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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