Avanos Medical, Inc.

And welcome to Havana's second quarter 2022 earnings call. Our participants will be in a listen-only mode. Should you need assistance, please sign our 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 the star then one on the touch-tone phone. To withdraw your question, please press the star then two. Please note this event has been recorded. I would now like to turn the conference over to Scott Gallivan. Please go ahead.

Good morning, everyone, and thanks for joining us. It's my pleasure to welcome you to the Avanos 2022 Second Quarter Earnings Conference Call. Presenting today will be Joe Woody, CEO, and Michael Greiner, Senior Vice President and CFO. Joe will review our quarter and current business environment, as well as provide an update on our key objectives for 2022. Then, Michael will discuss additional detail regarding our second quarter and review our 2022 planning assumptions. We'll 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, current 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'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 second quarter of 2022. Our operational and commercial teams continue to execute well against a range of macroeconomic challenges, and we remain focused on getting patients back to the things that matter as we meet the needs of our customers. Although we fell short of consensus revenue estimates for the second quarter and are also updating our full-year guidance for revenue and adjusted EPS, which Michael will discuss further, we continue to experience consistent demand throughout our product portfolio and remain confident in our ability to execute against our longer-term financial objectives as the supply chain and other macroeconomic dynamics improve. For the quarter, we achieved sales of $203 million representing 9% actual growth or greater than 10.5% growth, excluding the negative impact of foreign exchange. We generated 41 cents of adjusted diluted earnings per share and $23 million of free cash flow. Excluding the negative impact of foreign exchange, our chronic care portfolio grew by just under 1% despite a 10% contraction experienced in our respiratory business due to inventory being sold through our distributor channel that had accumulated during later phases of the pandemic. Our digestive franchise delivered another solid quarter with greater than 5% growth versus prior year, excluding FX. Excluding the impact of orthogenetics and foreign exchange, our pain portfolio was down 1%, with our interventional pain franchise growing 5%, and our acute pain product portfolio lower by a little over 4% versus last year. The pain franchise had a tough prior year comparison and continues to experience slower return to elective procedures due to staffing shortages and patient preferences. Our hyaluronic acid offerings through OrthoGenerex posted strong Q2 sales with a rapid adoption of TriVisc, our three-injection HA regimen, beginning in June. Given our reimbursement position in the market compared to competitors, we will continue to see favorable tailwinds in TriVisc capturing share from both the one and five injection segments with account transitions, new account acquisitions, and meeting patient demands. Additionally, we have service differentiators via our direct patient purchase program and Harmony, an online portal to enhance and streamline the customer experience. We believe these differentiators will help us retain the new business we are capturing moving forward. We remain confident in generating greater than $70 million of actual net sales for fiscal year 2022 from our OrthoGenerex offerings. Separately, we delivered adjusted gross margin of just under 59%, driven by favorable product mix in the quarter, inclusive of OrthoGenerex and our plants continuing to incrementally deliver on our manufacturing efficiency strategy. We are very pleased with our gross margin results for the second quarter and first half, but are cautiously optimistic for the duration of the year, given continued headwinds related to raw material availability, inflation across all manufacturing inputs, and shipping and distribution costs that remain elevated. Additionally, our back borders worsen throughout the second quarter after making progress in the first quarter and are currently in excess of $11 million. Given this continued uncertainty surrounding our supply chain, including access to certain resins, silicone, and Tyvek, and the costs associated with assessing some of these key raw materials for our product offerings, we are not increasing our full year 2022 expectation for gross margin, but are confidently maintaining our annual gross margin expectation between 55% and 57%. 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. Our second quarter SG&A as a percentage of revenue sequentially improved by 240 basis points versus our first quarter to 40.6%. Many of these expenses will not repeat in the second half of the year, as we had previously indicated. We still anticipate maintaining SG&A as a percentage of revenue to be less than 40% for the full year of 2022. With that as a background, let's review some detail on our product portfolio. The positive trends across our digestive health franchise continue with our Neomid portfolio growing over 27% and our legacy internal feeding products growing mid-single digits, despite supply constraints impeding even further growth for both product categories. We anticipate continued strong growth for the duration of 2022, assuming no further supply chain disruptions for this product category. Separately, although our respiratory health business was soft in the second quarter versus our expectations as distributors rebalanced their inventory levels on the tail end of the pandemic, we anticipate growth to revert to historical rates and should benefit from a stronger second half as we approach the 2023 flu season. Turning to our pain portfolio, although we experienced a weaker-than-anticipated overall second quarter, we continued to deliver mid-single-digit growth within interventional pain, and AMBIT also grew by over 50%. As we noted in our first quarter earnings call, we predicted low single-digit growth for our pain portfolio in the second quarter due to a tough prior year comparison and further indicated that we expected a return to double-digit growth for the second half of the year. Throughout the second quarter, we have seen strong demand for capital units and interventional pain, which is a key driver of future Cool Leaf growth and adoption. On the acute pain side, while supply chain challenges have been an ongoing issue this year, we have been able to mitigate some of the impact by continuing to drive the AMBIT reusable pump program, which will remain a key growth engine moving forward. With underlying demand of our products still present, increased momentum in some critical pockets of the portfolio, and a pathway to improving the backlog affecting our pain products, we are cautiously optimistic that we can return the pain portfolio to double-digit growth across the third and fourth quarters. Our next priority for 2022 is to demonstrate our ability to generate consistent, repeatable 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 as I noted earlier, generated $23 million of free cash flow in our second quarter. We previously communicated that we anticipated generating approximately $90 million of free cash flow for the full year 2022. However, as a result of higher interest expense payments, slightly lower operating earnings, and growing inventory balances due to inflationary pressures on our raw materials and managing our backlog, we now anticipate free cash flow to be closer to $80 million. Our final priority for 2022 is focused on capital deployment via M&A. Our M&A pipeline remains healthy, and as previously stated, 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. To ensure that our capital availability is optimized to pursue each of our capital allocation goals, we closed on a new $500 million credit facility during the second quarter. That said, our ability to close potential acquisition targets is incumbent upon disciplined due diligence and valuation that ensures ROIC is meaningfully above our cost of capital. As I noted earlier, we're very pleased with the expansion of our product offerings through the acquisition of Orthogenerex, and its performance to date has exceeded our initial expectations. In summary, even with various macroeconomic headwinds, including but not limited to inflation, currency, and supply chain, we had a solid first half and remain focused on achieving our primary objectives for 2022 relating to organic growth, orthogenerics execution, gross margin improvement, and material free cash flow generation. Now, I'll turn the call over to Michael.