Q2 2025 Avanos Medical Inc Earnings Call

Good morning, ladies and gentlemen, and welcome to the avanos second quarter 2025 earnings conference call at this time. All lines are in listen. Only mode following the presentation, we will conduct a question and answer session. And if at any time during this, call, you require immediate assistance, please press star zero for the operator.

I would now like to turn the conference over to Scott calavan to financial officer. Please go ahead sir.

Good morning everyone and thanks for joining us. It's my pleasure to welcome you to avenus 2025 second quarter earnings conference call presenting. Today will be Dave pasita CEO who will kick off the call by sharing a few leadership updates. Dave will then provide a high-level overview of our second quarter results before turning it over to Jason picket who has been serving as our interim CFO.

Jason will share additional details on these topics provide an overview of our financial results and affirm our 2025 planning assumptions inclusive of the impact of tariffs.

We will finish the call with Q&A.

A presentation for today's call is available on the investor section of our website avanos.com.

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'll turn the call over to David.

Thanks, Scott and good morning, everyone I'd like to begin today by addressing the leadership changes that we announced earlier this morning.

First it's my great pleasure to announce that Scott galvanic previously our SVP of strategy and corporate development has been appointed.

I noticed as new Chief Financial Officer.

Well plus years with the company Scott has been instrumental in executing our strategy identifying and pursuing strategic acquisitions and divestitures to strengthen our portfolio and keeping avenues focused on the future.

His extensive experience navigating complex transactions will be absolutely critical as we build on our transformation efforts.

We're excited to welcome him to this role and look forward to as dynamic leadership and invaluable contributions.

I'd also like to take this opportunity to thank Jason Pigott for serving as our interim CFO, while we conducted our search to build this role we greatly appreciate his leadership and his commitment to keeping us on the right path. During this transitional period, Jason will continue to lead our tax treasury and accounting functions.

Finally, I'm honored to announce that I have been appointed to Avenue's Board of directors working alongside our board members to guide avenues strategic direction and focus on delivering long term shareholder value will truly be my privilege.

Now, we will shift our comments to our quarterly results and outlook building off our first quarter results. We delivered a strong second quarter anchored by continued healthy performance of our life sustaining specialty nutrition systems segment, along with continued progress in our opioid sparing pain management and recovery segment.

The demand for our products remains robust and I am pleased with the foundation laid out our three year transformation efforts. During my first 100 days I reviewed the initiatives that we were identified and implemented within the transformation journey I've encouraged by the progress of these initiatives and believe these are additional opportunities to it.

Vance our optimization efforts, while still early in my tenure I'm confident we can improve our commercial effectiveness through organizational enhancements innovative and capital efficient go to market approaches and strategic partnerships. In addition, I believe there are further operating model improve.

And cost reduction opportunities through the organization that we will be addressing in the coming quarters.

I'm pleased to share that on July 31, we closed the sale of our hyaluronic acid product line of business. While we are not disclosing the financial terms. We were very pleased with this divestiture, which represents a meaningful step in advancing our transformation strategy and reinforcing our commitment to focus group.

And our two strategics segments specialty nutrition systems in pain management and recovery.

Now.

Turning to our second quarter results for the quarter, we achieved net sales of $175 million adjusted for the effects of foreign exchange and the impact of our strategic decision to withdraw from revenue streams that did not meet our return criteria specified by our portfolio transformation priority.

Organic sales were up 2% compared to a year ago.

Additionally, we regenerated 17 cents of adjusted diluted earnings per share is $17 million of adjusted EBITDA with adjusted gross margins of 55, 7% SG&A as a percentage of revenue of 45, 2%.

Finally, due to downward pressure on our market capitalization, we assess goodwill for impairment during the second quarter and recorded a noncash impairment charge of $77 million in the pain management and recovery reporting unit.

Our overall execution this quarter was solved 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.

With that let me turn the call over to Jason who will further discuss our second quarter financial results as well as our 2025 outlook.

Thanks, Dave.

Spend the next few minutes discussing our second quarter results at the segment level, our specialty nutrition systems portfolio continues to deliver above market results growing 5% organically versus prior year reaffirming our number one position and long term short term and neonatal enteral feeding demand for our long term.

Enteral feeding products remains strong and our underlying growth continues to beat market levels. However, as anticipated and shared during our first quarter earnings call. Our second quarter performance was tempered by the timing of distributor orders captured in our first quarter results, resulting from our go direct transition and the United Kingdom.

Our short term internal feeding portfolio posted another quarter of double digit growth globally. During the second quarter. These results were fueled by the continued expansion of our U S. Core track standard of care offering inclusive of our newly launched core grip tube retention system designed to reduce the risk of tube migration and dislodged.

Finally, our neonatal solutions business delivered another excellent quarter growing greater than 12% compared to the prior year as we had previously signaled we anticipate lower but still above market growth for our neo med product line over the next few quarters as we enter the late stages of the infinite adoption cycle in North America.

From a profitability standpoint operating profit for our specialty nutrition systems segment for the second quarter was nearly 18%, reflecting the impact of tariffs and transit unfavorable cost absorption. We believe the dynamics. We have just discussed provided a foundation for us to deliver mid single digit organic revenue grew.

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 this quarter were up three 4%, excluding the impact of foreign exchange and our previously announced strategic decision to withdraw from certain low growth low margin products.

Our radiofrequency ablation or RFA business continues to deliver excellent results posting near 14% growth this quarter compared to the previous year, we are experiencing sustained growth in our RFA generator capital sales, which enables us to capture higher procedure volumes, especially within our <unk> and <unk> 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 <unk> offering internationally leveraging reimbursement tailwind in several geographies, including the United Kingdom and Japan.

Our surgical pain business were down compared to prior year, but generally in line with our expectations, while the implementation of the reimbursement decision afforded by the no pain at is taking longer than anticipated and we are devoting more effort understanding and addressing coverage denials the no pain at provide hospitals and caregiver.

With improved options to administer non opioid post surgical pain relief, we're excited to support better patient care through our <unk> and <unk> product line offerings.

Finally, our game ready portfolio posted slightly lower revenues than a year ago. We are working to enhance our go to market model, primarily in North America to improve performance and expand profitability within our portfolio.

Operating profit for our pain management and recovery segment, excluding the noncash goodwill impairment charge previously mentioned grew nearly $2 million from a year ago. During the second quarter, demonstrating our recent top line and cost management execution.

Although we had some mixed results across our pain management and recovery segment. During the second quarter. We are encouraged by the continued progress we saw particularly within our RFA product line, which continues to make solid organic gains finally, our hyaluronic acid injections and intravenous infusion product lines reported in corporate and other.

Find over 20% during the second quarter, primarily due to continued pricing pressure on our three and five shot HVA categories as Dave mentioned, a few minutes ago, we divested the HOA business at the end of July.

Moving to our financial position and liquidity our balance sheet remains strong and continues to provide us with strategic flexibility with $90 million of cash on hand, and $105 million of debt outstanding as of June 30.

We have maintained that leverage levels meaningfully below one turn for several quarters and we will continue to be good stewards of our balance sheet.

Free cash flow for the quarter was negative approximately $4 million driven by the timing of tax payments as well as higher capital expenditures supporting our supply chain initiatives, we anticipate generating approximately $40 million of free cash flow for the year, including the impact of tariffs, which I'll address in a few minutes from a capital.

Allocation standpoint, and as we have previously shared we have closed on two smaller transactions that support our specialty nutrition system strategy and we are actively pursuing acquisitions that align with our returns criteria now turning to our 2025 outlook given our robust first and second quarter sales performance.

Along with favorable currency positions, we are reaffirming our full year revenue estimate of 665 million to $685 million inclusive.

Inclusive of the impact of our hyaluronic acid divestiture, we remain confident in our specialty nutrition systems segments strength for the duration of the year and continued market share gains in our RF segment.

Regarding tariffs, while the environment remains volatile and fluid, we still estimate approximately $15 million and incremental tariff related manufacturing costs for the year, primarily related to products with country of origin for Mexico, and China consistent with our initial estimate.

As a reminder, in the first quarter, we incurred $1 $5 million of tariffs, which were capitalized into inventory and amortize in the second quarter through cost of goods sold for the second quarter, we incurred over $8 million of tariffs, which we will be expensing in the third quarter. The second quarter tariffs were negatively impacted by increased China.

Origin goods shipments with some incurring about 145% tariff rate prior to the U S administration, reducing the China origin tariffs at 30%. Our team continues to implement a range of strategies focused on tariff mitigation action, including internal cost containment pricing actions where appropriate.

Leveraging previously issued temporary tariff exemptions for portions of our portfolio and lobbying efforts with <unk> and other third parties that had interactions with the administration.

Lastly, we have accelerated supply chain investments and are targeting a complete exit from China source, new med products by the second half of 2026.

As we noted in our first quarter earnings call. We entered 2025 with challenging market conditions for some of our product categories currency headwinds and other global macroeconomic factors like tariffs. Despite these challenges currency conditions have improved our strategic segment growth is healthy and our cost management discipline.

<unk> strong we still faced uncertainty on the full impact of tariffs on our profitability and free cash flow, but we are pleased with our commercial progress. Thus far this year as a result, the company is maintaining its 2025 adjusted earnings per share estimate range of 75 to 95 inclusive of the.

<unk> of our hyaluronic acid divestiture.

Operator, please open the line for questions.

Thank you ladies and gentlemen, we will now begin the question and answer session and if you wish to ask a question. Please press star and one on your telephone keypad.

And we now have our question this comes from Dan.

Further from citizen citizens JMP. Your line is now open. Please go ahead and ask your question.

Yeah, great. Thank you for the questions Congrats on a great quarter and Scott congratulations on the new role.

First one just on the 2025 guidance.

Yeah, you reaffirmed.

Full year on the sales line and that's inclusive of the H a divestiture. So that's.

Impressive and great to see but I was hoping you could just give us some some more high level color on what you had previously assumed for a chain in the second half of 'twenty, five and what that implies for SaaS and pain management.

Model out the back half of the year.

Sure. Thanks, Danny so.

Yes.

We're we're pleased to be able to affirm the year inclusive of the impact of Hai, obviously theres five five months of revenue that we're not going to be able to recognize in that business due to the sale. So.

We're pleased with the performance of our futures.

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Those businesses continue to perform well, we're not disclosing exactly what the impact would be of the foregone revenue, but we are comfortable reaffirming guidance for further topline and bottomline, yes, Danielle so that currency headwinds are not as material as we had anticipated. So that's been a great answer that allows.

US to follow up with that growth in the strategic segments that we have.

Okay, Great I appreciate that and then I guess, a little bit more specific on the RF ablation business really strong quarter I know you touched on some of the dynamics there.

But we'd still love some more color on what what's driving growth there and how sustainable do you feel that says in the second half of 'twenty, five and into 'twenty, Texas anything Youre seeing any more color would be great.

Yeah, Hi, Dan It's Dave a couple of things one had a chance to be out there with the team and also within a couple of pain conferences. So I've got a really good on better understanding of the market and as I spent time with physicians and our customers as well as our team in the field I think more and more customers see us as our RF solution company and very dedicated in that era.

There is companies with a broader different offerings in pain, but we're very focused in RF ablation, we have a three tiered offering which I think also is.

Very complementary to our physicians are trying to do.

When you look at our total portfolio. So given the fact that were dedicated to the space. We have been in the space a long time, we now have a three tiered offering.

There is a lot of momentum there on the on the RF ablation side, and we see that momentum continuing where rates were very pleased with the execution of the team in the field.

And the portfolio and the progress that we're making so yes, we are.

I would say I feel very good about it.

Feel good about heading into next year as well and I do think because we are dedicated to the space and as you know there is other companies are doing.

We have a broader offering as I mentioned, but given the fact that we're so focused on it people see us as the RF company with at least Thats the takeaway I have from being in the field.

And the offerings are really quite good in terms of having a three tiered solution and.

And I think from a numbers perspective, you can see 13, 8% growth quarter over quarter for the RFA and what we're saying is with our our increase in our generator sales, which is a great answer. We're also seeing material pull through so when we sell the generator, we're actually selling the higher price and a margin.

Probes that we have and we're seeing that not just with if you're seller generators, but we have people that keep those generators and they're continuing to buy from us. So again it comes back to the sales team is going out there servicing the customers and just being able to differentiate our products from what's out there.

Okay.

Great. Thanks for that and just one last one from me again on H a divestiture.

I guess, just how should we think about.

How this impacts the income statement longer term, specifically on the gross and operating margin lines.

We appreciate that you reiterated the bottom line guide here and understand that there's some other moving parts for the rest of 2025, but you know as we look out further what do you feel is more steady state without H, a as far as the margin level looks like or is it.

Pretty neutral given some of your initiatives that you have in place.

Yes.

I would say Daniel is when we looked at what was coming in the back half of the year as we've mentioned to you that we are running the business more from a cash perspective. So we were trying to maintain the revenue we were potentially.

Potentially lowering our sales prices to make the business work. So ultimately when we look at the financials for the rest of the year not a material impact on the bottom line. When it comes to the HCA divestiture, we're able to make up anything that we are losing there on the revenue side with our strong strategic.

Performance in those segments, so not a material number that were seeing all the way down to the bottom line, yes. The challenge in that business was not volumes there was more price and so obviously from a profitability perspective, as we continue to see pressure on margins and the impact there going forward from a just EPS and EBITDA perspective.

There is limited.

Yes.

Great. Thank you very much.

Thank you and no further questions that came through at this time I will now turn the call over back to David C. T. I mean, they've Pacific for closing remarks. Please go ahead Sir.

Yeah. Thanks, everyone. Thanks for the questions today in closing I'm really proud of the progress <unk> made in transforming our business as demonstrated by our hyaluronic acid divestiture Im generally pleased with our bright future driven by the dedication of our teams.

Vital role our products really play with our customers, which is great to see and really getting back.

To patients and back with things that matter. So we appreciate your continued interest in avenues and thanks again for the questions.

Thank you. This concludes our conference call for today. Thank you all for participating you may now disconnect.

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