Enovis 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 this 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 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 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 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. We'll 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, completed an equity offering, and finalized 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. MedSheet 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 fixations. The supralactic properties of nitinol, a nickel-titanium alloy, are applied in the diamond nail 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 focused on value creation. Medchiate 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 accreted 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 D-to-A 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, and 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.