Q4 2022 Avanos Medical Inc Earnings Call
Good day and welcome to the Avenova first quarter 2022 earnings conference call.
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I would now like to turn the conference over to Scott Gordon Senior Vice President strategy and M&A. Please go ahead.
Good morning, everyone and thanks for joining us.
My pleasure to welcome you to <unk> 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 details 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.
This 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 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 fourth quarter and full year 2022.
We are very pleased with our fourth quarter results, which built on solid execution in both our operational and commercial teams during the first nine months of 2022.
Okay.
Although the macro environment remain disruptive and dynamic we focused on what we can control and manage the demand for our products remains strong and all of those supply chain disruptions persisted, we executed well mitigating impacts to our financial results. We anticipate 2023 will continue to present supply chain headwinds cost pressure.
<unk> 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 four 7% organic growth both excluding the negative impact of foreign exchange.
We generated 60 of adjusted diluted earnings per share and $29 million of free cash flow for the full year, we grew 12%, including the impact of our acquisition of worth of generics and delivered adjusted diluted earnings per share of $1.65.
Additionally, our gross margin for the year was 56, 8%.
150 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 Jpmorgan conference in January .
Michael and I will address these priorities a bit later in the presentation.
Now I'll spend the next few minutes discussing our results and the problem at the product category level.
On a constant currency basis, our digestive health portfolio again by double digits, topping 10% with <unk> growing nearly 40% the positive trends across our digestive health franchise continued second half supply improvements allowed us to maximize north American MDI conversions.
Our legacy Enteral feeding product lines maintained its global mid single digit growth with robust double digit year over year growth in North America as supply constraints 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 viable cases like our S D and the early flu season uptick.
In total our chronic care business grew just under 6% in the fourth quarter and two 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 and solutions remains strong as evidenced by the double digit growth in both game ready and cooler sales during the quarter.
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 electric procedures levels reduced.
Our team's resilience has ensured that our paint solutions are available to meet the needs of our customers.
Separately, what's the general X exceeded expectations in 2022 by delivering on our key marketing strategies.
What's the general access to 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 allow all of the three injection product and maintained five injection customers within the company's portfolio.
Yeah.
In 2023, and we will expand our innovative regenerative patient access program for our five injection customers to address the growing.
Self pay market.
We also expect steady increases with the three injection sulfate program.
There will be continued reimbursement volatility in 2023 and pricing discipline and accurate average sales price for S. P reporting will be a focus for ortho <unk> to deliver stability for our customers.
In total our pain management business grew two 6% in the fourth quarter and 2% for the full year, excluding the negative impacts of foreign exchange and contributions from our <unk> 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 because of the worth of <unk> and our plants continuing to incrementally deliver on the manufacturing efficiency strategy.
Set forth at the end of last year.
Separately, we ended the year with back orders around $8 million slightly 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 as a percentage of revenue under 40% for the full year.
We remain committed to this financial metric.
As we enter 2023 and Michael will provide additional insight when he discusses our 'twenty to 'twenty three planning assumptions.
Our final two priorities for 2022 were to demonstrate our ability to deliver consistent repeatable free cash flow and capital deployment and M&A.
The fourth quarter, we generated $29 million of free cash flow. Despite continued inventory of supply chain headwinds our ability to consistently deliver free cash flows is critical to support our other strategic growth and capital allocation initiatives that has been identified and our priorities for 2023 and beyond.
While we are disappointed that we have been unable to announce another acquisition since worth of generation in early 2022.
We remain engaged in active dialogue with a number of potential tuck in targets, but the objective of leveraging our existing commercial infrastructure generating synergies and enhancing our topline growth.
We have been disciplined in our approach around strategic fit evaluation and due diligence and believe that this is critical for long term ROIC see enhancement.
The early success with the <unk>.
It's worth noting that our most recent acquisitions of near met game ready and summit medical or Abbott device average double digit growth in 2020 two.
Quickly summarizing 2022, our primary objectives were centering around consistent organic growth delivering on or off the generic 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 or the general X exceeded our internal expectations gross margin improved by 450 basis points.
<unk> delivered free cash flow of $72 million.
Or approximately $50 million greater than last year's free cash flow, excluding the cares Act refunds, we solidly delivered against our primary objectives, which as noted earlier effectively laid the groundwork for our longer term transformation efforts.
We outlined these transformation efforts in our JP Morgan 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 to focus on categories, where we have attractive margin profiles than the right to win.
Taking additional cost management measures to enhance operating profitability.
Continuing our path of efficient capital allocation to meaningfully improve our ROIC seat.
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.
Thanks, Joe as you noted we are very excited to embark on our transformation journey.
And believe our execution over the past 18 months has created a solid foundation to build upon.
Before diving deeper into the transformation efforts I'll provide additional color to our fourth quarter and full year results.
Total reported sales for the fourth quarter and full year for 217, and $820 million increases of 12, 4% and 10, 1% respectively.
Adjusted diluted EPS for the quarter was 60.
And $1 65 for the full year.
Additionally, as Joe already noted we delivered on both our gross margin and SG&A as a percentage of revenue commitments with full year gross margin of 56, 8%.
SG&A as a percentage of revenue for the full year at 38, 9%.
Also successfully executed on our ortho generate strategy during the year and generated over $70 million of free cash flow and the knee or with $128 million of cash on hand.
Our leverage ratio of less than one.
Excluding the negative impact of foreign exchange chronic care sales grew by almost 6% for the quarter with digestive health growing over 10%.
In our closed suction catheter systems growth exceeding 8%.
Within our digestive health portfolio.
That grew nearly 40% globally.
Again fueled by strong execution of customer conversions to our <unk> technology.
Although our closed suction catheter business showed a return to healthy growth as we noted what happened during our third quarter conference call. Our oral care sales were down almost 27% as we intentionally walked away from contracts with an attractive margin profiles.
Within pain management, we grew two 6% for the quarter, excluding the contribution of ortho generates.
And the negative impact of foreign exchange our.
Our intervention paint business grew 6% with our acute pain products growing at a little under 1%.
As Joe summarized earlier, we had another solid revenue quarter and overall positive financial contributions from ortho generates.
Game ready and are cool leaf water cooled RF system, both grew double digits for the quarter, partially offset by a decline in our surgical pain products.
Adjusted EBITDA totaled 45 million compared to $33 million last year, and adjusted net income totaled 28 million compared to $24 million a year ago.
Translating to 60 of adjusted diluted earnings per share versus 50 a.
A year ago.
In summary, 2022 was a strong year for the company with adjusted gross margin, improving 450 basis points compared to last year, while adjusted EBITDA margin exceeded 20% in the fourth quarter.
Additionally, we delivered on our internal EBITDA operating profit and adjusted diluted EPS targets, while further strengthening our balance sheet, even after allocating over $170 million towards M&A and share repurchases.
Joe noted earlier, our recent execution has positioned us to embark on a transformation efforts, we outlined at the Jpmorgan conference.
A transformation priorities are designed to shift our product portfolio over time into a higher growth portfolio.
Bridging our cornerstone product families and digestive health.
Intervention I'll paint. Additionally.
Additionally, these priorities are aimed at right sizing our cost structure and enhancing our operating profitability with EBITDA margins, ultimately achieving 22%, while generating annual free cash flow of $100 million.
Our three year transformation as soon as primarily organic efforts that we have visibility against and strategies that are in our control.
While still early we have made some impactful decisions already including leadership changes.
Her Holbrook was promoted to chief commercial officer, leading our combined chronic care and pain franchises, but the focus on realizing efficiencies and synergies within our commercial teams.
Additionally, my role was expanded to include senior leadership oversight over this critical initiative through the transformation management office.
We also announced that internationally, you would see selling certain products in our acute pain category and smaller product categories was insufficient profitability.
As noted earlier, we have also walked away from customer contracts with low margin as we exit 2022.
While these strategic decisions will result in an annualized revenue loss of approximately $35 million, we were not set up to win or grow profitably in these markets or categories over the long run.
Our cost savings initiatives will primarily offset stranded costs associated with these product categories.
In total we expect to realize approximately $10 million of savings in 2023.
Dissipate $45 million to $55 million of gross cost savings by 2025 of most of which will be achieved in 2024.
We will present, a refined view of our transformation program at our Investor Day on June 20th to be held at the convene one O. One Park Avenue location in New York City.
Although 2023 will be an uneven transition year, given the product portfolio rationalization and cost management initiatives, we anticipate improving our operating and EBITDA margins by at least 100 basis points.
Separately, we expect to earn between $1 16, or $1 80 of adjusted diluted earnings per share for 2023, while delivering at least $60 million of free cash flow exclude.
Excluding the one time cash costs associated with the restructuring efforts expected to total between 20 and 25 billion.
Finally, including the in year impact of the approximately 35 billion annualized product portfolio rationalization decisions the company anticipates comparable organic revenue growth to be low single digits.
As I mentioned earlier, we are excited to embark on a transformation journey.
I'm confident we will improve on each of these metrics at year progresses, with the first quarter, starting off slow and accelerating into the back half of the year similar pacing to what we experienced in 2022.
In summary, given our consistent execution over the back half of 2020, one and throughout 2022 and considering that the current global macro and industry specific environment remains uneven. We believe this is the appropriate time to proactively and strategically optimize our commercial organization.
Folio and cost structure.
Operator, please open the line for questions.
We will now begin the question and answer session.
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Okay.
The first question today comes from Rick Wise with Stifel. Please go ahead.
Okay.
Good morning, Joe Hi, Michael.
Let me log.
To tackle here.
You know I think that I'm going to start with the transformation commentary and sorry, Michael to make you say it again did I hear you correctly, it's $10 million.
Cost reduction this year.
The large portion next year and I'm sorry, you just went by quickly and maybe you could just.
Whatever you'll you'll correct my words, if they're wrong, but just help us understand better where the costs are going to come from.
You know what's involved how quickly you can get at them and and and to what extent.
Especially in the early part is this going to be a net positive offsetting other costs.
Costs are.
And inflation et cetera pressures.
Sorry for a long start up.
Yeah, No no that's okay.
So, yes, Ted you approximately $10 million.
In 2023, a majority of the remainder amount of between $45 55 billion in 2024. So just answer that first part of your question, where a majority of these savings are coming from.
The mix of things that will be outsourcing some opportunities.
We will be re bidding on a lot of third party contracts, we will be eliminating third party resources.
As we announced through the reorganization of naming her holbrook, the chief commercial officer.
There was duplication of roles some of those roles have already been eliminated and we will also just continue on the path that we've done the last couple of years with looking at trimming <unk> in other areas as well some of those things like outsourcing will take you know into the back half of this year to figure out the right partner to figure out the right.
Way to do that without being disruptive and so majority of those savings won't take place until 'twenty four.
Gotcha.
Exciting stuff Oh is it.
All unfolds.
Your supply chain a back order situation.
Maybe you could give us a little more color on the back order what drove the higher than expected back order in fourth quarter.
And the increase earliest here he said.
I don't know is it particular products supply shortages.
And again, what's your optimism on resolution.
Working through that now.
So Rick this is Joe and Michael welcome to comment as well, but we did a nice job at the end of the quarter.
Reducing our backlog.
And obviously the it shows in the revenue, but then it built back up again so.
Close to 10 ish million right now.
It will come down to a quarter by quarter, we think it will come down pretty significantly in the second half, but the three areas right now it's heavily weighted to just have helped at the moment and particularly there's a tie back issue I think everybody knows that.
Building a new plant.
That'll be up and running in Europe , but not until the fourth quarter. So that's some of it in our case. We also have a supplier of catheters for on Q&A and it where we actually could be producing more revenue and the underlying demand is there, but that's going to stick with us through the third quarter of this year and then there.
Our still electronic components that are issues across the board that does impact.
Impact Cooley now that said when we look out we do see by the time, we get into Q3.
That most of that will be in the rearview mirror and that's why Michael has talked about a progression a somewhat similar to.
This year that the aim, though and as I listen to Michael that the other element of the transformation is to eliminate S. K used to make some changes further.
In our portfolio, we believe that we can build ourselves into.
A consistent mid single digit growing business as we enter 2024.
And obviously the second half will be will be stronger than the first.
Got you and just last for me.
So I heard your M&A comments that you were disappointed that something you hadn't happened.
By now and as I think back to try to hit them with you and Michael in mid November at the Stifel Healthcare Conference you had said you'd.
Hope you thought the potential was there to see two potential bolt ons sometime in the first half.
How are you thinking about those timelines today that that track on your mind or if I imagine given the timing of the Investor day that no it's been pushed out longer.
What's going on out there and just where are you now thank you.
Yeah, Yeah, so very robust pipelines, even built further sense.
On the last tour together I think are in New York and in November we do think that we will have a transaction are in place prior to the investor day in that in the near term, but I do think that will likely have a second bolt ons in the second half of the year. So maybe not too in the first half of the year.
We are orienting a lot of our focus in the digestive health area, but we still have a couple of paint the items that you would get being more focused in orthopedic pain and recovery.
Then we have been in the past so we feel really good about this.
So you have a lot on with the transformation.
So we're carefully also looking at phasing and not wanting any missteps and execution because a lot of this as you can imagine requires a lot of work, but that said, we're going to be in an excellent position for M&A I think we've demonstrated a good track record.
We have plenty of.
Powder at one times to go out and.
Conduct these and they're going to enhance that growth profile as well, especially given that.
We said we'd do the two then that's going to give us an even better outlook for 'twenty for it.
Parts of the end of the year.
Thank you very much.
Uh huh.
Your next question comes from Matthew Wilson with Keybanc.
Keybanc. Please go ahead.
Hey, good morning, Joe morning, Michael.
Yeah, because you guys have quantified the product ethics between chronic care and in pain. We're about 35 million is is is coming out of <unk>.
And then does that also does that take the place of potential spin or divestitures or is that something you're still looking at.
[laughter].
So two points mountain will get more into details at Investor day as to where these agents are coming from partially because.
We have relationships that were still in place right now, which is why we're giving a range of what the full year impact would be.
So some of these we may handover to an existing distributor relationships something we may just get out of all together due to product availability. So we may get out of just due to other relationships. So we're not getting into details into the split of that yet, but we will have more clarity in detail at investor day around that first question.
Second question, it's a mix so some of that stuff, we're deciding to get out of a would be a little bit of the spin just getting on our products that just aren't worth the effort of trying to sell because we just wouldn't get value for them. So it just makes sense to exit those but it doesn't necessarily take place of other product categories. What we do.
Believe there's real value there and we would consider divesting of those product categories.
Okay excellent.
Excellent.
For 'twenty two 'twenty three I think.
Yeah, well, just taking a step back it looks like ortho Jan including you.
You know an extra week or two.
Pulls over from from you know that.
Panic.
For 2022 would be coming out of that $80 million for a full year on an annualized basis is what are the expectations for that.
Kind of 2023 at some of the pricing dynamics change.
Yeah, Joe will talk a second about the strategic aspects of what we're doing there the $80 million I think it's a little south of the 80 million, but youre directionally right.
And just on a strategic level I do think in the first half of this year Q1, and Q2, we're still going to see a minute for reimbursement level.
Really in the drive is scanned agenda. This good categories and it starts to level.
Level off in the second half and we see that more as a lovely we call level year year over year.
And that's where that's where we are that's a good outcome for us for the business and just as a reminder, we didnt really make the acquisition based upon you know thinking it was going to be north of our mid single digit on a consistent basis. After this year would you think it's a low single digit grower, but excellent contribution to the margins and more importantly.
A fit for our focus going forward. It paints give me more relevant ambulatory surgical center.
Or the <unk> office and.
And in that setting so you can see it pairing well obviously with cool.
Cool the pairing with game ready and just getting get total knee patients batch a recovery faster in all leading up to that obviously in the case of a J.
Okay, and then on the SG&A.
Last year, you started as a high point in the first quarter and then it sequentially.
Oh decelerated through the course of the year, how should we be thinking about SG&A.
Through the course of 2023 is the fourth quarter a good starting point or is it may have to get it done.
And then come down through the course of the year.
Yeah, the pacing will feel very similar.
That being said the.
The $10 million of in year cost.
There may be some movement between Q2 to Q4 as to when some of these costs come out, but the pace will feel very similar in that to your point, Matt will have a high point in Q1, and it will come down on actual dollars as the year goes on whereas you know revenue will be a low point in Q1 and will be even ish in Q2 Q3.
But higher than Q1, and then we'll have a.
Our solid Q4.
And therefore, you have that obviously you know you have your high 30, low forty's starting in 2023 Q1 for SG&A as a percentage of net sales going down into the <unk>.
Mid ish.
Percentage in Q4, some of it's just not something that is the pacing of the savings that we just talked about the $10 million.
Robots or maybe I just missed it just what are your expectations for gross margin in 2023, I know you kind of put out the 100 basis points of operating margin EBITDA margin improvement.
That's one place.
Yeah. So that was purposeful are we arent sure exactly.
Where we're going to get the 100 basis points from what we do know is gross margin should be sticky in these 57% level if not higher.
And SG&A at 38, nine should be a little bit lower if not in the range. So again, depending on how these savings come in and when we exit some of these low margin lower gross margin product categories will shift where that 100 basis points comes from so we're we're not trying to be cute on the 100 basis points at op EBITA, we just we're trying to be thoughtful.
And no doubt, we'll have more information to share at Investor Day in June .
Alright, Thanks, Michael Thanks sure.
Oh, you got it.
Okay.
As a reminder, if you would like to ask a question. Please press Star then one until the question queue.
The next question comes from drew Ranieri with Morgan Stanley . Please go ahead.
Hi, Joe Hi, Michael Thanks for taking the questions I, just maybe on the cost transformation side for a moment I understand that theres a lot going on that we will eventually get details with but just kind of looking back at the company. It's been kind of a few years of talking of right sizing the business and getting the expense.
The structure in place, but I was just kind of curious how you can oh or if he can really kind of give more details about the growth side of the equation and really what you're thinking on that side because it just feels like I have and I was just kind of been a low single digit grower. So I'd like to hear more about how you're thinking about growth improving and accelerating or the next.
12, 18 24 months.
So maybe I could start with a little bit of growth and I think Mike will pick up some more of the cost, but obviously, we want to set that foundation, so that we'd get the drop through.
And leverage and if you if you go around and look at what's going on in chronic care you do see a lot of spots a double digit growth I mean, do you met almost hitting 40% consistent mid single digit growth really in the rest of that just to help the portfolio on a global basis, we're starting to see paying come back its limit right now by some of the supply chain issues.
You know, there's there's probably still another $2 million or so a quarter going to be this year that.
Would be backlog each quarter that we could sell through and also we know we have a line of sight to choose some strong acquisitions at good valuations like we've been doing before in the areas, where we compete so orthopedic.
Paint and recovery management, and then obviously you said.
Digestive health. So we think that's going to be enhancing it and if you if you pull all of that back in a normalized situation.
We feel like we do have a mid single digit growing our organic business not going to show through obviously in the first half is starting to show through in the second half, but really being powerful as you move into 'twenty 'twenty four.
Coupled with the balance sheet that we have inside the company so.
Putting that together is where we see a lot of strong value creation.
And then when you see the cash flow now increasing it gives us also a medium term opportunities to do some what we would call bigger things for us.
The farm kind of a scenario like you see in the market, but larger than the deals that we've been doing.
And generally being and in many cases anyway.
Complementary to EBITDA and accretive to growth so with that I'll, let Michael maybe hit some of the cost Yeah. I would say to you. This is not a cost takeout efforts. This is a to Joe's point of portfolio rationalization optimization effort and Oh by the way if we're going to do that there's some cost opportunities and obviously from a reporting requirement, we've gotta get restructuring.
Other thing out of the table, but when you look at all of our internal messaging as this has nothing to do with cost take out those are just that's just a byproduct of goodbye product for sure what we're doing with our portfolio.
And there aren't attention too.
Further portfolio moves and maybe the time, we get to New York in June there are some other things like that help enhance the profile of our Roes that are related there. So we're pretty excited about it.
Got it thank you and maybe just a little bit more clarity on how we should think about the product exits.
For 'twenty three if there's any way to think about the weighting of our of what youre going to be doing I know you don't want to get into specifics of chronic care of pain, but can you at least help us understand the cadence for for 'twenty, three and just with 23, what's your guidance on the low single digit growth rate, we should be thinking or.
Round like 792, eight patent for for reported revenue for 'twenty three is that the right range. Thank you.
Yeah, I think you're I think we're probably a little higher than the $7 90, just based on the timing of some of the exits, but yes 795 to 810 ish a feel.
Feels like the right range.
Did that math correctly drew.
So again.
Timing is incumbent upon some of those relationships. We believe we have responsibility to some of these customers from a medical device products standpoint, and so some of these we can do sooner. Some of these are we are choosing to do later theres some opportunities to work with distributors and some of these categories to hand off a one two.
Years of inventory and have them continue to run that maybe even by some of our assets for a few dollars. So there's a range of things we're still very much working through on the timing, but your math broadly your ranges.
Appropriately stated.
Did I answer that direction.
All set thank you Michael.
Thanks, Joe Thanks drew.
The next question comes from Dave <unk> with JMP Securities. Please go ahead.
Great. Thanks, you mentioned, the new CCL position in.
You know you mentioned, some synergies and kind of putting chronic pain under one organization.
I'd Love to you know again, it doesn't completely intuitive that that would be the case that there would be opportunities like that but it but maybe you could highlight.
Some of the areas, where you see those opportunities and why that makes the most sense.
Yeah, there are a lot of areas, where we're seeing your head count the opportunity and strategic marketing areas like customer service really cursed make it also a wholesale look at the way he spent and the returns in various areas of the business and so that's that's been actually a strong piece for us is all.
Looking at his channels right now and there's opportunity to deploy our channels are somewhat differently.
In some cases utilize that 10 90 nines.
Two that will help expand our business and it also just a subtype of some of the cost of the sales. So all of those areas are areas that are built into Michaels plants.
Got it and then the comments you made on the.
EBITDA north of 22% free cash flow of 100 is that.
What do you expect to do at the end of the three years, so like say exiting 'twenty five is that the timeline for that.
Yeah, that's correct at the end of 2025, yes.
Great. Thanks.
He gave it to get to that question, we will have some more specifics around the pace on that you know what are the signals. Obviously, we're providing today is that we exited.
The fourth quarter at 28% EBITDA margin last year, we exited the fourth quarter at 16% and we did full year. This year at 16, 8% you know, we're not going to do 21% in 'twenty three.
But these are these are how the pacings will work for US right. Our Q4 ultimately as we manage.
Our portfolio optimization some of this offsetting cost opportunity. Though these are the types of numbers, we produce on an annual basis, not just a Q4 basis.
Got it.
Thank you.
The next question comes from Matthew <unk> with Keybanc. Please go ahead.
Thank you just one follow up I just wanted to I just wanted to give you guys the opportunity to talk a little bit about the Madden.
But just kind of how it ends up 40% again.
Product is growing.
For you over last year to two years, where are you at in this in this conversion cycle how much more is there and there are some of the initiatives that you're doing you know going to help improve the profitability of this product as well.
Yeah, I mean, yes, all the above and I will say that I think we had a line in the script about the double digit growth of the acquisitions that we've made and we see another strong year.
For near bed with continued and fit across the globe being converted I think ultimately that it becomes a strong.
High single digit type of a growth for us and it's opened up our aperture to looking at and why we're focusing more on the just the health of neonatal type of targets, where we think we can build.
You know get strong synergies at good gross margins in our organization, where we have a right to win and where we can get deals and really pay fair reasonable prices.
For those deals so it's been a home run obviously core trek was strong for us we're benefiting even what they end up moving into.
The amp to a surgical center and replacing sort of what's on Q.
There's no doubt that the <unk> acquisition has been a bit of an absolute homerun for us and again it does have there's opportunities everywhere, including being a bet around both our manufacturing.
Patients ease in transportation and just all the ways that we're going to market I don't know if you'd add anything that might.
Because I was going with that.
Yeah.
But thanks for pointing that out yet.
And what inning do you think you're in in that in that in that conversion like how much how much it is kind of lessons yeah.
Transitioning from the seventh or the eighth inning, but then just remember you know we still think we'll be north of our mid single digit for quite some time beyond that it's just that you can't grow at 30, 40% forever.
Alright, thank you.
Thank you.
This concludes our question and answer your question I would like to turn the conference back over to Joe Woody for any closing remarks.
I'd like to just basically thank everybody for the continued interest in that but Alex and you know as you're hearing from us the demand for our products remains strong.
We feel like the fundamentals across the business are strong.
We're focused on what we can control and manage and we think 'twenty. Two results 2020 results have built the foundation as we said back in January two.
Deliver on the commitment that we're confident priority as we detailed in this transformation program a.
Combined with our market lead portfolio in the markets. We're in a position to support sales growth margin expansion and meaningful free cash flow generation in 2023, and we look forward to sharing a lot more detail about the transformation program on our June 20, Investor Day in New York City. Thanks for your time today.
Yeah.
Now concluded. Thank you for attending today's presentation you may now disconnect.
Yeah.
Okay.
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