Staar Surgical Co Q3 FY2022 Earnings Call

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the STAAR Surgical Third Quarter Financial Results Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the call will be open for questions. We will have approximately 45 minutes for today’s call. This call is being recorded today, Wednesday, November 2, 2022. At this time, I would like to turn the conference over to Mr. Brian Moore, Vice President, Investor, Media Relations, and Corporate Development at STAAR Surgical. Please proceed.

Thank you, operator, and good afternoon everyone. Thank you for joining us on the STAAR Surgical conference call this afternoon to discuss the company’s financial results for the third quarter ended September 30, 2022. On the call today are Caren Mason, President and Chief Executive Officer; and Patrick Williams, Chief Financial Officer. The press release of our third quarter results was issued just after 4:00 p.m. Eastern Time and is now available on STAAR’s website. Before we begin, let me quickly remind you that during the course of this conference call, the company will make forward-looking statements. We caution you that any statement that is not a statement of historical fact is a forward-looking statement. This includes remarks about the company’s projections, expectations, plans, beliefs and prospects. These statements are based on judgment and analysis as of the date of this conference call and are subject to numerous important risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. The risks and uncertainties associated with the forward-looking statements made in this conference call and webcast are described in the Safe Harbor statement in today’s press release as well as STAAR’s public periodic filings with the SEC. Except as required by law, STAAR assumes no obligation to update these forward-looking statements to reflect future events or actual outcomes and does not intend to do so. In addition, to supplement the GAAP numbers, we have provided non-GAAP adjusted net income and adjusted earnings per share and sales in constant currency. We believe that these non-GAAP numbers provide meaningful supplemental information and are helpful in assessing our historical and future performance. A table reconciling the GAAP information to the non-GAAP information is included in today’s press release. Following our prepared remarks, we will open the line to questions from publishing analysts. We ask analysts to limit themselves to two initial questions, then re-queue with any follow-ups. We thank everyone in advance for their cooperation with this process. And with that, I would now like to turn the call over to Caren Mason, President and CEO of STAAR.

Thank you, Brian. Good afternoon, everyone, and thank you for joining us on today’s call. STAAR achieved 30% net sales growth in the third quarter, which reflects strong EVO ICL unit growth in APAC and strong accelerating growth in the U.S. despite constant currency challenges and macroeconomic headwinds in Europe. In the third quarter, global ICL unit growth was up 40% year-over-year. We advanced our patient awareness, engagement and market building initiatives for EVO in the U.S. during and subsequent to the third quarter, highlighted by media campaigns featuring global entertainment celebrity Joe Jonas and NBA player Max Strus. We introduced our presbyopia lens EVO Viva to surgeons at our experts meeting preceding the Annual Congress of the European Society of Cataract and Refractive Surgeons. In China, we concluded another successful peak busy season that put EVO on track to exceed a 25% share of the refractive surgery market units by year end. However, due to tighter COVID restrictions in China, we expect delayed demand in the fourth quarter. Ongoing headwinds in Europe, weakness in the yen and euro, and lower other product sales means we now anticipate total net sales will be approximately $285 million for fiscal 2022, which represents $300 million adjusted for constant currency. Our fiscal 2022 outlook includes ICL sales of approximately $272 million representing 28% year-over-year growth and other product sales of approximately $13 million. It is vital that STAAR focuses on the significant growth opportunities we have with our premium EVO products. Our low-margin other products business, which represents approximately 5% of sales, has faced increasing supply chain challenges. Because of these challenges, we will no longer be able to support other products as we have historically, though we will continue to support customers through the end of 2023. Looking to fiscal 2023, despite the challenges, we expect approximately 30% ICL sales growth year-over-year to approximately $355 million in total company net sales, which anticipates limited sales from other products. We see tremendous growth potential for our EVO family of lenses globally and look forward to continuing our focus, efforts, and resources on large growth opportunities in the U.S. and Asia in 2023. In the third quarter, global ICL unit growth was up 40% year-over-year, with strong unit growth observed in China, the United States, Japan, South Korea, and APAC distributor markets. In the U.S., we are pleased with our progress in advancing the adoption of EVO lenses through patient awareness and surgeon engagement. After our August partnership announcement with Joe Jonas, we launched EVO brand advertising featuring him in the U.S. on September 26. The campaign included targeted advertising to our core 21 to 35-year-old target demographic across various platforms. Last month, we announced our partnership with NBA player Max Strus, who had EVO lenses implanted and is thrilled with his new vision. We believe our ambassadors will continue to build momentum for EVO’s success in the U.S. YouTube is the second most popular search engine for our target audience. We launched our EVO ICL educational series on YouTube, which has expanded to 8 videos, covering Joe and Max’s decision to choose EVO. The channel is approaching 6 million video views. Moving forward, we will continue to partner with new ambassadors, as we have seen that earlier partnerships have helped expand our engagement with potential patients. We are engaging with U.S. refractive surgeons to increase education on our lens, aiming for a transition to lens-based solutions. As of today, we have trained and certified over 550 U.S. surgeons on EVO since FDA approval approximately 7 months ago, and we are on track to exceed our goal of training and certifying 600 U.S. surgeons in 2022. We measure various metrics for surgeon and patient engagement. Our U.S. commercial organization and STAAR management are diligently working to assist patients in their journey for visual freedom and to help surgeons provide the EVO lens-based solution to appropriate patients. We are focused on transforming the refractive industry for qualified patients to an EVO lens-based industry. We are pleased to report accelerating unit growth in the U.S., which was up 63% year-over-year in the third quarter, up from 36% in Q2. We anticipate unit growth in the U.S. will further accelerate in the fourth quarter to approximately 100%. Innovation and strengthening our business remains a strategic imperative for STAAR. This includes potential expansion and enhancements of our EVO lenses to new indications and the execution of R&D, clinical and regulatory pathways for our existing and next-gen products. For fiscal 2023, we expect a strong trajectory of growth for EVO ICL and continued market share gains.

Thank you, Caren, and good afternoon everyone. Total net sales for Q3 2022 were $76 million, up 30% compared to $58.4 million in Q3 2021. This increase is attributed to a 33% rise in ICL sales, which made up 95% of total net sales in the quarter. Sequentially, Q3 2022 sales were down 6% from Q2 2022, similar to last year’s step-down in sales from Q2 to Q3. The reported net sales in Q3 included an approximate $4 million negative currency impact compared to the prior year due to changes in constant currency, primarily the Japanese yen and the euro. In constant currency, Q3 2022 net sales would have been approximately $80 million, a 37% increase year-over-year. For the nine months ended September 30, 2022, reported net sales includes a $9 million negative impact from currency changes as outlined in the earnings release. We anticipate approximately $65 million in net sales for Q4 2022, which factors in tighter COVID restrictions in certain Chinese cities, a delay in demand, ongoing headwinds in Europe, and lower other product sales. For Q3, gross profit was $60.5 million or 79.5% of net sales as compared to $45.3 million or 77.6% of net sales in Q3 2021. The increase in gross margin is primarily due to geographic and product mix, while also factoring in increased manufacturing costs. For Q4, we now expect gross margin to be approximately 80% of net sales. Moving down the income statement, total operating expenses for Q3 2022 were $46.8 million compared to $37.5 million in Q3 2021. G&A expense was $14 million in Q3 2022, an increase from $11 million in Q3 2021 and comparable to Q2. The increase in G&A is attributable to rising compensation-related costs and facility expenses. We expect G&A expense to be approximately $15 million for Q4 2022. Selling and marketing expenses were $23.1 million, up from $18.2 million in Q3 2021. This increase is due to higher costs associated with tradeshows and sales meetings, travel expenses, and promotional activities. We expect selling and marketing expense as a percentage of sales to be about 35% to 40% for Q4 2022. R&D expense was $9.6 million for Q3 2022, compared to $8.3 million in Q3 2021. This year-over-year increase is associated with rising compensation-related expenses and increased clinical trial expenses. Our operating income for Q3 2022 was $13.7 million or 18% of net sales compared to $7.8 million or 13.4% of net sales for Q3 2021. We forecast operating margin for fiscal year 2022 to be around 15%. Our team is proud of our ability to drive high sales growth while expanding profitability. For Q3 2022, the net income was $10.3 million or $0.21 per diluted share, in comparison to net income of $6 million or $0.12 per diluted share for Q3 2021. On a non-GAAP basis, adjusted net income was $18.1 million or $0.37 per diluted share, compared to $10.3 million or $0.21 per diluted share for Q3 2021. A table reconciling GAAP to non-GAAP information is included in today’s financial release. We expect our Q4 effective tax rate to be approximately 20%, subject to no changes in our valuation allowance. As for our balance sheet, we implemented an investment policy to preserve capital, which involved shifting a portion of our cash to high-quality U.S. treasuries and commercial paper. This shift resulted in increased interest income in Q3 2022, with cash and cash equivalents totaling $224.7 million as of September 30, 2022. We generated $24.1 million in cash from operations and invested $6.3 million in property and equipment. We remain on track to invest approximately $20 million in CapEx to support manufacturing capacity expansion for the full year of fiscal 2022. We anticipate generating positive cash from operations in Q4 2022 and ending the year with a higher cash balance. Considering the foreign exchange headwinds, we previously estimated a $15 million negative impact on full-year fiscal 2022 net sales. Normalizing for these FX headwinds results in constant currency net sales of about $300 million. For fiscal 2023, we believe we can achieve ICL net sales growth of approximately 30% year-over-year, despite the ongoing macroeconomic environment in Europe.

Absolutely. Our first question today comes from the line of Anthony Petrone with Mizuho Group. Anthony, your line is now open.

Thanks. And I hope everyone is doing well. I will keep my two questions to the Q4 implied outlook as well as some of the statistics that were thrown out there for 2023. So when we look at the implied ICL guide for Q4, it looks like $63 million to $64 million is implied, and several headwinds were called out—currency delays in China shipments. Could you provide a little more color on how those headwinds are broken out? In terms of the implied U.S. outlook, you called out 100% growth in units, but we are missing how we should translate that into dollars. And I’ll have one quick follow-up on 2023.

Yes, this is Patrick. To answer your question, what we discussed and what you described is generally in the right direction. We guided to $65 million with very little contribution from other products, which is our IOL legacy business. And I did highlight in my prepared comments that we saw about $5 million in delayed revenue due to tighter COVID lockdowns in China, a couple of million dollars related to European macroeconomic factors, $1.5 million on FX, and another $1.5 million related to IOL. We tried to provide transparency as best we could.

And for my follow-up, for '23 at $355 million, predominantly ICL, it suggests healthy growth year-over-year. Can you provide more color geographically on what is anticipated in China growth, assuming lingering headwinds from COVID into '23? Additionally, what should we expect from other geographies, especially the U.S. and Europe?

Hi, Anthony. I’m happy to be with you today. Regarding 2023, we believe that growth in China will exceed the 30% range on a unit basis. Delayed demand primarily relates to perceptions about COVID and government actions following the recent election. Our major customers, hospitals and clinics, are looking forward to 2023. There’s a belief, which hasn’t been validated officially yet, that COVID lockdown principles may change for the better. Overall, we expect strong demand next year. In the U.S., we expect growth to be above this year’s figures in terms of percentage. We anticipate that the U.S. market will perform similarly to China in about 18 months regarding market share. Europe’s recovery seems less certain due to the recession, but we believe we are still on a growth trajectory in all markets.

Thank you very much. I’ll get in queue.

Thank you, Anthony.

Hey, good afternoon, everyone and thanks for taking the question. I wanted to follow-up on your China comments. It is the first time I’ve seen you mention COVID lockdowns in three years; can you provide additional commentary on that and its implications for 2023? What base should we consider for that 30% growth?

Thank you, Margaret. The basis for the 30% growth is built on our existing contractual agreements and our team's focus on key accounts in major markets. We are preparing inventory for 2023. The reason Q4 is uncertain is due to recent consumer hesitations about COVID recovery due to the election. We are prudently shipping inventory for a strong 2023.

Great, thanks for the color. I want to shift to the U.S. with 550 surgeons now trained. That’s a strong number. Can you provide insight into how this will shift in the latter half of the year, and also detail the profile of the 550 practices? Will they transition many patients to EVO, or just add it to their offerings?

We believe the enthusiasm for expanding the U.S. market with EVO lens-based technology is strong and just beginning. We are training the most interested surgeons first—those who signed agreements with STAAR to get started. I visited a surgeon who had a big poster of Joe Jonas in her waiting room, so the enthusiasm is palpable. Transitioning from a LASIK-based to a lens-based practice varies by the surgeon’s experience. Some surgeons are moving quickly to offer more EVO lenses.

Thanks, guys.

Hi, Caren and Patrick. It’s John on for Bill Plovanic. Could you discuss early U.S. users? Have you been able to convert any exclusive laser-only clinicians? Do laser-only users have the infrastructure to support EVO procedures?

It depends on the practice. If they have a strong cataract practice and are familiar with premium cataract lenses, they'll adapt quicker than those who are not familiar with intraocular procedures. Some surgeons are moving quickly from LASIK to offering more EVO lenses.

Thank you. Given the softness in Q4 regarding China, are there any updates on the existing backlog, and how might you catch up by year-end?

We expect Q4 growth in China to be around 22% to 25%, a slowdown compared to our earlier expectations. The delays are due to figuring out how COVID policies play out. Despite this, we anticipate continued growth.

Will the discontinuation of the other products line impact ICL use?

No, as users of our IOLs and injectors remain satisfied with our ICL offerings. We will provide support until customers find alternate sources. We are positive about the growth of our ICL business.

Thanks for the questions. Could you provide color on the U.S. market, as it seems flat sequentially this quarter? How should we expect it to perform in Q4?

Patrick, could you answer? I don't believe it was flat sequentially.

Correct. We were actually up closer to 75% year-over-year. I need to double-check the sequential figures. But as Caren noted, we expect unit growth from 66% year-over-year in Q3 to 100% in Q4.

Thanks for taking my questions.

Thanks for the questions. For clarification, your U.S. revenue in Q2 was $3.872 million, and $3.873 in Q3. It seems like some of that is injector sales. Can you provide color on the EVO launch and implied 100% unit growth?

Patrick, could you take that?

There is noise on the domestic side related to Canadian and North America markets, making it hard to compare apples to apples. In Q4, we expect greater market share as the product is in the market longer. As a reminder, this is only the third quarter of commercialization for EVO. We anticipate bigger gains throughout 2023.

Appreciate the color and clarifications. Regarding the $355 million and the implied 30% growth, will this primarily come from units or is there some price impact?

We have a healthy ASP in the U.S. We don’t see pressure on our ASPs because of our strategic alliances. The ASP mix comes from product and geography. The U.S. is still small in revenue contribution, so it won’t significantly affect the overall numbers right now.

Thanks for the color and for taking my question.

We are showing no more questions in queue. I would now like to turn the call back over to Caren for closing remarks.

She might have dropped off with some connectivity issues. I appreciate everyone’s participation today. We look forward to seeing you at these upcoming conferences. Thank you for your interest and investment in STAAR Surgical, and best to everyone.

That concludes today’s call. Thank you for your participation. You may now disconnect your lines.