Omnicom Group Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
December 7, 2023

There are 13 speakers on the call.

Operator

Thank you for standing by, and welcome to the Q4 2023 Cooper Companies Earnings Conference Call. I would now like to welcome Ken Duncan, VP, Investor Relations and Risk Management to begin the call. Kim, over to you.

Speaker 1

Awesome. Thank you. Good afternoon, and welcome to Cooper Companies' 4th quarter and full year 2023 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.

Speaker 1

Before we begin, I'd like to remind you that this conference call contains forward looking statements, including revenue, EPS, operating income, tax rate and other financial guidance, a pending stock split, expected revenue growth and accretion related to our recent acquisition, Strategic and Operational Initiatives, Market and Regulatory Conditions and Trends, and Product Launches and Demand. Forward looking statements depend on assumptions, data or methods that may be incorrect or imprecise and are subject to risks and uncertainties. Events that could cause our actual results and future actions of the company to differ materially from those described in forward looking statements are set forth under the caption forward looking statements in today's earnings release and are described in our SEC filings, including Cooper's Form 10 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 under 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 Materials.

Speaker 1

Should you have any additional questions following the call, please 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 Company's 2023 fiscal Q4 year end conference call. This was a fantastic year for Cooper as we finished with all time record revenues of almost 3,600,000,000 And we closed the year on a really positive note with CooperVision posting its 11th consecutive quarter of double digit organic growth and CooperSurgical posting record quarterly revenues driven by our fertility business posting its 12th consecutive quarter of double digit organic growth. Truly tremendous accomplishments by phenomenal teams. We've now entered fiscal 2024 with a lot of excitement and focus to our long range strategic objectives, including gaining market share, driving profitability, launching innovative products and services and maintaining our fantastic Cooper culture. Moving to the quarterly numbers, consolidated revenues were 927 and Cooperservicon.

Speaker 2

Year over year, CooperVision posted revenues of $623,000,000 up 11% organically and CooperSurgical posted revenues of $304,000,000 up 7% organically. CooperVision's growth was led by in our daily silicone hydrogel portfolio and CooperSurgical's growth was led by a very strong quarter in our fertility business. Margins improved and profits were solid with non GAAP earnings per share of $3.47 up 26%. For CooperVision and reporting all percentages on an organic basis, revenue growth was strong and diversified. The Americas grew 12%, EMEA grew 9% and Asia Pac grew 10%, with all three regions having success with our innovative products, market leading flexibility and growth in key accounts.

Speaker 2

Within categories, torics grew 15%, multifocals grew 18%, single use SPEAR grew 7% and non single use Sphero Other grew 4%. Within modalities, daily silicone hydrogel lenses grew 19% and our silicone hydrogel monthly and 2 week lenses Biofinity and Avera vitality grew 8%. Turning to products and starting with our high growth daily silicone hydrogel portfolio. We continue to outperform expectations with MyDay. We just passed the 2 year anniversary of the MyDay multifocal launch and the pace of growth on this product remains outstanding.

Speaker 2

The unique combination of an advanced multifocal design paired with an easy fitting system has resulted in very high satisfaction levels, including a 98% fit success rate in 2 pairs or less. This makes it a win for the doctor and the patient and it shows in our results and momentum. From a personal perspective, as I shared last quarter, I now wear my day multifocals and I continue to be amazed at how easy the lenses are to insert and remove and how fantastic my distance and near vision are. And I put these lenses in as soon as I wake up and I don't take them out until bedtime. I may be biased, but I truly believe these are the best multifocal lenses on the market and our sales growth certainly supports that.

Speaker 2

Moving to MyDay Toric, demand remains very strong following the rollout of our parameter expansion across North America and Europe. This success is due to the product's market leading Toric design, which mirrors Biofinity's design and our industry leading SKU range. And MyDay Energous, our most recent launch continues to impress eye care practitioners and patients with its innovative digital boost technology designed specifically for today's digital lifestyle. The lenses deliver fantastic comfort and sales are exceeding our expectations. And I'm proud to say that MyDay Energous was recently voted the most innovative product of 2023 by U.

Speaker 2

S. Eye Care Practitioners, an awesome accomplishment and a great recognition for our team. With the success of these MyDay products, we certainly look forward to rolling them out in additional markets around the world as capacity allows. And while MyDay continues to be our key growth driver in the daily silicone segment, We're continuing to have success with Claroty, which offers a full family of Spears, Torix and Multifocals at a great price point. The initial comfort, excellent handling and price positioning have led clariti to be a lens of choice for new wearers.

Speaker 2

Outside of dailies, demand for our Biofinity family of products remains healthy led by torics and multifocals. And I'm excited to announce we'll be launching our highly Kin, the successful Biofinity Toric Multifocal to several new markets in the coming year in response to extremely strong demand. Avera also had a nice quarter led by Torex. Moving to Myopia Management, we posted revenues of $35,000,000 up 41% with MiSight up 46%. This was another excellent quarter for MiSight powered by growth in the Americas and EMEA, While Asia Pac was flat due to challenges in China.

Speaker 2

As we enter fiscal 2024, we're expecting excellent growth with the positive trends in the Americas and EMEA continuing and Asia Pac returning to growth as the region has hurdled past stocking orders and is already showing improving trends. Additionally, we're continuing to see high retention rates, growing momentum in key accounts and a nice halo effect on our other products. All this adds up to over 250,000 children around the world wearing MySite and momentum being very strong. MiSight remains the 1st and only FDA approved contact lens for myopia control and it's backed by extensive clinical data. This is a crucial differentiator as the proactive management of Myopia becomes standard of care within the eye care community to help reduce the progression of Myopia in children along with reducing the risk of long term eye health problems associated with Myopia such as cataracts, retinal detachment and macular degeneration.

Speaker 2

Meanwhile, our Ortho K franchise had a nice rebound quarter growing 37% year over year. To finish on CooperVision, the contact lens market grew roughly 7% in calendar Q3 with CooperVision taking share growing 10%. We expect the market to remain healthy growing 5% to 7% this coming year supported by the long term macro growth trend of more people needing vision correction. It's estimated that 50% of the global population will have Myopia by the year 2,050, up from roughly 24% today. This is driven by kids spending more time indoors and the related greater use of digital screens among other factors.

Speaker 2

When you combine this with the ongoing shift to silicone hydrogel dailies, the increasing focus on higher value products and higher pricing, We expect many years of solid growth for the industry. Within this, we expect to remain a leader with our innovation, robust product portfolio, ongoing product launches, strength in premium toric and multifocal products, our fast growing myopia management business and our leading new fit data. Moving to CooperSurgical. We posted record revenues of $304,000,000 up 7% organically. This included fertility sales of $121,000,000 up 15% organically, which was our 12th consecutive quarter of double digit organic growth.

Speaker 2

Within this, we saw share gains around the world and throughout our portfolio driven by our market leading products and services including consumables, capital equipment and reproductive genetic testing. We also continued investing in geographic expansion, key accounts and R and D. We're entering fiscal 2024 as one of the fastest growing and most innovative fertility companies in the world. We're developing and launching new products, opening new donor sites, providing extensive training through our centers of excellence, expanding in new and existing geographies, and we're well positioned to continue delivering success given our great team, diverse portfolio and global momentum. For the broader fertility market, the macro growth trends remain intact starting with women delaying childbirth.

Speaker 2

Age is a key factor in contributing to the need for fertility assistance and the median age of a woman's first birth in the U. S. Within several other developed countries is roughly 30 years old and moving higher. Other growth drivers include improving access to treatment, increasing patient awareness, increasing fertility benefits coverage and technology improvements to address both male and female infertility challenges. The World Health Organization data highlights that 1 in 6 people globally are affected by infertility at some point in their lives and given that 1 third of the underlying cause of infertility is women, 1 third is men and 1 third is a combination of the 2 are unknown.

Speaker 2

This is an issue that impacts a lot of people and will continue to do so in the future. Moving to Office and Surgical, we posted sales of 183,000,000 up 3% organically with medical devices growing 3% against a very challenging comp. Within this part of our business, we recently closed the acquisition of several highly strategic products from Coogan Medical. Given the strength of our medical device team and the success we're having in the labor and delivery space where several of these acquired products reside. This will be a great deal for us and I look forward to reporting future results on these products.

Speaker 2

Stem cell storage posted solid growth of 6% and PARAGARD was flat as higher pricing offset declining unit sales. To conclude our CooperSurgical, we take great pride being able to say that every minute somewhere around the world a baby is born using CooperSurgical products. We're making a difference in people's lives and that's part of what makes this business really special for us. Moving to fiscal 2024, Let me provide comments on revenue guidance and Brian will cover the rest of the P and L. We expect CooperVision to post strong results and are guiding to 7% to 9% organic revenue growth for the year.

Speaker 2

The main limiter to this growth is capacity challenges from Newwear demand, especially for MyDay. We expect these capacity constraints to pressure revenues in fiscal Q1, Resulting growth of around 7% for the quarter. We are actively bringing additional capacity online though and expect to report high single digit to double digit growth as we move through the year. For CooperSurgical, we're guiding to full year organic revenue growth of 4% to 6 percent, which includes another year of strength in fertility, low to mid single digit growth in medical devices and stem cell storage and flat to slightly down in PARAGARD due to declining volumes. To conclude, let me say this was a great year for Cooper and we've entered fiscal 2024 with great momentum.

Speaker 2

But none of this is possible without the incredible hard work and dedication of our employees. So a big thank you to the entire Global Cooper team for another incredible year. And now, 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. For the Q4, consolidated revenues were $927,000,000 up 9% as reported and up 9% organically. Consolidated gross margin was 66.7%, up from 65% last year, Driven by better operational performance at both CooperVision and CooperSurgical, along with favorable currency.

Speaker 3

Operating expenses grew 8% improving to 42.3% of revenues as we saw leverage from prior investment activity. Consolidated operating margin improved to 24.4%, up from 22.2%, Led by the strong gross margins and leverage from our operating expenses. Below operating income, interest expense was $26,400,000 and the effective tax rate was slightly higher than guidance at 12.8%. Non GAAP EPS was $3.47 was roughly 49,900,000 average shares outstanding. With respect to FX, It was $0.25 positive year over year for the quarter, which was $0.02 worse than expected in our Q4 guidance.

Speaker 3

Free cash flow was $29,000,000 with CapEx of 145,000,000 Net debt decreased to $2,450,000,000 For the full year 2023, we reported record revenues of $3,600,000,000 up 9% or up 10% organically and non GAAP EPS of $12.81 Within this, consolidated operating income grew 11% on a constant currency basis. To provide additional color on our 4th quarter results. First, we had solid execution with an emphasis on delivering stronger gross margins and leveraging our operating expenses. This focus on delivering a more leveraged P and L is continuing in fiscal 2024. 2nd, we completed a significant amount of infrastructure and integration activity this quarter.

Speaker 3

This puts us in an excellent position to deliver success moving forward, including ramping up capacity and implementing continuous improvement projects. And lastly, we finished the majority of the integration of our Specialty Lens Care unit into our core CooperVision business. This is a great move from a commercial and efficiency perspective, but it did result in a non cash intangible asset impairment charge associated with the discontinuation of certain products, which was a large part of our non GAAP adjustments this quarter. Before moving to guidance, let me mention that we closed the acquisition of Select Cook Medical Assets on November 1. The purchase price was $300,000,000 with $200,000,000 paid at closing and the remaining $100,000,000 to be paid in 2.50 1,000,000 Dollar Annual Installments.

Speaker 3

The acquired assets generated approximately $56,000,000 in trailing 12 month revenue as of September 30, 2023, and we expect growth of 5% to 7% in constant currency this year. Excluding one time charges and yield related amortization, the transaction is expected to be accretive to non GAAP gross and operating margins and accretive to non GAAP earnings per share by approximately $0.20 in fiscal 2024. Moving to guidance, we're guiding to fiscal 2024 consolidated revenues of $3,810,000,000 to 3,880,000,000 up 6% to 8% organically with CooperVision revenues of $2,550,000,000 to $2,600,000,000 up 7% to 9% organically and CooperSurgical Revenues of $1,260,000,000 to $1,280,000,000 up 4% to 6% organically. Non GAAP EPS is expected to be in the range of $13.60 to $14 This assumes roughly $110,000,000 of interest expense, which includes the debt from the assets acquired from Cook Medical and no interest rate changes by the Fed during our fiscal year. For tax, we're still expecting a roughly 15% effective tax rate excluding any discrete items such as stock option exercises.

Speaker 3

For currency, We're using roughly current rates, which results in a year over year FX headwind of roughly 1% to revenues and roughly 5% to earnings. And lastly, the EPS range corresponds to roughly 10% to 13% constant currency OI growth, excluding Koch or 13% to 16% with the Koch acquisition accretion. To wrap up, as announced in our earnings release, our Board has approved a 4 for 1 stock split with an effective date of February 16, 2024. This is in response to many years of strength in our stock and our desire to adjust the price to make ownership more accessible to employees and investors. And lastly, we made the decision to stop paying our de minimis semiannual dividend.

Speaker 3

With that, let me conclude by saying fiscal 2023 was a record year for Cooper, and we're well positioned to deliver solid growth and leverage in fiscal 2024. And now, I'll hand it back to the operator for questions.

Operator

Question please. We'll pause for just a moment to compile any questions. Our first question comes from the line of Jason Bednar with Piper Sandler. Please go ahead.

Speaker 4

Hey, good afternoon. Thanks for taking the questions and congrats on a nice close to the year. Wanted to start first on CVI revenue growth guidance And really connect the discussion on pricing. You're guiding to more share gains here, Alan, Brian. I think growth is like 2 points above the market, at least how you're calling.

Speaker 4

I think you've historically been seeing price gains below peers though. We're hearing you implemented a price increase at the beginning of this month that's at or above peers. So when we think about your CVI growth guidance and you're getting a little bit more aggressive with pricing than you have in the past, but your growth in performance versus the market is similar to where we started fiscal 23. I guess does this imply you're anticipating volume growth to moderate due to those capacity challenges you mentioned? And then maybe just again, sorry for packing a few in here, but can you confirm that you have visibility these capacity challenges Arndt going to be a headwind beyond the current fiscal Q1.

Speaker 2

Sure. Hey, Jason. A couple of things. We're still going to

Speaker 3

put up good growth In

Speaker 2

the Q1 here, I mentioned we think we'll be somewhere about roughly 7%. We are capacity constrained and that we could Grow faster than that if we had more capacity, but a lot of wear demand on that. So we have new lines coming in. We'll progress through the year bringing additional lines on So that we'll be able to continue to report upper single digits or even double digit growth in some quarters. When I look at our guidance of the 7 to 9, I think about price, I'll kind of probably Maybe give it in the context of the market, right?

Speaker 2

Last year, if we look at 23%, the market pricing was about 2% to 3 Cent. We were on the lower end of that. I think if you looked at this year pricing again in the market will probably be 2% to 3%. We'll be at the higher end of that, and that's probably how I would define it. So I wouldn't read too much into a dramatic delta Between our price increases and where I think the market is ultimately going to be, I mean, we did our price increase for some of our pricing at least here earlier in the year than normal.

Speaker 2

We'll see what some of our competitors do with respect to pricing in the coming months.

Speaker 4

Okay. Yes, definitely a high class problem with the capacity challenges and it sounds like the pricing Maybe more in line with peers in the past. But if I want to zoom out one other maybe bigger picture question, Al. And this is a question I get a lot from investors. What's it going to take to get operating margin expansion to come back to the business?

Speaker 4

It's the most common question we get. I think we're now 3 years into really seeing good growth across CVI and Fertility. I guess can you sustain Good top line growth if you moderate some of those investments. I know FX has been a challenge, but I guess will there become a time when you're more willing to commit to Like a multiyear margin expansion plan that could take us back into that 27% to 28% margin range for the business.

Speaker 2

Yes. I guess my response would be that we grew operating income 11% this year on a constant currency basis. That's faster than revenues. Our consolidated guidance this year at the midpoint is 7% and Brian just mentioned that our Driven Successor. So we did it in 2023.

Speaker 2

We're anticipating doing it in 2024 and my belief is you'll continue to see that in the coming years.

Speaker 4

Okay. All right. Fair enough. Thanks so much. Yes.

Operator

Our next question comes from the line of Larry Biegelsen Wizzwells Fargo. Please go ahead.

Speaker 5

Hey, Al, and everyone. Thanks for taking the question. Hey, I just wanted to understand on the last call, you talked about guiding less conservatively at the start of the year. The guidance for fiscal 2024 is I think exactly the same as it was at the start fiscal 2023. The only thing that changed The capacity and any more color on where those capacity constraints are?

Speaker 3

Yes. The capacity constraints are tied to my day.

Speaker 2

So we have continued to win Ken. So we have continued to win wearers in my day at a faster clip than we were anticipating. A lot of that wear growth and growth in my day is coming from torics especially which have a wide SKU range. So that's put some pressure on us. So I would kind of say, hey, the success that we're having again in terms of where growth has driven some of those capacity changes.

Speaker 2

Now we knew it. We saw that stuff. We've been investing in CapEx. You can see that in our CapEx numbers. We have additional manufacturing capacity coming online.

Speaker 2

So we're in good shape. We're just running into kind of a little bit more of a very short term issue here where we'll have a Strong quarter, but maybe not a double digit quarter.

Speaker 5

And is that the reason the guidance is exactly the same where you alluded to it On the Q3 call being a little bit more aggressive to start this year versus last year.

Speaker 2

Yes. If we had more MyDay capacity No. If we have more at MyDay capacity, the guidance range would be higher.

Speaker 5

Okay. And then Brian, Ken. Can you talk about the assumptions in the guidance for gross and operating margin for the full year and the cadence? I thought I heard sales commentary for the cadence, but not margin. And I didn't hear the Myopia management number for fiscal 2024.

Speaker 5

Thank you.

Speaker 3

Yes. Hi, Larry. Currency is a negative for both gross and operating margins next year. But gross margin should be pretty similar to last year, obviously up from a constant currency basis. With respect to operating margins, again, with Currency is a negative, but it will be a little bit better on an as reported basis than last year.

Speaker 3

We're getting operating leverage from OpEx. With respect to our Myopia management range, we Todd, do you want to take that or

Speaker 2

Sure. Yes, we're not going to give guidance range for Myopia Management this year. I mean similar to all of our other products, we're just not to do guidance like we don't do for daily size highs or anything else. I mean, we'll continue to give growth rates and details and so forth, but I'm not going to get into a guidance range. One other thing, Larry, I just want to mention like our usual guidance, if you will put that in quotes usual guidance, and certainly pre COVID was kind of running at the market at 4 to 6 and us 6% to 8%.

Speaker 2

I mean the market at 5% to 7% and 7% to 9% is greater than our kind of pre COVID, if you will, traditional guidance. So I just want to be clear That we are guiding to a stronger market overall and stronger performance from us than we used to guide to at least pre COVID.

Speaker 4

Thank you. Yes.

Operator

Our next question comes from the line of Jeff Johnson with Baird. Please go ahead.

Speaker 6

Yes, thanks. Good evening, guys. Al, just going back to some of the capacity and supply issues, we hear a letter went out in Japan. I'm not sure David did in other markets as well, just on some of those supply constraints. So should we think be thinking about geographically That 7% is going to be most impacted in the Asia Pac region, number 1.

Speaker 6

And number I think over the last couple of years as a lot of contact lens companies you guys included have dealt with a lot of this rebound and strong move to dailies and that which is helping fuel that top line. We've seen some things pop up right on the distribution side, on the warehousing side, some added costs. Ken, you are having to put in some extra lines to kind of hit these demand things, which are good. Can you give us any assurances that this year you don't feel like there's going to be anything that gets uncovered kind of mid year that all of a sudden adds some costs or takes away from some of the earnings that are being guided to for this year? Thanks.

Speaker 2

Yes, yes, great questions. Let me answer that second one first. You are right, we have a lot more volume going through our Supply Chain, if you will, or through our logistics chain. We did a significant amount of that work over the last couple of years. And I take my hat off to our global distribution team.

Speaker 2

They've done an amazing job. I'm happy to say that The vast majority of that activity is getting behind us and I'll use the example I talked about which is our West Henrietta distribution center outside of Rochester, New York. Great team. They're a great group of people. They've done a really nice job.

Speaker 2

That expansion is done. So the risk associated with that kind of activity is I think we're in a really good spot when it comes to our distribution or packaging, labeling, distribution and so forth. And I've got a lot of confidence in the team there. So Happy to say a lot of that work is behind us. On the supply constraints, again, it's my day related.

Speaker 2

From a regional perspective, we'll see how that plays out. I don't want to kind of point to any particular region or tip my hat From a competitive perspective or anything else to anyone. So we'll see how it plays out. I'll certainly obviously give commentary on that on the Q1 quarter. But again, I just want to be clear, we're still expecting a good solid Q1.

Speaker 6

Yes. No, you come up against double digit comp, I get that, so all good there. And then Brian, I guess if I could just pin you down a little bit on the guidance on the EPS guidance. I just want to make sure I Stan. The yen or the pound, the euro, some of those currencies have been kind of in a pretty tight range here over the last few weeks.

Speaker 6

The yen is what has really strengthened quite a bit in just the last week or 2. Obviously, you guys have a pretty big sensitivity to the yen. So when you say you're using current I'm assuming you guys didn't update your guidance this morning as the yen was off or strengthened a couple of 2.5, 3 points. So just are you at 148 on the end, 146 on the end, 144 on the end, 144? I know it's ridiculous to have the single currency, but just The sensitivity is there, so I'd like to know kind of where we're starting the assumptions on that $13.60 to $14 Thanks.

Speaker 3

Hi, Jeff. Yes. I guess what I'll say is, we use roughly current rates, but you're absolutely right. We did not factor in today's currency moves, in particular the yen. So like with guidance, we're initiating the year.

Speaker 3

We always exercise a certain level of prudence and I would say we did that with respect to currency as well.

Speaker 6

Thank you.

Operator

Our next question comes from the line of Jon Block with Stifel. Please go ahead.

Speaker 7

Yes, guys. Great. Thanks for the questions.

Speaker 2

I want to just stick

Speaker 7

with the constraints for a second. And Ali, you always mentioned the challenges on capacity. I think you're always very transparent about it. But you had been seemingly staying ahead of the demand curve unlike some of your competitors. And what recently changed, because I wouldn't think the demand in an industry that's very consistent Kin.

Speaker 7

In terms of the growth rate, can the demand really spikes suddenly in a 6, 8, 10 week timeframe That caused you to be from in front of it to behind it or was it really acute because it's in one particular part of

Speaker 4

the portfolio?

Speaker 7

And then maybe if that's the case, how do you have the confidence that you are able to rectify or reconcile it over the next 2 to 3 months?

Speaker 2

Yes, great question, John. Then in a way, it's not a demand spike, so to speak, as much as it has been consistently strong demand. Remember That when you're talking about the MyDay lines and a lot of our manufacturing lines now, it's still taking us somewhere in the area of 18 months from the time we order that line To the time the line is producing product that we can sell into the marketplace. That's still a little bit longer because of all the robotics, camera systems and so forth. So you're talking about if we had an increase in demand, which we've seen on those products, say over the last 6, 9 months that kind of thing, right.

Speaker 2

You can order new lines, but to catch up on that sometimes it takes a little while, right. So what you're getting in For production here right now would be lines that we ordered a year and a half ago. So I think the team did a really nice job in terms of planning that out and we continue to plan that out in advance. But it's a little hard to tie that together. When you get an extended period of time of winning more wearers than you anticipated, You can get yourself in these kind of situations, but where I get comfortable is we know what lines are coming on.

Speaker 2

We can see the production, we see the lines Ken. Our manufacturing team is insanely strong at getting these lines ramped up and into production and they're doing a great job. So we have all the schedules, We have the demand. We see all the activity and so forth and we're able to manage it.

Speaker 7

Okay. Thanks. That was great color. And just to shift right over to you. And sorry if I missed this earlier on EPS, but anything to call out regarding the cadence throughout fiscal 2024 as we think about FX particularly violent last year and maybe I don't know less leverage in fiscal 1Q due to some of those constraints that are most acute in the current quarter.

Speaker 7

Thanks.

Speaker 3

Hi, John. Yes, I guess I wouldn't really there's nothing In particular that I would point out, we're going to have a I think we'll start off with a good year as Al said. But if there's going to be something maybe that I point out is if I look at currency today, the biggest impact from currency is probably hitting us in Q2 versus the other quarters. But outside of that, I would say kind of normal seasonality gating kind of phasing through the year.

Speaker 7

Fair enough. Thanks guys.

Operator

Our next question comes from the line of Joanne Wuensch with Citi. Please go ahead.

Speaker 4

Good afternoon. This is actually Anthony on for Joanne. Thanks for taking our questions. Just one from us. Are you do you think you're losing any potential new customers related to these capacity challenges in my day?

Speaker 2

We're definitely not losing any customers, that's for damn sure. And we're continuing to gain new wearers. There's no question about that. Could we be gaining even more wearers? Yes.

Speaker 2

Do I think we're going to permanently lose them? No, Because we are going to have the product, it's rolling into the market. I'm not talking about a dramatic change. We're giving guidance for the year of 7% to 9%, and we're talking about doing 7% in Q1. So Let's not blow this out of proportion, right.

Speaker 2

This is a there's a short term like little thing here from a revenue perspective, but we are winning wearers at At a normally large clip, we're going to continue to win wearers this quarter in Q1 and we're going to win them the rest of this year.

Speaker 8

Thanks.

Operator

Our next question comes from the line of Craig Bijou with Bank of America. Please go ahead.

Speaker 9

Good afternoon, guys. Thanks for taking the questions. I wanted to start with a follow-up on FX and obviously it's been volatile. To the extent that the dollar weakens over the course of your fiscal year, I guess I just wanted to get a sense for how you guys plan to either let that fall to the bottom line or if there is potential reinvestment of some of the benefits there.

Speaker 3

Hi, Craig. Yes, great question. We've been getting this question a lot because currency has been really moving against us year after year after year. I certainly would love to see This trend continue, but certainly if it does and the dollar were to weaken, yes, we're going to let that currency fall through to the bottom line.

Speaker 2

You want the recent trend to continue. The recent

Speaker 3

trend to continue, that's exactly right.

Speaker 9

Yes, understood. And then maybe for you Al, just I mean any update on Sightglass and the timing or any communications or maybe even any expectations that you expect on the data front or that you've heard from the FDA. Just what's the timing? What's the thinking on Sightglass?

Speaker 2

Yes. I mean, no, Unfortunately, I guess I'd say no updates right now on Sightglass. We're continuing to progress and do work. We're selling that product in markets around the world. There continues to be positive momentum.

Speaker 2

I'm excited about it, but I don't have any good updates to give you right now, maybe on the next

Operator

Our next question comes from the line of Robbie Marcus with JPMorgan. Please go ahead.

Speaker 10

Great. Hello and thanks for taking the questions. 2 for me. First on free cash flow, it Looks like you came in plus or minus $170,000,000 on the year. I think that this time last year you guided to 300,000,000 So what drove the shortfall in 2023 and how should we think about free cash flow generation in 2024?

Speaker 3

Hi, Robbie. Yes, we actually came in at $215,000,000 of free cash flow. Obviously, we had a pretty large CapEx year. We ended the year at $393,000,000 in CapEx. We've been guiding we had been guiding around $400,000,000 so we kind of landed right at that mark.

Speaker 3

We had the Cook Termination fee that we paid in 2023, so that offset some of the free cash flow Interest, FX, taxes were also headwinds in 2023. So That kind of really put a damper on free cash flow generation. I do expect that free cash flow will improve in 2024, Probably in excess of $100,000,000 over 2023. We still have some headwinds tied to FX, Taxes and interest probably about $50,000,000 that are creating more of a headwind for us. But certainly, if I look at CapEx, it's going to be elevated again in 2024, probably similar levels as we saw in 2023.

Speaker 10

Great. And apologies on my math. Maybe more of a strategic question here. You've had the past few years double digit organic top line growth yet. We're just not seeing it translate down to the bottom line for a number of reasons, whether it's operating margin or currency.

Speaker 10

So how do you think about your commitment to double digit and Company. And are there anything you could do moving forward to help With the consistency, I don't know if it's a return to hedging or something else, but how do you think about the necessity of giving us reported EPS leverage growth. Thanks.

Speaker 2

Sure. Yes, I think I'll go back to a question Craig asked there with Brian, right? I mean a couple of things. One is, As we talked about last year and as we gave guidance this year, we are talking about our operating income growth in constant currency. When it comes to FX, we've seen it move nicely in our favor.

Speaker 2

As Jeff said, some of that are out, some of that's not incorporated in Earnings, but it's great to have currency moving in our favor. And I'll reiterate what Brian said, which is, we're going to continue to manage the business that way. If Currency moves in our favor, that currency is going to flow through the P and L. We have great investors and they and a lot of them have stuck with us as we've worked through the last some strong quarters. I mean, I think, what EPS was up 26% this quarter.

Speaker 2

I'd love to see currency move in our favor and Post some more really strong quarter. So that's what I would tell you is we run this business to drive constant currency leverage and growth and We plan on delivering that and hopefully fingers crossed like we get some positive currency that helps us drive that. And then on top of that, I guess maybe one other add Would be generating cash flow, paying down some debt, reducing interest expense.

Speaker 10

Great. Thanks for taking the question.

Speaker 3

Yes.

Operator

Our next question comes from the line of Steven Lichtman with Oppenheimer. Please go ahead.

Speaker 8

Thank you. Al, you mentioned expected price increases for the industry here near term at about the same year over year level as we saw over the last 12 months. What is your confidence in the sustainability of price increases for you and the industry as year over year inflation moderates. I think you've said that 2% to 3 percent maybe a point, 0.5 above historical levels.

Speaker 2

Yes. I mean, we're a little early probably this year Compared to some other years in terms of our price increases, so we'll see what other people do. But I mean, I've talked a little bit about some of the constraints we have here in capacity. We have competitors who have similar challenges. We don't have some of the other supply chain challenges.

Speaker 2

Some of them I've been working through, but at the end of the day, the core contact lens industry is growing nicely and it's growing for a number of different reasons, Some trade ups, growth in torics, growth in multifocals, growth in wearers, geographic expansion. One of the things that's happening as we move to this kind of happy oligopoly because remember our sales J and J and Alcon are close to 90% of Global Revenues for contact lenses is you're seeing a lot of demand for contact lenses and that's creating an environment where all of us are struggling to keep up with that Demand and it takes a lot of time to get new manufacturing lines and ramp up capacity and manage through all the logistics that you have to do with this growth. So That's a long way of saying that I believe for the foreseeable future, the contact lens industry is going to have very strong demand. Anytime you have strong demand and you have Cassidy related issues associated with demand challenges, you normally have an environment where you have pricing. Companies are able to take pricing in that to offset some of those challenges.

Speaker 2

And then I would also add any inflationary pressures that are potentially out there. So I happen to believe you're going to see pricing trend at a higher level here for a number of years in front of us.

Speaker 8

Got it. Thanks, Al. And Brian, just a follow-up on the tax rate for FY 2024 here. Does that contemplate Pillar 2 or based on your fiscal year, it doesn't? And if it doesn't, how should we be thinking about that over the medium term?

Speaker 3

Hi, Steve. Yes, that does contemplate Pillar 2. It's incorporated our expectations are incorporated in guidance And I'll just restate, we expect our ETR to be around 15% pre discrete.

Speaker 8

Got it. Thank you.

Operator

Our next question comes from the line of David Saxon with Needham. Please go ahead.

Speaker 4

Great. Good afternoon. Thanks for taking my questions. Maybe one on CBI, one on CSI. For CooperVision, just wanted to ask on MiSight, what inning are we in terms of MiSight coverage?

Speaker 4

And for the payers that are covering it like Aetna and Kaiser. What portion of the cost do they actually reimburse?

Speaker 2

We're in the first inning on that. We're probably I don't even know if there's one out in the game. It's very early in that. So Aetna just started coverage on that. Kaiser has some coverage on that.

Speaker 2

But in terms of insurance reimbursement and getting that through the industry to optometrists and so forth, it is very, very early in that process. So There's some very significant potential upside associated with that, but I do not want to get in front of that because we are very, very early in that game.

Speaker 4

Okay. And just, I guess, how much they're reimbursing? And then I'll just ask my second question on PARAGARD. I mean volumes obviously have been kind of flat to down especially this past So just wanted to get your updated thoughts on that product. Is there anything you can do to drive recovery in volumes?

Speaker 4

Or Paragas is Paragas Growth going to be kind of primarily driven by pricing over the long term? And if so, I guess at what point does that ability to drive growth through pricing kind of go away? Thanks so much.

Speaker 2

Yes, sure. Yes, the amounts vary Depending upon who it is and how it's covered and what plans people have for MiSight, I mean some of the coverage gets fairly high, As high as 50% or as high as 80%. So I think a lot of that coverage would be half up to 80% coverage. But again, I just want to Caveat that by saying it's very early in the process of how it's defined and how it's reimbursed. So a lot of work there.

Speaker 2

On PARAGARD, yes, we're guiding to a flat to maybe down year. The challenge is around volume. There's access to other birth control options Ken. That are out there, be it easier access to birth control pills as an example or other areas. I think the IUD market is going to Continue to be pressured from a volume perspective.

Speaker 2

We do take price as do other people in that space and that kind of offsets it. But I think as you look at IUDs for at least for this year and I don't know if I want to forecast too much further out, But we're going to be looking at flat to declining volume. So that's just the world that we live in right now with respect to IUDs.

Speaker 4

Great. Thank you.

Operator

Yes. Our next question comes from the line of Nevan Tai with BNP Paribas. Please go ahead.

Speaker 11

Hi, good afternoon. Thanks for taking my questions and the color so far. So will the 2024 Cheriagins be in contact lenses and Cooper Surgical as well and will they be driven by innovation? And can I also please ask about your capital allocation priorities after the maternal health acquisition?

Speaker 2

Yes. So I would say on capital allocation, our focus frankly is on paying down debt right now. We'll continue to do the things we do, but we'll have a heavier focus on paying down debt. If I look at share gains, yes, we anticipate continuing to take Chair and contact lenses. A lot of that will come from innovation because there are some exciting products out there.

Speaker 2

Like I talked about MyDay Energous as an example, which is doing really well, Really cool innovative product that's doing well. And then some of it, I call innovation tied to some of the stuff that we've been doing like on the multi Ocal side and on the Toric side. So I think we'll have another good year within the vision space and I think we'll take share also Within CooperSurgical, certainly within fertility, great team there doing just an absolutely fantastic job, just posted a tremendous quarter. I have all the faith in the world in them, and we're continuing to invest behind them and we'll continue to invest behind them moving forward. And I think we'll to see ongoing share gains with infertility.

Speaker 11

Thank you.

Operator

Our final question comes from the line of Anthony Petrone with Mizuho. Please go ahead.

Speaker 12

Thanks. Maybe one on vision 1 on surgical. On the vision side, going back to MiSight, Maybe just to recap on what you're seeing from early patient adopters. Are there any noticeable drop offs? Or is the attach rate So, hi.

Speaker 12

And then when you think of prescribers, the early adopters on the prescriber end, are they writing more prescriptions for MiSight? And then just really quickly on surgical, when we think of just kind of the M and A landscape, we would assume that IVF there was issues there from antitrust, so that wouldn't be an area. What other areas in women's health are potentially attractive to CSI? Thanks.

Speaker 2

For CSI, yes, we'll continue to look at some tuck in acquisitions and so forth if we can find them. Again, I would reiterate though that we are looking at paying down debt. We've done I think a deal is going to turn out to be fantastic for us that we closed November 1. So we'll keep our eyes open maybe on some medical device stuff or some smaller tuck ins that are out there. And if something comes along that makes sense, we'd evaluate that.

Speaker 2

Otherwise, we'll focus on paying down debt. If I look at MiSight, our retention rates remain very high. We use an app that tracks all that, so all of our patients are on an app and we're still running somewhere around that 90% retention rate. We are seeing increasing fitting activity around the world. We're seeing increasing fitting activity within key accounts also, which Kin.

Speaker 2

So the trends are good there. We had a good Q4. I'm anticipating a good Q1 right off the bat. We normally have our business kind of a sequential decline. It will be interesting to see whether we even have that within MiSight given the strength of that business, the momentum Going on right now in terms of the number of fits that are out there and the growth that we're seeing.

Speaker 2

So more to come on that one.

Speaker 6

Thanks again.

Operator

I would now like to turn the call over to Al White for closing remarks.

Speaker 2

Great. Thank you. Just to summarize record year, record revenues in Vision, Surgical, Strong OI growth this year. We're giving guidance and we believe we're going to have another strong year this year all the way through the P and L. So I'm excited about where things stand today and I'm looking forward to this year because I think it's going to be a really good year for us.

Speaker 2

So thank you to all of our employees around the world who killed it this year and I

Operator

I would like to thank our speakers for today's presentation and thank you all for joining us. This now concludes today's call and you may now disconnect.

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Earnings Conference Call
Omnicom Group Q4 2023
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