Q3 2019 Earnings Call

I would now like to introduce your host for today's conference Ms. Kim Duncan.

Vice President Investor Relations and administration Ma'am you may begin.

Good afternoon, and welcome to the Cooper companies third quarter 2019 earnings Conference call. During today's call. We will discuss the results included in the earnings release, along with the updated guidance and then use the remaining time for acuity.

Our presenters on today's call are al White, President and Chief Executive Officer, and Brian Andrews, Chief Financial Officer and Treasurer.

Before we begin I'd like to remind you that this conference call contains forward looking statements, including all revenue and earnings per share guidance and other statements regarding anticipated results of operations market or regulatory conditions and integration of any acquisitions or their failure to achieve 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 captions forward looking statements in today's earnings release and are described in our SEC filings, including Coopers Form 10-K , all of which are available on our web site <unk> Dot com should you have any additional questions. Following the call. Please call our investor line at nine to 546, 03663 or email IR at Cooper co Dot Com and I will turn the call over to al for his opening remarks.

Thank you Kim and good afternoon, everyone welcome to our third quarter 2019 conference call for the quarter, We reported 679 million in consolidated revenue up 3% year over year or up 5% pro forma.

Coopervision posted revenues of 509.1 million up 4% or up 6% pro forma Coopersurgical posted revenues of 170 point Threemillion flat year over year up 2% pro forma non-GAAP earnings per share were $3.23.

These results were driven by our market, leading products and strong operational execution and we expect this success to continue.

Well as I walk through the quarterly results today, the numbers will be on a pro forma basis, but it's mostly constant currency now as other adjustments are minimal.

For the quarter Coopervision posted growth throughout the world with the Americas up 5%, EMEA, 3% and Asia Pac up 13%. All three regions were led by our daily silicone hydrogel lenses, Myday and Clariti, which grew 23%.

Biofinity also performed well with Energous and Torics, leading the way in our <unk> franchise was solid leading to RFP or two week and monthly silicone hydrogels growth of 6%.

Moving outside of brand Torques grew 8% and Multifocals grew 2%.

Touching on the details Asia Pac continues to post very strong results our growth in that region is highly diversified from a product and geographic perspective, and it's driven by a fantastic team growing double digits for as long as they have with the momentum to keep it going it's not easy. So I wanted to highlight I'd say great job to the team.

Second EMEA was a little softer than we were expecting largely due to lower stocking levels as that region experienced fluctuations working through challenges associated with Brexit.

And finally, just a reminder, that our consolidated third quarter growth from last year was 9%, meaning this was a very solid quarter off a tough comp and looking forward. We are guiding Q4 to 6% to 8% and that's against a very tough 10% comp so our business remains strong.

We're also continuing to take share as we stay on the offensive with our strong product portfolio and our successful key account strategy.

Moving on to our myopia management strategy I'm going to focus on my site rather than the broader specialty unit is that's where most of our future investments will be dedicated.

As you'll remember my side is our innovative myopia management land that is selling in several European countries, Canada, and a few Asia Pacific countries I'm proud to announce my site exceeded $1 million in revenues this quarter for the first time ever more than doubling on a year over year basis.

The lenses supported by strong five year clinical data and we're continuing to see significant interest in accelerating demand for the product regarding the U.S., we're continuing to work with the FDA and hope to provide a meaningful update prior to calendar year end. Given there are currently no. After FDA approved myopia management contact lenses out approval would obviously be a major milestone in cement our leadership in this extremely exciting space.

With this positive activity, we've ramped up pre launch investment efforts and the U.S. they get a better understanding of the market and we've accelerated sales and marketing and educational activity outside the U.S.

These investments will add several million dollars and additional costs in Q4, but I'm excited to see the results as I remain extremely excited about my sights potential and the positive Halo effect. It will have on the rest of our portfolio.

Moving back to the quarter for Coopervision, Let me briefly walk through our ongoing infrastructure investments as this is an important part of our customized solution strategy to support our long term growth initiatives, we're continuing to invest in support of key accounts and independent practitioners by upgrading our distribution and packaging operations, our IP systems, and our overall customer service capabilities.

We're also enhancing manufacturing by maintaining an intense continuous improvement mentality, while expanding facilities and increasing the use of automation.

Lastly, we're also investing in sales and marketing activities, including increasing in store promotional activity education advertising and new sales and marketing hires. These efforts are critical to our long term success as we need the appropriate infrastructure to support our partners in growing their contact lens businesses for many years into the future.

Moving to market data at important trends.

On a trailing 12 month basis, the market grew roughly 7% to 8.7 billion with the primary growth driver being dailies up 11%.

The market continues to be healthy and I remain comfortable targeting growth in the mid to upper part of the 4% to 6% range I frequently discussed this growth will continue to be driven by several factors, including the shifted daily the trade up from from traditional hydro gel to silicone hydrogel dailies.

Geographic expansion and growth in Torics and Multifocals to put some numbers to some of that's roughly 41% of daily sales are now and silicones compared to 83% of F. R. P sales.

And I believe we'll see daily silicone sales approach or even reach the f. RP levels as pricing comes in line and new products are launched from a dollar perspective. This means that roughly 2 billion in current daily Hydrogels sales should be converted to silicon dailies, which will drive solid market growth for many years to come.

Additionally, new wares entering the market and daily lenses drive significant we more revenue than existing F. R. P or I'm, sorry, then exiting F. R. P. Wears so the transition were seeing to daily lenses from two week and monthly lenses is another underlying positive factor in the market's growth.

With respect to coopervision, our daily market shares roughly 18% compared to 31% within the F. R. P space. So there's a long runway for us to continue growing faster than the market.

The key remains executing on our core strategies and winning new wares and I'm very happy to say the new fit data is very strong showing our momentum is continuing.

Moving to Coopersurgical, we reported revenues of 170.3 million up 2% with our office and surgical business roughly flat infertility up 5%.

Within office and surgical Parago was unexpectedly flat given continued ASP improvements, but we believe there are two factors that impacted performance with those being our decision to pause certain advertising programs, including TV ads to take the time to assess the returns on these initiatives and some channel inventory contraction at the physician level.

We found a clear correlation between our consumer awareness campaigns in unit growth. So our challenge moving forward is to optimize the return on this activity theres more work to be done, but I'm confident we'll be successful given the strength of the sales and marketing team, we built and the significant amount of insightful direct to consumer information we've obtained.

The question right now is what's the long term growth opportunity for PARAGUARD and answering that revolves largely around unit and price performance. When looking at these two items I feel comfortable reiterating the paragon should grow in the mid single digits and I believe in the upper part of that for the next several years.

This is supported by roughly 3% annualized unit growth, which we believe will be able to obtain through normal sales and marketing activity and then roughly 3% coming from price.

As we've discussed our experiences have shown that we can push the unit growth rate higher than 3% through higher advertising, but we need to keep working and challenging ourselves as to the returns we're getting from that activity.

On price, we haven't adjusted price since we acquired the product, but we've seen our competitors increased their base price on the hormonal side of the market.

Given current market conditions, we're currently evaluating a price increase noting that any potential price increase rolled through the PNM overtime due to Medicaid and contractual arrangements.

Regarding fertility growth was led by our device portfolio, which includes consumable products like I'd be up media and our market, leading Wallace embryo transfer catheter.

We also saw stabilization in our genomics business as our restructuring activities are now completely behind us, including our lab consolidation efforts, where we reduce the total number of labs from 16 to three which will result in significant efficiency improvements going forward.

Overall, the fertility space continues to offer mid to upper single digit long term growth potential. So we're investing in sales and marketing talent as we expand internationally driving product improvements through R&D and implementing new selling and advertising programs.

Outside of the commercial part of Coopersurgical, we're making a lot of progress upgrading our infrastructure, including expanding our headquarters in Connecticut, increasing our distribution capabilities, such as adding a new facility that just went live in Europe , and expanding our Costa Rica manufacturing facility.

Regarding the Costa Rica project production is growing and we're on target with our build out plans, including tripling the size of the facility to accommodate the relocation of several production lines from other facilities around the world.

Once completed this facility will be a state of the art manufacturing location, including what we believe will be the most technologically advanced fertility manufacturing manufacturing operation in the world.

The team is doing a fantastic job handling all the complexities associated with this activity and im extremely pleased with the progress.

Before concluding I want to wrap up by mentioning we just refreshed our corporate brand with a new logo brand identity in web site.

This is an exciting step for the organization and better ties the visual representations of Coopervision and Coopersurgical and Cooper companies together you can check it out on our new website at Cooper Coes Dotcom Im also happy to say, we are continuing to make nice strides with our SG and corporate responsibility efforts, including expanding our philanthropic efforts, increasing supporting our local communities and increasing our environmental sustainability efforts and with that I will turn the call over to Brian .

Thank you Bill good afternoon, everyone. Most of my commentary will be on a non-GAAP basis. So please refer to today's earnings release for a full reconciliation of GAAP to non-GAAP results.

Our covered revenues so I'll focus on the rest of the financials and guidance.

Consolidated gross margin for the quarter was essentially flat at 67.3% versus 64% to 67.4% last year.

Coopervisions gross margin was 65.6% down from 65.9% last year due largely to higher secondary handling costs as we complete the distribution center upgrades that we've discussed before.

Coopersurgical is gross margin increased to 72.4% up from 71.7% driven primarily from improvements in our fertility business, where we're starting to see the progress following the completion of our genomics integration activity.

Consolidated operating margin increased nicely to 28.4% from 27.8% last year as we saw leverage from consolidated operating expenses only growing 1.3% year over year.

Investments, we're very targeted in key areas, including selling and marketing and distribution within coopervision.

Selling customer service and distribution within Coopersurgical.

Interest expense was 16.7 million and our effective tax rate was 8.9%.

Which included additional excess tax benefits received from the exercising of stock options.

non-GAAP EPS for the quarter was $3.23 with roughly 50.1 million average shares outstanding.

Free cash flow was 121.3 million comprised of $196.7 million of operating cash flow.

Offset by $75.4 million of Capex.

Net debt decreased by 122.8 million to 1.702 billion and our adjusted leverage ratio declined to 1.83 times.

One last matter from this quarter was we implemented a soft freeze our pension plan effective August Onest 2019.

Like many companies our focus is shifting to what our employees are requesting and Thats program such as our four one Kay.

And our new employee stock purchase plan.

This move did not impact our financials, you will see it in the Q. So I wanted to mention it.

Moving to guidance, our pro forma revenue growth ranges are basically unchanged, while EPS is being raised.

For the full year, we are now guiding consolidated revenues to $2.635 billion to $2.655 billion with coopervision range being $1.966 billion to $1.976 billion.

Which remains 78% full year pro forma growth and coopersurgical $669 million to $679 million, which remains full year pro forma revenue pro forma growth of six or 46%.

Full year non-GAAP EPS guidance is being raised 12 cents on the bottom end to $12.27 to $12.35.

Calculating this for just the fourth quarter shows coopervision revenue guidance of $503 million to $513 million.

6% to 8% pro forma.

And coopersurgical revenue guidance of $171 million to $181 million up 1% to 7% pro forma.

And non-GAAP EPS of $3.22 to $3.30.

No. The Q4 assumption is for roughly 10.5% effective tax rate.

Regarding FX.

Rates have moved around a lot over the past three months with the pound and yen, making decent moves, but the ultimate impact as a minimal change from last quarter with the fiscal year impact on revenues being a negative $67 million.

And a negative 60 cents EPS.

Our assumptions are based on generally current rates, including the euro at 110, the pound at 122 and the yen at 106.

Regarding fiscal 2020 guidance, it's too early to provide much detail, but at a high level. We remain focused on taking share by driving strong sustainable revenue growth and posting low double digit constant currency operating income growth.

Having said that we remain very excited about my site and there could be incremental investments in that product depending on the timing.

Around an approval from the FDA and ore from accelerating demand, we're seeing outside the United States.

As is our practice, we will provide full guidance for next year on our fourth quarter 2019 earnings call, which is set for December .

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

Thank you ladies and gentlemen, if you have a question at this time. Please press. The Star then the number one key on your touched on telephone.

If your question has been answered or you wish to remove yourself from the queue. Please press the pound key.

Again, that's star then one to ask a question.

In the interest of time, we ask that you. Please limit yourselves to one question and one follow up.

And our first question comes from Larry Biegelsen with Wells Fargo. Your line is now open.

Good afternoon, thanks for taking the question.

Just two for me to start with the Q4 coopervision.

Guidance Al I think can be reached the mid point.

To accelerate growth on on a nominal and a stacked two year basis, so what drives the acceleration in Q4.

And how much was that kind of Q3 impact from Brexit.

Is that something you'll quantify for us it's something you get back in Q4, and I had one follow up.

Yes, I think that when you look at Q4, if you kind of compared sequentially to Q3, you'd say the Americas are going to be similar or probably a little bit stronger I would expect in Q4 than they were in Q3 Asia Pac somewhat similar and I think EMEA puts up a better numbers and you kind of touched on it there. We we did see some de stocking this quarter. So assuming that we don't get a rebound in that we just have a regular kind of quarter for EMEA I think they'll post a stronger number than what they posted this quarter that pushes you somewhere to six being equivalent to this quarter to as high as eight in Q4.

That's helpful and then on 2020 appreciate the color.

Can you give us a little color right now on where kind of FX would be.

First is the impact for sales and EPS at this point and the tax rate outage, its still 13% to 14% is that the right way to think about tax for 2020, thanks for taking the questions guys.

Yeah, I think that on the tax rate side.

Probably 14% is the right way to think about it I mean, you're right I do think of it in that 13 to 14.

Kind of range at the end of the day, we've had some excess stock comp benefit and thats been around one and a half a percent for the last couple of years, so that could certainly push it lower but somewhere in that range and probably 14 for right. Now is probably the best number to go with just as a place holder well, obviously update that in December .

FX I think right now kind of current rates is neutral to maybe a little positive.

For next year, we'll update that obviously in the summer when we get there, but right now at least we don't have anywhere near the headwind that we've had this year.

Thanks for taking the questions.

Thank you and our next question comes from Jeff Johnson with Baird. Your line is now open.

Thank you good afternoon, guys. So.

Al the only other places CVI that maybe was a little short of our number other than the EU question that Larry just asked was on Multifocals up 2%.

Is that competition there was there any specific destock multifocals in the EU that would explain that I, just kind of what's going on in the multifocal category would be helpful.

Yes, Jeff I think it's tied more to competition than anything.

Some of our competitors have put out some pretty good lenses recently, we have significant market share in the Multifocals space. We do as you know really really well in that space, but but there is some heightened competition there.

The next real step for us is probably tied to like Myday Multifocals I could tell you we'll come out with that lens eventually and it's going to be received incredibly well in my opinion, it's just a matter of production on that so I think for right now, we're probably looking at closer to kind of low single digit growth and multifocals, where the market would be more in the upper single digits.

Yes, when do you think that might Multifocals put role and then as a follow up to that I'll count that just as my first question is a follow up to that you don't you did talk about some pre launch activity in F Q4 for the myopia lens in the U.S. for my site.

Yes that would suggest to me you have some confidence that you hear something good before year end from the FDA and as we've talked to some people out there. It sounds like the FDA is really just concerned about putting contact lenses on eight year olds not necessarily on the.

Process of reducing myopia progression. So it would seem like a low bar you have to kind of hurdle to get them to approve this product, but just any commentary you can provide would be helpful. Thanks.

Yes on the multi focal let me hit that one first on Myday multi focal no timeline on that one yet.

We have.

Some significant demand and now.

Not only significant but actually accelerating demand.

My day right now in and that's even without raising price. So we dropped the rebate and you asked we raise price and a lot of markets and and Myday demand is actually accelerating so im not sure. The multifocals is going to be out that soon.

So but at the end of the day, that's not that detrimental to us that the multi focal markets still four or 5% of the overall market. So well update on that as soon as we can we're bringing production lines on and we'll continue to bring them on next year. So the faster we can ramp up production the faster, we'll get up multifold caught there.

On my side, yes, as I mentioned in the prepared comments I think I'm keeping my fingers crossed cross will have a nice positive announcement prior to calendar year end on that product. So I think you're right on your commentary on on the FDA were working with them right now trying to get through that process. So.

Won't comment too much more than that other than to say fingers crossed and yes. We are.

Accelerating pulling forward if you will activity associated with that from a pre launch perspective, and then we've seen really really strong demand and my side outside of the us and Thats just been fantastic and Thats kind of accelerating also so we're doing a lot of work right now on understanding the market and launch activity, adding and engaging sales professionals and so forth on that side.

Thank you and our next question comes from Joanne Wuensch with BMO capital markets. Your line is now open.

Hi, Good afternoon, how are you all doing today.

Good Joe I know you.

Excellent.

It looks like the contact lens market has accelerated somewhat over the last few quarters and particularly this quarter is there any particular reason why.

Yeah, I think that you're starting to see people grab more and more and more a hold of the shifted daily silicone I mean for a little while you had JNJ. Then there are just a little bit and now kind of little bit and you had to us a little bit but capacity constrained in spots and then weve expanded our portfolio you've seen JNJ ramp up capacity of their daily size. Obviously alcan has some stuff going on I mean, that's your biggest shift so as you're seeing wearers exit the market a lot of those wears are fr, whereas there to weaker monthly where's the new wares coming into the market or daily wear so that's a pretty significant trade up and then the trade up if you will from a traditional daily hydrogen where do a silicone hydrogel, whereas another 20% or so trade up so we've talked about this for a number of years right and I think that it's gaining traction is what it comes down to it I think it's going to continue to gain traction as you get capacity ramping up new products and so forth come out.

Quoted that number $2 billion that needs to be converted over.

If you convert just that $2 billion over that changes to somewhere around 2.4 $2.5 billion of revenue, adding $4 million to $500 million of revenue to the industry that will probably take five to 10 years, but then you also rolling the other factors some growth and where as around the world at Torics and Multifocals. The other stuff that's going on and then the general transition to more daily wearers and it's all just a lot of really good.

Positive trends.

Now I'd like to hear that you had spoken about listening to your key brands strategy. A couple of quarters ago could you just give us an update on how that's going thanks.

Yes, absolutely, yes, we are focused on that as you kind of mentioned a lot of the investment activity were doing we put the key account team in place.

And it's a fantastic team, they're doing really really well we've had some very nice wins on the key account.

Within the key account team, we're working on some other stuff right now that's really exciting. So I hope that you will continue to to see some stuff in the in the near future here, that's going to be pretty positive and pretty excited about its going well.

Thank you and have a great weekend.

Thanks, Tim.

Thank you and our next question comes from Matthew Me Sean.

From Keybanc. Your line is now open.

Great. Thanks for taking the questions.

Hey al.

What are your competitors one of your competitors is working to improve the productivity of its new manufacturing lines I'm. Just curious like how confident you are that you. The manufacturing process that you acquired with soft line can still be a competitive advantage for you moving forward.

Oh, yeah, very confident of that I think in my my opinion right now looking at I mean, we have the best manufacturing team in the contact lens industry and we have the best lines.

That are out there right now so thats Sauflon acquisition was just phenomenal for us and linking in that technology into our real high volume technology, we have and pulling those together to standardize those lines.

I think thats, a true competitive advantage for us and frankly, I see I think you'll see that in our margins you see that in the strength of the coopervision margins that are out there and we can't rest on our laurels there and we're not we have a very highly focused intense continuous improvement mentality within manufacturing. So we are really working hard to drive.

Continuum production improvements and cost reduction so I feel good about that on the manufacturing side.

Okay, and then on the revenue growth side, I think I think.

That's the first time, you've mentioned targeting growth at the high end of at the high end of the market.

But you have been coming in well above that for like the last couple of years are you, suggesting that the recent the recent growth in this in this seven 8% isn't a viable target for you moving forward.

Oh no. It definitely is so I would say that I continue to believe that we can put a pretty strong growth kind of talk about it in the context of the market at four to six and we talk about ourselves taken share and we'll talk about kind of that 6% to 8% growth. So I think we can continue to put up those numbers I do think that the actual market growth could get stronger I don't think that will be detrimental to us, but I do think the market growth can be stronger you can use alcan as an example, you know they come out with precision one great product or trading up DCP wearers, and they're getting a 20% or so trade up from that I mean that alone is going to increase them, but we're going to continue to put up our numbers and grow so I feel pretty good about our growth and I think the market kind of stable here to maybe even a little bit improving.

Thanks, Jeff.

Yep.

Thank you and our next question comes from Matt O'brien Piper Jaffray. Your line is now open.

Hi, guys. This is drew on for Matt I mean, thank you for taking the questions I guess first wanted to touch on what you what you just mentioned there.

Obviously over the last couple of quarters clarity growth has been great. I mean of this new competitor, bringing a product in the next couple of months I guess that is probably going to take a little while scale, but I guess now that you've seen the product sort of how do you think that stacks up against your product portfolio.

Yes, I think that our product portfolio is very strong I mean, we have to keep in mind clarity has a sphere toric and multifocals. So it's the full set of products might.

My days out there right now and as a sphere and toric also so we're in good shape, we do need to expand parameter ranges, we'll add a base curve for instance, the myday. So theres a number of things we're doing to continue to expand our existing portfolio. So we're quite ahead of a lot of people in the game right. Now. So I mean competition is going to come that's part of where we are thats. The industry. We live in and we have good big competitors, but we're not sitting around doing nothing thats for sure we're expanding the portfolio getting product out in more countries and locations and so forth. So we we said many years in front of us have upside from that type of activity.

Okay.

And then obviously paragon has been.

I was here for the last couple of quarters. It moderated may be a little bit here in Q3, I know you guys have been a little hesitant to go down the television advertising rose.

So I guess the question is one I mean have you started your television ads, yes, I'm going to kind of was the hang up.

From pushing a little bit more aggressively into the DTC channel. Thank you Yep Yep Great question, Yes, the TV as we have not started those backup so we've talked about this a little bit in the past we were running TV ads and some really heavy promotional activity in a debt. In addition to kind of the social media print media everything else that we're doing so we stepped back from some of that activity as we discussed we've kind of talked about this openly to see what the impact would be to see how closely the correlation between those advertising campaigns and our unit sales were.

And to really understand the kind of the cost benefit of that a lot of that activity is very expensive to do so we're doing exactly what we said we would do and exactly what we wanted to integrate Intel on that.

I do think that you will see us come back with some TV ads are going to be more focused more targeted TV ads because there are certain markets in the us where we can target and be very successful with those TV ads. So I think you're going to see more were just kind of fine tune in that but if I do step back I'd say Paragon has grown about 6.5% year to date and I think thats a decent number yes, I think pergo is going to grow around 6%. If we just look at core unit growth from doing what were doing well plus price gets us to around that 6% number and we can drive that number higher we've proven we can drive that higher it's just going to be the cost benefit of doing a lot of that activity. So still learning still working through it but clearly feel very positive about that product and I've talked for a while about a mid single digit grower and I would be more comfortable at this point, saying, yes mid single digit is right, but the upper part of that mid single digit is is probably the most accurate.

Very helpful. Thank you.

Thank you and our next question comes from Larry Keusch with Raymond James Your line is now open.

Thanks.

Al could you you alluded to in your prepared comments about new fits doing very well can you provide just some more color in any way you can on just helping us think about kind of have the new fits are going.

Yes, the new fit data was strong this quarter no question about it and we saw an acceleration in some areas of new fit data that.

That excite me specifically when it came to new fits on the daily silicone Hydrogels side, that's what I would really point to I think this quarter, we hit an all time high and some of those metrics in one of the key metric certainly we hit an all time high so.

That's where the market's going markets go into daily silicone Hydrogels, and that's where we're focused and that's where we're accelerating and when I see that new fed data coming through.

It makes me feel really good because it might not happen immediately, but it's going to happen when you're getting the wears youre going to get the revenue associated with it.

Okay, perfect and then just.

Yes, one other one.

Again sort of you alluded to accelerating demand for for Myday Toric. So maybe you can talk about sort of geographically where you're seeing that.

Your ability to actually meet demand.

Could you give that continues to accelerate and maybe weave in there just sort of again, how you're thinking about.

Your manufacturing capacity expansion plan.

Yes, Larry that's it that's a great question.

Myday toric came into the market and it has been received so well and we had a halo effect where process fear up.

We're in a situation, where we've been increasing our manufacturing capacity. So the team's doing really well there with the existing lines. We have we've ordered a number of new lines that are becoming in over time. So we are going to be growing capacity, we've taken price up in many markets around the world and we've actually you've seen that in the us through a reduction in rebate, having said that.

My day demand continues to accelerate in the face of all that so that's the great news the challenge for US ends up being avoiding back orders and those types of problems. So we are putting stuff in place right now with respect to our supply chain to ensure that we don't go into back order situations and we take care of all of our customers and right. Now we are kind of playing that fine line of.

Ensuring we give high quality customer service, while we're ramping up production and I think that that youre going to see production come online I don't want to get into much detail for competitive reasons, but you're going to see production coming on line in this next fiscal year and especially at the tail end. So I think we're positioned well to put up good numbers next fiscal year, and then I think we're positioned frankly extremely well to really.

Put up some good numbers in fiscal 21 as that capacity comes on and we can expand our offerings and our parameter arranges and get back to so I've mentioned, it Jeff like Myday Multifocals and so forth on the market.

Okay terrific, thanks very much.

Thank you and our next question comes from Jon Block of Stifel. Your line is now open.

Hi, This is Trevor on for John Thanks for taking my questions. So first one vision has the rebid activity on daily is remains depressed relative to six to 12 months ago and should we view that as a tailwind.

To reported revenues looking forward over the next few quarters.

Yes, rebate activity is kind of flattened out.

Theres a little activity in there always seems to be hearing someone will run like a.

Small promotional activity for back to school and some of that kind of stuff. So you will see everyone saw some rebate activity come in but at the end of the day a lot of that is stabilized I do think we're working through some of that still but.

It's stabilized which is good news and you are seeing some base price increases so I think that trend there is.

At worst neutral and probably positive slightly positive.

Okay, great. Thanks, and then on surgical.

Where would you say you are winning share from on Paragon or does that just you are getting larger volumes from current prescribers are you, bringing in new docs in order to expand the product a little bit.

Yes, I think both I think both they and some of it is just awareness its consumer awareness and is also awareness to the physician. So we're out there doing physician training and so forth the product and kind of gone quiet so to speak for a number of years before we bought it so to get back out there to get into some training programs and talk to physicians as a working through school I think we are picking up some new docs and I think we're also picking up some new somewheres from some of the consumer awareness activity. So that's what kind of makes me feel pretty good about that 3% unit growth, we've actually been growing a little bit faster than that so I think we'll be able to hold that and hold that for a number of years.

Great. Thank you.

Thank you and our next question comes from Chris Cooley with Stephens. Your line is now open.

Good afternoon. Thanks for taking the questions Al just two from me on Perigord appreciate the additional color there about volume and pricing be curious just to.

Get your take on overall category potential.

Obviously, it tapered here a little bit with the lack of advertising. So just where do you see the broader category here in the states and specifically the non hormonal segment of that going relative to maybe other markets. Then I've got a quick follow up on vision.

Yes, the kind of are you de market in total in the US is some it's over $1 billion goes call. It close to kind of 1 billion, one and you are seeing decent growth within the space. So.

The as as are you the market, you're probably seeing around 2% to 3% unit growth.

For us plus price.

We're a little bit on the higher end of that from a unit growth perspective, as I mentioned, we haven't taken price recently, but looking at that.

And then when you look at how the non hormonal market because keep in mind were we have the only non hormonal I'd product in the us market when you compare that to markets outside of the us.

The non hormonal penetration rates are higher than they are in the U.S. So.

I think we can just do our job and get out their market and make sure people know the products available the trends are in our favor there.

But just to be clear no no change in your long term view there, even though you had a little bit of a step back here in them in the most recent quarter.

Oh, yes, absolutely no change there now we we pulled back on that intentionally right. We saw some we saw some destocking, which probably isn't a surprise we were doing all that advertising and promotions and you got a little buy in from physicians and some distributor kind of activity you get that kind of stuff you know why you're doing all of that and then you pull back and you get a pause in the marketplace, but now.

I don't have any I'm not stepping back at all from the positive feelings I have about Paragon. It was just a much more profitable quarter. If you will would be with the pullback in some of that.

Understood and then just lastly from me on the vision side. Just looking ahead, if we do see some volatility just to the economy is there anything different when we think about the current contact lens market here in the states versus say the use of in a wait time frame.

We saw.

Purchases go to maybe more to the six to nine month versus the full annual.

Supply at the time of the exam with the shift to dailies and with the focus now.

Key accounts should we be thinking about that for trying to risk adjust numbers in the out years or is that now changed structurally such that you purchase still full year supply at the time of the exam. How is how should we think about that going forward.

Yes, I think that the market overall is probably a little better place than it was then but to be fair. If we get an economic slowdown even with the shift to dailies, even with the things weve seen in the <unk> and all of that continuing you can get somebody that doesn't wear their daily lenses everyday they could always were five days, a week and where their glasses for over the weekend or something like that which would take the year supply of lenses that they purchased out to make it a 15 month suppliers or 14 months supply. So it wouldn't surprise me. If you saw that you know anytime you you moved to that kind of environment people are trying to save money. That's those are the kind of things that are pretty easy to do to save money on a Saturday or Sunday, just put your glasses on but I still think you know you go to 2009, the contact lens market in the middle of the recession grew 3% I would be really surprised under any scenario to see it get down there are lower.

Thank you.

Yep.

Thank you.

As a reminder, ladies and gentlemen that Star then one to ask a question.

Our next question comes from Anthony Petrone with Jefferies. Your line is now.

Thanks on CVI and then one on.

In parallel or just.

We recap in terms of where silicone hydrogel penetration isn't dailies right now.

And maybe what that debt that the value of that market is in dollar terms and then as you think of.

Silicone hydrogel material, becoming sort of more evenly weighted within daily specifically, where that total mark is going to go.

And then a follow up on power there will be it was trending I believe it around $170 million run rate last quarter. So it's a little bit of a step down this quarter, so trending around 17% market share. When you think of the positioning of PARAGUARD within the U.D. space and is it still possible that that market share could double over time and in the I'd market. Thanks.

Yes, I'll take part first yes, I do think it could I mean, there are markets outside of the US where you see hormonal non hormone on equal footing and you'll see 30 35, even 40% is couple of markets, where you get it's kind of 50 50. So I do think theres the chance to make that happen. It just takes time and it takes effort and we want to make sure that we do that in the most intelligent way possible and that's kind of maximize our returns. So I think if we went out with a massive marketing program and blanketed the us with television ads and so forth, we can push up PARAGUARD really fast.

I really I really do think that in the TV ads and where we did them in kind of Metro New York and San Francisco, We saw some really positive responses on that but but but I don't think its going to happen that way I think it will be more of a general trend in that direction. So I would say with a product like that with the margins we're getting on it.

If we can get that kind of.

Mid single digits, 6% kind of growth and push that up sometimes we're going to be pretty happy with that so no reason to to kind of push that further from a negative return perspective.

On side high and daily size.

Right now 41% of.

Daily side highs are being fit and silicone. So I think thats, probably key number you know the market right now a little bit over half of the market isn't dailies.

And.

41% of that being a daily silicone say it gets a little confusing with the numbers, but right now if you look at the two week and monthly market about 83% of that is being fit and silicone hydrogel lenses. So there is no reason daily silicones in my mind don't get up to kind of that same level and when you look at that conversion you are talking about another $2 billion and product. That's it that's the big shift right. There right was to go from 41 up to the 80% kind of level and that that 41 that I'm quoting right, where I think it was 39 last quarter 38, the quarter before I can't remember exact but somewhere around there continues to kind of move up a point every quarter.

Thanks.

Yep.

Thank you and our next question comes from Robbie Marcus with Jpmorgan. Your line is now open.

Great. Thanks for taking the question.

Maybe first just a housekeeping question can you walk through how FX impacted the PML on sales gross margin and the bottom line.

Sure I'll take that yes. So in Q3 the impact to sales was was about.

$13 million. So that's about a $3 million, that's a detriment so $3 million better than our previous guidance.

As the impact was a negative six cents.

Which was six cents better than our previous guidance.

Okay, and then as you think about.

Fiscal 20, and I realize you haven't given guidance yet so its more in a hypothetical sense.

What's what's your confidence in driving.

Above peer operating margin expansion here, what we see with a pretty good topline. This year FX is is eating away a lot of that and maybe you could just give us the year to date number to to help us calibrate on operating margin, but how do you think about your ability to expand operating margins going forward. Thanks.

Well I'll answer this and certainly let Brian jump in.

We can continue to expand operating margins.

I don't see anything that's preventing us from doing that I mean, we're going to get some leverage we're doing a lot of investment activity right now I kind of walk through that.

And thats within Coopervision and within Coopersurgical also so we will get some leverage and that we're just really building outright now in anticipation of some big years going forward because as I touched on with the Myday capacity expansion and so forth, we see a lot of good things in the future. So we're kind of getting ourselves ready so to speak and in front of a lot of that so we will get some leverage.

From some of that kind of activity and I think when you look at products like PARAGUARD. That's another one that we're going to get some pretty good operating margin improvement from from a product like that because that has really a high operating margins.

Yes, and I guess, just add to that I mean, we've talked about this in prior quarters around just how we kind of manager key accounts really down to the operating margin levels. So as we continue to evolve and those relationships.

I'd expect operating margins to improve we've got some push and pull and then we've got with rates going down you know even though.

That's great for interest expense, our pension service cost goes up.

It runs counter to that and.

But I think in general I mean I think.

Hit the nail on the head we're going to we'll expect to see some some expansion but it's.

With the things, we're doing especially around also distribution.

Where we said this year with a little bit elevated and I'd expect a little bit of leverage next year.

All right great. Thanks, a lot.

Thank you and our next question comes from Steve Willoughby.

From Cleveland Research Your line is now open.

Hi, good evening, thanks for taking my questions.

I've actually got three things for you.

First a quick one Brian .

Was there any M&A contribution in the quarter.

Not really I mean, it was when you look at last year you had a.

A couple of million dollar positive and then a couple of million dollars negative. So the so the net impact was zero on a consolidated basis.

Okay.

And then secondly al.

More commentary.

But in the past on Paragon as it relates to price.

What do you what is what are your thinking on timing of potential price increases and if you could remind us how much of a discount paragon is to the hormonal competitors right now and if you think you can bring that up to parity and then I have one quick last one.

Yes, Steve we bought that and Teva had done the price increase remember we talked about back reserves kind of all the disruption in the channel and so forth as we work through that so this will be the first price increase that we've done. So we are very actively right now kind of going through and evaluating where we stand how that price increase rose through the PNM.

And when to do it so I would expect something in the near future here in terms of price increase.

We are price below our competitors, who are in the hormonal side of that depending upon what product you look at it I mean, it can be 15% or so kind of beneath them. There is a lot of different factors that go into that pricing, but there are certainly some some room for us to take a decent increase in price and still be priced below them as as one more tool kind of in the tool box in order to be able to sell the product. In addition to the fact is the only non hormonal product in the market.

Okay, and then just last thing for you Brian on the tax rate.

Yes, I believe you said, 10.5% for the fourth quarter.

During my math it looks like it implies about 7.5% for the full year, which is actually flat to slightly down year over year am I thinking about that the right way because that adds based on my math kind of 10% to 15%.

10 to 15 cents of EPS this year versus your guidance a quarter ago.

Yes, Thats right.

Okay. Thanks very much.

Thank you I'm not showing any further questions at this time.

I would now like to turn the call back over to Outlink, President and CEO for any closing remarks.

Thank you no. Thank you for everyone who called in.

We have our next call become beginning in December I think December 5th so.