Joanne Wuensch: Thank you.
Operator: Thank you. And our next question will come from Vijay Kumar from Evercore ISI. Your line is open.
Vijay Kumar: Hey guys. Thanks for taking my questions. Good morning to you Robert. Maybe my first question on your organic growth assumptions here. I think I heard 8 plus is a reasonable number for F €˜23. What is that assuming for any impact from China supply chain, any VBP impact? If you could just give us some assumptions around those macro factors that would be helpful.
Robert Ford: Well, I will let Bob talk a little bit about some of the potentially other macro factors. But the ones you just mentioned here. I mean China, it’s an important market for us, Vijay. It’s an important growth market and it’s good that it’s moved to a more kind of reopening play. I think that has not only a big impact for us in China, where we have got a strong position. I mean we are not overly reliant, I would say, it’s about less than 5% of our total sales. But nonetheless, it’s an important kind of growth market for us. And I think that reopening in China is going to have a real positive spillover effect in other areas of the world. And I would say, predominantly in Asia, Southeast Asia, where we have got strong position in our EPD and in our nutrition business and some device areas, too.
So, I think the overall opening of China is good. Like Bob said, there is going to be some choppiness in the first quarter because seeing a lot of cases, hospitalizations, etcetera. But I think as that moves €“ starts to move down, I think we will see a pretty strong rebound in our growth prospects over there. So, the VBP that you mentioned, yes, I mean that does have an impact. It’s more restricted for 2023 in our electrophysiology business. So, we will feel a little bit of an impact there, but I think that the market opens up for us because of the strategy we took on VBP side. So, I think it’s net-net, it’s going to be positive for us in the long-term here, medium, long-term in terms of that being an opportunity for us. We have seen this, Vijay.
I mean this happened to us €“ this happened in the market with stents in 2019 in our vascular business. That business is back to what I would call pre-VBP levels this year. So, there is an impact. In that case, we didn’t necessarily win some of the contracts. In the case of VBP, we did win a contract, so €“ or a portion of the contract. So, I would say macro, yes, we have got some of these headwinds that we have talked about. FX, I think Bob has already talked about it, inflation, but all those seem to be easing off a little bit and the recovery of the procedures and the pipeline and the product launch is a key growth driver for us.
Vijay Kumar: Understood. And then Bob, one for you on that gross margins, you are at 56%. That’s a step down year-on-year. When I look at pre-pandemic, you guys were at 59%. Is there a simple bridge Bob on how much of this has been inflation, you did spoke for hedging impact. Is that all hitting your gross margin line? And why shouldn’t inflationary pressures improve? And when can we start seeing gross margins creep back up to pre-pandemic levels?
Bob Funck: Yes. So, the €“ as I have said in my opening remarks around 56% for the year, that’s a modest step-up kind of from where we exited last year. As you would expect, Vijay, in this environment, there is a lot of different dynamics that multinationals are facing. We have got some headwinds. We have talked about those inflationary impact, how that flows through, including the inventory we built last year that will be sold this year. We talked about currency, where we are going to €“ we are not going to see a repeat of those hedging gains that we had in €˜22. So, that’s a €“ that’s a bit of a headwind there. On the positive side, I would say the recovery we are forecasting in the U.S. infant nutrition business will contribute positively.
And as that recovery occurs over the course of the year that will have a more positive impact. We also have gross margin improvement programs across all of our businesses that will help to offset some of those headwinds. And we are taking price where we can, I would say, in our more consumer-facing businesses. And then finally, I would say just kind of from a mix standpoint, as we continue to see an acceleration in our medical device business with some of these new product launches, those are higher gross margins than the overall company, and that will positively contribute to our gross margin. If you €“ to your question about kind of where we pre-pandemic in what we are guiding to this year kind of I would say the biggest impact on a cumulative basis has really been inflation.
And that’s really the €“ I would say the big difference here in terms of where we are guiding right now, and where we were pre-pandemic. But as we continue to see an acceleration from a mix standpoint and continue to work at some of our costs, we would expect over time to see that gross margin to continue to improve.
Vijay Kumar: Understood. Thank you, guys.
Operator: Thank you. And our next question will come from Travis Steed from Bank of America. Your line is open.
Travis Steed: Hi. Good morning. Thanks for taking the question. Just a follow-up to Vijay’s question. On the inflation piece, is that still $1 billion baked into the 4.40 guidance? I just want to make sure I understand what’s baked in on the gross margin line. And then anything to call out on the 2023 operating margin expansion kind of the moving parts to get the op margin expansion there. It looks like 22% is kind of what’s implied by the guide?
Bob Funck: Yes. So, yes, on the gross €“ on the operating margin, yes, we are around 22% kind of where we were pre-pandemic. We are getting the high-single digit growth on the top line kind of in the €“ excluding the COVID testing. We are getting leverage down the P&L, which Robert talked about where we were able forward invest over the last couple of years. So, we are going to get leverage in the expense area and that gets you to about around 22% op margin. In terms of inflation, we are going to see a carryover impact from last year, still pretty meaningful. But we have been able to mitigate a good portion of that through both our gross margin improvement programs that we have across our businesses as well as taking some price where we can.
Travis Steed: Okay. That’s helpful. And a couple of product questions on EP. I think you mentioned the new EP catheter mapping system. I know that was new, maybe I missed that in the past. I am curious how you are thinking about ablation and the impact on your EP business. And then the other product question was on Libre. The vitamin C, is that on Libre 2 or Libre 3, just want to understand the pathway to get vitamin C on Libre 3 and the timing there?
Robert Ford: Sure. On the Libre 3, Vit C, I mean it’s going to start off with Libre 2. So, we want to get that done first, and then we will progress on to Libre 3. So, focus right now is on Libre 2. And then we will move to Libre 3. On your question on EP, yes, I mean I think the new catheter that we have launched in Japan and started to launch in Europe towards the end of last year is our TactiFlex, which is really using contact force together with the flexible tip that we had in our flex catheter. So, the feedback we have got in that is really, really positive. So, I think the combination here of our enhanced new mapping system together with our market-leading mapping catheter in HD grid and now bringing TactiFlex. That combination is very powerful.
Regarding PSA, it’s definitely an area of interest. We have been investing in it. We actually had two internal programs, had a bake off and saw the one that we felt stronger about taking some of the learnings that we are seeing from the current on-market products. And there is obviously some trialing that’s ongoing right now, but I would say it’s a growth opportunity. It’s an interesting area. I think it’s still too early to say in terms of will the market move completely over to this technology or not. I think it’s important to have it and hence, why we are investing in our program and incorporating into our R&D program, all of sort of the deficiencies that we have heard from some of the current on-market products are the ones that are being put in development right now.
