Good day, and thank you for standing by. Welcome to The Cooper Companies second quarter 2022 earnings conference call. At this time, all participants are in a listen only mode. After the speaker's presentation, there'll be a question and answer session. To ask a question during the session, you'll need to press star one on your telephone. We ask that you limit yourself to one question with one follow-up to ensure that everyone can ask a question. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Kim Duncan, Vice President of Investor Relations and Risk Management. Please go ahead, ma'am.
Good afternoon and welcome to The Cooper Companies second quarter 2022 earnings conference call. During today's call, we will discuss the results and guidance included in the earnings release and then use the remaining time for questions. Our presenters on today's call are Al White, President and Chief Executive Officer, and Brian Andrews, Chief Financial Officer and Treasurer. Before we begin, I'd like to remind you that this conference call contains forward-looking statements, including all revenue and earnings per share guidance and other statements regarding anticipated results of operations, market or regulatory conditions and acquisitions, integration of any acquisitions, or their anticipated benefits. Forward-looking statements depend on assumptions, data or methods that may be incorrect or imprecise and are subject to risks and uncertainties.
Events that could cause our actual result, results and future actions of the company to differ materially from those described in forward-looking statements are set forth under the caption Forward-Looking Statements in today's earnings release and are described in our SEC filings, including Cooper's Form 10-K and Form 10-Q filings, all of which are available on our website at coopercos.com. Should you have any additional questions following the call, please call our investor line at 925-460-3663 or email ir@coopercos.com. Now I'll turn the call over to Al for his opening remarks.
Great. Thank you, Kim, and welcome everyone to our second quarter conference call. Let me start by highlighting that our businesses are performing extremely well. Both CooperVision and CooperSurgical posted strong revenue growth, gained share, and are continuing to see strong momentum. We're successfully managing through a variety of challenges, from supply chain to COVID restrictions in China, and we're maintaining our market leading growth rates. I'm really pleased with how the year is progressing. For the full year, we're increasing our organic revenue guidance for both businesses by incorporating our Q2 outperformance and the strength we're continuing to see. Moving to the quarter, consolidated revenues reached an all-time high of $830 million, with CooperVision at $554 million, up 12% organically, and CooperSurgical at $276 million, up 40% as reported or up 6% organically.
The quarter was led by strength in CooperVision's daily silicone hydrogel portfolio and our myopia management products, and CooperSurgical's fertility business, which posted another double-digit growth quarter. Non-GAAP earnings per share were $3.24, and Brian will provide the details, but this quarter was negatively impacted by FX and our contact lens solutions business. Moving to CooperVision and reporting all percentages on an organic basis, our revenue growth was strong and diversified as we grew nicely in all product categories, spheres, torics, and multifocals, and within all three geographic regions. The Americas were up 8%, EMEA grew 17%, and Asia Pac grew 11%. This resulted in nice share gains, which is impressive following our strong Q1 performance. For those of you tracking calendar quarters, our calendar Q1 organic growth rate was 16% against a market we estimate grew 12%.
Strong numbers and we remain well positioned to continue gaining share as we launch new products, expand product ranges, provide market leading flexibility through our customized offerings, execute on key account relationships, and deliver fantastic customer service. Regarding products, our daily silicone hydrogel lenses posted very strong results, growing 28%. Daily silicones continue to lead the market, and we offer the broadest portfolio in the industry. Our premium one-day offering, MyDay, is available in a broad range of spheres, torics, and multifocals. While all these categories are performing well, it's worth highlighting the multifocal. The launch of the MyDay multifocal is still limited geographically, but it's rapidly taking share in markets where it's available and we'll continue rolling it out as we progress through the year.
The feedback from optometrists on our breakthrough Binocular Progressive System remains fantastic, and patients are continuing to say the lens is the best multifocal they've ever worn. This success is also driving a nice halo effect on our already successful MyDay spheres and torics, so we remain very optimistic about the future of this brand. The other brand in our daily silicone hydrogel portfolio is clariti, which is also available as a sphere, toric, and multifocal, and is typically sold in more of a mass market setting. This lens performed really well again this quarter, especially in our Asia Pac region, where we're continuing to roll out the sphere in Japan. Our silicone FRPs, Biofinity and Avaira, reported another solid quarter of 8% growth.
Lastly, as an umbrella comment about all these offerings, I'm happy to report that we're seeing an uptick in the growth rate of our branded product sales. As many of you are aware, we take a lot of pride in our customized offerings, which includes customer brands, but our own high-quality CooperVision brands are also showing strong growth, especially MyDay. Moving to myopia management. We posted revenues of $23 million, up 61%, including MiSight up 144%. This specialty part of our business is extremely healthy, driven by growing traction in key accounts and continued strength with private practitioners. We have some challenges in China where COVID restrictions are hurting our Ortho-K sales and impacting our MiSight launch, but the rest of the world is performing really well.
MiSight in particular is excelling in all geographies as the ophthalmic community continues to embrace the growing myopia management segment of the market. On another encouraging note, we're also seeing positive halo trends with our tracking data showing customers who are selling MiSight are accelerating their selling of our other lenses. Moving to SightGlass myopia management glasses, we closed our joint venture with EssilorLuxottica in March, and we're already seeing exciting progress, including additional availability of the product in additional markets such as China. Regarding an FDA approval, the three-year clinical data for SightGlass is being compiled right now, and we look forward to receiving the data and sharing it with the FDA in the near future. In summary, we're seeing strong momentum in all areas of myopia management, and we expect to continue posting strong results.
Before moving to market data, let me touch on our contact lens solutions business. Recent supply challenges have hit this operation hard, and we've experienced a significant decline in sales. Given this, we completed a strategic review and confirmed this is a non-strategic business in a declining industry that's going to require a lot of capital to upgrade the facility, so we decided to exit the business by fiscal year-end. From a financial perspective, we expect this business to report roughly $20 million in revenues this year, down from $44 million last year. We are excluding these results from our organic growth rates to ensure transparency and comparability, and Brian will provide additional color on the rest of the P&L in a few minutes. To wrap up on CooperVision, the contact lens market is performing exceptionally well, even in the face of continuing COVID challenges.
Growth in daily silicones and an increasing prevalence of childhood myopia are offsetting the lower patient traffic tied to COVID. We expect global growth in the industry to remain strong as patient traffic continues to improve, and we look forward to what should be a strong back-to-school season this fall. Growth is also supported by the macro trends around vision correction, including that roughly one-third of the world is myopic today, and that is expected to increase to 50% by 2050. For CooperVision, we have a robust product portfolio, ongoing product launches, a fast-growing myopia management business, and our fit data remains very strong, so we remain very bullish on our future. Moving to CooperSurgical, we posted another strong quarter led by double-digit growth in our fertility business. Our OBGYN medical device portfolio also returned to growth, and our stem cell storage business posted a solid quarter.
We did have some unexpected weakness in Paragard, but believe our performance tracked the broader IUD market, which hasn't rebounded as fast from COVID as other areas. Walking through each of these, let me start with fertility. Fertility posted sales of $114 million, up 15%. Strength was seen throughout our product portfolio of consumables, capital equipment, genomics, and donor egg activity. Particular strength was seen from our RI Witness products, which comprise our proprietary automated lab management system that clinics implement to maximize safety and security by optimizing their lab practices, along with strength from our AI-based genetic testing, which doctors use to select the best embryos to transfer. Moving to our office and surgical category, we posted sales of $162 million, down 1%.
Our OBGYN medical devices grew 3%, which was strong given this is the area where we were most impacted by global supply chain challenges. Particular strength in this business unit was seen within our labor and delivery portfolio and laparoscopic closure products. Moving to our stem cell storage business that we entered with the Generate acquisition, sales grew 5%. There is a ton of activity right now integrating this business into CooperSurgical, and it's going well. The teams are seeing early success on commercial synergies, and they have some exciting ideas to drive additional growth synergies, so I remain bullish on our future in this space. Lastly, on Paragard, sales were down 6% for the quarter, and we're continuing to see softness in the market.
This certainly doesn't appear to be product specific as the entire IUD marketplace has remained under pressure with lower volumes driven by lower patient flow and what we believe is a temporary shift in buying behavior to birth control pills with telemedicine. We're closely monitoring the market, and we remain cautiously optimistic we'll see a return to pre-COVID levels as we move towards the end of the year. To wrap up on CooperSurgical, let me highlight a few key takeaways. First, we're seeing success from our Generate acquisition, both on the fertility and stem cell storage parts of the business. There are a lot of commercial synergies that we're capitalizing on, and this acquisition is certainly looking like a success right now. Second, our fertility business continues to perform extremely well.
This is a solid growth industry with strong macro trends, and we continue forecasting long-term market growth of 5%-10% with us in the upper part of that range. Lastly, our team has completed 6 acquisitions since the beginning of last fiscal year, and they've maintained market-leading customer service and strong sales, even while integrating these businesses and managing through significant supply chain and logistics challenges, so impressive performance. To conclude, we operate in recession-resistant industries with strong macro growth trends. Additionally, significant amounts of our sales are annuity in nature, so we need to be resilient in times like this, investing intelligently to capitalize on growth opportunities while ensuring we're advancing our infrastructure projects to support our growth.
We'll remain sensitive to the challenges facing us and be proactive managing our businesses, maintaining a focus on delivering long-term shareholder value. This includes continuing to make progress on our ESG initiatives. We just released our second ESG report, which highlights progress in several important areas, and you can find this report on our investor relations page. Lastly, I'd be remiss if I didn't thank our fantastic employees. It's their hard work and dedication that drives our success and makes Cooper such a special place to work. A big thank you to all Cooper employees. With that, I'll turn the call over to Brian.
Thank you, Al, and good afternoon, everyone. Most of my commentary will be on a non-GAAP basis, so please refer to our earnings release for a reconciliation of GAAP to non-GAAP results. Second quarter consolidated revenues were $830 million, up 15% or up 10% organically. Consolidated gross margin was 66.7%, down 140 basis points from last year, driven primarily by currency. Operating expenses grew 18% and were 42.2% of revenues, primarily as a result of the acquisition of Generate Life Sciences and higher R&D investments. Consolidated operating margin was 24.5%.
Within this, we did see challenges from supply chain and inflationary pressures, but our teams did a nice job managing costs and price increases and continuing efficiency improvement initiatives, such as the consolidation of CooperSurgical's production into Costa Rica helped offset the impact. Interest expense was $10.8 million, and our effective tax rate was 13.7%. Non-GAAP EPS was $3.24, with roughly 49.7 million average shares outstanding. Year-over-year, FX negatively impacted earnings by $0.53 in the quarter, which is $0.15 worse than we forecasted at the time of our last earnings call. One point to mention is that a large portion of the quarterly FX loss was from the remeasurement impact of yen and euro-based intercompany trade receivables. These remeasurements happen every quarter, and the net amount is usually relatively small.
However, significant currency moves towards the end of the quarter resulted in a larger loss in other income and expense. The other unusual item from this quarter was the operating loss from our contact lens solution business of roughly $0.05. To add some color to what Al mentioned earlier, this has not been a profitable business for us this year. We had a recall in Q1, which resulted in low sales and an operating loss. We expected the business to rebound in Q2, but continuing supply chain challenges prevented that, and Q2 sales were only $4.4 million, with a roughly $2.7 million operating loss. From a non-GAAP perspective, we recognized and excluded many costs from the shutdown decision this quarter, but the business remains operational, so activity remains in our non-GAAP P&L and will remain so until we exit the business at fiscal year-end.
Returning to the quarter, free cash flow was $88 million. Net debt decreased $125 million to $2.86 billion, and our adjusted leverage ratio reduced to 2.59 times. Net debt decreased by more than free cash flow due to the positive impact from closing the SightGlass Vision joint venture. Moving to guidance. We're increasing our revenue growth ranges for CooperVision and CooperSurgical to include our Q2 results and the strength we're continuing to see in our markets, offset mostly by the impact of currency. For EPS, we're updating our guidance to reflect the negative impact of currency and interest rates, but holding it unchanged outside of that.
Outside of that, there are a number of moving parts, but ultimately positive, such as higher revenues, efficiency efforts, and a lower effective tax rate are offsetting supply chain inflationary pressures and the negative impact of the solutions shutdown. This all results in a consolidated revenue guidance range of $3.280 billion-$3.312 billion, up 9%-10% organically, with CooperVision revenues of $2.225 billion-$2.247 billion, up 10%-11% organically, and CooperSurgical revenues of $1.055 billion-$1.065 billion, up 6%-7% organically. Non-GAAP EPS is expected to be in the range of $13.09-$13.29.
For interest expense, we're still assuming a 50 basis point increase in both June and July, and a 25 basis point rate increase in September. Regarding currency, the year-over-year impact from FX is now a roughly 5% headwind to revenues and a 14% headwind to EPS. Although we don't provide quarterly guidance, with a number of moving parts, let me add that we expect Q3 earnings to be similar to Q2, driven by the significant negative impact of currency for the quarter. We also forecast a large increase in interest expense in Q3, but expect that to be offset by a lower tax rate. For Q4, we expect a rebound in EPS led by a lower pound flowing through our cost of goods, helping CooperVision's gross margin. Note, this guidance does not include our pending acquisition of Cook Medical's reproductive health business.
That transaction is still pending regulatory approval, and we'll update you once we're closer to completing that process. With that, I will hand it back to the operator for questions.
Thank you. As a reminder, to ask a question, you'll need to press star one on your telephone. To withdraw your question, please press the pound key. We ask that you limit yourself to one question with one follow-up. Please stand by while we compile the Q&A roster. Our first question comes from Matthew Mishan with KeyBank. Your line is open.
Hey, good afternoon, guys, and thank you for taking the questions. A lot of moving pieces here, but I'll start with like a bigger macro piece. Are you guys seeing any kind of change in consumer activity or due to like the inflation that we've been seeing?
I think, Matt, it's a little different depending upon where you are around the world, right? Some markets are obviously quote-unquote back, like the U.S., and then other markets are in situations where it's quite a bit more restrictive. As of today, I would say we have not seen a lot of consumer activity changes because of inflation. I wouldn't highlight that as something that we've really seen.
I'm not sure if I missed it or not, but what is your expectation for myopia control this year as far as the $100 million goes? How much of that $100 million was China, I guess, including U.S., okay?
Yeah, I won't break out all the China details. The thing that's hurting us probably more than anything right now ends up being currency, because that's impacting a lot of our sales around the world. I think we still have a chance to get to that $100 million, even in the face of currency, even in the face of the China shutdowns that we've seen in Shanghai. That's negatively impacted the MiSight launch over there. It's negatively impacted our sales. We have so much strength with MiSight, especially here in the U.S. and throughout Europe, that I think we still have a chance to get to a $100 million.
Maybe it's because of currency. It's you know, $95 million-$100 million when I roll in currency in China and everything else, but I'm not giving up right now on the possibility of getting to $100 million.
Excellent. Thank you very much.
Yep.
Thank you. Our next question comes from Larry Biegelsen with Wells Fargo. Your line is now open.
Good afternoon. Thanks for taking the question. Just one on Cook Medical and one on the EPS guidance for Brian. Al, just an update on the Cook Medical deal and next steps, you know, confidence that the deal will close in late, you know, calendar 2022. Do you expect, you know, potential divestitures? You know, have the economics changed, you know, the accretion changed just, you know, from the old economics, just, you know, just a different starting point. I have one follow-up.
Yeah. I'd love to give you some more information on that, Larry. Unfortunately, I don't have much to give. We're in discussions right now with the FTC to try to sort things out and get that thing moving forward quickly and hopefully getting it sold. There's not much to add outside of that right now. As soon as we know more and we start making progress to get resolution and try to get that closed, I'll certainly update everyone.
Fair enough. Then, Brian, could you bridge, there's a lot of moving parts, kind of the old EPS guidance to the new EPS guidance. I mean, you gave the pieces, but can you give the numbers? You know, how much worse is FX from an EPS standpoint, interest, you know, the contact lens solution, just kind of the pieces you called out. Can you kind of give us some numbers on that and tax? Thanks for taking the questions.
Yeah, sure. Hi, Larry. The midpoint of our last guidance was $13.95. The FX detriment to Q2 was $0.15. The second half FX detriment is $0.41. The interest expense degradation, if you will, from the Fed increasing rates 50, and 25 is $0.20. Your $13.95 gets brought down to $13.19 solely from FX and interest expense. What we said was higher revenues, the efficiency efforts that we're undertaking, and the lower tax rate helped to offset the supply chain and inflationary pressures, as well as the lens care exit disruption that we're likely to see in the back half of the year.
All right. Thanks for taking the questions.
Thank you. Our next question comes from Jason Bednar with Piper Sandler. Your line is now open.
Hey, good afternoon. Thanks for taking the questions here. Al or Brian, when I'm looking at the model and really trying to update for, I guess, the implied margin outlook for the year, you know, it looks like maybe we settle out around 25% for adjusted operating margins this year. Maybe I'm off a little bit. I'm just trying to go back to the envelope here quick. You know, that's obviously come down quite a bit for FX. I mean, how much do you think you can get back purely from, you know, pound and foreign weakness that could flow through next year? And then are there any cost actions or spending decisions you can make on SG&A to recapture what's been lost here in fiscal 2022?
Yeah, I mean, the pound is, as everybody knows, the pound is a six-month lag. We're gonna get some benefit from the pound in the fourth quarter. As the pound weakens, you know, that certainly has a nice impact to cost of goods. We'll have to see what happens on revenues. Obviously, the impact to revenues this year has been so significant, any move in the right direction significantly helps. Now, when you look at your operating margin of around 25%, yeah, I would say that's in the ballpark. That certainly fits within the guidance that we've suggested. That's really just being driven down primarily by currency. We're certainly gonna get some OpEx leverage from more of the integration efforts that we're undertaking. We've been accelerating our integration efforts.
Alf mentioned the 6 deals we did since the beginning of last fiscal year. You know, we've moved faster to integrate Generate. As an example, fertility is integrating faster. But in general, we're integrating those more quickly. Generate's gonna get some more OpEx leverage next year. And then just the continued moves that we're making around Costa Rica, you'll get the full benefit next year. We put a power plant in place in Puerto Rico that'll help, you know, gross margin next year. So I'd say overall, you know, gross margin should be up on a constant currency basis within both divisions, at least a little bit next year. Operating margins, we should get some leverage out of OpEx next year on a constant currency basis.
Okay. All right. That's helpful. That's very helpful. Thank you. Then maybe just as a quick follow-up, Brian, I know, you know, many of us haven't experienced interest rate movements like what we've seen and are expecting to see here this year. You know, your variable rate debt's been great for multiple years, but I guess just the question here is, you know, is there a philosophical change on converting that floating rate debt that you have to fixed and avoid some of the sensitivity, you know, that the variable rate debt creates, just if this, you know, if the pace of rate increases accelerates even further?
For now, the decision is to really stay the course. I mean, just like currency, interest rates are gonna move and bounce around. You know, I'd say our first priority with respect to capital allocation is to pay down debt. We're gonna generate a decent amount of free cash flow in the back half of this year, that'll go towards, you know, paying down debt, and investing back in the business, like into CapEx. You know, we're still gonna be able to take out a decent chunk of debt in the back half, and that'll continue next year. We'll have to see how things play out. You know, for now, we're gonna stay the course.
As everybody knows, we have $1 billion hedged at fixed for another several years. As we take down that debt, you know, it'll help offset some of the interest rate moves.
All right. Very helpful. Thank you.
Thank you. Our next question comes from Chris Cooley with Stephens. Your line is now open.
Good afternoon, and thanks for taking the questions. Just two from me, if I may. First, just nearer term, when we think about just the margin structure there, you had an acceleration in daily silicone hydrogel sequentially just in terms of the growth rate. As we think about the mix kinda going into the back half of the year, ex currency, can we start to think about a little bit better margin profile overall with growth in myopia management as well as some of these premium offerings just within the broader CooperVision portfolio?
Just for my follow-up, just a little bit curious, maybe I didn't catch this in the prepared remarks, but you mentioned an improvement in the outlook for Paragard as we're exiting the fiscal year, but wasn't sure if you now expected to see actual growth year over year in the franchise. Just trying to think about how to square that as we trend through the back half of the year. Thank you.
Sure, Chris. I'll take the Paragard. I'll let Brian comment on the margins for vision in Q3, Q4. For Paragard, we're gonna see a pretty sizable year-over-year decline in Q3. You may remember we took a price increase last year in Q4, so we had some buy-in associated with that. What you're gonna end up seeing in Q3 and Q4 will be on a year-over-year comparison basis, a decent decline in Q3 and then strong growth in Q4. I mean, that's just how the numbers are gonna play out. What we're seeing right now is a lack of traffic, patient traffic basically is hormonal IUDs.
We think that that's gonna start to improve a little bit here because one of the things we've seen historically, and we believe we're seeing now is you'll see when this is happening, some of the channel inventory gets burned down that's out in the field, and then that at some point levels off, and at some point even increases back up. We think from a channel inventory perspective and we think from improvement in just patient traffic in OBGYN offices, we'll start to see a general increase here as we get into Q4. Yeah, expecting a challenging quarter, if you will, in Q3, certainly from a comp perspective and even patient traffic, and then starting to improve some in Q4.
On the gross margin question, I would say that currency is just having a bigger impact on margins in the back half of the year than really anything else. I mean, certainly there are puts and takes when you look through FX. Myopia management is a positive to gross margins, but we're seeing a really rapid acceleration in the shift back into daily SiHy's. You know, that puts a little bit of pressure on our gross margin. That'd be kind of one of the offsets. I'd say in Q3, we always have a little bit of negative manufacturing variances that hit us in Q3 from shutting down our lines in the first fiscal quarter of the year. That's gonna be a little bit of a headwind.
You get some benefit, like I said, in cost of goods within from FX in the fourth quarter. The business is gonna be performing really well in the fourth quarter with strength in both businesses. I would say, you know, nothing really tied to myopia management, but, you know, the puts and takes are kind of those couple of elements.
Thank you.
Thank you. Our next question comes from Jonathan Block with Stifel. Your line is now open.
Thanks, guys. Good afternoon. Maybe just first on CooperVision, you know, solid increase in the CooperVision organic growth for fiscal 2022. I guess sort of a couple questions in here. It seems like 100 basis points of that roughly is exiting the solutions business, if I have that right. Al or Brian, maybe you can comment there. Al, if you can just talk to how price is trending in the market for fiscal 2022 and how that compares to prior years.
Sure. Yeah, you're right on the solutions side of things. That's about a point, right? Going 44%-20%. When you remove that, you pick up a point. Outside of that, you have several different positives. I think prices are positive. We took some price at the beginning of this year. Frankly, we don't have it in guidance, but we'll probably take some additional prices, my guess, as we move through this year to offset some of the inflationary pressures. You have Brian alluded to it there, growth in daily SiHy. I mean, we're just really strong in that market. We have the best portfolio in the daily silicone hydrogel marketplace, so you're getting good growth there.
To be fair, you know, when we did our last earnings call in early March, it was one week after Russia invaded Ukraine. We probably had a little conservatism in the back half of the year in our Q3, Q4 organic growth rates for CooperVision. We've worked through that. We're continuing to see nice trends in all three geographies and with all of our markets. Taking up guidance, even as much as we did, seemed to make a lot of sense.
Got it. That's helpful color. Thanks. I'll actually shift gears and move over to CooperSurgical and more specific fertility. Now I just love your thoughts, you know, really solid fertility numbers, but your thoughts on, you know, the consumer call it for this segment, so expensive treatment on one end, but then on the other end, call it sort of a finite window for that individual in their childbearing days. If inflation just continues to spiral out of control, we get a weakening consumer over the next 12-18 months, just your thoughts on fertility and what it means for that particular business. Thanks.
Yeah. As of now, we haven't seen anything, and I think you're spot on, when you talk about a limited window. When a woman decides she wants to have a baby, you know, time is her enemy. You need to go in and go through the IVF process as soon as you can, trying to have a baby. A lot of times the cost ends up being secondary. This is one of those areas where cost is secondary to, the actual process itself. The other thing you have is you've just got an industry. Fertility as an industry is a pretty high growth marketplace.
When we look at the number of new clinics that are coming on, when we look at upgrades within existing clinics for capital expenditures and so forth that are going on, when you look at all that activity on top of the fact that going through fertility treatments is becoming more common, if you will, more accepted and so forth, you're seeing just really strong underlying growth of the industry. As you know, we do well in that space, so we participate in that growth. I think even if you get a situation here where the economy moves closer to a recession or even into a recession, that will be a very recession resistant industry. We've seen that in the past. I don't see any reason that would change right now.
Got it. Perfect. Thanks for the color, guys.
Yeah.
Thank you. Our next question comes from Joanne Wuensch with Citibank. Your line is now open.
Thank you, and good evening. Ask the same question for contact lenses as you just answered for women's health. Historically, that's been also very recession resistant. Do you feel the same way about that in the current environment?
Yeah, Joanne, I do. Like, been doing this a long time, so we've been through several recessions, and we've seen contact lens growth come back a little bit in some of the recessions. Frankly, even when it comes back as a market, it's still kind of a low single-digit grower. I think even in some of the worst parts of prior recessions, we were still kind of a mid-single-digit grower. With the underlying fundamentals there, I'd say similar to fertility in that more people are becoming myopic, right? A third of the world is myopic today. It's going to be 50% in 2050. The underlying growth factors for vision correction are just powerful. They're just there, and it's just happening. Regardless of what happens with respect to the economy, people are going to need visual correction.
Now, there could certainly be a little bit of a difference in terms of what people are buying, right? Is everyone going to buy some of the highest priced daily silicone hitting the market, or do they buy some more Biofinity, or do they buy some clariti or something else? There could be a little shift in buyer behavior, but underlying growth is going to remain there even in any recessionary type of environment. Contact lenses are just, they're a great industry to be in from that perspective.
A follow-up question. Historically, at one stage, you had a foreign exchange hedging program. I don't believe you have that currently. Are there thoughts to put that back into place? Thank you.
Hi, Joanne. I instituted that program in, I don't know, 2006, and I think we ceased it around 2011 or 2012. It's been several years now. You know, we just made that decision a long time ago not to hedge because not only is it costly and it requires resources and it's time-consuming, but you know, unless you're gonna manage your business differently, all you're doing is delaying the inevitable. If you're hedging something, you know what to expect some period of time ahead of time. You know, unless we're gonna change the way that we're gonna operate our business from doing hedging, it ends up just being not worth the time or the effort or the cost to do it.
Now that the yen is where it is and everything is kind of in a bad place, it'd probably be a horrible time to start hedging. Of course-
You know, it still could go, continue to go in the wrong direction, but, you know, I'm a bit of an optimist. Hopefully, we get a little bit of relief here over the next couple of quarters. No, there's not gonna be any change to our hedging strategy.
Yeah, to add on that one, it's a quick add, which I don't know if everyone saw it or not, but as we were working through this and talking about the script and reconciling things and so forth, and the FX loss that was in our other income and expense, it was interesting today that Microsoft just came out and made a statement about that and talked about the impact from the exact same thing we saw in the month of April. I don't know if other people see it, but you know, Microsoft announced it today, and we had the same thing happen, so it won't surprise me if you see it from some other people.
Thank you. Our next question comes from Jeff Johnson with Baird. Your line is now open.
Hey, thanks, guys. Good evening. Hey, Al, I always wanna make sure I understand this, but when you talk about 12% market growth for you guys or for the market in Q1, calendar Q1, and you guys 16%. That 12%, I'm assuming this time you're getting to that by just kind of looking at the four companies' growth rates. Is that right? It's not like a CLI data end market kinda number. That's just looking at kind of the four companies?
Yeah. Yes. True, true growth of the market, if you will, right? Because CLI has, you know, it's gross data rather than net data.
Right.
It doesn't take into consideration on discounts, and GfK doesn't capture the whole market, all that kind of stuff. Yeah, I have a tendency to just look at what companies are actually reporting.
Yeah, I would agree. I think when Alcon was talking on their quarter about like mid-single-digit market growth, they were using CLI and GfK, and that was looking more at sell out, and guys, you're looking at more kinda, you know, if you will, sell in from you guys to the distributors or to the end market.
That's correct. Yeah.
Yeah. Okay. Then, you know, on that point, your 16%, even your daily SiHy number, probably a little stronger than we were expecting here this quarter. I think, you know, we've been hearing a little bit of increased chatter around things like PRECISION1 and things like that. But you guys seem to be holding up well there. You know, just the update you're seeing in the competitive environment, especially with some of these new products rolling out from, you know, especially Alcon, but some others.
Yeah. I think some of those guys. Well, Alcon's doing really well. They have a big portfolio of legacy wearers that they'll be trading up, and they'll be trading up, I'm sure, for a long time. I think that the story kind of remains the same to some degree, if you will, for us, which is we don't have as large a legacy portfolio to trade up. We're winning our fair share, certainly of new fits. I think that's probably the differentiator is when you're talking about new fits, new wearers coming into the market, and you're talking about products like MyDay and clariti, we're certainly winning our fair share of that new fit activity. I think that's the thing that's held up really well.
It continues to hold up well based on the latest data I've seen, which is a really good sign for us, because frankly, that's where we need to get a lot of our growth from. We can't get as much from trading up legacy wear, so we have to be able to win new wearers coming into the market.
Yeah, understood. The last one I've got just on MiSight. I've got you at about $18 million year to date now. It seems like you're gonna come short of that $50 million, but just, I hear you on, you know, still feeling okay, maybe at the $100 million myopia. Where are you at on thinking about the $50 million for MiSight? Just talk maybe about stability of kind of the, you know, those MiSight wearers who are now rolling over into year one or one and a half of wear, you know, in this macro environment. Are you seeing any kind of dropouts from those established wearers now, on the MiSight side? Thanks.
I just had the team update the numbers on MiSight for wearers, and it's a little different geographically, but it was running kind of in the 85%-95% retention rate, if you will, going into multi-year. So not a lot of change from what we've seen in the past, which I'm really happy to report, right? It's working for a very significant number of kids, and then they're staying in the lens, which is great news. On MiSight, yeah, I was kind of expecting 40-50 this year, depending upon what happened with China. We're still gonna be in that 40-50. I wouldn't change that range. To get to 50, we're gonna need some uptick in China. I mean, we should be farther ahead, ideally.
A lot of our activity, including some of our distribution activity, is literally through Shanghai. The shutdowns in Shanghai have certainly hurt us. Now, the activity when we first launched that in China and first went in there was really strong. It was definitely stronger than I thought it was going to be. We received some early kind of pickup, if you will, there, and then all of a sudden it really shut itself down here. Now, Shanghai just started kind of reopening a little bit here in the last day or two, hopefully we get some improvement. I mean, if we get kind of a snap rebound on that, I still think we could probably move up maybe towards that $50 million. I think we'll be somewhere in that $40 million-$50 million.
I think we still have a decent chance to get to 100 if the market in China comes back a little bit, because we'll pick up a lot of that Ortho-K activity. I still think we'll be at least mid-90s.
Yeah. Gotcha. Okay. Thank you.
Yeah.
Thank you. Our next question comes from Zachary Weiner with Jefferies. Your line is now open.
Hey, thanks for taking the questions. Just one on the strong performance from the vision care business. Could you parse out some of the share gains for switch fits versus new fits?
I would love to, but no, it's incredibly difficult to get because of trade ups. When you get trade up activity and how it all gets classified in terms of switches and new fits and so forth, and when you look around on a global basis, it's just viciously difficult to get into. I think that it kind of is a general comment. You'd see we're doing really well when it comes to new fits, especially in torics and multifocals. We're certainly doing fine in spheres, but I would say that's where we're seeing strength. It's hard to get those numbers. I mean, even you'll see some stuff from GfK in places, but it's like partial data and only in certain markets. It's hard to get that level of granularity.
Understood. No, that's helpful. That was my only question. Thanks.
Okay. Yep. Thanks.
Thank you. Our next question comes from Andrew Brackmann with William Blair. Your line is now open.
Hey, good afternoon, guys. This is Mike on for Andrew today. Thanks for taking the question. Maybe just to dig in on your comments a little bit more on the expected FX headwinds and the interest rate impacts to the bottom line. Can you sort of just level set us from a strategic standpoint around how you view spending in this sort of environment we find ourselves in? Is this something that will cause you to pull back a little bit? Or what do you do to better balance spending here, just given the macro backdrop?
Yeah, you know, that's a really good question, Mike. You know, I mean, and we've spent quite a bit of time thinking through that. We ended up saying, "Hey, the fundamentals of our business, vision and surgical, are really strong right now." We're taking share in the vision space. We've got a bunch of great products. We're launching products around the world and expanding parameters. We got a lot of good things going with fertility, and we're gaining some traction on some of our medical devices and international med device. We kind of looked at it and said, "Man, you hate to take the foot off the pedal." It's hard to get momentum. Now that we have momentum, we really wanna keep it.
We ended up saying, "Okay, we have different factors pushing and pulling on that side of things." We said, "Okay, well, if we exclude FX and we exclude the interest rate increases, can we continue to do everything that we wanna do as a business? Can we invest everywhere we wanna invest? Can we hurdle the solution stuff? Can we hurdle the supply chain and inflationary pressures and everything else," right? Then you pull that apart and you're like, "Yeah, well, I've got price increases here. I've got some growing revenue. I've got a lot of different positives, cost containment efforts and initiatives that I can net all that kind of stuff out and get myself in a situation where kind of my core margins are even up year-over-year, if you will," right?
I can't also hurdle FX and interest expense without cutting into some of my momentum and my growth opportunities that are out there. That's the way we ended up separating it and saying, "Hey, the fundamentals of the business are too strong to ignore right now. We're not gonna hurdle the interest and the FX." Unlike maybe in prior years or other companies or something, I mean, when FX goes the other way, we're just gonna pass that FX right along back. I sure as hell hope that happens sometime soon, right? That'll go right back into our numbers. Interest expense is gonna do what it's gonna do. As Brian said, you know, we're focused on paying down debt right now, so we're gonna generate some cash flow here. We're gonna pay down debt to help offset that.
That was kind of our strategic thinking, if you will, for the back half of this year and into next year.
Great. Thanks for all that color. That was really helpful.
Maybe one more. Al, you mentioned some potential synergies that the CooperSurgical team is coming up with during the integration of the Generate acquisition. Is there anything specific you could tell us on those opportunities?
Yeah, I'll give you an example. Like, we have a labor and delivery group, and we have a very strong sales force within our OBGYN medical device team, which includes labor and delivery in a couple of areas. Leveraging that sales force, educating them on what stem cells are and regenerative medicine and so forth, and then incentivizing them to help the stem cell business from Generate, to cross-sell, if you will, and the teams to work together and to help one another be more successful. We've worked through that process, so we accelerated all the Generate acquisition activity. We've worked through that training activity, and we've quote, unquote, if you will, increased our sales force by utilizing our existing sales force, and we're seeing some positives from that, already.
I think that as we move through the back half of the year, I think we'll continue to see positives from that. Those are the kind of synergies that I'm talking about that we're starting to find and implement on.
Got it. Great. Thank you, guys, for the questions.
Yep.
Thank you. Our next question comes from Robbie Marcus with JP Morgan. Your line is now open.
Yeah, thanks. Thanks for taking the question. You know, free cash flow came in a bit weak in the quarter. I was hoping, you know, maybe give us a sense of what drove that, how much is due to currency versus deal integration. How do we think about free cash flow for the balance of the year?
Yeah. Hi, Robbie. I mentioned the $88 million of free cash flow. You know, it was impacted interestingly by a $41 million SightGlass Vision cash outlay. We settled a revenue milestone. We bought out a milestone tied to a contingency of revenues, and that cash outflow was a negative to operating cash. We had been remeasuring that contingency last year, and that was hitting OpEx, and we were calling that out as it was being remeasured in OpEx. Now, when you're paying it out, it ends up being a detriment.
Even though, by the way, we received more than that from SightGlass Vision as part of closing the joint venture and part of getting the money from them to help, you know, support the payment, the 50% payment of this buyout. That was a big part of it. Obviously, you've got FX and lens solutions, you know, cash, you know, cost tied to shutting that down. Then just some higher inventory costs that, you know, just with raw materials purchases and just trying to get ahead of some things.
The amalgam of all that was resulting in $88 million, but expect still, you know, strong free cash flow in the back half of the year, with CapEx really just being one of those things where I'd expect CapEx is gonna inflect up a little bit in Q3 and start to trend a little bit higher. The demand is really strong for our lenses right now. We've got basically very little idle costs, and we're utilizing all of our equipment. We wanna make sure that we stay ahead of the game and buy equipment, and we're putting some into production.
We'll continue to do that, and you'll see CapEx come up in the back half of the year, but see free cash flow still looking really solid as we round out the end of the year.
Great. Just wanted to follow up. I think it was Joanne who asked the question about hedging before, and I was hoping you could expand on it a little bit. You know, 5% top line impact from FX is kinda what we're seeing across the board in med tech, but 14% is probably the most significant impact by far that we're seeing. You know, how do you think about just when you set out your guidance, do you plan it in constant currency or reported? You know, why are you, I guess, you know, leaving FX as a risk for the business? You know, any natural hedges you can do to offset that over time? Thanks.
Yeah. Robbie, that's a good question and a lot there to unpack. The long story short is, you know, we do have some natural hedges in our business, but they're fairly insignificant in the grand scheme of things. We do have, when you look at sort of what's been really moving, even just from last quarter to this quarter, throughout the P&L, you know, this was a story of the yen and euro and pound hitting that impacted revenues. When with the yen moving so significantly weaker, we have very little to offset that. Our OpEx, you know, our OpEx in Japan is very, very low, so the flow-through is immediate, and it's significant.
You know, we have that play out throughout Europe and in other currencies. We talked about in the second quarter, you know, the majority of the delta from $0.15 from last quarter's guidance to this quarter's guidance stemmed from intercompany. As Al mentioned earlier, Microsoft mentioned that today as a big $50 million impact that they experienced was just balance sheet stuff. You know, you're basically going. You were measuring intercompany trade balances from one month to the other. You might settle that every 30 days, and typically, that doesn't result in a very significant loss to the bottom line because you have pluses and minuses. In this case, you know, those balances are always there.
There was a big impact towards the end of our quarter, and that made up the majority of or a large part of that $0.15. You know, like I said before, and we've said in the past, you know, currency sometimes moves in your favor, sometimes it moves against you. When currency starts to move in our favor, that'll be a big positive to us, and you'll see a big impact move the other way. When it comes to setting our guidance, we basically just, you know, try to. We take a look at our forecast, and we apply roughly current rates, and that's what you get. That's what we tell you is the headwind. There isn't any magic around it.
That's kind of how we arrive at the guidance.
Yeah. Robbie Marcus, to add a point on that. The 5 and 14 that you're highlighting, the delta being abnormally large between that's misleading. Because we're the same as every other company in terms of that delta. One of the primary differences from us from a lot of different companies is our FX gets capitalized within our cost of goods, and it turns through inventory 6 months later. So we're not getting any of the positive within our manufacturing from the change in the pound. All we're seeing right now basically is negatives coming from inventory, and the only offset is OpEx. The pound starts flowing through at the end of our fiscal year and into next year, and all of a sudden, that's when you get the bigger offset from currency. So it's a little misleading, the 5 and 14.
That's happening because it's all happening within a fiscal year. If you stretched it out over a full year, it wouldn't be that dramatic as much of a difference. It'd be very similar to what you see from other companies.
Appreciate it. Thanks a lot.
Yeah.
Thank you. Our next question comes from Steven Lichtman with Oppenheimer. Your line is now open.
Thank you. Hi, guys. Just I guess, outside of the solutions business, how much are supply chain inflation impacting you guys on the bottom line this year? Do you see second half similar to first on that front, better? You know, any comments generally would be helpful.
Yeah. Solutions is a little bit different of an animal with the plastic that you need to purchase and so forth, or the solution bottles and so forth. That's been a challenge for us. There's no question about that. We're working through it and we've actually made some progress on that, but that has definitely impacted us. Now, we're shutting that business down at the end of this year, so we're trying to take care of our customers. I think we did have a decent operating loss in Q1 from that business. We had a decent operating loss in Q2.
I think in Q3 and Q4, where we're at now that we made the decision and are working to rightsize things very quickly, is revenues probably hold fairly stable as we supply as much as we can out to our customers. Because of rightsized infrastructure, we probably get to like a neutral operating profit or no operating profit, if you will, kind of in Q3, Q4.
Okay, got it. Brian, you mentioned tax rate as an offset. What are you guys assuming now in the guidance for the year? Thanks.
Around 13%.
Coming down from around 14% to around 13%.
Got it. Thanks, guys.
Thank you. Our next question comes from David Saxon with Needham & Company. Your line is open.
Hey, guys. Good afternoon. Thanks for taking the questions. Maybe two on CVI, starting with MiSight. Just wondering, you know, what inning you are for MiSight training in the U.S., and how are you thinking about MiSight pricing in a potentially recessionary environment?
Yeah, I mean, we're still, as far as I'm concerned, in the first inning when it comes to MiSight. I mean, we are just very early in what is going to be a very large myopia management marketplace, and we're going to have a number of additional products coming out. I mean, MiSight, we just expanded the parameter range on MiSight, so I'm excited about that. You're gonna see more products coming out of R&D continuing to expand and grow. I think that industry is just gonna continue to grow because anywhere you go right now within the ophthalmic space, you're seeing everyone talking about myopia management, what it means, how they can build it within their practices, how they manage it, and so forth.
It's exciting that you're seeing, you know, eye care practitioners saying, "Hey, I have a way to treat this disease. I can tackle this thing, and I can help kids, and I can help society and benefit everyone." We're definitely gaining some momentum there. We're very early in that process. Pricing to me is, we're not, we haven't made changes in pricing. I mean, if anything, I think in some spots around the world, we've taken pricing up a little bit. We have a fantastic FDA-approved strong clinical product that works, and it's the only one in the market out there right now that's doing that as a contact lens. I think from our perspective right now, we'll continue with pricing roughly where it's at.
Okay, that's helpful. You did call out the growth in your branded products. Just wondering, you know, are you seeing anything new in the key account segment or if that's just you know, strong underlying branded growth?
Yeah, we're seeing. We talked for a while about a lot of the growth was being driven by more of our customized solutions, if you will, the customer brands and so forth. We've seen a little bit of shift in that more recently here. Some of the products, MyDay in particular, Biofinity also, the Torics, the multifocal that's out, some of that, a lot of which gets sold through private practitioners and so forth. A lot of that strength we're seeing from more traditional branded products, if you will. That's a really good sign. I'm really happy to see that. That it doesn't really surprise me, but it's still nice to say.
Great. Thank you.
Yeah.
Thank you. At this time, I'm showing further questions in the queue. I'd like to hand the conference back over to Mr. White for any closing remarks.
Great. Thank you, operator, and thank you everyone for attending today's call and we appreciate your time and so forth and look forward to updating everyone again in September on our next earnings call. Thank you. Appreciate it.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone have a wonderful day.