Q2 2022 Avanos Medical Inc Earnings Call
Good day and welcome to the second quarter 'twenty to 'twenty two earnings call.
Participants will be in a listen only mode.
You need assistance, please sign up Nicholson specialists by pressing the star key followed by email.
After todays presentation, there will be an opportunity to ask questions.
Ask the question you May Press Star then one on that.
That's dumb phone to withdraw your question. Please press the Star didn't you. Please note. This event is been recorded I would now like to turn the conference over to Scott yellow, but please go ahead.
Good morning, everyone. Thanks for joining us.
My pleasure to welcome you to the Avenova 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 details regarding our second 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 <unk> Dot 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.
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.
Additionally, we will be referring to adjusted results and outlook.
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 continued 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.
Fly 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.
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 or the generics 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 electric procedures due to staffing shortages and patient preferences.
Our Colorado asset offerings through ortho <unk> posted strong Q2 sales with a rapid adoption of try this are three injection H a regimen beginning in June .
Given our reimbursement position in the market compared to competitors, we will continue to see favorable tailwind and try this 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 in harmony and 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, but more ortho generates offerings.
Separately.
We delivered adjusted gross margin of just under 59% driven by favorable product mix in the quarter inclusive of ortho <unk> 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 backwards worsened 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 tie back and the cost 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%.
Yeah.
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 46%.
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 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 <unk> portfolio growing over 27% and our legacy enteral feeding products growing mid single digits. Despite supply constraints impeding even further growth for both product categories.
We anticipate continued strong growth of 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.
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 to units and interventional pain, which is a key driver of future <unk> 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 paint 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 onetime 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 topline 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 insurers 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 worth of <unk> 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.
Worth of generics execution gross margin improvement and material free cash flow generation.
Now I'll turn the call over to Michael.
Thanks, Joe as you noted even with the uncertainty that persists in the economy globally and industry wide macro pressures, we met or exceeded most of our first half objectives. We delivered on our gross margin improvement and free cash flow generation as well as continued to successfully execute on our ortho generate strategy.
Additionally, our SG&A spend as a percentage of revenue sequentially reduced significantly in the second quarter and we remain committed to ensuring full year spend remained below 40% as a percentage of revenue.
Even though we have built good momentum across these objectives. We believe it is prudent to update our revenue and adjusted EPS guidance based on the continuing macroeconomic pressures currency headwinds and increased interest expense.
We now anticipate delivering net sales between 815 and $835 million for fiscal year 2022, and adjusted EPS between $1 45, and $1 65, primarily due to further projected negative foreign exchange impact and higher interest expense totaling approximately 10 cents as well as slightly lower operating earnings due.
Lower gross margins in the back half of the year.
Now, let's review our second quarter results total reported sales were $203 million up eight 9% compared to last year with adjusted EPS of <unk> 41.
On a constant currency basis organic growth was flat this.
This excludes the contribution from ortho generate sales in the second quarter as well as removing extra generated revenue from the prior year second quarter.
Chronic care actual sales were down by $2 million versus last year at $112 million in the quarter, excluding the prior impact of sales coming from our exited Baxter facility.
We continue to see strong growth in our digestive health business with second quarter growth of three 5% despite supply constraints competing even further growth within this portfolio Neilmed grew almost 35% domestically and over 27% globally and a continuation of conversions to our <unk> technology.
Separately as Joe noted earlier, our respiratory health business experienced a 10% contraction in the second quarter, primarily due to distributor is selling through their inventory as we exit the pandemic combined with the some supply disruptions.
Moving to pain management, excluding the contribution of ortho generates we delivered $69 million of actual sales 1 million behind the prior year, driven by a tough comparable and ongoing supply chain challenges.
The interventional pain side of the business saw 4% growth as reported in the quarter, whereas acute pain declined by 6% in large part driven by back orders that grew in the quarter as well as lagging in elective procedures that utilize on Q.
As Joe noted we are continuing to see positive contributions from ortho generates specifically a high level of adoption of <unk>, our three shot H a regimen as we capitalize on the upside opportunity that'll be present through the remainder of the year and into 2023.
Moving down the income statement adjusted gross margin improved more than 740 basis points to 58, 7% versus last year as indicated earlier, we are pleased with the progress on gross margins with a combination of better product mix, including ortho generates improved plant performance and lower than forecasted shipping cost.
You recall last year to support the business, we incurred significantly higher shipping cost for our new med products to capture the unfit conversion opportunity.
Although we are very encouraged with our second quarter results with regards to gross margin and across the first half 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 backwater as.
As Joe already noted even with these headwinds 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 28 million compared to 15 million in the prior year higher sales and improved gross margins were partially offset by additional spend across SG&A as discussed earlier.
<unk> adjusted operating margins of 14% for the quarter adjusted.
Adjusted EBITDA totaled $33 million compared with $20 million last year, and adjusted net income totaled $19 million compared to $10 million a year ago translate into 41 cents.
Adjusted diluted earnings per share.
Now turning to our financial position and liquidity.
Our balance sheet remains a strength and continues to provide us with strategic flexibility as we currently have over $100 million of cash on hand, but $255 million of debt outstanding post the closing of the ortho generates acquisition and completion of our share repurchase programs.
Given our post acquisition pro forma EBITDA, we are levered at approximately one times.
Additionally, we generated $23 million of cash for the second quarter and although we are now anticipating slightly lower free cash flow generation for the full year of $80 million, which includes approximately $20 million of capital expenditures, we have more than sufficient capacity to meet each of our internal and external capital allocation priorities.
As we already shared our primary objectives in 2020 to center around consistent organic growth delivering on our ortho generate strategy.
Making meaningful improvements in our gross margin profile and demonstrating our ability to deliver material free cash flow.
To summarize total net sales are expected to be between $815 million and $835 million with ortho generates delivering sales of greater than $70 million.
The low end of this range assumes continued challenges with accessing raw materials unfavorable impact of currency continued unevenness in the return of elective procedures and other factors, including a less impactful flu season.
Annual gross margins are expected to be in the range of 55% to 57%, but the lower end of that range, capturing continued elevated inflation and distribution costs.
And our free cash flow target is approximately $80 million as we drive sales and margin expansion, partially offset by higher inventory balances and interest payments on our outstanding debt.
Although the current global macro and industry specific environment remains difficult, we remain confident in our ability to execute against our strategy and priorities and are taking the necessary steps to drive both gross and operating margin improvement and delivery of significant free cash flow, ensuring that we maintain a solid financial position during this.
Uncertain economic environment operator, please open the line for questions.
Thank you well now begin the question and answer session.
Ask a question you May press Star then one on your Touchtone phone if you use a nice speaker phone. Please go ahead, Sir before pressing Vicky.
If at any time. Your question has been addressed and you would like to withdraw your question. Please.
At this time than at.
At this time, we will pause momentarily to assemble our roster.
The first question comes from Rick Wise with.
This call. Please go ahead.
Hi, good morning to you both.
Lots to unpack here.
Maybe help us.
I think through.
And a little more detail some of the challenges facing the second half just for starters.
You know the supply chain.
Yes, everybody in the industry is dealing with it youre dealing with it.
Where are you do you feel like in finding new suppliers are resolvable.
Is it just help us better understand and therefore I assume that's the prelude to working through your backlog as well.
Thanks.
Thats correct Ric good morning, It's Joe Woody I'll start and then of course, Mark can add anything that he would like for us what we have been mainly seeing a range of resins.
Silicone and that affects the Ikea business, the digestive health business.
In the first half we saw some chip.
Problems that effective truly generators that looks to be dissipating in NH too.
And all of that in turn also affects the international business now to the extent that that clears up and as you can imagine like other companies. We're working 1 million different pathways to do that Theres also the potential for upside but at any given time just in the supply chain that we're in right now other.
Other items of urge you know whether it would be around packaging or are seeing things as simple as inc, and <unk>.
It goes on from there I think in H, two kind of our major issue is going to be around tie that and.
And we're equally working with Abbott Mad with other companies to try to see how we can get more raw material released for medical device.
Product so essentially that's what you see in the range and in the guidance change, but equally you know there's an opportunity if that doesn't prove obviously, we do much better but I don't know Michael if you want to add to that yes, I would just add to that.
15, 835 on revenue, although than FX, which has a meaningful impact 5 million in the first half of the year and we're estimating at least 5 million in the back half of the year. If those back orders are clear up then we have line of sight.
Getting us to the higher end of that range of that 835 is very realistic give those back orders were not able to secure the raw materials as Joe just mentioned that's needed then more towards the mid point lower end would be possible and I would just clarify you know that the demand is absolutely. There we could have absolutely done more in the quarter without this type of supply chain Chan.
<unk>.
But I think the nature of our portfolio and the size of our company to hit sort of a different way, maybe not even as bad as some of the others I've seen but certainly for our size of company and the portfolio we have.
It impacted the quarter, yes, I mean, if you look at the first half of the year North America grew.
Grew organically three 5% through the first half of the year with it you know even with these back orders so would have been much.
Much more substantial and then international had more of the back order issue plus the FX issue, which obviously had a total impact on our revenue.
For the first half of the year.
Gotcha.
Thanks for that.
Turning to ortho <unk>.
A terrific quarter, you had said on the first quarter you expect it to generate sales.
That's a $70 million, you're reiterating that and I just wanted to be make sure I was clear my own mind now that we're halfway through the year.
It sounds like you're feeling more confident but how do we think about it sort of a two part question. How do we think about that outlook given the reimbursement.
Change booming for Jay and just how you're thinking about that and what you have dialed into that projection.
And in a sense, what's next it seems like Youre doing better than others, maybe help us understand.
Why that could should and will continue to be the case I'd appreciate it. Thank you.
Yesterday, it's Joe I'll go to do that we are definitely more confident in the full year outlook, we knew with the new allowable there would be a migration to try this that happened a lot more quickly than we anticipated faster from the five shops.
Some of our bioshock customers or a good portion of them want to get into the three shots.
Market, we're seeing competitive moves over to ours short term there is a reimbursement favorability that customers can experience because of the way, we strategically want them around our pricing focusing on the wholesale side.
We have to maintain a healthy asps, we intend to add direct reps and 10 99 reps. So we think that we sort of have this window. If you will a six to nine months I think have a pretty positive tailwind in this business, where we're going to see some upside in the strategy is working we're definitely beating the internal model and that'll be helpful.
And I think that.
That's just sort of bodes well for what you'd also what we said about year two and then beyond.
With that business. So all in all it's turned out to be an excellent.
Acquisition for Us and one that's strategic obviously alongside of the things that we're doing in.
In other orthopedic areas of our business like cool leaf and <unk>.
Got you thanks again.
Yes.
The next question comes from Matthew <unk> with Keybanc. Please go ahead.
You there Matt.
I think we may have lost Matt there.
It may come back into the line, maybe we take another question.
Melissa.
Yeah I'm here.
Oh, there he is a math Joe Woody here alright.
Alright, sorry about that go to as well.
Hey, just a follow up just to follow up on the try. This question you know what.
Specifically about drive this.
It allows you to have a better reimbursement position than some.
Some of the peers in the space.
Well its primarily its the way that we priced our product at the wholesale level not a lot of specialty pharmacies kind of rebating.
Our business in that strategically was the way that we focus the business. So we ended up with a more favorable reimbursement than all the other three.
Three injection products going forward I mean, I think the differentiator is the other portfolio that we have the conversations we can have an alternate sites or different sides like ambulatory surgical centers are places where we're <unk>.
Selling cool leaf.
And again, we do intend to expand our channel of it as well ultimately.
Differentiators are gonna come around the servicing really we've got a portal that we talked about in the script.
And the way that we service.
And make it easier.
To do business and then we have some technology that we're working on in terms of the syringe that we think there'll be a differentiator as ultimately over time, you have to differentiate that way as much as the reimbursement later on and move out a year from now will be very similar.
Okay, So you're expecting the change your favorable reimbursement position too.
Two.
Sort of.
Come together with the rest of rest of the industry as you kind of get through the second half of this year.
So next year through the second half of next year I think is where we feel like we're going to be favorable.
And the three injection area.
On a rehab.
Do you feel like you'll be favorable through the mid through the middle of next year, and then and then back to a more okay.
It could be.
It could extend a little bit or probably go into eventually more level.
Where you have your base of customers and we're differentiating through basically our other portfolio.
We service and then we're doing some things from an innovation standpoint, with our syringe because I think at that.
At that point, you have to have differentiator at that kind of a reimbursement level and so what's what's key as Joe mentioned in the prepared remarks as we gain all these additional customers we service them well and once pricing is less of a dynamic in this market. We maintain the market share that we will have developed over.
The last few weeks and into the next few quarters.
Okay.
I think I heard I think I understand that.
Now good.
Question around.
Around neo Madden and digested.
It seems like deal that is growing and I remember this being a larger from a larger base of sales from you guys outside of Neil Matt is digested is digested contracted or is that still growing as well.
No. It's still we see it as a mid single digit grower on a global level, it's one of those areas affected by it.
I believe tie back and silicon.
NH two there's absolutely an upside where if we can get the right amount of raw materials, we can even do better in the digestive health area, which is where we will primarily focus on our Mickey product, but you also see core track are all of them.
It's slowed a bit in North America, with the staffing shortages and the ICU census.
We still think that that's a good grower for us inside of that is just help franchise. So you feel it all back.
A very solid business mid single digit grower with a good runway.
Globally for the future and.
And good actually good margins for us and a big contributor to our cash EBITDA.
Okay got it and then just on the ortho Jim just the the number in the quarter you're back into its about $22 million does that is that the correct number contribution from that acquisition this quarter.
Yes.
That's directionally correct, yes.
Okay. Thank you very much.
Thank you Matt.
Next question comes from Chris Cooley Li.
Please go ahead.
Hey, good morning, and thanks for taking the questions just maybe.
Clarifying question for me to start and then maybe a little bit bigger picture follow up.
Michael just in regards to the guidance you mentioned you know the lower end of the topline did assume continued FX headwinds.
Apologize if I missed this in your prepared remarks, but did you call out.
What.
You're assuming there in terms of the incremental headwind there from a basis point perspective, or maybe alternatively could you just give us.
Where your markers where for the major currencies coming into the quarter.
Then just kind of as another offshoot kind of from a just.
To clarifying point.
When you look at it pricing.
For HVA products the way it gets published out there.
I just want to make sure I'm understanding this correctly when we look at your pricing versus say some of your competitors.
You're assuming that.
That discount continues there's no additional rebates being added so that's that's just going to be does that price differential. You think then will continue until the mid point of.
Next calendar year, because there's quite a bit of disparity across three to four players here just in terms of published pricing.
On the H a offerings at this time.
One quick kind of bigger picture follow up.
Do you want to do the currency if you want to start with the start with so I think you've got the Asia piece right, we're not really.
We haven't really structured a lot of rebate type of business or or discounted too.
Payers and and so forth a specialty pharmacy is not a big area for us to focus so we benefited from that with a wholesale price that's pretty robust and yes. It should continue into about the middle of.
Of next year, and we think that that's going to allow for us to gain share.
From competitors fairly significantly during that period, and then I think we'll keep it.
But the things that we've got playing on the innovation side and then the servicing model that we want to go after and also one thing I Didnt mentioned in the prior question was are also building a cash business as well that looks like it's got the opportunity for us Cashback cashback.
And then on your other question, Chris So we had about a 5 million dollar headwind across the first half related to FX.
First is our planning model.
We anticipate that we will probably see 5% to seven in the second half as well. The reason for the increase is just that we're going to do $25 million to $30 million more in revenue in the second half so.
That obviously has a bigger FX impact in addition.
Good portions of our back orders were international related.
So we have a bigger ramp in the back half of the year related international orders, hence the additional FX impact in the back half of the year.
I appreciate the additional color and then just bigger picture follow up there you alluded to stronger capital demand on the pain management side as we think about the Cooley franchise.
Any way you can.
Quantify that for us a little bit here in terms of maybe site of service, where youre seeing the incremental demand.
Relative to prior periods, just trying to get a little bit better ground you more granularity around just how much incremental demand youre seeing versus kind of relative levels. There. Thanks.
Thanks, so much.
Sure Chris Yes, one of the things actually Theres a benefit I think is that as the chip shortage.
Took hold in the first half there was an opportunity for the channel to connect with existing customers.
Penetration or bringing active accounts that I think the other thing also drives that is the continued studies that are coming out are definitely as they as they publish but also now as everybody knows I think we are in the OE space. So that's a.
A strong grower for us for those sites that are treating.
In.
And the quantification is really that we think there was a tough comparator.
As we all came out of the first aspect of Covid and everyone bounce back in this quarter last year was in Q2 last year with procedures, but as we get into the second half Theres definitely some better imperatives for us we certainly see that quantifying in terms of double digit growth in the teens again.
For Q3, and Q4, and we just have a big demand for that.
The capital and so we have a backlog for these units.
And I think the team is doing a nice job of selling the capital. So that's where it's all coming from.
Thanks for the additional color.
Yep.
Again, if you have a question. Please press Star then one.
Okay.
Yes.
Yeah.
Next question comes from drew Ranieri with Morgan Stanley . Please go ahead.
Hi, everyone. Thanks for taking the questions maybe.
Maybe just the.
Keep it on the topic for my first one, but Joe it'd be kind of curious to hear more about.
Some of the innovation that you're putting behind behind the product I know that there was actually like a single injection product coming but can you go into a little bit more detail about what you precisely mean by innovation in the service model and also.
The cash pay kind of struck me just kind of curious how that would work and the DHA market and then I had a follow up.
So as we've talked about in the script about the harmony portal, just making it easier.
For customers to do business with us to order to get.
You know reimbursement assistance.
That's one thing I mean, the next thing that we're doing on the differentiation are differentiable side in innovation after sort of the Reimbursable changes is technology that will allow for the injection.
To be guided more precisely into the areas of the need to get the best effect.
And so it's sort of known that if you're not in the REIT space. When you make this injection.
You get less of an impact which is why sometimes I think.
<unk> experienced maybe no pain relief or just a couple of weeks, while others experienced two months or more.
Pain relief, so I think that will be a differentiator and then the other thing I think is that just where we can go with some of the access and sites.
And then I think that a lot of the folks that are are believers in a J are going to want to have the ability to have.
Have patients come in they want relief.
And and want to pay cash for that relief.
And so theres opportunities there really in most all of the sites, where we are for that and we will be talking a little bit more about that is it sort of unfolds towards the end of the year.
But that's where that's where we are on that.
Okay.
Just maybe on the injection for accuracy is this going to be just around using kind of ultrasound and improving like the needle at the injector or anything else there.
It's more related to our guidance of the needle.
Okay.
All right.
And then maybe for Michael a couple of questions here.
When we kind of look at your organic guidance.
For for EPS, I mean, I get that some of this is FX. Some of this interest, but when youre looking at the change from the prior guidance. The two point organic guidance reduction can you maybe just talk about how that flows through into and to EPS and maybe what the what the changes there and also on gross.
I mean, it looks like it's going to be flat year over year in the back half, but could you maybe just give us a bridge.
Between second half or first half of how youre thinking about the macro factors and maybe.
Where could there be like a specific relief area.
Can control versus just kind of the macro uncertainty. Thank you.
Yeah, great questions. So on the EPS side. The biggest reason for the call down was the higher interest expense the FX impact.
Then a little bit on the lower operating earnings in those lower operating earnings are primarily through the lower gross margin in the second half we will offset the lower revenue organically that you just referenced we will offset that through opex challenging and opex savings. So.
Revenue down on the on the organic side offset by more favorable opex. The other pieces, Dan that relate to the ultimate EPS guidance change were higher interest expense FX and a little bit of a lower gross margin.
Does that help with that part of the question drew yes. It does thank you.
And then when you think about the March from first half to second half gross margin. The biggest piece of that is inflationary factor. So if you noticed on our balance sheet. Our inventory is up about $19 million that's more than we anticipated that obviously has an impact on free cash flow as well.
But we as we have opportunities to buy.
Raw materials were doing that in pockets that we know don't have dating concerns. So we've been a little bit looser on that but also that inventory that is now capitalized that's going to as we sell them work through the back order on the back half of the year.
We are going to be releasing in the cost of goods sold higher priced inventory and therefore, that's going to have a big impact on our gross margin in the back half of the year now as we worked through that and we start to have a little bit more normalized raw material purchasing as we enter into 2023 that drag that's not capitalized on our balance sheet.
Obviously reverses meaningfully.
Thanks for taking the question.
Thank you.
This concludes our question and answer session I would like to turn the conference back over to Joe Woody for any closing remarks.
Thanks, I just wanted to thank everybody for their continued interest in Avenova and while we're very pleased with our overall execution. This quarter given the uncertainty in this environment, we are committed to creating meaningful shareholder value and believe our 2022 results are building the foundation to deliver on that commitment I'm confident that the priorities that we've detailed combined with our marketing portfolio.
They are in attractive markets position us for consistent sales growth margin expansion and significant free cash flow generation as we enter the back half of 2022, and we will probably see a lot of you in the fall Investor meeting. So thank you very much bye bye.
Right.
The conference has now concluded. Thank you for attending today's presentation you may.
Now disconnect.
[music].
Okay.
Yes.
[music].
Okay.
[music].
Yes.
Yes.
[music].
Okay.
[music].
Okay.
Yes.
Okay.
[music].
Yeah.
[music].
Yeah.
Yes.
[music].