Good morning, ladies and gentlemen, and welcome to the Avanos First Quarter 2024 Earnings Conference. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] This call is being recorded on Thursday, May 2, 2024. I would now like to turn the conference over to Scott Galovan. Please go ahead.

Good morning, everyone, and thanks for joining us. It's my pleasure to welcome you to Avanos 2024 First Quarter Earnings Conference Call. Presenting today will be Joe Woody, CEO; and Michael Greiner, Senior Vice President, CFO and Chief Transformation Officer. Joe will review our first quarter results, the current business environment, as well as provide an update on our transformation efforts. Michael will share additional detail regarding these topics and affirm our 2024 planning assumptions. We will finish the call with Q&A. A presentation for today's call is available on the Investors 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 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 will 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 Joe.

Thanks, Scott. Good morning, everyone, and thank you for joining us to review our operational and financial results for the first quarter 2024. First quarter results were in line with our expectations as Digestive Health continued its consistent performance, and we experienced additional positive shifts in our Pain Management and our Recovery business. As we noted in our 2023 year-end earnings call, our quarterly performance for 2024 will improve as the year progresses, following a similar cadence to past years. The demand for our products remain strong, and our supply chain organization is executing effectively to support our commercial strategy with our backlog at about $1 million at quarter end. This is a significant improvement over last year's first quarter back-order levels of over $8 million. We are continuing to make steady progress against each of our transformation priorities, which both Michael and I will talk further about. And as always, our primary focus is on getting patients back to the things that matter as we meet the needs of our customers. For the quarter, our sales from continuing operations were approximately $166 million, adjusted for the effects of foreign exchange and the impact of our strategic decision to discontinue revenue streams that did not meet return criteria specified by our portfolio transformation priority. Organic sales were up 4.7% compared to a year ago. We generated $0.22 of adjusted diluted earnings per share and above $21 million of adjusted EBITDA for continuing operations. Our 3-year transformation priorities continue to drive our execution and our first quarter results provide confidence in our ability to be within the ranges of the 2025 financial targets we established last year during our Investor Day. Now I'll spend the next few minutes discussing our results at the product category level. Our Digestive Health portfolio continues…

Thanks, Joe. As you shared, we are pleased with our first quarter results, results that show continued progress against our transformation and support our full year targets. Since 2021, we have been delivering mid- to high single-digit growth in our Digestive Health portfolio and again delivered that level of performance in the first quarter. Our Game Ready portfolio grew double digits this quarter compared to prior year. And our newly acquired Trident product line has produced results above our expectations, capitalizing on our U.S. market launch, which kicked off in November of last year, and continued momentum in international markets. As expected, we continue to see price volatility in our HA business. However, we believe we have set the right strategies in place to largely mitigate unfavorable price impacts. This quarter, our HA sales are in line with our fourth quarter and prior year through higher sales volumes. From a continuing operations standpoint, net sales were $166.1 million. We generated $21.6 million of adjusted EBITDA and $0.22 of adjusted diluted earnings per share during the quarter. Adjusted for the effects of foreign exchange and the impact of our strategic decision to discontinue revenue streams that did not meet return criteria specified by our portfolio transformation efforts, organic sales were up 4.7% compared to a year ago. Our adjusted EBITDA grew by 34% compared to a year ago with adjusted EBITDA margin expansion of 290 basis points. Our adjusted diluted earnings per share grew by 69% compared to a year ago. This margin expansion was positively impacted by top line growth, manufacturing and operations execution and continued SG&A optimization efforts. For the quarter, our adjusted gross margin was 59.8%, which is sequentially favorable to our fourth quarter 2023 results and versus the first quarter of last year. We were able to…

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from Kristen Stewart at CLK.

And I was just wondering if you could further expand upon your commentary around the Pain Management business and what kind of gives you the confidence that you're going to see improved results for the balance of the year.

Kristen, thanks for the question. So a couple of things. I mean inside of that, we saw Game Ready at double-digit growth. We talked about the RF business and that portfolio of RF at sort of mid-single-digit growth. It got hurt by some exits that we purposely did in that group, but we also sold 80 generators during the quarter, which sort of shows us that we're trending in the right direction. We're seeing a good adoption of the Triton technology from Diros. We see some positive things also in the international business, albeit it's a smaller part of the business. And the other thing I would say is that, between ambIT and On-Q, that leveling off, we see real potential for low single-digit growth for surgical pain this year, which is the first time in a long time. So everything is pointing in the right direction. We feel like we'll be able to point to some further evidence in Q2, and we're standing by the perspective that, outside of HA, which kind of runs through by Q4, we've got a mid-single-digit grower now in that pain business for the full year.

That's perfect. And then I was wondering if we could switch gears and just talk a little bit about your appetite for M&A. You mentioned the low leverage ratio and plenty of firepower to kind of do deals. How should we be thinking about potential transactions as we look out over the next 12 to 18 months?

We've been primarily focused in digestive, as we laid that out and, again, the types of bolt-ons that we've been doing. We've actually passed on a couple of transactions that we thought were -- 2 things really, multiples were a bit high, but also when we looked internally and through third parties at some of the growth perspectives of the businesses, they didn't really seem to be there. And we feel like, in this stage of our execution, that's not really where we want to be. But the pipeline itself is robust around digestive. That's probably where you'd likely see something first coming from us.

[Operator Instructions] The next question comes from Danny Stauder at Citizen JMP.

So the first question is just on gross margin. It's nice to see the improvement. And then you also gave some 2Q commentary that points to another good quarter. But how should we think about gross margin for the rest of the year? You noted that you have been able to offset some of the impacts from HA. But what is baked in or what is assumed as far as HA stabilization in the back half of the year? And what gets you to the higher end of your guidance range?

So the gross margin for the year, quarter-over-quarter, will be fairly stable, give or take 100 basis points. To your point, Danny, in the back half of the year, we do anticipate gross margin points to be above 60%. As you know, our back half of the year is our heavier revenue part of the year and the mix in the back half of the year is a little bit more favorable. And third, it gives us another few months for a continuation of the cost savings and other initiatives we're doing at the plant. So very pleased with the first quarter in confidence, as we announced on the call today, around where we should be in 2Q, somewhere around 60%. And then we should be heading north of 60% as we get into the back half of the year based on the few things I just mentioned. So we're doing all the right things in the plants. Mix is obviously helpful. HA, to your point, is going to be very stable through the year. We'll be doing somewhere between $9 million and $12 million per quarter, each quarter, and that lines up with the negative 20% decline in HA that we had indicated on the year-end earnings call.

Great. And then just as a follow-up, focusing on Game Ready double-digit growth in the quarter, another strong quarter, but could you just give us any more color on what's driving this to be a little bit above your growth expectations? And then, just given the quarter and what you're seeing as far as trends, do you still think that mid-single-digit growth is what it could be this year? Or any color there would be great.

Sure. No, Game Ready obviously driven by sports medicine and orthopedic procedures. I think you're seeing some of the relationships with distributors and some of the work we've been doing on our direct force starting to pay off. But on top of that, we're making some strides in the international markets as well with Game Ready, where he had been a little bit more passive before. We definitely see Game Ready as a mid-single-digit grower. And then as I was saying earlier, if you take HA out of the equation until we settle out on the pricing element of that probably in the Q4-ish range, we're more and more confident on the mid-single-digit growth of the Pain Management and Recovery business at mid-single-digit growth for the full year.

One thing just to add to that is on the - one thing to add, Danny, on the Pain business, it primarily hurt us in the first quarter in Pain with our IV infusion and needles, kits and trays product families. Those are less focused on, obviously, historically. We do have some things throughout the year that we will refocus some energies there and strategies there. But those were the 2 categories, IV infusion, which is in our surgical pain grouping, and needles, kits and trays, which is in our interventional pain grouping. That hurt us in the first quarter from a total growth standpoint, but we don't anticipate that to be the case as we enter the back half of the year, which is further supportive of and tying to Kristen Stewart's earlier question, further supportive of what we'll be able to do in the back half of the year in Pain in total.

Thank you. There are no further questions. You may proceed with closing comments.

Good. Our focus has been on execution. We have done a lot of things, successfully executing on the product exits, divesting RH, making the Diros acquisition and increasing our shareholdings through our repurchase program. I think we've established now the foundation to meet our midterm financial commitments, our transformation priorities and shaping our portfolio, which we think are in an attractive market. So we're confident that we're well positioned, as we outlined in the script, for sales growth, margin expansion and meaningful free cash flow generation through '24 and accelerating that in '25. So I appreciate everyone's attendance on the call. Thank you and your continued following of Avanos.

Ladies and gentlemen, this concludes your conference for today. We thank you for participating, and we ask that you please disconnect your lines.