Avanos Medical, Inc. (NYSE:AVNS) Q2 2020 Earnings Conference Call August 4, 2020 9:00 AM ET

Company Participants

Dave Crawford – Vice President of Investor Relations

Joe Woody – Chief Executive Officer

Michael Greiner – Senior Vice President and Chief Financial Officer

Conference Call Participants

Chris Cooley – Stephens

Matthew Mishan – KeyBanc

Marissa Bych – Morgan Stanley

Ravi Misra – Berenberg Capital Markets

Andrew Ranieri – Stifel, Nicolaus & Company

Kristen Stewart – Barclays


Good morning, and welcome to Avanos Second Quarter 2020 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I’d now like to turn the conference over to Dave Crawford. Please go ahead.

Dave Crawford

Good morning, everyone, and thanks for joining us. It’s my pleasure to welcome you to the Avanos second quarter earnings conference call. With me this morning are Joe Woody, CEO; and Michael Greiner, Senior Vice President and CFO.

Joe will discuss three topics this morning beginning with an update on our response to the pandemic, then our second quarter performance, and end with our progress against our 2020 priority. Michael will then provide details of the actions we’re taking to address the challenges presented by the pandemic and review our second quarter results. 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 the 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.

Joe Woody

Thanks, Dave. Good morning, everyone and thank you for your interest in Avanos. Before I discuss the company’s performance, I want to share with you our thoughts on the events that have once again highlighted social injustice and racial inequalities in our country. We need to do better and we need to start by understanding and acknowledging the systemic issues of racial and gender inequality. Senior leadership team will begin a listening journey to further understand our employees’ perspectives and feelings and to identify what we’re doing right and where we’re coming up short. At Avanos, we pride ourselves we’re making a difference and putting action behind our words. So, we formally launched a strategic initiative focused on developing and implementing in Avanos’ diversity, equality and inclusion plan to further engage and motivate our global workforce.

In parallel, we also made a significant donation to the Equal Justice Initiative, a non-profit agency committed to challenging racial injustice. We believe that if we stand together in these efforts at Avanos, we will have an organization where everyone feels 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 performance. We’re at the midpoint of the year and I continue to be pleased with our team’s strategic execution and commitment to meet the urgent needs of patients with our critical products. Our team has demonstrated resilience in adapting in this dynamic work environment, rising to the challenges facing our business and executing their responsibilities to the highest standards. Our team’s work ethic brings to life our values and speed, collaboration and being customer centric. Values that have proven instrumental in helping us respond effectively to the pandemic. In this ever changing environment, where there is still uncertainty around the duration and economic impact of the virus, we remain focused on our three priorities. One, maintaining the health and safety of our employees and their families. Two, ensuring we have sufficient supply of our respiratory health products used to treat COVID-19 patients; and three, preserving our strong financial metrics and meeting the needs of customers while ensuring we’re well-positioned for future growth in a post COVID-19 environment.

First, the health and safety of our employees and their families remain our top priority. A significant challenge has been maintaining production at our manufacturing plant to ensure availability of our critically needed products. We continue to implement additional prevention measures and protocols before, during and after each shift.

For example, we increased the number of buses used to transport employees so that physical distancing to be maintained. Instituted procedures ensuring everyone passes a temperature screening before reporting our facilities, added physical barriers to ensure physical distancing and modified schedules to provide time for enhanced cleaning of the plant. These are just a few of the protocols implemented to ensure our manufacturing employees feel and remain safe.

In a recent audit of our facilities for COVID-19 readiness, the Mexican government auditor made a special note of the many positive measures we’ve taken to keep employees safe. I want to thank our products supply and plant leadership teams, who are rising in the challenges and keeping our teams safe. During the quarter, our global field sales teams began to have in-person meetings with healthcare providers in their facilities. For these teams, we provided them with PPE and training. So they are equipped to safely perform their jobs in this environment.

Our second priority is to ensure availability of our life enabling respiratory health products. During the quarter, accelerated demand for these products continued and some products remain on back order. Our cross-functional teams using an allocation process ensured customers around the world receive the needed products while also preventing stockpiling.

In response to the surging demand, during the quarter, our team rose to the challenge and design, install and start a new production line at our Tucson facility to provide additional supply of high volume codes. This was a complex multi-faceted project as it touched all aspects of our supply chain from sourcing raw materials and assembling to packaging, to the finished goods.

The dedication our employees repeatedly demonstrated is a testament to the strength of the Avanos team. Our third priority is to preserve our strong financial position through strategic cost containment and cash preservation measures to position us for future growth. We execute on our plans to deliver savings and in reduced unusual costs, which help to drive positive cash flow from operations.

Additionally, we limited capital spending to maintenance for our facilities and to boost production for our respiratory health products. Because of our strategic actions, we’re entering the second half of the year in a strong financial position.

Turning to our second quarter performance, sales were stronger than we had expected as we were pleased to see the faster resumption of elective procedures, which positively impacted our premiums and franchises. Overall sales of $164 million or 5% lower compared to the prior year and we earned $0.13 of adjusted diluted earnings per share. Both metrics were above our expectations.

As the quarter unfolded, we saw a monthly sequential improvement in our Pain Management franchises, both ON-Q and COOLIEF which are almost exclusively used in procedures performed in hospitals, so our US volumes at a trough in April of roughly 25% of their pre-COVID level and grew to approximately 75% of normal volume by the end of the quarter.

While this is encouraging drivers of a sustained recovery will likely vary regionally and it may be predicated on the extent and duration of COVID outbreaks. In recent weeks, we have seen a surge in the number of COVID cases in Florida, Texas and Arizona showing signs of impacting the recovery for these franchises.

To gain a more holistic view of the recovery for our industry, our team partnered with hospitals, customers, consultants and market experts to gain insight and to help frame our forecast models that contemplate the recent spike in COVID-19 cases along with the risk of regional shutdowns and economic uncertainty.

While we continue to anticipate elective procedures will increase in the second half of the year, we no longer view US procedural volume returning to pre-COVID levels by year end and expect the recovery will continue to 2021.

Moving to chronic care, as I highlighted earlier performance was driven by continued and heightened demand for our portfolio of clinically proven respiratory health products which are essential in treating COVID-19 patients.

We expect this elevated demand to continue into the second half of the year but at a slower rate than the first half. In the gist of health fewer elective procedures coupled with patients delaying tube replacements out of fear of potentially being exposed to the virus in hospitals impacted performance. We anticipate these headwinds will continue to some extent through the balance of the year.

Looking beyond the pandemic, our market leading chronic care business remains strong and is well-positioned to grow consistently at mid-single digits. While the impact of the pandemic continues to evolve, we are poised to respond accordingly to meet the needs of our customers while moving our business forward as we remain equally focused on our long-term strategy and our four 2020 priorities.

First, we’re taking steps to build sales momentum across our franchises. With respect to our pain businesses, we are working to further raise awareness of our non-narcotic pain therapies for ON-Q during the quarter. We conducted the webinar and VuMedi sessions attended by over 4,000 healthcare professionals. These virtual sessions will continue into the second half of the year and are complimented by a recently published article in The Journal of Orthopedic Experience and Innovation and by Dr. Wickline and Dr. Stevenson on the ease of use of ON-Q in treating TKA patients. Their research found that TKA patients who use ON-Q needed fewer opioids and in some instances no opioids to effectively manage to post-operative pain. Also the number of customers moving to Leiters, as a pre-filled alternative continued to grow. In fact, in June we saw the highest volume of pumps filled by Leiters despite overall volumes being affected by the pandemic.

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In Digestive Health, our portfolio is the most comprehensive, enteral feeding portfolio that offers solutions for every stage and age of feeding. To further leverage our portfolio in early June, we launched a campaign that brings all three of our market leading brands MIC-KEY, CORPAK and NEOME together under one family of brands. The campaign uses various media including digital platforms and a comprehensive educational website called Tubefed.com, a complete guide to enteral feeding in one convenient location to further educate clinicians, caregivers and patients of our feeding solutions.

A family of Avanos brands enables our sales teams to better leverage the depth and breadth of our portfolio while helping grow and protect our Digestive Health franchise. Our second priority this year is the integration of Game Ready, NeoMed and Summit. Despite the challenges of working remotely, we’re on schedule with our integration plans and expect to close the associated facilities during the second half of the year and recently began integrating these companies into our IT system to further gain operational efficiencies.

Our third priority complements our integration accomplishments as we’re beginning to see some efficiency from our new IT system. The improvements are enabling us to conduct more in-depth analysis, realized reductions in accounts receivable and improve process times for transactions. Finally as I mentioned, we implemented a strategic cost containment measures that helped improve our cash flow for the quarter. As we enter the second half of the year, we’re strengthening an already solid balance sheet and I’m confident we’ll be well-positioned for growth in a post-COVID-19 environment. Before turning the call over to Michael, I want to share some good news about the class action lawsuit brought against Kimberly-Clark and Avanos regarding MICROCOOL surgical gowns. Two years ago, we have appealed the judgment on July 23 we were notified that the United States Court of Appeals for the 9th Circuit had reversed the judgment against the company and instructed the trial court to dismiss Avanos from the case altogether for lack of jurisdiction. The 9th Circuit also ruled that the class action against Kimberly-Clark should not have been allowed to proceed and as ordered the case sent back of the trial court for further proceedings.

Overall, this is a great outcome for us as we remain focused on advancing as a pure play medical device company.

In summary, we continue to manage through our current challenges with the strategic focus of meeting customers need and positioning the company for long-term growth in a post COVID-19 environment.

Now I’ll turn the call over to Michael.

Michael Greiner

Thanks Joe. I’d like to start by reiterating how important it is for Avanos to better understand our employees’ perspectives and our unique experiences and use those insights to identify where we can progress as a company. Many studies have highlighted that the diversity and inclusiveness across the company’s inputs is a key determinant in companies reaching their full potential. The resilience our team has consistently demonstrated in this dynamic COVID-19 environment serves as a barometer of how this team will equally lean into this need a dialogue on systemic inequalities.

As we enter into the back half of the year, I would like to further highlight the strategic and tactical approaches we have undertaken to mitigate the impact of the pandemic on our business. The numbers of COVID cases are again spiking in the United States and the pressures we faced in the second quarter will continue to some extent into the balance of the year. Given this continued uncertainty, we are not updating our full year 2020 financial guidance at this time.

Towards the end of the quarter, we again modeled multiple sales earnings and cash flow sensitivity outcomes factoring in various revenue possibilities, the possible lengthening of accounts receivable collections, identifying discretionary spending cost containment opportunities and other potential impacts to stress test our liquidity needs.

I’m pleased that even into the most bearish scenario, we are confident we can maintain a similar financial position as we ended the quarter. The actions taken today to reduce costs, curtail capital spending and drive working capital efficiencies have helped us preserve our solid balance sheet as evidenced with our current cash balance of $185 million being roughly equivalent to our balance prior to the pandemic.

In the second half of the year, we will continue to execute in these areas while looking to further enhance the efficiency of our working capital by reducing inventories. Finally, we’re working to file our amended US federal tax returns in response to various provisions in the CARES Act. The filing in these returns should result in a significant refunds resulting from carrying back our NOLs to periods where we previously paid federal income taxes. While we’re not planning to receive these refunds in 2020, they will further enhance our return to positive free cash flow in 2021.

In addition to a solid cash position, we also maintain minimal leverage and have no debt maturities until 2022. As Joe highlighted, despite lower sales, we generated positive cash from operations and our free cash flow improved to an outflow of just $6 million. With that as a backdrop, I’ll now review our second quarter results.

Overall, sales for the quarter declined 5% to $164 million versus last year with organic sales down 11% due to lower volumes. The difference represents the 6% growth contributed by our NeoMed and Summit acquisitions. Chronic Care sales grew 18% to $120 million, driven by strong demand in Respiratory Health for our closed suction catheters and oral care products used to treat COVID-19 patients, as well as our contribution from our NeoMed acquisition.

In Digestive Health, we saw an uptick in demand for our CORTRAK products related to treating COVID-19 patients. However, as Joe mentioned, this growth was offset by our legacy Mickey business that was affected by the postponement of elective procedures and delayed tube replacement by patients who weigh the cost that possibly contracting COVID-19 in a hospital setting versus complying with their feeding tube replacement regimen.

Turning to Pain Management, while we saw elective procedure was resumed during the quarter ahead of our expectations. Sales still decreased by 38% to $44 million. Despite the slowdown, our ON-Q Leiters partnership presented strong second quarter results, pre-filled by ON-Q pumps sold at record levels in June. This momentum is continuing into the second half as existing and new accounts seeing the benefit of pre-filled pumps. In addition, pumps filled by Leiters are now approved for a 90 day shelf life versus 30 days. This extended shelf life enables customers to order in quantities that fulfill anticipated usage, while also providing insurance against they need to dispose of unused pumps, when cases are either canceled or delayed.

With respect to COOLIEF, 1,500 physicians attended a total of 9 webinars and training sessions, we delivered during the quarter that focused on different modalities. Additionally, we place more generators and plan despite hospitals restricted capital spending and our sales team limited access to facilities, these outcomes during quarter with significant headwinds further build our confidence that COOLIEF will remain a solid double-digit grower.

Also, we are excited to see the benefits from our investments in clinical studies, support COOLIEF as a leader in its space. The dynamics of our international business are similar to the trends in the US business. We delivered double-digit growth fueled by global demand for our respiratory health products and our CORTRAK nasal gastric feeding tube. We are well-positioned to deliver on our mid single-digit growth expectation for the year and longer term, we continue to see opportunities in this business that has support our overall growth strategy.

Moving down to the income statement, adjusted gross margin decreased to 56% compared to 60% last year. Margin contraction was mainly due to unfavorable sales mix, primarily respiratory health product demand coupled with significant decreases in our pain businesses. Also contributing elevated costs associated with COVID-19 that Joe referenced in his remarks. Although costs associated with COVID-19 are anticipated to lessen in the second half of the year. These costs still had a negative impact on our gross margin in the coming quarters.

Adjusted operating profit totaled $13 million compared to $20 million in the prior year. Performance was impacted by lower revenue and lower adjusted gross margin, which was partially offset by the previously mentioned cost containment measures. Adjusted EBITDA totaled $19 million compared to $23 million in the prior year. Adjusted net income totaled $6 million compared to $14 million a year ago and we earned $0.13 of adjusted diluted earnings per share ahead of our expectations driven by the faster recovery in elective procedures and lower operating expense profile driven by our cost savings measures.

In summary, we delivered sales and earnings that exceeded our expectations, while taking strategic steps to ensure financial position and liquidity remain strong. Our team showed resilience and exhibited each of our values during the second quarter, which enabled us to meet customers demand and position our portfolio products for long-term growth while getting patients back to the things that matter. Operator, please open the line for questions.

Question-and-Answer Session


[Operator Instructions]

Our first question today comes from Chris Cooley with Stephens.


Thank you. Good morning. Appreciate you taking the questions. Hope everybody’s well. Maybe just two from me at the outset. You’ve touched on this in the past in your prepared remarks but with the closed suction catheter, the BALLARD been endorsed by the World Health Organization and your fourth line coming up and running now. And I’m just curious; help us think a little bit about this tailwind as it applies to Europe and Asia specifically because those markets would be converting. And do you still think that this business would as a result 25 to 50 basis points to overall corporate growth and a bigger impact in 2021. Just kind of curious about it as we kind of think to the back half of the year to the extent that you can provide some additional color there, would be appreciated. And then for my follow-up noticed in your schedules this morning on the GAAP to non-GAAP reconciliations that approximately half of the adjustments there are COVID-19 related expenses in the quarter. Could you just give us some color as to how we should think about those COVID-19 related expenses to the back half of the year to kind of get to a cash flow number? Thanks.

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Chris, it’s Joe Woody. I’ll take the respiratory question and then Mike will follow up on the COVID expenses. But the way to think about respiratory and the close suction BALLARD is about a third of our headwind was offset by the closed suction revenue that would so you think of it in terms that we’ve been about $10 million ahead of our normal respiratory volume for the year. And we expect that to continue to some extent in the second half. Next year to your question, we’ll have we’ve had boluses of orders this year, but you are right with the WHO recommendation, we’ve seen for example India become active and looking at KOLs and establishing education programs. So I do think over time, we’re going to be able to expand that business more internationally based upon unfortunately that the pandemic. So hopefully that helps on the revenue side and it looks like Michael can answer your COVID expense question.


Yes. Thanks for the question, Chris. So we have two sets of COVID costs, one set that we’re calling out to $3 million plus that we’re considering more one time in nature, some of that will continue into the back half of the year. And then there are some costs that we’re incurring on a more routine basis that we are and expect to incur going forward and that has an impact on our gross margins that’s embedded in our actual cost of goods sold.


Our next question comes from Matthew Mishan with KeyBanc.


Hey. Good morning, guys. So I just want to get what you’re implying with for some of your commentary like on one hand you’re saying the virus impacts will extend into 2021; on the other hand you’re saying kind of you’re prepared to return to the growth post-COVID. You know are you basically saying that you’re not expecting a return to growth by the fourth quarter?


I think it’s difficult to predict things like that at the moment because the duration and severity of the pandemic is just an unknown and what we’ve seen like I think most of the calls, is on elective procedures are return to sort of 70% to 75% overall and there’s definitely pockets where that’s maybe increased or even lower with the increases are probably on more severe surgical cases that need to be done. And we definitely think that there was an element of a bolus of backlog that came back in that 70% to 75%. Depends on how different regions manage these surges and now we see the Midwest coming on. I think there’s a lot of focus, soon it will come on unemployment. How people are managing their deductibles? And so keeping an eye on that and until we kind of get through the third quarter and into the fourth, I think it’s easy to get a second wave which hasn’t even happened yet. It’s just a really tough thing to manage. Now that said, we’re really happy with our performance both on the cost side and on the revenue side and keeping our manufacturing plants going. I think we’re in a pretty good position overarching and we want to obviously maintain that, but it’s a very tough environment to predict anyway.


Okay, that’s fair. And then the trajectory of the recovery in pain management is obviously a very severe trough for you and getting back to 70%, 75% of volume. Could you compare ON-Q versus COOLIEF? Are there some differences in those trajectories there?


Very similar. Interventional pain maybe slightly coming back a little bit faster overarching. But as you can imagine we saw the same only 25% of normal procedures in sort of the March-April timeframe that went up in May to 50%. Now we’re seeing that progress in June and into July to more of the 70%, 75% depending on the geographical area. They were very similar in terms of that progression back to the what is now a normal at 70%, 75% and then I think everybody has got an eye when do you get back to you know 90% or 100%. We’re just not seeing that fully happen in H2 and we actually think depending on what happens in the fall and the winter, this could go well into 2021.


Okay. And then the trajectory of the Digestive Health, the delayed tube replacements, I guess how long can that continue I hate to make the analogies like a haircut you can just skip that doesn’t necessarily need to be replaced or is there a backlog that needs to be people coming back to the hospital for that?


I think it’s starting to come back. I mean look you know people it’s a little bit of a consumer confidence element, but obviously in this case, it’s the fear of contracting the virus in the medical center or the healthcare environment. So there have been delayed feeding tube placements. We’re seeing a little bit of progression and things as we get to the end of the year that we’re progressed more fully. There’s nothing really structural in this Digestive Health and then we also in Q1 we’re pleased with the performance before all this started in CORTRAK and NeoMed. They broaden our portfolio. There’s the international opportunity there like we talked about with Chris on the respiratory side. So it’s going to come back over time. But it’s definitely one of those elements of waiting to get into the healthcare system, but we’ve definitely adds in the last few months seen an improvement in that category.

We saw solid July, Matt. And to your point maybe you can skip one of your reinsertions, but at some point you’re going to have to get your tube replaced. So hopefully we’re starting to see that.


Just a follow-up for clarity. How often is it supposed to be replaced? How many times per year?


Every three months. Yes, that’s a normal regimen.


Our next question comes from David Lewis with Morgan Stanley.


Hi, good morning. This is Marissa on for David. Can you hear me, okay? Okay, great. Good morning. And so I want to go back to the comment that you made on ON-Q that I think you said and saw record sales of pre-sold pumps through the Leiters relationship in June. Can you just remind us kind of what percentage of your total ON-Q business that is? And then, secondly, are you specifically attributing any of those sales to the — to that’s actually have a longer shelf life now in other words, do you think it could be any pull forward or stocking or just how would you kind of describe that? Thank you.


Yes. So remember one of the key elements on the dislodgement of that market was for minimum Avella going down and really just now Leiters being the only solution and we’re very fortunate to have a sole source agreement with them. But so about half, just riding about half of the 30% of our business that was being built is now in Leiters and Leiters continues to grow double-digit.

We think just like all of the procedures, there was a little bit of a pent-up demand and where that’s where probably you’re seeing such a spring back in certain categories in medical devices and then it’s sort of leveling out between that 70%, 75% right now. And everyone’s got their eye on the surges. But they’re having been steep away shutdowns obviously it’s kind of more only in the cities at the moment. So that’s — that it was just kind of my take on that.


Okay, great. And then on just a modeling question on the M&A, is it fair to assume that of the 6 points you’re attributing to M&A of growth, is that about roughly 5 points or a little bit more would be coming from your NeoMed relative to summit.


That’s right.


Our next question comes from Ravi Misra with Berenberg Capital Market.


Hi, thanks. Hi, good morning. How are you guys doing? Thanks for taking my question. Just one for me really quick one, how are we thinking about the M&A strategy here at the company given kind of everything that’s going on in the world and in your balance sheet. Just help me understand like what you’re looking at kind of are you still going to be optimistic or how you think about valuations right now? Thanks.


Thanks, Ravi. You know the way I think about it is we’re more focused on execution and cash building or cash preservation. I think we’re doing a great job of that. And also alongside of that a top priority is integrating Game Ready, NeoMed and Summit which are going on extremely well to capture those synergies even in this environment. And there are locations obviously being changed and so that’s in switchover of inventory things like that, but that’s all going very well. Our M&A pipeline is still extremely robust and work is definitely continuing. It’s obviously a little bit harder to do due diligence face to face or travel. It’s the same strategy you know, which is the tuck-in around the channel, which allows us to get that synergy and drive and expand our current franchises in between pain and chronic care. I think you’re more likely to see action in on the M&A side from us in 2021 versus 2020. But that we would not forego a great opportunity and we feel like we’re in a really good position in any of the near-term and the ones that we’re really excited about. So that’s how we think about it.

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Great. And then maybe one more just on flu. I mean there was an article a few weeks ago about how Southern Hemisphere levels are almost at record lows, if not nothing. Can you talk about maybe how you think that impacting some of the purchasing decisions in the back half of the year as we kind of think about the puts and takes with the COVID in that business line. Thanks.


Yes, on respiratory I mean we’re also experiencing some orders from governments that wouldn’t really affect our year-over-year. They are bulk orders. They come in their cash and then they put into inventory for these types of pandemics and we have an allocation process that we’re managing tightly, the utilization looking our trade sales to make sure inventory is not building too much.

That said like in the first question, there’s no doubt we’ll have competitor issues like many companies will that have products for COVID-19 year-over-year, but we’re doing I think a pretty good job of balancing the utilization mapping that with tracing so that it’s not something that is insurmountable. Likewise on the other side of the business in pain there will be favorable competitors.


Our next question comes from Rick Wise with Stifel.


Hi Joe. It’s actually Andrew Ranieri on for Rick this morning. Good morning. Just a question actually on upcoming catalysts. I know there’s not a lot of talk about new products at the moment just given the background. But Joe you’ve always discussed innovation as a critical growth driver at Avanos. I mean could you just give us a better sense of what’s upcoming whether product launches or clinical studies. What should we focused on so it doesn’t got lost in the COVID shuffle and maybe what is your sales force may be most excited to get a hold off?


I think the things that you should focused on with us for catalysts are the international growth obviously COOLIEF continuing a double digit growth. And then everyone including us is highly focused on the return of Acute Pain to a growth perspective. On innovation, we continue to invest in our own R&D but likewise we’re putting a heavy concerted effort in open innovation and we’re close to a deal that we’ll announce probably this week on an open innovation technology and in interventional pain business. I think the Acute Pain is excited about having some of the electronic pump right now and then we’re doing some revisions on that to make it an even better product. And of course, we’ve announced in a couple of quarters ago the BioQ partnership there and certainly chronic care is excited about the CORTRAK standard of care program and things that NeoMed brings to the table. And there are a number of conversions that had to go on hold basically because of the hospitals dealing with COVID-19. So that’s the way to generally think about it and then breakthrough products in acute pain and probably a couple of years off. But the idea is to maintain the investment level to protect our positions and continue to invest in the breakthrough areas and broaden ourselves to the open innovation.

But just remember we feel that the updated COOLIEF generator a few months ago. We were just about to launch that just prior to COVID-19. So we’re excited to see what that looks like. We had some very good early feedback on that.


Great. Thank you. And maybe for Joe or Michael but with the COVID disruptions continuing into 2021 as you’ve discussed earlier are you thinking more about the company’s cost structure balancing cash preservations and growth opportunities. It sounded like you’re maybe ready to make or start layering back on some internal investments but as we look at costs today I mean is there a even better opportunity in front of you to take out more costs and focus even more on profitability.


Yes, a great question. So we continue with all of our previously announced cost savings initiatives those keep going. With COVID-19, we’ve had a little bit of delay in a couple of the areas, but we anticipate getting all those costs as we enter the back half of the year. And then we also announced some additional cost savings that were very much COVID-19 focused. We’re ahead of where we thought we would be there. And as we sit here looking at 2021 to your core question, we’re taking a step back and thinking about which things we really need, roles that haven’t been filled for months. We don’t need to backfill some of those roles. T&E and how we think about travel, how we use video. Some of the other investments we had internally in R&D are those the type of products that we think are the right products or as Joe mentioned is open innovation a better way to approach some newer technology.

So there’s a variety of things that as we kind of enter this budget season over the coming couple of months. We’re very much trying to understand what does our proper cost structure looks like going forward both on an organizational level, but just given that those transaction type expenses like T&E. So we do believe like most companies we’ve learned a lot about ourselves in the work from home environment and we do think there is a cost structure that’s more appropriate for who we’re going to be going forward.


Our next question comes from Kristen Stewart with Barclays.


Hey, guys. Hope you’re doing well and all are safe. Sorry, there is jumping between calls, so I apologies if this was asked. But I just wanted to better understand kind of your exit run rate as you commented on July trends at all. And just wanted to kind of get further clarification on this recovery kind of pushing out into 2021 if that was kind of just your view on COVID kind of bleeding over into 2021 or if there was something just a little bit more Avanos specific just with the Pain Management business or just kind of a little bit further clarity on kind of why you believe recovery was going to kind of push out into 2021 just want to make sure I fully understand that? Thanks.


Got it, Kristen, just a couple things to update you. We did say at the beginning of the Q&A session that a third of our headwinds were offset by respiratory and that we feel like we’re about $10 million ahead there. We did say that and the electives in Pain Management in that March-April timeframe were only at 25% of normal volumes, it kind of went back to 50% in May and June was more 70%, 75% and we see that continuing into July. Our commentary on the go forward in H2 and into 2021 was really not related to Avanos, but just that without a number of antivirals and no vaccine and the time it may take to distribute that we think this is with us into 2021. And obviously, we’re seeing the resurgence now actually watching to see if there’s going to be one in the Midwest and just to sort of be cautious about the unknowns and the uncertainty in this environment. And then, obviously, if it comes back faster I think we participate in that as evidenced by kind of what happened in June. And I do believe everybody is going to be a little bit better suited sort of the end of the third quarter into the fourth to really get a read on this.


I think there’s also the reality, Kristen, is as unemployment stays high, folks don’t have health insurance so certain elective procedures will get pushed off or not done at all. We did talk to a couple of consultants that we brought in to try to understand the broader macro environment to Joe’s point. And so our comments are not Avanos specific at all which is really what we believe is the reality of the environment that we get back to 100% sometime in 2021.


Okay. That makes sense. Yes, some companies are taking a little bit more optimistic view on the end market. So it sounds like you guys are what I would consider to be a little more reasonable beyond this market, so that’s a lot of —


Look at to Joe’s last point if those end markets do come back, we’re ready to participate and then when we participated in the downs back in the June-July timeframe already. So again not a commentary that we feel like we’re missing something on the elective side or our products aren’t set up for success. We just don’t believe it’s coming back to 100% until next year.


This ends question-and-answer session. And I’d like to turn the call back over to Joe Woody for any closing remarks.

Joe Woody

I just want to thank everybody as always for the interest in Avanos. And while we do continue to manage these near-term challenges, I think we’re taking the right strategic steps to preserve cash and to continue to meet our customer demand. This in our clinically proven portfolio does give me confidence that our financial position is going to remain strong. And we look forward to talk with everybody again next quarter. Thanks.


The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.

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