Earnings Call Transcript - BLCO Q3 2022

Operator, Operator

Good morning, and welcome to the Bausch + Lomb Third Quarter 2022 Earnings Call. Please note, this event is being recorded. I would now like to turn the conference over to Alison Ryan. Please go ahead.

Alison Ryan, Investor Relations

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. Sam Eldessouky. In addition to this live webcast, a copy of 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. We would 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. For more information about these measures, please refer to Slide 2 of the presentation. Non-GAAP reconciliations 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 and to not update or affirm guidance other than through broadly disseminated public disclosure. With that, it is my pleasure to turn the call over to Joe.

Joseph Papa, CEO

Thank you, Alison, and thank you, everyone, for joining us today. I will begin some comments about our Bausch + Lomb third quarter highlights. Sam Eldessouky, 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 want to especially thank our B&L team for their strong efforts in the third quarter of 2022, our first full quarter as a public company. As an integrated eye care company operating today, Bausch + Lomb is uniquely positioned in the eye health market. On Page 4, you see that we are building on approximately 170 years of success as a leading eye health brand. Bausch + Lomb is a company with the highest brand awareness in eye care. And as a global leader in consumer eye health, we have outpaced U.S. market growth by approximately 1.7 times since 2018. Turning to Slide 5. We continue to see compelling opportunities for stand-alone Bausch + Lomb as a pure-play eye health company. First, we believe the company is well positioned for growth in large durable markets driven by new products and favorable mega trends or tailwinds that are expected to continue driving demand for our eye health products. Second, we continue to see 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 want to spend a moment to share our insights on the potential impact of inflationary pressures on the eye health category. On Slide 6, we've presented data and other insights which show that the eye health business is resilient to economic pressures. The first statistic on the left underscores just how important eyesight is. 81% of U.S. adult survey respondents would be willing to give up something else that is very important to them if it meant never losing their eyesight. Looking at Bausch + Lomb within this eye health sector, we believe our business is well positioned to weather an economic downturn because Bausch + Lomb has the highest brand awareness in eye care. Bausch + Lomb has a diverse product portfolio of more than four branded and generic products, as well as products that are offered at various ranges of price points. Bausch + Lomb has a geographic presence in approximately 100 countries, and Bausch + Lomb is investing in R&D to expand our portfolio with more than 15 new product launches expected in 2023. To summarize, the survey data and our team's experience through previous economic cycles tells us that eye health 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 Bausch + Lomb is well positioned within the overall eye health sector. Moving now to the third quarter highlights on Slide 7. 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 are worth noting. First, our continued momentum in key portfolios, with reported revenue of Ocuvite and PreserVision growing by 14%, and we're pleased to report that PreserVision currently has an approximately 95% market share in the U.S. The 14% organic growth in surgical implantables was driven by premium and standard IOLs. Next, our investment in the faster-growing eye health categories. LUMIFY's U.S. weekly market share in the redness relief 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 to 2021 and is expected to see double-digit growth from 2021 to 2027. In NOVO3, our potential first-in-class treatment for dry eye disease associated with meibomian gland dysfunction has a June 2023 PDUFA 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. Our premium LuxSmart IOL has 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. Our key brands have demonstrated their durability through challenging economic conditions and remain focused on continuing 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.

Sam Eldessouky, CFO

Thank you, Joe. Before we get into the details, I will remind listeners that when we talk about organic revenue growth, we mean on a constant currency basis and adjusted to remove the impact of divestitures and discontinuations. Turning now to our results on Slide 8. We're pleased to report our sixth consecutive quarter of organic growth, demonstrating the durability of our business in a highly attractive eye care 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 LUMIFY are maintaining leading market share positions. Our contact lens portfolio continues to grow, and procedure volume is driving demand in surgical, which is also creating positive tailwinds in our Ophthalmic Pharmaceuticals segment. In an economic environment where sustained levels of high inflation are leading to some changes in consumer behavior, customers are remaining loyal to trusted brands like Bausch + Lomb. While we are not immune to the economic pressures, we do expect that Bausch + Lomb's portfolio will continue to demonstrate strong resilience, as consumers and patients prioritize their vision care needs. We are pleased with the recovery in China. The B&L 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'll continue to monitor the pace of the recovery as the market works to return to pre-COVID levels. Currency had a substantial impact in the quarter, which impacted our reported revenue by minus 1%. 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 at the strongest level in about 20 years versus the euro. The U.S. dollar's strength versus key P&L currencies like the yen and British pound 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 remain highly attractive. Now I'll go into more detail on each of our segments. Revenue in the VisionCare segment, which includes contact lenses and consumer products, grew organically by 4% in the third quarter. Our consumer portfolio, which was up 3% organically, saw continued market share leadership in key categories, such as Eye Vitamin, Redness Relief, and Lens Care. We're seeing consumer behavior adjusting to inflation, although the prevalence differs by category and market; generally price and promotion sensitivity have increased. B&L has the 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, PreserVision, grew by 14% on a reported basis and 6% organically. PreserVision is the market leader in the Eye Vitamin category and is a great example of our B&L product with strong brand equity. The Eye Vitamin franchise continues to be a strong driver of growth. We recently launched an enhanced eye vitamin formulation, and we see an opportunity for the category to continue to expand with increased AMD awareness. LUMIFY reported revenue grew by 7% in the quarter and reached a record 49% market share. Consumers continue to value the level of innovation LUMIFY brings to the redness relief category. LUMIFY recently launched in Canada and is off to a strong start. We see multiple catalysts to continue the growth trajectory for LUMIFY, including launching in new categories. We saw strong revenue growth in our BioTrue franchise, led by the launch of BioTrue Hydration plus multipurpose solution. B&L continues to gain market share in the multipurpose solutions category. In the quarter, B&L's market share increased by 410 basis points versus the prior year. Artelac, a leading dry eye product in Europe and 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 Ian, which we expect to recover in Q4. Revenue in lenses was up 6% organically, with strong growth in each of the three key B&L franchises: 8% reported and 23% organic growth in daily disposables, 7% reported and 12% organic growth in Ultra, and 2% reported and 8% organic growth in BioTrue One Day. The market conditions in China have improved, and the China lens portfolio grew organically by 2% year-over-year. We're very encouraged by the improvement trend. We will continue to monitor the progress as local policies and measures continue to be in place to comply with the zero-COVID policy. In addition, the pace of 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 SiHy high lenses. This is a multi-year growth driver for our portfolio as we gain scale and prepare for the future launches of multifocal and toric lenses. We're focused on accelerating 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 benefits our business in times of high consumer price sensitivity. Our value-oriented Dailies brand, Soft Lens, grew 9% organically in the quarter. Moving on to our Surgical segment, third quarter revenue grew organically by 8% to $172 million. As procedure volume continues to increase in certain markets, the increase in procedure volume drove 6% organic revenue growth in consumables, which is the largest B&L Surgical category, and 14% organic growth in implantables. The strong performance in implantables was driven by both our premium and standard IOL portfolios. Our equipment portfolio grew 3% organically in the quarter and was impacted by some constraints on the availability of supply. We expect the backlog of cataract surgeries 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 3D microscope, for which we expect to launch in 2023. Finally, in the Ophthalmic Pharmaceuticals segment, third quarter revenue of $172 million grew by 5% on an organic basis. This was mainly driven by strong performance in 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 operations continue to demonstrate durable growth and the benefits of a large portfolio with an extensive global reach. In the U.S., the tail end of LOE headwinds is becoming less meaningful and investments in market access of our key promoted brands like VYZULTA continue to drive volume gains. VYZULTA TRx growth was up 29% in the quarter and revenue grew by 4%. We're also executing our VYZULTA geographic expansion strategy. We launched VYZULTA in Thailand in the second quarter, and we're preparing for a launch in Brazil by the end of this year, with further geo expansion opportunities targeted. We continue to focus on the transformation of the Opto portfolio. The launch of new products is tracking well, and NOVO3 has been assigned a PDUFA date of June 28, 2023. This brings us a step closer to what we believe is a substantial market opportunity. On Slide 9, we quantify the impact that FX headwinds are having on the business. The strength of the U.S. dollar against all major currencies is something we have not seen in the market in decades. Inflation remains at the highest level since the 1980s. B&L continues to perform, and the eye care market is demonstrating resilience to macroeconomic 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, the 2021 results were not fully burdened by all the stand-up costs associated with the separation. As we previously disclosed, full year 2021 results did not reflect estimated stand-up 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 EBITDA in the third quarter was $187 million. Adjusted gross margin for the core was approximately 60.5%, 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 costs of energy, transportation, labor, input costs such as resins, and rising prices of surgical components. We're working to mitigate inflation challenges through various efficiency-enhancing initiatives and strategic pricing. We're also monitoring 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 opportunities for margin expansions continue to be in place. We have a clear path to expand margin in all areas of our business with launches of premium surgical products, a higher-margin Opto portfolio, increased scale in 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 the 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 inflation-driven increases in transportation and labor costs. SG&A also reflects the cost structure of B&L as a stand-alone company, which was not fully reflected in the prior year's results. Finally, adjusted EPS for the quarter was $0.31. Moving on to Slide 12, adjusted cash flow from operations was $48 million in the third quarter, bringing year-to-date adjusted cash flow to $216 million. Strategic inventory management and maintaining working capital efficiency continued to be key initiatives in light of the macroeconomic environment challenges. Third quarter CapEx of $49 million reflects strategic investments in our VisionCare portfolio and a number of productivity-enhancing initiatives. We ended the quarter with approximately $2.5 billion of debt, a net leverage ratio of approximately 2.9 times. B&L 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 our reported revenue will be in the range of $3.7 billion to $3.75 billion. 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 are updating our adjusted EBITDA guidance for 2022 to be in the range of $750 million to $755 million. This reflects approximately $10 million of FX headwinds incremental to our August guidance. It also reflects a $50 million impact related to the manufacturing yield and output ramp-up of our Daily SiHy lenses. As we increase production of the Daily SiHy lenses to meet significant end market demand, the output ramp-up and 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 a cross-currency swap to mitigate market fluctuations, and 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. We expect the fundamentals of the eye care market to remain 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 NOVO3 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. We have 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 B&L portfolio continues to demonstrate resilience and the long-term fundamentals of the eye care market remain solid. Now back to you, Joe.

Joseph Papa, CEO

Thank you, Sam. I will now discuss our product pipeline and the upcoming catalysts that we expect to drive our business results. On Slide 16, we highlight some of the key consumer franchises that have been gaining market share. First, on the left, PreserVision retained 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 brand family line extensions, including an enhanced formulation of Ocuvite with Vitamin D for adults age 50 and over, and a combination presentation product with an antioxidant that helps support healthy heart function. Next, U.S. market share for our multi-purpose solution was 57.4%, up 410 basis points compared to the third quarter of last year, driven by our BioTrue multi-purpose solution. We are expanding the BioTrue mega brand platform to strengthen our competitive advantage in dry eye disease. Finally, on the right, Artelac, a $100 million growing dry eye global franchise, grew organically by 11% compared to the third quarter of last year. Artelac branded products are available in more than 35 countries, and we have more than 10 line extensions underway. We recently launched Alexia, a moisturizing drop for dry eyes, in France. Now turning to Slide 17 on LUMIFY. In the U.S., LUMIFY is the 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 LUMIFY in Canada. It's on track to be the fastest launch for Bausch + Lomb in the Canadian eye drop market and is generating twice the amount of sales versus the previous leading eye drop launches. Geographic expansion continues to be a priority, and LUMIFY is now approved in six countries. In addition to launching in new markets, we are expanding LUMIFY's beauty positioning to specialty eye care and have a number of line extensions planned for 2023 and beyond, including a makeup remover, eye cream, and elastin brow serum, along with a single-dose preservative-free eye drop and a combination product with ketotifen 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 XIPERE, revised custom soft contact lenses, our Lux Premium IOLs, and most recently, Project Watson, our brand-new line of products specifically aimed at supporting 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 and innovative products in higher margin, high-growth categories such as premium IOLs and pharmaceuticals. On Slide 19, as we mentioned earlier, we now have a June 2023 PDUFA date for NOVO3, a potential first-in-class treatment for dry eye disease associated with meibomian gland dysfunction. If approved by the FDA, we expect to launch NOVO3 in the second half of 2023. Dry eye disease is one of the most common ocular surface disorders, affecting approximately 18 million Americans. NOVO3 is expected to address evaporative dry eye, which is an unmet need in approximately 90% of dry eye disease sufferers. This is a fast-growing market with unmet patient needs; from 2016 to '21, the U.S. prescription dry market grew at a CAGR of approximately 24%. Given the current macroeconomic environment and the results of the two Phase III trials, we believe that NOVO3 has the potential to be a major future growth driver for our business. On Slide 20, our Surgical business is preparing for the upcoming launch of the Eye Telligence system, a cloud-based digital platform that will help streamline the complex processes from pre-surgery assessment to post-surgery evaluation. Ophthalmic surgical procedures require a sophisticated multistep process that involves patient diagnostics, clinical treatment planning, surgery planning, and post-op analysis. The transitions between each step require the manual transfer of data, which can be time-consuming and lead to unintended human error. When the next-generation Eye Telligence platform is launched, expected in 2023, the analytics software allows surgeons to seamlessly integrate all aspects of the cataract, retinal, or refractive surgery processes to maximize their overall practice efficiency. We're excited about this significant step forward that will enable us to advance interconnectivity, leverage data support, and improve patient outcomes. On Slide 21, we feature another anticipated 2023 launch in our Surgical business: the 3D Microscope, which will provide ophthalmic surgeons a fully digital surgical visualization platform. The microscope offers exceptional image quality with ergonomics, allowing them to tackle complicated surgical cases with confidence. Importantly, the 3D Microscope can be integrated with our Eye Telligence digital platform. The market opportunity for this product is significant, with industry reports estimating a $400 million market growing at a CAGR of approximately 6%. On Slide 22, we show the geographic locations and expected timings of the upcoming premium IOL launches. Near-term, we are preparing for 2023 launches of Bausch + Lomb Envy, the Invista trifocal IOL in Canada, and Bausch + Lomb Aspire, the extended range monofocal IOL in the U.S. and Canada. Our near-term focus is launching these premium IOLs 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 as priorities at the beginning of 2022. First, the continued 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, the strong performance of our key franchises, including market share gains. We have made investments in innovation like our Daily SiHy lenses, the 3D microscope, and NOVO3. Lastly, we've expanded into new categories with XIPERE, revised contact lenses, and the minimally invasive surgical procedure for glaucoma. We believe that by continuing to deliver against these three key areas of focus, we 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 in approximately 100 countries, and a comprehensive portfolio of more than 400 products across all price points, Bausch + Lomb is uniquely positioned to meet the eye needs of patients and customers, even in a challenging economic environment. Bausch + Lomb serves our patients and consumers through all phases of their lives, developing and offering new treatments to meet unmet eye health needs and help people see better to live better. Our third quarter results demonstrate that our business is continuing to deliver strong performance despite the currency and inflationary headwind pressures we face. Our team remains focused on continuing to generate momentum in our key products, invest in fast-growing categories, and expand into new product categories. Looking ahead, we continue to believe that Bausch + Lomb is well-positioned for success as a stand-alone pure-play eye health company. With that, operator, let's open up the line for questions.

Zack Weiner, Analyst

Hey. Good morning, everyone. Thanks for taking my question. Just one for me on inflationary pressures to start. Can you give some color on the impact in 3Q? 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 the SiHy lenses? Thanks.

Sam Eldessouky, CFO

Good morning, Zack, it's Sam. So when you think about inflation, when we looked at the beginning of the year, we expected inflation to be roughly about 100 basis points on our COGS. As we continue to see inflation rise right now, in the U.S. it's hitting about 8%, in Europe, we're about 10%. We've updated our estimate to be about 130 basis points for the full year. In the quarter, it's staying relatively the same direction; it's about the 100 to 110 basis points impact we've seen. As you look forward, we probably expect it to run around the same rate that we've seen right now. So we'll be around the 100 basis point impact. Briefly from an impact on Daily SiHy, we haven't seen much of an impact on inflation per se. I think Daily SiHy really doesn't have much of an impact in place; you see a little bit on transportation, but we haven't noticed many significant impacts from inflation. The important part for us, as we think about the launch of the SiHy product, is that it is a premium product relative to, obviously, a monthly lens or a hydrogel lens. So it moves patients to an opportunity for us to have a premium product in the marketplace. So that's going to help us with the inflationary pressure that we see out there.

Cecilia Furlong, Analyst

Hi, great. Good morning and thank you for taking my questions. I wanted to start with R&D. Just your comments on the spend in 2Q; you talked about previously a 7% to 8% of sales outlook over the next few years. Can you just talk to how you're thinking about R&D spend and focus beyond 2022?

Joseph Papa, CEO

Sure. Good question, of course. One of the things that we're excited about is the future opportunities for the products that we have. I mentioned during the call that we have 15 new product launch opportunities in 2023. Importantly, going into areas that are significant for us, like the premium IOLs, we have the Lux product and premium launching out there. We also have some new Invista opportunities as we look to 2023. These are all exciting. We also have the new 3D Microscope and the Eye Telligence System. All these things are backed by our R&D programs that we're putting forth. What we have said as a company is that we want to invest 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 R&D spend from that 7% to 8% to invest and get it to around 8% this year as we've discussed. While we think about the future, we're not going to guide specifically to 2023 and beyond, but we do think the trends would remain in that 7% to 8% because we see opportunities in front of us to invest in our business. We believe that R&D investment will be the most critical place for us to ensure we have new products coming into the future to support the long-term growth of our company. So we're excited about that.

Cecilia Furlong, Analyst

Great. And if I could follow up, just on Daily SiHy. Can you talk about the growth you saw in the quarter and where you're seeing higher share from new fits versus competitive conversions versus cannibalization? And if you could also comment on China, how you're thinking about recovery into 4Q and what you saw from a recovery standpoint in 2Q and 3Q. Thank you for taking the questions.

Joseph Papa, CEO

Sure. A lot of good follow-up questions here; I'll try to cover them all. The first comment on the Daily SiHy growth is 23%, which we grew. We're clearly excited about that growth in the quarter relative to Daily SiHy. As Sam said, our supply chain team is doing a great job with execution in everything from installing new equipment, getting it validated, running it, and ramping up the opportunity in front of us. But the demand is there, so we just want to make sure to supply a sufficient amount of Daily SiHy in the marketplace. Regarding origins, most new fits have come from DT1, Oasis, and general new starts. We have seen some cannibalization from our lines, but primarily it's from DT1, Oasis, and new starts that we saw the primary source of the product. As for China, we saw a very nice recovery in Q3. As you recall, we had challenges in the first half of the year with lockdowns in China. We saw this trend turn in Q3; we had 6% organic revenue growth that year-over-year. Sequentially, it was about 28% growth. We're very encouraged by this improvement trend. E-commerce has recovered more quickly than retail channels, but that is a trend we will continue to monitor closely.

Sam Eldessouky, CFO

In terms of that recovery, we're optimistic, but we have to keep an eye on policy. They're still under the zero-COVID policy, and that could prompt some lockdowns. So, we’re cautiously optimistic but will continue to monitor what happens in the next couple of months.

Kevin, Analyst

Hi, this is Kevin on for Vijay. Just one on pricing. Can you talk a little bit about the pricing impact in the quarter? And looking into 2023, how should we think about pricing increases and savings for the year?

Joseph Papa, CEO

Sure. I'll start, and Sam can add. We took pricing throughout the year in 2022, starting with our ophthalmology prescription products in January, and then we moved to the contact lenses and consumer products as well. We needed to provide sufficient advance notice, so the actual operating process did not show up until approximately March for consumer products. Our expectation is that we will take similar pricing actions early in January 2023 for our ophthalmology prescription products and possibly for lenses and consumer products to reflect the inflationary pressures we’re monitoring.

Sam Eldessouky, CFO

We have strong brand equity overall, and you've seen that throughout this year; we've gained market share across many of our product lines and markets. We'll continue to monitor market conditions as we enter 2023, balancing strategic pricing and continued market share.

Joseph Papa, CEO

Pricing is not just about the list price changes. We continuously look at the project core initiative, which stands for cost optimization and revenue enhancement. These programs not only review the list price but also the net price we implement. Project core has been beneficial for us in the past and will be critical for managing pricing as we face inflation.

Lilly, Analyst

This is actually Lilly on for Robbie. Thanks for taking the question. Maybe if you could just talk about the environment for capital equipment and what demand has looked like recently. What is a headwind for you in the quarter? And how are you thinking about this trending into the fourth quarter and into 2023?

Joseph Papa, CEO

Yes. We’ve looked at the demand for cataract procedures. Based on what we've seen historically during recessions, the answer is no; the usage of these procedures continues. We do think that providers will seek to become more efficient but the need for cataract surgeries will not decline. We had a stronger demand for our surgical consumables and implantables. Implantables showed 14% organic growth, while consumables experienced a 6% organic growth. Overall, we do not foresee a slowdown in capital equipment demand.

Craig Bijou, Analyst

Good morning, guys. Thanks for taking the questions. I wanted to follow up on some of your comments on the resiliency of the eye care market. You also mentioned price and promotion sensitivity in the consumer business. Could you talk about the sensitivity in other parts of the business, especially contact lenses, and maybe even monofocal versus premium IOLs? How do you think that might change in a recessionary environment?

Joseph Papa, CEO

Great question. We explore questions regarding the future of our business. In terms of the resiliency of the eye care market, we have seen continued growth both in the consumer and contact lens sectors. We're gaining volume in key products like LUMIFY, for instance, while PreserVision is also seeing an increase in market share. The situation with the contact lens fits is roughly flat this year, but we have noticed a movement towards daily disposables. I remain confident in our ability to take prices where necessary while continuing to gain market share.

Larry Biegelsen, Analyst

Good morning, thanks for taking the question. Just first on LUMIFY, Joe, could you talk about the outlook there? Growth was relatively low at 7% for Q3. Can this become a double-digit grower going forward with some of these line extensions and geographic expansion? And then for Sam, can you provide some guidance on 2023 regarding FX, interest expense, and margin challenges due to inflation?

Joseph Papa, CEO

Yes, we had 7% growth for LUMIFY, which marks significant progress considering we have a 49% market share. We are optimistic about growth beyond the U.S.; its successful launch in Canada is promising. Line extensions and new markets will be key to driving future growth. Importantly, our consumption numbers indicate a low double-digit growth. So, yes, we feel confident in the outlook. As for your other questions, Sam will handle future guidance.

Sam Eldessouky, CFO

There are various components here worth addressing. When we look at 2022, we've seen good organic growth, but it's crucial now to focus on driving that momentum into 2023. We aim for organic growth around our product launch opportunities, including NOVO3. Although I'm not offering specific guidance today, the infrastructure we’ve built will support our growth. As for foreign exchange, we expect FX to have a similar impact in 2023 as it has this year. Inflation will continue to challenge margins.

Joseph Papa, CEO

Just to add to that, our tax rate this year is approximately 6%. We anticipate a low tax rate for 2023 but don’t have a specific percentage to provide yet. We are not expecting it to hit the 12% rate seen earlier.

Pito Chickering, Analyst

Yeah. Good morning, guys. Thanks for taking my questions. A follow-up on CapEx. I understand the need for this equipment in a recession environment, but provider margins have been pressured this year from labor costs, thus they have lower cash flows to invest in new equipment. Number one, do you see providers becoming more efficient with their existing equipment? What did capital equipment growth look like in the first half of the year? And how do new orders look for Q4?

Joseph Papa, CEO

Yes. We believe that cataract procedures will continue to grow, even in recessionary periods. The demand for capital equipment, especially our Stellaris systems, has remained steady despite pressure on pricing. For capital equipment growth, we're observing around 3% growth, although it's lesser than our surgical business overall. We are encouraged by the ongoing demand and the potential for future orders in Q4. Let me wrap this up by thanking everyone for attending today's session. We look forward to addressing any additional questions. Thank you for your support of Bausch + Lomb. Have a great day, everyone.

Operator, Operator

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.