Q1 2024 Earnings Summary
- Pain Management segment shows strong signs of growth, with Game Ready posting double-digit growth driven by sports medicine and orthopedic procedures, and the radiofrequency ablation portfolio growing mid-single digits. The company sold 80 generators during the quarter, indicating positive momentum. There's potential for low single-digit growth in surgical pain this year, the first time in a long time. Excluding the impact of HA, the company is confident in achieving mid-single-digit growth in the Pain Management and Recovery business for the full year.
- Gross margins are expected to improve, with anticipation of gross margins above 60% in the back half of the year, driven by a heavier revenue mix, favorable product mix, and ongoing cost-saving initiatives at the plants. The company is pleased with the first quarter gross margin and is confident about achieving around 60% in Q2. This improvement indicates enhanced profitability moving forward.
- The company has a strong balance sheet with low leverage, providing flexibility for strategic M&A opportunities. They have been focused on the Digestive Health segment for potential acquisitions and indicate a robust pipeline in this area. This strategic focus on M&A could drive future growth and enhance the company's market position.
- Declines in Key Pain Management Products: Avanos' Pain Management business was "primarily hurt... in the first quarter" by underperformance in the IV infusion and needles, kits, and trays product families, which are "less focused on, obviously, historically". This suggests ongoing challenges in these product lines that may continue to impact overall performance.
- Projected 20% Decline in HA Revenue: The company anticipates a "negative 20% decline in HA revenue" for the full year , which could significantly affect total revenues and profitability, indicating potential headwinds in the HA segment.
- Challenges in Identifying Attractive M&A Opportunities: Avanos has "passed on a couple of transactions" due to "multiples were a bit high" and lack of promising "growth perspectives". This could imply difficulties in executing growth through acquisitions, possibly limiting future expansion prospects.
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Gross Margin Outlook
Q: What's the gross margin outlook for the rest of the year?
A: Management expects gross margins to remain fairly stable quarter-over-quarter, with fluctuations of about 1% ( ). They anticipate gross margins to be above 60% in the back half of the year ( ), due to heavier revenue periods, favorable mix, and ongoing cost-saving initiatives at the plants ( ). In Q2, they expect margins around 60%, moving higher as the year progresses ( ). Stability in HA sales, projected between $9 million and $12 million per quarter and aligning with a 20% decline previously indicated, supports this outlook ( ). -
M&A Appetite
Q: What's your plan for potential M&A in the next 12-18 months?
A: Management is primarily focused on bolt-on acquisitions in the digestive area ( ). They've passed on some deals due to high multiples and uncertain growth prospects ( ). However, they see a robust pipeline in digestive and indicate that's where new deals are most likely to occur ( ). -
Pain Management Outlook
Q: Why are you confident in improved Pain Management results?
A: Management is confident due to several factors ( ). Game Ready achieved double-digit growth, and the RF business grew at mid-single digits, despite purposeful exits in some areas ( ). They sold 80 generators during the quarter, indicating positive trends, and they're seeing good adoption of the Triton technology from Diros ( ). They also anticipate low single-digit growth in surgical pain, a positive shift after a long time ( ). Overall, excluding HA, they expect the pain business to grow at mid-single digits for the full year ( ). -
Game Ready Growth
Q: What's driving Game Ready's strong growth, and outlook?
A: Game Ready's double-digit growth is driven by sports medicine and orthopedic procedures, improved distributor relationships, and enhanced direct sales efforts ( ). The company is also expanding in international markets where they were previously more passive ( ). Management expects Game Ready to grow at mid-single digits for the year ( ). Challenges in Q1 from the IV infusion and needles, kits, and trays product lines are expected to ease in the back half, further supporting growth in the Pain segment ( ).