Q3 2023 Avanos Medical Inc Earnings Call

Good morning, and welcome to Albinos is third quarter 2023 earnings conference call. All participants will be most of them only mode should you need assistance. Please tingly conference specialist by pressing star.

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I would now like to turn the conference over to Scott.

<unk> senior.

Senior Vice President of strategy and corporate development. Please go ahead.

Good morning, everyone and thanks for joining us it's my pleasure to welcome you to <unk> 2023 third quarter earnings conference call presenting today will be Joe Woody C E O and Michael Greiner Senior Vice President CFO and Chief transformation Officer.

Joe will review, our third quarter expectations for the remainder of 2023 and provide an update on our transformation efforts.

Michael will share additional details regarding these topics will finish the call with Q&A Hey.

Hey presentation for today's call is available on the investors section of our website Albinos dotcom.

As a reminder, or comments today contains forward looking statements related to the company are 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 S. P C.

Additionally will be referring to adjusted results and outlook. The press releases information on these adjustments and reconciliations two 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 2023, we are pleased with our third quarter results, which align with the expectations outlined during our second quarter earnings call.

We anticipated that continued reductions supply chain disruptions in strong demand for our products last quarter, we indicated that our year in backwater would be around $3 million down from over $10 million at the beginning of the year and we are making steady progress toward achieving this target by the end of December.

Finale, we continue to make steady progress against each of our transformation priorities, which I will further comment on in a few minutes.

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, our sales from continuing operations are $171 million adjusted for the adverse effects of foreign exchange and the impact.

Of our earlier decision to discontinue revenue that didn't meet our return criteria.

And Additionally generated 30 cents of adjusted diluted earnings per share and almost $28 million of adjusted EBITDA from continuing operations during the quarter.

Are adjusted gross margin exceeded 58% in our SG&A as a percentage of revenues stood at approximately 42%.

Now I'll spend the next few minutes discussing our results at the product category level.

On a constant currency basis, our digestive health portfolio showed robust growth exceeding 10.5%.

This growth was bolstered by our <unk> product line, which delivered another strong quarter compared to the previous year as we continue to take advantage of the demand for <unk> conversions in North America.

Our legacy digestive health product line grew just shy of double digit globally, primarily behind the performance of our legacy Entrail feeding portfolio, coupled with the continued expansion of our U S core track standard of care offering.

Our ability to continue to deliver above market growth and leadership and our core digestive health markets will be supported by innovations that we plan to launch over the next 12 months.

Expansion in.

To high potential global markets <unk>.

Low growth product rationalization, and actionable M&A targets and large attractive adjacencies.

Turning sharp pain management and recovery portfolio. This quarter sales were down approximately 10% excluding the benefit of <unk> revenue the negative impact of foreign exchange in our previously announced decision to discontinue certain low growth low margin products.

We continue to see softness across the game ready in ancient product categories, both of which were down greater than 10% versus the prior year.

Our individual pain portfolio experienced an 8% decline compared to the previous year due to supply challenges given our queue for supply chain improvements, we anticipate our IBP portfolio to be at least flat versus prior year, excluding the positive impact of <unk> revenue.

Separately or surgical pain business is showing improvement after several consecutive quarters of decline, we're making progress in executing our new go to market strategy in structure.

In the current quarter, we delivered low single digit growth.

Excluding the previously described market withdrawals of certain low growth and low margin products, we anticipate that our fourth quarter revenue for our surgical pain business will be largely consistent with our third quarter results.

R. A J portfolio, the Dow versus prior year met our internal expectations as discussed during last quarter's call. We continue to experience volatility and are three and five shut offering largely due to the competitive pricing and dynamics of the market environment.

Nevertheless, we believe we have the right strategies in place to capitalize on our H opportunities over the long term, but continued to anticipate near term volatility and sequential quarterly declines.

Finally early performance of our newly acquired trading product line has been solid and we are excited about the U S market launch, which kicked off yesterday.

Now moving to an update on our 2023 transformational priorities in efforts as a reminder, 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 are stir.

Strategically and commercially optimizing our organization <unk>.

<unk>, forming our portfolio to focus on categories, where we have attractive margin profiles and the right to win.

Taking additional cost management measures to enhance operating profitability and continuing our path of efficient capital allocation to meaningfully improve our roissy.

We are very pleased with our execution against these priorities as evidenced by the.

Divesting or respiratory health business, enhancing our portfolio gross margin outlook.

Closing, the <unk> acquisition, which broadens our interventions paint portfolio was accretive growth and margin products continuing.

Continuing strong performance throughout our portfolio.

Progressing are paying go to market strategy as I, just noted and accelerating our transpiration cost savings, which we now expect to exceed $20 million in 2023.

As we have consistently communicated since I first presented our transformation plan at the J P. Morgan Conference in January this year would be a bit uneven given to the transformation priorities. The realignment of our commercial organization M&A execution and our other portfolio optimization activities.

We continue to execute solidly on each of these priorities, which serve as the building blocks for achieving the 2024 and the 2025 financial metrics, we outline and our June 2023 Investor day.

Unknown Attendee: Good morning and welcome to Avanos' third quarter 2023 earnings conference call. All participants will be in list and only mode. Should you need assistance, please signally conference specialist by pressing star, then zero on your telephone keypad.

Now I'll turn the call over to Michael with continues to lead these efforts as chief transformation officer and will provide further insights into our third quarter financial results.

Thanks, Joe from a continuing operations standpoint, net sales were $171 $3 million adjusted gross margin was $58, 2% and adjusted net income for the quarter totaled 14 million translating to 30 of adjusted diluted earnings per share.

Unknown Attendee: After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded.

Ah just an EBITDA for the quarter was almost $28 million favorable more than two and a half million versus prior year for.

Scott Galovan: I would now like to turn the conference over to Scott Galovan, Senior Vice President of Strategy and Corporate Development. Please go ahead. Good morning, everyone, and thanks for joining us.

For the quarter, we generated over $25 million, a free cash flow, despite continued headwinds and supply chain and our pain management and recovery portfolio.

Joseph Woody: It's my pleasure to welcome you to Avanos 2023 third quarter earnings conference call.

Subsequent to quarter, and we successfully close the sale of our our H business and used most of the proceeds to pay down a portion of a revolving credit facility.

Joseph Woody: Presenting today will be Joe Woody, CEO and Michael Greiner, Senior Vice President, CFO and Chief Transformation Officer. Joe will review our third quarter expectations for the remainder of 2023 and provide an update on our transformation efforts. Michael will share additional detail regarding these topics.

As a result, we currently have $105 million of cash on hand, and 169 million of outstanding debt, giving us a leverage ratio of less than half a turn.

Scott Galovan: We will finish the call with Q&A. A presentation for today's call is available on the Investor section of our website, Avanos.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. After 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 reconciliation to comparable gap financial measures.

As I just noted adjusted gross margin for the quarter was 58.2%, which is down compared to the previous quarter.

Client, however was mainly due to our efforts to reduce inventory, which negatively impacted fixed cost absorption coupled with ongoing inflationary pressure on our electronic components.

We anticipate gross margin will exceed 60% in the fourth quarter.

SG&A as a percentage of revenue was 41.6% marketing 140 basis point improvement versus the prior year and a notable sequential gain of 350 basis points looking.

Looking ahead, we anticipate SG&A as a percentage of revenue to range from approximately 40% to 41% for the fourth quarter from a continuing operation standpoint.

Joseph Woody: Now, I'll turn the call over to Joe. Thanks Scott.

This is part of our ongoing journey to further enhance our financial profile with continued improvements in 2024, ultimately leading to our 2025 goal of between 38, 39%.

Joseph Woody: Good morning, everyone, and thank you for joining us to review our operational and financial results for the third quarter of 2023. We are aligned with the expectations outlined during our second quarter earnings call. We anticipated the continued reduction supply chain disruptions and strong demand for our products. Last quarter, we indicated that our year-end back quarter would be around $3 million, down from over $10 million at the beginning of the year. And we are making steady progress toward achieving this target by the end of December.

These improvements are driven by reduced headcount third party cost savings and business process optimizations among others.

Adjusted diluted earnings per share were 31st.

Versus 24 cents, a year ago, when adjusted EBITDA margin of 16.2% compared to 14.6% in 2022.

Joseph Woody: Additionally, we continue to make steady progress against each of our transformation priorities, which I will further comment on in a few minutes. 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, our sales from continuing operations are $171 million, adjusted for the adverse effects of foreign exchange and the impact of our earlier decision to discontinue revenue that didn't meet our return criteria.

We are reaffirming our previously stated full year, continuing operations guidance, which was presented during our second quarter earnings call.

This guidance includes an adjusted diluted EPS range of one dollar five to $1.15 <unk>.

Gross margin greater than 59%.

And adjusted EBITDA margin of approximately 15%.

Taking into account the current year of <unk> of the approximately $17 million annualized impact, resulting from product portfolio rationalization.

Joseph Woody: In addition, we generated 30 cents of adjusted-to-delude earnings per share, and almost $28 million of adjusted EBITDA from continuing operations during the quarter. Our adjusted gross margin exceeded 58% and our SGNA as a percentage of revenues stood at approximately 42%.

The company anticipates comparable organic revenue for the year to be flat to low single digits.

As previously shared the cost management component of our transformation program is on track to generate growth savings between 45 and $55 million by 2025.

Joseph Woody: Now I'll spend the next few minutes discussing our results at the product category level. On a constant currency basis, our digestive health portfolio showed robust growth exceeding 10.5%. This growth was bolstered by our NEO-Med product line, which delivered another strong quarter compared to the previous year, as we continue to take advantage of the demand for infant conversions in North America. Our legacy digestive health product line grew just shy of double-digit globally, primarily behind the performance of our legacy, entral feeding portfolio, coupled with the continued expansion of our U.S, core track standard of care offering.

As Joe noted earlier, we remain committed to the execution of our transformation priorities and are maintaining a sharp focus on our business strategies for both are adjusted health and pain management and recovery businesses.

The successful implementation of these portfolio strategies in conjunction with our other transformation efforts.

One naval us to achieve mid single digit organic revenue growth.

Gross margins surpassing 60%.

Suggested EBITDA margins greater than 20%.

Joseph Woody: Our ability to continue to deliver above market growth and leadership in our core digestive health markets will be supported by innovations that we plan to launch over the next 12 months, expansion into high potential global markets, low growth product rationalization, and actionable emanate targets in large, attractive adjacencies.

Free cash flow generation of approximately $100 million in 2000 to 25.

Finally at.

Outlined that are Investor day in June, we anticipate generating rois see greater than 8% over this horizon.

With rois exceeding 6% by the end of this year.

Operator, please hold on the line for questions.

Joseph Woody: Turning to our Pay Management and Recovery Portfolio, this quarter sales were down approximately 10%, excluding the benefit of dearest revenue, the negative impact of foreign exchange and our previously announced decision to discontinue certain low growth, low margin products. We continue to see softness across the game ready and H.A, product categories, both of which were down greater than 10% versus the prior year. Our Interventional Payment Portfolio experience in 8% decline compared to the previous year through the supply challenges.

We will now begin the question and answer session.

To ask a question you May press Star then one on your telephone keypad, if you're using a speaker phone. Please pick up your handset before pressing the keys if.

If at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then too.

At this time, we will pause momentarily to assemble our roster.

Joseph Woody: Given our Q4 supply chain improvements, we anticipate our IBP portfolio to be at least flat versus prior year, excluding the positive impact of dearest revenue. Separately, our surgical pain business is showing improvement. After several consecutive quarters of decline, we're making progress in executing our new go-to-market strategy instruction. In the current quarter, we delivered low single-visit growth, excluding the previously described market withdrawals of certain low growth and low margin products. We anticipate that our fourth quarter revenue for our surgical pain business will be largely consistent with our third quarter results.

The first question comes from Rick Wise with Stifel.

Please go ahead.

Good morning, gentlemen, nice to see the corner.

Let me start with gross margins.

Maybe a job Michael you could expand on it.

Yes third quarter gross margins came in a bit soft and that we were anticipating Michael you you indicated that it would serve spit.

Specific deliberate efforts to reduce <unk> <unk> just talk that out.

Joseph Woody: Our H.A, portfolio, though down versus prior year, met our internal expectations. As discussed during last quarter's call, we continue to experience volatility in our three- and five-shot offering, largely due to the competitive pricing and dynamics of the market environment. Nevertheless, we believe we have the right strategies in place to capitalize on our H.A, opportunities over the long-term, but continue to anticipate near-term volatility and sequential quarterly declines.

A little bit are you through with that whole process what inventory.

Did you.

You were you're cutting back on and and and I think I heard you say that that your goal is to.

Did I hear you say it in the fourth quarter to to get to 60% I know your full your guide.

Joseph Woody: Finally, really performance of our newly acquired Trident product line has been solid, and we are excited about the U.S, market launch which ticked off yesterday.

Stolen that 59.5% to 60% ranch just expand on all that if you would thank you.

[noise], Yeah, so fourth quarter, we anticipate gross margin gross margins north of 60%.

Joseph Woody: Now I'm going to be to an update on our 2023 transformational priorities and efforts. As a reminder, 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 are strategically and commercially optimizing our organization, transforming our portfolio to focus on categories where we have attractive margin profiles and the right to win, taking additional cost management measures to enhance operating profitability and continuing our path of efficient capital allocation to meaningfully improve our ROIC.

And still affirming kind of 59, 5% plus range for the full year. So that's that's accurate read Rick and then in the third quarter.

We still had our age that we were working down. We we were also working out other parts of our portfolio, which is part of the longer term goal around 61%, 60% to 61% annualized gross margin profile that we've talked about an investor day. So.

There will still be some efforts to reduce inventory for sure. If you look at our balance sheet that is not in the inventory levels that we're happy with however, we will be doing that as we get out of the two plans that are currently are H plant moving to a smaller footprint and so the kind of 100 plus basis point impact we saw in the third quarter.

Joseph Woody: We are very pleased with our execution against these priorities as evidenced by the vesting our respiratory health business, enhancing our portfolio growth and margin outlook, closing the Deeros acquisition which broadens our interventional pain portfolio with accretive growth and margin products, continuing strong performance throughout our DH portfolio, progressing our pain-go-to-market strategy as I just noted, and accelerating our transformation cost savings which we now expect to exceed $20 million in 2023.

Better.

Is not necessarily be showing up in future quarters, but we are not in diamond with our inventory reduction efforts.

That longer term is going to support much better gross margins, because we will have producing the right inventory at the rate cadence.

Joseph Woody: As we have consistently communicated since I first presented our transformation plan at the JP Morgan Conference in January, this year would be a bit uneven given to the transformation priorities, the realignment of our commercial organization, M&A execution, and our other portfolio optimization activities. We continue to execute solidly on each of these priorities which serve as a building blocks for achieving the 2024 and the 2025 financial metrics we outlined in our June 2023 investor day.

Increasing returns from what's currently 1314 times per year to well north of two five times per year.

And that is all going to be obviously helpful. I'm working capital, but also helpful. All ultimately on gross margin. After you get through a couple of absorption negative absorption quarters.

Yeah and just for.

Second question.

Hey, Joe you were talking very quickly.

Michael Greiner: Now I'll turn the call over to Michael who continues to lead these efforts as chief transformation officer and will provide further insights into our third quarter financial results. Thanks Joe, for my continuing operations standpoint, net sales were $171.3 million. Adjusted growth margin was 58.2% and adjusted net income for the quarter total 14 million, translating to 30 cents of adjusted diluted earnings for share. Adjusted EBITDA for the quarter was almost 28 million, favorable more than 2.5 million versus prior year.

Through a couple of key aspects of that.

The the pain story and I just wanted to make sure.

I'm understanding really clearly.

How that business gets back on track and the.

Set up I feel like you've talked about.

Pain in the past.

Trying to mid single digit top line growth as we entered 24.

Maybe just take us through again, a little more detail the interfacial pain, which is.

<unk>, where are we there the surgical pain, you were saying, it's I I wasn't quite <unk>.

Michael Greiner: For the quarter, we generated over 25 million of free cash flow despite continued headwinds and supply chain and our pain management and recovery portfolio. Subsequent to quarter end, we successfully closed the sale of our RH business and used most of the proceeds to pay down a portion of our revolving credit facility. As a result, we currently have 105 million of cash on hand and 169 million about standing debt, giving us a leverage ratio of less than half a turn.

Yeah, I hear what you said about the low single digit growth just take us through again. Thank you Yep you got it Rick Uhm, we don't really see pain, continuing to worse and at this point, we're seeing improvement we expect a sequential improvement in.

In Q4, and we're still standing by him feel very.

Bullish about 2024 growth as you outline in the mid single digit.

Area, which is obviously, what we outlined in the New York investment thing in a couple of things are happening one that back orders are coming down and going to be down completely at the end of the queue for really there'll be gone.

Michael Greiner: As I just noted, adjusted growth margin for the quarter was 58.2%, which is down compared to the previous quarter. This decline, however, was mainly due to our efforts to reduce inventory, which negatively impacted fixed cost absorption, coupled with ongoing inflationary pressure on electronic components. We anticipate growth margin will exceed 60% in the fourth quarter. SDNAs of percentage of revenue was 41.6%, marking 840 basis point improvement versus the prior year and a notable sequential gain of 350 basis points.

We have <unk> in the business now as a catalyst and the example that you highlighted as well surgical paying two per cent growth in that category.

Does it mean that were automatically back to growth as in queue for we have sort of a tough comparators from year over year, but we are feeling strong about that business getting into growth same with international pain with the.

Supply chain behind that the addition, Ah bureaus, even in the fourth quarter to go all around the infield here, we're going to see growth, we feel like an in game ready maybe in the low to mid single digit arena.

Michael Greiner: Looking ahead, we anticipate SDNAs of percentage of revenue to range from approximately 40 to 41% for the fourth quarter from a continuing operations standpoint. This is part of our ongoing journey to further enhance our financial profile with continued improvements in 2024, ultimately leading to our 2025 goal of between 38 to 39%. These improvements are driven by reduced headcount, third-party cost savings, and business process optimizations among others.

Four Q for and so even with a J, which is still experiencing the CMS reimbursement changes in the pricing declines we.

We do believe we will achieve mid single digit growth.

And.

In 2024.

So the the other thing to think about and that is that we've got the new team in place the new structure in place in there about in their sixth month really so things are starting to click in.

Michael Greiner: Service. Adjusted diluted earnings for share were 30 cents versus 24 cents a year ago with adjusted even a margin of 16.2 percent compared to 14.6 percent in 2022. We are reaffirming our previously stated, fully year continuing operations guidance, which was presented during our second quarter earnings call. This guidance includes an adjusted diluted EPS range of $1.5 to $1.15 gross margin greater than 59 percent and adjusted even a margin of approximately 15 percent.

And we're feeling much much better about it and I'm not feeling great about this year, obviously, you remember too that.

You know a J was kind of high double digit dollars 1000 in millions of part of that and we had some product that we discontinued sort of in the $15 million ish.

Range as well, but didn't help us in that effort, but we feel like will be definitely back to growth in the growth that's needed frankly in 2024.

Contracted to.

Joe's point, social pain has a little bit of a tough cop in queue for however quarter over quarter Q3, Q for an absolute dollar basis, we expect surgical pain to grow.

Michael Greiner: Taking into account the current year effects of the approximately 17 million annualized impact resulting from product portfolio rationalization. The company anticipates comparable organic revenue for the year to be flat to low single digits. As previously shared, the cost management component of our transformation program is on track to generate gross savings between $45 and $55 million by 2025. As Joe noted earlier, we remain committed to the execution of our transformation priorities and are maintaining a sharp focus on our business strategies for both our digestive health and pain management and recovery businesses.

It's Jones noted game ready as had.

In the past some supply chain issues.

Then had a strategic kick up here, we do anticipate Q3 to Q4 four game ready to also have a nice growth.

As well so there there are pockets that had been holding us back.

That we feel like we're starting to see some rooms green shoots some of which we saw in Q3 will continue to see more in queue. For then so you're you're very opening question that should support the mid single digit growth that we've talked about before and the pain business overall and 24 and to your to your first question on gross margin and also with the addition of <unk> and his pain comes back.

Michael Greiner: The successful implementation of these portfolio strategies in conjunction with our other transformation efforts will enable us to achieve mid-single digit organic revenue growth. Gross margins surpassing 60 percent, adjusted even a margin greater than 20 percent and free cash flow generation of approximately a $100 million in 2025. Finally, as outlined at our investor day in June, we anticipate generating ROIC greater than 8 percent over this horizon with ROIC exceeding 6 percent by the end of this year.

That shouldn't be an improvement in some <unk> two gotcha.

Gotcha, and I I shouldn't do it but <unk> [laughter] <unk>.

Technology contribution in the third quarter, and then I'll stop thank you.

I know the full years, we get about $6 million, yeah, it's about two and a half million dollars in Q3.

Perfect. Thanks, so much for the peer to peer W. I remember that two and a half was just international we did not launch in the United States until today, So that's super exciting.

Unknown Attendee: Operator, please open the line for questions. We will now begin the question and answer session. To ask a question, you may press star than one on your telephone keypad. If you're using a speaker phone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star than two. At this time, we will pause momentarily to assemble our roster.

But the growth that they have had upon acquisition has been international only Canada and Europe Mosley so.

So we are launching in the us here.

Here very shortly here, which is super exciting.

I appreciate the color. Thanks again.

Thank you.

The next question comes from Kristen Stewart with C. L. King please.

Please go ahead.

Hi, Thanks for taking my question I was wondering if you could just expand a little bit more on the digestive health business and you might extent you think that's score three to sustainable and then I have a follow up.

Rick Wise: The first question comes from Rick Wise with Steeple. Please go ahead. Good morning, gentlemen. Nice to see the solid quarter. Let me start with gross margins. Just maybe Joe, Michael, you could expand on it. Yes, third quarter of gross margins came in a bit soft and then we were anticipating, Michael, you indicated that it was sort of specific deliberate efforts to reduce inventory. Make me, you can just talk that out a little bit.

Yeah the the.

Hold th business globally continues to deliver you know the market itself is sort of mid single digit growth.

But excluding even the <unk> performance digestive health delivered high single digit.

Growth in Q3, I think it was roughly around eight ish percent in that in that category driven by a lot of growth in the core Mickey business. So even though the market growth is 4% to 5% where conflict between the innovation.

Bolt on M&A that we do that we can deliver higher than the market growth, although it will taper off from the double digit sort.

Rick Wise: Are you through with that whole process? What inventory did you, were you cutting back on? I think I heard you say that your goal is to I hear you say in the fourth quarter to get to 60%, I know your full year guide is still in that 59.5 to 60% range. Just expand on all that if you would. Thank you. Yeah, so fourth quarter, we anticipate gross margins, gross margins north of 60% and still affirming that kind of 59.5% plus range for the full year.

Sort of mid single issue can be to hide single digit in any given quarters, a very stable business with a good runaway and a good M&A pipeline behind it and an international opportunity around that as well.

Perfect and my follow up from Michael you've given last quarter. Some preliminary numbers around 2024 I was just wondering if you still feel confident in the ability to change that.

Yes, yes. Thank you for that question Christine Yep Yep, those are targets of 24 and.

And we will we will further update those in and provide color J P Morgan conference and.

In January around 24.

Okay perfect. Thanks, that's it for me.

Rick Wise: So that's an accurate read brick. And then in the third quarter, you know, we still had our age that we were working down. We were also working out other parts of our portfolio, which is part of the longer term goal around 61% 60 to 61% annualized gross margin profile that we've talked about in the investor day. So there will still be some efforts to reduce inventory for sure. If you look at our balance sheet, that is not the inventory levels that we're happy with.

Thank you.

Again, if you have a question. Please press Star then one.

The next question comes from Daniel Stauter with G. M. P Securities. Please go ahead.

Yeah, great. Thanks, So I'm just as a follow up to that digestive health sustainable growth question.

Now a few good quarters of double digit growth here in a row.

And you'll get any noted driven by convergence of benefit. So we're just gonna ask you know how many more of these conversions are there and you know how sustainable is then how much more space for growth you have here, but it sounds like you know the the rest of the business is moving along great, but any commentary on just you know the the white space for continued conversions. Thank you Yep Daniel.

Rick Wise: However, we'll be doing that as we get out of the two plans that are currently our age plans moving to a smaller footprint. And so the kind of 100 plus basis point impact we saw in the third quarter is not can necessarily be showing up in future quarters, but we are not done with our inventory reduction efforts. That longer term is going to support much better gross margins because we will have producing the right inventory at the right cadence, increasing returns from what's currently 1.3, 1.4 times per year to well north of two and a half times per year.

We've said in the past and I really believe it to be true, we probably have about another half a year of of the <unk> conversion benefiting benefit rather <unk>, but again, we have any international opportunity. Their team is doing a great job in the base business growing high single digit we've got a number of bolton's and sort of.

Semi large I'll call them M&A deals for us that we think is along with that innovation as it goes into 24 and 25 that can really help us bolstered that so we feel that's a very consistent sustainable mid single digit yes, it might be high single digit the.

Rick Wise: And that is all going to be obviously helpful on working capital, but also helpful on, ultimately on gross margin after you get through a couple of absorption, you know, negative joe, you were talking very quickly through a couple of key aspects of the pain story. And I just wanted to make sure I'm understanding really clearly how that business gets back on track. And, you know, the setup, I feel like you've talked about pain in the past.

The second half of the year back and forth in any given quarter, but it is a very very.

Stable business for US, Yeah, and just being very specific with the numbers here to Christian and Dan Your questions. If you remember Q4 last year, we had for the first nine months of the year last year, we had.

Digested backlog building from a supply chain standpoint, we got a really big two four last year and digestive. So digestive for Q4. This year is not going to be anywhere near double digit growth, but that is not a product of.

Rick Wise: We're turning to mid single digit top line growth as we enter 24. Maybe just take us through, again, a little more detail, the individual pain, which is by chain, where are we there? The surgical pain. You were saying it's I wasn't quite sure what you said about the low single digit growth. Just take us through again. Thank you. Yep. You got it, Rick. We don't really see pain continuing to worsen at this point.

Any worsening.

Macro environment for digestive or anything like that this is a 78 per cent grauer. We showed at an investor day, we will continue to be that but just heads up that in Q4.

Gonna be a low single digit mid single digit grower in queue for because of the year because of the queue for we had last year, where we had $4 million to $5 million of revenue gained because we finally had backward resolved and we have such a big fourth quarter. So just mathematically be aware of that.

Rick Wise: We've seen improvement. We expect sequential improvement in Q4. And we're still standing by and feel very bullish about 2024 growth as you outlined in the mid single digit area, which is also what we outlined in the New York investment day. And a couple of things are happening. One, the back orders are coming down and going to be down completely at the end of Q4. Really will be gone. We have Deeros in the business now as a catalyst.

Great and then just one follow up on the operating expense side made some progress this quarter, especially in that J wine and thank you for the direction <unk> four Q, but as we look a little further out you know how should we think about.

We know you'll have some coughing, but how should we think about operating expenses you know go into the 2024 and more specifically.

Rick Wise: And the example that you highlighted as well, in surgical pain, 2% growth in that category. It doesn't mean that we're automatically back to growth as in Q4. We have sort of tough comparators from year over year. But we are feeling strong about that business getting into growth. Same with the interventional pain with the Supply Chain behind at the addition of bureaus. Even in the fourth quarter to go all around the infield here, we're gonna see growth we feel like in game ready, maybe in the low to mid-single digit arena for Q4.

<unk> <unk> in the U S. You know how much more investment might that take it you start to ramp that up, especially not is a different settings and your other Appalachian products. Thanks.

Yeah, I think that that's a great question I point to what I just shared in the script on our expectations for Q4 and two Christians question on our confidence in 2024, which we talked about it and the last earnings call I would point to those numbers as well we're very much on target.

<unk> wise with those numbers bolt through the cost savings transformation efforts, but also just a good discipline on where we spent whether that be a new launched product R&D. Other areas. So we still very much on target and are focused on the 38% to 39%.

Rick Wise: And so even with HA, which is still experiencing the CMS reimbursement changes and the pricing decline, we do believe we'll achieve mid-single digit growth in 2024. So the other thing to think about in that is that we've got the new team in place, the new structure in place, and they're about in their sixth month, really. So things are starting to clip in, and we're feeling much, much better about it. Not feeling great about this year.

Term SG&A as a percentage of revenue targets.

There's nothing indicating that we should come off of those.

Great. Thank you.

Rick Wise: Obviously, remember too that HA was kind of high-double-digit dollars, a million millions of part of that, and we had some product that we just continued sort of in the 15-millionish range as well that didn't help us in that effort, but we feel like we'll be definitely back to growth and the growth that's needed, frankly, in 2024. I'd like to add to Joe's point, social pain has a little bit of a tough comment to Q4.

This concludes our question and answer session I would like to turn the conference back over to Joh Woody for any closing remarks.

So thanks, everybody for your interest in the <unk> and then I think everybody understands our primary focus is on precise execution as we deliver the strategic plan that we outline as an investor day.

We definitely successfully executed product exits divested R. H acquired a viable technology and zeroes and approved an additional share repurchase program and delivered most of our financial objectives. We really believe these results are established the foundation to deliver our midterm financial commitments and we're confident that our transformation per.

Rick Wise: However, quarter over quarter, Q3, Q4 on an absolute dollar basis, we expect social pain to grow. As Joe noted, game ready has had in the past some supply chain issues, then had a strategic pick up here. We do anticipate Q3, Q4, for game ready to also have a nice growth as well. So there are pockets that have been holding us back that we feel like we're starting to see some green shoots, some of which we saw in Q3, we'll continue to see more in Q4 than to your very opening question.

<unk>, coupled with our market, leading portfolio and the attractive markets will position as well for sales growth margin expansion.

Meaningful free cash flow generation. So we appreciate it.

Again everyone's interest in all of US. Thank you. Thank you very much.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

Rick Wise: That should support the mid-single digit growth that we've talked about before in the pain business overall in 24. And to your first question, I'd gross margin also with the addition of Deiros, and as pain comes back, that should be an improvement in some mixed areas for us too. Gotcha, and I shouldn't do it, but I meant to add, the Deiros technology contribution to the third quarter, and then I'll stop. Thank you.

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Rick Wise: I know the full years, we've got about six million. Yeah, about two and a half million in Q3. Perfect, thanks so much for the period W. I remember that two and a half was just international, we did not launch in the United States until today. So that's super exciting, but the growth that they have had upon acquisition has been international only Canada and Europe mostly. So we are launching the U.S, here very shortly here, which is super exciting. Appreciate the color. Thanks again. Thank you.

Kristen Stewart: The next question comes from Kristen Stewart with CL King. Please go ahead. Hi, thanks for taking my question. I was wondering if you could just expand a little bit more on the digestive health business and to what extent you think the growth rate is sustainable, and then I have a follow-up. Yeah, the whole DH business globally continues to deliver. The market itself is sort of mid-single-digit growth, but excluding even the Neomed performance, the just-of-health delivered high-single-digit growth in Q3, I think it was roughly around eight-ish percent in that category driven by a lot of growth in the core Mickey business.

Kristen Stewart: So even though the market growth is 45%, we're confident between the innovation, both on M&A that we do that we can deliver higher than the market growth, although we'll taper off from the double-digit, you know, sort of mid-single-ish it could be to hide single-digit in a given quarter. So very stable business with a good runaway and a good M&A pipeline behind it and an international opportunity around that as well. Perfect.

Michael Greiner: And then my follow up from Michael, you've given last quarter some preliminary numbers around 2024. I'm just wondering if you still feel confident in the ability to achieve those. Yes, yes, thank you for that question, Kristen. Yep, those are our targets for 24. And we will we will further, you know, update those and and provide color to JPMorgan conference in January around 24. Okay, perfect. Thanks. That's it for me. Thank you. Again, if you have a question, please press star than one.

Daniel Stauder: The next question comes from Daniel Stauder with JMP securities. Please go ahead. Yeah, great. Thanks. So I'm just as a follow up to that digestive health sustainable growth question. You know, a few good quarters of double digit growth here in a row. And again, you know, they're driven by convergence and fit. So we just want to ask, you know, how many more of these conversions are there? And you know, how sustainable is that and how much more space for growth you have here. But it sounds like, you know, the rest of the business is moving along great, but any commentary on just, you know, the white space for continuing conversions.

Joseph Woody: Thank you. Yes, Daniel, what we've said in the past, and I really believe it to be true. We probably have about another half a year of the infant conversion benefiting benefit rather for me and bad. But again, we have an international opportunity there to do a great job. And the base business is growing high single digit. We've got a number of photons and sort of semi large. I'll call them M&A deals for us that we think along with that innovation as it goes into 24 and 25 that can really help us.

Joseph Woody: Also bolster that. So we feel that's a very consistent, sustainable, mid single digit. Yes, it might be high single digit, you know, in the second half of the year back and forth in a given quarter. But it's a very, very stable business for us. Yeah, and just being very specific with the numbers here to Kristen and Daniel questions, if you remember Q4 last year, we had for the first time months of the year last year, we had digestive backlog building from a supply chain standpoint, we had a really big Q4 last year and digestive.

Joseph Woody: So digestive for Q4 this year is not going to be anywhere near double digit growth, but that is not a product of, you know, any worsening macro environment for digestive or anything like that. This is a, you know, 70% grow or we showed it on a best or day, we'll continue to be that but just heads up and Q4. It's going to be, you know, a low single digit mid single digit grow or Q4 because of the year because of the Q4 we had last year, where we had four to five million. A revenue gain, because we finally had backwards solved and we had such a big fourth quarter, so just mathematically be aware of that.

Michael Greiner: Great, then this one follow up on the operating expense side. We made some progress. This quarter, especially in the S2NA line and thank you for the directional guidance for Q, but as we look forward further out, you know, how should we think about. We know you'll have some problems, but how should we think about operating expenses, you know, going to 2024 and more specifically. As you launch DROs in the US, you know, how much more investment might that take is you start to ramp that up, especially in a different setting than your other ablation product.

Michael Greiner: [inaudible] Thanks. Yeah, I think that's a great question. Do I point to what I just shared in the script on our expectations for Q4 and to Kristen's question on our confidence in 2024, which we talked about in the last earnings call, I would point to those numbers as well. We're very much on target, affects wise, with those numbers, both through the cost savings transformation efforts, but also just through good discipline on where we spent, whether that be a new launch product or in the other areas. So we still very much are on target and are focused on the 38 to 39 percent all term SDNAs are percentage of revenue targets and there's nothing indicating that we should come off of those.

Unknown Attendee: Great. Thank you.

Joseph Woody: This concludes our question and answer session. I would like to turn the conference back over to Go Woody for any closing remarks. So thanks everybody for your interest in the Avanos. And I think everybody understands our primary focus is on precise execution as we deliver the strategic plan that we outlined in our investor day. We definitely successfully executed product exits, divested RH, acquired valuable technology in Deiros and approved an additional share repurchase program and delivered most of our financial objectives.

Joseph Woody: We really believe these results have established the foundation to deliver on our midterm financial commitments and we're confident that our transformation priorities coupled with our market leading portfolio and the attractive markets will position us well for sales growth, margin expansion and meaningful free cash flow generations. So we appreciate again everyone's interested in Avanos. Thank you. Thank you very much.

Unknown Attendee: The conference has now concluded. Thank you for attending today's presentation.

Unknown Attendee: You may now disconnect.