Avanos Medical, Inc. (AVNS) Q4 2022 Earnings Call Transcript

Avanos Medical, Inc. (NYSE:AVNS) Q4 2022 Earnings Conference Call February 21, 2023 9:00 AM ET

Company Participants

Scott Galovan - Senior Vice President, Strategy and M&A

Joe Woody - Chief Executive Officer

Michael Greiner - Senior Vice President, Chief Financial Officer and CTO

Conference Call Participants

Rick Wise - Stifel

Matthew Mishan - KeyBanc

Drew Ranieri - Morgan Stanley

Dave Turkaly - JMP Securities

Operator

Good day. And welcome to the Avanos Fourth Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation there will be an opportunity to ask questions. [Operator Instructions]

Please note, this event is being recorded. I would now like to turn the conference over to Scott Galovan, Senior Vice President, Strategy and M&A. Please go ahead.

Scott Galovan

Good morning, everyone, and thanks for joining us. It’s my pleasure to welcome you to Avanos 2022 fourth quarter and full year earnings conference call. Presenting today will be Joe Woody, CEO; and Michael Greiner, Senior Vice President, CFO and Chief Transformation Officer.

Joe will review our quarter and the current business environment and provide an assessment of our execution against our key objectives for 2022. Then Michael will discuss additional detail regarding our fourth quarter and full year and share our 2023 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 risk factors described in our filings with the SEC.

Additionally, we will be referring to adjusted results and outlook. The press release has information on these adjustments and reconciliations to comparable GAAP financial measures.

Now I will turn the call over to Joe.

Joe Woody

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 2022. We are very pleased with our fourth quarter results, which built on solid execution from both our operational and commercial teams during the first nine months of 2022.

Although, the macro environment remained disruptive and dynamic, we focused on what we could control and manage. The demand for our products remained strong, and although, supply chain disruptions persisted, we executed well, mitigating impacts to our financial results.

We anticipate 2023 will continue to present supply chain headwinds, cost pressures and pockets of product availability challenges. As always, our primary focus is on getting patients back to the things that matter as we meet the needs of our customers.

For the quarter, we achieved sales of $217 million, representing over 14% total growth and 4.7% organic growth, both excluding the negative impact of foreign exchange. We generated $0.60 of adjusted diluted earnings per share and $29 million of free cash flow. For the full year, we grew 12%, including the impact of our acquisition of OrthogenRx and delivered adjusted diluted earnings per share of $1.65.

Additionally, our gross margin for the year was 56.8%, a 450-basis-point improvement versus the prior year and we ended the year with a leverage ratio of under 1 times. These results position us to confidently execute against the transformation priorities we laid out at the JPMorgan conference in January. Michael and I will address these priorities a bit later in the presentation.

Now I will spend the next few minutes discussing our results and the product -- at the product category level. On a constant currency basis, our adjusted portfolio again grew by double digits, topping 10% with NeoMed growing nearly 40%. The positive trends across our Digestive Health franchise continued as second half supply improvements allowed us to maximize North American ENFit conversions.

Our legacy enteral feeding product line maintained its global mid-single-digit growth with robust double-digit year-over-year growth in North America as supply constraints alleviated in the latter part of the fourth quarter.

Even though our respiratory business declined by 4% overall, our closed suction catheters grew over 8% versus the prior year. As we noted in our third quarter call, we experienced improved ordering patterns for our closed suction catheter systems throughout the fourth quarter, specifically due to trends with pediatric viral cases like RSV and the early flu season uptick. In total, our Chronic Care business grew just under 6% in the fourth quarter and 2.6% for the full year, excluding the negative impact of foreign exchange.

Turning to the Pain portfolio. For the quarter, we experienced low single-digit growth in acute pain, coupled with mid-single-digit growth in our interventional pain compared to the prior year. The demand for our products and solutions remains strong as evidenced by the double-digit growth in both Game Ready and COOLIEF sales during the quarter.

As anticipated, we continue to experience supply headwinds, particularly within our surgical pain category and we expect these headwinds to remain a factor throughout the first part of 2023. Despite some of the ongoing pressures brought about by supply chain challenges, as well as hospital staff shortages that have kept elective procedure levels reduced, our team’s resilience has ensured that our Pain solutions are available to meet the needs of our customers.

Separately, OrthogenRx exceeded expectations in 2022 by delivering on our key marketing strategies. OrthogenRx’s unique patient access program, coupled with a relentless focus on service and support allowed us to expand our portfolio to self-pay patients and differentiate our brands to providers. In parallel, our strategic pricing initiatives drove a favorable allowable of the three injection product and maintain five injection customers within the company’s portfolio.

In 2023, we will expand our innovative OrthogenRx patient access program for our five injection customers to address the growing self-pay market. We also expect steady increases with the three injection self-pay program. There will be continued reimbursement volatility in 2023 and pricing discipline and accurate average sales price or ASP reporting will be a focus for OrthogenRx to deliver stability for our customers.

In total, our pain management business grew 2.6% in the fourth quarter and 2% for the full year, excluding the negative impacts of foreign exchange and contributions from our OrthogenRx acquisition.

We continue to deliver on both our gross margin and SG&A commitments during the fourth quarter. Gross margin was 55.6% in the fourth quarter and 56.8% for the full year, driven by favorable product mix, inclusive of OrthogenRx and our plants continuing to incrementally deliver on the manufacturing efficiency strategy we set forth at the end of last year.

Separately, we ended the year with back orders around $8 million, slightly higher than we anticipated coming out of the third quarter. Additionally, current back orders have increased to just under $10 million and we are cautiously optimistic that we can meaningfully reduce our back order throughout 2023.

Turning to SG&A. Our fourth quarter and full year SG&A numbers as a percentage of revenue were 34.2% and 38.9%, respectively, exceeding our commitment to keep SG&A as a percentage of revenue under 40% for the full year. We remain committed to this financial metric as we enter 2023 and Michael will provide additional insight when he discusses our 2023 planning assumptions.

Our final two priorities for 2022 were to demonstrate our ability to deliver consistent repeatable free cash flow and capital deployment via M&A. For the fourth quarter, we generated $29 million of free cash flow despite continued inventory and supply chain headwinds. Our ability to consistently deliver free cash flow is critical to support our other strategic growth and capital allocation initiatives and has been identified in our priorities for 2023 and beyond.

While we are disappointed, we have been unable to announce another acquisition since OrthogenRx in early 2022, we remain engaged in active dialogue with a number of potential tuck-in targets with the objective of leveraging our existing commercial infrastructure, generating synergies and enhancing our topline growth.

We have been disciplined in our approach around strategic fit, evaluation and due diligence, and believe that discipline is critical for long-term ROIC enhancement. On top of the early success of OrthogenRx, it is worth noting that our most recent acquisitions of NeoMed, Game Ready and Summit Medical, our ambIT device averaged double-digit growth in 2022.

Quickly summarizing 2022. Our primary objectives were centered around consistent organic growth. delivering on our OrthogenRx strategy, making meaningful improvements in our gross margin profile and demonstrating our ability to deliver material free cash flow.

With organic growth in the middle of our range, excluding the unusual impacts of FX, OrthogenRx exceeded our internal expectations. Gross margin improved by 450 basis points. We delivered free cash flow of $72 million or approximately $50 million greater than last year’s free cash flow, excluding the CARES Act refunds, we solidly delivered against our primary objectives, which as noted earlier, effectively laid the groundwork for our longer term transformation efforts.

We outlined these transformation efforts in our JPMorgan presentation in January. In that presentation, I described four key priorities over the next three years that would optimize our go-to-market opportunities and substantially enhance our financial profile.

These priorities include, strategically and commercially optimizing our organization, transforming our portfolio to focus on categories where we have attractive margin profiles and the right to win, taking additional cost management measures to enhance operating profitability, and continuing our path of efficient capital allocation to meaningfully improve our ROIC.

Now I will turn the call over to Michael, who will help lead these efforts in his expanded role as Chief Transformation Officer and will elaborate on both the near and longer term goals of these efforts.

Michael Greiner

Thanks, Joe. As you noted, we are very excited to embark on our transformation journey and believe our execution over the past 18 months has created a solid foundation to build upon. Before diving deeper into these transformation efforts, I will provide additional color to our fourth quarter and full year results.

Total reported sales for the fourth quarter and full year were $217 million and $820 million, increases of 12.4% and 10.1%, respectively. Adjusted diluted EPS for the quarter was $0.60 and $1.65 for the full year.

Additionally, as Joe already noted, we delivered on both our gross margin and SG&A as a percentage of revenue commitments, with full year gross margin at 56.8% and SG&A as a percentage of revenue for the full year at 38.9%.

We also successfully executed on our OrthogenRx strategy during the year and generated over $70 million of free cash flow ending the year with $128 million of cash on hand and a leverage ratio of less than 1.

Excluding the negative impact of foreign exchange, Chronic Care sales grew by almost 6% for the quarter, with Digestive Health growing over 10% and our closed suction catheter systems growth exceeding 8%.

Within our Digested Health portfolio, NeoMed grew nearly 4% globally, again fueled by strong execution of customer conversions to our ENFit technology. Although, our closed suction catheter business should return to healthy growth, as we noted what happened during our third quarter conference call, our Oral Care sales were down almost 27%, as we intentionally walked away from contracts with unattractive margin profiles.

Within Pain management, we grew 2.6% for the quarter, excluding the contribution of OrthogenRx and the negative impact of foreign exchange. Our interventional pain business grew 6% with our acute pain products growing a little under 1%.

As Joe summarized earlier, we had another solid revenue quarter and overall positive financial contributions from OrthogenRx. Game Ready and our COOLIEF water cooled RF system both grew double digits for the quarter, partially offset by a decline in our surgical pain products.

Adjusted EBITDA totaled $45 million, compared to $33 million last year and adjusted net income totaled $28 million, compared to $24 million a year ago, translating to $0.60 of adjusted diluted earnings per share versus $0.50 a year ago.

In summary, 2022 was a strong year for the company, with adjusted gross margin improving 450 basis points compared to last year this year, while adjusted EBITDA margin exceeded 20% in the fourth quarter.

Additionally, we delivered on our internal EBITDA, operating profit and adjusted diluted EPS targets, while further strengthening our balance sheet, even after allocating over $170 million towards M&A and share repurchases.

As Joe noted earlier, our recent execution has positioned us to embark on the transformation efforts we outlined at the JPMorgan conference. Our transformation priorities are designed to shift our product portfolio over time into a higher growth portfolio, leveraging our cornerstone product families in Digestive Health and interventional pain.

Additionally, these priorities are aimed at rightsizing our cost structure and enhancing our operating profitability with EBITDA margins ultimately exceeding 22%, while generating annual free cash flow of $100 million. Our three-year transformation assumes primarily organic efforts that we have visibility against and strategies that are in our control.

While still early, we have made some impactful decisions already, including leadership changes. Kerr Holbrook was promoted to Chief Commercial Officer, leading our combined Chronic Care and Pain franchises with a focus on realizing efficiencies and synergies within our commercial teams. Additionally, my role was expanded to include senior leadership oversight over this critical initiative through the transformation management office.

We also announced that internationally, we would cease selling certain products in our acute pain category and smaller product categories with insufficient profitability. As noted earlier, we have also walked away from customer contracts with low margin as we exited 2022.

While these strategic decisions will result in an annualized revenue loss of approximately $35 million, we were not set up to win or grow profitably in these markets or categories over the long run. Our cost savings initiatives will primarily offset stranded costs associated with these product categories.

In total, we expect to realize approximately $10 million of savings in 2023, anticipate $45 million to $55 million of gross cost savings by 2025, most of which will be achieved in 2024. We will present a refined view of our transformation program at our Investor Day on June 20th to be held at the Convene 101 Park Avenue location in New York City.

Although 2023 will be an uneven transition year, given the product portfolio rationalization and cost management initiatives, we anticipate improving our operating and EBITDA margins by at least 100 basis points.

Separately, we expect to earn between $1.60 and $1.80 of adjusted diluted earnings per share for 2023, while delivering at least $60 million in free cash flow, excluding the one-time cash costs associated with the restructuring efforts expected to total between $20 million and $25 million.

Finally, including the in-year impact of the approximately $35 million annualized product portfolio rationalization decisions, the company anticipates comparable organic revenue growth to be low single digits.

As I mentioned earlier, we are excited to embark on our transformation journey and I am confident we will improve on each of these metrics as the year progresses with the first quarter starting off slow and accelerating into the back half of the year, similar pacing to what we experienced in 2022.

In summary, given our consistent execution over the back half of 2021 and throughout 2022, and considering this current global macro and industry specific environment remains uneven, we believe this is the appropriate time to proactively and strategically optimize our commercial organization, portfolio and cost structure.

Operator, please open the line for questions.

Question-and-Answer Session

Operator

[Operator Instructions] The first question today comes from Rick Wise with Stifel. Please go ahead.

Rick Wise

Good morning, Joe. Hi, Michael. Let me -- a lot to tackle here. I think that I am going to start with the transformation commentary. And sorry, Michael, to make you say it again, did I hear you correctly, it’s $10 million cost reduction this year and the large portion of next year? I am sorry, I just went by quickly. And maybe you could just -- whatever you will correct my words, if they are wrong, but just help us understand better where the costs are going to come from, were the -- what’s involved, how quickly you can get at them, and to what extent, especially in the early part, is this going to be a net positive, offsetting other cost and inflation, et cetera, pressures? Sorry for the long start.

Michael Greiner

Yeah. No. No. That’s okay. Hi, Rick. So, yes, approximately $10 million in 2023, a majority of the remainder amount, of between $45 million and $55 million in 2024. So just to answer that first part of your question.

Where a majority of these savings are coming from is a mix of things. We will be outsourcing some opportunities. We will be rebidding on a lot of third-party contracts. We will be eliminating third-party resources as we announced through the reorganization of naming Kerr Holbrook, the Chief Commercial Officer. There was a duplication of roles. Some of those roles have already been eliminated.

We will also just continue on the path that we have done in the last couple of years with looking at trimming T&E and other areas as well. Some of those things like outsourcing will take into the back half of this year to figure out the right partner to figure out the right way to do that without being disruptive and so a majority of those savings won’t take place until 2024.

Rick Wise

Got you. Exciting stuff as it all unfolds. Your supply chain back order situation, maybe you could give us a little more color on the back order, what drove the higher than expected back quarter in fourth quarter and the increase early this year? Is it -- I don’t know, is it particular product supply shortages or -- and again what’s your optimism on resolution working through that now?

Joe Woody

Yeah. So, Rick, this is Joe, and Michael is welcome to comment as well. But we did a nice job at the end of the quarter, reducing our backlog, and obviously, that shows in the revenue, but then it built back up again. So it’s close to $10-ish million right now. It will come down though, quarter-by-quarter. We think it will come down pretty significantly in the second half.

But three areas right now. It’s heavily weighted to just of health at the moment and particularly there’s the tieback issue. I think everybody knows that DuPont’s building a new plant. It will be up and running in Europe but not until the fourth quarter. So that’s some of it.

In our case, we also have a supplier of catheters for ON-Q and ambIT where we actually could be producing more revenue and the underlying demand is there, but that’s going to stick with us through the third quarter of this year. And then there are still electronic components that are issues across the Board that does impact COOLIEF.

Now that said, when we look out, we do see by the time we get to Q3 that most of that will be in the rearview mirror and that’s why Michael has talked about a progression somewhat similar to this year.

But the ambul [ph] and what -- as I listened to Michael, the element of the transformation is to eliminate SKUs to make some changes further in our portfolio. We believe that we can build ourselves into a consistent mid-single-digit growing business as we enter 2024, and obviously, the second half will be stronger than the first.

Rick Wise

Got you. Just last for me. Joe, I heard your M&A comments that you were disappointed that something hadn’t happened by now and as I think back to chatting here with you and Michael in mid-November at the Stifel Healthcare Conference, you had said you would hoped, you thought the potential was there to see two potential bolt-ons sometime in the first half. How are you thinking about those time lines today? Is that the track on your mind or should I imagine, given the timing of the Investor Day that, no, it’s been pushed out longer. Just what’s going on out there and just where are you now? Thank you.

Joe Woody

Yeah. Yeah. So very robust pipeline, it’s even built further since we last were together, I think, at the New York in November. We do think that we will have a transaction in place prior to the Investor Day in the near-term. And I do think that we will likely have a second bolt-on in the second half of the year, so maybe not too in the first half of the year.

We are orienting a lot of our focus on the Digestive Health area, but we still have a couple of Pain items that we want to do, again, being more focused in orthopedic pain and recovery than we have been in the past. So we feel really good about this.

We obviously have a lot on with the transformation. So we are carefully also looking at phasing and not wanting any missteps in execution, because a lot of this, as you can imagine, requires a lot of work.

But that said, we are going to be in an excellent position for M&A and I think we have demonstrated a good track record. We have plenty of powder at one time to go out and conduct these and they are going to enhance that growth profile as well, especially given that to the extent we did two and that’s going to give us an even better outlook for 2024 and parts of the end of the year.

Rick Wise

Thank you very much.

Operator

The next question comes from Matthew Mishan with KeyBanc. Please go ahead.

Matthew Mishan

Hi. Good morning, Joe. Good morning, Michael.

Joe Woody

Good morning.

Matthew Mishan

Could you guys -- yeah. Could you guys help quantify the product exits between Chronic Care and Pain, where the $35 million is coming out of? And then does that also -- does that take the place of potential spins or divestitures or is that something you are still looking at?

Michael Greiner

So two points. Matt, we will get more into details at Investor Day as to where these exits are coming from, partially because we have relationships that we are still in place right now, which is why we are giving a range of what the full year impact would be.

So some of these we may hand over to an existing distributor relationship. Some we may just get out of altogether due to product availability. Some we may get out of just due to other relationships. So we are not going to get the details into the split of that yet, but we will have more clarity in detail on Investor Day around that first question.

To the second question, it’s a mix. So some of the stuff we are deciding to get out of would be a little bit of the spend in getting out of products that just aren’t worth the effort of trying to sell, because we just wouldn’t get value for them.

So it just makes sense to exit those, but it doesn’t necessarily take place out of other product categories where we do believe there’s real value there and we would consider divesting of those product categories.

Matthew Mishan

Okay. Excellent. And then for 2023, I think, well, just taking a step back, it looks like OrthogenRx, including an extra week or two, that pulls over from that inorganic for 2022 would be coming out about $80 million for a full year on an annualized basis. Just what are the expectations for that in kind of 2023 as some of the dynamics change?

Michael Greiner

Yeah. Joe will talk in a second about the strategic aspect of what we are doing there. The $80 million, I think, it’s a little south of the $80 million, but you are directionally right.

Joe Woody

And just on a strategic level, I do think in the first half of this year Q1 and Q2, we are still going to see benefit on the reimbursement level really in the TriVisc and the GenVisc categories and that starts to level off in the second half and we see that more as a level. And we call a level year-over-year and that’s where we are and that’s a good outcome for us for the business.

And just as a reminder, we didn’t really make the acquisition based upon thinking it was going to be north of our mid-single-digit on a consistent basis after this year, we do think it’s a low single-digit grower, but excellent contribution to the margins.

And more importantly, a fit for our focus going forward in pain is going to be more around the ambulatory surgical center, orthopedic office and in that setting, so you can see it pairing well, obviously, with COOLIEF pairing with Game Ready and just getting total knees of the patients back to recovery faster and leading up to that, obviously, in the case of HA.

Matthew Mishan

Okay. And then on SG&A, last year you started at a high point in the first quarter and then sequentially decelerated through the course of the year. How should we be thinking about SG&A through the course of 2023? Is the fourth quarter a good starting point or does it ramp again and then come down through the course of the year?

Michael Greiner

Yeah. The pacing will feel very similar. That being said, the $10 million of in-year cost, there may be some movement between Q2 to Q4 as to when some of these costs come out, but the pacing will feel very similar.

And that, to your point, Matt, will have a high point and it will come down on actual dollars as the year goes on, whereas revenue will be a low point in Q1 and will be even-ish in Q2, Q3, but higher than Q1 and then will have a solid Q4.

And therefore, you have that, obviously, you have your high 30s, low 40s, starting in 2023, Q1 for SG&A as percentage of net sales going down into the mid-ish percentage in Q4. Some of it’s just math, some of it is the pacing of the savings that we just talked about the $10 million.

Matthew Mishan

Okay. And then last one, maybe I just missed it. Just what are your expectations for gross margin in 2023? I know you kind of put out the 100 basis points of operating margin, EBITDA margin improvement in kind of 2023.

Michael Greiner

Yeah. So that was purposeful. We aren’t sure exactly where we are going to get the 100 basis points from, what we do know is gross margin should be sticky in this 57% level if not higher and SG&A a 38.9% should be a little bit lower, if not in the range.

So again, depending on how these savings come in and when we exit some of these low margin -- lower gross margin product categories, will shift where that 100 basis points comes from. So we are not trying to be cute on the 100 basis points at op EBITDA. We just -- we are trying to be thoughtful. I know that we will have more information to share at Investor Day in June.

Matthew Mishan

Got it. Thanks, Michael. Thanks, Joe.

Joe Woody

You got it.

Operator

[Operator Instructions] The next question comes from Drew Ranieri with Morgan Stanley. Please go ahead.

Drew Ranieri

Hi, Joe. Hi, Michael. Thanks for taking the questions. Just maybe on the cost transformation side for a moment and I understand that there’s a lot going on that we will eventually get details with. But just kind of looking back at the company, it’s been kind of a few years of talking of right-sizing the business and getting the expense structure in place. But I was just kind of curious how you can or if you can really kind of give more details about the growth side of the equation and really what you are thinking on that side, because it just feels like Avanos has kind of been a low single-digit grower. So I’d like to hear more about how you are thinking about growth improving and accelerating over the next 12 months, 18 months, 24 months?

Joe Woody

Maybe I could start with a little bit of growth and I think Michael will pick up on some more of the costs. But obviously, we want to set that foundation so that we get the drop-through and leverage.

And if you go around and look at what’s going on in Chronic Care, you do see a lot of spots of double-digit growth. I mean, NeoMed almost hitting 40% consistent mid-single-digit growth really and the rest of it just to help the portfolio on a global basis.

We are starting to see Pain come back. It’s limited right now by some of the supply chain issues. There’s probably still another $2 million or so a quarter going to be this year that would be backlog each quarter that we could sell through.

And also, we know we have a line of sight to some strong acquisitions and good valuations like we have been doing before in the areas where we compete, so orthopedic pain and recovery, management, and then, obviously, we said, we are going to an emphasis on Digestive Health. So we think that’s going to be enhancing it.

And if you pull all that back in a normalized situation, we feel like we do have a mid-single-digit growing organic business, not going to show through, obviously, in the first half, but starting to show through in the second half, but really being powerful as we move into 2024 coupled with the balance sheet that we have as the size of the company.

So I think putting that together is where we see a lot of strong value creation and when you see the cash flow now increasing, it gives us also medium-term opportunity to do some, what we would call, bigger things for us, not like the pharma kind of a scenario like you see in the market, but larger than the deals that we have been doing, and generally being, in many cases anyway, complementary to EBITDA and accretive growth. So with that, I will let Michael maybe hit some of the costs.

Michael Greiner

Yeah. No. I would say, Drew, this is not a cost takeout effort. This is a -- to Joe’s point, a portfolio rationalization/optimization effort. And oh, by the way, if we are going to that there’s some cost opportunities, and obviously, from a reporting requirement, we have got to get restructuring and other things. out of the table. But when you look at all our internal messaging, this has nothing to do with cost takeout. Those are just -- that’s just a byproduct and a good byproduct for sure of what we are doing with our portfolio.

Joe Woody

Our intention to make further portfolio moves and maybe by the time we get to New York in June, there are some other things that help enhance the profile of our growth that are related there. So we are pretty excited about it.

Drew Ranieri

Got it. Thank you. And maybe just a little bit more clarity on how we should think about the product exit for 2023, if there’s any way to think about the weighting of what you are going to be doing? I know you don’t want to get into specifics of kind of Chronic Care or Pain, but can you at least help us with understanding the cadence for 2023? And just with 2023 with your guidance, the low single-digit growth rate, we should be thinking around like $790 million to $810 million [ph] for reported revenue for 2023, is that the right range? Thank you.

Michael Greiner

Yeah. I think you are -- I think we are probably a little higher than the $790 million, just based on the timing of some of the exits. But, yeah, $795 million to $810-ish million [ph] feels like the right range. You did that math correctly, Drew.

And so, again, the timing is incumbent upon some of those relationships. We believe we have responsibility to some of these customers from a medical device product standpoint and so some of these we can do sooner, some of these we are choosing to do later.

There are some opportunities to work with distributors in some of these categories to hand off one year, two years of inventory and have them continue to run that, maybe even by some of our assets for a few dollars. So there’s a range of things we are still very much working through on the as timing. But your math broadly -- your range is appropriately stated. Did I answer that, Drew?

Operator

The next question…

Drew Ranieri

All said. Thank you, Michael.

Michael Greiner

Yeah. Thanks, Drew.

Joe Woody

Thanks, Drew.

Operator

The next question comes from Dave Turkaly with JMP Securities. Please go ahead.

Dave Turkaly

Great. Thanks. You mentioned the new CCO position and you mentioned some synergies and kind of putting Chronic and Pain under one organization. I’d love to -- again, it doesn’t sound completely intuitive that, that would be the case that there would be opportunities like that, but maybe you could highlight some of the areas where you see those opportunities and why that makes the most sense?

Joe Woody

Yeah, there are a lot of areas where we are seeing headcount opportunity and strategic marketing, areas like customer service. Really, Kerr’s taking also a look at the way he spends and the returns in various areas of the business and so that’s been actually a strong piece for us.

He’s also looking at his channels right now. There’s opportunity deploy our channels somewhat differently and in some cases utilize 1099s to help expand our business and it also addresses sometimes some of the cost of the of sales. So all those areas are areas that are built into Michael’s plans.

Dave Turkaly

Got it. And then the comments you made on the EBITDA north of 22%, free cash flow above $100 million, is that what you expect to do at the end of the three years? So, like, say, exiting 2025, is that the time line for that?

Joe Woody

Yeah. That’s correct. At the end of 2025. Yes.

Dave Turkaly

Great. Thank you.

Michael Greiner

Dave, to get to that question, we will have some more specifics around the pacing on that. One of the signals, obviously, we are providing today is that we exited the fourth quarter at 20.8% EBITDA margin. Last year, we exited the fourth quarter at 16% and we did full year this year at 16.8%.

We are not going to do 21% in 2023. But these are how the pacings will work for us, right? Our Q4, ultimately, as we manage our portfolio optimization, some of this offsetting cost opportunity, those -- these are the text numbers we produce on an annual basis, not just the Q4 basis.

Dave Turkaly

Got it.

Michael Greiner

Thank you.

Operator

The next question comes from Matthew Mishan with KeyBanc. Please go ahead.

Matthew Mishan

Thank you. Just one follow-up. I just wanted you…

Joe Woody

Hi, Matt.

Matthew Mishan

Hi. I just wanted you guys the opportunity to talk a little bit about NeoMed and ENFit. Just kind of, how -- is it a 40% again, I mean, this product has grown like significantly for you over the last year to two years, kind of where are you at in this conversion cycle, how much more like is there? And then are some of the initiatives that you are doing going to help improve the profitability of this product as well?

Joe Woody

Yeah. I mean, yeah, all of the above. And I will say that, I think, we had a line in the script about the double-digit growth of the acquisitions that we have made and we see another strong year for NeoMed with continued ENFit across the globe being converted.

I think, ultimately, it becomes a strong high single-digit type of growth for us and it’s opened up our aperture to looking at and why we are focusing more on Digestive Health and NeoMed type of targets, where we think we can build get strong synergies, get good gross margins in our organization where we have a right to win and where we can get deals and really pay fair reasonable prices for those deals.

So it’s been a home run. Obviously, CORTRAK was strong for us. We are benefiting even with ambIT moving into the Ambulatory Surgical Center and replacing sort of what was ON-Q. But there’s no doubt that the NeoMed acquisition has been an absolute home run for us.

And again, it does have -- there’s opportunities everywhere, including NeoMed around both our manufacturing efficiencies and transportation and just all the ways that we are going to market. I don’t know if you want to add anything, no, Michael with that. But thanks for pointing that out, Matt.

Matthew Mishan

And what inning do you think you are in that conversion, like how much is kind of...

Joe Woody

I like…

Matthew Mishan

Yeah.

Joe Woody

I like transitioning from the seventh to the eighth inning, but then just remember, we still think we will be north of our mid-single-digit for quite some time beyond that. It’s just that you can’t grow at 30%, 40% forever.

Matthew Mishan

Okay. All right. Thank you.

Joe Woody

Thank you.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Joe Woody for any closing remarks.

Joe Woody

I’d like to just basically thank everybody for the continued interest in Avanos and as you are hearing from us, the demand for our products does remain strong. We try -- the fundamentals across the business are strong. We are focused on what we can control and manage and we think 2022 results -- 2022 results have built the foundation, as we said back in January to deliver on the commitment that we are confident priorities we detailed in this transformation program, combined with our market leading portfolio and the markets we are in to position us for sales growth margin expansion and meaningful free cash flow generation in 2023. We look forward to sharing a lot more detail about the transformation program at our June 20 Investor Day in New York City. Thanks for your time today.

Operator

The conference is concluded. Thank you for attending today’s presentation. You may now disconnect.