Greetings, and welcome to the Q2 2022 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Dan Cravens, Vice President and Global Head, Investor Relations. Please go ahead, sir.
Welcome to Alcon's Q2 2022 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 these documents in the investor relations section on our website at 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 from those in our forward-looking statements are included in Alcon's Form 20-F and our earnings press release and interim financial report on file with the Securities and Exchange Commission and available on the SEC's website at 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 in other companies. These non-IFRS measures should be considered along with, but not as alternatives to, the operating performance measures as prescribed by IFRS. Please see a reconciliation between our non-IFRS measures with directly comparable measures presented in accordance with IFRS in our public filings. For discussion purposes only, our comments on growth are expressed in constant currency. With that, I will now turn the call over to our CEO, David Endicott.
Thanks, Dan. Welcome to Alcon's Q2 2022 earnings call. I'll begin by giving a brief update on our Q2 results, overall market dynamics and recent performance. After my comments, Tim will discuss our Q2 performance and our outlook for the remainder of the year. Then I'll wrap up with some closing remarks, and we'll open the call for Q&A. I'm pleased to report that we had another strong quarter despite broad macroeconomic headwinds with sales growth of 10%, core operating margin of 18.4%, and core diluted earnings per share of $0.63. These results were driven by our innovative product portfolio, strong commercial execution, and continued improvements in international markets as they recover from COVID-19.
Overall, our surgical franchise continues to lead the market with our portfolio of advanced technology intraocular lenses, our substantial installed base of equipment, and our growing consumables base. Now, implantables, we remain the market leader in PCIOLs due to the strong customer reception for Vivity and PanOptix. Alcon is taking share in key international markets and exited the quarter with approximately 55% of the global PCIOL market, up five percentage points from when we launched Vivity in the Q1 of 2020. In the U.S., we've maintained our leading PCIOL market share of over 80% despite competitive products that entered the market last year. In equipment, we continue to lead the market on the strength of our innovative cataract suite. Interest in Active Sentry remains strong. If you recall, Active Sentry is the most advanced phaco handpiece where the system's fluidics are controlled through sensors near the eye.
This unique feature reduces surge and improves safety. Innovations like Active Sentry, as well as our leading Centurion technology, are driving favorable account conversions as we upgrade legacy phaco equipment to Centurion in our international markets. We're also seeing momentum for our Legion phaco machine in international markets among surgeons who are looking for premium performance on a portable machine and at a lower cost per use. Additionally, we saw another strong quarter in our consumables business, which grew high single digits versus last year in line with the recovery in procedural volumes. Earlier in the quarter, we participated in the American Society of Cataract and Refractive Surgery conference, where we showcased a robust scientific program. Data was presented that highlights the sharp, crisp vision and glistening free clarity of Clareon, our most advanced IOL material.
Clareon has been implanted in more than one million eyes and is now available on most of our IOL and PCIOL platforms across key geographies. In addition, surgeons at the meeting presented a real-world study highlighting that our ARGOS biometer delivers significant time savings in cataract evaluation. This is becoming an increasingly critical element for surgeons looking to improve practice efficiency, especially given current levels of staff turnover. The innovation and data presented at the event demonstrates that our products and services continue to support surgeons in delivering increased efficiencies and improved patient outcomes. Now moving to Vision Care, our new and recent product launches, including our PRECISION1 family of lenses, TOTAL30, and DAILIES TOTAL1 for Astigmatism, continue to drive momentum.
We're particularly excited about having two SiHy toric lenses in the market, PRECISION1 for Astigmatism, which is aimed at the mainstream market, and DAILIES TOTAL1 for Astigmatism for the premium segment. DAILIES TOTAL1 for Astigmatism has been eagerly anticipated by eye care professionals for years, and customer reception has been very strong. This is the first and only daily disposable toric lens to feature water gradient surface material. With this lens, exceptional comfort, eye care professionals are well positioned to fit and keep more astigmatic patients in contact lenses. This has contributed to our growing share of the daily toric market, which is the fastest-growing market segment. Additionally, we continue to see positive uptake of TOTAL30, our newest reusable lens.
This water gradient lens is nearly as soft as the cornea itself and is almost 100% water at the surface, creates a lens that is exceptionally comfortable, yet durable for 30 days of wear. We've now rolled out TOTAL30 in both Europe and the U.S., and we're preparing to launch TOTAL30 for astigmatism early next year. With new entries in daily reusable and specialty lenses, we're excited about the progress we're making in new and switch fits, which is a strong leading indicator of long-term share growth. Now finally, turning to ocular health. We continue to see strong retail, consumer, and physician interest in our portfolio of eye drops. Sales of our popular SYSTANE family of artificial tears grew in the high single digits%, driven by the recent launches of our multi-dose preservative-free formulations in the United States and international markets.
Simbrinza also continues to contribute nicely to our portfolio of eye drops. Recall that we've invested in a new sales force dedicated to supporting our portfolio of eye drops in the United States. Now let me provide an update on our end markets. In surgical, global cataract procedures were up high single digits in the Q2 versus prior year. This excludes the impact of the market recovery in India, which was significantly impacted by COVID-19 last year. Against this backdrop, we saw significant growth in our implantables business, driven by the strength of our advanced technology lenses, our commercial execution, and international market recovery. In vision care, the market growth was very dynamic and varied by region. United States grew mid-single digits in line with historical averages, while Europe and Japan, which were impacted more significantly by COVID-19 in the Q2 of last year, grew double digits.
To summarize, despite the macro and supply chain challenges we've faced, I'm very pleased with the strong underlying performance of our business in the Q2. We grew revenue 10% while continuing to invest in the business. Our robust innovation pipeline is delivering solid results as evidenced by the successful launches of our new ATIOLs and SiHy contact lenses. We continue to drive operating leverage, and our Q2 2022 core operating margin expanded by 170 basis points on a constant currency basis over the prior year. Given the current economic environment, we'll continue to take measures to offset some of the headwinds as we are well positioned to succeed in the future. With that, let me pass it to Tim, who will take you through our financial results and provide an outlook for the rest of the year.
Thank you, David. We're pleased to report Q2 sales of $2.2 billion, up 10% versus prior year. This double-digit growth was driven by demand for our innovative products and international market recovery. Similar to the Q1, our overall Q2 sales growth included approximately one percentage point of contribution from recently acquired products, Simbrinza and Hydrus. Our Q2 U.S. dollar sales growth included approximately five percentage points of pressure from foreign currency. For the first half of 2022, total company sales of $4.4 billion grew 14%. In the quarter, we continued to build upon our positive momentum despite the persistent macroeconomic headwinds. These headwinds included a historically strong U.S. dollar, supply chain tightness, and inflationary pressures.
This was pervasive across both our franchises and included pressures on availability of supply, rising prices on electronic components and commodities, including plastics and resins, as well as increased costs for labor and transportation. Fortunately, our team was able to offset much of the impact through productivity and cost reduction initiatives, strategic price increases from earlier in the year, and contract negotiations with suppliers. In our surgical franchise, revenue was up 13% year over year to $1.3 billion in the Q2. Surgical revenue in the first half of 2022 was up 17%. Implantable sales were $444 million in the quarter, up 21% year over year, primarily due to market recovery, the strength of Vivity, and sales of Hydrus, which was not part of our portfolio last year.
Implantable sales in the first half of the year were up 29%. For consumables, our Q2 sales were up 9% to $644 million, with cataract growing low double digits and vitreoretinal growing high single digits. For the first half of the year, consumable sales were up 13%. In equipment and other, our sales were up 10% year-over-year to $208 million in the Q2, primarily due to strong reception of our suite of cataract equipment. In our international regions, we continue to upgrade customers from older generations of phaco equipment to Centurion. Additionally, demand for Legion has been strong. We also see solid interest in our ACTIVE SENTRY handpiece, our Revalia microscope, and our ARGOS biometer. Sales growth was partially offset by declines in refractive equipment due to a difficult year-over-year comparison.
Equipment sales for the first half of the year were up 8%. Turning now to vision care. Q2 sales were up 7% year-over-year to $904 million. During the quarter, we saw robust international demand driven by market recovery and product launches. Vision care sales were $1.8 billion for the first half of 2022, up 10%. Contact lens sales were $547 million in the quarter, up 9% versus last year. We continue to see strong demand for our PRECISION1 and Total brand families as the recent launches of DAILIES TOTAL1 for Astigmatism and TOTAL30 continue to gain traction and take share. This growth was partially offset by declines in other reusable and non-SiHy daily lenses. Contact lens sales for the first half of the year were up 11%.
In ocular health, our Q2 sales were $357 million, up 4% year-over-year. This is primarily driven by our sustained family of products as well as sales of Simbrinza, which was not part of our portfolio for most of the Q2 last year. This growth was partially offset by supply chain challenges, primarily in contact lens care, which impacted growth by approximately three percentage points. Ocular health sales were up 9% for the first half of the year. Now, moving down the income statement. Q2 core gross margin was 63.3%, down 20 basis points on a constant currency basis, primarily due to inflationary pressures. Core operating margin was 18.4% in the quarter, up 170 basis points on a constant currency basis.
The improvement was primarily driven by operating leverage from higher sales, partially offset by increased inflationary pressures. As expected, we saw a planned increase in marketing and sales expense in the quarter. Q2 interest expense was $31 million, broadly in line with last year. The Q2 core tax rate was 11.1% compared to 19.2% last year. The lower rate was primarily due to the timing of a favorable geographic mix of pre-tax income, a benefit on inventory build in certain markets as a result of new product launches, as well as a benefit associated with an agreement for deductibility of a statutory expense in Switzerland related to fiscal year 2022. The core effective tax rate was 13.7% for the first six months of the year.
Core diluted earnings per share in the Q2 of 2022 were $0.63, up from $0.56 last year. Before I discuss our outlook for the remainder of 2022, I'll touch on a couple of cash flow and other related items. Free cash flow for the first half of 2022 was $233 million compared to $320 million last year. This variance was primarily driven by lower cash flow from operations in 2022 due to the annual bonus payment, which was higher than in 2021, and the timing of tax payments. Capital expenditures were $237 million for the first half of 2022, which was primarily related to our contact lens manufacturing production lines. Transformation costs were $9 million in the quarter and $193 million life to date.
During the Q2, we completed a public offering of EUR 500 million of senior notes, which are due in 2028. The proceeds from the offering were primarily used to repay existing debt. I'm also pleased to report that in the Q2, we paid $100 million in cash dividends to our shareholders. Now moving to our full year 2022 guidance. As I've mentioned, we continue to see certain macro headwinds, including foreign exchange pressure from an appreciating U.S. dollar, inflation and supply chain tightness, the global impacts of the war on Ukraine, and the ongoing effects from COVID-19.
Our current 2022 outlook assumes that the 2022 global markets grow at slightly above historical rates, inflation stays at current levels through the remainder of the year, supply chain does not materially deteriorate, and the U.S. dollar holds steady at mid-July foreign exchange rates. Based on our current assumptions, we are updating our net sales guidance for full year 2022 to $8.6 billion-$8.8 billion, versus our previous guide of $8.7 billion-$8.9 billion. However, given the strong performance of the business, we are maintaining our year-over-year constant currency sales growth of 9%-11%. Foreign exchange is now expected to have a negative impact of approximately five percentage points versus prior year, as compared to the negative three percentage point impact we estimated in May. Moving to core operating margins.
Despite the headwinds I've described, we are maintaining our full year outlook of 18%-19%. This guidance now reflects approximately 160 basis points of FX pressure versus last year, as compared to the 110 basis points in our May outlook. It also includes approximately 90 basis points of net inflationary pressure consistent with what we provided in May. Interest and other financial expense is now expected to be between $210 million-$220 million, up $10 million versus the guidance we provided in May. The increased expense is driven by higher interest rates and hedging costs due to the market volatility. We are maintaining our core effective tax rate of 17%-19% for the year, despite the favorable rates in the first half.
The increase in the second half will be driven by a less favorable geographic mix, along with less of an inventory build for new product launches. We're also discussing an advanced pricing agreement with the U.S. and Swiss tax authorities. Our guidance incorporates the impact of the new agreement and assumes the negotiations will be finalized in 2022. Finally, we now expect full year 2022 core diluted EPS of $2.20-$2.30 per share, down from the $2.35-$2.45 per share we provided in May. This updated guidance reflects an increase of approximately $0.15 of FX headwind versus our last call and approximately $0.37 versus prior year.
However, we are maintaining our constant currency core diluted EPS growth outlook of 19%-24% due to the strong momentum we are seeing in the business. With that, I'll turn it back to David.
Thanks, Tim. To wrap up, our underlying business continues to perform well despite headwinds that we continue to face. We're launching new products and gaining share in both franchises. We continue to invest in the business, and we're creating operating leverage and expanding margins. As we look to the future, our focus remains the same. We'll continue to fuel our innovative engine while prudently managing our resources. All the while, we remain committed to creating long-term value for our shareholders. Finally, I wanna thank all our associates for their hard work in delivering great results in an increasingly challenging environment. With that, let's open the line for Q&A.
At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star two if you would like to remove your question from the queue. We ask that you limit your questions to one and then a follow-up so that others may have an opportunity to ask questions. You may reenter the queue by pressing star one. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we hold for questions. Our first question comes from Zachary Weiner with Jefferies. Please proceed with your question.
Hey, everyone. Thanks for taking the question, and congrats on another great quarter. I just wanna touch on the PCIOL market. First, you know, expectations for market growth, which you kinda touched on. But then also, you know, PCIOL as being a more premium per procedure. How do you think that market will evolve as we head towards a potential economic downturn, you know, in the near future? Thanks.
Thanks, Zach. First of all, we had, we had a good quarter on PCIOLs. We're very pleased with our share performance. United States, I think, was up over 80% again. So we're, you know, we're under some new competitor launch in the United States now for almost a year, and I think we've really held up quite well. I think maybe better than many expected. So that's been terrific. I think outside the U.S., we've done a really nice job of growing share. I think in the script we quoted 55%. That's correct. And we're excited about that. That has been a combination of continuous progress made on PanOptix, but the addition of Vivity into the mix.
And so, you know, really importantly, we've gained five share points, you know, in the last 18 months or so on the back of Vivity. So what was really important to us though is to show that that was additive, you know, to the share position as opposed to potentially cannibalizing. So we're really, you know, very pleased with that performance so far. I think, you know, going forward, you know, we expect that there is gonna be, you know, continued growth in PCIOLs. I think year-over-year, penetration continued to grow. It was slightly down from Q1. I don't know that I read much into that. Principally, it was down in the U.S.
And I think the thing we'll have to see over time is how much this you know what the effect of recession on this would be. We've modeled recession in the past on IOLs, and it hasn't really been a very big effect because, of course, cataracts don't go away, and the cataract volumes continue in there. Back when we did it in 2008, 2009, which we've looked at, I think the kind of question in our minds was what was the PCIOL percentage, and it was quite low, so it's hard to take much from that. But it did stay pretty solid. So I think, you know, from our perspective, it's a little bit of wait and see. But I remind people that the headroom in this space is quite big, right?
So We think people can afford, you know, ATIOLs, you know, probably in that 35%-40% of the market can afford it. We're really sitting somewhere in the low teens%. So I think there's plenty of patients out there who can come get at PCIOLs. We're obviously spending a lot of time on it as well. So we've increased our sales force effort. We've matched our coverage of ORs with now representatives responsible for trying to grow this business, clinical-based sales force. And also we've begun to use programming right now that reaches patients directly on a digital basis, so engaging in very specific information that will help move this along.
So we're very positive on the outlook directionally, certainly on a share basis, but we're very aware of the penetration needs going forward and continue to work on those.
Very helpful. Thanks for taking the question.
Our next question comes from Chris Cooley with Stephens. Please proceed with your question.
Good morning, and thank you for taking the questions, and congrats on a great quarter in a tough environment. Maybe just one for me on the growth that you talked about in the MIGS market, you know, recent acquisition there, obviously of Ivantis. Would be interested in just learning a little bit more about your expectations for broad market growth, both here in the U.S. and abroad, after we've seen a number of reimbursement changes in the space. And then similarly, maybe any additional color you could provide just regarding receptivity to the various devices by channel when we think about the comprehensive ophthalmologist versus the glaucoma specialist. Thank you.
Yeah. Thanks, Chris. I mean, the glaucoma business has been, you know, exciting for us. We're glad to see the progress we're making. We've integrated the Ivantis team, we're actively training new surgeons, and we've got really great data on Hydrus now out in the hands of the reps. So we're, you know, excited to talk a lot about in two-thirds of patients remaining medication-free and 50% reduction, you know, in the relative risk of a second surgery. So we think MIGS is a growing space and, you know, we see it growing high single digits and continuing to grow high single digits. The stent-based part of the MIGS market, I would say, has been obviously year-on-year affected by the reimbursement. So I think it's growing currently in line with our expectations.
And I think, you know, it has stabilized as well, I think as we kind of come into the middle part of this year. So pretty much as expected in the market for it. There are a couple of new products I think coming out, you know, we've seen several new entries, at least approvals, I should say. And we think that's a good thing 'cause I think what it's showing is there's increasing attention, you know, into these channels for glaucoma interventions. So for the glaucoma surgeon, I think that's very positive. Gives them a lot of choices, gives them choices in the mild to moderate, where I think the vast majority of the market is and where we play.
And we'll also give them some newer choices on the more severe end of the spectrum, which I think is where some of the newer players will play. And also, obviously for the more comprehensive ophthalmologist, it gives them some choices on how to treat and refer or, you know, choose to do surgery. Their call. But I think we believe there's gonna be a very specific group of surgeons who, you know, are going to follow these patients, are pretty good cataract surgeons. They're not the super high volume cataract surgeons who frankly are gonna refer these patients. But I think we're gonna have a nice sweet spot in the middle of both glaucoma folks, and I'll just call them busy surgeons that will do a good bit of this stuff.
So very positive outlook, at least at this point. And I think, you know, kind of on par for where we'd expect it to be.
Thank you, and congratulations again on the great quarter.
Our next question comes from Daniel Buchta with ZKB. Please proceed with your question.
Yes, thank you much. Maybe the first question and then a follow-up question on that topic as well. First one on the core EBIT margin guidance. I mean, you kept it stable at 18%-19%, but now you have already 19.5% in the first half. I mean, at least the lower end of the margin guidance sounds pretty cautious. But in general, maybe you can provide a bit of a picture, what has changed or what could change now in the second half compared to the first half, where you were able to get up the margin so much already. So why at least the lower end is still possible of that range?
Sure. Thanks, Daniel. Yeah, good observation. We will see some headwinds in the second half of the year. I'll start with FX to the color we gave in the prepared remarks. You know, we are seeing more FX pressure in the second half as compared to the first half. I mean, if you just look at mid-July, which is sort of what we use for our forecast, and you compare that to June exit rates, I mean, the dollar continues to appreciate, right? It's up 6% versus the euro, up 4% versus the yen. So continues to get stronger. So that's probably, I'd say $60 million-$70 million of pressure in the second half as compared to the first half. The next piece is around our innovation.
So if you look at our R&D spend in the first half, it's about 7.5%. Now, we said at the beginning of the year that we would like that to be roughly 8% of revenue for the total year. So that would imply that we're gonna spend, call it, 8.5% in the second half, as compared to that 7.5% in the first half. So that's another $40 million or $50 million of incremental costs towards innovation. And then the last significant piece is around gross margin. So, you know, gross margin, there's really two pieces to it. One is we typically have seasonality.
If you go back to 2019, I wouldn't use 2020 and maybe 2021, you know, you'll see our gross margin is pressured in the second half as compared to the first half. So it's typically driven by the fact, you know, if you look at, you know, the allergy season, it was more favorable in the first half. People tend to buy more equipment in the back half of the year as their budgets are running up. So that's a piece of it. And then if you recall on the last Q1 earnings call, you know, we called out that Korea IOL impact. That was a one-time gain that we got in Q1 that won't repeat in the second half of the year.
So those are really the three key drivers around that pressure that we're seeing in the second half.
Understood, yeah. Thank you for that. And then maybe the follow-up on what that means for your guidance basically next year and also for 2025. I mean, the last comment from your side was you will be at low 20s% core EBIT margin by the end of next year and then mid-20s% by the end of 2025. Given what you see in the FX environment and everything you just mentioned, are both guidance still valid, or how do you see that?
Yeah. Well, the first thing I'd say is we're pleased with the 18.4% in Q2. And actually, if you take FX out of that gets you pretty close to 20%. So, so we're pleased with the margin progression that we're seeing in the business. And I would just add that we're getting that improvement while we continue to invest in the business in R&D, while we have a very volatile supply chain and backorder environment, if you will, and inflation levels that we haven't seen since, call it, the 1980s. So we're committed to our goal. We have an operational plan.
To achieve those goals. Now, having said that, you know, if the dollar continues to strengthen, we're gonna have to evaluate the financial impact that has. And the one thing that we are committed to is innovation and investing in innovation. We are committed to investing in programs that drive revenue growth, and we're committed to doing the right thing for the long term of the business.
Okay. Assuming if it stays where it is now, the guidance is still valid and no further strengthening of the U.S. dollar.
Again, we have, we have our operational plan in place, and we're committed to investing in the business, driving revenue growth, and doing the right long-term things for the business.
Our next question comes from Larry Biegelsen with Wells Fargo. Please proceed with your question.
Good morning. Thanks for taking the question. Just Tim and David, maybe a similar one for me, but on the top line. You know, the guidance implies about 4%-8% constant currency growth in the second half. And you know, so it's about 5%, you know, organic, you know, if you adjust for acquisitions at the midpoint. So what's driving this softer growth outlook in the second half? Is it more conservatism or do you expect maybe this, the market that's, you know, run very hot in the first half, David, to cool down? And what does, just to follow, you know, similar to the prior question, what does that imply for growth in 2023? Any preliminary thoughts would be helpful. I had one follow-up. Thanks.
Yeah. Larry, let me start with the market itself. You know, look, we think the market for the remainder of the year is gonna grow slightly faster than historical growth rates. But it really does start to come down, as we said at the last call, from what is wrapping around on the COVID numbers or the kind of COVID problems last year, to something that looks a lot more normal by the end of the year. Remember that our normal growth rates, you know, have always been kind of roughly and depending on the market, you know, they're around 4-5%. We grow a little faster than that. That's usually what we plan to do. But I think that's very consistent with the guidance we've given.
I think the short version of this year is that the international business is still doing quite well. Our U.S. business is, you know, kind of now wrapping around to a much more normal phase. And so those will likely balance out as you get to the end of the year, and then you'll see a much more, I think, normal year-on-year trajectory next year. So, we'll give further guidance and better color on 2023 obviously later in the year. But my expectation is that as we get through these difficult comparators, things will begin to normalize around what we have historically seen as a, you know, kind of 4%-5% growth rate for the markets, and then us growing hopefully a little bit faster than that.
Okay, that's helpful. And David, can you talk about pricing a little bit? You know, where are you being able to take price and where do you see additional opportunity to do so? Are you know, I don't know if you guys have disclosed kind of what you think net pricing will be for Alcon overall in 2022? Thanks for taking the question.
Yeah. We, we , we started late last year with some price announcements. We took them as much as we could early in the year. I don't think we anticipated the magnitude of the inflation that we've actually seen. You know, if you look at where we are right now, I think you know, the number's way up near 9%. And you know, I think we were thinking it was gonna be a good bit lower than that. So, you know, I think the magnitude of our pricing was certainly ambitious in our minds, but in retrospect, it still left us with a little bit of net inflation more than we had hoped for, I think.
Now truthfully, that's, you know, difficult when you take price because a lot of our business is contracted and is, you know, under a fixed contract for some period of time. So in the surgical business in particular, we're either working against, you know, a fixed government reimbursement or a fixed contract with an individual payer. That's been difficult to take. It is in certain circumstances we can, like loose items or one-off prices or some things that are not contracted. But we've been a little bit more cautious or I wouldn't say cautious, I would just say it's a little more difficult to do it in surgical. Vision care, we did take some fairly reasonable prices. We took price up in the contact lens business in the mid-single digits%, expecting that, you know, the majority of that would read through.
I think we're seeing, you know, low single digits read through, which is, you know, positive for us in that business. But again, think about that as not a global thing, but rather a market by market, relatively strategic. We're trying to stay very carefully in touch with competitors, and we're also aware of consumer behavior around price. So we wanna keep people, you know, in dailies and wanna keep them switching into dailies. So we're careful around the magnitude of the price.
Our next question comes from Matthew Mishan with KeyBanc Capital. Please proceed with your question.
Hey, good morning, and thank you for taking the questions. Just a couple of follow-ups on some other topics. First, on the operating margin, do you expect trough quarter to be 3Q or 4Q?
I'm sorry, what did you say?
Last quarter.
Yeah. Again, we're not, we're not, we're not giving quarterly guidance. So I would just say it should. You know, normal seasonality for the business, I'd go back and look at 2019, maybe look at 2021 and kind of see how the quarters behave. I'd expect to see something similar to that in 2022.
Okay. And then around ocular health, you said you had some supply chain constraints in contact lens care. How long do you expect that to be impacting results?
Well, you know, it's hard to tell. You know, I think, Matthew, we certainly saw, you know, at least 3% of a dip in our growth rate. I think we grew about 4% versus prior year in the Q2. We probably had, you know, it was probably closer to 7% had we been able to fill all our orders. We did not fill a lot of contact lens care, in particular. And then we had some contract manufacturers who were unable to supply us as well. We've struggled a little bit in that business, you know, this particular quarter. It should get better. I think the Q3 could still be a little bumpy.
But I think we, you know, at least at this point in this moment, which again is a little bit dangerous thing to say because it's just sporadic as we see going forward. But we feel it should resolve somewhere in the Q4. But I think I'll be a little bit cautious around that because as we said in our assumptions, we assume the supply chain will not get worse. And it obviously has been bumpy.
Thank you.
Our next question comes from Ryan Zimmerman with BTIG. Please proceed with your question.
Yeah, thanks for taking my question. David, to start on cataracts for a moment. You know, we've kind of talked before about there being about one million plus 1.1 million backlog in cataracts. The cataract market's been up, you know, double digits this past two quarters, running pretty good. You know, the guidance and commentary suggests that, you know, it could slow down in the back half of this year. And so, I'm curious kind of how you think about the duration of, you know, that dynamic and working through the backlog. Does it you know, if the market, if cataracts does slow down in the back half of this year, does that extend the duration of the backlog benefit, you know, longer term, you know, as we move through 2022 and into 2023? I'd appreciate your thoughts there.
Yeah, look, I think it does, Ryan. I really do. I think right now we're just not getting a lot of benefit from the backlog. That's what I believe. If you look at the U.S. cataract procedures and look at procedures in the U.S., I think they were probably in the, you know, 4% range. You know, it was 7% overall. We grew 9%. International was better than market. So we had a very good quarter on cataracts, but the U.S. really did slow down to a number that I thought was surprisingly low. And really because as we see it, they're having a hard time keeping staff, training staff, and the capacity doesn't appear to be there. And we had thought that it would be.
I think if you look at what's really getting reported in a lot of circumstances, different categories, OR staff in particular has been hard to keep. I think people are having a very hard time running at what they would believe is kind of the full 100% utilization of their facilities. And I think that's gonna continue to be the case for a while. I believe as it settles down, I've always said these cataracts haven't gone anywhere, so they are gonna come back. It is my own view that we'll see a steady, slightly warmer than historical rates for the market in cataract surgery, both internationally and in the US. But I think for now, it's difficult to find, train, and maintain OR staff.
Appreciate that, David. And then you know, globally, you made a comment, and if I look back last quarter, I think you guys were at 60% share, PCIOLs share globally last quarter went down to 55%. And I know it's up, you know, since the Vivity launch of about 5%. But, but what do you attribute to that dip? Not to, not to split hairs here, but you know, curious kind of what drove that dynamic from 1Q to 2Q.
Yeah, Ryan, we were up quarter-over-quarter, so I'm not sure where the 60 comes from. I have to go back and look. If I said 60, that's not right, because we gained market share in this quarter versus prior quarter. So I'm either confused here, but we read 55% as a very positive share. I believe we were somewhere in the low 50s% last quarter, and we've come up, you know, I think about 1.5 share points, mostly driven by the international business in this particular frame. But if you look at our U.S. business, PCIOLs, we're 80%, low 80s%. And, you know, that's been down below 80% and now it's bounced back up as you see competitive trial go away.
People kind of got a chance to try things, they kind of move on, and they really do come back to Vivity and PanOptix. So we're super comfortable with our share progress, particularly in the PCIOLs.
Our next question comes from Cecilia Furlong with Morgan Stanley. Please proceed with your question.
Great. Good morning, and thank you for taking the questions. I wanted to start with TOTAL30. If you could just speak to what you're seeing from either new versus switch fits initially, as well as, just how you've seen your overall share of the reusable market trend now versus when you initially launched the platform.
Yeah, TOTAL30 is doing really well. We're excited about the product. It, you know, it's a very unique material. It's the first really new material in a long time. The genius of that lens is, of course, you know, you can use that lens for 30 days. It's that durable, but it can still hold this kind of soft water gradient, you know, surface. And that's the magic of trying to create a reusable that could, you know, resist lipids, resist bacteria, last that long, but still be comfortable and really, really soft. And I think that's really bearing out to be true in the market.
I think a little bit of the halo that we had hoped to get from TOTAL1, you know, looks to be coming on to this reusable lens, TOTAL30. And I think our new and switch fits are in excellent condition right now. We're excited about what we see. If you read that as, you know, kind of a forward indicator of how we're gonna do, we are in very good shape between TOTAL30 and our Air Optix product, we're doing exceptionally well.
Great. And if I could follow up just the capital environment that you're seeing today, if you could speak to one, the regional dispersion of equipment demand that you're seeing, as well as just your outlook for the balance of the year, that you incorporate in your guidance and really just the sustainability of the recent cataract capital demand you've seen in international markets? And thank you for taking the questions.
Yeah. It's a good question, and I think there was a fairly significant disparity between the U.S. and international. So just to be clear, most of our growth, I mean, our—as we had expected, the U.S. market wrapping around on a very, very positive year from last year was, I think, flat or slightly down in capital equipment. And then the international business carried, you know, the whole of that 10% growth. When you look at it on the quarter, you know, really strong effort in the recovering markets, you know, with new capital. I suspect that stays pretty well for the rest of the year internationally. I suspect the trend is largely the same for the U.S. because I think, you know, we typically live with one-year capital budgets.
And so if there's money out there, it'll get spent. It's usually, in this case, you know, it's government money internationally, largely. In the US, I think people are, you know, there's a lot of private money in this, and people are holding back a little bit right now. So none of that is surprising to us. It's a little bit stronger than we'd expected internationally, principally because I think our cataract equipment has done very, very well. I think, you know, we had originally anticipated, you know, certain competitive intrusion. We're doing much better against competition in upgrading our own equipment than we had anticipated. But I think if you look at really what we're selling these days, you know, our Active Sentry handpiece is unsurpassed in its ability to maintain a soft, stable chamber.
And as you know, combined with a lot of the other equipment that we have, it's just the best equipment in the world, and so I think we're excited to see that. I think we had a really good. Actually, in international, we had a very good performance from the other end of our line, which was the LEGION line, which is our value product with which has terrific fluidics, but it's a portable product with a very low cost per use. We did very well with that in India and Brazil, a couple other countries. So we continued to do there a good job of maintaining and actually growing share in our phaco business.
You'll see also in our equipment, a little bit of noise in positive stuff, I think, around ARGOS, you know, our new biometer, which is doing very well, and the Revalia microscope, which again, year-over-year, both of which year-over-year are growing nicely. So we're excited about the equipment generally, and it has had a good year. I think the question about next year we'll have to deal as we get kind of later into the year and see how the economy shapes up.
Great. Thank you for taking the questions.
Our next question comes from Jeff Johnson with Baird. Please proceed with your question.
Thank you. Good morning, guys. Maybe just a couple follow-ups at this point, if I could. David, maybe interested to hear on the new and switch fits with all the new products out there, just relative to your internal expectations. You know, have you been surprised one way or the other on your share of new fits increasing or not increasing as fast as you thought, just either way there? And same on switch fits. Then just net between P1 and D T1, are you still seeing trade ups dominating trade downs? Thanks.
Yeah, a couple of dynamics in there to comment on. New and switch fits on a share basis is probably a little bit better than we'd expected, you know, in total, both on dailies and on reusables. I would say, though, that the number of new and switch fits has been down slightly. So if you think about it, there's been less foot traffic still than the pre-COVID years, and I think that's kept us from kind of capturing more volume that we'd like to. But that will, you know, that will even itself out, I suspect, over time. It's gotten better in the U.S. It's slowly coming back in the international markets. You know, and I think those are really the dynamics that we'd wanna see both going the right direction.
So one of them is more market, which we can't really control, but I think will come back on its own. The other one is, you know, choice of lens. And again, we're doing quite well in both reusables and dailies. You know, on the dailies themselves, P1 and DT1 are really both doing really well. I think the thing that we thought would happen is that once we got the toric out there with DT1 and you have a sphere, a toric, and a multifocal, that's really helping the family grow. That dailies total and family, really easy to use. You can pretty much fit anybody in it. It's, you know, a premium product, so, you know, it comes with a price point that is appropriate. But I think, you know, you got a...
You know, you've got a family there that makes it difficult. If you really like that lens, you're gonna stay in that, and that's helping each, you know, of those individual modalities nicely. P1's doing great with its toric. I think when we got the toric out there on top of the sphere, we've seen P1 toric in particular grow really well. It's at a price point that's very attractive to the middle part of the market. And frankly, it's just a lot more comfortable. It doesn't have the rotational spin that some of our competitors do, and I think it's a terrific product. So I think that's, again, helping the sphere. And I think our, you know, our daily share right now is, is, is quite good and continuing to grow.
Yeah. Thank you for that. That's helpful. And then just last point, just on end market. It does sound like, you know, and I don't wanna put words in your mouth. Maybe you're saying the contact lens market's still a little sluggish. I don't know if that's global or U.S. Just if you can provide any color there. When you talked about a mid-single-digit vision care market in the U.S., if that specifically is targeted at contact lenses, you know, we've been hearing pricing at about 2%-3%. It sounds like that's about what's sticking for you as well from a pricing in contact lenses. So does that imply underlying growth in the contact lens market? Ex pricing is a little bit weaker than historical norms at this point?
Yeah. I think you've got it directionally right. I mean, I don't know that we have a really good read on the price EQ. We call it EQ units, which is really, think of that as just, you know, the patient purchase in units. But it is clearly, I think, a little bit softer than it has been. And I say that with particular emphasis on the Q2 because we didn't really see that in the Q1. We saw a little bit of a difference in the Q2 in the U.S. But I'll just say that, you know, we're lapping a really big quarter last year.
I mean, I think there was some crazy number in the U.S., like we grew 80% over prior year, and the whole of the market grew 50-something%, you know, coming off of what was basically the shutdown year in 2020. So it's pretty tough to make much out of the 2Q data in contact lens right now other than, you know, we saw the whole of the global market grow about 7%. We grew about 9%. Some of that was price. I read it if you took your 2-3% off the top, you know, and you applied it to the 9% we grew, you know, that would give you some pretty healthy unit growth.
Remember that some of that, again, you're getting value trade up from reusables to dailies, as we always do, and also mixed positive price on, you know, toric mix for us. So unit volumes necessarily don't have to go up to get pretty good value growth. And so again, there's a lot to think about in there, I recognize. The short version of that is, I think you could be seeing still a little bit more recovery to come, certainly in the international markets, and maybe a little bit more in the U.S. as you know, as consumers come back into the office to get new lenses and to switch out.
Yeah. Understood. Thank you.
Our next question comes from Julien Dormois with BNP Paribas. Please proceed with your question.
Hi. Good morning, gentlemen. Thanks for taking my questions. I have two follow-ups, please. One relates back to AT IOLs, and more broadly to the overall penetration of AT IOLs as a category, in the context of a toughening macro environment. I think you previously mentioned that it's the category as a whole is now about 12.5% of global penetration, with more than 19% in the U.S. Have those numbers moved from that quarter, and how do you see that evolving? And the second question relates to the margin development. Should we see the macro headwind that you have referred to changing the way we should think about the respective contribution of operating leverage versus gross margin to margin development in the coming years?
I think you guys previously mentioned an 80/20 ratio. Is that still the way to look at things?
Yeah. Let me start with the penetration on ATIOLs. You know, global penetration, you know, in the Q2 was 30 basis points up over prior years. So we're still seeing nice growth in penetration on the quarter. I would say that, you know, it kind of went sideways from the Q1. And so, you know, I wouldn't make much out of that other than, you know, it wasn't. You know, we've seen a lot of growth over the last stretch. I would also say that in the Q1, we had a big move in Korea. So when you look at global penetration, Q1 could be a bit exaggerated.
So hard to tell right now exactly what that looks like, but we're very sensitive to penetration 'cause it's really, at this point with our shares, you know, we see penetration as one of the key drivers of moving this business. And so, as I said earlier, we're very concentrated, you know, a lot on making sure that we've got all the things out there programmatically to continue to help consumers and surgeons come to ATIOLs. Relative to the penetration in a recession and that piece of it, you know, our view has been that there's plenty of headroom to continue to grow penetration. And I think our total penetration in the U.S., North America in the last quarter, it was something like, you know, right around 19%, and globally it was about 12%.
So that, you know, implies, I think, outside the U.S., something on the order of, something down in the high single digits. What that gives us, I think, directionally is a belief that, you know, this has got plenty of room to grow, and particularly in the international markets. So again, it may turn out that if the U.S. goes into a recession, and again, I don't wanna predict what's going to happen in the next six months. There are a lot of people who think it's a global recession. Some think it could be different in different regions. The timing of which, the depth of which, and the duration of which, I just don't know.
But we've thought about it in a number of different scenarios and feel comfortable that we can plan our way through it. We'll follow it closely and, you know, make the decisions we need to along the way. In terms of impact on products, the biggest impact historically has been on refractive, and that's a very small part of our business. So, you know, our view is that the eye care demand for surgery will continue really pretty much unabated, and the eye care demand for, you know, visits and therapy will continue. People that wear contacts will still wear contacts. What usually happened, or at least used to happen, was you see a little bit less trade up from reusables to dailies, and you may see some slowdown in penetration.
But again, we've just never seen it before. So we've never been at this rate before, so I'd be loath to project it right now. But we feel pretty comfortable that we can manage it.
And on the margin progression, you know, the two macro headwinds we talk about, obviously foreign exchange, I mean, that works its way through the whole P&L, so no real differential, I'd say. The second one would be inflation. So if that were to continue, you'll probably see a little bit more pressure on the gross margin, you know, given the fact that that's where all the material purchases are. We have a lot of labor up in the gross margin up there. But I think directionally, as you think longer term about the business and that margin progression, you know, I'd still anticipate to see roughly 80% of it coming from operating leverage and 20% of it coming from margin expansion.
Helpful. Thank you.
Our next question comes from David Adlington with JP Morgan. Please proceed with your question.
Hey, guys. I have two follow-ups, please. Just on Ocular Health. You mentioned an outlook for improvement there, but in terms of the lost demand due to supply chain, how much of that is sort of pent up and could come back, or is that lost forever? And then secondly, just in terms of, I don't think you called out on the call so far, but any impact from the Chinese lockdowns in the Q2, please.
Yeah. On the second one, yeah, we had a rough quarter in China. I think it was flat or -2% or something like that. It was not good. So obviously a big market for us that didn't grow on the quarter. So that's holding back a little bit. Mostly our surgical business because that's dominantly a surgical mix element. So we look forward to that bouncing back next quarter. And I think generally speaking, on the eye drops, you know, it's been our view that when, you know, basically when you lose these sales, you're gonna lose them to somebody else on the shelf.
So, you know, I don't know that if you, if you're looking for contact lens solutions and you're a reusable wearer, you're gonna pick up a private label brand or you'll pick up something else. So it's probably a lost sale. I wouldn't expect any recovery from it.
All right. Thanks so much.
Our next question comes from Larry Biegelsen with Wells Fargo. Please proceed with your question.
Good morning. Thanks for taking the follow-up question. Tim, just one for you on the tax rate. The guidance seems to imply, you know, like 23% or so in the second half of the year. And I see the guidance for the full year. I guess my question is, how do we think about the tax rate beyond 2022? You know, I heard you talk about some type of settlement between the U.S. and Switzerland. So any color there would be helpful. Thanks for taking the follow-up.
Yeah, no problem. So, you know, you're absolutely right. The implied rate in the second half will be around 23%, and that's really driven by we'll have less profit in inventory, so we'll be releasing some DTAs, which increases your tax rate. You know, the timing of the APA is really a big one. Again, we assumed that we would close that in the first half. It looks like now we'll close it in the second half. When you see that, your rate goes up for the half. But for the total year, this is all really just timing. So for the total year, we feel very good about the 17%-19% range that we talked about.
And I would just go back, Larry, to the Capital Markets Day and what we said there for your tax rates going forward. I would just use that for now until we update you at the next Capital Markets Day.
All right. Thanks so much.
Ladies and gentlemen, we have reached the end of the question and answer session, and this concludes our call for today. Thank you for your participation. You may disconnect your line.