Good day and welcome to the Avanos Second Quarter Earnings Conference Call and Webcast. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference call over to Mr. Dave Crawford, Vice President of Investor Relations. Mr. Crawford, the floor is yours sir.

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 is Joe Woody, CEO. Joe will provide an overview of our performance, priorities and transformation then I will review our second quarter results and offer details on our financial performance and 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 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 our prior filings with the SEC. Additionally, we’ll be referring to adjusted results and outlook. The press release has information on these adjustments and reconciliations to comparable GAAP financial measures. Now I’ll turn the call over to Joe.

Thanks, Dave. Good morning, everyone, and thank you for your interest in Avanos. Today I’m going to walk you through the quarter’s results, discuss our franchises in more detail and provide you with an update on our growth initiatives before recapping the progress we’ve made, transitioning to a pure-play medical device company. I’m pleased to say that in the second quarter, we successfully executed against our 2019 priorities and delivered results in line with our financial plan. We also continue to invest in our growth initiatives and made progress towards achieving our longer-term strategic objectives. Our transformation process took a significant step forward with the successful launch of our new IT system on August 1. I am also excited to announce that we recently deployed capital for two acquisitions designed to broaden our franchises and strengthen our business. Overall, we delivered solid performance this quarter with 7% top-line growth and adjusted diluted earnings per share of $0.28. We expect results, including organic growth, to accelerate in the back half of the year, despite the industry-wide headwinds impacting our Acute Pain business continuing throughout the year. Given those headwinds, we are narrowing our full year 2019 adjusted diluted earnings per share guidance from $1.15 to $1.35 to between $1.15 and $1.25. Moving to our franchises, our marketing leading Chronic Care business delivered solid mid single-digit growth across our digestive and respiratory health businesses. To build upon this strong momentum, we acquired the remaining 80% of NeoMed. The developer and manufacturer of quality neonatal-focused specialized feeding devices, including ENFit products. NeoMed has been a leader in this space and the product strengthened our Digestive Health offering. As you know, Chronic Care is a significant component of our fast-growing international business, which also delivered results in line with our plan, up 1% as…

Thanks, Joe and good morning, everyone. First, I also wanted to congratulate the entire team on the global go-live of our new IT system, a significant milestone. The new system will reduce our structural costs and enhance efficiency from gathering the information and integrating acquisitions going forward. As with any implementation of the size and scope, adjustments will need to be made as we work through the initial transition. There will be the potential for short-term timing adjustments to sales from one quarter to the next in the back half of the year as we adjust to the new system. I’ll shift now to review of our second quarter results. Overall, we delivered sales of $172 million, an increase of 7% and in line with our expectations. Game Ready sales contributed 5% of our growth. Organic volume growth of 5% was partially offset by unfavorable product mix and lower selling prices of 3%. Unfavorable currency rates of 1% also impacted sales. We saw Coolief delivered another quarter on double-digit sales growth in North America. In Digestive Health, we saw continued strong demand for our Corpak and legacy enteral feeding products. The Respiratory Health team began converting new oral care contracts and gained share in pediatric Microcuff accounts, which resulted in mid-single-digit growth. Overall, Chronic Care continues to be a consistent mid-single-digit growth business. And as Joe discussed, we experienced lower volumes in our Acute Pain business, a trend we expect to see through the second half of the year. For the quarter, adjusted gross margin of 60% was even compared to last year. Performance was impacted by the unfavorable pricing and changes in product mix, attributed primarily to lower ON-Q sales. Adjusted operating profit totaled $20 million for the quarter, compared to $16 million a year ago, as prior year…

Yes, sir. We’ll now begin the question-and-answer session. [Operator Instructions] The first question we have will come from Rick Wise of Stifel. Please go ahead.

Good morning, Joe. A couple of things, maybe, let’s just start off with just one controversial thing, the persistence in the bupivacaine, ropivacaine supply issues and your comments that it’s going to persist through the balance of the year. Maybe talk to us a little more, that implies that or suggests that you’re optimistic or hopeful, maybe it doesn’t, that this will largely be resolved by then. Is that what you’re saying? And what’s the setup going – you all commented, it could last into 2020. But just any more color and update on how this gets resolved so that you can move – the company past this period?

Sure, Rick. Thanks for the question. I am optimistic, ultimately, about the business and the business going into 2020. We are now aware of the drug supply will remain with us through the end of the year, particularly around ropivacaine, which is 70% of the business. We do feel like we have weathered the bottom of this though as customers have been accustomed to the supply chain issues. We’re now moving more customers to Leiters, and we have seen sequential improvement quarter-to-quarter. But about 1/3 of that volume that was with Avella and PharMEDium, is now at Leiters and really that’s the only 503B in the market, and I’m really happy the team put a strategic relationship together and partnership with Leiters. This addition of Summit and the electronic pump is going to be important for us going forward. The ability to have a programmable intermittent Bolus and a way to create drug without the supply at a 503B, and it’s going to allow us, I think, going into 2020 with our scale against that business to improve that position. In addition, some of this trialing that’s going on, I think will dissipate as we will close the year out. And I do feel like that it is a business that can grow for us in 2020. And with the electronic pump and with some of the innovation that we also outlined, we’ll get this behind us. Essentially, the way to think about it is, if everyone remembers the Q1 call, about Q4, only a week later that Pfizer had more drug supply issues. And the feeling at the time or the reporting at the time was that, that might last into Q3 but we really believe that’s going to be more like Q4 – into Q4 and Q1. So we’ve moved sort of two quarters into the rebound, that we would have liked to have seen in the overarching business. In total, though, I will say that there was an improvement in the business from quarter-to-quarter and we’re happy about that.

Great. And just two more. One, maybe, you could update us on your search for the new Chief Financial Officer? What should we think about timing there? And maybe, some thoughts about the kind of individual you’re looking for? And last, Dave highlighted the new IT systems and obviously, it is a significant catalyst and should yield efficiency and cost synergies over time. But could you talk to us a little bit about that? And what kind of efficiency in cost savings could we see? And when? And maybe, what investments are left from here required to get that fully in place? Thanks.

Got it. Thanks, Rick. Look, so we’ve been interviewing CFO candidates, and we have a really compelling story. The same one has attracted me about what this business can become over the next three to five years. Currently, Warren Machan is serving as our Interim CFO. And just to remind everyone, he was the divisional CFO for the business. So we’re in good hands with someone who has extensive knowledge in the business. As these things go, we are in the middle of interviews, and we, in fact, have some this week. But we anticipate that in the fall we’ll be announcing a CFO for certain. And then Rick, on the IT, I can’t say enough about what the team accomplished there. And to be their assistant, we feel like we’re ahead of schedule and certainly, on schedule for August 1. We’re up and running on a new – completely brand-new IT system. We’re taking orders. That’s important, as many of you know, having gone through this or watch company’s go through it. That’s a very important – and we’re producing the factories. Now we have to close the months and the quarters, and these things will take several times to stabilize. Or we may have, for example, manual operations for a couple of months as we’re settling into the system. But it does allow for us to get after the $30 million to $40 million but more importantly than that, we think there’s more for us to do in efficiencies and we’ve talked about things like distribution synergies, things that we can do in the plant, efficiency there. So we’re very excited about that and excited about talking more about that as the year closes. And generally, the investments at a high-level have been complete now.

And Rick, all I would add to the IT piece is. When you think about where you could find savings, not only in IT, but then we think about back office, we were managing three systems previously. This will get us to one system globally, which will be very important. You’re going to see benefits when it comes to integrating these assets. Recall, when we did Corpak. We had to integrate it three different times from an IT perspective. When we do Game Ready and then Summit along with NeoMed, we’ll only have to do that once. So that’ll be a more efficient process. And then lastly, and I’d say, just information gathering. It’s very tough when you have three different unique systems that we had and trying to get information in realtime around the different regions. That’s something we will be able to have, when you think about managing inventory levels that are potentially just financially seeing things in a more clear way and not having to manipulate things in spreadsheets. It’s going to be more efficient for us from a back-office standpoint as well.

Thank you so much.

Thank you, Rick.

And next, we have Ravi Misra of Berenberg Capital Markets.

Great. Thank you for taking the questions. Can you hear me, okay?

We can hear you, Ravi.

Great. Thanks. So just a couple of questions. One, if I can start off with the commentary on Coolief. Joe, you said you’re responding to the comment period. Just help us think about how you handicap the possibilities, number one – a, if you get it or not? Whether they kind of accept your argument? And number two, what can growth like without a formalized CPT code at the reimbursement levels that you guys are looking for? And then I have a few follow-ups. Thanks.

So couple of things, and just to remind everyone, that Ravi is referring to the CMS proposed rules. The 2020 OPP ACS and the 2020 Physician Fee Schedule. And really what was announced, there’s a new code for SIJ. And the facility fees went up there. All though physician fees went slightly down. And we got a new knee code for hospital outpatient. He also referred to the fact that we’ve got a comment period back to CMS, I think, last until September 27, with final rules announced in November of 2019, and they go into effect January 1, 2020. And we’re very encouraged by this because sort of the positives – we have a new code for SIJ, that was an actually in the increase in the existing code for off-set the joint so that’s a positive. And we’re going to be able to comment – we feel like we have a good discussion, Ravi, where CMS categorized procedural injection versus – and the procedure category like the areas in the spine where we operate. And it’s really the same procedure. And so I think there is a possibility to, potentially, move that valuation up. Nonetheless, as we’ve talked about on all of our calls, we have multiple ways to address our participation, including innovation at different cost components for probes and obviously, technology. We can also seek our own code. In addition to that, we’ve talked about potential for cash pay but we’ve also talked a lot about the fact there’s still a lot of runway in our business both on an international level and frankly, in the SIJ area and the facet area, and even continuing with knees where we are today. So this was not – just to remind everyone, this was not to sort of maintain double-digit. We were talking about accelerating our double-digit growth alongside of this. And I think what I’d take away from it is, we’ve just started a very good mid- and long term position, and that we have, as everybody knows, really great outcomes and health economic stories, really a lot of good innovation on the way and these studies, that aren’t even complete, around hyaluronic acid comparison as well as the things that are around mechanism of action and duration of up to two years, are going to come to fruition. And so we’re in the game now where we really didn’t even have a code. So mid- and long term are positive, we’ll see what happens. Probably too early to project now, but in November, we’ll be able to do that. And now I foresee us really laying out a lot more detail and how we’ll strategically tackle this, probably around the time of the JPMorgan meeting.

Great. Thanks, Joe. And then just follow-up on guidance. You’re – it sounded like you said you’re expecting organic growth to accelerate in the back half of the year. You increased your constant currency guidance. Can you just help us understand kind of what are the drivers there? We still looking at – I mean, it looks like Chronic Care, at least versus our numbers, has come in better than forecast last couple of quarters? What are the growth drivers there that are kind of getting you to that mid-single-digit basis? And then what kind of expectations can we kind of put in with NeoMed? I mean if I just kind of do the math right, $38 million last year with mid-single-digit growth. Is kind of just flowing that through for 2019 and then taking half of that, should that be contribution in the back half of the year? Thanks.

So couple of things. I want to remind everybody that Chronic Care represents about 60% of our business, and it is growing at a nice tick, at mid-single digit and sometimes slightly above. When you combine that with Coolief, 80% of our business has grown over the past two years at roughly around the 8% organic level, which, obviously, one of the frustrating things about the supply dislodgment, if you will, in Acute Pain. But you’re right, Ravi, in H2, there’s a sale acceleration that’s really driven by the Coolief direct-to-patient. We outlined in the prepared comments that just over 400,000 patients are in the queue now to come in and finding their way to position. So there’ll be a uptick there along with just a general seasonality. And we are seeing in these electrical procedures a delay because of the deductible changes. So we expect we will see an increase in patients there. There will additionally be an international acceleration. We had 11% growth in Q1 for international. Although, we only had 1% in Q2, it was on a 10% comparator over last year. And we feel like the momentum is strong in international to put a full year, and reach a high single-digit number and then go into double-digit at the end of the year. There is a seasonality component to ON-Q. We always see a lift on ON-Q that will be helpful to this as well. And just on the other side, things with EPS, we did talk about our highest spend being in Q1 and Q2, primarily around efforts in Coolief, and then, some of our savings also begin to kick in that we’ve been talking about and obviously, each quarter we want to bring more and more of that to the table. But just from a big picture, you step away, you got Chronic Care, really running like a nice engine. We’re happy with what we’re seeing in the trajectory right now of Coolief, and we are very pleased with international. And so I think Dave’s saying, he wants to add something to that. Go ahead, Dave.

The only thing Ravi to add to Joe’s comments, when you think about Chronic Care, couple of the drivers there on the mid-single-digit growth, clearly Corpak continued to do well for us. That’s been accretive to that mid-single-digit growth level, and it’s a decent size of the portfolio. We talked earlier in the year and on the call today about winning some more oral care business back. It’s something where we were winning business a couple of years ago and then due to capacity strains that was a negative for us in the back half of the year but it’s turned back into a positive for us. And then when you think about those businesses, they really have really strong market share position. So it’s a pretty consistent business for us, here at least in North America and then you add on the international growth. To your last question around NeoMed, think about it as about three points of growth for the year for that perspective. It’ going to be closer to that $20 million or so, give or take as we look in the back half. Remember that we lost about a week or so of sales, so that’ll come off a little bit of it. But overall, very good acquisition for us, and we’re excited about it.

Yes, Dave’s right. And NeoMed, we see it as a mid-single-digit grower and obviously, with our scale, we look to try to improve that position but thanks, Ravi.

Thank you.

Next we have Larry Keusch of Raymond James.

Good morning. Joe, I just want to – and I know you’ve addressed some of this, but I wanted to come at this from a high level. Obviously, there are a lot of balls in the air right now, you’ve got the drug supply shortages on ON-Q, you’ve, obviously, got the Coolief reimbursement that you’re working through, the CFO search, the portfolio shaping, and so there’s just a lot of activity going on for a CEO. And so I’m just really curious at the end of the day, where are your top priorities right now as you sort of think about that – the back half of this year?

Thanks, Larry. So if I think about the Joe Woody to-do list, we’re ticking away pretty good. You outlined a number of things there. Obviously, it started with the separation of S&IP. Delivering IT on time really sets the stage for the costs component that’s going to be so important to driving further EPS growth. And we’re now going to really be able to, once we stabilize, move at a more accelerated rate with that. I’m absolutely pleased with the M&A and the ability to put value adding acquisitions in place that are very strategic and can be dropped into our channel. The other thing I would say is that I’m very happy about is the 8% growth outside of Acute Pain organically, and we have a good plan for growth and turning that around that we started with this acquisition of Summit. So really a main priority right now is to get the turnaround of the Acute Pain business into growth, and we see that pathway, albeit two quarters later than we would’ve seen, primarily because of supply and also bringing these customers back to utilization. But we’re building a good story and are going to have the broadest portfolio in line there. There is still a real desire for customers to use the pumps, you put that in place and we’re sort of back to the good old days, if I can say good old days in a short two-year tenure, which was the second half or H2 of 2017 that rolled into a really strong H1 2018, and I think made people feel like our story was interesting and they got very excited about our stock. And then these acquisitions are just going to be added to that rollover and help us with our organic growth. But it has to be and will be getting the Acute Pain business turn to the growth that we want, and I’m directly involved in that.

Okay. That’s helpful. Thank you for that. Just two other quick ones here. So a turn – so looking at the Acute Pain business, can you just help us – I want to make sure I’m understanding this correctly, just help me understand, you’ve now acquired this electronic pump, so how that fits into the portfolio? You did say, it was a gap. And sounds like you also, if I’m getting this right, can fill that pump with this relationship in the future with – again, without having to rely on API from or product from other manufacturers? So I want to just make sure I’m understanding those dynamics as you kind of fill in around ON-Q. And then I think, the other part of the question is, if I think about what you said, it sounds to me like Leiters is doing about 10% of the pump filling volume at this point. I think PharMEDium was closer to 30% at the peak, but at the same time if that 10% is right, that sounds a little bit static. I would have expected that to be higher. So I just want to make sure that I’m understanding that dynamic as well.

Yes. Leiters is a bit higher. And also the other thing with Leiters is we are working on a sterile to sterile solution with them, that sort of by the end of the year would be in place. But we’re seeing pretty good progression sequentially now with customers, and the fact that we have customers that have a lot of satisfaction around the utilization and good outcomes with patients. So we feel pretty bullish there. On the electronic pump, I think this is going to help us a lot, for example, in academic centers where they’re very focused on the programmable intermittent bolus. But also it doesn’t really require 503B to fill – you can, for example, use a bag to – or cartridge for the electronic pump. But more importantly, we think that we can really accelerate this state of the art electronic pump in a pretty rapid fashion with our innovation team now driving that innovation. And ultimately, the project with BioQ would really improve our position in pumps there. So you can see what we’re doing to enhance the customer management, if you will, of the supply chain. The other thing I would say is that as I talk to customers, and we visit with our customers. There still an intense desire to use the On-Q pump despite the fact that Heron is coming to the market, despite the fact that people use Exparel because there are just times when they do want that five days or certain surgeons want the patient to be able to manage the pain – ropivacaine and, for example, stand up quickly on a total knee. So that – what we really need out of that business to deliver our plan is certainly low-single digit to grow, which we believe is completely achievable in 2020 and then, build from there back to even more of a mid-single-digit level. And Larry, as you can imagine, what we’re doing at the same time is appropriately managing OpEx and our structure so that we have a profitable business that’s additive to EPS along the way. But generally, probably feeling better, albeit that it’s toward the end of the year than we have yet with Acute Pain.

Terrific. Thanks for those comments. Appreciated.

The next question we have will come from Matthew Mishan of KeyBanc.

Great. And thank you for taking questions. Just a follow up, Joe and Dave, on guidance. I guess if you’re increasing the constant- currency growth rate from 6% to 8%, 8% to 10% and 300 basis points of it is coming from the NeoMed acquisition. Is it safe to assume – is it fair to assume – and FX being still neutral, is it fair to assume that the organic contribution goes down 3% to 5% and 2% to 4% and the 100 basis points is distinctly from the incremental push out in supply chains for ropivacaine and bupivacaine?

You got it right. I mean that’s all completely accurate with the biggest part of the organic growth range coming down, primarily, just because of the Acute Pain not springing back at the end of the – or sort of at the beginning of the fourth quarter, end of Q3, mainly on the supply component.

Have you completely de-risked the guidance for 2019 for Pfizer supply chain constraints? And I guess what are they, generally, indicating to you that would give you confidence that 4 Q they start coming back?

We’ve – I would say the way I look at that, and it looks like Dave wants to say a couple of things too but we – when I say weathered the storm, we’ve looked at the bottom and we looked at average daily sales, and we can see, obviously, from there what we’re also building and put risk against that. And that’s why we’ve sort of made the change that we had, and why we’re, maybe, a little bit more optimistic about how we cannot return this to the growth, not only with sort of supply coming back in 2020. but more people moving to Leiters, and then now having an electronic pump in our hands that we can move into customers with the – we think affects with a much, much larger sales force – Dave you want to take that?

Yes, and I just also talk math, you know it’s not just Pfizer and their drug supply as well. One of the things and probably, where we’ve seen the biggest impact to sales over the last several quarters is really from the former PharMEDium and Avella customers. They maybe still be using the pump but they may not be using as many because of constraints within the pharmacy and filling those, specifically those that haven’t moved to Leiters or maybe, they’ve moved some to Leiters but they don’t have all the SKUs moved there. We have seen that rate of decline, as Joe indicated, start to slow. But that’s a big thing as well where we’ve really seen that group decline more than others. And as we get a better hold and feel that, that is reaching a low point, we can then start to return to growth from that standpoint as we move more people to Leiters. And just the people who are using the pumps continue to use them more each quarter, that will help from a growth perspective as well.

Yes, I do want to – Dave’s right, I don’t want to underclub the fact that one of the things that we can affect is that where the utilization has gone down because customers stopped using Avella or PharMEDium as we now have a good basis of business in place and can do side business and partner with Leiters, it’s a little bit easier for customers to see that it works, it safe, it’s good quality and the outcomes are fantastic. And so that’s the other thing that’s encouraging, is the ability to convert those over. They want to do business with us. They want to come back, some of them have taken a little bit of wait-and-see. And so when you bring that altogether, and you bring the acquisition that we just made together, and just sort of us feeling worth the bottom and looking at where we are to move the business and obviously, seeing that there are folks that are doing C-sections and rib fractures and total knees that want to be using ON-Q, we can see it more toward the first quarter of 2020.

Okay, that’s helpful. And then can you talk a little bit about the pricing and mix in the quarter? And whether or not that was independent of the sequential decline in the gross margin?

Yes. I’ll say a couple of things. I don’t feel there’s a really a fundamental change overall. For the full year and longer term, we kind of see it bouncing between 1% favorable to 1% unfavorable. And remember in 2018, we were even. We did experience a comparison issue in Q2 and that had to do a little bit with some rebate accruals with OMI. There was some pricing in ON-Q to protect business during this downturn, and I feel it’s necessary to create long contracts. We’re managing the tightly. In the NEEDLES KITS and TRAYS business, which is low-margin and Interventional Pain there was a little bit of price. Dave, I don’t know if you want to add anything more than that.

Yes. To the point, on the comparison issue that Joe talked about, if you remember, we had price up about two points last – second quarter of last year. Part of that was due to when we split some commingled rebate and distributor accruals and we allocated that, we had a benefit for the device business that trued up in the fourth quarter. So, there’s a little bit of a tough comparison because we actually have seen price loss when we look at the analysis of change for all of the different franchises, that’s something we would never expect to see, especially in some of the Chronic Care categories. And so I think this is a temporary think given the comparison to what we had last year. But as Joe indicated, there are a couple of areas where price is down a bit relative to expectations.

Okay, that’s fair. And lastly – and I’ll jump out. How should free cash flow track from here?

Yes. I think Matt, as we get through some of the onetime costs, clearly, we are going to have some of those still here in the third quarter, we went live with the system but that doesn’t mean that all the consultants have gone home, who are helping us out in implementing this. We have a lot of remediation of some things that will be taking place over the next month or so, hopefully, as we get through that and get it stabilized to then tell them thank you. That is a big piece of cost, though, that we’ve had here in the first half of the year, so it’ll be nice to get that behind us. And then we think in the fourth quarter, we should have a more normalized cash flow, probably even a bit elevated given the higher expectations for sales and earnings for that quarter as we go forward. very nice from a treasury standpoint to move on from some of the onetime costs that we’ve. We’ve also getting out of the LRD aspect, that was the relationship we had with OMI, costs and variability. That is now behind us as well. So we have a more normalized working capital as we go forward into the back of the year.

Alright, thanks guys.

And next we have David Lewis of Morgan Stanley.

Great, thanks. Joe, just a couple of questions for you. I guess, the first thing is, thinking about a recent investment for Coolief, how does this impact? How you are thinking about kind of investments if you can’t, if you’re unsuccessful in kind of revising net reimbursement in the final rule. How does that impact kind of investments you’re thinking about into next year? And then kind of related to that, you had a – in the cooled RF product, you’ve had kind of a dominant position. You’ve got some competitors coming in with a thermal cool product. How do you think about implications with that? And then one just quick follow-up to that?

No problem, David, and thanks. The investments are really in play which were the clinical study that we started around hyaluronic acid, obviously, we finished the course of the steroids that was positive. We have a mechanism of action in play as well as the duration, which we think might show in some cases up to two years of pain relief. So we’re not anticipating – and we’ve articulated a sort of a big acceleration in investment. Now we’re in a great position now that we have a CPT code to keep improving upon that but I think we can sort of manage that with our current government relations effort and drive that over time. So not overly investing. We’re in a good position right now to handle that. In terms of Medtronic, we – maybe there’s been a handful of installs. We’re all experiencing problems with the systems, some quality related, some technical, which we anticipated knowing what it takes the pros of the type of technology that they’re utilizing. So near midterm, not really a big impact at all. Long term, we’ll probably fix that like most people do, but what I’ve said is that this is a huge several billion-dollar market, two or three, even four competitors could have all boats rising kind of an effect and we have such a strong market leadership position with new innovation coming out and I think we’re positioned well.

Joe. Just lastly as you reflect on sort of the M&A and obviously, it’s an important component of story, how are your views on sort of size of the M&A changed here over the last kind of six to 12 months? Are you willing to go larger? And give us a sense of, in growth-oriented net tech M&A, kind of where you see relative evaluations? Thanks so much.

Yes, for us, David, we’ve been able to transact in one time revenue to two times revenue – most of our transactions when you think about Game Ready, Cortrak – Corpak, sorry, NeoMed and Summit because we’re hanging around the areas where some of the larger companies aren’t participating and they bring in tremendous values to us because of the synergies that are in front of us, and the fact that the drop right into our channel. So I think they’re going to be a real big value-creators for us, a lot like Corpak was. We have looked from time to time at larger opportunities, not to say that we wouldn’t look at it. We do think we can continue down the current track that we’re right now and create a lot of value. We still have capacity right now about sort of, let’s call it $450 million to $500 million range. That will change, obviously, overtime as we generate more EBITDA and generate better cash over time. So, yes, to the extent that we get out sort of a year from now, which I don’t – is another thing that we’ve been talking about. For us, larger might mean a couple of hundred million dollar deal or something that would be tied to our strategy in either enhancing pain or the Chronic Care business. I think that’s an important part of our story at our size and scale. Without that, it’s a little bit more difficult to be able to maintain organic growth, as I think everybody on the call knows but I think at least, for our size and the markets that we’re in, we’re positioned well.

And next we have Chris Cooley of Stephens.

Good morning. I appreciate taking the questions. Maybe just two from me at this point. You touched on the growth that you saw in international during the quarter, hurdling a much more challenging comp. Could you just talk to the key points there about the new system opportunities to go direct? And just kind of how you see that unfolding out into 2020, without giving, obviously, 2020 guidance yet, now that you have an IT system? And then I have one quick follow-up.

So on the international business, at the half, let’s call it 6% growth and really with a good trajectory on the business, with some of the kind of drivers around that are the new markets that we’re entering, examples of like India and Korea with our products, the things that we’re doing in Germany. And the team is driving that because we put people in place in Asia PAC and Europe, and they’re focused on a lot of position education, certainly the market expansion, introducing new products into these markets. Some of these products, for example, like Cortrak have not been introduced into the market and there’s just an element of commercial deployment and distributor management in terms of driving underlying growth in existing markets that’s really starting to pay off. So we like the trajectory that we see. Our aim is to have high single-digit growth for the full year in that business, which I think we’re on track for. And then we want to be able to enter 2020 at double-digit growth, which will be – make that an important sort of pillar for our business, and obviously, it’s primarily the driver’s at Chronic Care business, although, we are getting the seeds in place for the pain business in particular, the Coolief product in a number of areas. And then could you just repeat your question on the IT front?

Yes, No that – I’m sorry, that – you addressed it. If I could maybe just switch gears. Just following on M&A. I appreciate the additional color that you just provided today but should we think about additional opportunities for strategic partnerships more so than just absolute acquisition is that a way to get a better return on investment, maybe faster or should we still think about use of capital being primarily for out and out acquisition. Just thinking about, maybe, in-licensing opportunities on the Acute Pain side. Thanks.

Yes, no, I think, for example, BioQ is a good example of our open innovation plan. We have another deal and another part of our business that we’re about to announce that’s similar where we sort of partner and develop or buy a technology to rapidly develop, and so those –you might see some of those and I think those could enhance the speed at which we bring our innovation to market but also our good deployment of our capital as well, especially putting in technology that we can run into a much larger channel and get an uptick on our sales quickly, and we’re definitely looking at partnerships, I think that’s evidence, in a way, that we quickly got to the Leiters solution and got us all sorts of agreements there, as a 503B that’s something running – really one – only major ones really have been running now in the country. So I think you got it right that you could see some of those.

Thank you.

And next we have Kristen Stewart of Barclays.

Hey, good morning guys. I’ve clarification question and then one follow-up after. Just on the Game Ready acquisition contribution. It had mentioned 6% in the press release, 5% in the presentation, in your remarks. I’m curious if you can just reconcile those two. Is it just kind of rounding and FX impact or maybe, you could just give us the contribution on a dollar basis.

Yes, it’s just over $9 million, Kristen.

Okay. And then as we think about the guidance, I think it was asked about 300 basis points contribution from acquisitions now from NeoMed. Will you have additional revenues from Summit as well; I think you mentioned that was running around $7 million on an annual basis. So is the full year contribution from NeoMed and Summit closer to 350 basis points, so is the organic revenue embedded in your guidance actually closer to 150 basis points to 350 basis points?

So the guidance we have includes only NeoMed, it doesn’t include Summit. If you want to include probably 30 basis points to 40 basis points more for Summit, if and when that deal closes, that would be incremental to what we have there currently.

Okay. Great. And then just in terms of the guidance on the bottom line from NeoMed. I was wondering if you could just help us parse through what the accretion level is. I think you mentioned that deal was accretive to EPS.

Yes, it will be just slightly accretive this year. We got that for one-time sales. It’ll take some time to get further accretion as we do the dis-synergies from doing the integration of that transaction. But that really won’t take place until next year.

Okay. Perfect. And then Joe, just bigger picture question for you. As you think about just some of the headwinds that have been, really, outside of your control within the acute-care – acute pain business and then maybe, some of the disappointing news on the reimbursement front, potentially, from CMS. How are you just thinking about the overall growth profile of the company longer term? And the ability to get to the long-range forecast that you had talked about last year?

So one of the things earlier I talked about was my to-do list and a big milestone being IT, which creates a simplicity to the way we go about the business and the reimbursement for the knees is meant to – is always meant to be opening up a new attitude growth channel for the business, and we still think there’s a lot of runway for growth in that business, in this spine where we are today both in the U.S. and international, but I also am not convinced that we won’t find a better pathway yet on the need and could still actually service that market, even if things just sort of remain where they are. On Acute Pain, what we really need in that business is low single-digit growth, and we’ll set ourselves up to manage it appropriately, and now we have the addition of Summit, and I can still get to all of the goals, it’s just – I think the frustrating part, Kristen, is that the Acute Pain supply issue both on drug and 503B has probably put us, maybe, a year-ish away from some of the peak of all of that. But clearly, the thesis really hasn’t changed. We are in other strong markets as you can see characterized by the growth of that we’re getting, and then I do think that – I can’t say enough about this IT system being in place because we’re going to be able to get after this cost and get it out to really get better drop through and drive our earnings just like we would like to, so disappointed that it’s taken a little bit longer but still a good story.

So if I’m hearing it correctly, maybe the target that you set out for the LRP are still, certainly, achievable but, maybe, just pushed out a little bit, just given the challenges outside of your control within the Acute Pain business.

That’s correct. We set low 20’s operating profit and sort of mid-ish 20’s in EBITDA and gross margins in the mid ‘60s, those are still very achievable for this business and yes, we made a couple of acquisitions in the quarter but we still have $450 million to $500 million in capacity to be additive or really enhance that profile.

Thanks very much.

Okay.

So no further questions. We’ll go ahead and conclude our question-and-answer session. I would now like to turn the conference call back over to Mr. Joe Woody for any closing remarks, sir?

Yes, thank you. Listen, as always I’m very thankful for the interest in Avanos. I think you heard the confidence we have in our business outlook. It’s been an incredible two years. And we have accomplished a lot, the divestitures, several acquisitions and now this IT transformation. And I think over time becoming recognized as a medical device leader. Lastly, just to reiterate, the fundamentals of business are solid. And I think we are well positioned to create value long-term for shareholders, and look forward to seeing a number of you throughout the fall. Thank you very much.

Right, and we thank you sir, to the rest of the management team for your time also today, again, the conference call is now concluded. At this time, you may disconnect your lines. Thank you, again, everyone take care and have a wonderful day.