The other thing to think of is if you look at last year as an analog and for 8 quarters now, we’ve been very predictive in what our margin would do quarter-over-quarter, and we fully executed against the commitments we’ve made externally. So one, there’s credibility and that gives us confidence. But if you look at last year, we needed a little over 200 basis points on average in the back half. And as everyone knows, it was weighted towards Q4. This year, you’ll see a little bit more balanced in the second half, but we do need another year of a little over 200 basis points of margin improvement in the second half. By Q2, we get back to flat. The good news is last year, we were absorbing 200 basis points of outsized inflation. This year, it’s only 100 basis points of outsized inflation and a lot of that is happening in the front end, right?
So the back end gets easier, and it’s half of the challenge that we had last year when you think of outsized inflation. So it’s the same amount of margin improvement we need in the back half with half of the outsized inflation in the back half. And given the fact that we’re already delivering about 225 to 250 basis points of cost to win, pricing mix benefits in Q1. If that continues throughout the year, which we have strong plans that execute against that, we feel really confident with our margin goals for the year.
Tom Polen: Ravi, this is Tom. Just to add to Chris’s excellent summary there, just to call out, we feel great about the performance in FY ’23 as well as our outlook for ’24. And just to give a little bit more detail on that inventory number. So in Q3, you saw meaningful improvements in our cash flow, including a $200 million reduction in inventory. In Q4, if you haven’t seen yet, it’s a $300 million reduction in our inventory in Q4 that we just achieved. Obviously, that – the inventory reduces within that quarter, the variance is then from producing less inventory from manufacturing, caps and rolls into the first half of next year. And so just to put it in perspective the scale that we’ve been taking inventory down at. And obviously, that has a meaningful benefit to cash flow and why we see such strong cash flow, growing nice double digits next year all in, which is really enables our continued strategy on our tuck-in M&A strategy, investing behind growth, right, continuing to drive the flywheel.
Thanks again for the question.
Operator: Our next question will come from Vijay Kumar with Evercore ISI.
Vijay Kumar: Hey, guys. Thanks for taking my question Sorry, there were a lot of numbers being thrown around. But if you can just — let’s start with Q1 on the top line com. Your Q4 performance was pretty impressive. I think for Q1, you said 200 basis points below the annual guide. Your comps don’t seem crazy, right? It’s pretty easy. So what’s changing here? What are you assuming for pricing China headwinds Aleris?
Tom Polen: Sure. Thanks for the question, Vijay and Chris will take that.
Chris DelOrefice: Yes. Yes, Vijay, thanks for the question. Yes. On sales, we indicated that our organic growth in Q1 was under-indexed by 200 basis points. There’s really 2 factors, maybe 3. The key factors are, one, the respiratory testing dynamics, both in our base and the COVID only, which we’re going to now just report as our base business, right? It was still more indexed in Q1 of last year. So as that normalizes year-over-year. The other one is some of the China slowdown that I noted, which is mostly in our medical business, we’re still seeing strong performance, in particular, in BDI, which has been a source of strength for us. The good news is we’ve baked that into our planning by the time that we ramp up to the back of the year that normalizes throughout the year.
So those are the 2 small items. The third one I would point to, of course, that we’ve articulated is the Alaris. As that comes back, we talked about that being a ramp throughout the year. So those are probably the key 3 considerations. To your point, I think especially on the back of absorbing 75 basis points of a China headwind in our growth rate, 5.75 really implies organic growth of 6% north. So it’s just — it’s another year of really strong performance. I think it’s — when you think of BD, we’re not dependent on one area of growth. I think that offers a source of confidence in complex times like this. And I think the growth is broad-based, right? We talked about the 6 key areas within our portfolio that offer opportunity to deliver that outsized growth of either high single digits to double digits.
So we continue to focus on that, transforming our portfolio through organic investments in R&D and the tuck-in work we’ve done. If you noticed ’23, the impact from our tuck-in acquisitions are now contributing 40 basis points to growth after having anniversaried them for 1 year.
Tom Polen: And Vijay, just to add on. Obviously, with Aleris, we’ve always said, of course, typically from when we start booking installations, then we get contracts into 3 to 6 months from then that we actually start doing the installations, et cetera. And obviously, we started just a little over 90 days ago, engaging with customers. And so we’re really pleased. We’re making solid progress with Alaris, very constructive discussions. We started shipping. We’ve gotten our first contracts in place, but those will just take time to move through and therefore, we see the bigger ramp in the back half of the year. That’s natural for that selling cycle. The other thing is, as Chris mentioned, we’ve made some assumptions for Q1 on respiratory testing and COVID levels being notably lower than last year. Obviously, that’s to be determined. That could be an opportunity there depending on how the respiratory season plays out.
Vijay Kumar: Understood, Tom. And then one on margins here. I think in the Q1 gross margin is 350 basis points below. I just maintain your OpEx dollars, I still end up with an operating margin close to 21.5%. I think your guidance is implying sub-20% for Q1. So is there some investments that’s being pulled forward into Q1? And I think you mentioned gross margin flattish year-on-year. Are you planning to exit at 55%? Like what drives the gross margin from 51% to 55% as the year progresses?
Tom Polen: Yes. You’re talking specifically about Q1?
Vijay Kumar: Q1 op margins, yes and gross margin progression?
Tom Polen: Yes. So again, I mean, Q1 has – there’s really 2 onetime dynamics in there. You have FX that’s 200 basis points and you have the inventory take down, right? So the onetime impact of taking on increased absorption in your cost base, it’s 400 basis points, all happening in Q1 that basically goes away. The FX becomes much smaller and more normalized throughout the year. The inventory is predominantly done in Q1. That goes away. You also have the outsized inflation that on average through the year is 100 basis points, but Q1 is more elevated because you have a carryover effect from last year. It’s about 175 basis points. The good news again is we have really strong underlying cost improvements. I mean, at this point, Recode, which is supposed to deliver about $300 million savings as we enter into FY ’20, 25.
