Avanos Medical, Inc. Q3 FY2025 earnings call

• Strategic Imperatives: Accelerate growth in strategic segments, manage tariffs, realize efficiencies, improve/divest underperforming assets, acquire synergistic businesses.
• Divestiture and Acquisition: Divested hyaluronic acid business in July; acquired Nexus Medical, expanding presence in neonatal/pediatric settings and entering a growing $70M market.
• Cost Improvement: Took steps to optimize costs, expecting $15M-$20M of run rate annualized incremental cost savings by end of 2026, with ~$10M one-time cash charges, majority in Q4 2025.
• Tariff Mitigation: Implementing strategies like internal cost containment, pricing actions, leveraging tariff exemptions, and lobbying; tariff environment expected to impact 2026.
• Supply Chain: Prioritized investments to exit China for neonatal syringe production, leading to higher 2025 capital expenditures, aiming to be out by mid-2026.

Specialty Nutrition Systems (SNS): Achieved strong growth with each SNS business delivering double-digit and above-market growth. Organic sales up 10% compared to a year ago. Operating profit for the third quarter was 20%, a 130 basis point improvement. Demand for enteral feeding products strong, with short-term enteral feeding portfolio posting double-digit growth globally and neonatal solutions business growing double digits. However, NeoMed product line expected to have lower growth in fourth quarter. Pain Management and Recovery: Normalized organic sales up 2.4% excluding foreign exchange and strategic withdrawals. Radiofrequency ablation business posted double-digit growth. Surgical pain business flat, but Game Ready portfolio down year-over-year. Operating profit for the segment was 3%, a 200 basis point improvement. Hyaluronic acid injections and intravenous infusion product lines declined over 20% due to divestiture of HA business. The acquisition of Nexus Medical expands presence in neonatal and pediatric settings and is expected to be immediately accretive to revenue and earnings per share.

• Raised and narrowed full year revenue estimate to $690 million to $700 million, inclusive of HA divestiture and Nexus acquisition contributing ~$5M to 2025 revenue.
• Raised and narrowed full year adjusted EPS estimate to $0.85 to $0.95 per share, inclusive of HA divestiture and Nexus acquisition impact.
• Confident in delivering mid-single-digit growth across strategic segments despite Q4 headwinds in SNS.

• Tariff negotiations and their ongoing impact on the company's gross margin profile.
• Supply chain challenges, including higher-than-anticipated capital expenditures in 2025 due to exit from China plans.

Q: Could you go into more detail on the $15 million to $20 million annualized cost savings, specifically driving factors and what it looks like moving through 2026?

A: Focused on streamlining organization, reducing senior management, revamping R&D to improve decision-making and new product development speed; majority of actions to realize savings next year already taken.

Q: Any product development pipeline highlights for end of 2025 or 2026?

A: Moving to a hybrid R&D model, with internal R&D focused on certain projects and external contracting for others to improve speed to market with products.

Q: Thoughts on M&A appetite, including Nexus acquisition and potential for more deals?

A: Continues to seek synergistic M&A opportunities, with focus on SNS in short term, appetite for more deals, actively seeking opportunities though not expecting in 2025 yet.

Q: Does the free cash flow assumption of $25 million to $30 million include tariffs and one-time cash items?

A: Yes, includes $18 million in tariffs and $10 million one-time cash item from cost improvement plan, also accounts for higher CapEx to accelerate China exit plan