Alcon Inc. (NYSE:ALC) Q2 2022 Results Conference Call August 10, 2022 8:00 AM ET
Company Participants
Dan Cravens – VP and Global Head IR
David Endicott – CEO
Tim Stonesifer – CFO
Conference Call Participants
Zach Weiner – Jeffries
Chris Cooley – Stephens
Daniel Buchta – ZKB
Larry Biegelsen – Wells Fargo
Matthew Mishan – KeyBanc Capital
Ryan Zimmerman – BTIG
Cecilia Furlong – Morgan Stanley
Jeff Johnson – Baird
Julien Dormois – BNP Paribas
David Adlington – JPMorgan
Operator
Greetings and welcome to the Second Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host, Dan Cravens, Vice President and Global Head of Investor Relations. Please, go ahead sir.
Dan Cravens
Welcome to Alcon’s second quarter 2022 earnings conference call. Yesterday, we issued a press release and interim financial report and posted a supplemental slide presentation on our website to enhance today’s call. You can find all these documents in the Investor Relations section on our website at investor.alcon.com.
Joining me on today’s call are David Endicott, our Chief Executive Officer; and Tim Stonesifer, our Chief Financial Officer.
Our press release, presentation, and discussion will include forward-looking statements. We expressly disclaim any obligation to update forward-looking statements as a result of new information or future developments, except as required by law.
Our actual results may vary materially from those expressed or implied in our forward-looking statements. Accordingly, you should not place undue reliance on any forward-looking statements. Important factors that could cause our actual results to differ from those in our forward-looking statements are included in Alcon’s Form 20-F and our earnings press release and interim financial report on file with the Securities and Exchange Commission, and available on the SEC’s website at sec.gov.
Non-IFRS financial measures used by the Company may be calculated differently from and therefore, may not be comparable to similarly titled measures used in other companies. These non-IFRS measures should be considered along with but not as alternatives to the operating performance measures as prescribed by IFRS. Please see a reconciliation between our non-IFRS measures with directly comparable measures presented in accordance with IFRS in our public filings. For discussion purposes only, our comments on growth are expressed in constant currency.
With that, I will now turn the call over to our CEO, David Endicott.
David Endicott
Thanks, Dan. Welcome to Alcon’s second quarter 2022 earnings call.
I’ll begin by giving a brief update on our second quarter results, overall market dynamics and recent performance. After my comments, Tim will discuss our second quarter performance and our outlook for the remainder of the year. Then I’ll wrap up with some closing remarks and we’ll open the call for Q&A.
I’m pleased to report that we had another strong quarter, despite broad macroeconomic headwinds with sales growth of 10%, core operating margin of 18.4% and core diluted earnings per share of $0.63.
These results were driven by our innovative product portfolio, strong commercial execution and continued improvements in international markets as they recover from COVID-19. Overall, our Surgical franchise continues to lead the market with our portfolio of advanced technology, intraocular lenses, our substantial installed base of equipment and our growing consumables base.
Now, implantables, we remain the market leader in PCIOLs due to the strong customer reception for Vivity and PanOptix. Alcon is taking share in key international markets and exited the quarter with approximately 55% of the global PCIOL market, up 5 percentage points from when we launched Vivity in the first quarter of 2020. In the U.S., we’ve maintained our leading PCIOL market share of over 80%, despite competitive products that entered the market last year.
In equipment, we continue to lead the market on the strength of our innovative cataract suite. Interest in Active Sentry remains strong. If you recall, Active Sentry is the most advanced phaco hand piece, where the system’s fluidics are controlled through sensors near the eye. This unique feature reduces surge and improves safety. Innovations like Active Sentry, as well as our leading Centurion technology are driving favorable account conversions as we upgrade legacy phaco equipment to Centurion in our international markets.
We’re also seeing momentum for our Legion phaco machine in international markets among surgeons who are looking for premium performance on a portable machine and at a lower cost per use. Additionally, we saw another strong quarter in our consumables business, which grew high single digits versus last year, in line with the recovery in procedural volumes.
Earlier in the quarter, we participated in the American Society of Cataract and Refractive Surgery conference where we showcased a robust scientific program. Data was presented that highlights the sharp crisp, vision and glistening-free clarity of Clareon, our most advanced IOL material. Clareon has been implanted in more than 1 million eyes and is now available on most of our IOL and PCIOL platforms across key geographies. In addition, surgeons at the meeting presented a real world study highlighting that our Argos biometer delivers significant time savings in cataract evaluation.
This is becoming increasingly critical element for surgeons looking to improve practice efficiency, especially given current levels of staff turnover. Innovation and data presented at the event demonstrates that our products and services continue to support surgeons in delivering increased efficiencies and improve patient outcomes.
Now, moving to Vision Care, our new and recent product launches including our Precision1 family lenses, Total30 and Dailies Total1 for astigmatism continue to drive momentum. We’re particularly excited about having two SiHy toric lenses in the market, Precision1 for astigmatism, which is aimed at the mainstream market, and Dailies Total1 for astigmatism for the premium segment. Dailies Total1 for astigmatism has been eagerly anticipated by eye care professionals for years and the reception has been very strong. This is the first and only daily disposable toric lens to feature water gradient surface material. With this lens’ exceptional comfort, eye care professionals are well-positioned to fit and keep more astigmatic patients in contact lenses. This is contributing to our growing share of the daily toric market, which is the fastest growing market segment.
Additionally, we continue to see positive uptake of Total30, our newest reusable lens. This water gradient lens is nearly as soft as the cornea itself and is almost 100% water at the surface, creates a lens that is exceptionally comfortable, yet durable for 30 days of wear. We’ve now rolled out Total30 in both Europe and the U.S. and we’re preparing to launch Total30 for astigmatism early next year.
With new entries in daily, reusable and specialty lenses, we’re excited about the progress we’re making in new and switch fits, which is a strong leading indicator of long-term share growth.
And finally, turning to ocular health. We continue to see strong retail, consumer and physician interest in our portfolio of eye drops. Sales of our popular Systane family of artificial tears grew in the high single digits, driven by the recent launches of our multi-dose preservative-free formulations in the United States and international markets.
Simbrinza also continues to contribute nicely to our portfolio of eye drops. Recall that we’ve invested in a new sales force dedicated to supporting our portfolio of eye drops in the United States.
Now, let me provide an update on our end markets. In Surgical, global cataract procedures were up high single digits in the second quarter versus prior year. This excludes the impact of the market recovery in India which was significantly impacted by COVID-19 last year. Against this backdrop, we saw significant growth in our implantables business, driven by the strength of our advanced technology lenses for commercial execution and international market recovery.
In Vision Care, the market growth was very-dynamic and varied by region. United States grew mid-single-digits, in line with historical averages, while Europe and Japan, which were impacted more significantly by COVID-19 in the second quarter of last year, grew double digits.
To summarize, despite the macro and supply chain challenges we’ve faced, I’m very pleased with the strong underlying performance of our business in the second quarter. We grew revenue 10% while continuing to invest in the business. Our robust innovation pipeline is delivering solid results as evidenced by the successful launches of our new ATIOLs roles and SiHy contact lenses. We continue to drive operating leverage. And our second quarter 2022 core operating margin expanded by 170 basis points on a constant currency basis over the prior year. Given the current economic environment, we will continue to take measures to offset some of the headwinds as we are well-positioned to succeed in the future.
With that, let me pass it to Tim who will take you through our financial results and provide an outlook for the rest of the year.
Tim Stonesifer
Thank you, David. We’re pleased to report second quarter sales of $2.2 billion, up 10% versus prior year. This double-digit growth was driven by demand for our innovative products and international market recovery. Similar to the first quarter, our overall second quarter sales growth included approximately 1 percentage point of contribution from recently acquired products, Simbrinza and Hydrus. Our second quarter U.S. dollar sales growth included approximately 5 percentage points of pressure from foreign currency. For the first half of 2022, total company sales of $4.4 billion grew 14%.
In the quarter, we continued to build upon our positive momentum, despite the persistent macroeconomic headwinds. These headwinds included historically strong U.S. dollar, supply chain tightness and inflationary pressures. This was pervasive across both our franchises and included pressures on availability of supply, rising prices on electronic components and commodities including plastics and resins, as well as increased costs for labor and transportation.
Fortunately, our team was able to offset much of the impact through productivity and cost reduction initiatives, strategic price increases from earlier in the year and contract negotiations with suppliers. In our Surgical franchise, revenue was up 13% year-over-year to $1.3 billion in the second quarter. Surgical revenue in the first half of 2022 was up 17%.
Implantable sales were $444 million in the quarter, up 21% year-over-year, primarily due to market recovery, the strength of Vivity and sales of Hydrus, which is not part of our portfolio last year. Implantable sales in the first half of the year were up 29%. For consumables, our second quarter sales were up 9% to $644 million, with cataract growing low-double-digits and vit-ret growing high single digits. For the first half of the year, consumable sales are up 13%.
In equipment and other, our sales were up 10% year-over-year to $208 million in the second quarter, primarily due to strong reception of our suite of cataract equipment. In our international regions, we continue to upgrade customers from older generations of the phaco equipment to Centurion.
Additionally, demand for Legion has been strong. We also see solid interest in our Active Sentry hand piece, our Revalia microscope and our Argos biometer. Sales growth was partially offset by declines in refractive equipment due to a difficult year-over-year comparison. Equipment sales for the first half of the year were up 8%.
Turning now to Vision Care, second quarter sales were up 7% year-over-year to $904 million. During the quarter, we saw robust international demand driven by market recovery and product launches. Vision Care sales were $1.8 billion for the first half of 2022, up 10%. Contact lens sales were $547 million in the quarter, up 9% versus last year. We continue to see strong demand for our Precision1 and Total brand families as the recent launches of Dailies Total1 for astigmatism and Total30 continue to gain traction and take share.
This growth was partially offset by declines in other reusable and non-SiHy daily lenses. Contact lens sales for the first half of the year were up 11%. In ocular health, our second quarter sales were $357 million, up 4% year-over-year. This is primarily driven by our sustained family of products, as well as sales of Simbrinza, which was not part of our portfolio for most of the second quarter last year.
This growth was partially offset by supply chain challenges, primarily in contact lens care, which impacted growth by approximately 3 percentage points. Ocular health sales were up 9% for the first half of the year.
Now, moving down the income statement. Second quarter core gross margin was 63.3%, down 20 basis points on a constant currency basis, primarily due to inflationary pressures. Core operating margin was 18.4% in the quarter, up 170 basis points on a constant currency basis. The improvement was primarily driven by operating leverage from higher sales, partially offset by increased inflationary pressures. As expected, we saw a planned increase in marketing and sales expense in the quarter.
Second quarter interest expense was $31 million, broadly in line with last year. The second quarter core tax rate was 11.1%, compared to 19.2% last year. The lower rate was primarily due to the timing of a favorable geographic mix of pre-tax income, a benefit on inventory build in certain markets as a result of new product launches, as well as a benefit associated with an agreement for deductibility of a statutory expense in Switzerland related to fiscal year 2022. The core effective tax rate was 13.7% for the first six months of the year.
Core diluted earnings per share in the second quarter of 2022 were $0.63, up from $0.56 last year. Before I discuss our outlook for the remainder of 2022, I’ll touch on a couple of cash flow and other related items.
Free cash flow for the first half of 2022 was $233 million, compared to $320 million last year. This variance was primarily driven by lower cash flow from operations in 2022 due to the annual bonus payment, which was higher than in 2021, and the timing of tax payments. Capital expenditures were $237 million for the first half of 2022, which was primarily related to our contact lens manufacturing production lines. Transformation costs were $9 million in the quarter, and $193 million life to date.
During the second quarter, we completed a public offering of €500 million of senior notes, which are due in 2028. The proceeds from the offering were primarily used to repay existing debt. I’m also pleased to report that in the second quarter, we paid $100 million in cash dividends to our shareholders.
Now, moving to our full year 2022 guidance. As is mentioned, we continue to see certain macro headwinds, including foreign exchange pressure from an appreciating U.S. dollar, inflation and supply chain tightness, the global impacts of the war on Ukraine and the ongoing effects from COVID-19. Our current 2022 outlook assumes that the 2022 global markets grow at slightly above historical rates, inflation stays at current levels through the remainder of the year, supply chain does not materially deteriorate, and U.S. dollar holds steady at mid-July foreign exchange rates. Based on our current assumptions, we are updating our net sales guidance for full year 2022 to $8.6 billion to $8.8 billion, versus our previous guide of $8.7 billion to $8.9 billion. However, given the strong performance of the business, we are maintaining our year-over-year constant currency sales growth of 9% to 11%. Foreign exchange is now expected to have a negative impact of approximately 5 percentage points versus prior year as compared to the negative 3 percentage-point impact we estimated in May.
Moving to core operating margin, despite the headwinds I’ve described, we are maintaining our full year outlook of 18% to 19%. This guidance now reflects approximately 160 basis points of FX pressure versus last year, as compared to the 110 basis points in our May outlook. It also includes approximately 90 basis points of net inflationary pressure, consistent with what we provided in May.
Interest and other financial expense is now expected to be between $210 million to $220 million, up $10 million versus the guidance we provided in May. The increased expense is driven by higher interest rates and hedging costs due to the market volatility. We’re maintaining our core effective tax rate of 17% to 19% for the year, despite the favorable rates in the first half. The increase in the second half will be driven by a less favorable geographic mix, along with less of an inventory build for new product launches. We’re also discussing an advanced pricing agreement with the U.S. and Swiss tax authorities. Our guidance incorporates the impact of the new agreement and assumes the negotiations we finalized in 2022.
Finally, we now expect full year 2022 core diluted EPS of $2.20 to $2.30 per share, down from the $2.35 to $2.45 per share we provided in May. This updated guidance reflects an increase of approximately $0.15 of FX headwind versus our last call, and approximately $0.37 versus prior year. However, we are maintaining our constant currency core diluted EPS growth outlook of 19% to 24%, due to the strong momentum we’re seeing in the business.
With that, I’ll turn it back to David.
David Endicott
Thanks, Tim.
To wrap up, our underlying business continues to perform well, despite headwinds that we continue to face. We’re launching new products and gaining share in both franchises. We continue to invest in the business, and we’re creating operating leverage and expanding margins.
As we look to the future, our focus remains the same. We’ll continue to fuel our innovative engine, while prudently managing our resources. All the while, we remain committed to creating long term value for our shareholders. Finally, I want to thank all our associates for their hard work and delivering great results in an increasingly challenging environment.
With that let’s open the line for Q&A.
Question-and-Answer Session
Operator
[Operator Instructions] Our first question comes from Zach Weiner with Jeffries.
Zach Weiner
I just wanted to touch on the PCIOL market. First, expectations for market growth, which you kind of touched on, but then also PCIOL has been more premium procedure. How do you think that market will evolve as we head towards a potential economic downturn in the near future? Thanks.
David Endicott
First of all, we had a good quarter on PCIOLs. We’re very pleased with our share performance, United States, I think was up over 80 again. So, we’re under some new competitor launch in the United States now for almost a year. And I think we’ve really held up quite well, I think maybe better than many expected. So, that’s been terrific. I think outside the U.S., we’ve done a really nice job of growing share. So, I think, maybe in the script we quoted 55. That’s correct. We’re excited about that.
That has been a combination of continuous progress made on PanOptix, but the addition of Vivity into the mix. And so, really importantly, we’ve gained 5 share points in the last 18 months or so, on the back of Vivity. So, what was really important to us was to show that that was additive to the share position, as opposed to potentially cannibalizing. So, we’re really very pleased with that performance so far.
I think going forward, we expect that there is going to be continued growth in PCIOLs, I think year-over-year penetration continued to grow. It was slightly down from first quarter. I don’t know that I read much into that, principally was down in the U.S. And I think the thing we will have to see over time is how much this, what the effect of recession on this would be. We’ve modeled recession in the past on IOLs, and it hasn’t really been a very big effect because of course, cataracts don’t go away and the cataract volumes continue in there. Back when we did it in ‘08, ‘09, which we’ve looked at, I think the kind of question in our minds was what was the PCL percentage, and it was quite low. So, it’s hard to take much from that. But it did stay pretty solid.
So, I think from our perspective, it’s a little bit of wait and see. But I’ll remind people that the headroom in this space is quite big, right. So, we think people can afford ATIOLs, probably in that 35% to 40% of the market can afford it. We’re really sitting somewhere in the low-teens. So, I think there’s plenty of patients out there who can come get it, PCIOLs. We’re obviously spending a lot of time on it as well. So we’ve increased our sales force effort. We’ve matched our coverage of ORs with now representatives responsible for trying to grow this business, clinical based sales force. And also we’ve begun to use programming now that reaches patients directly on a digital basis. So, engaging in very specific information that will help move this along. So, we’re very positive on the outlook directionally, certainly on a share basis. But we’re very aware of the penetration needs going forward and continue to work on those.
Operator
Our next question comes from Chris Cooley with Stephens.
Chris Cooley
Good morning and thank you for taking the questions. And congrats on a great quarter in a tough environment. Maybe just one for me on the growth that you talked about in the MIGS market, recent acquisition there, obviously of Ivantis, would be interested in just learning a little bit more about your expectations for broad market growth, both here in the U.S. and abroad after we’ve seen a number of reimbursement changes in the space. And then, similarly, maybe any additional color you can provide just regarding receptivity to the various devices by channel when we think about the comprehensive ophthalmologist versus the glaucoma specialist? Thank you.
David Endicott
Yes. Thanks, Chris. I mean, the glaucoma business has been exciting for us. We’re glad to see the progress we’re making. We’ve integrated the Ivantis team. We’re actively training new surgeons. And we’ve got really great data on Hydrus now in the hands of the reps. So, we’re excited to talk a lot about two-thirds of patients remaining medication-free and 50% reduction in the relative risk of a second surgery. So, we think MIGS is a growing space. And we see it growing high single digits and continuing to grow high single digits. The step based part of the MIGS market I would say has been obviously year-on-year affected by the reimbursements. So, I think it’s growing currently in line with our expectations. And I think, it has stabilized as well, I think as we kind of come into the middle part of this year.
So pretty much as expected in the market for it. There are a couple of new products, I think, coming out. We’ve seen several new entries with at least approvals, I should say. And we think that’s a good thing, because I think what it’s showing is there’s increasing attention into these channels for glaucoma interventions. So, for the glaucoma surgeon, I think that’s very positive. It gives them a lot of choices, gives them choices in the mild to moderate where I think the vast majority of the market is and where we play. We’ll also give them some newer choices on the more severe end of the spectrum, which I think is where some of the newer players will play. And also, obviously, for the more comprehensive ophthalmologists, it gives them some choices on how to treat and refer or choose to do surgery they’re called. But I think we believe there’s going to be a very specific group of surgeons who are going to follow these patients, are pretty good cataract surgeons. They’re not the super high volume cataract surgeons who frankly are going to refer these patients, but I think we’re going to have a nice sweet spot in the middle of both glaucoma folks, and I’ll just call them busy surgeons that will do a good bit of this stuff. So very, very positive outlook, at least at this point, and I think kind of on par for where we had expected to be.
Operator
Our next question comes from Daniel Buchta with ZKB.
Daniel Buchta
Maybe the first question and then a follow-up question on that topic as well. First one on the core EBIT margin guidance, I mean, you’ve kept it stable at 18% to 19%. But now you have already 19.5% in the first half. I mean, at least the lower end of the margin guidance sounds pretty cautious. But in general, maybe you can provide a bit of a picture, what has changed or what could change now in the second half compared to the first half where you were able to get up the margin so much already. So why, at least the lower end is still possible or challenge?
Tim Stonesifer
Sure. Thanks, Daniel. Yes. Good observation. We will see some headwinds in the second half of the year. I’ll start with FX, to the color we gave in the prepared remarks. We are seeing more FX pressure in the second half as compared to the first half. I mean, if you just look at mid July, which is sort of what we use for our forecast, and you compare that to June exit rates. I mean, the dollar continues to appreciate, right, it’s about 6% versus the euro, up 4% versus the yen, so continues to get stronger.
So, that’s probably I’d say $60 million to $70 million of pressure in the second half as compared to the first half. The next piece is around our innovation. So, if you look at our R&D spend in the first half, it’s about 7.5%. Now, we said at the beginning of the year that we would like that to be roughly 8% of revenue for the total year. So, that would imply that we’re going to spend call it 8.5% in the second half, as compared to that 7.5% in the first half. So, that’s another $40 million or $50 million of incremental costs towards innovation.
And then the last significant piece is around gross margin. So, gross margin, there’s really two pieces to it. One is we typically have seasonality. So, if you go back to ‘19, I wouldn’t use ‘20, and maybe ‘21, you’ll see our gross margin is pressured in the second half as compared to the first half. So, it’s typically driven by the fact, if you look at the allergy season, it was more favorable in the first half, people tend to buy more equipment in the back half of the year as their budgets are running up. So, that’s a piece of it. And then, if you recall on the, on the last — on the Q1 earnings call, we had that –we spiked out that Korea IOL impact. So, that was a onetime good guy that we got in Q1 that won’t repeat in the second half of the year. So, those are really the three key drivers around that pressure that we’re seeing in the second half.
Daniel Buchta
And then, maybe the follow-up on what that means for your guidance basically next year and also for 2025. I mean, the last comment from your side was, you will be at low-20s core EBIT margin by the end of next year and then, mid-20s by the end of 2025. Given what you see in the FX environment and everything you just mentioned, are both guidance still valid, or how do you see that?
Tim Stonesifer
Yes. Well, the first thing I’d say is we’re pleased with the 18.4% in Q2. And actually if you take FX out of that that gets you pretty close to 20%. So, we’re pleased with the margin progression that we’re seeing in the business. And I would just add that we’re getting that improvement while we continue to invest in the business and R&D, while we have a very volatile supply chain and backorder environment, if you will, and inflation levels that we haven’t seen since, call it the ‘80s. So, we’re committed to our goal. We have an operational plan to achieve those goals. Now, having said that, if the dollar continues to strengthen, we’re going to have to evaluate the financial impact that has. And the one thing that we are committed to is we are committed to innovation and investing in innovation, we are committed to investing in programs that drive revenue growth, and we’re committed to doing the right thing for the long-term of the business.
Daniel Buchta
Okay. But, assuming FX stays where it is now, the guidance is still valid, and no further strengthening of the U.S. dollar?
Tim Stonesifer
Again, we have our operational plan in place, and we’re committed to investing in the business, driving revenue growth and doing the right long-term things for the business.
Operator
Our next question comes from Larry Biegelsen with Wells Fargo.
Larry Biegelsen
Just Tim and David, maybe a similar one for me, but on the top line, the guidance implies about 4% to 8% constant currency growth in the second half. And so, it’s about 5% organic if you adjust for acquisitions in the midpoint. So, what’s driving this softer growth outlook in the second half? Is it more conservatism, or do you expect maybe this — the market that’s run very hot in the first half, David to cool down? And what does — just a follow-up — similar to the prior question, what does that imply for growth in 2023? Any preliminary thoughts would be helpful. And I had one follow-up. Thanks.
David Endicott
Yes. Larry, let me start with the market itself. We think the market for the remainder of the year is going to grow slightly faster than historical growth rates. But it really does start to come down, as we said at the last call, from what is wrapping around on the COVID numbers, so the kind of COVID problems last year to something that looks a lot more normal by the end of the year. And remember that our normal growth rates have always been kind of roughly, and depending on the market, they’re around 4%, 5%. We grow a little faster than that. That’s usually what we plan to do. But I think that’s very consistent with the guidance we’ve given.
I think the short version of this year is that the international business is still doing quite well. Our U.S. business is kind of now wrapping around to a much more normal phase. And so, those will likely balance out as you get to the end of the year. And then, you’ll see a much more, I think, normal year-on-year trajectory next year. So, we’ll give further guidance and better color on ‘23, obviously, later in the year, but my expectation is that as we get through these difficult comparators, things will begin to normalize around what we have historically seen as a, kind of 4% or 5% growth rate for the markets and then us growing hopefully a little bit faster than that.
Larry Biegelsen
And David, can you talk about pricing a little bit, where you’ve been able to take price and where do you see additional opportunity to do so? And are you — I don’t know if you guys have disclosed kind of what you think net pricing will be for Alcon overall in 2022? Thanks for taking the question.
David Endicott
Yes. We started late last year with some price announcements. We took them as much as we could early in the year. I don’t think we anticipated the magnitude of the inflation that was actually seen. So, if you look at where we are right now, I think the numbers are way up, near 9, and I think we were thinking it was going to be a good bit lower than that. So, I think the magnitude of our pricing was certainly ambitious in our minds, but in retrospect has still left us with a little bit of net inflation more than we had hoped for, I think.
Now, truthfully, that’s difficult when you take price because a lot of our business is contracted and is under a fixed contract for some period of time. So, in the surgical business in particular, we’re either working against, fixed government reimbursement or a fixed contract with individual payer. That’s been difficult to take, it is in certain circumstances, we can like loose items, or one-off prices, or some things that are not contracted, but we’ve been a little bit more cautious or like — when you say cautious, I would just say, it’s a little more difficult to do in Surgical.
Vision Care, we did take some fairly reasonable prices. We took price up in the contact lens business in the mid single digits, expecting that the majority of that would read through. I think we’re seeing low single digits read through, which is positive for us in that business. But again, think about that as not a global thing, but rather a market by market, relatively strategic. We’re trying to stay very carefully in touch with competitors. And we’re also aware of consumer behavior around price. So, we want to keep people, in Dailies and want to keep them switching into Dailies. So, we’re careful around the magnitude of the price.
Operator
Our next question comes from Matthew Mishan with KeyBanc Capital.
Matthew Mishan
A couple of follow-ups on some other topics. First, on the operating margin, do you expect trough quarter to be 3Q or 4Q?
Tim Stonesifer
I’m sorry. What did you say?
David Endicott
Last quarter.
Tim Stonesifer
Yes. We’re not giving quarterly guidance. So, I would just say, it should — normal seasonality for the business, I go back and look at ‘19, maybe look at ‘21 and kind of see how the quarters behave. I’d expect to see something similar to that in ‘22.
Matthew Mishan
Okay. And then around ocular health, you said, you had some supply chain constraints in contact lens care. How long do you expect that to be impacting results?
David Endicott
Well, it’s hard to tell. I think, Matthew, we certainly saw at least 3% of a dip in our growth rate. I think, we grew about 4% versus prior year in the second quarter. We’ve probably had — it’s probably closer to 7%, had we been able to fill all our orders. We did not feel a lot of contact lens care in particular. And then, we had some contract manufacturers who were unable to supply us as well. So, we’ve struggled a little bit in that business, this particular quarter.
It should get better. I think the third quarter could still be a little bumpy. But I think we — at least at this point in this moment, which again, is a little bit dangerous thing to say, because it’s just sporadic as we see going forward. But we feel it should resolve somewhere in the fourth quarter. But I think I’d be a little bit cautious around that. Because as we said in our assumptions, we assume the supply chain will not get worse. And it obviously has been bumpy.
Operator
Our next question comes from Ryan Zimmerman with BTIG.
Ryan Zimmerman
David, to start on cataracts for a moment. We’ve kind of talked before about there being about a $1 million plus, $1.1 million backlog in cataracts. The cataract market’s been double-digits this past two quarters, running pretty good. And the guidance and commentary suggests that it could slow down in the back half of this year. And so, I’m curious kind of how you think about the duration of that dynamic and working through the backlog. Does it — if the market — if cataract does slow down in the back half of this year, does that extend the duration of the backlog benefit longer term, as we move through ‘22 and into ‘23? I appreciate your thoughts there.
David Endicott
Yes. Look, I think, it does, Ryan. I really do. I think, right now, we’re just not getting a lot of benefit from the backlog. That’s what I believe. If you look at the U.S. cataract procedures and look at procedures in the U.S., I think they were probably in the 4% range. It was 7%, overall, we grew 9%. International was better than market. So, we had a very good quarter on cataracts. But the U.S. really did slow down to a number that I thought was surprisingly low. And really, because as we see it, they’re having a hard time keeping staff, training staff. And the capacity doesn’t appear to be there. And we had thought that it would be. And I think if you look at what’s really getting reported in a lot of circumstances, different categories. OR staff, in particular, has been hard to keep. I think people are having a very hard time running at what they would believe is kind of the full 100% utilization of their facilities. And I think that’s going to continue to be the case for a while.
I believe, as it settles down, these — I’ve always said, these cataracts haven’t gone anywhere. So, they are going to come back. And it is my own view that we’ll see a steady, slightly warmer than historical rates for the market in cataract surgery, both internationally and in the U.S. But I think for now, it’s difficult to find, train and maintain OR staff.
Ryan Zimmerman
I appreciate that, David. And then, globally, you made a comment, and if I look back last quarter, I think you guys were at 60% share, PCIOL share globally last quarter went down to 55%. And I know it’s up since Vivity launch about 5%. But what do you attribute to that, that dip? Not to split hairs here, but curious kind of what drove that dynamic from 1Q to 2Q.
David Endicott
Yes. Ryan, we were up quarter-over-quarter. So, I’m not sure where the 60 comes from. I have to go back and look at if I said, 60. That’s not right, because we gained market share in this quarter versus prior quarter. So, I mean, confused here. But we read 55 as a very positive share. I believe we were somewhere in the low-50s, last quarter, and we’ve come up, I think about a share point and a half, mostly driven by the international business in this particular frame. But if you look at our U.S. business, PCIOLs were 80 — low-80s. And that’s been down below 80 and now it’s bounced back up as you see competitive trial go away, people kind of got a chance to try things, they kind of move on, and they really do come back to Vivity and PanOptix. So, we’re super comfortable with our share progress, particularly in the PCIOLs.
Operator
Our next question comes from Cecilia Furlong with Morgan Stanley.
Cecilia Furlong
I wanted to start with Total30. If you could just speak to what you’re seeing from either new versus switch fit initially, as well as just how you’ve seen your overall share of the reusable market trend now versus when you initially launched the platform?
David Endicott
Yes, Total30 is doing really well. We’re excited about the product. It’s a very unique material. It’s the first really new material in a long time. And the genius of that lens is, of course, you can use that lens for 30 days, it’s that durable, but it can still hold this kind of soft water gradient surface and that’s the — that was always the magic of trying to create a reusable that could resist lipids, resist bacteria, last that long, but still be comfortable and really, really soft. And I think that’s really bearing out to be true in the market. So, I think a little bit of the halo that we had hoped to get from Total1 looks to be coming on to this reusable lens Total30. And I’m not — I think our new and switch fits are in excellent condition. Right now we’re excited about what we see. If you read that as kind of a forward indicator of how we’re going to do, we are in very good shape between Total30 and our Air Optix products, we’re doing exceptionally well.
Cecilia Furlong
And if I could follow-up, just the capital environment that you’re seeing today, if you could speak to, one, the regional dispersion of equipment demand that you’re seeing, as well as just your outlook for the balance of the year that you incorporate in your guidance, and really just the sustainability of the recent cataract capital demand you’ve seen in international markets? And thank you for taking the questions.
David Endicott
Yes. It’s a good question. And I think there was a fairly significant disparity between the U.S. and international. So, just to be clear, most of our growth — I mean, our — as we had expected, the U.S. market, wrapping around on a very, very positive year from last year was, I think, flat or slightly down in capital equipment. And then, the U.S., — sorry, the international business carried the whole of that 10% growth. So when you look at it on the quarter, really strong, strong effort in the recovering markets with new capital.
I suspect that stays pretty well for the rest of the year internationally. I suspect the trend is largely the same for the U.S., because I think we typically live with one year capital budgets. And so, if there’s money out there, it’ll get spent. And it’s usually — in this case, it’s government money internationally, largely. And in the U.S., I think people are — there’s a lot of private money in this, and people are holding back a little bit right now. So, none of that is surprising to us. It’s a little bit stronger than we’d expected internationally, principally, because I think our cataract equipment has done very, very well. And I think, we had originally anticipated certain competitive intrusion. We’re doing much better against competition in upgrading our own equipment than we had anticipated. But I think if you look at really what we’re selling these days, our Active Sentry hands piece is unsurpassed in its ability to maintain a soft stable chamber, and as — combined with a lot of the other equipment that we have, it’s just the best equipment the world.
And so, I think we’re excited to see that. I think we had a really good — actually in international we had a very good performance from the other end of our line, which was the Legion line, which is our value product with just terrific fluidics. But it’s a portable product with a very low cost per use. We did very well with that in India and Brazil, a couple of other countries. So, we continue to do there a good job of maintaining and actually growing share in our in our phaco business.
You’ll see also in our equipment, a little bit of noise in positive stuff, I think around Argos, our new barometer, which is doing very well and the Revalia microscope, which again year-over-year — both of which year-over-year growing nicely. So, we’re excited about the equipment generally. And it has had a good year. I think the question about next year we’ll have to deal as we get kind of later into the year and see how the economy shapes up.
Operator
Our next question comes from Jeff Johnson with Baird.
Jeff Johnson
Maybe just a couple of follow-ups at this point, if I could. David, may be interested to hear on the new and switch fits with all the new products out there, just relative to your internal expectations. You have been surprised one way or the other on your share of new fit increasing or not increasing as fast you thought just either way there and same on switch fits. And then just net between P1 and DT1, are you still seeing trade-ups dominating trade-downs?
David Endicott
Yes. A couple of dynamics there to comment on. Doing switch fits on a share basis is probably a little bit better than we’d expected in total, both on dailies and on reusables. I would say, though, that the number of new and switch fits has been down slightly. So, if you think about it, there’s been less foot traffic still than the pre-COVID years. And I think that’s kept us from kind of capturing more volume that we’d like to. But that will even itself out I suspect over time. It’s gotten better in the U.S. It’s slowly coming back in the international markets. And I think those are really the dynamics that we’d want to see both going in the right direction. So, one of them is more market, which we can’t really control. But I think we’ll come back on its own and the other one is choice of lens. And again, we’re doing quite well in both reusables and dailies.
On the dailies themselves, P1 and DT1 are really both doing really well. I think the thing that we thought would happen is that once we got the toric out there with DT1 and you have a sphere, a toric, and multifocal, that’s really helping the family grow. And so, that dailies Total1 family, really easy to use, you can pretty much fit anybody in it. It’s a premium product. So, it comes with a price point that is appropriate, but I think you’ve got a family there that makes it difficult. If you’re — if you really liked that lens, you’re going to stay in that. And that’s helping each of those individual modalities nicely. And P1 is doing great with its toric. So, I think when we got the toric out there on top of the sphere, we’ve seen P1 toric in particular grow really well, price point is very attractive to the middle part of the market. And frankly, it’s just a lot more coverage, doesn’t have the rotational spin that some of our competitors do. And I think it’s terrific product. So, I think that’s, again, helping the sphere. And I think our Dailies share right now is quite good and continuing to grow.
Jeff Johnson
And then just last point, just on end market. It does sound like — and I don’t want to put words in your mouth, maybe you’re saying the contact lens market still a little sluggish. I don’t know if that’s global or U.S. Just if you could provide any color there. But when he talked about mid single digit Vision Care market in the U.S., if that specifically is targeted at contact lenses? We’ve been hearing pricing at about 2% or 3%. It sounds like that’s about what sticking for you as well from a pricing and contact lenses. So does that imply underlying growth in the contact lens market, ex pricing is a little bit weaker than historical norms at this point?
David Endicott
Yes. I think you’ve got it directionally right. I mean, I don’t know that we have a really good beat on the price EQ, we call it EQ units, which is really figured out as just the patient purchase in units. But it is clearly I think a little bit softer than it has been it. And I say that with particular emphasis on the second quarter, because we didn’t really see that in the first quarter, we saw a little bit of a difference in the second quarter in the U.S. But I’ll just say that we’re wrapping around a really big quarter last year.
I mean, I think there was some crazy number in the U.S., like we grew 80% over prior year, and the whole of the market grew 50 something, coming off of what was basically the shutdown year in ‘20. So, it’s pretty tough to make much out of the 2Q data in contact lenses right now other than, we saw the whole of the global market grow about 7%, we grew about 9%. Some of that was price, I read it — if you took your — off the top, if you took your 2%, 3%, and you applied it to the 9% we grew, that would give you some pretty healthy unit growth.
Remember that some of that, again, you’re getting value trade up from reusables to dailies as we always do, and also mix positive price on toric mix for us. So, unit volumes necessarily don’t have to go up to get pretty good value growth. And so, again, there’s a lot to think about in there, I recognize. But, the short version of that is I think you could be seeing still a little bit more recovery to come certainly in the international markets, and maybe a little bit more in the U.S., as consumers come back into the office to get new lenses and to switch out.
Operator
Our next question comes from Julien Dormois with BNP Paribas.
Julien Dormois
I’ll have two follow-ups please. One relates to — is back to ATIOLs and more broadly into the overall penetration of ATIOLs as a category in the context of softening microenvironment. So, I think you previously mentioned that the category as a whole is now about 12.5% of global penetration and is more than 19% in the U.S. Have those numbers moved from last quarter and how do you see that evolving?
And the second question relates to the margin development. Should we see the macro headwinds that you have referred to changing the way? We should think about the respective contribution of operating leverage versus gross margin — to margin developments in the coming years, I think you guys previously mentioned an 80-20 ratio, is that still the way to look at things?
David Endicott
Yes. Let me start with the penetration on ATIOLs. Global penetration in the second quarter was 30 basis points up over prior year. So, we’re still seeing nice growth in penetration on the quarter. I would say that, it kind of went sideways from the first quarter. And so, I wouldn’t make much out of that other than, wasn’t — we’ve seen a lot of growth over the last stretch. And I would also say that in the first quarter, we had a big move in Korea. So, when you look at global penetration, first quarter could be a bit exaggerated. So, hard to tell right now exactly what that looks like. But we’re very sensitive to penetration, because it’s really at this point with our shares — we see penetration as one of the key drivers of moving this business. And so, as I said earlier, we’re very concentrating a lot on making sure that we’ve got all the things out there programmatically — to continue to help consumers and surgeons come to ATIOLs.
Relative to the penetration in a recession and that piece of it, our view has been that there’s plenty of headroom to continue to grow penetration. And I think, our total penetration in the U.S., North America in last quarter was something like right around 19 and globally is about 12. So, that implies I think outside the U.S. something on the order of — something down in the high-single-digits.
What that gives us, I think directionally is a belief that this has got plenty of room to grow, and particularly in the international markets. So again, it may turn out that if the U.S. goes into a recession, and again, I don’t want to predict what’s going to happen in the next six months. There are a lot of people who think it’s a global recession, something that could be different, different regions, the timing of which, the depth of which, and the duration of which I just don’t know. But we’ve thought about it in a number of different scenarios and feel comfortable that we can plan our way through it. But we’ll follow it closely and make the decisions we need to along the way.
In terms of impact on products, the biggest impact historically has been on refractive. And that’s a very small part of our business. So, our view is that the eye care demand for surgery will continue really pretty much unabated, and then eye care demand for visits and therapy will continue. People that wear contacts will still wear contacts. What usually happened or at least used to happen was you see a little bit less trade up from dailies to — from reusable to dailies. And you may see some slowdown in penetration, but again, we’ve never seen it before. So, we’ve never been at this rate before. So, I’d be loath to project it right now. But we feel pretty comfortable that we can manage it.
Tim Stonesifer
And on the margin progression, the two macro headwinds we talk about, obviously, foreign exchange, I mean, that works its way through the whole P&L, so no real differential, I’d say. If you’d — the second one would be inflation. So, if that were to continue, you’d probably feel a little bit more pressure on the gross margin. And given the fact that that’s where all the material purchases are, we have a lot of labor up in the gross margin up there. But I think directionally, as you think longer term about the business and that margin progression, we — I’d still anticipate to see roughly 80% of it coming from operating leverage and 20% of it coming from margin expansion.
Operator
Our next question comes from David Adlington with JPMorgan.
David Adlington
Two follow-ups, please. Just on ocular health, you mentioned an outlook for improvement there. But in terms of the lost demand due to supply chain, how much of that is sort of pent up and could come back, or is that lost forever? And then secondly, just in terms of — I don’t know if you called it out on the call so far, but any impact from the Chinese locked down to the second quarter, please?
David Endicott
Yes. On the second one, yes, we had a rough quarter in China. We think it was flat or minus 2 or something like that. It was not good. So, obviously, a big market for us that didn’t grow on the quarter. So, that’s holding back a little bit, mostly our surgical business, because that’s a dominantly a surgical mix element. So, we look forward to that bouncing back next quarter. And I think, generally speaking on the eye drops, it’s been our view that when — basically when you lose these sales, you’re going to lose them to somebody else on the shelf. So, I don’t know that –if you’re looking for contact lens solutions and you’re reusable wearer, you’re going to pick up a private label brand or you’ll pick up something else. So, it’s probably a lost sale. I wouldn’t expect any recovery from it.
Operator
Our next question comes from Larry Biegelsen with Wells Fargo.
Larry Biegelsen
Tim, just one for you on the tax rate. The guidance seems to imply like 23% or so in the second half of the year. And I see the guidance for the full year. But I guess my question is, how do we think about the tax rate beyond 2022? And I heard you talk about some type of settlement between the U.S. and Switzerland. So, any color there would be helpful. Thanks for taking the follow-up.
Tim Stonesifer
Yes. No problem. So, you’re absolutely right, the implied rate in the second half will be around 23%. And that’s really driven by — will have less profit in inventory. So, we’ll be releasing some DTAs, which increases your tax rate. The timing of the APA is really a big one. Again, we’ve assumed — we assumed that we would close that on the first half, it looks like now we’ll close it in the second half. So when you see that your rate goes up for the half. But for the total year, this is all really just tiny. So, for the total year, we feel very good about the 17% to 19% range that we talked about. And I would just go back Larry to the capital markets today and what we said there for your tax rates going forward. I would just use that for now until we update you at the next capital markets day.
Operator
Ladies and gentlemen, we have reached the end of the question-and-answer session and this concludes our call for today. Thank you for your participation. You may disconnect your lines at this time.
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