Q2 2020 Alcon AG Earnings Call
[laughter].
Good day and welcome to outcomes second quarter 2020 earnings Conference call.
All participants will be in listen only mode should you need assistance. Please to ignite conference specialist bypassing the Starkey followed by zero.
After today's presentation, there will be an opportunity to ask questions. Please note. This event is being recorded I would now like turn the conference over to Karen King SPP of Corporate Affairs. Please go ahead.
Welcome to Alcons second quarter earnings Conference call earlier, we issued a press release and interim financial report and posted a supplemental slide presentation to our website to enhance today's call. You can find all of these documents in the Investor Relations section of our website at www.
Dot Investor Dot Alcon dotcom.
Joining me on today's call or David end, the caught our Chief Executive Officer, and Tim Stonesifer, Our Chief Financial Officer.
Our press release presentation and discussion will include forward looking statements. We expressively 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 materially from those in our forward. Looking statements are included in outcomes form 20-F R. Form 6K furnished on May 12, 2020, and our earnings press release and interim financial report.
On file with the Securities and Exchange Commission and available on the FCC website at Www Dot FCC Dot Gov.
Non IRS financial measures used by the company Navy calculated differently from and therefore may not be comparable to similarly titled measures used by other companies.
These non IRS financial measures should be considered along with but not as alternative to the operating performance measures as prescribed per IRS.
Please review the financial tables provided in the press release and our filings are reconciled non I FRS measures to directly comparable measures presented in accordance with IRS.
For discussion purposes, our comments on growth are expressed in constant currency.
And with that I'll now turn the call over to David Good morning.
Good afternoon, everyone.
I want to start out by acknowledging and expressing our gratitude to the healthcare professionals in the central workers, who continue to serve patients every day.
From the start we showed that the health of safety of our associates doctors patients in our communities.
His top priorities.
As such we continue to invest resources to safeguard their welfare.
I also want to specific we thank all of the ALCANZA Central Associates, who worked tirelessly to ensure that we can supplier customers with the products as they need as their businesses recover from the spend Devin.
For today's call I'll start by providing a performance update and then comment on overall market dynamics and our innovation agenda.
I will discuss our second quarter sales by business financial performance and provide more color on our outlook for recovery.
Then I'll wrap up with my closing comments and open the call for QNX.
The second quarter will no doubt go down as one of the most challenging quarters in our history with conditions that demanded extraordinary focus on carefully managing our business.
Despite the uncertainty created by covert 19, we're encouraged that we're tracking to the recovery we outlined in the last earnings call.
First we said that we believed April would be to low point for the quarter with modest improvement in May and June.
April sales did mark at the low point of the quarter sales were down close to 50% with may slightly better.
As ophthalmologists returned to the or and optometrist opened their doors for business June sales saw a significant improvement and we saw continued growth in the month of July.
Second we said that we were taking a variety of short term actions to help offset some of the income loss to sales pressure.
And these initiatives will result, approximately 200 million of savings in the quarter.
We were able to do just that decreased planned spending by approximately 200 million this quarter. Despite unplanned covance 19 related charges.
Aggressive controls around discretionary spend included implementing a hiring freeze reducing a meaningful amount of sales and marketing spend and almost all travel meetings and consulting expense were reduced.
These actions resulted in a 20% reduction or of course, selling general administrative costs in Q2 alone.
Third we said we are aligning our production schedules to help us reduce some of our raw materials and labor costs, but the decline in revenue in the fixed nature of some of our manufacturing infrastructure, we have a negative impact on gross margin.
While keeping our associates save who were able to maintain largely uninterrupted operations in our manufacturing and supply chain. However, we did see an impact to our gross margin as result of unfavorable manufacturing absorption.
To production lines operating below normal capacity.
We expect us to improve the sales increase.
Fourth we said, we're still committed to the long term strategic initiative, we discussed at our last capital markets day.
In the second quarter, we stayed on course with our separation and transformation activities. We finished commercial implementation of Sep and we're now rolling it out to our manufacturing facilities.
We have launched two new companywide solutions for HR and document management.
And we're ramping of global service centers to support our enabling functions such as finance HR and IP.
We've also stayed on track with the expansion of our vision care contact lens manufacturing capabilities.
Despite the significant challenges during the quarter, we continued to invest in our product pipeline.
Next let me comment on the market recovery for both surgical and vision care in the talk about market share.
In surgical hospitals and clinics have gradually reopened.
And surges across the globe, we're focusing on rebuilding their patient flow.
Ophthalmologists are managing evolving safety practices and turn over time between procedures is improving.
And discussions with our customers, we're hearing that countries like China with a large majority of surgeries are performed at hospitals procedure volumes are running at about 80% to 90%.
However in countries like to us where the large majority of surgeries are performed an ambulatory surgery centers or private clinics are customers seeing procedures volumes running above 90%.
This is due in part to doctors, increasing the number of surgery days or extending their hours to increase capacity.
While we believe we will return to more normalized market levels by the end of the year that could be some variabilities as doctors exhaustive backlog of pre coded patients and work to refill their pipeline.
In vision care most practices are back open, but optometrist are still adjusting to new safety procedures, such as spacing appointments cleaning their trials spectacle frames between uses and limiting foot traffic.
Recent survey data indicates that optometry practices in the United States are down approximately 20% and visits despite 95% plus being reopened.
Assuming we do not experienced further disruption from coated 19, we believe vision care will return to more normalized volumes by early next year.
Moving to market share global cataract procedures were cut approximately in half this quarter. After a high single digit decrease in the first quarter.
Second quarter market data shows us gaining share in the us PC, Iowa category, where Alkone now has over 70% of the market.
We're very pleased with the continued strong demand for Panoptix and our market leading position in the PC, Iowa category.
In vision care, the contact lens market declined a little over 20% in the second quarter after a relatively flat trend in the first quarter.
The fast growing part of the market historically has been the daily Sai high which declined around 12% versus growing 22% in the first quarter.
We are gaining share on the strength of our dailies total one our newly launched precision one and our multi focal lenses.
We continue to be excited about the potential for precision one based on the feedback from these who returned to fitting the lens in their clinics.
And then ocular health how did a strengthened our leadership position in the us OTG ocular allergy market, where we gained over 10 share points in the quarter, bringing outcomes shared over 50%.
We believe our product development is directly addressing current and future patient needs, including those created by coated 19.
Social distancing requirements are separated family members that have previously served as caretakers and put a heavier burden on our elderly.
For many of our elderly visual impairment can compromise their ability to lose independently and manage their own needs.
In addition for people pursuing everyday activities, we see an increase desire to be independent of spectacles glasses can fog up aware and facial protection people are getting screened fatigue after spending more time at home and for the computer and exercise is taking on an increasing importance.
These behavioral insights continue to inform our product innovation and we remain committed to leveraging our development expertise to address these eye care needs.
For example, our growing Iowa portfolio gives physicians more options to treat a broader range of patients.
Panoptix IOL leader, not only restores visual acuity, but enable spectacle independence by offering good performance that every distance.
Net optics continues to see encouraging adoption falling into production in the us in Japan did last year.
And in July we began launching panoptix in China with key opinion leaders and initial surgeon feedback in that country has been very strong.
We believe this advanced lends will play an important role in our global surgical recovery.
Vividly our patented first of its kind of non refractive PCIA Ll offers a greater range of vision, yet it's as simple to use as amount of focal out well. This lens may enable patients with otherwise disqualified conditions, such as retinal disease to benefit from an 18 well.
We received very positive feedback during our pilot with sales in Canada and select European countries, we're expanding our launch in the most of the major European markets. This year.
In contact lenses were focused on three major programs as optometrist return to their offices were regaining momentum for precision one with a variety of promotional programs in time for the seasonal back to school period, including one program directed at eye care professionals, who utilize our online platform.
This program helps optometrists address their patient needs through outcomes owned direct to consumer fulfillment capabilities, which contributes to patient satisfaction and strengthens the doctor patient relationship.
We also continue on plan with our manufacturing expansion, which will enable us to introduce new options for people with the stigmatism with a much anticipated launch of dailies Totalone toric and precision one toric later this year.
In particular health, we received us FDA approval repetitive extra strength, our third Rx otcs switch in the past six months, which was formerly position.
Hi, today extra strength contains more than twice the amount of all the patterning as Pat a day, enabling customers to experienced full 24 hours of I allergy relief.
Customers will be able to purchase online this year and at U.S. retailers in early 2021.
We also received CE mark for sustained ultra multi dose preservative free or MD Pf. The MDF category is particularly important in with Europe and this is our first entry into the large in fast growing international segment of artificial tears.
Sustain mbps, we'll open the doors to exciting share opportunities that build on Alcons dry leadership in this important region.
So as you could see you continue to momentum with our investments in innovation.
With that let me turn it over to Tim will review, our financial results provide more color on our outlook.
Thank you David results this quarter demonstrates strong execution, despite the cobot uncertainty we.
To implement measures to protect our associates support our customers and further strengthen our liquidity.
We exercise heightened financial discipline, and discretionary spending production planning and managing our investment priorities.
Starting with the topline we saw 34% declined to $1.2 billion and the second quarter with double digit declines in both surgical and vision care as we'd anticipated.
On a year to date basis, we saw a 15% decline.
Surgical sales were down 42%, reflecting the slowdown of surgical procedures globally.
On a year to date basis surgical sales were down 21%.
Implantable sales were $176 million down 40% versus the prior year.
Sales were down in Monaco goals, despite an increase in share during the quarter.
This was partially offset by PC, Iowa growth due to the strong adoption of Panoptix in the us in Japan, which will wrap around their launch dates in the second half of the year.
On a year to date basis and profitable sales were down 15%.
Consumable sales were $320 million down 45% versus prior year, which was driven by slowdown in surgical procedures.
Surgery levels increase we anticipate we'll see continued improvement in consumables aligned with market trends.
As expected video that procedures held up better than cataract, given the urgent nature of retinal surgeries.
On a year to date basis consumable sales were down 25%.
Sales from the equipment and other category were $106 million down 32% versus prior year.
We're seeing limited major capital purchases as customers manage their capital budgets, however, revenues from equipment service and procedural hydrops held up better than equipment in the quarter.
On a year to date basis equipment and other sales were down 18%.
Turning to vision care sales were down 25% and the second quarter, reflecting the impact of cobot 19.
On a year to date basis, we saw an 8% decline.
Contact lens sales were $329 million down 32% from last year.
Covert 19 impacted growth in all products and regions driven by the decline in traffic in widespread closures of optometry practices.
As offices began to reopen we saw an encouraging recovery in June driven by higher lens consumption and larger order volumes among distributors and retailers.
On a year to date basis contact lenses were down 15%.
Okay, how sales were $267 million down 14% versus prior year.
Sales pressure was driven by store closures due to covert 19, and the impact of Q1 stocking activity, which we expect to normalize by yearend.
We were pleased with the ongoing momentum of the Otcs launch hepatic day in the us and on a year to date basis ocular health was up 3%.
Now moving down the income statement.
As expected core gross margin was 54.6% this quarter down almost 10 percentage points year over year.
This was primarily driven by lower sales and $64 million of unfavorable manufacturing absorption, which we expect to incur to a lesser extent in Q3 and even less so in Q4 as markets start to normalize towards the end of the year.
Core operating margin was negative 6.6% this quarter compared to 16.6% last year.
Lower sales as the primary driver the margin pressure combined with the unfavorable manufacturing absorption and provisions related to the pandemic.
As we discussed on our last call, we made significant cut discretionary areas, such as marketing and sales support travel meeting expenses and consulting while protecting our associates and sustaining R&D.
Going forward, we expect R&D investments and marketing and sales to increase in the second half of the year as compared to the first half as sales improve.
Foreign currency had a negative 70 basis point impact during the quarter.
Second quarter interest expense was $30 million down $35 million from last year due to more favorable interest rates in the current period, partially offset by the interest expense from the newly issued senior notes in late May.
The core effective tax rate was a 10.4% benefit in the quarter compared to a 13.5% expense last year.
Year to date, our core effective tax rate was 20.5%.
The decrease in a tax rate was primarily due to the mix of pre tax income and loss across geographic tax jurisdictions and the impact of koby 19 on profitability.
Core loss per share were 21 cents down from income of 47 cents last year.
Lower sales are the primary driver along with approximately 14 cents per share of Copel specific charges and costs driven by lower manufacturing cost absorption provisions for expected credit losses and higher inventory provisions.
We ended the quarter with $1.3 billion in cash and cash equivalents at the end of June and $1 billion available in our revolving credit facility.
We successfully raised $750 million in late May that enabled us to further strengthen liquidity at a competitive interest rate.
We do not have any major maturities before 2024, and we do not have financial covenants or material adverse change causes on any of our existing facilities.
Free cash flow for the first half of the year was negative $110 million compared to positive $95 million last year.
This year over year decline is primarily related to the impact of covert 19 on our operating results.
Given near term operating income and networking capital pressures driven by Coven, we expect free cash flow for 2020 to be lower than 2019.
Separation costs this quarter were inline with expectations $62 million, primarily driven by IP projects.
Life to date separation costs were $370 million, we expect to substantially complete our separation process. This year.
The successful implementation of S&P has given us better visibility to real time conditions against a broad landscape in which we operate.
Transformation costs this quarter were $13 million, primarily related to third party consulting fees and restructuring.
Like today transformation costs were $72 million.
Looking forward to the second half of the year, we expect the path to reopening will vary based on country and local mandates.
The pace of the recovery will depend on the capacity of public versus private channels and the ability of the CP to incorporate new safety procedures and rebuild efficiency and patient flow.
We were encouraged by the June rebound and the favorable trend in July.
Although we're not counting on a linear trajectory, we expect the markets to return to more normalized levels by the end of this year early next year and this macro trend gives us confidence to invest in customer facing programs and ramp up strategic investments in the second half of the year.
By franchise, we believe surgical may recover slightly faster than vision care.
Surgical practices are accustomed to the adoption of safety protocols. So they are quickly adapting to their new measures.
While demand for Vid written cataract is durable and patients cannot postpone procedures indefinitely without additional health risks I want to remind you that the solid rebound. We've seen to date was primarily driven by patients that were booked pre coven and are now returning to complete their procedures.
It remains to be seeing how quickly the ophthalmology community can we filled our pipeline of patients, which could result in variability in the coming months.
Absent another pandemic shutdown, we expect the surgical markets will return to normal levels by the end of the year.
And the Optometry channel, we expect traffic to return to normal by early 2021.
We believe more customers are placing value on the comfort and convenience of contact lenses with increased screen time, and the need to wear masks outside the home.
Furthermore, the greater need for hygiene may create an opportunity you accelerate the switch from a usable to daily disposables.
We've been encouraged with the continued improvement in vision care, but we're cautious to extrapolate given the variability of stocking activity and foot traffic.
One thing is certain more than ever doctors and consumers want comfort and visual acuity.
We will continue to drive effective customer engagement and we're investing in the new activation and marketing campaigns to help ETP rebuild the practice.
Given this backdrop, our fundamentals remain strong and we'll continue to execute on our strategic imperatives.
That includes completing our separation.
Continuing our multiyear transformation of new outcome.
Accelerating innovation and R&D.
And expanding our vision care manufacturing capabilities to fuel our product pipeline.
With that I'll turn the call back over to David for some final comments.
Thanks, Tim in this environment, our talented employees and deep customer relationships give us confidence to steer steady course back to growth.
June July providing encouraging data points that were on the road to recovery and we expect the markets to return to more normalized levels by the end of this year really next.
Support remember our fundamentals are strong and we continue to steadily deliver on our product pipeline that benefits our customers as they rebuild their practices.
Net optics and vividly brings new advanced lens options for cataract surgery.
Precision one and our new dailies total one precision one lenses for stigmatism expand our contact lens portfolio to a broader consumer population.
And our new patent a family of over the counter allergy drops is bringing new prescription strength relief from macular allergies.
These are just a few examples of what we could achieve we stay focused on our commitment to help people see brilliantly.
This commitments is secured by 70 years of experience in our dedicated associates, who work everyday to sustain alcons ability to serve eye care practitioners and their patients in the post pandemic world.
Now, let's open up for questions.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone. If you are you can you speakerphone. Please pick up your handset before passing the key.
And with Jive. Your question. Please press Star then Q as a reminder, we ask that you. Please limit yourself to one question and one follow up if you have additional question you may reenter the question Q.
This time, we will progress on entirely to assemble thereafter.
Your first question today comes from Veronika Dubajova of Goldman Sachs. Please go ahead.
Yes. Good morning. Good afternoon. Thank you for taking my question, if I can start with just a little bit of color.
David on sort of how youre thinking about your competitive positioning and contact lens care notable that.
I think this is a second quarter in the rally that you're starting to kind of outperforming the market a little bit just curious how your thoughts on is this just a function of your mix either in terms of categories. Our geography or are you starting to see some green shoots.
Hi, competitive perspective from precision won and maybe if you can comment on durability of that as you move into the second half that would be really helpful and I will.
Uniquely ask as well is either very helpful hit given number on procedure volumes for cataract that if we can get a similar kind of metric for the contact Roddick market in July that would be super helpful.
Thanks, Ron.
Let me start with the competitive position I think look we've been very pleased with them.
The development of our product line in contact lenses, obviously, we've been by design targeting the fastest growing sections of the contact lens market. So think about the side high market in particular being considerably faster growing the the base market of contact lenses inside of that really when you think about at the site high touch.
Eric and so I have multi focal growing even faster yet so.
GT one is as benefited from that quite a little bit and sodas precision wanted ads for us.
And accessible lens that has a terrific kind of DT one quality to it.
But at a price point I think that is affordable to a lot of folks. So we feel good about.
The share gains were making progress, we're making a new fits and in switch fits around precision one.
And I think importantly, going forward with the Torics it puts us in position to really benefit from the growth in that market and we have almost a zero share we have zero share I think in OSI high Torics, we look forward to gaining kind of an appropriate share commensurate going forward, which with our with our GT one in precision one product orix, so that's kind of excess.
Adding niamh.
So I think the durability that is pretty good I think we see that going forward the on the on the contact lens piece.
Visits I think is really what we would comment on more than anything else in exits of has been kind of 80% of normal is what what the physicians have been reporting to us. So optometry, we use the jobs and survey I think a lot of people do that that study I think should 80% were backfilling lenses.
Average patients for day were down 20%.
So again I think it's not back to normal and you can you can see how that works because of course, there, they're having to limit flow through the office, they're having to clean the frames after everybody touching them. So it's just it's still going to be a while I think before we figure out how to get patient flow back and on the contact lens side of that I mean, I think thats your contact lenses still remain.
In a high time involved kind of share time involved process to do fits no I think.
96% of Dr. reporting, they're seeing new patients and their backfilling lenses, but.
Again, I think we think thats going to continue to be slow.
And kind of a slow steady growing back to normal. So again, we think probably normal looks like beginning in next year.
That's helpful. Thanks, David and Tim can I, just a follow up placed on that proficiency pep for inventory and accounts receivable. If you could quantify that more that would be super helpful.
Yes, Brian It gives us him it was about four cents.
Between both the credit losses on the inventory provisions.
Terrific. Thanks, guys.
The next question comes from Matt Miksic Credit Suisse. Please go ahead.
Thanks investigating question.
One follow up on on wall on PCR wells, and cataract and one on that I could so.
Panoptix.
Really impressive share.
Levels with the obvious question is is.
Where can we go from here.
The format.
That is visited polenta bold strategy in the north as I mentioned, one follow up with that.
Yes.
We're encouraged by the performance of Panoptix I think made we thought we've always thought it would do well I think the question. We always said was at what pace would it get up the curve and we've we've obviously been excited about seeing what's gone on us in Japan in particular.
I think the there's two things to think about when you think about the PCR wells. One is just what's the wrap around look like and how much do we have room growth and I think remember that exiting fourth quarter last year. We only had a 50 share. So we're going to have growth year on year route probably into the middle of next year.
Even on us in Japan.
Importantly, when you kind of add in China, and some of the other markets that were just launching now I think we see steady growth from Panoptix through the end of next year for sure and then really more market growth I would think in 22 going forward, but we're clearly going to be pushing on vividly as we had planned what we were trying to do is make sure that.
We embed panoptix get our share to where we're comfortable that its maximized with that product and then we'll bring devotee into the market. We're starting that now in Europe, where we've had a good run with Panoptix and I think we're seeing some positive additional patients coming into practices that are using a well so if you're already NHL.
Surgeon there are some patients who you may exclude from giving NHL, because you can't see through a diffracted lens as easily to the retina. So people would retinal disease.
In which there are many of US as you get a little bit older lot of people have a retinal disease or people with irregular cornea, where you've got a problem.
A lot of times the series will exclude them from HL wells and we think devotee provides an alternative here that that could add some patients into the market. So we'll see how that take shape, but.
We think the performance lenses quite good and I think we were initially try to figure that part out.
Feedback from the markets in Europe, and Canada been terrific. So we're feeling good over the long term there.
That's helpful and then I did read.
You mentioned I think invented that there may be to the slowdown in UK new procedures as you sort of the move through the backlog as some of these conditions, it's completed their PVC schedule patients.
Maybe if you could talk a little bit about that business and what would drive patients in.
To to the initial going into the clinic visits that puts among scheduled for for surgery and what you can do to support that are or.
Just because this is kind of at the acute ended the spectrum of things that need to be done for these patients.
Well can you do to support or accelerate those.
Clinic visits thanks, well didn't read it tends to be a pretty emergent category. So there's not a ton of stuff that gets delayed truthfully I'm, obviously, when we shut down.
For the month of April and for part of May depending on where you were in the world that had the thats going to have a material effect on on the on the sales, but vitric consumables. For example for US was pretty solid I mean, it was it was best it was better than cataract and better than.
And equipment and better than refractive. So I think we feel good about what was going on there I think the only real effect on EBIT was was all our time and availability, there's probably a little bit of of delay in certain kinds of procedures, but more or less we feel like thats, a pretty good business moving along for us pretty well, it's really cataracts that.
Are you could kind of differ for awhile.
And I think thats been the concern as to what's the pace at which patients will come back with what we're doing a cataracts as their rescheduling kind of at 90 day level. So at April they probably take the folks from April that were shut down of they moved up 90 days out is that's about the scheduling interval.
And there and those will fill up the June July the registers for patients and so that will be the best where we can think about refilling the pipeline going forward.
I think the the market for hit rate looks pretty good.
Thank you. So next question comes from Jeff Johnson of Baird. Please go ahead.
Thank you good morning, guys.
David just want to follow up on the cataract comments, one on did I hear a market share. This this quarter for Panoptix in U.S. in Japan, and 65% last quarter I'm not sure I heard that and any any additional color you can give on that funnel selling up both cataract surgeries I Harry on some of the backlog coming out, but what are you hearing about clinic visit.
Hi clinic days for these ophthalmologists are they still in that funnel back up at this point, how is that going versus the backlog coming out. Thanks.
Sure, it's a little tricky to do that because where you are using survey data and I'll give you what I know or whats been published and we can go from there, but let me start with the market shares. We we were up 70 plus in market share in the us in Japan.
We are.
Quite well in that in that.
Metric I think what you're going to continue to see is launches around the world, including China in the third quarter, which we were excited about as well. So we think panoptix will continue to do well as we kind of move forward through the next year. So.
On the on the on the office and the Rescheduling piece I think what we do know is that 98% of surgeons right now are reporting their open.
They're 93% of started some.
Our reporting kind of normal some to normal surgery.
80% of those DSC based surgeons are basically saying they've got.
Time that thats available and probably 30% of the of the surgeons are saying they've got a greater than 30 day backlog. So I think thats, probably the metric its most useful and thinking about this which is.
A lot of this there was a little bit of a perdido principal in the in the surgery with with.
With our customers so 30% are saying they've still got to 30 or greater day of backlog I think says we've got some room to go in terms of filling this out but we saw good June we saw a pretty solid July and.
I suspect that this works its way through the system over the coming months.
But we'll just have to seek is very difficult to kind of tell a tease out how much as rescheduled versus how much is refills.
Understood and Tim maybe you could help us on stocking up that distributor level in the contact lens space. I think you mentioned it in June that some of that continue in July do you feel like channel inventory is now at kind of a normalized level on the contact lens side and then we've seen from your competitors one of your competitors and contact lenses take their rebates up quite a bit.
On a daily side by side is that anything like you need to fall.
In any concern there on their behavior in the back half of this year from a rebating perspective. Thanks.
I'll, let David comment on the Rebating Anna of as far as the stocking we've worked our way through most of that I think there'll be some more coming through in Q3, but that should normalize by by the time to get through the end of the year.
And on the Rebidding, we expected the changes that have occurred in the market. We knew that that precision what was a fairly powerful value proposition going right into the middle part of this market and we've priced it where we think it's appropriate so while we have a rebate along with our own product, we feel like it's priced properly.
Thank you.
Your next question comes from Steve Willoughby of Cleveland Research. Please go ahead.
Yes, hi, good morning.
Just.
Was wondering if you could provide maybe a little bit more color.
The number of time sort of growth in the month of July and I was just wondering what specifically youre, referring to is that growth across the entire business.
Growth on a year over year basis growth compared to second quarter, maybe you could just provide a little bit more color. There and then I have one follow.
Yes, Steve I would just I would call the growth it's kind of growth over prior month revenue is the way to think about that and we're still working on how do we get to flat to prior year right. So we're not there yet and again, we're continuing to move forward with.
I believe that this normalizes for surgical kind of late this year and then revision care, probably just comes a little bit slower little bit flatter recovery into probably drags into next year's our vet.
You are the only additional we only additional color I'd say as you know we call up last quarter that April would be the trough, which it was.
There was some modest improvement in may.
We really saw some significant improvement in June and then some sort of slight improvement off of that so thats, how I kind of think about that kind of a big jump in June and then just kind of progressing towards the the points that we highlighted towards the end of year.
Thats helpful.
David My follow up question I was just on a surgical equipment.
Could you provide any perspective on what do you think that could potentially look like over the next couple of quarters as compared to the results here in the second quarter.
Yes look I think youre going to see similar results on equipment.
We don't expect the equipment markets really pick up until at least next year I think capital budgets right now most hospitals are slim if there are there at all the same thing with the.
Even the physician assay, so I think when you survey.
Ophthalmologists are set surgery centers, what you see as people putting off.
Equipment purchases at least so next year and.
And that's what that's really kind of what we expect once capital budgets get redone for next year, we'll work on that the thing. That's that's important to consider is remember that a significant part of that equipment other.
Bucket is our service revenue in our service revenues quite stable because it's a monthly service fee and that's partly why you see it a little bit better than what you saw with the cataract volumes in general So volumes as we said were off those have in the quarter or more than have in the quarter, but equipment kind of hung in there because the service revenues pretty stable.
Thank you. The next question comes from David Lewis of Morgan Stanley. Please go ahead.
Hi, Good morning, just a couple quick questions for me maybe to start.
Tim one for you on margins and maybe a follow up with with David but Tim a couple of things the second quarter had some different margin dynamics you. You've walked you can you sort of help us just qualitatively margins in the back half a year, both gross and EBIT any dynamics to think about on the recovery and then you did talk about the press release longer term margin initiatives.
Are those LR key targets still intact, the timeline still intact and then just a quick follow up for David.
Yes, so I would say about the second half again theres a lot of uncertainty out there, but assuming that the revenues come back as we have as we have called so again sort of surgical gets back to normalized levels towards the end of the year vision care sort of an early part of next year.
We're going to continue to monitor and I'll say toggle, our expenses and investments towards that revenue so as those revenues.
If that revenue improves we are going to continue to invest behind that so I would expect we think about second half sort of SGN a ramping up in line with with that revenue projection and again, assuming it all plays out I would expect Q4.
Could be something similar to Q4 of last year. If you think about kind of that that opex spend maybe a little less on the SDMA side, a little bit more on the R&D side as you compare from a year over year perspective, as far as long term guide again.
Given the uncertainty given the fact that we pulled our guide for this year.
I would just say this the fundamentals of the business remained very strong we still play into the markets will recover.
We are very well positioned we continue to invest in all of our strategic initiatives, whether it's the vision care lines, whether it's that R&D innovation the separation the transformation so.
It's too early to call now, but the thesis I think is intact and as we talked about earlier, we will be coming out with a capital markets day, probably.
In the first quarter of next year, and we want to see how 2020 settles down and then we'll we'll give you some more color from there.
Okay very helpful. Then David just on I kind of health dynamics is that a lot going on there this particularly or we have some destocking you talked about last quarter. We have had today as well as maybe some solutions demand dynamics, just help us understand sort of the second quarter and sort of how you see the accurate health dynamix into the back half of the year. Thanks, So much.
Yes, I mean, this second quarter was tough to read I mean, it's.
I think you start with the the elements of it that are easily reportable I think you see that the.
The whole of the dry eye category, which is a piece of the market was down 12% as a market and then contact lens care as a market was down in the low twentys.
And so on a relative performance basis, we were off 14, I think kind of.
If you kind of work that through I think what you'd probably see is that we're gaining share we certainly gain share inside the.
The allergy part of the market, we are gaining share I think in the in the dry eye piece as well the contact lens were roughly flat to slightly down in share. So I would the thing I'd continue to focus on to share movement, because the the stocking has gotten complicated we thought that the stocking would improve.
With the second quarter, but in truth I think.
They are still struggling to understand how much they want to keep at retail right now because I think is is in general retail view that they want to keep more than they need and so I think we're concerned that.
The demand and.
And inventories may not be perfectly aligned.
Thank you. The next question comes from Anthony Proterra of Jefferies. Please go ahead.
Thanks, and good morning.
Just on surgical wants cervical one on contact lenses.
I guess as we look at the fourth quarter, specifically, if we blend wall of surgical together is the right way to think about it that we should still be modeling year over year declines and then specifically for iOS falls is there potential to actually see that flat by the fourth quarter.
Or should we expect that to the also pushed into early next year, and then I'll contact lenses.
We are just given where JNJ as volatile rebates is is there a risk.
On the share side it.
If the company doesn't respond with similar rebate and I'll just have one quick cost question. Thanks.
On the on the iOS I think.
I think the way to think about iOS as we are gaining significant share at this moment.
Markets are going to return to normal largely towards the end of the year. So now have to leave it to you to forecast the markets themselves and then apply shares to them, we've held share really well and it was actually grown a little bit share amount of focal which is a positive our h. I will share is excellent.
And torque shares have always been high so we feel really good about our position in the Iowa market, we're going to have to wait and see what the trajectory of the market is and frankly, that's the that's the big question that we're we're kind of all guessing at.
But I think the best way to model is to kind of think about it as roughly back to normal.
At the end of the year.
On the contact lens piece look we we see the rebate, we don't we've been taking share that relates been out there for a while now we continued to gain share in new fits in switches.
With precision one.
Dailies Totalone continues to do really well.
Compared to the market. So I think we feel good about our daily say high and I would just.
Suggested that that the.
Sustainability of a program that is giving away significant margin you have to really pick that one through I'm not convinced that.
That we should respond in any other way than we have which is with a superior kind of.
Effort at marketing the product that we've got and we're doing a good job of that.
And then just a quick follow beyond JNJ litigation on the Staples signed a lens NSX and just a quick comment there it looks like this premature and I would assume that this has no impact on the panoptix momentum. Thanks again.
Yes, I mean, we.
We've seen that product for a while we know what it is and so I were.
We're always following very closely any new developments in fact go but as you know, we however, very substantial fickle base in the market, we feel really good about our current offering in constellation we have a new HAMP fees called active century, which does some very unique things relative to.
Fluidics inflow and were very.
Comfortable I think with that the technology that we have cannot be.
Thank you.
Next question comes from Matthew Mishan Keybanc. Please go ahead.
Great. Thank you for taking the question.
You can you give some good color around the us contact lens space not too much from Europe and Asia.
What are you seeing in those regions kind of faster or slower recovery.
Matt.
The.
The Asian market for Japan is kind of gone sideways as they kind of bump back into.
More cobot shut.
Not shut down exactly but there is struggling I think as coexist came up.
China has always been a pretty small market so in terms of.
Total impact on us it doesn't have a ton of impact.
And so I would say that part of the world is kind of as expected.
The the European market, I think will largely be more dependent on us launching new products. So I would think about.
Later this year as we launch.
Did you on toric and precision one precision one toric those are the products are going to lose share in Europe, and I suspect that really has impact next year.
Other than that I think we see the markets kind of very similar right. So the market Europe was down in the Twentys.
The Asian market was down Directionally as well.
So.
Not a lot of difference in the market impacts.
And underneath that I think is is the same competitive dynamics, where you've got.
New product flow coming from us.
Excellent and this is a follow up you probably had some some interesting perspective.
Your headquarters in Geneva, how should we think about that the decline in the U.S. dollar impact in years, it a little different than than than just translation.
Commission, Yes, I mean, we we hedge the balance sheet as many companies do we do not hedged the the piano.
And I would just say that in total.
1% move and the dollar is about $14 million of op bank and about $40 million or revenue. So thats, how I if it if it moved across all the currencies I thought I'd think about it.
Thank you. The next question comes from Larry Biegelsen of Wells Fargo. Please go ahead.
Good morning, Thanks for taking the question guys.
One on 2021, I'll try my lock and one on PC iOS. So I guess a question on 2021 is do you think you can get back to the level you expected to be at in 2020.
Before Covidien, you guided to 5% to 6% growth over 2019 in EPS of $1.95 to two low five has had a good way to think about 2021 today or could you potentially do better because of catch up from postponed procedures and had one follow up.
Hey, Larry This is Tim I applaud your efforts on the on the 2021 guide.
Listen I appreciate what you're trying to do again I would just say this it's we're not going to guide 2021.
But again the fundamentals of the business are strong assuming that the revenues come back as we communicated call. It late Q4 early Q1 that should give you a Q4 exit rate that's not too dissimilar to what we saw in Q4 of last year and then I think you just got to think through what.
The growth rate that you want to assume and the productivity and what have you and I I kind of take it from there, but again, we're I appreciate what you're trying to do we're going to kind of close out the year.
We will come out with the capital markets day in the early part of next year and give you gave a lot more clarity around 2021 and beyond.
That's helpful and David on PC, Iowa penetration.
In the past you've been pretty cautious CNO, you've seen about a 50 basis point. It you know increasing penetration in the us.
On an annual basis for many years.
And you've been cautious in the past, but do you see that changing.
Increasing more than you expected given the strength.
Panoptix and a reduction in cataract surgery reimbursement, thanks for taking the questions.
Larry It's a good question I wouldn't I wouldn't change my view on this one really I think we've seen over the years.
There is kind of the penetration with waxes and wanes I think that you may see some near term PCL penetration improvement.
Because of the enthusiasm around.
Panoptix activity, but I would I would bet you that it settles back after year too. So you generally speaking it's gone up with new products and then it's got US followed back the next year, it's really hard to see it right now because the the market is.
Is disproportionately.
Weighted right now to some of the larger practices, who got back in business quick and they tend to be higher PCL users. So be careful about assuming anything from the current market mix because that may not be stable state likely it's not and thinking about just one other comment to add Larry as you think about 21.
The way to think about it I think in model. It is that if we can get we get back to normalized markets kind of towards the end of the year go back and think about our market share and were how thats done because I think what I would encourage people to look at is with the steady product flow and the basic market share performance we've got.
I think we can we can know what the shares are pretty well.
And then you just have to apply the market to an that part we don't know so we just have begun to make an assumption about the market.
And work your way backwards, because our shares are really quite good right now.
Thanks for taking the questions.
Your next question comes from Chris Cooley Stephens, Inc. Please go ahead.
Consistent with.
One quick follow up those cliffs.
This going as well.
When we talk about the.
Category consists of conservatism there on the growth in the category as a whole.
Could you maybe help us the plane visiting obviously the.
Missile feedback on that part of the revised help us think about how that it's on the total opportunity.
Sales versus the current backdrop and may be provides municipal power.
You saw in those initial trials.
When looking at my notes, but you pulled forward that launched this double so slightly.
Considering a growing to provide the.
Yes, I think when we were cautious at the beginning.
On vividly principally because we wanted to see how the surgeons would react to it and it's always a little bit different when you get it out into wide use and so.
We were careful about getting information and trial information out I think what we've seen now having worked with it for six or eight months in Europe in Canada and some other places is that we're getting very good distance vision. It has a nice landing zone. So we think it's Scott.
A benefit to ease of use in terms of calculating and getting to a proper distance.
On corrected visual acuity and then we also getting really good intermediate vision. So I think we feel good about the those two focal points, we're getting pretty good near vision, but the trade off with this lenses.
You really get to avoid all of the kind of typical this photop. She is docs complain about you know this kind of driving at night do I see halos in glare et cetera. So this has model socal like characteristics.
But if you were comparing it say to Panoptix you don't get as good a near reading vision, you'll have to you have to do some other things to try and get there.
I think thats, probably been the trade off we were we were struggling with as to how does it fit with with this and I think what we've heard now and I think consistently hear from surgeons is that if you're already doing advanced technology lenses, what's you're going to find with this led as it provides an opportunity to bring patients who otherwise would probably.
Give amount of focal lens because of an irregular cornea shape or because of a prior lasik or because of retinal disease or some other need to be either.
You might exclude these patients because they have hide driving at night needs those kinds of things.
And that May actually add some patients into the so thats a cautiously optimistic.
More patients in two existing surgeons and so we don't think this is a surgeon expanding idea, but we think it could be a patient expanding idea.
Okay.
Thank you.
Your next question is from Chris Pasquale of Guggenheim. Please go ahead.
Thanks, two quick questions. One just on optometry visits getting back to normal by early next year.
You also talked about some potential headwinds for daily adoption is another element, we were wondering thats supply depletion and whether that could be slowed by contact lens customers, who are now working are going to school from home is that a potential headwind youre concerned about just paces night using as any lenses per week.
When do you think we'd actually start to see that in the numbers.
Reorder rates.
It's hard to tell you we've heard the same thing.
But it's really right now.
Excuse that utilization is tricky to get on a per patient basis I.
I think there there is intuitive Ali I think some slower where when people are at home because the two large degree there where they may where the glasses at home.
I do think Theres, a increasing desire were contact lenses when you're outside the home and I do think that will pick up and maybe that offsets maybe what does it but I don't think we have any real clear line of sight to what the per patient usage is I.
I'd be given your opinion as opposed to anything that we could give you concrete Chris sorry about that.
No it's understandable thanks.
Then just one quick one on ocular help wanted to make sure I understood. The comments there given all the moving pieces that you expect to have a headwind on that business in the back half year because of inventory drawdown is there anyway to quantify how big that might be.
Well I think there could be a little bit of of continued Destocking. We had suite as we said last quarter, we had a significant amount of stocking in.
Hi, pantry loading from patients who are worried about getting product.
That will draw down over the next two quarters, we've got some of it out in the second quarter I suspect there is still a little bit more to come.
But I think it'll be kind of a minor headwind.
Directionally, what we're looking bet right now is significant share movement with with pent up or with sorry.
Pat a day and so we gained 10 share points in this category of Alco allergy. So as you see the fall season kick up we're hopeful that the they will translate into into kind of a natural destocking. If you will.
Thats helpful. Thanks.
Our next question comes from Bob Hopkins of Bank of America. Please go ahead.
Oh, great and.
Good morning, and I guess is that good afternoon as well so just to two quick questions.
First on the financial side, just a quick clarification about some of the comps are made about.
Next year.
I guess I the way I phrase the question is.
Are there any of the co good related expenses or drains on free cash flow that could linger into 2021.
Or could 2021 be a fairly clean year from a cost and cash flow perspective, assuming demand comes back. Thank you.
Yes, I think most of the zinc coated related expenses to think about going forward is really around that manufacturing absorption rate. So we're going to continue to see.
Some of that pressure to a lesser extent in Q3, and then more in Q4, and then it's sort of works its way out as fires that provisions around inventory credit losses again, we look at that on a on a quarter by quarter basis.
We feel like we're adequately reserved right now and provider for right now so I wouldn't anticipate.
Any more coming through but again, we'll have to monitor that on a quarter by quarter basis from the free cash flow perspective.
The big things that really think about is obviously if you look just the first half of this year were down from an operating income perspective by about $400 million. So that obviously is a good proxy for free cash flow.
So we'd expect significant improvement next year.
The only other thing to think a little bit about thats hard to call would be maybe on the receivable front again, we're working with customers were extending terms.
So our collections are a little bit lower than what we would have anticipated. So some of that may work its way through.
Back half the back half a year or our first half of next year.
Okay. That's that's good color and then and then David for you I was wondering if we've talked a little bit about this already but how would you characterize how much visibility you have into the back half currently and ask the question because you'd mentioned some survey data, but then you also mentioned that.
Large portion of current volumes there just rescheduled cases so.
I would characterize that your your visibility in the back half of this year.
I I think we're still.
Really careful about it because candidly it's hard to tell how much is is that risk in surgical how much has been rescheduled versus how much is refilling.
We have a pretty good visibility week to week from our Salesforce on what demand looks like Directionally. We just don't know how much of that again is between rescheduled patients that were we're supposed to have surgery unit in April or may they are now having surgery.
In kind of June and July.
But again I think we have a directional view that most of this gets sorted out in this quarter.
And then it should look like fourth quarter gets a little bit more normal where demand and.
Revenue kind of aligned with each other but again, we're projecting there and then we don't really know so directionally visibility is pretty low.
To to what we actually have.
On the books.
Thank you and the interest of time. This does conclude our question and answer session. Today. The conference has now also concluded. Thank you for attending today's presentation. You may now disconnect.