This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk03: Good morning and welcome to Avanos first quarter 2022 earnings call. All participants will be in 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 a question, you may press star then two. Please note this event is being recorded. I would now like to turn the conference over to Scott Galvin. Please go ahead.
spk04: Good morning, everyone, and thanks for joining us. It's my pleasure to welcome you to the Avanos 2022 First 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 current business environment as well as review our key objectives for 2022. Then, Michael will discuss additional detail around our first quarter and affirm our 2022 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 are described in our 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.
spk00: Thanks, Scott. Good morning, everyone, and thank you for joining us to review our operational and financial results for the first quarter of 2022. I was very pleased with how our operational and commercial teams continue to execute against a range of challenging macroeconomic dynamics. As always, 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 reviewing our 2022 priorities. We achieved sales of over $197 million for the quarter with 3% organic growth in constant currency and earned 26 cents of adjusted diluted earnings per share. Our chronic care portfolio remained flat despite an 11% contraction experienced in our respiratory business due to a tough comparison with last year's first quarter COVID outbreak. However, as compared to the first quarter of 2019, the last quarter without a pandemic impact on our respiratory business, sales were up 3%. Our digestive franchise delivered another strong quarter with greater than 6% growth versus prior year. Our pain portfolio overall grew by more than 6%, with our interventional pain franchise growing over 9%, and our acute pain product portfolio delivering more than 4% growth. This performance driven by both elective procedure improvement and solid commercial execution. We were very pleased with the performance of OrthogenRx, which we owned for a little over two months of the first quarter. We remain confident that we will generate in excess of $70 million of net sales for fiscal year 2022 from our OrthogenRx offering. Including OrthogenRx sales for the first quarter, our growth rate for the company was a little over 9%. Another bright spot for us in the quarter was the delivery of gross margin of over 56%. Gross margin improved more than 400 basis points compared to the first quarter of 2021, and sequentially improved by 340 basis points compared to the fourth quarter of 2021. We experienced favorable product mix in the quarter inclusive of OrthoGenRx, as well as solid execution by our plants in delivering on manufacturing efficiencies. Although we are very pleased with our gross margin results for the first quarter, we remain cautiously optimistic for the duration of the year, given continued headwinds related to raw material availability, inflation, and escalated shipping costs due to fuel increases and overseas capacity availability. Our back order throughout the first quarter was between $7 and $11 million and is currently under $6 million on a net sales basis, but continues to be volatile on a weekly basis. We still believe that most of these headwinds are ultimately transitory and will not impact our ability to ultimately drive our gross margins back into the high 50s. Finally, we remain confident that gross margins, inclusive of our OrthoGenRx acquisition, will be between 55% and 57% for the full year 2022. Turning to SG&A, as we noted during our year-end earnings call, we identified a range of expenses that would impact our SG&A margin profile in the first half of 2022 and that we would still execute on maintaining SG&A as a percentage of revenue to be less than 40% for the full year 2022. Although first quarter SG&A was slightly elevated versus our expectations, we remain focused on delivering full year SG&A as a percentage of revenue below 40%. Michael will provide additional detail with regards to our expectations in a few minutes. With that as a background, let's review some detail on our product portfolio. As we stated on our year-end earnings call, we anticipated our pain portfolio would lead the way from a growth perspective as we start to see market tailwinds from elective procedures turn in our favor. Although the volume of elective procedures being performed remains depressed, our on-queue franchise returned to growth, while Cool Leaf experienced mid-single-digit growth versus the prior year's first quarter. We anticipate low single-digit growth for our pain portfolio for the second quarter due to a tough prior year comparison, but we then anticipate a return to double-digit growth across the portfolio for the second half of the year. In 2022, we are leveraging and seeing momentum on some of the product offerings and enhancements that were last year to improve the efficacy and ease of use for our care partners. For OnQ and Ambit, the continued adoption of PainBlock Pro Our data collection and patient engagement app is driving momentum and adoption in the business. For Cooley, the launch and conversion to our advanced cooled radio frequency probe kits continues to be a positive driver as we continue to strengthen our cool RF leadership position this year and beyond. Shifting to Chronicare, the positive trend across our digestive health franchise continues. We maintain double-digit growth across our NeoMed portfolio and anticipate strong growth throughout 2022. behind North American infant conversions. Our legacy enteral feeding products continue to grow amid single digits, and we anticipate that to continue throughout 2022 as well. Separately, although our respiratory health business was soft in the first quarter versus our own expectations, primarily due to product availability, we anticipate growth to revert to historical rates as we see more normalized comparisons in the second quarter and beyond. Our next priority for 2022 was to demonstrate our ability to generate consistent, repeatable free cash flow. As you may recall, we generated $26 million of normalized free cash flow in 2021, excluding a number of one-time impacts, and anticipate generating approximately $90 million in 2022. Michael will discuss the first quarter and full-year dynamics of our free cash flow profile in a few slides. Our final priority for 2022 is focused on efficient and value-added capital deployments. 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. We're very pleased with our addition of OrthoGenerex, and its performance to date is in line with our initial expectations. We remain focused on the second half of the year as the reimbursement landscape changes for both our five- and three-shot hyaluronic acid offerings. Based on current understanding of the reimbursement outcome, we are anticipating rates in line with our expectations, which would be favorable in helping us maintain our position in the five-shot category as we simultaneously work to expand our position within the three-shot market. In summary, we're off to a solid start to the year building upon our 2021 execution and are well positioned to achieve our primary objectives for 2022 around consistent organic growth, delivering on our OrthoGenerX strategy, making meaningful improvements in our gross margin profile, and demonstrating our ability to deliver material-free cash flow. Additionally, we have in excess of $200 million of immediately available capital to execute on further bolt-on acquisitions, as well as consider additional share repurchases should our shares remain meaningfully below our calculated intrinsic value for an extended period of time. Now, I'll turn the call over to Michael.
spk05: Thanks, Joe. As you noted, we are off to a solid start for the year and look forward to executing on our priorities for 2022. We delivered on both our organic growth plans and orthogeneric strategy in the first quarter, as well as meaningfully improving our gross margins. Although our SD&A spend was slightly higher than anticipated, we are committed to ensuring full-year spend remains below 40% as a percentage of revenue. The additional spending in the first quarter related to selling and marketing investments planned for later in the year and inflationary costs on compensation and outside services. Now let's review our first quarter results. Total reported sales was $197 million, up 9.2% compared to last year, with adjusted EPS of $0.26. On a constant currency basis, organic growth was 3%. This excludes the contribution from orthogeneric sales in the first quarter, as well as removing Maxter generated revenue from the prior year's first quarter. Chronicare sales were flat to last year at $119 million in the quarter, excluding the prior year impact of sales coming from our exited Maxter facility. We continue to see strong growth in our digestive health business, with the first quarter growth of over 6%. Within our digestive health portfolio, Neomed grew more than 30% from the continuation of conversions to our NFIT technology, despite supply constraints impeding even further growth. Separately, adjusting for the product supply challenges, respiratory health sales would have been down closer to 5%, consistent with our expectations. given the pandemic tailwind from the first quarter of last year. Moving to pain management, excluding the contribution of Orthogenerex, we delivered 63 million of sales, 3 million ahead of prior year, driven by a return of elective procedures for OnQ, and a strong performance across our interventional pain portfolio, growing more than 9%. With this start to the year, the pain portfolio is poised to capitalize on a return of procedural demands. The addition of Orthogenerex will help accelerate growth within the broader pain business as an extension in the continuum of care, giving us access to a wider base of patients and physicians. Additionally, the pain franchise will continue to benefit from the momentum and release of recent commercial products and initiatives like Pain Block Pro and the Advanced Cool Leaf Probes. Now, moving down the income statement, adjusted gross margin improved more than 400 basis points to 56.2% versus last year. As indicated earlier, We are pleased with the progress on gross margins with a combination of better product mix, including orthogenerics, benefits from our pricing initiatives, and improved plant performance. Although we are very encouraged with our first quarter results with regards to gross margin, the global supply chain environment remains disrupted, inflationary pressures are elevated, and the availability of certain raw material components presents a challenge as we work through our existing rolling back order. That being said, as Joe already noted, we are confident in our ability to achieve our previously stated objective of full-year gross margins between 55% and 57%. Adjusted operating profit totaled $18 million compared to $16 million in the prior year. Higher sales and improved gross margins were partially offset by higher spend across SG&A. Adjusted EBITDA totaled $24 million compared to $22 million last year, and adjusted net income totaled 12 million compared to 11 million a year ago, translating to 26 cents of adjusted diluted earnings per share. Turning to the balance sheet and cash flow statement, our balance sheet remains a strength for us and continues to provide us with strategic flexibility as we currently have over 100 million of cash on hand, with 255 million of debt outstanding post the closing of the OrthoGenerex acquisition and completion of our share repurchase program. Given our pro forma EBITDA post-acquisition, we are levered at approximately one times. The cash outflow of just over 3 million for the first quarter was weaker than we anticipated and was primarily driven by poor collections in the quarter. We remain focused on delivering our free cash flow target, which will require a meaningful improvement in our cash collection activities combined with appropriate inventory management. We still anticipate approximately 25 million of capital expenditures for the full year. As Joe indicated, Our primary objectives in 2022 center around consistent organic growth, delivering on our OrthoGenerX strategy, making meaningful improvements in our gross margin profile, and demonstrating our ability to deliver material free cash flow. To summarize, organic net sales is expected to grow 3% to 6% in constant currency, with OrthoGenerX delivering sales of $70 million this year. The low end of this range assumes continued challenges with accessing raw materials and unevenness with the return of elective procedures. As we already stated, we anticipate annual gross margins in the range of 55% to 57%, with the lower end of that range capturing elevated inflation and distribution costs. We continue to target free cash flow of approximately $90 million in 2022 as we drive sales and margin expansion. And finally, adjusted diluted EPS is anticipated to range from $1.55 to $1.75. We are off to a strong start and made progress towards our key priorities already. We remain confident in our ability to execute our strategy and are taking the necessary steps to drive both gross and operating margin improvement, as well as deliver more consistent results throughout 2022. Operator, please open the line for questions.
spk03: We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speaker phone, please pick up your headset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Chris Cooley with Stevens. Please go ahead.
spk07: Hey, good morning, Joe and Michael. I appreciate you taking the questions, and congrats on the solid start to the new year. Thanks, Chris. Maybe just two quick ones for me here at the outset, and I apologize. I was shuffling two calls here a little bit, if you already touched on it. But I just want to make sure I'm level set first correctly on orthogenerics on the year. So essentially a $15 million contribution in the one queue with that growth rate accelerating through the year to get to the $70 million. I just want to make sure I understand the underlying assumptions there for that acceleration as you get through the back half of the year. As I know, several of your public participants in the same space have talked about changes from a disclosure perspective hitting here in the second half of the year. and continued migration to one and three injection modalities. So I just want to make sure I fully understand kind of what you're expecting there, both in terms of reimbursement utilization and kind of the macro market. Then I've got a quick follow-up. Thanks so much.
spk00: Okay, Chris, I can start with that. I mean, we're confident in the $70 million that we've talked about. We have said that the entire business will be modestly accretive to overall costs. Avanos, and in our diligence, we were very much aware of the reimbursement changes, which is sort of reporting ASPs, if you will, currently and in Q2, and then a Q3 reimbursement shift to more of an ASP plus 4% to 6%, depending on where Medicare lands. And that's really going to affect all suppliers at any type of level of shots, whether it's 5-3 or 1. So, again, I think, you know, we captured that in diligence in part of thinking about the confidence we have in the $70 million The way that we're kind of going after that is strategically managing our pricing. We have differentiable approaches with the customer and different customer access points, and then obviously a non-avian product offering as well. But more importantly is we're going to be incorporating more 1099s in our own channel with this product over the second half of the year. It's actually already started in some places. And just to kind of go back up for a second, when we made the acquisition, we talked about the accretive growth this year and the $70 million, and then we said the reimbursement changes could mean a level-ish year in 23, but then going forward, we really see it for us as a solid mid-single-digit grower, and that's really what we need to achieve from the strategic aspect of tying this into the other areas of OA treatment and Cool Leaf that we want to head toward. So hopefully that helps.
spk07: That was great. I really appreciate all the additional support there. It makes sense. And then just lastly for me, when I look to the P&L here in the quarter, really good, nice to see the gross margin moving up. But I did want to look at just the overall OPEX spend in the quarter. I know you alluded to some comments, and I apologize. I think this was right when I hopped in, but kind of an elevated one-time level there on the SG&A side. But could you just walk us through how that comes back down such that you stay below 40% and, you know, actually can realize some leverage as that gross margin comes up. It's not burned away to the middle of the P&L. Thanks so much.
spk00: Correct. I think Michael will handle that. Yeah, sorry, Michael. Didn't want to call.
spk05: No, that's okay. We're in two different places, so sorry about that, guys.
spk00: Yeah, sorry, guys.
spk05: So the two things on the SP&A, one, we had indicated that the first half of the year we would be above 40%. Now, 1Q did come into your point, Chris, did come in a little bit hotter than we thought. And so specific to your question, the reason for that is we had a couple of selling and marketing initiatives that we expected to spend in Q2 or Q3. We decided to bring those forward. So we just won't have those spends in Q2, Q3. So those will normalize throughout the year. That being said, there was also about 2 million of additional headwinds with inflationary factors on compensation and outside services. Those we're going to have to make up for as the year goes on. So there's about $2 million that we're going to make up for as the year goes on. The other part of the headwind that we experienced in Q1 are things that will normalize as the year goes on, just because we've already spent it.
spk07: Okay. And maybe could you help us maybe just quantify that part, that last part, Michael, and I'll get back in queue. Is that 50 basis points? Is that 100 basis points? I'm just trying to think about, you know, how much did you pull forward into the quarter?
spk05: You're pulling forward into the quarter was about 100 basis points.
spk07: Got it. Okay, super, super. Thanks so much, and again, congrats on a good start to the year. Thank you.
spk03: Our next question comes from Matthew Michon with KeyBank. Please go ahead.
spk06: Hey, Matthew. Hey, good morning, Joe and Michael, and congratulations on a nice start to the year. I want to start on the gross margin. The sequential improvement, pretty impressive. What do you consider to be kind of sustainable versus the last three or four quarters where you were in the low 50s? What's changed there that makes this run right here be a little bit more sustainable? And is the way to look at it, did you exceed expectations on the gross margin side in the first quarter? And then incrementally, we're seeing some tougher inflationary conditions. and some more raw material issues.
spk00: I'll just say one thing, and I think Michael wants to take you through further on gross margin, but generally on the commercial side, the mix was a positive. We're seeing more pain sales, and I would expect that to increase each quarter throughout the year, so definitely some mix and eventually some pricing, but Michael can take you through where we think sort of the new normal is and some of the other things that are happening. Michael?
spk05: Yeah, great. So, Matt, if you recall, at year end, what we said was, and affirmed again today, our range for the year is 55 to 57, off of last year's 52. We said up to the 55%, so that 400 basis points, or 300 basis points, 52 to 55. Half of that would be just the favorable impact of OrthoGenerex. The other half of that, another 150 basis points, would be manufacturing efficiencies, cost savings initiatives, just better plant performance. Our 56% that we executed on in the first quarter was about that, half and half of the performance. The orthogeneric gross margin was slightly better than we had anticipated, which was good. And our overall plant performance was slightly better than we anticipated. We don't expect that to change as the year goes on. We expect to see much of that continue and improve. Now, the one thing that would keep us in the 55% level versus 57 would be, as Joe mentioned, some additional headwinds, some additional inflationary issues that we are not currently dealing with. So we think we've priced in. The current environment, we think we've priced in the shipping issues that we've experienced and will continue to see some of, and that leaves us at 55. If we continue to perform better than that, which we did in the first quarter, then, you know, we could leak ourselves up to 57, which would be a great year. Ultimately, though, as we said in the written comments, there's no reason why we can't get back up to the high 50s again on a more sustainable basis and a more normalized environment.
spk06: Okay, excellent. And then just going back to OrthoGenerex, how should we be thinking about modeling the cadence of that $70 million? Is it steady from here, or do you have embedded in a little bit of cushion for the reimbursement change in the second half of the year? Thank you.
spk00: Yeah. Yeah, that's fine. Typically with the AHA, the Q1 is a little bit softer as things get going in the year, and then it grows from there, not unlike the paying business. So that's one thing. Yes, we did consider the reimbursement change and any effects that might have in the Q3 time period. But at the same time, we're bringing on a number of new 1099s and selling channels into the market to sort of convert Tribisc accounts more in the orthopedic space, and early indications of that are going well. So it sort of all comes together is how we landed that 70. Okay.
spk06: Excellent. And then just last one on that one. I guess you – have the reimbursement rates been finalized? When do you expect to see a kind of final result there?
spk00: They've not been. I think we'll probably hear June is what most people think from Medicare. It could push into July, and then it will take some time to implement those. But generally in June, if we do hear and others hear, I think they'll all be talking about that in the next call. Okay. Excellent. Thank you very much, guys. Yep.
spk03: Again, if you would like to ask a question, press Star, then one. Our next question comes from Rick Wise with Stifle. Please go ahead.
spk02: Good morning to you both. Maybe going back to your comments about pain management, I mean, as I understand what you're saying, so Cool Leaf, Game Ready, Ambit, sort of Steady, on-track, mid-single-digit, outlook, no change. So the real factor in improvement as you go through the year is going to be on-queue. And if I'm understanding it correctly, and please correct me if I'm wrong, it's sort of an inverse. It's the un-COVID. So as COVID wanes, hospitals go down, and elective procedures go up. On-queue does better. So two questions specifically. Did it... Did it improve, my sense is, improve throughout the quarter? And did that improvement in utilization continue into April? And how do you, you know, sort of what's next as things get back to normal? What marketing issues? Are there new products? How big, what kind of impact does the PainBlock Pro app have? Just help us understand that. this important, you know, turnaround underway.
spk00: Yep. Absolutely. So Cooley, just to think about pain just generally, Rick, grew, you know, high single digit where we had the tough quarters, January, February, and then things came back to life in March at a fairly accelerated rate. And I think most everybody's been talking about that on their calls. But we did have good performance from Game Ready and Ambit. Ambit was high double digit. It's an excellent product. for the ambulatory surgical center where we're putting a lot of focus, and with PainBlock Pro, which is more of a clinical training and analytic differentiator for us. OnCue was coming back to growth in the low single digits. We do think we'll see sequential improvement in OnCue from quarter to quarter and just generally in the elective procedures, but we've just got momentum in GameReady and really in Ambit, which is a part of the acute pain portfolio alongside of OnCue. And that AMBIT, to me, seems like it has legs for double-digit solutions. So to the extent, double-digit growth for, you know, growth in the ambulatory surgical centers for some good time, some good runway. So really, you know, you land into low single-digit growth for OnQ to go into mid and that, and that puts us in an opportunity for pain to get more back to where it was, you know, before the pandemic, which is high single-digit as a total business. And obviously, we want to be additive with bolt-ons from there. So generally, from the inside perspective, we were very pleased with the performance and the comeback in pain.
spk02: And, Mike, you commented on, I think it was your comment about respiratory health being down 5%, adjusting for supply chain challenges. I wanted to make sure I understood what those were and what you were suggesting. And... So supply shortfalls impacted your ability to fill actual demand in orders? And where are we in resolving that?
spk05: Yeah, so we've had a, for the better part of six months now, a rolling back order. We noted it was about $7 to $10 million, $7 to $11 million throughout Q1. Last year was slightly higher than that. We ended the quarter, or we're right now in the first week of May here, just under six million. So we're making progress, but it's a rolling back order. So at some point, it's the respiratory health products. At some point, it's other products in the chronic care franchise. And it just happened that some of the shortages we have in raw materials at a period of time impacted our closed suction catheter product availability. So those are sales that ultimately ended up happening in April.
spk02: I got you. And last for me, maybe also for Well, actually, I'll just throw it out there. It's sort of one half your strong, your positive, continued free cash flow comments and the M&A comments. Joe, you've highlighted your hope to do two transactions in the not too distant future. Obviously, you've done one. You know, what's any update on the second one? I know you said you're engaged in active dialogue. And maybe tie that back into free cash flow. What's your priority beyond this other transaction that might not be that far away? Do you hope to tee up others this year? For the first time, I'm hearing you talk about your ability to repurchase shares. What are the priorities now as we think about your financial flexibility? Thank you.
spk00: Yeah, thanks, Rick. I'll comment on a couple of the M&A questions, and then Michael can finish off on some of the capacity and cash flow pieces. But, yeah, we have a couple of near-term bolt-ons. You can never predict these things, but I would definitely see that by early, late summer, we probably have another bolt-on to talk about. And we have a very full pipeline, as we've stated, each time we get on the calls. And so one or two are very much – you know, in the eyesight for this year and very doable. And again, I think we've got a pretty good track record on getting these things done when we say we're going to get them done. So that, a lot of confidence there. Then ultimately, as we move into 23 and 22, I think, you know, with the, frankly, the capacity and the cash flow that we're generating, for us, we could look at a larger type of acquisition that might be meaningful. We have opportunities really in both businesses for that. And, you know, that could be something that would be a little bit more transformational for us and getting scale and also looking at opportunities to expand internationally. So we're pretty pleased with that perspective. And then, Michael, you can sort of outline the capacity elements.
spk05: Yeah, absolutely, Joe. Rick, to your point, I'll tie it to your question around the share repurchase. So recall that we just completed the share repurchase program that we announced at the tail end of last year. When we announced that, we talked about it in two ways. One, We believe our stock is meaningfully undervalued versus our own internal DCF based on our outlook. And if you look at any of our peers, we're completely undervalued. So we think it's a good place to deploy capital to the extent that we have enough capital to do all the M&A that we want to do. So that's what we stated last year. We put in a shared purchase program, completed that already, and our stock remains depressed. We still believe we have enough capacity to do all the M&A we're looking to do. So engaging in another repurchase program during the year, should we remain at these levels or even above these levels, seems to make sense as far as employing some capital. So we would only do that under two scenarios. One, that we have enough capital for the M&A we want to do, and two, that we believe we are undervalued, which we clearly do. We think it's important to support our view of what we're going to do to execute over the next three to four years.
spk02: I appreciate all the detail. Thank you. Thank you.
spk03: Our next question comes from Drew Ranieri with Morgan Stanley. Please go ahead.
spk01: Hi, Joe and Michael. Thanks for taking the question. Just to go back on HA for a moment, I understand that there could be potential disruptions coming with the pricing changes for Medicare and you have that baked into your plan, but Kind of just curious what you kind of think about in terms of the mix of your five injection and three injection, where that stands today. Does this new pricing regime coming from Medicare maybe shift to your three injection? And as you're looking longer term, I guess 2024 and beyond with a mid-single digit growth outlook for the orthogen asset, how does mix kind of factor in with the shift from five to three injections? Thank you.
spk00: Drew, thanks for the question. Yeah, it's more of a maintain for us in the base, which is largely the five today, but we are increasing the tri-visc or three, and that'll mean that we shift more into the orthopedic space. That's our strategy. And, you know, just picture the game-ready 1099s that we have, the 1099s that we have that are working with us on OnQ and the base of 1099s that and direct sales force that are in OrthogenRx. We have an ability to expand that and put a focus on that, and that's how we build out the model internally and what we've talked about externally as well. And, yes, just to reiterate, we did consider a Q3 impact as people settled through the reimbursement. If that prolongs or whatever, it could be upside, but we're confident in the $70 million. Okay.
spk01: Got it. Thank you. And maybe, Michael, for you, just to go back to gross margins for a moment, you did 56, a bit over 56 this quarter. You maintained your guidance. And just to be clear, are you suggesting that should be kind of just improving sequentially throughout the year? Or is there any risk that you see a downturn in gross margins in the second quarter, just as some of the inflationary pricing, inflationary concerns increase? kind of push through your inventory. Thanks.
spk05: We could see a slight downtick in Inc. possibly. That's not necessarily anticipated, but could see a slight downtick. Second quarter, just due to mix and expectations of some of the programs we're putting in place and when those savings will take hold, more confident Q2 will be obviously above our 56. And we think, again, we should be able to be above that midpoint. between 55 and 57 for the year, given how we got off the start of the year and the programs that are in place. But we're very cognizant of the overall macro environment, and we just don't want to get too far ahead of something until we put a few more months and quarters on the board.
spk00: Jordan, I think that might be it on the question. Is that right?
spk03: That's correct. This concludes the question and answer session. I would now like to turn the conference back over to Joe Woody for any closing remarks.
spk00: I'd like to, as always, thank everybody for their continued interest in Avanos. And while we're very pleased with the overall execution this quarter, given the uncertain environment, we are committed to creating meaningful shareholder value and anticipate that 2022 results are going to deliver on that commitment. I'm confident the priorities we've detailed, combined with our market-leading portfolio and attractive markets, they're all going to position us for growth, margin expansion, and positive free cash flow as we go through 2022. Thanks, and we look forward to further discussions this week. Thank you all.
spk03: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
Disclaimer