Earnings Call Transcript - ALC Q1 2023

Operator, Operator

Greetings and welcome to the Alcon First Quarter 2023 Earnings Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce our hosts Dan Cravens, VP, Investor Relations. Thank you, sir. You may begin.

Dan Cravens, VP, Investor Relations

Welcome to Alcon's first quarter 2023 earnings conference call. Yesterday we issued a press release, an interim financial report, and posted a supplemental slide presentation on our website to enhance this 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 Finance 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. Important factors that could cause our actual results to differ from those in our forward-looking statements are included in Alcon's Form 20-F and our earnings press release and interim financial report on file with the Securities 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 an alternative 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 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 first quarter. After his remarks, Tim will discuss our performance and outlook for the remainder of the year. Then David will wrap up, and we will open the call for Q&A. With that, I will now turn the call over to our CEO, David Endicott.

David Endicott, CEO

Thanks Dan, and welcome to Alcon's first quarter 2023 earnings call. 2023 is off to a great start. We benefited from solid demand, strong commercial execution, and pricing improvements across both our franchises, which resulted in double-digit sales growth for the company in the quarter. In addition, we delivered a core operating margin of 20.6% and core diluted earnings of $0.70 per share. In surgical, we had another strong quarter despite challenging comparisons in South Korea. In implantables, recall that last year there was a change in PCIOL reimbursement in Korea, which increased demand during the first quarter. This change has made PCIOL out-of-pocket expense higher for many Korean patients, and as a result, local demand has since raised. If we exclude the impact from Korea, which we estimate to be approximately $47 million, total implantable sales were up roughly 5% on a reported basis and approximately 9% on a constant currency basis. More broadly, we have continued our ATIOL market leadership for another quarter with approximately half of the global market and two-thirds of the U.S. market despite increasing competitive activity. In Equipment, we continue to upgrade and expand our installed base with the CENTURION and LEGION devices. In the first quarter, our team delivered a record number of new phaco machine installations. Importantly, there remains a sizeable installed base of Legacy, Infiniti, Laureate, and other machines in international markets. Accordingly, we see continued opportunity for growth in 2023. Additionally, we continue to grow in Diagnostics and we're pleased with our win rate with the Argos Biometer. Argos helps deliver clinic to OR connectivity, and results from a real-world study highlight that Argos delivers significant time efficiencies for patients during cataract evaluation. We started rolling out Argos across international markets, and customer reception has been positive. Additionally, customers continue to be pleased with the performance of Centurion with Active Sentry, which enhances safety and confidence during surgery. Importantly, as we upgrade and expand our equipment in the installed base, we see a natural uplift in consumables, where we've also taken some select price increases. At the recent ASCRS conference, Alcon innovations were featured in approximately 180 abstracts across cataract, refractive, and glaucoma surgery, as well as visualization in ocular health. As a leader in the ophthalmic surgical space, we're committed to improving patient outcomes and surgeon efficiency by accelerating the pace of innovation. There are two important studies for the conference I thought I'd like to highlight. First is on Clarion. Data presented at the conference evaluated a head-to-head comparison of distance and intermediate vision of Clarion and a competitive monofocal plus IOL. This study concluded that Clarion provides excellent distance and no statistically significant difference in intermediate vision, potentially offering superior value to the competitive lens. At the conference, we also expanded our connected equipment ecosystem with the introduction of enhanced visualization and data integration. Diagnostic images from the Argos biometer with image guidance are now connected to the newly available NGENUITY 1.5 to precisely overlay incisions, Capsularexis, IOL centration, and toric alignment. Data presented at the conference shows that this integration is increasing efficiency and reducing manual errors. This helps surgeons work faster while improving their confidence in delivering better patient outcomes. Given the post-pandemic surgical backlog, these improvements are critically important. Lastly, data presented on our Hydrus Microstent reinforced that Hydrus offers long-term glaucoma medication reduction, as well as reduction of intraocular pressure. It's important as surgeons consider which stent to recommend to their patients. Now I'll move to Vision Care, where we had a strong quarter in both contact lenses and ocular health. In contact lenses, we're seeing the benefit of our expanded product portfolio, which now includes sphere, toric, and multifocal options for value, mainstream, and premium customers in both daily and reusable categories. We continue to see meaningful share gains driven by our new toric product launches, including Precision1, Total30, and Dailies Total1. We introduced Total30 for astigmatism in the first quarter. This is the first reusable lens with water gradient technology created specifically for astigmatic wearers, and initial customer response has been exceptional. Total30 toric is currently available in the U.S. and parts of Europe, and we anticipate expanding availability to additional markets throughout 2023. Turning to ocular health, we continue to integrate Aerie into the Alcon family. Our U.S. eye drop sales force has already added Rocklatan and Rhopressa to their promotional program, which contributed nicely to our Vision Care growth this quarter. In addition, we saw growth in our over-the-counter portfolio, mainly driven by favorable pricing and sustained family of products. Finally, in contact lens care, while we continue to navigate supply challenges, we feel increasingly confident about our progress towards resolution in the back half of the year. Now I'll provide an update on our end markets. In Surgical, global cataract procedures were up mid-single digits in the first quarter versus prior year. Global ATIOL penetration in the quarter was down 30 basis points versus prior year. However, excluding the impact from Korea, global penetration was up 90 basis points versus prior year and up 40 basis points sequentially. And we're following penetration trends closely and continue to expand programs that digitally and conveniently educate patients about their lens options early in the cataract journey. Based on recent survey data, we estimate that U.S. ATIOL penetration could go as high as 35%. So with current penetration in the high teens, we believe there's plenty of runway for value creation. Moving to contact lenses, retail market growth was up high single digits. In the quarter, we saw a steady wear trade-up and meaningful contribution from price increases. Now, before I pass it to Tim, I want to briefly comment on our market outlook for the remainder of the year. On our February earnings call, we indicated that we were planning for a modest slowdown in full-year market growth. During the first quarter, global ATIOL penetration was resilient, and contact lens trade-ups and price capture were both strong. Historically, our markets have grown around 5%. Given current macroeconomic news, we believe it's prudent to assume market growth at or slightly below historical rates in the back half of the year. However, we continue to expect positive contributions from market share and price, and as a result, we expect to grow faster than the market. With that, I'll turn it over to Tim, who will take you through our financial results and provide more color on our outlook.

Tim Stonesifer, CFO

Thanks, David. We're pleased to report first quarter sales of $2.3 billion, up 11% versus prior year. This growth was primarily driven by strong demand for our products, including products from acquisitions, as well as solid commercial execution. Additionally, our first quarter sales results reflect positive pricing across our business, particularly in consumables, contact lenses, and ocular health. Overall, we estimate that these price increases drove approximately one-third of our top-line growth. Our first quarter U.S. dollar sales growth included approximately 400 basis points of pressure from foreign currency. Starting with our surgical franchise, revenue was up 8% year-over-year to $1.3 billion. Implantable sales were $427 million in the quarter, down 3% year-over-year, primarily due to declines in PCIOL sales in South Korea, which David mentioned in his remarks. Excluding the impact from Korea, implantable sales continue to outpace the market and were up approximately 9% on a constant currency basis. We expect a minor residual impact from Korea of approximately $10 million in the second quarter due to the demand rebasing that David mentioned. In consumables, our first-quarter sales were up 13% to $656 million. This strong growth primarily reflects favorable market conditions as well as pricing. In equipment, sales of $221 million were up 14% year-over-year due to continued strong demand for cataract and Vit-Ret devices, particularly in international markets as we upgrade and expand our installed base. While our first-quarter results were strong, we expect our equipment year-over-year growth rate to moderate in the remainder of 2023. Turning to Vision Care, first-quarter sales of $1 billion were up 16%. This growth includes approximately 5 points of contribution from the ophthalmic pharmaceutical products we acquired in 2022. Contact lens sales were up 14% to $615 million in the quarter. This growth reflects the continued strength of our innovative portfolio of SiHy lenses. Importantly, we saw double-digit growth in both the daily and reusable contact lens categories. As I mentioned earlier, first-quarter contact lens growth also reflects price increases. In ocular health, first-quarter sales of $414 million were up 19% year-over-year. This growth was primarily driven by our portfolio of eye drops, including Rocklatan and Rhopressa, as well as price increases across our over-the-counter products, including Systane and Pataday. Now moving down the income statement. First-quarter core gross margin was 63.4%, up 160 basis points on a constant currency basis. This growth was driven by higher sales and manufacturing efficiencies from higher volumes, partially offset by unfavorable product mix from lower PCIOL sales in Korea. We expect gross margin to be pressured in the remainder of 2023 as we sell inventory that was manufactured with a higher cost base due to inflation and as we lap last year's price increases. Core operating margin was 20.6%, flat versus last year on a U.S. dollar basis, but up 130 basis points on a constant currency basis. The constant currency growth was mainly driven by higher gross margin and improved underlying operating leverage from higher sales, partially offset by higher investment in R&D following the acquisition of Aerie. As we commented on in the past, we expect to see seasonally higher marketing and sales spend in the second and third quarters for the peak summer and back-to-school season. First-quarter interest expense was $47 million compared to $29 million last year, driven by higher debt following the funding of the Aerie acquisition and less favorable interest rates. The first quarter core effective tax rate was 18.4% compared to 15.9% last year, primarily due to the mix of pretax income across tax jurisdictions and a decrease in the tax benefit associated with discrete items. Core diluted earnings per share were $0.70 in the quarter, up 14% from last year on a constant currency basis. Before I touch on our outlook for the remainder of the year, I'll discuss a few cash flow and other related items. Free cash flow for the quarter was an outflow of $19 million compared to an outflow of $52 million last year. The improvement is mainly driven by better cash flows from operations and lower capital expenditures. Similar to past years, we expect free cash flow to be stronger in the remainder of the year as the first quarter includes the annual associate incentive payment. Additionally, we paid the legal settlement we mentioned on our last earnings call in April. On a full-year basis, we continue to expect to generate more free cash flow this year compared to 2022. Transformation costs were $26 million in the quarter and $314 million to date. We continue to expect to wrap up the entire transformation program by the end of the year. Before moving to our outlook, I'm pleased to report that at our Annual General Meeting last week, shareholders approved the dividend of CHF 0.21 per share, in line with our payout policy of approximately 10% of the previous year's core net income. I want to thank our shareholders for their continued support of Alcon. Now moving to the 2023 guidance. Our current outlook assumes that markets grow at or slightly below historical averages in the back half of the year. Exchange rates as of mid-April hold through year-end, and inflation and supply chain challenges continue through 2023. Based on the strong momentum in the business, we are increasing our year-over-year constant currency sales growth guidance to 7% to 9%. This growth is partially offset by incremental FX headwinds based on currency movements against the dollar, which we expect to pressure sales by approximately 70 basis points versus prior year. As a result, we are maintaining our U.S. dollar net sales guidance for 2023 at $9.2 billion to $9.4 billion. Moving to core operating margin, we are maintaining the range of our full-year outlook of 19.5% to 20.5%. We now expect interest and other financial expense to be between $245 million and $255 million. Relative to the first quarter, we expect an increase in other financial expense primarily due to higher hedging costs and lower financial income. We are maintaining our core effective tax rate guidance of 17% to 19%. Finally, we're raising our core diluted EPS constant currency growth outlook to 20% to 24% due to the strong performance in the first quarter. This growth is offset by approximately $0.12 of FX headwind versus prior year. As a result, we are maintaining our core diluted EPS guidance of $2.55 to $2.65 per share. Based on our strong first quarter results and current assumptions, we are now trending toward the high end of our guided EPS range. To summarize, I'm very pleased with the momentum we've built at the start of the year, and it's clear that our business is performing well. As we look forward, we will continue to focus our efforts on driving innovation and delivering above-market sales growth.

David Endicott, CEO

Thanks, Tim. To wrap up, we're very pleased with our start to the year. We continue to build momentum with our new product launches, and our team continues to execute well. As a result, we're winning with customers and driving above-market growth. We also continue to deliver operating leverage in line with our financial thesis. So looking forward, our focus remains on accelerating innovation, driving top-line growth, and creating shareholder value. With that, operator, let's open the call up for Q&A.

Operator, Operator

Our first question comes from Anthony Petrone with Mizuho Group. Please go ahead.

Anthony Petrone, Analyst

Thanks, and congrats on a strong start to the year here. I'll have two questions here. The first will be just, Dave, maybe just a little bit on the premium IOL comments. Your competitor reported earlier a couple of weeks ago some pressure that they commented on in the premium IOL space here when we exclude South Korea plus 9 is ahead of our expectation. So maybe specifically, can you comment on the share dynamics within premium IOLs and then maybe a little bit of a compare and contrast as to what Alcon saw in the marketplace versus competitor? And I'll have one quick follow-up.

David Endicott, CEO

Yes, Anthony, thanks. On the premium market, we follow penetration pretty closely. And as I think I said in the notes there, we were up 90 basis points if you exclude Korea, so 11.5% to 12.3% globally. And sequentially, we saw good moves sequentially, again, 40 basis points of penetration up when you exclude Korea again. Now, that said, there's lots going on in the market; there are a number of share players moving around. We've obviously finished very strong with kind of the majority of the ATIOL business and kind of a two-thirds, if you will, of the PCI business. But notwithstanding that, we felt like we had a pretty good quarter. I think the Korea thing is a bit confounding and you do need to back it out. So I think that will clean itself up in the third quarter. So you get some pretty clean looks going forward, third, fourth quarter.

Anthony Petrone, Analyst

That's helpful. And then maybe one for Tim, just on margins, and I'll get back in queue. The 20.6% ahead of expectations. Just to clarify there; was there any selling day impact there? And then when we look at the bridge heading into year-end, 20.6% in the quarter versus the range, maybe just a little bit on the cadence for the next three quarters on how margins should play out. Again, congratulations.

Tim Stonesifer, CFO

Thank you. I don't believe there's a comparison issue regarding billing. In terms of revenue phasing, I see the year starting with revenue being a bit noisy in Q1 due to the Korea comparison issue and the impact from Omicron in North America. Therefore, I suggest taking the expected revenue between the $9.2 billion and $9.4 billion range, excluding Q1 revenue, and then projecting it similarly to last year's trend. Regarding gross margin, we were satisfied with the results this quarter, seeing some nice expansion, which benefited from lower-cost inventory and some price lapping. As mentioned last quarter, we anticipated a slight improvement in gross margin for the year, so consider that when estimating your figures. For R&D, we ended Q1 at 8.5%, and as noted previously, we expect to be at the higher end of the 7% to 9% range. Keep this in mind as well. Additionally, Q2 and Q3 typically see higher expenses as we invest in back-to-school initiatives, so factor that into your projections. Lastly, we did reduce overall interest expense, and Q1 was somewhat favorable, so consider the range between $2.45 and $2.55, excluding Q1, and distribute that to phase through the year.

Anthony Petrone, Analyst

Thank you much.

Operator, Operator

Our next question comes from Matthew Mishan with KeyBanc Capital Markets. Please go ahead.

Matthew Mishan, Analyst

Good morning, and thank you for your questions. Regarding the contact lens segment, I’m finding it challenging to grasp the disparity between the performance in the fourth quarter and the first quarter, particularly in relation to consumer behavior. Do you have any insights into what influenced purchasing activity three months ago and whether this quarter shows any regional changes, perhaps outside the U.S.?

David Endicott, CEO

Matthew, I'm happy to share what we know. We're very satisfied with our fourth-quarter performance. While there were concerns about unit volumes in the U.S., I believe those concerns were not justified. It's important to remember that a significant portion of value in the contact lens market comes from the shift to daily lenses, and we saw strong market activity in the fourth quarter. Our performance was solid, and we were operating effectively in the first quarter as well, noticing a steady shift towards daily lenses from consumers, particularly with volume growth for us. We believe we increased our volume share faster than our competitors and raised prices slightly to manage some of our input costs amidst wider market price increases. Thus, I anticipate that everyone's results will likely surpass the audited figures. It's also important to note that audited data reflects retail rather than factory figures, and there can be delays in interpreting that information, leading to some discrepancies. Overall, we had a positive fourth quarter and a strong first quarter, and I'm especially pleased with the strong uptake of Total 30 toric lenses in the U.S. contact lens market this quarter.

Matthew Mishan, Analyst

When discussing inventory and the transition from low-cost to high-cost inventory in the Vision Care and surgical segments, how many months of inventory do you usually maintain? This would help us understand when the inventory drag might subside.

Tim Stonesifer, CFO

Yes. I would say, in general, from a total company perspective, it probably takes five or six months for the inventory to go off the balance sheet into the P&L.

Operator, Operator

Our next question comes from Jeff Johnson with Baird. Please go ahead.

Jeff Johnson, Analyst

Thank you. Good morning, guys. Maybe two questions on contact lenses and on pricing. So Tim, you've said now a couple of times lapping some price increases from last year. But I think on this call, you've been as overt as I've heard you in a long time on price probably added almost 3 points to the company-wide that you were getting pricing across contact lenses, ocular health and on the consumable side in surgical. So it sounds like some new price increases have gone in just in this quarter, we clearly heard that in contact lenses, especially. But I'm just trying to reconcile that with you talking about lapping these price increases. So help us understand kind of the gating of price increases over the next 12 months versus what maybe you saw over the past 12 months.

Tim Stonesifer, CFO

Certainly. Let me address that, Jeff. The price increase we are referring to was implemented last year around December or January. This means for about six weeks of the quarter, specifically in January and part of February, we had two price increases in effect at the same time. This is what we mean by "lapping." This situation is not expected to happen again unless we decide to raise prices again, which we currently do not have plans for. Moving forward, we aim to be sensitive to consumer needs while also covering our increased raw material and input costs, which have risen significantly. Overall, we feel confident in our capacity to adjust prices during this time. The market has also adjusted prices, and we closely aligned with market trends, which means we’ve been in line with expectations from both sides. We were pleased with how receptive our customers were. Historically, we've discussed price leakage, but this time we performed better than what was expected. It seems that consumers are more understanding of the reasons behind our price increases, which benefited us this quarter.

Jeff Johnson, Analyst

Understood. Does the 3% price increase you mentioned in your prepared remarks indicate that there will be an additional 2% price growth for the rest of the year as some of these increases take effect? Also, when discussing volume growth in contact lenses that exceeds market performance, is this driven by an increasing market share, or are we starting to see a faster trade-up trend within your existing customer base that is contributing to these volumes? Please clarify the balance between the trade-up dynamics and market share for this quarter. Thank you.

Tim Stonesifer, CFO

Yes. We had a very good performance in the second quarter, mainly due to share gain. We did experience some trade-up within our own business, and there might be a bit of cannibalization, but overall, we were very pleased with the amount of share gain for the quarter. So, I would interpret this as volume being primarily driven by share gain. Regarding pricing for the rest of the year, I expect it to stabilize somewhat from the first quarter due to the previous year’s comparisons, and we anticipate some price changes throughout the year, but it will likely moderate towards the end.

Operator, Operator

Our next question comes from Ryan Zimmerman with BTIG. Please go ahead.

Ryan Zimmerman, Analyst

Hi, guys. Congrats on the quarter. Just two for me. Just Dave, you had previously, I think, on the fourth quarter call, assuming that cataracts would be weaker in the first quarter, yet the market does appear to be stable net of Korea. Is there anything to suggest that demand pulled forward here? And just how do we think about cataract demand or market volumes for the remainder of the year given this dynamic relative to your assumptions?

David Endicott, CEO

Well, Ryan, I think what we believe, and I hope I communicated in the first quarter, was that cataract volumes are generally pretty stable, even in a recession kind of environment, we still see the cataract volumes. What we've said is that implantables, the trade-up from a monofocal to an ATIOL, we've never seen that in a kind of a heavy recession environment. So we were unclear as to what was going to happen. And again, we made some assumptions. None of that really occurred in the first quarter. So volumes were very stable, and trade-ups looked pretty much consistent with what we've seen in the past. So directionally, I would expect cataract volumes to stay pretty stable. The only thing I would think about is if there is a real pullback in the consumer does it have an effect on ATIOLs. We really don't know that, and we really haven't forecasted much of one. So I think we feel pretty good about the positive forward momentum that we have in penetration. And I think as we kind of get beyond Korea this next quarter, maybe two quarters away, you'll really get a cleaner view on the back half of what's happening with both of those things. But I think a reasonable assumption, I think, at this point is the cataract market will remain in that kind of 4% to 5% range, kind of that's typically what we've seen historically, and we've always said it would be a little hotter after COVID because we get a little bit more folks back into the market. So it feels pretty much like that now.

Ryan Zimmerman, Analyst

Okay. And then real quick for me. The 7% to 9% underlying growth assumption, Aerie did, by my math, 470 basis points, roughly 500 basis points. If I take that forward, I'm kind of coming out to about 180 basis points to 200 basis points for the year. Tim, does that jive with kind of your thinking? Or do you expect some bare contributions from Aerie in the back half of the year? Thanks, guys.

Tim Stonesifer, CFO

No, I think it will be pretty consistent with how we guided on the last call. It's about 2 points of growth.

Operator, Operator

Our next question comes from Veronica Dubajova with Citi. Please go ahead.

Veronika Dubajova, Analyst

Hi, guys. Good afternoon. And thank you for taking my questions. Let me start with just a bigger picture for the full year. Obviously, lots of moving parts in the business, David, that if I extrapolate the growth rate that you've delivered over the year, the comp fees you're guiding for a deceleration in spite of that, other than the market commentary that you've made about the back half of the year, anything else that's worrying you as you think about the remainder of the year? Or is this just being a bit conservative? And then I have a follow-up after that.

David Endicott, CEO

Yes, Veronika, the comparisons are a bit easier in the first quarter, so you should expect somewhat higher results. Last year, China and Japan faced challenges, and our Asia business was affected, along with some ongoing coronavirus issues in certain western markets. Therefore, the first quarter is likely to perform better than the others. However, we aren't making any forecasts beyond our belief that we should be cautious and prudent regarding the second half of the year. That's the approach we're taking. We could be mistaken in our assessment, and if so, we might reach the upper end of our guidance. On the other hand, we believe this is the right method for budgeting, and we will navigate through the year and provide updates each quarter. That's our perspective on this year's outlook. I'm not sure if that completely answers your question, but that's our current thinking.

Veronika Dubajova, Analyst

Yes. No, no, no, that's really helpful. And then my second question was just on the consumables. And pricing specifically, it's a very impressive double-digit growth rate against a market that's growing mid-single digits. How broad-based have the pricing increases been that you've been able to put through? And do you expect for those to act through the remainder of the year? And that's it for me. Thanks, guys.

David Endicott, CEO

Yes, Veronica, we are very pleased with our consumables business. It's reasonable to say that our strong equipment revenue over the past several years is now contributing to an increase in consumable sales. We have expanded our presence globally, which is certainly benefiting our consumables segment. The price aspect is relatively modest; while we haven't made significant changes historically, about one-third of our consumables are sold separately without a contract. In those instances, we've been able to increase prices. As we review contracts that are a few years old or lack price escalation clauses, we've started making adjustments, particularly last year when inflation surged. As these contracts have reached maturity, we’ve been able to include some price increases. Consequently, consumables have seen a slight uptick. Though we do face some downward pressure, especially with government constraints, we've managed to establish a reasonable price expectation that should hold for the rest of the year. Our primary focus remains on the strong demand for consumables, which is supported by an excellent international performance in Equipment and steady growth overall. The U.S. had its best year ever last year and continues to perform well. We are experiencing significant success in Equipment, which consequently boosts our consumables.

Operator, Operator

Our next question comes from Larry Biegelsen with Wells Fargo. Please go ahead.

Larry Biegelsen, Analyst

Good morning. Thanks for taking the questions. And congrats on a really nice quarter here. Could I just clarify the price of one-third of your growth? Is that to be 11% constant currency or one-third of the 7% reported?

David Endicott, CEO

That would be the reported number.

Larry Biegelsen, Analyst

So one-third of the reported. Okay. And then we saw you got PRECISION 7 approved, David. Just curious what the launch plan is there. At the Analysts Meeting, you said you still had some work to do, but it looks like approval may have come earlier. So how are you thinking about the launch of Precision 7? I had one follow-up.

David Endicott, CEO

We are not yet ready to launch PRECISION 7. We have an inventory build to complete, and we also want to give our sales team the time to promote what may be sensitive products. Therefore, we will time and position this launch very carefully. We expect to have more updates later this year. Right now, we will not release the product immediately as we prepare our inventory, which will take some time. However, I want to mention that the first quarter showed positive results for Total 30 and Total 30 toric, as well as our toric products in general. We want to ensure we maximize the focus on those products since they belong to large, profitable markets that we understand well. As we refine our plans for PRECISION 7, we will share those plans with you. At this moment, we are pleased with the momentum of our existing products in the market.

Larry Biegelsen, Analyst

That's helpful. And David, you guys gave a lot of helpful numbers on this call. Sometimes it gets a little confusing. So I want to make sure I've heard this correctly, the ATIOL share in the U.S., I think that's where you said it was about two-thirds or 66% in your prepared remarks. That's down from over 80% a couple of quarters ago if I'm comparing apples-to-apples. So what's going on there? And do you feel like the share has stabilized? Thanks.

David Endicott, CEO

No. You misread that just a little bit. The 80% plus refers to PCIOL share, which is a part of ATIOL. Remember, ATIOL includes both toric lenses and PCIOL that are the correcting lenses. That number is down slightly, but it's mainly because we were over-indexed in Korea and under-indexed in China. Korea saw a significant decline, while China had an increase. So I wouldn't put too much emphasis on any specific share movement at this time.

Operator, Operator

Our next question comes from David Adlington with JPMorgan. Please go ahead.

David Adlington, Analyst

Hi, everyone. I appreciate the opportunity to ask a question. Regarding the SG&A expectations for the second and third quarters, there typically is an increase during those periods. Should we anticipate a rise greater than what we've experienced in previous years? Additionally, concerning foreign exchange, I'm starting to notice that you might be facing a more significant headwind now, as the dollar appears to have weakened against most currencies. Thank you.

Tim Stonesifer, CFO

Yes, the increase in SG&A will closely mirror what we've observed in previous years. I suggest using those same trends for forecasting. Regarding foreign exchange, many focus on the DXY and Bloomberg metrics, but our currency baskets differ. We are indeed noticing a strengthening of the U.S. dollar, especially against the Australian dollar, Japanese yen, and Russian ruble. Therefore, when examining our currency mix, we are experiencing some foreign exchange pressure.

Operator, Operator

Our next question comes from Graham Doyle with UBS. Please go ahead.

Graham Doyle, Analyst

Good afternoon, guys. Thanks for taking my questions. Just two from me. Firstly, just on contact lenses. It does look like you're taking meaningfully more share than maybe you have done in the last few quarters. And it seems to coincide with, I suppose, a broader international launch of a broader range of products. So I suppose, is this something we should get used to? Is the question on that? And then with regard to guidance, I mean, you've talked again about a sort of recessionary pressure or just the idea that you want to be slightly cautious in the second half just to make sure that you've got guidance in the right place. I suppose the flip side of that is if there is no pressure or no recession, is it fair to say there's upside to the current guidance then? Thank you.

David Endicott, CEO

Yes, Graham, you're interpreting it correctly. If we're mistaken, we acknowledge that we could be. We don't have definitive insights on when a recession might occur. However, if it does take place, I believe we'll be at the upper end of our revenue expectations. We've been cautious and strategic in our approach, and we'll continue to adjust our projections as needed while providing updates each quarter throughout the year. I remain hopeful that the situation globally is more stable than what's often indicated. Regarding our contact lens market share, we had a strong quarter. This success is likely due to an increased variety of products and their natural progression over time. After launching new products, it takes time to distribute samples, fit sets, and instill confidence in users. The introduction of toric products has also been beneficial, as combining toric and spherical lenses can create a positive perception among optometrists, allowing them to use a single brand for a majority of their patients. The first quarter's performance was excellent in this regard. We will do everything possible to maintain this momentum, but we'll need to observe how things develop moving forward.

Graham Doyle, Analyst

Could you provide an update on how this situation is affecting margins? Is it becoming easier to see some operational efficiency as contact lens sales grow? Are you experiencing a level of utilization that benefits you, and are contact lenses contributing positively or at least neutrally to overall gross margins?

David Endicott, CEO

Well, I think Tim should also share his thoughts on this. Directionally, I would say that as volumes increase, we tend to add more production lines, and they develop at different rates. For instance, some lines we introduced years ago are now operating at full capacity, achieving good pricing at terminal value. Meanwhile, we continue to add more lines, which results in a blended cost of goods that doesn't fully mature until everything stabilizes. Therefore, growth tends to be gradual in the later years. We are seeing substantial positive growth quickly, and we are very confident in our ability to achieve long-term operational efficiency on these lines, particularly based on our experiences with the lines we implemented a few years back. We believe our terminal values are accurate, and we expect to see steady growth in the TPC margin, which is a useful way to frame our expectations. Tim, do you have any additional comments?

Tim Stonesifer, CFO

Yes. No, that's right. If you go back to the Capital Markets Day, that margin expansion chart that we showed by franchise, what we saw historically was gross margin pressure, but you were getting leverage on the SG&A, then you sort of had less pressure on the gross margins. What we're seeing now and would expect to continue to see is you get continued gross margin expansion as these lines become more mature and end up running at their optimal capacity.

Operator, Operator

While we're waiting, Larry, I want to clarify that I misspoke regarding price growth; it is on a constant currency basis. Apologies for that.

Dan Cravens, VP, Investor Relations

Operator, we can take Steven Lichtman from Oppenheimer.

Steve Lichtman, Analyst

Thank you. Good morning, guys. Just two questions as follow-ups. One, you mentioned the comps in the first quarter. Obviously, it's been tricky to evaluate comps over the last few years. How much do you think comps played a part in the first quarter and were there one or two segments that perhaps had a different impact than the rest of the business? And then secondly, it seems like China is seeing a pickup. Wondering if you could talk about how that country is doing for you across your key segments.

David Endicott, CEO

Yes, Steve, we noticed that Asia, particularly, was impacted last year and was slow to recover, but it has improved in the first quarter. This has had a positive effect, and I believe it's been beneficial for everyone in the industry. China contributes about 5% to 6% of our revenue, and we've seen better performance there than anticipated. Japan also performed well, exceeding our expectations. Overall, both markets have shown a stronger response than we had forecasted. However, in terms of other factors, we had anticipated most of the impacts correctly, and we expect those to change modestly year-on-year.

Steve Lichtman, Analyst

Got it. Thank you.

Operator, Operator

There are no further questions at this time. I would like to turn the floor back over to Dan Cravens for closing comments.

Dan Cravens, VP, Investor Relations

Great. Well, thanks, everybody, for joining us this morning. If you have any follow-up questions, please don't hesitate to reach out to either Allen Trang or myself in IR. Have a great rest of your day. Appreciate the time.

David Endicott, CEO

Thanks, everyone.

Operator, Operator

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.