Good afternoon. My name is Emma, and I will be your conference operator today. I would like to welcome everyone to The Cooper Companies Second Quarter 2023 Earnings Conference Call. Kim Duncan, VP of Investor Relations and Risk Management, you may begin your conference.

Good afternoon, and welcome to Cooper Companies Second Quarter 2023 Earnings Conference Call. During today's call, we will discuss the results and guidance included in the earnings release and then use the remaining time for questions. Our presenters on today's call are Al White, President and Chief Executive Officer; and Brian Andrews, Chief Financial Officer and Treasurer. Before we begin, I'd like to remind you that this conference call contains forward-looking statements, including all revenue and earnings per share guidance and other statements regarding anticipated results of operations, market or regulatory conditions or trends, product launches, operational initiatives, regulatory submissions and closing or integration of any acquisitions or their anticipated benefits. Forward-looking statements depend on assumptions, data or methods that may be incorrect or imprecise and are subject to risks and uncertainties. Events that could cause our actual results and future actions of the company to differ materially from those described in forward-looking statements are set forth under the caption Forward-Looking Statements in today's earnings release and are described in our SEC filings, including Cooper's Form 10-K and Form 10-Q filings, all of which are available on our website at coopercos.com. Also as a reminder, the non-GAAP financial information we will provide on this call is provided as a supplement to our GAAP information. We encourage you to consider our results under GAAP as well as non-GAAP and refer to the reconciliations provided in our earnings release which is available on the Investor Relations section of our website. Should you have any additional questions following the call, please e-mail [email protected]. And now I'll turn the call over to Al for his opening remarks.

Great. Thank you, Kim, and welcome, everyone, to Cooper Companies Second Quarter Fiscal 2023 Conference Call. This was another strong quarter with CooperVision and CooperSurgical both outperforming expectations. For CooperVision, we reported record quarterly revenues and our ninth consecutive quarter of double-digit organic revenue growth. For CooperSurgical, we reported record quarterly revenues and our fertility business reported its tenth consecutive quarter of double-digit organic revenue growth and earnings exceeded expectations. Our teams are delivering impressive consistent growth, and we're seeing nice momentum. So we remain very positive about the future. Moving to the numbers. Consolidated revenue reached a record quarterly high of $877 million. CooperVision posted revenues of $589 million, up 10% organically, and CooperSurgical posted revenues of $288 million, up 5% organically. CooperVision's growth continues to be led by our daily silicone hydrogel and myopia management portfolios, and CooperSurgical's growth was led by our fertility and OB/GYN medical device portfolios. Non-GAAP earnings per share were $3.08. For the quarter and reporting all percentages on an organic basis, CooperVision's revenue growth was strong and diversified. By geography, the Americas grew 6%, EMEA grew 7%, and Asia Pac grew 19%. Results were driven by new product launches, expanded product ranges, market-leading flexibility and growth in key accounts. Within categories, torics and multifocals remain especially healthy with both posting growth of 15%. Within modalities, daily silicone hydrogel lenses grew 17% with especially strong performance from MyDay. Daily silicone hydrogel lenses continue to be the main driver of growth for the contact lens industry, and we offer the broadest portfolio with MyDay and clariti available on a wide range of spheres, torics, and multifocals. And lastly, our silicone hydrogel monthly and 2-week lenses, Biofinity and Avaira Vitality reported growth of 5%. Turning to products. The U.S. rollout of our latest innovative offering, MyDay Energys is going exceptionally well. This premium lens caters to the demands of today's lifestyles by incorporating DigitalBoost technology to alleviate the impacts of digital eye strain. Interestingly, we've been receiving a lot of positive feedback that patients in their 20s and 30s really like this lens which is great news as the original Biofinity Energys has been more heavily used by patients in their 40s. Given almost all of us are spending considerably more time on screens, which reduces blinking and causes eyes to dry out and become uncomfortable, it's not surprising that wearers of all ages are appreciating the DigitalBoost in their MyDay Energys. Meanwhile, MyDay multifocal sales remain robust, and we're seeing great momentum in new geographies as the lens becomes more readily available in EMEA and Asia Pac. I'm happy to report these launches are proceeding better than expected with feedback from customers and practitioners remaining very positive. Our MyDay Toric parameter expansion rollout in North America is also continuing successfully and our recent launch in EMEA is ahead of schedule. Given the success of this product, we'll be increasing availability throughout EMEA, and we're looking forward to launching in Asia Pac in the near future. With almost 4,000 SKUs, MyDay Toric has set the industry standard with the widest daily toric range in the market by a wide margin. With this broad range, it's providing many 2-week and monthly toric wearers the option to enjoy the freedom of wearing a daily contact lens for the first time in their lives. To conclude at MyDay, this technologically superior product family is performing exceptionally well and momentum is strong. And lastly, within the daily segment, our clariti family of lenses continues to perform well by offering a high-quality option at a mass market price point. Outside of dailies, demand for Biofinity remains healthy, led by torics, multifocals and extended-range offerings. We still have some capacity challenges. But with new production continuing to come online, we remain in good shape to meet ongoing demand. Moving to myopia management. We posted revenues of $30 million, up 36%, with MiSight up 49%. This slightly exceeded expectations and keeps us well on track to reach our goal of $120 million to $130 million this year. MiSight and Ortho-K sales were strong around the world, except China, where we didn't see a rebound until late in the quarter. Regarding MiSight specifically, we're seeing improving performance as we increase availability in key accounts, target practices with higher levels of pediatric patient flow and integrate the sales process into our regular sales channel. All this bodes well for MiSight, but also for our other products as there's a nice halo effect when MiSight practitioners accelerate their use of other CooperVision lenses. It's important to remember that MiSight is the first and only FDA-approved contact lens for myopia control and the product is backed by extensive clinical data. This is a critical differentiator as the proactive management of myopia becomes standard of care within the eye care community to help reduce the progression of myopia in children along with reducing the risk of long-term eye health problems associated with myopia, such as cataracts, retinal detachment, and macular degeneration. To finish on CooperVision, the contact lens market grew 12% in calendar Q1, with CooperVision growing faster at 14%. We expect the markets to remain healthy, supported by the macro growth trend and more people needing vision correction. It's estimated that 50% of the global population will have myopia or near-sightedness by the year 2050, up from roughly 34% today. This is driven by the increasing use of digital screens, among other factors. And when you combine this with the ongoing shift to silicon hydrogel dailies, the increasing focus on higher-value products such as torics to multifocals and higher pricing, we expect many years of solid growth for the industry. Within this, we expect CooperVision to remain a leader with its robust product portfolio and growing product launches, fast-growing myopia management business and leading new fit data. Moving to CooperSurgical. This was another strong quarter. Our fertility business posted sales of $125 million, up 11% organically for its tenth consecutive quarter of double-digit organic growth. Success was seen throughout the product portfolio as the team executed exceptionally well with our diverse offerings within consumables, capital equipment, reproductive genetic testing, and donor activity. Regionally, the Americas and EMEA continue to lead growth and the future is bright as we have solid momentum in both regions. Asia Pac is also performing well and we are excited about the potential of that region. With the uncertainty of the Cook transaction, we do have work to do in that region to build out our footprint, and we will do that. In this light, we're currently doing targeted investment activity, while also exploring ways we can advance efforts more quickly. Overall though, we're well positioned to maintain success given our strong team, diverse portfolio, and global momentum. Regarding the broader fertility market, we compete in a segment that's now over $2 billion in annual sales and we expect strong growth for many years to come. This industry is unique in that it has multiple growth drivers, starting with women delaying childbirth. The average age of a woman's first birth in the U.S. and within several other developed countries now stands at 30 years old, and Asia is a key factor contributing to the need for fertility assistance. Other growth drivers include improving access to treatment, increasing patient awareness, increasing fertility benefits coverage, and technology improvements for both male and female infertility challenges. The World Health Organization just released updated data showing that the prevalence of infertility affects more people than we thought, with approximately 1 in 6 people having experienced infertility at some stage in their lives. So the macro trends clearly support this industry's growth. Moving to office and surgical products, which includes OB/GYN Medical Devices, stem cell storage and PARAGARD, we posted sales of $163 million, up 1% organically. Within this, OB/GYN Medical Devices reported excellent results growing 11%, driven by positive trends in patient activity and strength in several core products. In particular, our labor and delivery group continued performing really well. Our stem cell storage business grew 3%, in line with expectations. Our current educational campaign just starring Chrissy Teigen highlights the importance of preserving newborn stem cells and we're really happy with the positive feedback, and we're looking forward to that effort gaining more traction. Meanwhile, PARAGARD declined 15%, primarily due to buy-in activity from the price increase in Q1. Our IUD revenues remain a challenge, and we're continuing to not expect any unit growth in PARAGARD this year. So any growth we do see will be driven by price. To conclude on CooperSurgical, it's with great pride that we say that every minute somewhere around the world, a baby is born using CooperSurgical products. Our business makes a difference in people's lives, and we love that. We're also operating in several markets that have fantastic long-term sustainable growth characteristics, such as fertility. So we feel good about where we're positioned and what the future holds. Before turning the call over to Brian, let me summarize by saying this quarter really highlights the stability and consistency of our businesses. CooperVision posted its ninth consecutive quarter of double-digit growth and CooperSurgical's fertility business posted its tenth consecutive quarter of double-digit growth, and both businesses reported record quarterly revenue. Our momentum is strong. Our investments are yielding solid returns and our management team is fully engaged in executing at a high level. And lastly, I hope everyone has had a chance to read our recent ESG report, which highlights a lot of accomplishments. Advancing our ESG efforts is an important part of Cooper's culture, and I'm proud of the success we've had and excited about what we'll be accomplishing in the future. And with that, let me turn the call over to Brian.

Thank you, Al, and good afternoon, everyone. Most of my commentary will be on a non-GAAP basis, so please refer to our earnings release for a reconciliation of GAAP to non-GAAP results. Second quarter consolidated revenues were $877 million, up 6% as reported or up 8% organically. Consolidated gross margin was up 40 basis points to 67.1% driven by currency improvements. Operating expenses grew 9% to 43.5% of revenues and consolidated operating margin was in line with expectations at 23.7%. This was down from 24.5% last year, primarily due to commercial investments and distribution. Below operating income, interest expense was $26 million, and the effective tax rate was 13.9%. Non-GAAP EPS was $3.08, with roughly 49.8 million average shares outstanding. To summarize the P&L this quarter, revenues came in ahead of expectations, while margins met expectations. The net impact from non-operational items, such as foreign exchange, interest expense, and taxes was slightly negative against our initial expectations. Overall, we exceeded our consolidated EPS expectations by roughly $0.06 and we'll pass along that in guidance. Free cash flow was $51 million, including CapEx of $74 million. Net debt decreased to $2.51 billion. And during this last quarter, we fixed the interest rate on an additional $300 million of debt. So now we have $1.3 billion fixed, going out roughly 2 to 4 years. Regarding 2023 guidance, we're increasing expectations for revenues and earnings by incorporating our Q2 revenue and earnings beats. This results in consolidated revenues of $3.51 million to $3.57 billion, up 7% to 9% organically, with CooperVision revenues of $2.37 billion to $2.4 billion, up 8% to 10% organically, and CooperSurgical revenues of $1.15 billion to $1.17 billion, up 5% to 7% organically. Non-GAAP EPS is expected to be in the range of $12.66 and to $12.96. Interest expense is expected to be around $110 million, assuming another 25 basis point rate increase by the Fed this month, and the effective tax rate is forecasted to be slightly below 14.5% when incorporating Q2. Within this, we're continuing to invest in our businesses to support long-term growth objectives. Demand across both businesses remains strong and our long-term growth trends are very positive. Before concluding, let me add that we took a $45 million charge this quarter for the breakage fee associated with the pending acquisition of Cook Medical's reproductive health business. We now believe it's probable that this transaction, as originally contemplated, does not close. We are still working on the deal, though, and we'll provide updates as we have more information. In conclusion, this was another strong quarter. We're very happy with the consistency of our businesses, and we have great momentum. We're closely monitoring expenses and we'll continue to do so, but we're also investing to drive long-term sustainable revenue growth. We're taking guidance up again and remain positive, we'll execute at a high level, delivering strong operating results through the back half of this year and into next year. And with that, I'll hand it back to the operator for questions.

Your first question comes from the line of Jeff Johnson with Baird.

So Al, I know when we look at the GSK data that sell-out data, you guys and everybody else kind of report sell-in data. So it's never apples-to-apples in that, but I think it's pretty clear January was a very strong month for contact lenses. It really was across all of medtech. April, obviously, a weaker month. So just maybe help us understand kind of the gating throughout the period of the quarter you just reported February, March, April and then maybe any updates on what you've been seeing so far in May? And just kind of the range of implied guidance for CVI now kind of 6% to 10% in the back half, just how you're feeling about the low end versus the high end of that range?

Yes, January was a really strong month. As the quarter progressed, February and March were good, but April was weaker for us. You can see this when comparing the calendar quarter to the fiscal quarter; we grew 14% in the calendar quarter and 10% in the fiscal quarter. April was a bit weaker, but May has been a good month for us. We did see some activities shift from April into May, and overall, the contact lens marketplace for our business has rebounded in May, which is a positive sign.

Okay. And then maybe just as a follow-up, if you can address that CVI guidance, implied in the back half to 6% to 10%, just kind of high and low end where your confidence is there. But the real follow-up question I wanted to ask was on pricing. It seems talking to Alcon and some of your other competitors looking at some of the pricing data we have for your lenses, there's a good price tailwind this year for, I mean, probably 2 to 3 points, something like that. Is that about the ballpark you're expecting? And then secularly or longer term, how comfortable are you if we stay in a persistent inflationary environment that you can maybe keep up 2%, 3% pricing a year for the next few years?

Sure. Yes, I think you're spot on. I think that 2% to 3% net pricing, I'm talking about net pricing is the way to look at it. The actual pricing that we've seen out there has been higher. The actual price increases have been higher. But if you look at the rebates and everything else, 2% to 3% is probably a good way to look at it right now. I think that's going to continue. I think that we're probably a little bit behind our competitors in that because we do have a lot of large contracts, especially some of the bigger store brand contracts that are multi-year contracts. So as those renew, we'll look at opportunities to adjust pricing on those. But I think that you're seeing that now. And frankly, I think you're going to see that for the next several years given supply constraints within the industry in general. If I look at our performance in the kind of back half of the year, the 6% to 10% you're talking about for CooperVision, I expect to be at the higher end of that range unless something happens to derail that. It'd have to be something unexpected, right? Some economic event or something out there. I mean we spent some time even this past week, it's been a little bit of a tough time for us coming up with some of the guidance and so forth with the debt ceiling and all the other activity that has been going on here recently. But no, we have good momentum. I feel optimistic that we'll continue to put up strong revenue numbers.

Your next question comes from the line of Larry Biegel with Wells Fargo.

Yes, I guess I'll ask the question on the guidance first here. The top line, you raised the top line and the bottom line by the amount of the beat in the quarter. I guess I would think FX was a little more favorable, particularly on EPS. Brian, maybe you could help us with that bridge how much currency changed from last quarter to this quarter for fiscal '23? And I guess the question is why not raise by a little more than the beat? And I had one follow-up.

Larry, I'll address the currency question. Currency has begun to move in our favor as we progressed through the quarter, but then it retraced. There was a minor positive impact on the profit and loss statement from revenues to operating income. However, the main effect we experienced this quarter was a negative one related to our foreign exchange losses. As previously mentioned, we are hedging some of our key currencies, but we still have several currencies and smaller exposures that are not hedged. This resulted in a loss that brought our earnings down to $3.08, which would have been somewhat better without that loss. We adjusted for the currency during the quarter, but interestingly, the overall impact for the second half of the year is similar. We anticipate about a 2.5% headwind to revenues for the year and a weaker 1% tailwind to earnings per share for the year.

And why not raised by more than the beat?

On EPS, we increased it by the operational net beat. However, given the macro uncertainty, including the Fed, foreign exchange, and recession, we chose to be prudent in setting our guidance. The positive takeaway is that we're not experiencing any demand or behavioral shifts. With gross and operating margins in line with expectations and overall progress being made, we're simply exercising caution in light of the macro environment.

That's helpful. Just, Al, on my follow-up here. Asia Pac, plus 19%, really strong. And myopia management, if I heard correctly, the $30 million up 36%, sequentially. That was one of the strongest sequential growth with absolute growth increases we've seen in a while. Just talk about the drivers in Asia Pac and myopia management and the sustainability.

Yes. Interestingly on myopia management, it was a good quarter, and we're gaining some traction in our MiSight, finally. We talked about it for a long time. It’s great to finally be gaining some real traction. And interestingly, it was not China. We actually struggled in China with MiSight this quarter until the very end of the quarter. So the MiSight was being driven by success here in the U.S. and throughout Europe were big drivers, in some of the markets in Asia Pac. So I think we're in good shape with our myopia management business, and I'm expecting Q3 to be a good quarter, Q4 to be a good quarter. As I was saying, I mean, we're certainly in good shape to hit, if not beat our $120 million to $130 million guidance range for myopia management. Asia Pac, we're in good shape. I would say Asia Pac, China being a little bit different if I look at our regular lenses and that it was more of a contributor in terms of our regular sales. But no, Kathy is doing a great job running that business, and we finally have some momentum going in Asia Pac, and I think we're going to continue to put up good quarters as we move through the back half of this year.

Your next question comes from the line of Joanne Wuensch with Citi.

Can we pick up part PARAGARD a little bit because I want to make sure that I understand what's going on there? Is this another setup where you've got 4 quarters of pricing headwinds and then you start to grow again? Or how do I think about that?

No. It’s a great question. No, it won't be that way. I would expect PARAGARD to grow here in Q3 and Q4. And for us, it kind of put up low single-digit growth probably for this year. We did have the tough quarter here in Q2, obviously. But some of that was tied to kind of inventory in the channel, some of that kind of movement around the price increase. So I wouldn't necessarily read too much into that. I would kind of restate what I've said on some of the prior quarters. We're not envisioning unit growth there, but I still think we'll post an okay Q3, okay Q4 and post growth for the full year.

Excluding PARAGARD, is there a way to describe how the rest of that business is doing because that was pretty much really the weak link in the quarter?

Yes. Fertility is performing really well. The team is doing an outstanding job with consistent strong performance, and it’s well diversified globally and by product family. Fertility is in good shape and we expect continued success in that area. Our medical device business, particularly traditional OB/GYN Devices, is also doing well, especially in the labor and delivery segment and some surgical products. Overall, aside from PARAGARD, the quarter was quite strong, and Holly has that business running smoothly at CooperSurgical, so we anticipate ongoing solid results.

Your next question comes from the line of Anthony Petrone with Mizuho.

And maybe just a couple of clarifying on PARAGARD. Can you remind us, Al, just the price increase that was put in earlier in the year and the extent of the volume declines, I guess, through the first two quarters of the year? So that would be my first question. And then maybe just in terms of overall share in contact lenses, at least according to our numbers, it looked like certainly, there was gains for Cooper in torics as well as multifocals but perhaps maybe a little bit of slippage in dailies. Again, just looking at the fiscal at plus 8%, and it looked like competitor data for dailies was a little bit higher than that. So just an overview on the share trends through May in lenses?

Sure, Anthony. The PARAGARD price increase was about 6%. Regarding volume, I wouldn't emphasize it too much. In Q1 and the recent quarter, and there might be some impact in Q3 as well, the changes are more related to channel inventory, whether through distributors or at physicians' offices, which is affecting our reported results. If we look past inventory, actual volumes have remained flat, and I don't expect significant changes in the near term. I mentioned this last quarter, and I hope I'm mistaken and being too cautious. But as of now, that's the situation with PARAGARD. However, I do anticipate growth in Q3 and Q4, expecting low single-digit growth for PARAGARD over the entire year. On contact lenses, this was a strong quarter. Biofinity and Avaira sales grew by 5%, and our non-single-use sphere also saw a 2% increase. You mentioned spheres, and we did have a couple of larger Biofinity orders that moved from April to May, along with substantial Biofinity Sphere activity, so I wouldn’t put too much weight on that variance. While the quarter-end figure was slightly lower, I believe we will see a strong start to Q3, reflecting positively on that segment of our business.

Your next question comes from the line of Robbie Marcus with JPMorgan.

I wanted to start with free cash flow and cash flow generation in general. It's been a little low the past few quarters. Maybe speak to the reasons behind it? And how you're thinking about cash flow generation going forward?

Operating cash flow continues to increase. However, there are factors that are causing free cash flow to decrease a bit, primarily our higher capital expenditures compared to previous years. Additionally, one significant factor is our interest expenses, which have doubled from $53 million last year to $110 million this year. Our tax rates are also rising over time, and our inventory levels have increased from last year to this year, adding further pressure. Overall, our operating cash flow remains strong, and we still expect to achieve solid free cash flow for this year, although it is somewhat offset by the increased capital expenditures, which we anticipate will be around $400 million this year.

Great. And then maybe on new fits. You talked about strong global new fits. Are you seeing any divergence in different regions? Just trying to get a sense of the future of the business and the trends there.

From a new fit perspective, no, not really. In terms of regional, we're seeing pretty good activity there. There's still a lot of demand on optometrists for appointments and so forth and the new fit activity is pretty strong. And our CooperVision new fit activity is looking really good right now. We're winning certainly our fair share when it comes to new fit. So I'm pretty optimistic from that perspective.

Your next question comes from the line of Matthew Mishan with KeyBanc.

This is Brett on today for Matt. Just wanted to ask a little bit about the trends in Europe given how robust several of the historical quarters looked a little bit of a deceleration here. Just wondering if there was anything driving that step down?

Brett, we are the leading company in Europe for contact lenses. Our franchise there is strong, and the team has excelled in enhancing our infrastructure around independent optometrists and key accounts where we perform exceptionally well. The European market is thriving, and we have not experienced any pullback related to economic concerns. The contact lens market is robust, and we are taking the lead. I believe we will continue to do so.

All right. Turning to MiSight, it appears that trends in the Americas, particularly in retailing fee accounts, contributed to the increase this quarter. Do you see a possibility to exceed that guidance range since China seems to be on the path to recovery and could potentially add to the positive trends you're experiencing in the Americas?

I guess, short answer to that would be yes. Yes, we're in a better spot when it comes to MiSight today than we were six months ago when we initiated that $120 million to $130 million guidance. So I think we've got a good shot to be at the higher end of that range or even push above it.

All right. Awesome. And then last question for me. I think you touched on some of the continued supply chains in the industry being a positive driver for pricing growth. So I was wondering if there are any pockets of particular issues from other companies that might be benefiting Cooper given the investments you've been making in your own production?

Yes, that's a tough one. I don't think there's too much there in terms of disruption from others. There are supply chain challenges, I think that we all have right now. Our competitors do and we do, too, in terms of just being able to produce enough product. I mean, in a lot of cases, I think a lot of us are selling everything that we can make right now. So not only are we dealing with whatever supply chain issues you could have associated with distribution and everything else and all those are certainly lightening up. But we're also dealing with demand. I mean, I'll talk about ourselves, right? We're a business that's been healthy for a long time, growing around 7%. And now we pushed up what our ninth straight quarter of double-digit growth. That puts pressure on the business in terms of having to make more product and run more products through your distribution channels. So there's just a natural challenge on that from a supply chain perspective. I think it's industry-wide, and we're all going to continue to deal with it because I think we're all increasing our production capabilities and kind of expanding our capabilities throughout our logistics networks. But it takes time, it takes effort, and the demand is there, right? So we're going to continue to see strength in the contact lens industry. I don't think you're seeing too much in terms of one person struggling so much as someone else is picking up business, as much as you're seeing supply chain issues or challenges just because of the global demand of the contact lens industry.

Your next question comes from the line of Jason Bednar with Piper Sandler.

Al, I wanted to ask on Biofinity toric. We've been hearing some greater channel inventory shift from a competing toric lens to Biofinity toric. I know it's been going on for a while, but are you able to quantify or do you have any metrics around maybe what kind of share you've picked up with Biofinity toric? How much of this is maybe adding to the toric revenue growth was pretty impressive in the quarter? And then sorry to pack a few into here, but how much tail is left from this conversion to toric and whether or not you're seeing any again, channel inventory shift with toric or even more broadly?

Yes, there's probably something there, but I just don't put too much weight on it, honestly. I mean we've had some competitors pull back a little bit on some of their SKU ranges and we have those SKU ranges. As a matter of fact, our Biofinity toric family is the widest toric offering out there. And when you roll in things like the tort multifocal and so forth, I mean, it's just an amazing franchise right now. We've been building that franchise out for a number of years. We spent a lot of time and a lot of money on the manufacturing side and also on our distribution network to be able to manufacture and distribute all those products in a wide SKU range. So do I think that we're maybe getting a little bit of help because some competitors or a competitor has pulled back on some of their SKU ranges? Yes, probably. But this isn't coming because of like one quarter or an action as somebody took. This is coming because of a multiyear strategy that CooperVision has deployed to drive growth in our torics. I mean, Jerry Warner runs that business for us does a fantastic job. He's just laid out a great strategy there in terms of torics and multifocals, appreciating that the market is growing. That portion of the market is growing faster than the sphere market, and it's a really sticky and great market. So I mean, we've, again, invested a lot of time and money for a lot of years to be in the position we're in. And I give the team a lot more credit around that activity than I do saying that a small movement by a competitor is allowing us to take a lot of share.

Okay, that's helpful. Can you follow up on whether you're noticing any shifts in inventory in the channel? Additionally, I wanted to ask about PARAGARD. It seems you've explored various approaches to grow this product line, including different advertising strategies and increased commercial focus, but the results have been challenging. Is there a point at which you would consider evaluating different options for PARAGARD, or does it still hold strategic and financial value for Cooper?

Yes. On the channel inventory side, I'd say we probably ended our fiscal quarter a little light on channel inventory. I kind of referenced that a little bit with some of the Biofinity shipments. But I'd say we were probably a little lighter from a channel inventory perspective, nothing to go crazy about but since you're asking. On PARAGARD, yes, boy, we bought that. We put some money into it. I think we've gotten a great return on that asset. But having said that, we put some money into it. We put some TV advertising out there and a lot of different marketing campaigns and so forth to really try to energize the non-hormonal IUD market. We had some success on that, not a ton, you kind of get to where you're at today. There's some fundamental shifts in the market that are causing challenges for us. You're not seeing women go into their gynecologists as much as they were pre-COVID for kind of annual wellness exams and so forth. And as that's happened, combined with the fact that a lot of birth control options, especially birth control pills, the availability has increased or the ease, if you will, to get that first control has improved. It's hurt the IUD market, and it's hurt PARAGARD. So we're evaluating that like we always do right now. I mean that's a good product. It does okay in the marketplace, right? It's a decent fit in terms of our women's healthcare franchise. But we'll always evaluate that just like we do everything else in terms of kind of our long-term strategic planning.

Your last question today comes from the line of Jon Block with Stifel.

Great. Really good quarter, but just despite the top line beat, you have in a little bit hot on OpEx as a percent of sales relative to our estimate. And if I look at sort of fiscal '23, I think OpEx as a percent of sales, you might be up roughly 100 bps from last year. Brian, I think you mentioned some investments. Is that CVI, is that CSI? Where are those investments being made? And does that sort of remain front and center for the next couple of quarters until sort of you lap them, call it, exiting fiscal '23, we can think about recapturing the leverage into fiscal '24?

Thank you for the question, Jon. Our total operating expenses came in as we anticipated, aligning with our gross and operating margin results. We are continuing to invest in commercial activities, including sales and marketing related to our product launches and rollouts I mentioned earlier. We are also making further investments in fertility, focusing on enhancing our capabilities in regions like Asia Pacific. Additionally, we are experiencing some inefficiencies in distribution, which have increased year-over-year, particularly as revenues rise and create strain on distribution. However, we are addressing these challenges. Overall, our total operating expenses met expectations, but our primary goal remains on achieving operating margin growth. As stated previously, at the midpoint of our constant currency revenue guidance, we anticipate constant currency operating income growth of around 11%. As long as we continue to expand our operating margin, largely driven by gross margin improvements this year, we are looking to achieve a leveraged profit and loss statement. This is our objective for the year.

Got it. Fair enough. I want to shift gears and ask about your perspective on China. I know you're focused on Japan in the APAC region, but I'm curious about what you've observed in China recently. There's been a lot of news surrounding the situation there, so I'd love to hear your thoughts on the ground in April and May.

Sure. Yes. We've seen some improvements in China, but I mean, China kind of even now comes and goes a little bit. When you look at it from our perspective, it's probably two different stories, right? Because you have our regular contact lens business there, the retail side, if you will, which we've seen some traction on and we've seen some improving results. And then you have the myopia management side, which is MiSight but also a lot of Ortho-K that gets sold through the hospital. That's a different channel. So I do think that we're seeing some improvements in that channel, in the hospital channel, which is actually going to help us a little bit on Ortho-K and MiSight. The other side, the retail, the general population, if you will, kind of comes and goes a little bit. Now having said that, Jon, remember, that's a pretty small market for us. I mean, some of our competitors have much bigger shares in China than what we have.

Your next question comes from the line of Steven Lichtman with Oppenheimer.

This is Ron on for Steve. I wanted to ask you guys about SightGlass a little bit. What is your estimate for the approval timing? And with MiSight being in the field for a bit now, how are you thinking about how SightGlass will be positioned in the field versus it?

Yes. So no real update on SightGlass when it comes to regulatory approval here, waiting to receive the final four-year data and compile that and then take the next step. So nothing really to add from that perspective. As you know, we've got a great partnership with EssilorLuxottica on that product. And the product has been launched in many markets around the world, and it's selling and it's doing well. That's within the joint venture itself. So I continue to be really optimistic about that product long-term. But that is within that joint venture, not in our P&L other than the investment activity, gains or losses below the line. When it comes to MiSight and how that looks, I mean, to me, glasses are going to do nothing but be a positive for the myopia control market. We want people getting into myopia control. They need to be wearing the product. So children need to be wearing those glasses. Compliance is really important as children get into myopia control, let's say they do that a lot at 5, 6, 7, 8, 9 10. Certainly, as they get to become teenagers, and certainly anyone who has compliance as an issue, you're going to want to be moving to contact lenses. So anything that we can do to drive the myopia control market forward and increase, it is a positive for us, positive for MiSight, positive for the industry.

That's really helpful. And I guess I have a follow-up on that. You guys mentioned that the headwinds on myopia in China are kind of abating towards the end of the quarter. Can you say what changed like towards the end? What was the shift because China has been a headwind on myopia for a little bit?

Yes. It's really those products are sold through the hospital channel. So you need the hospitals to kind of open up and have more kind of, if you will, availability for children and so forth. You need to transition back to a more traditional, normal hospital environment within China. So I think that's what we're seeing right now, right? As COVID starts to get in the rearview mirror and you're getting patients going back into the hospital for more traditional needs and so forth, you're opening up some space for optometry, and that's helping with the fittings.

Your next question comes from the line of Patrick Wood with Morgan Stanley.

Amazing. Two left for me, please. I guess the first one is on the fertility side, maybe just zooming out, if we just hypothetically say Cook doesn't close, how committed are you to APAC as a region? You hinted by saying maybe some accelerated pathway to growing that. I'm just curious if you could put a little bit of meat on the bone to how you feel about the region, how critical that is for you and fertility going forward?

Yes, that's a great question. The APAC region is important, and we are committed to investing there. We will continue to focus our efforts on that area. One of the main reasons for pursuing the Cook transaction was to enhance our growth in that region. There are several strong fertility markets there with impressive growth rates. While we have a solid presence in places like Australia, there are other countries where our presence is limited, and we need to expand by hiring and building infrastructure. We are currently assessing our activities in that area. As a leader in the industry, with our extensive portfolio across the Americas, Europe, and parts of Asia-Pacific, there's no reason we can't develop infrastructure and foster growth in that region. As part of our typical strategy, we are evaluating these opportunities and considering the return on investment because there are always challenges when establishing infrastructure in a new region. We are in the process of thoroughly evaluating all these activities at this time.

Amazing. And then one more, which is I was really interested around MiSight and the positive halo effect of selling in the rest of your offering. I mean is that more a function of MiSight opening the door in the first place, where there isn't a relationship because it's such a unique offering and then being able to sell more in? Or is it more about incremental depth with accounts where you already have that relationship?

Yes, that's an excellent point. There are many optometry offices that are more aligned with some competitors, often opting for their products instead of ours. However, MiSight has begun to create opportunities in several of these accounts. It has allowed our team to engage with them, leading to discussions about products like MyDay and our extended toric options. This has opened up new opportunities for us, and it's ongoing. I believe we are making progress with existing accounts by introducing innovative products, showcasing technological advancements, and helping them become more familiar with Cooper. However, I agree that we should not overlook the significance of new accounts where we can start introducing our core products.

Your next question comes from the line of David Saxon with Needham.

Maybe I'll ask two on CooperSurgical, starting with PARAGARD. I mean I heard the comments about flat volume growth, and you talked about some of the market dynamics, do you think PARAGARD can return to seeing volume growth over time? Or is this flat volume growth more of a longer-term expectation and kind of pricing is really the key driver over the long term?

I believe that depending on how you define long term, the volume will remain flat for the next few years. When considering the availability of various options and the ease with which they can be accessed, particularly on the hormonal side, I expect that the volumes for IUDs and PARAGARD will be flat for some time.

I would like to know about the new fertility clinic openings and any trends you’re seeing. Can you provide insight into how much of the growth in fertility is coming from new clinics and the potential opportunity this presents for your company?

Yes. The new fertility clinics is kind of a phenomena outside of the U.S., if you will. You're definitely seeing more of that activity in some of Asia Pac and some parts of Europe. You're seeing kind of consistent opening of new fertility clinics. The numbers aren't that huge in the end of the day, but they're big enough to continue to drive growth because we see some of that in our capital equipment sales. And obviously, that's a great part of our business. Anytime you can get capital equipment in, you've got the consumables following afterwards. So I'm not sure I've looked at it in terms of quantifying it because it hasn't been a spike or anything. It's been consistent here for probably the last four or five years, even through COVID, we were seeing new clinics continuing to open up. So I guess I would probably answer that by saying the fertility industry, I keep talking about like 5% to 10%, but obviously, it's grown more towards the upper end of that, certainly. Embedded within that are new fertility clinics opening. And I would envision the number of new clinics that we've been seeing open over the last five years or something to continue at a very similar pace probably for the next five years.

Your last question today comes from the line of Anthony Petrone with Mizuho.

I wanted to follow up on Cook. I apologize if I missed it, as I was on another call. It seems like the probability is lower, but there are still efforts to find a resolution. Can you provide an update on where the process stands and the likelihood of a closure? In the event that it doesn’t close, there was an $875 million commitment. What are your thoughts on the future of CooperSurgical's M&A activity if this deal doesn’t go through?

Sure. Just to recap on Cook, we did take a $45 million hit to the profit and loss this quarter because the original transaction we discussed is unlikely to happen. That $45 million would be paid if the deal were to proceed, which was expected at the beginning of August. As it stands now, we are in discussions with Cook. We have a strong relationship with their team, and we are exploring other potential transactions. However, I would say the likelihood of us paying that $45 million is significant. You mentioned the $875 million commitment, which is quite substantial. Currently, our capital focus remains consistent with the past couple of years. We plan to pay down debt and consider acquisitions that make sense. They need to be strategic and accretive, aligning with our goals at CooperSurgical or CooperVision, and this strategy is likely to continue. However, we also recognize the importance of reducing some debt.

This concludes the question-and-answer session for today. I'll turn the call back to Al for closing remarks.

Great. Thank you, and thank you, everyone, for joining today. We appreciate the time. As I mentioned, we're pretty proud of where we're at. We had a good quarter and things are starting off well this quarter, so we're well positioned. And we look forward to getting together again in three months and updating everyone after our next quarter. So thanks again.

This concludes today's conference call. You may now disconnect.