Avanos Medical, Inc.

Good morning and welcome to the AVENOS third quarter 2021 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. 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 a question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Mrs. Scott Gallivan, Vice President, Corporate Strategy at Business Development. Please go ahead.

Good morning, everyone, and thanks for joining us. It's my pleasure to welcome you to the Avanos 2021 Third Quarter Earnings Conference Call. Presenting today will be 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 against our 2021 priorities. Then, Michael will review our third 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 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 the forward-looking statements. For more information about forward-looking statements and the risk factors that could influence future results, please see today's press release and risk factors described in our filings with the SEC. Additionally, we will 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, Scott. Good morning, everyone, and thank you for your interest in Avanos. While we continue to see the impacts of the pandemic as it relates to elective surgeries, hospital staff shortages, and supply chain, We're very pleased with how our operational and commercial teams have responded 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'll begin with a brief review of our results for the quarter before discussing the current environment and our progress against our 2021 priorities. We achieved sales of $184 million for the quarter and earned 25 cents of adjusted diluted earnings per share. Our sales results were primarily in line with our planning assumption. Other than the slowdown in sales we experienced with OnCue as a result of the Delta variant pushing out electives during the summer, we delivered solid sales results in each of our other product categories during the third quarter and through the first nine months of the year. As we noted last quarter, we anticipated a meaningful improvement in our gross margin profile throughout the third quarter. Gross margins for both August and September were 54%, with gross margins for the third quarter exceeding 52%, or 90 basis points better versus the second quarter. Our gross margins will continue to improve throughout the fourth quarter and stabilize into 2022. However, transportation and other supply chain inflationary pressures remain and we are therefore unable to determine how much further improvement we will see in the short term. As we mentioned last quarter, most of these headwinds impacting our gross margin are transitory, primarily pandemic-driven, being seen across industries, and do not indicate a permanent change to our operating structure. We remain confident in that assessment. Although gross margins have improved and will continue to improve as we exit this year, We are meaningfully behind our internal projections on gross profit and therefore have identified additional efficiencies throughout the business to reduce operating expenses. Teams are continuing to find ways to increase productivity and lower our cost structure, ensuring that we can 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, let's move to a discussion on the current market environment and provide an update on our progress against our 2021 priorities. As mentioned earlier, we delivered solid revenue outcomes across most of our product portfolio. Our digestive health business, led by Neomed, was up over 2% globally versus prior year and 6% in North America. Our respiratory business was down versus the prior year. primarily related to the pandemic-related push we received in the third quarter of last year, which contributed $8 million of additional sales. Sequentially, we were flat versus the second quarter as the standard of care with our closed suction catheter systems for patients needing hospitalization due to the coronavirus has primarily shifted to non-invasive ventilation procedures before moving to mechanical ventilation. On the pain management side, we saw almost 5% growth from our interventional pain portfolio, while acute pain was down a little over 1% due to the delta-related pause in elective surgical procedures impacting our on-queue franchise. As we have stated in the past quarters, based on conversations with our surgeons and hospital administrators, as well as what our peers are also disclosing, we continue to believe inpatient procedural volume will remain below its full potential for the foreseeable future. That being said, we do anticipate sequential growth and recovery for our Anki franchise for the fourth quarter, similar to second quarter levels of revenue. As we move into the last quarter of the year, we continue to enhance our product offerings to improve the efficacy and ease of use for our care partners. For Cool-Leaf, we successfully completed a limited launch of next generation cooled radio frequency Pro kits in Q3, with the full launch now in place for Q4. The new probes make it easier for our physicians to perform cool leaf procedures while maintaining our premium look and feel. There is also increased manufacturing efficiencies associated with the new probes, which supports gross margin improvement for cool leafs already high gross margins. Combined with the launch of our new generator last year, our new probe kits strengthen our cool RF leadership position. Within our on-queue and AMBIT business, we recently launched PainBlock Pro, a differentiated app and data collection vehicle to track, monitor, and improve patient outcomes through more direct feedback between the patient and physician. The app tracks a patient's recovery to understand both satisfaction and pain levels in real time. The app also helps us engage patients to improve their experience by giving education about the pump and providing an avenue for a physician to give active feedback on questions the patient might have. We also continue to see momentum building from our channel partnership agreements where we leverage orthopedic sales partners to gain access to orthopedic surgeons. Finally, we're delivering our electronic pump, AMBIT, into the ambulatory surgical setting, which is positioning us to capture additional procedure volumes. 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. As I stated earlier, our respiratory health sales were down given the prior year pandemic tailwind. We have modeled in nominal flu season for this year and consistent with that modeling, we have not currently experienced any higher levels of buying activity for our closed suction catheter products. Our second area of focus in 2021 relates to improving our gross and operating margins. We remain focused on recapturing gross margin loss since the start of the pandemic and made some meaningful progress in Q3 on these initiatives. We were very pleased with our gross margin improvements as we exited the quarter and anticipate seeing further gains throughout the fourth quarter. As noted earlier, we are confident these gross margin headwinds are transitory, but also recognize that significant work remains to get our gross margin profile back up to the high 50s and low 60s. Our third priority is to begin generating consistent, repeatable free cash flow. We generated $10 million of free cash flow in the second quarter and $18 million in the current quarter, and we anticipate generating positive free cash flow again for the fourth quarter. We received $47 million of CARES Act-related tax refunds during the quarter, which was partially offset by the $22 million that we paid to the DOJ to settle our outstanding litigation. Improved operating results coupled with some remaining working capital upside will support this priority of generating consistent and repeatable free cash flow. 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, enhance our top-line growth, and meaningfully improve our margin profile. We will remain disciplined in identifying targets that meet both our strategic initiatives as well as exceed our financial hurdles, ensuring we generate a strong return on capital. Lastly, over the last four quarters, we have resolved all material outstanding litigation, including the DOJ investigation, the indemnification dispute with Kimberly Clark, a positive outcome with regards to our IP infringement case with Medtronic, and other smaller product liability cases. Not only has this reduced a range of uncertainty for us, but it will also significantly reduce our legal expenses from a cash flow perspective. This positions us to be more aggressive with M&A, as well as freeze up capital to repurchase our shares, while ensuring we continue to meet each of our internal funding needs. We remain well positioned to advance our strategies across each of these four areas of value creation as we complete 2021 and begin to look toward 2022. Now, I'll turn the call over to Michael.