Alcon Inc Q1 FY2022 Earnings Call

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. 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 the 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. 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, in 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. 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. 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 at 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 is 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 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, 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 favorite among 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 lenses, which is the reusable market with T30. TOTAL30 leverages the same water gradient technology of Dailies TOTAL1, making the lens uniquely comfortable even at day 30. TOTAL30 is now available in the U.S. and Europe. While it's still early in the launch, customer and 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 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. We continue to see gains in new and switch fits, which is a strong indicator of potential future sales. 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 pressure 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 of 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. Additionally, we're seeing solid demand for Argos biometers. 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 product 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 was 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 a decline in contact lens care due to supply chain challenges. 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 expenses 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 expenses were $29 million, in line with the 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 are 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. The 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 at 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. 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 you've developed? Is it fair to assume that any potential weakness PanOptix may see can be offset with the nice demand you've indicated for Vivity? How could Clareon help in that regard to keep the market share as high as possible? And then, the second question, maybe for both of you, 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 in the last year. I think AT-IOLs have been a very good business for us, and they continue to be strong. In the PC-IOL business, this is the segment that you would think of PanOptix and Vivity. We've actually gained share, I think 7 share points year over prior year. In the U.S., we're holding share a little bit better than we expected. And I think we're somewhere around 80%. We feel good about PanOptix and Vivity. Obviously, PanOptix is still our largest brand in this category. It's growing beautifully right now. We spend a lot more time talking about video right now because that's part of the reason the category is expanding. We have a fairly robust share at this moment. I would say Vivity gets a little more attention than PanOptix, even though PanOptix is a 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 PanOptix and Vivity and the toric. We're excited about getting those out there. Clareon is particularly unique as it's probably the first new material in this category in many years. With this material advancement, we have probably the most pristine optic in this space. So, we're very excited about what that means for patients in the long run. So, I think it will 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. Reimbursement via the government dictates some degree of implicit margin that we can have. 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; most people understand that raw materials are up—resins are up—a good bit of labor and freight are inflated on us, and considerably more than we had anticipated. The acceptance has gone pretty well inside the optometric community. They seem to be passing it on to the consumer, which has not had any negative impact on demand.

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

Good morning. Thanks for taking the question. 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? 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? How are you thinking about the COVID impact in China on Q2 sales? I have one follow-up.

Yes. Larry, thanks for the question. Revenue will be pretty close to what we've seen typically. I mean, 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. As far as Korea goes, I would think about it as a net one-time benefit in Q1. Surgeons basically clear their waiting lists. 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. Frankly, we just don't know yet how big of a challenge it'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 year. It seems there’s a disconnect here as the market seems to be growing faster. Do you still expect your contact lens growth to be accretive to overall Alcon growth in 2022? Thanks for taking the questions.

I do think that the Vision Care business, in particular, and the Surgical business are pretty close to the same rates of growth. In terms of the contact lens business itself, I think it'll be 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. If you look at this quarter, there are parts of the market, particularly in Europe, which bounced back with a high number. When you get high numbers like that, sometimes the data doesn't read through cleanly. 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, in that mid-single-digit range.

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

Good morning. And thanks for taking the question. You've mentioned low-teens growth in Surgical, but you're expecting that to decelerate. Given probably a backlog of these procedures, what do you think that decelerates to from a market growth perspective as we go through the second half?

Well, the big issue is the wrap around on COVID, right? We had a lot in the first quarter. We had a very soft compare particularly for international markets. International was basically back to 2019 levels at the end of last year. As we progress through the year, the comparison gets firmer and closer to what we should expect long-term as market growth. I would 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. The backlog is very difficult to know how much of that backlog is going to come through, when it comes through, and how it comes through. I will tell you, it isn't going to be a bolus of surgeries. It will be more surgery than has been typically done, principally because there isn't enough capacity around the world to absorb the number of cataracts quickly. At steady state, if the historical rate of growth was kind of that 4 percentage rate of procedures, we are a little bit warmer than that for an extended period of time. This year, we started out hot comparing to a relatively soft quarter last year, and it will get progressively slower approaching market growth plus a little bit.

Okay, excellent. I wanted to talk about the SG&A and R&D dynamics. You guys mentioned seasonality, expecting to progress through Q2, Q3, and Q4 to more normal levels. There was a lot of leverage in the model this quarter. Are you looking at it as being able to drive more leverage on operating expenses as you progress through '22 and that will provide a good lift to operating margins moving forward?

Yes. Operating leverage is really the key component to our financial thesis. Q1 is typically low for us if you were to look at it in prior years. If you take the first quarter and annualize it, you get to about 34% as a percentage of revenue. If you look at 2019, we were kind of at 38%. If you look at 2021, we were at 37%. You'll see some operating leverage, but it won't be 3 points worth. You will see some more spend on the SG&A front. If you go back to prior years, that's really where we ramp up the direct-to-consumer spend and spend on contact lenses. It's not unusual to see Q2 SG&A go up $60 million or $70 million from where we were in Q1. That's how I think about the expense flow.

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

I wanted to follow up on some of the product launches that you've talked about. Clareon, David, could you talk a little bit about why this is materially important? As successful as PanOptix and Vivity have been, what kind of resistance have you met from those who are still using your legacy material? What kind of additional share gains can you see at Clareon? I'd also like to ask Tim about margins.

Look, we're excited about the Clareon material. Historically, there's never been a better material than AcrySof, so it’s a hard fact to follow. Historically, the biggest improvement in this material is clarity itself. Occasionally, you may see some nano ghosting in any lens, particularly our competitive ones, with micro particles that might appear in this way. They're not clinically relevant, but they're aesthetically important to the doctors. We’ve cleaned up those concerns. Clareon is a significant advancement in material science for us. There has been some competitive noise about nano ghosting in our old material, which we feel is unimportant but easy to address. All of our material will transition to Clareon, a sequenced event that will occur starting with the U.S. market and moving to various markets through '23. We anticipate Clareon will enhance our monofocal and toric business. Regarding the margin conversation, we do recognize the incremental margin coming from our growth and sales volumes. I’m cautious to raise expectations significantly but am highly encouraged by our first quarter results.

I would say the margin performance in Q1 was solid. We continue to focus on maintaining operating leverage where possible, given the inflationary pressures. Our management approach has allowed us to absorb some costs. We've also benefited from favorable product mix under market conditions. But it is vital to retain a disciplined approach across all segments to enhance margins. The ongoing pressures will need to be managed as we look to the second half of the year.

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 of the market is currently AT-IOLs?

Yes, we do. In the U.S. it's 19%—we’ll find the global number for you.

Thank you. Do you have an opinion on where this sort of peaks out? Does this ultimately become the standard of care?

Yes. I think we have always had a view that there's substantial headroom in this market. We think the market may approach 35% to 40% of the total, willing to pay an additional fee for the values we've described. If we're at 19% in the U.S., we still have a sizable opportunity elsewhere worldwide. The global figure is actually 12.4%. The U.S. is significantly ahead, and the rest of the world possesses much larger potential through total procedures.

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

Great. Good morning. Thank you for taking the questions. I wanted to ask again about strategic price increases that you executed during the quarter. Any commentary on customer acceptance or any change in buying patterns ahead of taking price and just your outlook for any additional price increases in 2022?

Sure. We took several price increases in Vision Care, principally on our contact lenses. They were roughly aligned with inflation levels to offset some of our rising input costs. In Surgical, the pricing power is limited as it’s regulated. We raised prices, but on loose items purchased individually, it’s harder to gauge how that affects margin. In terms of acceptance, it's been good. Our customers seem to understand the input costs associated with our raw materials, and that has been well-received among the optometric community, who have passed it on to consumers.

Thank you for taking the question. On contact lens care, could you provide your outlook for recovering that segment and what you observed in the quarter?

The contact lens care market has been in decline for some time. It's typically low- to mid-single-digit decline. We faced some challenges during the quarter due to a shortage of bottles made from resin. This contributed to a slight revenue decline. While we have resolved that issue at this point, the ongoing supply challenges remain in the market more broadly. We are working diligently with our suppliers to maintain a steady flow of products, although vigilance will be necessary moving forward.

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

I just wanted to touch on new patient starts; any acceleration as we move away from COVID. Historically, P1 is the leading new fit start lens, is that still the case?

Yes. We have a very strong position in new and switch fits in daily disposables. In the cutting lens category, we lead in daily disposable, new and switch fits. I would say if you look inside the cutting lens category, we are the leader in new fitting and transitions this category. A survey by Johnson not long ago recorded that daily patient numbers in the U.S. in the optometry community were up 3% over 2019. This is a good sign for us. While some audits show new and switch starts still below 2019 levels, we believe we are getting back to normal. We expect to achieve normal growth rates plus some additional growth due to pent-up demand.

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

I just want to follow up on the inflationary drag across the business; Tim, you called out the 90 basis points. If I back out FX and the South Korea order, I think margins were up about 30 basis points ahead of last year. What do you estimate that inflation impact for this quarter? And is the 90 basis points an equal impact across all four quarters this year?

The 90 basis points is a year-over-year view. About a third of that was seen in Q1. The inflationary pressures last year were largely retained in inventory until those products were sold. So, we had roughly a third of that in Q1. The rest will carry out through the year relatively evenly.

Simbrinza in the drops segment has been doing well. We built out a dedicated sales force for Simbrinza, Pataday, and our Systane multi-dose preservative-free products. The Rx business has grown mid-single digits with Simbrinza performing positively. The growth correlates with a stronger sales force presence. We can expect overall sustainable growth in these segments over time as demand increases.

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

Just on Vivity, based on the surgeon feedback, confidence around the simplicity of using it gives them incentive to use it. Can you discuss its market positioning relative to PanOptix? What is the patient population it can address? Could you provide some scale and reach this product could have?

Sure. The question often arises about Vivity and PanOptix. If you want the best lens for all distances, you'll want PanOptix. However, this comes with potential halos and glare accommodation for about 1% or 2% of patients who might not tolerate it well. With Vivity being a non-diffractive lens, it allows for comfortable use in patients who might otherwise be excluded from advanced technology lenses due to complications. We are adding patients and expanding the market with both products growing nicely. While Vivity is smaller now, it is growing faster than PanOptix. Our main focus is on how both types of lenses contribute to the overall market expansion.

Regarding margins, you delivered a 22% in Q1 regarding the consumption and IOL sales you mentioned. Given the inflation backdrop, do you have more confidence in your 2025 target following the strong Q1 performance?

I don't want to get too far ahead of ourselves but we're pleased with the quarter. The business is performing well. The 20.6% margin delivered in Q1 is slightly high and we expect a more normalized view in the year's second half due to strategic investments in R&D and SG&A. Ultimately, we are encouraged by the underlying performance and will continue evaluating as we move forward.

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

David, on contact lens price increases, can you remind us of the timing? Did 1Q benefit at all from sell-in ahead of those? When you quote mid-single digits market growth, is that a sell-in number or sell-out number?

We use two data sources, GFK and CLI. They are retail sell-out. You shouldn't expect many material effects from price increases in the quarter. We purposely timed our price increases for February 1st to avoid those effects.

On the AT-IOL level market, the 19% and the 12.4% numbers you quoted, were these unit volumes? Did Vivity go into that? Is it officially considered an AT-IOL?

Yes, Vivity is an AT-IOL. It’s categorized as such in the reimbursement world. It’s unit volume we refer to regarding penetration. The category itself is expansive, offering potential for future growth.

Thank you. 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.