Avanos Medical, Inc. (AVNS) Earnings Call Transcript & Summary

Good afternoon, everyone. Thank you for joining us today. It is my great pleasure on behalf of the JPMorgan health care team to introduce Joseph Woody, CEO of Avanos Medical. And as a friendly reminder, you may submit your questions through the Ask-a-Q feature listed under the presentation. Thank you, again, for your participation. And now I'll hand it off to Joe. Please, begin.

Thank you, and thanks to everyone for listening in and viewing the webcast. Thank you for your interest in learning more about Avanos. I'm excited today to talk about the momentum in the business. And we really believe that in a non-pandemic situation, we have a consistent mid-single-digit top line growing business, great opportunity to expand our margins and also accelerate our free cash flow. For those of you that are following along, I'm going to move over to Slide 2. I will be making forward-looking statements today. There can be really no assurance that these future events will occur as indicated. If you're concerned about the risks in the business or about these statements, we would direct you to the Avanos' Investor website and/or please look at our filings that are online and up to date. I'm going to move to Slide 3. I think this is a great place to start because it demonstrates there's a lot that we've done in the business over the last 6 years, and we became a pure-play medical device company really in 2018 when we divested the S&IP business. But if you look at this, we've made 4 acquisitions and broadened our portfolio. We've also invested heavily in the business and clinical affairs, direct-to-patient advertising. We've really put some structure in, in Europe and Asia Pac. And in addition to that, we put a lot of money and investment into R&D. And we've really progressed along the way. There's been one impact to the business that was negative, and that was the industry-wide drug shortage and 503B drug supplier crisis that was really a supply chain issue outside of our control, but nonetheless, affected our sales. But that's behind us, and we've created a lot of momentum in the business. And of course, in 2020, we put a very heightened focus on commercial execution. And really from Q4 2019 until now, we've been meeting our internal objectives and external, and that's been demonstrated in our earnings release. So as an organization, we feel we're really positioned well to deliver sustainable revenue growth and margin expansion and really see sort of the next evolution of our business. I'll move to Slide 4. This is who we are today, a $700 million company in attractive markets. Our addressable markets are $10 billion, really in excess of $10 billion. We market in 90 countries today, but only 25% of our business is sold outside of the U.S., and that's a real catalyst for us. What you can see on the slide are 2 subsegments of each of our 2 franchises. On the left is our Chronic Care franchise, where we participate in Respiratory Health and Digestive Health. And on the right-hand side of the slide is our pain franchise. We recently combined Acute Pain and Interventional Pain. And in Acute Pain, we're focused on postsurgical pain. And in Interventional Pain, we're focused on chronic pain. Our vision to be the best at getting patients back to the things that matter, there's really been no better evidence of that or example of that than the top left-hand side of the slide, where 9 in 10 patients ventilated for COVID-19 were on our closed suction catheters. We maximized, as you can imagine, our manufacturing capacity and, in fact, invested quickly in the new capacity in a matter of several months to make sure that we could serve all of our global customers. Slide 5. Before we go forward, it's good to take a look back at 2020. We feel like we executed very strongly in challenging circumstances. I'm very proud of the team and the organization. We certainly build -- built sales momentum. Obviously, we were affected by the pandemic and the change in elective surgeries. Nonetheless, we anticipate that we'll have slight growth from '19 to '20. Even though we were working from home, we integrated our recent acquisitions, and we're going to enjoy the benefit of that going into '21 and beyond. We started to make progress on generating free cash flow. We will come on to some work we've done on the CARES Act. But generally, we anticipate $100 million or more in free cash flow going into 2021. In terms of the response to the pandemic, we focused first on the safety of our employees and our supply. We kept our factories open. And obviously, we focused on maintaining a strong balance sheet and preserving a strong financial position that continues into '21. The events of the summer affected our employees dramatically. We've put a renewed emphasis on diversity, equality and inclusion. We think this is the right way to attract and retain talent that we're going to be a more innovative company and a better company. I know investors are going to be interested to talk about this as the year goes on and in the future, and I'm very excited to be able to talk about our program with investors as we meet this year. Moving to Slide 6. Just want to transition now and talk about our playbook for creating value over the next 18 to 24 months and provide a little bit more detail, and hopefully, spark some questions and dialogue in the Q&A session. There's really 4 areas where we're going to focus: sustainable performance, margin expansion, repeatable cash flow and focused capital deployment. So in terms of sustainable performance, we think we have the right portfolio and execution for mid-single-digit growth in a non-pandemic environment. We have a multifaceted approach to margin expansion at both the gross and operating level. We'll come on to that. We've made a lot of advancement in creating repeatable cash flow. We'll talk more about that as well. And I think we can build upon a strong track record in terms of capital deployment on value-adding M&A. So we'll talk about that as well. Moving to Slide 8 for those of you that are following along. The first and most important aspect of our game plan is sustainable performance. We need to deliver mid-single-digit growth. And on the left-hand side, we feel like Chronic Care will contribute to that. It's the greater portion of our cash and EBITDA. We've been growing over the past several years at global levels with mid-single-digit growth, strong positions in the U.S. But our acquisitions of CORPAK and NeoMed and their segments are growing high single digit. And of course, we're growing mid-single digit in International. And this is allowing for us to have a lot of confidence that mid-single-digit growth in the Chronic Care franchise is realizable and has a good runway. In the Pain Management business, you may have noted that we hired a new executive, Bill Haydon. We combined the Acute Pain franchise and the Interventional Pain franchise. And there's 2 areas of focus for us to get this franchise where we want it and keep contributing to the overall mid-single-digit growth. One is to, certainly, continue the double-digit growth of COOLIEF. We've been doing that for the past several years. And again, I think we have a good mid- and long-range plan as well, and that will be done by focusing on our clinical studies, expanding our reimbursement and increasing our penetration in our installed base in spine and in the new areas of osteoarthritis of the knee, hip and shoulder. So we really feel strongly that we can maintain that double-digit growth, and that's been evidenced in our performance. We're very happy and pleased with where we're headed with Acute Pain. Most of the customers that were filling with 503Bs that were shut down due to regulatory circumstances are now over into Leiters, and we've been progressing them, sequentially improving each quarter. We're starting to see some positive reaction and growth from our Summit acquisition, and offering customers now a broader portfolio, including electronic pumps. And in the third quarter call, I talked about a partnership with InnovaSurgical, which is a distributor and 1099 organization, marketing directly to orthopedic surgeons. Their selling teams have the ability to scrub directly in. We're piloting in 2 other areas, and I think this is going to be an area that enables us faster growth in the orthopedic segment. I'll move on to Slide 9, the second area of focus, again, multifaceted. We're focused in continuing our disciplined cost management, M&A synergies and product mix. And those of you that have been following us know that we did announce a program in 2018 to achieve $30 million to $40 million in cost savings. They're largely manufacturing and IT-related. We're on track. But of course, the performance in Acute Pain has diminished somewhat the effect. There are some other areas that we're going to focus on where we can improve. One is we made savings of $20 million during the pandemic, and we believe fully, 1/3 of those can roll into 2021 and beyond. Today, I'm making a new announcement, and I announced a restructure in Q4, that will bring $7 million of benefit into 2021. We did this on $10 million of cash costs. I'm downsizing my senior leadership team. We focused on our corporate cost. We've also eliminated additional headcount. We're reducing our headquarter footprint and looking at additional footprint across the world globally. So this is something that is going to be additive to our margin expansion. The last bullet point here is that we've invested a lot to move the business and these products in this direction, and we're going to see leverage going forward alongside of the growth because we don't really need to invest as much in the business overall. I am happy that we were able to integrate and close down sites where appropriate and get the corporate costs for our acquired businesses. Our ERP system really came through for us in reducing integration time and helping us get these costs more quickly. Lastly, and I think a lot of the companies that are presenting are going to experience this if they're in the elective surgery area. We do know that as we progress into the second half of 2021, we'll see higher-margin ON-Q and COOLIEF products come back and enjoy some product mix benefit. Slide 10 on repeatable cash flow. This is the other area of focus for us in terms of value creation, our third area. We fully believe that we're going to deliver higher earnings year-over-year and continue that pace. Our unusual costs, as you can imagine, have been quite high based upon divesting the S&IP business and rolling out an ERP system. Those will reduce significantly and be impactful. We've been heavily focused on driving working capital, in particular, in inventory. And so with the CARES Act that I mentioned earlier, we worked to get provisions so that we'll get $50 million in refund this year. And we fully expect $100 million in free cash flow or more in 2021. We won't be able to achieve that every single year, but we'll be producing significant free cash flow and building our capacity. I'll move now to Slide 11, our last area of focus, focused capital deployment and M&A, again, a strong track record of bringing bolt-ons into the organization around a strategic, operating and financial plan around our call points, where we can use our growth and scale to increase the growth of the businesses brought in. We like seeing a clear path of synergies. We're generally looking for top line growth at or above mid-single digits to improve our growth, and obviously, improve our gross margins at 60% or higher. This is our plan for the next 18 to 24 months. It certainly does not mean that after that, we wouldn't look at new technologies maybe that aren't particularly related to our franchises or looking at a more transformational type of M&A. For the next 18 to 24 months, this is how we feel like we can create a lot of value with what we're laying out today in terms of execution and the go forward. So we're well positioned with a strong portfolio. We have a great international opportunity in Chronic Care. We're pleased with the progression of the pain business. The execution, again, since Q4 of 2019, has been strong and building momentum. And we're creating a lot of efficiencies and a culture of cost focus in our organization that, I think, is going to help us expand our margins. We have a good plan. It's clear and simple for the next 18 to 24 months, and this plan can certainly be enhanced by the right M&A, by further progression and reimbursement in some of our segments, and certainly, by the ability for us to bring breakthrough R&D to the market, which we're equally working on. So we hope to deliver for all of our stakeholders. I appreciate your time and your interest in Avanos. And at this time, I'm going to ask Michael Greiner and David Crawford to join us for the question session. Thank you.

No questions yet, Joe.

Thank you. I believe there's also an opportunity if there are listeners or viewers to type in your questions on the website. And if you'd like to do that, please do. Otherwise, we'll close our session. Sam, I suppose, we'll give it another minute to 2:15. And if there are no questions, we'll close the session. I think it's okay, Sam, to close the session. We appreciate you helping us.