Hey, good afternoon. I'd like to welcome everyone again to the KeyBanc Life Sciences and MedTech Investor Forum. My name is Matthew Mishan. I am our Senior MedTech Analyst. I'm pleased to be joined by Cooper Companies, who's represented today by CFO and Treasurer Brian Andrews, and EVP and COO Dan McBride. Thank you guys for joining us. I'm gonna start us off, but this will be 100% Q&A, and questions can be submitted directly to me by typing into the box below the video screen, and then I can relay from there. I'll start off, I think Brian, you're the only person I'm asking this question to. It's basically because you're in San Francisco. Are you talking to other CFOs about the Silicon Valley Bank issues?
Kinda how do you think about like direct versus tail risk at this point from that?
Yeah, that's a good question. I mean, certainly, you know, I'm a member of a number of different councils, we're all pretty actively talking to one another. You know, we obviously look at our counterparty risk and assess, you know, who we work with and by and large are the banks that we work with, whether it's our banking relationships or even those swap counterparty banks, those are our primary lenders. Those guys, you know, lend hundreds of millions of dollars to us, including KeyBank. You know, and we're in constant contact with those guys and our, you know, our deposits, you know, what little there is of our deposits is with those banks.
Obviously, we've got a fair amount of debt, and we do a really good job of paying down our debt as we generate cash. You know, we're always in a net debt position. It's not as big of a concern. We had no exposure to Silicon Valley Bank, but we're constantly assessing the credit worthiness and the risk of our banks. You know, it's a constantly moving situation. We're watching it closely. You know, you never know that you're completely out of the woods. You don't feel super confident with anything that's coming out these days. At least, you know, at least I'm confident the banks that we work with, they're all sound banks.
They're all, you know, strong and so I think we've got our bases covered.
That's good to hear. Then, Dan, are you surprised at how well, you know, market demand for contact lenses, seems to be holding up? You know, my sense is that the start to the year, in 2023 so far has been pretty good.
Yeah. No, we saw a really strong January and February. We're really pleased with that. We're not really that surprised. I mean, right now, you know, the consumer still has got buying power. You know, the tailwinds around our industry are all really strong in terms of macro trends of people becoming more myopic. You know, our portfolio continues to expand. Those people that can go into contact lenses, you know, that's helpful. You know, the work that we're doing around myopia management is bringing younger kids into contact lenses, which is healthy for the industry. We're seeing COVID recovery still driving some e-extra demand in Europe. We expect COVID recovery to drive extra demand in Asia Pac.
No, I think we're actually, you know, you know, really I think it's more the fear of recession that has people thinking that there should be some, you know, headwinds to the industry. You know, until that actually manifests itself in some way meaningful to our consumers, which for contact lenses, tend to be the wealthier consumer. You know, we're really seeing nothing but a strong market right now.
What did you make of, you know, one major competitor and a, and a healthy one, I mean, there's quality ones, there's not so quality ones, but a healthy competitor in Alcon indicated some level of constraint on volumes one week. The next week, you know, Cooper's out raising guidance and not really seeing anything. You know, how do you, how do you kinda reconcile the two?
Yeah, I think it, I think it has to do with the timeframe that they were reporting on, 'cause they were reporting on the fourth quarter, calendar fourth quarter, and we did definitely see a slowdown in November and December, calendar quarter. You know, that was more than made up for in, you know, the strength we saw January, February going into the marketplace. You know, I think it was maybe just a little. You know, we're not seeing what they were saying on when we were reporting, which was including January in our numbers and really taking a good look at February.
I mean, is that the right way to look at it from a risk perspective? You're not gonna see consumers switch lenses. I mean, once you're prescribed to the lens, you're not gonna say, "Give me the worst lens." Is the right way to look at it, you know, hey, we might like a consumer might wear less or instead of buying a 12-month supply, maybe you see people like say, "I'm gonna buy a three-month supply." Is that kinda how to think about, you know, what could potentially happen as things slow down?
Yeah. I mean, you'd have to see, in my mind, to see any activity like that, you'd really have to see something that changed, lifestyle and behavior.
Sure.
That's what we saw with COVID, which was really unique, you know, we hadn't seen that behavior before where consumers actually dial back their usage. Really when we talk about like a, you know, a recession like going 2008, 2009 , we really didn't see that much. You know? No, I don't really think we're gonna see consumers dialing a whole lot back unless you see sort of like a big jobs recession going on. Then consumer behavior, you know, then you can throw some things into the mix. I just think it's really premature to call anything negative about the industry until we know what's happening to the consumer with respect to vision care. Yeah, we know that consumer is under pressure with respect to inflation.
Vision care is relatively inexpensive. It's an essential, it's not a discretionary. You know, I'm not seeing either of those things happening. I'm not really thinking they're going to happen unless we saw something much more dramatic, occurring in the jobs market.
Well, do you, I mean, do you think that 2008, 2009 is like an accurate comparison at this point? I mean, when you think about the markets, you went from a two-week monthly market that, I mean, what is it, an annual supply, $150 or so back then, you know, to a market where you've traded up a lot of people to, you know, daily silicone hydrogel, which are running from $500-$900 per year. I mean, is it like it's more expensive now and maybe a little bit more volatile?
Yeah, I think the difference is the buying power of the consumer is so much stronger right now than it was in-.
Right.
In 2008, 2009. I, you know, and quite frankly, even in 2008, 2009, when you saw, you know, the market still growing 3% and we still growing 5% through that event, it's largely because, again, eye care is not, really that high, high cost of a for the value it brings.
Yeah.
You know what I mean? It's an essential piece of what people have. Yeah, I mean, you know, we have the portfolio that one would think you would see those activities happening immediately with. You know, we're leading in FRPs. You know, we have clariti, which is the really mass- market silicone hydrogel lens. We're still seeing like our competitors are seeing MyDay being the strongest product, higher-end parts of the Biofinity portfolio selling stronger. We're not really seeing anything that suggests that that's what consumers are doing or planning to do.
Yeah, just to add to that, we're also not seeing any difference really in our store brands versus our own brands. Certainly if you were to see... If there's more of a focus on trying to drive traffic to stores, trying to drive better profitability in stores, it wouldn't be surprising if we're out talking to investors, you know, if there's an economic hit, it wouldn't be surprising to hear us talk about strength in our store- branded portfolio. We've gotten some questions following this earnings call about, "Hey, is there something going on in your, you know, your customized solutions?" Really that part of our business is showing good growth, but it's really aligned with our own brands right now.
When you think about those customizable solutions, you know, it's funny. I always ask people, you know, what lenses they wear, and a lot of times they have no idea. It's just, which always strikes me as, you're putting something in your eyes prescribed. It's a lot of money. Is there a difference in how consumers really perceive like a store-bought brand and versus branded? For the most part, you're getting the lenses where you get, where you get lens, tested. I mean, 1-800 Contacts is a little bit of a different story. For the most part, if you go to Costco, you're gonna go to Costco retail, and then you get your lenses at Costco, or you go to LensCrafters, and then you get lenses.
Do they perceive it differently on the contact lens side, private label versus branded?
I think the only difference you really get is depends on the brand. Like, if you're buying into you know, a discount brand, you probably view it as discount. If you're buying into a premium brand, you're gonna view it as premium. Quite frankly, we sell across the spectrum there. There are brands that we provide to our customers that are actually viewed as a premium over premium, you know, the branded premiums. There's brands that we sell though, to customers that are viewed as a discount. It really is that allows the store or the retailer to put the brand identity behind the product.
All right. From my perspective, I think what came out of last quarter for me and my takeaway was that there seems to be a little bit of separation in share gains emerging with Cooper. You've always been a relative winner over the last couple of years, but are you now kind of a growing winner? Am I kind of reading that right?
Yeah. You know, what's interesting to us is, you know, you know, our own internal data, we've grown share 15 straight years. Our expectation is grow share at, you know, in every year. I think what we're seeing in terms of the differentiation that's interesting, and I, you know, I was just at Vision Expo East talking to customers about it. Certainly, you know, investors should be aware of it. You know, I think the industry kind of looks at us as apples, apples. Here's four companies that look kind of the same, providing kind of the same products to market. When you actually go below the covers, it really is more apple, apple, orange. You know, the three other competitors are providing around 10,000 SKUs to the market.
It kind of is center of the bell curve, eye service in contact lenses. They're kind of contact lens companies in that regard. We provide in the millions of SKUs. I mean, we're literally, you know, 10x, 100x, 80x, more complex in terms of what we provide to the marketplace. We're really delivering kind of a full- service vision model. Using contact lenses. We're not really just providing, you know, a narrow range of products. You know, I think that's a big, big, big difference that our customers value. We do that not only with product range, but we also do it with providing customized solutions in their own brands, by bringing in things like myopia management.
If you go back to the 10 or 15-year-old Cooper that was sort of, you know, a follower in the industry, you're mistaking who we are now. We're really leading the industry in providing contact lens services out there. It really is a very different dynamic that really unveiled itself most in this last round of product launches with MyDay multifocal, MyDay toric expanded range, MyDay Energys. We've suddenly said the 1-day category should serve as many patients as the FRP category. There's no competitor even doing that. There's no competitor even talking about doing that. We're just a different kind of company than the industry.
Well, yeah, I have been thinking about this more lately with Cooper is, you know, how difficult it would it be to exclude Cooper from a practice, like, at this point? I mean, let's say there's four contact lens manufacturers. You know, a lot of practices will use two or three.
Yep.
How many of those practices now look and say, "I can't exclude Cooper. Cooper is The Cooper rep and what Cooper does is important to my practice. Whichever of the two to three manufacturers I choose, one of them now has to be Cooper.
It, you know, partly it depends on what the customer's intent is in going to market. If they intend to serve every customer that comes through their door and have options for them, we have the essential portfolio that's there. Now we also know, you know, not to have too much arrogance around that, you know, we try to be incredibly customer flexible and customer friendly because, of course, you could just serve the center of the bell curve. I mean, contact lenses are just, you know, for most of our customers, it's like 15%-20% of their business. Those that really want to serve the full industry, or the full customer base that are coming through their doors, Cooper is the only one that really provides the range of products that allows that to happen.
you know, and I think, you know, when you combine that with being flexible, with being friendly, with being really adaptive to trying to meet customer needs, I think it makes you pretty indispensable, in the marketplace.
Where do you think the market share is coming from now? I mean, it's always been like, MOIST has always had this target on its back, you know, given the size of it. Is that now bleeding or just have they maintained their base and new fits are increasingly moving to Cooper at a higher rate?
Yeah, I think that's probably the better way to look at it, is its new fits are moving at a higher rate. You know, we are finally seeing the cracks. You know what I mean? I think it really One, they were happening anyway. You're now seeing, you know, new fits being predominantly 1-day SiHy. You're now seeing 1-day SiHy being greater than 50% of the revenues in the 1-day marketplace. You know, this was dominated by those two hydrogel families, the DACP and MOIST. By Alcon putting DACP in play, I think it's giving a license to ECPs to go like, "Yeah, we're switching to 1-day SiHys.
That's what we're doing with all of our new fits. I do think that there's a lot of pressure on J&J because I don't know what the trade-up. They don't seem to have a trade-up strategy for MOIST. You know, Alcon has a very clear trade-up strategy with PRECISION1 for DACP. It's not clear to me there's a trade-up strategy that J&J's put in place, you know, in that range. You know, we look at that as a good source of share. You know, we also look, you know, that Bausch seems to be languishing where they are.
You know, we're looking at it as, you know, we're spending a lot of time looking at wearers too, because I think J&J's done extremely good job of moving up price to hold share. We think wearers are disproportionately we're getting more of those.
How much longer do you think J&J stays disciplined? I ask this because it doesn't seem like you guys are getting ready to step off the gas. You know, I think the economy's holding in well now. Who knows where we're gonna be in another three to six months. Is there any concern that competitors kind of reverse pricing strategies and industry rebates start increasing if things get a little tighter?
Yeah, I think there's two reasons to think that's not going to happen. One is that there's actually a shortage of contact lenses globally. We're seeing service issues with everybody. We even have our own. We tend to find out from our customers that we're the best of everybody, but there... You know, why would you be reducing price in a shortage of supply situation? Demand is greater than supply, not a great environment to do that. I think the second reason why I don't expect to see that kind of behavior is, you know, everybody, you know, that was tried three years ago, nobody won.
We just gave more money back to the consumer. Basically everybody just matched each other. At the end of the day, there was no real value, there was no real benefits to giving giving more away. I think we are seeing is this much more targeted defense of, you know, like if this is a real key customer of mine, you might see, you know, J&J or Alcon or even ourselves running a promotion to try and make sure, you know, you fence, you ring-fence that customer of staying within your product.
You might see a little bit more of that type of activity, but I think the kind of the broad, moves on price, I think they actually we'll continue to see the opposite, which is that the, you know, the industry, consumers didn't react to the price increases that went through, in any way negative, so there's no reason that we can't continue to see prices move up.
Okay.
In, you know, effectively.
All that being said, you did put some level of conservatism in the guidance for like the second half.
Yeah.
In all intents and purposes, you know, you're not sure exactly what's gonna happen, but you're prepared for it if it were to.
Yeah, I would've been more comfortable saying it was conservative before the SVB thing. That changed things a little bit more around, you know, what the heck's gonna go on in the marketplace. you know, we also do believe that fundamentally, the market's a 4%-6% grower. It's probably gonna stay on the high side for a while. you know, when you run, you know, eight straight quarters of double-digit, you start to say, "Well, at some point you're lapping some pretty big numbers.
Okay.
You know, I think, you know, even though it may be seem a little conservative, on the other hand, it's also our pragmatic view that eventually the market goes back to sort of its normal growth rates.
Okay. Just switching over to Europe, I honestly still don't get Europe. Hoping you can explain that to me and just how that is a double-digit grower, kinda right now, 'cause it's just been so strong for you.
Yeah. I mean, I think what we misinterpreted that there was more of a COVID rebound even into 2022.
Mm-hmm.
Like it. We thought we had done a lot of the COVID rebound in 2021. There was still more COVID rebound that was growing into 2022. I think that's part of it. I think, you know, pricing's been a good piece of in the European market, the pricing's held up. You know, key accounts are doing extremely well. For us, you know, since we're really embedded in their strategies, I think that's helped us do better in Europe as a result of that. Europe, for us, as we reported, also includes, you know, emerging markets. You know, so it's, you know, so you get a little bit of an upswing from that as well. I agree.
I think it's been running, remarkably strong. We expect that to kind of return at some point in time. You know, I think those were the factors in why it's been delivering so strong for so long.
Okay. I know China's not a big market for you from a contact lens perspective. It could eventually be from the myopia control perspective. Does China coming back, you know, impact Asia Pac in general? Is there a halo in that region from an activity perspective if China is all of a sudden open, and, you know, it's post-COVID there, maybe a little bit later than everywhere else?
I don't think that we really see a halo from China to other markets. But the COVID opening that is happening in China, the, you know, the phenomenon around that, I think is helping other markets be more aggressive in opening too. I think you're not getting a, you know, a direct halo, but I think China changing its COVID policy is making it, you know, pretty clear that the rest of the countries there, you know, Taiwan, Korea, you know, Japan, are not gonna go probably back on COVID. I think it, you know, that would be the sort of the halo would be sort of in that direction.
Yeah.
Not really in a one-for-one market-to-market type of a halo.
Myopia control, how should we think about the right growth trajectory for myopia control over the next few years? You know, can that be like 100 basis points of growth for CooperVision? Or there's a second part to that is does the below the line contribution from SightGlass Vision eventually kinda impact the growth for, you know, that you can show to your top line?
Yeah. No. Definitely myopia management, it should be able to deliver the 100 basis points for a while. I mean, it does seem like between ortho-k and MiSight, there's, you know, strong growth there on the revenue line and that's really a nice uplift for the overall business. SGV, we're so a long ways out from that being a meaningful deliverer on, you know, below the line. You know, good partnership, you know, good progress being made, you know, there's a lot of investment that's gonna go in that. It's gonna. I think it's, you know, you're gonna see some costs roll through below the line supporting that business as we grow it. Probably not worth factoring a whole lot into any model on any type of short-term basis.
Okay. Could you guys, maybe Brian, put some context on the new investments, you guys are making into 2023, kind of versus the investments kinda you made, you know, several years ago. It just. It's, like, striking, like, to kinda see, you know, the size of what you guys are doing and stepping on the gas again, with this after kinda what you already accomplished, back in, like, 2018, 2019 and 2020.
Yeah. I mean, I think it's hard for investors probably to really put into context the commentary that Dan provided earlier on demand really outstripping supply. When you talk about all of us now, all of the industry having daily SiHys, and we're all saying the same thing, that the daily SiHys are the best, most comfortable, healthiest thing to put into your eye, and you talk about the amount of capacity that's needed to fulfill that demand, it's very, very significant. What warms my heart and makes me really feel confident in what we're doing is our manufacturing capabilities are best in class. That's my opinion. I obviously haven't been through our competition's plans. We continue to put new lines into production with amazing outputs, great yields, great cost per unit, very low defects per million, like just.
They're meeting or exceeding our expectations, you know, quarter in, quarter out. When we talk about the amount of capacity that we need to put in, I mean, we're gonna need to double our capacity in the next five years. We're talking, we already make nearly billions and billions of lenses per year. When you talk about just the manufacturing capabilities, and we talked about the portfolio, Dan highlighted how we're different and differentiated earlier. You also have to make sure that you're matching up on your packaging and your distribution capabilities. As we're adding capacity and we're making our portfolio more complex, we need to make sure the customer experience is great. We need to make sure service levels are great. We need to also make sure that we're compliant in MDR and all the changing regulatory environments.
Customized solutions are becoming a bigger part of our focus. All of these things have to line up in order for us to continue to drive these differentiated approach that we take towards meeting the demand in the market and driving growth in the market with our key accounts and all of our customers for that matter. There's a lot of capacity being put in. Back in those years you're talking about, the platforms were much more specific to the types of lenses that we were coming out with. They're a bit more flexible now. We can make different modalities and different lenses. We don't have to thread the needle as much on as we used to.
The volumes we're getting out of our new lines and is really helping us to drive that forward in a meaningful way.
I mean, do you think that your competitors have the same ability to kind of make these investments? You know, just thinking about it through this question, I mean, you know, one, on one, does one have the focus to do it? Does another one have the ability to kind of drive margins the way they wanna drive margins and still make these kind of investments? Does the other one have the cash to even do that?
Well, I don't wanna speculate, you know, if they can or. I mean, certainly you can throw dollars at anything. Some of our competition has plenty of dollars to throw at things. Whether they will is really the question. We haven't seen it. I mean, it's not something where you can throw a lot of dollars and get there overnight. I mean, remember, we've always been known as great in torics and multifocals, and we continue to expand our parameter ranges. We continue to invest in our manufacturing, packaging, and distribution competencies. It's all about continuous improvement. In order to get there, you have to continue to say, "Okay, what are we doing? How are we doing this? How are we gonna get better?" Those are all learned competencies.
Those are all things that you just can't learn overnight and just, and throw a lot of dollars at. We've been doing this for decades, working with key accounts, doing customized solutions. You know, whether it's dollars, you know, they might have the dollars, but we've also seen some of them talking about rationalizing their portfolio. They're not going in the direction of expanding. They're actually narrowing. It's more than dollars. It's also competencies. Certainly we've been leaning into it and continue to develop more and more. You know, and frankly, even just what you saw in Q1 with our results.
Yeah.
If we put more automation and robotics into production and we can be more flexible and have better, you know, better output to serve the needs of our customers, you know, that'll be room for operating margin expansion, which will drive, you know, future expansion as we leverage that infrastructure.
Yeah. I think one tiny insight, just in terms of for investors to think about in terms of capacity in the marketplace is as MOIST and DACP, decline in terms of their importance in the marketplace, that's capacity that falls out of the industry, that the industry has to replace. When we talk about investments into 1-day SiHy , we're not only building market with that, we also have to be replacing pieces of the market that are. That, you know, the capacity is, you know, now obsolete.
Is traditional-
Those are big families. Those are big families of products.
If you have a large manufacturing presence where you're building traditional hydrogel lenses, the conversion of those manufacturing lines to silicone hydrogel is not possible, requires a lot of money, or do you have to completely revamp the equipment that you kind of purchase to do that?
You know, obviously I don't know everything about how our competitors make product, but my understanding is it would require brand new lines. You're not gonna convert those lines.
Okay.
Yeah.
When does operating leverage become a bigger piece of the investment? I mean, now, after listening to you guys explain the capacity investments, and what you guys are doing, it's like, why am I even asking the question? Like, what, when are you guys gonna drive better leverage to EPS? I mean, when you have this kind of opportunity. Yeah, when are you gonna drive better leverage to EPS when you're gonna have this kind of opportunity ahead of you?
I guess I'll take that one. I mean, I would say we're doing it this year. Implied in the midpoint of our guidance on a consolidated basis is revenues of 7.5%-8% growth on a constant currency on an organic basis. We're delivering at the midpoint roughly 10.5% of constant currency OI growth. I would say that if you think about this year as being sort of our, a new base. You know, call it, around 24%. We should be able to drive incremental operating margin expansion on a constant currency basis year in and year out. We had some factors that from 2019, I got the question on the call about, you know, compare 2019 to this year.
you know, you had about 1.5% from FX and then another 2% from some operational items that I talked about. you know, really, we're in a really good spot now to drive up incremental operating margin expansion. Can we cut costs faster and get to, call it, 27.5%, more quickly? Absolutely. We are really focused on driving, you know, consistent, sustainable top-line growth. That's critical. We're gonna drive operating margin expansion incrementally year after year. We'll wanna reinvest in our business to make sure that we're driving that durable top-line growth.
Okay. We only have a couple of minutes, and I feel like we should have discussed CooperSurgical 'cause it's, it is a bigger piece of what you guys are doing. Is it like a couple of years ago where you just ignore it for like the last question, so the people who CooperSurgical apologize for that. Can fertility remain a, like a double-digit grower for you guys moving forward? That's pretty much what we have time for.
Yeah. I mean, obviously, we talked about the eight consecutive quarters of vision growing double digits, but fertility has grown nine consecutive quarters.
Yeah.
you know, it's I would say the fertility market is probably the best market that we're in for as a company. I mean, it's just the fundamentals driving that market are really strong, and we're in the best position to capitalize on those growth fundamentals. back to the, you know, it's hard to grow double digits continually, consecutively, but certainly we do believe that the market should be growing at the upper end of that single digits, and we should be growing faster than market.
I would expect that's gonna happen for the next several years, if not longer, where we just continue to drive above-market growth, and that's gonna be really one of the biggest driver, that's driving sort of CooperSurgical growth in that mid-single digits.
Do you need the infrastructure of Cook Medical internationally to continue to drive that?
You know, implied in our guidance is already a significant amount of infrastructure investments, including that, including Asia Pac, where Cook Medical was strong. That was gonna happen regardless, 'cause what we were getting was products and registrations, and we would have needed infrastructure to invest to support the business. We're going after those investments. As that business gets bigger, we continue to leverage those investments and to grow into our skin. We're certainly gonna continue to feed that beast and fuel that engine that's driving above-market growth, 'cause there's massive opportunity, whether it's geographic expansion and driving further, getting deeper with our portfolio into certain markets, getting better with our manufacturing competencies, integrating more of those businesses.
We're gonna continue to invest in the long-term growth of that business.
Great. Excellent. With that, Brian, Dan, I think we're out of time. Thank you very much. That was a good session.
Thank you. Appreciate it.