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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Greetings and welcome to the Alcon's Fourth Quarter and Full Year 2022 Earnings Call. [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, Investor Relations for Alcon. Thank you. You may begin.
Welcome to Alcon's fourth quarter and full year 2022 earnings conference call. Yesterday, we issued a press release, interim financial report and annual report as well as posted a supplemental slide presentation on our website to enhance today's call. You can find all of these documents in the Investor Relations section of our website at investor.alcon.com. Joining me on today's call from Geneva 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 which 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, similarly titled measures used and other companies. These non-IFRS measures should be considered along with but not as alternatives to, the operating performance measures as prescribed per IFRS. Please see a reconciliation between our non-IFRS measures with directly comparable measures presented in accordance with IFRS and our public filings.
For discussion purposes only, our comments on growth are expressed in constant currency. In a moment, David will begin by recapping highlights for 2022 in recent months, including market dynamics, innovation, highlights, key product launches and acquisitions. After his remarks, Tim will discuss our performance and outlook for 2023. Then David will wrap up with closing remarks and we will open the call for Q&A.
With that, I will now turn the call over to our CEO, David Endicott.
Thanks, Dan. Welcome to Alcon's fourth quarter and full year 2022 earnings call. 2022 was a great year for Alcon. We ended the year with sales of $8.7 billion and double-digit sales growth of 11%. These results were driven by new product launches, solid demand from resilient markets and strong commercial execution. Core operating margin for the year was 18.2% and core diluted earnings per share were $2.24 which was up 23% year-over-year on a constant currency basis.
Additionally, we achieved a core operating margin of 20% when adjusted for foreign exchange. Based on these results, it's clear that the Alcon team is delivering and our fundamentals are strong. As I reflect on 2022, I'm extremely proud of what we've accomplished, especially given the challenging geopolitical, macroeconomic and supply chain headwinds we faced. In surgical, we grew the business double digits, driven by industry-leading technology, solid execution and continuing international recovery.
Our portfolio of PC-IOLs, PanOptix and Vivity had another quarter of strong share growth and we exited the year with a global PC-IOL share position in the mid-50s. During the year, we launched our portfolio of IOLs on the CLAREON platform in the United States. This highly differentiated material delivers among the lowest levels of glistening and surface edge and as a proprietary edge curvature designed to help reduce glare. Our new CLAREON material has been well received by doctors around the world and is helping us to gain share.
We're also expanding our footprint with double-digit sales growth in the equipment category for the year. This growth was particularly strong in international markets where we continue to see solid uptake for our fecal machines, including our industry-leading Stancurion device as well as which is designed and priced for developing markets. We expect the demand for the equipment will return to more normalized growth rates this year.
While we continue to grow our footprint in ophthalmic operating rooms worldwide, we've also significantly expanded our presence in the clinic with the ARGOS biometer. Doctors are responding favorably to ARGOS, thanks in part to higher capture rates, easier prediction of accurate lens power and data integration into the operating room, all of which helps drive clinic efficiencies and improve patient outcomes.
Tying this all together is our digital offering, SMARTCataract which we beta tested in 2022. SMARTCataract received terrific feedback from surgeons and we'll continue to develop this platform in '23. SMARTCataract is the first application in Alcon's comprehensive cloud-based platform that is uniquely designed for surgical ophthalmic practices. SMARTCataract links data systems and diagnostic devices in the clinic with equipment in the OR. Data shows that SMARTCataract delivers significant time savings during the cataract evaluation, planning, operating room and postoperative workflows.
Put it simply, SMARTCataract is helping surgeons deliver better outcomes more efficiently. Also in 2022, we expanded our presence in surgical glaucoma with the acquisition of Ivantis which brought Hydrus Microstent into our portfolio of implantables. Hydrus has long-standing clinical efficacy data. Its 5-year horizon data demonstrated meaningful and statistically significant clinical benefits over the full 5 years, including sustained reduction in medication use and decreased need for secondary glaucoma surgery.
Now turning to Vision Care. Our team delivered high single-digit growth across both our contact lens and ocular health franchises. In contact lenses, our full year growth of 9% was driven by our portfolio of innovative lenses which continue to receive favorable market feedback as well as select price increases. We continue to fill out our portfolio and launch new contact lenses in our segments of the market or areas where we have opportunities to gain share.
In 2022, we launched TOTAL30 into the reusable market. This is the first major innovation of the $4.2 billion reusable lens category in many years. TOTAL30 is the only water gradient lens available for reusable wearers and since launching TOTAL30, we are seeing share growth in this category. TOTAL30 is available in the U.S. and Europe and we will continue to roll it out to more international markets in 2023. Just recently, we announced the launch of TOTAL30 for stigmatism which competes in the $1.3 billion reusable toric category. This is the first reusable water gradient lens for astigmatic wearers.
Since more patients with the stigmatism wear reusable contact lenses, the availability of the toric T30 provides us an opportunity to gain share and bring exceptional comfort to these patients. This lens will be broadly available in the U.S. and Europe earlier this year and we'll roll out the lens internationally throughout 2023. We also launched DAILIES TOTAL1 for stigmatism in early 2022 and customer steps has been very favorable. DAILIES TOTAL1 toric joins the sphere and multifocal modalities for the premium DAILIES lens market. DAILIES TOTAL1 toric is also the first and only daily toric lens to feature our proprietary water gradient technology that delivers exceptional comfort.
Now all of our toric lens is featured our proprietary balance design which creates clear and stable vision. Our toric portfolio represents a significant opportunity as our estimate is toric one of the fastest-growing segments of the contact lens market. Now turning to ocular health, where we also saw high single-digit growth in 2022 despite the supply chain challenges we faced.
Starting with dry eye, our sustained family, including sustained hydration, ultra and complete continues to perform well with double-digit sales growth in 2022. There are over 30 million people in the U.S. alone that suffer from dry eye and sustain is the best-selling brand of artificial tears and is clinically proven to sue and irritated eyes quickly.
Now with multi-dose preservative-free formulations, we have a full suite of convenient and affordable options for patients. Late in the year, we acquired Aerie Pharmaceuticals. With this acquisition, we expanded our glaucoma portfolio with 2 additional products, Rhopressa and Rocklatan which were complementary to Simbrinza. Rocklatan Simbrinza offer 4 different mechanisms of action allowing for maximum medical therapy in just 2 bottles.
Additionally, the Aerie acquisition expands our R&D pipeline and builds upon our pharma development expertise. Our strong 2022 ocular health performance was offset by significant supply chain challenges, particularly in contact lens care. Our team continues to address these challenges which are likely to persist through at least the first half of 2023.
Now let me provide an update on our end markets. In Surgical, global cataract procedures were up mid-single digits to fourth quarter versus prior year. This growth varies by region. In the United States where surgical centers continue to experience staffing challenges, procedural volume was up low single digits. Outside the U.S., procedures were up mid- to high single digits as markets continue to improve.
Encouragingly, we saw sequential improvements in ATI well penetration in the U.S. in the fourth quarter. We continue to focus on driving penetration by educating doctors, clinical staff and patients about the benefits of advanced technology lenses. In contact lenses, the retail market growth in the quarter was mid-single digits with low single-digit growth in the U.S. and high single-digit growth internationally.
While mid-single-digit growth is in line with historical rates, it's important to note that this growth predominantly reflects price increases and were trade-ups. Additionally, the market growth varies by modality with the daily SiHy category continuing to grow significantly due to higher pricing and patient trade-up. Torics also continued to grow nicely, primarily driven by the daily toric category.
Finally, the reuse category was flat. Now with that, let me pass it to Tim who will take you through our financial results and comment on our outlook for 2023.
Thanks, David. We're pleased to report fourth quarter sales of $2.2 billion, up 7% versus prior year. This growth was driven by continued recovery in most international markets and demand our innovative products, including those acquisitions. Our overall fourth quarter sales growth reflects approximately 180 basis points of contribution from sales of acquired products.
Our fourth quarter U.S. dollar sales growth included approximately 600 basis points of pressure from foreign currency. For the full year 2022, total company sales of $8.7 billion grew 11%. I'm extremely proud of how well the Alcon team has managed the challenges of 2022. We performed well while navigating a year of historic uncertainty, including a strong U.S. dollar, continued supply chain tightness and inflation.
Moving to our fourth quarter sales results. Our Surgical franchise revenue was up 8% year-over-year to $1.3 billion. Surgical revenue for the full year was up 13%. Implantable sales were $434 million in the quarter, up 11% year-over-year, primarily due to market recovery in most international geographies, increased demand for our PC-IOL portfolio led by Vivity and sales of Hydrus. This was partially offset by declines in South Korea following a reimbursement change during the first quarter.
Please recall that there was a significant spike in demand in Korea ahead of this reimbursement change and therefore, we expect difficult comps in implantables in the first quarter of 2023. Implantable sales for the year were up 20%. In Consumables, our fourth quarter sales were up 6% to $636 million, primarily driven by improving market conditions. For the full year, global sales were up 10%. Our strong consumables growth also reflects the expansion of our global equipment footprint. In equipment, sales were $204 million in the quarter, up 7% year-over-year, primarily due to continued strong demand for our cataract equipment and service, particularly in international markets as we upgrade older generations of equipment to Centurion and Legion.
Growth in the quarter was partially offset by declines in the refractive equipment. For the year, equipment sales were up 10%. We continue to be very pleased with our strong equipment performance as well as the resilience of demand for these products. Turning now to Vision Care. Fourth quarter sales were up 7% year-over-year to $881 million. For the full year, Vision Care sales were $3.6 billion, up 8%.
Contact lens sales were $530 million in the quarter, up 6% versus last year. Sales were led by our portfolio of SiHy lenses, partially offset by declines in legacy products. Additionally, we saw strong sales in the U.S. and slower international growth. Contact lens sales for the full year were up 9%. In ocular health, our fourth quarter sales were $351 million, up 8% year-over-year. This was led by our portfolio of eye drops, including our sustained family of artificial tears and ophthalmic pharmaceutical products.
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 400 basis points. As David mentioned, we expect these challenges to persist at least through the first half of 2023. Ocular health sales were up 7% for the full year.
Now moving down the income statement. Fourth quarter core gross margin was 61.3% which was flat on a constant currency basis. Core operating margin was 16.4% in the quarter, essentially flat versus last year on a U.S. dollar basis, put up 240 basis points on a constant currency basis. The improvement was mainly driven by underlying operating leverage from higher sales and favorability from incentive compensation, partially offset by increased inflationary pressures and increased investments in R&D, primarily associated with the acquisition of Aerie.
Core operating margin for the full year was 18.2%. However, on a constant currency basis, we achieved a full year core operating margin of 20%. Fourth quarter interest expense was $40 million compared to $28 million last year driven by higher debt following the funding of the Aerie acquisition and less favorable interest rates. The fourth quarter core effective tax rate was 30.6% compared to 10.4% last year. This increase was primarily due to the recognition of tax expense related to the advanced pricing agreement between the Swiss and U.S. tax authorities that we discussed on our last earnings call.
There was also an impact from a decrease in inventory build in certain markets and the geographical mix of pretax income. Core diluted earnings per share in the fourth quarter of 2022 were $0.42 versus $0.56 last year. The decrease is mainly due to higher interest expense and taxes following the advanced pricing agreement I just mentioned. For the full year, core diluted earnings per share of $2.24 grew 23% on a constant currency basis.
Before I discuss our outlook for 2023, I'll touch on a couple of cash flow and other related items. Free cash flow for the full year was $581 million compared to $645 million last year. This variance was primarily driven by lower cash from operations in 2022, driven by the negative impact of foreign currency on our operating results and the payout of the 2021 bonus, partially offset by lower capital expenditures.
For 2023, we expect free cash flow to be significantly better than 2022 despite several onetime payments in the year, including transformation and a legal settlement. Similar to last year, we expect the first quarter to be the low point in the year, driven by the timing of the annual bonus payment and payments related to our expanded transformation program. Capital expenditures were $636 million for the full year which were primarily related to investments in our contact lens manufacturing production lines.
Transformation costs were $78 million in the quarter and $288 million of life to date. As we announced on our last call, we identified additional transformation opportunities which we launched during the fourth quarter and which accounted for most of the transformation expense in the quarter. We continue to expect the entire transformation program to wrap up by the end of 2023.
Now moving to 2023 guidance. Our current outlook assumes that year-over-year market growth will be slightly below historical averages. Exchange rates as of the end of January prevail through year-end and inflation and supply chain headwinds moderate in the second half of the year. Accordingly, we expect 2023 net sales of $9.2 billion to $9.4 billion which corresponds to 6% to 8% constant currency sales growth versus the prior year. Now turning to expenses. We're going to continue to invest behind innovation and expect core R&D expense to come in toward the high end of our prior range of 7% to 9% of sales.
Moving to core operating margin. We expect efficiency initiatives and operating leverage to drive a core operating margin of between 19.5% and 20.5%. While we continue to see inflationary pressures, we've taken actions, including price and productivity initiatives to help mitigate the impact. Moving down the income statement. We expect interest and other financial expense to be between $260 million and $280 million. This reflects the financing activities completed in May and December at higher interest rates including the incremental debt used to fund the acquisition of Aerie.
Additionally, we project our core effective tax rate to be in the range of 17% to 19%. Based on all these factors, we project core diluted earnings in the range of $2.55 to $2.65 per share which corresponds to 16% to 20% constant currency growth over 2022. While we do not speculate on currency movements, based on exchange rates at the end of January, we expect a broadly neutral impact from FX to both sales and core net income growth for the full year. In terms of phasing, we expect FX to be a headwind in the first half of the year and a tailwind in the second half.
Before turning back to David, I'm pleased to report that our Board of Directors is proposing a dividend of CHF 21 per share which is in line with our payout policy of 10% of the previous year's core net income, pending shareholder approval. Shareholders will vote on this proposal at our upcoming Annual General Meeting in May.
In summary, despite the challenges we faced in 2022, I'm extremely pleased with our performance and I want to thank the entire Alcon team for their hard work and determination.
With that, I'll pass it back to David for closing remarks.
Thanks, Tim. To wrap it up, I'm extremely proud of all that the Alcon team achieved in 2022. Despite challenging macroeconomic headwinds, we produced strong operating results, improved efficiencies and we delivered innovation and outpaced market growth in several categories. These results reflect our strong business fundamentals, robust long-term strategy and the talent and expertise of our more than 25,000 associates.
As impressive as those results are, what I'm most proud of is Alcon's purpose of helping people see brilliantly. And I recently learned about a patient who suffered severe iTraminhis30s which was later complicated by the development of a cataract. This man experienced significant difficulties when it came to light, sun, snow and glare. And he underwent a cataract procedure. And when the surgeon removed the patch from his eyes, his vision was so improved that he was moved to tiers. And now this is the kind of procedure that genuinely changes lives.
It's moments like these when our purpose of helping people see brilliantly really does come to life and it's what drives the hard work and the dedication of all of our associates. I want to thank the entire Alcon team for their commitment to our purpose and I'm excited for what's to come in 2023.
With that, let's open it up for Q&A.
[Operator Instructions] Our first question comes from the line of Graham Doyle with UBS.
Just 2 for me. So just firstly, on the premium IOL penetration, where you've obviously seen a sort of sequential improvement back towards sort of the trends the last 2 years. And I know you were talking about staffing issues being a little bit of a headwind. Is there anything you've been doing from a marketing standpoint, for example, that's really been driving that improvement that we can kind of book into 2023? And then just a question on pricing. Would you be able to give us a sort of shape in terms of pricing as to what's happening in '23, say, versus '22?
Yes, Graham, let me start with the penetration. we did see sequential movement from the third quarter to the fourth quarter that was positive for us. I think it was -- we had kind of expected it to come back. It has kind of moved around flat most of the year. And it is, again, I should be careful, it's flat year over prior year quarter. So remember, sequentially, we were down a little bit in the third quarter which had bothered us a bit. I think what we're seeing is some programming effect but I do think that this year is where you really begin to find out whether all that we're investing in that programming is working or not. So our hope is, of course, that the more we can educate the staff on how to talk to patients about their choices and how to position those choice as well so that they understand the economics and to understand the benefits of them and come into the offices prepared to make that decision.
That speeds the office up. It makes it easier on the staff and obviously, a lot easier on the surgeon. So we're hopeful around the program but I wouldn't -- I would say it's too early to tell what's really going on there. We are obviously encouraged by the overall penetration. And remember, too, the penetration has got a little bit of a lapping effect to do. Korea had a very large penetration rate. I think it was up in the high 40s for a stretch. So for a lot of the prior year, we're lapping that around. So once that gets out of the way at the end of this quarter -- second quarter forward of this year, I think we'll get a lot cleaner view of where we really are. So a little bit of noise in there but directionally encouraging news in the fourth quarter. And on pricing, I think the way to think about it, at least is most of our pricing is in contact lenses, a little bit in ocular health but really, it's -- our Surgical business, we take it where we can but it's largely contracted and those contracts are multiyear. We probably have a little bit in that area. But I would say that directionally, we've taken price twice last year that we'll see the effect of once in February and then once again in December.
Again, I think those are yet to be seen as to how well they read through. And we're watching very carefully what the impacts are on those because we are concerned about pricing out the consumer and/or making sure that the margins that we're generating for the are competitive. I think we feel good about that, by the way. But directionally, the pricing has done well for us. And I think we should believe that, that takes well and it kind of moves along correctly. But I think directionally, we also believe that we should watch it carefully. So not a lot to say about '23 other than 22, we'll read through full year effect and we'll have to report out at some later date and what the numbers actually were.
Our next question comes from the line of Anthony Petrone with Mizuho Group.
And congrats on into the year here. I have 1 on Aerie and then 1 for Tim on margins. Maybe, Dave, just to level set on Aerie Pharmaceuticals. Just maybe where inhibitor share sits today in the United States. I think Gary had a statistic where that was about 3% of the IOP market? And where do you think share can go over time for versus across the glans? Just trying to sort of level set the multiyear run here -- and I'll just put in the margin 1 quickly. Tim, on margins, you get the constant currency margin outlook for 2023. I'm just wondering when we level set that back to 2022, it looks like we're still looking for 150 basis points at the midpoint. Even if we take constant FX effects out of it, I just want to make sure that math is correct.
Yes. Let me stop the row kinase discussion. I think we're excited about the progress that's being made from the acquisition forward. We've seen it kind of steady growth in the combination of both Rocklatan and Rhopressa. Directionally, we are pleased with the progress. I don't know that I want to speculate at this point in time how far we can go. I think we are working a lot on how to reposition both of those products. We also are working a lot on the managed market access element of it. And I do think those are largely the developments that we can add and I think we -- along with a little bit more promotional effort, we hope to take it off of its current trend. But to do that, obviously, we need to be successful with both the repositioning of these products and also the access element. Obviously, it's about -- it is about -- you got it about right. It's about 2% combined right now a little bit more than that.
And directionally, it's a very small part of the glaucoma market, albeit a lot of the glaucoma market is generic. So if you look at the -- probably the achievable markets, we're very realistic about what we expect but above the mind that we can bend the trend up from where we sit.
Yes. And then on the margin, you're in the ball, the right ballpark, Anthony. I mean if you think about moving from the 18% up to the 19.5% to 20.5%, we would expect gross margins to improve. We've got a lot of productivity initiatives in place. We also have inflation subsiding a little bit in the second half. So that should be helpful. There'll probably be some pressure on the R&D line. Our R&D expense in 2022 was roughly 8% of revenue. That's going to be a little bit higher as we integrate Aerie because we're doing some work there. So I'd expect a little bit of pressure there. On the last call, we talked about the additional transformation so that $100 million of savings. That's obviously going to drop through to the margin rate. That alone is probably 100, 110 basis points. And then we continue to get leverage. We're not on the SG&A front. So it probably won't be as high as the last year given the revenue growth. And when you take out the transformation but we continue to expect that. So those would be the levers to get you to that 19.5% to 20.5%.
Our next question comes from the line of Larry Biegelsen with Wells Fargo.
Two for me. I wanted to start on the U.S. and the market growth embedded in the guidance here. And then I wanted to ask a second 1 on just kind of revenue cadence for the year. Just starting on the market growth, Dave or Tim, can you talk about what you're seeing in the U.S., your organic growth in the U.S. has been in the low single digits the past 3 quarters. And is that why you expect market growth to be below historical averages in 2023? And what are you modeling for market growth in '23? Obviously, it looks like it's probably sub-5%. And I had 1 follow-up.
Yes, Larry, you're not wrong. The North American market this last year was relatively subdued but everybody has kind of they wrapped around the COVID is one of the ways you got to keep looking at it is what's the natural growth rate? And then what is it on '19? Because I think usually a 2-year number on '21, skip over '21 has been a pretty good idea. What we've seen on this year was the Surgical business on a full year basis, the market was roughly around 4% the Vision Care business, the contact lens care market was roughly around kind of 3%, 4%. Those are very historical numbers. A little softer on Vision Care than we would have expected probably for the full year -- sorry, for that was the fourth quarter but the full year was also on the U.S. was 4%.
So directionally, I think we feel like -- in the fourth quarter, we saw a little bit of softness with unit growth, where most of the 4% was in Vision Care was made up of price and mix. So yes, we're being a little careful but I think the fact of under is we're lucky we're in resilient markets directionally. And I think what we're talking about are relatives here. So we think cataracts don't go away. We think eye surgery and eye disorders don't go away and that directionally, we're going to see historical growth rates in the kind of we've always said kind of 4% to 5% range is the market depending on which 1 we're talking about. So a little bit soft to that is what we're calling it, principally because the Vision Care market, I think, has the potential as we look at '09 and what happened there, to come off a little bit. So it came off of a high of, I think, 8% in '08, went down to maybe 3%-ish in -- still growing but in the '09 frame. And a lot of that was really exactly the same. It was a slowdown in units, so under new starts.
We don't see that internationally yet but we're wrapping around soft numbers because of COVID. So I think given the, I would say, the uncertainty of the market, we felt it was best to plan for at least a softness in the market. If we're wrong, obviously, we'll lean into it. But like I said, we're over-indexed in the high-growth areas. So I feel like we got a pretty good plan and we're prepared to do well.
Yes. And then as far as the cadence, Larry, revenue, I think it's going to be broadly in line with historical trends. So I go back to '21, '22, you can probably go back to '19, I wouldn't look at '20. And as we've seen historically, Q2 and Q4 are typically higher than Q1 and Q3 from a revenue perspective. If you think about allergy season, that's predominantly in Q2, surprised revenues up. And then when you get to Q4, hospitals are managing their capital budgets. Consumers are managing their co-pays by the end of the year. So we typically see a little bit of a renew lift in Q4 as well. And then while we're on cadence, just from a P&L perspective, if you look at R&D, that will be a gradual progression throughout the year as we've seen in the past.
SG&A, I'd just remind folks that Q2 is a heavy spend for us as we get advertising and promotions, back-to-school programs, things like that. So I take a look at those historical trends because there's a big jump from Q1 to Q2. And then interest expense, I would just level load the interest expense.
The inorganic contribution, Tim, about 2% in '23?
Yes, that's about right.
Our next question comes from the line of Daniel Buchta with ZKB.
My first question maybe on product launches. I mean, obviously, you were pretty active in the last 3 years, I would say, especially on the contact lenses side where you launched a lot of things. But looking back at what you announced on the last day in terms of products to come, I would say, at the moment, there is not so much left anymore. Can you give indications at least what would come in '23 and also '24 here? And then on the M&A side, obviously, we're pretty active on the ophthalmic Rx side. Is there something left you could be interested in acquiring? Because in my view, there is just the large indications like what AMD left where outcome is not yet present. Would you help me hear that?
Sure. Look, we're -- we've got a lot of room left, both geographically and just as you think about where we are in the launch cycles for new product flow. So I would really point you at what we launched to a large degree over the last 24 months, most of those products are in their very early phases. So, I think what strikes me is our toric in particular, remember, we just launched DAILIES TOTAL1 torque. We just launched the P1 toric a little bit before that. Late in the year, we launched T30 Toric. We didn't even get that out into Europe until this year. So there's a lot of runway left for torics. And we start the dailies toric SiHy with almost a zero share. So we're doing quite well there. We expect to continue to do that. I think that if you look forward in the international markets, again, we have a lot of geographies yet to fill out with products. So we'll talk a little bit more about the product flow in both the near term and the long term at our Capital Markets Day. But I do think that the way to read where we are right now in Vision Care is positive.
And in Surgical, again, we just launched CLAREON last year and we haven't even got that outside of Europe yet. So we've got Europe, U.S. but not any of the other markets. So remember, CLAREON is really first year last year. So we still got a lot of movement to go there. We're rolling Vivity out in Japan this year, I think. And so we've got a number of things going on that I think keep the momentum moving in the business from new products. But also, I would just say really important that we maximize all the things we've got as we continue to develop products for later this year, early next and we'll talk more about those in Capital Markets Day. just -- we are always interested in the major categories. So think about glaucoma, dry eye, retina, for sure. All of them are of interest to us. I think probably the way to think about where the world is right now is it seems like with the exception of the multibillion-dollar kind of retina products or kind of orphan products big pharma is not real interested in our space. And I think that's for a lot of us who grew up in the space that's not unusual. It's kind of how Alcon grew up to begin with.
Well, we did a lot with $100 million to $300 million products that -- of which we had many. And so while the big categories and some of the big products, you may not naturally know. I think what you'll find is that there are a lot of nice, what I'll call, kind of singles and doubles, I guess, in American baseball terms, where we're moving the runners and doing a nice job of bringing in products that add value matter a lot to patients and matter a lot to the doctors who use them. So I'll leave it at that but there's quite a lot going on in the M&A space for us that we look at Obviously, we're very careful about how we make decisions there and we tend to be a little bit conservative and disciplined around capital deployment.
Our next question comes from the line of Matthew Mishan with Keybanc Capital Markets.
I first wanted to start on ocular health. I mean I guess with some of the headwinds you're seeing in solutions, I was just hoping you can call out trends in, let's call it, OTC and kind of dry eye. Are we kind of underestimating or some of the success you're having in that area, especially with driving growth from the new sales force?
Well, good question, Matt. Thanks for it. If you look at the full year impact in the IOL business for us, we're reporting a 7% number for the year. If you look at that, you take it apart, underlying sustained Pataday and kind of all the rest of our eye drops business probably grew at 8%. And we had about a 6% offset with the CLC business. So think of that growth kind of organically being naturally drawn down to 2%. And then, of course, the pharma stuff adds some inorganic to it to get to 7. So the markets are growing, we think, kind of in that, again, mid-single digits number and we're outperforming as we are in contact lens and also in the surgical business. So I don't think it gets as much attention which is interesting because it's actually a nice bit of business for us. But I would say that the big news for the quarter and I think until we get out of this is that we're losing some ground on contact lens care and that's a supply chain problem that we've had for almost a year now with one of our -- with a basket in peroxide solution product.
So we are doing all we can to get that sorted out. We're selling everything we can make but we aren't making as much as we used to. We're going to hopefully solve that in the middle part of the year but it is going to be hand to mouth until then. Directionally though, very good underlying growth.
And then a follow-up on some of the contact lens commentary you had. I guess where you said it's a little softer for the fourth quarter. I guess just where -- why -- do you have a sense of why you're seeing kind of some of that softness? Is it staffing? Is it supply constraint? Or is it -- are you kind of seeing the consumer start to moderate its purchases?
Yes. I mean, we've looked at it quite a little bit. And the fourth quarter in the U.S. was different than what it was in international. Obviously, we had a very good quarter internationally. But I would say, wrapping around on a relatively soft number. So, I think what we're watching very carefully is contact lenses are part -- good news is our contact lenses is, people don't stop wearing contact lenses. They don't just quit. What they do, it's part of their basic expense in a month. And so they -- but what they do is they shop for private label, they do shop for deals in different channels and they do stretch their lenses. And so we're aware of that; we saw it as a phenomenon in the '09 frame and I think when we looked at the fourth quarter, what we saw mostly was price and mix driving the U.S. growth. So in real terms, the units were basically flat to slightly down.
And again, we're being very careful with that to try to figure out what that really means. I think directionally, it's probably short-lived and it will bounce back to relatively normal growth but we'll have to see where that plays out.
Our next question comes from the line of Veronika Dubajova with Citi.
I'll keep it to two. One, Tim, just maybe thoughts on the levers that you have on gross margin and help us think through the bridge for 2023 between the inflationary headwinds, the tailwinds from productivity, including contact lenses and anything else that we should be bearing in mind. If you could just walk through of those pluses and minuses, that would be great. And then if I can follow up on your comment on the significant inflection in the free cash flow. Similar question maybe quantify and tell us what is the biggest delta there that gets you to a meaningfully higher free cash flow number in 2023?
Yes. Again, on the -- good question, Veronika. On the margin front, gross margin, I'd expect gross margin to improve year-over-year. Again, we have a lot of productivity initiatives in place. We've assumed that some inflation has subsided, particularly in the second half of the year. And then we obviously have some pricing that we have implemented this year that carries forward to next year. So it's going to be more of the same. We're going to get a little bit of gross margin improvement and then we're going to continue to get operating leverage. And that's going to be the transformation that we announced last year. That's 110 basis points right there or last call, I should say and then continued leverage.
So -- that's kind of the leverage story. On the free cash flow, the way I think about it is we ended the year at 581. So tailwinds going into 2023, we continue -- we expect to continue to grow operating income and that will flow down to free cash flow. We'll probably pick up a little bit of net working capital improvement, particularly on the inventory front as we built some inventory in '22 for some of the supply challenges that we had, maybe a little bit less CapEx. So those would be the key tailwinds. And then the headwinds that we're going to face will be increased interest expense driven by the financing of Aerie, the transformation costs that I called out and then the legal settlement, the J&J settlement that we talked about. So $120 million of that $199 million settlement will flow through free cash flow. So those are the big pressure points. But net-net, we'd expect to be higher despite the incremental onetimers, I'll call it, in 2023.
And Tim, you've talked about this $1.8 billion to $2 billion of free cash flow by 2025. Is this a linear improvement from the 580 is it front or back-end loaded?
Yes. I mean, again, if you take the -- assume that we improve 2023 through the levers that I just talked about and then you back out those one-timers, that kind of gets you to a normalized level that's significantly higher than the 581. And then it's just going to be volume growth. It's going to be rate improvement and probably a little bit more net working capital improvement. But there's still a clear path to get there.
Our next question comes from the line of Cecilia Furlong with Morgan Stanley.
I wanted to start with equipment, just off of the strength you've seen in international markets. Can you talk through, as you think about '23, both durability, sustainability as well as OUS versus U.S. outlook for growth, especially given the comps from 2022?
Yes. We had a terrific year on equipment. Obviously, equipment for the full year grew 10% mid-teens in international and pretty close to what we expected, really not great -- not much growth in the U.S. It was really the international business that carried our business. I think the -- the robustness of the equipment business has been really on the back of our machine. And I would just say that as much as we keep thinking that we've kind of run out of gas on the equipment business. Capital seems to be there out there and the capital seems to be coming to buy Centurion and our Legion product, both of which have done quite well.
I mean part of the equipment strength is new product flow. So we do have a full year of ARGOS internationally. We did really well year-on-year with that product. We did really well year-on-year with Revalia. We've got a lot of really good individual pieces that like Active Century Hemp piece for our older Centurion which really does upgrade the performance of the unit. So we've got a lot to talk about and a lot going on. And I do think that all that strength was offset by a decline in the refractive equipment which, again, I think hadn't been even flat, we'd have done better than we said. Going forward, I would -- we have a belief that this has to return to normal at some point. And I think probably we'll start again next year with a belief that this should probably run close to what procedural growth is. Generally, equipment runs a little bit in front of the growth rate of procedures because, of course, you need more equipment to do more procedures directionally.
And that has been the view that we had. This year, it was kind of, I think, underestimated by probably where competitors ended up. There were some supply chain challenges with some of our competitors. We thought we'd face more competition than we actually did. But I think directionally, we were really pleased with the business and I think expect to have a good year next year. I just don't think it's going to be a double-digit year next year.
Great. And if I could follow up also, just TOTAL30, some of your comments, both around toric, the recent launch planned OUS expansion in '23. If you could just level set what you've seen from both a growth as well as share standpoint through '22 and then your outlook for '23 as well?
Yes. I mean, we're really pleased with the product. It's a very unique product. It's a unique material that allows for water gradient to be on a different kind of material and material that actually sheds bacteria over time. So it's a durable material but can still hold water at the surface. That's -- nobody has been able to do that before. So what you feel on your eye at the end of 30 days is really cool. I mean it basically feels like the first day you put it on. So we're really excited about the potential lens. The doc response has been terrific and the new prescriptions for the lens are quite good in terms of share. What we've -- what I want to be careful about on T30 is that the monthly lens takes a longer time to come up the curve. And I think it's kind of obvious when you say it but if you have a dailies patient and you start them on a trial, you give them a week's worth of product and they come back and they buy a month supply or 3-month supply in a week.
If you give somebody a couple of boxes of TOTAL30, they're off for 2 months before they decide to come back and purchase the lens. So there is a natural delay in both the purchase cycle and the return cycle for reusable patients. And again, reusable patients tend to be folks who've been in their lenses a longer time or they're just starting. So we're real keen on the new patient starts. Again, we've been watching that as a leading indicator and we're very pleased with the lens. How fast it comes up the hill, we'll have to see as we get into next year. But I think directionally, we're pleased with that. I do think putting the TOTAL30 toric out there, particularly because are typically in reusable lenses are a lot more often in reasonable lenses. And we have a particularly good 1 I think will help the family a good bit this next year.
So those 2 ledges together, I think represent the premium product in the entire market for reusability. And so we look forward to seeing a really good response but the response so far has been as expected, maybe a little better than that.
Our next question comes from the line of Ryan Zimmerman with BTIG.
Congrats on your progress this year. So I want to talk a little bit about Hydrus. You guys have had for a few quarters now. I wonder if you could talk to us a little bit about kind of the attachment rate you're seeing with your IOLs and whether you're getting a lift in IOL sales as a result of entering the surgical glaucoma market because you really are the only player in the glaucoma space now that has that benefit of having both in IOL and then a surgical option in the combo cataract market.
Yes, it's a good question. We've never actually looked at -- I don't know that we've ever looked at the actual attachment rates but I imagine it's quite high because we were most ORs with surgeons. We're doing cataract surgery and obviously, the market we're going at is a combo procedure. I think what I can say about Hydrus is we're pleased with what's happened this year. We are pretty much right on our target. I think what we're excited about is the efficacy of this product. I think it continues to play out that patients come off of medications, stay off medications. They are delaying the second surgeries that have been so common with other procedures. And I think as surgeons get more comfortable with the procedure they see the efficacy. And I think over time, that will be the winning combination. I will say that the reimbursement landscape that did affect the visco injections around the canal have had a meaningful impact on the penetration. So the markets grow market has grown pretty nicely, actually a little bit better than we expected. The use of canaloplasty as a procedure has been also better than we expected.
So I would say that the mix has been surprisingly strong to that procedure. I suppose one could speculate the reimbursement there is so positive relative to what is a little bit more complicated procedure in either the stent products that, that could be driving. And I think that will even out over time that people will come back to, hey, the reason we're doing this is to get it better and to do something for the pressure. The best idea there, I think, is going to end up being Hydrus. So we're encouraged in the long run. We certainly were on plan for last year and we look forward to kind of finding -- if there is some leverage in there, I'd love to find it. I don't know whether it really is in there or not. I would tend to believe that this particular product is independently chosen.
Okay, that's very helpful. And then -- as I think about guidance for '23, this cataract growth is kind of below market, then I would assume consumables would be similar in that vein. And if equipment is moderating as well, then do we expect to see a more meaningful lift in implantables? And if I look at ocular health and the combination of Aerie, I just want to understand kind of the segment dynamics as it relates to your 6% to 8% growth, kind of what's below what's above assumed in your guidance?
Well, look, I think the best way to think about it is almost every one of the markets we've got with, again, plus or minus a little bit is in that mid-single-digit growth rate, right? So if you think let's call it, 4% to 6% as the market, you back out organic -- inorganic growth from the 6% to 8% on Aerie, you'll pull off 2 points. Let's just say you're kind of right on kind of the market, so to speak. Now, if you say and we are that the market is going to soften a little bit, then we're growing faster than the market consistently across all categories. So I would say kind of if you think about where the market dynamics sit then individually, we obviously plan to do a little bit better in IOLs, we plan to do. We'll probably do better than market in equipment. Consumables, we are such a big part of that market. We are likely to run real close to market, to your point.
And I think directionally on Vision Care, I think we're lucky in that we are indexing into the fast growth areas. So think SiHy, DAILIES and I think for those reasons, we should do a little bit better than market in contact lenses we certainly expect to. And then you're really adding on the ocular health piece which again gives you kind of the balance of growth. I think I would expect us to be kind of roughly at market or slightly ahead in the core of that business but then you got a little bit of positive news, I think, around the inorganic stuff that we add in. So I mean, that was kind of the math if you were trying to do it on really segment kind of high level, what's growing faster, what's growing at market. It's probably how we've been thinking about it.
Our next question comes from the line of Ed [ph] with Redburn.
Just a quick follow-up on Hydrus. Can you give us a color on the size of the business or the growth dynamic at all beyond what you've already said? And secondly, as you've highlighted, you're making nice progress upgrading on and Legion uploading the old installed base. Where would you say you are now on that upgrade cycle in the U.S. and Europe as you upgrade to the latest machines?
Yes. A couple of thoughts. First on, Hydrus, I guess the way to think about it is the market itself, the MIGS market, we think, is growing mid-teens. That's kind of where we thought it would be and that is where it is. I would say the mix inside of that is a little bit more heavy to the canaloplasty and visco dilating agents. So that grouping is growing a good bit faster than market. And so obviously, the stents are growing a little bit slower than that. That's directionally where we are. We haven't really commented on the size and we try not to go after individual products. But I think we're pleased with where we were. And if you go back to when we acquired the product, what we projected on it, I think we're right on that path.
Directionally, on the other piece of this on the upgrade cycle, we're pretty much done with Infinity this year. I think we end of life the cassette this year at the end of the year. We've mostly gotten them all out. There's still a few rolling around in various markets. I don't know that there's much in the United States. I think there -- it's always harder when you're dealing with another hundred-or-so countries around the world. So, I'm sure that we'll see some continued upgrades there. But really, what we're doing now is outfitting new ORs or replacing old Centurions. So remember, we're well past the 10-year mark on Centurion and that will in and of itself. Everybody wants a new 1 in a lot of ways because the new Active Century Hemp piece is a whole world different than what you're running if you're running a 10-year-old Centurion.
So there's a whole bunch of features that we put in over time. Think of it as a steady bunch of upgrades we've done over a long period of time. So it isn't just the affinities that we're upgrading. Of course, it's the older Centurion. And then we've actually had a pretty good run at some competition. I think our footprint share grew substantially this year, particularly in the international market. So we're feeling pretty good about where that business sits.
Our next question comes from the line of Chris Gretler with Credit Suisse.
I have 2 questions. First, I wanted to come back to the contact lens business and elasticity. Could you actually speak about the price action you've taken internationally versus the U.S. and the relative price differentials in these markets. But you see different response and also what is the spillover effect of the price effect into '23 and whether you intend to take a further price action? And the second question was just on simple on CapEx this year should be trending in the midterm guide of mid-single digit or not?
Yes. We really haven't articulated the detail around the flow-through on price. It's directionally low single digits. So I think what we believe is that both internationally and in the U.S. when we've taken price. We've done them in different moments in time. So I think the U.S. took some price originally at the very beginning of last year. International took, I think, something like closer to midyear. And then again, the U.S. announced an additional price increase for this year, late last year. So all of that said, it's a little bit tricky to compare it side to side. What I would say is that directionally, we thought that we would get kind of low single-digit flow-through from those activities. They are different market to market. We're very specific in how we think about products, markets and competitors and consumers, trying to make sure we get that mix right. And so a little tricky to answer that question any more specifically than that. CapEx.
Yes. Then on the CapEx, we'd expect this year, we'll probably be at that 5% or 6% of revenue for CapEx on 2023.
Thank you. Ladies and gentlemen, this concludes our Q&A session and this concludes our call today. We thank you for your interest and participation. You may now disconnect your lines.