Alcon Inc.

Hello, and welcome to Alcon's second quarter 2021 earnings call and webcast. At this time, all participants are in listen-only mode. If anyone should require operator assistance, please press star zero on your telephone keypad. A question and answer session will follow the formal presentation. We ask that you please ask one question and one follow-up, then return to the queue. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Karen Kink, Senior Vice President, Investor Relations and Corporate Affairs. Karen, please go ahead.

Welcome to Alcon's second quarter 2021 earnings conference call. Yesterday, we issued a press release and interim financial report and posted a supplemental side 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 on 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 outcomes 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 second quarter earnings presentation, which can be found on our investor relations website. For discussion purposes, we are providing comparisons of 2021 versus 2019 unless otherwise noted. While you need to take into account a two-year period, we believe the comparison versus 2019 is more operationally meaningful since our results were significantly impacted in the second quarter of 2020 by the pandemic. You will find a summary of results comparing 2021, 2020, and 2019 in our slide presentation and a comparison of 2021 versus 2020 in our press release and interim financials. As usual, Our comments on growth are expressed in constant currency. With that, I will now turn the call over to David.

Thanks, Karen, and good afternoon, everyone. Welcome to our second quarter earnings call. I'll begin by providing a brief update on our second quarter, overall market dynamics, and recent performance. After my comments, Tim will discuss our second quarter performance and our updated outlook for the full year, and I'll wrap up with some closing remarks and we'll open the call for Q&A. And we had a very strong second quarter with the highest quarterly sales and earnings since our spinoff. This was driven primarily by demand for new product innovation and solid commercial execution, coupled with strong market recovery in the United States. Q2 sales of $2.1 billion were up 11% versus 2019, with increases across all sales categories in surgical and vision care. Core operating margin improved to 18.2%. and core diluted earnings per share improved to 56 cents. Overall, our surgical franchise continues to outperform the market. We're growing share with our latest advanced technology IOLs. Consumables have returned to growth in line with the recovery and procedural volumes, and we continue to see strong demand for our equipment. Our vision care franchise also returned to growth over 2019. Our new product launches are gaining momentum and expanding our market share despite variable recovery in international markets. Precision One continues to be our leading brand for new and switch fits, even though new fits are still down globally. Consumer demand for patented extra strength has been better than expected, and our sustained brand family is posting strong growth, aided by our newest products, Sustain Ultra and Hydration Multi-Dose Preservative Free. Moving to our end markets by franchise. In surgical, the global cataract surgery market was down versus 2019, with the U.S. showing solid growth over 2019 and international markets below the 2019 levels. That's primarily due to suppressed markets like Japan and India. Against these market conditions, we are gaining PCI well share and outperforming the market, driven by our strong U.S. performance. In vision care, the contact lens market was up slightly versus the second quarter of 2019, And similar to Surgical, the U.S. market has returned to growth while the international markets have not yet returned to 2019 levels. Nonetheless, we are gaining global contact lens share and outperforming the market, driven by our strong U.S. performance. Moving to innovation and investments, in PCIOLs, we remain the market leader, and our share continues to grow with over 55% of global share and over 80% share in the United States. The continued adoption of Vividi at Panoptix is driving ATI oil penetration above its historical rates. Furthermore, Vividi is exceeding our expectations in launch markets and is largely incremental to Panoptix sales. The growth in ATI oils is driven by both existing surgeons increasing their use of advanced technology lenses and the conversion of new surgeons who traditionally preferred monofocals and Torex but are now implanting Vividi. While we do expect surgeons to try new competitive lenses, we're confident that the superior performance of our products, as supported by a growing body of clinical evidence, will sustain our market leadership. At the recent ASCRS conference, both Panoptix and Vividi earned a significant share of voice at the podium, with many surgeons discussing the incredible quality of vision from both lenses. Now moving to our equipment business, we're piloting our comprehensive cloud-based digital health solutions platform, our SmartSuite, which is designed to help ophthalmology practices streamline and create efficiencies in the cataract workflow. At the center of our equipment ecosystem is our cloud-based smart cataract application. This platform seamlessly connects the clinic to the OR, enabling surgeons to improve productivity and patient outcomes. We showcased our current platform recently at ASCRS, and we'll begin to expand the additional accounts at the American Academy of Ophthalmology in November. In VisionCare, PrecisionOne, our newest daily SciHigh lens, continues to gain momentum. PrecisionOne Sphere and Toric are now available in the U.S. and Europe, and we've introduced PrecisionOne Sphere in Japan. We're excited to see our share gains in Sphere and Toric continue to drive our global market share, which has increased for the second quarter in a row. In Daily's Sci-Hi, the fastest-growing contact lens category, we estimate we've gained approximately five share points globally since 2019 as a result of our new product flow. Additionally, we'll begin introducing Daily's Total One for astigmatism to select accounts in the U.S. this fall and are planning for a broader launch early 2022. We expect this launch will reinforce the leadership of Daily's Total One as the industry gold standard and bring more customers to the Daily's family. We've also begun to introduce Total 30, which we expect to launch commercially in the U.S. and select European markets later this year. This product builds on the brand promise of Daily's Total 1 by delivering premium comfort to reusable wearers who account for two-thirds of the lens-wearing population. The reusable market is approximately $4 billion, and our market share is currently in the high teens. So given our low share and the positive early feedback from our key accounts, we're confident we can expand our share position. In ocular health, we saw strong retail and consumer interest for our Pataday allergy drop portfolio, led by the successful introduction of Pataday Extra Strength during a particularly strong allergy season this year. The convenience of the prescription-strength allergy product available over-the-counter is very appealing to consumers, and we're excited to offer this premium, patent-protected product to a wider customer base. In dry ice, sustained sales continue to grow globally, reinforcing its leadership in artificial tiers. We launched sustained hydration multidose preservative-free during the second quarter in the United States. With our continued investment in innovation, we believe there's a significant opportunity to increase preservative-free penetration in the U.S. and grow our MDPF share internationally. As part of our strategy to grow our eyedrops business in ophthalmic channel, we've begun building a dedicated sales force for ophthalmology in the United States. This team will also sell pataday and simbrinza, a prescription glaucoma eyedrop. We closed the acquisition of U.S. commercial rights for Simbrinza in June, and the product is now contributing to net sales. So overall, our second quarter performance demonstrates the strength of our businesses and focused execution of our strategic priorities. Strong commercial execution behind our new product launches drove continued share gains, despite a more challenging international environment. As markets return to growth, we believe the benefit of these share gains will manifest in continued top-line growth. In manufacturing, we're installing more contact lens lines to keep up with demand and deliver steady product flow as we expand our portfolio and our market reach. Finally, we continue to invest in R&D to deepen our new product pipeline with exciting high-care innovation for the coming years. Now with that, let me pass it to Tim. We'll take you through our financial results and provide an updated outlook for 21.

Thanks, David. We're pleased to report second quarter sales of $2.1 billion, up 11% versus 2019, driven by 14% growth in the surgical business and 8% growth in vision care and broad-based growth across all sales categories. Year-to-date, sales were up 9% versus the first half of 2019, with surgical up 11% and vision care up 7%. And planables continue to reach new highs driven by momentum from our new product launches. Sales were $387 million in the second quarter, an increase of 29% versus 2019. Panoptix and Vividi continue to take share, and strong adoption is driving encouraging penetration rates. On a year-to-date basis, unplannable sales were up 25% versus the first half of 2019. Consumable sales of $620 million in the second quarter increased by 4% versus 2019. We're pleased to see sales growth across cataract, vitrex, and refractive consumables. On a year-to-date basis, consumable sales were flat versus the first half of 2019. Equipment and other sales were $199 million in the quarter, up 23% versus 2019 due to several reasons. First, our FACO equipment continues to benefit from innovation and strong commercial executions. In Europe, we've been focused on actively upgrading customers from legacy infinity devices to our newest generation sensory machine. We've also seen healthy demand for innovation like the active sensory handpiece. Second, given the significant backlog of procedures, we're seeing some accounts expand capacity into new operating rooms or alternate sites of care, which is driving demand for new equipment in the interim. And third, refractive has continued its trend of strong demand, which accounted for about half of the equipment growth. While we're enjoying the benefits of higher consumer discretionary income and increased focus on health and wellness, we don't expect to sustain the favorable trend in refractive over a longer period. On a year-to-date basis, equipment and other sales were up 22% versus the first half of 2019. Now turning to vision care, second quarter sales of $888 million grew 8%, versus 2019. Contact line sales were $535 million in the quarter, up 6% versus 2019. Our new product launches drove double-digit growth in the U.S., which more than offset a slight decline in international markets, where COVID headwinds are more pronounced. PrecisionOne continues to gain share in the daily sky-high category, And with the strong uptake of PrecisionOne for astigmatism, we're driving share gains in the fastest-growing daily side-high TORIC category for the first time. With favorable share gains and account conversions, we will continue to accelerate the ramp-up of our contact lens manufacturing lines. On a year-to-date basis, contact lens sales were up 4% versus the first half of 2019. Popular health sales of $353 million in the quarter increased by 11% versus 2019. This was driven by momentum and sustain, aided by our new launches of Sustain Ultra and hydration, multi-dose, preservative-free, and better-than-expected demand for our newest allergy eye drop, Pataday. We launched Pataday Extra Strength, which provides a full 24 hours of allergy relief this spring, and demand has exceeded our expectations. The favorable patent life of Pataday Extra Strength gives the brand significant runway for future growth. On a year-to-date basis, Ocula Health sales were up 13% versus the first half of 2019. Now moving down the income statement, second quarter core gross margin was 64.4%, down slightly versus 2019. While we've seen some inflationary pressures, we've been able to mitigate the impact through cost containment. Core operating margin was 18.2% in the quarter, up 160 basis points versus 2019, primarily driven by operating leverage and reduced investments in COVID-impacted markets. Second quarter interest expense was $30 million, down from $35 million in 2019. While we've taken on incremental debt, we've benefited from lower variable interest rates and have refinanced some of our higher-cost local debt. The core effective tax rate was 19.2% in the quarter, compared to 13.5% in the second quarter of 2019. The difference can be explained by the impact of the Swiss tax reform in 2020, which increased the corporate tax rate for Alcon by approximately 300 basis points, along with a more favorable geographical mix in the second quarter of 2019. The core effective tax rate was 19.9% for the last six months. Quarterly earnings per share in the second quarter of 2021 were $0.56, up $0.09 versus the second quarter of 2019, driven primarily by higher sales and better operating leverage. Before I discuss our 2021 outlook, I'll touch on a couple of cash flow and balance sheet items. Free cash flow year-to-date was $320 million, compared to $95 million for the same period in 2019. Higher core operating income and lower separation spend were partially offset by increases in inventory to support new product launches and upcoming demand. CapEx was $222 million for the first half of the year, with the increase driven by our contact lens manufacturing expansion. We expect higher capital spending in the back half of the year due to the timing of line installations. We closed the acquisition of the U.S. commercial rights system Brinza for $355 million this quarter. and we paid our first dividend of $54 million in the quarter. Transformation costs were $15 million for the second quarter and $126 million life to date. Now moving to 2021 guidance. Given the strong performance in the first half of the year, we are raising our full-year sales and earnings outlook. While the economic recovery is underway in many of our markets, we anticipate that customers in some geographies will continue to face COVID-19 challenges, including the rising cases from the Delta variant. Against this backdrop, our 2021 guidance also assumes that global markets return to 2019 levels by the end of the year, U.S. markets will continue to grow above 2019 in the second half of the year, and international markets will reach 2019 levels early next year, with countries such as India and Japan remaining subdued. Accordingly, we now expect full-year net sales of $8 to $8.2 billion. This is an improvement from our previous guidance of $7.8 to $8 billion last quarter. We also improved our outlook for core operating margin from approximately 17% to approximately 17.5%, driven primarily by higher sales and operating leverage. Although we've been pleased with our margin improvement to date, We do expect to see incremental margin pressure in the second half of the year, primarily due to product mix and timing of spend. As markets continue to recover, we will increase our investment behind innovation, our new product launches, and some of our commercial activities. We're also observing some challenges with suppliers and inflationary pressure in areas like raw materials and freight. We now expect core diluted earnings per share to be in the range of $2 to $2.10. as compared to our previous outlook of $1.85 to $1.95 per share. This assumes a core effective tax rate of approximately 20% for the full year. Now I'll turn it back to David for some closing remarks.

Thanks, Tim. Before we open it up for Q&A, I want to thank all of our associates for a great quarter. Our results today demonstrate what we can achieve with great innovation, commercial execution, and manufacturing excellence. Pleased with our ability to deliver growth and outpace the market. Our share gains are remarkable considering current conditions, and we're confident that we're well-positioned to capture an outsized benefit as the global markets recover. Until then, we remain laser-focused on supporting doctors and patients while we deliver long-term value to shareholders. So with that, let me open it up for Q&A.

Thank you, and I'll be conducting a question-and-answer session. As a reminder, please limit yourselves to one question and one follow-up, then return to the queue. If you'd like to be placed in the question queue, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your headset before pressing star 1. One moment, please, while we poll for questions. Our first question today is coming from Michael Lucan from UBS, your line is out live.

Thank you very much. A quick question on your comments around capacity expansion in some of your key accounts. Does that come with some inventory fill that would suggest that maybe some of the surgical growth we've seen in the second quarter we shouldn't translate into the third quarter and further? And then the second question, just as we see the Delta variant increase and have some impact in the U.S., you made it very clear what your assumptions are, what your outlook for international markets in Europe. But it sounds like you're not worried about the U.S. at this point in time. Is that a fair interpretation of your comments? Thank you very much.

Well, on the second one, Michael, you know, I think we are comfortable that we understand where we are right now. But, you know, again, the Delta variant is moving around the U.S. quite quickly. And I think, you know, we have a trajectory on it. We kind of have a view of it. I don't know that anybody really knows, you know, what's going to happen there. So, It's baked into our thinking for sure, but I would just say that there's no certainty around what's going to happen. On the capacity expansion, I'm not sure I understood your question precisely because if it's referring to our surgical growth and are we expanding for surgical, that's not really where we're adding capacity right now. We have plenty of capacity in our surgical business right now to manage key accounts and or expansion around the surgical business. Our capacity expansion is going on principally to kind of keep up with demand in the vision care. That's our principal expansion effort. And, again, our expansion is related really to our interpretation of demand. Right now demand has been better than we expected, but we're going to keep a close eye on it, evaluate capacity as we go forward.

Thank you.

Thank you. Our next question today is from Veronica Dubojova from Goldman Sachs. Your line is now live.

Hi, guys. Good morning, and thank you for taking my questions. I will also keep it to Q1. Just would love to understand, David, kind of the type of momentum that you saw as you moved through the quarter, obviously very strong performance. I'm kind of trying to see was it weighted more towards May and June and has that continued to July, or was the kind of growth momentum that you saw pretty steady throughout Q2? And just maybe kind of try to push you a bit more on this Delta variant. You know, have you seen any deceleration in the U.S. since you've reported Q2? just to give us a sense for where you are. And then a big picture question just on Vividi and Panoptix. Where do you think we are with ATIOL penetration? And now that we've seen continued uptake here, are you more confident in seeing a step change here in momentum as you look forward? Thanks, guys.

Hey, Veronica, thanks for the questions. Let me try and give a little bit of color on the quarter itself. I think inside the quarter we had pretty steady momentum. It wasn't, you know, choppy. I think what was happening really was the U.S. was doing really well coming back, you know, through April, May, June, you know, kind of consistently. And, again, it was a relatively consistent month-to-month in terms of its growth. You know, I don't know that we have seen any real signs of deceleration, you know, in the U.S. around Delta. I would say outside the U.S. in the second quarter, you know, we actually saw a little bit of improvement in Europe, but obviously some real challenges in India and Japan. And so the international markets broadly are quite complicated to describe, but I would just say that we think it's going to take a fair bit longer for the international markets to get back to 2019 levels. And we've said, you know, kind of early 2020, sorry, they'll get back to 19 levels early next year, which is 2022. U.S. should grow. Our assumption is U.S. is going to grow through the rest of the year. And again, the rate of that growth is kind of hard to know based on the Delta variant. But the only thing we've seen really is a few hospitals here and there where they've shut down some elective procedures. But in the U.S., our business is dominantly in the ASCs, and those ASCs are not shut. So, again, we haven't really seen any material impact on surgical procedure volume in the U.S. Internationally, again, it just depends on what market we're talking about, and I think that's going to be more of a slow grind. On the second one, on penetration, Vividi looks like it's adding about 300 basis points over the last three years, or I should say 300 basis points has been the improvement over the last three years, which is higher than the typical 50 points I think I've said to you before. Now, what's really hard to know about that, is whether or not that's just the mix of public hospitals who dominantly do, you know, monofocal business. So if you take India, a lot of the numbers we'll quote against 2019 exclude India because it's a massive amount of procedures and a massive number of local manufactured monofocal lenses. So if you look at the world market right now, it's down quite a lot. If you exclude India, it's still down probably mid-single digits in surgical procedures. What we're seeing is a – clear movement towards ATIOLs by about 300 basis points over the last three years. So let's call that 100 basis points a year. That's principally the U.S., right? So that's taken us now to 17% in the second quarter from what was roughly 14% several years ago. So, again, better than expected, but hard to know if that isn't just mix. I will tell you we're a little bit optimistic about it. Every quarter I get a little bit more willing to say, you know, we're seeing better penetration than expected. but I would just wait until we get to a normal, really kind of a normal setting when monofocals are back as much as I thought. But, look, the more people that come in and talk about ATI wells in the U.S., the better, and I think we're going to continue to see growth on the back of Vividi because it's turning out to be quite a useful product.

Very clear. Thanks.

Thank you. Next question today is coming from Larry Beagleson from Wells Fargo. Your line is now live.

Good morning. Thanks for taking the question and congrats on that. Nice quarter here. One for you, David, one for Tim. So I'll ask them both here. David, do you think Q2 benefited from catch-up procedures and you expect that to continue for a few quarters? I know you talked about potentially cataract procedures, for example, running hot, to use your words, coming out of the pandemic. And then, Tim, one thing that big picture that was interesting to me is we've seen the surgical margin increase about 700 basis points since 2018 to 27%, but the vision care margin has actually decreased, you know, by 200 to 300 basis points over that time. Why has the vision care, you know, margin eroded, and what's the outlook for each? Thanks for taking the questions, guys.

Thanks, Larry. I'll listen on 2Q for surgical procedures. You know, our understanding of the market at this point was that it was up mid-single digits. So if you do that over 19 mid-single digits, let's just cut it in half for each year, that would be pretty much the normal procedural growth. that we would have expected to have seen during that period of time. So given that there really wasn't any last year, there must have been some made up. But what I would say is that the capacity to make up a lot of this in the United States is relatively small. Most ORs are running you know, we think in the kind of 85% to 90% capacity, or sorry, of their capacity. And so that really only gives them, you know, let's just call it 10% to 15% of additional makeup. So if you figure we lost a million cataracts over the last year or so, maybe a million one, it's going to take us a while, you know, given that we do what, four and a half million of procedures a year, you know, 10% would only get you through if everybody in the system worked at nearly 100% capacity, it would take you a couple of years to get through it. That's how we're doing the math right now. That could change. We are seeing a little bit of additional capacity being added. Some of the equipment volume you see in our business right now is a function of additional people adding additional ORs, not a lot of it, but a little bit of it. So we're cautiously optimistic. But I think what you're going to see is kind of a slightly warmer than normal We would normally call procedural growth 3%. I think it's going to be a little better than that going forward for several years.

Yeah, and then on the vision care lines, you know, I would just say this. If you take, you know, to your point, if you go back, I'll just take 2019. The end of 2019, I think the vision care margins were around 18%. We just reported, obviously, 16.4 in Q2. So, there has been some pressure. Again, that is primarily driven by the vision care lines and the installation of those lines. So, You know, if you go back to that Capital Markets Day presentation and you look at the lines that we have put in, you'll see that there were a bunch of lines put in in 19, even more so in 20, and we continue to put lines in in 21, and we'll continue to meet demand as we go forward. So that pressure is really driven by the fact that it takes anywhere between 18 to 24 months to get those things fully up and running. So we've got sort of a pressure point up right now as we talk about it at the capital markets day. Again, I think what our plans are is you'll start to see that those margins pick up probably in the 22-23 timeframe as we get through this sort of catch-up phase on the CapEx front.

Thank you.

Thank you. Our next question today is coming from Scott Barbell from Barenburg. Your line is now live.

Yeah, thanks very much for taking the questions. I have to. David, I wonder if you could give us some sense of the relative share then of your presbyopia correcting business. Can you split that roughly now between panoptics and vivity and other monofocals, just to give us a sense really of how vivity is taking up? And furthermore, can you perhaps discuss a little bit then how Dailies Total One is trending amid the Precision One launch? That would be helpful. And follow-up question, please. Obviously, Michael Onashek has gone on to Pastures New. I just wondered if you could talk a little bit about the global business and innovation position and what your stance is in terms of filling that management capacity. Thanks.

Sure. Let me start with the first one. You know, directionally, you know, we continue to gain unit share globally in the PCI wells. Particularly, it's really on the U.S. strength. You know, Vivity and Penn Optics have done really well. And obviously, in value, you know, we get a real benefit from that, particularly when we upgrade torrent patients or monofocals. So as the penetration has gone up, we've done well. And like we said, our share in the United States is 80-plus. And I think – You know, our global share is somewhere around 50-plus, so we've been a little bit coy below that saying what Vividi and PO split or the Panoptix split was, but I think directionally you can assume that Panoptix is the majority of it right now, and Vividi is relatively new, so it's gaining share nicely. And as we said, you know, a lot of that share seems to be additive, which is what we think is kind of driving the opportunity to kind of see penetration grow a little bit more. DT1 is trending fine. It's down a little bit relative to P1 launch, just as we'd expected. I think we always knew there'd be a little bit of cannibalization in both Daly's AquaComfort Plus and Daly's Total One. But Precision One has done so well, I think that it's, you know, a lot of the new patients that would normally come in and reach for Daly's Total One maybe don't want to spend that with as good a product we have at this price point. I do think that's one of the reasons we're going to launch our Daly's Total One TORIC, and we're excited about that. given the experience with Precision One Tauric and its positive impact on our sphere, you know, we think it's a good time now in this fourth quarter to get, you know, to begin to get that launch out. So, you know, we're going to build inventory and make that available principally next year in the U.S., but I think we'll see some of that effect coming into the fourth quarter, which is really around giving, you know, this Daly's Total One the benefit of a Tauric, which has been long awaited by, you know, most optometrists, and I think this will put a gold standard Toric now, you know, for comfort in a Toric, you know, out on the market, and we think that will help both brands. But directionally not different than what we expected, but we are seeing now a time where we can grow total dailies, which is really what we're after, nicely. And, again, we saw a great, you know, in total daily share. globally, again, we gained, I think, a full share point or so on the quarter. So pretty good all-in result. And then just on the GBI position, big role for us, obviously, you know, it is the core of the business is our innovation position, and really pleased that Ian Bell has taken the role. Ian has a long history in ophthalmology, knows a lot about what it looks like to be successful products and customers, and knows a ton about ophthalmology. So as we kind of move into what is largely a customer-informed innovation process. Ian brings with him, I think, a lot of very practical customer experience and knowledge of KOLs around the world, given his substantial international experience. So we're real excited about that ad, and it will kind of continue on, I think, quite successfully under his leadership.

Thanks a lot.

Thank you. Our next question today is from Celia Furlong from Morgan Stanley. Your line is now live.

Great. Thank you for taking the questions, and I'll ask both up front. But just on the recent capital equipment strength, could you provide some more color around your outlook for the second half following the recent strength? And then just on total 30, the outlook for 2021, or is this really more of a 2022 dynamic in terms of, contributing to contact sales. Thank you.

Yeah, let me start with the equipment business. We had a good quarter. We were up 23% over 2019, which is, you know, unusually warm, really, for what we would normally expect. I think historically we've said, you know, if we can grow in that mid-single digits, that would be terrific. So this is a good bit better than what we expected. Now, half of that growth was from our refractive equipment. which was up 90% over 2019. So we continue to see an accelerated demand for LASIK, which continues to be the world's most popular procedure. And obviously, our Wavelight platform continues to be the world's leading equipment. So as a function of that, we are pleased with the refractive performance, but we've been careful around refractive not to portray it as a durable idea because, again, we got pretty spooked about this in 2009 and at the last recession. There is a lot of economics and patient momentum tied up in this. I hope for a long-term sustainability. I wouldn't plan it that way necessarily because I think we're cautiously thinking about what's happened in the past. So we're very careful on that one. The other half of the growth is really from our core cataract business, which has been kind of a combination of You know, Centurion, which, you know, remains the most advanced fluidics platform in the world, you know, helped by ActiveCentury, which is giving the Centurion an upgrade decision that's super easy for customers right now. So if you've got an older machine, it's a, you know, this is still the best machine on the market. You know, there's a number of competitors coming in right now. We are seeing tremendous response regardless of any of that. to both our Centurion and its active century piece. So that, along with some new stuff, Argos and Revalue, which are really doing well. Our Argos biometer, I think, has been a very nice platform. It's faster, a little bit easier to use, particularly with dense cataracts. So I think that, you know, is doing well against competition. And fundamentally, you know, we are excited about bringing forward our new smart cataract suite. So as we go forward into the next years, the way I think about it is, you know, we're in a good place right now There should be, I think, just based on the momentum in these early years, some wraparound headwind, because I don't think durability of capital equipment is going to stay like that. I do think that over time it will settle back into a more normal, you know, pattern, which looks a little bit closer to that mid-single-digit pattern we've seen, which is slightly ahead of procedural volume, which makes a lot more intuitive sense. So we'll see how that takes shape. On the other one, which was the T30 piece, we haven't really indicated, you know, what we thought the outlook was going to be. It's not really a 21 effect. I think there will be, you know, a nominal amount of sales. We're getting going right now. It is more of a 2022 contribution. But I would say the excitement of this product for us is it's the first serious innovation for a reusable contact lens in many years. You know, two-thirds of the wearers out there are actually – reusable wares. And, you know, we have a high teen share, which is kind of under indexed for us. So if you think about the size of that market and you think about where our position in that market is, you know, we're really excited about what the R&D guys have created here, which, you know, is a material that's uniquely designed to last 30 days, but yet it feels like nothing on your eye at day 30. That is a super compelling consumer idea because it's this kind of innovation that bridges the durable material with our proprietary water gradient technology. It gives patients something that you know, they're going to have all month, which is comfort. That's what people have been missing. That's what they really want, a reusable, something they've kind of learned to live with, unfortunately. But that's something that we look to try and improve on. So we're excited about total 30, principally a 22 outlook idea.

Great. Thank you.

Thank you. Our next question today is from Rich Newitter from SCB Lear.

Thank you for taking the questions. Just maybe a little bit on the comments you made in the back half, a margin outlook implied by your guidance. I think you bucketed a couple of things that would, you know, weigh on the margin, including product mix, spend timing, and inflationary pressures. Can you maybe just calibrate us a little bit on how much each of those buckets will weigh and which dominates? And then how do we think about those items as we look ahead into 2022? Thanks.

Yeah, so, you know, obviously, if you take the first half, we're at about 18% from a margin rate perspective. That would imply 17% in the second half to get you to the approximately 17.5%. So, to your point, the three components are investments, some inflationary pressure, and mix. I'd say the investments... are roughly half of that pressure point. And that's primarily driven by the fact that we're going to continue to invest behind our new launches. So if you think about, to David's point, you know, T30 sphere and torque in the U.S., we've got DT1 torque in the U.S. and Europe, Precision 1 in Europe and Japan. So we still have quite a few launches in the second half that we're going to continue to invest behind. I'd say the other half is probably a 50-50 split. Inflation being part of that. Again, we did see some inflation in particularly in Q2. We were able to mitigate that. We'd expect to see continued inflation in the second half. If you think about raw materials, wages, freight, We plan on offsetting some of that, but probably won't be able to offset all of it. And then the other component is mix, and it's really a combination of geographic mix and some product mix. So those are kind of the components and the breakdowns. As far as 2022, again, we would expect to see continued margin progression. We'll give you more color on the 22, but we're still on track, obviously, for that low 20s in 2023 and then the guidance we gave at the capital markets day.

Okay, thank you.

Thank you. Our next question today is coming from David Atherton from J.P. Morgan. Your line is now live.

Thanks, guys. A couple of questions. The first one, just to be interested to get your thoughts on the impact of J&J's launch of Synergy in the U.S. and how that's impacted the dynamics, the competitive dynamics there. And then secondly, just to follow up on that second half margin question, I just wondered how much of that cost base you can flex in response to either sales coming in better or slightly worse than expected. In particular, if they come in better, will you be able to spend enough to keep the margins down as low as 17%? Thanks.

Okay, let me take the first one. On the J&J Synergy launch, again, we saw that one coming. We obviously know that product pretty well from Europe. And, you know, again, it is a – diffractive lens. I think it's a combination of a diffractive lens and EDOF, so it doesn't really do much to improve the halos and glare. And I think some of those vehicle disturbances are what has kept people from using ATI wells in the past. So we're very comfortable that Vividi is a very good alternative to complement Panoptix, which is going to give you, I think, a profile that in and of itself has very low disturbances but has very sharp, you know, focal points at near, intermediate, and distance. And so I think we've got kind of the best of both worlds, kind of triangulating the best in, you know, if you want near vision, very sharp, intermediate, very sharp, and obviously distance. That's the panoptics lens, which, again, will be kind of uncompromised or unbeaten on that level. And then if you really are concerned or the patient is concerned about visual disturbances, you really do need to use something like Vivid because the competitive lenses that are diffractive are not going to help you. So I think we're comfortable with it. People are going to try these lenses. In the second quarter, as I said, we grew share in the United States against that launch, and we were up over 80%. So I think we feel like we've planned for and expect competitive intrusion, but nothing that we don't expect.

Yeah, and as far as the flexing on the cost base, again, if you just take the midpoint, and I think we've talked about this before, You know, we feel like we have the right cost envelope. Our cost envelope is about the right size if you think about G&A and all that type of stuff. So, obviously, as you get more revenue, you get more leverage. If you have less revenue, you have less leverage. So the flexing piece, we haven't really broken it out. But think about, you know, you've got commissions in there that would go up or down with revenue. You've got advertising and promotion, particularly in the contact lines business, where that's a heavy component of driving incremental growth. and then you have samples as well as you launch stuff. So I think about those as the flexing pieces.

That's great. Thank you.

Thank you. Our next question is coming from Matthew Michon from KeyBank. Your line is now live.

Great. Thank you for taking the questions. You know, my first is on the concentration of the number of surgeons that are doing the ATIL procedures. I mean, I imagine that there was a larger concentration of surgeons that were performing those procedures, making up that 14% penetration rate. Are you seeing just an expansion in the high-propensity surgeons that are doing it, or is that 14% to 17%, 18% change in penetration? Are you guys actually expanding out significantly the number of surgeons that are doing these procedures?

It's a really good question, and I can't answer it exactly because I haven't looked at it lately. But the, you know, the question we often ask is, are we getting, obviously, are we bringing more surgeons into HILs? Because you're exactly right. A portion of the, a relatively small portion of the surgical community do most of the HILs. And, again, that's largely because historically, you know, if you needed to fix something at the end and you didn't have access to a refractive laser, then it was unlikely that you would really want to get after this because, you know, even the best of surgeons are now and again going to have to fix something. And what they do to fix it usually is they'll, you know, do a small correction with a LASIK laser. So, you know, it has been limited to certain surgeons. We have seen some surgeons coming back in that are new. We have a number of one-off, you know, surgeons we talked to. I just came back from the American Academy of Cataract and Refractive Surgeons, and it was a terrific meeting, and I've probably heard, a dozen or more surgeons, you know, but that's, you know, it's very anecdotal what I'm telling you. I think there's more surgeons for sure. I don't think there's less. I just don't know if that's a meaningful number in the real scheme of things. What I do know is that the existing surgeons that are using HIOLs are very excited about adding patients into the portfolio of patients that they would offer a lens to because it's very much the case that if they see somebody who does a lot of, of night driving or that they feel like, you know, would be concerned about a halo or a glare, you know, that they don't think would accommodate or they're, you know, or they're very particular and they make a judgment about those lenses, they generally haven't put them in. And that was usually like three or ten, three out of ten that would be in that zone. So we think we're adding, you know, some of those patients into the pool and that's really what's driving the majority of it right now. I do think over time you're going to see more surgeons jumping in because I think the Vividi upgrade, particularly from if you're doing a TORIC right now, doing Vividi TORIC is, to me, a really obvious next step. It gives patients the opportunity for considerably better, well, you know, really good intermediate vision and a pretty good chance they're not going to have to wear reading glasses. So, you know, I feel like that's the rich part of the curve right now is the TORIC using kind of non-PCIOL user But that is, again, that would only move the penetration a little bit, but I think it's a rich part of the market.

Good question, though. Thank you. And then next, and then moving to contact lenses, I think last quarter you were talking about new fits being more difficult in this environment. Have you seen that change in 2Q, which is allowing more of the trade-up into Precision 1s?

Well, let me give you a couple of data points, and then I'll try and answer best I can. The short version of that is I don't know. What we are using right now are some data that is survey data from optometrists. You know, if you look at where optometrists are right now, in the U.S. at least, roughly they're, you know, generating about the same number of visits they're reporting as they did in 2019. So visits are roughly back. What they're also saying, however, is revenue is back, but they're using about 25% telehealth. And so I think there may be a lot of existing wearers that are being refilled, you know, through a telehealth, telemedicine kind of scenario. I don't know that for sure. I think that's kind of directionally correct. What I do think is the case is that outside the United States, the international business, there's a higher chain penetration and slower recovery of foot traffic. So they're having throughput issues in these offices. And, again, that's going to reduce, I think, directionally the number of new fits internationally. So we're a little slower internationally with new product uptake, and I do believe that's new fits. In the U.S., it doesn't appear to be holding us back much. So I think the U.S. right now, the market grew, was up high single digits in contact lenses, and obviously we grew 17% against that. So we feel really good about what happened in the United States. International, we did a little better than market, or we're broadly in line with the market, but it was down mid-single digits. That's kind of the current story on contact lenses.

Thank you very much.

Thank you. Our next question is coming from Chris Cooley from Stevens. Your line is now live.

Good morning, and congratulations on the very strong quarter there. Appreciate you taking the questions. Just too quickly for me, if we think about the U.S. cataract market opportunity, Help us kind of frame the way that you're contemplating Edna's recent decision to require preauthorization. I realize it caused basically a temporal kind of disruption there from a scheduling perspective, but some overtones there about ClearLens Exchange possibly getting cut down over time and some scheduling issues there. So I'm just curious if you think others will follow suit and if that, as a result, makes this a more protracted ramp back up. as you recoup those lost procedures from COVID. And then I've got a quick follow-up.

Yeah, I think, you know, we had a look at that. I think the best estimate on it was that they were affecting maybe 10,000 to 20,000 patients a month in the U.S. You know, that's a slow-up. It's a difficult thing for the surgeons in particular because it creates an administrative burden. Patients with cataracts are going to pass and they're going to go through you know, Aetna's decision to kind of make it more difficult for them, I think is broadly, you know, not appreciated by either the associations or the surgeons or us. I think there's very, if their rationale was clear lens extraction, and again, I haven't read the rationale, but if that's it, I, you know, I think that's highly suspect because there just isn't that much of that going on. If they have a standard they want to enforce, which is a you know, 2100 cataract or something, they should come out and say that. But I think what we believe right now is that that will, over time, you know, be a poor decision for, you know, reapplying new patients because that's the kind of, you know, supply-demand issue that causes problems with patients that are enrolling in these plans, particularly seniors.

Thank you. I appreciate that additional color. And then just as my follow-up, Wanted to stay on Cataract and just similarly ask, at ASCRS, a lot of new technology when we look at the premium lens category. Just curious how you're thinking about additional efforts to grow the category, because if you're already a little bit north of 80% share here in the U.S., just over half of share when we think about this category globally and seeing a little bit more of an inflationary environment right now, just Just curious what you think you have to do to keep thriving that share or that category growth over time because it's hard to accelerate growth when you already have 80% market share without growing the category.

Well, that's 80 in the U.S., and I always like to say to the sales team, 80 means we've got 20 left. But in truth, you're 100% right, which is we've got penetration as a primary idea now going forward in the United States, and so we are working very carefully on How do we get more patients, you know, involved in, you know, what is the best outcome? And I actually think, you know, broadly speaking, increased innovation is good for market growth. And so, you know, we welcome competitors in this space on ATI wells because it increases the amount of discussion around it, increases people's choices. And I think that brings more patients into it. And, you know, if there's plenty of room here, you know, the real money is in moving penetration up in this category and more surgeons in. And so if you were, you know, going to trade something, you'd definitely trade a SharePoint for a point of penetration because, you know, the SharePoint is worth a lot less than one SharePoint of penetration, especially as we carry kind of 50-plus share around the world. I'll also say, though, that there are markets, plenty of them, where we have share opportunities. You know, we don't have Vividi in China. We don't have Vividi in Japan. We don't have a couple of other markets that are still left to go for that product, and it's TORIC. We don't have Panoptix TORIC in China. So we're still working on opportunities where we have lower than our U.S. share, and there are many. Our European share is going nicely up, but I would say directionally, you know, there is still a lot of opportunity in the international markets for ATI wells, particularly the portfolio that we have.

Thank you, and congrats on a great quarter.

Thank you. Our next question today is coming from Anthony Patron from Jeffrey. Your line is now live.

Thanks, and congratulations on a strong quarter all around. I'll stick with ATIOLs and maybe just a recap on pricing trends, just when you consider that there is more competition in the space and some reimbursement pressures for monofocals in the U.S. How are pricing trends for ATIOLs, and if they are stable, what is the recap on the premium relative to, say, a monofocal? And then the follow-up would be on Simprinza. I think that was a 50 million run rate. It's coming in this quarter. Maybe just remind us what is the growth profile on Simprinza and maybe sort of the views on the glaucoma space going forward in terms of expansion. Will we see more products added in pharma devices or a combination? Thanks.

Yeah, Anthony, thanks for the questions. Pricing looks pretty stable right now around the world. I mean, I think there are – I would say internationally it's more difficult than the United States. You know, the pricing, you know, against the monofocal – monofocals tend to run around $100, you know, plus or minus probably $20. The pricing around our ATILs, our PCILs in particular, is roughly $800 to $1,000. So obviously we're very keen on watching the pricing around that. We've been pretty good about discipline in the U.S. so far, and I think what my observation historically has been is that if you've got a similar lens, you know, if the lenses are similar, the surgeons are very interested in pricing. If the lenses are significantly different, surgeons are very interested in providing the absolute best care they can to their patients, and most of the time that's really what's driving the behavior. So I think we're in a pretty good place relative to ATOL pricing. But, you know, in general, pricing in this category is, as you know, over the years will always come down a little bit, and, you know, we always plan for that. So I would expect to see some pricing pressure in every market every year, and we apply a little bit of that to our planning every year. On the glaucoma market, I think, you know, what we've seen is, you know, that the device category is a very interesting device category. We think it's going to be, you know, a billion-dollar-plus category. We're still thinking about how to get into it. We're watching it carefully, as you probably know. You know, there have been some reimbursement changes in that space, so we're continuing to think about what it looks like to get in there and how we might do that. I do think that, you know, we're a very patient, very disciplined financial company, so I think we're going to be thoughtful about prices and that kind of thing. I do think that – in the ATIOL business, or sorry, the Simbrinza business, that really is a relatively low growth product. I mean, the category grows nicely, you know, kind of in that low single digits. And I think what we're of the mind of is that that is an ad to really drive our preservative-free multidose line, which is really our sustained products, and then also continue to build on our powder day products. So what we have when the rep goes in now is a a proper ophthalmic portfolio of eye drops for the ophthalmologist who uses a lot of eye drops for tears, which is our multi-dose preservative free. We think that, you know, is a half a billion dollar market opportunity for us in the United States. So the opportunity around the world is substantial. We're getting that going, but you have to be able to get to where people make those recommendations, I think, to be effective. Patented, same thing. You know, we certainly get a lot done with optometry and in the consumer world, but There's still plenty of that that was prescribed by ophthalmologists. We think we can contribute there. And importantly, I think, as we go forward, we'll look to add eye drops into that portfolio. So, you know, I've said in the past, you know, we'll be thoughtful about the RX business. Right now, this was a principal way of getting a sales force on the ground and give us an opportunity to go into any number of categories. Glaucoma might be one, but dry eye and retinal disorders are obviously other big categories in this space that we would look at. So, Broadly speaking, you know, it's not our first priority, but it is something we're going to look at over the years. Lastly on this one, I do think that, you know, for us over time, you know, the opportunity to kind of bring broad stroke ophthalmic products to light is a really important idea. So we're going to be, you know, carefully looking at every white space we can because we think that we have a particularly good commercial platform and that people, you know, that are around the world, there are a lot of companies right now with interesting, exciting products, but may not have the commercial skill we have or the commercial leverage we have around the world. And we're excited to start to find those opportunities because I think that's how we leverage our platform long term. So, thanks for the question.

Thank you.

Thank you. We've reached the end of our question and answer session. And ladies and gentlemen, that does conclude today's teleconference and webcast. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.