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

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

Thanks, Scott. Good morning, everyone, and thank you for joining us to review our operational and financial results for the fourth quarter and full year 2024. We delivered a strong fourth quarter anchored by continued solid performance of our enteral feeding franchise. We also completed our obligations related to the sale of our respiratory health business with the completion of final asset transfers on October 1, 2024. This is a key milestone in our three-year transformation process. Additionally, in January, we received notification from the DOJ that we have met our commitments with regards to our deferred prosecution agreement. Separately, we are pleased to have served over two million patients in 2024 through our enteral feeding portfolio, which provides essential nutrition and medication delivery for those in need, and our pain management and recovery solutions which deliver clinically proven, non-opioid therapies to support patients with chronic pain conditions or those recovering from postoperative pain. Switching to financial highlights, sales from continuing operations during the fourth quarter were approximately $180 million. Adjusted for the effects of foreign exchange and the impact of our strategic decision to discontinue revenue streams that did not meet return criteria specified by our portfolio transformation priority, organic sales were up 5% compared to a year ago. For the quarter, we generated $0.43 of adjusted diluted earnings per share and nearly $29 million of adjusted EBITDA from continuing operations, with adjusted gross margins just shy of 59% and SG&A as a percentage of revenue of 41.6%. Our fourth quarter GAAP results include a non-cash impairment charge of approximately $437 million based upon assessment that the fair value of our single company reporting unit was below its carrying value. For the full year, our sales from continuing operations were approximately $688 million. Adjusted for the effects of foreign…

Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the number one on your touch-tone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press the star followed by the number two. If you are using a speakerphone, please lift the handset before pressing any keys. One moment, please, for our first question. Our first question comes from Mr. Rick Wise of Stifel. Please go ahead.

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

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

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

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

Thanks again for taking our question.

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

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

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

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

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

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

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

Great. Thanks so much.

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

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

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.