Alcon Inc.

Hello, and welcome to Alcon's fourth quarter and full year 2019 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please seek the World Conference Specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to your host today, Karen King. Please go ahead, ma'am.

Welcome to Alcon's fourth quarter sales update and full year 2019 conference call. We issued a press release at 20F yesterday and posted a supplemental slide presentation a few hours ago to our website to enhance today's call. You can find all three 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 Stonecipher, our Chief Financial Officer. Our press release, slide 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 Earnings Press Release and Form 20F Annual Report on file with the Securities and Exchange Commission and available on the SEC's website at www.sec.gov. Included in the press release are selected non-IFRS measures. Company management uses these measures as aids in monitoring the company's ongoing financial performance from quarter to quarter and year to year on a regular basis and for benchmarking purposes. 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 financial measures presented in accordance with IFRS. In just a few moments, We will be discussing net sales results for the quarter and year to date. In our press release, we provide a table that shows both reported net sales growth and constant currency growth so you can see the impact of foreign currency fluctuations. For discussion purposes, our comments on net sales growth during opening remarks will be expressed in constant currency. And with that, I'll now turn the call over to David.

Thanks, Karen, and good afternoon to you all. Welcome to today's call. As we wrapped up our first calendar year, I'm pleased to report that we've accomplished a lot, and we have ended the year in a really well position for the future. I'll start by recapping notable highlights from 2019 and recent months, including an update on our new launches and some perspective on market dynamics. And after my comments, Tim will discuss our sales performance by business and provide you with additional color on the financials in China. I'll wrap up with some closing comments before we move to Q&A. Now, as I reflect back on 2019, I'm really proud of what Alcon accomplished in our first nine months of being a new public company. We delivered strong top-line results, ending the year with 5% sales growth, which was at the upper end of our full-year guidance range. We grew core operating income by 4% or 11% on a constant currency basis. And we generated $367 million in free cash flow despite significant spend readiness and separation costs, interest on financial debt, and capital for our new vision care lines. Now, the strong performance was a result of some positive wins and overcoming a few challenges. We start with the headwinds. Foreign currency negatively impacted operating margins in 2019 by 60 basis points. We also had pressure from China tariffs, the uncertainty of Brexit, and a new Japanese consumption tax. And we're still working to offset our flat to declining legacy products like contact lens care with our growth drivers. As far as the tailwinds, we're particularly proud of several accomplishments in 2019, which were driven by our focused strategy and execution. We made some smart decisions around product flow, and our investments are starting to pay off with our third consecutive year of constant currency growth in Topline. Our pipeline is stronger than it has been in years, paving the way for our next decade of innovation in iCare. We had 22 new product approvals and invested in our marquee products like Daily's Total One and Sustain, which have driven strong results. Performance and legacy products, such as consumables and reusable contact lenses, were aided by strong market growth during the year, and we introduced panoptics in the U.S. and Japan, precision one in the U.S., slightly ahead of schedule, and they're executing well in the market. We did all this as an organization while we balanced priorities to stand up new functions, implement SAP, and advance separation and transformation activities all at the same time. Since innovation is the heart of what we do, I'll spend a few minutes on some of our recent launches before moving to market dynamics. Let me start with panoptics. The first trifocal advanced technology that's been in the U.S. market, panoptics is providing something that no other lens has been able to accomplish. The vast majority of panoptic patients are now spectacle-free following cataract surgery. This is important as the panoptics patient is after high performance. They're typically active. They want to be able to count on their near, intermediate, and distance vision without a second thought or without worrying about readers. Our sales team has been placing consignment sets at key accounts since early September, and all accounts currently have access to the lens. Fourth quarter market data shows us gaining over 20 share points in the US PCIOL category in four months, putting our current share at around 55%. We're very excited about the strong reception from our customers and patients in the United States, as well as the strong performance in the quarter. And we're also expanding our IOL portfolio with the introduction of Vividi, a complementary PCIOL lens to Panoptix. We recently began the initial introduction of Vividi in select European markets after receiving CE mark at the end of last year. Vividi is a unique lens with a patented new optical design created to eliminate halos and glare, a problem some patients face with diffractive lenses. It's the first and only lens that provides PCIOL performance with the ease of monofocal patient management. So this lens delivers extended vision and reduces the needs for glasses. We're closely monitoring Vividi's performance in Europe as we await the FDA approval in the U.S. Moving to VisionCare Precision 1, our new CyHi contact lens, which targets the largest segment of the fast-growing daily disposable market. We've made very good progress with our manufacturing lines and currently have unconstrained availability in the United States. As an early data point, after the first four months of launch, we've activated significantly more fit sets compared to DT1 over that same launch period, with twice the average revenue per fit set. By the end of Q2, we should have a first good feel as to whether there have been any material share shifts in the market, and we look forward to that readout. Finally, we're excited to receive approval from the FDA to switch pataday, the number one prescribed allergy ingredient, to an over-the-counter product in drugstores and retail locations starting on March 2nd. We're going to sell two dosage strengths in the U.S., Pataday once daily and Pataday twice daily, which was the former Patenol product. With 66 million Americans suffering from eye allergies, the introduction of Pataday OTC will provide more consumers rapid prescription strength relief this allergy season. This leverages our long history in ocular health OTC products and strong relationships with major retailers and eye care professionals. Now, before I turn the call over to Tim, I'll provide a little color on our end markets. We recently received the latest market share data, and I'll be focusing my comments on the fourth quarter 2019 results. In surgical, global cataract procedures continue to show solid mid-single-digit growth with significant contribution from sales outside the United States. We're pleased with the positive response to our launched innovations as evidenced in the early commercial success of panoptics in Japan and the U.S., In vision care, the contact lens market is seeing a low single-digit increase. The fast-growing part of the market is the daily psi highs, which are growing at 22%, where both dailies total one and precision one are positioned. We're also gaining significant share in the fast-growing daily psi high multifocal market, which is up 34%. That's really through our successful multifocal DT1 campaign, and we're ramping up new manufacturing capacity for precision one. So with that, let me turn it over to Tim, who will review our financial results.

Thanks, David. We're pleased to report 6% top-line growth in the fourth quarter and 5% for the full year, marking 13 consecutive quarters of revenue growth. Our U.S. business posted its strongest quarterly increase this year thanks to new product launches. Surgical sales were up 8% in the fourth quarter, driven by growth across all categories. For the full year, surgical sales were up 7%. And plannable sales of $338 million increased by 17% in the fourth quarter, primarily due to strong gains in panoptics. As David mentioned earlier, we're seeing high demand for panoptics in our newly launched countries, Japan and the U.S., and continued strong performance in Europe and APAC countries. For the full year, and plannable sales were up 9%. Consumable sales of $594 million increased by 4% in the fourth quarter. Demand for Cataract and VITREC consumables is aligned with a mid-single-digit increase in procedural market growth. Also, recall that consumption tax increase in Japan pulled forward sales from fourth quarter to third quarter. For the full year, consumable sales were up 6%. Sales from the equipment and other category were $172 million in the fourth quarter, an increase of 10% versus prior year. This was primarily due to the addition of a large refractive order in the U.S., and a good quarter for service revenue and procedural eye drops. For the full year, equipment and other sales were up 6%. Division care sales were up 3% in the fourth quarter and for the full year. Contact lens sales were $460 million, up 3% versus the fourth quarter of 2018. The increase was primarily driven by strong demand for our leading product, Daily's Total One, with growth in both sphere and multifocal. While the product contribution in 2019 was minimal, we have seen very good early reception for Precision 1. For the full year, contact lens sales were up 4%. Popular health sales of $317 million increased by 3% in the fourth quarter. Since becoming independent, we have invested in direct-to-consumer advertising, which has increased the growth profile of our sustained family of products. Strong growth and dry eye was offset by contact lens care. which has lost a little bit of share in a declining market. For the full year, ocular health sales were up 2%. Now moving down the income statement, core gross margin was 63.3% for the full year, broadly in line with prior year, with a favorable product mix and product costs absorbing the impact of the China tariffs and foreign currency. Core operating margin was 17.2% for the full year, up 20 basis points versus prior year, and up 80 basis points, excluding the negative impact from foreign currency. This was primarily related to better expense leverage. Our full-year results are in line with our 2019 guidance of 17 to 17.5%. Full-year interest expense was $113 million, up from $24 million last year, primarily due to higher interest expense associated with the debt related to the spinoff of Alcon and the refinance debt to longer-term notes. The core effective tax rate was 17.4% for the full year compared to 16% last year. The increase in the tax rate was primarily due to the loss of certain tax benefits in the U.S. due to the spinoff and the mix of pre-tax income from geographical tax jurisdictions. This is also in line with the full year 2019 guidance of 17% to 18%. Core earnings per share for the full year was $1.89. down 11 cents from prior year, driven by pressure of 14 cents from interest on financial debt and 12 cents from foreign currency. Now, before I move to guidance, I'll touch on a couple of cash flow and other related items. Free cash flow for the full year 2019 was $367 million, down from $616 million from the prior year. The decrease versus last year was primarily due to spin readiness and separation costs, along with interest payments on financial debt. Capital expenditures were $553 million for the full year 2019, up $29 million from the prior year, driven by the continued expansion of our VisionCare contact lens manufacturing platform and other supply chain investments. Separation costs for the full year 2019 were $237 million, which was primarily driven by IT investments. The vast majority of the remaining costs will be spent this year with the remainder in 2021. Transformation costs for the full year 2019 were $52 million, primarily related to restructuring. Now turning to our full year 2020 projections. We expect full year net sales to be in the range of 5% to 6% growth on a constant currency basis. We expect a 0% to negative 1% impact from foreign currency. We expect core operating margin to be accretive from full year 2019. and in the range of 17.5% to 18.5%. We're going to continue to invest in innovation and expect core research and development expense to be up 10% to 15% from last year's core R&D expense of $584 million. Now, given the feedback we received last year concerning interest expense, we've decided to provide a range for this year. In 2020, we expect interest expense and other financial income expense to be in the range of $145 to $155 million. And despite an extra quarter of interest expense, the range is comparable to 2019, as we'll continue to pay down some of our local debt where our interest expense is high. We project our core effective tax rate for the full year to be in the range of 19.5 to 21.5%. The midpoint is aligned with the 300 basis point increase from Swiss tax reform we discussed this past year. The broader range reflects sensitivities around discrete items as well as geographic and product mix. We project core earnings per share in the range of $1.95 to $2.05. We expect a nominal impact from FX and believe our core earnings will continue to grow nicely in spite of the higher tax rate and higher R&D investments. Although we will not be guiding the quarters, there are a few factors to consider as you think about the first quarter of 2020. First, as we discussed last year, We will have a higher tax rate as a result of the Swiss tax reform and incremental interest expense, as we didn't have the additional debt related to spin on our balance sheet this time last year. Second, we will have incremental SG&A from stand-up and IT costs, along with additional marketing support for new launches like Pataday. And we'll also continue to invest in R&D. And third, we are seeing pressure in China related to the coronavirus global health issue. And to help give you a better perspective around the size and impact of China with regards to the total Alcon business, I'd like to share with you a few data points. China revenue in 2019 was approximately $377 million, which is 5% of our total sales, growing 15% on a constant currency basis versus prior year. On a segment basis, close to 80% of the country's sales come from surgical. with the remaining 20% from vision care. From a supply side, we don't have any manufacturing facilities in China, but we do have a few critical suppliers who serve our equipment business. We currently have three to four months of inventory on the ground and have continuity plans in place for the short term. From the demand side, January sales were in line with internal expectations, but we have seen a significant slowdown in February sales. which are currently tracking to only 10% of our internal expectations. We believe this is due to the coronavirus, as patients are postponing non-critical surgeries and ophthalmologists are canceling non-emergency procedures. If the February trend continues through the end of the first quarter, we could see a negative impact of approximately three percentage points of growth on the top line and up to four cents of earnings in the first quarter. Our guidance can accommodate the forced sense of pressure from Q1, but it would push us to the lower end of the range. This assumes that business activities normalize in China at the beginning of the second quarter. It also assumes that canceled procedures from the first quarter are not rescheduled during the year, and as a consequence, we won't regain the sales lost in the first quarter. This is obviously a fluid situation, and there are many things that remain unclear. We will continue to monitor the situation and provide an update as we learn more. Because of all these items, we currently expect the first quarter to be our softest earnings quarter of the year. Now let me briefly discuss our capital allocation priorities. While we're not providing a hard guidance range for free cash flow, we anticipate improvements in our core results to deliver a significant increase in free cash flow this year despite separation, transformation, and capital spend. We are investing to support our innovative pipeline and new product launches. With the encouraging startup of our new contact lens manufacturing, we will be installing a greater number of lines this year, which will not only support the launch of Precision One, but also support a variety of new contact lens platforms. With this continued capacity expansion, capital spending this year will be relatively comparable to last year. I'm pleased to report that our Board of Directors is proposing an annual dividend of 19 Swiss cents per share. our first as an independent company as we committed during our Capital Markets Day in 2018. Shareholders will vote on this proposal at our upcoming AGM on May 6th. So to summarize, we feel very good about our 2019 financial results. We delivered strong sales at the top of our guidance range and accretive margins, while making progress in many operational areas. We remain committed to operating with greater focus and discipline as we move towards becoming a stronger and more profitable company. With that, I'll turn the call over to David for some final comments.

Thanks, Tim. In 2019, we did what we said we'd do. We delivered solid financial results and achieved several important operational milestones, which Tim and I have touched on today. We're harnessing the energy created by the spinoff and building even greater momentum through our transformation, all to unlock Alcon's full potential and to deliver value to all our stakeholders. You know, I spend a lot of time with customers. It's actually one of the things I like to do most, and something I consistently hear from customers is that Alcon is back, and indeed, you know, we are back to our sole focus for nearly 75 years, and that's eye care. We've gotten really good at understanding the markets we participate in and applying our technical expertise to develop the right solutions. Over the past few years, we've focused on building a solid foundation and robust pipeline, with success as evidenced by our 13 quarters of positive top line growth. We look forward to new and exciting decade of bringing innovative products and solutions that will drive the best patient outcomes and advance the eye care industry. And that's a great place to be. So with that, operator, we're ready for questions.

Yes, thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. This time we will pause momentarily to assemble the roster. And the first question comes from Anthony Petrone with Jefferies.

Hi, Gray, and congratulations on the quarter. Maybe a couple on IOL's panoptics and then maybe just to clean a little bit up on the numbers you gave there on coronavirus. But the U.S. panoptic launch, just trying to get a sense. Dave, you mentioned 55% share in the quarter. Just wondering where that can go in the U.S., and how pricing specifically is holding up for Panoptix. The follow-up on IOL would be, you know, to what extent is Vividi, the launch in Europe, baked into guidance? And then I'll have one follow-up on the coronavirus. Thanks.

Yeah, thanks, Anthony. Let me just cover Panoptix. We're pleased with the performance and the uptake right now. It's been well-received, I think, by surgeons. We've had a good – four months of launch through kind of the end of the year. And we did accomplish, I think, the share position that we'd hoped to. And so on the quarter, as I said, it was a 55 share, which had an exit rate, obviously, that would have been a little bit higher than that. So we expect that to do well. And we have not really had a lot of pricing pressure on it per se. The price remains, I think, premium to restore. And I think, really, it's a product that I think is kind of speaking for itself. The outcomes are terrific so far, and we're kind of excited to keep moving with it. On the Vividi side, we have included Vividi in all of our projections going forward this year, so we do have a full European launch in it, and we hope to have a U.S. approval later this year. We'll see when and how that comes through. That is also in our current view. Maybe you had a follow-up on something else.

Yeah, just on the coronavirus math there, I'm just kind of running through. So 5% of total is China, 80% of that is surgical. You sort of, if you annualize, I guess, the February impact, I'm wondering if I'm getting this right, but it comes out to maybe a 165 to 170 hit. I just want to make sure that that's sort of accurate. And then just in terms of timing, is there an estimate at this point? I know the situation is fluid, but some other companies have sort of mentioned You know, we think, you know, possibly we're looking out to maybe April as we're forecasting and then we'll make an update there. So just a little bit of clarity on the China comments. Thanks. Congratulations again.

Yeah. So just to help you out with some of the math. So, yeah, you're thinking about it in the right framework. I mean, I would take you can take the 377 that we did last year, apply a growth rate to that. you know, kind of divide it by 12, and as we said, to get you a monthly rate. And as we said, in February, we were about 10% of what our internal plans were. So if that were to carry through for the next, you know, 10 or 11 months, you can do that math there. What we have assumed in our numbers, because, again, we don't want to speculate, we've assumed that run rate carries through March. And then we've assumed it's sort of back to normal run rates in April. So that's the first assumption. The second assumption is really around the lost sales that we see in Q1. We are not anticipating or have not incorporated that as far as getting those sales back because we feel that the clinics will be full and procedures will not be rescheduled. No, they'll be rescheduled eventually, but we've assumed that they will not be rescheduled this year. So that's how we sort of came up with the four cents assumption. for q1 again we don't want to speculate it's a very fluid situation we'll continue to monitor it and incorporate that as we get more information thank you and the next question comes from david lewis with morgan stanley

Good morning. Just a couple of questions for me here this morning. First off, Tim, just kind of follow up on China. So if you're not assuming those procedures are coming back, I appreciate your guiding the five to six constant currency. But an underlying basis, the guidance is actually closer to six to seven percent. Just correct me if I'm wrong. And that's obviously trending in excess of the LRP. So maybe for you or David, A, is that correct? And B, What are some of those drivers? I think we're thinking about PO and P1 as significant drivers for the business. But to what extent is Clarion, Vividi, Panaday contributing to that sort of, you know, at the top end or slightly above the top end of the LRP from a growth perspective? And I have a couple follow-ups.

Yeah, David, I think on the sales number, we've got most all of the products in there at five to six top lines. So we're guiding that way with the view that we can – accomplish that. And obviously, we're doing that on the back of offsetting legacy businesses that aren't growing super fast with, you know, new product flow that is helping us quite a little bit. The China piece, you're going to need to take out of that, because if we do have continued slowdown beyond the first quarter, then we'll obviously have an impact against that number. So we haven't really, we haven't, you know, assumed higher than that per se. So we're starting with an annual guidance we think we can make in that five to six range. Obviously, we backed out China, but only the first quarter so far.

Okay, very helpful. Then just two more quick ones for me. One, just, David, the candidate opportunity, can you just give us any sense of how we should think about it, that product transitions to OTC, how expansive it could be to the addressable market for the product, or any thoughts about impact over the next couple of years? And then just, Tim, for margins in 2020, can you just give us any relative sense? GMs were a little softer in the fourth quarter. We're assuming that may have been visioned. Just in terms of as you think about expansion or operating margins into 2020, what's that balance of GM versus middle-of-the-income statement leverage? Thanks so much.

Yeah, David, just a quick comment on the size. You know, we obviously are excited about PATADAY. We think the market in total is probably, you know, approximately $600 million at its maturity. I would say that's a combination of moving – about half of that market, 300 million of that is a switch from RX status to OTC. So if you took the RX volumes and brought them into the OTC market and then charged them basically an OTC price, you know, that would generate about 300 million. Now, you know, the pace of that you'd have to model on your own. There are other, you know, RX to OTC switches that may give you some guidance on that piece of it. You know, our current view is that that combined with some share gains, that we could pick up, you know, on our own, catalyzing some of our own stuff, but also really getting after the rest of the market gives us a sizable market opportunity, I would say.

And then on the margin point, you know, you are correct. We did see some pressure in Q4 on some of the vision care projects. lines that we're installing. As you think about the accretion in 2020, we're going to get some gross margin accretion, and then we're going to continue to get operating leverage. I'd say it's probably about maybe a third, two-thirds, somewhere in that range.

Thank you. And the next question comes from Veronica de Villalba from Goldman Sachs.

Hi, it's actually Kira for Veronica. Sorry about that. Just one question on the guidance. So at this point in time, other than obviously coronavirus, what do you see as the single biggest moving variable between the lower and the upper end of that guidance range, please?

Well, I think it's new product flow, Kira. Thanks for the question. I do think that we are excited about our pipeline maturing kind of as we accept that. Obviously, we have yet to see you know, how Precision One really performs. I think we'll get a good view of that near the end of the second quarter once you kind of have an unconstrained run at it. I also think that Vividi performance in Europe will be an interesting opportunity for us, and we have yet to really understand exactly how high that's going to go or what will happen there. So I think we feel good about Precision 1, sorry, I should say Daly's Total 1, Sustain, and Panoptix, all of which we have a pretty good view of from our own historical work. But I think some of the newer products, we're going to have to see how they do, and that will be the main. The only other variable I would give you, I'll go forward, is And, again, we had a pretty good assistance from the market in some of the more mature markets last year. So think reusable contacts, for example. Last year the MAT was roughly about 1%, 2% growth for a period of time, and then in the fourth quarter it fell off again. So I'm not 100% sure where that goes. And, of course, we have the contact lens care business, which, again, tends to be an anchor for us until we see some stability there. So those are the kind of dynamics that I think we're trying to work against, and the variables are probably the new product flow.

Thank you. And the next question comes from Sebastian Walker with UBS.

Hi, thanks for taking the questions. I've got three, please, if I could. So first on Panoptix, the 55% market share over the four months, could you just help us with how that's being defined? And then is there anything in the 17% growth that you want to flag as being kind of one-off in nature in terms of stocking patterns, for example? The second question is on the contact lens market overall, some of your competitors are talking about a very healthy market driven by the structural shift towards daily wear. Is that something that you expect to continue happening for the next three to five years, the higher level of growth than what we've seen recently? And then just lastly, a technical one in the ocular health business, could you just comment on what proportion of your sales are kind of the declining business and what proportion is the growing business and where you expect those both to go. Thanks.

Sure. Let me start with the PCI well definition. So, you know, we are obviously thinking about market share in a very specific element of the category of IOLs. So we're looking at it relative to multifocal lenses within the foldable lens category. So that's a relatively fine cut. So, you know, hence the fairly rapid movement in share. But I think it's the most accurate way to think about it because it really is a swapping of lenses that's going on inside of that particular market. Maybe one other piece of information I think that we, you know, we get a lot, and that is that the category itself really isn't moving a ton on a yearly basis. So we're still seeing kind of that normal half a share point movement in penetration on the PCIOLs, in particular, if you're correcting. That's kind of what we had expected, and so the shared gain is what we are looking at, and it is inside of that particular element. And there wasn't anything particular in stocking. I don't think there was anything other than our normal course of business. So we don't really stock because they're used directly into the IOLs, and we consign the inventory into the ORs. So it's generally not an issue relative to our output. And then the last one was market growth structurally. No, I think you're right about the market growth, and I think everybody's kind of talking about the same thing, which is daily disposables are increasing the value growth of the market, and they are doing that by trading people from reusable lenses to dailies. I would say the fourth quarter was a little soft in general because the total lens market, I think, grew probably around 2%. That has a lot to do with the Japanese pull forward. So if you look at Japan itself, it was off in the quarter almost 10%. So I think you see a little bit of artifact between Q3 and Q4. And if you're thinking about it more in terms of the long run, the long-range plan, I think you're going to see consistent growth in the market close to where the MAT is, moving annual runs right around 5%. Dailies have been running somewhere in that 8% to 9%. Those are value numbers. So I would think that is kind of the way to think about it. The last one was the ocular health split. And I think the best way that we can give you that information is to say we typically have said that the tier business is about 60% of our revenue there and 40% is the contact lens care. So if you think about the contact lens care as probably the more challenged part of our business, that's probably the best way to think about it.

Thank you. And the next question comes from Chris Pasquale with Guggenheim.

Thanks. Did I hear you correctly that you had an unusually large order in the U.S. equipment business this quarter? Could you just quantify that and kind of frame how you would think about growth in that segment going forward? It was pretty lumpy this year.

Yeah, you know, we did have a very good order from a large customer in refractive. You know, we continue to be the market leader in the refractive space in terms of procedure growth, and I think we feel good about our shares there. I would say that the refractive market is still relatively, you know, You know, internationally, it's pretty good. I mean, the Asian markets have historically been growing nicely. U.S. has been pretty flat-ish. But I guess, you know, I think in general, we've gained a little share along the way. So we've been kind of, I would say, low single digits, you know, in the way which we've been thinking about refractive. But that's really all there is to it. And, again, refractive for us is a good business, but it isn't the majority. You know, it's a small part of our kind of equipment business, I would say.

Thank you. And the next question comes from Matt McSick with Credit Suisse.

Hi, thanks for taking the question. So just one on margins and then a couple of quick follow-ups on the products, the comments that you've made. So, just looking at the margin goals for this year, I guess, you know, last year, X currency, I guess you were up maybe 70, 80 bps year over year or something like that. You know, is there an element of? you know, acceleration that we should look at this year? Is it that 50 to 100 basis points if we were to look at it on a constant currency basis? You know, any kind of color on just trends of leverage? And then a couple of quick questions on products.

Yeah, I would just say this is with regards to FX, when you look at 20 as compared to 19, there's really nominal pressure from an FX perspective. Now, again, that assumes that the rates as of, we took average rates in January, that assumes that those rates hold throughout the course of the year. So, you know, as far as acceleration, you know, margins will improve over the course of the year. Q1 will have some pressures, as we talked about, as you think about some of those stand-up costs, some of the marketing spend that I talked about for the new launches. So you should see or we would expect a natural progression over the course of the year with regards to margins and end up in that 17.5 to 18.5 range.

Thanks. And then on the products, just in surgical, impressive start for panoptics for sure and strong surgical equipment. But I just wanted to make sure we're looking at Q1 and maybe the sequential trends correctly on panoptics. Is there an element of folks trying it, seeing what kind of results they get, and then you expect maybe some settling, at least in the near term, before it continues to go? And then on equipment, you mentioned this order. I just want to make sure we're thinking about that right, if you could quantify that or give us some sense of how the sequential numbers or year-over-year numbers should look.

Yeah, let me start with the panoptics piece. I mean, I think the The experience we've had with intraocular lenses is that there'll be a steady trial phase. It will begin to, you know, kind of settle in, and then the growth will kind of continue on in a way that's relatively organized. I think I wouldn't say linear, but I don't think it's where you go up and you have some kind of over-the-top R-shaped curve before you start growing again. So I do think it's a little bit more steady as she goes, and I would think that's what we see right now. So I don't anticipate any leveling off necessarily other than you know, you get to the upper limits of what you can do with the product, you know, relative to competition. And I think, as we've seen in most cases, that happens in that kind of 18 to 24-month frame. So, I think that's probably where I'd leave that piece. On the equipment piece and on the equipment other bucket, because I think the growth was solid this quarter, I would point to two other pieces of it that you should keep in mind. The service revenue was relatively strong, as was procedural eye drops. And so, I wouldn't read too much into the refractive order that we got. It was reasonably good, but for the full year, I think you should think about equipment as growing roughly around procedures or relatively flat. We had a very good equipment year last year, and frankly, it should be a low single-digit number on a year-on-year basis. So read the remainder of that as largely service revenue and procedural eye drops because I think that's really where it is.

Thank you. And the next question comes from Scott Bartow with Ehrenberg.

Hi there, guys. It's Michael Healy today in for Scott. Thanks for taking my questions. Just a couple on Precision 1, really. If you can give us a bit of color, really, on how many machines you've installed at the moment and how many you expect to install by the end of the year. And then maybe just some of the speciality lenses. Is it still the plan to launch a TORIC version of Precision 1 by the end of 2020 and a TORIC in Daly's Total 1? And I appreciate this might be early, but is there any feeling of what sort of cannibalization in DT1 you might see from the launch of PrecisionOne? Thanks a lot.

Yeah, Michael, I think on P1, I presume you meant consignments or fit sets, I should say. And I do think that we've had a pretty good run on fit sets. We've got quite a lot of them out there. We should have the vast majority of the market covered by the end of the quarter with fit sets. It'll be – we'll inch up over the next quarter beyond that, but I would say the 80-20 rule is pretty much covered by the end of this quarter, which is what we've said in the past. So I think that's the way to think about distribution of fit sets. If anybody wants the lens today, they can order it. So we're basically – we've opened it up to any retailer, any practice with or without consignment. So we feel good about where we are relative to supply. But obviously consignments – or I should say fit sets – you know, are an expensive adventure. So we try and put them in where we have definitive commitments. And so we'll work our way through that process in the next 90 days or so. On the TORIC lens, we are excited about the TORIC business. We are continuing to build TORIC inventory on both Daly's Total One and Precision One. Those are likely late this year with a real full effect next year. But we would like to get them out, obviously, as soon as possible to complete the family. I do think there's a lot of opportunity in that over the long haul because DT1 is a very popular product. Patients prefer it. And I think we are, if you really look at where we're getting hurt in the market, it's the lack of having a TOREC. And if we can shore that up, I think that helps our business quite a little bit. Lastly, on the cannibalization piece, I'd just say that we are really early in the process, and I'd be careful about assuming too much around this one, but our early read would be that DT1 We don't really see a lot of cannibalization. There's a little, but not a lot on DT1. I think more likely we're seeing a little bit more cannibalization of our Daly's AquaComfort Plus product, which, again, I think is what we would have expected given the positioning of those two products relative to the value patients.

And then on the capacity front, you know, we tend to be very, you know, sensitive around the capacity communication. So I would just say this, you know, we're putting in more lines this year than we did last year. This will be sort of our peak year. So, again, that will drive some near-term, you know, gross margin pressure as it takes some time to get those lines fully optimized and up and running.

Thank you. And the next question comes from Larry Bigelson with Wells Fargo.

Hey, good morning, guys. Thanks for taking the question. Can you hear me okay?

Yeah.

Good, good. Hey, one clarification on the guidance, one on Pat today. So the 3% negative impact in Q1 from coronavirus, Tim, that's included in the 5% to 6% guidance. So if that, by my math, 55 million or so came back, it would represent upside. Is that the right way to think about it?

Yeah, that would be a quarter's worth of revenue growth. So, yeah, we'd still be within our range of 5% to 6%. And, again, your math is directionally correct.

Just be careful, Larry, though, that we are assuming at this point it's not going to come back. So, again, the watch out right now with the China piece is that the hospital system there, most patients are not going in right now, and almost all the ophthalmology guys have canceled their surgeries while we're going on with this. So, The public hospitals run pretty close to capacity most of the year. We have a good private business, which is where we might see some pick up, but I would just be careful in assuming much is going to come back later in the year.

Thank you. And once again, we ask that you lend yourself to one question as a follow-up as a courtesy to others. And the next question comes from James Gordon with J.P. Morgan.

Hello. Thanks for taking the questions. James Gordon from J.P. Morgan. One on implantables and one on contact lenses. So on implantables and panoptics, I noted the comment about being at 55% market share after four months. I think you said that's up about 20 percentage points from where you were before you launched the product. So the question is, are you hoping or planning to be able to expand the market faster for ATLs any quicker now? Or is it a finite market and you're already sort of more than halfway there after four months? So the ceiling and where you can get to is only twice where you currently are? So that's the first question. And then just contact lenses, so quite a deceleration at Q4. So I think you went from 7% in the last quarter to 3% in this quarter. I think in Q3, Japan's stock up was only seen as about a percentage point delta. And for other contact lens peers, it's not been a big impact from Japan. It's maybe been one or two percentage points. So is there a reason that there was a bigger deceleration for your business in Q4 or anything we should extrapolate forward there? Thanks.

Yeah, James, let me take the first one. I think the – I think you're right. You're correct in the way you're assessing the market penetration versus share growth. I do think there is – you have a full year of share growth to be observed. So I think because we started this in September, we'll get a full wraparound on whatever the share entry is. And we'll probably have some additional accumulation of share this year, one would hope. So I think the – The bulk of the growth should, again, happen this year and slightly into the following, which, again, is kind of that 18, 24-month timeframe we've talked about to get to the peak share. I do think that you are going to see most of the market take shape for us with Panoptix on a share basis, not an expansion basis. So we haven't seen a ton of expansion. We saw a little bit in the fourth quarter, which could have been pent-up patience waiting for this. We'll see what happens going forward. But On a year basis, the moving annual penetration is pretty much as we've typically expected. It's in that kind of half a percentage point of penetration growth, and that's fairly consistent with what it's been over the years. On the contact lens piece, you're also correct. There is about a percentage point of Japanese movement here, and I would say that the contact lens piece is a little bit stronger than It's reported as because of that. But it was a little bit weaker, I would say, on two fronts. One is the reusable lenses for us were particularly soft on the market, and we did lose a little bit of share in that market. So we were a little bit soft there for those reasons. So that's the right way to read it.

Thank you. And the next question comes from Jeff Johnson with Baird.

Hey, guys, just one follow-up question for me, and it would be on Vividi. We want a potential launch in the U.S., or at least a potential FDA approval in the U.S. this year. It seems a little bit ahead of the schedule we were thinking, just any update you can provide there on what you're seeing with the FDA. Two, from a pricing perspective, what kind of pricing or where are you positioning pricing in Europe for Vividi and how to think about where you might position it in the U.S., you know, from an ATIOL price point versus a standard monofocal somewhere in between, just high-level kind of how should we think about pricing? Thank you.

Yeah, Jeff, two things. One is Vividi we submitted last year to FDA, and we expected, you know, some kind of a response from them this year. We don't have a timeline that we've talked about yet on that lens. In Europe, we have set a price. It is similar to the Panoptix price, so there won't be any, I think, tradeoff between the two. And I think you should think about those two products as roughly going to be the same price, plus or minus a little bit on the market we launch in. So that's where we are with those.

Thank you. And the next question comes from Bob Hopkins with Bank of America.

Thanks, and good morning. Just love you to comment on two quick things. First, just one last question on coronavirus. Just curious, are you seeing any impact outside of China, or are you assuming any? And then the other topic I'd love you to offer a quick comment on is just the IOL growth, obviously, in the quarter was phenomenal and a very strong year, I think around 9% for the total year, but much stronger growth in the back half. Can you give us any rough directional sense what you're assuming for ILO growth in 2020 relative to that 9%? Thanks for taking the questions.

Yeah, so as far as impact on the rest of Asia, you know, we have not seen much impact if you look at February sales. So there's been a little bit of impact but not much. We've assumed those trends continue, but, again, it's too early to tell. We don't want to speculate, but certainly it's not the impact that we talked about in China.

Yeah, and the guidance assumes no impact beyond China is the way I think we ought to think about it. So, you know, obviously there may be some, and we haven't accommodated for it yet because we haven't actually seen it yet. So there is, you know, something to think about with that. The other piece is just on the implantables, yeah. Just directionally, you know, we had very, you know, obviously we had a back half launch or really fourth quarter launch. On a year-on-year basis, let me just give it to you this way. I think we have an additional half year in Japan. We'll have a full year or almost three-quarters wraparound on the United States. And we should have approval. We have approval in China. Presumably when we get back to business there, we should be able to launch, you know, maybe second half of this year. So I think in our implantables business, that plus the Vividy piece, you know, we should be able to kind of reproduce, you know, a pretty good year. So I would be a little – I don't want to forecast the individual category for you, but I would say that we feel good about the implantables.

Thank you. And the next question comes from Steve Willoughby with Cleveland Research.

Hi. Thanks for taking my questions. I have two for you. First, just on the guidance, just – and again, kind of clarifying some of the comments around China – I believe you made a comment saying that what you're assuming in February and March will impact you by 3% in the first quarter and 4 cents. And if that happens, the EPS number might be closer to the low end of the guidance you gave. I just wanted to confirm that's what you said. And then I have a follow-up question.

Yeah, so again, we've assumed that the February run rates for China progressed through March. That causes about 4 cents of EPS pressure. That would take us down to the low end of the range. And then what we've assumed is that it's sort of business as usual from April 1st moving forward. Again, it's very fluid, so we wanted to give you guys some transparency around what we're seeing and what we have a decent line of sight to, but we don't think it's prudent to speculate how long this is going to progress going forward.

Okay, thank you. And then secondly, just wondering if you have seen any impact to the company from any of the sterilization changes that have happened over the last 90 to 120 days in terms of availability for sterilization services.

Yeah, it's a good question, Steve, and we have. You know, I would say that the ETO piece has been, you know, the closure of the facilities in Illinois and Georgia, while they don't affect us directly, indirectly they're putting a lot of pressure on the system. So there is, I think, very, you know, demand and supply on sterilization services is a little bit difficult right now. So we have been sporadically out of custom packs off and on. as we kind of went through the last several weeks in the first part of this year. So we are struggling with it. We are working very closely with our vendors on that topic. We hope to have that settled before too long. But, again, it is a little bit hand-to-mouth right now.

Thank you. And the next question is a follow-up from Larry Bigelson with Wells Fargo.

Hey, good morning, guys. Thanks for taking the follow-up. Hey, just, David, I'm Pat today. I don't think I've heard you talk about how long Alcon has exclusivity. And also, could you talk a little bit about the ramp? You know, it seems like a product like this should have a relatively quick ramp. And you mentioned looking at analogs in this space. You know, Zatador does about $40 million in the U.S. It would seem Pat today should, you know, do better given the product profile. Is that reasonable? Thanks for taking the follow-up question, guys.

Yeah, look, I mean, you're not wrong on a number of those points. Let me start with the patent piece. There's no unexpired patent protection on PatentAll. That one expired, I think, in 2015. But for Pataday, there's two remaining patents in the Orange Book, one in 22 and one in 24. But there's a number of companies who've already filed NDAs and which have been settled for early entry. So I think we're going to see some, you know, near-term entries from folks that, you know, want to be in the OTC business. So, we'll have to see whether they want that kind of a business or not, but that will be the question we'll have going forward. The ramp itself, Larry, you know, I don't know. I mean, I think the, you know, we've modeled it after a couple of other OTC RX switches. So, you know, you could probably find the same data we've got and give yourself a sense of how fast people will move off of the RX. A lot of it, you know, often it's the delisting from the benefit plan that actually creates the forced movement to OTC, and that doesn't happen but once a year usually. So, you know, again, we're in the wrong part of that cycle. That should usually happen at the beginning of the year. So we'll see whether that can take shape over the next few months. What I do think is going to happen is that we're going to see an allergy season. On the good side of things, we – We made this in time for the algae season, so I think you're going to see some direct advertising to consumers to make them available. They could get prescription strength for probably a little bit less than their copay. So I think that's the message we're going to get out there early and hope that we can bring that market in.

Thank you. And the next question comes from Ryan Zimmerman with BTIG.

Great. Thank you for squeezing me in. So just on the Panoptix launch, you called out Japan. as being you know recently launched so please help us frame that opportunity how you're how you're seeing or what you're seeing early on in that launch for pan optics and if you're anticipating any additional country vacation uh over the course of 2020 then i will follow up on capital allocation thank you um well on japan you know we launched in the middle part of the year it was um

I think very well received, and I'm just looking for the Japanese share, as I said. I don't think we've ever described it exactly. I would say that we've had a very good run of IOL performance in Japan, and I suspect that we will see a little bit more of that. There is a little bit of a dynamic in Japan to watch out for, which is this change in reimbursement for the consumer, for the doctor. So we're watching that carefully this year. I think that takes shape in April. And I think we're going to have to see how that lands because there's still some uncertainty around that. So I'd be careful not to predict too much around Japan other than we get a full year of effect of whatever we do on pet optics.

And then I'm sorry, what was the other one? Capital allocation. Yeah, so I just want to ask the question. So, Tim, I mean, you talked a little bit about your capital allocation strategy. But just between, you know, the interest expense, the capex, and the separation cost, you know, How much room do you feel like you have for M&A and FY20 and specifically looking out beyond that?

Yeah, I mean, as we've talked about before, you know, there's really three components of our capital allocation, right? The organic investment where when we do that well, we do it right. It's good for customers. It's good for shareholders. It's good for us. You know, we do look at M&A and BD&L. What has worked well for us, and I don't think it changes in 2020 – is those $50 million to $300 million type deals. Again, we realize that we can't develop everything, and if there's something out there that we can get at the right price that accelerates our strategy, we'll certainly take a look at it. And then, obviously, the third component is returning cash to shareholders, either through buybacks or dividends. Thank you.

And this morning's last question comes from Richard Doolittle with SVB Larrick.

Hi, this is Jamie on for Rich. Thanks for taking my questions. I guess just to kind of piggyback off of that last question, what types of assets in the M&A space are you kind of looking at that are really picking your interest that you really potentially could see as, you know, something more needle moving, whether it's in the surgical space or in the contact lens and vision care space?

Yeah, Jay, we look at just nearly everything that's going on in eye care. And so, you know, there's a – I think typically what we're looking for are things that we're not already involved in, although we're always interested in technologies that are going to advance the category. So we've followed for some interest for, you know, in the second of those, there are a number of technologies in what I would usually call energy sources for phacomulsification. which we think are kind of interesting and different. And as we have a next generation platform, we're looking to complement that with some different ideas around it. We've looked a good bit at glaucoma for some time. We continue to see that as a super interesting space, one that we could get into fairly easily and one that we've been in and out of, you know, over the last several years. So I think we would be interested in something like that. And then we're also continuing to look for, in our OTC businesses, other ways of getting involved and expanding the OTC markets, whether that's particularly in the international space where the technologies are not necessarily things that we have. Multi-dose preservative-free is one that we're just beginning to get into, and that is an important part of what's going on internationally. we'll work at that as well. There's a number of other things that are a bit smaller, and there are some that are kind of quite ambitious, but I would say that we're following nearly everything in the eye care space. Thank you.

And as it does conclude the question session, I would like to return to Florida Management for any closing comments.

Yeah, just a final remark on the coronavirus. I just want to mention that, you know, our primary interest in this one is keeping our associates safe out there and then making sure that the communities in which are affected have the right support as well. So we're watching this one carefully. We are following government advice and advice from the health authorities in those countries. And obviously, this is a dynamic situation that we'll continue to follow closely. But principally, what we're interested in importantly is to make sure everybody's safe out there. So I appreciate the interest in that topic and well wishes to everybody who's affected.

Thank you. The conference has now concluded. Thank you for attending today's presentation. May now disconnect your lines.