Alcon Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 10, 2023

There are 13 speakers on the call.

Operator

Greetings, and welcome to the Alcon 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. As a reminder, this conference is being recorded. It is now my pleasure to introduce our host, Dan Cravens, VP of Investor Relations.

Operator

Thank you, sir. You may begin.

Speaker 1

Welcome to Alcon's Q1 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 Stonecypher, 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 looking we will be conducting a

Speaker 2

few key financial statements

Speaker 1

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 20 F and our earnings press release and interim financial report on file with the Securities and Exchange Commission and available on the SEC's website atsec.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.

Speaker 1

These non IFRS financial measures should be considered along with, but not as alternatives to, the operating performance measures as prescribed for IFRS. Please see a reconciliation between our non IFRS measures with directly comparable measures presented in accordance with IFRS in our public filings. For discussion purposes, our comments on growth are expressed in constant currency. In a moment, David will begin by recapping highlights from the Q1. 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 will open the call for Q and A. With that, I will now turn the call over to our CEO, David Endicott.

Speaker 3

Thanks, Dan, and welcome to Alcon's Q1 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 20.6 percent and a core diluted earnings of $0.70 per share. In Surgical, we had another strong quarter despite challenging comparisons in South Korea.

Speaker 3

In implantables, recall that last year, there was a change in PCIOL reimbursement in Korea, which increased demand during the Q1. This change has made PCIOL out of pocket expense higher for many Korean patients and as a result, local demand has since released. If we exclude the impact from Korea, which we estimate to be approximately $47,000,000 total implantable sales were up roughly 5% on a reported basis 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 2 thirds of the U. S.

Speaker 3

Market despite increasing competitive activity. In equipment, we continue to upgrade and expand our installed base with the Centurion and Legion devices. In the Q1, our team delivered a record number of new FEKO machine installations since spin. Importantly, there remains a sizable installed base of legacy Infinity, Laureate and other machines in international markets. Accordingly, we see continued opportunity for growth in 2023.

Speaker 3

Additionally, we continue to grow in diagnostics and we're 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 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, glaucoma surgery as well as visualization and ocular health.

Speaker 3

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 3 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.

Speaker 3

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, CapsuleRhexis, iWellCentration 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.

Speaker 3

Lastly, data presented on our we have a strong start to the year. We have a strong start to the year. We have a strong start to the year. We have a strong start to the year. It's important that surgeons consider which stent to recommend to their patients.

Speaker 3

Additionally, governments and healthcare payers consider this type of data as they determine which products the 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 1, Total30 and DAILIES Total1. We introduced Total30 for astigmatism in the Q1.

Speaker 3

This is the 1st reusable lens to use water gradient technology created specifically for astigmatic wearers and initial customer response has been exceptional. Total ferritorik is currently available in the U. S. 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.

Speaker 3

Our U. S. Eye drop sales force has already added Rocklatan and Rhopressa 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.

Speaker 3

Now I'll provide an update on our end markets. In surgical, global cataract procedures were up mid single digits in the Q1 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 we're following penetration trends closely and continue to expand programs that digitally we can conveniently educate patients about their lens options early in the cataract journey. Based on recent survey data, we estimate that U.

Speaker 3

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.

Speaker 3

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 Q1, global ATI oil 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 slightly below historical rates in the back half of the year. However, we continue to expect positive contributions from market share and price.

Speaker 3

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.

Speaker 4

Thanks, David. We're pleased to report 1st quarter sales of $2,300,000,000 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 Q1 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 onethree of our top line growth.

Speaker 4

Our first quarter U. S. Dollar sales growth included approximately 400 this points of pressure from foreign currency. Starting with our surgical franchise, revenue was up 8% year over year to $1,300,000,000 Implantable sales was $427,000,000 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, implantable sales we continue to outpace the market and were up approximately 9% on a constant currency basis.

Speaker 4

We expect a minor residual impact from of approximately $10,000,000 in the 2nd quarter due to the demand rebasing that David mentioned. In consumables, our Q1 sales were up 13% to $656,000,000 This strong growth primarily reflects favorable market conditions as well as pricing. In equipment, sales of $221,000,000 were up 14% year over year due to continued strong demand for cataract and Vitret 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.

Speaker 4

1st quarter sales of $1,000,000,000 were up 16%. This growth includes approximately 5 points of contribution from the ophthalmic pharmaceutical products we acquired in 2022. Contact lens sales were up 14% to $615,000,000 in the quarter. This growth reflects the continued strength of our innovative portfolio of SiHi lenses. Importantly, we saw double digit growth in both the daily and reusable contact lens categories.

Speaker 4

As I mentioned earlier, 1st quarter contact lens growth also reflects price increases. In ocular health, 1st quarter sales of $414,000,000 were up 19% year over year. This growth was primarily driven by our portfolio of eye drops, including Rocklatan and Rhopressa as well as price increases across our over the counter products, including Sustain and PATA Day. Now moving down the income statement. 1st quarter core gross margin was 63.4%, up 160 basis points on a constant currency basis.

Speaker 4

This growth was driven by higher sales and manufacturing efficiencies from higher volumes, partially offset by unfavorable product mix from lower PC IOL 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 U. S. Dollar basis, but up 130 basis points on a constant currency basis.

Speaker 4

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 and D following the acquisition of Aerie. As we commented on in the past, we expect to see seasonally higher marketing and sales spend in the second and third quarters for the peak summer and back to school season. 1st quarter interest expense was $47,000,000 compared to $29,000,000 last year, driven by higher debt following the funding of the Aerie acquisition and less favorable interest rates. The 1st quarter core effective tax rate was 18.4% compared to 15.9% last year, primarily due to the mix of pretax income across tax jurisdictions and a decrease in the tax benefit associated with discrete items. Core diluted earnings per share were $0.70 in the quarter, up 14% from last year on a constant currency basis.

Speaker 4

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 $19,000,000 compared to an outflow of $52,000,000 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 Q1 includes the annual associate incentive payment. Additionally, we paid the legal settlement we mentioned on our last earnings call in April.

Speaker 4

On a full year basis, we continue to expect to generate more free cash flow this year as compared to 2022. Transformation costs were $26,000,000 in the quarter $314,000,000 like 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 report that at our Annual General Meeting last week, shareholders approved the dividend of CHF0.21 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.

Speaker 4

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 we expect to pressure sales by approximately 70 basis points versus prior year.

Speaker 4

As a result, we are maintaining our U. S. Dollar net sales guidance for 2023 at $9,200,000,000 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%. We now expect interest and other financial expense to be between $255,000,000 Relative to the Q1, 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%.

Speaker 4

Finally, we're raising our core diluted EPS constant currency growth outlook to 20% to 24% due to the strong performance in the Q1. This growth is offset by approximately $0.12 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. 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.

Speaker 4

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.

Speaker 3

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.

Speaker 3

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 and A.

Operator

Thank you. We will now be conducting a question and answer session. Our first question comes from Anthony Petrone with Mizuho Group. Please go ahead.

Speaker 5

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, some pressure that they commented in the premium IOL space here when we exclude South Korea plus 9 it is ahead of our expectation. So maybe specifically, can you comment on the share 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.

Speaker 5

And I'll have one quick follow-up.

Speaker 3

Yes, 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 move sequentially, again, 40 basis points of penetration up, when you exclude Korea again.

Speaker 3

Now that said, the 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 majority of the ATOL business and kind of a 2 thirds, if you will, of the PCIL business. But Notwithstanding that, we felt like we've had a pretty good quarter. I think the Korea thing is a bit confounding, and you do need to back it out.

Speaker 3

So I think That will clean itself up in the Q3, so you get some pretty clean looks going forward 3rd, 4th quarter.

Speaker 5

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 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.

Speaker 6

Yes. Thanks a lot.

Speaker 4

Yes, I don't think there's a billing day comp issue there. As far as the phasing goes, I would think about the year this way is 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 effect there. So What I'd probably do there is I take whatever you think between that $9,200,000,000 $9,400,000,000 range. I take out the Q1 revenue And then I would trend it very similar to what how we trended last year and that's how I'd layer in your revenue number.

Speaker 4

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.

Speaker 4

So if you 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 and D, I'd say, 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.

Speaker 4

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. 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 $245,000,000 and $255,000,000 Again, I'd back out Q1 And then I would just level load that and that's how I sort of phase the year.

Speaker 7

Thank you much.

Operator

Our next question comes from Matthew Mishan with KeyBanc Capital Markets. Please go ahead.

Speaker 7

Hey, good morning and thank you for taking the questions. Just on the contact lens side, have you got it's just really hard to understand the difference between the kind of 4th quarter performance and the 1st quarter performance and And how consumers are kind of acting. Do you have any data on what drove purchasing activity 3 months ago, what drove it this quarter? Is it a regional inflection maybe outside the U. S?

Speaker 3

Matthew, let me give you what we do know and I think what I can tell you is, we're very pleased with our 4th quarter 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 4th quarter. We saw for our own performance, we were happy with it.

Speaker 3

We obviously were hitting on all cylinders in the Q1, Continue to see steady trade up from consumers, continue to see in particular volume growth for us. So read that as we think we grew faster In volume share than our competitors. And I think we picked up a little price in there as well as we try and offset some of our input costs. So When you most of the market was putting some price in play in the Q1. So again, I think you're going to see everybody's number Kind of exceed what you'll see in the audited data.

Speaker 3

And again, I'd be careful with the audited data because it's retail, not factory. And the read through on that So, I would there's going to be some gaps in there. There always is. So, I think we had a good Q4. We had a very good Q1.

Speaker 3

And I think what I'm really encouraged about is the uptake in Total30 Toric in the U. S. Contact lens business in particular had a very, very good quarter.

Speaker 7

Excellent. And then just like more of a technical question. When you're talking about like inventory and getting through cost of 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 lag when that drag, I'm sorry, may go away.

Speaker 4

Yes, I would say in general from a total company perspective, it probably takes 5 or 6 months for the inventory to go off the balance sheet into the P and L.

Speaker 7

Thanks, Tim.

Operator

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

Speaker 8

Thank you. Good morning, guys. Maybe two questions on contact lenses and on pricing. So Tim, you've said now a couple of 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 3 points to the company wide that you were getting pricing across contact lenses, ocular health and on the consumable side in surgical.

Speaker 8

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?

Speaker 3

Yes, 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 6 weeks of the quarter, January and part of February, we had 2 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.

Speaker 3

That won't occur, I think going forward, 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, 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 costs as we all know 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.

Speaker 3

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 We're taking some price increases. So that's helped us a little bit in the quarter.

Speaker 8

Understood. And then so does that 3% price or so, I think that's what you were trying to signal in the prepared remarks. Is that 3% price slip back to Plus 2 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 iShare that is increasing? Or are you finally starting to see maybe a more rapid kind of trade up within your own user base that's helping those volumes.

Speaker 8

So just help us understand kind of the trade up dynamic versus on iShare during the quarter? Thanks.

Speaker 3

Yes, we had a very good on the second one. It was principally share. We obviously get some trade up from our own business. We probably have A little bit of cannibalization, but we were very pleased with the amount of share gain that we had in the quarter. So I think directionally I would read that as volume is principally share gain.

Speaker 3

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 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.

Speaker 8

Thank you.

Operator

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

Speaker 9

Hey, guys. Congrats on the quarter. Just 2 for me. Just Dave, you had previously, I think on the Q4 call, I assume that cataracts would be weaker in the Q1, yet the market does appear to be stable net of Korea. Is there anything to suggest that demand pulled forward here and just how to think about cataract demand or market volumes for the remainder of the the year given this dynamic relative

Speaker 3

to your assumptions? Well, Ryan, I think what we believe and I hope I communicated Q1 was that cataract volumes are generally pretty stable even in a recession kind of environment. We still see the cataract volumes. What we've said is that implantables, the trade up from a monofocal to an ATIL, we've never seen that In a kind of a heavy recession environment. So we were unclear as to what was going to happen.

Speaker 3

And again, we made some assumptions. None of that really occurred in the So volumes was very stable and trade ups look pretty much consistent with what we've seen in the past. So directionally, I would Cataract volumes to stay pretty stable and the only thing I would think about is if there is 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 the positive forward momentum that we have In penetration and I think as we kind of get beyond Korea this next quarter, maybe 2 quarters away, you'll really get a cleaner view of the back half of what's happening With both of those things.

Speaker 3

But I think reasonable assumption, I think at this point is that cataract market will remain in that kind of 4% to 5% range, 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 much like that now.

Speaker 9

Okay. And then real quick for me, the 7% to 9% underlying growth Aerie did by my math 4 70 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 Baird contributions from Aerie in the back half of the year?

Speaker 9

Thanks guys.

Speaker 4

No, I think it will be pretty consistent with how I did on the last call, it's about 2 points of growth.

Speaker 9

Yes. Okay. Just understood. Thank you guys for taking the questions.

Operator

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

Speaker 10

Hi, guys. Good afternoon and thank you for taking my questions. Let me start with just 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 comps you're guiding for deceleration in spite of that. Other than the market commentary that you've made about the back Anything else that's worrying you as you think about the remainder of the year or is this just being a bit conservative?

Speaker 10

And then I have a follow-up after that.

Speaker 3

Yes, Veronica, look, I mean, the comps are a little easier, as you know, in the Q1. So you should expect that to be a little bit higher. So Don't forget that there was really China last year, I was in a tough spot. Japan was in a tough spot. Our Asia business broadly.

Speaker 3

And then we still had some coronavirus stuff going on in even some of the Western markets. So, the Q1 is going to be a little bit better than I think the rest of the quarters. That said, I don't think we're trying to forecast anything other than a belief that 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.

Speaker 3

But on the other hand, 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 was direct to your question, but that's what we've been doing.

Speaker 10

Yes. No, no, no. That's really helpful. And then my second question was just on the consumables and pricing specific. I mean, it's a very impressive double digit growth Market that's growing mid single digits.

Speaker 10

How broad based have the pricing increases been that you've been able to And do you expect to for those to last through the remainder of the year? And that's it for me. Thanks guys.

Speaker 3

Yes. Veronika, we are very pleased with the 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 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.

Speaker 3

And as we come back around on contracts that maybe are 3 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.

Speaker 3

And I think it's built on what has been a terrific international performance by equipment and a real steady growth. I think U. S. 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.

Operator

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

Speaker 11

Good morning. Thanks for taking the question and congrats on a really nice quarter here. Hey, Tim, can I just clarify the price one third of your growth, is that the 11% constant currency or 1 third of the 7% reported?

Speaker 4

That would be the reported number.

Speaker 11

The 1 third of the reported. Okay. And then we saw you got Precision 7 approved, David. Just curious what the launch plan is there. At the analyst meeting you said you still had some work to do, but it looks like approval may have come earlier.

Speaker 11

So how are you thinking about the launch of Precision 7? I had one follow-up.

Speaker 3

Yes. We're not yet ready to launch Precision 7. We've got an inventory build to go on to. We also want to give candidly, we want to give Salesforce, the time to promote what appear to be quite sensitive products to promotion. So we're going to time this one and position it Very carefully, I think we'll have more news on that later in the year.

Speaker 3

I don't think what we're going to do right now Get that product out immediately as we build inventory for it. That will take us some time. But also I would just say that The Q1 was encouraging around total 30 and total 30 Torex and frankly our Torex 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 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.

Speaker 3

But Directionally right now, we're super happy with the momentum we have on existing products in the market.

Speaker 11

That's helpful. And 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've heard this correctly. The AT IOL share in the U.

Speaker 11

S, I think that's where you said it was about 2 thirds or 66 In your prepared remarks, that's down from over 80 a couple of 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.

Speaker 3

No. You kind of misread that one just a little bit. The 80 plus is a PCIOL share, which is a subset of ATILs. So remember, ATILs is the combination of toric lenses And PCI wells, but you have the correcting lenses. And so that's what's going on there.

Speaker 3

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 Korea was Way down and China was up. So, I wouldn't make much of any particular share movement at this point.

Speaker 11

I got it. Thank you.

Operator

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

Speaker 12

Hey, guys. Thanks for taking the question. Maybe just on the SG and A expectations for 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.

Speaker 12

And then just a follow-up, just in terms of foreign exchange, I just wondered I'm just also starting to see how you can have a bigger headwind now, given the we've weakened against most currency since the full year results. Thanks.

Speaker 6

Yes. The SG and A lift will

Speaker 4

be very similar to what we've seen in prior years. Again, I would kind of use those same trends and go off of that. As far as the FX, It really depends a lot of people look at the DXY, the Bloomberg thing and the baskets there are different than our baskets. So we definitely see some strengthening of the U. S.

Speaker 4

Dollar, particularly against the Aussie dollar, the Japanese yen And the Russian ruble. So we are certainly when you look at our basket of currencies, we are seeing some FX pressure.

Operator

Our next question comes from Graham Doyle with UBS. Please go ahead.

Speaker 6

Good afternoon, guys. Thanks for taking my questions. Just 2 for me. Firstly, just on contact lenses. It does look like you're taking meaningfully more share than maybe you have done in the last few quarters.

Speaker 6

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 guidance then. Thank you.

Speaker 3

Yes. 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 on 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.

Speaker 3

So I think we've been smart I think to 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 can, but we'll update each quarter as we go through the year and hopefully 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 again, it takes a little while after you launch to Get people samples, get them fit sets, get those on to eye, get people confident with the products.

Speaker 3

It also happens to help a lot to see the Toric 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 in there where you can where the optometrists can just simply use a brand and fit most of their patients. And that I think is having a positive effect. So The Q1 was terrific that way. 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.

Speaker 6

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 So 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 is the gross margin neutral to accretive to the group?

Speaker 3

Well, I mean, Tim, you should comment on this as well. But I think directionally, what I would say is, 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 I'm 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.

Speaker 3

So it grows Kind of gently towards the outer years, we've obviously got some nice positive growth in a hurry here and we're super confident about our ability now To generate long term operating efficiency on the lines because I think 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. I do think you'll just see steady growth in the kind of TPC margin and that's probably the best way to think about it. Tim, you want to add anything?

Speaker 4

Yes. No, that's right. If you go back to the Capital Say that margin expansion chart that we showed by franchise, what we saw historically was gross margin pressure, but you were getting leverage on the G and 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 you get continued gross margin expansion as these lines become more mature and end up running at their optimal capacity.

Speaker 6

Awesome. Super clear. Thanks guys.

Speaker 4

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

Speaker 1

Operator, we can take Steve Leachman from Oppenheimer.

Operator

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

Speaker 2

Thank you. Good morning, guys. Just two questions as follow ups. One, you mentioned the comps in the Q1. Obviously, it's been tricky to evaluate comps over the last few years.

Speaker 2

How much do you think comps played a part in the first Was there 1 or 2 segments that perhaps had a different impact than the rest of the business? And then Secondly, it seems like China is seeing a pickup. Wondering if you could talk about how that country is doing for you across your key segments?

Speaker 3

Yes. 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 So that did help, I think everybody in the industry all over. So 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.

Speaker 3

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 still had some other we had forecasted most of the other impacts correctly. I think directionally, we see those as more modest in terms of change year on year.

Speaker 7

What was the

Speaker 3

second part?

Speaker 2

Just on the comps dynamic in the Q1 and if there was any That we're different than others in terms of the impact there.

Speaker 3

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

Operator

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

Speaker 1

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 Trang or myself in the NIR, have a great rest of your day. Appreciate the time.

Speaker 4

Thanks, everyone.

Operator

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

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Earnings Conference Call
Alcon Q1 2023
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