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

Good afternoon, everyone. Welcome to Day 2 of the Jefferies Healthcare Conference. I'm Zach Weiner from the research team here in New York. Up next we have Cooper and with us, we have Al White. Al, thanks for joining us today.

Absolutely.

So I wanted to start with fiscal 2Q results. Top line continued to perform well with CVI leading the charge. And just can you talk about some of the growth drivers within the vision care business.

Sure. One of the great things about the Vision Care business, I guess, if I just kind of step back and looked at it maybe as a market, is that there are a number of growth drivers. So within contact lenses, we have a number of things we've talked about in the past, whether it's the shift to dailies and silicone hydrogels. You've got growth in torics, especially outside of the U.S., multifocals, we're seeing that in some of our products. But the other thing I'd probably highlight on that ends up just being the vision correction space in general, if you will. Around 1/3 of the world is myopic today. Studies which would say that around 50% of people will be myopic by the year 2050. So you have an underlying driver of growth within the vision correction space, which is really exciting. So on a consistent basis, we just see more wearers coming into the space, if you will. And then I think the other thing that layers on here and certainly in today's time frame is it ends up being the impact of COVID. You go back and you think about kids. One thing you would say is for a number of years, parents were able to control their kids' screen time. You could tell, I have kids. I mean you could tell them that they can't be on a screen. They don't have a phone or whatever the activity is, you know that was eliminated. You weren't able to tell your 10-year-old or 12-year-old that they can't be on a screen because the school is requiring them to be on a screen. So I think all the additional screen time we've seen over the last 2 or 3 years, probably is accelerating the progression of myopia, if you will, amongst kids around the world. And as much as I hate to see that and talk about that, that's going to be a benefit for anyone in the vision correction space, including ourselves. And I think you're going to see more of that come to life probably here, even this fall, when you talk about back to school, but certainly over the next couple of years. I think that's part of what the pent-up demand is. And you can see that in some of our revenue growth numbers, which have been really strong -- frankly strong for a number of quarters here. We had the COVID rebound. But then on top of that, you've seen an extension of that time frame. And I think it's just a multitude of factors that are driving it right now.

And the shift to the premium daily SiHy continues to be a tailwind. Can you talk about that market and the growth drivers there?

Yes, absolutely. There's still a fairly large traditional hydrogel market. And on the daily side, you have J&J and Alcon both have a fairly large base of wearers. We don't have quite as much. But you do have silicone hydrogel lenses that came out years ago. They're fully available in dailies and a broad parameter ranges of torics and multifocals, on top of spheres obviously. So that part of the market has been growing for years, have been driving a lot of the growth, and I'd anticipate that to continue just because all new wearers who are coming in are being fit in silicone hydrogel.

And so where do you see penetration currently in the daily SiHy market? And where do you expect it to grow?

Right now, daily SiHys are probably around -- in the low 50s kind of range. For 2-week and monthly as your FRP space, it's in the mid-80s. So I think, ultimately, I don't see a reason you wouldn't get to that same point. And that's pretty dramatic. I mean if you just choose a number and say, hey, 50% of the dailies are in silicones today, it's 85% for FRPs. You're talking $1 billion plus wearer conversion coming over a period of time. That will happen over a 5- to 10-year period. So we have a decent amount of wind at our back, if you will, as an industry, and certainly, we're a benefactor of that at Cooper.

Is that a U.S. number? Or is that global number?

Global number.

Global number. Yes. And is there any significant spread between U.S. and OUS number in terms of penetration?

There would be, it would be a little tough getting into some of those details. You end up having to go kind of by country on that. But I wouldn't read too much into that, I think, because at the end of the day, I think the more important aspect of that is, what is the big trend? What's the macro trend, if you will, on that and the macro trend is clearly very positive.

Yes. And part of that trend is premium pricing when it comes to the daily SiHy market, and rebates and allowances and things of that nature are always a part of the conversation. Can you talk about the rebate programs and that shifted through COVID and how you expect to see it play out as we move out of this COVID environment, maybe?

I'm going to talk about it a lot less than we used to. Yes, it seems for a number of years rebates were kind of a constant conversation. And because of the rebate activity, which is really a U.S. phenomenon, but you did see pricing flat, I would argue, potentially even down in the U.S. market in some years. We pulled way back from that. The amount of rebate activity has reduced significantly. I think that's part of the price increases. Like as an industry, we've been taking price for different reasons, different places. I mean there's a lot of competition in the contact lens industry, but different places, different ways we take price, whether it's increased list price, reduced rebate activity, freight surcharges, all that other kind of stuff. But I would probably just say I'm happy to not be talking about rebates.

That's fair enough. And inflationary pressures is something that has been impacting a lot of med tech. The Cooper is not immune to it. Can you talk about the inflationary pressures and how that's impacting margins specifically to the Vision Care business?

Sure. Yes. I mean everyone is dealing with inflationary pressures and arguably in different ways. We have wage inflation, some supply challenges, a little bit more on the CooperSurgical side, I would say, than on the vision side. But vision, we were shipping a lot of product over water, now you get a greater degree flying that product in, which is more expensive. Yes. So I would say kind of a variety of challenges, broadly speaking, with respect to supply chain picking up inflation, all of which we're managing through right now, probably through price increases and a combination of cost containment efforts successfully managing through.

And through COVID, we saw a lot of patients, again, on the Vision Care side, patients extending their prescriptions or not going into their opticians as often And with that came reordering through folks like 1-800 Contacts and online retailers, how has that impacted your business?

Yes. That's absolutely true. You did see an increase in online order and you certainly saw it at 1-800 and a lot of pure retail -- pure optometry kind of order sites. You've seen a lot of those levels go back to normal, not completely back to normal, but to a large degree. You've also seen greater activity online to a lot of the retailers. So when you think about some of the great retailers out around the world, Specsavers and a variety of different people out there, you see increased online ordering with those folks. It depends what people are ordering. Obviously, we do customized solutions, which includes customer brands. So any activity shifting in that direction ends up being a positive for us. But I would say the big movement that was associated with that activity, and it was a fairly large swing early on has come back and has neutralized itself out. So I wouldn't put too much weight on that type of purchase activity.

And with patients extending their prescriptions, did you see any major impact to new fit starts or switch fits? And is that getting back to more normalized levels?

Yes, it's really interesting right now, looking at the market data that's out there because you are seeing differences in how people are buying lenses. It used to be that -- we'll use the U.S. here as an example because it's a script market. So you would see somebody, hey, they're 11 months in, they go back to the optometrist, they get an update on their script. Maybe they get tweaked 0.25 or something happens along those lines. In today's world, you see less of that. So you're seeing people call and renewing their scripts. And the optometry community has kind of changed and developed over the past couple of years to accommodate that. And then you look at the fit data, and it can be a little challenging to roll up your sleeves and dig into that fit data because is it a new fit, meaning a brand new wearer to contact lenses. Is it a new fit, meaning a different script that you're writing to somebody? Is it a new fit because they're moving from a monthly to daily or into a toric or something like that. But I think that as you try to look through all that noise and all this purchase activity, what you're seeing is an increase in the number of wearers. You're seeing more people who are needing visual correction at the end of the day. Now, they can't all necessarily get into the optometrists because you still have 2, 3, 4 months and a lot of optometrists in terms of backlogs to get an appointment, clear positives for us. But I think fundamentally, that's the key. It is you can look at all the different fit data and try to parse out what all of it means. But at the end of the day, you're seeing the strength in our revenue numbers and our sales and a lot of that is being driven by just increased visual correction needs.

Just continuing with the switch fit conversation and talk about share amongst the major 4 players in the contact lens space. There's -- in terms of the broader daily SiHy market and then the broader contact lens market in general?

Yes. From a share perspective, Kim is probably more of an expert than me on that on our website. I think J&J is a 39% market share, and I think we're at 25% and Alcon's 24%, and that's the -- certainly the lion share of the global contact lens market. We've been gaining share on a pretty consistent basis. So our 25% is moving kind of up towards 26%, if you will, as we continue to do well. With daily silicones, probably somewhat similar to that market share. I would say we're winning share there certainly on the daily SiHy side. We just posted another strong quarter here 28% growth. So, we would be taking share. Our share of daily silicones would be higher than our average share that would drive us higher. Maybe when we think about Cooper in particular, in our share, we're in the low 30s market share when you look at kind of 2-week and monthly lenses torics, multifocals, and we're about 19% share on the daily side. And as anyone who follows us knows, we continue to take share on the daily SiHy side. That's pushing up that daily percentage, which is increasing ultimately our total percentage. And I think you'll continue to see us move up towards that 30% market share as we continue to gain on the daily side.

And I just wanted to move over to myopia management, which is a topic of conversation for many folks. Just the recent approval of MiSight in China and just how MiSight has trended through COVID and reorder patterns and things of that nature, just some commentary.

Sure. Yes, if we pull it right up to date here, I think that what we've seen most recently here is that MiSight outperformed in the America -- well, outperformed outside of China, really, if we look at this last quarter. We do a lot of our business in China, runs through Shanghai. We work with EssilorLuxottica and a lot of that are Ortho-K in our MiSight business, which has been growing really nice there. And obviously, with the restrictions -- shutdown in China that eliminated a lot of that activity. I'm pretty excited about where we stand. I mean our Ortho K business was growing nice in China. MiSight, all the early indications were really positive on MiSight in China. Some of the side commentary was also positive, including stuff like hearing back from the eye care practitioners talking about compliance. And that's an important thing when we talk about MiSight. You want kids in that treatment 10-plus hours a day. So if there's a concern about glasses, you want to move kids over. So I think what we're seeing kind of to step back on that is the myopia management space is clearly doing well. There's a ton of interest. Outside of China, our MiSight is growing faster than expected. We're seeing renewal rates or reorder rates, if you will, that 85% to 95% level around the world. So clearly, the product is working. If you look at the independent optometry market, we're getting to that point where finally, especially here in the U.S. market, we're starting to see kids come back and reorder. And we're starting to see optometrists get more comfortable with the fact that MiSight clearly works and are thinking, how can I integrate myopia management into my practice. The next big thing here will end up being FDA approval on glasses. If we can get myopia management glasses into the marketplace, that's going to be a very significant step forward. If we go in Europe, strong growth in MiSight. If we go into Asia Pac, we're seeing some really tremendous growth in certain countries. We launched in Taiwan, as an example, doing really, really well there. I think that with respect to China, we don't need China to "be reopened" and be fully back open to be successful. One of the differences for myopia management is in China, it's sold through the hospitals. So you're talking about big hospitals, very heavy volume. So as long as China is open enough where the hospitals are open and you can have children move their way through the hospital for eye exams, you'll see Ortho-K and you'll certainly see MiSight move fairly quickly. So I still think we talked about that number of $100 million this year in myopia management, and we've been impacted by currency, we've been impacted by the China activity on MiSight and Ortho-K. Still think we have a chance of getting there just because there's enough strength around the world right now with our myopia management sales that momentum, I think, alone will probably carry us.

And it's probably too early in the MiSight or myopia management cycle to really give much detail on this. But is the expectation that as a patient works through their MiSight, they'll move on to other Cooper lenses like MyDay and clariti. Are you seeing that? Or is it too early?

Yes. That's absolutely intent. It'd be a little too early to say that. Although we are seeing that in some countries, Australia being a good example of that. But no, you're absolutely correct. I mean right now, MiSight is sold as a Proclear lens. We have a number of projects within R&D, including coming out with a silicone hydrogel version of MiSight at some point here. A toric within the MiSight family of products. But as we do that, I mean, the intent will be that kids should wear MiSight or some version of MiSight, let's say, until they're roughly 18 years old in that kind of time frame. Ideally, they would be wearing one of our -- they'd obviously be wearing our products through there, and they would convert at that point potentially into the same product that just doesn't do the visual treatment, right? So one of the great things that we've been seeing here more recently is our tracking data is showing that the MiSight doctors who are fitting -- or I'm sorry, the optometrists that are fitting MiSight are having success with MiSight. Not only are they fitting more MiSight but they're fitting more of our other CooperVision products. So we're seeing that right now. And I believe as those kids wear MiSight and age up to the point where eventually, they don't need to be in MiSight, they'll naturally convert over to a CooperVision product and potentially the same product that they're wearing that just doesn't do the treatment.

I know it's still early, and you mentioned it earlier. But just some comments on SightGlass, the JV with Essilor.

Great joint venture. Essilor has glasses right now that they're selling in multiple markets, including in China. They talked about the massive success that they're having there. SightGlass is a different technology. It's also glasses for myopia management, but a completely different technology. So there's a lot of reasons to believe that both of those are going to be successful. That joint venture is a 50-50 JV that we did. We have just launched that product in several markets. It's really just become available in China. We just started selling product there. So I think that as that product rolls out around the world, you're just going to see more success, more conversations about myopia management in general. It's going to help everything. With respect to the U.S., that would be the product that's closest to getting FDA approval as a myopia management set of glasses. We did get the data back on SGV. We just got it back. So that data is all being compiled right now. So I'll get this visibility on that towards the end of this month, beginning of next month. And we'll certainly get that to the FDA as soon as we can to work hard, to work with them to get approval by the end of this calendar year.

There's lots we can talk about myopia management, but I did want to jump into the surgical side of the business. It's been busy couple first 6 months of the year or so, just high level on some of the moving parts in the surgical business.

Yes. The surgical business is kind of broken up into a couple of different areas. Certainly, we did the Generate acquisition, but we had the fertility business, which is just going fantastic. That industry is really strong right now. There's a lot of -- similar to contact lenses, there's a lot of big macro trends that are driving growth in the fertility space. It's led by a women delaying childbirth and that's the biggest driver of it. But fertility is growing on a global basis. So we're happy to be a leader in that space right now. And the Generate acquisition we did brought from the fertility space, largely donor egg and donor sperm, which broadened our portfolio of offerings. So pretty excited about where we are here in near term and long term with the fertility space, and that's a growing part of our CooperSurgical business and an important part. And then we had the medical device part of that, which is largely OB/GYN medical devices. That returned to growth this quarter, which was great. And you got the stem cell business that grew 5% this quarter. I'm looking forward to seeing what we can do in that business. That business that we bought from Generate was mostly an in-house sales office and direct-to-consumer business around umbilical cord storage, right? We bring the other side of that. We have 100-plus sales reps out there going into OB/GYN offices right now. They're able to go in and talk about that. They're able to do some education with respect to regenerative medicine and so forth that I think is going to advance those efforts. So we're seeing some early synergies there. So I think that's going to play out positively for us. And then we have PARAGARD which is our nonhormonal IUD. And we've had a few challenges on that. We've talked about here recently as the IUD market has shifted. But I'd kind of step back on surgical right now and say that where it sits today, it's about a 5% to 6% organic grower. It's obviously growing well north of that with the acquisitions we've layered on. But probably around a 5% to 6% organic growth, which is a pretty good number and driven by the fertility business.

And you hinted to some of the COVID-related challenges that you've seen in the PARAGARD business. That's not PARAGARD specific, that's the broader IUD market, correct?

Correct.

And is the expectation that, that should normalize as COVID sort of continues to shift towards the rearview?

Yes, there's probably 2 ways to look at that. One is that we're going to annualize this weakness here as -- after we exit this quarter. That's not the way you want to get back to growth, but that will -- that alone will do it. The question ends up being, do we get it shipped back to IUDs? And I haven't believed we will. There's nothing out there that fundamentally says there's been a change in consumer behavior or women behavior, if you will, with respect to IUDs. So I think we will. I think that will just trend back over time because I think we need traffic back into the OB/GYNs office.

And then just shifting to the P&L a little bit. We talked about at the beginning here, the inflationary pressures that were impacting the Vision Care side of the business, but can you talk about the inflationary pressures that may be impacting the surgical side?

Yes, a lot of similar things to the Vision business. The one thing I would probably say about the surgical side is because of the breadth of products there, especially on the medical device side of things but even on the fertility side of the business, we did deal with more supply chain challenges there. Even this quarter, our backlog exiting this quarter was certainly larger than it normally is. So there are some supply chain challenges. We're working through there. We keep making progress on that. It seems like every week, we make a little bit of progress. We get some shipments on supplies and so forth, we need. So I think you're going to continue to see a positive trend there, but that not a snap of the finger and things are better. That will just progress a little bit.

The backlog is from patients?

Backlog from orders.

Orders, okay.

Yes.

And how long do you expect that backlog to last?

Through this year, we incorporated into our guidance, certainly an assumption that we're going to continue to have some backlog challenges. There's nothing indicating at this point in time that we see at all that we're losing any business because some of our competitors in the space don't have the supplies either. So I think it will continue for a little while. It's one of the reasons I was really happy we saw our base medical business grow 3% on an organic basis this quarter. That was a good effort to be able to get back to growing without being able to meet all the demand that's out there was a good sign for us.

And then just thinking about margins, are there specific areas of the business? I know the daily SiHy market is -- or daily SiHy is a margin driver. Any other areas that should get back to higher growth that really will drive margins?

Yes. Well, certainly, you have our myopia management business. We talked about MiSight. That's probably right now, operating margin neutral. We've hired a lot of people there. The infrastructure that we built is one that we're going to be able to leverage. So over the coming years, you're going to see a definite improvement in the operating margins in that business. We do have a number of projects out there, cost containment projects that we've initiated over the last couple of years. You're starting to see the benefit of some of those come through. Consolidating manufacturing, for instance, CooperSurgical down in Costa Rica is a good example of that. We're just going live with our power plant. We have kind of a mini power plant in Puerto Rico that we're going live with right now. That's going to generate some pretty decent cost savings. So yes, there's a lot of initiatives, a lot of cost control initiatives are out there and then some of the product portfolio will drive margin expansion. The daily side, as you mentioned, a lot of the dailies, especially the daily silicones as we continue to ramp those up, can drag margins down a little bit. But Brian mentioned this on the last call, the trend with respect to margins is a positive trend. Right now, it gets completely skewed because of currency. But if we pull currency out, your gross and your operating margins are trending in the right direction.

Al, with that, we're unfortunately out of time. We could probably go for another half hour or so. But we really thank you for participating in the conference, and thanks for your time.

Absolutely. Yes. Thanks for having me.