Good day, and thank you for standing by. Welcome to the Cooper Companies Second Quarter 2022 Earnings Conference Call. Please be advised that today's conference is being recorded. 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 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 e-mail [email protected]. And 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. So 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 in 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 within all 3 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. And for those of you tracking calendar quarters, our calendar Q1 organic growth rate was 16% against the market we estimate grew 12%. So 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 1-day offering, MyDay, is available on a broad range of spheres, torics and multifocals. And 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 fitting 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 into 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 this year in Japan. Our silicone FRPs, Biofinity and Avaira reported another solid quarter of 8% growth. And 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%. The 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. And 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 and 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 3-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. So 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 nonstrategic 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 1/3 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 OB/GYN 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 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 used to select the best embryo transfer. Moving to our office and surgical category. We posted sales of $162 million, down 1%. Our OB/GYN 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% to 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. And 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. So a big thank you to all Cooper employees. And 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. 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 was $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 solutions 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 2.59x. 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 positives 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 to $3.312 billion, up 9% to 10% organically with CooperVision revenues of $2.225 billion to $2.247 billion, up 10% to 11% organically and CooperSurgical revenues of $1.055 billion to $1.065 billion, up 6% to 7% organically. Non-GAAP EPS is expected to be in the range of $13.09 to $13.29. For interest expense, we're 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. And 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. And with that, I will hand it back to the operator for questions.

Our first question comes from Matthew Mishan with KeyBanc.

A lot of moving pieces here, but I'll start with a bigger macro piece. Are you guys seeing any kind of change in consumer activity due to the inflation that we've been seeing?

I think, Matt, it's a little different depending upon where you are around the world, right? Because some markets are obviously back like the U.S. and then other markets are in situations where it's quite a bit more restrictive. But 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.

Okay. And then 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? And how much of that $100 million was China, I guess, including New York, okay?

Yes, 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. But 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 $100 million. Maybe it's because of currency, it's $95 million to $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.

Our next question comes from Larry Biegelsen with Wells Fargo.

Just one on Cook Medical and one on the EPS guidance for Brian. So Al, just an update on Cook Medical deal and next steps, confidence that the deal will close in late calendar '22. And do you expect potential divestitures? And have the economics changed, the accretion change just from the old economics, just a different starting point? And I have one follow-up.

Yes. 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. So there's not much to add outside of that right now. As soon as we know more, we start making progress to get resolution and try to get that closed, I'll certainly update everyone.

Fair enough. And 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? How much worse is FX from an EPS standpoint, interest, the contact lens solution, just kind of the pieces you called out? Can you kind of give us some numbers on that and tax?

Yes. Sure, Larry. So 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. And the interest expense degradation, if you will, from the Fed increasing rates 50-50 and 25% is $0.20. So your $13.95 gets brought down to $13.19, solely from FX and interest expense. And 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.

Our next question comes from Jason Bednar with Piper Sandler.

Al or Brian, when I'm looking at the model and really trying to update for the, I guess, the implied margin outlook for the year, 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. But that's obviously come down quite a bit for FX. I mean how much do you think you can get back purely from 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 '22?

Yes. I mean the pound, as everybody knows, the pound is a 6-month lag. So we're going to get some benefit from the pound in the fourth quarter. So as the pound weakens, 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. So any move in the right direction significantly helps. Now when you look at your operating margin of around 25%, yes, 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 going to get some OpEx leverage from more of the integration efforts that we're undertaking. We've been accelerating our integration efforts. Al mentioned the 6 deals we did since the beginning of last fiscal year. 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 going to 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 will help gross margin next year. So I'd say overall, gross margin should be up on a constant currency basis within both divisions at least a little bit next year and operating margins, we should get some leverage out of OpEx next year on a constant currency basis.

Okay. That's very helpful. As a quick follow-up, Brian, many of us haven't faced interest rate changes like we've seen and are anticipating this year. Your variable rate debt has performed well for several years. The question is, are you considering converting that floating rate debt to fixed to mitigate some of the sensitivity that the variable rate debt creates, especially if interest rates continue to rise?

For now, we have decided to continue with our current strategy. Our first priority regarding capital allocation is to pay down debt. We expect to generate a significant amount of free cash flow in the second half of this year, which will be directed towards paying down debt and investing in the business, such as capital expenditures. We anticipate being able to reduce a substantial amount of debt in the latter half of the year, and this will carry on into next year. We'll have to see how things unfold, but for now, we are sticking to our plan. It’s important to note that we have $1 billion hedged at a fixed rate for several more years. As we reduce our debt, it will help mitigate some of the impacts from interest rate fluctuations.

Our next question comes from Chris Cooley with Stephens.

I have two questions, if I may. First, regarding the near term and the margin structure, there was an acceleration in the growth rate of daily silicon hydrogel. As we look at the mix heading into the latter half of the year, excluding currency effects, can we anticipate an improved margin profile overall with growth in myopia management and some of these premium offerings within the broader CDI portfolio? For my follow-up, I’m curious about the improvement in the outlook for PARAGARD as we conclude the fiscal year. I'm wondering if you now expect to see actual year-over-year growth in that franchise and how that aligns with our expectations for the latter half of the year.

Sure, Chris. I'll address PARAGARD, and then I'll let Brian comment on the margins for Vision in the third and fourth quarters. For PARAGARD, we expect a significant year-over-year decline in the third quarter. As you may recall, we implemented a price increase last year in the fourth quarter, which led to some initial buy-in. Consequently, you will see a notable decline in the third quarter and then strong growth in the fourth quarter when making year-over-year comparisons. Currently, we are experiencing a decrease in patient traffic, particularly for IUDs. However, we believe this situation will begin to improve because historically, when this occurs, channel inventory in the field gets reduced, which eventually stabilizes and may even increase. Therefore, we are optimistic about a general increase in channel inventory and improvements in patient traffic in OB/GYN offices as we approach the fourth quarter. However, we do anticipate a challenging third quarter, particularly in terms of comparisons and patient traffic, before beginning to see some improvement in the fourth quarter.

Regarding the gross margin, currency fluctuations are having a more significant impact on margins in the latter half of the year than other factors. While there are both positive and negative influences from foreign exchange, the focus on myopia management has been beneficial for gross margins. However, we are experiencing a quick return to daily silicone hydrogel usage, which is putting some pressure on our margins. In Q3, we typically face negative manufacturing variances because of the downtime from shutting down our production lines in the first fiscal quarter, which will be a slight setback. On the positive side, there will be some improvement in cost of goods from foreign exchange in the fourth quarter, and we expect the business to perform strongly during that period with robust performance from both sectors. Overall, nothing is significantly tied to myopia management, but those are the key factors influencing the situation.

Our next question comes from Jon Block with Stifel.

Maybe just first on CVI, a solid increase in the CVI organic growth for fiscal '22. I guess sort of a couple of questions in here. It seems like 100 bps of that roughly is exiting the solutions business, if I have that right, Al or Brian, maybe you can comment there. And then, Al, if you can just talk to how price is trending in the market for fiscal '22 and how that compares to prior years?

Sure. Yes, you're right on the solutions side of things. That's about 1 point, right, going 44 to 20. So when you remove that, you pick up a point. And then outside of that, you have several different positives. I think price is a 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. And then you have Brian alluded to it their growth in daily SiHys. 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. And to be fair, when we did our last earnings call in early March, it was 1 week after Russia invaded Ukraine. So 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 3 geographies and with all of our markets. So taking up guidance even as much as we did seem to make a lot of sense.

Got it. That's helpful color that. And then I'll actually shift gears and move over to CSI and more specific fertility. Now I just love your thoughts. Really solid fertility numbers, but your thoughts on 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. So if inflation just continues to spiral out of control, we get a weakening consumer over the next 12 to 18 months. Just your thoughts on fertility and what it means for that particular business.

Yes. So as of now, we haven't seen anything. And I think you're spot on when you talk about a limited window. So when a woman decides she wants to have a baby, 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. So 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. So the other thing you have is you've just got an industry. Fertility as an industry is a pretty high-growth marketplace. So 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. So 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.

Our next question comes from Joanne Wuensch with Citibank.

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?

Yes, Joanne, I do. I've been in this field for a long time, and we've experienced several recessions where contact lens growth has eventually rebounded, although it tends to be a low single-digit growth rate. In some of the most challenging periods during past recessions, we still managed to achieve mid-single-digit growth. The underlying fundamentals are similar to what we see in fertility, as more people are becoming myopic; currently, one-third of the global population is myopic, and this is projected to increase to 50% by 2050. The factors driving growth in vision correction are strong and ongoing. Regardless of economic conditions, there will always be a need for visual correction. There might be variations in consumer purchasing behavior, such as whether they opt for higher-priced daily silicones or more affordable options like Biofinity or clarity. However, the fundamental growth will remain intact, even in recessionary environments. Contact lenses represent a robust industry for that reason.

And 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?

Yes, I implemented that program back in 2006, and we phased it out around 2011 or 2012. It's been several years since we made the decision not to hedge because it is not only costly and resource-intensive but also time-consuming. Unless we plan to manage our business differently, hedging just delays the inevitable. By hedging, you anticipate outcomes ahead of time, so if there’s no change in our operational approach, the effort and cost ultimately aren't justified. Given the current state of the yen and the overall market conditions, it would likely be a poor time to begin hedging again. While there is always the risk that things could worsen, I am hopeful we will see some relief in the coming quarters. However, there will be no changes to our hedging strategy.

Yes, I'd add on that one, 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. So I don't know if other people will see it, but Microsoft announced it today, and we had the same thing happen.

Our next question comes from Jeff Johnson with Baird.

I always want to 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 go to 16%. That 12%, I'm assuming this time you're getting to that by just kind of looking at the 4 companies' growth rates. Is that right? It's not like a CLI data end market kind of number that's looking at kind of the 4 companies?

Yes, the true growth of the market is based on gross data rather than net data. It doesn't account for discounts, and GFK doesn't cover the entire market. So, I tend to focus on the actual reports from the companies.

Yes, I would agree. And I think when Alcon was talking in their quarter about like mid-single-digit market growth, they were in CLI and GFK and that was looking more sell out and you're looking at more kind of, if you will, sell in for you guys to the distributors or to the end market?

That's correct. Yes.

Yes. Okay. And then on that point, you're 16% and even your daily SiHy number, probably a little stronger than we were expecting here this quarter. I think 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 in well there. So just with the update you're seeing kind of competitive environment, especially with some of these new products rolling out from especially Alcon but some others.

Yes. I think Alcon is performing very well. They have a significant portfolio of legacy wearers that they will continue to upgrade for a long time. For us, the situation is somewhat different because we don’t have as extensive a legacy portfolio to upgrade. However, we are certainly capturing our fair share of new fits. This is probably where we stand out. When it comes to new fits, new wearers entering the market, and products like MyDay and clariti, we are performing well. This aspect has remained strong based on the latest data I've seen, which is encouraging for us since that's where a lot of our growth needs to come from. We can't rely as heavily on upgrading legacy wear, so it's vital that we attract new wearers entering the market.

Yes, understood. Regarding MiSight, I have you at approximately $18 million year-to-date. It appears you might not reach the $50 million target. However, I understand your optimism about possibly achieving $100 million in myopia. Could you share your thoughts on the $50 million goal for MiSight? Additionally, could you discuss the stability of MiSight wearers who are now transitioning into their first or one-and-a-half years? Are you experiencing any dropouts among these established users in the current macro environment?

Yes. 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% to 95% retainage rate, if you will, going into multiyear. So not a lot of change from what we've seen in the past, which I'm really happy to report, right? And it's working for a very significant number of kids and then they're staying in the lens, which is great news. On MiSight, yes, I was kind of expecting $40 million to $50 million this year, depending upon what happened with China. We're still going to be in that $40 million to $50 million. I wouldn't change that range to get to $50 million, we're going to 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. So the shutdowns in Shanghai have certainly hurt us. Now Shanghai just started kind of reopening a little bit here in the last day or 2. So 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. But I think we'll be somewhere in that $40 million to $50 million and I think we still have a decent chance to get to $100 million if the market in China comes back a little bit because we'll pick up a lot of that ortho-k activity. But I still think we'll be at least mid-90s.

Our next question comes from Zach Weiner with Jefferies.

Just one on the strong performance from the Vision Care business. Could you parse out some of the share gains for switch fit versus new fits?

I would love to, but no, it's incredibly difficult to get because of trade-ups. So 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 at round on a global basis, it's just viciously difficult to get into. I think that it kind of as 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 and fierce, but I would say that's where we're seeing strength. But it's hard to get those numbers. I mean even you'll see some stuff from GSK in places, but it's like partial data and only in certain markets, it's hard to get that level of granularity.

Our next question comes from Andrew Brackmann with William Blair.

This is Mike on for Andrew today. Maybe just to dig in on your comments a little bit more on the expected FX headwinds and the interest rate impact to the bottom line. Can you sort of just level set us from a strategic standpoint around how you view spending in the 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?

Yes. It's a really good question, Mike. I mean 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 devices. So 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 want to keep it. So we ended up saying, okay, we have different factors pushing and pulling on that side of things. And we said, okay, well, if we exclude FX and we exclude the interest rate increases, can we continue to do everything that we want to do as a business? Can we invest everywhere we want to invest? Can we hurdle the solution stuff? Can we hurdle the supply chain and inflationary pressures and everything else, right? And then you pulled out a partner, you're like, yes, we've got price increases here. I've got some growing revenue. I've got a lot of different positive 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? But I can't also hurdle FX and interest expense without cutting into some of my momentum and my growth opportunities that are out there. So 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 going to hurdle the interest in the FX. Now unlike maybe in prior years or other companies or something, I mean, when FX goes the other way, we're just going to pass that FX right along back. So I sure as I hope that happens sometime soon, right? That will go right back into our numbers. Interest expense is going to do what it's going to do, as Brian said, we're focused on paying down debt right now. So we're going to generate some cash flow here, we're going to pay down debt to help offset that. But that was kind of our strategic thinking, if you will, for the back half of this year and into next year.

Great. That was really helpful. And then 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?

Yes, I’ll give you an example. Like we have a labor and delivery group. And we have a very strong sales force within our OB/GYN 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, if you will, increased our sales force by utilizing our existing sales force, and we’re seeing some positives from that already. And I think that as we move through the back half of the year, I think we’ll continue to see positives from that. So those are the kind of synergies that I’m talking about that we’re starting to find and to implement.

Our next question comes from Robbie Marcus with JPMorgan.

Free cash flow came in a bit weak in the quarter. I was hoping 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?

I mentioned the $88 million in free cash flow, which was notably affected by a $41 million outlay for SightGlass Vision. We settled a revenue milestone, involving a buyout related to certain revenue contingencies, which negatively influenced our operating cash. We had previously been remeasuring that contingency last year, impacting our operating expenses. Now, when we make the payment, it becomes a liability. However, we did receive more than that amount from SightGlass as part of closing the joint venture and securing funds to support half of this buyout. This significantly contributed to the situation. Additionally, there were costs associated with foreign exchange and lens solutions, as well as increased inventory costs due to raw materials purchases as we aimed to prepare for future needs. All of these factors combined resulted in the $88 million cash flow. Nevertheless, we still anticipate strong free cash flow in the latter half of the year. I expect capital expenditures to increase slightly in the third quarter and begin to trend higher, driven by strong demand for our lenses. We have minimal idle costs and are fully utilizing our equipment, so we aim to stay proactive in purchasing equipment, which will be reflected in our capital expenditures for the second half of the year, while free cash flow remains robust as we finish the year.

Great. I wanted to follow up on a question about hedging that Joanne asked earlier. Could you provide more details on that? We're observing a 5% impact on our top line due to foreign exchange, which is consistent across the medical technology sector, but the 14% impact we are experiencing is notably significant. How do you approach your guidance in terms of whether it's set in constant currency or reported? Why do you consider foreign exchange a risk for the business? Are there any natural hedges you can implement to mitigate that over time?

Yes, that's a good question with a lot to consider. In short, we do have some natural hedges in our business, but they are relatively minor overall. The most significant factors affecting our P&L between last quarter and this quarter have been the impacts of the yen, euro, and pound on our revenues. With the yen weakening significantly, there's not much we can do to counteract that. Our operating expenses in Japan are very low, leading to immediate and substantial effects. This situation also applies to Europe and other currencies. In the second quarter, the bulk of the change, amounting to $0.15, between the previous guidance and the current one, was largely due to intercompany transactions. As previously mentioned, Microsoft noted a $50 million effect attributed to balance sheet issues. This measures the intercompany trade balances from month to month, which are typically settled every 30 days. Normally, this doesn’t create a notable loss since there are fluctuations that balance out. However, this quarter, there was a significant impact at the end of the period, contributing heavily to the $0.15 change. As I've stated before, currency can work for or against you. When it moves in our favor, it will provide a considerable boost, and the opposite is true as well. When setting our guidance, we examine our forecasts and apply current rates to derive our estimates. That’s essentially how we assess the headwind from currency fluctuations, without any complicated procedures involved.

Yes. Robbie, to add a point on that. The 5% and 14% that you're highlighting the delta being abnormally large between that, 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 stretch it out over a full year, it wouldn't be that dramatic of a difference. It would be very similar to what you see from other companies.

Our next question comes from Steven Lichtman with Oppenheimer.

Just, I guess, outside of the solutions business, how much are supply chain inflation impacting you guys on the bottom line this year? And do you see second half similar to first on that front, better? Any comments generally would be helpful.

Yes. Solutions is a little bit different of an animal with the plastic that you need to purchase and so forth for 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 lose. 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. And then 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?

Around 13%. So coming down from around 14% to around 13%.

Our next question comes from David Saxon with Needham & Company.

Maybe on 2 CPI, starting with MiSight. Just wondering what inning, you are for MiSight trending in the U.S.? And how are you thinking about MiSight pricing in a potentially recessionary environment?

Yes, I believe we're still in the very early stages with MiSight, comparable to the first inning of a game. We're just beginning to tap into what will be a significant myopia management market, and we have several additional products on the way. We've recently expanded the parameter range for MiSight, which I find very encouraging. You'll see more products coming out of our R&D efforts as we continue to develop and grow. The industry is poised for ongoing expansion as practitioners in the ophthalmic field increasingly discuss myopia management and how to integrate it into their practices. It's thrilling to see eye care professionals recognizing their capability to treat this condition, ultimately benefiting children and society as a whole. We're gaining traction in this area, even though we're still in the early stages. Regarding pricing, we have not made changes; in some regions, we may have even slightly increased prices. We offer a robust, FDA-approved clinical product that stands alone in the market as a contact lens. From our standpoint, we'll maintain pricing roughly where it currently is.

Okay, that's helpful. You mentioned the growth in your branded products. Are you noticing any new developments in the key account segment, or is this primarily due to strong underlying growth in branded products?

Yes. We have been discussing how a significant portion of our growth has been driven by our customized solutions and customer brands. Recently, however, we've noticed a shift. Products like MyDay and Biofinity, especially the torics and multifocal lenses, are performing well, particularly through private practitioners. We're also observing strong performance from more traditional branded products, which is a positive development. I'm pleased to see this trend, and while it doesn't surprise me, it's still encouraging.

Thank you. And 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. So 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.