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spk12: Greetings, and welcome to the Alcon third quarter 2022 earnings 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, Mr. Dan Cravens, Vice President and Global Head of Investor Relations for Alcon. Thank you. You may begin.
spk01: Thanks, and welcome to Alcon's third 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 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 from those And 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 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. Non-IFRS measures should be considered along with, but not as alternatives to, the operating performance measures as prescribed by IFRS. Please see a reconciliation between our non-IFRS measures with directly comparable measures presented in accordance with IFRS in our public filings. For discussion purposes only, our comments on growth are expressed in constant currency. With that, I will now turn the call over to our CEO, David Endicott.
spk00: Thanks, Dan. Welcome to Alcon's third quarter 2022 earnings call. Today, I'll begin by giving a brief update on our third quarter results, our overall market dynamics, and recent performance. After my remarks, Tim will discuss our third quarter performance and our outlook for the remainder of the year. Then I'll wrap up with some closing remarks and we'll open it up for Q&A. I'm pleased to report that the Alcon team delivered third quarter sales of $2.1 billion with sales growth of 9%, core operating margin of 17.2%, and diluted core earnings per share of 50 cents. Based on these results, it's clear that our fundamentals remain strong. I'm proud of what we were able to accomplish, particularly given the persistent macroeconomic headwinds we continue to navigate. Now, similar to the second quarter, these results were driven by the ongoing improvements in international markets, our broad portfolio of market-leading products, and strong commercial execution. In Surgical, our broad suite of products continues to win in the market. Starting with implantables, we remain the market share leader in intraocular lenses, driven by our comprehensive portfolio of PCIOLs, including Panoptix and Vividi. While recent ATIOL penetration trends have moderated, we continue to focus on driving penetration by educating doctors, clinical staff, and patients about the value and benefits of advanced technology lenses. For surgeons, we've continued investing in our clinic-based sales force and peer-to-peer learning programs. Patients were providing educational materials in advance of their doctor visit, so they come into the clinic informed about their lens choice options. All of these programs are showing encouraging early results, and we plan to continue to expand them in 2023. In monofocals, Clarion, our latest IOL material, is helping us defend our market-leading position. Recently, at the AAO, we announced the rollout of Clarion Tauric across select practices in the United States. With the introduction of Clarion Tauric, Alcon now offers a robust portfolio of options for U.S. cataract patients with astigmatism on our latest glistening-free material. We've also received extremely favorable customer feedback on our suite of cataract equipment, including the Argos Biometer and the Legion and Centurion FACO devices. The Argos Biometer with image guidance provides higher data capture rates than other biometers and enables better prediction of lens power, which may lead to improved lens selections. Customers also appreciate that Argos is fully integrated with the Alcon cataract refractive suite, helping make it easier for doctors to deliver better outcomes with greater efficiency. Customers in emerging markets are also responding favorably to the Legion FACO machine. Legion delivers the Alcon FACO performance advantage with the right features and price for emerging markets. And in international markets, where we are continuing to upgrade the legacy FACO machines in our industry-leading Centurion system, Demand for Centurion is supported by our ActiveCentury handpiece, the most advanced FACO handpiece on the market. Importantly, we're seeing that Centurion with ActiveCentury is helping drive practice efficiencies. Results from a multicenter prospective clinical trial presented at the AAO conference demonstrate meaningful surgical time savings when using Centurion with ActiveCentury. Given persistent global surgery backlogs and staffing shortages, this is becoming increasingly important to surgeons. Now moving to vision care, we continue to be pleased with the progress of our innovative suite of lenses, including Precision One, Daly's Total One, and Total 30. Precision One continues to be our main growth driver. Precision One was designed to deliver the right balance of visual acuity, wearer comfort, and ease of handling at the right price for the mainstream wearer. And with Precision One for astigmatism, we have a lens for mainstream astigmatic patients who have historically been a significant but underserved population. Similarly, Daly's Total One continues to be the gold standard in the premium contact lenses. Earlier this year, we launched Daly's Total One for astigmatism, the first and only daily toric lens to feature water gradient technology. This launch completes the Daly's Total One portfolio, which now includes spherical, toric, and multifocal lenses. This is important because eye care professionals can now target and treat a wide range of patients with a single premium lens family. We're also capturing share in the reusable lens category since launching Total30. Recall that this is a $4 billion category and represents approximately two-thirds of wearers. Total30 represents the first major innovation in reusable markets in a number of years and for the first time adds water gradient technology to a reusable lens. We plan to expand the Total30 product family with a commercial launch of Total30 for astigmatism early next year. And finally, in ocular health, we recently announced the intended acquisition of Aerie Pharmaceuticals. As we welcome the ARRI team to Alcon, we look forward to leveraging our expanded commercial footprint and expertise to bring Roccatana Repressa to even more customers and their patients. This acquisition underpins our strategy of entering into productive white spaces. We started moving in this direction with the acquisition of the U.S. commercial rights of Sembrenza and Isuvus, and see this as a natural addition to that portfolio. Now, let me provide an update on our end markets. In surgical, global cataract procedures were up high single digits in the third quarter versus prior year. This growth varies significantly by region. In the United States, where surgical centers continue to be constrained by staffing shortages, procedural volume was relatively flat. Outside the US, procedures were up low teens as markets continued to improve. In contact lenses, the market growth for the quarter was difficult to read due to the timing of price increases and inventory movements. Based on the available data, we estimate the overall lens market grew mid to high single digits in the third quarter. We're encouraged to see current reporting indicate that optometry visits have returned to pre-COVID levels. Against that backdrop, we believe that our contact lens business grew in line with the market. Now I'd like to update you on our transformation program. We've made significant progress with our cultural and business transformation journey over the past few years. As we've said before, the goal is to drive speed and simplicity into the business. By allocating expenses more efficiently, we've created savings that were reinvested in a new product development and launches. This has fueled our innovation engine and helped us to outpace market growth. Specifically, we've streamlined our operating model and established global shared service centers for key functions like finance, HR, and IT. To continue to optimize our business, we've identified additional transformation initiatives, including reviewing management spans and layers, as well as streamlining our commercial processes. These additional steps will help us to offset some of the macroeconomic headwinds we face while continuing to invest behind our strategic priorities. Tim will discuss this in greater detail in his remarks. So to summarize, our operational performance has been exceptional, particularly given the current macro environment. In constant currency, we grew revenue 9% as we continue to launch new products. We grew core operating income by 19% despite inflationary pressures, And we expanded core operating margin by 160 basis points. So with that, let me pass it to Tim, who will take you through our financial results and comment on our outlook for the rest of the year.
spk07: Thanks, David. We're pleased to report third quarter sales of $2.1 billion, up 9% versus prior year. This growth is driven by continued recovery in international markets and demand for our innovative products. Our overall third quarter sales growth included approximately one point of contribution from Hydrus. Recall that we acquired Sembrinza late in the second quarter of 2021, and we have therefore lapped its sales contribution. Our third quarter U.S. dollar sales growth included approximately 700 basis points of pressure from foreign currency. For the first nine months of 2022, total company sales of $6.5 billion grew 12%. As David mentioned, the Alcon team delivered another quarter of strong execution despite a challenging macroeconomic backdrop, including a strong U.S. dollar, continued supply chain tightness, and inflation. Moving to our third quarter results, our surgical franchise revenue was up 12% year over year to $1.2 billion. Surgical revenue in the first nine months of 2022 was up 15%. Implantable sales were $392 million in the quarter, up 11% year-over-year, primarily due to international market recovery, continued demand for Vividi, and sales of Hydrus, which was not part of our portfolio last year. This was partially offset by declines in advanced technology intraocular lenses in South Korea, following a reimbursement change during the first quarter. Implantable sales in the first nine months of the year were up 23%. In consumables, our third quarter sales were up 11% to $618 million, primarily driven by improving conditions across international markets and continued strength in cataract consumables in the United States. We saw double-digit growth in cataract and refractive consumables and high single-digit growth in vit-ret consumables. For the first nine months of the year, consumable sales were up 12%. In equipment and other, sales were $206 million in the quarter, up 15% year over year, primarily due to continued strong demand for our Cataract suite of equipment. We are continuing to upgrade older generations of FACO equipment in international markets to our Centurion machine, and account conversion has been favorable. We also continue to see healthy demand for our Legion FACO machine in developing markets. Equipment sales for the first nine months of the year were up 10%. Turning out of VisionCare, third quarter sales were up 5% year over year to $908 million. While we saw demand in both the U.S. and international markets, foreign currency negatively impacted sales by approximately 700 basis points. For the first nine months of the year, VisionCare sales were $2.7 billion, up 8%. Contact lens sales were $558 million in the quarter, up 7% versus last year. In the quarter, we saw solid demand for our new innovative portfolio of Sci-Hi Lenders, Precision 1, Daily Total 1, and Total 30. Contact Lend sales for the first nine months of the year were up 10%. In Ocular Health, our third quarter sales were $350 million, up 2% year over year. This was led by our sustained family of artificial tears and international market recoveries. Similar to last quarter, this growth was significantly offset by supply chain challenges, primarily in contact lens care, which negatively impacted ocular health growth by approximately 300 basis points. Although we'll continue to actively manage our supply chain, we expect these challenges to persist through early 2023. Ocular health sales were up 6% for the first nine months of the year. Now moving down the income statement. Third quarter gross margin was 61.7%, down 60 basis points on a constant currency basis, primarily due to inflationary pressures. Core operating margin was 17.2% in the quarter, down 50 basis points on a U.S. dollar basis, but up 160 basis points on a constant currency basis. The improvement was primarily driven by operating leverage from higher sales and favorability from incentive compensation, partially offset by increased inflationary pressures. Third quarter interest expense was $34 million compared to $31 million last year, driven by higher interest rates. Going forward, we expect interest expense to increase as we finance the area transaction with debt and look to refinance our remaining term loan. The third quarter core tax rate was 19.2% compared to 17.5% last year, primarily due to a mix of pre-tax income across geographical tax jurisdictions and a decrease in the build of inventory in certain markets, partially offset by a discrete tax benefit related to fiscal year 2021. Core diluted earnings per share in the third quarter of 2022 were 50 cents, down 4 cents from last year. On a constant currency basis, core diluted EPS was up 14%. Before I discuss our outlook for the remainder of 2022, I'll touch on a couple of free cash flow and other related items. Pre-cash flow for the first nine months of 2022 was $475 million, compared to $578 million last year. This variance was primarily driven by lower cash flow from operations in 2022 from changes in networking capital, primarily related to the timing of the annual bonus payment, which was higher than in 2021. Capital expenditures were $397 million for the first nine months of 2022, which were primarily related to investments in our contact lens manufacturing production lines. Similar to prior years, we expect to see an increase in CapEx in the fourth quarter. Transformation costs were $17 million in the quarter and $210 million alike to date. We've made great progress with our transformation initiatives and have delivered our targeted savings. As David mentioned, we've identified additional transformation initiatives to generate incremental efficiencies. The incremental annual savings are expected to be approximately $100 million starting this year while the incremental one-time cost for these activities is expected to be about $125 million. Importantly, we expect these incremental savings to partially mitigate the macroeconomic headwinds we're seeing while allowing us to continue to invest behind innovation and new product launches. We plan to complete the program around the end of 2023, as originally communicated. Now moving to our full-year guidance. Our current outlook assumes that the 2022 global markets grow at a slightly above historical rate, inflation stays at current levels to the remainder of the year, the supply chain does not materially deteriorate, and the US dollar holds steady at mid-October foreign exchange rates. Based on our current assumptions, we are updating our net sales guidance for 2022 to $8.5 to $8.7 billion. We're also tightening our year-over-year constant currency sales growth guidance to 10% to 11%. Foreign exchange is now expected to have a negative impact of approximately 6 percentage points versus prior year. Moving to core operating margin, we are tightening the range of our full-year outlook to 18% to 18.5%. This guidance now reflects approximately 180 basis points of FX pressure and approximately 100 basis points of net inflationary pressures. Consistent with last quarter, we expect interest and other financial expense to be between $210 and $220 million. This does not include the potential impact from the planned acquisition of Aerie. We are maintaining our 2022 core effective tax rate guidance of 17 to 19%, which implies a high 20s tax rate in the fourth quarter. As I mentioned in August, we are in discussions with the U.S. and Swiss tax authorities regarding an advanced pricing agreement. Our guidance incorporates the impact of the new agreement and assumes the negotiations will be finalized in the fourth quarter of this year. Finally, we're now tightening the range of our 2022 core diluted EPS guidance and now expect core diluted EPS of $2.20 to $2.25 per share. This updated guidance reflects an increase of approximately $0.06 of FX headwind versus our last call and approximately $0.43 versus prior year. Additionally, we are tightening our constant currency core diluted EPS growth outlook to 21% to 24% due to the strong momentum we're seeing in the business. This excludes any impact from the ARRI acquisition, which we expect to pressure core diluted EPS by approximately $0.03 in the fourth quarter. Now I'll briefly discuss our intended acquisition of ARRI Pharmaceuticals. Under the terms of the agreement, Alcon will acquire ARRI for $15.25 per share which represents an equity value of approximately $770 million. Additionally, Alcon will assume approximately $160 million of net debt for a total purchase consideration of approximately $930 million, which we intend to finance with new debt. The agreement was approved by the boards of both companies, and we expect to close the transaction in the coming weeks. In summary, I'm very pleased with our third quarter performance, and I want to thank the entire team for their hard work and determination. This year has had its challenges, but we continue to manage well in a difficult environment. With that, I'll pass it back to David for closing remarks.
spk00: Thanks, Tim. To wrap it up, our underlying business is performing well. Our team is executing and delivering on our commitments to our shareholders. We continue to lead the market on the strength of our innovative product portfolio. We're investing in innovation. We're creating operating leverage and expanding margins. And finally, we're moving into attractive white spaces by expanding inocular health with the intended acquisition of Aerie. Based on these results, I'm optimistic about Alcon's long-term outlook and value creation. And I want to thank all of our associates once again for another great quarter. With that, let's open it up for Q&A.
spk12: Thank you. At this time, I'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 key. 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 Ryan Zimmerman with BTIG. Please proceed with your question.
spk04: Hey, good morning. Thanks for taking our questions, Dave and Tim. I want to ask actually about the Aerie transaction a little bit. You know, as we think about the margin benefits that you're getting from the transaction, I'm wondering if you can provide a little bit of color. I think the street's looking for about 100 basis points of op margin expansion next year. I assume Aerie will kind of carry some of that load given their existing margin profile, but I wanted to get your take on that and kind of how to think about the benefit we get from the Aerie transaction.
spk07: Yeah, actually, Ryan, thanks for the question. As we announced on the press release when we did the deal yesterday, Actually, in year one, it is relatively neutral. From an operating income perspective, it'll be relatively neutral as we work through the synergies and what have you. And then obviously, the financing cost is sort of below the line. So it will cause a little bit of pressure in next year's number, but it's not that material.
spk04: Okay, that's very helpful, Tim. And then David, you did comment that ATIOL is moderated a little bit. I'm wondering if you could elaborate on kind of what you're seeing there in terms of that moderation, how you think about the end markets for ATIOLs and when you expect that to start to turn more favorable. Thanks for taking the questions, guys.
spk00: Yeah, Ryan. In the surgical business, the implantables business was pretty good. We actually had a pretty good quarter, as you can tell. The implantables was mixed, though. Obviously, the international markets were did really well. Penetration was up. You have to take out Korea from that number, but I mean, it was a pretty good penetration improvement. Our share across all markets was very good. And again, we, particularly in the PC IOLs, and Eclareon Toric has done a nice job of helping stabilize our Toric business, which again, we'd lost a little share in that category. But directionally, the news was, you know, pretty good. I think the thing that went sideways was the U.S., and I think the U.S. had been sideways slightly. Again, I think we're really thinking about this as penetration moving a lot with the staffing considerations that are going on in the U.S. And I think what we've heard a lot from the conventions we've been at was that we're losing people who know a lot about how to articulate the value of ATI wells. And when you lose somebody like that in a staff, it is difficult to get them right back. So we're spending a lot of time right now on our programming focused on getting information to the patient directly. also training docs on how to communicate the value of quality of life and the value of the long-term benefit of being spectacle-free. And again, that is a big part of how you move people from kind of standard lenses to premium procedures. So the good news, I guess, is procedures themselves look pretty normal. I mean, I don't think procedures were off at all. In fact, we We saw direction around the world a pretty good number for procedures. The mix to penetration went sideways on us quarter to quarter, and that's obviously something we're paying attention to, but feel like we've got a line of sight to the programming that can help move that.
spk04: Thanks for taking the questions. Congrats on the nice quarter.
spk12: Thank you. Our next question comes from the line of Julian Dormois with BNP Paribas. Please proceed with your question.
spk08: Yes, hi, good afternoon, guys. Thanks for taking my questions. It's also related to Aerie, and particularly the focus on the product they have in the development, which is called AR15512, if I'm right. I think this is a potentially direct competitor to Novartis drug Xydra, and this drug has very high expectations in the consensus, and for whatever reason, it failed. So what makes you comfortable that this drug could be much more interesting than Xydra? and also if you could update us on the clinical development program and particularly the timeline for the top-line data readouts and the potential findings with the FDA, please.
spk00: Yeah, Julian, thanks for the question. I think, first of all, on 512, you know, we like the potential of that product for a number of reasons, but mainly because it's probably additive to almost every other mechanism that's out there in the dry eye category. So I think the exciting part for us is you may find that this mechanism isn't really competing directly with Zydra, but could be additive to it. And a number of the products that are out there, including Zydra, take quite a little bit of time to work. And so what we're optimistic about is its potential to work a little more quickly and also be complementary to other products. So that's kind of the profile we like. Now, look, it's in clinical phase three, and so we'll see what the data comes out. I believe the data readout is somewhere in the third quarter range next year. And then we'll have to figure out kind of right after that how it looks and what we want to say about that and its filing timeline. So we're just getting familiar with a lot of these things. And again, as we actually close the deal, we'll have a lot more to say about this and the other pipeline. But I think directionally, we feel pretty good about that product.
spk08: Okay, that's very helpful. Thank you very much. And if I can have a quick follow-up, which is on South Korea. Sorry if I missed that, but how long do you think that could impact the implantables trajectory? Is it into Q4 or could we see another raft of impact in 2023?
spk00: Well, it's probably got two more quarters to go. So the impact was, there was a big, a very significant increase in revenue growth in Korea in the first quarter of this year. And so we'll wrap around on that, obviously, next year. What we're seeing right now is that the penetration that in Korea was north of 50% has come down to much more normal levels as the reimbursement from the payers has changed. And so as a consequence of that, I think you're going to see a more normalized number going forward. Still a pretty good number, and I think North Korea is still leading the way in a lot of ways on the ATI wells. But Certainly will cause us some challenges until end of first quarter.
spk08: Okay, great. Thank you very much.
spk12: Thank you. Our next question comes from the line of Daniel Buchta with VKV. Please proceed with your question.
spk10: Yes, thank you very much. Hello, gentlemen. Maybe the first question from my side on the contact lenses side. I mean, 7% organic growth here in this quarter. I mean, at least my personal expectation was a notch higher than that. We have seen what your larger competitor J&J has also reported. And in the past, you clearly stated this year you want to gain market share. Is there anything holding you back a little bit? Are there older, more mature products that are in decline? Or how do you feel about this ability to gain market share this year and then also in the coming years? Maybe that's the first one from my side.
spk00: Yeah, Daniel, look, we feel really good about market share in the contact lens business. Let me just start by saying market growth was pretty difficult to gauge this quarter. There was a number of things going on. The timing of price increases, depending on when they come out, may or may not get captured in the market data. And similarly, depending on when they happen, inventory loads can be carried into quarters or not. So you should be real careful about the market assumption and just kind of think carefully about what other people have done relative to inventories and inventory movements. Secondly, the contact lens market itself is, you know, we've had it kind of mid to high single digits. So let's just call 7% growing with the market. I would tell you in the U.S., we grew share with a great deal of confidence in And internationally, you know, we continue to grow nicely, and our share of new and switch fits continues to look very good for us. So, again, I think as one of the things I mentioned earlier was that as patient volumes get back to normal, and that is the flow of patients through the offices, that's really what we need to grow share. Because in order to grow share, you've got to have a switch or a new patient. And it's exciting, I think, for us to see that patient visits are now kind of roughly back to pre-COVID levels. And international in particular will do well. And I think as that happens, we like what we see. So I feel good about where we are and certainly feel good about growing share consistently, growing faster than markets.
spk10: much very clear answer and then maybe the second one to tim um asking on the former or the still still valid 2023 guidance for core operating margin i'm in the low 20s i mean thank you for your comment on on area that it's not really margin dilutive into next year um fx fortunately at least compared to your mid-october assumptions has also eased a little bit um i mean how do you feel about this low 20s core even margin in the headwinds to material to really compensate for until then.
spk07: Yeah, great question, Daniel. You know, we do have a plan to get to the 20% in 2023. I'm not going to go into all the details here. We'll share plenty of details with you on the February when we guide. But I can tell you what gives us confidence is just how we're performing this year. I mean, we continue to launch products that resonate with customers. If you look at our revenue, you know, we're up 12% in constant currency year to date. So we've been able to demonstrate, obviously, that we can grow the business. We're also driving nice operating leverage. I mean, if you look at third quarter year to date, you know, we've got an SG&A alone in constant currency. We've got about 200 basis points of operating leverage. So that just tells us that the fundamentals of the business are working very, very well. And that's what gives us confidence in our 2023 numbers. But we'll share more details with you on the February call when we give formal guidance.
spk10: Pretty understood. Thanks for the confidence. Thanks.
spk12: Thank you. Our next question comes from the line of Larry Beagleson with Wells Fargo. Please proceed with your question.
spk05: Good morning. Thanks for taking the question. Hey, David, you know, I wanted to ask you about your pharma strategy going forward. Bloomberg's reporting this morning that Novartis is considering, you know, selling its ophthalmology business, and that business could garner about $5 billion. Can you talk about your approach to building your pharma business, you know, post-Aerie, If the right large asset became available, would you consider it? And what's your capacity for M&A? And I had one follow-up.
spk00: Yeah, look, I mean, we kind of consistently say, you know, we really like this kind of 50 to 500 million range. It's not that we couldn't do something bigger than that, but I don't think we're looking for transformational ideas at this moment. What we're really looking at, I think, is how do we build nice, steady, even growth with a disciplined approach and that I think generates real long-term shareholder value and adds kind of consistently accretive to what we're trying to do. So we like what we're doing. And I would tell you that I think what has been great about the area approach has been that, you know, we get two products in glaucoma that blend nicely with Simbrinza. So together, those glaucoma products now, I think, are probably the best approach to maximum medical therapy and glaucoma you can get. You know, Roclatan plus Simbrinza is three different mechanisms doing just, I think, about the very best you could do for a glaucoma patient. So we get excited about that approach. Nice synergy with what we've done already. And then as you go forward, I assume this is a really exciting product that we think can complement something like 512 that were coming to market and be a dry eye complement where we've got a kind of a mechanism that treats flare and a mechanism that treats dry eye long-term. So the business strategy we have directionally is to kind of find products that have growth potential. And I would say that a lot of what you see out there in the, I would say, legacy portfolios of many of the companies that are available, you know, really aren't growth phase or they're way late in their growth phase and they're expensive. And I don't think that's really an approach we're going to take. I think we see the market as becoming a lot more interesting over time as values come into line with what we think they ought to be. And I think you ought to think of us as probably more taking a moderated approach in that kind of typically kind of 50 to 500 million range. And, you know, every now and again, maybe we dip into an area or something like that.
spk05: That's helpful. And then just on the top line for Tim or David, You know, how should we think about what are some of the puts and takes on the top line? Tim, your comments on the 20 percent margin goal were clear and helpful. How about the top line? I mean, you talked about year to date, 12 percent constant currency. I mean, do you guys think you guys are above a mid single digit grower at this point? And, you know, what are some of the puts and takes to consider, you know, for 23 on the top line? Thanks, guys.
spk00: Yeah, look, on the revenue line, you know, we really believe we could consistently grow faster than market. So I think, you know, if we're doing the right things, and I think we are, and our innovation comes through, which I think it will, you know, I think what we're going to see is steady market growth, because we've got good fundamental macros underneath the eye care market, which should drive kind of a mid single digit, you know, results. So I think, you know, if you think our markets grow, should grow kind of four to six in a normal world, we should grow a little bit faster than that. So I think, depending on where you, you know, where you put the market, then where you put us should be a little bit north of that. And I think that should be the way we think about it over time. So, yeah, we're not going to, I mean, I don't see us growing, you know, 12% is a big number because international is wrapping around a COVID year, right? So we're getting a big number off of international, which is terrific for right now, but it's not the normal world. And we're seeing the U.S. business as something coming back to, you know, as it's not wrapping around the COVID numbers, right back to what the markets ought to be. And so I feel like, You know, we're coming probably into next year at a frame where most of next year should be relatively normal, notwithstanding other macro problems.
spk09: Thank you.
spk12: Thank you. Our next question comes from the line of Matthew Michon with KeyBank Capital Markets. Please proceed with your question.
spk02: Hey, good morning, and thank you for taking the questions. Just first on the transformational cost savings. The $325 million, including $100 million incremental that you're announcing this quarter, have the majority of those been realized yet? And is that incremental $100 million in cost savings, does that come in in 2023? Or does that start coming in in 2024? Thanks.
spk07: Yeah, great question. So I'll call it the first round of transformation, the $200 to $225 million of savings. Most of that has been realized. We do have more of that coming in in 2023 as we have some actions taking place. But we've got projects in place, plans, the numbers identified. But that is, again, that portion of the transformation, as we said from the get-go, was going to be reinvested back into the business. So that's allowed us to strengthen what I'd call some more of those customer-facing expenses that we'd like to invest in to drive that revenue line. Now, the incremental $100 million that has been identified, that will come through in 2023.
spk02: Okay, excellent. And then just one last one on contact lens trends, how you're seeing the consumer buying patterns potentially change or or stay the same as inflation and the economy moves?
spk00: Yeah, look, I mean, I think we've typically thought about, you know, consumer behavior, you know, linking it back to the kind of 09-2010 recession. You know, we've modeled, you know, six ways from Sunday what we think could happen. What you saw back at that one, and it's probably our best proxy, was that you didn't see a lot of trade-ups. People don't stop wearing contact lenses, so the volumes are fine. What you end up selling is, you know, at that time, what you didn't see was a bunch of reusable folks moving into dailies at the same pace. Everybody kind of stays put in their lenses. So trade-ups from HEMA lenses to Sci-Hi might slow. You might see some reusable to dailies slow. But the good news with our business is we're well positioned at this point with a value product in P1 that really, you know, has a price point that I think is much more attractive than, say, if you're trying to jump all the way to DT1. And similarly with Total 30 and the reusable, if you stay in the reusable space, you can still get now, I think, a better lens at a very similar price and trade up into our T30. So we feel like we've got very good positioning for our contact lenses for really whatever happens. I do think that you'll see some value slowdown in that market if there's a significant turn. But directionally, you know, I think we feel like we can manage that pretty well. That's certainly what happened, and it was a pretty quick turnaround the other way as well. So, again, I think we understand it, and we've modeled it a lot of different ways. Those are generally speaking what you see. Thank you.
spk12: Thank you. Our next question comes from the line of Jeff Johnson with Baird. Please proceed with your question.
spk06: Thank you. Good morning, guys. Tim, maybe just a couple follow-ups on the margin comments you made. I just want to make sure I understand. One, when you say area is going to be, I thought you said operating profit neutral. Operating profit neutral or operating margin neutral, number one. And number two, on the 20% comment for 2023, a path back to that. Would that be for a full year? You think there's still a path to getting to a 20% operating margin? Are you speaking about maybe an exit rate or something like that? Thanks.
spk07: Yeah, as far as ARRI goes, the operating income dollars will be neutral. So it will apply a little bit of pressure, given the fact that we'll have some revenue from that in year one. Then it becomes accretive in year two. So it does apply a little bit of pressure, but that is in our 20% and not material, what I would say. The 20% is a full year number.
spk06: All right, fair enough. And, David, maybe for you, just on the ATIOL comments in the U.S., you know, you put a lot of that on staffing. That's well with what kind of we're hearing in the field. But do you think any competitive impact at this point? And on the South Korean impact in 3Q, was that any different than the impact in the second quarter? I know the first quarter was the big buy forward, but did 2Q or 3Q have any difference in impact? Thanks.
spk00: No, 2Q and 3Q were kind of roughly the same. And I actually think I may have said North Korea earlier. Just somebody pointed that out to me. So sorry for my geographically challenged verbiage. The truth is on that business, you know, we feel pretty good about what's going on with the programming. And I do think that while you can see some slowdown in this category, you know, I don't know that it's necessarily going to be related to what we see right now. Right now, I feel like the share has been a pretty good move for us. So if you think, if I take it apart and I just say, you know, PCIOLs, we actually gained share globally, which offset a little bit of the penetration concern. In the monofocal business, we had a really good quarter. It looks like we gained share principally on our Clarion launches. And in TOREC, we were slightly down, I think. maybe, you know, but a lot better than where we've been. So I think stabilizing there, I think we've had a good competitor in the TOREC space now. But if you think about it around the world, we've got pretty much everybody in play now that's going to be meaningful, you know, to affect us, certainly in the international markets. Maybe there's a couple more smaller players to come in the U.S., but we've been now through at least a full cycle of opportunity to see share move, and we've held a really strong position. I think in the U.S., PCI wells at least is still up over 80, so really feel good about how well the market has accepted Vividi and Panoptix.
spk06: Understood. Thank you.
spk12: Thank you. Our next question comes from the line of Cecilia Furlong with Morgan Stanley. Please proceed with your question.
spk13: Good morning, and thank you for taking the questions. I want to start still with Cataracts. Just looking internationally, if there are any markets at this point that you'd say are still in recovery or are most at this point from your perspective largely back to pre-COVID trends. And then as you think about PCI penetration, can you just update us, especially after some of the recent dynamics, how you think about broadly PCI penetration US as well as OUS? as you think about U.S. specifically and the clinical-based sales force, you know, the timing at which you think you could start to see recovery and growth in PCIL volumes?
spk00: Let me try to take those a little bit of time. The international recovery is pretty solid. I would say we've still got a little more wraparound to go. I would say that our sense of it was, even through the beginning of the first quarter this year, we still had a little bit of COVID shutdown in China. We had a few... Other markets around the world, Japan has been slow coming back. It's not yet back to what we think it could be. I would say there's still kind of – of the big markets, it's probably China and Japan. That's probably the best way to say it. Latin America has been very strong this year, and so I think they're kind of back to where they wanted to be. What I think is really left to do is see Asia come completely back to where it can be. And maybe even a little bit of Europe, Eastern Europe, but it really stops, I think, about the end of fourth quarter. So we should get a little more international benefit at the end of fourth quarter. And then I think as you start into next year, it gets to be really hard to discern because we're kind of a couple of years past it. And I think we're probably in that zone where we should just assume we're roughly normal. Not entirely true, but probably the best way to talk about it. And on the penetration, You know, the clinical Salesforce, we expanded our Salesforce and we continue to, you know, see the benefits of that. You know, we are spending a lot of time in clinic on things like biometry and in the United States on biometry and ATI wells. And that matters because, again, there's a lot of work that needs to go on inside the office to run a really efficient premium practice. And so we're really proud of the work that's been done by the U.S. Salesforce to give the training and to get another group of folks up and really creating an environment where surgeons could thrive and really do the work they love to do, which is surgery, and then help the clinic and the staff do the things that they need to do to get the patients aware of and prepared for decision-making around what they would prefer to have. And so in terms of clinical outcome, we try and demonstrate that. We try and obviously help them understand the economics of these choices and what the long-term benefits are. So That's kind of where we are right now. And I do think penetration has gone sideways. I kind of imagine it picks up as staffing stabilizes and as kind of the noise around the economy kind of stabilizes. And I think those two things together, we'll have to see. Procedures themselves don't look like they're way off, either internationally or in the U.S., really. Really just looks like we're getting a mixed shift here right now to a little more traditional lenses and a I think that bounces around a little bit for a while before it gets better.
spk13: Great. And if I could follow up on contact lenses too, specifically the reusable lens market, what you've seen post-launching total 30 in terms of where your share was then versus where it's trended now and just your outlook for the ability to continue to increase share in the reusable segment of the markets.
spk00: Yeah, just not being redundant, but I would tell you that what we're excited about is the visit data because, you know, getting patients back in the office to receive a new prescription when their visit is due I think is a really big deal because that obviously gives us an opportunity to do precisely that, is to offer them a new and better solution. So we'll see. I mean, when we look at, you know, the leading indicators in these markets, it's always new and switch fits, and that data is pretty easy to get in the United States, a little harder to get outside the U.S., But in the U.S., the T30 product looks really good on our new share profile. And, again, that's the leading indicator. It takes time to move all these markets. So none of these markets move, you know, real fast. We're thrilled with a share point a year. I mean, that would be a terrific outcome. I think, you know, we're doing great with T30, and we expect it to do well over time.
spk13: Great.
spk12: Thanks for taking the questions. Thank you. Our next question comes from the line of Joanne Wunsch with Citi. Please proceed with your question.
spk11: Good morning. Thank you very much for taking my questions. Just two quick things. I appreciate the comments on the economic impact or potential impact in the recession on contact lenses, but can I get your thoughts, please, on what it may or may not mean for ATIOLs? Because they're far more penetrated today than they were in the previous recession. And then my follow-up question really has to do with any commentary you can give us on 2023, simple things like FX, headwinds potential, or an affected tax, right, so we can sort of get those moving in the right direction. Thank you.
spk00: Sure, Joanne. Let me try the ATOL piece, and then Tim can grab the rest. Look, on ATOLs, it's very hard to know because, you know, we – We don't really have a metric on this. You know, penetration, you know, is up in the international markets. It grew nicely. And if you backed out Korea, you'd be pretty pleased with it. You know, so that on the one hand looks really good. And I don't know that the recession is necessarily, you know, or any of the kind of economic overlays are any different out there than they are in the U.S., I do think that the U.S. market, you know, certainly has had a penetration that kind of moved sideways this quarter and has for a couple of quarters, actually. So how do I think about that? I tend to believe, because what I'm hearing, you know, more from the surgeon than anything else, is that this is staffing-oriented. But I will tell you that, you know, anytime, you know, seniors, you know, see pensions, you know, decreasing or inflation taking a bigger chunk out of their budget, you could imagine that it has an effect. So I think the challenge is going to be discerning which is which, and we'll have to see that over time. What I think is positive is our share movement, and in particular, our ability to kind of influence the adoption and help train staff that may be turning over, because I really can't do much about the environment. I do think what we can do is show surgeons and their staff how to continue to help these folks understand the economics, understand the benefits, do that in a very simple and efficient way, get them through the practice and get them into something that I think long-term is in their best interest. So we're working hard on the things that we can control there, and we'll just have to see over time how the rest of that works out.
spk07: Yeah, again, we'll give you guys more color on 2023 on the February call, but just at a high level. You know, the tailwinds that we should be benefiting from as we go into next year, to David's point earlier, you know, we would expect to grow from a revenue perspective to grow faster than the market. We would expect to continue to get operating leverage as we've done this year. We have the transformation that we announced at incremental $100 million. That will obviously help as we go into next year. So I would say those are the main tailwinds. From a headwind perspective, we do expect FX to be a pressure point. When you look at 23 versus 22, it just depends on where the rates shake out this year. We'll give you more guidance on the tax rate when we get there, but it'll be relatively close. And then if you're thinking about this is not a rate thing but an EPS thing, you know, do keep in mind that interest expense will go up next year. You know, we plan on financing the area acquisition through debt, and then we've got some term loans that you can see in the 20K that we will plan on refinancing. Those were due in March of 24, so we'll take care of that relatively soon. But those are the headwinds and tailwinds.
spk11: Much appreciated. Thank you.
spk09: thank you our next question comes from line of falco friedrichs with deutsche bank please please proceed with your question thank you very much um so my question is coming back to 2023 and thanks for your previous comment that fx should still be a bit of a pressure point but then also good to hear your confidence into the 20 margin target next year so is your confidence into this 20 is that confidence into a cer 20 margin or is it a confidence in all-in, even including this expected FX headwind? Thank you.
spk07: Yeah, again, I think I've elaborated enough on the 2030. We're going to have our call in February. We will give you plenty of details with the guide and the revenues and the margins and all that, but we feel good about the 20%.
spk09: Okay, thanks. And then a quick follow-up. So this, on the margin in Q3, the favorability from incentive payments Can you elaborate a little bit on what is behind that and is that a temporary thing or will that be with us for the next quarters now? Thank you.
spk07: No, it is. It is more of a timing thing than anything else. If you recall last year, our bonus pool was larger than what we anticipated will be this year. So every quarter we accrue our bonus pool. So basically our last year our accrual was higher than it was this year.
spk09: Okay, thank you.
spk12: Thank you. Our next question comes from the line of Zach Weiner with Jefferies. Please proceed with your question.
spk03: Hey, thanks for taking the question. I was wondering if you could give an update on some of the contact lens manufacturing upgrades that you're working through and any color on price for contact lenses that you've seen throughout the year. Thanks.
spk00: Yeah, Zach, so we're proceeding and continue to build out capacity in our contact lens business, and we're doing that on our newest lines, which, again, have tremendous flexibility to produce dailies or monthlies, can produce, you know, any of the modalities as well. The beauty of that, of course, is it helps you in prediction. It helps you in making kind of shorter runs and more efficient use of the equipment. Directionally, we continue to see the lines we put in several years ago mature at the levels we expected. So the metric we use is OEE. And as we look at that, you know, our planned numbers have been met or exceeded on our original lines. So we have great confidence that the remainder of those lines, as they come in over time, will be able to meet or exceed what we had planned. So we feel good about the performance of those lines and the way in which they're running going forward. That should help us, you know, in the outer years of our plans as we kind of moderate the amount of equipment we put in, the lines we put in, we should see, you know, some improvement in gross margin around our vision care business. So we're optimistic, I think, that that is realizable. On pricing and contact lenses, there have been a number of price increases by a number of competitors, and some folks have taken two. They took smaller than we did, and then they took it twice. We took a larger one. more mid-single digits in the beginning of the year. We have also in our international business gone out, as well as our U.S. business, and began to talk about some price increases that we are going to take going forward. They have not taken place yet. And of course, we've said kind of mid-single digits again. We'll see what we have in terms of leakage and what we can really realize from that. But We are trying as best we can to offset the raw material input costs that are inflating as we've kind of gone through this year. So we're trying to keep up with it, but it is tough. And we will see how that goes.
spk03: Thanks. And if I could just follow up with one more. On the T30 lens, can you give any color as to who that lens or where that lens is taking share? You know, is it other alcohol lenses or, you know, competitors? Thanks.
spk00: Yeah, I mean, you know, yeah, I mean, obviously the biggest lens target for us, I think, you know, is the obvious one. It's J&J's two-week lens. But we're obviously, you know, we're doing pretty well against biofinity as well. So we like biofinity. We like our chances against any monthly lens. And, you know, we like to say, you know, this is a lens that feels like, you know, the same thing on day 30 as it does on day one. And that is a different experience I think you can get in either the two-week or the monthly modality. So we're pretty ambivalent to who we take it from, but it's certainly done well competitively. You know, we're always going to cannibalize our own products. In this case, we have a better margin on our T30 than we do on our air optics lens. So we feel good about going ahead and, you know, whatever people want to move to from that, we'll take a look at that. But that's not our main source of business. Our main source of business is competition. It's a new product, though, and I'd give it a little bit of a run, though. It takes a little while. And as we see the TORIC come in in particular, which happens at the beginning of the year, that'll really help, I think, because it is one of those things where, you know, practices really like to have a family of lenses. So having Sphere with TORIC gives you most everything you need to kind of fit as many patients that are coming through the door. So I think that'll be a big uptick for us as well.
spk03: Thanks for taking the question.
spk12: Thank you. Ladies and gentlemen, this concludes our question and answer 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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