Enovis Corp

NYSE:ENOV

Earnings Call Transcript 2020-Q4

[Operator]

Thank you for standing by, and welcome to the Colfax Fourth Quarter 2020 Earnings Call. [Operator Instructions] I must advise you that this conference is being recorded. Thank you.

Mr. Mike Macek, you may begin.

[Michael Macek, executive]

Thank you. Good morning, everyone, and thank you for joining us. I am Mike Macek, Vice President of Finance. Joining me on the call today are Matt Trerotola, President and CEO; and Chris Hix, Executive Vice President and CFO.

Our earnings release was issued this morning and is available in the Investors section of our website, colfaxcorp.com. We'll be using a slide presentation to walk through today's call, which can also be found on our website. Both the audio and the slide presentation of this call will be archived on the website later today and will be available until the next quarterly earnings call.

During this call, we'll be making some forward-looking statements about our beliefs and estimates regarding future events and results. These forward-looking statements are subject to risks and uncertainties, including those set forth in the safe harbor language in today's earnings release and in our filings with the SEC. Actual results may differ materially from any forward-looking statements that we make today. The forward-looking statements speak only as of today, and we do not assume any obligation or intent to update them, except as required by law.

With respect to any non-GAAP financial measures made during the call today, the accompanying reconciliation information relating to those measures can be found in our earnings press release and in today's slide presentation.

Before turning it over to Matt, I would like to highlight that, in our earnings release published this morning, we also announced that we'll be hosting a virtual Investor Day on Thursday, March 11. You can see the details of the event on Slide 3 of the earnings presentation and in our release. The event will take place from 9 a.m. to approximately 1 p.m. Eastern Time, and the meeting will include presentations from the company's corporate and business leadership. To register for the event, please visit the Investor Relations section of our website at colfaxcorp.com. And if you're not able to join us live, replay will be available on the company's website following the event.

With that, let me turn it over to Matt, who will start on Slide 4.

[Matthew Trerotola, executive]

Thanks, Mike. Good morning, and thanks to everyone for joining the call. We're pleased to report another quarter of improving financial results as we close out 2020. Despite the challenges of COVID, we continued our focus on improving and growing our businesses while keeping our associates healthy and safe. I want to thank our global team for their unwavering commitment to serving our customers and patients during this dynamic period.

2020 started with great momentum that we successfully translated into steadfast resiliency during the pandemic while strengthening our company both operationally and through acquisitions. As a result, we're exiting the year poised to significantly grow in 2021 and beyond.

We thoughtfully balanced our objectives during 2020: Increased our investments in innovation, drove initiatives that position us to win as markets recover and continually outperform our markets. We did this while also executing on our cost-savings plans, structurally eliminating over $20 million of costs and maintaining our financial strength by taking temporary actions to offset the COVID-driven volume declines.

We also strengthened our cash flow processes to improve consistency in conversion levels. Our second half cash flow was very strong, and we exited the year with a clear line of sight to generate greater than $250 million in 2021.

With this progress, we secured the financial flexibility to begin executing on our strategy of expanding the business through strategic investments again. As we start 2021, we're renewing the exciting momentum that we had in early 2020 and are well positioned for a strong, scalable growth.

On Slide 5, you see another quarter of sequential improvement while managing through the dynamic market conditions caused by the escalation of COVID cases during the quarter. As a reminder, Q4 had several fewer selling days for us in comparison to the prior year and the third quarter of this year. Despite this, sales improved 3% sequentially from the third quarter. We delivered adjusted EPS of $0.51 per share and free cash of $96 million, both above guidance. We generated $145 million of free cash flow in the second half of 2020, a good indication of the cash flow capabilities of both of our businesses.

Our innovation and commercial teams continued their solid execution, and we outperformed our markets again this quarter. We also successfully expanded our MedTech platform by executing on 3 acquisitions, 2 during the quarter and another in January, which I'll discuss in more detail in a moment.

Slide 6 updates the pace of recovery in underlying customer demand. Our MedTech business was approximately flat sequentially on a sales-per-day basis. And as the fourth quarter progressed, elective procedures and mobility were negatively pressured as infection and hospitalization rates surged through the month of December. The slowdown this quarter was much less severe than the previous one. Hospitals are much better equipped to manage COVID patients while maintaining higher levels of elective surgeries.

Looking at 2021, volumes have stabilized in Q1, and we expect conditions to continually improve as we progress through the year. We expect a strong recovery versus 2020 and see volumes getting back to growth over 2019 levels as we move into Q2 and the second half.

Our FabTech business continued its strong recovery with sequential sales-per-day growth of 10% versus the third quarter and down only 2% versus the prior year. We have seen the developing regions continue to grow, again demonstrating the strength of this business' global reach. Our improving trends continued into January, giving us a good start to Q1. We're projecting year-over-year growth in Q1 and a return to 2019 volume levels by the second half of 2021.

We've been actively executing our strategic growth program, as you see on Slide 7. We were attracted to MedTech in part due to the many opportunities for investment in this attractive, fragmented space. In the past 4 months, we acquired 3 high-margin businesses with significant long-term growth potential. During Q4, we closed on the STAR total ankle replacement business that we highlighted on the last call. And we've since closed on 2 more acquisitions, Trilliant Surgical and LiteCure.

Trilliant Surgical has a rapidly growing portfolio of innovative foot and ankle surgical solutions that promote better patient outcomes. Its broad product line targets foot and ankle surgeons and podiatrists for both elective and trauma procedures. This includes their state-of-the-art Arsenal Foot Plating System, a patented plating technology.

Along with the 2020 acquisition of the STAR Total Ankle Replacement system, the Trilliant addition establishes a dedicated foot and ankle business that will leverage our Recon segment infrastructure and replicate our highly successful surgical growth model. Foot and ankle surgery is a $1 billion U.S. market with attractive core growth and further opportunities for strategic investment. We expect the Trilliant business to grow in the mid- to high teens, with gross margins in the area of 80%.

LiteCure is a market leader in therapeutic laser technology for human and animal health. This business has a strategic fit in our recovery sciences business and strengthens our leadership position in physical therapy and rehabilitation. High-power laser technology is on the steep part of a long market penetration curve with higher growth than many of the other technologies that are being applied in rehabilitation. We see the opportunity to grow this product line at high single to low double digits between the market tailwind and the innovation and channel synergies.

We're very excited that these businesses are now a part of our MedTech platform. Slide 8 expands a bit more on these acquisitions. Investors know that we have a very disciplined acquisition process rooted in our business strategy and focused on value creation. We have a very experienced team, CBS processes, to ensure strong execution. And as you can see, each of our recent acquisitions accelerates our business growth strategies and expands our markets. For these transactions, we expect very strong returns, which also points to the strategic fit and attractiveness that each brings. We paid $135 million for the 3 businesses and expect them to contribute over $100 million of annual revenue in year 3 at accretive margins and double-digit organic growth.

With this expansion, we're aligning our MedTech structure to accelerate growth. Our new foot and ankle business is becoming an additional growth platform within Reconstructive. And our bone growth stimulation business, which was formerly part of Reconstructive, is now in Prevention and Recovery, where it shares some common infrastructure.

Moving to Slide 9. Q4 MedTech sales declined 7% on a sales-per-day basis in comparison to the prior year. As we moved through the quarter, volumes were pressured from increasing COVID cases and hospitalization. Recon sales declined 1% in the U.S., 3% overall. And P&R declined 8% both -- on an organic sales-per-day basis. Given the rapid return to growth we saw earlier in 2020, we're confident that we'll see a quick return to growth in the coming months as cases subside and vaccines continue to roll out.

Earnings were flat sequentially despite lower volumes. We continue to incur some COVID-related inefficiencies driven by the challenges of managing through the changing demand levels and supply and shipping constraints. But we aren't letting that slow down our improvement journey. We continue to make great progress using CBS to strengthen the supply chain and innovation engine in our MedTech platform. As a result, we remain confident in our ability to drive above-market growth and continuous margin improvement in the future.

On Slide 10, Q4 marked another quarter of sales and margins sequential improvement in FabTech. Versus the prior year, organic sales per day declined 2%. This represents a continuation of the recovery we saw last quarter and what we see continuing into 2021. Also, this completes the second year of outperforming our markets.

The majority of our regions improved from the third quarter. Nearly half of our sales come from faster-growing emerging markets that achieved year-on-year growth. Our North American and European regional sales improved, but these markets are still the most affected by government actions to control the spread of the COVID virus.

Our gas control business achieved another quarter of solid growth due to the strong demand for our medical and life sciences gas control solutions.

Our FabTech team achieved another quarter of strong decremental margins of 19%, significantly mitigating the profit impact from lower sales. Margins were only 20 basis points less than our strong Q4 margins last year. During 2021, we successfully executed upon our restructuring programs to drive savings of just over $20 million, with approximately $10 million of follow-up benefits next year. We're targeting additional savings next year at comparable levels, positioning ESAB for continuous margin improvement and strong cash conversion.

Before handing over to Chris to walk through our financial results, I'll wrap up on Slide 11 and share our key 2021 priorities. We exited the year well positioned to build on our momentum and are poised to have significant growth in 2021. We expect our teams to leverage CBS to sustain and strengthen our innovation and commercial processes, to successfully grow our pipeline of new products and deliver market outperformance and share gains. We expect to leverage this growth, CBS and further savings from restructuring actions to expand margins while reinvesting in the businesses. We also expect to build on the cash flow momentum that we created to deliver strong and consistent cash conversion in 2021.

Next, we'll ensure the successful integration of our recent MedTech acquisitions to capture the benefits that will strengthen and accelerate growth in our business and to improve the health and mobility of patients all over the world. This success will enhance our ability to actively pursue additional strategic opportunity in both our served and adjacent markets.

Wrapping up, we feel both our FabTech and MedTech businesses should have a strong recovery in 2021 and have exciting futures, driving growth, innovation and long-term value creation.

With that, I'll turn it over to Chris, who will start on Slide 12.

[Christopher Hix, executive]

Thanks, Matt. Fourth quarter results show that our company has gotten much closer to pre-COVID performance levels. Setting aside the fewer number of selling days in the quarter that we signaled through the year, Q4 sales per day were down only 4%. Our industrial business grew in developing markets and experienced little drag from the COVID resurgence that affected our medical business.

Gross margins of nearly 43% reflect our work to control costs and mitigate the negative operating leverage and COVID inefficiencies in the quarter. Our cost controls extended beyond the supply chain and enabled us to deliver operating margins of 13.6% and EBITDA margins of over 17%. Despite COVID pressures, we executed well in the quarter and achieved $0.51 of adjusted EPS, better than the guidance we issued. We also generated $96 million of free cash flow, a clear indication of our potential that supports our confident view of future performance.

Slide 13 demonstrates our improving cash flow trends throughout the year and compared with the prior year, which included costs related to our portfolio transformation. We started 2020 with a clear line of sight to $250 million or more of free cash flow in the year, and we're solidly on that path before COVID impacted our results. COVID (sic) [ Colfax ] is a resilient company, and we used this challenge to accelerate many of our continuous improvement projects and firm up processes that kept us financially healthy in 2020.

Our second half performance this year demonstrates that we are on a solid recovery path and fully capable of generating at least $250 million of cash flow each year from our businesses. It also shows that our leverage ratio should rapidly decline in 2021.

We have a strong growth outlook for the new year, as shown on Slide 14. Full year MedTech growth of 21% to 24% over 2020 levels includes mid-teens organic growth, about 6 points of growth from recent acquisitions and 1 point of expected FX. Our MedTech business is stabilizing in Q1 from the recent increase in COVID cases, and we expect this business to return to growth over 2019 levels in the second quarter, led by strong double-digit surgical growth.

We are projecting this growth to translate into strong margin recovery before the impact from acquisitions. These recent acquisitions have gross margins of nearly 80% that will translate into high operating margins as they achieve scale. And in 2021, these high-growth acquisitions are expected to post mid-single-digit margins.

Our FabTech business is projected to grow organically in the high single to low double-digit range, and we are currently forecasting a couple of points of FX. We are projecting that faster-growing developing regions will continue to grow and developed economy regions will sequentially improve before returning to 2019 levels some time in the second half of 2021. This business is expected to improve margins more than 0.5 points in 2021 and end with margins higher than record 2019 levels. We are currently experiencing raw material inflation and applying our CBS toolkit to address this with dynamic pricing. We expect a net neutral profit impact in 2021 from this.

All of this is expected to add up to EPS growth of over 40% or $2 to $2.15 and free cash flow of over $250 million. The slide includes the expected quarterly shape of the revenue, sequentially building into Q2 and ending with our typically strongest fourth quarter. This translates into an earnings pattern that grows with revenue and restructuring benefits. We expect first quarter EPS of $0.35 to $0.40.

Let's wrap up on Slide 15. 2020 was a challenging year. All of us at Colfax accepted the challenge and got to work to strengthen our company and rebuild our positive momentum. Strong fourth quarter results demonstrated that momentum, as did the recent completion of 2 additional high-growth MedTech acquisitions that will be fully integrated this year. Market conditions continue to improve, and we are continuously improving our businesses. We have an active funnel of acquisitions to further enhance our company. We are excited by the potential of our businesses and expect 2021 to be an exciting year of profitable growth.

With that, Em, let's open up the call for questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Joe Giordano from Cowen.

[Joseph Giordano, analyst]

Can you talk about, for the new acquisitions, kind of -- I know it's early, but how does the -- maybe uptake with your existing sales force. Did you pick up new sales force? As you continue to build out the channel with small businesses like this, how's the ability to kind of like push these new products through the existing channels that you have? And how does that develop from there?

[Matthew Trerotola, executive]

Yes. Thanks, Joe. So I'll comment on each. In foot and ankle, there are specific doctors there. And so as we acquire these businesses, we get some channel that serves the specific surgeons and podiatrists there. But we also have the opportunity to leverage our surgical channel because some of the partners that we work with in surgical can easily access those doctors as well. So we definitely get some synergy both between our existing surgical business and each of these new businesses as they come in, and the businesses also have channel synergy with each other. So that's kind of what's happening on the foot and ankle side.

And even bringing -- we already had a good start with STAR in the channel and then bringing Trilliant in is -- makes it even more exciting in terms of attracting reps and doctors to STAR on the LiteCure side, there's a direct overlap in human rehabilitation with our existing channel, and so there's a great opportunity to bring the channels together and have great cross-selling opportunities, not just here in the U.S., but around the world.

[Joseph Giordano, analyst]

All right. And then Chris, how are you thinking about temporary costs or like incremental spending that needs to come back into the organization this year versus last year? And are you seeing any like supply chain issues across any of your businesses?

[Christopher Hix, executive]

Yes, Joe, what I would say is that, as Matt commented, we've taken out a tremendous amount of costs permanently in 2020. But to your point, there were some temporary cost actions that we took, and we expect those to flow back into the results of the company this year. And that's reflected in the guidance that we gave, including the strong margin improvements that we're expecting in both of the businesses. So we do have that fully baked in there.

In terms of supply chain with respect to COVID, we're still seeing a little bit of friction that, that's causing in the supply chain that we're working through, and principally in our MedTech business. And we expect that as COVID continues to clear, that we'll be able to put that behind us.

[Operator]

Our next question comes from the line of Scott Davis from Melius Research.

[Scott Davis, analyst]

Can you talk a little bit about -- you outgrew your peers in welding pretty much all year. And I know you have some geographic differences and such, but do you attribute it to the new product investment? Was there a bigger marketing push? Was there incentives? Any color you could provide there would be helpful.

[Matthew Trerotola, executive]

Yes. Thanks for the question, Scott. We've really spent years in FabTech building this very strong capability. We've got a tremendous global footprint with an ability to have kind of strong scale but at the same time have agile regional service. We provide tremendous service to our customers around the world. We've built a tremendous innovation engine that continues to crank out more and more and more great progress -- or great products and innovation into that business, including fresh and exciting things like our WeldCloud software solutions that have been gaining a lot of momentum.

And so I think there's just an accumulative effect there, that over the past couple of years, you're seeing -- reading through that business in terms of our ability to grow stronger than markets. And there's no question that we're benefiting some last year from the fact that emerging markets grew faster. We're actually growing as we came through the back half of the year while the developed markets were still down. And the shape of our portfolio helped us there, but we're also benefiting from years of effort making that business into really a tremendous business.

[Scott Davis, analyst]

Okay. Helpful. And the acquisitions that you brought in, are they similar gross margin profile to DJO, or a little bit higher, a little bit lower?

[Matthew Trerotola, executive]

Yes, as Chris commented, they're higher, I think, significantly higher than our fleet gross margins there in DJO. And that's really one of our -- as we look at the acquisitions that we're making in both platforms, but particularly MedTech platforms, we're looking for acquisitions that enhance our gross margins, improve our growth. And the ones we're talking about here today do both. They're more in the range of our Recon gross margins than our DJO overall gross margins.

[Operator]

Our next question comes from the line of Mike Halloran from Baird.

[Michael Halloran, analyst]

So on the MedTech side of the platform, obviously, I understand cumulative cadence to the year, a little softer in the first quarter, ramps through the year given some of the delays on the both sides of the business. But could you talk about how you're seeing that cadence develop through the year between the Reconstructive side and then the Prevention and Recovery? How much of a lag do you think you might see in the Prevention and Recovery side? Is there -- maybe there's not a lag? And kind of how those dynamics are expected to cadence as we move forward.

[Matthew Trerotola, executive]

Yes. So I think I heard the question, Mike, about the cadence of the recovery on the MedTech side. In particular, how it's going to play out between the different parts of the business. And I think we learned a lot last year that's very instructive in terms of how we thought about how things play out this year.

As a reminder, our Reconstructive part of the business is almost entirely driven by elective surgery. Our P&R side does have a portion that is driven by elective surgery, but then also has a broader range of growth drivers and is also significantly more global in terms of the growth drivers of the business. So those factor in.

And what we saw happen last year was that the recovery of elective surgery was very fast in June and July. As soon as infection rates and hospitalization rates started to come down, June and July recovery in elective surgery was very fast. So we saw a very fast spring-back in our Recon business. And we saw the portion of our P&R business that was driven off elective surgery spring back very quickly as well. And then in the subsequent months, we started to see kind of the rest of those things that are more affected by mobility start to come back. And so our -- and as we got to sort of September, October, we were just about back to pre-COVID levels across all of that before we got into the kind of November, December pressure that we're still seeing a little bit here.

So as we planned this year, we really tried to learn from that, and we do expect that as we work through the first quarter, we'll see kind of a rapid recovery of elective surgery to pre-COVID levels and then growth versus pre-COVID levels. And we'll see the P&R business lag that. Part of the P&R business will come back very quickly, but it will lag that some and take a little bit longer to get back to pre-COVID levels and beyond.

And so when we put that together, that's how we've talked about getting back to growth over '19 by Q2 and then having sort of healthy growth over '19 in the back half of the year as we're getting into a more normalized environment.

[Michael Halloran, analyst]

That's super helpful. And then second question, leverage in the high 3s, but cash flow is going to be stronger this year. How are you guys thinking about the balance between lowering the leverage levels and then how aggressive you want to be on the M&A side?

And then secondarily, maybe just some thoughts on what that funnel looks like today, size, scope, and how active you think you can be there.

[Christopher Hix, executive]

Yes. Maybe I'll start with that just by commenting that we think we've got this flexibility ahead of us to harness this growing and substantial cash flow to manage the path that we're on, which is a combination of deleveraging through the increasing profit and the use of our cash with -- and pursuing the M&A agenda, like we've done recently with these highly attractive bolt-on acquisitions that have really tremendous growth potential in them. So I think you'll see us still tracking that through 2021.

Matt, do you want to comment on the...

[Matthew Trerotola, executive]

Yes. We've got a robust funnel. We've got really good process to start with strategy and think about and understand the things that can accelerate the strategies of the businesses, also think about the attractive adjacencies around the businesses and then prioritize that and build an M&A funnel based on that and do active cultivation within that funnel and then make thoughtful decisions about when we engage in opportunities to acquire companies.

So we've got a robust process we've been using for years, and we're using it very actively in our MedTech business and have built a very robust funnel of opportunity, some of which are direct bolt-ons that strengthen and improve the businesses, and some of which are more adjacencies.

And as we've talked about before really, looking at things more in the kind of small to medium-sized range because there's a lot of attractive stuff that we can do in that range that can create a lot of value for our shareholders and strengthen and improve our businesses.

[Operator]

Your next question comes from the line of Jeff Hammond from KeyBanc Capital Markets.

[Jeffrey Hammond, analyst]

I guess, first, can we -- can you talk about what the underlying incremental margins are by business kind of incorporated in the guide?

[Matthew Trerotola, executive]

Sure. Yes. Jeff, as you know, the FabTech businesses, we've consistently talked about that being in the sort of low 30s rate when you consider, in a growth period, that we're reinvesting in the business. And I wouldn't expect the incremental margins to really be much different than that as we head into the new year. Now I want to set aside from that the return of some of these temporary costs that we took out in 2020 that would naturally return in 2021. And then, of course, we've got the restructuring benefits that we'd expect to see in the business that we referred to in our prepared remarks.

On the MedTech side, that business, that's one that we've talked about being -- given the higher gross margins, being consistently in that sort of low to maybe mid-50s range. And we think that there's a fairly clear path to that. And again, I want to set that aside from the return of any sort of temporary costs. So if you put that together with the growth that we've indicated with those other data elements here, you'll see that it aligns nicely with the guidance that we've given for the significant margin expansion in 2021.

[Jeffrey Hammond, analyst]

Okay. Great. And then just on the FabTech guide, certainly a little bit better than the peers put out here recently. Can you just unpack it a little bit? What do you see in developed markets in terms of growth versus developing? How much are you baking in on price? And are there any kind of share gain built in there?

[Matthew Trerotola, executive]

Yes. So first, we've talked about last year that the developing market down the back half of the year and that we're growing over '19. And so from a developing market standpoint, we build on that and have some positive growth again here as we're working through 2021 as well. Whereas the developed markets, we're off versus '19 last year. So we see a significant spring back in 2021 versus '20, but we start out the year off versus '19 and then climb through the year back to where we turn it over and are positive versus '19 in those markets.

[Jeffrey Hammond, analyst]

And what's price built in within that?

[Matthew Trerotola, executive]

Yes, yes. So I mean, if you look -- our price drop last year was increasing. We had higher price in the fourth quarter than the first quarter. There's also been ongoing inflationary pressure there. And so just from the shape of price last year, you're going to see that roll over into price for this year. And then we've been doing some additional price increases on top of that. So most of the growth is from volume, but there is still a piece of price that's in that growth.

Sorry, Chris, go ahead.

[Christopher Hix, executive]

Yes. And the price that we -- as I mentioned in my comments here, the price we put forward is really just the dynamic pricing to deal with raw material inflation. So we don't expect any net profit impact from that in 2021.

[Jeffrey Hammond, analyst]

Okay. And then if I could sneak one more in. Foot and ankle, it looks like 2 nice deals, maybe a $50 million business starting out. What do you think is the right scale in that business to kind of really be meaningful and nicely profitable?

[Matthew Trerotola, executive]

Yes. So it's about $1 billion U.S. market, a couple of billion dollars globally. But it's got a lot of different slices in it. And so you can actually build nicely scaled businesses in the pieces, they don't have to be all that big. But you also can build scale across all of that. And so we feel pretty excited that we've got a good head start towards building, say, $100 million business in the space over the coming years. And that would be a very attractive player in the space and a great growth engine, highly profitable growth engine, for our business.

[Operator]

Our next question comes from the line of Andrew Obin from Bank of America.

[Andrew Obin, analyst]

Yes. Can you hear me?

[Matthew Trerotola, executive]

We can.

[Christopher Hix, executive]

We can, Andrew.

[Andrew Obin, analyst]

Just a question, longer-term question on MedTech. Lots of moving parts, COVID comps, M&A. What's your view of medium-term normalized revenue growth, including the work you've done at DJO and the new acquisitions? And on top of it, I just also want to make sure that there is no big catch-up in '21, there would be a big headwind to growth in '22. So just a big-picture question on MedTech.

[Matthew Trerotola, executive]

Yes. So we talked -- we've been talking since we acquired the business about growing it to be a mid-single-digit grower, sort of 4% to 5% type of growth range. And we demonstrated that in the back half of 2019, I think, pretty clearly, that the portfolio can do at least that 4% to 5% range and likely more. And I think even how we've made our way through 2020 sort of reinforces that we're already demonstrating kind of a growth versus the market that would suggest at least kind of a mid-single-digits capability.

I think you add in some of these growth accelerators that we've already acquired as well as the improvement trajectory that we've got in the business, and we see it as a business that we think can grow north of mid-single digits. And then we're going to continue to add things to the business that solidify it as a high single-digit grower in the MedTech space.

As far as recovery, I think if you really look at the dynamics in the space and even really look at what a lot of other players have talked about in the space, there's really more of a view that, even with a strong recovery in 2021, there's likely to be some more extra growth in 2022 that comes from some of the delayed demand. Because most of the demand -- or I think the significant amount of the demand in our business is things that continued through COVID, the diseases that drive the need to have an implant procedure, they continue to march on. And so you have people that needed the procedures, but have been pushed to the right.

And so what happens here in 2021 is that we get recovered to pre-COVID, some growth and even get to start kind of working on catching up on the backlog. But the conventional wisdom is that still that as you roll over into 2022, there's probably going to be another year of catch-up where there's kind of above-normal growth in the elective surgery parts of the business before we get to a more normalized environment.

So I think we've got great opportunity for a couple of years here of very strong growth. And by then, we expect to continue to shape the portfolio to where it can sustain that kind of high single-digit growth range.

[Andrew Obin, analyst]

Sounds good to me. So just another question on your M&A. It seems like you guys are able to find a lot of these $25 million to $30 million revenue targets in MedTech. Does the pipeline look similar to the completed deals? Similar scale, high gross margins, good growth prospects? I know you sort of answered it in one way, but just a different way of asking about the targets that you are seeing.

[Matthew Trerotola, executive]

Yes. We do see -- it is a space that there is a lot of players that will get started, will have some good innovations, will leverage some of the existing channel, build a little bit of their own channel and kind of grow their way into that $10 million, $20 million, $30 million revenue range. And it's been quite common in the foot and ankle space, there's a number of players there. Even within the existing, call it, larger shoulder and hip and knee space, there are still players that are kind of growing their way through with new and innovative technologies and things.

So we see a lot of opportunities in Recon, still in that kind of smaller and attractive company growth range. There's attractive bolt-ons to look at on the P&R side also that look like the LiteCure acquisition, where there's certain technologies or applications that are higher-growth areas where we don't have as strong a position, either based on history or based on kind of some new innovation that someone has been doing. And we can acquire those businesses, bring them into our channels and create a lot of value. So we do see a healthy pipeline and expect to be able to continue to do attractive acquisitions in MedTech.

[Andrew Obin, analyst]

It sounds like you guys have a lot of things to do into '21.

[Matthew Trerotola, executive]

Yes, indeed. Thanks, Andrew.

[Operator]

Your next question comes from the line of Chris Snyder from UBS.

[Christopher Snyder, analyst]

I was hoping to get a bit more color on the Q1 guidance, specifically for MedTech. So in the prepared remarks, you guys said that volumes are stabilizing in Q1. But is this relative to Q4, or is this just a stabilization in the monthly cadence? And should this lead to less seasonality than normal into Q1 for MedTech?

[Matthew Trerotola, executive]

Yes. I will just comment on the revenue trends. What -- Q4, again, started out at kind of that level of almost fully recovered and then November, December had pressure. And so November and December were not as high up as October had been. And I think our view of Q1 from a demand standpoint is sort of the mirror image of Q4 in that January has started out with some pressure, but already started to see some of that pressure subside in late January through February. And so we're seeing kind of that mirror image effect in terms of how Q1 plays out before we get to what I've talked about earlier in terms of Q2 being in a more normalized range.

I don't know if Chris might want to comment a little more on the guidance beyond that.

[Christopher Hix, executive]

Yes. So the guidance reflects that revenue trend that we see from Q4 to Q1, as Matt laid out. And that's fully baked in.

[Christopher Snyder, analyst]

Okay. I appreciate all of that. And then for the second question, you guided to mid-single-digit margins in 2021 for the recent MedTech acquisitions. Can you maybe provide a time frame for when you think these acquisitions will turn margin-neutral relative to the existing MedTech, in the high teens range? And then what's the potential for these to ultimately become margin-accretive? Because there is the gross margin premium.

[Matthew Trerotola, executive]

Yes. So as I said, the -- by year 3, they will be gross margin-accretive. And certainly, when you look at the gross margins, there's the potential for them to be highly accretive, but there's also the potential to keep investing in them and grow them a lot for a long time. And so I think, as we've acquired some of these higher-growth businesses, we definitely have a view of how do we get them to scale in the first couple of years and get them to where they're accretive to earnings? But we also have a view of making sure that our plans include continuous investment in the innovation and the channel of those businesses so that they will be able to carry forward these high-growth rates on a go-forward basis.

I think that creates a great opportunity as we continue to scale our Recon business further and further with these higher gross margins. We can have very high growth for a long period of time. But as the business scales, there will be an opportunity for more and more overall margin to drop through.

[Operator]

And our next question comes from the line of Nathan Jones from Stifel.

[Nathan Jones, analyst]

I'm just going to do one more on the acquisitions and maybe the path to getting to those high teens, low 20s or better EBITDA -- EBITA margins. You talked about needing scale here. Is this just a matter of they've got pretty good organic growth, leverage the SG&A without having to add to it to get to that kind of level? Are there CBS improvements to be made in the businesses? Do you need to make further acquisitions to get that scale that you're talking about to push those margins up? Just any color you can give us on the path to that margin improvement.

[Matthew Trerotola, executive]

Yes, sure. Yes. So many of the acquisitions that we do have some extra costs in the first year that lead to a little bit less initial margin that then grows over time in terms of some of the normal kind of early investments that we make in the business, like maybe kind of get them over to a new IT system and things like that. So it's pretty common to have that pattern in our bolt-on acquisitions, of the first year being a little bit lighter.

And then certainly, these acquisitions we're talking about here, we have the opportunity over the next couple of years to have channel synergies, operational synergies and just the scaling of the business. And so yes, we're not counting on another acquisition in order to get to the kind of accretive margin levels that we're talking about. We see a clear path in terms of just some of the natural synergies and some of the normal scaling of the business over the first couple of years of ownership.

[Christopher Hix, executive]

Yes. And with the sort of growth rates that we're -- that we envision with these businesses, with the high gross margins that they've got, you can achieve a lot of operating -- a significant amount of operating leverage that gives you the benefit of both margin expansion, but also providing some of the wherewithal to continue to invest in the businesses' innovation, channel, et cetera.

[Nathan Jones, analyst]

Makes sense. And then free cash flow, you guys are guiding to at least $250 million in 2021. You've got about $35 million of restructuring costs -- cash restructuring costs baked into that. And I'm assuming that the growth that you're forecasting in 2021 is going to require some investment in working capital this year. Does the restructuring expense drop off as we go into '22, working capital investment kind of normalizes, and we can see a path to that being at least $300 million over the next year or 2?

[Matthew Trerotola, executive]

Yes. So for 2021, as you would imagine, the sort of growth rates that we're talking about will require a little bit of working capital investment, notwithstanding that we expect the underlying metrics of days sales and inventory, DSO, et cetera, to all improve. So we expect there will be a little bit of drag on cash flow as we go into 2021. And we expect to have considerable growth beyond 2021, but perhaps not at the same sort of recovery levels. So I would expect there to be a little bit of a less of a drag from working capital going forward. And that opens up the window certainly with expanded profit -- along with expanded profit to increase cash flow as we get into 2022 and beyond.

[Operator]

Our next question comes from the line of Steve Tusa from JPMorgan.

[C. Stephen Tusa, analyst]

Just looking at -- do you guys expect total revenues to be around 2019 this year or above? I mean, I know you got a bit of like a slow start, but you talked about the second half growing from '19. I mean, with the acquisitions, can revenues kind of get back to '19 levels?

[Christopher Hix, executive]

Yes. In the -- I think what we're suggesting is that the MedTech business, we would expect the revenues to be higher than what we had in 2019 as the business returns to growth over 2019 levels starting in Q2 and then in the back half of the year. So for the FabTech business, there's the opportunity for that, depending on how quickly the developed markets recover.

As we mentioned in our comments, the developing markets have shown considerable resiliency and growth throughout 2020. We think that continues in 2021. But in -- for the developed markets there, it's really just about the pace of the recovery which we expect to see more towards the back half of the year.

[C. Stephen Tusa, analyst]

Right. I mean, I think you guys did like $2 in earnings in '19, at least. I don't know. Maybe that's like a pro forma number. There's a lot of adjustments. But I mean, is there any reason why you can't do a higher number on -- are there any like major differences? Whether it's -- maybe it's mix? I mean, I think you took some structural cost out, so why wouldn't you be further above that level?

And I don't think that you actually included a full complement of DJO, so I'm just -- like, is that kind of what the guidance implies, above that, just above that number? I would think it would just be a little bit higher like-for-like on an EPS basis.

[Christopher Hix, executive]

Yes. So the number in 2019, I think it was about $2 of earnings. That was a fully baked pro forma number. So that had a full year of expected benefits from DJO, even though we only owned it for 10 months at the time. So we had, let's call it, $2 in 2019, and we're guiding to $2 to $2.15. On revenue levels, it could be very similar or perhaps slightly above.

Now we've made considerable strides in both businesses, and -- but as you know, we also continue to reinvest in both businesses to drive innovation and other operating improvements there. So we expect to drive significant improvement in EPS while at the same time supporting the business' long-term potential.

[C. Stephen Tusa, analyst]

Right. So the margin is like a little bit below what it was back then, I guess, maybe?

[Christopher Hix, executive]

I think for -- the businesses are on different trajectories. You've got the FabTech business, which we commented, we expected to exceed its record margin performance in 2019; and then the MedTech business, which will have the -- these new acquisitions in it as well, which influences the margins a little bit. Underlying corporate, the margins, we mentioned, would be up 400 basis points off 2020 levels. So I'd say pretty good progress there as well.

[C. Stephen Tusa, analyst]

Yes. Sure, sure, for sure. And then just one last one on free cash flow. You said above $250 million, I still -- I think that's short of 100% conversion. I mean, is there any visibility on kind of when you guys can get to 100% cash conversion? Is that in the mindset at some point in the intermediate term on your adjusted EPS?

[Matthew Trerotola, executive]

For the current year, I think -- sure, sure. Listen, I'm really pleased with the progress that we've made on cash flow, and we talked about going into 2020 and getting sort of a 90%-plus conversion. We ended up at, I think, 97%, somewhere around there, which demonstrates the improvements we've made. Now that had a little bit of tailwind from working capital in it, but we are very close to knocking on the door of getting to 100% conversion. I think, this year, we'll have a little bit of a drag from working capital. And then as we get beyond this into 2022 and 2023, I think 100% conversion very much comes into frame.

[Operator]

Your next question comes from the line of Joe Ritchie from Goldman Sachs.

[Joseph Ritchie, analyst]

Matt, I was wondering if you can maybe just elaborate a bit more on the COVID-related inefficiencies that you described earlier in the MedTech business. What are you seeing exactly? Is it impacting your supply chain at all? Is it freight? Like what's -- what are you guys seeing in the business right now?

[Christopher Hix, executive]

Yes, sure, Joe. I think, certainly, in Q3 and Q4, we -- as we had to bring the supply chain up fast and then do some ups and downs kind of the back half of the year, there's been some inefficiencies related to labor force and having to kind of flex the labor force, bring in temporary labor, things like that. There's also been some inefficiencies around expediting and other costs on the freight and logistics front. Some earlier on in terms of getting it out to customers. And then later in the year, the inbound stuff got tougher and we had to do some expediting on the inbound. And so those are the kinds of things.

We've been really trying to keep our eyes on the prize and keep our customers in good shape, and that's led to some extra cost in the business in Q3 and Q4. And at the same time, we keep working on the extra -- the underlying improvements, so that as we come out the other side, we'll make sure we're in the right place.

[Joseph Ritchie, analyst]

Got it. So is the expectation in the guidance that, that starts to normalize then in the second half of the year? And that actually becomes like a good guy or a tailwind in 2H?

[Matthew Trerotola, executive]

Yes, certainly, on a year-over-year basis, so yes. So I think, certainly, we'll start the year still with a little bit of that pressure, but then should clear it. And it'll -- that will get us back normal -- more normal environment. And so when you get to the back half of the year, yes, you will have some benefits on the year-over-year comp, but you'll also have some of the temporary costs coming back in. So those will have some pros and cons.

[Joseph Ritchie, analyst]

Got it. Okay. And then maybe just one question for Chris. I know you're kind of managing to price/cost neutral. But specifically on the welding segment, is there anything we need to be aware of from like a cadence perspective on -- I know price is going to come through from 2020 into 2021. But given where commodity prices are today, are there any like specific quarters where you'll actually see some negative pressure from that dynamic?

[Christopher Hix, executive]

So as Matt, I think, indicated maybe in an earlier comment, the price actions that were taken to begin to address the raw material inflation in Q4 are going to roll into the first quarter this year and the first half of this year. And then he mentioned that there's some other actions we've taken more recently to further address the raw material inflation.

From this point forward, it's really about dynamic pricing, so reacting to the conditions that present themselves and staying on the balls of our feet on that. So that's what we see right now.

[Operator]

Your next question comes from the line of Julian Mitchell from Barclays.

[Julian Mitchell, analyst]

Maybe just -- wanted to try and understand the acquisitions a little bit better. I think you said that the gross margin's 80%, the operating margin is sort of 5%. So you've got maybe a 75% OpEx to sales ratio, which is quite high, I think, versus most businesses in any industry that we come across. So just wanted to understand, is that some sort of adjusted gross margin or some definitional difference of cost versus how the Colfax base business looks at it?

[Matthew Trerotola, executive]

Yes. Well, it's not an gross margin or anything like that. I think -- what I'll say it varies by the businesses, and I can comment on these as well as just others that we've got in the pipeline we look at. In some cases, these smaller businesses that are -- have been built -- have really had a philosophy of investing 100% of the profit and growing the business. And so when we bring them in, we have an ability to do those investments more efficiently, at some of them, and to start to scale that. And so we make a thoughtful call over the first couple of years how are we going to continue to effectively the same level of growth investment, but get efficiencies on that and things that start to make the total SG&A and R&D as a percent of sales come down a little bit. And so that's one.

But then there's others that we consciously have some specific overinvestment that we're going to do in the first year, like that IT, consolidation of sales forces, different things that are kind of year 1 investments. They are not adjusted investments, but they're kind of in the business investments that we know are going to pull down that first year versus the course that they've been on, but then are going to clear. And so there's a little bit of each in these 3 businesses.

[Julian Mitchell, analyst]

And then maybe just looking at that FabTech organic sales guide for the year. So should we assume you're up single digits Q1 year-on-year, up 20%-plus Q2, and then you're sort of up mid-single digits in the second half? And maybe help us understanding that second half assumption, any split of sort of the international versus more domestic business, what growth rates you're assuming there in the second half.

[Christopher Hix, executive]

Yes. I'm not sure that we're prepared to guide specifically each quarter's revenue growth there, Julian. But we do believe that the business is pretty well positioned starting off the year in the first quarter and then continuing to pace through. And we'll have the easiest comparison as we get into the second quarter and a bit of the residual effect in Q3. And then we get into Q4, and you'll start to see us clear more and more of the COVID year-over-year comparison there.

[Julian Mitchell, analyst]

And any sort of bifurcation on that international versus more domestic business? Maybe just the year as a whole. Then the 2 -- the different growth rates between the 2.

[Christopher Hix, executive]

Yes. As we've commented, we've seen the developing markets continue to grow through 2020, and we expect that to continue in 2021. On the developed market side, we expect those to, let's put aside the easier comp over 2020 rates and think about over 2019. And as we commented, we expect those -- the developed regions to get back to 2019 levels some time in the second half of the year.

[Operator]

Your next question comes from the line of Nicole DeBlase from Deutsche Bank.

[Nicole DeBlase, analyst]

I appreciate you guys squeezing me in here. So I guess maybe starting with 1Q thinking about FabTech margins. That was definitely an area of positive surprise during the fourth quarter, decrementals a bit lower than I think you guys were expecting as well. So can that decremental margin performance carry into the first quarter? Or are there any kind of puts and takes on costs -- price/cost that we need to be thinking about?

[Christopher Hix, executive]

Well, the -- I think the comment that we made just a moment ago was suggesting that the ESAB business is likely to -- more likely to be in a growth mode in -- year-over-year in Q1. And so we're thinking about it more from an incremental margin perspective. And as we frame up the full year, Nicole, we think about the incremental margins in the business being largely in that traditional kind of 30%-ish sort of range, reflecting both the natural operating leverage and then the desire that we always have to continue to reinvest some of that back into the business.

That's the natural sort of rate of the business independent of some of these temporary costs coming back that we took out in Q2 and a bit of Q3 of 2020, those sort of reemerging. But then you've also got the factor of restructuring benefits flowing through. So all of that is baked in and gives us the viewpoint that, in this business, we should be able to deliver another year of record margins in 2021.

[Nicole DeBlase, analyst]

Got it. That's helpful. And then I guess just on MedTech, the one thing I was surprised about is that you guys are expecting a return to 2019 demand levels as early as 2Q, when it seems like the vaccine rollout is going a little bit slower than expected and infection rates remain high. So I guess, how did you think through getting confident in that outcome?

[Matthew Trerotola, executive]

Yes. Again, Nicole, as I said, when we look back at what happened in June and July, we see that in June and July, when things were kind of starting to clear there, we got back very close to 2019 demand levels, and our surgical business was actually growing nicely. Now elective surgery got into maybe 80% to 90% of pre-COVID level. That took our surgical business into positive growth range and brought our P&R business closer to '19 levels. And so what -- think using that as a reference point and looking at the trends on cases, looking at the rollout of the vaccine, looking at what we're hearing from hospitals about their plans and surgeons about their plan, we see an opportunity for a similar kind of balance in the next couple of months. We see that as the expected pass-through this year, and that gets us then in Q2, kind of at or above '19 growth levels, and then growing nicely in the back half of the year of '19.

[Operator]

[Operator Instructions]

[Matthew Trerotola, executive]

Em, I think -- with that, I think we can end today's call as there's no longer anybody in the queue. Thanks, everybody, for joining our call today. I look forward to talking to you soon.

[Operator]

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you all for joining. You may all disconnect.