Enovis Corporation

Thank you for standing by and welcome to the Colfax Fourth Quarter 2020 Earnings Call. All lines have been placed on mute to prevent any background noise. After the presentation, there will be a question and answer session, at which time if you wish to ask a question, you will need to press star 1 on your telephone. If you wish to cancel your request, please press the pound or hash key. I must advise you that this conference is being recorded. Thank you. Mr. Mike Masek, you may begin.

Thank you. 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 Tarotolo, 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, colfaxsports.com. We'll 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 uncertainty, including those set forth in the State Harbor language in today's earnings release and in our filings with the SEC. Actual results may 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 intent to update them except as 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 in today's slide presentation. Before turning it over to Matt, I would like to highlight that in our earnings release published this morning, we also announced that we'll be hosting a virtual investor day on Thursday, March 11th. You can see the details of the event on slide three of the earnings presentation and in our release. The event will take place from 9 a.m. to approximately 1 p.m. Eastern time, and the meeting will include presentations from the company's corporate and business leadership. To register for the event, please visit the investment relations section of our website at colfaxcorp.com. And if you're not able to join us live, replays will be available on the company's website following the event. With that, let me turn it over to Matt to start on slide four.

Thanks, Mike. Good morning and thanks to everyone for joining the call. We're pleased to report another quarter of improving financial results as we close out 2020. Despite the challenges of COVID, we continued our focus on improving and growing our businesses while keeping our associates healthy and safe. I want to thank our global team for their unwavering commitment to serving our customers and patients during this dynamic period. 2020 started with great momentum that we successfully translated into steadfast resiliency during the pandemic while strengthening our company both operationally and through acquisitions. As a result, we're exiting the year poised to significantly grow in 2021 and beyond. We thoughtfully balanced our objectives during 2020. increased our investments in innovation, drove initiatives that position us to win as markets recover and continually outperform our markets. We did this while also executing on our cost savings plans, structurally eliminating over $20 million of costs, and maintaining our financial strength by taking temporary actions to offset the COVID-driven volume declines. We also strengthened our cash flow processes to improve consistency and conversion levels. Our second half cash flow was very strong and we exited the year with a clear line of sight to generate greater than $250 million in 2021. With this progress, we secured the financial flexibility to begin executing on our strategy of expanding the business through strategic investments again. As we start 2021, we're renewing the exciting momentum that we had in early 2020 and are well positioned for strong, scalable growth. On slide five, you see another quarter of sequential improvement while managing through the dynamic market conditions caused by the escalation of COVID cases during the quarter. As a reminder, Q4 had several fewer selling days for us in comparison to the prior year and the third quarter of this year. Despite this, sales improved 3% sequentially from the third quarter. We delivered adjusted EPS of 51 cents per share and free cash of $96 million, both above guidance. We generated $145 million of free cash flow in the second half of 2020, a good indication of the cash flow capabilities of both of our businesses. Our innovation and commercial teams continued their solid execution and we outperformed our markets again this quarter. We also successfully expanded our MedTech platform by executing on three acquisitions, two during the quarter and another in January, which I'll discuss in more detail in a moment. Slide six updates the pace of recovery in underlying customer demand. Our MedTech business was approximately flat sequentially on a sales per day basis, and as the fourth quarter progressed, elective procedures and mobility were negatively pressured, as infection and hospitalization rates surge through the month of December. The slowdown this quarter was much less severe than the previous one. Hospitals are much better equipped to manage COVID patients while maintaining higher levels of elective surgeries. Looking at 2021, volumes have stabilized in Q1, and we expect conditions to continually improve as we progress through the year. We expect a strong recovery versus 2020 and see volumes getting back to growth over 2019 levels as we move into Q2 and the second half. Our Fabtech business continued its strong recovery with sequential sales per day growth of 10% versus the third quarter and down only 2% versus the prior year. We've seen the developing regions continue to grow, again, demonstrating the strength of this business's global reach. Our improving trends continued into January, giving us a good start to Q1. We're projecting year-over-year growth in Q1 and a return to 2019 volume levels by the second half of 2021. We've been actively executing our strategic growth program, as you see on slide seven. We were attracted to MedTech in part due to the many opportunities for investment in this attractive, fragmented space. In the past four months, we acquired three high-margin businesses with significant long-term growth potential. During Q4, we closed on the star total angle replacement business that we highlighted on the last call, and we've since closed on two more acquisitions, Trilliant Surgical and LifeCures. Trillium Surgical has a rapidly growing portfolio of innovative foot and ankle surgical solutions that promote better patient outcomes. Its broad product line targets foot and ankle surgeons and podiatrists for both elective and trauma procedures. This includes the state-of-the-art Arsenal Foot Plating System, a patented plating technology. Along with the 2020 acquisition of the Star Total Ankle Replacement System, The Trillion Edition established a dedicated foot and ankle business that will leverage our recon segment infrastructure and replicate our highly successful surgical growth model. Foot and ankle surgery is a billion-dollar U.S. market with attractive core growth and further opportunities for strategic investment. We expect the Trillion business to grow in the mid to high teens with gross margins in the area of 80%. LightCure is a market leader in therapeutic laser technology for human and animal health. This business has a strategic fit in our recovery sciences business and strengthens our leadership position in physical therapy and rehabilitation. High-powered laser technology is on the steep part of a long market penetration curve with higher growth than many of the other technologies that are being applied in rehabilitation. We see the opportunity to grow this product line at high single to low double digits between the market tailwind and the innovation and channel synergies. We're very excited these businesses are now a part of our MedTech platform. Slide eight expands a bit more on these acquisitions. Investors know that we have a very disciplined acquisition process rooted in our business strategy and focused on value creation. We have a very experienced team, CBS processes to ensure strong execution. And as you can see, each of our recent acquisitions accelerates our business growth strategies and expands our markets. For these transactions, we expect very strong returns, which also points to the strategic fit and attractiveness that each brings. We pay $135 million for the three businesses and expect them to contribute over $100 million of annual revenue in year three at accretive margins and double-digit organic growth. With this expansion, we're aligning our MedTech structure to accelerate growth. Our new foot and ankle business is becoming an additional growth platform within Reconstructive, and our bone growth stimulation business, which was formerly part of Reconstructive, is now in prevention and recovery, where it shares some common infrastructure. Moving to slide nine, Q4 MedTech sales declined 7% on a sales per day basis in comparison to the prior year. As we move through the quarter, volumes were pressured from increasing COVID cases and hospitalization. Recon sales declined 1% in the U.S., 3% overall, and P&R declined 8%, both on an organic sales per day basis. Given the rapid return to growth we saw earlier in 2020, we're confident that we'll see a quick return to growth in the coming months as cases subside and vaccines continue to roll out. Earnings were flat sequentially despite lower volumes. We continue to incur some COVID-related inefficiencies driven by the challenges of managing through the changing demand levels and supply and shipping constraints. But we aren't letting that slow down our improvement journey. We continue to make great progress using CDS to strengthen the supply chain and innovation engines in our MedTech platform. As a result, we remain confident in our ability to drive above-market growth and continuous margin improvement in the future. On slide 10, Q4 marked another quarter of sales and margins sequential improvement in Fab Tech. Versus the prior year, organic sales per day declined 2%. This represents a continuation of the recovery we saw last quarter and what we see continuing into 2021. Also, this completes the second year of outperforming our markets. The majority of our regions improved from the third quarter. Nearly half of our sales come from faster-growing emerging markets that achieved year-on-year growth. Our North American and European regional sales improved, but these markets are still the most affected by government actions to control the spread of the COVID virus. Our gas control business achieved another quarter of solid growth due to the strong demand for our medical and life sciences gas control solutions. Our Fabtech team achieved another quarter of strong decremental margins of 19%, significantly mitigating the profit impact from lower sales. Margins were only 20 basis points less than our strong Q4 margins last year. During 2021, we successfully executed upon our restructuring programs to drive savings of just over $20 million with approximately $10 million of follow-up benefits next year. We're targeting additional savings next year at comparable levels, positioning ESOD for continuous margin improvement and strong cash conversion. Before handing over to Chris to walk through our financial results, I'll wrap up on slide 11 and share our key 2021 priorities. We entered the year well-positioned to build on our momentum and are poised to have significant growth in 2021. We expect our teams to leverage CBS to sustain and strengthen our innovation and commercial processes to successfully grow our pipeline of new products and deliver market outperformance and share gains. We expect to leverage this growth, CBS, and further savings from restructuring actions to expand margins while reinvesting in the businesses. We also expect to build on the cash flow momentum that we created to deliver strong and consistent cash conversion in 2021. Next, we'll ensure the successful integration of our recent MedTech acquisitions to capture the benefits that will strengthen and accelerate growth in our business and to improve the health and mobility of patients all over the world. This success will enhance our ability to actively pursue additional strategic opportunities in both our served and adjacent markets. Wrapping up, we feel both our Fabtech and Medtech businesses should have a strong recovery in 2021 and have exciting futures driving growth, innovation, and long-term value creation. With that, I'll turn it over to Chris, who will start on slide 12. Thanks, Matt. Fourth quarter results show that our company has gotten much closer to pre-COVID performance levels. Setting aside the fewer number of selling days in the quarter that we signaled through the year, Q4 sales per day were down only 4%. Our industrial business grew in developing markets and experienced little drag from the COVID resurgence that affected our medical business. Gross margins of nearly 43% reflect our work to control costs and mitigate the negative operating leverage and COVID inefficiencies in the quarter. Our cost controls extended beyond the supply chain and enabled us to deliver operating margins of 13.6% and EBITDA margins of over 17%. Despite COVID pressures, we executed well in the quarter and achieved 51 cents of adjusted EPS, better than the guidance we issued. We also generated $96 million of free cash flow, a clear indication of our potential that supports our confident view of future performance. Slide 13 demonstrates our improving cash flow trends throughout the year and compared with the prior year, which included costs related to our portfolio transformation. We started 2020 with a clear line of sight to $250 million or more of free cash flow in the year, and we're solidly on that path before COVID impacted our results. COVID is a resilient company and we use this challenge to accelerate many of our continuous improvement projects and firm up processes that kept us financially healthy in 2020. Our second half performance this year demonstrates that we are on a solid recovery path and fully capable of generating at least $250 million of cash flow each year from our businesses. It also shows that our leverage ratio should rapidly decline in 2021. We have a strong growth outlook for the new year, as shown on slide 14. Full-year MedTech growth of 21% to 24% over 2020 levels includes mid-teens organic growth, about six points of growth from recent acquisitions, and a point of expected FX. Our MedTech business is stabilizing in Q1 from the recent increase in COVID cases, and we expect this business to return to growth over 2019 levels in the second quarter, led by strong double-digit surgical growth. We are projecting this growth to translate into strong margin recovery before the impact from acquisitions. These recent acquisitions have gross margins of nearly 80%, that will translate into high operating margins as they achieve scale. And in 2021, these high growth acquisitions are expected to post mid single digit margins. Our Fabtech business is projected to grow organically in the high single to low double digit range. And we are currently forecasting a couple points of FX. We are projecting that faster growing developing regions will continue to grow and developed economy regions will sequentially improve before returning to 2019 levels sometime in the second half of 2021. This business is expected to improve margins more than half of a point in 2021 and end with margins higher than record 2019 levels. We are currently experiencing raw material inflation and applying our CVS toolkit to address this with dynamic pricing. We expect a net neutral profit impact in 2021 from this. All of this is expected to add up to EPS growth of over 40%, or $2 to $2.15, and free cash flow of over $250 million. The slide includes the expected quarterly shape of the revenue, sequentially building into Key 2 and ending with our typically strongest fourth quarter. This translates into an earnings pattern that grows with revenue and restructuring benefits. We expect first quarter EPS of 35 to 40 cents. Let's wrap up on slide 15. 2020 was a challenging year. All of us at Colfax accepted the challenge and got to work to strengthen our company and rebuild our positive momentum. Strong fourth quarter results demonstrated that momentum, as did the recent completion of two additional high-growth MedTech acquisitions that will be fully integrated this year. Market conditions continue to improve, and we are continuously improving our businesses. We have an active funnel of acquisitions to further enhance our company. We are excited by the potential of our businesses and expect 2021 to be an exciting year of profitable growth. With that, Em, let's open up the call for questions.