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The Cooper Companies Inc. (NYSE:COO)

Barclays Global Healthcare Conference

March 12, 2013 9:30 am ET

Executives

Gregory W. Matz - Chief Financial Officer and Vice President

Analysts

Matthew Taylor - Barclays Capital, Research Division

Matthew Taylor - Barclays Capital, Research Division

So good morning. We have our next presentation from The Cooper Companies, and really pleased to have them joining us this morning. Cooper's performed very well in the surgical market, in the ophthalmic market. With a lot of growth in their contact franchise over the last couple of years. This morning, we have Greg Matz, who's the VP and CFO, he's going to give a formal presentation and go through some slides of the company.

So I'm going to take a break while he does his thing. Greg?

Gregory W. Matz

Matt, thank you. First, welcome, everybody. Thank you for taking time out to hear the Cooper story. First off, for those who are in the room, you can read the statement. For those of you online, let me just give you a couple of highlights. This presentation contains some forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. We do have some forward-looking statements that necessarily depend on assumptions, data and methods that may be incorrect or imprecise and are subject to risks and uncertainties. So for more understanding of our risks and uncertainties, please look at our Securities and Exchange Commission filing on 10-K and 10-Q.

So again, Thank you very much for coming to listen to the Cooper story. From my perspective, The Cooper Companies is a New York Stock Exchange company. We're located in Pleasanton, California, and that is just outside of San Francisco. We employ about 7,800 people and our business is in 2 different segments. The first segment is CooperVision and that's about $1.2 billion, it's a contact lens business. We're the third largest manufacturer of contact lenses in the world. We compete in a $7.3 billion market and our key competitors would be J&J, Vistakon, CIBA/Alcon/Novartis and Bausch & Lomb. On the other side, we have CooperSurgical, and CooperSurgical is about $250 million business. It's women's health care focused on the OB/GYN and IVF, or in vitro fertilization.

We look at -- we just did our earnings announcement last Thursday night. And in that, we announced, we had $380 million of sales for the quarter, grew 16% year-over-year. And we're up 11% excluding currency and acquisition. Our GAAP EPS is about $1.50, our non-GAAP EPS about $1.23. A difference between GAAP and non-GAAP is really, predominantly, we had $14.1 million business interruption claim that was settled. And so that's the basic difference between those 2 numbers. Free cash flow for the quarter was $19 million.

Looking at our earnings per share, a good story over this last few years growing compound annual growth rate of 27%. And when you look at this growth rate, what's really -- the highlights of what the company has been doing is we've been outgrowing the top line, we've been growing CooperVision 1.75x to 2.2x the market. Over the last few years, we have improved our gross margins every year systematically. If you look at our interest expense, something that's not really highlighted here, but when you go back to 2008, we had $50 million of interest expense and $905 million worth of debt. 2012, we ended the year at $12 million in interest expense and about $374 million in debt. So really, that has had a big impact on our financials also. And then, finally, more recently, operating leverage with our OpEx.

Look at our guidance, we revised the guidance on Thursday night. We have a total revenue, and I won't go through all of these numbers, but $1.575 billion to $1.625 billion in revenue. We're looking at GAAP or non-GAAP EPS of $5.95 to $6.10. The difference between GAAP and non-GAAP is basically the business interruption insurance I mentioned earlier. Free cash flow, 170 to 200, that was 210 to 230. We did announce Thursday night that we brought that down, as we look to make some capital investments in our 1 Day business. Specifically, or predominately, around the silicon single use.

Here is really the story of what the Cooper company is about and kind of our management philosophy as we go forward. One, as I mentioned, grow revenue faster than the market, and we're doing that in both businesses. It's a little bit more difficult in the CooperSurgical side to show that, because that business really has no one-on-one competitor or peer. We have a lot of different products in that business and people compete against the product, they don't compete against the portfolio, but we're growing that business well. Expand our operating margins. Going from the 18%, 19% to mid-20s, and that's a threefold plan. One of that -- the components of that is we do pay a royalty to CIBA, and the expectation is to get to the mid-20s is that, over time, that royalty will expire and go away.

The other thing is we have some amortization. We'll drop about $5 million worth of amortization in 2015 related to our Ocular Sciences acquisition that we did many years ago, in 2005. So that will drop off $5 million. We have some other amortization that we'll drop off, and you will see that happen in 2014 and 2015. The remaining business is really operating leverage, to be able to get the leverage from the infrastructure that we put in place, the feet on the street we put in place. Growing EPS faster than revenue. We've been able to do that. You saw the 27% compound annual growth rate. We continue to look at that as we look at our capitalization structure, as we look at our gross margins, improving gross margins, leveraging our OpEx and again, we continue to see EPS growth in the double digits. Generates $1.3 billion in cash, even though we announced that we're going to do more CapEx in 2013 and 2014, we still see over this period, the 2013 to 2017, that we can generate the $1.3 billion in free cash flow.

The next 2 boxes, expand CooperVision and CooperSurgical geographically and also complete strategic acquisition, these are really tied together because if you look at CooperVision, over the last few years, CooperVision has grown in Eastern Europe, Poland, Hungary, Czechoslovakia, Asia in Malaysia, Singapore, by buying out distributors. So our growth and our geographic disburse has also come by buying out our partners who were selling our lenses. We're also looking at China and India and focus Brazil, so like other companies looking at the emerging economies and growing in those areas.

CooperSurgical, which was about 15% international up until July last year when we bought Origio, which is headquartered out of Denmark and it was the leading in vitro fertilization company, IVF company, and now that probably doubled their geographic footprint. CooperSurgical has also grown and their business model has been around investing in companies, and I'll talk about that later, but they have amassed a portfolio of products focused on women's health care on mainly OB/GYN and IVF.

So let me just focus a little bit on CooperVision, give you a flavor. I mentioned they are the third largest manufacturer of soft contact lens. They employ a vast majority of our people, 6,800, headquartered also in Pleasanton. And they're manufacturing in U.K., Puerto Rico and the U.S. The U.S. is upstate New York. Our major distribution centers are in the U.K., Belgium and the U.S., which is also upstate New York.

Looking at the industry. To give you a flavor of what the industry is doing, we're looking at a growth rate of 4% to 6%. So if you look at the various lens category, multifocal, toric and sphere, you'll kind of get a sense of where they're growing. Cooper Companies has always been known as a specialty company. We are the company that did the lenses that, really, were the advanced vision correction. And when you look at lenses like the torics and the multifocals, those are more advanced vision correction than the sphere. We have held about 30% market share in those 2 categories. So you can see the growth, multifocal growing the most. And the main reason for that is we're having people, like myself, stay in contact lenses longer than normal. Usually, when we get to that 40-, 45-year range and you find your arms aren't quite long enough to do the reading you want to do, people drop out and they go to glasses. Multifocals are the most difficult lens to fit because you have 3 different vision ranges that you're focused on. And what we're seeing is people, because of the technology and the comfort, are staying into their 50s and 60s wearing the multifocal.

A look at geography. Starting off, EMEA is our Europe, Middle East and Africa. You can see geography-wise, or geographically, our growth is about the same. Americas, we've got the BRIC, Brazil is in there, we've got Mexico and other Latin American countries bolstering some of the growth. Asia Pac, you might say, well, I would expect Asia Pac would really be growing like crazy, why is it only growing at 5%? And the reason being is that in Asia Pac is Japan. And Japan is a very mature contact lens market, about $1.4 billion, and growing at about 1% to 2%. So from that perspective, Japan is kind of holding the regions growth rate down, but we are seeing strong growth in places like China and other Asia countries.

Looking at what drives the market. So if we look at the contact lens business, what is actually giving us the growth? We talked about the geographic expansion, so that's one piece of it. So wearer base, we started to touch on. So in the wearer base, we're starting to see kids, where usually 12 to 14 would get into contact lenses, now seeing people getting into contact lenses at 10 -- 10 to 12. So people are getting into contact lenses earlier. We're seeing people at the other end of the spectrum staying in contact lenses longer, and so that combination is growing the market. Presbyopse are the people who can't get their arms out far enough to read the paper, so people like myself who are getting up in age and are wearing more of the multifocal, bifocal. Better comfort, the whole industry is about comfort. The more comfortable you could make the lens, the less dropout you have of people wearing contacts.

Increasing myopia and nearsightedness, there's been a couple of the studies. One study would suggest because myopia is increasing in some cases in certain countries at an alarming rate, and part of it is people suspect using computers, using gaming toys where people are closely focused for hours at a time are creating more and more myopia. The other study I've seen, and I'm not a doctor or a scientist, but the other studies talked about people coming out of daylight and going into more artificial light. And that when they've seen cultures or groups of the people switch from being outdoors a lot to indoors a lot, they've also seen an increase in myopia. So just something to keep in mind.

The last place where we're seeing growth in the industry is what we call pricing modality. The first one is we have hydrogel material, we have silicon material. And silicon is the newer material, considered a premium material, breathes better in oxygen to the eye. And so what we're seeing is practitioners are trading people up from hydrogel to silicon, and that's usually a 20% to 40% uplift. The other area is single-use lenses. So we're seeing people go from monthly or 2-week lenses down to daily. And that, from a practitioner standpoint, you see 4x to 6x the patient revenue, 3x to 5x the patient profit on those lenses. So that's kind of, if you look at it, those are the growth dynamics of the market.

The next thing, which I found interesting when I first saw this slide a couple of years ago, is each geography kind of has a modality. And a modality is daily, 2-week, monthly. It's a period of wear. And in that, you'll see in Asia Pac, 1 Day is 59%. And the reason why this number is so high, one is Japan. Japan is a large daily market, and I won't go into it here, but there's a lot of history that goes behind why Japan had switched out a longer-term lens to a daily lens. If we go to Europe, Europe has been pretty steady for a number of years. You'll see their largest modality is monthly, it's at 48% with 1 Day being a close second. And then you go to the Americas, and Americas is a 2-week segment. And one thing that we're excited about at CooperVision is that we weren't efficiently or effectively competing in 2-week once until we a got Avaira back in the market. And now with our Avaira lens, we're back in the 2-week space with good opportunity. The other thing that's interesting, if you look at 1 Day at 21%, 3 years ago, that was 11%. So in 3 years, a huge, almost doubling, of the 1 Day.

If we look at patient fits, we're starting to see patient fits going out of 2-week going into monthly and going into daily. So we are seeing the continual trend for dailies in Americas to go up. Market share, we look at our market share, we've grown market share over the last few years, going from 15% to 18%. A lot of that is on the -- the basis of our new silicon franchise. We were late getting into silicon. We provide hydrogel lenses, we provide silicon lenses, we provide all modalities. So we were late getting into silicon, and so we started to regain some lost share, and really building a good pace of market share based on our silicon family led by Biofinity. The other competitors, CIBA and J&J, have been pretty constant over the last few years, and our share probably coming at the expense of B&L and others.

I mentioned about growth, and this is just to pictorially show you that we've outgrown the market 1.75x to 2x times the market. So you can see in the current year '12, this is the CLI data, the Contact Lens Institute data. Market grew 5%, we grew 11%. In the fourth quarter, the market grew 5%, we grew 10%. So again, good growth coming from our dailies and our silicon family.

Looking at some of the actual products. You can see our Proclear 1 Day, non-silicon material actually doing very, very well, one of our best performing 1 Day product. 2009, we see the Biofinity Toric, 2010 Avaira Toric. We just relaunched the Avaira Toric at the end of last year. That is doing well. We saw Avaira, the family, go up more than 50% year-over-year, so good growth this past quarter. Biofinity Multifocal, fairly new, we launched it probably about 18 months ago. But we've not launched it globally, we're continuing to launch it in more and more places. Doing very, very well. I wear this lense, love it. It's probably one of the best lens on the market, in our opinion. And we're really seeing some good growth out of it. Proclear 1 Day multifocal. I actually also wear this one. When I'm traveling, I usually throw a handful on my bag so I could skip the solutions and just pull out the lens when I need it. And that is also -- that was launched just a few months ago and is also doing very, very well.

Finally, the silicon hydrogel 1 Day. A brand new -- a brand-new lens, we've been trialing it out in Europe, in various parts of Europe. It's done very well, the clinicals have gone very well. We're very excited. We still see silicon 1 Day as a niche market, but we do see the fact that, that market will develop over the next 3 to 5 years. It's really not about lens quality, but more about cost to manufacture. Silicon is more expensive. All of us, J&J, CIBA, ourselves, have to be able to get the price, the cost of that lens down for that lens to be a viable market lens.

At CooperVision, again, I mentioned that we had our earnings call on Thursday night. CooperVision grew total sales $301 million, grew 12%, 14% in constant currency. And that was on the strength of our silicon family and our 1 Day family.

Sales by geography, if you look at Americas, grew 18%, Europe grew 7%, Asia Pac grew 10%, 17% in constant currency, which bears the differences in the yen. The yen has had a big impact on us. We have $200 million plus in Japan annually. And so we definitely feel the yen.

Looking by category, and I won't go through each of these. But generally, each category is growing 12% to 13% in constant currency. Our multifocal, as I mentioned before, 31%. So really strong growth, real strong growth against the market. If we look at material, our silicon family grew 38%, 40% of our total volume is in silicon now. And then our Proclear family, which we've had for some time, led by the 1 Day Proclear lens, up 7%, 8% constant currency.

Let me spend a little bit of time on CooperSurgical. Again, our premier women's health business, focused on OB/GYN and in vitro fertilization. They're headquartered in Trumbull, Connecticut. And they also have core operations not only in Connecticut, in the U.S., also Texas and a couple of other states, but also Denmark is our headquarters for Origio, the company we bought last July. Surgical announced sales of about $78 million, up 37%. 1% excluding acquisitions, which is basically excluding Origio.

On the conference call, Bob, our CEO, threw out the -- a 7% growth number. And that number is really focused on the fact that we had an in vitro fertilization business called SAGE. We bought Origio. When you start to integrate those businesses, some of the lines start to become fuzzy, as they should. The better you integrate, the more you lose both businesses and you have one business. So if we had Origio all the way back in the first quarter last year, our growth year-over-year would have been about 7%. That's our estimate, our base CooperSurgical growth.

Outside of IVF, we have 2 other businesses. One is the office, so the OB/GYN. The other one is the surgical procedure, the surgical/hospital. And so we had some tough compares this year versus last year. We had some strong growth last, year Q1 '12. So in the office space, we actually saw that decline 3% year-over-year. In the surgical space, that actually increased 9% year-over-year. And again, both of those are against some very strong comparison the prior year. If you look at the percentage of our business, you can see fertility now is about 30%, our office is about 38% and surgical 32%. So all of those businesses are pretty close.

For those of you are tracking women's health care and medical devices, a lot of these names you probably resonate with or you'll be familiar. These are the acquisitions we've done over the last few years, 30 acquisitions since inception. Again, the business model, this business is really to go out and identify leading edge and new technologies in women's health care, again, specific around OB/GYN and IVF, and add that to the portfolio. CooperSurgical is in a unique position that we've amassed a portfolio that is not a direct competitor with anybody. Each of our products have competitors, but nobody has put together this kind of a portfolio.

So in summary, let me just leave you with 5 key takeaways for our business. First is we're operating in 2 solid markets with high barriers to entry. If you look at contact lenses, capital intensive, but it goes beyond capital. It goes to -- we're building a device that goes in somebody's eyes. We have a relationship with doctors. We have worked with the FDA. We -- there's a lot that you have to do to be in this business, and so you can't just step into this business. On CooperSurgical, I mentioned the portfolio. Again, we have competitors on every products we have, almost, except nobody has the portfolio. Nobody can take on the whole portfolio. So we're a one-stop shop for our doctors and for the hospitals in a lot of the OB/GYN products.

Revenue growth exceeding market. We see that on both businesses. It's harder to pull out for CooperSurgical because we don't have a one-on-one competitor. Easy for CooperVision and again, this past time grown over 2x the market. Looking at investing in the infrastructure, very, very important. As we look at our infrastructure, it's not just putting in the capital in place, which we're obviously doing, and focused on getting stronger the 1 Day market and the 1 Day silicon market. It's also putting the feet on the street, the marketing that goes behind it, social marketing. If you look at the fact that, that is changing the way that the world learns about products. A lot of our products in CooperVision are kids, and kids are into social media. So how do -- what does that mean? So looking at the structure for that, investing or looking at position for long-term objectives and track record of success.

I think when you put both of those together, we have put that business together, both businesses, so that we can hit our objectives. We've done great in outgrowing the market on a revenue side. We've improved our gross margins. We brought down our debt. We have been able to do acquisitions, tuck-in acquisitions, in a variety of our businesses including geographic expansion. We've really positioned ourselves well. And if you look at our list of products, we sell all modalities, we sell hydrogel and silicon, we do private label, we really opened our business up and really feel that we're in a great position as we go forward from today, which has had great success over the last few years, a tremendous first quarter, and going forward now for the next few years, we feel we're very, very well positioned to build shareholder value in the coming years.

With that, thank you for attention. And I know we do have a breakout session in a few minutes, I think, down the hall.

Matthew Taylor - Barclays Capital, Research Division

Yes, the breakout will be in Poinciana 4, so we'll break...

Gregory W. Matz

Great job, Matt. Sorry about that.

Matthew Taylor - Barclays Capital, Research Division

Okay. Well done. Thanks. Thank you for your time.

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