Q2 2022 Cooper Companies Inc Earnings Call
Ladies and gentlemen, your conference is scheduled to begin momentarily. Please continue to standby and thank you for your patience.
[music].
Oh no.
Good day and thank you for standing by welcome to the Cooper companies' second quarter 2022 earnings conference call. At this time, all participants are in a listen only mode. So.
So to speak of the presentation there'll be a question and answer session to ask a question during the session you'll need to press star one on your telephone we ask that you limit yourself to one question with one follow up to ensure that everyone can ask a question. Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to you.
Today, Kim Duncan Vice President of Investor Relations and risk management. Please go ahead ma'am.
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.
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 that could cause our actual results 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.
Two filings all of which are available on our website at Cooper codes Dotcom should you have any additional questions. Following the call. Please call our Investor line at 90, 546036, 63 or email <unk> at Cooper co Dot Com and now I'll turn the call over to al for his opening remarks.
Alright, Thank you, Tim and welcome everyone to our second quarter Conference call. Let me start by highlighting that our businesses are performing extremely well, both coopervision and Cooper surgical 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-19 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% organically and Cooper surgical at $276 million up 40% as reported or up 6% organically.
The quarter was led by a strike at Coopervision is daily silicone hydrogel portfolio, and our myopia management product and Cooper Surgical'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, <unk> and multifocal and within all three geographic regions. The Americas were up 8% EMEA grew 17% in 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 or 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.
Cute 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 one day offering by day is available on a broad range of spheres, toric and multifocal and while all of these categories are performing well, it's worth highlighting the multifocal and the launch of the <unk> Multifocal is still limited geographically, but it's rapidly.
Taking share in markets, where it's available and well continue rolling it out as we progress through the year.
Feedback from optometrists on a breakthrough binocular progressive fitting system remains fantastic and patients are continuing to say the lenses the best multifocal they've ever worn.
This success is also driving a nice halo effect on our already successful <unk> spheres and <unk>. So we remain very optimistic about the future of this brand.
The other brand in our daily silicone hydrogel portfolio as clarity, which is also available as a sphere toric and multifocal and is typically sold into more of a mass market setting.
This was performed really well again this quarter, especially in our Asia Pac region, where we're continuing to rollout the sphere in Japan.
Our silicone frp's bowel affinity and <unk> reported another solid quarter of 8% growth.
And lastly, as an umbrella comment about all of these offerings I'm happy to report that we are 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 my day.
Moving to myopia management, we posted revenues of $23 million up 61%, including my site 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-19 restrictions are hurting our ortho K sales and impacting our buy side launch, but the rest of the world is performing really well.
<unk> 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 though we're also seeing positive halo trends with our tracking data showing customers who are selling my site are accelerating or selling out of our other lenses.
Moving to site glass myopia management glasses, we closed our joint venture with Essilor Luxottica 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 three year clinical data for site glass 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 confirm 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-19 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 strong back to school season. This fall.
Growth is also supported by the macro trends around vision correction, including a roughly one third 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 fifth data remains very strong so we remain.
Bullish on our future.
Moving to Cooper's surgical we posted another strong quarter led by double digit growth in our fertility business. Our obgyn medical device portfolio also returned to growth in 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 egg activity particular.
Particular strength was seen from our our I witnessed 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 Dr. Doctors used to select the best embryo transfer.
Moving to our office and surgical category, we posted sales of $162 million down 1%.
Our obgyn medical devices grew 3%, which was strong given this is the area, where we were most impacted by global supply chain challenges particular strike 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 Cooper surgical 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.
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 is 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 will receipt will see a return to pre COVID-19 levels as we move towards the end of the year.
To wrap up on Cooper surgical let me highlight a few key takeaways first we are 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 in 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 six acquisitions since the beginning of last fiscal year and they maintain 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 and 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 are advancing our infrastructure projects to support our growth.
We remain sensitive to the challenges 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 think 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 .
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.
<unk> 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 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 Coopers surgical's production into Costa Rica helped to offset the impact.
Interest expense was $10 8 million and our effective tax rate was 13, 7% non.
non-GAAP EPS was $3 in 2004 with roughly $49 7 million average shares outstanding.
Year over year FX.
<unk> negatively impacted earnings by <unk> 53 in the quarter, which was 15 worst than we forecasted at the time of our last earnings call.
One point you had mentioned is that a large portion of the quarterly FX loss was from the Remeasurement impact of yen and Euro based intercompany trade receivables.
These re measurements 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 items from this quarter was the operating loss from our contact lens solutions business of roughly five.
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 lower sales and an operating loss.
We expected the business to rebound in Q2, but continuing supply chain challenges prevented that in.
In Q2 sales were only $4 4 million with a roughly $2 $7 million operating loss.
From a non-GAAP perspective.
We recognized an 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 259 times.
Net debt decreased by more than free cash flow due to the positive impact from closing the safeguard vision joint venture.
Moving to guidance.
We are increasing our revenue growth ranges for coopervision and Coopers surgical 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 in holding it unchanged outside of that.
Outside of that there are a number of moving parts, but ultimately positives such as higher revenues.
<unk> efforts and a lower effective tax rate.
Our offsetting supply chain inflationary pressures and the negative impact of the solutions shutdown.
This all results in our consolidated revenue guidance range of three to eight zero to 3.312 billion up 9% to 10% organically with coopervision revenues of $2 to $2 five to two to $4 7 billion of 10% to 11% organic.
<unk>.
And Cooper surgical revenues of one point <unk> five to $1 65 billion up 6% to 7% organically.
non-GAAP EPS is expected to be in the range of $13 nine.
To $13 29.
For interest expense, we're 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 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 will update you. Once we are closer to completing that process.
And with that I will hand, it back to the operator for questions.
Thank you as a reminder to ask a question you will need to press star one on your telephone.
Sorry. Your question. Please press the pound key.
Yourself to one question with one follow up please standby, while we compile the Q&A roster.
Our first question comes from Matthew <unk> with Keybanc. Your line is open.
Hey, good afternoon, guys and thank you for taking the questions.
A lot of moving pieces here, but I'll start with.
The bigger macro piece are you guys seeing any kind of change in consumer activity or due to linked to inflation.
We've been saying.
Sure.
I think Matt it's a little different depending upon where you are around the world right because.
Some markets are obviously.
Quote unquote back like the U S. And then other markets are in situations, where it's quite a bit more restricted but.
As of today I would say, we have not seen a lot of consumer activity changes because of inflation I wouldn't highlight that as something that we've really seen.
Okay.
And then I'm not sure if I missed it or not but what is your expectation for.
<unk> for myopia control this year as far as as far as <unk> goes.
And how much of how much of that $100 million was China, I guess, including New York Okay.
Yes, I wont break out all the China details.
The thing that's hurting us probably more than anything right now ends up being currency.
Because that's impacting a lot of our sales around the world.
We still have a chance to get to that $100 million, even in the face of currency even in the face of the China shutdowns that we've seen in Shanghai, that's negatively impacted the my side launch over there it's negatively impacted our sales, but we have so much strength with my side, especially here in the U S and throughout Europe that I think we still have a chance to get to a $100 million maybe.
Because of currency $95 million to $100 million when I roll in currency in China, and everything else, but but I am not giving up right now on the possibility of getting to $100 million.
Thank you very much.
Yes.
Thank you.
Next question comes from Larry Nicholson with Wells Fargo. Your line is now open.
Good afternoon, and thanks for taking the question just one on Cook medical and one on <unk>.
EPS guidance for Brian So I'll, just an update on medical the Cook medical deal and next steps confidence that the deal will close in late.
Calendar.
2002, and do you expect.
Potential divestitures.
Economics changed.
The accretion changed.
From the old economics, it's just a different starting point and I had one follow up.
Yes, I'd love to give you some more information on that Larry Unfortunately, I don't have much to give.
We're in discussions right now with the FTC to try to sort things out and get that thing.
Moving forward quickly and hopefully getting it sold so theres not much to add outside of that right now as soon as we know more we start making progress to get resolution and try to get that closed.
Certainly update everyone.
Okay.
Fair enough and then Brian could you bridge, there's a lot of moving parts kind of the old EPS guidance to the new EPS guidance you gave the pieces, but can you give the numbers how much worse is FX.
Excuse me, an EPS standpoint interest.
The.
Contact lens solution, just kind of the pieces you called out can you kind of give us some numbers on that and tax thanks for taking the questions.
Yeah, sure Hi, Larry so.
The midpoint of our last guidance is $13 95, the FX detriment to Q2 was 15.
The second half FX detriment is 41.
And the interest expense.
Degradation, if you will from the fed increasing rates 50, 50 and 25.
Is 20.
So youre 13, 95 gets brought down to 13 19 solely from FX and interest expense and what we said was higher revenues the efficiency efforts that we're undertaking.
And the lower tax rate helped to offset.
The supply chain and inflationary pressures as well as the lens care exit.
<unk> that we're likely to see in the back half of the year.
Alright, thanks for taking the questions.
Our next question comes from Jason <unk> with Piper Sandler Your line is now open.
Hey, good afternoon, thanks for taking the questions here.
Al or Brian when I am looking at the model and really trying to update it for the I guess the implied margin outlook for the year. It looks like maybe we settle out around 25% per adjusted operating margins. This year, maybe I'm off a little bit I'm just trying to go back of the envelop here quick, but that's obviously come down quite a bit for FX and how much do you think you can get back purely.
From pound and foreign weakness that could flow through next year.
And then are there any cost actions or spending decisions you can make on SG&A to recapture what's been lost here in fiscal 'twenty two.
Yes.
The pound as everybody knows the pound is.
<unk> is a six month lag so we're going to get some benefit from the pound in the fourth quarter.
So as the pound weakened that certainly has a nice impact to cost of goods will have to see what happens on revenues obviously the impact to revenues. This year has been so significant so any move in the right direction significantly helps now when you look at your operating margin of around 25%, Yes, I would say that's in the ballpark that certainly fits within the guide.
So we've suggested.
It's really just being been drip being driven down primarily by currency, we're certainly going to get some opex leverage from more of the integration efforts that we're undertaking we've been accelerating accelerating our integration efforts I'll mentioned the six deals we did since the beginning of last fiscal year, we've moved faster to integrate generate.
As an example fertility is move is integrating faster.
But in general.
We're integrating those more quickly generate is going to get some more opex leverage next year.
And then just the continued moves that we're making around Costa Rica Youll get the full benefit next year, we put a power plant in place.
In Puerto Rico that will help.
Gross margin next year, so I'd say overall gross margins should be up on a constant currency basis.
With boat within both divisions at least a little bit next year and operating margins, we should get some leverage out of out of Opex next year on a constant currency basis.
Okay, Alright, that's helpful very helpful. Thank you.
And then maybe just as a quick follow up Brian I know many of US have an experienced interest rate movements like we've seen and are expecting to see here this year.
Your variable rate that's been great for multiple years, but I guess just the question here is.
Is there a philosophical change on converting that floating rate debt that you have to fixed.
Avoid some of the sensitivity of that.
The variable rate.
That creates just at this.
The pace of rate increases accelerates even further.
For now the.
The decision is to really stay the course I mean, we have been.
Just like currency interest rates are going to move and bounce around.
We're I'd say, our first priority with respect to capital allocation is to pay down debt, so where we're going to generate a decent amount of free cash flow in the back half of this year that.
That will go towards paying.
Paying down debt and investing back in the business like into Capex, but.
We're still going to be able to take out a decent chunk of that in the back half and that will continue next year.
So we'll have to see how things play out.
But for now where we're going.
To stay the course.
And as everybody knows we have a $1 billion hedged at fixed for another several years, so as we take down that debt.
It'll it'll help offset some of the interest rate moves.
Alright very helpful. Thank you.
Thank you. Our next question comes from Chris Cooley with Stephens. Your line is now open.
Good afternoon, and thanks for taking the questions just two for me if I. My first just near term when we think about just the margin structure. There was you had an acceleration in daily silicone hydrogel sequentially just in terms of the growth rate. So as we think about the mix kind of going into the back half for the year ex currency can we start to.
Think about a little bit better margin profile overall.
With growth in myopia management as well as some of these premium offerings just within the broader CVI portfolio.
And then just for my follow up just a little bit curious that maybe I didn't catch this in the prepared remarks, but you mentioned an improvement in the outlook for PARAGARD.
And sort of exiting the fiscal year, but wasn't sure. If you are now expected to see actual growth year over year in the franchise and so just trying to think about how to how to square that as we trend through the back half of the year. Thank you.
Sure, Chris I will take the PARAGARD I'll, let Brian comment on the margins for vision in Q3 Q4.
For PARAGARD, we're going to see a pretty sizable year over year decline in Q3, you may remember, we took a price increase last year in Q4. So we had some <unk> associated with that so what youre going to end up seeing in Q3 and Q4.
We'll be on a year over year comparison basis, a decent decline in Q3, and then strong growth in Q4.
I mean thats just how the numbers are going to play out what we're seeing some right now is.
A lack of traffic patient traffic basically is heard and iuds, and we think that thats going to <unk>.
To start to improve a little bit here, because one of the things we've seen historically.
And we believe we are seeing now is youll see when this is happening some of the channel inventory gets burned down that's out in the field and then that at some point levels off.
And at some point even increases back up so we think from a channel inventory perspective, and we think from improvement in just patient traffic and obgyn offices will start to see a general increase here as we get into Q4, but yes, we're expecting a challenging quarter. If you will in Q3, certainly from a comp perspective and even patient.
Traffic and then starting to improve some in Q4.
So on the.
On the gross margin question I would say that currently is just having a bigger impact on our margins in the back half of the year than really anything else. I mean, certainly there are puts and takes when you look through FX.
Myopia management is as a positive to gross margins, but we're seeing really rapid acceleration.
Back into daily Si highs and so that puts a little bit of pressure on our gross margin so that'd be kind of.
One of the offsets I think Q3, we always have a little bit of negative manufacturing variances that that that hit us in Q3 from from shutting down our lines in the first fiscal quarter of the year. So that's going to be a little bit of a headwind.
And then you get some benefit like I said in cost of goods within from FX in the fourth quarter.
And the business is going to be performing really well in the fourth quarter with less of a well with strength in both businesses. So I would say nothing really tied to myopia management, but the puts and takes are kind of those couple of elements.
Sure.
Thank you.
Our next question comes from Jon Block with Stifel. Your line is now open.
Thanks, guys good afternoon.
Maybe just first on CVI, a solid increase in the CVI organic growth for fiscal 'twenty, two I guess sort of a couple of questions in here. It seems like a 100 bps of that roughly is exiting.
The solutions business, if I have that right al or Brian maybe you can comment there and then al. If you can just talk to how price is trading in the market for fiscal 'twenty, two and how that compares to prior years.
Sure, Yes, you're right on the.
Solutions side of thing that's about a point right going 44% to 20. So when you remove that you pick up a point.
And then outside of that you have several different positives a prices are positive we took some price at the beginning of this year.
Frankly, we don't have it in guidance, but will probably take some additional prices my guess as we move through this year to offset some of the inflationary pressures.
And then you have Brian alluded to it there.
And daily Si highs.
We're just really strong in that market, we have the best portfolio in the daily silicone hydrogel marketplace. So youre getting good growth there.
Fair you know when we did our last earnings call in early March It was one week after Russia invaded Ukraine. So we probably had a little conservatism in the back half of the year and our Q3 Q4 organic growth rates for coopervision.
We've worked through that we're continuing to see nice trends in all three geographies and with all of our markets. So taken up guidance, even as much as we did.
Seem to make a lot of SaaS.
Got it that's helpful color. Thanks, and then oxy shift gears and move over to CSI more specific fertility I just love your thoughts.
Really solid fertility numbers, but your thoughts on the consumer call. It for this segment so expensive treatment on one end, but then on the other end call it sort of a finite window for that individual and their childbearing days. So.
And inflation just continues to spiral out of control, we get a weakening consumer over the next 12 to 18 months just your thoughts on fertility and what it means for that particular business. Thanks.
Yes, so as of now we haven't seen anything and I think youre spot on.
When you talk about a limited window so.
When a woman decides she wants to have a baby.
Time is our enemy you need to go in and go through the IVF process. As soon as you can trying to have a baby. So a lot of times the cost ends up being secondary. This is one of those areas where cost is secondary to the.
The actual process itself. So the other thing you have is you've just got an industry fertility as an industry is a pretty high growth marketplace. So when we look at the number of new clinics that or comment on when we look at upgrades within existing <unk>.
Clinics for capital expenditures and so forth that are going on when you look at all of that activity on top of the fact that going through fertility treatments is becoming more common if you will more accepted in and so forth youre seeing just really strong underlying growth of the industry.
As you know, we do well in that space. So we participate in that growth. So I think even if you get a situation here, where the economy moves closer to a recession or even into a recession that that will be a very recession resistant industry. We've seen that in the past I don't see any reason that would change right now.
Got it perfect. Thanks for the color guys.
Yes.
Thank you. Our next question comes from Joanne Wuensch with Citibank. Your line is now open.
Thank you and good evening asked the same question for contact lenses as you just answered for women's health historically and also very recession resistant.
That in the current environment.
Yeah John .
No.
Been doing this a long time, so we've been through several recessions and we've seen contact lens growth come back a little bit in some of the recessions, but frankly, even when it comes back as a market. It's still kind of a low single digit grower I think even in some of the the worst parts of prior recessions, we were still kind of a mid single digit grow or so with the underlying fundamentals there.
I would say similar to fertility and that more people are becoming myopic right. A third of the world is myopic today, it's going to be 50% in 2050, the underlying growth factors for vision correction or just powerful they're just there and its just happening so regardless of what happens with respect to the economy people.
We're going to need visual correction now there could certainly be a little bit of a difference in terms of what people are buying is everyone going to buy some of the highest priced daily silicones hitting the market or do they buy some more biocenology or do they buy some clarity or something else there can be a little shift in buyer behavior, but underlying growth is going to remain there even then.
Any recessionary type of environment contact lenses are just they're a great industry to be in from that perspective.
And a follow up question historically at one stage you had a foreign exchange hedging program I don't believe you have that currently are there thoughts to put that back into place and thank you.
Hi, Joanne.
Yes.
I instituted that program and I don't know 2006, and I think we ceased at around 2011 and 12.
But it's been several years now.
Just made that decision a long time ago not to hedge because not only is costly and it requires resources and is time consuming.
But.
Unless youre going to manage your business differently, all youre doing is delaying the inevitable you're delaying it.
If you are hedging something you know what to expect some period of time ahead of time, so unless we're going to change the way that we're going to operate our business from doing hedging. It ends up just being not worth it ends up not being not worth the time or the effort or the cost to do it. So now that the yen is where it is and everything is kind of in a bad place would probably be.
Horrible time to start hedging.
Of course.
Still could go continue to go in the wrong direction, but you know I'm a bit of an optimist hopefully we get a little bit of relief here over the next couple of quarters, but no. There's no there's not going to be any change to your hedging strategy.
Yeah, I'd add on that one quick add which I don't know if everyone saw it or not but as we were working through this and talking about the scrip and reconciling things and so forth and the FX loss that was in our other income and expense. It was interesting today that Microsoft just came out and made a statement about that and talked about the impact.
From the exact same thing we saw in the month of April So I don't know if other people see it but but.
Microsoft announced that today and we had the same thing happened. So it won't surprise me if you see it from some other people.
Thank you.
Our next question comes from Jeff Johnson with Baird. Your line is now open.
Okay. Thanks, guys good evening.
We want to make sure I understand this but when you talk about 12% market growth for you guys in the market in Q1 calendar Q1, and you guys 16 does that.
<unk> percent I'm, assuming this time youre getting to that I, just kind of looking at the four companies growth rates is that right. It's not like a CLI data and market kind of number that's a looking at kind of the four companies.
Yes true true growth of the market. If you will right because CLI has gross data rather than net data. So it doesn't take into consideration all discounts at JFK doesn't capture the whole market all of that kind of stuff. So yes, I have a tendency to just look at what companies actually reported.
Yes, I would agree and I mean, what Alcon will talk about in their quarter about like mid single digit market growth.
And GSK and that Mark sell out and that you are looking at more of a pain. If you will sell in for you guys to the distributors or to the end market.
That's correct yeah, yeah, Okay and then.
On that point, your 16% and even your daily Si Hy number probably a little stronger than we were expecting here. This quarter I think we've been hearing a little bit of increased chatter around things like precision one and things.
Things like that but you guys seem to be holding in well there. So just any update you're seeing kind of competitive environment, especially with some of these new products rolling out from especially all kinds of models.
Yes, so I think some of those guys well alcon is doing really well they have a big portfolio of legacy Where's that.
Be trading up and there'll be trading up I'm sure for a long time.
That the story kind of remains the same to some degree if you will for US which is we don't have as large a legacy portfolio to trade up but we're winning our fair share certainly of new fits so I think that that's probably the differentiator. When you are talking about new fits new wears coming into the market.
Talking about products like my dad, and clarity, where we're certainly winning our fair share of that new FID activity. So I think thats. The thing Thats held up really well continues to hold up well based on the latest data I've seen which is a really good sign for us because frankly, that's where we need to get a lot of our growth from we can't get as much from trading up legacy, where so we have to be able to win new.
Whereas coming into the market.
Yes, understood and then last one I've got just on my side I've got you at about 18 million year to date now it seems like youre going to come short of that $50 million, but yes, I hear you on still feeling okay. Maybe at the 100 million myopia, where you add on thinking about the $50 million from my side and then just talk maybe about the stability of kind of the <unk>.
My site, where we are now rolling over into year, one or one five.
All in this macro environment are you seeing any kind of drop outs from those established whereas now.
Thanks.
Yes, I just had that came update that.
Number is on my side for wearers, and it's a little different geographically, but but it was running kind of in the 85% to 95%.
Retain its rate if you will going into multi year. So so not a lot of change from what we've seen in the past, which which I'm really happy to report right. It's working for US very significant number of kids and then they are staying in the lens, which is great news.
On my side, Yes, I was kind of expecting 40 to 50 this year, depending upon what happened with China.
We're still going to be in that 40% to 50, I wouldn't change that range to get to 50, we're going to need.
Some uptick in China, I mean, we should be farther ahead, ideally a lot of our activity, including some of our distribution activity is literally through Shanghai.
So the shutdowns in Shanghai has certainly hurt us now.
The activity when we first launched that in China. In first went in there was really strong it was definitely stronger than I thought it was going to be so we received some early kind of pick up if you will there and then all of a sudden it really shut itself down here now Shanghai, just started kind of reopening a little bit here in the last day or two so.
Hopefully, we get some improvement I mean, if we get kind of a snap rebound on that I still think we could probably move up maybe towards that $50 million, but I think it will be somewhere in that 40% to 50 and.
I think we still have a decent chance to get to a 100, if if the market in China comes back a little bit because we will pick up a lot of that ortho K activity, but I still think it will be at least mid nineties.
Okay. Thank you.
Thank you.
Our next question comes from Zach <unk> with Jefferies. Your line is now open.
Hey, Thanks for taking the question just.
One on the strong performance from the vision care business.
Could you parse out some of the share gains.
For switch fits versus new fits.
Uh huh.
I would love to but no it does.
Incredibly difficult to get because of trade ups. So when you get trade up activity and how it all gets classified in terms of switches and new fits and so forth, but when you look at our route on a global basis, it's just viciously difficult to get into.
I think that it kind of as a general comment you'd see we're doing really well when it comes to new fits, especially in toric and multifocal.
We're certainly doing fine and spheres, but I would say, that's where we're seeing strength, but it's hard to get those numbers I mean, even you'll see some stuff from GSK in places, but it's like partial data and only in certain markets, it's hard to get that level of granularity.
Understood.
It's helpful.
That was my only question. Thanks.
Yes.
Thank you. Our next question comes from Andrew Blackman with William Blair. Your line is now open.
Hey, Good afternoon, guys. This is Mike on for Andrew today. Thanks for taking my question, maybe just dig in on your comments a little bit more on the expected FX headwinds.
The interest rate impact to the bottom line can you sort of level set us from a strategic standpoint.
Around how you're spending and that sort of environment, we find ourselves then.
Something that will cause you to pull back a little bit.
What are you doing a better balanced spending here just given the macro backdrop.
Yeah.
A really good question, Mike you know I mean, we've spent.
Quite a bit of time thinking through that.
We ended up saying, hey, the fundamentals of our business vision and surgical are really strong right now and we're taking share in the vision space. We've got a bunch of great products, we're launching products around the world and expanding parameters. We've got a lot of good things going with fertility and we're gaining some traction on some of them are medical devices and international.
Med device. So we kind of looked at it and said man you hate to take the foot off the pedal as hard to get momentum.
Now that we have momentum, we really want to keep it. So we ended up saying, okay. We have different different factors pushing and pulling on that side of things and we said, okay well if we if we exclude FX and we exclude the interest rate increases can we continue to do everything that we wanted to do as a business can we invest everywhere.
We want to invest can we hurdle the solution stuff, Ken we hurdle as supply chain and inflationary pressures and everything else right and then you pulled out a partner like yeah, I've got price increases here I've got some growing revenue.
Got a lot of different positives cost containment efforts and initiatives that I can net all that kind of stuff out and get myself in a situation, where we're kind of my core margins are even up year over year. If you will right, but I can't also hurdle FX and interest expense without cutting into <unk>.
Some of my momentum in my growth opportunities that are out there. So that's the way we ended up separating it and saying hey, the fundamentals of the business are too strong to ignore right now we're.
We're not going to hurdle the interest and the FX now unlike maybe in prior years or other companies or something I mean, what FX goes the other way, we're just going to pass that FX right along back so I sure as Hell hope to happen sometime soon right that'll go right back into our numbers interest expense is going to do what it's going to do as Brian said, you know where we're.
On paying down debt right now so we're going to generate some cash flow here, we're going to pay down debt to help offset that but that was kind of our strategic thinking if you will for the back half of this year and into next year.
Great. Thanks for all that color that was really helpful. And then maybe one more al you mentioned some potential synergies that Cooper surgical team is coming up with during the integration of generate acquisition.
Anything specific you could tell us on those opportunities.
Yes, I'll give you. An example, like we have a labor and delivery group.
We have a very strong sales force within our obgyn medical device team, which includes labor and delivery in a couple of areas leveraging that sales force educating them on what stem cells are and and regenerative medicine, and so forth and then incentivizing them to help the stem cell business from generate.
To cross sell if you will and the teams to work together and to help one another be more successful we've worked through that process. So we accelerated all the generate acquisition activity. We've worked through that training activity and we quote unquote. If you will increased our salesforce by utilizing our existing sales force and we're seeing some positives from that already and I think.
As we move through the back half of the year I think we will we will continue to see positives from that so those are the kinds of synergies that are talking about that we're starting to find and implement it.
Got it great. Thank you guys for the questions.
Thank you. Our next question comes from Robbie Marcus with Jpmorgan. Your line is now open.
Yeah. Thanks, Thanks for taking the question.
Free cash flow came in a bit weak in the quarter.
I was hoping.
Maybe give us a sense of what drove that.
How much is due to currency versus deal integration, how do we think about free cash flow for the balance of the year.
Yeah, Hi, Ravi so.
I mentioned, the $88 million of free cash flow.
It was impacted interestingly bye bye.
$41 million site glass vision cash outlay, we settled a revenue milestone we bought out a milestone.
Tied to the contingency of revenues and that cash outflow.
Was a negative two two operating cash and so.
We had we had been re measuring that contingency.
Last year and that was hitting opex and we were calling that out.
As it was being as it was being re measured.
In Opex and so now that the when you are paying it out and ends up being a detriment, even though by the way we received more than that from site glass as part of closing the joint venture and part of getting the money from them to help.
Support the payment to 50% payment of this by US So that was a big part of it obviously you've got <unk>.
Next in lens solutions.
Cash cost tied to shutting that down.
And then just some higher inventory cost that just with raw materials purchases and just trying to trying to get ahead of some things so.
The amalgam of all that was resulting in an $88 million but.
Expect still strong free cash flow in the back half of the year.
With Capex really just being one of those things where I would expect capex is going to inflict up a little bit in Q3 and start to trend a little bit higher the demand is really really strong for our lenses right now.
We've got we've got basically very little idle cost and we're utilizing all of our equipment. So we wanted to make sure that we stay ahead of the game and buy buy equipment and we're putting some into production. So.
So we'll continue to do that and you'll see capex come up in the back half of the year, but free cash flow still looking really solid as we as we round out at the end of the year.
Great and just wanted to follow up I think it was Joanne who asked the question about hedging before and I was hoping you could expand on it a little bit 5% top line impact from FX is kind.
What we're seeing across the board in Med Tech, but 14% is probably the most significant impact by far that we're seeing so.
How do you think about.
Sure.
When you set out your guidance do you planted in constant currency or reported.
Why are you I guess.
Leafing FX as a risk for the business and how do you know any natural hedges you can do to offset that over time.
Thanks.
Yeah, well I mean, it's a good question and a lot there to unpack but.
The long story short is we do have some natural hedges in our business.
They are fairly insignificant.
In the Grand scheme of things, we do have when you look at sort of what's been really moving even just from last quarter to this quarter.
Throughout the P&L.
This was a story of the yen and euro and pound hitting that impacted revenues, but when you win with the yen moving so significantly weaker.
We have very little to offset that our opex.
Opex in Japan is very very low so the flow through was immediate and it's significant.
So when.
And we have that play out throughout Europe and other currencies.
We talked about in the second quarter.
The majority of the Delta from <unk>.
<unk> <unk> from last quarter's guidance to this quarter's guidance stemmed from intercompany and as Al mentioned earlier, Microsoft mentioned that today is a big that $50 million impact that they experienced was was just balance sheet stuff Youre. Basically go you were measuring intercompany trade balances be from one month.
Other you might settle that every 30 days and typically that doesn't result in a very significant.
Loss to the bottom line, because you have pluses and minuses, but in this case week you know it goes those balances are always there. They there was a big impact towards the end of the quarter and that made up the majority of or a large part of that 15 and so.
Like I said before and we've said in the past currency, sometimes it was in your favor sometimes it moves against you when currency starts to move in our favor that'll be a big positive to us and Youll see a big impact move the other way.
When it comes to setting our guidance, we basically just try to take a look at our forecast and we apply roughly current rates and Thats, what you get and so that's what we tell you is is the the headwinds so there isn't any magic around it.
That's kind of how we arrive at our guidance.
The guidance, yes, Ravi to add a point on that the five and 14 that youre highlighting the delta being normal large between that that's.
That's misleading because were the same as every other company in terms of that Delta one of the primary differences from us from a lot of different companies as our FX gets capitalized within our cost of goods and it turns through inventory six months later, so we're not getting any of the positive within our manufacturing from that.
And the pound all we're seeing right now basically is negatives coming from inventory and the only offset is opex.
The pound starts flowing through at the end of our fiscal year and into next year and all of a sudden that's when you get the bigger offset from currency. So it's a little misleading to five in 2014, that's happening because it's all happening within our fiscal year. If you stretch that out over a full year. It wouldn't be that dramatic of a difference it would be very similar to what you see from other companies.
I appreciate it thanks a lot.
Yes.
Thank you. Our next question comes from Steven Lichtman with Oppenheimer. Your line is now open.
Thank you hi, guys.
I guess outside of the solutions business, how much our supply chain inflation impacting you guys on the bottom line. This year and do you see second half similar to first on that front better any any comments generally would be it would be helpful.
Yes solutions is a little bit different of an animal with.
The plastic that you need to purchase and so forth, but the solution bottles and so forth.
That's that's been a challenge for US there's no question about that.
We're working through it and we've actually made some progress on that but that is definitely impacted us now we're shutting that business down at the end of this year. So we're trying to take care of our customers I think we did lose.
We did have a decent operating loss in Q1 from that business. We had a decent operating loss in Q2, I think in Q3 and Q4, where we're at now that we made the decision and are working to rightsize things very quickly is revenues probably holds fairly stable as we supply as much as we can out to our customers.
And then because the right sized infrastructure, we probably get to like a neutral.
Operating profit or no operating profit if you will kind of in Q3 Q4.
Okay got it.
Brian You mentioned tax rate there is an offset.
What are you guys, assuming now in the guidance for the year.
Around 13%, so coming down from around 2014 to around 13.
Got it thanks guys.
Yeah.
Thank you. Our next question comes from David Saxon with Needham <unk> Company. Your line is open.
Hey, guys. Good afternoon, thanks for taking the questions maybe two on CPI, starting with my site. Just wondering what inning you are for my take training in the U S. And then how are you thinking about my site pricing in a potentially recessionary environment.
Yeah, I mean, we're still as far as I'm concerned in the first inning. When it comes to my side. We are just very early in what is going to be a very large myopia management.
<unk> place and we're going to have a number of additional products coming out I mean my side, we just expanded the parameter range on my site. So I'm excited about that youre going to see more products coming are out of R&D, continuing to expand and grow and I think that industry is just going to continue to grow because anywhere you go right now within the ophthalmic space.
Youre seeing everyone talking about myopia management and what it means how they can build it within their practices, how they manage it and so forth. So it's exciting that you're seeing.
Eyecare practitioner, saying have a way to treat this disease I can tackle this thing and I can help kids and I can help society and benefit everyone. So we're definitely gaining some momentum there. So we're very very early in that process.
Pricing to me is that we're not we have made changes in pricing I mean, if anything I think in some spots around the world, we've taken pricing up a little bit.
We have a fantastic FDA approved.
Strong clinical product that works and it's the only one in the market out there right now that is doing that as a contact lens. So I think from our perspective right now we will continue with.
Pricing roughly where it's at.
Okay. That's helpful. And then you did call out.
Your.
The growth in your branded <unk>.
So just wondering are you seeing anything new in that.
Key account segment or if that's just.
Strong underlying branded growth.
Yes, we're seeing we talked for a while about a lot of the growth was being driven by.
More of our customized solutions, if you will the customer brands and so forth, we've seen a little bit of shift in that more recently here.
Some of the products.
My day in particular Biofact. He also.
Towards the multifocal, that's all some of that a lot of which gets sold through private practitioners and so forth a lot of that strength, we're seeing from <unk>.
More traditional branded products if you will.
So that's a really good side I'm really happy to see that that it doesn't really surprise me, but.
It's still nice to say.
Great. Thank you.
Yes.
Thank you and at this time Im showing further questions in the queue I'd like to hand, the conference back over to Mr. Wang for any closing remarks.
Great. Thank you operator, and thank you everyone for.
In today's call and.
We appreciate your time and so forth and look forward to updating everyone again in September on our next earnings call. So thank you I appreciate it ladies.
Ladies and gentlemen. This concludes today's conference call. Thank you for your participation you may now disconnect everyone have a wonderful day.
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