Q3 2023 Alcon Inc Earnings Call
Greetings and welcome to the all Com third quarter 2023 earnings call. At this time, all participants are in a listen only mode.
Brief question and answer session will follow the formal presentation.
Anyone should require operator assistance during the conference. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded it is now my pleasure to introduce your host.
Dan Cravens, Vice President and global head of Investor Relations.
Dan you may begin.
Welcome to Alcon third quarter 2023 earnings Conference call yesterday, we issued a press release and interim financial report and posted a supplemental slide presentation on our website to enhance today's call. You can find all these documents in the Investor Relations section of our website at investors that Alcon dotcom.
Tom.
Joining me on today's call are David Endicott, Our Chief Executive Officer, and Tim Stonesifer, Our Chief Financial Officer.
Our press release presentation and discussion will include forward looking statements. We expressly disclaim any obligation to update forward looking statements as a result of new information or future developments, except as required by law.
Our actual results may vary materially from those expressed or implied in our forward looking statements. Accordingly, you should not place undue reliance on any forward looking statements important factors that could cause our actual results to differ materially from those in our forward looking statements are included in our <unk> form 20-F.
And our earnings press release, and interim financial report on file with the SEC and available on the Sec's website at SEC Gov.
Non <unk> financial measures used by the company may be calculated differently from and therefore may not be comparable to similarly titled measures used in other companies. These non <unk> financial measures should be considered along with but not as alternatives to the operating performance measures as prescribed by her I F. R. S.
Please see a reconciliation between our non <unk> measures with directly comparable measures presented in accordance with I for RIS and.
In our public filings.
For discussion purposes, our comments on growth are expressed in constant currency.
In a moment, David David will begin by recapping highlights from the third quarter. After his remarks, Tim will discuss our performance and outlook for the remainder of the year, then David will wrap up and we'll open the call for Q&A with that I will now turn the call over to our CEO David Endicott.
Thanks, Dan and welcome to <unk> third quarter 2023 earnings call I'm pleased to report another strong quarter with sales growth of 9% core operating margin of 19, 5% and core diluted earnings of 66 per share.
These great results were driven by international markets, and surgical and global strength across the portfolio of vision care as we continue to outgrow our markets.
As we look across the industry were beginning to see market growth rates returned to historical levels of mid single digits and now count continues to outpace the market in nearly every category.
Let me start with surgical Implantables, our technology continues to lead the market globally. One out of every three <unk> implanted is done with an alcon lens and premium lenses decision. The statistic is even more impressive with one out of two <unk> is an alcon product.
<unk> shipped lenses <unk> and Pan out to continue to lead the category in the U S and around the world. Additionally, we're continuing to expand in areas, where we have opportunities to grow share such as China.
We continue to be encouraged by the resilience of Hei will penetration, notably global penetration was up 120 basis points versus prior year and up 30 basis points sequentially, driven by international markets and in particular, China, where we are under indexed which accounted for almost half of the growth year over year.
In surgical glaucoma, our customers continue to be impressed by the hydrus Microstat hide.
<unk> is the first and only mixed device to report significant outcomes for from a pivotal trial at five years. These.
These results show that hydrous offers long term glaucoma medication reduction reduction of secondary surgery and reduction of inter ocular pressure.
These are important factors for both quality of life and payer economics and in the U S. After reductions in reimbursement for other glaucoma procedures reimbursement for hydrous remains favorable.
Now I'll discuss our expanding equipment footprint similar to last few quarters, we're continuing to see strong demand for our Centurion and Legion Saco machines in international markets as we work through the upgrade cycle.
In the U S, which has already gone through the upgrade cycle and is largely on the Centurion platform. We continue to see strong interest for innovations like active century handpiece.
Additionally, we continue to see success in consumables consumables are a large and important part of our business as they represent a durable and recurring stream of cash flows.
We have dedicated items like our fluid management system to our custom packs, our consumables have an important role throughout the procedural journey.
Additionally, as custom packs are individually customized by practice procedure surgeon and sequence they drive efficiencies in the clinic and the operating room.
We're enhancing our equipment offering with digital innovation to create a connected ecosystem at the recent American Academy of Ophthalmology Conference, We announced U S commercial availability of smart cataract.
With smart cataract practices can link data systems and diagnostic devices in the clinic with equipment in the or.
Smart cataract has demonstrated significant time savings during the cataract workflow with almost 14 minutes per case saved versus traditional methods for certain patients with.
We've continued to receive positive surgeon feedback as the product has started its official rollout.
Now I'll turn to vision care, where we had another quarter of strong performance in both contact lenses and ocular health.
In contact lenses, we're seeing strong interest for our specialty lenses, including multifocal <unk>.
These are large fast growing markets that have historically been underserved by innovation.
We've launched several new products in these categories, which are quickly, becoming a favorite of eye care professionals and their patients.
Our most recent launches totaled 30, multifocal, which we introduced early in the fourth quarter of this year.
<unk> represent an important opportunity for us as many whereas drop out of contact lenses. After the age of 40 due to dry eye discomfort and visual acuity issues.
Multifocal market is valued at over $1 billion globally and growing double digits.
<unk> is uniquely positioned as it offers our premium water gradient innovation at a more accessible price point.
It's also the first and only monthly water gradient multifocal lens that provides excellent visual acuity at all distances.
Brian care professionals. This lens leverages outcomes proven precision profile design, which delivers a 96% fit success.
The multifocal modality completes the expanding total 30 family, which also includes a sphere and toric lens.
Now we're also seeing strong uptake of our specialty daily lenses, including daily dailies total one toric.
Dailies total one multifocal and precision one toric.
Even after more than a decade in the market. The dailies total one family remains the gold standard and we're comfort.
Clinical studies showcased at the recent American Academy of Optometry meeting illustrated the performance of the dailies total one family in particular these studies showed that most contact lens dropouts, who are re fit into dailies total one could become successful contact lens wearers and that comfort was improved in a stigmatic patients who switched to date.
We started <unk> toric.
Now, let me move to precision one which is our fastest growing contact lens brand as a reminder, precision one was designed to address where drop out by providing precise vision long lasting comfort and ease of handling.
Precision went toward brings these benefits to mainstream asthmatic wears.
And for eye care professionals clinical studies show that lends settles in less than 60 seconds for 99% first fit success rate.
These types of innovation are testament to our dedication to helping eyecare professionals modernize their practices with leading technology to better serve the needs of their patients.
Now as we look to our ocular health business, we continue to see strong demand for our portfolio of eyedrops.
Driven by our multi dose preservative free formulations sustained continues to grow globally since.
Since 2021, we've launched the <unk> in more than 40 markets and we continue to see favorable customer response.
In the U S only about 25% of the fast growing artificial tears market is in the preservative free category compared to more than 50% in some European markets.
With multi dose formulations were seeing the U S preservative free category expand where one point of growth represents almost $9 million of revenue for outcome.
Moving to ocular allergy as we continue to see strong retail and consumer interest in our <unk> brand family, especially <unk> extra strength.
The convenience of a prescription strength allergy product available over the counter is appealing to consumers.
In our pharmaceutical eye drops business, we continue to be pleased with Rockwood 10 in Rhopressa in particular, Rockwood Tam continues to perform well with low teens total rx growth year to date.
Lastly in contact lens care I am pleased to report that the recovery of supply is largely complete.
While we still have work to do to fully recapture lost customers were happy that this issue is behind us.
Now I'll provide an update on our end markets.
In surgical global cataract procedures were up approximately mid single digits in the third quarter versus prior year.
Doug lenses retail market value was also up mid single digits similar to last quarter, we saw steady where trade up and meaningful contribution from price.
For the year, we continue to expect eyecare markets to grow at or above historical levels.
And before I pass it to Tim I want to comment on how saddened we were by the recent passing of Matt Michel <unk>, who covered our kind of Keybanc that was an asset to his organization.
Pleasure to work with them in our thoughts and sympathies go out to his loved ones.
With that I'll turn it over to Tim who will take you through our financial results and provide more color on our outlook.
Thanks, David We're pleased to report third quarter sales of $2 3 billion up 9% versus prior year, including approximately two points of contribution from products acquired in 2022.
We also saw favorable pricing in the quarter.
Our third quarter U S. Dollar sales growth included approximately 100 basis points of pressure from foreign currency.
In our surgical franchise revenue was up 6% year over year to $1 3 billion.
Implantable sales were $401 million in the quarter up 5% year over year, mainly driven by demand for <unk>, our non diffractive advanced technology, Iowa and international markets.
And consumables are third quarter sales were up 7% to $661 million in.
In the quarter, we saw strong demand for cataract and <unk> consumables, particularly in international markets as well as price increases.
And equipment sales of $214 million were up 5% year over year and reflect growth over a strong base due to the strength of equipment sales last year.
Sales were driven by double digit growth in international markets due to the ongoing upgrade cycle that we've seen all year.
Sales in the U S are broadly in line with prior year as most surgical centers are already on the <unk> platform.
Given the remaining installed base of legacy <unk> machines in international markets and our strong competitive performance. We continue to expect solid global equipment growth for the full year.
Turning to vision care third quarter sales of $1 billion were up 13%.
Contact lens sales were up 9% to $612 million in the quarter.
As David mentioned, our product innovation, including our toric lenses continues to win in the market in.
In the quarter, we saw solid growth contribution from precision one <unk>.
Total 30, and dailies total one for astigmatism, which were partially offset by declines in legacy contact lens brands.
We also saw a strong contribution from price increases.
In ocular health third quarter sales of $415 million were up 20% year over year.
This growth was driven by our portfolio of eyedrops and price increases.
Approximately 11 points of ocular health growth in the quarter was from products acquired in 2022, including Rockwell Tan and Rhopressa.
Now moving down the income statement.
Third quarter core gross margin was 63, 4% up 210 basis points.
This improvement was driven by higher sales price and manufacturing efficiencies from higher volumes.
This growth was partially offset by inflationary pressures.
We continue to expect gross margin gross margin to be pressured in the coming quarters as we sell inventory that was manufactured at a higher cost base due to inflation.
For full year 2023, we continue to expect gross margin to improve versus last year.
Core operating margin was 19, 5% up 350 basis points.
The growth was mainly driven by higher gross margin and improved underlying operating leverage from higher sales, partially offset by higher investment in R&D, including higher spend following the acquisition of Aerie.
Third quarter interest expense was $47 million compared to $34 million last year, driven by higher debt. Following the funding of the <unk> acquisition and less favorable interest rates.
The third quarter average core tax rate was 17, 2% compared to 19, 2% last year.
The lower tax rate in the third quarter of 2023 is primarily due to the mix of pre tax income across tax jurisdictions and the impact of discrete tax items.
Okay.
Core diluted earnings were <unk> 66 per share in the quarter up 41% from last year.
These strong results are another proof point that we're able to drive continued earnings growth through sustained operating leverage.
Before I touch on our outlook for the remainder of the year I'll discuss a few cash flow and other related items.
Free cash flow for the first nine months of the year was $592 million.
Impaired to $475 million for the first nine months of 2022.
The improvement versus 2022 reflects an increase in cash flows from operations and lower capital expenditures.
Similar to prior years, we expect to see a significant increase in capex in the fourth quarter.
Transformation costs were $30 million in the quarter and $370 million life to date I'm proud of how well. The team has executed. This program we've exceeded our savings target, which has enabled us to invest into R&D grow the top line and expand margins through operating leverage we continue to expect to wrap up the entire program on budget.
And on time by the end of the year.
Now moving to the 2023 guidance.
Our current outlook assumes that markets grow at or above historical averages for the year.
Exchange rates as of the end of October hold through year end.
And inflation and supply chain challenges continue.
Based on the strong results in the quarter and first nine months of the year, we are tightening our year over year constant currency sales growth guidance to 10% to 11% for the year.
This growth is partially offset by the continuing appreciation of U S dollar against our basket of currencies.
Which we expect to pressure our 2023 sales growth by approximately 200 basis points.
Due to this increased pressure we are updating our U S. Dollar net sales guidance range for 2023 of nine 3% to $9 4 billion.
Moving to core operating margin, we are maintaining the range of our full year outlook of $19 5, million% to 25%. Despite approximately 120 basis points of FX headwind versus prior year.
We now expect interest and other financial expense to be between $215 million and $225 million.
We are maintaining our core effective tax rate guidance of 17% to 19%.
And finally, we are raising our core diluted EPS constant currency growth outlook to 31% to 33% due to the strong performance in the first nine months of the year.
This growth is offset by approximately 25.
Ex headwind versus prior year, which represents an incremental seven since our last earnings call.
Due to this pressure we're also updating our full year core diluted earnings guidance range to $2 70.
To $2 75 per share.
And finally, while we don't speculate on currency movements using exchange rates as of the end of October would yield approximately 20 of.
Of year over year pressure on 2024 core diluted EPS.
To wrap up I continue to be very pleased by the strong operational performance by our team, we're ending the year with great momentum and look forward to the year ahead.
Thanks, Tim to conclude my remarks were pleased with our strong results for the third quarter and as I sit here in November I'm proud of all the team has accomplished year to date, we have grown faster than the market in nearly every category.
We've expanded core operating margin by 250 basis points.
We generated approximately $600 million in free cash flow.
And we've grown core diluted earnings per share by approximately 20%.
All while navigating significant foreign exchange inflation, and a challenging geopolitical environment.
And we have a lot of momentum as we move into 2024, and we're excited about the future. We remain focused on accelerating innovation and continuing to grow sales faster than the market driving earnings through operating leverage.
Confident that our strategy will position us to deliver long term growth and create significant value for shareholders.
Finally, I want to thank our teams around the world for their commitment to our customers and their patience and dedication to helping the world see brilliantly.
With that operator, let's open up the call for Q&A.
Thank you we will now 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.
<unk> would like to remove your question from the queue for participants using speaker equipment may be necessary to pick up your handset before pressing the star keys.
In the interest of time, we ask the participants limit themselves to one question and one follow up.
One moment, please while we poll for questions.
Thank you. Our first question is from Patrick <unk> with Morgan Stanley. Please proceed with your question.
Amazing. Thank you so much for taking the questions.
So the first one a bit of a specific one but I am curious.
Or a system Ora.
Well spread out is that do you think amongst clinics, whether it's in the U S. You asked how much more growth is that it goes.
And given the pricing structure of that and how thats connected to ILS. How much do you think that helps you protect your market share across all Io modalities overtime, given the cost of the clinics they end up switching.
Patrick Thanks for the question here or is it fairly specific topic, but I would say that it's dominantly of U S system I think we have a bit of it in Japan.
So it does there's a lot of things that we do with <unk>.
With our equipment.
That endears us to the ophthalmologists and the surgeons I do think that we have access to the ore in ways that many folks do not but I don't think theres anything specific that really is holding up.
Our products there I do think that that is a really good outcome system. So he can do inter operative.
Aberrometer, yes, it's a really valuable idea for getting a better outcome and that's really how we position it.
No that makes complete sense and one quick follow up please on hydrous, you, obviously touched on the reimbursement challenges that I guess some of your payers face in the U S.
How should we think from your perspective going forward about how that market evolves. When we think about mix in the share of the relevant players. Thanks.
Well, we continue to grow grow share in the <unk> space as we look at it I think the stent business in particular has been very stable and reimbursement and I think in this particular moment.
That has been a comfort to surgeons because they think they can predictably understand what theyre going to get reimbursed and how thats going to play I do think the big story here is that five years of data is very powerful and I don't think there is anybody else who's been able to show the kind of differences that we've shown in visual field.
Loss and also.
Preventing visual field loss.
In IOP reduction in saving medications or advanced visualization that preventing additional surgeries and what we're trying to get around the world really is that reimbursement understanding of how powerful that is and how much money. We're saving the system. So work can be done there for sure, but I do think that.
We have some really exciting data that has been presented continues to be well understood and we're seeing nice progress there.
Thanks for taking the questions.
Thank you. Our next question is from Veronica Dubose Yoga with Citi. Please proceed with your question.
Excellent Hey, guys. Good morning, and thank you for taking my questions I also have two.
Firstly.
Well I was hoping thats the comments I'll Miss it.
Volume dynamics in the cataract space.
I think David when we when you reported you had expressed some hope and optimism that we might see some continued efficiency and throughput gains among surgeons in particular.
It was notably absent from your prepared remarks. This morning I noticed in the press release, you called out strength in international and circuit.
Just curious what happened in the U S market in the third quarter from asking of surgical perspective.
And maybe if you can also briefly comment on those competitive pressures you are seeing in toric ACI.
ACI allows them whether that would happen.
Question. Please.
Yes, Brian Thanks look markets overall are relatively resilient. They stayed mid single digits really it was 4% globally with 2% in the U S and so I do think you are reading that correctly.
The international markets were stronger in the U S. I think coming off of a very strong third quarter prior year.
At a comparator that was a little bit tricky, but again, 2% growth was was the number.
I think as we look at that what we were excited about was our implantables in many ways were very positive. So we are U S. Total share was up over prior year, our mono focal share was up our PC <unk> share was up and sequentially. Our toric share was up although we're still wrapping around so over prior year.
It's down a little bit so I think.
In the U S. As I said last time I think what we're seeing is an attenuation of.
Kind of the trial phase that happens kind of when you get new products in the market and we're seeing us kind of move back to what I think it will be a stable environment, where we really care, mostly about the U S. <unk> penetration now on that comment <unk> penetration was relatively flat. So I think we've been watching carefully there was a run up as you know.
For several years, we knew there was going to be a pause that pause is kind of I think most of this year and.
And I do think that we should expect 50 basis points out of the U S. Internationally, we saw a nice penetration growth of 120 basis points or better more than half of that coming from China, but the emerging markets were really driving all of that so.
Long way around to U S is good solid share performance this quarter market was a little bit softer than we would've expected, but directionally I think we feel very comfortable that the way to think about this market is going to be kind of slightly better than historical growth rates I do think that is kind of in the U S 3% historical rate.
So probably a little better than that normally and I do think that internationally it will be better than that so I.
Hopefully that gives you enough.
No. That's very helpful. Thanks, David and then my second one is for Kevin and Thank you for the 2007.
For fiscal 2004 Super helpful for Us.
Our expectation.
Just curious if it kind of moves.
<unk>.
Inflation has obviously come down significantly and I'm just curious how you feel about your ability to drive that roughly 150 basis point margin improvement that consensus has eight.
At this point in time.
Any sort of tailwind and headwind you would call out to that at this point.
Okay.
Yes, so we'll give formal guidance in February but I. Appreciate the fact that you guys are updating your models. So let me let me give you a little color on the FX to your point, we wanted to make sure people understood that and I'd say a couple of things one that assumes October rates hold.
So keep that in mind and the other thing that I would add is just given the phasing of the appreciation of the U S dollar roughly call it 75%, 80% of that pressure will come in the first half of 2024. So as you update your models I'd take that into account.
From a P&L perspective, I would say that revenue will grow we will continue to grow faster than the markets.
To continue to invest in R&D, we're going to continue to drive and <unk>.
Improve our innovation pipeline that is key to the revenue growth along with commercial execution.
R&D I would say we've said since it's been 7% to 9%. We feel is kind of the right range cost as a percent of revenue we'd like to be at the high end of that range. So that depends on the project pipeline and what we have had running so that's what we would shoot for.
On the SG&A front, we're going to continue to be disciplined around our cost as we have been in the past, we're going to try to optimize that cost envelope and keep it at inflationary type levels, we're going to continue to prioritize our investments towards customer facing.
Activities, Thats really whats going to drive that revenue growth.
And if you if we do that then that should drive nice operating leverage to your point I would say.
The one thing I think we've been able to demonstrate is operating leverage and margin expansion now it's been a little muddied up by FX, but if you go back to 2022, we've grown margins. We grew margins in 'twenty two versus 21 by 240 basis points in constant currency. If you look at 2023 year to date, we're up 250 basis points.
In constant currency, so we would expect that to continue.
And we're going to do that by investing in the top line and managing our.
Our cost base and then the last thing that I would say is on the tax front I would just keep pillar two in mind. So assuming pillar two is implemented in 2024 that has about two points of impact to our effective tax rate. So that's how I think about next year and we feel very comfortable with our long term goals that we laid out.
Great. Thanks, guys.
Thank you. Our next question is from Larry vehicles than with Wells Fargo. Please proceed with your question.
Good morning, Thanks for taking the question two for me one for you Tim on price how much did price contribute to the ex FX growth of 9% in Q3, and how do you see price in 2024 versus 2023, and I had one follow up.
Yes prices a little bit choppy as you know Larry it's driven by when we go out with price increases what the realization rate is so I would look at it on a year to date basis, and if you look at year to date its about a third of our revenue growth.
As far as 2024, we're going to continue to monitor the market see what competitors are doing see what inflation is doing and we would expect to continue to toggle that price with inflation.
We see that impacting the marketplace.
That's helpful.
David one for you on Unimplanted bowls.
How are you thinking about growth in the global Implantables business going forward, given J&J Bausch and are excited to have new iOS, either here or coming can you grow that business call. It mid single digit like we saw this quarter and what's next for Alcon in Implantables remind us how far away you are with your tunable lens.
Thank you.
Yes look.
We think right now is that the international markets in particular have real opportunity and I would say that as you look at penetration, which is really the main thing I mean, let's assume that's.
Most of the Implantables that Youre talking about we've seen in the international market. So there is nothing really new coming into the U S.
Save maybe one or two.
And so I think our view is is that penetration is going to continue to be the major driver for us.
Looking at the kind of 50 basis points, a year would be a good result, I would love to see it better than that but in this quarter internationally.
Penetration grew 120 points, so 140 basis points. So that was a positive it came in markets, where we also have real significant opportunity. So think about it is we're wildly under indexed in China, we are under indexed in.
In India and also at some of the growth in emerging markets.
Southeast Asia, So I do think that there as we think about the world.
The opportunity to <unk> is in the international markets. It is in penetration in the U S than it is in kind of steady performance there'll be some next generation products that are a little ways out for us.
Pretty much consistent with what we said at capital markets day.
Do think the one thing to consider is that we have multiple vectors of growth here I think one of the things that maybe isn't appreciated enough is how how big an opportunity hydrous might be how big an opportunity.
Some of our <unk>.
Toric and multifocal and reusable contact lenses are we've got a lot of stuff going on.
Equipment and consumables, that's coming in the next 12 to 24 months, we've got high drops the multi dose preservative free business is growing really well.
Contact lens care back on track, we've got Rx, that's still moving nicely. So I would just make sure you're giving a fulsome view of how we're going to grow because our view is almost every one of those categories. We cannot grow the market. So we're feeling pretty good about the market growth and then fundamentally how we perform inside of it.
Thank you.
Thank you. Our next question is from Daniel <unk> with <unk>. Please proceed with your question.
Yes. Thanks, so much Hello, gents, maybe the first question just to follow up a bit on the surgical performance and thanks for the comment on how the market has done but I mean.
At least compared to what consensus was expecting before today's results I mean, the performance in surgical was probably a notch weaker.
Yes.
Purely the market or do you see any product innovation from competitors or the seasonal factors that have influenced your organic growth momentum a little bit in this business.
So I mean, yes, because I think we would have expected a little bit of a strong momentum in surgical and then the second question, maybe an update on China V. BPM do you have an idea already on the timeline when it should concrete how it may look like and then ultimately of course the question on how it may affect you in 'twenty four and.
Maybe in 'twenty five.
Rather a bit slower implementation. Thank you very much.
Yes, I mean look I would put really a fine point on the growth number as is really this is market.
What we saw in the second quarter I think maybe people got a little bit enthusiastic about was.
7% procedural growth in the second quarter, that's not a normal number nor was the first quarter, which was again very high number. So when you come back to 4% kind of globally in the third quarter, that's a pretty normal number and you should expect the market to kind of move to a mid single digit normalization over time, and that's really what we're trying to <unk>.
Indicators procedural growth on a normalized basis is going to be kind of in the low mid single digits, depending on what we see we think it's a little bit better than that because there's some backlog because theres some productivity gains.
But when you look at the third quarter it was 2% so.
If you look at the gap between us and the market, we grew faster than the market in surgical.
Almost all of our it will all three categories. So my view is that we.
A little bit of a softer market I think that's mostly a U S comparator from prior year, because there's a big bounce back last year, but that really is I think what's happening and I do think we will see a <unk>.
Steady kind of mid single growth.
Going forward, what I do think also on the on the China piece is that we are in a <unk>.
Positioned to really take advantage of China at some point, we just haven't really we didn't participate in the <unk> in the past.
And the Pvp.
Had some very old products in it so we werent, 100% clear as to how that would impact the private markets and our strategy I think was very successful as we went through it but we're evaluating the BBB. It comes out I think in the end of first quarter.
Early second quarter something like that.
I'll have to see how that turns out, but I think directionally I would think about China and Asia and many of the developing markets as an opportunity for both penetration to grow but also our share to grow. So I think those are kind of where we're thinking about growth opportunities as well as obviously penetration in Europe.
More in the U S. So that's kind of where we are.
Okay. Thanks, very much very helpful.
Thank you. Our next question is from Ryan Zimmerman with <unk>. Please proceed with your question.
Good morning, Thanks for taking the question and I appreciate the update.
Some of your peers have called out, particularly in Med Tech and this is more for Tim that supply chain inflation numbers have been easing.
I know youre still factored into your guidance.
Excuse me, we've got a pretty good CPI print yesterday, so I'm just kind of wondering kind of what you expect from here and into 2024 from an inflationary or supply perspective.
Appreciating that freight costs have come down energy costs have come down et cetera.
Yes, I think.
If you if you read the.
Prince.
We would expect inflation to come down the one thing that's really important to understand is how that inflation works its way through the P&L. So I'm sure you know this but.
We are still working through it takes for us it takes anywhere between six to eight months.
For inventory to work its way through the P&L. So you may be seeing deflation are lower inflation today, that's not going to hit the P&L today, because you've got like six months of inventory or whatever it may be that still has to work its way through the P&L. So we saw a little bit of that in Q3, and the prepared remarks youll notice that.
We would expect to continue to see that kind of in Q4, and Q1, probably I think Q2 will be more of a normalized view from a inflationary perspective. So you just need to keep in mind. There is a bit of a lag between what youre reading about versus what's been purchased and working its way through the P&L.
So Brian on supply changes to comment look everything is looking pretty good right now honestly, but it's always looks good until it doesn't so the good news is that we solve some of our challenges, but the supply chain is still pretty fragile. There are there are outages sporadically on component parts.
And we need to make sure that we again I wanted to just make sure. We're balanced about how we think about production going forward. We've had a very good run at it and our manufacturing teams have done a terrific job I think of keeping us in product, but you're always kind of one one supplier away from some challenges.
Very helpful. And then just a follow up if next year, you've called out equipment.
Benefiting from an upgrade cycle, David and I'm, just wondering if you could kind of speak to where we're at from an <unk> perspective, if you can point to that.
Penetration level it sounds like most of the the U S market has been upgraded but how long can that upgrade cycle persists beyond say the next few quarters and is that kind of how to think about maybe one of the key drivers for growth next year.
For 2020 for thanks for taking the question.
Yes, Ryan 24, I don't know that equipment is going to be that strong I mean actually what's going to be what's going to occur as we're likely to get.
A lot of new equipment out next year that we are going to be testing for part of the year and that likely will have a.
In effect more in the 25 range than 'twenty, four, but what I would say is that the.
International markets continue to upgrade and we had very strong equipment number internationally in the third quarter, but as you 100% right I mean right now we're selling.
We're selling a lot of equipment in U S, but year over prior year, we had a big year last year, So it's pretty pretty normalized in the U S. So I would just say that directionally.
We're going to sell Biometer, we are going to sell visualization equipment, we're gonna sell hand pieces, we're going to sell in the U S and that we're going to sell a lot of.
Near term some some said <unk> through the end of next year internationally as we.
End of life, our infinity units.
What will happen after that is it will go into a new cycle, which will be upgrading old <unk> and so I remember that most of our FICO machines last.
Call it eight to 12 years.
And so you get about an eighth of the installed base to let's just call. It tenths of the installed base every year and we will see that will try and manage that over the lifecycle of our next generation products. So again, we'll try and manage that would obviously be a little enthusiasm and 25, when we really get going but.
I think directionally as we said at capital markets day, we expect to be pretty good place for consumables and equipment through our longer term planning because we see some real opportunity to improve efficiencies with the new equipment.
Thank you.
Thank you. Our next question is from Anthony the trunk with Mizuho Group. Please proceed with your question.
Thanks, and good morning, maybe one for.
Dave and one for Tim David maybe just an update I think when we looked at the.
A&D deck.
Earlier, a couple of weeks ago, just a reminder, on comment three it looks like you could get a headline read out on comment three before the end of the year and if that's the case would with a mid 2020 for NDA submission for dry eye still be on the table and then the follow up for Tim would be on earnings next year, just when we sort of try to.
Think about it.
The FX headwind here.
I think a little bit of a delay in contact lens manufacturing margin gains.
And then we have some mixed outlook for <unk> and just how that plays out in the street.
It's sort of looking for about 12% earnings growth so.
And maybe just kind of putting all of those inputs into earnings as we think about 2024.
Anthony just on 512.
The readout, you're right. We will have a couple of the trials, where we've got a third one that's an observational trial that matures somewhere in the end of the second and first quarter, but we should have some some data to look at if it's positive obviously.
It will probably take us four or five months too.
Get it.
Into our submission format.
So obviously that would be around mid 24, so I think youre on the right track. There again, we'll have to see how that data looks.
And then Anthony I would just say on earnings next year again, we will give you more color in February but.
We would expect to grow faster than the market as we talked about I think the delay in margin.
But I would expect is that we will continue to expand margins in vision care. Some of that is driven by to your point the installation of the DSM flex lines and that has become a bigger percentage of our overall manufacturing footprint. So.
So that drives incremental improvements.
And if we if we get that revenue growth and we control our cost envelope. We should continue to see margin expansion and obviously that will drop right through to our earnings growth, but we'll give you more color in February.
Alright, Thanks, a lot.
Thank you. Our next question is from Steven Lichtman with Oppenheimer and company. Please proceed with your question.
Hi, guys. This is Steve.
I need to ask you guys.
Can you talk a little bit of capital equipment environment, you saw during the quarter comps were slightly tougher in Turkey with <unk>, but anything else of note in terms of customer willingness to invest in capital.
Thank you.
Yes, Steve I think on the capital. We it is it has a little bit tougher I think in the U S. But I think really the bigger picture is in the U S capital equipment for us.
It is more of an upgrade cycle phenomenon. So I think we see steady.
Our purchasing of equipment still and we are selling a lot of Biometer is we're selling a lot of visualization in the U S. Internationally, we had a very robust quarter.
I would have said that.
We would we might have expected a little bit more of a slowdown we didn't see it some of that is that we're gaining share. Some of it is that we are we've got some very compelling equipment and I do think where we've been remarkably successful with our our new diagnostic our new visualization equipment in a number of our other pieces of equipment in the hand pieces and the like so.
Still solid for us.
But I would say the U S was a little bit slower than international.
That's great. Thanks, Michelle Carla.
And then you guys can give us an update on it.
Yes.
Precision seven alright.
Yes, we are.
We obviously are working on precision seven now we're building the product.
We haven't announced.
Launch date, I do think that the kind of key thinking on this will be.
How do we maximize the number of products that we have right now in the market. We just launched our totaled 30 multi focal lens, we're excited about that.
We just really launched a year ago, our dailies total one toric, which has been a longtime coming and we've got dailies total one toric and sphere again growing really nicely after more than 10 years as I said in the prepared remarks, <unk> is still growing but.
Probably the most popular toric right now for new fits and so I think directionally, we've got a lot to work on so we've got $232 30, Toric <unk> multifocal, we've got.
Our precision one toric, it's going well, we've got dailies total one toric and we just.
We've got lots to do let me say it that way and I am very encouraged about the performance, particularly in the U S and Japan, where we're seeing really nice uptake into very solid share movements. So I think again when you think about growth drivers, we feel very good about our vision care business.
Thank you so much.
Yeah.
Thank you. Our next question is from Jeff Johnson with Baird. Please proceed with your question.
Thank you good morning, guys, David maybe I can follow up I'd just add all the toric multifocal comments, you were just making that 9% contact lens number obviously, a solid number it's been solid here for a few quarters running.
How much of that was price I know Larry asked price overall on company, but how much of that was price.
How much is mix just given the good cycle, you're going through on all of the specialty side.
Those product families.
Yes, Jeff I mean, it was you're right I mean, the global market was 6% we grew nine.
I think there is a bit of share in there, there's a bit of price and theres a bit of mix and I would just say that price was probably about a third of that.
And so I think we feel like that.
That's probably a pretty good place to start I think mix is obviously, helping us as we move continuously to dailies and particularly our dailies <unk> toric is giving us a nice lift both in price and mix.
And so again I feel like we're kind of on a nice a nice move here.
Yes, and then I guess, a follow up just on the contact lens business outside of <unk> and two other kind of consumer facing I guess some of your OTC stuff as well, but just your outlook with what we've seen on the consumer here over the last couple of months of your outlook for kind of consumption of contact whether there's any trade down to any kind of pause.
Anything youre seeing there.
I guess, that's what I thought I had one other parts of it but I'll leave it that thanks.
Yes, I mean contact lens the patients.
Looked like it was pretty pretty normal I would say the U S was a little bit better than international I think.
Right.
<unk> on what we call EQ basis.
And that was the number of patients getting lenses looked like it was very normal historical rates roughly up 1% I do think that internationally. It was a little bit softer I think was down 1%. So kind of flat overall, that's very normal historically remember that most of this business is about trade up and trade up was exactly where we would have.
Expected it and again I think we have a little bit of price a little bit of trade up and then for US It was a little bit of share.
Thank you.
Thank you. Our next question is from Graham Doyle with UBS. Please proceed with your question.
Hi, guys. Thanks for taking my questions.
Just a quick one and then a slightly longer one so on the quick one could you just confirm we did hear that right. So U S. <unk> market grew 2%.
<unk> been taking share there or at least maintaining in Q3.
The sequential improvement over Q2, and then maybe Tim just one on the guidance range for this year in terms of core EBIT margin, obviously still pretty fly as we go into the last quarter.
Is there just kind of unusual is that reflection of the fact that you've got this kind of stronger contact lens margin question vision care margin in Q4, and therefore, maybe it's a slightly different mix potential unusual is that what gives you kind of hope that there's upside in terms of where we stand today. Thank you.
Yeah.
Yes Graham.
Total procedures in the market grew roughly 3% ish, 2%.
Depending on who you want around it.
Internationally grew a little faster than that and the <unk>.
Globe grew about 4%, but most of the international growth was in emerging markets I would just tell you. So again relative to our performance in market in the U S. We saw mono focal share grow we saw.
PC IOL share grow we saw decline those are all year over year, but sequentially toric improve so I would just say overall, our total share grew and <unk>.
I think in the U S. We had a pretty solid performance and pretty much as expected and I just remind you when people try things in this market because it's a discrete opportunity to do that.
But they generally come back to the products that they think are the best performing products yes.
And then I would just say on the margin, it's really going to be volte.
Volume driven and mix to your point.
Really just depends on we've always said that we sort of pick the midpoint, so I would probably stick with that.
But it could be plus or minus depending on what the final revenue and volume numbers look like.
That's great. Thanks, a lot guys I appreciate it.
Thank you there are no further questions at this time I would like to hand, the floor back over to Dan Cravens for any closing comments.
Well, thanks, everybody for joining us if you have any follow up questions.
Certainly feel free to reach out to Alan Turing and myself in Investor relations or media reach out to our media relations team.
Thanks, again have a great day.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.
Yeah.