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

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

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

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

We will now begin the question-and-answer session. The first question comes from Larry Keusch with Raymond James. Please go ahead.

Thanks. Good morning, everyone, and I appreciate you taking the questions. Joe, to start, I have a question for you. You've mentioned some of this in your prepared remarks, but I would like to understand the strategic goals for the pain business. Additionally, how should we view the expansion in that portfolio? For instance, you were recognized as an FDA innovation challenge winner; could you provide an update on that product? How should we consider Leiters in this context? Lastly, what is the best way to think about the anticipated longer-term normalized growth of the franchise?

Thank you, Larry. I’ll take that. I believe you have another question for Michael as well. To begin, we have now integrated Acute Pain and Interventional Pain. Starting with COOLIEF, we’ve been seeing consistent double-digit growth, even reaching 20% in Q1 of 2020. Our main goal is to increase our outreach to knee osteoarthritis patients and enhance physician usage through our ongoing clinical studies, while also improving reimbursement options. We have made progress in that area with ambulatory surgical centers, and we are also working on orthopedic reimbursement. The clinical studies are expected to be published in peer-reviewed journals in 2022, which should bring some significant changes to that business. We’re quite optimistic about it. Regarding Leiters, we just had our highest sales quarter to date, with most customers returning from Avella and PharMEDium. We’ve focused significantly on educating our Acute Pain customers through various forums, including webcasts. We’re pleased with the growth we’re seeing from the Summit product and the improvements in our channel partnerships. Despite the challenges posed by the pandemic, we’ve been encouraged by the ON-Q product, which is mainly used for patients with extended hospital stays and those undergoing elective surgeries. We’re satisfied with the strategic and tactical advancements in both areas, and there have been some positive findings shared in medical journals about long-lasting anesthetics, which gives us a chance to present our products as better economic options. Overall, as we navigate through the elective surgeries, we anticipate continued progress in that business and feel confident about it. I'll stop there, and I believe you have another question for Michael.

Yes, I did. Thanks for that, Joe. Michael, there's significant attention on your operating expenses for 2021, and you shared some insights on that. Could you elaborate on the cost savings you achieved in 2020? You mentioned that some of those savings would be reversed. How much of that will come back and what factors are influencing this? Additionally, how should we understand the two aspects of the cost savings: those linked to the initial long-range plan and those from the new restructuring program? I'm trying to clarify these details.

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

Okay. Terrific. Thanks so much. Appreciate it.

Thanks, Larry.

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

Hi. Good morning. Thank you for the opportunity to ask questions. I have a couple of inquiries primarily for Mike. I would like more details about the gross margin improvement you mentioned for the mid-term throughout the year and what factors are contributing to that. It seems like it might be more about a shift in mix than anything else. Additionally, I have a specific question for both Joe and Mike regarding any potential supply or production challenges due to the recent cold weather in the Midwest. I'm curious if your plants, especially in the maquiladoras, were impacted or if there are any considerations we should be aware of. Thank you.

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

I completely agree, Joe. The main factor affecting our gross margin in the third and fourth quarters is the mix shift. Interestingly, the mix shift in the fourth quarter was caused by different products compared to the third quarter. Respiratory sales continue to perform well, and while we've seen a strong recovery in elective procedures related to pain in the latter half of the year, they are still not at the full levels we would expect as a baseline. As we move into 2021, we anticipate a positive impact of around 200 basis points on our gross margin. We also faced significant write-offs related to COVID in the third and fourth quarters, nearly double the usual amount for a year. We expect 2021 to be more normalized. Additionally, there have been expenses linked to COVID for vulnerable employees, some of which will continue, but many have now become embedded costs, like those related to spacing and cafeteria changes that we will not incur again. We also had a small adjustment regarding transfer pricing with our Mexico plant, which accounted for about 60 basis points, but this was a one-time correction that won’t happen again in 2021. Altogether, when considering these one-time factors and the improved mix, we can see how we may align more closely with figures between our end of 2019 and end of 2020. In 2019, our gross margin was 59.7%, while for 2020 it dropped to 56.5%. We believe we'll settle somewhere in between for 2021.

The only thing I would add is that the mix accounted for about a third of the impact. In Q4, we saw increased sales in respiratory and more oral care and IV infusion for acute pain, which are among our lowest categories. What Michael is pointing out is that we are very focused on improving our gross margin. We have some COVID-related issues and mix challenges along with certain one-time factors that are currently making our position appear worse, but we are committed to making improvements as we move into 2021. Apologies, it seems you have another question.

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

Yeah.

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

I will start by addressing the last question. I believe we are closer to the conditions of 2019, but not entirely in the middle. We have some favorable trends leading into 2021. Regarding your first question, our current assets, combined with the cost savings we are implementing and our focus on efficiency, should enable us to achieve gross margins exceeding 60% in the future. However, to reach the mid-60% range, we would need to adjust our portfolio, potentially through mergers and acquisitions or by eliminating certain SKUs that don't align with our future plans. We are already taking steps in our restructuring, which includes closing our plant in France due to its negative gross margins. These are the kinds of actions we will continue to undertake in the fourth quarter. Overall, we have a portfolio that should generate over 60% gross margins in a normalized environment, but to hit those mid-60% figures, further portfolio adjustments will likely be necessary through M&A.

Thanks, Ravi.

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

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

Hey, Michael, I can start with a few points and then you can elaborate further. Overall, we believe we can achieve solid mid-single-digit growth in a non-pandemic context. Digestive Health is showing strong mid-single-digit growth. We're also experiencing high-single-digit and occasionally double-digit growth in NeoMed. This year, we anticipate that our MIC-KEY feeding business will perform better than it did previously. However, Respiratory Health will pose some challenges, as $25 million of revenue in that segment is linked to COVID. Additionally, cold and flu cases are expected to be somewhat lower. These factors create some offsets given the current environment. On a positive note, elective procedures have been rebounding well in Q3 and continuing into Q4. If we navigate through the hospitalizations and infections without major issues from new variants, and vaccination efforts succeed, we expect a solid second half with favorable comparisons. I should mention that it’s typical for us to see a slight decline from Q4 to Q1 under normal circumstances, primarily due to high-deductible insurance plans and similar factors. Michael, feel free to add to this.

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

Thank you. I appreciate that. Lastly, I wanted to get more clarity on your expectations regarding the pain franchise, specifically that you don't expect a return to pre-COVID-19 volume levels. I understand the changes we've experienced, including the rise of virus variants. I want to ensure I understand your assumptions. Are you suggesting that no efficiencies will be realized throughout the year or that providers won't implement scheduled changes to help return to those levels, or do you believe we will continue to see fluctuations? Additionally, are you making similar assumptions for the Chronic Care franchise, acknowledging the growth driven by tailwinds, but I would like to clarify your baseline expectations? Thank you.

Yes, no problem, Chris. Regarding Pain, we initially anticipated a longer recovery after experiencing a slight setback in Q2 of 2020. We experienced a slowdown in the fourth quarter as expected. We are projecting that full procedure volumes might not return until the end of the year, but we do see consistent progress every quarter in that area. As we approach the end of the year and transition into 2022 without any further surprises, I believe we can achieve overall growth in that segment, aiming for high single-digit growth, which would be typical in a non-pandemic context. For Chronic Care, the only significant year-over-year impact may come from CORTRAK, but largely it's due to Respiratory Health closed suction. Overall, Digestive Health is expected to maintain solid mid-single-digit growth globally, and in fact, we are outpacing the market internationally. This growth is closely tied to the severity and duration of elective procedures and moving towards endemic conditions. We believe the company is well-positioned for future growth, although we, like everyone else, need to navigate these challenges.

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

Thank you. Stay well.

Thank you.

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

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

My perspective is that we need to observe how the vaccines are distributed. Their rollout has been somewhat delayed for the general public, and we're also watching how patients regain their confidence to seek out procedures while adhering to the new surgical protocols. Additionally, we need to consider how emerging variants might impact our situation moving forward. If we can address all these aspects and gain more clarity by the end of the second quarter or around midyear, there might be an opportunity to adjust our strategy. Michael, feel free to add anything you'd like.

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

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

Thank you. Yes. No, we do have a sales force. It would be the same sales force that sells both our RF standard and COOLIEF products. We think the benefit because the reimbursement is $800 for the facility versus $1,800 at the hospital outpatient department is likely more of an RF, a standard RF opportunity. We think we'll get some benefit from that. The bigger opportunity is to really get better reimbursement in that setting than that, but we'll take a move up. And then obviously ultimately get it in an orthopedic office setting. So you'll probably see some impact from that on a positive in the end of Q3 into Q4 as we're rolling that out now and talking to those customers and getting them set up for putting some units in place. Thank you.

Okay. Thanks very much.

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

Good morning, Joe. Good morning, Michael.

Good morning.

I think we should discuss an area of growth that we haven't focused on much, which is mergers and acquisitions. Clearly, you've successfully managed your acquisitions so far. You've expressed increasing confidence in your IT and integration skills. Michael pointed out the improvements in the balance sheet and the removal of some encumbrances. This indicates that the potential for M&A in 2021 could be higher, given the increased cash flow, enhanced balance sheet, and better execution. Is that the correct perspective? Is there an active pipeline? How significant is it as a priority? Should we interpret your comments today as suggesting a higher likelihood of M&A contributing to better growth this year? Thank you.

Yes, Rick. You're correct. I want to mention a few recent discussions. Timing these things is always challenging. We have kept in touch with our acquisition pipeline, which consists of similar types of acquisitions that fit our strategic goals. We're focused on enhancing our sales and gross margin. We prefer deals where we can quickly integrate corporate selling and other synergies, as we've achieved returns exceeding our cost of capital of 9% and more accretive transactions. Additionally, if we execute well, we could end the year with nearly $600 million in capacity. Both of our businesses are currently engaged in several active conversations. We believe that in the current environment, which we can describe as more stable, we can navigate these discussions effectively. While it's difficult to predict specific outcomes, we aim to acquire one or two opportunities this year, similar to our efforts before the pandemic. We intend to be more proactive in seeking these opportunities.

Yes, great. Your main focus is driving top line growth. Reflecting on that, could you provide more insight into two additional topics? I believe you mentioned that you've entered into several ON-Q partnerships, along with other collaborations like the one with Leiters. Are there additional opportunities for ON-Q in other areas of the business where similar partnerships could present growth potential in 2021 and beyond that we might not be considering? Are you working on such initiatives?

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

That's great. I have one last question. I'm looking to gain a clearer understanding of your international growth potential and initiatives. I know you hired Bill Haydon to lead the One Pain franchise, and while reviewing the third quarter transcript, I recalled that global strategy was part of that. From the perspective of One Pain and other areas, what are the major factors that could drive international growth over the next year or two, especially beyond recovery from COVID? Thank you.

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

Thank you.

Yes.

Our next question comes from Marissa Bych with Morgan Stanley. Please go ahead.

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

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

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

We are not providing any guidance, but I can say that everything mainly depends on how quickly the elective procedures return. If they were to come back very quickly and everything aligned perfectly, it might reach a certain range, but we do not anticipate that all will return to those levels. Additionally, there is some impact from our Respiratory Health segment, with $25 million in sales prior to the pandemic affecting our Chronic Care business. In a non-pandemic context, we believe we can achieve good growth in the single to mid-single digits. Like many other companies, the key factors for us are the speed of the elective procedures returning and how quickly the backlog is processed, which could influence the outcome significantly.

Okay. Thanks very much.

Thank you.

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

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

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