Ladies and gentlemen, thank you for standing by. Welcome to the Q4 2021 Cooper Companies Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Kim Duncan, Vice President, Investor Relations and Risk Management. Ma'am, please go ahead.

Good afternoon and welcome to the Cooper Companies Fourth Quarter and Full Year 2021 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 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 acquisitions. 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 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 SEC filings, including Cooper's Form 10-K and Form 10-Q filings, all of which are available on our website at cooperco.com. Should you have any additional questions following the call, please call our investor line at 925-460-3663 or email [email protected]. And now I'll turn the call over to Al for his opening remarks.

Thank you Kim, and welcome everyone to Cooper Companies fiscal fourth quarter conference call. I'm pleased to report another strong quarter led by record revenues at CooperVision, where we exceeded the high end of expectations for the quarter. Our daily silicone hydrogel and myopia management portfolios posted strong results. And our key account strategy generated share gains in markets around the world. Within CooperSurgical, our fertility business continued to perform extremely well and we recently announced an exciting agreement to acquire Generate Life Sciences, a great strategic fit with our fertility and labor and delivery offerings. For the full fiscal year 2021, I'm proud to report record revenues at both CooperVision and CooperSurgical, record non-GAAP earnings, and record free cash flow. As we enter fiscal 2022, we have strong momentum and expect another record-setting year. Regarding fourth quarter results, and reporting all percentages on a constant-currency basis, consolidated revenues were $759 million, with CooperVision at $565 million, up 11%, and CooperSurgical at $194 million, up 11%. Non-GAAP earnings per share were $3.28. For CooperVision, our daily silicone hydrogel portfolio led the way, growing 19%. All three regions reported strength in this product category with our premium product MyDay and our mass market product clariti, both performing really well. Biofinity also had a solid quarter, supported by strength in torics and multifocals. For the regions, the Americas grew 6% led by our daily silicone hydrogel lenses, with particular strength in MyDay where we continued seeing strong fit activity. EMEA grew a healthy 15% with improving consumer activity and strength in our key accounts, driving growth and shared gains. Within this region, we posted broad-based growth from our daily silicones and Biofinity. Asia Pac grew 14% led by a steady improvement in consumer activity and success with several new product launches. This region remains a very important growth driver for us, and we're investing accordingly as we're outperforming the market and taking share. For our FRP portfolio, Biofinity posted solid results driving growth in markets around the world with its broad offerings, including a tour of Multifocal and Energys, the most innovative product in the monthly space. Regarding product launches, we remain incredibly active. I've highlighted in the past the many products and range extensions we've been launching around the world for MyDay, clariti, and Biofinity, and all that activity continued. This has driven consistent share gains and we expect that to continue. One recent launch that I want to highlight this quarter is our new MyDay multifocal. We've launched the product in the U.S. and several major European markets, and the feedback and results are absolutely fantastic. We're consistently hearing from eye care practitioners that the new binocular progressive fitting system is a breakthrough approach that simplifies fit and provides optimal visual acuity at all levels. And we're hearing that from patients who are touting it as the best multifocal they've ever worn for exceptional near, intermediate, and distant vision. We expect this launch to continue performing extremely well and to provide a nice halo effect supporting the already successful MyDay brand of Torics and Sears. Moving to myopia management, our portfolio grew 63% to $21 million, with MiSight up 165% to $7 million and Ortho-K products up 40%. We reached our goal of $65 million for the year, up 76% year-over-year and our momentum is strong. As a global leader in the myopia management space, our portfolio is the broadest in the industry comprised of MiSight, the only FDA-approved myopia control product, our broad range of market-leading ortho-K lenses, and our innovative SightGlass Vision glasses. Regarding MiSight, we didn't quite reach our target this quarter, but we did reach $19 million in sales for the full year, up a very impressive 149% year-over-year. We're making great progress with independent optometrists, buying groups and retailers around the world, and we're seeing momentum in all these channels. We're also making great progress in China, where we signed an exclusive distribution agreement with SLR. SLR is now actively promoting MiSight following a soft launch last month at one of the largest optometry trade shows, and we're on target for our full launch in fiscal Q2. We've also assembled an advisory board of key opinion leaders whose affiliated hospitals represent over 50% of myopia management contact lens volume in China. This team of experts is providing fantastic insight into our MiSight positioning, and how we can grow Ortho-K even faster, and how SightGlass will successfully fit in. As a reminder, childhood myopia rates in China are estimated at over 80% and reducing myopia is a priority for the Chinese government, so the opportunity is significant. Lastly, we recently presented our industry-leading seven-year clinical study of MiSight, confirming the product works for nearly all myopic children. It cuts myopia progression by roughly 59% on average. It works at any age a child starts treatment. It works for as long as a child wears it and there's no rebound if treatment is stopped. These are the drivers that will continue supporting short and long-term growth. Regarding our other myopia management products, our Ortho-K portfolio performed really well led by success in China. And in November, we commercially co-launched our SightGlass Myopia Management glasses in Europe with Essilor, and we'll be partnering with them on several additional launches coming soon. Overall, on Myopia Management, our momentum is strong and we're still targeting constant-currency growth of over 50% in fiscal 2022 to roughly $100 million in sales. To conclude our vision, we estimate the overall contact lens market grew 7% in calendar Q3, while CooperVision grew 8%, even as new fits remained below pre-COVID levels. According to recent U.S. data, roughly 64% of eye care practitioners stated they had capacity to serve more patients but cannot, mostly due to staffing challenges. Having said that, trends are positive and we expect the market to grow in the 4% to 6% range this coming year, supported by improving fit activity in the U.S. and EMEA and reopening activity in Asia-Pac. Meanwhile the long-term macro growth trends remain solid, with roughly one-third of the world being myopic today and that expected to increase to 50% by 2050. For CooperVision, we closed this fiscal year on a really strong note, exceeding the high end of our expectations, and we've entered fiscal 2022 with a robust product portfolio, new product launches, a fast-growing myopia management business, and strong fit data. To ensure we're seizing the growth opportunities in front of us, we've increased our sales force investments and we'll continue with our successful myopia management investment strategy. We have strong momentum, we're growing faster than the market, and we expect that to continue. Moving to CooperSurgical. Our fertility business performed exceptionally well, growing 24% year-over-year to $82 million. Strength was seen around the world and throughout our product portfolio, including from consumables, capital equipment, and genomics. One particular area of continued strength was our RI Witness platform. This is our proprietary automated lab management system that clinics implement to maximize safety and security by optimizing their lab practices. A system like this is especially important in today's world to improve quality control and workflow management to enable social distancing and prevent mistakes, such as embryo mismatches, which you unfortunately occasionally hear about. Regarding the broader fertility industry, our addressable market is approaching $2 billion with 5% to 10% long-term growth expected. It's estimated that one in eight couples has trouble getting pregnant due to a variety of factors, such as increasing maternal age. And that more than 100 million individuals worldwide suffer from infertility. Given the improving access to treatments, increasing patient awareness, greater comfort discussing IVF, and increasing global disposable income, this industry should grow nicely for many years to come. Within our office and surgical unit, we grew 3%. Medical devices performed well, growing 20%, led by our portfolio of uterine manipulators, several of our surgical devices, and our next-generation advanced product line. Meanwhile, PARAGARD declined 17% largely as forecasted, due to buy-in activity from last quarter's price increase. Having said that, similar to what we've seen from the general IUD market, the performance was soft, likely due to COVID staffing challenges. Lastly, for CooperSurgical, we recently announced an agreement to acquire Generate Life Sciences for $1.6 billion. Many of you may know this Company as a cord blood storage business, but they've done a phenomenal job expanding over the years and this business is now a great strategic fit for CooperSurgical as they're a leader in donor egg and sperm and cryopreservation services for fertility treatments, as well as being a leader in cord blood and cord tissue storage, which is an excellent fit with our Labor and Delivery group. We have an investor presentation on our website that summarizes the deal, but let me provide some additional color. Roughly one-third of the business is infertility, which we estimate will grow 5% to 10% long-term, supported by general industry growth. Meanwhile, combining Generate's offerings with our existing portfolio allows us to leverage our infrastructure, launch new products, and go international to accelerate growth beyond this range. Two-thirds of the business is in cord blood and cord tissue storage, which we expect to grow 3% to 5% long-term. This is driven by increasing demand for cord tissue stem cells due to optimism around the significant number of clinical trials using these stem cells for regenerative medicine. Consolidated, this business offers long-term sustainable growth of 4% to 6%, and we believe there are opportunities to push that range higher, with potential revenue synergies as we leverage our expertise. To finish, let me make a few comments on fiscal 2022. Introducing the annual guidance in today's world is a challenge given COVID uncertainties. Regardless, our organic revenue growth is strong and we expect that to continue. We're investing in product launches and we're doing that intelligently by leveraging our operations to ensure we receive strong returns. I believe CooperVision is the most innovative Company in the contact lens space today, with leading products in myopia management and the broadest product offerings in the market. And CooperSurgical is in an extremely exciting position led by our Fertility business. As a Company, we remain on a steady upward trend and we see that continuing for fiscal 2022 and many years beyond. And with that, I will 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. Fourth quarter consolidated revenues increased 11% year-over-year, and also 11% in constant currency, to $759 million. Consolidated gross margin decreased year-over-year by 20 basis points to 67.5%, driven primarily by currency, partially offset by lower manufacturing costs at CooperVision. Operating expenses grew 16% as strategic investments in sales and marketing to support Myopia Management and Fertility continued. Within this, we did see slightly higher than initially forecasted investments for SightGlass Vision and MiSight in China, along with elevated distribution costs, tied to higher demand of direct shipments. Consolidated operating margins were 24.9%, down from 26.8% last year. Interest expense was $5 million on lower average debt, and the effective tax rate was 10.3%, helped by stock option exercises in the quarter. Non-GAAP EPS was $3.28, with roughly 49.9 million average shares outstanding. FX negatively impacted us and was roughly $0.05 worse than expected when we gave guidance last quarter. Free cash flow was solid at $110 million, comprised of $175 million of operating cash flow offset by $65 million of CapEx. Net debt decreased to $1.4 billion and our adjusted leverage ratio improved to 1.38x. Moving to 2022 guidance and excluding the recently-announced Generate Life Sciences acquisition, consolidated revenues are expected to be in the range of $3.032 billion to $3.090 billion, up 6% to 8% in constant currency, with CooperVision revenues between $2.225 billion and $2.267 billion, up 6% to 8% in constant currency, and CooperSurgical revenues between $807 million and $823 million, up 6% to 8% in constant currency. Non-GAAP EPS is expected to range from $13.60 to $14, up 9.5% to 12.5% in constant currency and the tax rate is expected to be around 13%. At the midpoints of guidance, this equates to constant currency revenue growth of roughly 7% and constant currency EPS growth of roughly 11%. Regarding currency on a year-over-year basis, we're expecting an FX headwind of roughly 2.5% on revenues and 7% on EPS. This impact will be most detrimental in Q1 where we're expecting EPS in the $3 to $3.10 range. Before opening the call to questions, let me touch on the Generate Life Sciences acquisition that we announced on November 10th. As of today, we're optimistic we'll close in the next couple of weeks, which will give us roughly 10.5 months of their operations in our fiscal 2022. Having said that, we're still waiting for final regulatory approvals, so we're not providing specific guidance today. In the meantime, let me walk you through the deal accretion that we expect. As previously announced, Generate has roughly $250 million in trailing 12-month revenue. Gross margins are expected to be roughly 70% and OpEx is expected to be elevated in year one, as synergies are expected to be minimal as we integrate and invest in the business. As we are now closer to securing permanent financing for this transaction, we are updating our year one non-GAAP EPS accretion estimate to around $0.50 and would add that we expect this accretion to improve in year two with synergies. In summary, we're pleased with how we closed this fiscal year and as we look forward into 2022 and beyond, we continue to believe our strategic investments will drive top-line momentum supporting share gains in both businesses and long-term sustainable earnings growth. And with that, I'll hand it back to the Operator for questions.

Our first question comes from Andrew Brackmann of William Blair. Your line is open.

Hi, guys. Good afternoon, and thanks for taking the questions. Appreciate all the color on the guidance and the forward outlook. Maybe just to start here on the Generate business that you are going to be acquiring shortly. Now, this is the first call that you've had sort of post announcement. So maybe just from a strategic standpoint, Al, can you just talk about how this merges with your current offering, how you're going to merge these commercial organizations that you have? And then just broadly, Generate had a nice DTC marketing angle. Anything that you guys can do there to maybe expand that capability on your fertility side right now? Thanks.

Sure. I'm glad to discuss this. I know the announcement caused frustration for many, including myself, as I was eager to talk about a deal I'm really passionate about. This is a significant opportunity for us, representing about one-third of our business in fertility. We already have a strong position in this industry, and adding the donor component to our existing product lineup allows us to go into a fertility clinic and offer a comprehensive range of products. I'm very enthusiastic about how this will unfold. Our existing sales team and relationships with fertility clinics, both in the U.S. and internationally, give us a solid advantage. The fertility business is growing by at least 5% to 10%, and this segment is expanding as well. I believe we can accelerate growth with new products we plan to introduce and the leverage we have. It's a perfect match for us in the fertility sector. Furthermore, there's also the cryopreservation aspect, which aligns perfectly with our goals. About two-thirds of the business concerns the storage of cord blood and cord tissue, which many people are familiar with, especially parents. Recently, this area has gained more attention due to the regenerative medicine uses of cord tissue stem cells, with over 1,000 clinical studies currently underway. Interest in cord tissue storage is rising, which is exciting. Currently, there's a relatively small sales force handling this, but we have an excellent team reaching out to OB-GYNs across the U.S. We will be able to promote our message directly to them. While direct-to-consumer marketing is valuable, medical professionals significantly influence decision-making in this area. Being the first company owning one of these businesses that communicates directly with OB-GYNs and has established relationships, I believe we can provide substantial value. I'm excited about both aspects of this acquisition.

Great. Thanks for all that color. Maybe just to switch gears here a little bit, on the margin side, so 70% gross margins for Generate, can you just talk about how this might be accretive on the operating margin side? I know you guys have talked about expanding total Cooper margins to 30% range or so over time. It doesn't look like that's going to be this year, but can you talk about how this plays into that longer-term goal of around 30%?

Sure. Yes, and that continues to be an objective. As you know, and Brian touched on, currency is a fairly decent negative to us this year, so that's causing us to take a step back, from an as-reported perspective but not from a constant-currency perspective. Yeah, good gross margins on the Generate business, 70% or so fits in really well. Now, this first year buying this, we'll be a little careful on the integration activity. They had acquired a business this past summer that took them into Australia and Canada. We need to roll this business into our operations. We need to take care of everything we respect from IT to customer service and a variety of other things, so not anticipating a lot of leverage in the first year. But then, we will roll it in and then through the year we will, we will get leverage from this business. Now, the question mark on it ends up really being when you look at the $0.50, is more around the interest expense. We're not going to get into the OpEx at this point in time and interest expense because: 1. We haven't closed Generate yet, 2. We haven't closed the permanent financing for it yet. So when we do, we can supply a little bit more color, but suffice it to say that long term, this will be accretive to company-wide gross margins and help us get to that 30%.

Thank you. Our next question is from the line of Larry Biegelsen. Your line is open.

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

Yeah.

I have a couple of questions regarding myopia management for fiscal 2022. That $100 million figure you mentioned is clear, but I would appreciate your insights on its components. I'm particularly interested in the potential contribution from China. We’ve noticed that Stellus’ SLR sales in China are impressive, exceeding 2,000 pairs per day now. How do you foresee the ramp-up of MiSight in China compared to what Stellus achieved? We've heard estimates suggesting it might reach a third of Stellus' sales, which would still be quite significant. I also have a follow-up question.

You're right. China is very promising for us. We have a solid partnership with Epsilor, who distributes our main ortho-k products there. We have exclusive distribution rights for MiSight, which we have already soft launched in China. Our collaboration is performing well, and we are making significant progress. You mentioned their glasses, which they are currently selling in China and doing quite well with. The Chinese government has publicly acknowledged that addressing myopia is a major concern, and they are treating it seriously. The glasses and contact lenses are distributed through hospitals, allowing for rapid implementation and potential success. While I won’t specify exact financial expectations, we are optimistic about our opportunities in China. Regarding the $100 million goal we've discussed previously, we still support that outlook. Personally, I believe MiSight will see substantial success, depending on how well it performs in China this year. Simultaneously, we are already experiencing success with our ortho-k products there, even more than I anticipated. There are various factors at play, and I wouldn’t overlook SightGlass. This product was co-launched with Essilor in Europe and is performing well. We plan to introduce SightGlass to China at a later date, and these various elements will drive our pursuit of the $100 million target.

That's helpful. For my follow-up, Al. Obviously, we all see the inflationary pressures. How are you thinking about your ability, at least in CooperVision, to take price in fiscal 2022? What are you assuming in the guidance? We have heard that your competitors are taking over 4% in 2022, which is a little bit above average. How are you thinking about price in '22? Thanks.

I won't discuss a specific number right now, but we will be increasing prices. We're experiencing inflationary pressures and similar factors. Our industry, particularly in contact lenses, is strong, and an annual price increase is justified. Given the inflation and shipping costs, we will be raising prices. While I won’t provide a specific figure at this time, you can expect to see it soon.

Thank you. Our next question is from the line of Matthew Mishan of KeyBanc. Your line is open.

Hey. Great. Thanks for taking the questions. Hey, Al. I'm just trying to understand your thoughts around starting at 6% to 8% with the CVI guidance. That's where you were starting point for 2018 and 2019, but now you have myopia control portfolio as an extra lever, you have some easier comps especially in the first quarter, and from what you just said, you have some price increases also helping you out as a potential tailwind there. How are you thinking about that 6% to 8% starting point?

I'll answer as easy as one word, COVID. That's it. Right? So if you want to think that 6 to 8 is conservative, I'm not going to argue with you on that. But I'm also not sure what's going to happen with COVID and some of the variants out there. So you have to try to factor that in a little bit, it's only prudent when you're giving annual guidance in a period like we're in today to try to build in a little bit of conservatism, if you will, for that.

Okay. That sounds reasonable. Regarding EPS, you mentioned 11% constant currency growth year-over-year at the midpoint. We can factor in the FX impact you mentioned earlier. However, how should we assess the influence of increased investments and taxes on EPS year-over-year?

Yeah. Tax, we have going up a little bit because it was in the low 11s going to 13. So obviously, if you excluded tax, our profit growth would be better. If you kind of look it, kind of leverage through the P&L, I guess, I'd probably just do it at a high level and say if I wanted to midpoint of guidance, that 7% is the midpoint of revenue guidance in constant currency. And the midpoint of EPS guidance is 11%. And that includes hurdling the tax that we talked about. So that's your leverage right there. I've talked in the past about how we have a business where we can leverage this business. We've invested a lot in Myopia Management; we're going to continue to invest there, and, frankly, we're investing in Vision more aggressively in a number of different areas which we started this past quarter with some sales force expansion in several markets. So a lot of investments going into Vision right now: sales force, product launches, MyDay multifocal, super excited about that, SightGlass, a lot of different areas. We're doing all those investments and we're still talking about 7% and 11% leverage through the P&L. So I feel pretty good about that and that, again, hurdles the tax increase.

Thank you. Next question from the line of Jeff Johnson of Baird. Your line is open.

Hi everyone, good evening. Al, I have a question about pricing, not just for the cord portfolio but also regarding MiSight. In our discussions with many of these doctors, there's a clear excitement about the technology and a desire to introduce it to more patients. However, the $750 wholesale price is a significant barrier, especially if we're considering adding $500 in professional fees or more. How do you feel about that $750 price point? If you generated $19 million in MiSight revenue without reducing the box price substantially, you could potentially recover that within a year or two, possibly even sooner. What are your thoughts on that rather high wholesale price?

That's a great question, Jeff. We're currently discussing this internally. We wanted to get through the year-end, where we had a strong comparison, particularly in the U.S., as last year we gave away a lot of lenses for free. We're assessing the situation and considering the cap price you mentioned. The potential for selling more product and whether that compensates for it is under evaluation. However, the main hesitation we're seeing is not primarily about pricing. While that's a factor, the top issue remains staffing and fit concerns. The process of communicating with parents, discussing with kids, and getting them into the product is taking longer than we initially expected. Although we're successfully converting many patients, it can take 6 to 12 months. The child needs to return for follow-ups, during which the eye care professional explains myopia, its progression, and the parents often hesitate due to costs or concerns about contact lenses. This leads to delays in decision-making, and it's only when they return and learn that their child's vision has worsened that the sale occurs. I anticipated these sales would happen more quickly, and while they are happening, they are occurring later than I hoped. Pricing is part of the equation, but improved fitting activities will also contribute.

That's helpful. As a follow-up regarding the 4% to 6% market and the 6% to 8% per CVI, if we exclude the myopia with the $35 million incremental adjustment on a constant currency basis, that translates to about a point and a half, slightly more than that. If we consider your core portfolio in the 4s, specifically between 4.5 and 6.5, it seems you're suggesting that you anticipate being roughly on par with the market. Historically, you have performed above market levels. Is this a sign of conservatism, a consequence of COVID, or influenced by competitive product launches? Additionally, concerning your 4% to 6% market assumption, does this forecast take into account a potential increase in pricing across the industry this year, and do you still believe it will be in the 4 to 6 range?

I believe pricing is accounted for. It's possible to argue that the 4 to 6 could be slightly lower due to COVID concerns and various other factors in the global marketplace. As of today, I expect us to remain within that 4 to 6 range, factoring in some pricing. I anticipate that we will gain market share and would be quite surprised if we don't do so on a core, like-for-like basis. Our myopia management portfolio will contribute to this and help ensure that we exceed market growth. While I don't expect massive share gains, it would be surprising if we gained no share at all. There are some strong competitive launches happening, so I want to be cautious in my predictions. However, based on the strength I'm observing with key accounts, particularly in Europe and Asia Pacific, I believe we will take share. The extent of our share gains within our core portfolio will be linked to specific geographies. If Asia Pacific continues to recover, particularly in Japan where we are well-positioned, we could see significant share gains.

Thank you. Next question from the line of Jon Block of Stifel. Your line is open.

Hey guys, good afternoon. Brian, maybe the first one for you. Just any color on other parts of the P&L for '22 to Alice's prior point. There seems to be some applied leverage in the model when we think about things, especially after taking into consideration the higher tax rate. But how about just the moving parts? Is it a little bit of gross margin expansion? But think about OpEx as a percent of revenue, maybe flattish because you guys have flagged and called out some ongoing investments.

Thank you for the question, Jon. I'm glad to address it today. Regarding our guidance, when we look at the midpoint, we expect gross margins on a constant currency basis to increase year-over-year, with operating margins improving even more. Al mentioned the leverage we've gained while overcoming inflationary pressures such as wages and freight, along with our ongoing investments in growth areas like myopia and fertility. This leverage from higher revenues is positively impacting our operating margins, and I anticipate a significant year-over-year increase in those margins.

Got it. Got it. And I'll equally weigh my questions. The next one, just, Al, on the fertility side, over the past handful of years, we've seen a lot of fertility deals, obviously smaller than Generate, but now you've done Generate, or are about to do Generate. In your opinion, does this fully build that out, the fertility part of the business? Does it complete the puzzle, so to say? And then maybe to just a tack on CSI, Paragard did miss our number. I know there are some moving parts due to the price last quarter and the buy-ahead, but maybe exiting fiscal '21, do you feel like inventory's in a good place due to the buy-in on the Paragard side of things? Thanks.

On Fertility, I really believe in this sector. It’s a promising industry with a lot of potential. It remains fairly fragmented, with various players operating in different global markets, including some significant ones. I think Generate is a solid example of this and a valuable addition for us. We currently have a strong fertility franchise with many opportunities for growth that could exceed market rates. If we can identify additional transactions that make sense for geographic expansion, we will certainly consider those. Regarding Paragard, we did observe some softness in our medical device segment in September, and that continued into October. I was pleasantly surprised that our core medical device products performed reasonably well during that period. Some naturally perform well due to their connection to childbirth, but even our elective procedure products held up decently in October, unlike PARAGARD. However, I don’t believe PARAGARD is an outlier. The entire IUD market has experienced some softness, so it’s challenging to pinpoint issues to a specific product. I think some staffing limitations are causing challenges for IUDs and similar products. Honestly, I expect some of these difficulties to persist into our fiscal Q1 due to ongoing staffing issues in the medical field. We don’t see these problems on the contact lens side, but they are apparent in the medical device sector, affecting Paragard as well. That said, I want to clarify that Paragard is not performing worse compared to the IUD market; it's on par or possibly slightly better, even though this segment has faced challenges.

Thank you. Next question from the line of Jason Bednar of Piper Sandler. Your line is open.

Good afternoon, and thank you for taking my questions. I have one regarding Generate Life and another about MiSight. Al, starting with Generate Life, I recognize the strategic benefits of this transaction, but this asset does have a somewhat complicated history and comes with a significant price tag of $1.26 billion, which is the largest in your history. My question is, what led you to consider this transaction the right choice now instead of focusing on possibly faster-growing assets? Additionally, can you explain how you anticipate GLS will operate more efficiently under the CSI umbrella compared to its performance before private equity ownership?

One of the things that's going to make it more effective for us and one of the things that's exciting for us is the size of our business. We just have a very large fertility business and we have a large OB-GYN business and some great products specifically within the OB space. So we're talking to those professionals, we know those professionals really well. One of the challenges you have when you're a company like Generate, is you're seeing a lot of your success come from direct-to-consumer activities, that type of thing. It's more DTC and not direct to the professional. We're known as kind of a high-quality educational shop within CooperSurgical, within the OB-GYN space, and within the fertility space. If you look at the training we do, there's just extensive training and knowledge, communication, and so forth, that we do with medical professionals in that side of things. That's not something that Generate has really been able to take advantage of because they just didn't have the size to be able to do that. When you take their business and combine it with our strengths, that one plus one is a three. That's what's so cool about this. Yeah, this opportunity came up. I've been following it, frankly, for a long time. When it was a cord blood storage business, that was a little bit of a different story. As you fast forward to where it is today, and you think about things like regenerative medicine and what's going on over 1,000 clinicals in process on that, who is able to talk to the obstetricians about that? Who's able to speak to the fertility clinics of the value of that and those clinical studies and so forth. We are. We have the professionals already in there talking to them and doing training and so forth. So I really think we can add a lot of value there. Frankly, at the end of the day, deals come up when deals come up when opportunities are available. I've been looking at this thing for many, many years. I was happy to see it come up and I was happy to see us get the opportunity to win this business. So to me, I look at it as it's a big deal and it is a big deal for us. It's an important deal for us. But when you find something that's a great strategic fit, that's growing mid-single-digits and you think that you're going to be able to enhance that growth, you look at those opportunities, you take advantage of them, especially on something that's going to throw some nice accretion to the bottom line.

All right. That's great and very helpful. Maybe for the MiSight question, Cooper did have a representation today at the VHCPCS meeting lobbying for level 2 code for MiSight. Could you update us on where you're at with the reimbursement strategy for MiSight here in the U.S? And where securing this coding and associated payment would fit into the overall plan and how you're considering that maybe as an element of adjusting price points in the future just to maybe go back to Jeff's earlier question?

Currently, we do not have any assumptions related to reimbursement. Any potential future gains in that area could be significant, but that's all I can share at this moment. We are actively working on this and have a strong interest in making it successful. However, at this stage, we haven't incorporated any assumptions about it. We'll see how things develop, and I hope to provide positive news in the future.

The next question from the line of Joanne Wuensch of Citibank, your line is open.

Thank you, and good evening. I appreciate the color on the sale process for MiSight. Can we shift to the other side of that, which is the training process for physicians? Is there a way to quantify how many physicians have been trained, others that have been trained, which ones start integrating it into their practice?

I don’t have that number on me, but it’s important because it continues to grow. Many eye care professionals are currently trained on it. A key takeaway is that if I had to approach it again, I would consider how to handle it differently. Many of these trained and certified professionals return to their practices excited, but sometimes they have low patient volume, which leads to their focus shifting away from this area due to staffing challenges and the need to prioritize more straightforward patients. What we’ve found is that once an eye care professional is trained and enthusiastic, and when they have a myopia specialist to support them, we see a significant increase in success. It’s not just about how many are trained; it’s also about how many are actively supported and engaged. Once they start fitting a few children, momentum builds, and they become comfortable with the process. They then intend to discuss this solution with every child that comes in because they understand how to fit, sell, and charge for it. This is critical, and in some new markets we are entering, we are seeing quicker success because we’ve learned how to effectively transition from training to selling the product.

It's really helpful. Can I ask a very boring question? FX in the first quarter, can you quantify revenue and EPS impact?

I'm not going to specify the numbers. Clearly, the impact from foreign exchange has been the most significant. Compared to other quarters in the year, it poses a double-digit challenge to earnings per share in the first quarter, and we also experienced the most severe impact on the cost of goods in that same quarter.

And you get the double whammy because you get the pound 6 months later flowing through bad in the revenues immediate hit. Yeah.

Thank you. Next question from the line of Anthony Petrone of Jefferies. Your line is open.

Thank you. A couple on MiSight and one on GLS. On MiSight, we've had calls where we've heard that the attach rate and the stickiness going into next year is going to be quite high. Just thinking about the existing ECPs that have already implanted patients this year and fitted patients this year, do you expect the attach rate to be like a traditional contact lens? And then in terms of just the effectiveness, you mentioned the clinical data, Al, we've heard that, and in some cases, they've actually slowed progression by almost half and so they have seen some good effectiveness in controlling the progression of myopia. Those will be the first two on MiSight and I'll have a follow-up on GLS.

Certainly, there's no question the product's working in the marketplace. If you go and look at the success rate, it is reducing the progression of myopia for children at a fairly high level. On average 59%. There are a number of kids who their myopia progression essentially stops entirely, which is amazing. Can you imagine that? But that definitely happens and we have many instances of eye care professionals telling us that. That's really fantastic. Their retainage rate, if you will, on those sales is really high. It's somewhere 85%, 90% or so. There's still kids who are non-responders to MiSight. You give them the lens, they wear the lens, we've seen that in the clinical data and we see it in a real world application where some kids, for whatever reason, continue to have their myopia progress at the same rate. I mentioned last call we have a lot of clinical work going on; we have eight products in R&D right now specifically associated with this and some of those are addressing the non-responders right now, so that we can come out with some additional products to try to address everybody. But yes, it's something like nine in ten kids are staying in the product. It's a pretty high level of retainage.

I want to follow up on GLS regarding the drug development opportunities and the several thousand trials. Could you explain how this will impact the business, particularly in terms of the timeline from clinical trials to when these products reach the market? What does the revenue opportunity look like? Thank you.

There's a lot happening in the clinical space for regenerative medicine, especially with cord tissue stem cells, which are considered the most effective. While they differ from the more familiar cord blood stem cells, there are promising clinical studies showing significant potential for success. Our research included surveys of women who recently gave birth or were pregnant about their intentions to store cord tissue, and the initial interest was quite low. However, after providing information about the advancements in regenerative medicine, interest surged to nearly 100%. This highlights the importance of education in this area. Selling directly to consumers may be challenging, but engaging medical professionals from various fields, not just obstetrics, can create opportunities for discussing the benefits of regenerative medicine. There's a lot of strong clinical work being done, particularly compared to the stem cells associated with cord blood, and we may see increased storage opportunities as awareness grows.

Thank you. Next question from the line of Robbie Marcus of JPMorgan. Your line is open.

Great. Thanks for taking the questions. 2 for me. First, you guys, I believe spent $25 million in 2020 incremental on MiSight marketing. Do you have that number for 2021? And what you're expecting in 2022? And I guess it's probably more better to be inclusive of more of the new product launches.

No, we don't have that specific number because everything has merged under myopia management. We no longer break that figure out separately. It was a solid figure this year. We made significant investments in Q4, and it will be a substantial number this year. That said, we actually see year-over-year leverage, which is partly why you're noticing that leverage. We established a strong infrastructure this year, allowing us to start leveraging that in terms of year-over-year comparisons for our myopia management investments.

Got it. And maybe as a follow-up. I think it'd be helpful if you maybe run through just your thought process on M&A and capital allocation. The Generate deal is growth dilutive to the overall business, accretive to CSI, but diluted to the overall business. So maybe just how you're thinking about deals, how you think about growth rates versus return on invested capital, what kind of metrics you're looking at, and how you're thinking about priorities for cash going forward? Thanks.

Yeah. I certainly, personally, do not believe that the Generate deal is going to be diluted to our consolidated growth rate, just to be clear. I do think that it's based on their history and based on where I see the market going, that's probably a 4% to 6% grower, and that's what we talked about, but we have multiple areas to drive that growth rate higher. We have some new products that we're already talking about right now that we're going to be launching, and we have other forms of revenue synergies coming from our sales forces and then international expansion also, where there's some faster growth rates out there. I am optimistic about our ability to drive growth. Now, it's pretty close right now. 4% to 6% is not bad, that's for sure, especially on an annuity sale and very high cash flow product with strong margin. That's the other side of this because at the end of the day, we still look at this stuff and say, 'Okay. Well, what makes sense from an acquisition perspective?' We have a tendency to really focus on traditional discounted cash flow models. We're very curious, and we focus on that and we try to be very intensive about the numbers that are going in that, to ensure we're getting a sufficient return on that. We do that a little bit more than we would do like ROIC and some of that kind of stuff because of the nature of our business, right? Strong cash flow, growth business, so on and so forth. So the other thing I would add on that, is strategic deals. I've talked about that in the past. If we could find strategic acquisitions that meet the financial metrics that can drive value in this business, then we're going to look at doing those kind of deals. And this one kind of checks all those boxes.

Thank you. Next question from the line of Rob Cottrell of Cleveland Research. Your line is open.

Hi, good afternoon. Thanks for taking my questions. Just first on the first quarter guidance, understand the FX headwind and the $3 to $3.10 EPS. But wondering if you've seen any change in top-line trends here in November, just given the fourth wave in Europe or any other change in momentum in either business?

No. November was a good month.

Okay. I guess more strategically then, Al, in the past, you've talked about not wanting to change investment pacing or strategy given FX headwinds. Clearly right now with a 7-point headwinds next year, it's materially worse than it has been in the past, does that change your thinking at all around managing costs into next year?

No, it frustrates me. Brian said gross margins would be up year-over-year on a constant currency basis, and our guidance shows that on an as-reported basis, those gross margins are going to be down year-over-year, so that frustrates me. And when I look at operating margins and we talk about getting to 30%, we'd be having a nice positive move in operating margins if currency held true. Having said that, we're still running a business that's a long-term business. We're looking at five years, ten years long-term growth and doing what makes sense to drive long-term growth. I want sustainable mid upper single-digit growth as a Company with margin expansion. We can't jerk the business around because of FX. And I'm not going to play the game where FX is good and then we're going to go invest a whole bunch, and then FX is bad and we're not. That's just not how we're going to run the business.

Great. Thanks for the details.

Thank you. Next question from the line of Chris Pasquale of Guggenheim. Your line is open.

Thanks. Al, I wanted to follow up on your comment about driving growth from the Generate assets above that mid-single-digits you get to if you just look at the business today. And in particular, how we should think about the opportunity for geographic expansion. I would think that distance from the patients to the facility might be a factor when you're talking about something like cryopreservation. So are you going to have to invest in building new storage facilities to get into new markets, and how should we think about the CapEx requirements of this business? Because historically, CSI has not had a lot of CapEx associated with it.

Yes. The CapEx is really low in this business. The storage tanks and so forth are cheap. So at the end of the day, you have to have everything else that goes along with a really high quality control systems, security systems, all that kind of stuff. But the actual CapEx itself is not high. When you look at the international expansion opportunities, let's go to fertility because that's one I would really highlight. A lot of that gets done with the fertility clinic. You're teaming up with the fertility clinic. Because when you're talking about donor eggs and donor sperm, that's usually a fairly quick transaction. Unlike the traditional stores like, we'll obviously do permanent storage of eggs and sperm, that type of thing, but a lot of that activity aligns itself directly with fertility clinics. And you're using the fertility clinics and working with them, their operations, so you just don't get a situation where you have significant CapEx. It's low CapEx. It's really high cash flow in that business.

Okay. That's helpful. And then, Brian, I will give you another at-bat here, too. We saw CapEx for the core business here come down by about $100 million this past year. Can it go lower in 2022? How should we be thinking about the CapEx requirements of the existing Cooper business? And is this low 200s now a good run rate going forward, or do you have more potential to drive that down?

Thanks, Chris. I appreciate the question. I know we've given CapEx over the years. And as you know, CapEx is a moving target. It's always based on timing of projects and milestones, and lead time, which is getting longer capacity needs demand, things like that. Rather than getting into that level of detail, whatever it is, we'll cover it. I've mentioned we'll do around $600 million of free cash flow in 2022, which is nice increase over '21. So operating cash flow will be strong and therefore free cash flow will be strong again in '22.

And there are no further questions at this time. I would like to turn the call over to Al White. Please continue.

Great. Fantastic. Well, thank you, everyone. I appreciate you taking the time for the call and obviously we're happy to announce the numbers and we're pretty positive about where we stand as a business. We look forward to continuing to produce here and speak to everyone in early March, when we do our next earnings call. Thank you. Thank you, Operator.

Thank you. And that concludes today's conference. Thank you everyone for participating. You may now all disconnect.