Cooper Companies, Inc. Q4 FY2020 Earnings Call

Thank you for joining us for the Q4 2020 Cooper Companies Earnings Conference Call. All participants are currently in a listen-only mode. Following the presentations, we will have a question-and-answer session. I will now hand the call over to Ms. Kim Duncan, Vice President of Investor Relations and Risk Management. Please proceed.

Good afternoon, and welcome to The Cooper Companies’ fourth quarter and full year 2020 earnings conference call. During today's call, we will discuss the results included in the earnings release and then use the remaining time for Q&A. 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 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. Should you have any additional questions following the call, please call our investor line at 925-460-3663 or e-mail ir@cooperco.com. And now, I'll turn the call over to Al for his opening remarks.

Great. Thank you, Kim, and welcome everyone to our fiscal fourth quarter conference call. Let me start by providing some key takeaways. First, we continued taking share in the global contact lens market with CooperVision being flat for calendar Q3 against the market being down 3%. We are having success with our strong daily silicon hydrogel portfolio with unique products like Biofinity Energys and with several product launches. Second, CooperSurgical outperformed with fertility, PARAGARD, and medical devices all exceeding expectations. In particular, we're taking share in the fertility market where we're seeing strong momentum. Third, our myopia management portfolio comprised of MiSight and ortho-k lenses performed extremely well including MiSight being up 73%. So we're taking share, launching products, and investing intelligently, including helping expand the pediatric optometry marketplace. Our teams are executing at a very high level and we expect that to continue. Moving to the numbers and reporting all percentages on a constant currency basis. We posted consolidated revenues of 682 million in Q4, with CooperVision revenues of 506 million down 3% and CooperSurgical revenues of 175 million down 4%. Non-GAAP earnings per share were $3.16. For CooperVision, the Americas were up 3% led by strength in MyDay and Biofinity and some rebound in channel inventory of roughly $10 million. EMEA was down 6%, which included quarter-end purchasing delays from several large accounts as the region returned to more restrictive COVID-related lockdowns in October. Asia-Pac was down 8% with COVID-related softness lingering longer into the quarter than we were expecting. To add a little more color on Asia-Pac, we're well positioned in that region and taking share, but the market has been sluggish. We're becoming more optimistic though as we saw a pickup in October and November driven by strong MyDay sales. Overall, for the full quarter revenues came in roughly where we expect it with COVID continuing to present challenges, but we're managing through it and taking share by executing on product launches and expanding our key account relationships. Moving to some additional quarterly numbers. Our silicone hydrogels dailies were up 1% in Q4, led by strength in torics and a strong rebound in MyDay sphere sales. We're seeing daily silicones as the clear winner right now, as health and wellness trends continue to drive adoption, and this bodes well for us given our strong portfolio. Additionally, we're now fully unconstrained on MyDay, so we're able to aggressively launch the product around the world, especially the toric which is still relatively early in its launch stage. Biofinity and Avaira combined to be flat for the quarter, with strength noted in Biofinity toric and Energys. Energys continues to be a strong performer growing double-digit. It was launched a few years ago probably a little ahead of its time. But its innovative lens design that uses digital zone optics to help alleviate eye fatigue from excessive screen time is certainly catching on now as it's addressing an important need in today's digital world. Moving to our product launches, we remain incredibly busy with MyDay sphere and toric being launched or relaunched in many markets around the world. Biofinity toric, multifocal, and Clarity’s extended daily toric range continuing their successful launches, and the launch of MiSight. One point to highlight is how incredibly active we are in the daily silicone hydrogel space right now, probably busier launching products than anyone. And we expect this to continue throughout 2021. Given there still exists roughly 2.4 billion in traditional daily hydrogels sales worldwide, there's a significant multi-year trade-off opportunity for us and our industry. Moving to MiSight, the only FDA approved myopia management contact lens clinically proven to slow the progression of myopia in children, things are going incredibly well. We now have roughly 25,000 kids around the world wearing MiSight, including over 1000 in the U.S., and the momentum with new fits is strong. We're still early in our U.S. launch, but we already have 2100 optometrists certified to fit the lens and 1400 more in the process of being certified. We've also recently launched in Taiwan and Russia, and the early feedback is very positive. Additionally, we're accumulating some really interesting data from our U.S. launch, including the average age for a new MiSight wearer is 11 years old. Getting fits in this age range is fantastic as the average age for fitting a new wearer in regular contact lenses is 17, which means we're getting an extra six years' worth of revenue. Furthermore, 70% of kids being fit in MiSight are 12 and under, so we're changing the overall perception of what age kids can be fit in contact lenses. Regarding sales, even with continuing COVID challenges, our myopia management portfolio including MiSight and ortho-k lenses grew 39% to $13 million. Within these results MiSight grew 73% to 2.5 million and ortho-k grew 33% which included 1.3 million in revenue from last quarter's acquisition of GP Specialties. For this coming year, even with COVID impacting the market, we're continuing to target 25 million in global MiSight sales, which is growth of roughly 250%. We're also targeting strong growth in our ortho-k franchise driven by positive developments such as the recent receipt of European CE mark approval for our Paragon lenses. When looking at the global myopia management market, we're at the forefront of an extremely exciting pediatric optometry category. Myopia management is in its infancy. But as we discussed last quarter, there's a clear path to a market that we expect will ultimately be well over $5 billion annually for manufacturers. We still have a lot of work to do. And we're investing in sales and marketing programs, new launches, regulatory approvals, and R&D activities to really help drive the market forward. This approach is clearly working and it's great to keep hearing optometrists talk about MiSight as standard of care for their pediatric patients. As trained professionals, optometrists know that reducing the progression of myopia brings many benefits, including reducing the risk of serious eye disease later in life such as retinal detachment, cataracts, and glaucoma. To conclude our vision, let me touch on the global contact lens market. We're seeing optometry offices mostly open around the world, and we're frequently hearing that they're fully booked with appointments running through January. Having said that, patient throughput remains below pre-COVID levels as offices work to get more efficient with COVID safety protocols and managing staffing challenges. From a consumption perspective, wearers are returning to their normal wearing and ordering habits. But new fits are running roughly 90% of pre-COVID levels on a global basis. And that's the challenge. New fits are certainly better in the U.S. and in markets like China, and it's improving everywhere that eye care professionals are still struggling to meet demand. We're not seeing any signs of demand that is disappearing though. So we believe it's only a matter of time before new fit activity returns to pre-COVID levels and the pent-up demand is addressed. On a longer-term basis, the underlying growth drivers for our industry remain strong and they actually may be improving with a macro trend of people spending more time on electronic devices, with roughly one third of the world myopic and this expected to increase to 50% by 2050, combined with a continuing shift to daily silicone hydrogel lenses, geographic expansion, and strong growth in torics and multifocals. Our industry has a very bright future. And for CooperVision, our strong product portfolio momentum within the myopia management space and strong new fit data puts us in a great position for long-term sustainable growth. Moving to CooperSurgical, revenues rebounded faster than expected to 175 million for the quarter. Although down 4%, we exceeded expectations in a challenging market environment and expect solid performance moving forward. Starting with our fertility business, revenues rebounded nicely and we're only down 2% year-over-year. We're taking market share and we're well positioned for future gains with a strong product portfolio and improved traction with key accounts. Within products, our consumable portfolio grew this quarter led by our RI Witness system. This is an RFID lab-based management system that helps fertility clinics automate their processes by identifying, tracking, and recording patient samples throughout the IVF process. Labs are starting to use it as a cornerstone solution to improve safety, reduce errors, improve workflow management, and enhance compliance with standard operating procedures. The product almost doubled in revenue to 2.5 million, and with a growing focus on safety and compliance within fertility clinics, we expect this product to continue growing nicely. Our genomics business also returned to growth this quarter as testing volumes picked up and our media products also grew. The only softness we saw was in capital equipment, which declined against a very tough comp from last year. From a fertility market perspective, we're still seeing COVID negatively impact patient flow, and some important countries like India still have clinics shut down or operating with minimal patient volume. But the good news is, we're seeing patient flow improving and we believe we'll see IVF cycles return to normal soon. With this happening, we'll continue expanding our business through in-person and virtual sales and marketing activity, adding sales personnel, and expanding our product offerings. The fertility market has extremely positive long-term macro growth trends, and as a global leader in the space, we're intent on helping the industry return to strong historical growth rates. Within our office and surgical unit, we were down 5%, slightly better than forecasted. PARAGARD continued to rebound down 6% to 50 million against a tough comp from last year due to buy-in activity before price increases. PARAGARD is another product that is benefiting from the positive wellness trends we're seeing in the U.S. As the only 100% hormone-free IUD on the U.S. market, it offers a fantastic long-lasting birth control option that addresses the needs and interests of women looking for a healthy alternative. Sales of the product continued trending in the right direction through November. So we're optimistic we'll see PARAGARD grow year-over-year in Q1. Elsewhere, like many medical device companies, we've seen deferred elective procedures steadily rescheduled, and our medical device sales have improved. We're entering this year in a really nice position with some of our focused products such as INSORB, our patented surgical skin closure device, and Endosee Advance, our direct visualization system for the evaluation of the endometrium, positioned to grow nicely as markets rebound. In conclusion, let me say I'm optimistic about the future. Our businesses are performing well and we're taking share. We're very active with new product launches, and we have fantastic dedicated people driving our businesses forward. And with that, I'll turn the call over to Brian.

Thank you, Al, and good afternoon everyone. Most of my commentary will be on a non-GAAP basis, so please refer to our earnings release for a reconciliation of GAAP to non-GAAP results. Our fourth quarter consolidated revenues decreased 1% as reported or 3% in constant currency to $682 million. Consolidated gross margin increased 70 basis points year-over-year to 67.7%. This was driven primarily by currency at CooperVision and efficiency improvements at CooperSurgical from our successful global manufacturing integration and consolidation efforts. This quarter was an extremely busy one for our manufacturing teams as we work diligently to finish most of our manufacturing restructuring activity. This now allows us to minimize costs while optimizing production to more efficiently manage inventory levels and improve margins and cash flow. We're in a significantly better position with our manufacturing operations right-sized for the current environment while also being well positioned to ramp up quickly. We still have some absorption-related inefficiencies, but we expect these to go away quickly as growth returns. OpEx was up 4.3% year-over-year largely due to planned MiSight investment activity, including sales and marketing, regulatory, and R&D costs. This resulted in consolidated operating margins of 26.8%, down from 28.5% last year. This performance slightly exceeded expectations as we continued effectively managing expenses and balancing costs against investment opportunities. Interest expense for the quarter was $6.7 million driven by lower interest rates and lower average debt, and the effective tax rate was 11.1%. Non-GAAP EPS was $3.16 with roughly 49.6 million average shares outstanding. The year-over-year FX impact for the quarter to revenue and EPS was a positive 10.6 million and a positive $0.15. Free cash flow is strong at 111 million comprised of 218 million of operating cash flow offset by 107 million of CapEx. Net debt decreased by $76 million to 1.68 billion and our adjusted leverage ratio decreased to 2.15x. Before moving to guidance, I want to mention an item you'll see disclosed in the tax footnote in our upcoming 10-K. In November, as part of an internal restructuring to simplify our supply chain, CooperVision's intellectual property and related assets were transferred from Barbados to the U.K. Although this will impact our GAAP financials, including a significant one-time P&L benefit in Q1, along with offsetting adjustments over the next 10 plus years, we will exclude these entries from our non-GAAP results to ensure transparency. We do not expect this to have a material impact on our non-GAAP tax rate over this period. Moving to guidance, we were hoping to give full year guidance, but the surging COVID cases in Europe and in the U.S. make that extremely difficult. So we're providing only Q1 guidance at this time. This includes consolidated revenues of 642 million to 670 million down 1% to up 4% or down 3% to up 2% in constant currency. CooperVision revenue of 482 million to 502 million down 1% to up 4% or down 3% to up 1% in constant currency. And CooperSurgical revenue of 160 to 168 million down 1% to up 4% both as reported and in constant currency. Non-GAAP EPS is expected to be in the range of $2.66 to $2.86. As compared to last year, we expect the midpoint of our non-GAAP EPS guidance to be up $0.07 due to a positive $0.21 currency impact offset by MiSight investment activity and slightly lower gross margins tied to unfavorable manufacturing absorption. Below the line, we expect lower interest expense to be roughly offset by a higher effective tax rate. Lastly, on cash flow, we made significant progress completing our multi-year capacity expansion program and expect solid improvement in free cash flow moving forward as operating cash flow improves and CapEx reduces. In conclusion, even with COVID, we expect to start the year off well. We have strong product lines, solid manufacturing and distribution capabilities, growing key account relationships, plenty of MyDay capacity, and our dynamic myopia management business. We plan to continue taking market share and we look forward to COVID vaccines and better treatments returning markets to normal. And with that, I'll hand it back to the operator for questions.

Thank you. Our first question comes from Larry Keusch of Raymond James.

Couple questions here. I guess the first one, Al, if you could kind of come back to MiSight. Obviously, it sounds like things are going extremely well there and certainly, way over performed the number of optometrists that you anticipated that you would train for the year, I think you were targeting closer to 1000. And obviously, you did significantly better than that. But the guidance said 25 million remains the same. So what do you think it takes to get more confident in moving that guidance up?

Yes, good question, Larry. You're spot on. We are doing quite a bit better than we anticipated, right? The number of certified docs here in the U.S. is up. You're seeing similar activity outside of the U.S. and sales and so forth, picking up commensurate with all of those certifications. So the thing that holds that back really ends up being COVID. And that's really it. I think if we kind of move along like we are now in the marketplace or see anything better, I think we have a chance to beat that number. Maybe the other reason you could argue a little bit on the conservative side is because that is back end loaded. Right? I mean, you're looking at continuing increases every quarter, but you're going to see a big Q4 of next year. So that's the question mark. I do think we have the potential to beat that number though.

Okay, perfect. I have two more questions before I finish. First, regarding single-use spheres, it seems that the revenues for the quarter fell short of Wall Street expectations. It appears you pulled in some channel inventory that was lower than anticipated, and there were also delays in orders in Europe due to COVID. Could you elaborate on the dynamics surrounding the single-use sphere revenues, as it seems they may have been impacted? Secondly, for Brian, I believe the COVID adjustment to COGS was 37.2 million, which is higher than the 22 million in the third and second quarters. Can you explain why that adjustment increased so significantly and how we should view it for the first quarter outlook? Thanks.

Yes. So let me touch on single-use spheres. Where we saw strength there was on silicone hydrogels. And where there was weakness was your traditional dailies. Right? So no surprise there. We're taking share. We're growing on the silicones side of things; the traditional side is softer. If you look at the impact, yes, the channel inventory came back here in the U.S. not quite as much as we were thinking. I think you'll see some of that trend back here as we move through this year, but a little bit less than we were thinking there. Same in Europe, there were some orders that we were expecting kind of at the very end of October that I think will end up seeing come back here as we move through fiscal '21. A number of those orders, whether in the U.S. or whether in Europe would have been, frankly, daily silicone, so it would have improved that number. I will turn it over to Brian for the...

Sure. So the question on adjustments, yes, there's nothing I would highlight that was materially different from what we talked about last quarter. In fact, we talked on our last earnings call about how this activity would push into Q4. Now there were a significant number of things that we needed to do to right size our inventory levels and our future production levels. Frankly, the work that was done by manufacturing, the manufacturing teams is no small task, especially to get the vast majority of it completed by fiscal year-end. So at the end of the day, the steps we've taken to address the COVID-related challenges are putting us in a great position as we enter 2021 and the adjustments are going to be dramatically reduced starting in Q1.

Our next question comes from Larry Biegelsen of Wells Fargo.

Two for me, one on Q4 trends in CVI and one just kind of big picture on fiscal 2021. So Al, can you talk a little bit about the Q4 trends in CVI, August was up, you said on the Q3 call. So it looks like September and October were down a little bit year-over-year. How is November relative to the midpoint of the CVI guidance for Q1, I think of about negative 1%. And then, I had a follow-up.

Yes. I don't want to get too much into too much detail on a monthly basis. I know we're doing that a little bit through COVID. I kind of want to step away from that. You can kind of see a little bit of what happened though. If you look at the calendar number I gave versus the fiscal quarter. So yes, I mean, October was down; it was tied largely to what I was talking about activity at the very end of October. The only thing I'll really say is November, I'm going to give you the same answer I gave historically, November performance is included in our guidance.

Got it. And Al, how do you see fiscal 2021 playing out just maybe directionally? I know you don't have guidance out there. You did seem comfortable with where consensus was in mid-September, before COVID started, obviously spiking dramatically here. Can you still grow sales and EPS, in fiscal 2021 over fiscal 2019? Thanks for taking the questions, guys.

Yes. So I won't get into too much detail on that. It's a little tough to compare to '19. The issue ends up being it's just COVID. I don't want to say that it's anything else, because everything else in our business is going well. As Brian said, we're really well positioned from a manufacturing distribution perspective, our product launches are going well. We gave guidance here, assuming things kind of continue as is, which is frankly not very good, COVID cases going up and continued struggles in a lot of places. So we're assuming that continues, and that's baked into our Q1 guidance. Anything that comes out better than that, with respect to vaccines happening or improvements, I think we provide upside for us. And you can kind of look at our Q1 and hopefully make some assumptions off that as we move forward tied to whatever your assumptions are with respect to COVID. But I'm personally optimistic with the news that I see out there, that's for sure. And the fact that you have optometry offices open around the world and fit coming back and so forth and consumers who wear contact lenses are really back to what they were pre-COVID, in terms of their wearing habits and their ordering habits. So a lot of really positive signs there.

Our next question comes from Matt Mishan of Key.

Just when you look at the level of inventory in the channel right now, where is inventory versus patient demand? Is that equalized to your, to the point where you're not going to see some stocking in one quarter and some destocking in the next quarter? And have you finally reached that point?

Yes. I think so. And that's one of the reasons I kind of say that we need to get away from months again, because we always see this, we always have our entire lives with in terms of orders coming in and one month being up and one month being down and so forth. But channel inventories has basically equalized. I would probably say if I had to pinpoint it, looking at all the numbers and charts and everything that we have, it's lower than it was pre-COVID. But your sales are a little bit lower. So I think you'll continue to see as we move through '21 here, positive trends there. And if anything shorter term, maybe you get a little bit of positive that we're not anticipating that would come from some of the delayed October aspect. But I would certainly hope that I won't be talking about channel inventory moving forward.

Okay. Excellent. And then just a longer-term question, like it's interesting how Cooper's evolved over the years. Like where you guys were previously like fast followers inside high-end daily side. But now you're starting category leadership in MiSight, and especially the lenses. Kind of what's the advantages of being first in these markets? Is it just more sticky over time, is it harder for people to catch up to you?

Oh, yes. You're absolutely right. I remember when I started here years ago, we used to consider ourselves a fast follower and took pride in that. That is not the case anymore. We are clearly the most innovative contact lens company in the market. Being a category leader is significant. When you get into the market first, like with MyDay toric as an example, it's a daily toric lens with a wide parameter range, and once you establish that fitting set, why would someone replace it? Introducing a new lens with fewer SKUs makes it even more challenging to replace a high-end fitting set like MyDay. Being first is crucial. If you look at category creation, like the MiSight product, it’s currently defining the myopia management space. It's similar to how people order a Coke and get handed a Pepsi. Right now, the category has been defined by MiSight, which shows the strength of that program as a leader. I can't praise the team's achievements over the past several years enough. It's remarkable. Being the innovator now feels much better than being the fast follower.

Our next question comes from Matthew O'Brien of Piper Sandler.

Al or Brian, can we just focus on the daily piece of the business first, because it's probably going to get the most attention tomorrow. Again, like Larry mentioned, it is a little bit below what people were modeling. Get out time on the market, now you’ve got J&J rebating more aggressively, the economy is obviously a little bit of a headwind, people aren't going out as much. So what can you really point to maybe under the hood here that we can't see that really gives you confidence and a rebound in that business as we hopefully come out of the pandemic? And are you getting a lot more new patients? Are you getting a lot more clinicians? What is it that you can really point to with all these other moving parts that we really can't see clearly?

Yes. Well, I think some of it, you're looking at the earnings release that we put out there, right. And so you're talking about single-use spheres there. If you look at single-use torics, especially torics, which are strong for us, multifocals, you're seeing better performance there. So if you narrow into that, that line item, you're talking about weakness in single-use spheres coming from older hydrogel lenses. Right? The whole industry, that's still a massive part of this industry, it's 2.4 billion in sales, and it's declining, and it's being replaced by silicones. And that's where we're doing well. When you look at what happened at the end of the quarter in terms of people not ordering, when you see orders get delayed, what we've seen here through this pandemic is, the orders that are getting delayed and the pull down in channel inventory is tied a little bit more to daily silicones than it is anything. So at the end of the day, the weakness is coming from weakness in the industry in the marketplaces, daily, traditional dailies move away, and daily silicones transition over. When it comes to the sphere, we had a strong sphere quarter with MyDay. I think that one of the things that makes us feel good about that and looking specifically at the daily sphere side of things, is the success we're having with MyDay sphere coming back in the marketplace. We were constrained. I talked about that for a while on past earnings calls; we pulled that product off of the market in several countries, right? We didn't launch it as aggressively as we could. We are now unconstrained on that product. So you're seeing MyDay out there, unconstrained, we're aggressively rolling it out. I feel really positive about the future of that. And I don't want to downplay clarity, either, by the way because clarity, definitely doing well. But MyDay is definitely outperforming.

Okay. That makes a lot of sense. It's more expensive, and there's a lot more with the chef to hold. So that makes sense, the inventory levels have come down among all the different products you sell. Okay, makes sense. So then you flipping over to MiSight. Again, it's a big step up from 7 to 25. But the number of docs that you've got certified now, if I just do some quick back of the envelope math, as far as what you did in revenue last year, seems like, again, don't have perfect numbers here, but it seems like, a lot of your doctors are adding a couple of patients per month to MiSight on average. If you read it, is that a number that seems reasonable for this group, fairly quickly? Because it is so new because you're pretty much only game in town on the market? Is that a way to kind of put some aerobars or triangulate on how to think about, this next tranche of docs and how many patients they can add on a monthly basis?

Yes. You wonder what's really been interesting about that is that that's true. So we get these docs; they come in, they get certified, they fit a kid or two, they want to see how it's working out. So a lot of times they'll fit a couple kids, and then they'll wait a little while and they'll see how that interaction is with the parents how successful it is. And then, what we've seen is a significant ramp. Like if you looked at it as a curve, it's just a very fast ramp, because once they get comfortable with it, and they say, yes, this product works, yes, I can sell it, I can talk to parents, clearly these kids can wear it, right, which was a hurdle concerned about whether an 8, 9, 10-year-old can wear these lenses. Yes, all those things get checked. And when they get checked, these docs are flipping over and saying, well, I'm going to talk to every single pediatric patient I have that comes in here about this product. And we see these big ramps going. So if we continue to see that kind of activity, we should all be very excited. I mean, you're holding Cooper stock, you're a happy person if we continue to see ramps that we're seeing there.

Our next question comes from Jon Block of Stifel.

I guess first one, I certainly get the hesitancy to provide specific fiscal '21 guidance. But I'm just curious, qualitatively anything that could comment on, maybe should market share gains continue at the same clip, versus the past 12 to 24 months of being accelerated based on your comments to the daily portfolio? And then, Brian, sort of a similar question for you, any high-level comments, if you would, from a margin profile? Then, I've just got a quick follow-up.

Yes. Our work market share gains, it's a little hard to tell. I don't see anything that would indicate we're not going to continue to take share each quarter. In terms of how much share that is, that's a little bit of a question mark. And that'll vary quarter-by-quarter. Clearly a product like MiSight, ortho-k, some of that stuff, the Biofinity Energys. Those are unique products to us, that are high-growth products. So those are going to help continue to take market share themselves. I kind of hesitant to forecast whether it would accelerate or not, but I do believe we'll continue to take market share as we move through 2021.

Yes. I guess I'll take the margin question. I mean, we're not getting guidance beyond Q1, but I mentioned in my prepared remarks, gross margins being slightly down from volume-related absorption. And also, higher MiSight spend. So beyond that, I mean, there's obviously lots of pluses and minuses from COVID. And we're going to be dealing with that. But those are the two primary drivers that I would say, outside of FX that kind of bring you to the midpoint of our EPS range.

Okay, got it. And maybe just the follow-up question is, pretty specific to myopia management and MiSight. Can you just remind us or detail for us, the MiSight spend targets this year from an advertising or DTC perspective? And if you could remind us what those investments totaled in fiscal year '20? Because I'm guessing, even with the revenue ramp this year in MiSight, depending on what you're doing from a DTC perspective, it could actually be more diluted before maybe we start going the other way. And in fiscal 22 and beyond. Thanks, guys.

Yes. I hate to get into some of that stuff. But I'll look at Brian, I think we did. We had about 15 million to 18 million, something like that in Q4 spend on MiSight. So a pretty significant number, then we must have roughly hit what we were going to do for the full year about 25 million. So it’s a pretty good investments going on, Jon, no question about that. I would clearly not take the Q4 spend and just annualize that. We spent a lot. We did a lot of great stuff around the launch. We're looking at it right now to determine kind of how we're doing in the best way to drive that market forward. But it is dilutive for a little while and then it should flip over and become pretty accretive to gross and operating margins—won't be accretive, I guess to gross margins now, but accretive operating margins in a couple of years and it should be in a pretty good way.

Our next question comes from Anthony Petrone of Jefferies.

Maybe I'll start with a couple on CVI and then I'll have a question on MiSight as well. So on CVI, maybe just an update on the competitive dynamics, as they've trended through this year, just your updated view there. And in particular, Bausch is out there with the new SiHy daily lens, as this outcome with Precision One. So any kind of views competitively? And in that regard, as well, just have you seen anything new on the rebate front? And then, I have a follow up on MiSight? Thanks.

Yes. Nothing new on the rebate front. I think we're probably at a point here, we're in a relatively near future. We'll get some updated news from some of our competitors on the rebate activity because they have a tendency to do that as we move into new calendar years. So maybe they will, maybe they won't, I don't know. But there's been nothing new. On competitive dynamics, I mean, at the end of the day, we have great competitors out there. They are always launching products. They have for as long as I've been here, and I'm sure they will for as long as I am here. So all we can do is continue to do what we can do, right? We manage our own business. We launch our own products. We drive success from our own products. We have a very active launch campaign going on right now. We have a strong pipeline. So we control—we can control, and as I mentioned, I think we'll continue to take share doing that.

It's helpful. On MiSight, just going back to the 25 million guide, I'm just curious as to what's baked in there from a stocking standpoint amongst trained ODs at this point and geographies that are cleared? And maybe Al, if you have any updated views as you continue to scrub numbers on the TAM opportunity for MiSight in particular, it seems that the feedback we continue to get is bullish, I'm curious if there's updated views on the TAM. Thanks again.

Yes. Some good stuff there. First of all, no stocking in the 25 million. So the assumption there is we just continue to ship product directly to people's homes. So zero stocking. Geographically, we are expanding; we launched in a couple markets. We just got approved on another one, we'll launch there. We're making progress, trying to get approvals in some huge markets, right? China is one of them that has some potential. So I think you'll continue to see us talk on these quarters coming forward about new markets that we launched into. If you look at the TAM, it's really fascinating, we did the numbers last quarter and said, a total market kind of over $5 billion annually. We based that on 8 to 12 year-olds. I mentioned on this earlier in my prepared remarks that about 70% of the fits we're seeing in the U.S. are 12 years old and under. When you start seeing fitting of 13, 14, 15, 16 year-olds, which we clearly see outside of the U.S. and here in the U.S. off-label, that expands the size of the market. So I'm not sure what the market is when it comes to like braces and so forth. But you could make a pretty good argument right now that north of 5 billion is definitely in play. And when you talk about spectacles, I look forward to some of the—some products coming and some of the advancements I've seen out there with spectacles that they're still very early. But that'll help drive this market forward. I think that ultimately, contact lenses are going to be more efficacious than spectacles are. So I think we'll have a great position there with a market-leading contact lens, but I do think you're going to have a very large pediatric optometry market. I really believe that. It'll be north of 5 billion annually for manufacturers.

Our next question comes from Chris Cooley of Stephens.

Just two for me. Maybe Al or Brian, if you could help us with the PARAGARD number, you said you do expect that to grow year-over-year in the coming fiscal year? Just curious if that's growing, without having to make a more aggressive DTC push? Or if that's assuming a continuation of focused marketing? And if so, kind of how do we think about that spend relative to MiSight? Then, I've just got a quick follow up on CVI as well.

Yes. So PARAGARD, the only comment we gave on growth was expecting Q1 growth. So I do think that it will grow here in Q1 year-over-year. The spending on that this year, I would think would end up being pretty similar to what we did this year. The direct-to-consumer spending is trending more towards social media now. We did a lot of that, like the television spending and so forth. And a lot of that was expensive. So we can pull back on that activity shifted over to social media type spending and get a bigger bang for our buck, without spending any more money. So I think ultimately, we're going to see more profitability coming from PARAGARD, right, because you're going to get some growth on a year-over-year basis, you're going to hold your spending flat. So I think we'll be in a good spot there. With respect to MiSight, it's a little tough; I mean we're going to spend more on MiSight than we're going to spend on PARAGARD, when it comes to all the activity that we put behind MiSight. But I won't get into quantifying what that'll be because it does get dependent on when we get approval on markets around the world.

Understood. Appreciate you clarifying that. And then, just lastly from me, I know it's still early days, and it's not a typical operating environment by any means. But when you look at your most mature MiSight fitters here in the United States, could you maybe just contrast how that practice looks for you from a sales basis, say versus the prior year? If we think about not only, not just, if we exclude just the MiSight portion, but you think about total Cooper lens utilization there. I'm just kind of curious if you've seen a lift and if so in what type products or is it broader based? Thank you.

Yes. That's a real interesting one. You would think that the docs who are fitting MiSight were CooperVision docs, right. But that's not really what we've seen. The people who have gravitated towards MiSight are people who either were doing myopia management beforehand through things like ortho-k or myopia or something else, or people who have bigger pediatric practices. So obviously, we give some preferential treatment to people who are more part of the CooperVision family or who are willing to ship more product over to the CooperVision family, that halo effect kind of concept I talked about. It's still very early, but it's broad. It's not focused on CooperVision docs. It's broader in terms of the optometrists who are looking at it, using our competitive products for other options.

Our next question comes from Jeff Johnson of Baird.

So maybe just a couple cleanup questions here that I've got at the end if possible. Al, you talked about MiSight being big and fiscal Q4 of the coming year here. How backend loaded are you thinking guidance, number one? And number two, what drives that? Is that just kind of thoughts around vaccine and the cumulative impact of all the doctor training, just trying to get kind of the pacing of MiSight here locked down maybe if we could?

Yes. Well, December Q4, as you remember in the U.S., as an example, we were given the first two fits away for free. So as we've done some of that activity, and a lot of kids are getting fit. If they get a year supply, well, they're not going to get their next year supply until Q3, Q4 of next year. So you're going to get kind of a ball that's just naturally that happens there, people order their year’s supply. And they're paying us, right, because right now we gave that to the doctor for free. So the doc received the money. We didn't receive the money. We will in Q4 of next year. And then you just get the natural ramp itself, right? So we're up to what it was 2100 optometrists. We had a lot of optometrists here in Q4 and Q3 definitely in Q4; it's accelerated. We have a lot in the backlog here in Q1 who are going through it. So as a lot of those optometrists come on, and they start fitting kits and so forth in the lens, do a few, do a few more, as I mentioned, it has a tendency to ramp up quickly when they're successful. So just naturally, it's going to move to Q4. That will continue right into Q1 next year, Q2, Q3 because it's a natural ramp. So it's not related to COVID. There's nothing specifically related to COVID on that. It's just the cadence of how the revenues evolve.

Yes. That makes sense. I don't think I heard the answer to Jon's question on MiSight spending this year; you kind of said you hit that 25 million target for the year, obviously Q4 was a big part of that. But just above or below 25 million again, as we try to dial in kind of full-year OpEx side of the model.

It'll be over 25 million. It's just a matter of what it'll be, right? Because I mean, if we happen to get early approval in China, I could see it being a decent amount higher than that. If we don't, it'll be less. So hard to dial that in right now. Because some of it does depend on COVID; we get rid of COVID early and you see new fits and stuff, you'll see our spending increase. And then, again, the more markets we get into, the more spending you'll see. And by the way, just to be clear on that, like that spending is DTC related, but it's also related to R&D. We're doing a lot R&D work for new versions of MiSight and enhanced versions and so forth. It's regulatory because regulatory approval costs and so forth are high in a lot of markets around the world. It's myopia management specialists; we're still—we're selling through our existing sales forces, and we're not going to add salespeople, but we do have and are adding more specific myopia management specialists who docs can call and talk to. So it is kind of a broad spending that is attached to it rather than just DTC.

Our next question comes from Joanne Wuensch of Citibank.

I appreciate the first quarter guide, particularly when the world feels Sunday is a little bit upside down. But for the full year, could you just give us an idea of what you're thinking about the tax rate, the impact of foreign exchange, and some of the other metrics which should be outside of the land of COVID-19?

I'll let Brian answer that one.

Well, by that he means we're not going to be talking about it. I hear you, Joanne. At the end of the day, I think we're just going to be guiding into Q1 and we'll leave it at that.

Okay, I'm going to try something different. Barbados to the U.K., can you just give us a second of what the decision was behind that and what the one-time P&L benefit will be? And I want to make sure I understand whether that goes into non-GAAP numbers, or is that going to go only in GAAP numbers?

Sure. Okay. Well, I'm going to try not to make this a lengthy conversation; we might have to talk after hours. But at the end of the day, there's not a whole lot to add other than, right, what I said in my prepared remarks; the IT and related assets are transferred to the U.K. and stepped up to new fair market value. It's going to result in a significant deferred tax asset in Q1. So that's going to be shielding us from future taxable income over the next 10-plus years. So what you're going to find is with that significant DTA, our GAAP EPS is going to be significantly high in Q1. And then, in all the subsequent years, it's going to be lower than our non-GAAP rate. And so, the non-GAAP adjustments that we're going to be making will basically neutralize the amortization shield that will result from—over the next 10 years.

But to be clear, you won't see that in non-GAAP.

But you won't see that in non-GAAP. That's correct.

Okay. So going back to my first question, for tax purposes, we should think about historical, relatively recent historical tax levels in non-GAAP EPS.

Yes. I'd say that's appropriate.

Our next question comes from Chris Pasquale of Guggenheim.

Brian, not to make this too much of a tax conversation here. But my understanding was that the company's historical low tax rate relative to peers was driven in large part by the favorable tax jurisdiction for the IP. So why would changing that domicile not have a negative impact resulting in a higher tax rate going forward?

Well, that's a very good question. Ultimately, the step up in basis that we get from transferring that IP and the related assets into the U.K. provides an amortization shield against that the future taxable income. So, yes, we are eventually going to be paying taxes, but we will have a tax shield for the next 10-plus years.

Okay, interesting. And then, Al, if you could just walk me through some of the thinking around the guidance. If I back out the inventory benefit that CVI got this quarter, you would have been down about 4% to 5% constant currency, the macro picture seems more challenging now than it was through most of Q4, but 1Q guidance is down 1% at the midpoint, so it's implying underlying improvement. So walk through the thought process there and maybe contrast the two periods?

Yes. What we're seeing is that optometry offices are open. So if you go back over the last six or seven months, you had offices closed and you had reduced foot traffic, and that's continued to improve. So you have optometry offices open everywhere, even in Europe, they've excluded optometry offices such that they're an essential business and can remain open. So we're in a better position from optometry offices being open than when we were, and we're in a better position in terms of the amount of foot traffic that's coming through those open offices. The other thing is we’ve seen wearers return to their normal wearing habits and purchase patterns. Yes, there was a study that was just done. I just read it today that 76% of people wearing glasses are talking to their optometrist complaining about fogging. That's amazing. Three out of four people who wear glasses are talking to optometrists about fogging of their glasses. So you are seeing more activity. And I'll tell you, we're going into the winter months, right? So there are things that are making the contact lens market actually a little bit better in in our fiscal Q1 than kind of what we were seeing in fiscal Q4. And if you compare that on a year-over-year basis, that helps because, I mean, keep in mind, the numbers we're talking about here for fiscal Q1, down 1% at the midpoint, that's against a really a non-COVID quarter last year. For us, we don't, because of the way the fiscal quarters work. So we're back to almost growing and maybe even growing in fiscal Q1 comparing a COVID-impacted quarter to a non-COVID impacted quarter. So pretty good stuff.

Our next question comes from Robbie Marcus of JPMorgan.

Brian, you touched on first quarter EPS and some of the inputs to get there. If I take the revenue guidance and basically hold SG&A and R&D flat, similar, maybe a little step down in gross margin, is that the way to think about how to get there?

Yes. More or less, yes.

Got it. And Al, maybe just quickly. You talked about how reorders are the vast majority of the business; what are you seeing in terms of where you are as a percentage to normal? Are you picking up on any trends of people stretching it out? Is it different by geography? Just trying to think about how the reorder businesses is trending? And what that might look like post-COVID? Thanks.

Yes. It's a tough one to answer because it is different around the world. Just because you're seeing different amount of COVID cases, different amount of restrictions and so forth, different amount of activity. But if I just pull that back up to a high level, I go back to some of my comments that you're seeing things for a significant number of contact lens wearers going back to normal, their ordering patterns going back to normal, all that type of stuff, going back to pre-COVID levels. There's nothing I'd really highlighted, particularly unique around there.

Our next question comes from Steven Lichtman of Oppenheimer & Company.

Just had a couple of P&L questions. Brian, just on gross margin, obviously you mentioned this slight headwind in 1Q, will that unfavorable manufacturing absorption impact that you mentioned, will that continue past the first quarter?

Well, not with growth. I mean, it's really purely tied to sort of volume-related inefficiency. So as we grow, then that starts to go away.

Okay. And then, secondly, I guess CapEx for the year was north of 300 million. You mentioned that should come down. Can you give us a sense of what that number could be for fiscal year '21?

Well, it's going to come down materially, or at least meaningfully. We did 307 million or so over 100 million of CapEx in Q4. We'll still have a pretty decent CapEx quarter in Q1 probably followed by maybe a slight step down in Q2 and then a more meaningful step down in the second half of the year. So, I wouldn't be surprised before somewhere in the neighborhood of, let's say $75 million less than where we ended this year.

Thank you. I'm showing no further question at this time. I will turn the call back over to management for any closing remarks.

Okay. Well, it sounds like we're in good shape. Thank you, everyone. Appreciate your time heading into the holidays. So good health to everyone and best wishes, and I look forward to speaking to everyone next year when we get to our conference call in March. Thank you.

Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you for participating. You may all disconnect. Have a great day.