U.S. Markets open in 2 hrs 23 mins

Avanos Medical, Inc. (AVNS) Q1 2019 Earnings Call Transcript

Motley Fool Transcribers, The Motley Fool
Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Avanos Medical, Inc. (NYSE: AVNS)
Q1 2019 Earnings Call
May. 7, 2019 , 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the Avanos First Quarter Conference Call -- First Quarter Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note, today's event is being recorded.

I would now like to turn the conference over to Dave Crawford, Vice President of Investor Relations. Please go ahead, sir.

David Crawford -- Vice President of FP&A and Investor Relations and Treasurer

Good morning, everyone, and thanks for joining us. It's my pleasure to welcome you to the Avanos' first quarter earnings conference call. With me this morning are Joe Woody, CEO; and Steve Voskuil, Senior Vice President and CFO. Joe will begin with a brief review of our performance and provide an outlook for our business and progress toward our 2019 priorities, then Steve will review our results, offer details on our financial performance and earnings outlook for 2019. We'll finish the call with Q&A.

A presentation for today's call is available on the Investors section of our website, avanos.com.

As a reminder, our comments today contain forward-looking statements related to the company, our expected performance, economic conditions and our industry. No assurance can be given as to the future financial result. 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.

Joseph Woody -- Chief Executive Officer

Thanks, Dave. Good morning, everyone, and thank you for your interest in Avanos. Let me start by saying that in the first quarter we had a strong start, executing against the 2019 priorities we outlined on our fourth quarter conference call. This quarter, we delivered results in line with our financial plan, we continue to invest in growth initiatives, we advanced our IT transformation with the successful go-live of our ERP system in EMEA, and we strategically deployed capital with our investment in NeoMed. I'm very pleased with our start to the year as sales grew 5% and we are in $0.15 of adjusted diluted earnings per share. Looking ahead, we are maintaining our 2019 guidance and key planning assumptions and expect sales and earnings to accelerate throughout the year.

For the quarter, double-digit growth continued for COOLIEF in interventional pain and we delivered solid growth in Digestive Health across our enteral feeding and Corpak products. International also delivered a strong quarter, driven by demand in Respiratory Health and Digestive Health as we cycle against a weaker prior year comparison. This year, we are on track to deliver accelerated growth in our international regions as we continue to strengthen our team to move this business to double-digit growth over the next few years.

As expected, we continue to see pressure in our Acute Pain business. Two factors had impacted our performance. First, the continuing industrywide drug shortage and second headwinds from last year's pain pump pre-filler disruption. As we outlined on our last earnings call, we planned for flat to slow growth during the first half of the year with growth accelerating in the back half. With this as a backdrop, we are monitoring the availability of Bupivacaine and Ropivacaine along with innovating long-term in this space.

Ropivacaine is used in about 70% of our pain pumps and we expect market supply to improve in the second half of the year. We expect Bupivacaine, which represents the balance of the market to return to supply in 2020.

On a positive note, customers continue to move to Leiters as a pump pre-filling option. While sales through Leiters rose 21% sequentially, our overall sales volume through formal pre-filler accounts was down for the quarter compared to the prior year. Despite these short-term challenges, we are excited about the Acute Pain business and the opportunity to meet physicians growing need for effective non-opioid pain therapies. These headwinds aside, we continue to believe this business will return to solid mid-single-digit growth over time.

To help drive the performance, we've recently appointed Michael Acevedo as Vice President and General Manager of our Acute Pain business. Michael is a leader with deep medical device industry experience and a successful track record in developing and executing medical device sales and marketing strategies. Michael most recently served as our Director of Sales for Chronic Care. Prior to that, he held leadership positions at Johnson & Johnson and CareFusion.

I'd like to turn next to our progress on accelerating investment in our growth initiatives. In interventional pain, we expanded our direct-to-patient advertising for COOLIEF to 13 large US markets and we're excited by the early results.

We're at the halfway point of our expanded campaign in traffic to our website mycoolief.com already exceeds half of the expected business for the entire year. More importantly, of those visits, almost half sought out of position.This is encouraging as we expect patients will move through the process of making an appointment, getting a diagnosis and receiving treatment, thus contributing to our expected sales acceleration in the second half of the year. Besides direct-to-patient advertising, we increased our investment in clinical research and are continuing to build a strong compendium of clinical evidence that demonstrates the value for COOLIEF to both patients and payers, while differentiating COOLIEF from alternative therapies.

During the quarter, we announced the results of a knee osteoarthritis study that shows that six months after treatment, COOLIEF achieved statistically significant reductions in pain and improved function compared to hyaluronic acid injection. We anticipate this study will be published in the fourth quarter.

In addition, the one-year data from our large prospective knee osteoarthritis steroid comparison study was published during the quarter. And we've been informed that two large retrospective series, one for knee and one for hip, have been accepted for publication. We anticipate seeing that ledger later this quarter. Our evidence pipeline is full for the remainder of the year with the knee cost effectiveness study anticipated late in the third quarter and our 24-month steroid comparison study anticipated in the fourth quarter.

I'd like to turn now to an update on our cost transformation. On May 1, we deployed the first phase of our new IT system in the EMEA region and anticipate a complete rollout to our other regions in the second half of the year. Once implemented, we'll see a reduction in IT costs as well as enhanced efficiency in our business processes and systems.

We also ended our limited risk distributor agreement with Owens & Minor for our international regions. This was a key step in the final separation of the S&IP business we expect later this year.

Finally, this quarter, we strategically deployed capital. As you know, M&A is an important area of growth for us and we actively evaluate opportunities through a wide lens, exploring potential targets that leverage our technologies, help us expand the call points and increase our addressable markets. We also consider different deal structures to maximize shareholder value and flexibility as we explore multiple acquisitions.

To that end, on April 16th, we made a $7 million minority investment in NeoMed, Inc., a market leader in specialized feeding and medication dosing for low birth weight, neonatal and pediatric patients. That was in 2007, NeoMed has been enhancing patient safety through the creation of quality neonatal focused devices. The core of NeoMed's vision is developing and marketing a neonatal- and pediatric-specific enteral safety system ENFit, which eliminates dangerous connection errors that can result from using enteral products to deliver nutrition. Since the infant initiative launched almost 10 years ago, NeoMed has been a leader in helping customers convert to this model through hospital direct sales force that calls our neonatal intensive care units and pharmacy departments.

NeoMed generated revenue of approximately $38 million in 2018 and has similar topline growth and growth margin profiles as our Digestive Health business. We hope to exercise our exclusive option to acquire the remaining 80% of NeoMed, during the next 12 months.

In summary, we're making solid progress against our 2019 priorities. With a quarter behind us, we are well positioned to achieve our goals.

Before I turn the call over to Steve, I want to thank him for his leadership over the past five years. As Chief Financial Officer, he has been instrumental in launching Avanos where we became an independent company, executing our transformation into a pure play medical device company and driving numerous strategic investments. We wish him all the best in his future endeavors.

Steven Voskuil -- Senior Vice President and Chief Financial Officer

Thanks, Joe; and good morning, everyone. Let me also say that I'm pleased with our first quarter execution and that the initial results from our investments are encouraging. Additionally, I want to acknowledge our team's work across Avanos as we completed the crucial first step in implementing our new ERP system. To-date, we have met all key milestones and deliverables, including implementing the first phase of the rollout as we went live in our EMEA region on May 1st.

While early, the first phase of this implementation appears to have gone very well as we prepare to go-live with the rest of this system in the second half of the year, we now anticipate spending up to an additional $10 million compared to what we previously communicated to delivering on time implementation. Besides the progress on our ERP implementation, in recent months, our team's work to end our limited risk distributor agreement with Owens & Minor, advanced our rebranding efforts, and continued the process of optimizing our distribution network.

Now, let's begin with a review of our first quarter results. Overall, we delivered sales of $164 million, an increase of 5% in line with our expectations. Game Ready sales contributed 6% of our growth. Unfavorable currency exchange rates also impacted sales by 1%. As planned, these factors resulted in flat organic volume and pricing. As outlined previously, we continue to expect slower growth for the first half of the year and then acceleration in the second half. We saw another quarter of strong growth in interventional pain, driven by increased adoption of COOLIEF.

In Digestive Health, we saw higher than anticipated distributor demand for our Corpak and legacy enteral feeding products.

Looking ahead, we expect distributor inventory to revert to normal levels.

In Respiratory Health, growth was below its normal mid-single-digit rate due to the moderate cold and flu season, evidenced by the sharp decline in flu-related hospital admissions. We anticipate demand will return to its normal growth rate for the balance of the year.

As Joe discussed, we saw lower volumes in acute pain, stemming from the continuing industrywide drug shortage and third-party pump filler disruption.

For the quarter, adjusted gross margin of 62% was in line with our expectation and compared favourably to 59% last year. Adjusted operating profit totaled $10 million for the quarter compared to $2 million a year ago, as prior year results were impacted by $28 million of cost allocated from discontinued operations. Our higher level of investing to drive near and long-term growth coupled with the expected dis-synergies from the S&IP divestiture impacted operating profit.

Adjusted EBITDA for the quarter was $14 million compared to $59 million a year ago, as results from last year included discontinued operations. Adjusted net income totaled $7 million compared to $36 million a year ago. For the quarter, we earned $0.15 of adjusted diluted earnings per share, in line with our expectations.

Shifting to our balance sheet. We ended the quarter in a strong financial position with $348 million of cash on hand. Our balance sheet remains strong and we are well positioned to invest in future growth initiatives.

Moving to our outlook, we maintain our full year 2019 guidance of $1.15 to $1.35 of adjusted diluted earnings per share. Additionally, our key planning assumptions remain unchanged.

In summary, we have a strong financial profile and are well positioned to achieve our priorities and to create shareholder value.

With that, operator, we are ready to take questions.

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) Today's first question comes from Larry Keusch of Raymond James. Please go ahead.

Lawrence Keusch -- Raymond James & Associates, Inc. -- Analyst

Thank you. Good morning, everyone. So I guess first question, given the flattish organic growth through the first quarter, can you talk, Steve or Joe, sort of how you are -- how the revenue guidance is constructed for the second half of the year? How do you think about that accelerating?

Joseph Woody -- Chief Executive Officer

Sure, Larry. I'll make a few comments and then Steve will comment as well. But one thing I think to remember is that outside of the Acute Pain headwinds that we're working our way through, we currently have mid-single-digit organic growth rate in the business. Our intention is obviously that will accelerate from -- to high over time, but we are getting double-digit growth with COOLIEF, we're real pleased with international Game Ready, as a reminder, will contribute 3 points for the full year. And in addition to that, as we move along some of these comparables in the second half will get a little bit better for us.

In addition to that, on the other side of things, we are also reducing our investment. We talked in the first call about the heavy investment, the sales meeting that we have and more importantly the direct-to-patient and the clinical studies that we did as well. But essentially, we expect that we get better revenue sequentially, better margins sequentially and bottom line as well as we move into the year and that's how we plan. But, Steve, you may want to add.

Steven Voskuil -- Senior Vice President and Chief Financial Officer

Yeah. I agree. Sequential bills, Q2, we had a pretty strong chronic care in Q1 despite the comp, DH did better than we talked, expected some inventory adjustments, so that will probably come back in Q2. But certainly ON-Q expecting strong back half results and COOLIEF, on the back of all the investment, on the direct-to-patient side, same thing. So, that's really the fundamentals underlying the profile.

Joseph Woody -- Chief Executive Officer

And I think, Larry, I'd just say one more thing, Joe here, what's on everybody's mind now is Acute Pain and then we -- after we had our earnings call for Q4, there was the Pfizer announcement. We do think that that has some impact, but we don't think it's going to be for the full year and it gets better in the second half as well. We're more focused on moving our customers over time to Leiter. So that all plays together.

Lawrence Keusch -- Raymond James & Associates, Inc. -- Analyst

Yeah. Okay. That's perfect. I wanted to get into that. So, I guess, look, I recognize that you guys do not directly buy the drug and so you've got somewhat limited visibility, but I guess sitting here today on May 7th versus where some of the start to happen back in the early portion of the year, is there anything there that has changed, or that you're hearing that may give you some sense that Ropivacaine may, in fact, be in a position to come back? And I guess along with that, maybe, Joe, if you just talk a little bit, you mentioned Leiters and the improvement in the growth there, but they're really not restricted in their API access, so maybe just talk a little bit about where that pump filler is since this is exclusive to you guys, and kind of with your volume in and where do you think you can ultimately take that?

Joseph Woody -- Chief Executive Officer

Yeah. Number one, Larry, we did a pretty thorough survey of all of our customers to really understand their decisions in their supply chain and really we came out of that frankly with the customers have been a lot more resilient than we expected. On top of that, in locating drugs and being flexible, I mean, on top of that, we've been continuing to move customers over to Leiters.

We do think that Ropivacaine in the second half will come back, but I do want everybody to be aware that Bupivacaine, which is approximately 30% of the market is probably going to remain a problem into 2020. But that said, about a-third of our customers that were in pre-fill have been moving to Leiters, that increases every quarter and we're seeing high double-digit growth and 100% reorder rates from this customer. So it is a matter of moving them over to an API. But that said, Leiters is also working on a longer term steroid-to-sterile approach as well that we're talking to them about. So there are other solutions as well that we are working on. And so, that's why we have a lot of confidence in the second half of the year in moving this thing back to where we were.

Lawrence Keusch -- Raymond James & Associates, Inc. -- Analyst

Okay. Last one from me. Just on free cash flow guidance, I just want to make sure I understand how you guys are thinking about the free cash flow now versus where we were at the start of the year?

Steven Voskuil -- Senior Vice President and Chief Financial Officer

I'd say, we're still thinking about it in a similar way, obviously a lot of separation costs in the first quarter, we talked on the remarks about the LRD termination, which was probably two-thirds of the separation cost spending in the first quarter. Obviously that's behind us. And so, those separation costs kind of hit watermark in Q1 and start to take rough -- also pretty high litigation costs in Q1. So if you take all that aside, you start to see the benefit on that side of the cash flow and then following the P&L, sales ramp up and earnings ramp up drives more cash, we've got the front-end loaded investment on clinical and DTP that rolls off and drive those sales growth in the back half. So I think we're still confident in the cash generation for the year, but the profile, much like the P&L itself, profile, it's more back-end loaded.

Joseph Woody -- Chief Executive Officer

Especially the quarter in itself (technical difficulty) core separation costs in the litigation, this would not be a typical quarter.

Lawrence Keusch -- Raymond James & Associates, Inc. -- Analyst

Got it. Okay. Thank you.

Operator

And our next question today comes from Ravi Misra of Berenberg Capital Markets. Please go ahead.

Ravi Misra -- Berenberg Capital Markets -- Analyst

Hi. Good morning. Thanks for taking the call. So just a couple from me. Just wanted to parse out a little bit of the commentary around the Leiter sales, which seems to have increased, but the pre-filler accounts were down year-over-year, how do we think about that? And then just a couple of follow-ups on NeoMed after that.

Joseph Woody -- Chief Executive Officer

I'll make a couple of high level comments and I can see that Steve wants to jump in as well. But, generally, the customers have gone over Leiters, which represents about a-third of our fellow customers are growing high double digits, they reorient at a 100% rate, they continue to grow, that's very positive for us. Obviously, we're very focused on moving customers over. Customers in a second pull (ph) that decided to just fill in-house, they're typically down, sort of, low double digits, and the reason is it's a little bit more of a difficult process for them to do all of that and the utilization is lower, but that's actually an opportunity for us to keep moving those folks over to Leiters and there's a series of customers that, over time, have left completely and that's really the bigger issue for us versus competition and even bigger than the drug supply, but we're getting better and better and more customers moving over quarter-to-quarter, which is why we feel confident in the mid- and long-term, and especially in H2 with competitors. But, Steve?

Steven Voskuil -- Senior Vice President and Chief Financial Officer

Yeah. I think you've captured. The Leiters are doing great, strong double-digit growth, we want to get as many former pre-filler customers over there as we can. And then, meanwhile, help hospital pharmacies who are struggling with the time it takes to fill ON-Q to find solutions.

Ravi Misra -- Berenberg Capital Markets -- Analyst

Okay, great. And then on NeoMed, just hoping you can help me understand a little bit of the strategy. First, is that going to just kind of walk through the equity accounting and then you said you have the exclusive option to buy the rest of the company. Can we just understand kind of like the historical growth there for it? And would that suggest kind of evaluation of them about $35 million taking that from $7 million as a 20% investment?

Steven Voskuil -- Senior Vice President and Chief Financial Officer

Yeah, that's been sort of on growing like a mid-single-digit alongside of where our Digestive Health business is. If you do the math on it, it's sort of one times revenue, not unlike Game Ready or a deal like Corpak that will synergizes it right into that channel, so it's going to be strong for us and we think we can affect the growth in an even stronger way. We are going to look at our diligence a little bit more accelerated. We have the option to convert that to a sale inside of this year and frankly we were working on a little bit larger acquisition. They got to evaluation point that we did not think was good for our investors or good business decision for us, which is why we put this into the side where we fully have the option to expedite that inside of this year.

And, again, what I see is, this is a great acquisition for Digestive Health, because we're going to be able to contract differently with a broader portfolio. This will focus more in the low birth weight, neonatal space where we don't participate today. And, again, if you think of it in terms of Corpak, there's this plenty of synergy available to us in this deal and it fits right into our channel.

Ravi Misra -- Berenberg Capital Markets -- Analyst

Great, thanks. And then just maybe one last one on the P&L. And, Steve, congratulations. How do we just kind of piece this SG&A investment? If you just help us calibrate our models there? And you pointed toward accelerating sales and EPS growth, can you just help us just think about what the rest of the year looks like on the expense line? Thanks.

Steven Voskuil -- Senior Vice President and Chief Financial Officer

Sure. We'll be happy to. So the -- from a profile standpoint, obviously, Q1 is high with the DTP, heavy clinical and R&D was also high. What I would expect about looking forward to be sequential declines as we go over the next two quarters and then not a typical we'll see a pop in the fourth quarter and some of that can be R&D timing, just I'll say year-end spending tends to be a little bit higher. So I think about it down for the next few quarters and then probably up in the fourth.

Joseph Woody -- Chief Executive Officer

And just remember, Ravi, that in the last call -- everything that's in there, it's again not normal, the COOLIEF and the TV ads in the 13 markets. A global sales, we knew that was very necessary; clinical studies, that are going to benefit COOLIEF in particular, sales force expansion and then, obviously, an uptick in comp or commissions from last year. So now alongside of that, we committed to $7 million to $10 million in cost savings. Some of that's already in the works and the bulk of that picks up in the second half and ties right into the IT transformation. So that's why these got the confidence and we do and we knew it was going to be a tough Q1, sort of half of Q2, but then it really starts to change, as Steve outlined.

Ravi Misra -- Berenberg Capital Markets -- Analyst

Appreciate it. Thanks.

Operator

And our next question today comes from Rick Wise of Stifel. Please go ahead.

Frederick Wise -- Stifel Financial Corp. -- Analyst

Good morning, Joe. Good morning, Steve. Maybe I'll start with back to Acute Pain, again. I just want to make sure I'm understanding Acute Pain growth rate in the quarter had to be down year-over-year, I assume. And I don't know, Steve, if you want to be more specific about it, but I noticed in your slides on slide six, you're saying you plan for flat to slow growth in the first half and if Acute Pain was down in the first quarter and is going to be flat to a slow growth, it would imply it's going to be -- how I should say it, better or a lot better year-over-year in the second quarter, is that -- am I thinking about it correctly?

Steven Voskuil -- Senior Vice President and Chief Financial Officer

Yeah, you're thinking about it the right way. The first quarter was down single digits in Acute Pain. So just as a reference point now. Inside there, you have IV business as well, might be a distributor driven, obviously not much margin and that was down a bit quarter-over-quarter. But ON-Q itself was also down single digits, so just as a reference point. And you're right, as you look forward across the quarters, you see the pick up more in the back half than the first half clearly and of course the fourth quarter tends to be a strong quarter for that business anyway.

Frederick Wise -- Stifel Financial Corp. -- Analyst

And, Joe, turning to your comments on the international and strengthening the US team, et cetera, a couple of questions here. How much of this -- these initiatives internationally are, let's call them, blocking and tackling versus new product registration? So a couple of questions around here, you've emphasized this is big growth drivers, I guess looking ahead, one, what kind of growth should we expect, do you expect? Does the new IT system facilitate that growth or in some kind of way just talk us through some of the moving pieces and where we're heading, if you would be so kind?

Joseph Woody -- Chief Executive Officer

Yeah. So on international, a lot of it this year is blocking and tackling. Arjun Sarker has a full team now in Asia Pac. As of sort of the end of May, he'll have a full team in place in EMEA is inclusive of leadership and distributor management. And then as you move into the end of this year and into 2020, different initiatives taking hold, whether it'd be registrations or marketing approaches or medical education, it's all -- we had a good quarter, we're not expecting every quarter to be that way this year. However, we do expect that the full year performance will be more like a high-single-digit and if you think about it, that's moved from sort of 3% two years ago to 5%. And then if we hit the high-single digit, we believe we'll be well on track for double-digit in international moving forward and that's our goal. And, again, that's a place where having the people in place, the right investment and the right strategic plan in and of itself allows for growth of what we've outlined is sort of a $140 million of our total business.

And it might be worth just reiterate, because you said catalysts for growth, I mean, to me what I think about obviously is COOLIEF being a major catalyst for our business, certainly international. The Digestive Health business with the core track standard of care and then alongside that we intend to enhance with M&A and for us, I think everybody on the call knows, the cost that comes out and whether it's a $7 million to $10 million this year and the $14 million to $18 million next year all really significantly improves us from where we are.

Frederick Wise -- Stifel Financial Corp. -- Analyst

Sounds Good. And Steve, gross margins, you've talked about the 2019 gross margins in the low-60s, obviously first quarter '19, 61.6%, sequentially higher than the fourth quarter, is that the right way to think about the cadence throughout '19 each quarter sequentially higher and maybe again I appreciate you've -- many factors here are moving in that direction, but maybe some of the biggest drivers of that improvement if that's the right way to think about it?

Steven Voskuil -- Senior Vice President and Chief Financial Officer

Sure. You can expect it to improve over the year. I wouldn't get a specific as -- or sequentially every quarter, because we do have some movement inside there. Clearly the back half volume will help as we get more through the top line there, that will drive efficiency at the plans. And, as Joe said, some of the cost savings will be higher in the back half. So we're right in the middle now, the distribution optimization work, for example. If we don't have any savings really from that in the first quarter, not much in the second quarter, but then that ramps up in the back half as well. So all of that will be part of driving improvement in the back half. Still in line with the overall guidance for the year that you said, kind of low-60s.

Frederick Wise -- Stifel Financial Corp. -- Analyst

Okay, great. Thank you so much.

Joseph Woody -- Chief Executive Officer

Thank you, Rick.

Operator

(Operator Instructions) Today's next question comes from Jonathan Demchick of Morgan Stanley. Please go ahead.

Jonathan Demchick -- Morgan Stanley -- Analyst

Hello. Thanks for taking the questions. I had I guess two quick questions. One kind of following up on the P&L and then another on pain management. So maybe I'll start off in the P&L. So heading into the year, I guess, we knew that 1Q would obviously be the low point on margins, given some of the headwinds you guys have listed off -- sell -- like, lower sales, heavier investments, more limited cost savings, but getting to the lower end of guidance there actually needs to be, obviously, a lot of margin improvement as you guys have outlined, but I mean basically doubling the margins from the 1Q levels, if I'm doing my math right. So can you kind of quantify the $7 million to $10 million of cost savings that we're going to see kind of ramp up, but is there any way that we can kind of think about some of the DTP spending, some of the clinical studies, can you quantify the levels that we're really in the first quarter that potentially go away, because from looking at it like operating expenses that you kind of talked to really do need to step down from current levels. So just any clarity on like the absolute dollars that are getting removed from the P&L that could be really helpful to figure out more visibility into the broader ramp.

Steven Voskuil -- Senior Vice President and Chief Financial Officer

Yeah. I'm going to probably avoid giving a specific dollars on DTP and the same on clinical, but those are the key drivers. DTP is a significant year-over-year investment for us across Q1, in the first half of Q2, so that the component clinical, heavy on the front-end. Joe mentioned earlier in response to the sales conferences for us, which is, again, given our size is not an insignificant investment that hits OpEx in the first quarter. And so, if you just take those three alone, that's going to drop quite a bit of margin improvement right there. And then these things around cost savings, again some of it's in gross margin, but we'll also see some of it on the OpEx side as the IT system rolls up. Against some of that IT specifically more to the very end of the year. But those are the key drivers, Jon. I want to stop -- sort of starting to break out the P&L by line item, but you have all the right drivers.

Joseph Woody -- Chief Executive Officer

And the DTP will be concluded about mid-May, but you can imagine 13 markets major advertising folks are seeing there -- yell our comments on the advertising, it's a fairly significant expense for us. And then another thing I would add is that we have our attention on this and we are managing very tightly for the remainder of the year. So...

Jonathan Demchick -- Morgan Stanley -- Analyst

Understood. And Just on pain management, I mean, it looks to have declined maybe mid-single digits organically when you start backing out Game Ready and given just the variation in growth rates of some of your major products, mainly ON-Q and COOLIEF, and I think you've kind of talked a good amount about ON-Q, but I was hoping you could provide a little more detail, I guess, around the growth rates for COOLIEF or at least how it's growing this quarter relative to the last few and maybe kind of talking to some of the recent investments that if that's already had a contribution or if that's supposed to -- do you expect that to really drive material acceleration into the back of the year?

Steven Voskuil -- Senior Vice President and Chief Financial Officer

Yeah. It continued with the double-digit growth in COOLIEF, which I'm very happy with. One of the things that you don't see quite as readily that is in one at the moment is the needles, kits and trays portion of that business for Q1, which are the accessories, if you will, to the procedure, and that's just sort of a shift between distributor order in Q4, Q1. But, frankly, you see that same thing in the IV infusion business for Acute Pain. So those are actually big hits to the growth rate where we're making progress in ON-Q and then obviously we're maintaining with COOLIEF.

We do feel like that as we move into June, we're going to start to see benefit from this direct-to-patient. We're getting a lot more patients through to physician appointments than we have in the past and I think at one point we were nearly halfway to our number for the full year. Last year is a very short period of running these ads.

The other thing I would add is that, we're not really seeing an impact at all for COOLIEF from anything that Medtronic is doing and they're not delivering products as far as we know. I think we reminded everyone that we also have a next generation that we'll see at some point this year in different probe sets and we already think we're ahead and certainly ahead in the clinical data. So I do believe that's going to be and remain a really strong growth area and catalyst for us. And then the bigger thing for this year to think about is the TBT Code decision in July, which opens up differentiated reimbursement for us, but then also helps us with the private payers or the management of care are sometimes make negative decisions on coverage and that means there's just more market force and that's also why we spend so much in these clinical studies.

Jonathan Demchick -- Morgan Stanley -- Analyst

Understood. Thank you for the color.

Operator

And today's next question comes from Kristen Stewart of Barclays. Please go ahead.

Kristen Stewart -- Barclays Bank PLC -- Analyst

Hey, guys. Steve, just want to say good luck at Hershey, we will miss you. So just a couple of follow ups here. So just on the change in GAAP guidance, it does look like you guys are now expecting a pretty significant loss now for the year. I think earlier you had commented that you're not expecting any change in cash flows, but could you just maybe help us understand kind of that bridge to GAAP and I guess are you expecting positive cash flows this year or negative?

Steven Voskuil -- Senior Vice President and Chief Financial Officer

Yeah. We said we will have positive cash flow for the year and, again, more to the back than the front. And the bridge pay does pretty good job in the tables in the press release, but near the bridge is really those separation costs in particular, again first quarter being a high watermark for those on the back of the LRD termination litigation, which is an adjusting item for us, also high in the first quarter. I wouldn't expect that as a run rate going forward. So those two are going to start to bleed off going forward. And those two right there, that's a big lift from a cash flow standpoint. So those are the two biggest movers, then obviously the business performance itself running through the P&L.

Kristen Stewart -- Barclays Bank PLC -- Analyst

What's the change relative to the original guidance. It looks like restructuring IT charges are expected to be higher and post divestitures target, is that -- I think you had mentioned about $10 million (technical difficulty) for the ERP go-live, is that predominantly (technical difficulty)

Steven Voskuil -- Senior Vice President and Chief Financial Officer

Sorry, Kristen, I didn't mean to cut you off. That's the biggest piece. The separation cost probably a little bit -- running a little bit higher than what we expected. Again, in the first quarter, the LRD component was more involved than we expected when we put that structure in place and then the second one, which you picked up is the IT side, and really what we want to do there, we're off to a good start, but we still got a lot of work to do and the largest part will be that North American go-live later in the year and really want to make sure we fortify the investment there around both post-go-live care, some additional testing on new modules that come into play and so forth.

Kristen Stewart -- Barclays Bank PLC -- Analyst

Okay. And then just thinking kind of longer term, how comfortable do you guys still feel with the ability to achieve the long-range plan forecast given what you're seeing this year, it seems like some of the initial cost savings that you had earmarked are being reinvested back into the business. It looks like the IT expenses might be a little bit higher, I'm not sure if that means maybe kind of (technical difficulty) a little bit more on the saving side or if you just have better visibility on some of the cost, just how do you think about getting to the LRP numbers overall? Is it going to require M&A or do you still feel confident you can do without?

Joseph Woody -- Chief Executive Officer

This is Joe and I'm sure Steve will comment. I mean I always do remind everyone that without the headwinds in Acute Pain, we did grow organically 7% last year. We're headed back toward that direction with our business, but we also don't intend to stop at $30 million to $40 million that we've talked about and I think on the last call I may have mentioned hiring Dave Ball who is with me sell the -- when we took $250 million cost out of that business and he has the skill set in running the procurement not only supply chain, but the project management office as well to manage that and that was a really good process. But I think we'll find more costs here and one of the things that's frustrating, I think, to investors and to management is that the IT system really is sort of the locked -- kind of, once that's open, we can get to a lot of these things really on the corporate cost side, SG&A. And, on the last call, we did talk about the investments, we thought it was an opportunistic time with the reimbursement and the clinical studies for COOLIEF and, yeah, I mean M&A enhances the plan, but we still feel like we've got a good opportunity to get more cost out, generally. I don't know Steve, if you...

Steven Voskuil -- Senior Vice President and Chief Financial Officer

Yeah, I would just -- about your question, Kristen. Reinvesting the cost savings is not the new normal.

Joseph Woody -- Chief Executive Officer

No.

Steven Voskuil -- Senior Vice President and Chief Financial Officer

That's not the plan going forward. We are betting on our winner and the biggest winner in the portfolio are right now COOLIEF this year and that was the plan and we're going to fulfill that plan based on the good results we saw in the experimentation we did last year. But that's not the new model, we are going to drop cash from savings and, as Joe said, we are working and have talked in the past about an additional phase of cost savings relative to supply chain and Dave Ball is working through those details. We'll expect to talk more about that externally as the year progresses. So at the same time, we are again really looking for more savings to bring to the bottom line, but not all of it will be reinvested (ph) certainly.

Kristen Stewart -- Barclays Bank PLC -- Analyst

Okay. And then one last quick one. On NeoMed, how is that consolidated through the P&L? Will that be included within a line item or consolidated into sales? I'm just trying to figure out how that's embedded within the guidance now?

Steven Voskuil -- Senior Vice President and Chief Financial Officer

Yeah. For now, it's not in guidance, it's going to be on the balance sheet, it's an equity investment until or unless we make a change in that ownership structure going forward.

Kristen Stewart -- Barclays Bank PLC -- Analyst

Perfect. Thanks, guys.

Joseph Woody -- Chief Executive Officer

Thank you.

Steven Voskuil -- Senior Vice President and Chief Financial Officer

Thank you.

Operator

And today's next question comes from Matthew Mishan of KeyBanc. Please go ahead.

Matthew Mishan -- KeyBanc Capital Markets -- Analyst

Great, and thank you taking the questions. Guys, what are the remaining steps that need to take place to completely separate from Owens & Minor, where we're no longer doing TSAs, we're no longer have anything kind of tied to them?

Steven Voskuil -- Senior Vice President and Chief Financial Officer

Yeah. Biggest piece, as Joe touched on earlier, is really the IT separation. So as we come up live fully on our own system, the next step after that will be, you can imagine, the unplugging and disconnection of the two companies on the legacy IT system. That is the biggest piece. The remaining TSAs are largely connected to that IT separation and we still have that in our plan to be completed by the end of the year.

Matthew Mishan -- KeyBanc Capital Markets -- Analyst

And then just to understand the guidance, especially around the organic revenue growth, it does look like ON-Q is coming in a little bit worse than you guys had expected given the supply constraints, what is the offset to that in your current assumptions? Which part of the business is coming in maybe a little bit better to offset kind of some of the weakness?

Joseph Woody -- Chief Executive Officer

If you think about it from a full year perspective, I mean the international for the full year, which I'm not talking about quarters now, but full year, I think, doing better, COOLIEF absolutely with the GDP in there and we are seeing -- all of this is also facing by quarter, good underlying growth in our Digestive Health business, which gives us a lot of confidence. And then I think, lastly, we knock through this respiratory, which we really haven't talked about in the -- kind of the flu season impact and you work your way through that, I guess, back to a more normalized growth for us than where it is right now.

Matthew Mishan -- KeyBanc Capital Markets -- Analyst

Okay. And then last question on COOLIEF, can you talk a bit about maybe your placement growth for the boxes versus the recurring revenue? Is our placements keeping up with this -- the double-digit growth you're seeing on, maybe, the clinical (ph) side or is one outpacing the other?

Joseph Woody -- Chief Executive Officer

Yeah, I mean, we have -- we don't disclose the exacts, but we're -- it's about thereabouts, if you will, quarter-to-quarter from where it had been sort of six months or a year ago. We do now talk about the fact that we got a 1,000 installed base units there and I guess it's about 850 or so somewhere in their users. So obviously some locations have more than one units, some of those are doing standard, some of doing COOLIEF.

Matthew Mishan -- KeyBanc Capital Markets -- Analyst

Steve, congratulations, and look forward to discounted tickets at Hersheypark?

Steven Voskuil -- Senior Vice President and Chief Financial Officer

We're giving you a lot of chocolate, you're all going on a diet after this call. So...

Joseph Woody -- Chief Executive Officer

We're OK about the chocolate, but I think -- you also have some chocolate too. So...

Matthew Mishan -- KeyBanc Capital Markets -- Analyst

We're waiting for our gift baskets.

Steven Voskuil -- Senior Vice President and Chief Financial Officer

Thanks, Matt.

Operator

And our next question today comes from Chris Cooley of Stephens. Please go ahead.

Christopher Cooley -- Stephens Inc. -- Analyst

Good morning, and thanks for taking the questions. Just maybe two quick ones for me here at the end. And I apologize, I had a turbulent couple of calls here this morning if you touched on this at the outset. But just when we think about the NeoMed minority investment, I know you stated you were working on something much larger, so it kind of gotten put to this side, but just want to be clear, this isn't -- or is this a change in maybe the way you approach your strategic investments going to forward where you would initially do a minority stake, maybe, to further evaluate the business and then roll it in? I just want to make sure how or what to read into that? I have a quick follow up also on COOLIEF.

Joseph Woody -- Chief Executive Officer

Yes. This was kind of an opportunistic element, because we thought we had tightened going on, obviously, the separation at a larger deal. And so, when I say opportunistic, I mean for us to have the service structure. The team has been working with this company for several years, such a nice fit. While we do have an open innovation platform that we put in place and we plan to do some investing along the way, you can see from the table earlier on technology, this wouldn't be typically the way you would see us sort of structure something like this.

Steven Voskuil -- Senior Vice President and Chief Financial Officer

Yeah. I would say if we learned anything, it's that doing an equity investments is much work to do in an M&A piece and -- but for that other deal, we really just want to make sure we created plenty of cap space from a liquidity standpoint. We would not have done this structure at all, but at the moment it was just a good hedge against this other deal moving in a positive direction.

Christopher Cooley -- Stephens Inc. -- Analyst

Okay, super. And then I apologize, I misspoke earlier, but when I think back to just your customer base on the pain side and specifically thinking about ON-Q, I appreciate the color that you provided between both Ropivacaine and Bupivacaine in terms of the pre-sale, but have you disclosed or would you remind us your mix between the customer base that currently utilizes pre-fill versus those that are doing it in-house just so as we can kind of try and think through the phasing of that supply ramp to the back half of the year?

Joseph Woody -- Chief Executive Officer

So you're asking the percentage of our customers that use pre-fill, is that what you're asking?

Christopher Cooley -- Stephens Inc. -- Analyst

Yeah, essentially, just trying to think about what percentage of that is pre-fill that's been converted to Leiters and seen that ramp versus the percentage that's going to be falling off there on the home fill just due to supply constraints?

Steven Voskuil -- Senior Vice President and Chief Financial Officer

Yeah. So in days gone by, before our pre-fill customers went out of business, we did about 70% of ON-Q with in-house filled and 30% was due -- went through a couple of different pre-fillers, one in particular, so 70/30 was the split before, today it's about 90% done in-house and about 10% that's done through Leiters. Obviously, the piece of Leiters is growing very quickly and we'd like to see that percentage obviously balance out. And again one of the benefits of Leiters is you get the lucky strike of both compensating for the pre-fill side, making it easier for them, but also avoiding the drug side, and so it's a double win everyone we move into that percentage.

Christopher Cooley -- Stephens Inc. -- Analyst

Understood. I appreciate the additional color. And, Steve, again, congrats on your new opportunity. You will definitely be missed. All the best.

Steven Voskuil -- Senior Vice President and Chief Financial Officer

Thank you, Chris.

Joseph Woody -- Chief Executive Officer

Thank you.

Steven Voskuil -- Senior Vice President and Chief Financial Officer

I appreciate it.

Operator

(Operator Instructions) Today's next question is a follow-up from Kristen Stewart of Barclays. Please go ahead.

Kristen Stewart -- Barclays Bank PLC -- Analyst

Hi. Thanks for taking the follow-up. Joe, I just wanted to go back to the M&A question. I was just wondering if you could update us on how you're thinking about the deal sizes? I think you've said in the past that you had about $650 million in M&A capacity, is that still how we should think about things? And was the deal that you were looking at, it sounds like that could have been what you've described as more of a growth-oriented deal, is that the way we should think about that or was that a smaller or I said more of an accretive deal, I guess a larger version of Corpak or Game Ready?

Joseph Woody -- Chief Executive Officer

Yeah, you're right about the $650 million in capacity. And when we say large deal, I don't mean like the Stryker or those companies, whether it's been in billions or billion, for us several hundred million is a big deal. We would look at growth, we still want to be accretive quickly like two or three years on a growth deal and certainly our other metrics remain in place for the smaller deals. But, at the moment, we are primarily looking at the bolt-ons and we have a pretty robust pipeline as well and I'm not going to guarantee any M&A, because it's too hard to call, but we're set up pretty well with -- obviously, you can see the ability to do at least one and there's a couple of other bolt-ons that are near-term as well.

Steven Voskuil -- Senior Vice President and Chief Financial Officer

Yeah, I would just say it is an example. Kind of the first deal that we've ever walked away from on price and value, usually it's the due diligence issue, so I would just say it's an example of us trying to be good stewards of capital at the same time not getting caught up in a frenzy on any particular asset.

Kristen Stewart -- Barclays Bank PLC -- Analyst

Okay, perfect. And then you'd mentioned some distributor shifting, I guess that was more within respiratory, I think, this quarter? Can you help us maybe quantify that or correct me if I'm wrong?

Steven Voskuil -- Senior Vice President and Chief Financial Officer

Yeah, you're close. It was in DH, primarily. We had some distributor benefits in Q4, we thought that will bleed out in Q1, in fact it didn't. And so, at some point, we're going to see that inventory normalize. Order of magnitude will be probably $3 million kind of range.

Kristen Stewart -- Barclays Bank PLC -- Analyst

Okay, perfect. Thank you, guys.

Operator

And, ladies and gentlemen, this concludes your question-and-answer session. I'd like to turn the conference back over to Joe Woody for any closing remarks.

Joseph Woody -- Chief Executive Officer

I'd just like to thank everybody's interest in Avanos. And as you can tell from the call, we've got a lot of confidence in the business outlook and our ability to deliver against the priorities that we've outlined. Fundamentals are there in the business and we are well positioned to continue value creation for shareholders. Thanks, again.

Operator

And thank you, sir. Today's conference has now concluded, and we thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.

Duration: 51 minutes

Call participants:

David Crawford -- Vice President of FP&A and Investor Relations and Treasurer

Joseph Woody -- Chief Executive Officer

Steven Voskuil -- Senior Vice President and Chief Financial Officer

Lawrence Keusch -- Raymond James & Associates, Inc. -- Analyst

Lawrence Keusch -- Raymond James & Associates, Inc. -- Analyst

Ravi Misra -- Berenberg Capital Markets -- Analyst

Frederick Wise -- Stifel Financial Corp. -- Analyst

Jonathan Demchick -- Morgan Stanley -- Analyst

Kristen Stewart -- Barclays Bank PLC -- Analyst

Matthew Mishan -- KeyBanc Capital Markets -- Analyst

Christopher Cooley -- Stephens Inc. -- Analyst

More AVNS analysis

All earnings call transcripts

AlphaStreet Logo

More From The Motley Fool

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

Motley Fool Transcribers has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy .