Q2 2020 Colfax Corp Earnings Call

Ladies and gentlemen, thank you for standing by welcome to the Colfax second quarter 2020, <unk> earnings Conference call. At this time, all participant lines I'll listen only mode. After the speakers presentation. There will be a question answer session tests. The question during the session wanting to press star one on your telephone please be advised that today.

This conference is being recorded if you require any further assistance. Please press star zero I would now like to have the conference over to your speaker today like they said with cool. Thank you. Please go ahead Sir.

Good morning, everyone and thank you for joining us I might basic Vice President Finance, joining me on the call today, or Mad <unk>, President and CEO, and Crystex Executive Vice President and CFO.

Earnings release was issued this morning and is available on the Investor section of our website Colfax core dot com.

Well, we're using a slide presentation to walk you through today's call, which can also be found on our website.

The audio and that's what presentation of this call will be archived on the website later today.

And we'll be available until the next quarterly earnings call.

During this call will be making some forward looking statements about our beliefs and estimates regarding future events and resolve.

These forward looking statements are subject to risk uncertainties, including those set forth in a safe Harbor language in today's earnings release and in our filings with the FCC.

Actual results may might differ materially from any forward looking statements that we make today. The forward looking statements speak only as of today and we did not assume any obligation or intend to update them except required by law.

Respect to any non-GAAP financial measures made during the call today. The Comping reconciliation information related 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 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 their colleagues, while serving our customers in patients.

As I mentioned on our last call, we make koby 19 safety our top priority for Q2, I 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 flex down our cost of partly mitigate mitigate this slowdown in sales and achieve very strong decremental margins.

We also used and aggressive CBS focus to keep our cash flow positive.

And protect the overall financial strength of the company.

In the second quarter, we earned nine cents per share on an adjusted basis and generate $18 million a free cash flow achieving our objective that being earnings and cash flow positive. Despite a year over year sales reduction of about 30%.

[noise] sales hit a low point in April down more than 40%.

And then sequentially improved in both May and June as customers work 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 Kobe.

Slide four shows him 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, so 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 I've hospitals analyses 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 improve 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 and just elective surgeries.

Across the total med Tech business preliminary July results are consistent with our view that Q3 sales growth will be better than June levels.

In Fab Tech sales also improved throughout the quarter.

In April we experienced a decline of just under 30% and improved it down 20% in June.

As the quarter progressed, we benefited from reopened facilities easing of restrictions in many served areas and sequential demand improvement in almost all regions.

Similar to our Med Tech 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 maintaining and expanding our market advantages and investing for future growth.

Med Tech 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 reconstruct it 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 EBIT a in the second quarter, despite significant volume declines.

Given the improving sales were rolling back most of our Q2 temporary savings actions and focusing on driving strong sales recovery through commercial process is 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 surge in key opinion leader teams.

He developed 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 procedures, where patients can benefit from the greater stability and natural knee motion patterns that have made our in power such a great success.

We also recently received FDA approval for the ultra they anatomic C S edge, which adds a stimulus 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 cobot.

We recently released two new products under the market, leading Don enjoy brand.

The extra postop knee brace combined excellent range of motion protection with a comfortable user friendly design.

The first Iran hip rate so the 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 connected health care 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 cobot crisis has made doctors and patients even more interested in these benefits.

This week, we introduced motion I Q and innovative new software solution designed to transform the surgically surgical experience by digitally connecting the surgeon care team and patient throughout the larger continuum of care.

Motion I Q empowers patient to take an active role in their care through a more personalized and informed process, while providing the care team with continuous how 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 strength of our Fab Tech 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 GC gas control business grew in the quarter, we acquired GC several years ago as part of our strategy to improve the margins and growth opportunities within our fab Tech platform.

Gee is a leader in gas equipment selling in the health care space with medical gas systems, and other equipment as well as in more traditional industrial sectors.

We significantly mitigated the profit impact from lower Fab Tech sales through strong cost control and temporary savings actions, resulting in depth decrementals of only 21%.

Restructuring projects initiated late last year remain on track with expected in your benefits of at least $20 million and with higher annualized benefits.

We're also playing aggressive offense in fab Tech.

Hi, effectively supporting customers focusing on healthier market sectors and protecting key growth investments we're positioned for continued outperformance.

Slide eight highlights some of the Sab'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 at in east job that reliably creates market, leading new products that drive share gain each year.

Our fab Tech platform has also been focused on digital solutions.

We expanded our digital offering this quarter with the introducing introduction of wealth cloud notes document management software.

This solution add well process storage and quality documentation to our industry, leading weld cloud offering.

This quarter, we also launched the Arista So 500, I Echo a portable power source that is designed to better serve the need of the heavy industrial market.

We also rolled out the mini arc Roque, yes, when 80, I affordable stick lift ticket inverter that gives us access to a new market segment.

Hi growth markets.

We will launch dozens of filler metal and gas control products. This year and I've 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 and our manufacturing sites, our field service team and those working via technology from home.

These teams are focused on continuing to reliably deliver to customers at a time when they need are essential products.

At the same time, our teams are driving CBS 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 at 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.

Thanks, Matt despite the pressure on a revenues in the quarter from co bid, we flex their total spending down to achieve our objective to generate positive free cash flow.

$10 million, we're reporting does not include another 3 million from the sale of assets.

He also reduced our operating cash balances to more efficient levels.

All of these efforts supported the 300 million dollar revolver repayment in the quarter and kept our liquidity at 1.2 billion.

We finished the quarter with 4.2 turns of debt.

We are forecasting to be cash flow positive again in Q3 and generate our seasonally highest quarter of cash flow in Q4.

Our current views in the second half of the year with leverage in the mid four churns and then to return into the threes as EBITDA levels rebuild in 2021.

Slide 11 is an overview of our as reported second quarter consolidated performance.

Sales declined 32% or 28% organically as FX headwinds impacted sales just under 4% in the quarter.

Based on current exchange rates, we expect this headwind to be lower in Q3 in the range of 2% to 3%.

During the quarter, we executed the temporary spending reductions as outlined in our last call. This enabled us to achieve Q2 decrementals of 28% within our expected range.

Our outlook is for sales to continue to sequentially strengthen and we're dialing back many of the temporary cost actions to align with this view as a result, we expect the decrementals in Q3 to slightly move into the low thirtys.

Our Q2 operating cash flow 37 million reflects process improvements that were quickly implemented by our teams throughout the company in some cases accelerating efforts. It would have been completed later in the year.

These improvements will also contribute to future performance.

As koby debates after 2020, we expect to return to the 250 million or more free cash flow and 90% plus conversion that we originally guided for this year.

For the rest of 2020, we expect interest cost to track near Q2 levels and the tax rate on adjusted earnings to likely be in the mid Twentys.

The share count should be mostly in line with this quarter's results.

Slide 12 provides a similar view of the recovery in each of our businesses as we provided in our last call.

The long term drives that we discussed a few months ago remain intact. Our med tech business is well positioned to serve the increasing demand from aging and more active populations and related medical conditions.

Our fab Tech business remains the only truly global supplier to support infrastructure investments in the developing world.

Our medtech business should benefit from increasing access to healthcare in our served markets.

The industry as a powerful incentive to continue to serve patients and protect revenue.

We're already seeing increased activity as surgeons worked down their backlogs at future revenue will also be linked to more patients were entering treatment arenas to seek relief for chronic pain, and new mobility and for injury prevention.

We're expecting flat to down mid single digit revenue in Q3 and continued normalization heading into 2021.

Our industrial scenarios continue to have a wind or a wider band of potential outcomes to reflect the broad number of market served.

We continue to expect sequential progression each month and preliminary July results are inline with our views we cannot predict with certainty when demand levels were returned to pre cobot conditions, but see a path for quarterly normalization sometime in 2021.

We're pleased that the rate of top line improvement in our businesses through Q2 and ended July.

We acknowledge the risks associated with additional waves of infection that continues to influence the wide range of potential recovery outcomes, but we're confident of our path for sequential improvements into the back half of 2020.

Wrapping up on slide 13 in the second quarter, we demonstrated our resilience of the strength of our teams and the power of our business system by responding quickly to the pandemic.

We've protected our associates and delivered on our Q2 financial objectives of positive earnings and cash flow.

Business conditions, clearly improved off of April lows and this momentum is already continued into Q3.

Sales and profit should sequentially improved this quarter.

Throughout the downturn, we continue to invest for growth to ensure we remain well positioned to play offense and resume our momentum of gross margin expansion and healthy cash flow is cobot abates.

That completes our prepared remarks, let's go and open up the call for Q and eight.

As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound team. Please standby, while we compile the culinary roster.

Our first question comes from the line of Scott Davis, Scott Davis from nucleus Research. Your line is now open.

Hi, Good morning, guys can you hear me okay.

Yeah, Hey, Scott morning, Scott.

Good morning.

Thank you sound interesting here I mean, you made a comment.

We ended prepared remarks it.

Yes improvements accelerated.

Given the pandemic to me can you give us some examples of what you're referring to.

You know, whether its factory base leaner sales marketing or kind of all the above.

Basically anything that you can share with us in that regard, yes got to me. This specific comment was was related to cash flow. Although we're working on process improvements throughout the business and in cash flow.

We had.

You had active efforts working on on improving.

Inventory management in both of the businesses.

As part of our overall CBS focus.

In the businesses.

And that's an area, where we had already laid a lot quite a bit a foundation.

In terms of that process work and as we got a early into the crisis, we were able to use that foundation.

Two very thoughtfully pivot, what we're doing on on the inventory front across our many facilities around the around the globe and stay in a position where we could serve customers.

Well as a as the volumes were declining, but where we didnt continue to build up inventory in the business and so we feel like we've been able to keep us ourselves strategically positioned to have the right amount of inventory for the for the recovery, but at the same time not to have our inventory run up on us as the revenue was coming down.

I would I'd add that we also increased the.

Cycle times in the reviews that we've got in various parts of our operations as well and as you know the more frequently your Matt you're measuring and improving generally are going to be able to drive better results that way as well.

Okay helpful and then.

Just kind of logistically I mean, you you have a few new product rollouts in med Tech that look look promising, but I guess those products out to educate your customer in times like this.

You know is is this the right time I touched a lot I had to launch new products or is this just a part of the regular cycle. One is just going to take a little longer perhaps given the endemic to.

To really get get customers to understand the offering.

Well interesting enough Scott its and its been sort of a great time as long as your thoughtful about the about the timing for a couple of months there in Q2 doctors and their other practitioners had more time than they've ever had to talk to us. So we took full advantage of that we had a lot of digital education sessions on a range of issues.

Including the new product that we had so we did it with a couple of products, we shifted out the timing of the of the launch by a couple of months to get them out of Q2, when there wasn't as much activity, but then we use that time to do a whole lot of education and a and now I think we've got the opportunity to bring those bring those products into.

The market here in Q3, so I think it was a bit of up a bit of a unique opportunity on on these products that we our teams have taken full advantage it.

Helpful. Well good luck to you guys. Thank you very much. Thanks.

Thank you. Our next question comes from the line of Jeff Hammond from Keybanc capital markets. Your line is now open.

Hey, good morning, guys.

Hey, Jeff.

So just wanted to focus on decremental margins and med tech they seemed a little bit I'm, a little bit weaker than than what we were forecasting just can you talk about.

What you did in terms of time costs, and what comes back and and.

What what investments may have kind of Wade and maybe how to think about decrementals are.

You know as we you know between the two segments as we go into through Q I know you give us an overall.

Yes, Jeff we were I think we're really pleased with the execution that we had in in Q2 in both the businesses.

Theres, obviously a difference in the in the performance because you've got a different starting point with the margin profile in the businesses. So we would expect the fabtech a business to come in with lower Decrementals just as it did.

And so we've executed really across the wide range of temporary initiatives that we had which impacted.

Employment levels of compensation.

Discretionary spend just really pulled a pretty much all the levers to make sure that we could this stay financially healthy.

As the quarter progressing we began to see improving sales levels.

Became clear to us that we had the opportunity to match the temporary spending going into Q3 against those improving sales levels and so we began to turn the knobs, a little bit, especially with respect to employees decrease in the furloughs.

We're changing the compensation tactics that we had engaged in it.

But still all of that means that we're targeting a level of decrementals in Q3, that's really going to be very similar to Q2, instead of being in the sort of high twentys for saying low Thirtys, we think thats appropriate given the level of improvement and the fact that we're pivoting the team more and more to playing offense, making sure that we're getting our fair share of the market opportunity.

Okay, and then I.

I think there's been talk of you know kind of this catch up and the surgical piece and I'm. Just wondering how you think about you know I know visibilities tough, but how you're thinking about cadence into into Fourq. You do these catch ups all happened in Threeq, you and then we stepped back or how to think about.

You know some of that catch up.

Yeah, Yes, Scott from really from the start of that or sorry, Jeff there has been a.

I I think theres been an understanding.

That's.

Wow elective surgery was essentially shut down.

There is there's a backlog that build up.

And at same time, there's less clinic visits that we're taking place.

And then as elective surgery.

Started to come back initially we're working off that that backlog, but then the clinic visits are building back up the backlog and so from the start there has been an understanding.

At.

The recovery came super fast and there might be a little bit of a pause after the recovery before you got to normal and if the recovery came slower than they are probably wouldn't be a pause and it just sort of the math equation.

Between the backlog and the recreation.

Of the backlog and so.

As we think about the pack back half of the year you know, we're keeping that that in frame as as I shared in my comments are reconstructive business within a positive zone positive growth zone in July that doesn't mean the industry within a positive note rosone overall be because we've been taking share can.

System Lee in that in that industry for a couple of years now.

But but that that positive zone in July you know if we stay in a positive loan zone through through the quarter in that business. It just depends how positive we are right. The stronger we get the more chance that we might pull back a little late in the quarter or in in Q4. Once the backlog has been been worked off and if it's a more.

Steady progress in through the quarter, then it's more likely that it will stay in that in that steady progress and but the good news is that right. Now. This is in the reconstructive business all the discussion around the range of flat or up a little are down a little.

Unless unless something changes in the external scenario versus the significant declines of Q2.

And the how's the.

Progression of recovery happening in the and the in the rehab side relative to maybe what you would have thought you know three four months ago.

Yeah, I think in in reconstructive, it's been it's been pretty consistent with what we might have thought that that business didn't go down as as as far and its recovery has been slower what what we see happening there is that there's a significant portion that business has driven off of sports medicine elective surgery, as well as implants elective surgery and that part.

Of course has come back very quickly with those elective surgeries, but then there's also a significant portion of that business that is based on a broader range of drivers around the world sports activities workplace injury trauma, and a and those are coming back at a more step by step pace.

Frankly is more consistent with what we're seeing on the fab Tech.

Business in terms of kind of step by step pace of a recovery and so I'd say the recovering that businesses.

Consistent with what we expected and we're encouraged to see improvement again in July in that business.

As well that we think it's consistent with what's going on in the outside world as more people are getting back to activities and the clinics are getting more full et cetera, but at the same time you know there's a lot of activities that have not resumed yet and it's going to take some number of months or a couple of quarters before all of those do.

Okay, great. Thanks, guys.

Thanks.

Thank you. Our next question comes on the line of Joe Giordano from Cowen Your line is open.

Good morning.

Hey, Joe.

Hey, so really.

Good color.

Surgical being up in July is important and I'm just curious like.

Is there a wide range.

Hi, My comment outcomes that you're seeing now in different parts of the country like is it a lot in the northeast and like.

Downstairs or getting worse in my California, or places I haven't seen second waves Im just curious is that now how do we think about.

The sustainability and full or direction of that July number.

Yeah, Joe will first our surgical balances are a surgical business is nicely balanced across the across the country and.

There is there is no question that there are regional differences that there are certain states in cities. They came back very very fast.

And then have a you know have had a you know some flare ups in terms of infections that have led to some.

Some pull back and there is other states that have you know that took longer to come back and they're just now really accelerating now the good. Good news is that there's a degree of diversification there that it'll have some month by month impacts, but not a you know, we're not seeing wide swings and and frankly it tends to be.

Quite quite situation specific again, if you go back to March everything stock essentially.

It really had to happen, whereas with what's happened here in June even July is yeah, you'll have a you'll have a doctor that starts to see a that because of some local flare up there they're scheduled getting a little bit a little bit pulled back into you know what I'm, taking vacation why I'm going to go take two weeks [laughter]. So we have one of our doctors that we were thinking.

It is going to do a lot and then they're not and and we adjust to that or you have a hospital that starts to get concerned and and so they they dial back to only doing things a in in the.

In in the ambulatory center and that takes a hospital from.

80, 90% to 60 or 70%, they're more specific case by case things that are that are happening that are causing some of the oscillations in the business and I think our team we've got incredibly agile surgical team and they're doing a fantastic time.

Jot adapting to that and making sure that date, the doctors have what they need to do the surgery than that we can pivot when someone decides to to pull back and someone else decide do a little more we're staying very close to those docs and I think doing a great job doing that.

And we do feel like.

That that.

Kind of surgical implants business has recovered.

Yes, most most of the way and it's going to pop bounce up and down a little.

But unless there's some significant unexpected.

New new phenomena, we should be kind of away from the very difficult times in that business.

No I apologize if you put some started in kind of generally positive Nick warning.

But.

Have you seen kind of like maybe an accelerated shift towards the ambulatory center and you are they kind of accelerated maybe the the uptake of some of your digital offerings for patient, scoring and things like that.

Yeah. So there's no question that right now a larger percentage of procedures are being done in an outpatient environment in multiple types of outpatient environments not just AOCI.

A larger presented a procedures are being done that way that's the way the hospitals have have dealt with.

You know with getting back to elective surgery, while at the same time, having the appropriate separations and things that they need to have I just want a temporary basis. There is a meaningfully elevated amount of stuff being done in that outpatient environment.

On the back side of that that will stabilize back.

To to a more more balanced level, but but for sure.

Just kind of trend to more outpatient surgery has likely been accelerated for good.

Through this and there's some great things that we've been doing there.

Or a score is it's something that we've made available to everyone on a short term basis. So they can they can use it and see how it helps them to do the risk assessment assessments of which are the which are the right patients to be able to do in that outpatient.

Environment. We've also you know our knee product a empower knee is a knee that is that sets up very well for the type of patient. They active patient that has done in the outpatient environment and so that creates more in the AMC is an advantage for us and we've also been continually working on our our instrument sets and other work.

Flow for the assay to make sure that as that trend continues that we can be a real leader there.

And just last for me just on contact now obviously of your significant exposure.

Some parts of the world that have been hit pretty hard to.

Brazil, Russia things like that have you seen those markets kind of stabilize at least from a from a demand standpoint.

Yeah, we as I said most of our regions have <unk>.

Accelerated through through the quarter and.

That includes kind of various emerging regions.

Like Russia in India is one that.

It was completely shut down in April and most of May and then has.

Reopened in June and taking some time to get restarted on the back side of that kind of a shutdown.

But but all of our facilities reopened in late May early early June in.

In India, and we certainly are seeing that developing part of the business performing better than the developed and.

Accelerating as well on an ongoing basis.

Great. Thanks, guys.

Yes.

Thank you. Our next question comes from the line of Mike Halloran from Baird. Your line is no fun.

Good morning, gentlemen.

So first on said tech side, a little bit of the continuation from our last question you think about the guidance in a high single to low mid teen kind of decline range from 20% decline in June.

What informs that improvement constitute a little easier.

But is this a linear improvements curve is that what you're seeing july across regions and kind of going normal sequentials off that are normal seasonality off that excuse me.

Although we kind of frame, where how you right.

Johnny.

Hi single due diligence to mid teen type decline range.

Yeah. So I mean, we've certainly we track very carefully the trends through the quarter and what was driving those those trends and which would how much. The improvements were driven by factories that we'd had to shutdown that were then able to reopen versus how much was driven by.

Demand based economic drivers and which of those were policy driven in terms of they were they were shut down and then reopened versus.

Which of them were activity driven and maybe they slowed down and then there. They are we starting at some some pace and we've looked at it kind of segment by segment. So we looked at how things went through a through the quarter and then we've taken a close look at how.

How June has has developed.

And based on that have.

I tried to give our.

Best Beauty, you about how we see things going through the quarter.

And as you'll notice that we would be a sequential trajectory for us.

It is quite different from history. We typically are down from Q2 to Q3 based on this summer in Europe and and.

We're now expecting that we should be up from Q2 to Q3.

The pricing for the full tilt.

Positive quarter thoughts on how that dynamic plays out.

Kind of price cost commentary from your perspective.

Yes, so pricing in the market is pretty stable and our positive in the quarter is more related to.

Covering inflation into high growth areas, a world versus some some broader pricing actions.

But we are.

Feeling like there is a good good stable.

Nice environment.

In the industry and we continue to drive value based pricing efforts, while at the same time being very proactive about about covering inflation when when it hits us.

And then last one when you go back to how you're thinking talking about the rehabilitation side of things.

How does it correlate to activity levels and the return reconstruction is it pretty quick incidental is there a lag impact.

How are you guys thinking about the timing is that versus the other pieces.

Yes, so again, there's there's a meaningful portion of our prevention in rehab business that is is related to elective surgery and it's a it's pretty closely pretty closely linked as as elect as as sports medicine surgery restarted around the world and not just in the U.S.

We saw.

A meaningful pickup in a part of our bracing.

That.

In some cases it was constricted just because people weren't going to clinics and so they they would have pain, but they weren't able to to get the clinic. Some of that came through a consumer channel, but the reality most of it just didnt come for a little bit there.

But but theres also.

Different sports industries workplace injuries.

Trauma that are the some of the drivers of the need for prevention and rehabilitation.

We're we're significantly reduce based on all of the.

All the policies around the world of people sheltering in place and different things like that and and so thats just as these economies get more more open and people get more and more active.

That should get the rest of the way back to normal.

And we're not sure if thats going to be a quarter or several quarters, but we do expect the demand drivers to return as Chris talked about as we as we get into next year.

Appreciate it thanks Tom.

[music].

Our next question comes on the line of Joe Ritchie from Goldman Sachs. Your line is now from.

Thanks, Good morning, guys going to Joe.

Okay can we just talk a little bit about med tech margins in the re queue. So.

If you guys into doing let's just call it flat organic in med Tech so roughly 300 million in revenue I'm trying to understand like whether the EBITDA margins can get back into like the mid teens, because I had them you know closer to like the high teens last year and you do have a mix benefit.

Sorry, that's my dog in the background.

Nick Nick benefit right that should should be occurring in threeq as well.

Yes, I'll just comment on its Chris can can add but.

I think.

From an overarching standpoint, we certainly are focused.

On making sure that as as our revenue recovers.

That our margins are in a healthy place and that we can drive the kind of margin improvements in this business that we that we talked about.

Since we've acquired the business and we're confident that that's something that can happen.

And every any given quarter, there's going to be some some twos in frozen in terms of.

What we're selling and what we're investing in and.

Different aspects of temporary measure that cetera, and so yes, I think we're not going to be not ready to comment on specifically quarter quarterly margin comparisons but.

What I can say is that we're very focused on making sure that as as the revenue fully recovers that we have the kind of margins that we should have in that business and are able to continue to improve from there.

Okay Fair.

Fair enough growth I guess, maybe just to make sure that I got it straight, though the expectation is for reconstructive to grow faster than that prevents in rehab business and the second half of the year and that should be mixed accretive correct.

Yes, that's a dynamic that we've seen for quite some time and we would expect to see that continue in the in the back half of the year.

Okay, Great and then maybe just my one quick follow up on Fabtech can you, maybe just talk a little bit about what you're seeing.

Geographically and then also.

What you're seeing on the consumable side of the business versus the equipment side.

Okay.

Yes from from a geographic split in in Fab Tech.

As as I shared the did the developed markets.

We're down we're down more than the emerging markets.

Both but but both sets of markets showed healthy acceleration.

Through the quarter.

We.

We expect both sets of markets to continue to accelerate as as we move into the.

Into the third quarter.

And yes, obviously on a country country basis. Every every country is going through things that a little little different pace based on policy and and other things.

But thats, what the what the broad trends are saying.

Okay great.

Okay.

I think there was a follow up on the equipment versus consumables, there and in that yes that case there. The experience we had the quarter was actually pretty similar between the the consumables part of the business and the equipment side.

Okay, great. Thanks, guys.

No.

Thank you Sir our next question comes on the line of onshore open Crombie.

Your line is now from.

Good morning.

Andrew Andrew running.

Hi, just couple of questions we've been getting.

So the first one on how we think.

The impact of professional sports on college sports on production on rehab.

In the second half of the year.

How should we sort of.

Quantify the impact.

What kind of impact will it have wants college sports resumed.

Yes so.

Sports not as professional and college, but but also the broader set of.

Hi School and youth sports activities and other sports activities around the world.

Our one of the growth drivers of our prevention and rehab.

Business.

At one of a number of growth drivers as as we've talked about but certainly one of the one of the growth drivers and so certainly that the.

The declines that we've seen and the rate of recovery that we've had and the rate of recovery that we're talking about.

Is is being affected by that by that driver and the assumptions that we've made for the balance of the year is that there is a step by step return.

The sports.

Theres not a total locked down of all Coke sports and that Theres not.

A kind of immediate resumption of all sports that's going to be sometime next year before all sports are.

Our resumed and that that's kind of what we factored into the the high level trajectory guidance that were given.

Thanks, and I am not the second question just thinking about 2021.

What would it take for Matt Tech business to be up over 2019 and 2021.

Not asking your core forecast for just asking for scenario under which met tax could actually be up over 2019.

Yes, so yes, it's an area that as Medtech above 2019 is is that first.

Elective surgery is let's say essentially back to normal rate that we that we clear through this year.

You know the return to elective surgery as well as the kind of recreation of the.

Of the backlog and that.

Next year with Brad.

Kind of at least close to normal elective elective surgery levels.

Is.

As is the first assumption and then the second would be that.

Kind of the vast majority of the drags that have existed this year in terms of activities in sports and things like that I have.

Fast.

That.

Whether it's through a vaccine or through comfort with treatment.

Or through comfort with kind of managing things through PB in social distancing et cetera people have gotten comfortable get it getting back sort of.

Close to normal resumption of of activities I think that that combination would get us.

Two positive zone next year, which we would you think is a very very reasonable set of assumptions, we're not ready at this point to to guide that that's what we think is going to happen, but we think theres certainly a reasonable set of assumptions that would get us to positive in med tech over 19 in 2021.

Thanks, so much.

Thanks for our next question comes on the line see per apart from JP Morgan Your line workflow from.

Hi, good morning, everyone.

Steve.

Just the kind of decremental margin commentary is there any reason why for Q would be materially worse or off much from this from what seems to be kind of a more of a managed kind of stable trend I mean, I don't I don't think of low thirtys is different than 29%.

So it seems like you guys have kind of stabilize things on this front any reason why fourq here would.

Bounce around at all assuming no revenues are within a band we don't all collapse again by then.

Well the under the normal Decrementals in the business. Our if you think about it around 40% for Fabtech and over 50% in the Med Tech business, So thats, our normal operating range.

And we tend to flex around that given levels of investment and so forth. So the idea that we're in the in the Twentys and maybe even a low thirtys shows that reflects the cost pretty significantly as we sequentially improve the business at some point youre going to see us migrating back toward the more natural levels, a decrementals and then eventually converting into incrementals in the business.

So.

I think we've got the the certainly the our hands on the cost levers to be able to manage toward the decrementals here as the sales are down, but I would expect to see us migrate over time.

Okay overtime does that mean, you're going to be kind of mid forties in Fourq, you think things play out.

No I don't think we're in a in a position to talk a lot about Q4 at this point in time, but.

I don't think there'll be a reason why we'd have a significant shift in a single quarter in our decrementals.

Right, Okay that makes sense and then I guess.

I think kind of the real opportunity on margins it looks like it.

Comes at this.

The fab Tech business, you've got here is a peer average that comfortably above that.

You guys said, you're working on improving kind of the process season, perhaps some more structural.

You know up more of a structural approach to cost and better ops there.

Should we see that materialize on the way up for that business I mean in order to close the gap on margins you, obviously have to leverage better than peers on the way up is that kind of the goal for Fabtech to you noted to really leveraged the some of the process improvements to deliver.

Better than it's better than historical incremental does this thing recovers overtime.

Yes, Steve I think.

First of all over the last four five years, we've driven really substantial improvements in the in the margins of our fab Tech business to where we're now sort of kind of in inline with where the key peer there versus versus where we used to be and that's been a combination of structural.

As well as CBS based productivity and innovation and value pricing in the business overtime and we are not done we intend to continue to improve the margins of that business and you can tell from our comments about some of the structural actions were taken in that business.

That we're trying to make sure that in that business as we get back to 19 kind of revenue levels that.

That we've made progress on on the margin front and that we're also in a position to continue to make make progress from there now I will say that.

No.

One of our other peers has structurally different business and so I've always said, it's going to take execution for us to get to that kind of.

15% to operating profit range in margins in that business, which we were closing in on pre Cove. It but it takes strategy to get us further than that and we've been working on strategy. Both acquisitions that we've made and innovation strategy et cetera to kind of lift up the head room to were 15% operating margins is not the is not the.

Ceiling for us and I'm talking operating margins not EBITDA margins because because that's.

Thats kind of what we had talked about historically here.

But the EBITDA margin would that would go at 15% operating margin is about 60 and a half a percent EBIT a EBITDA margin. So we we were closing in on that we're going to close in on it fast on the back side of Cove. It.

But we're also strategically lifting the ceiling both through restructuring efforts and its strategic efforts.

To make sure that we're not done and we can keep advancing the margins that business.

Right right, Great and then one last one on on free cash flow.

Yes, I would hope or would it would improve sequentially.

Hi.

When you think about kind of the moving parts.

On working capital for example in the back half maybe I know you don't want to give like specific guidance, but maybe just some color on.

Some of the moving parts and working capital what what could get better just seasonally or from what we're seeing in the revenue trends and.

Maybe if there are other headwinds that are discrete when it comes to us second half.

Free cash flow Directionally, because just seems obviously to get back to 250.

I would hope, it's not going to be like really bad in the second half year that there will be.

I have a pick up on cash and the second that maybe just some moving parts there.

Sure see the if you think about it starting in the second quarter, we had obviously the declining revenues, which which had a profit impact on our business and so to counter that we had two things working for us in the beginning of the quarter. We had receivables that were working down that provided cash force there and then in the back half of the quarter. We're.

But of all the spending actions that we were taking which certainly started earlier in the quarter, but you had the full benefit there as you roll into Q3 with sales getting sequentially better now we're going to be in the physician, where we're rebuilding the receivables. So you've got higher sales higher profit, but you've got certainly at the at least in the front end of the quarter are present, perhaps throughout the course.

Order.

Got to rebuild the receivables that's going to take some of that cash and so as you turn the you turned the clock into Q4, what we'd expect to see now is working capitals largely normalized I'm sure they'll still be some puts and takes but largely normalize the potential for and increasing sequential improvements and then as I mentioned in my comments, we'd expect that to be the or high.

This quarter in one that's a little bit more reflective not fully reflective, but more reflective of the of the cash flow potential of our company.

So you think the for Q could be could close to reflect that kind of 250.

I'm not prepared to talk about.

About Q4 in specifics, but I think you'll see of being a lot closer to the potential the business that we had in terms of conversion and longer term potential now the reason I. The reason I'm hesitating here is obviously, we don't have a full view on Q4.

I don't expect a full recovery this year and so and then of course, depending on the rate of improvement that could be a factor as well along the way Steve I think I'd just remind everybody that we've continued to make the investments in our business to support growth and.

Thats also a factor this this year and an important when that will help us regaining momentum as we were past co that.

Alright, great color. Thanks, Thanks, a lot guys. Appreciate it thank you.

Thank you. Our next question comes from the line of Julian Mitchell from Barclays. Your line is now.

Thank you and maybe just trying to stick to two questions. My first one would be around the med Tech margins understood. You are not commenting on Q3, but I guess I want just trying to gauge how satisfied with the Q2.

Eliminates the EBIT I think it was down almost 90% year on year.

Maybe within that help us understand what cost savings you realized.

And why the once we look ahead to the recovery if that Q2 performance how does that in coal and what type of incremental margins, we could expect.

On the way up on sales return some normal.

Yes, so the perspective I have on the margins is we're delighted with the performance. If you think about a business that went through this kind of revenue downturn with this sort of gross margin profile. The high gross margin profile. There was obviously going to be a lot of pressure on the profitability in the business there and.

So to maintain the performance that we have with that kind of revenue downturn accrued caused us to or required us to flex our costs pretty heavily we talk to have in Q2 about overall getting flexing our costs in the $80 million plus range across the company.

Just given the different size profiles of the business.

I think it may have been a little heavier on the fed tech side, but.

But we were able to flux costs now some of that comes naturally with the business because it's got a variable cost structure with some of its us selling costs.

But a lot of the other cost flex came from discretionary spend reductions bye bye.

Turning to having better cost the contracts the suppliers, making some changes on the employment side as well now. This is a business that is quickly more quickly recovering and as Matt mentioned the a part of this businesses have returned to growth are demonstrated growth in the in July and so we feel it's appropriate that those cost.

Covers our ease back a bit and and matched up with the revenue profile. These sort of emerging revenue profile of the business.

So I'd say overall quite pleased with that and as we get to closer and closer to revenue matching up to where we've been before I think that provides a clear path for us to to get our margins back in that neighborhood as Matt mentioned Theres, some puts and takes.

Yes, we're working through co that you've got extra cost in some places you've got some inefficiencies that weve that we continue to work through but overall I think we're quite pleased with the performance in the path that we've got on the margins.

Thanks, and then my second question.

Just wanted to understand you gave some color on receivables accounts payable fell very sharply.

Sequentially in Q2, nothing that was a big private behind the free cash flow pressure that you'd seen.

Maybe help us understand what happened with payables number falling a lot more than receivables and inventories and how you see payables playing out over the balance of this year.

Yes, so the of the payables performance that we added Q2 was principally driven by two factors number. One is we had heavier capex spend in Q1, and just given the timing of that a lot of the actual payment for that capex fill into fell into Q2.

So that's certainly one factor and then the second factor is just ensuring that we have a healthy supply chain as we as we work through cobot. There was a lot of pivoting we had to do to make sure that we maintain the continuity supply for our customers, which we which we did do and so we had to make sure that we kept the supply chain healthy.

Looking forward there so I. So I think we ended the quarter with reasonable.

They say days.

Sales in in payables, there, but I do think theres the potential as we now have increased levels of sales and production that you'll see accounts payable rising up and and that could provide a bit of a source of additional cash in Q3 in Q4.

Thank you.

Our next question comes from the line.

Walter Liptak from Seaport Your line Macau from.

Hi, Good morning, guys. Thanks for taking my questions.

Good morning.

I just wanted to ask one about the you saw a channel you guys. Your inventories were kind of just right.

For any kind of improvement what are you thinking about with the.

The channel partners has there been any sort of or reproach, yet or your customers starting now hold more inventory as production levels go up.

Yes, you when these type business we don't.

See a lot of channel impact in that business you know, there's some some modest channel impacts at times as the channel is kind of leaning in a little are leaning leaning out a little but but unlike some other businesses. It's not a business that has these kind of white springs swings from from channel stocking or Destocking in.

I would say, obviously were very global business and so it varies all over the world.

But here in.

In North America, certainly as as we went through the second quarter. The channel got more positive over time and and July is starting out step forward from.

From June as we've as we've talked about and so and we think Thats reflective again here in North America, it's reflective of the the industrial markets and some of the construction markets and some.

Kind of government government, driven infrastructure things like shipbuilding and things like that.

Those are leading to some some healthy progress in the U.S market and and then another other markets are around the world.

The channels are generally cautiously optimistic about the step by step progress forward in terms of.

More activity as there are less constraints put on industry and the rebuilding a demand that creates even more activity.

Okay, great and kind of along those lines.

No other things besides ship building that might be picking up or like the there's a housing recovery that's going on just said protect get any benefit from that.

And likewise, there's some things that are still.

Although maybe that's picking up oil and gas is still weak aerospace I wonder if we can get to comment on some of the sectors. Yes, yes, that's right certainly general industrial land and construction not just residential but but all construction.

And have been positive areas infrastructure around the world, but but some of the government driven stuff.

Here in the U.S. So those have all been positive things and alternative energy has been a positive as well.

Wind towers and things, but but then on on the flip side obviously.

Oil and gas as has been tougher automotive has been has been tougher were not as exposed automotive here in the in the us but plan that supply chain in Europe.

The automotive has been tough for some of the yellow yellow goods.

As has been a bit but tougher as as well so it's definitely.

Everything stopped or everything kind of went slower for a bit there, but things are coming back a differential rates and and one of our key strategies in the sub businesses has been to make sure that we are proactively positioning ourselves to succeed with the segments that are coming back the fastest and and most successfully and make sure that that that contribute.

Two continued out outperformance from a growth in share gain standpoint in that business that we've been able to demonstrate now here for awhile.

Okay, great in the last one was just on M&A.

With.

You know any changes on look one of the med tech bump in silver the welding focus and is it possible even to get deals.

To look at in this environment.

Yes, we've we've got to.

A healthy M&A funnel rebuilding and are encouraged about the opportunities ahead of us and we focused on I mean M&A opportunities in both businesses that are going to strategically it advance and strengthen the businesses, but we also have been been transparent that were look into.

Overdrive the growth of the Med tech business and disproportionately invest in M&A there in the.

In the coming coming years, but.

Yes, there was a period, where it was really not that practical to do any any meaningful deals there because the visibility was just really bad but as visibility starting to come back there's more constructive dialogue happened on and resin prices restarting et cetera, and I think.

As we work through the balance of this year and into next year, we're encouraged by the possibilities that we see.

Okay, great. Thank you.

No.

From floor at this time I'm showing no further questions I would like to turn the call back over to Mike Rahm for closing remarks.

Thanks, everybody for joining our call today, we look forward US speaking with you are going forward or whatever good day.

Ladies and gentlemen, this concludes todays conference call from for participating run out just from us.

[music].