Good morning, ladies and gentlemen, and welcome to the Avanos Medical, Avanos First Quarter 2025 Earnings Call. 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.

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 Pacitti 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 of 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 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, 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 GAAP 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 Systems 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 go-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 2.8% compared to a year ago. Additionally, we generated $0.26 of adjusted diluted earnings per share and approximately $22 million of adjusted EBITDA with adjusted gross margins of 56.7% 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 31. During the quarter, we generated $19 million of 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 Systems segment, previously known as our Digestive Health business, comprises three key portfolios: our long-term enteral feeding portfolio featuring our MICK-KEY low-profile enteral feeding tubes, our short-term enteral feeding portfolio including our CORTRAK guided feeding tube placement, our CORFLO nasal gastric feeding tubes, and our CORGRIP tube retention system, along with our Neonate portfolio featuring our NEOMED solutions for neonatal and pediatric care. The name Specialty Nutrition Systems captures our bold vision to evolve from a leading enteral feeding portfolio into a life-sustaining range of enteral 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 portfolio featuring our ESENTEC conventional RFA solution, our TRIDENT tined RFA solution, and our COOLIEF Cooled RFA solution; second, our surgical pain pumps portfolio featuring our ON-Q elastomeric pain pumps and ambIT 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. Lastly, our Hyaluronic Acid injections and intravenous infusion product lines are combined and reported in corporate and other. As noted, we believe this structure will better guide internal capital allocation decisions, optimizing returns and achieving 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 a prior year, reaffirming our number one position in long-term, short-term, and neonatal enteral feeding. Demand for our long-term enteral 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 enteral feeding portfolio grew double-digits globally during the first quarter, primarily driven by the continued expansion of our U.S. CORTRAK standard-of-care offering, inclusive of our newly-launched CORGRIP 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 ENFit adoption cycle in North America. From a profitability standpoint, operating profit for our Specialty Nutrition Systems segment for the first quarter was nearly 21%, a 460 basis-point increase from a year ago. 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 RFA generator capital sales, which enables us to capture higher procedure volumes, especially within our ESENTEC 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 COOLIEF offering internationally, leveraging reimbursement tailwinds in several geographies, including the United Kingdom and Japan. Our Surgical Pain business was down compared to the prior year, but in line with our expectations. The implementation of the reimbursement decisions afforded by the NOPAIN Act provides hospitals and caregivers with improved options to administer non-opioid post-surgical pain relief. We are excited to support better patient care through our ON-Q and ambIT product line offerings. Additionally, our ambIT product line, which has benefited from the procedural shift to the ASC, continues to post excellent results, growing by double-digits compared to the 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 HA categories. 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 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 Systems segment, primarily due to distributor order timing tied to our international Go-Direct transition, we remain confident in the segment's 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 regarding 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 for 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 neonatal syringes and feeding tubes, and our relationships with AdvaMed 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 were not compensated in our initial guidance. As a result of these two factors, the company is lowering its 2025 adjusted earnings per share estimate range to $0.75 to $0.95.

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 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.

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. You know, just to help us think through, you detailed a lot; we're going to have to think about all the details. But just for starters, help us think about the second quarter specifically, you know, 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?

Hi, Rick. This is Jason. Very nice to meet you for the first time. It's a good question. As - 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 going to get back some of that in the second quarter? Yes, because some of that was accelerated in the first quarter, which was not in our original plan, but it was in our total plan. 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 specific to the SNS as well as to the Go-Direct. Again, anticipation that that strategy that we have 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 had 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.

Got you. And 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. I mean - and maybe I was thinking a way you might be comfortable is, talk about maybe some of your past experience, what you're going to be able to bring to Avanos that you feel your first instincts are this will - these will be areas that you can tackle happily and productively and helpfully?

Thanks, Rick. And it's nice to hear your voice again. It's been a long time. I think from my - and yes, 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, 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 for my past, obviously, I mean, as you know, I've got a strong commercial background, so I'm going to be very focused on go-to-market strategies and how do we continue to optimize our commercial position as an organization. And I think that will apply to both Specialty Nutrition and in the Pain Management business, where we can, you know, continue to innovate from a commercial standpoint, similar to, you know, things that I've done in the past. So that's where, I mean, 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, you know, I would say, a plethora of things, looking at strategic partnerships and continuing 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 the 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 going to 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 going to think about '26? Thanks again, yes.

Yes. Thanks, Rick. Yes, I'll start it off, and maybe Jason or Scott will add in, but let me just take a step back and give a big-picture view of the tariffs. Certainly a very dynamic market right now. But as we look at it, obviously, I want to note the fact that we had a change in our - in issued guidance - had a change in our guidance. To be specific, to 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 and our current estimates for exposure, we're looking at this - expect about $15 million in incremental tariff-related manufacturing costs this year. 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 with Canada and then 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 want to leverage our previously granted temporary exemptions for our neonatal feeding products in China. That's really important, so we're continuing to try to leverage that and expand that. Our relationships with various third parties, as you can imagine, like AdvaMed, to have 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 just as a reminder, Jason said it in the prepared statements, we also announced 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 on to that?

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

Okay. Thank you very much.

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

Yes, great. Thanks for the question. You know, just a quick one on the segments. You know, we appreciate the more granular breakdown in 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 two, as well as their specific businesses for the full-year and into 2026? You know, any cadence we should consider for each beyond what you outlined for Q2? And then, you know, any other high-level thoughts would be helpful there. Thank you.

Yes. Hi, thank you for the question. Let me kind of go through a couple of the segment details and hope to help accomplish the answer for the question. I'll reiterate what we mentioned with the SNS portfolio. We're pretty excited about that business. 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—last quarter dealt with some of the go-to-direct. So as we think about that, that's going to even out. But going forward, you know, we're going to hopefully have a growth in that area. We do believe that with the SNS portfolio, as we mentioned previously, that—we're going to add mid-single-digit growth for that for the entire year. Again, cadence historically, 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 the more visibility and granular visibility that you'll have, you'll see additional information in our 10-Qs, where 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 enteral 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 will 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. You know, 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 RA business experienced good growth as we are starting to see the benefits of prior-year generator placements as well as the results from good execution with the AC strategy for our TRIDENT and ESENTEC 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 downtick in the second quarter, it's going to come back, and we're still going to be able to have flat- to 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 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 going to manage the business. And hopefully, as we think about all the cost transformation initiatives that Scott and the team have put in place through the years, we're excited about the opportunities.

No, that's great. I appreciate that information. I apologize if I missed this since I was on a few other calls, but I believe you had the free cash flow for the full-year 2025 at $65 million.

Currently, yes.

…so, I wasn't sure what was excluded for tariffs at this point. And you know, if you had just - add any more color, that would be great.

No, no. Absolutely. The $65 million is our forecast for free cash flow 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 heard earlier, Scott and David mentioned, roughly about $50 million—that's 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 are 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 that, in the first quarter, free cash flow was $19 million. The reason why you should not take a run rate and go-is you should not be going $19 million every quarter, the first quarter, even though we're really excited about having positive cash flow, historically, we have not had positive cash flow in the first quarter because it's one of the 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 generated $19 million. But in that $19 million, there are some one-time items—about $9 million overall of income tax refunds, customs refunds, and some small benefits specific to our TSA that we had with our divestiture of our respiratory health business. So even though $19 million is the first quarter, pulling out some of those one-time items, we do believe that $65 million this year is a good number.

Excluding tariffs.

Great. That's some great color and I appreciate it. That's it from me. Thank you very much.

Thank you. There are no further questions at this time. I would now like to turn the call back over to Dave Pacitti 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 play in 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.