Cooper Companies Q2 2023 Earnings Call Transcript

Participants

Corporate Executives

• Kim Duncan, Vice President, Investor Relations and Risk Management
• Albert G. White, President and Chief Executive Officer
• Brian Andrews, Executive Vice President, Chief Financial Officer and Treasurer

Analysts

• Jeff Johnson, Robert W. Baird
• Larry Biegelsen, Wells Fargo & Company
• Joanne Wuensch, Smith Barney Citigroup
• Anthony Petrone, Mizuho
• Robbie Marcus, JP Morgan Cazenove
• Brett Fishbin, KeyBanc Capital Markets
• Jason Bednar, Piper Sandler Companies
• Jonathan D. Block, Stifel Nicolaus
• Ron Feiner, Oppenheimer & Co.
• Patrick Wood, Morgan Stanley
• David Saxon, Needham & Company Inc.

Presentation

[Operator]

Good afternoon. My name is Emma and I will be your conference operator today. At this time, I would like to welcome everyone to the CooperCompanies Second Quarter 2023 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 Instructions] Thank you.

Kim Duncan, VP of Investor Relations and Risk Management, you may begin your conference.

[Kim Duncan, Vice President, Investor Relations and Risk Management at Cooper Companies]

Good afternoon and welcome to CooperCompanies second quarter 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.

Before we begin, I'd like to remind you that this conference call contains forward-looking statements, including all revenue and earnings per share guidance and other statements regarding anticipated results of operations, market or regulatory conditions or trends, product launches, operational initiatives, regulatory submissions and closing or integration of any acquisitions or their anticipated benefits. Forward-looking statements depend on assumptions, data or methods that may be incorrect or imprecise and are subject to risks and uncertainties. Events that could cause our actual results and future actions of the Company to differ materially from those described in forward-looking statements are set forth under the caption Forward-Looking Statements in today's earnings release and are described in our SEC filings, including Cooper's Form 10-K and Form 10-Q filings, all of which are available on our website at coopercos.com.

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. Should you have any additional questions following the call, please email ir@cooperco.com.

And now I will turn the call over to Al for his opening remarks.

[Albert G. White, President and Chief Executive Officer at Cooper Companies]

Great. Thank you, Kim, and welcome everyone to CooperCompanies second quarter fiscal 2023 conference call. This was another strong quarter with CooperVision and CooperSurgical both outperforming expectations.

For CooperVision we reported record quarterly revenues and our ninth consecutive quarter of double-digit organic revenue growth. For CooperSurgical, we reported record quarterly revenues and our fertility business reported its 10th consecutive quarter of double-digit organic revenue growth and earnings exceeded expectations. Our teams are delivering impressive consistent growth and we're seeing nice momentum. So we remain very positive about the future.

Moving to the numbers. Consolidated revenue reached a record quarterly high of $877 million, CooperVision posted revenues of $589 million, up 10% organically and CooperSurgical posted revenues of $288 million, up 5% organically. CooperVision's growth continues to be led by our daily silicone hydrogel and myopia management portfolios and CooperSurgical's growth was led by our fertility and OB-GYN medical device portfolios. Non-GAAP earnings per share were $3.08.

For the quarter and reporting all percentages on an organic basis, CooperVision's revenue growth was strong and diversified. By geography the Americas grew 6%, EMEA grew 7% and Asia Pac grew 19%. Results were driven by new product launches, expanded product ranges, market-leading flexibility and growth in key accounts. Within categories, torics and multifocals remained especially healthy, with both posting growth of 15%.

Within modalities, daily silicone hydrogel lenses grew 17%, with especially strong performance from MyDay. Daily silicone hydrogel lenses continue to be the main driver of growth for the contact lens industry, and we offer the broadest portfolio with MyDay and clariti available in a wide range of spheres, torics and multifocals. And lastly, our silicone hydrogel monthly and two-week lenses, Biofinity and Avaira Vitality, reported growth of 5%.

Turning to products. The US rollout of our latest innovative offering, MyDay Energys is going exceptionally well. This premium lens caters to the demands of today's lifestyles by incorporating DigitalBoost technology to alleviate the impacts of digital eye strain. Interestingly, we've been receiving a lot of positive feedback that patients in their 20s and 30s really like this lens, which is great news as the original Biofinity Energys has been more heavily used by patients in their 40s.

Given almost all of us are spending considerably more time on screens, which reduces blinking and causes eyes to dry out and become uncomfortable, it's not surprising that wearers of all ages are appreciating the DigitalBoost in their MyDay Energys. Meanwhile, MyDay multifocal sales remain robust and we're seeing great momentum in new geographies as the lens becomes more readily available in EMEA and Asia Pac. I'm happy to report these launches are proceeding better than expected, with feedback from customers and practitioners remaining very positive.

Our MyDay toric parameter expansion rollout in North America is also continuing successfully, and our recent launch in EMEA is ahead of schedule. Given the success of this product, we'll be increasing availability throughout EMEA, and we're looking forward to launching in Asia Pac in the near future.

With almost 4,000 SKUs MyDay toric has set the industry standard with the widest daily toric range in the market by a wide margin. With this broad range, it's providing many two-week and monthly toric wearers the option to enjoy the freedom of wearing a daily contact lens for the first time in their lives.

To conclude on MyDay, this technologically superior product family is performing exceptionally well and momentum is strong. And lastly, within the daily segment, our clariti family of lenses continues to perform well by offering a high-quality option at a mass market price point.

Outside of dailies, demand for Biofinity remains healthy, led by torics, multifocals and extended range offerings. We still have some capacity challenges, but with new production continuing to come online, we remain in good shape to meet ongoing demand.

Moving to myopia management, we posted revenues of $30 million, up 36%, with MiSight up 49%. This slightly exceeded expectations and keeps us well on track to reach our goal of $120 million to $130 million this year. MiSight and Ortho-K sales were strong around the world, except China where we didn't see a rebound until late in the quarter.

Regarding MiSight specifically, we're seeing improving performance as we increase availability in key accounts, target practices with higher levels of pediatric patient flow and integrate the sales process into our regular sales channel. All this bodes well for MiSight but also for our other products as there is a nice halo effect with MiSight practitioners, accelerating their use of other CooperVision lenses. It's important to remember that MiSight is the first and only FDA approved contact lens for myopia control and the product is backed by extensive clinical data. This is a critical differentiator as the proactive management of myopia become 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.

To finish on CooperVision, the contact lens market grew 12% in calendar Q1 with CooperVision growing faster at 14%. We expect the market to remain healthy, supported by the macro growth trend of more people needing vision correction. It's estimated that 50% of the global population will have myopia or near sightedness by the year 2050, up from roughly 34% today. This is driven by the increasing use of digital screens, among other factors. And when you combine this with the ongoing shift to silicone hydrogel dailies, the increasing focus on higher-value products such as torics to multifocals and higher pricing, we expect many years of solid growth for the industry. Within this, we expect CooperVision to remain a leader with its robust product portfolio, ongoing product launches fast-growing myopia management business and leading new FIT data.

Moving to CooperSurgical. This was another strong quarter. Our fertility business posted sales of $125 million, up 11% organically for its 10th consecutive quarter of double digit organic growth. Success was seen throughout the product portfolio as the team executed exceptionally well with our diverse offerings within consumables, capital equipment, reproductive genetic testing and donor activity. Regionally, the Americas and EMEA continued to lead growth and the future is bright as we have solid momentum in both regions. Asia Pac is also performing well and we're excited about the potential of that region.

With the uncertainty of the Cook transaction, we do have work to do in that region to build out our footprint and we'll do that. In this light, we're currently doing targeted investment activity, while also exploring ways we can advance efforts more quickly. Overall though, we're well positioned to maintain success, given our strong team, diverse portfolio and global momentum.

Regarding the broader fertility market. We compete in a segment that's now over $2 billion in annual sales and we expect strong growth for many years to come. This industry is unique in that it has multiple growth drivers starting with women delaying childbirth. The average age of a woman's first birth in the US and within several other developed countries now stands at 30 years old, and Asia is a key factor in contributing to the need for fertility assistance.

Other growth drivers include improving access to treatment, increasing patient awareness, increasing fertility benefits coverage and technology improvements for both male and female infertility challenges. The World Health Organization just released updated data showing that the prevalence of infertility affects more people than we thought with approximately one in six people having experienced infertility at some stage in their lives. So the macro trends clearly support this industry's growth.

Moving office and surgical products, which includes OB-GYN medical devices, stem cell storage and PARAGARD, we posted sales of $163 million, up 1% organically. Within this OB-GYN Medical Devices reported excellent results growing 11% driven by positive trends in patient activity and strength in several core products. In particular, our labor and delivery, group continued performing really well.

Our stem cell storage business grew 3% in-line with expectations. Our current educational campaign just starring Chrissy Teigen highlights the importance of preserving newborn stem cells and we're really happy with the positive feedback and we're looking forward to that effort gaining more traction.

Meanwhile PARAGARD declined 15% primarily due to buy-in activity from the price increase in Q1. Our IUD revenues remain a challenge, and we're continuing to not expect any unit growth in PARAGARD this year. So any growth we do see will be driven by price.

To conclude on CooperSurgical, it's with great pride that we say that every minute somewhere around the world a baby is born using CooperSurgical products. Our business makes a difference in people's lives and we love that. We're also operating in several markets that have fantastic long-term sustainable growth characteristics such as fertility. So we feel good about where we're positioned and what the future holds. Before turning the call over to Brian, let me summarize by saying this quarter really highlights the stability and consistency of our businesses. CooperVision posted its ninth consecutive quarter of double-digit growth. And CooperSurgicals' fertility business posted its 10th consecutive quarter of double-digit growth. And both businesses reported record quarterly revenue. Our momentum is strong, our investments are yielding solid returns and our management team is fully engaged in executing at a high level.

And lastly, I hope everyone has had a chance to read our recent ESG report, which highlights a lot of accomplishments. Advancing our ESG efforts is an important part of Cooper's culture and I'm proud of the success we've had and excited about what we'll be accomplishing in the future. And with that let me turn the call over to Brian.

[Brian Andrews, Executive Vice President, Chief Financial Officer and Treasurer at Cooper Companies]

Thank you, Al and good afternoon, everyone. Most of my commentary will be on a non-GAAP basis. So please refer to our earnings release for a reconciliation of GAAP to non-GAAP results. Second quarter consolidated revenues were $877 million, up 6% as reported, or up 8% organically. Consolidated gross margin was up 40 basis points to 67.1% driven by currency improvements. Operating expenses grew 9% to 43.5% of revenues and consolidated operating margin was in line with expectations at 23.7%. This was down from 24.5% last year, primarily due to commercial investments and distribution. Below operating income, interest expense was $26 million and the effective tax-rate was 13.9%. Non-GAAP EPS was $3.08 with roughly 49.8 million average shares outstanding.

To summarize the P&L this quarter. Revenues came in ahead of expectations, while margins met expectations. The net impact from non-operational items, such as FX, interest expense and taxes was slightly negative against our initial expectations. Overall, we exceeded our consolidated EPS expectations by roughly $0.06 and we'll pass along that in guidance.

Free cash flow was $51 million, including capex of $74 million. Net debt decreased to $2.1 billion. And during this last quarter, we fixed the interest rate on an additional $300 million of debt. So we're now -- we now have $1.3 billion fixed going out roughly two to four years.

Regarding 2023 guidance, we are increasing expectations for revenues and earnings by incorporating our Q2 revenue and earnings beats. This results in consolidated revenues of $3.51 billion to $3.57 billion, up 7% to 9% organically with CooperVision revenues of $2.37 billion to $2.4 billion, up 8% to 10% organically and CooperSurgical revenues of $1.15 billion to $1.17 billion, up 5% to 7% organically.

Non-GAAP EPS is expected to be in the range of $12.66 to $12.96. Interest expense is expected to be around $110 million, assuming another 25 basis point rate increase by the Fed this month. And the effective tax rate is forecasted to be slightly below 14.5% when incorporating Q2. Within this, we're continuing to invest in our businesses to support long-term growth objectives. Demand across both businesses remained strong and our long-term growth trends are very positive.

Before concluding, let me add that we took a $45 million charge this quarter for the breakage fee associated with the pending acquisition of Cook Medical's reproductive health business. We now believe it's probable that this transaction as originally contemplated does not close. We are still working on the deal though and will provide updates as we have more information.

In conclusion, this was another strong quarter. We're very happy with the consistency of our businesses and we have great momentum. We're closely monitoring expenses and we'll continue to do so but we're also investing to drive long-term sustainable revenue growth. We're taking guidance up again and remain positive we will execute at a high level, delivering strong operating results through the back half of this year and into next year.

And with that, I'll hand it back to the operator for questions.

Questions and Answers

[Operator]

[Operator Instructions] Your first question comes from the line of Jeff Johnson with Baird. Your line is open.

[Jeff Johnson, Analyst at Robert W. Baird]

Thanks guys. Good evening. Can you hear me okay?

[Albert G. White, President and Chief Executive Officer at Cooper Companies]

Yeah. Hey, Jeff.

[Jeff Johnson, Analyst at Robert W. Baird]

Hi. Hey, guys. So, Al, I know when we look at like the GfK data, that sell out data, you guys and everybody else kind of report sell in data. So it's never apples to apples in that. But I think it's pretty clear. January was a very strong month for contact lenses. It really was across all of Medtech. April obviously a weaker month. So just maybe help us understand kind of the gating throughout the period of the quarter you just reported February, March, April, and then maybe any updates on what you've been seeing so far in May and just kind of the range of implied guidance for CVI now, kind of 6% to 10% in the back half. Just how you're feeling about the low end versus the high end of that range. Thanks.

[Albert G. White, President and Chief Executive Officer at Cooper Companies]

Yeah, you're right. January was a really strong month as we worked through the quarter, it was okay. I mean, February was a good month. March -- April was a weaker month for us. You can kind of see that if you look at the calendar quarter compared to the fiscal quarter for us because we grew in the calendar quarter14% and then grew 10% in the fiscal quarter. So when you trade those months up. So you're right, April was a little weaker. May has been a good month. We did have a little -- some stuff moved kind of from April into May, but May has been a good month for us. So we've seen the contact lens marketplace, at least for our business, rebound in the month of May. So that's been a positive.

[Jeff Johnson, Analyst at Robert W. Baird]

Okay. And then maybe just as a follow-up, if you can address that CVI guidance that's implied in the back half to 6% to 10%, just kind of high end, low end, where your confidence is there. But the real follow-up question I wanted to ask was on pricing. It seems, talking to Alcon and some of your other competitors, looking at some of the pricing data we have for your lenses, there's a good price tailwind this year for, I mean, probably two to three points, something like that. Is that about the ballpark you're expecting?

And then secularly or longer term, how comfortable are you if we stay in a persistent inflationary environment that you could maybe keep up 2%, 3% pricing a year for the next few years? Thanks.

[Albert G. White, President and Chief Executive Officer at Cooper Companies]

Sure. Yeah, I think you're spot on. I think that 2% to 3% net pricing, talking about net pricing is the way to look at it. The actual pricing that we've seen out there has been higher. The actual price increases has been higher. But if you look at the rebates and everything else, 2% to 3% is probably a good way to look at it right now. I think that's going to continue. I think that we're probably a little bit behind our competitors in that because we do have a lot of large contracts, especially some of the bigger store brand contracts that are multi-year contracts. So as those renew, we'll look at opportunities to adjust pricing on those. But I think that you're seeing that now and frankly, I think you're going to see that for the next several years, given supply constraints within the industry in general.

If I look at our performance in the kind of back half of the year, the 6% to 10% you're talking about for CooperVision, I expect to be at the higher end of that range unless something happens to derail that. It has to be something unexpected, right, some economic event or something out there. I mean, we spent some time even this past week. It's been a little bit of a tough time for us coming up with some of the guidance and so forth with the debt ceiling and all the other activity that has been going on here recently. But -- now we have good momentum. I feel optimistic that we'll continue to put up strong revenue numbers.

[Jeff Johnson, Analyst at Robert W. Baird]

Thank you.

[Albert G. White, President and Chief Executive Officer at Cooper Companies]

Yeah.

[Operator]

Your next question comes from the line of Larry Biegel [Phonetic] with Wells Fargo. Your line is open.

[Larry Biegelsen, Analyst at Wells Fargo & Company]

All right. Thanks for taking the question. Congrats on the nice quarter. Al, can you hear me okay?

[Albert G. White, President and Chief Executive Officer at Cooper Companies]

Yeah, I can hear. Go ahead.

[Brian Andrews, Executive Vice President, Chief Financial Officer and Treasurer at Cooper Companies]

Yeah.

[Larry Biegelsen, Analyst at Wells Fargo & Company]

Yeah. I guess I'll ask the question on the guidance first here. The top line, you raised the top line and the bottom line by the amount of the beat in the quarter. I guess I would think FX was a little more favorable, particularly on EPS. Brian, maybe you could help us with that bridge. How much currency changed from last quarter to this quarter for fiscal '23? And I guess the question is, why not raise by a little more than the beat? And I had one follow-up.

[Brian Andrews, Executive Vice President, Chief Financial Officer and Treasurer at Cooper Companies]

Larry, I'll take that, the currency question. Currencies kind of were starting to move in our favor as we were working through the quarter, and then they retraced. I mean, there was a little bit of positive, very little positive sort of to the P&L from revenues down to OI. But really the impact that we saw in the quarter was a negative tied to our FX losses below the line. As we talked about before, we're hedging some of our material currencies, but we still have several currencies and smaller exposures that we're not hedging. And so we had a loss below the line that took our earnings down to $3.08. It would have been a little bit better.

But we basically adjusted for the currency in the quarter. But the impact for the second half of the year for currency, strangely, or interestingly enough, kind of all netted to being sort of the same. So we're still looking at a 2.5% or roughly 2.5% headwind to revenues for the year and kind of a weaker 1% tailwind to EPS for the year.

[Larry Biegelsen, Analyst at Wells Fargo & Company]

And why not raise by more than the beat?

[Brian Andrews, Executive Vice President, Chief Financial Officer and Treasurer at Cooper Companies]

On EPS?

[Larry Biegelsen, Analyst at Wells Fargo & Company]

Yeah.

[Brian Andrews, Executive Vice President, Chief Financial Officer and Treasurer at Cooper Companies]

Well, we raised by the operational the net beat. But with everything, as Al just said, with the macro uncertainty, Fed, FX recession, we just decided, look, we're exercising prudence and setting guidance. The good news is that we're not seeing demand or behavior shifts and since gross and operating margins fallen as expected and things are progressing, we're just exercising some caution in light of the macro.

[Larry Biegelsen, Analyst at Wells Fargo & Company]

That's helpful. Just Al on my follow-up here, Asia Pac plus 19%, really strong. And myopia management, if I heard correctly, the $30 million up 5% -- $5 million, I'm sorry, sequentially. That was one of the strongest sequential growth -- absolute growth increases we've seen in a while. Just talk about the drivers in Asia Pac and myopia management and the sustainability. Thanks a lot.

[Albert G. White, President and Chief Executive Officer at Cooper Companies]

Yeah. Yeah, interesting on myopia management, it was a good quarter and we're gaining some traction there on MiSight finally. We talked about it for a long time. It's great to finally be gaining some real traction. And interestingly, it was not China. We actually struggled in China with MiSight this quarter until the very end of the quarter. So the MiSight was being driven by success here in the US and throughout Europe were big drivers in some of the markets in Asia Pac. So I think we're in good shape with our myopia management business. And I'm expecting Q3 to be a good quarter, Q4 to be a good quarter. As I was saying, I mean, we're certainly in good shape to hit, if not beat our $120 million to $130 million, quote-unquote, guidance range for myopia management.

Asia Pac, we're in good shape. I would say Asia Pac, China being a little bit different if I look at our regular lenses and that it was more of a contributor in terms of our regular sales. But no, Cathy is doing a great job running that business, and we finally have some momentum going in Asia Pac, and I think we're going to continue to put up good quarters as we move through the back half of this year.

[Larry Biegelsen, Analyst at Wells Fargo & Company]

Thanks for taking the questions.

[Albert G. White, President and Chief Executive Officer at Cooper Companies]

Yeah.

[Operator]

Your next question comes from the line of Joanne Wuensch with Citi. Your line is open.

[Joanne Wuensch, Analyst at Smith Barney Citigroup]

Good evening and thank you for taking the question. Can we pick apart PARAGARD a little bit because I want to make sure that I understand what's going on there? Is this another setup where you've got four quarters of pricing headwinds and then we start to grow again, or how do I think about that? Thank you.

[Albert G. White, President and Chief Executive Officer at Cooper Companies]

No -- great question. No, it won't be that way. I would expect PARAGARD to grow here in Q3 and Q4 and for us to kind of put up low single digit growth probably for this year. We did have the tough quarter here in Q2 obviously, but some of that was tied to kind of inventory in the channel, some of that kind of movement around the price increase. So I wouldn't necessarily read too much into that. I would kind of restate what I've said on some of the prior quarters. We're not envisioning unit growth there, but I still think we'll post an okay Q3 okay Q4 and post growth for the full year.

[Joanne Wuensch, Analyst at Smith Barney Citigroup]

Excluding PARAGARD is there a way to describe how the rest of that business is doing because that was pretty much the only weak link in the quarter? Thank you.

[Albert G. White, President and Chief Executive Officer at Cooper Companies]

Yeah. Well, obviously, fertility really strong. That team is doing an amazing job. Just consistent, strong performance, and it's really diversified around the world and by products or product families. So fertility is in good shape. We should continue to do well in fertility. Our med device business is doing really well. Kind of our traditional OB-GYN medical devices. We've seen some strength there in the labor and delivery side some of our surgical products doing really well. So, yeah, outside of PARAGARD, that was a pretty good quarter. I mean, Holly's got that business humming over at CooperSurgical, so expecting them to continue to put up good results.

[Joanne Wuensch, Analyst at Smith Barney Citigroup]

Thank you.

[Operator]

Your next question comes from the line of Anthony Petrone with Mizuho. Your line is open.

[Anthony Petrone, Analyst at Mizuho]

Thanks. Thanks again. And maybe just a couple of clarifying on PARAGARD. Can you remind us, Al, just the price increase that was put in earlier in the year and the extent of volume declines, I guess, through the first two quarters of the year? So that would be my first question. And then maybe just in terms of overall share in contact lenses, at least according to our numbers, it looked like certainly there was gains for Cooper in torics as well as multifocals, but perhaps maybe a little bit of slippage in dailies. Again, just looking at the fiscal at plus 8%, and it looked like competitor data for dailies was a little bit higher than that. So just an overview on the share trends through May in lenses. Thanks again.

[Albert G. White, President and Chief Executive Officer at Cooper Companies]

Sure. Sure, Anthony. The PARAGARD price increase, I think, was 6% that we put in place. Yeah. From a volume perspective, I don't know if I'd highlight necessarily too much on volume. What you're seeing here in Q1 and the quarter we just had, and frankly, you'll see a little bit here in kind of Q3 is tied more to channel inventory, whether it's through the distributor or down actually into the physician's office. You're seeing some fluctuations in that driving our as reported results. So I think if you look through that, which I try to do right, and say, regardless of inventory, how are we looking at actual volume? That's where volume has been flat. We just haven't really seen those increases. And I'm not anticipating that we're going to here in the near term. So, again, I said it last quarter, I'd say it again, I hope I'm wrong on that and being conservative, but as of right now, I think that's where we stand with PARAGARD. But again, a lot of movement tied to inventory. So I do think that we'll get growth in Q3 and Q4, to be clear. And that I do think we'll post some low single digit growth in PARAGARD for the full year.

On contact lenses, yeah, this was a great quarter. Now, if you look at it and you kind of step back and you say Biofinity and Avaira grew 5%. You can see our non single use sphere other grew 2%. So that's what you're getting to, Anthony, right which is kind of the sphere side of things. We did have a couple of larger Biofinity orders that fell from April into May, and you had quite a bit of Biofinity sphere activity there. So I wouldn't read too much into that. I mean, if you're thinking about a quarter-end, yes, that number came in a little bit lighter, but we'll pick that up because we started off Q3 with a good quarter from a good perspective when you look at that part of our business.

[Anthony Petrone, Analyst at Mizuho]

Very helpful. Thanks. I'll get back in queue.

[Albert G. White, President and Chief Executive Officer at Cooper Companies]

Yeah.

[Operator]

Your next question comes from the line of Robbie Marcus with JP Morgan. Your line is open.

[Robbie Marcus, Analyst at JP Morgan Cazenove]

Oh, great. Thanks for taking the questions. Wanted to start with free cash flow and cash flow generation in general. It's been a little low the past few quarters. Maybe speak to the reasons behind it and how you're thinking about cash flow generation going forward.

[Brian Andrews, Executive Vice President, Chief Financial Officer and Treasurer at Cooper Companies]

Hi Robbie. Yeah, sure. So operating cash flow continues to drive higher. We do have some things that are driving free cash flow a little lower. One of them obviously is capex. It's quite a bit higher than in years past. Some other larger components that are driving it that are having an impact downwards are frankly interest. I mean, our interest expense is going from -- doubling from $53 million to $110 million last year to this year. Taxes over the course of, depending on what time horizon you're looking at, our taxes -- tax rates keep going up. Our inventory levels from last year to this year also are going higher. So that's having an impact as well. But overall, I mean, our operating cash flow continues to be strong and expected to deliver still strong free cash flow for this year. Just offsetting, obviously the operating cash flow is just a higher capex, which we've been talking about around $400 million this year.

[Robbie Marcus, Analyst at JP Morgan Cazenove]

Great. And then maybe on new FITS, you talked about strong global new FITS. Are you seeing any divergence in different regions? Just trying to get a sense of the future of the business and the trends there. Thanks a lot.

[Albert G. White, President and Chief Executive Officer at Cooper Companies]

From a new FIT perspective, no, not really. In terms of regional, we're seeing pretty good activity there. There's still a lot of demand on optometrists for appointments and so forth. And the new FIT activity is pretty strong. And our CooperVision new FIT activity is looking really good right now. We're winning certainly our fair share when it comes to new FIT, so I'm pretty optimistic from that perspective.

[Robbie Marcus, Analyst at JP Morgan Cazenove]

Great. Thanks a lot.

[Albert G. White, President and Chief Executive Officer at Cooper Companies]

Yeah.

[Operator]

Your next question comes from the line of Matthew Mishan with KeyBanc. Your line is open.

[Brett Fishbin, Analyst at KeyBanc Capital Markets]

Hey guys. This is Brett on today for Matt. Thanks so much for taking the questions. Just wanted to ask a little bit about the trends in Europe, given how robust several of the historical quarters looked. A little bit of a deceleration here. Just wondering if there was anything driving that step down.

[Albert G. White, President and Chief Executive Officer at Cooper Companies]

Hey, Brett. We have -- we're number one in Europe when it comes to contact lenses. We get fantastic franchise there. The team has done a great job not only building up our infrastructure, if you will, around a lot of the independent optometrists, but also with some of the key accounts where we're especially strong. So no, I think that the European market is doing well. We have not seen a pullback in that market tied to any economic concerns or anything. The contact lens market is strong there and we're kind of leading the charge, if you will. And I think we'll continue to do that.

[Brett Fishbin, Analyst at KeyBanc Capital Markets]

All right, thank you. And then just turning to MiSight, it sounded like trends in Americas in retailing key accounts was actually the driver of the step up this quarter. So do you see potential maybe to drive some upside to that guidance range given China now it seems like it's starting to recover and might actually be an incremental driver to the positivity you're seeing in the Americas?

[Albert G. White, President and Chief Executive Officer at Cooper Companies]

I guess, short answer to that would be yes. Yeah, we're in a better spot when it comes to MiSight today than we were six months ago when we initiated that $120 million to $130 million. So I think we've got a good shot to be at the higher end of that range or even push above it.

[Brett Fishbin, Analyst at KeyBanc Capital Markets]

All right. Awesome. And then last question for me. I think you touched on some of the continued supply chains in the industry being a positive driver for pricing growth. Wondering if there are any pockets of particular issues from other companies that might be benefiting Cooper, given the investments you've been making in your own production. Thanks very much for taking the questions.

[Albert G. White, President and Chief Executive Officer at Cooper Companies]

Yeah, that's a tough one. I don't think there's too much there in terms of disruption from others. There are supply chain challenges I think that we all have right now. Our competitors do and we do too, in terms of just being able to produce enough product. I mean, in a lot of cases, I think a lot of us are selling everything that we can make right now. So not only are we dealing with whatever supply chain issues you could have associated with distribution and everything else, and all those are certainly lightening up. But we're also dealing with demand. I mean, I'll talk about ourselves, right? We're a business that's been healthy for a long time, growing around 7%, and now we pushed up what, our 9th straight quarter double digit growth. That puts pressure on the business in terms of having to make more product and run more product through your distribution channels.

So there's just a natural challenge on that from a supply chain perspective. I think it's industry wide, and we're all going to continue to deal with it because I think we're all increasing our production capabilities and kind of expanding our capabilities throughout our logistics networks. But it takes time, it takes effort, and the demand is there, right? So we're going to continue to see strength in the contact lens industry. I don't think you're seeing too much in terms of one person struggling so much as someone else is picking up business, as much as you're seeing supply chain issues or challenges just because of the global demand of the contact lens industry.

[Operator]

Your next question comes from the line of Jason Bednar with Piper Sandler. Your line is open.

[Jason Bednar, Analyst at Piper Sandler Companies]

Hey, guys. Thanks for taking the questions. Al, I wanted to ask on Biofinity toric, we've been hearing of some greater channel inventory shift from a competing toric lens to Biofinity toric. I know this has been going on for awhile, but are you able to quantify or do you have any metrics around maybe what kind of share you've picked up with Biofinity toric? How much this is maybe adding to the toric revenue growth was pretty impressive in the quarter. And then sorry to pack a few into here, but how much tail is left from this conversion to toric and whether or not you're seeing any, again, channel inventory shift with toric or even more broadly?

[Albert G. White, President and Chief Executive Officer at Cooper Companies]

Yeah. There's probably something there, but I just don't put too much weight on it, honestly. I mean, we've had some competitors pull back a little bit on some of their SKU ranges, and we have those SKU ranges. As a matter of fact, our Biofinity toric family is the widest toric offering out there. And when you roll in things like the toric multifocal and so forth, it's just an amazing franchise right now. We've been building that franchise out for a number of years. We spent a lot of time and a lot of money on the manufacturing side and also on our distribution network to be able to manufacture and distribute all those products in a wide SKU range.

So do I think that we're maybe getting a little bit of help because some competitors or a competitor has pulled back on some of their SKU ranges? Yeah, probably. But this isn't coming because of, like, one quarter or an action that somebody took. This is coming because of a multi-year strategy that CooperVision has deployed to drive growth in our torics. I mean, Jerry Warner runs that business for us, does a fantastic job. He just laid out a great strategy there in terms of torics and multifocals appreciating that the market is growing. That portion of the market is growing faster than the sphere market, and it's a really sticky and great market. So I mean we've again invested a lot of time and money for a lot of years to be in the position we're in. And I give the team a lot more credit around that activity than I do saying that a small movement by a competitor is allowing us to take a lot of share.

[Jason Bednar, Analyst at Piper Sandler Companies]

Okay. That's helpful. Maybe if you just follow up your comment on whether or not you're seeing any share shift or, sorry, not share shift, but inventory shift in the channel at all. But then separate follow up. Actually, wanted to ask another one on PARAGARD here. I think you've probably tried every which way to get this product line to grow. We've seen different advertising, sales recondition, greater commercial focus. The effect here has been tough. Does there come a point where you'd look to evaluate different options for PARAGARD or maybe better said is a strategic and financial fit still make this a good asset for Cooper. Thanks.

[Albert G. White, President and Chief Executive Officer at Cooper Companies]

Yeah. On the channel inventory side, I'd say we probably ended our fiscal quarter a little light on channel inventory. I kind of referenced that a little bit with some of the Biofinity shipments, but I'd say we were probably a little lighter from a channel inventory perspective. Nothing to go crazy about. But since you're asking.

On PARAGARD, yeah, boy, we bought that, we put some money into it. I think we've gotten a great return on that asset. But having said that, we put some money into it. We put some TV advertising out there and a lot of different marketing campaigns and so forth to really try to energize the non hormonal IUD market. We had some success on that. Not a ton. You kind of get to where you're at today. There's some fundamental shifts in the market that are causing challenges for us. You're not seeing women go into their gynecologists as much as they were pre-COVID for kind of annual wellness exams and so forth.

And as that's happened, combined with the fact that a lot of birth control options, especially birth control pills, the availability has increased, or the ease, if you will, to get that birth control has improved. It's hurt the IUD market and it's hurt PARAGARD. So we're evaluating that like we always do right now. I mean, that's a good product. It does okay in the marketplace, right? It's a decent fit in terms of our women's healthcare franchise, but we'll always evaluate that just like we do everything else in terms of kind of our long-term strategic planning.

[Jason Bednar, Analyst at Piper Sandler Companies]

Very helpful. Thank you.

[Albert G. White, President and Chief Executive Officer at Cooper Companies]

Yeah.

[Operator]

Your next question comes from the line of Jon Block with Stifel. Your line is open.

[Jonathan D. Block, Analyst at Stifel Nicolaus]

Great. Thanks, guys. Good afternoon. Really good quarter. But just despite the top line beat, you came in a little bit hot on opex as a percent of sales relative to our estimate. And if I look at sort of fiscal 1H23, I think opex as a percent of sales you might be up roughly 100 BPs from last year. Brian, I think you mentioned some investments. Is that CVI?Is that CSI? Where are those investments being made? And does that sort of remain front and center for the next couple of quarters until sort of you lap them, call it exiting fiscal '23 and we can think about recapturing leverage into fiscal '24?

[Brian Andrews, Executive Vice President, Chief Financial Officer and Treasurer at Cooper Companies]

Yeah, good question. Thanks, Jon. Yeah, I mean, I'd say our opex kind of -- the total opex dollars came in kind of where we expected along with our gross and operating margin results. We continued to invest in commercial activities, including sales and marketing, tied to the product launches and the rollouts that Al mention in his prepared remarks. We had also continued fertility investments, and that includes kind of building out more of our competencies in various regions like Asia Pac. And then lastly, I mean, we still have inefficiencies that we expected in distribution that were higher year over year. And I'll just mention sort of the challenges that we have when revenues continue to drive higher and the strain it puts on distribution. But we're working through those challenges. And I'd say total opex again, landed where we expected. But our real focus is on driving operating margin expansion. And like I've said before in the last call, and I'll say it again here our operating margin at the midpoint of our constant currency revenue guide, we're expecting constant currency OI growth of around 11%.

So as long as we're driving that operating margin expansion and that's in this year driven in large part from gross margin expansion, then we're putting up a leverage P&L. And so that's the goal for this year.

[Jonathan D. Block, Analyst at Stifel Nicolaus]

Got it. Fair enough. And maybe just to shift gears. And Al this one might be with you -- for you, but within APAC, I know you're overweight to Japan, but sort of want to take the opportunity to ask what you're seeing in China, the slope of the business of late. I just think there's been a lot of headline noise news. And so just love to get your thoughts on what you're seeing on the ground in that sort of April into May time frame. Thanks.

[Albert G. White, President and Chief Executive Officer at Cooper Companies]

Sure. Yeah, we've seen some improvements in China, but China kind of even now comes and goes a little bit. When you look at it from our perspective, it's probably two different stories, right? Because you have our regular contact lens business there, the retail side, if you will, which we've seen some traction on, and we've seen some improving results. And then you have the myopia management side, which is MiSight, but also a lot of Ortho-K that gets sold through the hospital. That's a different channel. So I do think that we're seeing some improvements in that channel, in the hospital channel, which is actually going to help us a little bit on Ortho-K and MiSight. The other side, the retail, the general population, if you will, kind of comes and goes a little bit.

Now, having said that, Jon, remember, that's a pretty small market for us. I mean, some of our competitors have much bigger shares in China than what we have.

[Jonathan D. Block, Analyst at Stifel Nicolaus]

Perfect. Thanks for the color, guys.

[Albert G. White, President and Chief Executive Officer at Cooper Companies]

Yeah.

[Operator]

Your next question comes from the line of Steven Lichtman with Oppenheimer. Your line is open.

[Ron Feiner, Analyst at Oppenheimer & Co.]

Hi, guys. This is Ron on for Steve. I wanted to ask you guys about SightGlass a little bit. What is your estimate for the approval timing? And with MiSight being in the field for a bit now, how are you thinking about how SightGlass will be positioned in the field versus it? Thanks.

[Albert G. White, President and Chief Executive Officer at Cooper Companies]

Yeah, so no real update on SightGlass when it comes to regulatory approval here. Waiting to receive the final four-year data and compile that and then take next steps. So nothing really to add from that perspective. As you know, we got a great partnership with EssilorLuxottica on that product, and the product has been launched in many markets around the world, and it's selling and it's doing well. That's within the joint venture itself. So I continue to be really optimistic about that product long term, but that is within that joint venture, not in our P&L, other than the investment activity, gains or losses below the line.

When it comes to MiSight and how that looks. To me, glasses are going to do nothing but be a positive for the myopia control market. We want people getting into myopia control. They need to be wearing the product, so children need to be wearing those glasses. Compliance is really important as children get into myopia control, and let's say they do that a lot at five, six, seven, eight, nine 10 certainly as they get to become teenagers, and certainly anyone who has compliance as an issue, you're going to want to be moving to contact lenses.

So anything that we can do to drive the myopia control market forward and increase it is a positive for us, positive for MiSight, positive for the industry.

[Ron Feiner, Analyst at Oppenheimer & Co.]

Thanks. That's really helpful. And I guess sort of a follow up on that. You guys mentioned that the headwinds on myopia and China are kind of abating towards the end of the quarter. Can you say what changed, like, towards the end what was the shift? Because China has been a headwind on myopia for a little bit.

[Albert G. White, President and Chief Executive Officer at Cooper Companies]

Yeah. It's really those products are sold through the hospital channel. So you need the hospitals to kind of open up and have more kind of, if you will, availability for children and so forth. You need to transition back to a more traditional, normal hospital environment within China. So I think that's what we're seeing right now, right as COVID starts to get in the rearview mirror and you're getting patients going back into the hospital for more traditional needs and so forth, you're opening up some space for optometry, and that's helping with the fittings.

[Ron Feiner, Analyst at Oppenheimer & Co.]

Thanks.

[Albert G. White, President and Chief Executive Officer at Cooper Companies]

Yeah.

[Operator]

Your next question comes from the line of Patrick Wood with Morgan Stanley. Your line is open.

[Patrick Wood, Analyst at Morgan Stanley]

Amazing. Thank you very much. Two left for me, please. I guess the first one is on the fertility side. Maybe just zooming out. If we just hypothetically say Cook doesn't close, how committed are you to APAC as a region? You hinted by saying maybe some accelerated pathway to growing there. I'm just curious if you could put a little bit of meat on the bone, how you feel about the region, how critical that is for you and fertility going forward.

[Albert G. White, President and Chief Executive Officer at Cooper Companies]

Yeah, that's a really good question. That is an important region, and we are going to invest in that region. So we are right now, we're going to continue to invest there. One of the primary reasons we were doing the Cook transaction was for growth in that region. There's a number of markets there that are really, really strong fertility markets, I mean, really strong growth rates. So we have a solid presence, I think, in parts of that region, like Australia and so forth. But there's a number of countries where we don't have a presence, or the presence is pretty small.

We need to hire some people, build out some infrastructure there. So we're evaluating that activity right now. Because when you look at our business as a leader in the space, right, and as well as we do with our broad portfolio in the Americas and throughout Europe and in parts of Asia Pac, there's no reason we shouldn't be able to buildout infrastructure and continue to drive growth there. So that's a matter of the typical thing we do as a company, which is evaluate those opportunities, look at the return metrics associated with them, because you do have inefficiencies anytime you're building out infrastructure in a new region like that. So we're going through the process and evaluating all that activity right now.

[Patrick Wood, Analyst at Morgan Stanley]

Amazing. And then one more, which is I was really interested around MiSight and the positive halo effect of selling and the rest of your offering. I mean, is that more a function of MiSight opening the door in the first place where there isn't a relationship because it's such a unique offering and then being able to sell more in? Or is it more about incremental depth with accounts where you already have that relationship?

[Albert G. White, President and Chief Executive Officer at Cooper Companies]

Yeah. That's a really good -- it's a really good point because you're right. There's a lot of optometry offices where they're much stronger with some of our competitors to the point where they might just use competitor products and not our products. And MiSight has cracked open the door in a number of those accounts. And it's gotten our people in there, and all of a sudden, we're able to have conversations about products like MyDay as an example and about our extended toric ranges and so forth. It's opened the door and it's continuing to open the door into more new opportunities for us.

So I do think there are some in terms of existing accounts where we're going in with an innovative product, right, and they can kind of see the technology advancements and they get more comfortable with Cooper. But you're spot on, I would not discount the importance of kind of virgin Cooper stores, if you will, where we can go in there and finally start selling some of our core products.

[Patrick Wood, Analyst at Morgan Stanley]

Really helpful. Thank you for taking the question.

[Albert G. White, President and Chief Executive Officer at Cooper Companies]

Yeah.

[Operator]

Your next question comes from the line of David Saxon with Needham. Your line is open.

[David Saxon, Analyst at Needham & Company Inc.]

Yeah. Thanks for taking the questions and congrats on the quarter. Maybe I'll ask two on CooperSurgical, starting with PARAGARD. I mean I heard the comments about flat volume growth, and you talked about some of the market dynamics. Do you think PARAGARD can return to seeing volume growth over time? Or is this flat volume growth more of a longer-term expectation and kind of pricing is really the key driver over the long term?

[Albert G. White, President and Chief Executive Officer at Cooper Companies]

My gut tells me depending upon how you define long term, but certainly for the coming years here that volume is going to be flat. I think when you look at the availability of other offerings, the ease of availability and the additional offerings that are out there -- now those are on the hormonal side. But when you look at the birth control market out there, I think the volumes for IUDs and PARAGARD are going to be flat for a little while here.

[David Saxon, Analyst at Needham & Company Inc.]

Okay. Got it. And then on -- in fertility, I just wanted to hear what you're seeing in terms of new fertility clinic openings, trends there? And any way to size how much of fertility growth is driven by like de novo clinics opening up and kind of how big of an opportunity that is for you guys? Thanks so much.

[Albert G. White, President and Chief Executive Officer at Cooper Companies]

Yeah. The new fertility clinics is kind of a phenomena outside of the US, if you will. You're definitely seeing more of that activity in some of Asia Pac and some parts of Europe. You're seeing kind of consistent opening of new fertility clinics. The numbers aren't that huge in the end of the day, but they're big enough to continue to drive growth because we see some of that in our capital equipment sales.

And obviously, that's a great part of our business. Anytime you can get capital equipment in. You've got the consumables following afterwards. So I'm not sure I've looked at it in terms of quantifying it because it hasn't been a spike or anything. It's been consistent here for probably the last four or five years, even through COVID, we were seeing new clinics continuing to open up. So I guess I would probably answer that by saying the fertility industry, I keep talking about like 5% to 10%, but obviously, it's grown more towards the upper end of that, certainly. Embedded within that is new fertility clinics opening. And I would envision the number of new clinics that we've been seeing open over the last five years or something to continue at a very similar pace probably for the next five years.

[David Saxon, Analyst at Needham & Company Inc.]

Great. Thank you.

[Albert G. White, President and Chief Executive Officer at Cooper Companies]

Yeah.

[Operator]

Your last question today comes from the line of Anthony Petrone with Mizuho. Your line is open.

[Anthony Petrone, Analyst at Mizuho]

Hey. Just wanted a follow-up on Cook. Apologies if I missed it, just had another call there. But maybe just -- it sounds like it's certainly the probability is lower but there's still efforts to find a resolution. So maybe a little bit on just where the process sits and probability for close. And under a scenario where it does not close, there was an $875 million commitment and maybe just thoughts on where CooperSurgical M&A activity can go from here if this deal does not close? Thanks.

[Albert G. White, President and Chief Executive Officer at Cooper Companies]

Sure. So yeah, just a quick recap on Cook. We did take the $45 million hit to the P&L we accrued for it this quarter because the original transaction that we discussed is frankly, it's probably not going to happen. That $45 million would get paid under that scenario at the beginning of August.

So that's where we sit with that transaction today. You're exactly right. We are talking with Cook. We have a great relationship or a great group of people there. So we continue to have conversations with them to see if there's some transaction that we could still do. But I would certainly say with respect to that transaction, the likelihood is that we'll pay that $45 million.

You're right, it was a big number, $875 million that we committed on that transaction. Right now, the focus -- the kind of capital focus, if you will, is very similar to what it's been over the last couple of years. We're going to look at paying down debt. We're going to look at acquisitions if they make sense. They got to be strategic, accretive acquisitions that fit well into what we want to accomplish at CooperSurgical or CooperVision, and that will probably continue, right? But there's nothing wrong with paying down some debt either.

[Anthony Petrone, Analyst at Mizuho]

Thanks again.

[Albert G. White, President and Chief Executive Officer at Cooper Companies]

Yeah.

[Operator]

This concludes the question-and-answer session for today. I'll turn the call back to Al for closing remarks.

[Albert G. White, President and Chief Executive Officer at Cooper Companies]

Great. Thank you, and thank you, everyone, for joining today. We appreciate the time. As I mentioned, we're pretty proud of where we're at. We had a good quarter and things are starting off well this quarter, so we're well positioned. And we look forward to getting together again in three months and updating everyone after our next quarter. So thanks again.

[Operator]

[Operator Closing Remarks]