Q1 2025 Avanos Medical Inc Earnings Call
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Frederick Wise, Michael Greiner, Joseph Woody, Daniel Stauder, Joseph Woody
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 [inaudible]
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 zero for the operator.
This call is being recorded on Tuesday, May 6, 2025. I would now like to turn the conference over to Scott Galovan. Please go ahead.
Scott Galovan: Good morning, everyone, and thanks for joining us. It's my pleasure to welcome you to Avanos 2025 first quarter earnings conference call.
Speaker Change: I'm pleased to start today's call by welcoming Dave Pasiti as the new Chief Executive Officer of Avanos.
Scott Galovan: 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 that leadership will be instrumental in advancing our strategic priorities and unlocking new opportunities for the company.
Scott Galovan: 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 may come well suited to serve in this interim capacity.
Speaker Change: During today's call, Dave will provide a high-level overview of our first court results and share his initial thoughts and observations on business environment and our product portfolio.
Speaker Change: 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.
Speaker Change: As a reminder, our comments today contain four 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.
Speaker Change: Actual results could differ materially from those in the forelooking statements.
Speaker Change: For more information about four looking statements and the risk factors that could influence future results, please see today's press release and risk factors describe in our fileings with the SCC.
Speaker Change: Additionally, we will be referring to adjusted results in that look. The press release has information on these adjustments and reconciliation to comparable GAAP financial measures. Now, I'll turn the call over to Dave.
Dave Pacitti: Thanks, Scott. Good morning, everyone, and thank you for joining us to review our operational financial results for the first quarter 2025.
Speaker Change: We deliver a strong first quarter anchored by continued healthy performance of our specialty nutrition system segment along with notable progress in our pain management.
Speaker Change: and Recovery Second. Before Jason shares details on our financial results, I'd like to take a few minutes to share initial observations at my first couple of weeks at the company. First and foremost, the transformation efforts made around the portfolio, organization structure and cost management.
Speaker Change: Have laid a strong foundation for enhancing our growth profile, particularly as we look to deploy capital for M&A and partnerships.
Speaker Change: 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, go-to-market approaches, and strengthen our margin profile.
Speaker Change: As I gain deeper insight into the business over the coming quarters, I look forward to sharing more fully developed perspectives.
Jason Pickett: Now, let me turn the call over to Jason to review our financial results for the quarter.
For the quarter, we achieve sales of approximately $168 million.
Jason Pickett: Ajust it 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 to 28% compared to a year ago.
Jason Pickett: Additionally, we generated 26 cents of adjusted deluded earnings per share and approximately 22 million of adjusted EBITDA, with adjusted gross margins of 56.7% and SNA as a percentage of revenue of 43.4%
Jason Pickett: Now, turning to our financial position in 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 get outstanding as of March 31st.
Jason Pickett: During the quarter, we generated 19 million free cash flow, which supports our latest estimate.
Jason Pickett: to generate approximately 65 million a free cash flow for 2025, excluding the potential impact of tariffs which will address in a few minutes.
Jason Pickett: 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.
Jason Pickett: Separately, we will also consider deploying capital expenditures to support some of our transformation programs.
Jason Pickett: Our overall execution this quarter was strong and the steady progress we've made against each of our transformation priorities provides confidence and our ability to achieve the ranges of our 2025 financial guidance, excluding the impact of tariffs.
Jason Pickett: As announced during our last earnings call, we have refined the company's organizational focus.
Jason Pickett: and Strategic Business Priorities to ensure our 2025 priorities are clear for the organization, positively impact our operating processes.
Jason Pickett: Improve our patient and customer experience and capitalize on growth opportunities to deliver margin expansion. Starting this quarter and an alignment with our operational approach, we will be reporting under two operating segments.
Jason Pickett: First, our specialty nutrition system segment previously known as our digestive health business comprises three key portfolios.
Jason Pickett: Our long-term, integral feeding portfolio featuring our Mickey, Low Profile, Internal
Jason Pickett: Our short-term, integral feeding portfolio, including our core trot guided feeding tube placement, our core flow names of gastric feeding tubes, and our core drip tube retention system.
Jason Pickett: and our neonate portfolio featuring our neonate solutions for neonatal and pediatric care.
Jason Pickett: The name specialty nutrition systems captures our bold vision to evolve from a leading, interofeeding portfolio into a life-sustaining range of interofeeding and nutrition products designed to meet the need for a simplified, patient-preferred and integrated specialty nutrition
Jason Pickett: Next, our pain management and recovery segment includes three distinct portfolios.
Jason Pickett: First, our comprehensive three-tier radio frequency ablation, or RFA portfolio, featuring our esentech, conventional RFA solution, our trident, timed RFA solution, and our coolied cooled RFA solution.
Jason Pickett: Second, our surgical pain pumps portfolio featuring our ONQ Elisomeric Pain Pumps and Anzac Electronic Pain Pumps.
and third are Game Ready Cold in Compression Therapy offering.
Jason Pickett: 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 methods.
Jason Pickett: 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.
Jason Pickett: Additionally, this structure is expected to provide improved visibility and highlight the financial profiles of our two operating segments.
Jason Pickett: Now I'll spend the next few minutes discussing our first quarter results at the segment level.
Jason Pickett: Our specialty nutrition system 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.
Jason Pickett: Demand for a long-term interval feeding products remain strong, growing above market levels during the first quarter and favorable compared to the previous year.
Jason Pickett: The first quarter's performance benefited from the timing of distributor orders which we expect will balance out in the second quarter.
Jason Pickett: Our short term, Intro Feeding Portfolio, grew double digits globally during the first quarter, primarily driven by the continued expansion of our U.S. core track standard of care offering, inclusive of our newly launched core drip tube retention system designed to reduce the risk of tube migration and dislodgment.
Finally, our neonatal solutions business delivered another robust corner.
Jason Pickett: Growing greater than 8% compared to the prior year. As we have previously signaled, we anticipated lower but still above marked growth for our Neomit product line over the next few quarters, as we enter the late stages of the infant adopting cycle in North America.
Jason Pickett: 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.
Jason Pickett: We believe these dynamics provide a foundation for us to deliver mid-single, digit, organic revenue growth for specialty nutrition systems, portfolio in 2025, driven by core commercial execution, new product innovations, and further global market expansion opportunities.
Jason Pickett: 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.
Jason Pickett: Our Radio Frequency Abolation Business posted near double-digit growth this quarter compared to the previous year. We continue to seek growth in our RFA generator capital sales which enables us to capture higher procedure volumes.
especially within a recent tech and try this product line.
Jason Pickett: We credit our renewed ASC strategy and the increasing productivity of our fully deployed new sales structure and supporting these outcomes.
Jason Pickett: 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.
Jason Pickett: The implementation of the reimbursement decisions afforded by the no-paying act provides hospitals and caregivers with improved options to administer non-opioid post-urgical pain relief. We are excited to support better patient care through our ONQ and AMBIT product line offerings.
Jason Pickett: Additionally, our ambient product line, which has benefited from the procedural shift to the ASC, continues to pose excellent results.
Growing My Double Digits Compared to Prior Year [inaudible]
Jason Pickett: 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.
Jason Pickett: Separately, operating profit for our pain management and recovery segment during the first quarter was break even, a nearly 400 basis point improvement from a year ago, demonstrating our recent top line and cost management execution.
Jason Pickett: 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.
Jason Pickett: Finally, our hyaluronic acid injections and intravenous infusion product lines reported and corporate another declined over 30 percent combined during the first quarter. Primarily due to continued pricing pressures and our three and five shot H.A. categories.
Jason Pickett: We continue to make good progress on our transformation programs and are pleased to see that they have been embedded into our day-to-day operations. Highlighting a couple of these efforts, we have meaningfully improved our demand planning processes as evidence by lower inventory carrying levels.
Jason Pickett: Moreover, in response to the tariff sympos and the 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.
Jason Pickett: Finally, we have embedded a discipline cost management culture that will be important in helping offset a portion of the tear of pressures we will discuss in a minute.
Jason Pickett: Now turning to our 2025 Outlook, given our strong first core sales performance, we are maintaining our full year revenue estimate of $665 million to $685 million.
Jason Pickett: While we anticipate a softer Q2 for our specialty nutrition system segment, primarily due to distributor over time and tied to our international GO direct transition, we remain confident in the segment strength of the duration of the year, as well as continued market share gains in our our phase segment.
Jason Pickett: As we noted in our year-end earnings call, we entered 2025 in a challenging market environment for some of our product categories.
Jason Pickett: 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.
Jason Pickett: We face significant uncertainty on the ultimate impact of tariffs on our profitability and cash flow.
Jason Pickett: In the first quarter, we incurred 1.5 million of tariffs, which are capitalized into inventory and will be amortized in the second quarter through costs of good sold. However, significant additional tariffs have been announced in the past 60 days, particularly on China origin goods.
Jason Pickett: If these tariffs remain in effect, we anticipate they will have a material negative impact on the minds of the year.
Jason Pickett: We now estimate approximately 15 million in incremental tariff-related manufacturing costs for the year, primarily related to products with country origin from Mexico and China.
Jason Pickett: This estimate of the impact of tariffs assumes that we will be able to mitigate certain tariff expenses through the U.S. MCA and other existing international agreements that allow for reduced or equity-free importation of products.
Jason Pickett: 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
Jason Pickett: The company continues to work through a range of strategies to further mitigate the impact of tariffs.
Jason Pickett: Included internal cost containment measures, price increases to customers, leveraging our previously issued temporary exemption for neonatal syringes and feeding tubes, and our relationships with Addemez and other third parties that have interactions with the administration.
Jason Pickett: In addition to the impact of tariffs, the company will incur one-time executive leadership change cause during the second quarter, which were not contemplated in our initial guidance.
Jason Pickett: As a result of these two factors, the company is lowering its 2025 adjusted or in-per-share estimate range to 75 cents to 95 cents.
Speaker Change: 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,
Speaker Change: The current economic environment is dynamic and we believe our revised adjusted EPS estimate reflects a reasonable view of the tariff impact on our four-year results at this time.
Speaker Change: We are actively monitoring the situation and are executing on some initiatives to reduce the risk of tires on our results.
Operator, please open the line for questions.
Speaker Change: 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.
Speaker Change: You will hear from 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.
Speaker Change: Your first question comes from Rick Wise of Stiffel. Please go ahead.
Rick Weiss: Hi, good morning, and Dave, welcome to the hot seat here.
Speaker Change: 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, you know, just to help us.
Speaker Change: Think through your details a lot. We're going to have to think about all the details, but just for starters
to help us think about the second quarter specifically.
Speaker Change: You know, relative to the first given the distributor order, maybe you can quantify that more specifically and just more broadly do we do we think that the second quarter can be.
Speaker Change: 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, for your thoughts?
Speaker Change: 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.
Speaker Change: 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.
Plan, but it wasn't our total plan.
Speaker Change: So as we think about what's going to 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.
Speaker Change: 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.
Speaker Change: Overall, when we're thinking about the second quarter at this point in time, there are definitely other challenges that we have in various products.
Speaker Change: H.A. is something that we have talked about in the past. When we think about our H.A. business, those sales were a little bit lighter than we anticipated, but it's more of a challenge in our three-shot category, but our five-shot category remains stronger.
Speaker Change: 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. [inaudible]
Speaker Change: Gotcha, and good to meet you to Jason. Thank you for all that detail. David, I know you're you're just there and you said you gave us some opening thoughts.
Speaker Change: 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 where you might be comfortable as
Dave Pacitti: Talk about, maybe some of your past experience, what you're going to be able to bring to Avanos.
Dave Pacitti: that you feel your first instincts are, these will be areas that you can tackle happily and conductively and helpfully.
Thank you.
Rick Weiss: Thank you, Rick. It's nice to hear your voice again. It's been a long time. I think from my
Speaker Change: and thanks for the question. I think, you know, 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, you know, especially interested systems and pain management and recovery. I think it's the right two areas to focus on with the right products in those.
Speaker Change: Two segments. I think from my past, obviously, as you know, I've got a strong commercial background, so I'm going to be very focused on go-to-market strategies.
Speaker Change: How we continue to optimize our commercial position as an organization. And I think that will apply for both specialty and nutrition and in the pain management business where we can, you know.
Speaker Change: I'm going to continue to innovate from a commercial standpoint, similar to things that I've done in the past. So that's where going to be 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 going to continue to optimize how we go to market from a commercial standpoint. And that's a, you know, I would say a plethora of things, looking at strategic partnerships.
Speaker Change: and continue to focus on the execution of the team from a commercial standpoint.
Speaker Change: Great. And maybe just last, I'll sneak that third one in. Maybe talk a little bit more. Help us better understand.
Your Terrible Assumptions
Speaker Change: and what's contemplated in the guide. Just specifically help us better understand the assumptions around China-Tariff Rates.
Speaker Change: 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
Speaker Change: 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.
Speaker Change: Yeah, thanks Rick. I'll start off and maybe Jason or Scott will add in, but let me just take a step back, a big picture view of the tariffs. It's certainly a very dynamic market right now, but as we look at it, obviously, we first want to note the fact that we had a change in our guidance, to be specific, really focused on the transitory issues related to tariffs. And as we mentioned, even some of the executive leadership changes that we saw.
Speaker Change: Even though we had very, although we had very good first quarter results, I think as we look at the tire situation
Speaker Change: by 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,
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: I think, secondly, we want to leverage our previously granted temporary exemptions for our neil need of feeding products in China. That's really important.
Speaker Change: Process efficiencies and price increases potentially with customers. And then I think it just doesn't remind her of Jason said that in the paired statements. We also announced previously our intent to be out of to transition out of China with our neonidous syringes in the first half of 2026.
Speaker Change: So let me stop there and see if Scott wants to add anything on to that
Scott Galovan: Yeah, I would just add, Rick, around the question on the assumption, 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 percent, 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.
Speaker Change: Thank you. Another question comes from Danny Stauder of Citizen's JMP. Let's go ahead.
Speaker Change: Yeah, great thing for the question. Just a quick one on the segments.
Speaker Change: You know, 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 to as well as their specific businesses for the full year and into 2026.
Speaker Change: You know, any cadence we should consider for each beyond what you outline for 2Q and then any other high level thoughts would be helpful there. Thank you.
Thank you.
Yes, thank you for the question.
Speaker Change: Let me kind of go through a couple of the segment details and help accomplish the answer for the question. I'll reiterate what we mentioned with the SNS portfolio. We're pretty excited about that business.
Speaker Change: You know, 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 going to even out.
Speaker Change: Reporting with the new segments and that more visibility and grain or visibility that you'll have, you'll see additional information or ten cues, or you will actually get to see those sales by the specialty nutrition systems area as well as the pain management recovery. You'll have that broken down into inner feeding and neonate solutions, and then you'll have the pain business broken down to surgical pain and the RFA business. Maybe not broken down into the individual products below. So that'll help.
Speaker Change: Review as you're thinking through the process. As I mentioned before, our pain business, we're actually pretty excited at this point in time. You know, we were encouraged by the start of the year, Q1 sales were on, they were on plan for us. So it was not a surprise. Our R.A. business experienced good growth as we are starting to see the benefits of prior generator placements.
Speaker Change: as well as the results from good execution with the AC strategy for our Trident and E-Centic 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.
Speaker Change: Field 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 going to come back and we're going to 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 going to be running our business that we've called out in the corporate and other section, which includes our oncology business and our H.A. portfolio. More from Academy.
Speaker Change: Cash Optimization Perspective. We should 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 that we are going to manage the business. And hopefully as we think about all of the...
Scott Galovan: The cost transformation initiatives that Scott and team have put in place of the years were excited about the opportunities.
No, it's great. We appreciate that color.
Speaker Change: I apologize if I missed this, we're on a few other calls, but I believe you had free cash for the full year, $25.65 million.
Scott Galovan: But I wasn't sure what was excluded for tariffs at this point, and if you had to match it, any more color would be great.
Scott Galovan: No, absolutely. The 65 million is our forecast of free cash flow for the year. That does not have any impact.
Speaker Change: specific to tariffs. It is our normal operating activities. So whatever it turns out that our tariff estimates may be if you heard earlier Scott and David mentioned roughly about $15 million as well as an hour on our earlier statements.
Speaker Change: Opportunities. What I'll add is, we have first quarter free cash flow with 19 million.
Speaker Change: 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 cash flow because historically we have not had positive cash flow 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.
Speaker Change: and usually our sales are lower in the first quarter. This quarter we actually have generated 19 million, but in that 19 million there are some one-time items and say about nine million overall of income tax refunds, some custom refunds, and some small benefit specific to our TSA that we had with our investiture of a restaurant for the health business.
Speaker Change: 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.
Speaker Change: Great. That's some great color and appreciate it. That's it for me. Thank you very much.
David Pacitti, David Pacitti, David Pacitti, David Pacitti
Speaker Change: Thank you. There are no further questions at this time. I would now like to turn the call back over to Dave Bacity for his closing remarks.
Speaker Change: 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 break future driven by the dedication of our teams and the vital role of our products playing, getting patients back to things that matter. We appreciate your continued interest in Avanos. Thank you very much.
Speaker Change: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.