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

Good afternoon, everyone. I'm Robbie Marcus, the med tech analyst at JPMorgan. I'm really happy to introduce our next speaker, CEO, Al White of Cooper Companies. Al will do a presentation followed by some Q&A.

Thank you, Robbie. Welcome, everyone. I'll go ahead and jump right into this. For those of you who do not know us, we're The Cooper Companies, a medical device company. And we have 2 business units we'll discuss today, CooperVision and CooperSurgical, CooperVision being the larger part of our business. About 2/3 of our revenue is contact lenses, and the other part being CooperSurgical, which is a fertility and more of a women's health care business. A couple of highlights to set a basis here, the company has been around for a while, selling products in over 130 countries, 16,000 employees and over 50 million people benefiting from using Cooper products. If I look at a couple of things here, this is always an interesting slide to me. If you go back to 2015 and you look at our business over the years, you could see the growth rate on a consolidated basis, 8.6% CAGR for our consolidated business, 16% growth rate for CooperSurgical, 6.4% for CooperVision. You could see the consistency on this slide of the growth over the last 10 years. We operate in 2 great businesses. I mean, at the end of the day, we have contact lenses, and we'll go through the details of that. But whether it's kids looking at their phones or whatever the reason, right, we're seeing an increase in myopia around the world. And that's resulting in increase in the terms -- in the degree of myopia and people wearing glasses and contact lenses. So that's a growth industry. There's a number of drivers that are driving the industry forward. We'll touch on those as we go through the presentation. The other one here that's been a growth driver for us has been our CooperSurgical business. We're the largest medical device fertility company in the world. We've been growing pretty rapidly. I think we're -- 14 of our last 15 quarters within fertility have been double-digit organic growth, so pretty strong, consistent growth for a long period of time. And you can see the consistency here over the years with the only dip coming back during COVID. And we're certainly expecting this type of growth to continue into the future. If we look at our guidance, we reported earnings at the beginning of December, so just recently. Our fiscal year-end is October. So we started our next -- our new fiscal year here November 1. Our guidance for this year is 6% to 8% organic growth. CooperVision, that's 6.5% to 8.5% growth, 4% to 6% for CooperSurgical, and you can see 10% to 13% growth for our earnings per share. If I step back a second and kind of look at the business from a higher-level perspective and look at the corporate strategy, kind of the long-term corporate strategy, we highlight that on this slide with kind of 4 arrows here. Drive sustainable revenue growth, we touched on that a little bit. And I'll go through it more when we break down the details of CooperVision and CooperSurgical, but very consistent, solid growth on an annual basis. As a consolidated business, we're a mid-single digit, maybe a little bit stronger than mid-single digit, grower. And as I mentioned, we anticipate we'll continue to do that, driven by -- a little bit by acquisitions, but much more so by organic growth and our own internal development. Deliver profitability and leverage, this is a hot topic these days. We've been spending more time talking about it. I will spend time talking about it today. Last year, we gave guidance of 10% to 12% constant currency OI growth. We delivered 18%, 19%. This year, we've once again given guidance at 10% to 12%, obviously looking to perform strongly against that. We started seeing leverage through the business, SG&A leverage, as we've invested heavily over the years and that -- the return on that investment activity is playing out. We're starting to see improving gross margins. So when I look at our business right now for CooperVision and CooperSurgical, but especially CooperVision, expecting improving gross margins as we move into this year. Stewards of investor capital, obviously, we're a public company. We're built for the long term. We're driving long-term success. We think, long term, our markets are long-term in nature. They trend up and to the right over time, so we need to invest and support that. And then foster culture and community, Cooper's got a great culture. We have a great team. The management team has been around a lot of time. I've been with the company 20 years, Kim from IR and Brian and Dan, the whole group, Jerry who runs CooperVision, and Holly, a long-term management team. We've got a great culture. People love working for Cooper. It's part of the reason we're so successful. If I break out the pieces here, we look at the contact lens market, the contact lens market globally is a little bit over $10 billion. It's almost $11 billion. As a matter of fact, my guess, when we get the year-end numbers, it'll probably be $11 billion. You can look at the market by competitor here, that's in revenue dollars, where we have 26%, a good, strong 26% market share in that market. The one thing I'd highlight out of here is this is the market share in terms of revenue dollars. If you look at wearers, CooperVision is the #1 contact lens company in the world. We have about 43 million wearers wearing our product, which is more than any other company. So we'll probably update this slide and change it to where we're #1. But since this is investors and everybody is talking about dollars, this is probably appropriate. If you look at categories, a big portion of the market is traditional spheres, the regular vision correction that everyone needs. Torics and multifocals continue to grow as a percentage of the market. I remember it wasn't that long ago, we always said torics are 25%, multifocals, 10%. And we're just continuing to see those trend up. Technologies have gotten better and better. The amount of options out there is better in terms of daily torics and daily multifocals, products like the one I'm wearing right now, the multifocals are just fantastic. If you're wearing reading glasses, like I was for a while, right, when you get into contact lenses, your ability to look down and read and look up at toss those glasses, it's a game changer from what it was a few years ago. So I couldn't recommend those enough for anyone in the room. I'll send you some free ones, if you want. Okay? High barriers to entry for the market, we spend a lot on capital. Right now, we're spending more than normal. We're kind of doubling up on a lot of our investment activity for capacity manufacturing on MyDay. For anyone to enter this market, it would be brutally difficult. I mean, our CapEx this year will be over $400 million. It was over $400 million last year. It's just an expensive marketplace to be in, in terms of being able to produce enough product to get into the marketplace when is growing as fast as it is. Technology know-how, obviously, it's FDA-based and different regulatory agencies around the world, a global medical device company. We have a long history of product innovation. And I would add in there it's not only product innovation, it's manufacturing innovation, our ability to produce billions of contact lenses, which is what we'll produce this year. Billion -- billions of contact lenses is something that would be incredibly difficult for anyone to replicate outside of the existing industry participants. Favorable industry characteristics, strong fundamentals for growth. Still, when people ask me this question, what should I do about my child? My child has myopia. They're going to get worse. I say -- the first thing I say is go outside, right? Go outside and spend time outside, look in the distance. But we all know that's not happening. I have a 17-year-old daughter who spends all her time staring at her phone. As much as I hate it, that's a good thing for our industry. It's continuing to drive growth in our industry. We're seeing more wearers come in because of that, so wearer growth. It's a recession-resistant business. That's a plus/minus. When times are bad -- 2009, the contact lens industry grew 3%. We grew 5%. That's kind of as bad as it gets. And when you go to the other side, we'll grow 8%, 9%. In some years, the industry will grow 6%, 7%. So it's kind of in a tight band, but a very consistent grower on an annual basis. If I jump into our products here, many of these -- for those who follow us, you'll know these, and hopefully some of you are wearing them. MyDay is our premium daily silicone hydrogel lens, a fantastic product. The only struggle we have on that product right now that we continue to see is the demand is greater than our capacity. So we're continuing to order and start up new lines to be able to hit demand. So that's a good problem, but it's still a challenge as we continue to ramp up. Biofinity is just a fantastic product. It's a monthly contact lens, unlike MyDay and clariti, right, where everyone's throwing it out at the end of the day. Biofinity is an [ all ]-range. Essentially, any person in the entire world who wants to wear contact lenses, regardless of what their script is, we can make you a Biofinity contact lens. We have that ability, including all custom ability, to produce anything that anyone could want. Clariti is our other daily silicone hydrogel lens, a great product. And MiSight we'll touch on. MiSight is our myopian control product to reduce the progression of myopia in children. Contact lens macro growth trends, right, I've touched on a few of these already. You look at the glowing -- growing global wearer base that's coming literally around the world, we see opportunities for growth. New bids and trade up, right now, when a new patient goes in, you're a 15-year-old, you're a 16-year-old, and you're heading your way to optometrist's office. You are being fit in a daily silicone hydrogel lens. That's a difference from years gone by where people were fitting in monthly lenses. You could still do monthly lenses or you could do a 2-week or a 7-day replacement-type lines and use solutions, but in today's world, you just don't need to. You can use daily lenses, and we're continuing to see that very slow shift as new wearers coming into the market are coming in as daily wearers. Growth in torics and multifocals, I mentioned multifocals, but torics is another one. A significant number of people have an astigmatism. Not everyone needs a lens to fix, if you will, or address that astigmatism. But a significant people -- a number of people who are seeing optometrists look for and treat astigmatisms much better. And that's one of the reasons we're getting so much growth in our toric franchise. And we are the #1 toric contact lens company in the world. So as we continue to see that trend happen, that's a positive for our business. And then taking price, I mean, we took price again this year. As an industry, we've seen the entire industry taking price the last several years. That's been a positive, right? I mean, I think you're getting a market that, pre-COVID, had more participants. If you move forward to today, you've got -- I mean, you've got a high percentage of the market. 90% of the market is 3 players right now. So it's certainly an oligopoly. If you [ roll ] all 4 players, then you're very strong, 90-some-percent of the market. Worldwide prevalence of myopia, just to touch on this very quickly, right, you can see the increasing myopia as we go to 2050. And on a percentage basis, right now, you're talking about 1/3, a little bit over 1/3, of the world is myopic. And studies show half of people, 50% of people, worldwide are going to be myopic by the year 2050. That underlies all of our growth. New wearers coming into the market underlies all of our growth, and that's what's happening. You go specifically to CooperVision, as I mentioned, a long history of success. You can go back to 2014, 10 years ago, and see our 6% revenue CAGR. Our market share has gone from 19% to 26%. And I think we've taken market share since 2006 every single year in the contact lens industry. So we're well positioned to continue to do that. We're very heavily focused on driving success in this business. As I mentioned, #1 contact lens company in the world, roughly 34% wearers, 43 million people wearing CooperVision contact lenses. Innovation, everyone talks about innovation. There's only 1 contact lens on the market -- there's only 1 product on the market to treat myopia progression in children that's an FDA-approved product. That's MiSight that CooperVision, we created, we invested in and then we created that product. So the idea behind that is to take any child who's myopic and their myopia is going to continue to get worse, they wear this contact lens. It eliminates or reduces the progression of myopia in the child. So we've seen a lot of success on that, frankly, not as much as I thought we were going to see. Where we've seen a big success is where a parent or both parents are high myopes, and they know the impact of that. Right? I mean, if you look -- if you have vision and you're minus 5 or minus 6, you know that you want your child to have some visual correction, if they can get it, to reduce that progression, so that your child ends up being a minus 2 or something around those lines. So we've seen a lot of improvement and a lot of uptake on high myopes. It's been slower than we were expecting in some of the lower myopes. But I think as we move forward and we talk about spectacle lenses here with SightGlass, that's a joint venture we have with EssilorLuxottica, we're optimistic that we're going to get FDA approval on SightGlass as we finish this year. Once we can get myopia-control glasses into the market and truly become standard of care, which we should be, every child that walks into an optometry office should be fit in a myopia-control product. The easiest is obviously glasses. Contact lenses for an 8-, 9-, 10-, 11-year-old is a harder sell. But we have to get every child that we can into this. It will become standard of care. So if SightGlass gets approved, I think that's just going to be a very successful product. Right now, that is selling. We launched it as MiSight spectacles, MiSight glasses, in Spain and some other markets. We have it in China right now. It's just doing absolutely fantastic. So it's growing like great -- it's a great product. So I'm super excited about that. And Ortho-k would be another myopia management product that we have that we're continuing to sell. I jumped to the CooperVision summary. I'm not going to read all of this. But at the end of the day, it comes down to fantastic products, great customer support and relationships. We're the only company -- really the only company that's doing customer brands. So if you go buy Kirkland contact lenses, as an example, you're buying CooperVision lenses. That would be true with Specsavers, [ Brand Visions ] and different big retailers around the world. So we have a lot of those key accounts. It creates complexity for us in terms of our logistics, our distribution system for packaging and labeling and so forth, but it's a pretty significant advantage for us. And I won't read the long list here. Jumping to CooperSurgical, the other part of our business, we spend a lot of time on vision and maybe don't spend enough time here. But about 40% of this business is fertility. It's a really exciting business for us. And then the office surgical is 60%. I like this quote down here. "Roughly every 30 seconds, somewhere around the world, a baby is born using CooperSurgical products." I just think that's a cool quote. When it came up, I found it kind of hard to believe, honestly. You know? But when you think about it, that's how prevalent we are throughout the OB/GYN community. A history of success, durable sales, this includes acquisitions, but you could see a 10-year revenue growth CAGR of 15%, over 600 products, 130 countries. 40 acquisitions is how we built this business over the years. That number will end up tailing off here where we are right now, but the business is built from acquisitions over the years. If we look at the fertility business, combined products and services, we have the broadest portfolio out there selling to fertility clinics, be it capital equipment, consumables. The genetic testing that we have is market leading, the donor egg and sperm activity that we have and the cryo solutions that we offer. So we have the full gamut, right, coming from the point of if somebody wants to go through the fertility process, if you need donor eggs, or you need donor sperm, to the point of media and so forth of creating the embryo to the genetic testing of that embryo, looking for genetic abnormalities, or ranking those. We now have, through our AI platform, because we've done those type -- and most of this is genetic testing. Our AI platform is built around looking at these embryos and saying, what embryo is going to give you the highest probability of a successful child? That's a clear game-changer and very unique to us. I mean, at the end of the day, you go to the extreme and you could say, why would anybody have a baby without going through IVF when you could do genetic testing and say I can eliminate all genetic abnormalities. CRISPR presented, but [indiscernible] is they could even add onto that if they wanted to. But the AI platform that we have right now, when you're going through the fertility process and you have 5 embryos to choose from, and historically, you didn't know which one to choose from, we now rank those say, hey, this embryo has the best chance of success. That's a game-changer in the fertility space. It's a big deal for us. And it's part of the reason that we've been growing this business as successful as we have for as long as we have. Take genetic testing all the way through the process to the embryo transfer catheter and so forth, so we're offering the full gamut of products and services to the fertility clinics. Fertility, for those who don't know, on a marketplace for where we participate, the market is a little bit over $2 billion, growing 5% to 10%. We're pretty consistently growing in the upper single digits. And as I mentioned, we have many, many quarters where we reach into the double digits. A couple of facts here that are interesting, 1 in 6 people experienced fertility at some stage of their lives, so a pretty significant number. It touches a lot of people. That used to be a quiet fact where people didn't want to talk about it. It's not anymore. People are much more willing to discuss their fertility challenges. Over 1 million babies are born annually from assisted reproductive technologies. That's a pretty big number. And if you look at the cause for it, it's not a women-based challenge. This is 1/3 of the time it's women, 1/3 of the time it's the man, and 1/3 of the time, it's a combination of the 2 of them. So just some interesting statistics and numbers in there. This is a long-term growth market. I believe we're going [ do good in ] this market. In 10 years from now, we'll be looking back, saying, wow, the fertility market continued to grow mid-upper single digits on an annual basis. Growth trends here on the right-hand side, the continued drivers, women delaying childbirth. The longer that a woman waits in order to have a child, the harder it is to get pregnant. And that's one of the biggest factors that's been driving fertility growth around the world. Improving access to treatment, there's more clinics that are going up in different spots around the world, patient awareness, people understanding what's out there and the availability of this and how it works and that there's a greater likelihood of success than maybe what there was historically. All of that, technology improvements and so forth, are all helping to drive the success of the fertility industry. When we look at markets in Japan and a number of other markets where there's not -- the birth rates are not high enough to replenish that population on a consistent basis, we are seeing a lot of those countries starting to offer insurance reimbursement and other types of coverage. So that's another positive that's pushing the industry forward. Office and Surgical, another part of our business here that's focused on the OB/GYN. You've got labor and delivery and operating room, a variety of our different products that are offered here. We have a number of premium market-leading, if you will, products within the obstetrics space. That's been built over the years. So if you're in that world, you would certainly know our products, or the names of our products. And then we have Paragard, which is a nonhormonal IUD, a fairly flat product but high-margin, CBR, which is cord blood storage, similar, a fairly low-growth, high-margin product that we have. There are some facts along the right-hand side. I'll skip over there, please. If you look at the 2 pieces here, to break this up a different way, right, you have the medical device side, which is your traditional OB/GYN medical devices. We've actually broadened that just a little bit to go out of pure OB/GYN, where we're finding some really successful products. So that's been a nice business for us. It's kind of low- to mid-single-digit growth and decent margins than the more traditional med device business, if you will. Stem cell storage I've mentioned. That's cord blood storage. That's -- you possibly use CBR and have your baby's cord blood stored with us. ESG highlights. You look at ESG. For us at least, this has been part of the fabric at Cooper for a long time. This is way before people were running around talking to ESG. It is something that we needed to do as a company. We manufacture a significant amount of our contact lenses, as an example, in Puerto Rico. Puerto Rico has an unstable power grid. We built a micro power plant in Puerto Rico, so we have that with all the turbines in there. We finished production of that a couple of years ago. We're actually starting to see the leverage from that investment activity over the long-term project, right? We're starting to see the upside from all of that work its way into our P&L. So I mean, that type of thing is what we do as a company. We look at ways that are positive for the environment but that are also positive for us from a business perspective. So we've been doing that for years. We'll continue to do that. I think this might be the last slide, driving long-term sustainable value. So as I mentioned a couple of times, great businesses that we operate in. Just the core business itself is growing. The marketplace itself is growing nicely, and we grow a little bit faster than the overall market. So strong tailwinds will continue to drive forward in contact lenses and fertility especially. Brand leadership, if you're out in the marketplace, you would know our brands. We're one of the top companies out there. You might not necessarily recognize CooperVision, but you're definitely going to know Biofinity, as an example. It would be the same within the fertility space and some of the other areas within the OB/GYN space. Leverage investments to drive continuous improvements, I'll touch on this in a minute, and Robbie will ask me about it. This is the investment side for us. As we shifted within CooperVision and move more to dailies and want to grow our daily share and continue to increase our overall share, we have invested very heavily in the last several years in manufacturing facilities, in manufacturing lines, in distribution centers, in the IT associated with that and the IT that comes along with that. So we've done that very heavily in CooperVision. We've done that within CooperSurgical. We went live with a brand-new ERP at CooperSurgical this past February. Yes, we had our disruptions on that, but we're running smooth right now on that. We're starting to see that investment activity come through the P&L, right? We're starting to see that leverage work its way through, and that's improving our operating margins. The only thing that, frankly, has offset that has been currency has been a negative against that, but very consistent operating margin growth, and we're really focused on driving that. The other thing that is an important point here is free cash flow, right? So we've seen heavy investment activity. We're seeing the margins, because of that activity, starting to work its way through the P&L. We're going to see more of that this year, especially when we look at gross margins, and a heavy focus on free cash flow. We had about $290 million of free cash flow, which is pretty light for us, last year. We should be somewhere around $100 million higher than that this year. And then I think we're going to see a situation where big CapEx investment starts to level off, if not come down, and we'll see free cash flow continue to improve in '26 and '27. So that's certainly a focus area of ours. Long-term focus and discipline on creating shareholder value. As I mentioned, our industries that we operate in grow mid-single digits consistently, we grow a little bit faster than that. That allows us to kind of have visibility to the future and invest for long-term returns. And a proven track record of delivering strong financial results and revenue growth, I've highlighted that in several of the slides, where we've seen very consistent long-term revenue and EPS CAGRs. We anticipate and are working very hard to ensure that continues. That might be it. So I ran through that. Happy to answer any questions. Robbie's here.

Al, maybe we can start with where we left off on the fiscal fourth quarter. Two things I wanted to touch on, first was the contact market growth. I think it originally started off at 5% last year at this time, went up to 7%. Guidance is for 5% for fiscal '25. I just wanted to see if you've seen any trend change over the past few months since the earnings call and if 5% is still the right place to be.

Yes. So since the earnings call, I would definitely say the market is more positive. We had pricing increases go through. All the major companies took solid price increases. We took the most this year in terms of price increases. But that activity is done, is behind us. So I would say the base floor, if you will, in the industry, the marketplace, because the pricing is certainly healthy. That's for sure. So I would anticipate a stronger market certainly than 5%.

Great. And I know you had always had a lower price point than your competitors. Do you still feel like, one, there is room for positive pricing in the industry overall, and then, two, room for Cooper to continue to close the gap with maybe a little above-market pricing in the future?

Yes. So I would answer that as yes to both of those. I think that, as an industry right now, the industry has moved more towards innovation. And whether that's distribution innovation or whether that's product innovation, you've seen that move. And as you've seen the industry consolidate a little bit, it puts us in a position, I believe, as an industry, where we're going to be able to at least take inflation. And for those who are unaware, pre-COVID, you were seeing an industry where you were seeing about 1% a year price increases. Last year, this year, we're somewhere in that 2% to 3% net price increasing. I think you'll see that this year on a global basis. It won't surprise me if you continue to see higher price increases in the future.

On the other things in fourth quarter was destocking across multiple geographies and different products. Have you been able to understand if that destocking was more financially driven, or what was driven behind it? And is that something that we could see restocking at any point in the future?

Yes, that's a great question because I think that's hit our stock here recently. We reported earnings at the beginning of December. When we reported earnings, we were continuing to see the underlying market be strong. So we were seeing consumption. We were seeing fitting activity remain consistent and remain strong in terms of dailies and torics and so forth. But we saw a pullback in some of our revenue activity. Now, we still had a strong Q4. We still beat earnings and so forth, but it came in, the last couple of weeks, a little bit softer than we anticipated. That moved its way [ into ] November. At the beginning of November, we had a couple of weeks there where it was a little bit softer than it normally was. At the time of the earnings call, that was relatively recent, and I was saying, hey, we're seeing things move back to normal, but a little uncertainty around the drivers of that. Standing here today, I would tell you that that was stocking, or destocking. That was inventory related. Some of that was definitely tied to the hurricanes. It seems like a little bit of a distant memory now, but remember the hurricanes moving up the East Coast. You had some of that activity, and we saw some distributors and key accounts pull back on some of their -- just the inventory that they were holding. We see that every now and then, kind of channel inventory ebb and flow a little bit. It's not a big dollar amount, so I certainly wouldn't want to make too big a deal out of it, because it's not that big a deal, big of a dollar amount. But we have certainly seen the contact lens market, from our perspective, return to normal and normal growth. We saw that in December. We're seeing that through January.

Maybe we could talk on MiSight and SightGlass. MiSight continues to healthy -- smaller dollars, but very healthy percentage growth and pretty good incremental dollar growth year-over-year. But like you said, SightGlass is really the one that can lead the way because, with younger kids, glasses is a lot either. So just remind us of when we should expect approval in the U.S., and then how to think about the financial contribution as a JV. How should we think about the financial contribution to Cooper once it is launched?

Sure. Yes. So as a reminder, SightGlass is a joint venture, a 50-50 joint venture, between us and EssilorLuxottica. Essilor recognizes the revenue on that product. We show a gain or loss below operating income. So right now, because that's all launch-based around the world, that's just a loss that comes through our P&L every single quarter. Obviously, we're anticipating that product growing. As I mentioned, we have the only FDA-approved product in the market with MiSight contact lenses for myopia control. We are well on our way with FDA, hopefully, to get approval at the end of this year. We have breakthrough designation on that. We're finishing up our latest year here in clinical studies, and we'll be -- we've got a good chance to get FDA approval at the end of this year. And you're right, Robbie. I look at it and I still go back -- I said this earlier, myopia control will be standard of care. And when I talk to optometrists all over the place, they'll say, hey, my office isn't really set up for kids, or my office isn't this or that, but if children come in here, I have to have a place where I can refer them to somebody to get treatment. This is a treatment. And as we talk about -- as we talk to some of our bigger key accounts and so forth that have numerous locations, they are all talking about taking one of those locations or creating a new location where they have a myopia control center, where they can just send the kids, similar to pediatric dentistry. Right? You take your kids in, and maybe it's a couple of kids, and they're playing video games or whatever, that kind of stuff. You create a better requirement for children and fitting and education of what myopia progression is and so forth. So it's really exciting. I'm still really passionate about it. I do believe that it's going to be a multibillion-dollar market, and contact lenses will certainly have their place in there.

If you look out 3 years from now, do you think SightGlass or MiSight is a bigger contributor to Cooper?

I think that, well, obviously, from a revenue perspective, we recognize MiSight and not SightGlass. So obviously, from a P&L perspective, for us, it would end up being MiSight. But I think, when I look at long-term profits and long-term potential, SightGlass has a very significant and positive runway too.