Q1 2021 Avanos Medical Inc Earnings Call
Good day and welcome to the oven of medical first quarter 2021 earnings conference call all participants will be in a listen only mode.
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I'd now like to turn the conference over to Dave Crawford, Vice President of Investor Relations. Please go ahead.
Yeah.
Good morning, everyone and thanks for joining us it's my pleasure to welcome you to the Albert of 2021 first quarter earnings Conference call with me. This morning on Joe Woody CEO, and Michael Greiner, Senior Vice President and CFO.
Joe will begin with an update on our business and then review the progress we are making against our 2021 priorities and <unk>.
Michael will review, our 2021 first quarter and provide an update on our current planning environment, we will finish the call with Q&A.
The presentation for today's call is available on the investors section of our website <unk> Dot com.
And as a reminder, our comments today contain forward looking statements related to the company.
But the performance economic conditions and our industry.
And it can be given as to the future financial results actual results could differ materially from those and forward looking statements from.
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 SEC.
Additionally, we will be referring to adjusted results and outlook.
Press release of 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 and Avenova.
And I'm encouraged by our team's continued strong execution and resiliency of they respond to the challenging dynamics to our business brought on by the pandemic.
Our employees remain focused on the dedication of getting patients back of the things that matter as you meet the need.
Needs of our customers.
As mentioned on our last earnings call, we began the quarter with some headwinds and uncertainty, resulting from rising hospitalizations and the corresponding negative impact of the elective procedures.
However, as we exited the quarter, we saw increasing top line momentum across our Pea and manage our franchise and the return of electric procedures began to reaccelerate.
Looking ahead, while we are encouraged to see the elective procedure volume, increasing and expect it to accelerate we continue to believe volume likely to remain below its full potential until the end of the year.
And we examine the business environment, we are gaining confidence and the direction of our business and have better line of sight. The gradual ablation of challenges presented by the pandemic.
As a result, we feel well positioned to provide financial guidance for 2020 one.
Based on current projections, we expect net sales on a constant currency basis to increase 2% to 4% compared to the prior year.
Also we expect to earn between $1 of Tencent.
The $1 25 of adjusted diluted earnings per share.
And we'll share additional information on our financial guidance and his remarks.
During the quarter, we established our first diversity equity and inclusion council consisting of 15 global employees across all departments.
The D E and I counsel will build upon our we stand together initiative to better understand our employees perspective regarding the issues of racial and gender inequality.
Our D E and I understood remains of critical effort for us to shape, the organization and culture, where all of our employees want to work.
Lastly, we are discussing with the Doj and potential resolution of their investigation into the micro cool and other surgical gowns that were a part of the S and IP business when we divested in 2018.
We anticipate finalizing an agreement and the Doj and Q2 or Q3.
With that as background and I'll review, our first quarter results and provide you with an update on our drivers of value creation.
Sales totaled $181 million unchanged compared to the prior year, while we earned 23 of adjusted diluted earnings per share.
Earnings were positively impacted by our disciplined cost control measures, but were partially offset by increased transportation costs.
Results of our chronic care business were mixed and digestive health, we continue to deliver mid single digit growth of the franchise overall.
The respiratory health sales related to the direct treatment of patients impacted by the pandemic were similar to last year.
However, overall growth was down slightly at the precautionary measures taken by the pandemic impacted the normal cold and flu season, and uplift and therefore significantly reduced the seasonal sales related to of cold and flu season.
And pain management as I stated earlier electric procedures remains depressed at the start of the quarter as COVID-19 related hospitalization spiked and some regions.
And I had one or two are on acute therapy, where a significant percentage of surgeries where on here as use of require of hospital stay.
Separately cooling was less impacted as it performed as an outpatient therapy.
Overall sales grew sequentially throughout the quarter as procedural volume returns.
Despite the early quarter headwinds caused by the new wave of the pandemic, we continue to build on our solid foundation to accelerate growth across the pain management.
Finally, let me provide you with an update on our progress this quarter and regarding our four areas of the value creation.
As a reminder of the areas are strengthening our growth profile.
Expanding our gross and operating margins.
Driving consistent free cash flow generation and deploying capital towards M&A.
First as we look to strengthen our growth profile, we maintained our momentum and driving market adoption and gaining share by growing book, our core pack and the other med portfolios.
And we're executing our strategy to establish core track of the standard of care for nasogastric feeding along with increasing the adoption of knee and bad to further address neonatal enteral feeding needs.
We delivered record sales of the courtyard hardware units and the first quarter and are on target to reach our Gulf of near met the account conversions.
On previous calls and we can discuss the progress we're making to expand the clinical evidence for Cooley the.
Demonstrate its differentiation as of radiofrequency ablation therapy.
Also important this effort are independent physician led studies being conducted.
During the quarter to independent physician led publications on cool leaf were published the first concluded that the use of radio frequency was predictive of a better outcome for patients suffering from knee osteoarthritis.
Additionally, another large retrospective knee series concluded the Cooley, what's clinically effective for book managing pain and reducing disabilities.
Finally, we continue to execute on our international expansion initiatives, we achieved high single digit organic growth across each of our regions. During the quarter. The first time, we have seen this level of growth across all of our regions and the same quarter.
Also internationally, we achieved growth in both of our chronic care and pain management franchise.
Our second area of focus is on gross and operating margin expansion I'm encouraged by the continued cost discipline and the emphasis on driving efficiencies and our spending however.
However, we incurred additional transportation costs related to facilitate neither of bad growth from account conversions we.
We anticipate these increased distribution costs to continue into the second quarter, albeit at a slower rate.
As we advance our business, we're looking at all processes throughout 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 is to generate consistent repeatable cash flow cash flow and met our internet internal expectation for the quarter as we anticipated certain outflows relating to compensation.
And the consideration of a preliminary agreement with the Doj, we now anticipate delivering approximately $80 million of free cash flow.
Cash flow will be driven by improved earnings and the disciplined cost savings that I previously mentioned as well as receiving and unexpected and $60 million and U S tax refunds, primarily derived from the provisions of available through the cares Act.
Finally, we continue to examine of capital deployment for M&A, our M&A pipeline remains robust and we maintain an active dialogue with the number of potential tuck in targets, which would leverage our existing footprint generate synergies and enhance our top line growth profile.
While I'm optimistic about the prospect of bolstering our robust portfolio on 2020, one we will remain disciplined and our assessment of the targets, ensuring we generate a strong return on capital.
Overall, we remain well positioned to advance our strategies across each of these four areas of value creation as our focus on execution remains strong.
This along with our market leading portfolio of gives me confidence, we can deliver growth and margin expansion in 2020, one and be on.
Now I'll turn the call over to Mike.
Thanks, Joe as you noted we continue to battle the range of headwinds and yet the team remains focused on execution and overcoming these challenges let's.
Let's begin with review of our first quarter results total sales of 181 million were unchanged compared to last year, we saw 1% increase and volume and a 1% benefit from favorable exchange rates unfavorable price offset sales by 2% the slightly higher than normal price impact was primarily due to the timing of disk.
Counts and allowances page of customers.
Chronic care sales grew 5% to 121 million and the quarter as we saw mid single digit demand for digestive health products double digit core pack growth resulted from the execution of our standard of care strategy, while Neil that growth came from the continued continuation of conversions to our and fit technology mentioned earlier double digit into.
National growth bolstered performance, driven by new channel partnerships, and our Asia Pacific and Middle East regions for core track along with share gains across Europe.
Meanwhile, performance and respiratory health was down slightly due to the weaker than normal cold and flu season, and also we continue to monitor our pandemic related sales and the relationship between sales to distributors and trade sales from our customers while over the past year. There's been some added variability. It does not appear from the analysis that additional inventory is currently being <unk>.
Held by distributors and thus, while we do expect and impacts of respiratory health growth from hospitalizations declining over the next several quarters, we do not anticipate and additional headwind from distributors rebalancing their inventory levels.
Moving to pain management, we delivered $60 million of sales, 8% lower compared to the prior year the.
The cancellation of elective procedures impacted performance as well as lower procedural efficiency the law.
Largest change was and on Q, which is heavily correlated to procedures requiring some length of patients stay on the hospital as Joe mentioned, we saw sequential growth in Hangzhou and the hospitalizations declined and elect of procedural volume increased despite the challenge the on Q for the quarter sales through lighters increased by double digits as our partnership with Pfizer.
<unk> continues to benefit customers as of Prefill option.
With respect coolly and we're encouraged by the results for the quarter that were essentially flat compared to prior year, while growth was unfavorable for the first two months, we saw significant growth in March as anticipated.
And pain management was double digit growth and game ready.
Efforts to expand the rental of units directly from Avenova is progressing well. In addition, the the business benefited from the return of sports and both North American and European markets. We continue to meet patient needs for effective opioid sparing pain management therapies and believe the return of elective procedures being performed in the hospital.
The support additional growth for this franchise moving down the income statement adjusted gross margin decreased to 52 per cent compared to 59% last year as we indicated on our previous earnings call gross margin was expected to be lower given the timing of manufacturing variances and unfavorable product mix and addition, gross.
And in the quarter was also impacted by higher transportation costs to bring Neil net products from China to the United States to meet customer demand as well as higher than normal price declines and the timing of discounts and a line allowance is paid to customers.
We continue to expect adjusted gross margin to improve as we regain growth and pain management and demand for our respiratory health products, partially normalizes to pre COVID-19 levels and.
Adjusted gross margins are still expected to range between 2019, and 'twenty 'twenty margin levels as mentioned during our yearend earnings call. However, we anticipate the meaningful improvement in gross margin will now occur and the second half of the year as we will continue to incur higher transportation costs to meet the sales demand for Neil Matt during the second quarter.
Adjusted operating profit totaled 16 million compared to $14 million on the prior year performance was primarily driven by adjusted operating expense reductions, which was partially offset by the lower adjusted gross margin I just reviewed.
Adjusted EBITDA totaled 22 million compared to $20 million last year and.
Net income totaled 11 million compared to 8 million a year ago, and we earned 23 of adjusted diluted earnings per share.
Now turning to the balance sheet and cash flow statement as Joe mentioned, keeping a healthy balance sheet and generating meaningful free cash flow remains a key go forward priority.
Our balance sheet remains solid and continues to provide us with strategic flexibility as we ended the quarter with $100 billion of cash on hand, as well as the hundred and 75 billion of debt outstanding on our revolving credit facility. This is an improvement of $5 million versus ear and do it a repayment we made during the quarter.
Free cash flow represented an outflow of $9 million due to the timing of payments related to employee short term incentive and severance payments related to our restructuring announced last quarter.
Overall as Joe mentioned, taking into consideration on a preliminary settlement with the Doj, we are confident and generating approximately 80 million of free cash flow. This year, which includes refunds from the cares Act.
Finally, while some unpredictability of the Corona virus remains the return of elective procedures and the success of the vaccine rollout enables us to provide a 2021 full year outlook at this time based.
Based on current trends and our business, including the expectation of elective procedures returning by the end of the year to a normal level. We expect net sales on a constant currency basis to increase 2% to 4% compared to the prior year.
This includes an approximate 50 basis point impact from the exit of of non strategic international chronic care business discussed last quarter. Additionally, as we noted on our year end earnings call quarter over quarter sales results will be more variable than usual given the impact of COVID-19 on our prior year sales and how that will impact the quarterly comparable.
Yes.
For the year, we expect to earn between of dollar 10, and a dollar of 25 cents of adjusted adjusted diluted earnings per share, we expect higher earnings and the second half of the year from of pacing perspective. This is based on higher sales and gross margin expansion along with the continued focus on controlling our operating expenses.
In closing we are off to a strong start for the year and we've made meaningful progress on our evaluation of pathway I'm confident and.
And our ability to execute on the strategy and to deliver significant free cash flow and deploy capital and a disciplined manner through the duration of this year and going forward.
Operator, please open the line for questions.
Okay.
We will now begin the question and answer session.
Ask a question you May press Star then one on your Touchtone phone.
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At this time, we will pause momentarily to assemble our roster.
Okay.
Our first question comes from Ravi Misra with Bayer and Peck. Please go ahead.
Oh, Hi, good morning. Thank you for taking the question. So just a couple of questions on me.
On the guidance from Mike and Joe just wondering you know you're kind of assuming a normalization by the end of the year. Just wondering does that kind of getting you to the midpoint of your guidance or the or the high and can you help us think about you know what what's contemplated a kind of on the low and high and I mean should the high end and kind of include getting.
And more aggressive in terms of.
More aggressive rebound of procedures and have cut.
The follow ups. Thanks.
Hey, Rob and good morning, It's Joe I'll say, a couple of things and then and Michael may want to add to it but generally.
The way I would sort of view that guidance is that you know the faster electives come back you know the better it can be and chronic care is likely to be below the low end of our range, but are obtained the U S.
The high end of greater than really the the high end of our range.
So you know we are.
And are looking at obviously, the the improvement less hospitalizations, we really do believe things are going to improve on the electives and this and the second half of the year, we're watching the speed the because we don't have full indication that that's across the board.
From a lot of our customers.
And Michael do you have anything to the other I would just say the low end of the range Ravi to your question.
<unk> some continued headwinds from the back half of the year on both the cost side and as Joe just mentioned some of these elective is not returning and order to hit that that dollar 10, and so that's a fairly conservative low end of the range of lot of things that have to do.
Rocco right for us and the back half of the Arctic be there the great.
Great. Thanks, and then maybe just if you could help Oh asked and I have no.
Follow ups altogether, just if you could help US understand you know your international growth was pretty strong just can you help us understand the kind of impact to margin there in terms of how it compares to the on the overall corporate average and then finally any updates on the kind of progress on the breakthrough designation product.
And that's it for me thank you.
So I'll start with just talk about the international business. The good performance, we see that continuing into Q2 as well and there's been a real focus on geographical expansion through bringing the M&A that we've.
And been able to conduct into those markets and entering new markets I think that teams and a nice job of managing distributors, and EMEA and Asia Pac and getting more out of them and some cases going direct and eliminating the distributors and aren't living up to our standards and.
And then they're very focused on medical education.
And clinical studies and so that's the therapy adoption that they're really both in Asia Pac and EMEA are that they're getting so again you know we think it's a in the non pandemic situation and the mid single digit grower that we're working toward high single digit and important lever for us.
Early on and my tenure, we did a lot of and investment in people and the structure in that area and the Michaels looking like he wants to talk a little bit about the margin contribution yes, you'll remember Ravi good majority of the revenue. We do have internationally right. Now is chronic care, we are looking to expand our pain footprint.
So by definition, our chronic care portfolio by and large is theres a lower gross margin profile and then as Joe just alluded to we are doing some key investments internationally that we think are right for the long term. So our overall margin profile of both of the gross margin levels and the operating margin levels are slightly lower than the overall consolidated.
Companies.
And then just on that breakthrough designation device can you just I'm, sorry, I'm sorry about that yeah, we are progressing.
Progressing well and and electronic nerve bought the product really focused on total knee where in patients now we're very impressed with the results are and so that portion of the development has gone well and that we're obviously working on the the FDA approval applications and how we would view a reimbursement there when we.
We have the on Investor day, which maybe towards the end of the year call. It ball or about the time that would rollout and L. RP and new LRB, we're going to highlight that and talk more about it and that meeting.
Yes.
Okay.
Thanks.
Yep.
The next question comes from malaria huge with Raymond James. Please go ahead.
Hey, good morning, everyone and thanks for taking the question.
I guess to start off I'm.
Sorry, I'm just thinking about the.
The the guidance for 'twenty, and 'twenty, one and and thanks for.
Now and beginning to provide that I guess it was.
A little bit lower than I was anticipating and I'm, just and just as I'm trying to parse through the various moving pieces of the business I'm curious it.
And how you're thinking about that on Q.
Is that sort of a.
A bit of a laggard as youre waiting for these procedures to come back because I would assume that.
On your commentary on the first quarter and the exiting rates Cooley of should be a pretty substantial grower for the year.
Yes, that's right leery of mean cool gooley will be of substantial grower.
And with respect to on Q, we saw positive growth in March we've seen continued acceleration, but because of the bulk of our businesses and the hospital with on Q, it's coming back a little bit slower than the hospital outpatient department with Cooley.
But again, we do see moving into the second half good growth. Obviously some of that is obviously related to comparator for on Q and we're pleased with the progression and the things you know where we're headed with the the channel partners and what's going on with lighters and got some of that in the commentary I think the biggest thing.
And then in my mind is just some of the unknowns on the range you know, it's the you know the with relation to how fast the hospitals do come back with all of the procedures and as opposed to ambulatory surgical setting and if you think about last year I think we caught a little bit of heat and saying the things we're gonna come back as the asbestos they did and the second half and then they might even slow again.
And with another wave of and that did happen. So we're being cautious there, but I did say I think and the first question that to the extent of the of the electives come back and a much faster manner and that's upside for us and I don't know Michael do you have anything and I know Michael Michael doesn't have anything to add but I know Larry you may have a couple more questions. Yeah, just to add two more thanks for that.
I guess.
Joe on on that topic about <unk>.
And your commentary of.
You know you don't expect the.
The full volume potential to come back until till the end of the year and.
As you assess things what do you think is really the the biggest gating factor there, what's what's kind of driving that assumption I mean that is it feels a little bit different than what other companies are assuming it feels like most are anticipating kind of the second half as is is much more nor.
It sounds like your commentary is hey, let's wait and see what happens till the end of the year and I guess, just the second question and I'll, just ask and and probably fair from Michael is just how should we think about that that SG&A coming back through the year.
The generally you know for us, it's the therapy and pain, they're done of different sites and there's a little bit more complex of example of game ready is coming in very quickly of sports come back.
And we're getting a lot of growth there and that's in the done in the outpatient setting again cooley of coming together quickly and the outpatient setting. So we feel like we're and it's sort of and 80, 85% maybe range and the and the hospital right now and that should climb.
And this of our decision to sort of be a little bit more conservative on the on that is based upon talking of hospital executives. We use some outside consultants as we've talked to our own surgeons and customers and our customer base, but again.
If this you know quickly.
Quickly comes back and call. It the May June July and we think the H two will be strong and that could be good potential for us and the alky space.
Yeah, I think Larry one other thing to consider is we didn't want to come back and revisit this range and we believe that we were appropriately looking at the various sensitivities of when things would occur and this range allows us to capture some downside of that were to occur and and obviously some upside if things sort of come back quicker. So that's part of our thinking just as far as.
How we thought about the range and and putting it out here on the second quarter started the second quarter with regards to the SG&A.
As you've noticed the last three quarters, we've had of SG&A as a percentage of revenue and the high thirties, which ultimately is our long term goal. There. We do believe as we enter the back half of the year. There are some investment opportunities on the operating side that we are considering if we were to do those investments of SG&A would increase.
And probably just north of 40% again temporarily before we get sort of longer term goals of the high thirties, and a more permanent way so.
And so that 110 to 125 also considers that we would be doing some of these SG&A investments and the back half of the year.
Terrific. Thanks, guys appreciate it thank.
Thank you.
Yeah.
The next question comes from Matthew of Mission with Keybanc. Please go ahead.
Hey, good morning, guys on.
Good morning.
It's the it's fine.
Morning, after a long week of my listening comprehension of skills of our or are not that strong. This morning.
And what I heard of.
I I heard Doj of couple of times.
And in the in the presentation.
Just first can you just go over.
And do you still have a liability there or is that Kimberly Clark and did that change your free cash flow expectations for the year, because I think I heard the $80 million and I think it was it was 100 Boe previously.
Right. So I'll say a couple of things and then I won't go much further for now, but basically we did with the Doj agreed in principle.
And we're continuing.
Continuously discussing a potential resolution, we anticipate that that would be finalized in Q2 or Q3, and if you're referring to I think the identification and that was the case Jive that with we have no more.
And issues there we settled with the with Casey really was the Q4 I think of of last and I'll share yes.
And yes, you're correct that day.
The change and free cash flow from one of 280 relates to what we believe will be the settled and ultimately of the settlement of Mt.
And just one other thing I mean, if you think about the sort of step back a little bit we've always talked about getting things behind us and moving forward and I think this is a big step on to understand where we might be with this and this coupled with the putting the I T system deployment and the divestiture of S and IP and then obviously positioning ourselves you know.
And where we'd get a lot of cost out of the business and heading into a place where we can get stronger growth, so our ability to execute and a more clear manner.
And as big as any of any type of agreement yet we're moving these overhangs and we think is important.
Okay excellent and then.
Just gross margin trends.
Okay.
The improved from one Q2.
And the rest of the day I believe you previously said that.
You're somewhere between 19, and 20 and what is that still the case.
Yeah. So Michael is going to take you through some of some detail, but I'll say a couple of things.
Upfront you know it was only about a year ago that we were and the high Fifty's and low sixty's and the business and these things really are temporary and and as you hear more about it and the second a pandemic related and we have a lot of confidence we talked a little bit about these and Q4, the Q1 and Q2 would be like force and then we would.
Very strong.
And and H two.
So I think that.
<unk> had a lot of progression of the business on the on the flip side of it you can sort of look at EBITDA growing the way it did for the quarter.
And this call Michael to talk a little bit about the SG&A. So as we get the this moving and the right direction, which we have the plans for and the sales come on and we should be in good shape, but maybe Michael you may want to talk a little more detail about it yeah, great great question.
The reality is we didn't all of a sudden just become of $53, 54% gross margin company right. So there's a range of things that happened over the last few quarters that are taken out of gross margins suppressed them and of temporary manner.
And self inflicted which were fixing some of the and exogenous events that we're working through but when you look at the first half of the year the second half of the year.
Almost 500 basis points greatest greater than 500 basis points of opportunity for us and the second half of the year were a temporal items transitory items around price and product mix are the revaluation for the manufacturing variances and the Miss.
Nomad freight issue that we're dealing with that is important for our long term growth prospects for Neil Neil on that but also unfortunately, I had us incurring higher than anticipated freight cost from China, where Neil Mehta has manufactured so second half of the year, we feel really good about especially given that we know and you'll get portions of the headwinds into the second half of the young.
Gross margins relate directly to temporary things and the first half.
Think about first quarter to the second quarter, we do anticipate improvements.
Improvement significant improvement, although not what we're going to see and the second half, but significant improvement primarily related to improved product mix.
Okay like book.
And what would you what would you what's the pathway is there a pathway back to 60% plus gross margins from here.
Absolutely, yes, and we believe that we will see a quarter of.
Or two and then in the back half of the year that will show those 60% plus gross margins.
Okay.
That's kind of.
And then what and the.
And you called out unfavorable discounts and allowances and in the quarter.
And you elaborated a little bit on what those were.
You know just generally we're not backing off of the our business has been sort of negative one plus 1% overall and price and this has more to do with timing.
You know of rebates and the.
The discounts with some of our customers. So I don't I don't see it as the long term either yes, there was that the the price issue that we had and the first quarter was not a not related to <unk>.
Changes in how we go to business or giving away price it related more to timing all of the products are respiratory and others and the back half of the year and and these are just catch up refunds that we had to get in place that we didn't we didn't capture is timely not knowing what some of the some of the measurement criteria was.
Given the the different changes in revenue that we saw okay.
And then reimbursement and the Asp's for cooling and has that moved the needle for your guidance.
You know I wouldn't say, yet I think we talked about that having an impact and the back half of the year, we're doing a full breakdown and assessment of of all of the ASC and looking how they're structured and which ones you want to go into to be efficient and profitable about the way that we go about it but I would think that as you get into the Q3 and four we will see some benefit there.
Okay and.
And then just lastly game ready avian and take the first of all of you mentioned getting ready and in a while is that due to any kind of new product or you know, what's what's changed where like game ready all of a sudden it is at the forefront.
So a couple of things one definitely sports of come back where there are sports and.
Injuries, but we have also been very focused on the drop ship program that the team put together and did a nice job with as well as the rental business and bringing that up the speed and and making better connection with our customers and also making that efficient as part of the also the synergies.
As we you know.
Finish that off of last year with game ready, so really three things, there and and we're happy with that momentum.
Okay. Thank you very much.
Thank you.
The next question comes from Rick Wise with Stifel. Please go ahead.
Alright, good morning.
How're you doing.
To start off.
First of the sort of a little shorter term question and I've been asking.
Every company this quarter.
The same thing just to better understand the recovery brands.
Like many other January February were softer as you said Joe.
It sounds like March of nice snapback have those trends continued into april or accelerated or are they on the path.
And so sort of a two part question are they the that's the case of are we on a path to sequentially higher second quarter sales or no second quarter is going to look.
A lot like the first from a sales or margin perspective.
Clearly.
And we're expecting a stronger second half, but just help us getting the right.
Sort of talk mode for the second quarter, and we try to model it correctly.
Sure Rick I mean, we feel like we will see and are seeing some sequential improvement from Q1 to Q2, obviously our business is a stronger H two performer.
And noting that and kind of the way that you know the I think about it as kind of we're seeing and the respiratory health as expected our digestive health business is pretty consistent.
And the international as we talked about earlier on the call also starting off of strong and performing well and we are seeing improvement and the arguing business, but faster improvement in the and the interventional pain.
Business, because it's in the hospital outpatient department and.
And so things are headed and the right direction, but clearly we do think there'll be much stronger even and H two.
And remember it too just from a comparable standpoint on Q and cool equal both have very attractive comparable versus last year's second quarter. So those will be good numbers sequentially. The OTA. Joe mentioned, we are starting to see some nice improvement there as well which is good and then also recall the.
The flipside is that our restaurant business in particular of closed suction catheters had a very strong <unk> and Q3 last year. So those will be much tougher comps.
As you know at the beginning of the pandemic last year.
Gotcha and <unk> specifically so.
And just depreciating the.
And hospital aspect and as you've emphasized.
We should see better on Q and the second quarter because of the recovery trends you're already seeing is that right, yes, yes.
Yes, that's correct and you know one of the ways that we sort of evaluated that and I think investors can evaluate it is.
As of orthopedic procedures in the hospital versus the S. C come back at that level were somewhat in line with that.
Okay.
And I wanted to come back to the your <unk>.
M&A pipeline comments, Joe from sort of two.
Two aspects the.
I mean, it's always intriguing.
You know and you're very clear about your robust pipeline and just as an outside of them always at the mall.
I'm always fascinated.
What and.
And I know, it's hobbies and I appreciate it's very complex.
Price willingness to sell timing all sorts of things go into it but how.
Help us understand why you havent moved even faster.
Is it something internal.
I have noticed right now that you waited until you just felt better about recovery or.
Whenever I T systems or people or was it that or is it.
Have valuations been too high and I'm, just trying to understand what might released the floodgates, which could potentially be very exciting.
And in terms of potential growth and the leverage and I'll book.
Yeah, it's more of our disciplined approach and why.
Waiting for the pandemic to subside and obviously, we had some other execution issues that we've been highly focused on and really really told our investors. That's where we would be focused I think we've delivered that sort of let's call. It over the last six quarters, but now are in high gear, we're talking to a couple of different potential.
Potential targets.
And and and in terms of valuation and that's not been a hold back for us because we are.
Hanging around the same kind of places that we have them of private equity with a privately owned businesses and areas that we want to participate that would enhance our business and.
And be accretive where we're not having to look at the kind of multiples that you see and some of the deal. So I think we're going to come forward with when we do come forward with deals you know with good value of white.
They've been doing and the path.
Got you and just to follow up on that.
So we should be.
Cautiously hopeful optimistic that the.
So you could get one or more of these across the finish line this year and that too much helpful.
Thanks, Darren and I was not too much you mean and you can never predict these I'd love to do too, but we really are pushing hard to do one for sure and and we'll see where we land and we've got a good track record. So we'll see what really and at the end of the year.
That's great. Thank you again.
Thank you.
The next question comes from Morris <unk> with Morgan Stanley. Please go ahead.
Hi, good morning, and thanks for taking the platform I'm sorry, the to go back to gross margins and I, just want and Paul push a little further on the transportation impact it seems like.
Cogs this quite a lot of about 8 million higher than consensus estimates what was that relative impact and of the transportation at the M. Ed.
And kind of relative to about 8 million total hydrocarbon and was there anything else and and.
The next like COVID-19 overhead expense.
Lingering from the Osteo.
And any other kind of onetime impacts of that you would call out and thank you very much.
And Michael is going to talk about this a little bit and then I just wanted to make a comment about the <unk>. The positive side of this but go ahead, yeah. So about a third of that Marissa the 8 million of if youre looking in absolute dollars.
Related to.
Related to Neilmed, another third or so related to the revaluation.
And that we had for the manufacturing variances and.
And then we had a little bit of that price impact that you just talked about with Matt's question. So that was that was the if you'll lay out and then there was some nits and nats, but those of the three primary chunks of that $8 million higher up from a cogs absolute value standpoint.
And just on the on the wire side of it and I think it's the right thing to do if you can imagine the ports in California on interest rates.
And out of China things going on on the supply chain. These prices are crazy right now, but we have converted ahead of our expectations and the image customers and this will be of pay off on the second half and then in 2000 and till two so doing that I think is the right thing to do for for more sustainable growth and the business, but obviously not happy about the price of that transportation we may.
Have a little bit more of it not quite as much and Q2, but should absolutely subside and the second half.
Okay, Great and my one follow up would just be on Cooley.
And you touched on this but.
Can you give us any more detail on how the Kruif growth has improved into April relative to the strong growth that you saw in March and is.
That more driven by growth and new accounts are more of a reacceleration in the existing accounts.
Thank you Pat and thank you very good at it.
Most of it yes, it's actually accelerated from March into April. So, we're seeing that continue and we did sell of number of of capital consoles and even last year. During the pandemic. So there are new accounts are coming in with the with our new technology, but even new customers, but as you can imagine there's also a bad.
Logs of.
Spine and then osteoarthritis of the knee patients are coming through so it's really two things and then obviously, we have some easy parables, but just generally a we've done well with the with new customers as well.
Right.
I think we're ready for the next question.
As a reminder, if you have a question. Please press Star then one.
Our next question comes from Chris Cooley with Stephens. Please go ahead.
Yeah.
Yeah.
Okay.
Okay.
Mr. <unk>. Your line is open and you may ask your question.
Thank you.
I apologize.
Congratulations on solid quarter.
Sure.
Just two quick ones at this point from the first.
And the respective.
Talk about your from the surface.
And about the transit.
And so.
On a year.
All of that commentary.
Some of the dominantly licensing.
And so.
Yes.
And obviously.
The strength now.
And just.
Thanks.
On it.
The follow up question.
The picture.
And we think about.
And the targets longer term.
Couple of snakes.
Talked about 60% gross margin.
And.
Striking distance of pricing power.
Yes.
And realize greater operating efficiencies.
The construction.
The steps now.
On the margin cash flow.
The source.
And.
Youre not giving guidance yet.
Just thinking about conceptually.
The chart.
You would have a greater operating efficiencies, especially with the Newmar team.
Systems.
And I think about op margin and cash flow of longer terms.
Thanks, Chris and I'll say, a couple of things of that on Q and then let Michael.
Talk about some of the margin elements and the cash flow and some things that we are excited about.
But generally with respect to on Q.
And we're happy with the following things one litres continues to be growing at a significant rate, we're adding new customers as a percentage wise of the business that you know we had managed under of Ellen for many of them as you know, we're actually approaching that same level now.
We are getting growth out of the summit and the electronic pump and starting to see that that can be beneficial to us for customers that want that solution versus the last of merit.
Pump and we're very excited about the of the orthopedic channel partners that we're putting in place where again a greater portion of on Q is used there and and are looking to sign up more of those relationships over time. So I think we're headed in the right direction and I think to the extent of electives come back of the hospital faster that'll be a plus for us.
And then Michael did you want and you can talk about the yeah just longer term on the margins we've talked about on the call. The that we've had three quarters in a row now where SG&A as being.
30%.
We believe that ultimately that is where we should live longer term and that being said and the back half of the year, we may have some spend and.
And selling and marketing that we think of smart for longer term revenue opportunities and so we may see of Q3 of Q4, where SG&A is a little bit higher than.
And the high thirties, and similar to gross margin.
Where we've had some of these temporal things that we've talked about we've got 500 plus basis points of a tailwind going into the back half of the year for these temporary things. So we do anticipate seeing the Q3 of our Q4 and maybe in both quarters being greater than 60%. So these pieces have and all fit together perfectly yet Chris but you can see.
How we can get there in these various pieces as operating expenses as well as gross margins and how that lends itself to wherever you want to take ultimately our EBITDA and operating margins longer term to your question around could we be even better than that given some of the efficiencies that we're building into the organization I think with M&A.
And as well as continuing to learn over the next few quarters around where some of the key smart spend is.
There is marginal opportunity.
To have margins, probably higher than what we've talked about previously, but we'll lay that out and a more holistic view as Joe mentioned in the fall when we issue a new three of our three year <unk>.
Thank you very much.
Thank you.
This concludes our question and the answer session I would like to turn the conference back over to Joe Woody.
Oh for any closing remarks.
Thank you and I just want to thank everybody for your.
Your continued interest and avenues, and while we're executing well and an uncertain environment, we are committed to creating shareholder value I'm confident the priorities that we detailed today.
Combined with our portfolio of attractive markets ran do position us for sales growth margin expansion and positive free cash flow and 2021 and so I look forward to continuing to report that out throughout the year. Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.