Enovis Corp

NYSE:ENOV

Earnings Call Transcript 2021-Q4

[Operator]

Good morning, ladies and gentlemen. Thank you for standing by, and welcome to the Colfax Fourth Quarter 2021 Earnings Conference Call. [Operator Instructions]

I would now like to turn the conference over to your speaker host today, Mike Macek. Please go ahead.

[Michael Macek, executive]

Thanks, Olivia. Good morning, everyone, and thank you for joining us.

I'm Mike Macek, Vice President of Finance. Joining me on the call today are Matt Trerotola, President and CEO; Chris Hix, Executive Vice President and CFO; and Shyam Kambeyanda, Executive Vice President and CEO of our ESAB business.

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 you through today's call, which can also be found on our website. Both the audio and the slide presentation of this call will be archived on the website later today and will be available until the next quarterly earnings call.

During this call, we'll be making some forward-looking statements about our beliefs and estimates regarding future events and results. These forward-looking statements are subject to risks and uncertainties, including those set forth in our 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 the non-GAAP financial measures made during the call today, the accompanying reconciliation information related to those measures can be found in our earnings press release and today's slide presentation.

I'd also like to highlight, on Slide 3, our virtual investor event scheduled for March 14. In advance of Colfax' upcoming separation into 2 independent public companies, the leadership teams of ESAB and Enovis will separately review their respective strategies for growth and value creation. We will also outline longer-term financial objectives and further details for 2022 forecasted performance. The ESAB presentation and Q&A will start at 9 a.m. Eastern, and the Enovis team will present at 11:00 a.m. Eastern. For more information, please visit the Investor Relations section of our website. If you're not able to join us live, replays 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. Welcome, everyone, and thanks for joining our call today.

I'm pleased to report another quarter of strong financial results and progress as we close out 2021 and prepare to separate into 2 independent public companies.

During the year, we made significant progress both operationally and strategically while successfully executing through the macro challenges of COVID, inflation and supply chain bottlenecks. I want to take a moment to recognize our talented teams around the world for their continued focus on our success and for their dedication to our customers and our patients.

Our operating improvements and revenue growth throughout the year translated into strong profit growth. We delivered EPS of $2.14, up 53% from 2020 and above 2019 levels. EBITDA grew 32% and is nearly $50 million higher than 2019 levels. We invested in innovation and commercial capabilities that will enable us to continue to outgrow our markets.

Both of our businesses are driving operating efficiencies and leveraging the scale advantages that come with our fast growth. ESAB increased its segment level EBITDA margins 150 basis points to a record 17.9%, its third record year in a row. Shyam and the team are deep into their CBS journey and have set their sights on 20% or higher margins in the coming years.

The MedTech CBS engine is gaining strong momentum across the business. Early wins in operations were followed by improvements in innovation and customer-facing activities. We invested to accelerate future growth while expanding margins in this business by 80 basis points in 2021.

We complemented these operating improvements with some great strategic acquisitions to further accelerate growth. These included creating a platform in the high-growth foot and ankle segment and acquiring a great European business, Mathys, to expand the markets for our differentiated surgical implants products. The integration of these businesses is on track, and we're confident it will help us to drive faster growth for many years to come.

In early March of last year, we announced our intent to separate into 2 independent publicly-traded companies and unlock additional value for our investors. ESAB and Enovis are each ready for the separation, have strong growth path ahead of them and are positioned for compounding value creation. I'll talk more about our progress on this topic in a moment.

Moving on to Slide 5. Our businesses outperformed their markets once again in 2021 and extended a multiyear streak. In MedTech, our fast-growing reconstructive portfolio has a history of significantly higher growth than the overall market. Except for 2021 -- except for 2020, this part of our business has grown double digits. Even from 2019 to '21, when the market declined, we strongly grew our business with innovative products and strong positions in the faster-growing ASC market segment. As we've shared before, this consistent double-digit growth in normal times and this pandemic outperformance is across shoulder, knee and hip.

Our MedTech P&R business has returned to pre-COVID sales levels. We've steadily increased our vitality and customer service levels in this business to secure a market position in line with our industry leadership position and outperform our peers.

ESAB has consistently outperformed the market for several years now. The business has leading shares in faster-growing developing markets around the world and is well positioned in attractive segments like medical gas control and alternative energy. We have a well-known reputation for innovation, and our regional teams nimbly meet local customer needs.

To summarize, we're winning in our markets and confident in our ability to continue.

Looking at the fourth quarter highlights on Slide 6, we finished the year strong results. Despite the COVID Omicron surge in the second half of the quarter, we grew organically by 16% with strong performance in both businesses. We also grew EBITDA and EPS at mid-teens levels as we successfully managed supply chain and inflation pressures.

Slide 7 provides an update on the separation. Most of the steps required to create 2 great companies have been completed. Our Form 10 will be publicly filed later today. We have full teams in both businesses that are excited to forge their independent paths for value creation. The required legal and other supporting actions are largely done, and we expect to complete the separation around the end of the first quarter.

We have capital structures that are designed to provide flexibility to achieve each business' long-term strategic goals. The banks that have supported us for many years came through again with committed, attractive financing.

At the time of the separation, Enovis will retain a 10% ownership position in ESAB. Later, we intend to exchange this retained stake for Enovis' outstanding debt. The company is expected to be debt-free at that point with significant financial capacity for acquisitive growth. ESAB is expected to launch with about 2.75 turns of net leverage and use its strong and consistent cash flow for deleveraging and bolt-on acquisitions.

We have 2 very strong Boards ready to go, each one a mix of current directors and valuable new perspectives. These diverse Boards will have significant industry expertise and other skills relevant to each company. We are pleased that Mitch Rales, Colfax' co-Founder and current Chairman, will serve as Chairman of each of the Boards. We will share more details about our Board members in public filings and our investor calls on March 14. We're nearing the finish line and wrapping up our key activities to complete the separation around the end of the quarter.

Slide 8 gives an update on our MedTech business for the fourth quarter. Sales for the quarter increased 29%, including acquisitions, or 10% organically. It was another quarter of strong market outperformance in both Recon and P&R.

We continue to see strong execution in our Recon business. Organic Q4 growth was 10%, even with some COVID-driven pressure from reductions to elective surgeries towards the end of the quarter. We had strong growth across the product portfolio with exceptionally strong mid-teens growth in knee implants. Our recent acquisitions in Recon, which include Mathys and the 3 foot and ankle businesses, all are performing well, and integration activities remain on track.

Our P&R business also grew 10% organically in the quarter, or about 1% over 2019, with balanced growth in both the U.S. and international markets.

As we started 2022, elective procedure volumes continued to be depressed in January, but we're now seeing some initial signs of improving demand conditions. We expect market dynamics to improve over the course of 2022 and feel each of these businesses are well positioned for strong growth.

ESAB, again, had fantastic performance in the quarter. Let me now turn it over to Shyam, who will take you through some of these details on Slide 9. Shyam?

[Shyam Kambeyanda, executive]

Good morning, everyone.

First, let me thank Matt and Chris. They've been great partners to ESAB, and as a result, we're ready for our next chapter as an independent company.

Second, let me also recognize the extra effort of our manufacturing and supply chain teams who work extraordinarily hard to ensure another successful quarter despite Omicron and some supply constraints. We have built a strong team and more recently successfully added additional talent that we needed to become an independent company. Our leadership team prides itself on accountability, and we are energized and ready for what lies ahead.

Moving on to the fourth quarter. Our Americas region grew 31% year-over-year and 10% in volume, reflecting continued market strength in orders and share gain from new products. Our EMEA and APAC business grew 16% year-over-year and 6% in volume as the business continued to show sequential strength. We believe Europe continues to have upside potential once the auto sector begins to rebound. This marks another quarter of outperformance on the top line from both of our businesses.

Our fourth quarter reflected healthy demand in most of our end markets, and new product introductions continued the top line momentum. In fact, we delivered 100 new products in 2021, and I'm excited about the new products we have planned for 2022. Our pipeline for innovation remains strong, and we're on track to deliver more than 100 new products this year.

Let me briefly touch on price. We continue to drive our CBS processes. As I've mentioned before in the past, we have 3 defined processes on price: inflation-related; strategic and value pricing; and product line rationalization. We're working all 3 of these processes to manage inflation. And for 2022, we expect to be price cost neutral.

To wrap up, we had a great 2021, which represented another record year, as Matt mentioned, for ESAB. We entered 2022 with great momentum to start our next phase as an independent public company. We're fueled up and ready to go, and I believe our best is yet to come.

With that, I'd like to hand it over to Chris.

[Christopher Hix, executive]

Thank you, Shyam.

I'll start on Slide 10 with our Q4 2021 financial highlights. We entered the quarter with softening COVID-driven revenue pressures and good momentum across all of our businesses. With the arrival of the Omicron variant midway through the quarter, elective surgeries again became limited in certain sections of the U.S. and Europe, impacting MedTech revenues. Despite this, our total company achieved 18% organic sales growth. Our recent acquisitions are performing as expected and contributed 7 points of total growth.

Gross margins were about 41% in the fourth quarter. Raw material, freight and logistics inflation remained high. Our ESAB business has been dynamically passing these costs to customers in line with industry practice. This protects the amount of profit dollars but dilutes the reported margins, as we have seen in past inflation cycles. Isolating for this effect, our underlying margin picture is healthy and shows year-over-year improvement that we expect to emerge when inflation subsides, just as in prior cycles.

Total company EBITA margins included dilutive effects from recent acquisitions that are expected to improve as their fast growth creates operating leverage and accretive margins. Our core margins grew 20 basis points with a line of sight for attractive expansion in 2022 and beyond. Overall, we achieved adjusted EPS of $0.59 in the quarter, in line with our expectations.

I'm proud of our team's work over the past 2 years to really lock down our cash flow standard work and improved performance. We had another strong quarter of free cash flow at the end of the year, and we met our raised guidance of $275 million or more for the year, excluding separation costs.

On Slide 11, our MedTech business grew 29% in the quarter, including organic sales per day growth of 10%. The COVID Omicron sales pressure that started mid-quarter continued into early 2022, and we are seeing encouraging signs as the pandemic surge passes and elective surgeries pick back up.

Our recent acquisitions in the foot and ankle and European reconstructive markets are contributing as expected and added another 19 points of growth in the quarter. These businesses remain on track for rapid growth and for sourcing and commercial synergies for years to come.

Core EBITA margins, excluding our recent acquisitions, improved over the prior year by 50 basis points. COVID-driven supply chain inefficiencies and net inflation continued in the quarter, reaching a cumulative level of over $20 million since 2019.

In the fourth quarter, we benefited from price increases to customers to offset some of these pressures, and we plan for more price increases in the first half of 2022. Our margins are also expected to benefit as our recent acquisitions continue to grow and quickly scale. EBITDA levels have grown sequentially each quarter, and we are well positioned for significant growth in the new year.

Turning to Slide 12. Our ESAB business posted strong results this quarter. The business achieved 20% growth that included volume growth over both 2020 and 2019 levels. We continue to effectively apply dynamic customer pricing to stay current with raw material and other inflationary pressures, which we expect to continue into 2022.

Strong operating execution led to a 60 basis point improvement in EBITA margins, overcoming approximately 50 bps of margin pressure from continued inflationary pricing. This improvement reflects both growth and savings from ongoing projects to streamline G&A costs and reduce our operating footprint.

Our strong 2022 segment level sales and EBITDA growth outlooks are on Slide 13. We're projecting ESAB to organically grow as much as 10% this year with contributions from all regions. We are expecting at least 5 points of year-over-year price benefits for actions taken in 2021 that roll into 2022. If we experience additional inflation, we would expect to respond with further price increases.

We are forecasting operating leverage, continued productivity improvements and cost programs to create healthy segment level EBITDA of $455 million to $475 million. We are forecasting Enovis to grow its top line at low double-digit to mid-teen rates, including organic growth of mid- to high single digits. We expect much of the lingering COVID pressure on revenue to subside in the first half of the year. We are projecting a healthy step-up in EBITDA in 2022 to $280 million to $300 million. Our guidance assumes that inflation does not stabilize until the second half of the year.

We're continuing to invest in innovation and commercial capabilities to secure our path to sustainable high single-digit growth. We're also driving productivity and streamlining initiatives to support even faster EBITDA growth in the future.

At our investor event on March 14, we will supplement these segment level views with additional information about our plans for profitable growth in 2022, including corporate costs.

I'll conclude our prepared remarks on Slide 14. 2021 was a pivotal year for us. We prepared the company for separation, getting ready to finish the portfolio transformation that we started in 2017. We have 2 terrific businesses that are each on paths to continue to outperform their markets and create substantial value. Strong operating performance in 2021 demonstrates the capabilities of our effective teams and offers an indicator of the long-term success that we are expecting. We entered 2022 with momentum and excitement for our future.

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

[Operator]

[Operator Instructions] And our first question coming from the line of Scott Davis of Melius Research.

[Scott Davis, analyst]

I look forward to the details we'll get in March. But just until we get there, I'll just ask about the quarter then. The -- it wasn't really clear in the slide, but did you guys have lost sales in the quarter because of supply chain issues or any bottlenecks and problems? And was it meaningful or material or so?

[Matthew Trerotola, executive]

All right. Scott, we had some technical difficulties here. We've reassembled. Can you start your question again, please?

[Scott Davis, analyst]

Sure. I just wanted to know if there were -- I mean, you alluded to supply chain issues, which obviously everybody's had this quarter, but did you actually have lost sales in the quarter or some sort of backlog metric or something you'll be delivering out in future quarters?

[Matthew Trerotola, executive]

Yes, Scott. I'd say there's 2 things on the supply chain difficulties is that in each of the businesses throughout the last year and even some in 2020, there are -- there's pressures that create extra backlog and that -- if we go back a few quarters, there was -- it was tougher to serve customers, and we're having to invest whatever it took to make sure we could serve customers. I would say, in the last part of the year, we still have some extra backlog and still have some pressure from a supply standpoint, but the customer service levels are getting to a better place in both businesses in the back half of the year. And we think throughout all of it, we were able to serve our customers as well or better than our competitors.

The other thing in the supply chain is more of the inflationary pressure, which in the ESAB case, the team has done a great job continually passing through. And on the MedTech side, we've been passing it through as fast as we can but have had some price cost squeeze, as Chris talked about.

[Scott Davis, analyst]

Right. That makes sense. Is there such a thing, Matt -- I mean, can you talk through kind of on-time deliveries? Are they -- do they get really wonky when you have times like this? Are you still delivering, as you said, in both businesses at kind of more traditional rates? And that's it. I'll stop there.

[Matthew Trerotola, executive]

It's still extremely relevant. So first of all, in our surgical business, we've continued to serve every surgery. And so the surgical business, it's critical for us that we make sure that we don't miss surgeries. We pride ourselves in that. We've done a great job of supporting our surgeons there.

And then if you go to the rest of our MedTech business, the more traditional on-time delivery metrics are normal. And that's a business which we improved back in 2019 from much lower levels of on-time delivery up into the 90s and where we're serving customers very well there in late '19, consistent with the revenue momentum we got there. And then certainly, through COVID, those on-time delivery levels were pulled down into the 80s for a period of time, and in most parts of the business are now back into the 90s. And so we're back closer to normal delivery levels but with a little bit of elevated backlog and some extra inventory that we put into the system in order to do that.

And Shyam, I don't know if you want to talk a little bit about the delivery situation on the FabTech side?

[Shyam Kambeyanda, executive]

Yes. Scott, we continue to improve as well month-on-month on our OTS metric. I think one of the things that we've always done is measure ourselves to customer request date. And what I would say to you is that the teams are constantly focused on it, working on it. We keep very close track with our distributors as to how we're performing in the marketplace. And so far, all of the return information has been good and strong and positive towards ESAB, and I expect that to continue to get better to where we get back into the high 90s in the second half of this year.

[Operator]

Our next question coming from the line of Chris Snyder with UBS.

[Christopher Snyder, analyst]

I wanted to start off on the 2022 margin guidance, which pegs each of the segments up about 20 to 30 bps at the midpoint, at least on my math. So relatively muted compared to high single digit, almost 10% organic growth. Certainly understand there's an elevated cost environment, but the company grew margins pretty nicely in 2021 in a tough cost environment. So I guess my question is, is the expectation that we'll see more incremental price cost pressure in '22? Any further color on what's embedded in that margin guidance would be helpful.

[Matthew Trerotola, executive]

Yes. First, I'll say on the MedTech side, if you pro forma our 2021 results to include the Mathys business on a full year basis, that takes down our starting point a little bit. And so the margin guidance that we've given is a good healthy step forward in the face of expecting to have this inflationary pressure stay with us at least for the first half of the year.

Shyam, do you want to talk a little bit about the FabTech margin guidance?

[Shyam Kambeyanda, executive]

Yes. And I think you sort of hit it. I think the view that we have is think that for 2022, sort of the 20s of incremental rate is probably the right spot to look at us, partially because of the price cost piece that's coming at us and continued inflationary pressure. But that being said, I think from an operating perspective, we expect to move the ball forward and continue our journey towards stronger margin expansion.

[Christopher Hix, executive]

Yes. And I would just jump in and mention, Chris, that in March 14, when we've unpacked this even more for you, you'll see Matt's point that he made on the MedTech margins reading through, and you'll see the underlying core margin expansion is quite healthy.

[Christopher Snyder, analyst]

I appreciate that. And then I guess following up, I want to talk about ESAB leverage and capital allocation. How does the company feel about that 2.75x leverage ratio going forward? Is getting that down a priority use of capital? Or should we expect capital allocation will be focused on growth or M&A, internal investment?

[Shyam Kambeyanda, executive]

Yes. So let me first start by saying ESAB has been a great generator of cash, and that continues into 2022. And so we're very confident about the ability to do both, which is take the leverage down and be looking at bolt-on acquisitions that come that way. And we've mentioned that, if you remember at the Investor Day we did a year ago, and you'll get more details of it when we talk on March 14. And so what I'd say to you is that we're confident on our way forward to be able to do both well as we get into 2022.

[Operator]

And our next question coming from the line of Joe Giordano with Cowen.

[Joseph Giordano, analyst]

Shyam, you mentioned 100 new products in '21. Can you kind of like benchmark that for us? Like what's been the normal number for the last couple of years? And like how much may be like on a rough percentage of revenue does 100 new products mean to ESAB?

[Shyam Kambeyanda, executive]

Yes. And so first, let me say that when we got started on this journey with Matt and I, we were sort of generating close to about 20 new products a year, and we've kind of moved that number from 20 to, I think, closer to 60, then to 80, and now at 100, and we expect to be above that number for 2022.

And when you look at sales from new products, we measure it. If you look at it on a 5-year basis, it's in the high 20s, closer to 26%, 27% of revenue coming from new products. And we're really excited about the new funnel that we have and the new products that we've put forth. And what you've seen as some of our equipment products especially has been generating a tremendous amount of buzz, again, adding to the brand image that we have out there as the machine of choice, not just in North America, but globally. And so really thrilled about the progress our engineering teams have made.

[Joseph Giordano, analyst]

And just one more for you, and then I have one quick one on MedTech, too. I think, if I remember, you guys have like a decent Russia business. What's the -- what are you guys doing there? Are you -- is there anything you have to do kind of to protect that business now?

[Shyam Kambeyanda, executive]

Yes. I appreciate the question, Joe. I think the best way to think about it is that we have actually a phenomenal emerging markets franchise. And the reason for our success, as you know, has been that we have local production, local sales teams that sort of drive a significant amount of share gain and ground activity. And so what I'd say to you, when I look at the emerging markets, India is actually a phenomenal market. Same applies to the Middle East and South America. And in Russia, we have a business that's just around 6% to 7% of our total sales, and about 60% of that business, we supply locally. And about 2/3 of that business, we supply locally; and about 1/3 of the business, we sort of send in from other regions.

So what I'd say to you is that as we look at the situation today, we're well positioned to manage it, and then we'll continue to monitor it and give you any updates as needed.

[Joseph Giordano, analyst]

All right. And then, Matt, maybe just ask you on MedTech. What's the latest on the rollout of your portfolio in Europe through the Mathys channel?

[Matthew Trerotola, executive]

Yes. As we move into the second and third quarter, we'll start to have the -- all the instrument sets coming over there. In fact, Brady is over there this week, meeting with a lot of surgeons around Europe and really started to give them some hands-on experience with our products. So we expect the synergy to start to materialize in the back half of the year and build some real momentum by Q4 and rolling into next year.

[Operator]

And our next question coming from the line of Jeff Hammond with KeyBanc.

[Jeffrey Hammond, analyst]

Just on -- I don't know if some of this is going to come out in the Form 10, but just maybe a little color on how you're thinking now about the corporate costs for each business. And just the rationale for the 90% spin and 10% later, I just want some color there.

[Christopher Hix, executive]

Sure. Jeff, we'll dive into the corporate costs in a little bit more detail as we -- in the March 14 call. But I can tell you that the progression that we would expect between the total costs as you go into the 2 companies is very much in the -- aligned with what we had talked about all along. So we'll provide the more detail, but we don't expect any deviation from the message track that we've had on that all along.

On the retained stake, we've talked all along about setting up the 2 businesses with capital structures that are aligned with their respective strategies. In the case of ESAB, with the tremendous strong and consistent cash flow, of having a modest amount of leverage and then a clear path for both deleveraging and investing in bolt-on acquisitions made a lot of sense for MedTech, which is in an earlier stage of creating scale, having a capital structure that supported more investment in acquisitions is very much aligned with that -- with the strategy of the business. And so the retained stake essentially enables us to accomplish the capital structure that we're looking for, for the MedTech business with maximum financial capacity available.

[Jeffrey Hammond, analyst]

Okay. That's helpful. And then just back on MedTech margins. Chris, maybe you can walk us through what you think the underlying incrementals are for that business and versus kind of the puts and takes on the margin growth into '22.

[Christopher Hix, executive]

Sure, Jeff. So generally, in the business, we know that we've got really attractive gross margins in there that are 50% plus. And then it puts us in a great position for incrementals that can be sort of in that rough range. And then as you know, just like the story we've told at ESAB as we've been growing and investing in that business, that's sort of the starting point, and then we typically are going to take some of that and invest it in innovation and the commercial ground game. So we expect generally that the incrementals are going to be less than that sort of mid-50-ish kind of range just because of the investment that we need to drive and create that sustainable outperformance versus the peers.

I highlighted in my comments that we have had these incremental costs and freight logistics inflation, et cetera, that all kicked off with COVID that are now in the sort of $20 million or more range, and that's additional pressure that we've been living with. We don't expect that to stabilize until the second half of 2022. But as it does stabilize and then as it begins to correct itself, we know that, that's a longer-term contributor to even more margin growth.

So as you look for 2022, and we'll have a chance to talk more about this in the March 14 call, but we think there's a number of levers for attractive margin expansion in the MedTech business. And again, as we unpack it and move the fast-growing acquisitions off to the side, once you see that core performance, you'll get a strong -- even stronger sense for that.

[Operator]

And our next question coming from the line of Andrew Obin with Bank of America.

[David Ridley-Lane, analyst]

This is David Ridley-Lane on for Andrew. Chris, can you just clarify that last comment you made on the supply chain impact at MedTech? Was that $20 million for the full year, or just for the fourth quarter?

[Christopher Hix, executive]

No, that's -- I should have clarified that. As I said in my original comments, that's a cumulative impact that we've incurred since the end of 2019. So as you read through for all of 2020, at all of 2021, and you stack all of those impacts together cumulatively over the 2 years, it's about $20 million or more.

[David Ridley-Lane, analyst]

Got it. And then just a quick one. What's embedded in the 2022 MedTech guidance in terms of your assumptions on patient volumes? And just to the extent there is kind of shippable backlog release.

[Matthew Trerotola, executive]

Yes, it's Matt here. Yes, we expect -- our 2022 guidance is based on an expectation that the year has started slow. Obviously, 2021 ended with some pressure on it from Omicron, and 2022 has started with some pressure on it from Omicron, and we expect that pressure to start to relieve as we move from Q1 into Q2 and get back into a more normalized environment in the back half of the year. And so that would result in a 2022 that is closer to a normal year, if you think about some of the pressure there was on '21. That gets us to closer to a normal kind of year-over-year picture from '21 to '22. And our guidance shows that with the potential for some catch-up at the higher end and the potential for a little more pressure at the lower end.

[Operator]

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

[Nathan Jones, analyst]

I wanted to start off on cash flow. I think, Shyam, you mentioned ESAB historically has had strong cash flow. Is there any kind of metrics you can put around that in terms of conversion of EBITDA or conversion of net income into free cash flow historically? And then I didn't -- I don't think there is any guidance for combined free cash flow out of the businesses for 2022. Obviously, some big swings in some of the working capital accounts in '21. So just if you can give us any color on how you see those progressing in '22.

[Shyam Kambeyanda, executive]

Yes. So let me start on that one. So one of the things that we do look at is free cash flow conversion, and we've been in the high 90s and low 90s as we've gone through the year, and we expect to be in that range. As you saw in the Investor Day as well, we sort of published a target to be well above that 90s as we become a public company. And so that continues.

Going forward, the cash flow generation is steady and consistent, as you know, and we've sort of ended the year strong, and we started the year the same way.

So with that, I'll hand it over to Chris to finish up.

[Christopher Hix, executive]

Yes, Nathan, we'll provide more guidance on the free cash flow as we get into -- as we get to March 14 and we're able to spend more time on the projections for the business and 2022 performance there. But as Shyam said, ESAB's on a terrific path for free cash flow conversion, as we outlined a year ago, and has been demonstrating a strong and consistent cash flow. And MedTech is on a slightly different trajectory as you know just because of the significant investment in growth in the business, but that to support the high single-digit growth expectations.

[Nathan Jones, analyst]

Fair enough. I do have one follow-up on the Recon side of the MedTech business, double-digit organic growth in the fourth quarter of '21. I think that's been historically a slower growth business. Is this still lapping easy comps from the end of 2020? Is there some market share growth going on? Just any commentary you can give us on the good growth you saw in the Recon business.

[Matthew Trerotola, executive]

Yes. So just to clarify, so the Recon business has historically always been a double-digit growth business, many -- multiple times market growth, 3 to 5x knee and hip market growth and usually about 1.5 to 2x shoulder market growth, sometimes 2 to 3. So our Recon business has consistently been a double-digit grower. And that fourth quarter performance in Recon, we think the market was probably flat to down in the fourth quarter, best we can understand. And so the temper growth in Recon is just a continuation of substantial above-market growth that we've had for many years and that we're expecting to have here in 2022 and beyond.

Now the P&R business perhaps is the question. That's a business that historically -- there was a period of time when it did grow below market for a couple of years. And in '19, we improved that market. And as we exited '19 and even entered 2020, that business was growing at above market growth levels, kind of in the mid-single digits range. And throughout COVID, as we've been tracking market factors, we feel like we've been continuing to be at or above that market growth level. And certainly, that 10% growth in that business in the fourth quarter is above market growth levels. It's against a softer comp. So as we roll into Q1, now we expect that business to be a little bit above pre-COVID levels and being able to start to grow in that at or above market range.

[Nathan Jones, analyst]

Yes, that was my mistake. I meant P&R.

[Matthew Trerotola, executive]

Yes, that's okay. That's what I thought. But we're really happy with each part of the business in MedTech and the trajectory they're on. We think our guidance reflects that. We've taken some ground on the margins front, and we expect to take ground here again in 2020, some healthy margin improvement on an underlying basis at the segment level and also a chance to shed some corporate costs and then scale. And we continue to believe that we can drive strong margin performance over time in our MedTech business, consistent with what we shared at Investor Day.

[Operator]

And our next question coming from the line of Chris Dankert with Loop Capital.

[Christopher Dankert, analyst]

A couple of quick questions for Shyam here, I guess. You touched on emerging markets more broadly. But I guess, any comments specifically kind of on China here as we go forward? Obviously, kind of a lot of moving pieces there. But just any thoughts on how we think about China in 2022.

[Shyam Kambeyanda, executive]

Yes. Here's what I'd say. China, as some of you may know, I lived in China for 6 years, and one of the things I've learned over time is that they usually figure it out and come out of whatever they're going through with a tremendous amount of strength. So what I'd say to you is we had great momentum in 2021. They've obviously had the Olympic Games that's ending -- that has ended. And sort of as we move into the rest of the year, we continue to see some activity in China, where they're going to, again, stimulate the market and drive what benefits us to a better spot. So I'm cautiously optimistic that the momentum continues in China as we move forward. I'm really excited about the team that we had there, and they did a tremendous job both in 2020 and 2021 to drive share gain. And we continue to drive really strong lean efforts in that facility in Zhangjiagang that we have. So cautiously optimistic about 2022. And if history is any inclination, then China should be just fine.

[Christopher Dankert, analyst]

Got it. Got it. And then I guess, following up, I think you mentioned price cost neutral is kind of the goal or the expectation for the year. Is there any split by half? Or do you think you can kind of maintain general neutrality kind of all the way through '22 here?

[Shyam Kambeyanda, executive]

Maybe I didn't understand the question, but do you sort of...

[Christopher Dankert, analyst]

Sorry, my apologies. I was just thinking about price cost, do we expect to kind of be price cost neutral coming out of the gate here in the first quarter and the second quarter? Or is that something that kind of takes some time for pricing to kind of work through the P&L and turn positive in the back half of '22?

[Shyam Kambeyanda, executive]

I think the best way to think about it is that we will be price cost neutral as we start the year, and then we'll see how the second half shapes up, whether there's stabilization in the market or we have continued inflation. So it's sort of to be determined based on what comes at us.

The one thing that we're very confident about is that whatever comes at us, the business has really shown resilience and how to deal with it, and we've got great processes in place to monitor and check. And I think something that we've mentioned in the past, inflation is a funny thing for us, and it does different things in different geographic regions. And so we've got to be really nuanced in how we approach it. But I think the way you're thinking about it is that being neutral for the first half of the year, the second half is to be determined depending on what happens in terms of inflation.

[Operator]

And I'm showing no further questions at this time. I would now like to turn the call back over to Mike Macek for any closing remarks.

[Michael Macek, executive]

Thanks, everyone, for joining our call today. And please join us on March 14 for our updated investor meetings for both ESAB and Enovis. And that concludes our call today.

[Matthew Trerotola, executive]

Thank you.

[Christopher Hix, executive]

Thanks, guys.

[Operator]

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.