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David Pacitti

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 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.

Jason Pickett

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 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'll 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 enteral feeding portfolio featuring our MIC-KEY low profile enteral feeding tubes, our short term enteral feeding portfolio, including our CORTRAK guided feeding tube placement, our CORFLO nasogastric feeding tubes, and our CORGRIP tube retention system, and 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 radiofrequency ablation or RFA portfolio featuring our Semtech Conventional RFA solution, our Trident Timed 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. And finally, our hyaluronic acid injections and intravenous infusion product lines are combined and reported in corporate and others.
As noted, we believe this structure will better guide enteral 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 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 US 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 infant 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 radiofrequency 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 Semtech 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 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 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 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 break even, 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 radiofrequency 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 system 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 on the ultimate impact of tariffs on our profitability and cash flow. In the first quarter, we incurred $1.5 million of tariffs which are capitalized into inventory and will be advertised 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 of 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 enteral cost containment measures, price increases to customers, leveraging our previously issued temporary exemption for NEOMED, neonatal syringes and feeding tubes, and our relationships with Adamed 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 contemplated 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.

David Pacitti

Thanks, Jason. As I mentioned in the opening, I'm energized by the opportunity to lead Avanos and I've 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.

Question and Answer Session

Operator

(Operator Instructions) Rick Wise, Stifel.

Rick Wise

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 your details 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, 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?

Jason Pickett

Hey Rick, this is Jason. Very nice to meet you for the first time. It's a good question and 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 [S&S] 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 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 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 S&S area, but it still does not prevent us from keeping our full year guidance specific to the S&S as well as to the go-direct. Again, anticipation is that strategy that we have is actually going to grow our business, which is what's reflected in us maintaining 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.

Rick Wise

Gotcha. 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 these will be areas that you can tackle happily and productively and helpfully.

David Pacitti

Thanks Rick, and it's nice to hear your voice again. Been a long time. I think from my -- and 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 Special 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 I've been -- 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 for both specialty in 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 a 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 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.

Rick Wise

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 analyze? I know it's early to even mention 2026, but we're going to have to put something down. Do we assume that our fourth quarter '25 times four is the right -- we should dial that into whatever we're going to think about '26. Thanks again.

David Pacitti

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, we, first want to note the fact that we had a change in our issue of guidance -- a change of 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 -- although 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. 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 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 imagine like Adamed 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 be out of -- 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.

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%, but it does assume that we will have higher tariff expenses in China and Mexico than we've had in previous years.

Rick Wise

Thank you very much.

David Pacitti

Thank you.

Operator

Danny Stauder, Citizens JMP.

Danny Stauder

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 the larger two 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.

Jason Pickett

Yes, hey, 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 quarter dealt with some of the go-to-direct. So as we think about that's going to even out.
But going forward, we're going to hopefully have a growth in that area. We do believe that with the S&S portfolio, as we mentioned previously that we're going to have mid-single 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 on 10-Qs 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 enteral feeding and neonate solutions. And then you'll have the Pain business broken down as 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, so it was not a surprise. Our RFA 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 ASC strategy for our Trident and Semtech sales. Semtech 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 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 S&S 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 team have put in place through the years, we're excited about the opportunities.

Danny Stauder

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 cash flow for the full year '25 to $65 million. But I wasn't sure what was excluded for tariffs at this point, and if you have that. Just any more color would be great.

Jason Pickett

No, absolutely. The $65 million is our forecast of free cash flow for the year. That does not have any impact 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 that's what was on 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 cash flow was $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 cash flow because historically we have not had positive cash flow in the first quarter because it's our 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 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 our 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.

Danny Stauder

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

Operator

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.

David Pacitti

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 generally excited about our bright future, driven by the dedication of our teams and the vital role of our products, playing in getting patients back to things that matter. We appreciate your continued interest in Avanos. Thank you very much.

Operator

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