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Participants

Scott Galovan; Senior Vice President of Strategy and Corporate Development; Avanos Medical Inc

Michael Greiner; Interim Chief Executive Officer, Senior Vice President, Chief Transformation Officer; Avanos Medical Inc

Daniel Stauder; Analyst; Citizens JMP Securities

Presentation

Operator

Good morning ladies and gentlemen. Welcome to the Avanos fourth quarter 2024 earnings call.
(Operator Instructions)
This call is being recorded on Wednesday, February 26, 2025.
I would now like to turn the conference over to Mr. Scott Galovan, Senior Vice President of Strategy and Corporate Development. Please go ahead.

Scott Galovan

Good morning, everyone, and thanks for joining us. It's my pleasure to welcome you to Avanos 2024 fourth quarter and full year Earnings conference call. Presenting today will be Michael Greiner, Interim CEO.
Michael will review our fourth quarter and full year results, the current business environment as well as provide an update on our transformation efforts. Additionally, Michael will provide our 2025 planning assumptions. We will finish the call with Q&A. A presentation for today's call is available on the Investors section of our website, avanos.com.
As a reminder, our comments today contain forward-looking statements related to the company, our expected performance, current economic conditions and our industry. No assurance can be given as to future financial results. Actual results could differ materially from those in the forward-looking statements. For more information about forward-looking statements and the risk factors that could influence future results, please see today's press release and the risk factors described in our filings with the SEC.
Additionally, we'll be referring to adjusted results and outlook. The press release has information on these adjustments and reconciliations to comparable GAAP financial measures.
Now I'll turn the call over to Michael.

Michael Greiner

Thanks, Scott. Good morning, everyone, and thank you for joining us to review our operational and financial results for the fourth quarter and full year 2024. We delivered a strong fourth quarter anchored by continued solid performance of our enteral feeding franchise. We also completed our obligations related to the sale of our respiratory health business with the completion of final asset transfers on October 1, 2024. This is a key milestone in our three-year transformation process.
Additionally, in January, we received notification from the DOJ that we have met our commitments with regards to our deferred prosecution agreement. Separately, we are pleased to have served over 2 million patients in 2024 through our enteral feeding portfolio, which provide essential nutrition and medication delivery for those in need, and our pain management and recovery solutions, which deliver clinically proven nonopioid therapies to support patients with chronic pain conditions or those recovering from postoperative pain.
Switching to financial highlights. Sales from continuing operations during the fourth quarter were approximately $180 million, adjusted for the effects of foreign exchange and the impact of our strategic decision to discontinue revenue streams that did not meet return criteria specified by our portfolio transformation priority, organic sales were up 5% compared to a year ago. For the quarter, we generated $0.43 of adjusted diluted earnings per share and nearly $29 million of adjusted EBITDA from continuing operations with adjusted gross margins just shy of 59% and SG&A as a percentage of revenue of 41.6%.
Our fourth quarter GAAP results include a non-cash impairment charge of approximately $437 million based upon an assessment that the fair value of our single company reporting unit was below its carrying value. For the full year, our sales from continuing operations were approximately $688 million. Adjusted for the effects of foreign exchange and as I just noted, the impact of our earlier strategic decision to discontinue revenue streams that did not meet our return criteria, organic sales increased 3.3% compared to a year ago.
We delivered adjusted diluted earnings per share of $1.35, a 31% increase compared to the prior year and adjusted EBITDA from continuing operations of approximately $108 million or almost 100 basis point expansion of margin. For the full year, adjusted gross margins were 59%, flat with the prior year. And SG&A as a percentage of revenue was 42.5%, an improvement of 80 basis points compared to a year ago. This was primarily driven by cost transformation initiatives and business process improvements.
While we had some uneven performance this year, we are pleased with our overall execution and the steady progress we've made against each of our transformation priorities. The progress in our transformation over the past 18 months has strengthened our ability to deliver on our broader strategic goals, which I'll discuss in a few minutes.
Now turning to our financial position and liquidity. Our balance sheet remains strong and continues to provide us with strategic flexibility with $108 million of cash on hand and $135 million of debt outstanding as of December 31. We have further improved our financial position in the early weeks of 2025 as we currently have over $90 million of cash and net debt of approximately $20 million. During the year, we generated $83 million of free cash flow, an increase of almost $70 million compared to the previous year. This year's free cash flow included the collection of an $18 million tax receivable that included almost $2.5 million of interest income.
From a capital allocation standpoint, and as we have previously shared, we continue to actively pursue strategic M&A opportunities that align with our returns criteria, and we'll also deploy capital for opportunistic share repurchases.
Now I'll spend the next few minutes discussing our fourth quarter results at the product category level. Our enteral feeding portfolio continues to deliver above-market results, growing almost 12% organically versus prior year, reaffirming our number-one position in short term, long term and neonatal feeding. This business sustained double-digit growth, which was supported by our NeoMed product line as we continue to take advantage of the strong demand for ENFit conversions in North America while also capturing opportunities from a competitor's backorder.
During the fourth quarter, we also benefited from a meaningful international order through an OEM partner. As we have previously signaled, we anticipate lower but still above market growth for our NeoMed product line over the next few quarters as we enter the late stages of the ENFit adoption cycle. Demand for our legacy enteral feeding business remained healthy, growing at market levels during the fourth quarter compared to the previous year. We believe these dynamics provide a foundation for us to deliver mid-single-digit growth for our overall enteral feeding portfolio in 2025 with core commercial execution, product innovations and further global market expansion.
Now turning to our pain management and recovery portfolio. Normalized organic sales for this quarter were down approximately 3% excluding the impact of foreign exchange and our previously announced strategic decision to discontinue certain low-growth, low-margin products. Our overall surgical pain business, while down compared to prior year, rebounded from a weaker third quarter performance with our combined ON-Q ambIT portfolio growing 13% sequentially. The implementation of the reimbursement decision afforded by the No Pain Act provides hospitals and caregivers with improved options to administer nonopioid postsurgical pain relief. We are excited to participate in this better patient care through our ON-Q and ambIT product line offerings.
Additionally, our ambIT product, which has capitalized on the procedural shift to the ASC, continues to post excellent results, growing more than 30% in each quarter of 2024. Our interventional pain or IVP business, posted high single-digit growth this quarter compared to the previous year. We continue to see momentum in our IVP generator sales. capturing higher procedural volumes, especially within our Semtech and Trident product lines.
We credit our renewed ASC strategy and the increasing productivity of our fully deployed new sales structure and supporting these outcomes. Additionally, we are encouraged by the progress of our COOLIEF offering internationally, leveraging reimbursement tailwinds in several countries, including the United Kingdom and Japan. Trident product line acquired in the Diros transaction 18 months ago, continues to exceed our internal growth expectations. We are capitalizing on our successful U.S. market launch with over 180 accounts having converted to our Trident technology.
Now moving to our Game Ready offering. As noted during our last call, we anticipated a decline from our Game Ready portfolio in the fourth quarter, given the particularly strong fourth quarter we experienced in 2023. However, as expected, actual revenue in the fourth quarter was in line with the first three quarters of 2024 as we continue to deliver on direct sales opportunities with high-level sports teams, orthopedic sites of care, and some direct cash pay customers.
Finally, our HA portfolio, while down year-over-year, was sequentially consistent with our prior three quarters' results. This leveling off of revenue in our HA portfolio for 2024 was anticipated and aligns with our previously forecasted 20% decrease in HA revenue for the full year. As we actively execute strategies to grow volume share in the three and five-shot HA categories, we are seeing progress in the five-shot segment. However, pricing pressure in the three-shot offering continues to present a challenge, offsetting our overall share growth.
Although we had some mixed results across the pain management and recovery portfolio throughout 2024, we are encouraged by the progress we saw this year in our IVP and Game Ready businesses that delivered organic mid-single-digit growth. Looking ahead, we expect the following across the PM&R portfolio in 2025. Our IVP and Game Ready businesses continuing to make organic gains, our surgical pain products reversing years of negative outcomes with the No Pain Act tailwind and our HA product line continuing to see pricing pressure, as I just noted.
Now moving to our 2023 to 2025 transformation priorities and efforts. As a reminder, we have four key priorities designed to improve our go-to-market execution and meaningfully enhance our financial profile. These priorities are strategically and commercially optimizing our organization, transforming our product portfolio to focus on categories where we have attractive margin profiles and the ability to win, taking additional cost management measures to enhance operating profitability and continuing our path of efficient capital allocation to meaningfully improve our ROIC.
We continue to make important gains against these transformation priorities, which included the following progress during the fourth quarter, completed the divestiture of our respiratory health business with the conveyance of certain Mexican assets to AirLife in early October and exiting all remaining global distribution agreements. We maintained consistent growth in our enteral feeding business, benefiting from strong conversion wins in North America that are expected to continue into early 2025. We realized record generator sales in our IVP business that we expect will support ongoing volume procedural share growth gains during 2025, and we executed on our go-to-market strategy for our Trident technology, allowing us to achieve greater than 20% growth globally.
We also continued progress of our business efficiency programs with third-party service providers and the establishment of our AI solutions portfolio, which will allow us to better utilize data to drive efficiencies, assist in targeting customers, identify new product innovation and streamline decision-making. We also further identified and executed with relation to our company-wide cost management programs. We maintained M&A discipline throughout the year, and our current leverage levels will allow us to be appropriately positioned for acquisitions throughout 2025. And we exited our deferred prosecution agreement with the DOJ in January.
As you know, we kicked off our transformation journey at our June 2023 Investor Day and have made solid progress. Nonetheless, the full benefit of our transformation initiatives has been tempered by inconsistent top line results, primarily in our PM&R business. To address this challenge, we are actively making changes to improve our go-to-market strategies that we expect will enable us to realize the full financial outcomes of our transformation efforts as well as reporting changes that will mirror how we run our businesses and provide more transparency around the growth and margin profiles of these businesses.
We have refined the company's organizational focus and strategic business priorities to ensure all priorities are clear and positively impact our operating processes, improve customer experience and capitalize on growth opportunities to deliver margin expansion.
To align this approach with how we will manage the business, starting in the first quarter of 2025, we will start reporting under three operating segments. First, our enteral feeding portfolio will be renamed as our Specialty Nutrition Systems segment. This segment will include our long-term feeding portfolio, featuring our MIC-KEY low-profile enteral feeding tubes. Our short-term feeding portfolio, encompassing our CORTRAK guided feeding tube placement, our CORFLO nasogastric feeding tubes and our CORGRIP 2 Retention system. And finally, our NICU portfolio, which includes our NeoMed neonatal pediatric solutions.
The Specialty Nutrition Systems name captures our bold vision to expand from our leading enteral feeding portfolio to a life-sustaining enteral feeding and nutrition products portfolio that responds to the need for a simplified patient-preferred integrated specialty nutrition ecosystem.
Next, our interventional pain and pain management and recovery portfolios will be combined into a single pain management and recovery segment. This segment will include our three-tier radio frequency ablation offering, featuring our Semtech Conventional RFA solution, our Trident Timed RFA solution and our COOLIEF Cooled RFA solution. It will also include our surgical pain pumps portfolio, featuring our On-Q Elastomeric pain pumps and ambIT electronic pain pumps, along with our Game Ready cold and compression therapy offering. And finally, our hyaluronic acid injections and intravenous infusion product lines will be combined and reported in our Corporate and Other segment.
As noted, we believe this transparency will highlight the financial profiles of our specialty nutrition systems and pain management and recovery segments. More importantly, this will guide internal capital allocation decisions, helping us optimize returns and achieve stronger ROIC as we evaluate investment opportunities across each of our segments.
Now turning to our 2025 outlook. Our 2025 guidance reflects a challenging market environment for some of our product categories as well as currency headwinds and other global macroeconomic factors, like tariffs. While we anticipate a temporary pause in margin improvement this year due to these factors, we remain committed to executing our long-term strategy, achieving our previously stated margin targets. Accordingly, we expect net sales in the range of $665 million to $685 million.
With our Specialty Nutrition Systems segment growing mid-single digits organically, and our Pain Management and Recovery segment expected to deliver flat to low single-digit organic growth. Finally, our Corporate and Other segment is anticipated to decline over 20%. These top line results will support expected adjusted diluted earnings per share of between $1.05 and $1.25.
To reiterate, this guidance reflects currency headwinds on reported revenue of approximately 100 basis points due to the strengthening of the U.S. dollar. And as you know, we don't speculate on future currency movements, and are currently assuming foreign exchange rates near current levels for the duration of the year. Separately, as you are aware, we are manufacturing in or sourcing from Mexico, Canada and China and we are, therefore, very closely monitoring the evolving tariff landscape as well as any potential downstream effects on our customers.
While we await further developments and explore strategies to mitigate potential impacts, this current guidance reflects a relatively neutral view on tariffs for 2025. Guidance also considers continued HA pricing pressures and a deemphasis on our intravenous infusion products that are now included in our Corporate and Other segment and reflects a combined expected decline of 20% in those categories. And finally, we anticipate an annual effective tax rate of about 27%.
While this guidance implies that our 2025 financial results will be similar to our 2024 results on a consolidated level, we believe that the actions we take this year will position us to reignite our margin expansion journey, deliver consistent revenue growth in our two strategic operating segments over the mid- to long term and enable the company to ultimately deliver on a financial profile that includes gross margins greater than 60% and adjusted EBITDA margins of 20%.
Operator, please open the line for questions.