Q3 2022 Bausch + Lomb Corp Earnings Call
Good morning, and welcome to the Bausch and Lomb third quarter 2022 earnings calls.
All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions.
To ask a question you May Press Star then one on your Touchtone phone.
To withdraw your question. Please press Star then two.
Please note this event is being recorded.
I'd now like to turn the conference over to Alison Ryan. Please go ahead.
Thank you good morning, everyone and welcome to our third quarter 2022 financial results conference call participating on today's call are Chief Executive Officer, Mr. Joe Papa and Chief Financial Officer. Mr. Stand out are sticky. In addition to this live webcast a copy of <unk>.
Today's slide presentation, and a replay of this conference call will be available on our website under the Investor Relations section before we begin we would like to remind you that our presentation. Today contains forward looking information.
I'd ask that you take a moment to read the forward looking statement legend at the beginning of our presentation. As it contains important information. This presentation contains non-GAAP financial measures.
More information about these measures. Please refer to slide two of the presentation non-GAAP reconciliation can be found in the appendix to the presentation posted on our website finally, the financial guidance. In this presentation is effective as of today only it is our policy to generally not update guidance until the following quarter end to not update or affirm guidance other than through.
Disseminated public displeasure with that it's my pleasure to turn the call over to Joe.
Thank you Allison and thank you everyone for joining us today I'll begin some comments about our bausch and lomb third quarter highlights.
<unk>, our CFO will then review the third quarter financial results in detail and discuss our 2022 guidance. Finally, I will conclude by discussing our product pipeline and upcoming catalysts before opening the line for questions before I start I'm wondering, especially thank our <unk> team for their strong efforts in the third quarter of 2022.
Our first full quarter as a public company.
I have an integrated eye care company operating today Bausch <unk> Lomb is uniquely positioned in the ILS market on page four you see that we are building on approximately 170 years of success.
Leading IHOP brand balance sheet.
One is a company with the highest brand awareness and Ikea and as a global leader in consumer health, we have outpaced U S market growth by approximately one seven times since 2018.
Turning to slide five we continue to see compelling opportunities for stand alone <unk> as a pure play <unk> company first we believe the company is well positioned for growth in large durable markets driven by new products and favorable Mega trends are tailwind that are expected to continue driving demand for IHOP.
Products second we can did you've seen margin expansion over the long term based on our new product launch opportunities and finally as a publicly traded company. We expect to have balance sheet flexibility to expand investment in business and additional strategic bolt on product opportunities.
Given the challenges presented by the current economic environment I wanted to spend a moment to share insights on the potential impact of inflationary pressures on the IHOP category on slide six we presented data and other insights would share that the IHOP business is resilient to economic pressures. The first statistics on the left underscores just how important eyesight is.
81% of U S. Adults surveyed would be willing to give up something else and it's very important to them if it met never losing their eyesight.
Looking at Bausch and Lomb within this IHOP sector. We believe our business is well positioned guests an economic downturn, because <unk> has the highest brand awareness and Ikea vascular.
<unk> has a diverse product portfolio of more than 400 branded and generic products as well as products that are offered at various ranges of price points Bachelor and has a geographic president and approximately 100 countries and Russia is investing in R&D to expand our portfolio with more than 15, new product launches expected in 2002.
<unk> three <unk>.
To summarize the survey data and our team's experience through previous economic cycles tells us that I hope will continue to be a priority for consumers and patients. We believe customers will continue to want the best and most trusted products and services, which means that <unk> is well positioned within the overall Idaho sector.
Moving now to the third quarter highlights on slide seven our third quarter overall organic revenue growth was 5% and importantly, it reflects growth in all three of our business segments.
A few key highlights to note first our continued momentum in key portfolios.
<unk> revenue of Aki rate and preservation grew by 14%.
Pleased to report that preservation currently has an approximately 95% market share in the U S.
In the 14% organic growth in surgical and plan to book was driven by the premium and standard iOS.
Next our investment in the faster growing <unk> category Rubify U S weekly market share in the registry category has reached 49% and we are seeing signs of a strong early launch in Canada.
We're also well positioned to take advantage of the U S prescription dry eye market, which grew at a 24% CAGR from 2016, and 2021 and is expect to see double digit growth from 2021% to 2027.
And Novo three our potential first in class treatment for dry eye disease associated <unk> gland dysfunction is a June 2023, <unk> date finally, new product category expansion, we entered into an exclusive European distribution agreement for a minimally invasive surgical procedure for the treatment of glaucoma during the third quarter and our.
Our premium <unk> Smart Io is now launched in 19 countries to summarize third quarter results demonstrate that our business is continuing to deliver strong performance. Despite the currency and inflationary headwind pressures are key brands have demonstrated their durability through challenging economic conditions, we remain focused on.
<unk> to invest in innovation to drive future growth in large fast growing markets and categories.
And with that I will turn the call over to Sam to cover the financial results in more detail.
Thank you Joe before we get into the details.
I'll remind listeners that when we talk about the organic revenue growth, we meet on a constant currency basis and adjusted to remove the impact of divestitures and discontinuation.
Turning now to our results on slide eight.
We're pleased to report our sixth consecutive quarter, where organic growth demonstrating the durability of our business in a highly attractive market.
Our total company revenue was $942 million for the third quarter up 5% organically.
The revenue growth was broad based with strong performance across all segments.
Key consumer brands, such as our eye vitamin franchise, and <unk> are maintaining our leading market share positions.
Our contact lens portfolio continues to grow.
And procedure volume is driving demand in surgical which is also creating positive tailwind in our ophthalmic pharmaceutical segment.
Economic environment, where sustained levels of high inflation are leading to some changes in consumer behavior.
The remaining loyal to trusted brands like Bausch <unk> lomb, while we're not immune to the economic pressures, we do expect that Bausch <unk> lomb portfolio to continue to demonstrate strong resilience.
Consumers and patients to prioritize their vision care needs.
We are pleased with the recovery in China.
The BNS business in China grew 6% organically compared to the prior year quarter and 28% on a sequential basis. We're encouraged by the improvement trends and we will continue to monitor to that piece of the recovery as the market works through returned to pre COVID-19 levels currency had a substantial impact in the quarter, which impacted our reported revenue minus one <unk>.
FX headwinds on revenue were approximately $55 million or 575 basis points.
The current strength of the U S. Dollar is something the market has not seen in a long time. The U S. Dollar is the strongest loving that about 20 years versus the euro.
And the U S dollar strength versus keep you in all currencies like the yen in British pounds is also something we have not seen in decades.
Overall, we're very pleased with our 5% organic revenue growth in the third quarter.
And believe that the long term fundamentals of our business and the eye care market remains highly attractive.
Now I'll go into more detail on each of our segments.
Revenue in the vision care segment, which includes contact lenses and consumer products grew organically by 4% in the third quarter.
Our consumer portfolio, which was up 3% organically. So continued market share leadership in key categories.
Such as eye vitamins redness relief unless care.
We're seeing consumer behavior, you're adjusting for inflation, although the prevailing differs by category or market generally price and promotion sensitivity have increased.
<unk> has a trusted brands consumers are sticking with and we will continue to manage the balance between strategic pricing and growing market share.
The eye vitamin franchise preservation occupied grew by 14% on a reported basis and 60% organically.
President vision as the market leader in the eye vitamin category and is a great example of a <unk> product with a strong brand equity.
The eye vitamin franchise continues to be a strong driver of growth.
We recently launched an enhanced occupied formulation and we see an opportunity for the category to continue to expand with increased Andy awareness.
<unk> reported revenue grew by 7% in the quarter.
And reached a record 49% market share.
Consumers continue to value the level of innovation and new fiber rings to the redness relief category Tumefy recently, launching Canada is off to a strong start.
We see multiple catalysts to continue the growth trajectory for <unk>, including launching into new categories.
We saw strong revenue growth in our biofuel franchise led by the launch of <unk> hydration plus multipurpose solution.
We are now continues to gain market share and the multipurpose solutions category.
In the quarter, but no market share increased 410 basis points versus the prior year, our select which is a leading dry product in Europe and is a 100 million plus revenue brand grew by 11% organically.
Also during the third quarter, we saw a slight impact to revenue caused by the delayed timing of shipments due to hurricane in which we expect to recover in Q4 <unk>.
Revenue lenses was up 6% organically with strong growth in each of the three key BNS franchises, 8% reported and 23% organic growth in daily Si Hy.
7% as reported and 12% organic growth in ultra.
And 2% reported and 8% organic growth and buy through one day.
The market conditions in China have improved and the China lens portfolio grew organically by 3% year over year.
We're very encouraged by the improvement trend, we will continue to monitor the progress as local policies and measures continued to be in place to comply with the zero corporate policy.
Also the pace of the recovery has varied by channel with e-commerce progressing at a faster rate than retail.
As the retail market improves we see an additional opportunity for growth.
We continue to be excited about our daily Si Hy lenders, there's a multiyear growth driver for our portfolio as we gain scale and prepare for the future launches of the multifocal toric lenses.
We're focused on accelerating the manufacturing output to meet significant end market demand.
I expect manufacturing output ramp up and yield to continue to improve.
Having a diversified portfolio with different modalities and price points also benefited our business at the time of our highest consumer price sensitivity.
Our value oriented dailies brand soft lines grew 9% organically in the quarter.
Moving onto our surgical segment third quarter revenue grew organically by 8% to $172 million ASP.
As procedure volume continues to increase in certain markets the.
The increase in procedure volume grew 6% organic revenue growth in consumables, which is the largest BNS surgical category and.
And 14% organic growth in the Implantables.
The strong performance in Implantables was driven by both our premium and standard <unk> portfolios.
Our equipment portfolio grew 3% organically in the quarter and was impacted by some constraints on the availability of supply.
We expect that backlog of cataract surgery to be a tailwind over an extended period of time.
We also have an opportunity to expand the portfolio with several upcoming launches, including a speedy microscope for which we expect to launch in 2023.
Finally in the ophthalmic pharmaceutical segment third quarter revenue of $172 million grew by 5% on an organic basis.
This was mainly driven by strong performance in the international markets with 15% organic growth.
The growth is attributed to improving conditions in China, and an increase in surgical procedure volumes in Europe .
International also continues to demonstrate durable growth and the benefits of a large portfolio with an extensive global reach.
In the U S.
Tail end of LOE headwinds is becoming less meaningful and investments in market access of our key promoted brands by Volta continues to drive volume gains.
But <unk> growth was up 29% in the quarter and revenue grew by 4%. We're also executing on our <unk> geographic expansion strategy. We launched resulted in Thailand in the second quarter, we're preparing for a launch in Brazil by the end of this year and we're targeting further geo expansion opportunities.
We continue to focus on the transformation of the auto portfolio.
With a peer launch is tracking well and nobody has been assigned a <unk> date of June 28 2023.
This brings us a step closer to what we believe is a substantial market opportunity.
On slide nine we quantify the impact of the FX headwinds are having on the business.
The strength of the U S dollar against all major currencies, something we have not seen in the markets in decades.
Inflation remains at the highest level since the 19 eighties.
GNL continues to perform and the eye care market is demonstrating resilience to macro headwinds our base business performance of $48 million in revenue growth was offset by FX headwinds of approximately $55 million for the quarter.
Turning now to slide 10.
As a reminder, given the timing of the IPO to 2021 results, we're not fully burdened by all the standup costs associated with the separation.
As we previously disclosed full year 2021 results did not reflect estimates standup costs of approximately $70 million with total revenues of $942 million in the third quarter, we remain committed to our strategy to be fully invested in new product launches and in R&D, while managing the impact of macro headwinds our adjusted <unk>.
EBITDA in the third quarter was $187 million.
Adjusted gross margin for the quarter was approximately 65%, which is 110 basis points lower than Q3 2021.
Apart from the product mix and manufacturing yield the change in gross margin is largely driven by the high level of inflation.
Leading to higher cost of energy transportation labor input cost such as resins and rising prices of surgical components.
We are working to mitigate inflation challenges through various efficiency enhancing initiatives and strategic pricing.
We're also monitoring the geopolitical developments in Europe to assess the potential impact of increasing energy costs over the coming months.
Over the longer term the fundamentals and market opportunity for margin expansion continues to be in place.
We have a clear path to expand margin in all areas of our business with launches of premiums surgical products.
Higher margin auto portfolio increased scale and lenses and operating leverage.
Our investment in R&D continues to trend at roughly 8% of revenue, which is approximately $14 million or 160 basis points higher compared to prior year. We remain focused on high priority projects, while continuously evaluating our pipeline to accelerate new products to market.
Adjusted SG&A increased by approximately $12 million year over year, which is attributed to an inflation driven increases in transportation and labor costs.
SG&A also reflects the cost structure of <unk> as a standalone company, which was not fully reflected in the prior year's results.
Finally, adjusted EPS for the quarter was 31.
Moving on to slide 12.
Adjusted cash flow from operation was $48 million in the third quarter.
Year to date, adjusted cash flow to $216 million.
Strategic inventory management, and maintaining working capital efficiency continues to be key initiatives in light of the macro environment challenges.
Third quarter Capex of $49 million reflects strategic investments in our vision care portfolio and a number of productivity enhancing initiatives.
We ended the quarter with approximately $2 5 billion of debt.
Our net leverage ratio of approximately two nine times.
It continues to have a strong balance sheet, which provides us with the flexibility to pursue value enhancing investment opportunities.
Now turning to our guidance on slide 14.
We are reaffirming our organic revenue growth guidance for 2022 in the range of 4% to 5%.
We continue to see momentum in our business and we remain committed to making the investments to execute our growth strategy.
While our organic performance continues to be strong based on current exchange rates, we estimate full year FX headwinds to be approximately $210 million compared to $160 million, including our August guidance.
To reflect the $50 million of incremental FX headwinds, we estimate that our reported revenue will be in the range of $2 7 billion to $2 75 billion where.
We're maintaining our gross margin guidance of approximately 60%.
We have implemented various cost efficiency measures and strategic price increases, which we expect will allow us to manage approximately 130 basis points of inflation pressure for the full year.
We're updating our adjusted EBITDA guidance for 2020 to be in the range of $750 million to $755 million.
This reflects approximately $10 million of FX headwinds incremented our August guidance.
It also reflects a $15 million impact related to the manufacturing yield and output ramp up of our daily Si Hy lenses.
As we increased production of the daily Si Hy lens is to meet significant end market demand the output ramp up in manufacturing yield is trending slower than expected in 2022.
We expect that the output ramp up will accelerate and the yield will improve in the upcoming months.
And the incremental headwinds will be substantially reduced in early 2023.
We continue to expect interest expense of approximately $150 million.
In the third quarter, we entered into cross currency swaps to mitigate market fluctuations.
We're exploring other options to manage potential interest rate movements.
We are maintaining our estimate for the full year R&D investment at approximately 8% of revenue. Despite the macro volatility we will continue to prioritize investment in our R&D pipeline as we look forward to a number of launches in 2023 and beyond.
Lastly, we expect our full year tax rate to be at the low end of our guidance range of 6%.
This is mainly driven by our expectation of the product and geographic mix of taxable income.
Looking forward, we want to provide some initial thoughts on our key priorities for 2023 weeks.
We expect the fundamentals of the eye care market remains strong and our focus will be on driving revenue growth.
We have a full pipeline of more than 15 products that we expect to launch in 2023 across all of our segments.
This includes <unk> three in our ophthalmology portfolio and a number of launches in our surgical business.
At this time, we expect macro market conditions to continue to evolve with inflation stabilizing although at a higher rate relative to historical levels.
We also expect currency to remain volatile.
Despite the macro pressures, we will continue to prioritize investment in R&D and product launches as we continue the momentum in our current portfolio and add new products.
An opportunity to leverage our existing commercial infrastructure for long term margin expansion.
In summary, we're pleased with the third quarter growth reflected in all of our three segments. The BNS portfolio continues to demonstrate resilience.
In the long term fundamentals of the IPO market remained solid now back to you Joe.
Thank you Sam I will now discuss our product pipeline in the upcoming catalysts that we expect to drive our business results on slide 16, we highlight some of the key consumer franchise, that's been gaining market share first on the left preservation attained a 95, 1% market share in the third quarter of 2022, a gain of 120 basis points.
Compared to the prior year quarter.
Given the success of our eye vitamin franchise, we are working on the brand family line extensions, including an enhanced formulation of <unk> with vitamin D for adults, aged 50 and over and a combination of preservation products with an anti oxidant that helps support healthy heart function.
Next use market share professional and multi purpose solution was 57, 4% up 410 basis points compared to the third quarter last year, driven by our biotech multi purpose solution and we are expanding the mic bio true Mega brand platform to strengthen our competitive advantage in dry eye disease finally on the right.
<unk> a $100 million.
Growing dry eye global franchise grew organically by 11% compared to the third quarter of last year <unk> branded products are available in more than 35 countries and we have more than 10 line extensions underway.
<unk> recently launched Alexia moisture eyedrops for dry eyes in France.
Now turning to slide 17 on <unk> in the U S. <unk> has a number one redness reliever in the category with approximately a 49% market share building on the phenomenal success of this product and using the power of our fully integrated eye care platform. We are planning to expand the brand geographically and through line extensions.
In July we launched unify in Canada, where it is off to the fastest launch for Bausch and Lomb and the Canadian eye drop market is generating twice the amount of sales versus the previous leading eyedrop lunches Geo expansion continues to be a priority and <unk> has now improved in six countries. In addition to launching in new markets, we are expanding wound.
Beauty positioning to specialty Ike here and have a number of line extensions planned for 2023 and beyond including a makeup for even longer.
Cream and our lash and brow serum along with a single dose preservative free eye drop and a combination of product with key to Tiffany for allergy symptom control.
On Slide 18, we show the 2022 and near term launches that we believe will position the company for transformational growth. Our 2022 launches included <unk> revised custom soft contact lenses are Lux premium <unk> and most recently project Watson our brand new line of products specifically for them right.
To help support dogs eyes ears, and overall well being.
Looking ahead to 2023 and beyond our strategic investments in R&D are yielding a pipeline of new innovative products and higher margin high growth categories, such as premium ILS and pharmaceuticals.
On slide 19, as we mentioned earlier, we now have a June 2023, <unk> date for Novo III a potential first in class treatment for dry eye disease associated with my Bill Muir Glen dysfunction, if approved by the FDA, We expect to watch number three in the second half of 2023.
Dry eye disease is one of the most common ocular service disorder affecting approximately 18 million Americans Novo <unk> III is expected to address the <unk> dry eye, which is an unmet need in approximately 90% of dry eye disease suffers.
This is a fast growing market with unmet patient needs from 2016 to 21, the U S prescription dry eye market grew at a CAGR of approximately 24% and given the current mark for dry eye disease treatments and a result of the two phase III trials, we believe that <unk> has the potential to be a major future growth driver for our business.
On slide 20, our surgical business preparing for the upcoming launch of the Itel agent system, a cloud based digital platform that will help streamline the complex processes for pre surgery assessment to post surgery evaluation ophthalmic surgical procedures required sophisticated multi step process that involves patient diagnostics clinical treatment.
Planning surgery planning post op analysis, and more that transitioned to between each step required the manual transfer of data, which can be time consuming and lead to unintended human error when.
When the next generation <unk> platform is launch we expect to occur in 2023, the analytic software allow surgeons to seamlessly integrate all aspects of the cataract retina, where refractive surgery processes to maximize their overall practice efficiency.
We are excited about the significant step forward that will enable us to advance interconnectivity and leverage due to support and improve patient outcomes.
On slide 21, we feature another anticipated 2020 to be launching our surgical business. The three D microscope with drivers ophthalmic surgeons, a fully digital surgical visualization platform the <unk>.
<unk> appears exceptional image quality with economics, allowing certain to tackle complicated surgical cases with confidence and ease and importantly, the three D microscope can be integrated with our eye Telegent digital platform the market opportunity for this product has significant industry reports estimate a $400 million growing at a CAGR.
There are approximately 6%.
On slide 22, we show the geographic location expected timing of the upcoming premium Iowa launches near term. We are preparing for 2020 through launches of Bausch and Lomb NV Invista Trifocal, IOL in Canada, and Bausch and Lomb aspire the investment extended range model focal, Iowa, and the U S and Canada are near term.
Focus is launching these premium <unk> in North America, and the EU, followed by the Asia Pacific region.
On Slide 23, we listed the progress we've made against three key areas of focus that we identified at the priorities at the beginning of 2022 first the continuing momentum of our portfolio second investing in categories that are growing faster than the market.
And third expanding into new product categories to highlight a few we are on track to deliver 4% to 5% organic revenue growth in 2022 due to in part to strong performance of our key franchises, including market share gains.
We have made investments and innovation like our <unk> daily lenses, <unk> microscope, and Noah III, and lastly expanded into new categories with XI pure revive contact lenses in the minimally invasive surgical procedure for glaucoma. We believe that continued to deliver against these three key areas of focus will position the company for future.
Growth.
To wrap up on slide 24, as a fully integrated eye health company with the highest brand awareness of any eye care company, a global footprint and approximately 100 countries a comprehensive portfolio of more than 400 products across all price points.
<unk> is uniquely positioned to meet the ikea needs of patients and customers even in challenging economic environment that <unk> serves our patients and consumers through all phases of their lives belting and offering new treatments to meet unmet health needs and help people to see better to live better or.
Third quarter results demonstrate that our business is continuing to deliver on strong performance. Despite the currency and inflationary headwind pressures. We faced our team remains focused on continuing to generate momentum in our key product invest in fast growing categories and expand into new product categories looking at.
Had we continue to believe that <unk> is well positioned for success as a standalone pure play <unk> company.
With that operator, let's open up the line for questions.
Secondly, we will now begin the question answer session to ask a question you May Press Star then one on your Touchtone phone.
We are using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Sure.
And the first question is coming from Zach <unk> from Jefferies. Zach Your line is live.
Hey, good morning, everyone and thanks for taking the question just one from me on inflationary pressures to start can you give some color on the impact in <unk> and how we should be thinking about inflationary pressures over the next couple of quarters.
And then also how that will impact the manufacturing of this <unk> lenses.
Good morning, Zach stem.
So when you think about the inflation when we looked at the beginning of the year, we expect inflation to be roughly about 100 basis point on our Cogs and no. One as we continue to see inflation rise right now in the U S is hitting about 8% year over year about 10%.
Updated our estimate to be about 130 basis points and that's for the full year in the quarter.
Staying relatively in the same direction its about the 100 110 basis point into.
In the quarter that we've seen the impact.
We look forward.
It really when do we think about Q4, we'd probably expect it to be running at around the same rate that we've seen right now so it will be around that so the 100 basis point impact.
And really from an impact on Idose.
We haven't seen much of an impact on inflation per se on daily Si Hy I think the Delta high it really doesn't have much of an impact of a place you would see a little bit on transportation, but not really seeing much of an impact on the inflation.
I think the only thing I'd add to what Sam said as you know the important part for US as we think about the launch of the Si Hy product is that it is a premium priced product relative to obviously, a monthly lens or a hydrogel lens. So it moves patient to an opportunity for us too.
Have a premium product.
Into the marketplace. So that's you are moving patients from a monthly lens from a $250 per year lends to a.
Daily Hydrogel lens somewhere in that $500 lens up to the daily Si Hy at somewhere in that $750 range. So obviously, that's obviously going to help us with some of these inflationary pressure that we see out there.
Very helpful. Thank you.
Operator next question please.
The next question is coming from Cecilia furlong from Morgan Stanley .
<unk> Your line is live.
Alright, great. Good morning, and thank you for taking my questions I wanted to start with R&D just your comments on spending.
Spend into Q, you talked about previously kind of at a 7% to 8% of sales outlook over the next few years can you just talk to you and how youre thinking about R&D spend in key areas of focus beyond 2022.
Sure.
Good question of course is certainly one of the things that we're excited about is the future opportunity of the products that we have I made mentioned during the call of 15, new product launch opportunities.
In 2023, and importantly going into some areas that once again are important to us going in with the premium <unk>. So we have the luxe product premium out there we have some new investment opportunities as we look to 2023.
Those are going to be excited we also have the new microscope <unk> microscope.
We have the Italian system all of these things arent backed by the R&D programs that we're putting forth. What we have said as a company is that we want to make the investments in R&D and everything that we can do to accelerate the timing and launch of these products is important to us we did see an opportunity in.
2022 to move the R&D.
Spend from that 7% to 8% to invest and get it to somewhere around 8%. This year as we've talked about as we think about the future I think.
We are not going to guide to 2023 and beyond but we do think the trends are going to be somewhere in that 7% to 8% because we do see the opportunities.
Front of us to invest in our business.
The R&D investment is going to be the probably the most critical placement we make these investments to ensure that we have new products coming into the future to support the long term growth of our company. So we're excited about it.
Okay, and if I could follow up just on daily Sorry House can you talk about the growth you saw in the quarter and.
And really where youre seeing the greatest share from new fits versus competitive conversions.
Versus cannibalization and then also separately if you could just comment on China, how youre thinking about recovery in Q4, Q and really what you saw from a recovery standpoint <unk>. Thank.
Thank you and thank you for taking my questions.
A lot of good follow up questions here I'm going to try and get them all if I Miss them just to come back to me.
The first comment on that daily.
High growth is 23% we grew so clearly we're excited about that growth in the quarter relative to our daily Si Hy.
Sam said that some of the things that we're working on here.
Our supply chain team is doing a great job on the execution of everything from installing new.
Equipment getting it validated running at ramping up the <unk>.
<unk> in front of us, but the demand is out there. We just wanted to make sure that we can supply sufficient amount of daily Si has happened to the marketplace. So that clearly was an important part of what we've tried to do but 23% growth. This is the specific answer.
In terms of where it's coming from.
Everything we see is coming from <unk> Oasis and just generally new starts and we have seen some cannibalization from our own lines, but really mostly that we've seen from the the <unk> Oasis and new starts is where we saw the primary source of of the product and then Dan you want to talk about the China Recut.
Every portion sure.
Terms of China.
<unk>.
A very nice recovery in the third quarter and as you recall, we had challenges in the first half of the year with the Lockdowns in China, we've seen that turned in the third quarter, we had 6% organic.
Revenue growth Thats year over year, when you look at it sequentially. It was about 28% growth. So we're very encouraged by the trends that we're seeing in terms of a recovery.
We've seen the retail channel come faster sorry.
e-commerce come faster than the retail channel.
At this point.
One of the things that we're going to continue to watch is the policies within China. There are still under the Jacobus policy.
That could.
Sparked some locked down so we're going to be optimistic about where we're going to continue to watch what happens in the next couple of months.
Great. Thank you again for taking my questions.
Thanks, Phil.
Operator next question please.
Certainly the next question is coming from Vijay Kumar from Evercore P. J. Your line is live.
Yes.
Hi, This is Kevin on for Vijay just one on pricing can you talk a little bit about the pricing impact in the quarter end.
Looking into 2023, how should we think about pricing increases.
On the cadence of that for the year.
Sure I'll start and Sam you want to add to it but we.
Just going back on pricing because I think it really comes back to where we were in the beginning of the year, we did take pricing.
Throughout the year in the 2022 timeframe when we started it first.
The January time, with our <unk> prescription products and then we moved it to also to the lenses contact lenses and then we did take pricing on our consumer products in that January timeframe, because we need to give them sufficient advance notice the actual <unk>.
Operating process of actually showing it to the marketplace did not show up until approximately March time for our pricing on the consumer products that we have taken that price during the quarter.
Through out the year.
As we think about pricing going forward.
Take a similar approach we've been Sam was talking before we've been monitoring the inflationary pressures out there in the marketplace. Our expectation is that we will take our price increases on our ophthalmology prescription products.
Early in January of 2023, as well as some decisions that we're making right now on the pricing in the early.
2023 timing for what we'll do with lenses and the consumer products to reflect what we're seeing up any inflationary pressures, but those plans are in place and we have plans to go forward with it.
Yes.
We have strong brand equity overall, you've seen throughout this year in 2020 to gain market share.
Across many of our product lines in many of our markets that we participate in so we have a leading position will continue to monitor the market conditions. As we go into 2023 and will continue to manage the balance between the strategic pricing to market share.
And then the only other thing I'll mention on pricing because one part of it pricing oasis the actual.
List price changes, but we also are continuing we mentioned previously that we have something called project core core stands for cost optimization revenue enhancement and those programs are also designed to look at not just the the list price, but really as it gets to the net price of what we are doing our project core is.
<unk> been very beneficial to us in the past and we also look to for this to help us in the future.
Activities on discounts and some of the other programs that are part of that will be an important part of what we do on pricing going forward, especially as we look to see what's happening from an inflation point of view and of course as I mentioned before we also look as we launched the premium products.
Can realize higher pricing on some of these products as we move through two daily Si Hy or as we move to a premium.
Versus the other products that are out there in the market today. So all of that is how we're thinking about pricing as we go into the future for our business.
Thank you operator.
Excellent.
Certainly the next question is coming from Robbie Marcus from JP Morgan Ravi Your line is live.
Hi, This is actually Lili on for Robbie Thanks for taking the question.
Maybe you could just talk a bit about.
The environment for capital equipment demand has looked like recently.
Does the headwind for you in the quarter and how are you thinking about this trending into fourth quarter and in 2023.
So everything that we've looked at this question on the capital equipment, especially with some of the concerns and questions about recession.
So what do we know what we know is that based on prior recessions.
Usage of the cataract procedures, which is where we're mostly weighted continued like during the recession of the group.
The great recession of 2008, and nine we saw capital equipment demand continue actually the amount of procedures continue which ultimately is going to translate longer term into capital equipment. So we do see that from a big macro environment point of view that the.
Need for cataract surgery is going to continue even if we head into a recessionary environment and that's one of the things we've looked at.
We do obviously acknowledged that we had strong in our surgical business, we had a stronger demand for our surgical consumables in implantables that is absolutely clear in what we've seen.
Specifically implantables was a 14% organic growth.
Consumables was about a 6% organic growth. So those were the fastest growing segment of our surgical business and we've been continuing to look at what's going to happen with the capital equipment, but overall, we do know because one of the questions. We ask ourselves all the time is what happens in a recession for things like cataracts.
Seizures, but overall the direct answers it was about a 3% capital equipment growth rate. So it was lower than the rest of our surgical business, but.
Continues to grow.
Thank you for your questions.
Thank you. The next question is coming from Craig Bijou from Bank of America.
Craig Your line is live.
Good morning, guys. Thanks for taking the questions I wanted to follow up on some of your comments on the resiliency of the.
I care market.
And then also you did talk about price and promotion sensitivity in the income in the consumer business.
So maybe you wanted to see if you could talk a little bit about the sensitivity on other parts of the business to contact lenses.
Maybe even.
The mono focal versus premium <unk>, and what Youre seeing there and then it sounds like you.
You still have confidence that you guys can take some price looking at 'twenty three so.
Yes.
Yes, I guess the question is just.
How good do you feel about that do you think that any changes in the macro recessionary environment might impact that ability to take price.
Sure Great question.
When we ask ourselves all the time in terms of how we're thinking about the future of the business in.
In terms of the resiliency the Ikea market, we did mentioned the comments on the consumer side.
Clearly as we look to across all of our business. We take a very segmented approach, we look kind of the consumer side on price sensitivity everything for what's happening with the products like <unk>, which we see continued strong growth as I mentioned <unk> got a 49% share we saw the gains in market share that we saw in.
The preservation as the example, I used on present vision.
We were up.
Thanks.
Significant basis points, we were up on on transmission we were up.
120 basis points for U S market share just as an example, so we're continuing to see that momentum gaining.
<unk> volume there on the question on directly related to contact lenses.
On the contact lens fit tests, and they're roughly flat from a year ago that was one of the questions. We asked.
Clearly within the fit sets.
What's the things going on there or more movement towards the daily disposables to be clear, but.
Actual number to fits or roughly flat versus last year. So that's something that we're monitoring closely of course with our infuse as I mentioned is up 23% organically. So that's something we're really excited about.
The next part of the question.
Yes.
Macro environment, and an ability to take price.
We're looking at is the inflationary pressures that Sam talked about and how we're going to look at the pricing environment.
Everything that we looked at so far tells us that on the.
Places, where we're planning on pricing like the ophthalmology prescription business that there is an opportunity for us to take some incremental pricing. There. We do believe on the consumer side of the business, we're going to be smart about what we do but we do think there is an opportunity to take prices also.
On the consumer side and on the wind side.
So if anything I left out that you want to add to the comment I think we covered it well Joe.
I will add when you think about our lens portfolio I think we benefit from having the diversification of the portfolio I think we talked a lot about daily Si Hy and growth of 23% organic in the quarter.
But also you think about ultra grew 12% organically.
You have by through one day grew at 8% organically and also soft lens the dailies brand within our soft lines, which is a value type offering under lenses that grew 9% in the quarter. So we are benefiting from the opportunity of having different price points and different offerings within our lenders and we are seeing the growth across all the different component.
Yeah.
Great if I could squeeze one follow up.
The update on the CEO succession plan.
Sure Good question.
The company as you recall back in July we announced that we.
We would be moving forward with a new CEO .
The search committee has undertaken that search.
Internal and external candidates.
They're making good progress and it is our expectation that the.
The search committee will successfully.
<unk> the search by the end of the year and at this point I've committed to stay through the.
To make sure that she wants to see it was announced and there is a successful trade.
Transition with that CEO . So all of that continues to move forward at this time.
Thank you guys.
Thank you.
The next question is coming from Larry <unk> from Wells Fargo, Larry Your line is live.
Good morning, Thanks for taking the question.
Just first on alumina Fi Joe maybe could you talk about the outlook there 7% growth in Q3 that was relatively low.
That was it.
I think ex FX basis, but it's mostly a U S product. So is this a double digit grower going forward with some of these line extensions and geographic expansion you talked about.
I'll ask my second question upfront.
<unk>, which is maybe a little bit more of a framework Sam on 2023, I mean, do you still see 4% to 5% organic growth you talked about revenue growth upfront and can you help us with kind of.
FX should we think about that as being a similar impact.
In 2003 is 'twenty two interest expense, how much does that go up or maybe it doesn't because of the swaps.
Just the last piece can you can you grow margins year over year in 2023 with this inflation headwinds thanks for taking the questions guys.
Great questions. There, let me start with the mobile portion, yes, 7% growth I mean, one of the important things I need to point out though is that we are also at a 49% market share. So we're really excited about what that means in terms of our ability to go from essentially zero share in a couple of years to get to 49% share.
But to be clear, we do have plans for growth beyond just the U S business as we mentioned it's off to a great start in Canada, it's outperforming previous launches of eye drops and Canada significantly back to times of growth of the next best launch in.
In Canada. So we're really excited about that albeit it's a smaller market in the U S. But obviously is benefiting is seeing the same type of uptick with fee. What we saw here in the U S. Importantly, though as we think about it.
What are the key growth drivers for <unk> number one is the geographic expansion.
But other countries coming online number two it is the line extensions that will do in terms of alumina alumina.
Illumination is essentially taking this brand and coming out with some additional line extensions that are going to help us to to leverage what we're doing with.
With aluminum wound by opportunity.
One of the other things that I would I would mentioned is that there is.
As always going to be some.
Shipments that occurred in early in one quarter, a little bit later in the next quarter things like that and that's just normal variation so.
We actually saw the consumption.
<unk> flight just if we think about the fuel consumption to be a low double digit consumption growth. So we're clearly still confident about that.
And with these new launches that is going to be another part of it and then importantly last comment is that we're looking for the preservative free formulation and also adding <unk> to any of the histamine keto Tiffin.
So that youll have the opportunity to help people, who have allergic red eyes for.
<unk> for the future if approved by the FDA, we think that will be the other big growth driver for for the alumina front. This is Tim.
Turning to Q4, the second part of the question sure. Thank you Larry for the question.
Many parts here, so I'm going to try to go through all of them if I Miss anything just to come back.
Just when you step back and you think about the top line and the growth and what we've seen in 2022 is just the foundation for our the framework as you go into 'twenty three as we focus on driving organic growth in 2022, and you see that Q1 was 5% Q2 was 6% and now Q3 on the board here four 5% organic growth.
As we shift going forward I think the focus on driving growth and organic getting organic growth momentum to continue there will be a key for us as we move forward.
<unk> covered a couple of the key highlights are the drivers for us in 2020, we have about 15 product launches that we expect next year.
<unk> <unk>, which is a really a great product for us and we're excited about the launch in 2023, and then on the daily Si Hy, which is.
Re seeing a significant market and market demand right now we're seeing that continue to shift.
<unk> continued to increase as we go forward.
We will see that demand continuing with us in 2023, so from a top line perspective.
<unk>.
I will say that we have all the ingredients right now to continue with the organic growth as we go forward 2020.
Currently give a percentage right now is we're not guiding for 2023 today, but just all the key factors are there.
From a currency that's an interesting one because we've seen currency.
Being very volatile in 2022, I think when we started the year with about $160 million of currency headwind that was about a 425 basis point.
Now, we're saying we update that based on the recent movement in the dollar being stronger against almost every currency that we do business and so we've seen that roughly about $210 million. So when you factor in we're probably assuming for the full year is roughly about 560 basis points of currency headwind.
It's hard to predict how things will go into 2022, specifically, but at least it and where we are today and where the currencies are I would expect content to continue to be a headwind for us going into 2023.
Based on the rates of where the dollar is.
On the interest expense.
Guidance for full year 2022 for about 150 million when we guided.
We end up using the curve when the factoring and the multiple increases from the fact that were going to happen into 2022. So the full guidance for 150 still remained.
Good for us for 2022, one of the things that we will be watching very closely and it's just as a reminder for everyone.
And from a capital structure for us So we will get to be triggering upon the separation.
A reevaluation on the ratings and will trigger it will move into more of a permanent capital structure. So right now we're our steps that we're taking is trying to make sure that we continue to mitigate any type of incremental additional head interest expense as we go forward. So.
We entered the cross currency swap in Q3, and we're evaluating multiple other alternatives and tools that will be able to explore for the rest of this year to be able to continue to help us manage interest expense.
I think the last part of your question was on the margin.
We grow margin and I'll say, absolutely I think all the fundamentals that.
So we have seen in 2022 as being our base year for us coming out of the IPO.
And all of the product launches and the growth on the topline.
And the commercial infrastructure that we built in 2022, who believes that all together that give us the opportunity to be able to continue to grow margins as we go forward.
2023 and beyond.
Okay.
Thanks for that okay.
Second.
What Sam said in terms of I think it comes down to we've done a lot of the preparation required for us to go forward in 'twenty three here in 2022.
This ability to spend more in R&D now to accelerate some of the timing on the premium.
We think thats important in the premium iOS going to get a much higher price point, if I use U S numbers.
<unk> somewhere in the $100 $125 range, where the premium iOS can be somewhere in the 700 5800 $900 range. So to those types of opportunities on the margin are there same comment as I mentioned before in the infuse product as we launch.
A stronger ability to do.
Get more share on the Si Hy daily at a higher price point those are all going to be important contributors to the margin and the things that Sam talked about project core all the things that the supply chain team are doing great work there to look at the cost optimization portion of that so I think all of those things are going to be the benefits for as well as the new products that Sam mentioned.
Joe and Jim. Thanks, so much with that Sam I didn't hear on tax rate, 6%. This year I assume we shouldn't use at next year's 13%, which I think was the pro forma rate in 'twenty, one the right rate.
And I'll drop.
Yes, sure so where we're guiding this year is 6% I was as I think about next year.
Again, I'm not going to guide the exact specific percentage right. Now however, I will say we are going to be.
Still at the low tax rate as we go into 2023.
And they've got guys specifically to what number it is right now.
Still have work to do on that but we will not see the 12% next year.
Thanks, so much guys.
Operator, I think we have time for maybe one more question. Please sorry.
The next question is coming from <unk> Chickering from Deutsche Bank. Your line is live.
Hey, good morning, guys. Thanks for taking my questions a follow up question actually on the Capex question I understand the need for this equipment in a recessionary environment.
But provider margins have been pretty pressured this year from labor pressures and therefore, they have lower cash flows to buy new equipment. So I guess sort of a multipart question here I guess number one do you see providers, becoming more efficient with the curriculum that they have number two you talked about is for 3% instrument growth in the quarter. Despite a slowdown what did it grow in the first half of year.
And number three how does it how did new orders look for <unk> was that 3% range right number for the fourth quarter.
Okay.
A lot of good questions there.
So I think that the general question in my mind is.
Whats going to happen with the actual demand for cataract procedures, and that's where I started with is do I think cataract procedures in a recessionary environment are going to decline and simply based on what we've seen historically recessions. The answer is no do I do I do think that one of your comments is that.
The provided ceremony to become more efficient of course, I do think that people will seek to become more efficient, but but I remind you that one of the things that we talked about previously is that because of what's happened with COVID-19.
Anywhere from a 15% decline in procedures in 'twenty 2021.
220% decline 2020 to 2021 outside the U S. So we have seen there's a pent up demand there is an opportunity to do more procedures, you're 100% right. There as providers have questions about staffing they have questions about cost of staffing do I think there will be.
In effort to be more efficient, yes I.
I do seek that.
We're going to keep monitoring it I can simply say that with some of the innovation that we brought on our stellaris equipment, we're seeing good demand for it.
We're working very diligently to get the product out of our supply chain team once again doing a great job dealing with some of the issues of making sure you get sufficient microprocessors chips to get get the product out the door.
We've got demand out there. So we're excited we think theres going to be opportunity there.
We've got 3% growth now of course I am.
Mentioned that before but we're going to continue to look to see demand out there and track. It very closely we don't see a specific slowdown other than what I mentioned about this quarter.
We still see demand out there and you know if you want to add in terms of in terms of the first half I think we've seen the equipment.
Overall has been holding pretty pretty steady for the first half.
So you will see the performance has been pretty steady.
Notwithstanding the different point that Joe just highlighted.
Okay.
Okay, and then if I could.
Just a quick follow up just on cash flows can you sort of walk us through the impact to free cash flows.
Cash flow from ops or this quarter and how we should know about cash flow conversion for <unk>.
Good question, we always thought about cash conversion for US is a free cash flow is roughly anywhere between 40% to 50% of EBITDA. So when we think about that as a metric from a conversion for free cash flow, that's probably the right sort of framework to think about just one thing I would probably highlight then you will see as we file.
Our 10-K 10-Q, there today, we've been strategically also been building up inventory in certain parts of our business to make sure that we're actually.
Meeting the end demand end market demand that we have so you'll see the inventory has been.
Going up roughly in the range from the beginning of the year until now it's dropped to about $100 million, that's all strategic and certain parts of our business to support the demand. So that's having a little bit of an impact on our free cash flow, but were still probably going to be holding around that 40% to 50% conversion margin.
Great. Thanks, so much.
Well, let me let me bring it close to today's session. Thank you everyone for joining US today, we look forward to having opportunities to address any additional questions you have and thanks again for your support of fashion and have a great day everyone.
Thank you. The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Yeah.