Alcon AG
SIX:ALC
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
63.02
84.68
|
| Price Target |
|
We'll email you a reminder when the closing price reaches CHF.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
Alcon AG
You don't have any saved screeners yet
Good day, and welcome to Alcon's Second Quarter 2020 Earnings Conference Call. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Karen King, SVP of Corporate Affairs. Please go ahead.
Welcome to Alcon's second quarter earnings conference call. Earlier, we issued a press release and interim financial report and posted a supplemental slide presentation to our website to enhance today's call. You can find all of these documents in the Investor Relations section of our website at www.investor.alcon.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 in our forward-looking statements are included in Alcon's Form 20-F, our Form 6-K, furnished on May 12, 2020, and our earnings press release and interim financial report on file with the Securities and Exchange Commission and available on the SEC website at www.sec.gov. Non-IFRS financial measures used by the company may be calculated differently from and therefore may not be comparable to similarly titled measures used by other companies. These non-IFRS financial measures should be considered along with, but not as alternative to, the operating performance measures as prescribed per IFRS. Please review the financial tables provided in the press release and our filings that reconcile non-IFRS measures to directly comparable measures presented in accordance with IFRS. 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, and good afternoon, everyone. I want to start out by acknowledging and expressing our gratitude to the healthcare professionals and essential workers who continue to serve patients every day. From the start, we've said that the health and safety of our associates, doctors, patients and our communities is top priority. As such, we continue to invest resources to safeguard their welfare. I also want to specifically thank all of Alcon's essential associates who work tirelessly to ensure that we can supply our customers with the products they need, as their businesses recover from this pandemic. On today's call, I'll start by providing a performance update and then comment on overall market dynamics and our innovation agenda. Tim will discuss our second quarter sales by business, financial performance, and provide more color on our outlook for recovery. Then I'll wrap up with my closing comments and open up the call for Q&A. The second quarter will no doubt go down as one of the most challenging quarters in our history, with conditions that demanded extraordinary focus on carefully managing our business. Despite the uncertainty created by COVID-19, we're encouraged that we're tracking to the recovery that we outlined in our last earnings call. First, we said that we believed April would be the low point for the quarter with modest improvement in May and June. April sales did mark the low point of the quarter. Sales were down close to 50%, with May slightly better. As ophthalmologists returned to the OR and optometrists open their doors for business, June sales saw a significant improvement and we saw continued growth in the month of July. Second, we said that we were taking a variety of short-term actions to help offset some of the income lost to sales pressure. And these initiatives will result approximately $200 million of savings in the quarter. We were able to do just that and decreased planned spending by approximately $200 million this quarter despite unplanned COVID-19-related charges. Aggressive controls around discretionary spend included implementing a hiring freeze, reducing a meaningful amount of sales and marketing spend and almost all travel meetings and consulting expense were reduced. These actions resulted in a 20% reduction in our core selling, general and administrative costs in Q2 alone. Third, we said we are aligning our production schedules to help us reduce some of our raw materials and labor costs. But the decline in revenue and the fixed nature of some of our manufacturing infrastructure will have a negative impact on gross margin. While keeping our associates safe, we were able to maintain largely uninterrupted operations in our manufacturing and supply chain. However, we did see an impact to our gross margin as a result of unfavorable manufacturing absorption due to production lines operating below normal capacity. We expect this to improve as sales increase. Fourth, we said we are still committed to the long-term strategic initiative we discussed at our last Capital Markets Day. In the second quarter, we stayed on course with our separation and transformation activities. We finished commercial implementation of SAP, and we're now rolling it out to our manufacturing facilities. We've launched 2 new company-wide solutions for HR and document management, and we're ramping up global service centers to support our enabling functions, such as finance, HR and IT. We've also stayed on track with the expansion of our Vision Care contact lens manufacturing capabilities. And despite the significant challenges during the quarter, we continued to invest in our product pipeline. Next, let me comment on the market recovery for both Surgical and Vision Care and then talk about market share. In Surgical, hospitals and clinics have gradually reopened and surgeons across the globe are focusing on rebuilding their patient flow. Ophthalmologists are managing evolving safety practices, and turnover time between procedures is improving. In discussions with our customers, we're hearing that countries like China, where a large majority of surgeries are performed in hospitals, procedure volumes are running at about 80% to 90%. However, in countries like the U.S., where the large majority of surgeries are performed in ambulatory surgery centers or private clinics, our customers are seeing procedures volumes running above 90%. This is due in part to doctors increasing the number of surgery days or extending their hours to increase capacity. While we believe we will return to more normalized market levels by the end of the year, there could be some variabilities, as doctors exhaust a backlog of pre-COVID patients and work to refill their pipeline.In Vision Care, most practices are back open, but optometrists are still adjusting to new safety procedures, such as spacing appointments, cleaning their trial spectacle frames between uses and limiting foot traffic. Recent survey data indicates that optometry practices in the United States are down approximately 20% in visits despite 95% plus being reopened. Assuming we do not experience further disruption from COVID-19, we believe Vision Care will return to more normalized volumes by early next year. Moving to market share. Global cataract procedures were cut approximately in half this quarter after a high single-digit decrease in the first quarter. Second quarter market data shows us gaining share in the U.S. PC-IOL category, where Alcon now has over 70% of the market. We're very pleased with the continued strong demand for PanOptix and our market-leading position in the PC-IOL category. In Vision Care, the contact lens market declined a little over 20% in the second quarter after a relatively flat trend in the first quarter. The fast-growing part of the market historically has been the Daily SiHy, which declined around 12% versus growing 22% in the first quarter. We're gaining share on the strength of our DAILIES TOTAL1, our newly launched PRECISION1 and our multifocal lenses. We continue to be excited about the potential for PRECISION1 based on the feedback from ODs who've returned to fitting the lens in their clinics. And in ocular health, Pataday strengthened our leadership position in the U.S. OTC ocular allergy market, where we gained over 10 share points in the quarter, bringing Alcon's share to over 50%. We believe our product development is directly addressing current and future patient needs, including those created by COVID-19. Social distancing requirements have separated family members that have previously served as caretakers and put a heavier burden on our elderly. For many of our elderly, visual impairment can compromise their ability to live independently and manage their own needs. In addition, for people pursuing everyday activities, we see an increased desire to be independent of spectacles. Glasses can fog up when wearing facial protection. People are getting screened fatigue after spending more time at home in front of the computer. And exercise is taken on an increasing importance. These behavioral insights continue to inform our product innovation, and we remain committed to leveraging our development expertise to address these eye care needs. For example, our growing IOL portfolio gives physicians more options to treat a broader range of patients. PanOptix, the AT-IOL leader, not only restores visual acuity, but enables spectacle independence by offering good performance at every distance. PanOptix continues to see encouraging adoption following its introduction in the U.S. and Japan mid last year. And in July, we began launching PanOptix in China with key opinion leaders. And initial surgeon feedback in that country has been very strong. We believe this advanced lens will play an important role in our global surgical recovery. Vivity, our patented, first-of-its-kind, non-diffractive PC-IOL, offers a greater range of vision yet it's as simple to use as a monofocal IOL. This lens may enable patients with otherwise disqualifying conditions, such as retinal disease, to benefit from an AT-IOL. We received very positive feedback during our pilot with KOLs in Canada and select European countries, and we're expanding our launch into most of the major European markets this year. In contact lenses, we're focused on 3 major programs. As optometrists return to their offices, we're regaining momentum for PRECISION1 with a variety of promotional programs in time for the seasonal back-to-school period, including one program directed at eye care professionals who utilize our online platform. This program helps optometrists address their patient needs through Alcon's own direct-to-consumer fulfillment capabilities, which contributes to patient satisfaction and strengthens the doctor-patient relationship. We also continue on plan with our manufacturing expansion, which will enable us to introduce new options for people with astigmatism with a much anticipated launch of DAILIES TOTAL1 toric and PRECISION1 toric later this year. In ocular health, we received U.S. FDA approval for Pataday Extra Strength, our third Rx OTC switch in the past 6 months, which was formerly Pazeo. Pataday Extra Strength contains more than twice the amount of olopatadine as Pataday, enabling customers to experience full 24 hours of eye allergy relief. Customers will be able to purchase online this year and at U.S. retailers in early 2021. We also received CE Mark for Systane Ultra MultiDose Preservative Free or MDPF. The MDPF category is particularly important in mid-Europe, and this is our first entry into a large and fast-growing international segment of artificial tears. Systane MDPF will open the doors to exciting share opportunities that build on Alcon's dry eye leadership in this important region. So as you could see, we continued the momentum with our investments in innovation. With that, let me turn it over to Tim, who will review our financial results and provide more color on our outlook.
Thank you, David. Results this quarter demonstrate strong execution despite the COVID uncertainty. We continue to implement measures to protect our associates, support our customers and further strengthen our liquidity. We exercised heightened financial discipline and discretionary spending, production planning and managing our investment priorities. Starting with the top line, we saw a 34% decline to $1.2 billion in the second quarter, with double-digit declines in both Surgical and Vision Care as we had anticipated. On a year-to-date basis, we saw a 15% decline. Surgical sales were down 42%, reflecting the slowdown of surgical procedures globally. On a year-to-date basis, Surgical sales were down 21%. Implantable sales were $176 million, down 40% versus the prior year. Sales were down in monofocals, despite an increase in share during the quarter. This was partially offset by PC-IOL growth due to the strong adoption of PanOptix in the U.S. and Japan, which will wrap around their launch dates in the second half of the year. On a year-to-date basis, implantable sales were down 15%. Consumables sales were $320 million, down 45% versus prior year, which was driven by a slowdown in surgical procedures. As surgery levels increase, we anticipate we'll see continued improvement in consumables aligned with market trends. As expected, vit-ret procedures held up better than cataract given the urgent nature of retinal surgeries. On a year-to-date basis, consumable sales were down 25%. Sales on the equipment and other category were $106 million, down 32% versus prior year. We're seeing limited major capital purchases as customers manage their capital budgets. However, revenues from equipment service and procedural eye drops held up better than equipment in the quarter. On a year-to-date basis, equipment and other sales were down 18%. Turning to Vision Care. Sales were down 25% in the second quarter, reflecting the impact of COVID-19. On a year-to-date basis, we saw an 8% decline. Contact lens sales were $329 million, down 32% from last year. COVID-19 impacted growth in all products and regions, driven by the decline in traffic and widespread closures of optometry practices. As offices began to reopen, we saw an encouraging recovery in June, driven by higher lens consumption and larger order volumes among distributors and retailers. On a year-to-date basis, contact lenses were down 15%. Ocular health sales were $267 million, down 14% versus prior year. Sales pressure was driven by store closures due to COVID-19 and the impact of Q1 stocking activity, which we expect to normalize by year-end. We were pleased with the ongoing momentum of the OTC launch of Pataday in the U.S. And on a year-to-date basis, ocular health was up 3%. Now moving down the income statement. As expected, core gross margin was 54.6% this quarter, down almost 10 percentage points year-over-year. This was primarily driven by lower sales and $64 million of unfavorable manufacturing absorption, which we expect to incur to a lesser extent in Q3 and even less so in Q4 as markets start to normalize towards the end of the year. Core operating margin was negative 6.6% this quarter compared to 16.6% last year. Lower sales was the primary driver of the margin pressure, combined with the unfavorable manufacturing absorption and provisions related to the pandemic. As we discussed on our last call, we made significant cuts in discretionary areas, such as marketing and sales support, travel, meeting expenses and consulting, while protecting our associates and sustaining R&D. Going forward, we expect R&D investments and marketing and sales to increase in the second half of the year as compared to the first half as sales improve. Foreign currency had a negative 70 basis point impact during the quarter. Second quarter interest expense was $30 million, down $35 million from last year due to more favorable interest rates in the current period, partially offset by the interest expense from the newly issued senior notes in late May. The core effective tax rate was a 10.4% benefit in the quarter compared to a 13.5% expense last year. Year-to-date, our core effective tax rate was 20.5%. The decrease in the tax rate was primarily due to the mix of pretax income and loss across geographic tax jurisdictions and the impact of COVID-19 on profitability. Core losses per share were $0.21, down from income of $0.47 last year. Lower sales were the primary driver, along with approximately $0.14 per share of COVID-specific charges and costs, driven by lower manufacturing cost absorption, provisions for expected credit losses and higher inventory provisions. We ended the quarter with $1.3 billion in cash and cash equivalents at the end of June and $1 billion available in our revolving credit facility. We successfully raised $750 million in late May that enabled us to further strengthen liquidity at a competitive interest rate. We do not have any major maturities before 2024, and we do not have financial covenants or material adverse change clauses on any of our existing facilities. Free cash flow for the first half of the year was negative $110 million compared to positive $95 million last year. This year-over-year decline is primarily related to the impact of COVID-19 on our operating results. Given near-term operating income and net working capital pressures driven by COVID, we expect free cash flow for 2020 to be lower than 2019. Separation costs this quarter were in line with expectations of $62 million, primarily driven by IT projects. Life-to-date separation costs were $370 million. We expect to substantially complete our separation process this year. The successful implementation of SAP has given us better visibility to real-time conditions against the broad landscape in which we operate. Transformation costs this quarter were $13 million, primarily related to third-party consulting fees and restructuring. Life-to-date transformation costs were $72 million. Looking forward to the second half of the year, we expect the path to reopening will vary based on country and local mandates. The pace of the recovery will depend on the capacity of public versus private channels and the ability of the ECP to incorporate new safety procedures and rebuild efficiency and patient flow. We were encouraged by the June rebound and the favorable trend in July. Although we're not counting on a linear trajectory, we expect the markets to return to more normalized levels by the end of this year, early next year. And this macro trend gives us confidence to invest in customer-facing programs and ramp up strategic investments in the second half of the year. By franchise, we believe Surgical may recover slightly faster than Vision Care. Surgical practices are accustomed to the adoption of safety protocols, so they are quickly adapting to their new measures. While demand for vit-ret and cataract is durable and patients cannot postpone procedures indefinitely without additional health risks. I want to remind you that the solid rebound we've seen to date was primarily driven by patients that were booked pre-COVID and are now returning to complete their procedures. It remains to be seen how quickly the ophthalmology community can refill their pipeline of patients, which could result in variability in the coming months. Absent another pandemic shutdown, we expect the surgical markets will return to normal levels by the end of the year. In the optometry channel, we expect traffic to return to normal by early 2021. We believe more customers are placing value on the comfort and convenience of contact lenses with increased screen time and the need to wear masks outside the home. Furthermore, the greater need for hygiene may create an opportunity to accelerate the switch from reusable to daily disposables. We've been encouraged with the continued improvement in Vision Care, but we're cautious to extrapolate given the variability of stocking activity and foot traffic. One thing is certain, more than ever, doctors and consumers want comfort and visual acuity. We will continue to drive effective customer engagement, and we're investing in the new activation and marketing campaigns to help ECPs rebuild their practice. Given this backdrop, our fundamentals remain strong, and we'll continue to execute on our strategic imperatives. That includes completing our separation, continuing our multiyear transformation of new Alcon, accelerating innovation in R&D and expanding our Vision Care manufacturing capabilities to fuel our product pipeline. With that, I'll turn the call back over to David for some final comments.
Thanks, Tim. In this environment, our talented employees and deep customer relationships give us confidence to steer a steady course back to growth. June and July are providing encouraging data points that we are on the road to recovery, and we expect the markets to return to more normalized levels by the end of this year, or early next. It's important to remember, our fundamentals are strong, and we continue to steadily deliver on our product pipeline that benefits our customers as they rebuild their practices. PanOptix and Vivity brings new advanced lens options for cataract surgery. PRECISION1 and our new DAILIES TOTAL1 and PRECISION1 lenses for astigmatism expand our contact lens portfolio to a broader consumer population. And our new Pataday family of over-the-counter allergy drops is bringing new prescription strength relief for ocular allergies. And these are just a few examples of what we can achieve when we stay focused on our commitment to help people see brilliantly. This commitment is secured by 70 years of experience and our dedicated associates who work every day to sustain Alcon's ability to serve eye care practitioners and their patients in the post pandemic world. And now let's open up for questions.
[Operator Instructions] The first question today comes from Veronika Dubajova of Goldman Sachs.
If I can start with just a little bit of color, David, on sort of how you're thinking about your competitive positioning in contact lenses, it's sort of notable that -- I think this is the second quarter in a row that you're starting to kind of outperform the market a little bit. Just curious kind of your thoughts on, is this just a function of your mix, either in terms of categories or geographies? Or are you starting to see some green shoots from a competitive perspective from PRECISION1? And maybe if you can comment on durability of that as you move into the second half, that would be really helpful. And I will sneakily ask as well, because you were very helpful to give a number on procedure volumes for cataracts, but if we can get a similar kind of metric for the contact lens market in July, that would be super helpful.
Thanks, Veronika. Let me start with the competitive position. I think, look, we've been very pleased with the development of our product line in contact lenses. Obviously, we've been, by design, targeting the fastest-growing sections of the contact lens market. So think about the SiHy market, in particular, being considerably faster growing than the base market of contact lenses. Inside of that, really, when you think about it, the SiHy toric and SiHy multifocal growing even faster yet. So DT1 has benefited from that quite a little bit and so does PRECISION1. It adds for us an accessible lens that has a terrific kind of DT1 quality to it. But at a price point, I think, that is affordable to a lot of folks. So we feel good about the share gains we're making, the progress we're making in new fits and then switch fits around PRECISION1. And I think importantly, going forward with the torics, it puts us in position to really benefit from the growth in that market. We have almost a 0 share. We have a 0 share, I think, in the SiHy torics. We look forward to gaining kind of an appropriate share commensurate going forward with our DT1 and PRECISION1 product torics. So that's kind of exciting. So I think the durability of that is pretty good. I think we see that going forward. On the contact lens piece, visits, I think, is really what we would comment on more than anything else. I think visits have been kind of 80% of normal is what the physicians have been reporting to us. So optometry -- we use the jobs and survey. I think a lot of people do. That study, I think, showed 80% were backfitting lenses. Average patients per day were down 20%. And so again, I think it's not back to normal. And you can see how that works because, of course, they're having to limit flow through the office. They're having to clean the frames after everybody touches them. So it's just -- it's still going to be a while, I think, before we figure out how to get patient flow back. On the contact lens side of that, I mean, I think that's -- contact lenses still remain a high time involved, kind of chair time involved process to do fits. Now I think 96% of docs are reporting they're seeing new patients and they're back fitting lenses. But again, I think we think that's going to continue to be slow and kind of a slow, steady grind back to normal. So again, we think probably normal looks like beginning of next year.
That's helpful, David. And Tim, can I just follow-up, please, on the provisions you took for inventories and accounts receivables, if you could quantify that number, that would be super helpful.
Yes, Veronika, this is Tim. It was about $0.04 between both the credit losses and the inventory provisions.
Next question comes from Matthew Miksic of Crédit Suisse.
So one follow-up on PC-IOL and cataracts and one on vit-ret, if I could. So on PanOptix, really impressive share at these levels. I guess the obvious question is where can we go from here? How do you defend that? How does Vivity play into that strategy? And then as I mentioned one follow-up on vit-ret.
Yes. Matt, we're encouraged by the performance of PanOptix. I think maybe we thought -- we've always thought it would do well. I think the question we always had was at what pace would it get up the curve. And we've obviously been excited about seeing what's going on in the U.S. and in Japan in particular. I think that there's 2 things to think about when you think about the PC-IOLs. One is just what's the wraparound look like, and how much do we have room for growth. And I think remember that exiting fourth quarter last year, we only had a 50 share. So we're going to have growth year-on-year. We're -- probably into the middle of next year, even on U.S. and Japan. And importantly, when you kind of add in China and some of the other markets that we're just launching now, I think we see steady growth from PanOptix through the end of next year for sure. And then really more market growth, I would think, in '22 going forward. But we're clearly going to be pushing on Vivity as we had planned. And what we were trying to do is make sure that we embed PanOptix, get our share to where we're comfortable, that it's maximized with that product and then we'll bring Vivity into the market. We're starting that now in Europe, where we've had a good run with PanOptix. And I think we're seeing some positive additional patients coming into practices that are using AT-IOL. So if you're already an AT-IOL surgeon, there are some patients who you may exclude from giving an AT-IOL because you can't see through a diffractive lens as easily to the retina. So people with retinal disease -- and which there are many, as you get a little bit older, a lot of people have retinal disease, are people with irregular cornea, where you've got a problem, a lot of times, the surgeons will exclude them from AT-IOLs. And we think Vivity provides an alternative here that could add some patients into the market. So we'll see how that takes shape. But we think the performance of the lens is quite good. And I think we were initially trying to figure that part out. The feedback from the markets in Europe and Canada have been terrific. So we're feeling good over the long-term there.
That's helpful. And then on vit-rec. You mentioned, I think, that there may be sort of a slowdown in new procedures as you sort of move through the backlog as some of these clinicians have kind of completed their previously scheduled patients. Is -- maybe if you could talk a little bit about that business and what drives patients in -- to the initial [ visits ], the clinic visits that puts them on schedule for surgery and what you can do to support that? Or just because this is kind of at the acute end of the spectrum of things that need to be done for these patients. What can you do to support or accelerate those clinic visits?
Well, vit-rec tends to be a pretty emerging category. So there's not a ton of stuff that gets delayed, truthfully. Obviously, when we shut down for the month of April and for part of May, depending on where you were in the world, that had -- that's going to have a material effect on the sales. But vit-rec consumables, for example, for us was pretty solid. I mean it was best. It was better than cataract and better than an equipment and better than refractive. So I think we feel good about what was going on there. I think the only real effect on vit-ret was all our time and availability. There's probably a little bit of delay in certain kinds of procedures, but more or less, we feel like that's a pretty good business, moving along for us pretty well. It's really cataracts that are -- you could kind of defer for a while. And I think that's been the concern as to what's the pace at which patients will come back. What we're doing in cataracts is they're rescheduling kind of at 90-day interval. So in April, they probably take the folks from April that were shut down and they moved them 90 days out because that's about the scheduling interval. And there -- and those will fill up the June and July registers for patients. And so that will be the best way we can think about refilling the pipeline going forward. But I think the market for vit-rec looks pretty good.
The next question comes from Jeff Johnson of Baird.
David, just want to follow-up on the cataract comments. One, on -- did I hear any market share this quarter for PanOptix in U.S. and Japan? I know it was 65% last quarter. I'm not sure I heard that. And any additional color you could give on that funnel filling up those cataract surgeries? I hear you on some of the backlog coming out. But what are you hearing about clinic visits, clinic days for these ophthalmologists? Are they filling that funnel back up at this point? How is that going versus the backlog that's been coming out?
Sure. It's a little tricky to do that because we're using survey data, and I'll give you what I know or what's been published, and we can go from there. But let me start with the market shares. We were 70 plus in market share in the U.S. and Japan. We are doing quite well in that metric. I think what you're going to continue to see is launches around the world, including China in the third quarter, which we're excited about as well. So we think PanOptix will continue to do well as [ we kind of move forward through the next year ]. So on the office and the rescheduling piece, I think what we do know is that 98% of surgeons right now are reporting they're open. Their -- 93% have started some -- are reporting kind of normal -- some to normal surgery. 80% of the ASC-based surgeons are basically saying they've got time that's available and probably 30% of the surgeons are saying they've got a greater than 30-day backlog. So I think that's probably the metric that's most useful in thinking about this, which is a lot of -- there's a little bit of a Pareto principle in the surgery with our customers. So 30% are saying they've still got a 30 or greater day of backlog, I think since we've got some room to go in terms of filling this out. But we saw a good June. We saw a pretty solid July. And I suspect that this works its way through the system in the next coming months. But we'll just have to see because it's very difficult to kind of tell and tease out how much is rescheduled versus how much is refilled.
Understood. And then, Tim, maybe you could help us on stocking at the distributor level in the contact lens space. I think you mentioned it in June. Did some of that continue in July? Do you feel like channel inventory is now at kind of a normalized level on the contact lens side? And then we've seen some of your competitors -- one of your competitors in contact lenses take their rebates up quite a bit on the Daily SiHy side. Is that anything you feel like you need to follow and any concerns there on their behavior in the back half of this year from a rebating perspective?
Yes, I'll let David comment on the rebating. As far as the stocking, we've worked our way through most of that. I think there'll be some more coming through in Q3, but that should normalize by the time we get through the end of the year.
And on the rebating, I mean we expected the changes that have occurred in the market. We knew that PRECISION1 was a fairly powerful value proposition going right into the middle part of this market. And we've priced it where we think it's appropriate. So while we have a rebate along with our own product, we feel like it's priced properly.
Next question comes from Steve Willoughby of Cleveland Research.
I just was wondering if you could provide maybe a little bit more color. You've referenced a number of times sort of growth in the month of July. And I was just wondering what specifically you were referring to? Is that growth across the entire business, growth on a year-over-year basis, growth compared to the second quarter? Maybe if you could just provide a little bit more color there? And then I have one follow-up.
Yes, Steve, I would just -- I would call the growth -- it's kind of growth over prior month revenue, is the way to think about that. And we're still working on how do we get to flat to prior year, right? So we were not there yet. And again, we're continuing to move forward with a belief that this normalizes for Surgical kind of late this year. And then with Vision Care probably just comes a little bit slower, a little bit flatter recovery into -- probably drags into next year is our bet.
The only additional color I'd say is we called last quarter that April would be the trough, which it was. There was some modest improvement in May. We really saw some significant improvement in June and then some sort of slight improvement off of that. So that's how I kind of think about that, kind of a big jump in June and then just kind of progressing towards the points that we highlighted towards the end of the year.
Very good. That's helpful. David, my follow-up question was just on surgical equipment. Could you provide any perspective on what you think that could potentially look like over the next couple of quarters as compared to the results here in the second quarter?
Yes. Look, I think you're going to see similar results on equipment. We don't expect the equipment market to really pick up until at least next year. And I think capital budgets right now on most hospitals are slim, if they're there at all. The same thing with even the physician ASC. So I think when you survey ophthalmologists or surgery centers, what you see is people putting off equipment purchases, at least till next year. And that's really kind of what we expect once the capital budgets get redone for next year, we'll work on that. The thing that's important to consider is remember that a significant part of that equipment other bucket is our service revenue. And our service revenue is quite stable because it's a monthly service fee. And that's partly why you see it a little bit better than what you saw with the cataract volumes in general. So volumes, as I said, were off -- almost halved in the quarter or more than halved in the quarter. But equipment kind of hung in there because the service revenue is pretty stable.
The next question comes from David Lewis of Morgan Stanley.
Just a couple of quick questions for me. Maybe just to start, Tim, one for you on margins. And maybe I'll follow-up with David. But Tim, a couple of things. The second quarter had seen different margin dynamics you walked through. Could you sort of help us just qualitatively margins into the back half of the year, both gross and EBIT, any dynamics to think about on the recovery? And then you did talk about in the press release, longer-term margin initiatives. Are those LRP targets still intact? The time line is still intact? And then just a quick follow-up for David.
Yes. So I would say about the second half, again, there's a lot of uncertainty out there. But assuming that the revenues come back as we have -- as we have called -- so again, sort of Surgical gets back to normalized levels towards the end of the year. Vision Care is sort of an early part of next year, we're going to continue to monitor, and I'll say, toggle our expenses and investments towards that revenue. So if those revenues -- if that revenue improves, we're going to continue to invest behind that. So I would think about second half sort of SG&A ramping up in line with that revenue projection. And again, assuming it all plays out, I would expect Q4 could be something similar to Q4 of last year. If you think about kind of that OpEx spend, maybe a little less on the SG&A side, a little bit more on the R&D side as you compare from a year-over-year perspective. As far as long-term guide, again, given the uncertainty, given the fact we pulled our guide for this year, I would just say this, the fundamentals of the business remain very strong. We still play, the markets will recover. We are very well positioned. We continue to invest in all of our strategic initiatives, whether it's the Vision Care lines, whether it's that R&D, innovation, the separation, the transformation. So it's too early to call now, but the thesis, I think, is intact. And as we talked about earlier, we'll be coming out with a Capital Markets Day probably in the first quarter of next year. And we want to see how 2020 settles down, and then we'll give you some more color from there.
Okay. Very helpful. And then, David, just on ocular health dynamics. There's a lot going on there, this particular year. We have some destocking, you talked about last quarter. We had Pataday as well as maybe some solutions demand dynamics. Can you help us understand sort of the second quarter and sort of how you see the ocular health dynamics into the back half of the year?
Yes. I mean, the second quarter was tough to read. I mean, it's -- I think you start with the elements of it that are easily reportable. And I think you see that the whole of the dry eye category, which is a piece of the market, was down 12% as a market. And then contact lens care as a market was down in the low 20s. And so, on a relative performance basis, we were off 14. I think kind of -- if you kind of work that through, I think what you'd probably see is that we're gaining share. We certainly gained share inside the allergy part of the market. And we are gaining share, I think, in the dry eyepiece as well. The contact lens were roughly flat to slightly down in share. So I would -- the thing I'd continue to focus on is share movement because the stocking has gotten complicated. We thought that the stocking would improve a little bit in the second quarter. But in truth, I think they're still struggling to understand how much they want to keep at retail right now, because I think there's a general retail view that they want to keep more than they need. And so I think we're concerned that the demand and inventories may not be perfectly aligned.
The next question comes from Anthony Petrone of Jefferies.
Maybe just on Surgical, one on Surgical, one on contact lenses. I guess as we look at the fourth quarter specifically, if we blend all of Surgical together, is the right way to think about that we should still be modeling year-over-year declines? And then specifically for IOLs, is there potential to actually see that flat by the fourth quarter? Or should we expect that to be also pushed into early next year? And then on contact lenses, just given where J&J has gone with rebates, is there a risk on the share side if the company doesn't respond with a similar rebate? And I'll just have one quick cost question.
On the IOLs, I think the way to think about IOLs is we are gaining significant share at this moment. The markets are going to return to normal largely towards the end of the year. So I have to leave it to you to forecast the markets themselves and then apply shares to them. We've held share really well, and we've actually grown a little bit of share in monofocal which is a positive. Our AT-IOL share is excellent. And our toric shares have always been high. So we feel really good about our position in the IOL market. We're going to have to wait and see what the trajectory of the market is. And frankly, that's the big question that we're kind of all guessing at. But I think the best way to model it is to kind of think about it as roughly back to normal at the end of the year. On the contact lens piece, look, we see the rebate. We don't -- we've been taking share. That rebate's been out there for a while now. We continue to gain share in new fits and switches with PRECISION1. DAILIES TOTAL1 continues to do really well compared to the market. So I think we feel good about our Daily SiHy. And I would just suggest that the sustainability of our program that is giving away significant margin, you have to really think that one through. I'm not convinced that we should respond in any other way than we have, which is with a superior kind of effort at marketing the product that we've got, and we're doing a good job at that.
And then just a quick follow-up would be on J&J litigation on the phaco side, the Lens Sx. And then just a quick comment there. It looks like this is premature, and I would assume that this has no impact on the PanOptix momentum.
Yes. I mean we've seen that product for a while. We know what it is. And so we're always following very closely any new developments in phaco. But as you know, we have a very substantial phaco base in the market. We feel really good about our current offering in constellation. We have a new handpiece called ACTIVE SENTRY, which does some very unique things relative to fluidics and flow, and we're very comfortable, I think, with -- the technology that we have cannot be beat.
Next question comes from Matthew Mishan of KeyBanc.
You gave some good color around the U.S. contact lens space. Not too much from Europe and Asia. What are you seeing in those regions? Is it kind of faster or slower recovery?
Matt, the Asia market for Japan has kind of gone sideways as they kind of bump back into more COVID shut -- not shutdown exactly, but they're struggling, I think, as COVID cases came up. China has always been a pretty small market. So in terms of total impact on us, it doesn't have a ton of impact. And so I would say that part of the world is kind of as expected. The European market, I think, will largely be more dependent on us launching new products. So I would think about -- later this year as we launch DT1 toric and PRECISION1 toric, those are the products that are going to move share in Europe. And I suspect that really has an impact next year. Other than that, I think we see the markets kind of very similar, right? So the market in Europe was down in the 20s. The Asian market was down directionally as well. So not a lot of difference in the market impacts. And underneath that, I think, is the same competitive dynamics, where you've got new product flow coming from us.
Okay. Excellent. And just as a follow-up, you probably had some interesting perspective with your headquarters in Geneva. How should we think about the decline in the U.S. dollar impacting you? Is it a little different than just translation?
Yes. I mean, we hedge the balance sheet, as many companies do. We do not hedge the P&L. And I would just say that in total, a 1% move in the dollar is about $14 million of [ our bank ] and about $40 million of revenue. So that's how I -- if it moved across all the currencies. That's how I think about it.
The next question comes from Larry Biegelsen of Wells Fargo.
One on 2021, I'll try my luck and one on PC-IOLs. So I guess the question on 2021 is, do you think you can get back to the level you expected to be at in 2020 before COVID when you guided to 5% to 6% growth over 2019 and an EPS of $1.95 to $2.05. Is that a good way to think about 2021 today? Or could you potentially do better because of catch-up from postponed procedures? And I have one follow-up.
Larry, this is Tim. I applaud your efforts on the 2021 guide. Listen, I appreciate what you're trying to do. Again, I would just say this, it's -- we're not going to guide 2021. But again, the fundamentals of the business are strong. Assuming that the revenues come back, as we've communicated, call it, late Q4, early Q1, that should give you a Q4 exit rate. That's not too dissimilar to what we saw in Q4 of last year. And then I think you just got to think through what are the growth rates that you want to assume and the productivity and what have you. And I'd kind of take it from there. But again, I appreciate what you're trying to do. We're going to kind of close out the year and then we'll come out with the Capital Markets Day in the early part of next year and give you guys a lot more clarity around 2021 and beyond.
That's helpful. And David, on PC-IOL penetration, in the past, you've been pretty cautious. You've seen about a 50 basis point increase in penetration in the U.S. on an annual basis for many years. And you've been cautious in the past. But do you see that changing, increasing more than you expected, given the strength of PanOptix and a reduction in cataract surgery reimbursement?
Yes, Larry, it's a good question. I wouldn't change my view on this one really. I think we've seen over the years, there's kind of -- the penetration waxes and wanes. I think that you may see some near-term PC-IOL penetration improvement because of the enthusiasm around PanOptix and Vivity. But I would bet you that it settles back after a year or 2. So generally speaking, it's gone up with new products, and then it's kind of followed back to next year. It's really hard to see it right now because the market is disproportionately weighted, right now, to some of the larger practices who got back in business quick, and they tend to be higher PC-IOL users. So be careful about assuming anything from the current market mix because that may not be stable state, likely it's not. And thinking about -- just one other comment to add, Larry, as you think about '21, the way to think about it, I think, and model it is that if we get back to normalized markets kind of towards the end of the year, go back and think about our market share and how that's done. Because I think what I would encourage people to look at is with the steady product flow and the basic market share performance we've got, I think we can know what the shares are pretty well. And then you just have to apply the market to it. And that part, we don't know. So you just have to kind of make an assumption about the market and work your way backwards because our shares are really quite good right now.
The next question comes from Chris Cooley of Stephens Inc.
Maybe just one quick follow-up, there's a question that I have and an additional one as well. When we think about the PC-IOL category, I appreciate the conservatism there on the growth in the category as a whole. But could you maybe help us better frame the Vivity? I mean, obviously, you had very good initial feedback on that product or I think the device. Help us think about how that expands the total opportunity for PC-IOLs versus the current backdrop? And maybe if you could provide some additional color that you saw in those initial trials. If I look at my notes correctly, you pulled forward that launch just ever so slightly. So just -- appreciate any color you can provide there.
Yes. I think we were cautious at the beginning on Vivity, principally because we wanted to see how the surgeons would react to it, and it's always a little bit different when you get it out into wide use. And so we were careful about getting information and trial information out. I think what we've seen now having worked with it for 6 or 8 months in Europe and Canada and some other places is that we're getting very good distance vision. It has a nice landing zone. So we think it's got a benefit to ease of use in terms of calculating and getting to a proper distance uncorrected visual acuity. And then we also get really good intermediate vision. So I think we feel good about those 2 focal points. We're getting pretty good near vision, but the trade-off with this lens is you really get to avoid all of the kind of typical dysphotopsia that the docs complain about. This kind of driving at night, do I see halos and glare, et cetera. So this has monofocal-like characteristics. But if you were comparing it, say, to PanOptix, you don't get as good a near reading vision. You will have to do some other things to try and get there. And I think that, that's probably been the trade-off we were struggling with as to how does it fit with this. And I think what we've heard now, and I think consistently hear from surgeons is that if you're already doing advanced technology lenses, what you're going to find with this lens is it provides an opportunity to bring patients who you otherwise would probably give a monofocal lens because of an irregular cornea shape or because of a prior LASIK or because of retinal disease or some other need to be there. You might exclude these patients because they have high driving-at-night needs and those kinds of things. And that may actually add some patients into this. So that's a cautiously optimistic more patients in to existing surgeons. And so we don't think this is a surgeon expanding idea, but we think it could be a patient expanding idea.
The next question is from Chris Pasquale of Guggenheim.
Two quick questions. One, just on optometry visits getting back to normal by early next year. You also talked about some potential headwinds for daily adoption. There's another element we've been wondering about that's supply depletion and whether that could be slowed by contact lens customers who are now working or going to school from home. Is that a potential headwind you're concerned about just patients not using as many lenses per week? And when do you think we'd actually start to see that in the numbers given reorder rates?
It's hard to tell. We've heard the same thing, but it's really -- right now, utilization is tricky to get on a per patient basis. I think there is intuitive [ at least ] I think some slower wear when people are at home because to a large degree they may wear their glasses at home. I do think there's an increasing desire to wear contact lenses when you're outside the home. And I do think that will pick up. And maybe that offsets, maybe it doesn't. But I don't think we have any real clear line of sight to what the per patient usage is. I'd be giving you opinion as opposed to anything that we could give you concrete, Chris, sorry about that.
No, it's understandable. And then just one quick one on ocular health. I wanted to make sure I understood the comments there, given all the moving pieces. So do you expect to have a headwind on that business in the back half of the year because of inventory drawdowns? Is there any way to quantify how big that might be?
Well, I think there could be a little bit of continued destocking. We had -- as we said last quarter, we had a significant amount of stocking and pantry loading from patients who were worried about getting product . That will draw down over the next few quarters. We've got some of it out in the second quarter. I suspect there's still a little bit more to come. But I think it will be kind of a minor headwind directionally. What we're looking at right now is significant share movement with a Pataday. And so we gained 10 share points in this category of ocular allergy. So as you see the fall season kick up, we're hopeful that the -- that will translate into kind of a natural destocking, if you will.
The next question comes from Bob Hopkins of Bank of America.
So just 2 quick questions. First, on the financial side, just a quick clarification about some of the comments that you made about next year. I guess the way I'd phrase the question is, are there any of the COVID-related expenses or drains on free cash flow that could linger into 2021? Or could 2021 be a fairly clean year from a cost and cash flow perspective, assuming demand comes back?
Yes. I think most of -- the COVID-related expenses to think about going forward is really around that manufacturing absorption rate. So we're going to continue to see some of that pressure to a lesser extent in Q3 and then more in Q4 and then it sort of works its way out. As far as the provisions around inventory, credit losses, again, we look at that on a quarter-by-quarter basis. We feel like we're adequately reserved right now and provided for right now. So I wouldn't anticipate any more coming through. But again, we'll have to monitor that on a quarter-by-quarter basis. From a free cash flow perspective, the big things to really think about is obviously, if you look at just the first half of this year, we're down from an operating income perspective by about $400 million. So that obviously is a good proxy for free cash flow. So we'd expect significant improvement next year. The only other thing to think a little bit about, that's hard to call would be maybe on the receivable front. Again, we're working with customers. We're extending terms. So our collections are a little bit lower than what we would have anticipated. So some of that may work its way through back half of the year or first half of next year.
Okay. That's good color. And then, David, for you, I was wondering if you just -- you've talked a little bit about this already, but kind of how would you characterize how much visibility you have into the back half currently? And I asked the question because you mentioned some survey data, but then you also mentioned that a large portion of current volumes are just rescheduled cases. So how would you characterize your visibility into the back half of this year?
I think we're still really careful about it because candidly it's hard to tell how much this has been -- in Surgical, how much has been rescheduled versus how much is refilling. We have a pretty good visibility week-to-week from our sales force on what demand looks like directionally. We just don't know how much of that, again, is between rescheduled patients that were supposed to have surgery in April or May. They are now having surgery in kind of June and July. But again, I think we have a directional view that most of this gets sorted out in this quarter. That it should look like fourth quarter, gets a little bit more normal, where demand and revenue kind of align with each other.But again, we're projecting there, and we don't really know. So directionally, visibility is pretty low to what we actually have on the books.
In the interest of time, this does conclude our question-and-answer session today. The conference has now also concluded. Thank you for attending today's presentation. You may now disconnect.