STAAR Surgical Co (STAA) 2022 Q3 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the STAAR Surgical Third Quarter Financial Results Conference Call. (Operator Instructions) This call is being recorded today, Wednesday, November 2, 2022. At this time, I would like to turn the conference over to Mr. Brian Moore, Vice President - Investor, Media Relations and Corporate Development for STAAR Surgical. Please proceed.

Thank you, operator, and good afternoon, everyone. Thank you for joining us on the STAAR Surgical conference call this afternoon to discuss the company's financial results for the third quarter, ended September 30, 2022. On the call today are Caren Mason, President and Chief Executive Officer; and Patrick Williams, Chief Financial Officer. The press release of our third quarter results was issued just after 4:00 p.m. Eastern Time and is now available on STAAR's website 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 2 initial questions, then re-queue with any follow-ups. We thank everyone in advance for their cooperation with this process. And with that, I would now like to turn the call over to Caren Mason, President and CEO of STAAR.

Thank you, Brian. Good afternoon, everyone, and thank you for joining us on today's call. STAAR achieved 30% net sales growth in the third quarter, which reflects strong EVO ICL unit growth in APAC and strong accelerating growth in the U.S. despite constant currency challenges and in Europe, macroeconomic headwinds. In the third quarter, global ICL unit growth was up 40% year-over-year. We advanced our patient awareness, engagement, and market building initiatives for EVO in the U.S. during and subsequent to the third quarter, highlighted by media campaigns with Global Entertainment celebrity, Joe Jonas, and NBA Player, Max Strus, and introduced our presbyopia lens, EVO Viva, to surgeons at our experts meeting, proceeding the Annual Congress of the European Society of Cataract and Refractive Surgeons.

In China, we concluded another successful peak busy season that put EVO on track to exceed a 25% share of refractive surgery market units by year-end. However, due to tighter COVID restrictions in China, resulting in expected delayed demand in the fourth quarter, ongoing headwinds in Europe, weakness in the yen and euro, and lower other product sales; we now anticipate total net sales will be approximately $285 million for fiscal 2022, which represents $300 million adjusted for constant currency. Our fiscal 2022 outlook includes ICL sales of approximately $272 million, representing 28% year-over-year growth and other product sales of approximately $13 million.

As you know, today, it is vital that STAAR focus on the significant growth opportunities we have with our premium EVO products. At the same time, our low-margin other products business, which represents approximately 5% of sales and consists of cataract IOLs, IOL injectors and injector parts has faced increasing supply chain challenges. As a result of third-party materials and supply chain challenges that only affect our other products business, we will no longer be able to support other products as we have historically. We will continue to support customers of other products through the end of 2023. As we look to fiscal 2023, despite the aforementioned challenges, we expect to achieve approximately 30% ICL sales growth year-over-year to approximately $355 million in total company net sales, which contemplates limited sales from other products. We see tremendous growth potential for our EVO family of lenses globally and look forward to continuing our focus, efforts, and resources on especially large growth opportunities in the U.S., and Asia in 2023.

Turning back to the third quarter of 2022. For the third quarter, global ICL unit growth was up 40% year-over-year. By geography, we achieved strong ICL unit growth; in China, up 52%; the United States, up 63%; Japan, up 40%; South Korea, up 49%; and APAC distributor markets, up 47%, all as compared to the prior year quarter. In the U.S., we are pleased with our progress in advancing the adoption of EVO lenses through patient awareness and surgeon engagement. After our August partnership announcement with singer-songwriter and actor, Joe Jonas, we launched Evo brand advertising featuring Joe in the U.S. on September 26. The campaign included targeted geographic and multichannel advertising to our core 21- to 35-year-old target population on YouTube, Instagram, Snapchat, TikTok, display advertising and search engine marketing.

Last month, we announced our partnership with NBA player, Max Strus, a sharp shooter for the Miami Heat. Max is another example of a person with a myopia prescription of less than minus 5 diopters who had EVO lenses implanted and is now thrilled with his new 20/10 vision, which is better than 20/20. Max joins other EVO brand ambassadors in the U.S., including a top model, a TV chef, a style expert and blogger of fitness and wellness coach, and others who are helping to inform potential patients about the benefits of EVO based on their own EVO experiences. Each of our ambassadors speaks to potential EVO patients with a unique voice that we believe will continue to build momentum and contribute to EVO's broad success in the U.S.

YouTube is the second most popular search engine for our target audience. In August, we launched our EVO ICL educational series on YouTube, which has now expanded to 8 videos as we added individual videos about Joe and Max's decision to choose EVO. The EVO ICL channel on YouTube is now approaching 6 million video views. Going forward, we will continue to partner with new micro-, macro-, and celebrity EVO brand ambassadors in the U.S. since we have experienced through our earlier partnerships that we can successfully expand our engagement with potential patients.

We are also engaging with U.S. refractive surgeons -- our goal is to accelerate education of our lens so that surgeons may increasingly transition the mix of vision correction options or entire practices to lens-based solutions with our EVO family of lenses. As of today, we have trained and certified over 550 U.S. surgeons on EVO since FDA approval approximately 7 months ago. We remain on track to meet or exceed our goal of training and certifying 600 U.S. surgeons on EVO in 2022. Please take note that the "number of surgeons trained" is just one of the metrics we establish, manage, and measure for search and in patient engagement -- our U.S. commercial organization and STAAR management is working diligently to assist patients in their journey for visual freedom from glasses and contact lenses, and to assist surgeons in their confidence and desire to offer the EVO lens-based solution to appropriate patients seeking visual freedom. We're focused on transforming the refractive industry for qualified patients to an EVO lens-based industry.

We are pleased to report accelerating unit growth in the U.S., up 63% year-over-year in the third quarter and up from 36% in Chile 100% year-over-year. Innovation and strengthening the moat around our business remains a strategic imperative for STAAR. This includes potential expansion and enhancements of our EVO lenses to new indications and execution of other R&D, clinical and regulatory pathways to get our existing and next-generation products to market and to certified surgeons. As we look to fiscal 2023, our outlook is for a strong trajectory of growth for EVO ICL, continued market share gains, prudent investment, growing earnings, and many happy new EVO ICL patients and surgeons. Patrick?

Thank you, Caren, and good afternoon, everyone. Total net sales for Q3 2022 were $76 million, up 30% as compared to $58.4 million of net sales in Q3 2021.The 30% year-over-year increase in Q3 2022 net sales is attributable to a 32% increase in ICL sales, which represented 95% of total company net sales in the quarter. On a sequential basis, Q3 2022 sales were down 6% from Q2 2022, which is similar to the year ago step down in sales from Q2 to Q3. Q3 2022 reported net sales includes an approximate $4 million negative currency impact as compared to the prior year quarter due to changes in constant currency, primarily the Japanese yen and the euro. In constant currency, net sales for Q3 2022 would have been approximately $80 million, up 37% year-over-year. For the 9 months ended September 30, 2022, reported net sales includes a $9 million negative impact from changes in constant currency, as outlined in the constant currency table in today's earnings release.

We currently anticipate approximately $65 million in net sales for Q4 2022, which contemplates tighter COVID restrictions in certain cities in China, resulting in an expected delayed demand in the fourth quarter of approximately $5 million. Ongoing headwinds in Europe of approximately $2 million, weakness in the yen and euro since our August 10 Q2 earnings call of approximately $1.5 million, and lower other product sales of approximately $1.5 million. Turning back to Q3. Gross profit was $60.5 million or 79.5% of net sales as compared to gross profit of $45.3 million or 77.6% of net sales for Q3 2021 and $63.9 million or 78.8% of net sales for Q2 2022. The 190-basis point year-over-year increase in gross margin is due mainly to geographic and product mix, partially offset by increased period costs associated with manufacturing progress. The sequential increase in gross margins 70-basis points from Q2 2022 is primarily due to geographic and product mix and decreased inventory reserves, partially offset by increased period costs associated with manufacturing projects. For Q4 2022, we now expect gross margin will be approximately 80% of net sales.

Moving down the income statement, total operating expense for Q3 2022 was $46.8 million as compared to $37.5 million in Q3 2021, and $46.9 million for Q2 2022. Taking a closer look at the components of operating expenses, G&A expense for Q3 2022 was $14 million compared to $11 million for Q3 2021, and $14 million for Q2 of 2022. The year-over-year increase in G&A is due to increased compensation-related expenses, facility costs, and outside services. We continue to expect G&A expense will be approximately $15 million for Q4 2022. Selling and marketing expense was $23.1 million for Q3 2022 compared to $18.2 million for Q3 2021 ,and $24.2 million for Q2 2022. The increase in selling and marketing expense from the prior year is due to increased trade shows and sales meetings, advertising and promotional activities, travel expenses and compensation-related expenses. The sequential decrease in selling and marketing expense from Q2 2022 is due to decreased marketing, promotion and advertising expense, partially offset by increased trade shows, sales meetings, compensation, and travel expenses. We now expect selling and marketing expense as a percent of sales will be approximately 35% to 40% for Q4 2022.

Research and development expense was $9.6 million in Q3 2022 compared to $8.3 million for Q3 2021, and $8.6 million for Q2 2022. The year-over-year increase in R&D is due to increased compensation-related expenses. The sequential increase in R&D from Q2 2022 is partially due to increased post-approval study, clinical trial expenses. We now expect R&D expense will be approximately $10 million for Q4 2022. Operating income in Q3 2022 was $13.7 million or 18% of net sales as compared to $7.8 million or 13.4% of net sales for Q3 2021. We continue to expect operating margin for fiscal year 2022 will be approximately 15%. The STAAR team continues to be proud of our ability to drive very high levels of sales growth while expanding profitability. For Q3 2022 net income was $10.3 million or $0.21 per diluted share compared to net income of $6 million or $0.12 per diluted share for Q3 2021. On a non-GAAP basis, adjusted net income for Q3 2022 was $18.1 million or $0.37 per diluted share compared to adjusted net income of $10.3 million or $0.21 per diluted share for Q3 2021. A table reconciling the GAAP information to the non-GAAP information is included in today's financial release. We now expect our fourth quarter effective tax rate will be approximately 20%, subject to no change in our valuation allowance.

Turning now to our balance sheet, we implemented an investment policy for a portion of the growing cash on our balance sheet. The primary objective of our investment policy is capital preservation while maximizing return on investments through AAA to A- investments discussed further in today's 10-Q. The investment policy resulted in STAAR shifting a portion of our cash to high-quality U.S. treasuries and commercial paper with shorter maturities. This did result in additional gains in interest income in Q3 2022. Thus, our cash, cash equivalents, and investments available for sale totaled $224.7 million as of September 30, 2022, as compared to $202.5 million at the end of Q2 2022.

In Q3 2022, we generated $24.1 million of cash from operations and invested $6.3 million in property and equipment. We remain on track to invest approximately $20 million for the full year fiscal 2022 Capex primarily to support manufacturing capacity expansion. We also continue to anticipate generating positive cash from operations in Q4 2022 and ending the year with a higher cash, cash equivalents, and investment balance during fiscal 2021. With regard to foreign exchange rate headwinds when compared to our initial fiscal 2022 full year revenue guidance in January of this year, we now estimate an approximate $15 million negative impact on full year fiscal 2022 net sales. Normalizing for these FX headwinds result in constant currency net sales of approximately $300 million.

For fiscal 2023, as we complete our initial planning and budgeting, we currently believe we can achieve ICL net sales growth of approximately 30% year-over-year, which contemplates the continuing challenging macroeconomic environment in Europe, a lessening impact of COVID, no significant changes to foreign exchange rates, and little to no sales from our other product business. which is more than offset by a strong trajectory of growth in the Asia and U.S. markets. Finally, including the Stephens Annual Investment Conference in Nashville, Tennessee on November 17, BTIG's Virtual Ophthalmology Day on November 29, and the speaker-investor…

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

Thanks and I hope everyone is doing well. I'll keep my two questions.

(technical difficulty)

So, when we look at the implied ICL guide for 4Q, it looks like $63 million to $64 million is implied and there were several headwinds called out currently. Just provide a little bit more color on how those headwinds is broken out, and then in terms of the implied U.S. outlook, and called out 100% growth in units, but we're missing sort of how we should translate that into dollars. And then I'll have one quick follow-up on 23.

This is Patrick, Anthony. Why don't I kick off? I think Caren might be on a -- Caren, if you get on there, please jump in. To answer your question, I tried to highlight in my prepared comments. So, you are right, what we talked about and what you described is a contribution from the other products, which is our IOL legacy business. And then I did highlight in my prepared comments, we saw about $5 million of what we think is delayed revenue related to the tighter COVID lockdowns in China, a couple of million dollars related to European macroeconomic factors, $1.5 million on the FX side since our August 10 earnings call in Q2, and then another $1.5 million related to that as well. So, we try to bridge that gap and provide as much transparency as we could offer.

And then just the follow-up would be as we bridge for healthy growth year-over-year. Just wondering if you can provide a little bit more color geographically what is contemplated in that China growth, for instance, assuming we still think about the rest of the geographies, of course, U.S. is in the launch phase and then we also have headwinds in Europe. So just how should we be thinking about the geographic makeup in 2023?

Hi Anthony, this is Karen. I'm happy to be with you today. I had a little bit of a connection issue. So, with regard to looking into 2023, we believe that growth in China will still on a unit basis exceed the 30% range. We believe, as Patrick stated, this is delayed demand, largely due to the fact that the recent election has for a number of…

(technical difficulty) how COVID would be handled. It seems to be a perception that COVID might, in fact, the lockdowns might in fact be a little more -- (technical difficulty) of our clinics are very, very much looking forward to 2023. There is a belief that on social media has been validated very strong growth. We're talking way above this year's growth in terms of percentages. We expect that within 18 months, that the market share wins. With regard to Europe, we think that's a little foggier in terms of when we expect Europe to really get out of a predictive recession. It's just when is demand going to be at its greatest in light of the macroeconomic trends, some of the political challenges, et cetera. But overall, we see nothing to blue sky...

(technical difficulty) I wanted to follow up just to start on the China comments. It could be wrong, but it seems like that's just the first time that at least I've seen you guys kind of -- and not only delaying, but what's the base that we should look at, I guess, for that 30% growth?

Thank you, Margaret, for joining us today. (technical difficulty) with the appropriate amount of what are our Toric lenses, which continue to grow in demand even above our (inaudible) growth. We already are aware where the hospitals and clinics are planning for 2023 as we plan along with them. The reason why the fourth quarter has a question mark is because right after the election over the last week, 1.5 weeks, there have been behaviors by consumers and employees that you saw may have read about Foxconn, which is making people a little hesitant about how the government may react to the freedom around COVID and what can happen if you happen to be in the wrong place or the wrong time with an outbreak -- (technical difficulty) If it concerns are different than what we experienced in the other COGA challenges throughout the last 2.5 years. So, we've decided rightfully to strong 2023.

Okay. Great. I appreciate that color. And then let's maybe shift to the U.S. the 550, it seems like maybe you're pointing towards more of an inflection in the back half of the year. And so, I think maybe you can tell me whether I'm right or wrong on that. And then any color on the profile of -- or just adding is an option for those that aren't eligible for Lasik or so.

So, in the United States, we believe that the enthusiasm is just beginning. So, we are training the most interested surgeons first, obviously, the ones who have committed from the very beginning. Just a personal note; the other day, my husband and I went to an outstanding surgeon in San Diego, Dr. Sandy Feldman and the entire team, and this was just on my personal visit. You can imagine that this is being replicated around the United States. And so, in terms of moving the business models.

(technical difficulty) based EVO, it varies, but we found everywhere else, including our largest markets around the world, that within 12 to 18 months, you start to see some -- (technical difficulty) into 2024 and 20% by 2025. So, these are big numbers, but we believe we're going to meet them. And we think that the rollout as... (technical difficulty)

Our next question is from the line of Bill Plovanic with Canaccord.

I kind of actually just want to follow-up on Margaret's question. Could you talk about this early U.S. users. Have you been able to convert any exclusive ways or only clinicians? And do you see practices today, especially the way only users? Do they have the infrastructure facilities today support doing the procedure or they need to build those out still?

(technical difficulty) Assuming they've never done EVO lenses even in the previous Visian type of lens. So, let's say that you are not doing a lot of intraocular procedures. It's probably going to take you a little longer to move your practice model and your clinical confidence, than it will be for those surgeons who are very comfortable in the eye, either having used our EVO lenses. known as Visian before, and/or sale to go from maybe not all Lasik-based to all lens base that quickly, but certainly from a mix of procedures to way more EVO – (technical difficulty) pickup and the greatest users we currently have.

That's really helpful. Thank you. As we think about Q4 and what you've spoken about China and the softness there, and setting up for '23, are there any updates to the backlog that was existing -- and how can you use this period to we'll be able to catch up by year-end?

Yes. So, first of all, I just -- and I appreciate because we've -- we're reporting 40% growth quite often that it appears that Q4 is soft. It's not soft. We're still looking at China a 22% to 25% growth of units. It's just not going to be 30% to 35% in the fourth quarter while we're delayed as people are trying to figure out how this COVID challenge plays out in terms of what we expect – (technical difficulty).

Okay. And then just to sneak one last one into the other products discontinuation. I know that (inaudible) (technical difficulty).

(technical difficulty) and injectors and injector parts. They are, at this point, very happy with STAAR's lens, but we are going to make sure, as we have as we moved out of the Iowa business in other markets that there's a long lead time and that we're very supportive to provide inventory until they find alternative sources for their IOL lenses and injector parts. We're really talking about two markets and really our hope is that the ICL business will be even stronger in conversation in those markets where IOL business has really been not a focus for us for a long time, a bit of a downward cycle. So, we're only going to be talking positives going forward, and we see our ICL business picking up just fine in those markets as well.

Enter with Jefferies. Zach, your line is open.

I just wanted to touch on the U.S. market. It looks like looking at the Q that was released, it looks like U.S. was flat sequentially this quarter. Can you just give some color on performance in the quarter in the U.S. and how we should be thinking about it in the fourth... (technical difficulty)

(technical difficulty) You take that one, I do not believe it was flat sequentially.

You are correct. So let me go pull maybe see what you're seeing, Zack. But no, we were up actually on revenue closer to 75% year-over-year. (technical difficulty) But as Caren said in her prepared comments, we expect unit growth to be going from 66% year-over-year in Q3 to 100% in Q4. And then as you said, even as we go through 2023, continue to see even larger market share gains as we move through 2023.

Apologies, I must have read the wrong thing. And then, I guess, just looking at -- how do you look at procedure volumes through the quarter and how should we think about it through 2023?

So, as I said, we plus -- (technical difficulty) so that -- we consider that strong healthy growth.

Our next question comes from the line of Ryan Zimmerman with BTIG.

Just a follow-up on the sector sales, and I appreciate that the units are up. But I guess, the question goes to just the fact that U.S. growth sequentially on the EVO launch for the U.S. in fourth quarter and just hope -- I want to check my math on that and see if that's what you're kind of expecting for the U.S. in fourth quarter.

Yes. So, if you're checking math, I... (technical difficulty)

Yes. So, there's a little bit of noise in there on the domestic side related to perhaps some Canadian in North America so you can't quite get apples-to-apples on that one. In terms of your math of looking at Q4, I would say directionally, you're headed in the right direction. As Caren has said, we expect to get greater market share gains as the product is in the market longer. As a reminder, the fourth quarter that we're currently in, this is only the third quarter of commercialization and so as we've been very consistently saying we expect to see bigger gains as we move through 2023, and certainly as we exit 2023, in terms of contribution from the U.S.

Okay. Appreciate that color and the clarifications. On the Sears number, the $355 million -- I would appreciate your thoughts either Patrick or Caren, around just the impact of units versus price? And how much price you expect to pick up maybe next year as the U.S. becomes a larger proportion of sales (technical difficulty) you're guiding to on an underlying basis...

(technical difficulty) Patrick?

Sure. So. on that one, what I would say is that in terms of our ASP, we don't see a lot of pressure on ASPs at all because of the nature of our strategic alliances globally. We know exactly what we're going to get in terms of pricing and that's set for the forthcoming year. Where we do see a mix in ASP is going to really come from either product mix, which where we see more Toric or Toric being a higher ASP, and of course, the geography mix, which is what your question was on the direct side for the U.S. Still the U.S. is a relatively small piece of the revenue contribution so it's really not going to move the needle that much. In fact, if you look at our revenue in the U.S., as we said, we were 66% on units and actually higher on revenue growth year-over-year because of the higher ASP. So hopefully, that answers your question, Ryan. I think we're -- as we said, it's still a relatively small piece of the contribution. But as we move through 2023, then I think those questions will be a lot more viable in terms of modeling.

So just a clarification then. The $355 million and the implied 30% growth essentially equates to 30%-unit growth or there is some price impact in there as is the other sales diminish?

Yes, we would expect a slightly higher unit growth. But I think to your point, as the U.S. is starting to come on board with a higher ASP, that differential is perhaps not as great as it's been in the past when we were more concentrated with lower Asia market pricing such as China.

Okay. Appreciate for taking my question.

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

She might have dropped off with some connectivity so I will chime in and appreciate everyone's participation today. We look forward to seeing you at these upcoming conferences, and we appreciate your interest and investment in STAAR Surgical and the best to everyone.

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