Avanos Medical, Inc.

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.

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.

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.