Operator: Our next question comes from the line of Veronika Dubajova with Citi.
Veronika Dubajova: I’ll keep it to two. One, Tim, just maybe thoughts on the levers that you have on gross margin and help us think through the bridge for 2023 between the inflationary headwinds, the tailwinds from productivity, including contact lenses and anything else that we should be bearing in mind. If you could just walk through of those pluses and minuses, that would be great. And then if I can follow up on your comment on the significant inflection in the free cash flow. Similar question maybe quantify and tell us what is the biggest delta there that gets you to a meaningfully higher free cash flow number in 2023?
Tim Stonesifer: Yes. Again, on the — good question, Veronika. On the margin front, gross margin, I’d expect gross margin to improve year-over-year. Again, we have a lot of productivity initiatives in place. We’ve assumed that some inflation has subsided, particularly in the second half of the year. And then we obviously have some pricing that we have implemented this year that carries forward to next year. So it’s going to be more of the same. We’re going to get a little bit of gross margin improvement and then we’re going to continue to get operating leverage. And that’s going to be the transformation that we announced last year. That’s 110 basis points right there or last call, I should say and then continued leverage. So — that’s kind of the leverage story.
On the free cash flow, the way I think about it is we ended the year at 581. So tailwinds going into 2023, we continue — we expect to continue to grow operating income and that will flow down to free cash flow. We’ll probably pick up a little bit of net working capital improvement, particularly on the inventory front as we built some inventory in ’22 for some of the supply challenges that we had, maybe a little bit less CapEx. So those would be the key tailwinds. And then the headwinds that we’re going to face will be increased interest expense driven by the financing of Aerie, the transformation costs that I called out and then the legal settlement, the J&J settlement that we talked about. So $120 million of that $199 million settlement will flow through free cash flow.
So those are the big pressure points. But net-net, we’d expect to be higher despite the incremental onetimers, I’ll call it, in 2023.
Veronika Dubajova: And Tim, you’ve talked about this $1.8 billion to $2 billion of free cash flow by 2025. Is this a linear improvement from the 580 is it front or back-end loaded?
Tim Stonesifer: Yes. I mean, again, if you take the — assume that we improve 2023 through the levers that I just talked about and then you back out those one-timers, that kind of gets you to a normalized level that’s significantly higher than the 581. And then it’s just going to be volume growth. It’s going to be rate improvement and probably a little bit more net working capital improvement. But there’s still a clear path to get there.
Operator: Our next question comes from the line of Cecilia Furlong with Morgan Stanley.
Cecilia Furlong: I wanted to start with equipment, just off of the strength you’ve seen in international markets. Can you talk through, as you think about ’23, both durability, sustainability as well as OUS versus U.S. outlook for growth, especially given the comps from 2022?
David Endicott: Yes. We had a terrific year on equipment. Obviously, equipment for the full year grew 10% mid-teens in international and pretty close to what we expected, really not great — not much growth in the U.S. It was really the international business that carried our business. I think the — the robustness of the equipment business has been really on the back of our machine. And I would just say that as much as we keep thinking that we’ve kind of run out of gas on the equipment business. Capital seems to be there out there and the capital seems to be coming to buy Centurion and our Legion product, both of which have done quite well. I mean part of the equipment strength is new product flow. So we do have a full year of ARGOS internationally.
