Q1 2024 Avanos Medical Inc Earnings Call
Let's provide an update on our transformation efforts. Michael will share additional detail regarding these topics and affirm our 2024 planning assumptions.
We will finish the call with Q&A. A presentation for today's call is available on the investors section of our website, avanos.com.
As a reminder, our comments today contain forward-looking statements related to the company, our expected performance, current economic conditions, and our industry. No assurance can be given as to future financial results. Actual results could differ materially from those in the forward-looking statements.
For more information about forward-looking statements and the risk factors that could influence future results, please see today's press release and risk factors described in our filings with the SEC.
Additionally, we'll be referring to adjusted results and outlook. The press release has information on these adjustments and reconciliations to comparable GAAP financial measures. Now I'll turn the call over to Joe.
Thanks, Scott. Good morning, everyone, and thank you for joining us to review our operational and financial results for the first quarter, 2024. First quarter results were in line with our expectations as digestive health continued its consistent performance, and we experienced additional positive shifts in our pain management and recovery business.
As we noted in our 2023 year-end earnings call, our quarterly performance for 2024 will improve as the year progresses, following a similar cadence to past years.
The demand for our products remain strong and our supply chain organization is executing effectively to support our commercial strategy with our backlog at about $1 million at quarter in. This is a significant improvement over last year's first quarter back order levels of over $8 million.
We are continuing to make steady progress against each of our transformation priorities, which both Michael and I will talk further about. And as always, our primary focus is on getting patience back to the things that matter as we meet the needs of our customers.
For the quarter, our sales from continuing operations were approximately $166 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 up 4.7% compared to a year ago.
We generated 22 cents of adjusted deluded earnings per share and above $21 million of adjusted EBITDA for continuing operations.
Our three-year transformation priorities continue to drive our execution, and our first-quarter results provide confidence in our ability to be within the ranges 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. Our digestive health portfolio continues to deliver excellent results with over 9% organic growth versus prior year.
This performance was bolstered by our neomid product line, which posted another terrific quarter growing double digits versus the prior year, as we continue to take advantage of the strong demand for Enfit conversions in North America.
While we are currently experiencing solid double-digit growth, we anticipate slower growth over the next few quarters as we enter the late stages of the N-FIT adoption.
Our legacy intro feeding business also posted a strong quarter growing mid-single digits compared to the previous year.
As noted during our last call, we anticipate mid to high single-digit growth organically for our digestive health portfolio this year, 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,
low-growth product rationalization, and actionable M&A opportunities.
Now turning to our pain management and recovery portfolio, sales for this quarter were down approximately 1% excluding the benefit of Deeros-related sales, the impact of foreign exchange, and our previously announced strategic decision to discontinue certain low-growth, low-margin products.
While our overall surgical patent portfolio was down year over year, our combined on-Q ambit portfolio was flat for the same period, in line with our expectations.
The past quarter performances are indicators that our new go-to-market strategy and structure for this part of our portfolio support our low single-digit growth expectations for 2024.
The slight year-over-year decline in our IVP business, excluding the positive impact of dearest revenue, was primarily due to strategic rationalization within a low-growth, low-margin product category.
The performance of our combined radio frequency ablation portfolio grew by mid-single digits.
We're encouraged by the continued momentum seen in our IVP generator sales, driven by our renewed ASC strategy and the increasing productivity of our fully deployed new sales structure.
Further supporting our ASC strategy, our new Trident product line acquired in the Dearest transaction continues to exceed our expectations.
We were able to capture upside opportunities in the first quarter and continue to scale up manufacturing capacity in our Toronto facility to support our growth objectives, including capitalizing on our promising U.S. market launch.
Our Game Ready portfolio put together another solid quarter coming off our fourth quarter results with double-digit growth this quarter compared to prior year.
Finally, our H.A. portfolio was flat year over year and consistent with our fourth quarter results. This leveling off of revenue in our H.A. portfolio is anticipated and aligns with our forecast of a 20% decrease in H.A. revenue for the full year.
We remain confident in our strategies and ability to maintain this level of performance while leveraging long-term opportunities.
While our first quarter performance in our Pay Management Recovery portfolio is not yet where we want it to be, we're encouraged by the progress we're seeing across each of the pain businesses and I believe these are solid indicators of our ability to deliver mid-single digit growth for 2024, excluding the 20% decline in H.A. revenue I just noted.
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 improve 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 RIC.
We've made substantial progress against our transformation priorities with accelerating momentum against these priorities. Some of our first quarter highlights include meaningful stability and progress across our paying portfolio. Strong early execution with our new Trident product line.
continued separation efforts associated with the divestiture of our respiratory health business.
finalizing our commercial sales and marketing organizations to support our second half growth expectations exceeding 5%. Adjusted gross margin delivery approaching 60% and completing our latest share repurchase program.
While we're pleased with our first quarter results and the continued progress against each of our transformation priorities, we are focused on delivering consistent results over the coming quarters in order to meet our 2025 financial targets.
Now I'll turn the call over to Michael, who will provide further insight on our financial results and transformation platform.
Thanks, Joe. As you shared, we were pleased with our first quota results. Results that show continued progress against our transformation and support our full-year targets.
Since 2021, we have been delivering mid to high single-digit growth in our digestive health portfolio and again delivered that level of performance in the first quarter. Our gain-ready portfolio grew double digits this quarter compared to prior year.
And our newly acquired Trident Product Line has produced results above our expectations, capitalizing on our U.S. market launch, which kicked off in November of last year, and continued momentum in international markets.
As expected, we continue to see price volatility in our HA business. However, we believe we upset the right strategies in place to largely mitigate unfavorable price impacts. This quarter, our HA sales are in line with our fourth quarter and prior year through higher sales volumes.
By continuing operations standpoint, net sales were 166.1 million.
We generated 21.6 million of adjusted EBIDA and 22 cents of adjusted diluted earnings per share during the quarter.
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 efforts, organic sales were of 4.7% compared to a year ago.
Our adjusted EBDA grew by 34% compared to a year ago, but adjusted EBITA margin expansion of 290 basis points.
or adjusted diluted earnings per share grew by 69% compared to a year ago.
This margin expansion was positively impacted by top line growth, manufacturing and operations execution, and continued SG&A optimization efforts.
For the quarter, our adjusted gross margin is 59.8%.
which is sequentially favorable to our fourth quarter of 2023 results and versus the first quarter of last year. We were able to offset inflation and H.A. price volatility through our transformation initiatives at the plant and operations level.
We expect adjusted gross margin to be approximately 60% next quarter as well.
STNA is a percentage of revenue stood at 45.8%.
reflecting an improvement of 220 basis points compared to the first quarter of last year, primarily related to our cost savings efforts to streamline the organization and reduce our external spend profile.
As you know, this is part of our ongoing journey to further enhance our financial profile with continued improvements throughout 2024, ultimately leading to our 2025 goal between 38 to 39%.
Our performance in the first quarter is tracking with our expectations for the year, reflecting the success of our transformation strategy
which remains our organization's primary focus. As such, we are reaffirming our 2024 full-year guidance, with revenue in the range of $685 million to $705 million, representing mid-single-digit organic growth.
adjusted gross margin to range between 59.5 and 60.5% and SGNA is a percentage of revenue to be between 41 and 42%.
These financial metrics support an adjusted diluted earnings per share between $1.30 and $1.45 for the year, as well as adjusted EBITA margin improvement of at least 200 basis points.
Now, turning to our financial position and liquidity, our balance sheet remains strong and continues to provide us with strategic flexibility with $76 million of cash on hand and $1777,7 million of debt outstanding as of March 31st.
We have maintained bank debt leverage levels meaningfully below one turn over the past nine quarters and will continue to be good stewards of our balance sheet.
While we intend to maintain conservative leverage levels, we will actively pursue strategic M&A opportunities that align with our returns criteria, as well as opportunistic share re-purchases.
Finally, free cash flow was negative 12 million in the first quarter, roughly as anticipated, driven by year-end variable compensation payouts and one-time cash costs associated with accelerating certain transformation efforts.
We anticipate marked improvement in our free cash flow profile in the second quarter and remain confident in our ability to generate approximately 75 million of free cash flow for 2024.
Now, turning to some additional highlights specific to our transformation journey that began in 2023.
In addition to product portfolio rationalization, the divestiture of our respiratory health business, the acquisition of DEROS, sherry purchases, organizational changes, and meaningful cost management initiatives, we remain focused on our digestive health and pain management and recovery business strategies.
implementing further business process efficiency and cost management initiatives,
and actively seeking capital allocation opportunities that optimize our return on invested capital.
The second year of this transformation journey is crucial for achieving the 2025 financial objectives we outlined on Investor Day, which include consistent mid-single-digit growth that would drive our organic revenue to approximately $730 million in 2025.
Gross margins surpassing 60%.
SG&A is a percentage of revenue being between 38% to 39%.
and free cash flow generation of approximately $100 million in 2025, supported by these operational financial metrics, as well as consistent capex spend and meaningful improvement in working capital. Operator, please open the line for questions.
Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the one on your touch-tone phone. You will hear a prompt that your hand has been raised.
Should you wish to decline from the polling process, please press star followed by 2. If you are using a speakerphone, please lift the headset before pressing any keys.
Your first question comes from Kristen Stewart at CLK. Please go ahead.
Hi, thanks for taking the question. And I was just wondering if you could further expand upon your commentary around the pain management business and what kind of gives you the confidence that you're going to see improved results for the balance of the year.
Hey Kristen, thanks for the question, good morning. So a couple things. I mean, inside of that we saw Game Ready at double digit growth.
We talked about the RF business in that portfolio of RF, it's sort of mid-single-digit growth. It got hurt by some exits that we purposely did in that group, but we also sold 80.
generators during the quarter, which sort of shows us that we're trending in the right direction. We're seeing a good adoption of the Trident technology from Diros. We see some positive things also in the international business, albeit it's a smaller part of the business. And the other thing I would say is that
Uh...
Between Ambit and NONQ, that leveling off, we see real potential for low single-digit growth
for surgical pain this year, which is the first time in a long time. So everything's pointing in the right direction. We feel like
We'll be able to point to some further evidence in Q2. And we're standing by the perspective that outside of H.A., which kind of runs through by Q4, we've got a mid-single-digit grower now in that pain business for the full year.
Okay, perfect. And then I was wondering if we could switch gears and just talk a little bit about your appetite for M&A. You mentioned the low leverage ratio and plenty of firepower to kind of do deals. How should we be thinking about potential transactions as we look out over the next, you know, 12 to 18 months?
I mean, we've been primarily focused and digestive. As we've laid that out, and again, you know, the types of bolt-ons that we've been doing,
We've actually passed on a couple of transactions that we thought were two things really. Multiple were a bit high, but also when we looked internally and through third parties at some of the growth perspectives of the businesses that didn't really seem to be there. And we feel like in this stage of our execution,
That's not really where we want to be. But the pipeline itself is robust around digestive. That's probably where you'd likely see something first, you know, coming from us. Okay.
Okay, thanks very much.
Yeah.
Thank you, ladies and gentlemen. As a reminder, should you have any questions, please press star one.
Next question comes from Danny Stouter at Citizen JMP. Please go ahead.
Yeah, great, thanks. So first question is just on gross margin.
It's nice to see the improvement and then you
Also gave some two Q commentary that points to another good quarter, but
You know, how should we think about Chris Martin for the rest of the year? You noted that you have been able to offset some of the impacts from H.A., but what is baked in or, you know, what is assumed as far as H.A. stabilization, the back half of the year and what gets you to the higher end of your guidance range? Thanks.
So the
Gross margin for the year, quarter over quarter, will be fairly stable, give or take 100 basis points.
To your point, Danny, in the back half the year, we do anticipate
gross margin prints to be, you know, above 60. As you know, our back half of the years are heavier revenue part of the year and the mix in the back half of the year is a little bit more favorable. And third, you know, gives us another few months for continuation of the cost savings and other initiatives we're doing it to plan. So very pleased with the first quarter print, confidence as we announced on the call today, around where we should be in 2Q, somewhere around 60 and then we should be heading north of 60 as we get into the back half of the year based on the few things I just mentioned. So we're doing all the right things in the plants. Mix is obviously helpful. A.J. To your point.
is going to be very stable through the year. We'll be doing somewhere between 9 and 12 million per quarter each quarter, and that lines up with the negative 20% decline in H.A. that we had indicated on the year end's earning call.
Great. Then this is a follow-up focusing on game-ready
double-digit growth in a quarter or another strong quarter. But, you know, could you just give us any more color on what's driving this to be a little bit above your growth expectations? And then just, you know, given a quarter on what you're seeing as far as trends, do you still think that mid-single-digit growth is what it could be this year or, you know, in any color there would be great? Yeah.
Sure, no, game ready, obviously driven by sports medicine and orthopedic procedures. I think you're seeing some of the relationships with distributors and some of the work we've been doing on our direct force.
starting to pay off. But on top of that, we're making some strides in the international markets as well with Game Ready, where he had been a little bit more passive before. We definitely see Game Ready as a mid-single-digit grower and then as
I was saying earlier, you know, if you take HAA out of the equation until we settle out on the pricing element of that, probably in the Q4 range, we're more and more confident on the mid-single-digit growth of the pain management and recovery business at mid-single-digit growth for the full year.
One thing just dad dies on the
One thing to add, Danny, on the pain business,
but primarily hurt us in the first quarter in pain.
where our IV infusion and needles, kits and trays product families.
Those are less focused on, you know, obviously historically. We do have some things throughout the year that we will refocus some energies there and strategies there. But those were the two categories. IBE infusion, which is in our surgical pain grouping, and needles, kiss, and trays, which is in our in dimensional pain grouping that, you know, hurt us in the first quarter from a total growth standpoint. But we don't anticipate that to be the case as we enter the back half of the year.
which is further supportive, tying to Kristen Stewart's earlier question, further support of what we'll be able to do in the back half of the year in pain in total.
Thank you.
Thank you. There are no further questions. You may proceed with closing comments.
Good. You know, our focus has been on execution and we've done a lot of things, successfully executing on the product exits, the besting RH.
making the Dearest acquisition and increasing our shareholdings through our repurchase program. I think we're established now the foundation to meet our midterm financial commitments, our transformation priorities,
and shaping our portfolio, which we think are in attractive market. So we're confident that we're well positioned, as we outlined in the script for sales growth, margin expansion, and meaningful free cash for generation through 24 and accelerating that in 25. So appreciate everyone's attendance on the call. Thank you and your continued following of Abanos.
Ladies and gentlemen, this concludes your conference for today. We thank you for participating, and we ask that you please disconnect your lines.