Good day and welcome to the Alcon Third Quarter 2019 Conference Call. [Operator Instructions] 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 third quarter 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 Stonesifer, 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 at www.sec.gov.

Included in the press release are selected non-IFRS measures, Company management uses these measures as aids in monitoring the Company's ongoing financial performance from quarter-to-quarter and year-to-year on a regular basis and for benchmarking purposes.

Non-IFRS financial measures used by the Company may be calculated differently from and therefore may not be comparable to similarly titled measures used by other companies. These non-IFRS financial measures should be considered along with, but not as alternatives to the operating performance measures 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 and year-to-date.

In our press release, we provide a table that shows both reported net sales growth and constant currency growth. So you can see the impact of foreign currency fluctuations. For discussion purposes our comments on net sales growth during opening remarks will be expressed in constant currency. And with that, I'll now turn the call over to David..

Good afternoon and welcome to our third quarter 2019 performance update. We're pleased to report another solid quarter, showing strong top line growth and generated 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 billion of debt, launched two key products in the U.S. and just announced the implementation of a multi-year transformation plan. I'm going to 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&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 second site in Singapore ramping up this year. These lines will support our ability to open up capacity required for our global launch of PRECISION1.

Second, we strengthened our capital structure by refinancing $2 billion of our shorter-term debt and extending our average maturity. Third, the PRECISION1 and PanOptix 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 at launch events.

Starting with PRECISION1, 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 our distribution.

Starting this month and into early next year, our distributors will be able to stock PRECISION1 and we expect unconstrained availability by the end of Q1 2020. Shifting now to PanOptix for the first tri-focal 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 third quarter market share data shows us gaining eight share points in the U.S. PC IOL category. So very positive start.

We're also encouraged by the progress we've made on Vivity, our new PC IOL that uses a non-differactive mechanism of action to deliver extended vision, reducing the need for glasses. We published our European clinical data at ESCRS 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 20% 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. 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. 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 first nine 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% in 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. For Vision Care, contact lens market growth for the third 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 tax. 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 third 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 third 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 million increased by 8% primarily due to strong double-digit gains in PanOptix outside the U.S.

and other AT-IOLs, as well as steady monofocal IOL growth. Consumable sales of $571 million increased by 9% in the third quarter. 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 million, a decrease of 2% versus the third quarter of last year, primarily due to the decline of 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 third quarter, driven by strong results in daily contact lenses and Systane.

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 million, up 7% versus the third quarter of 2018. The increase is primarily driven by strong demand for our leading product DAILIES TOTAL1, 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. Third quarter sales were $304 million, relatively flat compared to last year.

Double-digit growth in our Systane 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 the China tariffs.

Core operating margin was 17.4% in the third 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. Third quarter, interest expense was $35 million, up from $7 million last year.

As David mentioned in his opening remarks, we were very pleased with our recent refinancing of $2 billion of shorter-term borrowings, which allowed us to extend the average maturity of our debt from two 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 pretax income from geographical tax jurisdictions. Core earnings per share was $0.46 in the third quarter, which includes approximately $0.06 of interest on financial borrowings and the write-off of unamortized debt issuance costs at the time of the refinancing.

Before I move to the guidance, I wanted to touch on a couple of cash flow related items. Free cash flow for the first nine months was $260 million compared to $598 million 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 million 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 million, 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 multi-functional document management solution rather than cloning several legacy end of life systems. We are also incurring additional cost to ramp up manufacturing for facility that was transferred to Alcon earlier this year.

These strategic decisions and others have resulted in a revised estimate from $300 million to approximately $500 million. Separation cost year-to-date are $155 million and will be substantially completed over the course of the next two years. As David discussed earlier, we also have embarked on a multi-year transformation plan.

At the end of 2023 our plan will enable us to reinvest about $200 million to $225 million 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 million of costs, which will be core adjusted and reported separately starting in the fourth quarter. We expect annual improvements in free cash flow and remain confident in our 2023 goal to deliver 2.5 to three times 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 are 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 are trending towards the lower end of our full year guidance range, we are 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 and 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, an important operational milestone this quarter. We continue to make progress in standing of 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 are 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..

[Operator Instructions] Our first question today will come from James Gordon of JP Morgan. Please go ahead..

Thanks for taking the question. James Gordon from JP Morgan. A question about the transformation program.

So you've reiterated the targets and the same type on the margin, but that's going to be, you're going to have increased investment, so it could be increased investment as you 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 time frame. So I think if you think about in 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'd be things that we carried in as a pharmaceutical company, that we probably wouldn't need.

And importantly as we've 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&D, and think sales and marketing.

And to do that obviously, we had to get a handle on what they were going to be in over the last, really six, nine months, we've been steadily working away at that plan.

And 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 obviously a range long-term and that's mid single-digits, we would obviously prefer to be on the high-end versus the middle part of that. But we'll see how we bring products to market and 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 there, thanks for taking the questions. I've got two as well, if I could. So just again on the reinvestment program, I think previously you talked about a margin inflection point is 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 at 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 PRECISION1 and PanOptix. Thank you..

Yes, let me start with the margin inflection question. I think what we said consistently has been that we would spend these first 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 indicated that the margin inflection accelerates as we're going towards the latter part of the plan. But 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 third quarter 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 difficulty to see it down at the bottom end of what we had guided towards - so we eliminated the three and frankly we're heading towards the high end of the range.

Into next year, I think we're not, we're going to give guidance, I think on next year really in the fourth quarter call, but I would just say that our general view is that, our product flow is solid for next year. It is 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 come through, we feel comfortable certainly with what we've indicated in the past. So that's probably the direction I direct..

And just in terms of the progress on the initials on the SAP in the manufacturing roll out. I mean is that all going according to plan, faster than plan or perhaps a little bit slower? Thanks..

Yeah. Manufacturing maybe just slightly better than we expected. I think we've always been a little bit cautious because things happen when you - 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'm very encouraged by. I would say that the SAP thing also is going to - 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 is more work to be done..

The next question will come from Larry Biegelsen of Wells Fargo. Please go ahead..

One on PRECISION1 and one on just kind of the P&L, how to think about next year a little bit.

So on PRECISION1, 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 is back-up in the wholesalers, the distributors and it's just kind of free range of running that, there is a lot of customers out there to get to. So the sales force is 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 second quarter next year. In the meantime, we are obviously doing a nice job that we've got great feedback from on the lens and on - and for people who put it into patient eyes terrific response so far, pretty much as we would have expected.

So feel good about what's going on with PRECISION1. 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, 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 are 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 then just, just a follow-up, Europe and Japan, PRECISION1, no timing there. And just for my follow-up, the Street [that TAM] [ph] is at about $2.08 for EPS next year. You do have some headwinds here with the higher tax rate. So, remind us of your commitment to pro forma double-digit EPS growth next year.

There is 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 - I think, I said last time, we are 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, will 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&L, assuming the market stay healthy. We would expect this revenue momentum to continue. So I would start with that.

And then from a margin perspective, as we've been saying there is really two key components. But 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 startup 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 PRECISION1 right? Again, as that comes out of the gates there is 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&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 three 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 four quarters of interest expense versus three quarters.

And then the other thing I would think about, that we haven't really talk 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 is 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 Buchta of Vontobel. 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 million to $225 million into R&D and marketing, because I mean my understanding was with the CMD late last year, you guided an R&D run rate of $2.5 billion over five years.

So I mean, if you reinvest now $200 million to $225 million, it's a quite significant amount. And I mean, it's also a bit surprising given the fact that I mean under Novartis, two years ago, you were investing already quite significantly in marketing and R&D.

Why is that incrementally necessary that you invest such an amount without saving that and it's improving profitability? And then the second question on the consumables business, I mean obviously extremely strong, a nice growth in Q3.

You were mentioning that you had some pull through from the equipment 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 and because you guide the market to grow by roughly 3%? Thank you very much..

Yes, 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, in a low to mid-20s and operating income was going to be leveraging our cost structure.

In other words, growing revenue faster than our cost. To do that we know we always knew we needed to get after the cost structure and get them moving because we felt was though there was a 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 gives us line of sight to how we would make those improvements. And that does sum to about $200 million - $225 million.

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&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 is going to be some quarter-to-quarter fluctuation. So refractive equipment in particular, was a little bit soft in the third quarter, it has been a little bit this year.

So I would, we're keeping an eye on that one. But VitRet 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, is that was really driving our consumables 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..

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 and 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 it will be the first question. And then 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. Thanks for the questions. First on PanOptix, we're pretty much there, obviously with - these are very different looking launches between Q1 and a PRECISION1 product and PanOptix. PanOptix, we've gotten 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 the advanced technology lenses, it's a much more efficient target. So we're really, we are there. I think we're going to see pretty solid effects going forward from that launch.

And I do think that is really just a matter of what the ultimate share is. The market itself, I think as we've said in the past, I think I don't know that there is 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've 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 other restructuring, the cadence on that one too much....

Yes. So I would just say on the $300 million, 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 given that profile a 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..

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 U.S. PCIOL markets.

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, Jaime. Thanks. Yeah, you heard that correctly. We were encouraged by the initial uptake. And so with the - we launched in early September, and we probably had three weeks for the data, so I think we saw a 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 gives us some room and some enthusiasm for what we had originally said, which was that we'd like to, we'd love 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, as if patients are really enthusiastic about what they're getting on the back end, they want results, surgeons are reporting to us are very encouraging..

And then can you just remind me, I know you guys mentioned of VVD PCIOL, what specifically is that lens?.

Yes, VVD is a new and novel technology. It's - we're using a non-refractive optical design. And VVD is important because in some cases, all the refractive 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 just comforted by their visual experience. And so they - 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 set.

And we had our data published at ESCRS. So as we said earlier in the year, we put some information out later this year as we got the clinical trials done, and 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 positioned 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..

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&J also speak to that.

I'd love to get your sense of kind of what you think that of refractive market is or what are the consumer demand is for LASIK particularly given the performance? And then my follow-up question is around PanOptix. A lot of question has been asked about the U.S. launch, but we did see a launch from J&J on the techno synergy 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 refractive market. The refractive market has been kind of up and down, I think for a stretch, we thought it was, it was down for a long stretch. 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 shared to our best calculation. 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 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 is 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 of what the markets 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 couple of share points, so I think we feel good broadly about our ongoing ability to move that product.

Almost everywhere we've launched it in the world, we do pretty well, even when we've come from fourth or fifth, which was a couple of the European markets. So we continue do well and we feel very good about PanOptix is 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 - the trifocals. And the newer versions and I know that Johnson & Johnson folks have put out a couple of lenses - I think that’s positive for the market in general.

Because I do think there will be it 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 Vivaldi and we'll just have to 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 is 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..

This is Martha 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 procedure reimbursement 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 Merci let me try a shot at that - just to be clear - for those who 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% and 15% I think it might be 15%.

But on the other hand, they are actually increasing the fees for this surgical facilities so the ASC and 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 mono-focals every year. And we experienced it I don't think there is going to be anything different this year from the buyers than there were - others.

So when you go to the other side of this you say what are surgeons going to do if they get paid to do you know paid less to do the same procedure.

Look there is 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 is a possibility to get these patients better outcomes.

And - we would encourage that and now obviously is more attractive from a reimburse perspective for the surgeon, because there is a collect from the patient in that process if that takes shape, that would be great.

We're not counting on that, but I doubt it does anything other than, in real terms try to get people interested in what else they can do - other procedures or better procedures or it's unfortunate that cataract has gotten very - it's the most common procedure United States and obviously a cost target for CMS. So that's just the current circumstance..

And then as a quick follow up, I know there's a lot of attention on P&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&A in the future, potentially to drive growth. Do you think we should expect increased activity or tuck-in still more likely? Thanks..

No, there is a real change there, not in our capacity or interest, I think - this is pretty much as we expected it to be. And 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 BTNL activity will be consistent with what we've done in the past and that kind of $50 million to $300 million range. Could we do more than that? Yeah but it isn't going to be, something really large unless, something really radically changes it's not our attention..

Our next question will come from Ed Ridley-Day of Redburn. Please go ahead..

Firstly, it's a follow-up on equipment. Obviously, you've given some color, and is there any little bit to the extent to which you potentially the competitive environment and particularly, one of your competitors has clearly done much better in refractive recently is 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 wait where the manufacturing is peaking.

Can you give us some - a bit more color around - which is good 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, CapEx on the equipment, we've actually done pretty well, in most markets on a refractive. I would say that we aren't as competitive as we'd like to be in China that's probably the one location where there are competitors that are doing pretty well.

I would say an 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 and 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. 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..

A technical one and 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 the contribution PanOptix has been towards that growth please? And sticking on with implantables I just wondered 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 & 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 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 PanOptix and our pipeline, that we're in a really good place to defend share particularly in the PC-IOL well, 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 is something new that we haven't seen, I think you'll see if 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-digit, not quite double-digit in AT-IOL growth internationally actually its double-digit growth as I'm looking at it.

So we feel good about the international growth, but the U.S. has in the third quarter was a little bit softer than probably it has been in the past. We enjoy and 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've 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..

Right good and maybe just a quick follow-up encouraging to hear that you're looking to drive efficiencies and to redeploy and more into R&D.

Can you share with us has there been any real triggering events for that as like any of your sort of more ambitious programs failed or so or perhaps give us some flavor as to which businesses are likely to receive most of that R&D funding, is it more surgical is more Vision Care? Thanks..

Yes, I don't think there is anything new to report per se, I think what we have seen is that as we've gotten ourselves organized, we've always had a very long list of ideas. And we've always had a cut line that we - historically could afford. And so but we have a lot of productive R&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'd like to get after more of those. And you'll see us do that. As we bring things into the two 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. We start guiding around next year, we'll talk a little bit more about what we think are the big ideas for next year..

I mean 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&D at Vision Care and I think that has hurt us.

So you do see in the Vision Care P&L alone just a significant jump up in R&D because that has been bereft of then we got long list of ideas and frankly we - hadn’t spend that much money there. So I think really important for the health of that business so all good stuff for the long run..

And we're out of time 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 is now concluded. We thank you all for attending today's presentation and you may now disconnect your lines..