Enovis Corporation

Ladies and gentlemen, thank you for standing by, and welcome to the Colfax Second Quarter 2020 Earnings Conference 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 the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Mike Nasik, with Colfax. Thank you. Please go ahead, sir.

Good morning, everyone, and thank you for joining us. I am Mike Masick, Vice President of Finance. Joining me on the call today are Matt Holtol, President and CEO, and Chris Hicks, Executive Vice President and CFO. Our earnings release was issued this morning and is available in the investor 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 the Safe Harbor language in today's earnings release and in our filings 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 required by law. With respect to any non-GAAP financial measures made during the call today, the accompanying reconciliation information relating to those measures can be found in our earnings press release and today's slide presentation. Now I'd like to turn it over to Matt, who will start on slide three.

Thanks, Mike. Good morning and thanks everyone for joining the call. I'd like to start by recognizing our associates for their continued dedication to protecting the health and safety of their colleagues while serving our customers and patients. As I mentioned on our last call, we made COVID-19 safety our top priority for Q2 and took quick actions to protect our associates around the world. At the same time, we successfully navigated a range of challenges to keep most of our supply chains flowing and recover quickly from a few policy-driven shutdowns. We aggressively flexed down our costs to partly mitigate the slowdown in sales and achieve very strong, detrimental margins. We also used an aggressive CBS focus to keep our cash flow positive and protect the overall financial strength of the company. In the second quarter, we earned $0.09 per share on an adjusted basis and generated $18 million of free cash flow, achieving our objective of being earnings and cash flow positive despite a year-over-year sales reduction of about 30%. Sales hit a low point in April, down more than 40%, and then sequentially improved in both May and June as customers worked past the initial pandemic shock. June sales were down 19%, and this positive trend continued in July with both of our businesses, again, sequentially improving. We finished the quarter with ample liquidity and financial flexibility. We protected our key growth investments, even as we reduced overall spending. Our actions this quarter will enable us to regain the strong momentum and relative performance that we had prior to COVID. Slide four shows in more detail the monthly sales progression in our businesses, which played out within our expected range of outcomes. Following a difficult April, our med tech business saw an increasing number of elective procedures, reopening of orthopedic clinics, and increasing levels of organized sports and trauma. Sales improved sequentially from down 60% in April to just down 16% in June. The reconstructive product lines had larger declines early in the quarter due to the nearly complete curtailment of elective procedures in March and April, and as hospitals and ASCs resumed these procedures starting in May, sales quickly improved with June sales down only 3%. Prevention and rehabilitation product lines declined to a lesser extent in April and then improved to down 21% in June. This part of the business has more diversified end uses and is more global, so the recovery is impacted by a broader range of factors than just elective surgeries. Across the total MedTech business, Preliminary July results are consistent with our view that Q3 sales growth will be better than June levels. In Fabtech, sales also improved throughout the quarter. In April, we experienced a decline of just under 30% and improved to down 20% in June. As the quarter progressed, we benefited from reopened facilities, easing of restrictions in many served areas, and sequential demand improvements in almost all regions. Similar to our MedTech business, we expect sequential improvements to continue in Q3. The pace of improvement in both businesses is uncertain, but we believe we will continue to improve through the second half of the year. We are increasingly focused on maintaining and expanding our market advantages and investing for future growth. MedTech business results are included on slide five. Q2 sales of $206 million were down 34% organically. Both segments were down a similar amount and improved through the quarter. As we expected, Reconstructive had a much steeper improvement and had positive growth in July. We are encouraged by the sequential improvements across the business as our teams are working effectively to serve recovering demand. Our temporary cost actions enabled us to deliver positive adjusted EBITDA in the second quarter despite significant volume declines. Given the improving sales, we're rolling back most of our Q2 temporary savings actions and focusing on driving strong sales recovery through commercial processes, strong operating execution, and innovation. We continue to invest in our key growth initiatives and expect to increase overall innovation spending this year versus last. We've highlighted some of our recent launches on slide six. Our fast-growing surgical implants business aligns with great surgeon key opinion leader teams to develop products with superior outcomes. We're building on our product portfolio and filling out the bag where we currently have gaps in our offering. We're about to launch two important new products. First, the Empower Partial Knee expands the number of procedures where patients can benefit from the greater stability and natural knee motion patterns that have made our Empower such a great success. We also recently received FDA approval for the Altivate Anatomic CS Edge, which adds a stemless offering in our shoulder portfolio. These products will help us to penetrate more deeply in existing surgeons and also to continue to attract new surgeons. In prevention and rehabilitation, focused operational improvements along with growing product vitality created significant growth momentum prior to COVID. We recently released two new products under the market-leading Don Joy brand. The X-Rom Post-Op Knee Brace combines excellent range of motion protection with a comfortable, user-friendly design. The VersaRom Hip Brace fills a key product gap in our portfolio. We are expecting to launch several more key bracing products this year, progressing step by step back to the healthy vitality levels that will support consistent above-industry growth. Another part of our innovation strategy is to lead in connected medicine. Connected medicine digitally connects healthcare practitioners to patients in outpatient settings. By capturing more real-time data and driving improved compliance to post-operative protocol, connected medicine can create better patient outcomes and satisfaction with the overall experience. As you can imagine, the COVID crisis has made doctors and patients even more interested in these benefits. This week, we introduced MotionIQ, an innovative new software solution designed to transform the surgical experience by digitally connecting the surgeon, care team, and patient throughout the larger continuum of care. MotionIQ empowers patients to take an active role in their care through a more personalized and informed process while providing the care team with continuous health and activity data. This is another great addition to our overall suite of digital solutions. Turning to slide seven, fabrication technology organic sales declined 25% to $414 million. One of the strengths of our Fabtech business is that it is a truly global business with almost half of our sales coming from faster growing emerging markets. This quarter, these developing regions were down less than developed, and both developed and developing regions showed sequential sales rate improvement through the quarter. Our GCE gas control business grew in the quarter. We acquired GCE several years ago as part of our strategy to improve the margins and growth opportunities within our Fabtech platforms. GCE is a leader in gas equipment, selling in the healthcare space with medical gas systems and other equipment, as well as in more traditional industrial sectors. We significantly mitigated the profit impact from lower Fabtech sales through strong cost control and temporary savings actions, resulting in decrementals of only 21%. Restructuring projects initiated late last year remain on track, with expected in-year benefits of at least $20 million and with higher annualized benefits. We are also playing aggressive offense in Fabtech. By effectively supporting customers, focusing on healthier market sectors, and protecting key growth investments, we're positioned for continued outperformance. Slide 8 highlights some of ESAB's new products. We launched 37 products through the end of Q2 and expect to again top 80 by year end this year. We have a strong and rigorous innovation process in ESAB that reliably creates market leading new products that drive share gain each year. Our Fabtech platform has also been focused on digital solutions. We expanded our digital offering this quarter with the introduction of WeldCloud Notes document management software. This solution adds weld process storage and quality documentation to our industry-leading WeldCloud offering. This quarter, we also launched the Aristo 500iX, a portable power source that is designed to better serve the needs of the heavy industrial market. We also rolled out the MINIARC Rogue ES180i, a portable stick lift TIG inverter that gives us access to a new market segment in high growth markets. We will launch dozens of filler metal and gas control products this year and have highlighted a few key ones from Q2 here. Before turning it over to Chris, I'll summarize our key priorities for the second half of the year on slide nine. The safety of our associates remains our top priority. This includes protecting associates around the world in our manufacturing sites, our field service teams, and those working via technology from home. These teams are focused on continuing to reliably deliver to customers at a time when they need our essential products. At the same time, our teams are driving CVS improvements and advancing our growth strategies. We continue to responsibly flex our costs and are also supporting our customers with strong delivery performance and an expanding number of innovative new products. These new products are being commercialized at a time when markets are improving. We expect to sequentially improve growth and profit in the third quarter and remain cash flow positive. We believe that the rate at which we recover will show clearly the strength of our reshaped portfolio. We also have a healthy acquisition pipeline of strategic bolt-on opportunities and technology investments that can help drive compounding value for our shareholders. I'll close by expressing my sincere gratitude to our associates around the world. Our teams have shown commitment, resilience, and great skill to successfully execute in these challenging times. I am extremely proud of our team and know that we will work through the rest of this crisis together and then resume our winning momentum. Chris will start on slide 10.