The Cooper Companies, Inc. (NYSE:COO) Q1 2023 Earnings Call Transcript

The Cooper Companies, Inc. (NYSE:COO) Q1 2023 Earnings Call Transcript March 2, 2023

Operator: Ladies and gentlemen, thank you for standing by. And welcome to Q1 2023 Cooper Companies Earnings Conference Call. I would now like to turn the call over to Kim Duncan, VP Investor Relations and Risk Management. Please go ahead.

Kim Duncan: Good afternoon, and welcome to Cooper Companies’ first quarter 2023 earnings conference call. During today’s call, we will discuss the results and guidance included in the earnings release and then use the remaining time for questions. Our presenters on today’s call are Al White, President and Chief Executive Officer; and Brian Andrews, Chief Financial Officer and Treasurer. Before we begin, I’d like to remind you that this conference call contains forward-looking statements, including all revenue and earnings per share guidance and other statements regarding anticipated results of operations, market or regulatory conditions or trends, product launches, operational initiative, regulatory submissions and closing or integration of any acquisitions or their anticipated benefits.

Forward-looking statements depend on assumptions, data or methods that may be incorrect or imprecise and are subject to risks and uncertainties. Events that could cause our actual results and future actions of the company to differ materially from those described in forward-looking statements are set forth under the caption forward-looking statements in today’s earnings release and are described in our SEC filings, including Cooper’s Form 10-K and Form 10-Q filings, all of which are available on our website at coopercos.com. Also, as a reminder, the non-GAAP financial information we will provide on this call is provided as a supplement to our GAAP information. We encourage you to consider our results under GAAP as well as non-GAAP and refer to the reconciliations provided in our earnings release, which is available on the Investor Relations section of our website under quarterly results.

Should you have any additional questions following the call, please e-mail ir@cooperco.com. And now, I’ll turn the call over to Al for his opening remarks.

Al White: Thank you, Kim, and welcome everyone to Cooper Companies first quarter fiscal 2023 conference call. We started this year on a positive note with strong operational performances at both CooperVision and CooperSurgical. For CooperVision, we reported record quarterly revenues and our eighth consecutive quarter of double digit organic revenue growth. For CooperSurgical, we posted strong results including fertility reporting its ninth consecutive quarter of double digit organic revenue growth. Earnings exceeded expectations driven by the strength in revenues and investment activities yielding operational efficiencies faster than expected. This is exactly how we wanted to start the year and will continue balancing investment activity with prudent operational management to deliver solid results.

Moving to the numbers. Consolidated quarterly revenue reached an all-time high of $858 million. CooperVision posted record quarterly revenues of $581 million up 10% organically and CooperSurgical posted revenues of $277 million up 10% organically. CooperVision’s growth was led by our daily silicone hydrogel portfolio and myopia management products and CooperSurgical’s growth was broad based with strength in many areas. Non-GAAP earnings per share were $2.90. For CooperVision in Q1 and reporting percentages on an organic basis, revenue growth was strong and diversified. The Americas grew 9%, EMEA grew 12% and Asia Pac grew 10%. This performance was driven by new product launches, expanded product ranges, market leading flexibility through our customized offerings and growth in key accounts.

Regarding product details, daily silicone hydrogel lenses grew 17% with especially strong growth from MyDay. Daily silicone hydrogel lenses continue to be the main driver of growth for the contact lens industry and we offer the broadest portfolio with MyDay and clarity available in a wide range of spheres torques and multifocals. As silicone hydrogel monthly and two week lenses Biofinity and Avaira Vitality reported another solid quarter of 9% growth. During the product news we remain extremely busy. Our MyDay multifocal rollout is going incredibly well and we expect strong growth to continue as the product becomes more readily available in EMEA and Asia Pac. Feedback from customers and practitioners remains outstanding and we continue taking share.

Our MyDay toric parameter expansion rollout in the U.S. and Canada is also going well and we’ll be launching the expanded range in EMEA this quarter. With over 4000 SKUs our MyDay toric has the widest daily torque range in the market by a wide margin and its opening the door to many two weeks and monthly toric wears to enjoy the freedom of wearing a daily contact lens for the first time ever. All this activity is having a positive halo impact on the MyDay sphere which is also performing well. And lastly, on MyDay franchise. I’m excited to announce we started the national rollout of MyDay Energys in the U.S., this premium lens uses the same innovative digital boost technology as Biofinity Energys to alleviate the impacts of digital eyestrain.

Studies show that adults are now spending more than seven hours a day on screens, resulting in eye ceiling strain and uncomfortable. Energys, with its boost technology is the perfect solution to address this digital eye fatigue. And our survey work clearly shows that practitioners and customers are excited to get this technology and a daily offering. All this MyDay activity is exciting and we remain dedicated to developing and rolling out technologically superior MyDay products for many years to come. Lastly, within the daily segment, Clarity is performing well. Its mass market price point is allowing eye care practitioners to continue utilizing the Clarity franchise as a great way to bring wares into the daily silicone hydrogel space. Moving outside of dailies.

Demand for biofinity remains strong led by our torics, multifocal and extended range offerings. We continue to be capacity constrained in some of these areas, especially around our extremely high demand made to order products such as extended range torics and toric multifocals. But the continued ramp up of our manufacturing facilities is allowing us to address the significant demand. And lastly, we had a nice quarter with a very vitality, especially in Asia Pac. Moving to Myopia management, we posted revenues of $25 million up 32% with MiSight up 50%. This was in line with expectations and keeps us on track to reach our goal of $120 million to $130 million in sales this year. Regarding MiSight, we’re expanding availability in numerous key accounts actively launching our expanded parameter range and making great progress on numerous R&D efforts.

Photo by National Cancer Institute on Unsplash

We’re seeing increased sitting activity as optical offices become more comfortable with their Myopia control practice management. And we’re continuing to see a positive halo effect with our MiSight customers accelerating their use of other CooperVision lenses. MiSight is the first and only FDA approved contact lens for Myopia control and the product is backed by extensive clinical data. This is a critical differentiator as the proactive management of Myopia become standard of care within the eye care community to help reduce the risk of longtime eye health problems associated with Myopia such as cataracts, retinal detachment, and macular degeneration. Finally, I want to mention the great work that the CooperVision team has done in our environmental sustainability efforts.

In January, we announced that our net plastic neutrality initiative reached a major milestone with the prevention of the equivalent of more than 100 million plastic bottles from entering the oceans. This program has been incredibly well received by contact lens wearers and eye care professionals and we’re extremely proud of its success. To finish on CooperVision, the contact lens market grew roughly 9% in calendar 2022, with CooperVision growing faster at 11%. And we expect 2023 to be another robust year supported by the macro growth trend of more people needing vision correction. It’s estimated a 50% of the global population will have myopia or nearsightedness by the year 2050, up from roughly 34% today. This is driven by a variety of factors including greater screen time, and when combined with the ongoing shift to silicon hydrogel dailies, the increasing focus on higher value products such as torics and multifocals, and higher pricing.

We expect many years of strong growth for the industry. And we expect to remain a leader with our robust product portfolio, ongoing product launches, fast growing Myopia management business and leading new fit data. Moving to CooperSurgical, this was an excellent start to the fiscal year, our fertility business posted sales of $112 million up 10% organically for its ninth consecutive quarter of double digit organic growth. Success was broad base with strong results throughout the product portfolio and around the world. The global fertility market remains very exciting space with strong macro trends supporting significant long term growth potential. There are multiple drivers in this industry beginning with women delaying childbirth. The average age a woman’s first birth in the U.S. and within several other developed countries now stands at a record 30 years old and age is a key factor and contributing to the need for fertility assistance.

Other growth drivers include improving access to treatment, increasing patient awareness, improved product offerings, increasing fertility benefit coverage, and technology improvements for both male and female infertility challenges. It’s estimated that roughly 15% of reproductive age couples have fertility challenges and that over 750,000 babies are born annually through fertility assisted measures, and these numbers are growing. Within the broader fertility space, we compete in a market that’s roughly $2 billion in annual sales and we forecast growth of 5% to 10% for many years to come. Our positioning is excellent with the broadest portfolio on the industry, a solid commercial footprint and strength in key accounts. We’re also investing in our team and our product portfolio, which includes consumables, capital equipment and reproductive genetic testing.

And we’re expanding geographically. Demand remains very strong, especially within our key accounts, so we need to keep building infrastructure by investing in our people and delivering the products and services required in this high growth market. Moving to Office and Surgical products, which includes OB/GYN medical devices, PARAGARD and stem cell storage, we posted sales of $165 million up 10% organically. Within this OB/GYN medical devices grew 10%, with strength seen in several of our core products. This team is doing a great job managing strong demand with ongoing supply chain challenges. And I’m proud of the hard work and success we’re having PARAGARD grew 11% driven by buying activity from a price increase of roughly 8% implemented at the end of the quarter.

We’ll see a natural offset to this in Q2, but it’s nice to get the year off to a good start. And lastly, our stem cell storage business grew 5% organically. We’ve owned this business for just over a year now. And I’m happy to report that we’re seeing improving traction. The synergies we expected as part of the transaction are occurring and the business is in a good position. As part of our focus in this space and ongoing investment activity and I’m happy to report we recently kicked off an exciting marketing campaign with Chrissie Tegan, leading our latest educational efforts around the importance of preserving newborn stem cells. The early reaction to this social media campaign has been very positive and I’m excited to see how it progresses and delivers value through the year.

To conclude our CooperSurgical, I want to mention something that I’m really proud of. Worldwide every minute a baby is now born using CooperSurgical products. I just love that and it truly shows what a fantastic and meaningful business CooperSurgical is. So to summarize, let me again say this is exactly how we wanted to start this fiscal year. Our operational performance was excellent, our momentum is strong, and we’re executing on our investments to drive long term sustainable growth. And with that, let me turn the call over to Brian.

Brian Andrews: Thank you, Al. And good afternoon everyone. Most of my commentary will be on a non-GAAP basis, so please refer to our earnings release for a reconciliation of GAAP to non-GAAP results. First quarter consolidated revenues were $858 million up 9% as reported, were up 10% organically. Consolidated gross margin was 65.7%, down 1.2% from last year primarily due to currency and product mix. Operating expenses grew 11% to 43.1% of revenues. And consolidated operating margin was 22.6% down from 24.6% last year, primarily due to currency. That’s some color, I’m happy to report that many of the freight and distribution challenges that we experienced in Q4 that continued into Q1 have now been resolved. And these financial results exceeded our expectations due to the strength at the end of the quarter.

Below operating income interest expense was $26 million, and our effective tax rate was 14.4%. Non-GAAP EPS was $2.90 with roughly 49.7 million average shares outstanding. FX negatively impacted earnings by roughly $0.30 year-over-year, which is $0.5 better than we were forecasting when we provided guidance in December. Free cash flow was $84 million, including CapEx of $83 million. CapEx continues to be heavily driven by capacity expansion, and we expect that to continue. Net debt decreased by $48 million to $2.56 billion. Turning to fiscal 2023 guidance, we’re increasing expectations for revenues and earnings by incorporating our Q1 beat, improved operational performance and slightly better FX rates. This results in consolidated revenues of $3.5 to $3.55 billion, up 7% to 9% organically.

With CooperVision revenues up $2.35 billion to $2.39 billion, up 8% to 9% organically. And CooperSurgical revenues of $1.14 billion to $1.1 7 billion, up 5% to 7% organically. Non-GAAP EPS is expected to be in a range of $12.60 to $12.90. Within this interest expense is expected to be slightly higher at around $110 million. But our effective tax rate is forecasted to be around 14.5% offsetting this. For interest expense, we’re assuming three future Fed moves. A 25 basis point rate increase this month, another 25 basis point increase in May, and then an additional 25 basis point increase in June. For currency, we’re using updated rates, we are now expecting a slightly more positive impact to the P&L which we’re fully passing along. And from an operational perspective, we’re raising expectations tied to actions we’ve taken to drive efficiencies.

To summarize this, we’re raising the midpoint of our earnings guidance by $0.30, with $0.20 cents coming for Q1 beat, $0.5 coming from operational improvements that we’re expecting in Q2 to Q4 and $0.5 from better FX in Q2 to Q4. The increase in our revenue guidance is similar incorporating the Q1 beat, stronger expected performance in Q2 to Q4 and better FX. Regarding the operational improvements in addition to addressing the supply chain challenges from Q4, we’ve taken further steps to improve our operational efficiencies. One such example would be the consolidation of our specialty lens business into our core lens franchise. Over the past several years, CooperVision has created the world’s most comprehensive specialty contact lens portfolio, comprised of products, such as leading Ortho-K and scleral lenses to treat myopia and more severe cases of irregular cornea.

This part of our business has grown nicely, and its now time to consolidate into our core operations and leverage our infrastructure. In the meantime, we’re continuing to invest in our product launches, manufacturing footprint and distribution capabilities to support our long term growth objectives. Demand is strong, and long term growth trends are very positive, so we’re investing prudently, but accordingly. There are a lot of positives to take away from this activity. Our capabilities are expanding, our operations are becoming more efficient, and the numbers are looking better. That being said, we remain cautious regarding recession risk, and continued inefficiencies tied to supply chain challenges. And I’ve incorporated that into our expectations.

To conclude on guidance. Note that it does not include the pending acquisition of Cook Medical’s reproductive health business. We’re exploring all options related to this transaction in order to obtain regulatory approval, including the potential sale of certain Cook assets. And we expect the transaction to be resolved by August of this year. And with that, I will hand it back to the operator for questions.

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Q&A Session

Operator: Our first question comes from the line of Jon Block from Stifel. Please proceed.

Jon Block: Hey, guys, thanks. And good afternoon. Brian, maybe I’ll just start with some clarifying questions. So the update from FX I think previously, it was a 2.5% drag to revs and net neutral for EPS. That was prior quarter. How does that change? So is there a new FX number of revenues within the 2.5% drag? I mean the intent to EPS, I want to make sure I heard you right, is that improved by $0.10? $0.5 is embedded in the 1Q outperformance and then $0.5 sort of the balance of fiscal 2Q to 4Q. Maybe we can just clear that up a little bit.

Brian Andrews: Sure, sure. Hi, Jon. You’re right. So on the prior guidance, we had a 2.5% headwind to revenues. It’s a little bit better. I say it’s just on the margin. It’s still kind of round to 2.5%, it’s a stronger 2.5%, I’d say for revenues, but still a headwind. And that EPS where we were saying neutral to EPS before from FX for the year, we’re about 1%. When it comes to the updated guidance, just to recap, we beat Q1 by $0.20, $0.5 is from FX, the other $0.15 operational. The rest of the year Q2 through Q4 we’re raising by $0.10, half of which coming from FX. That’s the $0.5 and then the other half from operational performance.

Jon Block: Yes. Okay, perfect. I think that certainly helps. Maybe Al, just for the second question, I’ll just ask, you know, big picture that there. There’s certainly been a lot of chatter about supply concerns within the contact lens industry, you guys certainly seem to be parallel. Okay. But maybe just talk about where you guys sit. I know, you mentioned a little bit around some of your product lines. But broadly speaking, where you guys sit from your confidence or comfort level that you’re building to be able to stay ahead of the demand curve, especially with hitting the gas and getting the MyDay Energy’s on top of them? Thanks, guys.

Al White: Sure. Yes. I mean, there’s still supply chain challenges in the market, if you will. And we still see those also, and some of our competitors have talked about that and it had some challenges. I feel pretty good about where we’re at. As I mentioned, we do have some capacity constraints, if you will, within biofinity, and a couple other spots that we’re working pretty aggressively at right now to resolve. But at a high level, I feel pretty good about where we’re at. We’re in a good spot with MyDay, we’ve got the Energys rolling out right now we’re in a good position with that, from a production perspective and distribution perspective, we’re at a good start with Clarity, we’re in a good spot with Biofinity, we’re in a good spot with a wear Vitality. So, pockets of challenges, but for us, at least from a supply chain perspective, we’re definitely getting in a better position.

Operator: Our next question comes from a line of Larry Biegelsen from Wells Fargo. Please proceed.

Larry Biegelsen : Good afternoon. Thanks for taking the question. And congrats on a really nice quarter here, guys. So I wanted to start Al on the contact lens market, and then I had one margin question for Brian. So how the guidance implies, roughly 80% organic growth the rest of the year, Alcon called out some softness in the contact lens market, on their call this week, what are you assuming for the contact lens market for 2023? Have you seen any changes in consumer behavior? And how does your private label business help insulate you?