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

My name is Caroline Borowski, and I'm a member here at the JPMorgan Healthcare Investment Banking team. It's my pleasure to introduce Michael Greiner, the Interim CEO of Avanos.

Thank you so much, Caroline. And it's great to be here again at the JPMorgan conference. You guys actually brought some good weather this week, so very exciting. As Caroline just said, I'm Interim CEO as of November of last year. Prior to that, I served as CFO and Chief Transformation Officer. Today, there's 3 things, in particular, I'd like us to review. One is a overview of our portfolio with a little bit of a deep dive into areas we think we're best positioned to win in, in the mid and longer term. Two, an update on our transformation. For those of you who have followed us, we had an Investor Day in June of 2023. We're about 18 months into that transformation. 2025 is the last year of the stated activities for that transformation, so wanted to provide an update on that. And then finally, provide an update on our Q4 guidance, which we issued in coordination with our Q3 earnings call. We will meet that guidance. And actually, from a revenue standpoint, we'll be above the midpoint. So a good way to end the year. As always, I will be making forward-looking statements, and our forward-looking statements will be included in the presentation. Those contain certain risks and uncertainties and that could cause our actual results to differ materially. So let's jump in. So we have 2 differentiated portfolios. These portfolios address some of today's most important health care needs. Our enteral feeding business is approaching $400 million in annual revenue, and our Pain Management Recovery business about $290 million in revenue. We operate combined in about a $10 billion addressable market. We are a global company that operates in 90-plus countries. And most of these product categories, brand names, are leaders in their space including globally for our MIC-KEY low-profile G-tube offering, which I'll spend a little bit of time talking about that later and actually have a patient profile with that product. So let's dive a little bit deeper first into our enteral feeding portfolio. So as you can see here, it's about a $1 billion served market opportunity. Across these 3 categories, we grow about mid-single digit from a market standpoint, 5% durable growth. We have actually been outgrowing each of these markets over the last few years. And given some of the tailwinds we have both internally as well as from a macro standpoint, we anticipate continuing to grow beyond these stated market growth rates here. Our portfolio here is used in hospital NICUs, PICUs, ICUs and also for our longer-term feeding patients who may need our products for the duration of their life, we are in the home care setting as well. The NICU enteral feeding market grows very consistently. And with the low birthweight neonates and the adoption of the ENFit ISO standard we've been growing double digits for several years. We've mentioned on our earnings call that we're in the late innings of this ENFit conversion cycle. We are now in extra innings. But obviously, we will take the continued double-digit growth that we've seen with our NeoMed product offering. And we exceeded $100 million of annualized revenue in December of this year being the #1 share player in the U.S. From a short-term product category, our ICU-based enteral feeding products have driven positive patient outcomes, and I'll provide an example of that with a patient who went from an NG tube to a G-tube in order to get the proper nutrition required for their development. Again, in this category, we are a market leader and we have a strong commercial footprint. We expect to continue outperforming the market. And then finally, the long-term feeding market is a large, growing market with pediatric neurological, GI and swallowing disorders along with adult cancers driving the growth of this space. We're the market leader as well here. And we have nice innovation that we're launching in both '25 and '26 that will help us maintain our market leadership position. So we have a couple of growth catalysts both near and midterm, some from a macro standpoint, some our own commercial execution in this space to support our leading positions. The shift to new alternatives like the ENFit connectors, which I just mentioned, as well as CORTRAK guided feeding tube placements can help prevent hospital never events, which is obviously very critical, especially in the feeding space. And this has driven overall demand for our solutions. Additionally, reimbursement for long-term feeding patients in the U.S. is robust, and that does not look to change anytime soon. We also maintain an extended footprint of dedicated enteral feeding commercial experts in the market, and we're expanding that expertise into select international markets. And finally, our broad portfolio of enteral feeding products gives us an edge in hospital and GOP contracting because of the full suite of products that we offer when we go into those contracting negotiations. So as I said before, our innovation portfolio is very exciting. We've got some things launching in '25 and '26, and those will both positively impact these trends and will allow us to continue to outgrow the market growth, which is mid-single digits, as I said before. So that's in our existing opportunity. This $1 billion market, which is on the left-hand side bubble. This middle bubble, which expands to $2.5 billion has a couple of opportunities. Both additional market spaces that we can get into, an international expanded footprint is an example of that, as well as some M&A. So feeding pumps and sets is a space that we have some R&D innovation that's not ready for market yet. But there's also some M&A opportunities in that. And I'll show an example of a vision that we have for our feeding and nutrition space that combines where we currently execute and operate along with feeding and pump sets and how that fits together. Finally, we think, to the far right, we have an opportunity to expand into the specialty nutrition and supplement space. This is a roughly $4 billion market. And obviously, we currently deliver those products through our feeding tube sets, and so it's a natural adjacency for us to get into. To be clear, this is a specialty nutrition that we're excited about. So blended foods, fortified milk. We're not looking at sugar, water or those types of nutrition, which often is what's used early on. So let's transition to -- I have 2 slides here to talk about the vision opportunities we have within our feeding space. So anything signified with an orange circle, with the triangle or the Avanos A are current products that we have. So you see this girl sitting at her desk at school. We already serve her from a standpoint of our feeding tubes, some accessories, extension and giving sets. We think there's a natural opportunity to go into the pump space that I just mentioned as well as these formula and supplements. This is a great opportunity to own the space from the beginning stages to the end, and end-to-end solution, from the collection of the mother's milk to delivery to this individual. So we are very excited about what we could do here longer term. And as we think about our feeding space, we don't think about just the delivery of it. We think about what we're trying to solve for the solution we're trying to solve for. Similarly, in the NICU, which is a broader comprehensive setup for newborns. Again, we have several product categories that we already are positioned well in. NeoMed, as I mentioned before, a $100 million category. That would be the syringes, the NG and percutaneous feeding tubes here. But we have lots of other opportunities around that in the NICU setting. We have R&D and this gastric venting for CPAP belly as well as with some of the intelligent feeding. We also have some external relationships that we're building in this space, and we're excited about what the comprehensive nutrition system could be for newborns here. It's an underappreciated space. The reason why we're excited about it is we understand these patients. We understand the NICU setting. We understand the customers that go after this. And as I said before, with the other setup, no manufacturer in the health care space owns the end-to-end solutions, and we are well positioned to do so. And to ultimately streamline both of these processes to ensuring that optimal nutrition gets to the individuals that need this. In this case, this is vulnerable babies. In the other case, it was someone that required a long-term feeding solution with our MIC-KEY G-tubes. Ultimately, too, this is a very exciting opportunity for our teams to get excited about our why. These are just -- like anybody else here is at JPMorgan Healthcare Conference. We're in it because we have opportunities to make health care more affordable, more accessible. We're solving global issues and disease states. And when we see pictures like this from whether it be the manufacturing floor or the individual on the sales team who's dealing with these patients, and customers and caregivers on a day-to-day basis, it's very exciting to get up and get excited for what we're doing. So to that example, meet Carson here. So Carson was born 3 weeks -- 6 weeks early. Spent 3 weeks to 4 weeks in the NICU and faced ongoing feeding issues during his time in the NICU. He started with a nasogastric tube. So that would be feeding through the nose, but showed limited growth progress using an NG tube. To Carson's parents' credit, they advocated for a MIC-KEY G-tube, our low-profile G-tube. And that G-tube provided a few things. One, it -- didn't have him coming back for multiple hospital visits. So it provided stability in his care. It eliminated the need for him to have a product going in and out of his nose, which is obviously frustrating for a baby. And it helped Carson, most importantly, catch up on the growth milestones while encouraging him to explore eating by the mouth, which ultimately is the process we want to get to. So as I said, we're really inspired by patient stories like this. You can see the MIC-KEY G-tube in his belly just above his diaper line there. And he is now a thriving young little boy. And again, these are the reasons why we're excited about where we're positioned and continuing to advance care in this space. So now similarly, as I just laid out, our ENFit and enteral feeding opportunities, talking about our pain management, our PM&R recovery portfolio. So we operate in 2 categories here, pre-surgical as well as post-surgical and recovery. This is roughly a $1.5 billion served market with low to mid-single-digit growth depending on the category. Some of these categories we grow at or above in hyaluronic acid. We are currently growing below that 1% CAGR. We operate only in the 3- and 5-shot market in the HA market. We don't operate in the one-shot market. That's the part of the market that tends to be growing quicker. So initially, some of our patients are introduced to Avanos through our HA portfolio. We used an example at Investor Day of somebody who had knee osteoarthritis. They would start with HA and then they were transitioned through the disease state as it worsens. So you get introduced through our portfolio with HA. That may give you 3 months to 12 months of pain relief depending upon the efficacy, depending upon how good the doctor was at, at getting it at the area and the knee that required the HA shot. But ultimately, the disease state worsens and a patient who's looking for more durable pain relief would transition to one of our RFA products, COOLIEF being an example of that. COOLIEF, as an example, is a market leader in the cooled RF space and overall in the $400 million -- approximately $400 million market space. We are a leader, which is growing mid-single digits. In total, we're growing above that right now. We also enjoy an opportunity here where we have a 3-tier portfolio in the RF space. So we have a standard RF product as well as our timed Trident product, which was acquired through our Diros acquisition last year, which is growing nicely double digits in the ASC offering, and will continue to do so. COOLIEF performs better in the hospital offering because of the reimbursement it has. COOLIEF also has nice reimbursement internationally, in particular, in India, Japan and the U.K. So we have nice growth opportunities with our COOLIEF. Ultimately, though, disease states worsen. Patients are going to want to have a full knee replacement. And again, using that as an example, the knee osteoarthritis disease state because you can see the patient journey. But these products can be used in knee, hip or shoulder replacements as well. So our goal is you get out of your knee replacement. You have a ON-Q with you, as well as a Game Ready for recovery. And we have a couple of hospital systems that as you exit the hospital, you have multi-day non-opioid pain relief through our catheter-based nerve blocks, ON-Q ambIT. And then you have Game Ready to help with the swelling and the recovery of those replacement surgeries. So there's exciting opportunity for us with some tailwinds, which I'll talk about in a second. But these are spaces which we have definitely had some inconsistent performance. And when you look at the last 3 years, in particular, we've pretty much printed on the number for our enteral feeding space and even have outgrown that. But we have had some definitely inconsistent performance on the pain space. And as, from a consolidated level, that has, for sure, had an impact on folks' views of our ability to consistently deliver. So we're excited about what we're doing here strategically in order to deliver some more consistent performance. We have several near and midterm growth catalysts in this space. You can see the non-opioid approach, both through the NOPAIN Act, just as well as awareness out there, and folks looking for non-opioid pain management solutions. We have an aging population that obviously enjoys being more active, which is great. But whether that be pickleball or other sports like that, we're seeing obviously more folks to have orthopedic type of events and our products serve that. The other thing, as I alluded to before with our ambIT offering in ASC, our Trident offering in ASC. We have opportunities there to capture both the ASC audience of procedures where a lot of the volume in these procedures is moving to the ASC. As well as capture the hospital procedures that are done with other offerings. And then the other thing we did, and this ties to our transformation, which I'm going to talk to in a few minutes, is we've really optimized our commercial footprint. We've optimized our go-to-market with our sales teams, and that has allowed us to position ourselves well to have a more consistent performance in our pain offering. So excited about that. As I talked about EF, we have a current market offering size. We have an available market. The example we use here is our Game Ready solution. So this is a solution that is a prescription-only product right now or you can buy it directly. We do that with professional sports teams, D1 sports teams. The prescription offering is done, as I mentioned before, post surgically to help with swelling and recovery. But we are working closely right now with the FDA to determine what type of opportunity we could have with an over-the-counter offering, which would not require a prescription. So that's an exciting large expansion of that market. We have some other opportunities there as well, and we feel that we can execute well much more consistently there than we have. Finally, if you move to the far right, and this is what I referenced before around the nutritional opportunity we have. There's about a $10 billion market opportunity -- I'm sorry, the far right is the market opportunity we have with next-generation pain management products. Both of these products, and in the interest of time, I won't go into detail here because we highlighted both of these at our Investor Day in June 2023. So if you want to learn more about FUSMobile and Synaptrix, we did a full couple of slides on each of these products and the opportunities that we have with these products going forward. So similar to our EF offerings and the nutrition opportunity we have there, we have this potential market. We are invested in both of these product categories. They had a new funding round both of these companies, had new funding rounds to support their FDA submissions. We participated in those funding rounds, and we have Board seats in -- on both of these companies. So excited about that future technology can look like as well. So I mentioned a couple of times the transformation. So a lot of why we have some clarity around the products, the market opportunities, the expansion of our market opportunities, whether it be adjacencies or just with our own internal R&D is because of what we did in bullets 1 and 2 here in these verticals for our transformation. And then also continued disciplines in 3 and 4. So in 1 and 2, we look really hard at our portfolio. And we said, "Hey, where do we have the right to win? What are the right categories that we already have some embedded technologies and expanded technologies with R&D? What do we have as an international footprint." And in so doing, we identified the product categories I just laid out. So we exited low margin and low growth areas. We divested of our respiratory health business, which those of you who have followed, we generally completed that at the tail end of 2024. And then we looked at some SKUs that we needed to rationalize, needles, kits and trays and other areas. About $25 million of SKUs that we got out of. That we just weren't well positioned to win longer term. And then we're, by and large, got out of international surgical pain as well. So a lot of that work is behind us. The stated efforts that we wanted to get at with our transformation in these verticals 1 and 2 are behind us. That being said, we talked a lot internally about, "Well, what does it mean to be transformed?" And we say, "Look, when these behaviors, the way we think about our strategy is embedded in our DNA, we'll feel that we've gotten over the other side of the transformation." So although the stated goals here are by and large behind us, we'll continue to look to transform the product portfolio. We'll continue to look for optimizations. Optimization opportunities in our strategy, commercially our organization. So we're excited about these being behind us, but we're more excited, quite frankly, about building behaviors that will allow us to more consistently deliver on execution. And 3 and 4 is very similar. So we took out and have identified $50 million of cost to take out over '23 -- the back half of '23 and '24, finishing up some of that in '25. And we're also looking at taking on an additional $20 million. So that would be $70 million in total of growth savings. Those costs are related to the stranded costs for our respiratory health divestiture that I just mentioned. Also, M&A. We are excited about our M&A pipeline. We weren't active in '24 as we remained disciplined, but we have a very nice pipeline. We will end '24 or have ended '24. We'll report on that in the last week of February with about $25 million of net debt, which positions our leverage ratio to be less than a quarter term. So we have some dry powder for things that are interesting, but we'll remain disciplined there. And we have repurchased $85 million of shares over the last 2 years. And we have an outstanding approval from the Board for another $25 million of share repurchases to allocate capital towards as well. So we will continue these disciplines even after '25, but we have a few things to finish in '25 and feel really good about what we laid out in June of '23 and these very specific things that we wanted to execute against. So as I said, I'll end with reaffirming our Q4 guidance. We should be in the top end of the net sales range and be within the ranges of the others. In the background here is an Austrian footballer, Lion Schuster. He plays for a German soccer club. He had a bad knee injury. And then subsequent to that knee injury, he had certain congenital anomalies and had a couple of other surgeries. He uses Game Ready there to recover post surgery as well as he uses it now to help with swelling and other things going forward. So great product. We see a lot of pro athletes use these. Actually, Shohei Ohtani did a YouTube short a couple of years ago, nonpaid placement, just him talking. And he talked about -- in this YouTube short, it was the top 10 things he can't live without. And Game Ready was one of the things that he highlighted, which was obviously super exciting. So thank you again for your continued interest in Avanos. We're excited about where our journey is going. As I said, 18 months in this transformation, that has allowed us to really focus on those categories that we know we have a right to win. And expand into the adjacencies that will take us to more consistent growth and an even more improved margin profile. And I look forward to any questions you may have. Thank you.

We'll take a few questions from the audience in a little, but I guess to just start us off. As Interim CEO, do you have additional or different observations of the company versus your time when you were CFO and Chief Transformation Officer?

Yes. So do I need to hit or is this on? Can you guys hear me okay? It does come through? Okay. It sounded louder up there than here. So I would say -- one thing, people listen to you a lot closer when you're CEO versus CFO. That's been an interesting discovery. More importantly than that, what is affirming is that we have a really good team. And we have a good organization, the transformation is working. We're building momentum. People are starting to understand that we have a product portfolio now that we're focused on that can be a more consistent deliverer of value creation. So I think 1 observation is I'm seeing more things, and it's affirming what I already knew about the business. I think the other observation is we're going to be very thoughtful, but critical on ourselves around what's working and what's not. And yes we've talked about the type of team members we need on a team with a smaller, more versatile, more agile company. And so we really have a call to action for all our team members. If you're excited about entrepreneurial mindset. You like being a player coach. You like raising your hand and getting involved in projects, and can bounce around the different things and be a little bit more of a utility player, you're going to be really happy with where we're taking the story. If you're looking to do something that's very carved out and niche-y and kind of day-to-day, this may not be the place for you to work going forward. And that's been definitely affirmed as the last 60 days is taking place to finish Q4, thought about where our strategy is going. And just to be clear, we're going to build upon what we laid out in 20 minutes today in our Q4 earnings call. So for those of you that are following, we've got a Q4 earnings call that will have a couple more double-clicks down into some of the stuff we shared today. So in order to make sure we can do those things longer term, we have to have the right people and see. And generally, I think we do. But we also, like I said, it's a call to action around people that are going to step up and deliver and those folks that may mean a different environment, and that's okay.

Awesome. And the company is in its final year of the 3-year transformation. You provided a report card during your presentation of this. But what aspects of that transformation do you think are most critical to supporting your mid- to long-term success?

I think the first 2. The other 2 are good disciplines. We need to do the right things from a capital allocation standpoint. We need to continue to use our M&A muscle. Cost management just needs to be embedded with how we think about our spend each day. Horseracing things for highest ROI. But building that DNA of which products can win, where do we need to invest behind, where can we win with R&D, where do we need to win with M&A with our portfolio, do we have the right go-to-market strategies, where do we go direct internationally, and we've had some good successes. But where do we continue to look at opportunities to go direct internationally versus user distributor networks? Like we just have to do that well. We've done the big stuff, as I talked about, that we laid out to do and feel really good about that, but it doesn't stop there. We need to continue to do those things. Kerr Holbrook's with us today, our Chief Commercial Officer. He's done a really nice job of stepping into understanding where the pain business is and where it needs to go. He previously has established and set up the enteral feeding business to be the consistent performer it has. So we need that to look on the pain side like we do on the enteral feeding side. And so these behaviors just need to be part of how we talk to each other each and every day. So I'd go back to 1 and 2 -- those 1 and 2 verticals. If we continue to do those well, consistent mid-single-digit growth, consistent delivery of expanding our margin opportunity, those will just -- the math will happen. If execute on those other things, the math will happen.