The Cooper Companies, Inc.

and thank you for standing by. Welcome to Cooper Company's third quarter 2022 earnings conference call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask the question during the session, you will need to press star 1-1 on your telephone. I would now like to hand the conference over to your speaker, Kim Duncan, Vice President, Investor Relations and Risk Management. You may begin.

Good afternoon, and welcome to the Cooper Company's third quarter 2022 earnings conference call. During today's call, we will discuss the results and guidance included in the earnings release, and then use the remaining time for questions. Our presenters on today's call are Al White, President and Chief Executive Officer, and Brian Andrews, Chief Financial Officer and Treasurer. Before we begin, I'd like to remind you that this conference call contains forward-looking statements, including all revenue and earnings per share guidance, and other statements regarding anticipated results of operations, market or regulatory conditions or trends, product launches, operational initiatives, regulatory submissions, and closing or integration of any acquisitions or their anticipated benefits. Forward-looking statements depend on assumptions, data, or methods that may be incorrect or imprecise and are subject to risks and uncertainties. Events that could cause our actual results and future actions of the company to differ materially from those described in forward-looking statements are set forth under the caption, forward-looking statements in today's earnings release, and are described in our SEC filings, including Cooper's Form 10-K and Form 10-Q filings, all of which are available on our website at coopercos.com. Also, as a reminder, the non-GAAP financial information we will provide on this call is provided as a supplement to our GAAP information. We encourage you to consider our results under GAAP as well as non-GAAP and refer to the reconciliations provided in our earnings release which is available on the investor relations section of our website under quarterly results. Should you have any additional questions following the call, please email IR at cooperco.com. And now I'll turn the call over to Al for his opening remarks.

Thank you, Kim, and welcome everyone to Cooper Company's third quarter conference call. Let me start by highlighting that this was the sixth consecutive quarter of double digit organic revenue growth for Cooper Vision. and the seventh consecutive quarter of double-digit organic revenue for Cooper Surgical's fertility business. This impressive performance showcases the strength of our teams and the strong demand for our products and services. This momentum continued in August, and we're increasing the organic revenue guidance for both Cooper Vision and Cooper Surgical, incorporating our strong Q3 and the strength we're continuing to see. Overall, the challenging macro environment, including headwinds from currency, inflation, and supply chain challenges, has negatively impacted profitability, but has not reduced our ability to take share and drive sustainable top-line growth. Moving to the third quarter results, consolidated revenues reached an all-time high of $843 million, with Cooper Vision posting record revenues of $566 million, up 11% organically. and Cooper Surgical posting record revenues of $277 million, up 35% as reported, up 3% organically. Growth was led by our daily silicone hydrogel portfolio and myopia management products for Cooper Vision and Fertility for Cooper Surgical. Non-GAAP earnings per share were $3.19, and we posted record quarterly free cash flow of $217 million. For Coopervision and reporting all percentages on an organic basis, revenue growth was strong and diversified in all product categories, spheres, torques, and multifocals, and within all three geographic regions. The Americas was up 7%, EMEA grew 15%, and Asia-Pac grew 11%. This performance was driven by a number of factors, including new product launches, expanded product ranges, market-leading flexibility through our customized offerings, growth in key accounts, and strength in branded products. Regarding product details, daily silicone hydrogel lenses grew 24%, led by great results from both My Day and Clarity. Daily silicones continue to be the main driver of growth for the contact lens industry, and we offer the broadest portfolio in the market, with My Day and Clarity available in a broad range of spheres, torques, and multifocals. Within this, we're continuing to see especially strong growth from My Day. including from the very successful rollout of the MyDay multifocal, which is taking share in markets around the world. The feedback from patients remains fantastic and optometrists continue reporting that our breakthrough binocular progressive fitting system is allowing them to fit the lens quickly and accurately. This success is driving a positive halo effect on MyDay spheres and torques, and we remain very optimistic about the future of this brand. Clarity also posted a solid quarter, with particular strength noted in AsiaPac. And our silicone hydrogel FRP lenses, BioAffinity and Avera, reported another solid quarter of 8% growth. Regarding product launches, we remain very active. I'm excited to announce we'll be seeding the market with My Day EnerGIS over the next several months with a full launch scheduled for early calendar 2023. We've had a lot of requests for the Energist technology in a daily lens, and given the success we've had with BioAffinity Energist, we're really excited about this opportunity. MyDay Energist will use the same digital zone optics technology as BioAffinity Energist, providing wearers greater comfort when using digital devices, along with enhanced end-of-day comfort. This daily lens is a perfect product for today's digital world and another great example of Cooper Vision leading with innovation and manufacturing know-how. And building on this, we'll also be launching an expanded MyDay Toric parameter range in early fiscal 2023. MyDay already offers the most prescription options in the daily Toric market, and this expansion will essentially match the leading offerings in the FRP Toric segment, which will be a first for the contact lens industry. All this activity supports a fantastic MyDay brand and exemplifies Coopervision's focus on offering practitioners a wide variety of market-leading, technologically superior products. Meanwhile, we're expanding availability of Clarity around the world, which will further strengthen relationships with customers using store brands. And I'm also happy to report that we've recently increased production of BioAffinity, including made-to-order extended-range Torx and BioAffinity Torx multifocals. Demand continues to exceed supply on these products, which has caused supply disruptions, so adding capacity is great news. Overall, these products and technologies improve how eye care professionals deliver clinical care, and it's allowing us to lead in defining standard of care, a core component of our ongoing share gains. Moving to myopia management, another exciting area where we're a market leader. We posted revenues at $24 million. up 42%, including MySight up 109%. Our growth trajectory remains strong, with the main challenge being in China, where all contact lens sales, including MySight and OrthoK products, have experienced difficulties due to ongoing COVID restrictions. Outside of China, MySight is performing really well, backed by its extensive seven-year clinical data and FDA approval, and we're seeing strength with key accounts and private practitioners around the world. We're also seeing a positive halo effect with customers selling MySight, accelerating their use of other Cooper Vision lenses. For sight glass myopia management glasses, our JV relationship with Essilor Luxottica is going well and the team continues to make progress. In the U.S., we're finalizing the submission of the three-year clinical data and expect to submit it to the FDA in September. As a reminder, the only FDA-approved myopia management product on the market in the U.S. is MySight, So obtaining approval for glasses has the potential to really propel the myopia management field forward. To finish on CooperVision, the contact lens market continues to perform exceptionally well with estimated growth of 8% in calendar Q2. Although COVID-related challenges remain, including here in the U.S., where back-to-school eye exam demand is exceeding exam capacity, the many long-term growth drivers of the industry remain intact. This starts with a large macro growth trend that roughly one-third of the world is myopic today, and that is expected to increase to 50% by 2050. This is driven by heightened screen time, among other factors. Additionally, the shift to silicone hydrogel dailies remains strong. The penetration of higher-value products, such as torques and multifocals, is growing. The number of wearers is growing, and we're seeing price increases. Global growth to remain healthy and believed will remain a leader with our robust product portfolio, ongoing product launches, fast-growing myopia management business, and leading new fit data. And speaking of data, I'm proud to say Counter Q2 U.S. stats show Cooper Vision was the number one company for new wearers and the only manufacturer to grow share in all three daily categories, spheres, torques, and multifocals. Moving to Cooper Surgical, we posted a solid quarter led by fertility, which reported sales of $112 million, up 13% organically. As I mentioned earlier, this was the seventh consecutive quarter of double-digit organic growth, so a big congratulations to that team. Success was seen throughout the product portfolio and around the world, with particular strength noted in consumables, with products like media, pipettes, needles, and catheters doing well. Consumables are a core part of our fertility business and an excellent indicator of future growth, so we remain in great shape to continue delivering strong results. Regarding the broader fertility market, the fundamentals behind the industry's growth remain very healthy. There are many drivers, but women delaying childbirth is a primary factor as fertility challenges start increasing around the age of 30 with a more pronounced negative impact starting at 35. It's now estimated that roughly 15% of reproductive age couples worldwide have fertility challenges, and over 750,000 babies are born annually through fertility-assisted measures. And these numbers are growing. Regarding Cooper Surgical's positioning, we estimate the portion of the market we compete in is roughly $2 billion in annual sales, and that it will grow in the 5% to 10% range for many years to come. In addition to increasing maternal age, other drivers include improving access to treatment, increasing patient awareness, growth in the number of fertility clinics, improved product offerings such as donor activity and cryopreservation services, and technology improvements for both male and female infertility challenges. Given the momentum of the industry and the diversity of factors driving growth, fertility is certainly an exciting market to be in. Moving to office and surgical products, which includes OBGYN medical devices, ParaGuard, and stem cell storage, we posted sales of 165 million, up 36%, but down 3% organically. OBGYN medical device sales were negatively impacted by heightened back orders due to supply chain challenges. We've seen good demand and positive signs in our supply chain to start this quarter, so we expect healthy growth in fiscal Q4. Paragard was down 7% as expected due to a difficult comp with last year's price increase and related buy-in activity, but we expect nice growth in Q4 with an easier comp, improving patient flow, and an increasing patient focus on the most efficacious forms of birth control, including 99% effective IUDs such as Paragard. Lastly, our stem cell storage business that we entered with a generate acquisition this past December grew 1%. This was in line with expectations against a difficult comp from prior to our purchase of the business. To wrap up on Cooper Surgical, fertility remains strong, the other parts of the business are making progress, and the integration activity is going well. We expect a strong finish to this year and believe we're in an excellent position to deliver long-term, mid-single-digit growth. To conclude, we operate in recession-resistant industries with strong macro growth trends, but we're not immune to supply chain challenges and currency is having a material impact on our as-reported results. Having said that, our core business fundamentals are excellent. We're taking market share, we're leveraging where we can, we're taking price. We'll remain extremely focused on the challenges facing us, and we'll be proactive, and we'll proactively manage operations while maintaining a focus on delivering long-term shareholder value. And with that, I'll turn the call over to Brian to discuss financial results and guidance.

Thank you, Al, and good afternoon, everyone. Most of my commentary will be on a non-GAAP basis, so please refer to our earnings release for a reconciliation of GAAP to non-GAAP results. Third quarter consolidated revenues were $843 million, up 10%, or up 9% organically. Consolidated gross margin was 66.1%, down 220 basis points from last year, driven primarily by currency. Operating expenses grew 13% and were 42.7% of revenues primarily as a result of the acquisition of Generate Life Sciences. Consolidated operating margin was 23.4%. Within these results, currency is having a significant negative impact along with supply chain and inflationary pressures. We raised prices to offset some of this and have additional price increases coming. and will continue to work diligently controlling costs. Moving below the line, interest expense significantly increased year-over-year to $17 million, with higher rates and debt balances driving the large year-over-year increase. The effective tax rate was 10.2%, and non-GAAP EPS was $3.19, with roughly 49.6 million average shares outstanding. Year-over-year FX negatively impacted earnings by 67 cents in the quarter, which was 10 cents worse than we forecasted at the time of our last earnings call. As with last quarter, a large part of the 10 cents was attributable to the remeasurement of foreign currency-based intercompany trade receivables, which are recognized in other income and expense. In order to reduce this variability moving forward, we've made moves including closing out certain non-functional exposures and improving our natural and synthetic hedge positions. Moving forward, we believe these efforts will do a better job mitigating the impact of FX gains or losses that occur below the operating income line. Returning to the quarter, free cash flow was extremely strong at 217 million, and we decreased net debt by 218 million to $2.64 billion. This reduced leverage to 2.44 times, which lowered the borrowing rate on our long-term credit facility pricing grids by 25 basis points. As a reminder, $1 billion of our debt is fixed to 2025, with the remaining amount floating. Moving to guidance. we are increasing the full year organic revenue growth ranges for Cooper Vision and Cooper Surgical to include our strong Q3 results and the strength we're seeing as we enter fiscal Q4. For EPS, we're updating guidance to reflect the negative impact of currency and interest rates, offset slightly by better operational performance. Specific to fiscal Q4, The consolidated revenue guidance range is $830 to $850 million, up 9% to 11% organically, with Cooper Vision revenues of $554 to $565 million, up 8% to 10% organically, and Cooper Surgical revenues of $276 to $285 million, up 10% to 15% organically. Non-GAAP EPS is expected to be in the range of $3.05 to $3.20, based on a roughly 13.5 effective tax rate and roughly $22 million of interest expense, which includes an assumption for a 75 basis point increase in September. Regarding currency, we're now forecasting the year-over-year negative impact in Q4 to be roughly percent headwind to revenues and a 20 percent headwind to EPS. For fiscal 2023, we won't be providing detailed guidance, but let me provide some high-level direction. Assuming currency rates remain similar to where they are today, interest expense increases to around $85 million due to multiple rate hikes, our effective tax rate increases to roughly 15 percent, and the macroeconomic environment remains challenging, we expect to report low single-digit year-over-year non-GAAP EPS growth. These expectations do not include the pending acquisition of Cook Medical's reproductive health business. Lastly, as it relates to our pending acquisition of Cook, that transaction is still pending regulatory approval. We are currently exploring different options to close the transaction, including the potential sale of certain Cook assets in the U.S. and abroad. Given the process and necessary approvals, the timeline is tough to estimate, but we're hoping to close the transaction by June 30th of 2023. And with that, I'll hand it back to the operator for questions.

Thank you. As a reminder to ask the question, you will need to press star 11 on your telephone. We ask that you limit yourself to one question and one follow-up. Again, that's star 11 to ask the question. Please stand by while we compile the Q&A roster. Our first question comes from the line of Jason Bednor with Piper Sandler. Your line is open.

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

Yeah, on that second one, the back-to-school demand is strong. We've definitely seen an increase on that, and there's some commentary of other people. I think National Vision talked about it on their call earlier. It comes down to staffing shortages and really strong demand. So that's putting pressure on the optometry community, whether it's retailers or independent optometrists to meet all that demand. So that's a challenge right now. It's quote unquote a good challenge, right? But it's still a challenge that the industry needs to work through over the coming months. With respect to August, I won't give numbers on August, but yes, Cooper Vision and Cooper Surgical, including fertility, are both having good August.

All right, that's helpful. And I hear the hear the commentary on my site in China just probably got up to a little bit slower start with the lockdowns there. But, you know, now that you're into July and August, things around medtech seem to have started to recover in China. I mean, can you talk about uptake of the lens in that market compared to other regions where my site's been available? Are you seeing the sales and education process, you know, relatively shorter in that market? Just would love any color there. Thank you.

Yeah, so we have seen an uptake, if you will, in my site in the month of August, certainly, and including in China, where we've seen things loosen a little bit there. So positive news on that. The uptake of that product and success of that product is moving faster than we've seen in most other markets around the world. So certainly positive signs there, and fingers crossed, we're now on a better path, right? Because that's really the thing that impacted our numbers. It's really been China. That's, I don't know, 99% or 100% of what's impacted those numbers. Got it. Thank you.

Thank you. Please stand by for our next question. Our next question comes from the line of Larry Bileson with Wells Fargo. Your line is open.

Good afternoon. Thanks for taking the question. Brian, thanks so much for the color on fiscal 2023. Maybe if I could ask about maybe some of the other assumptions embedded in the low single-digit year-over-year non-GAAP BPS growth. Underlying organic sales growth, should we think about that in line with historical 6% to 8% growth, organic growth for Cooper, or do you think you can do better? And currency, Brian, I think I heard you talk about interest expense. But currency, right now, we think it's about 3% headwind to sales, 80 cents to EPS. Any color on those two? And I had one follow-up.

Hi. Hi, Larry. Thanks for the questions. You know, obviously, you've followed us for a very long time. You know our story really well. You know, long-term, you know, we've got – right now, we've got all the macroeconomic environment that makes it really challenging to provide specific guidance into the P&L this far in advance. We've decided to give a few elements today just to calibrate some people on a few important pieces. Again, I think we want to reiterate that the core fundamentals of our business remain strong. We're raising prices, we're growing share, and we're diligently controlling costs to leverage where we can. Obviously, long-term, we want to drive mid to high single-digit revenue growth and leverage the P&L. to grow EPS to low double digits. But right now, it's just too hard to say, and we're just not going to go there this early in the year to talk about next year. So appreciate the questions, Larry, but we'll update that in December.

Understood. And Al, on site class, and first of all, I didn't hear you reiterate the $90 to $100 million for myopia management this year, but it looks achievable based on the $24 million you did in Q3 here. Just want to confirm that. And For Cyclas approval in the U.S., what's your confidence here by calendar year end 2022? Did you hit, you know, FDA's goals for axial length and myopia progression? Thank you.

Yeah, I think on myopia management globally, we'll probably end up in that 90 to 95 million range. And the only reason we're not exceeding, well, two reasons, I mean, but the primary reason we're not at 100 or a little over 100 ends up being currency. The other one would be, obviously, China moving a little bit slower. So I wouldn't take it completely off the table, but I'd probably say 90, 95 is probably a better number that we'll settle in on. On Cyclas, I won't get into too many specific details on it, but I will say that we're submitting that data and looking forward to talking to the FDA on that and believe we have certainly a reasonable, good chance to get approval by the calendar you're in. Thank you. Yep.

Thank you. Please stand by for our next question. Our next question comes from the line of . Your line is open.

Good afternoon, and thanks for taking the questions. Can you hear me okay? Yep. Hey, Chris. I'm sorry. She broke up there a little bit. Congrats on the strong organic growth. Just maybe two quick ones for me. First, when we just think about the new product cadence, the expansion of the My Day portfolio, could you give us a little bit more color about when that will start to roll out just to make sure I have that understanding correctly? And then on the surgical side, you know, may be wrong here, but coming off of the physical 2Q, I thought we were going to expect a little bit stronger organic growth on the office side with the equipment. It looks like that's still a little bit more supply chain constrained. Could you give us some color about what gives you confidence that that improves as you go into the physical year-end?

Thank you. Sure. Good questions, Chris. And you can see in the guidance we gave for Cooper Surgical, that we're kind of in that 10% to 15% organic growth range for Cooper Surgical and fiscal Q4. So expecting a really strong quarter. We did have some stuff in Q3 because of supply chains move itself into fiscal Q4. As I mentioned, we started off with a good quarter within both businesses, but within Cooper Surgical to support that kind of guidance range. So anything that maybe you were thinking, hey, it's going to be a touch stronger in Q3, you're going to end up, I think, seeing in Q4 because I would imagine those kind of guidance expectations are a little bit above yours or most people's expectations for Q4. If we look at Cooper Vision, yeah, the organic growth is really strong there. The business is doing really well. That team is putting up some impressive results, and that's continuing. I think people underestimate the power of our portfolio, the breadth of our portfolio, the strength of our sales and marketing teams. And the amount of new products that we're launching, right? And whether that's a parameter expansion or a new product itself, we're very active and we've been very successful in a lot of segments. And that's going to continue, as I mentioned, as we roll into this next fiscal year, we'll be expanding the parameter range of My Day again. It's already market leading today. It's going to be even better. up where kind of BioAffinity is. So, my day is kind of turning into a BioAffinity daily, if you will, kind of success story, which is just awesome, amazing. And when you think about Energist, I mean, I'm really excited about that. We launched BioAffinity Energist. It did really well for itself. The demand around the Energist technology on a daily sci-hi has been really strong. We've had to ramp up production considerably within my day to be able to do that. The The manufacturing team has done a killer job to get us where we're at today. So we have that product. We're going to start seeding the market here in the next couple of months and look forward to getting that launched in early next year. And all that activity, along with the other stuff I mentioned, you know, biofinity and the things like biofinity toward multifocal and extended ranges and so forth are all going to continue to support what I believe is going to be some stronger than people are probably expecting organic revenue growth. Thank you. Appreciate this question. Yep.

Thank you. Please stand by for our next question. Our next question comes from the line of John Block with CESA. Your line is open.

Great, guys. Thanks. Good afternoon. Brian, maybe I'll start with you and just the EPS. Just the 22 EPS mid-20 stepping down by roughly 40 cents. I'm not sure if I missed it, but can you bridge, you know, the different components. Clearly, FX hit you. You had the interest rate, you know, coming above what you guys laid out last quarter. So maybe just walk us through the headwinds from FX and interest rate. You mentioned a little bit on supply chain as well. And then, you know, maybe what the offset was from better than expected. Sorry, there's a lot of noise. Better than expected operational growth as the organic came up by roughly 100 pips.

Yeah, sure. Hi, John. So prior guidance midpoint was the 319. I gave the FX unfavorability versus last guidance in my prepared remarks of $0.10. The Q4 FX unfavorability is a 20% headwind to Q4. Interest expense went up because of the Fed increases. John, were you asking about Q4? I thought you were asking about 2023. No, I'm sorry.

I'm asking just to be clear on fiscal 22. Let me just sort of make up some numbers. I mean, relative to when you last got it on the second quarter conference call, what did FX and interest rates take you down? You're lower by $0.40. Did you go down by $0.50 on FX and interest rates and then make back $0.10? I'm just making that number up. I'm just trying to get the bridge to get to it.

So in the full year.

Yes.

Okay, okay, okay. Yeah, so just starting with FX, I mean, I talked last quarter about the FX headwind to revenues for the full year being 5%. It's now 6%. The headwind to EPS... Last quarter was 14%, it's now 17%. As it relates to interest expense, forecasted a 50-50-25, and it was 75-75, and now we're saying 75 again in September. That's about five cents right there. So we've adjusted our guidance primarily tied to just FX and interest expense and some, you know, a slight operational improvement which gets you to that midpoint of 1280. Okay, I think I'm there.

And then Al, maybe I have a longer one for you, but you brought up the CBI organic growth again. Talk to us on the drivers. Is it new fits? It seems like it's certainly some incremental price. What do we think about price in fiscal 23? Does that have to step back down in relative to 22? And then one last one on my side. We just picked up, you know, some chatter that you might have rolled out a rebate program very recently. Is that correct? And if so, is that just a year one rebate for a new wear or is that also arguably year two, year three?

Thanks, guys. Yeah, on my site, John, I think what you're probably referring to is back-to-school promotional activity. So, yeah, I mean, the back-to-school demand has been very strong, and we've seen that demand on the optometry community. As part of that, we were running or are running promotional activity for my site. So I'm pretty confident that's what you're probably seeing out there. If we look at price, yeah, we took price earlier this year, and then we took price again this summer. We're looking at additional price increases right now and in the next year. So I think if everything holds as it is with the economy and inflationary pressures and so forth, you'll see incremental price increases from us. 2023 should still be a good growth year for us. We still have a lot of the underlying factors that are driving growth of the entire marketplace and our growth continuing. Now we're gaining wares. So when you look at the fit data, as I mentioned, we're just doing really well. We're number one on fit data. So when it comes to winning the new wearers coming in and winning the new fits, we're doing really well in that space. And I think that as we continue to roll products out and launch some of these new products and improve availability of products, we'll continue to do well from a new fit perspective. And when you combine that with some price, I think you end up with another pretty good year next year, frankly, for the entire marketplace and us included.

Helpful. Thanks, guys.

Thank you. Please stand by for our next question. As a reminder, ladies and gentlemen, we ask that you limit yourself to one question and one follow-up. Our next question comes from the line of Joanne Washington with Citi. Your line is open.

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

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

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

That is a continued number one spot.

And the source?

A variety of variety areas that would really depend on what product you're talking about. I mean, some of them are more dramatic than others. As an example of my day, multifocal is doing really well and it's picking up from a number of other multifocal companies. And then it's also picking up new multifocal wearers who are coming into the market. New wearers, and I'm talking about new wearers, the new 15 year old, 16 year old who enters the marketplace. We're doing really well there with my day and clarity. We don't have the same opportunity of trade-up, as you know, as some of our competitors do in terms of them shifting from like an old traditional, if you will, hydrogel daily lens to a new silicone and getting the trade-up benefit of that. We don't have as much of that. So when you look at our growth, it ends up coming from those new wearers. It's really a variety of different areas and different spots around the world.

Excellent. Thank you.

Yep.

Thank you. Please stand by for our next question. Our next question comes from the line of Matt Mission with KeyBank. Your line is open.

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

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

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

I would say very little benefit. In the contact lens industry, so much of it still goes around to the prescription itself, right? You go get a script and you buy. So if someone's having supply chain issues, Their wearer base generally extends their lenses or they wear their glasses or whatever in order to get those products. You have to have supply chain challenges of a decent magnitude that lasts a while before you really start seeing changing fitting behavior. So I don't think very much right now. I would change that answer if those kind of supply chain difficulties stay at high levels and go an extended period of time, but... I don't know. But as of now, I would say very little. All right. Thank you.

Thank you. Please stand by for our next question. Our next question comes from the line of Jeff Johnson with Baird. Your line is open.

Thank you. Good afternoon, guys. Hey, Al, I know you said you didn't want to quantify the price increases. Sorry. Yeah. Let's see if this is better, Al. I don't know. It sounds like I'm having the same problem John Block was having. Can you hear me okay?

Yeah, we can hear you fine. Yeah.

All right. Thank you. So I know you won't quantify the price increases, but, you know, our checks would say maybe one, one and a half percent earlier this year, another one, one and a half percent in August, but it's hard to know with your contracting and that. I mean, are those about the ranges we should be thinking about? Maybe two, two and a half points total net so far this year on the CDI side?

Yeah, I think that's probably fair. And, and, We talked about this, I think, in last quarter, the quarter before, right? Some of those price increases for us move in a little bit slower than others. Some of the guys have a lot on list price, right? So when they raise their list price, they'll get a benefit from those price increases relatively quickly. We have a lot under contract, especially with respect to anything that we're doing about store brands and that kind of stuff. So some of those price increases for us have a tendency to roll in over a longer period of time as those contracts need to re-up. But I think the magnitude of what you're talking about right now is somewhat in the ballpark to slash lower.

Yeah, okay. Okay, thank you. And then maybe two follow-ups on that. One, can you just remind me the surcharges in that, you know, transport costs and some distribution costs, and that's starting to come down a little bit. Do those fall into revenue or are those an expense line item? And would you expect to keep those – surcharges in place much longer or just how to think about that, one. And two, you mentioned my site, some back-to-school activity there on the promotion side. We were finding in our survey work maybe a little bit of lower sell-in price to docs as well on my site. Have you changed kind of your sell-in price, not just your sell-out?

No. So we haven't changed our pricing in terms of our sell-in. We've held pricing. We are – trying to do some other stuff, right? When you think about the most successful referral source, if you will, or person for us to market the product is anyone who's used MySite. The success rate has been really, really positive. So those parents who are positive on the product are telling other people, right? So we're trying to offer some promotional campaigns, for instance, for them. Hey, your kid's now in their second year or their third year wearing MySite. We'll give you a discount for everybody who you refer in who comes to my site. That type of thing. Promotional activity for a brand new wearer coming into my site around back to school. So there is some activity that we're doing, Jeff, to be fair, in terms of that pricing. There's been a few highlights about the pricing being a little high. So if you will, we haven't taken the list price down, but we are running promotional activity, especially with the heavy back to school season here. On the other side of things, on the freight, there's still – Freight's still a tough one, I got to tell you. Yeah, I would say things are getting a little bit better, but everyone still has their challenges there. I think that my gut tells me that those changes are just permanent price increases, if you will. And I think they all go through revenues, don't they?

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

Yeah, that makes sense. All right. Thanks, guys.

Thank you. Please stand by for our next question. Our next question comes from the line of Robbie Marcus with JP Morgan. Your line is open.

Hi, this is actually Lily on for Robbie. Thanks for taking the question. So operating margin came in lower than what we were thinking and pretty significantly lower than a year ago today. So is there any way to quantify how much of that is FX headwind versus operational challenges?

Hi, Lily. Yeah, I'll take that one. You know, I think operating margins for us came in more or less where we expected. FX is just brutally killing our P&L, and you're seeing that in the third quarter. ParaGuard was down versus last year's third quarter. That's a high gross margin product, so that impacted margins in the flow through. We also had inefficiencies within Cooper Vision, which we knew about going into the third quarter. tied to shutting down lines in fiscal Q1 that we always do to refurbish and, you know, what we usually do. And so, some of the activity we knew and we knew about, but it's really a story about FX.

Got it. That's helpful. And just as a follow-up, where are new fits relative to normal levels, and are there any geographies that stand out as lagging or being above pre-pandemic levels right now? Thanks so much.

Yeah, it's really interesting going through that data because even the U.S. data we just got shows that new fits are not back to pre-COVID levels. And there's different data at different spots kind of around the world being as much as 5%, 10% below pre-COVID levels. So if you look at the strength of the revenue numbers and where the industry is today, then you go, man, we still have 5% or 10% of fits to get back into the market just to get to pre-COVID levels, knowing that wearers are also increasing, right? You can get kind of excited about the potential opportunities there over the coming years. I happen to believe that a lot of those wearers are getting fit in different ways and maybe not getting fully captured in that data, like through things like telehealth and so forth, so that people are able to get prescriptions renewed or able to buy their lenses in different ways. But To be fair, the data is showing that we're not back to the pre-COVID levels in terms of this.

Got it.

Thank you. Thank you. As a reminder, ladies and gentlemen, that's star 11 to ask a question. Please stand by for our next question. Our next question comes from the line of Steve Lightman with Oppenheimer. Your line is open.

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

Yeah, on Paragard, we had a tough quarter, as we said, this quarter because of the comp. We'll have a good Q4. We started off well here in August. Matter of fact, we finished strong at the end of July with Paragard. So with Roe v. Wade and what's happened, women are out there and they're a little bit more concerned about things for obvious reasons. We are seeing that women are looking at, okay, well, what's the most efficacious form of birth control? What direction should I go here? So we have seen an increase in interest in in LARCs, and you've seen that in some of the numbers here more recently. So we'll see if that trend holds. If it does, you'll continue to see outperformance in IUDs. So I would say that the kind of Roe v. Wade outcome, if you will, I was saying that it was a neutral to a modest positive to us. I would probably upgrade that to saying that that's turning out to be a modest positive to our business. We'll see how Paragard goes, but I would envision a decent quarter in Q4, that's for sure.

Okay, got it. And, Brian, you and Al talked about ramping production, I think, across a number of lines in CVI. What is your outlook for CapEx spending this year? And directionally, are you anticipating next year to be up, down, flat versus this year at CapEx?

Yeah, hi, Steve. Good question. Yeah, so CapEx ticked up a little bit in the third quarter. Yeah, Al, in his prepared remarks, talked about how we put some lines in place and worked. We're doing whatever we can as quickly as we can to ramp up capacity. It's hugely difficult to increase capacity quickly. And we're having a tough time meeting demand. So I would expect, I'm expecting a pretty high CapEx number in the fourth quarter. Still free cash flow being strong for the full year. But that trend kind of continuing where next year CapEx continues to go higher. as we continue to put more capacity in place to try to meet demand.

Got it. Thank you, guys.

Thank you. Please stand by for our next question. Our next question comes from the line of David Saxon with Needham. Your line is open.

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

Yeah, so a couple things on Paragard. We did see office visits down, OBGYN office visits down, and that was due to COVID-related staffing challenges, right? We've seen some of that same stuff, obviously, in optometry offices, and I'm sure everyone has seen that in other areas. of the world. But we definitely saw a negative impact to patient traffic, especially with respect to things like general OBGYN visits and contraception OBGYN visits during the summer months. After the Roe v. Wade situation and a little bit of improvement in terms of capacity, you had a bunch more attention, if you will, focused on the matter. And we've seen that attention be a benefit to Paragard because Paragard is, I mean, it's highly efficacious, 99% plus efficacious. So if you don't want to get pregnant, get an IUD. And as people look at that, become more aware of that, obviously Paragard is the only non-hormonal IUD in the marketplace. We've seen an increase in terms of interest in the product and people inquiring about it, people searching for it. Our team, I think, has really done a nice job trying to capitalize on that activity. So we saw that improvement starting in July. We've seen it continue here through August. And Yeah, I think you'll see growth certainly in Q4. TBD on price increases. One of our competitors did a price increase or is doing one here. We'll evaluate another one and take price if we can, if it's appropriate.

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

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

Thank you. I'm not showing any further questions. I would now like to turn the call back over to Al White for closing remarks.

Great. Thank you. Thank you, everyone. Again, strength in the business and the core fundamentals are driving what's making us optimistic. I mean, the one thing Brian touched on it is currency has been painful for us. It's been pretty brutal. We're working through it the best that we can, and we're taking the measures that we can take. But if we exclude currency and really look at the fundamentals of the business, whether it's Cooper Vision or it's Cooper Surgical, especially the fertility business, things are strong, and we believe they're going to remain strong. We started Q4 off well, and we're optimistic about finishing this quarter well and having a good year next year. So appreciate everyone's interest. Look forward to seeing people, hopefully some of you at the Wells Conference with Larry here, I think, next week, and look forward to speaking to everyone else during the quarter or on the Q4 call. Thanks.

Ladies and gentlemen that concludes today's conference call. You may now disconnect.