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

So good afternoon. I'd like to welcome everybody here in the room to Avanos Investor Day and those of you that are on the webcast. We're excited to share a lot with you today, none of which excludes the recent sale of our respiratory business and our recent acquisition yesterday announced of Diros Technology. I'm especially excited because you get a chance to hear from this management team and hear about their strategies and what they're doing in the business. And Michael will tie things together with the transformation. So I have also been told to sort of advertise cocktails that are available for the innovation fair afterwards because we'd love for you to have a chance to come by and look at all the products and the teams -- some of the teams sitting in the back. They put a lot of work into that. And it's a great opportunity for you to kind of learn about the technology. Each one of us is going to be introducing ourselves. I look out in the room here, and I think I know just about everybody, but my name is Joe Woody, I'm the CEO of Avanos. Prior to that, I was the CEO of KCI, which became [indiscernible], but I've been with Avanos now for 6 years. It's gone very quickly. It's been a very exciting time. I was 6 years with Acelity. Maybe the 2 most relevant positions prior to that were global president of the wound care business for Smith & Nephew and the global president of the vascular business for Covidien. And of course, that became a big part of the sale to Medtronic. So everybody when they come up, they're going tell you a little bit about themselves. As always, I think not new to anybody in this room, we'll be talking about forward-looking information. There'll be a lot of risk associated with what we talked about. We point people to the annual report on Form 10-Q and our Form 10-K and certainly ask that you visit our website. Equally, we talk about non-GAAP financial measures. We think it's a great way to measure the performance of the business and the progress, but we certainly want to make sure that everybody goes to avanos.com/investors and kind of reconciles GAAP and non-GAAP. And then disclaimers around certain products, certain ideas will be discussed today. We're all, obviously, in a very highly regulatory -- regulated environment. So you can never be sure of launches and things like that. so I'll start with our agenda and the speakers. I'm opening with remarks. I'll talk a little bit about our strategy and give a bit of an update on the transformation. Then we're going to have Kerr Holbrook, our new Chief Commercial Officer, come up and talk about the Digestive Health business where we see a lot of new adjacencies there. A new structure for the Pain Management business and a new approach that has kind of an orthopedic focus going forward. And he'll talk about what he's doing to get this business moving in the right direction and the growth we see ahead. He'll be followed by Lee Burnes, who's our Senior Vice President of Global R&D. And Lee is going to talk about our approach to innovation. He'll talk about where we're focused with open innovation and M&A on breakthrough and sustaining R&D going forward with our base set of products. A new member of the management team, Sudhakar Varshney will come up, and talk about supply chain, really ear-shoring with our plants in Mexico. He'll also talk about extrusion and molding and competencies bringing SI&OP process. He's got a very clear line of sight beyond the things that we do with mix and pricing for gross margins of 60%, 61%. And then Michael Greiner, who I think everybody equally also knows our Chief Financial Officer and now also our Chief Transformation Officer will tie the numbers together and talk about phasing and timing and what they all mean. And that's a very exciting part of our discussion. I'll then come out for some closing remarks, and then we'll get into the Q&A, which I think that's the dialogue in the Q&A is probably going to be one robust parts of the session. Michael and I will certainly handle the questions. I'll probably a quarter back, but you have access to the management team as well and their presentations. And again, advertising the innovation showcase to have a glass of wine and learn about the technology. So this is who we were. And at JPMorgan, we came out and talked about the fact that we're 2 franchises, Chronic Care and Pain Management, $800 million in revenue with attractive markets. And we had global opportunity to sort of take the success in the U.S. and duplicate it on an international level. But we also said that we were going to be aggressive about transformation. And I'm excited that we are able to show you some key milestones, the Respiratory business sale, the acquisition of Diros Technology, but equally important, how far we've progressed on the margin improvement in the business and how that's going to affect the business as we go forward. It's worth talking about how we got where we're going essentially, but obviously, we weren't pleased with the value creation of the business over the past couple of years. And in October of 2022, we went to the Board and reviewed a new plan for 2023 to 2025. And it really was about reimagining the business. And when we say that reimagining business process, how we're structured, what portfolios that we wanted to bank on in the future, where we wanted to invest, and so we launched that transformation in January 2023. Michael and I were kind of talking out before the meeting, we couldn't say a lot at that point. Now we can certainly say a lot more. And then most recently in the past couple of weeks and even yesterday, we announced the divestiture of Respiratory Health and the acquisition of Diros Technology, which when Kerr comes up, we think we have a really strong opportunity with that technology in an Ambulatory Surgical Center. I do think before we move on, looking at the portfolio evolution. Obviously, over this time period, we didn't create the type of value that we would have liked to and as excited as we are about the value that we can create now. But really, the company spun in 2014. In 2016, just as I was coming on board, we acquired CORPAK in my first sort of 24 months, we announced the SI&OP divestiture acquired CoolSystems and Game Ready. And then in '19 and '21, NeoMed, Summit, OrthogenRx acquisitions. And then, of course, this year, announcing the Respiratory divestiture. And I think -- the point here is that one thing we've done extremely well is built a competency in M&A around good valuations, around integration, around ROIC. And then also, I think you'll hear from Lee that we've been able to take these businesses and sort of innovate from them. And in the next slide, you might be surprised by the growth of these businesses. What didn't go well? Look, execution internally wasn't always strong in the business, okay? And we've reacted to that and acted on it. Also, we did have a pandemic, yes, we had the supply chain issue, the 503B and the drugs, but we're also committed to improving our own execution. I think the other thing I would say is that the pain returns for breakthrough didn't really come to fruition like we would have thought. So obviously, we have shifted where we think we can win in Digestive Health and where the bigger portion of our cash EBITDA comes from. And the capital deployment is probably the biggest issue. It didn't go to strategic things. It went to things like litigation, onetime costs. And then in terms of portfolio management, I would have liked to have expedited sort of this focus a little bit sooner and get the alignment, if you will, sooner as these things take time. On the positive end, I think we're very well positioned. We've built an extremely strong Digestive Health business with a lot of pipeline for M&A, a lot of near adjacencies that we can go to and a lot of ability to create drop-through in that business. Again, the M&A has been strong for us. Currently, we're levered less than 1x. We have a nice balance sheet for a company of our size, and we can do these type of bolt-on acquisitions that we've been doing. And then lastly, this transformation plan is really ahead of schedule. It's taking flight. I think people are understanding that we're serious about what we want to do with the margins. So a lot of positive going into the next 3 years. But we did think it was worth taking just a moment to look at what has happened with the M&A because that's part of our plan going forward. The right-hand side of the slide, you see CORPAK, Game Ready, NeoMed, ambIT, OrthogenRX and Diros. We did deploy about $400 million in capital. Now as we sit today, about 35% of our Avanos 2023 revenue is represented by these companies. Good organic growth greater than 12% from these companies, operating margin to improve from good ROIC. And again, good valuations. A lot of you, we've had these discussions about the valuations and the way we go about M&A and hanging around the hoop. So you can expect more of this alongside of the transformation. So the other thing I'd say is that we've come to a much more, in my view, simple strategy, and it's clearly to invest in Digestive Health and grow above market. We think there's interesting things in enteral feeding, some aspects of nutrition, pumps and sets, and I don't want to take too much from Kerr's presentation. We do feel with the orthopedic focus and what we've done with Diros and where we're headed that we go into '24, with a mid-single-digit growth. Pain business, which is important for the overarching value creation that we have and then we have to execute on all of these priorities. There can't be a priority where we slip, and we are going to, I think, prove today that we're ahead of the game. And then lastly, now deploy capital more strategically. So in M&A and in the international markets, where we think we can win. So this is us now, two scale portfolios. On the left-hand side, Digestive Health, short-term feeding, long-term feeding, $365 million of our revenue. Again, a lot of places to go expansion into areas that are near enough to our channel that we'll be building. On the right-hand side, pre-surgical, surgical and recovery with an orthopedic focus. We're not backing away from acute pain or interventional pain where we service other procedures. But obviously, we have a unique portfolio that's relevant to the orthopedic surgeon. So that's where you'll see a lot of the focus and where Kerr will focus his presentation. The other thing I'll say about this is while we've gone down in revenue, as we end the year and go into '24, we're going to be there thereabouts on the EBITDA that we were sort of now. And Michael will come on to that and show you some builds on that. And I think you probably already looked at some of the presentation already. So before I transition, I did want to just go back over the 4 strategic priorities that we outlined at the beginning of the year: the commercial optimization, transforming the portfolio, excuse me, additional cost management initiatives to enhance operating profitability and then the capital allocation to improve our return on invested capital. So if we look at each one, I think we can give ourselves a lot of really positive checkmarks, we've pointed the organization in the direction of MIC-KEY, CORTRAK and NeoMed, we're seeing the performance heightened there. Today, you're going to hear more about the orthopedic approach and different channel approach for Game Ready, COOLIEF and ambIT. We have brought in some new commercial leadership. We've restructured the commercial organization, not only for better top line performance but for better efficiencies and a more profitable approach in particular to Pain sales. And then, of course, we do think we have some alternate sites where we can continue to grow. And the big one -- big news right now is Ambulatory Surgical Centers. And transforming the product portfolio, I mean, we're serious about it. We sold the Respiratory business. We said we would exit low margin and low growth product categories. We have discontinued ops of roughly around $25 million, I think, for the year, and we've reduced our SKUs. We've onboarded some price increases. And again, this is going to be improved upon by the M&A deployment. And saying that we are less than 1x levered looking at our track record, I think you can take us serious when we say we've got a very robust pipeline, and it's possible to maybe even transact something toward the end of the year, early into next year. number 3 and 4. 3 is cost management. We've done a lot with our indirect spend. And I think you can see that sometimes when the top line is out there, we're still improving on the bottom line. We are in the middle of working some outsourcing opportunities that we're just not ready to talk about yet. But in the future, we'll be able to talk about supply chain, which you're going to get a segment on, a lot of work on efficiencies there and a lot of work to improve the gross margin. And we do believe that we're setting ourselves up for we'll have this period of time where SG&A will be higher with the divestiture. But as we go into '24 and get into a steady state, all of this restructuring is leading us to a lot of confidence in a 38%, 39% SG&A. And of course, on the capital allocation, we know now, we are very focused, and I think all of you will understand where we're going to go with that, the same M&A discipline. I've said a couple of times in the presentation, less than 1x levered and these type of bolt-ons and not getting too levered are very available to us in terms of delivering this plan. And then we will continue share repurchase when we think there's a dislocation from our internal intrinsic value assets. We've done that, and we may do some more of that here in the future. So as we talk about the investment thesis for Avanos, I think as you listen to the presentations, listen for the core categories where we are and the explicit plans that we have for the organic growth that we know that we need to maintain in the business, not only with the channel changes that we've made, but with the innovation that we'll be putting in the M&A that we're bringing in. I think you've come away as you listen that there are very real direct adjacencies to the markets that we're in and where we're going to invest. In particular, there will be some interesting things to think about with Digestive Health, and I guess, most importantly, we have a very clear defined set of transformational priorities that are measured in the transformation office. Michael heads that up. We feel like we're ahead of the plan there, but it's very explicit to the organization. It's known throughout our entire organization. And then lastly, that you come away that we do actually have a leverageable financial model that's different now than it was in the past and that generate obviously strong cash flow and have an even better return on invested capital. So with that, I'll ask Kerr Holbrook, our Senior Vice President and Chief Commercial Officer, to come up talk about that.

All right. Thank you, Joe. All right. Nice to see everybody. And I've been with Avanos for 4 years this month. And -- so it is my 4-year anniversary. I came from Covidien, where I spent about 6 years and had an opportunity to run businesses there, manage marketing and business development as well. And then most recently, with AlloSource, which is orthobiologics provider and focused on sports medicine and orthopedics. So I'm very pleased to be here and get to speak with you today. We've made a lot of progress on the transformation, as Joe alluded to. On the commercial side, we've made changes from a personnel perspective, making sure we're bringing in additional capabilities from an orthopedic perspective. We've changed some of our go-to-market strategies, which I'll talk about a little bit later this morning. And we feel confident in the direction, particularly of the pain business for the back half of the year. On the portfolio side, we've made the 2 key transactions that we wanted to execute this year with the divestiture of Respiratory and the acquisition of Diros, as Joe said. I've got big eyes and have my eyes on a couple of other things that we may be able to do later this year, early next year, but we've made a great start in 2023 on our plans. So I'm going to talk about both sides of the portfolio. As I mentioned, I want to talk about our commercial plans. I want to talk about our portfolio plans and some of the strategies that we're executing on. But I want to start first with Digestive Health. We haven't spent a lot of time on this during earnings calls, et cetera. So I'm going to give a little background. But there are 4 key takeaways from the Digestive Health business. One is with our existing portfolio in our core market, we expect that we can deliver above-market growth in our $1 billion core market. We can achieve that with 60% gross margin. We'll maintain that into the future, we believe. And we think we can accelerate this opportunity with the innovation that we'll talk about today and more importantly, M&A that we see in the $6 billion of adjacencies around our core market. So before I dive into the strategies and more specifics around the business, I want to take a moment and talk -- just to give a little background on the enteral feeding business, and you'll hear some of this echoed as you go through the product demos. But we think about enteral feeding in 2 categories. One is short-term feeding. So less than 30 days, typically an ICU-based patient. And then on the right-hand side of the slide, long-term feeding, which can last anywhere from a month to a lifetime. And typically, the point of care is the home and the caregiver is taking care of a patient. On the left-hand side, again, ICU-based patient. These are patients that have end-stage cancer, they've got GI disease. They may have suffered a trauma when they enter into the ICU and what's challenging about these patients is 1/3 of them enter the ICU with malnutrition on top of everything else that they're dealing with. So being able to feed that patient early is paramount to their success because studies have shown that those patients have greater length of stay and greater morbidity with malnutrition in the ICU. So the feeding tube placement can take 2 forms. They can do hand-placed feeding tube through the nose, through the esophagus and down to the stomach or you could use a guided feeding tube placement system like CORTRAK. So the hand placement system has some challenges to it. So 2% to 4% of those tubes that you're putting through the nose and the esophagus end up in the lung can cause a lung puncture or pneumothorax, which has high morbidity. CORTRAK can help reduce that by 96%. And not only that, it helps to improve the throughput of patients that they're placing tubes with. They can get done with it by about 60% faster than hand feeding the tube. Once the patient is stabilized, they're in the second picture from the far left. There are 4 or 5 things that are needed to feed that patient. One is going to be nutrition, so they need the caloric intake. Two is going to be the pump to propel the nutrition into their gut. Three is the tubes and the extension sets to get the product into the patient. And then we've got the guided feeding tube placement there on the left. From an economic perspective, we only play in about 15% to 20% of those categories. So we see great opportunity to extend our reach beyond the 15% or 20% that we play in now in some of those other categories. On the right-hand side is long-term feeding. So these are patients that have been discharged from the hospital, many times, their kids with developmental disorder, congenital defects and are likely to face a lifetime of enteral feeding because they can't feed themselves normally. In this case, the caregiver is typically a parent or a third-party caregiver and they would purchase their products from a DME or a durable medical manufacturer that they would then use with the child. There too, the products that are required are going to be nutrition, a pump, the tubes and extension sets and again, Avanos plays in about 15% to 20% of those categories. So a large opportunity for us to grow into some of those other areas. So just a little more detail on the markets that we play in today. So our core market is at the base of the graphic here. It's about $1 billion, that's the enteral feeding tube market. And then above that are the expansion opportunities that we see for the business into pumps and sets and then to specialized nutrition. We're excited about the market because the trends kind of propelling the market forward are strong, right? It's mid-single digit, generally. There are some specialty areas here that are growing higher than that. There's a trend towards ICU personnel feeding the patients earlier. They recognize the issue with malnutrition, so they're trying to feed those patients quickly. The ENFit opportunity is substantial. You all have seen that in our earnings calls with the NeoMed offering growing double digit for the last 3 years since we've owned the NeoMed portfolio. We expect to see that continue through the strat plan period. Nutrition wise, more disease-specific and patient-specific nutrition is becoming more and more popular. So Nestle has the high fructose corn syrup products that are good for a standard patient but with very focused diseases and patient issues, they've developed there are numerous other products that allow that patient to feed on something that's going to be more impactful for their disease state. So we see a lot of innovation headroom. We've done a lot more research over the last couple of years with patients to understand their needs and build out products to address those needs, which we'll get to talk about in a moment, but we feel very confident in our ability to innovate and then to bring those products to market with our commercial infrastructure. So from a growth perspective, we've had 3 or 4 years of strong growth within the Digestive Health business since I've been with the organization. We've got a #1 position in the core market that I was describing a moment ago. We've got a strong commercial infrastructure in the United States with dedicated reps. We replicate that in a number of other large countries across the world. We've got a portfolio of innovation that's coming out over the next 12 to 18 months. We'll describe that in detail. And then lastly, we do see those large attractive adjacencies that we think can give us an accelerant to the growth plan that we've got. So we feel very good about our prospects for the Digestive Health business. One of the reasons is our competitive position. So just to give you a little more color on what this looks like. So today, we compete against large public companies. So a Cardinal, MedAll, a smaller private company would be AMT. And almost regardless of how you think about or measure success in the markets, Avanos will come out ahead. So from a brand position perspective, if you're taking a look at enteral feeding tubes, MIC-KEY is #1, and it's used in the top 10 children's hospitals in the United States and 20 of the top 25 IDNs, we have a dominant share in. Portfolio breadth, nobody has a broader portfolio than we have at Avanos from an enteral feeding perspective. But as I mentioned just a couple of minutes ago, we see an opportunity to expand into pumps and into nutrition as an opportunity to grow the business and fill out that portfolio. We also feel good about our commercial footprint, and I'll talk about that in a little more detail in a moment, too. But we've got a large, dedicated sales force focused on the ICU, focused on the NICU, focused on enteral feeding and a team that's focused on GPO and IDN contracts to make sure that we've got strong contracting positions, particularly within the U.S. market. And that commercial infrastructure extends from the hospital, which is where everything starts to the home. So in the hospital scenario, we've got 100 dedicated enteral feeding reps, we've got teams dedicated just to the ICU and CORTRAK, and we've got teams dedicated just to the NICU and NeoMed, for example, and a corporate accounts team that's negotiating the GPO and IDN contracts. Once the patient moves to the home, I mentioned the DME, the durable medical equipment provider becomes paramount. So the relationships that we have with the largest DMEs in the country are important. We got a sales team that's focused on the DMEs. And then we have a direct relationship with the patients as well. So we have a nurse hotline that can address patient questions, caregiver questions when they have them. And tubefed.com, is an important resource for patients as well for insight on tips and tricks for using your feeding tubes and things of that nature. So regardless of where they are on the continuum of their care, we've got the infrastructure to support them. All right. So CORTRAK from a strategic perspective, we see this as a continued growth engine for the business. We've had high single-digit growth the last couple of years, and we anticipate that continuing with this business because 20% of those feeding tubes are placed using guided feeding tube placement methodology, 80% are placed by hand, blind placement. We know the clinical advantages of using the CORTRAK system so our team is working to convert that 80% of hospitals, ICUs in the United States to CORTRAK and we see opportunities to expand that outside the U.S. as well. In addition, I'll share a couple of nuggets around the next generation of CORTRAK product, which is going to launch in early 2024. It makes it easier to use. So the Bovie is better, it's easier to take a look at and identify where the tube is in the patient and then in addition to that, we're adding language capabilities, so it's easier to market into some of the other geographies across the world. NeoMed has been a great driver of growth for the business. I mentioned that a moment ago. The ENFit standard is a recommendation by the FDA in JCO, but not a requirement in the U.S. And while ENFit has been adopted pretty thoroughly in Europe and most of Asia, it's been a little bit on slower adapting in the U.S. We see the market as about 60% penetrated today. NeoMed and our NICU sales force is the leader in that space. And we see the remainder of those hospitals, 35% to 45%, eventually moving over to ENFit, and we're encouraging them to do that. The advantages of the ENFit standard. It's an ISO standard that can reduce tube misconnections, which can cause up to death in neonates. So it's a pretty serious issue and the ENFit standard creates something that's a little safer for those very fragile patients. So we've got a team that's focused on ensuring that we can convert that remaining 35% to 40% of hospitals. In addition, we've done a lot of work with customers, clinicians, patients over the last several years. We've identified some hotspots where we think we can create innovation to give us advantage in the market. And then we also have a good footprint in the NICU generally. So we see opportunity for M&A in that space as well. And MIC-KEY has been the jewel of the portfolio for a long time. As I mentioned, it's #1 in the top 10 children's hospitals. Most IDNs, we have a dominant market share. And so we see great things ahead with MIC-KEY as well. Even during the supply chain crisis over the last couple of years, our team has done just a little bit better than our competitors. So we've been able to continue taking share even in the last 2 years. What we see that's exciting in this portfolio is globalization. So the same challenges with feeding that we see in the United States are global phenomenon. So we know that we can expand the MIC-KEY footprint into other particularly developed countries. And then secondly is going to be the M&A opportunity that I described earlier, the $6 billion of adjacencies, so we can create more of a system, a contiguous system for those patients. From a globalization perspective, just a couple of examples of where we're finding success today with the Digestive Health portfolio. On the far left there in Latin America, that's one of the last markets outside of the U.S. that isn't mostly penetrated with ENFit. We launched NeoMed into the Brazil market in Q2, and the team is very excited to be able to be in that journey with ENFit in Latin America. On the lower right-hand corner, we launched CORTRAK into the Japanese market this quarter as well. We see that as an opportunity, the same dynamics that we see in the U.S. with most tubes being blindly placed plays out in other parts of the world. So we see opportunity with CORTRAK there. And then at the top, we've used distributors in a lot of our overseas markets. And we've clawed that back in Western Europe and the Nordics, in particular. So we now have a direct team there that generates additional sales and gross margin for us. So this is a slide I'm proud of because when I joined the organization, the [ cupboard ] was a little bit bear from an innovation perspective. And over the last several years, and you'll hear it from Lee, we have doubled down on the customer insights and identifying needs and insights with our patients and clinicians to ensure that what we develop is relevant, not just in the U.S. but globally. So we've got a full portfolio of launches over the next couple of years that we're very excited about. Two that I want to call out, in particular, is CORTRAK. It's a big franchise for us and one that we see opportunity to continue to grow. I mentioned the usability is going to be improved with the new system, number one. And then number two, we're adding languages so that we can market it more efficiently overseas. And then secondly, the next generation of MIC-KEY. So we have marketed MIC-KEY for about 20 years without a material change to the product. So we've got a tremendous opportunity for this launch in 2024 to, we think, take market share, take price and improve our position in the market with this new iteration. And Lee will talk more about what that looks like. So from a growth perspective, we see opportunity to grow above market in the far left oval there with our existing portfolio, executing as planned. We see organic innovation opportunity in the middle oval into pumps and sets. And then we see M&A opportunities in the far right when you look at specialized nutrition. Again, not high fructose Nestle product but more specialized product. So we see great opportunity here from an M&A perspective to accelerate the growth rate of the business. So hopefully, you've heard over the last few slides how we think we can get to and exceed market growth in the DH business, we can get to and beat 60% gross margin and that we have accelerants in the form of M&A and innovation that we think can get us where we want to be as an organization. Let me transition to Pain. And before I go there, I want to take a moment and just acknowledge and give a little background on the Diros Technology acquisition because we are very excited about this. The sales team for this organization is fired up and ready to go. So the Diros acquisition is important to us for a couple of reasons. The first is because of how COOLIEF is positioned. So if I point to the little segment up there at the top, 10% of radiofrequency ablations take place in the hospital today. COOLIEF has the dominant share in that market. So we've got a nice durable base of customers in that space. But you see 90% of radiofrequency ablation takes place in the office or in the ASC. That's what we're playing to with the acquisition of Diros Technology. The product they have is called TRIDENT, and it's a tined radiofrequency probe. It fits into our portfolio with a good, better, best. So COOLIEF will be our best product, highest price used in the hospital typically based on reimbursement. The Trident product is going to be our mid-tier product that can be used in the office or the ASC, priced accordingly and can be used according to that segment's needs. And then we have standard RF, which is our value-based tier. The great thing, too, is that all of these products can be used with the same generator. So we've got a footprint of 1,000 generators worldwide and customers can begin using these products right away with their existing generators. Last thing we're excited about is for our COOLIEF team in the United States. They get to introduce this product to the market in the U.S. It's got virtually a very little sales in the U.S., 90-plus percent of their sales are outside of the U.S. So we'll get a foothold in Canada, Europe and Asia with the Trident product but be able to launch it de novo in the U.S. All right. So the 4 key things about the pain organization and our strategy that I'd like you to remember today, are: one, we've got 4 strong brands and hopefully, Trident will be our fifth at some point in the future. We've got 4 very strong brands that bridge the patient life cycle. So I want to share what that looks like from both a patient and a clinician perspective; two, is we think we can get the business back to mid-single-digit growth, and I'll tell you how we're going to do that across the portfolio. And we believe we can deliver 60% gross margin. As Joe alluded earlier, we need to sell more efficiently and effectively. So the commercial reset that we've been working on since I've been charged with the business over the last 5 months, should allow us to sell more effectively and keep our SG&A below 40% for the Pain business. And then lastly, we're going to continue that selective investment across the business into what markets we focus on internationally. We're going to focus on just a handful where we have a right to win. R&D projects. Lee will talk about a couple, but we're going to keep that very focused and also M&A. So we're going to stay very focused with our M&A activities here as well. Okay. Let me take a moment and share how the portfolio fits together. We've got 4 very strong brands. Again, we hope we have more as we build out ambIT and Trident over time. But -- we've got 4 very strong brands. And I think the best way to describe this is with a patient with knee osteoarthritis. So 50% of the U.S. population is going to come down with knee osteoarthritis sometime during their lifetime. It's a degenerative disease. So you can slow it but you can't stop it. So clinicians typically start with weight loss, non-steroidals, Advil, bracing, those types of things. But as those lose their luster and the patient has pain in their knee, one of the first remedies is hyaluronic acid. So these are injections, typically a series of injections that are done in the physician office. They're quick, mostly painless. I've never had one done, but I think mostly painless and they can give up to 6 months of relief to the patient. Clearly, that's not a complete solution. So if the patient is looking for a more durable pain relief for their osteoarthritis, they can advance to COOLIEF. So as I mentioned, COOLIEF is radiofrequency. It's done in the hospital. It's a minimally invasive procedure that ablates the nerves that are causing the pain and we've got 70 studies that demonstrate up to 2 years of pain relief. So strong clinical evidence in that category. Eventually, we'll add Trident to that category as well, which is going to be focused on the ASC. As the disease runs its course, the orthopedic surgeon will, at some point, decide that it's time for the surgery. And usually, it's going to be a knee replacement, but it could be an ACL reconstruction or something like that. And post-surgery, having localized anesthetic delivered to the site of the surgery is what ON-Q offers patients and 5 days of pain relief. So when you think about coming out of surgery, the first thing you want to do is get range of motion, begin your strength trading and be able to get back to what you do as quickly as you can. ON-Q gives you that 5-day window to start that process. And some orthopedic surgeons, as you come out of the -- in the recovery room, will have a Game Ready strap to your knee. So they know that inflammation is the enemy, particularly in the early days after surgery. And so Game Ready will reduce swelling, reduce inflammation and do it without opioids and allow that patient to start the rehabilitation, start their recovery more quickly. Peter Millett, who's at the Steadman Clinic said it's 20% faster recovery for patients that use Game Ready. From a call point perspective, it's pretty simple. We've got 2 primary call points. One is the orthopedic surgeon, two is interventional pain physicians. And there are ancillary players around it, obviously, nursing staff, anesthesiology need to be part of the equation as well. But the 2 primary call points for the business are orthopedic surgeons and interventional pain. And from a market perspective, it's about a $2 billion market globally. About 2/3 of that is in the U.S. The trends in this market are pretty good as well. It's obviously orthopedic. So it's a more competitive market than the one we just talked about in Digestive Health, but mid-single-digit growth, the aging population is a tailwind for the business. The trend towards ASC, we see as an opportunity. We have a strong foothold in hospitals. But as I mentioned, we've positioned our portfolios to play in the ASC at the right price point with the right usability and also our sales team to play not only in the hospital, but also at the ASC side of care so that we can win in those categories. And then lastly, I think some of the international dynamics are interesting. So this is one category where we think we can win and select international markets. A couple of examples are the U.K. has guidelines that give an advantage to radiofrequency ablation. Another one is Japan, where there's a strong reimbursement COOLIEF as well. To those very specific areas, we'll continue to invest in because we think we have a right to win in those spaces. So the last 5 months that I've been in the role, we've been building the strategy to get this business back to mid-single-digit growth. The first thing that we're fixing is the commercial plan. I mentioned the fact that we brought in new commercial leadership, additional orthopedic experience, we're modifying our go-to-market approach to accommodate that ASC site of care. From a product perspective, I mentioned that we're repositioning our products so that we have both an ASC and a hospital-based solution for our clinicians. Whatever site of care they choose to do the procedure at, we will have product and a sales team available to address that. And then lastly is select international investments. So I mentioned a couple of examples there that we're going to use to propel the business internationally. So HA is a function of our acquisition of OrthogenRx last year. And we've got 2 primary products: one is GenVisc. It's a 5-shot product. and TriVisc is a 3-shot product. They play in about a $500 million U.S.-based market. We see some challenges in the 5 shot. There's more of an evolution towards 3 and 1 shot we see, but we see growth opportunities in the 3-shot market. And where we feel good is on the sales side. We've got [ 310, 99s ] in the U.S. today. We're going to expand that footprint. We also have physicians that are calling on the orthopedic surgeon and the interventional pain docs who are the guys that use these products. And so they're going to cross-sell the HA products in the very near future. Second, we want to make sure that we can give access to as many patients as possible. So today, we have a strong footprint with Medicare. We've added a cash pay option for our clinicians and physicians. And we also have a specialty pharmacy option as well. So many of you, if you had to get HA in your knee, you probably have a pharmacy benefit that would allow you to get your product through a specialty pharmacy. And so we've created a relationship with one of the best there. Oh, the last -- yes, I don't want to forget. The last thing is -- so up to 20% of these injections don't make it into the joint. So when the clinician pushes go on the needle in your knee, there's 15% to 20% chance it doesn't get to the joint. So in 2024, we're planning to launch a needle placement technology that should help those clinicians feel more comfortable with that injection getting where it needs to be. And if you're a patient, you can imagine feeling comfortable that he's getting the job done the first time through. So Lee will talk a little bit about that in a moment. On the Pain Management and recovery side, the COOLIEF has been our gem. It's been a double-digit grower in the very recent past. We're turning that around, again, trying to get it back high single-digit growth. As I mentioned before, we feel real confident and excited about this portfolio. We plan to maintain and expand the business we have with COOLIEF in the hospital and then enter the ASC market more thoroughly with the advent of Trident. so we've got a two-pronged strategy there, Trident in the ASC, COOLIEF in the hospital, and we've got the broadest portfolio in the business and a really strong sales team there. So we feel good about continuing high single-digit growth with this portfolio. And then similarly, with our pain pump business. We've got ON-Q and ambIT are the primary products. And ON-Q is primarily a hospital-based product based on the reimbursement. So postsurgical knee pain alleviation and ambIT is well suited for the ASC. So it's an electronic pump. It's disposable, but it can be reusable as well. So we have a program that allows that -- the ambIT pump to be reused in the ASC. So from a price perspective, it's at the right price point and the right product for the ASC. So very similar to what we're doing with COOLIEF. We've got a surgical pump strategy that allows us to win in the hospital with ON-Q and then in the ASC with ambIT. And lastly, I won't say that Game Ready won the Super Bowl, but you probably saw Patrick Mahomes limping off the field in late in the playoffs. So Game Ready mirror may not have been a part of that recovery process for Patrick. It is the first choice for professional athletes PTs. It's got a tremendous, tremendous brand equity and following amongst those 2 groups. We have not done as good a job as we need to building that with the orthopedic surgeon. We'd like every patient that comes out of a total knee to wake up in the recovery room with a Game Ready wrapped around their knee. So we're working on the service model. We're working on the business model to improve that, make it easier for orthopedic surgeons to make it the first choice for their patients because we know from a clinical perspective, it's very, very strong. So we're excited about the prospects here. Peter Millett says it best, 20% faster recovery for a patient coming out of ACL surgery or total knee is significant. So hopefully, I've shared what I said out to at the beginning, which was to make sure that we all understand how the 4 brands fit together from a patient and from a clinician perspective, that we've got strategies and plans that are already in motion to get us back to the mid-single-digit growth that we think the portfolio has the capability of doing, doing it at a good gross margin. And then lastly, making sure that we're allocating our investments in the right places so we can keep our SG&A at a manageable level and invest in the right projects in international and R&D. So I'll leave it there. I'm going to turn it over to one of the more exciting speakers today and that he gets to talk about our innovation activities, Lee Burnes.

Thanks, Kerr. This is a really great exciting opportunity that don't let the R&D person out lab very often. So it's nice to get a chance to speak to the investment community. Again, by way of introduction, Lee Burnes, I lead research & development at Avanos. I've been actually working in the medical device industry now for over 30 years. Much of that time was spent at Covidien, where I led research and development for a number of different businesses within that corporation all the way from Kendall to Tyco Healthcare to Covidien. I joined Avanos right after the spin from Kimberly-Clark, obviously, under the Halyard name now serving here as Head of Research & Development. So I'm going to really build on what Kerr talked about. And I'm really going to break my presentation into really 2 kind of key parts. In the first half, I really want to talk about how we've been transforming our innovation efforts at Avanos here over the past 2 years. And then in the back half of my presentation, really talk about how those efforts are really leading to an exciting array of new products. Kerr mentioned quite a few of them here in his presentation that really, again, very focused in Digestive Health and then select portions of our Pain business overall. But just first a little bit, I think, on history. If you go back to the Halyard in early Avanos days, we were very focused in R&D on our pain portfolio. In fact, we're working on a number of technology-driven breakthrough projects that allow you high risk, high reward. And I think unfortunately, didn't really end up delivering the type of growth outcomes that we expected as a corporation. So over the past 2 years, we really have been shifting our capabilities and our focus much more towards Digestive Health. And as Joe noted, we're now leveraging a much more of a customer-driven innovation approach to how we execute our research and development activity. We're focused on a set of organic platform enhancements, iterations of products, very executable activity for the organization, focused on sustaining our businesses and helping to grow above market share and then a set of inorganic open innovation opportunities to build upon that. And it really allows us now to have a really consistent cadence of new products that will deliver to our commercial teams globally and really position us to create more value, we believe for investors. Now in order to drive that successful value creation, we have really been focused on building a whole set of capabilities in the organization. And Joe mentioned this a little bit in his presentation, we're now utilizing what we call a 6-step discovery-driven innovation process in the organization. And this is a really powerful process for us at Avanos. It really allows us to gain a much deeper understanding of customer needs and really unlock those key critical needs that are most unmet by existing product solutions and really allows us to then innovate against those key needs and ultimately deliver more value to our customers globally. Within focusing on solving those critical unmet needs in the categories that we have a right to win as a business. All the Digestive Health categories that Kerr covered with you as well as select portions of our Pain business. In R&D, we're focused on continuing to innovate in RF ablation for chronic pain in the compression cryotherapy technology, we call Game Ready, primarily focused in orthopedic pain, healing and recovery. And as you would all expect, right, we analyze every opportunity that we're looking at as a corporation against a set of disciplined investment criteria, things like, of course, net present value, internal rate of return, payback period. We then have our 150-person R&D team are focused really on what we like to call a cheaper, faster, better approach to executing research and development. We're using project management-led innovation teams now, as well as we've built internal centers of excellence focused on things like systems engineering, hardware and software engineering, human factors engineering and design thinking, just to name a few. All really focused for us on increasing our speed to market as an organization. And one thing we're really proud of at Avanos is we really strive to strike a balance between internal R&D efforts that we're working on in the corporation and work being done in the external innovation ecosystem across all the start-ups that exist right in the med tech space through what we call our open innovation process, we're evaluating over 100 opportunities annually, really looking for those solutions that now meet those critical unmet needs that we identify as part of that 6-step discovery-driven innovation process. And now for like the riskier breakthrough projects that were at one time we were trying to do organically as a corporation, we're now leveraging much more of a venture investment type approach to making those investments really making sure that we're leveraging our balance sheet to invest in disruptive innovation. And I'll just cover a couple of examples of minority investments that we've made as a corporation in these type of disruptive innovation opportunities. First is a company called FUSMobile. They're developing a high-intensity focused ultrasound system to non-invasively ablate chronic nerves. This is a really great breakthrough in the ablation space, obviously because it's noninvasive, but also because it has the potential to really treat patients as that site of service of care shifts more and more from the hospital setting to ambulatory surgery setting and then ultimately, more and more into the office setting. And then secondly, as a company, we actually recently just spun out from our research and development organization called Synaptrix. They're utilizing a novel electrical nerve-blocking therapy to treat both postsurgical pain and various forms of chronic pain. And this is, again, another really great disruptive technology with a great potential to disrupt how postsurgical pain relief is delivered to the patient how long the amount of pain relief that can be provided to the patient and then really how quickly a patient can begin physical therapy. So I think 2 good examples in the corporation of minority investments in disruptive technologies. We have just as many opportunities in the Digestive Health space we're looking at. A lot of really great exciting open innovation opportunities for the corporation. And as we've been highlighting here, we're really replacing significant emphasis on innovating in our Digestive Health business. That innovation strategy has 3 key pillars that I want to make sure I walk through with you. The first is protecting and helping to grow our core business, right, enteral access tubes, CORTRAK really making sure we iterate and innovate in that space to ultimately support that above-market growth strategy that Kerr mentioned. And then second, expand into near adjacencies like pumps and giving sets. Here really to help grow our market at above market rates and obviously Bovie through M&A transactions as well as a company. And then thirdly, continuing to focus on growing revenue in the NICU at high single digits. This is really leveraging our new med commercial infrastructure and what we believe is significant innovation headroom that exists in the NICU space. Overall, we're really, really -- very excited about the innovation opportunities in the Digestive Health space. Personally, what gets me excited is the really strong brands we have in the space between MIC, MIC-KEY, CORTRAK, our ability to leverage strong market leadership positions and obviously the call point synergies that we have overall. But really, ultimately, it's because it's -- organically, we're focused on a market that's over $3 billion annually, which is, I think, a really great opportunity for upside for the corporation, leveraging innovation. And this focus on innovation is in the -- particularly in the Digestive Health business and the strong road maps that we've built using that 6-step discovery-driven innovation process and the speed-to-market capabilities that we've built in the organization is really helping us build a very healthy cadence of new product launches that we can deliver to our commercial team. Now there are a number of key launches we're working on in our Pain business, and I'm going to really spend the rest of my presentation, diving just one click down on the Digestive Health R&D activity. So I just want to spend a moment and just touch on some of the innovation activity in our Pain business. The first is a technology Kerr alluded to it. It's a placement verification technology for hyaluronic acid. As Kerr mentioned, about anywhere between 15% to 20% of the time, a clinician based on -- depending on the type of skill use and the type of imaging technology used because these are procedures that are typically done and HA injection has typically done blind sometimes under ultrasound and really under fluoroscopy. And so about 15%, 20% of the time, that clinician will miss the intra-articular space. And so we think the delivery of a simple verification technology that can be paired with our hyaluronic acid solutions, gives us a real great opportunity to not only improve the accuracy in the space but also to differentiate our product offering in what is a very competitive market space of hyaluronic acid. Second is we're continuing to be very focused on innovating in COOLIEF. We're working on technologies for new procedures as well as leveraging data to build smarter algorithms using AI and ML. We consider ourselves the RF authority in the space. We're the ones that did the clinical studies. We did the procedures, we drove the utilization, which is why we believe we would need to continue to innovate in the COOLIEF space. But why we're also so excited about the acquisition of that Diros Trident probe. That's a really fantastic product in the bag for the sales force and really can help us drive more sales in the Ambulatory Surgery Center. And then lastly, we're continuing to work on next-generation versions of our cryo compression technology, Game Ready to improve ease of use and then integrate data into the product life cycle. Overall, increasing our innovation speed to market is putting it in a position to be able to double our vitality index in the next few years. This is the percent of sales of new products over total revenue. This is, I think, again, a really great opportunity for us to double that vitality index ultimately getting it up to 40% of sales. So I want to now just dive into -- a little bit deeper into key markets in Digestive Health. First market I want to talk about is the $2.5 billion large addressable global market of long-term enteral feeding. Here, I want to highlight 2 examples of innovations that we're actively working on. The first is the next-generation MIC-KEY low-profile gastrostomy tube that Kerr mentioned. It's a product called MIC-KEY Evolve. It's a really exciting product for us. It's a really great new innovation in the space and has a number of really great features. It has a low-profile balloon for enhanced patient comfort and some revolutionary patent-protected features, including a capless easy-to-clean valve system and a 360-degree rotatable extension system to help prevent accidental misconnections that can occur in the home environment. By the way, we're highlighting this product at the demo tables in the product showcase. So if you didn't get a chance to see it prior to the presentation, please take a moment after the presentations and check that new product out. And then secondly is our market entry into a key adjacent space for us, which is the $2 billion global enteral feeding pump ecosystem and the development of a novel line of compact size, pump and feeding sets, integrated with our low-profile gastrostomy tube product line. These products are really solving a lot of key needs for the customer. In particular, our emphasis is on portability and focusing on the needs of the caregiver in the home environment such as delivering highly viscous blend derived diets. The next area I want to highlight is the significant growth opportunity that exists in short-term enteral feeding in the ICU and CCU setting. In particular, because of the importance of early enteral feeding and the need to shift nasal gastric tube placement from blind approaches to intelligently guided placement and monitoring systems. As Kerr noted, only about 20% of the time our guided placement systems used today in the ICU and CCU setting to place nasogastric tube. We're obviously the leader with CORTRAK, so we feel like there's a real great upside in this market in the United States and globally. So first off, of course, we're developing a series of enhancements to the CORTRAK system for bedside placement of enteral feeding tubes. Here, these improvements include enhanced guided workflow or methods to simplify the placement of the tube, monitor the location of the tube long term, while also adding an indication for pediatrics and as Kerr mentioned, expanding the availability of the product more globally. And then with so much time and energy being spent placing nasogastric and nasoduodenal feeding tubes, having great tube securement technology is also really, really critical. And so we're developing a full line of novel, best-in-class securement technologies to ensure that accidental dislodgement does not occur with these tubes including our recently launched ANCORIS securement system. These innovations really, I believe, will really allow us to position us to continue to grow and be a market leader in this important space. And then lastly, I just want to cover briefly with you another key strategic area for us, which is the neonatal intensive care unit. This is about a $200 million market opportunity for us. We feel like there's a really significant innovation headroom in this space. We're really focused on delivering novel solutions to help make clinicians work easier in the very hectic ICU environment. The hallmark, by the way, of really what has made the NeoMed brand so well known. Our research shows that there is significant innovation headroom in solving NICU challenges. And as a result, we actually have a dedicated R&D team focused on just the NICU space, a very high customer intimacy and a strong knowledge of the needs in the space. So the first innovation I want to talk to you about, again, these are focused on simple innovations that can solve everyday challenges for neonatal nerves. And the first one is really focused on making sure that the critical nutrition that the neonate needs can actually reach them, including the critical fat that neonate needs to grow and ultimately get discharged from the NICU. Here, we're focused on research -- by the way, our research shows that the fat -- the critical fat gets trapped in the delivery systems that are used in the NICU. So our focus is really on creating solutions to ensure that, that critical fat gets delivered to the neonate, ultimately also while working on improving the workflow and transfer of the milk in the NICU setting. And the second is focused on simplifying the approach for noninvasive [ ventilation driven ] abdominal distention, which is a very painful condition for neonates and can also delay enteral feeding for the DNA as well. So we're working on some -- against some very simple solutions here that have systems that are closed, that minimize gastric residuals, that also improved the efficiency and ease of use for the clinicians. And these are just 2 of the many examples of NICU innovations that we're working on as a corporation, we're very focused on innovating in the NICU space. And so I realize this has been a relative brief presentation, but I hope I've demonstrated to how we're really transforming and optimizing our innovation approach at Avanos. We're very focused, as you can see, on the Digestive Health space and select portions of our Pain business. We're focused on businesses where we have a clear right to win, a great opportunity to deliver value to customers and ultimately, our innovation efforts really truly support Avanos' growth thesis. Importantly, our plan will deliver a consistent cadence of new products to our commercial teams across the globe. And then very importantly, is accretive to the 60% gross profit margin that Sudhakar and Michael will be talking to you about. So I really appreciate your time and attention today. It's now my pleasure to announce a 15-minute break. [Break]

A very good afternoon to all of you. My name Sudhakar Varshney and I have the responsibility for Global Supply Chain & Procurement for Avanos. I've been with the company just over 6 months. Prior to working for Avanos, I worked in various industries specifically relevant experience of around 14 years in medical device and diagnostics space, bioprocessing with companies like Covidien, Haemonetics, Danaher, and Antylia Scientific, both in public setting and private equity setting. I really excited about being part of the Avanos leadership team, really excited about being part of the portfolio, which Lee and Kerr shared and really excited about the growth opportunities we see actually. As we move forward in the presentation, I'll share more details around this. Focus on my slides will be around the transformation priorities. The things we are doing on cost savings, what we are doing in terms of transformation initiatives and how we are driving gross margin over 60%. Before we move into the discussion about gross margin, just a little bit about nearshored footprint. We currently have 5 facilities between U.S. and Mexico with over 440,000 square feet of space. Magdalena and Nogales are our facilities, which produce Respiratory products. Our Digestive Health products are primarily produced in Nogales 1. And our Pain products are primarily produced in Tijuana. When you think about all the investments companies are making a nearshored footprint, investing in capital to get nearshored. We already have a really good nearshored footprint to address supply chain risk, any geopolitical risk. Majority of our global distribution network of 6 distribution centers is managed by 3 -- third-party logistics providers. As Joe mentioned about the Respiratory Health carve-out, I think our Respiratory Health carve-out is quite simple. We are conveying 2 sites. One is Magdalena and one is Nogales 2 as part of this transition. We'll move pretty much all our production for respiratory products to Magdalena and we'll consolidate our Digestive Health portfolio in Nogales 1, and we'll basically consolidate our portfolio for pain management in Tijuana. The transition service agreement is going to last around 18 to 24 months, but we don't believe it's going to cause any distraction for us to focus on our Digestive Health portfolio and Pain Management portfolio. After the -- after TSA is complete, we'll be left with 3 sites, and we'll have still enough capacity and capabilities to acquire more acquisitions and also support, as Lee mentioned, some of the new product introduction efforts. So we don't see any challenges from a capacity standpoint. I think when you just look at this gross margin bridge, this is the core of the slide deck, this is a static model. It assumes that this flat revenue growth. It assumes no mix changes and it also assumes no future acquisitions. So it's a pretty static model. If you look at our 2022 margin of 56.8% with the Respiratory Health carve out, we are seeing a pickup of around 490 basis points, but just by exiting the dilutive business -- Respiratory Health business. We have stranded cost of approximately around $13 million, which is roughly around 200 basis points. So when you net it out, you're seeing a benefit of around 290 basis points by exiting the Respiratory Health business. I think as Joe mentioned, we are off to a really, really good start on our transformation priorities. We are getting some really good cross-functional momentum. This equates around $25 million of cost savings projects, and we have completed already around $5 million worth of it, which have been executed. And that's a 380 basis point you see on the slide on transformation savings. The next is the inflation. I think we've been very, very conservative in putting this 440 basis points of inflation on this. I think overall, we have factored in even the future government policy changes that are happening, which will impact our sites in Mexico. Overall, 2 primary drivers for this inflation. One is just a significant increase in foreign direct investment and nearshoring -- caused by nearshoring in Mexico, which is driving a lot of constraints from a labor standpoint. And the second one being the government policies in Mexico have been moving the needle, both on wage rates and also on the social security benefits to improve the livelihood of Mexican. So those are the 2 primary drivers of inflation here. The next bucket you see is the projects we have lined up with project plans complete, charters complete of around 140 basis points. And as we complete the next phase of our transformation savings, we'll start working on these projects. But there's very good clear line of sight here for us to get to a positive 60-plus percent gross margin. A little bit of further breakdown of the 380 basis points of transformation projects, which are underway and 140 basis points of projects, which are currently in the pipeline. I think overall, the area we are focused on is around 60% of our spend for the transformation projects which equated to around $25 million of savings. As I mentioned earlier, we already have executed and completed around $5 million of the projects. And the focus areas have been around freight and logistics, labor efficiency, and a little bit around materials -- direct materials. As we move into the next phase and start focusing on the 140 basis points of improvements, the areas we're going to focus on is the remaining 40% of the spend. And that will come from focusing on sales, inventory and operation planning processes, which we believe has a huge opportunity to reduce friction costs, not just in our plants, but also in our corporate headquarters in Alpharetta. The second area we're going to focus on is number of touches. If you look at our products right now and if you look at from the plant to the point of distribution, we can have anywhere between 7 to 9 touches. The area we're going to focus on a little bit is start reducing the number of touches to drive efficiency and cost optimization. The third area is on proprietary and specialized raw materials. As we have grown through acquisitions, we have not looked at consolidating raw material spend, and that's an area for us to focus on to start driving away from specialized and proprietary raw materials. And the last thing is service. We don't have a centralized service strategy currently and we currently lose money on aftermarket service. As Kerr mentioned, for some of our instrument manufacturing, there's a huge opportunity for us to start looking at centralizing service, make decisions around what will be depot repair, what will be field service repair and also bring a higher installed base of products under service. Currently, we have an installed base of around 97,000 different instruments between RF generators, ambIT, Game Ready products, and we only service around 15% of it. How do we drive service on a higher installed base to go from 15% to 30% over 2025? I think overall, we do believe that we have a very, very good line of sight to achieving these cost savings equating to around 420 basis points -- sorry, 520 basis points. And we do believe that as we move forward into '24, '25, we'll continue to develop the process capabilities and our capacity to further that. This is not a onetime thing for us. We're not looking at just generating the savings and move on, but I think it's about developing capability, process muscle to continue to drive value and fund the future of the company. The 3 areas we are focusing on to continually drive improvements is center of excellence. As Joe mentioned in his opening remarks, we are focusing on driving center of excellence. If you go to our product showcase and you pick up one of our products, it's based on 3 technologies, a consumer product. It's based on molded components, extrusion and packaging. We want to be the best in those areas. We want to develop standardized practices and procedures so that we know exactly how we are doing and we want to be best-in-class in terms of cost as well. The next area we're going to focus on instrument manufacturing. We use a lot of diverse set of suppliers right now. And whether we use them, whether we make them or buy them, we want to be the world class in terms of instrument manufacturing in terms of test fixture designs and other things. Lastly is as you develop the center of excellence, I think it gives us a lot of opportunity to be very agile in our change management processes to be able to take on future acquisitions and drive value there. The second area is end-to-end planning systems. As everybody has gone through the pandemic and supply chain disruptions, this is an area we're going to double down on. There's a lot of effort going in the organization in terms of sales, inventory and operation planning processes. And the core purpose of that is to be able to predict demand proactively and being able to react to the supply very quickly, okay? The other thing is it gives better visibility to our suppliers by doing that. And also, it helps us move changeovers. The other thing we are focused on in our SI&OP process is also getting rid of low volume and low margin products. Just in the first phase, of our product rationalization efforts, we have cut down the tail by around 550 codes as part of our classification process. And then we are also looking to use analytics and digitization to get better visibility to our supply chain. And lastly is we currently have over 2,000 suppliers. Strategic supplier management is becoming very key for us to be successful. It's all about consolidating the supply base, focusing on the critical few and making sure that we are strengthening our relationship with our suppliers to hold each other accountable. The way we are doing that is separating the strategic procurement organization from the tactical procurement organization so that they can focus on proactively building these relationships. And the tactical procurement distractions will be taken away from that. So I think it's a very important aspect of it. And lastly, we will say is digitization and also visibility to Tier 2, Tier 3 suppliers. If you look at the supply chain issues, which have happened over the last 3, 4 years, it's not just happened with your primary Tier 1 supplier. It happened with their Tier 2, Tier 3 supplier base. And as you develop these strong relationships with your Tier 1 suppliers, you will have more visibility to the challenges they are facing in sub-tier segments of it. So we strongly believe improving the process capabilities and the capacity will help us open up a strong capabilities and capacity to take on future acquisitions, new product introductions and continue to drive value creation in terms of cost savings to fund the future activities, whether it's new product introductions or acquisition opportunities. Thank you so much. And there's a quiz at the end actually, to pronounce my name. So I'll wait for the answers. With that, I'll introduce our fearless CFO and Chief Transformation Officer, Michael Greiner.

Thank you, Sudhakar. And it's nice to see a journey to getting our gross margins with a six-handle in place. So that's an exciting part of where we're taking the financial aspect of the story. So -- as Joe mentioned, I think many of you know me by virtue of the fact that I run the IR function at Avanos Medical, but a little bit of a background on me. I spent most of my career in some sort of life science company. I was at Deloitte, most of my client base was life sciences, med device. I went to Wyeth after that, Bausch & Lomb after that. And then I took a little bit of U-turn up to Boston and do some technology companies and realize actually like product categories that actually help people. So came back into Med Device, I became the CFO of AngioDynamics and then move down to Georgia to work with Joe as CFO, Avanos, I've been here 3.5 years actually started just in the front end of the pandemic. My kids went to school for 4 days down in Georgia. And then we homeschooled them in the basement as we were trying to paint the house. So it was definitely an interesting start to my time here at Avanos. So a couple of things I'm going to hit on here, talk a little bit more about the cost management initiatives that we laid out back in the early part of the year, more focused on the OpEx side. So Sudhakar obviously just took us through what we're doing in the cost of goods sold. Ramp to 60%, 61% and then spend some time, I'll bring together the full financial story and then also spend some time talking about how we're going to be allocating capital going forward. Which should look very familiar to those who have followed us because our stewardship of our balance sheet is not really changing all that much over the next couple of years. I know Joe and Kerr will like to get over their ski tips and talk about M&A that's coming forward. They will have to run through myself and our Treasurer, who used to play football in Georgia, to get a check for more M&A in the back half of this year, but we are excited about the M&A opportunities we have going forward. But we really do. We need to digest what we laid out here in this first 6 months, do that well, execute against on that. And then I think we've got some really interesting opportunities going forward in the '24, '25. We'll talk a little bit about what that looks like in the next few slides. I think the other thing what we really wanted to do today as we wrap up here with my 7 or 8 slides is, obviously, most times when companies do an Investor Day, they're out 3, 4, 5 years or so. One of the feedback that we've gotten through investors, fair enough, is that our story has been a little bit fits and starts, 2 steps forward, 2 steps back. Credibility of what we can execute against has often been questioned and so what we wanted to do today is lay out the next 2.5 years very specifically. This is why we have a bunch of bridges in what we're presenting here. Very specifically, what we're going to execute against. This is the beginning of the new Avanos. This is not this next 2.5 years, it's just the beginning of setting up the foundation for what we believe will be the really exciting stuff beyond that. So it is a little bit of a condensed time period for sure. That's purposeful. That's intended to reflect on the fact that we need to go execute on these particular objectives and the transformation priorities that Joe talked about. And so have that in your framing as we think about the next few slides and the financial setup. So I've got 4 slides on revenue. And the next slide will actually walk a little bit for those of you who have already seen it. We'll walk what the SKU rationalization impact is for this year. What the RH divestiture impact is for a full year as well as 0. So the [ $675 million ] is exactly what it says. It's a pro forma number. It's not a number you'll ever see because well, by virtue of the fact that we are going to have RH at least 9 months, if not further into the fourth quarter, depending on close. Diros is likely to close in the middle part of the third quarter. The SKU rationalization has been happening throughout the year. We talked about the $5 million or so in the first quarter. That was accelerated with additional SKU rationalization in the second quarter. We'll lay that out during our second quarter earnings call. So the $675 million, the way I think to really frame it is the baseline of where we're starting assuming that all these activities that we just announced over the first 6 months occurred at [ 1/1/22 ]. So that's the way to think about the $675 million is. As you saw in Kerr's presentation, we have 2 product categories that are growing at about a 6%, the orthopedic pain space and the digestive space. And I'll talk a little bit more about that in a second. We also layered in here is the assumption of an acquisition, a bolt-on acquisition in '24 and a bolt-on acquisition in '25, that both are $25 million in revenue. So it's just an assumption that we're making and the assumption we're making for capital needs is that we're paying about 2x revenue for those 2 acquisitions. Again, there are meant to be placeholders and illustrative to demonstrate how we're going to allocate capital and the types of M&A that we'll continue to look at from a bolt-on standpoint. So the first thing here is the revenue walk from, as I just said, ending 2022 if we were to actually take out all of the activities at in Diros, what would 1/1/22 look like, and this is the walk that you have here. And then taking that walk and adding it up to -- ultimately where we're taking a revenue to $800 million. So put the $50 million aside -- sorry click forward. Put the $50 million aside. And the 3 comps to really focus on is the market growth. That is supported by all the activities that we have naturally -- natural tailwinds in with the product categories that we're in, in digestive, orthopedic pain and what we're doing in the ON-Q space. And then we talked about -- and Kerr as well some of the innovations and initiatives that we have ongoing. So back to being what we believe is appropriately conservative in these numbers as well as laying out a plan that we think is credible. Those -- both of those numbers, innovation -- market growth is about what we think market growth is going to be. So that 53%, give or take, a couple of million what we think is to natural tailwinds. The innovations and initiatives, however, we have what we think is properly risk-adjusted those down given that we haven't had the best success and haven't had the greatest track record historically of getting those out timely and then also executing as [indiscernible] as we could to get those numbers. So we believe there's some upside potential in those areas. You saw the list of launches that we have ongoing. Some of those launches are definitely protective of the existing revenue base. So there's not a whole lot of additional revenue. But clearly, some of those launches position ourselves to gain share, take some price, do things of that nature in those categories. So that's the walk from the pro form a $675 million up to the $ 800 million. Another way to look at that is in the categories that we laid out. So orthopedic pain and for purposes of this slide, we're breaking out acute pain separately, and I'll talk about in a second why. For purposes of reporting, it's just going to be pain management and recovery and digestive health, just to make sure that we're clear on that going forward. So orthopedic pain, the new moniker there is intended to signal that where we have not necessarily had a go-to-market strategy where we have not necessarily had a synergistic call point strategy, we're now instituting that with what Kerr laid out on the slides earlier today. Digestive Health, as you saw on one of his slides, that's going to kind of a quiet -- I think, likely misunderstood part of our asset portfolio that one of the things we're excited about in divesting the RH business is that we hope that the DH business gets a lot more play in understanding than it has historically. So as you saw, we've been growing 6%, 7% for the last 7 years in digestive, and we're going to continue to grow 6%, 7% in the digestive space. This, again, is all without M&A. The other way to think about what we've done with those $225 million acquisitions is we're assuming that what we acquire is at the margin rates that we would be at in '24 and '25. So if we were to acquire in those two $25 million illustrative M&A opportunities and targets, if we were to acquire those with a more accretive stance, which is likely given the categories that we're getting into, that would obviously improve these categories. Acute pain, I want to just hit on that real quickly. So ON-Q, as Joe mentioned and Kerr mentioned as well, it's a product that unfortunately has had more than its fair share of issues, many of which have been external and macro event generated, whether it be the shortages and drugs for a bit, the 503B filler issue. We get behind that. And then all of a sudden, electives go away through the pandemic for 2 years. We got a competitive product set with a single shot use coming in, and it's just unfortunately been a product that is, although a great product. And for those that have used it, and I know some of this room have used it non-opioid mobile day pain management that's a great product. We have a ton of levers out there from a doctor universe standpoint that love it. It's just had a lot of kicks when it's down. So the goal for acute pain. And again, the only reason I'm calling it out on this slide is just to demonstrate how we're thinking about strategically the ON-Q product category versus the rest of the orthopedic pain opportunity set. We want to get that to be stabilized. We think we're seeing the bottom over the last quarter or so and then get that to low single-digit growth. So the next way to think about where we're going with revenue, and this is the last slide on the revenue portion is that as we get out of RH, as we get out of the lower growth, lower margin products, which would be that $25 million of SKU rationalization that we mentioned earlier this year and that we're executing through. The remaining part of the portfolio, 80%-ish of the portfolio is in what we consider moderate to high-growth market opportunities. So 3% or higher is what 80% natural tailwinds that we have in our market set going forward, whereas before that, about 40% of our products were in low growth category. So back to our 2 steps forward, 2 steps back dilemma that we've had, we would always report and have 3 products going really great. And these 2 products had a tough quarter or these 2 products had a supply chain disruption, whatever it might be. What's nice about where we're headed with our existing portfolio, plus the markets that we will continue to look at from an M&A standpoint is we have a naturally 130-or-so basis points served growth opportunity higher than where we were now. So as we think again about credibility and believability of the story, getting to consistent mid-single-digit growth, not just a quarter here and there, but consistent mid-single-digit growth, this is one of the, we believe, the more powerful opportunities with our SKU rationalization and getting our portfolio rightsized in the right markets. So that's the revenue. Revenue side of it. That's how we go from the $675 million pro forma up to ultimately $800 million in exit revenue in 2025, with 2 acquisitions, paying $25 million each paying estimated 2x revenue for those acquisitions. Next slide is going to cover off how we think about where we take the margin opportunity. So we've talked about this for a bit that our focus has been on getting the model where people looked at Avanos and say the model should look like this. Why haven't we had a chance to see more consistent execution on the margin profile and the free cash flow? So I'm here today to tell you we have a clear pathway to give you the model that you guys have been asking for, for several years now. I'll be brief on the gross margin since Sudhakar did a great job covering that off in detail. But Again, back to the credibility of the story, there's a lot of natural tailwinds that we have in here, one of which is those 2 columns in yellow in the middle, which just by virtue of getting out of these lower-margin products we increased our gross margin by 200-plus basis points. So it's just by virtue of manufacturing the higher gross margin products, getting out of 2 plants. We're going to have a higher gross margin profile. Then you layer on top of that, the work that Sudhakar talked about from a plant standpoint, efficiency standpoint, how we look at raw materials, how we look at just our overall supply chain dynamics from shipping to how we do manufacturing and use freight internationally and domestically. Those were all things that then get us up to that 60% to 61% gross margin. On the SG&A side, we finished 2022 at 38.9% SG&A as a percentage of revenue. So very much, we had a lot of good actions in course from a savings standpoint but also just from an efficiency standpoint. So it's not just about cutting. It's also about adding in how do we deploy our internal resources in a much more efficient manner, something simple like somebody leaves the company, do we have to backfill that role right away? Do we have to go to all 3 sales conferences? Could we go to 2? Just simple things that are not necessarily cutting into activities that create growth or support growth, it's just being smarter with how we use our internal resources. So that's how we're getting our SG&A curve bent down to that 38.9%. As we rationalize our SKUs, it helps on gross margin, but if we don't do anything in SG&A, our SG&A as a percentage of revenue, less revenue, right, SG&A as percentage of revenue, doing nothing on SG&A, naturally is going to go up. That's what the 40.1% represents. And then the pro forma, which is not a real number, just like the $675 million is not a real number because that will never be a number we have in our actual financials is assuming we do nothing in SG&A as we rationalize these product and as we walk away from $136 million of revenue with our divestiture of RH. So the first 3 columns are purely math as a framing exercise to give you some sense of what we need to do, and I'll show you on the next slide what we be doing to get ourselves back to our 38% to 39% baseline of SG&A. Again, this is a 2.5-year model. This is intended to give confidence of what we can execute on. The time period is going to take to execute on some of this as to Sudhakar said, our cross ESAs that we're going to have with SunMed are going to last 18 months. So activities we can't do right away. We have to service the model, giving them a manufacturing product for them or we have to support them from a customer service standpoint for a period of time. So these activities will take some time in order to actually execute and see and feel in the financial statements. You put those 2 together, plus the 3.5% or so of R&D that we will spend in a very targeted manner that Lee talked about and you see the 400 to 500 basis point improvement in both operating margin and EBITDA margin. So we're pretty excited about 2 things here on this slide. One is the categories we're getting out of were lower growth, lower margin. They are not categories we were going to win in longer term. They are great categories for others to own but we weren't going to win in them longer term. A lot of revenue we walked away from of the $25 million is internationally based because we just didn't have the scale to grow those product categories or in order to price them competitively, internationally, we were going to have appropriate margins. There was a range of reasons why we got out of that approximately $25 million of revenue. So we're excited about focused on areas that we know that we have a good foothold to start from and that we have a good M&A pipeline to build to as we get forward into '24, '25 and beyond. And we also gives us a real strategic as to how we spend internally. And so being able to sustain the 60%, 61% sustain the 38% plus SG&A as a percentage of revenue, that's critical. One of the things we don't want to do here and what we're not building to do is to get to a number just to go backwards again because we have other factors that impact that. What we really want to demonstrate here with the walks that we're representing financially is -- this is a consistent effort in the organization, which we refer to internally as our transformation effort in order to have a sustained model, a sustained model to support this. As I said before, this does not include an assumption that the M&A we buy can be accretive, which is a fairly conservative assumption given the markets that we're looking at from an M&A standpoint. This is really to look at, although we include the $50 million in here, it's really an organic look of where we're taking the margin story. So SG&A. Similar to how Sudhakar talked about the inflation, we have a inflationary impact on our SG&A, given that approximately 70% of our SG&A cost is labor-based in some form or fashion. So it could be third party, but of course, they have increases from a third-party cost. Our own annual merit increases are 3% to 3.5%. So that $18 million is just assuming the normal inflationary impact that you would have when almost 3/4 of your SG&A cost base is labor based. And then we have some very specific activities here that are either in process right now through the restructuring we already talked about and laid out earlier this year or our new activities that we will be implementing as we execute against the RH divestiture. So, some of those can, as I said before, because we are in a cross TSA relationship with SunMed for a period of time. We can't execute those immediately. Now we will be getting compensated for the activities that we are providing to them. So it's a net zero impact in our income statement. But at some point, then we have resources that are in place that will have to remove in order to be in the same place that we are right now. So you'll see the different activities. Ultimately, that lends itself to a $10 million to $15 million net savings in SG&A which brings us a 38% to 39% range of SG&A as a percentage of revenue. Now I personally believe and Joe personally believes and we've talked about this, that we -- as we get beyond the 2.5 years where we have a lot of work and a lot of wood to chop, we should be south of this percentage as a percentage of revenue. And if we bring in 1 of the advantages of being a more focused portfolio is you actually start to feel and get some synergies, right? So as we bring in revenue through M&A, or we have actual innovations get to market, and we have other initiatives that are successful, we'll start to get more scale around our fixed cost base. So these are things we have to do in order to rightsize where we are. But we also have what will ultimately turn into natural tailwinds as we do more M&A going forward and we can just place in our bag, right? Because we're not going to add a third leg. We're going to add a DH product. and that DH product will go in the bag of the existing salespeople that are already in place and we'll get immediate leverage out of that, same with the orthopedic pain approach. And so when we're more focused, any company is more focused, they get better leverage against their SG&A. So this is the pathway for what the right fixed cost base looks like. The additional opportunity set would be around leveraging M&A and more innovation as we go forward beyond '25. So switching to the balance sheet now. Not a lot of news here per se because we are going to continue to steward our balance sheet, and we're going to continue to allocate capital in the same manner in which we have over the last 3-plus years. R&D will be about 3.5% annually. I just mentioned that. And that's reflective of the new strategic approach in R&D that we laid out. So that connects very naturally to the dollars we need given the focused efforts that we're doing there. And should we have some uniquely innovative opportunities, we'll probably continue to look to off-balance sheet things with a partner who's probably better positioned to be innovative for those ground zero type of innovative products. We're very good at the 2.0s, taking an existing product set, creating protective IP around it, getting the next-gen stuff and the MIC-KEYS as an example, Game Ready's and so forth. So we will continue to do that. With 2 less facilities that we have to create maintenance for from a manufacturing standpoint. We've historically been around $25 million of CapEx. That's going to come down a little bit to about $20 million annually -- we have less footprint that we have to cover off. Although the footprint we have, will be more full than it is right now, as Sudhakar mentioned. So that's about $20 million annually. We will continue to look for opportunities to repurchase shares when we believe there's a disconnect between our internally calculated intrinsic value and what we believe the market is representing. The last 4 months is a perfect example of I wish we would have been able to repurchase shares. But before today, we obviously had a lot of nonpublic information that we were working with, and therefore, it would not be an appropriate or legal time to be repurchasing shares over the last 4 months. But now that this information is out, the one check that I'm willing to write from the treasurer is the share repurchase opportunity. So I'm excited to get beyond today for that reason as well. The right side gives you a little bit of walk on what we will be looking to do from a balance sheet standpoint. This assumes a couple of things. The 2 $50 million acquisitions, the $100 million of capital used to do M&A, paying down $140 million of the revolver, paying down $20 million of the term debt, which is just the natural amortization payments that we have with our 5-year term debt in place. And that takes us from a -- that less than half of a turn, which that end of year '23 includes the net proceeds from the RH divestiture, plus the cash consideration used for Diros. None of this assumes a share repurchase, even though I said we would really like to do some of that given where we are right now. So that does not -- that is not included in here. And if we get to the end of '25 with those 2 acquisitions, paying down all our debt, we are in a net cash position of approximately $20 million with no leverage at all. So we're pretty excited about the free cash flow model because one of the things that we have not done a great job on historically is being able to deliver a consistent free cash flow model. We've had some good quarters where we've thrown up some really quality numbers and then some other quarters where we've actually used cash. And we're always going to be a little bit lumpy because our first half of the year just by virtue of the product categories we're in, it's always going to be a little bit slower versus the back half of the year, and I'll show you in a couple of slides when we update our guidance. I'll show you how that looks for this year. So that's always going to be the case. But what we do want to do is have a much more consistent free cash flow model, where our working capital is working better. We have a big inventory opportunity with Soda and team are working on. We need to do better on our AR accounts payable. We actually managed fairly well, less CapEx, $5 million, $7 million per year less CapEx and less onetime costs. So I want to pause there for a second on the onetime cost because, unfortunately, we're a little bit -- I'll be talking on both sides of my mouth for a second here. One of the goals I had coming into Avanos was to have a better quality of earnings. So we had a lot going on in the company, as Joe mentioned, with the divestitures, obviously, spinning out the SIP business to -- that one's a minor. We settled court cases that we had to get behind us, both with Kimberly-Clark and the DOJ, there's just a range of things that we had a lot of cash going to get things in the rearview mirror. So we did that. And for those of you that are interested, I think if you go to the 2022 earnings and the first quarter of '23 earnings is a high quality of earnings. Our cash flow that's generated is supported by the earnings model and the non-GAAP to GAAP adjustments are significantly less. That is the goal to get there again. Unfortunately, over the next few quarters, we are going to have a fair amount of onetime cost related to restructuring that we're currently undergoing, relating to the divestiture and the activities. They're relating to some of the other cost initiatives that we have ongoing. So the quality of earnings that we're going to have and the free cash flow impact will -- there will be a little drag on that over the next few quarters. The good news is, even with that rather than be negative free cash flow, which we've had years of doing that, it's still going to be positive free cash flow, a meaningful positive free cash flow number in 2023 and '24. But the onetime costs will go up a fair amount over the next few quarters as we work through some of these really exciting transformation efforts, and I just wanted to share that how that looks in this walk. But even with that even with those onetime costs, which is embedded in here, we still have a 2.5-year plan to get to a net cash position with absolutely no leverage on the balance sheet. And the only thing outstanding from a debt standpoint would be the term debt that has a 5-year term to it. So what does that all look like then in summer when you bring this all together. So I mentioned before that one of the things I'm excited about as we look at either the natural tailwinds in the markets we're now operating in. The initiatives and the innovations that both Lee and Kerr talked about, you can feel a mid-single-digit story, right? We've had a low single digit story. We've had a mid-single-digit quarter from time to time, but we've had a low single-digit story. This is now switching to a mid-single-digit story. And so that's exciting. That's the starting point for all of this, quite frankly. From that, you just saw the walk for the margin expansion, a lot of great work that's going to go on, some natural tailwinds but also a lot of great work that's already going on and will continue to go on in Sudhakar's role. I remember not that long ago, where everybody was panicking, oh no, it's a 52% gross margin company. And as much as I stood on my head to say, no, we're not. Nobody believed us. And we're not. And we're already up to 56% plus as where we kind of naturally are right now, we have a pathway up to 60% plus. So that's super exciting. And then the SG&A piece of it, what's exciting about that is so much of that is in our control. The inflationary aspects are not. But hey, that's part of running the business. You're going to have some inflationary aspects and you've got to do what you. What you need to do to offset that inflation and also find additional savings and we've been very disciplined about that. Very excited about the 38.9% SG&A that we printed last year, and we're going to get there and better going forward over the next 2.5 years. With that model in place, we're going to generate greater than $100 million of free cash flow. You just saw the balance sheet walk that I did from the back half of this year into the end of 2025. The only way that, that balance sheet model works is generating this type of free cash flow. Again, the reason why the conversion rate is only 60% and not higher is because we are going to have some onetime costs that we're going to have to absorb as we go into the RH divestiture and other aspects of the transformation plan. The last part of this and what we focus on our STI and LTI have components of this in it from a management team is our return on invested capital. We were 3%, 3.5%, not that long ago. We did 5.8% last year. And as we get through this model, we'll do greater than 8% ROIC. And as we talked about, this is a 2.5-year plan. The plan beyond that is going to get us into double digits ROIC, which we're super excited about. One of the reasons we think ROIC is so critical to monitor for us other than obviously it's a good value creator is we are going to be deploying capital through both M&A and share repurchases. The only way to really grade yourself on whether or not you deploy that capital well is by looking at your ROIC over the long run. So if we are deploying our capital, in the way that Joe talked about from an M&A standpoint and the greater than 30% ROIC we've had on the acquisitions we've done to date, then this obviously is going to naturally go up. If we're destroying capital with that M&A or buying back shares just for the sake of buying back shares versus the fact that we're doing it based on a dislocation in the market price versus our intrinsic value, then we will have a higher ROIC. So -- this is one why we -- Joe and I agreed with the comp committee, we need to have this as a gauge from an STI and an LTI standpoint because the way we are deploying capital, ROIC, we think, is the best metric of determining how we've done that deployment well and consistently and effectively. Joe will close up with going back through that investment thesis slide. This slide and that slide go together hand in hand with why we think we have a compelling story, but also just financially what that compelling story looks like from a financial standpoint. So I'll wrap up here with an update on our guidance here. So not a lot of news to share. Our Q2 is in the range of consensus. You can see that in the second row. The first row, obviously, is actual results. I talked about earlier that the second half of our results historically tend to be quite a bit higher than the first half results. That remains true this year. That remained true last year, if you look at last year's results. There's a lot of activities going on internally to make sure this happens. So this doesn't just happen. This happens through a good coordination between our manufacturing, through our supply chain environment, through communications with the commercial teams, to making sure that we have the right products available, especially as we're starting to work through all of the back order issues that we've had over the past 1.5 years, 2 years. So we feel really good about this number, primarily because of how we've executed over the last couple of years with that type of jump up from the first half to the second half. And then the one thing we are doing is we're bringing down the top end of our range from 180 to 170. So I'll say this again. I know you guys will all yell at me for saying this. When we do a range, we are not doing a range to find a midpoint. Our range is there's activities that may happen that get us to 160, and there's some activities that may happen to get us to 180. And unfortunately, the activities that were going to get us from 170 to 180 like higher interest expense, which was continuing. We assumed a different interest expense model and lower HA revenue than we anticipated, which is our higher-margin products have -- are now having an impact -- and therefore, that second $0.10 of that range, so to speak, is just not a high probability outcome. And so we are lowering our range from 160 to 170 because the activities that we have, that we have control over we are highly confident in our ability to execute against that. Now the reality is that, those numbers aren't real numbers anyway because we're going to close on the RH business sometime in the fourth quarter. So that's going to have a meaningful impact to these numbers. And the Diros business, which is not in these numbers, is going to close sometime in the third quarter. So this was assuming if neither of those transactions, which we just announced over the last couple of weeks, close, this is what the year would look like. So we want to update that and be forthright around the interest expense headwind that we're seeing, that's a few pennies lasting longer and higher than we anticipated plus also, obviously, what we're paying for Diros. So that is in there for Diros even though the revenue is not in there. And then the HA model, as I said before, what we anticipated for revenue, given the headwinds that we had coming out of the first quarter and into the second quarter also has a little bit of a negative drag on this. So with that, I'll turn it back to Joe to close, and then we'll open up to M&A. Thank you very much.

Thank you, gentlemen. Thank you. All right. So I'm going to switch over slide here. So I don't think we're going to -- we are actually going to win the award of not keeping you glue to your chairs and finish a little bit early, so you can get into more of the Q&A and dialogue that's probably more what you're interested in. And then, of course, we have the product there afterwards and some cocktails as well. But I think Michael said it right, we're aligned more as a management team than we've ever been. We're aligned with our Board we're aligned in terms of compensation on this plan and generally ahead of the transformation for the business. So as I said at the beginning of the presentation, to listen for, do you think that we have a solid core category list with consistent organic growth, I think we do. I think Mike landed out very nicely when he talked about those fears of growth and what that looks like when you add it all together. Are there adjacencies that add growth to the margin profile and Lee -- both Lee and Kerr laid that out nice so these are very real areas that we've looked at. We have a very full pipeline. And the transformation priorities are set out clearly with a strong transformation office. And obviously, we have Michael Greiner as Chief Transformation Officer. And we've demonstrated, I think, today that generally, we're ahead on all those programs. And is this a leverageable financial model to generate the kind of cash flow and ROIC that we want and we know that our investors want. So it is a different Avanos. It is a different time for us. We're very, very excited as a management team. And with that, we look forward to switching over to the Q&A. And I think we're going to ask the management team to come up and then Michael and I are going to sit on one side, they're going to sit on the other, and we'll probably fill the questions and then pass them off as necessary. Please bear with us for just a moment. Okay.

Is there any way we can take questions from people that are watching or no? Is there any chat?

Okay. Okay. So [ Catherine ] has, I believe, a microphone. Is that right? And we wanted to start, obviously, with Q&A here in the room and be happy to take a question and we'll be serving as well on the webcast, if there any questions coming online. It's always going to be the first question.

Thanks. So the mid-single digits, obviously, it's a huge driver story. It looks like the digestive side is more fully baked there, I guess. So it's going to be on the pain side, right? And I know I just sat through the -- all your discussions, but just so it's really clear at the end here. It sounds like it's really sort of COOLIEF around the RF side. Like just give you a sense for what could sort of fall down and preclude that business from getting there?

Yes. So a couple of things. I'll say a few things. Michael wants to respond a little bit to this question and then even Kerr, maybe you want to talk about some of the initiatives. But generally, in a setting where you don't have supply chain constraints or any kind of procedure, we still think that COOLIEF is a high single digit grower. That's what Kerr was talking about, probably double digit now for Diros, more mid-single digit for Game Ready, which kind of as it adds up. HA, we think in the future is going to be a low single-digit grower. Putting that all together and putting in the acute pain and ambIT together at a low single-digit growth, we do believe between that and the international business that we outlined, we have a mid-single-digit really solid the kinds of things in that business that can be a challenge would be reimbursement type of things, but everybody has that sort of risk highlighted. We've had a number of quarters, as Michael outlined. Some of those areas were double digit. They've gone up and down, but a very realistic way to look at that business, especially with the focus on orthopedic and the way we're addressing the channel and adding in 1099s, I see it as a solid digit grower, especially as we enter into 2024. So Michael and Kerr, do you want to...

Well, I mean, one of our goals for today, and I meant to mention this before and I forgot, so thanks for the question, was we have a lot of people that -- so look, we kind of like the financial setup for Avanos, we just don't get how the strategy goes together. We know how these products go together. And so your question was perfect because you hit right on it. Yes, the pain needs to pick up its stay a little bit, Digestive needs to continue what it's been doing for years, which is great. So that is exactly what we were trying to convey today and great first question.

And Kerr, do you want to say a couple of things about the initiatives on Pain?

Yes. I think fundamentally, the couple of things that we think are going to move the needle are, changes in our go-to-market strategy and leadership on the pain side, and those are in motion and happening today. And then I think, too, how we're positioning the portfolio generally. So we've got that strong hospital business for both ON-Q and COOLIEF. We got to defend that, and the team knows where that business is and how to defend it and grow it. And then the upside, we think, is in the ASCs. And we've got -- we've repositioned products to make them more appealing to the ASC, so we believe we can win there as well.

Maybe I would just close off that too with a lot of focusing in the back of the room and occur as well. We're responsible for the Digestive Health business and really putting that strategy together and growing that business into the same people now that are sort of driving pain. So I've got a lot of confidence that we're going to do a much better job there. And Catherine, we were back to Q&A. I'm going to look around the room here, a huge room that we're in. Okay. Matt let's go for it.

Be nice, Matt.

We finished early now. We have wine and everything.

So on Diros, I mean, previously with COOLIEF, you put a lot of investment behind the clinical studies. You were -- I think you might be still the only one with an indication for osteoarthritis in the knee. I'm not sure if anyone else has migrated that down. What makes sense for like Diros? Has Diros done like similar kind of clinical investment with -- on evidence for them? Do they have an indication that could help you with those orthopedics?

A couple of things I'll say. And then I think Kerr will pick up to me. We're in the ambulatory surgical center with RF, but it isn't as good as COOLIEF. So this gets us a step closer with a product that has a better capability and a good capability internationally. So the clinical outcomes are good. They don't have the types of studies that we have associated with COOLIEF, but RF is very well established in the ambulatory surgical center. What's going to be good in the U.S., I think, is that clinicians are going to see a better outcome and a better product and that we'll actually be able to probably tackle even some of the OA of the knee, it might even be that we could eventually move more into orthopedics with it. And so it's established from the RF perspective, and I don't think it will be a huge problem for us. The reimbursement will be strong in those settings. But you maybe want to pick up on that a little bit.

I think just build on what you said. So the reimbursement with the, Trident is the name of the product in the ASC or the office is going to be strong. So they'll have good reimbursement for the product. It ablates more quickly. So a little bit larger ablation versus standard radio frequency. And our strategy is going to be to upgrade those clinicians that are doing standard radio frequency to the Trident product. So we think the patient will get a better outcome, physician gets good reimbursement, and we've got a winning product.

Can you talk a little bit about what's going on in the HA market right now? I think that's one of the reasons why some of the numbers are coming down? And -- and why you -- I think somebody -- I think at some point to be said, we feel really good about paying in the back half, like we feel really good. What makes you confident that, that stable -- that dynamic stabilizes in the back half as that reimbursement?

Yes. So I'll give you some perspective, and then I think Kerr can pick up on it or think about what.

We feel pain overall in the back half. That wasn't just an HA just to be clear on that.

Yes. We're still happy with the OrthogenRx acquisition overall. Good for gross margin mix, good for where we want to go from a strategic perspective is what we showed. My take on it is, you've got this point in time with reimbursement. This is obviously an ugly year. It is going to level off, though, and I think then the opportunity is we have opportunity to grow in the orthopedic space in the 3-shot area. For us, we have a direct sales source that can do it and then we'll have the 1099s so that can do it. We're not looking to double-digit growth and kind of take over the world. If we can get that as low single-digit growth alongside of everything else that we have, then we're going to be able to deliver this plan just fine. So you can pick more if you like to add.

That's right. So we see 5 shot cooling off a little bit. We see growth opportunities within the 3 shot I mentioned the call point synergy that we've got with the orthopedic surgeon and interventional pain physicians. So both our COOLIEF and our ON-Q teams will have access to that product in the future where they can leverage their relationships. Our reimbursement will stabilize as the year finishes. And so that's I think, good news for our customers and for us. There will still be players in the market that have a slight reimbursement advantages through the end of the year. So there's going to be some ups and downs we know from a competitive perspective. But as we go into 2024, we feel pretty good about the HA business overall being more stable than it is in 2023.

Kerr, you just want to mention on the 3 shot, we believe it is stabilized and our pricing approach has stabilized. You're more referencing a 5 shot.

And then just last one, and then I'll pass the mic. Can you talk a little bit more about the 440 basis point headwind from -- on nearshoring and government policy in Mexico. I think that -- I haven't heard that as a potential headwind in the industry over the next couple of years?

Go ahead, Sudhakar.

Yes. So I think we are seeing quite a substantial increase in labor cost I think if you look at the foreign direct investment in Mexico has gone up quite significantly, and that's driving it. The other thing is in the second half of the year, there's a law which is going through motions right now which will move Mexico down from 48 hours or 8 hours of work week to 40 hours of work week. It's in line with -- Mexico is the only -- 5 countries left in Latin America, which works 40 hours work week. So there's a huge headwind right now there in terms of going down from 48-hour work we do 40-hour week, which we have already factored in the plan. One other thing I would say is we have been very conservative in our inflation numbers we have not factored any mitigation from a pricing standpoint in the numbers as well.

Over here for Kristen.

I guess just to go up that point, what do you see in terms of opportunity for pricing across the portfolio?

Yes. So we -- last year, we had a new opportunity to add a new approach with our pricing strategy, and we annualized about $10 million of increase across our portfolio. I think what's interesting in our portfolio is, one; when we first rolled it out, you thought we were taking everybody's first baby. We can't possibly raise price, "Oh my gosh, we're going to lose all this revenue." And of course, if you do it the right way, you do with customers that recognize we're creating and providing value-added products. They're like, "Yes, we get it. You haven't given us a price increase in 5 years." So those all took very well. We had to do it in a staggered way because some of our products or many of our products are on GPO contracts. And so even they were open to having dialogue once the contract is over, having dialogue around increasing prices across the as well. So what I would say is our -- we demonstrated we can do it. We earned internally the respect that, wow, it can happen. Our products don't go away when we raise price, which was exciting to the internal people. So we've done that once. We're going to continue to do that activity. And now from a GPO standpoint, as we're rolling contracts, we will have open conversations with them around opportunities there. So -- that will -- now that being said, the price increases that we can take across the board will never offset a 440 basis point increase on inflation, but it will help to defer it for sure.

And one build is once you build that pricing capability between sales team and our corporate accounts team, that doesn't go away. So we're making sure that musculature is in place and they feel confident taking price. We have a little more advantage on the digestive side in doing so. And then I would say what's important to us as we look to the back part of this year and into '24 is we'll have innovations. And we haven't had those in the business for a long time. So as we launch new innovations, we expect differentiation, we expect improved pricing and better margins, too.

One other thing just to add to that, when people have asked me from a transformation officer standpoint, what's the goals of the transformation overall? And I simplify it in 2 buckets. It's the portfolio rationalization, optimization, some of the right products that we're in the right position to win in long term. And our D&A shift. And that's kind of amorphous to a lot of people. What does that mean? It means exactly things like this, where we had no discipline in pricing. We were afraid to price. We were afraid to stand up for the great quality of our products. Now to Kerr's point, we have a discipline. We got to continue that. That's a huge DNA shift for the company and a huge financial benefit to us if we continue that type of behavior. And there's a whole bunch of other things just like that, but I just wanted to highlight that from a transformation standpoint.

And one other question just on Trident. I think you had mentioned you're launching in the U.S. Do they not have a footprint in the U.S.?

It's -- yes, we're going to primarily launch in the U.S. They would have a very small footprint.

It's very small and ad hoc. So more than 90% of the sales for Trident are outside of the U.S., so it's Canada, Europe, Asia, and so our team is excited because it's basically a brand-new product to their customers to the markets, and they're really excited to be able to unveil that this fall as...

With a largely new call point too.

Yes, exactly. ASC yes.

I just wanted to make an announcement for the people who are dialed in. If they would like to ask a question, they need to refresh their browser and that will present the chat function, and they can enter the question in the chat and we'll read it aloud to you.

Okay. So refresh your browser if you're online and this will arise the chat and then we will get the questions, right?

Was that a nod to the Canadians?

Exactly. I'm a global executive. Anybody else?

Yes. So just focusing back on Digestive Health, you talked about some of the adjacent opportunities. Sounds like pumps and sets are getting into more through innovation and then nutrition supplements maybe organically -- inorganically excuse me. But a $6 billion opportunity. Can you just break down how you think about that? How fragmented are these markets? And what is your focus there?

Let Kerr handle it.

Yes. So we've broken it down even that $6 million would not include when we described the...

Billion. You said million.

So $6 billion in opportunity, about 1/3 of that is going to be in the pumps and giving sets and 2/3 of that is going to be in the nutrition. And even within the nutrition, we're excluding the high fruit dose kind of Nestle nutrition products and are more focused there on those products that are very patient-specific or disease specific. So that's a large and growing part of how they're feeding patients today. And if we were to enter that space, we would likely do it in that way.

And Lee, maybe you just want to tie some of the technologies and clinical aspects of the areas that we're looking....

Yes. I mean, so there's a tremendous opportunity to innovate in that pumped and giving sets market as we integrate with our low-profile feeding tube. We're very focused across the globe with that product line. There are a lot of unmet needs and wouldn't describe that space as being a high competitive intensity. So there's a lot of great opportunities from an innovation perspective.

And Catherine, just checking back, is there anything online? Okay. So just to remember, again, to refresh the browser, chat then shows up and you're able to ask a question online. Any more questions in the room?

Maybe just following up on the adjacencies, I guess, could you talk a little bit more about your plans to enter into those? When could we expect to see the company enter into those markets? And I guess, between the 2 levers of like internal innovation and M&A, like what do you see as kind of being more significant out of the two?

So just to tee it up and it can chime in on this. I think you're going to see both. You're going to see the launch you saw in the 12-month and a 36-month piece. We've sort of articulated that pipeline around the newer adjacencies is very full for us. At the same time, CFO can reduce a little bit and that we think we have a number of targets that could be available to us in '24.

That's good. That was.

And they're pretty strong. And there are things that we've been working on for quite some time as everybody that's been following our M&A knows we typically establish relationships over a long period of time. But you too should comment more on that.

I'll jump in. So we make elastomeric and electronic pumps today. So we have some capability there to do some of the innovation ourselves, but there are also assets out there that we potentially could buy to get into the pump space. the nutrition would certainly be M&A and likely into 2024. But we're really excited about the idea of bringing more of a systematic approach to our enteral feeding and rather than just having tubes as a stand-alone, adding that to some of the other elements of that full feeding equation. We know it will add value to the clinicians. We know it can add value to the patients as well.

As I mentioned, right, we're really focused on the home care environment, right, with that product line. And the way to think about it is we're constantly looking for ways to also bring in through open innovation, those kind of products while we're also working on developing the products as well.

3 questions.

Okay. Browsers refreshed.

So the first one is Andrew J. How big is the HA business? And should you sell it?

So we don't talk about the size of the business, I don't think we've actually articulated revenue. And as I -- when Matt asked this question, we are very happy with that acquisition for the mid and long run. Not happy, obviously, with the this year, but it was quite additive to our gross margin. It's quite additive to the long-term strategy on the orthopedic focus, whether it be in the office or in the ambulatory surgical center. I think the last thing I would say is that what you're experiencing this year is a reimbursement change is very significant. It happened faster than I think than we would have thought, particularly on the 5-shot side of the house, but that will level off and -- we've got a good base then to build from.

And the other thing I would just add is, when we acquired and announced it over 1.5 years ago, we specifically said this is not a growth asset. We never said this is a growth asset. Now, we weren't expecting it to be what it is the first and second quarter of this year. We thought there was a transition period between 5 and 3 shot that we were going to manage through effectively. So yes, that's been unfortunate, but this is not a growth asset it never was. We got it for a really good value. The ROIC will remain very high. The free cash flow generation will help support some of these activities. So there's no reason for us to sell a and as we're rolling out a new strategy with a different call point approach and it being in more bags and more salespeople with the 1099s as well. We do think there's a stabilization there as we get into the back half of the year in '24 that will prove that, yes, it's not a growth story. And it's a great stabilization story that provides a lot of free cash flow.

We have a follow-up to that question. Will you have a one-shot soon in HA as well?

We do not plan to participate in the one-shot portion of the market. We're going to participate in the 3 and 5 shot.

Next question is, Diros has a full line, and you have spoken mostly about the Trident. Will you continue offering all products, including the neurosurgical line?

Primarily, the neurosurgical line is utilized in Europe, and there's -- and that's something that we would continue to sell into. It would be the primary focus for us. In the U.S., I think we're going to be oriented more to the ambulatory surgical center certainly. Kerr, you can add anything you like.

You said it well.

[indiscernible] great line of standard RF products beyond just driven as well that we'll continue to sell.

It should just bolster in total to the questioners point, our total RF approach.

And then the final question we have online so far. Diana Cats. First part is, can you talk about which SKUs you rationalized from which areas? I'll let you answer that and then, it's a multipart question.

Do you want to highlight the $25 million?

Yes. I mean it was -- we're not going to get down to the SKU level to answer that question, but about 2/3 of it was international. About 1/3 of it was North America based. And equally the split was about 2/3 pain and 1/3 other.

Also, it used to be that 75% to 80% of your cash EBITDA was from Chronic Care Digestive Health products. How does your business look today on a cash EBITDA basis?

It's somewhat similar, right? That's where we are. And that's why we're emphasizing Digestive Health, and that's what we've been trying to voice market over the past year or so is that the greater portion of our cash EBITDA is driven out of the Digestive Health. Now Kerr outlined the plan today to make the pain business more profitable and change that.

Yes, I think over -- absolutely agree, Joe. And I do think, over time, we should have more -- I'll never get to 50-50. Digestive will be the heavier majority of our cash generation. But as we execute in the pain space and get that 6.5% mid-single-digit growth rate that we talked about, with the cost initiatives that we're putting in place there, that will be a heavier part of our revenue. I don't know whether it's 70-30 or 65-35, but that will be a heavier part of the cash flow that we generate on the paint side.

That's the last of the questions we have from our virtual attendees for now.

And the real attendees are still here.

The live ones.

Which, by the way, it is nice to be back like traveling in face-to-face, and it's a whole different dynamic. So we appreciate those of you that showed up. So anything more in the room?

How should we think about the dilutive impact of respiratory in 2024?

Yes. So RH in 2024 will have a slightly -- as a stand-alone, we'll have a slightly dilutive impact because of the trap costs that in stranded costs that we talked about. We haven't yet quite figured out exactly what that will be. There will be some impact. But given the restructurings that we were already doing in anticipation of a divestiture of this nature and some of the TSA payments that we will have as a cross-payment structure. I don't know exactly what that will be, but there'll be some drag for sure for '24, no doubt.

Okay. We do have 7 minutes left, or we could transition over to the innovation fair is behind the wall here across the hallway, and there'll be food, I think, and cocktail, bar, lime. You're rewarded for you sitting here, and I'm glad we did finish more efficiently. And I think generally, we're going to -- many of you are going to have some other conversations with us over the next couple of weeks as this all sets in, and we're happy to make ourselves available for that.

Yes. And I'll be a Boston on Thursday with JMP Securities to have some one-on-ones and some other sharing on Thursday. So -- and obviously, you guys are always welcome to reach out to the IR department, i.e. me and set up conversations with you on one as needed...

And transformation department.

And transformation department. You just have to hit the right button.

So good. So thanks, again, everyone online. Thanks, everybody here in the room. We appreciate your interest in Avanos and we'll see you in the product fair. Thank you.