Q4 2023 Avanos Medical Inc Earnings Call

Good day.

Operator: Good day, and welcome to the Avanos fourth quarter and full year 2023 earnings conference call. All participants will be in listen-only mode.

So the avenova fourth quarter or full year. When I was wondering three earnings conference call.

Speaker Change: All participants will be in listen only mode.

Especially in the system.

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Operator: To withdraw your question, please press star 1-2. Please note, today's event is being recorded. I'd now like to turn the conference over to Scott Galloway, Senior Vice President, Strategy and Corporate Development. Please go ahead.

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Speaker Change: I'd now like to turn the conference over to Scott Galloway Senior.

Scott Galloway: Senior Vice President strategy and corporate development. Please go ahead.

Scott Galloway: Good morning everyone, and thanks for joining us. It's my pleasure to welcome you to Avanos' 2023 fourth quarter and full year earnings conference call. Presenting today will be Joe Woody, CEO, and Michael Greiner. Joel will review our fourth quarter and full year results, the current business environment, as well as provide an update on our transformation efforts. Michael will share additional detail regarding these topics and our 2024 planning assumptions. We'll finish the call with Q&A.

Scott Galloway: Everyone and thanks for joining us.

Scott Galloway: Pleasure to welcome you to <unk> 2023 fourth quarter and full year earnings conference call.

Scott Galloway: Presenting today will be Joe Woody CEO, and Michael Greiner, Senior Vice President CFO and Chief transformation Officer.

Scott Galloway: Joe will review, our fourth quarter and full year results. The current business environment as well as provide an update on our transformation efforts Michael will share additional details regarding these topics and our 'twenty 'twenty four planning assumptions, we will finish the call with Q&A.

A presentation for today's call is available on the investors section of our website <unk> com.

Scott Galloway: 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.

Scott Galloway: As a reminder, our comments today contain forward looking statements related to the company.

Scott Galloway: Their performance current economic conditions and our industry.

Scott Galloway: No assurance can be given as to future financial results actual results could differ materially from those in the forward looking statements.

Scott Galloway: For more information about forward-looking statements and the risk factors that could influence future results, please see today's press release and the risk factors described in our filings with the SEC. Additionally, we'll be referring to adjusted results and outlook. The press release has information on these adjustments and reconciliations to comparable gap financial measures. Now, I'll turn the call over to Joe.

Scott Galloway: More information about forward looking statements and the risk factors that could influence future results. Please see today's press release the risk factors described in our filings with the SEC.

Scott Galloway: 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.

Joe Woody: 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 2023. Net sales for the fourth quarter were $173.3 million, impacted by the company's hyaluronic acid pain relief injection products as a result of continued pricing pressure due to the Medicare reimbursement changes and lower than anticipated sales across the company's North America Digestive Health products due to a major distributor's ordering pattern change. Net sales negatively impacted our margin profile; however, we were able to mitigate some of these top-line challenges through our transformation initiatives and deliver $1.03 of adjusted EPS, with adjusted gross margins at 59.1% and SG&A as a percentage of revenue at 43.3% for the full year.

Joe Woody: 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 2023.

Joe Woody: Net sales for the fourth quarter were $173 3 million in.

Joe Woody: Impacted by the companies like acid pain relief injection products as a result of continued pricing pressure due to the Medicare reimbursement changes and lower than anticipated sales across the company's North America digestive health products due to a major distributors ordering pattern change.

Joe Woody: Net sales negatively impacted our margin profile. However, we were able to mitigate some of these top line challenges through our transformation initiatives and deliver $1 three of adjusted EPS with.

Joe Woody: With adjusted gross margins at 59, 1% and SG&A as a percentage of revenue of 43, 3% for the full year.

Joe Woody: For the fourth quarter, we delivered adjusted gross margins of 58.6%, and SG&A was a percentage of revenue of 38.9%. Separately, we remained focused on reducing our back order and ended the year with less than $2 million in back orders, and we have continued to reduce this through our first two months of 2024. This is a significant improvement over last year's backward levels of over $10 million, serving as tangible proof that our supply chain organization is executing effectively on its transformation initiative. As we have consistently communicated since I first presented our transformation plan at the January 2023 J.P. Morgan Conference, 2023 would be a bit uneven given the transformation priorities and the realignment of our commercial organization. M&A Execution and our other portfolio optimization activities. But we are continuing to make steady progress against each of our transformation priorities.

Joe Woody: For the fourth quarter, we delivered adjusted gross margins of 58, 6% and SG&A as a percentage of revenue of 38, 9%.

Joe Woody: Separately, we remain focused on reducing our back order and ended the year with less than $2 million back order and we have continued to reduce this through our first two months of 2024.

Joe Woody: Is a significant improvement over last year's backward levels of over $10 million, serving as tangible proof that our supply chain organization is executing effectively on its transformation initiatives.

Joe Woody: As we have consistently communicated since I first presented our transformation plan at the January 2023, J P. Morgan Conference 2023 would be a bit uneven given the transformation priorities the realignment of our commercial organization.

Joe Woody: M&A execution and our other portfolio optimization activities.

Joe Woody: But we are continuing to make steady progress against each of our transformation priorities and as always our primary focus is on getting patients back to the things that matter as we meet the needs of our customers.

Joe Woody: And, as always, our primary focus is on getting patients back to the things that matter as we meet the needs of our customers. As I just noted, our sales from continuing operations during the quarter were approximately $173 million, adjusted for the effects of foreign exchange and the impact of our strategic decision to discontinue revenue streams that did not meet return criteria specified by our Portfolio Transformation Priority. Organic sales were down 4.5% compared to a year ago.

Joe Woody: And as I just noted our sales from continuing operations during the quarter were approximately $173 million.

Joe Woody: Adjusted for the effects of foreign exchange and the impact of our strategic decision to discontinue revenue streams that did not meet return criteria specified by our portfolio transformation priority organic sales were down four 5% compared to a year ago.

Joe Woody: For the quarter, we generated $0.36 of adjusted diluted earnings per share and about $32 million of adjusted EBITDA from continuing operations. For the year, our sales from continuing operations were above $673 million, adjusted for the effects of foreign exchange and, as I mentioned, above the impact of our earlier strategic decision to discontinue revenue streams that did not meet our return criteria. However, organic sales were down 0.3% compared to a year ago.

Joe Woody: For the quarter, we generated 36 cents of adjusted diluted earnings per share of $32 million of adjusted EBITDA from continuing operations.

Joe Woody: For the year, our sales from continuing operations were above $673 million adjusted for the effects of foreign exchange and as I mentioned above the impact of our earlier strategic decision to discontinue revenue streams that did not meet our return criteria organic sales were down 3% compared to a year ago.

Joe Woody: We delivered adjusted diluted earnings per share of $1 <unk>.

Joe Woody: We delivered adjusted diluted earnings per share of $1.03 and adjusted EBITDA of $99 million. Although we are disappointed with our fourth quarter sales results, we were pleased with our overall execution, which was driven throughout the year by our three-year transformation priorities. This performance gives us confidence in our ability to be within the range of the 2025 financial targets we established last year during our investor day. Now, I'll spend the next few minutes discussing our results at the product category level. As we mentioned during our third quarter earnings call, we anticipated that our digestive health business would have a tough comparison in the fourth quarter given the release of back-order products in the fourth quarter of last year. Additionally, as we have noted, we experienced distributor inventory rebalancing in the fourth quarter. As a result, our digestive health portfolio grew 3% in the fourth quarter on a constant currency basis below our full-year trending.

Joe Woody: And adjusted EBITDA of $99 million.

Although we are disappointed with our fourth quarter sales results. We were pleased with our overall execution, which was driven throughout the year by our three year transformation priorities. This.

Joe Woody: This performance gives us confidence in our ability to be within the range of the 2025 financial targets, we established last year during our Investor day.

Joe Woody: Now I'll spend the next few minutes discussing our results at the product category level as we mentioned during our third quarter earnings call. We anticipated that our digestive health business would have a tough comparison in the fourth quarter given the release of backwater products in the fourth quarter of last year.

Joe Woody: Additionally, as we have noted we experienced distributor inventory rebalancing in the fourth quarter as a result, our digestive health portfolio grew 3% in the fourth quarter on a constant currency basis below our full year trending.

Joe Woody: Our core portfolio continues to over perform globally growing double digits compared to the previous year driven by the sustained expansion of our U S. Core track standard of care offering separately, our knee product line delivered another robust quarter growing mid single digits sequentially, but faced a tough comparison as the previous year benefited from the noted backwater.

Joe Woody: Our CORPAC portfolio continues to overperform globally, growing double digits compared to the previous year, driven by the sustained expansion of our U.S. CORTRAC standard of care offering. Separately, our Neomet product line delivered another robust quarter, growing mid-single digits sequentially, but faced a tough comparison as the previous year benefited from the noted backwater relief and was flat year over year. Despite lower-than-anticipated sales in our fourth quarter, we are extremely pleased with the full-year performance of our Digestive Health portfolio, growing double-digits globally, excluding the slight negative impact of current, We continue to anticipate mid- to high-single-digit growth organically for our digestive health portfolio, and our ability to deliver above-market growth will be supported by innovations we plan to launch during the back half of the year, expansion into additional global markets with attractive growth prospects, and low-growth product rationalization.

Joe Woody: Relief and was flat year over year.

Joe Woody: Despite lower than anticipated sales in our fourth quarter. We are extremely pleased with our full year performance of our digestive health portfolio growing double digits globally, excluding the slight negative impact of currency. We continue to anticipate mid to high single digit growth organically for our digestive health portfolio and our ability to deliver above market growth will be supported.

Joe Woody: By innovations we plan to launch during the back half of the year expansion into additional global markets with attractive growth prospects and low growth product rationalization.

Joe Woody: Now turning to our pain management and recovery portfolio sales for this quarter were down approximately 12% excluding the benefit of duress related sales the impact of foreign exchange and our previously announced strategic decision to discontinue certain low growth low margin products.

Joe Woody: Now, turning to our pain management and recovery portfolio, sales for this quarter were down approximately 12 percent, excluding the benefit of DRS-related sales, the impact of foreign exchange, and our previously announced strategic decision to discontinue certain low-growth, low-margin products. As previously communicated, our HA portfolio was the main contributor to the decline, primarily as a result of continued pricing pressure due to Medicare reimbursement changes.

Joe Woody: Previously communicated our AG portfolio was the main contributor to the decline primarily as a result of continued pricing pressure due to Medicare reimbursement changes, we anticipated and communicated near term volatility along with the sequential and year over year quarterly call quarterly declines however, the impact on the fourth quarter was greater than anticipated that being.

Joe Woody: We anticipated and communicated near-term volatility, along with the sequential and year-over-year quarterly declines. However, the impact of the fourth quarter was greater than anticipated. That being said, we believe we have the right strategies in place to capitalize on our HA opportunities over the long term, some benefits of which will be seen in the current year, meaningfully slowing the pace of decline in that portfolio. Our overall surgical pain business was flat sequentially, with our combined on-cue-ambit portfolio growing 13% versus the third quarter.

Joe Woody: As said, we believe we have the right strategies in place to capitalize on our AGM for opportunities over the long term some benefits of which will be seen in the current year meaningfully slowing the pace of decline in that portfolio. Our overall surgical pain business was flat sequentially with our combined <unk> and portfolio growing 13% versus the third quarter.

Joe Woody: <unk>.

Joe Woody: These are early signs that our new go-to-market strategy and structure for this part of the portfolio support our low single-digit growth expectations for 2024. Similarly, our IVP portfolio shows sequential gains posting 10% growth versus the third quarter, excluding the positive impact of DUROS revenue as supply constraints alleviated in the latter part of the fourth quarter. We are encouraged by the double-digit growth seen in IVP generator sales in the U.S. this quarter versus the prior year, driven by our renewed ambulatory surgical center strategy and fully deployed sales structure. Our game-ready portfolio performed very strongly in North America, achieving double-digit growth compared to the prior year, boosted by capital sales. The favorable performance in North America was offset by a decline in international sales due to transient registration delays.

Joe Woody: These are early signs that our new go to market strategy and structure, who is part of the portfolio supports our low single digit growth expectations for 2024.

Joe Woody: Similarly, our IBP portfolio showed sequential gains posting 10% growth versus the third quarter, excluding the positive impact of <unk> revenue as supply constraints alleviated in the latter part of the fourth quarter. We are encouraged by the double digit growth seen in IBP generator sales in the U S. This quarter versus the prior year driven by a renewed.

Joe Woody: Ambulatory surgical center strategy and fully deployed sales structure.

Our game ready portfolio performed very strongly in North America, achieving double digit growth compared to the prior year boosted by capital sales with favorable performance in North America was offset by a decline in international sales due to transient registration delays.

Joe Woody: Finally, our newly acquired Trident product line has produced results in line with our expectations. However, upside opportunities were limited in the fourth quarter as we scaled up manufacturing capacity in our Toronto facility to support our growth objectives, including capitalizing on our U.S. market launch, which kicked off in November of last year. For the full year, sales of our pain management and recovery portfolio were down approximately 11 percent, excluding the benefit of JIRA's revenue, the impact of foreign exchange, and our previously announced decision to discontinue certain low-growth, low-margin products. As previously shared, this decrease was primarily driven by our HE portfolio, which was down almost 35% year over year.

Joe Woody: Finally, our newly acquired Triton product line has produced results in line with our expectations upside opportunities were limited in the fourth quarter as we scaled up manufacturing capacity in our Toronto facility to support our growth objectives, including capitalizing on our U S market launch, which kicked off in November of last year.

Joe Woody: For the full year sales of our pain management and recovery portfolio were down approximately 11%, excluding the benefit of <unk> revenue the impact of foreign exchange and our previously announced decision to discontinue certain low growth low margin products. As previously shared this decrease was primarily driven by our AG portfolio down almost 35% year over year.

Joe Woody: While we are disappointed by the decline in performance in our pain management recovery portfolio. In 2023, we are encouraged by the progress we saw in the second half of the year.

Joe Woody: While we are disappointed by the decline in performance in our pain management and recovery portfolio in 2023, we are encouraged by the progress we saw in the second half of the year. In particular, the organic sequential improvement in our fourth quarter that I just highlighted reinforces our expectation of mid-single digit growth for 2024. However, this expectation excludes HA, which we anticipate decreasing at approximately 20% in 2024 versus 2023.

Joe Woody: In particular, the organic sequential improvement in our fourth quarter that I, just highlighted reinforces our expectation of mid single digit growth for 2024 again this expectation excludes H E, which we anticipate decreasing approximately 20% in 2024 versus 2023.

Joe Woody: Now moving to our 2023 to 2025 transformation priorities and efforts.

Joe Woody: Now moving to our 2023 to 2025 transformation priorities and efforts. As a reminder, we have four key priorities for the next two 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. As you can see, we've made substantial progress against our transformation priorities. We're particularly excited by our commercial optimization and portfolio transformation accomplishments, which I will review now. Later in the call, Michael will discuss the other transformation priorities he's leaving in his role as Chief Transformation Officer.

As a reminder, we have four key priorities for the next two years that will optimize our go to market opportunities and meaningfully enhance our financial profile.

Joe Woody: These priorities are.

Joe Woody: Strategically and commercially optimizing our organization.

Joe Woody: Transforming our portfolio to focus on categories, where we have attractive margin profiles than the right to win.

Joe Woody: Taking additional cost management measures to enhance operating profitability and continue our path of efficient capital allocation to meaningfully improve our ROIC.

Joe Woody: As you can see we've made substantial progress against our transformation priorities, we're particularly excited by our commercial optimization and portfolio transformation accomplishments, which I will review now later in the call Michael will discuss the other transformation priorities. He is leaving his role as chief transformation Officer.

Joe Woody: In 2023, notably, we made significant leadership and go-to-market changes to improve our commercial effectiveness, executed the acquisition of Dero's Technologies as well as the divestiture of our respiratory health business, exited low-margin, low-growth product categories, and delivered double-digit growth across our DH portfolio. While we've seen improvements in our pain business that accelerated between the third and fourth quarters, we remain about two quarters behind our original sales expectations, as I shared in January at the J.P. Morgan conference. This two-quarter delay is due to the pain commercial reset necessary to address the breadth of strategy, structure, and talent changes in the pain business, although it is taking longer. Supply chain challenges impacting product availability slowed the ability of our commercial teams to execute on the new go-to-market strategy.

Joe Woody: In 2023, notably we made significant leadership and go to market changes to improve our commercial effectiveness.

Joe Woody: Executed the acquisition of <unk> technologies, as well as the divestiture of our respiratory health business.

Joe Woody: Exited low margin low growth product categories, and delivered double digit growth across our <unk> portfolio.

Joe Woody: While we've seen improvements in our paint business that accelerated between the third and fourth quarter, we remain about two quarters behind our original sales expectations as I shared in January at the Jpmorgan Conference.

Joe Woody: This two quarter delay is due to the paying commercial reset necessary to address the breadth of strategy structure and talent changes in the paint business.

Joe Woody: Though it is taking longer.

Joe Woody: Supply chain challenges impacting product availability slowed the ability of our commercial teams to execute on the new go to market strategies.

Joe Woody: The sequential sales improvements I just referenced give us confidence in our strategies as we move forward into 2024 and include the following. Our surgical pain business has reversed several years of decline to flattish results in the back half of this year, supporting low single-digit growth in 2024. Our U.S. Trident RF launch exceeded our expectations, and we were able to maintain double-digit growth in our OUS market. Our game-ready business returned to growth due to a renewed focus on capital sales and international expansion. We're seeing tailwinds from Cooley Reimbursement, OUS, including the UK and Japan.

Joe Woody: The sequential sales improvements I, just referenced give us confidence in our strategies as we move forward.

Joe Woody: For 2024 and include the following.

Joe Woody: Our surgical pain business has reversed several years of decline to flattish results in the back half of this year supporting low single digit growth in 2024.

Joe Woody: Our U S tried an RF launch exceeded our expectations and we were able to maintain double digit growth in our U S. R O U S markets.

Joe Woody: Our game ready business returned to growth due to renewed focus on capital sales and international expansion.

Joe Woody: We're seeing tailwind from Cooley reimbursement O U S, including the U K and Japan we've.

Michael C. Greiner: We've addressed most of our supply and quality issues, which has given confidence to our commercial team. We have established programs to help stabilize the HA business in the second half of 2024. While 2023 was a year of transition and transformation, we believe we established a foundation that will yield dividends in 2024 for our pain management and recovery business to gradually return to sustainable mid-single digit growth over the mid to long term. Now I'll turn the call over to Michael, who will provide further insights into our fourth quarter and full year financial results. Thanks, Joe.

Joe Woody: We've addressed most of our supply and quality issues, which has given confidence to our commercial team.

Joe Woody: We've established programs to help stabilize the business in the second half of 2024.

Joe Woody: While 2023 was a year of transition and transformation. We believe we established a foundation that will yield dividends in 2024 for our pain management and recovery business to gradually return to sustainable mid single digit growth over the mid to long term.

Joe Woody: Now I'll turn the call over to Michael who will provide further insights into our fourth quarter and full year financial results.

Michael C. Greiner: Thanks, Joe.

Michael C. Greiner: From a continuing operations standpoint, for the fourth quarter and full year, net sales were $173.3 million and $673.3 million, while adjusted gross margin was 58.6% and 59.1%, respectively. We generated 36 cents of adjusted diluted earnings per share during the quarter and $1.03 for the year. Adjusted EBITDA in the fourth quarter was $32 million, and $99 million for the year.

Michael C. Greiner: We're continuing operation standpoint for the fourth quarter and full year net sales were $173 3 million and $673 3 million, while adjusted gross margin was 58, 6% and 59, 1% respectively.

Michael C. Greiner: We generated 36 of adjusted diluted earnings per share during the quarter and $1 three for the year.

Michael C. Greiner: Adjusted EBITDA in the fourth quarter was $32 million and $99 million for the year.

Michael C. Greiner: For the year, we generated $15 million of actual free cash flow, which included one-time cash outflows of $10 million to settle outstanding litigation during the fourth quarter and approximately $33 million of restructuring expenses related to our transformation efforts as well as our RH divestiture. As I just noted, adjusted gross margin for the quarter was 58.6 percent, which is slightly favorable compared to the third quarter, and previously expected gross margin above 60% in the fourth quarter. With the nearly 4 million underperformance in our HA business combined with the lower sales in our North America pain management and recovery business, our mix unfavorably impacted our fourth quarter gross margin. In the fourth quarter, SG&A's percentage of revenue stood at 38.9 percent, reflecting a sequential improvement of 270 basis points and marking the fourth consecutive quarter of disciplined spending. As you know, 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 and 39 percent. These improvements are driven by reduced headcount, third-party cost savings, and business process optimization, to name a few.

Michael C. Greiner: For the year, we generated $15 million of actual free cash flow, which included onetime cash outflows of 10 million to settle outstanding litigation during the fourth quarter at approximately 33 million of restructuring expenses related to our transformation efforts as well as our RH divestiture.

Michael C. Greiner: As I just noted adjusted gross margin for the quarter was 58, 6%, which was slightly favorable compared to the third quarter.

Michael C. Greiner: Previously expected gross margin above 60% in the fourth quarter. However.

Michael C. Greiner: With a nearly $4 million of underperformance.

Michael C. Greiner: Hey, Jay business combined with the lower sales in our North America pain management and recovery business, our mix unfavorably impacted our fourth quarter gross margin.

Michael C. Greiner: In the fourth quarter SG&A as a percentage of revenue stood at 38, 9%.

Michael C. Greiner: The sequential improvement of 270 basis points, and marking the fourth consecutive quarter of disciplined spending.

Michael C. Greiner: As you know 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%.

Michael C. Greiner: These improvements are driven by reduced head count and third party cost savings and business process optimization to name a few.

Michael C. Greiner: Overall for the year adjusted EBITDA margin improved to 14, 7% compared to 13, 3% in 2022.

Michael C. Greiner: Overall, for the year, the adjusted EBITDA margin improved to 14.7% compared to 13.3% in 2022, a 140 basis point increase year over year. Now turning to our financial position and liquidity, our balance sheet remains strong and continues to provide us with strategic flexibility, with $88 million of cash on hand and $168 million of debt outstanding as of December 31st. We have maintained bank debt leverage levels of one times or less over the past eight quarters and will continue to be good stewards of our balance sheet.

Michael C. Greiner: 140 basis point increase year over year.

Michael C. Greiner: Now turning to our financial position and liquidity our balance sheet remains strong and continues to provide us with strategic flexibility with $88 million of cash on hand, and $168 million of debt outstanding as of December 31.

Michael C. Greiner: We have maintained bank debt leverage levels of one time or less over the past eight quarters.

Michael C. Greiner: They need to be good stewards of our balance sheet.

Michael C. Greiner: As we have noted in the past, we will look to deploy capital against both strategic M&A that meets our returns criteria, as well as opportunistic share repurchase. We repurchased a total of $15 million worth of shares during the second half of 2023, leaving us $10 million of buying power for additional shares that can be repurchased under the current board authorization. Finally, from a free cash flow perspective going forward, we anticipate approximately $20 million of capital expenditures annually while seeing meaningful improvement in working capital, primarily through inventory reduction in both 2024 and 2025. As Joe noted earlier, we made meaningful progress in 2023 against our transformation priorities, including product portfolio rationalization, the divestiture of our respiratory health business, the acquisition of bureaus, repurchasing of shares, organizational changes, and meaningful cost management initiatives.

Michael C. Greiner: As we have noted in the past we will.

Michael C. Greiner: Look to deploy capital against both strategic M&A that meets our returns criteria as well as opportunistic share repurchases.

Michael C. Greiner: We repurchased a total of $15 million worth of shares during the second half of 2023, leaving us $10 million of buying power for additional shares that can be repurchased under the current board authorization.

Michael C. Greiner: Finally for our free cash flow perspective, going forward, we anticipate approximately $20 million of capital expenditures annually, while seeing meaningful improvement in working capital primarily through inventory reduction in both 2024 and 2025.

Michael C. Greiner: As Joe noted earlier, we made meaningful progress in 2023 against our transformation priorities, including product portfolio rationalization, the divestiture of our respiratory health business. The acquisition of <unk> repurchasing of shares organizational changes and meaningful cost management initiatives as a.

Michael C. Greiner: As a result of these, we established a solid financial framework to build towards our 2025 goals, which I will touch on again in a few minutes. But first, let me highlight our 2024 planning expectations. As already announced, we expect 2024 revenue in the range of $685 million to $705 million, in line with our target of mid-single-digit organic growth. Additionally, we expect our adjusted gross margin to range between 59.5% and 60.5%, and our SG&A as a percentage of revenue to be between 41 and 42% for 2024. Those financial metrics support an adjusted diluted earnings per share between $1.30 and $1.45 for the year, as well as an adjusted EBITDA margin improvement of at least 200 basis points. As I mentioned earlier, we're excited about our transformation journey, and I'm confident we will improve on each of these metrics as the year progresses, with the first quarter starting off slow and accelerating in the back half of the year. Similar pacing to what we experienced in 2023.

Michael C. Greiner: Results of these we established a solid financial framework to build towards our 2025 goals, which I will touch on again in a few minutes, but first let me highlight our 2020 for planning expectations.

Michael C. Greiner: As already announced we expect 2020, where revenue in the range of 685 million to $705 million in line with our target of mid single digit organic growth.

Michael C. Greiner: Separately, we expect our adjusted gross margin to range between 59, 5% and 65% and our SG&A as a percentage of revenue to be between 41 and 42% for 2024.

Michael C. Greiner: Those financial metrics support and adjusted diluted earnings per share between $1 30, and $1 45 for the year as well as adjusted EBITDA margin improvement of at least 200 basis points.

Michael C. Greiner: As I mentioned earlier, we're excited about our transformation journey and I'm confident we will improve on each of these metrics as the year progresses with the first quarter, starting off slow and accelerating in the back half of the year similar pacing to what we have experienced in 2023.

With regards to specific execution of our 2024 transformation priorities, we are maintaining a sharp focus on our digestive health in pain management and recovery business strategies as Joe just described executing on additional business process efficiency and cost management initiatives and will seek opportunities to allocate cash.

Operator: With regard to specific execution of our 2024 Transformation Priorities, we are maintaining a sharp focus on our digestive health and pain management and recovery business strategies, as Joe just described, executing on additional business process efficiency and cost management initiatives, and we'll seek opportunities to allocate capital that enhance our overall return on invested capital. Year 2 of this transformation journey is critical to ensure that we can deliver on the 2025 financial metrics we outlined on Investor Day, which include consistent mid-single-digit growth that would take our organic revenue to approximately $750 million in 2025. Overall margin expansion of between 400 and 500 basis points, supported by gross margins surpassing 60%, and SG&A as a percent of revenue being between 38 and 39%, and free cash flow generation of approximately $100 million in 2025 supported by these operational financial metrics, consistent cap expense, and meaningful improvement in working capital.

Michael C. Greiner: Capital and enhance our overall return on invested capital.

Michael C. Greiner: There are two well this transformation journey is critical to ensure that we can deliver on the 2025 financial metrics, we outlined on Investor day, which include consistent mid single digit growth that would take our organic revenue to approximately $750 million in 2025.

Michael C. Greiner: Overall margin expansion of between 400 500 basis points supported by gross margin surpassing 60%.

Michael C. Greiner: And SG&A as a percentage of revenue being between 38 and 39%.

Michael C. Greiner: And free cash flow generation of approximately $100 million.

Michael C. Greiner: In 2025 supported by these operational financial metrics, consistent capex spend and meaningful improvement in working capital.

Operator: We still anticipate consistent mid-single-digit organic growth for 2024 and 2025, albeit this growth rate will be off a lower base due to the decreased sales in our HA business that we have already discussed. That being said, we remain confident in our ability to achieve the other components of the 2025 financial profile as a result of the progress we are making against our overall transformation priority. Operator, please open the line for questions.

Michael C. Greiner: We still anticipate consistent mid single digit organic growth for 24, and 2025, albeit this growth rate will be off a lower base due to the decreased sales in our AG business that we have already discussed.

Michael C. Greiner: That being said, we remain confident in our ability to achieve the other components of the 2025 financial profile as a result of the progress we are making against our overall transformation priorities.

Speaker Change: Operator, please open the line for questions.

Speaker Change: Thank you we will now begin the question and answer session.

Operator: Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad.

Speaker Change: So ask your question.

Speaker Change: And then one on your telephone keypad.

Daniel Staudter: To adjourn your question, please press stars 1 and 2. Today's first question comes from Daniel Staudter with Citizens JMP. Please go ahead. Yeah, great. Thanks. First question for me: You've commented that M&A is still a very important pillar, but, you know, with the recent updates you gave earlier this year as well as in this call, do you feel you have to wait a little bit for some stabilization before committing to acquisitions? I know you commented that share repurchases will also be a big part. Just any thoughts on how you're looking at M&A in 2024? That would be great. Thanks. Daniel, this is Joe.

Speaker Change: To withdraw your question. Please press Star then two.

Speaker Change: Today's first question comes from Danielle <unk> with citizens JMP. Please go ahead.

Danielle: Yeah, Great. Thanks first question for me you've commented that M&A is still very important pillar, but.

Danielle: I just wanted to ask with the recent updates you gave earlier this year as well as in this call.

Danielle: Do you feel you have to wait a little bit for some stabilization before committing to acquisitions I know you've commented that share repurchases will also be a big part just any thoughts on how youre looking at M&A in 2024 that would be great. Thanks.

Danielle: Danielle. This is this is joey thank you for the question I mean, obviously, we've kept a really strong balance sheet and our leverage extremely low in this environment that said, we do think we'll conduct some sort of a bolt on this year.

Joe Woody: Thank you for the question. I mean, obviously, we've kept a really strong balance sheet and our leverage extremely low in this environment. That said, we do think we'll conduct some sort of a bolt-on this year.

Joe Woody: Like we have in the past, we have, you know, enough capability inside to onboard these well and to get these integrated. So I don't see it detracting really from us being able to deliver our plan or actually do some of the share buyback if we so choose, you know, as we progress. So full pipeline, we still want to make sure we're executing, in particular, on the strategy around Digest-FL. Great.

Joey: Like we have in the past.

Joey: We have you know enough capability inside to onboard these well and to get these integrated so I don't see it in attracting really from us being able to deliver our plan or actually do some of the share back buyback. If we so choose you know as we as we progress so.

Full pipeline, we still have to make sure we're executing in particular on the strategy around that just to fill.

Speaker Change: Great and then just one follow up on the H eight business.

Joe Woody: And then this one follow-up on the HA business. We've talked about it a bit, as well as some of the programs you're implementing to stabilize that part of the business. But, you know, just any more thoughts on what gives you confidence and getting this to level out or any macro color that you could give that we should think about throughout 2024 would be pretty helpful. Thank you.

Speaker Change: You've talked about it a bit as well as some of the programs you're implementing to stabilize.

Speaker Change: That part of the business, but just any more thoughts on what gives you confidence and.

Speaker Change: Getting this to level out or any macro color that you could give that we should think about throughout 2024. It would be pretty helpful. Thank you yeah. Yeah. Yeah. So a couple of things. One is we have been maintaining a disciplined price strategy purposely and strategically and we do know that ultimately some of the specialized.

Joe Woody: Yeah, yeah, yeah. So, a couple of things.

Joe Woody: One is we have been maintaining a disciplined price strategy, purposely and strategically. And we do know that, ultimately, some of the specialized reimbursement for a couple of companies where people go because they can make more money and make decisions that way, customers, that's going to go away as you sort of end the year. We think we can also do some things with market access through some of the commercial programs and cross-selling initiatives that we have, and there are new markets as well for us that we think that we can penetrate. So, again, what we believe will happen, this is a strategic area for us because of the focus on orthopedic pain and recovery, and it fits nicely into our channel, and it has a great gross margin. We think it's a low single-digit grower who wants to make his way through this year. Great, thank you very much.

Speaker Change: Reimbursement for a couple of companies where people are going because they can make more.

Speaker Change: More money and making decisions that way customers, that's going to go away as you sort of in the.

Speaker Change: The year.

We think we can also do some things with market access through some of the commercial programs and cross selling initiatives that we have and enter new markets as well for us that are we think that we can achieve so again, what we believe will happen. This is a strategic area for us because of the focus on the orthopedic pay.

Speaker Change: <unk> and recovery.

Speaker Change: And it fits nicely into into our channel has great gross margin, we think it's a low single digit grower once we make our way through this year.

Speaker Change: Great. Thank you very much.

Joe Woody: Yep. Thank you. And our next question today comes from Rick Wise. It's beautiful. Please go ahead. Good morning, Joe.

Speaker Change: Yep.

Speaker Change: Thank you and our next question today comes from Rick Wise with Stifel. Please go ahead.

Rick Wise: Good morning, Joe Hi, Michael.

Rick Wise: Hi Michael, keep pushing on the HA side of things, but I want to make sure I better understand your thinking about the potential for stabilization. I appreciate what you said about your strategy and your discipline. But maybe talk to us a little more in depth about, you talked about some of the commercial team sales changes, and did I hear you correctly? You're thinking that in the second half of this fiscal year, we're going to see the business stabilize or return to growth? I just want to make sure I understood what you were saying there. Sure.

Rick Wise: Joe.

Rick Wise: Hey, Ted.

Rick Wise: Keep pushing on the AI side.

Speaker Change: Side of things, but.

Speaker Change: I want to make sure I better understand your thinking about the potential for stabilization I. Appreciate what you said about your strategy and your discipline.

Speaker Change: But maybe talk to us.

Speaker Change: A little more depth about.

Speaker Change: You talked about some of the commercial team sales changes.

Speaker Change: And did I hear you correctly youre thinking that in the second half of.

Speaker Change: This fiscal year, we're going to see the business stabilize or return to growth I don't want to make sure I understood.

Speaker Change: What you what you were saying there.

Joe Woody: No, I see stabilization toward the end of this year, toward the end of 2024. I see growth possible in 2025. And again, obviously, the biggest market volumes have somewhat remained about where they were. And so it's really the price affected by the Medicare changes that's really hurting the business.

Speaker Change: Sure No I see stabilization toward the end of this year towards the end of 2024 I see growth possible in 2025.

Speaker Change: And again sort of the obviously the biggest part of your volumes somewhat.

Speaker Change: <unk> remained about where they were and so the it's really the price affected by the Medicare changes, that's really hurting the business and.

Joe Woody: And in particular, I think everybody's fighting this a little bit, with, in some cases, a couple of competitors having specialized pricing that's going to go away about the middle of the year, and that creates more of a level playing field. And so we think with the customers that we'll also be selling to in terms of GameReady and, really, frankly, our surgical pain business and our DEROS business, we're going to be able to get this to more of a single-digit grower as we get into 2025. And I can see it based upon some of the progress, higher some of the programs, and the traction. But at the moment, we're also protecting our price for the longer term. The other thing to consider, Rick, is that volumes, although different in 3 and 5, and how these have developed over the last year, you know, 3-shot and 5-shot, have been relatively stable. The majority, the heavy majority, of the revenue decline has been due to pricing.

Speaker Change: And in particular, I think everybody is fighting this a little bit.

Speaker Change: With.

Speaker Change: In some cases, a couple of competitors have specialized pricing is going to go away by the middle of the year and that creates more of a level playing field and so we think with the customers that.

Speaker Change: We'll be also selling to in terms of game ready.

Speaker Change: And really frankly, our surgical pain business and our <unk> business that we're going to be able to get this to more of a low single digit grower as we get into 2025.

Speaker Change: And I can see it based upon some of the progress some higher some of the programs and the traction but at the moment. We're also.

Speaker Change: Protecting our price for the longer term dosing.

Speaker Change: The other thing to consider Rick is that volumes.

Speaker Change: Although different in three and five and how these have developed over the last year three shot in five shot.

Speaker Change: They have been relatively stable. The majority heavy majority of the revenue decline has been due to pricing so the volumes to remain stable.

Michael C. Greiner: So the volumes can remain stable, and we can get pricing into a more stable environment, which we believe will happen, as Joe just mentioned, in the back half to exit 2024. Then we have something to build on going into 2025. One of the things, too, Rick, that we said at the JP Morgan conference was that we can achieve mid-single-digit organic growth in the total global company with this type of decline in HA and still achieve mid-single-digit growth in the other parts of the pain business on a global level. So we feel good about that portion of it as we manage through what, quite frankly, is a tough aspect of HA. Gotcha. If I'm doing my math correctly, sales and EPS guidance midpoints imply operating margins of something like 14% for the full 24 year. Maybe, could you all help us think through how that's likely to set up for the first half versus the second half in the past? They started typically with operating margins more in the high single-digit range. Is that the right way to think of all that to think about 24, Michael?

Speaker Change: And we can get pricing into a more stable environment, which we believe will happen and as Joe just mentioned in the back half to exiting 2024, then we have something to build on going into 'twenty five one of the things to rig that we set up the JP Morgan conference was that we can achieve the mid single digit organic to the total global company with this type of decline.

Speaker Change: And a J and still achieve mid single digit growth in the other parts of the plane pain business on a global level. So we feel good about that portion of it.

Speaker Change: We managed through it quite frankly is a tough aspect with the H a piece.

Speaker Change: Gotcha.

Speaker Change: It's on operating margin, if I'm doing my math correctly.

Speaker Change: Sales and EPS guidance midpoint imply operating margin something like 14% for the.

Speaker Change: For 24 years.

Speaker Change: Maybe.

Speaker Change: Could you help us think through how that's likely to set up for the first half versus second half in the past.

Speaker Change: Typically with operating margins more in the high single digit range is that is it.

Speaker Change: That's the right way to think of all of that to think about 'twenty for Michael.

Michael C. Greiner: Yes, so youre right I mean, I think will be a little bit north of 14%, but you are in the range there.

Michael C. Greiner: Yeah, so you're right. I mean, I think we'll be a little bit north of 14%, but you're in the range there.

Michael C. Greiner: And yes, the first half is always going to be lower than the second half. I'd like to believe we can at least squeak in 10% operating profit in the first quarter. But yeah, that'll be our lowest operating profit quarter. And then it'll build, you know, a couple of hundred basis points per quarter from there. And just I'm going to stick in one more on a more positive note, the digestible business is doing well. You talked about second half product launches. Maybe talk about some of those products, the kind of impact they have. Does this sustain the current performance or has the potential to accelerate?

Speaker Change: Yes.

Michael C. Greiner: Half is always going to be lower than the second half I'd like to believe we can at least weekend, 10% operating profit in the first quarter, but yeah that will be our lowest operating profit quarter and then it will build.

Michael C. Greiner: A couple of few hundred basis points per quarter from there.

Speaker Change: Great and just.

Speaker Change: Sneak in one more on a more positive note.

Speaker Change: The suggested business doing well you talked about second.

Speaker Change: Second half product launches.

Speaker Change: Maybe talk about some of those products.

Speaker Change: The impact they have.

Speaker Change: Sustain the current performance has the potential to accelerate how should we think about it. Thank you.

Joe Woody: How should we think about it? Thank you. It's more sustaining in terms of the Mickey area, you know, maintaining our technology position and helping us there primarily. And then we do see, you know, continued growth in Neomed this year as an example, double digits again, even though we've talked about infant conversions are starting to get completed on a global level. So primarily, sustaining that leadership position in the legacy business. And then we still see good runway ahead for Cortrec and, frankly, for Neomed. Thank you. And our next question today comes from Kristen Stewart with C.L. King

Speaker Change: It's more sustaining in terms of the Mickey area, maintaining our technology position and helping US there primarily and then we do see continued growth in <unk>. This year as an example, double digit again, even though we've talked about the infant conversions are starting to get completed on a global level.

Speaker Change: So primarily sustaining.

Speaker Change: That leadership position in the legacy business and then we still see good good runway ahead for core Trek frankly in for Neil.

Speaker Change: Yes.

Speaker Change: Thank you.

Speaker Change: And our next question comes from Kristen Stewart with C. L. King. Please go ahead.

Kristen Stewart: Please go ahead. Hi Michael, I just wanted to clarify. You talked about the 2000 or 2025 kind of goals for the full year. Are you still reaffirming that 750 million target because we are growing at a lower base now? Or is it just the mid single-digit that you're reiterating? The mid single-digit, yeah.

Kristen Stewart: Hi, Thanks for taking the question.

Kristen Stewart: I just wanted to clarify Michael you talked about the 2000 or.

Kristen Stewart: 2025.

Kristen Stewart: Goals for the full year are you still reaffirming that 750 million target because we are growing at a lower base now or is it just the mid single digit they are.

Kristen Stewart: Reiterating the mid single digit, yes, but I was trying to convey was what we originally laid out was the 750 are correct.

Michael C. Greiner: What I was trying to convey was what we originally laid out was a 750, you're correct. And that 750 is not, we don't believe, currently achievable with the growth rates we see. But we still believe that the growth rates we're going to have are mid single digits. It's just off of that 20 million dollar lower base due to the HA impact. Okay, and separately, how do you feel about free cash flow generation and getting to that over $100 million of free cash flow in 2025? What are some of the measures that you're looking for to achieve that objective?

Kristen Stewart: And that 750 is not we don't believe currently attainable with the growth rates, we see but we still believe that the growth rates are going to have mid single digits is just off of that $20 million lower base due to the a J.

Kristen Stewart: Correct.

Speaker Change: Okay and separately, how do you feel about free cash flow generation and getting to that over $100 million of free cash flow in 2025, what are kind of some of the measures.

Speaker Change: That you're looking for to achieve that objective.

Michael C. Greiner: Yeah, I mean, if you think about this year, we had $50 million of total cash outflow for litigation settlements, restructuring, and the RH divestiture. That will be around $25 to $30 million in 2024, and then in 2025, we'll hopefully have minimal to no one-time cash payments. So that's a huge tailwind.

Speaker Change: Yeah, I mean, if you think about this year, we had $50 million of total cash outflow for.

Speaker Change: Litigation settlements restructuring.

Speaker Change: The <unk> divestiture.

Speaker Change: That will be around $25 million to $30 million in 'twenty four 'twenty five we'll have hopefully minimal to no onetime cash payments. So that's a huge tailwind on top of that our operational cash flow will be improving.

Michael C. Greiner: On top of that, our operational cash flow will be improving just by nature of the revenue going up mid-single digits and the margin improvement with the cost management takeout. And then, on top of that, we've got working capital opportunities in inventory. As you know, we've struggled a little bit with our inventory management over the last couple of years for a range of reasons, some macro and some self-inflicted.

Speaker Change: Just by nature of the revenue going up mid single digits and the margin improvement with the cost management takeout and then on top of that we've got working capital opportunities in inventory as you know we've struggled a little bit with our inventory management over the last couple of years for a range of reasons, some macro and some self inflicted we have.

Joe Woody: We have about $30 million, $25 to $30 million of inventory opportunity between now and the end of 2025. So if we execute on each of those pieces, many of them are very much in our control, I feel very good about the $100 million opportunity and free cash flow for 2025. Okay, perfect. And then last question, just on the IVP portfolio, can you maybe just talk through if you still have any supply constraints with Cooleaf? And then on the Trident launch in the U.S., I think you mentioned that it was better than expected. Can you maybe just provide additional color on that?

Speaker Change: $30 million $25 million to $30 million of inventory opportunity between now and the end of 'twenty five so if we execute on each of those pieces, which are many of them are very much in our control I feel very good about the 100 million dollar opportunity and free cash flow for 2025.

Speaker Change: Okay Perfect and then last question just on the I V. P portfolio can you maybe just talk through if you have any supply constraints still there with him coolly and then on the tried and launch in the U S. I think you had mentioned that was better than expected can you maybe just provide additional color on that.

Speaker Change: Yes, so again, we saw about a 10% growth versus the third quarter and the business and the quality.

Joe Woody: Yeah, so, you know, again, we saw about 10% growth versus the third quarter in the business, and the quality issues and the supply chain issues are behind us. We were also happy with the capital sold in the fourth quarter, which lends itself to the next year and the following year. Deros has really been exceeding our expectations in terms of a launch, but we just remind everybody that we sell into the U.S., which is a new market now, and we're going to be double-digit for the full year globally, high double-digit, but it can take you six months or so to get those accounts up and running for the full revenue streams. But we think Deros is going to be a big contributor to the business this year, And Kristen, just wanted to say, so the 10% Joe's referring to is the sequential Q3 to Q4 specific to our RF business, so that includes Coolieve, our standard RF probes, and, as Joe just mentioned, the capital sales. That does not include Deros.

Speaker Change: Issues in the supply chain issues are behind US we were also happy with the capital sold.

Speaker Change: In the fourth quarter that lends itself to the next year. The following year <unk> has really been.

Speaker Change: Exceeding our expectations in terms of a launch, but we just to remind everybody that we.

Speaker Change: We sell into the U S, which is a new market now and we're going to be double digit for the full year globally.

Speaker Change: High double digit but.

Speaker Change: But it can take you six months or so then they get those accounts up and running for the full revenue streams, but.

Speaker Change: We think there is going to be a big contributor to the business. This year and again it'll be it'll be high double digits as it has been.

Speaker Change: And curious Christian just wanted to so the 10% Joe's referring to is the sequential growth Q3 to Q4 specific to our RF business. So that includes cool leave our standard RF probes and as Joe just mentioned the capital sales that does not include <unk> grew more than <unk>.

Michael C. Greiner: Deros grew more than 10% from Q3 to Q4. Okay, perfect. And then the organic growth expectation for this year, I just want to make sure that does not include zeros, or does that include zeros? It includes DROs against the time period that we owned DROs. So the back half of the year; it does not include any revenue in the first half of the year through partially in the third quarter where we did not own DROs. So it's pure organic growth.

Speaker Change: 10% Q3 to Q4.

Christian: Okay, perfect and then the organic growth expectation for this year I just want to make sure that does not include euros or does that include bureaus.

Christian: It includes D rose against the time period that we owned bureaus. So the back half of the year. It does not include.

Christian: I mean revenue in the first half of the year first half of the year through partially at a third quarter, where we did not own <unk>. So it's pure organic growth.

Michael C. Greiner: Okay, perfect. Thank you very much.

Speaker Change: Okay perfect. Thank you very much.

Joe Woody: Thank you, and this concludes our question and answer session. I'd like to turn the conference back over to the management team for any closing remarks. So, look, our primary focus is getting the precise execution that we need in the business. We have successfully executed product exits, divesting of the RH business, and acquiring technology with Eros. We obviously approved an additional share repurchase program and delivered on most of our financial objectives. I think we've established the necessary foundation to deliver on the midterm financial commitments and are confident that our transformation priorities, you know, coupled with our market-leading portfolio and attractive markets position us for sales growth, margin expansion, and meaningful free cash flow generation. So we appreciate everybody's continued interest in Avanos, and I'm sure we'll speak further throughout the week. Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day. BF-WATCH TV 2021

Christian: Thanks.

Speaker Change: Thank you and this concludes our question and answer session I would like to turn the conference back over to the management team for any closing remarks.

Speaker Change: So with our primary focus is getting the precise execution that we need in the business.

Speaker Change: We have successfully executed our product exits divesting in the Orange has been our each business.

Speaker Change: And acquiring technology with bureaus.

Speaker Change: Obviously approved an additional share repurchase program and then delivered on most of our financial objectives.

Speaker Change: I think we've established the necessary foundation to deliver on our midterm financial commitments and confidence in our transformation priorities.

Speaker Change: Coupled with our market, leading portfolio and attractive markets does position us for sales growth margin expansion.

Speaker Change: Meaningful free cash flow generation. So we appreciate everybody.

Speaker Change: Interest in all of US I'm sure we'll speak further throughout the week. Thank you.

Speaker Change: Thank you. This concludes today's conference call.

Speaker Change: Thank you all for attending today's presentation you may now disconnect your orange level.

Speaker Change: Yeah.

Speaker Change: Okay.

Speaker Change: [music].