Q1 2021 Colfax Corp Earnings Call
Good day, and thank you for standing by and welcome to the conflicts first quarter 2000 of 21 earnings call. At this time of all participant lines are in a listen only mode. After the speaker's presentation there'll be a question and answer session.
Ask a question during this session you will need the press star followed by the number one on your telephone keypad.
If you require any further assistance. Please press star zero I would now like to hand, the conference over to your Speaker today, Mike Basic. Please go ahead.
Okay.
Good morning, everyone and thank you for joining us I'm, Mike Mason, Vice President of Finance and joining me on the call today are Naturals Hall, President and CEO and Chris Hix Executive Vice.
The CFO.
Our earnings release was issued this morning and is available on the investors section of our website for export Dot com, we will be using a slide presentation to walk you through today's call, which can also be found on our website of the.
Audio and 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 of resolve these forward looking statements are subject to risks and uncertainties, including those set for the Safe Harbor language in today's earnings release and in our filings with the SEC.
Actual results might differ materially from any forward looking statements that we make today.
The forward looking statements speak only as of today, and we do not assume any obligation or intend to update them, except as required by law.
With respect to any non-GAAP financial measures made during the call day. The topic of reconciliation information related to other measures can be found in our earnings press release and in today's slide presentation.
With that let me turn it over to Matt who will start on the slides.
Thanks, Mike.
Welcome everyone and thanks for joining our call today at.
As many of you know we've had a very active quarter and we made significant operating and strategic progress.
Now, it's our intent to separate into two companies.
<unk> completed an equity offering and finalize the key acquisitions.
I'm also pleased to report better than expected results in Q1.
Sets us up for a great year ahead.
Building off the momentum we have in each of our businesses, we delivered strong organic sales per day growth of 9% in Q1.
As a reminder, Q1 2020 included several extra selling days, resulting in approximately of 5% headwind in our reported sales numbers.
Despite this and continued challenges from COVID-19, we delivered adjusted EPS growth of 16% to <unk> 44 per cent per share above our guidance range of 35 to 47 per share.
We also posted another strong quarter of free cash flow continuing of the improvements we saw last year.
Our results and momentum of strengthened throughout the quarter as we benefited from improving market conditions in both of our businesses.
In early March we announced our intention to separate into two independent publicly traded companies with the target completion date for the first quarter of 2022.
The separation will create a global leader in fact, this technology specialty med Tech innovator.
Both companies with tremendous focus.
From an opportunity.
The decision as a result of a thorough strategic review undertaken by the board with management and it reflects our ongoing commitment to create long term value for all stakeholders.
We're confident the separation will position both companies for maximum flexibility for long term growth and value creation.
We successfully strengthened our balance sheet in March by completing an equity offering that gives us continued flexibility to execute from our discipline strategy driven acquisition process, while staying on the path that both new companies with strong balance sheets.
Earlier this week, we announced another strategic acquisition for our net check business, which I'll touch on in more detail at the moment.
Our pipeline of opportunities remains robust, we expect to complete more this year.
And you can see we remain focused on executing our proven strategy for compounding value creation.
Slide four dives into our med Tech business performance this quarter.
Q1 core daily sales increase a bit over 5% year over year.
Sales rates improve each month helped by the ongoing rollout of the vaccine and loosening of the COVID-19 related restrictions in many areas.
Elective procedures accelerated through the quarter contributing the recon double digit growth in March.
The first quarter daily sales growth of 8% with particular strength in shoulders and hips.
We continue to outperform the market in our recon business across the portfolio.
Prevention and recovery growth was almost 5% in the quarter also strong performance versus market indicators.
All in reported growth for the quarter was 7% with our recent acquisitions contributing 5%.
Adjusted EBITDA increased $3 million in the quarter of $48 million and margins increased to 55% ex.
Excluding our recent acquisition EBITDA margin increased 60 basis points year over year.
Adjusted EBITDA margins were also up slightly in the quarter when excluding acquisitions.
This puts us right on track versus the guidance, we provided at Investor day for Med Tech EBITDA margins for the year.
We expect the sequential improvement in market conditions to continue as we progress through the year.
We continue to expect of strong sales recovery versus 2020 in line with our prior guidance levels of 14% to 16% organic growth for the year.
Slide five highlights our April acquisition of Medici, the great strategic fit and our growing foot and ankle business.
As we've shared previously the U S foot and ankle surgery segment has more than $1 billion and grows high single digits.
<unk> provides the evidence.
<unk> and clinically differentiated solutions, the foot and ankle surgeons using its patented technology based on Super elastic alloys in polymers.
On the slide we show the breakthrough tightening of product that is reshape hind foot fixation.
The Super Lactic property of 19, all of nickel titanium alloy are applied in the Diamond now and many other michie of devices to create surgical solutions that actively participate in bone healing.
They are products, which include devices for fractured fixation joined fusion the soft tissue injury repair complement our existing portfolio strengthening our value proposition to surgeons and our channel.
Similar to our Chilean acquisition earlier in Q1 bed sheets growth and gross margins are accretive to our recon business and will drive EBITDA margin accretion by year three.
<unk> has grown almost 30% CAGR organically over the past five years.
We're very excited to add the talented team and groundbreaking product portfolio to our net debt business.
Our new foot and ankle business of coming together quickly over the past for five months, it's been part of our strategy ever since we acquired detail.
We are of very disciplined acquisition process rooted in our business strategy focused on value creation.
<unk> complements our recent acquisitions of the star total ankle replacement system and Trillium surgical debt form of very strong foundation, which strengthens our leadership in extremities.
We are investing $225 million to build the high growth high gross margin platform that will accelerate the overall growth of the company.
This business starts with annual revenues of approximately $65 million and is expected to grow rapidly to $100 million by year, three along with accretive EBITDA margins.
Turning to <unk> on slide seven.
We have very strong quarter Aesop with sales per day growth of 11% and of record adjusted EBITDA margins.
Our emerging market regions grew sharply in most regions continued to show strong sequential improvement.
Most product lines achieved solid growth in the quarter highlighted by equipment, especially the gas control sales.
All in reported sales increased 8%.
Inflation drove significant increases in raw material costs during the quarter, which we effectively managed by passing along higher prices to our customers for.
For the quarter prices increased 4%.
We continue to expect the dynamic environment for the next few quarters and plan to use our proven processes to mitigate any earnings impact.
Chris will touch on our pricing expectations for the year in a few moments.
Q1, adjusted EBITDA margin of 16, 1% is an all time high the team continues to execute with excellence effectively using CES innovation and targeted restructuring efforts to drive improvements in the business.
Slide eight highlights some of these types of new products and innovative innovation efforts.
As we discussed at our Investor Day in March This business had a great innovation engine that supports high growth high product vitality and continuous share gain.
The first quarter was no exception, we launched the road of high performance supportive of machine for sticking take welding with unique Aesop industrial design and the performance DNA.
We also expanded our robust the offering with ABS, which adds the ability for customers to be able to connect our products to non EBITDA welders.
We're very proud that the robust speed wire for the year has received the highly coveted Red Dot award for product design in 2021.
<unk> was designed to affordability durability productivity is the only portable theater with IP 40 for protection glass right.
Okay.
In the first quarter, we added to our digital solutions offering with wealth of fleet document management software that helps customers more efficiently manage their fleets of welding equipment.
And we acquired Octopus <unk> software, which specializes in offline robot programming.
This user friendly offline programming capability is critical to support penetration of robotic welding into the next wave of industrial applications.
As I said earlier, we've made tremendous tremendous amount of progress this quarter.
Before I turn it over to Chris I want to say, thank you to our global team I am extremely proud of our team for the strong start for the year as we build momentum towards the great 2021, and an exciting future as two very strong and valuable companies.
With that I'll turn it over to Chris who will start on slide nine.
Thanks, Matt at our Investor Day last month, we highlighted our positive momentum of the opportunity to perform at the top end or even above our first quarter expectations.
Net revenue momentum did in fact continue through the end of the quarter largely as a result of better industrial demand and an increased number of elective surgeries and we delivered above our EPS guidance range.
For the full quarter of sales grew 8% year over year, despite 5% fewer selling days.
Sales per day increased 9% and we had two points of benefit each from both the acquisitions and currency.
Gross margins for the quarter were 42%.
<unk> is again successfully passing its inflationary pressures the customers through pricing actions.
Of course from a sales and costs each increased by roughly the same amount of profit is protective of margins are artificially compressed as we've seen in the past.
Our true underlying margin performance was an increase of 50 basis points from operating leverage high gross margin acquisitions and restructuring benefits.
Restructuring benefits also kept core SG&A that is SG&A, excluding acquisitions flat year over year.
Our effective sales and operating execution led to a 50 basis point increase in EBITDA margins and we finished the quarter at 12, 2%.
As mentioned earlier, we exceeded our EPS guidance by for earning 44.
Which is a 16% year over year increase.
We generated $60 million of free cash flow in Q1, including the tax refund that of payment related to the divested business neither of which are expected to repeat.
Our treasury and business finance teams are leveraging robust processes to ensure that our growth translates into healthy cash levels.
Slide 10 provides an update of our strengthened the capital structure.
As Matt mentioned in March we completed a very successful $700 million of equity offering and in April we redeemed a like amount of our higher coupon bonds.
This reduced our net leverage to under three turns.
Our operating path of cash flow and profit improvements should average closer to two turns by year end.
We have more freedom to execute our M&A strategy and have already deployed some of this new capacity for the <unk> acquisition.
Slide 11 outlines outlines our updated 2021 forecast.
We started the year with the <unk> EPS guidance that we believe demonstrates less risk to achieve our full year guidance. As a result, we are increasing the bottom end of the range by the nickel and our full year EPS guidance now stands at $2 <unk>.
The $2 15.
These forecasts of results include offsetting about <unk> <unk> of net headwinds from the capital structure changes.
The guidance details that we provided in February and March are largely unchanged. Although we are clearly moving higher within those ranges.
I do want to highlight one change we now expect another four points of growth the aesop.
To recognize the additional pricing that we expect the pass along in response to current inflation trends.
We are not forecasting for this additional price to have any net profit effect.
Our foot and ankle acquisitions of reach out to a good start to achieve their high growth plans this year.
We are investing in integration and adding targeted resources to ensure the attainment of our aggressive plans to organically grow to a $100 million of revenue of three years.
We expect the EBITDA margins of these acquisitions to grow from the current pre scale low to mid single digits to the segment average or higher over the three year horizon.
Our outlook for Q2 reflects the positive growth revenue momentum we had throughout the first quarter and we expect our typically stronger seasonal performance.
We are forecasting for these higher revenues to Kuwait to create sequential operating leverage and support of adjusted earnings per share of <unk> 48 to 53.
Our strong start on cash flow in Q1 further strengthens our conviction for achieving at least $250 million for the full year at a healthy conversion level, despite investments being made the support high growth levels.
In summary on slide 12, our strong first quarter results demonstrate that we continue to execute effectively and are well positioned for strong growth. This year in all metrics sales margins EPS and cash flow.
Our confidence is reflected in our updated EPS guidance of 205 to $2 15.
We continue to push forward on the separation activities and are on track at this early stage of the project.
Our equity issuance created additional flexibility as we move closer to the expected separation in the first quarter of next year.
By strengthening the balance sheet, we also created more capacity to support our M&A program.
<unk> is just the latest example of attractive businesses that we can acquire to improve our company and accelerate our growth.
We continue to have an active funnel of acquisitions and expect to complete more of this year.
With that.
Let's go ahead and open up the call for questions.
My pleasure as a reminder, if you'd like to ask a question. Please press star followed by the number one on your telephone keypad that is star one asking all the other question, we'll pause for just a moment to think about that roster.
And your first question comes from Jeff Hammond with Keybanc capital.
Yes can you hear me.
Got you good morning, Okay great.
Any surprises as you kind of went through the quarter any surprises positive or negative in the trend line I know the guide is unchanged in med tech, but just.
As things kind of reopen what are you seeing versus expectations.
Surgeries and activity levels.
Well, maybe I'll start there.
Yes, sure Jeff Thanks for the question yet.
I would say a couple of changes as you went through the quarter.
We certainly saw the U S surgery Department and mobility environment improved nicely as we move through through the quarter and I would say it improved at least in line with our plan and probably a little bit better better than our plan.
And we.
We saw the outside the U S, particularly Europe.
Was tougher than we had planned for it to be the tougher than it was tough and I'd say was probably a little bit of little bit off of our plan. So as we've said we had a good strong start of med Tech and we expect to be right on track with our plan going forward I think I think we will have a little more out of the U S. In the second quarter that we planned for it.
Less out of Europe, and we planned for in the back half of the year old sort of come back in line with what we'd expected for for the plant.
And that's for a couple of couple of things that we saw on the med Tech side.
Okay, and then it sounds like Youre managing price well in fab Tech.
Can you just talk about inflation in the med Tech business and how Youre managing price in there and then just across both businesses anywhere that you are seeing any kind of emerging supply chain issues that would prevent some of the strong revenue momentum. Thanks.
Okay.
Yes sure.
Yes, as you said certainly we're seeing a lot of inflation in fab Tech, we're passing that through the med check out. So we've got a lot higher gross margin and so that makes the sort of product cost in phase <unk>.
Little little less of an issue and there are mechanisms to get that pass through sometimes immediately sometimes debt.
Sometimes the overtime.
But what do I say it we've certainly seen other forms of inflation like Frank freight inflation net.
I think that we've been doing for the last quarter or so in terms of expediting in the supply chain to make sure that we serve sort of customer as well and so I think GAAP.
We're expecting that some of those some of the extra cost within the med Tech business will subside as we as we work through the year.
Okay. Thanks, guys.
And your next question comes from Joe Gordon <unk> with Cowen.
Hey, guys good morning.
Hey, Joe Hey, Joe.
Hey, So can you just address the.
The FDA warning from the star portfolio that we got a little bit ago and Mike what.
Talk about the timeframe for that how it has been addressed and like how we should think about that going forward.
Yeah sure. Thanks Jo.
We acquired the star ankle.
The step in the independent angle for us because it's the tremendous product. It's got the best long term outcomes data of the technology advantage product and that's something that takes a long time to build.
And that debt.
The long term outcome data in terms of survivorship of the star ankle is that it.
The superior is outcome data that includes all forms of failures.
We were well aware and the diligence that debt there was a ongoing dialogue between Stryker and the FDA about about polymer cracking. We're also well aware of the Stryker had made some changes the number of years back debt. They believe addressing the situation.
There are some some sterilization of packaging changes and we're also aware that the market was fully aware of the situation that EBIT, including the stress crack related failures.
The long term outcomes were superior for the product.
We had a plan from the start and have already moved on that plan to replace the polymer.
The <unk> that we use the poly technology that we use in our other products and for that plan is ongoing.
We expect to work through and make that change.
It's unfortunate that the FDA got frustrated with Stryker and made the warning that they did and we've had to certainly do do some handholding, but customers to remind them of.
The great overall data for the product in the point to the limited sample size that was related in that net warning and the feedback from customers has been good is the product that the people that are using it are very.
The tax of the product they've liked it for a long long time, and so we're confident we'll be able to to work through and move to the other side and it won't have any change on our plans for our foot and ankle business growth over time.
Alright, Thats really helpful.
And the follow up for me.
I know we've talked about robotics several times as something you guys are interested in the right way for Med Tech can you also talk about like.
Ways of doing that I mean, I know there is.
We've talked to startup companies that have kind of like.
Open source robotics platforms, essentially where they can use kind of the free agents to use any any kind of knee or anything like that like being surgical of those kind of those kind of companies is that of preferred path or is that like of complementary path for you guys.
Yes, I think as we've talked about before the Brady talked quite a bit of avera and Louie at our at our Investor Day.
We really think about surgical workflow overall and that range is from the planning on the front end to the guidance.
Within the within the product and.
Within the surgery in the <unk>.
Use of robotics in various different ways to automate that and we.
We've had a strategy for how we can bring debt the right total solution for each of the parts of the anatomy.
We've got some some of already strong capabilities in the planning and already terrific position in shoulder, where that's the most important we've also invested as we've talked about debt.
The company in the guidance area debt.
It's going to be bringing us a capability to bring virtual reality guidance that we're excited about and our surgeons, we're excited about and on the robotics front I.
I think.
We've talked about before we think theres going to be multiple waves of this as the technology.
<unk> less costly and less and less bulky and we've got a strategy for how we can we can bring a robotic solution that is.
Is the right solution for for our value proposition and in particular, the right solution for the ASC, which is the more constrained environment.
Through of Biotics and that yet thats something that will breakthrough through.
Through partnerships as well as internal innovation over time.
Thanks, guys I'll pass it along.
Your next question comes from Andrew <unk> with Bank of America.
Good morning.
Hello, Andrew Andrew Hey, just a question on your M&A strategy.
Seem to have found the very good niche on the.
Extremities.
Sort of a bunch of singles.
Your capital of race is there an opportunity for a larger deal.
And the second question is.
You also highlight Petcare I think that's one of the Adjacencies. The if you have answered is that something of the company could look down the line.
Yes, Andrew the first of all we're really excited that we've been able to get the three the three great deals done in the foot and ankle space that established that strong position that we can then build from and and.
I think it's been great timing in terms of stepping in as I think people are becoming more and more aware of how exciting and attractive that space is and we're in a position where we can now build the business organically plenty and have strong double digit growth over time, but there's also other bolt ons and tuck ins within that space that we can.
That we can take a take a look at.
We certainly have more flexibility now, but I would say that.
Most of the things that we're thinking about our in the in the kind of small to medium size range versus versus the big moves in the in the short to medium term.
There will always be considering the larger possibilities that we can consider but we are spending the vast majority of our time and energy on things that either greatly improve the the strategies of our of our businesses like some of the things that we've done in surgical like the like your acquisition.
In recovery Sciences, and Theres theres other opportunities within surgical within within the recovery sciences that with embracing to do bolt on acquisitions that Greg the advanced.
The strategy of our businesses.
Looking at opportunities around the global expansion and participating in more of the attractive.
Attractive parts of the global markets beyond the great U S market, where we were so strong.
And so yes.
Think of that.
That's what you'll see is as far as your specific question about pet care. It's obviously, a very attractive space. We were excited debt that like year gives us the position in that space and Theres certainly.
<unk> to think about.
If you focus more on the rehabilitation aspects of pet care.
That would be an area that we already participate in that there are other adjacent things to think about there is theres, obviously lots of other possibilities in pet care that debt. When you think about over time, but in the short term I think there is some some more logical things that we can we can think about that are close in.
Got you and then just a follow up in terms of folks getting vaccinated embedding getting more active.
Should we think that there is the catch up.
Older people actually catch up on all of the procedures.
They.
We're not able to do.
In <unk> 'twenty.
And does that mean that 2021 is relatively flat for was pointing to or can you grow off that base. Thank you and best of the Med Tech question clearly.
Yes, so yes, again I think clearly it's been it's been talked about a lot and we've talked about it that the vast majority.
40 of the demand drivers related to our.
Our surgery for products.
Didn't stop when COVID-19 Scott.
So.
The diseases that drive most of those surgeries continued to advance and so theres backlog debt.
That's been created and I think the.
Certainly the a lot of the published things that are out there as well as our perspective.
Is that it's not a.
It's not a quick catch up in one year. If it were this year would be meaningfully more than what we have forecast, but I think our expectation I think the other expectations of people that have published a lot of the space is that there is going to be multiple years, where we're working off some of the things that got delayed during <unk>.
COVID-19 and that's going to create a little bit little bit elevated growth.
Versus the norm.
For for a couple of years and.
So.
What the shape of that is if that were really sharp and maybe there would be the back side of it but I think our assumption in terms of the growth that we planned for this year. What we've talked about is between one and two years of growth versus 19, which would say that theres still additional catch up opportunity there in that.
In 2021 versus the versus the flat tax efforts of our 2022 versus the flat tax day.
Okay.
Your next question comes from Chris Snyder with UBS.
The margin guidance for rest of the year Q.
Q1, EBITDA margins came in above the full year guidance and it doesn't seem like you guys expect volume declines so are the <unk>.
Sequential headwinds just cost coming back for the business or is the expectation that price cost will be a more substantial margin drag the rest of the year relative to Q1, and then also is the $25 million to $30 million restructuring savings fully reflected in the Q1 run rate.
Yeah, Hey, Chris Your question got cut off at the beginning but I think it was about the sequential margin progression here.
Okay.
Okay, Alright, specifically in the Haynesville.
Hey, so within each of the.
Let me answer the question first about restructuring.
The benefit from last year's restructuring is fully baked in in the Q1 results that we add and of course that will continue to will get the benefit of that throughout the year, but the restructuring that we're doing in 2021 as you would expect takes time to fully bake in you don't really get to the run rate of that till you get into the deep into the year.
<unk> and <unk>.
That's why we ended for the partial year benefit this year and then the.
The additional benefit that flows into the into.
In the next year I think that.
The address the question about the about the restructuring.
On the margin side, yes, there is a really good point, which is what we touched on in our prepared remarks, Chris switches.
The business is doing an excellent job of dynamically managing the price and inflation.
To protect profit, but you've still got the debt compressing effect. It has arithmetically on the on the margins.
We've seen that happened in the past it tends to obscure the real improvements that we continue to make of the business and yet here.
We are talking about record margins of the first quarter. So we will continue to manage that we do expect that will have some impact of more price and inflation that happens the more of that effect will be reflected in the in the sequential performance of the business, but again the underlying performance is very healthy growing and as we get past the inflation curve.
For just like we've done in the past you'll continue to see those margin improvements reading through.
Okay I appreciate that so it sounds like just the cost inflation is going higher and even if you offset it to the same capacity as of Q1, it's the sequential headwind just because it's zero margin on a higher pricing.
And the right, yes, thats right.
If I could just follow up on Med Tech margin could you provide some color on seasonality here as we have net.
Never really seen of normal one H since you acquired <unk> I'm, just trying to think about the normalized sequential move into Q2.
Yes sure.
Christopher just generally this is the business that has the slowest revenue in Q1 and its highest revenue in Q4, there is always a bit of a step up in Q1 to Q2 and so the margin profile tends to fall of the revenue as you mentioned the operating leverage for these high gross margin was pretty big in the business and so it's the XP.
<unk> net as we go from Q1 to Q2 and revenue steps up and this year, it's stepping up both seasonally and because of the improving recovery that you would expect to see the margins expand and then youll see it another step up in the second half of the year, which again will be because of more revenue in typically in Q4.
For and then also we're always working on productivity and other projects that should drive additional benefit having said that we did have a little bit of supply chain friction in the first quarter as Matt touched on briefly in is the answer to a question a moment ago and we expect of work past debt as well as we get into the second half so.
Theres a number of factors, there, but largely volume driven operating leverage.
Thank you.
Your next question comes from Nathan Jones with Stifel.
Okay.
Just starting with a question on the on the guidance.
You beat the first quarter here relative to your original guidance by six to seven dense for sense of headwinds from the from the capital allocation.
Actions and you raised the guidance by about two and a half cents, which latest two Q3 for Q pretty flat.
Relative to what you've had in the previous guidance, you've talked pretty bullishly about the.
Trends in Med Tech better volume trends in med Tech and better volume trends in industrial can.
Can you talk about what's holding you back from having increased the guidance a little bit more maybe taking the top end up what the concerns all day.
Yeah, Hey, Nathan.
I wouldn't say that there is there is any concerns or what I would say is that we're really of the year. We're pleased with the first quarter performance. We thought it was the prudent and appropriate to reflect the derisking of the guidance by taking up the lower end of the range.
As you mentioned, we have the capital structure actions, there that create a little bit of a headwind obviously a terrific move the company made strategically for the long term benefits.
Of the business.
But that didn't have a little bit of headwind and so really the operating results of the business.
We ended up for absorbing that and so the underlying performance is pretty good here as we progress through the year. We continued to see how it plays out that will give us additional opportunities to assess the performance assess the trajectory of the run and think about how that might be reflected in the forecast going forward, but at this point, we don't see any risks to the guidance that.
David and we're very bullish.
That's helpful. Thanks.
These capital moves your debt with the equity raise the debt pay down it sounds like Youre still planning on doing a number of acquisitions in med Tech. This year is there any further color you can give us on what the capital structures of each of the businesses might look like post the split.
Yeah. Thanks, Nathan as we've talked about we will be providing a level of detail on that as we get deeper into the process, but it's really important that we underscore a couple of key strength.
One of those is that we intend to make sure of both businesses are set up for success.
These are two terrific franchises with great futures in the capital structure needed to support the strategic direction of both of these businesses. That's one principal second principles, we expect to have differentiated balance sheets. They are different businesses. There's the bigger gap between the med tech and its goal of being of $3 billion coming.
The then there is for fab Tech and so we want to make sure that we're considerate of that as we're thinking about the the.
The capital structure for these businesses at the <unk>.
Many of the separation so we're going to launch two great healthy businesses with terrific capital structures that are consistent with the strategy of those businesses and we will provide more details as we get closer to each line here.
It sounds like it's a fair assumption net med tech is going to have the lower leverage debt.
Nathan will give you more details on that later.
The question, but we'll see.
Thank you.
Okay. Thanks, Scott.
And your final question comes from Steve Tusa with JP Morgan.
Hey, guys good morning.
Okay.
The kind of seasonality I think you guys had talked about.
Last year that.
The first quarter would be some percentage of the year I think it was like 23% or something like that but obviously you have this negative sales impact. So I would think that the first quarter of be even.
Lower kind of on a reported basis as a percentage of the year I'm just trying to kind of.
Wrap my arms around the the.
The seasonality dynamics sequentially into the second quarter on sales if you Mike.
Okay, Let me take a stab of that Steven.
So I would say is that.
There's a couple of different dynamics that we're always talking about the selling days.
To make sure that we separate that out from the from the reported results. So last year, we highlight that we have for selling days in the first quarter net we benefited from that this year on a comparative basis, we had fewer selling days and thats why its important that we get to them.
I can pull that part so you can see the underlying performance, which is particularly of 9% growth on a selling day basis, and 8% reported and.
The 5% headwind of fewer selling days, so so peeling that apart the basis for the discussion starts with the 9% SPD growth in Q1 now as we move forward here. We've got a couple of different things. We've got the typical seasonal strengthening of the business going from Q1 to Q2 that the both of them.
Our businesses.
And we.
To see that there is no reason why we wouldn't this year on top of that we still have the sequential recovery Thats net.
Getting into the numbers as well now we generally talk about SPD growth, that's getting a little bit cloudy as we start comparing against COVID-19 COVID-19 periods, there and so really it's important that we think about the sequential performance and whether that's in line with the expectations that we had coming into the year and so far what we've got everything.
Lining up the way, we'd expected a little bit of a faster recovery in Q1 net derisk the full year, but the trend from Q1 to Q2 as is lining.
Playing out pretty much the way we would have expected when we gave the original guidance for the year.
Got it so so I guess, maybe could you just.
Let us know kind of roughly what you expect for annual sales I mean, if you do normal seasonality off the first quarter I mean, it looks like you are.
Comfortably into the kind of the net.
$900 million range like almost like 950 million bucks or of the <unk>.
Revenues in.
As I look out for the for the second half of the year I mean, if that just holds flat I mean youre at some pretty.
Or down even a little bit you're kind of well about where we are for share.
Can you just maybe give us for an annual frame.
<unk> framework for revenues.
Yes. So if you go back and look at the guidance that we gave back in February where we gave some we gave percentage percentage range has been there and then we talked about also the the.
The.
The timing of debt within each of the quarters I think we're still comfortably following that what we gave you know Q1's, a little bit maybe a little bit hotter than what we had originally guided to but for the full year, we still expect that Steve. The other thing to keep in mind is as we go from Q2 to Q3 in our Fab Tech business Oftentimes, we'll see.
Less sequentially less revenue thats, the typical trend in the business you've got summer holidays in Europe, and other factors that come into play that we've seen repeated year after year of the business. So whatever your expectations are for Q2, I would just sort of baked that all the way through for the rest of the year, just think about a little bit of of sequential step down in Q3.
Seasonal step down and then then of step back up in Q4, but as far as normal seasonality.
You feel as though if we go back over time and look at kind of the normal seasonality of at least fab tech because you've had that for a long time debt that is the.
That's what you would expect off of this <unk> print for the rest of the year.
Yes, generally that's the case what's the.
It's also in the mix here is we've got this price dynamic and that's why one of the comments we made in our prepared remarks was that we expect the four points of additional price read through but we'll be driving any profit and thats why we try to all of them.
Set the model that is in the incentive side did not expect any incremental margins to come out of that.
Yes.
That makes it that makes sense to us that you have.
The sales arent going to necessarily read through.
Okay.
Very helpful. Thanks, a lot.
Thanks, Steve Okay with that I think we're wrapping up the call. Thanks, everyone for joining the day I. Appreciate you and look forward look forward to talking to you over the next week.
Thank you.
That does conclude today's call. Thank you for your participation you may now disconnect.