Full Year 2022 Alcon AG Earnings Call
Greetings and welcome to the Alcon fourth quarter and full year 2022 earnings call. At this time, all participants are in a listen only mode.
<unk> 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 Mr. Dan Cravens, Vice President and global head of Investor Relations for Alcon. Thank you you may be.
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Welcome to our fourth quarter and full year 2022 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.
Our web site at Investor <unk> Dot com.
Joining me on today's call from Geneva, David Endicott, Our Chief Executive Officer, and Tim Stonesifer, Our Chief announced financial Officer.
Our press release presentation and discussion will include forward looking statements. We expressly disclaim any obligation to update forward looking statements as a result of new information or future developments, except as required by law.
Our actual results may vary materially from those expressed or implied in our forward looking statements. Accordingly, you should not place undue reliance on any forward looking statements.
Factors that could cause our actual results to differ from those in our forward. Looking statements are included in <unk> form 20-F, and our earnings press release and interim financial report on file with the Securities Exchange Commission and available on the SEC's website at SEC Gov, non <unk> financial measures used by the company.
Maybe calculated differently from and therefore may not be comparable to similarly titled measures used in other companies. These non <unk> measures should be considered along with but not as alternatives to the operating performance measures as prescribed per <unk>. Please see a reconciliation between.
Sure.
Our non <unk> measures with directly comparable measures presented in accordance with IRS and our public filings.
For discussion purposes, only our comments on growth are expressed in constant currency.
In a moment David will begin by recapping highlights from 2022 in recent months, including market dynamics innovation highlights key product launches and acquisitions. After his remarks, Tim will discuss our performance and outlook for 2023, then David will wrap up with closing remarks, and we will open the call for Q&A with that I'll now turn the call over to <unk>.
David Endicott.
Thanks, Dan and welcome to <unk> fourth quarter, and full year 2022 earnings call.
2022 was a great year for Alcon, we ended the year with sales of $8 7 billion in double digit sales growth of 11%.
These results were driven by new product launches solid demand from resilient markets and strong commercial execution.
Core operating margin for the year was 18, 2% and core diluted earnings per share were $2 24.
Which was up 23% year over year on a constant currency basis.
Additionally, we achieved a core operating margin of 20% when adjusted for foreign exchange based.
Based on these results, it's clear that the Alcon team is delivering and our fundamentals are strong.
As I reflect on 2022, I'm extremely proud of what we've accomplished especially given the challenging geopolitical macroeconomic and supply chain headwinds we faced.
In surgical we grew the business double digits, driven by industry, leading technology solid execution and continuing international recovery.
Our portfolio of PCI wells Panoptic invitee had another quarter of strong share growth and we exited the year with a global PCI will share position in the mid fifties.
During the year, we launched our portfolio of <unk> on the <unk> platform in United States. This highly differentiated materials delivered among the lowest levels of glistening of surfaces as a proprietary edge curvature designed to help reduce glare.
Our nuclear materials were well received by doctors around the world and is helping us to gain share.
We're also expanding our footprint with double digit sales growth in the equipment category for the year.
This growth was particularly strong in international markets, where we continue to see solid uptake for our <unk> machines, including our industry, leading <unk> device as well as Legion, which is designed and priced for developing markets.
We expect the demand for equipment will return to norm more normalized growth rates this year.
While we continue to grow our footprint in ophthalmic operating rooms worldwide. We have also significantly expanded our presence in the clinic with the Argos Biometer.
Doctors are responding favorably to Argos, thanks in part to higher capture rates easier prediction of accurate lens power and data integration into the operating room, all of which helps drive clinic efficiencies and improve patient outcomes.
Tying this all together as our digital offering smart cataract, which we beta tested in 2022.
Smart Cat Rx received terrific feedback from surgeons that will continue to develop this platform in 2023.
So our cataract is the first application and outcomes comprehensive cloud based platform that is uniquely designed for surgical ophthalmic practices.
So our carrier links data systems and diagnostic devices in the clinic with equipment.
<unk>.
Data shows that smart cataract deliver significant time savings during the cataract evaluation planning operating room and post operative workflows.
Put it simply smart character is helping surgeons deliver better outcomes more efficiently.
Also in 2022, we expanded our presence in surgical glaucoma with the acquisition of <unk>, which brought the hydrus micro stent into our portfolio of Implantables.
Hydro has long standing clinical efficacy data its five year horizon data demonstrated meaningful and statistically significant clinical benefits over the full five years, including sustained reduction in medication use and decreased need for secondary glaucoma surgery.
Now turning to vision care, our team delivered high single digit growth across both our contact lens in ocular health franchises.
<unk> lenses, our full year growth of 9% was driven by our portfolio of innovative lenses, which continue to receive favorable market feedback as well as select price increases.
We continue to fill out our portfolio and launched new contact lenses in high growth segments of the market where areas, where we have opportunities to gain share.
In 2022, we launched totaled 30% of the reusable market. This is the first major innovation of the $4 2 billion reusable lens category in many years.
Total 30 is the only water gradient lens available for reusable wearers and since launching totaled 30, we're seeing share growth in this category.
Total 30 is available in the U S and Europe , and we will continue to roll it out to more international markets in 2023.
Just recently, we announced the launch of total 31, Stigmatism, which competes in the $1 $3 billion reusable toric category.
This is the first reusable water gradient lens phrase stigmatic wears.
So it's more patients with astigmatism, where reusable contact lenses the availability of the toric <unk> provides us an opportunity to gain share and bring exceptional comfort to these patients.
This leads will be broadly available in the U S and Europe earlier this year.
And we will rollout the lids internationally throughout 2023.
We also launch dailies total one for Stigmatism in early 2022 and customer reception has been very favorable dailies total one toric joins the sphere and multifocal modalities for the premium daily <unk> lens market.
Dailies total one toric is also the first and only daily Toric lens to feature our proprietary <unk> technology that delivers exceptional comfort.
Now all of our toric lenses feature our proprietary balanced design, which creates clear and stable vision.
<unk> portfolio represents a significant opportunity as our estimates show that toric is among the fastest growing segments of the contact lens market.
Now turning to ocular health, where we also saw high single digit growth in 2022, despite the supply chain challenges we faced.
Starting with dry IR sustained family, including sustained hydration ultra and complete continues to perform well with double digit sales growth in 2022.
There are over 30 million people in the U S alone that suffer from dry eye and sustain is the best selling brand of artificial tears and is clinically proven to suit dry irritated eyes quickly.
Now with multi dose preservative free formulations, we have a full suite of convenient and affordable options for patients.
Late in the year, we acquired Aerie Pharmaceuticals with this acquisition, we expanded our glaucoma portfolio with two additional products Rhopressa and <unk>, which were complementary distant brynza.
Rocco Tennyson Brynza offer four different mechanisms of action, allowing for maximum medical therapy adjust two bottles <unk>.
Additionally, the <unk> acquisition expands our R&D pipeline and builds upon our pharma development expertise.
Our strong 2022, ocular health performance was offset by significant supply chain challenges, particularly in contact lens care.
Our team continues to address these challenges, which are likely to persist through at least the first half of 2023.
Now let me provide.
An update on our end markets.
In surgical global cataract procedures were up mid single digits in the fourth quarter versus prior year.
This growth varies by region.
In the United States, where we where surgical centers continued to experienced staffing challenges procedural volume was up low single digits outside the U S procedures were up mid to high single digits as markets continue to improve.
Encouragingly, we saw sequential improvements in <unk> penetration in the U S in the fourth quarter.
We continue to focus on driving penetration by educating doctors clinical staff and patients about the benefits of advanced technology lenses.
In contact lenses, the retail market growth in the quarter was mid single digits with low single digit growth in the U S and high single digit growth internationally.
While mid single digit growth is in line with historical rates. It's important to note that this growth predominantly reflects price increases and where trade ups.
Additionally, the market growth varies by modality with daily Si Hy category, continuing to grow significantly due to higher pricing and patient trade up.
<unk> also continued to grow nicely, primarily driven by the daily Toric category.
Finally, the reusable category was flat.
And with that let me pass it to Tim will take you through our financial results and comment on our outlook for 2023. Thanks, David We're pleased to report fourth quarter sales up $2 2 billion up 7% versus prior year.
This growth was driven by continued recovery in most international markets and demand for our innovative products, including those from acquisitions. Our overall fourth quarter sales growth reflects approximately 180 basis points of contribution from sales of acquired products.
Our fourth quarter U S. Dollar sales growth included approximately 600 basis points of pressure from foreign currency.
For the full year 2022, total company sales of $8 $7 billion grew 11%.
I am extremely proud of how well the alcon team has managed the challenges of 2022.
We performed well, while navigating a year of historic uncertainty, including a strong U S dollar.
Continued supply chain tightness and inflation.
Moving to our fourth quarter sales results, our surgical franchise revenue was up 8% year over year to $1 3 billion.
Surgical revenue for the full year was up 13%.
And final sales were $434 million in the quarter up 11% year over year, primarily due to market recovering in most international geographies increased demand for our <unk> portfolio led by <unk> and sales of hydrous.
This was partially offset by declines in South Korea, following a reimbursement change during the first quarter.
Please recall that there was a significant spike in demand in Korea ahead of this reimbursement change and therefore, we expect difficult comps in implantables in the first quarter of 2023.
<unk> sales for the year were up 20%.
And consumables are fourth quarter sales were up 6% to $636 million.
Primarily driven by improving market conditions for the full year consumable sales were up 10%.
Our strong consumables growth also reflects the expansion of our global equipment footprint.
And equipment sales were $204 million in the quarter.
Up 7% year over year, primarily due to continued strong demand for our cataract equipment and service, particularly in international markets as we upgrade older generations of equipment to Centurion and Legion.
Growth in the quarter was partially offset by declines in the refractive equipment.
For the year equipment sales were up 10% we.
We continue to be very pleased with our strong equipment performance as well as the resilience of demand for these products.
Turning now to vision care fourth quarter sales were up 7% year over year to $881 million.
For the full year vision care sales were $3 6 billion up 8%.
Contact lens sales were $530 million in the quarter up 6% versus last year.
Sales were led by our portfolio of Si Hy lenses, partially offset by declines in legacy products. Additionally.
Additionally, we saw strong sales in the U S and slower international growth.
Contact lens sales for the full year were up 9%.
And I've got a health our fourth quarter sales were $351 million up 8% year over year.
This was led by a portfolio of eyedrops, including our sustained family of artificial tears and ophthalmic pharmaceutical products.
Similar to last quarter. This growth was significantly offset by supply chain challenges, primarily in contact lens care, which negatively impacted ocular health growth by approximately 400 basis points.
As David mentioned, we expect these challenges to persist at least through the first half of 2023.
Ocular health sales were up 7% for the full year.
Now moving down the income statement.
Quarter four gross margin was 61, 3%, which was flat on a constant currency basis.
Core operating margin was 16, 4% in the quarter essentially flat versus last year on a us dollar basis, but up 240 basis points on a constant currency basis.
The improvement was mainly driven by underlying operating leverage from higher sales and favorability from incentive compensation, partially offset by increased inflationary pressures and increased investments in R&D, primarily associated with the acquisition of Aerie.
Core operating margin for the full year was 18, 2%. However on a constant currency basis, we achieved a full year core operating margin of 20%.
Fourth quarter interest expense was $40 million compared to $28 million last year, driven by higher debt. Following the funding of the <unk> acquisition and a less favorable interest rates.
The fourth quarter core effective tax rate was 36% compared to 10, 4% last year.
This increase was primarily due to the recognition of tax expense related to the advanced pricing agreement between the Swiss and U S tax authorities that we discussed on our last earnings call.
There was also an impact from a decrease in inventory build in certain markets and the geographical mix of pretax income.
Core diluted earnings per share in the fourth quarter of 2022 were <unk> 42.
Versus 56 last year.
The decrease is mainly due to higher interest expense and taxes. Following the advance pricing agreement I just mentioned.
For the full year core diluted earnings per share of $2 24 grew 23% on a constant currency basis.
Before I discuss our outlook for 2023, I'll touch on a couple of cash flow and other related items.
Free cash flow for the full year was $581 million compared to $645 million last year.
This variance is primarily driven by lower cash from operations in 2022, driven by the negative impact of foreign currency on our operating results and the payout of the 2021 bonus partially offset by lower capital expenditures.
For 2023, we expect free cash flow to be significantly better than 2022, despite several onetime payments in the year, including transformation and a legal settlement similar.
Similar to last year, we expect the first quarter to be the low point in the year driven by the timing of the annual bonus payments and payments related to our expanded transformation program.
Capital expenditures were $636 million for the full year, which was primarily related to investments in our contact lens manufacturing production lines.
Transformation costs were $78 million in the quarter and $288 million of life to date as.
As we announced in our last call we identified additional transformation opportunities, which we launched during the fourth quarter and which accounted for most of the transformation expense in the quarter.
We continue to expect the entire transformation program to wrap up by the end of 2023.
Now moving to 2023 guidance.
Our current outlook assumes at year over year market growth will be slightly below historical averages.
Exchange rates as of the end of January prevail through year end.
And inflation and supply chain headwinds moderate in the second half of the year.
Accordingly, we expect 2023 net sales of nine 2% to $9 4 billion.
Which corresponds to 6% to 8% constant currency sales growth versus the prior year.
Now turning to expenses, we're going to continue to invest behind innovation and expect core R&D expense to come in toward the high end of our prior range of 7% to 9% of sales.
Moving to core operating margin, we expect efficiency initiatives and operating leverage to drive a core operating margin of between $19 five and 25%.
While we continue to see inflationary pressures, we've taken actions, including price and productivity initiatives to help mitigate the impact.
Moving down the income statement, we expect interest and other financial expense to be between 260 and $280 million. This reflects the financing activities completed in May and December at higher interest rates, including the incremental debt used to fund the acquisition of Aerie.
Additionally, we project our core effective tax rate to be in the range of 17% to 19%.
Based on all of these factors we project core diluted earnings in the range of $2 55.
The $2 65 per share, which corresponds to 16% to 20% constant currency growth over 2022.
While we do not speculate on currency movements based on exchange rates at the end of January we expect a broadly neutral impact from FX to both sales and core net income growth for the full year.
In terms of phasing, we would expect FX to be a headwind in the first half of the year and a tailwind in the second half.
Before turning it back to David I Am pleased to report that our board of directors is proposing a dividend of <unk> 21, <unk> <unk> per share, which is in line with our payout policy up 10% of the previous year's core net income pending shareholder approval.
Shareholders will vote on this proposal at our upcoming annual general meeting in May.
In summary, despite the challenges we faced in 2022 I am extremely pleased with our performance and I want to thank the entire icon team for their hard work and determination.
With that I'll pass it back to David for closing remarks.
Thanks, Tim to wrap it up I am extremely proud of all that the <unk> team achieved in 2022.
Despite challenging macroeconomic headwinds we produced strong operating results improved efficiencies, we delivered innovation and outpaced market growth in several categories.
These results reflect our strong business fundamentals robust long term strategy and the talent and expertise of our more than 25000 associates.
As impressive as those results are what I'm. Most proud of is <unk> purpose of helping people see brilliantly.
I recently learned about a patient who suffered severe <unk> is <unk>, which was later complicated by the development of a cataract.
<unk> experienced significant difficulties when it came to light Sun's snow and glare and underwent a cataract procedure and when the surgeon removed a patch from US is his vision was still improve that he was moved to tears and now this is the kind of procedure that genuinely changes lives.
It's moments like these when our purpose of helping people see brilliantly really does come to life and it's what drives the hard work and the dedication of all of our associates.
I want to thank the entire alcon team for their commitment to our purpose and I'm excited for what's to come in 2023.
With that let's open it up for Q&A.
Thank you.
If you'd like to ask a question. Please press star one on your telephone keypad.
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In the interest of time, we ask that you each keep to one question and one follow up thank you.
First question comes from the line of Graham Doyle with UBS. Please proceed with your question.
Hi, Thanks, guys. Thanks, a lot for taking my questions. Just two for me. So just firstly on the premium <unk> penetration.
<unk> as a sequential improvement back towards.
Trends in the last two years.
I know you were talking about staffing issues being a little bit of a headwind is there anything you've been doing from a marketing standpoint for example, thats really been driving that improvement that we can kind of book into 2023.
Then just a question on pricing would you be able to give us a sort of shape in terms of pricing as to what's happening in 'twenty three say versus 2018, thanks a lot.
Yes, let me start with the penetration and we did see sequential movement from the third quarter to the fourth quarter that was positive for US I think it was.
We had kind of expected it to come back or is it kind of moved around flat most of the year and it is again I should be careful it's flat year over prior year quarter. So remember sequentially, we were down a little bit into the third quarter, which had bothered us a bit.
I think what we're seeing is.
Programming effect, but I do think that this year is where you really begin to find out with all that we're investing in that programming is working or not so our hope is of course that the more we can educate the staff on how to talk to patients about their choices and how to position those choices as well.
So that they understand the economics of them understand the benefits of an of come into the office and is prepared to make that decision that speeds. The office up it makes it easier on the.
On the staff and obviously a lot easier on the on the surgeon. So we're hopeful around the program, but I wouldn't I would say, it's too early to tell what's really going on there. We are obviously encouraged though by the overall penetration and remember too that the penetration has got a little bit of a lapping effect to do.
At a very large penetration rate I think it was up in the high $40 for a stretch.
So for a lot of the prior year, we're lapping that around so once that gets out of the way at the end of this quarter second quarter forward or this year I think we'll get a lot cleaner view of where we really are so a little bit of noise in there, but directionally encouraging news in the fourth quarter.
On pricing I think the way to think about it at least as most of our pricing is in contact lenses, a little bit of an ocular health, but really it's.
Our surgical business, we take it where we can but it's largely contracted and those contracts are multi year.
We probably have.
A little bit in that area, but I would say that directionally, we've taken price twice last year that we'll see the effect of once in February and then once again.
December again, I think those are yet to be seen as to how well they read through and we're watching very carefully what the impacts are on those because we are concerned about pricing out the consumer <unk>, making sure that the margins that we're generally for the surge for the optometrists are competitive I think we feel good about that by the way but.
Directionally the pricing has done well for us.
I think we should believes that takes well.
Kind of moves along correctly, but I think directionally. We also believe that we should watch it carefully so not a lot to say about 23 other than 'twenty, two will read through full year effect.
And we'll have to report out at some later date.
The numbers actually work.
Okay. Thanks, a lot super clean.
Thank you. Our next question comes from the line of Anthony Petrone with Mizuho Group. Please proceed with your question.
Thanks, and congrats on a strong end to the year here one on Aerie and then one for Tim on margins, maybe Dave just to level set on on Aerie pharmaceuticals.
So maybe we a rho kinase inhibitor share.
Sits today in the United States I think Gary had it.
Mystic, where.
That was about 30% of the IOP market and where do you think share can go over time or rho kinase versus prostaglandin.
Just trying to sort of level set the multiyear run here and I'll just put it in the margin one quickly Tim on margin.
We gave the constant currency margin.
Outlook for 2023, I'm, just wondering when we level set that back to 2022. It looks like we're still looking for 150 basis points at the mid point, even if we take constant.
Constant.
<unk> effects out of it I just want to make sure that math.
It's correct. Thanks again.
Yes, let me, let me start with the the Rho kinase discussion I think.
Yes, we're excited about the progress is being made from the acquisition forward, we've seen it kind of steady steady growth in the combination of both.
<unk> and Rhopressa Directionally.
We are pleased with the progress.
I know that I want to speculate at this point in terms of how far we can go I think we are working a lot on.
How to put reposition both of those products. We also working a lot on.
The managed markets access element of it but I do think those are largely the developments that we can add and I think we are.
Along with a little bit more promotional effort, we hope to take it off of its current trend.
But to do that obviously.
We need to be successful with both the repositioning of these products and also the access element. Obviously, it's about it is about you've got it about right. It's about 2% combined right now a little more than that.
Directionally.
Very small part of the glaucoma market, albeit a lot of the glaucoma market is generic so if you look at the probably the achievable markets.
We're very realistic about what we expect.
I love the mind that we can bend the trend up from where we sit.
And then on the margin you are in the ball right ballpark Anthony I mean, if you think about moving from the 18 to up to the 19, 5% to 25.
We would expect gross margins to improve we've got a lot of productivity initiatives in place.
We also have inflation subsiding, a little bit in the second half.
So that should be helpful.
It will probably be some pressure on the R&D line.
R&D expense in 2022 was roughly 8% of revenue that's going to be a little bit higher as we integrate aerie because we're doing some work there. So I would expect a little bit of pressure there on the last call. We talked about the additional transformation, so that $100 million of savings.
That's obviously going to drop through to the margin rate that alone is probably 100 110 basis points and then we would expect to continue to get leverage.
On the SG&A front, so it probably won't be as high as last year, given the revenue growth.
When you take out the transformation, but we continue to expect that so those would be the levers to get you to that 19, 5% to 25%.
Thanks.
Thank you. Our next question comes from the line of Larry Nicholson with Wells Fargo. Please proceed with your question.
Good morning, Thanks for taking the question.
Two for me I wanted to start on the U S and the market growth.
Embedded in the guidance here and then I wanted to ask a second one on just kind of revenue cadence for the year just starting on the market growth.
Dave or Tim can you talk about what youre seeing in the U S. Your organic growth in the U S has been in the low single digits. The past three quarters and is that why you expect market growth to be below historical averages in 2023.
And what are you modeling for market growth in 'twenty, three obviously, it looks like its probably sub 5% and I had one follow up.
Yes, Larry.
Youre not wrong, the North American market. This last year was was relatively subdued but everybody is kind of they wrapped around the COVID-19 is one of the ways you've got to keep looking at it as what's the natural growth rate and then what is it on 19, because they are usually two year number on 'twenty one.
Skip over 'twenty, one it's been a pretty good idea.
We've seen this year was.
The surgical business on a full year basis, the market was roughly around 4% the vision care business.
<unk> care market was roughly around kind of three 4% those are very historical numbers.
A little softer on vision care than we would have expected probably.
For the full year for the sorry for the fourth quarter, but the full year. It was also in the U S was 4%. So directionally I think we feel like there is in the fourth quarter, we saw a little bit of softness with unit growth, where most of the 4% was in vision care was made up of price and mix.
Yes, we're being a little careful but I think the fact that motors. We're lucky we're in resilient markets Directionally and I think what we're talking about are relative isms here. So we think cataracts don't go away, we think eye surgery and eye disorders don't go away that Directionally, we're going to see historical growth rates in the.
Kind of we've always said kind of 4% to 5% range as the market is depending on which one we're talking about so a little bit softer that is what we're calling it principally because the vision care market.
<unk> has the potential as we look at <unk> nine and what happened there.
To come off a little bit so it came off of the <unk>.
I have I think 8% went down to maybe 3% ish.
And.
Still growing but in the <unk> frame.
And a lot of that was really exactly to say it was it was a.
Slowdown in units slowdown in new starts.
See that internationally, yet, but we're wrapping around soft numbers.
Because of Covid. So I think given the I would say the uncertainty of the market. We felt it was best to.
Plan for at least a.
Softness in the market if we're wrong, obviously, we'll lean into it but like I said, we're over indexed in the high growth areas. So I feel like we've got a pretty good plan.
We're prepared to do well.
Yes, and then as far as the <unk>.
Or is the cadence slurry revenue I think it is going to be broadly in line with historical trends. So I'd go back to 'twenty. One 'twenty two you could probably go back to 19, I Wouldnt look at 'twenty.
And as we've seen historically Q2, and Q4 are typically higher than Q1 and Q3 from a revenue perspective.
If you think about allergy season, and Thats predominantly in Q2, so drives revenues up and then when you get to Q4 hospitals are managing their capital budgets consumers are managing their co pays by the end of the year. So we typically see a little bit of a revenue lift in Q4 as well.
And then while we're on cadence just from a P&L perspective, if you look at R&D.
That will be a gradual progression throughout the year as we've seen in the past.
SG&A I'd, just remind folks that Q2 is a heavy spend for us as we get to advertising and promotions back to school programs things like that so let's take a look at those historical trends because there is a big jump from Q1 to Q2.
And then interest expense I would just level load the interest expense.
The inorganic contribution Tim about two.
<unk> and 'twenty three.
Yes, that's about right.
So much.
Thank you. Our next question comes from the line of Daniel <unk> with.
Please proceed with your question.
Yes, thank you much.
Question, maybe on product launches something obviously you were pretty active the last few years I would say, especially on the contact center side. When you launched a lot of things.
But looking back what you announced in the last in the in terms of products to come I would say at the moment there is not so much lift anymore.
Can you give indications at least come in 'twenty, three and also 24 here.
And then on the M&A side, obviously pretty active on the ophthalmic side.
Eastern something less.
<unk> be interested in acquiring because in my view there is just the large indications like wet AMD left where all come as market presence could you help me with it.
Sure.
But we.
We've got a lot of room left both geographically and just as you think about where we are in the launch cycles for new product flow. So.
Would really point you at what we launched to a large degree over the last 24 months most of those products are in their very early phases. So I think.
But what strikes me as our tour X in particular remember we just launched.
Dailies total one toric, we just launched the <unk> talk a little bit before that.
Late in the year, we launched <unk>, we didn't even get that out into Europe till this year. So there's a lot of runway left for <unk>.
And we start the the dailies <unk> toric <unk> with almost a zero share. So we're doing quite well there we expect to continue to do that.
I think if you look forward in the international markets again, we have a lot of geographies yet to fill out with products. So we'll talk a little bit more about.
The product flow in both the near term and long term at our capital markets day.
But I do think that the way to read where we are right now in vision care is quite positive and in surgical again, we just launched <unk> last year and we haven't even got that outside of Europe , Yes, We've got Europe U S, but not any of the other markets. So remember clearing out is really first year last year. So we still got a lot of movement to go there with <unk>.
<unk>.
Vivid out in Japan. This year, I think and so we've got a number of things going on that.
I think keep the momentum moving in the business from new products, but also I would just say really important that we maximize all the things we've got as we.
Continue to develop products for later this year early next and we will talk more about those at capital markets day.
Just.
We are always interested in.
The major categories, So think about glaucoma dry eye retina for sure all of them are of interest to us I think probably.
The way to think about where the world is right now is it seems like with the exception of the multibillion dollar kind of retina products or kind of orphan products.
Big Pharma is not real interested in our space and I think that's for a lot of US who grew up in this space. That's not unusual its kind of alcon grew up to begin with.
We did a lot with $100 million to $300 million products.
That which we had many and so while the big categories and some of the Big products you may not naturally no I think what you'll find is that there are a lot of nice what I'll call in.
It's singles and doubles I guess, an American baseball terms were.
We're moving the runners and doing a nice job of bringing in products that add value.
Matter, a lot to patients and matter a lot to the doctors who use them.
I'll leave it at that but there's quite a lot going on.
In the M&A space for us that we look at.
Obviously, we're very careful about.
How we make decisions there and we tend to be a little bit conservative and disciplined around capital deployment.
Okay very helpful. Thank you very much.
Thank you. Our next question comes from the line of Matthew Michelle right.
Bank capital markets. Please proceed with your question.
Hey, good morning, and thank you for taking the questions.
I first wanted to start on inoculum health.
I guess with some of the headwinds youre seeing in solution doses, hoping you can call out.
Trends in it.
Hi, today, OTC and kind of dry eye or are we kind of underestimating or some of the success, you're having in that area, especially with driving growth.
From a new sales force.
Well good question, Matt Thanks for it.
If you look at the full year impact in the ocular health business for US we're reporting a 7% number for the year. If you look at that you take it apart.
The underlying sustained pattern day, and kind of all the rest of our eye drops business probably grew at 8%.
And we had about a 6% offset.
With the CLC business, so think of that growth kind of organically being naturally drawn down to 2% and then of course, the pharma stuff adds some inorganic.
To get to seven so the markets are growing we think it kind of in that.
Again mid single digits number and we're outperforming as we are in contact lens and also in the surgical business. So I don't think it gets as much attention, which is interesting because it's actually a nice nice bit of business for us.
But I would say that the big news for.
For the quarter and I think until we get out of this is that we are.
We're losing some ground on contact lens care.
Supply chain problem that we've had for almost a year now.
With one of our with our basket.
In the.
Peroxide solution.
Products. So we are doing all we can to get that sorted out we're selling everything we can make but we aren't making as much as we used to.
We're going to hopefully solve that middle part of the year, but it is going to be hand to mouth till then directionally, though very good underlying growth.
And then a follow up on <unk>.
Contact lens commentary you had.
Yes, what you said, it's a little a little softer for the for the fourth quarter I guess.
Why do you have a sense of why youre seeing kind of some of that softness is it staffing.
Is it supply constraints or is it are you seeing.
The consumer start to moderate its purchases.
Yes, I mean, we've looked at it quite a little bit and.
The fourth quarter in the U S was.
It was different then.
Than what it was in your international obviously, we had a very good quarter internationally, but.
I would say, they're wrapping around on a relatively soft numbers. So.
What we're watching very carefully is contact lenses are part of the good news is our contact lenses is people don't stop wearing contact lenses. They don't just quit.
It's part of their basic expense in a month and so what what they do do is they shop for private label. They do shop for deals in different channels and they do stretch their lenses and so we're aware of that we saw as a phenomenon.
In the <unk>.
Nine frame and I think when we looked at the fourth quarter. What we saw mostly was price and mix driving the U S growth. So in real terms the units were basically flat to slightly down.
And again, we're being very careful with that.
Just trying to figure out what that really means I think directionally.
It's probably short lived and it will bounce back to relatively normal growth, but we'll have to see where that plays out.
Thank you David.
Thank you. Our next question comes from the line of Veronica David Joseph with Citi. Please proceed with your question.
Yes, hi, guys. Good afternoon, and thank you for taking my questions I'll also keep it to two.
One Tim maybe thoughts on the levers that you have on gross margin and help us think through the bridge.
For 2023 between the inflationary headwind the tailwind from productivity, including our contact lenses and anything else that we should be bearing in mind. If you could just walk through those pluses and minuses that would be great.
And then if I can follow up on your comment on the significant inflection in our free cash flow similar.
Similar question, maybe quantify and tell us what is the biggest delta there that gets you to eight meaningfully higher free cash flow number in 2023. Thank you guys.
Yes again on the good question, Brian on the on the margin front.
Gross margin I'd expect gross margin to improve year over year again, we have a lot of productivity initiatives in place.
We've assumed that some inflation has subsided, particularly in the second half of the year.
And then we obviously have some pricing that we have implemented this year that carries forward to next year. So.
It's going to be more of the same we're going to get a little bit of gross margin improvement and then we're going to continue to get operating leverage and that's going to be the transformation that we announced last year.
At 110 basis points right there our last call I should say and then continued leverage so that's kind of the that's kind of the leverage story on the free cash flow the way I'd think about it is we ended the year at $5 81.
So tailwind going into 2023.
We continue we expect to continue to grow operating income that will flow down to to free cash flow will probably pick up a little bit of networking capital improvement, particularly on the inventory front as we built some inventory in 'twenty two for some of the supply challenges that we had maybe a little bit less capex. So those would be the key tailwind and then the headwinds that we're going.
To face will be increased interest expense driven by the financing of aerie the transformation costs that I that I called out and then legal settlement. The J&J settlement that we talked about so.
100, or 120 of that $199 million settlement will flow through free cash flow. So those are those are the big pressure points, but net net we would expect we would expect to be higher despite the incremental one timers I'll call. It in 2023.
And Tim you talked about this one $8 billion to $2 billion of free cash flow by 2025 and is this a linear improvement from the 500, either front or back end loaded.
Yes, I mean again, if you take the assume that we improve 2023 through the levers that I just talked about.
And then you back out those one time or is that kind of gets you to a normalized level that's significantly higher than the $5 81, and then it's just going to be volume growth, it's going to be.
Rate improvement and probably a little bit more networking capital improvement, but there is still a clear path to get there.
Thanks Scott.
Thank you. Our next question comes from the line of Cecilia furlong with Morgan Stanley . Please proceed with your question.
Good morning, and thank you for taking my questions I wanted to start with equipment just off of the strength you've seen in international markets can you talk to you as you think about 'twenty Tivo durability sustainability.
As well as our U S versus U S.
Look for growth, especially given that the comps from 2022.
Yes, we had a terrific year on equipment obviously.
Equipment for the full year grew 10%.
Mid teens in international and pretty close to what we expected really not great not much growth in the U S. It was really the international business that carried carried our business.
I think the.
The robustness of the equipment business has been really on the back of our FICO machine and I would just say that as much.
<unk>.
We keep thinking that we've kind of run out of gas on the equipment business.
The capital seems to be there out there and the capital seems to be coming to buy Centurion.
Legion product, both of which have done quite well.
Part of the equipment strength is new product flow. So we do have.
A full year of Argos internationally, we did really well year on year with that product, we did really well year on year with real value.
We've got a lot of really good.
Individual pieces that.
Like active century, handpiece for our oldest <unk>, which really does upgrade the performance.
Performance of the units. So we've got a lot to talk about it a lot going on.
And I do think that all of that strength was offset by a decline in the refractive equipment, which again I think.
I had it been it'll even flat we would have done better than we said going forward.
We have a belief that this has to return to normal at some point and I think probably we will start again next year with a belief that this should probably run close to what procedural growth is generally equipment runs a little bit in front of the growth rate.
Of procedures because of course, you need more equipment or do more procedures directionally.
And that has been the view that we had this year it was.
Kind of I think underestimated.
Probably where competitors ended up there was there were some supply chain challenges with some of our competitors we thought we'd.
<unk> face more competition than we actually did but I think directionally, we were really pleased with the business.
<unk> expect to have a good year next year I, just don't think it's going to be a double digit year next year.
Okay, and if I could follow up also totaled 30 some of your comments around the recent launch.
That's expansion in 2000, and if you could just level set what you've seen from both a growth that's all assurance standpoint.
22, and then your outlook for 2020 as well.
Yes, I mean, we're really pleased with the product.
It's a very unique product has a unique material that allows for water gradient to be on a different kind of material material that actually sheds bacteria over time so.
It is a durable material, but can still hold water at the surface.
Nobody has been able to do that before so what you feel on your eye at the end of 30 days is really cool basically feels like the first day you put it on so.
We're really excited about the potential leads the Doc response has been terrific and the new prescriptions for the lens are quite good in terms of share.
What we've what I want to be careful about on <unk> is that the monthly lens takes a longer time to come up the curve I.
I think it's kind of obvious when you say it but do you have a daily patient you start them on a trial you give them a week's worth of product and they come back and they buy a month's supply of three months supply in a week. If you give somebody a couple of boxes of total <unk> for two months before they decided to come back and purchase the land. So there is there is a natural.
In both.
The purchase cycle and the return cycle for reusable patients.
And again were useful patients tend to be.
Folks who've been in their ledgers, a longer type or Theyre just starting so we were real keen on the new patient starts again, we've been watching that as a leading indicator and we're very pleased with the less of that.
How fast it comes up the hill, we will have to see as we get into next year.
But I think Directionally, we're pleased with it I do think putting the totaled 30 toric out there, particularly because they stigmatic.
Our typically in reusable lenses are a lot more often and reasonable lenses.
We have a particularly good one I think will help the family a good bit. This next year. So those two lenses together I think represent the premium product.
Product in the entire market for Reusability and so we look forward to seeing.
Good response, but the response so far has been as expected maybe a little better net.
Okay. Thank you for taking my question.
Thank you. Our next question comes from the line of Ryan Zimmerman with BTG. Please proceed with your question.
Hey, David Hey, Tim Thanks for taking my questions. Congrats on your progress. This year. So wanted to talk a little bit about hydrous you guys have had it for a few quarters now I'm wondering if you could talk to us a little bit about kind of the attachment rate youre seeing with your <unk> and whether you are getting a lift in sales as a result of entering the surgical robot.
Common market because you really are the only player in the glaucoma space now that has that that benefit of having both on iOS and then a surgical option and the combo cataract market.
Yes, it's a good question, we've never actually looked at I don't know that we've ever looked at the actual attachment rates, but I imagine it's quite high because we are in most of ours with surgeons.
We're doing cataract surgery, and obviously the market we are going add as a combo.
Procedure.
I think what I can say about hydrous is we're pleased with what's happened this year, we're pretty much right on our target.
I think what we're excited about is the efficacy of this product I think it continues to play out.
Patients come off of medications stay off medications they are delaying.
The second surgeries that have been so common with other procedures and I think as surgeons get more comfortable with the procedure.
They see the efficacy and I think over time that will be the winning combination I will say that the reimbursement.
Landscape that did.
Affect the.
The visco injections around the canal have had a meaningful impact on the penetration. So the market's grown migs market has grown pretty nicely actually little bit better than we expected the use of keratoplasty.
A procedure has been also better than we expected so I would say that the mix.
Has been surprisingly strong to that procedure I suppose one could speculate the reimbursement there is so positive relative to what is a little bit more complicated procedure in either the stent products that.
That could be driving it I think that will even out over time that people will come back to hey, the reason we're doing this is to get the patient better and.
To do something for the pressure the best idea. There I think is going to end up being hydrous. So we're encouraged in the long run. We certainly were on plan for last year, and we look forward to kind of finding if there is some leverage there I'd love to find it I don't know whether it really is in there or not I would tend to believe that this particular product is.
Independently chosen.
Okay. That's very helpful and then.
So as I think about guidance for 2003.
Cataract growth is kind of below market, then I would assume.
Consumables will be similar in that vein and if equipment is moderating as while then do we expect to see a more meaningful lift in implantables and if I look at ocular health or a combination of aerie.
I just want to understand kind of the segment dynamics as it relates to your 6% to 8% growth kind of what's below what's above assumed in your guidance.
Well look I think the best way to think about it as almost every one of the markets. We've got without again, plus or minus a little bit is in that mid single digit growth rate right. So if you think.
Let's call it 4% to six as the market you're back out organic.
Inorganic growth from the six to eight.
Ore youll pulp pull off two point, so, let's just say you're kind of right on.
Kind of the market so to speak now if you say and we are that the market is going to soften a little bit and we're growing faster than the market consistently across all categories. So I would say kind of if you think about where the market dynamics sit then individually.
<unk> planned to do a little bit better Nols, we plan to do it we'll probably do better than market and equipment.
<unk>, we are such a big part of that market, we are likely to run real close to the market to your point.
And I think Directionally on vision care I think we're lucky in that we are indexing into the fast growth areas. So think Si Hy dailies <unk> toric.
And I think for those reasons, we should do a little bit better than market in contact lenses, we certainly expect to.
And then you're really adding onto the ocular health piece, which again gives you kind of the balance of growth I think I would expect us to be kind of roughly at market or slightly ahead of that in the core of that business. But then you get a little bit of positive news I think around the the inorganic stuff that we add in so I mean that was kind of the math. If you were trying to do it I'd really segment kind of high level whats.
<unk> faster, what's what's growing at market, it's probably how we've been thinking about it.
Thank you Tim Thank you Dave.
Thank you. Our next question comes from the line of Ed Ridley Day with Redburn. Please proceed with your question.
Hi, guys. Thanks, so much.
Quick follow up on Hydrus.
Can you give us any color on the size of the business with a growth dynamic.
Beyond what you've already said.
And secondly, as you highlighted youre, making.
Nice progress upgrading on securing Legion.
And the old installed base.
Would you say you all know on that upgrade cycle in the U S and Europe as you upgrade to the latest machines.
Yes, a couple of thoughts first on hydrous I guess the way to think about it is the market itself. The migs market. We think is growing mid teens thats kind of where we thought it would be.
And that is where it is I would say the mix inside of that is a little bit more heavy to the Kendall plasty and visco dilating agents so that.
That grouping is growing a good bit faster than market and so obviously, the stats are growing a little bit slower than that.
Thats Directionally, where we are we haven't really commented on the size that we try not to go after individual products, but I think we're pleased with where we were to go back to when we acquired the product what we projected on it I think we're right on that path of Directionally on the other piece of this on.
The upgrade cycle.
We're pretty much done with infinity.
This year I think we end of life. The cassette this year at the end of the year.
We've mostly gotten them all out there is still a few rolling around in various markets I don't know that theres much in United States I think it's always harder when.
When you're dealing with another 100 or so countries around the world. So I'm sure that we'll see some continued upgrades there, but really what we're doing now is outfitting, new <unk> or replacing old insurance. So remember, we're well past the 10 year Mark on Centurion.
That will in and of itself.
Body wants a new one in a lot of ways because the new active century, Handpiece is a whole world different than what youre running if you're running a 10 year old century, So theres a whole bunch of features that we.
Put in over time.
Or it is steady bunch of upgrades, we've done over a long period of time. So it is it just the infinity is that we're upgrading of course, it's the older <unk> and then we've actually had a pretty good run at some competition I think our footprint share grew substantially.
Substantially this year, particularly in the international market. So we're feeling pretty good about.
Where that business sits.
Thanks, David Thats helpful.
Thank you. Our next question comes from the line of Chris <unk> with Credit Suisse. Please proceed with your question.
Thank you operator.
Good morning, good afternoon.
At the very beginning of last year International took I think something a little bit closer to mid year, and then again the.
The U S announced an additional price increase for this year late last year. So all of that said, it's a little bit tricky to compare it. So I decided what I would say is it directionally. We've thought that we would get kind of low single digits flow through from those from those activities are they are different market to market, we're very specific and how we think about.
Products markets and competitors.
And consumers trying to make sure we get that mixed right.
And so a little tricky to answer that question any more specifically than that.
Capex, yes on the Capex, we would expect this year will probably be at that five or 6% of revenue.
Capex on 2023.
Alright. Thanks.
So.
Thank you ladies and gentlemen, this concludes our queue in any fashion and thus concludes our call today. We thank you for your interest and participation you may now disconnect your lines.