Summary of Avanos Medical (AVNS) Conference Call - May 13, 2025 Company Overview - **Company**: Avanos Medical (AVNS) - **Industry**: Consumer Goods, specifically in health and hygiene products Key Points and Arguments Company Evolution and Strategy - The company has evolved from being perceived as a "pulp proxy" to focusing on volume mix-led growth, aided by a reorganization in the previous year [3][9] - The CEO highlighted the importance of innovation and the need to elevate and expand product categories, particularly in emerging markets [11][13] - Organic growth improved from 1-2% to approximately 4% over the past five years, indicating a successful shift in strategy [14] Financial Performance and Challenges - The company faced significant cost inflation of approximately $3.5 to $3.7 billion between 2021 and 2022, impacting gross margins which fell to 29.8%, 500 basis points lower than pre-pandemic levels [31][33] - Despite challenges, the company achieved a gross margin of 36.5% in 2024, up 200 basis points year-on-year, and aims for at least 40% by the end of the decade [77] Market Dynamics - The overall category growth has decelerated to about 1.5-2%, below the historical range of 2-3%, leading to a reduction in full-year guidance primarily due to tariff impacts [51][53] - Demand for essential products remains resilient, with consumers exhibiting value-seeking behavior in developed markets [55][62] Innovation and Product Development - The company has focused on launching premium products while also ensuring competitive offerings in the value tier, with a significant shift from 60% value tier to 85% premium in North American diapers [73][74] - Recent product launches include Huggies Skin Essentials and Snug and Dry, which leverage advanced technology for better performance [101][106] Supply Chain and Cost Management - A new global supply chain organization was established to drive efficiency and standardization across product platforms [41][46] - The company is adopting a proactive risk management approach, including programmatic hedging and strategic supplier relationships to manage costs effectively [35][36] Tariff Impacts and Guidance - The company anticipates a gross impact of $300 million from tariffs, with two-thirds of this impact stemming from China [84][96] - The management is exploring ways to mitigate these costs through network reflowing and other strategies [86][90] Marketing and Advertising Strategy - The company has doubled its advertising spend since 2018, focusing on storytelling to enhance brand perception rather than relying on promotions [126][128] - The CEO expressed a preference for advertising over promotions, viewing the latter as potentially dilutive to brand value [128][129] Additional Important Insights - The company is committed to maintaining investments in innovation and brand support despite the challenging market environment [77][100] - There is a strong bifurcation in consumer behavior, with higher-income households continuing to spend on premium products while budget-constrained consumers seek value [62][65] This summary encapsulates the key discussions and insights from the Avanos Medical conference call, highlighting the company's strategic direction, financial performance, market challenges, and innovation efforts.

Financial Data and Key Metrics Changes - The company achieved adjusted net sales within guidance range, with adjusted EBITDA exceeding the upper end of guidance by approximately $6 million due to planned expense shifts [4][5] - Adjusted net sales decreased by approximately 3% year over year, while adjusted EBITDA increased by 25% to $57.5 million, resulting in an adjusted EBITDA margin of 7.2%, up 160 basis points from the previous year [15][16] Business Line Data and Key Metrics Changes - The decline in volume and mix was attributed to planned margin management actions, service impacts from the griddle facility restoration, and slower takeaway later in the quarter [16] - The acquisition of Harris Teas contributed nearly 5% to sales, while pricing adjustments provided a benefit of approximately 1% [16][17] Market Data and Key Metrics Changes - Private brand unit sales were slightly negative in the quarter due to consumer pressure and the timing of the Easter holiday, but categories showed some recovery in April [8][9] - The private brand industry dynamics remain favorable, with healthy price gaps allowing private brands to gain market share in a lower consumption environment [9][10] Company Strategy and Development Direction - The company is focused on strengthening its supply chain, margin management initiatives, and restoring production levels in key categories while pursuing profitable new business opportunities [22] - Strategic decisions have been made to streamline operations, including reducing management layers and consolidating divisions to enhance efficiency and decision-making [13][14] Management Comments on Operating Environment and Future Outlook - The operating environment is more dynamic than anticipated, but the company is committed to controlling its operations and executing plans to drive profits and cash flow [5] - The full-year adjusted net sales guidance is reiterated at a decline of 1% to growth of 1%, with expectations of a mid-single-digit decline in organic volume and mix for the second quarter [19][21] Other Important Information - The company has visibility to deliver $250 million in gross supply chain savings through 2027, with significant recent success in procurement [12] - The company is focused on maintaining a balance sheet that supports its net debt to adjusted EBITDA ratio, aiming for a target range of 3% to 3.5% [52][53] Q&A Session Summary Question: How is macro uncertainty affecting consumer demand for private label? - Management noted that any shift towards private label would be upside in their numbers, as consumers are seeking value and the quality and price gaps for private labels are favorable [27][28] Question: What should be expected regarding margin management activity? - Management indicated that organic volume and mix are expected to decline about 1% for the full year, with margin management actions impacting the top line [30][31] Question: How are decisions made regarding bids that do not meet margin targets? - Management explained that the focus is on aligning capacity with customer needs, streamlining product offerings, and enhancing operational efficiency rather than being pressured by retailers [37][38] Question: What are the thoughts on snacking categories and their performance? - Management acknowledged some pressure in snacking categories but noted that consumers are still snacking, with expectations for improvement in the back half of the year due to seasonality and recovery of the griddle plant [42][45] Question: How is the refill of the griddle pipeline progressing? - Management reported that all lines are running and while it will take time to fill the customer pipeline, they expect benefits to materialize in the second half of the year [49][50] Question: What is the focus regarding capital allocation and leverage goals? - Management confirmed that the target leverage remains at 3% to 3.5%, with plans to rebuild cash positions and reevaluate options for capital deployment later in the year [52][53]