Q3 2023 Cooper Companies Inc Earnings Call

Ladies and gentlemen, this is the operator today's conference is scheduled to begin momentarily until that time your lines again will be placed on music hold thank you for your patience.

[music].

Good afternoon, My name is Krista and I'll be your conference operator today at this time I would like to welcome everyone to the third quarter 'twenty twenty-three Cooper companies earnings Conference call.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during that time. Please press star one on your telephone keypad and if you would like to withdraw that question press. The pound key I will now turn the conference over to Kim Duncan Vice President of Investor Relations.

And risk management, you may begin your conference.

Good afternoon, and welcome to the Cooper companies third quarter of 2023 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.

Presenters on todays call are al White, President and Chief Executive Officer.

Andrews, Chief Financial Officer and Treasurer.

Before we begin I'd like to remind you that this conference call will contain forward looking statements, including anticipated results of operations revenue EPS operating income tax rate in other financial guidance anticipated expenses benefits of infrastructure investments strategic and operational initiatives market and regulatory conditions and trends.

Product launches and demand and pending or possible transactions.

Forward looking statements depend on assumptions data or methods that maybe 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 Cooper pose dot com.

So as a reminder, the non-GAAP financial information, we will provide on this call is provided as a supplement to our GAAP to 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.

It is available on the Investor Relations section of our website under quarterly materials should you have any additional questions. Following the call. Please email IR at Cooper co Dot Com and now I'll turn the call over to al for his opening remarks. Thank.

Thank you, Ken and welcome everyone to Cooper companies' third quarter fiscal 2023 conference call demand for our products and services remains very healthy and we solidly exceeded revenue expectations posting record quarterly revenues of $930 million driven by strong sustainable organic growth.

Coopervision reported record quarterly revenues and its 10th consecutive quarter of double digit organic revenue growth and Cooper surgical reported record quarterly revenues with its fertility business posting its 11th consecutive quarter of double digit organic revenue growth.

Our teams are delivering impressive results and our momentum is strong and we're executing well on our strategic growth initiatives.

Moving to the numbers consolidated revenues were $930 million up 12% organically coopervision posted revenues of $630 million up 13% organically and Cooper surgical posted revenues of $300 million up 9% organically.

Exceeding $600 million in quarterly revenues was a first for coopervision and exceeding $300 million was a first for Cooper surgical.

Coopervision growth was driven by our daily silicone hydrogel portfolios and Cooper Surgical's growth was led by our fertility business non-GAAP earnings per share were $3 35 SaaS.

For the quarter and reporting all percentages on and on.

On an organic basis coopervision revenue growth was strong and diversified by geography. The Americas grew 12% EMEA grew 13% in Asia Pac grew 16%.

Without the world, we're leading with innovation tied to new products expanded product ranges market, leading flexibility and growth in key accounts.

Main categories spheres grew 9% towards grew 16% and multifocal is grew 19%.

Within modality dailies silicone hydrogel lenses accelerated and grew 23% with <unk>, leading the way.

Daily silicone hydrogel lenses continued to be the main driver of growth for the contact lens industry and we offer the broadest portfolio with my day and clarity available on a wide range of spheres, toric and multifocal and lastly, our silicone hydrogel monthly in two week lens is bio affinity and a very vitality grew a healthy 8%.

Turning to products and starting with our high growth dailies silicone hydrogel portfolio, we're six months into the U S launch of our highly innovative <unk> lens and the ramp is progressing exceptionally well this premium lens taps into a fundamental where need catering to the demands of today's lifestyles by incorporating digit digital boost.

Technology to alleviate the impact of digital I straight, it's a big success with eye care practitioners and wears alike. Our sales momentum is very strong. We're also seeing high demand for a toric as we continue rolling out our parameter expansion across North America and Europe . This demand is being driven by its market leading toward design, which.

Mirrors bio affinities design and our industry, leading <unk> range, which is by far the widest toric range in the daily market.

With its broad range eye care practitioners are capitalizing on the opportunity to offer their two week and monthly toric Where's the option to enjoy the freedom of wearing a daily toric lens and last but not least <unk> multifocal continues to take considerable share around the world Reestablishing coopervision his position in the premium multifocal market.

<unk>.

We continue to hear from eye care practitioners, how easy the lenses to fit and how fantastic. The visual acuity is that I can speak to this personally because I was recently fit in contact lenses for the very first time and <unk> multifocal.

<unk> was a remarkably fast and easy and these lenses are truly amazing.

To conclude I might add this technologically superior family of products continues to deliver high growth at our momentum is fantastic and lastly, within the daily segment, our clarity family of lenses continues to perform well by offering a high quality product at a mass market price points. It was especially nice to see strengths with clarity and several international Mark.

That's including an acceleration of sales in Asia Pac.

Outside of dailies demand for <unk> remains strong led by tourists multifocal and our custom offerings, a very vitality had a solid quarter led by towards.

Moving to myopia management, we posted revenues of $30 million up 30% with <unk> up 53%.

<unk> accelerated this quarter posting its best growth of the year, even with China declining year over year due to tough comps against the stocking order last year. Meanwhile, our ortho K franchise had a difficult quarter tied to portfolio realignment and weakness in China fiscal Q4 has started off well and we remain comfortable with our full year Guy.

<unk> of 120 to 130 million, albeit probably at the lower end has strengthened my site likely won't offset ortho K softness.

Regarding my site, we're seeing improving fitting trends around the world driven by key accounts higher volume pediatric optometry practices and from the successful integration of the sales process from our specialty lens unit into our regular sales channel.

We're also continuing to see very high retention rates, including roughly 90% in the U S. Along with an ongoing positive halo effect with ISI practitioner is accelerating their use of other coopervision lenses.

We also recently confirmed the Aetna is now covering my site under medical plans to opt in to lens coverage, which represents 70% to 80% of Aetna plans.

This follows Kaiser who started covering my side through vision care plans roughly a year ago. This type of coverage that is exciting, but it's still very early in the process and we have a lot of work to do to ensure eye care practitioners and families understand what it means.

To conclude our mine site as a reminder, it's the first and only FDA approved contact lens for myopia control and the product is backed by extensive clinical data.

This is a critical differentiator as a proactive management of myopia become standard of care within the eye care community to help reduce the progression of myopia in children, along with reducing the risk of long term eye health problems associated with myopia, such as cataract retinal detachment macular degeneration.

To finish on coopervision, the contact lens market grew roughly 8% in calendar Q2 with coopervision, taking share at 11%. We expect the markets remained healthy supported by the long term macro growth trend and more people needing vision correction.

It's estimated that 50% of the global population will have myopia or nearsightedness by the year 2050 up from roughly 34%. Today. This is driven by kids spending less time outdoors and a related greater use of digital screens indoors. Among other factors. When you combine this with the ongoing shift to silicone hydrogel dailies the.

Increasing focus on higher value products, such as towards a multifocal at higher pricing. We expect many years of solid growth for the industry. Within this we expect coopervision to remain a leader with its market, leading innovation robust product portfolio ongoing product launches fast growing myopia management business and leading new fit data.

Later.

Moving to Cooper surgical we posted 9% organic revenue growth, including fertility sales of $122 million up 11% organically for its 11th consecutive quarter of double digit organic growth or.

Our fertility business continues to perform at a very high level in the future is bright with strong macro trends supporting the industry's growth for the quarter. We once again realized success from our diverse offerings within consumables capital equipment reproductive genetic testing and donor activity.

And regionally.

We posted solid growth in the Americas, EMEA and Asia Pac This was accomplished while investing in multiple areas, including geographic expansion and key accounts infrastructure build out in R&D.

We continue to launch new products and rollout of existing products in new geographies and we're clearly leading the way is one of the most innovative fertility companies in the world and.

In summary, we're in a fantastic place and we're well positioned to continue delivering success given our great team diverse portfolio of global momentum.

Regarding the broader fertility market the macro trends that are driving global growth remains strong and we're continuing to see a lot of exciting activity in this space.

The industry has multiple growth drivers starting with women delaying childbirth age as a key factor in contributing to the need for fertility assist us in the median age of a women's first birth in the U S and within several other developed countries is roughly 30 years old and continuing to move higher.

Other growth drivers include improving access to treatment, increasing patient awareness, increasing fertility benefits coverage and technology improvements for both male and female and fertility challenges.

The World Health organization recently released updated data showing that one in six people globally are affected by in fertility at some point in their lives and given that one third of the underlying cause of infertility as women one third as men and one third is a combination of the two or unknown. This is an issue that impacts a lot of people and we will continue to do so in the <unk>.

Future.

Moving now to the surgical which includes medical devices, PARAGARD and stem cell storage, we posted sales of $178 million up 8% organically.

Within this medical devices reported strong growth of 11% driven by positive procedure volume and strength in several core products in particular, our surgical and labor and delivery products performed well.

While PARAGARD grew 7% as we saw some bounce back from last quarter softness in our stem cell storage business grew 4% in line with expectations.

To conclude on Cooper surgical it's with great Pride that we say that every minute somewhere around the world. A baby is born using Cooper surgical products. Our business makes a difference in People's lives and we love that.

We're also operating in several markets that have excellent long term growth characteristics such as fertility. So we feel good about where we're positioned and what the future holds.

Before turning the call over to Brian Let me make some high level comments on our strategic growth initiatives. The last couple of years has shown the strength of our business with revenue growth accelerating as we exited the COVID-19 pandemic.

This is a result of a multiyear effort concentrated on investing to drive sustainable organic growth and we've done this while completing several successful strategic acquisitions, we intend to continue with this growth strategy moving forward.

And embedded within this is investing in our people improving our infrastructure expanding areas, such as sales and marketing and investing in R&D.

With that let me conclude by saying how proud I am of our team's none of this is possible without the dedication and incredible hard work of our employees and now let me 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.

Third quarter consolidated revenues were $930 million up 10% as reported or up 12% organically.

Consolidated gross margin was flat year over year at 66, 1% with positive currency and product mix being offset by a certain period costs.

Operating expenses grew 9%, but improved to 42, 2% of revenues as we started seeing leverage in parts of the P&L from prior investment activity.

Consolidated operating margin improved to 23, 9% up from 23, 4% last year led by leveraging our operating expenses.

Below operating income interest expense of $26 8 million and the effective tax rate was better than expected at 12, 6% due to discrete items.

non-GAAP EPS was $3 35, with roughly $49 9 million average shares outstanding.

With respect to FX. It was <unk> <unk> worse than initially expected mainly due to losses below the operating income line associated with certain unhedged currencies.

This FX loss offset the better tax rate.

Some color to the P&L revenues exceeded expectations and we are seeing leverage in certain opex line items.

However, gross margins were below expectations due to softer than expected margins that Cooper surgical.

And this negatively impacted earnings by roughly 8%.

This was primarily attributable to period costs largely in our fertility business.

As an example, we are significantly ramping up our donor sperm and AG businesses that we acquired with generate.

This activity is moving ahead faster than expected, which is great news, but.

But it created unexpectedly large period charges.

We also had some inventory write offs during the quarter.

Some of this activity continued into August .

We expect these matters to be resolved during fiscal Q4 and not impact fiscal 2024.

Meanwhile, regarding opex leverage I'm pleased to report that we've completed several important upgrades this year, which will benefit us moving forward.

This includes several large infrastructure improvements at coopervision, and Cooper surgical including a major it implementation at our primary European warehouse at Coopervision.

Additionally, we essentially doubled the size of our U S distribution facility and added several upgraded packaging and labeling lives.

And that facility has now gone live.

This activity puts us in an excellent position to leverage the P&L moving forward.

That's for the quarter free cash flow was 52 million with capex of $91 million.

Net debt decreased to 246 billion.

Before moving to guidance.

Let me add that after quarter end, we paid 45 or $45 million termination fee for ending the contemplated acquisition of Cook Medicals reproductive health business.

This does not impact Q3 that won't impact Q4 as P&L.

But it will negatively impact free cash flow for Q4 as this is treated as a reduction in operating cash flow.

Moving to guidance, we are increasing our full year revenue guidance to incorporate our strong fiscal Q3 results and the strength, we're seeing as we enter fiscal Q4.

For EPS, we're holding our range unchanged at the midpoint, which reconfirms roughly 11% constant currency operating income growth for the full year.

Specific to fiscal Q4.

The consolidated revenue guidance range is $912 million to $929 million of 79% organically.

And Cooper Surgical's revenues of $299 million to $305 million of 5% to 7% organically.

non-GAAP EPS is expected to be in the range of $3 39 to $3 57.

Based on a roughly 12% effective tax rate, which offset the softer gross margin our cooper surgical and.

And recent FX weakness led by the yen.

For fiscal 2024, it's too early to provide detailed guidance, but let me give some direction.

At a high level, our focus remains on executing on our long term growth objectives.

Which include expanding capacity and enhancing our supply chain capabilities.

Within this we will work to leverage the P&L with a focus on delivering low double digit constant currency operating income growth next year.

Outside of that we expect a roughly 15% effective tax rate subject to discrete items, such as the positive impact of stock option exercises.

In.

This was another solid quarter.

Our organic growth was strong and our momentum is very healthy in both coopervision and <unk> surgical.

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

If you would like to ask a question. Please press star one on your telephone keypad and we ask that you limit yourself to one question and one follow up.

First question comes from the line of Jon Block from Stifel. Please go ahead. Your line is open.

Hey, guys. Good afternoon, Brian I might just sort of pick up where you left off a little bit so maybe I'll ask about the quarter.

High level fiscal 'twenty four he added a solid topline increase for both businesses EPS midpoint unchanged I just wanted to make sure. It seems like that was all Cogs related per your comments, Brian nothing on Opex. So I'm just looking for sort of verification. There and then if thats the case im landing at around 20, or 30 bps of margin expansion.

<unk> this year with the updated updated guide being fiscal 'twenty three.

Scott some of the GM headwinds you just alluded to should we think about that rate of <unk> expansion.

Celebrating into fiscal 'twenty, four maybe getting back more in that range of 50 to 100 bps. When we think about next year at a high level.

Yes, so just to answer the first part of your question Jon You're correct. It was really purely a gross margin Miss.

That.

That softened our EPS delivery in the quarter.

Outside of.

What I've provided for next year.

In terms of this year I mean, we're going to have margins sequentially up.

Versus Q3, and like I said Oi growth is still means we're still maintaining oi growth on a constant currency basis. This year growing double digits at 11%.

I'm kind of direction for next year, we're not I'm not going to get into giving guidance now we'll do that in December and I will give more color in a few months once once we get there.

Okay.

Got it and then maybe just second question will be a little bit.

A couple of moving parts to it but can you speak to price durability of pricing just maybe again high level everything got sticky going into fiscal 'twenty four and also just talk about your ability to stay ahead of the demand curve. Some of your competitors have been tripped up there you put up really big growth in Si Hy dailies or at least relative to our expectations that obvious.

<unk>.

A demand component to it so just your confidence we're able to stay ahead of the demand curve. There. Thanks guys.

Sure John I think on a pricing perspective, I think thats still positive we've talked about that for a few quarters now and I would probably just.

We confirm the statements I've made in prior quarters, which is the market somewhere in that 2% to 3% range, we're probably a little on the lighter side of that I would think that that will probably improve some for us, but I think youll see additional pricing in the market.

As we continue to move forward since inflation seems like it's lingering.

Ability to manage growth.

We've got our challenges too.

We do have some.

Some capacity issues in different spots and we've had some challenges through our supply chain thats for sure.

I think we're in a decent place, we're obviously putting up some good revenue numbers demand is strong.

It's costing us some money so.

I'd love to get some additional leverage, especially some operating expense leverage as we move forward on a distribution in some areas, but right now we're pretty focused on delivering really high quality customer service meeting.

Somebody orders product right, we're able to make that product and we're able to ship it and get it in our hands and sometimes that cost us a little bit more money than we'd like for it to cost us, but I think we're in really good shape to be able to continue to hit revenues is just a matter of leveraging that which I think youre actually going to see over the coming years.

Next year will be a more positive year than I think the year after that will probably be even more positive.

Thanks, guys.

Our next question comes from the line of Larry <unk> from Wells Fargo. Please go ahead. Your line is open.

Good afternoon, Thanks for taking the question and congrats on a nice quarter here.

<unk>.

Two from me here, just maybe Brian on the fiscal 'twenty four commentary.

Interest expense should we expect that to be stable and FX headwind to EPS as of today is that about 50 and I had one follow up.

Hi, Larry.

Gosh, I wish I could I would.

Wish I could give you a really good color on that I mean, I guess I would say, it's subject to the fed not doing anything surprising we're going to pay down debt next year.

So I mean.

Hopefully, we see our interest expense at least flat or decline with our debt pay down.

FX, Matt it's just a moving target just swinging so wildly so.

I hesitate to give you any kind of commentary on FX until we get to December .

Fair enough and al you guided to 6% to 8% organic growth for total Cooper entering this year, you're guiding to 9% to 10 now what or how do you think about the sustainability of that momentum next year.

Just any color on that would be helpful. Thank you.

Yes, Larry.

EMEA are probably would lean towards kind of guiding to more on the conservative side, but im not even sure we will because our business is just remaining strong it's just healthy.

Markets that we operate in are healthy were healthy we're taking share.

We're continuing to launch products, whether it's envision our surgical rolled products out around the world.

So I am probably more optimistic than I normally would be at this point in time as I look forward into next year. The following year. So we will give that guidance in a few months here, but but I'm optimistic.

Thanks Al.

Yes.

Your next question comes from the line of Jeff Johnson from Baird. Please go ahead. Your line is open.

Thank you good afternoon, guys al I wanted to start maybe on your clarity business you mentioned some strength in Asia Pac and EMEA, how is that clarity business in the U S. I mean, obviously, you're putting up double digit CVI organic growth you've got appear thats doing.

The same it seems like you two are both doing very well, but their entry level daily silicone <unk> in the U S is just starting to move into those some of those specialty areas, where clarity has had some good success here over the years. So how is your clarity business in the U S holding in and you don't.

Where do you think kind of CVI growth due.

Due to share gains continue into next year at kind of the pace they have been.

Going out here in the last few quarters.

Yes.

Clarity in the U S is doing fine.

We don't talk about it or I don't talk about it maybe as much and I am not sure Thats necessarily fair declared if you will it's just that my day is performing so well that numbers are so strong in my day kind of across the board, whether it's energen switches going gangbusters or the toric multifocal or this fear right that sometimes I talk.

About 30, a little yes, a little less but now clarity still doing okay.

It did accelerate its growth actually in Asia, Pac, which was kind of nice to see but it is still doing okay in the U S.

From a share gain perspective, I would think that yes, I would think moving forward the rate of share gains that we've been having.

Should be somewhat similar.

The next several years just based on our product launches and the activity we have going on I mean, we are still pretty active with a lot of.

The product launches and product expansions.

Geographic expansion some of those products. So yeah, I think we will continue to take share for quite a while alright.

Alright Thats helpful. Thank you and then just as a follow up on on PARAGARD I was somewhat skeptical you'd hit that $50 million number this quarter I've got you know $51 million I believe so just maybe cross check my math on that.

But again is that all pricing I would assume it is but to go from $37 5 million last quarter to $51 million. This quarter was a nice sequential bump that I wasn't convinced you could do so just any color there outside of pricing anything changing on your view of the PARAGARD business. Thanks.

Yes, $51 million Youre right no nothing changing on my view of that was.

Predominantly pricing and Theres always a little bit in all of our businesses right. When it comes a little bit of channel inventory and some of that kind of stuff, but now that the driver on that is clearly pricing.

Thank you.

Yes.

Your next question comes from the line of Matthew Mccann from Keybanc Capital markets. Please go ahead. Your line is open.

Hey, Thank you.

And could you guys walk through the R&D pipeline and sort of what's driving the increased investments I mean, it's just.

It's one of those lines that sets up a lot year over year.

Yes, Matt I mean, I won't get too detailed on projects, but I will say within coopervision certainly.

We've got higher R&D associated with Myopia management, a lot of our my site activity is in there. So that's that's definitely occurring within our Cooper surgical business.

There is increased R&D for a couple of different products actually that we're seeing in there which would include in our fertility space also but it's definitely tied to product development within both businesses.

Okay.

And then with.

Unfortunately, the coke not being able to go through just how are you thinking about the investments that might need to be made.

And how does that fit into the context of kind of.

Leveraging the P&L moving forward.

Yes.

Well I would say that right now fertility is a global business. No question right. We have a very big European presence than we have in Asia Pac presence.

In some countries is much stronger than others, but no we're investing in that business right now to drive international growth. We did it here in Q3, we're going to in Q4, we're going to do definitely more investing next fiscal year to support the long term growth of the fertility franchise, that's all embedded within the numbers Brian .

<unk> of 11% this year constant currency Oi growth and within the objective next year to deliver low double digit.

Constant currency Oi growth. So yeah, I mean, we're continuing to invest there is no question about that and fertility is definitely one of the areas we're investing in.

Thanks Al.

Yes.

Your next question comes from the line of Jason Bednar from Piper Sandler. Please go ahead.

So.

Hey, good afternoon, thanks for taking the questions Echo the congrats on the good quarter.

Okay al or Brian <unk>.

Like lenses.

The performance was really good versus the market.

As you called out in the calendar quarter. Your fiscal quarter, you had the benefit of trading April for July which was definitely a good trade.

It also seems like just based on the fourth quarter guidance Youre seeing good results for your core business.

Can you elaborate what's changed in your guidance for the fourth quarter.

I think you're going to have the street numbers that are moving up a little bit is it certain product category or geography, where you're more comfortable or confident today.

Yeah, I would probably end up saying that where we are today versus where we started the year. We were looking at the possible possibility remember of like a little bit of a recession or an economic slowdown.

We haven't seen that.

And if you look at our sales of our products.

Some of the higher priced products are actually selling better and even accelerating when I look at like <unk> as an example might a multifocal.

Some of those kind of products so.

It just feels like as we sit here today, we're in a better environment.

Somebody asked about that earlier when you look at fiscal 'twenty four for US I just feel like we're in a better more stable environment right now.

With a lot of good products that have a lot of good momentum.

Okay, and then maybe as a follow up because I wanted to ask on your key account strategy. That's actually it seems like maybe a little bit of a recession hedge but youre.

Sure.

As you said your higher value lines that are doing better here, yes, I don't think I call. It an update on the key account strategy, but maybe just talk about what youre seeing there with respect to share gains.

And then any shifts in terms of banks with higher or lower on that strategy, maybe as we look ahead to fiscal 'twenty four.

Yes, you would think that.

Some of the store brands or private label activity. If you will would be driving more of that growth right because that would be a hedge if you will against an inflationary environment and I've actually seen that or I've read that I should say from some companies talking about increases in those type of sales.

That's not what we've seen.

So if there isn't an inflationary issue or an economic pullback, maybe you do see that and we would see an increase in our store brand activity, but right now it's being driven more by as I was mentioning some of those some of the other products that we are doing some.

Store brands for but certainly a lot of it is on a branded basis and those being some of the higher price products we have.

Okay helpful. Thanks, so much.

Yes.

Your next question comes from the line of Joni Zhang from Citi. Please go ahead. Your line is open.

Thank you Ross Joann Lynch.

Very nice quarter.

I'm trying to appeal through your commentary about operating margin next year and I wanted to make sure I understand that when you talk about low double digit operating margin expansion is happening.

Is it the dollar Amazon ex FX, just peel that away. So we make sure we set expectations appropriately.

Yes, when I, when I mentioned low double digit constant currency Oi growth operating income growth.

So it's just operating on a constant currency basis.

Okay.

And are you in a position to be able to give us a guidance number for revenue for next year. Our range should we go back to thinking about how you entered this year at 6% to 7% or.

Is that not even the right way to think about things.

Yeah.

<unk>.

We will see in December I mean, my gut right now would tell me, we would have a hard time, giving.

That level of conservative guidance, but we'll update that in three months.

Terrific. Thank you so much and have a great evening.

Thanks Sharon.

Your next question comes from the line of Anthony Petrone from Mizuho Securities. Please go ahead. Your line is open.

Hi, there. Thanks for taking the question you have Brad Bowers Huron grants need today.

So using some of the math on the GM headwind it looks like it was about a 50 basis point headwind.

This would imply a little bit of a step up in the <unk>, but if we assume that reverses that's a tailwind to 2024 and then the Oi comments imply about 100 basis points about margin expansion. So.

It seems like that would imply that there would be some more opportunity on the cost leverage side as well as on the organic GM expansion side. So I wanted to make sure that that math is kind of checking out and how youre thinking.

Yes, I think that math, all checks out and I'll, let Brian confirm that but that makes sense to me.

I do agree with your comment about.

Potentially being able to get incremental leverage if you will.

I think one of the issues that were running into here.

I think we will continue to have a challenge with next year is that we do have very strong demand right now.

Logically you might think hey, that's great right you get those incremental revenues and all of that flows through to Oi.

But in order to support that growth right now with the infrastructure investments, we're doing combined with geographic.

<unk> expansion and everything else Thats going on you are not seeing that right now so what history would tell you based on Cooper I've been here a long time now what history would tell you is when we have this stuff happens we get comfortable with the organic growth. If you will the better organic growth that we have and it certainly appears to be sustainable higher.

Organic growth and we have had historically once we get comfortable with that and I mean by that is you get these facilities in place you get the packaging lines in place and the shipping lines and everything else and Brian touched on some of that once you get that stuff in place you start leveraging it and youre able to really drive some margin expansion I think that will happen as a matter of fact.

I'm highly confident that that's going to happen, but I think we're going to continue to deal with some of those challenges.

Over the next year, if you will or some some timeframe.

Managing that growth is tied to the investment activity that we're talking about whether it's in the fertility business, where we're putting a lot of dollars or within our myopia management business, especially my site, where we're putting a lot of dollars right. Now. So I think when you put that all together you step back and you go okay low double digits kind of makes sense for this year. It makes sense for next year.

It'll be interesting as we move forward and we build out some of this infrastructure enabled to leverage yet what will happen in some of the years after that.

That's helpful and one follow up on that specifically within the CVI business. You've mentioned your strategy of the carrying more skus and inventory side, just wanted to kind of hear about how.

How much do you think thats contributing to some of the wins in ophthalmology, we had heard from J&J that potentially there was some focus on their more core business as opposed to some of the more tail skus and.

Addition to how.

Yeah.

The infrastructure build that is related to kind of maintaining that SKU range and if we talk about.

In the past I think it's at least a couple of years, maybe 24 to 36 months to see the benefit from.

Manufacturing those contact lens lines is that the right way to be thinking about that and also from a market share perspective, Thank you for answering them.

Yes, Brian that is a great question and great point on that SKU range I mean, we.

Do take the position that if a patient walks into an an optometrist office that theyre able to be fit in a coopervision products. So we do have very wide skew ranges largest in the industry. There is no doubt when you look at like the daily tour like the <unk> is by far the widest SKU range that's available it is.

<unk> the manufacturer of those is expensive to manage them through your logistics change through chain through distribution and so forth, but you are exactly right you move through a period of time, where youre increasing your production capabilities you are improving your distribution capabilities and so forth, you'll get that behind you and you're re.

Really in an excellent place and it does take several years in order to get there. So we are on that journey right now.

We've been there before we've done it before we've done it successfully before I'm highly confident the team will deliver again, but that is another great example of one of the challenges were dealing with right now around our growth.

If you would like to ask a question. Please press Star One. Your next question comes from the line of Patrick Wood from Morgan Stanley . Please go ahead. Your line is open.

Amazing. Thank you so much for taking the questions I guess.

First one maybe on my side, you alluded to some of the work to happen on consumer awareness on that side.

You've got better coverage now do you think the marginal dollars needs to be spent on the optometrists to convince the consumer or are we thinking DTC and why shouldnt why shouldn't we expect quite a lot of money to go in here to take advantage of the better coverage.

Yeah, I don't think its going to be DTC related I mean, we spent money on that side of things will continue to spend some but I don't think its going to be significant dollars, because thats more social media and so forth that focuses more on the optometrist themselves.

I think the one thing that could be a little different would be we're starting to see insurance reimbursement our insurance coverage. If you will I mentioned Aetna is now covering my site.

We've had kaiser here for a little bit covering it as we knock on wood pick up other insurance companies covering it working with optometrists and ensuring that they know what's available and how it works and with families.

That'll take us a little bit of work thats easier wed like pediatric ophthalmologists, who are a little bit more comfortable with some of the insurance reimbursement activity.

But.

I think that could be a little bit of active a little bit of work and cost us a couple of bucks, but we built that into all of our assumptions, but I do think that we're gaining while I do I know were gaining traction and my site right now we see it in a lot of different markets, especially here in the U S and throughout Europe .

So we're going to continue to invest in it I mean, we've got our shoulder behind it now.

Are going to leverage some of that we did build out a fairly large infrastructure and we will start leveraging that a little bit more as we move forward, but theres still dollars to be spent no question about it driving that business forward, we want to drive it its a good long term sustainable business. So we want to continue to push it that's for sure.

Essentially and then maybe just one more in.

I guess I think I know the answer to this because there's been supply chain challenges with some of your peers, but do you have any sense from like sell in relative to sell out Mike is the channel, presumably quite lean in terms of inventory side, a lot of players or is it youre not Glenn normalize with amendment.

I would say inventories lean.

Thank you so much.

Yes.

Your next question comes from the line of Robbie Marcus from JP Morgan. Please go ahead. Your line is open.

Oh, great. Thanks for taking the question and I will add a congrats on a good quarter.

Two for me.

Maybe first.

Gross margin and operating margin are both fairly below pre COVID-19 levels. How do you think about your ability to return to the pre COVID-19 margins, particularly on operating margin.

How far out is that event.

Yes, hi.

Hi, Ravi I'll take that so I mean, if you look at pre Covid, a big big driver to operating margin reduction is FX that almost half of that of that difference you've got some operational items in there. Obviously, we talked about this a few quarters ago about share based comp we had some changes of vesting for five years.

Before.

Supply chain and general inflation higher cost freight, even though things have gotten better.

Elevated where from where they were in 2019.

And then of course, the all those infrastructure investments at <unk>.

A big one right there that's been elevated since 2019 so.

I just kind of just play back what al just said earlier and I had in my prepared remarks, we're going to start to leverage some of that stuff and hopefully one of these days FX starts to move in our favor but.

Im confident that we.

We will start to get some we got some opex leverage this quarter, you'll see some more next quarter.

As we get into next year from leveraging those investments from this year.

Great and maybe one on free cash flow.

And I know this year has a lot of <unk>.

Investment CRE at about a 48% free cash flow conversion through third quarter.

Fourth quarter is going to be even lower so, let's say you end the year and a 45% of lower on conversion.

Same sort of question.

Are you Comping yourself against the Med Tech average of about 80% and when do you think you might be able to get back up to those levels.

Yes, I mean, obviously, you've got a number of things a lot of moving parts.

By far I mean, if you look at free cash flow this year versus last year, I mean, capex is driving much much higher.

And then besides that you've got interest expense as a very big factors as those two combined alone is over $200 million.

The <unk> termination fee I mentioned that in my prepared remarks that will be $50 million. So.

Outside of that you've got FX.

Depending on how far you look back tax has gone up and then you've got a few other working capital items. So we're definitely investing a lot in our business a lot of dollars going towards infrastructure.

Is really mostly tied to capacity expansion.

But do you expect that free cash flow will improve next year versus this year.

Your next question comes from the line of David Saxon from Needham and company. Please go ahead. Your line is open.

Great. Thanks, guys and congrats on the quarter, maybe just a couple on the myopia management portfolio My site with strong despite China. So how are you thinking about the recovery in that region.

My site and then ortho K, maybe you can give a little more color on.

What that realignment is and how long that impact glass.

Sure.

Yes, China My site.

We don't have a big business in China.

Don't do a lot of in China.

But what we do do there and certainly myopia management is included there has been I guess bumpy maybe is the word to describe it.

Take a step forward in two steps backwards it seems at times over there so.

I know personally I get more optimistic about it because I am starting to see some good stuff happening and then all of a sudden.

It slows down so I'm, having a hard time reading it now again I'm not a China export we don't do a ton of business there.

But at least for what we do there are part of the business and the myopia management part of the business it's definitely.

Fits and starts so.

I wish I could give you more specific detail on that I mean, we don't have a lot built into our assumptions.

With respect to China, but.

I'm not sure how that's going to play out I will say that the receptivity to my site has been really strong around the world.

And it's been strong in China, I mean, we've gotten really good feedback in China about the product in and I think the product is going to be successful in that we did accelerate growth this quarter, which was great. We had a stocking order last year, so even hurdle that and still accelerated my site growth and we continue to see some really nice success with my side is as we start off the fourth quarter here. So.

Definitely optimistic on my side, and where it's going on a global basis, including within.

China, a little bit more questioning what's going to happen with ortho K we.

We did have some portfolio realignment, where we had to true up some products. We had a lot of products. There. So we had to do some products up and so forth.

We should have a better Q4 as a matter of fact, I think we will have a pretty decent Q4.

But again, it's still bumpy, we held the range of 120 to 130 right we did.

25% to 30% or 30, so we're at 85, so thats $35 million to hit the bottom of that range. So we're looking at sequentially at least $5 million more than our myopia management business. So.

That kind of gives you directionally, where I'm thinking as you're going to see some bounce back into some improvement, but I'm a little hesitant to get too excited about it just because it seems like we keep moving forward and stepping back there.

Great. Thanks.

With there.

Okay.

Your next question comes from the line of Steven Lichtman from Oppenheimer. Please go ahead. Your line is open.

Hi, guys. This is Ron <unk> on for Steve.

I just wanted to ask.

What was the problem.

<unk> of price to CDI this quarter and what are you guys assuming for the rest of the year.

Prices help and CVR around in the low two percents I would.

We would have that same amount kind of factored into fiscal Q4.

Okay.

And.

Do you guys have any.

Any thoughts on tax rate interest expense FX impact for fiscal 'twenty forward based on where things sit today.

Yes, Ron.

The tax rate, we're expecting them to bounce back to our sort of our organic.

Tax rate of 15% pre discrete.

And outside of some commentary I gave a little bit earlier on just subject to the fed.

We'll pay down some debt and hopefully, we'll see interest expense sort of flat to declining next year.

I didn't give any other sort of non operational commentary.

Okay. Thanks, guys.

And we have no further questions at this time I'll turn the call back over to you.

Great. Thank you.

And thank you for everyone joining today I'm pretty proud of where we're at right now.

Business is doing really well as everyone knows we just posted really strong revenue numbers this quarter and solid EPS numbers and our guidance is strong so I'm pretty optimistic about where we sit today and what the future holds and I look forward to December and discussing Q4, and definitely giving guidance for next year and talk.

About those details so thanks, again and look forward to hopefully seeing everybody during the quarter.

This concludes today's conference call. Thank you for your participation and you may now disconnect.

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