Q1 2023 Avanos Medical Inc Earnings Call
Speaker 2: Good morning and welcome to the Avanos Q1 earnings conference call. All participants will be listening only mode. Should you need assistance, please signal a conference specialist by pressing star and zero.
Speaker 2: After the day's presentation there will be an opportunity to ask questions. To ask a question you may press star n1 on your telephone keepet. To withdraw your question please press star n2. Please note this event has been recorded.
Speaker 2: I would now like to turn the conference over to Scott Gallivan. Please go ahead.
Speaker 3: Good morning everyone and thanks for joining us. It's my pleasure to welcome you to Avanos 2023 first quarter earnings conference call. Presenting today will be Joe Woody, CEO , and Michael Greiner, Senior Vice President, CFO , and Chief Transformation Officer.
Speaker 3: Joe will review our first quarter and expectations for 2023, as well as provide an update on the current business environment. Then, Michael will discuss additional detail regarding our first quarter and 2023 planning assumptions. We will finish the call with Q&A. A presentation for today's call is available on the investors section of our website, avanos.com. As a reminder, our comments today contain forward-looking statements related to the company, our expected performance, and the
Speaker 3: current economic conditions, and our industry. No assurance can be given as to future financial results.
Speaker 3: Actual results could differ materially from those in the forward-looking statements.
Speaker 3: 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 describe inner filings with the SEC.
Speaker 3: Now, I'll turn the call over to Joe.
Speaker 3: Thanks, Scott. Good morning, everyone, and thank you for joining us to review our operational and financial results for the first quarter of 2023.
Speaker 4: Our first quarter results were generally in line with our expectations.
Speaker 4: As we noted in our year-end earnings call, our quarterly results for 2023 would likely be uneven given the timing uncertainties associated with our transformation plan.
Speaker 4: including the pace at which we rationalize our product portfolio, eliminate SKUs, or accelerate cost savings.
Speaker 4: The demand for our products remains strong and all those supply chain disruptions have improved with our backlog coming down $1 million during the quarter. We continue to have a sticky backlog that has limited our ability to fulfill our demand levels.
Speaker 4: but that as we got to the back half of the year, many of these headwinds would ease, and we believe that's still to be the case.
Speaker 4: As always, our primary focus is on getting patients back to the things that matter as we meet the needs of our customers.
Speaker 4: $192 million or negative 2.9% compared to last year.
Speaker 4: Excluding both the negative impact for foreign exchange and the $5 million impact related to our previously announced decision to walk away from revenue that was not meeting our returns criteria, organic growth was unfavorable 0.7% for the quarter.
Speaker 4: Separately for the quarter, we generated 27 cents of adjusted diluted earnings per share and greater than $26 million of adjusted EBITDA.
Speaker 4: while our adjusted gross margin was 56.4% and our SG&A as a percentage of revenue 41.6%.
Speaker 4: These results support the transformation priorities we laid out at the JP Morgan Conference in January .
Speaker 4: which we will expand upon at our investor day on June 20th.
Speaker 4: Now I'll spend the next few minutes discussing our results at the product category level.
Speaker 4: On a constant currency basis, our digestive health portfolio grew over 10%, altered by our Neomet business, which posted another strong quarter with over 36% growth versus the prior year as we continue to take advantage of the strong demand for NFIT conversions in North America.
Speaker 4: Our legacy infra feeding product line maintained its global mid single digit growth behind the continued expansion of our US quartet standard of care offering.
Speaker 4: Our respiratory business declined by a little over 6% with both our closed suction catheters
Speaker 4: and oral care solutions facing tough comps due to the Omicron spike in early 2022.
Speaker 4: We anticipate that the respiratory health business will grow 2% for the full year of 2003
Speaker 4: with normal seasonal ordering patterns returning during the second half of the year.
Speaker 4: In total, our chronic care business grew greater than 5% in the first quarter, excluding the negative impact of foreign exchange and low-growth, low-margin product care categories we are no longer selling.?
Speaker 4: Turning to the pain portfolio, sales were down 10% for the quarter with soft results across our surgical pain, game ready and 5 shot HA product categories.
Speaker 4: each of which were down at least 10% versus the prior year.
Speaker 4: Our Interventional Pain Products category is grew by 1%.
Speaker 4: As noted on the year-end earnings call, we continue to experience supply headwinds within our surgical pain category.
Speaker 4: We expect these headwinds to remain a factor throughout the first part of 2023. Alleviating these supply chain challenges is critical as macro dynamic factors.
Speaker 4: impacting the use of our surgical pain products during the past two years, like hospital staff shortages and overall reduction of electric procedures, have subsided and we are working diligently to take advantage of this improved landscape.
Speaker 4: Separately, our HA4 folio experience to weaker than expected for a quarter, however this office was primarily concentrated in our five-shot or gen visc product.
Speaker 4: The five-shot market has specific pricing and competitive challenges that are not as prevalent within the three-shot market.
Speaker 4: Tribusque, our three-shot offering, remains in line with our long-term orthopedic call point strategy and is performing as anticipated.
Speaker 4: to be a factor throughout the year as we face strong comparables from last year and continue to experience the related swings from entering the ASP reporting environment in Q3 2022.
Speaker 4: Despite the volatility, we believe we have the right strategies in place to capitalize on the opportunities present in the HA market, including continuing to provide best-in-class service and support, expanding market access through both our direct patient and our specialty pharmacy business.
Speaker 4: important characteristics for the orthopedic market in particular.
Speaker 4: Now moving to an update on our 2023 Priorities and Transformation efforts.
Speaker 4: We have four key priorities for the next three years that will optimize our go-to-market opportunities and meaningfully enhance our financial profile. These priorities include strategically and commercially optimizing our organization.
Speaker 4: to meaningfully improve our ROIC.
Speaker 4: In the first quarter, we executed well against his priorities as Kirk Holbrook announced his new sales and marketing organization, among other strategic initiatives.
Speaker 4: Our margin profile was enhanced versus prior year first quarter. We executed against our portfolio optimization strategy and remained on track to deliver at least $10 million in current year operating expense savings. Additionally, we continue to review our capital allocation priorities including strategic M&A and opportunistic share repurchases.
Speaker 4: to convene 101 Park Avenue location in New York City.
Speaker 4: Now I'll turn the call over to Michael who will continue to lead these efforts in his expanded role as Chief Transformation Officer and will further discuss our first quarter financial results.
Speaker 3: Thanks Joe. Before diving deeper into these transformation efforts, I'll provide additional color to our first quarter results. Total reported sales for the first quarter was $191.7 million, a decrease of 2.9% compared to last year.
Speaker 3: Adjusted EBITDA for the quarter was greater than 26 million compared to 23 million a year ago with EBITDA margin improving 200 basis points versus last year.
Speaker 3: Adjust the net income for the quarter total almost 13 million compared to 12 million a year ago Translating to 27 cents of adjusted diluted earnings for share versus 25 cents a year ago
Speaker 5: We ended the quarter with 96 million to pass on hand and a leverage ratio of 0.8.
Speaker 5: As Joe already noted, we delivered on both our gross margin and S&A as a percentage of our revenue targets.
Speaker 5: 50 basis point improvement versus the prior year.
Speaker 5: margin to be slightly improved versus the first quarter.
Speaker 5: to streamline the organization and reduce our external spam to profile.
Speaker 5: As with gross margin, we anticipate our sDNA levels will be largely similar during the second quarter versus the first quarter.
Speaker 5: with material improvement expected in the second half of the year as our cost management transformation efforts begin to accelerate.
Speaker 5: As we previously shared, 2023 will be a transition year, given our product portfolio rationalization and cost management initiatives. And the first quarter was an example of this unevenness with slightly lower revenue than anticipated across some of our product categories, while profitability measures were either in line.
Speaker 5: or exceeded our expectations.
Speaker 5: In summary, we are pleased with our first quarter execution in total and remain confident in our ability to meet our previously announced guidance for the year of earning between $1.60 and $1.80 of adjusted diluted earnings per share while delivering at least $60 million in free cash flow, excluding the one-time cash costs associated with the restructuring efforts.
Speaker 5: I expected a total of approximately $25 million.
Speaker 5: Finally, including the current year impact of the approximately 35 million annualized impact of product portfolio rationalization,
Speaker 5: The company anticipates organic revenue growth to be low single-digits.
Speaker 5: Now, turning to our transformation priorities, which are designed to shift their product portfolio over time into a higher growth portfolio, leveraging our core stone product families in digestive health, as well as our orthopedic pain and recovery focused products.
Speaker 5: In addition, these priorities will right size our cost structure and enhance our operating profitability, allowing us to generate significantly greater annual free cash flow over the next three years.
Speaker 5: while meaningfully improving ROIC over this transformation horizon.
Speaker 5: As already shared, we expect to realize approximately $10 million of savings in 2023.
Speaker 5: while anticipating $45 to $55 million of gross cost savings by 2025, most of which will be achieved in 2024.
Speaker 5: to embark on our transformation journey and are confident we will improve on each of our financial metrics as 2023 progresses.
Speaker 5: With a slow start for the first quarter, followed by acceleration in the back half of the year.
Speaker 5: Similar pacing to what we experienced in 2022. Operator, please open the line for questions.
Speaker 2: We will now begin the question and answer session. To ask a question, you may press star and one on your telephone keyboard. If you are using a speaker phone, please pick up your handset before pressing the keys.
Speaker 2: To withdraw your question please press start and 2. At this time we will pause momentarily to assemble our roster.
Speaker 2: The first question comes from David Turclay from JMP Securities. Please go ahead.
Speaker 6: Yeah, great. This is actually Danny on for Dave. So just a quick one on gross margin.
Speaker 6: It was a nice increase during the quarter and you noted some of that benefited from manufacturing efficiencies and improvement supply chain, but I guess our question really is more around looking ahead how should we think about benefits to gross margin for the full year more specifically how much of the improvement should we expect from
Speaker 6: the exiting of lower margin product lines and other portfolio rationalization efforts versus continued improvement in the supply chain that you've seen. Thanks.
Speaker 5: Yeah, thanks, Dan, for the question. We still anticipate, as we said previously, we will have 100 basis point improvement on our operating margin for the full year. And given the uncertainties of the moving pieces, we weren't sure if that was going to come from gross margin.
Speaker 5: or from our SDA as a percentage of revenue or total op-ed spend. But I do think as we move through the year, the 56.4 that we started with in the first quarter, which we were very pleased with the overall execution that you pointed out, should land higher for the full year. Great, thanks. And this one.
Speaker 5: Yeah, so the first quarter for free cash flow is definitely going to be the lowest. It was going to be what we ended up with for the quarter. It was going to be dependent upon how much execution we had on the transformation and cost savings plan. So we spent, as you'll see in the one time cost in a non-gap reconciliation, we spent about 7 and a half million in cash.
Speaker 5: in the first quarter for those activities. And of course revenue was a little bit softer than we anticipated. So the combination of those two had free cash flow a little bit lower than we anticipated in the first quarter. That will be our lowest free cash flow quarter for the year, and putting aside some tax payments that we may have.
Speaker 5: So, we should see an improvement in free cash flow through the rest of the year.
Speaker 2: Great, thank you very much. The next question comes from Rick Weiss from Stifle. Please go ahead.
Speaker 7: Good morning, Joe. Just to start us off, so far this earnings season, we've heard a lot from much larger companies, obviously, talking about just in general...
Speaker 7: the macro environment still challenging, but less of a headwind, supply chain stabilizing, stabilized, etc, etc. It'd be really interesting to hear your perspectives on how that, you know, is that really happening in the next Leninener7 segment, but I'd love to hear your thoughts with climate change
Speaker 7: in the world of Avanos, how did they trend in the quarter? What are you seeing so far in second quarter and sort of how does this all wrap into your outlook for the year?
Speaker 7: in the world of Avnos, how did they trend in the quarter? What are you seeing so far in second quarter and sort of how does this all wrap into your outlook for the year? Thanks.
Speaker 4: have the broader portfolio to your point, but they did inside of that, inside of those comments say that they still, you know, made it clear that there were some issues. So for us specifically, you know, on cue and some catheter availability is hurting us there generally. We really had it across the board though even in our Cooley product line.
Speaker 4: our AMBIT product line somewhat in digestive health, although we did move a lot of that through in the quarter. It's definitely going to improve, but still be with us in Q2. We do agree that the second half is likely going to be much, much better, given that these things are going to disappear for us. But again, for us, we probably had four to five million more that we could have pushed through if we were all the way clear on our backlog.
Speaker 5: I think the other thing too Rick to add to that is our confidence in reiterating our previously announced guidance is high because we do think the storm clouds are clearing. Some of the things that we missed this quarter were very specific to us, our raw materials, our input costs.
Speaker 4: but we think we have visibility to those things, clearing and giving us confidence to being able to still achieve our full year guidance outcomes. And if you do think, you know, you've been following us for quite some time and we do have a portfolio that unfortunately starts, as Michael has outlined, slow, with Q1 being the weakest, and even if you think about last year, we sort of progressed as each quarter went and then a very large third and fourth quarter.
Speaker 7: Yeah, no, that makes sense. Thanks, Jeeboz. And Michael, maybe this is a question for you. On the interventional pain side, if I'm doing the back of the envelope math correctly, I may not be, please don't hesitate to correct me. It looks like what I would call the base X-orthogen, RX pain management business. It was.
Speaker 7: down sequentially 25% versus the fourth quarter. I know that seasonal sequential, you know, figure, whatever, down five or 10%, is that the backlog, is that component, is there something else going on? Or maybe she lives it off the chart, but that goes back to sheep, if that's rock integrating within this context.
Speaker 7: Maybe I missed your language. Is pain more uniquely affected here or you're seeing less of a recovery? Any extra color would be great.
Speaker 5: and access to material issues there. But in particular, Game Ready had a very strong fourth quarter and a less than optimal first quarter. So a big part of the math that you're doing is Game Ready attributed. In addition, standard RF was also down. That was more attributable to...
Speaker 5: to the availability of product. Coolleaf was by and large a push 4Q to 1Q. So primarily our RF and our game ready are the pain points, no pun intended, for the weak 4Q to 1Q transition and interventional pain.
Speaker 7: Gotcha. And it just lasts for me. Joe, I hate to keep being one, but what are what are we going to do? Asking the M&A question. But I know that you had hoped to have at least one transaction announced before the upcoming June investor day. If I remember your words correctly.
Speaker 4: or a month or so away from it. Any additional color of your Mayfront and just help us bring us up to the end of the year. Yes, we do feel like we're going to be able to talk about an additional bolt-on for the orthopedic pain business, something that would help us in the Amritory Search Go Center.
Speaker 4: strategic area. It's also possible that we'll be able to say some things more explicitly about the portfolio that would be a significant change for us. So we feel pretty good about that. You know, a lot of times we hit it and it's hard to predict these things, but we're working very hard to make that happen because I think that will be very key for the investor day.
Speaker 4: that we'll be able to say some things more explicitly about the portfolio that would be a significant change for us. So we feel pretty good about that. You know, a lot of times we hit it and it's hard to predict these things, but we're working very hard to make that happen because I think that will be very key for the investor day. Thanks again.
Speaker 2: As a reminder, if you have a question, please press star then 1. I don't think there is anybody else queued up operator.
Speaker 5: Yes, sir. There are no more... Sorry, hold on. Matt just got in. Let's let Matt ask his question.
Speaker 6: Sorry, I think I had an issue getting into the queue at first. Just wanted to ask on guidance on thinking about the cadence sequentially. I think you guys kind of hinted at a little bit of a softer first quarter relative to the low single digit organic guide. Just wanted to think about the rest of the year, how it plays out. If you or someone that is interested inard for which I didn't. But totally, you guys have a look at what you guys think.
Speaker 6: I know you said that the second half would likely be stronger, but also just maybe breaking out pain management versus chronic care and what you'd expect to see as a base case for the rest of the year.
Speaker 5: Yeah, so great question. So Q2 is going to look largely similar, give or take, to Q1. There will be some pushes and takes there, but largely similar to Q1, as we said, I think gross margin will be improved given that we've got some programs that are picking up momentum. And then that calf deer will be very strong, both on the gross margin.
Speaker 5: and the op-ag side. What we'll do in investor day and 45 days is give a little more specific layout. We'll kind of free talk about Q2.
Speaker 5: given that it will be June 20th, and then we'll lay out the back half of the year with more detail, inclusive of some of these transactions we think we'll be able to get over the finish line to talk about June 20th.
Speaker 6: All right, great. And then just a quick follow-up. I'm not sure if you said in the prepared remarks if there was any change around the orthogon expectations for the rest of the year. Does Guidance still contemplate relatively flat full-year sales versus last year, or has there been any type of change? Thanks very much.
Speaker 4: No, there's been some change there. We talked about really a combination, if you will, of 10% decline in orthogen in the HE part, primarily in the five-shot area, as well as the game ready and even the acute pain sector and the acute pain on cue being tied to supply.
Speaker 4: away for a bit, they're chasing the best reimbursement, and they come back, but it's really gonna all kind of even itself out by the end of the year.
Speaker 5: So just to clarify quickly, are you still contemplating flat or through Gen Sam's health and collapse here? No, we're not contemplating flat. All right, try this, try this, will be flat to better versus last year or meaningfully better to last year. So just to clarify, are you still contemplating flat or through Gen Sam's health and collapse?
Speaker 5: five shots will be down versus last year. We aren't confident yet, we have a sense of exactly what that makes it look like, but in total it will be down versus last year.
Speaker 6: Okay, I guess like lastly for me, would you point to any product areas as a potential offset to guidance given like low single digit organic was unchanged and it seems like OrthoGen might be a little bit lower.
Speaker 5: Yeah, digestive in particular. We also believe there's upside in acute pain as we get visibility to the supply chain issues. And then international as well. We think we have some pockets of strength internationally that have not been fully accounted for. increase or decline in delivered lingual Kissinger to slow dramatically higher outcomes as you engage macropl CT teams still a good. The industry has moved to the Fran seventies to release a more robust population.
Speaker 5: Digestive in particular, we also believe there's upside in acute pain as we get visibility to the supply chain issues. And then international as well, we think we have some pockets of strength internationally that have not been fully accounted for. All right, thanks very much for taking the questions. Appreciate it.
Speaker 8: Thank you.
Speaker 2: The next question comes from Drew Ranieri from Wilkins Stanley. Please go ahead.
Speaker 9: Hi, Joe Michael. Thanks for taking the questions. Just another on orthogen for a moment, but I hear you on the five injection and three injection market, but just curious, maybe on the five injection, is the decline at all more of just a mixed shift into the three injection? Can you give a little bit more color there? And then I had a follow-up. Thanks. Yeah, yeah, I think there's really two things. I mean one is some...
Speaker 4: customers clearly with the reduced reimbursement in that segment, which is a lot of it is non-orthopedic segment, it's more of a pain center segment, are leaving the business. The other component of that is that we had a competitor that has special code in the first quarter, I believe that's going away.
Speaker 4: in Q2 as they start reporting too. So you have a number of customers that kind of moved over for a bit to take advantage. We benefited from that obviously in Q4, but we didn't in Q1. That all settles out and our intention is to maintain the base that we'll have of five, but we're growing and stabilizing in the three. And we've actually...
Speaker 4: have another focus that's inclusive of additional 1099s, new structure, a new VP of sales coming in to focus on the orthopedic space, not only in HA but in the Ambulance Surgical Center with some of our other products and then the bolt-on that we alluded to in the earlier comments.
Speaker 9: Got it. Thank you. And then just another follow up to one of Rick's questions on M&A, but kind of in response to his question, you mentioned there could be more of a portfolio move. It's kind of like more of a divestiture than anything. So are we kind of hearing you right into analyst day that that could be something that's still on the table? And should we think about that as a multiple of what you're doing already?
Speaker 2: Gentlemen, there are no more questions at this time.
Speaker 2: Gentlemen, there are no more questions at this time.
Speaker 4: Again, I want to thank everybody for the continued interest in Avanos. We feel the demand and fundamentals of our products remain strong. We are committed to obviously creating meaningful shareholder value through thoughtful strategic capital allocation.
Speaker 4: We believe the 22 results have built the necessary foundation to deliver the commitment that we have and are confident the priorities we've detailed in the transformation program combined with our market leading portfolio and attractive markets. This all positions us for growth, margin expansion, and cash flow as we've outlined and as Michael has talked about in the transformation process. We do look forward to seeing everybody at the June 20th investor day to be held at the convene.