Q3 2024 Avanos Medical Inc Earnings Call
Speaker Change: and the
Speaker Change: The
Speaker Change: The
Speaker Change: Good morning, ladies and gentlemen and welcome to the Avanos Medical, Avenue 3rd Quarter, 2024 earnings call. At this time, all lines are in a listen-only mode.
Speaker Change: And our leadership changes before Michael reviews, our third quarter results. The current business environment, an update on our transformation efforts in our fourth quarter 2020 for planning assumptions, we will finish the call with Q&A.
Speaker Change: Presentation for today's call is available on the investors section of our website <unk> Dot com.
Speaker Change: 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.
Speaker Change: Risk factors that could influence future results. Please see today's press release and risk factors described in our filings with the SEC.
Speaker Change: Additionally, we will be referring to adjusted results and outlook. The press release has information on these adjustments and reconciliations to comparable GAAP financial measures now I'll turn the call over to Gary for introductory remarks.
Gary: Thanks Scott.
Gary: Here today to provide a brief update on recent leadership changes at <unk>.
Gary: Joe Woody has announced his decision to retire as evidenced as CEO and Michael Greiner has been appointed interim CEO.
Gary: Joe has graciously agreed to assist the company in this leadership transition and he'll continue to consult with the company through April of next year.
Gary: Joe has accomplished a great deal of his tenure as CEO.
Gary: He led the strategic positioning for the company to a more focused medical device solutions company via acquisitions and divestiture of assets or businesses that were not aligned to the company's long term strategy.
Avid is in a better position financially and organizationally today to achieve its long term value creation goals.
Speaker Change: We're grateful for Joes leadership these past seven years and we thank him for his efforts and dedication to avocados.
Speaker Change: We're also pleased to announce that Michael Greiner has agreed to serve as interim CEO for avenues.
Speaker Change: As evidenced CFO and Chief transformation Officer, Michael was.
Speaker Change: Demonstrated his ability to deliver consistent results against our three year transformation plan.
Speaker Change: And he is well positioned to step in as interim CEO.
Speaker Change: While Michael is our leading candidate to become the permanent CEO. Our board was to evaluate other candidates as well and we will conduct a fulsome search for a permanent CEO over the coming weeks.
Speaker Change: To enable Michael to focus on running the company.
Speaker Change: Warren Mahady has been appointed interim CFO.
Speaker Change: Many of you May remember Warren who previously previously spent seven years as senior Vice President of strategy for Avenova and.
Speaker Change: And served as interim CFO before Michael joined Avenues.
Speaker Change: Prior to leaving <unk> in 2021, Warren had 34 years of experience with Kimberly Clark Halyard health and <unk>.
Speaker Change: Since leaving.
Speaker Change: <unk> has continued to provide strategic consulting and supported the company's transformation agenda.
Speaker Change: We welcome warm back as interim CFO.
Speaker Change: Yes.
Speaker Change: Change is constant and the medical device World and the board of Director believes these leadership changes will allow the company to continue its strategic path of becoming a more focused organization.
Speaker Change: In closing I am proud of the transformation progress <unk> made and I'm genuinely excited about the company's promising future powered by our team's commitment to make a difference and by the enduring importance of our products in patients' lives.
Speaker Change: With that I'll turn the call over to Michael.
Michael Greiner: Thanks, Gary.
Michael Greiner: Morning, everyone and thank you for joining us to review, our operational and financial results for the third quarter of 2024.
Michael Greiner: And as Gary just mentioned over one year ago, we announced a transformation plan to optimize our portfolio.
Michael Greiner: Refocused, our commercial operations and improve our margin profile. This.
Michael Greiner: This quarter marked a significant milestone in our transformation as we successfully completed the conveyance of two respiratory health plans to air life.
As well as continued our efforts to rightsize, our cost structure and enhance our operating profitability and also generated meaningful free cash flow Ulta.
Michael Greiner: Ultimately positioning the company to more effectively and efficiently deliver shareholder value creation.
Michael Greiner: Although we are pleased with our transformation progress we fell short in the third quarter of our stated objective of mid single digit organic growth, which also negatively impacted gross margin for the quarter.
Michael Greiner: Our pain portfolio, particularly surgical pain was the primary driver of this underperformance, partially offset by another strong quarter and digestive health.
Michael Greiner: In spite of these mixed results. We have continued to help patients get back to the things that matter. So far this year, we have supported over 1 million patients in overcoming a wide range of challenges from post surgical pain management and recovery using our <unk> catheter based therapy and game ready solutions.
Michael Greiner: Addressing short and long term enteral feeding needs with our core track and Mickey brands.
Michael Greiner: Are very committed to making a positive impact in these patients lives.
Michael Greiner: Now switching to financial highlights for the quarter, we generated approximately $170 million of sales from continuing operations.
<unk> 36 of adjusted diluted earnings per share and approximately $31 million of adjusted EBITDA from continuing operations or almost 18% of adjusted EBITDA margin.
Michael Greiner: Adjusted for the effects of foreign exchange and the impact of our strategic decision to discontinue revenue streams that did not meet the return criteria specified by our portfolio transformation priority.
Michael Greiner: Organic sales were up one 1% compared to a year ago.
Michael Greiner: Now let me spend the next few minutes discussing our results at the product category level.
Michael Greiner: Our digestive health portfolio continues to deliver consistent results growing almost 6% organically versus prior year reaffirming our number one position in long term short term and neonate feeding.
Michael Greiner: Digestive health performance was supported by continued double digit growth in our <unk> product line as we continue to take advantage of a strong demand for and fit conversions in North America, while also capturing opportunities from our competitors' backwater.
Michael Greiner: As we've previously signaled we anticipate lower but still above market growth over the next few quarters as we enter the late stages of the adoption cycle.
Michael Greiner: Demand for our legacy Enteral feeding business remained healthy growing at market level during the third quarter compared to the previous year.
Michael Greiner: We expect continued above market growth for our digestive health portfolio will be supported by product innovations global market expansion and inorganic growth opportunities.
Michael Greiner: Now turning to our pain management and recovery portfolio normalized organic sales for this quarter were up a little over 1%, excluding HCA and inorganic sales related to our <unk> acquisition.
Michael Greiner: While our overall pain portfolio grew year over year, we are disappointed by the performance of our surgical pain portfolio and softness in our North America Cooley offering.
The setback in our surgical pain portfolio was centered around our <unk> product line.
Michael Greiner: It was affected by transient execution and supply issues stemming from Backorder challenges at one of our pre fillers early in the third quarter.
Michael Greiner: Additionally, while we have maintained key customer relationships and prioritize supply for these tier one <unk> customers, we have experienced higher than expected turnover in our next tier of customers. We are actively working to reengage them.
Michael Greiner: These headwinds muted the strong performance of our <unk> product, which has grown in excess of 30% in each of the last four quarters capitalizing on a procedural shift to the ASC.
Michael Greiner: Our IBP business posted double digit growth for this quarter compared to the previous year, we continue to see momentum in our IBP generator sales, capturing higher procedural volumes, especially within our suntech and try it and product lines.
Michael Greiner: Credit a renewed ASC strategy and the increasing productivity of our fully deployed new sales structure and supporting these outcomes. Additionally, we are encouraged by the progress of our <unk> offering internationally leveraging reimbursement <unk> in several countries, including the UK and Japan.
Michael Greiner: Our China and product line acquired in the <unk> acquisition, a year ago continues to deliver against our internal growth expectations.
Michael Greiner: We are capitalizing on our successful U S market launch with over 130 accounts, having converted to our trading technology.
Michael Greiner: Our game ready portfolio posted its third consecutive quarter of double digit growth compared to the prior year as noted during our last call. We anticipate a lower growth profile from game ready in the fourth quarter, given the particularly strong fourth quarter, we experienced in 2023. However.
Michael Greiner: However, actual revenue results for the fourth quarter will be in line with the first three quarters of 2024.
Michael Greiner: Finally, our HD portfolio, while down year over year was flat and sequentially consistent with our prior three quarter results.
Michael Greiner: This leveling off of revenue on our <unk> portfolio was anticipated and aligns with our previously forecasted 20% decrease in revenue for the full year.
Michael Greiner: We expect fourth quarter revenue for our portfolio to be north of $10 million, which would mark the fifth consecutive quarter at this level of performance.
Michael Greiner: While we continue to execute on mid to longer term strategy to gain volume share in a three and five shot a J categories, we continue to experience pricing pressure.
Michael Greiner: She is currently offsetting the volume share gains we are achieving now margin expansion was positively impacted by continued SG&A optimization efforts and a favorable outcome from a Canadian customs duty refund matter.
Michael Greiner: Adjusted SG&A as a percentage of revenue was 39, 8%.
Michael Greiner: Marking an improvement of 180 basis points compared to the third quarter of last year and 320 basis points sequentially. This.
Michael Greiner: This improvement is primarily driven by our cost savings efforts to streamline the organization and reduce overall spend as part of one of our transformation pillars.
Michael Greiner: For the quarter, our adjusted gross margin was 58%, which is comparable to last year, we were able to partially offset inflation and price volatility through transformation initiatives at our plants and operations level.
Michael Greiner: We expect adjusted gross margin to be approximately 59% for the fourth quarter as we see better product mix and savings initiatives that were delayed during the third quarter implemented in the fourth quarter.
Michael Greiner: As I already shared our performance in the third quarter and tracked slightly behind our expectations.
Michael Greiner: That being said our organizations primary focus remains our transformation priorities as we address transient challenges that are likely to provide a slight headwinds into the fourth quarter.
Michael Greiner: As a result, we anticipate the following outcomes for the fourth quarter.
Michael Greiner: Revenue in the range of $175 million to $180 million, representing low to mid single digit organic growth.
Michael Greiner: Adjusted gross margin of approximately 59% and approximately 40% of adjusted SG&A as a percentage of revenue.
These financial metrics support and adjusted diluted earnings per share between <unk> 38 and 43.
Michael Greiner: Now turning to our financial position and liquidity are.
Michael Greiner: Our balance sheet remains strong and continues to provide us with strategic flexibility with $89 million of cash on hand.
Michael Greiner: And $162 million of debt outstanding as of September 30.
Michael Greiner: Supporting our cash on hand free cash flow was positive $20 million in the third quarter.
Michael Greiner: During the fourth quarter, we anticipate generating approximately $30 million of free cash flow as well as receiving $30 million of cash from air life, primarily due to final transfers on the remaining assets related to our RH divestiture.
Michael Greiner: As a result, we expect our year end balance sheet to have net debt of approximately $20 million and a leverage ratio of under a quarter of churn.
Michael Greiner: As we've previously shared we continue to actively pursue strategic M&A opportunities that align with our returns criteria and we'll also deploy capital for opportunistic share repurchases.
Michael Greiner: Now finally, moving to our 2023 to 2025 transformation priorities and efforts.
Michael Greiner: As a reminder, we have four key priorities that are expected to improve our go to market opportunities and meaningfully enhance our financial profile.
Michael Greiner: These priorities are strategically and commercially optimizing our organization.
Michael Greiner: Transforming our product portfolio to focus on categories, where we have attractive margin profiles and the ability to win taken.
Michael Greiner: Taking additional cost management measures to enhance operating profitability and continuing our path of efficient capital allocation to meaningfully improve our ROIC.
Michael Greiner: Yes.
Michael Greiner: We continue to make important progress against these transformation priorities.
Michael Greiner: Highlights include but are not limited to finalizing separation efforts associated with the divestiture of our respiratory health business with the convenience of our Magdalena and Nogales to plants to air life as well as the transfer of the Australia and New Zealand International operations.
Michael Greiner: Maintaining above market growth in our enteral feeding business benefiting from strong and fit conversion tailwind in North America.
Michael Greiner: <unk> to continue into Q4.
Capturing procedural volume growth for our IBP portfolio.
Michael Greiner: Strong execution for our <unk> product line.
Michael Greiner: Further execution related to a companywide cost management programs.
Michael Greiner: And maintaining M&A discipline, and a conservative leverage level of less than one term.
Michael Greiner: And as of last Friday, we received an FDA approval for our core grip SRM nasal bridal system. Our third FDA approved 500, 10-K premarket submission this year.
Michael Greiner: As you know we kicked off our transformation journey at our June 2023, Investor day and have executed on the majority of these key initiatives. Nonetheless, the full benefit of these initiatives is currently being tempered by inconsistent topline results.
Michael Greiner: To address this challenge we are continuing to adjust our go to market approach invest in <unk> and reimbursement strategies enhance the quality of our selling and marketing organization and selectively enter international markets to achieve consistent mid single digit top line growth that is required to support the full finance.
Michael Greiner: Outcomes of our transformation efforts.
Speaker Change: Operator, please open the line for questions.
Speaker Change: Thank you so much ladies and gentlemen, you will now begin the question and answer session should you have a question. Please press the star followed by the number one on your Touchtone phone, you'll hear a prompt that your hand has been raised should you wish to decline from the polling process. Please press the star followed by the number too.
Speaker Change: And if you're using a speaker phone please lift the handset before pressing any keys.
Speaker Change: And one moment. Please for your first question.
Speaker Change: Our first question comes from the line of Kristen Stewart of C. L. King Your line is now open.
Kristen Stewart: Hi, Thanks for taking the question I wanted to just start off on the pain business and the supplier constraints within on Q.
Kristen Stewart: Specifically, how long do you think that these supplier constraints are going to be lasting them. How should we think about the longer term growth rate for on Q in the portfolio, especially as we look out into FY 'twenty five.
Speaker Change: Yeah. Thanks, Kristen so the primary supply challenges, we have with <unk> in the quarter related to lighters and that was in the first half of the third quarter those resolve themselves as the quarter went on but as you know we Miss a procedure that has an <unk> attribute we're not going to get that procedure.
Kristen Stewart: Back so it has a <unk>.
Kristen Stewart: Impact in quarter.
Kristen Stewart: And so we have to get some of those customers back and obviously, depending on what the uptake of procedure volume is in the fourth quarter that will have an impact on on Q.
Kristen Stewart: As well longer term.
Kristen Stewart: We are excited about <unk> prospects, primarily because no pain Act, which we've talked about previously so we will find out in the coming weeks, what our reimbursement will be around <unk>, and we will be able to have a much more thoughtful view as to what that will do to impact on <unk> going forward.
Kristen Stewart: <unk> Act is a positive no doubt about it we just arent quite yet sure exactly how positive when the actual reimbursement rate will be a big determinant in that.
Speaker Change: Okay, and then how should we just think about the company's lager.
Speaker Change: Term goals and objectives.
Speaker Change: That wasn't mentioned on today's call and just thinking ahead to FY 'twenty five if you still feel comfortable with seeing an acceleration to mid single digit growth or if we should think about this more as a low to mid single digit growth profile sort of company given kind of the four key performance is in that range.
Yes, so a couple of things great question, we're not commenting on 25 right now we will be doing that as we attend the Jpmorgan conference in January.
Speaker Change: The.
Speaker Change: Other than <unk>, and North America softness in cool leaf, we actually had very good performance throughout our product portfolio.
Speaker Change: So we continue to analyze coming out of Q3 with the softness in <unk>, which was about $3 million and then there is a little over $2 million and softness with North America cool leave the rest of the portfolio is operating as intended.
Speaker Change: While we do need to take a step back and think about what the no pain Act will be.
For <unk> going forward as I just shared with your initial question and then also what is the right growth profile for the company going forward, but we are acting.
Speaker Change: As intended through the rest of the transformation and you can see that in the remaining parts of the income statement and.
Speaker Change: And so we will have a more wholesome update.
Speaker Change: Early part of January for.
Speaker Change: 2025.
Speaker Change: Thanks very much.
Speaker Change: Thank you so much.
Speaker Change: Again, if you would like to ask a question. Please press Star One. Your next question comes from the line of Danny Saturday of Stephens JMP. Your line is now open.
Speaker Change: Yes, great. Thank you.
Speaker Change: For my first one.
Speaker Change: I wanted to ask on <unk>, five, but I'll keep it high level.
Danny Saturday: You talked about a number of items, but could you just give us some primary tailwind to sales that we should be thinking about what are the major products.
Danny Saturday: The product launches or anything else, we should keep in mind as we look to next year.
Speaker Change: Yeah, So I'll start with digestive health business, you know, we have our legacy business, which we supported by our core group as our launch amongst two other launches that we'll have throughout next year.
Danny Saturday: Our legacy DH businesses.
Danny Saturday: At the market of 3% to 4% grower, we've been growing faster than that in many quarters due to taking share.
Danny Saturday: These launches are important in order to ensure that we can continue to grow.
Danny Saturday: At the 3% to 4% rate and higher as we take share so.
Danny Saturday: That's part of the enteral feeding business. The other part of our enteral feeding DH businesses, our <unk> product line for neonates.
Danny Saturday: As you know thats been growing very healthy for a couple of years now we have signal for a bit of time that we're in the later innings of the <unk> conversion cycle for Neilmed. His lasted longer than we anticipated, which obviously is great and we will be achieving over $100 million in revenue in <unk> for the year at some point in December so we're.
Danny Saturday: Cited about that that growth rate, though will come down a little bit in 2025, which which we have anticipated and have already signaled when you look at our pain management recovery business. We look primarily of four buckets I'll start with a J.
Danny Saturday: This is the fourth quarter in a row, where HCA has been between $10 million to $11 million of revenue, we anticipate fourth quarter to have a similar level of revenue.
Danny Saturday: And then we expect to continue to have good volume share gains into 'twenty five but we're currently assessing what is the pricing impacts between our three and five shot markets going into 2025. If you look at the new allowable pricing that was just published.
Danny Saturday: <unk> was up three shop was down and so there's various strategies that we're deploying.
Danny Saturday: Against both our three and five shot offering in both Medicaid Medicare and the commercial set so we've got some work to do to understand what are the pros and cons of our pricing strategy going into 'twenty five but on a volume basis, we've done a very nice job on the HR side.
Danny Saturday: Our.
Danny Saturday: IBP business, which consist of three different platforms has been growing quite nicely, we had a double digit growth rate this quarter.
Danny Saturday: Our new acquisition from <unk> has performed as expected if not slightly better. So we're excited about that offering and what we can capture and share of.
Danny Saturday: Volume of procedures in the ASC setting <unk> is doing very nicely internationally as I noted earlier in North America. It was a little soft, but internationally with reimbursement tailwind, particularly in the UK and Japan.
Danny Saturday: Brian Cooley nicely. So we're excited about our IBP part of our portfolio.
Danny Saturday: I'm ready has had three consecutive quarters of double digit growth by the fourth quarter, we will not have that percentage growth just because of the tough comp we have for the fourth quarter of last year, but we will have absolute dollar value revenue growth similar in the fourth quarter for game ready. So that is stable and growing we're excited about the opportunity to gain.
Danny Saturday: And in 'twenty, five and beyond and our surgical pain business and it has been growing 30% plus as we noted in our prepared remarks, we're excited about the share that it's taking in the ASC and <unk>. We do think is set up for stabilization at worse and hopefully some growth given the no pain Act.
Danny Saturday: And reimbursement.
Danny Saturday: Positive news that we'll be receiving as we enter into 125, so we like where we're positioned with this portfolio, but as I said to Christine's question, we do need to do some more work over the coming weeks and into the early part of next year.
Danny Saturday: Two.
Danny Saturday: Be able to lay out a an inappropriate 2025 set of financial metrics.
Danny Saturday: More to come on that in early January.
Speaker Change: That's great I appreciate that and just one follow up so.
Speaker Change: Just on game ready.
Speaker Change: A few strong quarters here and you talked a little bit about that but any more color you can give us on what's driving this growth.
Speaker Change: Some of it due to 2023 comps or do you feel this is more steady state solid performances and then any notable drivers we should keep top of mind as we look into next year. This category. Thanks, Yeah, No. It's a great question, so a little bit of it is the comps.
Speaker Change: As you point out just as the tough comp for Q4 will mute some of the percentage for game ready in Q4, but if you look at the absolute dollars. It is growing year over year in total for the year. We expect to have similar growth in total for 2025, we are deploying some new strategies in game ready around.
Speaker Change: Correct to consumer approach, which we are currently testing.
Speaker Change: And currently we are very pleased with some of the early feedback we're getting we're also deploying additional.
Speaker Change: Strategies with orthopedics in game ready rental model that is a little more seamless than the current rental model that we currently deploy which can be clumsy at times for us because that's not our expertise.
So we think we have the right strategies in place for game ready and were excited to lay out additional.
Speaker Change: I think 25 to help support further growth in that category.
Speaker Change: Great. Thank you very much.
Speaker Change: Thank you so much and there are no further questions at this time I would like to turn the call over to Michael <unk> for closing remarks.
Speaker Change: Yes.
Michael Greiner: Great. Thank you.
Speaker Change: So our primary focus as you guys know continues to be the execution of the strategic transformation plan that we outlined a 15 or so months ago at Investor day.
Michael Greiner: As we previously talked about we've successfully executed product exits divested our <unk> business and hit our <unk>.
Michael Greiner: Important milestone this quarter with that divestiture.
<unk>, some great technology with <unk>.
Michael Greiner: And we supported our valuation through.
Michael Greiner: Various share repurchase opportunities Opportunistically, which we will continue to do going forward and we've made significant progress from a margin standpoint free cash flow generation standpoint towards our financial objectives. We look forward to presenting at the Jpmorgan conference in January with a more holistic review of our transformation priorities.
Along with as I, just shared the full year financial metrics for 2025. Thank you for your continued interest in <unk>.
Speaker Change: Thank you presenters, ladies and gentlemen. This concludes today's conference call. Thank you for your participation and you may now disconnect have a great day.
Michael Greiner: Okay.
Michael Greiner: Oh.
Michael Greiner: Okay.