first about restructuring. The benefit from last year's restructuring is fully baked in the Q1 results that we had. And, of course, that will continue to – we'll get the benefit of that throughout the year. But the restructuring that we're doing in 2021, as you would expect, takes time to fully bake, and you don't really get to the run rate of that until you get deep into the year. And that's why we end up with a partial year benefit this year and then the additional benefit that flows in the next year. I think that should address the question about the restructuring. You know, on the margin side, yeah, you raise a really good point, which is what we touched on in our prepared remarks, Chris, which is the business is doing an excellent job of dynamically managing the price and inflation to protect profit, but you've still got that compressing effect it has arithmetically on the margins. And we've seen that happen in the past. It tends to obscure the real improvements that we continue to make in the business, and yet, Here we are talking about record margins in the first quarter. So we'll continue to manage that. We do expect that will have some impact. The more price and inflation that happens, the more that effect will be reflected in the sequential performance of the business. But again, the underlying performance is very healthy, growing, and as we get past the inflation curve, just like we've done in the past, you'll continue to see those margin improvements reading through.

Okay, I appreciate that. So it sounds like just the cost inflation is going higher, and even if you offset it to the same capacity as Q1, it's a sequential headwind just because it's zero margin on a higher pricing. Yeah, that's right. Okay, if I could just follow up on MedTech margin, can you provide some color on seasonality here? As we've never really seen a normal 1H since you acquired DJO, and just trying to think about the normalized sequential move into Q2.

Yeah, sure. Hey, Chris, just generally, this is a business that has its lowest revenue in Q1 and its highest revenue in Q4. There's always a bit of a step up in Q1 to Q2. And so the margin profile tends to follow the revenue. As you imagine, the operating leverage with these high gross margins is pretty big in the business. And so it's the expectation that as we go from Q1 to Q2 and revenue steps up, and this year it's stepping up both seasonally and because of the improving recovery, that you'd expect to see the margins expand. And then you'll see another step up in the second half of the year, which again will be because of more revenue, typically in Q4. And then also we're always working on productivity and other projects that should drive additional benefits. You know, having said that, you know, we did have a little bit of supply chain friction in the first quarter, as Matt touched on briefly in his answer to a question a moment ago. And, you know, we expect to work past that as well as we get into the second half. So there's a number of factors there, but largely volume driven operating leverage.

Thank you.

Your next question comes from Nathan Jones with Steeple.

Just starting with a question on the guidance. You know, you beat the first quarter here relative to your original guidance by 67 cents, 4 cents of headwinds from the capital allocation actions, and you raised the guidance by about 2.5 cents, which leaves 2Q through 4Q pretty flat relative to what you'd had in the previous guidance. You've talked pretty bullishly about better trends in medtech, better volume trends in medtech, and better volume trends in industrial. Can you talk about what's holding you back from having increased the guidance a little bit more, maybe taking the top end up, what the concerns are there?

Yeah, hey, Nathan. So I wouldn't say that there's any concerns there. What I would say is that we're really in the year. We're pleased with the first quarter performance. We thought it was prudent and appropriate to reflect the de-risking and the guidance by taking up the lower end of the range. As you mentioned, we had the capital structure actions there that created a little bit of a headwind, obviously a terrific move the company made strategically and for the long-term benefits of the business. But that did have a little bit of headwind, and so really the operating results of the business ended up absorbing that. And so the underlying performance is pretty good here. Now, as we progress through the year and we continue to see how it plays out, that will give us additional opportunities to assess the performance, assess the trajectory that we're on, and think about how that might be reflected in the forecast going forward. But at this point, we don't see any risk to the guidance that we've given, and we're very bullish.

That's helpful. Thanks. On these capital moves with the equity raise, the debt pay down, sounds like you're still planning on doing a number of acquisitions in MedTech this year. Is there any further color you can give us on what the capital structures of each of the businesses might look like post the split?

Yeah, thanks, Nathan. As we've talked about, we'll be providing a lot more detail on that as we get deeper into the process, but it's really important that we underscore the a couple of key principles here. One of those is that we intend to make sure both businesses are set up for success. These are two terrific franchises with great futures, and the capital structures need to support the strategic direction of both of these businesses. That's one principle. Second principle is we expect to have differentiated balance sheets. They are different businesses. There's a bigger gap between MedTech and its its goal of being a $3 billion company than there is for Fabtech. And so we want to make sure that we're considerate of that as we're thinking about the capital structure for these businesses at the time of separation. So we're going to launch two great healthy businesses with terrific capital structures that are consistent with the strategy of those businesses, and we'll provide more details as we get closer to the finish line here.

Sounds like it's a fair assumption that MedTech is going to have the lower leverage, though. Nathan will give you more details on that later.

I don't mind the question, but we'll see you soon.

Okay. Thanks, guys.

And your final question comes from Steve Tessa with J.P. Morgan.

Hey, guys. Good morning. Hey, Steve. The kind of seasonality, I think you guys had talked about last year that the first quarter would be some percentage of the year. I think it was like 23% or something like that. But obviously you have this negative day sales impact. So I would think that the first quarter would be even. you know, lower kind of on a reported basis as a percentage of the year. I'm just trying to kind of wrap my arms around the seasonality dynamics, you know, sequentially into the second quarter on sales, if you might.

Okay. Let me take a stab at that, Steve. And what I would say is that there's a couple different dynamics here. We're always talking about the selling days, just to make sure that we separate that out from the reported results. So last year we highlighted that we had more selling days in the first quarter, and that we benefited from that. Now this year, on a comparative basis, we have fewer selling days, and that's why it's important that we pull that apart so you can see the underlying performance, which is I think we had 9% growth on a selling day basis and 8% reported, and 5% headwind on fewer selling days. So peeling that apart, the basis of the discussion starts with the 9% SPD growth in Q1. Now, as we move forward here, we've got a couple different things. We've got the typical seasonal strengthening of the business going from Q1 to Q2. That's in both of our businesses. And we expect to see that. There's no reason why we wouldn't this year. And on top of that, we still have the sequential recovery that's hitting into the numbers as well. Now, we generally talk about SPD growth. That's getting a little bit cloudy as we start comparing against COVID periods there. And so really it's important that we think about the sequential performance and whether that's in line with the expectations that we had coming into the year. And so far what we've got, everything is lining up the way that we'd expected. A little bit of faster recovery in Q1 that de-risks the full year, but the trend from Q1 to Q2 is, is lining up just pretty much the way we would have expected when we gave the original guidance for the year.

Got it. So I guess maybe could you just let us know kind of roughly what you expect for annual sales? I mean, if you do normal seasonality off the first quarter, I mean, it looks like you're comfortably into kind of the $900 million range, like almost like $950 million of revenues. And, you know, as I look out for the second half of the year, I mean, if that just holds flat, I mean, you're at some pretty – or down even a little bit, you're kind of well above where we are for sure. Can you just maybe give us an annual framework for revenues?

Yeah, so if you go back and look at the guidance that we gave back in February, where we gave percentage ranges there, and then we talked about also the timing of that within each of the quarters, I think we're still comfortably following what we gave you. Now, Q1 is a little bit maybe a little bit hotter than what we'd originally guided to. But for the full year, we still expect that. Steve, the other thing to keep in mind is as we go from Q2 to Q3 in our bad tech business, oftentimes we'll see sequentially less revenue. That's a typical trend in the business. You've got summer holidays in Europe and other factors that come into play that we've seen repeated year after year in the business. So Whatever your expectations are for Q2, I wouldn't just sort of bake that all the way through for the rest of the year. Just think about a little bit of a sequential step down in Q3 and a seasonal step down and then a step back up in Q4.

Right. But as far as normal seasonality, like you feel as though if we go back over time and look at kind of the normal seasonality of at least Fabtech, because you've had that for a long time, that's what you would expect off of this one Q print for the rest of the year.

Yeah, generally that's the case. Now, what's also in the mix here is we've got this price dynamic, and that's why one of the comments we made in our prepared remarks was that we expect four points of additional price reading through, but it won't be driving any profit, and that's why we try to, you almost have to model that in and then set it aside and not expect any incremental margins to come out of that.

Yeah, that makes a sense, too, is that the sales aren't going to necessarily read through. Okay, that's very helpful. Thanks a lot.

Thanks, Dean.

Okay, with that, I think we're wrapping up the call. Thanks, everyone, for joining today. I appreciate you and look forward to talking to you over the next few weeks. Thank you.

That does conclude today's call. Thank you for your participation.