Q3 2022 Avanos Medical Inc Earnings Call
Good morning, and welcome to the Avenova third quarter 2022 earnings conference call.
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I would now like to turn the conference over to Scott Galleried. Please go ahead.
Okay.
Good morning, everyone and thanks for joining us it's my pleasure to welcome you to the <unk> 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 details 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 <unk> 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 manage supply chain disruptions to mitigate the impact of our persistent backwater challenges despite.
Despite these challenges we were still able to deliver strong operating and EBITDA margin results.
Along with consistent free cash flow generation.
There's no 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 38 cents 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 NIM and growing slightly greater than 39%, while our respiratory business declined by nearly 21% due to industry wide post COVID-19 slowdowns and inventory being sold through our distributor channel. They had accumulated during later phases of the pandemic.
Through October we're seeing improved ordering patterns for our closed suction catheter systems are closely monitoring the beginning of the flu season, specifically trends, we're seeing in pediatric Barbara cases like RSV.
Yeah.
Excluding the impact of worth of generation Foreign 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.
Paint franchise continued to experience sluggish procedural volumes due to staffing shortages and patient preferences.
Our Hollywood asset offerings through fourth <unk> posted another strong quarter with continued adoption of try. This are three injection H a regimen are 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.
[laughter] portal to enhance and streamline the customer experience will help us retain these new customers as we enter 2023.
Separately, our back orders were unchanged throughout the third quarter and are currently in the range of $11 million, which had a negative impact on the revenue we could've delivered across our portfolio in Q3.
We currently anticipate and believe we have visibility to end the year with our back order below $7 billion.
On gross margin, we delivered positive results with adjusted gross margin of over 56% driven by favorable product mix in the quarter inclusive of course of <unk> and our plants continuing to incrementally deliver on our manufacturing efficiency strategy.
Set forth 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 remain elevated we anticipate similar fourth quarter gross margin results as we experienced in Q3, while our full year gross margin guidance.
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 was the background, let's read some detail on our product portfolio.
The positive trends across our digestive health franchise continued.
Ill served by our knee portfolio enjoying a record quarter growing over 39% versus prior year.
By improvements allowed us to maximize north American and the conversions.
Our legacy Enteral feeding products maintained its mid single digit growth despite supply constraints impeding further growth.
We anticipate sustained growth for the remainder of 2022, assuming no further supply chain disruptions for this product category.
Separately, our respiratory health business continues to experience industry wide post COVID-19 interruptions, despite softness in revenue in the third quarter, we're seeing higher demand for our closed suction catheter products as we enter the flu season and are monitoring its development on adult and pediatric patients.
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.
Supply chain challenges that persisted throughout the year with our surgical pain and RF categories disproportionately impacted in Q3.
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 were confident and motivated to continue working through these challenges to ensure our paint solutions are available to meet the needs of our customers.
To that point, we want to highlight the impact of our products have had and getting patients back to the things that matter.
In Q3 over 100000 patients benefiting from our office portfolio of pain products, including our pumps RF products and H, a offerings as well as game ready prescriptions.
Our next priority for 2022 is to demonstrate our ability to generate consistent repeatable free cash flow and then 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 'twenty two 'twenty three 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 active dialogue with a number of potential tuck in targets, which would leverage our existing commercial infrastructure generate synergies and enhance our topline growth.
We are disappointed we have been unable to announce another transaction sense of what the generics 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 worth of <unk> 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 and active M&A pipeline and continuing to demonstrate overall margin improvement now I'll turn the call over to Michael.
Thanks, Joe as you noted even with the uncertainty that persists in the global economy and the <unk>.
Industry wide macro pressures, we met or exceeded most of our third quarter objectives. Total reported sales were $202 million up nine 8% compared to last year with adjusted EPS of <unk> 38 cents on.
On a constant currency basis organic growth was one 6%.
Organic growth results exclude the contribution from what to generate sales in the third quarter as well as removing approximately 500000 at Baxter generated revenue for the prior year's third quarter.
We delivered on our gross margin commitment and sequentially SG&A spend as a percentage of revenue significantly reduced again this quarter.
We continued to successfully execute on all of our general strategy and we generated $23 million of free cash flow as Joe noted earlier.
Chronic care actual sales were down by 1 billion versus last year at $116 million in the quarter.
Excluding the prior year's impact of sales coming from our exited matched or facility.
We continue to see strong growth in our digestive health business with third quarter growth of 11% despite supply constraints impeding even further growth.
Within this portfolio that grew over 39% globally fueled by strong execution of customer conversions to our technology.
Separately, our respiratory health business experienced a 24% contraction in the third quarter facing continued industrywide post COVID-19 headwinds from distributors selling through their inventory as we I used to pandemic lower ICU census, combined with some supply disruptions.
Moving to pain management, excluding the contribution of course generates we delivered $66 million of actual sales or $1 million lower versus the prior year, primarily driven by supply chain difficulties related to raw material shortages.
Interventional pain side of the business saw 3% as reported growth in the quarter, whereas Q painesville declined by over 4%.
We have continued to see positive contributions from worth of generates with a high level of adoption I'll try. This are three shot H a regimen.
To capitalize on the upside opportunity that will be present for the remainder of this year and into 2023.
Moving down the income statement adjusted gross margin improved more than 420 basis points to 56, 3% versus last year.
As indicated earlier, we are pleased with the progress on gross margins, but the combination of better product mix.
Including wants a generous improved plant performance at lower shipping costs.
Sequential decrease in gross margin for the second quarter was primarily related to our LIFO restatement and an increase in the cost of raw materials are.
Our year to date results with regards to gross margin is anticipated. However, the global supply chain environment remains disruptive inflationary pressures are elevated and the availability of certain raw material components presents a continuing challenge as we work through our existing back order.
As Joe already noted we are confident in our ability to achieve our previously stated objective hopefully your gross margins between 55% and 57%.
Separately adjusted operating profit totaled 27 million compared to $17 million in the prior year higher sales and improved gross margins were partially offset by higher absolute spans across SG&A, resulting in adjusted operating margins of 13% for the quarter.
With regards to SG&A as a percentage of revenue we indicated that we would have had sequential improvement in each quarter. This year due to front loaded spending in the first four months of the year, we have executed against this trend and anticipate fourth quarter SG&A spend to be approximately 37%.
Adjusted EBITDA totaled 33 million compared to $22 million last year and adjusted net income totaled 18 million compared to 12 million a year ago translate into 38 cents of adjusted diluted earnings per share.
Now turning to our financial position and liquidity our balance sheet remains a strength. It continues to provide us with strategic flexibility as we currently have over $120 million of cash on hand with $254 million of debt outstanding post the closing of the ortho generous acquisition and completion of our share repurchase programs.
We have consistently maintained leverage levels of approximately one times, providing us flexibility against our capital allocation options.
Our current available capital exceeds $350 million, which provides ample liquidity for our near term priorities.
Additionally, we believe there was a disconnect between our intrinsic value and our market capitalization as we look at our strategy and ability to drive higher cash flows and Rois C and have therefore allocated 55 billion repurchasing our own shares over the prior three quarters.
To reiterate our prior.
Larry objectives in 2020 to center around consistent organic growth delivering.
Delivering on orsa generate strategy.
Meaningful improvements in our gross margin profile and demonstrating our ability to deliver material free cash flow.
As Joe noted, we are reaffirming our full year guidance with total net sales between $815 million and $835 billion annual gross margins in the range of 55% to 57%.
And ensuring full year spend remains below 40% as a percentage of revenue.
It is important to note the challenges remain with accessing raw materials.
All impacts of currency and unevenness in the returnable lots of procedures.
As noted on our last earnings call. If these challenges persisted we'd be closer to the low end of our net sales range versus the upper.
Finally, we continue to expect to earn $1.45 to $1 65 of adjusted diluted earnings per share for 2022.
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.
Operator, please open the line for questions.
Thank you we will now begin the question and answer session.
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At this time, we will pause momentarily to assemble Iraq's day.
Today's first question comes from Rick Wise with Stifel. Please go ahead.
Okay.
Good morning to you both it's good to see the positive directional progress here.
A couple of questions for me, maybe just starting off if you would with the the back order challenges I just wanted to make sure I'm fully understanding the exact drivers.
And Joe your optimism about the potential for working it down by the time, you get to the quarter and maybe just the last part of that little part.
It'd be more for Michael.
Does your guidance for the year already assume that are you know that whatever it is the math is a three or 4 million backlog work down or no that would be over and above.
Good morning, Ric, It's Jim I'll say, a couple of things I think Michael would want to make a few comments, but the way to look at our backlog is about 50% of it is digestive health, which is primarily tied to tie back.
<unk>, which is an industry wide backlog problem I mean, it happened is involved all the companies are involved and working to get as much as I, possibly can.
The other sort of 20% is around the acute pain area and various components and one major one being catheter used up.
That impacts the revenue opportunity there and the other 30% of it.
Call It changing day to day right. It can be and it can be silicone it could be geographic two things that affect the international business and you know we have assumed today you know that that will get down to that seven but what I think we would say in most of the folks on these calls I've been saying is that it's a very difficult environment to manage it.
Because of the spot buys where you'd get a commitment for a particular set of materials and they don't come through and so that's that's the general high level, then I don't know, Mike if you want to add anything to it yeah. So Rick to your the setting is put into our current guidance. If we were to get below seven that would be above and beyond.
Gotcha.
Thank you for that and Joe you talked about the M&A and.
It's interesting to hear that you're engaged still engaged in active dialogue et cetera.
Your you said the word you're a little bit disappointed I'd be curious I is it where.
Where are the hurdles in moving ahead with some of these is it that prices are still too high or you're facing competition.
You know why you're in some of these deals happening that you're you've been hoping for.
Less about you know action ability.
It's just the time for diligence. We also are dealing a lot in private circumstances and private companies.
At times, they take sometimes it can work very quickly sometimes they take a little bit more time, but where we're active and are working towards and aimed it to expand our offering in the ambulatory surgical center and we're very excited about a couple of things.
Digestive health it obviously in general the performance she digestive health.
We're very happy and we intend to spend more time sort of building around digestive health.
And so we're we're also happy with the valuation that we think we'll achieve very similar to what we've done in the past.
You might see as we move through the year next year that we do some slightly larger but not you know larger for US a couple hundred million dollar deal. It's.
It's not betting the farm as we've always said.
And so we actually feel pretty good I think we've shown a decent competency there we'd love to have done something here in the fourth quarter, but you could see one or two deals sort of mid ish Q1 next year.
Gotcha and it always just my last question I had just always seems to fall to the first questioner on third quarter calls to ask about 'twenty three I know you're anxious to comment in detail but.
But maybe you could maybe are you comfortable with current consensus.
Ex FX do you feel like the business.
You know mid to upper single digits ex FX growth, what do you aspire to can we see the kind of gross margin.
It's very solid gross margin improvement continue next year any color or direction would be obviously incredibly welcome. Thank you so much.
Yeah, just a couple of things Michael that wherever he wants but look I'm I'm very happy with the financial metrics. We look at gross margin EBITDA cash flow generation. So basically we've set the stage for one of the top line turns to really get leverage.
And that's been that's been a lot of work in and actually really good execution. There's more you know more than we can do and more that we're working do its just real difficult right now to judge the top line.
It's so independent I mean, where we do believe one thing which is at least through the middle of 'twenty three we're still gonna be deal with some of these supply chain challenges and I think that's been echoed in some of the other calls we've not changed our view of the business underlying business or the range that we can achieve and actually what we've said is that Ah.
In any given quarter. This year, we had $3 million to $4 million more we could have essentially are produced in revenue had we not been dealing with these headwinds and then obviously with US you know we have the opportunity to enhance through M&A.
I actually have a great balance sheet and the ability to do that.
No that is it.
Very comfortable with the margin profile of continuing to expand attractively tunes demonstrate free cash flow generation solid balance sheet top lines, just a little bit of a hit or Miss right now so.
Really nothing to comment out there, but the rest of the income statement, we really feel good about going into 'twenty three.
Thank you very much.
Look forward to seeing Charlotte.
The next question comes from Matt Mission with Keybanc. Please go ahead.
Hey, guys, Hey, Matt Hey.
Hey, this is actually Brad on for Matt. Thanks, a lot okay and the question.
No really one thing that one thing that stood out as positive was the continued stability around gross margins and was just hoping you guys could provide some more color around what drove the year over year improvement and then maybe touch on specifically how much of it was driven by.
The contribution of workloads that are accident.
Yeah. So so just as the second quarter bread and what we what we indicated earlier in the year.
Whatever improvements we have in gross margin year over year about 50% of that was going to come from ortho generates a contribution and 50% would come from the improved manufacturing efficiencies.
Efficiencies are at other programs, we're doing within our plants, so and that remains to be the case through the third quarter and as we line up the fourth quarter, we think fourth quarter will fall out that will be the same thing. So remember we said 55 to 57, we started the year at 52 or exited last year at 52.
Whatever wherever we are within that range about 50% of that will.
Woke up north of Jan racks are definitely on the low end of the range as we start to approach the higher end the range a little bit more will come from the manufacturing efficiencies and plant work that we're doing which is again why going into 'twenty. Three we feel very good about continued improvement in.
And our gross margin profile.
All right excellent and then just wanted to follow up on that.
Gross margin had been such a strength of the company just thinking longer term, maybe 'twenty 'twenty four and beyond.
Do you see an opportunity to maybe get back to that 60% level that you were at several quarters ago, and if not what's the right level that you got you're targeting and.
How do you think about the remaining levers to get there.
Yeah. So yeah. So there definitely has been since the last time, we printed the 60, we have acquired some companies put aside also generated so we've acquired some other companies that are below that 60, or so new baseline as a company.
Is call it 58% to 59%.
That we can naturally get too so into 'twenty. Three 'twenty 450, 59 is a very comfortable place for us to talk about to get back up to 62 things will need to happen. We could we could acquire some other companies obviously that had a gross margin profile that will just naturally help them provide a tailwind and some additional.
<unk> savings or footprint opportunities. They may have in the plant so can.
Can we get 60 again and we feel confident we will be do we think there is a pathway there.
Natural sense 50, 859 is about what we can do with our current niche without other things haven't pulled it if that makes sense.
No that definitely does and then last question for me just thinking about you know.
Understanding it's a very challenging environment, but just wanted to hone in a little bit more on what you're seeing in.
In pain management, just given the expectations that you communicated last quarter around the potential improvement to double digit growth in two each.
Just wondering if you could touch on.
Beyond beyond the supply constraints, what might've contributed to that Delta and then what maybe gets better into for Q2.
Yeah, I mean, there's there's a little bit of where we are.
Our focused and pain is in the hospital I think everybody knows things are moving to the animals were certain surgical center, but we're getting active there and some of the staffing components that people have outlined but really the biggest part of it.
If you think about acute pain, you know the catheter issue and other supply chain backlog issues you have to think of that business also to include ambit and that although it's a smaller portion of the business has been growing quite nicely 30 40 in some cases 50 per cent and ultimately things are headed towards electronic pump, but I think we're positioned.
Nicely for when it all goes that way.
That's you know today less than 10% of our business, but nonetheless, we're still focused there and I V. P of you know I see that as a.
And that's a cool ether or at a high single digit.
Double digits in any given quarter with a good runway, it's really been hit hard by the series G backlogs, but really our console and you have to sell the capital to then generate and expand.
The business is strengthening in Q4, and we don't see more strength in Q4, and then we have some internal and external plans in place to move more of our Cooley, Florida. So if you will or IBP.
Products into the ambulatory surgical center and then you know we've been happy we said we've got some opportunity in the short term with ortho <unk> in game ready steady mid single digit grow or so.
At the same time, we're trying to enhance it with.
With the M&A.
The underlying demand seems to still be there for the business and you know like everybody and I'm sure you're probably tired of hearing on these calls.
We got to work our way through supply chain to really see the true up of Kennedy.
Alright, Thanks again for taking the questions guys.
Thank you Brett.
The next question comes from drew Ranieri of Morgan Stanley . Please go ahead.
Hi, Joe Michael This is Jacob on for drew.
Thanks for taking the questions I'll ask my two questions upfront first one following up on some of the previous 2023 questions. I mean looking at margins for next year, if the macro environment stays as is to what extent could we still see gross margin improve.
And next year and then my second question on Ortho Gen. Rx how has your thinking shifted if at all since last quarter in terms of the expected reimbursement tailwind into two.
2023, any changes there and how youre thinking of the size or duration of the tailwind. Thank you.
So maybe just two quick comments and then Michael will say a few things, but with respect to gross margin I think that we also have some price and.
And mix opportunities, but he's lived that out a little bit.
And just maybe say a few more things there.
Well it was the generics I think we're starting to see that tailing off a bit because we said it was going to be a short term sort of last one.
Impact in the by the end of the first quarter. If you will everybody will be on a very level playing field and yes, we are.
Adding both direct sales.
Sales Representatives and 10, 90 nines and we want to take this into some of our other areas, but we've also highlighted from the very beginning with it from the initial acquisition that we would see a flattish this for one year in that business as we transition the reimbursement but.
We'll get some benefit in Q4, and I think that will start to wane into next year and can come back a little bit.
Yeah, I don't I don't think the macro environment on gross margins for us or operating margins for that matter are getting them back.
It's too much next year that was pointing to earlier question for Rick is that put aside the topline which is still a little bit fuzzy on the the core of our income statement and we've done a lot of work. The last 18 months for those of you that follow US closely and you know we're seeing that those benefits come through in Q2 Q3, you'll see them in Q4.
Trends should continue to either improve or stabilize at very attractive levels and twenty-three irrespective of the macro environment, It's really the top line.
The macro environment has had a much more meaningful impact on both FX and the back order situations that we've been dealing with for the last six quarters.
Okay.
This concludes our question and answer session I would like to turn the conference back over to Joe Woody for any closing remarks.
Look I just want to thank everybody for the interest in avenues, we're pleased with the overall execution.
The environment we're in.
We are committed to creating shareholder value and believe our 2022 results are getting to that foundation to deliver on our commitment.
I'm very cognizant priorities detailed and combined with our market positions.
And Marcus I think we're gonna see eventually consistent sales growth and margin expansion.
Either a free cash flow generation.
Just next week, Michael will be at credit Suisse.
Week after both Michael and I will be at the Stifel Conference in New York. So I appreciate everybody's interest in haven't great remainder of your week. Thank you.
Yeah.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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Yeah.
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