The Cooper Companies, Inc. (COO) Earnings Call Transcript & Summary

Welcome to the Wells Fargo Healthcare Conference. Before we start, please note that Wells Fargo Securities events are by invitation only. Members of the press or media are not permitted to join. If you are a member of the press or media, please disconnect at this time. Also, please be advised that today's conference is being recorded. Thank you.

All right. Good afternoon, and good morning, people on the West Coast, like our guest, Al White. I'm Larry Biegelsen, the medical device analyst at Wells Fargo. And I'm pleased to introduce the next company in our afternoon session, Cooper Companies. Joining us from the company is President and CEO, Al White. In terms of format, this will be a 30-minute fireside chat. So Al, welcome, and thanks for joining us.

Yes. Thanks, Larry. Great to be here.

So Al, let's start with your fiscal Q3 report from last week and the update on the COVID recovery. You reported fiscal Q3 results that exceeded Street expectations in both businesses. Remind us of what went better than expected. Let's start there.

Yes. Well, I think on the CooperVision side, consumption came back faster than we were initially thinking. And as an example, when we were doing our initial survey work and asking people, if you're going to wear your lenses more or less or the same, a lot of people came back and said, "Well, I'm going to be working from home, so I'm going to wear my lenses less." Now when we go back and ask them that same kind of question, they were like, "Well, that was my intent. But due to video, and the fact that I wear contact lenses basically anyways for cosmetic reasons, I see myself on video. I could even be more self-conscious, so I've started wearing my contact lenses again." And we saw consumption certainly ramp back up, and video would be a good reason for part of why that's happened. So that allowed us to pull -- well, inventory pulled in because of that because people were buying more products. So that was a good thing on the contact lens side. I think the other one for us, specifically because we took some nice market share, was some of our differentiated products. We have things like Biofinity Energys, which is specifically designed for digital eye fatigue. That product grew in the quarter. Our specialty lens portfolio, ortho-k, MiSight, that part of our portfolio grew in the quarter. So those are differentiated products that we have that helped take market share. And then on the women's health care side, we see some good stuff going with fertility, but we're a little bit of a lag player in that. But surgeries came back. You saw that from a number of medical device companies, where you saw some of the surgeries come back, and we experienced that same thing. And then PARAGARD was the other one. As offices open, we saw placements come back on PARAGARD a little bit quicker than we were anticipating.

That's helpful. So let's turn to fiscal Q4 and your guidance. You guided to fiscal Q4 sales down 4% to flattish on a constant currency basis for CVI and down 6% to 10% for CSI. So looking at CVI, I think you said August grew mid-single digits, but stocking boosted sales by, call it, 5% or so. So August was flattish on an underlying basis. Is this math directionally right? And does that imply you're well positioned to hit your Q4 CVI guidance?

Yes. I mean a question mark still goes out there on COVID, right? And it's the same thing as next year. We didn't give guidance for next fiscal year because of the impact on COVID. We've seen -- even last quarter, we posted a strong quarter, I thought Asia Pac was going to be stronger. I thought Asia Pac could even get to growing, which would have been $10 million more in revenue. But we're moving a little slower in Asia Pac on our comeback. Kind of like in Europe, it's a little slower. We saw the Americas, specifically the U.S. come back a little faster. So yes, I mean, obviously, I would love to be able to say when we report that guidance was a little conservative. But I sure don't want to get in front of ourselves when it comes to the impact of COVID and any potential step backs we could see. And I would put it just with that, by the way, because I think from a product perspective and everything else that's going on within the business right now, I'm pretty happy about that. So it's a little bit of risk associated with COVID more than anything. The only other thing I would remind people of is there was a VAT increase in Japan last year, and we had some -- we had a really strong quarter in Asia Pac because of that. So we comp against that in Q4. Yes, quickly, just very quickly on surgical, yes. I think that I would kind of comment the same way. I think fertility is going to be strong because we see that coming back. PARAGARD is actually coming back a little bit better than what we thought it was going to come back to. We're starting to see new fits be similar to what they were pre-COVID. We won't catch our Q4 last year because we had a big buy-in with a price increase on PARAGARD. And then you get surgeries, you got everything going on with COVID and surgeries on the rest of that business. So I kind of mirror what I would say in vision with respect to the thinking around surgical.

Surgical -- so you have the PARAGARD in CSI and this PARAGARD buy-in from a year ago, which creates a bit of a tough comp. But you still grew CSI in August, and you're guiding for sales decline in Q4. So basically, the 2 main elements are the tough comp for PARAGARD and uncertainty around COVID. Is that fair?

Yes. And the big buy-in for PARAGARD happened, that was a September, October for us. So that's -- it's a much harder comp here the last couple of months. Having said that, like the important thing that I really look at ends up being more placements. How is PARAGARD really truly doing? Not the buy-in and everything else. The placements are back to where they were pre-COVID. So that's what I'm really happy about, right? Because at the end of the day, you get all these individual quarters and buy-ins and inventory moves. But what you really want to look at is say, hey, as we go long term, we look at next year and the following year, is PARAGARD back to a mid-single-digit grower? And I would say, yes, I mean, based on everything we're seeing. So I'm really happy about that. But yes, I mean, for the fourth quarter, specifically, tough comp, COVID potential concerns.

There's like 3 elements in CVI, just going back, that you called out on the COVID impact, new starts, demand or consumption and distributor inventory, stocking or destocking. I just wanted to ask about new fits because they're kind of a leading indicator. Where do you think we are in terms of new fits versus pre-COVID levels? And when do you think we'd get back to pre-COVID levels?

Yes. I don't think we'd get back to pre-COVID levels until COVID is "done" or it's much closer behind us. I mean, right now, we're seeing kind of all optometrist offices open. It's not -- maybe it's not 100%, but malls are starting to open up back up. So you're picking up optometry offices that were in malls. So you're seeing a lot of the optometry offices open. A lot of them have gone back. It's got to be at least 80%, 85% are back to doing new fits right now. So we're clearly seeing, like, every week is another step in the right direction and things are getting better. But we talk to a lot of optometry offices right now that are fully booked. Their appointments are booked through October or even through November and some through December because they're coming back and saying, "Hey, this is -- there's a lot of pent-up demand, but I have COVID restrictions here in terms of foot traffic. So I can't get more patients in than what I have in." I think that we need to get past that. And I think once we do, that pent-up demand will likely cause a little bit of an uptick there. So I look forward to that, right? But obviously, I can't call when that's going to happen.

Yes. And Al, looking at the P&L, it seems like operating expenses have to go up pretty significantly sequentially from Q3 to Q4 to just get to the midpoint of your EPS guidance. What's driving that?

Yes. Well, a lot of that is MiSight, right? Because, I mean we're going to spend in the range of $15 million in Q4 on MiSight. And there's a lot going into that with the social media, right? Sarah Michelle Gellar is our celebrity spokesperson, a lot of geo-targeted marketing for a lot of the new fitters. And we're talking about the U.S. but also in spots around the world. So a lot of activity going on there. That is a big part of the increase in the operating expenses.

All right. So shifting gears, fiscal 2021 starts in less than 2 months. I know you're not giving guidance for next year, but maybe you can help us frame the outlook. But maybe before we get into that, let me ask about the Ray-Ban contact lens news that we wrote about this morning. A couple of questions on that. Is it U.S. or global? And how do you want people to think about that opportunity? It's easy to get pretty excited when you hear about Ray-Ban, probably the most widely known brand in the whole world for -- in the optometry space.

Yes. We're really excited about it, right? And if people could see the Ray-Ban written on your contact lenses, I think that would certainly help. The fact is, yes, a lot of kids, you go out to kids right now and you ask them. And if they had to get contact lenses, they would get Ray-Ban if that was a choice. I mean, no question about it. And if you look at the box, all the survey work we did, the really cool boxes, you can see it on LensCrafters, right? The kids and teenagers, people love that kind of stuff. At the end of the day though, a lot of it is you still go back to whatever your practitioner is recommending. Now one of the exciting things for us ends up being, you got 1,000 stores here where this product is going into. That optometrist who may have been fitting a competitor's lens now has Ray-Ban to be able to fit. And we've been able to go in there and now start talking to these optometrists and saying, not only do you have Ray-Ban, which is an easy sell because your patient wants it anyways, but you're making more money fitting this product than you're fitting some of the competitor products that you were fitting. So I think over time, we're going to pick up a lot of optometrists that were fitting competitive products that will now start fitting the Ray-Ban, right? And that's just going to help us over time. It's not going to be a channel inventory stuff or anything along those lines. It's just going to be picking up new wearers over time. And I think that will be another benefit for us because it is a big deal. I mean Ray-Ban is a massive name, right? So there's always something to that. And if a patient walks in and they're getting fit and Ray-Ban is there as an option, that patient is definitely thinking about Ray-Ban positively. Whether or not you can see it written on the contact lens or not, it's still a phenomenal brand name that drives -- that has a credible amount of awareness that will drive fitting. And if the eye care practitioner wants the easy way to go, you fit them in Ray-Ban because it's an easy way to go. And then, by the way, you can make a little bit more money, that's not so bad either.

So Al, is it U.S. or global?

It's U.S. So we're looking at it right now, saying, we have a great relationship with Essilor looking at it saying, okay, we're doing LensCrafters. Do we expand that? How much does that get expanded? How successful is this? LensCrafters obviously has other outlets, Target and other places, where there's some potential. So we'll see how successful this is and how it goes and how it plays out over time.

So just so people on the line know, it's clariti. It's a private-label version of clariti. And you've got multifocal and toric as well and sphere.

That's right. Now that we've been able to move behind some of these capacity constraints and so forth, we're able to do a deal like this and put clariti sphere, toric and multifocal in there. Yes, it's a fantastic offering.

One more question on that. I think you had an agreement with Luxottica in the past, so it's EssilorLuxottica now. They merged, right? They have LensCrafters, the stores, just so people know. And I think they own the Ray-Ban brand, right?

Yes.

Okay. You had a private-label deal with Luxottica for Love Eyes in the past. And I mean, I don't know if that moved the needle or not for you, but why is this going to be different?

Yes, we did. And yes, we have a great relationship with the kind of entire EssilorLuxottica family, if you will, part of our key account initiatives that we've been doing over the last couple of years. Love Eyes was a little different. It was Love Eyes. And you just can't even compare, right? The idea of Love Eyes is something no one's ever heard of that you're out there talking about the rating, right? Ray-Ban was the one. It took us a while to work with Essilor, as you can imagine, Luxottica and say, "Hey, guys, like put your trust in us. We know what we're doing, like we're really, really good at this kind of stuff. You're fantastic at what you do. Let's combine your insane good brand name with all the characteristics that we can provide, right? Not just a private-label lens in your name, but a broad private label in your names. We'll do the co-marketing and branding review. We'll help you create like some real cool graphics and advertising campaign, some marketing campaign and so forth." We can handle a lot of that shipping activity and so forth, whether it's to your patient or directly to your stores as needed. There's an entire offering that's here. That's part of those customized solutions we've talked about. So yes, at the end of the day, I think it's just a matter of the Ray-Ban name is just such a dominant name within so many of the LensCrafters and Essilor broadly stores.

Why did you go with clariti and not MyDay?

You could go with either of those. I mean, clariti is a product right now that's available as a toric and a multifocal and broadly available. And it's a great product. It's a great lens. It's doing really well, right? So I mean, at the end of the day, if you're Essilor and you really want to go out and say, we have Ray-Ban. We have Ray-Ban in a fantastic product and everything that you could possibly want. I mean clariti has the widest view range for a toric -- for a silicone hydrogel toric in the marketplace. It's a fantastic multifocal. So it's everything immediately available.

Okay. Fair enough. So when we think about 2021 -- fiscal 2021, I mean in the Streets, basically next year, consensus is about [ $2.76 million ], 4% growth over fiscal 2019. That's the way a lot of people are looking at this. And any reaction, I mean, anything that makes you uncomfortable?

Yes. It's a tough one. I'll answer it a little without answering it because I'm really trying to avoid giving guidance next year and giving numbers. I would say our business is going well. We're finally launching MyDay toric. We got it out there a little bit, but not very much. So we're finally doing that launch. We've got MyDay sphere going back into markets around the world. Our specialty lens business is going well. Biofinity Energys is out there going well. A lot of things are going positive for us as we move into next year. So I'm optimistic about next year. The reason -- and you know I have a tendency to give guidance and so forth. It's just the COVID side of things, right? So that's the only reason that I have a little bit of concern on how it's going to come back or are we going to see step backs? When do we get a vaccine or something else that can move things along? So fundamentally, I'd say business is going well. It's not a business issue. It ends up being a COVID issue.

Yes. And I did mention, I mean, by our math, FX could be 1.5% to 2% tailwind in '21. So that 4% is on a constant currency basis, even lower. But people probably don't have much FX in their models yet. So let me -- before we get to FX, let me ask you about just the P&L. Operating margin was about 27% in fiscal '18 and '19. Do you think you can get back there in '21?

Yes. There's nothing within kind of as you flow through the P&L that shouldn't allow us to continue to put up good margins. The only one that I would mention, and we'll be very transparent about it overlaying, ends up being the MiSight investment activity. Now this is a big quarter for us at $15 million with everything we're doing. You're not going to see $15 million every quarter, but you're going to see heightened MiSight investment activity. So what we'll probably do is I'll probably just try to give that, right, and say, "Hey, here's what we're thinking about MiSight from a revenue perspective, from an investment perspective. Here's the rest of the business." But the fundamentals of the rest of the business for margin are sound. Like we're in good shape on that side of thing. Gross margin's decent. OpEx, certainly under control right now. Yes, so we're in decent shape.

And Al, on FX, I mean, maybe comment on that. Is that 1.5% to 2% tailwind right now? Is that directionally accurate? And the flow-through in the Q4 call, $12 million tailwind, I think, translating into $0.16 of EPS. We can all do that kind of ratio. Any comment on where FX is right now next year?

Yes. Well, Q4 was skewed a little bit because of the pound because we have the lag of the pound from our manufacturing coming into the P&L. So that percent ratio of going revenues down to OI was definitely higher than normal. I mean that happens every once in a while, and it will go the other way sometimes. But yes, I mean, currency has moved in our favor, obviously. It will be a matter of when we get to December. Is currency held there, has it moved more in our favor, or moved against us? And we'll obviously update that. We try to be really transparent with currency and the impact on currency. But yes, I would love for it to hold where it's at. I'll take that. It doesn't even have to improve. Just hold where it's at, and I'd be happy with that.

Yes. And just lastly, on EPS, I don't know, last on this one. But on EPS, $12.72 is where The Street's at, 3% above fiscal 2019 EPS of $12.35. I don't want to put words in your mouth, but it doesn't sound like you're seeing anything -- or maybe I'm wrong, anything that you're not comfortable with today, with the caveat, there's a lot of uncertainty. Is that fair?