Q3 2020 Alcon AG Earnings Call
No.
[music].
Good day and welcome to Al Khan third quarter 2020 earnings Conference call.
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After todays presentation, there will be an opportunity to ask questions.
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I would now like to turn the conference over to Karen King Senior Vice President of Investor Relations and communications. Please.
Please go ahead.
Welcome to <unk> third quarter earnings Conference call yesterday, we issued a press release and in our financial report and 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 web site at Www Dot investor that Al Khan Dot com.
Joining me on today's call 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.
We express we 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 Alcons form 20-F, our form 6K furnished on May 12 2020.
In our earnings press release and interim financial report.
On line with the Securities and Exchange Commission and available on the Fccs website at Www Dot FCC that dove.
None I or for financial measures used by the company may be calculated differently from and therefore may not be comparable to similarly titled measures used by other companies. These.
These non IRS financial measures should be considered along with but not as alternatives to the operating performance measures as prescribed per IRS.
Please review the financial tables provided in the press release and filings that reconcile non IRS measures to directly comparable measures presented in accordance with IRS.
For discussion purposes, our comments on growth or expressed in constant currency.
And with that I'll now turn the call over to David.
Good morning, and good afternoon to everyone.
For today's call I'll start by Recapping, our third quarter performance discuss current market dynamics and our strategic priorities.
Jim will discuss our third quarter results and provide more color on our outlook for recovery then I'll wrap up my closing comments and open the call up for Q and a.
Our third quarter results demonstrate a solid recovery from the second quarter with sales of 1.8 billion, just 1% shy of last year core.
Core margin of 15.3% and core EPS was 39 cents.
This significant rebound as a result of both improving market conditions and strong execution.
Which enabled us to outperform the market led by double digit sales growth in the United States.
The strong you EPS performance was offset by our international business, which had a mixed pace of recovery in various regions.
Our results this quarter demonstrate the resilience of our people and our ability to execute on our priorities in the current environment.
First we remain focused on our associates during the course of this pandemic, we kept our associates fully employed while maintaining continuous operations about half our employees are in production and we've worked through the pandemic in order to ensure doctors and patients to receive the eye care products they need.
We appreciate their commitment and dedication.
We've advanced our separation activities on schedule, despite having most of our office based teams working from home, we've accelerated our IP migration carve out and exited more than 90% of our transition service agreements.
Recent investments in our global planning and forecasting platform and the successful commercial implementation of S&P have increased real time visibility to our customers' needs at this point, we expect to exit all our t. assays with Novartis at the end of April 2021.
Our transformation program continues on schedule as we stand up our global service centers simplified processes and streamline work in our core support functions. We're building the right mindset around continuous improvement, which is critical to developing organizational efficiency.
We are also becoming a more agile company.
In response to Covance impact on sales, we reduced cost substantially and pivoted to digital technology to augment our customer engagement.
In the third quarter, our Salesforce quickly implemented digital marketing campaigns and virtual training programs, which drove tremendous word of mouth and share of voice in recent industry Congresses.
This is an important capability that enables us to stay connected with our customers in these challenging times.
We continued to invest in new contact lens manufacturing lines to support product launches such as precision one and more importantly increased our presence in the growing HSI high toric market.
And we continue to advance our R&D portfolio of products that address significant customer needs.
We look forward to sharing more about our pipeline and our virtual investor update early next year.
Now turning to innovation, we are building excitement in the market with our new product launches, which is evidenced by strong growth and market share gains.
Panoptix Trifocal, Iowa for cataract surgery continues to perform extremely well in some of the newly launched countries such as the us in Japan with Al Khan now accounting for over 75% share of the USBC, Iowa market.
More recently Panoptix was launched in a controlled manner in China initial feedback by both surgeons and patients has been very positive and we are gaining share with target private hospital groups. We.
We plan to extend distribution to a broad number of hospitals during the fourth quarter vis.
Vividly the world's first non to for active extended depth of focus lids has received favorable feedback from doctors that participated in our pilot program in Europe.
Revenue is proved to be a great lens for all patients and surgeons are excited to use the lens for patients who may be concerned about visual disturbances.
Prior to the city. These patients would not have been ideal candidates for advanced technology wells.
Yes, we're satisfaction has been high and we are in the midst of rolling out activity to major markets across Europe.
Sales of procedure, one our newest daily side contact lens of nearly doubled from the sales levels earlier this year driven by increased adoption and conversion through.
Through strong commercial execution Alkone now has the leading share in new and switch fits in the daily sphere category. The preceding one is outperforming the first year of our successful dailies Totalone launch.
We've also introduced procedure one for Stigmatism to select us accounts last month early.
Early feedback has been superb and were now prioritizing the launch of precision one for astigmatism in the us and Europe early next year.
In fact, we plan to launch both precision sphere and toric in Europe within the same quarter, which is a first railcars and the industry.
We believe launching both modalities concurrently significantly strengthens the impact of our precision one brand family.
Combined with dailies Totalone sphere, and multifocal as our premium offering.
We'll have a more comprehensive offering of lenses for both the premium segment and the middle market.
Moving forward, we made the decision to focus our resources on those brands.
We will make a future call on the launch timing of dailies Totalone toric once we have precision one sphere and toric fully established in our key geographies.
Lastly, patter day continues to reinforce our leadership position in the us over the counter ocular allergy market and we've recently launched sustained ultra multi dose preservative free or MDP ETF in Germany, our first entry to the preservative free market in Europe as.
As I've said before our sustained multi dose preservative free we'll open the doors to exciting share opportunities that build on outcomes global dry eye leadership turning.
Turning to our markets, we saw strong improvements in both surgical and vision care during the third quarter.
The trend for global cataract procedures rebounded from a 50% plus declined in the second quarter to approximate 15% decline in the third quarter.
In vision care, the contact lens market declined 5% in the third quarter after declining a little over 20% in Q2.
While the daily disposal market declined around 4%, we were the leading share gainer precision.
Precision one and DT, one combined contributed to share gains in both the global sphere, and multi focal category, which were partly offset by declines in toric.
As I mentioned earlier, we're excited to be launching precision one for stigmatism of us and other key markets in early 2001, which allows us to compete in the daily side Toric market.
Over the past six months, we conducted various surveys of our doctors and patients across several markets and I want to share just a couple of highlights.
First more than 70% of our respondents indicated a willingness to pay a premium for a better contact lens.
Unlike glasses contact lenses do not fog up on one's wearing official mask with.
We believe that consumers emphasis on health and wellness will drive demand for better lens performance and as a result, we believe precision one and dailies totalone are well positioned for long term growth second.
Second is 80% of Americans are spending more time in front of screens during the pen dentek and 45% our reporting dry eye because of this increased screen time.
The growing awareness of our health at Dri I will give consumers a reason to visit their eye care professionals and seek out our ocular health products, giving our sustained brand family of steady growth market over time.
And third on the surgical side monthly cataract referrals in the US has returned to close to 70% of where they were prior to the pandemic as a very positive sign that surgeons are sufficiently refilling the pipeline and not just performing surgery on prior patients that have been rescheduled for their procedure.
So going forward, we're pleased with the strength of our underlying performance as coded cases tickup in some markets and safety measures are implemented other markets continue to bounce back so while it's not entirely clear where the market trajectory will be we're confident in our competitive position.
With that let me turn it over Tim will take you through some of the financial highlights and provide color on our outlook. Thank you David.
Our performance this quarter illustrates the durability of our end markets and the ability of our new product launches to drive our topline growth and market share as.
As a result, we saw a strong rebound in sales volumes and core margin from the depressed second quarter levels.
Our topline results were robust with sales of $1.8 billion in the third quarter, a significant improvement from the 34% decline in the second quarter Yeah.
Year over year third quarter sales were flat, excluding the impact in demand related to the Japanese consumption tax last year.
Year to date sales were $4.8 billion, 11% below the same period last year.
Surgical sales of $996 million were down 2% versus prior year in the third quarter, demonstrating a strong recovery from the 42% decline in Q2.
This reflects favorable performance of several product launches as well as the continued recovery of surgical procedures at hospitals and private clinics increased their patient flow.
On a year to date basis surgical sales were down 15%.
And final sales were $290 million up 2% versus the prior year driven by continued adoption of Panoptix.
This was offset by minor focus sales, which performed in line with market surgical procedures on a year to date basis implantable sales were down 10%.
Consumable sales were $526 million down 8% versus prior year, reflecting the continued impact of covance, but slightly better performance than the market.
On a year to date basis consumable sales were down 20%.
Sales from the equipment and other category were $180 million up 13% versus prior year about.
About half of the increase was due to strong demand for innovation and surgical diagnostics and peco and accessories and the other half was due to a onetime benefit which will not repeat in future quarters.
On a year to date basis equipment and other sales were down 8%.
Turning to vision care third quarter sales were flat against prior year rebounding solidly from the 25% decline in the second quarter.
Momentum of our new product launches helps vision care sales approach Q1 levels prior to the impact of Covance.
On a year to date basis sales are 5% lower than the same period last year.
Contact lens sales were $517 million down slightly versus last year with healthy demand for precision was offset by lower sales from certain legacy products.
We launched an exciting marketing campaign to drive awareness of precision one and were encouraged to see gains in new and switch fits this quarter.
Tagline sales in North America increased in the double digits led by precision one where sales were nearly doubled their pre covered levels yeah.
Year to date contact lens sales were down 10%.
Ill health sales were $305 million up 1% versus prior year.
Demand for dry eye products led by sustained and momentum APAC today's LTC launch in the U.S drove category sales in the positive territory. Despite the decline in the artificial tiers contact lens care and Q1 stocking activity.
Year to date sales were up 2% driven by the strong performance of our dry in ocular allergy portfolio.
Now moving down the income statement.
Third quarter core gross margin was 61.4% down 240 basis points on a year over year basis, primarily driven by inventory provisions and unfavorable manufacturing absorption.
For operating margin was 15.3% this quarter down 210 basis points from last year and down 170 basis points, excluding foreign exchange.
We continue to benefit from disciplined cost management, which partly offset lower gross margin.
Although R&D spending was below last year due to timing of external projects than our long term innovation pipeline remains intact, and we intend to ramp up R&D spending in the fourth quarter.
Third quarter interest expense was $32 million down slightly from $35 million last year.
The increased interest from higher debt levels was more than offset by favorable interest rates in the current period as we continue to pay down high interest local debt.
The core effective tax rate was 19.6% in the quarter compared to 18.2% last year.
The increase in core tax rate was driven by the mix of pre tax income Swiss tax reform and the overall impact of Covance on profitability.
Year to date, our core effective tax rate was 19.9%.
Core diluted earnings per share were 39 cents down from 46 cents last year.
This includes approximately two cents per share of covert related charges on a year to date basis core diluted earnings per share were 63 cents down from $1.43 last year with approximately 19 cents for coping related charges.
We ended the quarter with a strong cash position of $1.4 billion in cash and cash equivalents and $1 billion available in our revolving credit facility.
Free cash flow for the nine months was $115 million compared to $260 million last year, driven by the impact of co bid on operating results, partially offset by lower Capex spending.
We are encouraged to see strong collections during the quarter. However, we still expect full year free cash flow levels to remain below last year.
Separation costs, this quarter were $48 million and $181 million year to date.
Life to date, we've incurred $418 million for separation expenses.
As David mentioned in his opening remarks, we have made significant progress with our separation activities and look forward to substantially completing the process over the next six months, which will free up resources and allow greater focus on our growth initiatives.
Transformation costs, this quarter were $14 million and $34 million year to date.
Life to date transformation costs were $86 million.
As you can see we have made significant progress on our strategic initiatives in a challenging environment, our separation transformation and new contact lens manufacturing capability create a strong foundation that will reinforce our constantly to ship position and should drive market share growth for years to come.
Now moving to our outlook for the remainder of 2020.
Although we don't think it would be prudent to give guidance due to the macro uncertainty around coated we do want to give you. Some color to help you think about Q4.
If you recall during our second quarter earnings call, we confirm that April revenue with the trough and that we saw a significant improvement in June with continued growth in July we.
We also stated that we expected markets to return to more normalized levels by the end of this year or early next year.
Through the end of the third quarter, our forecast for the Kovar recovery has played out as expected.
We continue to see sequential improvement as a result of market recovery, but this was also aided by our strong execution, which enabled us to outperform the market.
However in the past several weeks to increases in KOVA cases have made it more difficult to predict market recovery, particularly in Europe Marc.
Markets in some countries such as the us in China continue to recover and we could see those markets returning to normalized levels by year end.
As a result, given where we are today, we think we'll continue to see sequential revenue growth from Q3 to Q4.
From a cost perspective gross margins will continue to be burdened by unfavorable manufacturing absorption.
We will also continue to invest behind revenue growth in our growing markets and accelerate our R&D spend as we get caught up with projects in the fourth quarter.
All of this will put some pressure on earnings versus the fourth quarter of 2019.
In summary, we are pleased with our strong execution and the competitiveness of our product portfolio, which has enabled us to outperform the market our share gains position us well to accelerate future topline growth with the macro recovery and improve profitability as we increasingly shift towards advanced iOS and optimize our new contact lens manufacturing plant.
Hello.
With that I'll turn the call back over to David for some final comments.
Thanks, Jim in closing I want to thank our associates, who have worked together tirelessly on behalf of our patients and customers.
Our commitment to help people see brilliantly has always guided us, but all the more in this year. Our sense of purpose is an important source of motivation for many here.
In summary, the rapid recovery, we have seen a little fast five months reinforces the attractiveness of our markets and our strong fundamentals.
The organization has been extremely resilient and executing on our priorities in the current environment and responding to customer and patient needs.
We're nearing completion of our separation we're on schedule with our transformation program and we continue to advance installation and optimization of our new contact lens manufacturing lines.
Our new products are gaining share in the market and we have a robust pipeline ready to launch next year.
We've all of this positions us well to execute on our growth strategy and create value for shareholders and with that let me open it 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 touch 10 SSAT.
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The first question today will come from Anthony Petrone with Jefferies. Please go ahead.
Thanks, and congratulations on a great quarter year, I hope everyone is doing well.
Dave maybe I'll start with a couple high level on on a cataract market and its in a contact lens market in a couple of follow ups for Tim.
So were assist assist market.
From a market new standpoint, maybe a comment on cataract market volumes it seems like potentially they're settling at a new normal trending down 15% would you describe that as a new normal due to cultivate restrictions or do you think there's still some demand thats depressed here did a resurgent.
Okay says and on the contact lens side, maybe a little bit of detail on new fits starts specifically from the back to school season, how much did that benefit and your views on the adult market, where that sits today and I have two follow ups. Thanks.
Yes. Thanks for the question, let me start with the surgical market.
We we see the market kind of on track to where we had talked about it early in the year I think you know.
We expected that we'd get these markets back to normal by the end of the year and so if you were kind of drawing a trajectory.
We said April would be kind of the bottom and we kind of improved through the third quarter Thats really what we did see search.
Surgical market, we think was probably 85% back through the third quarter and I think on the trend that it's on we would have expected it and continue to expect it to be back kind of towards the end of this year early next.
Obviously that depends on what happens with go bid in the next coming months, but I think we are.
Through the third quarter consistent with what we had originally thought.
Very different markets, though internationally to us so us I think much closer to 95% of prior year volume and the international probably more like 80%. So a.
A little bit different than we probably saw it originally from a geographic perspective, but importantly kind of moving back towards what we in total had hoped to see which is kind of end of the year roughly getting back to last year's volumes on.
On the vision care side would probably again, we're kind of 90% back through the third quarter.
Not back fully on either business, but I think a similar situation where the US is done a lot better than we kind of expected that 95% probably of what we had seen prior year affect us contact lens business on Gfk grew in the <unk>.
In the third quarter, which was a little bit of a surprise to us.
I think the international business again, probably 85% of what we'd expected. So when you kind of work that through.
Both markets seem to be headed in the direction that we had hoped for we just have the obviously some uncertainty right now around the European markets and obviously with the coated cases up in the us and many places, which subsea that plays out but directionally. Our underlying performance was really what we were focused on this quarter, which was in the share movements in the.
The product launches, which is against those markets done pretty well.
That's helpful and a quick follow up here would be 10, just any I'm intrigued by your manufacturing comp comments.
In baseball terminology can you just give us a sense of what inning. We're in in terms of the manufacturing builds what percent of the lens capacity now actually coming off the new lines and how does that play to the margin targets that are baked any LLP. Thanks.
Yes, I mean, the the margin pressure that we're seeing right. Now is is really driven by the absorption challenges we have due to the decline demand. So that's roughly half the pressure that we're seeing.
And then the other piece that to to your point, we do have precision one is ahead of schedule.
So thats, putting a little bit of pressure on those margins as well but.
Again this whole plan when we talked about at capital markets day.
The margin improvement really accelerates and so are the 22 23 timeframe is how we positioned at and we still think that that will be the case, we just have to get through these absorption challenges.
Which we should be through we'll have some more pressure next quarter, but we should be through most of that as we get into 2021.
Our next question today will come from Daniel Dr., Bob Kb. Please go ahead.
Yes. Thank you very much two questions from my side. Please.
The first one on Panoptix I mean, obviously, a great performance that you were able to show again.
I look at your main competitor to Johnson Johnson, they are clearly losing market share compared to you.
But they are about to launch Symphony plus to my view and also they have synergy in their pipeline can.
Can you say a little bit more about how you see panoptix compared to these lenses and would you expect your current market position to remain unchanged. Once these things just come to the market.
And then the second one on duty I mean, it's good to hear that you're launching if now low and in Europe. So it seems that your pilot launch did quite well.
What I have still difficulties on the stand given the fact that at this non defect the fit test technically my view just advantages over traditional lenses, what speaks against applying vivid compared to other multi focal of toric lenses. So for me that sounds like quite an interesting opportunity to gain significant market share.
Thank you very much.
Yes.
Let me start with the Panoptix piece you know, we're pleased with what Panoptix is doing in the us Japan pretty much everywhere, it's been launched and we compete with JJ all over the world. So I think we've seen most of the products that they have in one market or another prior to them getting into the us or some of the markets are not quite in yet so we feel like Panoptix will do well.
In that circumstance remember that Panoptix is a trifocal and that some of the other lenses are not trifocal. So in this case.
Anthony than the synergy probably another trifocal kind of a different design.
We'll see how that bears out I think in the European experience.
We've been very comfortable with how we compete.
On the.
On the vividly piece, we are excited about Vivien I think.
I would just say that's kind of an increasingly comfortable with what it may do out there for for US what we what we see which is unique in this non refractive lens is that it doesn't have the rings that many of our competitive of.
The diffracted rings that many of our competitors lenses have which scatter light and create halos and glare and so through this kind of unique.
Next wave technology that we have that's a patented in our group here, we come up with this way of bending lighter stretching light, which gives us a very good intermediate.
Distance.
And importantly, maybe half of patients are seeing well in near vision. So you don't get something for nothing on this one if you really want sharp near vision Panoptix is going to be a better choice because consistently panoptix can give you that three focal point distances, but you do have to put up with a little bit of of halos and glare and if you're not.
Comfortable without all the patient in the Doctor's mind is going to not tolerate that Vic.
Vividly as a terrific choices given great distance great intermediate.
And really pretty good near vision and so we've been really impressed I think with the the positioning of this as an alternative to differ.
Refractive.
Lenses, which is kind of the majority of what's out there right now.
Okay. Thanks, very much that's very interesting.
Our next question today will come from James Gordon Jpmorgan. Please go ahead.
Hello, James Gordon. Thank you Morgan Thanks for taking the questions ill focus just on the top line you mentioned things have been a bit tougher in the last few weeks six in Europe can you elaborate on what you've actually seen in October and so far in November.
Only the national has actually been any contamination vessels, where you revenue finished Q3.
Well so just.
Within the surgical warehousing balance in Q3 are you seeing any on warm told that in Q4.
Just finally on the topline inventory movement slides five refer to Q2 in Q3 and Ventura counties.
Was there any benefit from stocking going on this quarter with a totally clean number.
Let's see on the on the sales trends in Europe, we really haven't seen a lot of change yet.
We're not really commenting on the October or get a first couple of weeks in November on in this particular call, but I will say that.
We are concerned about it we're watching it carefully and I don't know, whether it's going to have a big impact or a small impact I think.
This shutdown or if you will so this impact I should say is different than some of the other ones and we don't really expect all of the awards to shut down like they did in in April and so that will have an impact I think differently than than what we saw before but again, we really just don't know what people are actually going to do.
On the surgical stock and we really didnt see any stocking benefit.
Change in inventory of kind of quarter to quarter on surgical we did see some on contact lens and I think if you think that through against our growth, we probably had a 5% restocking in the in the growth number for contact lenses and remember that we had a pretty big destocking in the second quarter, and then we had a little bit of build coming back.
Through the third quarter.
Our next question will come from Bob Hopkins from Bank of America. Please go ahead.
Well, thanks, and good morning, thanks for taking the questions.
Just just to this morning first you sort of are you talk about the performance in the consumables line you mentioned that.
It felt like you are doing a little bit better than the market could you just give us a little bit a sense as to why that market is a little bit weaker than some of the others and how you're thinking about the prospects for a return to normalization there.
Yes, Bob look the consumables market tracks the procedures market and I think the way to think about that is.
We think procedures were probably all in for the for the the world probably about 85% of what they were last year.
And particularly weaker in international than the United States.
The consumables number will benefit a little bit from value and mix to the United States.
So so read that as you know some of the benefit that we're seeing but importantly, as well the the consumers will line up to the procedural market. So if the market is off 15%. If you will globally roughly on volume.
We did 8% consumables numbers pretty decent I think share is slightly up but where would read much into share on on the consumable side are fake opex look pretty good Ob diesel are pretty good but I think we're we're roughly where we've been most of the year.
Okay Thats helpful. And then the second question is really just on your comments about the U.S market overall.
Frankly to sound a little more optimistic maybe than what we're seeing from others given the given the current spread that's going on and we obviously haven't shut down like some European countries have been just wonder if you could flesh it out a little bit more on your optimism on the U.S. and.
You know just kind of thoughts there would be appreciated. Thank you.
I'm not sure I'm optimistic per se I think what I'm, what I'm watching I think is that the.
The appetite for shutting down all ours is different and when we when we were back in April things just went to a complete stop.
And that was partly because we didnt understand didnt know.
I do think that there will be a more thoughtful approach to whatever happens going forward.
Our view what it has been that this.
Absent a second wave them.
The markets would return to normal kind of by the end of the year looks like we're going to see some of.
Of this but we just don't know what it is going to do to volume. So it doesn't look like we're seeing lots of office is shutdown the United States. It doesn't look like we're seeing a large shutdown in United States yet.
But again, we don't really expect that to happen either so again, even in Europe I think we're seeing.
A number of our stay open in major countries. We just again, it's going to be a little bit more about what foot traffic looks like because that is likely to be slower.
Oh, our throughput looks like and again I think thats relatively well managed at this point. So I think people are getting.
Some kind of analysts are used to it but again I think there is a little bit different emotion around this one than where we were in April and may.
Our next question will come from Larry Biegelsen of Wells Fargo. Please go ahead.
Good morning, Thanks for taking the question one on on the recovery of one Big picture.
Question.
So Tim.
I heard the comments on Q4 do you think you will show year over year growth in Q4 and on 2021.
Any color on how we should think about that you see consensus for sales as modeling low single digits over 2019.
Same for EPS to be in 2021, if you get back to normal by the end of 20 2020 do you think you could kind of achieve your original 2020 guidance.
In 2021 that I had one follow up.
Yes, so I think on Q4, it's a little tricky right now given the spike in KOVA cases, particularly in Europe, but.
We said, we would expect to see some sequential growth Q3 to Q4 so.
I would just take whatever your view is on the markets and then and then grow that off of that Q3 base.
From a cost perspective, I would say a couple of things I think the profile in Q4 20 will be similar to the profile of Q4 in 19 with a couple of exceptions I mean one.
We're going to continue to have some absorption pressure in Q4.
I would I would ballpark that is around $20 million I would think about that.
And then I think on the R&D side.
We are going to have a bit of a catch up as I said in the prepared remarks. You know we were we were a little bit low in Q2, and Q3 again, we want to keep our innovation roadmap intact. So I would expect to see some accelerated R&D spend as you compare that with.
With Q4 of last year, and then on the EPS DNA front, you know I would just throw that in line with whatever you are growing your revenue by so.
That's how I sort of think about the Q4 and the profile.
As far as 2021, obviously, we're going to we're going to give you some more color on the Q4 call, but again, a little tricky given that this spike but from what we see today, we'd expect that sequential growth that we talked about.
And as you think about 21, we should be able to grow off of that right. If you think about the new launches we had PD one spear coming out we've got two are coming out you have vivendi. We think we've got more room and Panoptix. We've got patent assets banks. So there's a lot of momentum there from a revenue perspective, so we should be able to grow off of that Q4 base.
Now kind of working my way down the PNM, a little bit if you look at R&D.
We talked at capital markets day, we'd be in that 79% range. We're still committed to the innovation pipeline, we're going to continue to invest behind that.
Probably be at the upper end of that range.
On the EPS Gnh side again, we're going to continue invest behind in revenue associated the sort of similar ratios. If you will on the on the cost side and again, we're going to toggle to that revenue number just like we did this year. So if revenues coming in hot we're going to continue to invest behind that so just keep that in mind on the M&A front.
And if we see pressure because cove it spikes.
We're going to be very disciplined on the cost management side, just as we did in Q2 and Q3.
So thats sort of how I think about the 21, the only other thing I'd say for housekeeping you know we had some noise about below the line last year. If you look at interest expense in our Fi I'd, probably have that in the 170 180 ish range, given the incremental debt and some of the loss.
Interest income so thats, how I think about 21, but we'll give you more color as we get to the Q4 earnings call.
That's very helpful and just for my follow up one Big picture question, David I know at the time of the spin you were.
Very focused on and devices have your has your kind of your thoughts changed on being more broadly based in ophthalmology and adding more pharma I know you already have some pharma, especially over the counter and within.
Surgical but has your thinking evolved.
On pharma since the spin thanks for taking the questions.
Yes, Larry and we continue to focus on the device business, because it's obviously, where we've got a lot of good product flow, it's been our approach from the beginning.
But as you know we are in the pharma business and we will continue to be in it for for a good bit of time, So now I'd never say never but I.
I think what we're really focused on right now is trying to develop the business we're in and the.
Then if something came along that was a good opportunity for us we really was on possible or something we'd we'd look at it and we continue to we get approached on these things all the time, we will have to see over time, whether or not theres something it's appropriate.
Our next question today will come from Matthew Mishan of Keybanc. Please go ahead.
Hey, good morning, and thank you. Please thank you for taking the questions.
David I'm sure I'm, just trying to reconcile with the survey data with with actual results last quarter, you were talking about office it sound like 20%, but the contact lens sales were were.
Flat to up and then this quarter, you're talking about referrals of X, 70% of pre cover levels for cataract and that would imply a pickup.
A slowdown from from three Q, how should we think of as we think about the survey data versus the actual results.
Yes, it's a little tricky because they are there is out there kind of apples and oranges, but let me just let me doing one business at a time.
On the surgical business the backlog.
As backup to about 80% of prior year. So remember most there is a limited number of surgeons and an excess number of surgeries. So historically most surgeons have had a kind of a couple of week backlog on average some people bigger some people none at all but but if we're seeing backlog up to 80% of what it was prior year, which is the survey data we're re.
Filling the pipeline at a pretty decent clip and that means most people have got some backlog, which means theyre doing surgery kind of at what we would expect the net.
Jives with our view of kind of 95% of Pryor in the us surgical business. So let me be clear about where those survey data are coming from because that's really us data.
And referrals coming in at 70%, primarily again, that's a bit of a of an important number just because that really says optometry is back in business and referring patients in there is always part of part of this business coming from general practitioner or optometrist, referring a patient to.
A surgeon, but there also are just the normal flow of eye exams coming through the ophthalmology group and again that is another part of the of the source of business I would just say that the surgical business ties out a little bit easier to me than the vision care business does.
On the vision care business. The reason I say that is just because in the US your jobs numbers reporting kind of 90% pre pandemic revenue it fits for contact lens wearers and so as we looked at that.
We thought well, that's probably where it ought to be although I will say that the data as I said in the in the earlier remarks, the us contact lens all lenses Gfk data is up 6%. So that disconnect a little bit for us. It's hard to explain I will say that I think theres. Some stocking in there I think theres some real consumption.
Thats kind of.
With that I would just say, 95% were probably mostly back in.
In the us so I would again say kind of 95% back through the third quarter.
But theres got to be some noise in that data. So I'm kind of I'm kind of the mind that that's the best way to explain it right now.
But directionally I think the way to think about our movement against that is look we're holding share we're doing well with with our new products.
And in the market is is I would just say solid right now internationally more complicated answer and again, we don't have really good data internationally on the on anything other than the consumption.
The consumption international is probably.
Only 85% of what it ought to be.
Okay.
And just as a follow up to that just any changes you're seeing in contact Glenn ordering patterns.
From customers that could potentially explain some of the some of the disconnect.
No nothing other than what I said earlier, which was that we did see a destocking as you know as demand falls.
Normally all of our major chains and uneven.
The offices, which will in order to backup inventory. So you will see some natural inventory contraction and obviously when when.
Revenue picks up in sales pickup you will naturally refill inventory to support that so you're going to see some inventory pick up in the third quarter, which we assessed at roughly 5% of the 15% growth that we saw in contact lenses.
Our next question from Veronika Dubajova of Goldman Sachs. Please go ahead.
Hey, guys and good morning, everyone is keeping Wow I want to start off with contact lenses, placing.
Just last unpack a little bit the comments that you had made around the momentum that you're seeing among.
Our new areas and a model where switch ask if you could give us a little bit of color exactly what that market share data is looking like all and then I guess I mean, if I look at the progression of growth here today, you have continuously that better than Prs as weakness coming quarters. Do you think this is the normal or now that we're moving into Q4.
Or add into next year and you have to support coming through at global launch do you see scope for that relative outperformance for you versus the market Q widened for there and then I have a follow up after that.
Yes, Veronika just on the on the aggregate share you know look we were pleased with the September share of new and fits so we measure through gfk.
What is in essence, each manufactures share of new and switch fits that if you look at daily disposable clear sphere.
We did quite well, we've been picking up a little bit of share here. It's obviously, an aggregated share that I'm, describing so thats PD one GT one in our dailies aka comfort plus product and there is some mix shifts in there.
So we're seeing some real pickup in Q1, and obviously, we've got some pressure competitive pressure on dailies total one and Davis OCC recover plus so but the aggregate is moving the direction, we want to see it so I think that feels good to us.
In overall picture.
Picture you know I think what we've said in a quite consistently is this year was a year, where we needed to get back to market growth and I think we've kind of done that roughly in this zone. So I don't know that I would start declaring victory on anything right now I think what we believe is we're getting back to where we wanted to be which is gaining share in a place where we're kind of consistent with market.
Growth.
And now I think the opportunity next year is to kind of grow faster than the market. So that will be the way we'll be thinking about.
You know how to have moved the contact lens share business and on.
On the on the go forward look I think the the market is a big part of what happens I think given where we are.
I have been so far this year.
My Hope is is that the markets continue to develop like they have they have been remarkably robust I think in vision care.
I think we thought originally there might be more pressure on it I think we've been pleased to see.
That they kind of hung in there effect endeavored.
Quite as deep as we had anticipated and they've come back a little bit more steady than we anticipated I would say principally in the United States, but.
But as yet as the international that rebounds were in a good position assuming that the there is a real change in the dynamic of selling to get precision one in Brazil, one toric out first of the year in Europe, and I think that bodes well for us because again as I said a lot of number times. The toric business is really where we're losing our share we.
Consistently lost share a toric and that holds us back quite a bit so.
Getting people on toric out last month in the United States based on what we've seen with it we think we've got a good chance to kind of get back some of the share we've lost there and build back our overall share so that plus the European performance gives us I think a nice headroom for contact lens growth next year.
Thats very helpful. And then as I was going to ask you a little bit about vaccine and now that we have had success is how you guys are thinking about pent up demand that that is out there and you've alluded to to backlog and kind you demand generation, but I'm just curious if you haven't seen a lot.
You look at the market this year at the procedure volumes that they can you give me a generation that you're seeing should we have a successful vaccine that ramp vaccinated by December of next year. What do you think that had happened and could be that could materialize and I guess, how much capacity there as an assistant to accommodate at home and I'll jump back into queue. After that thanks, Yes, Rocky best too.
Good questions one on capacity and one on the vaccine DM.
The vaccine itself look I mean, I think the best way to think about the surgical business is to draw a long line and think about it in a 30 36 month or or even longer frame, because cataract or not going away and people are going to continue to get them, they're going to continue to need to take them out and and really the way to think about this market. My view is this has been a.
Three four or 5% growth, let's just call it 4% compounded growth over a long stretch. So I don't know what the timing of this thing is to bring back all that demand I don't know that it comes back in a bolus I probably think it doesn't because the the second part of your question, which is important is what kind of capacity do we have in the systems.
You know to handle that that pent up demand and I do think that it will come back relatively slowly relatively steadily and you might just see a slightly better than normal market growth in a couple of years or not for a couple of years I should say.
And that could be really what happens I can get I won't predict when the the markets really get back to 100%, but I do think that over the long haul we are really fundamentally sound markets.
As a reminder, in the interest of time, please limit to one question and one follow up. Our next question today is from David Lewis of Morgan Stanley. Please go ahead.
Good morning, just a couple from me.
David just want to circle back on capital trends in the quarter that number even adjusted for the onetime benefit was frankly, probably in line with our pre cobot estimate for capital in a quarter and I. Appreciate there probably was a catch up from the second quarter, but just kind of help us understand what you're seeing from a capital environment that number was dramatically stronger than most investors for thinking about what does it mean for the for the outlook in that business.
And then a quick follow up for Tim.
Yes, David the.
The equipment was a little bit stronger than I think we expected just remember the couple of things in the equipment business, we always like to point out the service business, which is a very steady part of our equipment picture and so our service revenue was slightly up it continues to be a solid performer for us kind of year end a year out.
Recall also the procedural eyedrops are in there and that was slightly up procedural eye drops are going to are going to really mirror about's back in procedure volumes and as you see that procedure volume bounce back there is going to be some backfill in inventory, so you're going to see a little bit of that as a consequence of the bounce back on surgical procedures on eyedrops.
And then really what was what was I think positive for us and maybe.
People are really thought through as much was that we have year on year. Some new equipment. So it's kind of white space year on year, and if you think about our buy arbiter, we really launched that in the us this year.
We've done pretty well with Argos, which is the name of the Biosimilar and that had a good run through the third quarter. So I think we felt good about the the biometric position that we have and then we have a very good upgraded hand piece thats, a little bit lower priced capital, but it really has an ability to improve the performance of the scenario.
And so the active century hand piece that we have did quite well in the quarter and then our underlying equipment was was solid but not the not stellar so I would just say that we have been.
Typically and I still think kind of it's a tough thing to start saying the equipment is going to bounce back I. Just don't think it will but I will list I will agree with you that it was a surprise a little bit to us in the quarter to see people buying.
Continuing to buy equipment in here.
Okay very helpful color, Dave and then Tim just thinking about I know you were asked about margins for next year industry consensus has margins kind of flattish just 21 versus 19, which it looks a little conservative, but you gave some decent color to get there, but the question I wanted to ask you. Additionally, interest free cash isn't that dramatically better free cash quarter, and you started off talking about sort of transformation.
And getting through some of the major components of transformation and kind of give us an updated timeline for after the ERP and giving cash for such a big focus for investors last year, how should we think about free cash and free cash flow yield over the next six to 12 months in light of some of the comments you made on transformation. Thanks, So much yes, I mean listen when you make.
Core operating income it's significantly improve your free cash flow. So if you just look at Q3 as compared to Q2 sequentially. We were up $350 million on our bank, which is a decent proxy for free cash flow. So.
But at the same time, we still expect to.
Come in free cash flow why below last year's levels.
So the only thing I would caution you in that Q3 number although we are very pleased with it.
Our capex is heavier in Q4.
We've got our interest payments on that incremental $750 million of debt, we have that in Q4.
And then we pushed out some tax payments from Q1 to Q4 when co heads so.
We do have some cash pressures.
In Q4 that you should think about but but netting that thinking about next year.
If you go off of our base you've got it.
Incremental operating income improvement, which we should have assuming phase two of Kobe Doesnt head and we get the revenue growth and the rest of the financials that we talked about.
You have less separation to your point.
The one thing that's tough to gauge, but you need to take into account is receivables. We've had some very strong collections and receivables. So from a working capital perspective, I would expect some that the bounce back and be a pressure point next year, but net net 2021 should be should be significantly better than 2020 from a free cash flow perspective.
Our next question is from Chris Pasquale of Guggenheim. Please go ahead.
Thanks for taking the questions David.
David I want to start off just a couple of questions on the contact lens business first could you clarify the launch timing for the PD, one and Btwob torics in the us in Europe, just want to make sure we understand the cadence of both those products launching in each of those geographies.
Yes, we're going to we've got people on toric out now in the United States along with piece here.
And so the precision one.
Portfolio I think it will move kind of on from here in United States and obviously, we will have an.
An extended launch once we get kind of into next year, We'll we'll continue to build both in the United States and in Europe will start Europe, probably beginning of next year, but we are going to launch I think in the first quarter is our intention to launch both this year and the toric in the first quarter.
For the European market, So I think thats. The first on this but does it really has been first.
First time for us to do something like that so.
The idea that we've got right now is to try and focus on the PD, 100% toric and particularly because as we said to kind of earlier in the year I think I mentioned this earlier, we read really think true.
What do we want to do with resources and our priorities here.
And as we thought about the challenge with Covance, we probably lost about six months or so of of promotion on on on on precision. One. So I think what we're going to do is get after PD, one a few and toric.
As many places, we can but particularly United States and Europe.
And then do that along with the Q1 TG one multi focal sustained pattern. They so quite a big bag of stuff to do.
But I think we feel like did you want to be Great addition to the portfolio, we just need to find the right time for it.
You would be once precision once established in our core geographies will make a call on that timing.
Okay, and then Tim I just wanted to follow up on the comments about 2021 and it was something you clarify to the comments you may one around as gene I think you said as cdna.
It will be similar but it wasn't clear was similar to two well what are you talking about 2019, or some 2020 comparison and then the other and interest expense.
Wasn't clear why that should step up $20 million to $30 million over what you guys are tracking for this year. So if you could just clarify those that'd be great.
Yes, if you look at the ratios so kind of ethylene 8% of revenue.
It should be relatively consistent with 2019 levels, we may get a little bit of productivity after going through the transformation, but.
Yes, I can take a look at that and then couple of things you got to keep in mind is one on that that is one is we've got a full year of incremental $750 million. That's a big driver of the increase and then you've got lower interest income due to a degree.
And our last question today will come from Steve Willoughby of Cleveland Research. Please go ahead.
Hi, good morning, and thanks for taking my questions.
I think two things for you.
One I was wondering if you could comment at all on surgical volumes.
And if you will where we stand in terms of sort of catching up with what we lost in the second quarter win awards were shut down. If you think we've made that up in the third quarter and or Theres still more to go there and then I have a follow up.
Steve I think the.
The third quarter really I think is representing something that in the United States is probably 95% of the of the prior year volume. So I don't think Weve made it up necessarily.
I do think that there is going to continue to be a backlog in most surgeons practices and I think.
The survey data that we have says the backlog is kind of 80% of prior years. So.
We may have.
We maybe working through it, but where you're going to see a steady refill I think of a volume going forward. So I think right now the gating factor for surgical has more to do with the throughput in the in the surgical facilities and staffing in a number of days in surgery et cetera, et cetera, I think that is really the kind of gating factor as a.
Opposed to say seniors not wanting to come to surgery, which I think had been our our original concern which was they do how or when do they come and then how do we begin to refill that so our view kind of going forward is.
You know depending on what happens with Cobian, we should again see steady improvement in surgical volumes and over the long haul I think volumes grow at roughly this compounded 4% rate, which again.
I think has been the historical rate.
I don't know exactly what the timing of that looks like but it will be.
It will be kind of the number I think when we look back at this over some period of time as a compounded growth rate.
That's helpful. David and then just the follow up is just on the contact lens business.
A couple of numbers I might have missed or was confused on did you say and please correct me if I'm wrong did you say that the us contact lens business was up 15%.
And if so I guess as it relates to the stocking benefit of 5% you mentioned.
Stocking, mostly a us phenomenon or is that also an international.
Yeah, our our US business was was up 15%.
Our restocking was about 5% five percentage points of that.
Okay and so.
Thats the right way to think about it as we said there is a little bit of there was a little bit of drawdown in a good bit of drawdown in Q2, and a little bit of bounce back in Q3.
Gotcha, Okay. Thank you.
Ladies and gentlemen at this time.
Well conclude our question and answer session.
And we will also conclude ALCANZA third quarter 2000, and plenty earnings conference call. We do thank you for attending today's presentation.
And you May now disconnect your line.