Q3 2020 Colfax Corp Earnings Call
And welcome to the Colfax third quarter 2020 earnings call.
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It is now my attached to it during the call and French over to your speaker today Mr., Mike Music true. Please go ahead.
[music]. Thank you good morning, everyone and thank you for joining US Hi, Mike Mason Vice President of Finance joining me on the call today are Metro <unk>, President and CEO, and Chris <unk> Executive Vice President and CFO.
Our earnings release was issued this morning and available in the investors section on our website called Pacs Corp, Dotcom will.
We'll be using a slide presentation to walk through today's call, which can also be found on our website.
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 risks and uncertainties, including those set forth in the safe Harbor language in today's earnings release internal filings with the SEC.
Actual results might differ materially from an important 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. The accompanying reconciliation information relating to those measures can be found in our earnings press release and today's slide presentation now.
Now I'd like to turn turn it over to Matt I'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 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 cant pandemics effects.
We achieved very strong sequential improvement during Q3.
Organic sales improved 30% from the second quarter declining only 3% year over year.
Both businesses are quickly recovering with line of sight to regaining our pre cobot 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 at $49 million of free cash flow.
These are strong against sequential improvement over Q2, and we expect further strengthening Q4.
We also announced the signing of an acquisition that was strategically broaden our medtech reconstructive business.
We are regaining our positive momentum with a clear strategy for compounding value creation.
Slide four update the pace of recovery and underlying customer demand.
All market strongly improved from Q2, low this quarter and many returned to growth.
Our med Tech business grew 1% with a little help from nonrecurring pp sales.
Elective surgical procedures in the U.S. are nearly back to pre felt good levels and many organized sports activities and other athree drivers have resumed.
Clinics in our served markets are operating much closer to pre co bid levels, increasing demand for non surgical products and recreating the pipeline for our reconstructive products.
With markets in the range of 90% to 95% recovery, we expect sales per day growth to stabilize at the flattish levels in Q4.
The short term range of outcomes will be influenced by continued positive activity and treatment trends.
Versus reactions to cobot case escalation in some geographies.
We believe that our markets should return to healthy growth in 2021 over 2019 demand levels.
Our fab tech 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 is 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 cobot reemergence in Europe, and the U.S. elections.
This overall positive trending gives us a confidence.
In gives us confidence in a return to 29 team 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 showed the strength and resilience of our Medtech portfolio.
Reconstructive product lines returned that fast growth, 9% above last year as we extended our multi year record of taking share in surgical.
Prevention to rehabilitation product line sales also recovered strongly off of Q2, Loews declining only 2% year over year for the period.
As 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 in general recreation that drive norm or 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 higher supply chain costs in Q3 to overcome cobot related challenges and maintain customer service during a period of quickly recovering demand in medtech.
We expect margins to improve a bit sequentially sequentially in Q4 and have a clear focus on driving further improvements.
We continue to make good progress using CBS to strengthen the PNR 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 replacement business and certain finger and plant from Stryker Corporation that should close in the fourth quarter were excited to complete our first strategic acquisition since acquiring biggio and the DJ protein is ready to use.
Our proven CD DBS tool kit to integrate these product lines.
The acquisition complements our fast growing reconstructive product line within entry into a billion dollar plus.
Wouldn't ankle surgery market. They consistently grows mid to high single digits.
The total ankle replacement segment is the strategy and strategic entry point, given its high growth strong gross margins and importance to the surgeons.
The star ankle is a great technology with compelling outcomes data and many loyal surgeons.
We are confident that we can apply our proven DJ surgical playbook to drive above market organic growth overtime.
In addition, the fragmentation of the foot and ankle space present multiple paths for further acquisition base 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 cobot buyers.
Our GP gas control business achieved another quarter of solid growth due to strong demand for our medical and life Sciences solutions.
Our fab Tech team achieved another quarter of low Twentys decremental margins significantly mitigating the profit impact from lower sale 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 that follow on benefits next year.
Temporary cost controls are still in place to ensure we beat our spend with the recovery, while also supporting growth and innovation spending.
EBITDA remains well positioned for strong relative growth continuous margin improvement and strong cash conversion going forward.
On slide eight you can see that CBS 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 activity have temporarily declined a bit the number of virtual activity has exploded.
For example, we started the year with a plan to roll out and operations boot camp training with five modules for our operations leaders around the world. We traveled became restricted we revised the curriculum and materials to create interactive online session that were affected 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 and even larger component of our associate development efforts going forwards.
Our CBS engine, it's still very active in our supply chain.
By year end, we will have completed close to a 100 kaizen around the world. This.
This slide highlights one where the relatively new to Colfax team at GC used our five debt and SMET 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 chain. The teams have developed innovative virtual tied then approaches we highlighted on the slide the way the DJ operating team has adapted the 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 leaving our company purpose.
Creating better together.
With that I will turn it over to Chris will start on slide nine.
Thank you, Matt we reported $806 million of sales in the quarter only 3% down organically from the prior year as we get closer to full recovery from the effects of the pandemic on our financial results.
Our team successfully flexed variable and fixed costs to control the gross margin impact from the lower sales to only 80 basis points.
We continue to control, our opex and execute on our restructuring programs, while protecting growth and innovation spending.
EBITDA margins moved up significantly from Q2 levels and really narrowed the gap to the prior year.
Excluding cobot friction costs, we achieved year over year decrementals in the low thirtys as expected.
The tax rate drifted up in the quarter to recognize profit mix and other effects that are not expected to recur and we expect the rate to land back in the low twentys in Q4.
Overall, we achieved a very healthy 41 cents of adjusted EPS in the third quarter.
I am very pleased with the progress we've made on cash flow. This year throughout Colfax, our teams have strengthened processes to reduce seasonality and produce.
Improved predictability of future cash flows.
We achieved $49 million of free cash flow and 86% conversion in the third quarter. Despite a $15 million net headwind for restoring working capital as we signaled on our last call.
We are clearly getting closer to the type of market and operating conditions that support $250 million or more of annual free cash flow at high conversion levels.
Earlier, Matt reviewed current market conditions, and our financial outlook on slide 10 reflects these improvements we.
We expect another sequential increase in sales in the fourth quarter of one half to 2.5%.
Excluding the 3% to 4% headwind from fewer selling days, we expect year over year core sales growth to be similar to or slightly better than third quarter performance.
This reflects a year over year medtech change of flat to down 2% and the fabtech change of down 4% to 6%.
Interest costs should be in line with third quarter reported results.
Adjusted EPS is forecasted to step up from 41 cents in Q3 to 45 to 50 cents in Q4 on sequentially higher sales margin improvement and a lower tax rate.
We expect free cash flow to sequentially increase to at least $80 million.
This range of earnings reflects the current risks to the global economy from Cove in us elections.
Our improving profitability and cash flow are also shown on slide 11.
Our second half 2020 profit performance should narrow the gap to last years pre covance levels and demonstrate the cash flow potential of our transformed portfolio of businesses.
Factoring in factoring in expected cash flow in Q4, and Annualizing second half performance shows that we would end the year on a run rate of 3.7 times leverage and.
And this is before the expected additional cash flow and higher EBITDA in 2021 that will drive this metric down even further and create additional capacity to support our strategic growth program.
We have a firm financial foundation that strengthens every day.
Wrapping up on slide 12, the effects of the pandemic are largely behind us our teams demonstrated resilience continuously outperforming competitors despite cobot pressures.
We are close to returning to our pre coded momentum of growth in sales profit and cash flow and the fourth quarter should show another positive step.
We are again active in sourcing closing and integrating acquisitions that strengthen our businesses and increase their growth potential.
To summarize we are executing our strategy of continuous improvement and compounding value creation.
With that brain, let's open up the call for questions.
Sure.
As a reminder, you asked a question you will need to press star one on your telephone keypad, we enjoy a question press the pound.
Your first question comes from Andrew Obin friend Bank of America. Your line is open guys.
Okay. Thank you so much for fitting me in early.
So just a question in terms of the impact on profit on good business model can you just talk about ship from hospital to ambulatory surgery centers, how much what are you seeing and what's the longer term impact.
[music].
Yes. Thanks, Thanks, Andrew So obviously there has been that that an ongoing trend up for from hospitals to ambulatory centers. You know a lot of shoulders have been been done outside the hospital already historically, but knee as the product it's been going through that.
Rapid rapid shift and.
Certainly in co bid there is there has been some acceleration to that that shift.
That is.
A way that the hospitals have been protecting to be sure that they continue to do elective surgeries, even even as we continue to have have infections.
And and so we've seen that that shift that I think for US you know, we see that inventories shift as a positive thing. It's a part of the market that grows faster we've got products that set up well for that shift our knee product is is one that does well with more active adults and that fits well the kind of patients.
The first one to be shifted into the ambulatory environment, we provided our or a risk scoring ish.
Tool to doctors to enable them to help assess the risks around doing surgery in ambulatory and we've got.
Relatively simple equipment sets and continue to work on simplifying our instrument sets for that ambulatory environment. So we see that as an opportunity for us and certainly we've been able to continue to have.
Me is the product that has grown the leased in the cobot market has grown the least but within that weve continued growth stronger than the market and have healthy growth in our new product lines.
And just a follow up question is there a difference in terms of sort of ability to postpone different kinds of orthopedic surgery is there a difference between shoulders knees hips do they behave differently or its credit with similar thank you.
Yes, they do they behave and that gets funded we called elective surgeries I think I said on the previous call. Yet there there are sort of more deferrable, then Ben elective most of the surgeries that typically they're being done because patients are in in a degree of pain to where they feel like they need the surgery or they're having their activity that they used to be able to do in their life.
It's restricted to the point that they really want to get back to being able to do those those activities and so it comes.
Comes down to deferrals and what we see it is that.
The hip part of the market has come back the most aggressively I think because those are those are situations, where the pain is debated the most and the need for the surgery is is the most there and so that's the part of the market. That's that's come back the most.
Thank you.
Your next question comes from Daniel from Cowen Your line too.
Hey, good morning, guys.
Good morning, Joe.
Hey.
So I'm guessing you're not wanted me to ask about 2021 necessarily but you guys said then DJ though.
And the trends before 2021 being above 2019, so if thats the case and that plays out would you expect margins to be higher as well on a on a 12 month basis non.
It's different than what you guys reported.
Based on the stub period, but on a 12 year equivalency.
Yes, so Joe we have talked about.
From a growth standpoint, if you look at Q3, where our underlying growth was just in the range of of.
Flat or minus one.
The guide for Q4 being a flat to down a couple in terms of daily growth.
We feel like that that reflects that that even add there continue to be some challenges and risks that are that are very real. There is also progress on the fundamental demand drivers of the business and progress on people being more comfortable going in and getting treatments in service and until we feel like that.
That points to a turnover to to growth in 2021, and as you know kind of healthy year of growth in 2021 versus versus 19 on the more margin front and I will say in our mid Tech bird business. Our primary focus on the bid that business is to make sure that we can pick back up with the mid single digit core growth that we were starting to demo.
The straight in that business down the stretch at the last quarter last year. The first couple of months of this year. We started to show that that that mid single digit core growth capability of the business that.
It is important to make the business very very valuable.
So that's our first focused on that business. We're also very focused on making sure that we drive margin improvement in that business certainly back from where we are back to more normalized rates in that business and where we land on the other side of Cove. It is it's going to be a combination of the investments that we've been making in the business and.
The supply chain and in R&D and growth engines of the business up against the the productivity that we've been drive and were certainly focused on making sure. We get the margins restored and then we have strong and healthy cash flow in that business, but we're also trying to make sure we do the right things.
To really solidify that mid single digit growth engine.
Yes, I think it was great to see the deal on the ankle portfolio I think that and people were hoping to see stuff like that coming out of the transaction with Stryker I'm. Just curious if there any color on momentum of new talent acquisition.
In general were as a direct result of the transaction through some people kind of up for grabs kalo salespeople things like that.
Yes, we're certainly very excited about about adding the the star product line, great great opportunity. Its just a great adjacently certainly when we did the.
When we were.
Doing the planning for the acquisition of DJ How we looked at whether they were attractive adjacent seems to move into in foot and ankle was one that had attractive growth.
Good good structure, good possibilities, but it was a nice surprise to have this structure transaction Stryker transaction create this this opportunity. This early in our ownership of DJ owed it to step into that that adjacency and do it at an attractive and attractive price.
Yes, certainly anytime there is theres changes like that there are there are opportunities and we're focused on making sure that we retain that all the key customers there and that we make sure that were.
Getting at getting the right great channel to be able to strongly serve that that foot and ankle some of that will be done through our existing surgical channel. Some of that will be pieces that we that we pick up and.
So we're certainly focused on making sure that we come out of the gate in good shape with that with that product line and be able to drive strong growth over time.
If I could just sneak one last one in on Fab Tech real quick I mean, you guys continue to outperform there has been a nice story, but how are you kind of managing the business now maybe preemptively around some of the Europe headlines around potential shutdowns area.
Yes, there is certainly we watch the things that are going around the world.
Very carefully all year in Fab Tech, we've tried to make sure.
That we are.
Being cautious about what kind of revenue is going to come in that in that business in the rate of recovery that will come in that business. We've tried to make sure we're being cautious about that we've taken a lot of structural cost out of that business as you've seen and we've got some additional project that we've talked about that could continue to Brent take structural.
Cost out of the business.
But then at the same time, we're making the necessary.
Investments to keep that debt relative growth performance going and so we've tried to make sure that we're ready for a range of recovery scenarios.
In fab Tech and to.
To be honest, they look for a little bit like they're like mid we're headed towards the better end of the spectrum on those recovery scenarios and that the business.
Mike turned over Q4, Q1 turn over to growth and certainly with a little bit of a slowing down in progress in the U.S. and some of the European things that are going on you can you can see that we're taking a little more cautious path that had that it will take a number of quarters before it turns back over but what we're seeing around the world is.
That as people are seeing additional waves of co bid.
They are being very very careful to protect the industrial production in the countries.
I think even if you look at what what Germany, and France have talked about in recent days about their situations. They have shutdown significant portions of their of their economy, but they have explicitly left open the industrial portions of their economies and up.
That means that the constrictions that we saw back in Q2 are not going to reappear in terms of economies being just kind of course down but certainly.
Some of that kind of limitations in peoples behaviors are going to slow the rate of the latest rate of recovery. We've tried to reflect that in our comments.
That's very fair. Thank you.
Sure.
Your next question comes from Jeff Hammond from Keybanc. Your line is open.
Hey, good morning, guys.
Okay, Hey, a couple of questions on Med Tech margins, one just in the quarter.
I guess, if you exclude the covert costs, you're still down year over year is that mix or investments and then just talk about the profitability profile of this acquisition.
Yes, so the first is that business.
It's going to have a little bit of quarterly variations in the margin levels.
For seasonality factors, whether certain investments are made in certain quarters et cetera, and so yeah.
You know the.
The specific quarterly margin level that they were cop and again it was probably a little on the high side you saw in our full year number back in 19 was.
Was below that so.
So again I think there is a little bit of a little bit tougher comp there, but then as we've talked about we did have.
A.
Pretty significant amount of inefficiency just just from.
Revenue quickly turn that business down and to quickly turn it back up and really keeping our focus on serving customers as first priority and be willing to take on some of the extra cost to to expedite split shipments and do the things that it takes to win when you're kind of in that kind of a dynamic environment.
Certainly took on some some extra costs and we'll still have a little bit of those.
As we move through the next couple of months here.
But we.
We certainly are focused on getting the margins recovered in that business and making good sequential improvement there.
As far as the the ankle business that we got that the gross margins that business are very attractive at the upper end of surgical Oh.
Surgical margins and so it's an attractive at and.
For sure we'll be working on scaling the fixed cost base of that business and so lets them at the profit out of the gate, but as the business grows.
The total profitability yield will scale up against those very high gross margins.
Okay, and then just on Fab tech it looks like you.
Developing markets saw the the best.
Yeah, I guess the developed markets looks like it accelerated the most can you just talk about where you're seeing the best recovery from a geographic and if you can maybe comment on end markets as well.
Yes sure so.
Most of the developing markets group grew in the quarter and.
I think that's consistent with what we talked about even from what we are seeing early early in the quarter.
That's consistent across places like Asia, and Russia, and parts of South America.
The one developing market that has been slower to recover is it.
India, which is still in the negative because it really that they really locking down hard back there in Q2 and has taken some tickets and time to get that economy restart in India is making is making progress and certainly what were seeing down. There is is resolved from the government and not kind.
To recreate that debt total lock down that debt hurt their economy. So much back in in Q2, So we feel like that when we'll get back to growth.
Pretty pretty soon here and then kind of the.
Yes majority developing markets will be will be in the in the positive I just had developed markets significant improvement from Q2 to Q3.
Three but those are ones that will take little bit longer to go to get back to growth, especially given some of the sort of the current pressure in those markets, but we did see very.
[noise] I just thought with a follow up on Jeff's question on the D. J I've imagined and specifically on that $5 million of of supply chain costs can you give us a little more color around what those costs, where I assume those are temporary things that you should be able to get out of the business what's the.
[noise] timing on being able to eliminate those from the business that are they gone in the fall quarter or should we expect a bit of a drag still from those supply chain coast.
Yeah, Nathan so there's a couple of different sources, you know one when we flex down fast you know we had certain certain places in the world where we.
We're not able to flex down the label based on on government government restrictions on what we could and couldn't do and so we we took some a little bit extra cost into the product from some of the production and kind of mid to late immediately queue to that flows through into the things that we that we sell in Q3 and sort of that.
Part of it would would clear through.
Second as we flex it back up.
Quickly.
We have we've kind of done whatever it whatever it's taken in terms of things.
Things like overtime that add some extra cost and then third there's been quite a bit of.
Both inbound and outbound frate, frate expediting and splitting up borders in order to get the customer as much as possible what.
But they've asked for while we're still kind.
Waiting to get through the other the other car to so that those are the operational costs to make up that extra cost in the quarter.
Portion of that is cleared through but certainly some of the more kind of expediting related aspects of it will still continue for for another couple of a couple of months here and put a little extra cost into the into the fourth quarter. All indications are that as we move into next year, there should be fully behind us.
Got it.
This when we have recessions like this you would you normally say industrial revenue shifted permanently to the right I would think a fair amount of the prevention in rehab revenue has shifted permanently to the right, but the the reconstructive revenue.
Isn't pushed permanently to the right people are still gonna get that as the implants done at some point do you feel like that three two caught up on some of those deferred out of the second quarter or that there is some pent up demand that you still have to work through going forward and any any ideas you've got on the timing of that.
So first you are absolutely right that are reconstructive business is business, where it is not coming now it's predominantly shifting to the right.
And a part of our prevention rehabilitation business is driven off of elective surgery as well and so for that part of prevention and rehabilitation. If it isn't coming now most of it is is shifting to the right.
As you certainly pointed out that for the rest of our prevention validation business, if the activities aren't happening.
The domain, we kind of missed the demand and so is the right way to think about about our portfolio as far as kind of how that dynamic. It has played out I think if you look at most most published.
Most public sources, they talk about elective surgery recovered and in the U S to kind of Ah 90 to 95.
Percent of free Covid kind of range right now and they talk about clinics being in maybe the 80% to 90% of pre covid range and improving.
And those are the two things that kind of effect that equation right because the rate of which were doing elective surgeries.
A few months back was burning down the backlog and the clinics, we're at much lower levels, but as those to approach the difference between the surgery that are happening today in the ones that are being created for tomorrow starts to get narrower and we've kept a close close view of that.
And so our view is it the way that we made our way through the through the third quarter certainly left left some things in the backlog in terms of surgeries that had been deferred and that we're still still scheduled and that's enough to.
Offset the.
Fact that clinics are not fully operating and restoring the pipeline and sort of keep that elective surgery and that 9100% type of range as we move through the fourth quarter and reflective surgeries in that range, we're having a nice growth in our in our surgical business based on the way that we we take share in that.
In that business.
And then as we move into the next year at some point there will be a time when when the clinics are fully operating and so we're fully restoring the pipeline, but there may still be a little bit more a little bit more backlog to burn off over time to make up some what we lost this year and whether that comes through next year, whether some.
[noise] comes through next year and someone comes through the following year kind of remains to be seen.
Great just one more quick one on the margins you did about 18% in 2019, hi, Incrementals in he you're talking about some pretty decent growth in 21 over 19 levels.
The same operation operational improvement, it's going into the business that probably some our investment as well.
Is 20% EBITDA margins in 2021 beyond the realms of possibility or is that a target you have in mind.
Yeah.
About the med tech business or these other that it didn't hear the question.
Med Tech <unk>.
<unk>.
And particularly EBITDA or EBITDA.
EBIT a.
Yeah.
You know I think.
We have talked about.
China nature and domestic business that they were focused on restoring back to <unk>.
2019.
Margins as soon as possible as we come out the other side of of.
Covid and the 2019, EBITDA margins, where in that 17 or so.
Or you die margins were closer closer to closer to 20 and as I said earlier in my comments. We continued we're focused on sequential improvement in the med Tech.
Ah margins.
With understanding of different seasonality and things that will that will come in different.
Quarters, and we're focused on making sure that we have the right balance of making the right investments in that business while at the same.
Same time driving the productivity in the business. So we can restore the mid single digit growth engine quickly.
Get those margins restored to pre covid levels.
As soon as possible as well and then build from there both continuing to drive the growth and improve the margins from there.
Great. Thanks for the commentary.
Your next question comes from alternately attack, France, Seaborg he'll and children.
Hi, good morning, guys.
It will.
I have one to ask about.
The the comment that you made about outperforming the Fam tech peers.
And I wanted to get an idea of do you think is the geographic mix that helps you guys get a little bit better.
Lower declines in the last couple of quarters or do you think there's something with the the changes we've made two products of channels. That's helping you know doing some market share.
Yeah.
Yes, certainly.
Certainly we take a look at both of those carefully most geography's, we can get a signal on on.
Specific share gain and we also look at the mix.
I think what day is that we've been over time shape in that business. Both in terms of the Geography's reserve the segments. We serve the type of business model, we have the innovation that we drive.
To make sure we've got a very strong healthy business that can have strong growth relative industry growth and then also can can have strong and consistent margins in and cash flow and.
I think if you look at not just the last couple of quarters, but but you look at the last eight quarters I think you'll see that the.
The growth performance versus industry.
Has been consistently very strong and that is a combination of having a healthy footprint to our business in terms of the industry in geography that we serve and how we're executing our growth model and innovation in the channels.
Okay, Great was there any difference in the growth rates declined worried script equipment versus consumables <unk>.
Yeah, there was not a significant difference between equipment and consumables.
Okay, great and the last one <unk>.
You don't get with the Cvs that you're doing you know you just probably a lot of opportunities in the med Tech business I Wonder what your experiences now with.
Do in C. B S news and supply chain or is it factory work that you can do.
How much margin do you think the roots.
Yeah. So we.
We have gotten a lot of good cvs activities going into detail business. The team has really embraced.
Toolkit in the cultural aspects of Cvs, and we'd certainly been leading in and helping as well we've done a lot of work in the supply chain. So.
So far already most of that supply chain work has been focused on.
Customer service and laying the foundation for productivity improvement over time, which is which is not unexpected as we step into this and not inconsistent with what what I've seen in other other businesses.
Over over time we've.
We've also been been doing quite a bit of a.
Cvs work in the innovation engine, particularly the breaking rehabilitation, where PNR innovation engine within that within that business.
That's something that pay dividends over time in terms of both the productivity and innovation engine and the kind of growth contributions and how that helps with price resetting and so that's something to take take longer but it's an area that we've we've done a lot of good. Good work. So far have been able to put some resourcing in that they can help with.
That that got some some experienced in that area and then third some of the back office processes and a specific one to this businesses. The reimbursement process. It's got a lot of opportunity for process process improvement and we've again our initial work there.
Has has been in eliminating restrictions to growth that were that existed in that in that readmit burst men engine and getting getting things flowing better on the front end to where we weren't constricting the growth of some of our our businesses. But then we have also.
Foundation that is going to enable productivity benefits.
Okay, Alright that sounds great. Thank you.
Control.
Your next question calm trend going <unk> online shopping.
Thanks, Good morning, everyone.
Joe Hey, Joe So I just wanted to kind of make sure. We're all level set on on 2021, and the recovery and Med Tech. So if we assume you know 2019 had call. It pro forma revenues a call at 1.2 $1.3 billion.
And the 17% type EBITDA margins that you talked about.
Could we then assume the comments around 2021 being above 2019 levels that we're looking at you know call at 1.3 billion plus type revenues in EBITDA north of call at 210 million in the in the Med Tech business.
Yeah, Joe really not ready to give specific guidance next year I think we've we've we've.
We've got pretty far in this alternative.
Shape, a little how we see the markets.
Recovering and.
And give us a sense for how we're working on that I think what I'll say.
Uh-huh.
On the east side.
We've been clear that we've been working hard on making sure that we restore the margins and then some by the time, we get back to get.
Get back to 2019 levels.
A med tech side, we're we're trying to make sure that we're getting back to those margins at the right time based on based on the investments in the business and.
I think that's as far as we're going to go on this call, but but certainly not too far down the path here were given will be given much more specific guidance.
Okay. That's that's fair enough I guess to maybe to spying on there, though as we kind of think about the recovery into next year.
Just based on what you know today the backlogs on the on the surgical side you'd like the procedure side versus what you're saying on on the bracing side.
<unk> back at this point to see some type of like mixed benefit.
From a margin perspective, as we head into next year.
Yeah, again, it's really well too too too early to make the call on that.
There's a lot a lot of moving parts.
Beyond just those macro moving parts and so.
Thank you again, we'll certainly be happy to share comments like that when we get into our specific guidance.
I would say.
Okay, Alright, maybe maybe just kind of shifting gears. One last question on this acquisition that he did still a relatively small acquisition and what you guys are kind of defined as a as a potentially billion dollar plus type market and so maybe maybe just discuss a little bit more about what the what the <unk>.
I can get you into the specific market and and what the potential opportunities are for bolt ons.
Within within put an ankle surgery.
Yeah, sure that that the foot and ankle space and the space that is $1 billion billion dollars, so market, but it's got a number of different.
Kind of slices in terms of this specific.
Challenging the patient and the procedure that that doctors do to address those those situations and.
And it's got great great growth grade reimbursement margins and and has.
Has a lot of fragmentation that create that acquisition runway for us what what started it step this into a portion of that market.
With a leading leading product.
A good share physician, leading product that's got a ton of historical data and surgeons that are that are committed to that product and it is we believe the most strategic part of that foot and ankle space it because it's.
Face that for the for the surgeon that do foot and ankle work it's.
It's a very important procedure for them in terms of in terms of the dollar per per procedure of the importance to patients and so we see it as a strategic entry point that gets us that connection in the space space. It's a.
A meeting position within that slice of foot and ankle that we can solidify and build from within that slides, but then it also creates that anchor point to then extend organically.
<unk> inorganically into other pieces of that foot ankle space over time, many of which have those attractive growth dynamics.
Like the.
T E R.
Okay. Thanks for the color.
Yeah, and then I have an analogy shoulders bigger.
Bigger.
Shoulders more a couple of billion dollars or so mark, but if you're kind of role shoulder back 10 years.
Kind of like foot and ankle does today is.
Way to think about it there was a lot of fragmentation.
Still lie growth a lot of growth growth runway and some different slices in terms of what was being what was being done there and so we got a extremely valuable shoulder franchise within D. J O that drive strong growth high margins has got a lot of growth runway ahead of it and and now we're adding this.
This additional foot and ankle franchise.
We're going to start start out.
We're we're stepping in but with plenty of opportunities from there.
But yeah, that's encouraging thank you.
Your next question comes from Steve to San Fran J P. Morgan Hill and told me.
Hey, guys good morning.
I believe the.
Can you just talk about how.
I mean, I know, there's been a lot of M&A activity out there, but how are you.
Evaluations and then how are you.
You know.
Basically modeling dcf's on these things that you're looking at what what types of multiples are you seeing out there it's kind of a <unk>.
Hi, multiples, but a lot of uncertainty is a bit of a strange time right. Now. So how are you. How do you think about that at a high level.
Yes, Dave so sure.
Period of time, where it was tough to do acquisitions, because there was there was so much uncertainty, but it is things it's starting to clear certainly in the med Tech front as I'd.
Electric surgery is largely recovered and there's kind of more more clarity of where it will probably pick up on the other side of this thing I think you've seen certainly more deals being done.
I think.
As we look at acquisition opportunity certainly on domestic side, we see a range of opportunities.
From things that are more more straight up.
Bolt ons of a product lines are channels that we can see opportunity to do them at attracted multiples with kind of faster.
Turn pass.
And then we see adjacency kind of opportunities like like the star ankle. The star we got for a very attractive price given the backdrop of striker needing to to sell it but then we see other other ones.
That are adjacencies, where we might have to pay a higher multiple multiple but they are really going to contribute to organic growth in a in a significant way and strategically strengthen strengthen the business and the longer path.
To return.
And.
So there's there's a range of opportunities we've got a very full full pipeline. We continue to keep focused on our 10% returned threshold, but we appropriately flecked that sometimes we're expecting a lot sooner and sometimes we're willing to take the four or five years to get to that threshold based on the strategic strategic importance of.
Of what we're adding I Gotta say I'm really encouraged.
By the amount of opportunities that we've got.
In the pipeline I'm and I'm excited about the star ankle I think it creates a great great growth vector for us that we'll be able to build out filled out over time.
Great. Thanks, a lot.
I see.
Your next question comes from Julian Mitchell, a friend Barkley's online shopping.
Hey, My name is Theresa on for Julian to just need one more question on Med Tech Martin I know you mentioned that there isn't seasonality there and maybe some supply chain concepts till there, but you expect sequential improvement. These margins were down around thousand basis plain. Thank you too and 250 basis points in Q3 is it possible.
They get back to flash in queue for it should we still expect them to be town near a a year and then just one one acquisition I think you mentioned hi, gross margins when we consider kind of selling costs and everything else are the operating margins who wanted to my tent.
Yeah, So first before Q4.
Has got let days and last year, which is going to be a kind of a meaningful effect on the on the margins and it's it's also got.
Some of these some of these costs that that we talked about what will continue on and so we're definitely more we're focused on sequential improvement.
In Q4, and then being able to to rollover and drive to a good healthy 2019 O 2021 overall margin and.
I think <unk> certainly queue for March likely will be lower than last year, but the reason that we talked about.
Here on the call in mid Tech.
And then as far as far as the acquisition we see the.
This acquisition in the broader foot and ankle opportunity over time is.
The opportunity.
To have the same are stronger margins over time as the rest of our our med Tech business is certainly on an incremental basis as we can scale a physician in that space it can be accretive to.
Accreted over on that tech margins from the gross margins are attractive and whether it's accretive or not it's just.
How much you invest for growth versus when do you when you take more margin decision.
Got it. Thank you very helpful. And then just maybe one more for me on pre Castro is mentioned you're on track for 250 million kind of if we annualize the second half. Thank the printout tends to be seasonally weaker in terms. It's free cashflow P. That so has anything changed in terms of what you're expecting for seasonality a free cashflow uhm and so we know.
Be expecting a big working capital headwind next year. It sounds recovered and then just one final point last thing you'd talk to kind of 185 million adjusted based free cashflow.
That implies kind of flattish with your with your guide for this here and the slides it looks like we're comparing to gap for that second half number and what's the right place we should be comparing bits here, it's free cashflow man. Thanks.
Okay. That's a lot of questions let me let.
Let me see if I can help you out on that.
I think the main point that we want to make is that we've done a lot of good work this year around the around through all of our teams to improve the sort of predictability and reduced a little bit the seasonality and the cash flow what that means is even though we would expect the second half cash flow next year to likely be higher than the first half.
We wouldn't expect to have quite as significant of around and and so I think that's a that's an important element there that demonstrates improvement that we've made the.
The second half performance that we have this year is is certainly indicative of the potential for next year.
Do believe it paves Ah.
Pretty clear path that we can get back to that sort of hiking.
Hi conversion rate that we'd expected and we talked about previously in the amount of cash flow that we would that we would generate.
In terms of the current year cash flow I think we've laid that out transparently people can see and understand that and obviously they understand the impact of Covid I would say that up until mid March. We were we had high conviction that we would get to the $250 million more than 2020.
But obviously, we had to deal with the pandemic and the effects of that but what's great about the second half even though we've had a Q3 that had a lot of working capital rebuild as we've clearly demonstrated that we're back on that path to to being able to generate significant cash flow for for next.
Okay. Thank you.
Extra.
Your next question comes from Chriss Snyder from UBS he'll any children.
Thank you. So just following up on previous conversation around 2020 Med Tech guidance.
Q for outlooks seems to suggest that the the deferred backlog built up in Q2 is being worked through this year and then so when we look up to 2021 no.
Mobility on the margin should be depressed diverse 2019 at least early in the year Oh. So what are you guys seeing that gives you confidence around healthy growth next year over 2019 levels.
Yeah I.
I think there is a.
A range there by business. So I think I can get into the details I would get there I mean, I'd say, we go to the surgical end of the spectrum.
I think they're still going to be some catch up opportunity next year that I think is likely to to create some opportunity for a little stronger performance on that debt reconstructive part of the business.
Versus as you as you appropriately point out if you could go more to the part of the pinard business that is not driven by surgical.
There.
Some of them some of the limits on activities and things that are like they'd come are going to put put a little pressure on can you get a full year growth or not but even that PNR segment has a combination of surgically driven drivers.
As well as.
As well as drivers from those those activities and so we put that all together and the view is.
29 21.
Got good good potential to be kind of a normal healthy year growth off of 19.
Okay I'm very much appreciate that color. So I understand the weightings between reconstructive and PNR and is that the way we should be thinking about the the part of the business that's.
That's 30, maybe cause 30 70 split between you know injuries driven by mobility, and then just kind of general wear and tear which is obviously less impacted by mobility is is that the fair kind of split.
Across the entire me yeah.
Yes, it's not actually so the 30% that is reconstructive is.
Predominantly driftwood surgically driven and that's.
Predominantly driven from disease.
As the primary driver and so.
So I think I think and I think just an important comment on that.
We can work off the backlog in terms of patients that are scheduled for surgery.
But we still have patients that cancelled their surgery, but still need it.
So that's a factor that will come into play next year or the following year as far as.
Quote elective surgery.
That kind of factors into that equation, so the 30%.
Reconstructive is all surgically driven and then when you go into that PNR section. There is a meaningful portion of it that is surgically driven either from implant surgery or sports medicine kind of surgery. Obviously, some sports medicine surgeries are based on condition that already existed before covid.
Some some would be from things that that needed would be created.
Within Covid, but.
Portion of PNR sports is surgically driven.
And then there is the poorest portion of.
PNR, that's actually workplace injury, driven and so did you get the industrial workplaces in construction workplaces.
All back you get a a restoration.
Of that and then there's a portion that is created by.
By sports and even with its <unk> got organized sports.
That have had.
Had constriction.
Or I should say sports and recreation, you've got organized sports at about Constrictions, but then you also have the the weekend warriors that if anything has has been doing more exercise not lesser exercise so.
I think it's you got to kind of get down down into it to get to the pieces and parts, but I think you've got the right top down view that there is a surgical portion that a lot of the direct backlog will be worked off but don't forget some of this deferred procedures that comes back into the end of the backlog that was pent up.
And then you've got a kind.
Kind of an activity based part that is part from.
Kind of mobility organized sports and stuff like that but it's part from.
Things like.
Things like the just people get back to work.
I appreciate all that caller, thank the time.
Mmm.
Your next question comes from Nicole the best friend, Billy Shebang online shopping.
Yeah. Thanks for squeezing me and guys come morning.
Hi uncle.
So I just want to ask a little bit about that tech decremental margins, obviously have been really really strong for the past two quarters and the low 20th I mean, when we think about what's embedded in the fourth quarter outlook is the expectation that you guys can kind of stay in that low 20th range in that segment just trying.
To think about you know damn.
The impact of temporary costs come back on all up and moving pieces into next quarter.
Sure Yeah, Nicole the it seems that a great job of managing the costs and the downturn as you note the decrementals and it really comes from two factors number one is some of the temporary cost actions that were taken that.
We continue to manage and and work and then as the business improves.
Those will come back into the business and have already started to to come back into the business. The second is the restructuring activities that are well underway in the business that were plan for the year and some of those actions may have been accelerated a little bit as as covid.
Him to bear earlier in the year. So we have both of those.
Play in both of those should come together to produce some pretty respectable decrementals again, but I think we should set expectations that.
As Covid continues to obey the we continue to have growth in certain regions, we have easing.
Declines in other regions that those decrementals should in fact started to climb on them, but that's natural healthy in the business and we would expect to see that.
Okay got it understood that makes sense and then secondly, I'm not sure if you're willing to comment on this but you to talk about.
Crashing signs of improvement in September and October.
I'm focusing on the welding business I mean can you give us a sense of the exit right.
In in South Tech end in September and October I, just to give us a sense of how <unk> is shaping up initially.
Yeah.
Not not going to get specific on that but more than what we said, which is that we did see that those two months better better than the previous and we certainly factored that into how we how.
How we thought about and are talking about the fourth quarter, but at the same time, we've seen some of these these risks that people have asked about on call.
Like some of the European resurgence isn't thing that and so we try to combine what we've seen in the first couple of months with the.
The best understanding and thinking we have about how the next few would play out and give guidance based on that.
Okay fair enough. Thanks, I'll pass it on.
There's no for a great question at this time I'd like to turn to call you back to me.
Great. Thank you everyone for joining our call today and look forward to talking to you going forward with that will end our our call.
Thanks, everybody.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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