Thank you all. My name is Caroline Borowski, I am part of the J.P. Morgan Healthcare Group here. I would like to introduce Joe Woody, the Chief Executive Officer of Avanos.
Thank you, Caroline. Good afternoon, everyone. Appreciate everyone here live in the room, and those of you that are on the webcast, appreciate your interest in Avanos. It's great to be live again at JP Morgan, and we've had a good meeting so far. I have three things that I wanna do today. One is update on our portfolio and talk a little bit about our vision.
The second is we wanna give an update on 2022. Third, and most importantly, we wanna talk about a transformation, a three-year transformation in our business that we believe is gonna create a lot of value. As always, I will be talking about forward-looking information. We can't guarantee that projections come out the way as planned. There are certainly lots of risks and uncertainties in the presentation.
As well, we utilize non-GAAP financial measures. We think it's a good way for investors to understand the business. But most importantly, we encourage everyone to go to our investor website and to make sure that as you research the company, you are reviewing our 10-K and the 10-Q reports and all of our SEC filings for that matter.
First I wanna start with who we are, and our vision is to be the best at getting patients back to the things that matter. We're an $815 million-plus global revenue company involved in pain management and chronic care. We have large addressable markets that give us an opportunity to grow across our portfolio. Our two franchises are chronic care and pain management.
In chronic care, you can think of very seriously ill patients that need assistance in feeding, in the hospital and even at home in their daily lives. In pain management, we're focused on orthopedic recovery and healing, in particular before a total knee where patients are treated for OA, and secondarily to that, after a total knee where we would use non-opioid solutions like our ambIT product in the ambulatory surgical center.
We do have a diversified portfolio, importantly with market-leading products in the U.S., eight that have market-leading positions. This has really afforded us a chance to do a lot of bolt-on acquisition during my tenure, and quickly integrate and change the trajectory of growth for the acquisitions that we make.
We do business in 90 countries outside of the U.S., and we have a great opportunity to duplicate the success that we've had in the U.S. on an international level. I'm just gonna transition to talk about our two franchises. The first is chronic care, a vital lifeline from hospital to home.
The chronic care business generates the greater portion historically of our cash and EBITDA, and we have market-leading positions really across the board. The first three products, MIC-KEY, CORTRAK 2, and NEOMED, are digestive health products. The last product on the right-hand side of the slide is our Ballard Closed Suction Catheter, used for patients that are on ventilators, used a lot in the pandemic as well.
A couple of drivers here I'll talk about, but I think the takeaway is that this business is a mid-single-digit growing business on a consistent basis, globally. That's driven by MIC-KEY, which we continue to innovate and have international opportunities to grow above market. Our CORTRAK product is used for the visualization of placing nasogastric feeding tubes to reduce the number of complications involved in that procedure.
That's a high single-digit growing product line. NEOMED continues to grow at double-digit. We think it will continue to grow into 2023 at double-digit, benefiting from the ENFit connection standardization that's happening on a global level with a broad set of products for pediatric and neonatal patients.
Ballard, we think will continue to grow above market with in particular opportunity internationally because our United States market share is very high, also with the innovation around infection control for patients needing ventilation. We have outstanding channels where we're easily able to bring on bolt-on acquisitions and quickly
integrate them. I think the takeaway here is that we're gonna spend a lot of our focus time around digestive health, and we'll come on to that more in the presentation. The next franchise is the pain management franchise, where we're getting patients back to life primarily around orthopedic recovery and healing and pain management. The products that you see here on this slide, many of them are very recognized brand names like COOLIEF, Game Ready , and ON-Q.
Each of these franchises we intend to build and expand upon on an innovation level and through M&A. Over the pandemic, primarily tied to procedures and the supply chain challenges that everyone experienced in the industry last year, we've had some of these categories go to negative growth, but we have plenty of opportunity for positive growth.
An example would be COOLIEF in our interventional pain segment, where we intend to have double-digit growth, and it's where we have cooled radiofrequency for the treatment of pain in OA, hip, knee, and spine. We did make an acquisition, OrthogenRx, last year. The two products, GenVisc 850 and TriVisc, are performing above plan. We expect that that category will grow above market.
Game Ready is a product utilized for fast recovery in total knee and in sports injury, and it grows mid-single digit to high single digit as a global business. ambIT is an electronic pump utilized for non-opioid pain management after a total knee orthopedic surgery and other surgeries. A good opportunity for us in an ambulatory surgical center.
We see that continuing to grow double digit. ON-Q is a manage business for us as the pain management after surgery is moving toward the electronic pumps. We're gonna continue to focus on indirect sales in the pain category and focus the business as well on improving our margins. 2022, I wanna talk a little bit about how we performed.
We're not giving an earnings update at this meeting, but we can say that we feel like the year and Q4 set us up for the transformation that we see over the next three years. We really performed well on a strategic level. This year, we did deploy $55 million in share repurchases beginning in December 2021 throughout the past year. We did deploy capital, $130 million, to purchase OrthogenRx.
We're ahead of plan in both our external and internal models. We have an organizational transformation underway that was enabled by all of this. Today, we had a press release naming Kerr Holbrook, our Chief Commercial Officer.
Kerr has been running our chronic care business quite successfully, and brings a lot of experience into the business, and I'll talk about that in a few slides. Around core execution, we believe that we're gonna have the ability to talk about meaningful gross margin and EBITDA margin improvements, possibly even north of 400 basis points improvement, you know, in a situation like this or a year like this.
That's a pretty good accomplishment. We've had effective OpEx management. We've met our goal of being below 40% SG&A, and we think we can improve from there. We did each quarter deliver strong free cash flow. Although we had uneven sales performance, it was primarily due to supply chain and currency headwinds.
Throughout our earnings, last year, we talked about every quarter having about $3 million-$4 million in revenue more that we could have done in a normalized environment. It set up a transformation for us, we believe, for 2023-2025 that will deliver a lot of value in our business.
Another part of our announcement today was that Michael Greiner, who's to my left in the front row, who's our Chief Financial Officer, will remain our Chief Financial Officer, but also take on the role of Chief Transformation Officer, where he'll work with a number of our executives on initiatives to really drive improvement in our margin and rethink our business in four categories: around strategic and commercial optimization, additional cost management initiatives to enhance our profitability, a transformation of our product portfolio, and continued deployment efficiently of our capital through M&A and other strategies.
What I wanna do at this point is basically walk everyone through each of those four categories. The first two are strategic and commercial optimization and transform the product portfolio. We really are gonna put a heavier investment in digestive health.
We think we have a big, robust pipeline in M&A, and we have good innovation and nice markets and channels to expand that business. We will focus more on orthopedic pain and recovery in the pain segment and grow those franchises there.
In terms of the appointment of Kerr Holbrook as Chief Commercial Officer, there's a lot of synergistic opportunities in strategic marketing, downstream R&D, customer service, and our go-to-market, and we think we'll see a lot of synergistic opportunities there. In particular, we're gonna focus in pain on expanding in the ambulatory surgical center, and likewise, in chronic care, there's an opportunity for us to move our products more to the home. In terms of transforming the product portfolio, main message that we wanna send today is that you can expect us to exit low margin and low growth product categories.
We'll do that in the form of SKU rationalization, divestitures as well. We've had a number of price increase programs that took hold in 2022 and will give benefit in 2023. Of course, we've developed a competency in focusing on core M&A and near adjacent categories at good values, and we expect to continue that into this year as well.
Number three and number four, additional cost management initiatives to enhance operating profitability and continued efficient capital allocation strategies to expand return on capital. We've done a big body of work on our indirect spend and think we have a lot of opportunity there. We will continue to pursue outsourcing opportunities, and we think we can deliver the same level of service internally and externally with a lot of opportunity there.
Through the supply chain challenges that we did experience or that really that the industry experienced, we see a real opportunity for us to simplify and focus and improve our plant execution, looking at our footprint and just really across the board and supply chain.
While we did meet our goal of delivering SG&A below 40%, we see a very clear pathway to 37%-38% SG&A. In terms of continued efficient capital allocation strategies, our direct internal capital allocation is now focused in tight categories. You know, we have a very strong balance sheet for the size of company that we are. We're currently levered below 1x right now.
We think that we can deploy this strategy with not exceeding 3x leverage over the course of the next 3 years. We will continue share repurchases when the market is dislocated from internal intrinsic value estimates. It's really a secondary approach for us.
Our first thought and consideration is to expand and deploy that capital for M&A like we've done, you know, over the past five years. In early 2022, we started as a management team to look at opportunities to, at a more accelerated rate, increase value. We worked with a third party to validate our strategy and our approaches to rethinking our business and where we should participate in the market.
In July, we aligned a strategy with our board of directors, and started really the deployment, you know, in the second half of 2022. The big change for this is gonna be optimizing our product portfolio, and continuing to focus on the M&A to provide additional growth.
What we clearly see by the time we get to 2025 is an opportunity for us to deliver gross margins in excess of 60%, deliver operating margins in the high teens, and EBITDA margins in the low to mid 20%. We are now generating and expecting to go forward generating free cash flow greater than $100 million a year.
There's a lot of detail, as you can imagine, behind this and a lot more in terms of numbers and details of the initiatives that we will deliver February 21st on our Q4 earnings call. Later in the year, probably in June in New York, we're gonna hold an Investor Day, where you'll get a chance to meet some of our management team and go into a lot more detail on all of these initiatives. I appreciate everyone's interest in Avanos. I think we're gonna transition now to the Q&A session, and I'll ask Michael Greiner, our Chief Financial Officer, to join me on the desk here. Thank you.
Thank you. Moving a little bit into what you kinda touched upon in your presentation, can you go into a little bit more detail on why now is the right time to advance the three-year transformation?
Yeah. I'll say a couple things, and I think Michael will also wanna say a few things. Generally, if you know our story, we divested of our S&IP business, and then we, you know, for a number of years, were delivering service level agreements.
We deployed an SAP system. We really started to think about this after that. The pandemic came along, and it changed just the timing for some of the trajectory. As we watched interest rates and inflation and thought about our business and our, and our growth potential and what we might need to do to change it up, we started to really accelerate our plans this year.
A lot of the one-time costs, a lot of the things that we dealt with to really spin the company, and then get a sustainable growth strategy in place, you know, they're all behind us now, and it's a great time for us to deploy this over the next three years. Michael?
Yeah. The only other thing I'd add to that is to all these issues that we've been dealing with over the last five years, we've been primarily playing defense. I think we've done a generally good job of playing defense, but it wasn't allowing us to navigate what our strategy needed to be.
You know, part of what we're trying to communicate today is we're now in the position to play offense. We're now making our own choices as to where we wanna deploy capital a little more effectively and aggressively. That's a nice place to be because you know, playing defense over time gets tiresome.
Being able to kinda, you know, generate the right returns that we think we can, and making our own choices as opposed to having choices made for us, is exciting for the whole management team.
Great. Maybe can you expand a little bit on the four priorities that you just outlined and why those might be the right focus areas?
I mean, I'll say a couple things. I know Michael will add to that. I'm probably most excited about the portfolio aspect around the SKU reduction, around the ability to maybe move on some of the lower growth, low margin areas of our business to redeploy that capital. In particular, we think around digestive health while we do still build some aspects of our pain business around the orthopedic recovery and healing.
That said, I do also believe that this M&A opportunity for us because of the balance sheet that we have and the cash flow that we're generating, we've shown that we can deploy and that we can integrate well, and we can get a good valuation because, unlike some of the larger companies, we, you know, are focused on long-term relationships with private owners, with small private equity firms, and that's proven itself out extremely well.
Just in general, I mean, it's a chance to reshape the company, and to do that over a 3-year period, while at the same time each quarter, delivering, you know, more value and more proof points, if you will.
Yeah, I think tying back to the first question as well, these four areas are a product of what we've executed on in the last, call it, five to six quarters. I'm including the fourth quarter of 2022 in that statement. We've done a nice job with cost management, as Joe highlighted with SG&A.
We continue to be very effective with our tuck-in strategy and the value propositions there, especially as we think about our strategy. You know, our share repurchase had a dual purpose. One was we really do believe that there's a dislocation and understanding of our value longer term, and so we thought it was a good place to deploy capital.
Also, if you're gonna deploy $55 million in capital at a company that has not generated free cash flow for the better part of three prior years, you're hopefully signaling that you have confidence that a lot of that stuff that Joe was talking about is in the rearview mirror, and that we can deploy capital effectively. As Joe said, we had a very good free cash flow year this year, and we anticipate being able to generate cash flow in excess of $100 million as we go out into this transformation strategy.
A lot of what we've done is built some credibility to be able to be in a position to do what we announced today. I think we've put enough points on the board to say, hey, there's, you know, they've done a good job operationally.
Now, like I said before, we could be a little bit more aggressive on the M&A front as well, especially knowing the target areas, digestive and the orthopedic side, that we wanna go after. We're comfortable that there are a number of targets that would, you know, effectively do what we're trying to do with our portfolio optimization.
As Joe just mentioned, that's the thing that excites him most. When I was asked internally a few days ago around what is it around the story of these four buckets, these four pillars, how would you describe it in one sentence? I said, portfolio optimization, portfolio rationalization, really owning the areas where we've built the right to win, and where we know we can build scale against those rights to win.
I think I would also just add to it, I mean, one of the portions of the presentation was to talk about, we're not reporting our earnings, but we anticipate that we're gonna print something that really shows the potential of our business. We're positive about our fourth quarter. I think that's why we feel like it does segue nicely into the transformation, because I think investors are gonna get a chance to see some different numbers than they would have seen from us in the past.
As you mentioned, you have a healthy balance sheet with low leverage levels and a strong free cash flow. How do you think about capital allocation and the use of the balance sheet as an advantage?
A couple things, you know, come to mind for me, and I think I said it in the, in the presentation. You know, repurchase of shares is a secondary sort of strategy, but it's one that we would go to, if we thought there was a disconnect or a continued disconnect in the valuation of the business. We have a very, very robust pipeline, in our M&A area, and we have a number of bolt-ons that we expect to do this year.
We're really shooting for at least two, the same kind of valuations that you've seen from us, in the past. In particular, we're looking at some things in the interventional pain area that would lend itself to us getting more into the ambulatory surgical center.
There's some opportunity for us to expand through a bolt-on or digestive health franchise, and bring something right, directly into our channel. As we move into 2024, I think a little bit more about, you know, larger for us, not betting the farm, so to speak, but a $200 million acquisition for us instead of a $40, $50, can move the needle a little bit more. We think we see some of those, in particular, around digestive health as we do the other portfolio management.
We wanted to quickly open it up to the audience if there's any other questions? I think that concludes our presentation for today. Thank you very much for the time.
Thank you.