The Cooper Companies, Inc. — 2024 Q1
Transcript
Each turn shows the speaker, their inferred role, the section, and that turn's net sentiment (×1000).
Good afternoon. At this time, I would like to welcome everyone to the Q1 2024 Cooper Companies Earnings Conference Call. [Operator Instructions]
Good afternoon, and welcome to Cooper Companies First Quarter 2024 Earnings Conference Call. During today's call, we will discuss the results and guidance included in the earnings release and then use the remaining time for questions. Our presenters on today's call are AL White, President and Chief Executive Officer; and Brian Andrews, Chief Financial Officer and Treasurer.
Great. Thank you, Kim, and welcome, everyone, to Cooper Companies 2024 Fiscal First Quarter Conference Call. We're off to an outstanding start this year, posting all-time record quarterly revenues of $932 million. CooperVision started the year on a solid note, growing nicely around the world and CooperSurgical achieved record quarterly revenues with our fertility business posting its 13th consecutive quarter of double-digit organic growth. Our earnings were strong and our momentum is excellent with capacity expansion progressing well and demand remaining very healthy.
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.
[Operator Instructions] Your first question comes from the line of Craig Bijou with Bank of America.
So maybe -- I guess -- maybe just start with some of the backdrop on the overall contact lens market. Obviously, still pretty strong. I heard your comments, AL, on the growth of the market. But I'd love to hear a little bit about pricing volume trends. And just kind of -- the transition to daily and just where you guys are with your supply and how you can capitalize on that?
Sure. Yes. Absolutely, I'll cover that. Several comments, I guess, as we think about it. You're correct, the contact lens market is strong right now, and it doesn't show any indications of slowing down. So we're -- we, as an industry, are in pretty good shape.
Got it. And if I could just follow up on the fertility environment. And obviously, you guys had pretty strong growth again, double digits. Obviously, there's a lot of headlines around IVF fertility. And some companies calling or pointing out that benefits may be getting pushed.
You're right, fertility is getting a lot of headlines. Now that's largely a U.S.-based thing because it's side to Alabama in the court like, we were like -- I won't kind of get in my high horse, if you will, of my frustration about what's going on there. But obviously, as a big player, we support fertility and all the patients and all the fertility clinics out there and we'll continue to do so.
Our next question comes from the line of Larry Biegelsen with Wells Fargo.
I'll echo my congratulations on the quarter here. AL and Brian, I actually wanted to start with margins and then one on CSI. So Brian, the gross and operating margin were up nicely in Q1. How do we think about the gross margin and operating margin for fiscal 2024 and the phasing? It seems like we could see upside to the margins based on what's implied in the guidance from what I can tell.
Larry, thank you. Our -- the story is largely pretty similar to the commentary we provided last quarter. Outside of the FX piece, which is negative to us on revenues and EPS and some OI, frankly, and cost of goods, we're still holding gross margins pretty similar to last year. .
That's helpful. And I had a follow-up on Craig's question on CSI. You grew 8% in Q1 organically, you're guiding to 5% to 7%. So why does growth slow? Are you assuming some slowdown in IVF? Or are you assuming new competition to PARAGARD and talk about that, please?
Yes. We'll see how fertility does on a quarterly basis, right? I mean underlying -- the underlying factors that drive fertility are continue to be strong. And I believe we're going to continue to put up strong fertility growth moving forward. When it comes to the growth of 5% to 7%, you are correct, right? I would still say, even with the strength of PARAGARD in Q1. And by the way, I think we're going to have a good quarter with PARAGARD in Q2. I would still kind of guide people to say, "Hey, that's going to be roughly flat on a year-over-year basis", due to ultimate volume demand and maybe some competitive entrants into that market. Now maybe that doesn't happen, and you'll get some upside from that. So you could argue there's a little bit of conservatism in that number. But after one quarter, I think taking it from 4% to 6% up to 5% to 7% is probably enough. And hopefully, we're able to certainly meet that if not beat that.
Our next question comes from the line of Jeff Johnson with Baird.
So AL, maybe a similar question, as Larry just asked on CSI, but for CVI, you're taking that up 100 basis points for the year. This first quarter came in right exactly where you guided right at the 7%, so it does imply an acceleration over the back half. So with 1Q being where you expected, what gives you the confidence to raise this early in the year to faster growth over the next few quarters, number one?
Yes. Yes. Great question, Jeff. Well, in Q1, we did 7%. It was a strong 7%. I mean we almost got ourselves to round up to 8%. So a good solid Q1 to start the year off. I do think we'll get ourselves back to double digit. As a matter of fact, I think we've got a good chance to get to double digit right away here in Q2.
Fair enough. And then, Brian, if I could ask a clarifying question on the gross margin commentary you made. You were up 100 -- what was it, 160 basis points year-over-year in the first quarter. You're now talking kind of flattish for the year. It implies somewhere around 50 basis points down year-over-year each of the next 3 quarters or maybe it doesn't gate out perfectly even like that. But is that just simply because currency was plus 100 basis points year-over-year in the first quarter, and it looks like in the second and third quarter, it's going to swing back to a negative? Is that just purely currency? Is there something else in there that would get the gross margin from up so nicely in Q1 year-over-year to down a decent amount year-over-year in the balance of the year?
Yes. Jeff, thanks for the question. Yes, currency in the first quarter wasn't as impactful as the latter part of the year. Certainly, Q2 and Q3 are worse from an operating profit or a gross profit perspective. Outside of that, I wouldn't really point to anything in particular. I would say Q1 kind of landed about where we expected. Some of it's a little bit of timing. But I would say, in general, we're expecting on an as-reported basis, pretty similar gross margins as we work through the year.
Our next question comes from the line of Joanne Wuensch with Citi Group.
Nice quarter. Mechanically, is there a reason you've consolidated the way that you're reporting some of the revenue for CooperVision. And part of that, where now am I going to see MiSight?
So you'll see MiSight in sphere, is where we'll report that. And we consolidated ultimately because I think it's just a better representation of how we look at the business, combined with competitive dynamics. And that was really the reason behind it. Yes.
And my sort of second follow-up question has to do with SightGlass. What are the steps now to bringing that to market? And can you please remind us of how the JV shows up on your income statement?
Yes, sure. So for SightGlass, most of the JV shows up below the line, below operating income. It's a loss, as you can imagine right now, as we continue to invest in it. So we just run that through our P&L. And that's the way it will be moving forward other than if all goes well, that will turn obviously to a profit, and we'll report that below the line.
Our next question comes from the line of Anthony Petrone with Mizuho Group.
Congrats again on the quarter here. Maybe one just on lens capacity and Brian, we spoke about this a little bit earlier this year. Just where are you on the build-out? And maybe to clarify, like how much demand is actually being left out there? Like how much are you not getting because Cooper is a bit supply constrained?
Sure. Good questions. On lens capacity, yes, I think demand is strong. It's going to continue to be strong because you're continuing to get wearers that are going in, whether it's a new wearer or an existing wearer moving themselves to dailies and moving into torics and multifocals. So you're going to have that demand. I believe that underlying demand for years and years and years and years and years in front of us. The position that we're in today from a capacity perspective is allowing us to meet a lot of that demand, not all of it, but a lot of that demand. As I mentioned earlier, I think may have been Jeff asking about it. right? We're in a good enough spot here where we're going to be able to, I believe, even return to double-digit growth here in Q2, but certainly put us in a position where we're going to be able to post strong numbers. So that's how I'd answer that right now. And I think that with capacity continuing to come on, it's going to put us in a position to have, frankly, strong years for a number of years in front of us.
Our next question comes from the line of Jason Bednar with Piper Sandler.
AL, I wanted to start, in past calls, I think we've heard about your position, maybe from like a new fit perspective. Just would love to hear what you're seeing out there in the data on dailies or [ daily sight eyes ], torics, multifocals, just really where you're punching pretty well right now. Just any insight on where your share stands on the new fit side, again, maybe in the context of your current market share in those categories.
Yes. As a general answer, I would say that our fit data is certainly in front of what our current market share is. And that's a good sign, right? And we've been running that way for a little while here, and we're continuing to run that way. The only caveat I would put on that or asterisk, if you will, is sometimes it's hard to get that data all around the world. We get that through GSK and a few other sources. But I'm comfortable continuing to say that our fit data is in excess of our market share, which is a really good sign for us.
Okay. I mean, maybe one follow-up there and then a separate one. But are there any of those categories where you'd say or maybe outsized share gains, just as we think about how -- where the revenue growth or the accelerated revenue growth is going to come from? As we look out over the next several quarters? And then I think you also mentioned key account strategy wins just across all geographies. Any more color you can add there, and maybe latest update on that strategy and how pricing is trending in that category?
Sure. I think that as we look forward here, where you're going to see growth is going to continue to be what you've seen, meaning we're going to do well in torics and multifocals. We have a great position in those categories and leadership position, right? We do really well. I think you're going to continue to see strong numbers there. The other place that you'll see strong numbers, we're doing well from a fit perspective is in the daily silicone hydrogel side of things. Now that would include some torics and multifocals, but also on the sphere side.
Our next question comes from the line of Patrick Wood with Morgan Stanley.
On the toric side, I'm just kind of curious, it's like a astigmatism is probably like 1/3 of the population. So I'm just curious, from the data that you guys have, do you have a good sense of like from an Rx perspective, where we are on the lenses, i.e. how underpenetrated that category is it kind of totality?
Yes, it's way underpenetrated. So I don't have the numbers right off the top of my head, but I would tell you, it's definitely underpenetrated in the U.S. market, and the U.S. market is by far the most penetrated and it's still solidly underpenetrated. When you go outside of the U.S., it would be way underpenetrated.
Certainly makes sense. I'm a astigmatic as well, so I can -- I get it. And then maybe on the Europe side, like that was a big number within CVI, and you gave some color there. Was there anything in particular -- I know you have some of the bigger contracts that were rolling over on that side of things, but dynamics in Europe, very curious about that as well.
Yes. Yes, good strong number in Europe. I think we're going to continue to have them. We have just a fantastic team there. Our commercial team is just killing it, and they have for a number of years. So I think when you combine the strength of our team over there, the rollout of products, we're going to get some new products in there. We're going to expand some of the products that we currently have put ourselves in a better position to sell.
Our next question comes from the line of Robbie Marcus with JPMorgan.
And I'll add congrats on a good quarter. Maybe to start, I know there's some regulations coming out in April for the lab developed tests. I wanted to see what your exposure to that was and any implications in your view?
I'm kind of raising my eyebrow. I'm not sure what you're referring to, which means that's probably a really good sign because it wouldn't be applicable to us.
Got it. I think it's in some of your filings, maybe I'll circle back. Maybe just to touch on myopia management. It was down quarter-over-quarter. You talked about down 10% in China and Ortho K. Just maybe speak to the Ortho K market globally and in China specifically and your view there, both on an underlying basis and competitive.
Sure. Yes, we had Ortho K growth around the world. So our team continues to do well with Ortho K but within China, it's very bumpy. I mean, we grew, what, 30 -- upper 30%, 39% or something like that in Q4 and down 10% here. So it's pretty bumpy. And whether that's channel fill or some other activity that's happening in China, that China is -- I believe, going to continue to be bumpy for us. Now we're -- that's not a huge market for us, as you know. So I'm not going to claim to be an expert in China. But we are seeing some volatility with respect to the Ortho K market and certainly within China.
Our next question comes from the line of [ Chris Scally scale with Nephron ].
AL, on the last call, I think you talked about 5% to 7% contact lens market growth in calendar '24, was the underlying expectation embedded in the guidance. Is that still your expectation? Or do you think it will be better than that?
I guess I would probably stick with the 5% to 7% right now, but I would certainly lean towards the upper end of that.
Okay. And then how are you thinking about how MiSight and SightGlass fit together in the myopia market longer term, do spectacles become first-line therapy in contacts or reserve for older patients? Or is it not that clean? Just trying to get a sense for how additive the addition of spectacles in markets like the U.S. could be versus cannibalistic of what you've got going on already?
Yes, that's really an interesting one. Spectacles are going to become the first line, if you will. Because when a child walks in the door, and we're talking about children, right? So 5 years old up to 13, 14 years old, the easiest fit by far for the optometrist is to put them in glasses. And I think that, that's really going to push the myopia management market forward because every single optometrist will be able to fit a child in glasses and get them out the door. And I don't know why you wouldn't do that. It'd be almost malpractice not to put somebody in glasses and treat their myopia progression.
Our next question comes from the line of Steve Lichtman, with Oppenheimer & Company.
Congrats on the quarter. I guess, Brian, you're obviously investing behind capacity expansion. So how should we think about CapEx levels and free cash flow this year? And do you expect CapEx as a percent of sales to go higher in the coming years as you maybe try to stay ahead of demand?
Steve, yes. So I guess what I'd say is we talked about free cash flow last quarter being up versus last year, probably about $100 million this year. I would say that the first half of the year is we're going to see sort of similar kind of free cash flow numbers as we saw in Q1 and Q2. And then I would expect will reflect nicely in Q3 and Q4. So cash flow conversion will be improved. I'd say as a percentage of revenues, this is going to be kind of a, I would call it, a high. I mean, it should be pretty similar to last year on a percentage basis. But as we look at next year and the years thereafter, I would expect it to come down on a percentage basis.
Okay. Got it. And then just a follow-up on SightGlass. Appreciate the update there. Do you expect the investments behind SightGlass in the near term to go up to the board's approval? Or do they go down for a bit given the sort of the later approval expectations? Understanding it's below the line. I'm just curious on that.
Well, I think we'll continue to invest as we are now. Once we get FDA approval, we'll work with EssilorLuxottica. I have conversations about the best way to launch that and how to capitalize on the FDA approval. So we'll continue to spend on it right now, supporting that product and launches around the world and things we're trying to accomplish, including the clinical work and so forth that we're trying to do.
Our next question comes from the line of Brett Fishbin with KeyBanc Capital Markets.
Just had a couple quick ones on pricing. One, just in the context of the full year CVI guide of 8% to 9%, do you have a directional sense of how much of that is getting driven by price?
Yes. Well, we'll see on future price increases as to how the economy continues to move. As of date, we're not seeing significant pushback, but a lot of the growth of the industry, remember, continues to be moved to daily. So a lot of that is a product mix trade-up, which includes higher price embedded within it, if that makes sense. So as we continue to move forward, that's where you're going to see a lot of that. So that's price increasing, if you will, but it's really a product mix shift to higher-priced products.
And then just one other question. I think you had a really interesting comment, but it was pretty brief on the idea of introducing some new digital tools to help facilitate MiSight in streamlining the fitting process a little bit, which seems like it might be a little bit of a friction that could be helped with these kind of initiatives. So just maybe expand a little bit on what you're doing there and how it could help that process?
Yes, absolutely. One of the challenges that optometrists have with MiSight is they bring the child in. They have to talk to the child. They have to explain what contact lenses are, how to put lenses in, take lenses out. They got to explain to the parent what myopia is and the progression of myopia. The process takes a little while.
Our next question comes from the line of Jon Block with Stifel.
I'll try to be somewhat brief, 2 quick ones. First on PARAGARD, I don't know, I just feel like the talk track has seemingly improved maybe from 3 months ago, nothing has really changed from a regulation standpoint. AL, am I right? Is there anything behind that where, again, you had a decent beat in the quarter. You talked about a pretty good start in fiscal 2Q. It just seems a little less dire, if correct? Is there something more to it?
I think with respect to PARAGARD, that's going to be a little bumpy. The underlying demand is still a struggle there in terms of being able to grow volumes. And then the other aspect of that ends up being a competitive product. We talked about that before. There was a product that could potentially get FDA approval that's essentially a generic. But if that does get approved and hit the market, that would impact us. When we gave guidance back in December, we incorporated some of that. That product has not been approved. So if you look at it as we move through the year, that makes me, yes, a little bit more optimistic for better performance this year.
Okay. And second quick one, just within CVI, just cleaning up a little bit. The overall 7%, I think, was in line with estimates. You guys sort of signaled that. But from ROC, EMEA was decently ahead, APAC below and anything to call out specific to APAC? Because when I look at the year ago comp, it was actually one of the easier ones from fiscal '23. I don't know if that's where we sort of go from a capacity standpoint. But maybe if you could just elaborate on that?
Yes. Yes. Not too much to say on that other than I think it got picked up a little bit about some communication we had in Japan with respect to some capacity constraints. So when you look at allocation of product and capacity constraints that we had, that negatively impacted Asia Pac and probably will, frankly, a little bit again here in the second quarter.
Next question comes from the line of Issie Kirby with Redburn Atlantic.
We'll just stick to one. I mean obviously, you have your handful with MyDay and the strength of that product. But I would love to know how you're thinking about potential new innovation within the [ Filshie Clip ] space, potential new product launches. I think it's been close to 10 years now since we saw MyDay first hit the market. So I guess, what is next? How are you thinking about new launches? And to what extent does capacity right now in your ability to introduce perhaps a new lens family?
Yes. Great question. If we look at MyDay as an example, I think the multifocal just came out a couple of years ago. MyDay Energys, as an example, just came out roughly a year ago in the U.S. market. So we still need to roll the multifocal out around the world. Frankly, there's still areas we need to get the toric out more the expanded framer range. There's markets we need to get MyDay Energys into. So you're just going to continue to see for the coming years, a bunch of launch activity, but it will be associated to mostly the products that you've already heard of.
Okay. And then just a quick follow-up, if I may, just on daily penetration. I mean we've talked a lot about the runway in toric but really I guess what's the runway like in daily? Just in terms of units where do you see it currently sitting, I guess, for 2023? And where do you think the ceiling really is for dailies in terms of units?
Yes. It's tough in terms of units because there are so many units when somebody's wearing dailies, right? Because if they go from like Biofinity for [ us ], they need 24 lenses a year and depending upon how often they're wearing their dailies, right, 700-and-some lenses a year. So it's tough. But I would tell you, if you looked at a comparison of the FRP market, the 2-week and monthly market and said, that's where dailies is going to get ultimately, that was -- that's kind of without getting then now the core details would tell you that you just have a very significant runway in terms of dailies and wearers. So that's where I go back to like saying, hey, the market is a great market for 10 years or something like that because it's so underpenetrated on the dailies side.
There are no further questions at this time. I'll now turn the call over to AL White, President and CEO.
Great. Thank you. Thank you to everyone for taking the time and joining the call. As you can probably tell from our commentary and response to questions, we're excited about where we are now. We started the year off really well. We're in a really good position moving forward. So thanks again, and I really look forward to catching up with everyone on our next earnings call. Thank you, operator.
This concludes today's conference call. You may now disconnect.