Avanos (AVNS) Q3 2023: Digestive Health Up 10.5% as Pain Recovery Stabilizes
Digestive health growth outpaced expectations, while pain management stabilized after several quarters of decline. Management’s transformation priorities are reshaping the portfolio, with cost discipline and margin expansion in focus for 2024. Backlog reduction and U.S. DEROS launch set up the business for improved growth and cash flow next year.
Summary
- Digestive Health Outperformance: Core digestive health lines maintained above-market growth with innovation and M&A pipeline support.
- Pain Management Inflection: Supply chain and portfolio actions are stabilizing pain management, setting up for 2024 growth.
- Margin and Cost Focus: Transformation cost savings and portfolio optimization drive margin expansion and free cash flow targets.
Business Overview
Avanos Medical is a medical device company focused on delivering products for digestive health and pain management. The company generates revenue through two primary segments: digestive health, including enteral feeding and related devices, and pain management and recovery, including interventional, surgical, and recovery products. Avanos pursues growth via innovation, portfolio optimization, and targeted M&A, while actively rationalizing lower-margin lines and divesting non-core assets.
Performance Analysis
Digestive health led the quarter with over 10.5% constant currency growth, driven by strong NeoMed, neonatal enteral feeding, performance and continued conversion to NFIT, a safety connector standard. The legacy digestive health portfolio also posted high single-digit global gains, reflecting robust demand and successful product innovation. Management expects this segment to remain a stable mid- to high-single-digit grower, with some near-term moderation as conversion tailwinds fade.
Pain management and recovery sales declined approximately 10% year-over-year, reflecting ongoing portfolio rationalization, supply chain headwinds, and competitive pricing in HA, hyaluronic acid injection, offerings. However, surgical pain returned to low single-digit growth, and management anticipates sequential improvement in Q4, supported by the DEROS, radiofrequency ablation system, acquisition and backlog normalization. Cost management efforts drove SG&A as a percentage of revenue down 140 basis points year-over-year, and adjusted EBITDA margin improved to 16.2%.
- Digestive Health Momentum: Strong innovation pipeline and international expansion underpin continued outperformance versus market growth rates.
- Pain Recovery Stabilization: DEROS integration, supply chain normalization, and new go-to-market structure are mitigating prior declines.
- Margin Expansion: Inventory reduction and cost controls position Avanos for gross margins above 60% in Q4 and improved working capital efficiency.
Overall, the quarter reflects disciplined execution on portfolio transformation and cost structure improvements, with clear signals that operational headwinds are abating as Avanos enters 2024.
Executive Commentary
"Our ability to continue to deliver above-market growth and leadership in our core digestive health markets will be supported by innovations that we plan to launch over the next 12 months, expansion into high potential global markets, low growth product rationalization, and actionable M&A targets in large attractive adjacencies."
Joe Woody, CEO
"We are very much on target, OpEx-wise, with those numbers, both through the cost savings transformation efforts, but also just through good discipline on where we spend, whether that be a new launch product, R&D, other areas. So we still very much are on target and are focused on the 38% to 39% long-term SD&A as a percentage of revenue targets, and there's nothing indicating that we should come off of those."
Michael Greiner, CFO & Chief Transformation Officer
Strategic Positioning
1. Digestive Health as Growth Anchor
Digestive health remains Avanos’s most reliable growth engine, consistently outpacing the market through a combination of innovation, M&A, and international expansion. Management expects mid- to high-single-digit growth to persist, even as the NFIT conversion benefit tapers in 2024. The stable base and pipeline of bolt-on deals provide ongoing runway.
2. Pain Management Turnaround
After several quarters of decline, pain management is stabilizing, aided by the DEROS acquisition, supply chain recovery, and a refreshed commercial structure. Surgical pain and game ready, a cold therapy system, are showing sequential improvement, and management is confident in restoring mid-single-digit growth in 2024.
3. Cost Structure and Margin Expansion
Transformation initiatives are driving sustained cost savings, with SG&A as a percentage of revenue targeted to fall to 38-39% by 2025. Inventory reduction is temporarily pressuring gross margin but will ultimately support higher efficiency and working capital turns, with gross margins expected to exceed 60% in Q4.
4. Portfolio Optimization and Capital Allocation
Avanos is actively reshaping its portfolio, divesting its respiratory health business, discontinuing low-growth SKUs, and deploying capital to higher-margin adjacencies. The DEROS U.S. launch is a near-term growth lever, while management remains disciplined on M&A and share repurchases.
5. Foundation for Midterm Targets
Management reaffirmed its midterm financial commitments, including mid-single-digit organic revenue growth, over 60% gross margin, and $100 million in free cash flow by 2025. Execution on transformation priorities is seen as the key to delivering these outcomes.
Key Considerations
The quarter marks a transition from operational recovery to proactive growth investments, with a focus on margin quality and selective expansion. Investors should monitor:
- Digestive Health Durability: NFIT conversion tailwinds will fade in 2024, so ongoing innovation and international penetration must sustain growth rates.
- Pain Management Trajectory: DEROS U.S. launch and supply chain normalization are critical tests for restoring growth and margin in this segment.
- Cost Discipline Execution: SG&A reductions and inventory management will determine if margin targets are achievable without impairing commercial momentum.
- Capital Deployment Discipline: M&A and share repurchases must be balanced against debt reduction and organic investment needs.
Risks
Key risks include execution missteps in pain management recovery, slower-than-expected international growth, and potential delays in margin expansion if inventory and cost initiatives stall. Competitive pricing, particularly in HA and other pain categories, remains an ongoing pressure, as do macroeconomic and reimbursement headwinds. Any underperformance in transformation priorities could impact Avanos’s ability to deliver on its 2024-2025 targets.
Forward Outlook
For Q4, Avanos guided to:
- Gross margin exceeding 60%.
- SG&A as a percentage of revenue in the 40-41% range.
For full-year 2023, management reaffirmed guidance:
- Adjusted diluted EPS of $1.05 to $1.15
- Gross margin greater than 59%
- Adjusted EBITDA margin of approximately 15%
Management highlighted several factors that will influence near-term results:
- Digestive health growth moderating due to tougher Q4 comps as backlog normalization laps prior-year gains.
- Pain management expected to return to sequential growth, with DEROS U.S. launch as a catalyst.
Takeaways
Avanos delivered on its transformation and cost discipline agenda, setting up for improved margin and cash flow in 2024. Digestive health remains the anchor, while pain management is positioned for a rebound. Execution on inventory reduction, DEROS integration, and international expansion will determine if Avanos can meet its midterm targets.
- Digestive Health Strength: Outperformance is supported by innovation and M&A, but growth rates will normalize as conversion tailwinds fade.
- Pain Recovery Inflection: DEROS and supply chain normalization underpin the path to growth in 2024, but execution risk remains.
- Margin Expansion Path: Transformation cost savings and inventory actions are key levers for delivering on 2025 margin and free cash flow goals.
Conclusion
Avanos’s Q3 results confirm momentum in digestive health and stabilization in pain management, with transformation priorities driving improved margins and a stronger balance sheet. Investors should watch for sustained growth in digestive, successful DEROS U.S. launch, and continued cost discipline as the company pursues its midterm financial commitments.
Industry Read-Through
Avanos’s experience underscores the importance of portfolio focus and disciplined cost management in medtech, especially as supply chain volatility recedes. Competitors in pain management and enteral feeding face similar margin and pricing pressures, and the shift toward innovation-driven growth and international expansion is a common industry theme. Transformation programs and targeted M&A are likely to remain central to value creation across the sector, with execution risk and reimbursement headwinds as persistent challenges.