Alcon Inc. (NYSE:ALC) Q1 2023 Earnings Call Transcript May 10, 2023

Operator: Greetings and welcome to the Alcon First Quarter 2023 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce our hosts Dan Cravens, VP, Investor Relations. Thank you, sir. You may begin.

Dan Cravens: Welcome to Alcon’s first quarter 2023 earnings conference call. Yesterday we issued a press release an interim financial report and posted a supplemental slide presentation on our website to enhance this call. You find all these documents in the investor relations section of our website at investor.alcon.com. Joining me on today’s call are David Endicott our Chief Executive Officer; and Tim Stonesifer. Our Chief Finance 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 from those and our forward-looking statements are included in Alcon’s 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-IFRS 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-IFRS financial measures should be considered along with but not as alternative to the operating performance measures as prescribed for IFRS. Please see a reconciliation between our non-IFRS measures, with directly comparable measures presented in accordance with IFRS and our public filings.

For discussion purposes, our comments on growth are expressed in constant currency. In a moment David will begin by recapping highlights from the first quarter. After his remarks Tim will discuss our performance and outlook for the remainder of the year. Then David will wrap up and we will open the call for Q&A. With that, I will now turn the call over to our CEO, David Endicott.

David Endicott: Thanks Dan, and welcome to Alcon’s first quarter 2023 earnings call. 2023 is off to a great start. We benefited from solid demand, strong commercial execution and pricing improvements across both our franchises which resulted in double digit sales growth for the company in the quarter. In addition, we delivered a core-operating margin of 20.6% and a core-diluted earnings of $0.70 per share. In surgical, we had another strong quarter despite challenging comparisons in South Korea. In implantables recall that last year there was a change in PCIOL reimbursement Korea, which increased demand during the first quarter. This change has made PCIOL out of pocket expense higher for many Korean patients, and as a result, local demand has since raised.

If we exclude the impact from Korea, which we estimate to be approximately $47 million total implantable sales were up roughly 5% on a reported basis and approximately 9% on a constant currency basis. More broadly, we have continued our ATIOL market leadership for another quarter with approximately half of the global market and two-thirds of the U.S. market despite increasing competitive activity. In Equipment we continue to upgrade and expand our installed base with the CENTURION and LEGION devices. In the first quarter our team delivered a record number of new phaco machine installations since been. Importantly, there remains a sizeable installed base of Legacy, Infiniti, Laureate and other machines in international markets. Accordingly, we see continued opportunity for growth in 2023.

Additionally, we continue to grow in Diagnostics and we’re pleased with our win rate with the Argos Biometer. Argos helps deliver clinic to OR connectivity and results from real-world study highlight that Argos delivers significant time efficiencies for patients during cataract evaluation. We started rolling out Argos across international markets and customer reception has been positive. Additionally, customers continue to be pleased with the performance of Centurion with Active Sentry, which enhances safety and confidence during surgery. Importantly, as we upgrade and expand our equipment in installed base, we see a natural uplift in consumables, where we’ve also taken some select price increases. At the recent ASCRS conference, Alcon innovations were featured in approximately 180 abstracts across cataract, refractive and glaucoma surgery as well as visualization in ocular health.

As a leader in the ophthalmic surgical space, we’re committed to improving patient outcomes and surgeon efficiency by accelerating the pace of innovation. There are two important studies for the conference I thought I’d like to highlight. First is on Clarion. Data presented at the conference evaluated a head-to-head comparison of distance and intermediate vision of Clarion and a competitive monofocal plus IOL. This study concluded that Clarion provides excellent distance and no statistically significant difference in intermediate vision potentially offering superior value to the competitive lens. At the conference, we also expanded our connected equipment ecosystem with the introduction of enhanced visualization and data integration. Diagnostic images from the Argos biometer with image guidance are now connected to the newly available NGENUITY 1.5 to precisely overlay incisions, Capsularexis, IOL centration and toric alignment.

Data presented at the conference shows that this integration is increasing efficiency and reducing manual errors. This helps surgeons work faster while improving their confidence in delivering better patient outcomes. Given the post-pandemic surgical backlog, these improvements are critically important. Lastly, data presented on our Hydrus Microstent reinforced that Hydrus offers long-term glaucoma medication reduction, as well as reduction of intraocular pressure. It’s important as surgeons consider which stent to recommend to their patients. Additionally, governments and health care payers consider this type of data as they determine which products and procedures to reimburse. Now I’ll move to Vision Care, where we had a strong quarter in both contact lenses and ocular health.

In contact lenses, we’re seeing the benefit of our expanded product portfolio, which now includes sphere, toric and multifocal options for value, mainstream and premium customers in both daily and reusable categories. We continue to see meaningful share gains driven by our new toric product launches, including Precision1, Total30 and Dailies Total1. We introduced Total30 for astigmatism in the first quarter. This is the first reusable lenses water gradient technology created specifically for astigmatic wearers and initial customer response has been exceptional. Total 30 toric is currently available in the U.S. and parts of Europe, and we anticipate expanding availability to additional markets throughout 2023. Turning to ocular health. We continue to integrate Aerie into the Alcon family.

Our U.S. eye drop sales force has already added Rocklatan and Rhopressa to their promotional program, which contributed nicely to our Vision Care growth this quarter. In addition, we saw growth in our over-the-counter portfolio, mainly driven by favorable pricing and sustained family of products. Finally, in contact lens care, while we continue to navigate supply challenges, we feel increasingly confident about our progress towards resolution in the back half of the year. Now I’ll provide an update on our end markets. In Surgical, global cataract procedures were up mid-single digits in the first quarter versus prior year. Global ATIOL penetration in the quarter was down 30 basis points versus prior year. However, excluding the impact from Korea, global penetration was up 90 basis points versus prior year and up 40 basis points sequentially.

And we’re following penetration trends closely and continue to expand programs that digitally and conveniently educate patients about their lens options early in the cataract journey. Based on recent survey data, we estimate that U.S. ATIOL penetration could go as high as 35%. So with current penetration in the high teens, we believe there’s plenty of runway for value creation. Moving to contact lenses. Retail market growth was up high single digits. In the quarter, we saw a steady wear trade-up and meaningful contribution from price increases. Now, before I pass it to Tim, I want to briefly comment on our market outlook for the remainder of the year. And on our February earnings call, we indicated that we were planning for a modest slowdown in full year market growth.

During the first quarter, global ATIOL penetration was resilient and contact lens trade-ups and price capture were both strong. Historically, our markets have grown around 5%. And given current macroeconomic news, we believe it’s prudent to assume market growth at or slightly below historical rates in the back half of the year. However, we continue to expect positive contributions from market share and price. And as a result, we expect to grow faster than the market. With that, I’ll turn it over to Tim, who will take you through our financial results and provide more color on our outlook.

Tim Stonesifer: Thanks, David. We’re pleased to report first quarter sales of $2.3 billion, up 11% versus prior year. This growth was primarily driven by strong demand for our products, including products from acquisitions as well as solid commercial execution. Additionally, our first quarter sales results reflect positive pricing across our business, particularly in consumables, contact lenses and ocular health. Overall, we estimate that these price increases drove approximately one-third of our top line growth. Our first quarter U.S. dollar sales growth included approximately 400 basis points of pressure from foreign currency. Starting with our surgical franchise, revenue was up 8% year-over-year to $1.3 billion. Implantable sales was $427 million in the quarter, down 3% year-over-year, primarily due to declines in PCIOL sales in South Korea, which David mentioned in his remarks.

Excluding the impact from Korea, implantable sales continue to outpace the market and were up approximately 9% on a constant currency basis. We expect a minor residual impact from Korea of approximately $10 million in the second quarter due to the demand rebasing that David mentioned. In consumables, our first quarter sales were up 13% to $656 million. This strong growth primarily reflects favorable market conditions as well as pricing. In equipment, sales of $221 million were up 14% year-over-year due to continued strong demand for cataract and Vit-Ret devices, particularly in international markets as we upgrade and expand our installed base. While our first quarter results were strong, we expect our equipment year-over-year growth rate to moderate in the remainder of 2023.

Turning to Vision Care. First quarter sales of $1 billion were up 16%. This growth includes approximately 5 points of contribution from the ophthalmic pharmaceutical products we acquired in 2022. Contact lens sales were up 14% to $615 million in the quarter. This growth reflects the continued strength of our innovative portfolio of SiHy lenses. Importantly, we saw double-digit growth in both the daily and reusable contact lens categories. As I mentioned earlier, first quarter contact lens growth also reflects price increases. In ocular health, first quarter sales of $414 million were up 19% year-over-year. This growth was primarily driven by our portfolio of eye drops, including Rocklatan and Rhopressa, as well as price increases across our over-the-counter products, including Systane and Pataday.

Now moving down the income statement. First quarter core gross margin was 63.4%, up 160 basis points on a constant currency basis. This growth was driven by higher sales and manufacturing efficiencies from higher volumes, partially offset by unfavorable product mix from lower PCIOL sales in Korea. We expect gross margin to be pressured in the remainder of 2023 as we sell inventory that was manufactured with a higher cost base due to inflation and as we lap last year’s price increases. Core operating margin was 20.6%, flat versus last year on a U.S. dollar basis, but up 130 basis points on a constant currency basis. The constant currency growth was mainly driven by higher gross margin and improved underlying operating leverage from higher sales, partially offset by higher investment in R&D following the acquisition of Aerie.

As we commented on in the past, we expect to see seasonally higher marketing and sales spend in the second and third quarters for the peak summer and back-to-school season. First quarter interest expense was $47 million compared to $29 million last year, driven by higher debt following the funding of the Aerie acquisition and less favorable interest rates. The first quarter core effective tax rate was 18.4% compared to 15.9% last year, primarily due to the mix of pretax income across tax jurisdictions and a decrease in the tax benefit associated with discrete items. Core diluted earnings per share were $0.70 in the quarter, up 14% from last year on a constant currency basis. 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 quarter was an outflow of $19 million compared to an outflow of $52 million last year. The improvement is mainly driven by better cash flows from operations and lower capital expenditures. Similar to past years, we expect free cash flow to be stronger in the remainder of the year as the first quarter includes the annual associate incentive payment. Additionally, we paid the legal settlement we mentioned on our last earnings call in April. On a full year basis, we continue to expect to generate more free cash flow this year as compared to 2022. Transformation costs were $26 million in the quarter and $314 million like to date. We continue to expect to wrap up the entire transformation program by the end of the year. Before moving to our outlook, I’m pleased to report that at our Annual General Meeting last week, shareholders approved the dividend of CHF 0.21 per share, in line with our payout policy of approximately 10% of the previous year’s core net income.

I want to thank our shareholders for their continued support of Alcon. Now moving to the 2023 guidance. Our current outlook assumes that markets grow at or slightly below historical averages in the back half of the year. Exchange rates as of mid-April hold through year-end, and inflation and supply chain challenges continue through 2023. Based on the strong momentum in the business, we are increasing our year-over-year constant currency sales growth guidance to 7% to 9%. This growth is partially offset by incremental FX headwinds based on currency movements against the dollar, which we expect to pressure sales by approximately 70 basis points versus prior year. As a result, we are maintaining our U.S. dollar net sales guidance for 2023 at $9.2 billion to $9.4 billion.

Moving to core operating margin, we are maintaining the range of our full year outlook of 19.5% to 20.5%. We now expect interest and other financial expense to be between $245 million and $255 million. Relative to the first quarter, we expect an increase in other financial expense primarily due to higher hedging costs and the lower financial income. We are maintaining our core effective tax rate guidance of 17% to 19%. Finally, we’re raising our core diluted EPS constant currency growth outlook to 20% to 24% due to the strong performance in the first quarter. This growth is offset by approximately $0.12 of FX headwind versus prior year. As a result, we are maintaining our core diluted EPS guidance of $2.55 to $2.65 per share. Based on our strong first quarter results and current assumptions, we are now trending toward the high end of our guided EPS range.

To summarize, I’m very pleased with the momentum we’ve built at the start of the year, and it’s clear that our business is performing well. As we look forward, we will continue to focus our efforts on driving innovation and delivering above-market sales growth. Lastly, I’d like to take this opportunity to thank all of our team members for another quarter of outstanding results. With that, I’ll turn it back to David.

David Endicott: Thanks, Tim. To wrap up, we’re very pleased with our start to the year. We continue to build momentum with our new product launches and our team continues to execute well. As a result, we’re winning with customers and driving above-market growth. We also continue to deliver operating leverage in line with our financial thesis. So looking forward, our focus remains on accelerating innovation, driving top line growth and creating shareholder value. With that, operator, let’s open the call up for Q&A.

Q&A Session

Operator: [Operator Instructions] Our first question comes from Anthony Petrone with Mizuho Group. Please go ahead.

Operator: Our next question comes from Matthew Mishan with KeyBanc Capital Markets. Please go ahead.

Operator: Our next question comes from Jeff Johnson with Baird. Please go ahead.

Operator: Our next question comes from Ryan Zimmerman with BTIG. Please go ahead.

Operator: Our next question comes from Veronica Dubajova with Citi. Please go ahead.

Operator: Our next question comes from Larry Biegelsen with Wells Fargo. Please go ahead.

Operator: Our next question comes from David Adlington with JPMorgan. Please go ahead.

Operator: [Operator Instructions] Our next question comes from Graham Doyle with UBS. Please go ahead.

Operator: [Operator Instructions]

Operator: Our next question is from Steve Lichtman with Oppenheimer. Please go ahead.

Operator: There are no further questions at this time. I would like to turn the floor back over to Dan Cravens for closing comments.

Dan Cravens: Great. Well, thanks, everybody, for joining us this morning. If you have any follow-up questions, please don’t hesitate to reach out to either Allen Trang or myself in IR. Have a great rest of your day. Appreciate the time.

A – David Endicott: Thanks, everyone.

Operator: This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.