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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Greetings, and welcome to the Second Quarter 2022 Earnings Conference Call. [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, Investor Relations. Please go ahead, sir.
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 of these documents in the Investor Relations section on our website at investor.alcon.com.
Joining me on today's call are David Endicott, our Chief Executive Officer; and Tim Stonesifer, our Chief Financial Officer. Our press release, presentation and discussion will include forward-looking statements. We expressly disclaim any obligation to update forward-looking statements as a result of new information or future developments, except as required by law. Our actual results may vary materially from those expressed or implied in our forward-looking statements.
Accordingly, you should not place undue reliance on any forward-looking statements. Important factors that could cause our actual results to differ from those in our forward-looking statements are included in Alcon's Form 20-F and our earnings press release and interim financial report on file with the Securities and Exchange Commission and available on the SEC's website at sec.gov.
Non-IFRS financial measures used by the company may be calculated differently from, and therefore may not be comparable to similarly titled measures used in other companies. These non-IFRS measures should be considered along with, but not as alternatives to the operating performance measures as prescribed by IFRS. Please see a reconciliation between our non-IFRS measures with directly comparable measures presented in accordance with IFRS in our public filings. For discussion purposes only, our comments on growth are expressed in constant currency.
With that, I will now turn the call over to our CEO, David Endicott.
Thanks, Dan. Welcome to Alcon's Second Quarter 2020 Earnings Call. I'll begin by giving a brief update on our second quarter results, overall market dynamics, and recent performance. And for 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 in our growing consumables space.
On plantables, 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 when we launched Vivity in the first quarter of 2020. In the U.S., we've maintained our leading PCI 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 Century remains strong. If you recall, Active Century is the most advanced phaco hand piece where the systems fluidics are controlled through sensors near the eye. This unique feature reduces surge and improve safety.
Innovations like Active Century 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 & Refractive Surgery Conference where we showcased a robust scientific program. Data was presented that highlights the sharp crisp vision and glistening free clarity of Clarion our most advanced IOL material. Clarion's been implanted in more than 1 million eyes that 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 improved patient outcomes.
Now moving to Vidacare, 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 2 SiHy toric lenses in the market, PRECISION1 for astigmatism which is aimed at the mainstream market and Dailies Total1 for stigmatism for the premium segment. Dailies Total1 for astigmatism has been eagerly anticipated by eye care professionals for years and it's reception has been very strong. This is the first and only daily disposable toric lens to feature water gradient surface material. With this lens exceptional comfort, eye care professionals are well positioned to fit and keep more astigmatic patients in contact lenses. This has contributed to our growing share of the Dailies Total 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 at daily reusable and specialty lenses, we're excited about the progress we're making in new and switch fits which is a strong leading indicator of long-term share growth.
Now finally, turning to Ocular Health. We continue to see strong retail, consumer, and physician interest in our portfolio of eye drops. Sales of our popular sustained family of artificial tiers 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 eyedrops. Recall that we have invested in a new sales force dedicated to supporting our portfolio of eyedrops 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, our commercial execution, and international market recovery. In Vision Care, the market growth was very dynamic and varied by region. United States grew mid-single digits, in line with historical averages, while Europe and Japan, which were impacted more significantly by COVID-19 in the second quarter of last year, grew double digits.
To summarize, despite the macro and supply chain challenges we 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 in [indiscernible] eye contact lenses. We continue to drive operating leverage in our second quarter 2022 core operating margin expanded by 170 basis points on a constant currency basis over the prior year. And given the current economic environment, we'll continue to take measures to offset some of the headwinds as we are well positioned to succeed in the future.
With that, let me pass it to Tim, who will take you through our financial results and provide an outlook for the rest of the year.
Thank you, David. We're pleased to report 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 continue to build upon our positive momentum despite the persistent macroeconomic headwinds. These headwinds included a historically strong U.S. dollar, supply chain tightness, and inflationary pressures. This was pervasive across both our franchises and included pressures on availability of supply, rising prices on electronic components and commodities, including plastics and resins as well as increased costs for labor and transportation. Fortunately, our team was able to offset much of the impact through productivity and cost reduction initiatives, strategic price increases from earlier in the year and contract negotiations with suppliers.
In our surgical franchise, revenue was up 13% year-over-year to $1.3 billion in the 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 VitRet growing high single digits. For the first half of the year, consumable sales were up 13%.
In Equipment and Other, our sales were up 10% year-over-year to $208 million in the 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 phaco equipment to Centurion. Additionally, demand for Legion has been strong. We also see solid interest in our Active Sentry handpiece, our Revalia microscope, and our Argos biometer. Sales growth was partially offset by declines in refractive equipment due to a difficult year-over-year comparison. Equipment sales for the first half of the year were up 8%. Turning now to Vision Care. 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 stigmatism 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 was 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 pretax 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 6 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 I've mentioned, we continue to see certain macro headwinds, including foreign exchange pressure from an appreciating U.S. dollar, inflation and supply chain tightness, the global impacts of the war on Ukraine and the ongoing effects from COVID-19. Our current 2022 outlook assumes that the 2022 global markets grow at slightly above historical rates, inflation stays at current levels through the remainder of the year, supply chain does not materially deteriorate, and the U.S. dollar holds steady at mid-July foreign exchange rates.
Based on our current assumptions, we are updating our net sales guidance for full year 2022 to $8.6 billion 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 are 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 will be 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 are seeing in the business. With that, I'll turn it back to David.
Thanks, Tim. To wrap up, our underlying business continues to perform well despite headwinds that we continue to face. We're launching new products and gaining share in both franchises. We continue to invest in the business, and we're creating operating leverage and expanding margins. As we look to the future, our focus remains the same. We'll continue to fuel our innovative engine while prudently managing our resources all the while we remain committed to creating long-term value for our shareholders. And finally, I want to thank all our associates with our hard work in delivering great results in an increasingly challenging environment. With that, let's open the line for Q&A.
[Operator Instructions] Our first question comes from Zach Weiner with Jefferies.
I just wanted to touch on the PCI IOL market. First, expectations for market growth, which you kind of touched on, but then also PCIs being a more premium procedure, how do you think that market will evolve as we head towards a potential economic downturn in the near future? Thanks.
Thanks, Zach. First of all, we had a good quarter on PCI IOLs. We're very pleased with our share performance in the United States. I think it was up over 80% again. So we are under some new competitor launch in the United States now for almost a year, and I think we've really held up quite well, 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 our -- I think in the script, we quoted 55.
That's correct. And we're excited about that. That has been a combination of continuous progress made on PanOptix, but the addition of Vivity into the mix. And so 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, it was down in the U.S. And I think the thing we'll have to see over time is how much this -- what the effective 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 PCIOL percentage? 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 remind people that the headroom in this space is quite big. So we think people can afford ATIOLs probably in that 40% -- 35% to 40% of the market can afford. We're really sitting somewhere in the low teens. So I think there's plenty of patients out there who can come get at PCIOLs. We're obviously spending a lot of time on it as well.
So we've increased our sales force effort. We've matched our coverage of IOLs 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.
Our next question comes from Chris Cooley with Stephens.
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, the Ivantis. Would be interested in just learning a little bit more about your expectations for broad market growth, both here in the U.S. and abroad after we've seen a number of reimbursement changes in the space. And then similarly, maybe any additional color you could provide just regarding receptivity to the various devices by channel when we think about the comprehensive ophthalmologists versus the glaucoma specialists. Thank you.
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 out in the hands of the reps. So we're excited to talk a lot about 2/3 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 stent-based part of the MIGS market, I would say, has been obviously year-on-year affected by the reimbursement. So I think it's growing currently in line with our expectations. And I think we -- 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, 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 was where some of the newer players will play.
And also, obviously, for the more comprehensive ophthalmologists, gives them the choices on how to treat and refer or choose to do surgery, their call. 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 surgeries. They're not the super high-volume cataract surgeons who, frankly, are going to refer to 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 positive outlook at least at this point, and I think kind of on par for where we'd expect it to be.
Our next question comes from Daniel Buchta with ZKB.
Maybe the first question and then a follow-up question on that topic as well. The first one on the core EBIT margin guidance. I mean you 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 of...
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 up 6% versus the euro, up 4% versus the yen. So it 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 2 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 last -- on the Q1 earnings call, we had that -- we spiked out that Korea IOL impact. So that was a one-time good guy that we got in Q1 that won't repeat in the second half of the year. So those are really the 3 key drivers around that pressure that we're seeing in the second half.
Understood, yes. 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 fixed environment and everything you just mentioned, are both guidance is still valid? Or how do you see that?
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 in R&D, while we have a very volatile supply chain and back order 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.
Okay. But assuming it stays where it is now, the guidance is still valid and no further strengthening of the U.S. dollar.
Again, we have an operational plan in place, and we're committed to investing in the business, driving revenue growth and doing the right long-term things for the business.
Our next question comes from Larry Biegelsen with Wells Fargo.
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 the 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.
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 in the last call from what is wrapping around on the COVID numbers or the kind of COVID problems last year to something that looks a lot more normal by the end of the year. And remember, our normal growth rates have always been kind of roughly -- depending on the market, around 4%, 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%, 5% growth rate for the markets and then us growing hopefully, a little bit faster than that.
Okay. That's helpful. And David, can you talk about pricing a little bit, 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?
Yes. We've -- we started late last year with some price announcements. We took them as much as we could early in the year. I don't think we anticipated the magnitude of the inflation that we've actually seen. So if you look at where we are right now, I think the numbers 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, it 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 a fixed government reimbursement or a fixed contract with an individual payer. That's been difficult to take. It is in certain circumstances, we can like lose items or one-off prices or some things that are not contracted. But we've been a little bit more cautious or I wouldn't say cautious, I would just say it's a little more difficult to do it surgical.
Vision Care, we did take some fairly reasonable prices. We took price up in the [cataract] 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.
Our next question comes from Matthew Mishan with KeyBanc Capital.
Just a couple of follow-ups on some other topics. First, on the operating margin, do you expect trough quarter to be 3Q or 4Q?
I'm sorry, what would you say?
Trough quarter.
Yes. Again, 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.
Okay. And then around ocular health. You said you had some supply chain constraints in contact lens care. How long do you expect that to be impacting results?
Well, 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 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 contact -- 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 like it should resolve somewhere in the fourth quarter, but I think I'll be a little bit cautious around that because as we said in our assumptions, we assume the supply chain will not get worse and it obviously has been bumpy.
Our next question comes from Ryan Zimmerman with BTIG.
David, to start on cataracts for a moment. We've kind of talked before about there being about $1 million plus, $1.1 million backlog in cataracts. The cataract market has been up double digits this past 2 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 cataracts 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.
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 looking 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, IOL staff, in particular, has been hard to keep. So 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, the -- 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 IOL staff.
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 the [very] launch about 5%. But what do you attribute to that dip, not to split hairs here, but curious kind of what drove that dynamic from 1Q to 2Q.
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. If I said 60%, that's not right because we gained market share in this quarter versus prior quarter. So I'm either confused here, but we read 55 as a very positive share. I believe we were somewhere in the low 50s last quarter, and we've come up, I think, about [1.5 share], mostly driven by the international business in this particular frame. But if you look at our U.S. business, PCIOLs, we're 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.
Our next question comes from Cecilia Furlong with Morgan Stanley.
I wanted to start with Total30. If you could just speak to what you're seeing from either new versus switch fits initially as well as just how you've seen your overall share of the reusable market trend now versus when you initially launched the platform.
Yes. Total30 is doing really well. We're excited about the product. It's a very unique material. It's one of the -- 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 think our new and switch fits are in excellent condition right now. We're excited about what we see. If you read that as a kind of a forward indicator of how we're going to do, we are in very good shape between Total30 and our Air Optix product, we're doing exceptionally well.
Great. And if I could follow up, just the capital environment that you're seeing today. If you could speak to when the regional dispersion of the equipment demand that you're seeing as well as just your outlook for the balance of the year that you incorporated 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.
Yes. So 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 will 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 handpiece is unsurpassed and 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 in the world. And so I think we're excited to see that. I think we had a really good -- actually in international, we had a very good performance from the other end of our line, which was the Legion line, which is our value product, which has terrific fluidics, but it's a portable product with a very low cost per use. We did very well with that in India and Brazil, a couple of other countries. So we continue to do there a good job of maintaining and growing -- actually growing share in our phaco business.
You'll see also in our equipment a little bit of noise and positive stuff, I think, around Argos, our new biometer, which is doing very well, and the Revalia microscope, which again year-over-year -- both of which year-over-year are growing nicely. So we're excited about the equipment generally. And it has had a good year. I think the question about next year, we'll have to deal as we get kind of later into the year and see how the economy shapes up.
Our next question comes from Jeff Johnson with Baird.
Maybe just a couple of follow-ups at this point, if I could. David, maybe interested to hear on the new and switch fits with all the new products out there. Just relative to your internal expectations, have you been surprised one way or the other on your share of new fits 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?
Yes. A couple of dynamics in there to comment on. New and switch fits on a share basis is probably a little bit better than we'd expected 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 than 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 a 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 really like 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 torics]. 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. It's a price point that's very attractive to the middle part of the market. And frankly, it's just a lot more - doesn't have the rotational spend that some of our competitors do. And I think it's a terrific product. So I think that's, again, helping the sphere. And I think our daily share right now is quite good and continuing to grow.
Yes. That's helpful. 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 is still a little sluggish. I don't know if that's global or U.S. Just if you can provide any color there. But when you talked about a 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's 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?
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 -- we call it EQ units, which is really think of that as just the patient purchase in units. But it is clearly, I think, a little bit softer than it has been. And I say that with particular emphasis on the 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 lens 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 traded 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.
Our next question comes from Julien Dormois with BNP Paribas.
I have 2 follow-ups, please. One relates to -- is back to ATIOLs and more broadly to the overall penetration of ATI wealth as a category in the context of a softening macro environment. So I think you previously mentioned that it's -- the category as a whole is now about 12.5% of global penetration with more than 19 versions in the U.S. Has [business] 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 development in the coming years. I think you guys previously mentioned an '18-'20 ratio. Is that the way to look at things?
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 it wouldn't make much out of that other than it 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 the last quarter, it 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 6 months. There are a lot of people who think it's a global recession, some think it could be different in different regions, the timing of which, the depth of which and the duration of which I just don't know. But we've thought about it in a number of different scenarios and feel comfortable that we can plan our way through it, 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 the eye care demand for visits and therapy will continue. People that wear contact will still wear contacts. What usually happened or at least used to happen was you see a little bit less trade-up from dailies -- from reusables 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 -- love to project it right now. But we feel pretty comfortable that we can manage it.
And on the margin progression, the 2 macro headwinds we talk about, obviously, foreign exchange. I mean, that works its way through the whole P&L. So no real differential, I'd say. The second one would be inflation. So if that were to continue, you'll probably see a little bit more pressure on the gross margin 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, I'd still anticipate to see roughly 80% of it coming from operating leverage and 20% of it coming from margin expansion.
Our next question comes from David Adlington with JPMorgan.
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 out on the call so far, but any impact from the Chinese lockdowns in the second quarter, please?
Yes. On the second one, yes, we had a rough quarter in China. I 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 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 where 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.
Our next question comes from Larry Biegelsen with Wells Fargo.
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. Thank you for taking the follow-up.
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 -- we'll 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 in 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 timing. 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 Day and what we said there for your tax rates going forward. I would just use that for now until we update you at the next Capital Markets Day.
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.