This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk05: Good morning and welcome to the Alcon first quarter 2021 earnings conference call. All participants will be in listening mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star then two. Please note today's event is being recorded. I'd now like to turn the conference over to Karen King, Head of Corporate Affairs and Investor Relations. Please go ahead.
spk01: Welcome to Alcon's first quarter 2021 earnings conference call. Yesterday, we issued a press release, an interim financial report, and posted a supplemental slide presentation on our website to enhance today's call. You can find all of these documents in the investor relations section of our website at investor.alcon.com. Joining me on today's call are David Endicott, our Chief Executive Officer, and Tim Stonecipher, our Chief Financial Officer. Our press release presentation and discussion will include forward-looking statements. We expressly disclaim any obligation to update forward-looking statements as a result of new information or future developments, except as required by law. Our actual results may vary materially from those expressed or implied in our forward-looking statements. Accordingly, you should not place undue reliance on any forward-looking statements. Important factors that could cause our actual results to differ materially from those in our forward-looking statements are included in OutCon's Form 20F and our Earnings Press Release and Interim Financial Report, on file with the Securities and Exchange Commission and available on the SEC's website at sec.gov. Non-IFRS financial measures used by the company may be calculated differently from and therefore may not be comparable to similarly titled measures used in other companies. These non-IFRS financial measures should be considered along with, but not as alternatives to, the operating performance measures as prescribed per IFRS. Please see a reconciliation between our non-IFRS measures with directly comparable measures presented in accordance with IFRS in our public filings. For discussion purposes, our comments on growth are expressed in constant currency. And with that, I'll now turn the call over to David.
spk09: Welcome to Alcon's first quarter 2021 earnings call. Let me begin by providing a brief update of our first quarter, overall market dynamics, and recent performance. After my comments, Tim will discuss our first quarter performance and our outlook for the full year 2021. Then I'll wrap up with some closing remarks and we'll open the call for Q&A. We started out the year with solid results in line with the expectations we shared during our last earnings call. We delivered sales growth of 2% and core operating margin of 18% despite continued impacts from the pandemic. Core earnings per share were better than expected at 49 cents. Overall, our surgical franchise continues to perform above market, benefiting from the strong growth in our latest advanced technology eye wells and strong demand for our equipment. In vision care, we saw high interest for our recent launch of Precision One Sphere and Toric and our newest allergy eye drop, Pataday Extra Strength. This was masked by a challenging year-over-year comparison due to the preemptive stock in the OTC products by U.S. retailers and consumers at the onset of the COVID pandemic. Assuming the prior year COVID-19 related forward purchasing estimate, the vision care first quarter sales would have been broadly in line with prior year. Now let me provide an update of our key initiatives. I'm proud to say that we've substantially completed our separation. This represents a major milestone in Alcon's journey as we intensify our focus on innovating products that delight our customers and create value for shareholders. We're also advancing our transformation program, which is optimizing our cost structure, increasing our investment in innovation and creating greater organizational agility. We also continue to expand our new contact lens manufacturing platform. Successful expansion increases our capacity and commercial agility as demonstrated by the successive rollout of Precision One Sphere and Precision One for Stigmatism. These lines also provide us with the flexibility to innovate new contact lens platforms such as Total 30 and other lenses. Let me now provide an update on our end markets. In surgical, cataract procedures remain down mid-single digits in the quarter, similar to the fourth quarter of 2020, with North America nearly back to 2019 volumes, but international markets continuing to lag 2019. We expect to see steady improvements as vaccines become more widely available across the globe. In vision care, the contact lens market was flat this quarter versus up 4% last quarter. We believe the noise and sequential growth rates was primarily caused by year-end purchasing of lenses. While optometrists are working with their existing patients to renew lenses, the new and switch fits have not returned to pre-pandemic levels. We are, however, gaining global share, driven by a strong U.S. performance. A fast-growing part of the market is daily Sci-Hi, which is growing at nearly 10%, and where Alcon is gaining share in all categories, especially daily Sci-Hi Tauric, with our new launch of Precision 1 for astigmatism. Strong commercial execution continues to fuel the global rollout of our new product launches. Starting with the strong contribution for both Panoptix and Vividi, this reinforces our market leadership with more than 50 share of the global PCIOL category. Panoptix, the only trifocal available in the U.S., continues to perform well across our launch markets, including China, where we began rolling out the product at the end of last year. Vividi, our breakthrough non-diffractive extended depth of focus lens, offers excellent distance with intermediate vision without the halos and glare typical of diffractive lenses. We've been pleased with the positive customer reception to Vividi. Together, Vividi and Panoptix provide surgeons with superior options to address the needs of a broad patient population. We believe ATL market penetration will benefit from our continued investment. In vision care, PrecisionOne, our newest daily sci-hi lens, is gaining momentum as we roll out the sphere and toric lenses across multiple geographic markets, with PrecisionOne for astigmatism in the U.S., the concurrent rollout of PrecisionOne sphere and toric in major European markets, and PrecisionOne sphere in Japan. Although it's early, initial reception has been strong from optometrists and patients alike. PrecisionOne remained our leading brand for new and switch fits this quarter. With our growing product options, we are converting and retaining more customers in the Alcon portfolio. We continue to gain share in the United States and expect to see similar progress in our international markets as we gain momentum on our Precision One rollout. As mentioned at our Capital Markets Day, we're bringing the proprietary surface chemistry used in our Daly's Total One lens to reusable wearers so they can enjoy the same incredible comfort. We're excited to announce that we've received FDA approval and CE mark for our latest reusable Saihai lens, Total 30, which we expect to launch in 2022. Total 30 represents an exciting opportunity in the $4 billion reusable lens market where our share is currently under-indexed. Lastly, new product introductions continue to expand our ocular health portfolio. Following the successful over-the-counter switch of Pataday once daily and twice daily last year, We introduced Pataday OneStay Extra Strength, our strongest allergy drop offering a full 24 hours of relief. We're seeing better than expected retail and consumer interest in Pataday Extra Strength, which will continue to benefit from several years of patent protection. In DryEye, we launched Sustained Hydration Multidose Preservative Free last week, which is our first multidose preservative-free product in the United States. The U.S. market for artificial tears is around 700 million, of which the fastest-growing preservative-free category is approximately 25%, compared to over 50% in the international markets. We believe that by continuing to add new innovation in the U.S., we could significantly increase preservative-free penetration. We also announced a new agreement last week to acquire exclusive U.S. commercialization rights to Simbrinza from Novartis. Simbrinza is a pharmaceutical eye drop indicated for the reduction of elevated intraocular pressure in patients with open-angle glaucoma or ocular hypertension. This is a product that our management team launched in 2017 and currently manufactured for Novartis. We know this product well, and we see significant value in building a new U.S. commercial team focused on 10,000 U.S. eye care professionals promoting prescription Simbrinza and helping to develop the preservative-free multidose eye drop market. Initially, that will be led by sustained hydration multidose preservative-free. So we feel good about how we started the year. We participate in attractive markets. We're entering familiar white space aligned with our focus on delivering innovative eye care products, and we see solid growth returning. And with that, let me pass it to Tim, who will take you through our financial results and provide our outlook on 2021. Thanks, David.
spk11: We're pleased to report first quarter sales of $1.9 billion, up 2% versus prior year. Sales growth was driven by the surgical franchise, where sales increased 7% in the quarter, led by North America. And plannable sales of $344 million increased by 9% in the first quarter, primarily due to the recent introduction of Vividi and continued strength of Panoptix. Vividi is available in the U.S., Europe, and key markets in Asia-Pacific, and we're encouraged by the strong initial demand. We're particularly pleased that both Panoptix and Vividi are taking share and increasing penetration. This was offset by challenging year-over-year comparisons in Japan, which benefited in the first quarter of last year from the launch of Panoptix and favorable market conditions. In consumables, while market procedures were down mid-single digits, Sales of $535 million were flat in the first quarter due to the strength of our refractive and VIT-REP consumables. Equipment and other sales were $198 million in the quarter, up 25% versus the prior year. The strong double-digit growth was driven by multiple factors. First, we continue to do well with our FACO equipment with the addition of the Active Century handpiece and upgrades to newer generation technology such as Centurion and Legion. Legion is starting to gain momentum among surgeons who are looking for premium performance on a portable machine at a lower cost per use. Beckin, we're encouraged with the performance of our new Argos Biometer, which is part of our small but growing visualization portfolio. And third, our refractive business is seeing strong demand, which accounted for 11 points of the growth due to the increased amount of screen time and discretionary income. While we are pleased with the growth and refractive this quarter, we don't expect this exceptional demand to be sustainable. Turning now to VisionCare, first quarter sales of $833 million declined 3% versus prior year. Excluding the early pandemic pantry stocking from the first quarter of 2020, we estimate VisionCare sales would have been relatively flat. Contact Lend sales were $509 million in the quarter, down 1% versus last year. Growth in North America, which was up 6%, was offset by softness in international markets where we continued to see some COVID impacts. As David mentioned, Precision One continues to gain share in the daily Si High category, and with a strong uptake of Precision One for astigmatism, we're driving share gains in the fast-growing daily Si High TOR category for the first time. Ocular health sales of $324 million decreased by 5% in the first quarter. Excluding the pantry stocking from last year, we estimate ocular health sales would have been up 2%. This was primarily driven by strength in Pataday, supported by the launch of our newest allergy eyedrop, Pataday Extra Strength, in the U.S. We were pleased with the market response to the launch of Sustained Ultra MBPF in Europe and key APAC markets. and are confident our strong clinical performance will enable us to grow Alcon's leadership in this category. Now moving down the income statement. First quarter core gross margin was 62.9% of 70 basis points year over year, primarily driven by higher sales leverage and manufacturing efficiencies. Core operating margin was 18% in the quarter, up 140 basis points and 100 basis points excluding foreign exchange. The improvement was primarily driven by increased sales, with half of the benefit from gross margin and the other half from operating leverage, including a favorable year-over-year comparison as Q1 2020 was impacted by provisions for expected credit losses due to COVID-19. Our core operating margin in the current quarter also benefited from our decision to hold off on a portion of our planned marketing and promotional spend due to slower market recovery in some international markets. However, we plan to increase investment at international markets we cover to ensure we're adequately supporting our new product launches. First quarter interest expense was $31 million in line with prior year. More favorable interest rates were offset by interest for the senior notes issued in May of 2020. The core effective tax rate was 20.7% in the quarter compared to 16.1% in Q1 of 2020. If you recall, we had several discrete tax items last year, which benefited last year's core effective tax rate by approximately 270 basis points. Core diluted earnings per share in the first quarter of 2021 were 49 cents, up from 45 cents last year driven by solid sales and operating leverage. Before I discuss our 2021 outlook, I'll touch on a couple of cash flow and other related items. Free cash flow for the first quarter was $48 million, compared to a $60 million outflow last year, with higher cash flow from operations and lower separation and transformation costs partially offset by increased capital spend and tax payments. CapEx is $108 million for the quarter, driven by our contact lens manufacturing expansion. Separation costs were $10 million in the quarter and $464 million life-to-date. As we've said in the past, we expect total separation costs of approximately $500 million, with the balance of the costs to be spent throughout the remainder of the year. And finally, transformation costs were $11 million for the first quarter and $113 million life to date. Before I turn to guidance, let me say a few words regarding our latest acquisition. We're excited to welcome Bax & Brimda to our brand family. We expect that acquiring the exclusive U.S. commercialization rights to Sembrenza will expand our existing portfolio and strengthen our position in the ophthalmic eyedrop market. Sembrenza generates close to $50 million in annualized U.S. revenues and has historically grown in the low single digits with favorable pharma-type gross margins. We intend to invest in a dedicated sales force this year, which will help us develop the dry-eye, preservative-free market as well as selling Sembrenza. This will allow us to spend even more time with U.S. eye care professionals and to cultivate a new distribution channel specifically for eye drops. We expect the transaction to close in the second quarter. Now moving to 2021 guidance. We've decided to provide guidance despite the continued uncertainty related to COVID-19. Countries such as the United States and China continue to rebound, but other countries in Europe and Asia, like Japan and India, are seeing different paces of recovery. Against this backdrop, our 2021 guidance assumes that we will continue to be impacted from COVID-19 during the second quarter, but that markets return to historical levels in the third quarter with market growth throughout the second half of the year. We also assume we will continue to advance our strategic initiatives and invest in our innovative pipeline and new product launches. We expect full-year net sales to be between $7.8 and $8 billion. Based on this sales trajectory, we expect operating leverage to drive a core operating margin of approximately 17%. Keep in mind that Q1 core margin benefited from lower than expected marketing spend in COVID-affected countries, which we intend to invest in future quarters to support our growing portfolio of new product launches. We also expect to continue investing in R&D, which will remain at the higher end of our previously disclosed 79% of sales, as we continue to build our future innovation pipeline. The sales and core operating margin guidance we provided should result in core diluted earnings per share in the range of $1.85 to $1.95. We do not anticipate the Symbrenza deal to have a material impact in 2021. Before I pass it back to David, I'm pleased to report that at our annual general meeting last week, Shareholders approve the initiation of our first dividend of 10 Swiss centimes per share, equivalent to a payout of approximately 10% of core net income. We want to thank our shareholders for their continued support of Alcon. With that, I'll turn it back to David for some closing remarks.
spk09: Thanks, Tim. In summary, we started out the year in a very good position, with new products driving top-line momentum and operating profitability returning to 2019 levels. last march we held our capital markets day where we reiterated our strategy delivered an update on our robust pipeline of innovation and laid out our updated long-term targets through 2025. so we're very excited about the positive response we've received from our various stakeholders we're fortunate to operate in attractive markets we're gaining share through our innovative products and we're on track to deliver our long-term financial plan now we're inspired by the significant possibilities we have to advance the frontiers of sight And we will continue to innovate murder to treat challenging conditions like cataracts, retinal disease, and problems like dry eye, presbyopia, and myopia. Each and every day, 20,000 associates come to Alcon to bring the gift of vision and the ability to see brilliantly to millions of more people. I want to thank every one of you for your continued commitment. With that, let's open the line for Q&A. Thank you.
spk05: We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you're using a speakerphone, we ask that you please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. And as a reminder, ladies and gentlemen, we do ask that you please limit yourself to one question and a single follow-up. If you do have further questions, you can rejoin the queue after your original ones have been answered. And today's first question comes from Scott Bardo at Varenberg. Please go ahead.
spk04: Yeah, thanks very much for taking my question. So first question, please, just relates to the Precision One rollout in the international markets. I think you were kind enough to give us some disclosure about the uptake in the US markets being, you know, the leading new fit product and the fastest growing product in the US. I think round about now you should have some data in international markets. So I wonder if you could share that with us, please. And the follow up question, please, just relates to and the acquisition of Simbrinza. Can you confirm that you also have acquired the rights to the over-the-counter switch for this product in several years' time? Thank you.
spk09: It's going to be a prescription product, I suspect, until it goes generic. But it has quite a long patent life. So, recall that this is patented, I think, through 2030. So, it has a long runway, and we feel really good about the potential of its promotion sensitivity. On the P1 OUS, you know, we just got started with OUS. It looks very good. But again, you know, we're launching principally in Europe and Japan. which again are the two most affected sections of the international market. So we're going to see, as I said in the original launch, we'd give it six months, see where we were. It's going to be that same kind of time period. And I do think that all signs are pretty much similar to what we expected to see, so we feel good about it. But I would just say it's too early to give us much from the first quarter. Remember that I think we put SPHERE out in Europe in February, and TORIC went out in March. And so, again, you just really haven't got any real time yet to see much result. But feedback from the optometrists is exactly what we would have expected, which is they really like it on IME.
spk05: Thank you. Our next question today comes from Daniel Booker with VKB. Please go ahead.
spk10: Yes, thank you very much. The first question maybe from my side on your contact lenses business. I mean, you recorded minus 2% while J&J a few weeks ago was showing 3.5% after quite disappointing, I would say, last 12 months. And also Bausch & Lomb yesterday was plus 13%. Do you have more color on why you only 2% compared to the others being much better? Is it stocking effects? Any other factors that can explain this difference? And I mean, I would assume the one who has helped because of the good uptake in the US and initially a bit also on the European side. And then the second question on your core EBIT margin guidance for this year of approximately 17%. I mean, we have the first quarter now done with 18%. And I would assume sequentially, at least in terms of revenues, it will be the lowest quarter because the recovery is now taking place with growth as you guide coming back in a third and fourth quarter. Why only 17%? Because if I look back what you were expecting initially for 2020, so a bit ago already before COVID-19, you were looking for 17 and a half to 18 and a half percent already at that time. And yeah, since then, I mean, now you're back to growth again and panoptic was playing out very well with high model. How can you give us a bit more guidance on this 17% how to get there? Thank you very much.
spk09: Yeah, Dan, thanks. Let me start with the contact lens performance. The market in the international global market was roughly flat, 0%, and we were off 1%. So pretty much with the market. The split between that, we did quite well in the United States. We are obviously hampered a little bit in the international markets by the trajectory of that recovery. So, again, I think we believe the market broadly is still at about 95% of the 2019 levels. Relative to other companies' performance, all I would direct you to is the mix of recovery. So think very carefully about who has highest exposure and contribution to China and the rest of Asia. where we have very small business. So we had less of a downturn last year and less of an uptick this year. So don't confuse market share growth with the actual return of growth, because we're, on a global basis, gaining share on the back of the U.S., and obviously we're pleased with the early read on P1. And on, Edith? Yeah, sure.
spk11: So on the margins, although we're very pleased with the 18%, the one thing that I would say, as we said in the prepared remarks earlier, we did pull back on some advertising and promotion spend, particularly in our international markets. Because if you recall, in January, we started to see some slowdowns again, and we just wanted to make sure that we were disciplined and cautious about our op-packs. So if you think about hiring folks and all that, we were very cautious through that. Now, we would expect to put that back into the P&L. A majority of that will go back into Q2. So I would think about it as call it maybe $15 or $20 million that we didn't spend in Q1 that we're going to spend throughout the course of the year. And again, a majority of that would be in Q2. So I think what you're going to see is Q1 might be a little bit inflated and then Q2 will be a little bit more depressed and that'll sort of normalize similar to a profile. Maybe take a look at 2019 and you can kind of see how the margin profile played out there.
spk05: Thank you. Our next question today comes from Cecilia Furlong with Morgan Stanley. Please go ahead.
spk00: Great. Thanks for taking our questions. I wanted to ask about equipment sales, which have been fairly strong the past few quarters. But just as you look out, what's the sustainability in your mind in terms of the strength and just really what type of mix you're seeing recently sales to developed markets versus other devices?
spk09: Yeah, good question, Cecilia. Let me answer it this way. The equipment was up 25% versus prior year, which, again, surprised us in many ways. The refractive business was very strong, and we continue to do well in refractive. LASIK as a procedure continues to be robust through this period of time. It looks like I think people who, you know, have been – not taking their vacation holiday money and spending it on traveling are investing in their eyes. And so we've seen LASIK procedures, consumables, and importantly, equipment way up over a prior year. That's driven about half of our growth in the equipment piece. But I would tell you that the other half of the growth is our core equipment. So cataract equipment on the back of active sentry handpiece, Constellation, our VITREP machine is doing quite well. And, of course, we have two new pieces of equipment. One, our new biometer, which is a diagnostic before cataract surgery, is doing quite well. And our visualization system, which is the Revalia product, again, doing quite well. So we're very pleased with the equipment. It's a combination of steady replacement equipment, and some marginal market share gain with kind of a refractive overlay that I suspect is not durable. But I do think the underlying strength of some of our equipment should persist. So we're a little bit careful about how we think about it because, to be honest, I really didn't think the equipment, the capital was going to be there for equipment. It looks like it is. And so for the moment, at least, we're having a pretty good time with our capital equipment.
spk00: Great. Thank you. And I guess just second, if I could ask on, just as you look out to the year, what you're considering really versus regards to traditional summer seasonality against the ongoing COVID impact, just improvement to Q to three Q and thank you.
spk09: Yeah. I mean, I think what we said is, is that, you know, and what we really think is you're going to see some persistent COVID impacts through the end of the second quarter. You know, there may be markets that persist beyond that, but I think in aggregate, our view is the market will return to kind of 2019 levels by the middle part of the year. That's our basic assumption, and that we'll start to see that same growth through the end of the year, so we'll grow on the back half. The pace of that is just still a little bit unknown. We still see Japan and countries obviously like India that are struggling mightily with this. There are other countries, again, that are still kind of slow to come out of this. And so we're worrying a little bit about what the pace of that recovery is, but I would just say that's our basic assumption. So, you know, from our perspective, what that means is we focus on share, and I think we feel very good about our share position in all of our categories at the moment, and we particularly feel good about our product innovation cycle and where we are introducing new products. So, again, I can't control the market pace, but I feel really good competitively relative to our current position.
spk05: Thank you. Our next question today comes from Larry Beagleson with Wells Fargo. Please go ahead.
spk02: Good morning. Thanks for taking the question. Let me start on Simbranza. So, first, you know, how large is the dedicated sales force going to be, you know, and was that contemplated in the long-term margin guidance you provided at the Capital Markets Day? And, David, should we expect more pharma deals like this in the future? And I had one follow-up.
spk09: Yeah, Larry, let me give you the sense of it. You know, there's about 10,000 prescribing ophthalmologist and optometrist. And so we'll build a sales force adequate to cover that audience. It's fairly typical. I think most of the companies build around that size. So you can kind of benchmark it off what is, I think, kind of the standard in the pharma space. I think, you know, in order to be successful in eye drops business, you've got to be able to reach all those guys. So Simbrinzo, you know, we're excited about because, look, it's a high margin product that we already manufacture it. It remains promotionally sensitive. It has a critical mass to build a sales force around. And that also gives us then the means to take multi-dose preservative-free products. In particular, we're just launching right now multi-dose preservative-free sustained hydration, which we think is a great idea. And we're also launching right now Pataday Extra Strength. So remember that this same audience is the one that was prescribing Pataday last year. It's now over the counter. We're working directly with those folks to build the markets. And so we're excited about the opportunity to put in a bag, you know, kind of multi-dose preservative-free products to build some brinsen, glaucoma, and allergies. So we're basically treating dry eye allergy and glaucoma in a sales force that I think can have a real impact on this. So that's kind of the direction we're headed.
spk11: Just on a related topic, because I've seen some of the notes and we've had some of the questions on, you know, is it in 21? Is it not in 21? You know, we made the comments and the prepared remarks. But, again, the way I would think about it from a 21 perspective is it's $50 million of annualized revenues. Obviously, we won't close the transaction to what we predict to be the end of the second quarter. So you sort of have a half a year of that. But keep in mind, to David's point, we will be building that sales force up. So we will be incurring those costs going out there and hiring those people. In addition to that, we have a transitional service agreement with Novartis. They will continue to sell the product for us. while we're building that sales force and we'll get a markup for that so you know that's why you're not going to see a material impact in 2021 but in 2022 we'll obviously have a full year revenue our sales force and play we won't have that markup from nevada so that's how i sort of think about it from a eps perspective
spk09: And, Tim, just in terms of guidance, is this in or out, just to make sure everything's clear?
spk11: This is not in the long-term guidance. This was not in, as we said, at Capital Market Day, that did not include any acquisitions. In our 2021 guidance, it is in that number.
spk02: But the Salesforce build, that's super helpful, but the Salesforce build was contemplated in a while. I apologize if you touched upon that. I didn't hear it. And just for my follow-up, David, once your implantable growth has been pretty impressive, but once we get past this year, you're going to have some increasing competition. J&J just got approval for Synergy in the U.S. How are you thinking about being able to sustain above-market growth in implantables beyond this year? Thanks for taking the questions, guys.
spk09: Yeah, Larry, look, I think we're pleased with the share performance that we've got in the U.S. In fact, it obviously has projected faster than we had originally thought. Vividy appears to be additive to the panoptics business in a fairly meaningful way. So what we're seeing right now and hope to continue to see is improved penetration of ATI wells. And so remember that one point of penetration is about $100 million globally. And so I think we're We're keen to think about how we move penetration of ATI wells up versus monofocal. So while I think you're not wrong that there will be competition in and they will have some effect, we contemplated that. What we're really interested in now, especially in the United States where we have better than 70 share, You know, we're really thinking about, you know, what is the penetration of the ATI wells and how can we move that going forward? And so, you know, we've got a nice blend of products, right? So you've got the best trifocal in the world that has, you know, in my mind, the perfect focal point distance and real clarity of vision at those focal points. If you want that crisp vision, Panoptix is going to be very competitive for it. And likewise, on the other end of it, if what you really want is a non-diffractive lens, which has been some of the benefit of the EDOFs, well, Vividi clearly does a better job than everything else out there. And so I think that while there are going to be competitors that blend things and do different things, I think we've solved for the two core needs in the market. And I think what we believe is that that's going to be very competitive. So we could turn our attention now, I think, to trying to build the market on the back of what is a fairly strong share position. I do think there'll be some share erosion. I think I've said that in the past, but we've contemplated that.
spk05: Thank you. And our next question today comes from Julian Dormois with XA and BNP Paribas. Please go ahead.
spk07: Hi, guys. Good morning. Thanks for taking my questions. I will start with one question on the discrepancy that we've seen between your implantable business and the consumable business over the past few quarters. My understanding is that in the end, these two should be used broadly in the same procedures or close to the same procedures. So what's happening here? Am I missing something on that side? And then I have one follow-up, please.
spk09: Well, yeah, two things. One is share and the other is price. So, you know, what you see in the consumables market is generally going to track to procedures, you know, depending on mix and the like. But you're directly correct that consumables will travel largely on a volume basis with procedures. What's going on in IOLs, though, is that we are gaining share in global IOLs and have been for about a year. and we're continuing to gain share in advanced technology lenses, which are significantly more valuable than a monofocal lens. So remember the monofocal lens is about $100 on average around the world, plus or minus a bit. And, you know, you can, you know, in the United States, you know, the ATI wells are $800, $900, you know, upwards, you know, that range. So, you know, you just see a different value change the more we grow our share, particularly in ATI wells.
spk07: Okay thanks, that's helpful. And then my follow-up question relates to Q2. I mean last quarter you told us that Q1 sales would be very similar to what they were in Q4 last year. Should we expect the same thing in Q2 in terms of absolute sales number considering maybe the seasonality but also the challenges you're facing in this COVID world?
spk11: Yeah, again, we're not going to give a lot of quarterly splits. But what I would say is this. Obviously, Q2 for us last year, like many companies, was significantly depressed. So we will rebound, or we anticipate to rebound from that. But I think the best way to think about it is, again, our assumption is that markets return to historical levels sort of in the third quarter. And then we'll continue to see that natural growth that we've seen historically. So that's how I would sort of think about the total year. And that's the assumption that we have used for the guidance that we've given.
spk05: Thank you. And our next question today comes from Veronica Duvadova with Goldman Sachs. Please go ahead.
spk06: Hi, guys. Thanks for taking my questions. want to start a little bit on the revenue guidance for 2021. If I just do some very simple math, it sort of seems to me that the guidance is applying something like a 7% to 8% organic sales growth versus the 2019 base. I think you were already at 7% in the first quarter. So I'm just trying to understand why you guys don't think you should see more revenue growth acceleration, especially as we move into the second half. And and the market normalizes, is there something that you're seeing on the horizon that's leaving you a little bit more cautious on that at this stage? If you could talk to that, and then I'll ask my follow-up after that.
spk09: Yeah, well, Veronica, the markets as we see them right now are probably 95% of what they were in 2019. So we're starting from a 5% deficit. And I do think that you need to think carefully about what the 19 levels, you know, it's not, it's going to, we're going to have to grow back from here to get to the 19 levels. So I think we're in the ballpark. But again, I think what we're trying to figure out is what is the rate of return. And again, as you know, without trying to be too you know, repetitive. I do think that we, you know, this quarter and two quarter is, is going to kind of see us get back to normal levels. There's some risk in that. I don't know that that will happen exactly, but I do think that that's directionally the right assumption. And then as we kind of move through the rest of the year, it's not going to be all of a sudden popped up to the original rate. You're rather going to, you're going to glide up to the original kind of the original growth rate as things return and, So unless there's, you know, it's just been our experience so far that this looks to be a, you know, a more gradual return to normal than a, you know, all of a sudden it's over and we pop back to normal rates. So I think that graduated return is maybe what you may be missing as opposed to, you know, what would be kind of an intuitive endpoint growth rate.
spk06: Okay, understood. No, thank you for that. And then my second question, contact lenses. I appreciate there's a ton of noise, not only your numbers, but your competitors. And thank you, David, for the comment of China. But just maybe can you give us a sense in the U.S., if you look at your growth rate and how that compares versus the market, just so we can see or have a better sense for where you think the P1 momentum is now in the U.S.? And then I guess maybe if you can share that color on the OUS business experience. China. It's quite hard for us to see share gains from the print that you put out today.
spk09: Yeah, well, I mean, look, in the United States, the market grew about 5% in total contact lenses, and we grew 7% in the U.S. So we feel good about that. I think what you see in the international markets is a decline of something on the order of 5% plus or minus a little bit And I think what we're going to try and, you know, and again, we are working hard to get our products out there. But again, we, you know, we're kind of right at about market growth there. So when you kind of net those, you know, that's where you're coming up with this, you know, basically at market growth. So we think the full market around the world was flat. And we think that the, and again, we reported a minus one, so roughly flat. You know, my sense of it is, is that the biggest difference in our peer group is their exposure to markets that have already bounced back. That last year had very big declines, read China, particularly in February and March. And this year it had extraordinary Februaries in March. And so that swing, which we have a lower exposure to, you know, is really, I think, what's happening. I understand there's some other things going on, you know, inventory and gross debt and stuff like that. But, again, I think the big news here is just the exposure to the markets that bounced back and those that didn't. And we're obviously over-indexed in Europe and in Japan, both of which are still kind of under heavy COVID pressure.
spk05: Thank you. Our next question today comes from Rob Cottrell with Cleveland Research. Please go ahead.
spk13: Hi, good morning. I want to start on the contact lines business. I wonder if you can update us on timeline for when you think the new contact lines will be at capacity or full efficiency, and then how much of a margin benefit you expect from that, just trying to help us bridge from the 17% to the low 20s in 2023.
spk09: Yeah, I think the way to think about the contact lens lines is that there's going to be steady gross margin improvement over the period. You know, we're very optimistic, I think, about the progress of Precision 1 and the potential of T30. So we're going to continue to add lines to support those launches, I think, through the plan. And so the ones that are already in place get very productive. And they run up nicely, you know, basically in a 24-month frame. And then you see new ones come on. And so those take, you know, they start at zero, and then they kind of work their way up to productivity, full productivity. So you're going to get a blend all the way through the plan of new machines coming on as we add capacity continuously through the plan. And then the way to think about it really is that the average of that will kind of improve kind of consecutively year over year. And so that's probably the direction I'd give you.
spk11: Yeah, if I go back to the capital markets day commentary, and we would expect to see, you know, in 22, 23, you see some of the acceleration. So, again, we put in a lot of lines last year. We continue to put lines in this year. That's what's driving the pressure that we're seeing on the gross margins on the vision care business. And that sort of accelerates to David's point that you hit that kind of 24-month period. So I'd go back to that capital markets day material. That may be helpful.
spk13: Got it. Thank you. One follow-up then on the surgical business. How are you thinking about pent-up demand for cataract procedures, either in the back half of this year or into 2022?
spk09: Well, it's a really good question. I think we've estimated there's probably 800,000 to a million cataracts that probably haven't gotten done during this stretch. And I think the question of great interest, I think, is how that comes back. My belief is that it's likely to come back slowly over a longer period of time, not in a bolus coming back in any one moment. So I think what I've said in the past, and I still believe this, is that if you kind of draw a line or take a string from kind of end of 19 through to 23, you know, you're going to see roughly our procedure growth get back to what was a historical norm in that kind of 4%, 5% range. But I think it could come differently than that. but i don't know precisely how it comes back the compounded growth rate is likely to be that um so probably you know modestly hotter maybe five or six percent for a while as opposed to kind of a quick bolus back and then um settles back and that's mostly because most ascs run at a procedure um you know, productivity rate that's pretty high already. And in particular, in the public hospitals, you're not going to see a lot of movement quickly because they're also running relatively full. And there's a lot of other procedures competing for a long time. So I think there's going to be more of a slow, steady and longer trail of kind of warmer than normal demand. And, you know, it could be longer than that. But that's that's kind of best thinking now.
spk05: Thank you. And our next question today comes from Bob Hopkins with Bank of America. Please go ahead.
spk12: Thank you, and good morning. So, Tim, if I can, I wanted to start with you on the margin guidance for the year. Could you just give a sense for what your guidance implies about how you're exiting the year in the fourth quarter from an operating margin perspective, and then maybe also just maybe go into a little more detail on the factors that impact that number relative to what you put up in the first quarter? Thank you.
spk11: Yeah, I would say, you know, again, I would go back to the 2019 profile. I think assuming that the markets do come back, you'll see a similar profile. So, you know, Q2 is normally a little bit depressed because, as you recall, that's where we put in a lot of marketing and promo expenses to get ready for the summer season. So I would expect that to happen again. in, uh, in 2021. So, and then we'll sort of ramp up from there. So I would kind of look at that 2019 profile and I think that you'll see something relatively similar to that.
spk12: Um, okay. Um, and then are there any, just any other factors besides that spending that would, you know, cause the margins to end up at 17 for the full year when you start out at 18, just want to make sure we've got all the moving pieces here. And then, uh, David, just on that last question, just maybe a quick comment in terms of why you think the backlog happens more over time and not a bullet. Is the short answer purely a capacity one?
spk11: Yeah, again, I would say the factors to think about, we'll see some gross margin improvement as we go throughout the course of the year as we start to ramp up production. You'll get a little bit more operating leverage, right, as your sales improve. You'll see some of that. And, again, I just want to reiterate that. When you look at that first quarter number of 18%, we do have $15 to $20 million of spend in there that we chose not to spend, but we will over the course of the year. So I would just keep that in mind as you're trying to do a run rate from that Q1 number.
spk09: And Bob, on the capacity thing, yeah, it really is capacity and staffing in the United States. That will take some time to sort itself out. It's really site of care internationally. So the hospital-based markets have a lot of competing procedures and also, frankly, aren't going to move through a lot more productivity than what they have historically had. So Again, I think the waiting lists in international are going to get longer. They may look to find some other ways around that. I know there's some talk about trying to increase use of private facilities, but it really isn't clear to me yet that those are really going to happen. So I would say in the current sites of care internationally in the U.S., capacity is probably the main constraint.
spk05: Thank you. Our next question today comes from Matt Mixick with Credit Suisse. Please go ahead.
spk03: Great. Thank you very much. I just had a couple of follow-ups, one on implantables and one on contact. So, Tim, I think you mentioned that you saw panoptics and vividly driving growth and penetration. I know this came up a little bit in Q&A, this idea of expanding penetration, offsetting some of the competition you may begin to face in different regions around the world. But If you could talk a little bit about how you see those two products, you know, what you've seen so far. I know this was a question early in the Vividi launch. You know, can it, will it expand penetration? I'm wondering if you're starting to see that. And then I had one follow-up on contacts.
spk09: Yeah, look, Matt, on the panoptics and Vividi, we have seen some data. I mean, we're obviously watching it carefully. Vividi is doing very, very well, and we're excited about that because it does not seem to be affecting our panoptics trajectory either. So I think the two combined seem to be giving us an additive effect to a large degree, and there's obviously some cannibalization you should be thinking about. But I think, broadly speaking, we've seen penetration move of the ATIOL, particularly in the United States, but also internationally. And the question that we're really still struggling with, and I don't know the answer to, is that a phenomenon of just not being back to 100% of capacity, and we're really seeing the more progressive practices as a mix coming in with more ATI wells and that mix itself driving the penetration up? Or is it actually a phenomenon that's a little bit wider than that? And I think given our instinct on it is it's a little bit wider than we had originally expected, which is good. And so we're still cautious about it because people for years have been talking about How do we expand the ATI well market? And, again, I've always been kind of it's going to be 50 basis points a year because that's what it's been, even though you'll see blips here and there. So I'm still careful to say that we haven't proven this yet until we're back full speed. But right now the penetration of ATI wells in the total Iowa market is up and has inflected up over the last year. So I think, again, nice change for us to see. Our hope is that's continuing going forward. It's certainly our intention to try and get it that way because we think Vividi gives a lot of opportunity for people who haven't historically gotten excited about presbyopia correcting lenses, but do use Torex, for example, to use a Vividi Torex. I mean, there's just no downside to that in lots of ways. It gives some more forgiving lens in lots of ways, and it also has... you know, going to give you intermediate and near. So I think this is, you know, there's a really interesting opportunity here with Vividi to bring in some folks that have been a little bit afraid of diffractive lenses, and we think that's where the place for Vividi is going to be.
spk03: That's great and encouraging. Thanks for that. And then on contact lenses, just appreciate the color and tone for Q2 and the rest of the year that you provided. Maybe if you could give a sense as to – how this prior year stocking effect or anything else that we should be aware of here in Q2 may continue to affect contacts or what your visibility is into that just so we're in the right place here in terms of our expectations in the rest of the first half of the year. Thanks.
spk09: Yeah, on contact lenses, I'd be careful to look at growth rates the rest of this year, especially growth rates over prior year. Is there going to be a giant growth rate, you know, this next quarter over last year? Because, of course, you know, COVID was particularly impacting second quarter. And there was some movement of stock. But that's going to be messy all year in both businesses. I really would encourage people to think about market share globally. Because as the markets stabilize and as things come back, that will be the durable idea. And I would continue to say that we are very encouraged about our market share movement in the first quarter, and we're encouraged about the potential in the second quarter and going forward. So we feel really good about the underlying demand and our competitive position. And the growth rates all year this year, if you look at them versus – you know, last year are going to be really messy. So I don't want to venture a guess on 2Q because it's going to be particularly messy, but I would say that it's going to be all year that we're dealing with what I'd loosely call challenging comparators for last year.
spk03: Thank you.
spk05: And our next question today comes from Anthony Patron with Jefferies. Please go ahead.
spk11: Great. Two for me. One would be just is there a way to quantify the size of the backlog on new fits and contact lenses coming back? That would be the first question. And then the second question on the Symbrenza Salesforce expansion, just trying to get a sense of how many products will actually be added into that effort over time in addition to Symbrenza. Thank you.
spk09: Yeah. On the backlog, You know, what I can tell you, Anthony, really is just for probably the last two quarters consistently optometry in the United States has been saying they're at about 80 percent of contact lens new fits. I don't think that's any better outside the U.S., although I don't have the data on it. So I would say the survey data in the United States that we see. says they're off 20% on new fits. So that's a significant chunk of new fits that we wish we had but will likely return at some point. Again, I don't know that it's a backlog the same way you'd think about a cataract backlog because people may have just put it off and they're using their glasses and they're satisfied. It's a little bit different than really needing a cataract surgery to see. I do think that there will be some more... more aggressive market growth as we return to what Lucy called normal. And I just don't know how big that impact is, but I can tell you that's the gap between what they used to do last year before the COVID and what they're reporting doing right now in the first quarter of 2021. I'd also say that most of the optometrists are reporting still in dollar sales, 95% of 2019 numbers. So just to give you some, again, reasonable data on where the market actually is, it's still not 100% of 19. So you're seeing some bounce back in some of the revenue growth, but you're really not seeing it back to where it will be, I think, in the back half of this year. That said, on the other piece, the Sembrenza Salesforce, we're going to start with three products in the bag, actually a few more than that in some ways, but the three brands that we'll have in the bag are going to be obviously Sembrenza and then Sustain and Multidose Preservative Free, in particular Hydration, which will be our first. multi-dose preservative-free product. And, you know, again, I'd encourage people to, you know, think about that $700 million market in the United States and the relative penetration of preservative-free product versus the international markets, which we see quite significant opportunity. And so, internationally, it's about 50-plus percent, depending on where you are in the world. In the United States, about 25 percent. So, we think there's an opportunity to encourage people to use a multi-dose bottle that does not have preservative in it when it hits the eye. So that's a really exciting opportunity for us, in addition to Simbrinza. And obviously, we'll be selling our allergy brand, Pataday, in that same group. So most ophthalmologists and many optometrists, the generalists, are treating glaucoma, dry eye, as probably their two or three top visits, you know, day in and day out. And allergy, obviously, during the season, you know, falls in there as well. So we're hitting categorically a lot of things that are important to ophthalmologists. And obviously, it starts us down a path of building out our eye drops business.
spk05: Thank you. And ladies and gentlemen, our final question today comes from Jeff Johnson at Baird. Please go ahead.
spk08: Thank you. David, maybe two follow-up questions just on stuff you were just talking about. On Simbrinzen, on the Salesforce, you know, we're all trying to kind of circle around this operating margin guidance for the year. Will those Salesforce investments be dilutive near-term? And, Tim, I don't think I heard the answer, just longer-term. I know Simbrinzen was not in your LRP. But that approaching mid-20% operating margin by 2025,
spk11: how does the sales force and kind of uh doing what you're doing with these three products in the bag and going out to those 10 000 docs how does that impact that lrp margin target thanks yeah as far as the margin target in the 2025 again this is this is a 50 million dollar uh u.s revenue based business on an annualized basis that grows at call it low single digits so the the margin profile is favorable to our overall margin profile but just keep the relative scale of that in mind. So I wouldn't anticipate any impact to the long-term guidance that we gave you.
spk09: And in this year's guidance, you know, what we've got is really we haven't put the sales into the Simbrinza. We haven't put Simbrinza into this year's guidance, and the costs are borne by that P&L standalone. So we feel like, you know, again, we're not going to have a – it's kind of a net neutral for this year, if you will, relative to what we would have done without it, but it gives us momentum and an ability to sell some other products. Obviously, it's accretive next year.
spk08: All right, that's helpful. Thank you. And then just on the contact lens market, David, I mean, we've been seeing some of that same data, the 20% down in office visits and refractions and some of the things that you'd think would correlate well with contact lens fits, things like that. And even some of that data looks like it's bled off or gotten a little softer maybe here over the last month or two. But Do you believe that data, I guess, is my question. You just talked about a U.S. market being up 5% in dollars year over year, and new fits, even though new fits only make up sometimes 20% or so of a given quarter's revenue, down 20%. It's hard for me to reconcile those two numbers, and I'd like to hear how maybe you do.
spk09: Yeah, well, I mean, I would think very carefully about the 5%, because typically, you know, that's over 2019, remember? So 19 was an affected year. So even in the U.S., in March, March kind of fell off the map for us. So remember that that 5% is a you know, a growth number in the U.S. that is off of a declining base that went to substantially down, you know, in April and May. So I would say that, you know, I really do believe that there are a lot of opportunity for people to get into sci-high daily lenses, which is driving the value mix up. And that's still pretty robust. I think in the U.S., I can't remember, I think it was 10% growth. in the U.S. in daily CyHi value, even though it was only 5%, for example, in the overall market. So there's value trade in the contact lens market that's a real opportunity. And the question just is, you know, when are they going to come back and where are they? So I do believe that visits are down. I really think that. I think we see it on the ground with our folks, even in the U.S., and I'm pretty sure what's being reported has been very consistent in terms of decline of visits. And remember, the 5% was versus 2020, not 2019. And so, again, I think the 2019 number, again, was pretty robust. We had a good start to 19 and 20. And then obviously, it's changed a good bit. I think the short version of that is, yeah, we think it's still down. We think it's down in particular in international. And particularly for us who are launching new products, new fits, you know, are the problem. You don't have foot traffic or you don't have flow through the office, tougher to get new foots.
spk05: Thank you. And, ladies and gentlemen, this concludes today's question and answer session and today's presentation. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.
Disclaimer