Alcon Inc. (NYSE:ALC) Q4 2022 Earnings Call Transcript

Alcon Inc. (NYSE:ALC) Q4 2022 Earnings Call Transcript February 28, 2023

Operator: Greetings and welcome to the Alcon's Fourth Quarter and Full Year 2022 Earnings Call. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Dan Cravens, Vice President and Global Head, Investor Relations for Alcon. Thank you. You may begin.

Dan Cravens: Welcome to Alcon's fourth quarter and full year 2022 earnings conference call. Yesterday, we issued a press release, interim financial report and annual report as well as posted a supplemental slide presentation on our website to enhance today's call. You can find all of these documents in the Investor Relations section of our website at investor.alcon.com. Joining me on today's call from Geneva 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 which expressly disclaim any obligation to update forward-looking statements as a result of new information, or future developments, except as required by law.

Our actual results may vary materially from those expressed or implied in our forward-looking statements. Accordingly, you should not place undue reliance on any forward-looking statements. Important factors that could cause our actual results to differ from those 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 and other companies. These non-IFRS measures should be considered along with but not as alternatives to, the operating performance measures as prescribed per IFRS.

Please see a reconciliation between our non-IFRS measures with directly comparable measures presented in accordance with IFRS and our public filings. For discussion purposes only, our comments on growth are expressed in constant currency. In a moment, David will begin by recapping highlights for 2022 in recent months, including market dynamics, innovation, highlights, key product launches and acquisitions. After his remarks, Tim will discuss our performance and outlook for 2023. Then David will wrap up with closing remarks and we will open the call for Q&A. With that, I will now turn the call over to our CEO, David Endicott.

David Endicott: Thanks, Dan. Welcome to Alcon's fourth quarter and full year 2022 earnings call. 2022 was a great year for Alcon. We ended the year with sales of $8.7 billion and double-digit sales growth of 11%. These results were driven by new product launches, solid demand from resilient markets and strong commercial execution. Core operating margin for the year was 18.2% and core diluted earnings per share were $2.24 which was up 23% year-over-year on a constant currency basis. Additionally, we achieved a core operating margin of 20% when adjusted for foreign exchange. Based on these results, it's clear that the Alcon team is delivering and our fundamentals are strong. As I reflect on 2022, I'm extremely proud of what we've accomplished, especially given the challenging geopolitical, macroeconomic and supply chain headwinds we faced.

In surgical, we grew the business double digits, driven by industry-leading technology, solid execution and continuing international recovery. Our portfolio of PC-IOLs, PanOptix and Vivity had another quarter of strong share growth and we exited the year with a global PC-IOL share position in the mid-50s. During the year, we launched our portfolio of IOLs on the CLAREON platform in the United States. This highly differentiated material delivers among the lowest levels of glistening and surface edge and as a proprietary edge curvature designed to help reduce glare. Our new CLAREON material has been well received by doctors around the world and is helping us to gain share. We're also expanding our footprint with double-digit sales growth in the equipment category for the year.

This growth was particularly strong in international markets where we continue to see solid uptake for our fecal machines, including our industry-leading Stancurion device as well as which is designed and priced for developing markets. We expect the demand for the equipment will return to more normalized growth rates this year. While we continue to grow our footprint in ophthalmic operating rooms worldwide, we've also significantly expanded our presence in the clinic with the ARGOS biometer. Doctors are responding favorably to ARGOS, thanks in part to higher capture rates, easier prediction of accurate lens power and data integration into the operating room, all of which helps drive clinic efficiencies and improve patient outcomes. Tying this all together is our digital offering, SMARTCataract which we beta tested in 2022.

SMARTCataract received terrific feedback from surgeons and we'll continue to develop this platform in '23. SMARTCataract is the first application in Alcon's comprehensive cloud-based platform that is uniquely designed for surgical ophthalmic practices. SMARTCataract links data systems and diagnostic devices in the clinic with equipment in the OR. Data shows that SMARTCataract delivers significant time savings during the cataract evaluation, planning, operating room and postoperative workflows. Put it simply, SMARTCataract is helping surgeons deliver better outcomes more efficiently. Also in 2022, we expanded our presence in surgical glaucoma with the acquisition of Ivantis which brought Hydrus Microstent into our portfolio of implantables. Hydrus has long-standing clinical efficacy data.

Its 5-year horizon data demonstrated meaningful and statistically significant clinical benefits over the full 5 years, including sustained reduction in medication use and decreased need for secondary glaucoma surgery. Now turning to Vision Care. Our team delivered high single-digit growth across both our contact lens and ocular health franchises. In contact lenses, our full year growth of 9% was driven by our portfolio of innovative lenses which continue to receive favorable market feedback as well as select price increases. We continue to fill out our portfolio and launch new contact lenses in our segments of the market or areas where we have opportunities to gain share. In 2022, we launched TOTAL30 into the reusable market. This is the first major innovation of the $4.2 billion reusable lens category in many years.

TOTAL30 is the only water gradient lens available for reusable wearers and since launching TOTAL30, we are seeing share growth in this category. TOTAL30 is available in the U.S. and Europe and we will continue to roll it out to more international markets in 2023. Just recently, we announced the launch of TOTAL30 for stigmatism which competes in the $1.3 billion reusable toric category. This is the first reusable water gradient lens for astigmatic wearers. Since more patients with the stigmatism wear reusable contact lenses, the availability of the toric T30 provides us an opportunity to gain share and bring exceptional comfort to these patients. This lens will be broadly available in the U.S. and Europe earlier this year and we'll roll out the lens internationally throughout 2023.

We also launched DAILIES TOTAL1 for stigmatism in early 2022 and customer steps has been very favorable. DAILIES TOTAL1 toric joins the sphere and multifocal modalities for the premium DAILIES lens market. DAILIES TOTAL1 toric is also the first and only daily toric lens to feature our proprietary water gradient technology that delivers exceptional comfort. Now all of our toric lens is featured our proprietary balance design which creates clear and stable vision. Our toric portfolio represents a significant opportunity as our estimate is toric one of the fastest-growing segments of the contact lens market. Now turning to ocular health, where we also saw high single-digit growth in 2022 despite the supply chain challenges we faced. Starting with dry eye, our sustained family, including sustained hydration, ultra and complete continues to perform well with double-digit sales growth in 2022.

There are over 30 million people in the U.S. alone that suffer from dry eye and sustain is the best-selling brand of artificial tears and is clinically proven to sue and irritated eyes quickly. Now with multi-dose preservative-free formulations, we have a full suite of convenient and affordable options for patients. Late in the year, we acquired Aerie Pharmaceuticals. With this acquisition, we expanded our glaucoma portfolio with 2 additional products, Rhopressa and Rocklatan which were complementary to Simbrinza. Rocklatan Simbrinza offer 4 different mechanisms of action allowing for maximum medical therapy in just 2 bottles. Additionally, the Aerie acquisition expands our R&D pipeline and builds upon our pharma development expertise. Our strong 2022 ocular health performance was offset by significant supply chain challenges, particularly in contact lens care.

Our team continues to address these challenges which are likely to persist through at least the first half of 2023. Now let me provide an update on our end markets. In Surgical, global cataract procedures were up mid-single digits to fourth quarter versus prior year. This growth varies by region. In the United States where surgical centers continue to experience staffing challenges, procedural volume was up low single digits. Outside the U.S., procedures were up mid- to high single digits as markets continue to improve. Encouragingly, we saw sequential improvements in ATI well penetration in the U.S. in the fourth quarter. We continue to focus on driving penetration by educating doctors, clinical staff and patients about the benefits of advanced technology lenses.

In contact lenses, the retail market growth in the quarter was mid-single digits with low single-digit growth in the U.S. and high single-digit growth internationally. While mid-single-digit growth is in line with historical rates, it's important to note that this growth predominantly reflects price increases and were trade-ups. Additionally, the market growth varies by modality with the daily SiHy category continuing to grow significantly due to higher pricing and patient trade-up. Torics also continued to grow nicely, primarily driven by the daily toric category. Finally, the reuse category was flat. Now with that, let me pass it to Tim who will take you through our financial results and comment on our outlook for 2023.

wavebreakmedia/Shutterstock.com

Tim Stonesifer: Thanks, David. We're pleased to report fourth quarter sales of $2.2 billion, up 7% versus prior year. This growth was driven by continued recovery in most international markets and demand our innovative products, including those acquisitions. Our overall fourth quarter sales growth reflects approximately 180 basis points of contribution from sales of acquired products. Our fourth quarter U.S. dollar sales growth included approximately 600 basis points of pressure from foreign currency. For the full year 2022, total company sales of $8.7 billion grew 11%. I'm extremely proud of how well the Alcon team has managed the challenges of 2022. We performed well while navigating a year of historic uncertainty, including a strong U.S. dollar, continued supply chain tightness and inflation.

Moving to our fourth quarter sales results. Our Surgical franchise revenue was up 8% year-over-year to $1.3 billion. Surgical revenue for the full year was up 13%. Implantable sales were $434 million in the quarter, up 11% year-over-year, primarily due to market recovery in most international geographies, increased demand for our PC-IOL portfolio led by Vivity and sales of Hydrus. This was partially offset by declines in South Korea following a reimbursement change during the first quarter. Please recall that there was a significant spike in demand in Korea ahead of this reimbursement change and therefore, we expect difficult comps in implantables in the first quarter of 2023. Implantable sales for the year were up 20%. In Consumables, our fourth quarter sales were up 6% to $636 million, primarily driven by improving market conditions.

For the full year, global sales were up 10%. Our strong consumables growth also reflects the expansion of our global equipment footprint. In equipment, sales were $204 million in the quarter, up 7% year-over-year, primarily due to continued strong demand for our cataract equipment and service, particularly in international markets as we upgrade older generations of equipment to Centurion and Legion. Growth in the quarter was partially offset by declines in the refractive equipment. For the year, equipment sales were up 10%. We continue to be very pleased with our strong equipment performance as well as the resilience of demand for these products. Turning now to Vision Care. Fourth quarter sales were up 7% year-over-year to $881 million. For the full year, Vision Care sales were $3.6 billion, up 8%.

Contact lens sales were $530 million in the quarter, up 6% versus last year. Sales were led by our portfolio of SiHy lenses, partially offset by declines in legacy products. Additionally, we saw strong sales in the U.S. and slower international growth. Contact lens sales for the full year were up 9%. In ocular health, our fourth quarter sales were $351 million, up 8% year-over-year. This was led by our portfolio of eye drops, including our sustained family of artificial tears and ophthalmic pharmaceutical products. Similar to last quarter, this growth was significantly offset by supply chain challenges primarily in contact lens care which negatively impacted ocular health growth by approximately 400 basis points. As David mentioned, we expect these challenges to persist at least through the first half of 2023.

Ocular health sales were up 7% for the full year. Now moving down the income statement. Fourth quarter core gross margin was 61.3% which was flat on a constant currency basis. Core operating margin was 16.4% in the quarter, essentially flat versus last year on a U.S. dollar basis, put up 240 basis points on a constant currency basis. The improvement was mainly driven by underlying operating leverage from higher sales and favorability from incentive compensation, partially offset by increased inflationary pressures and increased investments in R&D, primarily associated with the acquisition of Aerie. Core operating margin for the full year was 18.2%. However, on a constant currency basis, we achieved a full year core operating margin of 20%. Fourth quarter interest expense was $40 million compared to $28 million last year driven by higher debt following the funding of the Aerie acquisition and less favorable interest rates.

The fourth quarter core effective tax rate was 30.6% compared to 10.4% last year. This increase was primarily due to the recognition of tax expense related to the advanced pricing agreement between the Swiss and U.S. tax authorities that we discussed on our last earnings call. There was also an impact from a decrease in inventory build in certain markets and the geographical mix of pretax income. Core diluted earnings per share in the fourth quarter of 2022 were $0.42 versus $0.56 last year. The decrease is mainly due to higher interest expense and taxes following the advanced pricing agreement I just mentioned. For the full year, core diluted earnings per share of $2.24 grew 23% on a constant currency basis. Before I discuss our outlook for 2023, I'll touch on a couple of cash flow and other related items.

Free cash flow for the full year was $581 million compared to $645 million last year. This variance was primarily driven by lower cash from operations in 2022, driven by the negative impact of foreign currency on our operating results and the payout of the 2021 bonus, partially offset by lower capital expenditures. For 2023, we expect free cash flow to be significantly better than 2022 despite several onetime payments in the year, including transformation and a legal settlement. Similar to last year, we expect the first quarter to be the low point in the year, driven by the timing of the annual bonus payment and payments related to our expanded transformation program. Capital expenditures were $636 million for the full year which were primarily related to investments in our contact lens manufacturing production lines.

Transformation costs were $78 million in the quarter and $288 million of life to date. As we announced on our last call, we identified additional transformation opportunities which we launched during the fourth quarter and which accounted for most of the transformation expense in the quarter. We continue to expect the entire transformation program to wrap up by the end of 2023. Now moving to 2023 guidance. Our current outlook assumes that year-over-year market growth will be slightly below historical averages. Exchange rates as of the end of January prevail through year-end and inflation and supply chain headwinds moderate in the second half of the year. Accordingly, we expect 2023 net sales of $9.2 billion to $9.4 billion which corresponds to 6% to 8% constant currency sales growth versus the prior year.

Now turning to expenses. We're going to continue to invest behind innovation and expect core R&D expense to come in toward the high end of our prior range of 7% to 9% of sales. Moving to core operating margin. We expect efficiency initiatives and operating leverage to drive a core operating margin of between 19.5% and 20.5%. While we continue to see inflationary pressures, we've taken actions, including price and productivity initiatives to help mitigate the impact. Moving down the income statement. We expect interest and other financial expense to be between $260 million and $280 million. This reflects the financing activities completed in May and December at higher interest rates including the incremental debt used to fund the acquisition of Aerie.

Additionally, we project our core effective tax rate to be in the range of 17% to 19%. Based on all these factors, we project core diluted earnings in the range of $2.55 to $2.65 per share which corresponds to 16% to 20% constant currency growth over 2022. While we do not speculate on currency movements, based on exchange rates at the end of January, we expect a broadly neutral impact from FX to both sales and core net income growth for the full year. In terms of phasing, we expect FX to be a headwind in the first half of the year and a tailwind in the second half. Before turning back to David, I'm pleased to report that our Board of Directors is proposing a dividend of CHF 21 per share which 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. In summary, despite the challenges we faced in 2022, I'm extremely pleased with our performance and I want to thank the entire Alcon team for their hard work and determination. With that, I'll pass it back to David for closing remarks.

David Endicott: Thanks, Tim. To wrap it up, I'm extremely proud of all that the Alcon team achieved in 2022. Despite challenging macroeconomic headwinds, we produced strong operating results, improved efficiencies and we delivered innovation and outpaced market growth in several categories. These results reflect our strong business fundamentals, robust long-term strategy and the talent and expertise of our more than 25,000 associates. As impressive as those results are, what I'm most proud of is Alcon's purpose of helping people see brilliantly. And I recently learned about a patient who suffered severe iTraminhis30s which was later complicated by the development of a cataract. This man experienced significant difficulties when it came to light, sun, snow and glare.

And he underwent a cataract procedure. And when the surgeon removed the patch from his eyes, his vision was so improved that he was moved to tiers. And now this is the kind of procedure that genuinely changes lives. It's moments like these when our purpose of helping people see brilliantly really does come to life and it's what drives the hard work and the dedication of all of our associates. I want to thank the entire Alcon team for their commitment to our purpose and I'm excited for what's to come in 2023. With that, let's open it up for Q&A.

See also 12 Best Low Priced Dividend Stocks To Buy and 11 Most Undervalued Foreign Stocks To Buy.

To continue reading the Q&A session, please click here.