Alcon Inc. (ALC) Q3 2022 Earnings Report, Transcript and Summary

Greetings. And welcome to the Alcon Third Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Dan Cravens, Vice President and Global Head of Investor Relations for Alcon. Thank you. You may begin.

Thanks. And welcome to Alcon’s third quarter 2022 earnings conference call. Yesterday, we issued a press release and interim financial report and posted a supplemental slide presentation on our website to enhance today’s call. You can find all these documents in the Investor Relations section of our website at investor.alcon.com. Joining me on today’s call are David Endicott, our Chief Executive Officer; and Tim Stonesifer, our Chief Financial Officer. Our press release, presentation and discussion will include forward-looking statements. We expressly disclaim any obligation to update forward-looking statements as a result of new information or future developments, except as required by law. Our actual results may vary materially from those expressed or implied in our forward-looking statements. Accordingly, you should not place undue reliance on any forward-looking statements. Important factors that could cause our actual results to differ from those in our forward-looking statements are included in Alcon’s Form 20-F and our earnings press release and interim financial report on file with the Securities and Exchange Commission and available on the SEC’s website at sec.gov. Non-IFRS financial measures used by the company may be calculated differently from, and therefore, may not be comparable to these similarly titled measures used in other companies. These non-IFRS measures should be considered along with, but not as alternatives to, the operating performance measures as prescribed by IFRS. Please see a reconciliation between our non-IFRS measures with directly comparable measures presented in accordance with IFRS in our public filings. For discussion purposes only, our comments on growth are expressed in constant currency. With that, I will now turn the call over to our CEO, David Endicott.

Thanks, Dan. Welcome to Alcon’s third quarter 2022 earnings call. Today, I will begin by giving a brief update on our third quarter results, our overall market dynamics and recent performance. After my remarks, Tim will discuss our third quarter performance and our outlook for the remainder of the year and then I will wrap it up with some closing remarks, and we will open it up for Q&A. I am pleased to report that the Alcon team delivered third quarter sales of $2.1 billion, with sales growth of 9%, core operating margin of 17.2% and diluted core earnings per share of $0.50. Based on these results, it’s clear that our fundamentals remain strong. I am proud of what we were able to accomplish, particularly given the persistent macroeconomic headwinds we continue to navigate. Now similar to the second quarter, these results were driven by the ongoing improvements in international markets, our broad portfolio of market-leading products and strong commercial execution. In Surgical, our broad suite of products continues to win in the market. Starting with implantables, we remain the market share leader in intraocular lenses, driven by our comprehensive portfolio of PCIOLs, including PanOptix and Vivity. While recent ATIOLs penetration trends have moderated, we continue to focus on driving penetration by educating doctors, clinical staff and patients about the value and benefits of advanced technology lenses. For surgeons, we have continued investing in our clinic-based sales force and peer-to-peer learning programs. For patients, we are providing educational materials in advance of their doctor visit so they come into the clinic informed about their lens choice options. All of these programs are showing encouraging early results and we plan to continue to expand them in 2023. In monofocals, Clareon, our latest IOL material has helped us defend our market-leading position. Recently, at the AAO, we announced the rollout of Clareon Toric across select practices in the United States. With the introduction of Clareon Toric, Alcon now offers a robust portfolio of options for U.S. cataract patients with astigmatism on our latest listening free material. We have also received extremely favorable customer feedback on our suite of cataract equipment, including the Argos biometer, and the Legion and Centurion phaco devices. The Argos biometer with image guidance provides higher data capture rates than other biometers and enables better prediction of lens power, which may lead to improved lens selection. Customers also appreciate that Argos is fully integrated with the Alcon cataract refractive suite, helping make it easier for doctors to deliver better outcomes with great urgency. Customers in emerging markets are also responding favorably to the Legion phaco machine. Legion delivers the Alcon phaco performance advantage with the right features and price for emerging markets. And in international markets, where we are continuing to upgrade the legacy phaco machines in our industry-leading Centurion system, demand for Centurion is supported by our active Sentry handpiece, the most advanced phaco handpiece on the market. Importantly, we are seeing that Centurion with Active Sentry is helping drive practice efficiencies. Results from a multicenter prospective clinical trial presented at the AAO conference demonstrate meaningful surgical time savings when using Centurion with Active Sentry. Given persistent global surgery backlogs and staffing shortages, this is becoming increasingly important to surgeons. Now moving to Vision Care. We continue to be pleased with the progress of our innovative suite of lenses, including Precision1, Dailies Total1 and Total30. Precision1 continues to be our main growth driver. Precision1 was designed to deliver the right balance of visual acuity, wear, comfort and ease of handling the right price for the mainstream wearer. And with Precision1 for astigmatism, we have a lens for mainstream astigmatic patients who have historically been a significant but underserved population. Similarly, Dailies Total1 continues to be the gold standard in the premium contact lenses. Earlier this year, we launched Dailies Total1 for astigmatism, the first and only daily toric lens to feature water gradient technology. This launch completes the Dailies Total1 portfolio, which now includes spherical, toric and multifocal lenses. This is important because eye care professionals can now target and treat a wide range of patients with a single premium lens family. We are also capturing share in the reusable lens category since launching Total30. Recall that this is a $4 billion category and represents approximately two-thirds of wearers. Total30 represents the first major innovation in reusable market in a number of years, and for the first time, adds water gradient technology to a reusable lens. We plan to expand the Total30 product family with a commercial launch of Total30 for astigmatism early next year. And finally, in ocular health, we recently announced the intended acquisition of Aerie Pharmaceuticals. As we welcome the Aerie team to Alcon, we look forward to leveraging our expanded commercial footprint and expertise to bring Rocklatan and Rhopressa to even more customers and their patients. This acquisition underpins our strategy of entering into productive white spaces. We started moving in this direction with the acquisition of the U.S. commercial rights of Simbrinza and Eysuvis and see this as a natural did that portfolio. Now let me provide an update on our end markets. In Surgical, global cataract procedures were up high-single digits in the third quarter versus prior year. This growth varies significantly by region. In the United States, where surgical centers continue to be constrained by staffing shortages, procedural volume was relatively flat. Outside the U.S., procedures were up low-teens as markets continue to improve. In contact lenses, the market growth for the quarter was difficult to read due to the timing of price increases and inventory movements. Based on the available data, we estimate the overall lens market grew mid-to-high single digits in the third quarter. We are encouraged to see current reporting indicate that optometry visits have returned to pre-COVID levels. Against that backdrop, we believe that our contact lens business grew in line with the market. Now I’d like to update you on our transformation program. We have made significant progress with our cultural and business transformation journey over the past few years. As we have said before, the goal is to drive speed and simplicity into the business. By allocating expenses more efficiently, we have created savings that were reinvested in new product development and launches. This has fueled our innovation engine and helped us to outpace market growth. Specifically, we streamlined our operating model and established global shared service centers for key functions like finance, HR and IT. To continue to optimize our business, we have identified additional transformation initiatives, including reviewing management spans and layers, as well as streamlining our commercial processes. These additional steps will help us to offset some of the macroeconomic headwinds we face, while continuing to invest behind our strategic priorities. Tim will discuss this in greater detail in his remarks. So to summarize, our operational performance has been exceptional, particularly given the current macro environment. In constant currency, we grew revenue 9% as we continue to launch new products, we grew core operating income by 19% despite inflationary pressures and we expanded core operating margin by 160 basis points. So, with that, let me pass it to Tim, who will take you through our financial results and comment on our outlook for the rest of the year.

Thanks, David. We are pleased to report third quarter sales of $2.1 billion, up 9% versus prior year. This growth was driven by continued recovery in international markets and demand for our innovative products. Our overall third quarter sales growth included approximately 1 point of contribution from Hydrus, recall that we acquired Simbrinza late in the second quarter of 2021, and we have therefore lapped its sales contribution. Our third quarter U.S. dollar sales growth included approximately 700 basis points of pressure from foreign currency. For the first nine months of 2022, total company sales of $6.5 billion grew 12%. As David mentioned, the Alcon team delivered another quarter of strong execution despite a challenging macroeconomic backdrop including a strong U.S. dollar, continued supply chain tightness and inflation. Moving to our third quarter results. Our Surgical franchise revenue was up 12% year-over-year to $1.2 billion. Surgical revenue in the first nine months of 2022 was up 15%. Implantable sales were $392 million in the quarter, up 11% year-over-year, primarily due to international market recovery, continued demand for Vivity and sales of Hydrus, which was not part of our portfolio last year. This was partially offset by declines in advanced technology intraocular lenses in South Korea, following a reimbursement change during the first quarter. Implantable sales in the first nine months of the year were up 23%. In consumables, our third quarter sales were up 11% to $618 million, primarily driven by improving conditions across international markets and continued strength in cataract consumables in the United States. We saw double-digit growth in cataract and refractive consumables and high single-digit growth in vitret consumables. For the first nine months of the year, consumable sales were up 12%. In equipment and other sales were $206 million in the quarter, up 15% year-over-year, primarily due to continued strong demand for our cataract suite of equipment. We are continuing to upgrade older generations of phaco equipment in international markets to our Sentry machine and account conversion has been favorable. We also continue to see healthy demand for our Legion phaco machine in developing markets. Equipment sales for the first nine months of the year were up 10%. Turning now to Vision Care. Third quarter sales were up 5% year-over-year to $908 million. While we saw demand in both the U.S. and international markets, foreign currency negatively impacted sales by approximately 700 basis points. For the first nine months of the year, Vision Care sales were $2.7 billion, up 8%. Contact lens sales were $558 million in the quarter, up 7% versus last year. In the quarter, we saw solid demand for our new innovative portfolio of SiHy lenses, Precision1, Dailies Total1 and Total 30. Contact lens sales for the first nine months of the year were up 10%. In ocular health, our third quarter sales were $350 million, up 2% year-over-year. This was led by our sustained family of artificial tears and international market recovery. Similar to last quarter, this growth was significantly offset by supply chain challenges, primarily in contact lens care, which negatively impacted ocular health growth by approximately 300 basis points. Although, we will continue to actively manage our supply chain, we expect these challenges to persist through early 2023. Ocular health sales were up 6% for the first nine months of the year. Now moving to income statement. Third quarter gross margin was 61.7%, down 60 basis points on a constant currency basis, primarily due to inflationary pressures. Core operating margin was 17.2% in the quarter, down 50 basis points on a U.S. dollar basis, but up 160 basis points on a constant currency basis. The improvement was primarily driven by operating leverage from higher sales and favorability from incentive compensation, partially offset by increased inflationary pressures. Third quarter interest expense was $34 million, compared to $31 million last year, driven by higher interest rates. Going forward, we expect interest expense to increase as we finance the Aerie transaction with debt and look to refinance our remaining term loan. The third quarter core tax rate was 19.2%, compared to 17.5% last year, primarily due to a mix of pre-tax income across geographical tax jurisdictions and a decrease in the build of inventory in certain markets, partially offset by a discrete tax benefit related to fiscal year 2021. Core diluted earnings per share in the third quarter of 2022 were $0.50, down $0.04 from last year. On a constant currency basis, core diluted EPS was up 14%. Before I discuss our outlook for the remainder of 2022, I will touch on a couple of free cash flow and other related items. Free cash flow for the first nine months of 2020 was $475 million, compared to $578 million last year. This variance was primarily driven by lower cash flow from operations in 2022 from changes in net working capital, primarily related to the timing of the annual bonus payment, which was higher than in 2021. Capital expenditures were $397 million for the first nine months of 2020, which were primarily related to investments in our contact lens manufacturing production lines. Similar to prior years, we expect to see an increase in CapEx in the fourth quarter. Transformation costs were $17 million in the quarter and $210 million of life-to-date. We have made great progress with our transformation initiatives and have delivered our targeted savings. As David mentioned, we have identified additional transformation initiatives to generate incremental efficiencies. The incremental annual savings are expected to be approximately $100 million starting next year, while the incremental one-time cost for these activities is expected to be about $125 million. Importantly, we expect these incremental savings to partially mitigate the macroeconomic headwinds we are seeing, while allowing us to continue to invest behind innovation and new product launches. We plan to complete the program around the end of 2023 as originally communicated. Now moving to our full year guidance. Our current outlook assumes that the 2022 global markets grow at a slightly above historical rate, inflation stays at current levels through the remainder of the year, the supply chain does not materially deteriorate and the U.S. dollar holds steady at mid-October foreign exchange rates. Based on our current assumptions, we are updating our net sales guidance for 2022 to $8.5 billion to $8.7 billion. We are also tightening our year-over-year constant currency sales growth guidance to 10% to 11%. Foreign exchange is now expected to have a negative impact of approximately 6 percentage points versus prior year. Moving to core operating margin. We are tightening the range of our full year outlook to 18% to 18.5%. This guidance now reflects approximately 180 basis points of FX pressure and approximately 100 basis points of net inflationary pressure. Consistent with last quarter, we expect interest and other financial expense to be between $210 million and $220 million. This does not include the potential impact from the planned acquisition of Aerie. We are maintaining our 2022 core effective tax rate guidance of 17% to 19%, which implies a high 2020s tax rate in the fourth quarter. As I mentioned in August, we are in discussions with the U.S. and Swiss tax authorities regarding an advanced pricing agreement. Our guidance incorporates the impact of the new agreement and assumes the negotiations will be finalized in the fourth quarter of this year. Finally, we are now tightening the range of our 2022 core diluted EPS guidance and now expect core diluted EPS of $2.20 per share to $2.25 per share. This updated guidance reflects an increase of approximately $0.06 of FX headwind versus our last call and approximately $0.43 versus prior year. Additionally, we are tightening our constant currency core diluted EPS growth outlook to 21% to 24% due to the strong momentum we are seeing in the business. This excludes any impact from the Aerie acquisition, which we expect to pressure core diluted EPS by approximately $0.03 in the fourth quarter. Now I will briefly discuss our intended acquisition of Aerie Pharmaceuticals. Under the terms of the agreement, Alcon will acquire Aerie for $15.25 per share, which represents an equity value of approximately $770 million. Additionally, Alcon will assume approximately $160 million of net debt for a total purchase consideration of approximately $930 million, which we intend to finance with new debt. The agreement was approved by the Boards of both companies and we expect to close the transaction in the coming weeks. In summary, I am very pleased with our third quarter performance and I want to thank the entire team for their hard work and determination. This year has had its challenges, but we continue to manage well in a difficult environment. With that, I will pass it back to David for closing remarks.

Thanks, Tim. To wrap it up, our underlying business is performing well. Our team is executing and delivering on our commitments to our shareholders. We continue to lead the market on the strength of our innovative product portfolio. We are investing in innovation. We are creating operating leverage and expanding margins. And finally, we are moving into attractive white spaces by expanding in ocular health with the intended acquisition of Aerie. Based on these results, I am optimistic about Alcon’s long-term outlook and value creation, and I want to thank all of our associates once again for another great quarter. With that, let’s open it up for Q&A.

Thank you. [Operator Instructions] Our first question comes from the line of Ryan Zimmerman with BTIG. Please proceed with your question.

Hey. Good morning. Thanks for taking my questions, David. I want to ask actually about the Aerie transaction a little bit. As we think about the margin benefit that you are getting from the transaction, I wonder if you can provide a little bit of color. I think the street looking for about 100 basis points of op margin expansion next year. I assume Aerie will kind of carry some of that load given their existing margin profile, but I wanted to get your take on that and kind of how to think about the benefit we get from the Aerie transaction?

Yeah. Actually, Ryan, thanks for the question. As we announced on the press release when we did the deal, actually, in year one, it is relatively neutral, from an operating income perspective, it will be relatively neutral as we work through the synergies and what have you, and then, obviously, the financing cost is sort of below the line. So it will cause a little bit of pressure in next year’s number, but it’s not that material.

Okay. That’s very helpful, Tim. And then, David, you did comment that ATIOLs has moderated a little bit. I am wondering if you could elaborate on kind of what you are seeing there in terms of that moderation, how you think about the end markets for ATIOLs and when do you expect that to start to turn more favorable? Thanks for taking my questions, guys.

Yeah. Ryan, in the Surgical business, the implantables business was pretty good. We actually had a pretty good quarter, as you can tell. The implantables was mixed, though, obviously, the international markets did really well. Penetration was up. You have to take out Korea from that number. But I mean it was a pretty good penetration improvement. Our share across all markets was very good, and again, we particularly in the PCIOLs. And Clareon Toric has done a nice job of helping stabilize our toric business, which, again, we would lost a little share in that category. But directionally, the news was pretty good. I think the thing of excitement was U.S. and I think the U.S. had been segue slightly. Again, I think, we are really thinking about this as penetration moving a lot with the staffing considerations that are going on in the U.S. And I think what we have heard a lot from the conventions we have been at was that we are losing people who know a lot about how to articulate the value of ATIOLs and when you lose somebody like that in a staff, it is difficult to get them right back. So we are spending a lot of time right now on our programming focused on getting information to the patient, also training docs on how to communicate the value of quality of life and the value of the long-term benefit of being spectacle free. And again, that is a big part of how you move people from kind of standard lenses to premium procedures. So good news, I guess, is procedures themselves look pretty normal. I mean I don’t think procedures were off at all. In fact, we saw direction around the world a pretty good number for procedures. The mix to penetration wet sideways on us quarter-to-quarter and that’s, obviously, something we are paying attention to, but I feel like we have got a line of sight to the programming that can help move that.

Thanks for taking the questions. Congrats on a nice quarter.

Thank you. Our next question comes from the line of Julien Dormois with BNP Paribas. Please proceed with your question.

Yes. Hi. Good afternoon, guys. Thanks for taking my question. It’s also related to Aerie and particularly the focus on the product they have under development, which is called AR-15512, if I am right. I think this is a potentially direct competitor to Novartis drug Xiidra and the drug had very high expectations in the consensus and for whatever is in sales. So what makes you comfortable that this drug could be much more interesting than Xiidra, and also, if you could update us on the clinical development program and particularly the time line for the topline data readouts and the potential filings with the FDA, please?

Yeah. Julien, thanks for the question. I think first of all, on 512, we like the potential of that product for a number of reasons, but mainly because it’s probably additive to almost every other mechanism that’s out there in the dry eye category. So I think the exciting part for us is you may find that this mechanism isn’t really competing directly with Xiidra, but could be additive to it and a number of the products that are out there, including Xiidra take quite a little bit of time to work. And so what we are optimistic about is its potential to work a little more quickly and also be complementary to other products. So that’s kind of the profile we like. Now look, it’s in clinical Phase 3 and so we will see what the data comes out. I believe the data readout is somewhere in the third quarter range next year and then we will have to figure out kind of right after that how it looks and what we want to say about that and it’s finally time line. So we are just getting familiar with a lot of these things, and again, as we actually close the deal, we will have a lot more to say about this and the other pipeline. But I think, directionally, we feel pretty good about that product.

Okay. That’s very helpful. Thank you very much. And if I can have a quick follow-up, which is on South Korea. Sorry if I missed that. But how long do you think that could impact the implantables trajectory, is it into Q4 or could we see another directly impact in 2023?

Well, it’s probably got two more quarters to go. So the impact was -- there was a big -- very significant increase in revenue growth in Korea in the first quarter of this year and so we will wrap around on that obviously next year. What we are seeing right now is that the penetration that in Korea was north of 50% has come down to much more normal levels as the reimbursement from the payers has changed. And so as a consequence of that, I think, you are going to see a more normalized number going forward. Still a pretty good number, and I think, North Korea is still leading the way in a lot of smart ways on the ATIOLs, but certainly will cause us some challenges until end of first quarter.

Okay. Great. Thank you very much.

Thank you. Our question comes from the line of Daniel Buchta with ZKB. Please proceed with your question.

Yes. Thanks very much. Hello, gentlemen. Maybe the first question from my side on the contact lenses side, I mean, 7% organic growth here in this quarter. I mean, at least my personal expectation was much higher than that, we have seen what your competitor J&J has also reported, and in the past, you have clearly stated this year, you want to gain market share. Is there anything holding you back a little bit, are there older more mature products that are inclined or how do you feel about this ability to gain market share this year and then also in the coming years? Maybe that’s the first one from my side.

Yeah. Daniel, look, we feel really good about market share in the contact lens business. So let me just start by saying, market growth was pretty difficult to gauge this quarter. There was a number of things going on, the timing of price increases, depending on when they come out, may or may not get captured in the market data. And similarly, depending on when they happen, inventory loads can be carried into quarters or not. So you should be really careful about the market assumption this -- and what -- and just kind of think carefully about what other people have done relative to inventories and inventory movements. Secondly, the contact lens market itself is we had it kind of mid-to-high single digits. So let’s just call it 7% growing with the market. I would tell you, in the U.S., we grew share with a great deal of confidence. And internationally, we continue to grow nicely, and our share of new and switch fits continues to look very good for us. So, again, I think as -- one of the things I mentioned earlier was that as, patient volumes get back to normal and that is the flow of patients through the offices, that’s really what we need to grow share, because in order to grow share, you have got to have a switch or a new patient and it’s exciting, I think, for us to see that patient visits are now kind of roughly back to pre-COVID levels and international, in particular, will do well. And I think as that happens, we like what we see. So I feel good about where we are and certainly feel good about growing share consistently growing faster than market.

Okay. Thank you much. Very clear answer. And then maybe the second one to Tim asking on the former or the still valid 2023 guidance for core operating margin in the low 20s, I mean, thank you for your comment on area that it’s not really margin dilutive into next year. At least, fortunately, at least compared to your mid-October assumptions has also eased a little bit. I mean, how do you feel about this low 20s core EBIT margin into next year? Is it still realistic or are the headwinds too material to really compensate for until then?

Yeah. Great question, Daniel. We do have a plan to get to the 20% in 2023. I am not going to go into all the details here, we will share plenty of details with you on the February when we guide. But I can tell you what gives us confidence is just how we are performing this year. I mean we continue to launch products that resonate with customers. If you look at our revenue, we are up 12% in constant currency year-to-date. So we have been able to demonstrate, obviously, that we can grow the business. We are also driving nice operating leverage. I mean if you look at third quarter year-to-date, we have got an SG&A alone in constant currency. We have got about 200 basis points of operating leverage. So that just tells us that the fundamentals of the business are working very, very well and that’s what gives us confidence in our 2022 numbers. But we will share more details with you on the February call when we give formal guidance.

Fully understood. Thanks for the conference.

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

Good morning. Thanks for taking the question. Hey, David, I wanted to ask you about your pharma strategy going forward. Bloomberg’s reporting this morning that Novartis is considering selling its ophthalmology business and that business could garner about $5 billion. Can you talk about your approach to building your pharma business post Aerie? If the right large asset became available, would you consider it and what’s your capacity for M&A? And I had one follow-up.

Yeah. Look, I mean, we kind of consistently say, we really like this kind of $50 million to $500 million range. It’s not that we couldn’t do something bigger than that, but I don’t think we are looking for transformational ideas at this moment. What we are really looking at, I think, is how do we build nice steady even growth with a disciplined approach that I think generates real long-term shareholder value and adds kind of consistently accretive to what we are trying to do. So we like what we are doing, and I would tell you that, I think, what is great about the Aerie approach has been that, we get two products in glaucoma that blend nicely with Simbrinza, So together, those glaucoma products now, I think, are probably the best approach to maximum medical therapy in glaucoma you can get. Rocklatan plus Simbrinza is three different mechanisms doing just, I think, about the very best you could do for a glaucoma patients. So we get excited about that approach. Nice synergy with what we have done already. And then as you go forward, Eysuvis is a really exciting product that we think can complement something like 512 that we come to market and be a dry eye complement where we have got kind of a mechanism that treats flare and a mechanism that treats dry eye long-term. So the business strategy we have directionally is to kind of find products that have growth potential. And I would say that, a lot of what you see out there in the, I would say, legacy portfolios of many of the companies that are available really aren’t growth phase or they are way late in their growth phase and they are expensive. And I don’t think that’s really an approach we are going to take. I think we see the market as becoming a lot more interesting over time as values come in the line with we thing there out to be and I think you have to think of us is, probably, more taking a moderated approach in that kind of -- typically kind of $50 million to $500 million range and every now and again, maybe we dip into an area or something like that.

That’s helpful. And then just on the topline for Tim or David, how should we think about -- what are some of the puts and takes on the topline? Tim, your comment on the 20% margin goal were clear and helpful. How about the topline, I mean, you talked about year-to-date 12% constant currency. I mean, do you guys think you guys are above a mid single-digit grow rate at this point and what are some of the puts and takes to consider for 2023 on the topline? Thanks guys.

Yeah. Look, on the revenue line, we really believe we could consistently grow faster than market. So I think if we are doing the right things, and I think, we are, and our innovation comes through, which I think it will. I think what we are going to see is steady market growth because we have got good fundamental macros underneath the eye care market, which should drive kind of a mid single-digit results. So I think if you think our markets grow, should grow kind of 4% to 6% in a normal world, we should grow a little bit faster than that. So I think depending on where you put the market then where you put us should be a little bit north of that and I think that should be the way we think about it over time. So, yeah, we are not going to -- I mean, I don’t see us growing, 12% is a big number, because international is wrapping around the COVID year, right? So we are getting a big number of international, which is terrific for right now, but it’s not the normal world. And we have see in the U.S. business is something coming back to, as it’s not wrapping around the COVID numbers right back to what the markets ought to be. And so I feel like we are coming probably into next year at a frame where most of next year should be relatively normal, notwithstanding other macro problems.

Thank you.

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

Hey. Good morning and thank you for taking the questions. Just first on the transformational cost savings, the $325 million including $100 million incremental that you are announcing this quarter. Have the majority of those been realized yet and is that incremental $100 million in cost savings, does that come in, in 2023 or does that start coming in in 2024? Thanks.

Yeah. Great question. So the first, I will call it, the first round of transformation, the $200 million to $225 million of savings, most of that has been realized. We do have more of that coming in in 2023 as we have some actions taken place. But we have got projects in place plans and numbers identified. But that is -- again, that portion of the transformation, as we said from the get-go, was going to be reinvested back into the business. So that’s allowed us to strengthen what I’d call some more of those customer-facing expenses that we would like to invest and to drive that revenue line. Now the incremental $100 million that has been identified, that will come through in 2023.

Okay. Excellent. And then just one last one on contact lens trends, how you are seeing the consumer buying patterns potentially change or stay the same as inflation in the economy that’s kind of move [ph]?

Yeah. Look, I mean, I think, we have typically thought about consumer behavior, linking it back to the kind of 2009, 2010 recession. We have modeled six ways from Sunday, what we think could happen. What you saw back at that one, that’s probably our best proxy was that you didn’t see a lot of trade-ups. People don’t stop more in contact lenses. So the volumes are fine. What you end up selling is, at that time, what you didn’t see was a bunch of reusable folks moving into Dailies at the same pace. Everybody kind of stays put in their lenses. So trade-ups from HEMA lenses to SiHy might slow, you might see some reasonable to Daillies slow. But the good news with our business is, we are well positioned at this point with a value product in P1 that really has a price point that I think is much more attractive than, say, if you are trying to jump all the way the GP1. And similarly, with Total30 and the reusable, if you stand at the reusable space, you can still get now, I think, a better lens at a very similar price and trade up into our T30. So we feel like we have got very good positioning for our contact lenses for really whatever happens. I do think that you will see some value slowdown in that market if there’s a significant turn. But directionally, I think, we feel like we can manage that pretty well, and certainly what happened, and it was a pretty quick turnaround the other way as well. So, again, I think, we understand it and we modeled it a lot of different ways. Those are generally speaking what you see.

Thank you.

Yeah.

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

Thank you. Good morning, guys. Tim, maybe just a couple of follow-ups on the margin comments you made. I just want to make sure I understand. One, when you say Aerie is going to be, I thought you said operating profit neutral or operating margin neutral? Number one. And number two, on the 20% comment for 2023 a path back to that. Would that be for a full year, you think there’s still a path to getting to a 20% operating margin or are you speaking about maybe an exit rate or something like that? Thanks.

Yeah. As far as Aerie goes, the operating income dollars will be neutral. So it will apply a little bit of pressure given the fact that we will have some revenue from that in year one then it becomes accretive in year two. So it does apply a little bit of pressure, but that is in our 20% and not material, what I would say. The 20% is a full year number.

All right. Fair enough. And David, maybe for you, just on the ATIOL comments in the U.S., you put a lot of that on staffing that sits well with what kind of we are hearing in the field. But do you think any competitive impact at this point and on the South Korean impact in 3Q, was that any different than the impact in the second quarter? Just I know the first quarter was the big buy forward, but did 2Q or 3Q have any difference in impact? Thanks.

No. 2Q and 3Q were kind of roughly the same and I actually think I missed North Korea earlier, just somebody pointed it out to me, so sorry for my geographically challenged verbiage. The truth is on the -- on that business, we feel pretty good about what’s going on with the programming and I do think that while you can see some slowdown in this category. I don’t know that it’s necessarily going to be related to what we see right now. Right now, I feel like the share has been a pretty good move for us. So if you take it -- if I take it apart and just say, PCIOLs, we actually gained share globally, which offset a little bit of the penetration concern. In the monofocal business, we had a really good quarter. It looks like we gained share, principally on our Clareon launches. And in toric, we were slightly down, I think, maybe -- but a lot better than where we have been. So I think stabilizing there. I think we have had a good competitor in the toric space now. But if you think about it around the world, we have got pretty much everybody in play now that’s going to be meaningful to affect us. Certainly in the international markets, maybe there’s a couple of more smaller players to come in the U.S. But we have been now through at least a full cycle of opportunity to see share move and we have held a really strong position. I think in the U.S. PCIOLs at least is still up over 80%. So really feel good about how well the market has accepted Vivity and PanOptix.

Understood. Thank you.

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

Good morning and thank you for taking the questions. I want to start still with cataract. Just looking internationally, if there are any markets at this point that you would say are still in recovery or are most at this point from your perspective largely back to pre-COVID trends? And then as you think about PCIOL penetration, can you just update us, especially after some of the recent dynamics, how you think about broadly PCIOL penetration U.S., as well as OUS. And as you think about U.S. specifically in the clinical based sales force, the timing at which you think you could start to see recovery and growth in PCIOL volumes?

Let me try to take those a little bit of time. The international recovery is pretty solid. I mean, I would say, we still got a little more wrap around the go. I would say that, our sense of it was we -- even if through the beginning of the first quarter of this year, we still had a little bit of COVID shutdown in China. We had a few other markets around the world. Japan has been slow coming back is not yet back to what we think it could be. I would say there’s still kind of -- the big markets, it’s probably China and Japan. That’s probably the best way to say it. Latin America has been very strong this year and so I think they are kind of back to where they wanted to be. What I think is really left to do you see Asia come completely back to where it can be. That -- and maybe even a little bit of Europe, Eastern Europe and so. But it really stops, I think, about the end of the fourth quarter. So we should get a little more international benefit at the end of fourth quarter. And then I think as you start into next year, it gets to be really hard to discern, because we are kind of a couple of years past it, and I think, we are probably in that zone where we should just assume we are roughly normal, not entirely true, but probably, the best way to talk about it. And on the penetration, the clinical sales force, we expanded our sales force and we continue to see the benefits of that. We are spending a lot of time in clinic on things like biometry and in the United States on biometry and ATIOLs. And that matters, because again, there’s a lot of work that needs to go on inside the office to run a really efficient premium practice. And so we are really proud of the work that’s been done by the U.S. sales force to give the training and to get another group of folks up and really creating an environment where surgeons could thrive and really do the work they love to do, which is surgery and then help the clinic and the staff do the things that they need to do to get the patients aware of and prepared for decision-making around what they would prefer to have. And so in terms of clinical outcome, we try and demonstrate that, we try to obviously help them understand the economics of these choices and what the long-term benefits are. So that’s kind of where we are right now. I do think penetration has gone sideways. I kind of imagine it picks up as staffing stabilizes and as kind of the noise around the economy kind of stabilizes and I think those two things together, we will have to see, procedures themselves don’t look like they are way off either internationally or in the U.S. really, really just looks like we are getting a mix shift here right now to a little more traditional lenses and I think that bounces around a little bit for a while before it gets better.

Great. And if I could follow up on contact lenses, too, specifically the reusable lens market. What you have seen post-pouncing Total30 in terms of where your share was then versus where it’s trended now in and just your outlook for the ability to continue to increase share in the reusable segment of the market?

Yeah. Just not being redundant, but I would tell you that what we are excited about is the visit data, because getting patients back in the office to receive a new prescription when their visit is due, I think, is a really big deal, because that obviously gives us an opportunity to do precisely that is to offer a new and better solution. So we will see, I mean, when we look at the leading indicators in these markets, it’s always new and switch fits and that data is pretty easy to get in the United States, a little harder to get outside the U.S. But in the U.S., the T30product looks really good on our new share profile. And again, that’s the leading indicator. It takes time to move all these markets. So none of these markets move real fast, we were thrilled with the share point a year. I mean that would be a terrific outcome. I think we are doing great with T30 and we expect it to do well over time.

Thanks for taking the questions.

Thank you. Our next question comes from the line of Joanne Wuensch with Citi. Please proceed with your question.

Good morning and thank you very much for asking -- for taking my questions. Just two quick things. I appreciate the comments on the economic impact or potential impact in a recession on contact lenses. But can I get your thoughts please, on what it may or may not mean for ATIOLs, because they are far more penetrated today than they were in the previous recession? And then my follow-up question really has to do with any commentary you can give us on 2023, simple things like FX, headwinds, potential or an effective tax rate, so we can sort of get those moving in the right direction? Thank you.

Sure, Joanne. Let me try the ATIOL piece and then Tim can grab the rest. The -- look, on ATIOLs, it’s very hard to know, because we don’t really have a metric on this. Penetration is up in the international markets. It grew nicely and if you backed out Korea, you would be pretty pleased with it. So that, on the one hand, looks really good and I don’t know that the recession is necessarily or any of the kind of economic overlays are any different out there than they are in the U.S. I do think that the U.S. market certainly has had a penetration that we kind of moved sideways this quarter and has for a couple of quarters actually. So, how do I think about that? I tend to believe, because what I am hearing more from the surgeon than anything else is that this is staffing oriented. But I will tell you that, any time seniors see pensions decreasing or inflation taking a bigger chunk out of their budget, you could imagine that it has an effect. So I think the challenge is going to be discerning which is which and we will have to see that over time. What I think is positive is our share movement, and in particular, our ability to kind of influence the adoption and help train staff that may be turning over, because I really can’t do much about the environment. I do think what we can do is show surgeons and their staff how to continue to help these folks understand the economics, understand the benefits, do that in a very simple and efficient way, get them through the practice and get them into something that I think long-term is in their best interest. So we are working hard on the things that we can control there and we will just have to see over time how the rest of that works out.

Yeah. Again, we will give you guys more color on 2023 on the February call. But just at a high level, the tailwinds that we should be benefiting from as we go into next year to David’s point earlier, we would expect to grow from a revenue perspective to grow faster in the market. We would expect to continue to get operating leverage as we have done this year. We have the transformation that we announced that incremental $100 million that will, obviously, help as we go into next year. So I would say those are the main tailwinds. From a headwind perspective, we do expect FX to be a pressure point, when you look at 2023 versus 2022. It just depends on where the rates shake out this year. We will give you more guidance on the tax rate when we get there, but it will be relatively close. And then if you are thinking about, this is not a rate thing, but an EPS thing, do you keep in mind that interest expense will go up next year. We have to -- we plan on financing the Aerie acquisition through debt and now we have got some term loans that you can see in the $20,000 that we will plan on refinancing. Those were due in March of 2024. So we will take care of that relatively soon, but those are the headwinds and tailwinds.

Much appreciated. Thank you.

Thank you. Our next question comes from the line of Falko Friedrichs with Deutsche Bank. Please proceed with your question.

Thank you very much. And so my question is coming back to 2023 and thanks for your previous comment that FX should still be a bit of a pressure point, but then also good to hear your confidence into the 20% margin target next year. So is your confidence into this 20%, is that confidence into a CER 20% margin or is it a confidence into an all-in, even including this expected FX headwind? Thank you.

Yeah. Again, I think, I have elaborated enough on the 2023. We are going to have our call in February. We will give you plenty of details with the guide and the revenues and the margins and all that, but we feel good about the 20%.

Okay. Thanks. And then a quick follow-up and so this -- on the margin in Q3, the favorability from incentive payments, can you elaborate a little bit on what is behind that and is that a temporary thing or will that be with us for the next quarters now? Thank you.

No. It is more of a timing thing than anything else. If you recall, last year, our bonus pool was larger than what we anticipated will be in this year. So as you -- every quarter we accrue our bonus pool. So, basically, our last year, our accrual was higher than it was this year.

Okay. Thank you.

Thank you. Our next question comes from the line of Zach Weiner with Jeffries. Please proceed with your question.

Hey. Thanks for taking the questions. I was wondering if you could give an update on some of the contact lens manufacturing upgrades that you are working through and any color on price that for content that you have seen throughout the year. Thanks.

Yeah. Zach, so we are proceeding and continue to build out capacity in our contact lens business and we are doing that on our newest lens, which again, have tremendous flexibility to produce Dailies or monthlies can produce any of the modalities as well. The beauty of that, of course is, it helps you in prediction, it helps you in making kind of shorter runs and more efficient use of the equipment. So directionally, we continue to see the lens we put in several years ago, mature at the levels we expected. So the metric we use as OEE, and as we look at that, our planned numbers have been met or exceeded on our original line. So we have great confidence that the remainder of those lines as they come in over time, we will be able to meet or exceed what we had planned. So we feel good about the performance of those lines and the way in which they are running going forward. So that should help us in the outer years of our plans, as we kind of moderate the amount of equipment we put in, the lens we put in we should see some improvement in gross margin around our Vision Care business. So we are optimistic, I think, that, that is realizable. On pricing in contact lenses, there have been a number of price increases by a number of competitors and some folks have taken two, they took smaller than we did and then they took it twice. We took a larger one, more mid-single digits at the beginning of the year. We have also in our international business, gone out, as well as our U.S. business and begin to talk about some price increases that we are going to take going forward. They have not taken place yet, and of course, we have said kind of mid-single digits again. We will see what we have in terms of leakage and what we can really realize from that. But we are trying as best we can to offset the raw material input costs that are inflating as we have kind of gone through this year. So we are trying to keep up with it, but it is tough and we will see how that goes.

Thanks. And if I could just follow up with one more on the T30 one, can you give any color as to who that lens -- where that lens is taking share, is there other Alcon lenses or competitors? Thanks.

Yeah. I mean, obviously, the biggest lens target for us, I think, is the obvious one. It’s J&J’s 2-week lens. But we are obviously -- we are doing pretty well against Biofinity as well. So we like we like our chances against any monthly lens. And we like to say this is a lens that feels like the same thing on day 30 as it does on day one and that is a different experience, I think, you can get in either the 2-week or the monthly modalities. So we are pretty ambivalent to who we take it from, but it’s certainly done well competitively. We are always going to cannibalize our own products in this case. We have a better margin on our T30 than we do on our Air Optix. So we feel good about going ahead and whatever people want to move to from that, we will take a look at that. But that’s not our main source of business. Our main source of business is competition. It’s a new product, though. I’d give it a little bit of a run though. It takes a little while, and as we see the toric come in, in particular, which happens at the beginning of the year, that will really help, I think, because it is one of those things where practices really like to have a family of lenses. So having sphere with toric gives you most everything you need to kind of fit as many patients that are coming through the door. So I think that will be a big uptick for us as well.

Thanks taking the questions.

Thank you. Ladies and gentlemen, this concludes our question-and-answer session and thus concludes our call today. We thank you for your interest and participation. You may now disconnect your lines.