All right. Good afternoon, everyone. Thank you for coming out and surviving and making it to the last meeting of the William Blair Growth Stock Conference. Really appreciate you guys all being here. My name is Margaret Kazer Andrew. I am the analyst here at William Blair that covers Cooper Companies. I am required to inform you that you can find a complete list of research disclosures and conflicts of interest at williamblair.com. With that, I'm going to turn it over to Brian, who's going to give a short background on the company, and then we'll probably make this more of a Q&A session for the rest of the time. Thanks.
Thanks, Margaret. I recognize a lot of the faces in the room. I'm only going to go through a couple of slides of our investor deck, our investor deck's available on our website. I should probably grab that clicker. Let's leave enough time for Q&A. A little bit about Cooper. We're a global medical device company. About two-thirds of our business is contact lenses, soft contact lenses. The other third is related to women's health primarily. We do a lot in fertility. We're a leader in fertility. About 40% of that surgical business is fertility. The other 60% is a host of surgical products, primarily for the OBGYN, though also used in specialty surgery. We've got a stem cell business and an IUD that's treated as a pharma that make up the other 60%. We've got 16,000 employees. We operate in over 130 countries.
Our revenue mix is a little bit more than half of our revenues are based outside of the U.S. When you look at that, America is part of the pie. That includes, obviously, Canada, Central, and South America. Pretty diversified across geographies. We operate in great industries that have great macro trends, great fundamentals, secular growth. We're in the early stages of, we're in the early innings of trading up wearers into daily silicones, more revenue per patient, healthier for the eyes. We've got a great portfolio, a differentiated portfolio, where we offer unique products that our competition doesn't offer. We also offer myopia control products that help reduce the progression of myopia in children, again, something that our competition doesn't have. We also have a large branded and private label part of the portfolio.
We do a lot of customer brands for key accounts around the world, again, a point of differentiation. Then we offer a wide range of lenses that are torics, extended range torics, toric multifocals, and so forth within the vision business, which really differentiates us. If we just kind of look at our performance over the years, I mean, this goes back 10 years, but you can go back 20 years and see it is the same kind of up and to the right. Our businesses always grow, except 2020 during COVID, you see up and to the right performance from vision and surgical, some of the CAGRs there. We are committed to growing faster than the market. We have been growing faster than the market in vision for the 20 or so years I have been at Cooper.
We intend to continue to drive market share gains every year going forward. We're committed to margin expansion, driving OI growth, and free cash flow. That's a big, big focus area for us right now. If you look at our guidance, this is the last slide, and then we'll jump into Q&A. We have Cooper Vision growing 6%-7% this year with a market that's expected to grow 4%-6%. Cooper Surgical growing 3.5%-4.5%. Our non-GAAP EPS range is right there at 4.05%-4.11%. Embedded within the P&L is gross margin expansion, both on a constant currency and as reported basis. Operating margin expansion, again, on a constant currency and as reported basis. FX has been a headwind for us. It will be. It is this year for us. It has been since 2019.
We're committed to driving operational improvements, operational efficiencies, and OI growth this year. That's our goal every year to drive low double-digit constant currency OI growth. With that, we'll allow the FX flow through to the bottom line. We'll talk about some of the probably some of the confusion around our guidance phrase on EPS with a Q&A, but expect to have a good year here. Free cash flow $350 million-$400 million. We're only at 9% of revenues. We can do a lot better than that. We're positioned to do better than that. We're going to grow free cash flow margin every year over the next coming years. It wasn't that long ago in 2018 when we were closer to 20% free cash flow margin. No reason why we can't get back to that place.
It's just going to take a little bit of time, but we're going to be working our way towards that in the coming years. I guess with that, I'll move it to Margaret and Q&A.
Perfect. Maybe just let's start with the quarterly performance and some of the commentary you had talked about in regards to CVI and the guidance change. What struck that guidance change? What are you seeing in the market today that made you change it?
Yeah, I mean, I'd say that if we look at pre-COVID, we were seeing a market that was growing sort of in that 4%-6% range. If we look at right now, we exited last year with a market that grew 7%. In the fourth quarter of last year, the market grew 9%. Now, I don't think the market was as strong as 9% because you saw Q1 this year, calendar quarter this year, grow 4%. You had J&J growing 2.7% and Alcon grew 4%. Those were not really the sell-through numbers. That is just reflective of probably some inventory that was in the channel last year, some overselling last year, some buying by distributors, key accounts, global retailers. The 7% probably was not quite as strong as 7%. It was probably closer to 6% if you look through all of that.
Our competition has been talking about mid-single digits growth in the contact lens industry. We agree with them. We updated our expectations for market growth of 5%-7% to 4%-6%. With that, we took down the midpoint of Cooper Vision by a point. That is how we arrived at our updated guidance.
Okay. I think Dan called himself an optimist on the call. That makes sense. You guys have been doing better. Margaret obviously has been doing better. Hopefully there's some reversal to that. Maybe give us some context over how contact lenses have maybe ebbed and flowed in prior market downturns and why this may or may not be a good corollary.
Yeah, I mean, if we look back at in 2008, 2009, the market, we had one quarter where the market grew 3%. I think that year the market around 2008, 2009, the market grew somewhere around 3% to 4%. We grew 5% that year. The market fundamentals haven't changed right now. I mean, you look at fitting activity, and it's still really strong. You still have consumers that are preferring and going into premium products. Our MyDay portfolio is doing exceptionally well. The only limiter to its growth has been supply. Now what we're saying to the street is we are unencumbered. We have taken the handcuffs off. We are now getting fit sets out. We haven't given fit sets into markets in a long time, trial lenses.
That when a customer comes in and they need a toric and they're astigmatic or they're presbyopic and they want a multifocal, now there's a lens that a doctor can grab off the shelf, put it on eyes, send them home with some lenses to try. That'll turn into revenue. If we looked at what happened in 2008, 2009, there was definitely people stretching out their wear. Back then you had FRP lenses, the monthly lenses or two-week lenses, where the two-week lens wearers were trying to stretch to a month or a month wearer was trying to stretch to 45 days. Now that you've got more and more people wearing dailies and people are already wearing their lenses kind of five days a week, maybe they're going to four days a week.
Maybe what we're also seeing with consumers is where they were buying, let's say, a year's supply, maybe they're buying six months instead of a year or three months instead of six months. That's impacting some of the channel levels because if people are buying a little bit less, but they're utilizing still the same amount, you're still going to need a little bit of a correction in the channel. That's what we're seeing right now play out, where there's just a little bit of correction that's happening in the industry. For us, we think we're going to be through the channel noise once we get through Q3 and back to kind of a normal sort of state of affairs within the channel as we exit and get into Q4.
Just on that point, right, we are talking a little bit of inventory. We are talking a little bit of new fits, new starts. New fit starts seem like they have not really ebbed down in your view. It is more inventory dynamics?
We haven't seen any change in fits. In fact, we're seeing some acceleration in fits just because we have more supply going out into the market. Again, the consumer is still buying premium products. You see our competition that have premium products and those products doing well. Same is true for us. Fitting activity is still robust. When we say, is there anything structurally different? No. Are there any fundamentals that are changed? I mean, you still have price as a tailwind for the market. Price is going to be 2%-3% this year to help offset inflation. You've got wearers growing roughly 1%.
The balance related to the trade-up to dailies and daily silicones because you still have a long way to go to move the market and to get more and more people into dailies that are otherwise in FRPs or in hydrogels or legacy dailies.
Okay. Maybe let's go to MyDay. And you had talked about that, seeing some really nice uplift. Can you provide a little bit more detail around torics, multifocals, and kind of the new Energys offering as well?
Yeah. MyDay is a full family of products. We've got spheres, torics. We've got the widest range of torics in the market in that portfolio. We've got a phenomenal multifocal. We've got Energys, which provides a little bit of a digital boost for people who are just myopic sphere wearers, but it kind of gives them a little bit of plus power to be able to see their iPhone or see the screen. It's unique. It's unique to Cooper. No one else has a product like that. We just launched that in—we launched Energys in Canada recently. We'll be launching Energys in Europe next year. That is due in large part because of the supply that we've had. We've been putting a lot of capital into production with great success.
That offers us an ability to go and push more torics out in the market, expand existing private label relationships that only had a certain SKU set to expand their SKUs, to give them the multifocal, to enter into new private label agreements and key account agreements to get MyDay into Asia-Pacific, where we have been really limiting the release of MyDay into that market. It also allows us to launch a silicone hydrogel MySight lens next year, which we will do probably in the early part of next year into Europe. You will have MyDay MySight in Europe next year, which will help drive some MySight growth.
Okay. There's a couple of concepts maybe to follow up on. You've got more of the capacity now that's leading to some of these more aggressive, maybe not aggressive, but just normal marketing strategies. How does that differ versus the competition in the marketplace?
I would say that the competition is good. I mean, I think everybody's got, everyone sort of has their respective lanes. You have a little bit of a battle going on in sort of the one-week, two-week space between our competition, but we do not play in that space. We have got a monthly product in Biofinity that can fit 99.9% of wearers. If you are a key account and you want a private label, a phenomenal product, and have a monthly product for your customers, Biofinity has always been and always will be a great option because we have the widest SKU range of torics. You have got the multifocal. You have got toric multifocals for those astigmatics that become presbyopic. You have got Energys, which provides that plus power. It is a product that there has been, there was a launch last year by a competitor. It is a fine product.
It's a good product. Biofinity continues to perform really, really well up against that product, not only because of comfort and fit and acuity, but also just because it's a wide range. I think we all have our points of strength. Certainly for Cooper, we've got a myopia control franchise, the only FDA-approved product to reduce the progression of myopia. When you look at our growth of 6.5% against the market midpoint of 5%, we're growing a little bit faster than the rest of the competition. We will continue to do so in our core portfolio of contact lenses. When you add to that MySight, which will be a $100 million product this year, growing just grew 35%, probably goes 25%-30% in Q3 as we give more free lenses away. Maybe you'll have some questions on that.
Probably exiting the year, probably growing 40%. I think we have a good chance of growing that product at least 30% next year, again, growing another point, giving us another point of growth. Beyond just the core portfolio, which is going to do well against the market, we also have that extra advantage of having a myopia control product, which gives us additional point of growth.
As we talk about that, that's one of the things you had referenced on the next quarter is maybe growth kind of pulls back a little bit because you are going to give away some lenses to try to basically get that new start. Then there's stream of revenue, hopefully, should they stick with the product. Why haven't you done that as aggressively in the past? Why is now the right moment?
Yeah, I mean, I would say we've been challenging sort of what's been holding back MySight because we know that it's effective. We know that when we put MySight onto a child's eyes and you have a small window within which you can influence the progression of myopia, you want to try to get start as early as possible with a child because that window runs out in their late teens. What we found through a number of different trials and testing is that if we try to discount the lens, it doesn't really move the needle much. We tried various different discounting scenarios. When we give three months free or give at least one month free of just say, "Hey, you know what? The parent comes in with a child.
Parent is a little concerned about, "Can I get contact lenses in my 10-year-old? Is my 10-year-old going to be able to put this on? Are we sure that this is going to work? I do not know. And it is expensive." It is a barrier. It takes sometimes a year or two to get that parent convinced because when parent comes in with the 10-year-old and that child is a minus 1, and then they come in a year later and that child is a minus 2, it is another opportunity to have that conversation and say, "You know, you could have done something about it. You cannot reverse it, but we should try it now." That has been a slow and steady role.
What's different now is we have Specsavers in Europe that was willing to really lean into myopia control across all of their stores and say, "You know what? Every child that comes in here, we're going to treat them with a form of myopia control, a standard of care." Whether that's glasses or it's contacts, if it's contacts, it's going to be MySight. What we did with them is we did a private label with Specsavers. It's their brand with MySight technology. It's essentially the MySight lens.
We said, "Hey, when we trialed this in a number of their stores, we realized that if we can just give the child, that we can let the parent go home with the child with three months free and we can get them convinced that the child can put the contact lens in their eyes, they come back and they buy the lens." We are really excited about it. We just started rolling that out now. It will result in a little bit of softness in Q3. I still think we will probably grow in excess of 25% in Q3. What it does do is it kind of leads to stronger uptake and revenue growth in the fourth quarter as we get into next year.
If we look at MySight in areas like Japan, right, that's still to be launched there, I think it's 2026. Maybe walk us through the go-to-market strategy and expectations.
Yeah, we're excited about Japan because Japan has no myopia control products in that market. You have a lot of myopes, a lot of myopic children in Japan. So we've been going through doing clinicals and got some really good clinical data to support and approval there. We expect to get an approval later this year. That would lead to a launch in Japan early next year. What we're doing right now is we're working with key account or KOLs in the market. We're talking to doctors who are going to be getting ready to fit that lens. We're educating the docs. We're educating our salesforce. We're getting promotional materials ready, really so that once we get the approval, we can hit the ground running and launch that product in the early part of 2026.
As we think about Sightglass, every once in a while we get these questions as that is an opportunity. It does seem like it's a meaningful opportunity. Update us on where you are today.
Yeah. Sightglass is a 50/50 joint venture with EssilorLuxottica. It's a phenomenal product. It works. It's effective. We have it launched in a number of markets around the world. Where it's really taking off is in China. The results of that product, or the efficacy of that product, is good as long as the child is wearing the glasses seven days a week, the majority of the day. We're excited about it. I mean, we'd love to see spectacles get approved in the U.S. market. We'll see. I mean, I think anywhere where we have spectacles in the market alongside MySight, it's an opportunity for the doctor to start fitting a form of myopia control at an early age onto a child.
Whether that's glasses or contacts, eventually that child is going to graduate and want to get into contacts, or they're not going to be wearing their glasses long enough to get the efficacy. That will be a conversation starter to get them into contacts. We want to see glasses in the market. We want to make it easy for optometrists to have that conversation. Sightglass has got great technology that's different from other technologies that are out there. We're bullish on it. The FDA has been slow to move, unfortunately.
One of the common questions we've gotten even, frankly, this week and in the past has been around your capacity, the improvements in capacity, but then more importantly, kind of the free cash flow conversion of those investments. Maybe you can provide us some thoughts around that.
Yeah. I mean, there's been a very heavy investment cycle that we've put into the Cooper Vision business. And when Al and I took over in our roles seven-plus years ago, we really decided to lean into our innovation and proficiency around torics and multifocals and the differentiation in our families between Clarity and MyDay and really lean into being a dailies powerhouse. And historically, we've always been that specialty company that does a good job with torics and does a good job with FRPs. But we really wanted to invest in dailies. And so we've invested in manufacturing, packaging, labeling, automation, distribution because a lot of our key accounts expect that we're going to manage their inventory for them. We're going to handle their supply chain. And we're going to do customized solutions. And we're going to do different things with labeling and inserts and so forth.
All of that took a lot of investment. We have been putting that investment into our facilities all around the world. We are now kind of in harvest mode. We are now actually starting to see the benefits where we are putting volumes through our plants. We are putting volumes through our distribution centers. You are seeing leverage, when I talked about getting gross margin expansion and operating income growth and operating margin expansion, and it is coming from leveraging that prior investment activity in manufacturing, packaging, distribution. Beyond that, we are also just being mindful of, hey, we have two businesses, a vision and surgical, that have largely operated on their own. Surgical has acquired a number of businesses. We are just wrapping up and finishing some really important integration activities that will continue to drive their expenses down and drive better margin expansion within surgical.
On the whole, when you have more critical mass between both businesses and you had people in countries and in regions and at the divisional level around some of the support structures, finance, IT, legal, HR, it gives you an opportunity to really now think differently about how are you going to support those businesses. We are still investing in commercial. We are still investing in R&D because we want to see that consistent revenue growth. We want to still drive faster than our markets, that durable, consistent, sustainable growth.
There are opportunities for us to continue to leverage that prior investment activity in the manufacturing and all that capacity expansion we've been putting in, get better utilization from our plants, better cost per unit, drive better efficiencies there, but also go after some of the integration work and some of the centralization work, which will lead to some better SG&A savings this year and going forward.
We've got more questions on the P&L. I know we haven't gotten to CSI. I guess just to wrap up the free cash flow and the capital usage, how do you look at the return to shareholders versus M&A as an argument versus CapEx?
Yeah. Free cash flow is certainly a focus of ours right now. I'd say capital priorities have shifted. We're definitely prioritizing our free cash flow towards debt paydown. If we can take our interest expense this year down from $90 million, that's immediately accretive and will help drive better free cash flow going forward. We bought back some stock last quarter. We saw a dislocation in our stock price relative to our peers. We saw an opportunity to buy back stock. Obviously, where we're trading today is, I would use a more inflammatory word than irritating if I wasn't in a public discourse. It's something that we're evaluating because we were obviously not clear enough about the strength of our business, the strength of our industry, how we're set up to drive success this year into next year.
That's not only on the revenue side, but also on driving low double-digit constant currency ROI growth. It's a target for this year. It's embedded in our guidance. It's going to be a goal for next year. Any FX moves that are positive, and we're starting to finally here in Q3 get to a place of tailwind for the first time in, as long as I can remember, since 2019, we're going to let that flow through to the bottom line too. It's a positive for next year. Again, I'm knocking on wood because I hate talking about FX, but hopefully we're starting to see some benefits there. I think the third piece of it is just free cash flow. I mean, we had a softer free cash flow quarter here in Q2.
We've got some big tax payments that went out the door, bonus and IPP payments that went out the door in Q2, and some timing of some other payments. We are not backing off of $350 million-$400 million this year. With CapEx starting to come down on a percentage basis next year, and all likely coming down not only on a percentage basis, but on an absolute basis in 2027, and better, more focus on working capital initiatives, inventory, DSOs, DPOs, there's no reason why we can't drive free cash flow margin higher each and every year. I expect we're going to do that. We're focused on it as a part of our comp. We've got the whole organization aligned around it. We know that free cash flow delivery is important. It first started with revenues, then margins, now free cash flow.
We're lined up really well to be able to deliver on all three of those.
Just from a free cash flow perspective, as we look at 2026, I hate to look for guidance or anything like that. From a growth perspective, what are the moving pieces that can get you to a higher rate?
Yeah. So I think if you just kind of look at the Cooper Vision business, I would say there's no reason why the contact lens market shouldn't grow 4%-6% next year. Like I said earlier, Cooper growing faster than the market, driven by a little bit better core performance. MySight, I still think MySight should grow at least 30% next year. I'd say on the surgical side of things, there's no reason why we shouldn't be back to sort of mid-single-digit growth next year as we work through some of the channel stuff, some of the cycle noise in Asia-Pacific. You can only delay IVF for so long. If you're going to an IVF center and you're seeking treatment, you've probably run out of luck. You've tried IUI. You've tried to get pregnant in lots of different ways. Maybe now you're in your 30s.
You can only delay so long before that window closes. We expect that the fertility market is still going to get back to sort of mid to upper single digits next year. We will grow at least at that rate, maybe a touch higher. The rest of the surgical business will do as it does. With stem cell and Paragard, it will be sort of up and down. At the end of the day, there is no reason why we cannot deliver mid-single-digit growth. If we look at the rest of the P&L, it is more of the same. It is kind of leveraging prior investment activity, driving OI growth, and then letting FX fall through the bottom line. I do not want to guide to next year, but we will give some more color on our Q3 call.
I think there's enough good and enough that we're going to want to talk about just to kind of clear the air and calm the nerves that it's probably worthwhile for us to talk about it in Q3.
Okay. Realistically, free cash flow, I would imagine, grows even faster than that because of the debt paydowns, CapEx leverage, and so forth.
Thank you. Yeah. Yes. Yeah. So by the end of this year, we will have increased free cash flow this year versus last year by roughly $100 million. Next year, free cash flow margin will take another step higher because free cash flow is abating. I'm sorry, CapEx is abating, moderating at least. Interest expense coming down. Tax will be probably pretty similar, around a little bit similar, nothing different about our tax rate materially. And then just the higher revenues and hopefully FX and operating improvements driving free cash flow higher.
Okay. We're just about out of time, at least for the public forum version of this. So unless you have any final statements, we might just switch to the breakout, which we're going to leave in this room since we're the last presentation of the day.
No. I guess with that commentary about what's happening, this isn't a one-time thing. When I look at next year and I look at sort of earnings expectations for next year, we're not getting enough credit for the good that's happening sort of in the center of the P&L. I think that maybe was something that we didn't articulate or that when we talked about the raise of $0.10 for EPS, I think a lot of people kind of came away from my commentary that it was mostly FX that drove the EPS increase. That is not true. If you look at revenues, we took down revenues by 1%. FX offset it by a little bit more. We were able to raise by $7 million on a consolidated basis for revenues.
If you look at EPS, that $41 million takedown in revenues was offset by FX of $0.10. $0.10 down on revenues, $0.10 up because of FX. What you're left with is roughly $0.10 of operating efficiencies that led to the EPS raised by $0.10. I think that maybe was something that was maybe misunderstood that we could have articulated better. We tried to simplify the message. It got missed. Outside of that, I think you've kind of.
Not me.
Yeah. No, not you. That's true. That's for sure.
All right. Really appreciate it, Brian. Thank you. We could wrap that. I appreciate it.