Alcon Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 15, 2023

There are 13 speakers on the call.

Operator

Greetings, and welcome to the Alcon Third Quarter 2023 Earnings Call. At this time, all participants are in a listen only mode. Brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Dan Cravens, Vice President and Global Head, Investor Relations.

Operator

Thank you, Dan. You may begin.

Speaker 1

Welcome to Alcon's Q3 2023 earnings conference call. Yesterday, we issued a press release and interim financial report and posted a supplemental slide presentation on our website to enhance today's call. You can find all these documents in the Investor Relations section of our website at investor. Alcon.com. Joining me on today's call are David Endicott, our Chief Executive Officer and Tim Stoneseifert, our Chief Financial Officer.

Speaker 1

Our press release, presentation and discussion will include forward looking statements. We expressly disclaim any obligation to update forward statements as a result of new information or future developments, except as required by law. Our actual results may vary materially from those expressed or implied in our forward looking statements. Accordingly, you should not place undue reliance on any forward looking statements. Important factors that could cause our actual results to differ materially from those in our forward looking statements are included in Alcon's Form 20 F And our earnings press release and interim financial report on file with the SEC and available on the SEC's website atsec.gov.

Speaker 1

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 by per IFRS. Please see a reconciliation between our non IFRS For discussion purposes, our comments on growth are expressed in constant currency. In a moment, David will begin by recapping highlights from the Q3. After his remarks, Tim will discuss our performance and outlook for the remainder of the year.

Speaker 1

Then David will wrap up, and we'll open the call for Q and A. With that, I will now turn the call over to our CEO, David Endicott.

Speaker 2

Thanks, Dan. Welcome to Alcon's Q3 2023 earnings call. I'm pleased to report another strong quarter with sales growth of 9%, core operating margin of 19.5% and core diluted earnings of $0.66 per share. These great results were driven by international markets in surgical and global strength across the portfolio of Vision Care as we continue to outgrow our markets. As we look across the industry, we're beginning to see market growth rates return to historical levels of mid single digits and Alcon continues to outpace the market in nearly every category.

Speaker 2

Let me start with surgical. In implantables, our technology continues to lead the market. Globally, 1 out of every 3 IOLs implanted is done with an Alcon lens. In premium lenses, the statistic is even more impressive with 1 out of 2 ATIOLs is an Alcon product. Our flagship lenses, Vivity and PanOptik, continue to lead the category in the U.

Speaker 2

S. And around the world. Additionally, we're continuing to expand in We continue to be encouraged by the resilience of ATI Well Penetration. Notably, global penetration was up 120 basis versus prior year and up 30 basis points sequentially driven by international markets and in particular China where we are under indexed, which accounted for almost half of the growth year over year. In surgical glaucoma, our customers continue to be impressed by the Hydrus MicroStent.

Speaker 2

Hydrus is the 1st and only MIGS device to report significant outcomes from a pivotal trial at 5 years. These results show that Hydrus offers long term glaucoma medication reduction, reduction of secondary surgery and reduction of intraocular pressure. These are important factors for both quality of life and payer economics. And in the U. S, after reductions in reimbursement for other glaucoma procedures, reimbursement Hydrus remains favorable.

Speaker 2

Now I'll discuss our expanding equipment footprint. Similar to last few quarters, we're continuing to see strong demand for our Centurion and Legion We continue to see strong interest for innovations like Active Sentry Handpiece. Additionally, we continue to see success in Consumables are a large and important part of our business as they represent a durable and recurring stream of cash flows. From dedicated items like our fluidics management system to our custom packs, Alcon consumables have an important role throughout the procedural journey. Additionally, as Custom Paks are individually customized by practice, procedure, surgeon and sequence, they drive efficiencies in the clinic And the operating room.

Speaker 2

We are enhancing our equipment offering with digital innovation to create a connected ecosystem. At the recent American Academy of Ophthalmology Conference, we announced U. S. Commercial availability of smart cataract. With smart cataract, Practices can link data systems and diagnostic devices in the clinic with equipment in the OR.

Speaker 2

Smart Cataract has demonstrated significant time savings during the cataract workflow with almost 14 minutes per case saved versus traditional methods for certain patients. We continue to receive positive surgeon feedback as the product has started its official rollout. Now I'll turn to Vision Care, where we had another quarter of strong performance in both Contact Lenses and Ocular Health. In contact lenses, we're seeing strong interest for our specialty lenses, including multifocals and torics. These are large, fast growing markets that have historically been underserved by innovation.

Speaker 2

We've launched several new products in these categories, which are quickly becoming a favorite of eye care professionals and their patients. Our most recent launch is Total 30 multifocal, which we introduced early in Q4 of this year. Multifocals represent an important opportunity for us as many wearers drop out of contact lenses after the age of 40 due to dry eye, discomfort, Visual acuity issues. The multifocal market is valued at over $1,000,000,000 globally and growing double digits. This lens is uniquely positioned as it offers our premium water gradient innovation at a more accessible price point.

Speaker 2

It's also the 1st and only monthly water gradient multifocal lens that provides excellent visual acuity at all distances. For eye care professionals, this lens leverages Alcon's proven precision profile design, which delivers a 96% fit success. The multifocal modality completes the expanding Total 30 family, which also includes a Sphere and a Toric lens. We're also seeing strong uptake of our specialty daily lenses, including DAILIES Total 1 Toric, DAILIES Total 1 Multifocal and PRECISION 1 Toric. Even after more than a decade in the market, the DAILIES Total One family remains the gold standard in wearer comfort.

Speaker 2

Clinical studies showcased at the recent American Academy of Optometry meeting illustrated the performance of the DAILIES Total 1 family. In particular, these studies showed that most contact lens dropouts who are refit into DAILIES Total 1 Could become successful contact lens wearers and that comfort was improved in astigmatic patients who switched to DAILIES Total 1 Toric. Now let me move to Precision 1, which is our fastest growing contact lens brand. As a reminder, Precision 1 was designed to wearer dropout by providing precise vision, long lasting comfort and ease of handling. Precision 1 Toric Brings these benefits to mainstream astigmatic wearers.

Speaker 2

And for eye care professionals, clinical studies show that the lens settles in less than 60 seconds for 99% first fit success rate. These types of innovation are a testament to our dedication to helping eye care professionals modernize their practices with leading technology to better serve the needs of their patients. Now as we look to our ocular health business, we continue to see strong demand for our portfolio of eye drops. Driven by our multi dose preservative free formulations, Sustain continues to grow globally. Since 2021, we've launched the MVPF in more than 40 markets and we continue to see favorable customer response.

Speaker 2

In the U. S, only about 25% of the fast growing artificial tears market is in the preservative free category compared to more than 50% in some European markets. With multi dose formulations, we're seeing the U. S. Preservative free category expand One point of growth represents almost $9,000,000 of revenue for Alcon.

Speaker 2

Moving to ocular allergies, we continue to see strong retail and consumer interest in our Pataday brand family, especially Petaday Extra Strength. The convenience of a prescription strength allergy product available over the counter is appealing to consumers. In our pharmaceutical eye drops business, we continue to be pleased with Rocklatan and Rhopressa. In particular, Rocklatan continues to perform well with low teens Total Rx growth year to date. Lastly, in Contact Lens Care, I'm pleased to report that the recovery of supply is largely complete.

Speaker 2

While we still have work to do to fully recapture lost customers, we're happy that this issue is behind us. Now I'll provide an update on our end markets. In surgical, global cataract procedures were up approximately mid single digits in the 3rd quarter versus prior year. In contact lenses, retail market value was also up mid Similar to last quarter, we saw steady wear trade up and meaningful contribution from price. For the year, we continue to expect eye care markets to grow at or above historical levels.

Speaker 2

And before I pass it to Tim, I want to comment on how saddened we were by the recent passing of Matt John, who covered Alcon at KeyBanc. Matt was an asset to his organization, a pleasure to work with him and our thoughts and sympathies go out to his loved ones. 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

Speaker 3

to report 3rd quarter sales of $2,300,000,000 up 9% versus prior year, including approximately 2 points of contribution from products acquired in 2022. We also saw favorable pricing in the quarter. Our 3rd quarter U. S. Dollar sales growth included approximately 100 basis points of pressure from foreign currency.

Speaker 3

In our surgical franchise, revenue was up 6% year over year to $1,300,000,000 Implantable sales were $401,000,000 in the quarter, up 5% year over year, mainly driven by demand for Vivity, our non diffractive Advanced Technology IOL and International Markets. In Consumables, our 3rd quarter sales were up 7% to $661,000,000 In the quarter, we saw strong demand for Cataract and bit rec consumables, particularly in international markets, as well as price increases. In equipment, sales of $214,000,000 were up 5% year over year and reflect growth over a Strong base due to the strength of equipment sales last year. Sales were driven by double digit growth in international markets due to the ongoing upgrade Given the remaining installed base of legacy Feko machines in international markets and our strong competitive performance, we continue to expect solid global equipment growth for the full year. Turning to Vision Care, 3rd quarter sales of $1,000,000,000 were up 13%.

Speaker 3

Contact lens sales were up 9% to $612,000,000 in the quarter. As David mentioned, our product innovation, including our toric lenses continues to win in the market. In the quarter, we saw solid growth contribution from PRECISION 1, Total 30 and DAILIES Total 1 for astigmatism, which were partially offset by declines in legacy contact lens brands. We also saw strong contribution from price increases. In Ocular Health, 3rd quarter sales of $415,000,000 were up 20% year over year.

Speaker 3

This growth was driven by our portfolio of eye drops and price increases. Approximately 11 points of ocular health growth in the quarter was from products acquired in 2022, including Rocklatan and Rhopressa. Now moving down the income statement. 3rd quarter core gross margin was 63.4%, up 210 basis points. This improvement was driven by higher sales, price and manufacturing efficiencies from higher volumes.

Speaker 3

This growth was partially offset by inflationary pressures. We continue to expect gross margin to be pressured in the coming quarters as we sell inventory that was manufactured at a higher cost base due to inflation. For full year 2023, we continue to expect gross margin to improve versus last year. Core operating margin was 19.5%, up 3 50 basis points. The growth was mainly driven by higher gross margin and improved underlying operating leverage 3rd quarter interest expense was $47,000,000 compared to $34,000,000 last year, driven by higher debt following the funding of the Aerie acquisition and less favorable interest rates.

Speaker 3

The 3rd quarter average core tax rate was 17.2% compared to 19.2% last year. The lower tax rate in the Q3 of 2023 is primarily due to the mix of pretax income across tax jurisdictions and the impact of discrete tax items. Core diluted earnings were $0.66 per share in the quarter, up 41% from last year. These strong results are another proof point that we are able to drive continued earnings growth through sustained operating leverage. Before I touch on our outlook for the remainder of the year, I'll discuss a few cash flow and other related items.

Speaker 3

Free cash flow for the 1st 9 months of the year was $592,000,000 compared to $475,000,000 for the 1st 9 months of 2022. The improvement versus 2022 reflects an increase in cash flows from operations and lower capital expenditures. Similar to prior years, we expect to see a significant increase in CapEx in the 4th quarter. Transformation costs were $30,000,000 in the quarter $370,000,000 life to date. I'm proud of how well the team has executed this program.

Speaker 3

We've exceeded our savings target, which has enabled us to invest into R and D, grow the top line and expand margins through operating leverage. We continue to expect to wrap up the entire program on budget and on time by the end of the year. Now moving to the 2023 guidance. Our Current outlook assumes that markets grow at or above historical averages for the year. Exchange rates As of the end of October hold through year end, and inflation and supply chain challenges continue.

Speaker 3

Based on the strong results in the quarter and 1st 9 months of the year, we are tightening our year over year constant currency sales growth guidance to 10% to 11% for the year.

Speaker 2

This growth is partially offset

Speaker 3

by the continuing appreciation of the U. S. Dollar against our basket of currencies, which we expect to pressure our 2023 sales growth by approximately 200 basis points. Due to this increased pressure, we are updating our U. S.

Speaker 3

Dollar net sales guidance range for 2023 of $9,300,000,000 to $9,400,000,000 Moving to core operating margin, we are maintaining the range of our full year outlook of 19.5% to 20.5 percent despite approximately 120 basis points of FX headwind versus prior year. We now expect interest and other financial expense to be between $215,000,000 $225,000,000 We are maintaining our core effective tax rate guidance of 17% to 19%. And finally, we're raising our core diluted EPS constant currency growth outlook to 31% to 33% due to the strong performance in the 1st 9 months of the year. This growth is offset by approximately $0.25 of FX headwind versus prior year, which represents an incremental $0.07 since our last earnings call. Due to this pressure, we are also updating our full year core diluted earnings guidance range to $2.70 to $2.75 per share.

Speaker 3

And finally, while we don't speculate on currency movements, using exchange rates as of the end of October would yield approximately $0.20 of year over year pressure on 2024 core diluted EPS. To wrap up, I continue to be very pleased by the strong operational performance by our team. We're ending the year with great momentum and look forward to the year ahead.

Speaker 2

Thanks, Tim. To conclude my remarks, we're pleased with our strong results for the Q3. And as I sit here in November, I'm proud of all the teams accomplished. Year to date, We've grown faster than the market in nearly every category. We've expanded core operating margin by 2 50 basis points.

Speaker 2

We've generated approximately $600,000,000 in free cash flow, and we've grown core diluted earnings per share by approximately 20%, all while navigating significant foreign exchange, inflation and a challenging geopolitical environment. And we have a lot of momentum as we move into 2024, and we're excited about the future. We remain focused on accelerating innovation and continuing to grow sales faster than the market and driving earnings through operating leverage. We're confident that our strategy will position us to deliver long term growth and create significant value for shareholders. Finally, I want to thank our teams around the world for their commitment to our And their patience and dedication to helping the world see brilliantly.

Speaker 2

With that operator, let's open up the call for Q and A.

Operator

Thank you. We will now be conducting a question and answer A confirmation tone will indicate your line is in the question In the interest of time, we ask the participants limit themselves to one question and one follow-up. One moment please while we poll for questions. Thank you. Our first question is from Patrick Wood with Morgan Stanley.

Operator

Please proceed with your question.

Speaker 4

Amazing. Thank you so much for taking the questions. So the first one, a bit of a specific one, but I'm curious, your ORA system, AURA, How well spread out is that do you think amongst clinics, whether it's in the U. S. Or OUS?

Speaker 4

How much more growth is there to go there? And given the pricing structure of that and how that's connected to IOLs, how much do you think that helps you protect your market share Across all IOML modalities over time given the cost of clinics they end up switching?

Speaker 2

Thanks for the question. Aura is a fairly specific topic, but I would say that it's dominantly a U. S. System. I think we have a bit of it in Japan.

Speaker 2

So, it does there's a lot of things that we do with our equipment. I think that endears us to the ophthalmologists and the surgeons. I do think that we have to the OR in ways that many folks do not. But I don't think there's anything specific that really is holding up Our products there, I do think that that is a really good outcome system. So if you can do interoperative, Aberometry, it's a really valuable idea for getting a better outcome and that's really how we position it.

Speaker 5

That makes complete sense. And then

Speaker 4

a quick follow-up please. On Hi, Trus, you obviously touched on the reimbursement challenges that I guess some of your peers face in the U. S. How should we think from your perspective Going forward about how that market evolves when we think about MIGS and the share of the relevant players? Thanks.

Speaker 2

Well, we continue to grow share in the MIGS space As we look at it, I think the stent business in particular has been very stable in reimbursement. And I think in this particular moment, That has been a comfort to surgeons because I think they can predictably understand what they're going to get reimbursed and how that's going to play. I do think the big story here is that 5 years of data is very powerful and I don't think there's anybody else who's been able to show The kind of differences that we've shown in visual field loss and also in preventing visual field loss In IOP reduction in saving medications or advanced medications and preventing additional surgeries. And what we're trying to get around the world really is a reimbursement how powerful that is and how much money we're saving the system. So work to be done there for sure, but I do think that We have some really exciting data that has been presented, continues to be well understood, and we're seeing nice progress there.

Speaker 4

Brilliant. Thanks for taking the questions.

Operator

Thank you. Our next question is from Veronika Dubajova with Citi. Please proceed with your question.

Speaker 6

Excellent. Hey, guys. Good morning and thank you for taking my questions. I also have 2. First, I'm hoping you guys could comment on the sort of volume dynamics in the cataract space.

Speaker 6

I think, David, When you reported KT, you had expressed some hope and optimism that we might see some continued efficiency and throughput gains among surgeons, in particular, in the U. S. It was notably absent from your prepared remarks this morning. I noticed in the press release you called out strength in international and surgical, But not really in the U. S.

Speaker 6

Just curious what happened in the U. S. Market in the Q3 from a sort of surgical perspective? And maybe if you can also briefly comment on those competitive pressures you were seeing in toric, AT ILLs and whether those have persisted? That's my first question, Thanks.

Speaker 2

Yes, Veronica, thanks. Look, markets overall are relatively resilient. They stayed mid single digits. Really, it was 4 percent globally, but 2% in the U. S.

Speaker 2

And so I do think you're reading that correctly, the international markets were stronger in the U. S, I think coming off of a very strong Q3 prior year, had a competitor that was a little bit tricky, but again 2% growth was the number. I think as we look at that, what we were excited about was our implantables in many ways were very positive. So we our U. S.

Speaker 2

Total share was up Over prior year, our monofocal share was up, our PC IOL share was up, and sequentially, our Toric share was up, although we're still So over prior year, it was down a little bit. So I think in the U. S, as I said last time, I think what we're seeing is an attenuation of kind of the trial phase that happens kind of when you get new products in the market and we're seeing us kind of move back to what I think will be a stable environment where we really care mostly about We've been watching carefully. There was a run up, as you know, for several years. We knew there was going to be a pause.

Speaker 2

That pause is kind of I think most of this year. And I do think that we should expect 50 basis points out of the U. S. Internationally, we saw a nice penetration Growth of 120 basis points or better, more than half of that coming from China, but the emerging markets were really driving all that. So That's a long way around to U.

Speaker 2

S. Is good solid share performance this quarter. Market was a little bit softer than we would have expected. But directionally, I think we feel very comfortable that the way to think about this market is going to be kind of slightly better than historical growth rates. I do think that's kind of in the U.

Speaker 2

S. 3% is a historical rate, so probably a little better than that normally. And I do think that internationally, it will be better than that. So hopefully that gives you enough.

Speaker 6

That's very helpful. Thanks, David. And then my second one is for Tim. And Tim, thank you for the You said FX headwind for fiscal 2024 super helpful for us as we anchor our expectations. Just curious if I kind of move operationally, Inflation has obviously come down significantly.

Speaker 6

I'm just curious how you feel about your ability to drive that roughly 150 basis point margin improvement Consensus has in numbers at this point in time and any sort of tailwinds and headwinds you'd call out to that at this point in time? Thanks, guys.

Speaker 3

Yes. So we'll give formal guidance in February, but appreciate the fact that you guys are updating your model. So let me give you The FX to your point, we wanted to make sure people understood that. And I'd say a couple of things. One, that assumes October rates hold, So keep that in mind.

Speaker 3

And the other thing that I would add is just given the phasing of the appreciation of the U. S. Dollar, Roughly, call it, 75%, 80% of that pressure will come in the first half of twenty twenty four. So as you update your models, I take that into account. From a P and L perspective, I would say that revenue will grow will continue to grow faster than the markets.

Speaker 3

We're going to continue to invest in R and D. We're going to continue to drive and improve our innovation pipeline. That's key to the revenue growth along with commercial execution. R and D, I would say, we've said since the spend 7% to 9%, we feel is kind of the right range, cost as a Percent of revenue, we'd like to be at the high end of that range. So that depends on the project pipeline and what we have running.

Speaker 3

So that's what we would Shoot for. On the SG and A front, we're going to continue to be disciplined around our costs as we have been in the past. We're going to try to optimize that cost envelope and keep it at We're going to continue to prioritize our investments towards customer facing activities. That's really what's going to drive that revenue growth. And if we do that, then that should drive nice operating leverage to your point.

Speaker 3

I would say, listen, the one thing I think we've been able to demonstrate is Operating leverage and margin expansion. Now it's been a little muddied up by FX, but if you go back to 2022, we've grown margins we grew margins in 2022 versus 21 by 2 40 basis points in constant currency. If you look at 2023 year to date, we're up 2 50 basis points In constant currency. So we would expect that to continue, and we're going to do that by investing in the top line and managing our cost base. And then The last thing that I would say is on the tax front, I would just keep Pillar 2 in mind.

Speaker 3

So assuming Pillar 2 is implemented In 2024, that has about 2 points of impact to our effective tax rate. So that's how I think about next year and we feel very comfortable with the long term goals that we laid out.

Speaker 6

Great. Thanks, guys.

Operator

Thank you. Our next question is from Larry Biegelsen with Wells Fargo. Please proceed with your question.

Speaker 7

Good morning. Thanks for taking the question. 2 for me. One for you, Tim, on price. How much did price contribute to the FX growth of 9% in Q3 and how do you see price in 2024 versus 2023?

Speaker 7

And I had one follow-up.

Speaker 8

Yes. Price is a little

Speaker 3

bit choppy as you know, Larry. It's driven by when we go out with the price increases, what the realization rate is. So I would look at it on a year to date basis. And if you look at year to date, it's about a third of our revenue growth. As far as 2024, We're going to continue to monitor the market, see what competitors are doing, see what inflation is doing, and we would expect to Continue to toggle that price with inflation as we see that impacting the marketplace.

Speaker 7

That's helpful. And David, one for you on implantables.

Speaker 2

How are

Speaker 7

you thinking about growth in the global implantable business going forward, given J and J, Bausch and RX Sight have new IOLs either here or coming. Can you grow that business, Mid single digit, like we saw this quarter. And what's next for Alcon in implantables? Remind us how far away you are with your tunable lens? Thank you.

Speaker 2

Yes. Look, what we think right now is that the international markets in particular have real opportunity. And I would say that As you look at penetration, which is really the main thing, I mean, let's assume that's we see they're mostly implantables that you're talking about, we've seen in the international market. So there's nothing really new coming into the U. S, save maybe 1 or 2.

Speaker 2

And so I think our view is that penetration is Continue to be the major driver for us. We're looking at kind of 50 basis points a year would be a good result. I would love to see it better than that. But In this quarter, internationally, the penetration grew 120 basis points. So that was a positive.

Speaker 2

It came in markets where we also have real significant opportunity. So think about it as we're wildly under indexed in China, we're Under indexed in India and also at some of the growth in emerging markets in Southeast Asia. So I do think that there as we think about the world, The opportunity in implantables is in the international markets. It is in penetration in the U. S.

Speaker 2

And it is in kind of steady performance. There'll be some next generation products. They're a little ways out for us, pretty much consistent with what we said at Capital Markets Day. I do think the one thing to consider is that We have multiple vectors of growth here. I think one of the things that maybe isn't appreciated enough is how big an opportunity Hydrus might be how big an opportunity some of our torics and multifocal and reusable contact lenses are.

Speaker 2

We've got a lot of stuff going on In equipment and in consumables that's coming in the next 12 months, 24 months, we've got eye drops, the multi dose preservative free business is growing really well. We've got contact lens care back on track. We've got RX that's still moving nicely. So I would just make sure you're giving a fulsome view of how we're going to grow because our view is Almost every one of those categories we can outgrow the market. So we're feeling pretty good about the market growth and then fundamentally how we perform inside of it.

Speaker 2

Thank

Speaker 9

you.

Operator

Thank you. Our next question is from Daniel Buchta with

Speaker 5

Maybe the first question just to follow-up a bit on the surgical performance and thanks I'll comment on how the market has done. But I mean, at least compared to what consensus was expecting for today's result, I mean, the performance in Surgical was Probably a notch weaker. Is this purely the market? Or do you see any product innovation from competitors? Are there seasonal factors that have influenced your organic growth momentum a little bit in this business?

Speaker 5

So I mean, yes, because I think we would have all expected a little bit of Strong momentum in Surgical. And then the second question, maybe an update on China VBP. Do you have an idea already on the timeline when it should Concrete, how it may look like? And then ultimately, of course, the question on how it may affect you in 'twenty four and maybe in 'twenty five, if it's Rather a bit slower the implementation? Thank you very much.

Speaker 2

Yes. I mean, look, I would put really a fine point on the growth number as This is Mark. What we saw in the Q2, I think maybe people got a little bit enthusiastic about was a 7% Procedural growth in the Q2, and that's not a normal number nor was the Q1, which was again very high number. So when you come back to 4% kind of globally in the 3rd quarter, that's a pretty normal number and you should expect the market to kind of move to a mid single digit Normalization over time and that's really what we're trying to communicate is procedural growth on a normalized basis is going to be Kind of in the low mid single digits depending on what we see. We think it's still a little bit better than that because there's some backlog, because there's some productivity gains.

Speaker 2

But when you look at the Q3, it was 2%. So if you look at the gap between us and the market, we grew faster than the market in surgical in almost all of our all three categories. So my view is that with a little bit of a softer market, I think that's mostly a U. S. Comparator from prior year because there's a big bounce back last year, but that really is I think what's happening and I do think we'll see a steady kind of mid single growth Going forward.

Speaker 2

What I do think also on the China piece is that we are in a position to really take advantage of China at Some point, we just haven't really we didn't participate in the VVPs in the past. And the VVP had some very old products in it. So we weren't 100% clear as to how that would impact the private markets and our strategy I think was very successful as we went through it. But we're evaluating the VBP. It comes out, I think, in the end of Q1, early Q2, something like that.

Speaker 2

We'll have to see how that turns out. But I think directionally, I would think about China and Asia and many of the developing markets as for both penetration to grow, but also our share to grow. So I think those are kind of where we're thinking about growth opportunities as well as obviously Penetration in the Europe and the more and the U. S. So that's kind of where we are.

Speaker 5

Okay. Thank you very much. Very helpful.

Operator

Thank you. Our next question is from Ryan Zimmerman with BTIG. Please proceed with your question.

Speaker 10

Good morning. Thanks for taking the question and appreciate the update. Just some of your peers have called out, particularly in MedTech, And this is more for Tim. That supply chain inflation numbers have been easing. I know you're still factored into your guidance.

Speaker 10

Excuse me. We got a pretty good CPI print yesterday. So I'm just kind of wondering kind of what you expect from here and Into 2024 from an inflationary or supply perspective, appreciating that freight costs have come down, energy costs have come down, etcetera?

Speaker 3

Yes, I think if you read the prints, we would expect inflation to come down. The one thing that's really important to understand is how that inflation works its way through the P and L. So I'm sure you know this, but we are still It takes for us, it takes anywhere between 6 to 8 months for inventory to work its way through the P and L. So You may be seeing deflation or lower inflation today. That's not going to hit the P and L today because you've got like 6 months Inventory or whatever it may be that still has to work its way through the P and L.

Speaker 3

So we saw a little bit of that in Q3. In the prepared remarks, you'll notice that we would expect to continue to see that kind of in Q4 and Q1 probably. I think Q2 will be more of a Normalized view from an inflationary perspective. So you just need to keep in mind there's a bit of a lag between what you're reading about versus what's

Speaker 2

And Ryan on supply chain, just a comment that look, everything's looking pretty good right now honestly, but it always Looks good until it doesn't. So the good news is that we've solved some of our challenges. But the supply chain is still pretty Joe, there are outages sporadically on component parts, and we need to make sure that we again, I want to just make sure we're balanced about how we think about production going forward. We've had a very good run We've had a very good run at it and our manufacturing teams have done a terrific job, I think, of keeping us in product. But you're always kind of 1 supplier away from Some challenges.

Speaker 10

Very helpful. And then just a follow-up. Next year, you called out equipment as You'll benefiting from an upgrade cycle, David. And I'm just wondering if you can kind of speak to where we're at from an OUS perspective, if you Cam put it at a penetration level. It sounds like most of the U.

Speaker 10

S. Market has been upgraded, but how long can that upgrade Cycle persists beyond, say, the next few quarters. And is that kind of how to think about maybe one of the key drivers for growth next year For 2024? Thanks for taking the question.

Speaker 2

Yes. Ryan, in 2024, I don't know that equipment is going to be that strong. I mean, Actually, what's going to be what's going to occur is, we're likely to get a lot of new equipment out next year that we are going to be testing for part of the year and that we know likely will have an effect more in the 25% range than 24%. But what I would say is that the International markets continue to upgrade and we have a very strong equipment number internationally in the Q3. But you're 100% right.

Speaker 2

I mean, right now, we're selling a lot of equipment in the U. S, but year over prior year, we had a big year last year. So it's pretty normalized in the U. S. So I would just say that directionally, we're going to sell biometers, we're going to sell visualization equipment, we're going to sell handpieces, we're going to sell in the U.

Speaker 2

S. And then we're going to sell a lot of Near term, some Centurions through the end of next year internationally as we end of life our Infinity units. What will happen after that is that we'll go into a new cycle, which will be upgrading old Centurions. And so remember that most of our Feko machines last, Let's call it 8 to 12 years. And so you get about an eighth of the installed base to let's just call it 10th of the installed base every year.

Speaker 2

And we'll see that and we'll try and manage that over the lifecycle of our next generation products. So again, we'll try and manage that with obviously a little enthusiasm In 2025 when we really get going, but I think directionally, as we said at Capital Markets Day, we expect to be pretty good place Consumables and equipment through our longer term planning because we see some real opportunity to improve efficiencies with the new equipment.

Speaker 10

Thank you.

Operator

Thank you. Our next question is from Anthony Petrone with Mizuho Group, please proceed with your question.

Speaker 11

Thanks and good morning. Maybe one for Dave and one for Tim. Dave, maybe just an Dave, I think when we looked at the EMD deck earlier a couple of weeks ago, just a reminder on COMET 3, It looks like you could get a headline readout on COMET 3 before the end of the year. And if that's the case, With a mid-twenty 24 NDA submission for dry eye still be on the table. And then the follow-up for Tim would be on earnings next year.

Speaker 11

Just when we sort of try to Think about the FX headwind here. There's still, I think, a little bit of a delay in contact lens manufacturing margin gains. And then we have some mixed outlook for IOLs and just how that plays out. The Street is sort of looking for About 12% earnings growth. So maybe just kind of putting all of those inputs into earnings as we think about 2024?

Speaker 11

Thanks.

Speaker 2

Anthony, just on 512, the readouts, you're 100% right, we will have a couple of the trials. We've got a third one that's observational trial that matures somewhere in the end of the second end of Q1. But we should have some data to look at. If it's positive, obviously, we'll It'll probably take us 4, 5 months to get it into a submission format. So obviously, That would be around mid-twenty 4.

Speaker 2

So I think you're on the right track there. Again, we'll have to see how that data looks.

Speaker 3

And then Anthony, I would just say on earnings next year, again, we'll give you more We'd expect to grow faster than the market as we talked about. I think the delay in margin, What I would expect is that we will continue to expand margins in Vision Care. Some of that is driven by, to your point, the installation of the DSM Flex lines and That has become a bigger percentage of our overall manufacturing footprint. So that drives incremental improvements. And if we get that revenue growth and we control our cost envelope, we should continue to see margin expansion and obviously that will drop right through to our earnings growth.

Speaker 3

But we'll give you more color in February.

Speaker 11

All right. Thanks a lot.

Operator

Thank you. Our next question is from Steven Lichtman with Oppenheimer and Company. Please proceed with your question.

Speaker 12

Hi, guys. This is Ron on for Steve. I wanted to ask if you guys can talk a little bit about the capital equipment environment you saw during the quarter. And then 3Q versus 2Q, but anything else of note in terms of customer relatedness to investment capital? And I have a short follow-up.

Speaker 12

Thanks.

Speaker 2

Yes. Steve, I think on the capital, we it is a little bit tougher, I think, in the U. S. But I think really the bigger picture is in the U. S.

Speaker 2

Capital equipment Us, is more of an upgrade cycle phenomenon. So I think we see steady Purchasing of equipment still, and we are selling a lot of biometers. We're selling a lot of visualization in the U. S. Internationally, we had a very robust quarter.

Speaker 2

I would have said that we would have we might have expected a little bit more of a slowdown. We didn't see it. Some of that is that we're gaining share. Some of it is that we are We've got some very compelling equipment. And I do think we've been remarkably successful with our new diagnostic, our new visualization equipment And a number of our other pieces of equipment in the handpieces and the like.

Speaker 2

So still solid for us, but I would say the U. S. Is a little bit slower than international.

Speaker 12

That's great. Thanks. And then just a short follow-up is maybe you guys can give us an update on Precision 7?

Speaker 2

Yes. We obviously are working on PRECISION 7 now. We're building the product. We haven't announced a launch date. I do think that the kind of key thinking on this will be, how do we maximize the number of products that we have right now in the market.

Speaker 2

We just launched our Total 30 multi focal lens. We're excited about that. We just really Launched a year ago, our DAILIES TOTAL 1 Toric, which has been a long time coming. And we've got DAILIES TOTAL 1 Toric and SPHERE again growing really nicely after more than 10 years as I said in the prepared remarks. P1 is still growing.

Speaker 2

The Toric is probably the most TURIC right now for new fits. And so I think directionally, we've got a lot to work on. So we've got T30, T30 Toric 230 Multifocal, we've got our Precision 1 Toric that's going well. We've got DAILIES Total 1 Toric And we just we've got lots to do, let me say it that way. And I am very encouraged about the performance, particularly in the U.

Speaker 2

S. And Japan, Where we're seeing really nice uptick and very solid share movement. So I think, again, when we think about growth drivers, we feel very good about our Vision Care business.

Speaker 12

Thank you so much.

Operator

Thank you. Our next question is from Jeff Johnson with Baird. Please proceed with your question.

Speaker 8

Thank you. Good morning, guys. David, maybe I can follow-up just on all the Toric Multifocal comments you were just making. That 9% contact lens number, obviously, Solid number. It's been solid here for a few quarters running.

Speaker 8

How much of that was price? I know Larry asked price overall on company, but how much of that was price? And how much is mix just given the good cycle you're going through on all the specialty sides of those product families? Thanks.

Speaker 2

Yes, Jeff, I mean, it was you're right. I mean, the global market was 6%. We grew 9%. I think there is a bit of share in there. There's a bit of price and there's a bit of mix.

Speaker 2

And I would just say that price was probably about a third of that. And so I think we feel like That's probably a pretty good place to start. I think mix is obviously helping us as we move continuously to dailies and particularly our dailies Toric It's giving us a nice lift, both in price and mix. And so, again, I feel like we're kind of on a nice move here.

Speaker 8

Yes. And then I guess follow-up just on the contact lens business, outside of ATIOLs that your other kind of consumer facing, I guess, some of your OTC stuff as well. But Just your outlook with what we've seen of the consumer here over the last couple of months, your outlook for kind of consumption of contact lenses, any trade downs, any kind of pause, Anything you're seeing there? I guess that's it. I thought I had one other part to it, but I'll leave it at that.

Speaker 8

Thanks.

Speaker 2

Yes. I mean contact lens, the patients looked like it was pretty normal. I mean, I would say, the U. S. Was a little bit better than international.

Speaker 2

I think unit movement on what we call EQ basis, In other words, number of patients getting lenses looked like it was very normal for historical rates, kind of roughly up 1%. I do think that internationally it was a little bit softer. I think it was down 1%, so kind of flat overall. That's very normal historically. Remember that most of this business is about Trade up and trade up was exactly where we would have expected it.

Speaker 2

And again, I think with a little bit of price, a little bit of trade up and then for us it was a little bit of share.

Speaker 11

Thank

Operator

you. Thank you. Our next question is from Graham Doyle with UBS. Please proceed with your question.

Speaker 9

Hi, guys. Thanks for taking my questions. And just a quick one and then a slightly longer one. So on the quick one, so could you just confirm we did hear that right. So U.

Speaker 9

S. IOLs as a market grew 2% and you're completely you've been taking share there or at least maintaining in Q3. So it's like a sequential improvement over Q2. And then maybe, Tim, just one on the guidance range for this year in terms of core EBIT margin. Obviously, still pretty wide as we go into the last quarter.

Speaker 9

Is it was kind of unusual. Is that a reflection of the fact You've got this kind of stronger contact lens margin versus Vision Care margin into Q4 and therefore maybe it's a slightly different mix Potential than usual. Is that what gives you kind of hope that there's upside in terms of where we stand today? Thank you.

Speaker 2

Yes. Graham, total procedures in the market grew roughly 3% -ish, 2%, Depending on how you want to round it. Internationally, it grew a little faster than that and the globe grew about 4%, but most of the international growth was Emerging markets, I would just tell you. So again, and relative to our performance in market, in the U. S, we saw monofocal share grow.

Speaker 2

We saw PC IOL share grow. We saw Toric decline. Those are all year over year, but sequentially Toric's So I would just say, overall, our total share grew. And again, I think in the U. S, we had a pretty solid performance And pretty much as expected.

Speaker 2

I just remind you, people try things in this market because it's a discrete opportunity to do that, but they generally come back to the products that they think are the

Speaker 3

Yes. And then I would just say on the margin, it's really going to be volume driven and mix to your point. It really just depends on we've always said that we sort of pick the midpoint, so I'd probably stick with that. But it could be plus or minus depending on What the final revenue and volume numbers look like?

Speaker 9

That's great. Thanks a lot guys. Appreciate it.

Operator

Thank you. There are no further questions at this time. I'd like to hand the floor back over to Dan Cravens for any closing comments.

Speaker 1

Well, thanks everybody for joining us. If you have any follow-up questions, certainly feel free to reach out To Alan Trang and myself in Investor Relations or for Media, reach out to our Media Relations team. Thanks again.

Operator

Have a great day. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.

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Key Takeaways

  • Q3 results: Sales rose 9% to $2.3 billion, core operating margin reached 19.5%, and core diluted EPS was $0.66, up 41% year-over-year.
  • Surgical leadership: Alcon lenses accounted for 1-in-3 global IOL implants (1-in-2 in premium ATIOLs) and the Hydrus MicroStent reported 5-year outcomes showing sustained IOP reduction and less secondary surgery.
  • Vision Care growth: Specialty lenses—including Total 30 multifocal, DAILIES Total 1 Toric and PRECISION 1 Toric—saw strong uptake, outpacing the mid-single-digit market.
  • Ocular Health & pharma: Multi-dose preservative-free drops gained share, Pataday Extra Strength drove OTC allergy growth, and Rocklatan/Rhopressa delivered low-teens Rx growth.
  • Inflation & currency headwinds: Selling higher-cost inventory will pressure gross margins in coming quarters, and FX moves are expected to drag ~ $0.25 off 2023 EPS and ~$ 0.20 off 2024 EPS.
AI Generated. May Contain Errors.
Earnings Conference Call
Alcon Q3 2023
00:00 / 00:00