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Avanos Medical, Inc. (NYSE:AVNS)
Q2 2020 Earnings Call
Aug 4, 2020, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the Avanos Second Quarter 2020 Earnings Conference Call. [Operator Instructions]

I would now like to turn the conference over to Dave Crawford. Please go ahead.

Dave Crawford -- Vice President and Treasurer and Investor Relations

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, than our second quarter performance and end with our progress against our 2020 priorities. Michael will then provide details of the actions we've taken 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.

Joseph F. Woody -- Chief Executive Officer

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 on making a difference and putting concrete action behind our words. So we formally launched a strategic initiative focused on developing and implementing an 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 nonprofit 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 a 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 commitments to meet the urgent needs of patients with our critical products. Our team has demonstrated resilience in adapting to 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 of 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 could be maintained, instituted procedures ensuring everyone passes a temperature screening before they enter our facilities, added physical barriers to ensure fiscal 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 product supply and plant leadership teams, who are rising to the challenges in 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're 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 remained on back order. Our cross-functional teams, using an allocation process, insured customers around the world received the needed products while also preventing stockpiling. In response to the surge in demand, during the quarter, our team rose to the challenge and designed, installed and started a new production line at our Tucson facility to provide additional supply of high-volume codes. This was a complex, multifaceted project as it touched all aspects of our supply chain from sourcing raw materials and assembly to packaging and 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 executed on our plans to deliver savings and reduced unusual costs, which helped 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 Pain Management franchises. Overall, sales of $164 million were 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 monthly sequential improvement in our Pain Management franchises. Both ON-Q and COOLIEF, which are almost exclusively used in procedures performed in hospitals, saw U.S. 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 maybe 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 more holistic view of the recovery for our industry, our team partnered with hospitals, customers, consultants and market experts to gain insights and to help frame our forecasting 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 U.S. procedural volume returning to pre-COVID levels by year-end and expect the recovery will continue into 2021. Moving to Chronic Care. As I highlighted earlier, performance was driven by continued 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 Digestive Health, fewer elective procedures, coupled with patients delaying tube replacements out of fear of potentially being exposed to the virus and 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're working to further raise awareness of our no-narcotic pain therapies. For ON-Q during the quarter, we conducted 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 complemented by our recently published article in the Journal of Orthopedic Experience and Innovation, penned by Dr. Wickline and Dr. Stevenson on the use of ON-Q in treating TKA patients. Their research found that TKA patients who used ON-Q needed fewer opioids and, in some instances, no opioids, to effectively manage their 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. 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 NEOMED, 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 are 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 efficiencies from our new IT system. The improvements are enabling us to conduct more in-depth analysis, realize reductions in accounts receivable and improve process times for transactions. Finally, as I mentioned, we implemented 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 appealed the judgment. On July 23, we were notified that the United States Court of Appeals for the Ninth 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 Ninth circuit also ruled that the class action against Kimberly Clark should not have been allowed to proceed, and has ordered the case sent back to 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 current challenges with a strategic focus of meeting customers' needs and positioning the company for a long-term growth in a post-COVID-19 environment.

Now I'll turn the call over to Michael.

Michael Greiner -- Senior Vice President and Chief Financial Officer

Thanks, Joe. I'd like to start by reiterating how important it is for Avanos to better understand our employees' perspectives and unique experiences, and use those insights to identify where we can progress as a company. Many studies have highlighted that 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 needed 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 number 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 under the most barest scenario, we are confident we can maintain a similar financial position as we ended the quarter. The actions taken to date 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 U.S. Federal tax returns in response to various provisions in the CARES Act. The filing of 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 are not planning to receive these refunds in 2020, they will further enhance our return to positive free cash flow in 2021. In addition to our solid cash position, we also maintained 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 CORPAK products related to treating COVID-19 patients. However, as Joe mentioned, this growth was offset by our legacy MIC-KEY business that was affected by the postponement of elective procedures and delayed tube replacement by patients who waived the cost of possibly contracting COVID-19 in a hospital setting versus complying with their feeding tube replacement regiment.

Turning to Pain Management. While we saw elective procedures resumed during the quarter ahead of our expectations, sales still decreased by 38% to $44 million. Despite the slowdown on our ON-Q, Leiters partnership presented strong second quarter results. Pre-sale behind ON-Q Pumps sold at record levels in June. This momentum is continuing into the second half of existing and new accounts see 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 the need to dispose of unused pumps when cases are either canceled or delayed. With respect to COOLIEF, 1,500 physicians attended a total of nine webinar training sessions we delivered during the quarter that focused on different modalities.

Additionally, we placed more generators than planned despite hospitals' restricted capital spending and our sales team's limited access to facilities. These outcomes during the 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 were similar to the trends in the U.S. business. We delivered double-digit growth fueled by global demand for our Respiratory Health products and our CORPAK Nasogastric Feeding Tubes. 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 support our overall growth strategy.

Moving down 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 were 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 have 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 exceed expectations, while taking strategic steps to ensure our financial position and liquidity remains strong. Our team showed resilience, and exhibited each of our values during the second quarter which enabled us to meet customer demand and position our portfolio of products for long-term growth while getting patients back to the things that matter.

Operator, please open the line for questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question today comes from Chris Cooley with Stephens.

Chris Cooley -- Stephens -- Analyst

Thank you. Good morning. And thanks for taking the questions. Hope all is well. Maybe just two for me at the outset. You touched on this in the past in your prepared remarks, but with the closed suction catheter, the Ballard being endorsed by the World Health Organization and your fourth line coming up and running now, 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 add, as a result, 25 to 50 basis points to overall corporate growth and a bigger impact in 2021?

Just kind of curious about as we kind of think through 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, I 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?

Joseph F. Woody -- Chief Executive Officer

Chris, its Joe Woody. I'll take the Respiratory question, and then Michael will follow-up on the COVID expenses. But the way to think about Respiratory in the closed suction Ballard is about 1/3 of our headwind was offset by the closed suction revenue that would so you think of it in terms of 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 some comparator issues because, obviously, we've had boluses of orders this year. But you are right, with the WHO recommendation, we've seen, for example, India become active in 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, the pandemic. So hopefully, that helps on the revenue side. It looks like Michael can answer your COVID expense question.

Michael Greiner -- Senior Vice President and Chief Financial Officer

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

Chris Cooley -- Stephens -- Analyst

Thank you.

Michael Greiner -- Senior Vice President and Chief Financial Officer

Thanks, Chris.

Operator

Our next question comes from Matthew Mishan with KeyBanc.

Matthew Mishan -- KeyBanc -- Analyst

Hey, good morning guys.

Joseph F. Woody -- Chief Executive Officer

Good morning.

Matthew Mishan -- KeyBanc -- Analyst

So I'm just trying to get at what you're implying with some of your commentary. Like on one hand, you're saying the virus impact will extend into 2021. On the other hand, you're saying you're prepared to refer to growth post-COVID. Are you basically saying that you're not expecting to return to growth by the fourth quarter?

Joseph F. Woody -- Chief Executive Officer

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, a return to sort of 70% to 75% overall. And there's definitely pockets where that's maybe increased or even lower, but the increases are probably in a more severe surgical cases that need to be done. And we definitely think that there was an element a bolus of backlog that came back and 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 that 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 and see if you get a second way, 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 in 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.

Matthew Mishan -- KeyBanc -- Analyst

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

Joseph F. Woody -- Chief Executive Officer

Very similar. Interventional Pain may be 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 time frame 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, very similar in terms of that progression back to the, what is now a normal 70%, 75%. And then I think everybody's got an eye to whe do you get back to 90% or 100%. And 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.

Matthew Mishan -- KeyBanc -- Analyst

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

Joseph F. Woody -- Chief Executive Officer

So I think it's starting to come back. I mean, look, 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 has been delayed feeding tube placements. We're seeing a little bit of progression. And I think as we get to the end of the year, that would progress more fully. There's nothing really structural in this, in Digestive Health. And then we also in Q1, we were pleased with performance before all this started and CORTRAK and NeoMed, and 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 the waiting to get into the healthcare system. But we've definitely had seen in the last two months, seeing an improvement in that category.

Michael Greiner -- Senior Vice President and Chief Financial Officer

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. Yes.

Matthew Mishan -- KeyBanc -- Analyst

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

Michael Greiner -- Senior Vice President and Chief Financial Officer

Every three months.

Joseph F. Woody -- Chief Executive Officer

Three months, yes. That's a normal regimen.

Matthew Mishan -- KeyBanc -- Analyst

Thank you.

Joseph F. Woody -- Chief Executive Officer

Yes

Operator

Our next question comes from David Lewis with Morgan Stanley.

Joseph F. Woody -- Chief Executive Officer

Good morning, David.

Marissa Bych -- Morgan Stanley -- Analyst

Hi, good morning. This is Marissa on for David. Can you hear me?

Joseph F. Woody -- Chief Executive Officer

Okay. Yes, good morning Marissa.

Marissa Bych -- Morgan Stanley -- Analyst

Okay, great. Good morning. So I want to go back to the comment that you made on ON-Q that I think you said you saw record sales of pre-fill 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 fact that you 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?

Joseph F. Woody -- Chief Executive Officer

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 fortunate to have a sole source agreement with them. So about half just right at about half of the 30% of our business that was being filled 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 that's why 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 there haven't been statewide shutdowns, obviously, it's kind of more oriented to cities at the moment. So that's just kind of my take on that.

Marissa Bych -- Morgan Stanley -- Analyst

Okay, great. And then just a modeling question. On the M&A, is it fair to assume that of the six points you're attributing to M&A of growth that roughly five points are a little bit more would be coming from NeoMed relative to Summit?

Joseph F. Woody -- Chief Executive Officer

That's right.

Marissa Bych -- Morgan Stanley -- Analyst

Okay, great. Thank you.

Joseph F. Woody -- Chief Executive Officer

Thank you.

Operator

[Operator Instructions] Our next question comes from Ravi Misra with Berenberg Capital Markets.

Joseph F. Woody -- Chief Executive Officer

Hi.

Ravi Misra -- Berenberg Capital Markets -- Analyst

Thanks. Hi, good morning, how are you guys and thanks for taking the question. Just one for me, a 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 your balance sheet? Just help me understand like what you're looking at and kind of you're still going to be opportunistic? Or how you think about valuations right now?

Joseph F. Woody -- Chief Executive Officer

Thanks, Ravi. 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 and NeoMed and some of which are going along extremely well to capture those synergies even in this environment. There are locations obviously being changed. And so that's and switchover of inventory and 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, which is the tuck-in around the channel, which allows us to get that synergy and drive and expand our current franchises between Pain and Chronic Care. I think you're more likely to see action on the M&A side from us in 2021 versus 2020, but that we would not forgo a great opportunity. And we feel like we're in a really good position in any of the near-term are the ones that we're really excited about. So that's how I think about it.

Ravi Misra -- Berenberg Capital Markets -- Analyst

Great. And then maybe one more just on flu. I mean, there was an article a few weeks ago about how Southern Hemisphere flu 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 of the COVID in that business line?

Joseph F. Woody -- Chief Executive Officer

Yes, on Respiratory, I mean, we're also experiencing some orders from governments. They wouldn't really affect our year-over-year. They are bulk orders, they come in their cash and then they're put into inventory for these types of pandemics. And we have an allocation process that we're managing tightly the utilization, looking at our trace sales to make sure inventory is not building too much. That said, like in the first question, there's no doubt, we'll have comparator issues like many companies will that have products for COVID-19 year-over-year, but we're doing a I think, a pretty good job of balancing the utilization, mapping that with tracing so that it's not something that's insurmountable. Likewise, on the other side of the business in pain, there'll be favorable comparators.

Operator

Our next question comes from Rick Wise with Stifel.

Joseph F. Woody -- Chief Executive Officer

Hey, Rick, good morning.

Andrew Ranieri -- Stifel -- Analyst

Hi, Joe, it's actually Andrew Ranieri on for Rick this morning.

Joseph F. Woody -- Chief Executive Officer

Hi, good morning.

Andrew Ranieri -- Stifel -- Analyst

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 goal growth driver to Avanos. I mean, could you just give us a better sense of what's upcoming, whether product launches or clinical studies what should we focus on, so it doesn't get lost in the COVID shuffle? And maybe what is your sales force maybe most excited to get a hold of?

Joseph F. Woody -- Chief Executive Officer

I think the things that you should focus on with us for catalysts are the international growth. Obviously, COOLIEF continuing at double-digit growth. And then everyone, including us, are 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 on that we'll announce probably this week on an open innovation technology and Interventional Pain business. I think Acute Pain is excited about the 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 the things that NeoMed brings to the table, there's 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 the breakthrough products in acute pain are probably a couple of years off, but the idea is to maintain the investment level, protect our positions, continue to invest in the breakthrough areas and broaden ourselves through the open innovation.

Michael Greiner -- Senior Vice President and Chief Financial Officer

Remember, 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.

Andrew Ranieri -- Stifel -- Analyst

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

Michael Greiner -- Senior Vice President and Chief Financial Officer

Yes. No, 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 do we really need, roles that haven't been filled for months, maybe we don't need to backfill some of those roles. Team meet, 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 technologies?

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 at an organizational level, but just even that those transaction type of expenses like G&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.

Andrew Ranieri -- Stifel -- Analyst

Thank you so much for taking the question.

Michael Greiner -- Senior Vice President and Chief Financial Officer

Thank you.

Operator

Our next question comes from Kristen Stewart with Barclays.

Kristen Stewart -- Barclays -- Analyst

Hey, guys.

Joseph F. Woody -- Chief Executive Officer

So we doing well and our faith new.

Kristen Stewart -- Barclays -- Analyst

Sorry, I've been jumping between calls. So apologies if this was asked. But I just wanted to better understand kind of your exit run rate, if 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 it 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? I just want to make sure I fully understand that.

Joseph F. Woody -- Chief Executive Officer

Got it, Kristen. Just a couple of things to update you. We did say at the beginning of the Q&A session that 1/3 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 and Pain Management in that March-April time frame, we're only at 25% of normal volumes that kind of went back to 50% and May and June was more 70%, 75%, and we see that continuing into July. Our commentary on the go for 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 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.

Michael Greiner -- Senior Vice President and Chief Financial Officer

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 quarter macro environment, to Joe's point. And so our comments are not Avanos specific at all. It's really what we believe is is the reality of the environment that we get back to 100% sometime in 2021.

Kristen Stewart -- Barclays -- Analyst

Okay. That makes sense. Yes. Some companies are taking a little bit more optimistic view on the end markets. It sounds like you guys are, what I would consider to be, a little more reasonable beyond the market. So yes...

Michael Greiner -- Senior Vice President and Chief Financial Officer

To Joe's last point, if those end markets do come back we're ready to participate in them when we participated in the bounce back in the June, July time frame 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.

Kristen Stewart -- Barclays -- Analyst

Okay. That's helpful, thanks very much.

Michael Greiner -- Senior Vice President and Chief Financial Officer

Thank you.

Operator

This concludes our question-and-answer session. And now, I'd like to turn the call back over to Joe Woody for any closing remarks.

Joseph F. Woody -- Chief Executive Officer

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 and our clinically proven portfolio does give me confidence that our financial position is going to remain strong, and we look forward to talking with everybody again next quarter. Thanks.

Operator

[Operator Closing Remarks]

Duration: 41 minutes

Call participants:

Dave Crawford -- Vice President and Treasurer and Investor Relations

Joseph F. Woody -- Chief Executive Officer

Michael Greiner -- Senior Vice President and Chief Financial Officer

Chris Cooley -- Stephens -- Analyst

Matthew Mishan -- KeyBanc -- Analyst

Marissa Bych -- Morgan Stanley -- Analyst

Ravi Misra -- Berenberg Capital Markets -- Analyst

Andrew Ranieri -- Stifel -- Analyst

Kristen Stewart -- Barclays -- Analyst

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