Cooper : REFINITIV STREETEVENTS EDITED TRANSCRIPT Q2 2022 Cooper Companies Inc Earnings Call

REFINITIV STREETEVENTS

EDITED TRANSCRIPT

Q2 2022 Cooper Companies Inc Earnings Call

EVENT DATE/TIME: JUNE 02, 2022 / 9:00PM GMT

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JUNE 02, 2022 / 9:00PM GMT, Q2 2022 Cooper Companies Inc Earnings Call

CORPORATE PARTICIPANTS

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

CONFERENCE CALL PARTICIPANTS

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., Research Division - MD

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 Matthew Ian Mishan KeyBanc Capital Markets Inc., Research Division - VP & Senior Equity Research Analyst

Robert Justin Marcus JPMorgan Chase & Co, Research Division - Analyst

Steven Michael Lichtman Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst Zachary Ross Weiner Jefferies LLC, Research Division - Equity Associate

PRESENTATION

Operator

Good day, and thank you for standing by. Welcome to the Cooper Companies Second Quarter 2022 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference over to your speaker today, Kim Duncan, Vice President of Investor Relations and Risk Management. Please go ahead, ma'am.

Kim Duncan The Cooper Companies, Inc. - VP of IR & Risk Management

Good afternoon, and welcome to the Cooper Companies Second 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, market or regulatory conditions and acquisitions, 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. Should you have any additional questions following the call, please call our investor line at [phone] or e-mail [e-mail].

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

Great. Thank you, Kim, and welcome, everyone, to our second quarter conference call. Let me start by highlighting that our businesses are performing extremely well. Both CooperVision and CooperSurgical posted strong revenue growth, gained share and are continuing to see strong momentum. We're successfully managing through a variety of challenges from supply chain to COVID restrictions in China and we're maintaining our market-leading growth rates. So I'm really pleased with how the year is progressing. For the full year, we're increasing our organic revenue guidance for both businesses by incorporating our Q2 outperformance and the strength we're continuing to see.

Moving to the quarter. Consolidated revenues reached an all-time high of $830 million, with CooperVision at $554 million, up 12%

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JUNE 02, 2022 / 9:00PM GMT, Q2 2022 Cooper Companies Inc Earnings Call

organically and CooperSurgical at $276 million, up 40% as reported or up 6% organically. The quarter was led by strength in CooperVision's daily silicone hydrogel portfolio and our myopia management products and CooperSurgical's fertility business, which posted another double-digit growth quarter. Non-GAAP earnings per share were $3.24, and Brian will provide the details, but this quarter was negatively impacted by FX in our contact lens solutions business.

Moving to CooperVision and reporting all percentages on an organic basis. Our revenue growth was strong and diversified as we grew nicely in all product categories, spheres, torics and multifocals within all 3 geographic regions. The Americas were up 8%, EMEA grew 17% and Asia Pac grew 11%. This resulted in nice share gains, which is impressive following our strong Q1 performance. And for those of you tracking calendar quarters, our calendar Q1 organic growth rate was 16% against the market we estimate grew 12%. So strong numbers, and we remain well positioned to continue gaining share as we launch new products, expand product ranges, provide market-leading flexibility through our customized offerings, execute on key account relationships and deliver fantastic customer service.

Regarding products, our daily silicone hydrogel lenses posted very strong results, growing 28%. Daily silicones continue to lead the market, and we offer the broadest portfolio in the industry. Our premium 1-day offering, MyDay, is available on a broad range of spheres, torics and multifocals. And while all these categories are performing well, it's worth highlighting the multifocal. The launch of the MyDay multifocal is still limited geographically, but it's rapidly taking share in markets where it's available, and we'll continue rolling it out as we progress through the year. The feedback from optometrists on our breakthrough binocular progressive fitting system remains fantastic, and patients are continuing to say the lens is the best multifocal they've ever worn.

This success is also driving a nice halo effect on our already successful MyDay spheres and torics, so we remain very optimistic about the future of this brand. The other brand in our daily silicone hydrogel portfolio is clariti, which is also available as a sphere, toric and multifocal and is typically sold into more of a mass market setting. This lens performed really well again this quarter, especially in our Asia Pac region, where we're continuing to roll out this year in Japan. Our silicone FRPs, Biofinity and Avaira reported another solid quarter of 8% growth. And lastly, as an umbrella comment about all these offerings, I'm happy to report that we're seeing an uptick in the growth rate of our branded product sales. As many of you are aware, we take a lot of pride in our customized offerings, which includes customer brands, but our own high-quality CooperVision brands are also showing strong growth, especially MyDay.

Moving to myopia management. We posted revenues of $23 million, up 61%, including MiSight up 144%. The specialty part of our business is extremely healthy, driven by growing traction in key accounts and continued strength with private practitioners. We have some challenges in China, where COVID restrictions are hurting our ortho-k sales and impacting our MiSight launch but the rest of the world is performing really well. MiSight, in particular, is excelling in all geographies as the ophthalmic community continues to embrace the growing myopia management segment of the market. And on another encouraging note, we're also seeing positive halo trends with our tracking data showing customers who are selling MiSight are accelerating their selling of our other lenses.

Moving to SightGlass, myopia and management glasses. We closed our joint venture with EssilorLuxottica in March, and we're already seeing exciting progress, including additional availability of the product in additional markets such as China. Regarding an FDA approval, the 3-year clinical data for SightGlass is being compiled right now, and we look forward to receiving the data and sharing it with the FDA in the near future.

So in summary, we're seeing strong momentum in all areas of myopia management, and we expect to continue posting strong results. Before moving to market data, let me touch on our contact lens solutions business. Recent supply challenges have hit this operation hard, and we've experienced a significant decline in sales. Given this, we completed a strategic review and confirmed this is a nonstrategic business in a declining industry that's going to require a lot of capital to upgrade the facility. So we decided to exit the business by fiscal year-end. From a financial perspective, we expect this business to report roughly $20 million in revenues this year, down from $44 million last year. We are excluding these results from our organic growth rates to ensure transparency and comparability, and Brian will provide additional color on the rest of the P&L in a few minutes.

To wrap up on CooperVision, the contact lens market is performing exceptionally well, even in the face of continuing COVID challenges. Growth in daily silicones and an increasing prevalence of childhood myopia are offsetting the lower patient traffic tied to COVID. We expect global growth in the industry to remain strong as patient traffic continues to improve, and we look forward to what should be a

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JUNE 02, 2022 / 9:00PM GMT, Q2 2022 Cooper Companies Inc Earnings Call

strong back-to-school season this fall. Growth is also supported by the macro trends around vision correction, including that roughly 1/3 of the world is myopic today and that is expected to increase to 50% by 2050. For CooperVision, we have a robust product portfolio, ongoing product launches, a fast-growing myopia management business, and our fit data remains very strong. So we remain very bullish on our future.

Moving to CooperSurgical. We posted another strong quarter led by double-digit growth in our fertility business. Our OB/GYN medical device portfolio also returned to growth, and our stem cell storage business posted a solid quarter. We did have some unexpected weakness in PARAGARD, but believe our performance track the broader IUD market, which hasn't rebounded as fast from COVID as other areas. Walking through each of these, let me start with fertility. Fertility posted sales of $114 million, up 15%. Strength was seen throughout our product portfolio of consumables, capital equipment, genomics and donor ag activity. Particular strength was seen from our RI Witness products, which comprise our proprietary automated lab management system that clinics implement to maximize safety and security by optimizing their lab practices along with strength from our AI-based genetic testing, which doctors used to select the best embryo transfer.

Moving to our office and surgical category. We posted sales of $162 million, down 1%. Our OB/GYN medical devices grew 3%, which was strong given this is the area where we were most impacted by global supply chain challenges. Particular strength in this business unit was seen within our labor and delivery portfolio and laparoscopic closure products. Moving to our stem cell storage business that we entered with the Generate acquisition, sales grew 5%. There is a ton of activity right now integrating this business into CooperSurgical, and it's going well. The teams are seeing early success on commercial synergies, and they have some exciting ideas to drive additional growth synergies. So I remain bullish on our future in this space.

Lastly, on PARAGARD. Sales were down 6% for the quarter, and we're continuing to see softness in the market. This certainly doesn't appear to be product-specific as the entire IUD marketplace has remained under pressure with lower volumes driven by lower patient flow and what we believe is a temporary shift in buying behavior to birth control pills with telemedicine. We're closely monitoring the market and we remain cautiously optimistic we'll see a return to pre-COVID levels as we move towards the end of the year.

To wrap up on CooperSurgical, let me highlight a few key takeaways. First, we're seeing success from our Generate acquisition, both on the fertility and stem cell storage parts of the business. There are a lot of commercial synergies that we're capitalizing on, and this acquisition is certainly looking like a success right now. Second, our fertility business continues to perform extremely well. This is a solid growth industry with strong macro trends, and we continue forecasting long-term market growth of 5% to 10% with us in the upper part of that range. Lastly, our team has completed 6 acquisitions since the beginning of last fiscal year, and they've maintained market-leading customer service and strong sales even while integrating these businesses and managing through significant supply chain and logistics challenges, so impressive performance.

To conclude, we operate in recession-resistant industries with strong macro growth trends. Additionally, significant amounts of our sales are annuity in nature. So we need to be resilient in times like this, investing intelligently to capitalize on growth opportunities while ensuring we're advancing our infrastructure projects to support our growth. We'll remain sensitive to the challenges facing us and be proactive managing our businesses, maintaining a focus on delivering long-term shareholder value. This includes continuing to make progress on our ESG initiatives. We just released our second ESG report, which highlights progress in several important areas, and you can find this report on our Investor Relations page. And lastly, I'd be remiss if I didn't thank our fantastic employees. It's their hard work and dedication that drives our success and makes Cooper such a special place to work. So a big thank you to all Cooper employees.

And with that, I'll turn the call over to Brian.

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.

Second quarter consolidated revenues were $830 million, up 15% or up 10% organically. Consolidated gross margin was 66.7% down 140 basis points from last year, driven primarily by currency. Operating expenses grew 18% and were 42.2% of revenues, primarily as a

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JUNE 02, 2022 / 9:00PM GMT, Q2 2022 Cooper Companies Inc Earnings Call

result of the acquisition of Generate Life Sciences and higher R&D investments. Consolidated operating margin was 24.5%. Within this, we did see challenges from supply chain and inflationary pressures, but our teams did a nice job managing costs and price increases and continuing efficiency improvement initiatives, such as the consolidation of CooperSurgical's production into Costa Rica helped offset the impact.

Interest expense was $10.8 million, and our effective tax rate was 13.7%. Non-GAAP EPS was $3.24, with roughly 49.7 million average shares outstanding. Year-over-year FX negatively impacted earnings by $0.53 in the quarter, which was $0.15 worse than we forecasted at the time of our last earnings call. One point to mention is that a large portion of the quarterly FX loss was from the remeasurement impact of yen and euro-based intercompany trade receivables. These remeasurements happen every quarter, and the net amount is usually relatively small. However, significant currency moves towards the end of the quarter resulted in a larger loss in other income and expense.

The other unusual item from this quarter was the operating loss from our contact lens solutions business of roughly $0.05. To add some color to what Al mentioned earlier, this has not been a profitable business for us this year. We had a recall in Q1, which resulted in low sales and an operating loss. We expected the business to rebound in Q2, but continuing supply chain challenges prevented that. And Q2 sales were only $4.4 million with a roughly $2.7 million operating loss. From a non-GAAP perspective, we recognized and excluded many costs from the shutdown decision this quarter. But the business remains operational, so activity remains in our non-GAAP P&L and will remain so until we exit the business at fiscal year-end.

Returning to the quarter. Free cash flow was $88 million. Net debt decreased $125 million to $2.86 billion and our adjusted leverage ratio reduced to 2.59x. Net debt decreased by more than free cash flow due to the positive impact from closing the SightGlass Vision joint venture.

Moving to guidance. We're increasing our revenue growth ranges for CooperVision and CooperSurgical to include our Q2 results and the strength we're continuing to see in our markets, offset mostly by the impact of currency. For EPS, we're updating our guidance to reflect the negative impact of currency and interest rates but holding it unchanged outside of that. Outside of that, there are a number of moving parts, but ultimately positives such as higher revenues, efficiency efforts, and a lower effective tax rate are offsetting supply chain inflationary pressures and the negative impact of the solutions shutdown. This all results in a consolidated revenue guidance range of $3.280 billion to $3.312 billion, up 9% to 10% organically with CooperVision revenues of $2.225 billion to $2.247 billion, up 10% to 11% organically and CooperSurgical revenues of $1.055 billion to $1.065 billion, up 6% to 7% organically.

Non-GAAP EPS is expected to be in the range of $13.09 to $13.29. For interest expense, we're assuming a 50 basis point increase in both June and July and a 25 basis point rate increase in September. Regarding currency, the year-over-year impact from FX is now a roughly 5% headwind to revenues and a 14% headwind to EPS. Although we don't provide quarterly guidance with a number of moving parts, let me add that we expect Q3 earnings to be similar to Q2 driven by the significant negative impact of currency for the quarter. We also forecast a large increase in interest expense in Q3, but expect that to be offset by a lower tax rate. For Q4, we expect a rebound in EPS, led by a lower pound flowing through our cost of goods, helping CooperVision's gross margin.

And note, this guidance does not include our pending acquisition of Cook Medical's reproductive health business. That transaction is still pending regulatory approval, and we'll update you once we're closer to completing that process.

And with that, I will hand it back to the operator for questions.

QUESTIONS AND ANSWERS

Operator

(Operator Instructions) Our first question comes from Matthew Mishan with KeyBanc.

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