Williams Companies Q3 2022 Earnings Call Transcript

Quartr
Provided by Quartr
August 31, 2022

There are 13 speakers on the call.

Operator

Welcome to Cooper Companies Third Quarter 2022 Earnings Conference Call.

Speaker 1

At

Operator

this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. I would now like to hand the conference over to your speaker, Kim Duncan, Vice President, Investor And risk management, you may begin.

Speaker 2

Good afternoon, and welcome to The Cooper Companies Third 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 or trends, product launches, operational initiatives, regulatory submissions and closing or integration of any acquisitions or their anticipated benefits. Forward looking statements depend on assumptions, data or methods that may be incorrect or imprecise are subject to risks and uncertainties.

Speaker 2

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 coopercos.com. Also, as a reminder, the non GAAP financial information we will provide on this Call is provided as a supplement to our GAAP information. We encourage you to consider our results under GAAP as well as non GAAP and refer to the reconciliations Provided in our earnings release, which is available on the Investor Relations section of our website under Quarterly Results. Should you have any additional questions following the call, Please e mail ircooperco.com. And now I'll turn the call over to Al for his opening remarks.

Speaker 3

Thank you, Kim, and welcome everyone to Cooper Companies' 3rd Quarter Conference Call. Let me start by highlighting that this was the 6th consecutive quarter of double digit organic revenue growth for CooperVision And the 7th consecutive quarter of double digit organic revenue for CooperSurgical's fertility business. This impressive performance showcases strength of our teams and the strong demand for our products and services. This momentum continued in August and we're increasing the organic revenue guidance for both CooperVision and Cooper Surgical incorporating our strong Q3 and the strength we're continuing to see. Overall, the challenging macro environment, Including headwinds from currency, inflation and supply chain challenges has negatively impacted profitability, but has not reduced our ability to take share and drive sustainable top line growth.

Speaker 3

Moving to the 3rd quarter results, Consolidated revenues reached an all time high of $843,000,000 with CooperVision posting record revenues of $566,000,000 up 11 organically and CooperSurgical posting record revenues of $277,000,000 up 35% as reported, up 3% organically. Growth was led by our daily silicone hydrogel portfolio and myopia management products for CooperVision And fertility for CooperSurgical, non GAAP earnings per share were $3.19 and we posted record quarterly free cash flow of $217,000,000 For CooperVision and reporting all percentages on an organic basis, Revenue growth was strong and diversified in all product categories, Spheres, torics and multifocals and within all three geographic regions. The Americas was up 7%, EMEA grew 15% and Asia Pac grew 11%. This performance was driven by a number of factors, including new product launches, expanded product ranges, market leading flexibility through our customized offerings, Growth in key accounts and strength in branded products. Regarding product details, daily silicone hydrogel lenses grew 24%, led by great results from both MyDay and Claroty.

Speaker 3

Daily silicones continue to be the main driver of growth for the contact lens industry We offer the broadest portfolio in the market with MyDay and Claroty available on a broad range of Spheres, torics and multifocals. Within this, we're continuing to see especially strong growth for MyDay, including from the very successful rollout of the MyDay multifocal, which is taking share in markets around the world. The feedback from patients remains fantastic and optometrists continue reporting That our breakthrough binocular progressive fitting system is allowing them to fit the lens quickly and accurately. This success is driving a positive halo effect And we remain very optimistic about the future of this brand. Claroty also posted a solid quarter with particular strength noted in Asia Pac.

Speaker 3

And our silicone hydrogel FRP lenses, Biofinity and Avera, reported another solid quarter of 8% growth. Regarding product launches, we remain very active. I'm excited to announce we'll be seeding the market with MyDay Energous over the next several months With a full launch scheduled for early calendar 2023. We've had a lot of requests for the Energous technology in a daily lens And given the success we've had with Biofinity Energous, we're really excited about this opportunity. MyDay Energous will use the same digital zone optics technology as This daily lens is a perfect product for today's digital world and another great example of CooperVision leading with innovation and manufacturing know how.

Speaker 3

And building on this, we'll also be launching an expanded MyDay Toric Parameter range in early fiscal 2023. MyDay already offers the most prescription options in the daily toric market and this expansion will essentially match the leading offerings in the FRP Toric segment, which will be a first for the contact lens industry. All this activity supports a fantastic Mi Day brand and exemplifies CooperVision's focus on offering practitioners a wide variety of market leading, technologically superior products. Meanwhile, we're expanding availability of Clarity around the world, which will further strengthen relationships with customers using store brands. And I'm also happy to report that we've recently increased production of Biofinity, including made to order extended range torics And Biofinity Toric Multifocals.

Speaker 3

Demand continues to exceed supply on these products, which has caused supply disruptions, so adding capacity is great news. Overall, these products and technologies improve how eye care professionals deliver clinical care and it's allowing us to lead a defining standard of care, a core component of our ongoing share gains. Moving to Myopia Management, another exciting area where we're a market leader. We posted revenues of $24,000,000 up 42%, including MiSight up 109%. Our growth trajectory remains strong with the main challenge being in China where all contact lens sales including MiSight and OrthoK products have experienced difficulties due to ongoing COVID restrictions.

Speaker 3

Outside of China, MiSight is performing really well, Backed by Xtensys 7 year clinical data and FDA approval and we're seeing strength with key accounts and private practitioners around the world. We're also seeing a positive halo effect with customers selling MiSight accelerating their use of other CooperVision lenses. For Sightglass Myopia Management Glasses, our JV relationship with Eslora Luxottica is going well and the team continues to make progress. In the U. S, we're finalizing the submission of the 3 year clinical data and expect to submit it to the FDA in September.

Speaker 3

As a reminder, the only FDA approved Myopia management product on the market in the U. S. Is MiSight, so obtaining approval for glasses has the potential to really propel the Myopia management field forward. To finish on CooperVision, the contact lens market continues to perform exceptionally well With estimated growth of 8% in calendar Q2. Although COVID related challenges remain, including here in the U.

Speaker 3

S. Where back to school eye exam demand is exceeding exam capacity, the many long term growth drivers of the industry remain intact. This starts with a large macro growth trend that roughly 1 third of the world is myopic today and that is expected to increase to 50% by 2,050. This is driven by heightened screen time among other factors. Additionally, the shift to silicone hydrogel dailies remains strong.

Speaker 3

The penetration of higher value products such as torics and multifocals is growing, the number of wearers is growing and we're seeing price increases. We expect global growth to remain healthy and believe we'll remain a leader with our robust product portfolio, ongoing product launches, fast growing myopia management business and leading new fit data. And speaking of data, I'm proud to say calendar Q2 U. S. Stats Showed CooperVision was the number one company for new wearers and the only manufacturer to grow share in all three daily categories: Moving to CooperSurgical, we posted a solid quarter led by fertility, Which reported sales of $112,000,000 up 13% organically.

Speaker 3

As I mentioned earlier, this was the 7th consecutive quarter of double digit organic growth, So a big congratulations to that team. Success was seen throughout the product portfolio and around the world with particular strength noted in consumables with products like media, pipettes, needles and catheters doing well. Consumables are a core part of our fertility business and an excellent indicator of future growth. So We remain in great shape to continue delivering strong results. Regarding the broader fertility market, The fundamentals behind the industry's growth remain very healthy.

Speaker 3

There are many drivers, but women delaying childbirth is a primary factor As fertility challenges start increasing around the age of 30 with a more pronounced negative impact starting at 35. It's now estimated that roughly 15% of reproductive age couples worldwide have fertility challenges and over 750,000 babies are born annually through fertility assisted measures and these numbers are growing. Regarding Cooper Surgical's positioning, we estimate the portion of the market we compete in is roughly $2,000,000,000 in annual sales And that it will grow in the 5% to 10% range for many years to come. In addition to increasing maternal age, other drivers include improving access to treatment, Increasing patient awareness, growth in the number of fertility clinics, improved product offerings such as donor activity and cryopreservation services and technology improvements for both male and female infertility challenges. Given the momentum of the industry and the diversity of factors driving growth, Fertility is certainly an exciting market to be in.

Speaker 3

Moving to office and surgical products, which includes OBGYN Medical Devices, PARAGARD and stem cell storage, we posted sales of $165,000,000 up 36%, but down 3% organically. OBGYN Medical Device sales were negatively impacted by heightened back orders due to supply chain challenges. We've seen good demand And positive signs in our supply chain to start this quarter, so we expect healthy growth in fiscal Q4. PARAGARD was down 7% as expected due to a difficult comp of last year's price increase and related buying activity, But we expect nice growth in Q4 with an easier comp, improving patient flow and an increasing patient focus on the most efficacious forms of birth control, including 99% effective IUDs such as PARAGARD. Lastly, our stem cell storage business that we entered with the Generate acquisition this past December Grew 1%.

Speaker 3

This was in line with expectations against the difficult comp from prior to our purchase of the business. To wrap up on CooperSurgical, fertility remains strong. The other parts of the business are making progress and the integration activity is going well. We expect a strong finish to this year and believe we're in an excellent position to deliver long term mid single digit growth. To conclude, we operate in recession resistant industries with strong macro growth trends, but we're not immune to supply chain challenges and currency is having a material impact on our as reported results.

Speaker 3

Having said that, our core business fundamentals are excellent. We're taking market share, we're leveraging where we can, we're taking price. We'll remain extremely focused on the challenges facing us and we'll be proactive and we will proactively manage operations while maintaining a focus on delivering long term shareholder value. And with that, I'll turn the call over to Brian to discuss

Speaker 4

Thank you, Al, and good afternoon, everyone. Most of my commentary will be on a non GAAP basis, so please to our earnings release for a reconciliation of GAAP to non GAAP results. 3rd quarter consolidated revenues were 843,000,000 up 10% or up 9% organically. Consolidated gross margin was 66.1%, Down 220 basis points from last year, driven primarily by currency. Operating expenses grew 13% and were 42.7 revenues primarily as a result of the acquisition of Generate Life Sciences.

Speaker 4

Consolidated operating margin was 23.4%. Within these results, currency is having a significant impact negative impact along with supply chain and inflationary pressures. We raised prices to offset some of this and have additional price increases coming and we'll continue to work diligently controlling costs. Moving below the line, interest expense significantly increased year over year to $17,000,000 with higher rates And debt balance is driving a large year over year increase. The effective tax rate was 10.2% And non GAAP EPS was $3.19 with roughly 49,600,000 average shares outstanding.

Speaker 4

Year over year FX negatively impacted earnings by $0.67 in the quarter, which was $0.10 worse that we forecasted at the time of our last earnings call. As with last quarter, a large part of the $0.10 was attributable to the remeasurement of foreign currency based intercompany trade receivables, which are recognized in other income and expense. In order to reduce this variability moving forward, we've made moves, including closing out certain non functional exposures and improving our natural and synthetic hedge positions. Moving forward, we believe these efforts will do a better job mitigating the impact of FX Gains or losses that occur below the operating income line. Returning to the quarter, free cash was extremely strong at $217,000,000 and we decreased net debt by $218,000,000 to $2,640,000,000 This reduced leverage to 2.44 times, which lowered the borrowing rate on our long term credit facility Pricing grids by 25 basis points.

Speaker 4

As a reminder, dollars 1,000,000,000 of our debt is fixed to 2025, with the remaining amount floating. Moving to guidance. We are increasing the full year organic revenue growth ranges For CooperVision and CooperSurgical to include our strong Q3 results and the strength we're seeing as we enter fiscal Q4. For EPS, we're updating guidance to reflect the negative impact of currency and interest rates, offset slightly by better operational performance. Specific to fiscal Q4, The consolidated revenue guidance range is $830,000,000 to $850,000,000 up 9% to 11% organically.

Speaker 4

With CooperVision revenues of $554,000,000 to $565,000,000 up 8 to 10% organically and CooperSurgical Revenues of $276,000,000 to 285,000,000 of 10% to 15% organically. Non GAAP EPS is expected to be in the range of $3.05 to $3.20 based on a roughly 13.5 effective tax rate and roughly $22,000,000 of interest expense, which includes an assumption for a 75 basis point increase in September. Regarding currency, we're now forecasting the year over year negative impact in Q4 to be roughly An 8% headwind to revenues and a 20% headwind to EPS. For fiscal 2023, we won't be providing detailed guidance, but let me provide some high level direction. Assuming currency rates remain similar to where they are today, interest expense increases to around $85,000,000 due to multiple rate hikes, Our effective tax rate increases to roughly 15% and the macroeconomic environment remains challenging.

Speaker 4

We expect to report low single digit year over year non GAAP EPS growth. These expectations do not include the pending acquisition of Koch Medical's reproductive health business. Lastly, as it relates to our pending acquisition of Coke, that transaction is still pending regulatory approval. We are currently exploring different options to close the transaction, including the potential sale of certain Cook assets in the U. S.

Speaker 4

And abroad. Given the process and necessary approvals, the timeline is tough to estimate, but we're hoping to close the transaction by June 30, of 2023. And with that, I'll hand it back to the operator for questions.

Operator

Thank We ask that you limit yourself to 1 question and one follow-up. Please stand by while we compile the Q and A roster. Our first question comes from the line of Jason Bednar with Piper Sandler. Your line is open.

Speaker 5

Thanks. Good afternoon. Thanks for taking the questions. Congrats on the strong organic growth here in the period. Maybe picking up on the real time commentary you provided there, Al, you mentioned strong growth for the business continuing into August.

Speaker 5

Just wanted to check, are you suggesting CVI and fertility both continue to grow at a double digit pace? And then you also suggested Glen's demand is exceeding capacity with respect to office visits. It's a fortunate problem, but do you have a sense, is this a function of staffing shortages or Is demand around back to school simply really strong and above what's normal for the season?

Speaker 3

Yes. That second one, the back to school demand is strong. We've definitely seen an increase on that and there's some commentary of other people. I think National Vision Talked about it on their call. It comes down to staffing shortages and really strong demand.

Speaker 3

So that's putting pressure on the optometry community, whether it's retailers or independent optometrists to meet all that demand. So That's a challenge right now. It's a good challenge, right? But it's still a challenge that the industry needs to work through over the coming months. With respect to August, I won't give numbers on August, but yes, CooperVision and CooperSurgical including fertility, are both having good August.

Speaker 5

All right. That's helpful. And I hear the commentary on MySight in China just probably got up to a little bit slower start with the lockdowns there. But now that you're into July August, things around medtech seem to have Started to recover in China. I mean, can you talk about uptake of the lens in that market compared to other regions where MiSight has been available?

Speaker 5

Are you seeing the sales and education process relatively shorter in that market? Just would love any color there. Thank you.

Speaker 3

Yes. So, we have seen an uptake, if you will, in MiSight in the month of August certainly and including in China where we've seen Thanks, losing a little bit there. So positive news on that. The uptake of that product and success of that product is moving faster than we've And most other markets around the world. So certainly positive signs there.

Speaker 3

And fingers crossed, we're now on a better path, right? That's really the thing that impacted our numbers. It's really been China. That's, I don't know, 99% or 100% of what's impacted those numbers.

Speaker 6

Got it. Thank you.

Operator

Thank you. Please standby for our next question. Our next question comes from the line of Larry Biegelsen with Wells Fargo. Your line is open.

Speaker 7

Good afternoon. Thanks for taking the question. Brian, thanks so much for the color on fiscal 2023. Maybe If I could ask about maybe some of the other assumptions embedded in the low single digit year over year non GAAP EPS growth. Underlying organic sales growth, do you think should we think about that in line with historical 6% to 8% growth organic growth for Cooper?

Speaker 7

Or do you think you can do better? And currency, Brian, I think I heard you talk about interest expense. But currency, right now, we think it's about 3% headwind to sales, dollars 0.80 To EPS, any color on those 2? And I had one follow-up.

Speaker 4

Hi, Larry. Thanks for the questions. Obviously, you've followed us for a very long time. You know our story really well. Long term, We've got right now, we've got all the macroeconomic environment that makes it really challenging to provide specific guidance into the P and L this far in advance.

Speaker 4

We've decided to give a few elements today just to calibrate some people on a few important pieces. Again, I think we want to reiterate that the core fundamentals of our business remain strong. We're raising prices, we're growing share and we're diligently Controlling costs and to leverage where we can. Obviously, long term, we want to drive mid to single high Mid to high single digit revenue growth and leverage the P and L, to grow EPS to low double digits. But right now, it's Too hard to say and we're just not going to go there, this early in the year to talk about next year.

Speaker 4

So Appreciate the questions, Larry, but we'll update that in December.

Speaker 7

Understood. And Al, on Sightglass, And first of all, I didn't hear you reiterate the $90,000,000 to $100,000,000 for Myopia management this year, but it looks achievable based on the $24,000,000 you did in Q3 here. Just want to confirm that. And for Sightglass approval in the U. S, what's your confidence here by calendar year end 2022?

Speaker 7

Did you hit FDA's goals for Axialent and Myopia progression? Thank you.

Speaker 3

Yes. I think on Myopia management globally will probably end up in that $90,000,000 to $95,000,000 range. And the only reason we're not exceed well, Two reasons, I mean, but the primary reason we're not at 100 or a little over 100 ends up being currency. The other one would be obviously China is moving a little bit slower. So I wouldn't take it completely off the table, but I'd probably say 90, 95 is probably a better number that we'll settle in.

Speaker 3

On Sightglass, I won't get into too many specific details on it, but I will say that we're submitting that data and looking forward to talking To the FDA on that and believe we have certainly a reasonable good chance to get approval by calendar year end.

Speaker 6

Thank you.

Operator

Thank you. Please stand by for our next question. Our next question comes from the line of Chris Lee with Stephens. Your line is open.

Speaker 6

Good afternoon and thanks for taking the questions. Can you hear me okay?

Speaker 3

Yes. Hey, Chris.

Speaker 6

I'm sorry, she broke up there a little bit. Congrats on the strong organic growth. Just maybe two quick ones for me. First, when we just think about the new product cadence, The expansion of the MyDay portfolio, could you give us a little bit more color about when That will start to roll out, just to make sure I have that understanding correctly. And then on the surgical side, Maybe wrong here, but I mean off of the fiscal 2Q, I thought we were going to expect a little bit stronger organic growth On the office side with the equipment, it looks like that's still a little bit more supply chain constrained.

Speaker 6

Could you give us some color about what gives you confidence That improves as you go into the fiscal year end? Thank you.

Speaker 3

Sure. Good questions, Chris. And you can see in the guidance we gave for CooperSurgical That we're kind of in that 10% to 15% organic growth range for CooperSurgical in fiscal Q4. So Expecting a really strong quarter. We did have some stuff in Q3 because of supply chain move itself into fiscal Q4.

Speaker 3

As I mentioned, we started off with a good within both businesses, but within CooperSurgical to support that kind of guidance range. So anything that maybe you were thinking, hey, it's going to be a touch Stronger in Q3, you're going to end up I think seeing in Q4 because I would imagine those kind of guidance expectations are a little bit above yours or most people's expectations If we look at CooperVision, yes, the organic growth is really strong there. The business is doing really well. That Team is putting up some impressive results and that's continuing. I think people underestimate the power of our portfolio, the breadth of our portfolio, The strength of our sales and marketing teams and the amount of new products that we're launching, I.

Speaker 3

E. Whether that's Parameter expansion or a new product itself, we're very active and we've been very successful in a lot of segments. And that's going to continue, as I mentioned. As we roll into this next fiscal year, we'll be expanding the parameter range of MyDay again. It's already market leading today.

Speaker 3

It's going to be even better, Up where kind of Biofinity is. So MyDay is kind of turning into a Biofinity daily, if you will, kind of success story, Which is just awesome, amazing. And when you think about Energous, I mean, I'm really excited about that. We launched Biofinity Energous. It did really well for itself.

Speaker 3

The demand around the Energous technology on a daily SiHy has been really strong. We've had to ramp up production considerably within my day to be able to do that. The manufacturing team has done a killer job to get us where we're at today. So we have that product. We're going to start seeding the market here in the Couple of months and look forward to getting that launched in early next year.

Speaker 3

And all that activity along with the other stuff I mentioned, Biofinity and the Things like Biofinity Tor multifocal and extended ranges and so forth are all going to continue to support what I believe is going to be some Stronger than people are probably expecting organic revenue growth.

Speaker 6

Thank you. Appreciate these questions. Yes.

Operator

Thank you. Please stand by for our next question. Our next question comes from the line of Jon Block with Stifel. Your line is open.

Speaker 8

Great, guys. Thanks. Good afternoon. Brian, maybe I'll start with you and just the EPS fiscal 'twenty two EPS midpoint is stepping down by roughly $0.40 I'm not sure if I missed it, but can you bridge the different components? Clearly, FX hit you, Yes, the interest rate coming above what you guys laid out last quarter.

Speaker 8

So maybe just walk us through the headwinds from FX and interest rate. You mentioned a little bit on supply chain as well. And then maybe what the offset was from better than expected Sorry, there's a lot of noise. Better than expected operational growth as the organic came up by roughly 100 bps.

Speaker 4

Yes, sure. Hi, John. So prior guidance midpoint was the 3.19. I gave the FX Unfavorability versus last guidance in my prepared remarks of $0.10 The Q4 FX unfavorability is a 20% headwind To Q4, interest expense is Went up because of the Fed increases?

Speaker 7

John, were you asking about Q4?

Speaker 3

I thought you were asking about 2023.

Speaker 8

No, I'm sorry. I'm asking just to be clear on fiscal 2022, like where were let me just sort of make up some numbers. I mean, relative 2, when you last guided on the Q2 conference call, what did FX and interest rates take you down? You're lower by $0.40 If you go down by $0.50 on FX and interest rates and then make back $0.10 I'm just taking that in a rough way. I'm just trying to get the bridge to get

Speaker 4

So in the full year?

Speaker 8

Yes.

Speaker 4

Okay. Okay. Okay. Yes. So Just starting with FX, I mean, we I talked last quarter about the FX headwind to revenues for the full year being 5%, it's now 6%.

Speaker 4

The headwind to EPS Last quarter was 14%, it's now 17%. As it relates to interest expense, forecasted of 50, 50, 25 and it was 75, 75 and now we're saying 75 again in September, That's about $0.05 right there. So we've adjusted our guidance Primarily tied to just FX and interest expense and some slight operational improvement, which gets you to that midpoint of 1280.

Speaker 8

Okay. I think I'm there. And then Al, maybe I have a longer one for you, but just you brought up the CVI organic growth again. Talk to us on the drivers. Is it new fits?

Speaker 8

It seems like it's certainly some incremental price. What do we think about price in fiscal 2023? Does that have to step back down relative to 42? And then one last one on my side, we just picked up Some chatter that you might have rolled out a rebate program very recently. Is that correct?

Speaker 8

And If so, is that just a year 1 rebate for Newwear or is that also arguably year 2 years already? Yes.

Speaker 3

On my side, John, I think what you're probably referring to is back to school promotional activity. So Yes, I mean, the back to school demand has been very strong and we've seen that demand on the optometry community. As part of that, we were Or are running promotional activity from MiSight. So I'm pretty confident that's what you're probably seeing out there. If we look at price, yes, we took price earlier this year and then we took price again this summer.

Speaker 3

We're looking at additional price increases Right now and in the next year or so, I think if everything holds as it is with the economy and inflationary pressures and So forth, you'll see incremental price increases from us. 2023 should still be a good growth year for us. We still have a lot of the underlying factors that are driving growth of the entire marketplace and our growth continuing. Now, we're gaining wares. So when you look at the FIT data, as I mentioned, we're just doing really well.

Speaker 3

We're number 1 on FIT data. So when it comes To winning the new wearerous coming in and winning the new fits, we're doing really well in that space. And I think that as we continue to roll products out, launch Some of these new products and improved availability of products will continue to do well from a new fit perspective. And when you combine that With some price, I think you end up with another pretty good year next year, frankly, for the entire marketplace and us included.

Speaker 8

Helpful. Thanks, guys.

Operator

Thank you. Please stand by for our next question. As a reminder, ladies and gentlemen, We ask that you limit yourself to one question and one follow-up. Our next question comes from the line of Joanne Wuenschen with Citi. Your line is open.

Speaker 9

Good evening and thank you for taking the questions. I'm curious about a couple of things. You're talking about a price increase earlier this year, And second one, a third one that's being happening now and then a 4th one. Can you quantify how much the price increases are? And then are those sort of like for like products or are they reflective of new product launches such as the Energous by Affinity family that's going out the door?

Speaker 3

Yes. I won't quantify, Joanne, but there's different price increases happening on different products at different points around the world. Not only that, you're actually seeing some stuff in terms of like freight surcharges and so forth offset some of those increases. I mean the one, I think most recently that we took a few months ago was Biofinity, but we had other increases to start the year. You're right that MyDay Energous is certainly being launched or will be launched at a price premium, which will be another quote unquote increase as you will.

Speaker 3

And then we'll look at other opportunities as we move through the end of this year and certainly into next year.

Speaker 9

And my second question is, I'm curious about your source for the Newfit share. And is that a new number one spot or is that a continued number one spot?

Speaker 3

That is a continued number one spot.

Operator

On the source? A

Speaker 3

variety of areas. It would really depend on what product you're Talking about, I mean, some of them are more dramatic than others. As an example, MyDay multifocal is doing really well and it's picking up from a number of other multifocal Companies and then it's also picking up new multifocals wearers who are coming into the market. New wearers and I'm talking about new wearers, the new 15 year old, 16 year old, year old who enters the marketplace. We're doing really well there with MyDay and Claroty.

Speaker 3

We don't have the same opportunity of Trade up, as you know, as some of our competitors do in terms of them shifting from like an old traditional, if you will, hydrogel daily lens to a new silicone And getting the trade up benefit of that, we don't have as much of that. So when you look at our growth, it ends up coming from those new wearers. And it's really a variety of different areas In different spots around the world.

Operator

Excellent. Thank you. Yes. Thank you. Please stand by for our next question.

Operator

Our next question comes from the line of Matt Mishan with KeyBanc. Your line is

Speaker 10

Hey, good afternoon. Thank you for taking the questions. Hey, I know you guys have done some amazing things around the kind of resiliency and power supply down in Puerto Rico. Have you incorporated some assumptions for increased power costs in the UK and Hungary into the forward outlook? And How should we think about the manufacturing in those regions and some of the difficulty that maybe this winter?

Speaker 3

Yes, we have incorporated that. That was built into Brian's commentary when he was talking about next year's numbers and Kind of ongoing challenges with respect to the macro economy, if you will.

Speaker 10

Okay, excellent. And then I know some of your competitors have had some supply chain issues. How much of a benefit do you think you're getting from some of those From some of those peers, and how sticky do you think those are?

Speaker 3

I would say very little benefit. In the contact lens industry, so much of it still goes around to the prescription itself, right? You go get a script and you buy. So if someone's having supply chain issues, Their wearer base generally extends their lenses or they wear their glasses or whatever in order to get those products. You have to have Supply chain challenges of a decent magnitude that lasts a while before you really start seeing changing fitting behavior.

Speaker 3

So I don't think very much right now. I would change that answer if those kind of supply chain difficulties Stay at high levels and go in an extended period of time, but I don't know. But as of now, I would say very little.

Speaker 10

All right. Thank you.

Operator

Thank you. Please stand by for our next question. Our next question comes from the line of Jeff Johnson with Baird. Your line is open.

Speaker 1

Thank Good afternoon, guys. Hey, Al, I know you said you didn't want to quantify the price increases.

Speaker 6

Yes.

Speaker 1

See if this is better, Al. I don't know, it sounds like I'm having the same problem John Block was having. Can you hear me okay?

Speaker 3

Yes, we can hear you fine. Yes.

Speaker 1

Thank you. So I know you won't quantify the price increases, but our checks would say maybe 1%, 1.5% earlier this year, another 1%, 1.5 In August, but it's hard to know what you're contracting in that. I mean, are those about the ranges we should be thinking about maybe 2, 2.5 points total net so far this year on the CDI side?

Speaker 3

Yes, I think that's probably fair. And we had talked about this, I think, in last quarter, the quarter before, Right. Some of those price increases for us move in a little bit slower than others. Some of the guys have a lot on list Right. So when they raise their list price, they'll get a benefit from those price increases relatively quickly.

Speaker 3

We have a lot under contract, Especially with respect to anything that we're doing about store brands and that kind of stuff. So some of those price increases for us have a tendency to roll in Over a longer period of time as those contracts need to re up. But I think the magnitude of what you're talking about right now Somewhat in the ballpark, this slash lower.

Speaker 1

Yes. Okay. Okay. Thank you. And then maybe two follow ups on that.

Speaker 1

One, can you just remind me the surcharges in that, Transport costs and some distribution costs and that's starting to come down a little bit. Do those fall into revenue or those are the And would you expect to keep those surcharges in place much longer or just how to think about that 1? And 2, You mentioned MiSight, some back to school activity there on the promotion side. We were finding in our survey work maybe a little bit of lower Sell in price to docs as well on MiSight. Have you changed kind of your sell in price, not just your sell out?

Speaker 3

No. So we haven't changed our pricing in terms of our sell in. We've held pricing. We are trying to do some other stuff, right? When you think about the most successful referral source, if you will, or person for us to market the product Is anyone who's used MySite.

Speaker 3

The success rate has been really, really positive. So those parents who are positive On the product or telling other people, right? So we're trying to offer some promotional campaigns for instance for them. Hey, your kids now on their 2nd year or their 3rd year wearing MiSight, We'll give you a discount for everybody who you refer in who comes to MiSight, that type of thing, promotional activity for a brand new wearer coming into MiSight around Back to school. So there is some activity that we're doing, Jeff, to be fair in terms of that pricing.

Speaker 3

There's been a few highlights about the pricing being a little high. So if you will, we haven't taken the list price down, but we are running promotional activity, especially with the heavy back to school season here. On the other side of things, on the freight, there's still freight is still a tough one, I got to tell you. Yes, I would say Things are getting a little bit better, but everyone still has their challenges there. I think that my gut tells me that those changes are just Permanent price increases, if you will, and I think they all go through revenues, don't they?

Speaker 3

Yes, freight revenue.

Speaker 4

I mean, the only thing I would add to that is, As we are having difficulty meeting demand, it does force us to fly more than we'd like to and we're not able to take advantage of the ocean freight. So I mean you're seeing freight charges go up all across the board. We're doing whatever we can to try to manage that by raising surcharges and so forth. But There's still inefficiency in a way that we're having to ship to our customers and you're seeing that as a detriment to both intercompany, but also freight out in distribution.

Speaker 1

Yes, that makes sense. All right. Thanks guys.

Operator

Thank you. Please stand by for our next question. Our next question comes from the line of Robbie Marcus with JPMorgan. Your line is open.

Speaker 11

Hi. This is actually Lily on for Robbie. Thanks for taking the question. So operating margin came in lower than what we were thinking and pretty significantly lower than a year ago today. So is there any way to quantify how much of that is FX headwinds versus operational challenges?

Speaker 4

Hi, Lily. Yes, I'll take

Speaker 5

that one.

Speaker 4

I think operating margins for us came in more or less where we expected. FX is just brutally Killing our P and L and you're seeing that in the Q3. PARAGARD was down versus last year's Q3. That's a high gross margin product. So that impacted margins in the flow through.

Speaker 4

We also had inefficiencies within CooperVision, which we knew about going into the 3rd quarter Tied to shutting down lines in fiscal Q1 that we always do to refurbish and Well, we usually do. And so some of the activity we knew and we knew about, but it's really a story about FX.

Speaker 11

Got it. That's helpful. And just as a follow-up, where are new fits Relative to normal levels, are there any geographies that stand out as lagging or being above pre pandemic levels right now? Thanks so much.

Speaker 3

Yes. It's really interesting going through that data because even the U. S. Data we just got shows that new fits are not back To pre COVID levels, and there's different data at different spots kind of around the world being as much as 5%, 10% below Pre COVID level. So if you look at the strength of the revenue numbers and where the industry is today, then you go, man, we still have 5% or 10% of fits to Get back in the market just to get the pre COVID levels knowing that wearers are also increasing, right?

Speaker 3

You can get kind of excited about the Potential opportunities there over the coming years. I happen to believe that a lot of those wearers are getting fit in different ways and maybe not getting fully captured in that data like Through things like telehealth and so forth, so that people are able to get prescriptions renewed, are able to buy their lenses in different ways. But To be fair, the data is showing that we're not back to pre COVID levels in terms of this.

Operator

Got it. Thank you. Thank you. Please stand by for our next question. Our next question comes from the line of Steve Leitman with Oppenheimer.

Operator

Your line is open.

Speaker 7

Thank you. Hi, Al and Brian. Al, just wanted to get your confidence on PARAGARD improvements from here Beyond the easier comps, what are you seeing on the ground there for PARAGARD? And what do you see as potential drivers for improvement ahead?

Speaker 3

Yes. On PARAGARD, we had a tough quarter, as we said, this quarter because of the comp. We'll have a good Q4. We started off Well here in August. As a matter of fact, we finished strong at the end of July with PARAGARD.

Speaker 3

So with Roe v. Wade and what's happened, Women are out there and they're a little bit more concerned about things for obvious reasons. We are seeing that Women are looking at, okay, well, what's the most efficacious form of birth control? What direction should I go here? So we have seen an increase in interest And Lark's and, you've seen that in some of the numbers here more recently.

Speaker 3

So we'll see if that trend holds. If it does, You'll continue to see outperformance in IUD. So I would say that the kind of Roe v. Wade Outcome, if you will, I was saying that it was a neutral to a modest positive to us. I would probably upgrade that to saying that that's turning out to be a modest positive to our business.

Speaker 3

We'll see how PARAGARD goes, but I would envision a decent quarter in Q4, that's for sure.

Speaker 7

Okay, got it. And Brian, You and Al talked about ramping production, I think across a number of lines in CVI. What is your outlook for CapEx spend in This year and directionally, are you anticipating next year to be up, down, flat versus this year at CapEx?

Speaker 4

Yes. Hi, Steve. Good question. Yes. So CapEx ticked up

Speaker 6

a little bit in the

Speaker 4

Q3. Yes, Al, in his prepared remarks talked about how we put some lines in place and We're doing whatever we can as quickly as we can to ramp up capacity. It's hugely difficult to increase capacity quickly And we're having a tough time meeting demand. So I would expect I'm expecting a pretty high CapEx number in the 4th quarter. Still free cash flow being strong for the full year, but that trend kind of continuing where next year CapEx continues To go higher, as we continue to put more capacity in place to try to meet demand.

Speaker 6

Got it. Thank you, guys.

Operator

Thank you. Please standby for our next question. Our next question comes from the line of David Saxon with Needham. Your line is open.

Speaker 12

Yes. Hi. Good afternoon. Thanks for taking the questions. Maybe just a follow-up on PARAGARD.

Speaker 12

I think last quarter you noted Softness in the market, so but it sounds like you have a fair bit of confidence in it returning to growth here in 4th. So is that market dynamic kind of past us at this point? And then just on pricing, I know you took price, I guess you're going to be laughing at soon, but any opportunity to take price again with PARAGARD?

Speaker 3

Yes. So a couple of things on PARAGARD. We did see office visits down, OBGYN office visits down, And that was due to, COVID related staffing challenges, right? We've seen some of that same stuff obviously in optometry offices and I'm sure everyone has seen that in other areas of the world. But we definitely saw a negative Active patient traffic, especially with respect to things like general OBGYN visits and contraception OBGYN visits During the summer months, after the Roe v.

Speaker 3

Wade situation and a little bit of improvement in terms of capacity, you had Bunch more attention, if you will, focused on the matter. And we've seen that attention be a benefit to PARAGARD because PARAGARD is, I mean, it's highly efficacious, 99% plus efficacious. So if you don't want to get pregnant, get an IUD. And as people look at that, become more aware of that, obviously PARAGARD is the only non hormonal IUD in the marketplace. We've seen An increase in terms of interest in the product, people inquiring about it, people searching for it.

Speaker 3

Our team, I think, has really done a nice job trying to capitalize on that activity. So we saw that improvement starting in July. We've seen it continue here through August. And yes, I think you'll see growth certainly in Q4. TBD on price increases, one of our competitors did a price increase or is doing one here.

Speaker 3

We'll evaluate another one and Take price if we can, if it's appropriate.

Speaker 12

Okay. That's helpful. And then on Myopia Management at 90 Sorry, 90 to 95, wherever it shakes out. Is that portfolio going to be profitable? And if not, How should we think about when that starts to contribute to earnings?

Speaker 12

Thanks so much.

Speaker 3

Yes. I would call that somewhere around the kind of breakeven this year. Let's go with let's just say it's Breakeven and then it will shift to being profitable next year. We've built a lot of infrastructure there, in terms of Myopia management support People and so forth, we'll start to leverage that infrastructure as we get into next year. So, yes, that's an operating margin drag certainly right now.

Speaker 3

It gets better next year. And then hopefully, If it continues to grow at the pace it's growing and what we're seeing, we'll continue to improve that operating margin. Hopefully, at some point in the future, get that to be operating margin Positive, especially with the gross margins in that business.

Speaker 12

Got it. Thank you.

Operator

Thank you. I'm not showing any further questions. I would now like to turn the call back over to Al White for closing remarks.

Speaker 3

Great. Thank you. Thank you, everyone. Again, strength in the business and the core fundamentals are driving What's making us optimistic, I mean, the one thing Brian touched on it is currency has been painful for us. It's been pretty brutal.

Speaker 3

We're working through it the best that we can and we're taking the measures that we can take. But if we exclude currency and really look at the fundamentals of the business, Whether it's CooperVision or it's CooperSurgical, especially the fertility business, things are strong and we believe they're going to remain strong. We Started Q4 off well and we're optimistic about finishing this quarter well and having a good year next year. So appreciate everyone's interest. Look forward to seeing people.

Speaker 3

Hopefully, some of you at the Wells Conference with Larry here, I think next week and look forward to speaking to everyone else during the quarter or on the Q4 call. Thanks.

Operator

Ladies and gentlemen, this concludes today's conference call. You may now

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Earnings Conference Call
Williams Companies Q3 2022
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