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    Avanos Medical Inc (AVNS)

    Q2 2024 Earnings Summary

    Reported on Feb 28, 2025 (Before Market Open)
    Pre-Earnings Price$22.96Last close (Jul 30, 2024)
    Post-Earnings Price$23.45Open (Jul 31, 2024)
    Price Change
    $0.49(+2.13%)

    What went well

    • Strong growth in the Digestive Health portfolio, with NeoMed expected to deliver double-digit growth through early 2025, supported by ENFit conversions and upcoming product launches like CORTRAK and CORPAK.
    • Positive momentum in the Pain Management business, with mid-single-digit growth expected as they see positive developments in surgical pain and Game Ready delivering consecutive double-digit growth quarters. Stabilization in HA pricing and volume increases are also contributing to the expected growth.
    • Disciplined capital allocation and strong balance sheet, with leverage less than 1x, enabling potential bolt-on acquisitions, particularly in Digestive Health, to further drive growth.

    What went wrong

    • The company expects a significant decline in hyaluronic acid (HA) revenues, with a 30% decrease in Q2 and a similar decline anticipated in Q3, which could continue to impact overall revenues and profitability.
    • Growth in key product lines like Game Ready is expected to slow down in the second half of the year due to tough prior year comparisons, potentially affecting the company's overall growth trajectory.
    • Supply chain issues and product discontinuations, such as those affecting the COOLIEF product line and the NKT supplies (needles, kits, and trays), have led to customer disappointment and may take time to recover, potentially delaying revenue contributions from these areas.

    Q&A Summary

    1. Pain Management Outlook
      Q: What's the long-term growth outlook for Pain Management, especially HA?
      A: Management expects the Pain Management business to achieve mid-single-digit growth globally by 2025. Positive developments include mid-single-digit growth in surgical pain products like ambIT and ON-Q, growth in IVP, and two consecutive quarters of double-digit growth in Game Ready. HA pricing is stabilizing, with volume increasing at roughly double-digit rates each quarter. They view HA as a low single-digit grower with strong gross margins, aiming for mid-single-digit growth in the longer term. However, HA revenue was down 30% in Q2 and is expected to be down similarly in Q3. They anticipate Q4 HA revenue to be around $11 million, leveling off at a $42 million annualized rate. Going forward, they expect low single-digit growth as pricing stabilizes.

    2. CMS Reimbursement for ON-Q
      Q: How will CMS's proposal to reimburse ON-Q affect the business?
      A: The company has been assigned a unique code for ON-Q under the outpatient prospective payment system, a process they've worked on for about four years. They are submitting comments on the payment until September 9th, and by January 1st, they'll know the reimbursement rate. Over the longer term, there's potential to restore the ON-Q business to its peak levels, which would be significant for them. While it's early to predict immediate impacts, having specific reimbursement beyond hospital DRGs should be a positive development.

    3. Digestive Health and NeoMed Growth
      Q: Can Digestive Health sustain growth as ENFit conversion winds down?
      A: NeoMed can maintain double-digit growth throughout this year and into early 2025. Even as ENFit conversions taper, they expect it to remain a high single-digit grower for the foreseeable future. They're converting about 100 accounts this year and anticipate similar numbers next year. The international business grew 11% in the quarter, with legacy Digestive Health contributing significantly. They see Digestive Health as a mid- to high single-digit grower long-term, and upcoming product launches like CORTRAK and CORPAK will bolster growth.

    4. M&A Strategy and Share Buyback
      Q: What's the outlook for M&A and share buyback plans?
      A: The company is working on potential bolt-on acquisitions, primarily in Digestive Health, but timing is unpredictable. They've taken a disciplined approach, passing on deals where due diligence revealed issues, rather than due to high prices. They remain cautious with the balance sheet, being less than 1x levered, but maintain a robust M&A pipeline. On share buybacks, they've completed $85 million over the last 1.5 years but have not announced any new authorizations. Any further buybacks would require board approval.

    5. Game Ready Growth Drivers
      Q: What's driving Game Ready's growth, and why might it ease?
      A: Game Ready saw double-digit growth, driven by strong international adoption and changes to the rental program and sales structure. Management views Game Ready as a consistent high single-digit grower, with occasional double-digit growth in certain quarters. The growth rate may ease in the back half due to prior year comparisons and other factors, but long-term performance is expected to range between high single-digit and double-digit growth depending on the quarter.

    6. COOLIEF and RF Products
      Q: What updates are there on COOLIEF and cross-selling benefits?
      A: The company is seeing strength in Diros and standard RF products, particularly due to the shift to ambulatory surgical centers. COOLIEF is recovering from past supply chain issues, with customers returning and the new sales structure gaining momentum each quarter. They've sold a record number of generators, with 3 out of every 4 being COOLIEF, which take 90 to 120 days to become operational. Management expects COOLIEF to be a consistent mid- to high single-digit grower. They are addressing challenges from discontinuing certain commoditized NKT products but anticipate sequential increases in the second half.

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