Q1 2022 Alcon AG Earnings Call
Greetings and welcome to the Alcon first quarter 2022 earnings conference call. 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.
I would now like to turn the conference over to your host Dan Cravens, Vice President Investor Relations for Alcon. Thank you you may begin.
Welcome to outcomes first quarter 2022 earnings conference call yesterday, we issued a press release and interim financial report and posted a supplemental slide presentation on our website to enhance today's call. You can find all these documents in the Investor Relations section of our website at Investor that Alcon Dot com joining.
With 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.
The law.
Our actual results may vary materially from those expressed or implied in our forward looking statements. Accordingly, you should not place undue reliance on any forward looking statements important factors that could cause our actual results to differ materially from those in our forward. Looking statements are included in outcomes form 20-F, and our earnings press.
The release and interim financial report on file with the Securities Exchange Commission and available on the SEC's website at SEC Gov.
Non ifr estimate 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 ifr estimate financial measures shouldn't should be considered along with but not as alternatives to the operating performance measures as prescribed per <unk>.
If our S. Please see a reconciliation between our non I FRS measures with directly comparable measures presented in accordance with IRS and our public filings for discussion purposes. Our comments on growth are expressed in constant currency with that I will now turn the call over to our CEO David Endicott.
Thanks, Dan and welcome to our <unk> first quarter 2022 earnings call before I begin my prepared remarks on the quarter I want to take a moment to recognize the current events that we see impacting the world today.
Any parts of the world continue to face slow recovery from the pandemic, including recent COVID-19 restrictions in China.
We also acknowledge the hardship brought on by the war in Ukraine, where our focus continues to be on the safety of our associates and their families.
I am very proud of Alcon team who's led with compassion and done heroic things to help our associates.
Now I'll give a brief update on our first quarter results.
Overall market dynamics and recent performance and after my comments, Tim will discuss our first quarter performance and our outlook for the remainder of 2022, and then I'll wrap up with closing remarks, and we'll open it up for Q&A.
We're very pleased with our first quarter results. Despite broad economic headwinds the alcon team delivered strong revenue performance with sales growth of 18%.
We also saw a significant improvement in quarterly profitability was a core operating margin of 26% and core diluted earnings per share of <unk> 68.
These results were driven by our innovative product portfolio solid execution by our commercial organization and continued market recovery.
Now lets surgical <unk> and Penn optics are allowing surgeons to address the needs of a wide patient population.
We continue to gain market share in the first quarter on the strength of our PCI portfolio.
Alcon now has approximately 60% of the global <unk> market. This.
This is up approximately seven percentage points versus prior year and driven by international share gains.
In the U S. We have a PCI with market share of approximately 80% despite new entrants in the market.
During the quarter, we also announced the geographic expansion of our <unk> portfolio of ILS.
Clearing on delivers excellent vision exceptional clarity and predictable outcomes in a glistening free IOM material.
We recently launched <unk> mono focal pan optics, and <unk> in the U S and we will bring our clearing our portfolio to additional markets throughout 2022 and 2023.
Early in the first quarter, we closed the acquisition of advantage that brought the hydrus microstat into our portfolio of Implantables, we're delighted to welcome the <unk> associates to Alcon family.
The integration of the Salesforce is going smoothly and it was great to see the combined teams working together at our recent national sales meeting.
As we've said in the past Hydrus is a differentiated product in the $500 million mild to moderate migs market.
It's also the only migs device with five years of safety and efficacy data from a pivotal study.
We recently attended the American Glaucoma Society, and the Crs conferences, where we heard positive feedback as we continue the commercial expansion of this product.
We also continued the introduction of our smart cataract planner in United States, which is part of our broader digital equipment ecosystem.
The data recently presented at <unk>, which was well received highlights that smart cataract delivers substantial time savings during the evaluation planning.
<unk> and post operative workflows.
With procedural volumes expected to grow at a higher rate than practicing surgeons. We know doctors are looking to drive efficiencies.
And also reduce manual data entry and improve accuracy.
In vision care, we continue to see momentum in our contact lens business driven by our Si Hy lenses precision ones visual acuity ease of handling and comfort make it a favorite of eye care professionals and patients alike.
We're also gaining share in the daily Si Hy Toric lens category and now have two options available for asthmatic patients precision one and dailies total one <unk>.
Precision one toric continues to be rolled out across our international markets. Following its introduction in the U S.
We're also excited to bring dailies total one toric to various European markets. Later this year following its successful U S rollout.
We're also innovating in what's still the largest patient population of contact lens, whereas the reusable market with $2 30.
Total 30, Leverages the same water gradient technology of dailies total, one which makes <unk> uniquely comfortable even at day 30.
Total <unk> is now available in the U S and Europe and while it's still early in the launch customer and patient feedback has been very positive.
Lastly in ocular health, we're pleased to have the three multi dose preservative free formulation of our popular sustained family of artificial tears now available.
Preservative free formulations are generally preferred by doctors now with multi dose formulations, we are more convenient and cost effective products available for consumers.
We're supporting these products as well as our patent and some Brexit drops with a dedicated sales force delivering eyedrops into the ophthalmic channel.
This sales force has been in the market working with doctors for few months now and we're pleased with their progress.
Now, let me provide an update on our end markets.
In surgical global cataract procedures were up low teens in the first quarter versus prior year led by strength in select international markets.
Keep in mind the procedures in the first quarter 2021 were still impacted by COVID-19, which makes year over year comparisons easier.
We expect market growth rates to decelerate in the remainder of the year as we now have lapped the low base from 2021.
Additionally, there was a notable onetime increase in demand for PCI wells in South Korea due to changes in reimbursement requirements that were implemented on April one.
Against this backdrop, our implantables business did outpace the market driven by the strength of our products and our commercial teams.
In vision care, we estimate that the contact lens market grew mid single digits in the first quarter, driven primarily by ongoing recovery in Europe .
Our contact lens growth outpaced the market for another quarter, and we continue to see gains in new and switch fits.
Strong indicators.
Potential future sales.
So in summary, we feel very good about our strong start to the year and we're encouraged by our full year outlook.
With that let me pass it to Tim who will take you through our financial results and provide an outlook for the rest of the year.
Thanks, David We're pleased to report first quarter sales of $2 2 billion up.
Up 18% versus prior year.
Demand for our products was robust in the first quarter, which led to double digit growth in both our surgical and vision care franchises.
Our overall sales growth includes approximately one point of contribution from some brynza anhydrous combined as well as one point from the benefit in South Korea that David referenced in his remarks or.
Our first quarter U S. Dollar sales growth included approximately four percentage points of pressure from foreign currency.
In the quarter, we continued to see momentum in the business, despite facing multiple macroeconomic headwinds, including an appreciating U S dollar supply chain tightness and inflation.
We're seeing pressures on availability of supply and rising prices on certain commodities, including plastics and resins as well as increased costs for labor and transportation.
Despite the inflationary impacts being pervasive across both franchises, we were able to offset much of the impact through mitigation efforts, including cost improvement initiatives strategic price increases and contract negotiations with suppliers.
We remain committed to maintaining the supply of products that our customers and their patients need to see brilliantly.
Turning now to our franchises surgical revenue was up 22% to $1 3 billion in the first quarter.
Implantable sales were $455 million up 38% year over year due primarily to the strength of <unk> sales of hydrous and continuing market recovery.
And <unk> growth includes approximately eight percentage points from the one time benefit in South Korea related to <unk>.
For consumables, our first quarter sales were up 16% to $601 million primarily.
Merrily due to increased surgical volumes at additional international markets reopened.
And equipment, our sales were up 7% year over year to $203 million.
This was primarily driven by strong demand for our cataract equipment, including upgrades to Centurion and sales of Legion and our international markets.
In addition, we're seeing solid demand for Argos Biometer.
Turning now to vision care first quarter sales were up 14% year over year to $916 million.
During the quarter, we saw strong global demand driven by product innovation and solid market recovery across most geographies.
Contact lens sales were $557 million in the quarter up 14% versus last year.
As David mentioned, we continue to see strong demand for our precision one and total brand families. As we recently launched dailies total one for astigmatism and totalled 30.
We're taking share and growing faster than the market.
In ocular health, our first quarter sales were $359 million up 13% on a year over year basis.
This was primarily driven by sustained which saw double digit year over year growth supported by our <unk> launches as well as sales of some brynza, which was not part of our portfolio in the first quarter of last year.
This growth was partially offset by decline in contact lens care due to supply chain challenges.
Now moving down the income statement.
First quarter core gross margin was 62, 4% up 30 basis points on a constant currency basis, despite inflationary pressures.
Core operating margin was 26% in the quarter up three nine percentage points on a constant currency basis.
The improvement was primarily driven by operating leverage from higher sales, partially offset by increased inflationary pressures.
While we're pleased with this result, I wanted to note that the benefit in South Korea contributed approximately one percentage point of core operating margin in the quarter.
Operationally, we expect marketing and sales expense and R&D to increase in the coming quarters, driven by normal seasonality, new product launches and higher spend as markets recover.
First quarter interest expense was $29 million in line with prior year.
The core effective tax rate was 15, 9% in the quarter compared to 27% in the first quarter of 2021.
The favorable rate is primarily due to a benefit on inventory build in certain markets with favorable product mix and discrete items.
Core diluted earnings per share in the first quarter of 2022 was 68.
Up from 49 last year.
The impact from South Korea contributed approximately <unk> of core EPS.
Before I discuss our outlook for the remainder of 2022 I'll touch on a couple of cash flow and other related items.
Free cash flow for the first quarter was an outflow of $52 million compared to an inflow of $48 million last year, driven by lower cash flow from operations in 2022 due to changes in net working capital the annual bonus payment.
The timing of tax payments.
Capital expenditures were $118 million for the quarter, which was primarily related to our contact lens manufacturing production lines.
We still expect full year 2022 free cash flow to be significantly higher than 2021.
Transformation costs were $15 million in the quarter and $184 million life to date.
Now moving to our guidance for the remainder of the year.
As I've mentioned, we continued to see certain <unk> headwinds, including FX pressure from an appreciating U S dollar.
Inflation and supply chain tightness.
Ongoing effects from COVID-19, particularly in countries like China.
And the impact from the war on Ukraine.
Our current 2022 outlook assumes that the global market size returns to 2019 levels growing slightly above historical rates.
Current levels of inflation persist through the remainder of the year.
And the U S dollar hold steady at mid April foreign exchange rates.
Based on our strong sales momentum exiting the first quarter, we're increasing our expected year over year constant currency sales growth rate to between nine and 11% up from the 7% to 9% we guided to in February .
Foreign exchange is now expected to have a negative impact of approximately three percentage points versus prior year as compared to the negative one percentage point, we provided in our February outlook.
As such we are maintaining our net sales guidance of between $8 7 billion and $8 9 billion.
Yeah.
Now moving to core operating margin, we're maintaining our full year outlook of 18% to 19%. Despite the headwinds I've just described.
This guidance now reflects approximately 110 basis points of FX pressure versus last year as compared to 40 basis points in our February outlook.
It also includes approximately 90 basis points of net inflationary pressure as compared to the 40 basis points, we provided in February .
Interest and other financial expense is now expected to be between 200 $210 million versus our prior guidance of $180 million to $190 million.
The change is due to higher hedging costs, given the volatility in the market.
Core effective tax rate is expected to range between 17% and 19% for the year. Despite the favorable discrete items in the first quarter.
Finally on core diluted EPS, we are maintaining our original guidance of $2 35 to $2 45.
Per share despite approximately 20 of incremental headwind from FX and inflation.
Accordingly, we are increasing our constant currency growth outlook to 19% to 24% due to the strong momentum we're seeing in the business.
We now expect approximately 10 percentage points of pressure from foreign currency for full year core diluted EPS year over year growth versus our previous estimate of four percentage points in February .
To summarize we are very pleased with our progress and the momentum we built base.
Based on the first quarter's results, it's clear that our core business is performing extraordinarily well.
To date, we have successfully navigated the exogenous headwinds that we've seen through improved operational performance and cost discipline.
We will continue to evaluate our response to these risks as we go forward.
Before I turn it back to David I Am pleased to report that our annual General meeting two weeks ago shareholders approved the dividend of <unk> <unk> per share equivalent to a payout of approximately 10% of 2020 one's core net income.
We want to thank our shareholders for their continued support of Alcon.
With that I'll turn it back over to David.
Thanks, Tim.
In summary, we're off to a strong start this year, despite the macroeconomic headwinds in volatile markets that Tim mentioned.
Performance of the business remains robust we are launching innovative products in growing revenue in excess of market growth, we're gaining share in both of our franchises and we're creating significant operating leverage and positive core operating margins.
As we move forward, we'll continue to focus on delivering robust revenue growth and driving significant shareholder value.
Finally during these uncertain times I want to thank all of our associates for their hard work in delivering on our purpose of helping people see brilliantly so with that let me open up the line for Q&A.
Thank you at this time, we'll be conducting a question and answer session. If you'd like to ask a question. 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 for participants using speaker equipment. It may be necessary to pick up your handset before.
Mr. Keith and the interest of time, we ask that you each keep to one question and one follow up thank you.
Our first question comes from the line of Daniel Burke dealt with.
Please proceed with your question.
Daniel Your line is live.
Okay.
Thank you so much for taking my two questions on the hospital.
David.
Mark you mentioned increased pressure.
Plus J&J.
Can you talk a little bit how market shares.
Fair to assume that any potential weakness.
And optics.
You were able to overcome with.
Very nice demand indicators cognizant.
And how comfortable are similar in.
That's helpful. In the next couple of quarters for the market shifts to keep it as high as possible.
Then the second question maybe.
And James on the inflationary pressures.
As far as the cadence of 90 basis points headwind.
I mean of course, we'll see how inflation is developing.
Maybe you can share some thoughts on how price discussions in both segments look like.
There is the headwind to moderate over the course of the year and housing cycle.
Thank you very much Paul.
Yes.
Yes, Thanks, Danielle let me start with the question on share we've had terrific share performance actually in the last I think <unk> been a very good business for us and they continue to be strong.
In the <unk> businesses.
The segment that you would think of Penn optics and dividend, we've actually gained share I think seven share points year over prior year. So.
We are holding share kind of a little bit better than we expected.
I think for some are still around 80%.
So I think we feel good about.
Penn optics, and <unk>, obviously pan optics is still our largest brand in this category. It's growing beautifully right now we spent a little more time talking about Liberty right now because it's it's actually I think part of the reason the category is expanding and we have a fairly robust share at this moment. So we are feeling as though the category expansion is our next move so I would say <unk>.
Gets a little more attention and Penn optics, even though panoptic bigger.
Principally because it seems to be bringing new patients into the category and some new surgeons in as well so that's been.
The positive vibe there.
Unclear, we are launching <unk> in the U S. At this moment, both with the pen optics, and <unk> and the toric and so I think we're excited about getting those out there in the amount of focus space. There is an increased amount of competition.
Clarion has a particularly unique product in that it has it's probably the first new material in this category in many many years and it really with our with this material advancement, we have probably the most pristine optic of anybody in this space. So we're very excited about what that means for four patients in the long run. So we're excited about that.
And I think again it will help continue to help our mono focal business and our toric business.
On the inflation piece.
We have put through some price increases in the vision care business and a little bit in surgical.
Surgical is obviously a little bit more difficult is most of that business is contracted and we also see a lot of government involvement here. So the reimbursement for the government is dictating usually some degree of implicit margin that we can that we can have so I think the.
The way to think about this has been that we've tried to pass along a roughly inflationary levels of price.
Its gone pretty well I think most people understand that.
The raw materials are up resins are up.
A good bit of labor and freight.
All inflated on us and a good bit more than we had anticipated. So the acceptance of that has gone pretty well inside the optometric community they seem to be passing it on to the consumer and that seems to not be having a at least in the present moment has not had an effect on demand. So we're optimistic I think about where we are with succeeding with.
With price.
There was a little bit more on.
Okay.
Okay. Thanks, so much.
Thank you. Our next question comes from the line of Larry <unk> with Wells Fargo. Please proceed with your question.
Hi, good morning, Thanks for taking the question.
Congratulations on a really impressive start to the year here.
So first I wanted to ask about the revenue cadence this year.
Tim should we expect normal seasonality and how do we think about the reimbursement change in South Korea.
For the rest of the year, how does that impact the rest of the year and how are you thinking about the COVID-19 impact in China.
Q2 sales that I had one follow up.
Yes, Larry Thanks for the question I would say revenue.
We will be pretty close to what we've seen typically I mean, when you look at Q2, and Q4 will be high points for us from a revenue perspective.
It's primarily driven by when you look at Q2, a lot of revenue driven by the allergy season Q4, we tend to get a nice lift in the equipment segment of the business as hospitals.
<unk> continued to spend their budgets so I.
I would kind of look at it that way for as far as Korea goes.
I would think about it as sort of a net one time benefit in Q1.
Surgeons basically cleared there waiting list, so I wouldn't expect a material impact going forward.
In China.
Im sorry, John and the China Covid thing, we haven't seen yet.
What the impact is going to be so I think we're still looking it's going to be something and I think.
Frankly, we just don't know yet how big.
That's going to be but.
We're watching it very carefully.
That's helpful and then on contact lenses and the market David <unk>.
You mentioned that you think the market grew mid single digits in Q1, but you and J&J, we're up over 10% year over 60% of the market.
<unk> guided to a pretty strong.
Quarter.
So there seems to be a disconnect here. It seems the market is growing faster than mid single digits and do you still expect your contact lens growth to be accretive to overall our comp growth in 2022, thanks for taking the questions.
Yes look I do think that the.
The vision care business in particular in our surgical business are pretty close to the same rates of growth. So in terms of the contact lens business itself.
I think it'll be there or thereabouts.
What I think is going on in the market as we typically use two different data sources that are audited.
People have.
Bearing degrees of.
Both.
Call it.
<unk> Internet there is a series of other channels that aren't always covered so youre going to see some fluctuations I feel pretty confident though that when we talk about the value growth in the global market, it's roughly in that mid single digits range.
Has rarely been much higher than that on the bounce back it may be for a while so if you look at this particular quarter. There are parts of the market Europe in particular, which bounce back with a high number and when you get high numbers like that sometimes the data doesn't read through is clean so I wouldn't.
I wouldn't get too wound up about the mid single digits number we're using just because it is a.
A lot of the data source and it fluctuates from time to time I think it is going to be likely long term and as we get back to normal growth rates right in that mid single digit range kind of.
As we've said.
Thank you.
Thank you. Our next question comes from the line of Matthew Michelle with Keybanc Capital markets. Please proceed with your question.
Hello, Good morning, Thanks for taking the question.
Like low teens growth in surgical.
Given the easier comparison.
That could accelerate.
I mean, given probably a backlog of these procedures. What do you think that decelerates too from a market growth perspective, as we work through the second half.
Okay.
Well I mean I think the.
The big issue of course is the wraparound on Covid right. So we had a lot in the first quarter, we had a very soft compare for particularly for international.
International was basically back to 2019 levels end of last year. So as we progressed through the year. The comparison gets firmer and firmer and closer to what we should expect long term as market growth. So I would just say that.
Incrementally as you move through the year, we will see this thing move back to a number that has traditionally been the market growth plus a little bit and so when we say the plus a little bit because there is a backlog.
It is very difficult to know how much of that backlog is going to come through and when it comes through in how it comes through but I will tell you it isn't going to be a bolus of surgery, that's going to be a little bit more surgery than that does that typically done principally because there isn't enough capacity around the world to kind of quickly absorb this.
The number of cataracts, so I suspect at steady state.
If the historical rate of growth was kind of that 4% ish rate procedures, where a little bit warmer than that for an extended period of time and thats, how the backlog clears. This year, we start out hot because we're comparing in first quarter to a relatively soft quarter internationally last year and it will get progressively slower and approach market growth plus a little bit.
As we get to the end of the year and I think thats, probably the best look at what I think is happening.
Excellent.
Talk about the SG&A.
SG&A and R&D dynamics.
I know you guys mentioned the seasonality you were expecting.
Ross.
Well as you get into Q3 Q4 to the more normal levels.
But also I mean.
A lot of leverage.
And the model this quarter are you looking at it.
Being able to drive more leverage.
On the operational expenses as you progressed through <unk>.
<unk> 22, and that does provide a cynical, but operating margins moving forward.
Yes, again as we said all along you know operating leverage is really the key component to the <unk>.
Actual thesis, but Q1 is typically low for us if you were to go back in prior years.
And the way I'd think about it let's start with R&D I mean, if you look at our R&D spend this quarter. It was about $160 million. If you were to annualize that as an example, it would be about $640 million, which is on the low end of 7% now we've said all along this year and our guidance I think we provided we said we'd be more at that 8% level. So.
That is going to be incremental spend if you think about the rest of the year call. It $50 million to $60 million same thing on SG&A. If you take that first quarter and annualize. It you get to about 34% as a percent of revenue. If you look at 2019, we were kind of about 38%. If you look at 2021, we're sort of at 37%.
So I would continue to expect to see some operating leverage there, but it won't be three points or so again youll see some more spend on the SG&A front. The other thing I would remind you of is if you look at Q2 again, if you go back to prior years, that's really where we amp up the DTC spend some of the back to school spend on the contact.
Aligns us so it's not unusual to see Q2, SG&A go up call it 60 or $70 million from where we were in in Q1. So that's sort of how I think about the expense level, yes, I mean, the whole thesis is around getting operating leverage we expect to do that to get to our goals, but if you just look at Q2 it is unusual.
Hello.
Well, thank you for the color.
Thank you. Our next question comes from the line of Matt Mcclintock with Credit Suisse. Please proceed with your question.
Hey, great. Thanks, so much for taking the questions.
One one follow up on.
So the product launches that you've talked about executing on and one on margins maybe for Tim but.
So clarient and David if you could talk a little bit about why why is this material importance.
You've been successful as panopticon <unk> had been over the past couple of years.
What if any resistance have you met from folks who are sort of dug in on your legacy material and.
Perhaps what kind of additional share trend share gains can you see added clarity on and as I mentioned, just one quick follow up for Tim.
Yes look we're excited about declaring a material historically theres never been a better material than acro soft. So again, it's a hard act.
To follow in many ways.
It's the most successful implantable material all of ophthalmology I think as we look at that and over the years. There has there's always improvements you can make the biggest improvement in this material is clarity.
Of the material itself. So every now and again you can see net of listings in any loans, particularly our competitive lenses there were some micro.
Micro particles, if you will that appear that way, they're not clinically relevant, but they're aesthetically important to the dock and so I think what we've done is.
We've cleaned up a number of things but by me.
Making this new material it gives us.
All of the same kind of physical characteristics as akhras off but the cosmetic appearance of.
Something that is worthy of something like Panoptic sensitivity in particular, so if you are paying a lot for premium <unk> and you look at what you want to see is crystal clear.
When you touch these lenses almost anything we will we will stick to them. So I think it's a it's a really important.
Advanced I think for us relative to competitors and there has been some competitive noise out there about.
<unk> and other things that are in our old material, which again, we think is kind of unimportant in real terms, but it was easy to get rid of so we went ahead did that.
I would say on the.
The go forward all of our material will transition to clarity on.
And that will be sequenced event.
Starting with the U S. We've got some of it out in Europe , now, but there'll be a number of markets really through the end of 'twenty three so it takes a little while to get this done, but but a real advance I think in material science.
And on the.
For Tim on margins maybe.
So you've.
You've talked throughout your prepared remarks about absorbing the impact.
Additional FX and that does kind of weigh on your P&L.
P&L set up and Youre hedging works.
No. It does kind of weigh on margins I, just love to maybe understand with with those.
Yes.
Does that impact that you're absorbing I guess, where in the P&L are you are you compensating for those where youre getting relief, where youre getting outperformance to help you kind of stay on plan for for margins and earnings this year and into next year.
Yes, I would say it's right now it's primarily coming out of two places we are getting we did get a bit of a mix lift if you look in Q1.
You have that Korea impact in there and again as our Implantables business continues to grow that gives us a bit of a mix lift so youll see some of that in gross margin and then youll see a lot of it on the SG&A front so again.
Some of that is just natural leverage some of that is we were looking at being a little bit more disciplined around the cost just to make sure that we can obtain our objectives given the macro environment. So I.
I'd say those are the two areas that is coming out of.
Great. Thanks, so much.
Okay.
Thank you. Our next question comes from the line of Joanne Wuensch with Citi. Please proceed with your question.
Thank you very much for taking the question and very nice quarter, a couple of little one offs here now what percentage or can you share what percentage of the market is currently ATI OLS.
Yes, we do.
Let me find that it was.
Just wanted to give you the number we quoted most times and we'll find it for you here in a second you've probably had a follow up to that.
Yes.
Okay.
The U S.
The U S is 19% and we will get the global number for you in just a second.
And do you have an opinion on where that's sort of key path I mean does this ultimately become the standard of care.
Yes, Julian I think we have always had a view from some work we've done.
A number of years ago, but I think it is still quite relevant the headroom in this was substantial.
We think that there is a market that probably approaches 35%, 40% of the total market that we will pay an additional fee to the values that we've described so somewhere in that eight to $900 a lens.
Base.
That is kind of the headroom that we have got so figure if were at <unk> 19 in the U S. We still got at least double that outside the U S and the global number is actually 12 four so the U S is considerably ahead I think the rest of world is much larger in terms of total procedures.
Below 10 kind of number for the rest of the world.
About $12 four it gives us plenty of room to continue growing <unk> penetration for quite a long time and that's obviously why we are spending a lot of time talking about <unk> and penetration and trying to work a series of programs on the ground that actually engage surgeons in the process of of the <unk>.
Preop work that's required but also importantly, the knowledge and use of <unk>, which I think at this point is it is one of the kind of a no regret moves in ophthalmology you can.
You can really do some things with this lens that are different than you've been able to do with other HR wells because it doesn't have the.
The rings.
Post diffraction challenges that some of the other lenses do so we're excited about the potential of penetration, but again I would say this has been pretty steady.
Over the last several years, it's picked up for sure, but kind of a long ramp for us to get to wherever we're going.
Excellent. Thank you very much.
Thank you. Our next question comes from the line of Cecilia furlong with Morgan Stanley . Please proceed with your question.
Hey, good morning, and thank you for taking my questions I wanted to ask you.
Strategic price increases that you took during the quarter and just any commentary you can provide there around customer acceptance.
Change in time patterns ahead of taking price.
And just your outlook as well for any additional price increases in 2022, and I had a follow up as well.
Sure.
We took a number of price increases in vision care, principally on our contact lenses. They were approximately at inflationary levels and I would say we've done it to obviously offset some of our input costs, which are growing quite quickly as im sure everybody knows and surgical the pricing power is a lot more limited.
And it's obviously a regulated and we have contractual commitments. So we have.
But more of a one off approach we raised the prices, but its usually on loose items that are not in our custom packs <unk> are purchased individually. So it's hard to tell how that.
Bleeds through it because it could take some time to see that one directionally, we've been pretty successful I think the acceptance of our current efforts has been pretty good.
So I think people understand what's going on I think in the environment and have.
And then the passing on at least vision care, a good bit of that price to consumers. So.
While it's not perfect for either us or our customers. It is kind of the way the world right. This second going forward, we're obviously paying very close attention to what the input costs are doing what theyre going to do in the back half of this year.
And we will obviously evaluate things as we go along here, but we're trying to recover as much as we can through procurement through productivity.
Initiatives.
And again, obviously as much price as is reasonable for us to kind of maintain competitiveness.
Okay, great and if I could follow up just on your the contact lens care decline that you called out in the supply chain pressure just your outlook for a recovery in that segment and really what you are seeing in the quarter as well and thank you for taking my questions.
Yes, well the contact lens care market itself has always been a decline for some time I mean, directionally it pops up and down but I think you should think about it as a kind of.
Low to mid single digit decliner for a while I don't think we believe it's going to move the rate in another direction and that we did have a little bit of challenge during the quarter with contact lens care. This was.
A bottle problem bottles are made of a resin that resin was in short supply during the quarter.
So as we crossed the quarter, we had not resolve that yet we have resolved at this point, but again that caused a slight decline in revenue during the quarter. So that's kind of the the circumstances were fine going forward at this point, but I would just tell you that.
The spotty kind of outages are happening I think everywhere and for everybody. So we're working through them as diligently as we can but we're always.
Very diligent with suppliers on whats going to whats going to take to get product in and made and there's.
We have lots and lots of suppliers, who are struggling so again, that's an ongoing battle, if you will and so far we've been good at it.
Our manufacturing guys have been terrific at managing through many many of these but.
We will have to be very vigilant going forward.
Okay. Thank you for taking my questions.
Thank you. Our next question comes from the line of Borgwarner with Jefferies. Please proceed with your question.
Hey, Thanks for taking the question and congrats on a great quarter I just wanted to touch on new patient starts and if youre seeing any acceleration as we move away from Covid.
And.
Historically, you guys have said that Q1 is the leading nuclear start lens.
The case.
Color there thanks.
Yes.
We have a very strong position in new and switch fits in.
And daily Disposables, So I would say if.
If you look inside the company.
Contact lens category right now.
Are the leader in daily disposable, new and switch fits and so we're obviously, we think that's a positive thing because it is a leading indicator of where share will ultimately go but it does depend on getting volume of those new and switch fit. So we are seeing some return of patients. There was a survey done by jobs not long ago that gave a.
A number that was.
Patients per day in the U S. In the Optometry community largely independents to be fair was up 3% over 2019, that's a good sign for US I will say, though that the newest switch starts as a whole looked also in another audit to be <unk>.
Below the 19 levels. So we're we got a little bit of a mixed series of signals here, but I think the best way to interpret it as we're getting back to normal we're not there yet in terms of new and switch.
But I do think that that will be will.
We will be back to its shortly and I think as we think through this year, we expect to be back to kind of what I'll loosely call normal growth rates plus a little bit given that there is some some.
Pent up demand out there.
Hi, Thanks for taking the question.
Thank you. Our next question comes from the line of Ryan Zimmerman with <unk>. Please proceed with your question.
Good morning, Thanks for taking the questions I just want to follow up on a few things.
The inflationary drag across the business Tim I appreciate you, calling out the 90 basis points, but if I back out FX and the South Korea order, taking margins are up about 30 basis points ahead of last year and so what the inflationary impact equal this quarter or what do you estimate of that for this quarter and is the 90 basis points.
Equal across all four quarters. This year as we think about that inflationary headwind.
Thanks for taking my question.
Yes sure Great question did the 90 basis points year over year view I would say.
I'd say, probably about a third of that we saw in Q1 and the reason that is is although we saw inflation spiking last year.
Some of that got caught up in inventory. So you don't you don't get the P&L hit obviously until you sell the inventory. So so we have probably I would call. It maybe a third or so of that inflation was in Q1. The rest of it will carry out through the rest of the year relatively level loaded.
Okay very helpful. Tim and then David for you.
<unk> brands on the drops segment has been doing really well you guys built out that dedicated sales force I think at some point, maybe early last year I could be mistaken maybe late 2020, but.
How much more of that contribution is coming from more feet on the street.
Relative to growth in those segments of the market and what can that.
Business segment of the drops if you will grow at sustainably going forward.
Well I mean, I think the glaucoma eye drops if youre speaking to some brands are specifically and remember this group <unk> today and the sustained multi dose preservative free line. So there is a number of drops in the eye drops business historically and I think this is what we will probably find ourselves back too.
Relatively soon as that business has grown market growth was about 6% kind of mid single digits, let's call. It and again I think we will grow faster than market with that so.
That has a lot to do with Salesforce presence.
Particularly as we convert Rx to OTC and as we kind of convert preserved to non preserved.
Present, multi dose the <unk> and particularly sensitive I would say that we've had a good start.
And look pretty good and we get the prescription data right now and it is clearly sensitive to sales force promotion.
And so I think we could see some positive growth coming from re energizing that brand re sampling at getting the information and data back out there to ophthalmologist, who really do want to treat these glaucoma patients.
<unk> as a category.
Rx is typically growing in that 3% range, so not a fast growing category, but this is a very small product in terms of share so opportunity I think on a low base to do some nice things and these are relatively high and all of the eye drops are relatively high margin for us. So obviously the more we can do in the eye drops business.
The more we can.
Advance our margins and again these are pretty profitable ideas generally when we get into them.
Thanks, I appreciate the color guys great quarter.
Thank you. Our next question comes from the line of Graham Doyle with UBS. Please proceed with your question.
Great. Thanks, a lot for taking my questions guys and just on <unk> I know you spoke a little bit about that earlier in terms of expanding the market Im just turning to feedback we got from surgeons at the conference Orion to simplicity to using it really give some.
In a sense to use it but it'd be great to know is how you think about this relative to pan optics.
You think about the patient population account address so what's the difference with characteristics.
Charlie can you give us a sort of scale difference. If you think about the patient reached this product could have thanks.
So I think this is a.
A question, we deal with everyday on the ground with with Surgeons, we get asked this a lot. It's it is the way I think we typically describe it is that look if you want the best lens out there at all distances near reading and distance.
Youre going to want pant optics, but youre going to have to potentially put up with a little bit of accommodation with halos and glare that will happen in about.
A good number of people, but probably one or 2% will not tolerate it well and you may have some challenges with those patients and that is the basic tradeoff of getting kind of what I would say best in class vision.
Versus what most people will accommodate two there's just a little bit of headache, and what happens to surgeons because they don't want those one or two because they feel like those are.
Many ways failures, if they have to take the lens out and put it put a new one in <unk>.
<unk> stayed away from all of the diffractive lenses, which is most everything else out there.
As you think about <unk>. It is a non diffractive lenses that means it does not have a concentric ring profile that creates different focal points, but what it does is stretch.
Wave front kind of way.
The focal distances and so what it allows then is any surgeon could put it in any patient and you get really good distance you get really good intermediate.
But the near vision, because you can't quite stretched as far as the pet Opex goes is.
It is not as good so 50% of the patients probably are going to need glasses and 50% of it will redefine.
That trade off for a lot of doctors worth it because they're saying look I can do this I got very big landing zone, which means it can be a little bit wrong in my procedure and get this right and I can get them glasses free at least 50% of the time and I'm pretty sure I got intermediate no matter. What so it's just basically a tradeoff and docs are doing is they're saying look.
Really great.
Surgeons will profile, the patient and kind of in their own minds Heather.
An algorithm for who will tolerate or potentially tolerate halos and glare and who will not and then if there is any concern at all they will move to <unk> and.
And in addition to that there is a group of patients that they see let's call. It macular retinal problems or they've got other other issues, whether it's necessary to see through the lens. They may have diabetic problems et cetera. Those patients have typically not been allowed into an advanced technology lends because you couldnt see the retina clearly through the multifocal lens and now you can.
Do you still do that with <unk>. So again it has some patient populations that can be added I would say.
Three year intern that used to be excluded now those are candidates for <unk>. So I think we're adding patients in on that front, we're adding surgeons and on the other front really didn't want to worry about the complex pre op and complex patient selection, but now are more comfortable doing that and again the mill.
Or that is hard to know what we can see is that both products are growing nicely very obviously smaller so it's growing faster, but what we see as the market is moving in an expanding way and so that's really what the game is and I think <unk> is probably more likely to expand the market that pet optics, and then pan optics will be the I'll call. It the graduate product that people move on to.
Great. Thanks for that just a really quick one on the margin side.
If you think about the margin you delivered in Q1 of sort of 22%. When you look at constant currency on your 2025 target, which is something in the 22% to 24% range.
Are you surprised the extent to which the drop through on that incremental consumables and <unk> sales in particular, given when you set the guidance for.
For 2025, you're probably werent expecting the inflation.
We have nice.
Is that do you have more confidence as far as not 2025 target having delivered this Q1.
Yeah, again, I don't want to get too far ahead of ourselves. We were pleased with the quarter that we had I think the performance. The business is performing very very well again, if you look at the 26 margin that we delivered in Q1, we sort of work some of the factors that is a little bit high.
We're going to have a more normalized view if you will in the back half of the year driven by the incremental investments in R&D and SG&A in the things that we talked about but.
Listen, we're very pleased with how the business is performing.
We've obviously had some headwinds whether it's FX or whether it's inflation, we've managed to absorb those to date.
But we'll see what happens in the future, we're very comfortable with what we control.
I feel very good about the underlying base performance of the business.
And we will just continue to evaluate things as we go forward.
That's great Super clear thanks, guys.
Thank you. Our next question comes from the line of Jeff Johnson with Baird. Please proceed with your question.
Thank you good morning, guys. It's David maybe just a couple of clarifying questions. If I could just on the contact lens price increases can you remind us the timing of those did one quarter good <unk> benefit at all from.
Some sell in ahead of those and when you quote that mid single digit market growth and I know, maybe some variability around that this quarter I appreciate that but is that a sell in number of sellout number because obviously, we see kind of the manufacturer data, but more of a solid number but sell out might be different than that so just trying to understand your data source that sell in sell out.
Yes, we used two data sources, we use JFK and we use CLI both of them you can anybody can buy I think but they are.
All retail sell out so you are going to have some differences between sell in and sell out to your point.
And on the contact lens pricing, we purposely time.
Our price increase for February 1st so that it wouldn't have an effect on either the fourth or the first quarter. So directionally I don't think I think it all washed in the quarter and we control the buy two.
Two generally speaking some somewhere around four weeks of inventory so that nobody is putting themselves in a position where they've got more than they need I think in the near term so.
I think we didn't really have any material effect.
From the price increases in the quarter.
Fair enough and then other.
Clarifying question was just on the ACI LLS market, the 19, and the 12, 4% numbers you quoted can you just remind us those are in unit volumes I think not dollars, but just remind us that and then two do you put <unk>.
<unk> go into that is that is it officially confirmed ACI goal or is it more of kind of a.
<unk> got Bob Monohull. Thanks.
Yes, no it's very different than some of our competitors Liberty is an ATI well it hasnt hei while designation.
And that matters a lot obviously for the reimbursement world.
And so.
No that is our ability it goes with the <unk> and it is unit volume that we're talking about when we talk about penetration. So obviously dollar value considerably different.
Okay fair enough. Thank you.
Thank you. Our next question comes from the line of David Adlington with Jpmorgan. Please proceed with your question.
Hey, guys couple of questions. So firstly I was wondering if you are expecting or whether you can give us some historical context.
Any impact from talking to Mac, Craig will consume a disposable income on either volumes or mix in both the contact lens.
Markets.
And what percentage of patients have some sort of patient out of pocket expenditure.
And then secondly, also J&J launched therapies.
Tenants with a combined antihistamine will be great to get your thoughts on that and whether you have any similar plans some of the products.
On the second one we don't have any plans and we don't know a lot about it.
We watched it I don't know.
Im sure if its out yet.
It's basically we're very aware of the notion of delivering drugs through a contact lens mechanism, we havent decided to pursue any of that.
On a percentage of purchases with us with patient out of pocket.
I'm not sure I have a percentage for you let me give you the categories, where it's obviously significant so most of the vision care business is out of pocket notwithstanding there's some contribution from vision care.
Insurances, but.
But it's usually a contribution to the total so $200 or something like that it's a vision plan like a VSP or something on the other side of the business.
And I should say in surgical refractive is almost 100% out of pocket.
So thats again, one of the sensitivities the surgical business is much more government run and I would say the vast majority of the world with the exception of.
Advanced technology lenses it really is.
It's a reimbursed government paid Medicare or Medicaid or gum.
Government health system compensated cyst procedure, so the patient pay element of it really comes into play only when we're talking about.
Advanced technology lenses and that is usually only in certain markets. So not every market will allow you to collect from the patient and that does hold the international markets back from penetrating hei wells, but again thats changing overtime as well.
Thank you and then I suppose following up.
Are you seeing multiple early but are you seeing any impact from tightening disposable incomes to consumers on any of those.
No and we don't really we have a pretty good sense of this we followed the <unk> in 2010, we've modeled the recessions just because we had a concern about all of that I think the things youll be most interested in I think it would be the refractive business. It's our most sensitive one because of the nature of the patient and the profile of the patient.
Cash pay it's a relatively expensive procedure.
And thats targeted at working working adults I would say and that becomes.
If you're out of work or Youre, making a lot less money youre going to hold off on those kinds of procedures.
The only thing we see in the vision care business, that's a little bit like that is typically people that are in lenses. They stay in lenses, but they don't trade up and so.
You may see some slowness in the trade up of value from.
The kind of elusive monthly two week modality to the daily modality, that's probably the main thing we saw in the Eni frame. So.
Mostly.
And impacting refractive I would say and that's relatively small for us so candidly <unk> got a pretty good profile for continuous demand.
Fantastic Thanks very much.
Thank you. Our next question comes from the line of Julien Tomorrow with BNP Paribas. Please proceed with your question.
Hi, Good morning, David Good morning, Tim Thanks for squeezing me in and congrats on the on the great quarter.
Two questions. One is on the margin development that you had to envision carry in the quarter.
In any way related to the launch of total search because I think you I think we did previously.
There are nicely accretive products fall for your portfolio. So I think it's in any way related noise. It's way too soon to see that sort of impacting going through and the second question relates to your M&A appetite, obviously valuations have come down quite a lot year to date.
Does that mean that going forward, you would be willing to accelerate the pace of M&A.
Does it doesn't change our views on that side.
Julian just on the margin $2 30.
Is margin accretive to the whole of the business and so we're looking forward to growing it wasn't big enough really to have a bigger impact on the first quarter. So I wouldn't read anything into the first quarter margin I think.
It's just getting started so the big picture, probably ocular health had more to do with it than anything else in terms of mix.
In the M&A piece, we do watch valuations and obviously, there's been a fairly sizable adjustment in a number of ophthalmic companies and so we're always interested in this I don't know that.
Historically, we were as interested because of because they were very expensive, but we'll see how long this lasts and what goes on I mean, I think our main idea here is to try to find inorganic.
Inorganic things that fill white spaces for us that can add value, where we really think it's.
Better owned in our hands. So I think the good news is is that we are we haven't underlying business right now that's performing quite well we feel good about our approach to this year, we feel good about our prospects.
And so I think we are in a position where with cash in a good position as well we could make some moves here if we chose to.
We'll see how that takes shape over time, but.
All things are kind of running on the right on the right track right now so I feel pretty good about the year.
Thank you very much.
Thank you ladies and gentlemen, this concludes our Q&A session and thus concludes our call today. We thank you for your interest and participation you may now disconnect your lines.