Q3 2021 Alcon AG Earnings Call
Greetings and welcome to the Alcon third quarter 2021 earnings call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
Anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
Please note this conference is being recorded.
Now I'll turn the conference over to your host Karen King Senior Vice President head of Global Corporate Affairs, and IR you may begin.
Welcome to Alcon third quarter 2021 earnings conference call Yes.
Yesterday, we issued a press release and interim financial report.
Posted a supplemental slide presentation on our website to enhance today's call.
You can find all of these documents in the Investor Relations section of our website at Investor Dot Alcon Dotcom.
Joining me on today's call are David Endicott, Our Chief Executive Officer, and Tim Stonesifer, Our Chief Financial Officer.
Our press release presentation and discussion will include forward looking statements.
We expressly disclaim any obligation to update forward looking statements as a result of new information or future developments.
Except as required by law.
Our actual results may vary materially from those expressed or implied in our forward looking statements.
Accordingly, you should not place undue reliance on any forward looking statement.
Important factors that could cause our actual results to differ materially from those in our forward looking statements are included in our form 20-F, and our earnings press release and interim financial report on file with the Securities Exchange Commission and available on the SEC's website at SEC Gov.
Not I F. R. S financial measures used by the company may be calculated differently from and therefore may not be comparable to similarly titled measures used another company.
These non <unk> financial measures should be considered along with but not as alternatives to the operating performance measures as prescribed her I FRS.
Please see a reconciliation between our non I F. R. S measures with directly comparable measures presented in accordance with I F. R. S.
Third quarter earnings presentation, which can be found on the Investor Relations website.
As a reminder for discussion purposes, we are providing comparisons of <unk> 2021 versus 2019, unless otherwise noted as we believe this is more operationally meaningful since our results were impacted by the pandemic in 2020.
We will continue this practice through the end of the year.
You will find a summary of results comparing 2021 'twenty 'twenty and 2019 in our slide presentation.
And a comparison of 2021 versus 'twenty, 'twenty, and our press release and interim financials.
As usual our comments on growth are expressed in constant currency.
And with that I'll now turn the call over to David.
Welcome to <unk> third quarter 2021 earnings call I'll begin by providing a brief update on our third quarter overall market dynamics and our new innovative products.
After my comments, Tim will discuss our third quarter performance and our outlook for the full year, then I'll wrap up with some closing remarks, and we'll open it up for Q&A.
Now we're pleased to announce we had another strong quarter. Despite markets that are still recovering Sim.
Similar to the second quarter. This was driven primarily by demand for new product innovation solid commercial execution and strong market recovery in the United States.
Recovery in our international markets remains mixed although we are encouraged to see signs of recovery in select European markets late in the quarter other countries like Japan, which is our second largest market continued to be impacted by the pandemic.
Third quarter sales of $2 1 billion were up 13% versus 2019 with increases across all sales categories in surgical and vision care.
Core operating margin was 17, 7% and core diluted earnings per share was <unk> 54 sets.
Customer interest and need for our new products are driving above market growth and in surgical our portfolio of advanced technology Intraocular lenses is driving increased penetration rates of hei wells and we continue to see strong demand for cataract refractive equipment.
In vision care, our new contact lenses are winning in the market and our sustained brand family is posting strong double digit growth in all regions.
Now moving to our end markets by franchise and surgical the global cataract surgery market was relatively consistent with last quarter.
Excluding India the global market was down mid single digits versus 2019.
While the U S showed solid mid single digit growth over 2019, the international markets remained down high single digits, primarily due to emerging markets in Japan, which continue to be suppressed.
Against this backdrop, our implantables business continued to outpace the market driven by our strong <unk> performance.
In vision care, the contact lens market was flat to slightly up versus the third quarter of 2019.
Similar to surgical the U S market has returned to growth while international markets are approaching 2019 levels.
Our contact lens business grew significantly faster than the market driven by the strong performance of precision one.
Now moving to innovation in surgical we maintained our strong market share in <unk> solidifying our position as the market leader.
This was driven by strong demand for our new innovative products panopticon and devotee, despite new market entrants.
We continue to see ATI, well penetration rates, increasing sequentially as existing surgeons increase their use of advanced technologies and as surgeons, who traditionally preferred mono focal and <unk> are now implanting devotee.
If it is the first and only PCI will with wavefront shaping technology and a clinically proven exceptionally low rate of visual disturbances.
Surgeons appreciate the consistency of patient outcomes without the worry of halos and glare.
In our equipment business, our products and innovations remain a favorite of surgeons, including our market, leading <unk> equipment are active century handpiece, the Luxor revalue, a microscope any Argos biometer.
Earlier this week, we unveiled the latest evolution of cataract connectivity with smart cataract.
Designed specifically for ophthalmology this new cloud based application delivers planning connectivity and analysis to improve cataract surgery efficiency reliability and accuracy.
This is the next step in the evolution of our equipment ecosystem and further enhances the value of our new innovations.
Installations of our first application smart cataract are underway with select customers in the United States.
In vision care, we're expanding our contact lens offerings to the premium and middle market segments by launching a steady stream of new silicone hydrogel daily and reusable products.
In the premium segment, we're building out our total brand with a complete portfolio of design options and.
In addition to our existing dailies total one sphere and multifocal lenses, we're now adding dailies total one for astigmatism to capture the premium toric market and.
And also totaled 30 to capture the premium reusable market.
Dailies total one for Steve with Ism has been eagerly anticipated by eye care professionals for years. This lens provides a significant opportunity in a fast growing segment, where only one in four a stigmatic patients are wearing toric lenses.
Select customers in the U S are already fitting the lens early feedback has been very positive and we're excited for the broader commercial launch early next year.
That totaled 30 addresses the large 4 billion reusable market, which hasn't seen any significant innovation in years totaled.
Total <unk> is now available to whereas in the U S and Europe and early reception has been strong.
<unk> brings the water gradient feature of dailies total one into a monthly lens, creating a comfortable lens, which feels like nothing on day, one and on day 30.
Now moving to the middle market segment, the strong performance of precision one of precision one for astigmatism continues to drive our above market growth in the total dailies market.
Both the sphere and toric designs are currently available in the U S and Europe and precision one sphere is available in Japan.
As more international markets recover we believe we are well positioned to drive steady growth with precision one.
Finally in ocular health, we are building out our eyedrop portfolio.
Sustained sales continue to grow globally, reinforcing our leadership in artificial tears.
If you recall about 25% of the fast growing U S market for artificial tears is the preservative free category compared over 50% in some international markets.
Our mark our multi dose preservative free formulation of sustained ultra and hydration are now available in Europe, and the U S, where we're seeing a favorable customer response.
We also continue to see strong demand for <unk> family of allergy products, which has been aided by our recent launch of <unk> extra strength earlier this year and finally this is the first full quarter, where we've added some brynza to our growing portfolio of eyedrops.
Now before I pass the call to Tim I wanted to touch on our recent announcement regarding our intention to acquire aventis.
We're very excited for the opportunity to expand our glaucoma portfolio in this large $500 million market growing in the low to mid teens <unk>.
<unk> is the second largest cause of blindness, after cataracts and impacts more than 75 million people globally.
<unk> flagship product is the hydrus microstat, our minimally invasive glaucoma surgery device.
Importantly, the hydrus is unique as the only migs device with safety and efficacy data out to five years.
The five year Horizon clinical study of hydrous is the longest continuous follow up of a migs device. It demonstrated that 65% of hydrous patients remained medication free at five years.
Hydrogen is a combination cataract indication in the U S, which means the devices implanted during cataract surgery in both combo cataract and Standalone indications and five international markets.
We intend to leverage our global commercial footprint and our development capabilities to create even greater value for existing and future advantaged products in a few minutes, Tim will walk you through some of the financial aspects of that deal.
Our third quarter performance demonstrates the resilience of our business the strength of our innovation engine and the expertise of our commercial organization.
We are executing on our new product launches and growing faster than the markets around the world even as they continue to recover.
For surgical we're expanding our leadership in equipment by developing an equipment ecosystem to improve efficiency and accuracy, while we're expanding our implantables business and surgical glaucoma.
And for vision care, we're using our water gradient technology to create differentiated new silicone hydrogel contact lenses for both daily and monthly use.
And with that let me pass it to Tim who will take you through our financial results.
Thanks, David we are pleased to report third quarter sales of $2 1 billion.
About 13% versus 2019, driven by 14% growth in surgical and 12% growth in vision care.
Year to date sales were up 10% versus the first nine months of 2019 with surgical up 12% and vision care up 9%.
Implantable sales were $375 million in the third quarter, an increase of 32% versus 2019.
As David mentioned, we remain market leaders with our <unk> portfolio, and we continue to see adoption driving encouraging penetration rates above historical levels.
On a year to date basis, and <unk> sales were up 28% versus the first nine months of 2019.
Consumable sales of $594 million in the third quarter increased by 3% versus 2019.
With sales growth across all three categories of cataract and.
And refractive.
On a year to date basis consumable sales were up 1% versus the first nine months of 2019.
Equipment and other sales were $192 million in the quarter up 20% versus 2019.
About eight points of the growth was due to the refractive sales with continued demand for lasik procedures.
The remaining growth was primarily due to strong demand in cataract and new equipment.
On a year to date basis equipment and other sales were up 21% versus the first nine months of 2019.
Now turning to vision care third quarter sales of $923 million grew 12% versus 2019.
Contact lens sales were $562 million in the quarter up 7% versus 2019.
This was driven by strong demand for precision one and precision one for astigmatism as well as continued growth from dailies total one.
As David mentioned, we're also rolling out total 30 in the United States, and Europe, where customer feedback has been extremely favorable base.
Based on the strong performance of our contact lens portfolio, we continue to add new manufacturing lines and assess the need for additional capacity to support product flow of our new products, especially precision one first statements ism.
On a year to date basis contact lens sales were up 5% versus the first nine months of 2019.
Now moving to ocular health, where sales of $361 million in the quarter increased by 20% versus 2019.
About half of the growth is attributed to a sustain which grew double digits in all regions underpinned by growing artificial tear market.
This was aided by our new multi dose preservative free launches in Europe and the U S.
Half of the growth is primarily due to new additions to our portfolio, including <unk> and <unk>, which had no comparable sales in 2019.
On a year to date basis ocular health sales were up 16% versus the first nine months of 2019.
Now moving down the income statement third quarter core gross margin was 63, 7% broadly in line with 2019.
We continue to see inflationary headwinds related to raw materials freight and labor. Despite our best efforts to mitigate these pressures through active management of supply and selective price increases.
Core operating margin was 17, 7% in the quarter driven by operating leverage is higher sales outpaced increases in SG&A.
As we mentioned on our last call. We do expect to see incremental margin pressure in Q4, primarily due to product mix and timing of spend as we continue to invest in our commercial activities and salesforce as markets recover.
Third quarter interest expense was $31 million down from $35 million in 2019.
While we've taken on incremental debt, we benefited from lower variable interest rates and lower debt and affiliates.
The core effective tax rate was 17, 5% in the quarter compared to 18, 2% in the third quarter of 2019.
The current rate benefited from a buildup of inventory in certain international markets that had a favorable product mix and a favorable mix of pre tax income and loss across tax jurisdictions.
For the first nine months of the year. The core effective tax rate was 17, 5% in the quarter compared to 18, 2% in the third quarter of 2019.
The current rate benefited from a buildup of inventory in certain international markets that had a favorable product mix and a favorable mix of pre tax income and loss across tax jurisdictions.
For the first nine months of the year the core effective tax rate was 19, 1%.
Core diluted earnings per share in the third quarter of 2021 were <unk> 54.
<unk> <unk> versus the third quarter of 2019, driven primarily by operating leverage.
Next I'll touch on a couple of cash flow and balance sheet items.
Free cash flow year to date was $578 million compared to $260 million for the same period in 2019.
Higher core operating income and lower separation spend were partially offset by increases in capital expenditures and inventory to support new product launches and expected upcoming demand.
Capex was $380 million for the first nine months of the year with the increase driven by our contact lens manufacturing expansion.
As a reminder, historically capex spend has.
<unk> has been heavily weighted in the fourth quarter and we expect that trend to continue this year.
Transformation costs were $14 million for the third quarter and $141 million life to date.
Turning now to business development as David mentioned, we announced our intention to acquire <unk> for $475 million in cash plus potential future payments contingent upon the achievement of certain development and commercial milestones.
<unk> offers an attractive sales and earnings growth potential and a fast growing category, where we currently do not participate we.
We estimate I've Anthos will have sales of approximately $60 million for the full year 2021.
In 2022, we estimate that <unk> will be broadly neutral to core operating income with some pressure on the core operating margin rate.
We expect the acquisition to be accretive to core operating income in 2023.
We anticipate to close the transaction in the first quarter of next year subject to customary closing conditions, including regulatory review.
As we discussed earlier in the call we continue to see broader macroeconomic burdens such as inflation and tightness in the supply chain, we have been proactively working to manage these challenges, but we have seen pressure to date and expect that to continue going forward.
In addition, the U S dollar has appreciated significantly since the first half of the year.
If the U S. Dollar remains at current rates, we would expect to see FX headwinds in 2022 as compared to 2021.
Despite that backdrop and based on our strong performance year to date, we expect to come in around the higher end of our 2021 guidance.
This outlook continues to assume that global markets returned to 2019 levels by the end of the year.
U S market to continue to grow above 2019 for the remainder of the year and on an aggregated basis International markets reached 2019 levels early next year with emerging markets in countries like Japan remaining subdued.
Now I'll turn it back to David for some closing remarks.
Thanks, Tim to briefly wrap up we're pleased with the strong results. We saw this quarter with sales up in every category exemplifying the resilience of our business the strength of our innovation engine and the expertise of our commercial organization.
Our new product launches are gaining momentum and taking share as markets around the world will continue to recover.
We're pleased to be expanding our surgical portfolio, both through our smart solution ecosystem and through our intended acquisition of <unk>.
<unk> robust pipeline of innovative products are bringing new options for doctors and patients and contact lenses dry eye allergy in glaucoma drops.
We're pleased with our ability to deliver growth and outpace the market and we are well positioned to capture an outsized benefit as the global markets recover delivering long term value to our shareholders and with that let's open up the line for Q&A.
Okay.
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One moment, please while we poll for questions.
And our first question comes from the line of Brian Zimmerman with <unk>. Please proceed with your question.
Great. Thank you for taking my questions and congrats on the corner.
Tim.
Dave when Im thinking about your market last year in the height of Covid ophthalmic markets really took a pause.
And yet now they're proving far more resilient and so I'm wondering if you could just kind of speak to that dynamic as to why that is and we've heard from many of your peers about staffing challenges.
Going into next year.
Are you anticipating that or not particularly in the U S market, where again it sounded to me it's proven to be more resilient.
There were some comments on that.
Yes, Ryan.
We have seen a lot of strength in the markets and I think it probably speaks to the underlying fundamentals the COO.
<unk> as you kind of think about getting through this not everybody.
I think.
We weren't sure how it was going to have first of all as you recall, we were a little bit.
On the early guidance, but I think what we really believe is that these cataracts arent going away and that they are coming back, but again EBIT through this point in time I think if you look at it we've used 2019 as comparator. So that you can kind of divide by two and see if it's still there and I think through a couple of years, we still think the market is not yet back to full growth. So I think in the U S. It was 4%.
Procedures over 2019, so if you do that by node by two youre still not quite what the normal growth would be we would have expected normal growth to have been about 3%. So yes, it's been solid coming back and again, although it paused last year a lot of the underlying things in vision care for example were better than we expected so yes.
I think vision care, we don't see necessarily for example.
The visits back to where we'd like to see them, but we are seeing revenue come back and that seems to be a phenomenon of of some renewal remotely for prescriptions and also larger purchase per patient. So we're seeing some of that happen as well so.
I think theres been some unique circumstances, but I think more importantly, the underlying fundamentals on eyecare lead you to believe that these are relatively resilient markets and so I do think the.
As we said come back largely by the first part of next year all in.
We think this year the U S is growing now as I said.
But international is going to take a while it's going to take a little longer in some markets may drag into the middle part of the year, but I think in aggregate international should be back sometime early next so we'll get there, but I think it's likely to be a slow steady climb from here maybe slightly above.
Historical numbers as opposed to.
Any kind of quick bounce back that looks a little bit more Steve I think it's much more likely to be a gradual climb that's just slightly warmer than historical growth rates.
Okay and staffing, yes, alright. Thanks.
Staffing, yes, we still see that.
I'll tell you that stat.
Staffing and optometry in particular, I think is difficult right now.
The surgical centers I think are generally pretty good but it is difficult for them to kind of go way beyond what they were doing and I think this is kind of.
Early on we would hope that there will be a steeper bounce back perhaps I don't really see that partly because frankly, it's hard to get more throughput out of the current capacity that we have and there are staffing issues in vision care. Similarly, I think if you were seeing 20 patients a week or sorry provision today 19, youre probably seeing <unk>.
<unk> or so right now and it is tough without additional staff to get back up to that 20. So again I think that will climb slowly but.
I think over the long haul youre going to see that.
These markets are kind of roughly returning as we would expect next year.
Kind of back to kind of historical growth rates.
Okay, and then just on cataract.
Obviously theres been some product introductions in the market competitively and so what are your expectations for when you could or could not see that impacted.
It seems like you are in Opex and <unk> are doing well despite that at those introductions and so I would imagine that you are baking in some expectation there you could speak to that a little bit and thank you for taking a.
Look we've seen these products in the market around the world for a while so that really the only new market here as the U S.
And I think we expect it to we had a very high share up in the eighties.
That's going to come down so it's just a matter of is it more or less than we planned and I think we're seeing pretty much what we expected I think people will try to lens. It's a good product, but I think they're going to find that particularly <unk>.
As no halos and glare really.
To speak of and I think it's very similar to a mono focal when you when you really cut all through it but its giving your intermediate and near vision. So this led has turned out to be a much better alternative for a lot of folks then trying some of the newer lenses I think that have a lot more of the visual disturbances.
I think somewhere between pet optics, if you really want near vision.
100% pretty much guaranteed near vision, that's going to be a panoptic station.
But you can get a lot out of this <unk> product and we are seeing a lot of benefit from that and remember that again, even with the share dynamic what we're really trying to do now is move more to the penetration side of this thing and so we've been talking a lot about.
How do we get more people involved in <unk>, how do we get more patients through the into these practices and I think that will be the dynamic that's probably more important over the long haul and I think we've said in the past as you know theres probably for every 100 basis points of penetration, we can pick up a $100 million. So we're very interested in right now the penetration rates.
Because our share is pretty solid.
Feel really good about the competitiveness of our current position.
Thank you.
And our next question comes from the line of Julien <unk> BNP Paribas. Please proceed with your question.
Yes, hi, good morning, Dave and team. Thanks for taking my questions I have two the first one relates to vision care and most precisely the launch of total <unk>.
You currently have are showing that in the mid teens in that category of premium reusable.
How do you think what's the reasonable share objectives that your hospital for these specific segments and how long do you think you could say.
Just to get you there.
And my second question is on surgical line level you have a question on the calls with US two very puzzled by the very different growth patterns that we still see between consumables on the one hand, and implantables and equipment on the other hand, and Thats, where we see compared to 2019.
Is it just a function of implantable then a quick one growing above their historical trends or do you should expect to see a catch up cycle at some point in consumables for example in 2022.
Sure Julian Let me, let me start with the first one.
We.
We are very excited about <unk> I mean total 30.
A unique product that I think adds water gradient to a material.
That is durable for 30 days and so you're getting the best elements of what we want which is durable material that will last 30 days and yet at the same time feels like nearly nothing on day, one and actually out a day 30 very similar to the first day you had in your eyes. So that's a big change from what the kind of products that are available right now.
We're excited about the reception, we see to that right now.
I think that that would not.
Notwithstanding the beautiful thing about the contact lens market is it takes a while to move share and so on the one hand you'd like to see it.
The aggressive part of this as you'd like to see it run up but what you're really doing is turning a small part of the market every year. So remember if you are happy and your lenses youre likely to stay in your lenses and that's probably 70%.
<unk> of the patients walk through the door theyre going to end up basically in the lens. They walked in with if you are unhappy or year, having a trouble or it's not as comfortable that's a switch or a new patient and you need to think about those is really about a third or less of the total market that churns and so that's the available opportunity every year to move some.
Sure and so that takes several.
<unk> years in many cases <unk>. One for example, we've had out nearly 10 years its still growing share.
And we will see a long rise of these products theyre not supersede theyre relatively stable when you get them on a share trajectory. They tend to grow every year, a little bit and thats really the outlook.
<unk>, that's a very helpful financial trajectory, because you've got a pretty good pattern.
And it's got long term sustainable growth. So we're excited about what it could be again I would forecast a share objective per se for this product right now, but we're excited about what we see early days.
On the surgical side, there isn't really the way to think about Implantables and equipment are different but you start to start with the market growth and again historically the market growth in procedures.
You can pretty much approximate with unit growth in Implantables.
And again typically it's been kind of in that three.
Somewhere between kind of three or four globally.
It's been harder than that occasionally but somewhere in there is usually the procedural growth.
The unit for Implantables is going to grow very close to that procedure rate because of course one.
One surgery, usually means one implantable consumable similarly should grow roughly in other words, one pack or one unit of use.
Idea will come along with that same surgical piece, what youre seeing in Implantables as a trade up in volume our value. So youre trading a unit that was $1.
Was in essence, a $100, let's just say for amount of focal now now trading at six to $800 to $900 in some places.
And that's what's driving the value difference between those those.
Those numbers.
Equipment is slightly different equipment has just been unusually robust and we would normally say that equipment should run just slightly in advance of procedural growth. So if you figure the market has enough equipment to service. The equipment. There is some changeover every year. So that's usually let's call it <unk>.
Somewhere between 10, and 20% of the market should should be retiring equipment and buying new equipment and then you've basically got growth on the market that is procedural growth and so that is how we think about that growth that's usually again.
<unk> slightly warmer than the procedural growth depending on the price of the equipment and then if you are upgrading on our price then are going into the value grows a little bit faster. So thats, probably the way to think about it.
But I don't think theres a ton of of catch up here for consumables, because whatever procedures grow I think is where youre going to see the consumables right grow generally and so that's kind of where we are at.
And part of the difference you're seeing is some of our markets as we index more heavily to markets that right now have recovered versus the global markets. In many cases, we exclude India, because it really hasnt recovered as a monster number of procedures.
But we're not benefiting from those right now.
Okay helpful. Thank you very much.
Our next question comes from the line of Scott Barbour with Bahrenburg. Please proceed with your question.
Yes, thanks, guys for taking the questions.
Two questions.
Firstly just on guidance so obvious question would be.
Why did you include any comments on guidance and Youll release marching that confused quite a bit of capital the capital markets. This morning, and I think we've seen it before.
I appreciate most of your client I can comment about inflation and logistic costs in size. So what I'm trying to understand is all of that.
No.
Drive the 16% margin in Q4 implied by your guidance and.
Do you still hold you a 20% margin by 2023, despite this acquisition.
Next question. Thanks.
So a few questions in that question yes.
To be honest with you I was a little surprised with that.
The reaction to the no guidance in the press release I mean, our philosophy. Our philosophy has typically been that we don't update the guidance unless there is a change to the guidance. So.
Obviously, we provided a little bit more color on the script that we think will be at the high end of the guidance, but there were no changes.
Overall from a.
From a 16% perspective, there are a couple of things in there I mean Q4.
Historically from a seasonality perspective is typically lower than Q3, that's primarily driven by.
By vision care in a couple of other elements. We also had as we mentioned some timing of spend so we've got some spend that we thought we would spend in Q3 that has now shifted to.
Q4, so I think as you think about how material are things going to be.
As you project out into 2020, I would just provide the following color I think first of all I would take the high end of our guide. So as an example, if you start with revenue take the $8 $2 billion.
And then we've said in the past that we're going to grow mid single digits I would just take into account that we have a lot of momentum exiting 2021 from a revenue perspective. So if you think about implantables to David's earlier comments really strong performance in <unk>, we're going to continue to launch that and new geographies next year, so that men.
<unk> will continue if you look at contact lenses as an example, we have a lot of momentum in <unk>. One we've got two new lenses coming at peak 30 day, one for astigmatism.
So again I would expect to see more growth there and then dry eye, we're very well positioned with our sustained family. So.
I would take that into account from a revenue perspective, the one caveat I would add is the comment around equipment.
Don't think equipment is going to run it hot next year as it did this year because I don't think refractive stayed at those levels. So, but nonetheless, that's how I think about.
Do we think about revenue now when you go to gross margin in my inflation comments I do expect to see some gross margin pressure year over year next year I mean, we like everybody else. We continue to see pressure on raw materials. If you think about resin if you think about it.
Electronic chips that continues I think freight pressures continue labor wages continue to be pressured. So we would expect to see some gross margin pressure next year year over year.
If you think about R&D just.
Just to keep going through the P&L.
Said, 7% to 9% we have been running at the high end of that range. I think next year now that we've not I don't want to say caught up but just given the profile of our innovation pipeline I would expect that to be more at the midpoint in that 7% to 9% and then SG&A as we've continued to say I would expect to continue to get some nice operating leverage I mean, if you look particularly on the if you look.
At the G&A side of the house, I mean, theyre going to be modest increases in that given all the transformation work. We've done and then obviously, we will invest behind the markets that are growing.
So that's how I would keyed up and then the only thing I would say on top of that is looking at FX. If you just look at the rates as of last Friday and compare that to two.
If you take the average rates for September year to date, I mean, all of the currencies are moving and you've got.
The year. The dollar has strengthened a couple percent versus the euro it's roughly two years to 3% versus the pound, it's 4% versus the yen. So.
Assuming rates stay at those levels, we would expect to see that type of pressure going forward into 2022.
And as far as 2023, we feel very comfortable with.
The guidance that we gave at capital markets day, and reaching the commitments in both 'twenty three and 'twenty five.
That's a very comprehensive answer thank you and that might be if I can just sneaking a quick one.
David that's often vehicles about.
And just in the acquisition here.
I'm just curious to understand why you decided to buy this business. When you could have arguably acquired the market leader with four times the revenue.
Just share with us what it is about this business, particularly appeals.
Well look I mean this is one of the things we've thought a lot about is as you know because we've been in this space a number of times.
As is where is the market need and I think this particular product I mean, there are various folks have done a terrific job with the data that they've created with the safety of this product and importantly, this is a uniquely effective product and we've always thought I've always thought that with the space that needs to get filled here is something that is.
Effective over a long haul and when you think about the data that they're showing which is 65% of patients medication free at five years. This has got a demonstrable efficacy that we think is very powerful and I think if we put our muscle behind that put some more data behind that.
Give that the commercial footprint that we have we think that this has got a lot of runway and so.
Thank the opportunity here is.
Per dollar paid if you will I think there's just a better value.
Okay. Thank you.
Our next question comes from the line of Veronica.
Got it.
From Goldman Sachs. Please proceed with your question.
Good morning, guys and thanks for taking my questions two please.
One just on that Io al PCI, while momentum David I was hoping you could talk about to what extent that growth that we saw in the quarter is being driven by the <unk> versus <unk>.
And maybe just give us a little bit of flavor for the type of market share that you've seen with <unk> in Europe and kind of how you think that an apartment units going forward.
And if I can't necessarily interpret your comments on the continued higher penetration and uptake.
<unk> I think I ask you. This question every quarter, but just your degree of confidence that that continues as we move into next year hesitant.
Has it increased or decreased.
And then my second question is a bit of a financial one for Tim Tim just thinking about the bridge from that 'twenty, one margin to that 2023 margin would love to get your thoughts to what extent do you think that margin progression of <unk> 22 versus 2023 weighted.
Is this an even keel.
Or should we be thinking about some elemental thinking, especially in the context of beta asset swap.
Hey, Brian good to hear from you listen on the on the <unk>.
Look the EBIT product on a growth rate basis is growing really well and obviously, it's growing fashion and Penn optics, because it's wrapping around on a really tiny number.
Panoptic still growing nicely to be fair double digits, but I think what we're seeing really is is what we said before which was youre going to see as Penn optics peaks. It comes over and starts wrapping around on all the launches that it's had that it's kind of settles down and then <unk> becomes really that next booth.
<unk>, if you will for us so we're.
So we're excited about what we see with <unk>.
We are excited about the utility that we see with <unk>, there's a lot of surgeons.
Doing a lot of.
Kind of important things I think enable to treat patients without this halo and glare that is bringing patients for example from.
Bonnell focal toric.
Multifocal Toric and that's that's a big move right because if we can upgrade our toric business, two multifocal toric really pretty risk free.
I think thats, a really nice opportunity that seems to be a big part of the visit growth for us right now.
But I would say that.
Our share growth in <unk>.
Around the World has been mostly at this point is being driven mostly by devotee panoptic pretty stable slight growth. There are several markets yet to launch <unk>. So you again I think what we saw in patent optics for about 12 to 18 months is what we'll probably see with Vivek for about 12 to 18 months, which is as it wraps around on its prior year will get steady launch.
As around the World, we still got to get it into Japan, We still got China to go we've got a couple of other markets. We haven't got the toric out yet in a couple of markets. So we're we've got.
More I think share to have to have you had but my point on penetration has been.
But look I mean, there's going to be competitors to us we've got a very high share right. Now. So we don't expect that that's the main driver of growth going forward. So your second question makes tons of sense, which is we are excited about what we see right now with vivid in particular, we think there is some additional patients coming into the <unk> business and that's a little bit about it.
I said before with <unk> and mono focal toric converting into patients now that are interested in doing this because lack of.
Halos and glare.
Or at least the very similar profile. It has the amount of focal I think thats really what it is that the confidence I have around it is a little bit tough because I feel good about that it's definitely driving greater penetration right now, but I would be careful with it because again right.
Right now the penetration rate has a denominator that lacks a lot amount of focus in it. So if you look around the world. We're still recovering internationally in particular, so there's millions of procedures that were not done, let's just pick India, Brazil, Russia, a bunch of other kind of developing.
Countries, where when you add back all of those units to the denominator I think.
Current penetration rate, which is pretty high.
Probably come down a little bit so we're waiting to see the market stabilized, but I think what's fair to say because we see it with individual surgeons is year on prior year inside of individual surgeons markets. We see there they are individual penetration is growing.
And we know we're not losing surgeons that direction. So I think we feel confident that it is growing the durability of it we'll have to see.
<unk> of it again I think is still jury is still out on but again we're of the mind that this is the right thing to be thinking about and tracking.
Hi, Veronica and on the margin profile I would say our story is still the same it's that margin improvement is really roughly 80% driven by operating leverage and call. It 20% driven by gross margin improvement. So I think from that from an operating leverage perspective.
Should be relatively linear because again revenue is really going to drive that improvement. So as we continue to grow at mid single digits and keep our cost base at inflationary type levels that should go over that should move in sort of a linear perspective on the gross margin perspective, I think the view is there is probably a little bit more improvement in 'twenty three.
As compared to 22, and Thats really driven by two things Im not sure how long. This inflationary pressure is going to last I am not sure we will see as much pressure in 'twenty three as 22% or 21, we will have more time, obviously to put in mitigating actions and what have you see how the market responds.
And then you have less pressure on the PD one.
Line installations in 'twenty, three as compared to 22% and 21. So that's how I would see that progression and then as far as Ive answers. If you recall our capital markets day. The guidance. We gave did not include.
Any acquisitions so we.
We feel very good about the 'twenty three 'twenty five commitments.
If I have anthos isn't really material enough to impact those when you think about the longer term.
Wei.
Okay.
Thank you guys.
Our next question comes from the line of Larry <unk> with Wells Fargo.
With your question.
Good morning, Thanks for taking the question.
So David just one on advancing.
Are you guys. It sounds like you guys think you can grow the product from here from the $60 million despite the reimbursement change.
In 2022 and.
And beyond and any color on the U S or U S. A breakdown of sales.
And Tim.
Could you just help us quantify the FX headwind this headwind in inflation in 2022, thanks for taking the questions.
Yeah, Larry on the I've asked yes, we believe we can grow the product long term I think.
We were very well.
We're very aware of a number of situations.
We wanted to see resolved before we got.
Into an acquisitive mode with <unk>.
The CMS ruling was one of them and as you know that settled out last week. It was it was very.
Improved from the very difficult price they gave us at the beginning.
But again it is going to have some downward effect on what was I think a low to mid teens growth rate on the market.
That said again, we think the market continues to grow and we think this product in particular can gain share so as we see it.
The market is a fast growing market, where with the right amount of energy on this product and the right amount of messaging and frankly, the great amount of data the team at <unk> has pulled together for us.
We're excited about what we can do with it and we'll see how that adds into it and this is right in our wheelhouse right I mean, we're in surgery everyday with these surgeons doing this procedure.
This is <unk>.
Two easy and important.
Kind of add to our our service to the surgeons and on the <unk> U S sales the way to think about it is it's just it's predominantly U S sales right now there's not a significant amount of O U S. Right now we look forward to trying to change that but we'll work principally on reimbursement first before we get very far out.
Again, a bunch of sales folks out there we're going to work through that and again I think they are in five countries right. Now as you know we are thinking about a lot of other markets than that yes.
And as far as the.
Some of the quantification is Larry I'll start with FX.
I rattled off some of the currencies that had been increasing I mean, if you were to take the entire bucket of the currencies that really matter.
It could be two or three points.
And but again thats as of rates as of last week, and we're just going to continue to monitor those.
As we progress through before we give guidance next year on the inflation front, it's I'm a little bit hesitant to say because again, we have we are pricing actions out there we have our manufacturing guys driving a bunch of productivity initiatives that we're still shaping up. So that's one we're going to continue to monitor I would expect to see some pressure.
But we'll give you some more color when we gave our guide next year and as far as I vantage it'll put some slight margin rate pressure I mean, I would think about take the $60 million in sales and grow that whatever you think is appropriate next year and there won't be a lot of core operating income with that so that will give you some rate.
Pressure.
Thank you guys.
Our next question comes from the line of Daniel <unk> with <unk>. Please proceed with your question.
Thank you so much gentlemen.
Two questions the first one.
Maybe on the vision care market.
Pretty nice to see that we're.
While it can be good marching into Q3.
Obviously, you are all welcome barrel capacity.
Capacity additions in Hong Kong.
Margin too.
Ken.
Q3, like <unk> going into 2022 vision cancer community.
With Todd and show rising margins.
And then the second question on the one offs.
This one impairment in the amount of $178 million.
We find them a bit more lumpy sports related and also you have 60 million EBIT.
Thanks, Deb copper and.
It comes to the needles.
You very much.
Sure. Thanks for the question Danny Yes, as far as vision care margins, we were pleased with with Q3 we.
We continue to make progress I would caveat that though that.
Q3 is impacted by seasonality. So we had a very strong revenue performance and some of that is driven by if you think about.
Allergies or allergy season, as an example, we have a heavier.
Revenue mix in Q3 as compared to Q4, if you look at the back to school programs that we wanted particularly in the U S. That gives you a stronger Q3 as compared to Q4, so operating leverage is driving a significant amount of that improvement, but nonetheless.
We're very pleased with with how the vision care business is performing from a impairment perspective, yes. We did impair we had a surgical asset that we had purchased in 2017.
And as you know given the portfolio that we have.
We manage all of our assets all of our investments.
On a continuous basis and given some of the successes we've had in other pieces of the surgical business, which is where this asset was.
We decided to suspend our R&D and any potential commercialization. So we did take an impairment.
That was $178 million that is a onetime noncash item and then lastly on the.
The legal provision, we don't really comment on an outstanding.
Legal cases, so what I would say is every quarter, we look at the legal landscape and we look at the balance sheet and we provide provisions to make sure that we are adequately covered and we feel like we're adequately covered in Q3.
Okay.
Okay.
Sure.
Multi word.
Yes.
I'm, sorry, what was that.
He was asking about.
Look again.
Again on the legal stuff, we look at it every quarter, we aggregate it and then look at our risks and we make an appropriate provision. So that's what we've done.
Okay. Thank you so much.
Our next question comes from the line of Cecilia furlong with Morgan Stanley. Please proceed with your question.
Okay. Thank you for taking my question two questions and ask them both upfront.
Just in terms of new fits I'm curious if you could talk a bit more about what you saw in O U S markets during the quarter as well as your outlook going forward from a recovery standpoint, and then also just between total 30.
And ramping <unk> can you talk a bit more about just how youre thinking about balancing those two and your comments on ramping manufacturing lines into 2000 and thank you.
Yes, so new fits right now are going quite well for us.
I'd say in the U S. We continue to make a lot of progress, particularly.
Particularly in the dailies that <unk> brand, new so we don't have a lot of data to give you on that one but <unk>.
Precision one has done very well <unk> is also.
<unk> continues to do well for us.
Outside the U S. It's a bit slower and I would say that.
What we've seen is that the markets really have new fits.
Into the office had been down and remained down, particularly Japan, which is our second largest market.
Europe has gotten a little bit better.
Slowly working its way back, but as you I think you are correctly pointing out you need to be in a situation, where new patients are coming into the office and <unk> patients who are having trouble with their current lenses are coming in and looking for some alternative and so as the market comes back in those in those areas and I think we believe that.
Vision care International business will largely be back to the 2019 levels.
Beginning of the year.
Again, I think that's really positive for the new fits for new products, but I do think that we've been trailing our trajectory in the U S. Because the the new fits really arent there yet so, but we'll get there and I think what we see which is encouraging is is that when we get these products into the hands of patients an optometrist they are really perform.
<unk>, well and so people really like.
Our precision one for Stigmatism, they really like the precision one sphere.
Our GT one for Stigmatisms got great reviews in the U S same thing with <unk>, both in Europe and in the.
And in the U S and so we are working through all of those and obviously, we look forward to a more.
Normal market next year, where we can get a little bit more share outside the U S.
I would say on the ramp up of manufacturing we are in a good place. We did we've had a greater than expected demand for precision one and so we were a little bit off guard with how well <unk>. One astigmatism did and we did have sporadic back orders around the U S and we've had to delay some of Rollouts.
Because of that but it just took off on us and so the good news is we're getting a great reception.
Some nice movement on that product.
But what we do need to do is really look at now what do we expect from these products and do we need more lead time and.
Do we need more machines, what are we going to do about it. So I think we're working through that now again I don't anticipate any major changes per se, but but we may want to invest a little bit more manufacturing for next year. So we'll see.
Okay. Thank you for taking my question.
And ladies and gentlemen, as it reached the top of the hour we have time for one more question.
<unk> leads us to the line of Jeff Johnson from Baird. Please proceed with your question.
Thank you good morning, guys. Thanks for squeezing me in David just on that contract one point.
Good to hear primarily your expectations, what youre seeing for trade ups versus trade downs from <unk>. The trade downs trade ups from ACP in some of the other older focused products number one and number two.
Let's say you grow a couple of points above market in the contact lens market over the next couple of years do you think that will primarily be driven by net kind of trade up benefits within your own portfolio or do you expect that you would also be taking unit or patient share on ice share. However, you want to think about it relative to competition.
Yes, a little bit of both Jeff I mean, I think let's start with the cannibalization question.
We expected to have some cannibalization with PD one.
Of the ACP in particular.
In truth, I think the DCP has been a little bit more stable than we expected a DP one was probably a little bit more than we expected, but directionally. All in value change was was pretty much as expected. So I would say the mixed might've been a little bit different than we expected.
We're also working hard to.
To make sure that people really understand what these products are in their proposition and I think as we get <unk> one of the reasons, we pushed <unk> toric.
Add a little bit sooner than maybe we had wanted to.
Because <unk> toric took off on us and that put some pressure on DT one because the total one product obviously, great product, but we didn't have a toric for it. So we were seeing a little bit of <unk> into <unk>. So now that we've got the toric out there again that stabilizes our premium product now we've got a foot when we've got both the <unk>.
<unk> and <unk> toric.
Out there so we've got a middle market product and again that line that lineup seems to be doing quite well for us going forward.
Over time, if you look I think there's a lot of trade up going on between reusable and dailies. That's gone on for years and I think one of the really great things about the vision care market is it.
Isn't fast moving or it isn't it's steady and strong and so youre seeing a very fundamental share.
A shift from reusable stood dailies, which is going to continue.
I think that drives value growth, even in a market where EQ growth would be.
1% ish, maybe 2% on a <unk>.
Good day, so I think that we expect to see some competitive share for sure but we.
We don't have to go steal share from everybody in this space too to grow nicely in the.
In the mid single digits or higher so I think thats the beauty of what we're doing right now the other piece of this of course is that our reusable business is under underrepresented in our share position as one of the earlier questions came to us and so as we think about that.
We actually think we can gain share the reusable space pretty easily, particularly with this technology and that margin profile is a good margin profile for us right I mean, thats a much better.
Margin than the dailies margin, albeit.
Lower growth market. So if we can gain share improve margin there and then gain revenue and maybe a less attractive margin, but still positive.
We've got a good mix going and I think thats, how we see moving forward remember too that when we go to the to the specialty lenses toric in particular, that's the sweet spot of this market right now growing very quickly in the silicone hydrogel space and at a premium price to the sphere. So again I think we're well positioned to grow for a good.
At a time here.
Understood and a quick follow up it's been a little fight here recently, maybe that's a good thing, but haven't heard any updates recently on Pvp in China.
Any timing updates there or any kind of way to look at public versus private mix within your business just how to think about exposure.
And if there is a timeline to think about when that exposure might have to be factored into the model. Thanks.
Yes, I mean, I think China has obviously.
Gone down this path for some time.
The <unk> was implemented on a provincial level in most of the most of the provinces at this point in October there was probably only one VB Pete tender I think it was a joint tender for two provinces, but.
In previous I will <unk> the ATL some of them included HOS, but mostly they were having price impacts on our amount of focus on the amount of focal business and we are I would say underrepresented in the public mono focal business generally so we're kind of overrepresented in China tends to be in the private.
<unk> business. So again I don't really have a split for you, but I'll just tell you that directionally.
<unk> of our money is kind of in the private sector <unk> business stuff look there is some crossover impacts here that we're watching very carefully but again I think directionally, we probably have less exposure than some.
Thank you.
And we have reached the end of the question and answer session.
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Thank you for your participation.
Yeah.
Okay.