Earnings Call: Q3 2019

Nov 20, 2019

Good day, and welcome to the Alcon Third Quarter 2019 Conference Call. All participants will be in listen only mode. Please note this event is being recorded. I would now like to turn the conference over to Karen King, Senior Vice President of Communications and Investor Relations. Please go ahead. Welcome to Alcon's Q3 2019 conference call. We issued a press release and financial results 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 Stonecypher, our Chief Financial Officer. Our quarterly 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 events or 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 20 F registration statement on file with the Securities and Exchange Commission and available on the SEC's website atwww.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 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 alternatives to, the operating performance measure as prescribed per IFRS. Please review the financial tables provided in the press release and our filings that reconcile such non IFRS measures to directly comparable financial measures presented in accordance with IFRS. In just a few moments, David and Tim will be discussing net sales results for the quarter 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. Good afternoon. Welcome to our Q3 2019 performance update. We're pleased to report another solid quarter showing strong top line growth and generating core operating leverage and solid core earnings. It's been a very busy quarter for us. We continue to make good progress in standing up the organization. We refinanced $2,000,000,000 of debt, launched 2 key products in the U. S. And just announced the implementation of a multi year transformation plan. I'll walk you through these items and provide some perspective on sales and market dynamics. And after my comments, Tim will discuss our sales performance by business and provide you with additional color on the financials. I'll wrap it up with some closing comments before moving on to Q and A. First, we continue to make progress in standing up new Alcon. As part of our transformation, we recently completed the implementation of SAP in all our remaining EMEA countries and now have approximately 85% of our sales running through the new system on standardized processes. We expect the SAP implementation spend to be substantially complete by the end of 2021. We're also making significant progress on the installation of our new vision care manufacturing lines with our 2nd site in Singapore ramping up this year. These lines will support our ability to open up capacity required for our global launch of PRECISION 1. 2nd, we strengthened our capital structure by refinancing $2,000,000,000 of our shorter term debt and extending our average maturity. 3rd, the PRECISION 1 and PAN OPTIC launches in the U. S. Are off to a good start. We saw high customer engagement with both launches at the recent American Academy of Ophthalmology and Optometry meetings. The products were very well received with heavy booth traffic, solid scientific presence and excellent customer participation in launch events. Starting with PRECISION 1, our new SiHy contact lens, which is targeted at the largest segment of the fast growing daily disposable market, our sales force has been delivering fit sets to targeted customers and we're steadily expanding that distribution. Starting this month and into early next year, our distributors will be able to stock Precision 1 and we expect unconstrained availability by the end of Q1 2020. Shifting now to PanOptix for the 1st trifocal advanced technology intraocular lens to enter the U. S. Market. Since early September, our sales force has been placing consignment sets at key accounts. We launched the product with a comprehensive offering by introducing Sphere and Toric modalities with both blue light and UV options. Although we launched late in the quarter, the reported 3rd quarter market share data shows us gaining 8 share points in the U. S. PCIOL category, so very positive start. We're also encouraged by the progress we've made on Vivity, our new PCIOL that uses a non diffractive mechanism of action to deliver extended vision, reducing the need for glasses. We published our European clinical data at EFCRS a couple of months ago and have begun a very limited KOL evaluation of the lens in Europe. We'll provide further updates as we get closer to launching this new and novel technology. And finally, we just announced that Alcon is embarking on a multi year transformation journey. As we've been saying all year, our long term financial goal of low to mid-twenty percent core operating margin is based on growing our top line faster than our cost structure. We've always said that we had the right amount of costs, but they weren't necessarily in the right places. By allocating our expenses more efficiently, we believe we can create savings to reinvest in new product development and sales and marketing. As we look across the organization, we see many opportunities to rationalize complex processes and eliminate bureaucratic layers that were previously built when we were part of a large pharmaceutical business. So we're streamlining our international commercial model and our back office functions in order to speed up our organization and focus on the highest value activities. Now this is a multi year program that will transform Alcon into an organization that's able to concentrate its efforts even more intently on our customers and patients. As a result, we believe that we are creating long term value for all stakeholders. In just a couple of minutes, Tim will provide a few more details and discuss the financial implications of that program. But first, let me give you an overview of our quarterly results. We delivered another quarter of solid performance. Overall, sales were up 6% for the quarter and 5% for the 1st 9 months of the year. Surgical continues to grow a little bit above market with growth of 7% in the quarter and 6% year to date. Vision Care is growing at or slightly below the market with growth of 4% both the quarter and year to date. Let me provide a little color on both our end markets. For Surgical, we estimate cataract procedures grew in the mid single digits this quarter driven by significant international volume growth. And for Vision Care, contact lens market growth for the 3rd quarter also increased in the mid single digits. We believe that some of the market growth this quarter was a result of buying behavior in advance of the increase in Japanese consumption task. With that, let me turn it over to Tim who will review our financial results. Thanks, David. We're pleased to report a 6% top line growth in 3rd quarter and 5% year to date. The quarterly results include approximately 1 percentage point of favorable impact due to higher demand ahead of the increase in consumption tax in Japan. Surgical sales were up 7% in the 3rd quarter, driven by strong results in implantables and consumables. Excluding the impact from the consumption tax in Japan, which affected all surgical categories, surgical sales were up 6%. Implantable sales of $287,000,000 increased by 8%, primarily due to strong double digit gains in PanOptics outside the U. S. And other AT IOLs, as well as steady monofocal IOL growth. Consumable sales of $571,000,000 increased by 9% in the Q3. We saw growth in both our cataract and Vitret consumables across all our regions. Asia in particular has been exceptionally strong due to our surgeon training and education programs, which have increased the amount of Vitret surgery we're seeing in the region. We also saw strong conversions of equipment and innovation to smaller gauge instrumentation. Sales from the equipment and other subcategory were $161,000,000 a decrease of 2% versus the Q3 of last year, primarily due to the decline in procedural drops and refractive equipment. Equipment sales, which are capital purchases, can vary from quarter to quarter, and we believe our year to date growth of 5% is more representative of our performance. Vision Care sales were up 4% in the 3rd quarter, driven by strong results in daily contact lenses and Sustain. Excluding the impact from the increase in Japanese consumption tax, which primarily affected contact lenses, Vision Care sales were up 3%. Contact lens sales were $518,000,000 up 7% versus the Q3 of 2018. The increase is primarily driven by strong demand for our leading product DAILIES Total 1 with growth in both Sphere and Multifocal. We're also seeing growth in our multifocal market share, which is helping to offset our decline in Toric as we await our new Toric entries late next year. Shifting now to Ocular Health. 3rd quarter sales were $304,000,000 relatively flat compared to last year. Double digit growth in our sustained family of products was offset by declines in contact lens care and the rest of our ocular health portfolio. Now moving down the income statement. Core gross margin was 63.8%, roughly in line with prior year while absorbing the impact of China tariffs. Core operating margin was 17.4% in the 3rd quarter, up 40 basis points versus prior year and up 60 basis points excluding the negative impact from foreign exchange, primarily related to better expense leverage as a percentage of sales. 3rd quarter interest expense was $35,000,000 up from $7,000,000 last year. As David mentioned in his opening remarks, we were very pleased with our recent refinancing of $2,000,000,000 of shorter term borrowings, which allowed us to extend the average maturity of our debt from 2 years to 10 years. The core effective tax rate was 18.2% in the quarter compared to 14.4% last year. The increase in the tax rate was primarily due to the mix of pre tax income from geographical tax jurisdictions. Core earnings per share was $0.46 in the 3rd quarter, which includes approximately $0.06 of interest on financial borrowings and the write off of unamortized debt issuance cost at the time of the refinancing. Now before I move to the guidance, wanted to touch on a couple of cash flow related items. Free cash flow for the 1st 9 months was $260,000,000 compared to $598,000,000 last year. The decrease versus last year was primarily due to spin readiness, separation and legal costs. On a year to date basis, capital expenditures were $314,000,000 driven by the expansion of our Vision Care contact lens manufacturing platform and other supply chain investments. Regarding separation costs, prior to the spin, the company provided an initial estimate of $300,000,000 primarily related to the separation of IT systems. A successful separation is critically important for us to ensure the sustainability and reliability of our independent systems and functions. Since the spin, our IT organization has done a thorough review and assessment of our systems and concluded that in some cases replicating the legacy systems was not a sustainable choice for Alcon. For example, we made the decision to invest in a multifunctional document management solution rather than cloning several legacy end of life systems. We're also incurring additional cost to ramp up manufacturing for a facility that was transferred to Alcon earlier this year. These strategic decisions and others have resulted in a revised estimate from $300,000,000 to approximately $500,000,000 Separation costs year to date are $155,000,000 and will be substantially completed over the course of the next 2 years. As David discussed earlier, we also have embarked on a multiyear transformation plan. At the end of 2023, our plan will enable us to reinvest about $200,000,000 to $225,000,000 of annual run rate savings on activities to accelerate innovation and fuel growth. Savings will be driven primarily by simplifying and rightsizing our infrastructure, creating a global shared services platform and driving process improvement and automation. This should result in about $300,000,000 of costs which will be core adjusted and reported separately starting in the Q4. We expect annual improvements in free cash flow and remain confident in our 2023 goal to deliver 2.5x to 3x our 2018 free cash flow. Now turning to our full year projections. Our strong year to date sales performance of 5% gives us greater confidence in our full year guidance. As a result, we're narrowing to the upper end of our previous net sales projections and now expect to be in the range of 4% to 5% growth on a constant currency basis, trending towards the high end of the range with a negative 2% impact from foreign currency. Our year to date core operating margin is 17.2%, which includes 70 basis points of foreign exchange pressure. As we're trending towards the lower end of our full year guidance range, we're narrowing our full year projections to be in the range of 17% to 17.5%. Our core effective tax rate for the quarter was 18.2%, which puts our year to date rate at 16.2%. We now expect our core effective tax rate to be in the range of 17% to 18% and trending towards the lower end of the range. So to summarize, we've delivered solid results while making progress in standing up Alcon as an independent company. We're committed to operating with greater focus and discipline as we take steps towards becoming a stronger and more profitable company. With that, I'll turn over the call to David for some final comments. Thanks, Tim. We're pleased to deliver solid financial results and important operational milestones this quarter. We continue to make progress in standing up Alcon. Significant progress was made this quarter as we wrap up the commercial implementation of SAP and expand our manufacturing capacity to support new contact lens innovation. We're going to execute a multi year transformation plan to leverage our strengths and competitive differentiators and evolve Alcon into a simpler, more agile company. And we're investing in new product development and customer facing initiatives that will improve our growth profile and create value for our doctors and their patients. So I mentioned at the outset of my comments, we plan to expand our margins by growing our top line and leveraging our infrastructure. We're already making progress as evidenced by our year to date sales performance of 5%. As a result, we've narrowed our full year guidance to the upper end of our previous range. Our solid performance coupled with our new product launches and comprehensive transformation plan fuels our confidence to achieve our goals and create long term shareholder value. I want to thank the 20,000 plus associates we have at Alcon for their commitment, dedicated focus and passion in helping us fulfill our purpose, doing what we do best, helping millions of people see brilliantly. And with that, operator, we're ready for questions. Thank you. And we will now begin the question and answer session. Our first question today will come from James Gordon of JPMorgan. Please go ahead. Hello. Thanks for taking the question. James Gordon from JPMorgan. A question about the transformation program. So you've reiterated the same type on the margin, but that's going to be you're going to have increased investment. So could the increased investment actually translate into faster top line growth between now and 2023 or faster growth beyond 2023? Or how should we think about that? And maybe just a follow-up as well, which would be transformation program costs, how should we think about the phasing of those please? Thanks James. Thanks for the question. Look, on the second part of that, we're pretty level loaded on the costs through the 2023 timeframe. So I think you should think about them that way. On the impact of the program, as we indicated early on when we separated from Novartis, we thought there was going to be an opportunity to transform Alcon into a significantly more agile company. We thought there would be things that we carried in as a pharmaceutical company that we probably wouldn't need. And importantly, as we spent time investing in systems and processes, I think we can make a simpler, more automated effort at many of these things. So we had planned from the very beginning to leverage our cost structure by moving costs from what I would loosely describe as less effective cost to more effective costs, think R and D and think sales and marketing. And to do that, obviously, we had to get a handle on what they were going to be. And over the last really 6, 9 months, we've been steadily working away at that plan. I think today we're just announcing really what we had described to you back at Capital Markets Day, which was this repurposing of our cost structure into the most efficient cost structure we can end up with. So we think we get very positive results from that by getting behind new product flow in terms of long term value creation. We have obviously a range long term and that's mid single digits. We'd obviously prefer to be on the high end versus the middle part of that, but we'll see how we bring products to market, how well we do with them. But obviously, what we're trying to do is get money behind those ideas to try and best accomplish that. We'll move on to the next question. The next question will come from Sebastian Walker of UBS. Please go ahead. Hi, thanks for taking the questions. I've got 2 as well if I could. So just again on the reinvestment program, I think previously you talked about a margin inflection point around 18 months from now. So could you confirm whether or not anything has changed on the timing of that margin turnaround? And then the second question was just on growth thinking about the remainder of this year and next year. So for 2019, what do you think gets you to the I'm interested in the bottom of that range. Is there anything that you're concerned about currently? And then how should we think about growth going into 2020 with the new product launches in Precision 1 and PENELTYX? Thank you. Yes. Let me start with the margin inflection question. I think what we said consistently has been that we would spend these 1st couple of years really trying to invest in this business and try and get our top line growing as best we can. That continues to be the plan. Obviously, as we see revenue grow and as we get new product flow, we intend to see margin inflection. So I think we've always kind of indicated that the margin inflection accelerates as we go in towards the later part of the plan, but that we always get accretion year on year. And so we expect that this year and we would expect that next year. In terms of revenue growth, we've narrowed the range because obviously we had a good quarter in the Q3 and we are off to a good start with the new products. So I think we see it at the high end of the range. I think it would be difficult to see it down at the bottom end of what we had guided towards. So we eliminated the 3 and frankly we are heading towards the high end of the range. Into next year, I think we are going to give guidance I think on next year really the Q4 call. But I would just say that our general view is that our product flow is solid for next year. And assuming our underlying businesses are healthy, again, we have this transformation going on with the revenue where we've got significant portions of our business growing at kind of slower than market rate. So obviously, to the extent that the health of the new products comes through, we feel comfortable certainly with what we've indicated in the past. So that's probably the direction I'd direct. Great. Thank you. And then just in terms of the progress on the initials on the SAP and the manufacturing rollout, I mean, is that all going according to plan, faster than plan or perhaps a little bit slower? Thanks. Yes. Manufacturing maybe just slightly better than we expected. I think we've always been a little bit cautious because things happen when you start new technologies. But our team in Singapore has done a terrific job of getting the second site up. Our team in Germany has done a great job of getting to optimal capacity as fast as possible. So we see lots of progress on the manufacturing front that I am very encouraged by. I would say that the SAP thing also is going very well. We just finished the EMEA rollout, which I think finishes all of the European commercial organization. And this last wave, I think, has gone off remarkably well. So, great credit to the team and the energy behind that team that finished that. So we feel good about both of those. Obviously, there's more work to be done. The next question will come from Larry Biegelsen of Wells Fargo. Please go ahead. Thanks for taking the question. 1 on Precision 1 and one on just kind of the P and L, how to think about next year a little bit. So on Precision 1, can you talk about how much cannibalization you're seeing from your business? Is it in line with your expectations? Any update on the launch timing for Europe and Japan? And just lastly, do you think your contact lens business can grow above market in 2020? And I had a follow-up. Yes. Let's start with the cannibalization question. It's pretty much what we thought. It's still early. And I think one of the things we had said was we got a big enough head start that we felt comfortable to begin putting fit sets out there. It is going to take us, Larry, probably till the end of Q1 to really get us fully distributed. Everybody's got some. There's backup in the wholesalers, the distributors and it's just kind of free range of running. There's a lot of customers out there to get to. So the sales force working very hard at it, making all the right progress. But I would think that the first real indication of how much share we can gain is going to come probably Q2 next year. In the meantime, we are obviously doing a nice job and we've got great feedback from on the lens and on and from people who put it on into patient's eyes, terrific response so far, pretty much as we would have expected. So feel good about what's going on with PrecisionOne. In terms of growing at or above market, our objective was always to get the contact lens business back to market growth, slightly ahead of market growth as we said with new product flow. P1, I think should do that. It depends entirely on how fast we can get the manufacturing up and support international launches, but I think also how fast we get the torics out. So we're looking I think at those ideas as being the principal drivers of how fast we get above market growth. But I would be disappointed if we weren't growing a little bit faster than market and growing share in this space. And just a follow-up, Europe and Japan, Precision 1, no timing there. And just for my follow-up, the Street that Tim is at about $2.08 for EPS next year. You do have some headwinds there with the higher tax rate. So remind us of your commitment to pro form a double digit EPS growth next year. There's some levers you have to kind of help overcome the higher tax rate. Thanks for taking the questions, guys. Yes. Larry, on the just following up on Japan and Europe, we haven't really indicated when we're going to launch yet because again, as I think I said last time, we're going to watch the U. S. Dynamic very carefully, make sure that we fully supply the U. S, make sure that we encourage that launch trajectory best we can and then we'll make a decision on when to go. Yes. And as far as 2020 goes, I mean, obviously, we're not going to guide here. We'll give you more color on the Q4 call. But just to help you think about it, to David's point, if you start at the top of the P and L, assuming the markets stay healthy, we'd expect this revenue momentum to continue. So I would start with that. And then from a margin perspective, as we've been saying, there's really 2 key components, right? If you look at surgical, we should continue to get have strong momentum there as well, particularly as we continue to grow PanOptix and that becomes a bigger piece of the portfolio, we'll get a natural mix lift from a gross margin perspective. So I would think about that a little bit. On the Vision Care side, a little bit similar to what we saw in Q3, that's going to continue to be pressured. We have said that we are going to be putting in new manufacturing lines. It takes 18 to 24 months to get those fully optimized. And 2020 is the peak year from an installation perspective. So as you incur start up costs, as an example, those don't get amortized. We'll continue to see those types of pressure in 2020. And then we'll also have the PrecisionOne, right? Again, as that comes out of the gates, there's a little bit of margin pressure there as well. So a couple of pressure points on the Vision Care side. And then we're going to continue to invest in the business, right? We're going to continue to invest in R and D and some of these other areas. So those are the key levers that I would think about from a margin perspective. But overall, as David alluded to, we'd expect continued improvement in margins next year, but the real acceleration really comes in 2021, 2022, 2023 when you get through some of those pressure points that I just talked about. And then to your point, we talked about last time that the tax rate with the Swiss tax reform that should go up about 3 points from what our average rate is in 2019. We've obviously guided to the low end of that effective tax rate. Next year, you're going to carry 4 quarters of interest expense versus 3 quarters. And then the other thing I would think about that we haven't really talked a lot about is share count, right? So we do not have plans at this stage to offset dilution next year. So I would just take that into account. We'll continue to review that when we review our capital allocation methodology and strategy with the Board. But as of 2020, there's no intention to offset that dilution because we're going to continue to invest in the business. So that's how I'd frame up next year, and we'll obviously give you some clear guidance on the Q4 call. Our next question will come from Daniel Bacta of Vanderbilt. Please go ahead. Yes. Thank you very much for taking my two questions. And the first one maybe coming back on your transformation program. I mean, obviously, I share your view that you want to make the organization more agile and that is very important coming from a big pharma company. But what I'm struggling to understand a little bit is that you want to reinvest the whole savings of €200,000,000 to 225,000,000 into R and D and marketing? Because I mean my understanding was with the CMD late last year, you guided an R and D run rate of €2,500,000,000 over 5 years. So I mean, if you reinvest now €200,000,000 to €225,000,000 it's a quite significant amount. And I mean, it's also a bit surprising given the fact that, I mean, under Novartis 2 years ago, you were investing already quite significantly in marketing and R and D. Why is that incrementally necessary that you invest such an amount without saving that and to improving profitability? And then the second question on the consumables business. I mean, obviously, extremely strong and nice growth in Q3. You were mentioning that you had some pull through from the equipments business, which has grown nicely also in the past couple of quarters. I mean, how sustainable is that rate? How do you think into Q4 and 2020 on that business because you guide the market to grow by roughly 3%? Thank you very much. Let me start with the reinvestment kind of the logic there. Look we have said early on and you'll remember this from the Capital Markets Day that we had an opportunity to do a lot with our leverage and that the basics of getting to 20 low to mid-20s in operating income was going to be leveraging our cost structure, in other words growing revenue faster than our costs. To do that, we always knew we needed to get after the cost structure and get them moving because we felt as though there was going to be a good bit of expense that we could move around. We've come to that view. We've put in the investments now, I think, that give us a line of sight to how we would make those improvements. And that does sum to about $200,000,000 $225,000,000 So we're excited about moving it forward to get us exactly to where we had intended to be, which was moving to the market with a better looking P and L where it's simply putting more money in the right places behind product development for the long term and behind product launches for the revenue growth required for leverage. So the argument really is simply that we have planned this from the start, and it's taken us a little bit of time to get to the costs, but I think it's consistent with where we've been for a while. Going forward, I think on the revenue side, our hope is obviously that this business can grow as we've said on a guidance basis in that kind of mid single digit basis. So the better revenue growth we get obviously the better leverage we're going to get long term. So I think that's the way to think about what the potential of the investment is. As we think about the near term question you asked really on the equipment side of things, I would just think about the equipment as a bit capital intensive and there's got to be some quarter to quarter fluctuations. So, refractive equipment in particular was a little bit soft in the Q3 and has been a little bit this year. So, I would we're keeping an eye on that one. But bit red equipment looks pretty solid and cataract equipment looks solid. So I think in terms of basic equipment placements, which is really what I would be thinking about in this category is, because that's what's really driving our consumable business is kind of as we would expect. Additionally, in this category of stuff, our service revenue is very healthy. So I feel pretty good about that. We had some one time stuff in the early part of this year where we were getting good growth rates, maybe a little bit higher than normal as I've indicated because we had some competitors out on the procedural eye drops business and they're obviously back in now. So that's come down to a more normal level. So with that, I think that's probably the answer to the near term equipment question. Our next question will come from Anthony Petrone of Jefferies. Please go ahead. Great. Thanks and congratulations on a strong quarter. Maybe a couple on PanOptix and a little bit on the restructuring program as well. In terms of the initial reception just in terms of the placements, how broad in the U. S. Market in terms of physicians is the initial rollout? And then what is the cadence sort of going to look like as we head into 2020? So that will be the first question. And on the restructuring front, how should we think about timing from now through the end of the LRP on how that would roll in? Thank you. Yes, Anthony, thanks for the questions. First on PanOptix, we are pretty much there. Obviously, these are very different looking launches between P1 and Precision 1 product in PanOptix. PanOptix, we've gotten to most of the surgeons by now. So again, you're trying to reach in the United States probably 2,000 or so surgeons that make up the vast majority of the surgery. So when you look at advanced technology lenses, it's a much more efficient target. So we are really we are there. I think we are going to see pretty solid effects going forward from that launch. And I do think that it's really just a matter of what the ultimate share is. The market itself, I think as we've said in the past, I don't know that there's going to be a big market movement on this one. I think what we're really doing is taking the share back that we once had. And I think that was anticipated by many and I think we have seen that in many of the markets around the world. So I think that's probably right on top of what we had expected and maybe just a little bit better in terms of timing and it seems to be coming along a little faster. On the restructuring, the cadence on that one, Tim, why don't you comment? Yes. So I would just say on the $300,000,000 I mean those costs will ramp over time, but we'd expect to spend about 75% of that by the end of 2021, which will be the peak year. And then given that profile, the vast majority of the rest will be incurred by the end of 2022. And savings are relatively similar in terms of the spend, in terms of the cadence. So I think you should think about the savings the same way. Our next question today will come from Richard Newitter of SVB Leerink. Please go ahead. Hi, this is Jamie Morgan on for Rich. Thanks for taking my questions. Just quickly, I wanted to circle back on PanOptix. I thought I heard you guys say that reported market share data suggested high single digit market share gain in the US PCIOL market. So I just wanted to make sure I heard that correctly. And if you could provide any additional color on that, that would be great. Yes, Jamie, thanks. Yes, you heard that correctly. We were encouraged by the initial uptake. And so with we launched in early September and we probably had 3 weeks' worth of data. So I think we saw plus or minus a little bit on 8. We are in that kind of 35 to 40 range right now. And I would just say that that gives us some room and some enthusiasm for what we had originally said, which was that we'd like to see a performance a little bit like our Canadian performance, which was get up over 50 share relatively quickly. So I think we're on that path and the product is doing quite well. And most importantly, what we're seeing right now is that patients are really enthusiastic about what they're getting on the back end. Day 1 results, surgeons are reporting to us are very encouraging. Got it. And then can you just remind me, I know you guys mentioned the Vivity PCIOL. What specifically is that one? Yes, Vivity is a new and novel technology. It's we're using a non diffractive optical design and Vivity is important because in some cases all the diffractive designs which are basically the current multifocal lenses, they are all basically going to create some visual disturbance, halos and glare and things like that, that can cause patients to be discomforted by their visual experience. And so they're upset by that. And so surgeons in many cases don't want to use those lenses because of that reason. This particular lens will not have those same halos and glares to that effect. It has a very similar profile to a monofocal. That's what the data said. And we had our data published at EFCRS. So as we said earlier in the year, we put some information out later this year as we got the clinical trials done as we began to work more towards getting this to market. This particular lens we think has some unique characteristics. It looks like very good distance vision, very good intermediate vision and about 50% of people are getting spectacle free even for reading. So we're feeling very good about what the data says. We need to find out I think what the patient needs are and how we then take that forward into the European market. So we're working right now very carefully with some key surgeons in Europe to begin to understand exactly how we'll position this. But we're excited about it and we'll see this take shape next year. Our next question will come from Ryan Zimmerman of BTIG. Please go ahead. Thanks for taking the question. So I just want to David, you commented a little bit on the health of the refractive market, particularly in light of the performance this quarter. We've seen J and J also speak to that. I'd love to get your sense of kind of what you think the health of the refractive market is or where the consumer demand is for LASIK, particularly given the performance? And then my follow-up question is around PanOptix. A lot of questions have been asked about the U. S. Launch, but we did see a launch from J and J on the Technosynergy side in Europe. And I'd love to see your thoughts around how Panoptix is holding up in the European markets in light of that launch? Thank you. Yes. Let me start with the refractive market. The refractive market has been kind of up and down. I think for a stretch, we thought it was down for a long stretch and then we thought it was bouncing back. There were probably some data errors in some of what was being reported by our data source. I think it was in truth kind of more flat to slightly growing. What's been encouraging for us is we've been gaining share. So I think we popped up over 50 share to our best calculation. And so we've been growing our consumables business kind of okay. So we see procedures in aggregate growing a little bit for us, but I think that's more share than it is anything else. And I think the bigger challenge is the equipment. So there just isn't a demand for new equipment at this moment in time because people are pretty satisfied with the number of installed base equipment with the exception I think of Asia and some of the international markets where there's still significant opportunity to place machines. But again, geographically, we're seeing kind of not a lot of equipment placed in the U. S, most of the equipment placements outside the U. S. Generally speaking, a relatively modest growth in total procedures for us. And I can only say that because I think we're gaining share, I suspect the market is relatively flat. But we'll get market scope later this month. And I think if you I think they're the best source or probably the only source on what the market's really doing. So we'll have the data shortly. On the PanOptix piece, I think the question for us is how do we continue to grow this in lots of different markets. The EMBA was up a couple of share points. So I think we feel good broadly about our ongoing ability to move that product. Almost everywhere we have launched it in the world, we do pretty well, even when we have come from 4th or 5th, which was a couple of the European markets. So we continue to do well and we feel very good about PanOptix as a trifocal versus the other diffractive lenses. I think most of the other products that are out there are in fact diffractive products. So in that event, I think we are doing quite well, particularly against other trifocals. And the newer versions, and I know the Joss and Joss folks have put out a couple of lenses that's I think that's positive for the market in general, because I do think there will be there needs to be some non diffractive lenses. I'm not sure they've mastered that yet, but that's basically the same premise that we have with Vivity and we'll just have see how those products do. So early read is it's not really having a big effect on us. We're continuing to grow share. But I wouldn't say that's the end of the story because I think there's going to be more lenses and more stuff to come there. Our next question will come from David Lewis of Morgan Stanley. Please go ahead. Good morning. This is Marisa on for David. We have a couple of quick questions. The first one that we wanted to ask is just next year, what impacts do you expect to see driven by the reduced monofocal procedural reimbursements in the U. S. That just came out. Do you think that this could lead to a softening capital environment or a catalyst for greater AT IOL and PanOptix adoption? Or how should we be thinking about that? Yes, Marisa, let me try a shot at that. Just to be clear on for those that may not know, what's going on with CMS in the United States is that they are decreasing the physician reimbursement for the surgery by a fairly significant amount. I think it's somewhere between 10% to 15%. I think it might be 15%. But on the other hand, they are actually increasing the fees for the surgical facilities. So the ASC, the surgery center or the hospitals both are going up. And I think remember that in general, the lenses are paid for by the hospital in the United States or the ambulatory surgery center under that one global fee. So in terms of price pressure, there is always price pressure on monofocals every year and we experienced that. I don't think there is going to be anything different this year from the buyers than there were yet other. So when you go to the other side of this and you say, well, what our surgeons going to do if they get paid to do paid less to do the same procedure. Look, there's some optimism amongst those of us in the AT IOL business that should encourage people to want to do more advanced technology lenses because for a little bit more time in the workup and a little bit more time in surgery, which I recognize is not everybody's interest, there's a possibility to give these patients better outcomes. And we would encourage that and that obviously is more attractive from a reimbursement perspective for the surgeon because there is a collect from the patient in that process. If that takes shape, that would be great. We are not counting on that, but I doubt it does anything other than in real terms trying to get people interested in what else they can do either other procedures or better procedures or it's unfortunate that but cataract has gotten very it's the most common procedure in the United States and it's obviously a cost target for CMS. So that's just the current circumstance. Okay. Thank you. And then as a quick follow-up, I know there's been a lot of attention on P and L transformation this morning, but how have your thoughts changed or have they changed around balance sheet deployment? I know we've talked about M and A in the future potentially to drive growth. Do you think we should expect increased activity or are tuck ins still more likely? Thanks. No, there's no real change there, neither in our capacity or our interest. I think this is pretty much as we expected it to be. I feel like consistently we've said we like ideas that are technology oriented. We like tuck in ideas. We're not looking to transform the company right now. We've got plenty of work to do. And I do think that the BD and L activity will be consistent with what we've done in the past in that kind of $50,000,000 to $300,000,000 range. Could we do more than that? Yes, but it isn't going to be something really large unless something really radically changes. It's not our intention. Our next question will come from Ed Ridley Day of Redburn. Please go ahead. Hi. Thank you for taking my question. Firstly, it's a follow-up on equipment. Obviously, you've given some color. Is there any if you talk back to the extent to which you potentially the competitive environment and particularly one of your competitors has clearly done much better in refractive recently? That would be my first question. And just thank you for the detail on the free cash flow and the guidance around that. If we look into 2020, with where the manufacturing is peaking, can you give us some a bit more color around how we should look at CapEx in 2020 before we see it start to improve? Let me take the first one and Tim take the second one on the cash flow. On the equipment, we have actually done pretty well in most markets on refractive. I would say that we aren't as competitive as we would like to be in China. That's probably the one location where there are competitors who are doing pretty well. I would say in aggregate though, we are growing share in the refractive business not losing it. So the LASIK procedure is still the most common procedure preferred by most surgeons all over the world and I think definitely from a literature basis the most predictable outcome. So I think we feel good about where we are in our long term strategy on refractive. I do think that the growth opportunity is going to end up being in Asia and we need to get more active over there. We're working on that as we speak. So that's probably the short answer to that one. Yes, I think on the CapEx, we will see a little bit of an increase next year as compared to this year because again, we've got those vision care lines going in. But longer term, we still feel very good. It's got a CapEx should be sort of mid single digit as a percent of revenue. And then on the free cash flow, as you think about the near term, we're going to continue to get operating improvements, so that should be helpful. If you look at next year as compared to this year, we will lapse the interest expense pressures given the debt structure. We had a legal settlement this year that doesn't repeat. But then on the pressure point side, you do have higher taxes, you do have the higher CapEx I talked about. And then the separation and restructuring charges should be relatively consistent year on year. So those are the levers I think through on the free cash flow side. Our next question will come from Scott Bardo of Berenberg. Please go ahead. Yes. Thanks very much for taking my question. A technical one. I wonder if you could help dissect a little bit the implantables growth that you saw this quarter, quite a healthy 7%, 8% growth. Can you give us some flavor for how that growth has been split geographically and how much of a contribution Panoptix has been towards that growth, please? And sticking on with the implantables, I just wonder if you could comment a little bit about how you perceive the window of opportunity for PanOptix in the U. S. In light of Johnson and Johnson's synergy product and others looking to enter the North American market and whether you're comfortable and confident that you have a cadence of new innovations that can sustain healthy growth in this business given your developmental pipeline? Thanks. Yes. Thanks, Scott. Let me start with the second one first actually because I think look PanOptix is going to do very well in the United States and I feel very confident that we will between PenOptix and our pipeline that we're in a really good place to defend share particularly in the PCIOL business. So we've seen the data on most of our competitive products in Europe. We understand them quite well and we don't see a tremendous amount of impact at least at this moment. So unless there's something new that we haven't seen, I think you'll see developments follow largely along the lines that we've articulated. I think in terms of growth dynamic, the U. S. In the quarter at least the U. S. Was a little bit slower than the international business in terms of total lenses. So I would just say that you saw kind of double not quite double digit in ATI Well Growth internationally. Actually it is double digit growth as I am looking at it. So we feel good about the international growth. But the U. S. Has in the Q3 was a little bit softer than it probably has been in the past. We enjoy an over indexing in the international markets. So I think part of the difference when you're looking at competition is just kind of what where their mix of business sits. So I think in terms of share, we have done very well in the U. S. The market was a little bit softer. Internationally, probably less share growth, but a stronger market. So pretty good mix there. Very good. And maybe just a quick follow-up. Encouraging to hear that you're looking to drive efficiencies and to redeploy more into R and D. Can you share with us, has there been any real triggering events for that? Has like any of your sort of more ambitious programs failed also? Or perhaps give us some flavor as to which businesses are likely to receive most of that R and D funding? Is it more surgical? Is it more vision care? Thanks. Yes. I don't think there's anything new to report per se. I mean, I think what we have seen is that as we have gotten ourselves organized, we have always had a very long list of ideas and we have always had a cut line that we historically could afford. And so but we have a lot of productive R and D projects that we'd like to continue with. So we think that enhances long term growth. We think that enhances long term financial value. So we would like to get after more of those and you will see us do that. As we bring things into a 2 year frame, we generally will try and communicate to you all about what they are and kind of where that goes. But nothing in the near term that we're going to describe now. But it will obviously as we kind of get further into next year and we start guiding around next year, we'll talk a little bit more about what we think are the big ideas for next year. Maybe one last piece on this is just that on Vision Care, as you might know, historically, we haven't spent very much money on R and D Vision Care and I think that has hurt us. So you do see in the Vision Care P and L alone just a significant jump up in R and D because that has been bereft of they've got a long list of ideas and frankly just hasn't spent much we haven't spent that much money there. So I think really important for the health of that business. So all good stuff for the long run. So we're at our time limit here, but we want to thank everybody for all the great questions and that will be it for today. Have a great day. Thanks a lot everybody. The conference has now concluded. We thank you all for attending today's presentation and you may now disconnect your lines.