Alcon Inc. (NYSE:ALC) Q3 2023 Earnings Call Transcript

Alcon Inc. (NYSE:ALC) Q3 2023 Earnings Call Transcript November 15, 2023

Operator: Greetings and welcome to the Alcon Third Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Dan Cravens, Vice President and Global Head, Investor Relations. Thank you, Dan. You may begin.

Dan Cravens: Welcome to Alcon’s 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 investor.alcon.com. Joining me on today’s call are David Endicott, our Chief Executive Officer, and Tim Stonesifer, our Chief Financial Officer. Our press release, presentation, and discussion will include forward-looking statements. We expressly disclaim any obligation to update forward-looking statements as a result of new information or future developments, except as required by law. Our actual results may vary materially from those expressed or implied in our forward-looking statements.

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 Alcon’s 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-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 alternatives to the operating performance measures as prescribed by — per IFRS. Please see a reconciliation between our non-IFRS measures with directly comparable measures presented in accordance with IFRS in 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 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 a call for Q&A. With that, I will now turn the call over to our CEO, David Endicott.

David Endicott: Thanks, Dan. Welcome to Alcon’s 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 $0.66 per share. These great results were driven by international markets in Surgical and global strength across the portfolio of Vision Care as we continue to outgrow our markets. As we look across the industry, we’re beginning to see market growth rates return to historical levels of mid-single digits, and Alcon 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 IOLs implanted is done with an Alcon lens.

In premium lenses, the statistic is even more impressive with one out of two ATIOLs is an Alcon product. Our flagship lenses, Vivity and PanOptix continue to lead the category in the US 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 ATI well 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 Microstent. Hydrus is the first and only MIGS device to report significant outcomes from a pivotal trial at five years.

These results show that Hydrus offers long-term glaucoma medication reduction, reduction of secondary surgery, and reduction of interocular pressure. These are important factors for both quality of life and pair economics. And in the US, after reductions in reimbursement for other glaucoma procedures, reimbursement for Hydrus 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 phaco machines in international markets as we work through the upgrade cycle. In the US, 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 SENTRY 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. From dedicated items like our Fluidics Management System to our Custom Paks, Alcon consumables have an important role throughout the procedural journey. Additionally, as Custom Paks 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 US commercial availability of SMARTCataract. With SMARTCataract, practices can link data systems and diagnostic devices in the clinic with equipment in the OR.

SMARTCataract has demonstrated significant time savings during the cataract workflow with almost 14 minutes per case saved versus traditional methods for certain patients. We continue to receive positive surgeon feedback as the product has started its official roll-out. 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 interests for our specialty lenses, including multifocals and torics. 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 launch is Total30 multifocal, which we introduced early in the fourth quarter of this year.

Multifocals represent an important opportunity for us as many wearers drop out of contact lenses after the age of 40 due to dry eye, discomfort, and visual acuity issues. The multifocal market is valued at over a billion dollars globally and growing double digits. This lens 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. For eye care professionals, this lens leverages Alcon’s proven Precision profile design, which delivers a 96% fit success. The multifocal modality completes the expanding Total30 family, which also includes a sphere and toric lens. Now, we’re also seeing strong uptake of our specialty daily lenses, including DAILIES Total1 Toric, DAILIES Total1 Multifocal, and Precision1 Toric.

Even after more than a decade in the market, the DAILIES Total1 family remains the gold standard in wear or comfort. Clinical studies showcased at the recent American Academy of Optometry meeting illustrated the performance of the DAILIES Total1 family. In particular, these studies showed that most contact lens dropouts who are refit into DAILIES Total1 could become successful contact lens wearers and that comfort was improved in astigmatic patients who switched to DAILIES Total1 Toric. Now let me move to Precision1, which is our fastest growing contact lens brand. As a reminder, Precision1 was designed to address wearer dropout by providing precise vision, long-lasting comfort, and ease of handling. Precision1 Toric brings these benefits to mainstream astigmatic wearers.

And for eye care professionals, clinical studies show that the lens settles in less than 60 seconds for a 99% first-fit success rate. These types of innovations are a testament to our dedication to helping eye care 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 eye drops. Driven by our multi-dose preservative-free formulations, SYSTANE continues to grow globally. Since 2021, we’ve launched the MDPF in more than 40 markets, and we continue to see favorable customer response. In the US, 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, we’re seeing the US preservative-free category expand, where 1 point of growth represents almost $9 million of revenue for Alcon. Moving to ocular allergies, we continue to see strong retail and consumer interest in our Pataday brand family, especially Pataday Extra Strength. The convenience of a prescription strength allergy product available over the counter is appealing to consumers. In our pharmaceutical eyedrops business, we continue to be pleased with Rocklatan and Rhopressa. In particular, Rocklatan continues to perform well with low teens, total RX growth year to date. Lastly, in contact lens care, I’m pleased to report that the recovery of supply is largely complete. While we still have work to do to fully recapture lost customers, we’re 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. In contact lenses, retail market value was also up mid-single digits. Similar to last quarter, we saw a steady wearer trade-up and meaningful contribution from price. For the year, we continue to expect eye care markets to grow at or above historical levels. Now, before I pass it to Tim, I want to comment on how saddened we were by the recent passing of Matt Mishan, who covered Alcon at Keybanc. Matt was an asset to his organization. A pleasure to work with him, and 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.

Tim Stonesifer: Thanks, David. We’re pleased to report third quarter sales of $2.3 billion, up 9% versus prior year, including approximately 2 points of contribution from products acquired in 2022. We also saw favorable pricing in the quarter. Our third quarter US 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 Vivity, our non-diffractive advanced technology IOL, in international markets. In consumables, our third quarter sales were up 7% to $661 million. In the quarter, we saw strong demand for cataract and vitret consumables, particularly in international markets, as well as price increases.

In 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 US were broadly in line with prior year as most surgical centers are already on the CENTURION platform. Given the remaining installed base of legacy phaco 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 the quarter, we saw solid growth contribution from Precision1, Total30, and Dailies Total1 for stigmatism, 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 eye drops and price increases. Approximately 11 points of ocular health growth in the quarter was from products acquired in 2022, including Rocklatan 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 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 Aerie 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. Core diluted earnings were $0.66 per share in the quarter, up 41% from last year. These strong results are another proof point that we are 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 compared 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 was partially offset by the continuing appreciation of the US 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 US dollar net sales guidance range for 2023 of $9.3 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% 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’re 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 was offset by approximately $0.25 of FX headwind versus prior year, which represents an incremental $0.07 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 $0.20 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.

David Endicott: Thanks, Tim. To conclude my remarks, we’re pleased with our strong results for the third quarter. And as I sit here in November, I’m proud of all that team has accomplished. Year to date, we’ve grown faster than the market in nearly every category. We’ve expanded core operating margin by 250 basis points. We’ve 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 and driving earnings through operating leverage.

We’re 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.

Operator: Thank you. We’ll now be conducting a question-and-answer session. [Operator Instructions] Our first question is from Patrick Wood with Morgan Stanley. Please proceed with your question.

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Q&A Session

Patrick Wood: Amazing. Thank you so much for taking the questions. So the first one, a bit of a specific one that I’m curious, your ORA system, ORA, how well spread out is that, do you think, amongst clinics, whether it’s in the US or OUS, how much more growth is there to go there? And given the pricing structure of that and how that’s connected to IOLs, how much do you think that helps you protect your market share across all [IOML] (ph) modalities over time, given the cost to clinics if they end up switching?

David Endicott: Patrick, thanks for the question. ORA is a fairly specific topic, but I would say that it’s dominantly a US system. I think we have a bit of it in Japan. So, it does — there’s a lot of things that we do with our equipment. I think that endears us to the ophthalmologists and the surgeons. I do think that we have access to the ORA in ways that many folks do not. But I don’t think there’s anything specific that really is holding up our products there. I do think that that is a really good outcome system. So if you can do intraoperative aberrometry, it’s a really valuable idea for getting a better outcome, and that’s really how we position it.

Patrick Wood: That makes complete sense. Then a quick follow-up, please. On Hydrus, you obviously touched on the reimbursement challenges that I guess some of your peers face in the US. How should we think from your perspective going forward about how that market evolves when we think about MIGS and the share of the relevant players? Thanks.

David Endicott: Well, we continue to grow share in the MIGS space as we look at it. I think the stent business in particular has been very stable in reimbursement, and I think in this particular moment, that has been a comfort to surgeons, because I think they can predictably understand what they’re going to get reimbursed and how that’s 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’s anybody else who’s been able to show the kind of differences that we’ve shown in visual field loss and also in preventing visual field loss, in IOP reduction, in saving medications or preventing additional surgeries. What we’re trying to get around the world really is a reimbursement understanding of how powerful that is and how much money we’re saving the system.

So work to 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.

Patrick Wood: Brilliant. Thanks for taking the questions.

Operator: Thank you. Our next question is from Veronika Dubajova with Citi. Please proceed with your question.

Veronika Dubajova: Excellent. Hey guys, good morning and thank you for taking my questions. I also have two. First, I’m hoping that you could comment on the sort of volume dynamics in the cataract phase. I think, David, when you reported CT, you had expressed some hope and optimism that we might see some continued efficiency and throughput gains among surgeons, in particular in the US. It was notably absent from your prepared remarks this morning. I noticed in the press release you called out strength in international and surgical, but not really in the US. Just curious what happened in the US market in the third quarter from a sort of surgical perspective? And maybe if you can also briefly comment on those competitive pressures you were seeing in toric, ATIOLs and whether those have persisted? That’s my first question, please.

David Endicott: Yeah, Veronika, thanks. Look, markets overall are relatively resilient. They stayed mid-single digits. Really, it was 4% globally, but 2% in the US. And so I do think you’re reading that correctly. The international markets were stronger, and the US, I think, coming off of a very strong third quarter prior year, had a comparator that was a little bit tricky, but again, 2% growth 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 our US total share was up over prior year, our monofocal share was up, our PCIOL share was up, and sequentially our toric share was up, although we’re still wrapping around, so over prior year it was down a little bit.

So I think in the US, 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 will be a stable environment where we really care mostly about the US ATI well penetration. Now on that comment, ATI well 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 I do think that we should expect 50 basis points out of the US. Internationally, we saw a nice penetration growth of 120 basis points or better, more than half of that coming from China.