Greetings and welcome to the Alcon First Quarter 2022 Earnings Conference. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Dan Cravens, Vice President, Investor Relations for Alcon. Thank you. You may begin..

Welcome to Alcon's first quarter 2022 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 and 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 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. With that, I will now turn the call over to our CEO, David Endicott..

Thanks, Dan. Welcome to Alcon's first quarter 2022 earnings call. Before I begin my prepared remarks on the quarter, I want to take a moment to recognize the current events that we see impacting the world today. Many parts of the world continue to face slow recovery from the pandemic, including recent COVID-19 restrictions in China.

We also acknowledge the hardship brought on by the war in Ukraine, where our focus continues to be on the safety of our associates and their families, I'm very proud of Alcon team who has led with compassion and done heroic things to help our associates.

Now, I'll give a brief update on our first quarter results, overall market dynamics and recent performance. And after my comments, Tim will discuss our first quarter performance and our outlook for the remainder of 2022. Then, I'll wrap up with closing remarks. And we'll open it up for Q&A. We're very pleased with our first quarter results.

Despite broad economic headwinds, the Alcon team delivered strong revenue performance with sales growth of 18%. We also saw a significant improvement in quarterly profitability with a core operating margin of 20.6% and core diluted earnings per share of $0.68.

These results were driven by our innovative product portfolio, solid execution by our commercial organization and continued market recovery. Now, at Surgical, Vivity and PanOptix are allowing surgeons to address the needs of a wide patient population. We continued to gain market share in the first quarter on the strength of our PC-IOL portfolio.

Alcon now has approximately 60% of the global PC-IOL market. This is up approximately 7 percentage points versus prior year and driven by international share gains. In the U.S. we have a PC-IOL market share of approximately 80%, despite new entrants in the market.

Now, in the quarter, we also announced the geographic expansion of our Clareon portfolio of IOLs. Clareon delivers excellent vision, exceptional clarity and predictable outcomes in a glistening-free IOL material.

We recently launched Clareon Monofocal, PanOptix, and Vivity IOLs in the U.S., and we will bring our Clareon portfolio to additional markets throughout 2022 and 2023. Now, early in the first quarter, we closed the acquisition of Ivantis and brought the Hydrus Microstent into our portfolio of implantables.

We are delighted to welcome the Ivantis associates to the Alcon family. The integration of the sales force is going smoothly, and it was great to see the combined teams working together on our recent national sales meeting. As we have said in the past, Hydrus is a differentiated product in the $500 million mild to moderate MIGS market.

It's also the only MIGS device with five years of safety and efficacy data from a pivotal study. We recently attended the American Glaucoma Society and the ASCRS conferences where we heard positive feedback as we continue the commercial expansion of this product.

We also continue the introduction of our SMARTCataract Planner in the United States, which is part of our broader digital equipment ecosystem. The data recently presented at a ASCRS, which was well received, highlights that SMARTCataract delivers substantial time savings during the evaluation, planning, OR and post-operative workflows.

With procedural volumes expected to grow at a higher rate than practicing surgeons, we know doctors are looking to drive efficiencies, and also reduce manual data entry and improve accuracy. In Vision Care, we continue to see momentum in our contact lens business, driven by our SiHy lenses.

PRECISION1's visual acuity, ease of handling and comfort make it a favor of eye care professionals and patients alike. We are also gaining share in the daily SiHy toric lens category and now have two options available for astigmatic patients PRECISION1 and Dailies TOTAL1 torics.

PRECISION1 toric continues to be rolled out across our international markets, following its introduction in the U.S. We're also excited to bring Dailies TOTAL1 toric to various European markets later this year, following its successful U.S. rollout.

We're also innovating in what's still the largest patient population of contact lens where is the reusable market with T30. TOTAL30 leverages the same water gradient technology of Dailies TOTAL1, which makes the lens uniquely comfortable even at day 30. TOTAL30 is now available in the U.S. and Europe.

And while it's still early in the launch, customer patient feedback has been very positive. Lastly, in ocular health, we're pleased to have the three multi-dose preservative-free formulations of our popular Systane family of artificial tears now available. Preservative-free formulations are generally preferred by doctors.

Now with multi-dose formulations, we have more convenient and cost-effective products available for consumers. We're supporting these products as well as our Pataday and Simbrinza drops from a dedicated sales force, delivering eye drops into the ophthalmic channel.

The sales force has been in the market working with doctors for a few months now, and we're pleased with their progress. Now, let me provide an update on our end markets. In Surgical, global cataract procedures were up low-teens in the first quarter versus prior year, led by strength in select international markets.

Keep in mind, the procedures in the first quarter of 2021 were still impacted by COVID-19, which makes year-over-year comparisons easier. We expect market growth rates to decelerate in the remainder of the year as we now have lapped at the low base from 2021.

Additionally, there was a notable one time increase in demand for PC-IOLs in South Korea, due to changes in reimbursement requirements that were implemented on April 1st. Against this backdrop, our implantables business did outpace the market, driven by the strength of our products and our commercial teams.

In Vision Care, we estimate that the contact lens market grew mid-single-digits in the first quarter, driven primarily by ongoing recovery in Europe. Our contact lens growth outpaced the market for another quarter. And we continue to see gains in new and switch fits, which is a strong indicator of potential future sales.

So, in summary, we feel very good about our strong start to the year, and we're encouraged by our full-year outlook. With that, let me pass it to Tim, who will take you through our financial results and provide an outlook for the rest of the year..

Thanks, David. We're pleased to report first quarter sales of $2.2 billion, up 18% versus prior year. Demand for our products was robust in the first quarter, which led to double digit growth in both, our Surgical and Vision Care franchises.

Our overall sales growth includes approximately 1 point of contribution from Simbrinza and Hydrus combined, as well as 1 point from the benefit in South Korea that David referenced in his remarks. Our first quarter U.S. dollar sales growth included approximately 4 percentage points of pressure from foreign currency.

In the quarter, we continued to see momentum in the business despite facing multiple macroeconomic headwinds, including an appreciating U.S. dollar, supply chain tightness and inflation.

We're seeing pressures on availability of supply and rising prices on certain commodities, including plastics and resins, as well as increased costs for labor and transportation.

Despite the inflationary impacts being pervasive across both franchises, we were able to offset much of the impact through mitigation efforts including cost improvement initiatives, strategic price increases and contract negotiations with suppliers.

We remain committed to maintaining the supply of products that our customers and their patients need to see brilliantly. Turning now to our franchises. Surgical revenue was up 22% to $1.3 billion in the first quarter.

Implantable sales were $455 million, up 38% year-over-year due primarily to the strength Vivity, sales of Hydrus and continuing market recovery. Implantables growth includes approximately 8 percentage points from the onetime benefit in South Korea related to PC-IOLs.

For consumables, our first quarter sales were up 16% to $601 million, primarily due to increased Surgical volumes as additional international markets reopened. In equipment, our sales were up 7% year-over-year to $203 million.

This was primarily driven by strong demand for our cataract equipment, including upgrades to Centurion and sales of Legion in our international markets. In addition, we're seeing solid demand for Argos biometer. Turning now to Vision Care. First quarter sales were up 14% year-over-year to $916 million.

During the quarter, we saw strong global demand, driven by product innovation and solid market recovery across most geographies. Contact lens sales were $557 million in the quarter, up 14% versus last year.

As David mentioned, we continue to see strong demand for our PRECISION1 and TOTAL brand families as we recently launched Dailies TOTAL1 for astigmatism and TOTAL30. We're taking share and growing faster than the market. In ocular health, our first quarter sales were $359 million, up 13% on a year-over-year basis.

This is primarily driven by Systane, which saw double-digit year-over-year growth, supported by our MDPF launches, as well as sales of Simbrinza, which was not part of our portfolio in the first quarter of last year. This growth was partially offset by decline in contact lens care due to supply chain challenges. Now, moving down the income statement.

First quarter core gross margin was 62.4%, up 30 basis points on a constant currency basis, despite inflationary pressures. Core operating margin was 20.6% in the quarter, up 3.9 percentage points on a constant currency basis.

The improvement was primarily driven by operating leverage from higher sales, partially offset by increased inflationary pressures. While we're pleased with this result, I want to note that the benefit in South Korea contributed approximately one percentage point of core operating margin in the quarter.

Operationally, we expect marketing and sales expense and R&D to increase in the coming quarters, driven by normal seasonality, new product launches and higher spend as markets recover. First quarter interest expense was $29 million, in line with prior year.

The core effective tax rate was 15.9% in the quarter compared to 20.7% in the first quarter of 2021. The favorable rate is primarily due to a benefit on inventory build in certain markets with favorable product mix and discrete items. Core diluted earnings per share in the first quarter of 2022 were $0.68, up from $0.49 last year.

The impact from South Korea contributed approximately $0.04 of core EPS. Before we discuss our outlook for the remainder of 2022, I'll touch on a couple of cash flow and other related items.

Free cash flow for the first quarter was an outflow of $52 million compared to an inflow of $48 million last year, driven by lower cash flow from operations in 2022 due to changes in net working capital, the annual bonus payment and the timing of tax payments.

Capital expenditures were $118 million for the quarter, which was primarily related to our contact lens manufacturing production lines. We still expect full year 2022 free cash flow to be significantly higher than 2021. Transformation costs were $15 million in the quarter and $184 million life-to-date.

Now moving to our guidance for the remainder of the year. As I've mentioned, we continue to see certain exogenous headwinds, including FX pressure from an appreciating U.S. dollar, inflation and supply chain tightness, ongoing effects from COVID-19, particularly in countries like China and the impact from the war on Ukraine.

Our current 2022 outlook assumes that the global market size returns to 2019 levels, growing slightly above historical rates, current levels of inflation persist through the remainder of the year and the U.S. dollar holds steady at mid-April foreign exchange rates.

Based on our strong sales momentum, exiting the first quarter, we’re increasing our expected year-over-year constant currency sales growth rate to between 9% and 11%, up from the 7% to 9% we guided to in February.

Foreign exchange is now expected to have a negative impact of approximately 3 percentage points versus prior year, as compared to the negative 1 percentage point we provided in our February outlook. As such, we are maintaining our net sales guidance of between $8.7 billion and $8.9 billion. Now moving to core operating margin.

We are maintaining our full-year outlook of 18% to 19%, despite the headwinds I've just described. This guidance now reflects approximately 110 basis points of FX pressure versus last year, as compared to 40 basis points in our February outlook.

It also includes approximately 90 basis points of net inflationary pressure, as compared to the 40 basis points we provided in February. Interest and other financial expense is now expected to be between $200 million and $210 million versus our prior guidance of $180 million to $190 million.

The change is due to higher hedging costs, given the volatility in the market. Core effective tax rate is expected to range between 17% and 19% for the year, despite the favorable discrete items in the first quarter.

Finally, on core diluted EPS, we are maintaining our original guidance of $2.35 to $2.45 per share, despite approximately $0.20 of incremental headwind from FX and inflation. Accordingly, we are increasing our constant currency growth outlook to 19% to 24%, due to the strong momentum we are seeing in the business.

We now expect approximately 10 percentage points of pressure from foreign currency for full year core diluted EPS year-over-year growth, versus our previous estimate of 4 percentage points in February. To summarize, we are very pleased with our progress and the momentum we’ve built.

Based on the first quarter's results, it's clear that our core business is performing extraordinarily well. To-date, we’ve successfully navigated the exogenous headwinds that we’ve seen through improved operational performance and cost discipline. We will continue to evaluate our response to these risks as we go forward.

Before I turn it back to David, I'm pleased to report that our Annual General Meeting two weeks ago, shareholders approved the dividend of CHF 0.20 per share, equivalent to a payout of approximately 10% of 2021's core net income. We want to thank our shareholders for their continued support of Alcon. With that, I'll turn it back over to David..

Thanks, Tim. In summary, we're off to a strong start this year, despite the macroeconomic headwinds and volatile markets that Tim mentioned. The underlying performance of the business remains robust. We are launching innovative products and growing revenue in excess of market growth. We're gaining share in both of our franchises.

And we're creating significant operating leverage and positive core operating margins. As we move forward, we'll continue to focus on delivering robust revenue growth and driving significant shareholder value.

And finally, during these uncertain times, I want to thank all of our associates for their hard work in delivering on our purpose of helping people see brilliantly. So, with that, let me open up the line for Q&A..

Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Daniel Buchta with ZKB..

Thank you very much for taking my two questions. The first one maybe for you, David, on the PC-IOL market. I mean, you mentioned the increased pressure, which means in the U.S., especially J&J.

Can you indicate a little bit how market share as you have developed? And is it fair to assume that any potential weakness PanOptix may see you are able to overcome with a very nice demand you indicated for Vivity? And how could Clareon in that regard help in the next couple of quarters for the market share to keep it as high as possible? And then, the second question, maybe both of you gents, on inflationary pressures.

Thanks for indicating the 90 basis points headwind. I mean, of course, we all see how inflation is developing and everything. But maybe you can share a little bit of insight on how price discussions in both segments look like.

Whether there is the headwind to moderate over the course of the year and how things are going there?.

Yes. Thanks, Daniel. Let me start with the question on share. We've had a terrific share performance actually in the last. I think, AT-IOLs have been a very good business for us, and they continue to be strong. We -- in the PC-IOL business, this is the segment that you would think of PanOptix and Vivity.

And we've actually gained share, I think 7 share points year over prior year. So, in the U.S., we're holding share kind of a little bit better than we expected. And I think we're somewhere still around 80%. So, I think we feel good about the PanOptix and Vivity. Obviously PanOptix is still our largest brand in this category.

It's growing beautifully right now. And we spend a lot more time talking about video right now, because it's exactly I think part of the reason the category is expanding. And we have a fairly -- robust share at this moment. So, we're feeling as though the category expansion is our next move.

So, I would say Vivity gets a little more attention than PanOptix, even though PanOptix is good bit bigger, principally because it seems to be bringing new patients into the category and some new surgeons in as well. So, that's been the positive vibe there. On Clareon, we are launching Clareon in the U.S.

at this moment, both with the PanOptix and Vivity and the toric. And so, I think we're excited about getting those out there. In the monofocal space, the other is increased amount of competition. Clareon is a particularly unique product and that it has -- it's probably the first new material in this category in many, many years.

And it really with our -- with this material advancement, we have probably the most pristine optic of anybody in this space. So, we're very excited about what that means for patients in the long run. So, we're excited about that. And I think, again, it will help -- continue to help our monofocal business and our toric business.

On the inflation piece, we have put through some price increases in the Vision Care business and a little bit in Surgical. Surgical is obviously a little bit more difficult as most of that business is contracted. And we also see a lot of government involvement here.

So, the reimbursement of the government is dictating usually some degree of implicit margin that we can have. So, I think the way to think about this has been that we've tried to pass along roughly inflationary levels of price.

It's gone pretty well, I think most people understand that the raw materials are up, resins are up, a good bit of labor and freight, those are all inflated on us, and a good bit more than we had anticipated. So, the acceptance of that has gone pretty well inside the optometric community. They seem to be passing it on to the consumer.

And that seems to not be having a -- at least in the present moment has not had an effect on demand. So, we're optimistic I think about where we are with succeeding with price. And it was a little bit more on vision. [Ph].

Our next question comes from line of Larry Biegelsen with Wells Fargo..

God morning. Thanks for taking the question. And congratulations on a really impressive start to the year here. So first, I wanted to ask about the revenue cadence this year.

Tim, should we expect normal seasonality? And how do we think about the reimbursement change in South Korea, for the rest of the year? How does that impact the rest of the year? And how are you thinking about the COVID impact in China on Q2 sales? And I have one follow-up?.

Yes. Larry, thanks for the question. I would say, revenue will be pretty close to what we've seen typically. I mean, you look at Q2 and Q4 will be high points for us from a revenue perspective. That's primarily driven by when you look at Q2, a lot of revenue driven by the allergy season.

Q4, we tend to get a nice lift in the equipment segment of the business as hospitals continue to spend their budget. So, I would kind of look at it that way. As far as Korea goes, I would think about it as sort of a net onetime benefit in Q1. Surgeons basically clear their waiting list. So, I wouldn't expect a material impact going forward..

And the China COVID thing, yes, we haven't seen yet what the impact is going to be. So, I think we're still looking. It's going to be something. And I think, frankly, we just don't know yet how big of a challenge that's going to be. But, we're watching it very carefully..

That's helpful. And then on contact lenses and the market, David, you mentioned you think the market grew mid single digits in Q1. But you and J&J were up over 10% year over 60% of the market. Cooper's guided to a pretty strong quarter. So, there seems to be a disconnect here. It seems the market’s growing faster than mid-single-digits.

And do you still expect your contact lens growth to be accretive to overall Alcon growth in 2022? Thanks for taking the questions..

Yes. Look, I do think that the Vision Care business in particular and the Surgical business are pretty close to the same rates of growth. So, in terms of the contact lens business itself, I think it'll be there thereabout. What I think is going on in the market is, we typically use two different data sources that are audited.

People have varying degrees of both, I would call it mail order, internet. There is a series of other channels that aren't always covered. So, they're going to see some fluctuations. I feel pretty confident though that when we talk about the value growth in the global market, it's roughly in that mid-single-digits range.

It has rarely been much higher than that. On the bounce back, it may be for a while. So, if you look at this particular quarter, there are parts of the market, Europe in particular, which bounced back with a high number. And when you get high numbers like that, sometimes the data doesn't read through as clean.

So, I wouldn't get too wound up about the mid single digits number, we're using, just because it is an audited data source and it fluctuates from time-to-time. I think it is going to be likely long-term and as we get back to normal growth rates, right in that mid-single-digit range, kind of as we've said..

Thank you. Our next question comes from the line as Matthew Mishan with KeyBanc Capital Markets. Please proceed with your question..

Good morning. And thanks for taking the question. Like low teen's growth in Surgical, given some easier comparisons, but you are expecting that to decelerate.

What -- I mean, given like probably a backlog of these procedures, just what do you think that decelerates to from a market growth perspective, as we go through the second half?.

Well, I mean, I think the big issue of course is the wrap around on COVID, right? So, we had a lot in the first quarter. We had a very soft compare particularly for international. International was basically back to 2019 levels end of last year.

So, as we progress through the year, the comparison gets firmer and firmer and closer to what we should expect long-term as market growth. So, I would just say that, incrementally, as you move through the year, we will see this thing move back to a number that has traditionally been the market growth plus a little bit.

And so, we say the plus a little bit, because there is a backlog. It is very difficult to know how much of that backlog is going to come through and when it comes through and how it comes through. But I will tell you, it isn't going to be a bolus of surgeries.

It's going to be a little bit more surgery than has been typically done principally because there isn't enough capacity around the world to kind of quickly absorb this -- the number of cataracts.

So, I suspect, at steady state, if the historical rate of growth was kind of that 4 percentage rate procedures, we are a little bit warmer than that for an extended period of time, and that's how the backlog clears. This year, we started out hot because we are comparing in first quarter to a relatively soft quarter than actually last year.

And it will get progressively slower and approach market growth, plus a little bit, as we get to the end of the year. And I think that's probably the best look at what I think is happening..

Okay, excellent. And then, I just wanted to talk about the SG&A and R&D dynamics. I know you guys mentioned that seasonality, you were expecting to progress, as you get through 2Q, 3Q, 4Q to more normal levels. But also, I mean, there was a lot of leverage in the model this quarter.

Are you looking at it as being able to drive more leverage on the operational expenses as you progress through '22 and that does provide a pretty good lift to operating margins moving forward?.

Yes. Again, as we said in -- all along, operating leverage is really the key component to the financial thesis. But, Q1 is typically low for us, if you were to go back in prior years. And the way I think about it -- let's start with R&D. I mean, if you look at our R&D spend this quarter, it was about $160 million.

If you were to annualize that, as an example, it'd be about $640 million, which is on the low end of 7%. And now, we said, all along this year, in our guidance I think we provided, we said we'd be more at that 8% level. So, that's going to be incremental spend, if you think about the rest of the year, call it $50 million, $60 million.

Same thing on SG&A. If you take that first quarter and annualize it, you get to about 34% as a percent of revenue. If you look at 2019, we were kind of at 38%. If you look at 2021, we're sort of at 37%. So, I would continue to expect to see some operating leverage there. But it won't be 3 points worth.

So, again, you'll see some more spend on the SG&A front. The other thing I'd remind you of is if you look at Q2, again, if you go back to prior years, that's really where we amp up the DTC spend, some of the back to school spend on the contact lenses.

So, it's not unusual to see Q2 SG&A go up, call it $60 million or $70 million from where we were in Q1. So, that's sort of how I think about the expense flow. But yes, I mean, the whole thesis is around getting operating leverage, we expect to do that to get to our goals. But if you just look at Q2, and it is unusually low..

Our next question comes from line of Matt Miksic with Credit Suisse..

So, one follow-up on some of the product launches that you've talked about and have been executing on, and one on margins, maybe for Tim.

But -- so, Clareon, David, if you could talk a little bit about, why is this materially important? As successful as PanOptix and Vivity have been over the past couple of years, what kind, if any, a resistance have you met from folks who are sort of dug in on your legacy material? And perhaps what kind of additional share gains can you see at a Clareon.

And then, as I mentioned, just one quick follow-up for Tim..

Yes. Look, we're excited about the Clareon material. Historically, there's never been a better material than AcrySof. So, again, it's a hard fact to follow in many ways. It's the most successful implantable material in all of ophthalmology. I think, as we look at that and over the years, there has -- there's always improvements you can make.

The biggest improvement in this material is clarity of the material itself. So, every now and again, you can see nano ghostings [ph] in any lens, particular our competitive lenses, there were some micro particles, if you will, that appear that way. They're not clinically relevant, but they're aesthetically important to the doc.

And so, I think what we've done is we've cleaned up a number of things. But by making this new material, it gives it -- all of the same kind of physical characteristics as AcrySof, but the cosmetic appearance of -- something that is worthy of something like PanOptix and Vivity in particular.

So, if you're paying a lot for premium IOL and you look in the eye, what you want to see is crystal clear. And when you touch these lenses, almost anything will stick to them. So, I think it's a really important advance I think for us relative to competitors.

And there has been some competitive noise out there about nano ghostings [ph] and other things in our old material, which again, we think is kind of unimportant in real terms, but was easy to get rid of. So, we went ahead and did that.

I would say, on the go forward, all of our material will transition to Clareon and that will be a sequenced event, starting with U.S. We've got some of it out in Europe now. But there'll be a number of markets really through the end of '23. So, it takes a little while to get this done but a real advance I think, in material science.

And on the -- the other part of the question….

It was for Tim on margins, maybe. So, you've talked throughout your prepared remarks about absorbing the impact of this additional FX, and that does kind of weigh on the way your P&L is set up and your hedging works. As we know, it does kind of weigh on margins.

I’d just love to maybe understand with those -- that impact that you're absorbing, I guess, where in the P&L are you compensating for those.

Where you're getting relief? Where you’re getting outperformance to help you kind of stay on plan for margins and earnings this year and into next year?.

Yes. I would say it's -- right now, it's primarily coming out of two places. We are getting -- we did get a bit of a mixed lift, if you look, in Q1, you have that Korea impact in there. And again, as our implantables business continues to grow, that gives us a bit of a mix lift. So, you'll see some of that in gross margin.

And then you'll see you know a lot of it on the SG&A front. So again, some of that is just natural leverage. Some of that is we were looking at being a little bit more disciplined around the costs, just to make sure that we could obtain our objectives given the macro environment. So, I'd say those are the two areas that it's coming out of..

Our next question comes from the line of Joanne Winch with Citi..

Thank you very much for taking the question, very nice quarter. A couple of little one-offs here.

Do you know what percentage -- or can you share what percentage of the market is currently AT-IOLs?.

Yes, we do. Let me find that. It was -- somebody give me the number. We quoted most times, and we'll find it for you in a second. You probably had a follow-up to that..

I do. Sometime....

The U.S. is 19%. And we’ll get the global number for you in just a second..

Thank you.

And do you have an opinion on where this sort of peaks out? I mean, does this ultimately become the standard of care?.

Yes. Joanne, I think we have always had a view from some work we've done a number of years ago, but I think it's still quite relevant. The headroom in this was substantial. So, we think that there's a market that probably approaches 35%, 40% of the total market that will pay an additional fee to the values that we've described.

So, somewhere in that $800, $900 a lens base. That is kind of the headroom that we've got. So, figure, if we're at 19 in the U.S., we still got at least double that outside the U.S. and the global number is actually 12.4. So, the U.S. is considerably ahead, I think the rest of the world is much larger in terms of total procedures.

So, it's a below 10 kind of number for the rest of the world. But 12.4 gives us plenty of room to continue growing AT-IOL penetration for quite a long time.

And that's obviously why we're spending a lot of time talking about Vivity and penetration, and trying to work a series of programs on the ground that actually engage surgeons in the process of the pre-op work that's required but also importantly the knowledge and use of Vivity, which I think at this point is one of the kind of no regret moves in ophthalmology.

You can you can really do some things with this lens that are different than you've been able to do with other AT-IOLs because it doesn't have the rings and the post- diffraction challenges that some of the other lenses do. So, we are excited about the potential of penetration.

But again, I would say this has been pretty steady over the last several years. It's picked up for sure, but kind of a long ramp for us to get to wherever we are going..

Excellent. Thank you very much..

Thank you. Our next question comes from line of Cecilia Furlong with Morgan Stanley. Please proceed with your question..

Great. Good morning. And thank you for taking the questions. I wanted to ask again on strategic price increases that you took during the quarter.

And just any commentary you could provide, either around customer acceptance or else, any change in buying patterns ahead of taking price and just your outlook as well for any additional price increases in 2022. And I had to follow up as well..

Sure. So, we took a number of price increases in Vision Care, principally on our contact lenses. They were approximately at inflationary levels. And I would say, we’ve done it to obviously offset some of our input costs, which have grown quite quickly, as I'm sure everybody knows. In Surgical, the pricing power is a lot more limited.

And it's obviously regulated and we have contractual commitment. So, we have a little bit more of a one-off approach. We raised the prices, but it's usually on loose items that are not in our custom packs and/or are purchased individually. So, it's hard to tell how that bleeds through, because it's going to take some time to see that one.

Directionally, we’ve been pretty successful. I think, the acceptance of our current efforts has been pretty good. And so, I think people understand what's going on I think in the environment and have been passing on at least in Vision Care, a good bit of that price to consumers.

So, while it's not perfect for either of us or our customers, it is kind of the way the world right this second. Going forward, we are obviously paying very close attention to what the input costs are doing, what they're going do in the back half of this year. And we will obviously evaluate things as we go along here.

But we are trying to recover as much as we can through procurement, through productivity initiatives, and again obviously as much price as is reasonable for us to kind of maintain competitiveness..

Okay, great. And if I could follow up, just on your -- the contact lens care decline that you called out and the supply chain pressure. Just your outlook for recovering that segment and really what you were seeing in the quarter as well. And thank you for taking the questions..

Well, the contact lens care market itself has always -- has been in decline for some time. I mean, directionally, it pops up and down. But I think you should think about it as a kind of, low to mid single-digit decliner for a while. I don't think we believe it's going to move the right -- in another direction than that.

We did have a little bit of challenge during the quarter with contact lens care. This was a bottle problem. Bottles are made of a resin. That resin was in short supply during the quarter. And so, as we crossed the quarter, we had not resolved that yet. We have resolved it at this point.

But again, that caused a slight decline in revenue during the quarter. So, that's kind of the circumstances. We are fine going forward at this point, but I -- I would just tell you that these spotty kind of outages are happening, I think everywhere and for everybody. So, we are working through them as diligently as we can.

But, we are always very diligent with suppliers on what it's going to take to get product in and made. And there we have lots and lots of suppliers who are struggling. So, again, that's an ongoing battle, if you will. And so far, we have been good at it. Our manufacturing guys have been terrific at managing through many, many of these.

But, we will have to be very vigilant going forward..

Great. Thank you for taking the questions..

Thank you. Our next question comes from line of Zach Weiner with Jefferies..

I just wanted to touch on new patient starts, if you're seeing any acceleration as we move away from COVID. And historically, you guys have said that P1 is the leading new fit start lens. Is that still the case and any color there? Thanks..

Yes. We have a very strong position in new and switch fits in daily disposables. So, I would say, if you look inside the cutting lens category, right now, we are the leader in daily disposable, new and switch fits. And so, we're obviously -- we think that's a positive thing, because it's a leading indicator of where share will ultimately go.

But it does depend on getting volume of those new and switch fits. So, we are seeing some return of patients. And there was a survey done by Johnson not long ago that gave a number that was patients per day in the U.S. in the optometry community, largely independents, to be fair, was up 3% over 2019. That's a good sign for us.

I will say though that the new and switch starts as a whole looked also in another audit to be still below the ‘19 levels. So, we got a little bit of a mixed series of signals here. But I think the best way to interpret it is we're getting back to normal. We're not there yet in terms of new and switch.

But I do think that that would be -- will be back to it shortly. And I think as we think through this year, we expect to be back to kind of what I would loosely call normal growth rates plus a little bit, given that there's some pent-up demand out there..

Our next question comes from the line of Ryan Zimmerman with BTIG..

I just want to follow-up on a few things. The inflationary drag across the business, Tim, I appreciate you calling out the 90 basis points. But if I back out FX and the South Korea order, I think margins were up about 30 basis points ahead of last year.

And so, with the inflationary impact equal this quarter, what do you estimate that for this quarter? And is the 90 basis points equal across all four quarters this year, as we think about that inflationary headwind?.

The 90 basis points is a year-over-year view. I would say, I'd say probably about a third of that we saw in Q1. And the reason that is, is although we saw inflation spiking last year, some of that got caught up in inventory. So, you don't get the P&L hit obviously until you sell the inventory.

So, we had probably I call it maybe a third or so of that inflation was in Q1. The rest of it, we'll carry out through the rest of the year relatively level loaded..

And then David for you. Simbrinza in the drop segment’s been doing really well. You guys built out that dedicated sales force? I think at some point, maybe it was either early last year, I could be mistaken, maybe late 2020.

But how much more of that contribution is coming from more feet on the street relative to growth in those segments of the market? And what can that business segment for the drops, if you will, grow at sustainably going forward?.

Well, I mean, I think the glaucoma eye drops, if you're speaking to Simbrinza specifically, and remember this group, sells Simbrinza, Pataday and the Systane multi-dose preservative-free line. So, there's a number of drops in there.

The eye drops business historically, and I think this is what we will probably find ourselves back to relatively soon is that business has grown. Market growth was about 6%, kind of mid single digits, let's call it. And again, I think we'll grow faster than market with that.

So, that has a lot to do with sales force presence, particularly as we convert Rx-to-OTC and as we kind of convert preserved to non-preserved multi-dose. Simbrinza is -- and particularly sensitive, I would say that we've had a good start and look pretty good. We get the prescription data right now and it is clearly sensitive to sales force promotion.

And so I think we can see some positive growth coming from reenergizing that brand, resampling it, getting information and data back out there to ophthalmologists who really do want to treat these glaucoma patients. Glaucoma as a category of Rx is typically growing in that 3% range.

So, not a fast-growing category but there's a very small product in terms of share. So, opportunity, I think on a low base to do some nice things, and these are relatively high -- all of the eye drops are relatively high margin for us. So, obviously, the more we can do in the eye drops business, the more we can advance our margins.

And again, that's -- these are pretty profitable ideas, generally when we get into it..

Our next question comes from the line of Graham Doyle with UBS..

Just on Vivity, I know you spoke a little bit about that earlier in terms of expanding the market. And certainly the feedback we get from surgeons, the confidence around, the simplicity of using it really gives them an incentive to use it. What would be great to know is how you think about this relative to PanOptix.

If you think about the patient population it can address, what's the difference in the characteristics? And maybe particularly, could you give us a sort of scale difference if you think about the patient reach this product could have?.

Yes. So, I think this is a question we deal with every day on the ground with surgeons, and we get asked this a lot. It is -- the way the way I think we typically describe it, is it -- look, if you want the best lens out there at all distances, near, reading and distance, you're going to want PanOptix.

But you're going to have to potentially put up with a little bit of accommodation with halos and glare that will happen in about, a good number of people, but probably 1% or 2% will not tolerate it well. And you may have some challenges with those patients.

And that is the basic trade-off of getting kind of what I would say best-in-class vision versus what most people will accommodate to. There's just a little bit of headache.

And what happens is surgeons, because they don't want those one or two because they feel like those are, in many ways, failures if they have to take the lens out and put a new one in, they've stayed away from all of the diffractive lenses which is most everything else out there. So, as you think about Vivity, it is a non diffractive lens.

And that means it does not have a concentric ring profile that creates different focal points. But what it does is stretch in a wave front kind of way the focal distances. And so, what it allows then is any surgeon can put it in any patient and you get really good distance, you get really good intermediate.

But the near vision, because you can't quite stretch it as far as the PanOptix goes, is not as good. So, 50% of the patients probably are going to need glasses and 50% of it will read fine. But that trade-off for a lot of doctors is worth it.

Because they're saying look, I can do this, I got very big landing zone, which means I can be a little bit wrong in my procedure and get this right. And I can get them glasses free, at least 50% of the time. And I'm pretty sure I get intermediate, no matter what. So, it's just basically a trade-off.

And what docs are doing is, they are saying, look -- the really great surgeons will profile the patients and kind of in their own minds, have an algorithm for who will tolerate or potentially tolerate halos and glares and who will not. And then, they'll -- if there is any concern at all, they'll move to Vivity.

And in addition to that, there is a group of patients that they see, let's call it macular, retinal problems or they've got other issues where it's necessary to see through the lens. They may have diabetic problems, et cetera.

Those patients have typically not been allowed into an advanced technology lens, because you couldn't see the retina clearly through the multi-focal lens. And now you can do -- you can still do that with Vivity. So again, it has some patient populations that can be added I would say of the 3 or in 10, that used to be excluded.

Now, those are candidates for Vivity. So, I think we are adding patients in -- on that front. We are adding surgeons in on the other front who really didn't want to worry about the complex pre-op and complex patient selection, but now are more comfortable doing that. And again, the mix of that is hard to know.

What we can see is that, both products are growing nicely. Vivity obviously is smaller, so it's growing faster. But, what we see is the market is moving in an expanding way. And so, that's really what the game is.

And I think Vivity is probably more likely to expand the market than PanOptix, and then PanOptix will be the, I'll call it the graduate product that people move on to..

Great. Thanks for that. Just a really quick one on the margin side. If you think about the margin delivered in Q1 of sort of 22%, when you look at constant currency and your 2025 target, which is something in the 22% to 24% range.

Are you surprised to the extent to which the drop there [ph] you got on that incremental consumables and IOL sales in particular, given when you set the guidance for 2025, you probably weren't expecting the inflation backdrop that we have now.

So, has that, do you have more confidence, I suppose, in that 2025 target having delivered this Q1?.

Yes. Again, I don't want to get too far ahead of ourselves. We were pleased with the quarter that we had. I think the business is performing very, very well. Again, if you look at the 20.6% margin that we delivered in Q1, we sort of worked some of the factors. That is a little bit high.

We are going to have a more normalized view, if you will, in the back half of the year, driven by the incremental investments in R&D and SG&A and the things that we talked about. But, listen, we are very pleased with how the business is performing. We’ve obviously had some headwinds, whether it's FX or whether it's inflation.

We have managed to absorb those, to-date. But we'll see what happens in the future. We are very comfortable with what we control. I feel very good about the underlying base performance of the business, and we will just continue to evaluate things as we go forward..

Thank you. Our next question comes from line of Jeff Johnson with Baird. Please proceed with your question..

Thank you. Good morning, guys. David, maybe just a couple clarifying questions, if I could.

Just on the contact lens price increases, can you remind us the timing of those? Did one quarter -- did 1Q benefit at all from sell-in ahead of those? And when you quote that mid-single-digits market growth, and I know maybe some variability around that this quarter. I appreciate that. But is that a sell-in number or sell-out number.

Because obviously we see kind of the manufacturer data that’s more of a sell-in number, but sell-out might be different than that. So, I’m just trying to understand your data source of that sell-in sell-out. Thanks..

Yes. We use two data sources. We use GFK and we use CLI. Both of them, anybody can buy, I think. But they are all retail sell-out. So, you are going to have some differences between sell-in and sell-out, to your point.

And on the contact lens pricing, we purposely timed our price increase for February 1st, so that it wouldn't have an effect on either the fourth or the first quarter. So, directionally, I don't think -- I think it all washed in the quarter.

And we controlled the buy to generally speaking somewhere around four weeks of inventory, so that nobody's putting themselves in a position where they've got more than they need, I think in the near-term. So I think we didn't really have any material effect from the price increases in the quarter..

And then, other clarifying question was just on the AT-IOL level market, the 19% and the 12.4% numbers you quoted. Can you just remind us, those are unit volumes, I think not dollars, but just remind us that.

And then, two, do Vivity or did Vivity go into that? Is it officially considered an AT-IOL or is it more of kind of a monofocal?.

Yes. No, it's very different than some of our competitors. Vivity is an AT-IOL, ahs an AT-IOL designation. And that matters a lot, obviously, for the reimbursement world. And so, no, that is a Vivity. It goes with the AT-IOL. And it is unit volume that we're talking about when we talk about penetration. So, obviously, dollar value considerably different..

Our next question comes from the line of David Adlington with JP Morgan..

So firstly, I was wondering if you were expecting, or whether you could give some historical context, on any impact from either macro or consumer disposable income on either volumes or mixing in both the contact lens and the IOL markets? And what percentage of purchase have some sort of patient out of pocket expenditure? And then secondly, after J&J launched Theravision, that contact lens with a combined antihistamine, would be great to get your thoughts on that and whether you have any similar plans for similar products?.

On the second one, we don't have any plans and we don't know a lot about it. It's -- we've watched it. I don't know that -- I'm not sure if it's out yet. It's basically -- we're very aware of the notion of delivering drugs through a contact lens mechanism. We haven't decided to pursue any of that.

On a percentage of purchases with patient out-of-pocket, I'm not sure, I have a percentage for you. Let me give you the categories where it's obviously significant.

So, most of the Vision Care business is out-of-pocket, notwithstanding there's some contribution from Vision Care insurances, but it's usually a contribution to the total, so $200 or something like that. It's a Vision plan, like a VSP or something.

On the other side of the business, and I should say, in Surgical, refractive is almost 100% out-of-pocket. So, that's, again, one of the sensitivities. The Surgical business is much more government-run.

And I would say in the vast majority of world with the exception of advanced technology lenses, it really is a real, it's a reimbursed government-paid Medicare or Medicaid or government health system compensated procedure.

So, the patient pay element of it really comes into play only when we're talking about advanced technology lenses, and that is usually only in certain markets. So, not every market will allow you to collect from the patient. And that does hold the international markets back from penetrating AT-IOLs wells. But again, that's changing over time as well..

Are you seeing -- it might be a bit early.

But, are you seeing any impact from tightening disposable incomes for consumers on any of those?.

No -- and we don't really. We have a pretty good sense of this. We follow the '09 and 2010, we've modeled the, the recessions just because we had a concern about all that. I think the things you'll be most interested in, I think would be the refractive business.

It's our most sensitive one, because of the nature of the patient and the profile of the patient. It’s cash pay, it's a relatively expensive procedure. And that's targeted at working adults, I would say. And that becomes a -- if you're out of work, or you're making a lot less money, you're going to hold off on those kinds of procedures.

So, the only thing we see in the Vision Care business that's a little bit like that is typically people are in lenses, they stay in lenses, but they don't trade up. And so, you may see some slowness in the trade up of value from the kind of I would loosely call monthly, two week modality to the daily modality.

That's probably the main thing we saw in the ‘09 frame. So, mostly an impact in refractive, I would say. And that's relatively small for us. So, candidly, eye care has got a pretty good profile for continuous demand..

Thank you. Our next question comes from line of Julien Dormois with BNP Paribas..

Hi. Good morning, Dave. Good morning, Tim. Thanks for squeezing me in and congrats on the great quarter. I'm left with two questions.

One is on the margin development that you had in Vision Care in the quarter? Is it in any way related to the launch of TOTAL30? Because I think you alluded previously that it's a nicely accretive product for your portfolio.

So, is it in any way related? Or is it way too soon to see that sort of impact going through? And the second question relates to your M&A appetite. Obviously, valuations have come down quite a lot year-to-date.

Does that mean that going forward, you would be willing to accelerate the pace of M&A or does it change all your views on that side?.

Julien, just on the margin, T30 is margin accretive to the whole of the business. And so, we're looking forward to growing it. It wasn't big enough really to have a big impact on the first quarter. So, I wouldn't read anything into the first quarter margin. I think it's just getting started.

So, in the big picture, probably ocular health had more to do with it than anything else, in terms of mix. In the M&A piece, we do watch valuations. And obviously, there's been a fairly sizable adjustment in a number of ophthalmic companies. And so, we're always interested in this.

I don't know that historically we were that -- as interested because of they were very expensive. But, we'll see how long this lasts and what goes on. I mean, I think our main idea here is to try to find inorganic things that fill white spaces for us, that can add value, where we really think it's better owned in our hands.

So, I think the good news is, is that we are -- we have an underlying business right now, that's performing quite well. We feel good about our approach to this year, we feel good about our prospects. And so, I think, we are in a position where with cash in a good position as well we can make some moves here if we chose to.

We'll see how that takes shape over time. But all things are kind of running on the right track right now. So, feel pretty good about the year..

Thank you. Ladies and gentlemen, this concludes our Q&A session and thus concludes our call today. We thank you for your interest and participation. You may now disconnect your lines..