Avanos Medical, Inc. (AVNS) on Q1 2021 Results - Earnings Call Transcript
Operator: Good day. And welcome to the Avanos Medical First Quarter 2021 Earnings Conference Call. All participants will be in a listen-only mode. After today’s presentation, there will be an opportunity to ask question. 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.
Dave Crawford: Good morning, everyone, and thanks for joining us. It’s my pleasure to welcome you to the Avanos 2021 first quarter earnings conference call. With me this morning are Joe Woody, CEO; and Michael Greiner, Senior Vice President and CFO.
Joe Woody: Thanks, Dave. Good morning, everyone, and thank you for your interest in Avanos. I’m encouraged by our team’s continued strong execution and resiliency as they respond to the challenging dynamics to our business brought on by the pandemic. Our employees remain focused and the dedication to getting patients back to the things that matter as we meet the needs of our customers. As mentioned on our last earnings call, we began the quarter with some headwinds and uncertainty resulting from rising hospitalizations and the corresponding negative impact to elective procedures. However, as we exited the quarter, we saw increasing topline momentum across our Pain Management franchise as a return of electric procedures began to reaccelerate. Looking ahead, while we’re encouraged to see the electric procedure volume increasing and expected to accelerate, we continue to believe volume likely to remain below its full potential until the end of the year. As we examined the business environment, we are gaining confidence in the direction of our business and have better line of sight to the gradual ablation of challenges presented by the pandemic. As a result, we feel well positioned to provide financial guidance for 2021. Based on current projections, we expect net sales on a constant currency basis to increase 2% to 4% compared to the prior year. Also we expect to earn between $1.10 to $1.25 of adjusted diluted earnings per share. Michael will share additional information on our financial guidance in his remarks.
Michael Greiner: Thanks, Joe. As you know that we continue to battle a range of headwinds and yet the team remains focused on execution and overcoming these challenges. Let’s begin with a review of our first quarter results. Total sales of $181 million were unchanged compared to last year. We saw 1% increase in volume and a 1% benefit from favorable exchange rates. Unfavorable price offset sales by 2%. The slightly higher than normal price impact was primarily due to the timing of discounts and allowances paid to customers. Chronic Care sales grew 5% to $121 million in the quarter, as we saw mid single-digit demand for our Digestive Health products. Double-digit CORTRAK growth resulted from the execution of our standard-of-care strategy, while NeoMed growth came from the continued -- continuation of conversions to our ENFit technology mentioned earlier. Double-digit international growth bolstered performance driven by new channel partnerships and our Asia-Pacific and Middle East regions for CORTRAK, along with share gains across Europe. Meanwhile, performance in Respiratory Health was down slightly due to the weaker than normal cold and flu season. Also, we continue to monitor our pandemic-related sales and the relationship between sales to distributors and trace sales from our customers. While over the past year, there has been some added variability, it does not appear for the analysis that additional inventory is currently being held by distributors. Thus, while we do expect an impact to Respiratory Health growth from hospitalizations declining over the next several quarters, we do not anticipate an additional headwind from distributors rebalancing their inventory levels. Moving to Pain Management, we delivered $60 million of sales, 8% lower compared to the prior year. The cancellation of elective procedures impacted performance, as well as lower procedural efficiency. The largest change was an ON-Q, which is heavily correlated to procedures requiring some length of patient stay in the hospital. As Joe mentioned, we saw sequential growth in ON-Q as the hospitalization declined and elective procedural volume increased. Despite this challenge to ON-Q for the quarter sales through Leiters increased by double digits as a partnership of Leiters continues to benefit customers as a pre-fill option.
Operator: Our first question comes from Ravi Misra with Berenberg. Please go ahead.
Ravi Misra: Oh! Hi. Good morning. Thank you for taking the questions. So, just a couple of questions from me. On the guidance front, Mike and Joe, just wondering you’re kind of assuming normalization by the end of the year. Just wondering, does that kind of get you to the midpoint of your guidance or the high end? Can you help us think about what -- what’s contemplated kind of on the low and high end? I mean, should the high end kind of include getting more aggressive in terms of more aggressive rebound of procedures and I have a couple of follow ups? Thanks,
Joe Woody: Hey, Ravi. Good morning. It’s Joe. I’ll say a couple things and then, Michael, may want to add to it. But generally, the way I would sort of view that guidance is that, the faster electives come back, the better it can be. And Chronic Care is likely to be below the low end of our range, but pain at the high end of a greater than really the high end of our range. So, we are looking at obviously the improvement, less hospitalizations, we really do believe things are going to improve on the electives in the second half of the year. We’re watching the speed there, because we don’t have full indication that that’s across the Board from a lot of our customers. And Michael, do you have anything to add there?
Michael Greiner: Yeah. I would just say the low end of the range, Ravi, to your question assumes some continued headwinds in the back half the year on both the cost side. And as Joe just mentioned, some of these electives not returning in order to hit that $10. So that’s a fairly conservative low end of the range, lot of things would have to not go right for us in the back half the year to be there.
Joe Woody: Agree.
Ravi Misra: Great. Thanks. And then maybe just, if you can help -- I ask my kind of follow-ups all together. Just if you can help us understand, your international growth was pretty strong. Just can you help us understand the kind of impact to margin there in terms of how it compares to the overall corporate average? And then, finally, any updates on the kind of progress on the breakthrough designation product and that’s it for me. Thank you.
Joe Woody: So I’ll start with just talking about the international business, good performance. We see that continuing into Q2 as well and there’s been a real focus on geographical expansion through bringing the M&A that we’ve been able to conduct into those markets and enter new markets. I think that team’s done a nice job of managing distributors in EMEA and Asia-Pac, getting more out of them, in some cases going direct and eliminating distributors that aren’t living up to our standards. And then they’re very focused on medical education and clinical studies. And so that’s therapy adoption that they’re really both in Asia-Pac and EMEA that they’re getting. So, again, we think it’s a -- in a non-pandemic situation and the mid single-digit grower that we’re working toward high single-digit, an important lever for us. Early on in my tenure, we did a lot of investment in people, the structure in that area. And Michael is looking like he wants to talk a little bit about the margin contribution.
Michael Greiner: Yeah. So remember, Ravi, good majority of the revenue we do have internationally right now as Chronic Care we are looking to expand our pain footprint. So by definition, our Chronic Care portfolio by and large is a lower gross margin profile. And then as Joe just alluded to, we are doing some key investments internationally that we think are right for the long-term. So our overall margin profile both at the gross margin levels and the operating margin levels are slightly lower than the overall consolidated companies.
Ravi Misra: And then just on that break through designation device changes…
Joe Woody: Oh! Sorry. Sorry about that. Yeah. We are progressing well and our electronic nerve block product really focused on total knee. We’re in patients now. We’re very impressed with the results. And so that portion of the development has gone well and now we’re obviously working on the FDA approval applications and how we would view reimbursement there. When we have an Investor Day, which maybe toward the end of the year, call it, ball or about the time that would rollout to an LRP -- new LRP. We’re going to highlight that and talk more about it in that meeting.
Ravi Misra: Thanks.
Joe Woody: Yeah.
Operator: The next question comes from Larry Keusch with Raymond James. Please go ahead.
Larry Keusch: Hey. Good morning, everyone. Thanks for taking the question. I guess to start off, sorry, I’m just thinking about the guidance for 2021 and thanks for now beginning to provide that. I guess, it was a little bit lower than I was anticipating and I’m just -- this is I’m trying to parse through the various moving pieces of the business. I’m curious that how you’re thinking about that ON-q? Is that sort of a bit of a laggard as you’re waiting for these procedures to come back? Because I would assume that, given your commentary on the first quarter and the exiting rates, COOLIEF should be a pretty substantial grower for the year?
Joe Woody: Yes. That’s right, Larry. I mean, COOLIEF will be a substantial grower. And with respect to ON-Q, we saw positive growth in March. We’ve seen continued acceleration. But because of the bulk of our businesses in the hospital with ON-Q, it’s coming back a little bit slower than the hospital outpatient department with COOLIEF. But again, we do see moving into the second half good growth, obviously, some of that’s obviously related to comparator for ON-Q and we’re pleased with the progression. And the things where we’re headed with the channel partners and what’s going on, what lies ahead some of that in the commentary. I think the biggest thing in my mind is just some of the unknowns on the range. It’s the -- the -- with relation to how fast the hospitals do come back with all the procedures, as opposed to ambulatory surgical setting. And if you think about last year, I think, we caught a little bit of heat saying that things were going to come back as fast as they did in the second half and then they might even slow again with another wave and that did happen. So we’re being cautious there. But I did say, I think in the first question, that to the extent that the life does come back at a much faster manner, that’s upside for us. And I don’t know, Michael, do you have anything -- Michael, has nothing to add. But I know, Larry, you may have a couple more questions.
Larry Keusch: Yeah. I do. Just two more. Thanks for that. I guess, Joe, on that topic about, again, your commentary of you don’t expect the full volume potential to come back until till the end of the year. As you assess things, what do you think is really the biggest gating factor there? What’s kind of driving that assumption? I mean, that is, it feels a little bit different than what other companies are assuming. It feels like most are anticipating kind of the second half is much more normalized. It sounds like your commentary is, hey, let’s wait and see what happens till the end of the year? And I guess just the second question I’ll just ask and probably for, Michael, is, just how should we think about that SG&A coming back through the year?
Joe Woody: So, generally, it’s -- for us it’s -- the therapy in pain, it’s -- they are done at different sites is a little bit more complex, example, Game Ready is coming in very quickly as sports come back and we’re getting a lot growth there and that’s done in an outpatient setting, again COOLIEF coming together quickly in the outpatient setting. So we feel like we’re at sort of an 80%, 85% maybe range and -- in the hospital right now and that should climb. And this -- our decision to sort of be a little bit more conservative on that is based upon talking hospital executives. We use some outside consultants. We’ve talked to our own surgeons and customers in our customer base. But, again, if this quickly comes back, and just call it, May, June, July, and we think that H2 will be strong, then that could be good potential for us in our knee space.
Michael Greiner: Yeah. I think, Larry, one of the things to consider is, we didn’t want to come back and revisit this range. And we believe that we were appropriately looking at the various sensitivities of when things would occur and this range allows us to capture some downside if that were to occur, and obviously, some upside if things were to come back quicker. So that’s part of our thinking, just as far as how we thought about the range and putting it out here in the second quarter -- start of the second quarter. With regards to SG&A, as you notice, the last three quarters, we’ve had SG&A as a percentage of revenue in the high 30%s, which ultimately is our long-term goal there. We do believe as we enter the back half of the year, there are some investment opportunities on the operating side that we are considering. If we were to do those investments, SG&A would increase probably just north of 40%, again, temporarily, before we get to our longer term goals of the high 30%s in a more permanent way. So that $1.10 to $1.25 also considers that we will be doing some of these SG&A investments in the back half of the year.
Larry Keusch: Okay. Terrific. Thanks, guys. Appreciate it.
Joe Woody: Thank you.
Operator: The next question comes from Matt Mishan with KeyBanc. Please go ahead.
Matt Mishan: Hey. Good morning, guys.
Joe Woody: Good morning.
Matt Mishan: So it’s a Friday morning after a long week. My listening comprehension skills are not that strong this morning. But I heard DOJ a couple of times in the presentation. Just, first, can you just go over, do you still have a liability there? Is that Kimberly Clark? And did that change your free cash flow expectations for the year sitting on $80 million? I think it was $100 million previously?
Michael Greiner: Right. So I’ll say a couple things and then I won’t go much further for now. But basically, we did what the DOJ agree in principle and we’re continuously discussing a potential resolution. We anticipate that that would be finalized in Q2 or Q3. And if you’re referring to I think the indemnification with KCI. That was -- we have no more issues there. We settled with KC, really was a Q4 I think of last…
Joe Woody: Last year. Yes.
Michael Greiner: You’re correct, Matt, the change in free cash flow from $100 million…
Joe Woody: Yes.
Michael Greiner: …to $80 million relates to what we believe will be the settlement -- ultimately the settlement amount with DOJ.
Joe Woody: And just one other thing, I mean, if you think about this, I will step back a little bit, we’ve always talked about getting things behind us and moving forward. And I think this is a big step to understand where we might be with this and this couples with putting the IT system deployment and the divestiture -- divest in IT. And then obviously positioning ourselves, where we’d get a lot of cost out of the business and heading into a place where we’re going to get stronger growth. So our ability to execute in a more clear manner is as big as any type of agreement.
Michael Greiner: Yeah. Removing these overhangs we think is important.
Matt Mishan: Okay. Excellent. And then, just gross margin trends. How you think they’ve been improved from 1Q to the rest of the year? I believe you previously said that, that you’re somewhere between 19 and 20. Is that still the case? I think it is?
Joe Woody: Yeah. So, Michael, is going to take you through some detail, but I’ll say a couple things upfront. It is only about a year ago that we were in the high 50s and low 60s in the business. And these things really are temporary, and as you hear more about that here in a second pandemic related and we have a lot of competence. We talked a little bit about these in Q4 that Q1 and Q2 would be light for us and then we would be very strong in H2. So I think that, we’ve had a lot of progression in the business on the flip side of it. You can sort of look at EBITDA growing the way it did for the quarter. In this call, Michael had talked a little bit about the SG&A. So as we get this moving in the right direction, which we have the plans for and the sales coming on, we should be in good shape. But maybe, Michael, you may want to talk a little more detail about it.
Michael Greiner: Yeah, Matt. Great question. The reality is we didn’t all of a sudden just become a 53%, 54% gross margin company, right? So there’s a range of things that happened over the last few quarters that have taken our gross margins, suppress them in a temporary manner, some self inflicted, which we’re fixing, some have been gangrenous events that we’re working through. But when you look at the first half of the year to the second half of the year, almost 500 basis points greatest -- greater than 500 basis points of opportunity for us in the second half of the year were temporal items, transitory items around price and product mix, the revaluation for the manufacturing variances and then this NeoMed freight issue that we’re dealing with. That is important for our long-term growth prospects for Neo -- NeoMed, but also, unfortunately, has us incurring higher than anticipated freight costs from China where NeoMed is manufactured. So the second half of the year, we feel really good about especially given that we know good portions of the headwinds into the second half of the year our gross margins relate directly to temporary things in the first half. When you think about first quarter to second quarter, we do anticipate improvements -- significant improvement, although not what we’re going to see in the second half, but significant improvement primarily related to improve product mix.
Matt Mishan: Okay. Like, what would you -- what’s the pathway -- is there a pathway back to 60% plus gross margins from here?
Michael Greiner: Absolutely. Yes. And we believe that we will see a quarter or two in this -- in the back half of the year that will show those 60% plus gross margins.
Matt Mishan: Okay. That’s great. And then what -- and then you call unfavorable discounts and allowances in the quarter?
Michael Greiner: Yeah.
Matt Mishan: Could you elaborate a little bit on what those were?
Joe Woody: Just, generally, we’re not backing off of -- our business has been sort of negative 1%, plus 1% overall on price. And this has more to do with timing rebates and discounts with some of our customers. So I don’t see this long-term either.
Michael Greiner: Yeah. There was -- the price issue that we had in the first quarter was not a -- not related to changes in how we go to business or giving away price. It related more to timing of the products, respiratory and others in the back half of the year and these are just catch up refunds that we had to get in place that we didn’t capture as timely not knowing what some of the measurement criteria was, given the different changes in revenue that we saw.
Matt Mishan: Okay. And then reimbursement and the ASCs for COOLIEF has that moves the needle for you guys?
Joe Woody: I wouldn’t say, yeah, I think, we talked about that having an impact in the back half of the year. We’re doing a full breakdown assessment of all of the ASCs and looking how they’re structured and which ones you want to go into to be efficient and profitable about the way that we go about it. But I would think that as you get into the Q3 and Q4, we’ll see some benefit there.
Matt Mishan: Okay. And then just lastly, Game Ready, I mean, the first time you mentioned Game Ready in a while, is that due to, I think, a new product or what’s changed -- were like Game Ready all of a sudden is at the forefront?
Joe Woody: So a couple things. One, definitely sports have come back where there are sports injuries. But we have also been very focused on a drop-ship program that the team put together did a nice job with, as well as the rental business, and bringing that up to speed and making better connection with our customers and also making that efficient as part of the also the synergies as we finish that off last year with Game Ready. So, really three things there and we’re happy with that momentum.
Matt Mishan: Okay. Thank you very much.
Joe Woody: Thank you.
Operator: The next question comes from Rick Wise with Stifel. Please go ahead.
Rick Wise: Good morning.
Joe Woody: Hi, Rick.
Rick Wise: How you doing? And just to start off, first, with a sort of a little shorter term question I’ve been asking every company this quarter, the same thing, just to better understand recovery plan, like many others, January, February, were softer, as you said, Joe, sounds like March a nice snapback, have those trends continued into April or accelerated or are they on a path? And so sort of a two part question, are they -- if that’s the case, are we on path to sequentially higher second quarter sales or no, second quarter is going to look a lot like the first two-month sales or margin perspective, you clearly are expecting a stronger second half. But just to help us get in the right sort of thought mode for the second quarter as we try to model it correctly?
Joe Woody: Sure. Rick, I mean, we feel like we will see and are seeing some sequential improvement from Q1 to Q2. Obviously, our business is a stronger H2 performer in noting that and kind of the way that I think about it is kind of we’re seeing in Respiratory Health as expected. Our Digestive Health business is pretty consistent, and International, as we talked about earlier in the call, also starting off strong and performing well. And we are seeing improvement in the ON-Q business, but faster improvement in the Interventional Pain business because it’s in the hospital outpatient department. So things are headed in the right direction, but clearly we do think there’ll be much stronger even in H2.
Michael Greiner: Remember to just from a comparable standpoint, ON-Q and COOLIEF will both has very attractive comparables versus last year second quarter. So those will be good numbers. Sequentially, Rick, as Joe mentioned, we are starting to see some nice improvement there as well which is good and then also recall that the flipside is that our respiratory business in particular, closed suction catheters had a very strong to Q2 and Q3 last year. So those will be much tougher comps at the beginnings of the pandemic last year.
Rick Wise: Got you. And to On-Q specifically, so just appreciating the in hospital aspect, as you’ve emphasized, we should see better ON-Q in the second quarter because of the recovery trends you’re already seeing. Is that the right way to say?
Joe Woody: Yeah. Yes. That’s correct. And one of the ways that we sort of evaluated that, I think, investors can evaluate it is, as orthopedic procedures in the hospital versus ASC comeback at that level, we are somewhat aligned with that.
Rick Wise: Got you. And I want to come back to the -- your M&A pipeline comments, Joe, from sort of two aspects. I mean, it’s always intriguing, I mean, you’re very clear about your robust pipeline. And just as an outsider, I’m always as an analyst, I’m always fascinated. What and I know, it’s obvious, I appreciate it’s very complex price, willingness to sell, timing, all sorts of things go into it. But help us understand why you haven’t moved even faster. Is it something internal to Avanos right now that you waited until you just felt better about recovery or whatever IT systems or people or was it that or is it and have valuations been too high? I’m just trying to understand what might release the floodgates, which could potentially be very exciting, obviously, in terms of potential growth and leverage and outlook?
Joe Woody: Yeah. It’s more of our disciplined approach and what waiting for the pandemic to subside. And obviously, we had some other execution issues that we’ve been highly focused on and we really told our investors, that’s where we would be focused. I think we’ve delivered that sort of, let’s call it, over the last six quarters. But now we’re in high gear. We’re talking to a couple of different potential targets. And in terms of valuation, that’s not going to hold back for us because we are hanging around the same kind of places that we have them with private equity, with privately owned businesses and areas that we want to participate that will enhance our business and be creative. Where we’re not having to look at the kind of multiples that you see in some of the deals. So I think we’re going to come forward with -- when we do come forward with deals, with good value, whether we’ve been doing in the past.
Rick Wise: Got you. And just to follow-up on that. So we should be cautiously hopeful optimistic that you could get one or more of these across the finish line this year or is that too much doubtful? Thanks.
Joe Woody: That’s a too much. I mean, I would -- you could never predict these. I’d love to do too. But we really are pushing hard to do one for sure and we’ll see where we land. We’ve got a good track record. So we’ll see where we land at the end of the year.
Rick Wise: Sounds great. Thank you again.
Joe Woody: Thank you.
Operator: The next question comes from Marissa Bych with Morgan Stanley. Please go ahead.
Marissa Bych: Hi. Good morning and thanks for taking the question. I’m sorry to go back to gross margins, but I just wanted to push a little further on the transportation impact. It seems like COGS this quarter were about $8 million higher than consensus estimates. What was the relative impact of the transportation of NeoMed and kind of relative to that $8 million total higher COGS and was there anything else in the next like COVID-19 overhead expense lingering from last year or really any other kind of one-time impacts that you would call out? Thank you very much.
Joe Woody: I think, Michael, is going to talk about this a little bit and I just want to make a comment about the NeoMed, the positive side of this. But go ahead.
Michael Greiner: Yeah. So about a third of that Marissa the $8 million if you’re looking at absolute dollars related to NeoMed, another third or so related to the revaluation that we had for the manufacturing variances and then we had a little bit of that price impact that we just talked about with Matt’s question. So that was if you layout and then there was some miss and match, but those are the three primary chunks of that $8 million higher up from a COGS absolute value standpoint.
Joe Woody: And just on the why side of it. I think is the right thing to do, if you can imagine the ports in California China things going on the supply chain. These prices are crazy right now. But we have converted ahead of our expectations NeoMed customers and this will be a payoff in the second half and then 2022. So doing that I think is the right thing to do for more sustainable growth in the business, but obviously not happy about the price of that transportation. We may have a little bit more of it, not quite as much in Q2, but absolutely subside in the second half.
Marissa Bych: Okay. Great. And my one follow-up would just be on COOLIEF. You touched on this. But can you give us any more detail on how the COOLIEF growth has improved into April relative to the strong growth that you saw in March? And is that more driven by growth in new accounts or more of a reacceleration in the existing accounts that you’ve had? And thank you very much.
Joe Woody: Yeah. It’s -- thank you, Marissa. Yeah. It’s actually accelerated from March into April. So we’re seeing that continue. And we did sell a number of capital consoles even last year during the pandemic. So there are new accounts coming in with the -- with our new technology, but even new customers. But as you can imagine, there’s also a backlog of spine and osteoarthritis of the knee patients are coming through. So it’s really two things. And then, obviously, we have some easy parables, but just generally, we’ve done well with new customers as well. I think we’re ready for the next question.
Operator: Our next question comes from Chris Cooley with Stephens. Please go ahead. Mr. Cooley, your line is open and you may ask your question.
Chris Cooley: Thank you. Can you apologize I am headed on the trunk . Congratulations on a solid quarter. Just two quick wins at this point from me, first, some clarification perspective, could you talk about your conservancy thinking about transition versus a year. Just want to be clear about that commentary that really centers predominantly related to the ON-Q portfolio plus these businesses, obviously, showing some strength now. Just wanted to kind of clarify that? Just -- that’s one question and my follow-up question is the bigger picture, just when we think about margin targets longer term, could you help us think a little bit you talked about 60% gross margins earlier on Matt’s question still be and striking distance pricing power for these businesses and realizing greater operating efficiencies. Is there anything structured just to preclude you from stepping up the op margin into cash flow type of characteristics, the business versus kind of where we were previously? I know you’re not giving guidance here now, just thinking about things conceptually as we think that longer term seen that you have greater operating efficiencies now, especially with new IT systems, just want to think about op margin and cash flow longer term as well? Thank you.
Joe Woody: Thanks, Chris. And I’ll say a couple things about ON-Q and then let Michael talk about some of the margin elements and the cash flow and some things that we are excited about. But, generally, with respect to ON-Q, we’re happy with the following things, one, Leiters continues to be growing at a significant rate. We’re adding new customers. As a percentage wise, the business that, we had managed under long-term medium is, we’re actually approaching that same level now. We are getting growth out of Summit and the electronic pump and starting to see that that can be beneficial to us for customers that want that solution versus the elastomeric pump. And we’re very excited about the orthopedic channel partners that we’re putting in place where, again, a greater portion of ON-Q is used there and looking to sign up more of those relationships over time. So I think we’re heading in the right direction. I think to the extent that electives come back in the hospital faster, that’ll be a plus for us. And then Michael, did you want to talk about that.
Michael Greiner: Yeah. Just longer term on the margins, we’ve talked about in the fall that, that we’ve had three quarters in a row now where SG&A is being high 30%. We believe that ultimately that is where we should live longer term. That being said, in the back half of the year, we may have some spends in selling and marketing that we think is smart for longer term revenue opportunities. And so we may see a Q3 or Q4 where SG&A is a little bit higher than the high 30%s. Similarly gross margin, where we’ve had some of these temporal things that we’ve talked about. We’ve got 500 plus basis points of tailwinds going into the back half of the year for these temporary things. So we do anticipate seeing Q3 or Q4 or maybe in both quarters being greater than 60%. So these pieces have it all fit together perfectly yet, Chris, but you can see how we can get there in these various pieces as operating expenses, as well as gross margins and how that lends itself to where we want to take ultimately even an operating margin longer term. To your question around, could we be even better than that, given some of the efficiencies that we’re building into the organization? I think with M&A, as well as continuing to learn over this next few quarters around where some of the key smart spend is, there is marginal opportunity to have margins, probably, higher than what we’ve talked about previously. But we’ll lay that out in a more holistic view, as Joe mentioned in the fall, when we issue a new three-year LRP.
Chris Cooley: Thank you very much.
Joe Woody: Thank you.
Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Joe Woody, CEO, for any closing remarks.
Joe Woody: Thank you. I just want to thank everybody for your continued interest in Avanos. And while we’re executing well in an uncertain environment, we are committed to creating shareholder value. I’m confident the priorities that we detailed today combined with our portfolio and attractive markets we’re in deep resistance for sales growth, margin expansion and positive free cash flow in 2021. So I look forward to continuing to report that out throughout the year. Thank you.
Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
