The Cooper Companies, Inc. (NYSE:COO) Q4 2023 Earnings Call Transcript

The Cooper Companies, Inc. (NYSE:COO) Q4 2023 Earnings Call Transcript December 7, 2023

The Cooper Companies, Inc. reports earnings inline with expectations. Reported EPS is $3.47 EPS, expectations were $3.47.

Operator: Thank you for standing by and welcome to the Q4 2023 Cooper Companies Earnings Conference Call. I would now like to welcome Kim Duncan, VP Investor Relations and Risk Management to begin the call. Kim, over to you.

Kim Duncan: Awesome. Thank you. Good afternoon and welcome to Cooper Companies’ Fourth Quarter and Full Year 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 revenue, EPS, operating income, tax rate, and other financial guidance, a pending stock split, expected revenue growth and accretion related to a recent acquisition, strategic and operational initiatives, market and regulatory conditions and trends, and product launches and demand.

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 coopercodes.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 under 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 materials.

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.

Albert White: Thank you, Kim, and welcome everyone to Cooper Company’s 2023 Fiscal Fourth Quarter and Year-End Conference Call. This was a fantastic year for Cooper as we finished with all-time record revenues of almost $3.6 billion, and we closed the year on a really positive note with CooperVision posting its 11th consecutive quarter of double-digit organic growth and CooperSurgical posting record quarterly revenues driven by our fertility business posting its 12th consecutive quarter of double-digit organic growth. Truly tremendous accomplishments by phenomenal teams. We’ve now entered Fiscal 2024 with a lot of excitement and focus on executing on our long-range strategic objectives, including gaining market share, driving profitability, launching innovative products and services, and maintaining our fantastic Cooper culture.

Moving to the quarterly numbers, consolidated revenues were $927 million, up 9% organically year-over-year. CooperVision posted revenues of $623 million, up 11% organically, and CooperSurgical posted revenues of $304 million, up 7% organically. CooperVision’s growth was led by strength in our daily silicone hydrogel portfolio, and CooperSurgical’s growth was led by a very strong quarter in our fertility business. Margins improved and profits were solid with non-GAAP earnings per share of $3.47, up 26%. For CooperVision, and reporting all percentages on an organic basis, revenue growth was strong and diversified. The Americas grew 12%, EMEA grew 9%, and Asia Pac grew 10%. With all three regions having success with our innovative products, market-leading flexibility and growth in key accounts.

Within categories, Torics grew 15%, Multifocals grew 18%, Single-use Sphere grew 7%, and Non-Single-use Sphere, other grew 4%. Within modalities, Daily Silicone Hydrogel lenses grew 19%, and our silicone hydrogel monthly and two-week lenses Biofinity and Avera vitality grew 8%. Turning to products, and starting with our high-growth daily silicone hydrogel portfolio, we continue to outperform expectations with MyDay. We just passed the two-year anniversary of the MyDay Multifocal launch, and the pace of growth on this product remains outstanding. The unique combination of an advanced multifocal design paired with an easy-fitting system has resulted in very high satisfaction levels, including a 98% fit success rate in two pairs or less. This makes it a win for the doctor and the patient, and it shows in our results and momentum.

From a personal perspective, as I shared last quarter, I now wear MyDay Multifocals, and I continue to be amazed at how easy the lenses are to insert and remove, and how fantastic my distance and near vision are. And I put these lenses in as soon as I wake up, and I don’t take them out until bedtime. I may be biased, but I truly believe these are the best multifocal lenses on the market, and our sales growth certainly supports that. Moving to MyDay Toric, demand remains very strong following the rollout of our parameter expansion across North America and Europe. This success is due to the product’s market-leading torque design, which mirrors Biofinity’s design, and our industry-leading SKU range. In MyDay Energous, our most recent launch continues to impress eye care practitioners and patients with its innovative digital boost technology designed specifically for today’s digital lifestyle.

The lenses deliver fantastic comfort, and sales are exceeding our expectations. And I’m proud to say that MyDay Energous was recently voted the most innovative product of 2023 by U.S. eye care practitioners, an awesome accomplishment and a great recognition for our team. With the success of these MyDay products, we certainly look forward to rolling them out in additional markets around the world as soon as capacity allows. And while MyDay continues to be our key growth driver in the daily silicone segment, we’re continuing to have success with Clarity, which offers a full family of spears, Torics, and multifocals at a great price point. The initial comfort, excellent handling, and price positioning have led Clarity to be a lens of choice for new wearers.

Outside of dailies, demand for our Biofinity family of products remains healthy, led by Torics and multifocals. And I’m excited to announce we’ll be launching our highly successful Biofinity Toric multifocal to several new markets in the coming year in response to extremely strong demand. Avera also had a nice quarter led by Torics. Moving to myopia Management. We posted revenues of $35 million, up 41%, with MiSight up 46%. This was another excellent quarter for MiSight, powered by growth in the Americas and EMEA, while Asia Pac was flat due to challenges in China. As we enter fiscal 2024, we’re expecting excellent growth, with the positive trends in the Americas and EMEA continuing, and Asia Pac returning to growth as the region has hurtled past stocking orders and is already showing improving trends.

Additionally, we’re continuing to see high retention rates, growing momentum in key accounts, and a nice halo effect on our other products. All this adds up to over 250,000 children around the world wearing MiSight and momentum being very strong. MiSight remains the first and only FDA approved contact lens for myopia control, and it’s backed by extensive clinical data. This is a crucial differentiator as the proactive management of myopia becomes standard-of-care within the eye care community to help reduce the -progression of myopia in children, along with reducing the risks of long-term eye health problems associated with myopia, such as cataracts, retinal detachment, and macular degeneration. Meanwhile, our Ortho-K franchise had a nice rebound quarter, growing 37% year-over-year.

To finish on CooperVision, the contact lens market grew roughly 7% in calendar Q3, with CooperVision taking share, growing 10%. We expect the market to remain healthy, growing 5% to 7% this coming year, supported by the long-term macro growth trend of more people needing vision correction. It’s estimated that 50% of the global population will have myopia by the year 2050, up from roughly 34% today. This is driven by kids spending more time indoors, and the related greater use of digital screens, among other factors. When you combine this with the ongoing shift to silicone hydrogel dailies, the increasing focus on higher value products and higher pricing, we expect many years of solid growth for the industry. Within this, we expect to remain a leader with our innovation, robust product portfolio, ongoing product launches, strength in premium toric and multifocal products, our fast-growing myopia management business, and our leading new fit data.

Moving to CooperSurgical, we posted record revenues of $304 million, up 7% organically. This included fertility sales of $121 million, up 15% organically, which was our 12th consecutive quarter of double-digit organic growth. Within this, we saw share gains around the world and throughout our portfolio, driven by our market-leading products and services, including consumables, capital equipment, and reproductive genetic testing. We also continued investing in geographic expansion, key accounts, and R&D. We’re entering fiscal 2024 as one of the fastest-growing and most innovative fertility companies in the world. We’re developing and launching new products, opening new donor sites, providing extensive training through our Centers of Excellence, expanding in new and existing geographies, and we’re well-positioned to continue delivering success, given our great team, diverse portfolio, and global momentum.

For the broader fertility market, the macro growth trends remain intact, starting with women delaying childbirth. Age is a key factor in contributing to the need for fertility assistance, and the median age of a woman’s first birth in the U.S. and within several other developed countries is roughly 30 years old and moving higher. Other growth drivers include improving access to treatment, increasing patient awareness, increasing fertility benefits coverage, and technology improvements to address both male and female infertility challenges. The World Health Organization data highlights that one in six people globally are affected by infertility at some point in their lives, and given that one-third of the underlying cause of infertility is women, one-third is men, and one-third is a combination of the two or unknown, this is an issue that impacts a lot of people and will continue to do so in the future.

Moving to office and surgical, we posted sales of $183 million, up 3% organically, with medical devices growing 3% against a very challenging comp. Within this part of our business, we recently closed the acquisition of several highly strategic products from Cook Medical. Given the strength of our medical device team and the success we’re having in the labor and delivery space where several of these acquired products reside, this will be a great deal for us, and I look forward to reporting future results on these products. Stem cell storage posted solid growth of 6%, and PARAGARD was flat, as higher pricing offset declining unit sales. To conclude on CooperSurgical, we take great pride being able to say that every minute somewhere around the world, a baby is born using CooperSurgical products.

We’re making a difference in people’s lives, and that’s part of what makes this business really special for us. Moving to fiscal 2024, let me provide comments on revenue guidance, and Brian will cover the rest of the P&L. We expect CooperVision to post strong results and are guiding to 7% to 9% organic revenue growth for the year. The main limiter to this growth is capacity challenges from new wearer demand, especially for MyDay. We expect these capacity constraints to pressure revenues in fiscal Q1, resulting in growth of around 7% for the quarter. We are actively bringing additional capacity online, though, and expect to report high single digit to double digit growth as we move through the year. For CooperSurgical, we’re guiding to full year organic revenue growth of 4% to 6%, which includes another year of strength and fertility, low to mid-single digit growth in medical devices and stem cell storage, and flat to slightly down in PARAGARD due to declining volumes.

To conclude, let me say this was a great year for Cooper, and we’ve entered fiscal 2024 with great momentum. But none of this is possible without the incredible hard work and dedication of our employees, so a big thank you to the entire Global Cooper team for another incredible year. And now I’ll 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. For the fourth quarter, consolidated revenues were $927 million, up 9% as reported, and up 9% organically. Consolidated gross margin was 66.7%, up from 65% last year, driven by better operational performance at both CooperVision and CooperSurgical, along with favorable currency. Operating expenses grew 8%, improving to 42.3% of revenues, as we saw leverage from prior investment activity. Consolidated operating margin improved to 24.4%, up from 22.2%, led by the strong gross margins and leverage from our operating expenses. Below operating income, interest expense was $26.4 million, and the effective tax rate was slightly higher than guidance at 12.8%.

Non-GAAP EPS was $3.47, with roughly 49.9 million average shares outstanding. With respect to FX, it was $0.25 positive year-over-year for the quarter, which was $0.02 worse than expected in our Q4 guidance. Free cash flow was $29 million, with CapEx of $145 million. Net debt decreased to $2.45 billion. For the full year 2023, we reported record revenues of $3.6 billion, up 9%, or up 10% organically, and non-GAAP EPS of $12.81. Within this, consolidated operating income grew 11% on a constant currency basis. To provide additional color on our fourth quarter results, first, we had solid execution with an emphasis on delivering stronger gross margins and leveraging our operating expenses. This focus on delivering a more leveraged P&L is continuing in fiscal 2024.

Second, we completed a significant amount of infrastructure and integration activity this quarter. This puts us in an excellent position to deliver success moving forward, including ramping up capacity and implementing continuous improvement projects. And lastly, we finished the majority of the integration of our specialty lens care unit into our core CooperVision business. This is a great move from a commercial and efficiency perspective, but it did result in a non-cash intangible asset impairment charge associated with the discontinuation of certain products, which was a large part of our non-GAAP adjustments this quarter. Before moving to guidance, let me mention that we closed the acquisition of select Cook medical assets on November 1st.

The purchase price was $300 million, with $200 million paid at closing, and the remaining $100 million to be paid in two $50 million annual installments. The acquired assets generated approximately $56 million in trailing 12-month revenue as of September 30th, 2023, and we expect growth of 5% to 7% in constant currency this year, excluding one-time charges and yield-related amortization. The transaction is expected to be accretive to non-GAAP gross and operating margins and accretive to non-GAAP earnings per share by approximately $0.20 in fiscal 2024. Moving to guidance, we’re guiding to fiscal 2024 consolidated revenues of $3.81 to $3.88 billion, up 6% to 8% organically, with CooperVision revenues of $2.55 to $2.6 billion, up 7% to 9% organically, and CooperSurgical revenues of $1.26 to $1.28 billion, up 4% to 6% organically.

Non-GAAP EPS is expected to be in the range of $13.60 to $14. This assumes roughly $110 million of interest expense, which includes the debt from the assets acquired from Cook Medical and no interest rate changes by the Fed during our fiscal year. For tax, we’re still expecting a roughly 15% effective tax rate, excluding any discrete items, such as stock option exercises. For currency, we’re using roughly current rates, which result in a year-over-year FX headwind of roughly 1% to revenues and roughly 5% to earnings. And lastly, the EPS range corresponds to roughly 10% to 13% constant currency OI growth, excluding Cook, or 13% to 16% with the Cook acquisition accretion. To wrap up, as announced in our earnings release, our board has approved a four-for-one stock split with an effective date of February 16, 2024.

This is in response to many years of strength in our stock and our desire to adjust the price to make ownership more accessible to employees and investors. And lastly, we made the decision to stop paying our de minimis semi-annual dividend. With that, let me conclude by saying fiscal 2023 was a record year for Cooper, and we’re well positioned to deliver solid growth and leverage in fiscal 2024. And now, I’ll hand it back to the operator for questions.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from a line of Jason Bednar with Piper Sandler. Please go ahead.

Jason Bednar: Hey, good afternoon. Thanks for taking the questions, and congrats on the close of the year. I wanted to start first on CVI revenue growth guidance and really connect the discussion on pricing. You’re guiding to more share gains here, Al and Brian. I think growth is like two points above the market, at least how you’re calling it. I think you’ve historically been seeing price gains below peers, though. We’re hearing you implemented a price increase at the beginning of this month that’s at or above peers. So when we think about your CVI growth guidance, and you’re getting a little bit more aggressive with pricing than you have in the past, but your growth and performance versus the market is similar to where we started fiscal 2023, I guess, does this imply you’re anticipating volume growth to moderate due to those capacity challenges you mentioned?

And then maybe just, again, sorry for packing a few in here, but can you confirm that you have visibility these capacity challenges aren’t going to be a headwind beyond the current fiscal first quarter?

Albert White: Sure. Hey, Jason. A couple of things. We’re still going to put out good growth in the first quarter here. I mentioned we think we’ll be somewhere about roughly 7%. We are capacity constrained and that we could grow faster than that if we had more capacity, but a lot of wear demand on that. So we have new lines coming in. We’ll progress through the year bringing additional lines on so that we’ll be able to continue to report upper single digits or even double digit growth in some quarters. When I look at our guidance of the 7 to 9, I think about price. I’ll probably maybe give it in the context of the market, right. Last year, if we look at 2023, the market pricing was about 2% to 3%. We were on the lower end of that.

I think if you looked at this year, pricing again in the market will probably be 2% to 3%. We’ll be at the higher end of that. And that’s probably how I would define it. So I wouldn’t read too much into a dramatic delta between our price increases and where I think the market’s ultimately going to be. We did our price increase for some of our pricing at least here earlier in the year and then normal. We’ll see what some of our competitors do with respect to pricing in the coming months.

Jason Bednar: Okay. I know definitely a high class problem with the capacity challenges and it sounds like the pricing may be more in line with peers in the past. But if I want to zoom out one other maybe bigger picture question now. And this is a question I get a lot from investors. What’s it going to take to get operating margin expansion to come back to the business? It’s the most common question we get. I think we’re now three years and they’re really seeing good growth across CBI and fertility. I guess, can you sustain that good top line growth if you moderate some of those investments? I know FX has been a challenge, but I guess will there become a time when you’re more willing to commit to a multi-year margin expansion plan that could take us back into that 27% to 28% margin range for the business?

Albert White: Yes, I guess my response would be that we grew operating income 11% this year on a constant currency basis. That’s faster than revenues. Our consolidated guidance this year at the midpoint is 7%. And Brian just mentioned that our operating income constant currency growth is 10% to 13%. So that’s leverage again and we’re focused on improving our operating margins and driving success there. So we did it in 23%. We’re anticipating doing it in 2024. And my belief is you’ll continue to see that in the coming years.

Jason Bednar: Okay. All right. Fair enough. Thanks so much.

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

Lawrence Biegelsen: Hey, Al and everyone. Thanks for taking the question. Hey, just Al, I just wanted to understand on the last call, you talked about guiding less conservatively at the start of the year. The guidance for fiscal 2024 is I think exactly the same as it was to start fiscal 2023. Is the only thing that changed the capacity and any more color on where those capacity constraints are?

Albert White: Yes, the capacity constraints are tied to MyDay. So we have continued to win wearers in MyDay at a faster clip than we were anticipating. A lot of that wearer growth and growth in my day is coming from Torics, especially, which have a wide skew range. So that’s put some pressure on us. So I would kind of say, hey, the success that we’re having, again, in terms of wearer growth has driven some of those capacity changes. Now, we knew it. We saw that stuff. We’ve been investing in CapEx. You can see that in our CapEx numbers. We have additional manufacturing capacity coming online. So we’re in good shape. We’re just running into kind of a little bit more of a very short term issue here where we’ll have a strong quarter, but maybe not a double digit quarter.

Lawrence Biegelsen: And is that the reason the guidance is exactly the same where you alluded to it on the Q3 call being a little bit more aggressive to start this year versus last year?

Albert White: Yes, if we had more in MyDay capacity, the guidance range would be higher.

Lawrence Biegelsen: Okay. And then, Brian, can you talk about the assumptions in the guidance for gross and operating margin for the full year and the cadence? I thought I heard sales commentary for the cadence, but not margin. And I didn’t hear the myopia management number for fiscal 2024. Thank you.

Brian Andrews: Yes. Hi, Larry. Currency is a negative for both gross and operating margins next year. But gross margins should be pretty similar to last year, obviously up from a constant currency basis. With respect to operating margins, again, with currency is a negative, but it’ll be a little bit better on an as reported basis than last year. We’re getting operating leverage from OpEx. With respect to our myopia management range, I’m sorry with respect to our myopia and management range, we — Al, do you want to take that?