Alcon Inc.

Greetings. Welcome to Alcon's third quarter 2021 earnings call. At this time, all participants are on a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note, this conference is being recorded. I will now turn the conference over to your host, Karen King, Senior Vice President, Head of Global Corporate Affairs, NIR. You may begin.

Welcome to Alcon's third quarter 2021 earnings conference call. Yesterday, we issued a press release and 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 ALCON'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 third quarter earnings presentation, which can be found on the investor relations website. As a reminder, for discussion purposes, we are providing comparisons of 2021 versus 2019, unless otherwise noted, as we believe this is more operationally meaningful since our results were impacted by the pandemic in 2020. We will continue this practice through the end of the year. 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. And with that, I'll now turn the call over to David.

welcome to alcon's third quarter 2021 earnings call i'll begin by providing a brief update on our third quarter overall market dynamics and our new innovative products after my comments tim will discuss our third quarter performance and our outlook for the full year then i'll wrap up with some closing remarks and we'll open it up for a q a now we're pleased to announce we had another strong quarter despite markets that are still recovering similar to the second quarter This was driven primarily by demand for new product innovation, solid commercial execution, and strong market recovery in the United States. Recovery in our international markets remains mixed. Although we're encouraged to see signs of recovery in select European markets late in the quarter, other countries like Japan, which is our second largest market, continue to be impacted by the pandemic. Third quarter sales of 2.1 billion were up 13% versus 2019. with increases across all sales categories in surgical and vision care. Core operating margin was 17.7%, and core diluted earnings per share was 54 cents. Customer interest and need for our new products are driving above-market growth, and in surgical, our portfolio of advanced technology intraocular lenses is driving increased penetration rates of ATIOLs, and we continue to see strong demand for cataract and refractive equipment. In vision care, our new contact lenses are winning in the market, and our sustained brand family is posting strong double-digit growth in all regions. Now, moving to our end markets by franchise, in surgical, the global cataract surgery market was relatively consistent with last quarter. Excluding India, the global market was down mid-single digits versus 2019. While the U.S. showed solid mid-single-digit growth over 2019, the international market's remained down high single digits, primarily due to emerging markets and Japan, which continue to be suppressed. Against this backdrop, our implantables business continued to outpace the market driven by our strong ATIOL performance. In vision care, the contact lens market was flat to slightly up versus the third quarter of 2019. Similar to surgical, the U.S. market has returned to growth, while international markets are approaching 2019 levels. Our contact lens business grew significantly faster than the market, driven by the strong performance of PrecisionOne. And moving to innovation, in surgical, we maintained our strong market share in PCIOLs, solidifying our position as the market leader. This is driven by strong demand for our new innovative products, Panoptix and Vivity, despite new market entrants. We continue to see ATIOL penetration rates increasing sequentially as existing surgeons increase their use of advanced technologies, and as surgeons who traditionally preferred monofocals and Torex are now implanting Vividi. Vividi is the first and only PCI well with wavefront shaping technology and a clinically proven exceptionally low rate of visual disturbances. Surgeons appreciate the consistency of patient outcomes without the worry of halos and glare. In our equipment business, our products and innovations remain a favorite of surgeons. including our market-leading FACO equipment, our Active Sentry handpiece, the Luxor Revalium microscope, and the Argos biometer. Earlier this week, we unveiled the latest evolution of cataract connectivity with Smart Cataract. Designed specifically for ophthalmology, this new cloud-based application delivers planning, connectivity, and analysis to improve cataract surgery efficiency, reliability, and accuracy. This is the next step in the evolution of our equipment ecosystem and further enhances the value of our new innovations. Installations of our first application, Smart Cataract, are underway with select customers in the United States. In VisionCare, we're expanding our contact lens offerings to the premium and middle market segments by launching a steady stream of new silicone hydrogel daily and reusable products. In the premium segment, we're building out our total brand with a complete portfolio of design options. In addition to our existing DALYS Total 1 sphere and multifocal lenses, we're now adding DALYS Total 1 for astigmatism to capture the premium toric market, and also Total 30 to capture the premium reusable market. DALYS Total 1 for astigmatism has been eagerly anticipated by eye care professionals for years. This lens provides a significant opportunity in a fast-growing segment where only one in four astigmatic patients are wearing toric lenses. Select customers in the U.S. are already fitting the lens. Early feedback has been very positive, and we're excited for the broader commercial launch early next year. Now, Total30 addresses the large $4 billion reusable market, which hasn't seen any significant innovation in years. Total30 is now available to wearers in the U.S. and Europe, and early reception has been strong. This lens brings the water gradient feature of DALYS Total 1 into a monthly lens, creating a comfortable lens which feels like nothing on day 1 and on day 30. Now moving to the middle market segment, the strong performance of Precision 1 and Precision 1 for Astigmatism continues to drive our above-market growth in the Total DALYS market. Both the Sphere and Toric designs are currently available in the US and Europe, and Precision 1 Sphere is available in Japan. As more international markets recover, we believe we are well positioned to drive steady growth with PrecisionOne. Finally, in ocular health, we're building out our iDrop portfolio. Sustained sales continue to grow globally, reinforcing our leadership in artificial tears. If you recall, about 25% of the fast-growing U.S. market for artificial tears is the preservative-free category, compared to over 50% in some international markets. Our multi-dose preservative-free formulations of Sustain Ultra and Hydration are now available in Europe and the U.S., where we're seeing a favorable customer response. We also continue to see strong demand for Pataday family of allergy products, which has been aided by our recent launch of Pataday Extra Strength earlier this year. And finally, this is the first full quarter where we've added Simbrinza to our growing portfolio of eye drops. Now, before I pass the call to Tim, I wanted to touch on a recent announcement regarding our intention to acquire IVANTIS. We're very excited for the opportunity to expand our glaucoma portfolio in this large $500 million market, growing in the low to mid-teens. Glaucoma is the second largest cause of blindness after cataracts and impacts more than 75 million people globally. IVANTIS's flagship product is the Hydrus MicroStent, a minimally invasive glaucoma surgery device. Importantly, The HYDRAS is unique as the only MIGS device with safety and efficacy data out to five years. The five-year horizon clinical study of HYDRAS is the longest continuous follow-up of a MIGS device. It demonstrated that 65% of HYDRAS patients remained medication-free at five years. HYDRAS has a combination cataract indication in the U.S., which means the device is implanted during cataract surgery and and both combo cataract and standalone indications in five international markets. We intend to leverage our global commercial footprint and our development capabilities to create even greater value for existing and future Ivantis products. In a few minutes, Tim will walk you through some of the financial aspects of that deal. Our third quarter performance demonstrates the resilience of our business, the strength of our innovation engine, and the expertise of our commercial organization. We are executing on our new product launches and growing faster than the markets around the world, even as they continue to recover. For surgical, we're expanding our leadership in equipment by developing an equipment ecosystem to improve efficiency and accuracy, while we're expanding our implantables business in surgical glaucoma. And for vision care, we're using our water gradient technology to create differentiated new silicone hydrogel contact lenses for both daily and monthly use. With that, let me pass it to Tim, who will take you through our financial results.

Thanks, David. We are pleased to report third quarter sales of $2.1 billion, up 13% versus 2019, driven by 14% growth in surgical and 12% growth in vision care. Year-to-date, sales were up 10% versus the first nine months of 2019, with surgical up 12% and vision care up 9%. Implantable sales were $375 million in the third quarter, an increase of 32% versus 2019. As David mentioned, we remain market leaders with our PCIOL portfolio, and we continue to see adoption driving encouraging penetration rates above historical levels. On a year-to-date basis, and plannable sales were up 28% versus the first nine months of 2019. Consumable sales of $594 million in the third quarter increased by 3% versus 2019. with sales growth across all three categories of cataract, vit, ret, and refractive. On a year-to-date basis, consumable sales were up 1% versus the first nine months of 2019. Equipment and other sales were $192 million in the quarter, up 20% versus 2019. About eight points of the growth was due to the refractive sales with continued demand for LASIK procedures. The remaining growth was primarily due to strong demand in cataract and new equipment. On a year-to-date basis, equipment and other sales were up 21% versus the first nine months of 2019. Now turning to vision care, third quarter sales of $923 million grew 12% versus 2019. Contact lens sales were $562 million in the quarter, up 7% versus 2019. This was driven by strong demand for Precision 1 and Precision 1 for Stigmatism, as well as continued growth from Daly's Total 1. As David mentioned, we are also rolling out Total 30 in the United States and Europe, where customer feedback has been extremely favorable. Based on the strong performance of our contact lens portfolio, we continue to add new manufacturing lines and assess the need for additional capacity to support product flow of our new products, especially Precision 1 for Stigmatism. On a year-to-date basis, contact lens sales were up 5% versus the first nine months of 2019. Now moving to ocular health, where sales of $361 million in the quarter increased by 20% versus 2019. About half of the growth is attributed to a sustain, which grew double digits in all regions, underpinned by a growing artificial tier market. This was aided by our new multi-dose preservative-free launches in Europe and the U.S. The other half of the growth is primarily due to new additions to our portfolio, including Pataday and Simbrinza, which had no comparable sales in 2019. On a year-to-date basis, Ocular Health sales were up 16% versus the first nine months of 2019. Now, moving down the income statement. Third quarter core gross margin was 63.7%, broadly in line with 2019. We continue to see inflationary headwinds related to raw materials, freight, and labor despite our best efforts to mitigate these pressures through active management of supply and selective price increases. Core operating margin was 17.7% in the quarter, driven by operating leverage as higher sales outpaced increases in SG&A. As we mentioned on our last call, we do expect to see incremental margin pressure in Q4, primarily due to product mix and timing of spend as we continue to invest in our commercial activities and sales force as markets recover. Third quarter interest expense was $31 million, down from $35 million in 2019. While we've taken on incremental debt, we've benefited from lower variable interest rates and lower debt in affiliates. The core effective tax rate was 17.5% in the quarter, compared to 18.2% in the third quarter of 2019. The current rate benefited from a buildup of inventory in certain international markets that had a favorable product mix, and a favorable mix of pre-tax income and loss across tax jurisdictions. For the first nine months of the year, the core effective tax rate was 17.5% in the quarter, compared to 18.2% in the third quarter of 2019. The current rate benefited from a buildup of inventory in certain international markets that had a favorable product mix, and a favorable mix of pre-tax income and loss across tax jurisdictions. For the first nine months of the year, the core effective tax rate was 19.1%. Core diluted earnings per share in the third quarter of 2021 were 54 cents, up 8 cents versus the third quarter of 2019, driven primarily by operating leverage. Next, I'll touch on a couple of cash flow and balance sheet items. Free cash flow year-to-date was $578 million, compared to $260 million for the same period in 2019. Higher core operating income and lower separation spend were partially offset by increases in capital expenditures and inventory to support new product launches and expected upcoming demand. CapEx was $380 million for the first nine months of the year, with the increase driven by our contact lens manufacturing expansion. As a reminder, historically, CapEx spend has been heavily weighted in the fourth quarter, and we expect that trend to continue this year. Transformation costs were $14 million for the third quarter and $141 million, like the date. Turning now to business development. As David mentioned, we announced our intention to acquire Ivantis for $475 million in cash, plus potential future payments contingent upon the achievement of certain development and commercial milestones. Ivantis offers attractive sales and earnings growth potential in a fast-growing category where we currently do not participate. We estimate Advantis will have sales of approximately $60 million for the full year 2021. In 2022, we estimate that Advantis will be broadly neutral to core operating income, with some pressure on the core operating margin rate. We expect the acquisition to be accretive to core operating income in 2023. We anticipate to close the transaction in the first quarter of next year, subject to customary closing conditions, including regulatory review. As we discussed earlier in the call, we continue to see broader macroeconomic burdens, such as inflation and tightness in the supply chain. We've been proactively working to manage these challenges, but we've seen pressure to date and expect that to continue going forward. In addition, the U.S. dollar has appreciated significantly since the first half of the year. If the U.S. dollar remains at current rates, we would expect to see FX headwinds in 2022 as compared to 2021. Despite that backdrop, and based on the strong performance year to date, we expect to come in around the higher end of our 2021 guidance. This outlook continues to assume that global markets return to 2019 levels by the end of the year. U.S. markets continue to grow above 2019 for the remainder of the year. And on an aggregated basis, international markets reach 2019 levels early next year with emerging markets in countries like Japan remaining subdued. Now, I'll turn it back to David for some closing remarks.

Thanks, Tim. To briefly wrap up, we're pleased with the strong results we saw this quarter, with sales up in every category, exemplifying the resilience of our business, the strength of our innovation engine, and the expertise of our commercial organization. Our new product launches are gaining momentum and taking share as markets around the world will continue to recover. We're pleased to be expanding our surgical portfolio, both through our smart solution ecosystem and through our intended acquisition of Ivanis. And at VisionCare, a robust pipeline of innovative products are bringing new options for doctors and patients in contact lenses, dry eye, allergy, and glaucoma drops. We're pleased with our ability to deliver growth and outpace the market, and we are well-positioned to capture an outsized benefit as the global markets recover, delivering long-term value to our shareholders. And with that, let's open up the line for Q&A.

Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. And our first question comes from the line of Ryan Zimmerman with BTIG. Please proceed with your questions.

Great. Thank you for taking the questions and congrats in the quarter. You know, Tim and Dave, when I think about your markets last year in the height of COVID, you know, ophthalmic markets really took a pause. And yet now they're proving far more resilient. And so I'm wondering if you could just kind of speak to that dynamic as to why that is. And we've heard from many of your peers about stacking challenges, you know, into the next year. Are you anticipating that or not, particularly in the U.S. market, where, again, it's proving to be more resilient? I'd love to hear some comments on that.

Yeah, Ryan, we have seen a lot of strength in the markets, and I think it probably speaks to the underlying fundamentals at the core. As you kind of think about getting through this, not everybody – I think we weren't 100% sure how it was going to happen, first of all. As you recall, we were a little bit – off on the early guidance. But I think what we really believe is that these cataracts aren't going away and that they are coming back. But again, even through this point in time, I think if you look, and we've used 2019 as comparators so that you can kind of divide by two and see if it's still there. And I think through a couple of years, we still think the market is not yet back to full growth. So I think in the US, it was 4% procedures over 2019. So if you do that by you know, by two, you're still not quite what the normal growth would be. We would have expected normal growth to have been about 3%. So, yeah, it's been solid coming back. And, you know, again, although it paused last year, you know, a lot of the underlying things in vision care, for example, were better than we expected. So, you know, I think vision care, we don't see necessarily, for example, the visits back to where we'd like to see them, but we are seeing revenue, you know, come back. And that seems to be a phenomenon of of some, you know, renewal remotely for prescriptions, and also larger purchase per patient. So we're seeing some of that happen as well. So I think there's been some unique circumstances, but I think more importantly, the underlying fundamentals on eye care lead you to believe that these are relatively resilient markets. And so I do think they are going to, as we said, come back largely, you know, by the, you know, first part of next year all in. You know, we think this year the U.S. is growing now, as I said. But international is going to take a while. It's going to take a little longer. And some markets may drag into the middle part of the year. But I think in aggregate, international should be back sometime early next. So, you know, we'll get there. But I think it's likely to be a slow, steady climb from here, maybe slightly above historical numbers as opposed to, you know, any kind of quick bounce back that looks a little bit more steep. I think it's much more likely to be a gradual climb that's just slightly warmer than historical growth rates. Stabbing. Okay. And staffing, yeah, sorry, thanks. On staffing, yeah, we still see that. I will tell you that staffing in optometry in particular I think is difficult right now. The surgical centers I think are generally pretty good, but it is difficult for them to kind of go way beyond what they were doing. And I think this kind of early on we had hoped that there would be a steeper bounce back perhaps. I don't really see that, partly because, frankly, it's hard to get more throughput out of the current capacity that we have. And there are staffing issues. In vision care, similarly, I think if you were seeing 20 patients a week, or sorry, 20 patients a day, you know, in 19, you're probably seeing 16 or so right now. And it is tough without, you know, additional staff to get back up to that 20. So, again, I think that will climb slowly. But I think over the long haul, you're going to see that, you know, these markets are kind of roughly returning, you know, as we would expect next year and kind of back to kind of historical growth rates.

Okay. And then just on Cataract, I mean, obviously there's been some product introductions in the market competitively. And so, you know, what are your expectations for when you could or could not see that impact? I mean, it seems like, you know, your Panoptix and Vividi are doing well despite those introductions. And so I would imagine, though, that you're baking in some expectation there you could speak to that a little bit. I'd appreciate it. Thank you for taking the time.

Yeah, no, I mean, look, we've seen these products in the market around the world for a while, so that, you know, really the only new market here is the U.S., and I think we expected to, you know, we had a very high share up in the 80s. Certainly, that's going to come down, so it's just a matter of, you know, is it more or less than we planned, and I think, you know, we're seeing pretty much what we expected. You know, I think people will try the lens. It's a good product, but I think they're going to find that, particularly Vividi, you know, has no halos and glare really, I mean, to speak of. And I think, you know, it's very similar to a monofocal when you really cut all through it, but it's giving you intermediate and near vision. So, you know, this lens has turned out to be a much better alternative for a lot of folks than trying some of the newer lenses, I think, that have a lot more of the visual disturbances. So, I think somewhere between panoptics, if you really want near vision, you know, 100%, you know, pretty much guaranteed near vision, that's going to be a panoptics patient. But you can get a lot out of this Vividi product, and we are seeing a lot of benefit from that. And remember that, again, even with the shared dynamic, what we're really trying to do now is move more to the penetration side of this thing. And so we've been talking a lot about, you know, how do we get more people involved in ATI wells? How do we get more patients through into these practices? And I think that will be the dynamic that's probably more important over the long haul. Because I think we've said in the past, as you know, there's probably for every 100 basis points of penetration, we can pick up $100 million. So we're very interested in right now the penetration rates because our share is pretty solid. And I feel really good about the competitiveness of our current position.

All right. Thank you.

And our next question comes from the line of Julian Dormois with BNP Paribas. Please proceed with your question.

Hi, good morning, Dave and Tim. Thanks for taking my questions. I have two. The first one relates to vision care and, more precisely, the launch of Total30. If I'm right, you currently have a share in the new teams in that category of premium reusable. What is the reasonable share objective that you have for this specific segment and how long do you think it could take to get you there? And my second question is on surgical, and I know I've already had the question on other calls, but I'm still very puzzled by the very different growth patterns that we still see between consumables on the one hand and implantables and equipment on the other hand. And that's obviously compared to 2019. So is it just a function of implantables and equipment going above the historical trends, or do you still expect to see a catch-up effect at some point in consumables, for example, in 2022?

Sure, Julian, let me... Let me start with the first one. We are very excited about T30. Total 30 is a unique product that I think adds water gradient to a material that is durable for 30 days. You're getting the two best elements of what we want, which is durable material that will last 30 days, and yet at the same time feels like nearly nothing on day one and actually out at day 30, very similar to the first day you had it in your eye. That's a big change from what the kind of products that are available right now, and we're excited about the reception we see to that right now. So I think that not withstood. The beautiful thing about the contact lens market is it takes a while to move share. And so on the one hand, you'd like to see it – the aggressive part of this is you'd like to see it run up, but what you're really doing is turning – a small part of the market every year. So remember, if you're happy in your lenses, you're likely to stay in your lenses. And that's probably 70% of the patients walking through the door. They're going to end up basically in the lens they walked in with. If you're unhappy or you're having a trouble or it's not as comfortable, that's a switch or a new patient. And you need to think about those as really about a third or less of the total market that churns. And so that's the available opportunity every year to move some share. And so that takes several years. In many cases, DT1, for example, we've had out nearly 10 years. It's still growing share. And we will see a long rise of these products. They're not super steep. They're relatively stable. When you get them on a share trajectory, they tend to grow every year a little bit. And that's really the outlook. And in a lot of ways, that's a very helpful financial trajectory because you've got a pretty good pattern and it's got long-term sustainable growth. So we're excited about what it could be. Again, I wouldn't forecast a share objective per se for this product right now, but we're excited about what we see early days. On the surgical side, there isn't really, the way to think about implantables and equipment are different, but you start with the market growth, and again, historically the market growth in procedures, you can pretty much approximate with unit growth in implantables. And again, typically it's been kind of in that three, somewhere between kind of three and four globally. It's been hotter than that occasionally, but somewhere in there is usually the procedural growth. The unit for implantables is going to grow very close to that procedure rate because, of course, one surgery usually means one implantable. Consumables similarly should grow roughly. In other words, one pack or one unit of use idea will come along with that same surgical piece. What you're seeing in implantables is a trade-up in value. So you're trading a unit that was, in essence, $100, let's just say, for a monofocal unit, now trading at $600 to $800 to $900 in some places. And that's what's driving the value difference between those numbers. Equipment is slightly different. Equipment has just been unusually robust. And we would normally say that equipment should run just slightly in advance of procedural growth. So if you figure the market has enough equipment to service the equipment, there's some changeover every year. So, you know, that's usually, let's call it, you know, somewhere between 10 and 20% of the market should be, you know, retiring equipment and buying new equipment. And then you've basically got, you know, growth on the market that is procedural growth. And so that is how we think about that growth. It's usually, again, typically slightly warmer than the procedural growth, depending on the price of the equipment. And then if you're upgrading on a price, then again, the value grows a little bit faster. So that's probably the way to think about it. But I don't think there's a ton of catch-up here for consumables because whatever procedures grow, I think, is where you're going to see the consumables rate grow generally. And so that's kind of where we are. And part of the difference you're seeing in some of our markets is that we index more heavily to markets that right now have recovered versus the global markets. In many cases, we exclude India because it really hasn't recovered. It has a monster number of procedures, but we're not benefiting from those right now.

Helpful. Thank you very much.

Our next question comes from the line of Scott Barbo with Barenburg. Please proceed with your questioning.

Yeah, thanks, guys, for taking the question. So two questions. I'll start with the first, please. Just on guidance, so obvious question would be, Why didn't you include any comments on guidance in your release? I think that confused quite a bit of the capital markets this morning, and I don't think we've seen it before. I appreciate, Tim, also you highlighting comments about inflation and logistic costs and so forth. What I'm trying to understand is, are they significant enough to drive this 16% margin in Q4 implied by your guidance? and do you still hold your 20% margin by 2023 despite this acquisition? So that's the first question. Thanks.

There's a few questions in that question. Yeah, to be honest with you, I was a little surprised with the reaction to the no guidance in the press release. I mean, our philosophy has typically been, that we don't update the guidance unless there's a change to the guidance. So, obviously, we provided a little bit more color in the script that we think will be at the high end of the guidance, but there were no changes overall. From a 16% perspective, you know, there are a couple things in there. I mean, Q4 – historically, from a seasonality perspective, is typically lower than Q3. That's primarily driven by vision care and a couple other elements. We also had, as we mentioned, some timing of spend. So we've got some spend that we thought we would spend in Q3. That has now shifted to Q4. So I think as you think about how material are things going to be, as you project out into 2020, I would just provide the following color. I think, first of all, I would take the high end of our guide. So as an example, if you start with revenue, take the $8.2 billion. And then, you know, we've said in the past that we're going to grow mid-single digits. I would just take into account that we have a lot of momentum exiting 2021 from a revenue perspective. So if you think about implantables, to David's earlier comments, Really strong performance in Vividi. We're going to continue to launch that in new geographies next year, so that momentum will continue. If you look at contact lenses as an example, we have a lot of momentum in P1. We've got two new lenses coming out, P30, DT1 for stigmatism. So, again, I would expect to see more growth there. And then dry eye, we're very well positioned with our sustained family. So I would take that into account from a revenue perspective. The one caveat I would add is the comment around equipment. I don't think equipment is going to run as hot next year as it did this year because I don't think refractive stays at those levels. But nonetheless, that's how I think about revenue. Now, when you go to gross margin in my inflation comments, I do expect to see some gross margin pressure year over year next year. I mean, we, like everybody else, we continue to see, you know, pressure in raw materials. If you think about resins, if you think about electronic chips, I mean, that continues. I think freight pressures continue. Labor wages continue to be pressured. So we would expect to see some gross margin pressure next year, year over year. If you think about R&D, Just to keep going through the P&L, we've said 7% to 9%. We've been running at the high end of that range. I think next year, now that we've, I don't want to say caught up, but just given the profile of our innovation pipeline, I would expect that to be more at the midpoint of that 7% to 9%. And then SG&A, as we've continued to say, I would expect to continue to get some nice operating leverage. I mean, if you look particularly on the – if you look at the G&A side of the house, I mean, there are going to be modest increases in that given all the transformation work we've done, and then obviously we'll invest behind the markets that are growing. So that's how I would tee it up. And then the only thing I would say on top of that is looking at FX, if you just look at the rates, as of last Friday and compare that to, you know, to take the average rates for September year to date, I mean, all the currencies are moving. And you've got, you know, the dollar has strengthened a couple percent versus the euro. It's roughly 2% or 3% versus the pound. It's 4% versus the yen. So assuming rates stay at those levels, we would expect to see that type of pressure going forward into 2022. And as far as 2023, we feel very comfortable with the guidance that we gave at Capital Markets Day in reaching the commitments in both 2023 and 2025.

That's a very comprehensive answer. Thank you. And maybe if I can just sneak in a quick one. David, I'd love to hear your thoughts about Avantis and the acquisition here. I'm just curious to understand why you decided to buy this business when you could have arguably acquired the market leader with four times the revenue Just share with us what it is about this business that particularly appeals.

Well, look, I mean, one of the things we've thought a lot about is, because we've been in this space a number of times, is where is the market need? And I think this particular product, I mean, the Adventist folks have done a terrific job with the data that they've created, with the safety of this product, and importantly, this is a uniquely effective product. And we've always thought, I've always thought that the space that needs to get filled here is something that is effective over a long haul. And when you think about the data that they're showing, which is 65% of patients medication-free at five years, this has got a demonstrable efficacy that we think is very powerful. And I think, you know, If we put our muscle behind that, put some more data behind that, you know, give that the commercial footprint that we have, we think that this has got a lot of runway. And so, you know, I think the opportunity here is, you know, per dollar paid, if you will, I think is just a better value.

Very clear. Thank you.

Our next question comes from the line of Veronica Dubojova from Goldman Sachs. Please.

Good morning, guys, and thanks for taking my questions. Two, please. One, just on the IOL or PCIOL momentum, David, I was hoping you could talk about to what extent the growth that we saw in the quarter is being driven by Vividi versus Panoptix. And maybe just give us a little bit of flavor for the type of market share that you've seen with Vividi in Europe and kind of how you think that informs your views going forward. And if I can sort of interpret your comments on the continued higher penetration and uptake of IOLs. I think I ask you this question every quarter, but just your degree of confidence that that continues as we move into next year. Has it increased or decreased? And then my second question is a bit of a financial one for Tim. Tim, just thinking about the bridge from the 21 margin to the 2023 margin and Would love to get your thoughts to what extent you think that margin progression is, you know, 22 versus 20, 23 weighted. Is this an even keel, or should we be thinking about some element of phasing, especially in the context of the Avantis deal as well? Thanks.

Hey, Veronica, good to hear from you. Listen, on the PCIOLs, look, the Vividi product on a growth rate basis is growing really well, and obviously it's growing faster than Panoptix because it's wrapping around on a really tiny number. Panoptix is still growing nicely, to be fair, double digits. But I think what we're seeing really is what we said before, which was you're going to see as Panoptix peaks and comes over and starts wrapping around on all the launches that it's had, that it kind of settles down. And then Vividi becomes really that next booster, if you will, for us. So we're excited about what we see with Vividi. We're excited about the utility that we see with Vividi. There's a lot of surgeons doing a lot of, you know, kind of important things, I think, and able to treat patients without this halo and glare that is bringing patients, for example, from a monofocal toric to a multifocal toric. And that's, you know, that's a big move, right? Because if we can, you know, upgrade our toric business to multifocal toric, really pretty risk-free, you know, I think that's a really nice opportunity. That seems to be a big part of the Vividi growth for us right now But I would say that our share growth around the world has been mostly, at this point, is being driven mostly by Vividi. Panoptix, pretty stable, slight growth. There are several markets yet to launch Vividi. So, again, I think what we saw in Panoptix for about 12, 18 months is what we'll probably see with Vividi for about 12 or 18 months, which is as it wraps around on its prior year, we'll get steady launches around the world. We've still got to get it into Japan. We've still got China to go. We've got a couple other markets. We haven't got the TORIC out yet in a couple of markets. So we've got more, I think, share to be had. But my point on penetration has been that, look, I mean, there's going to be competitors to us. We've got a very high share right now. So we don't expect that that's the main driver of growth going forward. So your second question makes tons of sense, which is, you know, we are excited about what we see right now with Vividi in particular. We think there is some additional patients coming into the PCIOL business. And that's a little bit of what I said before with monofocal and monofocal Torex converting into patients now that are interested in doing this because of the lack of halos and glare, or at least the very similar profile it has to a monofocal. I think that's really what it is. Now, the confidence I have around it is a little bit tough because I feel good about that it's definitely driving greater penetration right now But I would be careful with it because, again, right now the penetration rate has a denominator that lacks a lot of monofocals in it. So if you look around the world, we're still recovering internationally in particular. So there's millions of procedures that were not done. Let's just pick India, Brazil, Russia, a bunch of other kind of developing countries, where when you add back all of those units to the denominator, I think the current penetration rate which is pretty high, would probably come down a little bit. So we're waiting to see the market stabilize. But I think what's fair to say, because we see it with individual surgeons, is year on prior year inside of individual surgeons markets, we see their individual penetrations growing. And we know we're not losing surgeons that direction. So I think we feel confident that it's growing. The durability of it, we'll have to see. And the size of it, again, I think is still, jury's still out on. But again, we're of the mind that this is the right thing to be thinking about and tracking.

Hey, Veronica. And on the margin profile, you know, I'd say our story is still the same. It's that margin improvement is really roughly 80% driven by operating leverage and call it 20% driven by gross margin improvement. So, I think from an operating leverage perspective, you know, it should be relatively linear because, again, revenue is really going to drive that improvement. So as we continue to grow at mid-single digits and keep our cost base at inflationary type levels, you know, that should go over, that should move in sort of a linear perspective. On the gross margin perspective, I think the view is there's probably a little bit more improvement in 23 as compared to 22, and that's really driven by two things. I'm not sure how long this inflationary pressure is going to last. I'm not sure we'll see as much pressure in 23 as 22 or 21. We'll have more time, obviously, to put in mitigating actions and what have you, see how the market responds. And then you have less pressure on the P1 line installations in 23 as compared to, you know, 22 and 21. So that's how I would see the progression. And then as far as Ivantis, if you recall, Capital Markets Day, The guidance we gave did not include any acquisitions, so we feel very good about the 23 and 25 commitments. Advantage isn't really material enough to impact those when you think about the longer term anyway.

Fabulous. Thank you, guys.

Our next question comes from the line of Larry Beagleson with Wells Fargo. I'm curious to see what your question is.

Good morning. Thanks for taking the question. So, David, just one on Ivantis. It sounds like you guys think you can grow the product from here, from the $60 million, despite the reimbursement change. Can you grow that product in 2022 and beyond? And any color on the U.S. OUS breakdown of sales? And, Tim, could you just help us quantify the FX headwind, the Ivantis headwind in inflation? in 2022? Thanks for taking the question.

Yeah, Larry, on the IVANIS, yeah, we believe we can grow the product long-term. I think, you know, we were very aware of a number of situations that we wanted to see resolved before we got, you know, into an acquisitive mode with IVANIS. The CMS ruling was one of them, and as you know, that settled out last week. It was It was very, you know, improved from the very difficult price they gave us at the beginning. But, again, it is going to have some downward effect on what was, I think, a low to mid-teens growth rate on the market. That said, you know, again, we think the market continues to grow, and we think this product in particular can gain share. So, you know, as we see it, you know, the market is a fast-growing market where, you you know, with the right amount of energy on this product and the right amount of messaging and, frankly, the great amount of data that the team at Adventus has pulled together for us, we're excited about what we can do with it, and we'll see how that adds into it. And, you know, this is right in our wheelhouse, right? I mean, we're in surgery every day with these surgeons doing this procedure. You know, this is – it's an easy and important, you know, kind of add to our service to the surgeons. And on the OUS sales, the way to think about it is it's predominantly U.S. sales right now. There's not a significant amount of OUS right now. We look forward to trying to change that, but we'll work principally on reimbursement first before we get very far out, getting a bunch of sales folks out there. We're going to work through that. And, again, I think they're in five countries right now. As you know, we're thinking about a lot of other markets than that.

Yeah, and as far as some of the quantifications, Larry, I'll start with FX. You know, I rattled off some of the currencies that have been increasing. I mean, if you were to take the entire bucket of the currencies that really matter, you know, it could be two or three points. But again, that's as of rates as of, you know, last week, and we're just going to continue to monitor those as we progress through and before we give guidance next year. On the inflation front, it's I'm a little bit hesitant to say because, again, we have pricing actions out there. We have our manufacturing guys driving a bunch of productivity initiatives that we're still shaping up. So that's one we're going to continue to monitor. I would expect to see some pressure, but we'll give you some more color when we give our guide next year. And as far as Adventus, it'll put some slight margin rate pressure. I mean, I would think about take the $60 million in sales tax. and grow that at whatever you think is appropriate next year. And there won't be a lot of core operating income with that. So that will give you some rate pressure.

Thank you, guys.

Our next question comes from the line of Daniel Vuchter with ZKB. Please proceed with your questions.

Thank you very much, gentlemen, for taking my two questions. And the first one, maybe on the vision care margin, I mean, it was pretty nice to see that vision care had a relatively good margin in the Q3. Obviously, we are all aware of the capacity additions you have and the draft they are causing on operating margins here. But can we see Q3 like the turning point here so that going into 2022, vision care should really turn the tide and show rising margins? And then the second question on the one-offs. I mean, you had this one impairment in the amount of 178 million. Can you clarify a little bit more what this was related to? And also you have 50 million legal expenses. What does that cover and what are the risks here? Could there be bigger burdens to come still on the legal side? Thank you very much.

Sure, thanks for the question, Danny. Yeah, as far as vision care margins, we were pleased with Q3. We continue to make progress. I would caveat that, though, that Q3 is impacted by seasonality. So we had a very strong revenue performance, and some of that is driven by, if you think about allergies, allergy season as an example, we have a heavier revenue mix in Q3 as compared to Q4. If you look at the back-to-school programs that we run, particularly in the U.S., That gives you a stronger Q3 as compared to Q4. So operating leverage is driving a significant amount of that improvement. But nonetheless, we're very pleased with how the vision care business is performing. From an impairment perspective, yes, we did impair. We had a surgical asset that we had purchased in 2017. And as you know, given the portfolio that we have, you know, we manage all of our assets, all of our investments on a continuous basis. And given some of the successes we've had in other pieces of the surgical business, which is where this asset was, we decided to suspend our R&D and any potential commercialization. So we did take an impairment that was $178 million. That is a one-time non-cash item. And then lastly, on the legal provisions, We don't really comment on outstanding legal cases. So what I would say is every quarter, you know, we look at the legal landscape and we look at the balance sheet and we provide provisions to make sure that we are adequately covered and we feel like we're adequately covered in Q3. Okay.

Just to clarify, there is no bigger issue you are particularly worried about on the legal side?

I'm sorry, what was that?

He was asking about, no, look, we're, you know, again, on the legal stuff, you know, we look at it every quarter. We aggregate it and then look at our risks, and we make an appropriate provision, so that's what we've done. Okay.

Thank you very much. Thank you. Our next question comes from the line of Cecilia Furlong with Morgan Stanley. Please proceed with your question.

Great. Thank you for taking the question. Two questions, and I'll ask them both up front, but Just in terms of new fits, I'm curious if you could talk a bit more about what you saw in OUS markets during the quarter as well as your outlook going forward from a recovery standpoint. And then also just between total 30 and ramping VT1 TORIC, can you talk a bit more about just how you're thinking about balancing those two and your comments on ramping manufacturing lines into 22? And thank you.

Yeah, so new fits right now are going quite well for us. I would say in the U.S., we continue to make a lot of progress, particularly in the dailies. Now, T30 is brand new, so we don't have a lot of data to give you on that one, but Precision 1 has done very well. DT1 is also, you know, continues to do well for us. Outside the U.S., it's a bit slower, and I would say that What we've seen is that the markets really have new fits coming into the office have been down and remain down, particularly Japan, which is our second largest market. Europe has gotten a little bit better. It's slowly working its way back. But as I think you're correctly pointing out, you need to be in a situation where new patients are coming into the office and or patients are having trouble with their current lenses are coming in and looking for some alternative. And so As the market comes back in those areas, and I think we believe that the VisionCare international business will largely be back to the 2019 levels in the beginning of the year. Again, I think that's really positive for the new fits for new products. But I do think that we've been trailing our trajectory in the U.S. because the new fits really aren't there yet. But we'll get there. And I think what we see, which is encouraging, is is that when we get these products into the hands of patients and optometrists, they are really performing well. And so people really like our PrecisionOne for stigmatism. They really like the PrecisionOne sphere. You know, our DT1 for stigmatism has gotten great reviews in the U.S., same thing with T30, both in Europe and in the U.S. And so we are working through all of those, and obviously we look forward to a more normal market next year. where we can get a little bit more share outside the U.S. I would say on the ramp-up of manufacturing, we are in a good place. We've had a greater-than-expected demand for Precision I, and so we were a little bit off-guard with how well Precision I astigmatism did, and we did have sporadic backorders around the U.S., and we've had to delay some rollouts because of that, but it just took off on us. And so The good news is we're getting a great reception, and we've had some nice movement on that product. But what we do need to do is really look at now what do we expect from these products, and do we need more line time, and do we need more machines? What are we going to do about it? So I think we're working through that now. Again, I don't anticipate any major changes per se, but we may want to invest in a little bit more manufacturing for next year, so we'll see.

Great. Thank you for taking the questions.

And ladies and gentlemen, as we reach the top of the hour, we have time for one more question, which leads us to the line of Jeff Johnson from Baird. Please proceed with your question.

Thank you. Good morning, guys. Thanks for squeezing me in. David, just on that contact lens point, you know, I'd be interested to hear primarily your expectations, you know, what you're seeing for trade-ups versus trade-downs from PT1, the trade-downs, the trade-ups from DACP and some of the other older focus products, number one. And number two is, You know, let's say you grow a couple points above market in the contact lens market over the next couple years. Do you think that will primarily be driven by net kind of trade-up benefits within your own portfolio, or do you expect that you'd also be taking unit or patient share on iShare, however you want to think about it, relative to competition?

Yeah, a little bit of both, Jeff. I mean, I think let's start with a cannibalization question. You know, we expected to have some cannibalization with P1 of DACP in particular. You know, in truth, I think the DACP has been a little bit more stable than we expected, and DT1 was probably a little bit more than we expected. But directionally, the all-in value change was pretty much as expected. So I would say, you know, the mix might have been a little bit different than we expected. But we're also working hard to make sure that people really understand, you know, what these products are and their proposition. And I think as we get DT1 – one of the reasons we pushed DT1 TORIC – you know, out a little bit sooner than maybe we had wanted to was because P1 TORIC took off on us. And that put some pressure on DT1 because the Total One product, you know, obviously great product, but we didn't have a TORIC for it. So we were seeing a little bit of P1 eat into DT1. So now that we've got the TORIC out there, again, that stabilizes our premium product. Now we've got both the P1 and P1 TORIC out there. So we've got a middle market product. And, again, that line – that lineup seems to be doing quite well for us going forward. Over time, look, I think there's a lot of trade-up going on between reusables and dailies that's gone on for years. And I think one of the really great things about the vision care market is it, you know, it isn't fast moving or it isn't, you know, it's steady and strong. And so you're seeing a very fundamental, you know, shift from reusables to dailies, which is going to continue. And I think that drives value growth, even in a market where EQ growth would be 1%-ish, maybe 2% on a good day. So I think that we expect to see some competitive share for sure, but we don't have to go steal share from everybody in this space to grow nicely in the mid-single digits or higher. So I think that's the beauty of what we're doing right now. The other piece of this, of course, is that our reusable business you know, is underrepresented in, you know, our share position as one of the earlier questions came to us. And so, as we think about that, you know, we actually think we can gain share in the reusable space pretty easily, particularly with this technology. And that margin profile is a good margin profile for us, right? I mean, that's a much better, you know, margin than the daily's margin, albeit, you know, a lower growth at market. So, if we can gain share, improve margin there, and then gain revenue at maybe a less attractive margin, but still positive. We've got a good mix going, and I think that's how we see moving forward. Remember, too, that when we go to the specialty lenses, Torex in particular, that's the sweet spot of this market right now, growing very quickly in the silicon hydrogel space and at a premium price to the sphere. So, again, I think we're well-positioned to grow for a good bit of time here.

Understood. And a quick follow-up, it's been a little quiet here recently, maybe that's a good thing, but haven't heard any updates recently on BBP in China. You know, any timing updates there, any kind of way to look at public versus private mix within your business, just how to think about exposure, and if there is a timeline to think about when that exposure might have to be factored into models. Thanks.

Yeah, I mean, I think, you know, China has obviously, you know, gone down this path for some time. You know, the IOL was implemented on a provincial level in most of the provinces at this point. In October, there was probably only one VBP tender. I think it was a joint tender for two provinces. But, you know, in previous IOL VBPs, the ATLs, some of them included ATILs, but mostly they were having price impacts on the monofocal business. And we are, I would say, underrepresented in the public monofocal business generally. So where we're kind of overrepresented in China tends to be in the private ATI well business. So, again, I don't really have a split for you, but I'll just tell you that directionally most of our money is kind of in the private sector ATI well business. Now, look, there's some crossover impacts here that we're watching very carefully. But, again, I think directionally we probably have less exposure than some.

Thank you.

And we have reached the end of the question and answer session. And this also concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.