Avanos Medical, Inc. (AVNS) Q4 2020 Earnings Report, Transcript and Summary

Good day and Welcome to the Avanos Fourth Quarter 2020 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask question. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Dave Crawford, Vice President of Investor Relations. Please go ahead.

Good morning, everyone, and thanks for joining us. It's my pleasure to welcome you to the Avanos 2020 fourth quarter earnings conference call. With me this morning are Joe Woody, CEO; and Michael Greiner, Senior Vice President and CFO. Joe will begin with an update on our business, move to the progress we've made against our 2020 priorities and then summarize our past value creation for 2021 and beyond. Then Michael will review our 2020 fourth quarter and full year results and provide an update on our current planning environment. We'll finish the call with Q&A. A presentation for today's call is available on the Investors section of our website avanos.com. As a reminder, our comments today contain forward-looking statements related to the company, our expected performance, economic conditions and our industry. No assurance can be given as to the future financial results. Actual results could differ materially from those in forward-looking statements. For more information about forward-looking statements and the risk factors that could influence future results, please see today's press release and risk factors described in our filings with the SEC. Additionally, we'll be referring to adjusted results and outlook. The press release has information on these adjustments and reconciliations to comparable GAAP financial measures. Now, I'll turn the call over to Joe.

Thanks, Dave. Good morning, everyone, and thank you for your interest in Avanos. As I reflect on 2020, I'm inspired by our team's strong execution, commitment to succeed and resilient attitude in responding to the challenges presented by the pandemic. Throughout the year, their dedication to getting patients back to the things that matter remained at the forefront, as we continued to meet the needs of our customers. We successfully responded to the challenges of the pandemic and delivered on three priorities: keeping our employees and their families’ safe, ensuring a sufficient supply of our life-saving respiratory health products, and maintaining our solid financial position. While managing the challenges presented by the pandemic was top of mind, we remained equally focused on our long-term strategy and achieving our 2020 priorities. And I'm proud that we delivered meaningful progress against each of these priorities. The first priority was to drive top line growth across our franchises. In Chronic Care we maximized the opportunity in Respiratory Health by quickly increasing production capacity of our clinically proven closed suction catheters to meet the urgent needs of our customers. Within our Digestive Health franchise we launched our CORTRAK standard-of-care sales strategy, which helped contribute to double-digit growth across the CORPAK portfolio. Also our NeoMed portfolio generated double-digit growth. Accelerating growth in international regions is another key component of our growth strategy. This year we achieved double-digit growth internationally, partially aided by pandemic-related demands. While the postponement of elective procedures affected the growth of our Pain Management franchise, we strengthened the long-term growth potential of this franchise through a range of selling and marketing initiatives implemented during the early stages of the pandemic. We advanced our clinical evidence for COOLIEF and had several articles published in medical journals, demonstrating the clinical benefits of COOLIEF to other pain management therapies, including its superiority to hyaluronic acid in the treatment of osteoarthritic knee pain. With respect to ON-Q we saw a significant double-digit sales growth through customers using Leiters despite overall lower sales due to the pandemic. At the end of the year, we entered several partnerships with medical distribution and servicing organizations to promote ON-Q and expand our sales force capabilities and connections with customers. I'm encouraged by the solid start of these partnerships and we will continue to evaluate their benefit. The second priority was the integration of our recent acquisitions. While working from home, we leveraged our global IT system to complete the integration of each acquisition as scheduled. This was a significant milestone that enabled us to generate synergies in the back half of 2020 that we will carry forward. The final priority was to rebuild our cash position, while the pandemic impacted the generation of free cash flow, our rapid response to reduce costs, maintain disciplined capital spending and improve working capital resulted in meaningful progression. Over the last three quarters, we generated positive cash from operations. In summary, we executed well in a difficult environment and built quarter-over-quarter momentum, which positions us well to deliver on future growth opportunities. In addition to these priorities, we began our We Stand Together initiative to better understand our employees' perspectives regarding the systemic issues of racial and gender inequality, so we can identify what we're doing right and where we're coming up short. We're in the midst of assembling a diversity, equity and inclusion council, comprised of employees from various levels, departments and regions to advance our DE&I initiatives. I believe that if we stand together on these efforts, we'll have an organization where everyone is valued, appreciated and heard. That's the kind of organization we all want to work for and it's the right thing to do, from both the social and business standpoint. Now turning to our fourth quarter results. We ended the year with a solid quarter. Sales totaled $185 million 3% lower compared to the prior year, while we earned $0.28 of adjusted diluted earnings per share. Earnings were positively impacted by our disciplined cost control measures. We continued to see strong demand in our Chronic Care business, driven by Respiratory Health. In Digestive Health we saw a double-digit growth in CORPAK and NeoMed, even though overall growth for the quarter was limited, as we cycled against a strong prior year comparison. In Pain Management elective procedures remain suppressed. Although, sales grew sequentially for the quarter, they began to slow in December, as COVID-related hospitalizations spiked in some regions, resulting in additional suspension of elective procedures. This dynamic has continued, into the start of the year. As the year unfolds, we expect to see sequential improvement, but believe procedural volume will likely remain below its full potential, throughout most of the year. Despite the near-term headwinds caused by the pandemic, we continue to build on our solid foundation to accelerate growth, across Pain Management. In Interventional Pain, CMS announced its rule for enhanced reimbursement for radio frequency knee procedures, performed in an ambulatory surgical care setting. While not an immediate catalyst, this is a positive development, as we continue educating both public and private payers, on the clinical benefits and economic advantages of COOLIEF. Also, we recently presented, at the Annual Pain Management meeting. 18-month and 24-month data, from our large multi-centered randomized trial, that indicated that patients can see improvements in both, pain and function lasting up to, two years following a single COOLIEF procedure. These catalysts and operational efficiencies identified, through our newly combined Acute and Interventional Pain teams will drive improved sales that will return our Pain Management business to growth over the coming quarters. Looking ahead, we are well positioned to advance our strategies across four areas of value creation. Over the past several years, we've made significant, yet necessary, investments in our business to strengthen our foundation for future growth. In 2021 and beyond, we'll leverage that infrastructure to help us drive sustainable top line growth, margin expansion, and cash flow generation. First, we'll further strengthen our sales growth profile. We will continue to leverage our market-leading Respiratory Health and Digestive Health portfolios, further, to enhance growth, by executing our strategy to establish CORTRAK as the standard-of-care for nasogastric feeding, along with increasing the adoption of NeoMed to further address neonatal, enteral feeding needs. In Pain Management, we'll continue building our clinical evidence, to further improve reimbursement for COOLIEF. For ON-Q, we're leveraging selling relationships to raise therapy adoption. And drive sales. Second, we'll expand our gross and operating margins. Gross margin improvement in 2021 will be driven by a shift in product mix, as higher-margin Pain Management products return to growth. And demand for Respiratory Health products partially subside. Additionally, we'll continue to drive cost savings and efficiencies, at our manufacturing locations. As for operating margin expansion we expect to drive savings, in the final year of our cost savings program we implemented, as a part of our S&IP divestiture, while making permanent a portion of the cost savings we identified in 2020, in response to the pandemic. Additionally, we recently implemented a 2020 restructuring program that streamlined my senior leadership team as well as other corporate and franchise functions, to further drive efficiencies and strengthen our customer relationships. Also, we addressed our workspace requirements, for a post-COVID environment. Finally, as I mentioned earlier, we've integrated our recent acquisitions and with real high synergies from them. As we advance our business, we're looking at all processes through the lens of value creation, with the goal of enhancing efficiencies by embedding this approach into our culture, while more effectively meeting customers' needs. Our third pathway to value creation is to generate consistent repeatable cash flow. In 2021, we anticipate generating more than $100 million of free cash flow, driven by higher earnings and the disciplined cost savings that I just mentioned as well as receiving an expected $60 million in US tax refunds, primarily derived from the provisions available through the CARES Act. Our fourth pathway is disciplined capital deployment for M&A. We have a solid track record of executing value-enhancing acquisitions, with a disciplined eye towards balancing growth and valuation. Our team continues to identify and evaluate potential tuck-in opportunities that would leverage our existing footprint, generate synergies and enhance our top line growth profile. While I am optimistic about the prospect of bolstering our robust portfolio in 2021, we'll only do so in a disciplined manner, ensuring we generate a strong return on capital. In summary, our team and our focus on execution remain strong. This, along with our market-leading portfolio gives me confidence we can deliver growth and margin expansion in 2021 and beyond. Now, I'll turn the call over to Michael.

Thanks, Joe. Let me also state, how pleased I am with, the team's commitment to our priorities and strong execution during these challenging times. As Joe mentioned, we were very focused on maintaining our strong financial position during the pandemic. And improving our cash flow remains a key, go-forward priority. Our balance sheet is solid, as we ended the year with $112 million of cash on hand and $180 million of debt outstanding, in our revolving credit facility. For the second consecutive quarter, we delivered positive cash from operations, while free cash flow was an outflow of $4 million. Cash flow for the quarter was impacted by a $25 million payment to our former parent company to amicably resolve both surgical gown-related disputes between us. Settlement of these disputes along with the recent dismissals and other resolutions of the gown-related matters significantly diminishes uncertainty from these matters going forward. Absent this payment, free cash flow would have been $21 million for the quarter and positive for the year. With that as a backdrop, I'll now review our fourth quarter results. Total sales of $185 million were 3% lower compared to last year. We saw 3% lower volume and 1% unfavorable price and product mix which is partially offset by 1% favorable exchange rate. Chronic Care sales grew 2% to $116 million in the quarter as we saw continued demand for our Respiratory Health products driven by closed suction catheters and oral care products used to treat COVID-19 patients. As expected, the sequential benefit was less than that seen in previous quarters this year. In Digestive Health as Joe highlighted, we've generated double-digit growth in both CORPAK and NeoMed. CORPAK growth resulted from the execution of our standard-of-care strategy and from pandemic-related demand while NeoMed growth came from the continuation of conversions to our ENFit technology. This growth was offset by lower demand for our legacy enteral feeding products as we cycled against a strong prior year quarter that benefited from a significant back-order recovery. Moving to Pain Management. As we noted during our third quarter call, the usual fourth quarter uplift was suppressed and we delivered $69 million of sales 10% lower compared to the prior year. Sequentially, sales grew 3%. The cancellation of elective procedures impacted performance as well as lower procedural efficiency due to the health care protocols implemented to prevent the transmission of the virus and the reduced flexibility to schedule a new patient when another cancels a procedure after becoming infected or potentially infected with the virus. Longer term, our partnership with Leiters continues to benefit customers as a prefill option for ON-Q. For the quarter, sales through Leiters increased by double digits. With respect to COOLIEF, we're encouraged that the demand for our new generator remains above our internal estimates. Overall, we continue to meet patients' needs for effective opioid-sparing pain management therapies and are committed to returning this franchise to growth and improved profitability. Turning to International. Organic growth was flat for the quarter as pandemic-related demand for Respiratory Health products was offset by a strong prior year comparison due to a significant back-order recovery. Execution in our international business remains strong and we are confident we can deliver growth in 2021, despite a lower pandemic benefit. Longer term, the business is expected to achieve consistent mid to high single-digit growth. Now, moving down the income statement. Adjusted gross margin decreased to 54% compared to 60% last year. Contraction was mainly due to continued unfavorable sales mix, costs incurred related to the write-down of obsolete inventory and pandemic-related costs. Adjusted operating profit totaled $21 million compared to $26 million in the prior year. Performance was primarily impacted by lower adjusted gross margin and lower sales partially offset by cost savings. As we navigate the challenges presented by the pandemic, I've been encouraged by our disciplined cost containment measures. We've identified greater than $20 million in COVID-related savings throughout 2020, and we expect about a-third of these savings will become permanent. Additionally, the new restructuring program Joe mentioned is expected to deliver $7 million in cash savings, further enhancing margins in 2021. Adjusted EBITDA totaled $27 million compared to $31 million last year and adjusted net income totaled $13 million compared to $16 million a year ago as we earned $0.28 of adjusted diluted earnings per share. Now for a brief recap of our full year results. Net sales increased to $715 million a 3% increase compared to 2019. The acquisitions of NeoMed and Summit contributed 4% growth while organic sales volume was 1% lower. For the year, we earned $0.79 of adjusted diluted earnings per share. Adjusted gross margin for the year was 56% compared to 60% a year ago. Our 2020 adjusted gross margin reflects the impact of elevated Respiratory Health sales the write-down of obsolete inventory and the costs associated with our response to COVID-19, which I mentioned previously. Adjusted operating profit for the year totaled $66 million compared to $76 million in 2019. Finally, looking ahead to 2021, the unpredictability of the coronavirus remains as new strains of the virus emerge shutdowns across the United States and Europe continue and the vaccine rollout faces hurdles. Given this continued uncertainty, we don't feel we can fully quantify the impact of the pandemic on our financial results. Therefore, at this time we are not providing a full year 2021 outlook. With that as a backdrop, we do have some visibility into our business and 2021 performance. First, we expect adjusted gross margin to improve as we regain growth in Pain Management and demand for our Respiratory Health products, partially normalizes to pre-COVID levels. Adjusted gross margins are likely to range between our 2019 and 2020 margin levels with gross margins significantly improving past the first quarter. Second, operating expenses are expected to increase compared to 2020 as we resume some spending on T&E reinstate merit increases and fill open roles. Third as we drive sales and margin growth, we expect to build on our free cash flow momentum during 2021. Also, cash outflow for unusual costs will continue to trend lower. This coupled with the expected US tax refunds from the CARES Act that Joe mentioned, position us to generate more than $100 million of free cash flow in 2021. Fourth, as in prior years, we expect quarterly sequential earnings growth, driven by improved sales mix and cost savings. Finally, we expect quarter-over-quarter sales results to be more variable than usual, given the impact of COVID on our 2020 sales and how that will impact our quarterly comparables. We will provide updates as the year unfolds and we gain more confidence in the visibility to our sales trends. In closing, we met the challenges of the pandemic, ensured customers received our vital Respiratory Health products to treat COVID patients and maintained financial discipline. As we enter 2021, I'm confident in our ability to execute our strategy and that the prudent cost containment measures, position us to deliver growth and margin expansion going forward. Operator, please open the line for questions.

We will now begin the question-and-answer session. [Operator Instructions] And the first question comes from Larry Keusch with Raymond James. Please go ahead.

Thanks. Good morning everyone and thanks for taking the questions here. Joe, I guess, I have one for you to start with. Just -- you've touched on some of this within your prepared comments, but really just trying to understand the strategic objectives for the pain business. And I guess, as part of that question, how should we think about expansion in that portfolio? For example, you were an FDA innovation challenge winner kind of what's the status of that product? How should we think about sort of Leiters here? And what's the right way to think about, how you are anticipating the more longer-term normalized growth of the franchise?

Right. I mean -- so Larry thanks, I'll take that. And I think you said you have another question perhaps for Michael. But just let me start with -- we've now combined Acute Pain and Interventional Pain. If we start with COOLIEF, we've been experiencing double-digit growth on a consistent basis. In fact, even in Q1 of 2020, we touched up into the 20%. And the objective there really is to expand our ability to get patients that are knee OA patients and physician utilization through the clinical studies that we're doing and then also expanding reimbursement. And we've had some positive on that with ambulatory surgical centers. As you know, we're working for orthopedic reimbursement as well. But really the clinical studies will start to be published by the peer reviews in 2022. And that's when I think you'll see some inflection points in that business. So we feel very good there. You mentioned Leiters. I mean just to pick up on that a minute or two. We had our highest quarter of sales yet. Most of the customers are back from Avella and PharMEDium. We spent a lot of time in Acute Pain with customers educating them through medical education on webcasts and other forums. We're happy with some of the moves, we're seeing with the Summit product and the traction we're getting with our channels. We've expanded the channel partnership there in that business as well. So we -- aside from the pandemic issues, I mean obviously with ON-Q, it's really the product that's used where there's multiple-day stays in the hospital and things that happen with elective surgeries. We've been very happy with the progression in both the areas both strategically and tactically. There have been some positive things as well in the anesthesiology journal that came out with respect to long-lasting locals and regular single shots and that gives us an opportunity I think to position our products at a better economic value. So generally, what we're saying is, as we get through the elective, you should see us continue to progress that business and we're pretty confident about it. So I'll pause there and I think you had another question for Michael.

Yes, I did. Thanks for that, Joe. And then just for Michael, obviously, there's a lot of focus on your operating expenses for 2021 and you did provide some commentary around that. But maybe you can just help unpack that a little bit. What was your -- or what were your cost savings that you were able to execute against in 2020? I think, you said that, a portion of that would come back. So again, how much of that and what is driving that? And then, how do we think about the two components of the cost savings first associated with the initial long-range plan, as you spun out and then this new restructuring program. So I'm just sort of trying to peel apart the layers of onion a little bit here.

Yes. Great. Thanks, Larry. And first off, Dave and I are excited to attend your conference in a couple of weeks. So look forward to seeing you then. So two questions in there I'll unpack. In a short-term level, as most of us stated, when we came up against February, March, April last year, we weren't really sure how deep and how long. And so we tried to take a very measured approach here. We did some things very immediately and then some other things we kind of layered in as the year went on. So things like merit increases, we didn't do last year. Obviously, all travel stopped. There were shorter-term investments more on the selling and marketing side that weren't as relevant because we couldn't be in the hospital. So there's a range of things like that that we immediately stopped and then also continued to not do conference attending throughout 2020. Of that meaningful amounts of that, we do think will occur in 2021. So there's $10 million-plus or so of investments that we have within the businesses that we plan to invest on a selling and marketing level. We are doing merit increases actually currently for those that didn't get merit increases last year. And we do plan to have some travel not necessarily in the first half of the year in conference attendees, but as the year went on. Now that being said, the other thing we learned is that, hey, some of these things we actually can do without on a permanent basis, which we talked about in our prepared remarks. And so that was about $7 million or so that we believe just is cost that's now embedded in the organization, which is terrific. So when you think about longer-term, our first quarter of last year, which was our last kind of somewhat normalized quarter, maybe the last two weeks of last year's first quarter started to see some of that pandemic impact, we were about 45% SG&A as a percentage of revenue. For the full year, we're going to finish about 41% with the last two quarters being in the high 30s. So when you think about where we want to take the story, SG&A as a percentage of revenue, mid-40s are not where we wanted to be and we had a plan to get down to a more reasonable level. Lower 40s is a nice stopping place for us here in the near term. But ultimately what you saw in the third and fourth quarter for us these high 30s that's where we're taking the story from a standpoint of SG&A as a percentage of revenue. And the restructuring as well as these permanent savings are getting our fixed cost base to a place that we can monetize our revenue growth without having to add additional costs. And that's how you ultimately are going to see us getting down into those high 30s out into the next couple of few years.

Okay. Terrific. Thanks so much. Appreciate it.

Thanks, Larry.

The next question comes from Ravi Misra with Berenberg Capital. Please go ahead.

Hi. Good morning. Thanks for taking the questions. I guess, my questions are more for Mike today. Just want to get some more color on the kind of gross margin ramp that you're referring to in terms of the long -- the mid-term throughout the year and really the drivers of that? Sounds like a mix shift issue more so than anything else. And then maybe one more specifically for Joe and Mike both, how should we think about any kind of supply or kind of production issues given the recent cold snap in the Midwest? I'm assuming your plants may or may not have been affected in the maquiladoras or is there anything that we should be contemplating there? Appreciate that. Thank you.

Mike could take the GM. Let me just quickly, I'll knock off the supply chain and then Michael can focus on GM and I'll add anything that he doesn't hit, but I think he will hit it all. But really I don't think we're going to have a major quarter event with this. I think it's unfortunate obviously for one who is going through it. But our distribution centers, they're down for a couple of days, but that's going to be something that we can catch up as we go. And you're right Mexico isn't as affected by this, but I think it's just affecting distribution for this week, but it won't be any kind of a major event for us. Sorry, Michael go ahead.

No. Yes, Joe, I totally agree with that. So on the gross margin, the majority of what we're seeing in the third and fourth quarter is this mix shift. And ironically in the fourth quarter it was a little bit different set of products that had the mix shift impact versus the third quarter. But predominantly with the respiratory sales continuing to have some nice tailwinds, although, we've had a great comeback in the back half of the year on electives with pain, that's not at its full allotment that we would expect from a baseline standpoint. So when we enter 2021, meaningful impact 200 basis points or so will positively impact our gross margin. In addition though, we did have meaningful write-offs much associated with COVID in the third and then also into the fourth quarter almost double the number of write-offs we would normally have in a given year. We anticipate 2021 to be a more normalized year. And then we also had COVID spend for vulnerable employees. Some of that spend will continue, but some of that spend now is embedded, whether it be spacing or other things we've had to do in the cafeteria that -- those costs are now incurred and embedded in our basis and we won't see additional costs there. And then we had one small transfer pricing item with our Mexico plant. That was a little bit of a catch-up transfer pricing correction that we had in the fourth quarter. That was about 60 basis points. That is obviously very much a one-time thing that won't occur in 2021. So, ultimately when you add all those one-time things that won't recur in 2021 better mix you can see clearly how we can get back more in line with somewhere between where we're ending 2019 -- where we're ending 2020, -- sorry, and where we were in 2019. So 2019 was 59.7% and 2020 we're at 56.5%. We believe somewhere in between there is where we'll end up in 2021.

The only thing I would add -- Ravi just the only thing, I would add to it is, I mean, mix was about a third of the impact. So one is events in Q4 was in respiratory we sold more oral care and IV infusion for acute pain, which are some of our lowest. But I mean, I think what Michael is articulating is, we're very focused on the gross margin. I think we have some COVID and mix issues and some kind of one-time things that are making it look a little worse at the moment, but we're very focused on it for improving going forward into 2021. So, sorry it seems like you've another question.

Yes. Just I guess maybe a little bit more pushing on that segment if I may.

Yeah.

Med supply companies historically in the peer group have always kind of been in that kind of mid to high-50s margins. So, how do you see your guys getting beyond that level, or is that possible given the kind of existing asset base that you have? And then, just maybe one against the kind of commentary again on 2019 and 2020. Exiting the year, if all goes to plan should we think about closer to 2019, or are you saying that somewhere in the middle, is more the way to think about it? Thanks a lot.

So, I think I'll answer the last question first. I would say closer to 2019 and necessarily in the middle, I think we've got some good tailwinds going into 2021. And that goes to your first question, which is our existing set of assets with the additional cost savings that we're executing on and some other things we're doing just from an efficiency standpoint should allow us to see 60%-plus in gross margins going further. However, to get up into a kind of mid-60 range that would require a little bit of a change in the portfolio, either through M&A or perhaps looking at some SKU rationalization that doesn't make sense for us going forward. We are actually doing that with -- in our restructuring. Part of our restructuring is shuttering our plant in France. We had negative gross margins associated with that plant. So those are the types of things that we will continue to do and execute on that in the fourth quarter. But we absolutely have a portfolio that should produce 60%-plus gross margins in a normalized environment. But to get to those mid-60 ranges there's some other portfolio shifts that would have to occur likely through M&A.

Thanks, Ravi.

The next question comes from Chris Cooley with Stephens Incorporated. Please go ahead.

Thank you. Good morning. Appreciate you taking the questions. Maybe just for me, since you touched on the margins let's talk about growth a little bit. And maybe Michael, if you could help us, the sequential gating is just clearly going to be different in 2021 versus historical patterns. Just trying to help us think about maybe what could further alter that to make it look more like a traditional kind of sequential gating here. What are the levers that could help you offset? Because if we think about it a little bit here, obviously you had pressure in the pain franchise from the pandemic, but a nice lift there in Chronic Care, which probably looks normal in the first quarter but then you have tough comps throughout the back half. So just kind of help us think, what's in place today that could maybe counter this, or is that really the way we should just be thinking about the sequential gating on the top line? And then, I have a quick follow-up.

Hey, Michael, I could say a couple of things at the top and then you can sort of talk to some of the gating or pick up where I leave off. But generally, we do believe Chris, we're a solid mid-single-digit grower in a non-pandemic situation. I'll go through a couple of things in building that Digestive Health being a solid mid-single-digit grower. We're seeing high-single-digit and sometimes double-digit growth in NeoMed. This year as well we do think our MIC-KEY feeding business will get some favorability where we didn't have that this year. Obviously, Respiratory Health is going to be a challenge. $25 million of the revenue in Respiratory Health this year is COVID-related. And cold and flu is likely to be a little bit lower. So those are kind of offsets given the environment that we're in. But electives do -- we saw them coming back pretty strong in Q3. They were starting to progress a little further in Q4. So we get through these hospitalizations and infections and hopefully the variants don't provide us a problem the vaccine gets out. We do think second half that's going to come out. We'll have a good comparator. The only thing I would say before Michael adds to his comments to this would be that typically with us, even in the non-pandemic Q4 to Q1 is sequentially a little bit lower and that's based upon some of the high-deductible insurance programs and things like that. But Michael, feel free to sort of add to some of that tee-up there?

Yeah. Chris, specific to the gating, I think it's a great question. I think the numbers were so stark when you look at second quarter, what came back in third and fourth quarter there's just not a rhythm that I can foresee that we'd get back to normalization, right? In the second quarter as an example, we're having a tremendously positive comp on the pain business and vice versa on the Respiratory business. Respiratory will continue to be a tougher comp in Q3. And then in Q4 of this year, we'll start to see what flu season will look like for next year. What does this pandemic look like more like an endemic, and therefore that just added to a flu season going forward. We don't know yet, and we're analyzing all that. But the numbers were just so stark in the second quarter and third quarter in particular, there's not a change in the ordering or selling pattern that would be able to make up for those type of numbers. So I think we're just going to have to live with the lumpiness. And that goes to why we felt uncomfortable providing guidance in total, because there's just still so many moving parts.

Thank you. I appreciate that. And then just lastly, and then I'll get back in the queue. I just wanted to get some more clarity around your expectations there that -- on the pain franchise, in particular, that you wouldn't see a restoration to kind of pre-COVID-19 volume levels. I understand the changes that we've all seen take place. We've seen the variant arises of the virus itself. I just want to make sure that I understand what you're assuming there. Are you assuming that there are no efficiencies realized throughout the course of the year or scheduled changes that are implemented by providers such that you could get back to those levels, or is it more of a continuance of the spike? I just want to make sure I kind of understand the underlying assumptions there. And similarly are you assuming the same for the Chronic Care franchise in terms of business is obviously growing with the tailwinds, but on a baseline there just want to make sure I understand the baseline expectation? Thanks so much.

Yes, no problem, Chris. Look on Pain, we have a view -- we took a little bit of hit actually in Q2 of 2020 that we thought it would take longer to get back to normalized and there might be slow down in the fourth quarter and it did happen. So we're talking about the pain growth considering that we probably don't get back to full procedures until we get toward the end of the year. But that said, we do see progression every quarter happening in that business. And then as we get to the end of the year and you go into '22 and nothing else surprises us, I do see us getting back to in total growth so -- sort of a high single-digit growth for that franchise. I mean that's where it should be in a non-pandemic situation. In Chronic Care, the only thing that's really going to hit us year-over-year primarily maybe a little bit of CORTRAK, but primarily it's through Respiratory Health closed suction. But generally Digestive Health should be pretty solid mid-single-digit grower on a global basis. And in fact in the International, we're growing above the market there. So it's really related to the severity and duration of the electives and moving into as Michael said endemic, but we feel like we've really positioned the company for growth going forward. We just got to -- like everybody else wrangle from all this.

Chris, I would just add that, I think we feel confident that the revenue that we should have acquired through both our Chronic Care franchise and as electives picked up, we didn't lose any customers. We didn't miss any elective opportunities that we should have gotten. The respiratory opportunity that was made available and we were grateful that we were able to help the pandemic with our closed suction catheter system. We achieved all of those gains that we'd like to. So whatever that percentage is 85%, 90%, 82% we're not so much looking at that as much as that our products service the customers and the patients that we needed to service and we feel very confident that at that percentage that was 100%.

Thank you. Stay well.

Thank you.

The next question comes from Matt Mishan with KeyBanc. Please go ahead.

This is Brett Fishbin on for Matt today. Just wanted to start off, I know you guys gave some qualitative commentary, but just how you're looking at potentially being able to provide more specific guidance as the year progresses. And what you'd be looking to see between now and April to potentially do that on the first quarter call?

My take -- I'll give you my take and certainly Michael can give you his take. But one of the things is, we want to see how the vaccines roll out. And I think the -- they've been pushed out a little bit further for the broader population, how the patients return to the confident consumer if you will approach to going out and getting their procedures done, but also being cognizant of the protocols with new surgical throughputs. And then how these variants play out that we have any other further issues going ahead. I do think that to the extent that we can check the boxes in all those areas and there's more clarity as you get out to sort of the end of the second quarter or midyear there's a possibility that we would then change our approach here. And then Michael, please add anything that you'd like to?

Yes. I was just going to say, Joe, I agree with that. I think the issue that we struggled with thinking about what's the right ranges if we were to provide guidance is really revenue driven. When you look at our OpEx, our plans for gross margin although obviously gross margin will have a mixed impact as we talked about before we have a pretty good feel for what we're going to do throughout the year. So if all of a sudden elective slows down again, we know the levers we'd pull on the proper OpEx savings. So we feel really good about that side of the plan. But to your point, Joe, the revenue pieces do have a wide range of variability and we weren't -- we just weren't comfortable well giving a range that was reasonable.

All right. And then just one more from me. Have you guys seen any early benefit from the positive reimbursement change for COOLIEF in the ASC setting? And how are you looking to drive increased penetration there now that there's new rate set? And then just as a follow-up, do you have a specific sales force addressing that opportunity? Thanks very much.

Thank you. Yes. No, we do have a sales force. It would be the same sales force that sales both our RF standard and COOLIEF products. We think the benefit because the reimbursement is $800 for the facility versus $1800 at the hospital outpatient department it's likely more of an RF, a standard RF opportunity. We think we'll get some benefit from that. The bigger opportunity is to really get better reimbursement in that setting than that, but we'll take a move up. And then obviously ultimately get it in an orthopedic office setting. So you'll probably see some impact from that on a positive in the end of Q3 into Q4 as we're rolling that out now and talking to those customers and getting them set up for putting some units in place. Thank you.

Okay. Thanks very much.

The next question comes from Rick Wise with Stifel. Please go ahead.

Good morning, Joe. Good morning, Michael.

Good morning.

Good morning to you. I thought maybe we should talk about one aspect of growth we haven't really touched on a lot which is the M&A. Obviously, you've done a good job with the acquisitions that you've made so far. You've highlighted your growing confidence in the IT and your integration capabilities. Michael underscored the balance sheet improvement and some of the encumbrances that are falling away -- have fallen away. I mean to me that says that maybe the potential for M&A in 2021 would be greater more cash, better balance sheet, better execution all those good things. Is that the right way to think about it? Is there a pipeline? How big a priority? And should we come away from your comments today thinking that there's a greater likelihood this year of, sort of, accelerated M&A contribution to better growth? Thank you.

Yes, Rick. So you're right. I mean, I'll just add a couple of conversations recently. You can never time these things. We kept in touch with all of our pipeline. They're the same types of acquisitions that you've been seeing obviously a strategic fit. We're trying to improve our sales and gross margin. We like deals where we can get corporate selling and other synergies pretty quickly into the business like we've done return greater than cost of capital of 9% and more accretive deals. And you're also right that to the extent that we execute, obviously, we can end the year approaching towards $600 million in capacity. So we do -- and both businesses have a number of active dialogues. We feel like in this environment now that we're all managing a little bit differently in let's call the endemic that we can do that. We're conducting these and we're having conversations. You just can never predict them, but our intent is to try to get one or two like we did in the prior year before the pandemic. We'll make that happen. So we'll be more active.

Yes. Great. And just again your top priority is driving top line growth. So just as I reflect on that mindset, maybe you could give us a little more color on two other topics. You -- I think you said something like -- I think I'm quoting in your comments that we've entered into several ON-Q partnerships. And obviously, there's a lot -- there are other partnerships the Leiters relationship with ON-Q et cetera. And are there a lot of other opportunities or -- for ON-Q for other parts of the business where partnerships like these could be maybe growth potential in 2021 and beyond that maybe we're not thinking about. Are you working on things like that?

Yes. So just to pick up on there's still a lot more orthopedic large independent 1099 orthopedic opportunities for us that as the year progresses we'll roll out. Two or three of those are being worked as we speak right now. And I think that's a nice broadening there. And we do also partner at an international level with the international growth. And that's primarily the Chronic Care business. And I could see that as we get a better reimbursement footprint both with payers and then in sites different sites with respect to COOLIEF that there could be some opportunities for that as well because one of our aims is to get reimbursement in the orthopedic office space because we just have so much better result against steroids and HA and I think it's just a great way for a company of our size to broaden our channel look at better opportunities and do it in a cost effective way that will gain reach.

That's great. And maybe one last one for me. I'm not as clear as I'd like to be about your OUS growth potential and initiatives. I know you hired Bill Haydon to lead the One Pain franchise and I think just as I reread the third quarter transcript reminding myself that global strategy was part of that. But -- so from that -- from the One Pain perspective from other perspectives what are the major drivers that could accelerate OUS growth in the year or two ahead again beyond COVID recovery? Thanks so much.

Right. No problem, Rick. Good talking to you. So when I joined the company roughly, we were about $130-ish million in international sales and they were negative. They weren't growing. Now we've had some acquisitions obviously, but we're going to be approaching towards -- more towards $185-ish million in that range as we close the year. And it's a mid-single-digit growth for us on a pretty solid basis. Obviously, the double digit this year had the pandemic. But the drivers are mainly Chronic Care at the moment. We're going to really focus on maybe five or six areas Bill Haydon and his team; and Arjun Sarker who runs international on the pain franchise. But we're really driving NeoMed and CORTRAK through those channels just like we would in the US. The WHO recommendation on closed suction is going to help us maintain respiratory there. And we're doing a -- really a nice job also with, sort of, the legacy Digestive Health business. And what's driving that is we've put in the past couple of years executives in place from companies like Smith & Nephew and Bard and really put structures in place to drive that and really doing the medical education the standard-of-care change that we enjoyed in the US. So we do think that's a good lever and catalyst for the business. And again it's largely Chronic Care. But we're going to start with Bill Haydon to move up -- move pain more into the channel as well.

Thank you.

Yes.

[Operator Instructions] Our next question comes from Marissa Bych with Morgan Stanley. Please go ahead.

Hi. Good morning. This is Marissa Bych on for David Lewis at Morgan Stanley. Can you first just comment on, -- and I appreciate some of the comments very earlier, but, if you've seen any improvement in either or both of the COOLIEF procedures, or ON-Q blocks in the past couple of weeks relative to January? And then, I have a quick follow-up.

Yeah. Marissa, this is Joe. Yeah, we've seen a slight change. It's not enough to make us jump up and down yet. But definitely, our feeling is that, as you end February you're going to some of these areas that shut down, regionally come back. And I think, as the quarter progresses that will improve. We did say, earlier on the call that, in terms of 100% back to normal, we think that's more the end of the year. But then it does probably accelerate into Q2, given that, we don't have something obviously that we're all that aware of.

Okay. Great. And then secondly, acknowledging you're not providing guidance, but looking at consensus estimates, consensus appears to be modeling mid-single-digit total revenue dollar growth, in 2021 versus 2019. So that seems achievable to us, based on your growth comments earlier, and considering NeoMed's greater contribution versus two years ago. Can you just comment on, your level of comfort in delivering that 2021 decline or if there's any concrete models that appear to be lately missing? Thanks.

Yeah. We're not giving any guidance. But what I can say is that, all of it is primarily driven by how fast the electives do come back. If they came back immediately fast and all the stars align could that be potentially be in a range? Maybe but it's, -- that's not our view that, they're all going to come back to that level. And we do have a little bit of Respiratory Health the $25 million was prior to pandemic sales that will impact the Chronic Care business. But in a non-pandemic situation, we definitely feel we saw a good single-digit -- mid-single-digit grower. And like a lot of the other companies I think they're reporting, it's how fast does the elective element come back. And how much of a backlog comes through quickly, that could change it either way.

Okay. Thanks very much.

Thank you.

This concludes our question-and-answer session. I would now like to turn the conference back over to, Joe Woody, Chief Executive Officer, for any closing remarks.

Thank you. Look, I just want to thank everybody for their continued interest in Avanos. While, we continue to execute well, I think everybody is having an uncertain environment. We do remain committed to creating shareholder value. I'm confident in the priorities that we've detailed, combined with our portfolio, and the attractive markets that we're in, that we are positioned for sales growth, margin expansion and positive free cash flow in 2021. I wanted to also mention though, that Michael will present, at the Raymond James Institutional Investor Conference, Monday March 1. And the information on how to access the presentation can be found on, our Investor Relations section of our website avanos.com. And enjoy the rest of your day, everybody. Thank you very much.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.