Full Year 2021 Alcon AG Earnings Call
Hello, and welcome to the alcohol fourth quarter and full year 2021 earnings call and webcast. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded its now my pleasure to turn the call over to Karen King Senior Vice President head of Global Corporate Affairs.
Investor Relations. Please go ahead Karen.
Welcome to <unk> fourth quarter and full year 2021 earnings conference call yesterday, we issued a press release interim financial report and annual report as well as posted a supplemental slide presentation on our website to enhance today's call.
You can find all these documents in the Investor Relations section of our website at Investor that Alcon Dot com.
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 occur.
Accordingly, you should not place undue reliance on any forward looking statements.
Important factors that could cause our actual results to differ materially from those in our forward. Looking statements are included in our annual report and our earnings press release and interim financial reports on file with the Securities and Exchange Commission and available on the SEC's website at SEC Gov.
Non 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 in other companies.
These non <unk> financial measures should be considered along with but not as alternatives to the operating performance measures as prescribed per I FRS.
Please see a reconciliation between our non <unk> measures with directly comparable measures presented in accordance with ISR us in our fourth quarter and full year earnings presentation, which can be found on our investor Relations website.
As a reminder for discussion purposes, we're providing comparisons of 2021 versus 2019, unless otherwise noted as we believe this is more operationally meaningful since our results were impacted by the pandemic in 2020.
You will find the summary of results comparing 2021, 2020, and 2019 and our slide presentation and a comparison of 2021 versus 2020, and our press release and financial statements.
This is the last quarter, where we will provide comparisons against 2019, starting in the first quarter of 2022, we will resume year over year comparisons in all our earnings materials.
As usual our comments on growth are expressed in constant currency.
Before I turn the call over to David I want to introduce you to Alcon, New VP and head of Investor Relations, Dan Cravens, who started last week and is joining us on today's call. We're very excited to have Dan onboard he brings deep investor relations and financial experience to Alcon He will be.
Your day to day contact once he gets up to speed and we will be introducing our future earnings calls starting with the first quarter of 2022.
With that I'll now turn the call over to David.
Okay, Bill Com's fourth quarter and full year 2021 earnings call.
Let me begin by recapping, our highlights for 2021 in recent months, including market dynamics and key product launches.
My comments, Tim will discuss our fourth quarter and full year performance and then give some color on 2022.
Then I'll wrap up with some closing remarks, and we'll open the line for Q&A.
221 was an exceptional year for Alcon, we exited the year with fourth quarter sales of $2 1 billion full year sales of $8 2 billion, which was at the high end of our sales guidance.
As a result of strong demand for key products and new product launches as well as solid commercial execution.
Core operating margin was 16, 3% for the quarter and 17, 6% for the full year right in line with our guidance.
Finally core diluted EPS for the quarter was 56.
And $2 15 for the full year.
Additionally, despite our continued investments we generated $645 million in free cash flow for the year.
So as I reflect on full year of 2021, and I'm extremely proud of all that we've accomplished.
First despite the ongoing pandemic and broader economic pressures are full year 'twenty one results demonstrate the resilience of our business the strength of our innovation.
Proficiency of our commercial teams and our long term commitment to focus on growth.
Since then we've aspired to grow above the market drew.
Driven by delivering great products that address key customer needs.
In 2021, we did exactly that by growing share in some cases growing the market our product flow in mix has resulted in double digit revenue growth in both our surgical and vision care franchises, which drove core operating leverage and margin expansion.
Second we completed our separation, which was a major milestone as a new independent company.
This has allowed us to intensify our focus on innovative products that are critical to driving topline growth.
Third we're seeing favorable returns on our investments our.
Our investments in transformation.
Are you factoring in innovation.
Our transformation initiatives continue to optimize our cost structure, creating efficiencies and savings that we are reinvesting in innovation to support new product launches.
Our investments in our new contact lens manufacturing platform has given us the flexibility to launch a host of new products over the past two years, all of which are well positioned to capture share.
And our commitment to funding our innovation engine is producing a strong pipeline of new products.
Which were developed with our customers in mind and are addressing unmet patient needs.
Now I'll spend a few minutes updating you on some of those innovations.
In surgical we remain the market leaders in presbyopia correcting <unk> on the strength of both Penn optics and <unk> and.
Penetration of this technology lenses continues to increase.
<unk> non diffractive properties ease of use and consistency of surgical outcomes make it a particularly appealing.
Existing surgeons are increasing their use of advanced technologies upgrading patients from a mono focal toric multifocal toric, we're using video on patients who they would've previously excluded from an agi well due to a prior pathology or concerns with halos and glare.
We're also excited to add hydrogen microstat to our portfolio of implantable devices.
<unk> represents an exciting opportunity in the large and fast growing mild to moderate glaucoma market.
Physicians appreciate the strong and compelling safety and efficacy data from the pivotal trial showing that 66% of patients were medication for years to five years.
And a 61% had a reduced risk of invasive secondary surgeries compared to cataract surgery alone.
So on equipment, we continue to see strong reception for our suite of cataract equipment, including our FICO equipment microscopes and Argos Biometer.
We're also piloting our smart cataract planner, which is part of our broader digital ecosystem with select customers in the United States.
Turning to vision care, we continue to see strong demand for procedure, one and precision one for astigmatism, which are our newest contact lenses for the mainstream market.
Simultaneously, we're also building out our total brand in the premium segment.
We announced the broad commercial launch of dailies total one for astigmatism, United States, which has been eagerly anticipated by eye care professionals and completes our dailies total one portfolio.
We also announced the broad commercial launch of total 30 sphere in the U S and in some European markets. This is the first and only monthly contact lens leveraging the water ingredient technology first introduced on dailies total one.
This lends addresses the large 4 billion reusable market as the first meaningful innovation into this market in years.
And finally in ocular health, we were pleased to announce the recent launch of sustained complete and a multi dose preservative free format, our third multi dose preservative free offering in the past 18 months.
During the second half of 'twenty, one we built a U S sales force dedicated to delivering eye drops into the ophthalmic channel.
This sales force is now in place and has a robust portfolio to sell including some brynza glaucoma drops are sustained family of dry eye products and our <unk> allergy drops.
Now moving to our end markets by franchise.
In surgical global cataract procedures in the fourth quarter were down low single digits over 2019. However, if you exclude India, which has been slower to recover from the pandemic global procedures in the fourth quarter were up low to mid single digits versus 2019.
Growth in the U S market remained relatively consistent with prior quarter.
Growth in international markets, we're still slower to recover.
A solid sequential improvement over the third quarter.
Against this backdrop, our implantables business continued to outpace the market driven by our strong <unk> performance.
In vision care, the contact lens market in the fourth quarter broadly return to the 2019 levels and grew high single digits led by the U S.
Growth rates in international markets are still trailing behind us due to very paces of market recovery.
However, our contact lenses significantly outpaced the market driven by strong performance of precision one the precision one for astigmatism.
Our full year 'twenty, one performance demonstrates the durability of our markets and the resilience of our business all of which are underpinned by favorable macro trends.
Our strategy of investing behind markets with high growth opportunities for high share opportunities is playing out nicely and.
And we are creating innovative products that are addressing customer needs and using the expertise of our commercial organization to successfully execute on our new product launches.
As a result, we're growing faster than the markets around the world even as they continue to recover.
With that let me pass it to Tim who will take you through our financial results.
Yeah.
Thanks, David and the fourth quarter, we saw sales of $2 1 billion up 15% versus 2019, driven by 15% growth in surgical and 13% growth in vision care.
Full year sales were $8 2 billion up 12% versus 2019.
Implantable sales were $416 million in the fourth quarter, an increase of 27% versus 2019 as.
As David mentioned, our <unk> portfolio continues to lead the market and we saw strong atol adoption trend continue through the fourth quarter on.
On a full year basis, and <unk> sales were up 27% versus 2019.
Consumable sales of $639 million in the fourth quarter increased by 8% versus 2019 with sales growth, mainly driven by market recovery.
On a full year basis consumable sales were up 3% versus 2019.
Equipment and other sales were $204 million in the quarter up 21% versus 2019.
Approximately two thirds of the growth was due to strong sales of cataract equipment, which included competitive conversions upgrades from older to newer generation of equipment and surgeons, who are expanding their <unk> to accommodate patient flow.
On a full year basis equipment and other sales were up 21% versus 2019.
In vision care fourth quarter sales of $875 million grew 13% versus 2019.
Contact lens sales were $533 million in the quarter up 16% versus 2019.
We were very pleased with the strong interest in our daily lenses, including precision one and precision one for astigmatism as well as continued growth from dailies total one.
Total 30, our new premium Si Hy reusable lens is also starting to take foothold in the United States and Europe , where customer feedback has been very positive.
On a full year basis contact lens sales were up 7% versus 2019.
Ocular health sales were $342 million in the quarter, an increase of 10% versus 2019.
This is primarily attributable to a sustained family of dry eye products, which saw another quarter of double digit growth, including our recently launched multi dose preservative free formats.
We also saw solid contributions from patent allergy drops and some brands that glaucoma drops which had no comparable sales in 2019.
On a full year basis ocular health sales were up 14%.
Versus 2019.
Fourth quarter core gross margin was 52, 8% about 60 basis points ahead of 2019, mainly driven by higher sales and mix.
For the full year core gross margin was 63, 4% in line with 2019.
Core operating margin was 16, 3% in the quarter.
In line with our comments during our last earnings call, we increased spending in marketing and sales to support new product launches and key products.
For the full year core operating margin was 17, 6% an increase of 70 basis points versus 2019.
The core effective tax rate was 10, 4% in the quarter.
<unk> rate is primarily due to the mix of pretax income across tax jurisdictions and a recently concluded tax deduction of statutory expense in Switzerland.
For the full year, the core effective tax rate was 17%.
Core diluted earnings per share in the fourth quarter of 2021 was <unk> 56.
Up 11 versus the fourth quarter of 2019.
This was driven by strong revenue growth and a favorable core tax rate.
For the full year core diluted earnings per share was $2 15.
Up 26 versus 2019.
Now I'll touch on a couple of cash flow and balance sheet items.
Free cash flow in 2021 was $645 million compared to $367 million for 2019.
Higher core operating income and lower separation spend were partially offset by higher capital expenditures and increases in inventory primarily to support new product launches.
Capital expenditures was $700 million for the year up from $553 million in 2019, primarily due to the timing of spend for our contact lens manufacturing expansion.
Given the strong reception to our new contact lenses, we are increasing the number of lines in our new manufacturing platform to meet future demand as a result, we expect capital expenditure this year to remain relatively consistent to full year 2021 on an absolute basis.
Transformation costs were $28 million for the fourth quarter and $68 million for the full year.
Life to date transformation costs were $169 million and we have recognized close to $200 million of cost savings, which has been reinvested back into the business to support product launches and R&D.
We expect to substantially conclude the transformation program by the end of 2023.
To summarize the year, despite the headwinds we face we feel very good about our achievements in 2021.
All of our major initiatives remain on track we completed separation.
Our advancing our transformation and our new manufacturing platform is delivering innovative products that are experiencing high demand.
Our products are growing ahead of market and we have a robust pipeline for future growth.
Now turning to 2022 guidance starting next year, we will revert to a year over year comparison of our results aligned with our press release and interim financials.
So on our next earnings call, we will compare first quarter of 2022 with first quarter of 2021.
While we are monitoring the variance of COVID-19, and most recently omicron with the improved adoption of safety measures and the availability of vaccines. We are encouraged to see solid return of demand for surgical procedures in eyecare.
Our 2022 guidance further assumes that global markets grow over 2021 in line with historical averages.
The impact from inflation moderate in the second half of the year.
And the U S dollar hold steady at mid January foreign exchange rates.
Accordingly, we expect 2022 net sales of $8 7 billion to $8 9 billion.
Which corresponds to 7% to 9% constant currency growth over 2021.
We expect to see approximately 100 basis points of pressure from foreign currency.
Turning now to expenses, we're going to continue to invest in innovation and expect core research and development expense to come in around the midpoint of our previous range, which was 7% to 9% of sales.
Based on our sales trajectory, we expect operating leverage to drive a core operating margin of 18% to 19%.
We continue to see inflationary headwinds related to raw materials freight and labor.
And while we are actively working to mitigate these challenges through selective price increases and productivity initiatives. We have built in approximately 40 basis points of incremental margin pressure in our 2022 guidance.
Moving down the income statement, we expect interest and other financial expense to increase to a range of $180 million to $190 million given the current environment on interest rates and foreign exchange.
We also project our core effective tax rate to be in the range of 17% to 19%.
Based on this we project core diluted earnings per share in the range of $2 35.
To $2 45.
Which corresponds to 13% to 18% constant currency growth over 2021.
We expect to see approximately 400 basis points of pressure from foreign currency.
Before turning back to David I'm also pleased to report that our board of directors is proposing a dividend of <unk> Suisse <unk> per share, which is in line with our payout policy of 10% of previous year core net income pending shareholder approval.
Shareholders will vote on this proposal at our upcoming annual General meeting on April 27.
Now I'll hand, it over to David for some closing remarks.
Thanks, Tim in closing, we're very pleased with our full year 'twenty one results.
We demonstrated the resilience of our business. Despite market is still recovering from COVID-19, we completed our separation on time and on budget, we progressed with our transformation program optimizing our overall cost profile and reinvesting savings into new product launches and R&D.
We continue to invest in research and development, securing a robust pipeline that will drive future growth.
We installed lines aligned with demand on our new contact lens manufacturing platform.
We announced two deals that enhance our glaucoma portfolio, one which allowed us to build a broad portfolio of eye drops for the ophthalmic channel.
And the other giving us a reentry into minimally invasive glaucoma surgery.
We're launching innovative products, which are gaining share and increasing adoption driving double digit growth across both our surgical and our vision care franchises and importantly, we're creating shareholder value.
So as we enter 2022, we have a substantial momentum and believe we can continue to outpace the market with the full year benefit of our innovative products.
I want to thank our 24000 plus associates for all their hard work and dedication to helping everyone around the world see brilliantly with that let's open up the line for Q&A.
Thank you, we'll now be conducting a question and answer session. We ask you. Please ask one question and one follow up then return to the queue, if you'd like to be placed in the question queue. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from the queue.
Once again Thats star one to be placed in the question queue and we ask you. Please ask one question. One follow up then return to the queue. Our first question today is coming from Zach <unk> from Jefferies. Your line is now live.
Hey, Thanks for taking the question congrats on a great quarter just one on.
On the <unk> space in the past you've called out the share that you've held for.
The ACO space can you give an update on that and how pan optics performed in the quarter.
Yes.
Yes, we had a good quarter with Penn.
Penn optics and ability.
The total share I think came down.
A point or two in the quarter I can't remember exactly the number but it's it's running right around 80%.
In the United States and in the international market I think it was actually up.
If you could check that number and get back to you, but directionally I would say, we're holding share from a very high position, so really fairing quite well against the new product flow that's come in.
Got it thanks, and then one on.
On the contact lens manufacturing upgrades, how many lines are put in place during 2021 and what is the expected margin benefit as we can.
We move forward here can you just talk about that.
Yes, we've shied away from giving a lot of detail on the number of lines because it speaks to the capacity and we're trying to keep that a little bit to ourselves.
But I think in terms of margin progression, Tim once you grab that one.
Yes, I think what you'll see is we had another good year of investments and putting in lines, we will put in more in line this year.
So that will continue to put on sort of near term pressure on the vision care gross margins because again it takes roughly 18 to 24 months the adjusted for those to get up to optimal capacity.
So I would just think about it as you know over the next couple of years in the vision care business will continue to get operating leverage as we've done in the past and then that gross margin expansion will come in the latter part of the plan.
I think what we're excited about there is a 16% growth in the quarter on contact lenses and again I think we're seeing tremendous response to the choice of products, we've decided to build on these lines and so obviously.
We're excited about that we're going to continue to invest behind it.
Got it thanks, Thanks for taking the question guys.
Thank you. Our next question is coming from Veronika <unk> from Goldman Sachs. Your line is now live.
Hi, guys. Good morning, and thanks for taking my questions I wanted to start kind of big picture around the guidance, obviously and two parter, if that's all right one.
I'd love to understand what you think the big variables are in terms of ending at seven or nine in terms of the growth rate and where are you Sir.
The biggest upside opportunity and then maybe challenge you a little bit I noticed that you are assuming historical market growth.
In 2022, clearly not every single market had we have already in the course of 2021.
So just maybe talk through the rationale for.
Putting that it is a baseline at this stage.
Well I think you've nailed the biggest variable which is the market.
And so I think.
It's hard to know exactly what's going to happen and so perhaps we are a bit on the conservative side with mid single digits, but I think the the view that we have is that.
There's going to be some wrap around on some softer quarters, but again were not all the way back yet either so if you look at the market in the international markets in particular.
India and a number of other big markets, Japan are are really not back to normal it's going to take them a little while to get there and again I don't know what that rate is now Europe bounce back nicely I think in the third quarter for surgical which was very exciting in vision care surprisingly strong in the fourth quarter.
Up low single digits, which again, we hadn't seen or expected but.
So I think kind of natural growth rate. If we can get it is a pretty good safe place to be and we're going to do well from there could it be higher than that we will see but we also don't know that there isn't going to be another variant that there isn't going to be some delay in.
Markets coming back and I would say, particularly our international side.
Understood that's helpful and then.
Quickly on contact lenses, just if you can clarify any stocking or destocking that that happened in the fourth quarter that we should bear in mind.
And I know you've talked about hoping to put through some price increases on the sell side to help you compensate for some of the raw material increases that youre seeing just with the left to get an update on how thats gone and whether you've been able to realize some tailwind there.
Yes.
On the stocking there was some stocking by some of our competitors as I understand it we didn't do any but I would say that that had some effect on the market. It was quite a robust fourth quarter contact lens market I think probably a little bit of that is some competitive activity.
On the pricing piece, we have.
Put out a price increase late last year that goes into effect in February . So it's just an effect now and we're still seeing how that takes to be honest, we're waiting to see the consumer reaction to that in.
We have a number of things that go on as you know we have a direct price of course, we are a discount to the to some of the change <unk> customers and then of course, there's always the consumer rebate piece of that is in play here as well. So we're we're toggling all of those little.
EQ switches, if you will to see if we can't get the right mix.
To maximize return here, but that's really we'll be doing that probably will be fiddling with that probably through the.
The rest of this quarter.
I understood. Thanks, David.
Thank you. Our next question today is coming from Larry <unk> from Wells Fargo. Your line is now live.
Good morning, Thanks for taking the question and congrats to a strong end to the year.
One on the sales and EPS cadence for 'twenty, two and one of the the long term operating margin.
Maybe Tim can you talk about the cadence for sales and EPS in 2022.
Q1 sales are usually down low single digits is that your expectation given the omicron surge and I'm talking quarter over quarter.
And how does inflation and FX play into the cadence you're thinking about that one follow up.
Yeah sure. So I would just say this I think from a let's start with revenue from a revenue perspective, as you said Q1, and Q3 tends to be a little lower for us in general Q.
Q2, and Q4, a little bit higher if you think about Q2 allergy season, and as an example, Q4.
Hospitals are working on their capital budgets annual co pays are being utilized by customers. So I would expect to see a similar type of profile in 'twenty two as compared to 21 SG&A is a little bit trickier.
We had a low spend in Q1 of last year, we werent quite sure how the markets were coming back so we're a little bit cautious there.
And then I would just keep in mind Q2, as you know typically are particularly on the vision care side advertising promo as a little bit higher as we get ready for back to school and whatnot. So.
SG&A I think is a little bit trickier as far as inflation youll see more inflation inflationary impact, which obviously will impact your EPS.
In the first half of next year again, our assumption is that eases in the second half when we look at <unk> and we look at our inventory positions and what have you to come up with that assumption, but that's the assumption that we've assumed as we talked about in the prepared remarks, and then FX youll see more pressure in FX in the first half of next year of this year.
As compared to the second half and if you just go back the dollar really moved and kind of the summer timeframe in 2021. So that's that's why the profile looks like it does so those are the things I think about it is you're trying to phase out.
Very helpful and then another one for you Tim.
Guiding to about 100 basis points of operating margin improvement at the midpoint.
Believe and Thats absorbing it FX headwind and and and inflation headwind how are you.
Are you feeling about the low 20% operating margin goal in 2023 that you laid out at the capital markets day, that's a pretty big jump from call. It 18, 5% at the midpoint of the 2022 Guy Thanks for taking the question.
Yes, yes, Larry we still feel very good about about the goal in 2023 and I think.
It's going to be a lot of the same I think we're going to continue as we continue to grow revenue revenue, which we expect to do we're going to continue to get operating leverage.
And then I think in 2023 as compared to 22, we should get a little bit of gross margin lift again, we've got some inflationary pressure on other things going on this year that should get a little bit better.
So I think it's I think it's more of the same to be quite Frank with you.
Thanks, a lot Tim.
Thank you. Our next question today is coming from Matthew <unk> from Keybanc capital markets. Your line is now live.
Hey.
Excuse me good morning.
I'm just trying to understand the organic component of the guidance.
We're estimating about 100 basis points of acquisitions.
Underlying with 79, which was organically by six to eight first question is is that math.
Correct and when was this the second question is how do you put the 6% to 8% growth in the context of your.
The longer term.
Four to six mid single digit market.
Four to six guidance what are the tailwind driving above average growth this year and maybe what are some of the headwinds you see moving forward that bring that back down.
Let me take the second part of that first and then I'll, let you guys take the year over year comparison without without the acquisitions.
I think on the.
On the sales growth one of the things to think about is of course that.
The markets haven't fully recovered and you're wrapping around some COVID-19 affected market. So.
We're talking about a directionally a mid single digit market growth for this year, that's a little bit hotter than what we would typically call the.
Surgical procedures market. For example, we've typically said that surgical procedure market is kind of runs around 3% ish.
We are seeing a hotter than expected market, that's what's driving up some of our near term growth in this year and so that will settle back I suspect over time, we'll just have to see how and when that happens.
And then additionally, you have got some unique characteristics like the.
The wrap around on some of the products that we've put in there that are new and that didn't have a comparator. So on the lets take the.
Yes, I mean, the organic piece, we havent, we'd have it a little bit lower than the one point, but youre in the right Zip code.
Okay excellent. Thank you.
Okay.
Thank you. Our next question is coming from Jeff Johnson from Baird. Your line is now live.
Thanks, guys, sorry, I was on mute there for a second.
David, especially you talked about the cataract market or the surgical market, maybe being a little harder this year than the normalized 3%, we'd love to get your opinion on what you think the contact lens market might do this year historically, we think of that 4% to 6%, but I know new patient starts have been compressed as depressed here for the last year or two so just from a market standpoint, and I understand you.
Obviously, you have some product launch tailwind, but how are you thinking about contact lens market. This year.
Well look I mean, I think what we were excited about was to see the fourth quarter come back to 2019 levels. All in so that was we had said that earlier in the year, but then I think we hedged a little bit in the in the last call.
That it might take into the middle of this year, even or maybe end of this quarter before we saw it we actually did see a return to 2019 levels at.
At the end of last year with international making a pretty big move sequentially from third quarter to fourth quarter. So I think our view kind of directionally going forward is that we.
We see the contact lens market kind of up mid single digits versus 'twenty one.
But we'll have to see how that takes shape exactly.
Our belief right now is that there is.
<unk> kind of recovery of Av.
Foot traffic and optometry after a trip visits that will drive the market, but there are also patients are found ways now to get existing existing patients are found ways to get lenses that are different than what they used to do you know I used to go every 90 days in and pick them up from the dock and drive themselves over to that office to do that.
Officers are sending them.
James have refill programs, there's the online piece Theres a lot of existing business now that is being fulfilled in other ways and I think that's actually been very good for the market that leaves more room for patient visits for new and switch patients and so I think even though we seek today for example still visits down.
2019, what we believe right now that's not holding the market back, but the mix of what doctors are seeing tends to be more productive. So it's not just our annual visit where you get the same lens back if youre not having any trouble theyre going to bounce through that pretty quickly and I think thats, giving us a little bit more room to grow this market. So I think our view is mid <unk>.
Single digits would be a pretty good number that's a pretty traditional number again to your point $4 to six that's probably where we see it.
And you know could it be more than that yes could it be less than that yeah, but it seems like a pretty safe number for us right now.
That's helpful. Thank you and then just as a follow up on pricing you talked about some things you are trying to do in contact lenses and fiddling around with things.
This quarter, how about pricing across the rest of the business any equipment consumables ocular health is there any pricing power there and as we think just across kind of the blended portfolio. This year.
Given year, what is normally the price tailwind to your growth rate in this year. How do you think that might vary kind of again across the whole business. Thanks.
Yes, I mean I have to do that pretty qualitatively because it's a broad question. So let me directionally trying to answer and I think historically, our surgical business doesn't have a lot of price benefit to it in fact is the opposite of that is a bit of price erosion that we continuously work against.
Most countries lower prices most con.
Contracts as they come into us have an expectation that the prices will come down a little bit what we have done.
Perry that as you introduce new products and so what has hit typically we would describe as price benefit is usually mix and so we will see one or 2% price decrease every year, we'll get about a one or 2% mix lift.
Introducing new material, new injector new something.
And because of the efficiency of that product creates or the outcome that product creates patients and docs are willing to pay for it. So that's typically how the surgical business is and I don't see that really changing much because most of that business is under a contract of some kind.
And those contracts typically are.
Our are beneficial to the customers so price increases in certain business more difficult in many ways on the on the vision care side I do think we're going to see some.
At the at the consumer level that are acceptable.
Isn't been historically I don't know I can't remember the last time, we took price in contact lenses not since I've been here. So that's at least five years and it's been.
A surprise in many ways.
The fact that they never did because many of our input prices have gone up during that stretch now. This this obvious bump up quickly in price.
Prices for us for our resins and for inputs around materials and labor and these have all been we've been trying to figure out how to offset it we're not going to know until it gets to the consumer and we're not going to really know until we see what they do about it but we pass through as much as we can we think is reasonable and.
And we'll be thoughtful about watching demand as it comes out but that was an across the line.
Contact lens view for us.
And then again, we put a little bit of price and depending on which market you're in on our on our eye drops business as well, but not a lot. So that's kind of the.
The landscape, if you will and I think probably as we get further into the year, we can give a little bit better insight as to how has that has taken shape relative to volumes.
Thank you.
Thank you. Our next question today is coming from Cecilia furlong from Morgan Stanley . Your line is now live.
Okay. Thank you for taking the questions I wanted to ask about <unk>, specifically, if you could walk to what <unk> seen from an adoption standpoint in international markets as well as your outlook for further international market expansion in 2022.
Yes, we're obviously very pleased with the uptake on <unk>.
You know pan on optics has been a terrific run for us and it continues to be I think.
The <unk>.
<unk> of choice.
Liberty has added a lot to our discussion and I think what's been really unique about liberty is for physicians, who really have been concerned about halos and glare or who've had problems with it in the past. This is a very mono focal like lens. It doesn't take a lot more to put this lens in that it would a normal.
Mono focal and so.
Surgeons are very comfortable and confident with this lens and it gives a very very good intermediate vision and about half the patients are getting.
Reading without glasses. So this is a kind of a no risk win for a lot of people and that's I think what's been appealing about it for maybe for surgeons, who are dabbling in the <unk> business or <unk>.
<unk> had been concerned about it in the past and so what we've seen is.
The first place that seems to do well is in existing <unk> surgeons, who.
Whatever reasons have excluded patients a lot of times, they will exclude patients with other pathologies like a retinal disease or anything that you have to see through to the back of the eye on because the diffractive lenses makes that a little bit difficult. So this is a really good choice for them. So that add some patients back into their practice theyre used to using it as they've come along with that they have also begun.
To think about if there were excluding patients who they thought were unlikely to tolerate kind of halos and glare they've added those patients and so it's been expensive for our existing surgeons and now as we move.
Kind of out from there we begin to add new surgeons in and I think thats really what our intention is going forward is to try and bring more people into <unk> that haven't really been in the PCI or world in the past and so what youre going to see I think going forward is us focusing on penetration of PCI wells and using <unk> largely is that entry point.
I think it gives us a relatively safe way for people to start down this path.
And then again Pan optics and the yen is a perfect complement once you get comfortable with Liberty and you want to continue to move on.
But <unk> is a natural for those patients who are docs are comfortable putting in mono focal toric will.
And then put into <unk> because of course, it's just really not any different in terms of your mechanism more process and you get a lot better.
Reading and intermediate vision, so thats been our sweet spot for <unk> internationally.
And we'll just see I think the international market is moving nicely similar to the United States and penetration not quite as fast, but both markets have been moving up in penetration at a higher than historical average.
Okay. Thank you and I wanted to ask on total 30 as well if you could just talk to what you've seen just initial days post lunch and then your expectations for share capture in that segment of the market going forward and thank you.
Yes early days on <unk> 30, a terrific.
One of the things that we kind of maybe underestimated about $2 30 was how much good news in a in an old market can matter and I think we.
When would you go when you talk about reasonable lenses, it's a flat market directionally, but it's also a $4 billion market and so about every other patient that docs are starting is going into a reusable lens.
So when you go in and you say, Hey look we've got we figured out how to put our water gradient technology onto a reusable lens.
Dr really know that.
Technology and they really enjoy it from total one and it was always.
Well you can wear this totaled 30 lens and feel like on day 30, it's the same as of day, one that's pretty impressive to both patients and the docs and so we've had a really positive response to it because the optometrists know the technology, they're surprised we can do it for 30 days they've tried it and I think the the trials are working out quite well.
And so we're optimistic about what this can do.
We have a low share in this category in our minds, it's a mid teens share.
And so.
The way, we think about it.
There is a significant upside to the share potential.
A market that's really been underserved technology wise, so we feel pretty good about what the potential of this is and how it's moving so far.
Great. Thank you.
Thank you. Our next question today is coming from Chris Cooley from Stephens. Your line is now live.
Good morning, and thanks for taking the questions and congratulations again on a solid year in a tough environment.
David If I may just from my first question could you just help us think a little bit bigger picture here as you talk about the margin goal.
Question, you guys alluded that you felt good about that low twenties op margin goal in 'twenty three.
I'm just curious.
How are you thinking about new technologies in this space.
Specifically <unk>.
Wired investment how much of that is implicit in your getting to that low twenty's op margin goal or are you really thinking about getting to that level more so than just absorption of the capacity reduction in inflationary headwinds and stronger operating volumes and then I've just got a quick follow up.
Yes, Chris I mean, a little bit on.
We get a little bit of benefit from the last bit of this but really the thesis that we have on getting really into the low twenty's.
Entirely consistent with where we started which is we're going to grow our way there and it is mostly operating leverage I think it's probably 80% operating leverage and maybe 20% improvement gross margin. So I think what youre going to youre going to see is that new technologies and new products are exactly the way we get there.
What we found right now is that we've got the right amount of money moving into the P&L in our transformation has allowed us to enrich without necessarily increasing the productivity of the spend that we have so remember that we've moved almost $200 million out of what I would loosely call.
Back office, and less productive uses and into R&D and commercial support.
So again, we're finding that our <unk> spend for example is able to increase without necessarily increasing our total.
Functional costs, so not the same rate. So we think we can hold total functional costs below the growth of the revenue line and that is in essence, how we're getting.
Op margin goal to the largest extent.
So it does it does lean on on sales growth and that's partly why we are.
Positive around the forecast, we're giving right now I think as we think about 7% to 9% this year and the return of markets and our market position, we come in with a lot of momentum right now around some really good products. We probably have five products that are going to get a full year effect of growth.
This year and we're pretty excited about that I think that's the that's what we had intended to do and it is indeed, what we find ourselves in a position to do now for the next 24 months is really right a lot of really great products through through the next 24 months.
I appreciate that color and then just as a quick follow on to that.
You, obviously have a strong pipeline, but there's a tremendous amount of innovation in the ophthalmic space right now as well.
And I noted in your press release last night, you called out a $1 billion in capacity. So if we think about future M&A you had some friends that as a product you've had avant us with the hydrus all above corporate gross margin type products with good growth profiles.
Should we continue to think about maybe more of a an ophthalmic I'm sorry.
Pharmaceutical bent again higher type of margin profile business that drives better cash or are you looking for more kind of emerging technologies. As you go forward that you can leverage the existing sales and marketing infrastructure. Thanks, so much.
Yes, a little bit of both Chris and let me just say it this way I think.
As we reflect on where we are.
We feel very comfortable that we have the right investment organically in R&D and the right product flow and pipeline to get us to our goals without doing anything externally.
I would say, though that we do have capacity and we have every intention of using.
That capacity to continue to build our business and so to the extent that we see.
See opportunities, we're going to do them. The thing I would mention though is that we've been pretty disciplined really since we came out about what we looked at and what we chose to do.
And I do think that you should consider that we're likely to stay pretty close and we're gonna be in eye care, we're going to look for white spaces, we're going to look for opportunities like <unk>.
Hydrous or other technologies that could enhance our long term picture.
And we will look at pharma, but it's not a it's not a high need thing we're going to do it as we see fit and as we can do a good job of bringing in value.
We have the capacity at this point to take on more pharma. So if youre asking part of that question. I think was is it going to cost us more to put people on the ground to kind of support higher growth and I think the answer to my way of thinking is in the United States. We've already done that by getting this ophthalmic eyedrops group out there selling some brands are selling.
Our sustained multi dose preservative free products and selling patter day like any force.
Rotate those products as they mature there won't be incremental costs.
In the way at which you'd be starting up something so I feel good about our platform right now having already established it if we were to bring something into the pharma space I think that group could handle it.
And then going forward, we obviously have a lot of capacity.
To bring on devices and either vision care or surgical so I don't see a need to necessarily add a bunch there.
Thank you.
Okay.
Thank you. Our next question today is coming from Chris Pasquale from Guggenheim. Your line is now live.
Thanks, a couple of model detail questions for Tim.
At the capital markets day last year, you talked about 20% tax rate through the planning period came in lower in 'twenty. One now we're looking at a high teens number for 'twenty. Two can you go into more detail on why it's moving lower and whether this new range are sustainable.
Yeah. So during the capital markets day to your point, we were at 20% the biggest change there are really.
Two things one is this the tax agreement that we just settled in Q4, and Switzerland that drives the favorable.
<unk> benefit and that does carry forwards.
Through next year.
And then we had.
A geographical a favorable geographical mix of our profits in 2021, so going forward I would think of it as 18 I take the midpoint of our range you know I'm a big fan of the midpoint. So we guided 2017% to 19% and the reason it goes up are really twofold. One is we had the benefits related to.
Inventory buildups and our affiliates from 2021, we haven't anticipated that that carries forward.
And then there may be a potential one off.
Negative impact linked to the tax agreement that we're working with between the U S and Switzerland, so that.
That would be a one time item, but it would occur in 2022, we've assumed that happened. So again I think the short story is I would take the midpoint of that 17% to 19%.
Okay, and then the $180 million to $190 million in interest and other expense does that include the above the line other expense or was that all below the line just trying to figure out whether the comparable in 'twenty. One is 160 to 194.
It would be comparable to your 162 and there's two things that are in there we've baked in some rate increases.
Given the environment and then our hedging costs are in that line as well and we've anticipated some higher hedging costs as we grow and some of the markets that are a little bit more challenging if you think about Russia. If you think about Argentina and places like that.
Yes.
Okay. Thanks.
Thank you. Our next question today is coming from Daniel Butcher from <unk>. Your line is now live.
Thank you very much. Thank you gentlemen for taking my two questions.
First one maybe on <unk>, which is close now since early this year now since you have the details in science I mean can you share a little bit more light on how you see this acquisition.
I assume because you know that business from from the former <unk> product you have.
Quite meaningful sales synergies.
Say for example, until 2025, I mean, how meaningful could that business become.
And then the second.
Question, maybe on consumer openness or willingness to consider switching contact lenses from one to another and pay maybe more for innovation like for precision one how do you see this developing now into 2022 and maybe also the years beyond since be hopefully lift COVID-19 behind thank you very much into pumps.
Sure, let me start with <unk>.
We are very excited about the advantaged product and the acquisition. We made we think we.
I have added something that was really well timed for us and for everybody.
One of the exciting timings of this was the publication of their five year.
As follow up randomized clinical trial. The reason this matters is because.
I think it is very difficult sometimes to convince folks of the efficacy and safety of products than we had been.
Involved in this market before and that was one of the core ideas.
What's the state of basically says as I said in my opening remarks.
Is that more than 60% of patients 65% of patients are medication free at five years, that's a monstrously beneficial thing for patients to not have to put an eye drops it's economically beneficial for the systems that are involved in it and it creates the kind of health economics data that says this is a good thing for patients.
Good thing for the systems.
And people should be doing this if you have glaucoma and that kind of mild or moderate frame I think what we also wanted to say was that same data coming out of there talks to the fact that these patients if you put a stent in the I do not go on to have a second surgery.
You think about what that means.
Yes.
Untreated patients were going on to have a surgery 60 plus percent so at the time.
As opposed to the <unk>.
<unk> patients and that's a.
That's.
Surgery for the patient.
Cost of the system again, it's a lot of things that we had hoped to see came through this data and I think people as they begin to really understand that data and we will be at the Nashville American Glaucoma Society meeting next week really trying to help people grab a hold of this thing and understand both the economics of it and the patient impacts of this and so.
We think this is a big deal and we think the market is the market is $500 million right now.
We start into this with a $60 million a head start and we're just getting started so I think the opportunity here is to see this market grow nicely. It has historically grown in the low teens I think obviously some of the reimbursement issues that.
Finished out late last year will dampen that growth a little bit, but we expect to see meaningful growth on a relatively good sized market, where we have a starting position and so you'll have to do your own thinking about how well we can do but.
I'm optimistic about the impact of that product.
On frankly on the well being of patients out there with glaucoma.
Secondly on the consumer switch piece.
No.
Theres, a big change coming off of Covid around switching if youre if youre in a lens that you like and you don't have any trouble the factor matters. Most optometrists are not going to switch you.
They're going to they're going to ratchet up their prescriptions and you're on your way and get onto doing something else.
So I think that the normal course of business, which has been you know kind of three to four out of 10.
Patients that walk in the office are either a new patient or a switch potential because they're having a problem there and a new dock office, they want to get to dailies because they just for whatever reasons. They will do that that's pretty much the math.
Is kind of three or 410 and that means six or seven and 10 are not switching so remember this market moves a little bit slow.
For this reason, but it's also very durable for this reason and so I think what we get excited about is we're winning in the switch and new fit area.
We're doing very very well in that space and so over time, we expect to have a very durable business in these new products and so we're excited about where that moves.
Thank you very much very helpful.
Thank you. Our next question today is coming from Julien <unk> from BNP Paribas. Your line is now live.
Hi, Good morning, Dave Good morning team. Thanks for taking my two questions.
First one relates to the surgical markets.
The way you described that it should be pretty strong into 2022, but I was just curious whether this market could be even stronger without some of these the staff shortages at upper <unk> in the U S or in Europe .
But also in terms of the supply chain challenges that you guys and your competitors might be experiencing always all of the previous just irrelevant to the growth in this market at the moment.
The second question is how we should think about the growth for the equipment business specifically after a very very strong 2021.
Do you think there is a comp effect here to be sheds.
And whether this is Christian glennie for growth in 2022.
Yeah. Thanks, Julien, let me start with the surgical business Youre exactly right I think one of the challenges.
In the surgical business right now theres been two initially.
There was a lot of.
Turnover in staff.
Then I think even in the fourth quarter.
Though it stabilized a little bit.
You saw people having to step out for a week, because they've got COVID-19 or two weeks till they got better.
And that kind of interruption of staff and staffing.
To the extent that settles down we will improve capacity going forward, but I do think there is there remains a basic capacity problem internationally, which means there just isn't a lot of extra overtime given a lot of this is done in the hospital internationally and.
You are having to share and work with a lot of other people who are trying to also do new procedures.
And there is going to be I think <unk>.
A stabilization of staffing over time.
But again it isn't there yet so we're still working through interruptions and depending on where you are in the world.
How that looks so I think the surgical market does get better.
And again, we forecasted at a good bit better than what I would loosely call historical rates.
I think it's mid single digits would be a couple of points up from the stroke rates and some of Thats.
Because you see.
Some easier comps in the first quarter and also because you would see some return of capacity that will help push it up a little bit. So I think we feel good about the market and its potential.
Well it will yet to see how that plays out.
And obviously, we're making some assumptions around the lack of disruption as we go forward on the equipment piece of equipment, we had a terrific year and equipment last year I mean, we had a banner year for our FICO equipment, which again given the competitive set we're very pleased how many people chose to go with the market leader in the equipment.
We sell out there is still unsurpassed in its and its.
<unk>. So we're excited about that.
I think the additionally.
Kind of gratifying is to get a biometer out there that is really doing well head to head with our competitors and so the the Argos Biometer. We're very excited about what it can do it seems to be faster it seems to be easier to use seems to get through dense cataracts better.
So we're really pleased with the uptake on those things now.
Caution, though that.
There's been a lot of a couple of years now of equipment that looks like it's over the historical average by a fair bit now some of that was refractive early on and some of it now is just been.
<unk> for getting a new <unk> and returning into a more normal world.
But given the size of the year, we had last year, we have a great year, if we move sideways.
On equipment, and so I would think about equipment this year as being likely.
Kind of a net neutral year on year, if we can accomplish that I'd be pretty excited about it. It has some just to be quite as more chance of being a headwind than a tailwind let me say it that way and we will see because we just sold a ton of equipment over the last two years.
Thank you we reached end of our question and answer session and ladies and gentlemen that does conclude today's teleconference and webcast. You may disconnect. Your line at this time and have a wonderful day, we thank you for your participation today.