Good morning, and welcome to the Avanos First Quarter Conference Call -- First Quarter Earnings Conference Call. [Operator Instructions]. Please note, today's event is being recorded. I would now like to turn the conference over to Dave Crawford, Vice President of Investor Relations. Please go ahead, sir.

Good morning, everyone, and thanks for joining us. It's my pleasure to welcome you to the Avanos first quarter earnings conference call. With me this morning are Joe Woody, CEO; and Steve Voskuil, Senior Vice President and CFO. Joe will begin with a brief review of our performance and provide an outlook for our business and progress toward our 2019 priorities. Then Steve will review our results, offer details on our financial performance and earnings outlook for 2019. We'll 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 forwarding statements related to the company, our expected performance, economic conditions and our industry. No assurance can be given as to future financial results. Actual results could differ materially from those in forward-looking statement. For more information about forward-looking statements and the risk factors that could influence future results, please see today's press release and our prior 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 Joe.

Thanks, Dave. Good morning, everyone, and thank you of your interest in Avanos. Let me start by saying that in the first quarter, we had a strong start executing against the 2019 priorities we outlined on our fourth quarter conference call. This quarter, we delivered results in line with our financial plan, we continued to invest in growth initiatives, we advanced our IT transformation with the successful go-live of our ERP system in EMEA, and we strategically deployed capital with our investment in NeoMed. I'm very pleased with our start to the year as sales grew 5%, and we earned $0.15 of adjusted diluted earnings per share. Looking ahead, we are maintaining our 2019 guidance and key planning assumptions and expect sales and earnings to accelerate throughout the year. For the quarter, double-digit growth continued for COOLIEF in Interventional Pain, and we delivered solid growth in Digestive Health across our enteral feeding and CORPAK products. International also delivered a strong quarter driven by demand in Respiratory Health and Digestive Health as we cycled against a weaker prior year comparison. This year, we're on track to deliver accelerated growth in our international regions, as we continue to strengthen our team to move this business to double-digit growth over the next few years. As expected, we continued to see pressure in our Acute Pain business. Two factors had impacted our performance: first, the continuing industry-wide drug shortage; and second, headwinds from last year's pain pump pre-filler disruption. As we outlined on our last earnings call, we planned for flat to slow growth during the first half of the year with growth accelerating in the back half. With this as a backdrop, we are monitoring the availability of bupivacaine and ropivacaine, along with innovating long term in this space. Ropivacaine is used in…

Thanks, Joe, and good morning, everyone. Let me also say that I'm pleased with our first quarter execution and that the initial results from our investments are encouraging. Additionally, I want to acknowledge our team's work across Avanos as we completed the crucial first step in implementing our new ERP system. To date, we have met all key milestones and deliverables, including implementing the first phase of the rollout as we went live in our EMEA region on May 1. While early, the first phase of this implementation appears to have gone very well. As we're prepared to go live with the rest of the system in the second half of the year, we now anticipate spending up to an additional $10 million compared to what we previously communicated to delivering on-time implementation. Besides the progress on our ERP implementation, in recent months, our teams worked to end our limited risk distributor agreement with Owens & Minor, advanced our rebranding efforts and continued the process of optimizing our distribution network. Now let's begin with a review of our first quarter results. Overall, we delivered sales of $164 million, an increase of 5%, in line with our expectations. Game Ready sales contributed 6% of our growth. Unfavorable currency exchange rates also impacted sales by 1%. As planned, these factors resulted in flat organic volume and pricing. As outlined previously, we continue to expect slower growth for the first half of the year and then acceleration in the second half. We saw another quarter of strong growth in Interventional Pain driven by increased adoption of COOLIEF. In Digestive Health, we saw higher-than-anticipated distributor demand for our CORPAK and legacy enteral feeding products. Looking ahead, we expect distributor inventory to revert to normal levels. In Respiratory Health, growth was below its normal mid-single-digit…

[Operator Instructions]. Today's first question comes from Larry Keusch of Raymond James.

So I guess first question, given the flattish organic growth through the first quarter, can you talk, Steve or Joe, sort of how you are -- how the revenue guidance is constructed for the second half of the year? How do you think about that accelerating?

Sure, Larry. I'll make a few comments, and then Steve will comment as well. But one thing, I think, to remember is that outside of the Acute Pain headwinds that we're working our way through, we currently have a mid-single-digit organic growth rate in the business. Our intention is, obviously, that will accelerate from -- to high over time, but we are getting double-digit growth in COOLIEF. We're real pleased with international. Game Ready, as a reminder, will contribute 3 points for the full year. And in addition to that, as we move along, some of these comparables in the second half will get a little bit better for us. In addition to that, on the other side of things, we are also reducing our investment. We talked on the first call about the heavy investments, the sales meeting that we had, more importantly, the direct-to-patient and clinical studies that we did as well. But essentially, we expect that we get better revenues sequentially, better margins sequentially in bottom line as well as we move into the year, and that's how we planned. But Steve, you may want to add.

Yes. I agree. Sequential build, Q2 -- we had a pretty strong Chronic Care in Q1 despite the comp. DH did better than we thought, expected some inventory adjustments, so that will probably come back in Q2. But certainly, ON-Q expecting strong back half results and COOLIEF on the back of all of the investment on the direct-to-patient side things. So that's really the fundamentals underlying the profile.

And I think, Larry, I'd just say one more thing, what's on everybody's mind, obviously, is Acute Pain. And then we -- after we had our earnings call for Q4, there was the Pfizer announcement. We do think that, that has some impact, but we don't think it's going to be for the full year. I think it's better in the second half as well. We're more focused on moving our customers over time to Leiters. So that all plays together.

Yes. Okay. That's perfect. I wanted to get into that. So I guess, look, I recognize that you guys do not directly buy the drug and so you've got somewhat limited visibility. But I guess, sitting here today on May 7 versus where some of the start did happen back in the earlier portion of the year, is there anything there that has changed or that you're hearing that may give you some sense that ropivacaine may, in fact, be in a position to come back? And I guess, along with that, maybe, Joe, if you could just talk a little bit, you mentioned Leiters and the improvement in the growth there. But they're really not restricted in their API access. So maybe just talk a little bit about where that pump filler is, since it's exclusive to you guys kind of with your volume. And where do you think you can ultimately take that?

Yes. Number one, Larry, we did a pretty thorough survey of all of our customers to really understand their decisions and their supply chain. And really what came out of that, frankly, was that customers have been a lot more resilient than we expected. On top of that -- in locating drug and being flexible. And on top of that, we've been continuing to move customers over to Leiters. We do think that ropivacaine in the second half will come back, but I do want everybody to be aware that bupivacaine, which is approximately 30% of the market, is probably going to remain a problem into 2020. But that said, about 1/3 of our customers that were in pre-fill had been moving to Leiters, that increases every quarter, and we're seeing high double-digit growth and 100% reorder rates from those customers. So it is a matter of moving them over to an API. With that said, Leiters is also working on a longer-term sterile-to-sterile approach as well that we're talking to them about. So there are other solutions as well that we are working on. And so that's why we have a lot of confidence in the second half of the year and moving this thing back to where we were.

Okay. Last one for me. Just on free cash flow guidance. I just want to make sure I understand how you guys are thinking about the free cash flow now versus where we were at the start of the year.

Yes. I would say, we're still thinking about it in the similar way. Obviously, we had a lot of separation cost in the first quarter. We talked on the remarks about the LRD termination, which was probably 2/3 of the separation cost spending in the first quarter. Obviously, that's behind us. And so the separation costs kind of hit a high watermark in Q1 and start to take rough. We also had pretty high litigation costs in Q1. So if you take all that aside, you start to see the benefit on that side of the capital. And then following the P&L, sales ramp-up and earnings ramp-up drives more cash. We've got the front-end loaded investment on clinical and DTP that rolls off and drive those sales growth in the back half. So I think we're still confident in the cash generation for the year. But profile -- much like the P&L itself, profile is more back-end loaded.

Especially the quarter end cost before separation costs and the litigation, and this would not be a typical quarter.

And our next question today comes from Ravi Misra of Berenberg Capital Markets.

So just a couple for me. Just wanted to parse out a little bit the commentary around the Leiters sales, which seems to have increased but the pre-fill accounts were down year-over-year. How do we think about that? And then just a couple of follow-ups on NeoMed after that.

I'll make a couple of high-level comments, and I can see that Steve wants to jump in as well. But generally, the customers that have gone over to Leiters, which represents about 1/3 of our filler customers, are growing high double digits. They're reordering at 100% rate. They continue to grow. That's very positive for us. So obviously, we're very focused on moving customers over. Customers in the second pool that decided to just fill in-house are typically down sort of low double digits. And the reason is it's a little bit more difficult process for them to do all of that and the utilization is lower. But that's actually an opportunity for us to keep moving this focus over to Leiters. And there's a series of customers that over time have left completely, and that's really the bigger issue for us versus competition and even bigger than the drug supply, but we're getting better and better and more customers moving over quarter-to-quarter, which is why we feel confident in the mid and long term and especially in H2 with comparators. But Steve?

I think you've captured it. The Leiters are doing great, strong double-digit growth. We want to get as many former pre-fill customers over there as we can, and then meanwhile help hospital pharmacies who are struggling with the time it takes to fill on pre-defined solutions.

Okay. Great. And then on NeoMed, just hoping you can help me understand a little bit the strategy. First, is that kind of -- can you just kind of walk through the equity accounting? And then you said you have the exclusive option to buy the rest of the company. Can we just understand kind of like the historical growth there for it? And would that suggest kind of a valuation of them about $35 million, taking that $7 million as a 20% investment?

Yes. It's been sort of growing like a mid-single digit alongside where our Digestive Health business is. If you do the math on it, it's sort of a one time's revenue, not unlike Game Ready or a deal like CORPAK. It will synergize right into that channel. So it's going to be strong for us. So we think we can affect the growth in an even stronger way. We are going to look at our diligence a little bit more accelerated. We have the option to convert that to a sale inside of this year. And frankly, we were working on a little bit larger acquisition. They got to a valuation point that we did not think was good for our investors or good decision for us, which is why we put this one to the side, but we fully have the option to expedite that inside of this year. And again, what I see is this is a great acquisition for Digestive Health because we're going to be able to contract differently with a broader portfolio. This will focus more in the low birth weight, neonatal space, where we don't participate today. And again, if you think of it in terms of CORPAK, there's this plenty of synergy available to us in this deal, and it fit right into our channel.

Great. And then just maybe one last one on the P&L. And Steve, congratulations. How do we just kind of pace this SG&A investment? If you can just help us calibrate our models there. And you pointed towards accelerating sales and EPS growth. Can you just help us just think about what the rest of the year looks like on the expense line?

Sure. Yes, I'd be happy to. So the -- from a profile standpoint, obviously, Q1 is high. DTP, heavy clinical and R&D was also high. What I would expect about it looking forward is we should see sequential declines as we go over the next two quarters and then not atypically we'll see a pop in the fourth quarter. And some of that could be R&D timing. The year-end spending tends to be a little bit higher. So I think about it down for the next two quarters and then probably up in the fourth.

And just remember, Ravi, that in the last call -- everything that's in there, it's again not normal, the COOLIEF in TV ads in the 13 markets, global sales, we knew that thought was very necessary, clinical studies that are going to benefit COOLIEF, in particular, sales force expansion and, obviously, an uptick in comp and commissions from last year. So now alongside of that, we've committed to $7 million to $10 million in cost savings. Some of that's already in the works, and a bulk of that picks up in the second half and ties right into the IT transformation. So that's why Steve's got the confidence and we do. And we knew it's going to be a tough Q1, sort of half of Q2, but then it really starts to change, as Steve outlined.

And our next question today comes from Rick Wise of Stifel.

Maybe let's start with back to Acute Pain again. I just wanted to make sure I'm understanding Acute Pain growth rate in the quarter had to be down year-over-year, I assume, and I don't know, Steve, if you want to be more specific about it. But I noticed in your slides, on Slide 6, you're saying you plan for a flat to slow growth in the first half. And if Acute Pain was down in the first quarter, and it's going to be flat to slow growth, it would imply it's going to be, how I should say it, better or a lot better year-over-year in the second quarter. Is that -- am I thinking about it correctly?

Yes. You're thinking about it the right way. The first quarter was down single digits in Acute Pain, so just as a reference. Now inside there, you have some IV business as well. IV is distributor-driven, obviously, not much margin, and that was down a bit quarter-over-quarter. But ON-Q itself was also down single digits, so just as a reference point. And you're right, as you look forward across the quarters, you see the pickup more in the back half than the first half, clearly. And of course, the fourth quarter tends to be a strong quarter for that business anyway.

And Joe, turning to your comments on international and strengthening the OUS team, et cetera, a couple of questions here. How much of this -- the initiatives internationally are, let's call them, blocking and tackling versus new product registration? So couple of questions around here. You've emphasized this as big growth drivers. I guess, looking ahead, one, what kind of growth should we expect? Do you expect -- does the new IT system facilitate that growth in some kind of way? Just talk us through some of the moving pieces and where we're heading, if you would be so kind.

Yes. So in international, a lot of it this year is blocking and tackling. Arjun Sarker has a full team now in Asia-Pac. As of sort of the end of May, you'll have a full team in place in EMEA. It's inclusive of leadership and distributor management. And then as you move into the end of this year and into 2020, different initiatives taking hold, whether it be registrations or marketing approaches or medical education. It's all -- we had a good quarter. We're not expecting every quarter to be that way this year. However, we do expect the full year performance will be more like high single digit. And if you think about it, that's moved from sort of 3% 2 years ago to 5%. And then if we hit the high single digit, we believe we'll be well on track for double digit in international moving forward. And that's our goal. And again, that's a place where having the people in place, the right investment and the right strategic plan in and of itself allows for growth what we've outlined as sort of $140 million of our total business. And it might be worth just reiterating because you said catalyst for growth. I mean, to me, what I think about, obviously, is COOLIEF being a major catalyst for our business, certainly international, the Digestive Health business with the CORTRAK standard of care, and then outside of that, we intend to enhance with M&A. And for us, I think everybody on the call knows, the cost that comes out, whether it's the $7 million to $10 million this year and the $14 million to $18 million next year, really significantly improves us from where we are.

Sounds good. And Steve, gross margins, you've talked about 2019 gross margins in the low 60s. Obviously, first quarter of '19, 61.6% is sequentially higher than the fourth quarter. Is that the right way to think about the cadence throughout '19, each quarter sequentially higher? And maybe again, I appreciate you -- many factors here are moving in that direction, but maybe some of the biggest drivers of that improvement, is that the right way to think about it?

Sure. Yes. You can expect it to improve over the year. I wouldn't get as specific as at sequential every quarter because we do have some movement inside there. Clearly, in the back half, volume will help as we get more through the top line there that will drive efficiency at the plants. And as Joe said, some of the cost savings will be higher in the back half. So we're right in the middle now of the distribution optimization work, for example, as we don't have any savings really from that in the first quarter, not much in the second quarter, but then that ramps up in the back half as well. So all of that will be part of driving improvement in the back half, still in line with the overall guidance for the year that you said kind of low 60s.

[Operator Instructions]. Today's next question comes from Jonathan Demchick of Morgan Stanley.

Had, I guess, two quick questions, one kind of following up on the P&L and then another on pain management. So maybe I'll start off on the P&L. So heading into the year, I guess, we knew that 1Q would, obviously, be the low point on margins given some of the headwinds you guys have listed off, like, lower sales, heavier investments, more limited cost savings. But getting to the lower end of guidance, there actually needs to be, obviously, a lot of margin improvement as you've outlined. But I mean, basically doubling the margins from the 1Q levels, if I'm doing my math right. So you kind of quantified the $7 million to $10 million of cost savings that we're going to see kind of ramp up. But is there any way that we can kind of think about some of the DTP spending, some of the clinical studies? Can you quantify the levels that were really in the first quarter that potentially go away? Because from looking at it, like operating expenses, as you've kind of talked to, really do need to step down from current levels. So just any clarity on like the absolute dollars that are getting removed from the P&L, I think, would be really helpful to figure out more visibility into the broader ramp.

Yes. I'm going to try to avoid giving you specific dollars on DTP and the same on clinical, but those are the key drivers. DTP is a significant year-over-year investment for us across Q1 and the first half of Q2. So that's a component. Clinical, heavy on the front end. Joe mentioned earlier in response to sales conferences for us, which, again, given our size, is not an insignificant investment that hits OpEx in the first quarter. So if you just take those three alone, that's going to drop quite a bit of margin improvement right there. And then if things around cost savings, again, some of it's in gross margin, but we'll also see some of it on the OpEx side as the IT system rolls up, again, some of that IT specifically more to the very end of the year. But those are the key drivers, Jon. So I want to stop short of starting to break out the P&L by line item, but you have all the right drivers.

And the DTP will be included about mid-May, but you can imagine 13 markets major advertising folks are seeing that. I hear a lot of comments on the advertising. It's a fairly significant expense for us. And the only thing I would add is that we have our attention on this, and we are managing very tightly for the remainder of the year.

Understood. And just on pain management, I mean, it looks to have declined maybe mid-single digits organically when you start backing out Game Ready. And given just the variation in growth rates of some of your major products, mainly ON-Q and COOLIEF, and I think you've kind of talked a good amount about ON-Q, but was hoping you can provide a little more detail, I guess, around the growth rates for COOLIEF or at least how it's growing this quarter relative to the last few and maybe kind of talking to some of the recent investments if that's already had a contribution or if that's supposed to, if you'd expect that to really drive material acceleration into the back of the year.

Yes. It continued with the double-digit growth in COOLIEF, which I'm very happy with. One of the things that you don't see quite as readily that is a headwind at the moment is the needles, kits and trays portion of that business for Q1, which are the accessories, if you will, to the procedure. And that's just sort of a shift between distributor ordering in Q4 and Q1. Frankly, you see that same thing in the IV Infusion business for Acute Pain. So those are actually wickets to the growth rate, where we're making progress in ON-Q and then obviously we're maintaining with COOLIEF. We do feel like that as we move into June, we're going to start to see benefit from this direct-to-patient. We're getting a lot more patients through to physician appointments than we have in the past. I think at one point, we were nearly halfway to our number for the full year last year and just a very short period of running these ads. The only thing I would add is that we're not really seeing an impact at all for COOLIEF from anything that Medtronic is doing, and they're not delivering products as far as we know. I think we've reminded everyone that we also have a next-generation that we'll see at some point this year in different probe sets that we already think we're ahead and certainly ahead in the clinical data. So I do believe that's going to be and remain a really strong growth area and catalyst for us. And then the bigger thing for this year to think about is the CPT code decision in July, which opens up differentiated reimbursement for us, but then also helps us with the product pairs or the management and care, which sometimes make negative decisions on coverage, and that means there's just more market for us. Hence, that's also why we spend so much in these clinical studies.

And today's next question comes from Kristen Stewart of Barclays.

Steve, just wanted to say good luck at Hershey. We will miss you. So just a couple of follow-ups here. So just on the change in GAAP guidance. It does look like you guys are now expecting a pretty significant loss now for the year. I think earlier, you had commented that you're not expecting any change in cash flows, but could you just maybe help us understand kind of that bridge to GAAP? And I guess are you expecting positive cash flow this year or negative?

Yes. We said we will have positive cash flow for the year, again, more to the back than the front. And the bridge probably does pretty good job in the tables and the press release, but the bridge is really those separation constant, particularly, again, first quarter being a high watermark for those on the back of the LRD termination, litigation, which is an adjusting item for us, also high in the first quarter. I wouldn't expect that as a run rate going forward. So those two are going to start to bleed off going forward. And those two right there, that's a big lift from a cash flow standpoint. So those are probably the two biggest movers and then obviously the business performance itself running through the P&L.

What's the change relative to the original guidance? It looks like restructuring and IT charges are expected to be higher and post-divestiture charges. Is that -- I think you had mentioned about $10 million extra for the ERP go-live. Is that predominantly the key figure?

Sorry, Kristen, I didn't mean to cut you off. That's the biggest piece. The separation cost is probably -- running a little bit higher than what we expected. Again, in the first quarter, the LRD component was more involved than we expected when we put that structure in place. And then the second one, which you picked up, is the IT side. And really, what we want to do there, we're off to a good start, but we've still got a lot of work to do, and the largest part will be the North American go-live later in the year and really want to make sure we fortify the investment there around both post go-live care, some additional testing on new modules that come into play and so forth.

Okay. And then just thinking kind of longer term, how comfortable do you guys still feel with the ability to achieve the long-range plan forecast, just given what you're seeing this year? It seems like some of the initial cost savings that you had earmarked are being reinvested back into the business. Looks like the IT expenses might be a little bit higher. I'm not sure if that means maybe get a little more on the savings side or if you just have better visibility on some of the cost. Just how do you think about getting to the LRP numbers, overall? Is it going to require M&A? Or do you still feel confident you can do without?

This is Joe, and I'm not sure Steve will comment. I mean, I always do remind everyone that without the headwinds in Acute Pain, we did grow organically 7% last year. We're headed back towards that direction with our business. But we also don't intend to stop at the 30 to 40 that we've talked about. And I think on the last call, I may have mentioned hiring Dave Ball, who was with me at Acelity, where we took $250 million cost out of that business, and he has the skill set in running the procurement, not only supply chain, but the project management office as well to manage that, and that was a really good process. And I think we'll find more cost here. One of the things that's frustrating, I think, to investors and to management is that the IT system really is sort of the lock that kind of once that's opened, we can get to a lot of these things really on the corporate cost side, SG&A. On the last call, we did talk about the investments. We thought it was an opportunistic time with the reimbursement and the clinical studies for COOLIEF. And yes, I mean, M&A enhances the plan, but we still feel like we've got a good opportunity to get more cost out, generally. I don't know, Steve, if you...

Yes. I would just go to your question, Kristen. Reinvesting the cost savings is not the new normal. That's not the plan going forward. We are betting on a winner. The biggest winner in the portfolio right now, COOLIEF, this year. That was the plan, and we're going to fulfill that plan based on the good results we saw in the experimentation we did last year. But that's not the new model. We're going to drive cash from savings. And as Joe said, we are working and have talked in the past about an additional phase of cost savings relative to supply chain, and Dave Ball is working through those details. We'll expect to talk more about that externally as the year progresses. So at the same time, we're generating -- looking for more savings to bring to the bottom line, but not all of it will be invested, certainly.

Okay. And then one last quick one. In NeoMed, how is that consolidated through the P&L? Will that be included within a line item or consolidated into sales? I'm just trying to figure out how that's embedded within the guidance now?

Yes. For now, it's not in guidance. It's going to be on the balance sheet as an equity investment until or unless we make a change in that ownership structure going forward.

And today's next question comes from Matthew Mishan of KeyBanc.

What are the remaining steps that need to take place to completely separate from Owens & Minor? We're no longer doing TSAs. We're no longer -- we no longer have anything kind of tied to them?

Yes. Biggest piece, as Joe touched on earlier, is really the IT separation. So as we come up live fully on our own system, the next step after that will be, you can imagine, the unplugging and disconnection of the 2 companies on the legacy IT system. That is the biggest piece. The remaining TSAs are largely connected to that IT separation. And we still have that in our plan to be completed by the end of the year.

Okay. And then just to understand the guidance, especially around the organic revenue growth, it does look like ON-Q is coming in a little bit worse than you guys had expected given the supply constraints. What is the offset to that in your current assumptions? Which part of the business is coming in maybe a little bit better to offset kind of some of the weakest?

If you think about it from a full year perspective, I mean, international for the full year, we're talking nothing about quarters now, but full year, I think doing better with COOLIEF absolutely with the DTP in there. And we are seeing, although this is also phasing by quarter, good underlying growth in our Digestive Health business, which gives us a lot of confidence. And then I think, lastly, we knocked through this respiratory, which we really haven't talked about the kind of the flu season impact and you work your way through that. It gets back to a more normalized growth for us than where it is right now.

Okay. And the last question on COOLIEF. Can you talk a little bit about maybe your placement growth for the boxes versus the recurring revenue? Is -- are placements keeping up with the double-digit growth you're seeing on maybe the procedure side? Or is it one outpacing the other?

Yes. I mean we -- we don't disclose the exacts, but we're -- it's about there or thereabouts, if you will quarter-to-quarter from where it would have been sort of 6 months or a year ago. We do now talk about the fact that we have 1,000 installed base units there and, I guess, it's about 850-ish or somewhere in there users. So obviously, some locations have more than 1 unit, some of those are doing standard, some of those are doing COOLIEF.

Steve, congratulations and look forward discounted tickets to Hersheypark.

We're all -- we've eaten a lot of chocolate here. I'm going on a diet after this call.

We are going to have a lot of chocolate, but I think you all should have some chocolate, too.

We're waiting for our gift baskets.

And our next question today comes from Chris Cooley with Stephens.

Just maybe two quick ones for me here at the end, and I apologize, I was juggling a couple of calls here this morning, if you touched on this at the outset. But just when we think about the NeoMed minority investment, I know you stated you were working on something much larger, so it has kind of gotten put to the side. But just want to be clear this isn't -- or is this a change in maybe the way you approach your strategic investments going forward where you would initially do a minority stake, maybe further evaluate the business and then roll it in? I just want to make sure how -- or what to read into that? I have a quick follow-up also on COOLIEF.

Yes. This was kind of an opportunistic element because we thought we had tightening going on, obviously, the separation, a larger deal. And so when I say opportunistic, I mean, for us to have this sort of a structure. The team has been working with this company for several years because it's such a nice fit. While we do have an open innovation platform that we've put in place, and we plan to do some investing along the way to get through to the table earlier on, on technology, this wouldn't be typically the way you would see us sort of structure something like this.

Yes, I would say, if we learned anything, it's doing an equity investment. This is much more consuming than M&A piece. But for that other deal, and really we just want to make sure we created plenty of cap space from a liquidity standpoint, we wouldn't have done this structure at all. But at the moment, it was just a good hedge against this other deal moving in a positive direction.

Okay. Super. And then I apologize I misspoke to it earlier, but when I think back to just your customer base on the pain side and, specifically, thinking about ON-Q, appreciate the color that you've provided between both ropivacaine and bupivacaine in terms of the pre-fill. But have you disclosed or would you remind us your mix between the customer base that currently utilizes pre-fill versus those that are doing it in-house just so as we can kind of try and think through the phasing of that supply ramp to the back half of the year?

You're asking the percentage of our customers that use pre-fill. Is that what you're asking?

Yes, essentially, just trying to think about what percentage of that is pre-fill that's been converted to Leiters and then seeing that ramp versus the percentage that's going to be falling off there on the home filters due to supply constraints.

Yes. So in days gone by before our pre-fill customers went out of business, we did about 70% of ON-Q with in-house filled and 30% was due -- went through a couple of different pre-fillers, one in particular. So 70-30 was the split before. Today, it's about 90% done in-house and about 10% that's done through Leiters. Obviously, the piece through Leiters is growing very quickly, and we'd like to see that percentage, obviously, balance out. And again, one of the benefits of Leiters is you get the lucky strike of both compensating for the pre-fill side, making it easier for them, but also avoiding the drug side. And so it's a double win everyone we move into that percentage.

Understood. Steve, again congrats on your new opportunity. You'll definitely be missed. All the best.

Thank you, Chris. I appreciate it.

[Operator Instructions]. Today's next question is a follow-up from Kristen Stewart of Barclays.

Joe, I just wanted to go back to the M&A question. I was wondering if you could update us on how you're thinking about the deal sizes. I think you said in the past that you had about $650 million in M&A capacity. Is that still how we should think about things? And was the deal that you were looking at, it sounds like that could have been what you've described as more of a growth-oriented deal. Is that the way we should think about that? Or was that a smaller or I said more of an accretive deal, I guess, a larger version of CORPAK or Game Ready?

Yes. You're right about the $650 million in capacity. And when we say large deal, I don't mean like either Stryker or those companies are going to spend billions or a billion. For us, several hundred million is a big deal. We would look at growth. We still want to be accretive quickly like 2 or 3 years growth deal and, certainly, our other metrics remain in place for the smaller deals. But at the moment, we're primarily looking at the bolt-ons, and we have a pretty robust pipeline as well. And I'm not going to guarantee any M&A because it's too hard to call, but we're set up pretty well with -- obviously, you can see the ability to do at least one and there's a couple of other bolt-ons that are near term as well.

Yes. I would just say it is an example. It's probably the first deal that we've ever walked away from on price and value, usually, it's a due diligence issue. So I would just say, it's an example of us trying to be good stewards of capital, at the same time not getting caught up in a frenzy on any particular asset.

Okay. Perfect. And then you'd mentioned some distributor shifting. I guess that was more within respiratory, I think, this quarter. Can you help us maybe quantify that? Or correct me if I'm wrong.

Yes. You're close. It was in DH, primarily. We had some distributor benefits in Q4. We thought that would bleed out in Q1. In fact, it didn't. And so at some point, we're going to see that inventory normalize. Order of magnitude probably $3 million kind of range.

And ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Joe Woody for any closing remarks.

I'd just like to thank everybody's interest in Avanos. And as you can tell from the call, we've got a lot of confidence in the business outlook and our ability to deliver against the priorities that we've outlined. Fundamentals are there in the business, and we are well positioned to continue value creation for shareholders. Thanks, again.

And thank you, sir. Today's conference has now concluded, and we thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.