Alcon Inc.

Greetings and welcome to the ALCOM first quarter 2023 earnings call. At this time, all participants are in a listen-only mode. A brief 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. It is now my pleasure to introduce our host, Dan Cravens, VP and Investor Relations. Thank you, sir. You may begin.

Welcome to Alcon's first quarter 2023 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 sections 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 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 financial measures should be considered along with, but not as alternatives to, the operating performance measures as prescribed per IFRS. Please see a reconciliation between our non-IFRS measures with directly comparable measures presented in accordance with IFRS and our public filings. For discussion purposes, our comments on growth are expressed in constant currency. In a moment, David will begin by recapping highlights from the first quarter. After his remarks, Tim will discuss our performance and outlook for the remainder of the year. Then David will wrap up and we will open the call for Q&A. With that, I will now turn the call over to our CEO, David Endicott.

Thanks, Dan, and welcome to OutCon's first quarter 2023 earnings call. 2023 is off to a great start. We benefited from solid demand, strong commercial execution, and pricing improvements across both our franchises, which resulted in double-digit sales growth for the company in the quarter. In addition, we delivered a core operating margin of 20.6% and a core diluted earnings of 70 cents per share. At Surgical, we had another strong quarter despite challenging comparisons in South Korea. In implantables, recall that last year there was a change in PCIOL reimbursement in Korea, which increased demand during the first quarter. This change has made PCIOL out-of-pocket expense higher for many Korean patients, and as a result, local demand has since reduced. If we exclude the impact from Korea, which we estimate to be approximately 47 million, total implantable sales were up roughly 5% on a reported basis and approximately 9% on a constant currency basis. More broadly, we've continued our ATIL market leadership for another quarter with approximately half of the global market and two-thirds of the U.S. market, despite increasing competitive activity. In equipment, we continue to upgrade and expand our installed base with the Centurion and Legion devices. In the first quarter, our team delivered a record number of new FACO machine installations since spin. Importantly, there remains a sizable installed base of Legacy, Infinity, Lauria, and other machines in international markets. Accordingly, we see continued opportunity for growth in 2023. Additionally, we continue to grow in diagnostics, and we are pleased with our win rate with the Argos Biometer. Argos helps deliver clinic-to-OR connectivity, and results from real-world study highlight that Argos delivers significant time efficiencies for patients during cataract evaluation. We started rolling out Argos across international markets, and customer reception has been positive. Additionally, customers continue to be pleased with the performance of Centurion with Active Sentry, which enhances safety and confidence during surgery. Importantly, as we upgrade and expand our equipment installed base, we see a natural uplift in consumables, where we've also taken some select price increases. At the recent ASCRS conference, Alcon innovations were featured in approximately 180 abstracts across cataract, refractive, and glaucoma surgery, as well as visualization and ocular health. As a leader in the ophthalmic surgical space, we're committed to improving patient outcomes and surgeon efficiency by accelerating the pace of innovation. There are three important studies for the conference I thought I'd like to highlight. First is on Clarion. Data presented at the conference evaluated a head-to-head comparison of distance and intermediate vision of Clarion and a competitive monofocal plus IOL. This study concluded that Clarion, provides excellent distance and no statistically significant difference in intermediate vision potentially offering superior value to the competitive lens. At the conference, we also expanded our connected equipment ecosystem with the introduction of enhanced visualization and data integration. Diagnostic images from the Argos Biometer with image guidance are now connected to the newly available Ingenuity 1.5 to precisely overlay incisions, capsulorhexis, eye well centration, and toric alignment. Data presented at the conference shows that this integration is increasing efficiency and reducing manual errors. This helps surgeons work faster while improving their confidence in delivering better patient outcomes. Given the post-pandemic surgical backlogs, these improvements are critically important. Lastly, data presented on our HYDRAS microstent reinforced that HYDRAS offers long-term glaucoma medication reduction as well as reduction of interlacular pressure. It's important that surgeons consider which stent to recommend to their patients. Additionally, governments and healthcare payers consider this type of data as they determine which products and procedures to reimburse. Now I'll move to vision care, where we had a strong quarter in both contact lenses and ocular health. In contact lenses, we're seeing the benefit of our expanded product portfolio, which now includes sphere, toric, and multifocal options for value, mainstream, and premium customers in both daily and reusable categories. We continue to see meaningful share gains driven by our new TORIC product launches, including Precision One, Total 30, and Daly's Total One. We introduced Total 30 for astigmatism in the first quarter. This is the first reusable lens to use water gradient technology created specifically for astigmatic wearers, and initial customer response has been exceptional. Total 30 TORIC is currently available in the US and parts of Europe, and we anticipate expanding availability to additional markets throughout 2023. Turning to ocular health, we continue to integrate Aerie into the Alcon family. Our U.S. iDrop sales force has already added Roccatan and Repressa to their promotional program, which contributed nicely to our vision care growth this quarter. In addition, we saw growth in our over-the-counter portfolio, mainly driven by favorable pricing and sustained family of products. Finally, in contact lens care, while we continue to navigate supply challenges, we feel increasingly confident about our progress toward resolution in the back half of the year. Now I'll provide an update on our end markets. In surgical, global cataract procedures were up mid-single digits in the first quarter versus prior year. Global ATIOL penetration in the quarter was down 30 basis points versus prior year. However, excluding the impact from Korea, global penetration was up 90 basis points versus prior year, and up 40 basis points sequentially. And we're following penetration trends closely and continue to expand programs that digitally and conveniently educate patients about their lens options early in the cataract journey. Based on recent survey data, we estimate that U.S. ATI well penetration could go as high as 35%. So with current penetration in the high teens, we believe there's plenty of runway for value creation. Moving to contact lenses, retail market growth was up high single digits. In the quarter, we saw a steady wearer trade-up and meaningful contribution from price increases. Now, before I pass it to Tim, I want to briefly comment on our market outlook for the remainder of the year. On our February earnings call, we indicated that we were planning for a modest slowdown in full-year market growth. During the first quarter, global ATI well penetration was resilient, and contact lens trade-ups and price capture were both strong. Historically, our markets have grown around 5%, and given current macroeconomic news, we believe it's prudent to assume market growth at or slightly below historical rates in the back half of the year. However, we continue to expect positive contributions from market share and price, and as a result, we expect to grow faster than the market. With that, I'll turn it over to Tim, who will take you through our financial results and provide more color on our outlook.

Thanks, David. We're pleased to report first quarter sales of $2.3 billion, up 11% versus prior year. This growth is primarily driven by strong demand for our products, including products from acquisitions, as well as solid commercial execution. Additionally, our first quarter sales results reflect positive pricing across our business, particularly in consumables, contact lenses, and ocular health. Overall, we estimate that these price increases drove approximately one-third of our top-line growth. Our first quarter U.S. dollar sales growth included approximately 400 basis points of pressure from foreign currency. Starting with our surgical franchise, revenue was up 8% year-over-year to $1.3 billion. And plannable sales was $427 million in the quarter, down 3% year-over-year, primarily due to declines in PCU IOL sales in South Korea, which David mentioned in his remarks. Excluding the impact from Korea, and plannable sales continue to outpace the market, and we're up approximately 9% on a constant currency basis. We expect a minor residual impact from Korea of approximately $10 million in the second quarter due to the demand rebasing that David mentioned. In consumables, our first quarter sales were up 13% to $656 million. This strong growth primarily reflects favorable market conditions as well as pricing. In equipment, sales of $221 million were up 14% year-over-year due to continued strong demand for Cataract and VIT-RED devices, particularly in international markets as we upgrade and expand our installed base. While our first quarter results were strong, we expect our equipment year-over-year growth rate to moderate in the remainder of 2023. Turning to vision care, first quarter sales of $1 billion were up 16%. This growth includes approximately five points of contribution from the ophthalmic pharmaceutical products we acquired in 2022. Contact lens sales were up 14% to $615 million in the quarter. This growth reflects the continued strength of our innovative portfolio of CyHi lenses. Importantly, we saw double-digit growth in both the daily and reusable contact lens categories. As I mentioned earlier, first quarter contact lens growth also reflects price increases. In Ocular Health, first quarter sales of $414 million were up 19% year-over-year. This growth was primarily driven by our portfolio of eye drops, including Roclican and Repressa, as well as price increases across our over-the-counter products, including Sustain and Pataday. Now moving down the income statement. First quarter core gross margin was 63.4%, up 160 basis points on a constant currency basis. This growth was driven by higher sales and manufacturing efficiencies from higher volumes, partially offset by unfavorable product mix from lower PCIOL sales in Korea. We expect gross margin to be pressured in the remainder of 2023 as we sell inventory that was manufactured with a higher cost base due to inflation, and as we lap last year's price increases. Core operating margin was 20.6%, flat versus last year on a US dollar basis, but up 130 basis points on a constant currency basis. The constant currency growth was mainly driven by higher gross margin and improved underlying operating leverage from higher sales, partially offset by higher investment in R&D following the acquisition of ARRI. As we commented on in the past, we expect to see seasonally higher marketing and sales spend and the second and third quarters for the peak summer and back-to-school season. First quarter interest expense was $47 million compared to $29 million last year, driven by higher debt following the funding of the area acquisition and less favorable interest rates. The first quarter core effective tax rate was 18.4%. compared to 15.9% last year, primarily due to the mix of pre-tax income across tax jurisdictions and a decrease in the tax benefit associated with discrete items. Core diluted earnings per share were 70 cents in the quarter, up 14% from last year on a constant currency basis. Before I touch on our outlook for the remainder of the year, I'll discuss a few cash flow and other related items. Free cash flow for the quarter was an outflow of $19 million compared to an outflow of $52 million last year. The improvement is mainly driven by better cash flows from operations and lower capital expenditures. Similar to past years, we expect free cash flow to be stronger in the remainder of the year as the first quarter includes the annual associate incentive payment. Additionally, we paid the legal settlement we mentioned on our last earnings call in April. On a full year basis, we continue to expect to generate more free cash flow this year as compared to 2022. Transformation costs are $26 million in the quarter and $314 million life to date. We continue to expect to wrap up the entire transformation program by the end of the year. Before moving to our outlook, I'm pleased to report that at our annual general meeting last week, shareholders approved the dividend of 21 Swiss cent teams per share in line with our payout policy of approximately 10% of the previous year's core net income. I want to thank our shareholders for their continued support of Alcon. Now moving to the 2023 guidance. Our current outlook assumes that markets grow at or slightly below historical averages in the back half of the year. Exchange rates as of mid-April hold through year end. And inflation and supply chain challenges continue through 2023. Based on the strong momentum in the business, we are increasing our year-over-year constant currency sales growth guidance to 7% to 9%. This growth is partially offset by incremental FX headwinds based on currency movements against the dollar, which we expect to pressure sales by approximately 70 basis points versus prior year. As a result, we are maintaining our U.S. dollar net sales guidance for 2023 at $9.2 to $9.4 billion. Moving to core operating margin, we are maintaining the range of our full-year outlook of 19.5 to 20.5%. We now expect interest and other financial expense to be between $245 million and $255 million. Relative to the first quarter, we expect an increase in other financial expense primarily due to higher hedging costs and lower financial income. We are maintaining our core effective tax rate guidance of 17 to 19%. Finally, we're raising our core diluted EPS constant currency growth outlook to 20 to 24% due to the strong performance in the first quarter. This growth is offset by approximately 12 cents of FX headwind versus prior year. As a result, we are maintaining our core diluted EPS guidance of $2.55 to $2.65 per share. Based on our strong first quarter results and current assumptions, we are now trending toward the high end of our guided EPS range. To summarize, I'm very pleased with the momentum we've built at the start of the year, and it's clear that our business is performing well. As we look forward, we will continue to focus our efforts on driving innovation and delivering above market sales growth. Lastly, I'd like to take this opportunity to thank all of our team members for another quarter of outstanding results. With that, I'll turn it back to David.

Thanks, Tim. To wrap up, we're very pleased with our start to the year. We continue to build momentum with our new product launches and our team continues to execute well. As a result, we're winning with customers and driving above market growth. We also continue to deliver operating leverage in line with our financial thesis. So looking forward, our focus remains on accelerating innovation, driving top line growth, and creating shareholder value. With that, operator, let's open the call up for Q&A.

Thank you. We'll now be conducting a question and answer session. 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 would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. We kindly ask that each analyst limit yourself to one question and one follow-up. Our first question comes from Anthony Petrone with Mizuho Group. Please go ahead.

Thanks, and congrats to a strong start to the year here. I'll have two questions here. The first will be just, Dave, maybe just a little bit on the premium IOL comments. Your competitor reported earlier a couple of weeks ago. You know, some pressure that they commented in the premium IOL space here when we exclude South Korea plus nine is ahead of our expectation. So maybe specifically, can you comment on the shared dynamics within premium IOLs? And then maybe a little bit of a compare and contrast as to what Alcon saw in the marketplace versus competitor. And I'll have one quick follow-up.

Yeah, Anthony, thanks. On the premium market, we follow penetration pretty closely. And as I think I said in the notes there, we were up 90 basis points if you exclude Korea. So 11.5 to 12.3 globally. And sequentially, we saw good moves sequentially. Again, 40 basis points of penetration up when you exclude Korea again. Now, that said, there's lots going on in the market. There's a number of share players moving around. we've obviously finished very strong with kind of the majority of the ATIOL business and kind of a two-thirds, if you will, of the PCIOL business. But, you know, notwithstanding that, we felt like we had a pretty good quarter. I think the Korea thing is a bit confounding, and you do need to back it out. So I think that will clean itself up in the third quarter so you get some pretty clean looks going forward third, fourth quarter.

That's helpful. And then maybe one for Tim, just on margins. I'll get back in queue. The 20.6% ahead of expectations, just to clarify there, was there any selling day impact there? And then when we look at the bridge heading into the year end, 20.6% in the quarter versus the range, maybe just a little bit on the cadence for the next three quarters on how margins should play out. Again, congratulations.

Yeah, thanks a lot. Yeah, I don't think there's a billing day comp issue there. As far as the phasing goes, you know, I would think about the year this way is, you know, starting with revenue, Q1 revenue is a little bit noisy, I'd call it, because you've got the Korea comp issue. You've got the Omicron in North America. We had a little bit of an effect there. So what I'd probably do there is I'd take whatever you think between that $9.2 and $9.4 billion range. I take out the Q1 revenue, and then I would trend it very similar to how we trended last year, and that's how I'd layer in your revenue number. If I work my way down gross margin, we were pleased with the gross margin this quarter. There's no doubt about it. We saw some nice expansion there. We do have the benefits of some lower-cost inventory in there. We also have the benefit of some price lapping in there. So if you'll recall, last quarter when we gave the guide, we said that there would be a little bit of improvement in gross margin for the total year. So I would kind of bring that down to whatever you feel comfortable as far as that improvement is. On the R&D, I'd say, you know, we finished Q1. We were at 8.5%. As we said last quarter, we think we'll be at the higher end of that 7% to 9% range. So I take that into consideration. And then as we said in the script on the TFCs, Q2 and Q3 are typically higher for us as we invest behind back-to-school initiatives and things like that. So I would probably layer that in. And then lastly, on the interest expense, we did bring down the overall interest expense. Q1 was a little bit favorable. so I would pick whatever you think the range is between that 245 and 255. Again, I'd back out Q1, and then I would just level load that, and that's how I'd sort of phase the year.

Thank you much.

Our next question comes from Matthew Mission with KeyBank Capital Markets. Please go ahead.

Hey, good morning, and thank you for taking the question. Just on the contact lens side, um, have you got, it's just really hard to understand the difference between the, the kind of fourth quarter performance and, and, and the first quarter performance, um, and obviously, and, and kind of how consumers are, are, are kind of acting. Do you have any data on, on, on what drove purchasing activity, you know, three months ago, what drove it, you know, this quarter, Is it a regional inflection, you know, maybe outside the U.S.?

Matthew, let me give you what we do know. And I think, you know, what I can tell you is we're very pleased with our fourth quarter performance. I know that there was some concern around the unit volumes in the U.S. I don't think that was really well deserved. I think we've got to remember that most of the value in the contact lens market is the trade-up to dailies. And I think we saw a pretty solid market in the fourth quarter. We saw you know, for our own performance, we were happy with it. We obviously were hitting on all cylinders in the first quarter, continued to see steady trade-up from consumers, continued to see, in particular, volume growth for us. So read that as, you know, we think we grew faster in volume share than our competitors. And I think, you know, we picked up a little price in there as well as we try and offset some of our input costs. So, When you, you know, most of the market was putting some price in play in the first quarter. So again, I think you're going to see everybody's number kind of exceed what you'll see in the audited data. And again, I'd be careful with the audited data because it's retail, not factory. And the, you know, the read through on that takes a little bit of time. So, um, I would, I would, there's going to be some gaps in there. There always is. So I think, you know, we had a good fourth quarter. We had a very good first quarter. And I think what I'm really encouraged about is the uptake in total 30, a total 30 Torek, uh, in the U S contact lens business in particular had a very, very good quarter.

And then excellent. And then just to like more of a technical question, um, when you're talking about like inventory and getting through costs of high, uh, low cost inventory, moving to high cost inventory, On the vision care side versus the surgical side, just how many months of inventory do you typically hold so we can kind of get a sense of when that drag may go away?

Yeah, I would say in general, from a total company perspective, it probably takes five or six months for the inventory to go off the balance sheet into the P&L. All right, thanks, Tim.

Our next question comes from Jeff Johnson with Bired. Please go ahead.

Thank you. Good morning, guys. Maybe two questions on contact lenses and on pricing. So, Tim, you've said now a couple times lapping some price increases from last year, but I think on this call you've been as overt as I've heard you in a long time on price probably added almost three points to the company-wide that you were getting pricing across contact lenses, ocular health, and on the consumable side in surgical. So it sounds like some new price increases have gone in just in this quarter. We've clearly heard that in contact lenses especially, but I'm just trying to reconcile that with you talking about lapping these price increases. So help us understand kind of the gating of price increases over the next 12 months versus what maybe you saw over the past 12 months.

Yeah, let me take that, Jeff. The price increase lapping that we're talking about, we had a price increase this time last year. I think it was December or January. So for about six weeks of the quarter, January and part of February, we had two price increases in play. And so that was, that's really what we're talking about. We say lapping. So we had kind of a double up there. That won't occur, I think, going forward, you know, unless we take an additional price increase, which we don't currently have a comment on. I think directionally where we believe this is going is, you know, we're trying to be as sensitive as we can to the consumer and at the same time offset some of our raw material inputs. And our input cost, as we all know, is have gone up quite substantially. So I think we feel good about the ability of our ability to take price during this period. And the market took price. We were very much right on top of the market. So I don't think we were out of line either one direction or the other. And we were pleased with how accepting the customer groups were. I think we've typically talked a little bit about price leakage. And we got a little bit better performance from what we would have expected historically. So I think people are kind of willing to take and understand why you know, we're taking some price increases. So that's helped us a little bit in the quarter.

Understood. And then, so does that 3% price or so, I think that's what you were trying to signal in the prepared remarks, does that 3% price slip back to plus two over the rest of the year as some of these price increases continue? And when you were talking about volume growth in contact lenses above market, is that all coming on iShares? uh, that is increasing or are you finally starting to see maybe a, a more rapid kind of trade up within your own user base that's helping those volumes. So just, just help us understand kind of the trade up dynamic versus on I share during the quarter. Thanks.

Yeah, we had a very good on the second one, you know, it was principally, um, share. We obviously get some trade up from our own, uh, business. Uh, we probably have a little bit of cannibalization, but we were very pleased with the amount of, um, share gain that we had in the quarter. So I think directionally I would read that as volume is principally share gain. The second piece was on the price for the rest of the year. I would expect that the price settles down a little bit for the first quarter because we did have a little bit of a lapping and that we see some price for the rest of the year, but it kind of moderates towards the end of the year. Thank you.

Our next question comes from Ryan Zimmerman with BTIG. Please go ahead.

Hey, guys. Congrats on the quarter. Just two for me. Dave, you had previously, I think, on the fourth quarter call assumed that cataracts would be weaker in the first quarter, yet the market does appear to be stable, you know, net of Korea. Is there anything to suggest that demand pulled forward here and just how to think about cataract demand? or market, you know, volumes for the remainder of the year, given this dynamic relative to your assumptions?

Well, you know, Ryan, I think what we believe in, and I hope I communicated it the first quarter, was that, you know, cataract volumes are generally pretty stable. Even in a recession kind of environment, you know, we still see the cataract volumes. What we've said is that implantables, you know, the trade-up from a monofocal to an ATI, well, we've never seen that in a in a kind of a heavy recession environment. So we were unclear as to what was going to happen. And again, we made some assumptions. None of that really occurred in the first quarter. So, you know, volumes was very stable and trade-ups looked pretty much consistent with what we've seen in the past. So directionally, you know, I would expect cataract volumes to stay pretty stable. And the only thing I would, you know, think about is if there is a a real pullback in the consumer, does it have an effect on ATOs? We really don't know that, and we really haven't forecasted much of one. So I think we feel pretty good about, you know, the positive forward momentum that we have in penetration. And, you know, I think as we kind of get beyond Korea, you know, this next quarter, maybe two quarters away, you'll really get a cleaner view on the back half of what's happening with both of those things. But I think reasonable assumption, I think, at this point is that cataract market will remain in that kind of you know, four to five range, you know, kind of that, that's typically what we've seen historically. And we've always said it'd be a little hotter after COVID because we get a little bit more folks back into the market. So it feels pretty, pretty much like that now.

Okay. And then real quick for me, the seven to 9% underlying growth assumption, you know, Aerie did, you know, by my math, 470 basis points, roughly 500 basis points. If I take that forward, I'm kind of coming out to about 180 basis points to 200 basis points for the year. Tim, does that jive with kind of your thinking, or do you expect some bigger contributions from ARRI in the back half of the year? Thanks, guys.

No, I think it'll be pretty consistent with how we guided on the last call. It's about two points of growth.

Yeah, okay. Just understood. Thank you guys for taking the questions.

Our next question comes from Veronica Dubajova with Citi. Please go ahead.

Hi, guys. Good afternoon, and thank you for taking my questions. Let me start with just a bigger picture for the full year. Obviously, lots of moving parts in the business, David, but if I extrapolate the growth rate that you've delivered over the year, the comp fees, you're guiding for deceleration in spite of that. Other than the market commentary that you've made about the back half of the year, anything else that's worrying you? as you think about the remainder of the year, or is this just being a bit conservative? And then I have a follow-up after that.

Yeah, Veronica, look, I mean, the comps are a little easier, as you know, in the first quarter. So you should expect that to be a little bit higher. So, you know, don't forget that there was, you know, really China last year was in a tough spot. Japan was in a tough spot, you know, our Asian business broadly. And then we still had some coronavirus, you know, stuff going on and even some of the Western markets. So again, You know, the first quarter is going to be a little bit better than I think the rest of the quarters. That said, you know, I don't think we're trying to forecast anything other than a belief that, you know, there's enough news out there to be careful and be prudent about how we think about the back half of the year. And that's really all we're trying to do. We can be wrong on that assumption, and if we are, we'll be to the higher end of our guidance. But on the other hand, you know, we think it's the right way to budget, and we'll kind of move our way through the year and update this each quarter. So that's kind of how we've thought about the year. I'm not sure if that helped or not. was direct to your question, but that's what we've been doing.

Yeah. No, no, no. That's really helpful. And then my second question was just on the consumables and pricing specific. I'm going to say very impressive double digit growth rate against the market. That's going with single digits. How broad based have the pricing increases been that you've been able to put through and do you expect to, for those to last through the remainder of the year? And that's it for me. Thanks guys.

Yeah. Veronica, we, um, we are very pleased with the consumables business. Um, I think it's fair to assume that our equipment revenue for the last several years that has been fairly robust is driving now a pull through of consumables. And I think we have gained a footprint all over the world. And I think that's obviously helping us drive the consumables business. The price element of that is relatively modest. There is a price element to it, and we've historically not been able to do much there. But about a third of our consumables are bought standalone without a contract. And in those cases, we've been able to raise some price. And as we come back around on contracts that maybe are three years old or maybe they didn't have price escalation clauses in them, we've begun. We probably started this last year when inflation got hot. And as those contracts have matured and as we've been able to put and renegotiate them, we've been putting some price in. So, consumables have picked up a little bit. Again, we always see a little bit of downward pressure as well, as governments are always squeezing the other way. But in this case, we've been able to kind of eke out, I think, a reasonable price assumption that should stick kind of for the rest of the year. And we'll go forward with as much of that as we can. But the main thing here, I think, really is consumable demand is quite good, and I think it's built on what has been a terrific international performance by equipment and a real steady growth. I think the US had our best year ever last year and continues to do pretty well. So we're really doing well in equipment, and that obviously drives our consumables.

Our next question comes from Larry with Wells Fargo. Please go ahead.

Good morning, thanks for taking the question and congrats on a really nice quarter here. Hey, Tim, could I just clarify the price at one-third of your growth, is that the 11% constant currency or one-third of the 7% reported? That would be the reported number. So one-third of the reported, okay. And then, you know, we saw you got Precision 7 approved. David, just curious what the launch plan is there. You know, at the analyst meeting, you said you still had some work to do, but it looks like approval may have come earlier. So how are you thinking about the launch of Precision 7? I had one follow-up.

Yeah, we're not yet ready to launch Precision 7. We've got an inventory build to go on to, and we also want to give, candidly, we want to give our sales force the time to promote what appear to be quite sensitive products to promotion. So You know, we're going to time this one and position it, you know, very carefully. I think we'll have more news on that later in the year. I don't think, you know, what we're going to do right now is get that product out immediately as we build inventory for it. That'll take us some time. But also, I would just say that, you know, the first quarter was encouraging around total 30, and total 30 TORIC, and frankly, our TORICs in general. And we'd like to make sure that we get the full energy behind those products as they are relatively large markets, fairly profitable for us. And, you know, our existing markets that we know a lot about. So I think as we fine tune our plans around P7, we'll be back to you with some plans around that. But directionally right now, we're super happy with the momentum we have on existing products in the market.

That's helpful. David, you guys give a lot of helpful numbers on this call. Sometimes it gets a little confusing. So I want to make sure I I've heard this correctly, the ATIOL share in the U.S., I think that's where you said it was about two-thirds or 66% in your prepared remarks. That's down from over 80 a couple quarters ago, if I'm comparing apples to apples. So what's going on there, and do you feel like the share has stabilized? Thanks.

No, you kind of misread that one just a little bit. The 80-plus is a PCIOL share, which is a subset of ATIOL. So remember... ATI wells is the combination of toric lenses and PCI wells, but you have the correcting lenses. And so that's what's going on there. And that number is down slightly, but really it's a function of the, we were over-indexed in Korea and under-indexed in China. And frankly, those, you know, Korea was way down and China was up. So, you know, I wouldn't make much of any particular share movement at this point.

I got it. Thank you.

Our next question comes from David Addington with JP Morgan. Please go ahead.

Hey, guys. Thanks for taking the question. Maybe just on the SG&A expectations, the Q2, Q3, I mean, you always have a step up in those quarters. Should we expect something more than we've seen in previous years? And then just to follow up, just in terms of foreign exchange, I just wondered, I'm still struggling to see how you can have a bigger headwind now, given the dollar seems to have weakened against most currencies since the early results. Thanks.

Yeah, the SG&A lift will be very similar to what we've seen in prior years. So, again, I would kind of use those same trends and go off of that. You know, as far as the FX, you know, it really depends. A lot of people look at the DXY, you know, the Bloomberg thing, and the baskets there are different than our baskets. So we definitely see some strengthening of the U.S. dollar, particularly – against the Aussie dollar, the Japanese yen, and the Russian ruble. So we are certainly, you know, when you look at our basket of currencies, we are seeing some FX pressure.

Understood. Thank you.

Ladies and gentlemen, as a reminder, if you would like to ask a question, please press star 1. Our next question comes from Graham Doyle with UBS. Please go ahead.

Good afternoon, guys. Thanks for taking my questions. Just two from me. First, you're just on contact lenses. It does look like you're taking, well, meaningfully more share than maybe you have done in the last few quarters. And it seems to coincide with, I suppose, a broader international launch of a broader range of products. So I suppose, is this something we should get used to, is the question on that? And then with regard to guidance, I mean, you've talked again about a sort of recessionary pressure or just the idea that you want to be slightly cautious in the second half just to make sure that you've got guidance in the right place. I suppose the flip side of that is if there is no pressure or no recession, is it fair to say there's upside to the current guidance then? Thank you.

Yeah, Graham, obviously on the second one, that's exactly you're reading it correctly. I mean, if we're wrong, and again, we could be, we have no particular corner of the market of truth on when a recession happens. I think if it happens at all, I think we will be certainly to the high end of our revenue side. So, you know, I think we've been smart, I think, and I think prudent to do this and just slide it out as we see it. So we'll keep moving it out as we, you know, can. But we'll update you each quarter as we go through the year. And hopefully, you know, the world is much more stable than is often reported. What I would say is on the other one, on contact lens share, We did have a very good quarter on share. I do think it's a function of getting more products out there and also just some of those products maturing into their curves. So, you know, again, it takes a little while after you launch to get people samples, get them fit sets, get those onto eye, get people confident with the products. It also happens to help a lot to see the Torek products get out there. And I think as you get toric and sphere together, the toric tends to give a little bit of a halo to the sphere. So you get a little bit of a benefit from having a broader line, you know, in there where you can, you know, where the optometrist can just simply use a brand and fit most of their patients. And that I think is having a positive effect. So the first quarter was terrific that way. You know, we obviously plan to do everything we can to continue that. And we'll have to see as we go forward how that takes shape.

Maybe just a quick follow-up on the impacts of that for margin. I mean, is it functionally just easier now to see some of this operating leverage drop through when you've got that faster growth in contact lenses? So are you at the point where utilization is really working for you and contact lenses are sort of gross margin neutral to accrete up to the group?

Well, I mean, Tim, you should comment on this as well, but I think directionally what I would say is, you know, as volumes increase, we tend to add additional lines, and those lines mature kind of at a staggered basis, right? So as soon as we put one on, like some of the ones we put on years ago are kind of now running full speed. They make a lens at the terminal value, and that's a good price. But along the way, we've added more. So you get a blended rate of cost of goods, which doesn't quite – really mature until you've kind of stabilized all that and gotten themselves out there. So it grows kind of gently towards the outer years. Uh, we've obviously got, um, some nice positive growth in a hurry here. Um, and we're super confident about our ability now to generate longterm, um, operating efficiency on the lines. Cause I think we're, we've already seen it on some of the ones that we put in several years ago. So we know our terminal values are right. Um, I do think you'll just see steady growth in, uh, the kind of TPC margin, and that's probably the best way to think about it. Tim, you want to add anything?

Yeah, no, that's right. If you go back to the capital markets day, that margin expansion chart that we showed by franchise, what we saw historically was gross margin pressure, but you were getting leverage on the SG&A, then you sort of had less pressure on the gross margins. And what we're seeing now and would expect to continue to see is you get continued gross margin expansion as these lines become more mature and end up running at their optimal capacity.

Awesome. Super clear. Thanks, guys.

Ladies and gentlemen, as a reminder, if you would like to ask a question, please press star 1.

While we're waiting, Larry, I'd just like to clarify, I misspoke, that price growth is on a constant currency basis. Apologies for that.

Operator, we can take Steve Liekman from Oppenheimer.

Yes. Our next question is from Steve Leachman with Oppenheimer. Please go ahead.

Thank you. Good morning, guys. Just two questions as follow-ups. One, you mentioned the comps in the first quarter. Obviously, it's been tricky to evaluate comps over the last few years. How much do you think comps played a part in the first quarter? And was there one or two segments that perhaps had a different impact than the rest of the business. And then secondly, it seems like China is seeing a pickup. I'm wondering if you could talk about how that country is doing for you across your key segments.

Yeah, Steve, that's exactly where we saw it, which was Asia in particular was affected last year, was slow to come through the year. And it has picked up in the first quarter. So that did help, I think, everybody in the industry all over. And certainly China helps us. It's 5% or 6% of our revenue. So I think we feel like that was a nice positive and certainly a little bit better than we expected. Japan also had a pretty good quarter. And I would just say that it was a little bit better than expected for us. So I think the markets in both cases, we've kind of seen a little bit better response than perhaps we'd forecasted. That said, I think, you know, you still had some other – we had forecasted most of the other impacts, you know, correctly. And I think directionally, you know, we see those as more modest in terms of change year on year. What was the second part?

Just on the comps. Yeah, sorry. Just on the comps, you know, dynamic in the first quarter and if there was any segments that, you know, were different than others in terms of the impact there.

Not really. I mean, you know, I don't think there was any, you know, business to business. There really wasn't. Some geographies, it was really a geography thing. So I would say that's the main thing.

All right. Thank you.

There are no further questions at this time. I would like to turn the floor back over to Dan Cravens for closing comments.

Great. Well, thanks, everybody, for joining us this morning. If you have any follow-up questions, please don't hesitate to reach out to either Alan Treng or myself in the NIR. Have a great rest of your day. Appreciate the time. Thanks, everyone.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.