Alcon Inc. (NYSE:ALC) Q2 2023 Earnings Call Transcript

Alcon Inc. (NYSE:ALC) Q2 2023 Earnings Call Transcript August 16, 2023

Operator: Greetings, welcome to Alcon’s Second Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to Dan Cravens, Vice President of Investor Relations. Thank you, you may begin.

Daniel Cravens: Welcome to Alcon’s Second 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 Securities Exchange Commission and available on the SEC’s website at sec.gov. Non-IFRS 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 measures should be considered along with but not as alternatives to the operating performance measures as prescribed 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 second 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. Welcome to Alcon’s second quarter 2023 earnings call. I’m pleased to report that we had another strong quarter with double-digit sales growth of 12%, core operating margin of 19.9% and core diluted earnings of $0.69 per share. These outstanding results were driven by our competitive product portfolio, favorable market conditions, strong commercial execution and select price increases. We also saw strong performance in Asian markets particularly in China. In Surgical, our diverse portfolio and incremental innovation continued to deliver strong growth in a healthy market. In Implantables, similar to last quarter, we saw the tail end of the Korea PCIOL reimbursement change which increased out-of-pocket expenses for many Korean patients.

If we exclude this impact, total implantable sales were up 5%. We have now fully lapped the reimbursement change and expect more normalized comparisons going forward. During the quarter, we introduced Vivity to select international markets including Japan and Canada. Feedback from surgeons has been extremely positive and we’re excited to bring our patented Non-Diffractive technology into these important markets. As a reminder, Vivity is the first of its kind presbyopia-correcting IOL that provides patients with monofocal quality distance, but excellent intermediate and functional near vision, all with low levels of visual disturbances. With Vivity and PanOptix, we continue to lead the ATIOL category in the US and international. Importantly, we remain encouraged by the resilience of global ATIOL penetration, which was up 80 basis points versus prior year and up 60 basis points sequentially.

This growth was primarily driven by strength in international markets. As anticipated, we’re starting to see more entrants in the US IOL market, which will naturally have some impact on us given our significant share position. However, in China where IOL business is under-indexed, we’re preparing to launch Vivity later this year, which we believe will help accelerate our share in this important market as it returns to significant growth. In the monofocal space, our Clareon material is helping us to defend our market leading position. Clareon is the latest material advancement in our 20 plus year history of continuous innovation in IOLs. As the name suggests, Clareon provides exceptional clarity allowing surgeons to deliver long-lasting refractive outcomes.

Clareon is glistening-free biomaterial that has amongst the lowest level of hays and subsurface nano-glistening compared to leading competitive IOLs. Additionally the Clareon monofocal is available with autonomy preloaded IOL delivery system. Autonomy is designed with advancements intended to benefit both surgeons and patients, it’s automated delivery mechanism and ergonomic design allow precise and simplified single-handed control of IOL placement. Now turning to equipment. We are continuing to place CENTURION and LEGION devices in international markets as we work through the upgrade cycle of Legacy, Infiniti and other machines. CENTURION with ACTIVE SENTRY is designed with advanced technology to help enhance surgeon confidence with lower intraocular pressure and enhanced chamber stability.

Importantly, ACTIVE SENTRY helps maintain stability in the eye by adjusting for fluctuations in intraocular pressure. Our success in equipment also drives growth for consumables in three important ways. First, our growing share of the active equipment install base naturally drives higher consumables demand. Second, as surgeon productivity increase so does consumption of consumables. And third, as we install higher value machines, there is a natural ASP uplift that drives consumables value. So all these factors, along with select price increases have contributed nicely to our consumables growth. Now closely linked with equipment is our world-class service offering, which we believe is one of the core strengths. Service is a critical component of our portfolio and is often a key factor for health care professionals when selecting technology for their practices.

Our ability to offer market-leading technologies supported by best-in-class services allows customers to fully realize the potential of Alcon’s products, helping them deliver the best outcomes for their patients. Additionally, we’re continuing to rollout SMARTCataract and new practices. SMARTCataract is the first of our digital health solutions that empower surgical practices to work more efficiently while delivering optimal outcomes for patients. We specifically designed SMARTCataract with ophthalmology in mind. It seamlessly connects data systems, diagnostic devices and surgical equipment from the clinic to the operating room. Later this year, we’re rolling out a series of artificial intelligence based features that enable SMARTCataract to automatically evaluate patient data and take into account surgeon preference, preferred formulas and lens types to efficiently guide the surgical planning process.

This enables surgeons to make optimize recommendations that we believe will help lead to better patient outcomes. Real world data as indicated substantial time savings and efficiencies for cataract surgery planned with SMARTCataract. We’re excited to bring this technology in more practices. Now, I’ll turn to Vision Care, where I continue to be pleased with our strong performance in contact lenses and ocular health. In contact lenses, our strategy of investing behind fast growing market segments where we have significant share opportunities working out well. As a result, we’re outpacing market growth in every category where we have launched new products. I’ll start with reusable lenses, where our latest products our TOTAL30 and TOTAL30 for astigmatism.

Since launching TOTAL30 Toric earlier this year, we’ve seen an acceleration in the adoption of the TOTAL30 family, which is now available in the US and Europe. Later this year, we’ll launch this innovative lens in Japan. Additionally, we’ll further expand the TOTAL30 family in the US and Europe with the launch of our multifocal modality. The reusable water gradient design of TOTAL30 is made possible by the introduction of our proprietary Celligent technology. Celligent mimics the ocular surface to help resist bacteria and lipid deposits. This is what enables TOTAL30 to provide a premium wearer experience similar to DAILIES TOTAL1 but on a monthly platform. Now turning to Daily Lenses, where we saw another quarter of double-digit growth, in particular, I continue to be impressed by the performance of our Toric lenses, including Precision1 and DAILIES TOTAL1 Toric.

The DAILIES Toric segment is the fastest growing segment of the market as it’s estimated that approximately one-third of contact lens wearers have astigmatism but only 10% wear Toric lenses. And together, Precision1 and DAILIES TOTAL1 Toric address the mainstream and premium market segments. A recent clinical study evaluating the performance of DAILIES TOTAL1’s Sphere with wearers of previously dropped out of contact lenses due to issues of comfort or dryness. This study found that approximately 90% of participants were likely to continue to wear DAILIES TOTAL1 on a daily basis. This is important because preventing wearer drop out by improving the wearer experienced represents an important patient feature as well as a sizable opportunity of contact lens value capture for our customers.

Now turning to ocular health, we continue to see strong retail, consumer and physician interest in our portfolio of eye drops. I’ll start with SYSTANE, our family in artificial tears, a recent study examined the quality of life of high digital device users who are treated with SYSTANE complete preservative-free. This study found a 40% reduction in dryness symptoms in treated patients, and now with these options available in United States, we’re bringing the benefits of preservative-free formulations to even more consumers at a more accessible price point. Moving to Pataday, our family of ocular allergy drops, encouragingly, we’re seeing more consumers appropriately select ocular allergy drops to correctly treat their allergy symptoms as a result of our direct to consumer educational efforts in the US.

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And in our pharmaceutical eye drops, we’re continuing to build momentum behind Rocklatan and Rhopressa with ophthalmologists and optometrists. We’re seeing positive uptake of these first-in-class therapies with low-teens total prescription volume growth in the second quarter. Finally, I’m pleased to report that we’re making solid progress towards resolving the supply chain challenges in contact lens care. Recall that these pressures started in the second quarter of last year, so we’re wrapping around on an easier comparison and we expect the situation to continue to recover throughout the back half of the year. Now let me provide an update on our end markets. In Surgical, global cataract procedures were up mid-high single-digits in the second quarter versus prior year.

As I mentioned earlier, global ATIOL penetration was up 80 basis points versus prior year and 60 basis points versus prior quarter. Notably, we’re starting to see surgeon productivity improve, which when combined with the patient backlog should be an important driver of procedural growth. We continue to monitor penetration trends closely and are leveraging programs that digitally and conveniently educate patients about their lens options early in their cataract journey. Moving to contact lenses, retail market value was up mid to high-single digits. Similar to last quarter, we saw a steady wearer trade up and meaningful contribution from price. Now before I pass it to Tim, I want to briefly comment on our market outlook for the remainder of the year.

On our May earnings call, we indicated that we were planning for a potential slowdown in market growth in the back half of the year. Throughout the first half of the year, global ATIOL penetration was solid and contact lens trade-ups and price capture were both robust. Now given these results, we’ve updated our outlook for the remainder of the year and currently assume that markets grow at or above historical trends. Now with that, I’ll turn it over to Tim, who’ll take you through our financial results and provide more color on our updated outlook.

Tim Stonesifer: Thanks, David. We’re pleased to report second quarter sales of $2.4 billion, up 12% versus prior year. This growth was primarily driven by continued strength in demand for our products, including two points of contribution from acquired products as well as solid commercial execution. We also saw favorable pricing in the quarter, particularly in consumables, contact lenses and ocular health. Overall, we estimate that price increases drove approximately three points of our total top line growth. Our second quarter US dollar sales growth included approximately 300 basis points of pressure from foreign currency. In our Surgical franchise, revenue was up 10% year-over-year to $1.4 billion. Implantable sales were $437 million in the quarter up 2% year-over-year.

However, if you exclude the South Korean impact that David mentioned, implantable sales were up 5%. In consumables, our second quarter sales were up 13% to $714 million. This growth reflects favorable market conditions across geographies as well as pricing. We did see strong performance in China during the quarter as the country continues to recover. In equipment, sales of $231 million were up 15% year-over-year due to continued strong demand for cataract equipment, particularly in international markets as we upgrade and expand our installed base. In the quarter, we also saw higher revenues from equipment service. I continue to be extremely impressed by how well our manufacturing and procurement teams have navigated the ongoing supply chain challenges.

Thanks to their hard work and expertise, we’ve been able to manufacture, sell and support surgical equipment worldwide. Given the remaining installed base of Legacy Phaco devices and our strong competitive performance, we expect solid equipment growth in the remainder of the year. Turning to Vision Care. Second quarter sales of $1 billion were up 15%. Contact lens sales were up 10% to $594 million in the quarter. Contact lens growth was driven by our new innovations with meaningful contributions from our recent SiHy launches, including PRECISION1 Sphere and Toric, TOTAL30 Sphere and Toric and DAILIES TOTAL1 Toric. We also saw a strong contribution from price. In Ocular Health, second quarter sales of $426 million were up 22% year-over-year, approximately 10 points of this growth was driven by Rocklatan and Rhopressa, which we acquired in 2022.

We also saw significant growth in SYSTANE and Pataday including price. Finally, as David mentioned, we continue to recover in contact lens care and we estimate that channel restocking was approximately three points of growth to Ocular Health in the quarter. Now moving down the income statement. Second quarter core gross margin was 63.8%, up 110 basis points. This growth was driven by higher sales and manufacturing efficiencies from higher volumes, partially offset by a shift in product mix in Surgical, including the impact from South Korea and inflationary pressures. We continue to expect gross margin to be pressured in the remainder of 2023 as we sell inventory that was manufactured at a higher cost base due to inflation. However, on a full year basis, we continue to expect 2023 core gross margin to improve versus last year.

Core operating margin was 19.9%, up 270 basis points. The constant currency growth was primarily 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. Second quarter interest expense was $48 million compared to $31 million last year, driven by higher debt following the funding of the Aerie acquisition and less favorable interest rates. The second quarter core effective tax rate was 19.2% compared to 11.1% last year. This increase was primarily due to the geographic mix of pre-tax income and a lower tax benefit from the build of inventory in certain markets. This was partially offset by favorable discrete tax items in the second quarter of 2023.

Core diluted earnings per share were $0.69 in the quarter, up 19% from last year. And 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 half of the year was $189 million compared to $233 million last year. This reflects the change in cash from operations as we paid a legal settlement in April, partially offset by lower capital expenditures. Similar to past years, we expect free cash flow to be stronger in the back half of the year. On a full year basis, we continue to expect an improvement in free cash flow versus last year despite the higher outflows in the first half. Transformation costs were $26 million in the quarter and $340 million life-to-date.

We continue to expect to wrap up the entire transformation program on budget and on schedule by the end of the year. Now moving to the 2023 guidance. Our current outlook assumes that markets grow at or above historical averages in the back half of the year, exchange rates as of the end of July 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 9% to 11%. This growth was partially offset by the continuing appreciation of the US dollar against our basket of currencies, which we expect to pressure sales growth by approximately 120 basis points versus prior year. Despite this pressure, we’re increasing our US dollar net sales guidance for 2023 to $9.3 billion to $9.5 billion and we’re currently trending toward the high-end of this range.

Moving to core operating margin, we are maintaining the range of our full year outlook of 19.5% to 20.5%, despite approximately 90 basis points of foreign exchange headwind versus prior year. We now expect interest and other financial expense to be between $230 million and $240 million. For the full year, we expect lower financial expense primarily due to higher interest 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 28% to 32% due to the strong performance in the first half of the year. This growth is offset by approximately $0.17 of foreign exchange headwind versus prior year. And despite this pressure, we’re raising our core diluted EPS guidance to $2.70 per share to $2.80 per share.

So to summarize, I’m very pleased with our momentum in the second quarter. We continue to execute well in robust markets, and going forward, we remain focused on accelerating innovation, delivering above market sales growth and driving operating leverage. Finally, I’d like to thank the entire Alcon team for another great quarter. With that, I’ll turn it back to David.

David Endicott: Thanks, Tim. To wrap up, we are extremely pleased with the robust results for the second quarter and the first half of the year. They reflect the determination of our associates to deliver market-leading innovation, above-market sales growth and increased operational efficiency. As we look to the future, Alcon is well positioned to capitalize on our strengths. Our broad and balanced product portfolio combined with our leading go-to-market capabilities allow us to better serve the eye care community. By successfully executing our strategy across both franchises, we are further strengthening our ability to advance patient care and deliver long-term shareholder value. With that, operator, let’s open the call for Q&A.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question is from Veronika Dubajova with Citi. Please proceed.

Veronika Dubajova: Hi, guys. Good morning and thank you for taking my questions. I want to start with the US PCIOL comment David that you made about new entrants and some incremental share pressure. Maybe just give us an update on where you see your market share at the moment exiting the quarter and what are the risks that you see that this declines meaningfully from here, if you could just give us some insights into that? And then I’ll have a follow-up after that.

David Endicott: Yeah, sure Veronika. Thanks. Look, we — in the US, as you know, we have about two-thirds of the ATIOL business and we continue to hold that share through the second quarter. We had — I think in PCIOL, we were up over 80 again. We — obviously, last couple of years there have been a number of products that have come into the market. Last year, we saw two PCIOLs come in. We dropped down a little bit in PCIOL. We went back up after people have tried them. But they’re going to be in the Toric business. Now, this year there seemed to be a couple of new entrants as well. And again, people will try those lenses, they’ll experiment with them and then I suspect what they’ll find over time is that the performance of our lenses do quite well.

So directionally, I think we feel very good about what we’ve assumed. There’s really a performance that is better than expected from our perspective going on right now. And you will see some trial out there, but I think after that, we should see continued steady growth in our business going forward. I do think that when you start forward on this, you want to talk and think about the penetration rates more than share, and I think, for us, penetration when you hold this much of the market matters a lot. It’s probably three to one more valuable than a share point. So we were very encouraged by the global penetration rate, which was up 80 basis points year over prior year and 60 sequentially. So a lot of that came out of international, most of it did.

But I would just say that the volume of procedures in the US looked pretty good in the second quarter. So we feel pretty good about the prospects going forward.

Veronika Dubajova: Excellent. And just to confirm then David, the way we should be thinking about bit of the softness in Q2 is really you think there’s some trialing going on, but you don’t see the fundamental competitive pressure in the US PCIOL. Is that fair?

David Endicott: Yeah, that’s fair. I think it’s exactly as we would have expected it. I think people are going to try new lenses when they come out. There’s always a place for price in the market. There’s always something new that somebody is claiming. And surgeons want to try things. So they will. And then I think what happens is they figure them out and they kind of, generally speaking, I think, they’ve come back to where we have I think very, very good offerings that compete well.

Veronika Dubajova: Clear. Great. And then if I can just a follow-up. Obviously, we’ve now had two really impressive quarters in contact lenses. I think you’re the fastest growing CL company in the market. I know it’s not apples-to-apples but it’s the data that we have. Just curious how you’re thinking about the sustainability of that momentum. And I’m not really asking about the second half, but as we transition into 2024 and 2025, how far along are you, you think in that journey of winning market share and how much more is left? Thank you.