Avanos Medical, Inc.

Hello, and welcome to the Albinos Fourth Quarter 2021 Earnings Call. All participants will be in listen-only mode. Should you need assistance, please see the World 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 touchtone phone. To answer your question, please press star, then two. Please note, today's event is being recorded. And now I'd like to turn the conference over to Scott Gallivan. Mr. Gallivan, please go ahead.

Good morning, everyone. Thanks for joining us. It's my pleasure to welcome you to the Avanos 2021 Fourth 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 our current business environment, as well as recap progress made against our 2021 priorities and key objectives for 2022. Then Michael will review our fourth quarter and full year results, and share our 2022 planning assumptions, inclusive of our acquisition of OrthogenRex, which closed on January 20th. 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 joining us to review our operational and financial results for the fourth quarter and full year 2021. While we continue to see the impacts of the pandemic as it relates to elective surgeries, hospital staff shortages, and supply chain, we are 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 will begin with a brief review of our results for the quarter before discussing the current environment and summarize the outcomes from our 2021 priorities. We achieved sales of over $193 million for the quarter and earned 46 cents of adjusted diluted earnings per share. Our chronic care portfolio delivered strong results, growing over 8%, with our digestive franchise growing double digits in the fourth quarter and our North America respiratory business holding flat versus a tough comparison to last year's fourth quarter. Our pain portfolio overall declined by less than 2%, with our interventional pain franchise growing over 6%, offset by our acute pain product portfolio declining by a little less than 7%. The decline in the acute pain portfolio was primarily driven by the timing of the return of elective procedures. For the full year, our digestive health, acute pain, and interventional pain franchises grew by approximately 10 percent, 3 percent, and almost 19 percent respectively, with respiratory health expectedly declining by just over 11 percent. As we noted last quarter, we anticipated continued improvement in our gross margin profile for the fourth quarter versus the third quarter. Unfortunately, headwinds related to raw material availability, inflation, and shipping costs persisted, and our fourth quarter gross margins only improved 40 basis points versus the third quarter. We remain confident in our assessment that most of these headwinds are ultimately transitory, primarily pandemic-driven, being seen across industries, and do not indicate a permanent change to our operating structure. Michael will share some details on our view of gross margin improvement opportunities throughout 2022 in a few minutes. We anticipate gross margins inclusive of our OrthogenRx acquisition to be between 55% and 57% for the full year 2022. While our gross margin did not progress as much as we had planned in the fourth quarter, the team continued its spending discipline across our controllable expenses as we ended the year with SG&A as a percentage of revenue of 37.9 percent. Although we have a range of expenses that will negatively impact our SG&A margin profile in the first half of 2022, we remain confident and committed to maintaining SG&A as a percentage of revenue to be less than 40 percent for the full year 2022. 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. Although most of the volume of elective procedures being performed remains depressed, mostly impacting our on-queue franchise, many product families grew double digits in 2021. As Michael will discuss in more detail in a minute, we anticipate organic growth for 2022 to be between 3% and 6%, with our pain portfolio leading the way from a growth perspective as we start to see market tail ends from elective procedures turn in our favor. We anticipate our digestive and respiratory franchises will return to historical growth rates in 2022. Throughout 2021, we continue to enhance our product offerings to improve the efficacy and ease of use for our care partners. For Coolief, we successfully launched our next generation cooled radio frequency probe kits in Q4. Combined with the launch of our new generator last year, Our new upgraded offerings will strengthen our cool RF leadership position in 2022 and beyond. Within our on-queue and AMBIT business, we have started to see benefits from PainBlock Pro, the user-friendly app and data collection solution that we released earlier this year. This tool will continue to be an important differentiator that will help us drive growth in 2022. We've also seen success with our AMBIT products line utilizing the AMBIT Plus reusable program. in particular as it relates to capturing procedures in the ASC or ambulatory surgical center setting. Shifting to chronic care, the positive trend across our digestive health franchise continues. We maintain double-digit growth across our NeoMed portfolio, which we anticipate continuing into 2022. Separately, 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 basically flat given the prior year pandemic tailwind, and we anticipate our respiratory health business reflecting historical growth rates during 2022. Although we did not meet our internal objectives for gross and operating margin improvement in 2021, we were very pleased with our ability to meet our customers' needs for product availability and exceed our revenue targets for the year. Additionally, we contained costs throughout the year with a focus towards spending only on those initiatives with the highest ROI outcomes. We remained focused and confident that we can attain high 50% gross margins coupled with EBITDA margins greater than 17% during back half of 2022. Our third priority for 2021 was to demonstrate our ability to generate consistent, repeatable cash flow. We generated $47 million of free cash flow in the fourth quarter and $66 million for the full year inclusive of a range of one-time tax and legal settlements. Excluding those items, we generated $26 million of normalized free cash flow. Improved operating results will support this priority of generating consistent and repeatable free cash flow in 2022, which should exceed $90 million. Our last priority for 2021 focused 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. In addition, we closed our acquisition of OrthoGenerex on January 20th and anticipate achieving $70 million of revenue for 2022 related to this acquisition. This acquisition enhances our pain portfolio by providing continuum of care treatment options for patients living with knee OA. OrthogenRx is a clear strategic fit for Avanos and one that will further strengthen our relationship with healthcare providers. To summarize, 2021 was a critical year for us as we moved towards our longer-term financial objectives. Our product portfolio showed resilience. We stabilized our supply chain and operations challenges with meaningful improvements planned in 2022. We also demonstrated our ability to begin leveraging our fixed-cost operating expenses. Additionally, we have resolved all remaining material litigation. This includes the DOJ investigation, the identification dispute with Kimberly-Clark, as well as a positive outcome with regards to our IP infringement case with Medtronic. Our primary objectives in 2022 center around solid organic growth, delivering on our orthogeneric strategy, making meaningful improvements in our gross margin profile as the year progresses, and demonstrating our ability to deliver material free cash flow. We have an excess of $350 million of available capacity to execute on further bolt-on acquisitions, as well as consider additional share repurchases should our shares remain meaningfully below our calculated intrinsic value. Although our 2021 performance was uneven given to the macro environment, we advanced many of our key initiatives that will support solid progress in 2022. Now I'll turn the call over to Michael.