COO
#Overall, we've been saying 4% to 6% without necessarily saying any particular number in that range.
So, did we dial down this year a little.
A little.
Yes, there's no doubt that the combination of UPP has taken a little weight off of it, so that this year, 2015, I don't see us being at the top end of the range.
Having said that, I think if you adjust for the VAT year over year on a trailing 12-month basis we're still at around 4%, which is the bottom end of that range, and I would expect improvement going forward.
I made a comment in my comments on the guidance that it really is a combination of, FX is a factor, and the other factor is rationalization of the portfolio, the legacy products that come into play.
We did indicate when we put Sauflon together with our product line, we had some decisions to make on which we would promote, which we would redirect, which we would discontinue.
So, it's factoring in a bit more cannibalization/rationalization.
I would say in our revised guidance we think we've factored the current thinking.
Having said that, I would not say we've concluded all the challenges of what to do with the plethora of legacy products we have on both sides of the aisle.
So, in some degree, in some cases we're taking a product into a private label modality and it will survive.
In other cases, it will not survive.
That is not a concluded exercise at this juncture.
From a tax perspective, again, we've had some normal discretes that we normally do in the quarter.
We have incorporated Sauflon, which has gone well.
And, so, it's nothing really out of the ordinary that we've seen in the prior quarters.
The rate is a little bit low.
Rates do fluctuate.
We felt comfortable looking at the full year that the rate would be a little lower than we had originally guided to.
And, again, it just takes an opportunity to see where the tax laws are going and now we feel comfortable with that 8% to 9% range.
Okay, a couple things.
We obviously talked a lot about product ramp-up with our new products, clariti and MyDay.
So, the fact that we'll, among other things, be rolling out, launching MyDay in the US in August.
And when it comes to clariti, the ramp-up of production has gone very well.
We're actually ahead of the curve there which gives us a little bit more muscle and power in the marketplace.
Keep in mind, in the second quarter with the clariti roll-out in the US, we were still in a bottleneck getting the supply channel freed up, getting fitting sets out.
Now, we're in a pretty robust roll-out of our fitting sets and are optimistic we have the supply channel coming onboard to better service the quarter and the roll forward.
Yes.
Part of the step-up relative to the year-over-year growth is easier comps.
In the second quarter, of course, we had Japan and the VAT which was a substantial hurdle, as we can see from the Asia-Pac numbers, the fact that they're down for the calendar quarter substantially 6%.
I'll take the first one.
CooperSurgical, we understand the revisiting of that with the things going on between our rationalization of the product line and IVF, the foreign exchange hit we had in IVF, which is an offshore business predominantly, and then now coupled with the mesh and the mocellator issues in the US.
We think that's short-lived.
We're very excited for the new product pipeline that is now coming through surgical, and we see the IVF business as very attractive long term once we're through the rationalization period.
We like that side of it.
The fact that there is minimal CapEx and it generates a lot of cash flow and it fits perfectly in our tax structure.
And with that I'll turn the tax side over to <UNK>.
Yes, and <UNK>, as you know, we don't give guidance on the tax rate going forward, but there's a lot that goes into it.
There's geographic split of income.
There are discretes that we have year to year.
So there's a lot that we look at.
And also tax law changes.
There's a lot happening on the forefront.
So, at this point in time, with our current structure, we ran over the last three or four years, we've been in that non-GAAP tax range of around 9%.
I think there's nothing that we see at this point in time that dramatically changes that.
Great question.
The data we look at is also known as GFK data.
It used to be HPR in the past.
Now there is new data.
But the same concept is basically on eye.
It doesn't populate everything but what it does populate looks very good relative to the traffic into the eye care professional.
What we're seeing in the industry going out the door is not a true picture of what is happening in the on-eye part of the industry, which is good news.
It means that once the pipeline gets realigned to wherever it needs to settle out post UPP ---+ let's say it should settle out at some time in the near future where we catch up with the robust growth of the on-eye part of the industry.
So, we're optimistic about that.
I think your read is right, that the first calendar quarter was robust.
April was okay, part of that is comp related.
The long and the short of it is we say one quarter does not a trend make, whether or not you're looking at fiscal or calendar.
Look at a lot more than that.
And there's nothing we see particularly anomalous relative to the month of April that comes into play.
Yes, on UPP, obviously most of the manufacturers are only dealing with some new products they've rolled out.
UPP to us, while we can't predict what it means from a legal point of view, there's obviously legal activity that goes on in various proposals.
Net-net-net, Cooper doesn't weigh in one way or the other.
If it goes away tomorrow, that's okay.
If it stays, that's okay.
What it means in the marketplace on average realized prices, are the prices going up from the manufacturer or down.
Suffice it to say, there seems to be more arguments that some manufacturers are net up in their pricing.
But having said that, that's a little difficult as an assessment because, in most cases, exchange A's, they're all about new products, so that's an arbitrary assessment, is it net up or net down or just a new product launch and a technique.
So, remains to be debated there.
I think manufacturers are doing their price strategy as they see fit, with or without UPP, which means, at the end of the day, we're going to position products, if it's going to be in the premium market, the way we want, if it's going to be in the mass market, the way we want.
And coupons and other vehicles that have been around forever will traditionally play into that.
And it's like UPP is just another marketing strategy, if you will.
So, it's no big deal to me but I know it's a bigger deal to a lot of people.
Sure.
The operational efficiencies that are going well, we're ecstatic about two things.
One is the production ramp-up with related lower cost of goods.
That will ripple its way into more the tail end of our gross margins in the fourth quarter, because we see some of that coming through.
On the SG&A area, the integration around the world has gone very efficiently, particularly in Europe, which is getting the brunt of a lot of the rationalization and realignment.
So, all of that has gone extremely well and we're more optimistic about the amount of synergy we're getting out of that integration.
I think <UNK> mentioned in his script you've got a little bit of product rationalization.
And part of that you also have to step back and look at what we did in Q2.
So, a good chunk of that comes from the fact in Q2 we were light, and probably based on various guidance, the actual's probably somewhere around $9 million.
So, taking that off, you had some currency impact there.
And as you go into the second half, you've got a little bit of currency impact and then you've got again the product rationalization and maybe cannibalization.
I think we're saying about $3 million of FX in the back half.
I don't want to overplay how advanced we are in terms of having done it all.
We were very successful in unbottlenecking what we wanted to get out in March and in April.
As of the end of the quarter, or about now, we're north of 20,000 fitting sets.
Keep in mind that some accounts have three different fitting sets, and that 20,000 is the combination of multifocal, torics as well as the spheres.
Relative to the total market, the total market is over 37,000 fitters, of which let's say 30,000 is the total.
We have a long way to go to address all of that market with all of the types of lenses.
But obviously we're doing that in a prioritized manner, but not always doing just the Cooper accounts.
We also are, to a degree, going after our competitors' choice accounts which is something they would be frequent to reciprocate on that.
So, the long and the short of it is the roll-out of fitting sets is a multi-year program.
It's not going to be done in total just the next 12 months.
We're far from saying we're there already on that.
I think where we are is, this year we're expecting to be north of the $200 million we've talked about.
And it wouldn't surprise us to be in the range of $50 million to $75 million less next year than we are this year.
For example, if we finished this year at $225 million, just to pick a round number, someplace north of $200 million, and it came down $75 million to $150 million, it would be in that level, $50 million to $75 million of incremental free cash flow, combined with improved profitability would get us to that $300 million-ish range of free cash flow.
As far as sustained, if we talk about the sustained CapEx rate, where we're going north of $200 million now, it clearly will be well below that $200 million and probably below the $150 million mark post 2016.
What we have done the last couple years is built a lot of the bricks and mortar, spent a lot of money on what we call Speedwell in the UK and Costa Rica, our facility there, building the bricks and mortars.
As I indicated in our capital requirements, the cost of a line for Sauflon's production for silicone hydrogel is one-third our cost.
So you're talking about a huge model change on capital requirements for the same level of throughput capacity.
So that's why we're pretty optimistic not only about 2016 but the go-forward period.
It's probably a little early to give too much substantive feedback on the US opinion leaders.
But suffice it to say MyDay has been in the market for several years now in Europe, so we have a pretty good read on how it compares to others in the premium category where it's headed.
So that's clearly Total1 and TruEye.
We feel good about MyDay in that space and how the market should handle it.
I think that's where we come into play, because if things continued the way they were, with only premium silicone hydrogels, then your model would be you'll never get there because not everyone can afford a premium one-day silicone hydrogel.
Our whole thesis is we want to make it available for everyone and the sweet spot of the market, which is the Moist spot of the market, where the masses are.
Now you're talking about moving that paradigm to never getting there to probably still five- to seven-year period to really significantly influence.
The one thing going for us is we already have a lot of converted masses so that eye care professionals already know they like it in the two-week and the monthly market.
What's going against us is you're now dealing where 730 lenses are a lot to buy.
So, to the extent someone is really price limited, they're going to look for the bottom of the basement on what's a good product at the lowest price and that may mean they don't go with a silicone hydrogel.
So, I think that part of the paradigm is really, when we talk about it will take you a lot longer to reach much further down, which would with more cost of goods reduction play if it's going to really get there.
I think it will move quite a bit but it's not going to move quite as high as we are in the two-week and the monthly.
All right.
As far as the use of the platform, suffice it to say our pipeline of products and product rationalization, certain products will not be able to make, at least in any short-term sense, a migration from an alcohol product to a non-alcohol product.
So, we would not be able to take a Biofinity and an Avaira and move them onto a Sauflon platform as we know it.
Having said that, is there mixing and matching of temps going on.
Of course, in R&D.
So, we're looking at future generations of products.
And looking at future generations of products we obviously will have a bias to take the know-how we now have and leverage that as best we can.
Having said that, we have so much to do in terms of the ramp-up and roll-out of clariti, as we now know it, that it's going to keep us busy for several years.
So, even if we did have a magic bullet that could take one of our existing products onto that platform, we're still limited in terms of capacity for the near future on that platform.
But as I indicated in my commentary, that's something that's the ease of expansion is proving reasonably easy by way of the cost of the equipment, the time frame of getting the equipment in.
So, two years from now we're looking at a different discussion on that.
As far as free cash flow, go ahead, <UNK>.
I think, Matt, when it comes to debt, we were happy with being able to pay down the roughly $47 million worth of debt.
And I think next year as we have more free cash flow, obviously our uses of cash stay the same ---+ organic investment, M&A, debt paydown is obviously one of those and we would definitely be looking at the opportunity to do that as the quarters progress.
So, yes, that's definitely one of the things that we'll be paying attention to.
How much, I don't want to get into exactly how much it is because there's a lot that plays out between now and then.
I think, <UNK>, just going on the earnings, it really comes down to ---+ the guidance seems similar but if you look at, let's just take gross margin.
We said it was around 63%.
We're now seeing it being north of 63%, so we're seeing it sliding up a couple of tenths here and there.
Operating margins, the same thing.
Taxes is definitely ---+ we were guiding originally 9% to 11%, and now we're looking at 8% to 9%.
We've dropped our shares a few hundred thousand shares.
So you put all that together, from the standpoint that we're feeling comfortable with our mid point now and we definitely want to make sure again we feel good about the second half, so I think we're good where we're at this point.
As far as product rationalization and cannibalization, there always was the expectation that we would rationalize.
There also was always the expectation that some of the clariti roll-out would cannibalize and the whole of Sauflon would cannibalize part of our portfolio and others.
The introduction of clariti into the US, for example, the whole plan is to cannibalize, if you will, the sweet spot of the market, which J&J's Moist.
Meaning we're trying to switch out as well as get the new fits in the marketplace.
We're directly targeting their wearers.
That was always part of the plan, and it was always part of the plan to have some cannibalization as well as some rationalization in the guidance we were coming out with.
The comment on the $90 million drop in revenue at the mid point from December, that was very indicative of the fact that, as we've gotten into Sauflon, we see a lot more synergy coming to play, and are really impressed with their ability to cut costs.
Were it not for that, with the foreign exchange hit we had, you would have seen a real degradation of gross margin, which you're not seeing, in the numbers.
So we've been able to hold onto the gross margin that otherwise would have been penalized by the amount of foreign exchange hit we've taken along the way.
Yes.
I think in my comments I alluded to some of our legacy products, which would be your two-week and your monthly, and in particular your non-silicone hydrogel families are being, if you will, impacted and some of them we're discontinuing.
In those areas we're talking about, we've been able to take off the top and hold the bottom line by just having a more efficient higher gross margin product portfolio.
Of course selling the one-day and going from a two-week or a monthly to a one-day is of course a trade-up of revenue.
Relative to gross margin, the gross margin is considerably more attractive than what we initially thought about the one-day modality.
Said another way is, whereas in the past we said think of the model as 50% for one-day at the gross margin line, but a much smaller operating cost, we actually are seeing margins that are north of that 50% with clariti.
So better gross margins.
ASP, yes, you can't compare the ASP on a sell to sell basis.
You obviously are comparing a monthly, use 24 lenses or a two-week, which happens to use 24 lenses even though it should use 52, then obviously you're going to get a much lower ARP with a much higher revenue in aggregate with that switch.
We look to the OI line when we do those tradeoffs.
The profitability of switching out to some of these products on a profit per patient basis is enormous if we can switch them out from a two-week to a daily, for example, in the process.
I think anyone that's cracked the reported numbers of us and our competitors know there is some pretty big market share shifts going on surrounding that.
And you're correct, the big box retailers have been more vocal, as we know, in some of that shift, or reactionary, if you will, to what at least one of our competitors did in the marketplace.
Now, that's a two-way street because obviously not everyone is an independent eye care professional and not everyone is a retailer, and there's a whole bunch of gradations in the middle.
So, it's not one size fits all.
But net-net-net, you can see Cooper's numbers that we're putting up are pretty robust.
I want to thank everyone for their participation and questions.
And we look forward to updating you on the progress we're making and the MyDay launch that happens in August when we're on the phone for our next call, which is September 3, I believe.
And with that, operator, thank you.
