Avanos Medical, Inc.

Good morning and welcome to the Avanos third quarter 2022 earnings conference 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 a touchtone phone. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Scott Galleran. Please go ahead.

Good morning, everyone, and thanks for joining us. It's my pleasure to welcome you to the Avanos 2022 Third 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 third quarter and review 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, 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 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 third quarter of 2022. Our operational and commercial teams continue to execute well in this dynamic and uneven environment, which supports us maintaining our full-year guidance ranges. The demand for our products remains strong, and we continue to demand supply chain disruptions to mitigate the impact of our persistent backorder challenges. along with consistent free cash flow generation that is now almost $80 million over the trailing four quarters. As always, our primary focus is on getting patients back to the things that matter as we meet the needs of our customers. For the quarter, we achieved sales of $202 million, representing over 12% total growth, with organic growth at 1.6%, both excluding the negative impact of foreign exchange. We generated $0.38 of adjusted diluted earnings per share and $23 million of free cash flow. On a constant currency basis, our digestive health portfolio grew by 14%, with NEOMED growing slightly greater than 39%, while our respiratory business declined by nearly 21% due to industry-wide post-COVID slowdowns and inventory being sold through our distributor channel that had accumulated during later phases of the pandemic. Through October, we're seeing improvements of the flu season, specifically trends we are seeing in pediatric viral cases like RSV. Excluding the impact of orthogenesis for an exchange, our pain portfolio was flat versus the prior year, with our interventional pain franchise growing 4% and our acute pain product portfolio lower by a little over 2% versus last year. The pain franchise continues to experience sluggish procedural volumes due to staffing shortages and patient preferences. Our hyaluronic acid offerings through OrthoGenerex posted another strong quarter with continued adoption of TriVisc, our three-injection HA regimen. Our favorable pricing position and service model is driving account transitions and new account acquisitions while meeting patient demands. As we noted last quarter, our service differentiators via our direct patient purchase program and Harmony, an online portal to enhance and streamline the customer experience, will help us retain these new customers as we enter throughout the third quarter and are currently in the range of $11 million, which had a negative impact on the revenue we could have delivered across our portfolio in Q3. We currently anticipate and believe we have visibility to end the year with our back order below $7 million. On gross margin, we delivered positive results with adjusted gross at the end of last year. Although we continue to experience headwinds related to raw material availability, inflation across all manufacturing inputs and shipping and distribution costs that remain elevated, we anticipate similar fourth quarter gross margin results as we experienced in Q3, while our full year gross margin guidance of 55 to 57% remains firm. Turning to SG&A, we continue to make progress toward our full year target of less than 40% as a percentage of revenue delivering 38.3% for the third quarter. Our third quarter SG&A as a percentage of revenue sequentially improved by 230 basis points, and we will continue to make progress during the fourth quarter. Michael will provide additional insight on the positive execution of our SG&A profile. But that is the background. Let's review some detail on our product portfolio. Positive trends across our digestive health franchise continued. bolstered by our Neomet portfolio enjoying a record quarter, growing over 39% versus prior year, as supply improvements allowed us to maximize North American infit conversions. Our legacy enteral feeding products maintained its mid-single-digit growth, despite supply constraints impeding further growth. We anticipate sustained demand for our closed-section catheter products as we enter the flu season and are monitoring its development on adult and pediatric patients. We anticipate growth to return to historical levels throughout 2023. Within our pain portfolio, we were flat in Q3 compared to prior year, with interventional pain growing low single digits offset by a low single-digit decline within acute pain, as noted earlier. We anticipate these issues to continue through the end of the year and, as a result, are expecting to finish at a low single-digit growth level for the full year. The demand for our products and solutions remains strong, and we're confident and motivated to continue working through these challenges to ensure our pain solutions are available to meet the needs of our customers. To that point, we want to highlight the impact our products have had in getting patients back to the things that matter. In Q3, over 100,000 patients benefited from our ominous portfolio of pain products, including our pumps, RF products, and HA offerings, as well as game-ready prescriptions. Our next priority for 2022 is to demonstrate our ability to generate consistent, repeatable free cash flow. As in the second quarter, we generated $23 million of free cash flow despite continued near-term inventory and supply chain headwinds. we anticipate sequential free cash flow improvement for the fourth quarter. Our ability to consistently deliver free cash flow is critical to support our other strategic growth and capital allocation initiatives and will therefore remain a priority into 2023 and beyond. 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 infrastructure, generate synergies, and enhance our top-line growth. We are disappointed we have been unable to announce another transaction since OrthoGenerex and currently do not anticipate any M&A announcements until next year as we remain disciplined to our approach around strategic fit, valuation, and due diligence. Finally, we're very pleased with the expansion of our product offerings through the acquisition of OrthoGenerex and its performance to date has exceeded our expectations. In summary, even with various macroeconomic headwinds, including inflation, currency, and supply chain, we delivered a robust third quarter and are well positioned to exit the year with momentum around free cash flow generation, an active M&A pipeline, and continuing to demonstrate overall margin improvement. Now I'll turn the call over to Michael.