Cooper Companies Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 28, 2024

There are 15 speakers on the call.

Operator

Thank you for standing by. My name is Pam, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q3 2024 Cooper Companies Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Operator

I would now like to turn the conference over to Kim Duncan, VP of Investor Relations and Risk Management. You may begin.

Speaker 1

Good afternoon, and welcome to Cooper Companies' 3rd quarter 2024 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 will contain forward looking statements, including revenues, EPS, interest expense, operating income, tax rate, FX and other financial guidance and expectations, strategic and operational initiatives, expectations for recent acquisitions, 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.

Speaker 1

Events that could cause our actual results and future actions of the company to differ materially from those described in forward looking statements are set forth under the caption forward looking statements in today's earnings release and are described in our SEC filings, including Cooper's Form 10 ks and Form 10 Q filings, all of which are available on our website at 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 Materials. Should you have any additional questions following the call, please e mail ircooperco.com. Now I'll turn the call over to Al for his opening remarks.

Speaker 2

Thank you, Kim, and welcome everyone to today's earnings call. I'd like to start by congratulating our 15,000 plus employees for delivering Cooper's first ever $1,000,000,000 revenue quarter. We couldn't have reached this milestone without the hard work and dedication of our amazing employees, so a big thank you to the entire Cooper team. I'm also proud to announce that both CooperVision and CooperSurgical reported record revenues and that margins improved nicely, driving double digit earnings growth and record non GAAP quarterly earnings. This performance highlights the strength of our business as our multi year growth strategy to become a leader in the daily contact lens space a leader in the global fertility industry moves into a stage of healthy revenue growth combined with leverage through the P and L.

Speaker 2

To expand on that, at CooperVision, we've taken our highly successful monthly lens strategy, build on innovation and flexibility and taken it to the daily space where we're expanding the segment and gaining share. At CooperSurgical, we've expanded our global fertility capabilities while continuing to provide clinics with premium products and services that support every step of the fertility journey. And in both cases, we crafted our portfolios to expand our customers' businesses and improve patient outcomes. We've accomplished this by strategically investing throughout the organization, including installing state of the art manufacturing capabilities, implementing technological advancements in packaging and distribution, developing and launching numerous new products, completing significant IT upgrades and providing extensive employee training. This activity is paying off and I'm proud of our success and excited about what the future holds.

Speaker 2

Moving to the details and reporting all percentages on an organic basis, consolidated quarterly revenues were slightly over $1,000,000,000 up 8% year over year. CooperVision posted record quarterly revenues of $676,000,000 up 10% led by strength throughout our broad based product portfolio. And CooperSurgical posted record quarterly revenues of $327,000,000 up 5% including fertility returning to double digit growth. Non GAAP earnings per share grew 14% to $0.96 For CooperVision, we continue to be the most innovative company in the $10,000,000,000 plus contact lens industry with the broadest portfolio of lenses, the only FDA approved product for Myopia control, arguably the most active product launch schedule and a fantastic R and D pipeline. This has led to the consistency of our results and is why CooperVision is the number one contact lens company in the world in terms of wears.

Speaker 2

For the Q3, we once again took share with the Americas growing 13%, EMEA 7% and Asia Pac 7%. Within categories, torics and multifocals grew 12% and SPHERES grew 8%. Within modalities, our daily silicone hydrogel lenses MyDay and Clarity grew 13% and our silicone hydrogel FRP lenses, Biofinity and Avera grew 11%. And our Myopia management portfolio posted growth of 29% with MySite up 50%. All in a very nice quarter against a tough comp from last year.

Speaker 2

Turning to products and starting with our high performing daily portfolio, we continue to see strong growth and healthy momentum with MyDay in every category, Spheres, torics and multifocals. In particular, we're seeing extremely strong growth in our most innovative product areas led by MyDay Energous with its digital boost technology, with our industry leading toric range and with our easy to fit multifocals, which as everyone knows is a personal favorite of mine. This product family has been extremely well received by eye care practitioners and customers and we have more upside to our growth as we continue bringing manufacturing capacity online to meet the significant demand. This is particularly true of our market leading Toric where there is considerable new wearer opportunity along with upgrade potential given the decade plus success of Biofinity Toric which shares the same design. Moving to our mass market daily silicone hydrogel product family, Clarity, I'm excited to report that we recently launched an upgraded Clarity multifocal in the U.

Speaker 2

S. This past quarter. The lens design matches our MyDay multifocal design, featuring next generation enhancements that provide better vision and comfort for presbyopic patients as well as an easy fitting experience for eye care professionals. The Clarity family as a whole is known for its comfort, easy handling and affordability and patients appreciate the price point where we're continuing to successfully upgrade legacy hydrogel wearers. Moving to frequent replacement silicone hydrogel lenses, both Biofinity and Avera continue performing exceptionally well.

Speaker 2

For Biofinity, we're seeing nice growth across the entire portfolio with Biofinity Energous and our made to order products such as extended range torics and toric multifocals leading the way. These lenses are made using some of our most innovative manufacturing technologies and this allows us to provide the widest range of prescriptions in the market, something that is especially important in fitting patients with the most complex vision needs. Turning to Myopia Management, MiSight posted record quarterly revenues S. And we're running similar programs in other key markets such as Spain, the U. K.

Speaker 2

And Korea. We're incredibly proud of the number of children's lives we're meaningfully impacting through the growing adoption of MiSight and we continue to demonstrate leadership in driving global awareness of Opiant Management working closely with the entire global optical industry to expand usage and establish it as standard of care. In this spirit, in July at the World Congress of Pediatric Ophthalmology, the CooperVision Professional Affairs team showcased long duration of Mi Sight science, which now spans 10 years. With multiple additional studies underway in the U. S.

Speaker 2

And China, Mi Sight is the most thoroughly researched contact lens for children and the clinical data is excellent. We will showcase more data this quarter at the upcoming International Myopia Conference in China as well as in Korea at our Asia Pacific Myopia Management Symposium, which has become a premier annual event for practitioners and researchers across the region. To conclude on CooperVision, the contact lens market grew roughly 7% in calendar Q2 with Cooper continuing to take share up 10%. The market remains very healthy and that should continue supported by several long term macro growth trends. And within this, we're leading with innovation, our broad product portfolio, ongoing product launches, strength in premium products, fast growing myopia management business and leading new FIT data.

Speaker 2

Moving to CooperSurgical. We posted record quarterly revenues of $327,000,000 up 5%. Within this, fertility sales were $129,000,000 up 10%. Fertility continues to be a great business for us and the future is bright as we're taking share and expanding our leadership position globally. Our broad portfolio of products and services including consumables, capital equipment, reproductive genetic testing and donor activity continues to lead the market and we're investing by launching new products, accelerating innovation in R and D, opening new donor sites, providing extensive training in our centers of excellence and expanding geographically.

Speaker 2

Our focus on delivering the most advanced fertility solutions remains unmatched and our dedication to improving fertility outcomes for patients remains a guiding principle. Meanwhile, we're seeing strong demand in our focused markets with fertility clinics increasing patient activity, upgrading to new technologies and opening and expanding facilities in several markets. Regarding current activity, we just have one of the busiest global fertility events we've ever had at a large European conference in July. Excitement was high for the industry and for our products and services. In particular, there was a lot of excitement around our new culture and transfer media, which just launched in Europe, around our new fast track genomics testing, which is now launched globally, and around EmbryoOptions, our premier cryo management software, which recently launched in targeted European countries.

Speaker 2

Regarding the broader fertility industry, the macro trends supporting growth remain intact with the World Health Organization highlighting that 1 in 6 people globally will be affected by infertility at some point in their lives due to a variety of factors including women delaying childbirth. As a leader in the space, we remain incredibly industry by standing in support of patients and clinics and improving access to treatment on a global basis. Moving to Office and Surgical, we posted sales of $198,000,000 up 2%. Medical devices grew nicely led by our minimally evasive gynecological surgical products including our Ally Uterine Manipulator portfolio and our labor and delivery portfolio led by Feto Pillow, a balloon device used in C sections to elevate the fetal head and facilitate ease of delivery of the baby. Stem cell storage had a solid quarter and PARAGARD slightly declined as expected after last quarter's strong results.

Speaker 2

One quick note on PARAGARD, we recently received approval for a new single handed inserter, which makes placing the IUD easier and we are now in the process of launching this improvement. And with that, I'll turn the call over to Brian.

Speaker 3

Thank you, Al, and good afternoon, everyone. Most of my commentary will be on a non GAAP basis, so please refer to our earnings release for a reconciliation of GAAP to non GAAP results. For our 3rd fiscal quarter, consolidated revenues were $1,003,000,000 up 8% as reported and up 8% organically. Consolidated gross margin was 66.6%, up from 66.1% last year driven by continuing efficiency gains and product mix offset by FX. Operating expenses showed leverage growing slower than sales as efficiency gains from prior investment activities continue to offer positive returns within SG and A.

Speaker 3

Meanwhile R and D grew faster than sales as we maintain our R and D activity in several exciting areas including myopia management and fertility. Consolidated operating margin improved nicely up to 25.5 percent from 23.9% last year, led by gross improved gross margins and SG and A leverage. Below operating income interest expense was $27,100,000 and the effective tax rate was 16.6%, higher than expected mainly due to the geographic mix in income. Non GAAP EPS was $0.96 up 14% year over year with roughly 201,000,000 average shares outstanding. Free cash flow was $118,000,000 with CapEx of 89,000,000 dollars Net debt decreased to $2,500,000,000 Foreign exchange negatively impacted earnings by $0.05 in the quarter, dollars 0.01 better than expected helping to offset the higher effective tax rate.

Speaker 3

To summarize fiscal Q3, CooperVision reported double digit organic revenue growth against last year's tough 13% comp, fertility returned to double digit growth and we passed the $1,000,000,000 threshold in quarterly revenues for the first time. Gross and operating margins both improved nicely year over year even against currency headwinds and this resulted in a very strong operational quarter that delivered solid double digit earnings growth. Before moving to guidance, let me mention 2 tuck in acquisitions. The first is Zymote, which closed in June. This deal adds a first of its kind patented sperm separation device that helps optimize fertility procedures.

Speaker 3

The company had roughly $9,500,000 in trailing 12 month revenue and the purchase price was approximately $34,000,000 The second deal is OVP Surgical which closed on August 1. This deal adds both a lighted a lighted retractor with an integrated smoke evacuation system and a lighted surgical suction device. The company had trailing 12 month revenues of roughly $14,500,000 and the purchase price was approximately $100,000,000 Both deals are accretive to consolidated revenue growth rates, margins and non GAAP earnings. Moving to fiscal 2024 guidance. We're increasing our consolidated revenue and earnings per share guidance on our Q3 results and expectations for continuing operational strength.

Speaker 3

For the full fiscal year, this results in consolidated revenues of $3,89,000,000 to $3,910,000,000 of 8% to 8.5% organically. For CooperVision, the guidance range is $2,610,000,000 to $2,620,000,000 up 9% to 9.5% organically. And for CooperSurgical, the range is $1,286,000,000 to $1,294,000,000 up 5.5% to 6.5% organically. We expect interest expense of roughly $109,000,000 which assumes no interest rate changes by the Fed for the remainder of our fiscal year. We expect the full year effective tax rate to be slightly over 14%, assuming no additional discrete items.

Speaker 3

And we expect non GAAP EPS in the range of $3.64 to $3.67 up 14% to 15%. Built within this guidance is our fiscal Q4 expectations including CooperVision growing 8% to 10% organically, CooperSurgical growing 6% to 8% organically and non GAAP EPS in the range of $0.98 to $1.01 Regarding fiscal 2025, we'll provide specific guidance in December on our Q4 earnings call, but let me say that we remain focused on delivering strong operational performance and low double digit constant currency operating income growth. To conclude, let me briefly touch on where we are in our strategic journey from a financial perspective. As we've discussed on prior calls, we've spent considerable time and money positioning our business for higher, long term, sustainable organic revenue growth. This has meant significant investments throughout the company and we're now seeing that activity pay off with strong revenue growth and leverage through the P and L.

Speaker 3

We expect this to continue and to lead to improving free cash flow as operating cash flow improves and CapEx moderates. With that, I will hand it over to the operator for questions.

Operator

Thank you. We'll now begin the question and answer And your first question comes from the line of Jeff Johnson of Baird. Please go ahead.

Speaker 4

Hey, guys. Thanks. Good evening. Sorry, I was on mute there. So two quick questions.

Speaker 4

I guess, Al, you kind of talked about that 10% growth you did in the quarter, sorry, the 7% contact lens market growth and the 10% you did in calendar 2Q. What are you seeing from an end market perspective? There's been some chatter over the last maybe few weeks, a couple of months about has rebate activity gone up? Has it not gone up? Has end market softened a little bit with the consumer?

Speaker 4

It sure seems from the numbers we're seeing from all the companies that the market is holding in well. But I just maybe your state of the market U. S. And globally would be helpful here on the contact lens side. Thanks.

Speaker 2

Yes, sure. Yes, the state of the market is holding up really well. There's a little bit of noise every once in a while that we'll hear, right? You mentioned it with rebates, which is U. S.

Speaker 2

Consumer rebates relatively small in the grand scheme of things. But if we look at the market, whether it's the U. S. Or we look on a global basis, it remains really healthy. And you're continuing to see growth in a lot of the more mid and higher end products in torics and multifocals and some of the more premium products within those segments.

Speaker 2

So yes, I would just say maybe a little bit noise here and there, but on a U. S. Basis and a global basis, still pretty healthy market.

Speaker 4

All right. That's helpful. And then just on the return to double digit fertility growth, late last year, you had a culture media recall. Should we assume with you back to double digit growth there and you're calling out culture media as one of the growth drivers that there's no kind of lingering impact, any bad will that built up in any of these fertility centers there, anything? And do we need to think about any kind of big dollar potential litigation risk?

Speaker 4

Or is this all kind of normal course of business that companies have to deal with at times? Thanks.

Speaker 2

Yes. I would say on the litigation side, we're working through that. We have insurance to cover that. And yes, it's something that we'll work through as other companies work through similar situations. I think that event that you're referencing happened kind of back in the December timeframe and rolled a little bit in the beginning of this year.

Speaker 2

But our fertility team is fantastic and they've done a great job. And the message that they deliver and the message they believe in is that we are going to do what's best for our patients. And we're going to do what's best for our customers and we put our heart behind that. And I think the team did just a fantastic job going out and talking to people being open honest and transparent and so forth and working through the issue to get back on good footing and that's what you're seeing. That's why we're back to double digit growth here.

Operator

Your next question comes from the line of Larry Biegelsen of Wells Fargo. Please go ahead. Your next question comes from the line of Jon Block of Stifel. Please go ahead.

Speaker 5

Great, guys. Thanks. Good afternoon. Maybe on the first one, the Americas CVI to your stacked growth was notably strong, I think one of the strongest in a good couple of years. And just anything to call out to frame that?

Speaker 5

Is that a function of increasing capacity with some lenses and that going into the Americas? And then maybe if you can just use that as an opportunity to remind us of where you are with the overall capacity initiative relative to maybe where your expectations were 6 or 9 months ago?

Speaker 2

Sure. Yes, it was an excellent quarter. When you think about last year, I think we were 13%. So on a 2 year stack base, definitely a strong quarter. You are seeing some of what you referenced, John, which is we've got some capacity coming online and that's putting us in a position to be able to meet demand.

Speaker 2

As we sit here today, demand is still greater than supply, if you will. And I would say that's especially true with MyDay and some parts of the MyDay portfolio. And it's a little bit of a limiter in terms of our ability to meet the demand in locations and also a little bit of a restrictor in our ability to be able to launch some of the activity we want around the world. So that makes me optimistic about the future certainly as we continue to bring capacity on and expand our capabilities. In the meantime, you're seeing the results of bringing capacity on and the continuing strength of the product portfolio.

Speaker 5

Okay. Thanks for that. And then Brian, I'll turn to you. You mentioned the leverage. It was really solid better than my estimate in the quarter.

Speaker 5

I'm looking at I believe OpEx that was basically flattish Q over Q despite call it mid single digit sequential revenue growth. Maybe you can talk to is that more CBI than CSI? Was there anything abnormal in the quarter in terms of cadence in OpEx? But that really stood out in the quarter. Thanks for your time.

Speaker 3

Hi, John. Yes, thanks for the question. Yes, I mean, we expected strong results in the second half of the year. You heard my gross margin commentary in the 1st couple of quarters being stronger than in the first half than the second half, but we were going to make up for it with meaningful SG and A leverage in the second half. So we certainly put up some great results in the Q3 with SG and A leverage.

Speaker 3

I'd say both businesses are executing really well. Certainly, those investments that we've been that kind of stacked up on top of one another over the last several years are yielding positive returns and we're getting efficiencies from those. I mean, it's not a one thing, it's a multi quarter thing. And I think you'll expect we expect to see that next quarter and into next year. So, yes, happy with the results.

Operator

Your next question comes from the line of Larry Biegelsen of Wells Fargo. Please go ahead.

Speaker 6

Hi, it's Lei calling up for Larry. Can you hear me okay?

Speaker 2

Yes. Hey, Lei.

Operator

Thanks for taking the question.

Speaker 7

Just 2 for me, please.

Speaker 6

First, you talked on the call, you talked about double digit low double digit OI growth for fiscal 2025. Can you give any other commentary in the top line the last 3 fiscal years? You started guidance at 6% to 8% constant currency growth. Is there any reason to think that you would start differently for fiscal 2025 and anything below the line as far as interest rate, tax rate that you can call out at this point for fiscal 2025? And I have a follow-up.

Speaker 2

Sure. Lee, not going to get into much detail on guidance at this point in time, as we never do. A couple of things I would just say. I mean, the contact lens market is certainly healthy as we're just discussing with Jeff. I mean, we're giving guidance for ourselves in the Q4 here of 8% to 10%.

Speaker 2

Cooper Surgical's market is healthy, fertility is healthy. We're giving guidance for Cooper Surgical in the Q4 of 6% to 8%. So we're optimistic about both marketplaces and where we sit today here, I would say remaining optimistic that both markets are going to continue to be strong into next year. But outside of saying that, I'm going to hold off on given any revenue detail until we get to December. I'll turn it over to Brian on below the line items.

Speaker 3

Hi, Lee. Yes. So, similar to Al, I mean, I'm going to hold off on providing details until December. But you picked up in the commentary as said about delivering our long term commitment and our objective to deliver low double digit constant currency OI growth. So people can take comfort in the fact that that objective hasn't changed.

Speaker 3

We've got a lot of momentum going into next year. Next year should be another solid year. Free cash flow is going to be stronger next year. So we expect we'll pay down some debt. So hopefully, assuming rates hold, that'll mean that interest expense goes down to the extent that the Fed does something in our favor and that's going to be beneficial and that will help.

Speaker 3

I guess if I talk about FX, I'm knocking on wood right now, Leigh. But as we sit here today, FX is a positive fiscal 2025. So I don't want people to get ahead of themselves, but that could be some upside. And while I'm not providing guidance on taxes, if we use 2024 as a guide, our effective tax rate pre discrete this year will be around 25% I'm sorry, 15.5%. So we've got momentum.

Speaker 3

Hopefully, some of these upsides play out and we're going to have a great year.

Speaker 6

That's helpful. Thank you. And for my follow-up, can you just remind us when you last took price in CVI? So when does that anniversary? And how are you thinking about price into fiscal 2025?

Speaker 6

Thanks again for taking the question.

Speaker 2

Sure. We took price in fiscal Q1 of this year. I would anticipate we'd take price again in fiscal Q1. When I look at ourselves or the industry, inflation has come back a little bit, but it's still running what in the 3% kind of range. So I think where we've been is raising pricing to offset inflation.

Speaker 2

And I would anticipate the industry will continue to take price to offset inflation and I would anticipate we'll do that in fiscal Q1. So more to follow on that.

Operator

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

Speaker 8

Good afternoon, guys. Thanks for taking the questions. Wanted to start on the distributor issue that you had last quarter and really just wanted to see if it impacted any of your sales or growth numbers in the quarter and if it will continue into Q4 at all?

Speaker 2

Sure, Craig. Yes, that was the CooperSurgical related IT upgrade issue that we worked through last quarter. I would say that, yes, it did disrupt things a little bit into this quarter, but we've worked our way through that. I think you probably get a little bit of the residual upside from that frankly in Q4. As you saw, we did 5% growth in CooperSurgical in Q3 and we're guiding to 6% to 8% in Q4.

Speaker 2

So finishing the year strong as CooperSurgical gets back on full footing, if you will.

Speaker 8

Got it. That's helpful. Thanks, Al. And switching over to CBI and maybe follow-up on one of the earlier questions. And just looking at APAC growth, and I guess I wanted to ask where you are in getting full capacity or full supply to that region specifically.

Speaker 8

That's one if you look at the growth rates, it stands out as maybe a little bit more sluggish than some of the other geographies. And I know you but I know that you're working on meeting the demand there. So just maybe a little bit of color on where you are and how we should expect that maybe to ramp over the next several quarters and into 2025?

Speaker 2

Sure. That's a good question. Our Asia Pac numbers, yes, a little bit softer than maybe we were running historically. We've got a great team there. Kathy and her team of folks in Asia Pac have got all the confidence in the world and a strong team.

Speaker 2

They just need more product is what they need at the end of the day. And if we have more product, those numbers would be stronger. That's what it comes down to. So we're working hard on that. We're bringing capacity online.

Speaker 2

We're trying to get more MyDay, so we can get it out in the marketplace and get it over to help that team execute at the level that we know they can. I won't give any specific details on that at this point. I'll touch on that and give a little bit more color in December as we start discussing next year's guidance.

Speaker 9

Great. Thanks for taking the questions.

Operator

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

Speaker 7

I'm talking about Myopia Management. I mean, if my math is right, you're probably looking at about a 40,000,000 dollars per quarter revenue run rate with really healthy double digit growth. How do you think about where you are in sort of the adoption curve and the marketing of it and sort of the education of the physicians? Thank you.

Speaker 2

Yes. That's a great question, Joanne. Yes, we're we did about I think it was somewhere around $37,000,000 this quarter total Myopia Management. MiSight is bigger than OrthoK now and as you can see in the number continuing to gain traction. So I would say though, we're still in the early innings of that.

Speaker 2

You're seeing Myopia control continue to gain interest among the eye care community around the world. You're seeing more interest in some of the parts of the world where there's myopia controlled spectacles. We have a joint venture as you know with Esalor, Luxottica, who's doing a great job with Celeste. We're seeing some great numbers with Sightglass in China. So I'm really optimistic about that entire marketplace.

Speaker 2

I mean, I still believe the myopia controlled market is just going to be a really large market. As everyone knows, the only approved product right now in the U. S. Through the FDA is MiSight. I look forward to getting glasses approved at some point in time.

Speaker 2

I think that's going to take everything to a whole another level. But to your point, Joanne, like we're doing well, business is growing, we're gaining traction, that's moving closer to standard of care and pediatric optometry, which is fantastic in many markets around the world. So that's all positive news. It's not as big as I'd like it to be, but it is definitely moving in the right direction and continuing to get larger. And to be fair, 50% growth on MiSight off a little bit bigger number.

Speaker 2

The numbers keep getting bigger and the growth rate has been holding. So things are pretty positive there.

Speaker 7

Terrific. Thank you so much and have a good evening.

Speaker 2

Yes. Thanks.

Operator

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

Speaker 10

Great. Thanks. And I'll add my congratulations on a nice quarter. I wanted to see if I can maybe push my luck a little bit here with fiscal '25 and I appreciate it's early and it's a really strong guide to start. With low double digit operating income growth and positive FX, does that translate down to EPS as well?

Speaker 10

I think what people are looking for is that low double digit or better EPS growth in 25%, is that the implication?

Speaker 2

Yes. I mean, I think Brian kind of covered it well, which is FX as we sit here today would be a positive on a year over year basis. We'll see what happens with interest expense, right? But we're going to generate some decent free cash flow. We'll pay debt down.

Speaker 2

That's going to help. If the Fed lowers rates, that's going to help. Taxes, the effective tax rate is going to be higher year over year, as Brian said, 15.5% without the discrete this time. So I think it'd be higher next year. But if you plug all that in, yes, that should result in some pretty decent EPS.

Speaker 10

Great. And maybe just to dive in, you touched on some of this, but gross margins and operating margins were particularly strong. I know you touched on that already. But maybe just some of the particular drivers, especially in gross margin, as more and more dailies come online, you would expect that to maybe drop down, but it's holding in firm. So how are you offsetting that and how should we think about that moving forward?

Speaker 10

Thanks a lot.

Speaker 3

Hi, Robbie. Yes. So price and efficiency gains are offsetting the FX. On the efficiency side of things, we're making progress on our intercompany shipping. So when we put all of those infrastructure investments in tied to packaging, some of the labeling and so forth, and when we're moving product intercompany between and among our sites, we've gotten a lot more efficient at doing that.

Speaker 3

And so what you've seen is efficiency, that efficiency flowing through cost of goods as well as the price helping to improve gross margins. You've got a little bit of mix there as well. Americas, we've got a bit higher margin than in other parts of the world. And then some of the mix also at CooperSurgical. So you put it all together and it's offsetting that FX to a large extent.

Speaker 3

So I'd expect that we'll continue to do that type of activity. You'll see daily thigh highs be a bit of a headwind. But as we work through our capacity increases and we eventually get to moderating on that CapEx and we start working on continuous improvement activities, that's going to be another opportunity for us to continue to gross margins higher over the longer term.

Speaker 11

Great. Thanks a lot.

Operator

Your next question comes from the line of Anthony Petrone of Mizuho Group. Please go ahead.

Speaker 12

Thanks and congratulations on the strong quarter here. Maybe couple on CBI and then one on CSI. On lenses, maybe just a little bit on the pricing dynamic. It's been a tailwind here for a number of quarters. Pricing, I believe resets possibly every 6 months depending on distributor versus optometry versus retailer contracts.

Speaker 12

And so maybe just the visibility on pricing is something in the range of 200 basis points, sort of the new normal for contact lenses. And when we think about a mix toward Toric, in any modality, when we go from a Sphere to a Toric or just get

Speaker 8

a new

Speaker 12

Toric users relative to a Sphere, what is the margin uplift of Toric versus Sphere? And then I'll have one on CSI.

Speaker 2

Sure, Anthony. Yes, a couple of different things. Visibility internally on pricing,

Speaker 8

of course,

Speaker 2

but it's a complex model as you could imagine. I mean, you talked about a couple of the items, right? Distributors versus retailers and the direct channel to optometrists. That's why I always say to people like be careful reading too much into something like consumer rebate activities in the U. S.

Speaker 2

That occur in the U. S. And not outside of the U. S, right? I think at the end of the day, what you're thinking about is right, like 2% to 3% support for market growth is probably the range that we're sitting in.

Speaker 2

I think where inflation is, it won't surprise me if we continue to sit in that range for a little while longer. We'll see what happens long term on that. When you think about the growth of the market overall, it ties to your question on torics, which is one of the reasons the market is growing nicely, is it's not only price in terms of pure price, but it's price coming from a product mix shift. And as you get more growth in torics and you get more growth in multifocals, and some of the other specialty ones, I mean, we have some of the most innovative products in the market when it comes products like Energous and so forth. You do get a different margin profile.

Speaker 2

Now that one's a little challenging to answer, specifically because it depends on the life cycle, meaning when you're launching some of these products, especially wide SKU range torch, you're going to have lower margins. But once you get the products fully into the market, you'll get margins at or even above, fully into the market, you'll get margins at or even above, SPEAR margins. So I would say at the end of the day, we really look at operating margins more than gross margins.

Speaker 9

And all of this activity is going to end up being

Speaker 2

long term accretive to

Speaker 12

competition for PARAGARD from a competing copper non hormonal device coming on the market.

Speaker 8

So maybe just a

Speaker 12

little bit on the competitive landscape in IUDs broadly and your take on just brand loyalty to PARAGARD versus a new copper alternative in the marketplace? Thanks.

Speaker 2

Sure. Yes, I mean right now PARAGARD is the only approved product in the marketplace. And I think it's worth remembering that IUDs are governed as pharma products. So the regulatory approval process is long and arduous. And I can't comment on somebody else's process or their journey to getting approval.

Speaker 2

But what I can say is that we have a fantastic team selling PARAGARD. It's been in the market a long time. It has a 10 year indication, which is very unique to it. We just went through the full approval process to get single hand inserter approved. We've got that product into the market right now.

Speaker 2

That's a more efficient way for the practitioner to insert the IUD. So that's fantastic. And if there was pushback on PARAGARD, a lot of times it was tied to that. So that's a nice improvement we have in the marketplace. So where PARAGARD sits right now is actually in a pretty good spot.

Speaker 12

Thank you. Congrats again.

Speaker 9

Thank you.

Operator

Your next question comes from the line of Jason Bednar of Piper Sandler. Please go ahead.

Speaker 9

Hi, good afternoon. Thanks for taking the questions. I wanted to come back to CVI and really see if you can provide a bit more color on the cadence of demand throughout the quarter, the exit rate you had from July into August. I think you mentioned a good back to school season from my side. So I guess just wondering if that extends to the rest of your business as we exited the Q3, if that was on a high note?

Speaker 2

Yes. We had a good July. I would say we're having a good August. So yes, somebody asked a question kind of earlier about market demand and so forth, I'd say the market is remaining healthy certainly and we're seeing that in our business. I am excited about MiSight and where we're at.

Speaker 2

The receptivity on that seems to have increased and we're seeing more positive news on MiSight. So I'm expecting another good quarter here for fiscal Q4. But yes, in general, last couple of months have been good and the month we're in is starting off well. Okay. All right.

Speaker 2

That's helpful. Thanks, Al.

Speaker 9

And then one other one. We're hearing that J and J is reversing course on its decision to cut its toric SKUs. I think that was a decision from 18 months ago or so. But Cooper was a big beneficiary of that original decision from J and J to cut those SKUs that won over a lot of toric patients. Do you see any risk of share give back for that lens class?

Speaker 9

Or is there any reason to think that share would be less sticky, any less sticky, for those patients than what you would normally see with a typical contact lens consumer?

Speaker 2

No, I'm not too worried about that. I mean, first of all, I would say that it wasn't that big of a deal. They cut some SKUs out of some ranges in the wider part of the bell curve, if you will. So it would not be fair to say we took a lot of Toric business or a lot of Toric patients from them because of that decision. We did take some.

Speaker 2

And when you fit somebody in a Toric, especially a Toric like ours, just I mean, we're a market leader there with some of the best design the best design Toric in the marketplace period. We don't lose patience once they come into our products. So no, I think we're fine on that side of things. Okay. Kind of what I figured.

Speaker 2

Thank you.

Operator

Your next question comes from the line of Brett Fishman of KeyBanc Capital Markets. Please go ahead.

Speaker 11

Just think it's been pretty striking, I have to say, some of the uneven results that we've seen in the contact lens space this year with the market seemingly really healthy and perhaps like a major exception over the past few quarters. I'm just curious if you can comment maybe on like that level of the difference that we've seen across some of the different players. And what are the biggest differentiator separating, call it, like the outperformers such as yourself from the underperformers over the past few quarters?

Speaker 2

Yes. I think that when you look at the contact lens market, it's always a little tough to pick at any individual quarter because a lot of different things can happen. Brad, we've seen them over the last couple of years when it comes to people having some shipping issues or supply issues and so forth. But at the end of the day, I look at our business model and I say, okay, we have the broadest portfolio, some of the best arguably the best markets and a lot best products in a lot of segments of the market. So I think you're going to get consistency, I mean, from us.

Speaker 2

I think when you look at the rest of the market, you've got disruptions in business profiles and then you've got portfolios, where people are in their portfolios. The market has shifted over and continues to shift to silicone hydrogel dailies and specifically daily torics and daily multifocals. As you know, I mean over the last, geez, now 5, 6 years or so, we've put a heavy emphasis on expanding our capabilities in the daily side of things, bringing our monthly portfolio into the daily side of things, expanding parameter ranges for torics and creating products like MyDay Energous and MySite and so forth to expand the daily market. And that's worked out really well for us. So I don't know, I don't read too much necessarily into all the competitors quarterly results because at the end of the day, you got a strong market and everyone is going to continue to put up decent results moving forward because you just have healthy underlying demand.

Speaker 11

All right. I appreciate that commentary and color. And then just a really quick follow-up on the other side of the coin with Myopia management. Have there been any updates around the CyClass FDA approval timeline? And if not, what's really like the next data points that we should be paying attention to?

Speaker 11

Thank you very much.

Speaker 2

Sure. Yes. On CyClass, no updates on that. We're working through that clinical process right now to try to get FDA approval. The last kind of commentary we gave on that was looking, hoping to get FDA approval in the latter part of next year.

Speaker 2

I mentioned it earlier, we have an excellent relationship and joint venture with Esalora Luxottica, who is a true leader in myopia control. And they're doing some fantastic things in that space and we're working with them. We're doing some fantastic things. So 2 great companies working together to promote myopia care and really trying to help children that need visual correction around the world. With Sightglass, we have the product in China right now.

Speaker 2

It's doing really well there. And we're looking forward to continuing to do really well there and get launched, make its way around the world and ultimately get FDA approval and be really successful here and really help my side also.

Operator

Your next question comes from the line of David Traxson of Needham. Please go ahead.

Speaker 9

Great. Good afternoon, Alan, Brian. Thanks for taking my questions and congrats on the quarter. Maybe I'll continue on with Myopia management. So OrthoK, at least on my math, I mean, it looks like growth or it returned to growth in the quarter, I should say.

Speaker 9

So I guess what's driving that? How much of that is driven by China recovery versus kind of strengthening the rest of the world? And then for MiSight, can you talk about what percent or what inning you're in, in terms of commercial payer coverage? Kind of when should we expect you to reach critical mass on that? And I'll have one follow-up.

Speaker 9

Thanks.

Speaker 2

Sure. I would say when it comes to Myopia management and I would say this is true for OrthoK and MiSight, our weakest market is China. Now we don't do a lot of business in China period as a company. There's a tremendous amount of opportunity with myopia control and these treatments in China because there's such a high percentage of the pediatric population that's myopic. But that would be a market where we struggle.

Speaker 2

So as well as we're doing, it's largely being driven by success outside of China. You guys probably even know better than I do. You probably follow China closer than I do. But it'd be great to get some consistency in growth out of China because I think there's some tremendous growth opportunities there with MiSight and NorthOK. But right now, we're not really seeing it.

Speaker 2

That's not a driver. If I think about MiSight and insurance coverage, I would say we continue to make progress slow but sure. I've talked about Aetna coverage in the past and Kaiser coverage in the past. I think we're just continuing to make slow and steady progress on insurance reimbursement. I would go back to some prior comments I've made on other calls that we really need to get spectacles in the market and really get the myopic control market to become standard of care so that all optometry practices are looking at that when kids come in, right, and treating them the way they should be treating.

Speaker 2

And I think that's going to really kick start the insurance reimbursement. Until that point, I think we'll just continue to plug along slowly but surely.

Speaker 9

Okay. That's great. Thanks for that. And then on in CooperSurgical, I think last quarter you talked about PARAGARD expectations of being flat to slightly up. Is that still the case?

Speaker 9

And then, in the stem cell storage and medical devices part of the business, I think, Brian, you had called out some growth. Maybe can you get a little more granular? What kind of growth? Is that single digits, high singles, etcetera? And then what is driving that?

Speaker 9

Is that kind of M and A contribution or some of these organic product launches? Thanks so much.

Speaker 2

Yes. I'll give a couple here off the top of my head and see if Brian has anything to add. I mean PARAGARD is going to be up this year or we're anticipating it being up this year, just a little bit, not a lot, but it will be up slightly. STEM was kind of usual. It was up, I think, around 4%.

Speaker 2

And that was just organic growth. And we haven't done any acquisitions or anything on that side of things. We just did this 2 small ones Brian mentioned.

Speaker 3

Yes. David, I don't have anything else to add. Those are the right numbers.

Speaker 9

Okay, great. Thanks so much.

Operator

Your next question comes from the line of Steve Lichtman of Oppenheimer. Please go ahead.

Speaker 13

Thank you. Good evening, guys. Just wanted to follow-up on PARAGARD. So you've had moving parts with the stocking dynamics the last few quarters. Al, as you look beyond just this coming quarter, what is your outlook for underlying growth for PARAGARD looking forward and sort of the pluses and minuses driving your outlook?

Speaker 2

Sure. Yes. I mean, I think you can back into the numbers. PARAGARD will be down a little bit in Q4 again. But I think if I look longer term, you're talking about a marketplace that has declining unit sales.

Speaker 2

So we're getting a little bit of growth because of price. We've taken price a few times, maybe we'll take price again. But the marketplace is declining in terms of units, which creates the challenge. I mean, ultimately, there's more options available to women for birth control. And I think non hormonal IUDs meaning PARAGARD is going to continue to do okay.

Speaker 2

But that's not the it's not a big growth market, right? I mean, it's just not, but it's fine. I mean, it's less than 5% of our revenue. So it's I mean, we talked about it. I don't know why we spend so much time talking about it, but that would be the answer.

Speaker 8

Okay. Got

Speaker 13

it. And then Brian, you mentioned CapEx moderating. Just given the demand outstripping supply, what drives the ability to moderate that investment?

Speaker 3

Hi, Steve. Yes, I just want to

Speaker 2

be clear though. I mean, while

Speaker 3

I talked about in the future when CapEx moderates, we'll get to work on continuous improvement activities and that will result in efficiency gains. I wasn't necessarily suggesting that next year is going to be a light CapEx year and I wasn't certainly even giving guidance to next year. So certainly, we have a demand still outstripping supply. We're capacity constrained in a number of places. We're modulating some of our launches and our launch activities based on the capacity and the supply that we have.

Speaker 3

But capacity is coming on just about every month and we're doing great at adding capacity and better than expected yields and results. So I'd expect that next year we're still going to have a big CapEx number. I just talked about free cash flow being better next year than this year. And this year I'm reiterating this sort of around $300,000,000 of free cash flow. So things are looking positive, but I wouldn't initially say that a major change in CapEx for next year.

Speaker 13

Understood. Thanks guys.

Operator

Your next question comes from the line of Chris Pasquale of Nephron Research. Please go ahead.

Speaker 14

Thanks. Al, I'll ask one more paragraph question for you just to fill out the slate. Could you just clarify the number this quarter? I thought we were looking for down sequentially. I think I heard down a little bit year over year, which would be up actually a fair amount sequentially.

Speaker 14

So what did PARAGARD do in 3Q?

Speaker 2

$48,000,000

Speaker 14

Okay. Thank you. And then the Biofinity and Avera growth was strong this quarter. Every time the delta between dailies and FRP compresses, kind of stands out relative to what we're used to seeing historically. Was there anything unusual that helped those products?

Speaker 14

And then I'd love just a general sense of where we are in that transition to dailies in places like the U. S. And Europe that have been playing this very long game of catch up relative to markets like Asia that were quicker to adopt.

Speaker 2

Sure. Probably not too much to read into Biofinity avera this quarter. It was a strong quarter, and it was driven by some of the products that I mentioned Energous and extended range torics and toric multifocals and so forth. But I think you're going to get some stronger quarters and then some lower quarters there. I mean that will fluctuate around with dailies.

Speaker 2

So not too much to read into that. When I think about the marketplace on dailies, we still have a long runway as an industry there. Less than half of people are being fit in dailies right now. If we call somewhere around 45% of fits going into dailies, about 70 percent of those fits are going into daily silicone hydrogels. Those numbers are increasing.

Speaker 2

They continue to increase. But the fact that less than half of people are being fit into dailies right now just tells you how much of a runway we have to go as an industry. I mean, I just it's amazing. I wear dailies and I would never go back to not wearing dailies. They're just so easy, put them in, take them out, throw them out, clean, safety, everything else that goes along with it.

Speaker 2

So I just think that trend is going to continue. And then I would add on to that that as you've seen products like the one I'm wearing, my day multifocal, which is just I mean it's an amazing, amazing product. And what we've seen is people try my day multifocal and they stick with it and they stay in it for years years years rather than dropping out of contact lenses. And the last one I would add is torics. I mean, getting the fit that you should get, the correct lens for your eyes that gives you the best eyesight is critically important.

Speaker 2

And doctors' ability to fit people in torics right now has improved. And now that you're getting the availability of torics within dailies, it's continuing to grow that market. So I think we I don't know what inning we're at if you ask me that way, but we have many years left as an industry shifting continuing to shift over to daily silicone hydrogels and torics and multifocals.

Speaker 14

Great. Thanks.

Speaker 2

Yes.

Operator

Your last question comes from the line of Navin T of BNP Paribas. Please go ahead.

Speaker 7

Hi, good afternoon. First on capacity progress at CVI, do you have enough visibility to resume more launch activities in the near term? And then I have a follow-up on PARAGARD is the single hand inserter a differentiator versus the upcoming competition? Thank you.

Speaker 2

On the single hand inserter, I'd say it puts us on par if you will with the market. There is single hand inserter used by hormonal IUDs and that puts us on par with the market. I don't know what the competitor is going to do and what they'll get approval on or won't get approval on. So I won't speculate there. But I will say that it puts us on par with the other products like Mirena that are in the marketplace.

Speaker 2

On capacity, we are making great progress on capacity and we are more active in terms of getting product into the market and evaluating some incremental launch opportunities, if you will. So, that yes, I would answer that we have very good visibility on that, and it would be positive news.

Speaker 7

Thank you.

Speaker 2

Yes.

Operator

There are no more questions. I will now turn the conference back over to Al White, President and CEO for closing remarks.

Speaker 2

Great. Thank you. And thank you to everyone who called in. We had a really strong operational quarter as we talked about. As Brian said, we're really focused on that and we're going to continue to deliver results here in the short term and long term.

Speaker 2

That's our plan. So thank you again. Look forward to seeing everyone during this quarter. Thanks.

Operator

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.

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Earnings Conference Call
Cooper Companies Q3 2024
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