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spk07: Greetings and welcome to the Alcon first quarter 2022 earnings conference call. At this time, all participants are in 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. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Dan Cravens, Vice President, Investor Relations for Alcon. Thank you. You may begin.
spk11: Welcome to Alcon's first quarter 2022 earnings conference call. Yesterday, we issued a press release, an interim financial report, and posted a supplemental slide presentation on our website to enhance today's call. You can find all 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 four 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 Outcomes Form 20F, and our earnings press release and interim financial report on file with the Securities 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 and our public filings. For discussion purposes, our comments on growth are expressed in constant currency. With that, I will now turn the call over to our CEO, David Endicott.
spk01: Thanks, Dan. Welcome to Alcon's first quarter 2022 earnings call. Before I begin my prepared remarks on the quarter, I want to take a moment to recognize the current events that we're seeing impacting the world today. Many parts of the world continue to face slow recovery from the pandemic, including recent COVID-19 restrictions in China. We also acknowledge the hardship brought on by the war in Ukraine, where our focus continues to be on the safety of our associates and their families. I'm very proud of the Alcon team who's led with compassion and done heroic things to help our associates. Now I'll give a brief update on our first quarter results, overall market dynamics and recent performance. And after my comments, Tim will discuss our first quarter performance and our outlook for the remainder of 2022. Then I'll wrap up with closing remarks and we'll open it up for Q&A. We're very pleased with our first quarter results. Despite broad economic headwinds, the Alcon team delivered strong revenue performance with sales growth of 18%. We also saw significant improvement in quarterly profitability with a core operating margin of 20.6% and core diluted earnings per share of 68 cents. These results were driven by our innovative product portfolio, solid execution by our commercial organization, and continued market recovery. Now at Surgical, Vividi and Panoptix are allowing surgeons to address the needs of a wide patient population. We continue to gain market share in the first quarter on the strength of our PCIOL portfolio. Alcon now has approximately 60% of the global PCI well market. This is up approximately 7 percentage points versus prior year and driven by international share gains. In the U.S., we have a PCI well market share of approximately 80% despite new entrants in the market. In the quarter, we also announced a geographic expansion of our Clarion portfolio of IOLs. Clarion delivers excellent vision, exceptional clarity, and predictable outcomes in a glistening-free IOL material. We recently launched Clarion monofocal, panoptics, and Vividi IOLs in the U.S., and we will bring our Clarion portfolio to additional markets throughout 2022 and 2023. Now, early in the first quarter, we closed the acquisition of Ivanis and brought the Hydrus MicroStent into our portfolio of implantables. We're delighted to welcome the Ivanis associates to the Alcon family. Integration of the sales force is going smoothly, and it was great to see the combined teams working together on our recent national sales meeting. As we've said in the past, Hydrus is a differentiated product in the $500 million mild to moderate MIGS market. It's also the only MIGS device with five years of safety and efficacy data from a pivotal study. We recently attended the American Glaucoma Society and the ASCRS conferences where we heard positive feedback as we continued the commercial expansion of this product. We also continue the introduction of our Smart Cataract Planner in the United States, which is part of our broader digital equipment ecosystem. The data recently presented at ASCRS, which was well received, highlights that Smart Cataract delivers substantial time savings during the evaluation, planning, OR, and postoperative workflows. With procedural volumes expected to grow at a higher rate than practicing surgeons, we know doctors are looking to drive efficiencies. and also reduce manual data entry and improve accuracy. In vision care, we continue to see momentum in our contact lens business driven by our SI-HI lenses. Precision One's visual acuity, ease of handling, and comfort make it a favorite of eye care professionals and patients alike. We're also gaining share in the daily SI-HI TORIC lens category and now have two options available for astigmatic patients, Precision One and Daily's Total One TORICs. Precision 1 Toric continues to be rolled out across our international markets following its introduction in the U.S. We're also excited to bring Daly's Total 1 Toric to various European markets later this year following its successful U.S. rollout. We're also innovating in what's still the largest patient population of contact lens wearers, the reusable market, with T30. Total 30 leverages the same water gradient technology of Daly's Total 1, which makes the lens uniquely comfortable even at day 30. Total 30 is now available in the US and Europe, and while it's still early in the launch, customer and patient feedback has been very positive. Lastly, in ocular health, we're pleased to have the three multi-dose preservative-free formulations of our popular, sustained family of artificial tears now available. Preservative-free formulations are generally preferred by doctors. Now with multi-dose formulations, we have more convenient and cost-effective products available for consumers. We're supporting these products as well as our Pataday and Simbrenza drops with a dedicated sales force delivering eye drops into the ophthalmic channel. This sales force has been in the market working with doctors for a few months now, and we're pleased with their progress. Now let me provide an update on our end markets. In surgical, global cataract procedures were up low teens in the first quarter versus prior year, led by strength in select international markets. Keep in mind, the procedures in the first quarter of 2021 were still impacted by COVID-19, which makes year-over-year comparisons easier. We expect market growth rates to decelerate in the remainder of the year as we now have lapped the low base from 2021. Additionally, there was a notable one-time increase in demand for PCI wells in South Korea due to changes in reimbursement requirements that were implemented on April 1st. Against this backdrop, our implantables business did outpace the market driven by the strength of our products and our commercial teams. In vision care, we estimate that the contact lens market grew mid-single digits in the first quarter, driven primarily by ongoing recovery in Europe. Our contact lens growth outpaced the market for another quarter, and we continue to see gains in new and switch fits, which is a strong indicator of potential future sales. So in summary, we feel very good about our strong start to the year, and we're encouraged by our full-year outlook. With that, let me pass it to Tim. We'll take you through our financial results and provide an outlook for the rest of the year.
spk14: Thanks, David. We're pleased to report first quarter sales of $2.2 billion, up 18% versus prior year. Demand for our products was robust in the first quarter, which led to double-digit growth in both our surgical and vision care franchises. Our overall sales growth includes approximately one point of contribution from Sembrenza and Hydris combined, as well as one point from the benefit in South Korea that David referenced in his remarks. Our first quarter U.S. dollar sales growth included approximately 4 percentage points of pressure from foreign currency. In the quarter, we continue to see momentum in the business despite facing multiple macroeconomic headwinds, including an appreciating U.S. dollar, supply chain tightness, and inflation. We're seeing pressures on availability of supply and rising prices on certain commodities including plastics and resins, as well as increased costs for labor and transportation. Despite the inflationary impacts being pervasive across both franchises, we were able to offset much of the impact through mitigation efforts, including cost improvement initiatives, strategic price increases, and contract negotiations with suppliers. We remain committed to maintaining the supply of products that our customers and their patients need to see brilliantly. Turning now to our franchises, surgical revenue was up 22% to $1.3 billion in the first quarter. Implantable sales were $455 million, up 38% year-over-year, due primarily to the strength of Vividi, sales of Hydrus, and continuing market recovery. Implantable's growth includes approximately 8 percentage points from the one-time benefit in South Korea related to PCO IOLs. For consumables, our first quarter sales were up 16% to $601 million, primarily due to increased surgical volumes as additional international markets reopened. In equipment, our sales were up 7% year-over-year to $203 million. This was primarily driven by strong demand for our cataract equipment, including upgrades to Centurion and sales of Legion in our international markets. In addition, we're seeing solid demand for our Argos biometer. Turning now to vision care, first quarter sales were up 14% year-over-year to $916 million. During the quarter, we saw strong global demand driven by product innovation and solid market recovery across most geographies. Contact lens sales were $557 million in the quarter, up 14% versus last year. As David mentioned, we continue to see strong demand for our Precision One and Total brand families, as we recently launched Daily's Total One for stigmatism and Total 30. We're taking share and growing faster than the market. In ocular health, our first quarter sales were $359 million, up 13% on a year-over-year basis. This was primarily driven by Sustain, which saw double-digit year-over-year growth, supported by our MDPF launches, as well as sales of Sembrenza, which was not part of our portfolio in the first quarter of last year. This growth was partially offset by decline in contact lens care due to supply chain challenges. Now, moving down the income statement. First quarter core gross margin was 62.4%, up 30 basis points on a constant currency basis despite inflationary pressures. Core operating margin was 20.6% in the quarter, up 3.9 percentage points on a constant currency basis. The improvement was primarily driven by operating leverage from higher sales, partially offset by increased inflationary pressures. While we're pleased with this result, I want to note that the benefit in South Korea contributed approximately one percentage point of poor operating margin in the quarter. Operationally, we expect marketing and sales expense and R&D to increase in the coming quarters, driven by normal seasonality, new product launches, and higher spend as markets recover. First quarter interest expense was $29 million in line with prior year. The core effective tax rate was 15.9% in the quarter compared to 20.7% in the first quarter of 2021. The favorable rate is primarily due to a benefit on inventory build in certain markets with favorable product mix and discrete items. Core diluted earnings per share in the first quarter of 2022 were 68 cents, up from 49 cents last year. The impact from South Korea contributed approximately 4 cents of core EPS. Before I discuss our outlook for the remainder of 2022, I'll touch on a couple of cash flow and other related items. Pre-cash flow for the first quarter was an outflow of $52 million compared to an inflow of $48 million last year, driven by lower cash flow from operations in 2022 due to changes in net working capital, the annual bonus payment, and the timing of tax payments. Capital expenditures were $118 million for the quarter, which was primarily related to our contact lens manufacturing production lines. We still expect full year 2022 free cash flow to be significantly higher than 2021. Transformation costs were $15 million in the quarter, and $184 million life to date. Now moving to our guidance for the remainder of the year. As I've mentioned, we continue to see certain exogenous headwinds, including FX pressure from an appreciating U.S. dollar, inflation and supply chain tightness, ongoing effects from COVID-19, particularly in countries like China, and the impact from the war on Ukraine. Our current 2022 outlook assumes that the global market size returns to 2019 levels, growing slightly above historical rates. Current levels of inflation persist through the remainder of the year, and the U.S. dollar holds steady at mid-April foreign exchange rates. Based on our strong sales momentum exiting the first quarter, we're increasing our expected year-over-year constant currency sales growth rate to between 9% and 11%, up from the seven to nine percent we guided to in February. Foreign exchange is now expected to have a negative impact of approximately three percentage points versus prior year, as compared to the negative one percentage point we provided in our February outlook. As such, we are maintaining our net sales guidance of between $8.7 billion and $8.9 billion. Now moving to core operating margin, we're maintaining our full year outlook of 18 to 19 percent despite the headwinds I've just described. This guidance now reflects approximately 110 basis points of FX pressure versus last year as compared to 40 basis points in our February outlook. It also includes approximately 90 basis points of net inflationary pressure as compared to the 40 basis points we provided in February. Interest and other financial expense is now expected to be between $200 and $210 million versus our prior guidance of $180 to $190 million. The change is due to higher hedging costs given the volatility in the market. Core effective tax rate is expected to reign between 17% and 19% for the year, despite the favorable discrete items in the first quarter. Finally, on core diluted EPS, we are maintaining our original guidance of $2.35 to $2.45 per share, despite approximately 20 cents of incremental headwind from FX and inflation. Accordingly, we're increasing our constant currency growth outlook to 19 to 24 percent due to the strong momentum we're seeing in the business. We now expect approximately 10 percentage points of pressure from foreign currency for full-year core diluted EPS year-over-year growth versus our previous estimate of four percentage points in February. To summarize, we are very pleased with our progress and the momentum we've built. Based on the first quarter's results, it's clear that our core business is performing extraordinarily well. To date, we've successfully navigated the exogenous headwinds that we've seen through improved operational performance and cost discipline. We will continue to evaluate our response to these risks as we go forward. Before I turn it back to David, I'm pleased to report that our annual general meeting two weeks ago, shareholders approved the dividend of 20 Swiss centines per share, equivalent to a payout of approximately 10% of 2021's core net income. We want to thank our shareholders for their continued support of Alcon. With that, I'll turn it back over to David.
spk01: Thanks, Tim. In summary, we're off to a strong start this year, despite the macroeconomic headwinds in volatile markets that Tim mentioned. The underlying performance of the business remains robust. We are launching innovative products and growing revenue in excess of market growth. We're gaining share in both of our franchises, and we're creating significant operating leverage and positive core operating margins. As we move forward, we'll continue to focus on delivering robust revenue growth and driving significant shareholder value. And finally, during these uncertain times, I want to thank all of our associates for their hard work in delivering on our purpose of helping people see brilliantly. So with that, let me open up the line for Q&A.
spk07: Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, 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 handset before pressing the star keys. In the interest of time, we ask that you each keep to one question and one follow-up. Thank you. Our first question comes from the line of Daniel Bukta with ZKB.
spk08: Please proceed with your question. Daniel, your line is live.
spk02: Thank you very much for taking my two questions. The first one may be for you, David, on the PCI or L market. You mentioned the increased pressure, which means in the US, especially J&J. Can you indicate a little bit how market shares you have developed, and is it fair to assume that any potential weakness panoptics may see you were able to overcome with the very nice demands you indicated for validity and how could Clarion in that regard help in the next couple of quarters for the market share to keep it as high as possible? And then the second question maybe on both a few gems on inflationary pressures. Thanks for indicating the 90 basis points headwind. I mean, of course, we all see how inflation is developing and everything. But maybe you can share a little bit of insights on how price discussions in both segments look like, whether there is the headwind to moderate over the course of the year and how things are going there. Thank you very much in advance.
spk01: Yeah, thanks, Daniel. Let me start with the question on share. We've had a terrific share performance actually in the last I think ATIOLs have been a very good business for us, and they continue to be strong. In the PCIOL business, this is the segment that you would think of Panoptix and Vividi in, we've actually gained share, I think, seven share points year over prior year. So in the U.S., we're holding share kind of a little bit better than we expected, and I think we're somewhere still around 80%. So I think we feel good about the Panoptix and Vividi. Obviously, Panoptix is still our largest brand in this category. It's growing beautifully right now. We spent a little more time talking about Vividi right now because it's actually, I think, part of the reason the category is expanding. And we have a fairly robust share at this moment. So we're feeling as though the category expansion is our next move. So I would say Vividi gets a little more attention than Panoptix, even though Panoptix is a good bit bigger. principally because it seems to be bringing new patients into the category and some new surgeons in as well. So that's been the positive vibe there. On Clarion, we are launching Clarion in the U.S. at this moment, both with the Panoptix and Vividi and the Torec. And so I think we're excited about getting those out there. In the monofocal space, there is an increased amount of competition. Clarion is a particularly unique product in that it has, it's probably the first new material in this category in many, many years. And it really, with this material advancement, we have probably the most pristine optic of anybody in this space. So we're very excited about what that means for patients in the long run. So we're excited about that. And I think, again, it will help continue to help our monofocal business and our toric business. On the inflation piece, we have put through some price increases in the vision care business and a little bit in surgical. Surgical is obviously a little bit more difficult as most of that business is contracted. And we also see a lot of government involvement here. So the reimbursement for the government is dictating usually some degree of implicit margin that we can have. So I think the way to think about this has been that we've tried to pass along roughly inflationary levels of price. It's gone pretty well. I think most people understand that, you know, the raw materials are up, resins are up, you know, a good bit of labor and freight, you know, those have all inflated on us and a good bit more than we had anticipated. So the acceptance of that has gone pretty well inside the optometric community. They seem to be passing it on to the consumer and that seems to not be having a, at least in the present moment, has not had an effect on demand. So we're optimistic, I think, about where we are with succeeding with price.
spk00: And there was a little bit more on the first slide, pretty much it? Okay. Great.
spk08: Thank you very much.
spk07: Thank you. Our next question comes from the line of Larry Beagleson with Wells Fargo. Please proceed with your question.
spk03: Good morning. Thanks for taking the question. And congratulations on a really impressive start to the year here. So first, I wanted to ask about the revenue cadence this year. Tim, do we expect normal seasonality? And how do we think about the reimbursement change in South Korea, you know, for the rest of the year? How does that impact the rest of the year? And how are you thinking about the COVID impact in China on Q2 sales? And I had one follow up.
spk14: Yeah, Larry, thanks for the question. You know, I would say revenue will be pretty close to what we've seen typically. I mean, you look at Q2 and Q4 will be high points for us from a revenue perspective. That's primarily driven by when you look at Q2, a lot of revenue driven by the allergy season. Q4, we tend to get a nice lift in the equipment segment of the business as hospitals you know, continue to spend their budget. So I would kind of look at it that way. As far as Korea goes, I would think about it as sort of a net one-time benefit in Q1. You know, surgeons basically cleared their waiting list, so I wouldn't expect a material impact going forward. And the China COVID thing, you know, we haven't seen yet –
spk01: what the impact's going to be. So I think we're still looking. It's going to be something. And I think, you know, frankly, we just don't know yet how big of a challenge that's going to be. But we're watching it very carefully.
spk03: Let's hop on. Then on contact lenses and the market, David, you mentioned you think the market grew mid-single digits in Q1, but you and J&J were up over 10%. You're over 60% of the market. You know, Cooper's guided to a pretty strong quarter. So there seems to be a disconnect here. It seems the market's growing faster than mid-single digits. And do you still expect your contact lens growth to be accretive to overall Alcon growth in 2022? Thanks for taking the questions.
spk01: Yeah, look, I do think that the The vision care business in particular and the surgical business are pretty close to the same rates of growth. So in terms of the contact lens business itself, you know, I think it'll be there or thereabouts. What I think is going on in the market is, you know, we typically use two different data sources that are audited. You know, people have varying degrees of both, I would call it, mail order, internet, there's a series of other channels that aren't always covered. So you're going to see some fluctuations. I feel pretty confident, though, that when we talk about the value growth in the global market, it's roughly in that mid-single digits range. It has rarely been much higher than that. On the bounce back, it may be for a while. So if you look at this particular quarter, there are parts of the market, Europe in particular, which bounce back with a high number. And when you get high numbers like that, sometimes the data doesn't read through as clean. So I wouldn't get too wound up about the mid-single-digit number we're using just because it is an audited data source, and it fluctuates from time to time. I think it is going to be likely long-term, and as we get back to normal growth rates, right in that mid-single-digit range, kind of as we've said.
spk08: Thank you.
spk07: Thank you. Our next question comes from the line of Matthew Michon with KeyBank Capital Markets. Please proceed with your question.
spk05: Good morning. I thank you for taking the question. Like low teens growth in surgical, you know, given some easier comparisons, but you're expecting that to decelerate. I mean, given probably a backlog of these procedures, what do you think that decelerates to from a market growth perspective as we go through the second half?
spk01: Well, I mean, I think the big issue, of course, is the wraparound on COVID, right? So we had a lot in the first quarter. We had a very soft compare, particularly for international. International was basically back to 2019 levels end of last year. So as we progressed through the year, the comparison gets firmer and firmer and closer to what we should expect long-term as market growth. So I would just say that incrementally as you move through the year, we'll see this thing move back to a number that has traditionally been the market growth plus a little bit. And so we say the plus a little bit because there is a backlog. it is very difficult to know how much of that backlog is going to come through and when it comes through and how it comes through. But I will tell you, it isn't going to be a bolus of surgeries. It's going to be a little bit more surgery than has been typically done, principally because there isn't enough capacity around the world to kind of quickly absorb the number of cataracts. So I suspect at steady state, You know, if the historical rate of growth was kind of that 4%-ish rate in procedures, we're a little bit warmer than that for an extended period of time, and that's how the backlog clears. This year, you know, we start out hot because we're comparing in first quarter, you know, to a relatively soft quarter in actually last year, and it will get, you know, progressively slower and approach market growth plus a little bit, you know, as we get to the end of the year. And I think that's probably the best look at what I think is happening.
spk05: Okay, excellent. And then I just wanted to talk about the SG&A and R&D dynamics. I know you guys mentioned that seasonality, you're expecting to progress as you get through 2Q, 3Q, 4Q to more normal levels. But also, I mean, there was a lot of leverage in the model this quarter. Are you looking at it as being able to drive more leverage on the operational expenses as you progress through you know, 22, and that does provide a pretty good lift to operating margins moving forward?
spk14: Yeah, again, as we said all along, you know, operating leverage is really the key component to the financial thesis. But, you know, Q1 is typically low for us if you were to go back in prior years. And the way I think about it, let's start with R&D. I mean, if you look at our R&D spend this quarter, it was about $160 million. If you were to annualize that as an example, it'd be about $640 million, which is on the low end of 7%. Now we've said, you know, all along this year in our guidance, I think we provided, we said we'd be more at that 8% level. So that's going to be incremental spend. If you think about the rest of the year, call it, you know, 50, $60 million. Same thing on SG&A. You know, if you take that first quarter and annualize it, you get to about 34% as a percent of revenue. You know, if you look at 2019, we were kind of at 38%. If you look at 2021, We were sort of at 37%. So I would continue to expect to see some operating leverage there, but it won't be three points worth. So, again, you'll see some more spend on the SG&A front. The other thing I'd remind you of is if you look at Q2, again, if you go back to prior years, that's really where we amp up the DTC spend, some of the back-to-school spend on the contact lenses. So it's not unusual to see Q2 SG&A go up, call it $60 or $70 million from where we were in Q1. So that's sort of how I think about the expense flow. But, yeah, I mean, the whole thesis is around getting operating leverage. We expect to do that to get to our goals. But if you just look at Q2, it is unusually low.
spk05: Thank you for the call, Eric.
spk07: Thank you. Our next question comes from the line of Mac Mixick with Credit Suisse. Please proceed with your question.
spk13: Hey, great. Thanks so much for taking the questions. So I had one follow-up on sort of product launches that you've talked about and have been executing on and one on margins, maybe for Tim. So Clarion, David, if you could talk a little bit about Why is this material important? As successful as Panoptix and Vividi have been over the past couple of years, what kind, if any, of resistance have you met from folks who are sort of dug in on your legacy material? And perhaps what kind of additional share gains can you see out of Clarion? And then, as I mentioned, just one quick follow-up for Tim. Sure.
spk01: Yeah, look, we're excited about the Clarion material. Historically, there's never been a better material than Acrosoft. So again, it's a hard act to follow in many ways. It's the most successful implantable material in all of ophthalmology. I think as we look at that and over the years, there's always improvements you can make. The biggest improvement in this material is... clarity of the material itself. So, you know, every now and again, you can see nanoglycines in any lens, particularly our competitive lenses. There were some micro, you know, micro particles, if you will, that appear that way. They're not clinically relevant, but they're aesthetically important to the doc. And so, I think what we've done is we've cleaned up a number of things, but by making this new material, it gives it all of the same kind of physical characteristics as Acrosoft, but the cosmetic appearance of, you know, something that is worthy of something like Panoptix and Vividi in particular. So if you're paying a lot for a premium IOL and you look in the eye, what you want to see is crystal clear. And when you touch these lenses, you know, almost anything will stick to them. So I think it's a really important advance, I think, for us relative to competitors. And there has been some competitive noise out there about, you know, and other things in our old material, which, again, we think is kind of unimportant in real terms, but it was easy to get rid of. So we went ahead and did that. I would say on the go forward, all of our material will transition to Clarion, and that will be a sequenced event starting with the U.S. We've got some of it out in Europe now, but there will be a number of markets really through the end of 2023. So it takes a little while to get this done, but a real advance, I think, in material science. And on the other part of the question.
spk13: Oh, it's for Tim on margins, maybe. So, you know, you've talked, you know, throughout your prepared remarks about absorbing the impact of this additional FX. And that does kind of weigh on, you know, the way your P&L is set up and your hedging works. As we know, it does kind of weigh on margins. I'd just love to maybe understand with those, you know, that impact that you're absorbing, I guess, where in the P&L are you compensating for those? Where are you getting relief? Where are you getting outperformance to help you kind of stay on plan for margins and earnings this year and into next year?
spk14: Yeah, you know, I would say right now it's primarily coming out of two places. We did get a bit of a mixed lift if you look in Q1. You know, you have that Korea impact in there. And, again, as our implantables business continues to grow, that gives us a bit of a mix list. So you'll see some of that in gross margin, and then you'll see, you know, a lot of it on the SG&A front. So, again, some of that is just natural leverage. Some of that is we were looking at being a little bit more disciplined around the costs just to make sure that we can attain our objectives given the macro environment. So I'd say those are the two areas that it's coming out of.
spk13: Great. Thanks so much.
spk07: Thank you. Our next question comes from the line of Joanne Winch with Citi. Please proceed with your question.
spk06: Thank you very much for taking the question. A very nice quarter. A couple of little one-offs here. Do you know what percentage or can you share what percentage of the market is currently ATIOLs?
spk01: Yeah, we do. Let me find it. It was... Somebody give me the number. We quote it most times, and we'll find it for you here in a second. You probably had a follow-up to that.
spk06: I do.
spk01: The U.S. is 19%, and we'll get the global number for you in just a second.
spk06: Thank you. And do you have an opinion on where this sort of peaks out? I mean, does this ultimately become the standard of care?
spk01: Yeah, Joanne, I think we have always had a view from some work we've done a number of years ago, but I think it's still quite relevant, that the headroom in this was substantial. So, you know, we think that there's a market that probably approaches 35%, 40% of the total market that will pay an additional fee to the values that we've described, so somewhere in that $800, $900 lens range. you know, base, that is kind of the headroom that we've got. So figure if we're at 19 in the U.S., we've still got at least double that. And outside the U.S., the global number is actually 12.4. So the U.S. is considerably ahead. I think the rest of the world is much larger in terms of total procedures. So it's a below 10 kind of number for the rest of the world. But 12.4 gives us plenty of room to continue growing ATL penetration for quite a long time. And that's obviously why we're spending a lot of time talking about vivity and penetration and trying to work a series of programs, you know, on the ground that actually engage surgeons in the process of the pre-op work that's required, but also, importantly, the knowledge and use of vivity, which I think at this point is one of the kind of no-regret moves in ophthalmology. You can really do some things with this lens that are different than you've been able to do with other ATI wells because it doesn't have the rings and the post-diffraction challenges that some of the other lenses do. So we're excited about the potential of penetration. But again, I would say this has been pretty steady over the last several years. It's picked up for sure, but kind of a long ramp for us to get to wherever we're going.
spk06: Excellent. Thank you very much.
spk07: Thank you. Our next question comes from the line of Cecilia Furlong with Morgan Stanley. Please proceed with your question.
spk09: Great. Good morning and thank you for taking the questions. I wanted to ask again on strategic price increases that you took during the quarter and just any commentary you could provide either around customer acceptance or else any change in buying patterns ahead of taking price and just your outlook as well for any additional price increases in 2022. And I had a follow-up as well.
spk01: Sure. You know, we took a number of price increases in vision care, principally on our contact lenses. They were, you know, approximately at inflationary levels. And I would say we've done it, you know, to obviously offset some of our input costs, which have grown quite quickly, as I'm sure everybody knows. In surgical, the pricing power is a lot more limited. And it's, you know, it's obviously regulated and we have contractual commitments. So we have, you know, a little bit more of a one-off approach. We raise the prices, but it's usually on loose items that are not in our custom packs and or are purchased individually. So it's hard to tell how that, you know, bleeds through it because it's going to take some time to see that one. Directionally, we've been pretty successful. I think the acceptance of our current efforts has been pretty good. And so I think people understand what's going on, I think, in the environment and have been passing on, at least in vision care, a good bit of that price to consumers. So while it's not perfect for either of us or our customers, it is kind of the way of the world right this second. Going forward, you know, we're obviously paying very close attention to what the input costs are doing, what they're going to do in the back half of this year. And we will, you know, obviously evaluate things as we go along here. But We're trying to recover as much as we can through procurement, through productivity initiatives, and again, obviously, as much price as is reasonable for us to kind of maintain competitiveness.
spk09: Okay, great. And if I could follow up, just on the contact lens care decline that you called out and the supply chain pressure, just your outlook for recovering in that segment and really what you were seeing in the quarter as well. And thank you for taking the questions.
spk01: Yeah, well, the contact lens care market itself has always, you know, has been in decline for some time. I mean, directionally it pops up and down, but I think you should think about it as a kind of low to mid single digit decliner, you know, for a while. I don't think we believe it's going to move the right, you know, in another direction than that. We did have a little bit of challenge during the quarter with contact lens care. This was, you know, a bottle problem. Bottles are made of a resin. That resin was in short supply during the quarter. And so as we crossed the quarter, we had not resolved that yet. We have resolved it at this point. But again, that caused a slight decline in revenue during the quarter. So that's kind of the circumstances. We're fine going forward at this point, but I would just tell you that these spotty kind of outages are happening, I think, everywhere and for everybody. So we're working through them as diligently as we can, but we're always very diligent with suppliers on what it's going to take to get product in and made and We have lots and lots of suppliers who are struggling. So, again, that's an ongoing battle, if you will. And so far, we've been good at it. Our manufacturing guys have been terrific at managing through many, many of these. But we'll have to be very vigilant going forward.
spk07: Great. Thank you for taking the questions. Thank you. Our next question comes from the line of Zach Weiner with Jefferies. Please proceed with your questions.
spk12: Hey, thanks for taking the question, and congrats on a great quarter. I just want to touch on new patient starts, if you're seeing any acceleration as we move away from COVID. And historically, you guys have said that P1 is the leading new fit start lens. Is that still the case? Thanks.
spk01: Yeah, we have a very strong position in new and switch fits in daily disposables. So I would say If you look inside the contact lens category, right now, we are the leader in daily disposable nuance, which fits. And so, obviously, we think that's a positive thing because it's a leading indicator of where share will ultimately go. But it does depend on getting volume of those new end switch fits. So we are seeing some return of patients. There was a survey done by Jobson not long ago that gave a number that was patients per day in the U.S. in the optometry community, largely independents to be fair, was up 3% over 2019. That's a good sign for us. I will say, though, that the new end switch starts as a whole looked also in another audit to be still below the 19 levels. So we got a little bit of a mixed series of signals here, but I think the best way to interpret it is We're getting back to normal. We're not there yet in terms of new and switch. But I do think that that will be a – we'll be back to it shortly. And I think as we think through this year, we expect to be back to kind of what I would loosely call normal growth rates, you know, plus a little bit, given that there's some pent-up demand out there.
spk08: Thanks for taking the question.
spk07: Thank you. Our next question comes from the line of Ryan Zimmerman with BTIG. Please proceed with your question.
spk04: Good morning. Thanks for taking the questions. I just want to follow up on a few things. You know, the inflationary drag across the business, Tim, I appreciate you calling out the 90 basis points. But if I back out FX and the South Korea order, I think margins are up about 30 basis points ahead of last year. And so, you know, was the inflationary impact equal this quarter? What do you estimate it at for this quarter? And is the 90 basis points equal across all four quarters this year as we think about that inflationary headwind? Thanks for taking my question.
spk14: Yeah, sure. Great question. The 90 basis points is a year-over-year view. I would say probably about a third of that we saw in Q1. And the reason that is is although we saw inflation spiking last year, some of that got caught up in inventory. So you don't get the P&L hit, obviously, until you sell the inventory. So we had probably, I'd call it maybe a third or so of that inflation was in Q1. The rest of it will carry out through the rest of the year, relatively level-loaded.
spk04: Okay. Very helpful, Tim. And then, David, for you, Simbrinza and the drop segment's been doing really well. You guys built out that dedicated sales force, I think, at some point. Maybe it was either early last year or I could be mistaken, maybe late 2020. But how much more of that contribution is coming from more feet on the street relative to growth in those segments of the market? And what can that business segment, the drops, if you will, grow at sustainably going forward?
spk01: Well, I mean, I think the glaucoma eye drops, if you're speaking to Simbrinza specifically, and remember this group sells Simbrinza pataday and the sustained multi-dose preservative free line. So there's a number of drops in there. The eye drops business historically, and I think this is what we'll probably find ourselves back to relatively soon, is that business has grown. Market growth was about 6%, kind of mid-single digits, let's call it. And, again, I think we'll grow faster than market with that. So that has a lot to do with Salesforce presence, particularly as we convert Rx to OTC and as we kind of convert preserved to non-preserved multi-dose. The SimBridge has been particularly sensitive. I would say that we've had a good start and look pretty good. We get the prescription data right now, and it is clearly sensitive to Salesforce promotion. And so I think we can see some positive growth coming from re-energizing that brand, resampling it, getting information and data back out there to ophthalmologists who really do want to treat these glaucoma patients. Glaucoma as a category of RX is typically growing in that 3% range. So not a fast-growing category, but this is a very small product in terms of share. So opportunity, I think, on a low base range. you know, to do some nice things. And these are relatively high. All of the iDrops are relatively high margin for us. So, you know, obviously the more we can do in the iDrops business, the more we can, you know, advance our margins. And, again, these are pretty profitable ideas generally when we get into them.
spk04: Thanks. Appreciate the call, guys. Great quarter.
spk07: Thank you. Our next question comes from the line of Graham Doyle with UBS. Please proceed with your question.
spk16: Great. Thanks a lot for taking my questions, guys. Just on Vividi, I know you spoke a little bit about that earlier in terms of expanding the market. Certainly the feedback we get from surgeons, the confidence around the simplicity of using it really gives them an incentive to use it. What would be great to know is how you think about this relative to panoptics. If you think about the patient population it can address, what's the difference in this sort of characteristics? And maybe, cheekily, could you give us a sort of scale difference if you think about the patient reach this product could have? Thanks.
spk01: Yeah, so I think this is a question we deal with every day on the ground with surgeons, and we get asked this a lot. The way I think we typically describe it is that, look, if you want the best lens out there at all distances, near, reading, and distance, you're going to want panoptics. But you're going to have to potentially put up with a little bit of accommodation with halos and glare that will happen in about – you know, a good number of people, but probably one or two percent will not tolerate it well, and you may have some challenges with those patients. And that is the basic trade-off of getting, you know, kind of what I would say best-in-class vision versus what most people will accommodate to. There's just a little bit of headache. And what happens is surgeons, because they don't want those one or two because they feel like those are, you know, in many ways failures if they have to take the lens out and put it, you know, put a new one in, They've stayed away from all of the diffractive lenses, which is most everything else out there. So, you know, as you think about Vividi, it is a non-diffractive lens, and that means it does not have a concentric ring profile that creates different focal points. But what it does is stretch in a wavefront kind of way the focal distances. And so what it allows then is any surgeon can put it in any patient, and you get really good distance. You get really good intermediate. But the near vision, because you can't quite stretch it as far as the panoptics goes, you know, is not as good. So 50% of the patients probably are going to need glasses and 50% of it will read fine. But that trade-off for a lot of docs is worth it because they're saying, look, I can do this. I got very big landing zone, which means, you know, I can be a little bit wrong in my procedure and get this right. And I can get them glasses free, you know, at least 50% of the time. And I'm pretty sure I got intermediate no matter what. So It's just basically a trade-off. And what docs are doing is they're saying, look, the really great surgeons will profile the patients and kind of in their own minds have an algorithm for who will tolerate or potentially tolerate halos and glares and who will not. And then if there's any concern at all, they'll move to Vividi. And in addition to that, there is a group of patients that they see, let's call it macular retinal problems, or they've got other issues where it's necessary to see through the lens. they may have diabetic problems, et cetera. Those patients have typically not been allowed into an advanced technology lens because you couldn't see the retina clearly through the multifocal lens. And now you can still do that with Vividi. So again, it has some patient populations that can be added, I would say, you know, of the three in 10 that used to be excluded. Now, you know, those are candidates for Vividi. So I think we're adding patients in on that front. We're adding surgeons in on the other front who really didn't want to worry about the complex pre-op and complex patient selection, but now are more comfortable doing that. And again, the mix of that is hard to know. What we can see is that both products are growing nicely. Vividi obviously is smaller, so it's growing faster. But what we see is the market is moving in an expanding way. And so that's really what the game is. And I think Vividi is probably more likely to expand the market than Panoptix. And then Panoptix will be the, I'll call it the graduate product that people move on to.
spk16: Great. Thanks for that. Just a really quick one on the margin side. If you think about the margin you delivered in Q1 of sort of 22%, when you look at constant currency and your 2025 target, which is something in the 22% to 24% range, are you surprised the extent to which the drop through you got on that incremental consumables and IOL sales in particular, given when you set the guidance for 2025, you probably weren't expecting the inflation backdrop that we have now. So do you have more confidence, I suppose, in that 2025 target having delivered this Q1?
spk14: Yeah, again, I don't want to get too far ahead of ourselves. We were pleased with the quarter that we had. I think the business is performing very, very well. Again, if you look at the 20.6 margin that we delivered in Q1, we sort of worked some of the factors. That is a little bit high. You know, we're going to have a more normalized view, if you will, in the back half of the year, driven by the incremental investments in R&D and SGA and the things that we talked about. You know, listen, we're very pleased with how the business is performing. We've obviously had some headwinds, whether it's FX or whether it's inflation. We've managed to absorb those to date. But we'll see what happens in the future. We're very comfortable with what we control. I feel very good about the underlying base performance of the business. And we'll just continue to evaluate things as we go forward.
spk00: That's great. Super clear. Thanks, guys.
spk07: Thank you. Our next question comes from the line of Jeff Johnson with Baird. Please proceed with your question.
spk15: Thank you. Good morning, guys. David, maybe just a couple clarifying questions if I could. Just on the contact lens price increases, can you remind us the timing of those? Did 1Q benefit at all from some sell-in ahead of those? And when you quote that mid-single-digit market growth, and I know maybe some variability around that this quarter, I appreciate that. But is that a sell-in number or a sell-out number? Because obviously we see kind of the manufacturer data that's more of a sell-in number, but sell-out might be different than that. So I'm just trying to understand your data source of that sell-in, sell-out. Thanks.
spk01: Yeah, we use two data sources. We use GFK and we use CLI. Both of them anybody can buy, I think. But they are all retail sell-out. So you are going to have some differences between sell-in and sell-out, to your point. And on the contact lens pricing, you know, we purposely timed our price increase for February 1st so that it wouldn't have an effect on either the fourth or the first quarter. So directionally, I think it all washed in the quarter, and we control the buy to, generally speaking, somewhere around four weeks of inventory so that nobody's, you know, putting themselves in a position where they've got more than they need, I think, in the near term. I think we didn't really have any material effect from the price increases in the quarter.
spk15: Fair enough. And then other clarifying question was just on the ATIOL market, the 19 and the 12.4% numbers you quoted. Can you just remind us, those are unit volumes, I think, not dollars, but just remind us that. And then two, do you put Vividi or does Vividi go into that? Is it officially considered an ATIOL or is it more of kind of a souped up monofocal? Thanks.
spk01: Yeah, no, it's very different than some of our competitors. Vividi is an ATI well. It has an ATI well designation, and that matters a lot, obviously, for the reimbursement world. And so, no, that is a Vividi. It goes with the ATI wells, and it is unit volume that we're talking about when we talk about penetration. So, obviously, dollar value, considerably different.
spk00: Yeah, fair enough. Thank you.
spk07: Thank you. Our next question comes from the line of David Adventon with JP Morgan. Please proceed with your question.
spk18: Hey, guys. Thanks for the questions. So, firstly, I was wondering if you were expecting or whether you could give us some historical context on any impact from a Titan macro or consumer disposable income on either volumes or mix in both the contact lens and the IOL markets, and what percentage of purchase have some sort of patient out-of-pocket expenditure? And then secondly, obviously J&J launched TheraVision, the contact lens with a combined antihistamine. It would be great to get your thoughts on that and whether you have any similar plans for similar products.
spk01: On the second one, we don't have any plans, and we don't know a lot about it. It's – you know, we watched it. I don't know that – I'm not even sure if it's out yet. It's – It's basically, we're very aware of the notion of delivering drugs through a contact lens mechanism. We haven't decided to pursue any of that. On a percentage of purchases with patient out-of-pocket, you know, I'm not sure I have a percentage for you. Let me give you the categories where it's, you know, obviously significant. So most of the vision care business is out-of-pocket, notwithstanding there is some contribution from vision care you know, insurances. So, you know, but it's usually a contribution to the total. So, you know, $200 or something like that. It's a vision plan, like a VSP or something. On the other side of the business, and I should say in surgical, refractive is almost 100% out of pocket. So that's, again, one of the sensitivities. The surgical business is much more government run. And I would say in the vast majority of the world, with the exception of advanced technology lenses, it really is a reimbursed government-paid Medicare or Medicaid or government health system compensated procedure. So the patient pay element of it really comes into play only when we're talking about advanced technology lenses, and that is usually only in certain markets. So not every market will allow you to collect from the patient, and that does hold the international markets back from penetrating ATI wells. But again, that's changing over time as well.
spk18: Thank you. And I suppose following on from that, are you seeing, this might be a bit early, but are you seeing any impact from tightening disposable incomes for consumers on any of those?
spk01: No, and we don't really, you know, we have a pretty good sense of this. You know, we've followed the 09 and 2010. We've modeled the recessions just because we had a concern about all that. I think the things you'll be most interested in, I think, would be the refractive business. It's our most sensitive one because of the nature of the patient and the profile of the patient. It's cash pay. It's a relatively expensive procedure. And it's, you know, targeted at working adults, I would say. And that becomes a you know, if you're out of work or you're making a lot less money, you're going to hold off on those kinds of procedures. So the only thing we see in the vision care business that's a little bit like that is typically people are in lenses, they stay in lenses, but they don't trade up. And so, you know, you may see some slowness in the trade-up of value from the kind of, I would loosely call it monthly to week modality to the daily mobility. That's probably the main thing we saw in the 09 frames. So Mostly an impact in refractive, I would say. And that's relatively small for us. So, candidly, iCare has got a pretty good profile for continuous demand.
spk00: Fantastic. Thanks very much.
spk07: Thank you. Our next question comes from the line of Julian Dumas with BNP Paribas. Please proceed with your question.
spk17: Hi, good morning, Dave. Good morning, Tim. Thanks for squeezing me in and congrats on the great quarter. I'm left with two questions. One is on the margin development that you had in vision care in the quarter. Is it in any way related to the launch of Total30? Because I think you alluded previously that it's a nicely accretive product for your portfolio. So is it in any way related or is it way too soon to see that sort of impact going through? And the second question relates to your M&A appetite. Obviously, valuations have come down quite a lot year to date. Does that mean that going forward, you would be willing to accelerate the pace of M&A or does it change all your views on that side?
spk01: Julian, just on the margin, T30 is margin accretive to the whole of the business. And so we're looking forward to growing it. It wasn't big enough really to have a big impact on the first quarter. So I wouldn't read anything into the first quarter margin. I think it's just getting started. So, you know, the big picture, probably ocular health had more to do with it than anything else in terms of mix. In the M&A piece, you know, we do watch valuations, and obviously there's been a fairly sizable adjustment, you know, in a number of ophthalmic companies. And so, you know, we're always interested in this. I don't know that historically we were that, you know, as interested because they were very expensive. But, you know, we'll see how long this lasts and what goes on. I mean, I think our main idea here is to try to find inorganic things that fill white spaces for us that can add value where we really think it's, you know, better owned in our hands. So, you know, I think the good news is, is that we are, you know, we have an underlying business right now that's performing quite well. We feel good about our approach to this year. We feel good about our prospects. And so I think, you know, we are in a position where, you know, with, you know, cash in a good position as well, we could make some moves here if we chose to. We'll see how that takes shape over time, but all things are kind of running on the right, on the right track right now. So feel pretty good about the year.
spk05: Thank you very much.
spk07: Thank you. Ladies and gentlemen, this concludes our Q&A session and thus concludes our call today. We thank you for your interest and participation. You may now disconnect your lines.
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