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

Well, good afternoon, and welcome to the second day of the inaugural KeyBanc Life Sciences and MedTech Investor Forum. My name is Matt Mishan, I'm a senior MedTech analyst. I'm pleased to be joined by CFO, Brian Andrews, from CooperCompanies. If you have any questions, there is a Q&A box on the bottom of the screen that goes directly to me. And I will do my best to get to the questions as they come through. With that, I think we'll just get started with the questions. And Brian, thank you for joining us.

Matt, pleasure to be here. Thanks for having me.

I know you just reported, but could you give us an overview of how Cooper sees the recovery progressing in its core regions? And what are the key assumptions -- key macro assumptions for the next 3 to 6 months underlying your guidance?

Sure. Yes. So yes, we reported a couple of weeks ago. The rate of recovery is different from region to region. But on the whole, sort of at a macro level, what we're really seeing is steady, continued progress. And that doesn't matter whether it's in the U.S., or Asia, or even Europe. Certainly, there's a lot of noise out of Europe, and we'd love to see their vaccine being rolled out faster in all markets. But where we are -- what we are seeing is continued and steady progress. And so what you saw reflected in our guidance is kind of along that trend of, okay, we're going to -- we had solid numbers in Q1. We'll see sequential growth in both businesses in Q2, and then a stronger back half to the year. But what we're seeing is encouraging. I mean, you're seeing, certainly, a return to wearing trends and wearing habits. And certainly, as the vaccine gets rolled out, especially in markets where there's a high percentage of optometry offices that are based in malls and strip malls and chains, that should help to open up some capacity, and potentially even address some of the users that didn't enter the market last year.

I was surprised of how durable contact lens held -- demand held up throughout the pandemic. I think there were some trends that emerged. And I'm curious kind of how you look at and see how sustainable they are. The first is, I think you've mentioned there's an increased consumer focus on health and wellness, and that helped drive daily SiHy mix during the pandemic. I mean, did -- was the mix meaningfully different of daily SiHy versus none during those 6 to 9 months as things were like shut down?

It ebbed and flowed a little bit. We're seeing some resiliency within FRPs, particularly within our Biofinity franchise. We've been launching a number of extensions to that franchise over the years, including our Biofinity extended range, toric, our Biofinity multifocal toric, which helps with people with -- that are astigmatic, but also are developing presbyopia in the later years. So you're seeing continued strong numbers out of Biofinity because we can address such a wide part of the market. Certainly, dailies, you're absolutely right. There's a bit of an acceleration happening with dailies because of those health and wellness trends winning the day. I mean, you already have a massive amount of opportunity and a macro climate that's helping to drive that market. You've got wears that are now getting younger by virtue of myopia management. In MiSight, you've got wearers staying in the industry longer because you've got just comfortable lenses and better options for people, and also better lens to address their issues. So there -- the dropout rates are reducing. Obviously, the trade-up to dailies and daily silicones is massive, whether they're going from FRPs to dailies or daily silicones. And the health and wellness trends that are certainly heightened now through COVID are helping to accelerate that. And I think even just a little bit of price taking that happened at the beginning of the year, with rebates kind of coming back to normal, if you will, with some of our competition and list prices being taken up a little bit, gives us some confidence in just the rebound that we expect to see back to sort of that 5% to 6% growth in the industry. But we're encouraged by what we can see. We're taking our fair share of new fits, and we've got the broadest portfolio of daily lenses in the market and the broadest set of toric SKUs. And we'll have some new -- we're having -- we're active with launches right now, and we'll have some new launches that will help to continue to elevate that category for us versus the competition.

What do you think the effect of 1 year of people being inside and spending a lot more time on their devices means? I mean, you mentioned Energys, and that focuses on screen time and digital eye train. How successful has that branding been for you? And when you talk about new -- potential new launches, does Energys factor into a migration down into the dailies?

Yes. It's an interesting one. It's funny because Energys has probably launched a little bit before its time. We launched that lens with Biofinity a few years ago, and it was kind of slow to kind of get going. People were kind of confused by, how do I use this? And how do I fit this? And what's so different about it? Then all of a sudden the pandemic hit, and everyone is in front of their computers all the time and people were experiencing digital eye fatigue. And all of a sudden, you saw Energys really skyrocket. And that's growing like a weed, just like the rest of some of those extension products I just mentioned. So it's an opportunity for us we're certainly evaluating. Energys is something we could absolutely put into other lenses. There's definitely going to be -- you're seeing lots of companies now starting to more permanently say, hey, you can work from home. So this phenomenon of working from home and being in front of the computer may not be where it is today, but it's definitely going to be maybe more significant exiting the pandemic. I think whether you're in front of a computer and you've got digital eye fatigue or you're -- you've been in front of a computer and now you're back in the classroom staring at a whiteboard or blackboard, and you can't see it, there's going to be -- people are going to need vision correction, and they're going to need to address their issues. And so the nice thing is that, as an industry, we're now starting to get more capacity there to help the demand. We're obviously positioned exceptionally well, being capacity unconstrained within the daily silicone hydrogel space. And all the product launches that we're doing right now and the ones that we're going to be announcing later this year and into next year, will help to continue to address some of the needs in the market. But the market trends are strong, and certainly, we're poised to capitalize on.

Okay. And then the third trend that I noticed during COVID was that you did see a progression of renewals, online prescription renewals, at like an elevated level. How do you see that evolving over the next couple of years? And what would that mean for Cooper?

Well, I mean, the contact lens market has always been pretty sticky, right? I mean, it's the reason why market shares don't move a whole lot. You don't see -- we certainly trended up. If you followed us for the last 15 years, I mean, every year, we trend up higher and higher and higher, but it's always kind of at a very small margin at the expense of someone else. Some of the other players have kind of tried the water, kind of flatlined a little bit, but it's sticky. And it's why we were kind of confused by some of the rebating that was happening towards the end of last year because you just have these massive installed bases, this massive annuity of people that just they're in a lens, they like the lens, they stay in the lens, until they finally drop out of the market. And of course, there are people that are -- do research and they want to find out what's new and what's great, what's going to help them. And there's always opportunities to trade up existing wearers or lenses. But the renewal rate is annuity. Where we've seen -- where we've got a strong share is with key accounts and customized solutions. So those key accounts that had a very high share of spectacles being their vision correction method, all of a sudden, during the pandemic realized that, shoot, when people aren't coming to my stores, I'm not getting reorders of spectacles. But those stores that were having a higher -- a disproportionate share of contact lens users that were buying from that store were constantly getting reorders. And so it's really kind of open the eyes of our key accounts to realize, boy, like we really need to make sure we focus on contact lenses, too. Like this is a great annuity. It's profitable for us, but it gives us some durability and sustainability. And if we have our own customized solution, whereby we provide a script for a customer, and they're not going to shop that around to somebody else to a nonfitter or some other Internet players, and they're going to come back to us and they're going to bring their families and the brothers and sisters and their mothers and their fathers, we're going to get other business. We're going to -- and we're also going to maintain that business within our stores and within our franchise. And that's been pretty eye-opening for a lot of our key accounts. It's really kind of improve that and has really kind of added to some of the momentum we're seeing.

So is your sense of like the fitters are looking at doing spectacles and contact lenses? Or just fitting more people with contact lenses versus spectacles?

Yes. I think it's just kind of -- if anything, it just continues to give us confidence that the industry is going to come back to that 5% to 6% growth that we've historically seen. I think it's just, if anything, with liquidity issues being an issue during the pandemic, you had stores that were -- just didn't have that annuity base all of a sudden, struggling to stay liquid. But that's rebounded. That's not really an issue anymore. And if anything, it's just, hey, like this is an important part of whether you're an optometry office, whether you're a retail establishment. Having That annuity business and having that repeat business, and then being able to target the rest of the family, is pretty important. And so we talk about that halo effect even with MiSight, getting people into optometry offices for their children, hey, that opens up opportunities for now the parent to talk to the optometrist about themselves or whoever else they come to the office with. So there's a massive opportunity, and the trends are certainly favorable to, at least, support a bounce back to that 5% to 6% industry growth.

Okay. You talked about share being sticky, with the exception of when somebody is kind of giving it away or when somebody is having some issues. I think last quarter, it was evident that Cooper, Alcon, Bausch are outperforming Johnson & Johnson. Do you have an idea where it's coming from? Is it the 2 weeks migrating to dailies? Or is MOIST starting to crack a little bit?

Yes. I mean, it's coming from different places. I mean, certainly, under attack is MOIST and under attack has been DACP. I mean, your legacy daily hydrogel franchises, and they're big. I mean, Al talked about it on our last earnings call, the $2.4 billion attributable to daily hydrogels is going to trade into daily silicon hydrogels at some point. And they're happening. And it's happening. But that's a gradual ramp. I mean, we're talking about a trade-up that's going to take 5-plus -- 5 to 10 years between getting FRP wearers into dailies and dailies into daily silicones. So certainly, those franchises have been under attack, and Alcon is doing a nice job defending their base now with some of their launches. We're continuing to have success because any time that you're putting a wearer in play and you're trying to trade someone up, they're going to have success converting that wearer, but they're also going to -- they're also not going to have success 100% of the time. So once you put that wearer in play, it opens up an opportunity for us to capitalize on it. And of course, when you look at our New FIT Data, our global market share is 25%, but our New Fit Data is much higher than that. So we're taking our fair share of new fits for all those new wearers into the market. And that gives us a lot of confidence that we'll continue to take share and continue to grow above market.

Right. So first, just back to J&J, and then we'll get to an Alcon question coming off from their Investor Day. J&J -- the initial response from J&J to the pandemic, and I guess to potentially some of the share shift, was that we're going to be more aggressive on rebates, but they've kind of pulled back on that now. What do you think the response is going to look like over the next 1 year or 2 years if rebates are -- they're not something that's working?

Well, your guess is as good as mine. I mean, they've been kind of quiet as of late. I know that there may have been something announced today about sort of more of a niche product around drug-alluding technology. But in terms of just defending their wearers and sort of the broader market, you'll have to ask them. I think what's comforting to see is that they try to see if they can influence wearing habits and wearing behaviors by heavily rebating in the back half of last year, even Alcon followed suit. We did not react to that. And we kind of watched it play out and kind of thought -- we were puzzled a little bit and felt like, hey, they're just getting money away. I mean, they've got this massive installed base, massive annuity. So even if they take prices up, they might lose wearers, but at least they'll grow. And so what you saw in January is that play out. We thought that might happen. It played out. So you saw rebates come down. You saw list prices being taken up. And hopefully, we're entering now what historically has been a very stable marketplace with some -- with kind of a happy oligopoly, where we all have success in pockets with some of us having more success than others. And again, I think we'll -- based on our product launches that we're active with and what we have coming up and what we're doing around specialty lenses, myopia management, we're going to continue to think we're going to have a lot of success.

Okay. Excellent. That brings us to Alcon. They had their Investor Day. I was able to take a quick look at it through the presentation, not necessarily had a chance to listen in to the Q&A or follow-ups. But it seems like incrementally, on a -- from a product portfolio, they're launching a new reasonable lens on the premium side, which makes a lot of sense as for where they've been losing some share. What do you think a premium SiHy on the monthly side means for Alcon versus where you're at today with Biofinity?

Yes, Matt, it's a good question. I mean, I guess you have to ask them what that means for them. But I mean, clearly, they still also have -- back to sort of the install base, I mean, they have a pretty large air optic space, a mass market hydrogel franchise that staying in their lens, wearing the lens, they're losing some share. Biofinity has been a big share taker. In an FRP category, that includes 2 weeks to monthlies, that's been mostly flattish to declining. The 2-week side is declining faster than the monthly. I mean, when you look at Biofinity, we're growing, by virtue, of all the different things that we've done to add on to that Biofinity portfolio. I don't necessarily see Biofinity as being under attack per se, it's just such a -- it's got such a strong reputation in the market as being an ultra premium, really easy to fit lens. The toric design is outstanding. It's arguably best-in-class. And with all of the different -- the massive amount of SKUs that we offer to offer up to any really -- anyone on the bell curve with the XR and the XR toric and the myopia multifocal toric and Energys and so forth, we're going to have success with Biofinity, and -- but I'm sure they'll have success trading off some of their air optics wearers.

Okay. Can you explain your key accounts strategy? And kind of what differentiates your strategies from other companies? And kind of what it's enabled for Cooper? Before you go there, I think what people don't understand is that it's broad. Key accounts can mean Costco, and it can mean a large vision group or a large eye care professional group. I mean, it's broad.

Yes. You're right. I mean, the way that we define it is it could be regional players. It could be global players. It could be buying groups. Even just the decision-makers is different from one key account to another because sometimes you'll have the corporate office is influencing the rest of the retail chain. And in other cases, they've got some influence. They'll put it into the stores, but it's a lot of independents that are making that decision. So suffice to say, it's something that doesn't -- you just can't invest in it and be successful in it overnight. We've been working on our key account strategy for many, many, many years. And for those that have followed Cooper over the last several years, we've spent a lot of money in operating expenses to help build that foundation. It's everything from the key account support. You're talking to CEOs and CFOs of some pretty big companies. You're talking to the front of the house. You're working closely with them on a number of different initiatives to help grow the category, to help drive customers to their stores, to drive awareness. We're helping them with marketing and advertising campaigns. We're giving them technology so that they can communicate with their customers and help the reorder process. We're developing really customized solutions. In some of our key accounts, we actually are developing unique lenses for those key accounts. We're doing the logistics for them. We're doing all of the inventory management for them. We're doing -- we're drop shipping to their customers. So it's really important. When you're talking about doing a customized solution, like or Ray-Ban is an example that we mentioned a couple of quarters ago. When you're talking about taking a globally recognized brand, it's not -- to get to the point where you build up enough goodwill and trust, where you can now go and launch a product under a globally recognized brand, like Ray-Ban, you need to make sure that you have all of your ducks in a row. You have to make sure you've got capacity, you've got -- all of your -- you're not going to have any supply constraints. You've got to make sure you've got outstanding customer service. You're not going to impact the customer experience in any kind of negative way. In fact, you want to improve the customer experience for them so that it continues to drive more purchases and more stickiness for that customer. And we've had a lot of success doing that. And fortunately, all of that investment that we've been spending on key accounts and customer service and distribution and automation, managing inventory, and we're talking about the thousands and thousands of SKUs, especially when you're creating a unique lens, it's an enormous amount of work. But a lot of that investment activity is behind us. We're in outstanding shape right now exiting this pandemic to be able to capitalize on all of the growth dynamics that we can see in front of us. And that runway is long, but the successes we're having around these key accounts and also securing 5-year, 7-year, 10-year agreements, means that this is a durable, sustainable growth engine that we've got an enormous amount of visibility into that gives us a lot of confidence that we can continue to take share.

You mentioned Ray-Ban. I'm going to bring up SightGlass in next set of questions. But when you think about Essilor and the relationship, how do you see the acquisition of GrandVision further enhancing the relationship between you and them? Because that's another large private label relationship that potentially...

Yes. Yes. Well, fortunately, we have a great relationship with GrandVision, and we've got a great relationship with EssilorLuxottica. Obviously, we announced the creation of a 50-50 joint venture with EssilorLuxottica recently to commercialize the SightGlass vision technology, which is a spectacle myopia control lenses -- glasses. But -- and we've also launched Ray-Ban, and we do a number of things throughout the world with EssilorLuxottica, including they're our distributor of Ortho K throughout China. So that relationship is great. It's growing. We're both very, very committed, all the way up to the highest level of the EssilorLuxottica organization. Francesco and Paul had conversations with Al, and they're 100% committed to the joint success of building myopia management, being the dominant players in myopia management. And frankly, we've accumulated an enormous amount of knowledge over the years with fitters globally, doing specialty fitting around ortho-k, scleral lenses, now MiSight, developing new practices, how they -- how practices run their practices and everything really associated with it. So we've developed a massive amount of knowledge around myopia management and specialty lenses. They've got a massive amount of success and dominance they bring with their infrastructure around spectacles. So together, we're excited about what we can do to continue to grow that category and be the dominant players. But I think the work we do with GrandVision hopefully should continue to evolve in a positive way with the relationships we have both.

So on myopia control, what's most interesting to me is that you previously would consider -- I think you consider yourself a fast follower in the industry. But it seems like there's a cultural change at Cooper, where now you're like developing markets like this. Like how should we think about make that change?

It's interesting. I've been at Cooper for 15 years. And it was always just kind of like badge of honor that we would tell, like, hey, silicon hydrogels are new. In the early 2000s, they were being introduced, and we were the fast follower coming out with our silicone hydrogels and Biofinity. And then dailies and daily hydrogels were kind of a big thing, and we were a fast follower. Of course, that's the reason why we're only 19% share in dailies today is because we were the fast follower. But then you look at, back in 2014, we acquired Sauflon right around the time that we were launching MyDay. And we took a bet that this industry was going to really be driven by the growth in daily silicones. And you fast forward it to today, and we were right. And all of the investments and all of the learnings that we captured through Sauflon into our own in-house development, are now producing the lens -- the manufacturing lines that are being rolled out now across the world. And that we've been talking about with all of our capital expansion projects, we've got highly efficient platforms that are flexible, that bridge the best of MyDay, the best of clariti that are flexible, that have smaller footprints. I mean -- and then, of course, you layer on top of that, not only the efficiency and the cost reductions, but also sustainability in renewables and recycling. And the things that we're doing also around that around ESG. We're really excited about it. It's putting us in a great position. And we think we've got best-in-class operations people, best in the industry operations people. And we're extremely pleased with the early successes that we're having rolling out these new manufacturing lines because they're already exceeding our expectations.

I think the next step in that progression is learning how to develop reimbursement from this as a treatment rather than as a disease, rather than just for sight. When you look -- I mean, I don't even know how to ask it. When you look at the progression projections of dollars like that you could save the health care system over 20, 30, 40 years from stopping the progression of myopia, is it so overwhelming where reimbursement is intuitive? And how are you going to -- how can you quantify or model that for payers?

Yes. It's a good question. So yes. So back to MiSight, the -- in myopia management, the growth numbers that we're talking about, we've mentioned our confidence in getting to $25 million in revenues in MiSight this year, going to $50 million next year and then going to $100 million the year after and going to $200 million. No where in those -- in that -- in those expectations is an expectation that we're going to get reimbursement. It's not a key point to growth. Certainly, reimbursement from MiSight as a treatment is something we're working on. And -- but we just have to be careful. You just don't want to get a reimbursement at a really low amount that could be more hurtful than helpful. Well, we started that process. We're talking to people. We've hired some people to help us along that path. But you're right. Part of the challenge is just -- is getting insurers to understand that there are significant long-term benefits that you're going to be impacting people's livelihood by reducing problems when they're in their 60s or 70s or 80s. So it's a longer process. So we really do want to -- we want to get it right. We do think it can be a huge home run. We don't need it, but we're probably years away from getting sort of legitimate insurance reimbursement. The glasses will help though.

Switching on to CooperSurgical. I think I asked my first question on the conference call last quarter. I guess, why are you now confident in like sustained above-market growth? I mean, it's incrementally a big change for Cooper.

Yes. And thank you for that because it doesn't get a lot of -- people don't really ask much about it. And frankly, when they ask, they ask, why do we have it? And rather than -- wow, this is kind of a nice -- this is nice. Is this new? What's going on?

So it could be a great business.

It's turning into one, right? I mean, it's taken a fair amount of time. And obviously, Al has been with the company for 15 years, too. And so for a large part of the last several years, he was our Chief Strategy Officer, and he was heading up -- he was responsible for CooperSurgical. And several years ago, we acquired Origio. And since then, we've acquired a number of different companies to build a moat around IVF. And when you fast forward to today, we're #1 in the fertility market and -- when you exclude the hormones and the drug piece. But everything from equipment to consumables to genetic testing, the whole moat, we can offer the entire solution to an IVF clinic. So when you look at what's going on right now, you've got pent-up demand because you had a number of clinics and countries that were closed to IVF procedures for many, many months. And now all of a sudden, they're opening up. And you've got all those people that were wanting to get in that couldn't get in or that are now getting in, and then you've got the normal people that would have normally come in. The macro trends are great. We're -- it's a fragmented industry. Some of our -- some of the smaller competitors within fertility have struggled with their supply chain and their manufacturing. They've diverted some resources to other parts of their business. So they've disrupted some of the -- there has been some disruptions that we've been able to take advantage of to get our foot in the door with some of these IVF clinics. We're also building a key account practice within CooperSurgical, and we've been doing that over the last couple of years, which is very similar to CooperVision. And so as these IVF clinics are consolidating, we're right at the front of the house, working with them, helping them on their journey towards consolidating some of these IVF clinics. But the macro trends are great. COVID has had a funny kind of impact on people. It's either pushing people to have babies or pushing people to not have babies. And if they want to delay their baby journey and they want a nonhormonal IUD, the only one that's available in the U.S. is PARAGARD. And that also plays in the health and wellness trends. That's also lifting the PARAGARD franchise. So when you combine those 2, they're really leading to some pretty healthy growth numbers. And then if you layer on top of that, the acquisitions we've recently announced and some of the acquisitions that we've done over the years, are really starting will -- are either starting to take hold or will start to take hold. Again, they're small but they're all strong gross margin products. They all have great revenue growth potential. And so when we look forward, we really see CooperVision kind of growing alongside CooperVision, with higher gross margins, kind of similar operating margins and stronger cash flow per revenue dollar. It's not a very capital-intensive business.

And then CFO question. I've been asking everyone, are you seeing any inflationary pressures or concerned about raw materials and supply chain? And then just for you guys specifically, you guys have more exposure to the pound. Like how should we be thinking about that on a lag basis?

Yes. I wouldn't point to anything in particular or highlight anything about sort of what we're seeing in inflationary pressures. I mean, the only thing that -- one of the things I'll point out is really just during COVID, shipping lanes have been reduced, and our freight costs are higher and we're moving inventory from a manufacturing location to different distribution centers. And that's a bit of a headwind that we're dealing with. But we're doing a lot more, air to ocean, that will help mitigate it. But nothing I'm seeing really on the inflationary side of things. Your second part of the question was?

Was on the pound related? You have some specific manufacturing exposure there?

Yes. I mean, currency is going to move around. And we gave some guidance around the tailwind to revenues and EPS during our earnings call. The pound is we tend to have a 6-month lag when it comes to the pound within cost of goods. But within revenues, it hits us right away. So it's factored into our guidance based on a few weeks ago. And we're trying not to get too crazy about FX, things that are somewhat out of our control, but it ebbs and flows.

Quick one. I read a headline you deployed [ Vuzix ] in your distribution center? What's Vuzix?

It's funny. I wish I bought that stock last Thursday or whatever. They were like $1 or another. But it's a -- think about it as just kind of a headset that you can -- you have your normal -- in your distribution centers, you've got sort of your normal employees, and then you have to sometimes staff up or down based on seasonality or based on demand. So you get temps coming in from time to time, they can put on this headset and immediately, with very little training, they're able to go and walk around and know what to pick and what to go to next and where to go for it. And so it really makes the onboarding of an individual into our distribution center really easy and kind of just -- so it's really just that. But it's -- we're doing, obviously, a lot of automation in our distribution centers. And so there's a ton of robotics, but there is an element that -- there's still an element at times in certain locations where you've got people picking off of shelves, and this is helping to facilitate that and making them a bit more efficient.

Okay. With that, with my Vuzix question, I think we're out of time. Thank you, Brian.

Okay. No problem. It was my pleasure. Thanks.