Good day and welcome to the Avanos Fourth Quarter and Full Year 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note today’s event is being recorded. I'd now like to turn the conference over to Scott Galovan, Senior Vice President, Strategy and Corporate Development. Please go ahead.

Good morning, everyone and thanks for joining us. It's my pleasure to welcome you to Autodesk's 2023 fourth quarter and full year earnings conference call. Presenting today will be Joe Woody, CEO; and Michael Greiner, Senior Vice President CFO and Chief Transformation Officer. 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 2024 planning assumptions, we'll finish the call with Q&A. The 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 the risk factors described in our filings with the SEC. Additionally we'll be referring to adjusted results and outlook. 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 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 distributors 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 of 59.1% and SG&A as a percentage of revenue of 43.3% for the full year. For the fourth quarter, we delivered adjusted gross margins of 58.6% and SG&A as a percentage of revenue of 38.9%. Separately we remained focused on reducing our backorder 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. This is a significant improvement over last years back order loans of over $10 million serving as tangible proof that our supply chain organization is executing effectively on its transformation initiatives. As we have consistently communicated since I first presented our transformation plan at the January 2023 JPMorgan Conference, 2023 would be a bit uneven given the transformation priorities, 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. 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…

Thanks, Joe. 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 $0.36 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 dollars for the year. For the year, we generated $15 million of actual free cash flow which included onetime cash outflows of $10 million to settle an 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% which is slightly favorable compared to the third quarter. We previously expected gross margin above 60% in the fourth quarter. However, 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 as a percentage of revenue stood at 38.9% 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% to 39%. These improvements are driven by reduced headcount, third-party cost savings and business process optimization to name a few. Overall for the year adjusted EBITDA margin improved to 14.7% compared to 13.3% in 2022 and 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…

Thank you. We will now begin the question-and-answer session [Operator Instructions] Today’s first question comes from Daniel Stauder with JMP. Please go ahead.

Yes, great thanks. First question for me. You've commented that M&A is still very important pillar but just wanted to ask 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.

Hi, Daniel this is Joe. We 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. And like we have in the past, we have enough capability inside to onboard these well and to get this integrated. So I don't see it 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 for pipeline, we still have to make sure we're executing in particular on the strategy around that just developed. Q – Daniel Stauder: Great, and then just one follow-up on some of the HA business. You talked about it a bit as well as some of the programs, you're implementing to stabilize that part of the business. But just any more thoughts on what gives you confidence in 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.

Yes. 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 reimbursement for a couple of companies where people are going, because they can make more money and making decisions that way customers that's going to go away as you sort of end of the year, we think we can also do some things with market access to 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 achieve. 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 -- has great gross margin. We think it's a low single-digit grower, once we make our way through this year. Q – Daniel Stauder: Great. Thanks very much.

Thank you. And our next question today comes Rick Wise with Stifel. Please go ahead. Q – Rick Wise: Good morning, Joe. Hi, Michael. Joe, to keep pushing on the HA side of things, but I wanted to make sure I better understood 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 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 want to make sure I understood what you -- what you were saying there.

Sure, I see stabilization toward the end of this year towards the end of 2024. I see growth possible in 2025 and again, sort of the obviously the big target volumes have sort of somewhat remain about where they were. And so the -- it's really the price affected by the Medicare changes that's really hurting the business and in particular I think everybody's fighting, a little bit with that. In some cases a couple of competitors have specialized pricing that's going to go way up the middle of the year, and that creates more of a level playing field. And so we think with the customers, that will be also selling to in terms of Game Ready and really frankly, our Surgical Pain business and our Diros business that we're going to be able to get this to more of a low single-digit grower, as we get into 2025. 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 protecting our price for the longer term.

Dosing to consider, Rick, is that volumes, although different in three and five and how these have developed over the last year, three shot and five shot, they have been relatively stable. The majority -- heavy majority of the revenue decline has been due to pricing. So, the volumes to 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 exiting 2024, then we have something to build on going into 2025.

One of the things, too, Rick, that we said at the JPMorgan conference was that we can achieve the mid-single-digit organic to 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, quite frankly, is a tough aspect with the HA piece.

Got you. On operating margins, if I'm doing my math correctly, sales and EPS guidance midpoints imply operating margin something like 14% for the full 2024 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, you've 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 2024, Michael?

Yes. So, you're right. I mean I think we'll be a little bit north of 14%, but you're in the range there. And yes, first half is always going to be lower than the second half. I'd like to believe we can at least tweaking in 10% operating profit in the first quarter. But yes, that will be our lowest operating profit quarter, and then it will build a couple of few hundred basis points per quarter from there.

tested:

It's more sustaining in terms of the MIC-KEY area, maintaining our technology position and helping us there primarily. And then we do see continued growth in NeoMed 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. So, primarily sustaining that leadership position in the legacy business, and then we still see good runway ahead for CORTRAK, frankly, and for NeoMed.

Thank you.

And our next question today comes from Kristen Stewart with CL King. Please go ahead.

Hi. Thanks for taking the question. I just wanted to clarify, Michael, 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, yes. What I was trying to convey was what we originally laid out was the $750 million are correct. And that $750 million 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 or mid-single-digits, it's just off of that $20 million 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 kind of some of the measures that you're looking forward to achieve that objective?

Yes. I mean, if you think about this year we had a $50 million of total cash outflow for litigation settlements restructuring the RH divestiture that will be around $25 million to $30 million in 2024. And in 2025 we'll have hopefully minimal to no one-time cash payments. So that's a huge tailwind. On top of that our operational cash flow will be improving and just by nature of the revenue going up mid-single digits and the margin improvement 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 about $30 million -- $25 million to $30 million of inventory opportunity between now and the end of 2025. 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 opportunity and free cash flow over 2025.

Okay. Perfect. And then last question just on the IVP portfolio can you maybe just some talk through if you have any supply constraints still there with Tom Cooley? And then on the Trident launch in the US, I think you mentioned that was better than expected. Can you maybe just provide additional color on that?

Yes. So again, we saw about a 10% growth versus the third quarter in the business. And the quality issues in the supply chain issues are behind us. We were also happy with the capital sold in the fourth quarter that lends itself to the next year. The following year, zero's has really been exceeding our expectations in terms of a launch. But we just to remind everybody that we sell into the US, 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 than they get those accounts up and running for the full revenue streams. But we think there is going to be a big contributor to the business this year. And again it will be it will be high double digit as it has been.

And Kristen just one wanted to so the 10% Joe is referring to is the sequential growth Q3 to Q4 specific to our RF business. So that includes CoolWave our standard RF probes. And as Joe just mentioned the capital sales that does not include zero. Zero's grew more than 10%. Q3, Q4.

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 euros?

It includes D. Rose against the time period that we owned zeros. So the back half of the year it does not include any revenue in the first half of the year or the first half of the year through partially in the third quarter where we did not own zero. So it's pure organic growth.

Okay. Perfect.

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 the product ex-US. Investing in orange is the RH business and acquiring technology with euros. We obviously approved an additional share repurchase program and deliver most of our financial objectives. And I think, we've established the necessary foundation to deliver on the midterm financial commitments and confident that our transformation priorities coupled with our market-leading portfolio are attractive markets does position us for sales growth margin expansion and meaningful free cash flow generation. So we appreciate everybody's continued interest in hours, and I'm sure we'll speak further throughout the week. Thank you.

Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines. Have a good day.