Earnings Call Transcript - COO Q1 2024

Operator, Operator

Good afternoon. I would like to welcome everyone to the Q1 2024 Cooper Companies Earnings Conference Call. I will now turn the conference over to Kim Duncan, VP of Investor Relations and Risk Management. Please proceed.

Kim Duncan, VP of Investor Relations and Risk Management

Good afternoon, and welcome to Cooper Companies First Quarter 2024 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 revenues, EPS, operating income, tax rate, FX and other financial guidance and expectations, strategic and operational initiatives, market and regulatory conditions and trends and product launches and demand. 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.

AL White, President and CEO

Great. Thank you, Kim, and welcome, everyone, to Cooper Companies 2024 Fiscal First Quarter Conference Call. We're off to an outstanding start this year, posting all-time record quarterly revenues of $932 million. CooperVision started the year on a solid note, growing nicely around the world and CooperSurgical achieved record quarterly revenues with our fertility business posting its 13th consecutive quarter of double-digit organic growth. Our earnings were strong and our momentum is excellent with capacity expansion progressing well and demand remaining very healthy. Moving to the quarterly numbers and reporting all percentages on an organic basis. Consolidated revenues were $932 million, up 8% year-over-year. CooperVision posted revenues of $622 million, up 7%, led by strength in our daily silicone hydrogel portfolio. And CooperSurgical posted revenues of $310 million, up 8%, led by another great quarter in our fertility business. Margins improved, and profits were solid with non-GAAP earnings per share of $0.85, remembering that we just completed a 4-for-1 stock split last week. For CooperVision, the Americas grew 6%, EMEA 10%, and Asia Pac, 7%. All 3 regions reported success with our innovative product portfolios, market-leading flexibility and growth in key accounts. Within modalities, our daily silicone hydrogel lenses, MyDay and clariti, grew 14%, and our silicone hydrogel monthly and 2-week lenses, Biofinity and Avaira Vitality grew 6%. We're continuing to see outsized demand, especially for MyDay, where our capacity is improving, and this is reflected in our higher revenue guidance that we'll cover shortly. Turning to products. We're seeing very strong growth in demand with MyDay. Starting with MyDay multifocal, our momentum is truly fantastic. The unique combination of an advanced multifocal design, paired with an easy fitting system is resulting in 98% of patients being fit in 2 pairs or less. And patient feedback continues to be outstanding, including my own. As many of you know, I wear these lenses and they're amazing. Whether I'm looking at a screen for long hours, driving home, eating out or doing anything else, my vision is crisp and my eyes feel great. I'm comfortable saying these are the best multifocals in the market and our outstanding growth and strong demand certainly supports that. Moving to MyDay toric. This lens is also performing extremely well. The rollout of our parameter expansion across North America and Europe has been a tremendous success, and we look forward to increasing availability as capacity improves. Demand for the product continues to be driven by our market-leading toric design, which mirrors Biofinity's design and our industry-leading SKU range, which is by far the widest toric range in the daily market. In our MyDay sphere portfolio, MyDay Energys is approaching its 1-year anniversary in the U.S. market and is continuing to generate great results. Its innovative digital Boost technology delivers optics designed for today's lifestyle, where, on average, people spend more than 7 hours per day on screens and wearers love it. Meanwhile, our premium MyDay sphere is also posting great results. To wrap up on MyDay, our team has done a phenomenal job supplying existing customers while keeping expectations in check on new product launches and geographic expansion. I'm now happy to report that our success expanding capacity is easing some of those constraints and allowing us to be more active moving forward. Moving to clariti. With its full family of silicone hydrogel spheres, torics and multifocals, we're continuing to do well. The comfort, ease of handling and price positioning have led Clariti to be a lens of choice for many new wearers. Outside of dailies, demand for Biofinity remains strong, led by torics and multifocals. It's worth highlighting our Biofinity toric multifocal, which is growing very nicely as eye care practitioners continue making it their primary lens for patients experiencing more complex vision needs balancing presbyopia with differing levels of astigmatism. We'll be expanding availability of this lens in existing markets and launching a new market soon, so we're excited about that. Avaira also had a nice quarter led by torics. Moving to myopia management. We posted revenues of $29 million, up 19%, with MiSight up 51%. This was another excellent quarter for MiSight, powered by growth across all regions with particular strength in EMEA where we posted record quarterly sales. Worldwide, we're continuing to see momentum in key accounts, high retention rates and a nice halo effect. We're also launching new digital tools and programs to streamline the fitting process, making it easier and quicker. MiSight remains the first and only FDA-approved contact lens for myopia control and it's backed by extensive clinical data and real-world results. 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. Outside of MiSight, our Ortho K lenses declined 10% due to weakness in China. And on SightGlass, you may have heard from our JV partner, EssilorLuxottica that the FDA recently granted SightGlass Spectacles Breakthrough Device designation. We're excited about this update, and we'll continue working closely with the FDA in hopes of obtaining approval in the second half of 2025. Finally, as we look to expand myopia care to all children, we've launched a pilot program in the U.S. called Generation Sight in collaboration with 3 top optometry schools, the Illinois College of Optometry, the New England College of Optometry and the Massachusetts College of Pharmacy and Health Sciences, to provide myopia care to underserved children. This program engages local public school systems to drive awareness and treatment of myopia by providing free eye exams and free MiSight. It also helps optometry students get real-world pediatric experience while increasing their clinical capabilities as they develop into the next generation of professional leaders. As a leader in the myopia management space, we're certainly proud of programs like this that are making a difference with kids in our communities. To finish on CooperVision, the contact lens market grew 9% in calendar 2023, with CooperVision taking share growing 11%. We expect 2024 to be another strong year, supported by the long-term macro growth trend and more people needing vision correction. It's estimated that 50% of the global population will have myopia by the year 2050, up from roughly 34% today. When you combine this with the ongoing shift to silicone hydrogel dailies, the increasing focus on higher-value products and higher pricing, we expect many years of solid growth for the industry. Within this, we expect to remain a leader with our innovation, robust product portfolio, ongoing product launches, strength in premium toric and multifocal products, fast-growing myopia management business and leading new fit data. Moving to CooperSurgical. We posted record quarterly revenues of $310 million, up 8% organically. Fertility sales were $119 million, up 11%, which is our 13th consecutive quarter of double-digit organic growth. This success was driven by our outstanding team and market-leading products and services within consumables, capital equipment and reproductive genetic testing. We're also investing for the future, opening new donor sites, providing extensive training in our centers of excellence, expanding geographically and accelerating innovation. We believe our focus on investing and delivering the most innovative and advanced solutions to fertility clinics and patients remains unmatched. This includes our recent launch of Witness IQ, a cloud-based digital platform that further enhances the benefits of the witness system to track activity, reduce errors and improve efficiencies in fertility labs. And we remain at the forefront of fertility-based genetic testing. CooperSurgical was an early adopter of artificial intelligence to identify the best embryos to transfer during an IVF cycle and we're now further advancing our leadership position with the launch of primary template-directed amplification, a new approach to DNA amplification for embryo biopsy samples. As an enhancement to the existing pre-implementation genetic testing process, this technology better identifies genetic anomalies in a faster, more accurate manner. This is the first major advancement to DNA amplification and embryo since 2009 and will help drive better patient outcomes. Delivering these types of innovations is why we're a leader in this space, and it's our commitment to continue this type of work. For the global fertility market, the trends supporting significant long-term growth remain intact, including women delaying childbirth, increasing patient awareness, greater benefits coverage, technology advancements that improve success rates and broadly speaking, improving access to treatment. The World Health Organization highlights that 1 in 6 people globally will be affected by infertility at some point in their lives. So this is an issue that impacts a lot of people and will continue to do so in the future. As part of this, we remain incredibly committed to the fertility industry and will always stand in support of patients and clinics. Access to fertility treatment is incredibly important for so many people, and Cooper will continue to advocate for increased accessibility and the advancement of human reproductive rights on a global basis. Moving to Office and Surgical, we posted sales of $191 million, up 6% organically with medical devices growing 6%, stem cell storage up 4% and PARAGARD, up 7%. Within our medical device business, we reported strength in our labor and delivery portfolio, including the Cook products that we acquired last November that grew 13%. We also reported strength in our minimally invasive gynecological surgery products, which include market-leading disposables and innovative capital such as our Ally Uterine manipulator portfolio. Our stem cell business had a solid quarter and PARAGARD outperformed expectations with outstanding execution around a mid-single-digit price increase. To conclude, with CooperSurgical, we take great pride in being able to say that every minute, somewhere around the world, a baby is born using CooperSurgical products. We're making a difference in people's lives, and that's a big part of what makes this business special for us. Before turning the call over to Brian, let me say that in addition to our strong operational performance, our efforts around environmental sustainability, corporate social responsibility and other important areas within our business are also advancing well. So thank you to our 15,000-plus employees around the world for their hard work and dedication as they drive our success. And now I'll turn the call over to Brian.

Brian Andrews, CFO

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. For the first quarter, consolidated revenues were $932 million, up 9% as reported and up 8% organically. Consolidated gross margin was 67.3%, up from 65.7% last year, driven by efficiency gains and price at both CooperVision and CooperSurgical. Operating expenses grew 8%, improving to 43% of revenues as we continued leveraging prior SG&A investment activity. Consolidated operating margin improved to 24.4%, up from 22.6% led by the gross margin improvement and SG&A leverage. Below operating income, interest expense was $28.6 million, and the effective tax rate was lower than expected at 13.3% due to stock option exercises. Non-GAAP EPS was $0.85, up 18% with roughly 200 million average shares outstanding. The impact from FX was $0.03 negative year-over-year for the quarter. Free cash flow was $5 million with CapEx of $118 million. As discussed on prior calls, free cash flow continues to be impacted as we progress with our capacity expansion projects. Net debt increased to $2.6 billion due to the closing of the Cook Medical acquisition in November. To summarize fiscal Q1, this was an excellent start to the year. CooperVision and CooperSurgical both posted strong results, and we expect this to continue. We remain focused on exceptional operational execution, combined with high return investment activities such as increasing capacity and expanding geographically, and we're confident this will drive significant long-term shareholder value. Moving to fiscal 2024 guidance. We're increasing expectations for revenues and earnings by incorporating our better future operational performance and slightly lower interest expense. This results in full year consolidated revenues of $3.85 billion to $3.9 billion, up 7% to 8% organically. For CooperVision, we expect strong results to be driven by healthy demand and improving capacity. This translates to an increase in our organic revenue guidance to 8% to 9%, which equates to $2.57 billion to $2.6 billion. For CooperSurgical, we expect continuing strength in fertility along with solid performance in our office and surgical product category. This translates to an increase in our organic revenue guidance to 5% to 7%, which equates to $1.27 billion to $1.29 billion. We're increasing our non-GAAP EPS guidance to an expected range of $3.50 to $3.58, up 9% to 12% year-over-year or up 15% to 17% in constant currency. This guidance assumes roughly $108 million of interest expense, which includes no interest rate changes by the Fed during the remainder of our fiscal year. For tax, we're expecting a full year effective tax rate of roughly 14.5%, by incorporating Q1 and assuming no additional discrete items. For currency, rates are very similar to our initial annual guidance. Thus, the impact to Q2 to Q4 is essentially unchanged. And the full year impact is still roughly a negative 1% to revenues and a negative 5% to earnings. To wrap up, we had an excellent fiscal Q1 and the business is trending well. We're leveraging our prior investment activity, advancing our production efforts and investing to drive continued growth. Demand and momentum are strong, and that's reflected in our updated guidance. And with that, I'll hand it back to the operator for questions.

Operator, Operator

Your first question comes from the line of Craig Bijou with Bank of America.

Craig Bijou, Analyst

So maybe to start with some background on the overall contact lens market. It remains quite strong. I heard your comments about the market's growth, but I would like to know more about pricing and volume trends, as well as the shift to daily lenses and your current supply status and how you plan to take advantage of that.

AL White, President and CEO

Sure, I'll address that. The contact lens market is currently robust and shows no signs of slowing down. The industry is in good shape. Pricing and volume trends, especially the shift to daily lenses, are key factors driving the market. This transition to daily lenses from the bi-weekly and monthly options is a major contributor to overall market growth, which we expect to continue for many years. From a pricing standpoint, we are witnessing positive trends, and we anticipate further price increases in the future based on current market conditions. Additionally, the number of wearers globally is steadily increasing, providing a solid foundation for growth alongside the shift to daily lenses and pricing factors. Furthermore, there is notable growth in torics and multifocals, which are higher-priced products that remain underpenetrated, offering significant future growth potential. When we consider the emergence of daily torics and multifocals, it further supports strong market growth. On the supply side, we have made substantial progress since the beginning of the year. Our manufacturing team at CooperVision has worked exceptionally hard, placing us in a much stronger position to support our customers and launch new products and expand geographically.

Craig Bijou, Analyst

Got it. And if I could just follow up on the fertility environment. And obviously, you guys had pretty strong growth again, double digits. Obviously, there's a lot of headlines around IVF fertility. And some companies calling or pointing out that benefits may be getting pushed. So I guess I just wanted to ask you, the benefit environment, and it sounds like the overall environment for fertility is still very strong trends. But any reason to think that you can't continue to do the double-digit growth?

AL White, President and CEO

You're correct that fertility is receiving a lot of attention in the news. This is mainly a U.S. issue, particularly related to developments in Alabama. I won’t go into details about my frustrations with the situation there. However, as a major player in the market, we fully support fertility, along with all patients and fertility clinics, and we plan to keep doing so. There's more discussion about this in the U.S. market than elsewhere globally. When I evaluate the worldwide fertility market and our performance, I tend to not place too much emphasis on that U.S. attention because I believe that the fertility markets remain robust. We'll continue to assess our performance quarterly, but I am confident we will maintain double-digit growth for many years ahead. The fundamental factors driving this market are too strong and will foster significant growth for the foreseeable future.

Operator, Operator

Our next question comes from the line of Larry Biegelsen with Wells Fargo.

Larry Biegelsen, Analyst

I'll echo my congratulations on the quarter here. AL and Brian, I actually wanted to start with margins and then one on CSI. So Brian, the gross and operating margin were up nicely in Q1. How do we think about the gross margin and operating margin for fiscal 2024 and the phasing? It seems like we could see upside to the margins based on what's implied in the guidance from what I can tell.

Brian Andrews, CFO

Thank you, Larry. The situation is quite similar to what we discussed last quarter. Aside from the negative impact from foreign exchange on our revenues, EPS, and some operating income, our gross margins are holding steady compared to last year. The actual margin may fluctuate somewhat depending on product mix throughout the year, but I anticipate we will end up around the same level we finished last year for gross margin. We have increased our expected constant currency operating income growth to 14% to 17%, meaning we are slightly raising our operating margin guidance from last quarter. I expect operating margins to improve year-over-year on an as-reported basis and even more so on a constant currency basis. In terms of challenges, the foreign exchange situation, as we mentioned last quarter, is a greater negative factor in the second quarter, which is typically our weakest quarter for FX, and this will have some impact.

Larry Biegelsen, Analyst

That's helpful. And I had a follow-up on Craig's question on CSI. You grew 8% in Q1 organically, you're guiding to 5% to 7%. So why does growth slow? Are you assuming some slowdown in IVF? Or are you assuming new competition to PARAGARD and talk about that, please?

AL White, President and CEO

We'll monitor fertility on a quarterly basis. The factors driving fertility remain strong, and I anticipate ongoing robust growth in this area. Regarding the growth guidance of 5% to 7%, that's correct. I believe that despite PARAGARD's strength in the first quarter, which I expect to continue into the second quarter, we should anticipate flat growth year-over-year. This is due to overall demand and potential new competitors entering the market. However, there may still be opportunities for positive surprises. Although there’s a slight conservatism in that estimate, moving from a 4% to 6% range to 5% to 7% seems reasonable. I hope we can meet or exceed that guidance.

Operator, Operator

Our next question comes from the line of Jeff Johnson with Baird.

Jeffrey Johnson, Analyst

So AL, maybe a similar question, as Larry just asked on CSI, but for CVI, you're taking that up 100 basis points for the year. This first quarter came in right exactly where you guided right at the 7%, so it does imply an acceleration over the back half. So with 1Q being where you expected, what gives you the confidence to raise this early in the year to faster growth over the next few quarters, number one? And number 2, I think last quarter, you talked about potentially hitting double digits with CVI in the back 3 quarters of the year after this first capacity-constrained quarter, do you still have the confidence in that potentially getting to the double-digit CVI the rest of this year?

AL White, President and CEO

Yes. Yes. Great question, Jeff. Well, in Q1, we did 7%. It was a strong 7%. I mean we almost got ourselves to round up to 8%. So a good solid Q1 to start the year off. I do think we'll get ourselves back to double digit. As a matter of fact, I think we've got a good chance to get to double digit right away here in Q2. So when I look at kind of where we sit today, how we did in Q1, how we closed the quarter out, how February is going, improvements in our capacity that we have that's going to allow us a little bit more flexibility, yes, I feel comfortable taking that 7% to 9% up to 8% to 9%. And we'll see how it goes as we move through the year.

Jeffrey Johnson, Analyst

Fair enough. Brian, I’d like to ask for clarification regarding your comments on gross margin. You mentioned an increase of 160 basis points year-over-year in the first quarter. However, now you're indicating a flat outlook for the year. This suggests a decline of about 50 basis points year-over-year for each of the next three quarters, though it might not be evenly distributed. Is this mainly due to currency effects, given that it contributed positively by 100 basis points in the first quarter but is expected to turn negative in the second and third quarters? Is it only the currency impact, or are there other factors causing the gross margin to drop from a strong performance in Q1 to a decline for the rest of the year?

Brian Andrews, CFO

Yes. Jeff, thanks for the question. Yes, currency in the first quarter wasn't as impactful as the latter part of the year. Certainly, Q2 and Q3 are worse from an operating profit or a gross profit perspective. Outside of that, I wouldn't really point to anything in particular. I would say Q1 kind of landed about where we expected. Some of it's a little bit of timing. But I would say, in general, we're expecting on an as-reported basis, pretty similar gross margins as we work through the year.

Operator, Operator

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

Joanne Wuensch, Analyst

Nice quarter. Mechanically, is there a reason you've consolidated the way that you're reporting some of the revenue for CooperVision. And part of that, where now am I going to see MiSight?

AL White, President and CEO

So you'll see MiSight in sphere, is where we'll report that. And we consolidated ultimately because I think it's just a better representation of how we look at the business, combined with competitive dynamics. And that was really the reason behind it. Yes.

Joanne Wuensch, Analyst

And my sort of second follow-up question has to do with SightGlass. What are the steps now to bringing that to market? And can you please remind us of how the JV shows up on your income statement?

AL White, President and CEO

Yes, sure. So for SightGlass, most of the JV shows up below the line, below operating income. It's a loss, as you can imagine right now, as we continue to invest in it. So we just run that through our P&L. And that's the way it will be moving forward other than if all goes well, that will turn obviously to a profit, and we'll report that below the line. The process right now is, without getting into too much detail is really to continue to work with the FDA. There are some spots, especially among younger children, where we have some really strong clinical data. So to continue with the FDA, meet the requirements that they're looking for and work hard here to get approval for that product, FDA approval for that product in the back half of next year. In the meantime, we're selling that in multiple markets around the world, including in China, and we're getting some great feedback on it.

Operator, Operator

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

Anthony Petrone, Analyst

Congrats again on the quarter here. Maybe one just on lens capacity and Brian, we spoke about this a little bit earlier this year. Just where are you on the build-out? And maybe to clarify, like how much demand is actually being left out there? Like how much are you not getting because Cooper is a bit supply constrained? And then follow-up on myopia management. Just maybe a reset on the TAM opportunity of the combined bundle when we think of SightGlass with MiSight. just kind of a high-level recap of what the overall market opportunity is for those 2 products combined.

AL White, President and CEO

Sure. Good questions. On lens capacity, yes, I think demand is strong. It's going to continue to be strong because you're continuing to get wearers that are going in, whether it's a new wearer or an existing wearer moving themselves to dailies and moving into torics and multifocals. So you're going to have that demand. I believe that underlying demand for years and years and years and years and years in front of us. The position that we're in today from a capacity perspective is allowing us to meet a lot of that demand, not all of it, but a lot of that demand. As I mentioned earlier, I think may have been Jeff asking about it. right? We're in a good enough spot here where we're going to be able to, I believe, even return to double-digit growth here in Q2, but certainly put us in a position where we're going to be able to post strong numbers. So that's how I'd answer that right now. And I think that with capacity continuing to come on, it's going to put us in a position to have, frankly, strong years for a number of years in front of us. If I look at the myopia management market, boy, that's crazy, exciting. It's taking a while to develop. We obviously thought it would move along a little bit faster. But when I look at what's going in the marketplace right now with glasses, there are some fantastic products out there and SightGlass is one of those that's making its way into the marketplace and the feedback is excellent. MiSight is doing really well. We're seeing some really good momentum in MiSight in Europe and some other markets. It's a little difficult to get to a TAM, but we're certainly talking about a marketplace that's going to be in the billions of dollars. It's very large. And it's almost every month, we see a society somewhere coming out and pushing myopia management and just saying, 'Hey, this needs to become standard of care'. I think the U.K. was the most recent one. coming out and saying to optometrists needs to be standard of care. And it does. We need to proactively treat children. It's crazy that we don't do to the degree that we should. And frankly, you have one and only FDA-approved product with MiSight right now, which is great, but we need the glasses to come along with that. And I'm happy to say that the industry is making a lot of progress there. So a big opportunity still in front of us.

Operator, Operator

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

Jason Bednar, Analyst

AL, I wanted to start, in past calls, I think we've heard about your position, maybe from like a new fit perspective. Just would love to hear what you're seeing out there in the data on dailies or daily sight eyes, torics, multifocals, just really where you're punching pretty well right now. Just any insight on where your share stands on the new fit side, again, maybe in the context of your current market share in those categories.

AL White, President and CEO

Yes. As a general answer, I would say that our fit data is certainly in front of what our current market share is. And that's a good sign, right? And we've been running that way for a little while here, and we're continuing to run that way. The only caveat I would put on that or asterisk, if you will, is sometimes it's hard to get that data all around the world. We get that through GSK and a few other sources. But I'm comfortable continuing to say that our fit data is in excess of our market share, which is a really good sign for us.

Jason Bednar, Analyst

Are there any categories where you anticipate significant share gains as we consider the sources of revenue growth in the upcoming quarters? Additionally, could you provide more details on the key account strategy wins across different regions and any updates on that strategy, including how pricing is evolving in that category?

AL White, President and CEO

Sure. Looking ahead, we expect to see continued growth primarily in torics and multifocals, where we maintain a strong leadership position. Our performance in these categories has been robust, and we anticipate that trend will continue. Additionally, we are seeing positive results in the daily silicone hydrogel segment, which includes both torics and multifocals as well as sphere lenses. However, we do face challenges in the legacy hydrogels sector. Despite this, our fit data indicates that we are moving in the right direction, aligning with market trends, which is encouraging. Regarding key accounts, we are experiencing positive developments. Our efforts with MiSight have started off well, particularly with independent optometrists, and we are gradually gaining interest from key accounts to roll the product out across their franchises. They are currently working on how to market, standardize, and price the product within their systems, which represents solid and consistent progress. This growth contributed to over 50% growth this quarter, and I expect we will consistently achieve similar growth rates moving forward, around 45% to 55%. This is supported by our solid relationships with key accounts, particularly through our store brands, and we aim to expand those relationships to incorporate MiSight.

Operator, Operator

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

Patrick Andrew Wood, Analyst

On the toric side, I'm just kind of curious, it's like a astigmatism is probably like 1/3 of the population. So I'm just curious, from the data that you guys have, do you have a good sense of like from an Rx perspective, where we are on the lenses, i.e. how underpenetrated that category is it kind of totality?

AL White, President and CEO

Yes, it's significantly underpenetrated. While I don't have the exact figures handy, I can confirm that the U.S. market is the most penetrated, yet still shows considerable potential for growth. Outside of the U.S., the penetration is even less. It's encouraging to note that fitting patients with astigmatism has seen improvements over time, making it easier to use toric products, which have also enhanced in quality. MyDay toric, for instance, is an excellent product that patients appreciate due to its fit and stability. I'll need to look into more specifics, but overall, the market is certainly underpenetrated. There’s more than a decade of significant growth expected in the toric market as eye care professionals increasingly provide the right lenses for each patient seeking optimal visual correction.

Patrick Andrew Wood, Analyst

That makes sense. I can relate because I have astigmatism as well. Regarding Europe, that was a significant figure within CVI, and you provided some insights there. Was there anything specific? I know some of the larger contracts were renewing, but I’m also very interested in the dynamics in Europe.

AL White, President and CEO

Yes. Yes, good strong number in Europe. I think we're going to continue to have them. We have just a fantastic team there. Our commercial team is just killing it, and they have for a number of years. So I think when you combine the strength of our team over there, the rollout of products, we're going to get some new products in there. We're going to expand some of the products that we currently have put ourselves in a better position to sell. Yes, we're having strengths right there right now with key accounts and so forth. As product availability capacity improves, I think you're going to continue to see success. I couldn't be happier with what our European team is doing.

Operator, Operator

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

Robert Marcus, Analyst

And I'll add congrats on a good quarter. Maybe to start, I know there's some regulations coming out in April for the lab developed tests. I wanted to see what your exposure to that was and any implications in your view?

AL White, President and CEO

I'm kind of raising my eyebrow. I'm not sure what you're referring to, which means that's probably a really good sign because it wouldn't be applicable to us.

Robert Marcus, Analyst

Got it. I think it's in some of your filings, maybe I'll circle back. Maybe just to touch on myopia management. It was down quarter-over-quarter. You talked about down 10% in China and Ortho K. Just maybe speak to the Ortho K market globally and in China specifically and your view there, both on an underlying basis and competitive.

AL White, President and CEO

We experienced Ortho K growth globally, and our team is performing well. However, in China, the situation is quite unpredictable. While we had growth in the upper 30s percent in Q4, we've seen a 10% decline recently, indicating some fluctuations. This variability might be due to channel fill or other market dynamics in China, which I anticipate will continue to be unstable for us. It’s not a major market for us, so I don’t consider myself an expert on it, but we are noticing some volatility in the Ortho K segment, particularly in China. I would differentiate that from MiSight, which is performing well and could be contributing to some of the instability in Ortho K. Overall, MiSight remains strong, and while we expect Ortho K to grow for the year, we anticipate some ups and downs.

Operator, Operator

Our next question comes from the line of Chris Scally with Nephron.

Unknown Analyst, Analyst

AL, on the last call, I think you talked about 5% to 7% contact lens market growth in calendar '24, was the underlying expectation embedded in the guidance. Is that still your expectation? Or do you think it will be better than that?

AL White, President and CEO

I guess I would probably stick with the 5% to 7% right now, but I would certainly lean towards the upper end of that.

Unknown Analyst, Analyst

Okay. And then how are you thinking about how MiSight and SightGlass fit together in the myopia market longer term, do spectacles become first-line therapy in contacts or reserve for older patients? Or is it not that clean? Just trying to get a sense for how additive the addition of spectacles in markets like the U.S. could be versus cannibalistic of what you've got going on already?

AL White, President and CEO

Yes, that's an interesting point. Spectacles will become the primary option for children aged 5 to 14. The easiest solution for optometrists is to fit them with glasses. This is going to significantly advance the myopia management market since every optometrist can fit a child with glasses and send them on their way. It would be almost negligent not to do so and to address myopia progression. Consequentially, some children will opt for contact lenses, whether for sports, activities, or appearance. This will create demand in that area. However, a key factor will be compliance. For the treatment to work, children must wear their glasses frequently. If they aren't wearing them before their annual check-up, the optometrist will notice. It's similar to Invisalign; if it's not worn, the treatment won't be effective. The optometrist will speak to the parents about the need for the child to wear their myopia control glasses and may suggest contact lenses to maximize the treatment's benefits. Therefore, I believe there will be a higher adoption rate of contact lenses in the myopia control market compared to the general contact lens market.

Operator, Operator

Our next question comes from the line of Steve Lichtman, with Oppenheimer & Company.

Steven Lichtman, Analyst

Congrats on the quarter. I guess, Brian, you're obviously investing behind capacity expansion. So how should we think about CapEx levels and free cash flow this year? And do you expect CapEx as a percent of sales to go higher in the coming years as you maybe try to stay ahead of demand?

Brian Andrews, CFO

Steve, yes. So I guess what I'd say is we talked about free cash flow last quarter being up versus last year, probably about $100 million this year. I would say that the first half of the year is we're going to see sort of similar kind of free cash flow numbers as we saw in Q1 and Q2. And then I would expect will reflect nicely in Q3 and Q4. So cash flow conversion will be improved. I'd say as a percentage of revenues, this is going to be kind of a, I would call it, a high. I mean, it should be pretty similar to last year on a percentage basis. But as we look at next year and the years thereafter, I would expect it to come down on a percentage basis.

Steve Lichtman, Analyst

Okay. Got it. And then just a follow-up on SightGlass. Appreciate the update there. Do you expect the investments behind SightGlass in the near term to go up to the board's approval? Or do they go down for a bit given the sort of the later approval expectations? Understanding it's below the line. I'm just curious on that.

AL White, President and CEO

Well, I think we'll continue to invest as we are now. Once we get FDA approval, we'll work with EssilorLuxottica. I have conversations about the best way to launch that and how to capitalize on the FDA approval. So we'll continue to spend on it right now, supporting that product and launches around the world and things we're trying to accomplish, including the clinical work and so forth that we're trying to do. And then we'll determine the best path forward, hopefully, when we get the FDA approval kind of in the back half of next year. And that would be a really exciting thing and really open the doors to a pretty significant market for us. So we'll have to have the conversations and see where we go then.

Operator, Operator

Our next question comes from the line of Brett Fishbin with KeyBanc Capital Markets.

Brett Fishbin, Analyst

Just had a couple quick ones on pricing. One, just in the context of the full year CVI guide of 8% to 9%, do you have a directional sense of how much of that is getting driven by price? And then as a follow-up, just curious because I know you guys are playing a little bit of catch-up this year relative to the market, how the consumer is accepting some of the price changes this year? And if you think going forward, there might be a little bit more room for some continued catch-up activity relative to the industry?

AL White, President and CEO

Yes. We'll need to monitor future price increases as the economy evolves. Currently, we're not experiencing significant resistance, but much of the industry's growth is moving towards daily sales. This shift involves a change in product mix, which includes higher-priced items. As we move ahead, you'll notice this trend. So, while prices are increasing, it's primarily due to a shift towards higher-priced products. In terms of market pricing, we are looking at low single digits, in the 2% to 3% range, likely leaning towards the upper end. That’s the current state of the industry and our position within it.

Brett Fishbin, Analyst

And then just one other question. I think you had a really interesting comment, but it was pretty brief on the idea of introducing some new digital tools to help facilitate MiSight in streamlining the fitting process a little bit, which seems like it might be a little bit of a friction that could be helped with these kind of initiatives. So just maybe expand a little bit on what you're doing there and how it could help that process?

AL White, President and CEO

Yes, absolutely. One of the challenges that optometrists have with MiSight is they bring the child in. They have to talk to the child. They have to explain what contact lenses are, how to put lenses in, take lenses out. They got to explain to the parent what myopia is and the progression of myopia. The process takes a little while. And when you layer contact lenses into it, it makes it a little bit more difficult than glasses. So anything that we can do to improve that process and make it faster is going to be definitely beneficial. And our marketing team has done a really nice job there and the development team on streamlining some of that activity to ensure that optometrists understand the fitting process and are able to do it very quickly. I won't get into necessarily the technical attributes and so forth of what we're doing. But suffice it to say, yes, anything that we can do is streamline that and help make that process easier and faster the better. So yes, you picked up on that is a good point because that is a benefit, and it's going to help us continue to drive growth.

Operator, Operator

Our next question comes from the line of Jon Block with Stifel.

Jonathan Block, Analyst

I'll try to be somewhat brief, 2 quick ones. First on PARAGARD, I don't know, I just feel like the talk track has seemingly improved maybe from 3 months ago, nothing has really changed from a regulation standpoint. AL, am I right? Is there anything behind that where, again, you had a decent beat in the quarter. You talked about a pretty good start in fiscal 2Q. It just seems a little less dire, if correct? Is there something more to it?

AL White, President and CEO

I think with respect to PARAGARD, that's going to be a little bumpy. The underlying demand is still a struggle there in terms of being able to grow volumes. And then the other aspect of that ends up being a competitive product. We talked about that before. There was a product that could potentially get FDA approval that's essentially a generic. But if that does get approved and hit the market, that would impact us. When we gave guidance back in December, we incorporated some of that. That product has not been approved. So if you look at it as we move through the year, that makes me, yes, a little bit more optimistic for better performance this year.

Jonathan Block, Analyst

Okay. And second quick one, just within CVI, just cleaning up a little bit. The overall 7%, I think, was in line with estimates. You guys sort of signaled that. But from ROC, EMEA was decently ahead, APAC below and anything to call out specific to APAC? Because when I look at the year ago comp, it was actually one of the easier ones from fiscal '23. I don't know if that's where we sort of go from a capacity standpoint. But maybe if you could just elaborate on that?

AL White, President and CEO

Yes. Yes. Not too much to say on that other than I think it got picked up a little bit about some communication we had in Japan with respect to some capacity constraints. So when you look at allocation of product and capacity constraints that we had, that negatively impacted Asia Pac and probably will, frankly, a little bit again here in the second quarter. But the underlying fundamentals and the team and the success we're having in Asia Pac is still strong. I think there's just a little bit on the capacity constraint side of things is what you're picking up.

Operator, Operator

Next question comes from the line of Issie Kirby with Redburn Atlantic.

Issie Kirby, Analyst

We'll just stick to one. I mean obviously, you have your handful with MyDay and the strength of that product. But I would love to know how you're thinking about potential new innovation within the Filshie Clip space, potential new product launches. I think it's been close to 10 years now since we saw MyDay first hit the market. So I guess, what is next? How are you thinking about new launches? And to what extent does capacity right now in your ability to introduce perhaps a new lens family?

AL White, President and CEO

Yes. Great question. If we look at MyDay as an example, I think the multifocal just came out a couple of years ago. MyDay Energys, as an example, just came out roughly a year ago in the U.S. market. So we still need to roll the multifocal out around the world. Frankly, there's still areas we need to get the toric out more the expanded framer range. There's markets we need to get MyDay Energys into. So you're just going to continue to see for the coming years, a bunch of launch activity, but it will be associated to mostly the products that you've already heard of.

Issie Kirby, Analyst

Okay. And then just a quick follow-up, if I may, just on daily penetration. I mean we've talked a lot about the runway in toric but really I guess what's the runway like in daily? Just in terms of units where do you see it currently sitting, I guess, for 2023? And where do you think the ceiling really is for dailies in terms of units?

AL White, President and CEO

It's challenging in terms of units because there are so many lenses involved when someone uses daily contacts. For instance, if a customer switches from Biofinity, they would require 24 lenses a year, but if they wear dailies frequently, that's around 700 lenses annually. It is indeed tough. However, if you compare the daily market to the two-week and monthly markets, you can see a significant growth opportunity for dailies and wearers. This suggests that the daily contacts market has a tremendous potential for growth, which I believe could continue to thrive for about ten years or so, as it remains significantly underpenetrated.

Operator, Operator

There are no further questions at this time. I'll now turn the call over to AL White, President and CEO.

AL White, President and CEO

Great. Thank you. Thank you to everyone for taking the time and joining the call. As you can probably tell from our commentary and response to questions, we're excited about where we are now. We started the year off really well. We're in a really good position moving forward. So thanks again, and I really look forward to catching up with everyone on our next earnings call. Thank you, operator.

Operator, Operator

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