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

All right. Perfect. Good morning, everyone. Thanks for joining us for Day 2 of the William Blair Growth Stock Conference. We've all made it so far through roughly 1.5 days, which is good. My name is Margaret Kaczor Andrew, I am the research analyst here at William Blair & Company who covers Cooper. Before we begin, I am required to inform you that you can obtain a complete list of research disclosures or potential conflicts of interest at williamblair.com. With that, super happy to introduce Dan McBride. I appreciate you coming out to Chicago with us. I'll turn it back to you for a presentation and then maybe some Q&A at the end.

All right. Thank you, everyone and really happy to be here. Dan McBride, I'm the Chief Operating Officer for the Cooper Companies. I know some of you or many of you are familiar with the story, but I know some others in here may not be as familiar with the story. So I'm going to do kind of a bit of a quick overview through the presentation deck. Not going in too much detail, probably leave some time here for some Q&A, but just to make sure everybody is kind of familiar with the story. We obviously have our cautionary statements disclaimers. So if I say anything crazy, Kim can tell me and then you guys can ignore it. So the Cooper Companies, who are we? We're a medical device company. We got 2 really strong businesses. I think more important than having strong businesses, is that we are in 2 really great spaces. There's some of the business that's purposeful and some of it's luck. Being in great spaces is there's an element of that luck in there. Soft contact lenses for CooperVision, which represents about 2/3 of our revenues. And then for CooperSurgical being in women's health and in fertility to strong growing spaces, that's about 1/3 of our revenues for the business. Our revenues are split. About half of them are in the Americas, mostly that's U.S. and then Europe and then Asia. When we look at the business over time, we've had really strong performance and strong and consistent performance over the last 10 years, really over the last 15 years. And so both businesses growing consistently every year. A little bit more organic growth, you'll see on the vision side; a little more M&A growth, you'll see on the surgical side of the two. When you look at guidance, I won't spend a lot of time on here other than to mention that it's been a really strong year for us to date. We've had beaten raising -- raising revenues and beating EPS both quarters. And we feel like we are well positioned to have a strong year for our guidance. When we think about what we are doing and our commitment really to investors, first and foremost, is driving sustained revenue growth. We're very focused on delivering organic growth within the business. And then more so on the surgical side doing strategic acquisitions to help build out that franchise. We are very focused on profitability and leverage. I know investors in the questions that I've been getting over the last couple of quarters, very focused on leverage, and we are very focused on leverage. And you're starting to see it more so, particularly on the vision side, we've really crossed the hurdle, a lot of the investments we've made there and you're starting to see it on the surgical side as well. So that's the second biggest area of focus for us as a business. We take it seriously how we spend the capital of the company. The strategic priorities really go first, investing in the organic growth of the business. After that, it really is pay down debt in this climate and then strategic acquisitions are really how we're allocating capital. And obviously, any company, it's about people. We feel like we have a really strong product offering and a really strong mission to our customers and to the patients that use our products and that resonates well with our employees in terms of who we are. When we think about CooperVision, really, these 4 product families represent the main drivers of growth in CooperVision. The top 2 are 1 Day silicone hydrogel, that's the fastest-growing part of this -- the soft contact lens space. And we have 2 attractive full families of products there. In the bottom left, there's Biofinity. That is sort of the largest product in our franchise. It's in the FRP space. It's a leader in torics and multifocals and expanded parameter ranges. It's the biggest family of products from a SKU range in the industry, and that's what really resonates in terms of customers. And then the bottom right there is MiSight, and that's our entry into myopia control, which is really taking Vision Care beyond just correcting the vision problem, but actually reducing long-term myopic growth. So a new mission for the whole industry and we are kind of the leaders in that space. When we look at the global soft contact lens industry, it really is becoming a 1/3, 1/3, 1/3 kind of a market. It's something that I saw when I took over CooperVision back in 2014, but it really is where the market's playing out. Ourselves and Alcon are really the two big drivers within the market right now. We're the 2 companies taking market share. J&J still remains the largest company, but we're really seeing that the 3 companies are what dominate the industry. It's still a 2/3, 1/3 kind of split between sphere, toric and multifocal. But toric and multifocal, where is a lot of the energy and it's growing faster than the market. That is the strength of CooperVision is in that part of the market, it's the more profitable and the stickier part of the market. So we're delighted that our positioning is lining up well with market trends and the most important pieces of the market. When we think about the drivers. It's a growing wearer base. We have a growing prevalence of myopia globally. It's now about 30% of the world's population needs vision correction. That's expected to be about 50% of the world's population in 2050. It's an epidemic problem. And it's one that really gives you a macro trend to invest in the industry on. New fits and trade-ups have always been one of the biggest drivers, and that continues to be. It really is a shift in 1 Day. Silicone hydrogel lenses, and it's also growing in torics and multifocals. And then pricing. We've been in a good pricing environment. One of the things that we're seeing is that consumers continue to buy the highest end products in the marketplace. Our top seller is our top end products, Alcon's top sellers is its top end products. J&J's top sellers are their top end products. So consumers -- the industry has been able to take price and consumers are not reacting by changing their buying decisions on the types of products they buy. CooperVision, great history of success. What I take particular pride here is really on the market growth. For 15 years, we've not only grown in the market, we've grown faster than the market, 15 straight years. So I think that's a tremendous achievement. I think it's -- we can continue to do that. And we've really driven our share from being kind of a distant third player, to being a #2 player and really kind of creating that 1/3, 1/3, 1/3 kind of market view. One of the biggest areas that CooperVision is leading the industry and really changing what Vision Care is, is in myopia management, that's reducing the progression of myopia. We have the only FDA-approved product for the -- to control myopia, which is MiSight. We entered into the business originally because in orthokeratology that mostly focused on China, but that was a piece of the industry that was there. And now we've also recently added a joint venture with Essilor, the largest spectacle company in the world, to bringing a spectacle option for myopia control. This is building slowly, but it's building with kind of great strength, and it really is a great long-term trend. This should be standard of care for all children. They should have their myopia treated and keeping their myopia level as low as possible for their eye health for life and also for just quality of life. So in summary, we're well positioned to succeed. We've got -- we're in a great position within the market. We've got the largest product portfolio in the marketplace. And so anyway, good summary on the CooperVision business. If we look at CooperSurgical, CooperSurgical really, you could split it in different ways, but 40% of the business is in fertility, which is delivering healthy babies and allowing families to have babies, and 60% of the business office and surgical, which is a mix of businesses, including products for OB/GYNs, surgical products, also stem cell storage, a few things going on in the -- on the office and surgical side. It too has a great history of success. It's really tripled, quadrupled in size in 10 years. A lot of that is M&A driven, but it's really positioned it now to being a strong business in its categories. When we think about fertility, this is the business that most excites me on the surgical side. The fertility space, you cannot open any major newspaper or magazine and over the last 5 months, not see a story about population dynamics around the world. People are having children at a later age. 15% of the population has an infertility issue regardless. But all of this points to the need for more children, more babies. And so there's really strong tailwinds to the IVF space as it matures. And we have a leading portfolio with really kind of all the products that are needed to run a fertility treatment. So the biggest portion of the fertility market is in the drug side. We're not in that side. But when it gets to medical devices, CooperSurgical has a leading position. When we look at office and surgical, this was the historic CooperSurgical business that really focused on OB/GYNs, a wide variety of products, a lot of focus now on labor and delivery. The recent Cook acquisition was again on the labor and delivery side. So well positioned there. Good growth, slightly slower growth in this segment of the business than in fertility and in CooperVision, but it's a highly profitable segment for the business. So that's our med device and our stem cell storage kind of [ gloss ] over that. Finally, on our overall mission, obviously, we are focused as every company is on our corporate social responsibility. We take a lot of pride in the fact that the initiatives we've taken to both reduce waste, LEED-certified facilities. Our partnership with Plastic Bank to remove as much plastic from the environment as we're putting into the environment. So anyway, like many companies, a strong focus on this in the organization. And then just finally, so we can get on to sort of Q&A. Obviously, these are sort of how we sell and what we are as a company. We've got really 2 strong companies in growing markets that have good tailwinds, so it's an attractive space to be in. We have leadership leading portfolios, particularly in fertility and in the vision side. We are very focused on leverage. I think that's something investors have been saying since post-pandemic. They hadn't seen as much focus on the bottom line. We have been doing a lot of investment. A lot of those investments are now paying off, so you're seeing that right now in our -- in the margins we're delivering and in the EPS that we're delivering. Long-term focus on shareholder value, and I think we have a proven track record, I mean, growing every year and delivering for shareholders. So with that, I'll open it up for questions.

Perfect. Well, like I always say, I'm sure Dan would rather answer your questions than he would mine, but here we are to start with mine. So if you do have a question, please raise your hand and I'll immediately stop what I'm saying. You guys had a really strong fiscal second quarter result that you reported, frankly, just last week. CVI did another awesome performance. CSI, maybe there were some nuances to that. So maybe just at a high level, talk about the last few quarters in each of those businesses? And then as you -- talk a little bit more on the nuances on CSI and why those are manageable?

Yes. So on the vision side, the market is strong. We've seen a good pricing market. So we took price globally. We believe we took price above or where our competitors were, particularly outside the U.S. And consumers are not reacting to that. So again, the fastest-selling products are the top end products for everybody's product families. The market is very focused on 1 Day silicone hydrogels. That's where majority of the growth is with clariti and MyDay having 2 families of products there. It well positions us in that. We've taken a strategy with MyDay that MyDay should be the Biofinity of the 1 Day space. So our parameter range is -- far exceeds anything our competitors have done, and we believe that they will do. And that really allows practitioners to put more patients into 1-Days and that's where they want to be. They prefer to be in 1-Days, they're more convenient, they're healthier. So we think the market is strong, and we think our positioning is really, really strong on the vision side. Over on the surgical side, again, markets are strong there as well. I mean fertility has been doing double-digit growth every quarter. It slipped off of double-digit growth last quarter, but we expected to get back to there in the third quarter. And the one glitch in CooperSurgical is that the platform that, that business runs on needed to be upgraded. So we did a major systems upgrade with surgical at the beginning of Q2. We thought we would largely get through it and not have to really talk about it, but it caused mainly around data cleanup and the historical databases. They're notoriously difficult to get those things on to new systems. But we've done that cleanup and the system works. It's fine. We now have to clean up the backlog. So basically, we've kept guidance for surgical the same for the full year. But more importantly, surgical is in a much better position to grow as a company. This was an important piece of work to get done. And so we're actually really delighted they have it done and to have the system working and be in a position really to put surgical in a stronger position to grow going forward. So that was the glitch with surgical, but I view it as very short term. And fortunately, we got through it fairly quickly even though it impacted the quarterly numbers.

Any question?

[indiscernible].

Yes, it's historical. So if you really -- the origins of CooperSurgical go way back into the '90s. And it was -- when Tom Bender was Chairman of it, it was a side business he was building up. He saw an opportunity to consolidate in the OB-GYN space. So the company has been building in that side for numerous years. There used to be a tax benefit in having the 2 companies, that no longer is the case. But we've now invested in it. It's a strong business. It seems to not be dilutive on either side of vision or to surgical. So one would -- could say it's a historical anomaly as to why they're together. But we're happy with both businesses, and there's no desire ever to split them.

Okay. When we spoke with Brian last week, we didn't speak with you on the follow-up call. He's almost stopped himself [ sharply ] and he was about to say vision is growing on all and firing on all cylinders and then he stopped. So I don't know if that's a characterization, I guess, you would agree with at this point. And there's a series of tailwinds. You mentioned price a lot but frankly, capacity for you guys is improving, and yet you're still not able to fulfill the demand for things like -- for MyDay. So walk us through the tails of some of those over the next 2 to 3 years?

Yes. So I come from the vision side, and I'm super proud of where vision is. Vision is hitting on all cylinders. It's doing great. It's got great leverage. It's P&L is phenomenal. And yes, we are in a market where all of the investments we've made over the past years have been targeted at where the market is growing, and we're leading in that kind of a growth. So it looks sustainable, and it looks long term. The investments we made in 1 Day SiHys, our vision of viewing the 1 Day space as a full-service space and not just a cheap, easy, hit the center of the bell curve part, I think, is absolutely the right strategy. I think consumers want to be in 1-Days. So there's no reason they can't be. The big issue to conquer there was cost. How do you make the lenses cheap enough to be able to put 1-Days in a larger SKU range and parameter range? Well, that's really been Cooper -- one of CooperVision's expertise is to handling a lot of complexity and handling really complex SKU ranges. And so we've pulled that off. And so just delighted because we look at it and we go like -- we're not convinced our competitors want to do that. We're not convinced they can do it. And then when we think about the leveraging that's going on in the vision business, we've done a lot of investments. We talked to you guys about those investments. I thought they would start paying off in 2020. But of course, then we hit a pandemic and it kind of threw everything off a bit. But CooperVision is leveraging extremely well across its P&L. The big limitation there is really just FX. If you rolled FX back to 2019, CooperVision would look better today than it did even in 2019. So it's just a phenomenal business. So I'm pretty excited about that. And everything that about it is both sustainable and it's really about trying to keep up now with demand as I think I alluded to earlier in this presentation, MyDay is in its early days. I mean, it is -- it's a family of product that should be a big chunk of the 1 Day space, and it's still a small family in the overall space. I mean 1-Days were dominated by Alcon and J&J. They own the 1 Day space. So we've now pushed in. We're now about 20% share in the 1 Day space that we're starting to have relevance there, and we have a portfolio that allows us to have greater relevance going forward.

And so maybe just going back to short-term dynamics. I think one of the things that happened in the quarter, you guys still beat, but there were some channel inventory reductions that you did see. One of the things I'm curious about is how does that compare to pre, during and post-COVID days? And I asked that from the perspective of during COVID, maybe there was a weak supply or supply was too low and then maybe some of the channel increased that. So where are we today relative to that?

So the only channel thing that we really faced in the quarter was with MiSight and that -- so it really didn't really affect the CooperVision numbers all that much because it is still a small family of product. It did affect MiSight growth rates, which I know a lot of people pay close attention to because it's a really important future product. But that was really the only channel impact on CooperVision in the quarter. There was a lot of channel activity in the quarter, and that has to do with like Walmart is changing their distributor. NVI is moving out of ABB -- or out of America's Best. So there's some channel activity that's there. I think where you saw that probably is really more with J&J, where they had kind of a real anomaly in their first quarter. And I think they said it was channel and it makes sense to me that it was channel. There was a dynamic where distributors were loading up on product when service levels were sort of low in order to keep up their service levels and there's some rebalancing that's going on there. I don't think that activity is impacting us a whole lot. We didn't see a lot of that activity in there. And to the extent that it exists, we're largely just navigating through it. So I think you may see other evidence, and this is a U.S. market thing too because when you go outside the U.S. the distributors are way less significant to the marketplace. But I don't see the channel as being much of an impact on the numbers we're looking at, at least.

Okay. And you've mentioned, again, just several longer-term macro growth trends. This demand for contact lenses shift to Dailies pricing. Where do you see contact lens growth in the market this year? And then should we expect that to increase as capacity increases for you guys on a relative basis?

Yes. When we think about the overall global market, we've always had previously said, we view the market is growing 4% to 6% and it's been growing hotter than that. With myopia management now in the marketplace, we've changed that guidance to 5% to 7%. The markets clearly seems to be growing on the high side of that or above that. But when we look at overall the market, I still think that's our longer-term guidance is in this 5% to 7% range. And it's -- and just -- so we are in a heightened bit of market growth. But we do think, long term, the market kind of grows in that range, and we tend to grow above that range.

[indiscernible].

No. I mean LASIK has been out there for a long time, and it does pull some consumers out sort of in their late 20s and things like that. So it has some effect on the marketplace, but honestly, that's baked in, and we're not really seeing any real change in that dynamic.

And then going back to kind of market growth dynamics. You kind of have that 5% to 7%. EMEA has been fantastic for you guys more recently. So what's driving some of those dynamics competitive versus macro?

Yes. So for us, EMEA, it largely has to do with -- key accounts are really driving that market and we're really strong in key accounts. That has to do both with the key account strategy and also with the private label strategy. I think the key accounts really see tremendous benefit in having their brand name be in front of the consumer and be the brand name that they look at through the course of the year and helping them. One of the big issues for our industry is customers capturing this sale and the sale not going out to the Internet or the people that aren't doing any work fitting or putting people into contact lenses. So I think that's a big driver for us in EMEA. I think we're probably all the growth in that market almost. I think if you pulled us out, you might see that market significantly lower. But it's key accounts is the largest piece of it.

Is pricing a dynamic out there or not?

Yes. So we've -- EMEA historically didn't do as well on pricing. We did a bit more on pricing. We're not seeing -- we did a lot more than our competitors, at least from our market checks on pricing in the market, and that probably helped us as well.

And then as we look at APAC as the [ third ] region. That one maybe surprised you a little bit. Correct me if I'm wrong, but how should we think about the kind of broader macro concerns that folks have within that region?

Yes. I mean the interesting thing about APAC is like my whole life, everything has been focused on either we're trying to emulate what's going on in APAC or we want to be in those markets. And these last few years has been the first time where those markets haven't been the most attractive markets. And I think they'll return to that. But it's -- one, it's the FX environment has really hurt those markets. Two, the consumers, the recovery there has been worse than anywhere else in the world, particularly China, and China has been really slow on recovery. So when I think about our growth in APAC, some of it is that, but a lot of it is that we prioritized growing in the U.S. and EMEA more. So when we talk about being constrained on capacity, we gave less product to the APAC region. So unfortunately, we kind of forced that lower growth number ourselves, largely to do with one customer commitments that we had already, but also profitability of the region versus the U.S. market and the European market.

And then as we think about the CSI disruptions, there's some flex in that channel, right? So maybe you under -- you've not highlighted exactly what the disruption was. But let's say you're operating at 80% versus what you thought at 100%. What's the flex in that channel [ opt ]? So meaning can you do 150% and more than make up for that kind of Q2 dynamic? Or what time period can you go through some of that backlog...

Yes. So I mean, we kept our guidance, 5% to 7%, so that's -- we feel like that's the makeup that we can make as we can continue to get within the guidance range and hopefully at the high side of the guidance range.

But you have enough capacity to hit, at least in the high...

On surgical, it's not a capacity.

Yes, on the surgical. Okay.

Yes. Vision has the capacity issue.

Perfect. Correct. Yes. Okay. And then as we look at these SG&A investments you've mentioned several times in your intro comments, how you're expecting to get more leverage. Gross margin maybe comes down a little bit in the second half of this year just with higher-priced products. But then can that be more than offset by SG&A and what's the tail on those investments as well?

Yes. So our expectation is that operating income will be growing faster than the first half. So we are definitely seeing leverage. It's all coming really through the SG&A line. Largely has to do -- on the vision side, it's largely doing due to the fact that these investments we've made, we're now starting to see the benefits of them. We're starting to see leverage. Distribution is one of the areas where we're seeing leverage and some of that is just supply chains have gotten easier. You're seeing costs come back in line. We're able to do some cost saving type of activities on the distribution side. So that's a good driver there. On surgical, you'll get leverage even just from having overcome this disruption. There was additional costs that went into the disruption we had within the quarter. But they are also seeing leverage that they're getting in their SG&A line as well.

And then maybe last question. And this is -- again you've sort of referenced it. FX has not been your friend for a period of time at this point. And I think some people at least who have approached me and said, well, you're an FX play or you're debt play and that's it. How do you address some of those comments? And when does it become less of an impact to you all in your numbers?

Yes. So when I think about that, I think I just look at the last 10 years, last 15 years of strong performance. I mean the underlying business is performing strong, strong growth rates, good delivery to the bottom line. We're largely now hurdling a lot of these FX effects. So it would be certainly a nicer world if we didn't have FX running against us every year. It would be nice if the Fed would lower interest rates. But none of that really matters to the underlying fundamentals of the businesses, which are strong. And so that's what I think I would point to is those are two things we don't control, but what we do control is our positioning in the marketplace, our success in the marketplace and that continues to get better and better and better. We continue to leverage the lines we do control. So I look at that, hopefully, someday will be upside, if we ever see the dollar weaken and interest rates change.

Perfect. Well, with that, we're going to wrap it up here. The breakout is in the mail room upstairs. Thank you.

Okay. Thank you.