Colfax Corporation (CFX) Q1 2021 Earnings Conference Call April 29, 2021 8:00 AM ET
Mike Macek – Vice President-Finance
Matt Trerotola – President and Chief Executive Officer
Chris Hix – Executive Vice President and Chief Financial Officer
Conference Call Participants
Jeff Hammond – KeyBanc Capital
Joe Giordano – Cowen
Andrew Obin – Bank of America
Chris Snyder – UBS
Nathan Jones – Stifel
Steve Tusa – J.P. Morgan
Good day, and thank you for standing by, and welcome to the Colfax First Quarter 2021 Earnings Call. At this time, all participants’ lines are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions]
I would now like to hand the conference over to your speaker today, Mike Macek. Please go ahead.
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; and Chris Hix, Executive Vice President and CFO. Our earnings release was issued this morning and is available on the Investors section of our website, colfaxcorp.com. We will 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 the Safe Harbor language in today’s earnings release and in our filings with the SEC.
Actual results might differ materially from any forward-looking statements that we make today. The forward-looking statements speak only as of today, and we do not assume any obligation or intend to update them except as required by law. With respect to any non-GAAP financial measures made during the call today, the company reconciliation information related to those measures can be found in our earnings press release and in today’s slide presentation.
With that, let me turn over to Matt, who will start on Slide 3.
Thanks, Mike. Welcome, everyone, and thanks for joining our call today. As many of you know, we’ve had a very active quarter, and we made significant operating and strategic progress. We announced our intent to separate into two companies, completed an equity offering and finalized several key acquisitions.
I’m also pleased to report better-than-expected results in Q1 that sets us up for a great year ahead. Building up the momentum we have in each of our businesses, we delivered strong organic sales per day growth of 9% in Q1. As a reminder, Q1 2020 included several extra selling days, resulting in approximately a 5% headwind in our reported sales numbers.
Despite this and continued challenges from COVID, we delivered adjusted EPS growth of 16% to $0.44 per share, and above our guidance range of $0.35 to $0.40 per share. We also posted another strong quarter of free cash flow, continuing the improvements we saw last year. Our results and momentum strengthened throughout the quarter, as we benefited from improving market conditions in both of our businesses.
In early March, we announced our intention to separate into two independent, publicly traded companies, with a target completion date for the first quarter of 2022. This separation will create a global leader in fabrication technology and specialty med tech innovator, both companies with tremendous focus, momentum and opportunity.
This decision is a result of a thorough strategic review undertaken by the Board with management and it reflects our ongoing commitment to create long-term value for all stakeholders. We’re confident that separation will position both companies for maximum flexibility for long-term growth and value creation.
We successfully strengthened our balance sheet in March by completing an equity offering. This gives us continued flexibility to execute on our disciplined, strategy-driven acquisition process, while standing on the path to set both new companies up with strong balance sheets. Earlier this week, we announced another strategic acquisition for our MedTech business, which I’ll touch on in more detail in a moment. Our pipeline of opportunities remains robust, and we expect to complete more this year. As you can see, we remain focused on executing our proven strategy for compounding value creation.
Slide 4 dives into our MedTech business performance this quarter. Q1 core daily sales increased a bit over 5% year-over-year. Sales rates improved each month, helped by the ongoing rollout of the vaccine and loosening of COVID-related restrictions in many areas. Elective procedures accelerated through the quarter, contributing to recon double-digit growth in March and first quarter daily sales growth of 8%, with particular strength in shoulders and hips.
We continue to outperform the market in our recon business across the portfolio. Protection and recovery growth was almost 5% in the quarter, also strong performance versus market indicators. All-in, reported growth for the quarter was 7%, with our recent acquisitions contributing 5%. Adjusted EBITDA increased $3 million in the quarter to $48 million and margins increased to 15.5%.
Excluding our recent acquisition, EBITDA margin increased 60 basis points year-over-year. Adjusted EBITA margins were also up slightly in the quarter when excluding acquisitions. This puts us right on track versus the guidance we provided at Investor Day for MedTech EBITDA margins for the year. We expect the sequential improvement in market conditions to continue as we progress through the year. We continue to expect a strong sales recovery versus 2020, in line with our prior guidance levels of 14% to 16% organic growth for the year.
Slide 5 highlights our April acquisition of MedShape, a great strategic fit in our growing foot and ankle business. As we’ve shared previously, U.S. foot and ankle surgery segment is more than $1 billion and grows high-single digits. MedShape provides innovative and clinically differentiated solutions to foot and ankle surgeons, using its patented technologies based on super elastic alloys and polymers. On this slide, we show their breakthrough DynaNail product that has reshaped tight foot fixation.
The super elastic property of NiTiNOL and nickel titanium alloy are applied in the DynaNail and many other MedShape devices to create surgical solutions that actively participate in bone healing. Their products, which included devices for fracture fixation, joint fusion and soft tissue injury repair, complement our existing portfolio, strengthening our value proposition to surgeons and our channel.
Similar to our Trilliant acquisition earlier in Q1, MedShape’s growth in gross margins are accretive to our recon business and will drive EBITDA margin accretion by year three. MedShape has grown almost 30% CAGR organically over the past five years. We’re very excited to add a talented team and groundbreaking product portfolio to our MedTech business.
Although, our new foot and ankle business has come together quickly over the past four to five months, it’s been part of our strategy ever since we acquired DJO. We have a very disciplined acquisition process, rooted in our business strategy and focused on value creation. MedShape complements our recent acquisitions of the STAR total ankle replacement system and Trilliant Surgical to form a very strong foundation, which strengthens our leadership in extremities.
We’ve invested $225 million to build a high-growth, high-gross margin platform that will accelerate the overall growth of the company. This business starts with annual revenue of approximately $65 million and is expected to grow rapidly to $100 million by year three, along with accretive EBITDA margins.
Turning to FabTech on Slide 7. We had a very strong quarter in ESAB, with sales per day growth of 11% and a record adjusted EBITA margins. Our emerging market regions grew sharply and most regions continued to show strong sequential improvement. Most product lines achieved solid growth in the quarter, highlighted by equipment and specialty gas control sales. All-in reported sales increased 8%. Inflation drove significant increases in raw material costs during the quarter, which we effectively managed by passing along higher prices to our customers. For the quarter, prices increased 4%. We continue to expect a dynamic environment for the next few quarters and plan to use our proven processes to mitigate any earnings impact. Chris will touch on our pricing expectations for the year in a few moments. Q1 adjusted EBITA margins of 16.1% is an all-time high. The team continues to execute with excellence, effectively using CBS, innovation and targeted restructuring efforts to drive improvements in the business.
Slide 8 highlights some of ESAB’s new products and innovative – innovation efforts. As we discussed in our Investor Day in March, this business has a great innovation engine that supports high-growth, high-product vitality and continuous share gain. The first quarter was no exception. We launched the Rogue ET, a high-performance portable machine for steady intake welding with unique ESAB industrial design and welding performance DNA.
We also expanded our robust fee offering with AVS, which adds the ability for customers to be able to connect our products to non-ESAB welders. We’re very proud that the RobustFeed wire feeder has received the highly coveted Red Dot Award for product design in 2021. RobustFeed was designed affordability, durability and productivity and is the only portable feeder with IP44 protection glass rating.
In the first quarter, we added to our digital solutions offering with WeldCloud fleet document management software that helps customers more efficiently manage their fleets as well as the equipment. And we acquired Octopuz OLP software, which specializes in off-line robot programming. This user-friendly offline programming capability is critical to support penetration of robotic welding into the next wave of industrial applications.
As I said earlier, we made tremendous amount of progress this quarter. Before I turn it over to Chris, I want to say thank you to our global teams. I’m extremely proud of our team for the strong start to the year as we build momentum towards a great 2021 and an exciting future as two very strong and valuable companies.
With that, I’ll turn it over to Chris who will start on Slide 9.
Thanks, Matt. At our Investor Day last month, we highlighted our positive momentum and the opportunity to perform at the top end or even above our first quarter expectations. That revenue momentum did, in fact, continued through the end of the quarter, largely as a result of better industrial demand and an increased number of elective surgeries, and we delivered above our EPS guidance range.
For the full quarter, sales grew 8% year-over-year despite 5% fewer selling days. Sales per day increased 9%, and we had 2 points of benefit each from both acquisitions and currency. Gross margins for the quarter were 42%. ESAB is again successfully passing its inflationary pressures to customers through pricing actions.
Of course, when sales and costs each increased by roughly the same amount, profit is protective, but margins are artificially compressed as we’ve seen in the past. Our true underlying margin performance was an increase of 50 basis points from operating leverage, high-gross-margin acquisitions and restructuring benefits.
Restructuring benefits also kept core SG&A, that is SG&A excluding acquisitions, flat year-over-year. Our effective sales and operating execution led to a 50-basis-point increase in EBITA margins, and we finished the quarter at 12.2%. As mentioned earlier, we exceeded our EPS guidance by $0.04, earning $0.44, which is a 16% year-over-year increase. We generated $60 million of free cash flow in Q1, including the tax refund and a payment related to a divested business, neither of which are expected to repeat. Our treasury and business finance teams are leveraging robust processes to ensure that our growth translates into healthy cash levels.
Slide 10 provides an update of our strengthened capital structure. As Matt mentioned, in March, we completed a very successful $700 million equity offering. And in April, we redeemed a like amount of our higher coupon bonds. This reduced our net leverage to under three turns. Our operating path of cash flow and profit improvement should have us closer to two turns by year-end. We have more freedom to execute our M&A strategy and have already deployed some of this new capacity for the MedShape acquisition.
Slide 11 outlines our updated 2021 forecast. We started the year with a $0.04 EPS guidance feed that we believe demonstrates less risk to achieve our full year guidance. As a result, we are increasing the bottom end of the range by $0.05. And our full year EPS guidance now stands at $2.05 to $2.15. These forecasted results include offsetting about $0.04 of net headwinds from the capital structure changes.
The guidance details that we provided in February and March are largely unchanged, although we are clearly moving higher within those ranges. I do want to highlight one change. We now expect another 4 points of growth at ESAB to recognize the additional pricing that we expect to pass along in response to current inflation trends. We are not forecasting for this additional price to have any net profit effect.
Our foot and ankle acquisitions are each off to a good start to achieve their high-growth plans this year. We are investing in integration and adding targeted resources to ensure the attainment of our aggressive plans to organically grow to $100 million of revenue in three years. We expect the EBITDA margins of these acquisitions to grow from the current pre-scale low-to-mid single digits to the segment average or higher over the three-year horizon.
Our outlook for Q2 reflects the positive revenue momentum we had throughout the first quarter, and we expect our typically stronger seasonal performance. We are forecasting for these higher revenues to create sequential operating leverage and support adjusted earnings per share of $0.40 to $0.53. Our strong start on cash flow in Q1 further strengthens our conviction for achieving at least $250 million for the full year, at a healthy conversion level, despite investments being made to support high growth levels.
In summary, on Slide 12, our strong first quarter results demonstrate that we continue to execute effectively, that are well-positioned for strong growth this year in all metrics: sales, margins, EPS and cash flow. Our confidence is reflected in our updated EPS guidance of $2.05 and $2.15. We continue to push forward on the separation activities and are on track at this early stage of the project.
Our equity issuance created additional flexibility as we move closer to the expected separation in the first quarter of next year. By strengthening the balance sheet, we also created more capacity to support our M&A program. MedShape is just the latest example of attractive businesses that we can acquire to improve our company and accelerate our growth. We continue to have an active funnel of acquisitions and expect to complete more this year.
With that, operator, let’s go and open up the call for questions.
My pleasure. [Operator Instructions] And your first question comes from Jeff Hammond with KeyBanc Capital.
Jeff, are you there?
Yes. Can you hear me?
Yes. We got you. Good morning.
Okay, great. Just any surprises as you kind of went through the quarter, any surprises, positive or negative, in the trend line? I know the guide is unchanged in MedTech. But just as things kind of reopen, what are you seeing versus expectations on surgeries and activity levels? Well, maybe I’ll start there.
Yes. Sure, Jeff. Thanks for the question. Yes. I would say a couple of changes as we went through the quarter. We certainly saw the U.S. elective surgery environment and mobility environment improve nicely as we move through the quarter. And I would say it improved at least in line with our plan and probably a little bit better than our plan. And we saw the – outside the U.S., particularly Europe was tougher. We had planned for it to be tougher, and it was tough. And I’d say it was probably a little bit off of our plan.
So as we’ve said, we had a good strong start in MedTech, and we expect to be right on track with our plan going forward. I think we’ll have a little more out of the U.S. in the second quarter than we planned for and a little less out of Europe than we planned for. And then the back half of the year will sort of come back in line with what we expected for the plan. So those are a couple of things that we saw on the MedTech side.
Okay. And then it sounds like you’re managing price well in FabTech. Can you just talk about inflation in the MedTech business and how you’re managing pricing there? And then just across both businesses, anywhere that you’re seeing any kind of emerging supply chain issues that would prevent some of this strong revenue momentum? Thanks.
Yes, sure. So, well as you said, certainly, we’re seeing a lot of inflation in FabTech. We’re passing that through. In MedTech, absolutely we got a lot higher gross margins, and so that makes the sort of product cost inflation a little less of an issue. And there are mechanisms to get that passed through, sometimes immediately, sometimes over time.
But what do I say is we’ve certainly seen other forms of inflation like freight, freight inflation and things that we’ve been doing for the last quarter or so in terms of expediting in the supply chain to make sure that we serve customers well. And so again I think we’re expecting that some of those extra costs within the MedTech business will subside as we work through the year.
Okay. Thanks, guys.
And your next question comes from Joe Giordano with Cowen.
Hey, guys. Good morning.
Hey. So can you just address the FDA warranting from on STAR portfolio that we got a little bit ago and like what – and talk about the time frame for that, how it’s been addressed and like how we should think about that going forward?
Yes, sure. Thanks, Joe. So we acquired the STAR Ankle as the step into foot and ankle for us, because it’s a tremendous product. It’s got the best long-term outcomes data as a technology-advantaged product, and that’s something that takes a long time to build. And that long-term outcome data in terms of survivorship for the STAR Ankle that is superior, is outcome data that includes all forms of failures.
We were well aware in the diligence that there was an ongoing dialogue between Stryker and the FDA about polymer cracking. We’re also well aware that Stryker had made some changes a number of years back that they believe addressed the situation through some sterilization and packaging changes.
And we’re also aware that the market was fully aware of the situation that, even including these stress cracks-related failures, the long-term outcomes were superior for the product. We had a plan from the start, and we’ve already moved on that plan to replace the polymer with e-Poly that we use in our – e-Poly technology that we use in our other products. And so that plan is ongoing, and we expect to work through and make that change. It’s unfortunate that the FDA got frustrated with Stryker and made the warning that they did.
We’ve had – certainly do some handholding with customers to remind them of the great overall data for the product and to point to the limited sample size that was related in that warning. And the feedback from customers has been good. It’s a product that the people that are using it are very attached to the product. They’ve liked it for a long, long time. And so we’re confident we’ll be able to work through and move to the other side, and it won’t have any change on our plans for our foot and ankle business growth over time.
All right. That’s really helpful. And a follow-up for me. I know we’ve talked about robotics several times as something you guys are interested in, in the right way for MedTech. Can you also talk about like ways of doing that? I mean – I know there’s – we talked to start-up companies that have kind of like open-source robotics platforms essentially, where they can use kind of their free agents to use any kind of knee or anything like that, like things surgical, those kind of companies. Is that a preferred path? Or is that like a complementary path for you guys?
Yes. I think as we’ve talked about before, I think Brady talked a little bit about – and Louie at our Investor Day, we really think about surgical workflow overall, and that ranges from the planning on the front end, to the guidance within the product and within the surgery and the use of robotics in various different ways to automate that. And we had a strategy for how we can bring the right total solution for each of the parts of the anatomy. And we’ve got some already strong capabilities in the planning and are already in a terrific position in shoulder where that’s the most important.
We’ve also invested, as we’ve talked about in the company in the guidance area that it’s going to be bringing us the capability to bring virtual reality guidance that we’re excited about and our surgeons were excited about. And on the robotics front, again, I think we’ve talked about before. We think there’s going to be multiple ways to this as the technology becomes less costly and less bulky. And we’ve got a strategy for how we can bring a robotic solution that is the right solution for our value proposition, and in particular, the right solution for the ASC, which is a more constrained environment through robotics. And that’s something that we’ll bring through partnerships as well as internal innovation over time.
Thanks, guys. I’ll pass it on.
Your next question comes from Andrew Obin with Bank of America.
Hey, just a question on your M&A strategy. You seem to have found a very good niche on extremities, sort of a bunch of singles. Given your capital raise, is there an opportunity for a larger deal? And the second question is, you also highlight pet care. I think it’s one of the adjacencies that you have entered. Is that something that the company could look down the line?
Yes. Andrew, first of all, we’re really excited that we’ve been able to get the three great deals done in the foot and ankle space that established that strong position that we can then build from. And that’s – I think it’s been great timing in terms of stepping in as I think people are becoming more and more aware of how exciting and attractive that space is.
And we’re in a position where we can now build the business organically plenty and have strong double-digit growth over time. But there’s also other bolt-ons and tuck-ins within that space that we can take a look at. We certainly have more flexibility now. But I would say that most of the things that we’re thinking about are in the kind of small to medium-size range versus big moves in the short to medium-term.
There – we’ll always be considering the larger possibilities that we could consider. But we’re spending the vast majority of our time and energy on things that either greatly improve the strategies of our businesses, like some of the things that we’ve done in Surgical, like the LiteCure acquisition in Recovery Sciences, and there’s other opportunities within Surgical, within Recovery Sciences, that we’re embracing to do, bolt-on acquisitions that greatly advance the strategy of our businesses. We’re looking at opportunities around global expansion and participating in more of the attractive parts of the global markets beyond the great U.S. market where we’re so strong. And so I think that that’s where you’ll see us.
As far as your specific question about pet care, it is obviously a very attractive space. We were excited that LiteCure gives us a position in that space and there’s certainly opportunities to think about. Really if you focus more on the rehabilitation aspects of pet care, that’d be an area that we already participate in that there are other adjacent things to think about. There’s obviously lots of other possibilities in pet care that we think about over time. But in the short-term, I think there’s some more logical things that we can think about that are close in.
Got you. And then just a follow-up. In terms of folks getting vaccinated and betting – getting more active, should we think that there is this catch up as older people actually catch up on all the procedures that they were not able to do in 2020? And does that mean that 2021 is relatively flat versus 2022? Or can you grow off that base? Thank you. And this is a MedTech question clearly.
Yes. So yes, again, I think, clearly, it’s been talked about a lot, and we’ve talked about it that the vast majority of the demand drivers related to our surgery products didn’t stop when COVID stopped. And so the diseases that drive most of those surgeries continued to advance. And so there’s backlog that’s been created. And I think the – certainly, the – a lot of the published things that are out there as well as our perspective is that it’s not a quick catch-up in one year. If it were, this year would be meaningfully more than what we have forecast.
But I think our expectation, I think the expectations of people that has published a lot in the space is that there’s going to be multiple years where we’re working off some of the things that got delayed during COVID. And that’s going to create a little bit elevated growth versus the norm for a couple of years. And so again what the shape of that is, if that were really sharp, then maybe there wouldn’t be a vac side of it. But I think our assumption, in terms of the growth that we’ve planned for this year, what we’ve talked about is between one and two years of growth versus 2019, which would say that there’s still additional catch-up opportunity there in 2021 versus a flat back – or sorry, 2022, versus a flat back side.
Your next question comes from Chris Snyder with UBS.
That margin guidance for rest of the year. Q1 EBITDA margins came in above the full year guidance. And it doesn’t seem like you guys expect volume declines. So are the sequential headwinds just costs coming back to the business? Or is the expectation that price costs will be a more substantial margin drag the rest of the year relative to Q1? And then also, is the $25 million to $30 million restructuring savings fully reflected in the Q1 run rate?
Yes. I think, Chris, your question got cut up at the beginning, but I think it was about the sequential margin progression here...
ESAB, in ESAB.
Okay, in ESAB. Okay, all right.
Specifically in ESAB, yes.
Hey so within ESAB, the – let me answer the question first about restructuring. The benefit from last year’s restructuring is fully baked in, in the Q1 results that we had. And of course, that will continue to – we’ll get the benefit of that throughout the year. But the restructuring that we’re doing in 2021, as you would expect, takes time to fully bake. And you don’t really get to the run rate of that until you get into the – deep into the year. And that’s why we end up with a partial year benefit this year. And then the additional benefit that flows into next year. I think that should address the question about the restructuring.
On the margin side, yes, you raised a really good point, which is what we touched on in our prepared remarks, Chris, which is, the business is doing an excellent job of dynamically managing the price and inflation to protect profit, but you’ve still got that compressing effect it has arithmetically on the margins. And we’ve seen that happen in the past. It tends to obscure the real improvements that we continue to make in the business. And yet, here we are talking about record margins in the first quarter. So we’ll continue to manage that. We do expect that will have some impact.
The more price inflation that happens, the more of that effect will be reflected in the sequential performance of the business. But again, the underlying performance is very healthy, growing. And as we get past the inflation curve, just like we’ve done in the past, you’ll continue to see those margin improvements reading through.
Okay. I appreciate that. So it sounds like just the cost inflation is going higher. And even if you offset it to the same capacity as Q1, it’s a sequential headwind just because it’s zero margin on a higher pricing.
Yes, that’s right.
These – and if I could just – okay. If I could just follow-up on MedTech margin, can you provide some color on seasonality here? As we’ve never really seen a normal 1H since you acquired DJO, I’m just trying to think about the normalized sequential move into Q2.
Yes, sure. Hey Chris, just generally, this is a business that has its lowest revenue in Q1 and its highest revenue in Q4. There’s always a bit of a step-up in Q1 to Q2. And so the margin profile tends to fall off the revenue. As you imagine, the operating leverage with these high gross margins is pretty big in the business. And so it’s the expectation that as we go from Q1 to Q2 and revenue steps up and this year, it’s stepping up both seasonally, and because of the improving recovery, that you’d expect to see the margins expand.
And then you’ll see another step-up in the second half of the year, which, again, will be because of more revenue in – typically in Q4. And then also, we’re always working on productivity and other projects that should drive additional benefit. Having said that, we did have a little bit of supply chain friction in the first quarter, as Matt touched on briefly in his – the answer to your question a moment ago, and we expect to work past that as well as we get into the second half. So there’s a number of factors there, but largely, volume-driven operating leverage.
Your next question comes from Nathan Jones with Stifel.
Just starting with a question on the guidance. Yes. You baked the first quarter here relative to your original guidance by $0.67, $0.04 of headwinds from the capital allocation actions. And you raised the guidance by about $0.025, which leaves 2Q through 4Q pretty flat relative to what you had in the previous guidance. You talked pretty bullishly about better trends in MedTech, better volume trends in MedTech and better volume trends in Industrial. Can you talk about what’s holding you back from having increased the guidance a little bit more? Maybe taking the top end up? What the concerns are there?
Yes. Hey, Nathan, so I wouldn’t say that there’s any concerns there. What I would say is that we’re early in the year. We’re pleased with the first quarter performance. We thought it was prudent and appropriate to reflect the de-risking in the guidance by picking up the lower end of the range. As you mentioned, we have the capital structure actions there that create a little bit of a headwind. Obviously, a terrific move the company made strategically and for the long-term benefit of the business. But that did have a little bit of headwind.
And so really, the operating results of the business ended up absorbing that. And so the underlying performance is pretty good here. Now as we progress through the year, we continue to see how it plays out. I will give us additional opportunities to assess the performance, assess the trajectory that we’re on and think about how that might be reflected in the forecast going forward. But at this point, we don’t see any risk to the guidance that we’ve given, and we’re very bullish.
That’s helpful. Thanks. On these capital moves with the equity raise, the debt pay down, it sounds like you’re still planning on doing a number of acquisitions in MedTech this year. Is there any further color you can give us on what the capital structures of each of the businesses might look like post the split?
Yes. Thanks, Nathan. As we’ve talked about, we’ll be providing a lot more detail on that as we get deeper into the process. So it’s really important that we underscore a couple of key principles here. One of those is that we intend to make sure both businesses are set up for success. These are two terrific franchises with great futures and the capital structures need to support the strategic direction of both of these businesses. That’s one principle.
Second principle is we expect to have differentiated balance sheets. They are different businesses. There’s a bigger gap between MedTech and its goal of being a $3 billion company than there is for bad debt. And so we want to make sure that we’re considerate to that as we’re thinking about the capital structure for these businesses at the time of separation. So we’re going to launch two great healthy businesses with terrific capital structures that are consistent with the strategy of those businesses. And we’ll provide more details as we get closer to the finish line here.
It sounds like it’s a fair assumption that MedTech is going to have the lower leverage there?
Nathan, we’ll give you more details on that later. I don’t mind the question, but we’ll – stay tuned.
Okay. Thanks guys.
And your final question comes from Steve Tusa with J.P. Morgan.
Hey, guys. Good morning.
The kind of seasonality, I think you guys had talked about last year that the first quarter would be some percentage of the year. I think it was like 23% or something like that. But obviously, you have this negative day sales impact. So I would think that the first quarter would be even lower kind of on a reported basis as a percentage of the year. I’m just trying to kind of wrap my arms around the seasonality dynamics sequentially into the second quarter on sales, if you might.
Okay. Let me take a stab at that, Steve. And it says that – there’s a couple of different dynamics there. We’re always talking about the selling days just to make sure that we separate that out from the reported results. So last year, we highlighted that we had more selling days in the first quarter, and then we benefited from that. Now this year, on a comparative basis, we have fewer selling days. And that’s why I support that view, given you pull that part, you can see the underlying performance, which is I think we had 9% growth on a selling day basis and 8% reported and 5% headwind on fewer selling days, so peeling that apart, the basis for the discussion starts with the 9% SPD growth in Q1.
Now as we move forward here, we’ve got a couple of different things. We’ve got the typical seasonal strengthening of the business going from Q1 to Q2. That’s in both of our businesses. And we expect to see that is the reason why we wouldn’t this year. And on top of that, we still have the sequential recovery that’s sitting into the numbers as well. Now we generally talk about SPD growth. That’s getting a little bit cloudy as we start comparing against COVID periods there.
And so really, it’s important that we think about the sequential performance and whether that’s in line with the expectations that we had coming into the year. And so far, what we’ve got, everything is lining up the way that we’d expected. Little bit of a faster recovery in Q1, that de-risks the full year. But the trend from Q1 to Q2 is lining up just pretty much the way we would have expected when we gave the original guidance for the year.
Got it. So I guess maybe could you just let us know kind of roughly what you expect for annual sales? I mean if you do normal seasonality off the first quarter, I mean it looks like you’re comfortably into kind of the $900 million range, like almost like $950 million of revenues. And as I look out for the second half of the year, I mean if that just holds flat, I mean you’re at some pretty – or down even a little bit, you’re kind of well above where we are for sure. Can you just maybe give us an annual framework for revenues?
Yes. So if you go back and look at the guidance that we gave back in February, where we gave some – we gave percentage ranges there. And then we talked about also the timing of that within each of the quarters. I think we’re still comfortably following that what we gave you now. Q1 is a little bit – maybe a little bit hotter than what we had originally guided to. But for the full year, we still expect that. Steve, the other thing to keep in mind is as we go from Q2 to Q3 in our FabTech business, oftentimes, we’ll see less – sequentially less revenue.
That’s a typical trend in the business. You’ve got summer holidays in Europe and other factors that come into play that we’ve seen repeated year-after-year in the business. So whatever your expectations are for Q2, I wouldn’t just sort of bake that all the way through for the rest of the year. Just think about a little bit of a sequential step down in Q3 and a seasonal step down and then a step back up in Q4.
Right. But as far as normal seasonality, like you feel as though if we go back over time and look at kind of the normal seasonality of at least FabTech, because you’ve had that for a long time, that is the – that’s what you would expect off of this 1Q print for the rest of the year?
Yes. Generally, that’s the case. So it’s also in the mixtures. We’ve got this price dynamic. And that’s why one the comments we made in our prepared remarks was that we expect 4 points of additional price reading through, but it won’t be driving any profit and that’s why we try to give you almost like a model that is and then set it aside did not expect any incremental margins to come out of that.
Yes, yes. That makes it tight. This makes a sense too, is that you’ve – the sales aren’t going to necessarily read through. Okay. That’s very helpful. Thanks a lot.
Okay. With that, I think we’re wrapping up the call. Thanks, everyone, for joining today. I appreciate you, and look forward to talking to you over the next few weeks.
That does conclude today’s call. Thank you for your participation. You may now disconnect.