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Good morning, ladies and gentlemen. Welcome to the Avanos Medical, Inc. fourth quarter 2024 earnings call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Wednesday, February 26, 2025. I would now like to turn the conference over to Mr. Scott Galovan, Senior Vice President of Strategy and Corporate Development. Please go ahead.

Good morning, everyone, and thanks for joining us. It's my pleasure to welcome you to Avanos Medical, Inc. 2024 fourth quarter and full year earnings conference call. Presenting today will be Michael Greiner, Interim CEO. Michael will review our fourth quarter and full year results, the current business environment, as well as provide an update on our transformation efforts. Additionally, Michael will provide our 2025 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 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 GAAP financial measures.

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 2024. We delivered a strong fourth quarter anchored by continued solid performance of our enteral feeding franchise. We also completed our obligations related to the sale of our respiratory health business with the completion of final asset transfers on October 1, 2024. This is a key milestone in our three-year transformation process. Additionally, in January, we received notification from the DOJ that we have met our commitments with regards to our deferred prosecution agreement. Separately, we are pleased to have served over two million patients in 2024 through our enteral feeding portfolio, which provides essential nutrition and medication delivery for those in need, and our pain management and recovery solutions which deliver clinically proven, non-opioid therapies to support patients with chronic pain conditions or those recovering from postoperative pain. Switching to financial highlights, sales from continuing operations during the fourth quarter were approximately $180 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 5% compared to a year ago. For the quarter, we generated $0.43 of adjusted diluted earnings per share and nearly $29 million of adjusted EBITDA from continuing operations, with adjusted gross margins just shy of 59% and SG&A as a percentage of revenue of 41.6%. Our fourth quarter GAAP results include a non-cash impairment charge of approximately $437 million based upon assessment that the fair value of our single company reporting unit was below its carrying value. For the full year, our sales from continuing operations were approximately $688 million. Adjusted for the effects of foreign exchange, and as I just noted, the impact of our earlier strategic decision to discontinue revenue streams that did not meet our return criteria, organic sales increased 3.3% compared to a year ago. We delivered adjusted diluted earnings per share of $1.35, a 31% increase compared to the prior year, and adjusted EBITDA from continuing operations of approximately $108 million, or almost a 100 basis point expansion of margin. For the full year, adjusted gross margins were 59%, flat with the prior year, and SG&A as a percentage of revenue was 42.5%, an improvement of 80 basis points compared to a year ago. This is primarily driven by cost transformation initiatives and business process improvements. While we had some uneven performance this year, we are pleased with our overall execution and the steady progress we've made against each of our transformation priorities. The progress in our transformation over the past 18 months has strengthened our ability to deliver on our broader strategic goals, which I'll discuss in a few minutes. Now turning to our financial position and liquidity, our balance sheet remains strong and continues to provide us with strategic flexibility with $108 million of cash on hand and $135 million of debt outstanding as of December 31. We have further improved our financial position in the early weeks of 2025 as we currently have over $90 million in cash and net debt of approximately $20 million. During the year, we generated $83 million of free cash flow, an increase of almost $70 million compared to the previous year. This year's free cash flow included the collection of an $18 million tax receivable that included almost $2.5 million of interest income. From a capital allocation standpoint, and as we have 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. Now I'll spend the next few minutes discussing our fourth quarter results at the product category level. Our enteral feeding portfolio continues to deliver above-market results, growing almost 12% organically versus the prior year, reaffirming our number one position in short-term, long-term, and neonatal feeding. This business sustained double-digit growth, which was supported by our NeoMed product line as we continue to take advantage of the strong demand for ENFit conversions in North America, while also capturing opportunities from a competitor's back order. During the fourth quarter, we also benefited from a meaningful international order through an OEM partner. As we have previously signaled, we anticipate lower but still above-market growth for our NeoMed product line over the next few quarters as we enter the late stages of the ENFit adoption cycle. Demand for our legacy enteral feeding business remained healthy, growing at market levels during the fourth quarter compared to the previous year. We believe these dynamics provide a foundation for us to deliver mid-single-digit growth for our overall enteral feeding portfolio in 2025, with core commercial execution, product innovations, and further global market expansion. Now turning to our pain management and recovery portfolio, normalized organic sales for this quarter were down approximately 3%, excluding the impact of foreign exchange and our previously announced strategic decision to discontinue certain low-growth, low-margin products. Compared to the prior year, we rebounded from a weaker third-quarter performance, with our combined On-Q and Ambit portfolio growing 13% sequentially. The implementation of the reimbursement decision afforded by the No Pain Act provides hospitals and caregivers with improved options to administer non-opioid post-surgical pain relief. We are excited to participate in this better patient care through our On-Q and Ambit product line offerings. Additionally, our Ambit product, which has capitalized on the procedural shift to the ASC, continues to post excellent results, growing more than 30% in each quarter of 2024. Our interventional pain or IVP business posted high single-digit growth this quarter compared to the previous year. We continue to see momentum in our IVP generator sales, capturing higher procedural volumes, especially within our Ascentech and Trident product lines. We credit our renewed ASC strategy and the increasing productivity of our fully deployed new sales structure in supporting these outcomes. Additionally, we are encouraged by the progress of our Coolief offering internationally, leveraging reimbursement tailwinds in several countries, including the United Kingdom and Japan. The Trident product line, acquired in the Aderos transaction 18 months ago, continues to exceed our internal growth expectations. We are capitalizing on our successful US market launch with over 180 accounts having converted to our Trident technology. Now moving to our Game Ready offering, as noted during our last call, we anticipated a decline from our Game Ready portfolio in the fourth quarter, given the particularly strong fourth quarter we experienced in 2023. However, as expected, actual revenue in the fourth quarter was in line with the first three quarters of 2024, as we continue to deliver on direct sales opportunities with high-level sports teams, orthopedic sites of care, and some direct cash pay customers. Finally, our portfolio, while down year over year, was sequentially consistent with our prior three quarters' results. This leveling off of revenue in our portfolio for 2024 was anticipated and aligns with our previously forecasted 20% decrease in revenue for the full year. As we actively execute strategies to grow volume share in the three and five-shot categories, we are seeing progress in the five-shot segment. However, pricing pressure in the three-shot offering continues to present challenges, offsetting our overall share growth. Although we had some mixed results across the pain management and recovery portfolio throughout 2024, we are encouraged by the progress we saw this year in our IVP and Game Ready businesses that deliver organic mid-single-digit growth. Looking ahead, we expect the following across the PM&R portfolio in 2025: our IVP and Game Ready businesses continuing to make organic gains, our surgical pain products reversing years of negative outcomes with the No Pain Act tailwinds, and our product line continuing to see pricing pressure as I just noted. Now moving to our 2023 to 2025 transformation priorities and efforts. As a reminder, we have four key priorities designed to improve our go-to-market and meaningfully enhance our financial profile. These priorities are strategically and commercially optimizing our organization, transforming our product portfolio to focus on categories where we have attractive margin profiles and the ability to win, taking additional cost management measures to enhance operating profitability, and continuing our path of efficient capital allocation to meaningfully improve our ROIC. We continue to make important gains against these transformation priorities, which included the following progress during the fourth quarter: completed the divestiture of our respiratory health business, with the conveyance of certain Mexican assets to AirLife in early October, and exiting all remaining global distribution agreements; maintained consistent growth in our enteral feeding business, benefiting from strong ENFit conversion wins in North America that are expected to continue into early 2025; realized record generator sales in our IVP business, which we expect will support ongoing volume procedural share growth gains during 2025; and executed on our go-to-market strategy for our Trident technology, allowing us to achieve greater than 20% growth globally. We also continued progress of our business efficiency programs with third-party service providers and the establishment of our AI solutions portfolio, which will allow us to better utilize data to drive efficiencies, assist in targeting customers, identify new product innovation, and streamline decision-making. We also further identified and executed with relation to our company-wide cost management programs, maintained M&A discipline throughout the year, and our current leverage levels will allow us to be appropriately positioned for acquisitions throughout 2025. And we exited our deferred prosecution agreement with the DOJ in January. As you know, we kicked off our transformation journey at our June 2023 Investor Day and have made solid progress. Nonetheless, the full benefit of our transformation initiatives has been tempered by inconsistent top-line results primarily in our PM&R business. To address this challenge, we are actively making changes to improve our go-to-market strategies that we expect will enable us to realize the full financial outcomes of our transformation efforts, as well as reporting changes that will mirror how we run our businesses and provide more transparency around the growth and margin profiles of these businesses. We have refined the company's organizational focus and strategic business priorities to ensure all priorities are clear and positively impact our operating processes, improve customer experience, and capitalize on growth opportunities to deliver margin expansion. To align this approach with how we will manage the business, starting in the first quarter of 2025, we will start reporting under three operating segments. First, our enteral feeding portfolio will be renamed as our Specialty Nutrition Systems segment. This segment will include our long-term feeding portfolio featuring our MIC-KEY low-profile enteral feeding tubes, our short-term feeding portfolio encompassing our CORTRAK guided feeding tube placement, our CORFLO nasogastric feeding tubes, and our CORGRIP tube retention system. And finally, our NICU portfolio, which includes our NeoMed neonatal pediatric solutions. The Specialty Nutrition Systems name captures our bold vision to expand from our leading enteral feeding portfolio to a life-sustaining enteral feeding and nutrition products portfolio that responds to the need for a simplified, patient-preferred, integrated specialty nutrition ecosystem. Next, our interventional pain and pain management and recovery portfolios will be combined into a single Pain Management and Recovery segment. This segment will include our three-tier radiofrequency ablation offering, featuring our Ascentech conventional RFA solution, our Trident timed RFA solution, and our Coolief cooled RFA solution. It'll also include our surgical pain pumps portfolio featuring our On-Q elastomeric pain pumps and Ambit electronic pain pumps, along with our Game Ready cold and compression therapy offering. Finally, our hyaluronic acid injections and intravenous infusion product lines will be combined and reported in our Corporate and Other segment. As noted, we believe this transparency will highlight the financial profiles of our Specialty Nutrition Systems and Pain Management and Recovery segments. More importantly, this will guide internal capital allocation decisions, helping us optimize returns and achieve stronger ROIC as we evaluate investment opportunities across each of our segments. Now turning to our 2025 outlook. Our 2025 guidance reflects a challenging market environment for some of our product categories, as well as currency headwinds and other global macroeconomic factors like tariffs. While we anticipate a temporary pause in margin improvement this year due to these factors, we remain committed to executing our long-term strategy and achieving our previously stated margin targets. Accordingly, we expect net sales in the range of $665 million to $685 million, with our Specialty Nutrition Systems segment growing mid-single digits organically, and our Pain Management and Recovery segment expected to deliver flat to low single-digit organic growth. Finally, our Corporate and Other segment is anticipated to decline over 20%. These top-line results will support expected adjusted diluted earnings per share of between $1.05 and $1.25. To reiterate, this guidance reflects currency headwinds on reported revenue of approximately 100 basis points due to the strengthening of the US dollar, and as you know, we do not speculate on future currency movements and are currently assuming foreign exchange rates near current levels for the duration of the year. Separately, as you're aware, we have manufacturing in or sourcing from Mexico, Canada, and China, and we are therefore very closely monitoring the evolving tariff landscape, as well as any potential downstream effects on our customers. While we await further developments and explore strategies to mitigate potential impacts, this current guidance reflects a relatively neutral view on tariffs for 2025. Guidance also considers continued pricing pressures and a de-emphasis on our intravenous infusion products that are now included in our Corporate and Other segment and reflects a combined expected decline of 20% in those categories. And finally, we anticipate an annual effective tax rate of about 27%. What this guidance implies is that our 2025 financial results will be similar to our 2024 results on a consolidated level. We believe that the actions we take this year will position us to reignite our margin expansion journey, deliver consistent revenue growth in our two strategic operating segments over the mid to long term, and enable the company to ultimately deliver on a financial profile that includes gross margins greater than 60% and adjusted EBITDA margins of 20%. 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 number 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 the star followed by the number two. If you are using a speakerphone, please lift the handset before pressing any keys. One moment, please, for our first question. Our first question comes from Mr. Rick Wise of Stifel. Please go ahead.

Hey, Michael. It's Anton on for Rick. Thanks for taking my questions. Maybe first for me. I was hoping you could add some more color on the 2025 margin improvement pause. You know, I think to myself that you've been Chief Transformation Officer for, you know, two years now, probably have more wood to chop there. And on top of that, products like NeoMed, Ambit, and Trident continue to perform well. Maybe just help us understand the expectation for flat to down 2025 operating margins. Just conservatism?

So I think a couple of things. Great question, Anton. One, you could argue that some of what we put forward for 2025 is conservative, primarily driven by the macroeconomic uncertainties that are out there. So we've tried to embed some of that. Separately, when we think about our operating margin walk on an absolute dollar value, we will finish 2025 about where we said we would in our Investor Day from 2023. When we did our Investor Day in 2023, we anticipated that we would have had $40 million or so more in revenue at a much higher margin point. So we have executed on the cost takeout on a gross level. We have hit, by and large, our targets for total OpEx across R&D and SG&A. And the unfortunate part of the declines with the higher margin profile is it's impacted the math on the ultimate margin. That being said, that answers the pause for 2025. As we've said in our prepared remarks, I do have confidence that we can reignite that margin expansion as we get into 2026. We get some of these global macroeconomic uncertainties behind us. And we continue to execute on additional cost management takeout opportunities.

Great. Thanks so much for that perspective. And then maybe just one more on the business. I mean, you highlighted back in our conference in November that your first job as interim CEO was to figure out what Avanos Medical, Inc. is going to do with the business. Maybe talk to us a bit more about the company's progress on that front so far. Given the impairment charge recognition this quarter and your update expectations for the business going forward, does this add any more urgency to this evaluation process?

Yeah. So, absolutely, they're tied together. You know, we took a step back and looked at the portfolio, the headwinds, how we're positioned with our three and five-shot products, where we're winning on volume. We did grow volume almost 3% across the portfolio in 2024. But the offset was far greater from a pricing standpoint in order to achieve that volume gain. We see 2025 very similarly. Volumes will maintain a pretty healthy position in both three and five-shot with some continued movements between three and five-shot. The pricing dynamics that we have, because we are only in the Medicaid side of the market and not in the commercial private payer side of the market, continue to be a real detriment to us being able to do something meaningful with that category. So, you know, with our three segments, and there are strategic reasons for those segments and how we operate them, we decided to put our hyaluronic acid injections and intravenous product line in the Corporate and Other segment as a signal that we're deemphasizing what we can do there. And we will run both of those businesses from a cash optimization standpoint over the coming 12 to 18 months.

Thanks again for taking our question.

Thank you. Our next question comes from Mr. Donny Stouder of Citizens JMP. Please go ahead, sir.

Yeah. Great. Thanks. So first one is on guidance. I know we appreciate all the color, but could you give us a little more of a sense of what is contemplated here for both the high and low end of the range? You've talked about some of the moving pieces on the segment and product portfolio basis. What do you feel could be the most likely candidate for upside or downside to your numbers? Just, you know, any framing or little more color you give us would be much appreciated. Thank you.

Yeah. Good question, Donny. So I think on the upside, it would be, obviously, tariffs, creating some certainty there around what that is or isn't and how that affects our overall business model. From an FX standpoint, we've embedded a US dollar trading at or about where we are right now. Obviously, that could go in either direction, and so that could have an impact on the upside or the downside. We have been able to take advantage of an opportunity with a competitor back order. If we can execute against those demand levels, and that competitor stays out of the market longer than anticipated, that provides some upside. We talked about the record placements last year. And if we could get more procedure growth through probe use in our IVP category, that could provide some upside. And then we also have a couple of product innovations that we're launching. And depending on how successful those launches go in the back half of the year, you know, that could provide some upside as well. So there's definitely back to the earlier question, one would argue that our guidance is somewhat right down the middle of the fairway, a little bit conservative and appropriate for where we stand right now across our products and the macroeconomic environment. On a downside, it really would not be a product-specific issue. I think we've captured the downside in our Corporate and Other segment with hyaluronic acid injections and intravenous. I think we're well-positioned with the rest of our portfolio to not have downside versus what we've signaled with that range today. But, obviously, if macroeconomic factors got meaningfully worse, that would create some additional downside that would be, obviously, right now very hard for us to model.

No. That's great. Really appreciate the extra color there. This is the next question. Cash flow, really great progress in 2024, but should we say about this 2025, you know, what are the puts and takes? And then, you know, off the cash, what are some of the focus areas for potential transactions? Is it still on the nutrition side or have you narrowed that view at all since we last spoke?

Yeah. So it's definitely within our, you know, part of the naming convention that we have for the segment that used to be enteral feeding, digestive health, to Specialty Nutrition Systems. If you go back to the JPMorgan presentation that I did, you know, we think of that as a whole ecosystem to solve a patient need from the delivery to the actual nutrition they get to how the caretakers use these products. And so that's where our focus is going to be on the M&A side. And as you, I think, alluded to, our balance sheet is in a great position to deploy towards assets in those categories. So that's where we will spend most of our opportunities hunting this year. Specific to your free cash flow question, it was a great year. Yeah. We did have the tax receivable that was about $17 million, so let's call it normalized free cash flow. $65 million-ish in 2024. We should anticipate free cash flow in or about that range in 2025 as well. As our EBITDA levels will be, you know, on par with each other, give or take a couple million from 2024 to 2025. You know, we still think we have some opportunity on the working capital side with inventory. You'll see the improvements we've made on the balance sheet. We still think there's progress there. And we still have a little bit of progress we can make on the receivable side. You know, CapEx will be a little bit higher in 2025 versus 2024. As we move NeoMed production out of China, that's one of the active projects we're working on to avoid tariffs as of January 1, 2026, with our NeoMed set of products, syringes in particular. So we'll see a little bit more of a headwind in CapEx, call it, you know, $5 to $10 million in 2024 and 2025. But overall free cash flow on an operating standpoint should feel similar to 2024 minus the tax receivable that we got.

Great. Thanks for that. And I'll just go over one more if I can. Just on the product innovations that you touched on earlier, could you remind us of how many there are in 2025, what they are, and what the timing could be? Thank you.

Yeah. So all of our near-term product innovations in near-term, I'll speak to up to 12 months, are in our Specialty Nutrition Systems segment. We anticipate one to two by the back half of this year. Another one to two, one to three in full year 2025. Most of those are not going to be meaningfully added on the revenue side, but they secure our number one leadership positions in our short and long-term feeding portfolio. So important innovations to get out. They respond to some patient needs, in particular, lower profile MIC-KEY as an example. So we're excited to get those out. Again, you know, we've earned our leadership position in our Specialty Nutrition Systems segment. We want to maintain that leadership position, which then gives us the ability to add to it through M&A and the credibility that we've built with consistent performance there. So we're excited to get those out. It's important that we do get those out, as I said, to continue to position us well for that segment to continue to grow steadily. And as you know also, and you'll see in the first quarter when we do our first round of actual segment reporting, our higher profitable segment is our Specialty Nutrition Systems segment, and you'll see that starting in the first quarter.

Great. Thanks so much.

There are no further questions at this time. I would now like to turn the call back over to Mr. Michael Greiner for his closing remarks. Please go ahead, sir.

Thank you, everyone, for listening and your time today. In summary, our top priority remains disciplined execution as we advance the transformation plan we outlined at our June 2023 Investor Day. As I noted, we have successfully completed many key initiatives, and these achievements have established the necessary foundation for ultimately delivering the financial profile that we believe our market-leading portfolio and presence in attractive markets should support, including mid-single-digit sales growth, further margin expansion, and continued delivery of meaningful free cash flow generation. We appreciate your continued interest in Avanos Medical, Inc.