Q3 2022 Cooper Companies Inc Earnings Call
EVENT DATE/TIME: AUGUST 31, 2022 / 9:00PM GMT
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AUGUST 31, 2022 / 9:00PM GMT, Q3 2022 Cooper Companies Inc Earnings Call
Albert G. White The Cooper Companies, Inc. - President, CEO & Non-Independent Director
Brian G. Andrews The Cooper Companies, Inc. - Executive VP, CFO & Treasurer
Kim Duncan The Cooper Companies, Inc. - VP of IR & Risk Management
Christopher Cook Cooley Stephens Inc., Research Division - MD
David Joshua Saxon Needham & Company, LLC, Research Division - Senior Analyst Jason M. Bednar Piper Sandler & Co., Research Division - VP & Senior Research Analyst
Jeffrey D. Johnson Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst Joanne Karen Wuensch Citigroup Inc. Exchange Research - Research Analyst
Jonathan David Block Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst Lawrence H. Biegelsen Wells Fargo Securities, LLC, Research Division - Senior Medical Device Equity Research Analyst Lilia-Celine Breton Lozada JPMorgan Chase & Co, Research Division - Research Analyst
Matthew Ian Mishan KeyBanc Capital Markets Inc., Research Division - VP & Senior Equity Research Analyst Steven Michael Lichtman Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst
Good day, and thank you for standing by. Welcome to CooperCompanies Third Quarter 2022 Earnings Conference Call. (Operator Instructions) I would now like to hand the conference over to your speaker Kim Duncan, Vice President, Investor Relations and Risk Management. You may begin.
Kim Duncan The Cooper Companies, Inc. - VP of IR & Risk Management
Good afternoon, and welcome to the Cooper Companies Third Quarter 2022 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, the market or regulatory conditions or trends, product launches, operational initiatives, 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.
Albert G. White The Cooper Companies, Inc. - President, CEO & Non-Independent Director
Thank you Kim, and welcome everyone to CooperCompanies third quarter conference call. Let me start by highlighting that this was the sixth consecutive quarter of double-digit organic revenue growth for CooperVision and the seventh consecutive quarter of double-digit organic revenue [growth] (added by company after the call) for CooperSurgical's fertility business. This impressive performance showcases the strength of our teams and the strong demand for our products and services. This momentum continued in August and we're increasing the organic revenue guidance for both CooperVision and CooperSurgical, incorporating our strong Q3 and the strength we're continuing to see.
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AUGUST 31, 2022 / 9:00PM GMT, Q3 2022 Cooper Companies Inc Earnings Call
Overall, the challenging macro environment, including headwinds from currency, inflation, and supply chain challenges, has negatively impacted profitability, but has not reduced our ability to take share and drive sustainable top line growth.
Moving to the third quarter results, consolidated revenues reached an all-time high of $843 million, with CooperVision posting record revenues of $566 million, up 11% organically and CooperSurgical posting record revenues of $277 million, up 35% as reported, up 3% organically.
Growth was led by our daily silicone hydrogel portfolio and myopia management products for CooperVision and fertility for CooperSurgical. Non-GAAP earnings per share were $3.19 and we posted record quarterly free cash flow of $217 million.
For CooperVision, and reporting all percentages on an organic basis, revenue growth was strong and diversified in all product categories
Regarding product details, daily silicone hydrogel lenses grew 24% led by great results from both MyDay and clariti. Daily silicones continue to be the main driver of growth for the contact lens industry, and we offer the broadest portfolio in the market with MyDay and clariti available in a broad range of spheres, torics and multifocals. Within this, we're continuing to see especially strong growth from MyDay, including from the very successful rollout of the MyDay multifocal which is taking share in markets around the world. The feedback from patients remains fantastic, and optometrists continue reporting our breakthrough Binocular Progressive Fitting System is allowing them to fit the lens quickly and accurately. This success is driving a positive halo effect on MyDay spheres and torics, and we remain very optimistic about the future of this brand. Clariti also posted a solid quarter with particular strength noted in Asia Pac. And our silicone hydrogel FRP lenses, Biofinity and Avaira, reported another solid quarter of 8% growth.
Regarding product launches, we remain very active. I'm excited to announce we'll be seeding the market with MyDay Energys over the next several months with a full launch scheduled for early calendar 2023. We've had a lot of requests for the Energys technology in a daily lens and given the success we've had with Biofinity Energys, we're really excited about this opportunity. MyDay Energys will use the same Digital Zone Optics technology as Biofinity Energys providing wearers greater comfort when using digital devices along with enhanced end-of-day comfort. This daily lens is a perfect product for today's digital world and another great example of CooperVision leading with innovation and manufacturing know-how.
And building on this, we'll also be launching an expanded MyDay toric parameter range in early fiscal 2023. MyDay already offers the most prescription options in the daily [silicone hydrogel] (added by company after the call) toric market, and this expansion will essentially match the leading offerings in the FRP toric segment which will be a first for the contact lens industry. All this activity supports the fantastic MyDay brand and exemplifies CooperVision's focus on offering practitioners a wide variety of market-leading, technologically superior products. Meanwhile, we're expanding availability of clariti around the world, which will further strengthen relationships with customers using store-brands. And I'm also happy to report that we've recently increased production of Biofinity including made-to-order extended range torics and Biofinity toric multifocals. Demand continues to exceed supply on these products which has caused supply disruptions, so adding capacity is great news. Overall, these products and technologies improve how eye care professionals deliver clinical care and it's allowing us to lead in defining standard of care, a core component of our ongoing share gains.
Moving to myopia management, another exciting area where we're a market leader, we posted revenues of $24 million, up 42%, including MiSight up 109%. Our growth trajectory remains strong with the main challenge being in China where all contact lens sales, including MiSight and Ortho-K products have experienced difficulties due to ongoing COVID restrictions. Outside of China, MiSight is performing really well, backed by its extensive 7-year clinical data and FDA approval, and we're seeing strength with key accounts and private practitioners around the world. We're also seeing a positive halo effect with customers selling MiSight accelerating their use of other CooperVision lenses.
For SightGlass myopia management glasses, our JV relationship with EssilorLuxottica is going well and the team continues to make
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AUGUST 31, 2022 / 9:00PM GMT, Q3 2022 Cooper Companies Inc Earnings Call
progress. In the U.S., we're finalizing the submission of the 3-year clinical data and expect to submit it to the FDA in September. As a reminder, the only FDA-approved myopia management product on the market in the U.S. is MiSight, so obtaining approval for glasses has the potential to really propel the myopia management field forward.
To finish on CooperVision, the contact lens market continues to perform exceptionally well with estimated growth of 8% in calendar Q2. Although COVID-related challenges remain, including here in the U.S. where back-to-school eye exam demand is exceeding exam capacity, the many long-term growth drivers of the industry remain intact. This starts with a large macro growth trend that roughly 1/3 of the world is myopic today, and that is expected to increase to 50% by 2050. This is driven by heightened screen time among other factors.
Additionally, the shift to silicone hydrogel dailies remains strong, the penetration of higher-value products such as torics and multifocals is growing. The number of wearers is growing, and we're seeing price increases. We expect global growth to remain healthy and believe we'll remain a leader with our robust product portfolio, ongoing product launches, fast-growing myopia management business and leading new fit data.
And speaking of data, I'm proud to say calendar Q2 U.S. stats showed CooperVision was the #1 company for new wearers and the only manufacturer to grow share in all 3 daily categories - spheres, torics and multifocals.
Moving to CooperSurgical, we posted a solid quarter led by fertility which reported sales of $112 million, up 13% organically. As I mentioned earlier, this was the seventh consecutive quarter of double-digit organic growth, so a big congratulations to that team. Success was seen throughout the product portfolio and around the world with particular strength noted in consumables with products like media, pipettes, needles and catheters doing well. Consumables are a core part of our fertility business and an excellent indicator of future growth, so we remain in great shape to continue delivering strong results.
Regarding the broader fertility market, the fundamentals behind the industry's growth remain very healthy. There are many drivers, but women delaying childbirth is the primary factor as fertility challenges start increasing around the age of 30 with a more pronounced negative impact starting at 35. It's now estimated that roughly 15% of reproductive age couples worldwide have fertility challenges and over 750,000 babies are born annually through fertility assisted measures. And these numbers are growing.
Regarding CooperSurgical's positioning, we estimate the portion of the market we compete in is roughly $2 billion in annual sales, and that it will grow in the 5% to 10% range for many years to come. In addition to increasing maternal age, other drivers include improving access to treatment, increasing patient awareness, growth in the number of fertility clinics, improved product offerings such as donor activity and cryopreservation services, and technology improvements for both male and female and fertility challenges. Given the momentum of the industry and the diversity of factors driving growth, fertility is certainly an exciting market to be in.
Moving to office and surgical products, which includes OB/GYN medical devices, PARAGARD and stem cell storage. We posted sales of $165 million, up 36%, but down 3% organically. OB/GYN medical device sales were negatively impacted by heightened backorders due to supply chain challenges. We've seen good demand and positive signs in our supply chain to start this quarter so we expect healthy growth in fiscal Q4. PARAGARD was down 7% as expected due to a difficult comp with last year's price increase and related buy-in activity, but we expect nice growth in Q4 with an easier comp, improving patient flow, and an increasing patient focus on the most efficacious forms of birth control, including 99% effective IUDs such as PARAGARD.
Lastly, our stem cell storage business that we entered with the Generate acquisition this past December grew 1%. This was in line with expectations against the difficult comp from prior to our purchase of the business.
To wrap up on CooperSurgical, fertility remains strong, the other parts of the business are making progress, and the integration activity is going well. We expect a strong finish to this year and believe we're in an excellent position to deliver long-termmid-single-digit growth.
To conclude, we operate in recession-resistant industries with strong macro growth trends but we're not immune to supply chain challenges. And currency is having a material impact on our as-reported results. Having said that, our core business fundamentals are
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AUGUST 31, 2022 / 9:00PM GMT, Q3 2022 Cooper Companies Inc Earnings Call
excellent, we're taking market share, leveraging where we can, and taking price. We'll remain extremely focused on the challenges facing us and will be proactive managing operations while maintaining a focus on delivering long-term shareholder value.
And with that, I'll turn the call over to Brian to discuss financial results and guidance.
Brian G. Andrews The Cooper Companies, Inc. - Executive VP, CFO & Treasurer
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.
Third quarter consolidated revenues were $843 million, up 10% or up 9% organically. Consolidated gross margin was 66.1%, down 220 basis points from last year, driven primarily by currency. Operating expenses grew 13% and were 42.7% of revenues primarily as a result of the acquisition of Generate Life Sciences. Consolidated operating margin was 23.4%. Within these results, currency is having a significant negative impact, along with supply chain and inflationary pressures. We raised prices to offset some of this and have additional price increases coming, and we'll continue to work diligently controlling costs.
Moving below the line, interest expense significantly increased year-over-year to $17 million with higher rates and debt balances driving a large year-over-year increase. The effective tax rate was 10.2% and non-GAAP EPS was $3.19, with roughly 49.6 million average shares outstanding.
Year-over-year FX negatively impacted earnings by $0.67 in the quarter, which was $0.10 worse than we forecasted at the time of our last earnings call. As with last quarter, a large part of the $0.10 was attributable to the remeasurement of foreign currency-based intercompany trade receivables which are recognized in "other income and expense". In order to reduce this variability moving forward, we've made moves including closing out certain nonfunctional exposures and improving our natural and synthetic hedge positions. Moving forward we believe these efforts will do a better job mitigating the impact of FX gains or losses that occur below the operating income line.
Returning to the quarter, free cash flow was extremely strong at $217 million, and we decreased net debt by $218 million to $2.64 billion. This reduced leverage to 2.44x, which lowered the borrowing rate on our long-term credit facility pricing grids by 25 basis points. As a reminder, $1 billion of our debt is fixed to 2025 with the remaining amount floating.
Moving to guidance, we are increasing the full year organic revenue growth ranges for CooperVision and CooperSurgical to include our strong Q3 results and the strength we're seeing as we enter fiscal Q4. For EPS, we're updating guidance to reflect the negative impact of currency and interest rates, offset slightly by better operational performance.
Specific to fiscal Q4, the consolidated revenue guidance range is $830 million to $850 million, up 9% to 11% organically, with CooperVision revenues of $554 million to $565 million, up 8% to 10% organically, and CooperSurgical revenues of $276 million to $285 million, up 10% to 15% organically. Non-GAAP EPS is expected to be in the range of $3.05 to $3.20 based on a roughly 13.5% effective tax rate and roughly $22 million of interest expense, which includes an assumption for a 75-basis point increase in September. Regarding currency, we're now forecasting the year-over-year negative impact in Q4 to be roughly 8% headwind to revenues and a 20% headwind to EPS.
For fiscal 2023, we won't be providing detailed guidance but let me provide some high-level direction. Assuming currency rates remain similar to where they are today, interest expense increases to around $85 million due to multiple rate hikes, our effective tax rate increases to roughly 15%, and the macroeconomic environment remains challenging, we expect to report low single-digityear-over-yearnon-GAAP EPS growth. These expectations do not include the pending acquisition of Cook Medical's Reproductive Health business.
Lastly, as it relates to our pending acquisition of Cook, that transaction is still pending regulatory approval. We are currently exploring different options to close the transaction, including the potential sale of certain Cook assets in the U.S. and abroad. Given the process
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The Cooper Companies Inc. published this content on 07 September 2022 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 07 September 2022 22:09:05 UTC.