Alcon Inc Q4 FY2021 Earnings Call

Hello and welcome to the Alcon Fourth Quarter and Full Year 2021 Earnings Call and Webcast. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Karen King, Senior Vice President, Head of Global Corporate Affairs and Investor Relations. Please go ahead, Karen.

Welcome to Alcon's fourth quarter and full year 2021 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 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 annual report 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 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 fourth quarter and full year earnings presentation which can be found on our Investor Relations website. As a reminder, for discussion purposes, we're providing comparisons of 2021 versus 2019 unless otherwise noted as we believe this is more operationally meaningful since our results were impacted by the pandemic in 2020. You will find a summary of results comparing 2021, 2020, and 2019 in our slide presentation and a comparison of 2021 versus 2020 in our press release and financial statements. This is the last quarter where we'll provide comparisons against 2019. Starting in the first quarter of 2022, we will resume year-over-year comparisons in all our earnings materials. As usual, our comments on growth are expressed in constant currency. Before I turn the call over to David, I want to introduce you to Alcon's new VP and Head of Investor Relations, Dan Cravens, who started last week and is joining us on today's call. We're very excited to have Dan on board. He brings deep Investor Relations and financial experience to Alcon. He will be your day-to-day contact once he gets up to speed and will be introducing our future earnings calls starting with the first quarter of 2022. With that, I'll now turn the call over to David.

Welcome to Alcon's fourth quarter and full year 2021 earnings call. Let me begin by recapping highlights from 2021 in recent months, including market dynamics and key product launches. After my comments, Tim will discuss our fourth quarter and full year performance and then give some color on 2022. Then I'll wrap up with some closing remarks and we'll open the line for Q&A. 2021 was an exceptional year for Alcon. We exited the year with fourth quarter sales of $2.1 billion and full year sales of $8.2 billion, which is at the high end of our sales guidance. This is a result of strong demand for key products and new product launches as well as solid commercial execution. Core operating margin was 16.3% for the quarter and 17.6% for the full year right in line with our guidance. And finally, core diluted EPS for the quarter was $0.56 and $2.15 for the full year. Additionally, despite our continued investments, we generated $645 million in free cash flow for the year. Reflecting on full year 2021, I'm extremely proud of all that we've accomplished. First, despite the ongoing pandemic and broader economic pressures, our full year 2021 results demonstrate the resilience of our business, the strength of our innovation, the proficiency of our commercial teams and our long-term commitment to focus on growth. Since our spin, we've aspired to grow above the market driven by delivering great products that address key customer needs. In 2021, we did exactly that by growing share and in some cases growing the market. Our product flow and mix has resulted in double-digit revenue growth in both our Surgical and Vision Care franchises, which drove core operating leverage and margin expansion. Second, we completed our separation, which was a major milestone as a new independent company. This has allowed us to intensify our focus on innovating products that are critical to driving top-line growth. Now third, we're seeing favorable returns on our investments. Our investments in transformation, manufacturing, and innovation. Our transformation initiatives continue to optimize our cost structure creating efficiencies and savings that we are reinvesting in innovation to support new product launches. Our investments in our new contact lens manufacturing platform have given us the flexibility to launch a host of new products over the past two years, all of which are well-positioned to capture share. And our commitment to funding our innovation engine is producing a strong pipeline of new products, which we developed with our customers in mind and are addressing unmet patient needs. Now I'll spend a few minutes updating you on some of those innovations. In Surgical, we remain the market leaders in presbyopia-correcting IOLs on the strength of both PanOptix and Vivity. Penetration of advanced technology lenses continues to increase. Vivity's non-diffractive properties, ease of use, and consistency of surgical outcomes make it particularly appealing. Existing surgeons are increasing their use of advanced technologies, upgrading patients from a monofocal toric to a multifocal toric or using Vivity on patients who they would have previously excluded from an AT-IOL due to prior pathology or concerns with halos and glare. We're also excited to add Hydrus Microstent to our portfolio of implantable devices. Hydrus represents an exciting opportunity in the large and fast-growing mild-to-moderate glaucoma market. Physicians appreciate the strong and compelling safety and efficacy data from the pivotal trial, showing that 66% of patients were medication-free at five years and 61% had a reduced risk of invasive secondary surgeries compared to cataract surgery alone. Now in equipment, we continue to see strong reception for our suite of cataract equipment, including our phaco equipment, microscopes, and ARGOS biometer. We're also piloting our smart cataract planner, which is part of our broader digital ecosystem with select customers in the United States. Turning to Vision Care, we continue to see strong demand for PRECISION1 and PRECISION1 for Astigmatism, which are our newest contact lenses for the mainstream market. Simultaneously, we're also building out our total brand in the premium segment. We announced the broad commercial launch of Dailies TOTAL1 for Astigmatism in the United States, which has been eagerly anticipated by eye care professionals and completes our Dailies TOTAL1 portfolio. We also announced the broad commercial launch of TOTAL30 Sphere in the US and in some European markets. This is the first and only monthly contact lens leveraging the water gradient technology first introduced on Dailies TOTAL1. This lens addresses the large $4 billion reusable market and is the first meaningful innovation in this market in years. Now finally, in ocular health, we were pleased to announce the recent launch of Systane Complete in a multi-dose preservative-free format our third multi-dose preservative-free offering in the past 18 months. During the second half of 2021, we built a US sales force dedicated to delivering eye drops into the ophthalmic channel. This sales force is now in place and has a robust portfolio to sell including Simbrinza glaucoma drops, our sustained family of dry eye products, and our Pataday allergy drops. Now moving to our end markets by franchise. In Surgical, global cataract procedures in the fourth quarter were down low single digits over 2019. However, if you exclude India, which has been slower to recover from the pandemic, global procedures in the fourth quarter were up low to mid-single digits versus 2019. Growth in the US market remained relatively consistent with prior quarter. Growth in international markets was still slower to recover but saw solid sequential improvement over the third quarter. Against this backdrop, our implantables business continued to outpace the market, driven by our strong AT-IOL performance. In Vision Care, the contact lens market in the fourth quarter broadly returned to 2019 levels and grew high single digits, led by the US. Growth rates in international markets are still trailing behind the US due to varied paces of market recovery. However, our contact lenses significantly outpaced the market, driven by strong performance of PRECISION1 and PRECISION1 for Astigmatism. Our full year 2021 performance demonstrates the durability of our markets and the resilience of our business, all of which are underpinned by favorable macro trends. Our strategy of investing behind markets with high-growth opportunities or high share opportunities is paying off. We are creating innovative products that are addressing customer needs and using the expertise of our commercial organization to successfully execute on our new product launches. As a result, we're growing faster than markets around the world even as they continue to recover. With that, let me pass it to Tim, who'll take you through our financial results.

Thanks, David. In the fourth quarter, we saw sales of $2.1 billion, up 15% versus 2019, driven by 15% growth in Surgical and 13% growth in Vision Care. Full year sales were $8.2 billion, up 12% versus 2019. Implantable sales were $416 million in the fourth quarter, an increase of 27% versus 2019. As David mentioned, our PC-IOL portfolio continues to lead the market and we saw strong AT-IOL adoption trends continue through the fourth quarter. On a full year basis, implantable sales were up 27% versus 2019. Consumable sales of $639 million in the fourth quarter increased by 8% versus 2019, with sales growth mainly driven by market recovery. On a full year basis, consumable sales were up 3% versus 2019. Equipment and other sales were $204 million in the quarter, up 21% versus 2019. Approximately two-thirds of the growth was due to strong sales of cataract equipment, which included competitive conversions, upgrades from older to newer generations of equipment, and surgeons who are expanding their ORs to accommodate patient flow. On a full year basis, equipment and other sales were up 21% versus 2019. In Vision Care, fourth quarter sales of $875 million grew 13% versus 2019. Contact lens sales were $533 million in the quarter, up 16% versus 2019. We were very pleased with the strong interest in our daily lenses, including Precision1 and Precision1 for Astigmatism as well as continued growth from Dailies Total1. TOTAL30, our new premium SiHy reusable lens is also starting to take hold in the United States and Europe where customer feedback has been very positive. On a full year basis, contact lens sales were up 7% versus 2019. Ocular health sales were $342 million in the quarter, an increase of 10% versus 2019. This is primarily attributable to our sustained family of dry eye products which saw another quarter of double-digit growth, including our recently launched multi-dose preservative-free formats. We also saw solid contributions from Pataday allergy drops and Simbrinza glaucoma drops, which had no comparable sales in 2019. On a full year basis, Ocular health sales were up 14% versus 2019. Fourth quarter core gross margin was 62.8%, about 60 basis points ahead of 2019, mainly driven by higher sales and mix. For the full year, core gross margin was 63.4%, in line with 2019. Core operating margin was 16.3% in the quarter. In line with our comments, during our last earnings call, we increased spending on marketing and sales to support new product launches and key products. For the full year, core operating margin was 17.6%, an increase of 70 basis points versus 2019. The core effective tax rate was 10.4% in the quarter. The favorable rate is primarily due to the mix of pre-tax income across tax jurisdictions and a recently concluded tax deduction of statutory expense in Switzerland. For the full year, the core effective tax rate was 17%. Core diluted earnings per share in the fourth quarter of 2021 was $0.56, up $0.11 versus the fourth quarter of 2019. This was driven by strong revenue growth and a favorable core tax rate. For the full year, core diluted earnings per share was $2.15, up $0.26 versus 2019. Now I'll touch on a couple of cash flow and balance sheet items. Free cash flow in 2021 was $645 million, compared to $367 million for 2019. Higher core operating income and lower separation spend were partially offset by higher capital expenditures and increases in inventory, primarily to support new product launches. Capital expenditures were $700 million for the year, up from $553 million in 2019, primarily due to the timing of spend for our contact lens manufacturing expansion. Given the strong reception to our new contact lenses, we are increasing the number of lines in our new manufacturing platform to meet future demand. As a result, we expect capital expenditure this year to remain relatively consistent with the full year 2021 on an absolute basis. Transformation costs were $28 million for the fourth quarter and $68 million for the full year. Life-to-date transformation costs were $169 million and we have recognized close to $200 million of cost savings, which has been reinvested back into the business to support product launches and R&D. We expect to substantially conclude the transformation program by the end of 2023. To summarize the year, despite the headwinds we face, we feel very good about our achievements in 2021. All of our major initiatives remain on track. We completed separation, we are advancing our transformation and our new manufacturing platform is delivering innovative products that are experiencing high demand. Our products are growing ahead of the market, and we have a robust pipeline for future growth. Now turning to 2022 guidance. Starting next year, we will revert to a year-over-year comparison of our results, aligned with our press release and interim financials. So, on our next earnings call, we will compare the first quarter of 2022 with the first quarter of 2021. While we're monitoring the variance of COVID-19 and most recently Omicron, with the improved adoption of safety measures and the availability of vaccines we are encouraged to see solid return of demand for surgical procedures in eye care. Our 2022 guidance further assumes that global markets grow over 2021, in line with historical averages, the impact from inflation moderates in the second half of the year and the U.S. dollar holds steady at mid-January foreign exchange rates. Accordingly, we expect 2022 net sales of $8.7 billion to $8.9 billion, which corresponds to 7% to 9% constant currency growth over 2021. We expect to see approximately 100 basis points of pressure from foreign currency. Turning now to expenses. We're going to continue to invest in innovation and expect core research and development expense to come in around the midpoint of our previous range which was 7% to 9% of sales. Based on our sales trajectory, we expect operating leverage to drive a core operating margin of 18% to 19%. We continue to see inflationary headwinds related to raw materials, freight, and labor. And while we are actively working to mitigate these challenges through selective price increases and productivity initiatives, we have built in approximately 40 basis points of incremental margin pressure in our 2022 guidance. Moving down the income statement, we expect interest and other financial expense to increase to a range of $180 million to $190 million, given the current environment on interest rates and foreign exchange. We also project our core effective tax rate to be in the range of 17% to 19%. Based on this, we project core diluted earnings per share in the range of $2.35 to $2.45, which corresponds to 13% to 18% constant currency growth over 2021. We expect to see approximately 400 basis points of pressure from foreign currency. Before turning back to David, I'm also pleased to report that our Board of Directors is proposing a dividend of CHF 0.20 per share, which is in line with our payout policy of 10% of previous year core net income, pending shareholder approval. Shareholders will vote on this proposal at our upcoming Annual General Meeting on April 27. Now, I'll hand it over to David for some closing remarks.

Thanks, Tim. In closing, we're very pleased with our full year 2021 results. We demonstrated the resilience of our business despite markets still recovering from COVID-19. We completed our separation on time and on budget. We progressed with our transformation program, optimizing our overall cost profile and reinvesting savings into new product launches in R&D. We continue to invest in research and development, securing a robust pipeline that will drive future growth. We installed lines aligned with demand on our new contact lens manufacturing platform. We announced two deals that enhance our glaucoma portfolio, one which allowed us to build a broad portfolio of eyedrops for the ophthalmic channel, and the other giving us reentry into minimally invasive glaucoma surgery. We're launching innovative products which are gaining share and increasing adoption driving double-digit growth across both our Surgical and our Vision Care franchises, and importantly, we're creating shareholder value. So as we enter 2022, we have substantial momentum and believe that we can continue to outpace the market with the full year benefit of our innovative products. I want to thank our 24,000-plus associates for all their hard work and dedication to helping everyone around the world see brilliantly. With that, let's open up the line for Q&A.

Thank you. We will now be conducting a question-and-answer session. Our first question today is coming from Zach Weiner from Jefferies. Your line is now live.

Hey, thanks for taking the question. Congrats on a good quarter. Just one on the AT-IOL space. In the past, you've called out the share that you've held from the AT-IOL space. Can you give an update on that? And how did PanOptix perform in the quarter? Thanks.

Yeah, Zach, we had a good quarter with both PanOptix and Vivity. And the total share, I think came down a point or two in the quarter. I can't remember exactly the number, but it's running right around 80 in the United States. And in the international market I think it's actually up. I'd have to go check that number and get back to you. But directionally, I'd say we're holding share from a very high position. So really faring quite well against the new product flow that's come in.

Got it. Thanks. And then one on the contact lens manufacturing upgrades. How many lines were put in place during 2021? And what is the expected margin benefit as we move forward here? Can you just talk about that?

Yeah. We've shied away from giving a lot of detail on the number of lines, because it speaks to capacity, and we're trying to keep that a little bit to ourselves. But I think in terms of margin progression, Tim, why don't you grab that one?

Yeah. I think what you'll see is we had another good year of investments in putting in lines. We will put in more lines this year. So that will continue to put on sort of near-term pressure on the Vision Care gross margins because again, it takes roughly 18 to 24 months for those to get up to optimal capacity. So I would just think about it as over the next couple of years in the Vision Care business, we'll continue to get operating leverage as we've done in the past, and then that gross margin expansion will come in the latter part of the plan.

I think what we're excited about there is a 16% growth in the quarter on contact lenses. And again, I think we're seeing tremendous response to the choice of products we've decided to build on these lines. And so obviously, we're excited about that. We're going to continue to invest behind it.

Got it. Thanks for taking the question, guys.

Thank you. Our next question is coming from Veronika Dubajova from Goldman Sachs. Your line is now live.

Hi, guys. Good morning, and thanks for taking my questions. I want to start kind of big picture around the guidance, obviously and two-part, if that's all right. One, just would love to understand, David, what you think the big variables are in terms of ending up at 7% or 9% in terms of the growth rate? And where you sort of see the biggest upside opportunity? And then maybe challenge you a little bit. I noticed that you are assuming historical market growth in 2022. Clearly not every single market had recovered in the course of 2021. So just maybe talk through the rationale for putting that as a baseline at this stage?

Well, I think you've nailed the biggest variable, which is the market. And so I think it's hard to know exactly what's going to happen. And so perhaps we are a bit on the conservative side with mid-single digits. But I think the view that we have is that there's going to be some wraparound on some softer quarters. But again, we're not all the way back yet either. So if you look at the market in the international markets in particular, India and a number of other big markets, Japan are really not back to normal. It's going to take them a little while to get there. And again, I don't know what that rate is. Now Europe bounced back nicely I think in the third quarter for Surgical which was very exciting. And Vision Care surprisingly strong in the fourth quarter up low single digits which again we hadn't seen or expected. But so I think kind of natural growth rate if we can get it is a pretty good safe place to be and we're going to do well from there. Could it be higher than that? We'll see. But we also don't know that there isn't going to be another variant or there isn't going to be some delay in markets coming back and I would say particularly on our international side.

Understood. That's helpful. And then quickly on contact lenses just if you can clarify any stocking or destocking that happened in the fourth quarter that we should bear in mind? And I know you've talked about hoping to put through some price increases on the CL side to help you compensate for some of the raw material increases that you're seeing. Just would love to get an update on how that's gone and whether you've been able to realize some tailwinds there.

Yes, there was some stocking by some of our competitors. We didn't engage in any stocking, but I believe that had an impact on the market. The fourth quarter contact lens market was quite strong, and I think a bit of that is due to competitive activity. Regarding pricing, we implemented a price increase late last year that takes effect in February, so we are currently assessing its impact. We're waiting to see how consumers react to that, and we have several strategies in place. As you know, we have a direct pricing strategy, along with discounts for some retailers and consumer rebates. We're adjusting these various factors to find the right mix to maximize our returns. We will be evaluating this throughout the rest of the quarter.

Understood. Thanks, David.

Our next question today is coming from Larry Biegelsen from Wells Fargo. Your line is now live.

Good morning. Thanks for taking the question and congrats to a strong end to the year. One on the sales and EPS cadence for '22 and one on the long-term operating margin. Maybe Tim can you talk about the cadence for sales and EPS in 2022? Q1 sales are usually down low single digits. Is that your expectation given the Omicron surge and I'm talking quarter-over-quarter? And how does inflation and FX play into the cadence you're thinking about? And I had one follow-up.

Sure. From a revenue standpoint, Q1 and Q3 typically show lower figures for us, while Q2 and Q4 are generally higher. For instance, Q2 coincides with allergy season, and in Q4, hospitals are focused on their capital budgets and customers are utilizing their annual copays. Therefore, I anticipate a similar pattern in 2022 as we observed in 2021. SG&A is a bit more complicated. We had lower spending in Q1 last year due to uncertainty about market recovery, which made us cautious. Additionally, in Q2, especially within Vision Care, advertising and promotions tend to rise as we prepare for the back-to-school season. Regarding inflation, you will notice a greater impact in the first half of next year, affecting your EPS. We assume that this will ease in the second half, based on our analysis of indices and inventory levels. For foreign exchange, expect more pressure in the first half of this year compared to the second half. The dollar's significant movements mainly occurred during the summer of 2021, which explains the profile. These are the elements to consider as you forecast moving forward.

Very helpful. And another one for you, Tim. You're guiding to about 100 basis points of operating margin improvement at the midpoint. I believe and that's absorbing an FX headwind and an inflation headwind. How are you feeling about the low 20% operating margin goal in 2023 that you laid out at the Capital Markets Day? That's a pretty big jump from, call it, 18.5% at the midpoint of the 2022 guide. Thanks for taking the questions.

Yes, Larry, we remain optimistic about our goals for 2023. I believe we will see a continuation of our current trends. As we increase revenue, which we anticipate, we will also enjoy operational efficiencies. Additionally, I expect that in 2023, compared to 2022, we will experience a slight improvement in gross margins. While we do face some inflationary pressures and other challenges this year, I believe overall conditions will improve. So, to be honest, I think it will largely be more of the same.

Thanks a lot, Tim.

Thank you. Our next question today is coming from Matthew Mishan from KeyBanc Capital Markets. Your line is now live.

Hi. Good morning. I'm trying to understand the organic component of the guidance. We're estimating about 100 basis points of acquisitions underlying the 7% to 9%, which means organic growth is at least 6% to 8%. Is that calculation correct? Also, how do you view the 6% to 8% growth in the context of your longer-term 4% to 6% mid-single-digit market guidance? What are the factors supporting above-average growth this year, and what headwinds do you anticipate that might bring that down?

Let me address the second part of that question first. Regarding sales growth, it’s important to note that the markets haven't fully recovered and we are still seeing effects from COVID-19. We are projecting market growth in the mid-single digits for this year, which is stronger than the typical surgical procedures market that generally grows around 3%. This increased activity is contributing to our near-term growth this year. However, I anticipate that this will stabilize over time, and we will have to monitor when that occurs. Additionally, there are unique factors at play, such as the introduction of new products for which we don't have comparators. Would you like to elaborate?

Yeah. I mean, the organic piece, we have it a little bit lower than the one point but you're in the right zip code.

Thank you. Our next question today is coming from Jeff Johnson from Baird. Your line is now live.

Thanks, guys. Sorry, I was unmute there for a second. David, especially you talked about the cataract market or the surgical market maybe being a little harder this year than the normalized 3%. And I would love to get your opinion on what you think the contact lens market might do this year? Historically we think of that 4% to 6%, but I know new patient starts have been compressed or depressed here for the last year or two. So just from a market standpoint and I understand you, obviously, have some product launch tailwinds. But how are you thinking about the contact lens market this year?

We were pleased to see the fourth quarter return to 2019 levels overall. Earlier in the year, we anticipated it might take longer, possibly until the middle of this year or even the end of this quarter, to see that recovery. However, we actually observed a return to those levels by the end of last year, particularly with international markets showing significant improvement from the third to the fourth quarter. Looking ahead, we believe the contact lens market will grow in the mid-single digits compared to 2021, but we'll need to see how that develops. We think there has been sufficient recovery in foot traffic and optometric visits to drive this market. Additionally, patients have adapted to new ways of obtaining lenses. Instead of visiting every 90 days to pick them up, many are now utilizing refill programs from offices or online services. This shift has positively impacted the market by allowing more room for patient visits from new and switching patients. Currently, while visits remain lower compared to 2019, we believe this isn't hindering market growth as the types of visits doctors are conducting are more productive. Patients who aren't experiencing issues are moving through their visits more quickly, which provides additional opportunities for growth in the market. Our expectation of mid-single digits growth feels reasonable, sitting in the traditional range of 4% to 6%. While there is potential for it to exceed that, or possibly be less, this figure seems like a safe estimate for now.

That's helpful. Thank you. And then just as a follow-up. On pricing, you talked about some things you're trying to do in contact lenses and fiddling around with things this quarter. How about pricing across the rest of the business on equipment consumables ocular health? Is there any pricing power there? And as we think just to cross the blended portfolio this year in a given year, what is normally the price tailwind to your growth rate in this year? How do you think that might vary again across the whole business? Thanks.

Yeah. I mean, I have to do that pretty qualitatively because it's a broad question. So let me directionally try and answer it. And I think historically, our Surgical business doesn't have a lot of price benefit to it. In fact as the opposite. It has a bit of price erosion that we continuously work against. Most countries lower prices. Most contracts as they come into us have an expectation that the prices will come down a little bit. What we have done to parry that is introduce new products. And so what has hit – typically, we would describe as price benefit is usually mix. And so we'll see a 1% or 2% price decrease every year. We'll get about a 1% or 2% mix lift from introducing new material, new injector, new something. And because of the efficiency that product creates or the outcome that product creates, patients and docs are willing to pay for it. So that's typically how the Surgical business has run. And I don't see that really changing much because most of that business is under a contract of some kind and those contracts typically are beneficial to the customers. So price increases in the certain business are more difficult in many ways. On the Vision Care side, I do think we're going to see some at the consumer level that are acceptable. There hasn't been a lot historically. I don't know – I can't remember the last time we took price in contact lens not since I've been here so that's at least five years. And it's been a surprise in many ways to the fact that it never did because many of our input prices have gone up during that stretch. Now this obvious bump up quickly in price or on prices for us for our resins and for inputs around materials and labor. These have all been – we've been trying to figure out how to offset it. We're not going to know until it gets to the consumer and we're not going to really know until we see what they do about it. But we've passed through as much as we can, we think is reasonable and we'll be thoughtful about watching demand as it comes out. But that was an across-the-line contact lens view for us. And then again, we put a little bit of price depending on which market you're in on our eye drops business as well but not a lot. So that's kind of the landscape if you will. And I think probably as we get further into the year, we can give a little bit better insight as to how that's taking shape relative to volumes.

Thank you.

Thank you. Our next question today is coming from Cecilia Furlong from Morgan Stanley. Your line is now live.

Thank you for taking the questions. I wanted to ask about Vivity. Specifically, if you could walk through what you've seen from an adoption standpoint in international markets as well as your outlook for further international market expansion in 2022?

Yes, we are very pleased with the adoption of Vivity. PanOptix has been performing well, and Vivity has contributed significantly to our discussions. A notable aspect of Vivity is that it resembles a monofocal lens, which is advantageous for physicians who have previously had concerns about halos and glare. Surgeons find it easy to adopt this lens as it doesn't require much more effort than a standard monofocal lens. Moreover, it offers excellent intermediate vision, with around half of patients achieving reading capability without glasses. This creates a low-risk opportunity for many, appealing especially to surgeons who may have hesitated to enter the PC-IOL market. We've witnessed that existing PC-IOL surgeons, who might have previously excluded certain patients due to complications like retinal diseases, are now considering Vivity as a viable option. This lens allows them to bring those patients back into their practices, and they are also starting to incorporate patients they had previously ruled out due to concerns about halos and glare. As we progress, we aim to attract new surgeons to Vivity, especially those who haven’t yet ventured into the PC-IOL market. Our strategy moving forward will focus on increasing the penetration of PC-IOLs, with Vivity serving as an entry point. Once surgeons become comfortable with Vivity, PanOptix will be a fantastic complement for them to consider. Vivity is particularly suitable for doctors experienced in inserting monofocal toric lenses due to its similar insertion process, and it provides superior reading and intermediate vision. This positions Vivity well in international markets, which are experiencing solid growth, albeit at a slightly slower pace than the U.S., but both markets are seeing increased adoption rates above historical averages.

Great. Thank you. And I wanted to ask on TOTAL30 as well. If you could just walk through what you've seen just initial days post-launch and then your expectations for share capture in that segment of the market going forward? Thank you.

Yes, the early results for TOTAL30 are excellent. One thing we may have underestimated is the impact of positive developments in a mature market. When it comes to reusable lenses, the market is relatively stable at around $4 billion, and nearly half of the patients that doctors are starting are opting for reusable lenses. When we present our water gradient technology applied to a reusable lens, doctors are already familiar with and appreciate this technology from Total1. When we say that you can wear the TOTAL30 lens and have the same experience on day 30 as on day one, it impresses both patients and doctors. We've received very favorable feedback, as optometrists recognize the technology and are pleasantly surprised we can achieve 30 days of wear. The trials are yielding positive results, which gives us optimism about its potential. We currently hold a modest share in this category, estimated in the mid-teens, suggesting there is considerable room for growth in a market that has been lacking in technology advancements. We feel optimistic about the potential and progress so far.

Thank you. Our next question today is coming from Chris Cooley from Stephens. Your line is now live.

Good morning and thanks for taking the questions and congratulations again on a solid year in a tough environment. David, if I may just for my first question could you just help us think a little bit bigger picture here as you talk about the margin goal? In a prior question, you guys alluded that you felt good about that low 20s operating margin goal in 2023. I'm just curious how you are thinking about new technologies in this space and specifically that required investment? How much of that is implicit in you're getting to that low 20s op margin goal, or are you really thinking about getting to that level more so on just absorption of capacity reduction in inflationary headwinds and stronger operating volumes? And I just got a quick follow-up.

Yes, Chris, we do gain some benefit from recent developments. Our goal of reaching the low 20s operating margin is consistent with our initial strategy, which is focused on achieving growth. This is primarily driven by operating leverage, with about 80% stemming from that and 20% from improved gross margins. Our approach includes leveraging new technologies and products to help us reach this goal. Currently, we have optimized our spending, moving nearly $200 million from less productive areas into research and development and commercial support. This allows our sales and marketing expenditures to increase without raising our total functional costs at the same rate. We believe we can keep total functional costs below the revenue growth rate, which is pivotal for achieving our operating margin targets. Thus, our optimistic outlook is tied to anticipated sales growth. We are projecting growth of 7% to 9% this year, bolstered by our market position and various strong products. We expect to experience the full-year impact of five key products this year, and we are excited about our ability to continue launching great products over the next 24 months.

I appreciate that information. As a quick follow-up, you have a strong pipeline, but there is significant innovation happening in the ophthalmic space right now as well. I noticed in your press release last night that you mentioned $1 billion in capacity. Regarding future mergers and acquisitions, you have Simbrinza as a product and Ivantis with Hydrus, both of which boast strong growth profiles and are above corporate gross margin standards. Should we expect more focus on ophthalmic products, particularly those with higher margin profiles that generate better cash flow, or are you planning to explore more emerging technologies moving forward that can utilize your existing sales and marketing infrastructure? Thank you.

Yes. Well, a little bit of both, Chris. And let me just say it this way. I think that, as we reflect on where we are, we feel very comfortable that we have the right investment organically in R&D and the right product flow and pipeline to get us to our goals without doing anything externally. I would say though that we do have capacity and we have every intention of using that capacity to continue to build our business. And so, to the extent that we see opportunities, we're going to do them. The thing I would mention, though, is that we've been pretty disciplined, really, since we came out about what we looked at and what we chose to do. And I do think that you should consider that we're likely to stay pretty close. We're going to be in eye care, we're going to look for white spaces, we're going to look for opportunities like Hydrus or other technologies that could enhance our long-term picture. And we will look at pharma, but it's not a high need thing. We're going to do it as we see fit and as we can do a good job of bringing in value. We have the capacity at this point to take on more pharma. So if you're asking, part of that question I think was, is it going to cost us more to put people on the ground to kind of support higher growth? And I think the answer, to my way of thinking, is in the United States, we've already done that by getting this ophthalmic eyedrops group out there, selling Simbrinza, selling our sustained multi-dose preservative-free products, and selling Pataday. Like any force we can then rotate those products as they mature. There won't be incremental costs in the way at which you'd be starting up something. So I feel good about our platform right now having already established it. If we were to bring something into the pharma space, I think that group could handle it. And then going forward we obviously have a lot of capacity to bring on devices in either Vision Care or Surgical. So I don't see a need to necessarily add a bunch there.

Thank you.

Thank you. Our next question today is coming from Chris Pasquale from Guggenheim. Your line is now live.

Thanks. A couple of model detailed questions for Tim. At the Capital Markets Day last year, you talked about a 20% tax rate through the planning period came in lower in 2021. Now we're looking at a high-teens number for '22. Can you go into more detail on why it's moving lower and whether this new range is sustainable?

Yes. During the Capital Markets Day, we initially discussed a 20% rate. The main factors driving the change are a recent tax agreement we settled in Q4 in Switzerland, which provides a favorable rate benefit that will carry over to next year, and a positive geographical mix of our profits in 2021. Looking ahead, I anticipate an 18% rate, favoring the midpoint of our guidance range of 17% to 19%. The reasons for the increase are twofold: we have seen benefits from inventory buildups in our affiliates in 2021, which we did not expect to carry forward, and we may face a one-off negative impact related to an ongoing tax agreement between the US and Switzerland, which would be a one-time event occurring in 2022. Therefore, my conclusion is to take the midpoint of the range of 17% to 19%.

Okay. And then the $180 million to $190 million in interest and other expense does that include the above-the-line other expense, or is that all below the line? Just trying to figure out whether the comparable in 2021 is 162 or 194?

It'd be comparable to your 162. And there's two things that are in there. We've baked in some rate increases given the environment. And then our hedging costs are in that line as well. And we've anticipated some higher hedging costs as we grow in some of the markets that are a little bit more challenging if you think about Russia if you think about Argentina and places like that.

Thank you. Our next question today is coming from Daniel Buchta from ZKB. Your line is now live.

Thank you very much. Thank you gentlemen for taking my two questions. The first one maybe on Ivantis which is closed now since early this year. I mean now since you have detailed insights, I mean can you share a little bit more light on how you see this acquisition? I mean I assume because you know that business from the former product you had quite meaningful sales synergies. And with that say for example until 2025, I mean how meaningful could that business become? And then the second question maybe on consumer openness or willingness to consider switching contact lenses from one to another and pay maybe more for innovation like for Precision1. And how do you see this developing now into 2022 and maybe also the years beyond since we hopefully left COVID-19 behind? Thank you very much in advance.

Sure. Let me begin with Ivantis. We are very enthusiastic about the Ivantis product and the acquisition we made. We believe we have introduced something that is very well-timed for us and for everyone involved. One of the key moments was the publication of their five-year continuous follow-up randomized clinical trial. This is significant because it is often challenging to convince people of the efficacy and safety of products. We've been in this market previously, and that has been one of our main objectives. The data indicates, as I mentioned earlier, that over 60% of patients, specifically 65%, are medication-free after five years. This is tremendously beneficial for patients, as they do not have to use eye drops. It is also economically advantageous for the systems involved. Moreover, it provides the health economics data that illustrates this is beneficial for patients as well as the systems. People should consider this if they have mild to moderate glaucoma. We also want to highlight that the same data shows patients who receive a stent do not require a second surgery. In contrast, untreated patients are undergoing surgery more than 60% of the time, while stent patients do not. This indicates additional costs and burden for both patients and the system. The data has revealed many of the outcomes we hoped for. As awareness of this data grows, we will be attending the Nashville American Glaucoma Society Meeting next week to help people understand both the economic implications and patient impacts. We see this as a significant opportunity, with the current market valued at $500 million. We are entering with a $60 million advantage and are just beginning. Historically, this market has seen growth in the low teens, although some reimbursement changes from late last year may slightly hinder that growth. Nonetheless, we anticipate meaningful growth in a substantial market where we have a favorable starting position. You will need to assess how well we will perform, but I am optimistic about the positive impact of our product on the well-being of glaucoma patients. Regarding the consumer switch aspect, I don’t believe there will be significant changes stemming from COVID in terms of switching. If patients are satisfied with their current lenses, most optometrists are likely to issue another prescription rather than switching brands. Typically, three to four out of ten patients in an office are new or potential switch patients due to issues or preferences for daily lenses. This means that six or seven out of ten are not switching. The market changes gradually for this reason, but it is also resilient. We are excelling in the switch and new fit segments, and we expect to maintain a strong business with these new products over time. We are eager about the direction this will take.

Thank you very much. Very helpful.

Thank you. Our next question today is coming from Julien Dormois from BNP Paribas. Your line is now live.

Hi. Good morning, Dave. Good morning, Tim for taking my two questions. The first one relates to the Surgical markets, where you described that it should be pretty strong in 2022. But I was just curious whether this market could be even stronger without some of the staff shortages that apparently some ECPs are going through in the US or in Europe? But also in terms of the supply chain challenges that you guys and your competitors might be experiencing always all of the previous just irrelevant to the growth in this market at the moment. And the second question is how we should think about the growth of the equipment business, specifically after a very, very strong 2021? Do you think there is a comp effect here to be and whether this could still deliver growth in 2022?

Yes. Thanks, Julien. Let me start with the Surgical business. You're exactly right. I think one of the challenges in the Surgical business right now, there's been two. Initially, there was a lot of turnover in staff. Then I think even in the fourth quarter though it stabilized a little bit, you saw people having to step out for a week because they got COVID or two weeks until they got better. And that kind of interruption of staff and staffing to the extent it settles down we'll improve capacity going forward. But I do think there remains a basic capacity problem internationally, which means there just isn't a lot of extra OR time, given a lot of this is done in the hospital internationally and you're having to share and work with a lot of other people who are trying to also do new procedures. And there is going to be I think a stabilization of staffing over time. But again, it isn't there yet. So we're still working through interruptions and depending on where you are in the world how that looks. So I think the Surgical market does get better. And again, we forecasted it a good bit better than what I loosely call historical rates. I think it's mid-single digits would be a couple of points up from historical rates. And some of that was refractive early on. And some of it now has just been an enthusiasm for getting our new ORs and returning into a more normal world. I think that given the size of the year we had last year, we have a great year if we move sideways on equipment. And so I would think about equipment this year as being likely kind of a net neutral year-on-year. If we could accomplish that, I'd be pretty excited about it. It has some chance to be – probably there's more chance of being a headwind than a tailwind, let me say it that way. And we'll see, because we just sold a ton of equipment over the last two years.

Thank you. We've reached the end of our question-and-answer session. And ladies and gentlemen, that does conclude today's teleconference and webcast. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.