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Edited Transcript of CFX earnings conference call or presentation 31-Oct-19 12:00pm GMT

Q3 2019 Colfax Corp Earnings Call

RICHMOND Dec 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Colfax Corp earnings conference call or presentation Thursday, October 31, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christopher M. Hix

Colfax Corporation - Senior VP of Finance, CFO & Treasurer

* Matthew L. Trerotola

Colfax Corporation - President, CEO & Director

* Terry Ross

Colfax Corporation - VP of IR, Strategy & Business Development

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Conference Call Participants

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* David Emerson Ridley-Lane

BofA Merrill Lynch, Research Division - VP

* Jeffrey David Hammond

KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst

* Joseph Alfred Ritchie

Goldman Sachs Group Inc., Research Division - VP & Lead Multi-Industry Analyst

* Joseph Craig Giordano

Cowen and Company, LLC, Research Division - MD & Senior Analyst

* Julian C.H. Mitchell

Barclays Bank PLC, Research Division - Research Analyst

* Nathan Hardie Jones

Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst

* Nicole Sheree DeBlase

Deutsche Bank AG, Research Division - Director & Lead Analyst

* Walter Scott Liptak

Seaport Global Securities LLC, Research Division - MD & Senior Industrials Analyst

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Presentation

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Operator [1]

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Thank you for standing by, and welcome to the Colfax Third Quarter 2019 Earnings Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference over to your speaker today, Mr. Terry Ross. Thank you. Please go ahead, sir.

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Terry Ross, Colfax Corporation - VP of IR, Strategy & Business Development [2]

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Good morning, everyone, and thank you for joining us. My name is Terry Ross. I'm Colfax's Vice President of Investor Relations. Joining me on the call today are Matt Trerotola, President and CEO; and Chris Hix, Senior Vice President and CFO.

Our earnings release was issued this morning and is available in the Investors section of our website, colfaxcorp.com. We will be using a slide presentation to walk you through today's call, which also can 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 SEC filings. Actual results might differ materially from any forward-looking statements that we make today. The forward-looking statements speak only as of today and do not assume any obligation or intent -- 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 today's slide presentation.

Now I'd like to turn it over to Matt, who will start on Slide 3.

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Matthew L. Trerotola, Colfax Corporation - President, CEO & Director [3]

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Thanks, Terry, and good morning. We are pleased to report another strong quarter, achieving the upper end of our earnings commitment in Q3. In addition, we completed the pivot of our new Colfax portfolio at the beginning of Q4 with the sale of the Air & Gas Handling business. We remain on track to deliver our guidance for the year, and Chris will walk you through our financial outlook later in the presentation.

Our Medical Technology segment accelerated for the second quarter in a row with organic growth improving sequentially. And we continue to focus on driving near-term operational improvements and are off to a strong start on our CBS journey with DJO.

Our Fabrication Technology business posted another quarter of margin improvement, up 290 basis points from the prior year in spite of softer conditions in some of our end markets. We're on track for a year of global share gain and very strong margin progress.

On Slide 4, you can see the continued growth achieved at DJO. The business organically grew 4.5%, up 100 basis points from the second quarter, an early indicator of the growth potential over time.

The Prevention and Rehabilitation product lines grew year-on-year by 3%, marking the return to positive growth for these businesses. The Reconstructive product lines delivered 8% core growth with continued double-digit growth in the surgical businesses.

Adjusted EBITDA margin was up 200 basis points sequentially from the second quarter, driven by lower costs and higher productivity. Seasonally stronger volume in the fourth quarter is expected to bring further margin benefit as we close out the year.

On Slide 5, you can see DJO's improving growth performance and the potential that attracted us to this business. The third quarter was another step-up for the business, and we now expect even stronger organic growth in the fourth quarter. This is a terrific achievement for Brady and the team and reflects the operational service improvement and the early progress the team is making on growth initiatives.

As I discussed in our previous call, we continue to see strong momentum in our Reconstructive product line led by our surgical implant business. We continue to launch innovative new additions like our AltiVate shoulder -- [our QR] AltiVate shoulder and EMPOWR Knee lines, including the launch of our AltiVate Reverse Short Stem shoulder product in Q3. These and other innovations support a healthy pipeline of surgeon conversions. This strong and sustainable momentum reinforces our conviction that we can achieve consistent high single-digit growth in Reconstructive.

A highlight from the quarter is Prevention and Rehabilitation's return to growth. This is the part of the business impacted by past delivery and customer service issues, and we've had positive feedback from our customers on the strong progress this year. The 15 new Prevention and Rehabilitation products launching in 2019 are the highest in over 5 years. While second half 2019 growth rates will benefit from soft comparisons in 2018, we're investing for growth and have a healthy ramp of new products planned for 2020, to be sure that we can sustain the return to growth in P&R.

MedTech's growth trajectory is improving a bit faster than we forecasted back in March. We expect a strong fourth quarter, noting that we will benefit from an extra selling day. Overall, this has been a very good beginning to our journey to ramp to a sustained 4% to 5% organic growth range in the next few years. On the inorganic growth front, we're working a healthy funnel with DJO bolt-on acquisitions that could accelerate our growth next year.

Moving to Slide 6. You'll see that Fabrication Technology has made additional steps forward on margin, overcoming a softer end-market backdrop. Margin was up 290 basis points to 15.2% versus the prior year on lower margin -- lower volume. The ESAB team has continued to execute its operational improvement plans and has been proactive about managing price through the cycle.

It's no secret that there's softness in some of our end markets, but we're able to partially offset volume-driven pressure in North America and Europe with organic growth in the rest of the world. We're monitoring the environment carefully, and the team has clear line of sight to deliver strong margin growth in Q4 even if things are a bit tougher.

Slide 7 is a reminder of our successful journey to improved profitability in Fabrication Technology. We've had 4 consecutive years of margin improvement, and Shyam and the team have been able to create 340 basis points of expansion through a wide range of market conditions. We're driving strong commercial execution, CBS productivity and product innovation to continue to increase margins going forward.

I'll wrap up on Slide 8, as we share a view of the new Colfax and explain why we believe Colfax is heading into 2020 with a stronger and much more valuable portfolio. We've improved our growth potential. DJO and ESAB have positive long-term growth drivers, strong brands and market-leading positions on which to build and grow. Innovation matters in these businesses with plenty of opportunity to drive differentiation and extend or even redefine the solution set for customers. While most of the innovation to date has been in products, both businesses are on the front end of a long wave of digital innovation potential. Acquisitions can improve our scale and reach and accelerate technology development, and DJO gives us a number of exciting new directions in which to pursue M&A.

We've created a higher-margin, less cyclical company with better cash flow. Over 90% of our revenue is now from tens of thousands of recurring customers across the world buying hundreds of run rate-type products and services with average purchase prices measured in hundreds or thousands of dollars.

This resilience is on display right now with Colfax's third quarter total organic growth of 1.3% positive despite the short-cycle industrial downturn. And our new portfolio has terrific optionality with lots of places in which to invest and grow, both organically and through acquisitions.

Before I hand it off to Chris to take you through our results and outlook, let me finish by saying that we're on track for what I expect will be a very successful, transformative year for Colfax in 2019 and are positioned for strong performance in 2020 and beyond.

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Christopher M. Hix, Colfax Corporation - Senior VP of Finance, CFO & Treasurer [4]

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Well, thank you, Matt. Slide 9 shows our results on a continuing operations basis, which excludes the Air & Gas Handling business that was divested immediately following the end of the quarter.

Year-over-year, Colfax was up sharply in all measures, reflecting the acquisition of DJO and our pivot to a higher growth, more profitable company. We posted organic growth in the quarter as a result of improvements at DJO and effective price/cost management at ESAB that, together, more than offset ESAB's volume decrease.

Gross margins were materially higher due to the structural step-up from DJO and the strong margin performance by ESAB, both of which also contributed to higher operating margins. We continue to invest in DJO operating improvements to quickly return the business to healthy growth, which also has a balancing effect on the pacing of the margin improvements.

Operating performance for the quarter was slightly ahead of expectations and contributed to our $0.50 of adjusted EPS. In the quarter, we had a 26% tax rate as we worked our way through the Howden divestiture efforts. We are expecting the rate to return to the low 20s in Q4. Looking forward to the full year, we are reaffirming our guidance range of $1.90 to $2 per share of adjusted earnings for the year.

I also want to highlight some important balance sheet developments. When we completed the Air & Gas Handling divestiture at the beginning of the fourth quarter, we used the $1.6 billion in cash proceeds to pay down debt. In the quarter, we also closed out another large pension, creating a noncash charge of $33 million in our GAAP results. With this move, coupled with many other efforts, including divestitures, we have reduced our pension liabilities by about 80% in recent years, contributing to our expected higher cash flows next year.

Concluding on Slide 10, this has been an exciting quarter at Colfax. We successfully divested the Air & Gas Handling business and sharply reduced our leverage. Our new portfolio is structurally more profitable, less exposed to cyclical headwinds and able to generate more consistent cash flow.

Our existing ESAB business continues to execute to take share and make strides in its long-term journey of profit improvement. DJO has clearly returned to growth, reflecting market leadership, operating improvements and innovation. We expect to finish the year on a high note and are reaffirming our guidance. 2019 is a breakthrough year at Colfax.

Operator, we'll take questions now from the callers.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Jeff Hammond from KeyBanc Capital Markets.

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Jeffrey David Hammond, KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst [2]

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Just a couple of housekeeping items to start. Can you give us kind of pro forma leverage since the deal didn't close by the time you -- or I guess, your quarter end?

And then just on free cash flow. I don't know if there's some noise in there around Air & Gas, but maybe give us a better sense of free cash flow for the go-forward businesses.

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Christopher M. Hix, Colfax Corporation - Senior VP of Finance, CFO & Treasurer [3]

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Yes. Fair enough, Jeff. So we're expecting the leverage pro forma to be roughly in the neighborhood of 4 turns or 4x leverage on a pro forma basis. And free cash flow that we see in the quarter, to your point, had a bit of noise and it's related to the divestiture of Howden and so on. As we look into Q4, we're going to have a little bit more of that as we pay taxes related to the Howden divestiture and have some other transaction fees and costs.

If you look through all of that, we expect to see the free cash flow in the quarter being in somewhere, on a clean basis, of, say, $70 million to $90 million. And for next year, we're confident that we can generate the $250 million or more that we previously communicated.

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Jeffrey David Hammond, KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst [4]

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Okay. Great. And then just give us a sense of where MedTech margins came in versus expectation? I mean, good -- certainly, very good top line momentum. And where was the progress versus 2Q? And are there still some costs you're taking to kind of rightsize and fix the business?

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Matthew L. Trerotola, Colfax Corporation - President, CEO & Director [5]

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Yes. We're definitely pleased with the growth progress in MedTech, and we had a nice couple hundred basis point step-up in the quarter consistent with our expectations there. But we have been clear from the start that we're making some extra investments there and making sure that we address the supply chain issues proactively as we have, and then make sure that we're investing in the growth of the business.

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Operator [6]

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Our next question comes from Nathan Jones from Stifel.

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Nathan Hardie Jones, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [7]

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A couple of questions here on the growth in the MedTech business in DJO. Clearly, a great step-up here and a good expectation in the fourth quarter. And you did talk about the highest level of new products in 5 years and a pipeline going into next year. If you're going to do close to 4% organic growth in 2019, which is well above what you targeted. Is a growth level around that area sustainable in 2020? Is this some easy comps from 2019 versus 2018, and we should expect growth to moderate a little bit in 2020? Just how you're thinking about that going forward?

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Matthew L. Trerotola, Colfax Corporation - President, CEO & Director [8]

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Yes. So first, I'd say we had shared early on that we expected that we could ramp this business to 4% to 5% growth range as a consistent growth range a couple years out. And we still see that very much as an opportunity that is getting continually validated here. And we're probably a little ahead of schedule on the progress there.

As it relates to next year specifically, though, this year does have a little bit of tailwind from some backlog clearing and some second half easier comps and the extra day that we commented on. And so we expect that next year will be a very constructive step towards that 4% to 5% range that we feel very comfortable with for the business in the future.

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Nathan Hardie Jones, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [9]

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Okay. I was also interested in a comment that was in the press release that you -- where you talked about Reconstructive share gains and surgeon conversion in particular. I think that's probably a pretty important avenue for you to grow, and I know those surgeons are pretty sticky. So maybe you can talk a little bit about the process that you go through, looking to flip those surgeons to your products and the traction that you've seen so far on that.

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Matthew L. Trerotola, Colfax Corporation - President, CEO & Director [10]

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Yes, sure. Yes. Our surgical business has continued to have very nice double-digit growth, which is -- it's clearly share gain in that industry. And it's really been our formula for a while now of bringing innovations to the market, partnering with surgeons to create those innovations using the success on those innovations to attract other surgeons and then filling out the bag with other technologies. So we convert surgeons, and then we throw out the range of the different products, if it's a shoulder surgeon. We've got more of the bag at this point, but still actively working on filling out the bag there. And the knee surgeons, we've still got quite a bit of runway in terms of continuing to fill out the bag there.

The surgeon conversions continue. That's an active process. We're constantly working on that. We also have a great fellows program, where we're getting surgeons exposed early on to our products and technologies and brands, and that becomes a nice feeder pipeline. And so we look at those kind of new surgeon growth or new store growth and kind of same-surgeon growth, same-store growth, and those are both on a healthy trajectory that we can see plenty of opportunity to continue.

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Nathan Hardie Jones, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [11]

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Okay. A quick one on the balance sheet and M&A. Chris said you're about 4 turns on a pro forma basis. Matt, you talked about maybe bolt-ons to accelerate growth in the DJO business. What -- how much capital would you be comfortable deploying, say, in 2020?

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Christopher M. Hix, Colfax Corporation - Senior VP of Finance, CFO & Treasurer [12]

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Nathan, as we've talked about with the new portfolio businesses that we've got here, we have a pretty clean line of sight in 2020 on a healthy level of cash flow that we think gives us plenty of firepower to continue to build out the businesses that we've got here. And that, in conjunction with increasing levels of EBITDA and other things will -- we think, will contribute to -- and give us that ample firepower.

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Operator [13]

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Our next question comes from Joe Giordano from Cowen and Co.

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Joseph Craig Giordano, Cowen and Company, LLC, Research Division - MD & Senior Analyst [14]

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Just want to shift to Fabrication quickly. And I know it's -- a lot can happen between now and when you give your next set of guidance. But as you kind of enter 2020, can you kind of go through a regional breakdown of where you think those markets stand and like what is the most likely kind of directional movements there?

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Matthew L. Trerotola, Colfax Corporation - President, CEO & Director [15]

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Yes. Sure, Joe. I mean, as you saw in our results, we saw a step-down here in the third quarter, and we expect the markets to still be in a tough zone for the next few quarters here. And we're really certainly focused on making sure that what we show a good, healthy year-over-year margin progress in the fourth quarter and deliver a strong year even with a little tougher markets down the stretch here.

Yes, we've certainly got some time and work to do on the planning for next year. But if you look at the external signals, most of the industrial GDP signals as well as some of these more specific end markets signals point to things getting more constructive as we work through next year and back into a positive kind of growth range and down the back half of next year. That's kind of the external signals at this point. We're going to be preparing for a range of possibilities over the next few months here and certainly, we'll give you an update at our Investor Day in December in terms of how we're seeing next year.

As far as the specific regions, both Europe and North America had a step-down here in the quarter. I think the European step-down was driven probably the most heavily by Germany but also some knock-on effects in other places. On the other hand, we see India. India has been a little bit tougher through the middle of this year, and we see that starting to gain some traction with some good policy things going on down there. Brazil, everybody thought would get better this year but took a little longer to get the engine working quite right down there. But there's a lot of kind of positive thoughts about where Brazil is heading as we move into next year. And the flow business in China is still not bad. Some of the more project-based up there is more ups and downs, but the flow business in China is not in a bad zone either.

So we're -- we've been focused on making sure we drive share gain in as many places as we can, and we feel like we've been able to do that this year. And we're going to stay close to those market signals as the year finishes up and make sure that we're thinking proactively about productivity and cost actions to be sure that we can continue to show margin progress in that business.

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Joseph Craig Giordano, Cowen and Company, LLC, Research Division - MD & Senior Analyst [16]

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And then if I shift over to medical, is there anything major left on an operational standpoint that you guys have to take care of? I mean it seems like you handle that pretty quickly. And if you can just comment at least on the seasonal margin profile next year, obviously, we have a big step-up in second half this year versus beginning of the year, like, can we just talk about how that typically looks over a 4-quarter kind of period?

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Matthew L. Trerotola, Colfax Corporation - President, CEO & Director [17]

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Yes. On the operational front, we had some very important issues to hit right out of the gate, and then we've worked very well together on getting those fully stabilized. But now we've got a long journey of continuous improvement, not just in the supply chain, the operational aspects of that, but also in the reimbursement processes in the back-office processes. And so a lot of work to do, a lot of opportunity there but feeling very good about the progress we've made and definitely have gotten a clear signal that some of the real customer pain down the back half of last year and the beginning of this year has been mitigated. And now we can work on just making things better and better over time. Maybe Chris will talk a little bit about the margin path

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Christopher M. Hix, Colfax Corporation - Senior VP of Finance, CFO & Treasurer [18]

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Yes. The margin profile of the business typically follows the seasonal sales patterns, which means generally, you're going to see stronger margins in the first and fourth quarter and less margins relative to the full year average in the second and the third quarter. And we think that's still the primary driver for margin performance in the business.

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Operator [19]

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Our next question comes from Nicole DeBlase from Deutsche Bank.

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Nicole Sheree DeBlase, Deutsche Bank AG, Research Division - Director & Lead Analyst [20]

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So maybe starting with one on DJO. I know this year, you guys are -- you talked about how you're benefiting a bit from inventory cleaning, some easy comps, the extra selling day. Is it possible at all to like quantify how much all of those items are uplifting your organic growth? Just -- I'm kind of surprised that you say that you're going to take a step towards 4% to 5% in 2020, when we've already seen a 4.5% result this quarter. So maybe if you could kind of talk a little bit about the benefits you had this year and how it flows into next year?

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Matthew L. Trerotola, Colfax Corporation - President, CEO & Director [21]

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Yes. Nicole, we'll certainly get pretty darn specific about that at our Investor Day, when we talk about next year. But what I'd say is that I think what we've seen year-to-date and we're going to see down the back half of the year is some incremental tailwind versus it being the fundamental driver of the improvement. And I think we've been having some good inherent underlying improvement in the business but then a little bit of tailwind on top of that. And I think the kind of growth range that we've been in last quarter and this quarter is in a kind of -- in a good range. But then, we're going to head to a better place in the fourth quarter with the extra day and a little easier comp. And we just want to make sure that people understand that some of that is in the year tailwind and will need to be backed off before we kind of take a step forward next year.

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Nicole Sheree DeBlase, Deutsche Bank AG, Research Division - Director & Lead Analyst [22]

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Okay. Got it. That's helpful. And then maybe just on FabTech. So you guys talked a little bit about like geographic trends in that business. If you could talk a little bit about what you saw from an end-market perspective, areas that got substantially worse during the quarter? And if you've seen continued deterioration into October or if you've seen stabilization in trends?

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Matthew L. Trerotola, Colfax Corporation - President, CEO & Director [23]

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Yes. Sure. I think from an end-market standpoint, I think it's -- everybody is talking about how automotive take a big step down. We've got a little less exposure to that, particularly in North America, but we do participate kind of down the automotive supply chain in Germany and some other parts of Europe. And I think definitely some of the step-down here in the quarter was related to some pressure in that segment in Europe.

I think the oil and gas part of North American market has been under some pressure in the last quarter or 2, and that's definitely part of the step-down there as well. And then there is some broader industrial pressure from the tariffs that's affecting a number of different segments. And then finally, the yellow goods segment has been pretty public about some of their significant backlog reductions and changes.

So on the flip side, there's some good area doing infrastructure in a number of places in the world. A number of -- even the other construction markets are positive. There are some places in the world where wind towers and oil and gas investments have been on the positive swing. So it's a diverse market with a lot of different end uses and geographies. I think that's something that gives welding some resilience. And we're working hard to make sure that we're gaining share and that we're focusing on the areas that are going to grow and going to make sure that we keep improving the margin of the business.

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Operator [24]

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Our next question comes from Julian Mitchell from Barclays.

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Julian C.H. Mitchell, Barclays Bank PLC, Research Division - Research Analyst [25]

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Maybe just circling back to the free cash flow. So accounts payable and CapEx, each about $100 million outflow, I think, in the first 9 months. Maybe just give us a sense of where you think those 2 items end up for fiscal '19 as a whole. And also, in context of that $250 million-plus free cash guide for 2020, how are you thinking about those 2 items for next year versus this year?

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Christopher M. Hix, Colfax Corporation - Senior VP of Finance, CFO & Treasurer [26]

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Yes. So Julian, the numbers through the first 9 months are going to have the 3 businesses in it that is -- including the Air & Gas Handling business that we've divested. So the numbers going forward will look a little bit different. You will recall that we did make a $40 million investment in the working capital of DJO, when we acquired the business to help secure the supply chain and contribute to the operating improvements that we're now seeing reading through in the growth of the business. That $40 million is reading through largely in the accounts payable number there. So certainly, that's a factor at work. In addition to that, that number includes in the Air & Gas Handling business, the business that we've divested, that includes some other moving parts that relate to customer projects that you won't see recurring with the existing run rate businesses that we've retained in the new portfolio. So it's important to keep that in mind.

And then the CapEx number includes the 3 businesses going forward. We expect the MedTech business to continue to have CapEx in the range of sort of 4% to 5% revenue, the FabTech business more in the 1.5% to 2% consistent with what we've seen in the past.

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Julian C.H. Mitchell, Barclays Bank PLC, Research Division - Research Analyst [27]

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And then my second question, partly as a follow-up on that one would be around what's the seasonality of the free cash flow in the go-forward Colfax? Do we wait until Q4 to get most of the free cash for the year? Or is it a lot more linear now?

And on the balance sheet, not many companies talk about a lot of M&A at 4x leverage. So just wondered what your view is on the go-forward appropriate leverage level for the company.

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Christopher M. Hix, Colfax Corporation - Senior VP of Finance, CFO & Treasurer [28]

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Okay. So maybe I'll -- maybe I can start by addressing the seasonality of the cash flow. We do expect the cash flow to be a little less seasonal heading forward, but it will still retain an element of seasonality as the first quarter tends to be a strong sales quarter for both of our businesses. So that's going to naturally pull in some working capital investment that you'll see get sort of released throughout the course of the year. So we still expect to see the highest cash flow quarter likely to be the fourth quarter and the lowest to be the first quarter for those reasons.

On the balance sheet side. As we've talked about the longer-term goal of the company is to continue to drive the leverage down into the -- more closer to the 3x zone that we've operated at consistently over time. With the cash flow that we've got in the businesses going forward, we've got the ability to make some of these M&A investments and continue to work the leverage down to the longer-term target. And so the cash flow that we've guided the business here for the next 36 months, we think will lend itself to a considerable M&A bolt-on activity that continue to build out the MedTech and the FabTech businesses.

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Matthew L. Trerotola, Colfax Corporation - President, CEO & Director [29]

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Yes. And just to add to that. The funnel that we're actively working now is aligned with the kind of bandwidth that we'll have over the next 12 to 18 months. And so focused on a number of attractive kind of smaller bolt-ons and maybe some sort of medium-sized bolt-on, but nothing in the large range is actively being worked right now.

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Operator [30]

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Your next question comes from Joe Ritchie from Goldman Sachs.

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Joseph Alfred Ritchie, Goldman Sachs Group Inc., Research Division - VP & Lead Multi-Industry Analyst [31]

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So I'd like to see if we can maybe parse out some of the operating leverage that you saw in FabTech this quarter. Clearly, pricing came through very strongly, but pretty impressive margin expansion on a year-over-year basis. And so I'd be curious to hear how much of a tailwind was price/cost this quarter versus just internal productivity initiatives to help drive that strong leverage?

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Christopher M. Hix, Colfax Corporation - Senior VP of Finance, CFO & Treasurer [32]

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Yes. So productivity is always going to be a part of the story, Joe. As you know, we've got our teams consistently leveraging CBS throughout the businesses to drive that. We've also got the various restructuring projects that we found that continue to drive and improve -- an improved cost structure. So those are going to be key elements.

If you look at the journey of the price/cost management over time, as we are very public about being -- chasing the inflationary costs throughout 2017, getting into 2018, that started to stabilize a bit, but it had a diluting effect on the margins that we were clear about the substantial impact on the margins. And it's only as we've really gotten into 2019 that that is stable and starting to claw back some of the price/cost issues that we had back in 2017. So we're still on the journey to get back to equilibrium, but definitely in a better place in 2019 than where we started the journey in 2017.

And along the way, the company has really built some very good discipline and muscle and process around managing price that we can continue to leverage in the future.

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Joseph Alfred Ritchie, Goldman Sachs Group Inc., Research Division - VP & Lead Multi-Industry Analyst [33]

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And maybe just kind of following up on that. On the price/cost side, as you think about it for 2020 or at least the next few quarters, your base metals have been coming down. And so it seems like we're in this little deflationary period right now. And so should that become a better benefit for you in the upcoming quarters? Like, how are you guys thinking about it internally in your own planning?

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Matthew L. Trerotola, Colfax Corporation - President, CEO & Director [34]

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Yes. So first thing I'd say, Joe, is it varies market-by-market around the world as to whether the cost side is coming down or, in fact, even still going up like in South America. So for us, as a very global business, I'd say the net is definitely a little in the down direction, but there's not any kind of a wholesale drop there.

Second thing I'd say, as Chris said, if you look at the longer-term journey, yes, we're getting kind of in the range of -- caught up to where we're getting a little bit of benefit. But we don't feel like we're in a range where we're profiting from the long-term price/cost to where we're going to need to be kind of passing that back. So we think that the margin progress that we've made is sustainable, and we can continue to make margin progress. But for sure, as the price of steel comes down in different markets around the world, the -- there will be a pass-through effect of that. In some cases, direct pass-through, and in other cases, something that more happens over time. And we'll be making sure we make some tough calls about how we manage through that.

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Joseph Alfred Ritchie, Goldman Sachs Group Inc., Research Division - VP & Lead Multi-Industry Analyst [35]

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And if I may just ask one on MedTech. It was nice to see the positive momentum in the Prevention and Rehabilitation side. I know that this is an area that DJO, a couple of years ago, underinvested in. And it sounds like you've got a lot of new products in that area specifically. So as you're thinking about the sustainability of this growth rate on the go-forward, I mean is this kind of like the starting point of what we should see on the go-forward in terms of the momentum and the growth that you see, at least, specifically on the Prevention and Rehabilitation side?

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Matthew L. Trerotola, Colfax Corporation - President, CEO & Director [36]

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Yes. So well, that's the part of the portfolio where we've got the most tailwind from some of the operational issues are clearing through. But at the same time, even though we've launched a lot of new products this year, the revenue contribution from them is fairly limited because it's a combination of large products and small products, and they've been ramping through the year. And so we're in the very early days in terms of the innovation-based impact on growth in that business in North America in particular. And so we expect that as we clear some of the tailwinds from clearing the operational issues, we then have got some healthy runway over time in terms of bringing through the benefits of the innovation pipeline, both the things that have been launched this year and a lot more that are coming in the next few years. And then we'll be working hard to recreate a robust pipeline on the backside of that and already have some very good ideas about the next wave of innovation possibilities, both in the products and in some of the more kind of connected medicine opportunities as well.

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Operator [37]

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Our next question comes from Walter Liptak from Seaport Global.

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Walter Scott Liptak, Seaport Global Securities LLC, Research Division - MD & Senior Industrials Analyst [38]

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All right. Congratulations on a nice quarter. I wanted to ask kind of maybe a -- go a little bit further into the DJO surgical business. And understanding with this momentum that you're seeing in the growth rate, are there metrics around the number of surgical groups of surgeons that you can give us? And the thing I'm trying to get to is, are we early days with starting to try and win back market share? Or is there more penetration that you can do on the market here that we can see in 2020?

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Matthew L. Trerotola, Colfax Corporation - President, CEO & Director [39]

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Yes. Let me talk a little bit about that. So on the shoulder side of the business, which is the largest part of that business, that's a high single-digit growth market, mid- to high single-digit kind of growth market. And we've been gaining share in that market. We are a leader but have a small enough share position that there's still ample opportunity to gain share. We've been a strong leader in reverse shoulder part of that business but have a smaller position there in the anatomic and still plenty of opportunity, even here in the U.S. where we've got a leading position but also global expansion opportunity in that strong broken shoulder franchise, which is a very healthy growth market.

In hip and knee, those -- that's a more of a low single-digit growth market. But we've got a very, very small share position in that market. And so a whole lot of runway to have strong growth by taking share without needing to become one of the largest players in the market or anything like that. And there are plenty of surgeons. We don't release data about the exact number of surgeons, et cetera, but this is -- there are many, many, many surgeons that make up our position and then many multiples at times that that are available still out there for us to grow into.

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Walter Scott Liptak, Seaport Global Securities LLC, Research Division - MD & Senior Industrials Analyst [40]

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Okay. Sounds great. And with the new products, is there a lag between new surgeon adds and when they start using the prevention and rehab? Like is it more difficult or easier to convert to the new products like on rehab after you've won a new customer?

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Matthew L. Trerotola, Colfax Corporation - President, CEO & Director [41]

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Our bracing and rehab product -- I just want to be clear, so our surgical products, it's often the new product that attract the surgeons. And then we really kind of fill out the rest of what they're using over time. In our bracing and rehab business, we've got very strong channel position, very strong position in the clinic in North America with our MotionMD solution. And so there, as we bring new products to the market, we're often dropping them into an existing channel position or bringing them onto a contract at a key hospital group. And so that's being added to existing positions in most cases versus the tip of the spear in our surgical business.

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Walter Scott Liptak, Seaport Global Securities LLC, Research Division - MD & Senior Industrials Analyst [42]

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Okay. Got it. And then I wanted to ask about the margins are great in MedTech. And I wondered if there was still any purchase accounting or stabilization costs in this quarter that don't recur next quarter.

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Christopher M. Hix, Colfax Corporation - Senior VP of Finance, CFO & Treasurer [43]

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The way we report the EBITDA margins, we exclude the purchase accounting effects from those margins. So they should be largely clean margins. To Matt's point, we're continuing to work through the operating improvements in the business. So that's got a bit of a natural drag on the margins. But really, the purchase accounting is largely out of those numbers.

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Operator [44]

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

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David Emerson Ridley-Lane, BofA Merrill Lynch, Research Division - VP [45]

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This is David Ridley-Lane on for Andrew. What's the -- just so we all have the same starting point. What's the comparable fourth quarter '18 revenue number for DJO?

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Christopher M. Hix, Colfax Corporation - Senior VP of Finance, CFO & Treasurer [46]

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Sorry, David, give us just a second. Yes, I think -- I mean you need to be careful about currency and different things.

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Matthew L. Trerotola, Colfax Corporation - President, CEO & Director [47]

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Yes. David, let me get back to you off-line. I just don't have it here in the room.

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David Emerson Ridley-Lane, BofA Merrill Lynch, Research Division - VP [48]

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Got it. And then just on a rough basis, how much annualized fixed costs has been taken out permanently in FabTech? And I guess, what I'm trying to think about is if volumes are down somewhat over the next few quarters, is there a potential for margins to be flat? Any way to sort of size maybe the fixed cost amount that's been taken out?

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Christopher M. Hix, Colfax Corporation - Senior VP of Finance, CFO & Treasurer [49]

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Every year, in the business, we've taken out typically somewhere between $10 million and $20 million of cost, and the current year is no exception to that. Some of that benefit does flow from the current year into the following year just as it did in 2019. The biggest drivers in the business tend to be the ongoing productivity, what we do on the sales side, both price and volume and then additional restructuring projects that we put into play.

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David Emerson Ridley-Lane, BofA Merrill Lynch, Research Division - VP [50]

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Got it. And last one for me. Is there a benefit to FabTech's margins from the pension settlement this quarter?

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Christopher M. Hix, Colfax Corporation - Senior VP of Finance, CFO & Treasurer [51]

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No, no, that doesn't flow through. The biggest benefit that we'll get from the -- from reducing that pension liability down from roughly $1.6 billion, $1.7 billion down well into the low hundreds of millions, is on the cash flow side. In the past, we would fund the pensions, it wouldn't be surprising to have a year where you had $40 million or more. And I'd surprised if it was much different than $5 million next year. So you can see the substantial improvement in cash flow that that contributes to.

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Operator [52]

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We do have a follow-up question from Jeff Hammond from KeyBanc Capital Markets.

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Jeffrey David Hammond, KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst [53]

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Just again, great work on the margin side on ESAB. If we kind of continue in this malaise or start to see kind of low single-digit growth, what's the confidence level into 2020 you think you can kind of hold the margin kind of where they've been this year on great progress?

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Matthew L. Trerotola, Colfax Corporation - President, CEO & Director [54]

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Yes. I think part of why we included the long-term margin picture is to show that good times and bad, steel up, steel down, we've been able to drive consistent margin improvement in the business. And even the '18, when it shows flat on the chart, there was this kind of mathematical pass-through. So there was a lot of underlying margin improvement. And so we continue to do the right things in terms of productivity improvement, new products, continuing to get after-structural opportunities to make sure that we can keep expanding the margins of the business within any reasonable range of market situations.

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Jeffrey David Hammond, KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst [55]

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Okay. And then just back to the pipeline and balance sheet capacity dynamic because I think the messaging before was, "Hey, we're going to spend a year to kind of delever." And it seems like you're more willing to do deals. Is that informed by just what's in the pipeline and what's available? Or is that informed by your view on much more resilient business and cash flow? Just what's changed there?

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Matthew L. Trerotola, Colfax Corporation - President, CEO & Director [56]

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Yes. And the one comment I'll make, and I'll let Chris jump in, I think we said out of the gate, we're going to sort of take this year off in terms of any meaningfully sized acquisitions and focus on deleveraging. And that's what we've done and made good progress there. Our plan from the start was to -- as we worked through this year, start to get to work on creating and then working the funnel of acquisition possibilities with a hope to get back to doing some acquisitions next year. And maybe Chris can talk about how we're thinking about the envelope there.

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Christopher M. Hix, Colfax Corporation - Senior VP of Finance, CFO & Treasurer [57]

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That's right. Yes. And it's still the dual path that we've envisioned, which is the continued deleveraging of the business as well as the continued investment in M&A. And as Matt outlined, the scale and scope of what we're looking at in the M&A, it's a big funnel. That's a big funnel of opportunities that fit neatly within the existing platforms we have are not significant steps.

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Operator [58]

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There are no questions at this time. Please continue.

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Matthew L. Trerotola, Colfax Corporation - President, CEO & Director [59]

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Great. I want to thank everyone for joining us today, and we look forward to updating you on our next call.

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Operator [60]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.