Why don't we get this session started? Good afternoon, everyone. Welcome to day two of the Jefferies New York Healthcare Conference. My name is Young Li , one of the analysts on the U.S. MedTech team. Very pleased to be joined by management from Cooper. We have Brian Andrews, EVP, CFO, and Treasurer, and Kim Duncan, sit up front, VP IR Risk Management. So this will be a moderated Q&A session. Brian, Kim, welcome, and thanks for coming to our conference.
Thank you. Pleasure to be here.
Mm-hmm. I guess to start, why don't we start, you know, high level, just to begin. You know, Cooper has strong positions in two attractive markets: contact lenses and women's health, fertility. Can you maybe level set us on, you know, first half performance for these two segments? You know, what did better than expected? What was worse than expected?
Sure, yeah. Starting, I guess, with the contact lens industry and specific to Cooper, good, strong first half. You know, we expected, you know, around 7% growth in the first quarter, really tied to capacity challenges that we discussed on our fourth quarter earnings call. We posted a really strong 7, almost rounded to 8. Capacity's been coming online faster than we anticipated, more successfully than we anticipated. So, it's really given us confidence in, you know, as we exited Q1, that we're gonna have a strong rest of our year. So we ended up posting double-digit growth here in the second quarter. We reported earnings recently, I think it was about a week ago. And expect a strong back half of the year.
We're guiding to 9% at the midpoint for vision in the second half. And you know, hopefully that not only do we perform to those expectations, but you know, hopefully we'll exceed those. You know, the business is performing exceptionally well. Diversified growth, growth in product categories, modalities. You know, Biofinity and Avaira posted a strong quarter. Our silicone hydrogels posted a strong quarter. Expect that to continue. Myopia management providing incremental growth, and just growth in our branded and our customer-branded focus areas. So really, strength all around the world. Our biggest challenge is capacity, but like I said, it's we're adding new lines pretty much every month, and expect that to continue.
As we continue to put more capacity in, we, you know, our confidence in being able to deliver and perhaps exceed our guidance ranges continues to grow. On the surgical side, good solid quarter in Q1. Q2 was a little choppy because we went live with an ERP-type upgrade. A system upgrade resulted in some back orders and some challenges in getting shipments out the door. We reiterated our guidance for the year for CooperSurgical, with an expectation we'll recover those lost revenues in the third quarter, you know, if not entirely in a large part, and potentially, if not at all in Q3, then we'll see it come back in Q4.
But really, things are going well there. Underlying demand is strong. Fertility is gonna bounce back to, you know, high single, maybe even low double in the third quarter, and the rest of the business is performing well, with the only call-out that we've mentioned around Paragard having some channel contraction probably in the third quarter, which will lead to probably a sequential decline in Paragard and a pretty decent down year-over-year number for Paragard. But still, overall, the business is performing well. Excited about the second half.
All right, great. It's a nice overview. I guess maybe just focus in on contact lenses to begin. You know, you talk about having the most SKUs available among the competition, so you're able to meet more customers' demands. I guess, does that mean or imply that Cooper should be positioned to take much higher market share over time? You know, what could hold Cooper back? Is it the channel competition, customer awareness?
Yeah. So I mean, we have a pretty differentiated portfolio that's pretty hard to replicate, something that we've been building upon over the last couple of decades. We've taken share each and every year, I think since I've been at the company, which is about 18 years, at least for the last 16. I'd expect that we'll continue to take share in this, in this market, in the coming years. You know, we've been successfully doing so through our diversified approach, through, you know, customer brands, our own brands. We've got the broadest portfolios within FRPs, within dailies and daily silicones. You mentioned the expanded toric ranges. We do torics exceptionally well.
You know, it was—When I started with the company, we were lathing lenses in Scottsville one by one, and making the outer edges of the SKU ranges. You fast-forward to today, and we're automating a lot of that. You know, we've gotten really good at making really hard-to-make products, and when staffing challenges exist all around the world, and you don't have enough fitters fitting lenses, and chair time's at a premium, you know, when you have a portfolio that you can offer just about any lens to anyone who walks through your door, it puts you in a great position to win business, and it puts you in a great position to be the lens of choice in a facility or a practice....
So, whether it's our broad Toric ranges, our Toric multifocal lenses, which are best in class, our monthly products, our daily products, the broadest premium selection of products in our daily SiHy, a mass market portfolio, and a myopia management portfolio. We really do have a lot of shots on goal. We do expect to continue to have strong growth among or within a strong industry. And really right now, we're dealing with demand exceeding supply, so it's why we're being so proactive about adding new lines, is really just so that we can meet the demand in the market.
Okay, got it. And then, you know, you raised the vision guidance a little bit, given the strong results. I guess the second half comps get tougher, 11% in the second half versus 5% in the first half. I guess, you know, what are you seeing in the market that gives you the confidence in raising a vision outlook into the tougher comp?
Well, I think it's more relative to ourselves than anything else. I think the story around the market has been consistent and the same. It's been really strong. More people getting into the market, you know, increase in wearers, price being a positive, more incidents of nearsightedness. You know, a third of the world's population is nearsighted, going to 50% in 2050. The growth in torics and multifocals. So the market dynamics are holding as we expected, if not a little bit better. You know, we had a strong April, followed by a strong May. And capacity, as I mentioned earlier, you know, is coming on, and we're having success putting those lines into production.
So, it bodes well for our second half in light of, you know, what you mentioned is really strong. You know, we've got some tough comps, especially in Q3, but I wouldn't count it out that we're gonna have a really strong Q3, and despite the tough comps and a strong back half. The momentum is really good.
Okay, great. So, you know, daily SiHy is a strong driver of growth within contact lenses, grew 18% last quarter. Can you level set us on the market penetration of daily SiHy and, as well as Cooper's penetration into that, into daily SiHy as well?
Sure. So, different ways I can answer it. I guess, when you look at our market share being the number 2 contact lens company in the market at 26%, our dailies share is around 20%. Our daily silicone hydrogel share is quite a bit higher than that. And our new fit data, you know, in terms of putting new lenses on new wearers, is even higher than that. So when you talk about what's driving some of the growth at Cooper, it's new fits exceeding our market share, our daily silicone hydrogel share exceeding that as well, and so it's driving that 20% higher. You look at MyDay as an example, MyDay is probably 10% of the overall dailies market.
So that should go up to 20% at least, if not higher. If you look at the market, though, in general, about, call it 40% of wearers are wearing dailies today. In terms of revenue dollars, about 60% of the market is dailies, and within that category of dailies, probably 60% of that is silicone hydrogel. If you compare the 60% of the dailies market to an FRP market, like monthlies and two-week, where you have about 90% of that market in silicone hydrogel, you've got a fairly large and long runway to go, to get more wearers, that 40% higher into dailies, to get more people fit into daily silicone hydrogels from 60%-90%.
As it relates to Cooper, you know, we didn't have a very large daily hydrogel portfolio, but we really leaned into daily silicones, broadest portfolios, and really winning the day with new wearers, putting wearers into silicone hydrogel dailies with our broad portfolio of lenses.
Okay. And then, you know, I think you touched upon it briefly, but, you know, where do you think the daily SiHy penetration can ultimately go to? Sounds like it would be, you know, 90%, close to 100. But, you know, are there still meaningful trade-up opportunities left? Is it mostly driven by new starts? What do you think about that?
Yeah, well, I mean, wearers are growing in the industry, so that obviously helps the industry. More as wearers are coming in, more of them are being fit into daily SiHys. Torics and multifocals, you know, we talk about it, you know, we talk about it a lot, and especially more so lately, given our capacity is ramped up, and we're launching more and more of our daily SiHy's, Torics around the world, and multifocals. But, you know, if you look at people with astigmatism, and you roughly estimate that 30% of the world is in need of a Toric lens, but only about 26% or so in revenue dollars are wearing Torics, you've got a fairly big opportunity, and this is true in multifocals for presbyopes as well.
Fairly large opportunity to drive better penetration of Toric fitting and multifocal fitting around the world. You know, the Toric and multifocal market is largely a U.S. market. So as fitting trends improve, as availability improves, as first-time success continues to improve with better lenses and better technology, we would expect that to grow the dailies market and drive better penetration within higher-priced mixed products, but also just the right lenses on people's eyes. So you're seeing that happen in more mature markets around the world.
Okay, got it. And then, you know, it does seem like demand continues to exceed supply. You know, how much are you ramping up supply and capacity to meet the demand? And, you know, when do you think that can happen?
It's a great question and a tough one to answer. I think, as an industry, we're constrained. You know, it takes about 24 months to get so from ordering a line to getting a line into production, give or take. You know, our CapEx numbers have been climbing, and they were big last year. They'll be big again this year, and I assume I expect that they're going to be, you know, elevated again in 2025. You know, we're in this luxurious position of being able to put lines into production and then being able to sell just about everything that comes off those lines. And you saw that even in Q2 with Biofinity and Avaira.
We posted double-digit growth in our FRP silicone hydrogel segment, and that's because we are capacity constrained in Biofinity and put some lines into production in the first and second quarter. So, you know, it's across our portfolio, but much, you know, very significantly within daily silicones. It's why we have to modulate launches, why we only have Energys in the US market, why we still don't have expanded torics in different markets, why our, perhaps our Asia Pac numbers, have been not as strong as they could be, is we're putting a little bit more emphasis, if you will, in the Americas and in Europe. So, I think capacity is gonna be a challenge for the industry for the next several years.
We're certainly doing our part, gaining new wearers and putting more lenses on eyes, and adding capacity to meet the demands of the market.
Okay, got it. And then just, you know, on price, it remains pretty strong for the overall market, around 2%-3%. How much of that is just driven by the shortage in supplies? You know, how sustainable is this pricing dynamic going forward? And, you know, are there categories or regions that's taking more price than others?
Yeah, I mean, our price has been holding pretty steady, you know, exiting the pandemic. You will probably, as an industry, see net pricing land somewhere at the high end of the range that we had set out in the beginning of the year, kind of in that 2%-3% range. For Cooper, kind of towards the high end of that. You know, inflation's been sticking around, and consumers are still predominantly going after the highest-priced lenses in the market. You're seeing strength in our MyDay family, strength in both of our MyDay and clariti families, but much more so in MyDay.
Energys really putting up some really strong numbers, which I alluded to earlier, is why we can't get it outside the US, just the strength of the US market and demand for Energys. So, pricing's holding. We don't see any change in the consumers, and so, you know, I'd expect price to be another good year from price next year, at least as it relates to Cooper. You know, it's... And as we talk about price, it's not just the price of your products, but it's the price of value-added services that you do.
You know, we've spent a lot of money over the years, and people that wanna and you probably are gonna ask me about operating margins in a minute, but we've spent a lot of money investing in infrastructure to improve our distribution, and logistics, and supply chain, and packaging, labeling. Well, that makes us more efficient, but it also puts us in a position to offer value-added services for our customers. It allows us to do some things that are very differentiated for our key accounts with customer brands that's definitely differentiated. But what that also affords us is an ability to charge for those value-added services. So, you know, I'd say price is holding, and expect that to be still another positive for us as we go into next year.
Okay, got it. Yeah, we'll definitely ask about operating margins in a bit. But before that, just on MiSight, I mean, it seems like the momentum is continuing there. Can you maybe talk about you know, what you're doing to make it easier for, ECPs with adoption and, you know, scaling the product?
Yeah, I mean, I think it's a multifaceted approach. I mean, we're trying to educate the docs on the clinical efficacy of the lens. We're talking to clinicians and key accounts about how to have the conversation with their patients, how to have more success in convincing parents that putting a contact lens in a child's eye at an earlier age is not only possible, but easy to do and highly efficacious. And then we're also giving them some tools, like OptiExpert, that we've talked about. So, you know, we're seeing continued success in fittings around the world, both all the way down to the eye care practitioner level, all the way up to the key account level.
I was just in Asia a couple of weeks ago and visiting with docs and clinics, and yes, there's glasses out there, and they're excited about that, and that's easy to put on eyes. But the things that we've been talking about, which is, yeah, you can get good efficacy from glasses, but you need the compliance to be there. That's an issue, and they're seeing that. They're seeing that at times with kids not wearing their glasses, you know, seven days a week and, you know, 10 hours a day. But they're not seeing that with MiSight. In MiSight, they're putting a MiSight on eyes, and they're seeing many of their children not have any progression whatsoever with their myopia when they start wearing MiSight 'cause the compliance is there, and the efficacy is there.
So we're excited, don't get me wrong, about glasses in the market 'cause you wanna get a form of treatment onto eyes as early as possible. But MiSight is kind of, you know, steady up and to the right. You know, it's kind of that snowball moving downhill. It's not the hockey stick that we expected it was gonna be, but we're making progress sequentially year over year and expect that to continue as more and more adoption happens.
Okay, great. Yeah, I wish that product was available when I was younger, but I'll look into it for my kids.
Yeah.
I guess switching to the surgical side, so, you know, high level, pretty favorable demographic tailwinds. Can you maybe just talk about, just, you know, OB-GYN office visit trends and, you know, those type of drivers for the, for the business?
Yeah, I guess there's really nothing I would point out, broadly speaking, for our office surgical space tied to anything different around office staffing or foot traffic or anything of that nature. You know, we have a business that is, if I just stick with office surgical, that is, there's a lot of in-office procedures, a lot of solutions that are geared towards either surgical procedures that are highly specialized or labor and delivery. And we've been putting sort of a moat around labor and delivery with some of the acquisitions we've done more recently, also augmenting some of our existing portfolio. So, that part of our business has done really well.
You know, we had a little bit of a blip in Q2, entirely tied to Connect or to our systems upgrade, but expect that to have a good bounce back in the rest of the year as we look forward into the second half.
Okay, great. I guess, you know, Paragard, you know, sees some pressure from, I guess, easy-to-access pills.
Yep.
But, you know, you can sort of offset it with the price. I guess I'm just kinda curious, you know, how much additional price do you think you can continue to take for Paragard going forward?
You know, we've been taking price with Paragard the last several years. You know, while, as inflation continues to stick around, it's only sold in the U.S. market, so as inflation continues to linger, it affords us some ability to take price. So, that's been a good offset to the volume declines that we've seen. We've posted a good first half of the year that's been largely attributable to the price increases that we took to start the year, but also a buy-in period ahead of the price increase that took effect here in Q3. You know, that resulted in some channel fill in the first half. We'll see some contraction in the third quarter. I mentioned sequential decline and year-over-year decline.
That's part of the reason why we'll have a little softer gross margin here in the third quarter. And we've got a competitor that we were expecting was gonna get FDA approval this year. So far, we haven't heard anything. There's no approval there, so therefore, there's been no launches. So, you know, our expectation of a down year for Paragard has now been revised to sort of flat to up slightly. Certainly, if we don't see any competitor entry in the fourth quarter, that may provide some upside in our Paragard numbers. But right now, we're expecting sort of a flat Paragard for the full year, you know, with volumes down and price being the offset.
Okay, great. I guess on the operating margins, you know, seems like you've kind of hit a high, around 27% in the 2018, 2019 time frame. Now, it's around 24%. Can you maybe just, you know, talk about, you know, if there's a pathway back to 27%, and what are the key levers to get there?
Yeah. You know, we've invested a lot in this business. You know, we made the decision several years ago, you know, around COVID, to really lean into our daily silicone hydrogel franchise and be a leader in that space. And so being a leader in manufacturing the broadest portfolio is one thing, but you also have to have the support infrastructure to be able to do all the packaging, the labeling, the distribution, the logistics, and some of the value-added services we do for our customers. And so, you know, it's been climbing that hill over the last several years. And for...
You know, when you're doubling the size of distribution centers in the US and Europe, and you're doubling your packaging, and doubling, and adding automation, you know, you sometimes. You know, while you're going through that, that's significant spend, but you have to sort of. You have to, you sometimes, oftentimes will deal with increases in cost before you actually start seeing those efficiencies. So, you know, last year, we were kind of still in that climb mountain stage, and we were able to, in a very difficult way, deliver 11% constant currency OI growth. This year, our guidance implies 16%-18% constant currency OI growth. That's coming from leveraging all those prior investments, and it's not a one-quarter, two-quarter, one-year thing. We're now going downhill.
We're seeing the efficiencies from our IT go lives, from our distribution center go lives, from our packaging. You're seeing that, frankly, in gross margin and SG&A leverage because how we move inventory between our sites, between manufacturing and distribution centers and warehouses, gets influenced by how we pick, pack, and ship those and package those, and then our distribution out. So, you know, I expect we're gonna have a strong back half of this year from SG&A leverage that'll offset some of the gross margin commentary we provided on the last earnings call. And operating margins on an as-reported basis going up pretty nicely versus last year, you know, despite the FX pull down and headwind we're seeing from foreign exchange.
All right, great. I think that's all the time we have for this session. Brian, thank you so much for your, for your thoughts.
You're welcome. Thank you. Pleasure to be here. Thanks.