Avanos Medical, Inc.

Good day and welcome to the Avanos Second Quarter 2021 Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, press star then one on a touch-tone phone. To withdraw your question, press star then two. Please note this event is being recorded. I would now like to turn the conference over to Dave Crawford, Vice President of Investor Relations. Please go ahead.

Good morning, everyone, and thanks for joining us. It's my pleasure to welcome you to the Avidos 2021 Second Quarter Earnings Conference Call. With me this morning are Joe Woody, CEO and Michael Greiner, Senior Vice President and CFO. Joe will begin with an update on our quarter and then discuss our business environment and progress towards our 2021 priorities. Then Michael will review our second quarter results and update our 2021 planning assumptions. We will 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, and economic conditions and our industry. No assurance can be given as to the future financial results. Actual results could differ materially from those in 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 the risk factors described in our filings with the SEC. Additionally, we will be referring to adjusted results in 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. As we move into the second half of the year, I'm encouraged by our commercial teams' start to the year and the continued resiliency as they respond to the challenging dynamics brought on by the pandemic. Across our enterprise, we remain focused on getting patients back to the things that matter as we meet the needs of our customers. I will begin with a brief review of our results for the quarter before discussing the current environment and our progress against our 2021 priorities. Sales increased 14% for the quarter to $186 million while we earned 21 cents of adjusted diluted earnings per share. Our sales results were at the high end of our planning assumption. We not only benefited from the return of elective procedures, but more importantly, executed well against our growth initiatives. Performance for the quarter fell short of our expectations within our manufacturing and distribution footprint, negatively impacting gross margin for the quarter. These higher costs are temporary impacts to our business, primarily pandemic-driven, being seen across industries and do not indicate a permanent change to our operating structure. My management team and I have made this our top priority, and I'm confident we will show meaningful progress in the second half of the year. Michael will expand further on the steps we're taking in his remarks. I'm pleased with our team's execution in finding additional efficiencies throughout the business to reduce operating expenses. Teams are finding ways to increase productivity and lower our cost structure, which not only is assisting in offsetting some of our in-year gross margin headwinds, but also is positioning us to deliver on our commitment of SG&A as a percentage of revenue, being less than 40% on a go-forward basis. With that as a background, I'll discuss our market environment and update you on progress against our 2021 priorities, starting with how we are strengthening our growth profile. As I mentioned in our last earnings call, we began the quarter with increasing top-line momentum across our pain management franchise as elective procedures began to re-accelerate. Momentum continued throughout the quarter, and we saw the fastest acceleration in Cool Leaf and Game Ready, where outpatient procedures continued to recover faster than procedures performed within the hospital. Sales for both of these therapies eclipsed the pre-pandemic second quarter of 2019. While the recovery in OnQ has trailed our other pain therapies, we delivered sequential sales improvement throughout the quarter. Based on the gradual increase in procedures and conversations with our surgeons and hospital administrators, we continue to believe inpatient procedural volume will likely remain below its full potential until the end of the year. As we move into the second half of the year, we continue to build on our solid foundation to accelerate growth across pain management. For Cool-Leaf, we're planning to launch the next generation of Cool-Leaf cooled radio frequency probe kits. The new probes will make it easier for physicians to perform Cool-Leaf procedures while maintaining our premium look and feel. The new probes will also be more efficient for us to manufacture and deliver scalability, thus improving Cool-Leaf's already high gross margin. Combined with the launch of our new generator last year, our new probe kits strengthen our CoolRF leadership position. With respect to OnQ, we continue to see positive results from our channel partnership agreements where we are leveraging orthopedic sales partners to gain access to orthopedic surgeons. In an effort to differentiate ourselves from other pump manufacturers, in the coming months we'll be launching PainBlock Pro, a data collection and patient engagement app that will allow physicians to track their patients' recovery and understand their satisfaction levels and opioid consumption in real time without needing to speak with patients. PainBlock Pro will also help us engage patients and improve their experience by providing education about the pump and the ability for us to answer their questions. We will be the only pump company to offer both data collection and patient engagement to this extent. Finally, we continue to leverage our exclusive relationship with Leiters to further solidify our customer base. Shifting to chronic care, the positive trend across our digestive health franchise continues. We maintain double-digit growth across our Neomed franchise, while our standard of care strategy for CorePak is accelerating sales of our CoreTrack hardware to record levels. In respiratory health, sales were down as expected given the prior year pandemic tailwind. Finally, we continue to execute on our international expansion opportunities. Our market development initiatives focused on the clinical benefits of our therapies continue to pay dividends, and we are bolstering the growth of recently acquired products through our global footprint. While growth of the quarter was muted given the pandemic benefit last year, we delivered results at the high end of our expectations. Our second area focuses on gross and operating margin expansion. As I noted earlier, it is imperative that we begin to recapture gross margin loss since the start of the pandemic. Last year, we took the necessary steps to protect our employees from the pandemic and expand manufacturing of products to treat COVID patients. We responded well when presented with these challenges, but now need to address the inefficiencies and costs that arose out of our manufacturing sites. In addition, this year we have made a short-term trade-off to capture market share for our Neomid product family at the expense of higher freight costs to ensure that we take full advantage of its growth potential. These short-term cost increases will allow us to maximize the long-term investment of our Neomid acquisition, but have obviously created some in-year headwinds on gross margin that we did not anticipate coming into the year. Our continued cost discipline and emphasis on driving efficiencies in spending continues to produce results. I'm seeing a cultural shift in how our teams examine investments and make the necessary tradeoffs to achieve the best value for our spending. Improved efficiency also carried over into improved management of working capital, which helps drive a return to positive free cash flow in the quarter. We're on target for our third priority to begin generating consistent, repeatable free cash flow and continue to expect significant free cash flow acceleration in the second half as we await receipt of tax refunds we highlighted on prior calls coupled with our improved operating results and working capital discipline. Our last priority for the year focuses on capital deployment. Our M&A pipeline remains healthy and we are engaged in active dialogue with a number of potential tuck-in targets which would leverage our existing footprint. generate synergies, and enhance our top-line growth profile. M&A is a priority for us, but we will remain disciplined on identifying targets that meet both our strategic initiatives as well as exceed our financial hurdles, ensuring we generate a strong return on capital. Lastly, as a follow-up to the DOJ investigation we updated you on last quarter, in early July we entered into a deferred prosecution agreement with the United States Department of Justice that resolves the DOJ's criminal investigation related to the company's microcooled surgical gowns, which are part of the SNIP business we divested more than three years ago. As part of the agreement, we paid $22.2 million in line with the expectations we previously communicated. I want to assure our customers and our team members that we will continue to maintain robust compliance and quality programs and will continue to enhance them through new and revised policies, procedures, and training requirements. In conclusion, we remain well-positioned to advance our strategies across each of these four areas of value creation as our focus on execution remains strong. This, along with our market-leading portfolio, gives me confidence we can successfully deliver on our 2021 priorities. Now, I'll turn the call over to Michael.