Cooper Companies Q3 2023 Earnings Call Transcript

Presentation

[Operator]

Good afternoon, my name is Krista, and I'll be your conference operator today. At this time. I would like to welcome everyone to the third quarter 2023 Cooper Companies Earnings Conference Call. [Operator Instructions] I will now turn the conference over to Kim Duncan, Vice-President of Investor Relations and Risk Management. You may begin your conference.

[Kim Duncan, Vice President of Investor Relations at Cooper Companies]

Good afternoon, and welcome to the Cooper Companies third-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, will contain forward-looking statements, including anticipated results of operations, revenue, EPS, operating income, tax-rate, and other financial guidance, anticipated expenses, benefits of infrastructure investments, strategic and operational initiatives, market and regulatory conditions and trends, product launches and demand and pending or possible transactions.

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 cooperco.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 ir@cooperco.com. And now I'll turn the call over to Al for his opening remarks.

[Albert White, President and CEO at Cooper Companies]

Thank you, Kim and welcome everyone to Cooper Companies third Quarter Fiscal 2023 conference call. Demand for our products and services remains very healthy and we solidly exceeded revenue expectations, posting record quarterly revenues of $930 million, driven by strong sustainable organic growth. CooperVision reported record quarterly revenues and its 10th consecutive quarter of double-digit organic revenue growth and CooperSurgical reported record quarterly revenues with its fertility business posting its 11th consecutive quarter of double-digit organic revenue growth.

Our teams are delivering impressive results. Our momentum is strong and we're executing well on our strategic growth initiatives. Moving to the numbers. Consolidated revenues were $930 million, up 12% organically. CooperVision posted revenues of $630 million, up 13% organically and CooperSurgical posted revenues of $300 million, up 9% organically. Exceeding $600 million in quarterly revenues was the first for CooperVision and exceeding $300 million was the first for CooperSurgical. CooperVision's growth was driven by our daily silicone hydrogel portfolios and CooperSurgical's growth was led by our fertility business.

Non-GAAP earnings per share were $3.35. For the quarter and reporting all percentages on an organic basis CooperVision's revenue growth was strong and diversified by geography, the Americas grew 12%, EMEA grew 13%, and Asia-Pac grew 16%. Throughout the world, we're leading with innovation, tied to new products, expanded product ranges, market-leading flexibility, and growth in key accounts. Within categories, spheres grew 9%, torics grew 16%, and multifocals grew 19%. Within modalities daily silicone hydrogel lenses accelerated and grew 23% with MyDay leading the way.

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 Clarity available on a wide range of spheres, torics, and multifocals. And lastly, our silicone hydrogel monthly and two-week lenses Biofinity and Avaira vitality grew a healthy 8%. Turning to products and starting with our high-growth daily silicone hydrogel portfolio we're six months into the US launch of our highly innovative MyDay Energous lens and the ramp is progressing exceptionally well. This premium lens taps into a fundamental ware need catering to the demands of today's lifestyles by incorporating digital boost technology to alleviate the impact of digital eye strain.

It's a big success with eye care practitioners and wearers alike. Our sales momentum is very strong. We're also seeing high-demand for MyDay toric as we continue rolling out our parameter expansion across North-America and Europe. This demand is being driven by its market-leading toric design, which mirrors Biofinity design and our industry-leading SKU range, which is by far the widest toric range in the daily market. With this broad range eye care practitioners are capitalizing on the opportunity to offer their two-week and monthly toric wearers the option to enjoy the freedom of wearing a daily toric lens.

And last but not least MyDay multifocal continues to take considerable share around the world reestablishing CooperVision's position in the premium multifocal market segment. We continue to hear from eye care practitioners, how easy the lense is to fit and how fantastic visual acuity is and I can speak to this personally, as I was recently set-in contact lenses for the very first time as well with MyDay multifocals. The process was remarkably fast and easy and these lenses are truly amazing. To conclude on MyDay this technologically superior family of products continues to deliver high-growth and our momentum is fantastic.

And lastly, within the daily segment our clariti family of lenses continues to perform well by offering a high-quality product at a mass-market price point. It was especially nice to see strength with clariti and several international markets, including an acceleration of sales in Asia-Pac. Outside of daily demand for Biofinity remained strong led by torics, multifocals, and our customer offerings and Avaira Vitality had a solid quarter, led by torics.

Moving to myopia management, we posted revenues of $30 million, up 30% with MiSight up 53%. MiSight accelerated this quarter, posting its best growth for the year even with China declining Year-over-Year due to tough comps against the stocking order last year. Meanwhile, our Ortho-K franchise had a difficult quarter tied to portfolio realignment and weakness in China. Fiscal Q4 has started off well though and we remain comfortable with our full-year guidance of $120 to $130 million, albeit probably at the lower end as strength in MiSight likely won't offset Ortho-K softness. Regarding MiSight we're seeing improving fitting trends around the world driven by key accounts, higher-volume pediatric optometry practices, and from the successful integration of the sales process from our specialty lens[phonetic] unit into our regular sales channel.

We're also continuing to see very high retention rates, including roughly 90% in the US, along with an ongoing positive halo effect with MiSight practitioners, accelerating their use of other CooperVision lenses. We also recently confirmed Aetna is now covering MiSight under medical plans to opt-in to lens coverage, which represents 72% of Aetna plant. This follows Kaiser who started covering MiSight through vision care plans, roughly a year-ago. This type of coverage is exciting, but it's still very early in the process and we have a lot of work to do to ensure eyecare practitioners and families, understand what it means.

To conclude our MiSight. As a reminder, it's 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 a proactive management of myopia becomes standard-of-care within the eye care community to help reduce the progression of myopia in children along with reducing the risk of long-term eye health problems associated with myopia, such as cataracts, retinal detachment, and macular degeneration.

To finish on CooperVision, the contact lens market grew roughly 8% in calendar Q2 with CooperVision taking share at 11%. We expect the market to remain healthy, supported by the long-term macro growth trend of more people needing vision correction. It's estimated that 50% of the global population will have myopia or near sightedness by the year 2050, up from roughly 34% today. This is driven by kids spending less time outdoors and the related greater use of digital screen indoors among other factors.

When you combine this with the ongoing shift to silicone hydrogel dailies the increasing focus on higher-value products such as torics and 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 market-leading innovation, robust product portfolio, ongoing product launches, fast-growing myopia management business, and leading new fit data.

Moving to CooperSurgical. We posted 9% organic revenue growth, including fertility sales of $122 million, up 11% organically for its 11th consecutive quarter of double-digit organic growth. Our fertility business continues to perform at a very high level and the future is bright with strong macro trends supporting the industry's growth. For the quarter, we once again realized success from our diverse offerings within consumables, capital equipment, reproductive genetic testing, and donor activity. And regionally, we posted solid growth in the Americas, EMEA, and Asia-Pac. This was accomplished while investing in multiple areas, including geographic expansion, key accounts, infrastructure build-out, and R&D.

We continue to launch new products and roll-out existing products in new geographies and we're clearly leading the way as one of the most innovative fertility companies in the world. In summary, we're in a fantastic place and we're well-positioned to continue delivering success given our great team, diverse portfolio, and global momentum. Regarding the broader fertility market the macro trends that are driving global growth remains strong and we're continuing to see a lot of exciting activity in this space. The industry has multiple growth drivers starting with women delaying childbirth. Age is a key factor in contributing to the need for fertility assistance and the median age of women's first birth in the US within several other developed countries is roughly 30 years old and continuing to move higher.

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 recently released updated data showing that one in six people globally are affected by infertility at some point in their lives and given that 1/3 of the underlying cause of infertility is women. 1/3 is men and 1/3 is a combination of the two or unknown. This is an issue that impacts a lot of people, and we'll continue to do so in the future.

Moving to office and surgical, which includes Medical Devices PARAGARD and stem cell storage, we posted sales of $178 million, up 8% organically.

Within this, Medical Devices reported strong growth of 11%, driven by positive procedure volume and strength in several core product, in particular, our surgical and labor and delivery products perform well. Meanwhile PARAGARD grew 7% as we saw some bounce-back from last quarter softness and our Stem Cell storage business grew 4% in line with expectations.

To conclude on CooperSurgical'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 excellent long-term 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 make some high-level comments on our strategic growth initiatives.

The last couple of years has shown the strength of our business with revenue growth accelerating as we exited the COVID pandemic. This is a result of a multi year effort concentrated on investing to drive sustainable organic growth and we've done this while completing several successful strategic acquisitions. We intend to continue with this growth strategy moving forward and embedded within this investing in our people, improving our infrastructure, expanding areas such as sales and marketing, investing in R&D. With that, let me conclude by saying how proud I am of our team's none of this is possible without the dedication and incredible hard work of our employees.

Now let me turn the call over to Brian.

[Brian Andrews, Chief Financial Officer 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. Third-quarter consolidated revenues were $930 million, up 10% as reported, or up 12% organically. Consolidated gross margin was flat Year-over-Year at 66.1% with positive currency and product mix being offset by certain period costs. Operating expenses grew 9%, but improved to 42.2% of revenues, as we started seeing leverage in parts of the P&L from prior investment activity.

Consolidated operating margin improved to 23.9%, up from 23.4% last year, led by leveraging our operating expenses. Below operating income interest expense was $26.8 million and the effective tax-rate was better-than-expected at 12.6% due to discrete items. Non-GAAP EPS was $3.35 with roughly 49.9 million average shares outstanding. With respect to FX, it was $0.07 worse than initially expected, mainly due to losses below the operating income line associated with certain unhedged currency. This FX loss offset the better tax rate. [indecipherable] P&L revenues exceeded expectations and we're seeing leverage in certain opex line-item. However, gross margins were below expectations due to softer-than-expected margins at CooperSurgical and has negatively impacted earnings by roughly 8%.

This is primarily attributable to period costs largely in our fertility business. As an example, we are significantly ramping up our donor sperm and egg businesses that we acquired with Generate. This activity is moving ahead faster-than-expected, which is great news. But it created unexpectedly large period charges. We also had some inventory write-offs during the quarter. Some of this activity continued into August but we expect these matters to be resolved during fiscal Q4, and not impact fiscal 2024. Meanwhile, regarding opex leverage. I'm pleased to report that we've completed several important upgrades this year which will benefit us moving forward.

This includes several large infrastructure improvements at CooperVision and CooperSurgical, including a major IT implementation at our primary European warehouse at CooperVision. Additionally, we essentially doubled the size of our US distribution facility and added several upgraded packaging and labeling line and that facility has now gone live. This activity puts us in an excellent position to leverage the P&L moving forward. Back to the quarter, free-cash flow was $52 million, with capex of $91 million. Net-debt decreased to $2.46 billion. Before moving to guidance. Let me add that after quarter-end, we paid $45 million in termination fees, ending the contemplated acquisition of Cook Medical's reproductive health business.

This did not impact Q3 and it won't impact Q4s P&L. But it will negatively impact free-cash flow for Q4 as this is treated as a reduction in operating cash flow. Moving to guidance, we are increasing our full-year revenue guidance to incorporate our strong fiscal Q3 results and the strength we're seeing as we enter fiscal Q4. For EPS, we're holding our range unchanged at the midpoint, which reconfirms roughly 11% constant-currency operating income growth for the full-year. Specific to fiscal Q4 the consolidated revenue guidance range is $912 to $929 million up 7% to 9% organically and CooperSurgical's revenues of $299 to $305 million up 5% to 7% organically.

Non-GAAP EPS is expected to be in the range of $3.39 to $3.57. Based on a roughly 12% effective tax-rate, which offset the softer gross margin and CooperSurgical and recent FX weakness [indecipherable]. For fiscal 2024, it's too early to provide detailed guidance, but let me give some direction. At a high-level, our focus remains on executing on our long-term growth objectives which include expanding capacity and enhancing our supply-chain capability. Within this, we will work to leverage the P&L with a focus on delivering low-double-digit constant-currency operating income growth next year.

Outside of that, we expect a roughly 15% effective tax-rate subject to discrete items such as the positive impact of stock option exercises[phonetic]. In conclusion, this was another solid quarter. Our organic growth was strong, and our momentum is very healthy in both CooperVision and CooperSurgical. 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 Jon Block from Stifel. Please go ahead, your line is open.

[Jonathan Block, Analyst at Stifel Nicolaus]

Hey guys, good afternoon. Brian, I might just sort of pick-up where you left off a little bit. And so, maybe I'll ask about the quarter and the high-level fiscal 2024, had a solid topline increase for both businesses. EPS midpoint unchanged. I just want to make sure it seems like that was all-cause related per your comments Brian nothing on opex. So just looking for sort of verification there and then, if that's the case I'm landing at around 20 or 30 bps of margin expansion this year with the upgraded, updated guide being fiscal 2023 that's got some of the GM headwinds you just alluded to, should we think about that rate of OM expansion accelerating into fiscal 2024 and maybe getting back more in that range of 50 to 100 bps when we think about next year at a high level.

[Brian Andrews, Chief Financial Officer at Cooper Companies]

Yes, so just to answer the first part of your question, Jon, you're correct, it was really purely a gross margin mix that softened our EPS delivery. Outside of what I provided for next year I think in terms of this year I mean, we're going to have margins sequentially up versus Q3 and like I said, OI growth is still means -- we're still maintaining OI growth on a constant-currency basis this year, growing double-digit at 11%. Same kind of direction for next year. I'm not going to get into giving guidance now will do that in December. And I'll give more color in a few months once we get there.

[Jonathan Block, Analyst at Stifel Nicolaus]

Okay. Got it and then maybe just second question will be a little bit -- a couple of moving parts to it, but can you speak to price -- durability of price and just maybe again, high-level, if you think that sticky going into fiscal 2024 and also just talk about your ability to stay ahead of the demand curve, some of your competitors have been tripped up there. You put up really big growth in SiHy Daily at least relative to our expectations. It obviously that's got a demand component to it. So just your confidence be able to stay ahead of the demand curve there. Thanks guys.

[Albert White, President and CEO at Cooper Companies]

Sure, Jon. I think on a pricing perspective I think that's still positive. We've talked about that for a few quarters now and I would probably just reconfirm the statements I've made in prior quarters, which is the market, somewhere in that 2% to 3% range. We're probably a little on the lighter side of that. I would think that that will probably improve some for us, but I think you'll see additional pricing in the market as we continue to move forward since inflation seems like it's lingering. Ability to manage growth we've got our challenges too, we do have some capacity issues in different spots and we've had some challenges through our supply chain, that's for sure. I think we're in a decent place. We're obviously putting up some good revenue numbers. Demand is strong. It's costing us some money, so I'd love to get some additional leverage, especially some operating expense leverage.

You know as we move forward on a distribution in some areas, but right now we're pretty focused on delivering really high-quality customer service, meaning somebody orders product, right we're able to make that product and we're able to ship it and get it in their hands and sometimes that cost us a little bit more money than we'd like for it to cost us, but I think we're in really good shape to be able to continue to have revenues, it's just a matter of leveraging that which I think you're actually going to see over the coming years. Next year will be a more positive year and I think the year-after that will probably be even more positive.

[Jonathan Block, Analyst at Stifel Nicolaus]

Thanks guys.

[Operator]

Your next question comes from the line of Larry Biegelsen from Wells Fargo. Please go-ahead, your line is open.

[Lawrence Biegelsen, Analyst at Wells Fargo & Company]

Good afternoon, and thanks for taking the question and congrats on a nice quarter here, just two from me here. Just maybe, Brian, on the fiscal 2024 commentary, interest expense, should we expect that to be stable, and FX headwind to EPS as of today is that about $0.50 and I have one followup.

[Brian Andrews, Chief Financial Officer at Cooper Companies]

Hi, Larry. I mean, gosh, I wish I could -- I wish I could give you really good color on that. I mean I guess. I would say it's subject to the Fed not doing anything surprising. We're going to pay down debt next year. So I mean, it's hopefully we see our interest expense at least flat or decline with our debt pay-down. FX, it's just a moving target. It's just swinging so wildly. So I hesitate to give you any kind of commentary on FX, until we get to December.

[Lawrence Biegelsen, Analyst at Wells Fargo & Company]

Fair enough. And Al you guided to 6% to 8% organic growth for total COOPER entering this year you're guiding to 9% to 10% now. What are -- how do you think about the sustainability of that momentum next year? Just any color on that would be helpful. Thank you.

[Albert White, President and CEO at Cooper Companies]

Yeah, Larry. You know me, I probably would lean towards kind of guiding to more on the conservative side, but I'm not even sure we will, because our business is just remaining strong. It's just healthy. The markets that we operate in are healthy, we're healthy, we're taking share. We're continuing to launch products, whether it's in vision or surgical or raw[phonetic] products out around the world. So I'm probably more optimistic than I normally would be at this point in time as I look forward into next year, the following year. We'll give that guidance in a few months here, but I'm optimistic.

[Lawrence Biegelsen, Analyst at Wells Fargo & Company]

Thanks Al.

[Operator]

Your next question comes from the line of Jeff Johnson from Baird. Please go-ahead, your line is open.

[Jeffrey Johnson, Analyst at Robert W. Baird]

Thank you. Good afternoon, guys. Wanted to start maybe on your clariti business, you mentioned some strength in Asia-Pac and EMEA. How has that clariti business in the US. I mean obviously you're putting up double-digit PVI organic growth, you've got a peer that's doing the same. It seems like you two are both doing very well, but their entry-level daily silicone in the US is just starting to move into some of those specialty areas where clariti has had some good success here over the years. So how is your clariti business in the US, folding in and you don't -- where do you think kind of CVI growth due to share gains continue into next year kind of the pace they've been going out here in the last few quarters?

[Albert White, President and CEO at Cooper Companies]

Yeah, clariti in the US is doing fine. We don't talk about or I don't talk about it, maybe as much and I'm not sure that's necessarily fair declared if you felt it's just that MyDay is performing so well, the numbers are so strong in MyDay kind of across-the-board, whether it's Energys, which is going gangbusters[phonetic] toric and a multifocal or sphere, right, that sometimes I talk about 30 a little yes, but clariti still doing okay. It did accelerate as growth actually in Asia-Pac, which was kind of nice to see, but it's still doing okay, in the US. From a share gain perspective I would think that, yeah. I would think moving forward, the rate of share gains that we've been having should be somewhat similar for the next several years just based on our product launches and the activity we have going on.

I mean, we're still pretty active with a lot of the product launches and the product expansions, geographic expansion for some of those products, so yeah I think we'll continue to take share for quite a while.

[Jeffrey Johnson, Analyst at Robert W. Baird]

All right, that's helpful. Thank you. And then just as a follow-up on PARAGARD I was somewhat skeptical you'd hit that $50 million number this quarter. I've got you, now at $51 million, I believe. So just maybe cross-check my math on that. But again, is that all pricing. I would assume it is, but to go from $37.5 million last quarter to $51 million this quarter was a nice sequential bump that I wasn't convinced you could do. So just any color there outside of pricing anything changing on your view of the PARAGARD business. Thanks.

[Albert White, President and CEO at Cooper Companies]

Yeah, $51 million. You're right. No, nothing changing my view that was predominantly pricing and there's always a little bit in all of our businesses, right when it comes a little bit of channel inventory and some of that kind of stuff, but now that the driver on that is clear.

[Jeffrey Johnson, Analyst at Robert W. Baird]

Thank you.

[Albert White, President and CEO at Cooper Companies]

Yeah.

[Operator]

Your next question comes from the line of Matthew Mishan from KeyBanc Capital Markets. Please go-ahead, your line is open.

[Matthew Mishan, Analyst at KeyBanc Capital Markets]

Thank you. Could you guys walk-through the R&D pipeline and sort of what's driving like the increased investments. I mean just it's one of those lines that's up a lot Year-over-Year.

[Albert White, President and CEO at Cooper Companies]

Yeah, Matt. I mean I won't get too detailed on projects, but I will say within CooperVision certainly we've got higher R&D associated with myopia management, a lot of our MiSight activity is in there. So that's definitely occurring. Within our CooperSurgical business there is increased R&D for a couple of different products, actually that we're seeing in there, which would include in our fertility space also, but it's definitely tied to product development within both businesses.

[Matthew Mishan, Analyst at KeyBanc Capital Markets]

Okay. And then with unfortunately the Cook, not being able to go through. How are you thinking about the investments that might need to be made to kind of push fertility into more of a global business and how does that fit into the context of kind of the low leveraging the P&L moving forward.

[Albert White, President and CEO at Cooper Companies]

Yeah. Well. I would say that right now, fertility is a global business, no question, right. We have a very big European presence. And we have an Asia-Pac presence in some countries much stronger than others, but no, we're investing in that business right now to drive international growth, we did it here in Q3. We're going to in Q4. We're going to do definitely more investing next fiscal year to support the long-term growth of the Fertility franchise that's all embedded within the numbers Brian gave you, 11% this year. Constant-currency AOI growth and within the objective next year to deliver low-double-digit constant-currency AOI growth. So, yeah. I mean we're continuing investors. No question about that and fertility is definitely one of the areas we're investing in.

[Matthew Mishan, Analyst at KeyBanc Capital Markets]

Thanks.

[Albert White, President and CEO at Cooper Companies]

Yeah.

[Operator]

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

[Jason Bednar, Analyst at Piper Sandler Companies]

Hey, good afternoon and thanks for taking the questions. Echo the congrats, here on the good quarter. Al and Brian on contact lenses that performance is really good versus the market. As you called out in the calendar quarter or your fiscal quarter, you had the benefit of trading April for July, which was definitely a good trade. It also seems like just based on the fourth-quarter guidance, you're seeing good results for your core business. Can you elaborate what's changed in your guidance for the fourth-quarter. I mean we have Street numbers that are moving up a little bit, is it certain product category or geography where you're more comfortable or confident today?

[Albert White, President and CEO at Cooper Companies]

Yeah. I would probably end-up saying that where we are today versus where we started the year, we were looking at the possibility remember like a little bit of a recession or an economic slowdown we haven't seen that and if you look at our sales of our products, the some of the higher-priced products are actually selling better and even accelerating when. I look at like MyDay Energous an example MyDay multifocal. Some of those kinds of products. So it just feels like as we sit here today, we're in a better environment, and that's somebody asked about that earlier. When you look at fiscal 2024 for us. I just feel like we're in a better, more stable environment right now with a lot of good products that have a lot of good momentum.

[Jason Bednar, Analyst at Piper Sandler Companies]

Okay and then maybe as a follow-up, because I wanted to ask on your key account strategy that's actually it seems like a maybe a little bit of a recession hedge, but. Your. As you said, you're higher-value lenses are doing better here. I don't think I caught, an update on the key account strategy. But maybe just talk about what you're seeing there with respect to share gain. And then any shift in terms of emphasis, higher or lower. And that strategy makes this look-ahead to fiscal 2024.

[Albert White, President and CEO at Cooper Companies]

Yeah, you would think that some of the store brands or private-label activity, if you will, would be driving more of the growth, right, because that would be a hedge, if you will, against an inflationary environment and I've actually seen that I've read that, I should say, from some companies talking about increases and those types of sales. That's not what we've seen. So, if there isn't an inflationary issue or economic pullback maybe you do see that and we would see an increase in our store brand activity. But right now, it's being driven more by as I was mentioning some of those --some of the other products that we are doing some store brands for but certainly a lot of it is on a branded basis and there's been some of the higher-priced products we have. Okay, well thanks so much. Yeah.

[Operator]

Your next question comes from the line of Joanne Wuensch from Citi. Please go-ahead, your line is open.

[Joanne Wuensch, Analyst at Smith Barney Citigroup]

Thank you, Joanne Wuensch. Very nice quarter. I am trying to peel through your commentary about operating margin next year and I want to make sure I understand that when you talk about low-double-digit operating margin expansion margin is the one dollar and ex-FX just peel that away. So we make sure we set expectations appropriately. Yeah, when I, when I mentioned low-double-digit constant-currency OI growth, operating income growth. It's, so it's just operating I'm going on a constant-currency basis. Okay and are you in a position to be able to give us a guidance number for revenue for next year, a range should we go back to thinking about how you entered this year at 6% to 7% or is that not even the right way to think about things.

[Brian Andrews, Chief Financial Officer at Cooper Companies]

We'll see in December. I mean, my gut right now would tell me we would have a hard time giving that level of conservative guidance, but we'll update that in three months.

[Joanne Wuensch, Analyst at Smith Barney Citigroup]

Terrific, thank you so much and have a great evening.

[Brian Andrews, Chief Financial Officer at Cooper Companies]

Yeah, thanks.

[Operator]

Your next question comes from the line of Anthony Petrone from Mizuho Securities. Please go-ahead, your line is open.

[Anthony Petrone, Analyst at Mizuho Securities]

Hi there, thanks for taking the question. You [technical issue] So you see some of the math on the GM headwinds, it looked like it was about a 50 basis-point headwind. This is to apply a little bit of a step-up in the 4Q, but if we assume that reverses that at the tailwind to 2024 and then the OI comments supply about 100 basis-points of op margin expansion, so it seems like that would imply that there would be some more opportunity on the cost leverage side as well as on the organic GM expansion side. So wanted to make sure that that math is kind of checking out and how you're thinking.

[Albert White, President and CEO at Cooper Companies]

Yeah. I think that math checks out and I will let Brian confirm that, but that makes sense to me and I do agree with your comment about potentially being able to get incremental leverage if you will. I think one of the issues that we're running into here and I think we'll continue to have a challenge with next year is that we do have very strong demand right now and logically you might think, hey, that's great. Right. You get those incremental revenues and all that flow-through to OI but in order to support that growth right now with the infrastructure investments we're doing combined with the geographic expansion and everything else that's going on, you're not seeing that right now.

So what history would tell you based on COOPER [indecipherable] long-time, now what history would tell you is, when we have this stuff happen we get comfortable with the organic growth, if you will, the better organic growth that we have and it's certainly appears to be sustainable higher organic growth and we have had historically, once we get comfortable with that I mean by that is you get these facilities in place, you get the packaging lines in place, and the shipping lines and everything else, and Brian touched on some of that once you get that stuff in-place you start leveraging it and you're able to really drive some margin expansion. I think that will happen. It's a matter of fact, I'm highly confident that that's going to happen, but I think we're going to continue to deal with some of those challenges over the next year, if you will, or some timeframe, managing that growth tied to the investment activity that we're talking about, whether it's been the fertility business where we're putting a lot of dollars or within our myopia management business especially MiSight where we're putting a lot of dollars right now, so I think when you put that all together, you step-back and you go okay, low-double-digits, kind of makes sense for this year, it makes sense for next year. It will be interesting as we move forward and we build-out some of this infrastructure enabled to leverage it, little happiness in some of the years after that.

[Anthony Petrone, Analyst at Mizuho Securities]

That's helpful. And one follow-up on that, specifically within the CVI business, you've mentioned your strategy to carry more skews and toric side and just wanted to kind of hear about how much do you think that's contributing to some of the wins in ophthalmology, we had heard from J&J that potentially, there were some focused on them more core business as opposed to some of the more [indecipherable] SKUs. In addition to how much of the infrastructure build-out is related to kind of maintaining that range and if we talk about, you know in the past I think it's at least a couple of years, maybe 24 to 36 months-to see the benefit from manufacturing those contact lens line, is that the right way to be thinking about that and also from a market-share perspective. Thank you for the interim is. Yeah, that is a great question and great point on that SKU range. I mean, we do take the position that if a patient walks into an optometrist office that they able to be fit in a CooperVision products. So we do have very wide SKU ranges, largest in the industry, there is no doubt when you look at like the daily Torc. MyDay toric is by far the widest SKU range that's available. It is expensive to manufacture those, it's expensive to manage them through your logistics change through chain through distribution and so forth. But you're exactly right. You move through a period of time where you're increasing your production capabilities you're improving your distribution capabilities and so forth, you get that behind you and you're really-really in an excellent place and it does take several years in order to get there. So we are on that journey right now. We've been there before, we've done it before, we've done it successfully Before. I am highly confident the team will deliver again, but that is another great example of one of the challenges we're dealing with right now around our growth.

[Operator]

[Operator Instructions] Your next question comes from the line of Patrick Wood from Morgan Stanley. Please go-ahead, your line is open.

[Patrick Wood, Analyst at Morgan Stanley]

Amazing. Thank you so much for taking the questions. I guess the first one, maybe on My side. You alluded to some of the block to happen on consumer awareness and outside. I mean, you've got better coverage now, do you think the marginal dollars needs to be spent on the optometrists to convince the consumer. Are we thinking BTC and why shouldn't -- why shouldn't we expect quite a lot of money to go in here to take advantage of the better coverage.

[Albert White, President and CEO at Cooper Companies]

Yeah. I don't think it's going to be DTC related. I mean we spent money on that side of things we will continue to spend some, but. I don't think it's going to be significant dollars, because that's more social media and so forth, that focus is more on the optometrists themselves. I think the one thing that could be a little different would be we're starting to see insurance reimbursement, our insurance coverage, if you will I mentioned Aetna is now covering MySight we've had Keizer here for a little bit covering it as we knock on wood, pickup, other insurance companies, covering it working with optometrists and ensuring that they know it's available and how it works and with families that will take us a little bit of work that's easier. We'd like pediatric ophthalmologists, who are a little bit more comfortable with some of the insurance reimbursement activity, but I think that could be a little bit of active -- a little bit of work-in that has caused us a couple of bucks, but we've built that into our assumptions but I do think that we're gaining while I do I know we're gaining traction in my sight right now, we see it in a lot of different markets, especially here in the US and throughout Europe. So we're going to continue to invest in it. I mean, we've got our shoulders behind it now. We are going to leverage some of that, we did build-out a fairly large infrastructure and we will start leveraging that a little bit more as we move forward, but there's still dollars to be spent, no question about it. Driving that business forward, we want to drive it. It's a good long-term sustainable business. So we want to continue to push it, that's for sure. Exactly and then maybe just one more. In vision. I guess I think I know the answer to this, because there has been supply-chain challenges with some of your peers, but do you have any sense from like selling relative to sell-out, like is the channel presumably quite lean-in terms of inventory side, a lot of players or is it going normalize at the moment. I would say inventory is lean.

[Patrick Wood, Analyst at Morgan Stanley]

Thank you so much.

[Anthony Petrone, Analyst at Mizuho Securities]

Yeah.

[Operator]

Your next question comes from the line of Ravi Marcus from JP Morgan. Please go-ahead, your line is open.

[Ravi Marcus, Analyst at JP Morgan Cazenove]

Okay, great, thanks for taking the question and I'll add. Congrats on a good quarter. Two from me. Maybe first. Gross margin and operating margin are both fairly below pre COVID levels, how do you think about your ability to return to the pre COVID margins particularly on operating margin and how far-out is that event?

[Brian Andrews, Chief Financial Officer at Cooper Companies]

Yeah. hi Ravi, I'll take that, so I mean if you look at pre COVID, a big, big driver to operating margin reduction is FX, that's almost half of that of the difference, you had some operational items in there, obviously, we talked about this a few quarters ago about the share-based comp. We had some changes of vesting from five years to four. Supply-chain in general inflation, higher costs. Great. Even though things have gotten better, they're elevated work from where they were in 2019. And then I'll of course all those infrastructure investments and IT being a big one right there, that's been elevated since 2019, so I just kind of just play back what Al just said earlier an. I had in my prepared remarks. We're going to start to leverage some of that stuff. And hopefully, one of these days FX starts to move-in our favor, but I am confident that. We will start to get some we got some opex leverage. This quarter, you'll see it a more next quarter. And as we get into next year from leveraging those investments from this year.

[Ravi Marcus, Analyst at JP Morgan Cazenove]

Great. And maybe one on free-cash flow. I know the CR, has a lot of. Investments, zero to at about a 48% free-cash flow conversion through 3rd-quarter. 4th-quarter is going to be even lower. So let's say you end the year 45% lower on conversion. Same sort of question, are you comping yourself against the Medtech average of about 80% and when do you think you might be able to get back up to those levels. Thanks.

[Albert White, President and CEO at Cooper Companies]

Yeah. I mean, obviously you've got a number of things, a lot of moving parts by far. I mean if you look at free-cash flow this year versus last year. I mean capex is driving much, much higher. And then besides that you've got interest expense as a very big factor, just those two combined alone is over $200 million. The termination fee, I mentioned that in my prepared remarks, that will be $50 million. So, you know, outside of that, you've got FX. Depending on how far you look-back tax has gone up. And then you've got a few other working capital items. So, we're definitely investing a lot in our business, a lot of dollars going towards infrastructure. Which is really mostly tied to the capacity expansion. But I do expect that free-cash flow will improve next year versus this year.

[Operator]

Your next question comes from the line of David Saxon from Needham and Company. Please go-ahead, your line is open.

[David Joshua Saxon, Analyst at Needham & Company LLC]

Great. thank you, guys, and congrats on the quarter. Maybe just a couple on the myopia management portfolio MiSight was strong by China. So how are you thinking about the recovery in that region. For my side and then, Ortho-K, maybe can you give a little more color on what that realignment is and how long that impact last. Thanks.

[Albert White, President and CEO at Cooper Companies]

Sure. Yeah, China [indecipherable] we don't have a big business in China. We just don't do a lot in China. But what we do do there and certainly myopia management is included there has been I guess bumpy maybe is the word to describe it. We take a step forward and two steps backwards is seems at times over there, so. I personally I get more optimistic about it because I'm starting to see some good stuff happening and then all of sudden. It slows down so I'm having a hard time reading it, again, I'm not at China export, we don't do a ton of business there, but at least for what we do there are part of the business and myopia management part of the business. It's definitely fits and starts, so I wish I could give you more specific detail on that. I mean, we don't have a lot built into our assumptions with respect to China, but I'm not sure how that's going to play-out. I will say that the receptivity to MiSight has been really strong around the world and it's been strong in China. I mean, we've gotten really good feedback. In China, about the product and and. I think the product is going to be successful. Now we did accelerate growth this quarter, which was great. We had a stocking order last year. So we even hurdled that and still accelerated MiSight growth and we continue to see some really nice success with MiSight as we started-off the 4th-quarter here. So, I'm definitely optimistic on MiSight and what is going on a global basis including within China, a little bit more questioning what's going to happen with Ortho-K.

We did have some portfolio realignment, where we had to true-up some products, we had a lot of products there, so we added through some products up and so forth. We should have a better Q4 as matter of fact. I think we'll have a pretty decent Q4. But again it's still bumpy. I mean, we held a range to 120 to 130, right. We did 25 to 30 and 30, somewhere at 85, so that's $35 million to hit the bottom of that range. So we're looking at sequentially at least $5 million more than our myopia management business so that kind of gives you directionally where I thinking is, you're going to see some bounce-back in some improvement, but I'm a little hesitant to get too excited about it, just because it seems like we keep moving forward and stepping back there.

[David Joshua Saxon, Analyst at Needham & Company LLC]

Great, thanks. I'll leave it there.

[Albert White, President and CEO at Cooper Companies]

Okay.

[Operator]

Your next question comes from the line of Steven Lichtman from Oppenheimer. Please go-ahead, your line is open.

[Unidentified Participant, at Cooper Companies]

Hi guys, this is [indecipherable] on for Steve. I just wanted to ask what was the product contribution of price to CDI this quarter, and what are you guys assuming for the rest of the year.

[Albert White, President and CEO at Cooper Companies]

Prices help in CVR around in the low 2% I would -- we would have that same amount kind of factored into fiscal Q4.

[Unidentified Participant, at Cooper Companies]

Okay, thanks for. Do you guys have any early thoughts on tax rate interest expense FX impact for fiscal 2024 forward based on where things are today.

[Albert White, President and CEO at Cooper Companies]

Yeah, Ron[phonetic]. The tax-rate, we're expecting to bounce-back to a sort of our organic. Tax-rate of 15% pre discrete. And outside of some commentary I gave a little bit earlier on, just subject to the Fed and will pay-down some debt, and hopefully we'll see interest expense sort of flat to declining next year. I didn't give any other sort of non-operational commentary.

[Unidentified Participant, at Cooper Companies]

Okay, thanks guys.

[Operator]

We have no further questions at this time, Al White I will turn the call back over to you.

[Albert White, President and CEO at Cooper Companies]

Great, thank you and thank you for everyone joining today. I'm pretty proud of where we're at right now, the business is doing really well. As everyone knows, we just posted really strong revenue numbers this quarter and solid EPS numbers and our guidance is strong. So I'm pretty optimistic about where we sit today and what the future holds, and look-forward to December and discuss in Q4 and definitely giving guidance for next year and talking about those details. So thanks again and look-forward to hopefully seeing everybody during the quarter.

[Operator]

[Operator Closing Remarks]

Participants

Corporate Executives

• Kim Duncan, Vice President of Investor Relations
• Albert White, President and CEO
• Brian Andrews, Chief Financial Officer

Analysts

• Jonathan Block, Stifel Nicolaus
• Lawrence Biegelsen, Wells Fargo & Company
• Jeffrey Johnson, Robert W. Baird
• Matthew Mishan, KeyBanc Capital Markets
• Jason Bednar, Piper Sandler Companies
• Joanne Wuensch, Smith Barney Citigroup
• Anthony Petrone, Mizuho Securities
• Patrick Wood, Morgan Stanley
• Ravi Marcus, JP Morgan Cazenove
• David Joshua Saxon, Needham & Company LLC
• Unidentified Participant