Hello, all, and thank you for standing by. Welcome to the STAAR Surgical Second 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, August 10, 2022. At this time, I'd like to turn the conference over to Mr. Brian Moore, Vice President, Investor, Media Relations and Corporate Development at STAAR Surgical. Please go ahead.

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 July 1, 2022. On the call today are Caren Mason, 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 PM Eastern Time and is now available on STAAR's Web site 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. The second quarter results we reported today represent a record level of quarterly sales for STARR and $81.1 million, which represents 30% year-over-year sales growth and considerable progress in advancing our EVO ICL family of lenses. Considerable progress in the quarter includes a fantastic start in introducing our game-changing EVO lenses to the U.S. market, the second largest market for refractive vision correction. We could not be more thrilled to announce today in a separate press release our partnership with musician Joe Jonas, who will drive awareness of EVO and the visual freedom possible with our lenses among the millions who suffer from myopia globally. I will touch on the partnership more shortly. For the second quarter, we achieved record results despite COVID 19 related challenges and foreign currency headwinds. We also held fast to our culture of quality and manufacturing excellence in generating the second quarter results. Last month on July 15, we received our official five-year MDR Certification from our European Notified Body, DEKRA. As many of you know, MDR Certification is a change to the regulatory framework and recent data suggests fewer than 25% of medical device companies have received MDR Certification. My thanks to the STAAR teams involved in this milestone accomplishment and particularly the regulatory and quality teams which further demonstrates our commitment to STAAR's culture of quality imperative. For the second quarter of 2022, global ICL unit growth was up 42% year-over-year, despite some ongoing softness in Europe, which we attribute to macroeconomic factors. By geography, we achieved strong ICL unit growth in China, up 45%; the United States, up 36%; Japan, up 41%; India, up 181%; and Asia Pacific distributor markets up 66%, all as compared to the…

Thank you, Caren, and good afternoon, everyone. Total net sales for Q2 2022 were $81.1 million, up 30% as compared to $62.4 million of net sales in Q2 2021 and up 28% on a sequential basis from Q1 2022. The year-over-year increase in net sales is attributable to a 32% increase in ICL sales. For Q2 2022, ICL sales represented 96% of total company net sales similar to the year ago quarter in which ICL sales represented 95% of total company net sales. We continue to expect other products sales will be approximately 5% of total company net sales for fiscal 2022. Q2 2022 reported net sales include an approximate $3.1 million negative impact year-over-year from changes in currency, primarily to Japanese yen as well as the euro. In constant currency, net sales for Q2 2022 would have been $84.2 million, up over 35% year-over-year. Please refer to the constant currency table in today's earnings release for additional detail. For analyst modeling purposes, due to currency headwinds, we expect Q3 net sales to be approximately $74 million to $75 million. Our outlook for fiscal 2022 global ICL unit growth remains robust, and it's actually higher than our outlook entering the year. Therefore, even in the face of significant currency headwinds, we are today able to reaffirm our previously provided outlook for fiscal 2022 net sales of approximately $295 million. Turning back to Q2. Gross profit for Q2 2022 was $63.9 million or 78.8% of net sales as compared to gross profit of $49.2 million or 78.9% of net sales for Q2 2021 and $49.3 million or 77.9% of net sales for Q1 2022. The 90 basis points sequential increase in gross margins from Q1 2022 is primarily due to favorable geographic and product mix and manufacturing efficiencies, partially offset by…

Thank you. [Operator Instructions]. Our first question today comes from Andrew Brackmann of William Blair. Your line is open. Please go ahead.

Hi, guys. Good afternoon. And thanks for taking the questions. I guess I really want to ask you what your favorite Jonas Brothers' songs are, but I won't go there on this call. In all seriousness, Caren, maybe on this influencer platform, obviously this has been a big part of the playbook internationally before. So as you think about this coming to the United States and helping with the U.S. launch, what can you sort of tell us about sort of what you've seen in sort of terms of sales trajectory in past experiences when you have announced a big partnership like this? And then separate from historical sort of experiences, anything that you're expecting from this partnership in particular moving forward? Thanks.

Hi, Andrew. Thank you for joining us today. So when we launch with a major influencer, the focus is really on getting the message out that there is an implantable Collamer lens called EVO. And the focus is to get individuals who are very interested in the lives of those influencers, especially those who are also challenged with glasses and contact lenses to immediately learn more. And so what we do with the information that we have, like we've done today, is on evoicl.com if you were to go there today, Joe is on our front page of our consumer facing Web site talking to you personally about his journey. And what tends to happen is we get, as you can imagine, a very nice bump in interest, a huge increase in doc finders, and a very nice transformation and transition rate to actually having the surgery done. So our expectation is that in the U.S., as Joe's campaign rolls out over the next, especially six weeks, culminating on September 7 with a full media day in New York City and a number of appearances on national television, as well followed up by Joe publishing and posting on Instagram, TikTok, Twitter and others, where he has over 30 million followers combined, you're going to see a lot of immediate interests. Also, we're expecting Joe, who has been interviewed today by People Magazine, to be featured on their online Web site, and their -- I think they have approximately 77 million unique visitors a month on People Magazine online. Actually, make that daily and then People Magazine's Instagram with 11 million. So on this particular influencer, we love Joe. We think Joe's terrific. And we believe Joe's story is real and important. And so our expectation is there will be a lot of interest, more than we've experienced anywhere else around the world.

Thank you. There's some big numbers in there for visitors and sort of unique. And then maybe I guess I could ask a question around China. So obviously another strong quarter of performance there. But I guess as we're thinking longer term here, and as you've sort of continued to move up the ladder on market share in that region, can you just sort of talk to us about how maybe some of the drivers of that share might change over the next several years? Is it still going to be predicated on sort of growing the share in the large clinics that are already using EVO, or does it shift a little bit more to getting into smaller clinics or different geographies within the country? Thanks.

Well, we're going to continue on the successful path that has gotten us where we are. And that means that we're going to continue with our strategic alliance partners, many of whom are very large, the largest being Iiar [ph], to work very successfully with them as they grow, and to make sure that their business model shift toward lens space, namely EVO, continues aggressively. So we just participated actively in the 20th anniversary celebration of Iiar, and we continue to be impressed with their growth and their commitment too, especially in the refracted space. But we have actually grown our base in China to now over 1,000 hospitals and clinics. We continue to move in all directions in China. Wherever there is opportunity, we're increasing our distribution centers to make absolutely sure that we are able to get to any surgeon anywhere in the country, when needed. And so our commitment in China continues to be very strong. And we expect, by the way, the U.S. to give them a run for their money.

Great. Thanks so much.

You're welcome. Thank you.

Our next question today comes from Bill Plovanic of Canaccord Genuity. Bill, your line is open.

Great. Thank you. And thanks for taking my questions. First of all, I'll just start with the U.S. One, that number was up nicely. And just kind of trying to understand, how should we think about the U.S. for 2022? Was there any swap outs or destocking in the second quarter that may have impacted the numbers? And then my second question is on backlog from a manufacturing standpoint, I don't think there's any commentary on that. But where are you in kind of burning off that 20 million lens backlog that you had at the beginning of the year? And how should we think about that impacting the back half? Thanks.

Hi, Bill. It's Patrick. Yes, the U.S. was phenomenal. And so when we got the approval in late March and we ended up launching, what we did see were doctors wanting to switch over to EVO almost right away. And so as Caren mentioned, we're very much on track, in fact, ahead of where we wanted to be in terms of training of docs with over 600 now. So we did talk about that in our financials, but we did take a reserve on our old Visian product in the U.S. And that speaks to just how quickly the adoption has happened in the U.S. Your second question, I'm sorry, was on back orders. Yes. So on the backlog, look, we're not going to get into the details on it. I think what we proved in Q2 is our ability to deliver a substantial number of lenses worldwide. And we're very happy about that. And we continue to work through satisfying all our customer needs, especially on the custom lenses to take a little bit longer for us to produce, but we're in very good shape there and continue to bolster that up through our operational team as we move through the rest of the year.

Yes, Patrick, the question on the U.S. was, was there a negative hit to revenues when you took the reserve, or is that just the impact to the COG line or somewhere else or SG&A line? And then on the backlog, it's kind of important for us to understand is have you burned that off and refilled that, or is it still sitting there because if you kind of stocked in versus kind of -- and just got rid of the old orders, or you still have some of it sitting there? So thanks for taking my questions.

Yes. So the cost of goods is the cost of goods reserve that we took, so no impact on revenue. On backlog, once again I would just say that we have worked through some of that backlog. There's still a little bit to go. But we've accounted for that in our full year guidance. And so I'll just leave it at that.

Thank you.

Our next question today comes from Chris Cooley of Stephens Inc. Please go ahead.

Good afternoon and thanks for taking the questions and congrats on another record quarter. Caren, if you wouldn't mind, could you just give us some additional color on these kind of early days experience in the U.S. launch? And in particular, I'm interested in learning a little bit more about what you're seeing just from a prescribing pattern in terms of like the diopter, the mix that you're seeing in some of these practices, so you're now a couple months out in terms of the ICL versus LASIK and SMILE. And I think on the last call, you gave us an anecdotal commentary about one practice that had already moved to 50%. So just would appreciate some additional color on kind of how you're seeing this utilized in these early adopter practices? And then I've got a follow up.

Sure. Thank you, Chris. Well, the early adopters are really interested in offering EVO to a wide selection of patients. We believe that very quickly the message has gone out based on outstanding results of our clinical study that not only showed great safety, but the effectiveness at the lower diopters and how great this lens performed in any eye in the target range of minus 3 to minus 20. We're seeing a number of surgeons having their own family members have procedures. And I think the greatest testimony is that we're signing the largest strategic alliance deals we've done in terms of committed volume annually that we've ever seen here by a wide margin. And so certain surgeons who early in the game said that once EVO was approved, they would change the mix of their offering, they're now coming to the table to sign deals to cruise it. On top of that, every single day we get multiple indicators through the surgeons' own work by them posting online, on social media all their enthusiasm about the EVO product, talking about its advantages as they see it over the other procedures that they offer. And so when you think that we've only been out there for a couple of months, now we believe with the number of surgeons who are trained over 400, actually it's 461 as of today, we'll have 600 very soon and more beyond that, we believe that with our influencer campaign, with all the local marketing we're doing with the surgeons, as well as more excited influencers who aren't maybe a household name, but we just signed a really exciting chef who is very, very popular and has multiple channels on the Internet. So I think when you just put it all together, I believe that we will exceed the growth rate we had in China, when we first started to really push in 2016 and '17.

That's super. Really appreciate all the color. And then maybe just an operational question for Patrick. The company's been scaling up tripling capacity, just would appreciate if you could give us a little bit of an update on where you are in the process? And then maybe more importantly, how should we think about this as it relates to gross margin? Obviously, you're upper or top tier when we think about the gross margin profile today. But as that capacity comes online and it's absorbed, how should we think about this step up in product gross margin longer term? Thank you. And again, congrats on the quarter.

Thank you.

Sure, Chris. Yes. So in terms of where we're at, things are just going outstanding. The operational team has really stepped up as we saw by delivering such a huge Q2 for us and especially on a sequential basis. We're well positioned for the rest of the year. And we will continue to add capacity, not only in the U.S. but as we move out into our Switzerland facility as well into 2023. In terms of that impact on gross margin trying to account for in the guidance, I think in any given quarter as we bring on new facilities and you get that fixed costs, we'll do our best to guide you all from your modeling standpoint. But as I said, approximately 79% in Q3 and Q4 and we're very comfortable with that. So other than that, I think we're in good shape when it comes from all that stuff.

Thank you.

The next question today comes from Zach Weiner of Jefferies. Please go ahead.

Hi. Thanks for taking the question and congrats on another great quarter. I just wanted to touch on China procedural volumes, and I fully appreciate the color provided in the press release. But if you could give some color on unit growth -- sorry, on procedural trends in China through this new COVID policies they have, and if there's any like a local backlog in China that you guys are seeing?

Actually, this year, because of the intense effort to be able to really manufacture aggressively to support what we knew would be very increased demand for this busy season which has turned out to be the case, we actually had the best inventory position we've had historically in China. And we are using it all. So the bottom line is we're having a really strong busy season through today in the third quarter. Our expectation is that we'll continue appropriately through the end of the busy season, which is about mid September. And then we'll be in a replenishment mode for our more typical quarters that aren't quite as aggressive as Q2, which follows our annual expectation. So I think bottom line here is that we're in -- we're going to definitely need to replenish because we're using everything that we're sending.

That's helpful. And then just one on the presbyopia lens, just any early feedback that you're hearing that you can share?

Well, we're still in the limited launch. We're really not going to formally launch beyond the early surgeons until after about September 20. The feedback we're getting now from the surgeons who are contributing to the playbook is that the EVO family of lenses with the Viva edition is giving them a great armamentarium to treat their presbyopic patients as they learn from their myopia business what it takes to properly identify presbyopic patients, properly target for that patient implant and follow up. It is a whole different game. It takes longer, but we believe we're going to have a heck of an entry in the market.

Got it. That's helpful. And then just one follow up on the Viva lens, if I could. Any color on getting the Viva lens into other markets beyond the CE Mark countries? Thanks for taking the questions.

Yes, our initial focus, of course, was CE Mark countries and countries that recognize the CE Mark that we are getting closer to announcing other countries where we will be able also to distribute the lens. Thank you, Zack.

Our next question today comes from Ryan Zimmerman of BTIG. Please go ahead with your questions.

Yes. Thanks. Good afternoon. Thanks for taking our questions. I want to start, Caren, if I could around pricing and ASPs. First, I think just based on the proportion of sales into China, you saw a little bit lower ASP. One, is that correct? But how to think about modeling ASPs as the U.S. becomes a larger proportion of sales? And just what can you say in terms of your thoughts on it globally, given the larger FX and inflationary dynamics that we are seeing across the medtech industry?

Well, I think I'll answer the back half of your question first. Had we not had the FX headwinds, we would be reporting $84.5 million of revenue. And so we're very pleased with that. Our ASPs are on track in our Asian markets. They do differ by each country, China being the most aggressive pricing for the highest volume. In terms of our pricing in other Asian markets, we continue to be increasing our ASPs in spite of volume increase as our premium and primary marketing garners that kind of commitment in that kind of price point. As we add more volume in the United States where we do charge a different price schedule, we do go direct. And so as a result of that, we ought to see those ASPs going up nicely over the next 24 to 36 months.

Okay, that's helpful, Caren. And just, Patrick, given the FX impact this quarter, do you have an idea or can you give us the FX that you're expecting for the full year, given the reaffirmed guidance? How much FX or I guess I should say underlying, what is your underlying expectations for revenue, given FX for the remainder of the year?

Yes, I appreciate the question, Ryan. And so we gave the original guidance of approximately 295 at the beginning of the year. On our constant currency table, you can see that we've now had about $5 million of FX headwinds for the first six months. Notably, 3 million plus within Q2 which is when we really started seeing increased volatility with the strengthening of the dollar. So I really have to go back to what would be the impact in the second half of the year based on that initial guidance, which we've now been able to really keep steady in light of those headwinds. So I think it would be fair to say there's probably at least additional $5 million of FX impact in the second half of the year. And so we've taken that into account in this guidance. And we'll have to see where the rates go from here. But we're feeling comfortable with where we're at. And that's why we try to focus everyone on units. It's just a phenomenal unit quarter with over 40% growth on the unit side, but we're still able to deliver the revenue.

Okay, I appreciate that. And then, lastly for me, how to think about the U.S. trajectory? And I think this has been kind of asked already, but given where kind of Street expectations were this first quarter of launch for EVO I should say, how do you see that growing quarter-over-quarter, through the remainder of the year, and any color or kind of commentary you can give, guidance, I think would be appreciated by The Street?

Well, we haven't really released what we thought that growth should be or will be. What we are doing is reporting really great growth. I think the bottom line is I wouldn't be uncomfortable saying we'll grow more in the third quarter than we did in the second quarter and so on. But at this point, we're just giving kind of the overall view of the business, the strength of the business, and our ability to manage multiple markets well. But our real focus in the United States now is it's real, it's tangible and we have the highest hopes for some great demand. We're making sure that our surgeon partners are ready for what we hope will be an onslaught of interest. So at this point, we're not going to call a number, but we will say that the growth numbers exceed where we've been.

Thanks for taking my questions.

Thank you, Ryan.

Our next question today comes from David Saxon of Needham and Company. Your line is open.

Good afternoon. Thanks for taking the questions and congrats on the quarter. I guess a number that stood out to me in the script was the 400 docs trained. If memory serves, last quarter you had only trained 100 docs. So just wondering if 300 is a good quarterly pace we should think about? And then looking at the 400 docs you have trained, maybe can you just talk about the refractive share ramp you're seeing for EVO in the weeks and months after that training?

Well, there isn't a statistic associated with the number of surgeons already trained and how that will play out over the coming quarters other than what we know we can do by the end of the year. So our goal is to be sure that we are certifying surgeons so we have a dedicated commitment to increasing their profile of EVO managed patients. And that in the agreements we have with them, that they meet the growth trajectory they commit to and that they have really happy patients. And so with all of that, we're pacing ourselves to do this right. In terms of the number of additional surgeons who come on, our belief is that it's not going to be unlike any new medical device that catches on with the strongest surgeons in the market. Every other surgeon is going to be very interested in getting trained and getting smart, and making sure that economically they benefit from what we believe is an incredibly excellent outcome for their patients. So my answer to you is that stay tuned. Our goal is to have thousands of refractive surgeons trained, but we are not committing to a volume other than the 600 or so through the end of this year, as we have what you might call a longer timeframe to success with surgeons who are brand new to implanting lenses maybe from an all laser vision practice. So I think the bottom line though is as is the case in a lot of procedures, you get a huge amount of your volume from a relatively small number of surgeons, and then others catch on. And before you know it, your market share does get up to that 15% and 20%. That's certainly what's happened in every other market where we have unraveled and rolled out these new ways to perform refractive surgery that really does garner excellent support from surgeons and a lot of patient satisfaction.

Okay, that's super helpful. And then maybe I'll ask another on the U.S. It sounds like you're expecting growth to accelerate from here on out. So maybe talk about the sales force you have in the U.S.? Do you need to hire more, or do you feel like the size of the sales force is sufficient to support this U.S. launch? Thanks so much, and congrats again on the quarter.

Thank you very much, David. So we have a really strong contingent of account executives, practice development, clinical. We wrap around our surgeon customers a team of what we believe is excellence. We make sure we get them over the goal line. We make sure we monitor and work with them on their outreach to their local consumers, their Web marketing, et cetera. It is a unique skill set. It is a very strong leadership requirement, of which we have a very strong contingent of players. We will continue as need be to add on. But we also find that being in the unique situation we are today and hope to be in for a long period of time, our premium and primary position does not require us to have sales organization playing defense. We're purely an offensive game. And we expect to stay that way for a relatively long period of time. So as a result of that, our sales and marketing expenditures will be more tilted toward digital marketing, social media influencers. Those are going to be the way that we get EVO out. So people are asking for EVO the way they know to ask for other important procedures, like they have for years, laser vision correction.

Thank you. And our next question today comes from Steve Lichtman of Oppenheimer & Co. Please go ahead.

Thank you. Hi, guys. Caren, you mentioned stronger than expected demand for EVO. And Patrick, I think you mentioned you have higher unit growth expectations now for the year versus when the year started. Is there a region or two that is standing out versus your original expectations? And any you'd point out in particular that is driving upside versus your expectations heading into the year?

I would say that today Japan, Korea, China, Germany and the U.S. and even India are performing better than expected.

Okay, got it. Patrick, nice to see gross margin guide raise in this environment. Are you still feeling some headwinds from inflation in that number? How much, if so? And what are you doing to offset it?

Yes. So the nice thing about our operation is that we're fairly vertically integrated, so we do get raw materials in order to make our Collamer. But from there, we build obviously the lenses and go forward. We have seen related to COVID as everyone else has wage increases. That's factored into our guidance. We have seen maybe a little bit on the raw materials, which is factored in. But I think generally, the ability for us to raise our gross margin has everything to do with the efficiencies that we're seeing out of our outstanding operations team. So we're very pleased with what they've been doing over the last couple of quarters and pleased with what's going to come for the second half of the year.

Great. Thanks, Patrick. Thanks, Caren.

Thank you.

Thanks.

We have now reached our allotted time for questions. So I would now like to turn the call back to Caren Mason for closing remarks.

Thank you very much 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 investment in STAAR Surgical. Take good care. All the best to all of you. Thank you.

This concludes today's call. Thank you for joining. You may now disconnect your line.