Avanos Medical, Inc.

Good day and welcome to the Avanos fourth quarter 2018 earnings conference call. All participants will be in a listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Dave Crawford. Please go ahead.

Good morning, everyone, and thanks for joining us. It's my pleasure to welcome you to the Avanos Fourth Quarter Earnings Conference Call. With me this morning are Joe Woody, CEO, and Steve Oskell, Senior Vice President and CFO. Joe will begin with a brief review of our 2018 accomplishments, followed by an update on the outlook for our businesses and an overview of our 2019 priorities. Then Steve will review our results, offer details on our financial performance, and share our earnings outlook for 2019. We'll finish the call with Q&A. A presentation for today's call is available on the investor section of our website, Avanos.com. As a reminder, our comments today contain forward-looking statements related to the company, our expected performance, economic conditions, and our industry. No assurance can be given as to the future financial results. Actual results could differ materially from those in the forward-looking statements. For more information about forward-looking statements and the risk factors that could influence future results, please see today's press release and 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 gap financial measures. Now, I'll turn the call over to Joe.

Thanks, Dave. Good morning, everyone, and thank you for your interest in Avanos. 2018 was a year of transformation and achievement as we completed the S&IP sale, increased investment to accelerate growth, and initiated our cost savings program. I'm pleased with our performance against the five priorities outlined last year. First, build on our top line momentum. Second, close the S&IP divestiture and deliver on our TSA commitment. Third, execute strategic investments to accelerate growth. Fourth, begin to right-size our cost structure to support our leaner, more agile business. And finally, strategically deploy capital through M&A. I will review these accomplishments and their expansion in 2019. First, we sustained our top-line momentum in 2018. For the year, sales grew by 7% to $652 million, slightly ahead of our revised expectations, and we earned $1.93 of adjusted diluted earnings per share, exceeding the high end of our outlook. We continue to see strong demand for our cool leaf, digestive health, and respiratory health products throughout the year. Buying these businesses grew 8%. Additionally, organic sales in the international markets increased from 1% in 2017 to 5% in 2018 in constant currency. As discussed during our third quarter conference call, the regulatory issues around the industry-wide drug shortage and pre-filler disruption continued to pose challenges for our acute pain customers. This, coupled with the inventory consolidation initiatives of two of our IV infusion distributors, impacted our overall performance for the year. The number of customers working with our exclusive pump filling partner continued to increase as we saw a 25% increase in sales in all lighters accounts for the quarter. In addition, drug supply for ropivacaine is beginning to return to the market, and we expect it to take several months to work through the supply chain based on our experience last year when supply was interrupted. We continue to see significant growth potential for acute pain, given the large addressable market of more than 20 million applicable U.S. surgical procedures annually and the growing demand from surgeons for effective opioid-sparing pain treatments. Our well-trained sales force is focused not only on expanding market penetration in orthopedic pain and healing, but in new growth areas where such as OBGYN specialties were on cue to make a meaningful difference in patients' lives by enabling opioid-free C-sections and hysterectomies. Our second priority was to complete the SNIP divestiture and deliver on our TSA commitment. We are pleased to be progressing as scheduled with our TSA commitment. Our third priority was to accelerate strategic investment to drive our near and long-term growth with the goal of achieving sustainable, high single-digit growth over time. Our investments were focused on three key areas, interventional pain, R&D, and international. Let me highlight some examples. First, in interventional pain, our fastest-growing business, we made significant investments in Cool Leaf, the only FDA-cleared RF treatment for OA knee pain. These investments are in advance of the expected 2020 CPT-1 code for genicular nerve ablation. To raise patient awareness of our unique and effective therapy, we launched our first direct-to-patient television commercials in a selected U.S. market. We are excited about the results, which generated a 35% sales lift in those markets over our normal growth expectation. Also, we saw a significant increase in patient awareness. Additionally, to further differentiate Cool Leaf and bolster our position in the payer community, we increased our investment in clinical research. As a result, company-driven Cool Leaf publications have grown from just one in 2016 to an expected seven in 2019. Three key studies, when published, intend to show Cool Leaf's benefits against the use of steroids for the treatment of knee pain, the health economic benefit for Cool Leaf, and new results for our study against hyaluronic acid for knee pain, which could enable us to target this billion-dollar market. We're optimistic about this study and expect to publish more details in the near future. In addition to raising awareness, we're advocating for the adoption of reduced and or non-opioid alternatives to help combat the opioid crisis in the U.S. To this end, we've strengthened our government relations efforts. Members of my leadership team and I have met personally with members of Congress to lobby for improved reimbursement of opioid sparing therapies. We're encouraged by the Opioid Crisis Response Act, which contemplates the removal of financial incentives for prescribing opioids rather than medical devices such as OnCue and procedures like Cooley. Furthermore, we have strengthened our reimbursement capabilities. When I started a year and a half ago, our reimbursement team was a single person. Today, we have built a team of nine primarily focused on expanding coverage for Coolief, but also working on several initiatives in our on-queue business. Second, we continued investing in R&D to strengthen our capabilities to commercialize new products and to build a robust pipeline of innovative medical devices. Our increased investment in breakthrough technologies is showing signs of returns. We were one of eight companies from more than 250 submissions selected by the FDA for its Opioid Innovation Challenge. In addition, we continue to make strong progress across our breakthrough initiatives and are excited to be starting our first inpatient trial around new methods to treat post-surgical pain. Turning to international, we increased our focus on this business, restructured the leadership team, and prioritized our investment around selected growth markets. Arjun Sarkar leads this business and has laid out his strategic plan and growth framework, which includes prioritizing geographies where we can win and build scale, acquiring top device industry talent, evaluating our distribution channels, and determining how to rationalize our channel partners. Overall, we expect International's growth rate to accelerate each year and become a double-digit grower by 2021. These are just three areas of strategic investment we made in 2018 to position us for future growth. Transforming our cost structure was another 2018 priority. As we've mentioned on previous conference calls, we're taking a phased approach to this transformation. As a reminder, the first phase was right-sizing our organization to align with our growth model. Second was our IT restructuring, where we've initiated deployment of our new ERP system. When the implementation is completed in late 2019, it will reduce our structural cost, enable more efficient inventory management, and improve the information available to speed up and enhance decision making. The third phase, which is slated to begin later this year, will optimize our product supply, global distribution, and network and procurement. To drive this process, two months ago I appointed Dave Ball as Senior Vice President of Global Supply Chain and Procurement. I'm excited to have Dave as a member of my senior leadership team. In my previous experience with him, he has demonstrated the ability to optimize cost structure, drive continuous improvement programs, and increase efficiencies in manufacturing sites. Combining the three cost transformation phases, we anticipate reducing costs by $30 to $40 million by the end of 2021. These savings will be initially reinvested to help accelerate our growth. Strategically deploying capital through M&A to drive shareholder value was our final 2018 priority. I am pleased with the game-ready acquisition, It's meeting our expectations and we expect its growth to be faster than our organic growth rate. Moreover, it strengthens our access to the orthopedic and healing call points, broadens our access to post-operative pain management market, and demonstrates our disciplined approach to capital deployment. We are committed to executing deals that meet our criteria and we will remain disciplined, ensuring our acquisition criteria are met. Our pipeline remains robust and we are evaluating potential deals ranging in size that will complement business now I want to highlight our four priorities in 2019 first accelerating top-line momentum remains our top priority to drive growth we will increase investment we continue to see our chronic care business as a mid single-digit grower and expect to launch multiple new products to maintain our leading share positions we're also investing behind our market leading core track tube tracking technology as our goal is to establish it as the standard of care for bedside placement of small bore and nasoenteric feeding tubes. Chronic Care also provides the foundation for us to accelerate our international growth in the near term. To build on our momentum in Coolief, we've already expanded our successful direct-to-patient advertising into 13 new and large US markets, accelerating investment for new clinical trials and expanding our sales team by 20%. We have seven clinical studies currently underway and in total 13 planned over the next three years. During the first half of this year, we expect six-month results from the hyaluronic acid study to be published, as well as the health economic study that shows nerve ablation is more cost-effective than the current standard of care. Turning to acute pain, we're focusing on regaining growth. As the drug supply gradually improves, we anticipate our sales performance will begin to meaningfully accelerate in the second half of the year. Second, on the international front, we'll continue investing in our growth frameworks. including strengthening our sales and marketing capabilities and hiring regional management and customer-facing roles. Again, we see this business as a double-digit grower over time. Similar to 2018, our investments will temporarily impact margin, but we expect these investments will lead to accelerated growth and significant margin expansion after 2019. Also, post-2019, we will curtail our level of investment once we've established an appropriate level of support for our future growth initiatives. Turning to cross-transformation, this year we will begin the third phase and execute multiple projects. These include simplifying our current distribution network to optimize transport costs, enhancing productivity in our plants through product insourcing, and the phased rollout of our new IT platform that will simplify, streamline, and standardize our global systems and process. We anticipate providing more details about the next stage of our cost takeout program during the second quarter. Overall, we expect savings of $7 to $10 million in 2019. With the establishment of our IT infrastructure, we expect additional savings of $14 to $18 million in 2020. And finally, deploying capital for M&A will enhance our plan. We are well positioned to succeed in 2019 as a pure play medical device company. Our diverse product portfolio and leading positions in large growing market, our scalable infrastructure, our focus on key strategic initiatives, and our talented team gives me confidence we'll accelerate growth. With that, I'll turn the call over to Steve.