Enovis Corporation

Ladies and gentlemen, thank you for standing by, and welcome to the Colfax Third Quarter 2020 Earnings Call. At this time, all participants are in 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 further assistance, please press star 0. It is now my pleasure to turn the conference over to your speaker today, Mr. Mike Masek. Sir, please go ahead.

Thank you. Good morning, everyone, and thank you for joining us. I'm Mike Masek, Vice President of Finance. Joining me on the call today are Matt Terrell, 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 on our website, colfaxcorp.com. We will be using a slide presentation to walk 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 State 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 as required by law. With respect to any non-GAAP financial measures made during the call today, 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, and we'll 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 around the world. Thank you, team Colfax. Our results this quarter demonstrate that we have worked past the worst of the pandemic's effects. We achieved very strong sequential improvements during Q3. Organic sales improved 30% from the second quarter, declining only 3% year over year. Both businesses are quickly recovering with lines of sight to regaining our pre-COVID momentum. We again outperformed our competitors, driven by strong commercial execution and growing innovation. I am pleased with our financial results this quarter. We delivered 41 cents per share of adjusted earnings and $49 million of free cash flow. These are strong sequential improvements over Q2. and we expect further strengthening in Q4. We also announced the signing of an acquisition that will strategically broaden our MedTech reconstructive business. We are regaining our positive momentum with a clear strategy for compounding value creation. Slide 4 updates the pace of recovery and underlying customer demand. All markets strongly improved from Q2 lows this quarter, and many returned to growth. Our MedTech business grew 1% with a little help from non-recurring PPE sales. Elective surgical procedures in the U.S. are nearly back to pre-COVID levels, and many organized sports activities and other injury drivers have resumed. Clinics in our CERV markets are operating much closer to pre-COVID levels, increasing demand for non-surgical products, and recreating the pipeline for our reconstructive products. With markets in the range of 90 to 95% recovered, we expect sales per day growth to stabilize at these flattish levels in Q4. The short-term range of outcomes will be influenced by continued positive activity and treatment trends versus reactions to COVID case escalation in some geographies. We believe that our markets should return to healthy growth in 2021, over 2019 demand levels. Our Fabtech business rebounded sharply in the quarter, only down 6% versus 25% in the second quarter. Developing regions are mostly back to growth, again demonstrating the strength of this business's global reach. Our improving trend continued in September and October, giving us a good start to Q4. We are forecasting growth to be on par or better than Q3, depending on the short-term risks from COVID reemergence in Europe and the U.S. elections. This overall positive trending gives us confidence in a return to 2019 demand levels at some point in 2021. MedTech business results are included on slide five. Q3 sales increased 2% to $314 million, including a 1% FX benefit, and 2% from personal protective equipment sales that are not expected to repeat. This rapid and substantial rebound from Q2 shows the strength and resilience of our MedTech portfolio. Reconstructive product lines returned to fast growth, 9% above last year, as we extended our multi-year record of taking share in surgical. Prevention and rehabilitation product line sales also recovered strongly off of Q2 lows, declining only 2% year-over-year for the period. This part of the business is more global and impacted by a broader range of factors than just elective surgeries. We expect growth to return to PNR upon the full return to sports and general recreation that drive normal orthopedic clinic activity. The sales rebound in the quarter contributed to a strong improvement in profitability that narrowed the gap to prior year performance. We incurred about $5 million of higher supply chain costs in Q3 to overcome COVID-related challenges and maintain customer service during a period of quickly recovering demand in MedTech. We expect margins to improve sequentially in Q4 and have a clear focus on driving further improvements. We continue to make good progress using CDF to strengthen the P&R supply chain and innovation engine to drive above-market growth and margin improvement in the future. We're also making key supply chain and technology investments to scale our fast-growing surgical business, enabling continued future share gain and productivity. Moving to slide six, we signed an agreement this month to acquire the star total ankle placement business and certain finger implants from Stryker Corporation that should close in the fourth quarter. We're excited to complete our first strategic acquisition since acquiring DJO, and the DJO team is ready to use our proven CVS toolkit to integrate these product lines. The acquisition complements our fast-growing, reconstructive product line with an entry into a billion-dollar-plus foot and ankle surgery market that consistently grows mid to high single digits. The total ankle replacement segment is a strategic entry point given its high growth, strong gross margins, and importance to the surgeons. The STAR angle is a great technology with compelling outcomes data and many loyal surgeons. We are confident that we can apply our proven DJO surgical playbook to drive above-market organic growth over time. In addition, the fragmentation of the foot and ankle space presents multiple paths for further acquisition-based expansion into this very attractive adjacent market. On slide seven, fabrication technology organic sales declined 6% and FX pressure contributed three points of additional decline. This represents a strong recovery versus the second quarter and the eighth quarter in a row of outgrowing our primary competitors. All regions improved from the second quarter. Nearly half of our sales come from faster-growing emerging markets that collectively achieved year-on-year growth. Our North American and European regional sales significantly improved, but these markets are still the most affected by government actions to control the spread of COVID virus. Our GCE gas control business achieved another quarter of solid growth due to strong demand for our medical and life sciences solutions. Our Fabtech team achieved another quarter of low 20s decremental margins, significantly mitigating the profit impact from lower sales and achieving margins only 50 basis points less than our strong Q3 margins last year. Restructuring programs remain on track to deliver over $20 million of savings in 2020, with approximately $10 million of follow-on benefits next year. Temporary cost controls are still in place to ensure we meet our spend with recovery, while also supporting growth and innovation spending. ESOP remains well-positioned for strong relative growth, continuous margin improvement, and strong cash conversion going forward. On slide eight, you can see that CDF continues to thrive thrive at Colfax. Our teams have adapted to the virtual work environment in a number of ways to maintain our continuous improvement momentum. While our in-person activities have temporarily declined a bit, the number of virtual activities has exploded. For example, we started the year with a plan to roll out an operations boot camp training with five modules for our operations leaders around the world. When travel became restricted, we revised the curriculum and materials to create interactive online sessions that were effective and very well received. As an added plus, the leaders did not need to travel, and we were able to have most of my team participate directly in the facilitation. Our success this year has changed the way we think about delivering training to our associates, and we expect to make online training an even larger component of our associate development efforts going forward. Our CVS engine is still very active in our supply chain. By year end, we will have completed close to 100 Kaizen around the world. The slide highlights one where the relatively new Colfax team at GC used our 5S and SMED tools to reduce setup time by 60%, improving productivity and liberating additional capacity for the strong growth that business is capturing. Outside of our supply chains, the teams have developed innovative virtual Kaizen approaches. We highlight on the slide the way that the DJO bracing team has adapted voice of the customer processes to keep new product developments on track. Our business system remains alive and well. Our teams are adapting to recent challenges and continue to drive continuous improvement in everything we do, living our company purpose of creating better together. With that, I'll turn it over to Chris. We'll start on slide nine.