Alcon AG
SIX:ALC
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Alcon AG
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Good day, and welcome to Alcon's Third 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, Senior Vice President of Investor Relations and Communications. Please go ahead.
Welcome to Alcon's third quarter earnings conference call. Yesterday, we issued a press release and interim financial report and posted a supplemental slide presentation on our website to enhance today's call. You can find all of these documents in the Investor Relations section of our 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 online with the Securities and Exchange Commission and available on the SEC's 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 alternatives to, the operating performance measures as prescribed per IFRS. Please review the financial tables provided in the press release and 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 to everyone. For today's call, I'll start by recapping our third quarter performance, discuss current market dynamics and our strategic priorities. Tim will discuss our third quarter results and provide more color on our outlook for recovery. Then I'll wrap up my closing comments and open the call up for Q&A.Our third quarter results demonstrate a solid recovery from the second quarter with sales of $1.8 billion, just 1% shy of last year, core margin of 15.3% and core EPS of $0.39. This significant rebound is a result of both improving market conditions and strong execution, which enabled us to outperform the market, led by double-digit sales growth in the United States. The strong U.S. performance was offset by our international business, which had a mixed pace of recovery in various regions. Our results this quarter demonstrate the resilience of our people and our ability to execute on our priorities in the current environment. First, we remain focused on our associates. During the course of this pandemic, we've kept our associates fully employed while maintaining continuous operations. About half our employees are in production, and we've worked through the pandemic in order to ensure doctors and patients can receive the eye care products they need. We appreciate their commitment and dedication. We've advanced our separation activities on schedule, despite having most of our office-based teams working from home. We've accelerated our IT migration carve-out and exited more than 90% of our transition service agreements. Recent investments in our global planning and forecasting platform and the successful commercial implementation of SAP have increased real time visibility to our customers' needs. At this point, we expect to exit all our TSAs with Novartis at the end of April 2021. Our transformation program continues on schedule as we stand up our global service centers, simplify processes and streamline work in our core support functions. We're building the right mindset around continuous improvement, which is critical to developing organizational efficiency. We're also becoming a more agile company. In response to COVID's impact on sales, we reduced costs substantially and pivoted to digital technology to augment our customer engagement. In the third quarter, our sales force quickly implemented digital marketing campaigns and virtual training programs, which drove tremendous word-of-mouth and share voice in recent industry congresses. This is an important capability that enables us to stay connected with our customers in these challenging times. We continued to invest in new contact lens manufacturing lines to support product launches such as PRECISION1, and more importantly, increase our presence in the growing SiHy toric market. And we continue to advance our R&D portfolio of products that address significant customer needs. We look forward to sharing more about our pipeline at our virtual investor update early next year.Now turning to innovation. We're building excitement in the market with our new product launches, which is evidenced by strong growth and market share gains. PanOptix, our trifocal IOL for cataract surgery continues to perform extremely well in some of the newly launched countries such as the U.S. and Japan, with Alcon now accounting for over 75% share of the U.S. PC-IOL market. More recently, PanOptix was launched in a controlled manner in China. Initial feedback by both surgeons and patients has been very positive, and we're gaining share with target private hospital groups. We plan to extend distribution to a broad number of hospitals during the fourth quarter. Vivity, the world's first nondiffractive extended depth of focus LEDs, has received favorable feedback from doctors that participated in our pilot program in Europe. Vivity's proved to be a great lens for all patients, and surgeons are excited to use the lens for patients who may be concerned about visual disturbances. Prior to Vivity, these patients would not have been ideal candidates for advanced-technology IOLs. Customer satisfaction has been high, and we are in the midst of rolling out Vivity to major markets across Europe. Sales of PRECISION1, our newest daily SiHy contact lens, have nearly doubled from the sales levels earlier this year, driven by increased adoption and conversion. Through strong commercial execution, Alcon now has the leading share in new and switch fits in the daily sphere category. And PRECISION1 is outperforming the first year of our successful DAILIES TOTAL1 launch. We've also introduced PRECISION1 for astigmatism to select U.S. accounts last month. Early feedback has been superb, and we're now prioritizing the launch of PRECISION1 for astigmatism in the U.S. and Europe early next year. In fact, we plan to launch both precision sphere and toric in Europe within the same quarter, which is a first for Alcon and the industry. We believe launching both modalities concurrently significantly strengthens the impact of our PRECISION1 brand family. Combined with DAILIES TOTAL1 sphere and multifocal as our premium offering, we'll have a more comprehensive offering of lenses for both the premium segment and the middle market. Moving forward, we've made the decision to focus our resources on those brands. We will make a future call on the launch timing of DAILIES TOTAL1 toric once we have PRECISION1 sphere and toric fully established in our key geographies.Lastly, Pataday continues to reinforce our leadership position in the U.S. over-the-counter ocular allergy market, and we've recently launched Systane Ultra MultiDose Preservative Free or MDPF in Germany, our first entry into the preservative-free market in Europe. As I've said before, Systane Ultra MultiDose Preservative Free will open the doors to exciting share opportunities that build on Alcon's global dry eye leadership.Turning to our markets. We saw strong improvements in both Surgical and Vision Care during the third quarter. The trend for global cataract procedures rebounded from a 50% plus decline in the second quarter to an approximate 15% decline in the third quarter. In Vision Care, the contact lens market declined 5% in the third quarter after declining a little over 20% in Q2. While the daily disposal market declined around 4%, we were the leading share gainer. PRECISION1 and DT1 combined contributed to share gains in both the global sphere and multifocal category, which were partly offset by declines in toric. As I mentioned earlier, we're excited to be launching PRECISION1 for astigmatism in the U.S. and other key markets in early '21, which allows us to compete in the daily SiHy toric market.Over the past 6 months, we've conducted various surveys of our doctors and patients across several markets, and I want to share just a couple of highlights. First, more than 70% of our respondents indicated a willingness to pay a premium for a better contact lens. Unlike glasses, contact lenses do not fog up when one's wearing a facial mask. We believe that consumers' emphasis on health and wellness will drive demand for better lens performance. And as a result, we believe PRECISION1 and DAILIES TOTAL1 are well positioned for long-term growth. Second, 80% of Americans are spending more time in front of screens during the pandemic and 45% are reporting dry eye because of this increased screen time. The growing awareness of eye health and dry eye will give consumers a reason to visit their eye care professionals and seek out our ocular health products, giving our SYSTANE brand family a steady growth market over time. And third, on the surgical side, monthly cataract referrals in the U.S. has returned to close to 70% of where they were prior to the pandemic. That's a very positive sign that surgeons are sufficiently refilling their pipeline and not just performing surgery on prior patients. That have been rescheduled for their procedure. So going forward, we're pleased with the strength of our underlying performance. As COVID cases tick up in some markets and safety measures are implemented, other markets continue to bounce back. So while it's not entirely clear where the market trajectory will be, we're confident in our competitive position.With that, let me turn it over to Tim who will take you through some of the financial highlights and provide color on our outlook.
Thank you, David. Our performance this quarter illustrates the durability of our end markets and the ability of our new product launches to drive our top line growth and market share. As a result, we saw a strong rebound in sales volumes and core margin from the depressed second quarter levels. Our top line results were robust with sales of $1.8 billion in the third quarter, a significant improvement from the 34% decline in the second quarter. Year-over-year, third quarter sales were flat, excluding the impact on demand related to the Japanese consumption tax last year. Year-to-date, sales were $4.8 billion, 11% below the same period last year. Surgical sales of $996 million were down 2% versus prior year in the third quarter, demonstrating a strong recovery from the 42% decline in Q2. This reflects favorable performance of several product launches as well as the continued recovery of surgical procedures as hospitals and private clinics increase their patient flow. On a year-to-date basis, surgical sales were down 15%. Implantable sales were $290 million, up 2% versus the prior year, driven by continued adoption of PanOptix. This was offset by monofocals sales, which performed in line with market surgical procedures. On a year-to-date basis, implantable sales were down 10%. Consumable sales were $526 million, down 8% versus prior year, reflecting the continued impact of COVID, but slightly better performance than the market. On a year-to-date basis, consumable sales were down 20%. Sales from the equipment and other category were $180 million, up 13% versus prior year. About half of the increase was due to strong demand for innovation in surgical diagnostics and phaco accessories. And the other half was due to a onetime benefit, which will not repeat in future quarters. On a year-to-date basis, equipment and other sales were down 8%.Turning to Vision Care. Third quarter sales were flat against prior year, rebounding solidly from the 25% decline in the second quarter. Momentum of our new product launches helped Vision Care sales approach Q1 levels prior to the impact of COVID. On a year-to-date basis, sales are 5% lower than the same period last year. Contact lens sales were $517 million, down slightly versus last year, with healthy demand for PRECISION1, offset by lower sales from certain legacy products. We launched an exciting marketing campaign to drive awareness of PRECISION1, and we're encouraged to see gains in new and switch fits this quarter. Contact lens sales in North America increased in the double digits led by PRECISION1 where sales were nearly double their pre-COVID levels. Year-to-date, contact lens sales were down 10%. Ocular health sales were $305 million, up 1% versus prior year. Demand for dry eye products, led by SYSTANE and momentum of Pataday's OTC launch in the U.S., drove category sales in the positive territory, despite the decline in the artificial tiers, contact lens care and Q1 stocking activity. Year-to-date, sales were up 2%, driven by the strong performance of our dry eye and ocular allergy portfolio.Now moving down the income statement. Third quarter core gross margin was 61.4%, down 240 basis points on a year-over-year basis, primarily driven by inventory provisions and unfavorable manufacturing absorption. Core operating margin was 15.3% this quarter, down 210 basis points from last year and down 170 basis points, excluding foreign exchange. We continue to benefit from disciplined cost management, which partly offset lower gross margin. Although R&D spending was below last year due to timing of external project spend, our long-term innovation pipeline remains intact, and we intend to ramp up R&D spending in the fourth quarter. Third quarter interest expense was $32 million, down slightly from $35 million last year. The increased interest from higher debt levels was more than offset by favorable interest rates in the current period as we continue to pay down high interest local debt. The core effective tax rate was 19.6% in the quarter compared to 18.2% last year. The increase in core tax rate was driven by the mix of pretax income, Swiss tax reform and the overall impact of COVID on profitability. Year-to-date, our core effective tax rate was 19.9%. Core diluted earnings per share were $0.39, down from $0.46 last year. This includes approximately $0.02 per share of COVID-related charges. On a year-to-date basis, core diluted earnings per share were $0.63, down from $1.43 last year with approximately $0.19 for COVID-related charges. We ended the quarter with a strong cash position of $1.4 billion in cash and cash equivalents and $1 billion available in our revolving credit facility. Free cash flow for the 9 months was $115 million compared to $260 million last year, driven by the impact of COVID on operating results, partially offset by lower CapEx spending. We are encouraged to see strong collections during the quarter. However, we still expect full year free cash flow levels to remain below last year.Separation costs this quarter were $48 million and $181 million year-to-date. Like to date, we have incurred $418 million for separation expenses. As David mentioned in his opening remarks, we have made significant progress with our separation activities and look forward to substantially completing the process over the next 6 months, which will free up resources and allow greater focus on our growth initiatives. Transformation costs this quarter were $14 million and $34 million year-to-date. Life-to-date transformation costs were $86 million. As you can see, we have made significant progress on our strategic initiatives in a challenging environment. Our separation, transformation and new contact lens manufacturing capability create a strong foundation that will reinforce Alcon's leadership position and should drive market share growth for years to come. Now moving to our outlook for the remainder of 2020. Although we don't think it would be prudent to give guidance due to the macro uncertainty around COVID, we do want to give you some color to help you think about Q4. If you recall, during our second quarter earnings call, we confirmed that April revenue was the trough and that we saw a significant improvement in June, with continued growth in July. We also stated that we expected markets to return to more normalized levels by the end of this year or early next year. Through the end of the third quarter, our forecast for the COVID recovery has played out as expected. We continued to see sequential improvement as a result of market recovery, but this was also aided by our strong execution, which enabled us to outperform the market. However, in the past several weeks, the increases in COVID cases have made it more difficult to predict market recovery, particularly in Europe. Markets in some countries such as the U.S. and China continue to recover, and we could see those markets returning to normalized levels by year-end. As a result, given where we are today, we think we'll continue to see sequential revenue growth from Q3 to Q4. From a cost perspective, gross margins will continue to be burdened by unfavorable manufacturing absorption. We will also continue to invest behind revenue growth in our growing markets and accelerate our R&D spend as we get caught up with projects in the fourth quarter. All of this will put some pressure on earnings versus the fourth quarter of 2019. In summary, we're pleased with our strong execution and the competitiveness of our product portfolio, which has enabled us to outperform the market. Our share gains position us well to accelerate future top line growth with the macro recovery and improve profitability as we increasingly shift towards advanced IOLs and optimize our new contact lens manufacturing platform.With that, I'll turn the call back over to David for some final comments.
Thanks, Tim. In closing, I really want to thank our associates who have worked together tirelessly on behalf of our patients and customers. Our commitment to help people see brilliantly has always guided us, but all the more in this year. Our sense of purpose is an important source of motivation for many here.In summary, the rapid recovery we've seen over the past 5 months reinforces the attractiveness of our markets and our strong fundamentals. The organization has been extremely resilient in executing on our priorities in the current environment and responding to customer and patient needs. We're nearing completion of our separation. We're on schedule with our transformation program, and we continue to advance installation and optimization of our new contact lens manufacturing lines. Our new products are gaining share in the market, and we have a robust pipeline ready to launch next year. We believe all of this positions us well to execute on our growth strategy and create value for shareholders.And with that, let me open it up for questions.
[Operator Instructions] The first question today will come from Anthony Petrone with Jefferies.
Congratulations on a great quarter here. Dave, maybe I'll start with a couple of high level on the cataract market and in the contact lens market and a couple of follow-ups for Tim. So versus just market from a market view standpoint, maybe your comments on cataract market volumes. It seems like potentially they're settling at a new normal trending down 15%. Would you describe that as a new normal due to COVID restrictions? Or do you think there's still some demand that's depressed here due to resurgent cases? And on the contact lens side, maybe a little bit of detail on new fit starts, specifically from the back-to-school season. How much did that benefit and your views on the adult market, where that sits today? And I'll have 2 follow-ups.
Anthony, thanks for the question. Let me start with the surgical market. We see the market kind of on track to where we had talked about it early in the year. I think we expected that we'd get these markets back to normal by the end of the year. And so if you were kind of drawing a trajectory, we said April would be kind of the bottom, and we've kind of improved through the third quarter, and that's really what we did see. Surgical market, we think, was probably 85% back through the third quarter. And I think on the trend that it's on, we would have expected it and continue to expect it to be back kind of towards the end of this year, early next. Obviously, that depends on what happens with COVID in the next coming months. But I think we're kind of through the third quarter, consistent with what we had originally thought. Very different markets, though, internationally and to the U.S. So U.S., I think, much closer to 95% of prior year volume and international probably more like 80%. So a little bit different than we probably saw it originally from a geographic perspective, but importantly, kind of moving back towards what we, in total, had hoped to see, which is kind of end of the year roughly getting back to last year's volumes. On the Vision Care side, we're probably -- again, we're kind of 90% back through the third quarter. Again, not back fully on either business. But I think a similar situation where the U.S. has done a lot better than we kind of expected at 95% probably of what we had seen prior year. In fact, the U.S. contact lens business on GfK grew in the third quarter, which was a little bit of a surprise to us. I think the international business, again, probably 85% of what we'd expected. So when you kind of work that through, both markets seemed to be headed in the direction that we had hoped for. We just have, obviously, some uncertainty right now around the European markets. And obviously, with the COVID cases up in the U.S. in many places, we just have to see how that plays out. But directionally, our underlying performance was really what we were focused on this quarter, which was share movements in the product launches, which is against those markets, done pretty well.
That's helpful. And a quick follow-up here would be, Tim, just in -- I'm intrigued by your manufacturing comments. In baseball terminology, can you just give us a sense of what inning we're in, in terms of the manufacturing build? What percent of the lens capacity is now actually coming off the new lines? And how does that play to the margin targets that are baked in the [indiscernible]?
Yes. I mean the margin pressure that we're seeing right now is really driven by the absorption challenges we have due to the declined demand. So that's roughly half the pressure that we're seeing. And then the other piece, to your point, we do have -- PRECISION1 is ahead of schedule. So that's putting a little bit of pressure on those margins as well. But again, this whole plan when we talked about our Capital Markets Day, the margin improvement really accelerates in sort of the '22, '23 time frame is how we positioned it. And we still think that, that will be the case. We just have to get through these absorption challenges which we should be through. We'll have some more pressure next quarter, but we should be through most of that as we get into 2021.
Our next question today will come from Daniel Buchta of ZKB.
Two questions from my side, please. The first one on optics. I mean, obviously, a great performance that you were able to show again. If I look at your main competitor, Johnson & Johnson, I mean, they are clearly losing market share compared to you, but they are about to launch Symphony Plus to my view and also they have synergy in their pipeline. Can you say a little bit more about how you see PanOptix compared to these lenses? And would you expect your current market position to remain unchanged once these lenses come to the market? And then the second one on Vivity. I mean it's good to hear that you are launching it now in Europe. So it seems that your pilot launch did quite well. But what I have still difficulties to understand, given the fact that it is nondiffractive, it has technically, in my view, just advantages over traditional lenses. What speaks against applying Vivity compared to other multifocal or toric lenses? So for me, that sounds like quite an interesting opportunity to gain significant market share.
Dan, let me start with the PanOptix piece. We're pleased with what PanOptix is doing in the U.S., Japan, pretty much everywhere, it's been launched. And we compete with J&J all over the world. So I think we've seen most of the products that they have in one market or another prior to them getting into the U.S. or some of the markets that are not quite in yet. So we feel like PanOptix will do well in that circumstance. Remember that PanOptix is a trifocal and that some of the other lenses are not trifocal. So in this case, Symphony and the Synergy, probably not a trifocal, they're kind of a different design. We'll see how that bears out. I think in the European experience, we've been very comfortable with how we compete. On the Vivity piece, we are excited about Vivity. And I think -- I would just say that's kind of increasingly comfortable with what it may do out there for us. What we see, which is unique in this nondiffractive lens is that it doesn't have the rings that many of our competitive -- the diffractive rings that many of our competitive lenses have, which scatter light and create halos and glare. And so through this kind of unique x-wave technology that we have, that's patented in our group, here, we've come up with this way of bending light or stretching light, which gives us a very good intermediate distance and importantly, maybe half of the patients are seeing well in near vision. So you don't get something for nothing on this one. If you really want sharp near vision, PanOptix is going to be your better choice because consistently, PanOptix can give you that 3 focal point distances. But you do have to put up with a little bit of halos and glare. And if you're not comfortable with that or the patient in the doctor's mind is going to not tolerate that, Vivity is a terrific choice because it's given a great distance, great intermediate and really pretty good near vision. So we've been really impressed, I think, the positioning of this as an alternative to detractive lenses, which is kind of the majority of what's out there right now.
Our next question today will come from James Gordon of JPMorgan.
Firstly, just on the top line. I think you mentioned things have been a bit tougher in the last few weeks, particularly in Europe. Can you elaborate on what you've actually seen in October and so far in November in Europe or international? Has there actually been any deterioration versus where you were when you finished Q3? And also just what are the surgical warehousing benefit in Q3? Are you seeing any unwind at all there in Q4? And just finally on the top line, inventory moves, I think Slide 5 refers to Q2, Q3 inventory moves. Was there any benefit from stocking on contracts in this quarter? Or is it a totally clean number?
Let's see. On the sales trends in Europe, we really haven't seen a lot of change yet. We're not really commenting on the October or kind of first couple of weeks of November in this particular call. But I will say that we are concerned about it. We're watching it carefully. And I don't know whether it's going to have a big impact or a small impact. I think this shutdown or, if you will, say this impact, I should say, is different than some of the other ones. And we don't really expect all of the ORs to shut down like they did in April. And so that will have an impact, I think, differently than what we saw before. But again, we really just don't know what people are actually going to do. On the surgical stocking, we really didn't see any stocking benefit change in inventory kind of quarter-to-quarter on surgical. We did see some on contact lens. And I think if you think that's true against our growth, we probably had a 5% restocking in the growth number for contact lenses. Remember that we had a pretty big destocking in the second quarter, and then we had a little bit of build coming back through the third quarter.
Our next question will come from Bob Hopkins from Bank of America.
Just 2 this morning. First, just wondering if you could talk about the performance in the consumables line. You mentioned that you feel like you're doing a little bit better than the market. Can you just give us a little bit of sense as to why that market is a little bit weaker than some of the others? And how you're thinking about the prospects for return to normalization there?
Yes, Bob, look, the consumables market tracks the procedures market. And I think the way to think about that is, we think procedures were probably all in for the world, probably about 85% of what they were last year and particularly weaker in international than the United States. The consumables number will benefit a little bit from value and mix to the United States. So read that as some of the benefit that we're seeing. But importantly, as well, the consumables will line up to the procedural market. So if the market is off 15%, if you will, globally, roughly on volume, we did an 8% consumables number. That's pretty decent. I think share is slightly up. I don't -- we wouldn't read much into share on the consumables side. Our phaco packs look pretty good. OVDs look pretty good. But I think we're roughly where we've been most of the year.
Okay. That's helpful. And then the second question is really just on your comments about the U.S. market overall. Frankly, they sound a little more optimistic maybe than what we're seeing from others, given the current spread that's going on, and we obviously haven't shut down like some European countries have. But I just wonder if you could flesh it out a little bit more your optimism on the U.S. and just kind of thoughts there would be appreciated.
Bob, I'm not sure I'm optimistic per se. I think what I'm watching, I think, is that the appetite for shutting down ORs is different. I mean when we were back in April, things just went to a complete stop. And that was partly because we didn't understand, didn't know. And I do think that there'll be a more thoughtful approach to whatever happens going forward. Our view has been that this, absent a second wave, the markets would return to normal kind of by the end of the year. It looks like we're going to see some of this, but we just don't know what it's going to do to volume. So it doesn't look like we're seeing lots of offices shut down in the United States. It doesn't look like we're seeing OR shutdown in the United States yet. But again, we don't really expect that to happen either. So again, even in Europe, I think we're seeing a number of OR stay open in major countries. We just -- again, it's going to be a little bit more about what foot traffic looks like because that's likely to be slower and what OR throughput looks like. And again, I think that's relatively well-managed at this point. So I think people are getting some kind of, I don't want to say use to it. But again, I think there's a little bit different emotion around this one than where we were in April and May.
Our next question will come from Larry Biegelsen of Wells Fargo.
One on the recovery, one big picture question. So Tim, I heard the comments on Q4. Do you think it'll show year-over-year growth in Q4? And on 2021, any color on how we should think about that? You see consensus for sales. It was modeling low single digits over 2019, same for EPS. I mean, in 2021, if you get back to normal by the end of 2020, do you think you can kind of achieve your original 2020 guidance in 2021? And I have one follow-up.
So I think on Q4, it's a little tricky right now given the spike in COVID cases, particularly in Europe. But as we said, we would expect to see some sequential growth Q3 to Q4. So I would just take whatever your view is on the markets and then grow that off of that Q3 base. From a cost perspective, I would say a couple of things. I think the profile in Q4 of '20 will be similar to the profile of Q4 in '19 with a couple of exceptions. I mean, one, we're going to continue to have some absorption pressure in Q4. I would ballpark that at around $20 million, so I would think about that. And then I think on the R&D side, we are going to have a bit of a catch-up, as I said in the prepared remarks. We were a little bit low in Q2 and Q3. Again, we want to keep our innovation roadmap intact. So I would expect to see some accelerated R&D spend as you compare that with Q4 of last year. And then on the SG&A front, I would just grow that in line with whatever you're growing your revenue by. So that's how I sort of think about the Q4 and the profile. As far as 2021, obviously, we're going to give you some more color on the Q4 call. But again, a little tricky, given the spike. But from what we see today, we'd expect that sequential growth that we talked about. And then as you think about '21, we should be able to grow off of that, right? If you think about the new launches, we have P1 sphere coming out, we've got [indiscernible] coming out. You have Vivity. We think we've got more room in PanOptix. We've got Pataday Extra Strength. So there's a lot of momentum there from a revenue perspective. So we should be able to grow off of that Q4 base, kind of working my way down the P&L a little bit. If you look at R&D, we talked at Capital Markets Day, we'd be in that 7% to 9% range. We're still committed to the innovation pipeline. We're going to continue to invest behind that, probably be at the upper end of that range. On the SG&A side, again, we're going to continue to invest behind the revenue. So it should be sort of similar ratios, if you will, on the cost side. And again, we're going to toggle to that revenue number, just like we did this year. So if revenue is coming in hot, we're going to continue to invest behind that. So just keep that in mind on the SG&A front. And if we see pressure because COVID spikes, we're going to be very disciplined on the cost management side, just as we did in Q2 and Q3. So that's sort of how I think about the 2020. The only other thing I'd say for housekeeping, we had some noise below the line last year. If you look at interest expense and OFI, I'd probably have that in the 170, 180-ish range, given the incremental debt and some of the lost interest income. So that's how I think about '21. But we'll give you more color as we get to the Q4 earnings call.
That's very helpful. And just for my follow-up, one big picture question. David, I know at the time of the spin, you were very focused on devices. Have your thoughts changed on being more broadly based in ophthalmology and adding more pharma? I know you already have some pharma, especially over-the-counter and within surgical. But has your thinking evolved on pharma since the spin?
Yes, Larry, and we continue to focus on the device business because it's obviously where we've got a lot of good product flow. It's been our approach from the beginning. But as you know, we are in the pharma business, and we will continue to be in it for a good bit of time. So I'd never say never. But I think what we're really focused on right now is trying to develop the business we're in. And then if something came along and it was a good opportunity for us, it was unpassable or something, we'd look at it. And we continue to -- we get approached on these things all the time. We'll have to see over time whether or not there's something that's appropriate.
Our next question today will come from Matthew Mishan of KeyBanc.
David, I'm just trying to reconcile the survey data with actual results. Last quarter, you were talking about office, it was down like 20%, but contact lens sales were flat to up. And in this quarter, you're talking about referrals at 70% of pre-COVID levels for cataracts, and that would imply like a slowdown from 3Q. How should we think about the survey data versus the actual results?
It's a little tricky because they are kind of apples and oranges, but let me just -- let me do them one business at a time. On the Surgical business, the backlog is back up to about 80% of prior year. So remember, most -- there's a limited number of surgeons and an excess number of surgeries. So historically, most surgeons have had a kind of a couple of week backlog on average. Some people are bigger, some people none at all. But if we're seeing backlog up to 80% of what it was prior year, which is the survey data, we're refilling the pipeline at a pretty decent clip. And that means most people have got some backlog, which means they're doing surgery kind of at what we would expect. And that jives with our view of kind of 95% of prior -- in the U.S. surgical business. So let me be clear about where those survey data are coming from because that's really U.S. data. And referrals coming in at 70% priority. Again, that's a bit of an important number just because that really says optometry is back in business and referring patients in. There's always part of this business coming from general practitioner or optometrist referring a patient to a surgeon. But there also are -- there's the normal flow of eye exams coming through the ophthalmology group. And again, that is another part of the source of business. So I would just say that the Surgical business ties out a little bit easier to me than the Vision Care business does. On the Vision Care business, the reason I say that is just because in the U.S. Jobson was reporting kind of 90% pre-pandemic revenue and fits for contact lens wearers. And so as we looked at that, we thought, well, that's probably where it ought to be. Although I will say that the data, as I said in the earlier remarks, the U.S. contact lens, all lenses, GfK data is up 6%. So that disconnect a little bit for us is hard to explain. I will say that I think there's some stocking in there. I think there's some real consumption that's kind of in that, I would just say, 95%, we're probably mostly back in the U.S. So I would again say kind of 95% back through the third quarter. But there's got to be some noise in that data. So I'm kind of, of the mind that, that's the best way to explain it right now. But directionally, I think the way to think about our movement against that is, look, we're holding share. We're doing well with our new products. And the market is, I would just say, solid right now. Internationally, more complicated answer. And again, we don't have really good data internationally on anything other than the consumption, and the consumption international is probably only 85% of what it ought to be.
Okay. And just as a follow-up to that, just any changes you're seeing in contact lens ordering patterns from customers that could potentially explain some of the disconnects?
Nothing other than what I said earlier, which was that we did see a destocking. As demand falls, normally, all of our major chains and even the offices would just want an order to back up inventory. So you'll see some natural inventory contraction. And obviously, when revenue picks up and sales pick up, you will naturally refill inventory to support that. So you're going to see some inventory pickup in the third quarter, which we assessed at roughly 5% of the 15% growth that we saw in contact lenses.
Our next question is from Veronika Dubajova of Goldman Sachs.
I want to start it off with contact lenses, please. David, I'd just love to unpack a little bit the comments that you had made around the momentum that you're seeing among new wearers and among wearer switches, if you can give us a little bit of color exactly what that market share data is looking like. And then, I guess, I mean, if I look at the progression of growth year-to-date, you have continuously done better than peers as we've moved through the quarters. Do you think this is any normal? Or now that we're moving into Q4 and into next year and you have [indiscernible] coming through and the global launch, do you see scope for that relative outperformance for you versus the market to widen further? And then I have a follow-up after that.
Veronika, just on the aggregate share, look, we were pleased with the September share of new and fits. So we measure through GfK, what is, in essence, each manufacturer's share of new and switch fits. And if you look at daily disposable clear sphere, we did quite well. We've been picking up a little bit of share here. It's obviously an aggregated share that I'm describing. So that's P1, DT1 and our DAILIES AquaComfort Plus product. And there's some mix shifts in there. So we're seeing some real pickup in P1. And obviously, we've got some pressure and competitive pressure on DAILIES TOTAL1 and DAILIES AquaComfort Plus. So -- but the aggregate is moving in the direction we wanted to see it. So I think that feels good to us. In overall picture, I think what we've said quite consistently is this year was a year where we needed to get back to market growth. And I think we've kind of done that roughly in this zone. So I don't know that I would start declaring victory on anything right now. I think what we believe is we're getting back to where we wanted to be, which is gaining share in a place where we're kind of consistent with market growth. And now I think the opportunity next year is to kind of grow faster than the market. So that will be the way we'll be thinking about how to move the contact lens share business. And on the go-forward, look, I think the market is a big part of what happens. I think given where we have been so far this year, my hope is as the markets continue to develop like they have, they've been remarkably robust, I think, in Vision Care. I think we thought originally, there might be more pressure on it. I think we've been pleased to see that they kind of hung in there. In fact, they never went quite as deep as we had anticipated, and they've come back a little bit more steady than we anticipated, I would say, principally in the United States. But as the international rebounds, we're in a good position, assuming that there isn't a real change in the dynamic of selling to get PRECISION1 and PRECISION1 toric out first of the year in Europe. And I think that bodes well for us because, again, as I said, a number of times, the toric business is really where we're losing our share. We've consistently lost share in toric, and that holds us back quite a little bit. So getting P1 toric out last month in the United States and based on what we've seen with it, we think we've got a good chance to kind of get back some of the share we've lost there and build back our overall share. So that plus the European performance gives us, I think, a nice headroom for contact lens growth next year.
That's very helpful. And then I was going to ask you a little bit about sort of vaccine and now that we have had some good news. How you guys are thinking about the pent-up demand that is out there? You've alluded to backlog and kind of new demand generation. But I'm just curious if you have a view on -- as you look at the market this year, the procedure volumes and the new demand generation that you're seeing, should we have a successful vaccine and then we were vaccinated by the summer of next year. What do you think the pent-up demand could be that could materialize? And I guess, how much capacity there is in the system to accommodate it? And I'll jump back into the queue after that.
Veronika, you've asked 2 really good questions, one on capacity and one on the vaccine. The vaccine itself, look, I mean, I think the best way to think about the Surgical business is to draw a long line. And think about it in a 36 month or even longer frame because cataracts are not going away, and people are going to continue to get them, they're going to continue to need to take them out. And really, the way to think about this market, in my view, is kind of this has been a 3%, 4%, 5% growth, let's just call it 4% compounded growth over a long stretch. So I don't know what the timing of this thing is to bring back all that demand. I don't know that it comes back in a bolus. I probably think it doesn't. Because the second part of your question, which is important is, what kind of capacity do we have in the systems to handle that pent-up demand. And I do think that it will come back relatively slowly, relatively steadily, and you might just see a slightly better-than-normal market growth in a couple of years or not -- for a couple of years, I should say. And that could be really what happens. Again, I won't predict when the markets really get back to 100%. But I do think that over the long haul, we're in really fundamentally sound markets.
[Operator Instructions] Our next question today is from David Lewis of Morgan Stanley.
Just a couple for me. David, just want to circle back on capital trends in the quarter. That number, even adjusted for the onetime benefit was, frankly, probably in line with our pre-COVID estimate for capital in the quarter. And I appreciate there probably was a catch-up from the second quarter. But can you just kind of help us understand what you're seeing from a capital environment? I think that number was dramatically stronger than most investors were thinking about. But what does it mean for the outlook in that business? And then a quick follow-up for Tim.
Yes, David, the equipment was a little bit stronger than I think we expected. Just remember a couple of things in the equipment business we always like to point out. The service business is a very steady part of our equipment picture. And so our service revenue was slightly up and continues to be a solid performer for us kind of year in and year out. Recall also that procedural eye drops are in there, and that was slightly up. Procedural eye drops are going to really mirror a bounce back in procedure volumes. And as you see that procedure volume bounce back, there's going to be some backfill in inventory. So you're going to see a little bit of that as a consequence of the bounce back on surgical procedures on eye drops. And then really, what was, I think, positive for us, and maybe people haven't really thought through as much was that we have, year-on-year, some new equipment. So it's kind of white space year-on-year. And if you think about our biometer, we really launched that in the U.S. this year. We've done pretty well with ARGOS, which is the name of the biometer, and that had a good run through the third quarter. So I think we felt good about the biometry position that we have. And then we have a very good upgraded hand piece that's a little bit lower-priced capital, but it really has an ability to improve the performance of the Centurion. So the active century hand piece that we have did quite well in the quarter. And then our underlying equipment was solid, but not stellar. So I would just say that we've been typically -- and I still think kind of it's a tough thing to start saying, the equipment is going to bounce back. I just don't think it will, but I'll agree with you that it was a surprise a little bit to us in the quarter to see people buying -- continuing to buy equipment in here.
Okay. Very helpful color, David. And then Tim, just thinking about -- I know you were asked about margins for next year and industry consensus has margins kind of flattish as '21 versus '19, which looks a little conservative, but you gave some decent color to get there. But the question I wanted to ask you additionally is just free cash. This is a dramatically better free cash quarter. And you started out talking about sort of transformation and getting through some of the major components of transformation and kind of give us an updated time line for the ERP. And given cash versus big focus for investors last year, how should we think about free cash and free cash flow yield over the next 6 to 12 months in light of some of the comments you made on transformation?
I mean, listen, when you make more operating income, it significantly improves your free cash flow. So if you just look at Q3 as compared to Q2 sequentially, we were up $360 million on [indiscernible], which is a decent proxy for free cash flow. So -- but at the same time, we still expect to come in free cash flow wise below last year's levels. So the only thing I would caution you in that Q3 number, although we are very pleased with it, our CapEx is heavier in Q4. We've met our interest payment on that incremental $750 million of debt. We have that in Q4. And then we pushed out some tax payments from Q1 to Q4 when COVID hit. So we do have some cash pressures in Q4 that you should think about. But net-net, thinking about next year, if you go off of our base, you've got incremental operating income improvement, which we should have, assuming Phase 2 of COVID doesn't hit, and we get the revenue growth and the rest of the financials that we talked about. You have less separation to your point. The one thing that's tough to gauge but you need to take into account is receivables. We've had some very strong collections in receivables. So from a working capital perspective, I would expect some of that to bounce back and be a pressure point next year. But net-net, 2021 should be significantly better than 2020 from a free cash flow perspective.
Our next question is from Chris Pasquale of Guggenheim.
David, I want to start off just a couple of questions on the contact lens business. First, could you clarify the launch timing for the P1 and DT1 torics in the U.S. and Europe? I just want to make sure we understand the cadence of both of those products launching in each of those geographies?
Yes. Well, we're going to -- we've got P1 toric out now in the United States along with P sphere. And so the PRECISION1 portfolio, I think it will move kind of on from here in the United States. And obviously, we'll have an extended launch once we get kind of into next year, we'll continue to build both in the United States and in Europe. We'll start Europe probably beginning of next year. But we are going to launch, I think, in the first quarter, it's our intention to launch both the sphere and the toric in the first quarter for the European market. So I think that's the first time that's been -- that certainly has been first time for us to do something like that. So the idea that we've got right now is to try and focus on the P1 and P1 toric and particularly because as we said kind of earlier in the year, I think I mentioned this earlier, we had to really think through what we want to do with resources and our priorities here. And as we thought about the challenge with COVID, we probably lost about 6 months or so of promotion on PRECISION1. So I think what we're going to do is get after P1 and P1 toric as many places as we can, but particularly the United States and Europe, and then do that along with DT1 multifocal SYSTANE Pataday. So quite a big bag of stuff to do. But I think we feel like DT1 will be a great addition to the portfolio. We just need to find the right time for it. Our view would be once PRECISION1 is established in our core geographies, we'll make a call on that timing.
Okay. And then, Tim, I just want to follow-up on the comments about 2021. And I was hoping you can clarify 2 of the comments you made, one around SG&A. I think you said SG&A, it will be similar, but it wasn't clear, it was similar to what? Were you talking about 2019 or some 2020 comparison? And then the other in interest expense wasn't clear why that should step up $20 million to $30 million over what you guys are tracking for this year. So if you could just clarify those, that would be great.
Yes. The SG&A, if you look at the ratios, so kind of SG&A as a percent of revenue, those should be relatively consistent with 2019 levels. We may get a little bit of productivity as we're going through the transformation. But I would take a look at that. And then a couple of things you got to keep in mind is one on the debt -- is one as we've got a full year of the incremental $750 million. That's a big driver of the increase. And then you got lower interest income due to interest rates.
And our last question today will come from Steve Willoughby of Cleveland Research.
I think 2 things for you. One, I was wondering if you could comment at all on surgical volumes. And if you -- where we stand in terms of sort of catching up with what we lost in the second quarter when ORs were shut down, if you think we've made that up in the third quarter? And -- or if there's still more to go there? And then I have a follow-up.
Steve, I think the third quarter, really, I think, is representing something that in the United States is probably 95% of the prior year volume. So I don't think we've made it up necessarily. I do think that there is going to continue to be a backlog in most surgeons' practices. And I think the survey data that we have says the backlog is kind of 80% of prior year. So we may have -- we may be working through it, but you're going to see a steady refill, I think, of volume going forward. So I think right now, the gating factor for surgical has more to do with the throughput in the surgical facilities and staffing and number of days in surgery, et cetera, et cetera. I think that is really the kind of gating factor as opposed to, say, seniors not wanting to come to surgery, which I think had been our original concern, which was, a, how and when do they come? And then how do we begin to refill that? So our view kind of going forward is depending on what happens with COVID, we should, again, we'll see a steady improvement in surgical volumes. And over the long haul, I think volumes grow at roughly this compounded 4% rate, which, again, I think has been the historical rate. I don't know exactly what the timing of that looks like, but it will be kind of a number, I think when we look back at this over some period of time as a compounded growth rate.
That's helpful, David. And then just the follow-up is just on the contact lens business. A couple of numbers I might have missed or was confused on. Did you say -- and please correct me if I'm wrong, did you say that the U.S. contact lens business was up 15%. And if so, I guess, as it relates to the stocking benefit of 5% you mentioned, is stocking mostly a U.S. phenomenon? Or is that also an international number?
Our U.S. business was up 15%. Our restocking was about 5 percentage points of that. And so that's the right way to think about it as we said, there's a -- there was a little bit of drawdown and a good bit of drawdown in Q2 and a little bit of bounce back in Q3.
Ladies and gentlemen, at this time, we will conclude our question-and-answer session, and we will also conclude Alcon's Third Quarter 2020 Earnings Conference Call. We do thank you for attending today's presentation, and you may now disconnect your lines.