Good day, and welcome to the Avanos Third Quarter Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, today's event is being recorded.

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 Avanos third quarter earnings conference call. With me this morning are Joe Woody, CEO; and Michael Greiner, Senior Vice President and CFO. Joe will begin with an update on our business and the progress we’ve made against our 2020 priorities.

Then Michael will review our third quarter results. We'll finish the call with Q&A. A presentation for today's call is available on Investors section of our website at avanos.com. As a reminder, our comments today contain forward-looking statements related to the company, our expected performance, economic conditions and our industry.

No assurance can be given as to 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 SEC.

Additionally, we'll be referring to adjusted results and outlook. The press release has information on these adjustments and reconciliations to comparable GAAP financial measures. Now I'll turn the call over to Joe..

Thanks Dave. Good morning, everyone. And thank you for your interest in Avanos. As we look to build upon our momentum and deliver a strong finish to 2020, I continue to be pleased with our team's strategic execution during this challenging time and commitment in living out our mission of 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 and executing their roles to the highest standards. As the uncertainty of this virus persists, we remain steadfast on our three priorities I previously highlighted.

First, maintaining the health and safety of our employees and their families. Second, ensuring our clinically-proven Respiratory Health products used to treat COVID-19 patients remain available to customers.

And third, preserving our strong financial position and ensuring we're well-positioned for future growth while continuing to meet the needs of our customers. During the past two quarters, we've 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 enabled us to produce our clinically preferred products while ensuring our employees remain safe. The new production line in our Tucson facility has increased the supply of our high volume Respiratory Health codes and reduced our backorder position.

Also while we begin to really accelerate investment in our growth priorities during the third quarter, our teams continue to find savings and manage discretionary spending to preserve our strong financial position. We remain on target to realize the approximately $12 million of 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 lower revenue caused by the pandemic. Finally, our unusual costs for the first nine months of the year have decreased nearly $60 million compared to the prior year, enabling us 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 in the post-COVID 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 $0.21 of adjusted diluted earnings per share.

We continue to deliver strong sales growth across our Chronic Care franchise. In Respiratory Health, we again saw robust demand for our portfolio of clinically-proven closed suction catheters, which are essential in treating COVID-19 patients.

Although, the use of ventilation to treat patients has slowed, our additional capacity aided sales as well as reduced our backorder. In Digestive Health demand for legacy MIC-KEY feeding tubes returned to more normalized levels. Highlighting the quarter was double-digit growth across both our CORPAK and NeoMed portfolios.

Similar to last quarter, we saw a monthly sequential increase in U.S. elective procedures in both Interventional and Acute Pain. For COOLIEF and ON-Q, which are primarily used in the hospital setting, procedures are rebounding to almost 90% of their pre-COVID-19 levels.

While we expect to see some further strengthening in the fourth quarter, we continue to believe it will be sometime in 2021 before U.S. hospital procedure volume returns to pre-COVID 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.

Our responding to the impact of the pandemic is top of mind, we remain equally focused on moving forward our long-term strategy and priorities that we presented at the start of the year. Let me highlight some of our progress. First, we remain committed to implementing the necessary steps to build sales momentum across our franchises.

To maximize the full potential of our Pain Management franchise, we have hired Bill Haydon to lead our new One Pain franchise that combines our Interventional and Acute Pain teams.

Bill brings more than 25 years of healthcare experience and has held various positions in strategy, marketing, commercialization, innovation, M&A, strategy development and execution.

The deep experience, knowledge and leadership in MedTech will prove beneficial as we spearhead our global strategy to support transformation and growth across Interventional 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 InnovaSurgical, 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 enlarge the scope and scale of our Acute Pain’s 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 Leiters partnership continues to pay dividends as we once again saw sequential double-digit growth in new customers and had the highest quarter of ON-Q sales through Leiters.

In Interventional Pain, we continue building the compendium of clinical research for COOLIEF to demonstrate its efficacy and economic advantages as well as differentiated from other prevalent therapies in the market.

Recently, the Journal of Bone and Joint Surgery published a large randomized multi-center clinical trial demonstrating the superiority of COOLIEF to hyaluronic acid for the management of knee pain caused by osteoarthritis. The results showed tremendous consistency in response when compared to previously published trial data on COOLIEF.

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 into FUSMobile. This compliments our Pain Management franchise, as FUSMobile mobile develops novel, non-invasive ablation procedures, utilizing high intensity focused ultrasound technology.

With the year end approaching, we are nearing completion of two of our other key priorities integrating our recent acquisitions and gaining efficiencies from our new IT system. At the end of October, we closed the 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 continue to implement strategic cost containment measures that help improve our cash flow for the quarter. And there 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 our building momentum as we close the year.

Now I'll turn the call over to Michael..

Thanks, Joe. Let me also stay healthy as I am with our team's continuous commitment and strong execution during these challenging times. The unpredictability of the coronavirus remains, as we once again are seeing an increase in the number of infections across the United States and shut downs in Europe.

Given this continued uncertainty, we will continue to not provide full year 2020 financial guidance. However, as I looked 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. And we look to maintain this momentum into 2021.

We remain confident in our ability to maintain our strong liquidity position. And as Joe mentioned, we are steadfast in our focus to execute the necessarily cost savings, drive working capital efficiencies and exercise discipline capital spending. Since the end of the quarter, we've implemented two 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 in the CARES act to generate refunds in excess of $50 million. We currently plan to receive these refunds throughout 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 a 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 is a backdrop, I'll now review our third quarter results. Overall, sales for the quarter increased 80% to $186 million compared to last year.

Chronic care sales grew 22% to $119 million driven by strong demand across both our respiratory and digestive health brands. In respiratory health, we again saw enhanced demand for closed suction catheters and oral care products used to treat COVID-19 patients.

As Joe mentioned, our efforts in increasing our manufacturing capacity enabled us to work down the backlog that accumulated during the early months of the pandemic, As we looked 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 normalize levels.

In digestive health, we saw our legacy MIC-KEY products, branded products returned to normal growth driven by the return of initial placement procedures that had been postponed in the second quarter, along with patients returning to a more standardized tube replacement regimen.

Additionally, we saw double-digit growth in our CORPAK portfolio resulting from pandemic related demand. We also saw double-digit growth in NeoMed, as we accelerated conversions to our ENFit technology. Moving to pain management, sales grew 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 remains some hesitation from patients to have elective procedures.

Moreover, the protocols around preventing transmission of the virus have decreased procedural efficiency and reduced the flexibility to substitute a new patient, when a patient canceled the procedure after becoming infected or potentially infected with the virus.

Looking ahead, the fourth quarter has traditionally been the strongest quarter for our pain management franchise. However, this year we are not anticipating the typical seasonal uplift due to three external factors arising from the pandemic.

First, some patients continue to have an unwillingness to go into doctor's offices and hospitals to undergo medical procedures. Second, higher unemployment in the U.S. is leaving more potential patients uninsured. And third, patient’s inability to reach their high insurance deductibles.

By these factors, we continue to meet patients need for effective opioid sparing, pain management therapies and are committed to returning this franchise to growth and improving its profitability.

Moving 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 an excellent underlying execution and the trajectory of our international business is strong as we moved forward. Moving now to income statement, adjusted gross margin decreased to 55% compared to 57% last year.

Contraction was mainly due to continued unfavorable sales mix, costs incurred related to the pandemic and the write down of slower moving and obsolete inventory and raw materials in the third quarter.

The latter two is transitory and believe over time as we were gained 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 team's 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 resumed some of 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 total $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 $0.21 of adjusted earnings per share, ahead of our occupations driven by the acceleration of elective procedures and 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 customer's needs.

We are building credibility with each of our constituents through consistent delivery of meeting our patients and customers needs, which results in 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. [Operator Instructions] Today’s first question comes from Larry Keusch with Raymond James. Please go ahead..

Thanks. Good morning everyone. Hey Joe, maybe just to start off, could you – you alluded to some of this, but I just wanted to sort of get your updated thoughts.

How are you thinking about the algorithm for growth, after we get past the throws here at the COVID pandemic?.

Hey Larry, good morning. We've said on the last call and still believe that 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.

And I think obviously with this quarter, we're seeing elements of that, I'm sure we'll break it down at some point for somebody who wants to get into that, but we're confident in that 4% to 6% organic growth..

Larry, we do anticipate that our margin expansion, our free cash flow growth, our EBITDA margins will all far accelerate that 4% to 6% top line growth..

Okay. Got you. And then just two other quick ones for you here. Again, Joe, back to you, just on the new leadership within the pain franchise again, you talked about some of the opportunities in there.

I was wondering if you could just dig in a little bit more and kind of help us understand, what do you see as drivers for that business, as you have one leadership team there? And talk a 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 flat-ish with the third quarter..

Yes. So I'll take the first question on Bill. Bill Haydon joins us with a great amount of experience, primarily in the cardiac space, but a lot of work with KOLs innovation, portfolio management and strategic development.

And we really believe that he can enhance our strategic marketing, our portfolio and innovation and sort of an acceleration if you will of the growth in that area of both businesses despite some of the past challenges that we've had in business.

Generally as well, he can bring together both of the franchises and we think there will be efficiencies there within the organizations, as well as some of the back office areas that serve that organization.

So essentially, we're actually very excited about him and his ability to kind of enhance the 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 on Q4..

Yes. So Larry, I think your read on that being flattish to Q3 sequentially is right. We had a lot of backlog in RH into the second and third quarter as the pandemic really took off, we fulfilled much of that backlog, so we have a little bit to work through.

And then we anticipate that Q4 will be down a little bit, given some of the headwinds we talked about around RH, maybe flu season being a little bit less than past flu season, given what we've seen in the Southern Hemisphere. And so that may be a little bit of a flattish to back.

Pain continues to sequentially improve, sorry about that – sequentially improved. But as we talked about back in the second quarter results, we don't anticipate any 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-ish where we are now to 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 is that the uplift that you typically see in pains and it was sort of like a 15% in some years, based upon insurance coverage and unemployment.

We don't think we'll see that this year, we may see some of it, 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 Berenberg 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 Dave, Hi Mike. Just quickly on the ON-Q business.

Just curious how to think about this business as some of the procedures have been coming back? I don't know if I've calibrated my model, right, but it does look like there was a sequential at least volume step up for this business compared to 2Q, 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 help kind of parse out some of the puts and takes in the margin there that may have impacted? And then maybe my second one, if I had just asked upfront. I think the SG&A control here is a lot better than we had modeled, at least.

If you could just maybe help us understand, how much of the restructuring can come through and how much of the kind of the benefits you're seeing are “permanent” once COVID normalizes? Thanks..

Yes, no problem, Ravi. What I'll do is, I'll take the ON-Q and then we may as well with Michael and I both together talk a little bit about SG&A and just gross margin since you've raised it.

But essentially on ON-Q you're right, we saw sequential improvement better than anticipated, 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 on Q2, so we've definitely seen that improvement.

And again in Q4, I think Michael outlined that nicely, but we expect some sequential improvement to continue, I think what we've said with this, both of those businesses is that, it's 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 Michael wants to make a comment or two on that.

But generally what we're experiencing in the business is the mix with respiratory health and really its closed suction catheters and oral care.

So it's both of those, and there's essentially costs that you're seeing associated with the manufacturing organization and supply chain in protecting our vulnerable Mexican employees where we're actually maintaining the payroll where we have sort of subs, if you will in place during that period, some other things I think Michael wants to talk about, and he'll probably comment on SG&A as well..

Yes. Great, absolutely. So the mix of the biggest piece is as just Joe mentioned, and that's why we said in our prepared remarks that we continue to see that as a headwind going in 2021, until we get 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 pandemic. So from a healthcare standpoint, we feel great about our ability to meet those demands. And then Joe also mentioned the COVID related expenses.

There's two pieces there, there's one, just the protection within the manufacturing plant itself. And then as Joe mentioned, there is also folks in Mexico that are not coming to work because they are considered vulnerable as defined by the local government. And we're bringing in extra bodies in order to meet those labor requirements.

But we're paying both sets of employees right now. So that'll obviously work down over time and believe that is transitory with some of the COVID protection things in plan probably remaining for the foreseeable future. And then finally we had some write-offs. On the cusp of the pandemic, we talked about this way back a couple of quarters ago.

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 sold more. And so we wrote-off about $1 million more in inventory in Q3 this year versus Q3 last year.

So again, some of these things are transitory, some I think will stay with us for some period of time. But we still feel really good about what our gross margin profile will be able to grow into over the next couple of years.

On SG&A, we're very pleased with the work we've done as an organization on the cost side, both the plans savings coming into the year which we've continued to execute on, as well as $20 million plus and additional cost savings we've removed as a result of COVID.

Some of the things fairly easy, we're not traveling, so obviously we don't have those expenses. Other choices were a little bit more difficult to make like postponing, merit increases and things around human capital, backfills and those things. We are in the planning process right now, as most other companies going into 2021.

And we’re looking to permanently have those costs savings in place going forward as much as possible.

And so we don't have any news to make today per se on that other than we feel that we did the right things throughout this year from a pandemic, but also believe we looked at new ways to run the business by taking those costs out and wants to make some of those cost savings permanent going into 2021 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/improvement, et cetera. Let me start with – and I know you're – I apologize in advance. Help us think about 2021. I appreciate this is an awkward question and a tough time to do it. And I know about, we all know about healthy uncertainties out there.

But just as I reflect on it, I just – after seeing the numbers, just thinking it over, I started saying myself, you've been running at sort of this 185, 190 per quarter rate, third quarter fourth quarter. Again, I appreciate different moving pieces in there.

But is there any reason we shouldn't sort of take that second half run rate? And when we think about 2021 international growing double-digits, you're launching new products, you're executing better, you've got these partnerships, things gradually truing to the backlog.

Why wouldn't we just – even as a starting point take that second half run rates and figure you could get in the plus or minus in the middle of a range 750 as a starting point for next year, i.e., you’re going to grow over what you did in 2019 to put up a bottom line on it.

Is that right? Am I directionally, roughly, approximately thinking about this correctly? Thank you..

All right, Rick. I'll see what I can do to give you some direction, but obviously we're not giving guidance for 2021, not even really for Q4. And I think if I – as I looked through the transcripts, even myself, I could sort of see that it's what we're all dealing with, which is the complexity, the duration and longevity of the pandemic.

And now we're kind of in this rise, keeping our eyes peeled on Europe. And then also we're now seeing the rise in the U.S.

And so how does that impact, as to give you a specific example, even in sort of the down phase in the late summer, there are still hospitals that don't do – maybe they do what the – procedures, three days a week versus five or six on a normal basis, and it's just hard to gate.

Now that said, the reason that we've said that we have a 4% to 6% organic growth business is, because we really believe it. And it's 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 of June himself here.

As you definitely going to have a year, where respiratory, I think we've done a great job managing it. But in this quarter alone, as an example, we had sort of a $7 million to $8 million benefit from COVID with respiratory health.

Digestive health should remain mid single-digit, we believe we can get back to a high single-digit for the total pain business and then international business is looking like it really can stand to form on the mid single-digits.

So we are confident in the business, but unable really to give a forecast of what that may look like, because so many uncertainties.

Michael, do you want to add to that?.

Yes. I was really with all that Joe. The other thing I would add is, you mentioned Rick 2019, yes, we absolutely will grow meaningfully against 2019 in that mid single-digit range. More importantly, when you look at 2019, you'll see attractive margin expansion particularly around operating margins, EBITDA margins and free cash flow generation.

If you 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’s refunds, we're going to have a meaningful 10 of millions of free cash flow.

And then you could add on top of that, the expected read from the CARES act, so a lot of really great metrics above and beyond just the top line growth that we're going to demonstrate in 2021..

Yes. That's great. Impossible questions, but thank you for tackling it. And Michael, I did want to better understand your comments about cash. That all sounds very encouraging. And could you help me just better understand the addition and subtraction? So the end of the quarter, I'm not looking at like $180 million in cash.

You paid down the notes, so you have greater than a $100 million, now you're going to get back. Did I understand correctly over the next 12 months, the 50, you're going to generate 10s of millions in free cash. So net-net, all things equal, you really could end – 12 months now you could be back sort of where you were prepaying the notes down.

Am I in the approximate territory, they're thinking about it?.

Yes. Assuming we get those refunds back next year, as we anticipate, we filed everything timely. We have no reason to believe that there would be any sort of push to not get those from the IRS, but obviously working with a government agency, you're a little bit out there when there.

But assuming we get those back, which range from $60 million to $70 million in total, you're absolutely right with your math on where cash – end of your cash position would be next year..

And I think that puts us back Rick to eventually its 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 the things, just to Joe's point, one of the reasons why we felt – we looked at a variety of different things to do as the debt was coming callable. One of the reasons why we felt strongly about paying it down was as we look at the M&A landscape right now, we are still looking very much at tuck-in.

We're very focused on our execution of the acquisitions we've done, integrating them as we finished up this year, which has been great, using our systems to be able to do that.

And we're still want to be active in the M&A landscape, but again, more on the bolt-on tuck-in, the capacity we have available with the remaining revolver and the cash we have on the balance sheet is sufficient for the things that we're looking at.

We get an extra 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 screen right now, which is why we felt paying down the debt and saving the interest expense was the prudent thing to do in this moment in time..

Great. I have one last quicker one. Just for you Michael or – but Joe, feel free to chime in obviously. The new IT system, major milestone that it's all installed by the end of this year, just help us think through concretely the impact and both operationally, executionally, financially. I mean, is it may help us measure what that's going to mean.

I appreciate that it's really great to have and that's going to make a difference..

On a quantitative level the way to measure it is our ability to do integrations through acquisitions like NeoMed, right, and be able to do them, Game Ready in a way which allows us to reduce our SG&A needs, our support needs. And so there's just $1 savings that come from that. So that's one quantitative way.

The other way is if you think about our One Pain franchise that we just talked about. Combining those two franchises is fairly seamless within a one system approach. And then the other thing, which is a little bit tougher to put your quantitative on, but definitely has an impact is 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.com within an overall SAP environment? Those are things which make us more efficient, allow us to ask better questions, get a customer needs better.

But it's hard to quantify those things at any given moment. Over time, what that should allow us to do is sustain this mid single-digit growth fairly easily. The ones that you can put dollars around are 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 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..

Hey, Chris, good morning..

Hey, good morning. And thanks for taking the questions. Congratulations on a really solid quarter..

Thank you..

Just from the – I was hoping you could put a little bit finer bead on the One Pain initiative. Appreciate the new management there and the heightened focus, but those are desperate call points. So I just want to make sure I fully understand what you're trying to convey here. There's maybe some consolidation in administrative and maybe back office.

So that's a drive synergy, but are there synergies from the sales side as well? Maybe when you approach it the system, I'm just trying to better understand where you think you see the uplifts both from a cost and from a growth perspective on One Pain and then I've got a quick follow-up..

Yes, Chris. Generally the way to think about that is expansion of channels like we noted in the prepared remarks and we talked about InnovaSurgical and working with them and you're 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. And I think also on the strategic side, what we ultimately want to do in our business is the franchises get more of their functional areas into the businesses.

And so there's an opportunity there as well on the synergy side. So things like BD and strategy really end up with two big business leaders that are managing all that whole component instead of sort of disparate functional areas. And in that I think it's going to do two things. I think it's going to accelerate growth for us.

And I also think that over time, there will be synergistic opportunities for sure that at a later date we'll be prepared to talk about. And I think you had a follow-up..

Thank you. I just appreciate that color. And then just maybe if you could give us an update on COOLIEF and more specifically, how you're doing there in terms of your cloud efforts versus traditional RF.

I know COVID-19 delayed that a little bit, but maybe just help us kind of reassess our thinking there in terms of timing and maybe what you can do here in the interim to accelerate growth in this environment when some patients don't want to go to the traditional [indiscernible] setting. Thanks so much..

Yes. We're pretty pleased with the return that we've seen in that business. I think a little earlier in the call, we talked about being ahead of what we have anticipated. Most of what we're doing is in the HOPD part of the hospital.

And the clinical studies, we just had the published clinical study in Bone and Joint, talking about the HA versus COOLIEF and better pain relief on the pain scale six months of pain-free. And we've got studies that obviously are looking at longer duration of pain-free. We believe that the technology holds that capability.

What we're doing at the moment is really focusing heavily on the expansion of our existing accounts across the spine, and of course, new OA coming in and how to partner with our sites on increasing their throughput. And we really believe that there's a good runway there.

The other thing that we're doing is working not only on longer term, which I think is a catalyst for ambulatory surgical center reimbursement, but the day-to-day coverage, even the spine and now OA of the knee being a new treatment of a 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..

Just real quick, Chris, I think you guys obviously generally are aware of this, but as we look at the planning horizon in the 2021 and then even beyond. That 4% to 6% top line growth that Joe and I referenced does not include any M&A, and doesn't include things like what could happen given a favorable COOLIEF reimbursement situation.

Those are things that would be, to the extent those would be positive outcomes and we believe they would be, those will be above and beyond that 4% to 6% that we're currently looking at..

Yes. It’s a good point..

Thank you. And our next question today comes from Matthew Mishan with KeyBanc. Please go ahead..

Hey, Matt..

Hi, good morning, guys and really nice quarter. I just want to start off with the trajectory of the recovery in Pain Management. I think back in July or early August, last quarter, you guys were indicating it was about 75% back to pre-COVID levels.

I think where you finished up the quarter would imply significant improvement from there and kind of how that – kind of how that improvement moved into October, would be really helpful..

Yes. So a couple of things, just to start with – we were about 75% elective procedures in Q2. We did say to the extent that improved greater than the 75% we would benefit. And we clearly did, it was more like 90% of our overarching business in the quarter.

And we were pleased with Acute Pain with things like largest sales ever in Leiters, the benefits of the educations that we did online during sort of the earlier parts of the pandemic. And then I was just talking about COOLIEF and we're seeing even a faster, somewhat recovery on the COOLIEF side. Generally in October, we've seen more progression.

That said, we're watching the cases, the sort of the unknown in Europe and in the U.S. And in terms of pain though, we are initially seeing some further progression in October..

Okay. Go ahead, Michael..

I'd just say – 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 a little bit of time in 2021. So even with the good progression that Joe's talking about, maybe that feels more like 95% as we exit Q4, but not 100%. .

And equally it could stay where it is. So, I mean, I think everybody dealing with that, right. Everyone is dealing with the complexity of the unknown, but generally, to Michael's point, we've been happy with our progression..

Okay. So basically, you aren't seeing anything changing in the underlying environment.

You're just cautious around the broader macro and which makes sense, given all the uncertainty?.

Correct..

Okay..

In the second quarter range, we feel like we're capturing all of what is appropriate for us to capture. Our percentages coming out in second quarter seem to differ with maybe some of our peers, but we didn't think it was an indication back then. And we still don't that we're missing anything.

It just could be the procedures that our products are relevant for may have come back in a different cadence than other procedures..

All right. Excellent.

I mean, you've had a couple of quarters now where you’ve had Summit, just curious, kind of the early take on Summit 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. Over time, we've talked about innovating too, 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 pump segment between our install base 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 IT system and changing out some of the distributor relationships. It's smaller portion of the business at the moment, but over time can be a real help to the overarching growth..

Right. And then lastly, you see some other companies pull triggers on acquisitions recently.

It makes sense that you guys are going to wait a little bit for something larger, but what does the pipeline look? Are you happy with what you're seeing kind of build in your pipeline of potential targets?.

Yes. 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, a work that we did, we've not lost contact with our targets. We're still in contact with them.

And then just sort of a side note, we’re doing the FUSMobile deal, we're still active and out there I'll be in the virtual world. We sort of feel like that the second half of 2021 will start to get a little bit more active, but we've also said in the last call.

And I'll say it again, if something became available that looked attractive and with evaluation, it's not that we would – we're absolutely a stand still and don't think that we could conduct a transaction, if we need to.

And personally, I do think that that M&A in our industry anyway is going to start to move up a little bit in the second half of 2021. I do think a lot of folks are going to, you're kind of watching this uptick right now to see what this actually means that going forward. But we'll definitely pick up in the second half of 2021..

Just want to hone in on one thing Joe mentioned is, there's plenty of stuff for us to look at. But you talked about valuation. Valuations have remained incredibly buoyant. And so it's just made us wrapping our heads around actually executing on something a little bit difficult because of where valuations remain. So we like our pipeline.

We like effective 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..

Thank you, Matt..

[Operator Instructions] Our next question today comes from David Lewis with 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 Michael, question on margins.

But Joe, just thinking of the changes that were sort of made intra-quarter so it's still kind of, Pain Management, I wonder if you think about that franchise today, both in the Acute and the Interventional side.

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?.

Yes, we believe that we can add products in and around the call points, so where we are in expansion, that's why we put our investment into FUSMobile, which is a different way to approach a sort of Interventional Pain. And they're starting with the lower back.

So over time you can definitely strategically see us put bolt-ons or other acquisitions in that business. So we definitely feel like this is a portfolio approach and approach that Bill's going to work out on everything that we bring to the customer.

And there's been as you're probably aware kind of a little bit more of a heavier focus on the orthopedic because so much of the Acute Pain business is orthopedic, we're now starting to move into that.

In Interventional Pain, we kind of made a foray with Game Ready, but it's really everything that happens with that patient in terms of their Pain Management from beginning to end, is what you could think that we're thinking about in terms of either expanding from the inside or looking at acquisition..

Okay. And just Michael, just want to come back to 2021 on margins here for a second.

Can you give a lot of commentary on margins here sort of near and intermediate term, but as I think about 2021 these mix-driven dynamics, are they going to extend into 2021, basically more bluntly asking, is it better to think about 2021 gross margins being down over 2019 based on this mix-driven benefit? And as you think about sort of the cost oriented plans, how do you think about operating margins in 2021 versus 2019? Thanks so much..

The sequential improvements we'll see in operating margins from 2019 and 2021 are going to come from SG&A reduction in spend because to your point, gross margins will be at best flat to likely down. And so your math there is very accurate..

All right, thanks so much..

Thank you, David..

And everyone, this concludes our question-and-answer session. I'd like to turn the conference back over to Joe Woody for final remarks..

Thank you. I'd like to thank everyone obviously for your continued interest in Avanos. And while we continue to execute well in the face of these near-term challenges, we're also taking strategic steps that strengthen the foundation of the business and I think you heard that.

I'm confident these steps are combined with our market-leading portfolio and the attractive markets we operate in and position us for sales growth, margin expansion, and positive free cash flow in 2021 and beyond.

Also I will present at the Stifel Virtual Healthcare Conference in November 18 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 website, avanos.com. Thank you..

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..