Commerce Bancshares Q4 2021 Earnings Call Transcript

Quartr
Provided by Quartr
December 1, 2021

There are 12 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Q4 2021 Cooper Companies Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer 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, Investor Relations and Risk Management.

Operator

Ma'am, please go ahead.

Speaker 1

Good afternoon, And welcome to the Cooper Companies 4th Quarter and Full Year 2021 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, integrations of any acquisitions or other anticipated benefits. Forward looking statements depend on assumptions, data or methods that may be incorrect are imprecise and are subject to risks and uncertainties.

Speaker 1

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 ks and Form 10 Q filings, all of which are available on our website at coopercoast.com. Should you have any additional questions following the call, please call our investor line at 925-460-3663 or email ircooperco.com. And now I'll turn the call over to Al for his opening remarks.

Speaker 2

Thank you, Kim, and welcome everyone to Cooper Companies' fiscal 4th quarter conference call. I'm pleased to report another strong quarter led by record revenues at CooperVision where we exceeded the high end of expectations for the quarter. Our daily silicone hydrogel and myopia management portfolios posted strong results and our key account strategy generated share gains in markets around the world. Within Cooper Surgical, our fertility business continued to perform extremely well, and we recently announced an exciting agreement to acquire Generate Life Sciences, A great strategic fit with our fertility and labor and delivery offerings. For the full fiscal year 2021, I'm proud to report record revenues at both CooperVision and Cooper Surgical record non GAAP earnings and record free cash flow.

Speaker 2

As we enter fiscal 2022, We have strong momentum and expect another record setting year. Regarding 4th quarter results and reporting all percentages on a constant currency basis, Consolidated revenues were $759,000,000 with CooperVision at $565,000,000 up 11% And Cooper Surgical at $194,000,000 up 11%. Non GAAP earnings per share were $3.28 For CooperVision, our daily silicone hydrogel portfolio led the way growing 19%. All three regions reported strength in this product category with our premium product MyDay and our mass market product Clarity, both performing really well. Biofinity also had a solid quarter, supported by strength in torics and multifocals.

Speaker 2

For the regions, the Americas grew 6%, led by our daily silicone hydrogel lenses with particular strength in my day where we continue seeing strong fit activity. EMEA grew a healthy 15% with improving consumer activity and strength in our key accounts driving growth and share gains. Within this region, we posted broad based growth from our daily silicones and Biofinity. Asia Pac grew 14%, led by a steady improvement in consumer activity and success with several new product launches. This region remains a very important growth driver for us, And we're investing accordingly as we're outperforming the market and taking share.

Speaker 2

For our FRP portfolio, Biofinity posted solid results, Driving growth in markets around the world with its broad offerings, including Atorik Multifocal and Energous, the most innovative product in the monthly space. Regarding product launches, we remain incredibly active. I've highlighted in the past the many products and range extensions We've been launching around the world for MyDay, Clarity and Biofinity, and all that activity continued. This has driven consistent share gains, and we expect that to continue. One recent launch that I want to highlight this quarter is our new MyDay multifocal.

Speaker 2

We've launched the product in the U. S. And several major European markets And the feedback and results are absolutely fantastic. We're consistently hearing from eye care practitioners That the new binocular progressive fitting system is a breakthrough approach that simplifies fit and provides optimal visual acuity at all levels. And we're hearing that from patients who are touting it as the best multifocal they've ever worn for exceptional near, intermediate and distant vision.

Speaker 2

We expect this launch to continue performing extremely well and to provide a nice halo effect supporting the already successful MyDay brand of Taurox and Spheres. Moving to Myopia Management, our portfolio grew 63% to 21,000,000 55% to 7,000,000 and OrthoK products up 40%. We reached our goal of 65,000,000 for the year, Up 76% year over year and our momentum is strong. As a global leader in the myopia management space, our portfolio is the broadest in the comprised of MiSight, the only FDA approved myopia controlled product, our broad range of market leading OrthoCade lenses and our innovative Sightglass Vision Glasses. Regarding MiSight, we didn't quite reach our target this quarter, but we did reach $19,000,000 in sales for the full year, up a very impressive 149 We're making great progress with independent optometrists, buying groups and retailers around the world, and we're seeing momentum in all these channels.

Speaker 2

We're also making great progress in China, where we signed an exclusive distribution agreement with Essilor. Essilor is now actively promoting MiSight following a soft launch last month at one of the largest ophthalmic trade shows, and we're on target for a full launch in fiscal Q2. We've also assembled an advisory board of key opinion leaders whose affiliated hospitals represent over 50% of Myopia Management contact lens volume in China. This team of experts is Providing fantastic insight into our MiSight positioning and how we can grow OrthoK even faster and how CyGlass will successfully fit in. As a reminder, childhood myopia rates in China are estimated at over 80%, and reducing myopia is a priority for the Chinese government.

Speaker 2

So, the opportunity is significant. Lastly, we recently presented our industry leading 7 year clinical study of MiSight confirming the product works for nearly all myopic children, it cuts myopia progression by roughly 59% on average, It works at any age a child starts treatment. It works for as long as a child wears it, and there's no rebound if treatment is stopped. These are the drivers that will continue supporting short and long term growth. Regarding our other Myopia management products, Our Ortho K portfolio performed really well, led by success in China.

Speaker 2

And in November, we commercially co launched our Sightglass Myopia Management Glasses in Europe with Essilor and we'll be partnering with them on several additional launches coming soon. Overall, on Myopia Management, Our momentum is strong and we're still targeting constant currency growth of over 50% in fiscal 2022 to roughly $100,000,000 in sales. To conclude on Vision, we estimate the overall contact lens market grew 7 in calendar Q3, while CooperVision grew 8%, even as new fits remain below pre COVID levels. According to recent U. S.

Speaker 2

Data, roughly 64% of eye care practitioners stated they had capacity to serve more patients, But cannot, mostly due to staffing challenges. Having said that, trends are positive and we expect the market to grow in the 4% to 6% range this coming year, supported by improving fit activity in the U. S. And EMEA and reopening activity in Asia Pac. Meanwhile, the long term macro growth trends remain solid With roughly 1 third of the world being myopic today and that expected to increase to 50% by 2,050.

Speaker 2

For CooperVision, we closed this fiscal year on a really strong note, exceeding the high end of our expectations, and we've entered fiscal 2022 with a robust Product portfolio, new product launches, a fast growing myopia management business and strong fit data. To ensure we're seizing the growth opportunities in front of us, we've increased our sales force investments and we'll continue with our successful Myopia Management investment strategy. We have strong momentum. We're growing faster than the market, and we expect that to continue. Moving to Cooper Surgical.

Speaker 2

Our fertility business performed exceptionally well, growing 24% year over year to 82,000,000. Strength was seen around the world and throughout our product portfolio, including from consumables, capital equipment and genomics. One particular area of continued strength was our RI Witness platform. This is our proprietary automated lab management system that clinics implement to maximize safety and security by optimizing their lab practices. A system like this is especially important in today's world to improve quality control and workflow management to enable social distancing and prevent mistakes such as embryo mismatches, which you unfortunately occasionally hear about.

Speaker 2

Regarding the broader fertility industry, our addressable market is approaching $2,000,000,000 with 5% to 10% long term growth expected. It's estimated that 1 in 8 couples has trouble getting pregnant due to a variety of factors, such as increasing maternal age and that more than 100,000,000 individuals worldwide Suffer from infertility. Given the improving access to treatments, increasing patient awareness, greater comfort discussing IVF And increasing global disposable income, this industry should grow nicely for many years to come. Within our office and surgical unit, we grew 3%. Medical devices performed well growing 20%, led by our portfolio of uterine manipulators, several of our surgical devices quarter's price increase.

Speaker 2

Having said that, similar to what we've seen from the general IUD market, the performance was soft, likely due to COVID staffing challenges. Lastly, for CooperSurgical, we recently announced an agreement to acquire Generate Life Sciences for 1,600,000,000. Many of you may know this company as a core blood storage business, but they've done a phenomenal job expanding over the years and this business is now a great strategic fit for Cooper Surgical As they're a leader in donor ag and sperm and cryopreservation services for fertility treatments, as well as being a leader in core blood and core tissue storage, which is an excellent fit with our labor and delivery group. We have an investor presentation on our website that summarizes the deal, but let me provide some additional color. Roughly 1 third of the business is in fertility, which we estimate will grow 5% to 10% long term, supported by general industry growth.

Speaker 2

Meanwhile, combining Generate's offerings with our existing portfolio allows us to leverage our infrastructure, launch new products And GO International to accelerate growth beyond this range. 2 thirds of the business is in core blood and core tissue storage, which we expect to grow 3% to 5 This is driven by increasing demand for core tissue stem cells due to optimism around the significant number of clinical Trials using these stem cells for regenerative medicine. Consolidated, this business offers long term sustainable growth of 4% to 6%, And we believe there are opportunities to push that range higher with potential revenue synergies as we leverage our expertise. To finish, let me make a few comments on fiscal 2022. Introducing annual guidance in today's world is a challenge given COVID uncertainties.

Speaker 2

Regardless, our organic revenue growth is strong and we expect that to continue. We're investing in product launches and we're doing that intelligently by leveraging our operations to ensure we receive strong returns. I believe CooperVision is the most innovative company in the contact lens space today with leading products in myopia management and the broadest product offerings in the market and Cooper Surgical is in an extremely exciting position led by our fertility business. As a company, we remain on a steady upward trend and we see that continuing for fiscal 2022 and many years beyond. And with that, I'll turn the call over to Brian.

Speaker 3

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. 4th quarter consolidated revenues increased 11% year over year and also 11% in constant currency to 759,000,000. Consolidated gross margin decreased year over year by 20 basis to 67.5%, driven primarily by currency, partially offset by lower manufacturing costs at CooperVision.

Speaker 3

Operating expenses grew 16% as strategic investments in sales and marketing to support myopia management and fertility continued. Within this, we did see slightly higher than initially forecasted investments for Cycles Vision and MiSight in China, along with elevated distribution costs tied to higher demand of direct shipments. Consolidated operating margins were 24.9%, down from 26.8% last year. Interest expense was $5,000,000 on lower average debt and the effective tax rate was 10.3 percent helped by stock option exercises in the quarter. Non GAAP EPS was $3.28 with roughly 49,900,000 average shares outstanding.

Speaker 3

FX negatively impacted us and was roughly $0.05 worse than expected when we gave guidance last quarter. Free cash flow was solid at 110,000,000 comprised of 175,000,000 of operating cash flow, offset by 65,000,000 of CapEx. Net debt decreased to 1,400,000,000 and our adjusted leverage ratio improved to 1.38 times. Moving to 2022 guidance and excluding the recently announced Generate Life Sciences acquisition, Consolidated revenues are expected to be in the range of 3.032 to 3.090000000000 of 6% to 8% in constant currency with CooperVision revenues between 2.225,000,000 and 2.267,000,000, up 6% to 8% in constant currency and CooperSurgical revenues between 807,000,000 823,000,000 up 6% to 8% in constant currency. Non GAAP EPS is expected to range from $13.60 to $14 up 9.5% to 12.5% in constant currency and the tax rate is expected to be around 13%.

Speaker 3

At the midpoint of guidance, this equates to constant currency revenue growth of roughly 7% and constant currency EPS growth of roughly 11%. Regarding currency on a year over year basis, we're expecting an FX headwind of roughly 2.5% on revenues and 7% on EPS. This impact will be most detrimental in Q1 where we're expecting EPS in the $3 to $3.10 range. Before opening the call to questions, let me touch on the Generate Life Sciences acquisition that we announced on November 10th. As of today, we're optimistic we'll close in the next couple of weeks, which would give us roughly 10.5 months of their operations in our fiscal 2022.

Speaker 3

Having said that, we're still waiting for final regulatory approval, so we're not providing specific guidance today. In the meantime, Let me walk you through the deal accretion that we expect. As previously announced, Generate has roughly 250,000,000 in trailing 12 month revenue. Gross margins are expected to be roughly 70% and OpEx is expected to be elevated in year 1 as synergies are expected to be minimal as we integrate and invest in the business. As we are now closer to securing permanent financing for this transaction, We are updating our year 1 non GAAP EPS accretion estimate to around $0.50 and would add that we expect this accretion to improve in year 2 with synergies.

Speaker 3

In summary, we're pleased with how we closed this fiscal year And as we look forward into 2022 and beyond, we continue to believe our strategic investments will drive top line momentum supporting share gains in both businesses and long term sustainable earnings growth. And with that, I'll hand it back to the operator for questions.

Operator

Our first question comes from the line of Andrew Backman of William Blair, your line is open.

Speaker 4

Hey, guys. Good afternoon, and thanks for taking the questions. Appreciate all the color on the guidance and the forward outlook. Maybe just to start here on the Generate business that you're going to be acquiring here shortly. This is sort of the first call that you've had sort of post announcement.

Speaker 4

So maybe just from a strategic sort of standpoint, Al, can you just sort of talk about how this sort of meshes with your Current offering, how you're going to mesh these commercial organizations that you have? And then just broadly, Generate had a nice DTC marketing angle. Anything that you guys can do there to maybe expand that capability on your fertility side right now? Thanks.

Speaker 2

Sure. Yes. And happy to be talking about this. I know we made the announcement and it was Frustrating for many of you and absolutely frustrating for me to not be talking about it on a deal that I'm pretty passionate about. Yes.

Speaker 2

This is a great deal for us. It's a great fit. I mean, you're talking about a third of this business that's in fertility. We, as you know, have a great position in the fertility industry. Adding the donor piece of it to our existing product is just It's one more thing that allows us to walk into a fertility clinic and offer a full suite of products on.

Speaker 2

So I'm really excited about how that's going to roll in. And when I think about our ability to leverage that with our existing sales people and our ability to Leverage that with our existing relationships with fertility clinics in the U. S. And outside of the U. S.

Speaker 2

I get pretty excited about that. I mean, so you got You got a fertility business that's growing 5% to 10%, at least as you can see by the reported numbers. This part of the industry is growing along with that, has So, I do think that we're going to be able to accelerate that growth when I think of some of the new products that we're going to be able to launch in that space and then with some of the leverage we have. So, kind of a slam dunk fit, if you will, on the fertility side of things. And that's not even touching on the cryopreservation, which is a perfect fit.

Speaker 2

If you look at the other piece of it, about 2 thirds of that business is on the storage side for core blood and core tissue. That's been around for a long time and many people on the phone know about that. Anyone who's kids probably knows about that. That space has gotten a little bit more exciting recently because of the core tissue, the stem cells are used for regenerative medicine. There's a ton of clinical studies that are going on right now, well over 1,000.

Speaker 2

So you've seen an increasing interest in Storage of core tissue. So that's kind of exciting. I mean, they have a relatively small sales force handle on that. We have a great team that's calling on OB GYNs around the U. S, 100 people or so.

Speaker 2

So, we're going to be able to take that messaging directly to the OB GYN. And you touched on the DTC side of things, and that's great, right? DTC is certainly fine, but the medical professional drives a lot of the decision making here. Our ability to bring that in, first time that you're actually going to have a company own one of these businesses who's calling directly on OBGYNs With great relationships, I think we're going to be able to add some real value there. So kind of excited about both pieces of that.

Speaker 4

Great. Thanks for all that color. Maybe just to switch gears here a little bit on the margin side, so 70% Gross margins for Generate. Can you just sort of talk about how this might be accretive on the operating margin side? I know you guys have sort of talked about Expanding total Cooper margins to the 30% range or so over time, doesn't look like that's going to be this year.

Speaker 4

But can you sort of talk about how this plays into that Longer term goal of around 30%. Thanks.

Speaker 2

Sure. Yes. And that continues to be an objective. I mean, as you know and Brian Currency is a fairly decent negative to us this year. So, that's causing us to take a step back, right, from an as reported perspective, but not from A constant currency perspective.

Speaker 2

Yes, good gross margins on the Generate business, 70% or so, fits in really well. Now this 1st year Buying this, we'll be a little careful on the integration activity. They had acquired a business this past summer that took them into Australia and Canada. We need to roll this business into our operations. We need to take care of everything with respect from IT to customer service and a variety of other things.

Speaker 2

So not anticipating a lot of leverage in the 1st year, but then we will roll it in and then through the year we will. We will get Leverage from this business. Now the question mark on it ends up really being when you look at the $0.50 it's more around the interest expense. We're not going to get into the OpEx This point in time and interest expense because 1, we haven't closed Generate yet 2, we haven't closed the permanent financing for it yet. So, when we do, we can supply a little bit more color.

Speaker 2

But Suffice it to say that long term, this will be accretive, if you will, to company wide gross margins and help us get to that 30%. Thank

Operator

you. Our next question is from the line of Larry Biegelsen. Your line is open.

Speaker 5

Good afternoon. Thanks for taking the question and congrats on a nice quarter, Al. A couple from me. Just on Myopia Management for fiscal 2022, that $100,000,000 I know you're not giving MiSight guidance Help us think about the components of that. And I guess I'm particularly interested to hear how you're thinking about the contribution from China.

Speaker 5

I think we all see how many pairs of Stellar is selling per day in China over $2,000 per day What do you think what percent of that like how should we think about the ramp of MiSight in China relative to what they did With Stellish, I mean, we've heard things like maybe it could be a third or so, which would still be pretty strong. And then I had a follow-up.

Speaker 2

Yes. You're right. I mean China is really exciting. We have a strong relationship obviously with Essilor. Essilor distributes our Primary OrthoK product in China now.

Speaker 2

We have the exclusive distribution with them for MiSight. We did the soft launch already there. We are in a really good position with them. We're kind of hitting on all cylinders, if you will, early here in China. You talk about Celeste, Their glasses that they're selling into China right now and doing really well with.

Speaker 2

The Chinese government has said publicly that Addressing myopia is a very significant concern of theirs. So they're taking it seriously. These glasses or contact lenses are Are sold through the hospitals. So I mean it's something that can move fairly quickly and can be very successful. I won't necessarily break the dollars down in our expectations, but We definitely have high hopes for a lot of success in China.

Speaker 2

When I look at that $100,000,000 mark, we've talked about that in the past. We still stand by that. You know my opinion On my side, I think we're going to have a lot of success. Now, it's going to depend on China, how successful that is this year. But at the same time, we're seeing success in China with our OrthoK So I'm happy about that and maybe even a little bit more success than I was thinking about it.

Speaker 2

So a few different moving parts there and I wouldn't discount Sightglass. I mean that's a product that We just launched, co launched, I should say, with Esalora in Europe. As you said, Celeste is doing really well. We'll bring Cyclops into China here at some point in time. So A lot of different moving parts in there that are going to drive that $100,000,000

Speaker 5

That's helpful. And for my follow-up, Al, I mean, obviously, we all see the inflationary pressures. How are you thinking about your ability, at least in CooperVision, to take price in fiscal 2022? What are you Assuming in the guidance, I mean, we have heard that your competitors are taking over 4% in 2022, which is a little bit above average. How are you thinking about prices in 'twenty two?

Speaker 5

Thanks.

Speaker 2

Yes. I don't want to get into particular or a specific number right now, but we will be taking price. So that's coming. You're seeing the inflationary pressures and so forth out there. We're in a great industry On both sides of our business within contact lenses, it's a good industry and higher pricing is warranted on an annual basis.

Speaker 2

This year, you have inflationary pressures and shipping and everything else that goes along with it. So, yes, we'll be taking price higher. I just I'll stay away from giving a number at this point in time, but you'll see it at some point in the near future.

Operator

Our next question is from the line of Matthew Mishan of KeyBanc.

Speaker 6

Hey, Al. I'm just trying to understand your thoughts around starting at 6% to 8% with the CVI guidance. That's where you were starting point for 2018 2019, but now you have Myopia control portfolio as an extra lever. You have some easier comps, especially in the Q1. And from what you just said, you had some price increases also helping you out as a potential tailwind there.

Speaker 6

So, how are you thinking about that 6% to 8% starting point?

Speaker 2

I'll answer it As easy as one word, COVID. That's it, right? So if you want to think the 6 to 8 is conservative, I'm not going to Argue with you on that, but I'm also not sure what's going to happen with COVID and some of the variance out there. So you have to try to factor that in a little bit. It's only prudent When you're giving annual guidance in a period like we're in today to try to build in a little bit of conservatism, if you will, for that.

Speaker 6

Okay. I think that's fair enough. And then on the EPS side, when you think about The year over year walk, I think you said 11% constant currency EPS growth, if I'm not mistaken at the midpoint. We can all walk that down to what the FX impact was and you gave it to begin with. But how should we think about the impact Year over year on increased investments that you're making and tax on EPS?

Speaker 7

Yes. Tax, we have gone up

Speaker 3

a little bit because it was kind

Speaker 2

of in the low 11s going to 13. So obviously, If you exclude tax, right, our profit growth would be better. If you kind of look at kind of leverage through the P and L, I guess I'd probably just Probably do it at a high level and say, if I went to the midpoint of guidance, it's 7% is the midpoint of revenue guidance in constant currency And the midpoint of EPS guidance is 11%. And that includes hurtling the tax, right, that we talked about. So that's your leverage right there, right?

Speaker 2

I mean, I've talked in the past about how We have a business where we can lever this business. We've invested a lot in Myopia Management. We're going to continue to invest there. And frankly, We're investing in Vision more aggressively in a number of different areas, which we started this past quarter with some sales force expansion in several markets. So a lot of investments going into vision right now, sales force, product launches, mid day multifocal, super excited about that, You know, Sightglass, a lot of different areas.

Speaker 2

We're doing all those investments and we're still talking about 7% 11% leverage through the P and L. So, I feel pretty good about that. And that again hurdles the tax increase.

Operator

Thank you. Next question from the line of Jeff Johnson of Baird. Your line is open.

Speaker 8

Hey, guys. Good evening. Hey, Al, maybe another pricing question, not just on the core portfolio, but MiSight. When we go out and talk to a lot of these docs, it just seems like everybody is really excited about Technology wants to be pushing this into more and more patients, but that $7.50 wholesale price or selling price, however you want to look at it, It was kind of a big hurdle, especially if you guys want to put $500 in professional fees or something on top of that, or in some cases even more. How comfortable are you with that $750,000,000 I mean, if you did $19,000,000 in MiSight revenue, even if you had a haircut The per box price by a good amount to really push penetration, you probably make that up within a year or 2 or maybe faster.

Speaker 8

So, I mean, just what do you think on that wholesale price that is pretty high right now?

Speaker 2

Yes. That's a great question, Jeff. And we're talking about that internally right now. We wanted to get Through year end here where we had a good comp, especially in the U. S.

Speaker 2

Against last year where you remember we gave a lot of the lenses away for free. So we are looking at that. We are doing some sensitivity on that. To your point, right, you cut price, but you sell more product and does that make up for it? So We're kind of evaluating that, if you will, right now.

Speaker 2

Having said that, the number one pushback by far is definitely not price, Right. That's on the list, but it's not number 1. It continues to be the staffing concerns and fit concerns and The amount of time it takes to talk to the parents, talk to the kids, get the kids in it, it's just a longer process than what we initially thought. We're still seeing a situation where we're getting there and we're converting a ton of the patients, but it's taking 6 months, 9 months, Something like that, 12 months. The kid has to come in again, right?

Speaker 2

The parent the ECP explains that they have myopia, what it means, how it's Progressing, the parent doesn't want to pay to your point or they don't want their they're concerned about putting their kids in contact lenses. So they delay the decision And then they come back in and the ECP explains that their child's eyesight is worse and it's going to continue to get worse, that's when the sale actually happens. So The actual sale, which frankly I thought was going to happen a little bit quicker, obviously, when I put the numbers out there and the uptake, It's still happening. It's just a little bit more delayed. So, I think pricing is a component of it, but just better fit activity is going to drive it also.

Speaker 8

Yes, that's helpful. And then maybe as a follow-up, just kind of titrating around that 4% to 6% market and 6% to 8% for CVI. 1, if I take out the Myopia, the $35,000,000 incremental there on a constant currency basis anyway, that's about a point and a half, a little north of a point and a half. So let's say you're kind of Talking about your core portfolio in the 4 to 6, 4.5 to 6.5. So you're kind of saying we think we're going to be about in line with the market.

Speaker 8

Historically, you've been nicely above market. Is that conservatism, is that again just COVID, is that competitive launches? So one there, and the 4% to 6% market assumption you're going with, Does that include maybe a step up in pricing you think for

Speaker 7

the whole industry this year? And do

Speaker 8

you think it's 4% to 6% and then if people do take 3%, 4% price instead of historically 1% or 2% price, There's some upside to that 4 to 6 market. Thanks.

Speaker 2

Yes, I think you do have pricing in there. You could certainly make an argument that the 4 to 6 Could be a little bit lower, right? Because you do have obviously the COVID concerns, you have everything else that's going on in the marketplace In different markets around the world. So sitting here today, I think that we'll end up in that 4% to 6% range with the pricing, with some pricing in there. I think we'll take market share.

Speaker 2

I'll be really surprised if we don't take market share on a core on a like to like basis, if you will. Myopia Management or Myopia Management portfolio will add to that obviously and ensure, if you will, that we're above market growth. But on a like to like basis, I think we'll take share. I'm not sure it'll be a lot of share, but it'll be I'll be really surprised if it's not share. There's some other good competitive launches And stuff going on out there, so I don't want to necessarily get ahead of ourselves.

Speaker 2

But based on the strength I'm seeing with some key accounts and so forth, especially in Europe and Asia Pac, We'll take share. I think the degree of share gains for us on a core portfolio basis, meaning on a like to like basis, We'll certainly be tied to some geographies, right? I mean, if Asia Pac continues to come back and places like Japan where we're really well positioned right now, We would stretch kind of our share gains.

Operator

Thank you. Next question from the line of Jon Block of Stifel. Your line is open.

Speaker 7

Thanks guys. Good afternoon. Brian, maybe the first one for you. Just Any color on other parts of the P and L for 'twenty two? To Al's prior point, there seems to be some implied leverage in the model when we think about things, But how about just the moving parts?

Speaker 7

Is it a little bit of gross margin expansion, but think about OpEx As a percent of revenue, maybe flattish because you guys have flagged and called out some ongoing investments?

Speaker 3

Well, first of all, John, thank you very much for the question. I don't think I got a question last call. So, happy to take one today. So, yes, as it relates to guidance, Gross margins and operating margins, when you start at the midpoint of our guidance, Gross margins on a constant currency basis will be up year over year, and operating margins will be up even more year over year. So Now, we're talking about the leverage and we were talking about hurtling some inflationary pressures like wages and freight and other higher cost.

Speaker 3

And then also having that this continued investment activity in growth areas like myopia and fertility, we're levering We're getting leverage from the P and L and from higher revenues, and that's showing up in operating margins. So, I would expect our operating margins to be up nicely Year over year.

Speaker 7

And I'll equally weigh my question. So guess the next one, just out of the fertility side. I mean over the past handful of years, we've seen a lot of fertility deals, obviously smaller than generate, but now you've done generate or about to do generate. In your opinion, does this sort of fully build that out, the fertility part of the business? Does it complete the puzzle, so to say?

Speaker 7

And then maybe just to tack on CSI, Paragard did miss our number. I know there's some moving parts due to the price last quarter and the buy ahead, but maybe exiting Fiscal 'twenty one, do you feel like inventory is in a good place due to the buy in on the Paragard side of things? Thanks.

Speaker 2

Yes. On fertility, You know I love that space. It's a great industry. It's growing. It's got all kinds of potential.

Speaker 2

Interestingly, it's still relatively Fragmented. And there's different players in different markets around the world, some sizable players in different markets Around the world in different areas of fertility. So I think that Generate was a good example of one that kind of came out and is a nice addition for us. We'll see. I mean, we certainly have a great fertility franchise right now and a lot of opportunities to grow and grow in excess of the market rates.

Speaker 2

But I mean, if we could find other transactions to kind of fit in there that could make sense from a geographic expansion perspective, that type of thing, we would certainly evaluate those. If I look at PARAGARD, it was funny that within our medical device space, probably similar to a lot of companies that you follow, we did see some Softness in September, that's for sure. We even saw some softness in October. I was pleasantly surprised with how our Core medical device products held up during that time. Some of them hold up naturally because they're tied to childbirth and so forth.

Speaker 2

But even the elective procedure products held up okay and we had a decent October. That was not the case as much for PARAGARD. Now, I don't think PARAGARD is unique. When I look at the IUD market in general and you look at the other products out there, those have also been soft. So I'm not sure how to like really fine tune that down to the point of an individual product, but I do think that some of the staffing restrictions and so forth that are out there Are causing problems with IUDs and some other products.

Speaker 2

Frankly, I think you're going to continue to have a few of those struggles Even in our fiscal Q1, to be honest with you, because you're still seeing some of those staffing challenges and so forth out there. And On the medical side of things, we don't see that really on the contact lens side, but we certainly see it on the med device side of things and PARAGARD is Caught up in that. Now, I don't think it's doing any worse, by the way, just to be clear, with respect to the IUD market. It's in line or maybe even doing a little bit better. But that Part of the market has been hit.

Operator

Thank you. Next question from the line of Jason Bednar of Piper Sandler, your line is open.

Speaker 9

Hey, good afternoon. Thanks for taking the questions here. 1 on Generate Life and 1 on MiSight for me. Al, starting on Generate Life, totally appreciate the strategic merits for the transaction. But this asset does Clearly come with a little bit of the checkered past, has a big price tag, dollars 1,600,000,000 largest in your history.

Speaker 9

So I guess the question is what made this the right transaction for you right Now, over maybe some other faster growing assets that you've been maybe we're looking at? And then, could you also talk about how you expect GLS to operate more effectively under The CSI umbrella that maybe some of the pieces did prior to maybe private equity ownership?

Speaker 2

Yes. I mean, one of the things that That's going to make it more effective for us. And one of the things that's exciting for us is the size of our business. I mean, we just have a very large fertility business And we have a large OBGYN business and some great products specifically within the OB space. So, we're talking to those professionals.

Speaker 2

We know those professionals really well. One of the challenges you have when you're a company like Generate Is you're seeing a lot of your success come from like direct to consumer activity, that type of thing. It's more DTC and not direct to the professional. We're known as kind of a high quality educational shop Within the Cooper Surgical, within the OBGYN space and within the fertility space. I mean, if you look at the training we do, there's just extensive training and knowledge, Communication and so forth that we do with medical professionals and that side of things.

Speaker 2

That's not something that Generate has really been able to take advantage Because they just didn't have the size to be able to do that. When you take their business and combine it with our strengths, that 1 plus 1 is a 3. I mean, that's what's so cool about this. So, yes, this opportunity came up. I've been following it frankly for a long time.

Speaker 2

When it was a core blood storage business, that was a little bit of a different story. As you fast forward to where it is today and you think about things like regenerative medicine and what's going on over a 1,000 clinicals and process on that, Who's able to talk to the obstetricians about that? Who's able to speak to fertility clinics of the value of that in those clinical studies and so forth? We are. We have the professionals already in there talking to them and doing training and so forth.

Speaker 2

So I really think we can add a lot of value there. I mean and frankly, at the end of the day, deals Come up when deals come up, right? I mean, when opportunities are available. I've been looking at this thing for many, many years. I was happy to see it come up and I was happy to see us get the opportunity to win this business.

Speaker 2

So to me, I kind of look at it as, hey, it's yes, it's a big deal and it is a big deal for us. It's an important deal for us. But When you find something that's a great strategic fit that's growing mid single digits and you think that you're going to be able to enhance that growth, Yes. You look at those opportunities, you take advantage of them, especially on something that's going to throw some nice accretion to the bottom line. All right.

Speaker 2

That's great and very helpful.

Speaker 9

Maybe for the MiSight question, Cooper did have a representation today at the HCPCS Yes, meeting, lobbying for a level 2 code for MiSight. Could you update us on where you're at with the reimbursement strategy for MiSight here in the U. S? And We're securing this coding and associated payment would fit into the overall plan and how you're considering that maybe as an element of adjusting price points in the future, just to maybe Go back to Jeff's earlier question.

Speaker 2

Yes, yes, yes. So, right now, we have nothing in any assumptions regarding reimbursement. I mean, anything that we ever could get on that side of things could be is upside and could be material upside. But that's kind of all I would say at this point in time, right? We're working on stuff, obviously.

Speaker 2

We're highly interested in that and there's reasons for us to want that to be successful. But at the current state of the game, nothing factored in, no assumptions made around that. We'll see how that plays out. And I hope At some point in time in the future to be able to give you that good news.

Operator

Thank you. Next question from the line of Joanne Lou Lynch of Citibank, your line is open.

Speaker 1

Thank you and good evening. I appreciate the color on the sales process From my side, can we shift to the other side of that, which is the training process for physicians? Is there a way to quantify how many physicians have been trained? Of those that have been trained, which ones start integrating it into their practice?

Speaker 2

I don't have that number on me. It's significant because it's continued to grow. There's a lot of ECPs trained on it right now. I would say the more important takeaway probably from that Joanne is, if I had to do it over again, how would I go about that over again, right? Because a lot of these ECPs are getting trained.

Speaker 2

They're fully certified. They go back into their practice. They're excited about it. Maybe they don't have a lot of kids coming in, a lot of volume. And it ends up kind of falling on the it falls in the back seat, so to speak, right, because they're dealing with staffing challenges, they're dealing With patients that they're trying to pass through that are easier to fit and sell to.

Speaker 2

Where we've seen is that once you get the ECP trained and excited about it And you have a myopia specialist, which we have now, we fully staffed up our myopia management specialists around the world. When you have that Myopia management specialist talking to them and working with them and answering their questions as it comes up about how to sell it, how to fit it, how to charge for it and so forth, We are dramatically more successful. So that's the key. It's ended up not being so much like how many do you have, It's how many do you have combined and how many are you working with and helping. Once they fit a few kids and get rolling, it's like a snowball going downhill.

Speaker 2

Okay, now I'm comfortable with it. I'm I'm going to do this for every child that walks in the door. Every single child, I'm going to talk About this because I've got the process down. I understand how to do it. I understand how to sell it.

Speaker 2

So that ends up being the key. And some of these newer markets that we're going into right now, We're having a lot more success a lot faster because we've learned so much over the last couple of years about how to successfully transition someone from the training To the actual selling of the product.

Speaker 1

That's really helpful. Can I ask a very boring question? FX in the Q1, Can you quantify revenue and EPS impact?

Speaker 3

Yes. I'm not going to quantify it. Obviously, it's By far the biggest impact for FX relative to all the other quarters in the year, it's a double digit Headwinds to EPS in the Q1 and cost of goods is also the worst were hit the worst in cost of goods

Speaker 9

as well in the Q1.

Speaker 5

And you

Speaker 2

kind of get the double whammy, right, because you get the pound 6 months later flowing through bad and the revenues immediate hit.

Operator

Thank you. Next question from the line of Anthony Petrone of Jefferies. Your line is open.

Speaker 8

Thank you. A couple on MiSight and one on GLS.

Speaker 10

On MiSight, we've had calls where We've heard that the attach rate and the stickiness going into next year is going to be quite high. So just thinking about the existing ECPs that have Already implanted patients this year and fitted patients this year. Do you expect the attach rate to be like a traditional contact lens? And then in terms of just the effectiveness, you mentioned the clinical data, Al. We've heard that in some cases, They've actually slowed progression by almost half.

Speaker 10

And so they have seen some good effectiveness in controlling the Progression of Myopia. So those will be the first two on MiSight and I'll have a follow-up on GLS.

Speaker 2

Yes. Well, certainly, There's no question the product is working in the marketplace. If you go and look at the success rate, it is reducing the progression of myopia for children At a fairly high level, right, on average 59%. There are a number of kids, who their myopia progression Essentially stops entirely, like, which is amazing. Could you imagine that?

Speaker 2

But that definitely happens. And we have many instances of eye care Professionals telling us that. So that's really fantastic. The retainage rate, if you will, on those sales is really high. It's somewhere kind of 85%, 90% or so.

Speaker 2

There are still kids who are non responders to MiSight, Right. You give them the lens, they wear the lens. We've seen that in the clinical data and we see it in the real world application where some kids, For whatever reason, continue to have their myopia progress at the same rate. I mentioned last call, we have a lot Clinical work going on. We have 8 products in R and D right now, specifically associated with this.

Speaker 2

And some of those are addressing the non responders right now, so that we can come out With some additional products to try to address everybody. But, yes, I mean, it's something like 9 and 10 kids are staying in the product. It's pretty High level retainage.

Speaker 10

And then just a follow-up on GLS. When you mentioned, Al, just the opportunity On drug development, a few thousand trials. And just how does that play out for that business just when you think about clinicals versus When these products go commercial, like how does that revenue opportunity sort of shape up? Thanks.

Speaker 2

Yes. It's really interesting. There's enough clinicals out there and some of them are they're not Phase 1, right? I mean, I think the one on kidneys is an example, I think is Or livers is like stage 4. There's some real work being done there on the clinical side of things for regenerative medicine.

Speaker 2

And the best stem cells to use Are the core tissue stem cells. You don't have to use those, but those are the best. And just so everyone's aware, right, those are different stem cells Between the core blood that we've always heard about when we've had kids over the years to the stem cells with core tissue. There are legitimate clinicals going on out there that are showing a lot of potential for success. So there's definitely more interest in that.

Speaker 2

When we were doing our diligence and our work, we actually did a bunch of survey work asking people about that, asking women who just had children, Who are currently pregnant, are you going to store your core tissue? And the rates were pretty low. Then when we took them through the clinical side of things, if you will, and said, hey, this is what's going on with regenerative medicine, there's No guarantees here, but this is what's going on. The desire to store their core tissue went to almost 100%. So I think a bunch of it is education.

Speaker 2

If you try to sell that on a DTC basis, you're going to have a hard time. If you're talking to medical professionals And there's people out there and this does not have to be an OBGYN, right? This could be an oncologist. This could be some sort of sports injury professional. There's all kinds of things you could use regenerative medicine for.

Speaker 2

So you're saying, hey, there's no promises here, but there's a lot of really, really strong Clinical work going on, much more so than there is the stem cells associated with cord blood. So, some good exciting stuff going on there. We'll see how it plays out, but I think there's some opportunity

Operator

Thank you. Next question is from the line of Robbie Marcus of JP Morgan. Your line is open.

Speaker 11

Great. Thanks for Two for me. First, you guys, I believe, spent $25,000,000 in 20.20 Incremental on MySite marketing. Do you have that number for 20 '21 and what you're expecting in 2022? And I guess it's probably more better to be inclusive of more of the new product launches.

Speaker 2

No, we don't, Robert, just because that whole thing has kind of mushed itself together, if you will, under So it's not just MiSight, it's all together under Myopia management. And we just we stopped breaking that number out and separating it. It was a decent number, that's for sure this year. We had some pretty decent investments going out in Q4. And it will be a sizable number this year.

Speaker 2

Having said that, we actually get leverage on it year over year, meaning that's part of the reason you're seeing leverage. We put a pretty good infrastructure in place this year. So we're able to start to leverage that a little bit in terms of comparing year over year when it comes to our Myopia management investments.

Speaker 11

Got it. And maybe as a follow-up, I think it'd be helpful if you maybe run through just your thought process On M and A and capital allocation, the Generate deal is growth dilutive to the overall business, accretive to SI, but dilutive to the overall business. So maybe just how you're thinking about deals, how you think about growth rates Versus return on invested capital, what kind of metrics you're looking at? And how you're thinking about priorities for cash going forward? Thanks.

Speaker 2

Yes. And I guess to start, I mean, I certainly personally do not believe that the Generate deal is going to be diluted to our consolidated growth rate, just to be clear. I do think that based on their history Based on where I see the market going, that's probably a 4% to 6% kind of grower and that's what we talked about. But we have multiple areas To drive that growth rate higher. We have some new products that we're already talking about right now that we're going to be launching and we have other forms of revenue synergies coming from our sales forces And then international expansion also where there's some faster growth rates out there.

Speaker 2

So I am optimistic about our ability to drive growth. Now it's pretty close Right now, I mean, 4% to 6% is not bad, that's for sure, especially on annuity sale and very high cash flow product with strong margin. So That's the other side of this, right? I mean, because at the end of the day, we still look at this stuff and say, okay, well, what makes sense from an acquisition We have a tendency to really focus on traditional discounted cash flow models. We're very serious And we focus on that and we try to be very intense about the numbers that are going in that and sure we're getting a sufficient return on that.

Speaker 2

We do that a little bit more than we would do like ROIC and Some of that kind of stuff because of the nature of our business, right, strong cash flow, growth business, so on and so forth. So the other thing I would add on that is strategic deals. I've talked about that in the past. If we could find strategic acquisitions that meet the financial metrics that can drive value in this business, then we're going to look at doing those And this one kind of checks all those boxes.

Operator

Thank you. Next question from the line of Rob Cuthrieu of Cleveland Research. Your line is open.

Speaker 9

Hi, good afternoon. Thanks for taking my questions. Just first on the Q1 guidance, Understand the FX headwind in the $3 to $3.10 EPS. But wondering if you've seen any change in top line trends here in November, just given the 4th wave in Europe or any other change in momentum in either business?

Speaker 2

No, November was a good month.

Speaker 9

Okay. And I guess more strategically then, Al, in the past, you've talked about not wanting to change investment pacing or strategy given FX headwinds. Clearly, right now with the 7 point headwind next year, it's materially worse than it's been in the past.

Speaker 2

Be up year over year on a constant currency basis and our guidance shows that on an as reported basis, those gross margins are going to be down year over year. So That frustrates me. And when I look at operating margins and we talk about getting to 30%, we'd be having a nice positive move in operating margins If currency held true. Having said that, we're still running a business that's a long term business. We're looking at 5 years, 10 years long term growth and doing what makes to drive long term growth.

Speaker 2

I want sustainable mid upper single digit growth as a company with margin expansion. We can't jerk the business around because of FX. And I'm not going to play the game where FX is good and then we're going to go invest a whole bunch and then FX That and we're not, right? That's just not how we're going to run the business.

Operator

Next question is from the line of Chris Pasquale of Guggenheim. Your line is open.

Speaker 9

Thanks. Al, I wanted to follow-up on your comment about driving growth from the Generate assets above that mid single digits you get to if you just look at the business today. And in particular, how we should think about the opportunity for geographic expansion? I would think that distance from the patients to facility might be a factor when you're talking about something like So are you going to have to invest in building new storage facilities to get into new markets? And how should we think about the CapEx requirements of this business because historically CSI has not had a lot of CapEx associated with it?

Speaker 2

Yes. The CapEx is really low in this business. The Storage tanks and so forth are cheap. So at the end of the day, you have to have everything else that goes along with a really high quality control systems, Security systems, all that kind of stuff. But the actual CapEx itself is not high.

Speaker 2

When you look at the international Expansion opportunities, let's go to fertility, because that's one I would really highlight. A lot of that gets done with the fertility clinic. You're teaming up with the fertility clinic, because when you're talking about donor eggs and donor sperm, that's usually a fairly quick transaction, Unlike the traditional storage, like we'll obviously do like permanent storage of eggs and sperm, that type of thing. But a lot of that activity aligns itself directly with fertility clinics. And you're using the fertility clinics and working with them, their operations.

Speaker 2

So You just don't get a situation where you have significant CapEx. It's low CapEx. It's really high cash flow in that business.

Speaker 9

Okay. That's helpful. And then, Brian, I'll give you another at bat here too. So we saw CapEx for the core business here come down by about $100,000,000 this past year. Can it go lower in 2022?

Speaker 9

How should we be thinking about the CapEx requirements of The existing Cooper business and is this low 200s now a good run rate going forward or do you have more potential to drive that down?

Speaker 3

Thanks, Chris. Yes, I appreciate the question. I know we've given CapEx over the years. And as you know, CapEx is a moving target. It's It's based on timing of projects and milestones and lead time, which getting longer capacity needs demand, things like that.

Speaker 3

Rather than getting into that level of detail, Whatever it is, we'll cover it. I've mentioned, we'll do around $600,000,000 of free cash flow in 2022, which is nice increase over 'twenty one. So, operating cash will be strong and therefore free cash flow will be strong again in 'twenty two.

Operator

Thank you. And there are no further questions at this time. I would like to turn the call over to Al White. Please continue.

Speaker 3

Great. Fantastic. Well, thank you, everyone.

Speaker 2

I appreciate taking the time for the call. And obviously, we're happy to Announced the numbers and we're pretty positive about where we stand as a business. So, I look forward to continue to produce here and

Operator

Thank you. And that concludes today's conference. Thank you everyone for participating. You may now all disconnect.

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Commerce Bancshares Q4 2021
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