Avanos Medical, Inc.

Good day, and welcome to the AVENOS fourth quarter 2022 earnings conference call. All participants will be in a 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 touch-tone 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 Gallivan, Senior Vice President, Strategy, and M&A. Please go ahead.

Good morning, everyone, and thanks for joining us. It's my pleasure to welcome you to Avanos 2022 Fourth Quarter and Full Year Earnings Conference Call. Presenting today will be Joe Woody, CEO, and Michael Greiner, Senior Vice President, CFO, and Chief Transformation Officer. Joe will review our quarter and the current business environment and provide an assessment of our execution against our key objectives for 2022. Then, Michael will discuss additional detail regarding our fourth quarter and full year and share our 2023 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'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 fourth quarter and full year 2022. during the first nine months of 2022. Although the macro environment remained disruptive and dynamic, we focused on what we could control and manage. The demand for our products remained strong, and although supply chain disruptions persisted, we executed well, mitigating impacts to our financial results. We anticipate 2023 will continue to present supply chain headwinds, cost pressures, and pockets of product availability challenges. 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 $217 million, representing over 14% total growth and 4.7% organic growth, both excluding the negative impact of foreign exchange. We generated $0.60 of adjusted diluted earnings per share and $29 million of free cash flow. For the full year, we grew 12%, OrthoGenerex and delivered adjusted diluted earnings per share of $1.65. Additionally, our gross margin for the year was 56.8%, a 450 basis point improvement versus the prior year, and we ended the year with a leverage ratio of under one times. These results position us to confidently execute against the transformation priorities we laid out at the J.P. Morgan Conference in January. Michael and I will address Now I'll spend the next few minutes discussing our results at the product category level. On a constant currency basis, our digestive health portfolio again grew by double digits, topping 10%, with NEOMED growing nearly 40%. The positive trends across our digestive health franchise continued as second-half supply improvements allowed us to maximize North American NFIT conversions. alleviated in the latter part of the fourth quarter. Even though our respiratory business declined by 4% overall, our closed suction catheters grew over 8% versus the prior year. As we noted in our third quarter call, we experienced improved ordering patterns for our closed suction catheter systems throughout the fourth quarter, specifically due to trends with pediatric viral cases like RSD and the early flu season uptick. In total, our chronic care business grew just under 6% in the fourth quarter and 2.6% for the full year, excluding the negative impact of foreign exchange. Turning to the pain portfolio, for the quarter we experienced low single-digit growth in acute pain coupled with mid-single-digit growth in our interventional pain compared to the prior year. The demand for our products As anticipated, we continue to experience supply headwinds, particularly within our surgical pain category, and we expect these headwinds to remain a factor throughout the first part of 2023. Despite some of the ongoing pressures brought about by supply chain challenges, as well as hospital staff shortages that have kept elective procedure levels reduced, our team's resilience has ensured that our pain solutions are available to meet the needs of our customers. Separately, OrthoGenerects strategies. OrthoGenerax's unique patient access program, coupled with a relentless focus on service and support, allowed us to expand our portfolio to self-pay patients and differentiate our brands to providers. In parallel, our strategic pricing initiatives drove a favorable allowable of the three injection product and maintained five injection customers within the company's portfolio. In 2023, we will expand pay market. We also expect steady increases for the three-injection self-pay program. There will be continued reimbursement volatility in 2023, and pricing discipline and accurate average sales price, or ASP reporting, will be a focus for Orthogenerex to deliver stability for our customers. In total, our pay management business grew 2.6% in the fourth quarter and 2% for the full year, excluding the negative impacts of foreign exchange contributions from our OrthoGenerex acquisition. We continue to deliver on both our gross margin and SG&A commitments during the fourth quarter. Gross margin was 55.6% in the fourth quarter and 56.8% for the full year, driven by favorable product mix, inclusive of OrthoGenerex, and our plans continuing to incrementally deliver on the manufacturing efficiency strategy we set forth at the end of last year. Separately, we ended the year with back orders around $8 million. likely higher than we anticipated coming out of the third quarter. Additionally, current back orders have increased to just under $10 million, and we're cautiously optimistic that we can meaningfully reduce our back order throughout 2023. Turning to SG&A, our fourth quarter and full-year SG&A numbers as a percentage of revenue were 34.2% and 38.9% respectively, exceeding our commitment to keep SG&A We remain committed to this financial metric as we enter 2023, and Michael will provide additional insight when he discusses our 2023 planning assumptions. Our final two priorities for 2022 were to demonstrate our ability to deliver consistent, repeatable free cash flow and capital deployment via M&A. For the fourth quarter, we generated $29 million of free cash flow despite continued inventory and supply chain headwinds. Our ability to consistently deliver free cash flows is critical to support our other strategic growth and capital allocation initiatives and has been identified in our priorities for 2023 and beyond. While we are disappointed we have been unable to announce another acquisition since Orthogenerex in early 2022, we remain engaged in active dialogue with a number of potential tuck-in targets with the objective of leveraging our existing commercial infrastructure, generating synergies, and enhancing our top-line growth. We have been disciplined in our approach around strategic fit, valuation, and due diligence and believe that discipline is critical for long-term ROIC enhancement. On top of the early success of Orthogenerex, it is worth noting that our most recent acquisitions of Neomed, GameReady, and Summit Medical, our ambit device, averaged double-digit growth in 2022. Quickly summarizing 2022, our primary objectives were centered 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. With organic growth in the middle of our range, excluding the unusual impacts of FX, OrthoGenerX exceeded our internal expectations. Gross margin improved by 450 basis points. We delivered free cash flow of $72 million. which, as noted earlier, effectively laid the groundwork for our longer-term transformation efforts. We outlined these transformation efforts in our JPMorgan presentation in January. In that presentation, I described four key priorities over the next three years that would optimize our go-to-market opportunities and substantially enhance our financial profile. These priorities include strategically and commercially optimizing our organization, transforming our portfolio, and the right to win, taking additional cost management measures to enhance operating profitability, and continuing our path of efficient capital allocation to meaningfully improve our ROIC. Now I'll turn the call over to Michael, who will help lead these efforts in his expanded role as Chief Transformation Officer, and will elaborate on both the near and longer-term goals of these efforts.