Avanos Medical(AVNS) - 2019 Q3 - Earnings Call Transcript

Financial Data and Key Metrics Changes - Net sales for Q3 2019 were $171 million, representing a 4% increase compared to the prior year, while adjusted diluted earnings per share was $0.30 [7][17] - Full year sales expectations were revised down from 8% to 10% growth to 5% to 7% growth due to back orders and challenges from the new IT system [9][23] - Adjusted diluted earnings per share guidance was lowered from $1.15 to $1.25 to a range of $1 to $1.10 [9][23] Business Line Data and Key Metrics Changes - COOLIEF experienced over 20% growth, marking its highest quarterly growth this year, although it was slightly below expectations due to a shift from multi-probe kits to standard kits [10][17] - Acute Pain performed in line with expectations, but ON-Q sales were down mid-single digits for the quarter [19] - Chronic Care business faced challenges due to product back orders and supply chain issues, but is expected to continue growing in the mid-single digits [20] Market Data and Key Metrics Changes - International sales in EMEA and Latin America missed expectations due to back orders and supply chain challenges, but the Asia-Pacific region saw double-digit growth [9][21] - The company faced lower chronic care order volumes from U.S. distributors, impacting quarterly results [8][20] Company Strategy and Development Direction - The company is focused on accelerating organic growth, pursuing M&A, and managing costs effectively [14] - Recent acquisitions, including Endoclear and Summit Medical Products, are expected to strengthen the business and accelerate growth [12][13] - The company aims to stabilize its IT system and processes while addressing operational issues to enhance efficiency [16] Management's Comments on Operating Environment and Future Outlook - Management acknowledged challenges in Q3 but expressed confidence in the long-term strategy and ability to address operational gaps [6][9] - The company is committed to investing in growth areas like COOLIEF and Corpak while managing costs prudently [14][23] - Management expects to see improvements in operational efficiency and sales as back orders are resolved [39] Other Important Information - Adjusted gross margin for the quarter was 57%, which was unfavorable compared to the previous year due to IT system implementation and increased distribution costs [21] - Free cash flow was an outflow of $24 million due to one-time spending and increased working capital related to the new IT system [22] Q&A Session Summary Question: Impact of IT system integration on gross margin - Management explained that the IT system integration caused plant downtime and increased distribution costs, which negatively impacted gross margin [25][28] Question: Future investments in COOLIEF - Management indicated that while there will be some investment in COOLIEF, it will not be as aggressive as in previous years, focusing on maintaining momentum and expanding distribution [29][33] Question: Headwinds moving into Q4 - Management acknowledged that backlog issues would carry into Q4, but they are making progress in addressing these challenges [37][39] Question: Changes in reimbursement levels for COOLIEF - Management clarified that the new reimbursement rate for hospital outpatient departments is favorable compared to previous proposals, which should support growth [41][70] Question: CFO search update - Management provided an update on the CFO search, indicating progress with candidates and that the current team is performing well in the interim [63]