Alcon Inc. (NYSE:ALC) Q4 2023 Earnings Call Transcript

Alcon Inc. (NYSE:ALC) Q4 2023 Earnings Call Transcript February 28, 2024

Alcon Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings. Welcome to Alcon’s Fourth 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. At this time, I will now turn the conference over to Dan Cravens, Vice President and Global Head, Investor Relations. Mr. Cravens, you may now begin.

Daniel Cravens: Welcome to Alcon’s fourth quarter 2023 earnings conference call. Today, we issued a press release, interim financial report, and annual report posted 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 differ 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. Non-IFRS financial measures used by the company may be calculated differently from, and therefore, may not be comparable to, similar measures used at other companies. These non-IFRS measures should be considered along with, but not as alternatives 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 our 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 fourth quarter. After his remarks, Tim will discuss our performance and outlook for 2024. 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.

David Endicott: Thanks, Dan. Good morning, and welcome to Alcon’s fourth quarter 2023 earnings call. As I reflect on 2023, I’m extremely proud of what the team has accomplished. In a year of continued supply challenges, foreign exchange headwinds, high inflation, persistent competition and geopolitical uncertainty, our team achieved some remarkable things. We outgrew our markets in almost every category with sales of $9.4 billion, double-digit sales growth of 10%. This is driven by our broad portfolio of innovative products, solid commercial execution in robust markets. We grew quarterly earnings by 33% to $2.74 per share. We expanded core operating margin by a 150 basis points to 19.7%. And when adjusting for foreign exchange, we grew core operating margin by 280 basis points to 21%.

We generated more than $700 million of free cash flow, and we advanced our innovation and commercial agenda, particularly in our Vision Care franchise with the launch of total 30 for astigmatism and multifocal. We also expanded our ocular health business with the integration of Rocklatan and Rhopressa and concluded Phase 3 trials for AR-15512, our dry eye pharmaceutical candidate. Based on these results, it’s clear that our portfolio of products is winning. Our markets are growing and remain healthy. We’re demonstrating our ability to execute commercially, and we’re steadily advancing our pipeline. Now look forward into 2024. I’m excited about our product pipeline and our commercial agenda. Let me start with Surgical. Most exciting near-term product launch is UNITY VCS, our next generation Phacovit device.

This machine delivers unprecedented surgical performance that we expect will drive upgrades and capture market share. UNITY is a dual console with best-in-class Phaco and vitreoretinal capabilities. This combination reduces the equipment footprint in the OR and streamlines the procedural setup and intraoperative workflows. In addition, it was designed to create near physiological conditions during surgery, which is expected to improve performance and efficiency without compromising safety. Additionally, UNITY VCS represents an important opportunities to secure the next generation of consumables. As a reminder, consumables are a significant recurring revenue stream for us and contribute approximately half of our surgical revenue. We submitted for FDA authorization at the end of 2023 and expect approval in the coming months with international markets to follow in early 2025.

As we look to the anticipated rollout, we plan to gradually introduce VCS to the market in late 2024 and expect more meaningful revenue contribution starting in 2025. We’re also working to increase surgical efficiency in the clinic through better diagnostics with the upcoming launch of our next generation diagnostics device, UNITY DX. UNITY DX is a first of its kind whole eye analyzer that combines six separate devices into a single machine to deliver best-in-class performance at a lower price. This reduces the overall footprint in the clinic and reduces preoperative time. All of this is surrounded by the ability to seamlessly move data over to the cloud from the clinic into the OR, and then back into the clinic postoperatively. Importantly, this technology will also leverage the data captured to improve outcomes through AI driven algorithms.

We’re targeting to pilot UNITY DX in select international markets in the back half of 2024 with broader international and U.S. commercialization in 2025. We’ll position UNITY DX as a premium diagnostic device that will complement our current offering, the ARGOS Biometer. We’re very pleased with the performance of ARGOS, which continues to see very strong adoption. Now I’ll turn to Implantables, where we’re combining best-in-class materials, delivery and optics to drive premium penetration and share. In the fourth quarter, global ATI well penetration was up 170 basis points year-over-year, driven by international markets notably China. In the U.S., ATIOL penetration has remained stable in the high teens versus prior year. However, it improved 50 basis points sequentially from the third quarter and we continue to expect penetration to return to historical growth rates in the future.

Based on our willingness to pay data, we continue to believe that there is significant headroom for penetration going forward. Turning to market share, I continue to be pleased by our leadership in IOLs. Globally, we are the market leader. Alcon has an enviable position with approximately one-third of the monofocal category and approximately one-half of the PCIOL category as of the fourth quarter. Indeed in the U.S., our PCIOL hare remains stable above 80%. I’m particularly excited about our opportunity to grow share in international markets. For example, in China, where we have historically been under indexed, our recent success in the national volume-based procurement tender will provide a great platform to expand our footprint in this large and growing market.

Following the award, Alcon will hold the preferred position in the trifocal extended depth of focus and bifocal categories, as well as their toric modalities across each of those categories in China. With this tender, we expect to gradually increase our market share in the advanced technology category starting in the second half of the year. Now I’ll turn to Vision Care, where our historical investments have created the strongest pipeline we’ve had in years. Starting with contact lenses, since spin, we’ve launched a wave of new products into fast growing markets. These include the DAILIES SiHy category as well as areas where we have opportunity to capture share such as torics and reusables. Based on fourth quarter reported sales, it’s clear that our strategic investments are working, and we’re now one of the fastest growing companies in contact lenses.

In 2023, we launched two new specialty lenses, total 30 for astigmatism and for multifocal. These launches expand our specialty portfolio, which also includes PRECISION 1 toric and DAILIES TOTAL1 toric and its multifocal. I’m particularly pleased by the performance of our toric lens as these lenses leverage our proven precision balance technology. This patented design features defined anchor points that deliver exceptional stability and a smooth fitting process. Additionally, with an expanded portfolio of specialty lenses, we’re seeing an accelerated uptake of the spherical modalities. Now shifting to Ocular Health, as I mentioned earlier, we recently announced positive top-line results from Phase 3 trials for AR-15512, a novel dry eye candidate, which we estimate could have peak sales of between $250 million and $400 million.

We’re excited by 512 as it has the potential to address the limitations of current dry eye medications and provide dry eye sufferers with a new and effective therapy. While dry eye is one of the most common ocular disorders impacting approximately 38 million people in the U.S., less than 2 million patients are treated with a prescription product. The primary endpoint was met in both Phase 3 studies, supporting a path to seek full indication for the treatment of signs and symptoms of dry eye. The 512 product is effective as early as day one and persistent to day 90, which is an important differentiator versus other products currently in the market. As per timing, we intend to file the new drug application around the middle of 2024 and anticipate bringing the medication to the U.S. market around the middle of 2025.

From there, we expect more meaningful revenue contribution beginning in 2026. 512 is the first product candidate in our emerging pharmaceutical portfolio, which also includes the glaucoma assets Rocklatan and Rhopressa. I continue to be very pleased with the performance of these medications. For the full-year 2023, total prescription growth was in the mid-single digits ahead of the broader glaucoma market. Strategically, we will continue to focus on expanding its market access. Turning to our over the counter portfolio, our sustained brand continues to perform exceptionally well with another year of double-digit growth. We continue to see strong demand for our multi-dose preservative free formulations, which are helping expand the U.S. preservative free category.

And finally, we are pleased with the recovery of our Contact Lens Care business. We’re now in a situation of unconstrained supply and are happy to be able to restock this product in the U.S. and internationally. While contact lens care market is broadly flat, we do except to see year-over-year growth in this category due to the supply chain challenges we faced in 2023. Now let me provide an update on our end markets. In surgical, we estimate that global cataract procedural volume growth was low-single digits in the fourth quarter versus prior year. In contact lenses, we estimate that retail market value was up mid-to-high single digits. Similar to last quarter, we saw steady wearer trade-up and meaningful contribution from price. Now 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 fourth quarter sales of $2.3 billion up 10% versus prior year including favorable pricing. Our fourth quarter U.S. dollar sales growth included approximately 200 basis points of pressure from foreign currency. In our surgical franchise, revenue was up 8% year-over-year to $1.4 billion. Implantable sales were $438 million in the quarter, up 5% year-over-year, mainly driven by demand for our advanced technology intraocular lenses, including Vivity, PanOptix and our monofocal torics in international markets. In consumables, our fourth quarter sales were up 9% to $688 million. In the quarter, we saw strong demand for cataract and vitrect consumables, particularly in international markets.

In equipment, sales of $226 million were up 14% year-over-year. Sales were driven by double-digit growth in international markets for cataract and vitrect equipment due to the ongoing upgrade cycle. We also saw higher service revenues in the quarter. While we expect the international equipment upgrade cycle to continue into 2024, given the strong sales in 2023 and the future UNITY Phaco launch. We expect equipment sales to be broadly in line with 2023. Turning to Vision Care, fourth quarter sales of $980 million were up 13%. Contact lens sales were up 10% to $579 million in the quarter. Our innovation, including sphere and toric product launches, continues to win in the market. This growth was partially offset by declines in our legacy lens brands.

Additionally, we saw strong contribution from price in the quarter. In Ocular Health, fourth quarter sales of $401 million were up 17% year-over-year. This growth was driven by portfolio of eye drops, price increases and recovery from supply chain challenges in contact lens care. Approximately 4 points of ocular health growth in the quarter was from products acquired in 2022. Now moving down the income statement. Fourth quarter core gross margin was 62.1%, up 120 basis points. This improvement was driven by higher sales, price and manufacturing efficiencies from higher volumes and process improvements. This growth was partially offset by inflationary pressures. Core operating margin was 18.9%, up 360 basis points year-over-year, as we continue to see operating leverage from SG&A.

Fourth quarter interest expense was $47 million compared to $40 million last year, driven by higher debt following the funding of the Aerie acquisition and less favorable interest rates. The fourth quarter average core tax rate was 13.8% compared to 30.6% last year. For the full-year, the average core tax rate was 17.2% compared to 18.6% in 2022. The current year benefited from the mix of pretax income across jurisdictions and discrete tax benefits. Core diluted earnings were $0.70 per share in the quarter, up 78% from last year. Now before I touch on our outlook for 2024, I’ll discuss a few cash flow and other related items. Free cash flow for 2023 was $730 million compared to $581 million in 2022. The improvement versus 2022 reflects an increase in cash flows from operations, partially offset by higher capital expenditures.

For 2024, we expect a meaningful step up in free cash flow versus 2023. Finally, in 2023, we concluded our transformation program on time and on budget. I’m proud of how well the team has executed this program. We exceeded our savings target, which has enabled us to invest in R&D, grow the top line and expand margins through operating leverage. Now moving to the 2024 guidance. Our current outlook assumes that markets will grow in line with historical averages of mid- single-digits and that exchange rates as of the end of January hold through year end. Accordingly, we expect 2024 net sales of $9.9 billion to $10.1 billion which corresponds to 6% to 8% constant currency sales growth. This growth will be underpinned by our broad portfolio of products, particularly in our vision care franchise.

This growth is offset by approximately 60 basis points of foreign exchange impact. Moving to R&D expenses, the investments we’ve made are performing well and we have one of the strongest pipelines in Alcon’s history. Accordingly, we will continue to invest behind innovation and expect core R&D expense to be at the high end of our range of 7% to 9% of sales. Moving to profitability, we continue to expect our core operating margin to expand through operating leverage. Despite continued currency headwinds into 2024, we currently forecast core operating margin of between 20.5% and 21.5%. This forecast reflects approximately 30 basis points of foreign exchange headwinds versus prior year. In terms of phasing, we expect both the first and second quarters to be pressured by approximately one percentage point with recovery in the back half of the year.

As we’ve said in the past, this is due to higher cost inventory that was manufactured in 2023 and will be sold in 2024. Looking beyond 2024, we remain confident in our ability to achieve the goals we laid out at our most recent Capital Markets Day. Moving down the income statement, we expect interest and other financial expense to be between $190 million and $210 million. As we stated in the past, we expect our tax rate to increase due to the implementation of Pillar 2 with a core effective rate of approximately 20%. Based on all these factors, we project core diluted earnings in the range of $3 to $3.10 per share, which corresponds to 13% to 16% constant currency growth over 2023. This growth is offset by approximately $0.07 of foreign exchange headwind versus prior year.

I’m also pleased to report that our Board of Directors is proposing an increase in our dividend to CHF 0.24 per share. This is in line with our payout policy of 10% of the previous year’s core net income pending shareholder approval. Shareholders will vote on this proposal at our upcoming Annual General Meeting in May. Finally, I want to thank the entire Alcon team for another great year. And with that, I’ll turn it back over to David.

David Endicott: Thanks, Tim. To conclude my remarks, I want to thank the team once again for a strong 2023. These results demonstrate the durability of our markets, the breadth of our growth drivers and the expertise of our team. As we look to the future, we have a lot of momentum underpinned by a robust pipeline of products. We continue to expand our portfolio into high growth, high margin and durable opportunities that will drive above market sales, deliver operating leverage and long-term shareholder value. And with that, let’s open up the line for Q&A.

Operator: Thank you. At this time, we’ll be conducting a question-and-answer session. [Operator Instructions]. Thank you. And our first question today will be coming from the line of Veronika Dubajova with Citi. Please proceed with your questions.

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Q&A Session

Veronika Dubajova: Hey, guys. Good morning and thank you for taking my questions. I have two please. The first one is just looking at the IOL performance and in particular in the U.S. David, there’s been a lot of debate in the market about competitive pressures, new product launches. And so I’d love to understand from your guidance perspective what you are seeing in your U.S. premium IOL business, so kind of backwards looking at kind of fourth quarter and also what your expectations are heading into 2024? Obviously, we have a number of product launches coming up from some of your competitors and kind of what your assumptions are around that, I guess related to that, my follow-up is on the same topic, but slightly forward-looking as well.

You mentioned in your prepared remarks that you’re excited about the pipeline, including some new innovations in IOL. Can you maybe talk to what those look like and when you expect them to be commercial and why they matter? Thanks so much.

David Endicott: Yes. Thanks, Veronika. Just a couple of things. On IOLs look, we had strong growth internationally and a solid U.S. performance. The U.S. is really wrapping around competitive impacts at this point. So, penetration in the U.S. grew about 10% over prior year sorry, 10 basis points over prior year, and about 50 basis points sequentially. So in terms of movement of penetration, we feel like it’s normalizing, we think kind of long-term this 50 basis points that we have talked about in the past is a good answer. Look we have maintained our share in the U.S. on AT-IOLs for the PC category, but we’ve lost a little bit in Toric. And again, I think that’s to be expected. What we see right now though is that that sequentially seems to be moderating and we’re kind of normalizing around where we’ve been.

So I think long-term, we feel pretty good about the U.S. and kind of as expected, I would say. The bigger story though is the global AT-IOL penetration and that was up 170 basis points and principally driven by China. So we kind of look forward on this and say, where is the opportunity for share, where is the opportunity for penetration growth. Certainly, there’s some in the U.S, but it’s likely to be moderate. Internationally, we see China and the VBP there and that win has a very significant opportunity for us, because we have a single-digit share in China. We’ve been under indexed there for quite some time. We chose not to play in the last VBP. And in this case, we have won the VBP kind of against most of the categories, I think seven of the eight.

So Vivity, PanOptix, Toric, our whole line basically is going to be in play starting middle part of the year. And as you probably know, China is the second largest ATIOL market in the world. So from our point of view, we’ve got nice progress to be made internationally, U.S. is normalizing and there are going to be new products coming in. None of that is new to us. So I think we’ve been talking about competitors coming in and seeing them internationally and even the ones we kind of know are going to be first in the U.S. We’re not terribly bothered about. A lot has been made I think out of the RxSight product and I would just say that again it’s I think was 15,000 to 20,000 lenses in a 1 million unit market. So it’s just not going to be a big deal.

I think directionally we have a really good eye on our international growth and the penetration number in particular.

Veronika Dubajova: That is helpful, that’s an innovation?

David Endicott: Yes. Look, I mean we are working on a number of ideas. I mean, first of all, PanOptix is a patented trifocal that has set points that are unique. And I think it’s very difficult to improve on it. So I think I recognize there are people who say they’re coming in with trifocals. There are very few going to be competitive as they are around the world, very few that are competing with PanOptix in that way. And Vivity has a very unique wavefront shaping idea. So these are very specific technologies, which afford very specific benefits. And I think they are going to be very durable in the U.S. market as they have been around the world. We are working on a number of other ideas. Obviously, we’ve got some ideas around how we can improve contrast sensitivity, how we can improve intermediate vision.

Those are going to be experimented with for the rest of this year and into next year. And we’ll — if we find something we really get excited about, we’ll bring that out and we’ll get you information around that when we do. The other big thing of course is our accommodating and adjustable program. And that program will read out in the middle part of the year on its first in-human trial. And we’ll give you updates around that at that point. But again, I think we have what we think are really good ideas around both accommodation and adjustability. We think our adjustable mechanism is more durable, it’s easier to do, and it’s a little bit more predictable than what’s currently available. So although it’s a fairly far away out, I would just say that in terms of long-term, we feel very good about our competitiveness.

Veronika Dubajova: That’s great. Thanks, guys.

Operator: Our next question is from the line of Ryan Zimmerman with BTIG. Please proceed with your question.

Ryan Zimmerman: Good morning. Thanks for taking the questions and congrats on the ’23. Two part question on guidance first and then one on Rocklatan and Rhopressa. On guidance, Tim, when you look at results over the past year and I appreciate the commentary on pacing for margins, the top line doesn’t follow I guess what I’d consider kind of normal seasonality, right? First quarter was above fourth quarter, second quarter grew and then third quarter fell. Just help us on the top line maybe with pacing through the year? And then the second part on guidance is I appreciate you’re taking FX from the end of January, but if you look at the Japanese Yen for example, it’s gone up I think 240 basis points the other way in February. So just how might that impact the EPS guide? And then I have a follow-up on Rocklatan and Rhopressa?

Tim Stonesifer: Yes, thanks Ryan. Good question. Yes, so from a top line perspective, this year was a little bit different or 2023 was a little bit different than prior years. But as I look back at historical growth rates, I think we will trend towards more of a common seasonality. So I would expect from a revenue perspective, I would expect Q2 to be higher as we ramp up for allergy season. And then I would expect Q4 to also be a little bit higher given the fact that typically equipment sales are stronger in Q4. So I’d go back to your kind of ’22, ’21 models and I think we’ll probably pace towards that. As far as FX, listen, our internal processes are really built around kind of locking down a budget at the end of January. So it’s just not really practical to finish our budget yesterday for today’s call.

So that’s why we picked the end of January. To your point, the end’s up, if you look at the end of January, the end was about 147. I think today it’s about 150. So there is a bit of a pressure point, but if you look at some of the other currencies in the emerging markets, we’ve gotten some favorability there. So I would say overall versus the end of January, FX has an immaterial rate as of today. We’ll continue to monitor that going forward and if there are any changes, we’ll certainly let you know.

Ryan Zimmerman: Okay. And then Rocklatan and Rhopressa, David, if I think back, I think it was growing and correct me if I’m wrong 20% a year or at least it was on that pace before you guys acquired it. So you guys grew mid- single-digits. So what’s the right way to think about those assets in your hand as you make them organic in ’24?

David Endicott: Yes. Look, we’re very positive about where it is right now. I think you got to remember there’s a big push in the market to generics right now and as a number of the glaucoma products have gone generic, there has been a lot of access pressure. So I think directionally there has been a little bit of a slowing both in the market. I think the market was net negative in value. And I think directionally, we grew in the high single-digits on TRx. I think what we expect kind of going forward is that we’ll certainly outgrow the market and grow gain share. And I think we’re kind of pleased with where we are at this point. But remember too that we had to consolidate two sales forces, put them together, get them out there, redeploy that group. So I think we’re through that bit and I expect kind of I would think a very positive kind of teams kind of growth in that area.

Ryan Zimmerman: Thank you.

Operator: Our next question is from the line of Susannah Ludwig with Bernstein. Please proceed with your question.

Susannah Ludwig: Thanks. Good afternoon and thanks for taking my questions. I have one follow-up. So on 15512 [ph], can you provide some color as to what are the swing factors that you can get you from sort of the low end to the high end of your $250 million to $400 million peak sales? Just on this, also this is a category that’s quite sensitive to marketing spend. So how much investment do you think it will require to drive this sales range?

David Endicott: Yes, good questions. I think what we’re going to obviously be focused on is labeling and access in the early parts of the next kind of year and a half. So we’ll submit in the middle part of the year. We’ll have a good discussion. We feel good about what we’ve got in terms of labeling. I think as we get all of that detail out and we look at what the access point is and how fast we can get access, that will determine, I think the early curve on this one. And then access is obviously a big deal in a market like this. So I think those are the big variables if you kind of step back and say how do we move this product along. Investment wise, I think as we get closer to it, we’ll have a better picture of how we want to — how we see this.

But I would say that we expect to have some significant leverage from our existing sales force. And obviously, depending on the size of the product, we may make considerable investments. But I think directionally, we believe this is kind of a — we’ll size it appropriately to wherever we end up with the revenue.

Susannah Ludwig: Okay, great. Thank you.

Operator: Our next question is from the line of Anthony Petrone with Mizuho Group. Please proceed with your questions.

Anthony Petrone: Thanks for taking the questions. Congrats here on a good quarter. Maybe one, I’ll start with on contact lenses and maybe talk a little bit about the sustainability of price in contact lenses and maybe the flip side of that question is on the manufacturing side. We’re hearing that there are still constraints, I think for all of the suppliers. So maybe just talk a little bit about the manufacturing capacity just industry wide and what needs to be done to get that level setted? And I have one quick follow-up on glaucoma.

David Endicott: Well, I think, look, the sustainability of prices is a good question and it will depend a lot on the consumer and what happens in the market. As of the last couple of years, much of it, well, I would say a significant part of the growth, let’s say a third of the growth was coming from price in the market. And that’s not different than the historical number. It’s largely been mix and price, mix to dailies and then some price. But price used to be kind of 1% to 2% and probably more recently it’s been 2% to 3% as part of that 6% kind of average growth, if I was kind of giving you a very broad strokes across the last several years. I think we’ll see, as what we’re really concerned about is not pricing out the consumer from trading up to dailies, because that’s really where our principal interest is.

From there, I think manufacturing, we’re kind of unconstrained right now. We feel very good about our manufacturing capacity. We have plenty of room to make as much as we need. And if others are having a little bit of trouble making product, again that’s I’m sure a short term problem for them, but we will certainly supply in an unconstrained fashion for the indefinite future.

Anthony Petrone: And quickly on glaucoma. Just thoughts on drug device combination solutions, you have a competitor out there with Glaukos eye dose. Just your thoughts on that category and does Alcon have to be there? Thanks.

David Endicott: Well, we’ll see how reimbursement plays out there. I think it’s a great idea. I think the real question is whether or not reimbursement will come around it and be permanent in a way that is helpful to advancing that product. And again, we’ll have to see at a practical level whether people want to go back in and replace these things over I think going over this two or three years. But I’m sure those guys are smart guys, they’ll figure it out. So we’ll see over time, there are a lot of good ideas in that space. So if they blaze a trail there, we’ll certainly be interested.

Operator: Thank you. Our next question is from the line of David Saxon with Needham & Company. Please proceed with your question.

David Saxon: Great. Good morning. Thanks for taking my question. Maybe one for Tim. So operating margin should be down around one point in the first half. That implies a fairly meaningful ramp into the second half. So, outside of higher cost inventory, what drives that ramp? And does that improvement continue into ’25?

Tim Stonesifer: Yes, a great question. I mean the primary pressure point we’re going to see in the first half is going to be that higher cost inventory that’s bleeding through the P&L. So, you’re absolutely right, that would carry forward. If you look at the second half run rate, as that sort of normalizes, we will have less gross margin pressure and we’ll have all the benefit of that operating leverage. So, that should carry forward into the future years. And again, our whole financial thesis is around growing faster than the market. And when you do that and maintain your cost envelope, you should get nice operating leverage, and that’s what we would expect to happen.

David Saxon: Okay, great. Thank you. And then my follow-up is in ocular health, you talked about pricing, but would love to hear how much pricing benefit you saw specifically in ocular health. Is that kind of the primary driver of the Vision Care op margin performance or are other factors driving that? And then in ’24, where across the broader portfolio do you expect to take the most price? Thanks so much.

David Endicott: Yes. I mean, I think in terms of ocular health, I think it’s probably fair to say about a third of the growth was price. I think you’ll see a slightly less amount of that. I would suspect this year, I would think a little bit less than that, particularly in contact lenses, it’s going to be achievable. But I would say, in terms of margin progression, it was broadly a number of things. Actually, a mix in ocular health helps us quite a little bit. Our eye drops are very profitable, and Systane is quite a big brand at this point. And when you think about Systane, it is a high margin eye drop that’s over-the-counter that has really strong durability. So we expect that product to continue to contribute to ocular health and margins going forward.

Then you layer on manufacturing productivity gains, of which there were significant amounts of that last year. And then the price, that obviously contributed to what was, I think, quite a substantial sector performance for us on a segment basis. So that was really part of the margin story there. And I think directionally, for next year, we see kind of similar, but probably not quite as strong of a price move.

David Saxon: Great. Thank you.

Operator: Our next question is from the line of Larry Biegelsen with Wells Fargo. Please proceed with your question.

Larry Biegelsen: Good morning. Thanks for taking the question. One for Tim on 2025, one for David on AR-15512. Tim, can you just confirm that the 1% of margin pressure, you meant it’s going to be down 100 basis points year-over-year in the first half? And that was my — that’s what I thought the person on the prior question asked. I wasn’t sure if it was 100 basis points lower or 100 basis — versus second half or down 100 basis points year-over-year? Sorry for that. And then for my question, just confirm you’re still confident in your long-term margin goal for 2025 of the op margin guidance approaching mid-20s, or at the time I think it was 23% to 24%, and can growth accelerate next year with the launches of UNITY and AR-15512?

Tim Stonesifer: Yes, Larry, good clarification. The 100 basis points in the first half is down year-over-year. So, that’s how you should read that. And again, once that inventory, it’s kind of what I would consider a one-time phenomenon. Once that flows through the P&L, the gross margins will begin — continue to improve. As far as the Capital Markets Day, listen, we gave Capital Markets Day in March of last year. We gave you some guidelines for 2027. We feel very comfortable with that. If you’re referring to the 2021 Capital Markets Day and that approaching mid-20s that we talked about, I think we said approaching mid-20s in 2025. If you take the midpoint of this guide and you translate it back at those foreign exchange rates, we actually beat it by a year. But obviously, we report in U.S. dollars, but — so that’s more of a theoretical sort of credibility type of question. But yes, if you were to translate it, we would be a year ahead on that one.

David Endicott: And Larry, on UNITY and 512, the really — the real financial impact, I would say, for UNITY will be 2025, and I would think 2026 for 512, because just remember, we’re going to get an approval this year. We’re going to spend a good bit of time with a limited launch, making sure that that thing runs as pristinely as our current equipment does. And then we’ll release it to — for broad revenue growth. I think that’s what’s going to happen to UNITY. That’ll happen probably late this year for full release and then you really see revenue next year. And then on the 512, we won’t even submit till middle of the year on 512. So then you’ll have a year of submission. And so, by the time we get access by the end of ’25, you’re really talking about a ’26 impact.

So that’s the way to think about when those kind of play out. But I think the reason we point these out right now is because we’re very confident in the pipeline and we feel really good about our ability to kind of grow steadily over a broad portfolio of stuff.