Q3 2020 Avanos Medical Inc Earnings Call
Good day.
So the outdoors third quarter conference call.
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After todays presentation, there will be an opportunity to ask questions.
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I would now like to turn the conference over to Dave Crawford, Vice President Investor Relations. Please go ahead.
Good morning, everyone and thanks for joining us it's my pleasure to welcome you to the <unk> third quarter earnings Conference call.
With me. This morning are Joe what do you see a word Michael brighter senior Vice President and CFO.
Joe will begin with an update on our business and the progress we've made against our 2020 priority.
Mark will review, our third quarter results.
Understood called Cuda.
The presentation for today's call is available on the investors section of our website.
<unk> dot com as well.
A reminder, our comments today contain forward looking statements related to the company or expected performance economic conditions in our industry.
Assurance can be given as to 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 the risk factors described in our filings with the FTC.
Additionally, we will be referring to adjusted results and outlook. The press releases information on these adjustments and reconciliations to comparable GAAP financial measures now I'll turn the call over to Joan Thanks, Dave Good morning, everyone. Thank you for your interest and nominal.
As we look to build upon our momentum and deliver a strong finish to 2020 I continue to be pleased with our teams and strategic execution. During this challenging time commitment and living our mission getting patients back to the things that matter.
Throughout the pandemic our team has demonstrated resilience in adapting to this extraordinary period rising to the challenges facing our business in executing their rules to the highest standards.
The uncertainty of this virus persists, we remain steadfast in our three priorities I previously highlighted.
First maintaining the health and safety of our employees and their families.
In ensuring our clinically proven respiratory health products used to treat the Nike patients remain available to customers.
And third preserving our strong financial position and ensuring we are well positioned for future growth.
Continuing to meet the needs of our customers.
During the past two quarters, we performed well in each of these areas.
We continue to have a work from home environment for our office and field staff. Additionally, the enhanced protocols, we implemented in our manufacturing sites enable us to produce our clinically preferred products, while ensuring our employees remain sales.
The new production line at our Tucson facility has increased the supply of or high volume respiratory health codes and reduced our back order position.
Also while we begin to re accelerate investments in our growth priorities during the third quarter. Our teams continue to find savings manage discretionary spending to preserve our strong financial position.
We remain on target to realize approximately $12 million and planned cost savings we identified at the start of the year. Meanwhile, during the year, we have produced close to double that amount of savings through our cost containment efforts to address lost revenue caused by the endemic.
Finally, our unusual costs for the first nine months of the year have decreased nearly $60 million compared to the prior year. They really is to maintain a healthy balance sheet.
As we look toward 2021, we maintain this cost discipline and find additional cost savings to support.
Our strong financial position as opposed to code that environment.
We will remain focused on executing against these priorities and managing the business factors, we can control.
Turning to our third quarter performance, we delivered both strong sales and earnings as we saw favorable top line performance across both of our franchises.
Overall sales grew 8% to $186 million compared to the prior year.
And we earned 21 cents of adjusted diluted earnings per share.
We continue to deliver strong sales growth across our chronic care franchise in respiratory no.
We again saw robust demand for our portfolio clinically proven close section catheters, which are essential in treating so that 19 patients although.
Although the use of ventilation to treat patients has slowed.
Additional capacity aided sales as well as reduced our back order.
In the gist of healthy demand for our legacy Mickey feeding tubes return to more normalized levels.
For the quarter was double digit growth across both our we're back in the mid portfolio.
Similar to last quarter, we saw a monthly sequential increase in use electric procedures in both interventional and acute D.
For Coolief and onto which are primarily used in the hospital setting procedures are rebounding to almost 90% of their pre cobot Nike levels.
Well, we expect to see some further strengthening in the fourth quarter. We continue to believe it will be sometime in 2021 for US hospital procedure volume returns to pre corporate levels.
I'm pleased with the team's execution across the board and I'm confident we're positioned to build momentum in both of our franchises in the coming year.
On responding to the impact of the endemic is top of mind, we remain equally focused on moving forward, our long term strategy and priorities, we presented at the start of the year let.
Let me highlight some of our progress.
First we remain committed to implementing the necessary steps to build sales momentum across our franchises the.
To maximize the full potential of our pain management franchise, we have hired bill Haydon to lead our new one date franchise that combines our interventional.
Keeping teams.
Bill brings more than 25 years of health care experience and it's held various positions in strategy marketing commercialization innovation M&A strategy development and execution.
Deep experience knowledge and leadership in Medtech will prove beneficial because we spirit, our global strategy to support transformation and growth across in original and acute pain.
As we move forward, we envision leveraging these two portfolios to drive consistent sales growth and create operational efficiencies.
Additionally, in acute pain, we recently entered into a partnership with Inova surgical a leading medical distribution and servicing organization with a focus on innovative orthopedic solutions.
I'm excited about this partnership as it enables us to.
Enlarged the scope and scale of our acute pain sales force and expand connections with customers in the future. We look to further bolster our sales force capabilities by entering into similar partnerships with other regional channel partners.
Meanwhile, our letters partnership continues to pay dividends as we once again saw sequential double digit growth in new customers and had the highest quarter of monkey sales through lighters.
In interventional pain, we continue building the compendium of clinical research coolief to demonstrate its efficacy and economic advantages as well as differentiated from other couple of therapies in the market [noise].
Recently, the journal of bone and joint surgery published a large randomized multi center clinical trial, demonstrating the superiority of Coolief hyaluronic acid for the management of need being caused by osteoarthritis the.
The results show tremendous consistency in response when compared to previously published trial data on Cooley.
Additionally, in the past few years, we have increased our efforts to leverage open innovation and I'm excited to announce we made a minority investment infuse mobile.
This complements our Pimavanserin franchise as he is mobile develop novel non invasive ablation procedures utilize the high intensity focused ultrasound technology.
With year end approaching we are nearing completion of two of our other key priorities integrating our recent acquisitions and gaining efficiencies from our new Atg system.
At the end of October we closed last facility related to our acquisitions and are on target to complete the planned integration by year end.
Thanks to our team's efforts, we're beginning to see the financial benefits in our results.
Also as I mentioned, we continued to implement strategic cost containment measures.
That helped improve our cash flow for the quarter and are examining ways to make these and other cost savings opportunities permanent.
As a result, as we near year end, we're strengthening an already solid balance sheet and I'm confident we're well positioned for growth and margin expansion in a post COVID-19 environment.
In closing I'm pleased we delivered a solid quarter that exceeded our expectations and are building momentum as we close the year.
Now I'll turn the call over to Michael.
Thanks, Joe.
We also stay how pleased I am with our teams continuous commitment and strong execution during these challenging times.
The unpredictability of the current of Iris remains.
As we once again are seeing an increase the number of infections across the United States and shutdowns in Europe.
Given this continued uncertainty we will continue to not provide full year 2020 financial guidance. However, as I look back at the initial scenario planning we performed back in March and April the year has turned out far more favorably than we originally had anticipated.
We look to maintain this momentum into 2021.
We remain confident in our ability to maintain our strong liquidity position as Joe mentioned, we are steadfast in our focus to execute the necessary cost savings.
Working capital efficiencies and exercise disciplined capital spending.
Since the end of the quarter, we've implemented to actions that will further strengthen our cash flow first we filed our 2019 U.S federal tax return and amended prior year's filings. These filings combined will enable us to utilize the provisions and the carriers that generate refunds in excess of $50 million. We currently plan to receive these.
Refunds route 2021.
Second given our positive cash momentum in October we redeemed our 6.25% senior unsecured notes that were due in October 2022.
We refinanced this debt by drawing down $180 million on our revolver and using a portion of our available cash as a result, we anticipate more than 10 million annual interest expense savings.
Along with these meaningful interest expense savings, we also maintain our financial flexibility to execute tuck in acquisitions with the remaining capacity on our revolver and current strong cash position, which remains over $100 million after redeeming our unsecured notes in October.
These actions along with our working capital and operating efficiencies reinforce our confidence in generating significant free cash flow in 2021.
But that as a backdrop I'll now review our third quarter results.
Overall sales for the quarter increased 8% to 186 million compared to last year.
I didn't care sales grew 22% to $119 million driven by strong demand across both our respiratory and digestive health brands in.
In respiratory health, we again saw enhanced demand for clothes section catheters and oral care products used to treat COVID-19 patients.
As Joe mentioned, our efforts and increasing our manufacturing capacity enabled us to work down that backlog that accumulated during the early months of the pandemic.
As you look to the fourth quarter, we anticipate continued demand for pandemic related products, but to a lesser extent than we have seen during the last two quarters as we continue to work our backlog to normalized levels.
Digestive health, we saw our legacy making products branded products returned to normal growth driven by the return of initial placement procedures that have been postponed and the second quarter.
Along with patients returning to a more standardized to replacement regimen.
Additionally, we saw double digit growth in our core portfolio, resulting from pandemic related demand.
Also saw double digit growth in Neil Matt as we accelerated conversions to our and technology.
Technology.
Moving to pain management sales grew 6% sequentially.
Sequentially as elective procedures continued to recover throughout the quarter. However, sales of 66 million were still 10% lower compared to the prior year.
While procedures are accelerating there remain some hesitation from patients have elected procedures.
Moreover, the protocols around preventing transmission of the virus have decreased procedural efficiency and reduce the flexibility to substitute a new patient when a patient cancel the procedure after becoming infected potentially infected with the buyers looking.
Looking ahead, the fourth quarter has traditionally been the strongest quarter for our pain management franchise.
However, this year, we are not anticipating a typical seasonal uplift due to three external factors arising from the pandemic.
First some patients continue to have an unwillingness to go into doctors' offices and hospitals to undergo medical procedures second higher unemployment in the U.S., leaving or potential patients uninsured and third patient inability to reach their high insurance deductible.
Despite these factors we continue to be patient need for effective opioid sparing pain management therapy and are committed to returning this franchise to growth and improving its profitability.
Turning to international we delivered strong double digit growth that was aided by COVID-19 related demand and benefited from a favorable prior year comparison.
While sales growth comparisons clearly benefit from these two factors, we had excellent underlying execution and the trajectory of our international business is strong as we move forward.
Moving down the income statement adjusted gross margin decreased to 55% compared to 57% last year contraction was mainly due to continued unfavorable sales mix cost incurred related to the pandemic and the write down of slower moving and obsolete inventory and raw materials in the third quarter.
Yes. The latter two is transitory I believe over time as we regain sales momentum in our pain management franchise, we will see adjusted gross margins accelerate.
With that being said the shift in the mix of our portfolio to our lower margin respiratory health portfolio will for a time limit the upward potential of our adjusted gross margin.
Adjusted operating profit totaled 18 million compared to $21 million in the prior year performance was primarily impacted by lower adjusted gross margin, which was partially offset by higher sales.
Our teams ability to alleviate costs as we navigate the challenges presented by the pandemic has been encouraging as elective procedures have accelerated and our operating results improved we resume some our planned investments that had been delayed earlier this year and anticipate that our level of investment will grow sequentially into next year, partially being.
Offset by additional cost containment measures.
Adjusted EBITDA totaled $24 million compared to $25 million last year, and adjusted net income totaled $10 million compared to $14 million a year ago. As we earned 21 cents of adjusted adjusted earnings per share ahead of our expectations driven by the acceleration of elective procedures and a reduction of operating expenses.
In closing we have delivered on several excellent quarters effectively navigating a challenging environment and we are proud of the team's continued execution and focus on meeting customers needs. We are building credibility with each of our constituents through consistent delivery of meeting our patients and customers need.
Its results and strong financial outcomes and allows us to build upon our high quality financial position.
We are well positioned to grow sales drive operating efficiencies and deliver strong free cash flow growth as we enter into 2021 and beyond.
Operator, please open the line for questions.
Thank you we will now begin the question and answer session.
Asking questions. We request Star then one on a touchtone phone.
The speaker phone, we ask that you. Please pick up your handset before pressing the keys so.
So we tried a question. Please press Star then sue.
Today's first question comes from Larry Keusch with Raymond James. Please go ahead.
Thanks, Good morning, everyone.
Hey.
Joe maybe maybe just to start off can you you alluded to some of that but but I just want to sort of get your updated thoughts on how are you thinking about the algorithm for growth after we get past the.
Throws here at the Cobot pandemic.
Hey, Larry.
Good morning, Yeah, We've said on the last call and still believe that and then in a situation where there is not a pandemic and all things are normal we feel like we have a business with 4% to 6% organic growth on a pretty consistent basis. I think obviously with this quarter were seeing elements of that I'm sure, but we'll break it down at some point for somebody who wants to.
To get into that but we're confident in that 4% to 6% organic growth.
Thanks.
Larry we do anticipate that our margin expansion, our free cash flow growth our EBITDA margins.
All far accelerate that 4% to 6% topline growth.
Okay Gotcha.
And then just two other quick ones for you here.
Again, Joe back to you just on the new leadership within the pain franchise. You know again, you talked about some of the opportunities are there I was wondering if you could just dig in a little bit more and kind of help us understand what what do you see as.
As drivers for that business as you have one leadership team, there and talk little bit about the leverage or synergies that you could get there.
And then I guess for Michael.
How should we think about the sequential revenues in the fourth quarter. It sounds like based on all your commentary it could be sort of flattish.
With that with the third quarter.
Yes, I'll take the first question on Bill Bill Hayden joins us with.
A great amount of experience primarily in the cardiac space, but a lot of work with Kale wells innovation.
Folio management and strategic development, and we really believe that he can enhance our strategic marketing.
Our portfolio and innovation as sort of an acceleration if you will.
Of the growth in that area both businesses. Despite some of the past challenges that we've had business generally as well.
He can bring together both of the franchises and we think there will be efficiencies there within the organization as well as some of the.
Back office areas that serve.
Serve that organization so.
Essentially.
We're actually very excited about him and his ability to kind of enhance a strategic marketing and the strategic development.
And then ultimately get after some efficiencies as well in that business and I think you had Michael question. Okay. Yeah. So Larry I think your read on that.
Being flattish to Q3 sequentially is right.
We had a lot of backlog in our age into the second and third quarter as a pandemic really took off we fulfill much of that backlog. So we have a little bit to work through all that and we anticipate that Q4 will be down a little bit.
And some of the headwinds we talked about around our age Fannie flu season, being a little bit less than passionately season, given what we've seen in the southern hemisphere.
And so that may be a little bit of a flattish to back him.
Pain continues to sequentially improve sorry about that sequentially improve but as we talked about back in the second quarter results. We don't anticipate getting back to 100% I think others are seeing that as well now on the elective side until sometime in 2021. So although we will continue to see pain improve.
It's not going to go from 90 estuary aren't out of 100, So we'll see some positives there. So all in all we've got some puts and takes that put us around where we are in Q3. One other thing I would add Larry is just that also that we talked about this actually in the last earnings call as the uplift that you would typically see in pain associated with sort of like a 15% and some.
Years based upon insurance coverage and unemployment, we don't think we'll see that this year.
They see some of that but we don't think we'll see that full extent.
Okay very good. Thank you guys appreciate it.
Thank you.
And our next question today comes from Ravi Misra with.
Capital markets. Please go ahead.
Hi can you hear me Okay, Yes, Ravi we can hear you good morning, Hi, Good morning, Hi, Joe Hi.
Hi, Mike.
Quickly on the.
Beyond Q business, just curious how to think about this business as some of the procedures have been coming back.
I don't know I have calibrated by model right, but it does look like there was a sequential leasing volume step up for this business compared to Q number one is that correct and number two.
I think the pain management business came in a little bit better significantly better at least than we had modeled but the gross margin impact I guess didn't flow through can you kind of parse out some of the puts and takes in that bad in the margin. There that may have impacted and then maybe my second one if I just asked upfront I think yes DNA can.
Well here is a lot better than we had modeled at least.
If you could just maybe help us understand how much of the restructuring.
True and how much of the the kind of the.
The benefits you are seeing are quote unquote permanent ones Kobe that normalizes. Thanks.
Yeah, the problem Ravi what I'll do is I'll take the Q and then we may as well.
With Michael and I, both together talk a little bit about SGN and just gross margin since you've raised it but.
But essentially unlocking you're right, we saw sequential improvement better than anticipated.
You know and we've seen that move to more of a 90% remember we were on the pain business and electric procedures more at 75%.
Level in Q2, so we've definitely.
Seeing that.
That improvement.
Again.
Q4, I think Michael outlined that nicely, but we expect some sequential improvement to continue and I think what we've said with US both those businesses is that.
Still very complex.
With the pandemic in terms of severity and longevity.
To forecast, but to the extent, we do better we benefit from that and that's I think what happened.
In Q3.
Just with respect to gross margin.
Overall, I'd say, a couple things and then I know that my comments to make a.
A comment or two on that but generally what we're experiencing in the business.
Is the mix with the you know.
Respiratory health and really its close section catheters and oral care. So it's both of those and there is essentially a cost that you're seeing associated with the manufacturing organization, our supply chain and protecting our vulnerable Max.
Mexican employees, where we're actually maintaining the payroll where we have sort of subs. If you will in place during that period and some other things I think Michael is talking about and have probably comment on SGN as well yeah, great no absolutely. So that the mix is the biggest piece as Joe mentioned, that's why we said in our prepared remarks that we continue to see that.
Had been going in 2021 until we get to a better balance of our pain management and respiratory business.
But that being said, we're very happy that we're able to fulfill all the respiratory orders and help those that are suffering through a pandemic. So from a healthcare standpoint, we feel great about our ability to meet those those demands.
Then you also mentioned the cobot related expenses Theres two pieces there. There's one just the protection within the manufacturing plant itself and then as Joe mentioned, there's also folks in Mexico that are not coming to work because they are considered vulnerable as defined by the local government and.
And we're bringing in extra bodies in order to meet that was labor requirements or paying both sets of employees right. Now. So that'll obviously worked out over time and believe that as transitory with some of the Cove. It protection things in plant probably remaining for the foreseeable future and then finally, we.
The write offs on the on the cusp of the pandemic, we talked about this way back a couple of quarters ago. We.
We did a nice job of looking at our supply chain what are some of the raw materials, we would need and quite frankly, there are some skews that we didn't sell as much as we thought we would and others that we saw more and so we wrote off about $1 million more and inventory in Q3. This year versus Q3 last year. So some of these things are transitory some I think.
We will stay with us for some period of time, but we still feel really good about what our gross margin profile I will be able to grow into over the next couple of years I've never seen a oh, we're very pleased with the work we've done as an organization on the cost side, both the plan savings coming into the year I wish we continued to execute on as well as 20 million plus.
Additional cost savings we've removed.
Results of Cove, if some of the things fairly easy when I'm traveling. So obviously, we don't have those expenses other choices were a little bit more difficult to make a like postponing merit increases and things around human capital Backfills and those things we are in the in the planning process right now as most other companies going into 2021.
Looking to purchase a permanently I have those cost savings in place going forward as much as possible and so we don't have any news to me today per se on that other than we feel that we did the right things throughout this year from pandemic, but also believe we looked at new ways to run the business by taking those costs out and want to make some of those cost savings part.
We're not going into 21 and beyond.
Thanks, I'll get back in queue.
Thank you.
And our next question today comes from Rick Wise with Stifel. Please go ahead.
Hi, good morning, everybody.
Good morning, Rick.
Good to see the stabilization slash improvement et cetera.
[music].
Let me start with.
Yes.
I apologize in advance.
Help us think about 2021.
Appreciate it says it.
Awkward question, a tough time to do it and I I know about we all know about healthy uncertainty.
Out there.
But just as I reflect on it I just.
After seeing the numbers just thinking it over I sort of say myself you've been running.
At sort of this 180 590 per quarter rate third quarter fourth quarter again, I appreciate different moving pieces in there but is there any reason we shouldn't take that second half run rate and when we think about 21 international growing double digits, you're launching new products, you're executing better you've got these.
Yep.
Graduate students in the backlog why wouldn't we just.
Even as a starting point.
Take that second half run rate than figure.
Get in the plus or minus in the middle of a range.
750, as a starting point for next year I eat you're gonna grow overall, what's your gut 29 team put up.
The bottom line on it that's the right am I correct.
Directionally roughly approximate thinking about this correctly.
All right Rick I'll see what I can I can do to give you some direction, but obviously, we're not we're not giving guidance or 21, not even really four for Q4, I think if I as I look through the transcripts, even myself I can sort of see that it's what we're all dealing with which is the complexity of.
The duration and longevity and then we can now we're kind of in this rise keeping our eyes peeled on Europe.
Then.
Also we're now seeing the rise in the U.S.. So how does that impacts as give you. A specific example, even in sort of the down phase and the late summer. There are still hospitals that don't do maybe they do orthopedic procedures three days a week versus five or six on an old base I just hard to gauge now that said the reason that we said that we.
Have a 4% to 6% organic growth business is because we really believe it and its only affected currently by the circumstances really.
Of the pandemic and the way I think about it and then Michael May want to make a comment and units himself. Here is you definitely gonna have here were respiratory and we've got a great job managing it.
But in this quarter alone as an example, we have sort of a $7 million to $8 million benefit.
From covered with respiratory health digestive health should remain mid mid single digit.
We believe we can get back to a high single digit for the total pain that business and our international business is it looking like it really.
Can stand to form on the mid single digits. So we are.
Our confidence in the business, but unable really to give a forecast of what that may look like because so many uncertainties and Michael you want to add to that.
Three of all that John the other thing I would add is as you mentioned right 2019, yes, we absolutely will grow.
Meaningfully against 2019 in that mid single digit range more importantly, when you look at 2019, you will see a attractive margin expansion.
Particularly around operating margins EBITDA margins and free cash flow generation. If remember 2019, we had about negative 100 million in free cash flow. This year, we're going to have around negative 20 million for the year and next year. Excluding the cares Act three funds were going to have a meaningful tens of millions of free cash.
Oh, and then you can add on top of that I'd expect to re front.
From the cares act so a lot of really great.
Metrics above and beyond just the topline growth that we're going to demonstrate and 2021.
Yeah that's.
Great.
Hi, good profit question, but thank you for tackling it.
And Michael I did want to better understand your comments about cash it all sounds very encouraging and could you help me better understand that.
The addition, and subtraction. So you ended the quarter I'm not looking at like a 180 million in cash you paid down the notes. So you have greater than 100 million.
Got to get back did I understand correctly you over the next 12 months.
Your guidance generate tens of millions of free cash.
So net net all things equal you really could and.
12, 12 months got you coming back sort of where you were prepaying the notes down am I in the approximate territory, they're thinking about got assuming we get those refunds back next year as we anticipate we filed everything timely we got no reason to believe that there would be any sort of push and not get those from the IRS.
But obviously working with the government agency or a little bit out there when there, but assuming we get those back which ranged from $60 million to $70 million in total.
You're absolutely right with your math on where cash end of year cash position would be next year and I think that puts us back Rick too.
Eventually at similar capacity level for M&A with the performance of the business and that.
Which we feel good about as well coming out of the pandemic.
And one of them.
Just to Joe's 0.1 of the reasons why we felt we looked at a variety of different things to do as the debt was coming callable or one of the reasons why we felt strongly about paying it down.
As we look at the M&A landscape right now we are still looking very much a tuck in we're very focused on our execution on the acquisitions, we've done integrating them as we finished up the share which has been great I'm using our systems to be able to do that I, we're still want to be active in the M&A landscape again more on the bolt on tuck in.
Lastly, we have available with the remaining revolver and a cash we have on the balance sheet a sufficient for the things that we're looking at we get next year to build up more cash and then obviously build up more EBITDA with the expansion in the margins as we just referenced.
And we'll be able to do something larger down the road, that's just not on the radar.
Radar screen right now, which is why we felt paying down the debt and saving interest expense was the prudent thing to do in this moment of time [noise].
I have one back quicker one just for you Michael but that's so feel free to chime in.
Obviously.
The new IP system.
The major milestone that it's all installed by the end of this.
This year, just help us think through quickly the impact and both operationally executionally financially I mean is it may help us measure what that's going to me I appreciate it.
It's really great to have that that's going to make a difference.
On a qualitative level the way to measure it is our ability to do integration is through acquisitions like Neil Mad right and be able to do them.
Game ready and in a way, which allows us to reduce our SG needs. Our support means and so there's a dollar savings that come from that so that's one quantitative way the other way as we think about our one pain franchise that we just talked about combining those two franchises as fairly seamless within a one system approach and then the other thing.
Which is a little bit tougher to put your quantitative a pad on but definitely hasn't impacted our ability to do a better analysis, so whether that be how we think about what can gross margins ultimately get to how do we think about pricing opportunities. How do we think about contracting opportunities how do we leverage salesforce dot com.
Within an overall.
They pay environment, those are things, which make us more efficient allow us to ask that our questions I got a customer needs better, but it's hard to quantify those things any given moment over time, what that should allow us to do is sustain this mid single digit growth fairly easily the ones you can put dollars.
Dollars around our all the savings we get as we immediately integrate acquisitions within a given 12 month period. Those are meaningful dollars that we don't have to continue with our because we have the ability to leverage our system.
Thanks, so much thanks Rick.
And our next question today comes from Chris Cooley with Stephens. Please go ahead.
This morning.
Good morning, Thanks for taking the questions regulations are really solid quarter. Thank you just just from this for me I was hoping you could put a little bit so finer bead on the one paint initiative.
Appreciate the new management there.
Heightened focus, but those who are desperate call points. So I just want to make sure I fully understand what you're trying to convey here. This maybe some consolidation and administrative and revenue back office. So that's across synergy but are there synergies from the sales side as well when maybe when you approach a assist I'm just trying to better understand.
Stand, where do you think you see uplift both from a cost and from a growth perspective on one thing and then I've got a quick follow up Chris. So just generally the way to think about that is expansion of channels like we noted in the prepared remarks.
And we talked about in the surgical and working with them and you are right. They are separate call points. Nonetheless, as you go up the management chain. There are some opportunities for synergy there and certainly the back office type of element I think also on the strategic side, what we ultimately want to do in our business as the franchises get more of other functional areas.
Into the businesses and so theres an opportunity there as well on the synergy side of things like BD strategy and really in that with two big business leaders that are managing all that whole component instead of sort of desperate.
Functional areas and in that I think its going to two things I think it's going to accelerate growth for us and.
And I also think that over time, you know that will be synergistic opportunities for sure that a you know at a later date will be prepared to talk about.
[noise] I think you had a follow up.
Thanks.
Okay, and then just maybe if you could give us an update on currently.
And more specifically, how you're doing there in terms of the trial efforts versus traditional RF I know the 19 to lay down a little bit, but maybe just help us kind of reassess our thinking there in terms of timing on maybe what you can do for you on the interim.
Accelerate growth in.
In this environment when some cousins don't want to go to the traditional acute setting. Thanks so much.
Yeah, we're pretty pleased with the return that we've seen in that business I think a lot earlier in the call we talked about being ahead of what we.
Have anticipated most of what we're doing is in the H. show a PD.
PD part of a part of the hospital.
On the clinical studies you know.
We just had the Pope the published clinical study.
In bone and joint talking.
Talking about the.
Ha versus Cooley.
In better pain relief on the pain scale six months.
A pain free and we've got studies that obviously, you're looking at longer duration of pain free. We believe the technology holds that that capability. What we are doing at the moment is really focusing heavily on the expansion of our existing accounts across the spine and of course, new away coming in and how to partner with our sites.
On increasing their throughput and we really believe that theres a good runway there the other thing that we're doing.
Is working.
Only on longer term, which I think is a catalyst for ambulatory surgical center, a reimbursement, but the day to day coverage even of spine.
Now a way of any being a new treatment of private payer coverage. So that's another thing that we're working on that allows us the ability to maintain that runway of double digit.
Thank you.
And Chris.
Right.
I'll just real quick Chris I think you guys actually generally awareness, but as we look at the planning horizon and a 21 and then even beyond that 46% topline growth that Joe and I referenced does not include any M&A and doesn't include things like what could happen given.
Given a favorable coolief reimbursement situation those are things that would be.
It takes you think those will be positive outcomes and we believe they would be.
Those would be above and beyond that 4% to 6% that we're currently looking at.
Yeah good point.
Thank you. Another question today comes from Matthew Michelle.
Keybanc. Please go ahead.
Good morning, Good morning, guys and really this quarter.
I just want to start off with the trajectory of the recovery and in pain management I think back in in July and August last quarter. You guys were indicating is that 75% back to the pre called the bubble I think where you finished up the quarter would imply a significant improvement from there and the kind of how.
That kind of how that improvement.
IVD into October.
Would be really helpful.
Yeah. So a couple of things just to start with you know we were at about 75% elective procedures. In Q2, we did say to the extent that improved greater than 75%, we would benefit and we clearly did it was more like 90% of our of our overarching business in the quarter.
And you know we were pleased the acute pain with things like a largest sales ever and lidars the.
Benefits of the education that we did online during sort of the earlier parts of the pandemic and then I was just talking about Cooley.
And we're seeing you know even up even faster somewhat recovery.
On the Kulu side generally in October we've seen more progression.
That said, we're watching the cases, the sort of the unknown in Europe, and the U.S. and Oh in terms of pain that we are initially seeing some some further progression in October.
And then so be it.
Well, Michael I was just saying I just even in the best case scenario. We don't believe again, we're going to finish Q4 at 100%. We believe that's going to take to a little bit of time in the 2021. So you know what the progression that Joe is talking about now maybe that feels more like 95% as we exit Q4, but but not 100.
An equally it can stay where it is so I mean, I think everybody correct with that right everyone in dealing with that complexity of the unknown, but generally.
Michael's point, you know, we've been happy with our progression.
Okay. So bad so basically you are seeing anything changing in the underlying environment units cautious around around around the broader macro and.
Which makes sense given given all the uncertainty correct.
Correct.
As we said that in the second quarter and we feel like we're capturing all of what is appropriate for us to capture.
Percentages come in the second quarter seem to differ with maybe some of our peers, but if we didn't think it was an indication back then and we still don't.
That we're missing anything and just to meet the procedures that our products are relevant for may have come back in a different cadence than other procedures.
I mean, you've had a couple of quarters now where.
Where are you where.
We've had some it I'm just curious kind of the early take on on on summit and how that's and how that's progressing for you.
Yes, So I think what summit does for US is it rounds out the portfolio, obviously electronic pump takes an element of the filler issue out overtime Weve talked about innovating to and can we get data transfer and other things that some of our customers have been asking for so it's another alternative.
For our customers it gives us a broader portfolio that we believe in the anybody really in the palm segment between our install base and that and then we have continued innovation that we would certainly plan there and so.
The initial part of the integration has really been about getting that business.
Into our business and into our IP system and changing out some of the distributor relationships.
It's a smaller portion of the business at the moment, but overtime can be can be a real help to the overarching growth [noise].
And then lastly, you.
Some other companies pull triggers on on acquisitions recently.
It makes sense that you guys are going to wait a little bit to <unk> for something larger but in this case.
What does the pipeline look are you happy with what you're seeing kind of build in your pipeline of potential targets.
Yeah, I think we have a strong pipeline because of the work that was done really over the course of the past two years and the market environment landscape.
Work that we did we not lost contact with them with our targets. We are still in contact with them and then just sort of a side note you're doing that use mobile deal, we're still active and out there, albeit in a virtual world.
You know we were.
Sort of feel like that the second half of 21, we'll start to get a little bit more active but we've also said in the last call said again, if something became available that looked attractive and was the right valuation is not that we would absolutely a standstill and don't think that we can conduct a transaction if we need to and personally I do think that that mm.
In our in our industry anyway, it's going to start to.
Move up a little bit in the second half of 21, I do think a lot of folks are going to kind of what watching this uptick right now to see what this actually means that going forward, but.
Definitely pick up in the second half to one that just want to only on one thing. Joe mentioned is there's plenty of stuff for us to look at but it's not that valuation valuations have remained incredibly buoyant.
And so it's just made us wrap their heads around actually executing on something a little bit difficult because of where valuations remain so we like our pipeline. We liked the text technologies that are out there.
But we're going to remain patient around being disciplined as we have in the past.
Thank you very much guys.
Hey, Thank you Matt.
Ladies and gentlemen, as a reminder, if you'd like to ask a question. Please press Star then one our next question today comes from David Lewis of Morgan Stanley. Please go ahead.
Hi, Thanks for taking the question just a two quick ones for me and maybe Joe one strategic for you and then my follow up question on margins, but just thinking of the changes that were sort of me inter quarter sites to kind of pain management I Wonder as you think about that franchise today, both in the acute and the interventional side are.
Are you sort of comfortable with the portfolio of products that you have in that business or do you think that's sort of an area where.
You need a broader platform to sort of compete in the way that I think you've described strategically.
New management wants to take that business.
Yeah, we believe that we can add products in and around the the call points. So where we are in expansion Thats why we put our investment into a fuse mobile.
Which is a different way to approach sort of interventional pain and theyre, starting with the lower back. So over time, you could definitely strategically see us put bolt ons or other acquisitions in that business. So.
So we definitely feel like there's a a portfolio approach an approach that bill is going to work out on everything that we bring to the customer and has been as you're probably aware a kind of a little bit more of a heavier focus on the orthopedic because so much of the acute pain businesses orthopedic, we're now starting to move into that and interventional pain, we kind of made a foray with game.
I'd, but it's really the everything that happens with that patient in terms of their pain management from beginning to end as what you could think that we're thinking about in terms of either expanding from the inside or looking at acquisition.
Okay, and just Mike I, just want to come back to 21 on margins here for a second you gave a lot of commentary on margins here sort of near and intermediate term, but as I think about 2021.
These these mixed driven dynamics are they going to extend into 21 basically more bluntly asking you. It's better to think about 21 gross margins being down over 19 based on this this mix driven benefit and as you think about sort of the cost oriented plans. How do you think about operating margins in 21 versus 19. Thanks.
So much yes.
I believe that the sequential improvements, we'll see an operating margins from 2019 to 21 are going to come from ash in a a reduction in spend because to your point gross margins will be at best flat to likely down.
And so your math there as it is very accurate.
All right. Thanks, so much thank you David.
Everyone. This concludes our question and answer session. During the conference back over to Joe What do you for final remarks.
Thank you I'd like to thank everyone. Obviously for your continued interest and Albano sand, while we continue to execute well in the face of these near term challenges. We're also taking strategic steps to strengthen the foundation of the business I think you heard that I'm confident these steps are combined with our market leading portfolio and the attractive markets, we operate and position us for sales growth margin expansion and <unk>.
Positive free cash flow and 21 and beyond also out I will present at the Stifel Virtual Conference Healthcare Conference November 18th and the following day, Michael will present at the Stephens Virtual fall conference information on how to access the presentations can be found on the Investor Relations section of our web site <unk> Dot com. Thank you.
And ladies and gentlemen. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.