• Revenue: $166 million from continuing operations, adjusted for foreign exchange and strategic decisions.

• Organic Sales Growth: Up 4.7% year-over-year.

• Adjusted EBITDA: $21.6 million, a 34% increase from the previous year.

• Adjusted Diluted EPS: $0.22, up 69% compared to the previous year.

• Adjusted Gross Margin: 59.8%, expected to be around 60% next quarter.

• SG&A as Percentage of Revenue: 45.8%, improved by 220 basis points from last year.

• Free Cash Flow: Negative $12 million, with an anticipated improvement next quarter.

• Full Year Guidance: Revenue between $685 million and $705 million; Adjusted Gross Margin between 59.5% and 60.5%; SG&A as Percentage of Revenue between 41% and 42%.

• Debt: $177 million outstanding, with leverage levels below one turn.

• Cash on Hand: $76 million as of March 31.

• Warning! GuruFocus has detected 2 Warning Signs with AVNS.

Release Date: May 02, 2024

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• Avanos Medical Inc (NYSE:AVNS) reported first quarter results in line with expectations, showing a strong performance in digestive health and improvements in pain management and recovery.

• Organic sales increased by 4.7% year-over-year, driven by strategic decisions to focus on higher return activities and effective supply chain management.

• Adjusted EBITDA from continuing operations was $21 million, with adjusted diluted earnings per share at $0.22, indicating robust profitability.

• The company successfully reduced its first quarter backorder levels significantly from over $8 million last year to about $1 million, demonstrating improved operational efficiency.

• Avanos Medical Inc (NYSE:AVNS) is making substantial progress on its three-year transformation priorities, which are expected to enhance financial performance and operational efficiency by 2025.

Negative Points

• Sales in the pain management and recovery portfolio were down approximately 1% year-over-year, excluding certain benefits, due to strategic product discontinuations and foreign exchange impacts.

• The company anticipates slower growth in the coming quarters for its new unit product line as it enters the late stages of in-pit adoption.

• Free cash flow was negative $12 million in the first quarter, influenced by year-end payouts and one-time costs related to transformation efforts.

• While there has been progress in the pain management portfolio, the first quarter performance has not yet reached the company's desired levels.

• The company faces ongoing challenges with price volatility in its HA business, which could impact future financial stability despite mitigation strategies.

Q & A Highlights

Q: Can you expand on your commentary around the pain management business and what gives you confidence in improved results for the rest of the year? A: Joseph Woody, CEO of Avanos Medical, highlighted several positive indicators within the pain management sector, including double-digit growth in the Game Ready portfolio and mid-single digit growth in the RF business. He also noted the successful adoption of the Trident technology and positive trends in international markets. Woody expressed confidence in achieving mid-single digit growth for the year, excluding the anticipated decline in HA revenue.

Q: Could you discuss your appetite for M&A, considering your low leverage ratio and the potential for deals in the next 12 to 18 months? A: Joseph Woody discussed the company's focus on the digestive sector for potential M&A activities, noting that they have passed on some transactions due to high multiples and insufficient growth prospects. He emphasized the robust pipeline around the digestive sector and suggested that any near-term acquisitions would likely focus on this area.

Q: How should we think about gross margin for the rest of the year, especially considering the impacts from HA and assumptions for the back half of the year? A: Joseph Woody projected that gross margin would remain stable quarter over quarter, with an expectation to exceed 60% in the latter half of the year. He attributed this to favorable revenue mix, continued cost savings, and operational initiatives at the plant level. Woody reassured that the company is on track with its financial targets, including gross margin improvements.

Q: Can you provide more details on what's driving the double-digit growth in the Game Ready portfolio and whether this growth rate is sustainable throughout the year? A: Joseph Woody attributed the strong performance of the Game Ready portfolio to increased activities in sports medicine and orthopedics, enhanced distributor relationships, and expansion in international markets. He confirmed the expectation for Game Ready to maintain mid-single digit growth and expressed confidence in the overall mid-single digit growth projection for the pain management and recovery business.

Q: Regarding the financial outlook, can you confirm the guidance for the year and elaborate on the expected performance in key financial metrics? A: Michael Greiner, CFO, reaffirmed the 2024 full-year guidance, expecting revenue between $685 million and $705 million, with mid-single digit organic growth. He projected adjusted gross margins between 59.5% and 60.5%, and SG&A as a percentage of revenue to be between 41% and 42%. Greiner emphasized the alignment of these metrics with the company's transformation strategy and financial goals.

Q: What are the strategic priorities for Avanos Medical in the near term, especially concerning operational and financial transformations? A: Joseph Woody outlined the company's focus on optimizing the go-to-market strategy, transforming the portfolio towards high-margin categories, enhancing operational profitability through cost management, and pursuing efficient capital allocation to improve return on invested capital (ROIC). He highlighted the progress made in these areas and the company's commitment to achieving its 2025 financial objectives.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

This article first appeared on GuruFocus.