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spk13: Greetings and welcome to the Alcon fourth quarter and full year 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, Investor Relations for Alcon. Thank you. You may begin.
spk01: Welcome to Alcon's fourth quarter and full year 2022 earnings conference call. Yesterday, we issued a press release, interim financial report, an annual report, as well as 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 from Geneva 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 in our forward-looking statements are included in Alcon's Form 20F and our earnings press release and interim financial report on file with the Securities 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 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 only, our comments on growth are expressed in constant currency. In a moment, David will begin by recapping highlights from 2022 and recent months, including market dynamics, innovation, highlights, key product launches, and acquisitions. After his remarks, Tim will discuss our performance and outlook for 2023. Then David will wrap up with closing remarks, and we will open the call for Q&A. With that, I will now turn the call over to our CEO, David Endicott.
spk00: Thanks, Dan. Welcome to Alcon's fourth quarter and full year 2022 earnings call. 2022 was a great year for Alcon. We ended the year with sales of 8.7 billion and double-digit sales growth of 11%. These results were driven by new product launches, solid demand from resilient markets, and strong commercial execution. Core operating margin for the year was 18.2%, and core diluted earnings per share were $2.24, which was up 23% year-over-year on a constant currency basis. Additionally, we achieved a core operating margin of 20% when adjusted for foreign exchange. Based on these results, it's clear that the Alcon team is delivering and our fundamentals are strong. As I reflect on 2022, I'm extremely proud of what we've accomplished, especially given the challenging geopolitical, macroeconomic, and supply chain headwinds we faced. In Surgical, we grew the business double digits, driven by industry-leading technology, solid execution, and continuing international recovery. Our portfolio of PCI wells, Panoptix and Vividi, had another quarter of strong share growth. We exited the year with a global PCI well share position in the mid-50s. During the year, we launched our portfolio of IOLs on the Clarion platform in the United States. This highly differentiated material delivers among the lowest levels of glistening and surface haze and has a proprietary edge curvature designed to help reduce glare. Our new Clarion material has been well received by doctors around the world and is helping us to gain share. We're also expanding our footprint with double-digit sales growth in the equipment category for the year. This growth was particularly strong in international markets, where we continue to see solid uptake for our FACO machines, including our industry-leading Centurion device, as well as Legion, which is designed and priced for developing markets. We expect the demand for the equipment will return to more normalized growth rates this year. While we continue to grow our footprint in ophthalmic operating rooms worldwide, we've also significantly expanded our presence in the clinic with the Argos Biometer. Doctors are responding favorably to Argos, thanks in part to higher capture rates, easier prediction of accurate lens power, and data integration into the operating room, all of which helps drive clinic efficiencies and improve patient outcomes. Tying this all together is our digital offering, Smart Cataract, which we beta tested in 2022. Smart Cataracts received terrific feedback from surgeons and will continue to develop this platform in 2023. Smart Cataract is the first application in Alcon's comprehensive cloud-based platform that is uniquely designed for surgical ophthalmic practices. Smart Cataract links data systems and diagnostic devices in the clinic with equipment in the OR. Data shows that Smart Cataract delivers significant time savings during the cataract evaluation, planning, operating room, and post-operative workflows. Put it simply, Smart Cataract is helping surgeons deliver better outcomes more efficiently. Also in 2022, we expanded our presence in surgical glaucoma with the acquisition of Ivantis, which brought the Hydrus MicroStent into our portfolio of implantables. Hydrus has longstanding clinical and efficacy data. Its five-year horizon data demonstrated meaningful and statistically significant clinical benefits over the full five years, including sustained reduction in medication use, and decreased need for secondary glaucoma surgery. Now turning to vision care, our team delivered high single-digit growth across both our contact lens and ocular health franchises. In contact lenses, our full-year growth of 9% was driven by our portfolio of innovative lenses, which continue to receive favorable market feedback as well as select price increases. We continue to fill out our portfolio and launch new contact lenses in high-growth segments of the market or areas where we have opportunities to gain share. In 2022, we launched Total30 into the reusable market. This is the first major innovation of the $4.2 billion reusable lens category in many years. Total30 is the only water gradient lens available for reusable wearers, and since launching Total30, we are seeing share growth in this category. Total30 is available in the US and Europe, and we will continue to roll it out to more international markets in 2023. Just recently, we announced the launch of Total 30 for astigmatism, which competes in the $1.3 billion reusable TORIC category. This is the first reusable water gradient lens for astigmatic wearers. Since more patients with astigmatism wear reusable contact lenses, the availability of a TORIC T30 provides us an opportunity to gain share and bring exceptional comfort to these patients. This lens will be broadly available in the US and Europe earlier this year. and we'll roll out the lens internationally throughout 2023. We also launched DALYS Total One for astigmatism in early 2022, and customer reception has been very favorable. DALYS Total One TORIC joins the sphere and multifocal modalities for the premium DALYS lens market. DALYS Total One TORIC is also the first and only daily TORIC lens to feature our proprietary water gradient technology that delivers exceptional comfort. Now, all of our TORIC lenses feature a proprietary balanced design, which creates clear and stable vision. Our TORIC portfolio represents a significant opportunity as our estimates show that TORIC is among the fastest growing segments of the contact lens market. Now, turning to ocular health, where we also saw high single-digit growth in 2022, despite the supply chain challenges we faced. Starting with dry eye, our sustained family, including sustained hydration, ultra, and complete, continues to perform well, with double-digit sales growth in 2022. There are over 30 million people in the U.S. alone that suffer from dry eye, and Sustane is the best-selling brand of artificial tears and is clinically proven to soothe dry and irritated eyes quickly. Now, with multi-dose preservative-free formulations, we have a full suite of convenient and affordable options for patients. Late in the year, we acquired Aerie Pharmaceuticals. With this acquisition, we expanded our glaucoma portfolio with two additional products, Ropressa and Roclatan, which were complimentary to Stembrinza. Roccatan and Stembrinza offer four different mechanisms of action, allowing for maximal medical therapy in just two bottles. Additionally, the area acquisition expands our R&D pipeline and builds upon our pharma development expertise. Our strong 2022 ocular health performance was offset by significant supply chain challenges, particularly in contact lens care. Our team continues to address these challenges which are likely to persist through at least the first half of 2023. Now let me provide an update on our end markets. In surgical, global cataract procedures were up mid-single digits in the fourth quarter versus prior year. This growth varies by region. In the United States, where surgical centers continue to experience staffing challenges, procedural volume was up low single digits. Outside the U.S., procedures were up mid to high single digits as markets continue to improve. Encouragingly, we saw sequential improvements in ATI oil penetration in the U.S. in the fourth quarter. We continue to focus on driving penetration by educating doctors, clinical staff, and patients about the benefits of advanced technology lenses. In contact lenses, the retail market growth in the quarter was mid-single digits, with low single-digit growth in the U.S. and high single-digit growth internationally. While mid-single-digit growth is in line with historical rates, it's important to note that this growth predominantly reflects price increases and wearer trade-ups. Additionally, the market growth varies by modality, with the daily Cy-High category continuing to grow significantly due to higher pricing and patient trade-up. Torex also continued to grow nicely, primarily driven by the daily Torex category. Finally, the reusable category was flat. Now, with that, let me pass it to Tim. We'll take you through our financial results and comment on our outlook for 2023.
spk06: Thanks, David. We're pleased to report fourth quarter sales of $2.2 billion, up 7% versus prior year. This growth is driven by continued recovery in most international markets and demand for our innovative products, including those from acquisitions. Our overall fourth quarter sales growth reflects approximately 180 basis points of contribution from sales of acquired products. Our fourth quarter U.S. dollar sales growth included approximately 600 basis points of pressure from foreign currency. For the full year 2022, total company sales of $8.7 billion grew 11%. I'm extremely proud of how well the Alcon team has managed the challenges of 2022. We performed well while navigating a year of historic uncertainty, including a strong U.S. dollar, continued supply chain tightness, and inflation. Moving to our fourth quarter sales results, our surgical franchise revenue was up 8% year over year to $1.3 billion. Surgical revenue for the full year was up 13%. Implantable sales were $434 million in the quarter, up 11% year over year, primarily due to market recovery in most international geographies, increased demand for our PCIOL portfolio led by Vividi, and sales of Hydrus. This is partially offset by declines in South Korea following a reimbursement change during the first quarter. Please recall that there was a significant spike in demand in Korea ahead of this reimbursement change, and therefore we expect difficult comps and implantables in the first quarter of 2023. Implantable sales for the year were up 20%. In consumables, our fourth quarter sales were up 6% to $636 million, primarily driven by improving market conditions. For the full year, consumable sales were up 10%. Our strong consumable growth also reflects the expansion of our global equipment footprint. In equipment, sales were $204 million in the quarter, up 7% year over year, primarily due to continued strong demand for our Cataract equipment and service, particularly in international markets as we upgrade older generations of equipment to Centurion and Legion. Growth in the quarter was partially offset by declines in the refractive equipment. For the year, equipment sales were up 10%. We continue to be very pleased with our strong equipment performance as well as the resilience of demand for these products. Turning now to VisionCare, fourth quarter sales were up 7% year over year to $881 million. For the full year, VisionCare sales were $3.6 billion, up 8%. Contact lens sales were $530 million in the quarter, up 6% versus last year. Sales were led by our portfolio of CyHi lenses, partially offset by declines in legacy products. Additionally, we saw strong sales in the U.S. and slower international growth. Contact lens sales for the full year were up 9%. Inocular Health, our fourth quarter sales were $351 million, up 8% year over year. This was led by our portfolio of eye drops, including our sustained family of artificial tears and ophthalmic pharmaceutical products. 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 400 basis points. As David mentioned, we expect these challenges to persist at least through the first half of 2023. Ocular health sales were up 7% for the full year. Now moving down the income statement. Fourth quarter core gross margin was 61.3%, which was flat on a constant currency basis. Core operating margin was 16.4% in the quarter, essentially flat versus last year on a U.S. dollar basis, but up 240 basis points on a constant currency basis. The improvement was mainly driven by underlying operating leverage from higher sales and favorability from incentive compensation, partially offset by increased inflationary pressures and increased investments in R&D, primarily associated with the acquisition of ARIE. Core operating margin for the full year was 18.2%. However, on a constant currency basis, we achieved a full year core operating margin of 20%. Fourth quarter interest expense was $40 million compared to $28 million last year, driven by higher debt following the funding of the area acquisition and less favorable interest rates. The fourth quarter core effective tax rate was 30.6% compared to 10.4% last year, This increase was primarily due to the recognition of tax expense related to the advanced pricing agreement between the Swiss and U.S. tax authorities that we discussed on our last earnings call. There was also an impact from a decrease in inventory bills in certain markets and the geographical mix of pre-tax income. Four diluted earnings per share in the fourth quarter of 2022 were $0.42 versus $0.56 last year. The decrease is mainly due to higher interest expense and taxes following the advanced pricing agreement I just mentioned. For the full year, core diluted earnings per share of $2.24 grew 23% on a constant currency basis. Before I discuss our outlook for 2023, I'll touch on a couple of cash flow and other related items. Pre-cash flow for the full year was $581 million compared to $645 million last year. This variance is primarily driven by lower cash from operations in 2022, driven by the negative impact of foreign currency on our operating results, and the payout of the 2021 bonus partially offset by lower capital expenditures. For 2023, we expect free cash flow to be significantly better than 2022, despite several one-time payments in the year, including transformation and illegal settlement. Similar to last year, we expect the first quarter to be the low point in the year, driven by the timing of the annual bonus payment and payments related to our expanded transformation program. Capital expenditures were $636 million for the full year, which were primarily related to investments in our contact lens manufacturing production lines. Transformation costs were $78 million in the quarter and $288 million life to date. As we announced in our last call, we identified additional transformation opportunities, which we launched during the fourth quarter and which accounted for most of the transformation expense in the quarter. We continue to expect the entire transformation program to wrap up by the end of 2023. Now moving to 2023 guidance. Our current outlook assumes that year-over-year market growth will be slightly below historical averages. Exchange rates as of the end of January prevail through year-end, and inflation and supply chain headwinds moderate in the second half of the year. Accordingly, we expect 2023 net sales of $9.2 to $9.4 billion, which corresponds to 6% to 8% constant currency sales growth versus the prior year. Now, turning to expenses, we're going to continue to invest behind innovation and expect core R&D expense to come in toward the high end of our prior range of 7% to 9% of sales. Moving to core operating margin, we expect efficiency initiatives and operating leverage to drive a core operating margin of between 19.5% and 20.5%. While we continue to see inflationary pressures, we've taken actions, including price and productivity initiatives, to help mitigate the impact. Moving down the income statement, we expect interest and other financial expense to be between $260 and $280 million. This reflects the financing activities completed in May and December at higher interest rates, including the incremental debt used to fund the acquisition of ARRI. Additionally, we project our core effective tax rate to be in the range of 17 to 19%. Based on all these factors, we project core diluted earnings in the range of $2.55 to $2.65 per share, which corresponds to 16 to 20% constant currency growth over 2022. While we do not speculate on currency movements, based on exchange rates at the end of January, we expect a broadly neutral impact from FX to both sales and core net income growth for the full year. In terms of phasing, we'd expect FX to be a headwind in the first half of the year and a tailwind in the second half. Before turning back to David, I'm pleased to report that our board of directors is proposing a dividend of 21 Swiss centimes per share. which is in line with our payout policy of 10% of the previous year's core net income, pending shareholder approval. Shareholders will vote on this proposal at our upcoming annual general meeting in May. In summary, despite the challenges we face in 2022, I'm extremely pleased with our performance, and I want to thank the entire Alcon team for their hard work and determination. With that, I'll pass it back to David for closing remarks.
spk00: Thanks, Tim. To wrap it up, I'm extremely proud of all that the Alcon team achieved in 2022. Despite challenging macroeconomic headwinds, we produced strong operating results, improved efficiencies. We delivered innovation and outpaced market growth in several categories. These results reflect our strong business fundamentals, robust long-term strategy, and the talent and expertise of our more than 25,000 associates. As impressive as those results are, what I'm most proud of is Alcon's purpose of helping people see brilliantly. You know, I recently learned about a patient who suffered severe eye trauma in his 30s, which was later complicated by the development of a cataract. This man experienced significant difficulties when it came to light, sun, snow, and glare. And he underwent a cataract procedure. And when the surgeon removed the patch from his eyes, his vision was so improved that he was moved to tears. And this is the kind of procedure that genuinely changes lives. It's moments like these when our purpose of helping people see brilliantly really does come to life, and it's what drives the hard work and the dedication of all of our associates. I want to thank the entire Alcon team for their commitment to our purpose, and I'm excited what's to come in 2023. With that, let's open it up for Q&A.
spk13: Thank you. If you would 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 Graham Doyle with UBS. Please proceed with your question.
spk02: Thanks, guys. Thanks a lot for taking my questions. Just two from me. Firstly, on the premium IOL penetration, where you've obviously seen a sequential improvement back towards the trends the last two years. I know you were talking about staffing issues being a little bit of a headwind. Is there anything you've been doing from a marketing standpoint, for example, that's really been driving that improvement that we can kind of book into 2023? And then just a question on pricing. Would you be able to give us a sort of shape in terms of pricing as to what's happening in 23, say, versus 22? Thanks a lot.
spk00: Yeah, Graham, let me start with the penetration. We did see sequential movement from the third quarter to the fourth quarter that was positive for us. I think it was, you know, we had kind of expected it to come back. It had kind of moved around flat most of the year. And it is, again, I should be careful, it's flat year over prior year quarter. So remember, sequentially, we were down a little bit in the third quarter, which had bothered us a bit. I think what we're seeing is some programming effect, but I do think that this year is where you'll really begin to find out whether all that we're investing in that programming is working or not. So our hope is, of course, that the more we can educate the staff on how to talk to patients about their choices and how to position those choices well so that they understand the economics of them, understand the benefits of them, and come into the office as prepared to make that decision. That speeds the office up and makes it easier on the staff and obviously a lot easier on the surgeon. So, you know, we're hopeful around the program, but I would say it's too early to tell what's really going on there. We are obviously encouraged, though, by the overall penetration. And remember, too, that the penetration has got a little bit of a lapping effect to do. You know, Korea had a very large penetration rate. I think it was up in the high 40s for a stretch. So for a lot of the prior year, we're lapping that around. So once that gets out of the way at the end of this quarter, second quarter forward of this year, I think we'll get a lot cleaner view of where we really are. So a little bit of noise in there, but directionally encouraging news in the fourth quarter. And on pricing, I think the way to think about it at least is most of our pricing is in contact lenses, a little bit in ocular health, but really it's You know, our surgical business, we take it where we can, but it's largely contracted, and those contracts are multi-year. You know, we probably have a little bit in that area, but I would say that directionally, we've taken price twice last year that we'll see the effect of once in February and then once again in December. Again, I think those are yet to be seen as to how well they read through, and we're watching very carefully what the impacts are on those because, you know, we are concerned about pricing out the consumer and or making sure that the margins that we're generating for the optometrists are competitive. I think we feel good about that, by the way, but directionally the pricing has done well for us, and, you know, I think we should believe that that takes well and kind of moves along correctly. But I think directionally we also believe that we should watch it carefully. So not a lot to say about 23 other than 22 will read through full year effect, you know, and we'll have to report out at some later date what the numbers actually were.
spk02: Okay, thanks a lot. Super clear.
spk13: Thank you. Our next question comes from the line of Anthony Petrone with Mizuho Group. Please proceed with your question.
spk07: Thanks, and congrats on a strong end to the year here. One on Aerie and then one for Tim on margins. Maybe, Dave, just a level set on Aerie Pharmaceuticals, just maybe where Rokinase and inhibitor share you know, sits today in the United States. I think Harry had a statistic where that was about 3% of the IOP market. And where do you think share can go over time for Rokinase versus Prostaglandin? Just trying to sort of level set the multi-year run here. And I'll just put in the margin one quickly. Tim, on margin, you gave the constant currency margin outlook for 2023. I'm just wondering when we level set that back to 2022, it looks like we're still looking for 150 basis points at the midpoint, even if we take constant FX effects out of it. I just want to make sure that math is correct. Thanks again.
spk00: Yeah, let me start with the Rokinase discussion. I think we, you know, we're excited about the progress that's being made from the acquisition forward. We've seen a kind of steady growth in the combination of both Roclatan and Ropressa. Directionally, we are pleased with the progress. I don't know that I want to speculate at this point in time how far we can go. I think we are working a lot on how to reposition both of those products We also are working a lot on, um, the managed markets access element of it. Um, and I do think those are largely the developments that, that we can add. And I think we, um, uh, along with a little bit more promotional effort, uh, we hope to take it off of its current trend. Um, but to do that, obviously, um, you know, we need to be successful with both the repositioning of these products and also the, uh, the access element. Um, obviously it's about, it is about, you got it about right. It's about 2% combined right now, a little bit more than that. Um, and, uh, directionally, it's a very small part of the glaucoma market, albeit a lot of the glaucoma market is generic. So if you look at probably the achievable markets, we're very realistic about what we expect, but I'm of the mind that we can bend the trend up from where we sit.
spk06: Yeah, and then on the margin, you're in the right ballpark, Anthony. I mean, if you think about moving from the 18.2 up to the 19.5 to 20.5, You know, we would expect gross margins to improve. You know, we've got a lot of productivity initiatives in place. You know, we also have inflation subsiding a little bit in the second half. So that should be helpful. There'll probably be some pressure on the R&D line. R&D expense in 2022 was roughly 8% of revenue. You know, that's going to be a little bit higher as we integrate ARRI because we're doing some work there. So I'd expect a little bit of pressure there. You know, on the last call, we talked about the additional transformation, so that $100 million of savings. That's obviously going to drop through to the margin rate. That alone is probably 100, 110 basis points. And then we'd expect to continue to get leverage. You know, we're not on the SG&A front, so it probably won't be as high as last year given the revenue growth and when you take out the transformation, but we continue to expect that. So those will be the levers to get you to that 19.5% to 20.5%.
spk07: Thanks.
spk13: Thank you. Our next question comes from the line of Larry Beagleson with Wells Fargo. Please proceed with your question.
spk04: Good morning. Thanks for taking the question. You know, two for me. I wanted to start on the U.S. and the market growth, you know, embedded in the guidance here, and then I wanted to ask a second one on just kind of revenue cadence for the year. Just starting on the market growth, Dave or Tim, can you talk about what you're seeing in the U.S.? Your organic growth in the U.S. has been in the low single digits the past three quarters. And is that why you expect market growth to be below historical averages in 2023? And what are you modeling for market growth in 23? Obviously, it looks like it's probably sub 5%. And I had one follow up.
spk00: Yeah, Larry, you're not wrong. The North American market this last year was you know, was relatively subdued, you know, but everybody is kind of they've wrapped around the COVID is, you know, one of the ways you got to keep looking at it is, you know, what's the natural growth rate? And then, you know, what is it on 19? Because usually a two year number on 21, skip over 21 has been a pretty good idea. What we've seen on this year was, you know, the surgical business on a full year basis, the market was, you know, roughly around 4%. The vision care business, you know, the contact lens care market was roughly around kind of 3%, 4%. Those are very historical numbers. A little softer on vision care than we would have expected probably for the full year. Sorry, that was the fourth quarter. But the full year was also on the U.S. was 4%. So directionally, I think we feel like in the fourth quarter, we saw a little bit of softness with unit growth where most of the 4% in vision care was made up of price and mix. So, yeah, you know, we're being a little careful, but, you know, I think the fact of the matter is we're lucky we're in resilient markets directionally. And I think, you know, what we're talking about are, you know, relativisms here. So, you know, we think cataracts don't go away. We think, you know, eye surgery and eye disorders don't go away. And that directionally, you know, we're going to see historical growth rates in the kind of we've always said kind of four to five percent range is the market, depending on which one we're talking about. So a little bit soft to that is what we're calling it, principally because the vision care market, I think, has the potential, as we look at 2009 and what happened there, to come off a little bit. So it came off of a high of, I think, 8% in 2008, went down to maybe 3%-ish, still growing, but in the 2009 frame. And a lot of that was really exactly the same. It was a slowdown in units, slowdown in new starts. We don't see that internationally yet, but we're wrapping around soft numbers because of COVID. So I think given the, I would say the uncertainty of the market, we felt it was best to plan for at least a softness in the market. If we're wrong, obviously we'll lean into it. But like I said, we're over indexed in the high growth areas. So I feel like we've got a pretty good plan and we're prepared to do well.
spk06: Yeah, and then as far as the cadence, Larry, revenue, I think it's going to be broadly in line with historical trends. So I'd go back to 21, 22. You could probably go back to 19. I wouldn't look at 20. And as we've seen historically, Q2 and Q4 are typically higher than Q1 and Q3 from a revenue perspective. If you think about allergy season, that's predominantly in Q2, so it drives revenues up. And then when you get to Q4, you know, hospitals are managing their capital budgets. Consumers are managing their co-pays by the end of the year, so we typically see a little bit of a revenue lift in Q4 as well. And then while we're on cadence, just from a P&L perspective, if you look at R&D, you know, that will be a gradual progression throughout the year, as we've seen in the past. You know, SG&A, I just remind folks that Q2 is a heavy spend for us as we get advertising or promotions, back-to-school programs, things like that. So I take a look at those historical trends because there's a big jump from Q1 to Q2. And then interest expense, you know, I would just level load the interest expense.
spk04: All right, thanks. Is the inorganic contribution, Tim, about 2% in 23?
spk06: Yep, that's about right.
spk04: Thanks so much.
spk13: Thank you. Our next question comes from the line of Daniel Bolta with ZKB. Please proceed with your question.
spk11: Yes, thank you much. My first question may be on product launches. I mean, obviously you were pretty active in the last few years, I would say, especially on the contact lenses side where you launched a lot of things. But looking back at what you announced on the last C&B in terms of products to come, I would say at the moment there is not so much left anymore. Can you give indications at least what would come in 23 and also 24 here? And then on the M&A side, obviously, we're pretty active on the atomic RX side. Is there something left you could be interested in acquiring? Because in my view, there is just the large indications like what AMD left where Alcon is not yet present. Could you help me here then?
spk00: Sure. Look, we've got a lot of room left, both geographically and just as you think about where we are in the launch cycles for new product flow. So I would really point you at what we launched to a large degree over the last 24 months. Most of those products are in their very early phases. So I think what strikes me is our Torex in particular. Remember, we just launched Daly's Total One Torex. We just launched the P1 Torex a little bit before that. Late in the year, we launched T30 Torex. We didn't even get that out into Europe until this year. So, there's a lot of runway left for Torex. And, you know, we start the, you know, the dailies Torex Sci-Hive with almost a zero share. So, we're doing quite well there. We expect to continue to do that. I think that if you look forward in the international markets, again, we have a lot of geographies yet to fill out with products. So, We'll talk a little bit more about the product flow in both the near-term and the long-term at our Capital Markets Day. But I do think that the way to read where we are right now in vision care is quite positive. And in surgical, you know, again, we just launched Clarion last year, and we haven't even got that outside of Europe yet. So we've got Europe, U.S., but not any of the other markets. So remember, Clarion is, you know, really first year, last year. So we've still got a lot of movement to go there. We're rolling – uh, vividly out in Japan, uh, this, this year, I think. And so we've got a number of things going on that, um, you know, I think keep the momentum moving in the business, um, from new products, but also I would just say really important that we maximize all the things we've got as we, uh, uh, continue to develop products for, uh, later this year, early next. And we'll talk more about those in capital markets day, day front, just, um, You know, we are always interested in the major categories. So think about glaucoma, dry eye, retina, for sure. All of them are of interest to us. I think probably the way to think about where the world is right now is it seems like, with the exception of the multibillion-dollar kind of retina products or kind of orphan products, big pharma is not real interested in our space. And I think that's, for a lot of us who grew up in this space, that's not unusual. It's kind of how Alcon... grew up to begin with, um, you will, we did a lot with 100 to $300 million products, um, that, uh, of which we had many. Um, and so, you know, while the big categories and some of the big products, you know, you may not naturally know, I think what you'll find is that there are a lot of, of nice, what I'll call, uh, in, uh, you know, kind of singles and doubles, I guess, in, in American baseball terms. where we're moving the runners and doing a nice job of bringing in products that add value, matter a lot to patients, and matter a lot to the doctors who use them. So I'll leave it at that. But there's quite a lot going on in the M&A space for us that we look at. Obviously, we're very careful about how we make decisions there, and we tend to be a little bit conservative and disciplined around capital deployment.
spk11: Very helpful. Thank you very much.
spk13: Thank you. Our next question comes from the line of Matthew Michon with Hebing Capital Markets. Please proceed with your question.
spk05: Hey, good morning, and thank you for taking the questions. I first wanted to start on ocular health. I mean, I guess with some of the headwinds you're seeing in solutions, I was just hoping you can call out trends in, let's call it padded AOTC and kind of dry eye Are we kind of underestimating some of the success you're having in that area, especially with driving growth from a new sales force?
spk00: Well, good question, Matt. Thanks for it. You know, if you look at the full year impact in the ocular health business for us, you know, we're reporting a 7% number for the year. If you look at that and you take it apart, you know, the underlying sustained pataday and kind of all the rest of our eye drops business probably grew at 8%. And we had about a 6% offset with the CLC business. So think of that growth kind of organically being naturally drawn down to 2%. And then, of course, the pharma stuff adds some inorganic to it to get to 7%. So the markets are growing, we think, at kind of in that, you know, again, mid-single digits number. And we're outperforming as we are in contact lens and also in the surgical business. So I don't think it gets as much attention, which is interesting because it's actually a nice bit of business for us. But I would say that the big news for the quarter, and I think until we get out of this, is that we're losing some ground on contact lens care, and that's a supply chain problem that we've had for almost a year now with a basket in the peroxide solution product. We are doing all we can to get that sorted out. We're selling everything we can make, but we aren't making as much as we used to. We're going to hopefully solve that in the middle part of the year, but it is going to be hand-to-mouth until then. Directionally, though, very good underlying growth.
spk05: And then a follow-up on some of the contact lens commentary you had. I guess what you said, it's a little softer for the fourth quarter. I guess just why – do you have a sense of why you're seeing kind of some of that softness? Is it, is it staffing? Um, is it supply constraints or is it, are you kind of seeing, um, uh, the consumer start to moderate its purchases?
spk00: Yeah. I mean, we, we've looked at it quite a little bit and, um, you know, the fourth quarter in the U S was, you know, it was different than, um, you know, than what it was in international, you know, obviously we had a very good quarter internationally, but, um, you know, I would say they're wrapping around on a relatively soft number. So, you know, I think what we're watching very carefully is, you know, contact lenses are part of, you know, good news on contact lenses is people don't stop wearing contact lenses. You know, they don't just quit. You know, what they do, it's part of their basic expense in a month. And so they, but what they do do is they shop for private label. They do shop for deals in different channels and they do stretch their lenses. And so we're aware of that. We saw it as a phenomenon and, in the 2009 frame. And I think when we looked at the fourth quarter, what we saw mostly was price and mix driving the U.S. growth. So in real terms, the units were basically flat to slightly down. And again, we're being very careful with that to try to figure out what that really means. I think directionally, it's probably short-lived and it will bounce back to relatively normal growth, but we'll have to see where that plays out. Thank you, David.
spk13: Thank you. Our next question comes from the line of Veronica Dubojova with Citi. Please proceed with your question.
spk10: Yes. Hi, guys. Good afternoon, and thank you for taking my questions. I'll also keep it to two. One, Tim, just maybe thoughts on the levers that you have on gross margin and help us think through the bridge. for 2023 between the inflationary headwinds, the tailwinds from productivity, including on contact lenses and anything else that we should be bearing in mind. If you could just walk through those pluses and minuses, that would be great. And then if I can follow up on your comment on the significant inflection in the free cash flow, similar question, maybe quantify and tell us what is the biggest delta there that gets you to a meaningfully higher free cash flow number in 2023. Thank you, guys.
spk06: Yeah, again, on the good question, Veronica, on the margin front, you know, gross margin, I'd expect gross margin to improve year over year. Again, we have a lot of productivity initiatives in place. We've assumed that some inflation has subsided, particularly in the second half of the year. And then we obviously have some pricing that we have implemented this year that carries forward to next year. So it's going to be more of the same. We're going to get, you know, a little bit of gross margin improvement. And then we're going to continue to get operating leverage. And that's going to be, you know, the transformation that we announced last year. That's, you know, it's 110 basis points right there or last call, I should say, and then continued leverage. So that's kind of the, that's kind of the leverage story on the free cash flow. You know, the way I think about it is, you know, we ended the year at 581. So tailwinds going into 2023, You know, we expect to continue to grow operating income. That will flow down to free cash flow. We'll probably pick up a little bit of networking capital improvement, particularly on the inventory front as we built some inventory in 22 for some of these supply challenges that we had, maybe a little bit less CapEx. So those would be the key tailwinds. And then, you know, the headwinds that we're going to face will be increased interest expense, you know, driven by the financing of Aerie. the transformation costs that I called out, and then the legal settlement, the J&J settlement that we talked about. So 120 of that $199 million settlement will flow through free cash flow. So those are the big pressure points. But net-net, we'd expect to be higher despite the incremental one-timers, I'll call it, in 2023.
spk10: And Tim, you've talked about this $1.8 to $2 billion of free cash flow by 2025. Is this a linear improvement from the 580? Is it front or back and loaded?
spk06: Yeah, I mean, again, if you take the, you know, assume that we improve 2023 through the levers that I just talked about, and then you back out, you know, those one-timers, that kind of gets you to a normalized level that's significantly higher than the 581. And then it's just going to be, you know, volume growth. It's going to be rate improvement. and probably a little bit more network and capital improvement. But, you know, there's still a clear path to get there.
spk10: Claire, thanks, guys.
spk13: Thank you. Our next question comes from the line of Cecilia Furlong with Morgan Stanley. Please proceed with your question.
spk12: Great. Good morning, and thank you for taking the questions. I wanted to start with equipment just off of the strength you've seen in international markets. Can you talk through, as you think about 23, both durability, sustainability, as well as OUS versus U.S. Outlook for growth, especially given the comps from 2022?
spk00: Yeah, we had a terrific year on equipment, obviously. You know, equipment for the full year grew 10%, you know, mid-teens and international, and pretty close to what we expected, you know, really not great, you know, not much growth in the U.S. It was really the international business that carried our business. You know, I think the... The robustness of the equipment business has been really on the back of our FACO machine. And I would just say that, you know, as much as, you know, we keep thinking that we've kind of run out of gas on the equipment business, you know, the capital seems to be there, out there. And, you know, the capital seems to be coming to buy Centurion and our Legion product, both of which have done quite well. I mean, part of the equipment strength is new product flow. So, you know, we do have you know, a full year of Argos internationally. We did really well year on year with that product. We did really well year on year with Revalia. You know, we've got a lot of really good individual pieces that, you know, like Active Century Handpiece for our older Centurions, which really does upgrade the performance of the unit. So we've got a lot to talk about and a lot going on. And I do think that, you know, all that strength is often offset by a decline in the refractive equipment, which, again, I think had it been a leaving flat, we would have done better than we said. Going forward, you know, I would – you know, we have a belief that this has to return to normal at some point, and I think probably, you know, we'll start again next year with, you know, a belief that this should probably run close to what procedural growth is. Generally, equipment runs a little bit in front of the growth rate of procedures because, of course, you need more equipment to do more procedures directionally. And that has been the view that we had this year. It was kind of, I think, underestimated by probably where competitors ended up. There was some supply chain challenges with some of our competitors. We thought we'd face more competition than we actually did. But I think directionally, we were really pleased with the business. And I think expect to have a good year next year. I just don't think it's going to be a double digit year next year.
spk12: And if I could follow up also, just total 30, some of your comments both around TORC, the recent launch, planned OUS expansion in 23. If you could just level set what you've seen from both a growth as well as share standpoint through 22 and then your outlook for 23 as well.
spk00: Yeah, I mean, we're really pleased with the product. You know, it's a very unique product. It's a unique material that allows for WaterGranient to be on a different kind of material, a material that actually sheds bacteria over time. So it's a durable material but can still hold water at the surface. Nobody's been able to do that before. So what you feel on your eye at the end of 30 days is really cool. I mean, it basically feels like the first day you put it on. You know, we're really excited about the potential lens. The doc response has been terrific. And the new prescriptions for the lens are quite good in terms of share. What I'm careful about on T30 is that the monthly lens takes a longer time to come up the curve. And I think, you know, it's kind of obvious when you say it, but, you know, if you have a dailies patient, You know, you start them on a trial, you give them a week's worth of product, and they come back and they buy a month's supply or three-month supply in a week. If you give somebody a couple of boxes of total 30, they're off for two months before they decide to come back and purchase the lens. So there is a natural delay in both the purchase cycle and the return cycle for reusable patients. And, again, reusable patients tend to be – folks who've been in their lenses a longer time or they're just starting. So we're real keen on the new patient starts. Again, you know, we've been watching that as a leading indicator, and we're very pleased with the lens. How fast it comes up the hill, we'll have to see as we get into next year. But I think directionally, you know, we're pleased with it. I do think putting the total 30 toric out there, particularly because astigmatics, you know, are typically in reusable lenses or a lot more often in reusable lenses, And we have a particularly good one I think will help the family a good bit this next year. So those two ledges together I think represent the premium, you know, product in the entire market for reusability. And so, you know, we look forward to seeing a really good response. But the response so far has been as expected, maybe a little better than that.
spk12: Great. Thank you for taking the questions.
spk13: Thank you. Our next question comes from the line of Ryan Zimmerman with BTIG. Please proceed with your question.
spk03: Hey, David. Hey, Tim. Thanks for taking our questions. Congrats on your progress this year. So I want to talk a little bit about Hydra. You guys have had it for a few quarters now. I wonder if you could talk to us a little bit about kind of the attachment rate you're seeing with your IOLs and whether you're getting, you know, a lift in IOL sales as a result of entering the surgical glaucoma market Because you really are the only player in the glaucoma space now that has that benefit of having both an IOL and then a surgical option in the combo cataract market.
spk00: Yeah, it's a good question. We've never actually looked at – I don't know that we've ever looked at the actual attachment rates, but I imagine it's quite high because we're in most ORs with surgeons who are doing cataract surgery, and obviously the market we're going at is a combo – procedure. I think what I can say about Hydrus is we're pleased with what's happened this year. We're pretty much right on our target. I think what we're excited about is the efficacy of this product. I think it continues to play out that patients come off of medications, stay off medications. They are delaying the second surgeries that have been so common with other procedures. And I think as surgeons get more comfortable with the procedure, they see the efficacy. And I think over time, that will be the winning combination. I will say that, you know, the reimbursement, you know, landscape that did affect the VSCO injections around the canal, you know, have had a meaningful impact on the penetration. So the market's grown. MIGS market has grown pretty nicely, actually a little bit better than we expected. The use of chemoplasty as a procedure has been also better than we expected. So I would say that the mix has been surprisingly strong to that procedure. I suppose one could speculate that the reimbursement there is so positive relative to what is a little bit more complicated procedure in either the stent products that you know, that that could be driving it. I think that will even out over time and people will come back to, hey, the reason we're doing this is to get the patient better and to do something for the pressure. The best idea there, I think, is going to end up being hydrous. So we're, you know, we're encouraged in the long run. We certainly were on plan for last year and we look forward to kind of finding it. If there is some leverage in there, I'd love to find it. I don't know whether it really is in there or not. I would tend to believe that this particular product is independently chosen.
spk03: Okay. That's very helpful. And then, you know, as I think about guidance for 23, you know, if cataract growth is kind of below market, then I would assume, you know, consumables would be similar in that vein. And if equipment is moderating as well, then, you know, do we expect to see a more meaningful lift in implantables? And if I look at, you know, ocular health and the combination of Erie, I just want to, you know, understand kind of the segment dynamics as it relates to your 6% to 8% growth kind of What's below, what's above assumed in your guidance?
spk00: Well, look, I think the best way to think about it is almost every one of the markets we've got without, you know, again, plus or minus a little bit is in that mid-single-digit growth rate, right? So if you think, you know, let's call it four to six as the market, you back out organic, inorganic growth from the six to eight on area, you'll pull off two points, let's just say. You're kind of right on – you know, kind of the market, so to speak. Now, if you say, and we are, that the market's going to soften a little bit, then we're growing faster than the market consistently across all categories. So I would say kind of if you think about where the market dynamics sit then individually, you know, we obviously plan to do a little bit better in IOLs. We plan to do, you know, we'll probably do better than market in equipment. Consumables, you know, we are such a big part of that market, we are likely to run real close to the market, to your point. And I think directionally on vision care, I think we're lucky in that we are indexing into the fast growth areas. So think Sci-High Dailies, think Torex. And I think for those reasons, you know, we should do a little bit better than market in contact lenses. We certainly expect to. And then you're really adding on the ocular health piece, which, again, gives you kind of the balance of growth. And I think I would expect us to be kind of roughly at market or slightly ahead in the core of that business, but then you've got a little bit of positive news, I think, around the inorganic stuff that we add in. So, I mean, that was kind of the math if you were trying to do it at really segment kind of high level, what's growing faster, what's growing at market. You know, it's probably how we've been thinking about it.
spk03: Thank you, Tim. Thank you, Dave.
spk13: Thank you. Our next question comes from the line of Ed Ridley-Day with Redburn. Please proceed with your question.
spk09: Hi there. Thanks so much. A quick follow-up on Hydrus. Can you give us any color on the size of the business or the growth dynamic at all beyond what you've already said? And secondly, as you've highlighted, you're making nice progress upgrading on Centurion and Legion, upgrading the old installed base. Where would you say you are now on that upgrade cycle in the U.S. and Europe as you upgrade to the latest machines? Thanks.
spk00: Yeah, a couple of thoughts. First on Hydrus, I guess the way to think about it is the market itself, the MIGS market, we think is growing mid-teens. That's kind of where we thought it would be, and that is where it is. I would say the mix inside of that is a little bit more heavy to the Kenaloplasty and VSCO dilating agents. So, you know, that grouping is growing a good bit faster than market. And so obviously the stents are growing a little bit slower than that. That's directionally where we are. We haven't really commented on the size, and we try not to go after individual products. But I think, you know, we're pleased with where we were. And, you know, if you go back to where we acquired the product, what we projected on it, I think, you know, we're right on that path. Directionally, on the other piece of this, on the upgrade cycle, we're pretty much done with Infinity this year. I think we end of life the cassette this year at the end of the year. We've mostly gotten them all out. There's still a few rolling around in various markets. I don't know that there's much in the United States. I think it's always harder when you're dealing with another you know, 100 or so countries around the world. So I'm sure that we'll see some continued upgrades there. But really what we're doing now is outfitting new ORs or replacing old Centurions. So remember, we're well past the 10-year mark on Centurion, and that will, in and of itself, you know, everybody wants a new one in a lot of ways because the new ActiveCentury handpiece is a whole world different than what you're running if you're running a 10-year-old Centurion. So there's a whole bunch of features that we, you know, put in over time. Think of it as a steady bunch of upgrades we've done over a long period of time. So it isn't just the Infinities that we're upgrading. Of course, it's the older Centurions. And then we've actually had a pretty good run at some competition. I think our footprint share grew substantially this year, particularly in the international market. So we're feeling pretty good about where that business sits.
spk09: Thanks, David. That helps.
spk13: Thank you. Our next question comes from the line of Chris Gretler with Credit Suisse. Please proceed with your question.
spk08: Thank you, operator. Good morning, good afternoon. I have two questions. First, I wanted to come back to the contact lens business and the elasticity there. Could you actually speak about the price action you've taken internationally versus the U.S. and the relative price differentials in these markets? And whether you see different responses And also, what is the spillover effect of the price effect into 2023, and whether you intend to take further price action? And the second question was just simple on capex. This year should be trending in line with the midterm guides of meeting the .
spk00: Yeah. You know, we really haven't articulated the detail around the flow through on price. You know, it's directionally low single digits. You know, so I think what we believe is that both internationally and in the U.S., when we've taken price, we've done them in different moments in time. So I think the U.S. took some price originally at the very beginning of last year. International took, I think, something a little bit closer to mid-year. And then again, the U.S. announced an additional price increase for this year. late last year. So all of that said, it's a little bit tricky to compare it side to side. What I would say is that directionally, we've thought that we would get kind of low single digits flow through from those activities. They are different market to market. We're very specific in how we think about products, markets, and competitors, and consumers, trying to make sure we get that mix right. And so a little tricky to answer that question any more specifically than that. CapEx?
spk06: Yeah, then on the CapEx, we'd expect this year we'll probably be at that 5% or 6% of revenue for CapEx on 2023. Great. Thanks.
spk08: See you soon.
spk13: 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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