Alcon Inc Q4 FY2023 Earnings Call

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. 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.

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.

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 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. Our 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. Additionally, it was designed to create near-physiological conditions during surgery, which we expect will improve performance and efficiency without compromising safety. Furthermore, UNITY VCS represents an important opportunity 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. 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 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 the 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 share 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 the spin-off, 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 the 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 multifocal. These launches expand our specialty portfolio, which also includes PRECISION 1 toric, 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 about 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. 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 the contact lens care market is broadly flat, we do expect 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 the 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.

Thanks, David. We're pleased to report fourth quarter sales of $2.3 billion, up 10% versus the 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 contributions 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 a portfolio of eye drops, price increases, and recovery from supply chain challenges in contact lens care. Approximately four 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 the 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 expenses 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 the 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.

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.

Thank you. At this time, we'll be conducting a question-and-answer session. Thank you. And our first question today will be coming from the line of Veronika Dubajova with Citi. Please proceed with your questions.

Hey, guys. Good morning and thank you for taking my questions. I have two please. The first one is just looking at the IOL performance and in particular in the U.S. David, there's been a lot of debate in the market about competitive pressures, new product launches. And so I'd love to understand from your guidance perspective what you are seeing in your U.S. premium IOL business, so kind of backwards looking at kind of fourth quarter and also what your expectations are heading into 2024? Obviously, we have a number of product launches coming up from some of your competitors and kind of what your assumptions are around that, I guess related to that, my follow-up is on the same topic, but slightly forward-looking as well. You mentioned in your prepared remarks that you're excited about the pipeline, including some new innovations in IOL. Can you maybe talk to what those look like and when you expect them to be commercial and why they matter? Thanks so much.

Yes. Thanks, Veronika. Just a couple of things. On IOLs look, we had strong growth internationally and a solid U.S. performance. The U.S. is really wrapping around competitive impacts at this point. So, penetration in the U.S. grew about 10% over the prior year, sorry 10 basis points over the prior year, and about 50 basis points sequentially. So in terms of movement of penetration, we feel like it's normalizing, we think kind of long-term this 50 basis points that we have talked about in the past is a good answer. Look, we have maintained our share in the U.S. on AT-IOLs for the PC category, but we've lost a little bit in Toric. And again, I think that's to be expected. What we see right now though is that that sequentially seems to be moderating and we're kind of normalizing around where we've been. So I think long-term, we feel pretty good about the U.S. and kind of as expected, I would say. The bigger story though is the global AT-IOL penetration and that was up 170 basis points and principally driven by China. So we look forward on this and say, where is the opportunity for share, where is the opportunity for penetration growth. Certainly, there's some in the U.S., but it's likely to be moderate. Internationally, we see China and the VBP there and that win has a very significant opportunity for us, because we have a single-digit share in China. We've been under indexed there for quite some time. We chose not to play in the last VBP. And in this case, we have won the VBP kind of against most of the categories, I think seven of the eight. So Vivity, PanOptix, Toric, our whole line basically is going to be in play starting middle part of the year. And as you probably know, China is the second largest ATIOL market in the world. So from our point of view, we've got nice progress to be made internationally, the U.S. is normalizing and there are going to be new products coming in. None of that is new to us. So I think we've been talking about competitors coming in and seeing them internationally and even the ones we kind of know are going to be first in the U.S. We're not terribly bothered about. A lot has been made I think out of the RxSight product and I would just say that again it's I think was 15,000 to 20,000 lenses in a 1 million unit market. So it's just not going to be a big deal. I think directionally we have a really good eye on our international growth and the penetration number in particular.

That is helpful, that's an innovation?

Yes. We are exploring several ideas. Firstly, PanOptix is a patented trifocal with unique set points, making it challenging to enhance further. While some competitors are introducing trifocals, very few pose significant competition to PanOptix globally. Vivity offers a distinctive wavefront shaping concept. These are specialized technologies that provide specific advantages, and we believe they will remain strong in the U.S. market as they have internationally. We are also developing ideas aimed at enhancing contrast sensitivity and intermediate vision, which we will test throughout this year and next. If we discover something promising, we will share that information with you. Additionally, our accommodating and adjustable program will yield results from its first-in-human trial in the middle of the year, and we will provide updates at that time. We believe our adjustable mechanism is more durable, easier to implement, and a bit more predictable than existing options. Although this may take time, we feel confident about our long-term competitiveness.

That's great. Thanks, guys.

Our next question is from the line of Ryan Zimmerman with BTIG. Please proceed with your question.

Good morning. Thanks for taking the questions and congrats on the '23. Two-part question on guidance first and then one on Rocklatan and Rhopressa. On guidance, Tim, when you look at results over the past year and I appreciate the commentary on pacing for margins, the top line doesn't follow I guess what I'd consider kind of normal seasonality, right? First quarter was above the fourth quarter, second quarter grew and then third quarter fell. Just help us on the top line maybe with pacing through the year? And then the second part on guidance is I appreciate you're taking FX from the end of January, but if you look at the Japanese Yen for example, it's gone up I think 240 basis points the other way in February. So just how might that impact the EPS guide? And then I have a follow-up on Rocklatan and Rhopressa?

Yes, thanks Ryan. Good question. Yes, so from a top-line perspective, this year was a little bit different or 2023 was a little bit different than prior years. But as I look back at historical growth rates, I think we will trend towards more of a common seasonality. So I would expect from a revenue perspective, I would expect Q2 to be higher as we ramp up for allergy season. And then I would expect Q4 to also be a little bit higher given the fact that typically equipment sales are stronger in Q4. So I'd go back to your kind of '22, '21 models and I think we'll probably pace towards that. As far as FX, listen, our internal processes are really built around kind of locking down a budget at the end of January. So it's just not really practical to finish our budget yesterday for today's call. So that's why we picked the end of January. To your point, the Yen's up, if you look at the end of January, the Yen was about 147. I think today it's about 150. So there is a bit of a pressure point, but if you look at some of the other currencies in the emerging markets, we've gotten some favorability there. So I would say overall versus the end of January, FX has an immaterial rate as of today. We'll continue to monitor that going forward and if there are any changes, we'll certainly let you know.

Okay. And then Rocklatan and Rhopressa, David, if I think back, I think it was growing and correct me if I'm wrong 20% a year or at least it was on that pace before you guys acquired it. So you guys grew mid-single digits. So what's the right way to think about those assets in your hand as you make them organic in '24?

Yes. Look, we're very positive about where it is right now. I think you got to remember there's a big push in the market to generics right now and as a number of the glaucoma products have gone generic, there has been a lot of access pressure. So I think directionally there has been a little bit of a slowing both in the market. I think the market was net negative in value. And I think directionally, we grew in the high single digits on TRx. I think what we expect kind of going forward is that we'll certainly outgrow the market and grow gain share. And I think we're kind of pleased with where we are at this point. But remember too that we had to consolidate two sales forces, put them together, get them out there, redeploy that group. So I think we're through that bit and I expect kind of I would think a very positive kind of teams kind of growth in that area.

Our next question is from the line of Susannah Ludwig with Bernstein. Please proceed with your question.

Thanks. Good afternoon and thanks for taking my questions. I have one follow-up. So on 15512, can you provide some color as to what are the swing factors that you can get you from sort of the low end to the high end of your $250 million to $400 million peak sales? Just on this, also this is a category that's quite sensitive to marketing spend. So how much investment do you think it will require to drive this sales range?

Yes, those are good questions. Our primary focus over the next year and a half will be on labeling and access. We plan to submit our information mid-year and are optimistic about our labeling strategies. Once we provide all the details and assess the access points, along with how quickly we can achieve access, we will be able to gauge our initial progress. Access is crucial in this market, and these aspects will play a significant role in how we advance this product. In terms of investment, as we approach the timeframe, we will have a clearer view of our strategy. We anticipate leveraging our existing sales force significantly and, depending on the product's size, we may need to make substantial investments. Ultimately, we believe our approach will align with our revenue expectations.

Our next question is from the line of Anthony Petrone with Mizuho Group. Please proceed with your questions.

Thanks for taking the questions. Congrats here on a good quarter. Maybe one, I'll start with on contact lenses and maybe talk a little bit about the sustainability of price in contact lenses and maybe the flip side of that question is on the manufacturing side. We're hearing that there are still constraints, I think for all of the suppliers. So maybe just talk a little bit about the manufacturing capacity just industry-wide and what needs to be done to get that leveled.

Well, I think, look, the sustainability of prices is a good question, and it will depend a lot on the consumer and what happens in the market. As of the last couple of years, much of it, well, I would say a significant part of the growth, let's say a third of the growth was coming from price in the market. And that's not different than the historical number. It's largely been mix and price, mix to dailies and then some price. But price used to be kind of 1% to 2% and probably more recently it's been 2% to 3% as part of that 6% kind of average growth, if I was kind of giving you a very broad strokes across the last several years. I think we'll see, as what we're really concerned about is not pricing out the consumer from trading up to dailies, because that's really where our principal interest is. From there, I think manufacturing, we're kind of unconstrained right now. We feel very good about our manufacturing capacity. We have plenty of room to make as much as we need. And if others are having a little bit of trouble making product, again that's I'm sure a short term problem for them, but we will certainly supply in an unconstrained fashion for the indefinite future.

And I have one quick follow-up on glaucoma.

Well, I think it's a great idea. I think the real question is whether or not reimbursement will come around it and be permanent in a way that is helpful to advancing that product. And again, we'll have to see at a practical level whether people want to go back in and replace these things over, I think going over this two or three years. But I'm sure those guys are smart guys, they'll figure it out. So we'll see over time, there are a lot of good ideas in that space. So if they blaze a trail there, we'll certainly be interested.

Thank you. Our next question is from the line of David Saxon with Needham & Company. Please proceed with your question.

Great. Good morning. Thanks for taking my question. Maybe one for Tim. So operating margin should be down around one point in the first half. That implies a fairly meaningful ramp into the second half. So, outside of higher cost inventory, what drives that ramp? And does that improvement continue into '25?

Yes, a great question. I mean the primary pressure point we're going to see in the first half is going to be that higher cost inventory that's bleeding through the P&L. So, you're absolutely right, that would carry forward. If you look at the second half run rate, as that sort of normalizes, we will have less gross margin pressure and we'll have all the benefit of that operating leverage. So that should carry forward into the future years. And again, our whole financial thesis is around growing faster than the market. And when you do that and maintain your cost envelope, you should get nice operating leverage, and that's what we would expect to happen.

Okay, great. Thank you. And then my follow-up is in ocular health. You talked about pricing, but would love to hear how much pricing benefit you saw specifically in ocular health. Is that kind of the primary driver of the Vision Care op margin performance, or are other factors driving that? And then in '24, where across the broader portfolio do you expect to take the most price? Thanks so much.

Yes. I mean, I think in terms of ocular health, I think it's probably fair to say about a third of the growth was price. I think you'll see a slightly less amount of that. I would suspect this year, I would think a little bit less than that, particularly in contact lenses, it's going to be achievable. But I would say, in terms of margin progression, it was broadly a number of things. Actually, a mix in ocular health helps us quite a little bit. Our eye drops are very profitable, and Systane is quite a big brand at this point. And when you think about Systane, it is a high margin eye drop that's over-the-counter that has really strong durability. So we expect that product to continue to contribute to ocular health and margins going forward. Then you layer on manufacturing productivity gains, of which there were significant amounts of that last year. And then the price, that obviously contributed to what was, I think, quite a substantial sector performance for us on a segment basis. So that was really part of the margin story there. And I think directionally, for next year, we see kind of similar, but probably not quite as strong of a price move.

Great. Thank you.

Our next question is from the line of Larry Biegelsen with Wells Fargo. Please proceed with your question.

Good morning. Thank you for taking my question. I have one for Tim regarding 2025 and one for David on AR-15512. Tim, can you confirm that the 1% margin pressure you mentioned refers to a decrease of 100 basis points year-over-year in the first half? I was unclear if that indicates a drop of 100 basis points compared to the second half or down 100 basis points year-over-year. I apologize for the confusion. Additionally, could you confirm that you remain confident in your long-term margin goal for 2025, aiming for operating margin guidance in the mid-20s, specifically in the 23% to 24% range? Also, do you anticipate that growth will accelerate next year with the launches of UNITY and AR-15512?

Yes, Larry, good clarification. The 100 basis points in the first half is down year-over-year. That's how you should interpret that. Once that inventory, which I consider a one-time phenomenon, flows through the P&L, the gross margins will continue to improve. Regarding Capital Markets Day, we held it in March of last year and provided some guidelines for 2027, which we feel very comfortable with. If you're referring to the 2021 Capital Markets Day and the mid-20s target we discussed, we mentioned approaching mid-20s in 2025. If you take the midpoint of this guide and adjust for the foreign exchange rates, we actually achieved it a year earlier. We report in U.S. dollars, so that's more of a theoretical credibility question. But yes, if translated, we would be a year ahead on that metric.

Larry, regarding UNITY and 512, I believe the significant financial impact for UNITY will be felt in 2025, and for 512, it will likely be in 2026. Keep in mind that we expect to receive approval this year. We will take some time for a limited launch to ensure its performance matches our current equipment. Following that, we will proceed to a broader release for revenue growth. I anticipate that UNITY will have a full release late this year, with revenue starting next year. For 512, we won’t submit until the middle of the year, meaning we’ll be looking at a year post-submission. Thus, we'll have access by the end of 2025, which impacts us in 2026. This is how to think about the timing of these developments. We emphasize these points now because we are confident in our pipeline and feel positive about our ability to achieve steady growth across a diverse portfolio.

That's helpful. David, I have a follow-up on 15512. What symptom showed improvement in the Phase 3 trials? Can you also discuss tolerability? From the Phase 2 paper, we heard that there was burning or stinging about 40% of the time. How do you think that will affect adoption? Thank you.

Yes. We'll see over time. But, I mean, like almost every eye drop in this space, there is some burning and stinging. The discontinuation rate, I think, was inconsequential, like 1% or 2%. So I don't think we read that as a major problem. But what I would say is that directionally, the primary endpoint was a non-anesthetized Schirmer strip of 10 millimeters or more, and we did very, very well on that, very significant; and that was day one and consistent at day 90. So very important in terms of onset and very important in terms of its ability to create through this trip M8 mechanism, natural tears. So not supplementing tears, but rather stimulating natural tear production. And if that's true, as we kind of work our way through all these data, that's a very exciting thing because this is, I think, kind of a very different idea than trying to help the body by supplementing it. This is actually working with the body to kind of create more tears. So we're excited about the mechanism.

Thank you.

Our next question is from the line of Brett Fishbin with KeyBanc Capital Markets. Please proceed with your question.

Hey guys. Thanks so much for taking the questions. Just wanted to start off with a quick follow-up on the revenue growth guidance. Understand Vision Care definitely looks positioned to lead the way in terms of growth for 2024. But just curious on how you see the overall Surgical segment progressing in context of the expected step-down in equipment? And if you think the rest of the segment can kind of like be an offset and have the broader segments trend toward the low end of the overall constant currency range.

Yes. Clearly, Surgical will lag behind Vision Care slightly next year, but not by much. It's in a good position with consumables, which is an overlooked aspect of our business. Consumables account for half of our revenue in Surgical and are growing very well. One surprising outcome for us this year was our share growth in equipment. We anticipated facing more competitive pressure than we actually did, but we've gained market share in our equipment both internationally and in the U.S. Additionally, we've introduced more equipment, such as ARGOS, our microscopes, and refractive equipment, all of which have performed strong this year. While that makes it challenging to see comparable growth, it creates opportunities for consumables to expand. If half of our business can grow well with consumables, we'll be in a good position. We also expect implantables to grow at or above market rates. Directionally, we anticipate equipment growth to be relatively flat year-on-year mainly due to comparisons and because we might see some market stall. This is similar to how consumers wait to buy a new car model; we expect some of that behavior to occur.

All right, makes a ton of sense. And then just one quick follow-up for me. I think the operating margin guidance looks like it's implying about 80 basis points of year-over-year expansion at the midpoint, and definitely appreciate the first half gross margin commentary. But just curious, on a full-year basis, if you think gross margins can generally trend in line with the previous year or if you're looking at that more as a full-year offset to the operating margin expansion? And thanks for taking the questions.

Yes, I would expect that we'll continue to get gross margin improvement in the second half of the year as we pass through that inventory. So, I would think about gross margins being relatively in line with what we saw last year. And then, you obviously see continued operating leverage throughout the year and that's what's driving the margin rate improvement for this year.

Our next question is from the line of Tom Stephan with Stifel. Please proceed with your question.

Great. Hey guys. Thanks for taking the questions. Maybe first one on the IOL business in China. David, can you level set us maybe on the 2023 base? And then just talk about the assumptions of the outlook for your China IOL sales in 2024, particularly, I guess, as we think about VBP this year? And then I have a follow-up.

Yes, Tom, let me provide some guidance on that. China is currently the second largest market for ATIOLs globally, about half the size of the United States in terms of volume, which I will refer to as units. We hold a single-digit market share there, which is quite low compared to other markets where our share typically ranges between 30% and 80%. You can choose a share percentage you prefer and apply it to the U.S. market to project future trends. While we usually refrain from providing specific product or country forecasts, I understand the interest in this area and we've been contemplating how to address it. Moving forward, I believe sales will be more concentrated in the latter part of this year and fully realized next year. As you may be aware, the formal indications should come in this next quarter, the second quarter, with most activities wrapping up by April, May, and possibly extending into June, followed by primary sales in the latter half of the year. That's the general pattern we expect.

Got it. That's helpful. And then my follow-up is just on Hydrus. I guess directionally David, can you discuss a bit how that product performed in 2023 and again directional expectations for 2024? Thanks.

We were pleased with Hydrus, particularly considering the discussions around reimbursement challenges. The reimbursement issues with some other products slowed down the market, making it a bit softer than we anticipated. However, we experienced solid growth with Hydrus and expect to continue gaining market share. We did increase our share in 2023 and plan to maintain that in 2024 within the MIGS market, which didn't grow as quickly as we hoped. Overall, we performed well. Currently, many people recognize that if someone requires a stent, Hydrus has some of the most compelling efficacy data available. There is an understanding that treating glaucoma is important to get ahead of it, and Hydrus offers the best chance for that. Additionally, the reduction in medication over time has positively impacted many patients. As we look ahead to 2024, we anticipate continued strong growth in the market.

Our next question is from the line of Issie Kirby with Redburn Partners. Please proceed with your questions.

Hi, thanks for taking my question everyone. I just wanted to touch on some of the market dynamics there. I noticed within your guide you see market sort of growing in line with historic levels, but I think the '23 you were talking to market sort of at or above. Is there anything you're seeing within your underlying markets, particularly in surgical that influenced this? And then related, would love to hear about some of the dynamics you're seeing in cataract surgery in the U.S. perhaps any color you could give us on the volumes in the fourth quarter and for '24? And then I have a follow-up on China.

Yes, mid-single digits are likely high for 2024 or 2023 due to comparisons. China and several other Asian markets are improving. We expected to see a better than historical growth rate in 2023, which we did. Moving forward, we anticipate a normalization, with typical U.S. market growth being around 2% to 3% internationally, possibly hitting 4% to 5%. This leads to an estimate of around 3% to 4% in the cataract market, which we have communicated. Regarding the vision care market, we also expect growth in the mid-single digits, reflecting historical rates, with slight acceleration mainly due to more aggressive pricing this year compared to previous years. Overall, we see this as very normalized growth. In cataract surgery, the U.S. market dynamics remain typical for us. Our consumables serve as a good indicator, and we experienced solid growth in that area. We know the U.S. unit growth was around 2% to 3%, and we believe that low-single digits is a reasonable estimate for the fourth quarter.

Okay. No, that's helpful. Thank you. And then just on China, I'd love to hear your thoughts on why you decided sort of participate and lean into the VBP this time around. What has changed in that market to make you interested in participating?

At the core, it's about the volume. Several years ago, we chose not to participate for two reasons. First, we had a strong position in the private market and were uncertain if the public market would engage with AT-IOLs. That's changed significantly, as about a third of that market is now public. Additionally, historically, entering VBP for the first time yields a favorable price, but the second round often results in a substantial cut, making it tough to absorb year-over-year. Most others who have experienced this advised us similarly. Our strategy was to navigate through the private market first and then assess the second round, which is precisely what we did. As a result, our pricing is better than our minimum prices globally. It's decent pricing—not exceptional, but reasonably aligned with European standards. We anticipate more sustainable growth with significant volume, as this is now a large market. Many factors have shifted since our initial decision not to engage, and we are pleased with the response to Vivity and PanOptix. There's considerable interest in China regarding what the best products worldwide can offer.

Great, that's helpful. Thank you.

Thank you. Our final question is from the line of a representative with HSBC. Please go ahead with your question.

Hi, thanks for squeezing me in and congrats on the results. And one question on China and one on the mix, please. In China, VBP as we understand, there'll be a monofocal and that's part of it. I would believe that you're more on the advanced part, but exactly which category do you think you would be taking a larger share? And would you then down the line consider any production onshore? And my second question relates to the mix. You had quite high equipment sales that came above estimates. And with UNITY, it will probably come higher. Will this have downward impact, downward weight on the margins on the surgical side?

So on China, on the VBP, we won all but the monofocal business. So I think there were eight categories. I think we've got seven of the eight and where we were there in the primary position. But they're all advanced technology lenses, it's Torics, it's Multifocals, it's Bifocals, it's extended depth of focus lens. So those are all our highest margin products. And so, yes, that will that's a positive. We are not looking at production at this moment. We're not looking at production in China. We have very strong production facilities in the U.S. and in Ireland for our AT-IOLs. And the scale that we have there is really important in terms of keeping our costs down. In terms of mix, the equipment will always have a downward mix for us because it is lower margin relative to the rest of our lines. But I wouldn't expect that to really hit this year. It would really be a 2025 impact to the extent that we convert to selling the new equipment. But the new equipment itself is not lower margin than our old equipment. It's just a matter of what the total equipment mix to the rest of our businesses. So keep that in mind. Our new equipment will be above the same margin as our old equipment.

Thank you. At this time, we've reached the end of the question-and-answer session. And I'll turn the call over to Dan Cravens for closing remarks.

Thanks everybody for joining us this morning. If you have any other questions from the analyst community, certainly reach out to Allen Trang and myself or reach out to our Comm people for media. Thanks again for joining. Thanks.

Thank you. This will conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.