AVANOS MEDICAL, INC. Q3 FY2024 earnings call

• Leadership Changes: Joe Woody retires as CEO, Michael Greiner appointed Interim CEO, Warren MacHan appointed interim CFO. Joe will consult until April next year. - Transformation Progress: Completed conveyance of respiratory health plans to AirLife, rightsized cost structure, margin expansion from SG&A optimization and Canadian customs duty refund. - Business Performance: Digestive Health had organic growth, Pain management portfolio faced challenges but had opportunities, IVP showed growth, Game Ready continued double-digit growth, HA portfolio was stable. - Financial Highlights: Q3 sales from continuing operations were approximately $170 million, adjusted diluted earnings per share was $0.36, and adjusted EBITDA from continuing operations was approximately $31 million (almost 18% margin). Organic sales were up 1.1% adjusted for foreign exchange and discontinued streams.

Digestive Health: Grew almost 3% organically versus prior year, reaffirming #1 position in long term, short term and NeoMed feeding. Pain management and recovery: Normalized organic sales up a little over 1% excluding HA and inorganic sales related to Diros acquisition. Surgical pain portfolio was affected by execution and supply issues. ENFit products grew in excess of 30% in each of the last 4 quarters. IVP business posted double-digit growth. Game Ready posted third consecutive quarter of double-digit growth. HA portfolio: Down year-over-year but flat sequentially, expected fourth quarter revenue north of $10 million. Margin: Adjusted SG&A as a percentage of revenue was 39.8%, an improvement of 180 basis points compared to Q3 of last year and 320 basis points sequentially. Adjusted gross margin was 58% for Q3, expected ~59% for Q4.

• Q4 revenue expected in the range of $175 million to $180 million, representing low to mid-single digit organic growth. - Adjusted gross margin expected to be approximately 59% and adjusted SG&A as a percentage of revenue around 40%. - Adjusted diluted earnings per share expected between $0.38 and $0.43. - Anticipate generating approximately $30 million of free cash flow in Q4 and receiving $30 million of cash from AirLife. Year-end balance sheet expected to have net debt of approximately $20 million and a leverage ratio of under 1/4 turn. - Continue to actively pursue strategic M&A opportunities and deploy capital for opportunistic share repurchases.

• Supply issues affecting the ON-Q product line in the surgical pain portfolio. - Higher-than-expected customer turnover in the surgical pain portfolio. - Pricing pressure in the HA portfolio offsetting volume share gains. - Inconsistent top line results tempering the full benefit of transformation initiatives.

Q: Kristen Stewart wanted to know how long the supplier constraints for ON-Q would last and the longer-term growth rate for ON-Q in FY '25.

A: Primary supply challenges with ON-Q related to lighters in the early part of Q3, which resolved as the quarter went on. Longer term, excited about ON-Q prospects due to the No Pain Act, but awaiting reimbursement details to have a clearer view on its growth.

Q: Daniel Stauder asked about primary tailwinds to sales in 2025, major products, and launches.

A: Digestive Health legacy business supported by Coregrip SR and other launches, NeoMed product line growth though expected to slow. For pain management recovery: HA with volume share gains but pricing assessment needed, IVP growth including the Diros acquisition, COOLIEF growing nicely internationally, Game Ready stable growth, surgical pain business with Ambit growing and ON-Q set for stabilization/growth with the No Pain Act.