Staar Surgical Co (STAA) Q2 2023 Earnings Call Transcript

Good day ladies and gentlemen. Thank you for standing by. Welcome to the STAAR Surgical Second Quarter Financial Results Conference Call. This call is being recorded today, Wednesday, August 2, 2023. At this time, I would like to turn the conference over to Mr. Brian Moore, Vice President, Investor, Media Relations and Corporate Development for STAAR Surgical.

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 second quarter ended June 30, 2023. On the call today are Tom Frinzi, President and Chief Executive Officer; and Patrick Williams, Chief Financial Officer. The press release of our second quarter results was issued just after 4:00 p.m. Eastern Time and is now available on STAAR’s website at www.staar.com. 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, adjusted net income for ICL, the corresponding adjusted earnings per share and sales in constant currency. During the quarter, the company also reported various accounting adjustments related to its other product, cataract IOL business. Please refer to the non-GAAP financial measures tables to adjusted net sales, adjusted cost of sales, adjusted gross profit margin, adjusted operating expenses and adjusted income tax provision. We believe that these non-GAAP and adjusted 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. For brevity, all references to growth rates on today’s call refer to year-over-year growth unless otherwise stated. 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 like to now turn the call over to Tom Frinzi, President and CEO of STAAR.

Thank you, Brian, and good afternoon, everyone. Thank you for joining us on today’s call. I am pleased to report STAAR achieved record sales and profitable growth for the second quarter 2023. Results were driven by our EVO family of proprietary Implantable Collamer Lenses, ICLs, which are designed to correct refractive error for people seeking visual freedom from the hassles of contacts and eyeglasses. For the second quarter of 2023, total ICL sales were $93.1 million, which is in line with the outlook of approximately $93 million that we provided on our last earnings call in May. Globally, ICL sales growth in the second quarter was up 19% as reported and up 20% in constant currency. Global ICL unit growth was up 21%, with results in the second quarter driven by strength in APAC, the largest region for refractive procedures. APAC was up 29% in units and 26% in sales for the second quarter of 2023. In China specifically, ICL units were up 35% and sales up 33% for the second quarter of 2023. We are encouraged by a strong start to the peak implant season for ICLs in that market. For the second quarter, sales in our EMEA region declined 9%, impacted by the ongoing macroeconomic and geopolitical environment, and an inability to ship ICLs into one non-European country due to a country-specific product labeling change. However, looking at European markets only, ICL units were up 6% and sales up 2% for the second quarter of 2023. Turning attention to the United States, ICL sales grew 10% for the second quarter, well ahead of U.S. refractive industry procedure volumes, which the Refractive Surgery Council recently reported declined approximately 15% in the quarter. Sequentially, our U.S. sales in the second quarter were relatively flat. Lower than expected results in the U.S., the macroeconomic impact in Europe, and certain other refractive markets merit additional conservatism as we look to the second half of 2023. We have therefore today updated our fiscal 2023 ICL sales outlook to a range of approximately $320 million to $325 million. At the midpoint, our new outlook represents a high level of sales growth at approximately 20%. Since becoming CEO in January, I have had the opportunity to make a more complete assessment of the business in the U.S. and around the world. We have implemented a high-performance management system that helps us get closer to our customers and other stakeholders and identify top priorities for accelerating EVO adoption. We have created cross-functional teams for each top priority who are accountable for achieving the desired results. Among the priorities and actions we have taken to accelerate adoption in the U.S. and globally are the following. First, we’ve enhanced our leadership in April, appointing two seasoned executives, Warren Foust as Chief Operating Officer, and Magda Michna as Chief Clinical, Regulatory and Medical Affairs Officer. Second, we are taking actions to make our company even easier to do business with. The projects related to this top priority are focused on increasing surgeon confidence in measurement and lens size selection, simplifying our ordering process, delivering our lenses to customers faster, and longer term, making the EVO ICL even easier to deliver to the eye. Third, we have developed and are implementing new analytic tools, which is allowing us to better target high volume customers with favorable economics. For example, we have mapped the over 430 practices representing our 600 plus surgeon customers in the U.S., and as a result, we are implementing tailored programs that effectively leverage the knowledge we have gained from these tools. Fourth, we will pilot a patient call center education and surgeon referral program aimed at better answering patient questions and shepherding patients to the most appropriate EVO customers. We believe the call center will create a closed loop for our patient Doc Finder, allowing us to better support and track the patient journey and thereby better monitor the effectiveness of our investment in the U.S. in consumer awareness and other activities. We anticipate the actions and projects I just outlined, among others, will accelerate EVO adoption in the U.S. as we exit 2023 and beyond. Our vital few priorities and our learnings in the U.S. will also have positive implications for our markets globally. So while I’ve previously stated that laser vision correction is well-established, I remain confident in EVO’s ability to be successful in the U.S. and beyond. My confidence is buoyed as I spent time in the field with key opinion leaders discussing the impact that EVO is and can have on their practices. The investment rationale for STAAR remains compelling. We have a fantastic technology without peer. If you define good medicine as I do—excellent patient outcomes, high patient and surgeon satisfaction, and favorable economics—EVO is indeed good medicine. STAAR is the dominant player globally in lens-based refractive vision correction for 21 to 60-year-olds who are facing an increasing epidemic of myopia. Next, we expect to remain a high growth company based on our strength in APAC, the largest region for refractive procedures in the world. Additional growth will come as we deliver similar results in the U.S., the second-largest market for refractive procedures in the world, and Europe emerges from the current macro and geopolitical headwinds. Finally, we are profitable, we generate cash, and we have a rock-solid balance sheet. For those of you who would like to learn more, we will host an Investor and Analyst Meeting in New York next month on September 14 where we will outline in more detail initiatives and projects, including some next-generation product pipeline initiatives, and the significant growth opportunities ahead for STAAR. We also expect to have several EVO surgeons from around the world who will speak to their experience.

Thank you, Tom, and good afternoon, everyone. Before I go through the various financial metrics, I want to reference an additional non-GAAP reconciliation table in this quarter’s earnings release. As we have previously mentioned on prior earnings calls and in our filings, we are exiting our other product, cataract IOL business, as we focus on our core ICL products. This resulted in some accounting adjustments, primarily due to excess inventory and a smaller sales return reserve adjustment. Please refer to the non-GAAP financial measures tables in our earnings release as I will be referencing both as reported and adjusted impacts in my prepared comments. Total net sales for Q2 2023 were $92.3 million, up 14% compared to the $81.1 million of net sales in Q2 2022 and up 26% on a sequential basis from Q1 2023 net sales of $73.5 million. The year-over-year increase in net sales is attributable to a $50 million or a 19% increase in ICL sales, partially offset by a $4 million decrease in other product sales. This included a $742,000 sales return reserve adjustment for our other product cataract IOL business, resulting in adjusted net sales of $93 million, or up 15% year-over-year. We continue to expect other products will represent a smaller percentage of net sales as we move through fiscal 2023 and taper our support of this non-core cataract IOL business. Gross profit for Q2 2023 was $70.7 million, or 76.6% of net sales, compared to gross profit of $63.9 million, or 78.8% of net sales, for Q2 2022, and $57.6 million or 78.3% of net sales for Q1 2023. The decrease in gross margin compared to Q2 2022 is primarily due to inventory reserves related to the other product cataract IOL business. The total amount of additional inventory reserves was $2.8 million, and when adjusted, our gross margin was 79.8% in the quarter. Due to the additional cataract IOL reserves booked in the second quarter, and driven by lower sales outlook for fiscal 2023, we expect gross margin will be approximately 79% for both Q3 and Q4 and approximately 78% for the full year. We continue to drive initiatives to improve our manufacturing efficiency. When combined with more favorable geographic mix related to direct markets like the United States, we believe company gross margins can exceed 80% as we move beyond 2023. Moving down the income statement, total operating expenses for Q2 2023 were $62.1 million compared to $46.9 million in Q2 2022 and $54.8 million in Q1 2023. This included an intangible asset impairment adjustment related to our other product cataract IOL business. General and administrative expense for Q2 2023 was $18.1 million compared to $14 million for Q2 2022 and $18.1 million for Q1 2023. The year-over-year increase is due to increased compensation-related expenses, outside services, and facilities costs. For fiscal 2023, we continue to expect G&A expense will be approximately $19 million per quarter. Selling and marketing expense was $32.3 million for Q2 2023 compared to $24.2 million for Q2 2022 and $26.4 million for Q1 2023. The increase in selling and marketing expense from the prior year was due to increased advertising and promotional expenses, compensation-related expenses, trade shows, and meetings. We have seen that driving EVO adoption is a multi-pronged approach focused on physician training and confidence, along with increased brand awareness through our marketing efforts. We are not seeing the type of returns on our digital marketing investments that we had expected and have thus made the decision to reduce such investments until we can be more certain that patient conversion and overall cost of patient acquisition meets our internal targets. Thus, we now expect selling and marketing expenses will be approximately $30 million in Q3 and $27 million in Q4, down from approximately $33 million each quarter previously. Research and development expense was $11.8 million in Q2 2023 compared to $8.6 million for Q2 2022 and $10.3 million for Q1 2023. The year-over-year and sequential increase in R&D is due to increased compensation-related expenses and U.S. EVO post-approval clinical trial expenses associated with the three-year study. For fiscal 2023, we expect R&D expense will be slightly higher at approximately $12 million for Q3 and Q4 as we have made additional investments in our clinical and medical affairs, which falls under R&D, as we look to drive increased physician confidence through training, publications, and clinical studies. Operating income in Q2 2023 was $8.6 million or 9.3% of net sales, compared to operating income of $17 million or 21% of net sales for Q2 2022. We anticipate other income expense will be slightly down at approximately $500,000 of income per quarter for the balance of the year, primarily due to foreign exchange gain losses that are booked on this line item. We remain proud of our multi-year track record of profitability and cash generation, which we expect to continue, which is rare for a high-growth medical device company. The reduction in our sales outlook for the full year, primarily in high gross margin direct markets like the United States, does reduce our overall operating income. But when partially offset with the reduction in sales and marketing investments, we now expect operating margin for fiscal year 2023 will be approximately 5%. Net income in Q2 2023 was $6.1 million, or $0.12 per diluted share, compared to net income of $13 million, or $0.26 per diluted share in Q2 2022. After taking into account the aforementioned adjustments related to our other product cataract IOL business, as well as a $405,000 tax affected benefit from those adjustments, our adjusted net income for ICL was $9.4 million, or $0.19 per diluted share. Tables reconciling the GAAP to non-GAAP information and IOL accounting adjustments are included in today’s financial release. For fiscal 2023, we now expect our effective tax rate will be slightly higher at approximately 35% in Q3 and Q4 due to the reduction in United States profitability, and as always, subject to no significant change in our valuation allowance. Turning now to our balance sheet. Our cash, cash equivalents, and investments available for sale as of June 30, 2023, totaled $209.5 million compared to $225.5 million at the end of the fourth quarter of 2022. The decrease in overall cash is due to the timing of accounts receivable, which historically grows in the second quarter and should be converted to cash in the third quarter. Though we have only booked approximately $6 million in CapEx at the end of Q2, we continue to expect we will invest approximately $26 million in property and equipment for the full year, primarily related to manufacturing capacity expansion, including larger projects in the second half of this year. As Tom mentioned earlier, we updated our ICL net sales outlook to a range of $320 million to $325 million for fiscal 2023. We expect our other product sales will be essentially zero for the full fiscal year 2023 due to the cataract IOL business adjustments I referenced earlier. A reconciliation to the midpoint of our outlook results in an approximate $22 million change from our prior ICL outlook. This includes an approximate $12 million lower sales contribution from the United States, approximately $5 million lower sales contribution for EMEA, or flat sales year-over-year, and an approximate $5 million reduction in sales from certain APAC markets, primarily South Korea, which has faced some economic headwinds. For Q3 2023, we expect global ICL sales and overall net sales will be approximately $80 million. Next week, STAAR will be participating in the Canaccord Genuity Annual Growth Conference in Boston on August 9. We will also be participating in the Needham Virtual MedTech and Diagnostics Conference on August 15, the Piper Sandler West Coast Bus Tour on August 23, the William Blair West Coast Bus Tour on August 30; and the Goldman Sachs Annual European MedTech and Healthcare Services Conference in London on September 6. As Tom mentioned, on Thursday, September 14, STAAR will host an Investor and Analyst Meeting in New York. Finally, we intend to use our website as a means of disclosing material, non-public information and complying with our disclosure obligations under Regulation FD. Such disclosures will be included on our website in the Investor Relations section. Accordingly, investors should monitor our investor website in addition to following our press releases, SEC filings and public conference calls and webcasts. This concludes our prepared remarks. Operator, we are now ready to take questions.

Thank you. Your first question comes from Bill Plovanic from Canaccord. Please go ahead.

Hi, everyone. It’s John on for Bill tonight. Thanks for taking our questions. I think you could start on the U.S., which I think is maybe the most focused on topic. I appreciate all the detail that you gave there, Tom. But with the sequential flat to declining revenue, and I know you’ve made previous commercial investments there, too, beyond just adding Warren as CCO. But can you talk about when you expect productivity from those commercial additions to ramp? I know you talked about potentially expecting it in the back half of this year, but any incremental detail of what you’re seeing there, and what you’re hearing from surgeons?

Yes. Thanks, John, and good to hear from you. Give our best to Bill as well. I think, look, we said all along that laser vision correction is very well entrenched in the United States market. We’ve talked about the inertia of LASIK. Until we move EVO from a niche procedure to a more mainstream option within refractive practices, it’s just going to take time. However, we believe we better understand the market today as we’ve made investments in new analytical tools and certainly by putting more feet on the street and getting candid feedback. We remain very optimistic that as we execute on the vital few projects we’ve identified, we can create breakthrough opportunities. I’ve said all along, as recently as June, it was an 18 to 24-month process, and I think we’re still working on that same timeline.

Great. Thanks. Also for a follow-up, I was surprised by the commentary about the digital marketing not working out as you had anticipated in the U.S. Can you elaborate on what you think isn’t working correctly there? Because it seems like it’s had good patient traction. Is it that these patients who become aware of the procedure are seeing physicians who are not aware of EVO and then getting converted to other procedures or what do you think the hiccup is?

Yes. I think you do see some of that bait and switch happening in the marketplace. Again, we’ve said before, the beauty of digital marketing is you can redirect it; you can turn it off and on. That’s exactly what we’re doing. I think we’re just being more prudent about where we’re spending the money. A great example of that is the call center project we’re initiating in the back half of this year because it allows us for the first time to create this closed loop as a result of our Doc Finder. You’ve heard us talk positively about the amount of traffic we’re seeing on the Doc Finder, but it’s always been a challenge to understand what happens to those patients. Now through this process, we’re going to know exactly what’s happening, and we will be able to direct interested patients to an appropriate EVO center where we know they’re going to be treated well. We’re just getting smarter and more prudent about how we’re going to spend those digital dollars.

Got it. Thanks, Tom.

Your next question comes from Anthony Petrone from Mizuho Group. Please go ahead.

Thanks. Good afternoon, everyone. Maybe one for Tom on guidance and then a follow-up just on balance sheet for Patrick. So maybe Tom just walking through the shift here to a $20 million to $23 million revision in total from the prior range. You sort of look at the Q2 performance. China was actually ahead of our expectations, light in the United States, and also light in Japan. So when we reconcile the quarterly performance of the guidance, is it mostly just U.S., or are we splitting that between Japan and U.S. or should we also be taking a little bit of deceleration into the back half of the year for China as well? And I’ll have one follow-up.

Yes. Thank you, Anthony, for the question. I think you’re right. We see a little bit of softness, as Patrick mentioned in his prepared remarks, particularly in South Korea, and Japan to a lesser degree. We think China will continue to grow; as I mentioned in my prepared remarks, I am very encouraged by the first month and a half of the high season. That’s off to a phenomenal start. So globally, we believe we’re a 20% per year growth company. We continue to be a high-growth organization. I think that will continue beyond 2023 as we begin to execute on these vital few projects.

Alright. That’s helpful. And then the follow-up for Patrick, maybe just on the accounts receivable balance. Understand the seasonality here. I guess sequentially, it’s up $34 million. In the prior two years, it was up about $15 million Q-over-Q from Q1 to Q2. So maybe just walk through the outsized increase in receivables this cycle versus the prior two cycles? Thanks.

Yes, sure. It’s a little higher. Some of it has to do with just the timing of product as we delivered into the various markets, primarily into Asia Pacific. No issues with collectability. We’ll look to see that number go quite a bit down in Q3 as we monetize or convert that AR into cash. So we’re in good shape there. Inventory levels are very good across all of our regions, including APAC. Therefore, we’re feeling very good about where we’re at from all those standpoints.

Thanks. I will hop back in the queue.

Your next question comes from Margaret Kaczor from William Blair. Please go ahead.

Hey, good afternoon, guys. Thanks for taking the question. The first one I want to ask about is the U.S., like many of my colleagues. But I’m trying to do the math. It seems like you’re assuming relatively flat sales here through year-end, so maybe you can true me up on that. And as we think about that decrease down, certainly, you’re not seeing the ROI on some of the elements you expected, but how do you think about the macro element here? And second, how much success, if any, are you assuming in terms of measures that Tom mentioned, like the call center, especially as we get into Q4?

Margaret, this is Tom. Thank you for the question. First, to answer the first part of your question, yes, I think it’s not unreasonable to assume we’re relatively flat in the back half of the year for the U.S. as these priorities take shape and we move to an execution phase. The U.S. business is going to take some time. However, as we focus on enhanced training, additional clinical and medical education efforts, and driving surgeon confidence, they will all bear fruit in 2024 and beyond.

I’ll just piggyback off of that. Regarding guidance, because I think we’ll get a lot of questions on this. The programs and initiatives we outlined do not contemplate those having material traction in the second half of 2023, as we’ve said. We wanted to put a number out there that we feel very confident about, which is the range between $320 million and $325 million for the full year. It takes into account everything discussed, and as always, some of these may gain traction earlier, leading to potential upside. This is a very achievable number.

Okay. That’s helpful. And then I know we’re sitting here in mid-2023, so it’s not really fair of me to ask this question, but I’ll ask it anyway. As we look at 2024, can you walk us through what gets you to that 20% top-line growth between the different geographies? Especially if we’re assuming the U.S. will be around that $4 million revenue number, what’s the gap to get to that 20%? And then second, as we think about margin expansion, I assume we will see some of that in 2024 with 2023 being a low watermark. So how are you thinking about that expense structure? Thank you.

It’s a fair question. The 20% is clearly a 2023 number. We’re not going to delve into 2024 and beyond. But we continue to view ourselves as a high-growth company. However you define that, the 15% to 20% range is about right, and as I said, that number could go higher. We could be on the high end of that range as some of these programs come to fruition. We’ll provide more details as we gain more visibility and have the opportunity to really set the stage at our Analyst Day on September 14.

Okay, thank you, guys.

Your next question comes from Young Li from Jefferies. Please go ahead.

Okay. Great. Thanks so much for taking the question. I guess you have a lot of ongoing initiatives focused on the U.S. launch. I was wondering, by the Analyst Day, what do you think you can share with us related to the trajectory of the U.S. launch? And can you give us a preview for what we should expect to hear, maybe longer-term information out of the Analyst Day?

Yes, Young. This is Tom. Thanks for the question. As we’ve said, we continue to give guidance for this year at 20%. We believe we will continue to be a high-growth company beyond 2023 in the 15% to 20% range. You’ll hear more granularity in September from us, as well as leading KOLs who will discuss their expectations and how EVO is impacting their practices. We believe these are global KOLs that represent not only the U.S., but Europe and Asia Pacific regions. So more to come, and it’s going to be an exciting discussion. Many of the questions you’re asking already will be fully answered in September, so I hope you can join us in New York for what promises to be an exciting time.

Alright. Great. Looking forward to that. Maybe to follow up just on China. Pretty strong performance in the second quarter. I heard comments on the strong start to the peak season, but we see a lot of negative macro headlines coming out of China. Just wanted to clarify the level of confidence you have regarding China's performance in the second half?

Yes, Young. I can tell you firsthand, having just spent 10 days in China across three different markets within that country, enthusiasm is high, activity is high, and surgeon support and confidence is high. I've met with economists and clinicians. There is a bullish sentiment at the street level that I felt and observed. I continue to be extremely confident in our team and the quality of activity we’re seeing in that market. Our in-market sales have been at a very strong level through the second quarter.

Alright. Thanks, Tom.

Your next question comes from Ryan Zimmerman from BTIG. Please go ahead.

Hello, this is Sam on for Ryan. Thank you for taking our questions. Could you provide us an update on the geographic unit growth implied with your new 2023 guidance? Thank you.

I don’t think we will get into specifics on that, but it will be pretty close. It may be slightly above that from a unit standpoint because we do see, depending on geographies, a little bit of mixture regarding the ASP. So we may have about 1% or 2% higher than on the unit growth when it’s all said and done, but it should be pretty close to the 20%.

Thank you. That’s helpful. It sounds like China is performing very well. How have ASPs in China trended throughout the year, and how do you expect those to trend in the second half of the year? Thanks again.

I’m sorry, Sam. How is what trending?

How have ASPs trended in China this year?

Strong. No price degradation. No real pressure on price, if that’s what you were asking. Again, having just spent time there on the street myself, I can tell you we’re holding price heavy. We continue to be positioned as a premium choice, and the market’s reacting favorably.

Yes. Just as a reminder for everyone, we don’t have one single price for China. It’s a byproduct of multiple customers that have different pricing, as well as the fact that we sell Spheric and Toric lenses, which have different pricing as well. So we know our pricing and it’s set for basically the entire year. Any change that you see is really due to product mix and/or customer mix within the selling into that throughout the year.

Your next question comes from Matt O’Brien from Piper Sandler. Please go ahead.

Hi, this is Sam on for Matt. Thanks so much for taking our questions. I guess first, could you talk a little bit about stocking in China in the second quarter compared to a year ago? And also, are there any signs of moving down the diopter curve during the quarter?

Yes. As I said, the inventory levels are good in China. As always, as the market share continues to grow in China—and not just China; in other markets—we may look to further increase our service levels, meaning we want to ensure inventory is much closer to the physicians and end-user patients so that we can ensure that EVO occurs as rapidly as possible. There is nothing unusual with Q2. It is our high season where we sell in, and then the high season in terms of implants and procedures starts really in that July timeframe and continues through August and maybe a little in September. So we’re very comfortable with where we’re at on an inventory level across the globe.

Relative to the diopters, I would say, anecdotally, we certainly have heard and seen examples of surgeons globally coming down the curve. I would say in aggregate, as we look at it internally, there has been about a half a diopter to a one diopter movement down in our aggregate numbers. More and more, I think individual doctors are certainly starting to make moves bigger than that. A good example of that comes from a KOL in the United States who has gained a high degree of confidence now; his whole marketing effort is going to be around EVO, and he has indicated that he is going to be very comfortable offering EVO to anyone minus three or higher.

That’s great. Thank you for that color. I guess one more question to ask. And I know you all have mentioned being very confident in your updated guidance. Could you provide what gives you that confidence in your updated guidance and exactly when all of this begins?

Yes. As I have tried to indicate in my prepared remarks, I have spent a lot of time in the field around the world, particularly in the United States. I’ve talked with key opinion leaders, east, west, north, and south. I remain encouraged by the positive rhetoric and the commitment people have to the technology. We are trying to find ways to fit it into their practices on a more routine basis, moving it out of a niche mindset and more into the mainstream. As we better understand the nuances of these practices and how we can help them achieve the kind of positioning EVO deserves in their practice, I remain confident we can make that happen. One of our prescriptive visions, our mantra in the company, is to become the first choice for patients and doctors seeking visual freedom. We are on our way, that’s aspirational, and our organization is highly focused on achieving that.

Your next question comes from George Sellers from Stephens Inc. Please go ahead.

Good afternoon. This is Harrison on for George. Thanks for taking the questions. My first is on the U.S. refractive market down 15% year-over-year. I was wondering if you have any idea of the drivers there. Is that a macroeconomic issue, or is there something else going on in the offices that we need to be aware of?

Yes. I don’t think there is anything unusual that’s happened. The Refractive Surgery Council here in the United States tracks that pretty routinely, and they just came out with their Q2 assessment saying it’s down 15%. We’re not pleased with where the U.S. growth is, but it’s worth noting again that we were up 10% in a market that’s down 15%. So we know we are having an impact. It’s not the level we wanted to see. It’s certainly not at the level we want to see. We have plans in place, so when you consider what’s happening in the laser vision correction market in general, our performance in Q2 is certainly beating the market.

Got it. Yes, that’s helpful. Then switching over to China, I am just curious. I know you have spoken about moving down the diopter curve, but how are patients responding, given the elevated price compared to LASIK? Are they recognizing the clinical benefits and the better medicine that you have and are they willing to pay for that? Is that something you’ve seen?

Yes. Again, from firsthand experience, there are 11 EVO-only centers across China where all they do is EVO surgery at a premium price. People are seeing the outcomes. The patient satisfaction, as we have previously reported, continues to be at 99% to 99.5% satisfaction. Clearly, price is an issue for a specific type of patients, but overall, price has not been an obstacle to our growth, particularly in that marketplace.

Your next question comes from the line of Tom Stephan with Stifel. Please go ahead.

Great. Hey guys. Thanks for the questions. And sorry if some of these were asked. Jumping between calls. But I will start with just on the financial side. Profitable high growth really has been a differentiating aspect of STAAR’s financial profile for many years now. This year, operating margin is expected to step back a bit from last year. Can you talk philosophically about whether the focus has changed at all regarding high levels of profitability, and whether the focus is shifting towards growth due to the early stages of ICL penetration globally and notably in the U.S.?

Yes. Tom, thanks for the question. Good to hear from you. We have to serve both masters. We want to grow the top line and continue to grow the bottom line. We’ve said in the past that we have a strong balance sheet, and we want to leverage that. We’ve made investments in the first part of this year knowing it would compromise our bottom line, but we continue to be profitable on the bottom. We believe generating high growth is preferable, and we will continue to focus on being a high-growth company this year and beyond. We will be fiscally prudent and disciplined about how we allocate that balance sheet.

Thanks, Tom. As I discussed earlier, our gross margins remain strong. As we bring on direct markets like the U.S. and certain markets in Europe, this will help boost our overall gross margin by raising our ASPs. Launching in a new market typically requires increased infrastructure investment, like our sales force that we added at the start of the year. We’re laying the groundwork for expansion and we’ll share more details in September at the Analyst Day. Internally, we don’t foresee issues continuing with robust bottom line performance, but we also recognize the opportunity to capture market share, especially being the leading lens-based product globally.

Got it. That’s helpful. I also want to ask kind of longer term. In the past, the company talked about capturing 20% share by 2025. Maybe that’s pushed out a little. Can you speak to your level of confidence in achieving that number longer term, no matter how many years it may take? Can you elaborate on the main foundational challenges in the U.S. market, and more importantly, what STAAR is doing to lower those hurdles?

Thanks again for the follow-up. We need to move EVO beyond a niche mindset in the minds of many ophthalmologists. The challenge we have is making EVO more mainstream in their practices. One way we’re doing that is by taking some of the art out of the procedure, putting more science and predictability into it. We’re focusing on enhanced training, additional independent medical education, and looking at other opportunities. Overall, I’m confident because people like the outcomes that the procedure delivers. The procedure isn’t difficult, but it’s delicate, and that delicate portion involves more art than science compared to the nomogram rote procedure that laser vision correction has become. We’ve learned some things in these first seven months, and we’re focusing on making this procedure more predictable in the hands of any surgeon, regardless of their experience. Our cross-functional teams are focused on these areas and we're getting to the execution phase that will carry us through this year and keep our growth engines outside the United States moving forward for a consistent high-growth company for 2024 and beyond.

Your next question comes from David Saxon from Needham. Please go ahead.

Yes. Thanks for taking my questions. I guess maybe starting on the U.S. At the ASCRS conference, we had heard delivery times can be around six weeks. You called that out as something you are working on. What specifically needs to be done on that front? How quickly do you think you can get the order to delivery time?

Yes. Thank you for that question, Dave. We have said that one of our initiatives is dealing with our manufacturing and operational capabilities to deliver products quicker to customers. Currently, our inventory levels are strong, and we’re doing well at beating that six-week timeframe. Ideally, we want to move closer to a LASIK-like delivery time, where a patient walks in and can be treated within a matter of days.

Okay, got it. Regarding the EMEA country that you can’t ship to anymore, can you give us a little more detail? How much impact did that have in the quarter? The $5 million guide down related to the EMEA region, is that all attributed to this one country, or does it assume slower growth across the broader EMEA region? Thanks so much.

Sure, David. The countries in the Middle East faced challenges; if that order would have gone through, we probably would have seen the region almost flat. You can do the math and deduce that. Certainly, our direct markets and, as I said, Europe specifically were up in Q2. Not significantly, but 6% and 2%, respectively, related to sales and units. They are holding their own, but we see growth opportunities across Europe and EMEA.

I think Tom hit it. We did take down guidance slightly, and in my prepared comments, I tried to bridge the old guidance to the new one. As everyone can see, a large part of the underperformance and reduction is related to the U.S. We are coming off a record breaking Q2, and we feel good about what we’re doing for the rest of the year.

Your last question comes from Jim Sidoti from Sidoti & Company. Please go ahead.

Hi. Good afternoon, and thank you for taking the questions. I wanted to follow up on your decision to scale back on some of your digital marketing until you determine a more efficient strategy. Yet, you also mentioned you will ramp up capital spending for 2023. Does that imply you still expect to achieve a 15% to 20% market share in the U.S.? Do you still believe you will need that capacity over the next couple of years?

Yes. You are absolutely right. To clarify, we are reallocating some of our sales and marketing spend, as Tom noted. We certainly want to ensure, as we make investments, that we're achieving the returns we want. Our CapEx is a good observation. We remain bullish about our prospects, and we need to plan capacity now for higher market share globally in all these geographies, so yes, we are committing investment.

And again, I think other analysts may have asked this, but do you still believe long-term that you can capture at least 15% market share in the U.S.?

I think we will share more during the Analyst Day, but we view ourselves as a high-growth company, and we think the range of 15% to 20% is internally plausible with the potential for higher market share trajectories as we outline pathways during that event.

Your next question comes from Steve Lichtman from Oppenheimer. Please go ahead.

Thank you. Good evening, guys. I was wondering about the vital few initiatives you have underway. You mentioned projects like simplifying the ordering process. How should we think about the implementation time of those projects? When do you anticipate they will be operational?

Many initiatives are already operational. Some will kick in during Q3 and Q4, but throughout the back half of this year, we will be actively executing on all of our priorities, creating tailwinds for us for the remainder of this year.

As a follow-up, can you provide more detail on the call center? What pressure point in the field do you believe that will help address? How big do you expect that initiative to be?

Time will tell. We’re conducting a pilot test and will expand it regionally as we grow. We’re collaborating with a third party experienced in this area. Our Doc Finder continues to generate consistent visits, but we lose visibility on what happens to those patients after they come in. This call center will enable us to communicate with these patients to understand their motivations, if they are ready for a procedure, and direct them to appropriate practices where we know they will be treated well. It will create a closed loop, linking our investments generating brand awareness with tangible patient conversions.

Our last question for today comes from Bruce Jackson from The Benchmark Company. Please go ahead.

Hi. Thank you for taking my question. I wanted to gain some color on the decline in Japan and Korea. How much of that was due to discontinuing of other products, and how much was due to general market conditions? Do you still believe Japan and Korea can be up for the year in total?

Thanks for asking, Bruce. It’s important to note that the Japan figure in our disclosures includes other products and a sizable amount of revenue contributed from that segment. As you know, we are basically doing nothing in Q2 related to the IOL. Japan was actually up year-over-year in the ICL business. We see a little bit of pressure, particularly in South Korea and a mild amount in Japan, but that translates to the $5 million decrease related to APAC.

I will now turn the call back over to Tom Frinzi for closing remarks.

Thank you for joining our call today. We look forward to speaking with many of you in the coming days and weeks, including next month at our New York Investor and Analyst Meeting. Thank you.

Ladies and gentlemen, this concludes your conference call for today. We thank you for joining and you may now disconnect your lines. Thank you.