Good day, ladies and gentlemen. Thank you for standing by. Welcome to the STAAR Surgical Third Quarter Financial Results Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the call will be open for questions. [Operator Instructions] This call is being recorded today, Wednesday, November 3, 2021. 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. Brian, please proceed.

Thank you, operator, and good afternoon, everyone. Thank you for joining us on the STAAR Surgical conference call this afternoon to discuss the company's financial results for the third quarter ended October 1, 2021. On the call today are Caren Mason, President and Chief Executive Officer; and Patrick Williams, Chief Financial Officer. The press release of our third quarter results was issued just after 4:00 P.M. Eastern time and is now available on STAAR's website 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 and adjusted earnings per share and sales in constant currency. We believe that these non-GAAP numbers provide meaningful supplemental information and are helpful in assessing our historical and future performance. A table reconciling the GAAP information to the non-GAAP information is included in today's press release. Following our prepared remarks, we will open the line to questions from publishing analysts. We ask analysts limit themselves to two initial questions, then re-queue with any follow-ups. We thank everyone in advance for their cooperation with this process. And with that, I would now like to turn the call over to Caren Mason, President and CEO of STAAR.

Thank you, Brian. Good afternoon, everyone, and thank you for joining us on today's call. I am pleased to report that we experienced outstanding demand for our ICLs during the third quarter and achieved net sales above the high end of our previously provided outlook. Enthusiasm for our implantable Collamer lenses continues to grow and has never been higher. In fact, orders for ICLs outstripped our supply of lenses in the quarter. With China being our largest market, our distributors inventory levels in China were drawn down to historically low levels to meet surgeon and patient demand. While we were able to meet 35% growth levels to the surgeon and patient community from our distributors' inventory. We were only able to ship units equaling 19% growth to our distributor. COVID-related employment, production output and modest supply chain challenges impacted the quarter and resulted in a backlog of over 20,000 lenses at the end of the third quarter, representing several million dollars of orders in-house. As many of you are aware, we have typically been able to meet the vast majority of demand for our spherical lenses and non-custom toric lenses through real-time production and finished goods inventory on hand at STAAR within a few days of receiving an order. Continued strong demand combined with the aforementioned production challenges resulted in what we believe is a temporary, longer-than-usual delay in lens order fulfillment during the third quarter which we are addressing and aim to fully resolve in the coming quarters. With regard to China, I am pleased to report that our EVO ICL momentum in China continues unabated. We continue to increase our refractive market share projections for China next year and beyond. Overall, we achieved strong year-over-year global ICL unit growth of 29% in the third quarter of 2021 as…

Thank you, Caren and good afternoon, everyone. Total net sales for Q3 2021 were $58.4 million, up 24% as compared to the $47.1 million of net sales in Q3 2020 and above the outlook we provided to you in August for the third quarter net sales in the range of $57 million to $58 million. The year-over-year increase in net sales for Q3 2021 was attributable to global ICL sales growth, up 31%. We now anticipate robust levels of ICL unit growth in Q4 that will exceed 40% year-over-year that when combined with our strong results for the first three quarters of 2021 informs our raised outlook for full year fiscal 2021 that Caren just outlined. In terms of product mix, ICL sales represented 93% of total company net sales for the third quarter of 2021 and other products represented 7%. We continue to anticipate a similar sales mix in the fourth quarter and that other product sales will be approximately $15 million for the full year 2021. Gross profit for Q3 2021 was $45.3 million or 77.6% of net sales as compared to gross profit of $34.9 million or 74.1% of net sales for Q3 2020 and $49.2 million or 78.9% of net sales for Q2 2021. The year-over-year increase in gross margin was due to the higher mix of ICL, which command a higher margin than our other product business, partially offset by increased period costs associated with manufacturing projects. The sequential decrease in gross margin for the third quarter was due to a lower mix of ICL and increased period costs associated with manufacturing projects. For the fourth quarter and full year 2021, we now expect gross margin to be towards the higher end of the 75% to 77% range, we previously provided. Moving down the income…

[Operator Instructions] Our first question comes from Anthony Petrone from Jeffries. Anthony, your line is now open.

Thanks and good afternoon, everyone. I hope everyone is doing well and congrats here on a strong performance in a difficult quarter. Maybe, Caren, to start with the comments on China and the supply chain headwinds specifically. Is the read-through here that the 20,000 lenses that you referenced in backlog, in the prepared comments and in the press release, is that all related to China, A? And then, B, if there were no supply chain headwinds, would that have been realized in the quarter? And then, the last one on that specifically is, what is the dollar value on that $11 million that we should be thinking about? And I have one follow-up.

Okay. Thank you very much, Anthony, we appreciate it. We are very pleased with the quarter and we are working on what we believe is a very short-lived situation that occurred in Q3 with regard to available lenses for shipment. So the 20,000 lenses would have been shipped in the quarter, the majority of them to China. We haven't really released a range in terms of the dollars. But if you do the math on the low end, it'd be at least $65 million in revenue for the quarter had we been able to ship. But we're not going to get down to too many specifics here, but definitely would have been a record quarter for STAAR.

Yes, that's helpful. And then I guess maybe timing on when the distributor could restock it. Just -- I would imagine they can't run at this low level of inventory for an extensive amount of time. And then quickly on FDA, I understand your comments, should we be reading the comments on timing that the delay is specifically around just COVID constraints and agency dealing with the backlog of clearances elsewhere? Thanks again, will hop back in queue.

So, with regard to China, we are already replenishing inventory in China. We definitely will be prepared for the next big season which begins in January so our replenishment is already underway. With regard to the FDA, we continue to be in customary review. We have no other comment at that time. What we did when we talked about hoping to have an answer by the end of October, we were basing that on pre-COVID guidelines which due to COVID, the FDA has been a bit challenged and we more than accept and understand that and we're continuing to be in active interface with the FDA and looking forward to a resolution.

Thank you.

Our next question comes from Chris Cooley from Stephens. Chris, please proceed.

Good afternoon and Let me echo Anthony's sentiments on a great quarter. Just maybe two quick ones for me if I may. When we think about the restocking efforts on these 20,000 units or 20,000 lenses, are we to infer from your commentary that in fact that should all ship out during the fourth quarter? And I'm curious with that kind of a significant channel fill, can you still keep pace? I guess what I'm trying to get at very simply is do you catch up in the fourth quarter or is this a phenomenon that carries over a little bit into the first half of next year? And then I've got a follow-up.

So, thank you very much Chris. In terms of catching up, we expect to catch up in fourth quarter and Q1 of 2022. Our made-to-order custom lenses a little later in the year, but our supplied toric lenses for sure by the end of Q1 2022.

Super. And then just -- maybe just a quick clarification on that same point. It sounds like the issues which you faced during the third quarter from a supply chain standpoint have been addressed. I just want to clarify that here on the call. You aren't under any kind of backlog in terms of raw material purchases and you're not necessarily seeing outsized delays in shipping. Just net-net it was very, very strong demand there during the quarterly period and with these headwinds that existed in the marketplace, you just couldn't keep pace. Am I interpreting that correctly?

Yes. Really COVID-related employment means that we did have individuals who either didn't return to work or chose to leave for other opportunities which meant that we would bring in other individuals. We did update and modify our pay rates. We did hold job fairs but we have to train all of these new individuals and that's about a six to eight-week process. So, there was a little bit of production output that what's impacted by those that training schedule. We then had some production challenges in the particular area that are being addressed at this time which are not concerning. And the modest supply chain challenges have been rectified already. So, we are feeling very good and have already dug into that 20,000 lens back up in Q4 in the first month in terms of a good percentage of it having shipped out.

Yeah. I think Chris you hit it on the head there at the end you said, it's less about supply and more that the demand was just so strong for us and we just felt it was good for us to outline it as Caren did. And the demand is there and we're working through it and we will continue to work through it. And I think the CapEx that we laid out there for people that we've done now for the last year is clearly about expanding our capacity and everything else. And so we're feeling good about where we're at and moving into next year.

Super. And if I could just squeeze one other quick in and then I'll get back in queue. Well, I'd love to ask about the FDA. I think I'll focus more so. Just in terms of rollout plans in the US, really excited about the new ICL Experience Center. Just curious when I think about that as well as your step-up in DTC efforts have -- can you provide us any parameters about initially post approval you hope to be in x major markets, x number of surgeons trained in the US. Obviously those efforts are underway now, but just trying to think about some metrics that we can maybe look towards in terms of gating the rollout in 2022? Thanks so much.

So Chris I appreciate the question. But I think we're going to wait to answer it until we get FDA approval. Bottom line is that we just don't want to be in a situation where we're misperceived as pre-marketing here in terms because we're not doing that. But I can tell you that as we said in the prepared remarks these are several cities and we're ready and raring to go. So we'll give you all the details when we can.

Thank you.

Thank you Chris.

Our next question comes from Andrew Brackmann from William Blair. Andrew, please go ahead.

Hi, good afternoon. Thanks for taking the questions. So maybe just one on the US here, and I certainly understand all the enthusiasm around the US launch especially given the strength of that demographic that you're initially targeting. But maybe here as we think a couple of years out in the future, can you maybe just talk about the playbook that you intend to use to move down the diopter curve and target those people in that moderate bucket of myopes? Thanks.

Thank you Andrew and you did a great survey, so many compliments for the work that you did. A lot of us learned from your work, so thank you for that. In terms of lower diopter opportunity for us, we've learned in China and in Europe that when surgeons get really comfortable and confident with the tougher cases they then start to realize that all of the benefits of the lens are good for patients below minus five. And so we are keeping track of what our average diopter correction range is on a quarterly basis and it is getting better, and so our focus in the US in the next couple of years is going to be all of the advantages of the lens for minus three and above not just minus five, six or seven. But the surgeons really begin offering patients the choice of ICL with all its inherent benefits and then we start to see way more work down the diopter curve. So it pretty much solves itself with the enthusiasm of those who get the lens early and then the social media and the interest begins to build and individuals who have much lower correction want all the advantages of the visual freedom the lens offers.

And if I could add something on it, I think Andrew with your survey, the TAM is just so large, and I think a few quarters ago we talked about the fact that we've now moved slightly below the minus 10% specifically in China where we saw them buying more minus 10 and below versus above. But I think one of the things to remember is that you don't need large moves in that overall average. If we were to move slightly down on our overall average diopter uses let's say minus 10 to minus 9.5, minus nine to minus 8.5 on average, there is a huge TAM available there for us. And so I think people should be very -- people should understand that if they're trying to say that we need to get all the way down to a minus three in order to have a big revenue that's not the case at all. There's a lot of business out there with people there in those minus seven, minus eight and minus mine. That's what the data is showing us today.

That's great. Thanks for that, and Caren thanks for the compliments on the survey. Maybe just going back to your comments on the 25% growth CAGR from 2019 to 2022. I just want to check I think that implies just over $290 million for revenue for 2022. But maybe as it relates to sort of your expectations there, you gave that pre-COVID. Now that COVID has happened can you maybe just sort of talk about how some of the buildup of that has changed if at all. Has the geographic sort of mix change as it relates to pre-COVID to now? Thanks for the question.

Thank you. I think that the momentum that was building pre-COVID has come back roaring. And during COVID especially since we pretty much fully recovered in Q3 and Q4 of 2020, we now have really five quarters of what we would call more normal growth expectation, achievements regardless of COVID. So I think the bottom line for us is as we look to next year, we're looking at very high growth rates to achieve beyond the $290 million. Our focus is to really with a strong kickoff hopefully in the US market as well as continuing very strong trending for example in China 35% plus growth to the surgeon and patient community from the distributor and that's just huge and it's continuing. So you take that and you take all the other growth statistics that I talked about earlier. And we're extremely confident to pre-call 2022 at the same time that even though we had only 9% growth last year which was great because ophthalmology was down 11%. But even at that 9% in year 2 of a 3-year plan we're still making the objective because the growth is so strong and 40% this year now on top of that another very strong growth next year. So, we're super excited and really looking forward to really improving for patient their choices in terms of refractive care.

Great. Thanks for the question.

Thank you.

We now have a question from William Planovic from Canaccord. William, your line is now open.

Good afternoon. This is Rohan on for Bill. I just had a question on the details regarding the limited market release of EVO Viva in Europe. Could you provide some revenues number of countries and the 2022 plans on that?

We are going to officially roll out to everyone -- all surgeons in all approved CME Marked countries in September of 2022. We have not at this point released what that plan will be or what the revenue attributable to the EVO Viva product will be. We'll start to give those details in the January February time frame next year.

Okay. Perfect. And maybe one for you Patrick. If you could provide the breakout of the revenues from domestic Japan and China in this last quarter?

Let me make sure I understand the question again. Maybe I ask one more time you say domestic demand in China. I want to make sure I understand that.

The breakout of revenues in China, Japan and other in the last quarter.

Yes, we have it in our Q so it's probably better for me just to point you to that. We do call out China and Japan in there. For Japan I would recommend that you remember that our IOL business also flows into the Japan from a geography standpoint. But I can certainly pull it up Rohan and cite it, but I think it's better just -- we just filed our Q. So it's out there you can get all that detail.

Cool. Thank you.

Our next question comes from the line of Steve Lichtman from Oppenheimer. Steve, your line is now open. Q – Unidentified Analyst: Hi. This is actually David on for Steve. Thanks for taking our question. Maybe starting off I was just wondering if you saw any COVID impact during the quarter particularly with the Delta variant. Was there any month that you saw that were more impacted or that impacted demand? Thanks.

So we keep track of all the major markets around the world where we obviously work with refractory surgeons to deliver our ICL. And in this past quarter, in Q3, there has been limited concern in almost every market around the world. There have been some latecomers, Middle East was late, Latin America was kind of late coming into their own more as you can see from the growth rate for example in Q3 was much higher. So I would say with the exception of a couple of those markets a little bit in the smaller countries of Asia Pac, the majority almost all of the markets where we are very active they are managing COVID and the Delta variant very well.

Okay. Great. Appreciate the color. And just one more. I was wondering if you could provide any details on in terms of the growth you're seeing, how much of that is being driven by overall growth of the refractive market versus conversions of laser procedures?

The refractive market grows on average in the mid-single digits. As you can see, our growth rate is at least 25% plus. So we are growing faster than the market and we are taking share.

Got it. Thanks.

You’re welcome.

Our next question comes from Ryan Zimmerman from BTIG. Ryan, your line is now open.

Good afternoon. Thanks for taking the question. Caren, if I could just ask a little bit about the supply issues in China a little further. I mean I guess, I'm curious if you could provide a little more color just – why were the supply issues exclusively impacting China but not other markets? Because production, supply chain dynamics, they're all kind of US-based issues that you guys are dealing with COVID-related employment all US based. So why was it specifically China and not some of the dynamics we saw in say Japan or Korea?

Well I think, I don't want to give the impression that the 20,000 lenses were exclusively China, the majority were China. What we did was the right thing to do. We took a look at what our book of business was. We took a look at where the demand was and then we properly move lenses to where the need was greatest. When we looked at China, we recognized that we had enough inventory in stock to be able to meet the majority of the critical demand. So it allowed us to work very successfully with our country manager and with our importer to properly take care of the majority of the business that was necessary. So obviously with China being 50%-plus of our business, you're going to have more product there than you have anywhere else in a single place. So bottom line is we very effectively managed it and customer satisfaction is strong.

Okay. Got it. And then the 20,000 orders, I think some of those are custom lenses. So how are you thinking about kind of the risk the cancellation of the procedures, or how is – how are the distributors coming up with that number? Is that based on kind of a scheduled surgery rate that you had kind of looking at maybe a quarter or two?

So when we look at the normally stocked inventory in the aspheric and toric sizes, we're trying very hard to make sure that our recovery in that area is very swift and it's already underway because that is an area where you do have options as a patient. If you are a patient who is someone getting a made-to-order toric lens, you probably have marginal to no options related. That doesn't make your need for visual freedom any less but it does mean you're more willing to wait. Because the only real opportunity for excellent digital freedom for you as a made-to-order toric patient is what we deliver. So we never ever want to be in a situation where we disappoint anyone in terms of time to delivery. But we expect that by mid next year at the latest or like the April, May time frame this will all be back to normal which is the six to eight weeks return.

Okay. Got it. And then just last one for me. Patrick I think I've heard maybe from some other investors that you guys have kind of talk about your expectations for penetration in the US refractive market. And so I'd love to just understand kind of – I think some others have been asking about this too. But what percentage of the U.S. refractory market do you think you potentially own, call it, 12 to 18 months post launch? And how are you thinking about your launch now, given the time lines or the impact time lines from the FDA? Thank you for taking the questions.

Yes. Caren, can grab this one with the FDA, I think there's obviously some sensitivity on our side and a lot of is contingent on that. So I'll let Caren take it from here.

Yes. Assuming that we have an EVO product in the United States, our goal is to get to at least 20% share as soon as possible. Our track record in other markets, where we have had approval and have begun the business model and clinical model that's been so successful elsewhere, is that, we can do that in two to three years' time.

Thank you.

Thank you.

We now have a question from Jim Sidoti from Sidoti & Company. Jim, please go ahead.

Hi. Good afternoon. Thanks for taking the questions. I just want to be clear, this supply chain manufacturing issues that you said you had in the quarter, do you think there's any risk that these issues would prevent you from growing your historical 20%, 25% annually over the next few years?

No, Jim, we've been investing and expanding our production. And as you're aware, we've been investing in advanced manufacturing to expand the productivity and the amount of throughput that we have at our Monrovia facility. We're also opening -- reopening our Nidau facility in Switzerland. And we also have expanded the manufacturing for our Collamer buttons here in California. We're looking at millions of lenses of production capability over the next two to three years.

Yes. And let's kind of recalibrate here. We overperformed what we said we were going to do in Q3 and we just raised guidance in Q4 and reaffirmed our growth going into 2022. So this is, as Caren has described, and you can look at our financial statements, you'll see that our inventory levels have gone down the last couple of quarters as a percent of sales or percent of cost, however you want to look at it. And so, we're just building that back up, because demand has just been that robust. So we just felt that it was important that we outlined this, because I think people have looked at the company and expected very big things. And those big things are there and they're coming still. And we're very happy with the quarter and the guidance that we gave for the rest of the year.

Okay. And then, my second question is in regard to sales and marketing. And what you've done in other areas to increase your brand awareness, places like Japan and Korea, is that primarily -- that direct-to-marketing effort, is that primarily social media, is it billboard, or are there other things that you're doing? I'm just trying to get a handle on what to expect when you do launch the product in the United States.

Yes. There is outdoor advertising. There is digital marketing. There is social media. There is celebrity influencers. There is co-marketing with customers in their strategic agreements where they update and upgrade their website. We do a lot of doc finder monitoring. We do a lot of digital marketing work to make sure that we have access to searches on Google. So our search engine marketing is very strong. So we do all of the above and it is very successful.

Yeah, it sure seems like it is. Looking forward to see what happens when you do get the US approval.

Thank you Jim.

Our next question comes from the line of Bruce Jackson from The Benchmark Company. Bruce, please go ahead.

Hi, good afternoon. Another manufacturing question just to follow-up on your earlier comments. You've been working on getting Switzerland reopened. Is it actually fully reopened right now? And is it when -- if it's not open when will it be in production?

We're looking at Switzerland in the fourth quarter of 2022. And at that point in time, we will be manufacturing the majority of demand for China out in that facility.

Okay. And then not to flog the supply chain issue too hard, but presumably then when you do have that facility open then that's going to give you some flexibility in terms of being able to meet the demand in 2022.

Yeah. I think supply chain as I said was modest. We had a couple of manufacturing challenges associated with supplier changeover in one case and another we wanted a changeover and there was limited supply for a short while. So these are not the, kind of, issues that you read about in the news related to semiconductors and fabrication required units that are sitting in cargo ships in Long Beach. We're in a situation where we had a few local supplier issues that really did slow us down more than we would have liked but they have been rectified.

Yeah. And just to reiterate on the Nidau that's not -- we have enough capacity and we are actively expanding our Southern California capacity regardless of Nidau coming online. And so the lenses that we need over the next several quarters are not dependent on Nidau. Nidau is all about scaling up beyond that going into 2023 into 2024. So we're in good shape right now and machines are coming online. And I'll just come back to what I said before, which is we're making those investments as we said. We still plan to make a significant investment in Q4 in CapEx, which we'll report in 90 days.

Okay, great. That’s great helpful. Thank you.

Thank you Bruce. Thank you for your participation on our call today. We look forward to speaking with many of you in the days and weeks ahead. We appreciate your interest and your investment in STAAR Surgical.

This concludes today's call. Thank you for joining and I hope you have a lovely rest of your day. You may now disconnect your lines.