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

Hi, everyone. I'm Steve Lichtman, medical devices analyst at Oppenheimer. Welcome to the 32nd Annual Oppenheimer Healthcare Conference. Up next for us, I'm very happy to have the Cooper Companies. With us is Brian Andrews, Executive Vice President, CFO and Treasurer. We're going to do a fireside chat format. If you do have any questions, please key them in, and I will get them over to Brian. With that, Brian, thanks for joining us today.

Happy to be here, Steve. Thanks for having me.

So I thought we just sort of set the scene on the CDI side of your business. And wondering if you could lay out for investors where you think penetration sits on some of the key opportunities, including silicone hydrogel, dailies and maybe emerging markets where there's some of the biggest run rate and what's your sort of market outlook overall?

Yes, sure. So the trends that were there before the pandemic are absolutely still there today. A fantastic fundamentals and a lot of growth drivers that are driving the market. You've got the new fits and the trade-up opportunity that relates to dailies and daily SiHy. So you're having a continual shift of people going into SiHys, daily SiHys, more availability, broader SKU ranges, better products, better -- new sort of extension launches that are happening. You've got a growing prevalence of myopia, which is significant. And so we're kind of in the first inning, very nascent beginnings of what is -- what will be a fantastic market and one that should be standard of care for all children worldwide. Geographic expansion, emerging markets, still a lot of opportunity there in Central Eastern Europe and good parts of Asia and LatAm. And then just higher net pricing. You've got -- we've had many, many years now where pricing has not been up on a net basis, true realized net basis. So you finally have a situation now where you've got rational behaviors, no craziness around rebating and everyone taking price. And so I think we're probably at the beginning stages of net price increases. So all really, really good. When we talk about the market in general and back to sort of the new fits -- or I'm sorry, the trade up to daily SiHys, you've got about 56% of the market that's in dailies today. And that's -- and of the market, about 28% is in daily SiHys. So you can imagine, we've got a long way to go. If you look at just wearers in dailies, you're probably in somewhere in the neighborhood of 35-or-so percent of wearers that are wearing dailies today. So that's a massive, massive opportunity to get a lot of people into something that's really healthy, really comfortable at various different price points for those consumers. And then when you look at -- you just compare the FRP market, which is about 86% of that market is in SiHys, you compare that to the daily market where only 50% of dailies are in SiHys, there is massive opportunity. When you look at Cooper, we've got a 25% global market share, about 26-or-so percent in daily SiHys, but our daily market share is only 19%. You compare that to where we are in FRPs, where we are in SiHys, where we are in torics and multifocals, all of which are kind of in the low 30s. It's a real opportunity for us as we watch our new fits and where we're gaining momentum. It's all of those new fits and new wearers coming to market, we're taking more than our fair share of new wearers, well above our 26% daily SiHy share. So it's driving -- it's driving our consolidated market share up. It's driving our percentage of dailies up from 19%. And it's driving the whole overall market. And our success with key accounts is a big factor in something that differentiates Cooper from the rest.

One thing I wanted to follow up on there is price. And you talked about this on the last call, of course, with inflationary pressures, you had indicated that there would be and there has been some price increases. What's sort of been the receptivity of that? It sounds like it's -- there's been no pushback you talked about more to -- potentially to come. But what's sort been -- what you've seen from the ground so far in terms of those price increases and your ability to pass through some of the higher inflationary costs.

I think as an industry, we've been ripe for price increases for years. And for 1 reason or another, a lot of defensive positioning, you had some wacky rebating, as I mentioned earlier. It wasn't happening. And it's hard -- we all tend to kind of move together when it comes to the actions we take around pricing. And we're now at a place where all of us are raising prices in different spots and some more than others. But there shouldn't be any issue taking price. We're going to have success to taking price as a market. Every time a contract comes up for renewal at Cooper, it's an opportunity to take up price. I think where price probably impacts us differently versus, let's say, some of the others is just a large percentage of our business more than the others is tied to key accounts and customized solutions. And what that gives us and affords us is visibility and volume guarantees around for the next 3, 4, 5 years that helps us to invest in our business, manage those key accounts down to the operating margin level, drive efficiencies through our plants, improve cost per unit, knowing that we've got these long-term contracts. But it also means then that we're not adjusting price quite as often as maybe some others that are tied more to list prices. But that being said, there's still a big part of our business that's not tied to contracts. We do have a lot of contracts coming due this year or recently came due that we took price. So it will be an evolution, but I do think we're at the beginning stages of continued annual price increases that, frankly, we saw as an industry for many, many years before it abated over the last few years.

Great. Just last one on this because I think that's interesting talking about it beyond just sort of the acute inflationary stage. When you say -- talk about multiyears, would you be referring to taking up same account price-for-price or same product price-for-price? Are you talking about this may take several years for it to fully sort of roll in? Or is it not...

I'm saying, historically, I've been at Cooper for 16 years. So for many years, and while I've been here, the industry has been able to take price up by low single digits on an annual basis. I think we're back to being able to do that. We are -- we, Cooper and, frankly, the rest are trying to take up prices in pockets more than that, especially in places where the currency has devalued so significantly. We are looking for opportunities to take price up more significantly in a few of those markets. But I would say just on the whole sort of broadly speaking, I think that we, as an industry, believe that -- or I believe -- we believe that the industry should be able to take price in that low single digits on an annual basis for the next several years.

And where do you think we are in terms of sort of getting back to a normalization vis-a-vis COVID? I think you guys mentioned on the last call, still not at pre-COVID fit, new fit levels. But what are you seeing on the ground? What's your anticipation of getting into more normalized end market?

Yes. I mean, I think we'll -- I think the good story around this is staffing challenges, though there are still challenges, continue to improve. And that is true broadly speaking around the world. New fits are happening faster and better on a year-over-year basis, and we're seeing steady progress around the world. There's still prioritization more on new fits than on refits. So I'd say if you're a new wearer coming into the market, you'll find a way to get in and be seen and the doctor is going to prioritize you. If you're someone who's already in a contact lens, it's going to take you a little bit longer still to get seen and you're being put off a little bit longer. But the trends are still improving. I mean even though we said new fits were down 8% versus pre-COVID levels, we were still up meaningfully versus last year on new fits. So -- and you see -- you saw our daily SiHy number being up 25%. But the growth that we're seeing is diversified. I mean, it's definitely -- we're over-indexed in Europe. Europe is rebounding now and so we're the beneficiary of that. Asia Pac has been slower to rebound but is -- and still has a bigger rebound, I think, to come. But they're dealing with some challenges still with COVID, but we're putting up good numbers and still good numbers relative to last year, and expect that to continue. And then you have emerging markets where you can drop in Avaira, which it's not -- it's a good product, but you put that into a market and it helps to bolster your FRP SiHys, and that grew 10%. And our extension products around Biofinity, including Energys and the toric multifocal help to continue to drive the momentum of that category forward. So a very diversified growth, different in different regions, and the extension products like multifocal in MyDay helped to support the entire family, helped to provide a halo effect, [ fixed ] the parameter expansions that we've done over the last couple of years in MyDay and clariti, mean that every single patient that walks into a door can get fit into either one of those families more or less. So it's really exciting. We've got a ton -- a lot of -- we've done a lot of really good work on manufacturing and distribution. So a lot of the automation is helping to offset some of the inflationary pressures we're seeing. And then frankly, the pricing increases are helping to offset those inflationary pressures. So it's a good P&L story that's being hindered by FX.

If lenses in the U.S. increasingly get filled outside of the optometry offices, how does that affect your CVI business, if at all?

Well, we certainly saw an uptick in online channel in the early days of the pandemic. It spiked in the latter part of 2020 -- middle latter part of 2020. Since then, it's fallen down. It's not at pre-pandemic levels, but it's down considerably from the peak. We've been under-indexed in the online channel. We tend to focus most of our energies on fitters, so anyone who's independent docs, retailers that are fitting contact lens wearers, and we tend to spend a lot of time, obviously, on those customized solutions for those key accounts, because really, what you're trying to do is create a brand, create more stickiness for that customer, you want that customer to prescribe the lenses and then have all the annual renewals come back to those stores. And what the pandemic has proven out is you want to have an annuity business of contact lens wearers so all of those retailers that had a disproportionate share of glasses are focusing more on contact lenses because that's just a steady, stable growing income stream. And you've got families coming in, bringing their kids and their husbands and wives into the stores. But you want to get people going back to those same stores and not shopping their scripts. So it really continues to benefit Cooper where our key account relationships are a big part and a meaningful part of the growth trajectory that we're seeing globally as customers are realizing, hey, this is something that we want to lock these people in. We want to get them into our lens and keep them in those lenses. And if we continue to give them really high-quality products, product availability and great technologies and really comfortably fitting lenses, and the customer experience has improved, then we continue to build that trust and that loyalty and that continues to build that momentum and carries forward.

Great. Shifting to myopia management. What are the next steps that you guys can take to accelerate the MiSight revenue pace in the U.S. over the next couple of years?

I think it's just -- we're learning a lot because we've got a lot of launches that have been happening around the world. And we've -- and we're investing like crazy in myopia management. Our P&L is -- looks pretty good. I mean, we would -- outside of FX, gross margins will be up and operating margins would be up year-over-year, and that's with all of these investments we're putting into sales force expansion and myopia management specialists and all the dollars that we're throwing into myopia in general. But the successes -- what we're learning is you really need to get deep with those offices in the U.S. You really need to help them understand how to have the conversation with the patient. We've taken some learnings from different markets and we're applying those to the U.S. and having success getting people and getting the adoption curve moving faster, getting people into the lenses because the retention rate is high. We're getting 85% to 90% of wearers are buying another annual supply. So we posted 172% growth in MiSight. That's diversified growth. That's growth all around the world. And the myopia management number that we put out there at 100 million coming off of 65 million last year is a nice, healthy increase, and that's going to be also diversified. Obviously, we're launching in China. But as it relates to the U.S. market, it's literally going office to office and spending time with them to make sure that they understand how to say -- how to respond to a no, how to get their staff involved, how to get their staff certified, how do I start that conversation before the parent comes into the office so that they're not hearing about MiSight the first time from those docs when they're filed as a minus 1 or 2. So we're making good progress and definitely feeling optimistic about where we're going.

Can you scale the MiSight opportunity in China? And is there anything built in for the launch in your FY '22 guide?

Yes. It's hard to say how quickly it's going to ramp in China. We're obviously pretty bullish here. Given the market landscape in China, being that of very high myopes, 80%-plus of the population is myopic, government talking about it, trying to get kids reduce screen time, get kids outside. Unlike in the U.S. where you've got to go office-to-office and retailer-to-retailer, that all -- the vast majority kind of all of myopia management fits are done in hospitals, in the hospital setting in China. So you have already a natural funnel of children going to hospitals Ortho K. The Ortho K market is largest in China. So you've got a lot of kids already in contact lenses in China having success. That being said, it's a hard contact lens. It's worn overnight. So adding to the menu of options for people in China, for children in China, offering them spectacles, offering them soft contact lenses, there's a massive, massive opportunity, and there's going to be a lot of choices that people will have with different technologies associated with them. It's hard to know the ramp. We're going to launch that in April. We've got a modest number tied to myopia in China. It's not a particularly large one that makes up the $100 million. So if it really takes off, that's potentially upside to the number. But we're -- we didn't want to get ahead of ourselves. We wanted to put a number out there that we felt good about and is achievable. And so feel good about the $100 million.

And then on SightGlass spectacles. Is there revenue built in into the myopia management guidance in FY '22 for that? And which geographies do you see as having the biggest initial potential over the next couple of years?

Yes. So I mean, we launched SightGlass in the Netherlands. It's -- the revenues are de minimis right now. We're pretty close to closing on the joint venture with Essilor, Luxottica. I suspect you'll hear something fairly soon on that. As soon as that closes, since that's a 50-50 JV, all of the activity tied to commercializing SightGlass and its technology is going to fall below operating income. You won't see revenues -- you won't see anything above the operating income line. So you'll see sort of the -- initially the loss, which will eventually turn into a gain as that becomes profitable and as we launch our product globally. I'd say because the market is so early, and some markets, you can launch your product without approval, and some markets, you'll be helped by approvals, and some markets, we're going to be launching SightGlass in various markets throughout the year, including in China. But expect to see with the broadest portfolio of myopia management products between Ortho K, MiSight, soft contact lenses and SightGlass and then partnering with Essilor and what they're doing to grow the category, I do think that we're going to have a lot of success individually, but as a partner, too, to Essilor.

And then in the U.S., I know there were some discussion on whether a 2-year data or a 3-year data would be needed for approval. It sounds like you're getting closed in on a 3-year data, so you're going to just roll that in. So what's your latest on the timing potential for SightGlass in the U.S.? And what are the next milestones? Or when can we see the next data tranche?

The last point, you said the last...

The next data [indiscernible] recommendation, sorry.

Yes. So we're working with the FDA. We're confident that the product works, that it's highly efficacious. I believe the data clearly points to that. We're so close to getting 3-year data. It's only within a matter of months that, by this point, we started the -- we started the conversation with them. The conversation's been very productive and constructive. But at this point, our belief is that it's probably going to -- we're going to -- we might as a little wait until there's going to be -- we're going to wait to get the 3-year data, make sure that, that proves out. And then it's hard to handicap sort of when an approval happens. But as long as everything continues to point in that -- in the direction that we believe it will, then we believe that we'll see a launch sometime by the end of this calendar year in the U.S. In terms of the quality, we've got great quality data. We're very -- what that comes down to in essence is even if you end up having fairly similar results with a spectacle and a soft contact lens like MiSight, it's really going to come down to compliance that's going to result in better outcome. You need -- in order for it to be highly efficacious, you want that wearer to be wearing the device for as long during the day as possible, for as many days as possible. 10 hours a day, 7 days a week. So spectacles will certainly be, we believe, the largest part of the market. But contact lenses, by virtue of the fact that you're going to get better compliance, will probably be a larger part of the myopia management market than our contact lenses as a percentage of the overall vision correction market. So a lot of places to win. As long as we continue to advance the ball in product innovation and approvals and clinical data and advanced clinical data, we're going to have success.

Great. And then shifting to CSI, a lot of news flow there over the last couple of months. I guess, a couple of questions on that. When looking at the portfolio that you will have following the close of the Cook deal and the recently closed General Life Sciences deal, what do you see as the underlying weighted average market growth for your CSI business when that's all under your roof? And why was now the time in your mind to really -- to make those big investments on the CSI side of the business?

Yes. I mean, good questions. And obviously, we're getting a lot of questions around that. But the business that we have in CooperSurgical over the past several years, we've been transitioning it from being kind of a low single-digit grower, flat to low single-digit grower, to more sort of a mid-single-digit grower. Its gross margins are better than CooperVision. Operating margins will help us get to those low 30s over time that we've talked about in the past. But we've really -- what really -- the acquisitions that we've been going after from the small tuck-ins to some of these more recent ones, either right away or mid- to high single-digit grower, even some low double-digit growers. And then some of these more recent ones, these 2 larger ones, we believe we can get into those ranges of sort of mid- to higher single digits. So there's work that we need to do to prove that out. We need to execute on those plans. But fertility, as in general, the market for fertility is really, really strong. If we can get into markets where we can be strong in those markets, where markets have great fundamental macro trends like fertility, and we can be a one-stop shop for clinics around the world. With fertility growing 5% to 10% for the next 5, 10-plus years, that's a great market to be in. And there's opportunities to expand geographically like what Cook brings to us where we're not as strong in Asia Pac, where we don't have a lot of brake product registrations in China, where we get some sales force adds and commercial ads to help drive more strength within fertility. The donor, egg and sperm that came with Generate also was something that was missing from our bag that we are really, really excited about, where there's more demand than supply. Leveraging our key account focuses on both businesses. Our labor and delivery is one of those areas where we've been slowly but surely adding to that piece of the puzzle because it's a really, really -- they're differentiated products, great products and where we can leverage our sales force. So we're excited about what we're building, certainly wanting to try to continue to expand gross margins and operating margins with these deals, but really continuing to drive consistent, durable top line growth. In the early days sort of in that mid-single digits, but continuing as fertility becomes a bigger, bigger part of the piece of CooperSurgical to drive revenues higher as a result of the strength of that industry.

Great. And then also under CSI, I want to take your latest thoughts on PARAGARD. The growth there has been somewhat choppy, some very strong growth quarters and then some declines with inventory movement. What's your latest thought on the underlying opportunity there and your -- and the growth outlook for PARAGARD?

Yes. I mean, PARAGARD certainly was a bit of a soft spot for us in Q1, along with some of our devices in the office. But if we stick with just PARAGARD, certainly, the staffing challenges that have been present certainly impacted IUDs. I wouldn't say it's a PARAGARD issue. It's -- we're hearing the same thing from our friends that sell the hormonal IUDs. We are seeing a pickup in PARAGARD in Q2 and do expect to see -- we have a pretty good chance of being up, I would -- if we're up year-over-year in Q2, it's not going to be materially up, but it's -- Q2 last year was a pretty strong number. Expect that we're going to be right around there, potentially up year-over-year in PARAGARD in Q2. And then for the year, I still expect PARAGARD to be up year-over-year with strength in the back half. So it really -- I think it was just kind of staffing and COVID and foot traffic and prioritization, but nothing wrong with PARAGARD. I believe that that's going to continue to perform well.

Great. Shifting below the top line. I mean, you guys laid out pretty specific headwinds that you're anticipating from FX. Beyond FX, what -- can you talk about your underlying gross margin outlook? What are the sort of the tailwinds and headwinds to expansion over the next couple 3 years?

Yes, I mean, gross margins and operating margin should be a good story for the next several years. We definitely are -- we're dealing with some fairly significant FX headwinds right now. Every single currency is going against us, which is why when you look at our EPS guide, it was impacted so significantly by FX. But if we take FX out of the equation, because FX, when it's positive, it really helps, and that will flow right down to the bottom line. And when it hurts, sometimes we certainly try to hurdle it. But when it's this significant, it's hard to do that. But if we strip FX away, I would say on the gross margin side, like we're -- our manufacturing is going exceptionally well. We don't have very many idle lines. Everything is pumping out. Lenses, which is good for your absorption numbers. Your manufacturing efficiencies are good and getting better. We just put a micro power grid in place in Puerto Rico that produces cold and hot power, with natural gas being the input for our entire 500,000-square-foot facility there. We make billion-plus lenses a year there. So when you talk about a facility that runs 24/7, basically 360 days a year, it's those initiatives that helped to drive down cost per unit and improve your gross margins, moving more and more product down to Costa Rica for surgical gross margin improvement. So do you think that we have opportunities to at least maintain, but probably incrementally improve our gross margins over the next several years? The more -- the shift to more dailies is a little bit more dilutive than, let's say, FRP, so that's kind of your offset. But definitely see gross margins a pathway to gross margins improving. These acquisitions will help as well. And then on the operating margin line, again, continuing to leverage our business, absolutely can continue to see a trajectory towards the low 30s. That's a matter of when and not if. And we'll continue to invest in our business to support growth opportunities and sustainable growth opportunities. But I do still think that as myopia management continues to become a bigger portion of our revenues, we're going to be leveraging the infrastructure we've built, and you'll also see more and more of that flow down through OI and operating margins.

Great. And then maybe lastly, just your outlook on the tax rate line, that's moving up a little bit. I know you've got -- you've indicated with the Cook deal, that would be on a higher tax rate. So from where you sit today, where do you think that settles out for you guys over the next few years with all the -- with the puts and takes?

Yes. I would say for what we can see right now, without speculating on global tax reform changes that have been -- and there's been a lot of different things out there, we're trending higher. I mean, you've seen our tax rate kind of incrementally step up. Both these deals generate, and when Cook closes, will have had an impact of effectively raising our tax rate because both those acquisitions are U.S.-based or their IP, I should say, is U.S.-based. So right now, we're guiding to 14% for this year, around 14%. Cook will take it higher. But I would expect over the next several years, without any drastic or major changes to global tax reform, you would see our tax rate kind of incrementally step up. The core underlying tax rate will incrementally step up slowly year-over-year based on where our profits are. But outside of that, options exercises will help to offset some of the -- if there is options exercise, it helps to reduce the rate. But the underlying rate kind of trending up a little bit.

Okay. Thank you, Brian. Looks like we're out of time. And thank you for being with us today. Thanks, everyone, for joining us, and hope you have a great rest of the day here. Thanks.

Thanks, Steve.