Earnings Call Transcript - COO Q2 2020

Operator, Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Q2 2020 The Cooper Companies, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker 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 you speaker today, Kim Duncan, Vice President, Investor Relations and Risk Management. Please go ahead, ma'am.

Kim Duncan, Vice President, Investor Relations and Risk Management

Good afternoon, and welcome to The Cooper Companies’ second quarter 2020 earnings conference call. During today's call, we will discuss the results included in the earnings release and then use the remaining time for Q&A. Our presenters on today's call are Al White, President and Chief Executive Officer; and Brian Andrews, Chief Financial Officer and Treasurer. Before we begin, I'd like to remind you that this conference call contains forward-looking statements, including all guidance and other statements regarding anticipated results of operations, market or regulatory conditions and integration of any acquisitions or their failure to achieve anticipated benefits. Forward-looking statements depend on assumptions, data or methods that may be incorrect or imprecise and are subject to risks and uncertainties. Events that could cause our actual results and future actions of the company to differ materially from those described in forward-looking statements are set forth under the caption Forward-Looking Statements in today's earnings release and are described in our SEC filings, including Cooper's Form 10-K and subsequent Form 10-Q filings, all of which are available on our website at coopercos.com. This conference call also contains non-GAAP financial measures. Please refer to today's earnings release for a reconciliation of those measures to the most directly comparable GAAP measures. Should you have any additional questions following the call, please call our investor line at 925-460-3663 or e-mail [email protected]. And now I'll turn the call over to Al for his opening remarks.

Al White, President and Chief Executive Officer

Thank you, Kim, and good afternoon, everyone. I hope you and your families are healthy and staying safe during these challenging times. Before getting into our results, I want to recognize and say thank you to our employees, whose hard work, dedication, and resiliency have allowed us to continue moving forward through the global COVID-19 pandemic. We're coming out of this as a stronger company, so amazing job to all Cooper employees around the world, and again, thank you. From the outset, we made the health and well-being of our over 12,000 employees and their families a top priority. We instituted robust health and safety programs at all of our facilities, including staggering shifts, reorganizing workflows, and implementing work-from-home protocols to ensure social distancing. In the spirit of our strong company culture and our commitment to our people, we continue paying employees their normal compensation, including supporting our commission sales reps. We avoided layoffs, furloughed employees only upon request, maintained all benefits programs, and expanded our employee assistance programs. We've also been there supporting customers by offering new and innovative online training and virtual meetings, expanding our world-class customer service efforts, accelerating our direct-to-patient shipping activity, and providing extended terms to our small business partners. Throughout everything that's happened, we stayed focused on our long-term business objectives, and we believe this will serve us well moving forward. This includes developing and launching new products, increasing manufacturing output of high-demand products such as MyDay, enhancing distribution capabilities, and expanding facilities in key strategic locations such as Costa Rica. Looking ahead, our performance will be driven by the reopening of optometry offices for CooperVision and the reopening of OB/GYN offices and fertility clinics for CooperSurgical. We cannot control the speed of the reopening but we can be ready, and we are. It's very difficult to forecast the future but we're definitely seeing positive signs with trends moving in our favor. As we move into the numbers, note I'll be reporting percentages on a constant currency basis. For Q2, we reported consolidated revenues of $525 million with CooperVision posting revenues of $402 million, down 15%, and CooperSurgical posting revenues of $123 million, down 27%. Non-GAAP earnings per share were $1.51. For CooperVision, regional revenue declined around the world with the Americas down 22%, EMEA down 11%, and Asia-Pac down 10%. All product areas were also negatively impacted with silicone hydrogel dailies down 8%, Biofinity and Avaira down 16%, torics down 13%, and multifocals down 7%. I'll get to the fiscal quarter in a minute, but for calendar Q1, we grew 2.5%, continuing to take care against the market which grew roughly 1%. This improved our global market share to a very strong 24%, and I'm optimistic we'll move to 25% during the year. Calendar Q1 included March when the industry began experiencing the negative impact of COVID-19. But our numbers held up better than others due to market share gains from our daily silicone hydrogel portfolio. Regarding our fiscal quarter, the negative impact of economies closing around the world was felt throughout the quarter, but was most significant in April with sales down roughly 45% for the month. To provide color on the quarter, let me highlight the dollar impact and where we saw it. At one point during the quarter, I estimated our fiscal Q2 revenues at $510 million, and we ultimately reported roughly $110 million worse than that. Three primary areas impacted us. First was the effect of office closures on new fits. In a normal environment, new fits, including trade-ups, account for roughly 15% of our revenues, and these essentially disappeared. We estimate this negatively impacted us around $40 million for the quarter. Second, we experienced a reduction in channel inventory as retailers, distributors, and independent optometrists closed doors and offices and focused on liquidity. This was modestly offset by sales to pure Internet sellers, but that's not a big part of our business. We estimate the negative impact of this activity was around $35 million. Lastly, we saw a reduction in consumer consumption, meaning people used our lenses less often as they extended to wear other products or chose to wear glasses more often. This meant customers who would normally have ordered lenses in late March and April either didn't reorder or ordered smaller quantities than normal. And this made up the remaining roughly 35%. We certainly expect to recoup some of these lost sales, but it's difficult to forecast when. Our market research clearly indicates consumers expect to return to normal wearing habits as economies reopen, so we're optimistic. We did see an improvement in May, but revenues were still down roughly 30%. On the encouraging side, there were clear positive signs as the month progressed, and that continued into June. As a matter of fact, in parts of the world where economies started reopening sooner, we've seen a pretty quick rebound, with countries like China showing growth in May. For Q3, it's difficult to forecast revenues as the three items I just mentioned will have a major impact on our results. But we're currently expecting fiscal Q3 sales for CooperVision to be down 15% to 20% year-over-year. This assumes minimal rebound in channel inventory and a slow return in patient traffic as ECPs slowly reopen stores. Hopefully, this is conservative, but it's prudent to be cautious right now even with the positive trends we're seeing. Regarding products, I'm happy to report we’ve recently launched two new ones. Our Biofinity toric multifocal is now available in the U.S. and rolling out around the rest of the world. And our extended toric range for Clariti has been released giving it the widest parameter range available in the market today for daily silicone torics. I'm also happy to report we made significant progress on MyDay manufacturing, and we're now able to supply product to markets where we previously pulled it. We're also starting to resume placing sphere and toric fitting sets as stores reopen around the world. As we discussed on our last earnings call, we mobilized significant resources earlier this year to accelerate startup efforts on the new MyDay line, and this activity continued essentially unhampered through Q2. We're now several months ahead of our prior plans, so fantastic job to the manufacturing teams and our distribution and commercial teams moving quickly to put us in a position to capitalize on this opportunity. We saw similar improvements in our Clariti manufacturing, so we're in great shape in the daily silicone hydrogel market, especially with respect to toric lenses. And this is critical as our survey data indicates, usage and purchase frequency reductions are expected to be temporary, with practitioners aggressively fitting patients into daily silicones as offices reopen. Moving to MiSight, this was a bright spot for the quarter, growing 52% to $1.4 million in revenue. I'm happy to report we've seen a significant increase in interest from optometrists as they look for value-added ways to increase patient flow as their practices reopen. MiSight is a perfect fit as optometrists truly want to treat their patients with the best products available. This is the only FDA-approved myopia management offering on the market. Additionally, parent interest is very high when they're made aware of MiSight; the product can make a huge difference in a child's life, and the doctors control the process and pricing as the product is not available online. MiSight is our innovative FDA-approved myopia management contact lens that has been clinically proven to slow the progression of myopia in children. The lens is sold as part of our holistic myopia management program called Brilliant Futures, where we provide the eye care practitioner the lens and a suite of resources to help them connect with parents and to market the product. The doctor then incorporates this into their own customized myopia management program and charges an appropriate price for their offerings. From a training and certification perspective, we pivoted to virtual training and the response has been fantastic. In the U.S., we now have over 200 certified fitters with over 600 additional optometrists currently in the certification process. This puts us ahead of our previous expectations. Success is clearly dependent on offices reopening, but we expect solid growth with full fiscal year sales being in the $7 million to $8 million range. Assuming markets return to normal, we remain comfortable with our target of $25 million in sales next year. To be clear, we have not curtailed any investments in this product other than deferring certain marketing costs due to recent events. Frankly, if all continues to go as well as it has been, we may actually accelerate investments in Q4. Before concluding on vision, let me touch on the growth drivers for the $9 billion contact lens industry. First and foremost, it starts with myopia, where it's estimated that roughly one-third of the world's population is myopic, and this is expected to increase to 50% by 2050. We've been seeing this play out in the market data, with new wears up 2% globally last year. Additionally, we continue to see positive sales mix as doctors are fitting new patients in daily silicone hydrogel lenses. And then we have the trade-up from legacy hydrogel dailies and FRPs to silicone hydrogel dailies, geographic expansion, and growth in torics and multifocal. It's also interesting working with optometrists, as the shift to daily lenses has made it more apparent that contact lens wearers are higher value customers as they buy both contact lenses and glasses. Moving to CooperSurgical, we reported revenues of $123 million, down 27% for the quarter. We were feeling very optimistic about our business in March. However, as elective surgery restrictions were enacted, and OB/GYN offices and fertility clinics started closing, we began experiencing a significant decline in revenue. In the month of April alone, we were down almost 70%. May was still down roughly 60% as the beginning of the month was extremely weak, but we definitely saw improvement as the month progressed and we expect continued improvement through the quarter. For the full fiscal Q3, we forecast CooperSurgical's revenues being down 30% to 35%. Within the segment, fertility was down 15% for the quarter, holding up reasonably well as in-process patients were largely allowed to complete their treatments. Having said that, April was down roughly 50% as clinics around the world closed, and May was also down roughly 50% as several markets remained partially or entirely closed. Clinics are now reopening and patient traffic is good. However, it's important to note that our sales will lag initial patient activity as those visits are focused on consultations and the stimulation or pharma side of IVF. We thus expect our business to continue rebounding, but for the full Q3 we expect fertility sales to decline around 30%. For office and surgical, sales were down 34% in Q2, and we expect a similar decline in Q3. This is largely due to PARAGARD, where we essentially shipped zero products in the month of April and May. To be clear, this is a channel inventory matter as placements for PARAGARD continued in those months, although down roughly 65% in April and 40% in May. Our consumer research indicates we'll see placements fully return to normal as offices reopen, and we saw positive signs through May. So we expect a strong rebound in sales as offices reopen, and its channel inventory returns to normal. Outside of PARAGARD, our other office and surgical products were down roughly 20% in Q2, and we expect a similar result in Q3 with our research showing the majority of procedures were deferred, not canceled, and the procedures will happen as doctors’ offices reopen. Within all this, CooperSurgical continues making product in many other areas of the business, including continuing to build out and transferring of IVF production into our global manufacturing facility in Costa Rica, completing numerous sales and marketing virtual training sessions, which have been incredibly popular, and making meaningful advancements with product development and R&D. Our manufacturing and distribution teams kept our products available and shipping while several competitors struggled, now providing us the opportunity for future share gains. With that, let me conclude by saying our teams are laser-focused on executing as economies around the world open. Our commercial teams are intensely focused on capitalizing on opportunities, and momentum is building. Key products like MyDay are in a much better shape, and our product launches such as MiSight are going well. Cooper's culture remains rock solid, with our commitment to our employees remaining steadfast, our dedication to our ESG efforts continuing, and our focus on our long-term strategic objectives remaining intact. I'm 100% confident our employees are fully engaged and ready to deliver results. With that, I'll turn the call over to Brian.

Brian Andrews, Chief Financial Officer and Treasurer

Thank you, Al. And good afternoon, everyone. Most of my commentary will be on a non-GAAP basis. Please refer to today's earnings release for a full reconciliation of GAAP to non-GAAP results. Given the challenges that COVID-19 has brought upon our operations and the uncertainty regarding the future impact, we will not be issuing 2020 guidance at this time. But I'll try to provide as much transparency and disclosure as possible in my comments. To start, it's important to mention that our non-GAAP earnings are adjusted for the larger COVID-19 related items within cost of goods. However, we did not capture all costs, nor did we adjust any of our operating expenses for these items. Moving to our results, our second quarter consolidated revenue decreased 19.8% year-over-year to $524.9 million. Consolidated gross margin for the quarter decreased year-over-year to 65.8% from 67.3%. This was driven entirely by April as margins were up nicely through the first two months of the quarter. CooperVision's gross margin decreased slightly to 66% from 66.5%, driven by a shift in our regional sales mix, as we experienced larger percentage declines in revenues and markets with higher margins. CooperSurgical's gross margin decreased to 65.4% from 69.6%, largely due to PARAGARD sales being zero in April. Operating expenses were down 3.2% year-over-year, resulting in consolidated operating margins of 17.4%, down from 27.1% last year. Despite the top-line pressures, we continued investing in our business, which meant no material changes to employee compensation, continued support of our key products such as MiSight, and continued R&D investing while incurring higher costs related to COVID-19. Interest expense for the quarter reduced to $8.8 million driven by lower interest rates. The effective tax rate was 6.2%, due to the overall reduction of pre-tax income, and the benefit of stock options exercised in the quarter. Non-GAAP EPS was $1.51, with roughly 49.6 million average shares outstanding. Free cash flow was negative $63.5 million and this comprised of $25.8 million of operating cash flow offset by $89.3 million of CapEx. This reduction was primarily due to lower customer collections, a buildup of inventory, and maintaining CapEx as planned. Net debt increased by $118.6 million to $1.8 billion and our adjusted leverage ratio was 2.18 times. A few other items to note on Q2: we repurchased roughly 161,000 shares for $47.8 million. We also fixed the interest rate on a portion of our floating rate debt, given the historically low interest rate environment. This included entering into multiple slots locking in $1.5 billion in debt as far out to seven years. Lastly, from an FX perspective, the year-over-year FX impact for Q2 to revenue and EPS was a negative $8.9 million and $0.08, respectively. Before concluding, I'd like to briefly touch on a couple of additional points. We entered the COVID-19 pandemic with a solid balance sheet and continue to maintain strong financial ratios with ample liquidity. This allows us to continue supporting our employees and customers and puts us in a position to capitalize on opportunities as they become available. We continue to prioritize capital allocation and prudent expense control while remaining intensely focused on current trends, to ensure we remain in a strong position. Al mentioned a few items on fiscal Q3 revenues and to repeat them, at this point, we're looking at CooperVision being down 15% to 20%, and CooperSurgical down 30% to 35%, both in constant currency. Other than that, we're not providing much additional information at this time. We're going to continue closely monitoring expenses, but we want to be careful as controlling costs is important, but at the same time, we're seeing many positive trends and don't want to restrict our ability to execute in any way. We're taking a long-term view as our product portfolios are extremely strong, and we believe we're in an excellent competitive position to take share as the markets return to normal. Finally, I'd like to echo Al’s comments about our employees by issuing my own heartfelt thank you to all of our operations, commercial, and support staff for doing an incredible job in the face of unprecedented circumstances. I couldn't be prouder of the efforts we saw in Q2, and continue to see from everyone globally. With that, I'll hand it back to the operator for questions.

Operator, Operator

Thank you. Our first question comes from Larry Keusch with Raymond James. You may proceed with your question.

Larry Keusch, Analyst

I guess Al just to start out coming back to CVI. Could you talk a little bit about, I guess, how are you thinking when you think about the various modalities? Where did you see the most pressure in the month of April? And where do you expect to see that come out the other side? In other words, what do you think is going to be stronger post-COVID versus pre in terms of your product mix?

Al White, President and Chief Executive Officer

Yes. Thanks, Larry. Well, when you look at April, I mean, obviously we took a hit kind of throughout the portfolio. The numbers I gave show you that our daily silicone hydrogel portfolio stood up better than certainly the rest of our portfolio and MyDay in particular was still strong. But some of our legacy products, especially if you wanted to parcel it out, if you look at our legacy FRPs, the hydrogel FRPs, and the monthlies as an example, those took a pretty solid hit in the month of April. So those have been declining anyways, but took a bigger hit than most. I think as we look at where we are today and as we do our consumer research and we talk to optometrists and so forth and the market starts to recover, it seems very, very clear that the market is going to recover with a focus on daily silicone hydrogels. That's going to be the focus area. And that's going to be because of the reasons that were in place beforehand. But it's also because of the focus on hygiene. If you're looking at good hygiene, you're talking about a daily lens: put it in, wear it, throw it out at the end of the day. So that's clearly what people are talking about; that clearly is the focus. I think we're in a good position from that perspective, because if we go into more of a recessionary environment, we're the only ones who have a strong mass market daily silicone with clariti, a sphere, toric, and multifocal. And if we have somebody who is looking for a more premium wearing experience, obviously we have MyDay, which is hugely successful. So I think that's what we're going to see as we come out in the coming months and quarters.

Larry Keusch, Analyst

The second question relates to manufacturing for MyDay, particularly regarding toric lenses and your ability to supply regions you previously pulled back from. Additionally, what efforts did you undertake during this period that enabled you to essentially get ahead of your plan?

Al White, President and Chief Executive Officer

Yes. So I mean, we had the obvious happen, right? Which was like a pullback in demand in general, because you obviously had stores and so forth shut down around the world. While that was happening, we were continuing production of the product, building up our own inventory. But importantly, during that quarter, we were able to continue to work putting lines together and getting lines up and running. And that was a key point. You'll remember I talked about at some prior quarters, how we accelerated some of our efforts. We took a step back in some areas on cost control efforts and so forth, but we brought those lines in faster. Thankfully, we did that, because with those lines in our facility, we were able to continue working and putting them together. We didn't have equipment in Europe and we weren't relying on people from Europe or other places flying in to help us. Our manufacturing folks were able to do that work themselves. It was a great effort by our teams as they adjusted and adapted to the situation.

Operator, Operator

Thank you. Our next question comes from Brian Weinstein with William Blair. Your may proceed with your question.

Brian Weinstein, Analyst

Al, as we come back here and things start to improve a bit, does it matter for you as kind of more new guys coming in the 15% versus the existing? Or as you think about one versus the other, is there one that's more important for particularly driving silicone hydrogel fitting?

Al White, President and Chief Executive Officer

Yes, as we examined the data during COVID, we saw that we were capturing a significant share of new fittings, particularly in the U.S. market, where we had products like MyDay and clariti. New patients were increasingly choosing daily silicone lenses, and we captured a substantial portion of that market. New fittings accounted for around 15% of our revenue globally, which is even higher in the U.S., potentially around 20%. This includes a lot of new daily fittings and annual supply purchases. Consequently, our Americas performance was softer than expected because we were highly reliant on new fittings and faced some setbacks because of that.

Brian Weinstein, Analyst

Okay, great. And then as we think longer term here about the industry, how do you think the industry has changed longer term because of COVID? And how is Cooper positioned in the industry now, as we think about things like online ordering, you guys shipping direct, prescription moving online? How does all this kind of play into kind of how the industry develops? And then how you think you're positioned for all of this?

Al White, President and Chief Executive Officer

Yes, well, I definitely think you're seeing some changes. Direct-to-consumer shipment as an example definitely increased significantly. Whether that holds or not? We'll see. That was a trend that was occurring, and we probably accelerated some of that trend. If you remember, I’ve talked for a couple of years here about how much time and money we put into our distribution centers to improve our distribution capabilities. Thank God we did all that stuff because we're in a great spot to be able to support the market as we move in that direction. So if you're an optometrist selling products, you no longer have to have a ship that to your office; we can ship that directly to your patient's home. But the other thing I think when you look at the industry right now, I think you're actually going to see an even greater move to daily silicones. I think that's the direction you're going to go as I was talking about hygiene; when we talk to consumers, when we talk optometrists, that's what people are leaning towards.

Operator, Operator

Thank you. Our next question comes from Jeff Johnson with Baird. You may proceed with your questions.

Jeff Johnson, Analyst

Thank you. Good evening, guys. Al, I wanted to start maybe from a geographic perspective. You mentioned kind of the over-reliance on new patient fits in the U.S. Obviously, in Europe, you've got some just automatic drop ships that happen or patients were more on a subscription plan there. So I think it'd be helpful if you could provide any color on kind of how you saw April, May trends breakdown between U.S., Europe or Asia-Pac or at least maybe kind of how you're thinking about the recovery by geographic region? That would be wonderful if you can help us out with that.

Al White, President and Chief Executive Officer

Sure. Yes, absolutely, Jeff. I kind of put Europe in the middle to some degree. Because we're starting to see things come back in Asia-Pac. I mentioned that we actually saw growth in China in May. I mean, it's not going to surprise me if Asia-Pac grows in Q3. That's why I think there's a decent chance we'll get that. I don't want to get ahead of myself. But when I look at how things are going, I think we could get some growth in Asia-Pac in Q3. EMEA is still in a situation similar to the Americas. Stores are starting to reopen. Optometrist offices are reopening; you can see that in the news like I can. So we're making progress there certainly. Americas is lagging that. So I think we're still going to have a tough quarter in the Americas for Q3 because we had struggled at the beginning of May. We're seeing positive signs; there's no question about that. But I think when you look at the impact of May in the Americas, you're going to continue to see that be another kind of similar quarter to where it was.

Operator, Operator

Thank you. Our next question comes from Matthew Mishan with KeyBanc. You may proceed with your question.

Matthew Mishan, Analyst

I think I have a question for Brian actually. Decremental gross margin in CooperVision for the quarter was much lighter than I think you’d expected given the sales decline. Is there potentially a delayed margin impact because you're selling inventory that was with better manufacturing absorption?

Brian Andrews, Chief Financial Officer and Treasurer

Yes, that's a good question, Matt. I mentioned in my prepared remarks that CVI experienced an impact from regional mix, with a significant revenue decline in higher-margin markets, particularly the Americas, which saw a 22% decrease. Regarding capitalized costs, I won’t delve into detailed accounting here, but essentially, we made adjustments for the significant COVID-19 related costs and other manufacturing expenses. We identified these period costs and adjusted our earnings accordingly. The $22.1 million you see when comparing our GAAP to non-GAAP results reflects unabsorbed costs, excess capacity, and similar expenses that were beyond our typical operations and were not present before the pandemic. Therefore, you shouldn't expect these to affect future quarters, as we are not planning to capitalize or release those costs later on. This explains the gross margins we reported.

Matthew Mishan, Analyst

And then, as you think about the industry, typically you’re seeing rebating based upon annual supply. Do you see any changes in the way consumers are going to purchase contact lenses, really purchase about 90 days supply rather than the annual supplies? And kind of how do you see the industry adjusting to that as far as promotions and rebating?

Al White, President and Chief Executive Officer

Yes, that's more of a US question and likely outside of the global context. Looking at that activity, we definitely noticed some occurrences in Q2 and at the start of this quarter. For example, if a patient had a year’s supply and was ready to order another year’s supply but couldn't see their optometrist, I've heard instances where the optometrist extended their prescription for three months, allowing them to get a quarter's worth of supply instead of a whole year. This gives the optometrist a chance to check their eyes and ensure they are getting the right prescription. We've observed many patients wanting to complete their purchases and take advantage of the discounts, but they are unable to do so, resulting in a three-month delay in activity. The long-term question is whether this will lead to a fundamental market shift. I would relate that answer to economic conditions; in a recession, people might lean towards shorter-term purchases as they manage their finances more carefully. However, based on our current research, we do not anticipate that trend, and we expect the market to return to normal.

Operator, Operator

Thank you. Our next question comes from Matthew O'Brien with Piper Sandler. You may proceed with your question.

Matthew O'Brien, Analyst

Al, you've been touching on this a little bit. But I was just hoping you can reconcile the shortfall you saw in the quarter on the trade-up side, which I think you said was $40 million, so the most of the shortfall was associated with the lack of the trade-up with the comment that, hey, the daily SiHys which are more expensive are going to lead us out of it. With such a high unemployment rate in the U.S., such a high unemployment rate around the world, what gives you that confidence, what are you hearing from patients specifically or consumers specifically that gives you confidence in that? And are you putting any kind of programs in place to kind of ease the burden so that the people can do that trading up?

Al White, President and Chief Executive Officer

Yes. And just to be clear on that trade-up because that is included within new fits. The biggest component of that was clearly new fit. When you shut down the doctor's office, and you don't have the new patient able to come in and get a script and buy lenses, that's the thing that hurts you the most. Now you also missed out on the trade up, which is, somebody who is wearing a monthly or two-week or a traditional older hydrogel trading up to the new one, but the big part of that $40 million I was talking about is new fit patients, think about new patients coming in. With respect to us kind of coming out of this with daily silicones, if we come out of this in a decent way and the economy is doing well and so forth, I think you're not going to see much of a change at all. If we come out of this with a weaker economy, in my mind, you're definitely going to see a greater focus on clariti, right? That's the product that's going to do better and accelerate more because that's where people are going to be focused. If you're more budget conscious or cost conscious, you're going to still want a daily silicone hydrogel lens. That's what your doctor is still going to want to prescribe for you. That's the market-leading product, right, as the only real product there for a mass-market daily silicone hydrogel product. So, it'll depend on what direction we go. I will say based on where we are today, and based on the feedback we're getting from people, there's enough demand out there where we're going to be selling a very significant amount of MyDay no matter what. Even if it's premium, even if we went into more of a recessionary kind of environment, the demand there didn't disappear, it remains very, very strong from our consumer research.

Matthew O'Brien, Analyst

Okay, that's interesting and helpful. And then the second question was just on MiSight. You're backing up a little bit on the spend this year, totally understandable and the revenue contribution this year. But next year, you're still confident in that $25 million target, are you going to ramp up some of the spending dollars that you're saving this year next year? Or what I'm also trying to kind of get is, with the $25 million conservative, there was upside, maybe some of that upside is now removed for the time being and hopefully that gets pushed to the next fiscal year?

Al White, President and Chief Executive Officer

Yes, I kind of look at it and I'd say the $25 million was probably a little conservative beforehand, but I would say that it's probably still a little conservative right now. The difference that we're seeing is a greater interest by optometrists with respect to MiSight. Now, some of that was because people were home, right, they had the time to be able to go through the training, to look at the information, the clinical data and so forth, and get comfortable with the fact that, wow, this product really works. This should be standard of care. How am I not going to treat my myopic children in this lens? How can I not have a conversation with the parents about it? So the interest has definitely increased in that product, and the number of people we’re training inside the U.S. and outside of the U.S. is definitely higher than what we were anticipating it was going to be pre-COVID. Now, you can only fit it if your office is open, and kids are coming in and so forth. So you got to get back to normal. But I think that we might arguably be in better shape with MiSight oddly enough. Now, we did defer some marketing expenses on that, but we're still going to spend a very hefty amount of money this year. Depending upon what we do in Q4, because we are seeing that acceleration in interest and that's not only U.S., that's around the world, we might spend a little bit more. So I'm not going to hold back on investing in MiSight.

Operator, Operator

Thank you. Our next question comes from Chris Cooley with Stephens. You may proceed with your question.

Chris Cooley, Analyst

Let me just first follow up on Matt’s question on MiSight. Would appreciate if you could help us get a little bit better understanding of where you're seeing the demand in U.S. and international, a little bit better flavor there as well in terms of the training, and your thoughts as they pertain to some of the new spectacle alternatives that have been publishing data here recently, with some pretty impressive results? So just wanted to get your views maybe if that’s near-term obviously how MiSight is ramping and maybe longer term? I know you just reiterated the $25 million next year, but how you see the size of that opportunity? I had a quick follow-up on PARAGARD.

Al White, President and Chief Executive Officer

Sure, thanks Chris. In the U.S., we're seeing significant interest in training and the numbers I mentioned. This interest needs to translate into fittings. Earlier in the year, we definitely saw fittings, and more kids are now getting fitted with the lens. As stores reopen, I'm confident we'll see that number increase, though the extent and speed of that increase are still uncertain. Outside the U.S., we're working with some sizable organizations to discuss this product, which could potentially impact sales. From a demand perspective, actual sales have been somewhat muted due to office closures, but interest is high both in the U.S. and internationally. I remain enthusiastic about the entire industry. The ability to treat kids with myopia, which is only going to worsen, and to minimize that progression is remarkable. As physicians, it’s important to evaluate and treat this condition. I believe as more individuals enter this space and spectacle companies continue their research, there's a lot to be excited about. I've seen the data from those companies and I’m optimistic about the opportunities. We’re still in the early stages regarding available data and the potential to bring products to market. Our MiSight product is well ahead of others, but this is going to be a large market; it’s just a matter of how long it will take to fully develop. Understood. And then if I could just quickly on PARAGARD. Just may be premature at this time, but help us think, are you seeing any shifts in the broader birth control market? I realized, again, when we think about pharmacies remaining open, but any bias to maybe shifting to a more permanent methodology of birth control or, again, a greater emphasis on low estrogen alternatives or non-hormonal options? Yes. Obviously, with PARAGARD, I'd love to say yes to that. We're probably a little too early to see whether that's happening or not. When you look at what's happening in the world today with COVID-19, do people look at it and say, I want a non-hormonal option? I want what I would describe as a healthier option. We'll see how that plays out. I mean, I would think that new placements of PARAGARD were down pretty solid. In April, they were down about 65%. In May, they were down only about 40%. In June, we saw a nice rebound; currently, we're seeing a pretty impressive kind of uptake on that now. Does that continue or does that accelerate? We'll see. I mean, I'm certainly happy with the numbers I'm seeing with PARAGARD. I don't have that kind of visibility, obviously, within the hormonal IUD market, but PARAGARD is certainly taking steps in the right direction, that's for sure. We'll just see how it plays out. I hope that's true.

Operator, Operator

Thank you. Our next question comes from Joanne Wuensch with Citibank. You may proceed with your question.

Joanne Wuensch, Analyst

A boring question and maybe something more interesting. On the boring side, what are you seeing as your FX headwind this year?

Al White, President and Chief Executive Officer

Well, boy, you’ve seen rates move pretty aggressively here recently. I think the euro went over 1.13 some; I’m going to look at Brian, I'm not sure there is a headwind.

Brian Andrews, Chief Financial Officer and Treasurer

Yes, from a revenue standpoint, our revenues are still down for the year. We haven't provided guidance for the latter part of the year, particularly regarding FX rates. However, for Q2, we experienced a decline of $3.5 million in revenue and about $0.10 decrease in EPS.

Joanne Wuensch, Analyst

Okay. That's a good start. And then I want to go back to the comments of flat revenue in the fourth quarter. So for you guys, that would be August, September and October. How do we think about getting to flat revenue? What I'm trying to get at is the combination of what is the build to get there? And then also, how does the optometrist and ophthalmologist office change in a social distancing 6 feet apart environment?

Al White, President and Chief Executive Officer

Yes, great question. Because in order to get there, and in order to be as successful as we want to be in fiscal '21, we need optometrist offices reopen and operating to some decent degree. We're not going to be in a situation where you're going to return to normal. You're not snapping your fingers and seeing August volume being the same as it was last year because you're going to have social distancing and the other requirements that are going to continue out there. But we need to continue to move in that direction, right? It's almost like you go to a cold pool, right? You put your toes in, and then you put your foot in, and when it's not that bad, maybe you stepped in, and then it's not that bad, and ultimately you jump in. We're still in those early stages of kind of sticking your toe in the water in a lot of places. We need to continue to make that progress. For us to be flat in Q4 and to do what we want to do going forward, we obviously need that to come back because we need new fits. I think the volume is going to be there. Ultimately, I think as long as doors are opening, patients are going to go in there. The demand for contact lenses is going to be there. We're not seeing anything in our research that indicates otherwise. So it's really going to be tied to optometrists opening up their stores.

Operator, Operator

Thank you. Our next question comes from Jon Block with Stifel. You may proceed with your question.

Jon Block, Analyst

Great. Thanks, guys. Good afternoon. Firstly just on the inventory in the channel that compressed in the quarter. I guess where was it prior or where is it now? And then I believe you said you expected to remain call it at this new lower level for the foreseeable future. So if that's the case, is it the new normal? And why would it stay down here and not eventually sort of recapture where it was? And then I've just got a follow up.

Al White, President and Chief Executive Officer

Yes. With respect to inventory, we saw that kind of around the world. That was probably more focused here in the U.S. because you have a bigger distributor market. Having said that, I do think the majority of that is going to come back or a large portion will come back. Now not all of it because you had inventory, for instance, in optometrist offices, who ultimately as part of their buying group or individually are going to not want to carry that inventory anymore, which means we'll end up carrying it in our facility. Then we'll ship it direct to patients. So it'll be a little different structure of how that works. So I don't think all that inventory comes back. But I do think we see that inventory coming back; it's just going to be directly tied to store openings. The more they open, the more they start selling lenses, fulfilling product, the more distributors and the larger retailers will buy product that could be properly stocked.

Jon Block, Analyst

Okay. And just as a clarification. The fiscal Q3 numbers that you gave out on CVI, that does not assume much of a rebuild on the inventory side. Is that correct?

Al White, President and Chief Executive Officer

That is correct.

Jon Block, Analyst

Okay, got it. And then just the second question. In some of our checks we heard about, hey, as the optometry practices were closing your consumers were worried about securing lenses. Some of those guys who used to get their lenses from an ECP just went ahead and said, I'm going to turn to 1-800 Contacts or another pure online provider. So if that remains, that shift of lenses goes away from ECP to a pure online, can you just talk about what does that mean if anything for you guys from a margin perspective if that remains in place?

Al White, President and Chief Executive Officer

Yes, you did see some of that activity, right? And for us it kind of neutralized out because we saw the buying activity in March; it neutralized itself out in April from a reporting perspective. If you look at the shift to online, you definitely saw a greater shift to online and also direct-to-patient activity that we were just talking about. So it'll be interesting to see how that goes, if it goes back. Some of that online activity is actually people buying through a Walmart.com or through Specsavers or GrandVision or someone else’s, National Vision’s websites. At the end of the day, does that shift stay where it's at? I don't know. I mean, it doesn't make that big of a difference at the end of the day. How that’s sold through? I mean, it's not that big of a difference to our P&L.

Operator, Operator

Thank you. Our next question comes from Anthony Petrone with Jefferies. You may proceed with your question.

Anthony Petrone, Analyst

Maybe one on CVI, one on PARAGARD. I guess Al and Brian just as you look at the shape of the recovery and new fits, some of your competitors maybe commented that it could take a little bit of time here, and it's not necessarily a V shape, but I guess maybe your counter to that. How do you see the recovery shaping out? And in particular, how do you see the school season playing a role here? Do you get a fair amount of those new fits back with the back-to-school season in September? And then on PARAGARD, just a clarification on the channel hit; should we expect that a fair amount of that inventory in the channel flows as OB/GYN offices open in the coming months?

Al White, President and Chief Executive Officer

Yes, regarding PARAGARD, the inventory will begin to flow back due to continuous placements and an increase in activity. We temporarily paused shipments due to liquidity concerns, but that inventory will start re-entering the market. I expect to see this happening in July, which will be within our fiscal Q3 and certainly in Q4. The timing will determine how we report on this, and we'll keep you informed as updates are available. As for new fits, the timeline will significantly depend on the reopening of optometrist offices. I tend to agree with others that the recovery may not be a sharp V shape, as it requires both the reopening of offices and an immediate influx of traffic. The recovery will be gradual, but it will occur as stores open and traffic resumes. However, I wouldn’t anticipate a sudden surge. This is one reason why I think the Americas will have a softer fiscal Q3 for us.

Operator, Operator

Thank you. Our next question comes from Chris Pasquale with Guggenheim. You may proceed with your question.

Chris Pasquale, Analyst

Thanks. Al, I just wanted to piggyback on that last point and it seems like a lot of discussion is around the demand, the supply side rather. And optometry offices opening back up, a little assumed impact on the demand side from the macroeconomic fallout that we've experienced here. So I’d love to just know how you're thinking about that and lens utilization given this higher unemployment environment. Maybe any lessons we could take from 2009 where market growth got cut in half and it took a year or more for things to really rebound?

Al White, President and Chief Executive Officer

Yes, Chris, you're spot on there. I mean, when you go back to 2009, when we've seen kind of economic struggles out there, the contact lens industry, if I remember right off the top of my head was up 3% in 2009, I think we were up 5%. So we still put up pretty decent numbers because all the other underlying factors that are out there, geographic expansion and so on and so forth that occurs. If we are in a more of a recessionary environment, I would anticipate that that would reduce the overall growth of the market and our numbers as well.

Operator, Operator

Thank you. Our next question comes from Steven Lichtman with Oppenheimer. You may proceed with your question.

Steven Lichtman, Analyst

Thanks. I just wanted to follow up on Chris' question on unemployment. You mentioned that we see elevated unemployment; clariti would be a key focus within daily SiHy. But I just want to put a finer point on, if do you see any risk to a slower shift to dailies overall for the market in an elevated unemployment environment?

Al White, President and Chief Executive Officer

Not really, because your price differential isn't that great. So optometrists were still looking at it saying, what's the best product that fit my patient in. The best product is a daily lens. When I look at it from a hygiene perspective, or a comfort perspective, or any kind of all the different angles that you would look at it, you're saying a daily makes the most sense. To somebody who is cost-conscious, moves more towards the clariti daily, which gets a lot closer, by the way, to like a monthly lens because with a monthly lens, you also have to have solutions on. So I think you're going continue to see it, and maybe some of that shifting decreases a little bit. We'll see how that plays out, right? Because that would be you’re more cost-conscious. We move into next year and you're not seeing people want to switch. They're happy with their two-week or their monthly lens; their doctor is saying, hey, this is a better product for you, this daily SiHy. So I think there's some lumber that goes on. I would think that I think with economies and everything, people are going to remain more focused on getting a better product for their health.

Operator, Operator

Thank you. Our next question comes from Steve Willoughby with Cleveland Research. You may proceed with your question.

Steve Willoughby, Analyst

Hi, good evening. I have two questions for you. First, for Brian. You mentioned earlier about the call out related to gross margins, and I was surprised by how significant it is this quarter; it represents over 10% of your COGS. Could you help us understand what margins might look like going forward given this call out related to COVID this quarter? Additionally, what do decrementals look like with the anticipated revenue declines in the third quarter?

Brian Andrews, Chief Financial Officer and Treasurer

Yes, I'd like to provide more details. In the second quarter, we made the decision to temporarily shut down production lines for demand reasons and to comply with social distancing guidelines. This led to costs that were higher than usual. With decreased production levels, those extra costs contributed to our financial results, reflecting in the profit and loss statement. The variations in regional and product mix also influenced the figures, especially with regions experiencing declines of 22% or 11%. Looking ahead, as the business begins to recover, particularly towards the fourth quarter and into the first quarter, we anticipate that gross margins will start to improve and return to their normal levels.

Steve Willoughby, Analyst

Okay. Would we expect to see non-GAAP gross margins in the third and fourth quarter look similar to what we saw in the second quarter, or would they be worse than that? I just don't know what you're planning on calling out if that makes sense?

Brian Andrews, Chief Financial Officer and Treasurer

I believe the impact from COVID was felt towards the end of March and into April. Now that we've moved past that and are in recovery, you can still expect to see similar non-GAAP adjustments in Q3. I'm not ready to comment on whether those will appear in Q4 until we assess how things improve. However, I do anticipate something similar will happen. Additionally, regarding Al's earlier point about market recovery, Asia-Pac may show some growth, Europe is somewhat in between, and the Americas are still lagging. We will continue to face similar regional mix challenges in Q3 that we experienced in Q2.

Al White, President and Chief Executive Officer

Yes, it's always a little hard to say. I mean we have good visibility when it comes to some of the guys, right, like our distributors and so forth. And then we have less visibility when it comes to some of the retailers, especially the retailers who have a lot of stores out there that might not be corporate-owned, right, that could be franchise stores and so forth. I was trying to piece that out when I was looking at the month of April, and that I kind of got to that $35 million number, right? All those are a little bit squishy. I kind of think that, that was a number; maybe it's not as massive as it could have been. But I didn't see like a huge change. One of the things that's interesting is we've seen is some of these retailers are already kind of building up and they're anticipating that things are going to be okay. So, I shouldn't say build up, right? But they didn't go quite down as far as much as I thought they would have gone from an inventory perspective. And they seem to be kind of starting maybe to come back a little bit. So, it's a hard one Steve. We've talked about that over the years. It's always a struggle.

Operator, Operator

Our next question comes from Robbie Marcus with JPMorgan. You may proceed with your question.

Robbie Marcus, Analyst

Al, I know over the years, you've always talked about maybe a 3 to 5 time net income dollar benefit from the trade-up from a non-compliant two-week to a compliant daily. Is there any risk that as we move forward in a tough economic time that you might see the reverse happen as people trade down? And how do we think about any potential for people spacing out purchasing or trading down, down the P&L?

Al White, President and Chief Executive Officer

We don't really observe that trend. It's quite uncommon for someone to trade down. Once a customer switches to a daily lens, they are unlikely to revert to a two-week or monthly lens; in fact, they may find the daily lens even more appealing. It's rare for someone to go back. We might continue to see this trend, and perhaps the shift will lessen a bit over time. We'll have to wait and see how it unfolds, particularly if individuals become more cost-conscious. As we move into next year, if people are content with their current two-week or monthly lenses and their doctors are recommending the daily SiHy as a superior option, we might experience some inertia. Given the economic situation, I believe that people will increasingly focus on obtaining better products for their health. Yes. So I was talking more about the training. So people getting certified, people being ready to sell the product. We've probably done around $3 million through the first six months. I was still talking about $7 million to $8 million for this year, looking for some improvement here as we exit the year and certainly some improvement in Q4 as offices are opening back up. I'm basing that off the commentary that we've received from docs out there, who have gone through this, who are now certified fitters and able to fit, their commentary that they are going to be talking to parents about that and having discussions and so forth. So what I was really referring to was we're getting more trainings, right, we have more docs certified and more docs in the process of being certified than we would have had if we wouldn't have done it online.

Operator, Operator

Thank you. And I'm not showing any further questions at this time. I would now like to turn the call back over to Al White, President and CEO, for any further remarks.

Al White, President and Chief Executive Officer

Great, thank you. Thank you, everyone. I appreciate your time today. We had a lot to go through. So I think we hit on the high points and I look forward to catching up with everyone again in three months. Thank you.

Operator, Operator

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.