Avanos Medical, Inc.

Good morning, ladies and gentlemen, and welcome to the Avanos Medical Avanos First Quarter 2025 earnings call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct the question and answer session. If at any time during this call you require immediate assistance, please press star 0 for the operator. This call is being recorded on Tuesday, May 6, 2025. I would now like to turn the conference over to Scott Gullivan. Please go ahead.

Good morning, everyone, and thanks for joining us.

It's my pleasure to welcome you to Avanos 2025 First Quarter earnings conference call. I'm pleased to start today's call by welcoming Dave Pasitti as the new Chief Executive Officer of Avanos. Dave's extensive commercial expertise and industry knowledge have consistently driven growth and transformation throughout his career. We're excited to have Dave on board as we believe his leadership will be instrumental in advancing our strategic priorities and unlocking new opportunities for the company. I'm also pleased to introduce Jason Pickett, who was recently appointed interim CFO and treasurer with more than 30 years in corporate finance and accounting, including over a decade here at Avanos, most recently as Vice President, Finance, and Treasurer. Jason's experience and deep institutional knowledge make him well suited to serve in this interim capacity. During today's call, Dave will provide a high level overview of our first quarter results and share his initial thoughts and observations on the business environment and our product portfolio. Jason will then share additional details on these topics as well as an update on our transformation initiatives and our 2025 planning assumptions, including the impact of tariffs. We'll 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, including risks related to ongoing tariff negotiations, 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'll be referring to adjusted results and outlook. The press release has information on these adjustments and reconciliations to comparable gap financial measures. Now, I'll turn the call over to Dave.

Thanks, Scott. Good morning, everyone, and thank you for joining us to review our operational and financial results for the first quarter 2025. We delivered a strong first quarter anchored by continued healthy performance of our specialty nutrition system segment, along with notable progress in our pain management and recovery segment. Before Jason shares details on our financial results, I'd like to take a few minutes to share initial observations after my first couple of weeks at the company. First and foremost, the transformation efforts made around the portfolio, organization structure, and cost management have laid a strong foundation for enhancing our growth profile, particularly as we look to deploy capital for M&A and partnerships. Additionally, I'm very encouraged by the strong energy and strategic focus I'm seeing across the company. This focus creates opportunities to enhance execution consistency, explore new -to-market approaches, and strengthen our margin profile. As I gain deeper insight into the business over the coming quarters, I look forward to sharing more fully developed perspectives. Now, let me turn the call over to Jason to review our financial results for the quarter.

For the quarter, we achieved sales of approximately $168 million. Adjusted for the effects of foreign exchange and the impact of our strategic decision to withdraw from revenue streams that did not meet return criteria specified by our portfolio transformation priority, organic sales were up .8% compared to a year ago. Additionally, we generated 26 cents of adjusted diluted earnings per share and approximately 22 million of adjusted EBITDA, with adjusted gross margins of .7% and SG&A as a percentage of revenue of 43.4%. Now, turning to our financial position and liquidity. Our balance sheet remains strong and continues to provide us with strategic flexibility with 97 million of cash on hand and 107 million of debt outstanding as of March 31st. During the quarter, we generated 19 million free cash flow, which supports our latest estimate to generate approximately 65 million of free cash flow for 2025, excluding the potential impact of tariffs, which we will address in a few minutes. 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. So far this year, we have closed on two smaller transactions that support our specialty nutrition system strategy. Separately, we will also consider deploying capital expenditures to support some of our transformation programs. Our overall execution this quarter was strong and the steady progress we've made against each of our transformation priorities provides confidence in our ability to achieve the ranges of our 2025 financial guidance, excluding the impact of tariffs. As announced during our last earnings call, we have refined the company's organizational focus and strategic business priorities to ensure our 2025 priorities are clear for the organization, positively impact our operating processes, improve our patient and customer experience, and capitalize on growth opportunities to deliver margin expansion. Starting this quarter and in alignment with our operational approach, we will be reporting under two operating segments. First, our specialty nutrition system segment, previously known as our digestive health business, comprises three key portfolios. Our long-term, internal feeding portfolio, featuring our Mickey low-profile internal feeding tubes, our short-term, internal feeding portfolio, including our core track guided feeding tube placement, our core flow nasogastric feeding tubes, and our core grip tube retention system, and our neonate portfolio, featuring our neo-med solutions for neonatal and pediatric care. The name specialty nutrition systems captures our bold vision to evolve from a leading internal feeding portfolio into a life-sustaining range of internal feeding and nutrition products designed to meet the need for a simplified, patient-preferred, and integrated specialty nutrition ecosystem. Next, our pain management and recovery segment includes three distinct portfolios. First, our comprehensive three-tier radio frequency ablation, or RFA portfolio, featuring our eSyntec conventional RFA solution, our Trident Tind RFA solution, and our Cool Leaf cooled RFA solution. Second, our surgical pain pumps portfolio, featuring our OnQ Elistomeric pain pumps and Anvit electronic pain pumps. And third, our game-ready cold and compression therapy offering. Together, these offerings enable us to provide opioid-sparing benefits to patients throughout their continuum of care in hospitals, ambulatory surgical centers, and office settings. And finally, our hyaluronic acid injections and intravenous infusion product lines are combined and reported in corporate and OVAs. As noted, we believe this structure will better guide internal capital allocation decisions, helping us to optimize returns and achieve stronger ROIC as we evaluate investment opportunities across these segments. Additionally, this structure is expected to provide improved visibility and highlight the financial profiles of our two operating segments. Now I'll spend the next few minutes discussing our first quarter results at the segment level. Our specialty nutrition systems portfolio continues to deliver above-market results, growing almost 9% organically versus prior year, reaffirming our number one position in long-term, short-term, and neonatal interval feeding. Demand for our long-term interval feeding products remains strong, growing above market levels during the first quarter and favorable compared to the previous year. The first quarter's performance benefited from the timing of distributor orders, which we expect will balance out in the second quarter. Our short-term interval feeding portfolio grew double digits globally during the first quarter, primarily driven by the continued expansion of our U.S. CoreTrack standard of care offering, inclusive of our newly launched CoreDrip tube retention system, designed to reduce the risk of tube migration and dislodgement. Finally, our neonatal solutions business delivered another robust quarter, growing greater than 8% compared to the prior year. As we have previously signaled, we anticipated lower but still above market growth for our NeoMed product line over the next few quarters as we enter the late stages of the in-fit adoption cycle in North America. From a profitability standpoint, operating profit for our specialty nutrition system segment for the first quarter was nearly 21%, a 460 basis point increase from prior year. This improvement is due primarily to top line growth and margin expansion resulting from our transformation initiatives. We believe these dynamics provide a foundation for us to deliver mid-single digit organic revenue growth for our specialty nutrition systems portfolio in 2025, driven by core commercial execution, new product innovations, and further global market expansion opportunities. Now turning to our pain management and recovery portfolio, normalized organic sales for the quarter were up 2.4%, excluding the impact of foreign exchange and our previously announced strategic decision to withdraw from certain low growth, low margin products. Our radio frequency ablation business posted near double digit growth this quarter compared to the previous year. We continue to see growth in our RSA generator capital sales, which enables us to capture higher procedure volumes, especially within our AscentTech and Trident product lines. We credit our renewed ASC strategy and the increasing productivity of our fully deployed new sales structure in supporting these outcomes. Additionally, we are encouraged by the progress of our Cool Leaf offering internationally, leveraging reimbursement tailwinds in several geographies, including the United Kingdom and Japan. Our surgical pain business was down compared to prior year, but in line with our expectations. The implementation of the reimbursement decisions afforded by the No Pain Act provides hospitals and caregivers with improved options to administer non-opioid post-surgical pain release. We are excited to support better patient care through our OnQ and Anvid product line offerings. Additionally, our Anvid product line, which has benefited from the procedural shift to the ASC continues to post excellent results, growing by double digits compared to prior year. Finally, our game ready portfolio grew by low single digits over the prior year, in line with our expectations as we work to enhance our go-to market model, primarily in North America, to improve performance and expand profitability within our portfolio. Separately, operating profit for our pain management and recovery segment during the first quarter was breakeven, a nearly 400 basis point improvement from a year ago, demonstrating our recent top line and cost management execution. Although we had some mixed results across our pain management and recovery segment during the first quarter, we are encouraged by the progress we saw this quarter, particularly within our radio frequency ablation product line which continues to make strong organic gains. Finally, our hyaluronic acid injections and intravenous infusion product lines reported in corporate and other declined over 30% combined during the first quarter, primarily due to continued pricing pressures in our three and five shot HTA categories. We continue to make good progress on our transformation programs and are pleased to see that they have been embedded into our -to-day operations. Highlighting a couple of these efforts, we have meaningfully improved our demand planning processes as evidenced by lower inventory carrying levels. Moreover, in response to the tariffs imposed under President Biden related to syringe products manufactured in China, we are executing on our plan to have all syringe manufacturing and supply chain operations inside of China transitioned by the first half of 2026. Finally, we have embedded a disciplined cost management culture that will be important in helping offset a portion of the tariff pressures we will discuss in a minute. Now turning to our 2025 outlook. Given our strong first quarter sales performance, we are maintaining our full year revenue estimate of 665 million to 685 million. While we anticipate a softer Q2 for our specialty nutrition system segment, primarily due to distributor order timing tied to our international go direct transition, we remain confident in the segment strength for the duration of the year, as well as continued market share gains in our RFA segment. As we noted in our year end earnings call, we entered 2025 in a challenging market environment for some of our product categories, as well as currency headwinds and other global macroeconomic factors like tariffs. While currency conditions have improved and our top line is strong across most of our product categories, we face significant uncertainty on the ultimate impact of tariffs on our profitability and cash flow. In the first quarter, we incurred 1.5 million of tariffs, which were capitalized into inventory and will be amortized in the second quarter through cost of goods sold. However, significant additional tariffs have been announced in the past 60 days, particularly on China origin goods. If these tariffs remain in effect, we anticipate they will have a material negative impact on earnings for the year. We now estimate approximately 15 million in incremental tariff related manufacturing costs for the year, primarily related to products with country of origin from Mexico and China. This estimate of the impact of tariffs assumes that we will be able to mitigate certain tariff expenses through the USMCA and other existing international agreements that allow for reduced or duty-free importation of products. It also assumes that while tariffs on China origin goods will be meaningfully higher than last year, they will be significantly below the 145% rate that was announced in April. The company continues to work through a range of strategies to further mitigate the impact of tariffs, including internal cost containment measures, price increases to customers, leveraging our previously issued temporary exemption for Neomed neonatal syringes and feeding tubes, and our relationships with Adzomed and other third parties that have interactions with the administration. In addition to the impact of tariffs, the company will incur one-time executive leadership change costs during the second quarter, which we're not contemplating in our initial guidance. As a result of these two factors, the company is lowering its 2025 adjusted earnings per share estimate range to 75 cents to 95 cents.

Thanks, Jason. As I mentioned in the opening, I'm energized by the opportunity to lead Avanos and have been impressed with the team and momentum of the business. I'm especially encouraged by the strong start to the year, in particular across our strategic segments. That said, the current economic environment is dynamic and we believe that our revised adjusted EPS estimate reflects a reasonable view of the tariff impact on our full-year results at this time. We are actively monitoring the situation and are executing on some initiatives to reduce the risk of tariffs on our results. Operator, please open the line for questions.

Thank you. 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 touchstone 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 speaker phone, please lift the handset before pressing any keys. One moment please for your first question. Your first question comes from Rick Wise of Stifel. Please go ahead.

Hi, good morning and Dave, welcome to the hot seat here. It sounds like again, you started off with a positive overall quarter and thanks for all the additional color and detail. A couple of things, just to help us think through, you detailed a lot, we're gonna have to think about all the details, but just for starters, help us think about the second quarter specifically, relative to the first, given the distributor order, maybe you can quantify that more specifically and just more broadly, do we think that the second quarter can be up flat, below the first quarter level, given the moving dynamics and maybe just if you'd expand that, how do we think about the cadence for the year to get to your full

year thoughts? Hey Rick, this is Jason, very nice to meet you for the first time. It's a good question, if you know we don't give out quarterly guidance, but let me go ahead and address that first question that you have and then we'll go to the second. That distributor comment that we had made is specific to our SNS performance and in our first quarter, we definitely felt our sales were strong across all of those categories, our long-term feeding portfolio had solid market growth, that Q1 benefit did include some of that additional upside to the distributor ordering patterns that you referred to, that's mostly in our go-to direct model in Europe, which is something that is self-sustaining. Do we believe we're gonna give back some of that in the second quarter? Yes, because some of that was accelerated in the first quarter, was not in our original plan, but it was in our total plan. So as we think about what's gonna happen quarter over quarter, our expectation is specific to the distributor item, the second quarter may come down a little bit in the SNS area, but it still does not prevent us from keeping our full year guidance specific to the SNS as well as to the go-direct. Again, anticipation that that strategy that we're having is actually going to grow our business, which is what's reflected in us maintaining our estimate for the top line sales. Overall, when we're thinking about the second quarter at this point in time, there definitely are challenges that we have in various products. HA is something that we have talked about in the past, when we think about our HA business, those sales were a little bit lighter than we'd anticipated, but it's more of a challenge in our three-shot category, but our five-shot category remains stronger. We do believe that that business is something where we're running from more of a cash optimization perspective, but we do anticipate us actually affecting some sales strategies with some of our key customers in that business to hopefully maintain that. But ultimately, going over from Q1 to Q2, we still believe that our overall annual numbers from a sales perspective are still good.

Gotcha. Good to meet you too, Jason. Thank you for all that detail. Dave, I know you're just there, and you said you gave us some opening thoughts, but I wouldn't be a good analyst if I didn't put a little pressure on you and say maybe if you could expand on that. And maybe I was thinking a way you might be comfortable is talk about maybe some of your past experience, what you're gonna be able to bring to Avanos that you feel your first instincts are, these will be areas that you can tackle happily and productively and helpfully.

Thanks, Rick. It's nice to hear your voice again. It's been a long time. I think from my, yeah. And thanks for the question. I think from my past experience as I look at the business now, first of all, I'm really pleased about the focus on the two segments that we announced with specialty nutrition systems and pain management and recovery. I think it's the right two areas to focus on with the right products in those two segments. I think from my past, obviously, as you know, I've got a strong commercial background, so I'm gonna be very focused on -to-market strategies, how do we continue to optimize our commercial position as an organization. And I think that will apply for both specialty nutrition and in the pain management business, where we can continue to innovate from a commercial standpoint, similar to things that I've done in the past. So that's where my focus is. I think I'm really pleased with the strong start, which is great to get off to a good start. And then we're gonna continue to optimize how we go to market from a commercial standpoint. And that's, I would say, a plethora of things, looking at strategic partnerships and continue to focus on the execution of the team from a commercial standpoint.

Great. And maybe just last, I'll sneak a third one in, maybe talk a little bit more, help us better understand your tariff assumptions and what's contemplated in the guide. Just specifically help us better understand the assumptions around China tariff rates, the cadence of tariff impacts, which I know are complicated throughout the year. I'm assuming fourth quarter has the highest impact. Is that the right number, the right run rate to annualize? I know it's early to even mention 2026, but we're gonna have to put something down. Do we assume

that

a fourth quarter 25 times four is the right, we should dial that into whatever we're gonna think about 26? Thanks again.

Yeah, thanks Rick. I'll start off and maybe Jason or Scott will add in, but let me just take a step back, big picture view of the tariffs. Certainly a very dynamic market right now, but as we look at it, obviously, first wanna note the fact that we had a change in our guidance to be specific, really focus on the transitory issues related to tariffs and as we mentioned, even some of the executive leadership changes that we saw. Even though we had very good first quarter results, I think as we look at the tariff situation in our current estimates for exposure, we're looking at this expect about 15 million in incremental tariff related manufacturing costs this year. So that's part one. That being said, we still have several levers to help and I'll remind you of a couple of them to help us mitigate the tariffs impacts moving forward. One, mitigation opportunities continue with the USMCA, specifically obviously with Canada and Mexico and other existing international agreements. We've been very successful in that area. So that's moving in a very positive direction. I think secondly, we wanna leverage our previously granted temporary exemptions for our needle-needle feeding products in China. That's really important. So we're gonna continue to try to leverage that and expand that. Our relationship with various third parties, as you imagine, like Avomed, that direct contact with the current administration, we're obviously working on that as well. And then on top of that, there are internal factors for us to also implement. One, controlling such as cost containment measures, process efficiencies, and price increases potentially with customers. And then I think it just as a reminder, and Jason said it in the prepared statements, we also announced previously our intent to transition out of China with our neonatal syringes in the first half of 2026. So let me stop there and see if Scott wants to add anything onto that.

Yeah, I would just add, Rick, around the question on the assumption of the $15 million for 2025, that assumes, it does assume a reduction in the current tariffs on imports from China, but it does, from the 145%, but it does assume that we will have higher tariff expenses in China and Mexico than we've had in previous years.

Thank you very much.

Thank you.

Thank you. Another question comes from Danny Stauder of CitizensJMP. Please go ahead.

Yeah, great. Thanks for the question. Just a quick one on the segments. We appreciate the more granular breakdown and kind of the buckets that you put out this quarter, but could you just give us any more color on how we should be thinking about the relative performance from larger too, as well as their specific businesses for the full year and into 2026? Any cadence we should consider for each beyond what you outlined for 2Q, and then any other high-level thoughts would be helpful there. Thank you.

Yeah, thank you for the question. Let me kind of go through a couple of segment details and help accomplish the answer for the question. I'll reiterate what we've mentioned with the S&S portfolio. We're pretty excited about that business. We believe that the long-term feeding portfolio will continue to grow at the rates that we have. The benefit, again, we did have in this quarter dealt with some of the go-to direct. So as we think about that's gonna even out, but going forward, we're gonna hopefully have a growth in that area. We do believe that with the S&S portfolio, as we mentioned previously, that we're gonna have -signal-digit growth for that for the entire year. Again, cadence historically, what we have is, we do have a ramp up in our sales usually from quarter over quarter, but we don't provide that individual guidance necessarily. I think the good thing is what you'll see is as we're reporting with the new segments and that more visibility and granular visibility that you'll have, you'll see additional information or 10Qs, or you will actually get to see those sales by the specialty nutrition systems area, as well as the pain management and recovery. You'll have that broken down into intero feeding and neonate solutions, and then you'll have the pain business broken down in surgical pain and the RFA business, maybe not broken down into the individual products below. So that'll help you as you're thinking through the process. As I mentioned before, our pain business, we're actually pretty excited at this point in time. We were encouraged by the start of the year, Q1 sales were on, they were on plan for us. It was not a surprise. Our RFA business experienced good growth as we are starting to see the benefits of prior generator placements, as well as the results from good execution with the AC strategy for our Trident and Ascentek sales, Ascentek sales for game ready and surgical pain will be in line with expectations. So when you think overall in our portfolios, you'll see the detail, but we do feel that the growth that we're showing right now in our first quarter, and even though we may have that down tick in the second quarter, it's gonna come back and we're gonna still be able to have the flat, the low single digit growth for the pain business for the year. We do believe the mid single digit growth for the SNS business is there. We are gonna be running our business that we've called out in the corporate and other section, which includes our oncology business and our HA portfolio, more from a cash optimization perspective, which will give you some visibility there. But the key for us when we came up with the new segments was to hopefully give you more visibility into our portfolios, the way we're gonna manage the business. And hopefully as we think about all the cost transformation initiatives that Scott and team have put in place through the years, we're excited about the opportunities.

No, it's great. We appreciate that color. Then I guess I apologize if I missed this, we're on a few other calls, but I believe you had free cashflow for the full year 25, 65 million. But I wasn't sure what was excluded for tariffs at this point. And if you had an address, any more color would be great.

No, absolutely. The 65 million is our forecast of free cashflow for the year. That does not have any impact specific to tariffs. That is our normal operating activities. So whatever it turns out that our tariff estimates may be, if you were heard earlier, Scott and David mentioned roughly about $15 million as what was in our earlier statements. But from a cash perspective, that could be closer to 20 million, just because of the timing of when the cash is paid as opposed to when you were recording it in your income statement. So the 65 million does not include any impact for tariffs. It's actually a very good number. It's similar to last year. We're excited about that cash generation and what we'll be able to do with that when it comes to potentially investing in the business or spend on some of our transformation or capex opportunities. What I'll add is we have first quarter free cashflow with 19 million. The reason why you should not take a run rate and go, you should be going 19 million every quarter is in that 19 million, even though we're really excited about having positive cashflow, because historically we have not had positive cashflow in the first quarter, because it's one of our higher cost perspectives, because that's where we pay our bonuses and our long-term incentives. And usually our sales are lower in the first quarter. This quarter we actually had generated 19 million, but in that 19 million, there are some one-time items that say about 9 million overall of income tax refunds, some custom refunds, and some small benefits specific to our TSA that we had with our divestiture of a respiratory health business. So even though 19 million is first quarter, pull out some of those one-time items, and we do believe that 65 million this year is a good number.

Excluding tariffs. Excluding

tariffs.

Great, that's some great color and appreciate it. That's it for me. Thank you very much.

Thank you. There are no further questions at this time. I would now like to turn the whole back over to Dave Vasidi for his closing remarks.

Thank you everyone for your time and your questions today. In closing, I'm proud of the progress Avanos has made in transforming our business and genuinely excited about our bright future, driven by the dedication of our teams and the vital role of our products playing and getting patients back to things that matter. We appreciate your continued interest in Avanos. Thank you very much.

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