Q3 2022 Cooper Companies Inc Earnings Call

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the company's third quarter 2022 earnings conference call.

At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask the question during the session, you will need to press star, one, one on your telephone.

I would now like to hand the conference over to your speaker, Kim Duncan, Vice President, Investor Relations and Risk Management. You may begin. Good afternoon, and welcome to the Cooper Company's third 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 or trends, product launches, operational initiatives, regulatory submissions, and closing or 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 coopercoz.com.

Also, as a reminder, the non-GAAP financial information we will provide on this call is provided as a supplement to our GAAP information. We encourage you to consider our results under GAAP as well as non-GAAP and refer to the reconciliations provided in our earnings release, which is available on the investor relations section of our website under quarterly results. If you have any additional questions following the call, please email IR at cooperco.com.

And now I'll turn the call over to Al for his opening remarks.

Thank you, Ken, and welcome everyone to Cooper Company's third quarter conference call. Let me start by highlighting that this was the sixth consecutive quarter of double-digit organic revenue growth for Cooper Vision and the seventh consecutive quarter of double-digit organic revenue for Cooper Surgical's fertility business.

This impressive performance showcases the strength of our teams and the strong demand for our products and services.

This momentum continued in August and we're increasing the organic revenue guidance for both CooperVision and Cooper Surgical, incorporating our strong Q3 and the strengths we're continuing to see.

Overall, the challenging macro environment, including headwinds from currency, inflation, and supply chain challenges, has negatively impacted profitability, but has not reduced our ability to take share and drive sustainable top-line growth.

Moving to the third quarter results, consolidated revenues reached an all-time high of $843 million, with Cooper Vision posting record revenues of $566 million, up 11 percent organically, and Cooper Surgical posting record revenues of $277 million, up 35 percent as reported, up 3 percent organically.

Growth was led by our daily silicone hydrogel portfolio and myopia management products for Cooper Vision and fertility for Cooper Surgical. Non-gap earnings per share were $3.19 and we posted record quarterly free cash flow of $217 million.

For Cooper Vision and reporting all percentages on an organic basis, revenue growth was strong and diversified in all product categories, spheres, torques, and multifocals, and within all three geographic regions.

The Americas was up 7%, EMEA grew 15%, and Asia Pac grew 11%.

This performance was driven by a number of factors, including new product launches, expanded product ranges, market-leading flexibility through our customized offerings, growth in key accounts, and strength in branded products.

Regarding product details, daily silicone Hydrogel lenses grew 24%, led by great results from both MyDay and Clarity.

Daily silicones continue to be the main driver of growth for the contact lens industry, and we offer the broadest portfolio in the market, with my day and clarity available in a broad range of spheres, torques, and multi-focals.

Within this, we're continuing to see especially strong growth from MyDay, including from the very successful rollout of the MyDay multifocal, which is taking share in markets around the country.

The feedback from patients remains fantastic, and optometrists continue reporting that our breakthrough binocular progressive fitting system is allowing them to fit the lens quickly and accurately.

This success is driving a positive halo effect on my day's fears and torques and we remain very optimistic about the future of this brand.

Clarity also posted a solid quarter with particular strength noted in Asia Pac.

And our silicone hydrogel FRP lenses, Bioaffinity and Avera, reported another solid quarter of 8% growth.

Regarding product launches, we remain very active. I'm excited to announce we'll be seeding the market with MyDay Energis over the next several months with a full launch scheduled for early calendar 2023.

We've had a lot of requests for the Energis technology in a daily lens, and given the success we've had with Bioaffinity Energis, we're really excited about this opportunity.

MyDay Energis will use the same digital zone optics technology as Bioaffinity Energis, adding where is greater comfort when using digital devices along with enhanced end-of-day comfort.

This daily lens is a perfect product for today's digital world and another great example of Cooper Vision leading with innovation and manufacturing know-how.

Building on this, we'll also be launching an expanded My Day Tour parameter range in early fiscal 2023.

MyDay already offers the most prescription options in the daily toric market, and this expansion will essentially match the leading offerings in the FRP toric segment, which will be a first for the contact lens industry.

All this activity supports a fantastic My Day brand and exemplifies Cooper Vision's focus on offering practitioners a wide variety of market-leading, technologically superior ads.

Meanwhile, we're expanding availability of clarity around the world, which will further strengthen relationships with customers using store brands.

And I'm also happy to report that we've recently increased production of bioaffinity, including made-to-order extended range torques and bioaffinity torque multifocals.

Demand continues to exceed supply on these products, which has caused supply disruptions, so adding capacity is great news.

Overall, these products and technologies improve how eye care professionals deliver clinical care and it's allowing us to lead in defining stay in their care, a core component of our ongoing share gains.

Moving to Myopia Management, another exciting area where we're a market leader, we posted revenues of $24 million, up 42%, including my site up 109%.

Our growth trajectory remains strong, with the main challenge being in China, where all contact lens sales, including MySite and OrthoK products, have experienced difficulties due to ongoing COVID restrictions.

Outside of China, my site is performing really well, backed by its extensive seven-year clinical data and FDA approval, and we're seeing strength with key accounts and private practitioners ramming me.

We're also seeing a positive halo effect with customers selling my site accelerating their use of other Cooper vision lenses.

For Cyglass myopia management glasses, our JV relationship with S. lorelixotica is going well and the team continues to make progress. In the U.S., we're finalizing the submission of the three-year clinical data and expect to submit it to the FDA in September .

As a reminder, the only FDA-approved myopia management product on the market in the U.S. is MyCite, so obtaining approval for glasses has the potential to really propel the myopia management field forward.

To finish on Cooper Vision, the contact lens market continues to perform exceptionally well with estimated growth of 8% in calendar Q2.

Although COVID-related challenges remain, including here in the U.S., where back-to-school eye exam demand is exceeding exam capacity, the many long-term growth drivers of the industry remain intact.

This starts with a large macro growth trend that roughly one third of the world is myopic today, and that is expected to increase to 50% by 2050.

This is driven by heightened screen time, among other factors.

Additionally, the shift to silicon hydrogel dailies remains strong, the penetration of higher value products such as torques and multifocals is growing, the number of wearers is growing, and we're seeing price increases.

We expect global growth to remain healthy and believe we'll remain a leader with our robust product portfolio, ongoing product launches, fast growing myopia management business, and leading new fit data.

And speaking of data, I'm proud to say calendar Q2 US stats show Cooper Vision was the number one company for new wearers and the only manufacturer to grow share in all three daily categories Spheres, Torx and Multifocals.

Moving to Cooper Surgical, we posted a solid quarter led by fertility, which reported sales of 112 million, up 13% organically. As I mentioned earlier, this was the seventh consecutive quarter of double-digit organic growth. So a big congratulations to that team.

Success was seen throughout the product portfolio and around the world with particular strengths noted in consumables with products like media, pipettes, needles, and catheters doing well.

Consumables are a core part of our fertility business and an excellent indicator of future growth. So we remain in great shape to continue delivering strong results. So we remain in great shape to continue delivering strong results.

Regarding the broader fertility market, the fundamentals behind the industry's growth remained very healthy.

There are many drivers, but women delaying childbirth is a primary factor as fertility challenges start increasing around the age of 30 with a more pronounced negative impact starting at 35. The increasing cost of tailoring technique is growing and treatment company products created by the principal services throughout the factory of dolphins and a new model of COVID has been shown there has been growing under the company's influence onivan research per inhibitions??? studies in Yongkong and Cloud material bulliedige dream period because regular day prochaine?? (-aprine conclusions of three explicar data coilo ? you

It's now estimated that roughly 15% a reproductive age couples worldwide have fertility challenges. And over 750,000 babies are born annually through fertility assisted measures.

and these numbers are growing.

Regarding Cooper's surgical positioning, we estimate the portion of the market we compete in is roughly $2 billion in annual sales, and that it will grow in the 5 to 10% range for many years that come.

In addition to increasing maternal age, other drivers include improving access to treatment, increasing patient awareness, growth in the number of fertility clinics.

Improve product offerings such as donor activity and crowd preservation services, and technology improvements for both male and female infertility challenges.

Given the momentum of the industry and the diversity of factors driving growth, the opportunity is certainly an exciting market to be in.

Moving to office and surgical products, which includes OB-GYM medical devices, paraguard and stem cell storage, we posted sales of 165 million up 36%, but down 3% organically.

OB-GYN medical device sales were negatively impacted by heightened back orders due to supply chain challenges.

We've seen good demand and positive signs in our supply chain to start this quarter, so we expect healthy growth in Cisco Q4. So we expect healthy growth in Cisco Q4.

Paragraph was down 7% as expected due to a difficult comp the last year's price increase in related buy-in activity. But we expect nice growth in Q4 with an easier comp, improving patient flow, and an increasing patient focus on the most efficacious forms of birth control, including 99% effective IUDs such as Paragraph.

Lastly, our stem cell storage business that we entered with a generate acquisition this past December grew 1%. This was in line with expectations against a difficult comp prior to our purchase of the business. II??

To wrap up on Cooper Surgical, fertility remains strong, the other parts of the business are making progress, and the integration activity is going well. We expect a strong finish to this year and believe we're in an excellent position to deliver long-term, mid-single-digit growth.

They conclude.

We operate in recession resistant industries with strong macro-grow trends, but we're not immune to supply chain challenges, and currency is having a material impact on our AS report of results.

Having said that, our core business fundamentals are excellent.

We're taking market share, we're leveraging where we can, we're taking price. We're taking price.

We'll remain extremely focused on the challenges facing us and we'll be proactive and we'll proactively manage operations while maintaining a focus on delivering long-term shareholder value. And with that, I'll turn the call over to Brian to discuss financial results and guidance.

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 our reconciliation of GAAP to non-GAAP results.

Third quarter, consolidated revenues were 843 million, up 10% or up 9% organically.

Consolidated gross margin was 66.1%, down 220 basis points from last year driven primarily by currency.

operating expenses grew 13% and were 42.7% of revenues primarily as a result of the acquisition of Generate Life Sciences.

Consolidated operating margin was 23.4%.

Within these results, currency is having a significant impact, negative impact, along with supply chain and inflationary pressures.

We raised prices to offset some of this and have additional price increases coming.

and will continue to work diligently controlling costs.

Moving below the line, interest expense significantly increased year over year to $17 million, with higher rates and debt balances driving the large year over year increase.

The effective tax rate was 10.2%.

And non-GAAP ETS was $3.19, with roughly 49.6 million average shares outstanding.

Year-re-year FX negatively impacted earnings by 67 cents in the quarter.

which was 10 cents worse than we forecasted at the time of our last earnings call.

As with last quarter, a large part of the 10 cents was attributable to the re-measurement of foreign currency-based intercompany trade receivables, which are recognized in other income and expense.

In order to reduce this variability moving forward,

We've made moves including closing out certain non-functional exposures

and improving our natural and synthetic hedge positions.

Moving forward, we believe these efforts will do a better job mitigating the impact of FX gains or losses that occur below the operating income line.

Returning to the quarter, free cash flow was extremely strong at $217 million.

and we decreased net debt by 218 million.

to $2.64 billion.

This reduced leverage to 2.44 times, which lowered the borrowing rate on our long-term credit facility pricing grids by 25 basis points.

As a reminder, $1 billion of our debt is fixed to 2025, with the remaining amount floating.

Moving to guidance.

We are increasing the full year organic revenue growth ranges for Cooper Vision and Cooper Surgical to include our strong Q3 results and the strength we're seeing as we enter fiscal Q4. We're seeing as we enter fiscal Q4.

For EPS, we're updating guidance to reflect the negative impact of currency and interest rates.

offset slightly by better operational performance.

specific to fiscal Q4.

The consolidated revenue guidance range is $830 to $850 million, up 9 to 11 percent organically.

with Couper Vision revenues of $554 to $565 million.

up 8 to 10 percent organically.

and Cupra surgical revenues of 276 to 285 million of 10 to 15 percent organically.

non-GAAP EPS is expected to be in the range of $3.05.

to $3.20.

based on a roughly 13 and a half effective tax rate and roughly $22 million of interest expense.

which includes an assumption for a 75 basis point increase in September .

Regarding currency, we're now forecasting the year-over-year negative impact in Q4.

to be roughly an 8% headwind to revenues and a 20% headwind to EPS.

For fiscal 2023, we won't be providing detailed guidance, but we provide some high level direction.

Assuming currency rates remain similar to where they are today, interest expense increases to around 85 million due to multiple rate hikes.............

Our effective tax rate increases to roughly 15%.

the macroeconomic environment remains challenging.

We expect to report low single digit year-over-year non-GAAP EPS growth.

These expectations do not include the pending acquisition of Cook Medical's reproductive health business.

Lastly, as it relates to our pending acquisition of Cook, that transaction is still pending regulatory approval.

We are currently exploring different options to close the transaction, including the potential sale of certain Cook assets in the US and abroad.

Given the process and necessary approvals, the timeline is tough to estimate, but we're hoping to close the transaction by June 30.

of 2023.

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

Thank you.

As a reminder to ask a question, you will need to press star 11 on your telephone.

We ask that you limit yourself to one question and one follow-up.

Again, that's star 11 to ask the question.

Please stand by while we compile the Q&A roster.

Our first question comes from the line of Jason Bednar with Piper Sandler. Your line is open.

Thanks. Good afternoon. Thanks for taking the questions. Congrats on the strong organic growth here in the period. You know, maybe picking up on the real time commentary provided there, Al, you mentioned strong growth for the business continuing into August . Just wanted to check. Are you suggesting CVI and fertility both continue to grow at a double digit pace? And then you also suggested contact lens demand is exceeding capacity with respect to office visits. It's a fortunate problem, but do you have a sense? Is this a function of staffing shortages or?

Is demand around back to school simply really strong and above what's normal for the season?

Yeah, on that second one, the back to school demand is strong. We've definitely seen an increase on that and there's some commentary of other people. I think National Vision talked about it on their call. It comes down to staffing shortages and really strong demand. So that's putting pressure on the optometry community, whether it's retailers or independent optometrists to meet all that demand. So that's a challenge right now. It's quote unquote a good challenge, right, but it's still a challenge.

August , things around Medtech seem to have started to recover in China. I mean, can you talk about uptake of the lens in that market compared to other regions where my site's been available? Are you seeing the sales and education process relatively shorter in that market? Just would love any color there. Thank you.

Yeah, so we have seen an uptake, if you will, in my site in the month of August , certainly, and including in China, where we've seen things loosen a little bit there. So positive news on that. The uptake of that product and success of that product is moving faster than we've seen in most other markets around the world. So certainly positive signs there, and fingers crossed we're now on a better path, right? Because that's really the thing that...

that impacted our numbers. It's really been China. That's, I don't know, 99 percent or 100 percent of what's impacted those numbers.

Got it. Thank you.

Thank you.

Please stand by for our next question.

Our next question comes from the line of Larry Beigleson with Wells Fargo. Your line is open.

Good afternoon, thanks for taking the question. Brian thanks so much for the color on fiscal 2023. Maybe if I could ask about maybe some of the other assumptions embedded in the low single digit year over year non get BPS growth underlying organic sales growth. Do you think should we think about that in line with historical 6 to 8% growth organic growth for Cooper or do you think you can do better and currency Brian ? I think I heard you talk about interest expense.

But currency right now we think it's about 3% headwind to sales 80 cents to EPS. Any color on those two and I had one follow up.

Hi, Larry. Thanks for the questions. You know, obviously you followed us for a very long time. You know our story really well. Long term, you know, we've got, right now we've got all the macroeconomic environment that makes it really challenging to provide specific guidance into the P&L this far in advance.

We've decided to give a few elements today just to calibrate some people on a few important pieces. Again, I think we want to reiterate that the core fundamentals of our business remain strong. We're raising prices, we're growing share, and we're diligently controlling costs.

and to leverage where we can. Obviously, long term, we want to drive mid to single-digit revenue growth and leverage to P&L to grow EPS to low double digits, but right now it's just too hard to say and we're just not going to go there this early in the year to talk about next year. So, appreciate the questions Larry, but we'll update that in December .

Understood and out on site class. And 1st of all, I didn't hear you reiterate that 9200000000 for myopia management this year, but it looks looks achievable based on the 24000000 you did in Q3 here. Just want to confirm that and for site class approval in the US, what's your confidence here by calendar year in 2022? Did you hit FDA's goals for axial length and myopia progression? Thank you. Not based off the model that I showed you earlier or in Wrong it doesn't it doesn't deflect information or be.

Yeah, I think on myopia management globally, we'll probably end up in that 90 to 95 million range and the only reason we're not, well, two reasons, but the primary reason we're not at 100 or a little over 100 ends up being currency. The other one would be obviously China moving a little bit slower. So I wouldn't take it completely off the table, but I'd probably say 95 is probably a better number that we'll settle in on.

On Cyglass, I won't get into too many specific details on it, but I will say that we're submitting that data and looking forward to talking to the FDA on that and believe we have certainly a reasonable good chance to get approval by a calendar year end.

had too many specific details on it, but I will say that we're submitting that data and looking forward to talking to the FDA on that and believe we have certainly a reasonable good chance to get approval by a calendar year end.

Yep.

Thank you.

Please stand by for our next question.

Our next question comes from the line of crew. Your line is open.

Can you hear me okay?

Yep, I'm sorry, she broke up there a little bit. Congrats on the strong organic growth. Just maybe two quick ones for me. First, when we just think about the new product cadence.

the expansion of the My Day portfolio.

Could you give us a little bit more color about when that will start to roll out just to make sure I have that understanding correctly? And then on the surgical side.

Yeah, maybe wrong here, but I mean off of the physical 2q. I thought we were going to expect a little bit stronger organic growth

On the office side with the equipment, it looks like that's still a little bit more supply chain constraint. Could you give us some color about what gives you confidence?

that that improves as you go into the fiscal year end. Thank you.

Sure, good questions, Chris. And you can see in the guidance we gave for Cooper Surgical that we're kind of in that 10 to 15% organic growth range for Cooper Surgical in fiscal Q4. So expecting a really strong quarter. We did have some stuff in Q3 because the supply chain move itself into fiscal Q4. As I mentioned, we started off with a good quarter within both businesses, but within Cooper Surgical to support that kind of guidance range. So anything that maybe you were thinking, hey, it's going to be a touch.

stronger in Q3, you're going to end up, I think, seeing in Q4 because I would imagine those kind of guidance expectations are a little bit above yours or most people's expectations for Q4. If we look at Cooper Vision, yeah, the organic growth is really strong there. The business is doing really well. That team is putting up some impressive results and that's continuing. I think people underestimate the power of our portfolio, the breadth of our portfolio, the strength of our sales and marketing teams.

and the amount of new products that we're launching. And whether that's a parameter expansion or a new product itself, we're very active and we've been very successful in a lot of segments. And that's gonna continue as I mentioned. As we roll into this next fiscal year, we'll be expanding the parameter range of My Day again. It's already market leading today. It's gonna be even better up where it kind of bio affinity is so My Day is kind of turning into a bio affinity daily, if you will kind of success story, which is.

which is just awesome, amazing. And when you think about Energis, I mean, I'm really excited about that. We launched Bioaffinity Energis. It did really well for itself. The demand around the Energis technology on a daily side high has been really strong. We've had to ramp up production considerably within my day to be able to do that. The manufacturing team has done a killer job to get us where we're at today. So we have that product. We're going to start seeding the market here in the next couple of months. And look forward to getting that launched in early next year and.

All that activity along with the other stuff I mentioned, you know, Biofinity and the things like Biofinity Tour, multifocal and extended ranges and so forth are all going to continue to support what I believe is going to be stronger than people are probably expecting in organic revenue growth.

Thank you. Appreciate the question.

Yep.

Thank you.

Please stand by for our next question.

Our next question comes from the line of John Block with the C-4. Your line is open.

Great guys. Thanks. Good afternoon.

Brian , maybe I'll start with you and just the EPS. Just the 22 EPS mid-point stepping down by roughly $0.40. I'm not sure if I missed it, but can you bridge the different components? Clearly FX hit you. You had the interest rate coming above what you guys laid out last quarter. So maybe just walk us through the headwinds from FX and interest rate. You mentioned a little bit on supply chain as well. And then maybe what the offset was from better than expected.

Sorry, there's a lot of noise. Better than expected operational growth as the organic came up by roughly 100 bebs.

Yeah, sure. Hi, John . So prior guidance midpoint was a 319. I gave the FX unfavorability versus last guidance in my prepared remarks of 10 cents. The Q4 FX unfavorability is a 20% headwind to Q4. Interest expense.

interest expense is...

interest expenses went up because of the increases.

John , were you asking about Q4? I thought you were asking about 2023.

No, I'm sorry. I'm asking just to be clear on fiscal 22, like where were... let me just sort of make up some numbers. I mean, relative to when you last got it on the second quarter conference call, what did FX and interest rates take you down? You're lower by $0.30. Did you go down by $0.50 on FX and interest rates and then make back $0.10 on just making that number up and up? I'm just trying to get the bridge to get there.

So in the full year.

Okay. Okay. Okay.

Yeah, so I just starting with FX, I mean, we, I talked last quarter about the FX headwind to revenues for the full year being 5%, it's now 6%.

The headwind to EPS last quarter was 14%, it's now 17%.

As it relates to true interest expense, because we had forecasted a 50-50-25 and it was 75-75 and now we're saying 75 again in September , that's about 5 cents right there.

So we've adjusted our guidance.

primarily tied to just FX and interest expense and some slight operational improvement, which gets you to that midpoint of $1,280.

Okay, I think I'm there. And then Al, maybe I have a longer one for you, but just, you know, you brought up the CVI organic growth again. Talk to us in the drivers, you know, is it new fits? It seems like it's certainly some incremental price. What do we think about price in fiscal 23? Does that have to step back down in a relative to 22? And then one last one on my side, we just picked up, you know, some chatter that you might have rolled out a rebate program. Very recently.

or are running promotional activity for my site.

I'm pretty confident that's what you're probably seeing out there. If we look at price, yeah, we took price earlier this year and then we took price again this summer. We're looking at additional price increases right now and into next year. So I think if everything holds as it is with the economy and inflationary pressures and so forth, you'll see incremental price increases from us.

2023 should still be a good growth year for us. We still have a lot of the underlying factors that are driving growth of the entire marketplace and our growth continuing. Now, we're gaining wearers. So when you look at the FIT data, as I mentioned, we're just doing really well. We're number one on FIT data. So when it comes to winning the new wearers coming in and winning the new FITs, we're doing really well in that space. And I think that as we continue to roll products out and launch some of these new products and improve availability of products.

will continue to do well from a new fit perspective. When you combine that with some price, I think you end up with another pretty good year next year, frankly, for the entire marketplace and us included.

Thanks, guys.

Thank you. Please stand by for our next question.

As a reminder ladies and gentlemen, we ask that you limit yourself to one question and one follow-up.

Our next question comes from the line of Joanne Wanshin with Citi. Your line is open.

Good evening and thank you for taking the questions. I'm curious about a couple of things. You're talking about a price increase earlier this year, a second one, a third one that's being happening now, and then a fourth one. Can you quantify how much the price increases are? And then are those sort of like-for-like products or are they reflective of new product launches such as the Energis Biofinity family that's going out the door?

Yeah, I won't quantify Joanne, but there's different price increases happening on different products at different points around the world. Not only that, you're actually seeing some stuff in terms of freight surcharges and so forth. I'll set some of those increases. I mean, the one I think most recently that we took a few months ago was Bioaffinity, but we had other increases to start the year. You're right that My Day Energis is certainly being launched or will be launched at a price premium, which will be another quote-unquote increase, as you will.

And then we'll look at other opportunities as we move through the end of this year and certainly into next year.

And my second question is I'm curious about your source for the new fit share And is that a new number one spot or is that a continued number one spot?

That is a continued number one spot.

on the source.

A variety of areas that would really depend on what product you're talking about. I mean, some of them are more dramatic than others. As an example, a My Day multifocal is doing really well and it's picking up from a number of other multifocal companies and then it's also picking up new multifocals wearers who are coming into the market. New wearers, and I'm talking about new wearers, the new 15-year-old, 16-year-old who enters the marketplace.

We're doing really well there with My Day and Clarity. We don't have the same opportunity of trade-up, as you know, as some of our competitors do in terms of them shifting from like an old traditional, if you will, hydrogel daily lens to a new silicone and getting the trade-up benefit of that. We don't have as much of that. So when you look at our growth, it ends up coming from those new wearers. It's really a variety of different areas and different spots around the world.

Excellent. Thank you. Yep.

Thank you.

Thank you. Please stand by for our next question.

Our next question comes from the line of Matt Mission with Key Bank. Your line is open.

Hey, good afternoon. Thank you for taking the questions. Hey, I know you guys have done some amazing things around the kind of resiliency and power supply down in Puerto Rico. Have you incorporated some assumptions for increased power costs in the UK and Hungary into the forward outlook? And how should we think about the manufacturing in those regions and some of the difficulty that may be this winter?

Yeah, we have incorporated that. That was built into Brian's commentary when he was talking about next year's numbers and kind of ongoing challenges with respect to.

We have incorporated that. That was built into Brian's commentary when he was talking about next year's numbers and kind of ongoing challenges with respect to the macro economy, if you will.

Okay, excellent. And then I know some of your competitors have had some supply chain issues. Yeah, how much of a benefit do you think you're getting from some of those peers, and how sticky do you think those are?

I would say very little benefit. In the contact lens industry, so much of it still goes around to the prescription itself, right? You go get a script and you buy. So if someone's having supply chain issues, their wearer base generally extends their lenses or they wear their glasses or whatever in order to get those products. You have to have supply chain challenges of a decent magnitude that last a while before you really start seeing changing fitting behavior.

So I don't think very much right now. I would change that answer if those kind of supply chain difficulties stay at high levels and go an extended period of time.

I don't know, but as of now, I would say very little. Alright, thank you.

Thank you. Please stand by for our next question.

Our next question comes from the line of Jeff Johnson with Baird. Your line is open.

Thank you. Good afternoon, guys. Hey, Al, I know you said you didn't want to quantify the price increases.

Yeah, see if this is better. I don't know. Sounds like I'm having the same problem. John Block was having. Can you hear me OK? Yeah, we can hear you fine. Yeah, thank you. So I know you won't quantify the price increases, but you know our checks would say maybe one one and a half percent earlier this year. Another one one and a half percent in August , but it's hard to know with your contracting and that I mean are those about the ranges we should be thinking about? Maybe two two and a half points total net so far this year on the CDI side.

Yeah, I think that's probably fair. And we talked about this, I think, in last quarter to quarter before, right, some of those price increases for us move in a little bit slower than others. Some of the guys have a lot on list price, right? So when they raise their list price, they'll get a benefit from those price increases relatively quickly. We have a lot under contract, especially with respect to anything that we're doing about store brands and that kind of stuff. So some of those price increases.

for us have a tendency to roll in over a longer period of time as those contracts need to re-up. But I think the magnitude of what you're talking about right now is somewhat in the ballpark to slash lower. Yeah, okay. Okay, thank you. And then maybe two follow-ups on that. One, can you just remind me the surcharges in that, you know, transport costs and some distribution costs and that's starting to come down a little bit. Do those fall into revenue or those are expense line item and would you expect to keep those?

and we've held pricing. We are trying to do some other stuff, right? When you think about the most successful referral source, if you will, or person for us to market the product, is anyone who's used MySite. The success rate has been really, really positive, so those parents who are positive on the product are telling other people, right? So we're trying to offer some promotional campaigns, for instance, for them. Hey, your kid's now in their second year of their third year, where on MySite.

We'll give you a discount for everybody who you refer in who comes to my site. That type of thing. Promotional activity for a brand new wearer coming into my site around back to school. So there is some activity that we're doing, Jeff, to be fair, in terms of that pricing. There's been a few highlights about the pricing being a little high. So if you will, we haven't taken the list price down, but we are running promotional activity, especially with the heavy back to school season here. On the other side of things, on the freight, there's still...

Freight's still a tough one, I gotta tell you. Yeah, I would say things are getting a little bit better, but everyone still has their challenges there. I think that my gut tells me that those changes are just permanent price increases, if you will. And I think they all go through revenues, don't they? Yeah, freight revenue.

I mean the only thing I would add to that is as we are having difficulty meeting demand, it does force us to fly more than we'd like to and we're not able to take advantage of the ocean freight. So I mean you're seeing freight charges go up all across the board. We're doing whatever we can to try to manage that by raising surcharges and so forth. But there's still inefficiency in a way that we're having to shift to our customers and we're seeing that as a detriment to you know.

Both intercompany but also for a freight out in distribution That makes sense. All right. Thanks guys

Thank you. Please stand by for our next question.

Our next question comes from the line of Robbie Marcus with J.P. Morgan. Your line is open.

Hi, this is actually Lily on for Robbie. Thanks for taking the question. So operating margin came in lower than what we were thinking and pretty significantly lower than a year ago today. So is there any way to quantify how much of that is FX headwind versus operational challenges? Hi, Lily. Yeah, I'll take that one. You know, I think operating margins for us came in more or less where we expected. Doesn't affect royalty or revenues or how backward I look or how far I'm going heading Has there been an idle?

FX is just brutally killing our P&L and you're seeing that in the third quarter. ParaVard was down versus last year's third quarter. That's a high gross margin product.

So that impacted margins in the flow through. We also had inefficiencies within Cooper Vision, which we knew about going into the third quarter, tied to shutting down lines in fiscal Q1 that we always do to refurbish and...

what we usually do. And so some of the activity we knew about, but it's really a nice story about FX.

Got it. That's helpful. And just as a follow-up, where are new fits relative to normal levels? Are there any geographies that stand out as lagging or...

being above pre-pandemic levels right now. Thanks so much.

Yeah, you know, it's really interesting going through that data because even the US data we just got shows that new FITs are not back to pre-COVID levels. And there's different data at different spots kind of around the world being as much as 5, 10% below pre-COVID levels. So if you look at the strength of the revenue numbers and where the industry is today, then you go, man, we still have 5 or 10% of FITs to get back into the market just to get to pre-COVID levels knowing that wearers are also in...

levels in terms of FEDS.

Got it. Thank you.

Thank you.

As a reminder ladies and gentlemen, that's star 11 to ask the question.

Please stand by for our next question.

Our next question comes from the line of Steve Leitman with Oppenheimer. Your line is open. Your line is open.

Thank you. Hi, Al and Brian . Al, just wanted to get your confidence on ParaGuard improvements from here beyond the easier comps. What are you seeing on the ground there for ParaGuard and what do you see as potential drivers for improvement ahead?

Yeah, on ParaGuard, we had a tough quarter as we said this quarter because of the comp. We'll have a good Q4. We started off well here in August . Matter of fact, we finished strong at the end of July with ParaGuard. So with Roe v. Wade and what's happened, women are out there and they're a little bit more concerned about things for obvious reasons. We are seeing that women are looking at, okay, well, what's the most efficacious form of birth control? What direction should I go here?

So we have seen an increase in interest in Larks and you've seen that in some of the numbers here more recently. So we'll see if that trend holds. If it does, you'll continue to see outperformance in IUDs. So I would say that the kind of Roe v. Wade...

Outcome, if you will, I was saying that it was a neutral to a modest positive to us. I would probably upgrade that to saying that that's turning out to be a modest positive to our business. We'll see how ParaGuard goes, but I would envision a decent quarter in Q4, that's for sure.

Okay, got it and Brian , you and now talked about ramping production. I think across a number of lines and what is your outlook for for cap? X spend in this year and directionally you are you anticipating next year to be up down flat versus this year cap X?

Hi Steve, good question. CAPEX ticked up a little bit in the third quarter. Al in his prepared remarks talked about how we put some lines in place and we're doing whatever we can as quickly as we can to ramp up capacity. It's hugely difficult to increase capacity quickly. We're having a tough time meeting demand. I would expect I'm expecting a pretty high CAPEX number in the fourth quarter.....

Still, free cash flow being strong for the full year, but that trend kind of continuing where next year, TEPEX continues to go higher as we continue to put more capacity in place to try to meet demand.

strong for the full year, but that trend kind of continuing where next year, TEPEX continues to go higher as we continue to put more capacity in place to try to meet demand. Got it. Thank you guys.

Thank you.

Thank you. Please stand by for our next question.

Our next question comes from the line of David Saxon with needle. Your line is open.

Yeah, hi. Good afternoon. Thanks for taking the questions. Maybe just a follow-up on ParaGuard. I think last quarter you noted softness in the market, but it sounds like you have a fair bit of confidence in it returning to growth here in the fourth. So, you know, is that market dynamic kind of past us at this point? And then just on pricing, I know you took price, I guess you're going to be laughing at soon. ParaGuard, thanks for having us.

but any opportunity to take place again with ParaGuard? Yeah so a couple things on ParaGuard. We did see office visits down, OBGYN office visits down, and that was due to ParaGuard, or I'm sorry.

COVID-related staffing challenges, right? We've seen some of that same stuff, obviously, in optometry offices, and I'm sure everyone has seen that in other areas of the world. But we definitely saw a negative impact to patient traffic, especially with respect to things like general OB-GYN visits and contraception OB-GYN visits during the summer months. After the Roe v. Wade situation and a little bit of improvement in terms of capacity, you had a bunch more attention.

I think it's really done a nice job trying to capitalize on that activity. So we saw that improvement starting in July . We've seen it continue here through August . And yeah, I think you'll see growth certainly in Q4. TBD on price increases. One of our competitors did a price increase or is doing one here. We'll evaluate another one and take price if we can, if it's appropriate.

Okay, that's helpful. And then on myopia management at 90 to 95, wherever it shakes out, is that portfolio going to be profitable? And if not, how should we think about when that starts to contribute to earnings? Thanks so much.

Yeah, I would call that somewhere around the kind of break even this year. Let's go with, you know, let's just say it's break even and then it'll shift to being profitable next year. We've built a lot of infrastructure there in terms of myopia management support people and so forth. We'll start to leverage that infrastructure as we get into next year. So yeah, that's an operating margin drag certainly right now. It gets better next year and then hopefully as if it continues to grow at the pace it's growing in what we're seeing.

We'll continue to improve that operating margin. Hopefully at some point in the future, get that to be operating margin positive, especially with the gross margins in that business.

Thank you.

Thank you.

Thank you.

I'm not showing any further questions. I would now like to turn the call back over to Al White for closing remarks. Great. Thank you. Thank you, everyone. Again, strength in the business and the core fundamentals are driving what's making us optimistic. I mean, the one thing Brian touched on is currency has been painful for us. It's been pretty brutal. We're working through it the best that we can, and we're taking the measures that we can take. And if we exclude currency and really look at the fundamentals of the business.

And that concludes today's conference call. You may now disconnect.