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Avanos Medical, Inc. (NYSE:AVNS)
Q3 2019 Earnings Call
Nov 5, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to the Avanos Third Quarter Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to Mr. Dave Crawford Vice President of Investor Relations. Please go ahead.

Dave Crawford -- Vice President, Investor Relations

Good morning everyone and thanks for joining us. My pleasure to welcome you to the Avenos Third Quarter Earnings Conference Call. With me this morning is Joe Woody CEO. Joe will begin with a brief review of our business performance and then give an update on our priorities for Q4 and 2020. Then I will review our business unit results and offer details in our financial performance and earnings outlook for 2019. 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 statement. 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 will be referring to adjusted results and outlook. The press release has information on these adjustments and reconciliations to compare GAAP financial measures.

Now I'll turn the call over to Joe.

Joseph F. Woody -- Chief Executive Officer and Director

Thanks Dave. Good morning everyone and thank you for your interest in Avanos. In the third quarter we continued to execute against our priorities including double-digit growth in COOLIEF and positive results from CMS related to reimbursement for knee procedures. That said we faced specific challenges that resulted in under delivering relative to our expectations and which could continue to pressure results in the fourth quarter. While we were disappointed by our third quarter underperformance we remain confident that we have the right plan in place to address the gaps accelerate growth and deliver shareholder value. Overall net sales for the quarter were $171 million and adjusted diluted earnings per share was $0.30.

The majority of revenue shortfall for the quarter was primarily driven by approximately $5 million of backorders across our domestic and international regions associated with the implementation of our new IT system. Last quarter we flagged that fully implementing this system could create challenges and disruption to the business. Introducing the new IT system was crucial for the long-term benefit of the company and value creation. We have experienced temporary customer and supply issues in the implementation that have required manual workarounds resulting in decreased efficiency. Our internal team is remediating the challenges and we are working on returning sales to normal levels though it is possible some backorders may continue into the first quarter of 2020. That said we are fully focused on resolving these issues in the most efficient way possible. In addition to the supply chain and customer challenges I mentioned we were impacted by lower Chronic Care order volumes from distributors in the U.S. As we've discussed in the past inventory levels at our distributors can produce positive or negative variability in our quarterly results as they independently manage their inventory and customer transitions.

Importantly we are not seeing any changes to the underlying Chronic Care market dynamics. International sales in EMEA and Latin America also missed expectations but I'm confident our international business is a catalyst for growth. We now expect that the third quarter shortfalls will also impact growth plan for the fourth quarter. As a result we are lowering full year sales expectations from 8% to 10% to 5% to 7% which builds in the potential for continued backorders in the near term. Given our lower net sales outlook we're also revising our full year 2019 adjusted diluted earnings per share guidance from $1.15 to $1.25 to between $1 and $1.10. We remain confident in our long-term strategy and our ability to quickly address these gaps. We're committed to invest in the growth of our business prudently manage costs and strategically deploy capital to accelerate growth. Now I'm going to highlight a few critical drivers of future growth. In Interventional Pain COOLIEF had a strong quarter with over 20% growth. With regards to CMS coverage for COOLIEF the 2020 final rule was released on Friday while we felt the initial proposed rules undervalued reimbursement for knee procedures within the hospital outpatient setting I'm happy to share that new Medicare value for the knee is the same for the SIJ RF procedure. This update makes COOLIEF for the knee viable in a hospital setting again enabling patients suffering from osteoarthritis of the knee to continue to benefit from our leading non-opioid therapy. We were also actively developing other avenues of growth for COOLIEF.

We believe there's more runway for us in spine procedures in the U.S. and there's also an international component to the business that we're investing in. We're excited about COOLIEF's growth potential especially as we continue to generate compelling evidence on its clinical and cost-effectiveness. Acute Pain performed in line with our plans discussed last quarter and drug supply is returning to market the drug supply shortage is not expected to be a 2020 performance headwind but it will take time for the market to return to a steady state. We are highly focused on returning this business to growth and improving overall profitability. Our Chronic Care business remains a stable flow of growth and cash flow. While the backorder issues caused by our IT implementation primarily impacted these market-leading franchises overall this remains a business which we expect to continue to grow in the mid-single digits. In our International business we had a challenging quarter due to backorder shipping and supply chain challenges which was further complicated by product rebranding and high variability in emerging market. Going forward we continue to expect growth to accelerate across all regions in which we operate.

Now I'd like to turn to M&A which continues to be a key lever in strengthening our business and accelerating growth. This quarter we acquired Endoclear a strategic addition to our market-leading Respiratory Health portfolio. Endoclear brings enhance clinical tooth clearing to our closed suction catheters customers bolstering our portfolio and allowing us to leverage our existing sales and marketing infrastructure. Following the acquisition of Summit Medical Products into our Acute Pain portfolio we are encouraged by the initial sales performance and are confident that the Summit will continue to complement our business. In addition this acquisition has facilitated improved engagement with customers around ON-Q our non-narcotic pain relief therapy. Lastly we are pleased with NeoMed's recent performance which had sales in line with our expectations. We are moving forward and are on plan with the initial stages of integrating these acquisitions along with Game Ready.

Looking ahead we will continue to assess the landscape for additional growth opportunities that bring strategic value and synergies to the business. Before turning the call over to Dave I want to reiterate that we are committed to our strategy of accelerating organic growth pursuing M&A and taking out costs. We have taken significant and necessary steps to fundamentally transform the business as the company became independent at the end of 2014. As a result we are now able to simplify the business with a handful of growth drivers. I am fully confident in our ability to address these near-term operational issues while focusing on Q4 and 2020 priorities. These include completing the IT system and processes stabilization returning Acute Pain to growth investing in COOLIEF and CORPAK as catalysts for growth continuing to strategically deploy capital integrating acquired assets and delivering synergies and executing on our cost savings targets and developing additional savings opportunities.

I will not turn the call over to Dave to walk you through the financials.

Dave Crawford -- Vice President, Investor Relations

Thanks Joe and good morning everyone. Before I review our results in more detail I want to first discuss the status of our IT implementations and the actions we are taking to remediate the new systems and processes. Introducing the new IT system was a major milestone in our transformation and overall we're pleased with it. Since the August launch we've been able to effectively take these orders manufacture products collect cash from our sales and report earnings. With a project of this magnitude it's not surprising to encounter challenges that require temporary manual workarounds resulting in short-term decreased efficiency from the change in processes. Overall the peak of the number of issues is behind us and we are not seeing new ones develop. As we move forward we are working to address 3 main issues; 1 change management on the new technology and business process; 2 order-to-shipment process efficiency and 3 cash receipts and disbursements efficiency.

Rest assured we're making system stabilization and process improvement a top priority. Already we are beginning to see the benefits of a single-system and viewing our inventory on a global basis without the need for off-line data reconciliation by our team. We remain confident that over the course of the next several months we will continue to improve performance and efficiency. Transforming our cost structure is a top priority and our IT and back office infrastructure is part of the cost savings we continue to expect to generate over the next two years. This combined with savings in manufacturing and other areas in SG&A equates to the $12 million to $16 million in cost savings which we are confident we will deliver next year. Now I'll shift to the review of our third quarter results. Overall we delivered a $171 million of net sales a 4% increase compared to the prior year and adjusted diluted earnings per share of $0.30. Sales from NeoMed and Summit Medical contributed 6% to our growth. Organic volume fell less than 1% and unfavorable product price and mix declined 1% which offset growth from our acquisitions. COOLIEF again grew double digits and had its highest quarterly growth this year bolstered by our direct-to-patient advertising.

While we're pleased with the continued strong demand for the therapy growth was slightly below our expectations as we have seen several customers move from multi-probe kits to standard kits which drove an unfavorable sales mix. We continue to build a companion clinical evidence and invest in additional studies to enhance private payer coverage. In September the Pain Physician Journal published a large retrospective study that reinforces the clinical effectiveness of COOLIEF in treating chronic knee pain and providing long-term relief. As highlighted earlier this year we're also conducting a large multicenter prospective clinical trial to evaluate the effectiveness of COOLIEF compared to hyaluronic acid injection. Clinical outcomes data which confirms the long-term effectiveness of COOLIEF for the treatment of OA knee pain have been accepted for presentation at several industry-leading conferences 4 of which will take place this month. To help disseminate this data to a broader audience including pain physicians orthopedic surgeons and rheumatologists our team is holding symposium at key conferences. In Acute Pain we are encouraged that ON-Q and IV Infusion delivered results in line with our expectations.

ON-Q sales were down mid-single digits for the quarter and sales through Leiters again increased by double digits sequentially. Turning to Chronic Care as Joe discussed performance was primarily affected by the product backorders and supply chain issue. In addition we saw an expected decline in purchases due to draw down of inventories at certain distributors. Overall we continue to view Chronic Care as a mid-single digit growth business. Our tracing data supports consistent growth and we have retained all of our key accounts and don't see any changes in the underlying market dynamics. Moving to our International results sales were impacted by backorder and supply chain issues. Mitigating these challenges was complicated by the Avanos rebranding in some countries. Results did fall short of expectations probably due to tenders won by our team in Latin America that are yet to be converted to orders. Sales in our EMEA region also trail our forecast largely due to delayed uptake and market development growth in our Pain Management businesses.

Despite this quarter's performance the International business remains a key catalyst in our overall growth and we are confident we will work through these temporary setback. In our Asia-Pacific region where we've had a team in place since last year we saw a double-digit growth for the quarter and just below double digits for the year. We're encouraged by the results and believe there is a similar opportunity in our other regions. For the quarter adjusted gross margin of 57% was unfavorable compared to last year. We anticipated a lower-than-normal gross margin for the quarter as implementing the IT system required ticking down and restarting our manufacturing facilities. Additional pressure stem from an increase in distribution cost related to alleviating customer backorders. Adjusted operating profit totaled $21 million for the quarter compared to $25 million a year ago as results were impacted by the decline in gross margin.

Adjusted EBITDA for the quarter was $25 million compared to $28 million a year ago. Adjusted net income totaled $14 million compared to $18 million a year ago. Shifting to our balance sheet we ended the quarter in solid financial position with $214 million of cash on hand. Free cash flow was an outflow of $24 million due to spending on one-time items and increase in working capital related to the new IT systems as during the quarter some electronic data invoicing to customers required temporary manual intervention which delayed our billing process and the collection of receivables. As Joe mentioned we revised our full year 2019 outlook which now includes Summit Medical and Endoclear. Due to this quarter's results the expectation that these factors at some part will also impact fourth quarter we now expect constant currency sales growth of 5% to 7%. Given the adjustment in our sales expectations we're revising our adjusted diluted earnings per share to $1 to $1.10. In summary we are confident we're taking the necessary steps to create shareholder value while focusing on our fourth quarter and 2020 priorities.

With that operator we're now ready to take questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from Chris Cooley with Stephens. Please go ahead.

Christopher Cook Cooley -- Stephens Inc. -- Analyst

Just 2 for me and I'll hop in queue. May be Dave on that last point on gross margin if you would just maybe help us parse out a little bit more the impact from the IT system integration relative to just the mix that you saw in the business and the volumes. I appreciate the schedule that you guys provided but that would only imply about $2 million roughly overhead from the post-divesture IT issues during the quarters. So I just want to make sure I can kind of true-up back to kind of the prior year period. Then I have a follow-up on growth.

Joseph F. Woody -- Chief Executive Officer and Director

Chris this is Joe Woody. I will tee up a little bit and say a few thing and then Dave can weigh in. But last year we did experience a 65% gross margin with high productivity. And what you're seeing in this quarter is with the IT system we had our plants down in the quarter and equally we had high distribution cost as we saw this backlog things like airfreight. And there's a little bit of a mix piece as well as NeoMed came in with a lower gross margin. We have a plan to quickly get that up to our standard gross margin and you'll see a little bit of Acute Pain sales on where we have a high gross margin. There is an impact there that you see but we still feel like the full year that we've got gross margin for the -- for about 60% or so. But Dave you may want to add to some of that?

Dave Crawford -- Vice President, Investor Relations

Yes I think as Joe indicated those were the main drivers of what moved it. I think obviously the biggest impact in our normal margin would have been having our plants down roughly a week and then taking the time to start those plants up. Obviously you don't get those back up to normal efficiency 1 especially with the new systems that the teams were operating in at those facilities. And -- so that probably was the biggest driver overall Chris relative to having margin being down this quarter. Obviously we did not expect the increased distribution costs as we put together our plan but those were necessary as we encountered some of the backorders. And some of the backorders a little bit more color on that was more in Chronic Care specifically in our Digestive Health category which has some favorable margin relative to our normal or average margin. So that was the driver as well.

Christopher Cook Cooley -- Stephens Inc. -- Analyst

Appreciate the additional color there. And then maybe just lastly for me and then I'll get back in the queue. Very pleased to see the enhanced reimbursement for COOLIEF. I think it's well deserved there. Can you talk a little bit about your investments going forward as you talk about maybe a little bit more aggressive distribution of that technology both for other indications here in the States outside of the OA indication but also international expansion? Just kind of what we should assume in terms of incremental investments and when those initiatives should start to contribute from the top line perspective?

Joseph F. Woody -- Chief Executive Officer and Director

Chris Joe Woody again. I think the way to think about it let me just a couple of things. One thing is that we've got good momentum in that business again 20% growth but we were very happy about. Obviously the result that we got it could have been very negative but the team here and our consultants worked very hard to get that reimbursement final decision lifted and raise. So we now have the same reimbursement as we have today. So I want you to understand that that reimbursement had been in place on an organic code. Then the other thing is that we now have a dialogue open with CMS. This is an opportunity for us to work with them on the Ambulatory Surgical Center over time which we believe would bring in orthopedic surgeons and not just interventional pain specialists. I think you can see that we'll sort of probably moderate some of the investment initially because this is what's going to happen.

Commercial payers are generally going to react negatively and want us to complete the clinical studies that we have in place specifically HA and we do have one in 2021 that is comparing standard and cool. And then in the second half you might see us than raise a little bit of that investment in COOLIEF but not to the extent that we did this year where we added the reps we already got them in place or we went extremely heavy on the [D to P]. We do feel like we'll have some D to P investment in this business because we saw that it does generator and now I think with the reimbursement in place and more interest from physicians but not expanding necessarily the field sales force. That's a possibility out in 2021. Dave?

Dave Crawford -- Vice President, Investor Relations

Yes and Chris I'll add to Joe's commentary. If you think the last couple of years following us since the announcement of the S&IP divestiture we've increased spending substantially related to investment behind COOLIEF and our International region to get that to a level that it needed to be at. Obviously we're not going to give guidance right now for 2021 but I don't think we would expect to see the same level of step-up in investment next year. We've kind of got it to where it needs to be. We can make some tweaks on how we spend that money in different levels but again shouldn't see the big step-up that we've done over the last two years. Some of the things are in place whether it be as Joe mentioned DTP we've done that. We've also started spending money in International to get behind this therapy with some additional resources there. So I'll leave it with just -- I think we're at a good level of spending and any spending that we do increase will be kind of on the margin and not the significant ramp up that we've done in the last couple of years.

Joseph F. Woody -- Chief Executive Officer and Director

Yes really the stage has been said. I mean there's a way we think about it. We got the clinical studies in place right now they're going to come to an end sort of HA in the middle of 2020 and COOLIEF standard RF into 2021. We expanded the sales force last year. We did a real big push in D to P and now we have the right reimbursement decision and we can moderate our investment won't be anything like it was last year.

Christopher Cook Cooley -- Stephens Inc. -- Analyst

Appreciate that. Thanks.

Operator

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

Matthew Ian Mishan -- KeyBanc Capital Markets Inc. -- Analyst

Great. First off Joe Dave when we think about some of the headwinds that are impacting 3Q and are moving into 4Q do you necessarily lose any of those sales? Or is it just push to -- or some of it just pushed out into 2020? I'm just trying to understand what's transitory delayed versus something you may have lost?

Joseph F. Woody -- Chief Executive Officer and Director

Yes I'll say couple of things I'm sure Dave will weigh in. We do believe that the backlog issues is going to carry into Q4. Inside of that where we had inventory issues and visibility. And the cycle times really doubled from the product development all the way to sterilize it from the plant. We think that's continuing. Inside of that there's also some rebranding going on. To give you a specific example in Europe where we aren't fully registered with our Avanos branding and we have hired inventory and that was limited and part of that limited visibility that the supply chain experience. So we're being I think accurately cautious in thinking that it could continue into Q4. That said we're making progress everyday against that backlog do we had. We do think that we can do some customers in this scenario yes I think we wouldn't lose them permanently no. But there were associated with the implementation of the IT system like credit holds and some invoicing and customer service. So that's where we are on it.

Dave Crawford -- Vice President, Investor Relations

The only thing that I'd add Matt I think as we look at it we will explain some of this business that if a product was needed and it was not available whether it be direct or because it was getting ordered through a distributor that would be a lost sale in that aspect and that's why we're reflecting it in change in guidance. As we work through and the backorder situation is improving hopefully this is one thing that won't really be an issue with it. It is going to the beginning of next year. Though we're still working through the backorders today.

Matthew Ian Mishan -- KeyBanc Capital Markets Inc. -- Analyst

Okay. Fair enough and then just a follow up on COOLIEF. I guess what has changed from a reimbursement level like versus before the first proposal? I think the first approach was a negative to hospital then you got an enhanced backup. Like what's change in that versus what you had initially? And then why do you think you can get -- or did you get the level of investment you're expecting from physician offices and ASCs?

Joseph F. Woody -- Chief Executive Officer and Director

So on that -- the easiest way to think about the code from the hospital outpatients department is that what was proposed was $800 for the facility and we ended up all the way back up to $1719 or $1719 which is really akin to what we see in the spine area. So that's really really positive. On the physician side really in all the categories the physician payment went down but we don't think that that went true -- true in the spine and true from what was -- actually what was proposed stayed the same for us in the knee but we don't that will inhibit the procedures.

The reason that we think that there is an opportunity in the ambulatory surgical center is there's been a decision by CMS to move this into an office category because they are just -- the part of CMS that makes these decisions is uncertain where most of these invoices happen or procedures happens. And so we are really feeling like we have an ability to work with consultants or a group that can quickly show that pretty much all of these procedures are in the facilities. So moving to the facility payment we're at sort of [350] range in ambulatory surgical center. There's a possibility we can move that over time to [800]. And there would be a physician fee associated with for example orthopedic surgeon doing that in the ambulatory surgical centers. So every quarter this is looked at. We're going to have a chance to comment on it. It's probably more of a mid-term opportunity to long-term for us. And what I would say about that is that longer term I think orthos those could be interested in doing this because they're used to bundled payments in the ambulatory surgical center and they're trying to get the catchment of these patients so that ultimately they get the total knee repair. I don't know if Dave wants to make a comment?

Dave Crawford -- Vice President, Investor Relations

I mean the only thing I would add to that Matt is you also think from a reimbursement standpoint we also are focused on the private payers and that that's a little bit longer of a journey but we continue to make progress with our clinical trials -- our clinical studies excuse me are relative to COOLIEF. As Joe talked earlier we have one that's starting up comparing COOLIEF for standard RF. We've already have the steroid study complete and we'll be showing data here in the next couple of weeks with respect to the hyaluronic acid for the full year prior to that study. And so that journey continues with the private payers as well which is also an important part of getting COOLIEF more fully reimbursed.

Joseph F. Woody -- Chief Executive Officer and Director

I think it's really important what Dave said and I think everyone on the line has seen with other technologies. You get your code with CMS and then you really have to have all of your clinical studies complete. And for us the big one really is around July of 2020 with HA and then further to that standard which is really what the payers are going to be looking to. Doesn't mean that we're not going to be business or we're not going to grow our business but the real uptick that people are looking for sort of pushes out to the end of '20.

Matthew Ian Mishan -- KeyBanc Capital Markets Inc. -- Analyst

Thank you.

Operator

Our next question comes from David Lewis with Morgan Stanley. Please go ahead.

Marissa Elizabeth Bych -- Morgan Stanley Research Division -- Analyst

This is Marissa Bych on for David Lewis. I have 2 quick questions. The first one would just be as we think about 2020 margin expansion to what extent do these third quarter issues bleed into 2020 by your best estimates? And what's the right way to think about next year? I think consensus has about 4 points of leverage at this point. So can 2020 be 2x or more the expansion that we're going to see in 2019? Or would be a little below that given issues you have here?

Dave Crawford -- Vice President, Investor Relations

I'll try to address that question first Marrisa. As we think about 2020 obviously we're still putting our plans together with respect to that. You have to think there's definitely margin or leverage that we can get from our cost savings initiatives. One is of the carryovers and the impact of kind of resetting guidance here is we will have to reset compensation in some aspects for our short-term incentives and sales commissions. Those have been unfortunately favorable adjustments that we've made the last couple of quarters that we are all hoping get added back to our P&L next year as we deliver our plan. And that will offset a significant portion of the savings as we go into next year. And then you look at the there is going to be several moving pieces obviously. We won't see uplift in spending we've kind of commented on that reflective of some of the investment. And so hopefully we get a little bit of margin expansion from the top line growth of the business.

Marissa Elizabeth Bych -- Morgan Stanley Research Division -- Analyst

Okay. Great. That's Helpful. And then just one quick follow-up on ON-Q supply. I think we saw Hospira come back online this quarter I want to say early October. Is there any visibility that you have into how that impacts recovery timing? And then is mid-single digits the right way to think about 2020? I think last time you had mentioned may be a cadence of low single-digit to mid-single digit growth in the Acute Pain business over the course of next year. If there is anything you can share with us on your expectations there that would be great.

Joseph F. Woody -- Chief Executive Officer and Director

Yes. Marrisa this is Joe Woody. So ropivacaine looks to be back into the market bupivacaine is not completely back in the market. And just again for everyone's education it's 70% ropivacaine 30% bupivacaine. And so what that means for us is that the drug is back available -- starting to get back available almost in entirety. But what we're really have to do is resell the business to customers that were doing business with Avella and PharMEDium. And they have now moved on to other solutions as we mentioned on a couple of the other calls. And not unlike with Leiters which continues to be very successful and growing nicely. It can take several months to get folks moved over and get processed not only with just the discussions with them about doing that but then their own processes of changing their contracts and their protocols. So we feel a lot like the Leiters process and getting them back. And what we sort of feel like is that it's more of a flat type of a business in 2020 with a low single-digit growth emerging in the back half of the year. We do think long-term potentially we can move that up as You suggested. So that helps give you maybe a timeline.

Operator

[Operator Instructions] Our next question comes from Kristen Stewart with Barclays. It appears we don't have Kristen. Now we will move on to Ravi Misra with Berenberg Capital Market. Please go ahead.

Ravi Misra -- Joh. Berenberg Gossler & Co. -- Analyst

So just my first question I wanted to go back to if I could Chris' question around gross margin. With -- just hoping you'd help us quantify some of the level maybe directionally. Last quarter it was a similar sales base and you were looking at kind of 60% gross margin. I think after that call last quarter you said the third quarter would be a little bit below that. Would it be fair to say that if we kind of adjust for all these margin-related call outs in the third quarter the gross margin level would've been closer to kind of your original expectations after the 2Q call?

Dave Crawford -- Vice President, Investor Relations

Yes Ravi I'll take that one. I mean we definitely expected to have a sequential decline in margin given the shutdown of the plant. Hard to exactly predict that as we think about how long they're going to be down and how quickly they get ramped up. From a modeling standpoint it was a challenge for the teams to effectively estimate that given we've never done it before but that's the biggest driver. And then what was not planned was really around kind of the distribution aspect of the business. NeoMed as Joe mentioned was a drag on that sequentially as well. We are confident we can get that back up to kind of the average margin of the business as we get to the synergies over the next 2 years for that. But again I would really really emphasize that plant downtime and then the start-up of the plants and getting them up to a more normal efficiency was the biggest driver and then some of the distribution cost associated with trying to relieve the backorder situation at the end of the quarter was the second piece of that.

Ravi Misra -- Joh. Berenberg Gossler & Co. -- Analyst

Okay. Great. And then just on ON-Q I appreciate the color for 2020 around that flattish growth. Just curious if you can explain to us a little bit kind of what's in your control here and then what's out of your control in terms of how the hospitals go about securing that sale? Or whether you can drive contracts with your customer ahead of them to securing those bills? Just walk us through the sales process there and why it looks to be rebounding a little bit?

Joseph F. Woody -- Chief Executive Officer and Director

Yes I mean ultimately if you get the drug back that's a great thing and that puts a bit more in control for us. There is still really only one 503B that really can solve the solution for our customers. At Leiters thankfully we have the sole source relationship with them. But essentially many of these customers have likely moved on to their own use of -- sorry opioids or their own local shots or a completely different approach to treating these patients. I think we can get a greater majority of them back over time but again as we experienced with Leiters that timing can be several months and in some cases that could be up to a year for an account. The difference now though and the positive for us is what we know was working with us was the cadaver labs talking to surgeons getting our educations and our clinical studies out and we now have ways and avenues that are very different than one solution. So over time I'm very confident about us getting back to the kind of position that you've seen in the past. We just are really making sure that everyone understands. It's just not an automatic that in the fourth quarter you're going to see that kind of pop.

Dave Crawford -- Vice President, Investor Relations

I think this is also an area where bringing in Summit as the different solution with the electronic pump clearly helps it has helped improve the conversations with some accounts. And as we continue to bring that into the portfolio get our reps trained on that it can be additive to the portfolio as well and not only retaining customers but also getting customers back and moving forward with more people adopting the therapy.

Joseph F. Woody -- Chief Executive Officer and Director

I think it's a good point that Dave makes. I mean we are experiencing a real positive reception from customers on the Summit acquisition. They understand and we can show them pathway of our innovation on that. They're excited about the relationship with BioQ that we've put in place. So really -- in terms of pumps and us been the market leader everything coming back. We've got the best solutions in place and frankly we've got the best breakthrough work going on. So for that segment of the market the south side of the longer-acting local we're going to be in good position over time. So that I'm happy about.

Ravi Misra -- Joh. Berenberg Gossler & Co. -- Analyst

Great. Thanks. And then maybe just one last question or maybe 2 last questions. Just one easy one the FX impact that you're now expecting for the full year. And then second one the questions that we've been getting on the road a lot for -- regarding the company is can we get an update on the CFO search? And I don't think you guys provided one in the prepared script. So any information you can give us there?

Joseph F. Woody -- Chief Executive Officer and Director

Yes. I will see to CFO and then I guess Dave was waving plus talk a little bit about currency. Look this is a still a very compelling story. It attracted me from a standpoint -- look there is complexity we are transforming the business we've done a lot of things some have gone well and some have not. And I think the interview candidates can see that. And then we're actually getting to a point where you start to look out. A new year from now we get a lot of these things that are headwinds in our rearview mirror. we have been close with a candidate that we just could fully get to agreement on that we thought we were home with. In the meantime Warren who -- MacHan who was the CFO of the division is doing an outstanding job. Also Dave is taking on some of those roles and doing a great job for us along with the team. We have a good list now and we are now progressing the next in line and a few new candidates. So I think our new sort of target you can never predict these things like M&A is to get something done by the end of the year it may now have squeezed into the fall. But happy with the slate that I'm seeing. And Dave you want to mention?

Dave Crawford -- Vice President, Investor Relations

Yes. On your currency question Ravi currency has been a slight headwind less than 1 point pretty much all year long. It's going to be less than 1 point we would anticipate this year of a headwind to the business.

Ravi Misra -- Joh. Berenberg Gossler & Co. -- Analyst

Yes. Okay. Perfect. Thank you.

Operator

Our next question comes from Kristen Stewart with Barclays. Please go ahead.

Kristen Marie Stewart -- Barclays -- Analyst

Can you hear me now?

Joseph F. Woody -- Chief Executive Officer and Director

Kristen we can hear you now. I don't know what happened.

Kristen Marie Stewart -- Barclays -- Analyst

Glad you can hear me now. So I just wanted to go back to COOLIEF. I just wanted to understand the reimbursement because it is kind of confusing. So the $1700 that the new rate for hospital outpatient how does that compare to kind of the average reimbursement that was in place? Because my understanding was that you could book some modifiers and so the average reimbursement that a typical hospital outpatient could get was actually I guess generally higher. I guess what's kind of like where the net reimbursement has moved? I guess it's higher than generally speaking but just -- I don't know if you have a sense for where it is now -- an average kind of hospital was getting?

Joseph F. Woody -- Chief Executive Officer and Director

Yes. So very similar to the average that the hospital was getting we're going to be at $1719 for the facility and about $153 for the physician. The difference is that we can't do multiple nerves beyond 3. That's the package that you get as a lot of this is going to bundling as you know sort of one payment for everything on the procedure. We've worked a lot with our existing customers and obviously a lot of them were directly involved in the help that we had between the hill and also are consultants to look and do this. And I think we're in a space now where we feel comfortable that they are going to utilize this procedure for the knee in HOPD. And you know we are now out of the situation and I think I saw you right up where it could have been somewhat similar but it could have been obviously bad for us had this gone the other way and those knees weren't available to us.

Kristen Marie Stewart -- Barclays -- Analyst

Okay so the way to think about it is that it removes kind of that downside risk and so this is net-net a positive and kind of can keep you growing COOLIEF at that double-digit pace from here on now?

Joseph F. Woody -- Chief Executive Officer and Director

Yes. And then I think the other thing it does for us as the studies come through we now have a leg to stand on. We go into these commercial payers and talk to them and say look CMS has a code for this and obviously if you managed Medicare you sort of have to follow the -- along with the Medicare. And you get out a year from now toward the end of this year and then beyond the 2021 when all the studies are done then it becomes very powerful. But I think you're thinking about it the right way.

Kristen Marie Stewart -- Barclays -- Analyst

Okay. Great. And then you mentioned there was a shift from the multi-prob kits to standard kits and that kind of an adverse mix. What exactly was that? And is that something that you would expect to continue?

Dave Crawford -- Vice President, Investor Relations

So we sell a single probe kit that if you're doing burns on a knee or back you just use that. You place it once to a burn and then you place it 2 or 3 other times depending upon the number of burns that are necessary for the procedure. An alternative and at a higher price point is our multi-probe kit that allows the physician to place all 3 or 4 probes at one time and do the burns at the same time. The more efficient process for the physician. You can do more patients that way but we do charge a premium. So we saw unlike in the years past where we were actually moving people to that multi-probe kit we saw more people go back to the standard kit which is a less expensive option for them. Tough to say whether or not it will continue as we go forward. It wasn't a significant headwind but it was one that definitely impacted versus our expectation for COOLIEF.

Kristen Marie Stewart -- Barclays -- Analyst

Okay. And then my last question is what is the organic growth guidance for the full year? I think you've obviously revised the range I think last time organic was around 2% to 4%. If I'm looking at it correctly is it now around down 1% to up 1% for organic?

Dave Crawford -- Vice President, Investor Relations

You got it right Kristen.

Kristen Marie Stewart -- Barclays -- Analyst

Okay. Great. And then just in terms of last year it sounds like some of these issues are likely to persist into early in the year so it sounds like we should expect some continuation these headwinds? And then as we look into late 2020 some moderation. So to kind of think of next year kind of an improving trend I guess when you guys ultimately give 2020 guidance?

Joseph F. Woody -- Chief Executive Officer and Director

Yes.

Kristen Marie Stewart -- Barclays -- Analyst

Okay, great. Thank you so much.

Operator

Our next question comes from Lawrence Keusch with Raymond James. Please go ahead.

Lawrence Keusch -- Raymond James Financial, Inc -- Managing Director

This is John Hsu on for Larry. I just had a couple. If we could just stay on Kristen's question for a second. Just -- as far as the changing guidance I think you took things down by 3% at the midpoint. Can you just walk us through the backorder impact? You said that's about 80 basis points I believe. But then distributor destocking International sales shortfall partially offset by Endoclear. Could you just walk us through those 3 pieces that get us the new range from the old one?

Joseph F. Woody -- Chief Executive Officer and Director

Yes John. As you look at that clearly we have the impact that's rolling through this quarter relative to our expectations which is about half of bringing that down. And then you have the continued [piece] relative to potential risk and the backorders going into the fourth quarter that's partly reflected in there as we look at Chronic Care. And the start of the sales in October we continue to see some of the distributors pulling down what would -- on their sales and look to be adjusting our inventory. So we're reflecting that into the guidance as well.

We've talked to those distributors and they communicated they're going to get back to a more normal level or start rebuying at a more normal monthly level. But October was off to a little bit of the slower start similar to what we saw in the end of last quarter. And then the other piece is International. So we had some tenders won in the first half of the year. We had been counting on those to come through. A lot of those were in Mexico but with the government change that -- we have not seen those orders come through unfortunately. And then some of the acceleration we had hoped for with respect to the EMEA Pain Management business both in Acute Pain and the Interventional Pain that is falling short of expectation. We had hoped to cover some of that with a little bit stronger Chronic Care sales but that's an opportunity that is not now going to present itself.

So those pieces are pretty much the bigger drivers of the revision relative to guidance with the hardest part to predict is really how we address the backorders and to the earlier question what part of those are sales that we actually missed because we didn't have product available for our customers

John Hsu -- Raymond James & Associates Inc. -- Analyst

Okay. Great. And then I also got the comments that you still feel very confident with the focus on IT that you can get the savings of $12 million to $16 million in 2020. But can you just speak to the confidence in the long range margin target? I think you're thrown out there that you expect EBITDA to move to the mid-20s range but exiting 2021. So just where we are now? Do you expect that to shift at all?

Joseph F. Woody -- Chief Executive Officer and Director

I'll say a couple of things and then I think may be Dave stay will make a comment or 2 because that's generally like -- is the plan and the metrics are they intact. So we're clearly behind with this quarter and what we're saying we'll continuing into Q4. The main driver obviously has been Acute Pain which started on supply dislodgment that we've talked about. We definitely need to accelerate organic growth. We're committed to the cost up but we believe it now we need to go further and I -- you can expect more cost out from us. I don't see the peak metrics being reached on margin in 2021. But I do see that over time we can get there. And then there's sort 3 things that change that as a variable. Obviously to the extent that we can accelerate the organic growth number 2 the more cost beyond what we already talked about; and number 3 obviously the things unique about the company of our size is the M&A and the capacity that we still have in the [400 to 450] range. So it's going to be getting there a bit of a different way and the timeline obviously slightly different as well.

John Hsu -- Raymond James & Associates Inc. -- Analyst

Okay, great. Thank you so much.

Operator

[Operator Instructions] our next question comes from Rick Wise from Stifel. Please go ahead.

Frederick Allen Wise -- Stifel Nicolaus & Company -- Analyst

I'm joining -- jumping between calls and I want to go back to the IT question again. I know you've answered it in part but I just want I heard loud and clear. What -- the system came on in August so it was before the end of last quarter. And I'm not quite clear what happened did it not happen -- whatever the issues were didn't come up immediately? And how confident are you that the IT issues have peaked? Just help us understand your visibility on that? And how completely you feel like you've derisked it?

Joseph F. Woody -- Chief Executive Officer and Director

Yes no problem. This is Joe Woody. One of the things that I think about as we are up and running working we're billing customers we are closing our business we now understand that loss of visibility that we had in supply chain and Rick earlier on the call we were talking about what essentially caused us a problem was the inventory cycle times doubled from the plant to the sterilizing to the customer. Another piece inside of that is that we're having a rebranding going on so a level of higher inventory versus Avanos inventory in International where you're not register became a factor as well and this was largely Chronic Care related. I have seen tremendous progress since August 1 in the go-live. And these teams were basically a big change process kind of where they're learning new terminology they're learning the new systems there's a training element to it. And I feel like that we're really getting our hands around this but we're being very cautious about it and particularly the International side of this these backlog in the event that that we carry out. And in fact we have a backlog right now into Q4. Internally we've sort of characterized it a football analogy is that we're running the wishbone with an old IT system and we're now running the run and shoot. And you move -- that caused a lot of issues but the most major really was that inventory build and the ability to see the inventory. We just recently been visiting with our Board and we showed them what we're doing in the war room. So I do think that we're going to be out of this thing as we get into Q1 but we obviously need to be cautious in Q4.

Dave Crawford -- Vice President, Investor Relations

Other color I would add Rick to Joe's responses the system itself is working appropriately and to our expectations. It's really the big -- biggest thing is those change in processes and getting used to obviously a different system trusting the system that's in place you are seeing reports that are slightly new and people are having to learn and adjust to those and making sure that they have confidence in what is being generated out of it. As they do see that and is backed up with information from other teams that's where we're getting really benefit of going forward. If I just throw a couple of examples though. It took us pretty much the entire month of August to close the books. That was essentially cut in half for the month of September as we've gotten familiar with this. We are seeing more efficiencies on looking at things from a global basis. So it is working appropriately and we are making significant improvements in efficiency. It's unfortunately we probably had a little bit more issues than we anticipated relative to some of the cycle times. When we kicked this time off on August 1 we were shipping orders to an equivalent level almost immediately or just within a few days. It really became an issue relative in September and trying to replace and refresh the inventory at our distribution centers and internationally.

Frederick Allen Wise -- Stifel Nicolaus & Company -- Analyst

Gotcha. Thank you.

Operator

Our next question comes from Kristen Stewart with Barclays. Please go ahead.

Kristen Marie Stewart -- Barclays -- Analyst

A follow-up. I was wondering if you guys could just give an update on your cash flow expectations for the year. And just going forward it just seem like -- I'm just curious if there's going to be any added expensive just for the IT infrastructure changes or anything like that? And then just how we should just think about cash flow generation profile of this company?

Dave Crawford -- Vice President, Investor Relations

Yes. I'd say the biggest impact on the cash flow in the third quarter unfortunately was working capital. One of the processes thing that changed relative to receivables impacted that. We definitely saw an increase in our receivables we're working to get that back. So that as we go through and get back to a more normal level will be a positive impact to cash flow whether it all comes back during the fourth quarter I believe in the next year. We'll see how that happens but the team is definitely working on it. I think you've seen our big reduction in capital spending. So were getting to a more normalized level there that have been in the third quarter. We did have some elevated one-time cost around some of the things we're doing from an acquisition integration standpoint. We had some higher legal cost we're beginning to hopefully get to a level where we'll start to wind those down as well. So as we get to the next year we're definitely looking to have favorable cash coming into the doors as opposed to going out as we build our plan.

Kristen Marie Stewart -- Barclays -- Analyst

Okay and then just to go back I just want to make sure I heard clearly on the ON-Q site. Joe I think you had said for ON-Q next year you were thinking that could be more of a flattish business sounded like maybe a pressure earlier in the years as drug supply makes its way back into the channel and then kind of exiting the year more a little bit of low single-digit growth and then maybe looking out more into 2021 get back more of that kind of mid-single digit growth profile. Sounds like COOLIEF is still now intact with reimbursement looking like it's add or maybe even a little better with what's currently in place. Is -- does that sound about right? And then maybe Chronic Care probably still you're confident kind of that mid-single digit growth profile?

Joseph F. Woody -- Chief Executive Officer and Director

Yes you get it right.

Kristen Marie Stewart -- Barclays Investment Bank -- Medical Supplies & Devices Equity Research Analyst

All right. Perfect. Thank you very much.

Operator

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

Marissa Elizabeth Bych -- Morgan Stanley Research Division -- Analyst

Just a quick one for me. You guys mentioned that cycle time to sterilization has been extended. Are you guys having issues with contract sterilization and running into some delays there?

Joseph F. Woody -- Chief Executive Officer and Director

Not to the scale that you see some of the other medical device companies. We've got a couple of smaller product lines one would be micro cup as an example where we're seeing a little bit of an issue in Q4 but not at magnitude because the team has done a good job of having multiple sterilizer companies that we work with and also geographic locations. So less of an extent for us. I do know that that is a big trending issue for most medical device companies right now. And then I would apologize to the employees that have for asking this. But would you guys have like extra downtime to get these backorders in place around some of the holidays would you have some like extra days available that might not be accounted for manufacturing?

Dave Crawford -- Vice President, Investor Relations

Look I mean it's a good questions. Our employees are doing a great job. On the IT deployment there have been a lot of 24/7 weekend work going on. There is a war room where folks are here pretty late night and work in the weekend. So that's definitely going on.

Operator

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

Joseph F. Woody -- Chief Executive Officer and Director

Thank you. Thank you everybody for their interest in Avanos. I along with all of our management employees share our tremendous passion about this business and what we're doing. Sometimes it isn't easy because of the magnitude of what we're doing. We shared a great deal of information today because we wanted to make sure that all of our investors understand where we're making progress and what we're doing to overcome the hurdles. I and the team remain committed to our strategy of accelerating organic growth pursuing M&A and taking out cost and following a number of necessary changes to our business. We're focused on key drivers of growth and fully confident in our ability to achieve our Q4 and 2020 priorities. But thank you very much for your support.

Operator

[Operator Closing Remarks].

Duration: 57 minutes

Call participants:

Dave Crawford -- Vice President, Investor Relations

Joseph F. Woody -- Chief Executive Officer and Director

Christopher Cook Cooley -- Stephens Inc. -- Analyst

Matthew Ian Mishan -- KeyBanc Capital Markets Inc. -- Analyst

Marissa Elizabeth Bych -- Morgan Stanley Research Division -- Analyst

Ravi Misra -- Joh. Berenberg Gossler & Co. -- Analyst

Kristen Marie Stewart -- Barclays -- Analyst

Lawrence Keusch -- Raymond James Financial, Inc -- Managing Director

John Hsu -- Raymond James & Associates Inc. -- Analyst

Frederick Allen Wise -- Stifel Nicolaus & Company -- Analyst

Kristen Marie Stewart -- Barclays Investment Bank -- Medical Supplies & Devices Equity Research Analyst

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