Q1 2021 Alcon AG Earnings Call
Initial measures used by the company, maybe calculated differently from and therefore may not be comparable to similarly titled measures used in 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> RF.
Please see a reconciliation between our non <unk> measures with directly comparable measures presented in accordance with <unk> and our public filings.
For discussion purposes, our comments on growth are expressed in constant currency.
And with that I'll now turn the call over to David.
Welcome to Alcoa's first quarter 2021 earnings call.
Let me begin by providing a brief update of our first quarter overall market dynamics and recent performance. After my comments, Tim will discuss our first quarter performance and our outlook for the full year 2021.
Then I'll wrap up with some closing remarks, and we'll open the call for Q&A.
We started out the year with solid results in line with the expectations. We shared during our last earnings call. We.
We delivered sales growth of 2% and core operating margin of 18%. Despite continued impacts from the pandemic.
Core earnings per share were better than expected at 49 cents.
Overall, our surgical franchise continues to perform above market benefiting from the strong growth in our latest advanced technologies, <unk> and strong demand for our equipment.
In vision care, we saw high interest for our recent launch of precision one sphere, and toric and our newest allergy eyedrop had extra strength.
Was masked by a challenging year over year comparison due to the preemptive stocking with OTC products. The U S retailers and consumers at the onset of the COVID-19 pandemic.
As soon as the prior year COVID-19 related forward purchase of yesterday, the vision care first quarter sales would have been broadly in line with prior year.
Now, let me provide an update of our key initiatives.
I'm proud to say that we've substantially completed our separation.
That presents a major milestone in outcomes journey as we intensify our focus on innovative products that delight, our customers and create value for shareholders.
We're also advancing our transformation program, which is optimizing our cost structure, increasing our investment in innovation and creating greater organizational agility.
We also continue to expand our new contact lens manufacturing platform.
Successful expansion increases our capacity and commercial agility as demonstrated by the successful rollout of precision one sphere and precision one for astigmatism.
Your line is also provide us with the flexibility to innovate new contact lens platforms, such as total 30 another lenses.
Let me now provide an update on our end markets.
Surgical cataract procedures remain down mid single digits in the quarter similar to the fourth quarter of 2020 with North America nearly back to 2019 volumes with international markets continuing to lag 2019.
We expect to see steady improvements as vaccines become more widely available across the globe.
In vision care, the contact lens market was flat this quarter versus up 4% last quarter.
We believe the noise and sequential growth rates was primarily caused by year end purchasing of lenses.
While optometrists are working with their existing patients to renew lenses with new and switch rates have not returned to pre pandemic levels.
We are however, gaining global share driven by strong U S performance the.
Fast growing part of the market is daily Si Hy, which is growing at nearly 10% and we're all kind of gaining share in all categories, especially daily Si Hy toric with our new launch of precision one for astigmatism.
Strong commercial execution continues to fuel the global rollout of our new product launches.
Starting with a strong contribution for both Pan optics, and Liberty, which reinforces our market leadership with more than 50 share of the global PCI oil category.
And optics, the only trifocal available in the U S continues to perform well across our launch markets, including China, where we began rolling out the product at the end of last year.
<unk>, our breakthrough non diffractive extended depth of focus lens offers excellent distance with intermediate vision without the halos and glare typical of diffractive lenses.
We've been pleased with the positive customer reception to Liberty.
Together <unk> and Penn optics provides surgeons with superior options to address the needs of a broad patient population.
We believe <unk> market penetration will benefit from our continued investment.
In vision care precision one our newest daily Si Hy lens is gaining momentum as we rollout the sphere and toric lenses across multiple geographic markets with precision one for astigmatism in the U S with concurrent rollout of precision one sphere and toric in major European markets and precision one sphere in Japan.
Although it's early initial reception has been strong from optometrists and patients alike.
<unk> remained our leading brand for new and switch fits this quarter.
With our growing product options, we are converting and retaining more customers in the outcome portfolio.
We continue to gain share in the United States and expect to see similar progress in our international markets as we gain momentum on our precision one rollout.
As mentioned at our capital markets day, we're bringing the proprietary surface chemistry used in our dailies total one lens to reusable wearers. So they can enjoy the same incredible comfort.
We are excited to announce that we've received FDA approval and CE Mark for our latest reusable Si Hy lens total 30.
Which we expect to launch in 2022.
Total 30 represents an exciting opportunity and the $4 billion reusable lens market, where our share is currently under indexed.
And lastly, new product introductions continued to expand our ocular health portfolio.
Following the successful over the counter switch added a once daily and twice daily last year, we introduced pattern day once daily extra strength, our strongest allergy drop offering a full 24 hours of relief.
Better than expected retailer consumer interest in <unk> extra strength, which will continue to benefit from several years of patent protection.
In dry eye, we launched sustained hydration multi dose preservative free last week.
Which is our first multi dose preservative free product in the United States.
The U S market for artificial tears about $700 million of which the fastest growing preservative free category is approximately 25% compared to over 50% in the international markets.
We believe that by continuing to add new innovation in the U S. We could significantly increase preservative free penetration.
We also announced a new agreement last week to acquire exclusive U S commercialization rights to some brynza from Novartis.
So relative to pharmaceutical Eyedrop indicated for the reduction of elevated intraocular pressure in patients with open angle glaucoma or ocular hypertension.
It's a product that our management team launched in 2017 and currently manufactured for Novartis. We know this product well and we see significant value in building a new U S. Commercial team focused on 10000 U S eyecare professionals promoting prescriptions and brynza.
And helping to develop the preservative free multi dose eyedrop market initially that'll be led by sustained hydration multi dose preservative free.
So we feel good about how we started the year, we participate in attractive markets, we're entering familiar white space aligned with our focus on delivering innovative eyecare products and we see solid growth returning.
And with that let me pass it to Tim who will take you through our financial results and provide our outlook on 2021.
Thanks, David We're pleased to report first quarter sales of $1 9 billion.
Up 2% versus prior year.
Sales growth was driven by the surgical franchise, where sales increased 7% in the quarter led by North America.
Implantable sales of $344 million increased by 9% in the first quarter, primarily due to the recent introduction of <unk> and continued strength in Pan optics.
This is available in the U S Europe and key markets in Asia Pacific and we are encouraged by the strong initial demand.
We're particularly pleased that book Pan Opex, and <unk> are taking share and increasing penetration.
This was offset by challenging year over year comparisons in Japan, which benefited in the first quarter of last year from the launch of Pan Opex and favorable market conditions.
And consumables, while market procedures were down mid single digits sales of $535 million were flat in the first quarter due to the strength of our risk refractive and net rent consumables.
Equipment and other sales were $198 million in the quarter up 25% versus the prior year.
With strong double digit growth was driven by multiple factors first we continued to do well with our FICO equipment with the addition of the active century, handpiece and upgrades to newer generation technology, such as Centurion in region.
Legion is starting to gain momentum among surgeons, who are looking for premium performance on affordable machine at a lower cost per use.
Second we're encouraged with the performance of our new Argos, Biometer, which is part of our small but growing visualization portfolio.
And third a refractive business is seeing strong demand, which accounted for 11 points of the growth due to the increased amount of screen time and discretionary income.
While we're pleased with the growth in refractive this quarter, we don't expect this exceptional demand to be sustainable.
Turning now to vision care first quarter sales of $833 million declined 3% versus prior year.
Excluding the early pandemic pantry stocking from the first quarter of 2020, we estimate vision care sales would've been relatively flat.
Contact lens sales were $509 million in the quarter down 1% versus last year.
Growth in North America, which was up 6% was offset by softness in international markets, where we continue to see some COVID-19 impacts.
As David mentioned precision one continues to gain share in the daily Si Hy category and with the strong uptake of precision one for astigmatism, we're driving share gains in the fast growing daily Si Hy toy category for the first time.
Ocular health sales of $324 million decreased by 5% in the first quarter.
Excluding the pantry stocking from last year, we estimate ocular health sales would have been up 2%.
This was primarily driven by strength in pattern day supported by the launch of our newest allergy Eyedrop at a day extra strength in the U S.
We were pleased with the market response to the launch of sustained Altra MVP App in Europe, and key APAC markets and are confident our strong clinical performance will enable us to grow Alcon leadership in this category.
Now moving down the income statement.
First quarter core growth margin was 62, 9% up 70 basis points year over year, primarily driven by higher sales leverage and manufacturing efficiencies.
Core operating margin was 18% in the quarter up 140 basis points and 100 basis points, excluding foreign exchange.
The improvement was primarily driven by increased sales with half of the benefit from gross margin and the other half from operating leverage including a favorable year over year comparison as Q1 2020 was impacted by provisions for expected credit losses due to COVID-19.
Our core operating margin in the current quarter also benefited from our decision to hold off on a portion of our planned marketing and promotional spend due to slower market recovery in some international markets. However, we plan to increase investment in international and international markets recover to ensure we are adequately supporting our new product launches.
First quarter interest expense was $31 million in line with prior year.
More favorable interest rates were offset by interest for the senior notes issued in May of 2020.
The core effective tax rate was 27% in the quarter compared to 16, 1% in Q1 of 2020.
If you recall, we had several discrete tax items last year, which benefited last year's core effective tax rate by approximately 270 basis points.
Core diluted earnings per share in the first quarter of 2021 were <unk> 49.
Up from 45 last year, driven by solid sales and operating leverage.
Before I discuss our 2021 outlook I'll touch on a couple of cash flow and other related items.
Free cash flow for the first quarter was $48 million compared to a $60 million outflow last year with higher cash flow from operations and lower separation and transformation costs, partially offset by increased capital spend and tax payments.
Capex was $108 million for the quarter, driven by our contact lens manufacturing expansion.
Separation costs were $10 million in the quarter and $464 million life to date.
As we've said in the past and we expect total separation costs of approximately $500 million with.
With the balance of the cost to be spent throughout the remainder of the year.
And finally transformation costs were $11 million for the first quarter and $113 million life to date.
Before I turn to guidance, let me say a few words regarding our latest acquisition.
We're excited to welcome back and bring them to our brand family.
We expect that acquiring the exclusive U S commercialization rights and Brenda will expand our existing portfolio and strength in acquisition in the ophthalmic eye drop market.
<unk> generates close to $50 million in annualized U S revenues and has historically grown in the low single digits with favorable pharma type gross margins.
We intend to invest in a dedicated sales force this year, which will help us develop the dry eye preservative free market as well as selling some brenda.
This will allow us to spend even more time with U S eyecare professionals and to cultivate a new distribution channel specifically for <unk>.
We expect the transaction to close in the second quarter.
Now moving to 2021 guidance, we've decided to provide guidance. Despite the continued uncertainty related to COVID-19.
Countries, such as the United States, and China continue to rebound, but other countries in Europe, and Asia, like Japan and India.
Seeing different paces of recovery.
Against this backdrop, our 2021 guidance assumes that we will continue to be impacted from COVID-19 during the second quarter, but that market has returned to historical levels in the third quarter with market growth throughout the second half of the year.
We also assume we will continue to advance our strategic initiatives and invest in our innovative pipeline and new product launches.
We expect full year net sales to be between seven eight and $8 billion.
Based on net sales trajectory, we expect operating leverage to drive a core operating margin of approximately 17%.
Keep in mind that Q1 core margin benefited from lower than expected marketing spend and COVID-19 affected countries, which we intend to invest in future quarters to support our growing portfolio of new product launches.
We also expect to continue investing in R&D, which will remain at the higher end of our previously disclosed 7% to 9% of sales as we continue to build our future innovation pipeline.
The sales and core operating margin guidance. We provided should result in core diluted earnings per share in the range of $1 85 to $1 95.
We do not anticipate this and Brenda deal to have a material impact in 2021.
Before I pass it back to David I Am pleased to report debt at our annual General meeting last week shareholders approve the initiation of our first dividend of 10 <unk> per share equivalent to a payout of approximately 10% of core net income we want to thank our shareholders for their continued support of Alcon.
With that I'll turn it back to David for some closing remarks.
Thanks, Jim in summary, we started out the year at a very good position with new products driving top line momentum and operating profitability return into 2019 levels.
Last March we held our capital markets day, when we reiterated our strategy delivered an update on our robust pipeline of innovation and laid out our updated long term targets through 2025.
So we're very excited about the positive response, we received from our various stakeholders the.
We're fortunate to operating in attractive markets gaining share through our innovative products and we are on track to deliver our long term financial plan.
Now we are inspired by the significant possibilities, we have advanced the frontiers of site.
And we will continue to innovate in order to treat challenging conditions like cataracts retinal disease problems like dry eye presbyopia and myopia, each and every day 20000 associates come to Alcon to bring the gift of vision and the ability to see brilliantly to millions more people I want to thank every one of you for your continued commitment with that let's open the line for Q&A.
Thank you we will now begin the question and answer session.
To ask a question. It was a star then one on your Touchtone phone.
As they're using a speaker phone we ask you. Please pickup your handset before pressing the kidney.
Yes.
Your question. Please press Star then two.
As a reminder, ladies and gentlemen, we do ask you. Please limit yourself to one question and a single follow up.
If you do have further questions you can re rejoin the queue. After your original ones have been answered.
And today's first question comes from Scott Bardo.
Remember please go ahead.
Yes, thanks very much for taking my question.
So first question. Please just relates to the precision one rollout in the international market. So I think you were kind enough to give us some disclosure about the uptake in the U S markets being the <unk>.
Leading the call.
From our fastest growing product in the U S.
I think roundabout now you should have some data in international markets I Wonder if you could share that with us. Please.
The follow up question. Please.
This relates to.
Yes.
The acquisition.
Awesome brings a can you confirm that you also have acquired the rights to the over the counter switch for this product in several years.
Yes.
It's going to be a prescription product I suspect until it goes generic but it has quite a long patent life. So recall that this is Pat.
<unk> I think true 2030, so it has a long runway and we feel really good about the potential of its promotion sensitivity on the promote on the P. One O U S. We just got started with O U S. It looks very good.
But again.
Launched principally in Europe, and Japan, which again are the two most effective sections of the international market. So.
We're going to see as I said in the original launch we'd give it six months.
Where we were it is going to be that same kind of time period.
And I do think that.
All signs are pretty much similar to what we expected to see so we feel good about it but I would just say it's too early to really give us much from the first quarter remember that I think I think we put sphere out in Europe in February tour in Toric went out in March and so again, you just really haven't gotten any.
Any real time, yet to see much result, but feedback from the debt from the optometrist is exactly what we would've expected, which is they really like it.
Thank you. Our next question today comes from Daniel Book.
Please go ahead.
Thank you very much on the first question from my side on contact lenses.
Minus 2%, while on Jan one two weeks ago, showing three 5% after quite disappointing say last 12 months and also Boston volume yesterday was plus 13%.
Any more color on why you only 2% compared to the other income being much better is it stocking effects and other factors that can explain this difference in line with assumed from <unk> health.
Because it's a good uptake.
U S.
Initially a bit also on the European front and then the second question on your core EBIT margin guidance for the sales of approximately 17%.
First quarter net number was 18% and I would assume sequentially at least in terms of revenues and will be the lowest quarter.
Because the recovery is now taking place with growth in Dubai coming back in the fourth and fourth quarter.
Why only 17% because if I look back what you were expecting interest for 2020 physical already before COVID-19, and we're looking for 17 five to 18 under 5% already at that time and some young since then I mean now you're back to growth again.
One of the force playing out very well with high margin.
How can you.
Give us a bit more guidance on the 17% how to get there.
Thank you very much.
Yeah. Thanks, Let me, let me start with the contact lens performance.
Market in the international Global market was roughly flat zero percent and we were off 1% so pretty much with the market. The split between that we did quite well in United States.
We are obviously hampered a little bit in the international markets by the trajectory of that recovery. So again I think we believe the market broadly is still at about 95% of the 2019 levels.
Relative to other companies' performance. So all I would direct you to is the mix of recovery. So I think very carefully about who has highest exposure and contribution to China.
The rest of Asia.
Where we have very small business. So we had less of a downturn last year and less of an uptick this year. So don't confuse market share growth with the actual return to growth because we are on a global basis, gaining share on the back of the U S. And obviously, we're pleased with the early read on <unk>.
And on the EBIT, yes, sure. So on the margins. Although we are very pleased with the 18%. The one thing that I would say as we said in the prepared remarks, we did pull back on some advertising and promotion spend particularly in our international markets because if you'll recall in January we started to see some slowdowns again and we just wanted to make sure that.
We were disciplined and cautious about our opex. So if you think about hiring folks and all of that we were very cautious through that now we would expect to put that back into the P&L. A majority of that will go back into Q2. So I would think about it is call. It maybe 15 or $20 million that we didn't see.
Spend in Q1 that we're going to spend throughout the course of the year and again a majority of that would be in Q2. So I think what youre going to see is Q1 might be a little bit inflated and then Q2 will be a little bit more depressed and that will sort of normalize similar to a profile maybe take a look at 2019 and income Tennessee had no.
Origin profile played out there.
Thank you. Our next question today comes from Cecilia furlong with Morgan Stanley. Please go ahead.
Okay. Thanks for taking our questions I wanted to ask about equipment sales, which have been fairly constant.
A few quarters.
Thank you.
As you look out for sustainability.
In terms of the strength.
It's really what what type of mix shifting.
<unk>.
Net sales to developed markets versus other devices.
Yes.
Good question Cecilia, let me answer it this way.
Equipment was up 25% versus prior year, which again surprised us in many ways. The refractive business was very strong and we continue to do well in refractive lasik as a procedure continues to be robust through this period of time, it looks like I think people who.
Have been not.
I'm not taking their vacation holiday money and spending it on traveling are investing in their eyes, and so we've seen lasik procedures consumables and importantly equipment way up over prior year, that's driven about half of our growth in the equipment piece, but I would tell you that the other half of the growth is our core equipment. So cataract.
Shipments on the back of active century Handpiece.
Constellation, our refresh or sorry, our rep machine is doing quite well and of course, we have two new pieces of equipment, one our new Biometer, which is a diagnostic before cataract surgery.
Is doing quite well in our visualization system, which is.
The real value of product again doing quite well. So we're very pleased with equipment. It's a combination of steady replacement and some margin or market share gain with kind of a refractive overlay that I suspect is not durable, but I do think the underlying strength of some of our equipment.
Should persist so we're a little bit.
Careful about how we think about it because to be honest I really didn't think the equipment. The capital is going to be there for equipment. It looks like it is.
And so for the moment at least.
We're going to have a we're having pretty good time with our capital our capital equipment.
Okay. Thank you and I guess, the second if I could ask on.
Just as you look out to.
What are you considering.
Hi, guys to traditional summer.
Seasonality against ongoing COVID-19 impact just improve.
<unk>, Thank you and thank you.
Yes, I mean, I think what we said is is that what we really think is youre going to see some persistent COVID-19 impacts through the end of the second quarter.
There may be markets that persist beyond that but I think in aggregate. The our view is as the market will return to kind of 2019 levels by the middle part of the year, that's our basic assumption and that will start to see that same growth through the end of the year. So we'll grow in the back half.
The pace of that is going to it's just still a little bit unknown.
Still see Japan and.
Countries, obviously like India. They are struggling mightily with this there are other countries again that are still kind of slow to come out of this and so we're worrying a little bit about what the pace of that recovery is but I would just say that's our basic assumption.
From our perspective.
What that means is we focus on share and I think we feel very good about our share position.
And all of our categories at the moment, and we particularly feel good about our product.
Product innovation cycle, and where we are introducing new products. So again I can't control the market pace, but I feel really good competitively relative to our current position.
Thank you. Our next question today comes from Larry Nicholson with Wells Fargo. Please go ahead.
Good morning, Thanks for taking the question, let me start on Tim Brilinta.
So so first how large is the dedicated sales force going to be.
Was that contemplated in the long term margin guidance you provided at the capital markets day and day.
David should we expect more pharma deals like this.
Future It I had one follow up.
Yes, Larry let me give you the.
The sense of it.
10000.
Prescribing ophthalmologist and optometrist and so we will build a sales force adequate to cover that audience.
Fairly typical I think most most of the companies build around that size.
So you can kind of benchmark it off what is I think kind of the standard in the pharma space I think.
In order to be successful in eye drops business, you've got to be able to reach all those guys. So some brynza. We're excited about is look it's a high margin product that is already we already manufacture it.
It remains.
Promotional sensitive it has a critical mass to build a sales force around and that also gives US then the the means to take multi dose preservative free products. In particular, we're just launching right now multi dose preservative free sustained hydration, which we think is a great idea and we're also launching right now how did the extra strength.
Remember the same audience is the one that was prescribing pattern day last year. It's now over the counter we're working directly with those folks to build the markets and so we are.
Excited about the opportunity to put in the bag.
Of multi dose preservative free products to build some <unk> xen glaucoma in allergy. So we're basically treating dry eye allergy and glaucoma.
And our sales force that I think can have a real impact on this.
So that's kind of the direction we're headed.
On a related topic, because I've seen some of the notes and we've had some of the questions on <unk>.
Is it in 'twenty, one as a non in 'twenty. One we made the comments in the prepared remarks, but again the way I would think about it from a 'twenty one perspective.
Is it $50 million of annualized revenues, obviously, we don't we won't close the transactions are what we predict to be the end of the second quarter. So you sort of have a half a year of that.
But keep in mind to David's point, we will be building net sales force so.
So we will be incurring those costs going out there and hiring those people. In addition to that we have a transitional service agreement with Novartis. They will continue to sell the product for us while we're building that sales force and we will get a markup for that so thats why youre not going to see a material impact in 2021, but in 2022, we'll obviously have a full.
Year revenue, our sales force and play we won't have that markup from Novartis. So that's how I sort of think about it from a EPS perspective.
And then just in terms of guidance is the sooner out just to make sure everyone's clear. This is not this is not in the in the long term guidance. This was not and as we said debt capital markets day that does not include any acquisitions.
In our 2021 guidance it is in that number.
But it sounds like sales.
Super helpful, but the sales force build was contemplated hill.
I apologize if you touched upon that.
Here it and just for my follow up David.
Whats your implantable growth has been pretty impressive, but once we get past this year, you're going to have some increasing competition J&J just got approval for synergy in the U S. How are you thinking about being able to sustain above market growth in implantables beyond this year. Thanks for taking the questions guys.
Yes look I think the.
We're pleased with the share performance that we've got in the U S. In fact, it is obviously as the trajectory faster than we had originally thought.
<unk> appears to be additive to the pen optics business in a fairly meaningful way. So what we're seeing right now and hope to continue to see is improved penetration of hei LLS and so remember that one point of penetration is about $100 million globally, and so I think where we're keen to think about.
How we move penetration of Hei wells up versus mono focal so while I think youre not wrong is there will be competition in and they will have some effect we've contemplated that what we're really interested in now, especially in the United States, where we have better than 70 share we're really thinking about what is the.
The penetration of the ACI wells and how can we move that going forward and so we've got a nice blend of products right. So you've got the best Trifocal in the world that has to my mind, the perfect focal point distance and real clarity of vision at those focal points. If you want that Chris <unk> Pan optics is going to be very competitive for it.
<unk> on the other end of it if what you really want is a non diffractive lens, which has been some of the benefit of EDA as well <unk> clearly does a better job than everything else out there and so I think that while there are going to be competitors that blend of things and do different things I think we've solved for the two core needs in the market.
And I think what we believe is that that's going to be very competitive. So we can turn our attention now I think to try to build the market.
On the back of what is it fairly strong share position I do think there'll be some share erosion I think I've said that in the past, but we contemplated that.
Thank you and our next question today comes from Dorian Bruno.
Bob Please go ahead.
Hi, guys good morning from focusing more questions.
One question on <unk>.
On the discrepancy that renewables.
Between day.
Implantables business and the consumable business.
For the past few quarters.
My understanding is that <unk> two should be broadly the same for seniors I'll close with some of the same procedures. So what's happening here.
How long do you see something on that side and then I have one follow up.
Well two things one is share price.
No.
<unk>.
What you see in the consumables market is generally going to track two procedures.
Depending on mix and the like but you're Directionally correct, the consumables will travel largely.
On a volume basis with procedures.
Whats going on in iOS, though is that we are gaining share in global <unk> and have been for about a year.
And we're continuing to gain share in advanced technology lenses, which are significantly more valuable than a mono focal lens. So remember the mono focal lenses about $100 on average around the world plus or minus a bit and you can in the United States, the Agi wells or 800 $900.
Upwards that range so.
You just see a different.
Value change the more we grow our share particularly in <unk>.
Okay. Thanks, guys.
And then my follow up question as it relates to Q2.
Last quarter, you told us that Q1 sales similar to what they were in Q4 last year should we expect the same thing in Q2 in terms of absolute sales number considering maybe the season 90. That's also the challenges you're facing in discovery well.
Yeah, again, we're not going to give a lot of <unk>.
Quarterly splits, but what I would say is this obviously Q2 for us last year like many companies was significantly depressed.
So we will rebound, but we anticipate to rebound from that but I think the best way to think about it is again, our assumption is that markets returned to historical levels sort of in the third quarter and then we'll continue to see that net natural growth that we've seen historically, so that's how I would sort of think about the total year and that's that's the assumption that we have.
<unk> for the guidance that we've given.
Thank you and our next question today comes from barometer or do what drove out with Goldman Sachs. Please go ahead.
Hi, guys. Thanks for taking my questions.
I wanted to start a little bit on the revenue guidance for 2020 line. If I just give you some very simple math.
It sort of seems to me that the guidance is implying something like 7% to 8% organic sales growth versus the 2019 days.
I think you were already at seven percentage in the first quarter. So I'm just trying to understand why you guys don't think you should see more revenue growth acceleration, especially as they move into the second half.
And the market normalize you guys is there something that you're seeing on the horizon that sleeping you a little bit more cautious on that at this stage. If you could talk to that and then I'll ask my follow up after that.
Yes.
Veronica the markets as we see them right now are probably 95% of what they were in 2019. So we're starting from a 5% deficit.
And I do think that you need to think carefully about what the 19 levels. It's not it's going to we're going to grow back from here to get to the 19 levels. So I think we are in the ballpark, but again I think what we're trying to figure out is what is the rate of return and again.
Without trying to be too.
<unk> I do think that this quarter and two quarter is is going to kind of see us get back to normal levels. There is some risk in that I don't know that that will happen exactly but I do think that that's directionally. The right assumption and then as we kind of move through the rest of the year, it's not going to be all of a sudden popped up to the original rate you rather going to youre going to glide up to the original kind of our original growth rate.
Things return.
Unless there is it's just been our experience so far that this looks to be a.
More gradual return to normal then all of a sudden it's over and we pop back to normal rates. So I think that graduated return as maybe what you may be missing as opposed to what would be kind of an intuitive endpoint growth rate.
Okay understood. Thank you for that and then my second question.
I appreciate your comments.
Now moving tighter.
And thank you for the comments on China.
Thank you.
You asked if you look at your growth rate how that.
Mark.
We have a better sense for where you think peak volume.
Okay Alex.
Yes.
And then I guess, maybe if you can share that color on that.
Okay.
China, it's quite hard for us to share gains.
<unk> put out today.
Yes, well I mean look our in the United States market grew about 5%.
In total contact lenses and we drew seven in the U S.
So we feel we feel good about debt I think what you see in the international markets is.
A decline of something on the order of 5% plus or minus a little bit and I think what we're going to try and and again, we are working hard to get our products out there, but again, we were kind of right at about market growth. There. So when you kind of net those assets.
Where are you coming up with this basically at market growth. So we think the full market around the world was flat and we think that the.
And again, we reported a minus one so roughly flat.
My sense of it is is the biggest difference in our peer group is there exposure to markets that have already bounced back but last year had very big declines read China, particularly in February and March and this year. It had extraordinary February and March and so that swing, which we have a lower exposure to.
It's really I think what's happening I understand theres, some other things going on inventory and gross to net and stuff like that but again I think the big news here is just the exposure to the markets that bounce back and those that didn't and we're obviously over indexed in Europe and in Japan, both of which are still kind of under heavy COVID-19 pressure.
Thank you. Our next question today comes from Rob <unk> with <unk>.
Research. Please go ahead.
Hi, good morning.
Start on the contact lens business and wondering if you can update us on timeline for when you think the new contact volumes will be kind of at capacity or full efficiency and then how much of a margin benefit you expect from that just trying to help us bridge from the 17% to 28 in 2023.
Yes, I think the way to think about the contact lens lines is that theres going to be steady gross margin improvement over the period.
We are.
Very optimistic I think about the progress of precision one and.
And the potential of <unk>. So we're going to continue to add lines to support those launches I think through through the plan.
And so the ones that are already in place get very productive and they run up nicely basically in a 24 month frame.
And then you see new ones come on and so.
Those take they started at zero and then the kind of work their way up to productivity and full productivity. So youre going to get a blend all the way through the plan of new machines coming on as we add capacity continuously through the plan.
And then the way to think about it really is the average of that will kind of improve kind of consecutively year over year.
And so that's probably the direction that I gave you yes, if I go back to the capital markets day commentary and we would expect to see.
In 'twenty two 'twenty three you'll see some acceleration. So again, we put in a lot of line last year, we continue to put lines in this year, that's what's driving the pressure that we're seeing in gross margin is on the vision care business and that sort of accelerate to David's point that you hit that kind of a 24 month period.
So I'd go back to that capital markets day material that may be helpful.
Got it. Thank you one follow up then on the surgical business. How are you thinking about pent up demand for cataract procedures, either in the back half of this year or into 2022.
Well, it's a really good question I think we've estimated there's probably 800000 per 1 million cataract should probably haven't gotten done during this stretch and I think that.
The question of Great interest I think is how that comes back my belief is that it's likely to come back slowly over a longer period of time not in a bolus coming back in any one.
A moment, so I think what I've said in the past and I still believe this is that if you kind of draw a line or.
Take a string from kind of end of 19, 3% to 23.
C roughly our procedure growth get back to what was the historical norm and that kind of 4% five per cent range.
But I think the.
It could come differently than that but I don't know precisely how it comes back the compounded growth rate is likely to be that.
So probably modestly hotter, maybe five or 6% for a while as opposed to kind of a quick bolus back in then.
Settles back and Thats, mostly because most <unk> run at a procedure.
Productivity rate, that's pretty high already.
And in particular in the public hospitals, youre not going to see a lot of movement quickly.
Because they are also running relatively full and there's a lot of other procedures compete.
Competing for a long time, so I think theres going to be more of a slow steady and longer trail of kind of a swarm or than normal demand and it could be longer than that but thats kind of best thinking now.
Thank you and our next question today comes from Bob Hopkins with Bank of America. Please go ahead.
Thank you and good morning.
So.
Okay I wanted to start with you on the on the margin guidance for the year could you just give us a sense for what your guidance implies about how you're exiting the year in the fourth quarter from an operating margin perspective, and then <unk>.
Can you also just maybe go into a little more detail on the factors that that impact that number relative to what you put up in the first quarter. Thank you.
Yes, I would say.
Again, I would go back to the 2019 profile I think it assuming the markets do come back you'll see a similar profile. So.
Q2 is normally a little bit depressed because as you'll recall, that's why we put in a lot of marketing and promo.
Expenses to get ready for the summer season, So I would expect that to happen again in 2021. So and then we will sort of ramp up from there. So I would kind of look at that 2019 profile and I think that youll see something relatively similar to that.
Hum.
Okay.
And then are there any other factors besides that spending that would cause the margin to end up at 17 for the full year. When you start out at 18, I just want to make sure. We've got all the moving pieces here and then.
David just on that last question just maybe a quick comment in terms of why you think the backlog happens more over time and not a bolus or is the short answer purely a capacity one.
Sure.
Yes, again, I would say the factors to think about we will see some gross margin improvement as we go throughout the course of the year as we start to ramp up production.
Youll get a little bit more operating leverage rate as your sales improve.
You'll see some of that and again I just want to reiterate.
When you look at that debt that first quarter number of 18%, we do have $15 million to $20 million of spend in there that that we chose not to spend but we will.
Over the course of the year. So I would just keep that in mind as youre trying to do a run rate from that Q1 number.
And Bob on the on the capacity thing yes.
As capacity and staffing in the United States.
That will that will take some time.
So it's really site of care internationally, so the hospital based markets.
We have a lot of competing.
Procedures, and also frankly aren't going to move through.
A lot more productivity than what they have historically had so again I think the waiting lists and international are going to get longer. They may look to find some other ways around that I know theres. Some talk about trying to increase use of private facilities, but it really isn't clear to me yet that those are really going to happen. So I would say in the current sites of care internationally in U S.
<unk> capacity is probably the main the main constraint.
Thank you. Our next question today comes from Matt richness credits.
Credit Suisse. Please go ahead.
Great. Thank you very much.
Couple of follow ups, one on Implantables and one on contracts so.
Tim I think you mentioned that debt.
Penn optics and <unk>.
Driving growth and penetration I know.
This came up a little bit in Q&A this idea of expanding penetration.
Sending some of the competition you may begin to face in different regions around the world.
If you could talk a little bit about how you see those two products and what <unk> seen so far I know this was a question early in the day of any launch candidate will expand penetration I'm wondering if you're starting to see that.
And then I had one follow up on contracts.
Yes.
Look Matt on the Penn optics invitee.
We have seen some data I mean, we're obviously watching it carefully vividly is doing very very well and we're excited about that because it does not seem to be affecting our panoptic trajectory either so I think the two combined seem to be giving us an additive effect to a large degree and theres. Some theres, obviously, some cannibalization that you should be thinking about but I think broad.
<unk> speaking, we've seen penetration move.
Of the <unk>, particularly in the United States, but also internationally and the question that we're really still struggling with and I don't know the answer to it is that a phenomenon of just not being back to a 100% of capacity.
And we're really seeing the more progressive practices.
As a mix.
Coming in with more hei wells in that mix itself driving the penetration up or is it actually a phenomenon thats a little bit wider than that and I think given our instinct on it is it's.
A little bit wider than we had originally expected which is good.
And so we're still cautious about it because people have for years been talking about how.
How do we expand the <unk> market and again I've.
He's been kind of it's going to be 50 basis points, a year, because thats, what its been even though youll see blips here and there.
So I'm still careful to say that we haven't proven this yet until were backfill speed, but right now the penetration of <unk> in the total Iowa market is up and up.
And it has inflected up over the last year. So I think again nice change for us to see.
Our hope is is that as continuing going forward, it's certainly our intention to try and get it that way because with exhibit gives a lot of opportunity for people, who haven't historically gotten excited about presbyopia correcting lenses.
But do use tour X for example.
To use a <unk> toric I mean that gives theres just no downside to that in lots of ways. It gets some more forgiving lens in lots of ways and it also has.
Give your intermediate near so I think this is there's a really interesting opportunity here with <unk> to bring in some folks that had been a little bit of afraid of diffractive lenses.
And we think Thats, where the place for annuity is going to be.
That's great and encouraging thanks for that.
On contact lenses.
I appreciate the color.
And tone for Q2, and the rest of the year that you've provided and maybe if you could give a sense as to.
How this.
Prior year stocking effect or anything else that we should be aware of here in Q2.
May continue to affect contacts or what your visibility is into that just so so we're in the right place here in terms of our expectations in that in the first half the rest of the first half of the year. Thanks.
Yes, I'll contact lenses I'd be careful.
Look at growth rates, the rest of this share over especially the growth rates over prior year is it going to be a giant growth rate. This next quarter over last year because of course COVID-19 was was particularly.
Impacting second quarter.
And there was some movement of stock.
But that's going to be messy, all year and both businesses I really would encourage people to think about market share globally, because as the market stabilize and as things come back that will be the durable idea and I would continue to say that we are very encouraged about our market share movement.
In the first quarter and we're encouraged about the potential in the second quarter and going forward. So we feel really good about the underlying demand and our competitive position and the growth rates all year. This year when you look at them versus net.
Last year are going to be really messy. So I don't want to venture a guess on <unk>, because it's going to be particularly messy.
But I would say that it's going to be all year that we're dealing with where new cycle.
<unk> competitors for last year.
Thank you.
And our next question to the Samsung.
A term with Jefferies. Please go ahead.
Great. Two for me one would be just is there a way to quantify the size of the backlog on our new fits in contact lenses coming back that would be the first question and then the second question on the simple.
<unk>.
Sales force expansion and just trying to get a sense of how many products will actually be added into that effort over time.
In addition to some term debt.
Thank you.
Yes.
On the on the backlog.
What I can tell you Anthony really is just.
For probably the last two quarters consistently optometry in the United States has been saying they are at about 80% of contact lens, new fits I don't think that's any better outside the U S. Although I don't have the data on it. So I would say the survey data in United States that we see says they're off 20% on new fit so that's <unk>.
A chunk of new fits that we wish we had but will likely return at some point.
Again, I don't know that it's a backlog the same way you would think about a cataract backlog because people may have just put it off and they're using our glasses and theyre satisfied as a little bit different than.
Really needing a cataract surgery to see I do think that.
There will be some more.
<unk>.
More aggressive market growth as we return to what I'll loosely call normal.
I just don't know how big that impact is but I can tell you that's the GAAP between.
What they used to do last year before the COVID-19 and what they are reporting doing right now in the first quarter of <unk>.
2021.
I'd also say that most of the optometrists are reporting still in dollar sales, 95% of night 2019 numbers. So just to give you some again reasonable data on where the market actually is it's still not 100% of 19, so youre seeing some bounce back in some of the revenue growth, but youre really not seeing it.
Back to where it will be I think in the back half of this year.
That said on the other piece is simple.
The sales force, we're going to start with three products in the bag actually a few more than that in some ways, but the three brands that will have in the bag youre going to be obviously, some brynza and then.
Sustain and multi dose preservative free and particular hydration, which would be our first multi dose preservative free product and again I'd encourage people to think about that $700 million market in the United States and the relative penetration of preservative free product versus the international markets, which we see quite significant.
Opportunity and so internationally it's about.
<unk> 50, plus percent, depending on where you are in the world United States about 25%. So we think theres an opportunity to encourage people to use.
A multi dose bottle, but that does not have preservative in it so when it hits the eye. So that's a really exciting opportunity for us.
In addition to some brynza and obviously, we'll be selling our allergy brand patter day in that same group so.
Most ophthalmologists and many optometrists are.
The general lists are treating glaucoma dry eye is probably there.
Two or three top visits day in and day out and allergy obviously during the season falls in there as well. So we're hitting categorically a lot of things that are important to us ophthalmologists and obviously it starts us down a path of building out our eye drops business.
Thank you and ladies and gentlemen, our final question today comes from Jeff Johnson of Baird. Please go ahead.
Thank you David maybe two follow up questions. Just on stuff you were just talking about anthem Brendan on the sales force you know, we're all trying to kind of circle around this operating margin guidance for the year will those sales force investments be dilutive near term and Tim I don't think I heard the answer just longer term I know some brendan was not in your <unk>.
With that approaching mid 20% operating margin by 2025, how does the sales force and kind of doing what youre doing with these three products in the bag and go out to those 10000 docs, how does that impact that <unk> margin target. Thanks.
Yes.
We've taken them.
Yes, as far as the margin target in the 2025 again. This is this is a $50 million.
U S revenue base business on an annualized basis that grows at call. It low single digits. So the margin profile is favorable to our overall margin profile.
But just keep the relative scale of that in mind, So I wouldn't anticipate any impact to the long term guidance that we gave you and in this year's guidance what we've got is.
Really we haven't put the sales into the symptoms when put some brynza into the this year's guidance and the costs are borne by that P&L standalone. So we feel like again, we're not going to have a.
It's kind of a net neutral for this year if you will.
Relative to what we would have done without it but it gives us.
Momentum and an ability to sell some other products, obviously, it's accretive next year alright.
Alright Thats helpful. Thank you and then just on the contact lens market.
David I mean, we've been seeing some of that same data at the 20% down in office visits and refraction and some of the things that you think would correlate well with contact one fits things like that and even some of that data looks like it's bled off or gotten a little softer maybe here over the last month or two but do you believe that data I guess is my question you just talked about it in the U S market being up five.
5% in dollars year over year.
And new fits even though new fits only make up sometimes 20% or so of a given quarter's revenue.
Down 20%, it's hard for me to reconcile those two numbers and I'd like to hear how maybe you do.
Yes, I mean, I would think very carefully about the 5% because typically that's over 2019 remember so 19 was an affected.
Quarter so.
The even in the U S. In March March kind of fell off the map for us So remember that that 5% is a.
A growth number in the U S debt is off of a declining off of a declining base of it went to substantially down.
On April and May so I would say that.
I really do believe that there are a lot of opportunity for people to get into Si Hy daily lenses, which is driving the value mix up and.
And Thats still a pretty robust I think in the U S. I can't remember I think it was 10% growth in the U S. In daily Si Hy value, even though it was only five per cent for example in the overall market. So theres value trade in the contact lens market, that's a real opportunity.
And the question just is when are they going to come back and where are they so I do believe that the visits are down I really think that.
We see it on the ground with our folks.
Even in the U S and I'm pretty sure whats being reported there has been a very consistent in terms of.
Of decline of visits and the.
Remember the 5% was versus 2020.
2019, and so again I think the the 2019 number again as was pretty robust we had a good start to 19 and 20 and then we.
And then obviously it's changed a good bit here. So I think the short version of that is yes. We think it's still down we think it's down in particularly in international and particularly for US who are launching new products new fits.
The problem with foot traffic or you don't have flow through the office tougher to get new foods.
Thank you ladies and gentlemen. This concludes today's question and answer session. In today's presentation. We thank you all for attending today's presentation you may.
Now disconnect your lines and have a wonderful day.