Q4 2020 Alcon AG Earnings Call
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After todays presentation, there will be an opportunity to ask questions. Please note. This event is being recorded I would now like to turn conference over to Karen King. Please go ahead.
Welcome to Alcon fourth quarter and full year 2020 earnings conference call yesterday, we issued a press release interim financial report on form 20-F, 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 website at Www Dot Investor Dot Alcon 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 expressly disclaim any obligation to update forward looking statements as a result of new information or future developments, except as required by law.
Our actual results may vary materially from those expressed or implied in our forward looking statements. Accordingly, you should not place undue reliance on any forward looking statements.
Important factors that could cause our actual results to differ materially from those on our forward looking statements are included in Alcon form 20-F.
Our earnings press release, and interim financial reports on file with the Securities and Exchange Commission and available on the SEC's website at Ww W. Dot SEC Dot Gov.
Non <unk> financial measures used by the company, maybe calculated differently from and therefore may not be comparable to similarly titled measures used by other companies.
These non <unk> financial measures should be considered along with but not as alternatives to the operating performance measures as prescribed per <unk>.
Please review the financial tables provided in the press release and our filings that reconcile non <unk> measures to directly comparable measures presented in accordance with <unk>.
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, everyone and welcome to outcomes fourth quarter and full year 2020 earnings call.
Despite operating in these extraordinary circumstances for the global Health care crisis from 2020, we did make significant progress on our strategic initiatives and delivered innovative products that enabled us to grow our market shares.
Let me begin by recapping, our highlights for 2020 in recent months, including market dynamics on our strategic priorities.
After my comments, Tim will discuss the fourth quarter and full year performance will provide some color on 2021.
I'll wrap it up with some closing remarks, we will open the call for Q&A.
Now looking back on 2020, I'm proud of what outcomes accomplished against a difficult background.
We exited the year with fourth quarter sales of $1 9 billion in line with 2019 levels, which is a result of both recovering markets and strong execution.
Both of our businesses saw a rebound from the low point of the second quarter and exited the year by returning to growth for the fourth quarter.
Our core operating margin came in at 14, 9% for the quarter. Despite the impact of COVID-19 on our operating results and continued capital investments in separation costs, we generated $350 million of free cash flow for the year.
For the beginning of the pandemic, our first priority has been the safety and well being of our associates to protect them. We implemented a response framework with recommended COVID-19 prevention containment and mitigation measures.
We also kept our associates fully employed through the pandemic and maintained pay levels, notwithstanding lower production and sales volumes.
Despite the impacts of the pandemic, we are still on track to substantially complete our separation by the end of the first quarter. We're looking forward to channel more energy towards creating greater value for our customers and shareholders.
Our ongoing transformation program continues to enable a more agile culture defined by greater accountability ownership, we're making progress in optimizing our cost structure, which is also allowing us to reinvest cost savings into research and development and marketing to drive our topline.
We're continuing to advance our new contact lens manufacturing plant for them all through the pandemic and over the last several years, we've been on the process of adding capacity to enable new product development of daily Si Hy contact lenses, toric multifocal <unk> and other modalities.
These new lines are now producing precision one and our recently launched precision one for astigmatism.
Finally, we remain laser focused on our customers on their patients notwithstanding the challenges of 2020, we built an exciting pipeline with 11 first in market launches last year, which further expands our long term runway for growth.
Now, let me spend a few minutes updating you on some of our key products.
Yeah.
Penn optics, our Tri focal I will continues to be the market leader in a favorite of surgeons and patients and some of our largest markets.
Following its successful launch last year Alcon accounts for more than 75% of the U S <unk> market.
We also recently launched Panoptic from China with surgeon reception has been positive.
While panoptic wrapped around its launch anniversary of the U S for Japan in the second half of 2020, given its market share ramp the recovery of the market and our other regional opportunities. We anticipate continued steady share growth in the coming years.
Now moving to the <unk> the world's first non diffractive extended depth of focus lens.
<unk> offers excellent distance and intermediate vision, but also gives nearly half of the patients benefit of near vision, all without the visual disturbances typical of diffractive Hei LLS.
For the launch in Europe during the fourth quarter in 2020 and in the United States last month, we received very positive feedback.
We're seeing surgeons using devotee, who would not have previously considered using <unk> for certain patients. So we believe a less likelihood that he has the potential to expand our audience for agi wells as well as upgrade their experience.
Turning to precision one of our newest daily Si Hy contact lens precision one has become the fastest growing daily disposable contact lens in United States and Alcon, leading brand in terms of new and switch fits in the fourth quarter.
We're building on this momentum by introducing precision one for astigmatism, which launched in select U S accounts during the fourth quarter and also began a wider national rollout in January.
We received terrific feedback from eye care professionals on the lens settling time rotation on Blink and first time fit success rate all very important characteristics for a toric lens.
We also launched precision one sphere and toric concurrently in Europe this quarter.
Study show that approximately 40% of patients already stigmatic, but only 10% were toward contact lenses.
With the launch of precision when Toric Alcon now provides a comprehensive daily Si hy offering across sphere, toric and multifocal contact lenses that could treat nearly all patients.
Our Si Hy contact lenses continued to take share and sphere and multifocal categories globally, and we're confident we can make significant inroads into the daily Si Hy Toric category as you ramp up precision one for astigmatism.
Finally in ocular health Patter day continues to bolster our leadership in the over the counter market.
We were pleased to introduce Pat a day once daily extra strength to national retailers last month.
The Eyedrop, formerly prescribed this position is our strongest solution offering a full 24 hours of relief.
This expands our over the counter ocular allergy portfolio to meet a variety of patient needs in advance of the spring allergy season.
Recently, we also introduced <unk>.
Multi dose preservative free offering for sustained on the U S and also in select European markets, which extended sustains runway for growth in previously untapped preservative free markets.
Turning now to our markets and surgical the trend for global cataract procedures continues to improve sequentially. It was down mid single digits in the quarter with North America nearly back to 2019 volumes in international markets continuing to lag 2019.
Although COVID-19 cases began to increase again in the fall we did not see the magnitude of for our closures. We saw in the second quarter and so we continue to see some improvement through the end of the year.
In vision care, the global contact lens market increased about 4% in the fourth quarter versus the same period last year. However.
However, the increase for the Japanese consumption tax implemented in Q4 for 2019 is creating some noise with the quarterly growth rates. So excluding the Japanese market contact lens market growth would have been in the low single digits based on our estimates.
In summary, I'm pleased with the results of our key products on our underlying performance our ability to take share in a difficult market is a testament to our innovation and commercial execution.
And it's critical to our ability to outpace the market.
As we anticipate our focus following the completion of our separation activities. We are confident in our ability to win share in the marketplace.
With that let me pass it to Tim will take you through our financial results and provide some commentary on 2021.
Thanks, David We're pleased to report fourth quarter sales of $1 9 billion.
Up 1% versus prior year net.
Net sales in both franchises returned to growth led by strong results in North America, partially offset by softness in international.
The rapid recovery in the back half of the year from the second quarter low point enabled us to finish the year with sales of $6 8 billion down.
Down 8%.
Surgical sales were up 1% in the quarter driven by growth in Implantables and equipment other for.
For the full year surgical sales were down 11%.
And for animal sales of $350 million increased by 4% in the fourth quarter, primarily due to the continued strong demand for Pan Opex as.
As David mentioned earlier Pan optics continued to gain share and performed well as it lapped its launches in the U S and Japan.
We're also starting to see incremental sales contribution from <unk>, which we previewed with select accounts in the U S and launched in most major European markets in the fourth quarter.
The strong performance in the <unk> category offset lower sales from Monaco calls, which were impacted by COVID-19 in certain markets.
For the full year implantable sales were down 6%.
Consumable sales of $587 million decreased by 3% in the fourth quarter day.
Demand for consumables is slightly better than the mid single digit decrease on procedural market growth.
For the full year consumable sales were down 15%.
Sales from the equipment and other category were $191 million on the quarter up 10% versus the prior year.
Excluding the year over year benefit from the Japanese consumption tax equipment and other would have been up 6%.
The growth was a result of strong demand for innovation like our Centurion active century hand piece as well as upgrades to our equipment and a benefit due to a competitor outage and procedural eyedrops for.
For the full year equipment and other sales were down 3%.
Turning to vision care fourth quarter sales of $797 million grew 1% against prior year on.
On a full year basis vision care sales were 4% lower than the same period last year.
Contact lens sales were $490 million in the quarter up 5% versus last year.
Excluding the year over year benefit from the Japanese consumption tax contact bond sales would have been up approximately 3%.
The growth was primarily due to reusable and strong demand for precision one dailies in the U S, partially offset by softness in our international markets, which continue to see an impact from recent COVID-19 restrictions.
For the full year contact lens sales declined 7%.
Ocular health sales of $307 million decreased by 3% in the fourth quarter.
Strength in patter day and sustained in the U S were more than offset by declines in other artificial tears in contact lens care.
And allergy, we've started to introduce pattern day extra strength in the U S. On a full year basis ocular health sales grew 1%.
Now moving down the income statement.
Fourth quarter core gross margin was 61, 8% down 60 basis points on a year over year basis, primarily driven by unfavorable manufacturing absorption.
For the year core gross margin declined 280 basis points to 65%.
Core operating margin was 14, 9% in the quarter down 220 basis points from last year and down 180 basis points excluding FX.
Ultimately 60 basis points of this decline came from gross margin, which included pressure from manufacturing absorption and 110 basis points came from R&D, which peaked in Q4 due to the timing of project spend.
For the full year core operating margin was 11, 7%, which included significant deleverage due to lower year over year sales and 180 basis points of pressure from manufacturing absorption related to COVID-19.
Fourth quarter interest expense was $31 million slightly down from $34 million from the prior year.
For the full year interest expense was $124 million versus $113 million driven by an additional quarter of third party debt issued after the spinoff and senior notes issued in 2020.
The core effective tax rate was 18, 8% in the quarter compared to 29% for last year.
Our core tax rate was favorably impacted by the mix of pretax results across geographic tax jurisdictions.
For the year the core effective tax rate was 19, 5%.
Core diluted earnings per share were <unk> 41 in the fourth quarter down from 45 last year.
For the full year core diluted earnings per share were $1 four down from $1 89 last year due to significant deleverage and COVID-19 related charges.
Now before I discuss our 2021 outlook I'll touch on a couple of cash flow and other related items.
Free cash flow for the year was $350 million down from $367 million last year.
Despite decreased cash flows from operating activities. The team did a great job on managing costs and driving better collections.
Free cash flow was also aided by lower capital expenditures, which were $479 million for 2020 down from last year's $553 million.
Primarily due to the timing of spend for our new line installations.
Separation costs were $36 million for the fourth quarter and $217 million for the full year, primarily driven by it investments.
We completed the majority of our separation spend in 2020 and expect to complete most of the remaining activity by the end of the first quarter. This year.
Life to date separation costs were $454 million.
Transformation costs were $15 million for the fourth quarter and $49 million for the full year.
Life to date transformation costs were $101 million and we've recognized cost savings of $90 million, which have been reinvested back into the business to support product launches such as Pat a day.
To wrap up the year, we feel good about the progress we've made in 2020, despite the challenging environment.
We remain on track with all our major initiatives separation transformation and our new contact lens manufacturing platform. We've gained share with our new innovative launches and are investing to support product growth and build a robust pipeline for the future.
Now turning to 2021.
Outbreaks of Covid cases continue to occur and localized responses remain unpredictable.
With the improved adoption of safety measures and the availability of vaccines, we encouraged to see the demand for eye care and surgical procedures holding up.
Countries, such as the United States are rebounding faster than our international markets, where we are seeing different paces of recovery.
Against this backdrop, we believe we will likely see continued impact from COVID-19 during the first half of 2021.
And we're optimistic that markets will return to historical levels in the second half.
For the reasons I. Just described we continue to believe that it would not be prudent to give full year guidance, but as we did last quarter. We are providing some color to help you think about the first quarter of 2021.
Given where we are today, we expect sales to be in line with the fourth quarter of 2020 despite seasonality.
From a cost perspective core gross margins should improve as higher production volumes contribute to better manufacturing absorption.
While we continue to invest in sales and marketing to drive revenue growth core R&D should be sequentially lower due to the timing of spend.
We expect FX to be a modest tailwind in Q1.
All of this should result in a slight improvement in core earnings per share from the fourth quarter 2020 to the first quarter 2021.
I'm also pleased to report that our board of directors is proposing a new dividend at <unk> <unk> per share, which is in line with our payout policy of 10% of core net income pending shareholder approval.
This will be our first dividend as an independent company.
Shareholders will vote on this proposal at our upcoming annual General meeting on April 28.
To briefly summarize despite the unprecedented challenges from Covid. This year, we exerted tremendous expense discipline and made remarkable progress in our strategic initiatives, while protecting our associates.
Stepping up to our customers' needs and adapting to extraordinary change.
The strong foundation continues to give us great confidence for the future and our long term growth.
Now I'll turn it back over to David for some closing remarks.
Thanks, Jim in summary, 2020 was a challenging year, but we've come out the other side a stronger more robust company want to thank our 23000 plus associates for their hard work for support and commitment during these clearly trying times.
We've demonstrated our agility resilience and ability to execute on the face of significant headwinds.
For our products continue to win in the marketplace and we will fuel this momentum with an exciting pipeline in 2021.
We expect the eye care market to benefit from an increased demand for health and wellness and to continue to be underpinned by strong long term fundamentals.
We'll share our perspectives on long term growth at our upcoming virtual capital markets day on March 24th where we will discuss our strategy and innovation agenda.
Al will create shareholder value and improve outcomes for our customers and their patients.
Please visit our website for more details.
Now, let's open up the line for Q&A.
We will now begin the question and answer session. You ask a question you May Press Star then one on your Touchtone zone. If you are using a speakerphone. Please pick up your handset before pressing.
To withdraw your question please.
<unk>.
Yes.
Limit yourself to one question and one follow up if you have additional questions. You may reenter. The question queue. At this time, we will pause momentarily to assemble our roster.
Your first question today comes from there on <unk> with Goldman Sachs. Please go ahead.
Good morning, and thank you guys for taking my questions hope you're keeping well.
When it kind of follow up a little bit on on the outlook for for 2021, I think Tim in the past you sort of said he thought the shape of the P&L in 'twenty, one should be pretty similar to 2019 net would love to get your updated thoughts on how youre thinking about that in particular, given some of the setup on the Opex run rate in the fourth quarter and maybe his comments.
On what proportion of the SG&A spend on R&D spend was phasing for.
A new run rate of cost, where you've expanded your sales presence etcetera.
And then a quick one for David on <unk>.
David what are you seeing in terms of the proportion of new patients that this is attractive in the European market I know, it's still early on but just ballpark. If you can share some anecdotes about that would be great. Thanks, guys.
Yeah sure. Thanks for the question Veronica listen I think that when you when you think about 'twenty one.
Our assumption right now is that markets returned to historical levels at the back half of the year. So.
If that is to happen I think it's very reasonable to think that we're going to grow faster than on the market right. If you think about the investments we've made in Pan Opex, we've made and <unk> made in precision one so.
You can decide I would look take a look at our shares.
And as these markets return I think it would be very reasonable to think that we're going to grow faster than the market. So that's really the underpinning assumption and then as you work your way down the P&L.
From a gross margin perspective.
Obviously, we're not going to have the absorption challenges. We had this year, we may have a little bit depending on how long.
How long the Covid situation drags out in the first half of the year, but at this stage not expecting a material pressure point there.
On the R&D front.
<unk>, we would be spending more I think in 2019, we spent roughly 8%.
Always said, we're going to spend that 7% to 9%. My guess is we'll be sort of at the higher end of that range as we continue to fuel our innovation pipeline.
To your question around SG&A and the ramp.
I think it would be a similar profile.
In fact, I think we would probably be a little bit more productive because we are starting to see some of the benefits on.
Some of the transformation work, we're doing will also have a little bit more leverage.
So a similar profile with maybe a little bit lower from a percentage basis. So that's how I think about the P&L. If you were to compare 'twenty one with 19.
Yes on the on.
<unk> and <unk> in general I would just say that.
Our experience right now has been the <unk> seems to be adding share to the overall picture I think we've had a nice share growth. We continue to get good steady share growth around the world Europe has certainly been adding to that as we get <unk> out on and it does seem to be adding it on top of the pin optic share that we have there.
I think.
The going forward part for US is really just trying to get an assessment of what we think the penetration may change over time, we are pleased to see some of the penetration improvement and <unk>, It's a little hard to tell right now whether or not.
That's a function of.
A mix of accounts so the fastest more assertive accounts are probably coming out first the amount of focus or are probably trailing a little bit, but we are seeing global <unk> penetration up almost 140 basis points from prior year and typically what we've seen is that kind of 50 to 100 and it kind of always settles back so.
We will see whether that's a sustainable idea, we kind of hope that <unk> is bringing new patients in but we will see how that takes shape over time as we see them on a focal market return, we'll have a better picture of that.
That's really helpful can I just quickly ask for.
My understanding you correctly Youre expectation is the market is the same in the second half of 'twenty one as it was in the second half of 19, you don't expect any growth versus the second half 19 levels that seems pretty conservative to me I just want to make sure I got your point on that.
Well, let me let me comment on on the market's kind of separately I think right now the United States is doing quite well.
From about the we were almost back to <unk> 19 in the fourth quarter. So take that for what it's worth international was a good bit behind that though and I would say it was kind of 5% to 10% off of it.
On the surgical side on <unk>.
Vision care for the U S had kind of a remarkable fourth quarter that I think it looks like it was up on the.
High single digits.
International However was again behind that number so I think where we're at.
Cautious about wanting to.
See the recovery.
<unk> and see that kind of international growth in particular.
If you look if you've seen around the world. There is some kind of recovery plans that are out there that extended into June right. Now. So we're watching those carefully I think we feel good about where we are we also feel good about our share positions in those markets. So candidly as I've said before I'm not 100% share when they come back exactly but they are going to come back and they are going to grow beyond that.
In other <unk> fundamentals for US mean, if we've gained share through this stretch we are disproportionately going to benefit as they do come back so Rocco im not 100% share whether its back half or second quarter, or where where we really turned the corner on this but we feel pretty good about our position.
Our next question is from Bob Hopkins with Bank of America. Please go ahead.
Oh great.
Just two quick questions and thanks for taking them.
First I'm just wondering if.
Given your we'd love to get your preliminary thoughts on any diversions as you see in the in the outlook for the recovery between division business in the surgical business.
Over the course of 2021 that would be the first question and then I'll. Just go ahead and state the second one upfront.
I was just I was just wondering I mean, I'm sure, we'll get specifics at the capital markets day, but directionally from where you sit today do you think that disruption from Covid will have an impact on the original 2023 targets that you talked about or is there enough spacing between where we are today in 2023, such that all those old margin targets are still quite fine.
Thank you.
Yes, let me let me take the first one Bob and.
The vision care business right now.
It looks like the U S business has done pretty well bouncing back.
The international business again, I think is in a different place I will say, though that when you look at the numbers on the ground.
There is a slight divergence between what we're seeing in the consumption data and what we're what we're hearing from practices. So if you some of the research we've been doing over the last quarter would say that we still have a significant number of U S providers, who say exams are below normal lower than last year.
A significant portion of practices are reporting revenue that was below last now the weird part of that is even though we see total fits down almost 20% in the fourth quarter, we saw a 9% consumption growth in the U S. Those are U S numbers. Just so you know what they are and Thats odd, but I think that there is some belief that this is a.
Normalizing market on our perspective that that there is some reusable growth that's come back for people, who probably were wearing their glasses through most of Covid had decided they were going to tighter.
Hugged up and started to buy back some of that there is some general market growth as we kind of stabilize prescriptions and so there is a willingness I think in optometry to certain degree instead of fitting the lens to renew a prescription for it.
Without necessarily seeing the patient right now, it's a small percentage, but its big enough that we could compensate a little bit for what we see in short visits so I don't know precisely.
Where that sits going forward, but I think it's a good sign that the consumption value total was up in the fourth quarter for United States International continues to be a little bit slower and we believe that will continue on for a little while until we see a little bit more foot traffic into what's largely a chain dominated Europe and the same thing in Japan, which are the two.
A large international parts of our businesses.
On the.
On the original targets.
Just maybe one point to make here I think when we when we set out to spin the company out. We said two thirds of that was going to come from revenue leverage our operating improvement would come from just growth in revenue. So the thesis has always been about revenue growth. We obviously, we're going to get some gross margin from mix and other efficiencies but.
We are we have been on a.
<unk> really I think on the on the revenue side feel good about our share position, but the market's fallen away. So clearly there is some impact but I think from our perspective, we gave of low to mid mid twenties operating income range and.
And we still feel like the low end of that range is in play. So I think the view that we have continues to be debt.
Depending on the revenue it depending on how the markets move.
For our thesis should still be attached, but I think going forward, we want to update that with you and we will give a better update I think in more with more specificity.
On the.
March timeframe. So I guess just next month the only other thing that I would say is sort of the underpinning assumptions and work that needed to be done to drive those financials that David just talked to those are all on track right. So a big piece of that was the vision care lines installations and despite COVID-19, we continue to execute upon that.
Even though we took out $200 million on cost in Q2 versus the original target. When we started seeing the COVID-19 pressure last year, we kept our R&D.
Projects all on track, we continue to invest in that because again that is going to be critical to driving some of that long term growth that David alluded to so I think the underpinning on.
Operational levers are all on track to drive that.
Super helpful. Thank you.
Your next question is from Larry <unk> with.
Wells Fargo. Please go ahead.
Good morning, Thanks for taking the question just wanted to ask one quick clarification on Bob's question. The response to Bob's question the low David.
The low end is in play and I think.
Bob was referring to 2023 so.
Can I just confirm that the low end is still in play for 2023 or as COVID-19 kind of push that out.
No no we've been saying for I think a while that our thesis is still intact I think it's a matter of where the revenue hits and we still believe that the revenue lines, assuming that we get.
The market's back as well.
Indicated we think they are coming back now in the back half of this year, where COVID-19 will be behind us.
We've got time to get there and so I don't think we've changed any of our perspective on where it is I think it probably is to the low end of what we described at the time, but.
Again, we will give you a little more color on that in 2025, when we get to.
End of March.
That's super helpful and David the.
5% context, so one on contact lenses, the 5% growth in Q4 was with quite good do you feel like you've turned the corner and now can grow above market in 2021.
And is there any reason Q1.
'twenty, one would slow significantly.
From Q4, and I will just quickly ask my second one.
David if I look at consumables as a proxy for procedures Tim mentioned.
'twenty was down 15% year over year.
It typically grows mid single digits, how are you thinking about.
The catch up.
Loss procedures.
Over the course of 'twenty, one and 'twenty two thanks for taking the questions.
Yes, sure on the contact lens piece.
We have I think gotten ourselves back to what I'd say is kind of growth at market.
Think we're beating the market yet we are in some some kind of smaller spaces. So for example in the paces, we really desire to be so silicone hydrogel, we're doing very well we've grown market share in the fourth quarter in that category and that is the fastest growing part of the contact lens market. So we feel good about debt because that's of course, where <unk> plays Thats, where precision one player.
Through our entering toric and multifocal, so a lot of our energy that's going at the fastest growth part of this segment.
It is paying off well, but we obviously have a big underlying reusable business, we have to pay attention to and we also have some older dailies business. The exciting part for US is as we see the fourth quarter took shape. What we saw was our total day lease and Thats really <unk> plus PD, one plus <unk>, that's really what we're.
To think about because we're losing a little dhcp share where.
We're cannibalizing a little bit of it we're losing it to some other people that's normal that's what we would've expected.
That's an older hemo lens.
And I think as you kind of go forward and see the shift the Sinai continue.
We're disproportionately capturing share in the Si Hy so we're watching the total daily share very very.
Very carefully in terms of new fits and switch fits we had a very good fourth quarter. So I would say we were up a good bit.
On the share of new and switch fits for the dailies segment and sphere in particular.
And so I feel good about what we've said there and I feel good about where we're going but I will tell you that again, we've got more work to do I do think that are growing above market is our expectation for <unk>.
<unk> 2021, and so I think well within our reach given the near term trajectory, we saw with <unk> and the continued strength of dailies total one on.
On the other piece of this.
The surgical procedures I think it's right to wonder where we are with consumables the market overall in.
We said for the year was off almost 25% we were off I think.
And consumables what was it.
About <unk>.
13% or something in that neighborhood, maybe 15.
The index 15 on that one and three in the quarter. So let me just suggest that we.
We think we're gaining share in the consumables business right now on that the market has been.
Obviously slow internationally in particular, the U S market looks like it was nearly back to 2019 levels. It wasn't quite there, but it was off 1% or something so really close to what we would've expected as we started this journey some months ago, but I think our share looks pretty good in our international share in particular.
Has picked up with both said share and Allegiant performing very well internationally, we're expanding our footprint and I think we outperformed the market really.
A good bit on consumables relative to.
The actual procedures that were in the market. So again I think that the market picks up.
Internationally, but we will have to see when and again I would say, we feel comfortable saying back half of the year, but we'll see how the COVID-19 thing plays out.
We did this before let me give a little more color because I'm sure we'll get more questions on on 23% margin expansion what have you. So.
The other couple of points I'd make is.
One way to think about it is if you take our Q4 'twenty rate our margin rate was 14, 9% now.
Now in there you have some pressure from absorptions. So we spiked up to $30 million. So you guys can quantify that and then we also have some R&D timing on that right because we're playing a little bit of catch up from Q3. So.
If you normalize it if you will that kind of gets you to 17% and then what you need to believe over the next two or three years is you got to get call. It a point and a half two points.
Additional gross margin again, we spent a lot of time walking people through the vision care installations, and we've always said that the benefit of that net margin expansion will probably come in the latter part of the plans to think about it in 'twenty two youre going to get that mix lift that we talked about in Opex is a perfect example, so you got to believe you can get a point and a half of two points from.
On there and then you get two to three points of SG&A leverage.
Again, when we gave the original guidance in 2018.
There were a lot of things that we werent quite sure about Pan optics was just launched in the new markets <unk> was in clinical trials precision one was in development. So we feel like we're on a much better space now than we were in 2018, just because a lot. Some of those variables are sort of taken out of play so.
You got to believe that operating leverage on the.
On the revenue side and if you take it from kind of a Q4 exit rate normalize at that kind of gets you there.
Next question comes from Matt.
Credit Suisse. Please go ahead.
Great. Thanks, so much.
We're taking the question so maybe on that topic, just just following up on the margins.
For David.
The share of switching new switches is encouraging on people.
One.
I'm, just I'm wondering how important and as you start to sort of look for these 152%.
The improvement in gross margins that you mentioned in sort of volume on the P loans side.
Debt these fish.
Improving just because it seems like you.
You take share where there's a jump ball, where there is an opportunity not necessarily with is just the lift in consumption and then I have one follow up.
Yes, I mean look I don't think Thats the big picture.
<unk> is important for sure, but it's a small part of what we're doing right now and will be for a while <unk> continues to be a big product for us <unk> will grow nicely I'm sure and it will take share for us it but getting ourselves really in a leading share position in.
Daily Si Hy is kind of a big picture and I think toric lens will help us.
Here is doing well on multifocal <unk> multifocal is doing a great job of picking up patients there in a fast growing sector as well. So we feel good about that part of it the gross margins really right now you should expect it to come largely from the surgical business for the next kind of 24 months ish.
Because we're getting really good mix shift to <unk>, and that's giving us I think a good bit of lift.
That will continue and that will help us I think as we go forward more than anything else. The real the real thing on on margin is we lost $600 million of revenue top line between last year and this year, so or is that range from 19 to 20 right. So.
That's the day, that's a delevering.
A leverage a bowl topline so thats really the impact that we're struggling with is we go for it we've got to get the topline back we have every confidence we will do that but when you start talking about the long term plan. It really hinges on our belief that we can get revenue growth and market share movement and we're seeing all of those things take shapes I think Tim said.
It nicely, we believe we've de risked a lot of the top line assumptions that we had when we went out for good about that for good about the share performance.
And we've got a lot of our separation is behind us so it.
It looks like for us it looks like a lot of blue Ocean, but we feel good about where we're going on the you had another question I think on the.
As a follow up there.
Yes, I didn't think so.
And when you think about this coming meaning in the plan over the next couple of years in the context of your sort of original plan.
One is <unk> as it is.
Pretty significant I guess recent catalyst and it seems to be having some success on the market and I guess, how does that how does it change or enhancing.
The sort of growth or opportunity that you have in the next 12.
12 to 18 months from what your from what you have from what Youre seeing so far.
Well I mean.
We had a lot of these in our minds I don't know that we had <unk>, particularly we didn't really talk about revenue much. We also didn't talk about at a day, we didn't talk about a few others that are like multi dose preservative free tier.
Tears.
Got.
Some other things I think that we're excited about debt again, we just don't know 100% about technically yet, but I do think what you should believe is that we're investing for product flow that will impact our revenue topline going forward on liberty is going to do well we'll.
We will see how much we can get in addition to what Panoptic says that optics is clearly done very well for US. We think it will continue to do well as we said earlier for the next several years, but I think <unk> has the potential to add particularly in places like.
Like Europe, and <unk> kind of interesting proposition right now is that it's a really great upgrade to our toric growth right. So if you're if you're an <unk> user using a toric <unk> provide you all the touristy you would've gotten from the <unk> Toric, which is good and the market, leading toric lids and iOS.
But it also gives you intermediate vision and it also gives half those patients.
Near vision and really.
That's pretty exciting for the for the.
The surgeon, who was not super comfortable with visual disturbances of traditional hol's. So we have a really unique product here, we will see how much that takes off on in terms of new patients new docs, but that's clearly exciting for us, but I wouldn't limit it to that I do think that on our pipeline looks good and Thats really what <unk> is going to be about for US again, I think we should.
Kind of make sure we understand what we're trying to kind of give you an R&D day. If you will of what we think the near term drivers are for products and what we think the long term investments are for platforms that can mature and really changed the market. So we will we'll give you a good look at all of that stuff and hopefully you'll walk we feel good about our our belief in the revenue line.
Look forward to it thanks.
Your next question is from David Lewis with Morgan Stanley. Please go ahead.
Hi, good morning, Thanks for taking the question I just had two quick ones from me here, maybe start with Tien Tsin, just looking at the first quarter guide, which we appreciate it was actually a pretty strong number by our view, but theres a lot going on in that first quarter. There is normal quarterly cycling, it's got to be some resurgence recovery on weather dynamics as well as Youre Anniversarying, a big quarter for Pan optics in a year.
No periods can you help us flush out that guidance relative to some of those factors that I mentioned here on the first quarter.
Yes, again, there are a lot of moving parts I think at a high level I think I would expect to see revenue in line.
With Q4.
We're going to continue to monitor the COVID-19 situation in EMEA and Japan.
We obviously had a bad debt net of weather here, particularly in Texas last week, but we've taken that into consideration. So we would expect to be somewhat in line.
From a from a cost perspective.
Expect to see quite as much manufacturing absorption pressures we saw on Q4.
May be a little bit depending on how long as I said earlier, how long COVID-19 lingers, but I wouldn't expect it to be at that $30 million level by by any stretch.
R&D will probably be a little bit lighter.
Again, we had about $174 million of R&D spend in Q4, we had a lighter Q3 than what we had wanted so we had a little bit of catch up there. So that'll that'll kind of toggle back to a more normalized level. If you will.
And then we're going to continue to invest behind the revenue growth. So.
Assuming that that debt revenue line is intact, we're going to continue to put money behind advertising promotions to drive that so.
So that's how I would think about Q1 as compared to Q4.
Okay, and then David just in 2020, I guess, one of the surprises for used equipment and that was another very good number within surgical on the fourth quarter just for you.
Were you surprised this year, just how that equipment number kind of.
Manifest itself on the back half of the year. There are some concerns about sort of equipment pull forward or push outs, how do you.
How do you can do for the business wrapped up on the year and then how do you think about the outlook for that business in 'twenty. One thanks, so much.
Yes, really good question, David and candidly, we were a bit surprised by the strength of the capital equipment market. I think if you go back to a couple of calls ago I was probably pretty on probably negative about the potential for capital.
And I don't know.
We were way off except for the fact that we did pretty well with both some of our newer stuff, which has gone pretty well for us we.
We had a 10% quarter on on.
On equipment and that was.
Both the USA on international So we had good strength in our cataract equipment, particularly strong with century in our new entry Legion in the international markets, which is a.
Lower price.
But advanced fluidics kind of.
<unk> machine performed very well there.
Was also double digit growth for both U S International and we've got a small bump on the use of course for procedural eye drops where we had a bit of an outage, but I would but I would probably just say that the the overall effort I think internationally is up on equipment and in some markets. I think we may have underestimated the desire and drive for.
New equipment re China, and some of the emerging markets.
Okay.
The next question comes from Anthony Petrone with Jefferies. Please go on.
Thanks.
Everyone is staying healthy kind of cup on on.
One on contact lens, one on surgical just on contact lenses, Dave how should we think about <unk>.
We're restocking and Destocking trends.
As Covid continues to play out I know that debt had some pushes and pulls in 2020 I'm just wondering how that plays out in 2021, and then in terms of the Pan optics <unk> sort of dynamic do you think theres a little bit of cannibalization.
Pan Opex from <unk> or are these two completely separate lines and then I'll have a quick follow up for Tim.
Anthony I think on the on the contact lens business, we think that most of the the movement in inventory is pretty normalized right. Now I don't think we saw we saw a little bit of movement, we always see just a little bit here and there, but nothing on the fourth quarter that looks unusual.
As an unusually strong quarter in the United States. So we were pretty close we are closely looking at that but it looks like the inventories were appropriate for for what we saw.
And if we don't I don't really see a whole bunch of change in that in.
In that dynamic going forward. So I think we kind of think it's pretty normal right now.
On the on the <unk> and Penn Opex, because we really haven't I'm sure. There is some cannibalization it must be because we've got fairly high share combined.
But what we're really looking at is whether or not we're getting additional penetration or additional share growth. All in so there are some markets like Europe, where we don't enjoy the same share we have in the United States and some of the other markets in which we've.
Got out first with Penn optics. So we think there is opportunity to grow share for example in Europe and I do think we see that so and it is additive.
So I think at this point, we aren't seeing a lot of cannibalization, but I wouldn't say there is none.
In aggregate, we're doing quite well I think on the quarter.
Very nice share progression for us all over the world really between the two products combined.
Great and Tim just quick on the second half 19 to second half 2021 comparison, I just want to get that trade it.
Are you, suggesting that we model off second half 2019, combined revenues thinking about second half 'twenty one.
Just wanted to see if thats the comment there.
And how youre thinking about the second half of 'twenty, one again, just kind of lapping 2020.
Yes, I don't mean to be coy, Anthony, but I'm not going to get into modeling second half versus second half again, I think our assumption is that the markets return to sort of those historical levels at the second half of this year.
And then again, assuming I think you just need to take into account on our product launches our shares and when those markets return, we should get a disproportionate amount of that return given our share position. So I think that that's the main assumption that I would use to model out your revenue line and then you can work the.
For the rest of the P&L as I laid out to the earlier question.
From a question from.
Good morning.
Thanks, Paul.
Hi, Good morning, Dave Good morning, Tim Thanks for taking my questions I have two and they both for Nate to ocular health.
The first one and sorry for being a been blunt here, but I'm just.
Can you help me reconciling with Ics conflicting trends in between the strong performance you have highlighted in reusable lenses, but at the same time a decline in sales for contact lens care. So just seems a bit counterintuitive to me.
Okay got half has been to improve into crystal 'twenty 'twenty, one more patient, but she said, we've really enabled linkedin or what other anything here.
And second question.
Related to the reopening in the spring I mean, no one of US has a crystal ball, but it appears that maybe the reopening and the lifting of restrictions could be it could happen earlier in the spring than they did last year. So could this approval a nice surprise for ultimate health on especially in the context of eyedrops and the launch expense.
Good day.
The room for to benefit from easy comps, especially in Q2.
Yes, let me let.
Let me start by saying the.
The ocular health the reusable lenses was a bit of a surprise to us as well.
Again, I don't know that I have a really good explanation for I think it was up 3% on the quarter.
And the contact lens care business again has been pretty consistent.
Kind of in that mid single digit decline area for a while sometimes it does a little better than that but thats kind of where we had assumed it would be so the only surprise for us was that the resurgence of the reusable lenses in the quarter and to be honest I'm not reading a lot into it.
It could be that people just kind of decided they were tired aware on the glasses are tired of the way they looked on the little zoom strength that they've got or whatever I think we're going to have to see another quarter of data before we really make much out of the reusable side of that so I would just assume that these two things are a little bit disconnected as you say for the moment.
We'll see if that continues if it continues there is obviously something we're missing here, but at the moment. We think it's just kind of a day to aberration or a moment.
It looks a little weird on the spring reopening again I don't know whether.
How to think about the effect.
Spring versus back half is a bit like Tim just answered where we are.
Model right now is the full market return is there kind of in the back half of this year now the United States looks like it got mostly back to normal by the end of last year, but the rest of the world has not and so it's really.
Really important to understand that what we're saying here is that what our revenue is going to do what the markets are going to do.
As the markets for international are going to continue to move back towards normal probably hitting normal sometime.
At the middle part of the year, I think thats, a pretty safe bet I don't know if it helped a little sooner would it be upside maybe but again. The main thing for you to think about it is where our share position is against where the markets are on track work your way back to what you think our revenue is going to do that's how we're thinking about it and again, that's partly why we are still.
Careful about trying to guide here, it's really a little bit early for us because we can still see significant down markets in places around the World Asia Pac in particular Latin America in particular, both still double digit below market, where they are where they should be so again, we'll have to see where those were.
Where they show up again I'm optimistic that we'll get.
Good reads on that by the end by probably the middle of the year.
That's why we're kind of calling it to where we are.
On a long question today comes from Jeff Johnson with <unk> go ahead.
Thank you good morning, David I wanted to go back you made a comment and we've heard the same thing thats from docs, where maybe a little more lax on selling prescriptions that expired at the end of <unk>.
2020.
And kind of correlate that with the 9% consumption growth you were talking about in the fourth quarter I'd be interested to hear if some of that strength in the U S. Contact lens market, especially has continued into January and February or if there was kind of that rush.
These patients who hadn't filled a prescription all year and had some benefits that were may be expiring at the end of 2019, alright at the end of 2020 I'm sorry, if there was maybe a little aberration there Ian in December, especially that doesn't continue in January February just what are you seeing so far in the first couple months of this year on the contact lens U S market.
Yes, Jeff let me stay away from commenting on the intra quarter stuff, but let me let me say this way I don't think that 9% to a sustainable number on.
On a routine basis, we've had for a long time, a belief that the contact lens market growth on a value basis somewhere in that 5% to 6% a quarter range thats, probably where the normal rate on a b, it's kind of day historical rate.
So I think probably what we believe is over the long haul I don't know when exactly but when the markets get back to where they should be we should be kind of growing on.
On that same kind of curve, we were for probably five or six years.
With that kind of changed from reusable to dailies driving a value upgrade off of relatively stable contact lens.
Volume, so slight to up in patients new patients, but similar.
Kind of numbers, where you're kind of growing flat to up 1% in use but really getting a nice value trade up it looks a little bit more like five 5% ish plus or minus a little bit on five so that mid single digits is where I think the natural steady state is I really don't know where we are right now in the air.
Early part of this year.
Yes fair enough and then just on <unk>.
IL side, I think I heard you I just want to make sure I understand you think even off the 75%.
<unk> market share in the U S from Japan, there is still room for that to move a bit higher over the next couple of few years or over the next year or two anyway, and then where do you think share for you guys goes on the toric ALLL side does that hold steady obviously thats been a good growth driver over the last couple of years as well you've got some competitive entrants there does the torque ALLL.
Share hold steady or where does that go over the next year or two as well. Thanks.
Yes look I think we.
We expect to hold share in <unk> to a large degree theres a lot of competition in and out.
Around the world, we have pockets of opportunity in Europe in particular, but also I would say Asia, we have opportunities to grow share in the <unk> space. So we have a 75 share as we said are better than that in the United States right now, but that's and even Japan is not even that high.
But the rest of the world I think is considerably lower than that so I would say that in our minds, both Penn optics, and <unk> represents share growth opportunities for Asia for China for.
Latin America for Eastern Europe.
And I think those are things, we pay very close attention to so I think given the pace of.
Where we are on a wraparound basis, plus the new markets plus the potential for.
Yeah.
Penetration change, we feel really good about our position on the <unk> right now.
Can you. Please a question and answer session. The conference has now also concluded thank you for attending.
You may now disconnect.