Avanos Medical - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 delivered modest topline growth and solid profit improvement: revenue $167.5M (+0.8% y/y), GAAP diluted EPS $0.14, and adjusted EPS $0.26; adjusted EBITDA was flat y/y at $21.6M, with adjusted gross margin at 56.7% vs 59.8% a year ago due to HA pricing pressure.
• Specialty Nutrition Systems (SNS) remained the growth engine (sales $101.1M, +6.9% y/y; operating margin ~21%), while Pain Management & Recovery (PM&R) stabilized (sales $56.2M; RFA +8.2% y/y) and “Corporate & Other” declined on HA pricing pressure.
• 2025 revenue guidance maintained at $665–$685M, but adjusted EPS guidance was cut to $0.75–$0.95 (from $1.05–$1.25) driven primarily by newly announced tariffs; GAAP EPS guidance cut to $0.33–$0.56 (from $0.63–$0.86).
• Management detailed ~$15M estimated 2025 incremental tariff costs and near-term mitigation levers; Q1 incurred ~$1.5M of tariffs (capitalized, to flow in Q2). Free cash flow targeted at ~$65M for 2025 excluding tariff effects; Q1 FCF was $19.0M.

What Went Well and What Went Wrong

• What Went Well

  • SNS led with above-market growth: $101.1M sales (+6.9% y/y), 8.7% volume growth; operating profit ~21% (up 460 bps y/y) on higher volume and lower SG&A.
  • RFA momentum within PM&R (RFA +8.2% y/y) tied to generator placements and stronger ESENTEC/TRIDENT lines; Ambit continued double-digit growth; international COOLIEF benefiting from reimbursement tailwinds (U.K., Japan).
  • Operating leverage and cash generation improved: GAAP operating income rose to $10.3M (from $4.0M y/y); operating cash flow $25.7M and FCF $19.0M vs outflows a year ago.
  • CEO tone constructive on execution: “transformation efforts ... positioned us well to accelerate our growth profile” and focus on go-to-market and margin profile enhancements.

• What Went Wrong

  • Gross margin compressed (reported 53.6%, adjusted 56.7%) vs prior-year (57.1%/59.8%) on unfavorable HA pricing; “Corporate & Other” sales fell 32.9% y/y.
  • PM&R total flat to slightly down (-0.2% y/y) as surgical pain & recovery declined 9.3% y/y; segment operating profit only $0.2M (breakeven) despite RFA strength.
  • Macro/tariff overhang forced a guidance cut: adjusted EPS to $0.75–$0.95 (from $1.05–$1.25) and GAAP EPS to $0.33–$0.56 (from $0.63–$0.86), with ~$15M FY25 tariff cost now assumed; Q1 incurred ~$1.5M tariffs that will hit Q2 COGS.

Transcript

Operator (participant)

Good morning, ladies and gentlemen, and welcome to the Avanos Medical, Avanos first quarter 2025 earnings call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. If, at any time during this call, you require immediate assistance, please press star 0 for the operator. 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.

Scott Galovan (Senior VP and CFO)

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, 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'll finish the call with Q&A. A presentation for today's call is available on the Investor's 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.

Dave Pacitti (CEO)

Thanks, Scott. Good morning, everyone, and thank you for joining us to review our operational and financial results for 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.

Jason Pickett (Interim CFO and Treasurer)

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 31st.

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 Systems 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 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 ESENTEC 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. 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. Finally, our hyaluronic acid injections and intravenous infusion product lines are combined and reported in corporate analysis.

As noted, we believe this structure will better guide internal 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 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 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. CorTrack 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 Systems segment for 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 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 U.K. 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 hyaluronic acid 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-$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-to-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 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 from 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 NEOMED neonatal syringes and feeding tubes, and our relationships with Advimed 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-$0.95.

Dave Pacitti (CEO)

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.

Operator (participant)

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Should you have a question, please press the star followed by the number one on your touchstone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press the star followed by the number two. If you are using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. Your first question comes from Rick Wise of Stifel. Please go ahead.

Rick Wise (Managing Director)

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?

Jason Pickett (Interim CFO and Treasurer)

Hey, Rick, this is Jason.

Very nice to meet you for the first time. It's a good question. As you know, we don't give out quarterly guidance. 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. 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 was 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.

It was not in our original plan, but it was in our total plan. 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-to-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'd anticipated.

But it's more of a challenge in our three-shot category. 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. We do anticipate us actually affecting some sales strategies with some of our key customers in that business to hopefully maintain that. Ultimately, going over from Q1 to Q2, we still believe that our overall annual numbers from a sales perspective are still good.

Rick Wise (Managing Director)

Gotcha. Good to meet you too, Jason. Thank you for all that detail. Dave, I know you said you gave us some opening thoughts. I would not be a good analyst if I did not 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.

Dave Pacitti (CEO)

Thanks, Rick. And it's nice to hear your voice again. It's been a long time. I think from my, and yeah. 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 from my past, obviously, I've been, as you know, I've got a strong commercial background, so I'm going to be very focused on go-to-market strategies. How do we continue to optimize our commercial position as an organization? I think that will apply for 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. That's where my focus is. I think we're really pleased with a strong start, which is great to get off to a good start. We're going to continue to optimize how we go to market from a commercial standpoint.

That's a, you know, 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 (Managing Director)

Great. 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 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 2025 times four is the right? We should dial that into whatever we're going to think about 2026?Thanks again.

Dave Pacitti (CEO)

Yeah. Thanks, Rick. I'll start off, and maybe Jason or Scott will add in, but let me just take a step back, a big picture view of the tariffs. Certainly a very dynamic market right now, but as we look at it, obviously, we, you know, first want to note the fact that we had a change in our, an issue guidance, a change in our guidance, to be specific, 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, in 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. That is 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. We're continuing to try to leverage that and expand that. Our relationships with various third parties, as you imagine, like Advimed, that have direct contact with the current administration, we're obviously working on that as well. 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. 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 China, to transition out of China with our neonatal syringes in the first half of 2026. Let me stop there and see if Scott wants to add anything on to that.

Scott Galovan (Senior VP and CFO)

Yeah, I would just add, Rick, around the question on the assumptions, the $15 million for 2025, that assumes it does assume a reduction in the current tariffs on imports from China, 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 (Managing Director)

Thank you very much.

Dave Pacitti (CEO)

Thank you.

Operator (participant)

Thank you.

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

Danny Stauder (Director)

Yeah, great. Thanks for the question. You know, just a quick one on the segments. You know, 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 for the 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 2Q, and then, you know, any other high-level thoughts would be helpful there. Thank you.

Jason Pickett (Interim CFO and Treasurer)

Yes. Thank you for the question. Let me kind of go through a couple of the segment details and, you know, 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. 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 in the quarter dealt with some of the go-to-direct. As we think about that, it'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 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 in our 10Qs, 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 in surgical pain and the RFA business, maybe not broken down into the individual products below. 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. 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 RF business experienced good growth as we are starting to see the benefits of prior generator placements, as well as the results from good execution with the ASC strategy for our Trident and ESENTEC sales. ESENTEC sales for Game-Ready and surgical pain will be in line with expectations. 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 SNS business is there.

We are going to be running our business, that we have 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. The key for us when we came up with the new segments was to hopefully give you more visibility into our portfolios that we are going to manage the business. Hopefully as we think about all of the cost transformation initiatives that Scott and team have put in place through the years, we are excited about the opportunities.

Danny Stauder (Director)

No, that is great. We appreciate that, color. I guess I apologize if I missed this. We are on a few other calls, but I believe you had free cash flow for the full year, $25 million-$65 million.

I wasn't sure of what was excluded for tariffs at this point. And, you know, if you have given that just any more color would be great.

Jason Pickett (Interim CFO and Treasurer)

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 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. 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, should 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 one of our higher cost perspectives because that's where we pay our bonuses and our long-term incentives. Usually our sales are lower in the first quarter.

This quarter we actually had generated $19 million, but in that $19 million, there are some one-time items, let's say about $9 million overall of income tax refunds, some customs refunds, and some small benefits specific to our TSA that we had with our divestiture of our respiratory health business. 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.

Danny Stauder (Director)

Excluding tariffs.

Jason Pickett (Interim CFO and Treasurer)

Excluding tariffs.

Danny Stauder (Director)

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

Operator (participant)

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.

Dave Pacitti (CEO)

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 playing 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.