Thank you for standing by, and welcome to The Cooper Companies Second Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I'd now like to turn the call over to Kim Duncan, Vice President of Investor Relations and Risk Management. You may begin.

Good afternoon, and welcome to CooperCompanies' second 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 will contain 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 under Quarterly Materials. Should you have any additional questions following the call, please e-mail ir@cooperco.com. And now, I'll turn the call over to Al for his opening remarks.

Thank you, Kim, and welcome, everyone, to today's call. I'm pleased to report record quarterly revenues and great operational progress throughout our organization. CooperVision returned to double-digit revenue growth, driven by our portfolio of leading silicone hydrogel lenses, and CooperSurgical posted a solid quarter despite some unexpected challenges with the system upgrade impacting our US distribution center. Margins improved as we leveraged prior investment activity, and we delivered excellent earnings growth. As we move forward, we're increasing our revenue and earnings guidance by incorporating this past quarter and the momentum we're seeing in our markets. Moving to the details, and reporting all percentages on an organic basis, consolidated quarterly revenues were a record $943 million, up 8% year-over-year. CooperVision posted record quarterly revenues of $636 million, up 11%, led by strength in our daily silicone hydrogel portfolio. And CooperSurgical posted revenues of $307 million, up 4%. Margins improved, and non-GAAP earnings per share were $0.85. For CooperVision, the Americas grew 10%, EMEA 14%, and Asia Pac 7%. All three regions were led by our innovative product portfolios, market-leading flexibility and strength in key accounts. Within categories, torics and multifocals combined to grow 12% and spheres were up 9%. Within modalities, our daily silicone hydrogel lenses, MyDay and clariti grew 18% and our silicone hydrogel FRP lenses, Biofinity and Avaira, combined to grow 10%. And our myopia management portfolio was up 17%, with MiSight growing 39%. All-in, a very nice quarter with strength around the world and throughout our focused product portfolio. Turning to product details, and starting with our high-growth daily silicone hydrogel portfolio, we had another fantastic quarter with MyDay leading the way delivering outstanding results. MyDay is growing in every market and every category, with particular success in our innovative toric and multifocal products. Our ongoing toric parameter expansion launch across North America and Europe is enabling eyecare professionals, or ECPs, to fit more wearers in our market-leading design and industry-leading SKU range, which is by far the widest toric range in the daily market. And MyDay multifocal's unique combination of an advanced multifocal design paired with an easy fitting system has resulted in very high satisfaction levels, including a 98% fit success rate in two pairs or less. We continue to receive very positive feedback on this fantastic lens, and I continue to count myself as an aesthetic wearer of what is without a doubt the best multifocal contact lens in the market. We've also seen success with our MyDay spheres, especially with our Energys product, which is showing very strong growth. Energys is driven by its innovative DigitalBoost technology designed specifically for today's digital lifestyle and this meaningful technological improvement is important to contact lens wearers and to ECPs. Given the strong performance of this lens in the US, we're excited to launch it in additional markets in the near future. Moving to clariti, our other complete family of silicone hydrogel daily lenses, also remains a growth driver. ECPs love this product for its comfort, easy handling and affordability, which makes it an especially good choice for new wearers. It continues to be an important driver in expanding our daily wearer base with noted success in upgrading legacy hydrogel wearers. Outside of dailies, demand for Biofinity and Avaira remains very healthy. The Biofinity portfolio has continued expanding beyond the traditional ranges of spheres, torics and multifocals into expanded ranges, made-to-order lenses, toric multifocals and Energys and now provides ECPs the ability to fit an amazing 99.9% of patient prescriptions. This is an incredible manufacturing accomplishment and a fantastic benefit to those patients who require the most complex types of vision correction. This is a true differentiator in any office and one of the reasons Biofinity remains so successful. With new state-of-the-art manufacturing lines now in service, we'll be expanding availability of these lenses in existing markets and launching in new markets in the near future. Moving to myopia management, MiSight continues to gain traction, powered by healthy demand. Asia Pac posted a record quarter, EMEA was strong, and the Americas reported a record month in April, although revenues were negatively impacted by a reduction in channel inventory during the quarter. Our back-to-school promotional campaigns are starting soon and we expect robust results based on the success we saw last year. So, we're expecting strong results in the back half of this year. In the meantime, we're marking a milestone anniversary for MiSight with 2024 being the 10-year anniversary of the pivotal MiSight 1 day clinical trial which led to MiSight becoming the first and still the only FDA approved optical intervention for myopia control. This study remains a gold standard in clinical trial study design and duration for myopia control in the longest running study of contact lens wear in children. CooperVision's commitment to establishing myopia control as standard of care continues and can be seen via two important initiatives launched this quarter. First, as part of the continuation of our exclusive partnership with the World Council of Optometry, we've launched the digital Myopia Management Navigator tool available to ECPs around the world. This interactive toolkit provides practical tips and resources to help offices integrate myopia management into their practices. Second, CooperVision and the American Optometric Association have partnered on a groundbreaking initiative, the Myopia Collective, to rally US ECPs to adopt myopia management as a standard of care for their pediatric patients. The program is currently recruiting 51 ECPs representing each state plus the District of Columbia who will work proactively with the AOA and CooperVision to advocate for community and policy change. To conclude on contact lenses, the market grew roughly 5% in calendar Q1 with Cooper taking share up 7%. We continue to expect a robust market moving forward driven by several positive long-term macro growth trends. And within this, we expect to remain a leader with our innovation, robust product portfolio, ongoing product launches, strength in premium products, fast-growing myopia management business and leading New Fit data. Moving to CooperSurgical. We posted quarterly revenues of $307 million, up 4%. Demand was strong, but a systems upgrade caused shipping interruptions in our US distribution center for our medical device and fertility products. We were largely able to overcome this with strength in PARAGARD but not entirely. Having said that, we've made a lot of progress and we're comfortable we'll manage the backlog and reach our full year organic revenue guidance range, which remains unchanged. Implementing IT infrastructure upgrades can certainly be challenging, but this type of work is critical to our long-term success as it supports efficient growth, creates a better customer experience and makes internal operations more effective with improved real-time data. Moving to fertility, sales were $124 million, up 4%. We continue seeing strong demand around the world with our leading products and services continuing to position us well with fertility clinics as they open new facilities, upgrade existing locations and look for opportunities to improve outcomes and optimize our operations. We're also investing for the future, opening new donor sites, providing extensive training in our centers of excellence, expanding geographically and accelerating innovation. Our focus on investing and delivering the most innovative and advanced solutions to fertility clinics and patients remains unmatched. This includes the first and only European approval for a uniquely formulated 1-Step media. This specialized culture and transfer media reinforces embryo-endometrial communication from improved embryo development, sustained implementation and pregnancy. Similar to the advances we're making in fertility-based genetic testing, the science is complex, but the goal is straightforward, providing innovative, market-leading technologies to improve the journey to parenthood. Developing and 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. Regarding the broader fertility industry, this dynamic market is supported by several positive macro growth trends, including women delaying childbirth, increasing patient awareness, greater benefits coverage, technology advancements and improving access to treatment. The World Health Organization highlights that one in six people will be affected by infertility at some point in their lives, so this is an issue that impacts a lot of people and will do so in the future. As a leader in this space, we remain incredibly committed to advancing the industry by delivering innovative products, standing in support of patients and clinics, and improving access to treatment on a global basis. Moving to office and surgical, we posted sales of $183 million, up 4%, with medical devices declining 6% due to the previously mentioned shipping challenges. Stem cell storage was up 5% and PARAGARD up 22%. Within medical devices, demand was healthy, driven by our minimally invasive gynecological surgical products led by our ALLY Uterine Manipulator portfolio. And our labor and delivery portfolio is now arguably the most comprehensive obstetrics portfolio of medical devices ensuring the safety of mothers and babies and demand remains strong. Our stem cell business had a solid quarter and PARAGARD outperformed expectations with the benefit of stocking related to a mid-single digit price increase. This stocking will naturally offset itself largely in fiscal Q3. To conclude on CooperSurgical, with our expanding obstetrics portfolio of products and services, we can now update our impact to the global community and say that roughly every 30 seconds somewhere around the world, a baby is born using CooperSurgical products. We're making a difference in people's lives and that makes this business very special. To wrap up, let me add that we just released our latest ESG report, which highlights our efforts around environmental sustainability, corporate social responsibility and strong corporate governance. It's on our website and well worth reading when you have a chance. We are passionate about sustainability and I'm thankful to our employees around the world for their commitment to doing things the right way. So with that, let me say thank you to our 15,000-plus employees for their continuing hard work and dedication as they drive our success. And I'll now turn the call over to Brian.

Thank you, Al, and good afternoon, everyone. Most of my commentary will be on a non-GAAP basis, so please refer to our earnings release for reconciliation of GAAP to non-GAAP results. For the second quarter, consolidated revenues were $943 million, up 7% as reported, and up 8% organically. Consolidated gross margin was 67.3%, up from 67.1% last year, driven by continuing efficiency gains in price. Operating expenses grew in line with revenues, with SG&A showing leverage and R&D growing faster. Regarding R&D, we've increased our investment activity in several exciting areas to ensure we remain a technological leader by continuing to launch some of the most innovative products in our markets. More to come on this as products are developed and launched. Consolidated operating margin improved to 23.8%, up slightly from 23.7% last year, led by the gross margin improvement. Below operating income, interest expense was $27.5 million, and the effective tax rate was 13.5% due to the positive impact of stock option exercises. Non-GAAP EPS was $0.85, up 10% year-over-year, with roughly 201 million average shares outstanding. Free cash flow was $37 million, with CapEx of $74 million. Net debt decreased to $2.6 billion. Foreign exchange negatively impacted earnings by $0.07 in the quarter, which was $0.01 worse than we were expecting at the time of our last guidance, even with a positive offset from our hedging program. To summarize fiscal Q2, this was a solid quarter. CooperVision returned to double-digit growth. CooperSurgical made tremendous progress, implementing system upgrades, and margins improved year-over-year, even against currency headwinds. Tax and FX offset one another, and we delivered a strong bottom-line. Moving to fiscal 2024 guidance, we're increasing expectations for revenues and earnings by incorporating our Q2 performance and the momentum we're seeing as we enter the back half of the fiscal year. This results in full year consolidated revenues of $3.86 billion to $3.9 billion, of 7.5% to 8.5% organically. For CooperVision, we're increasing our guidance to $2.59 billion to $2.61 billion, up 8.5% to 9.5% organically, driven by healthy demand and improving capacity. For CooperSurgical, our organic revenue guidance is unchanged at 5% to 7%, which equates to $1.27 billion to $1.29 billion. Interest expense is also unchanged at roughly $108 million, which assumes no interest rate changes by the Fed for the remainder of our fiscal year. And for tax, we're forecasting a full year effective tax rate of roughly 14%, assuming no additional discrete items. Given all this, we're increasing our non-GAAP EPS guidance to a range of $3.54 to $3.60, up 11% to 13%. Regarding currency, the impact from FX is roughly $0.02 worse in the back half of the year compared to last quarter's guidance, but we expect a hurdle that with stronger operational performance. Lastly, on quarterly gating, we anticipate non-GAAP EPS to be higher in Q4 than Q3. This is primarily the result of a lower gross margin in Q3 associated with higher cost contact lens inventory rolling through the P&L in Q3. Currency is also slightly more negative in Q3 than in Q4. In summary on guidance, we're raising CooperVision's growth rate to reflect improving capacity, leaving CooperSurgical's growth unchanged, and raising our non-GAAP EPS range by $0.04 on the bottom and $0.02 on the top, even against the negative impact of an additional $0.02 from FX in the back half of the year. To conclude, we remain focused on delivering strong revenue growth and consistent operational performance. Our capacity is improving. We're leveraging prior investment activity. And we're deploying capital with a focus on organic investments, which offer the highest return for investment dollars. Our momentum remains very healthy, and that's reflected in our updated guidance. And with that, I'll hand it back to the operator for questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Craig Bijou from Bank of America. Your line is open.

Good afternoon, guys, and congrats on a strong quarter. So, I wanted to start with the CVI guidance. The revised guidance for the year assumes growth is going to be similar in the second half to the first half despite tougher comps. So, I guess, the question is, what gives you the confidence that you can maintain that level of growth in the second half despite the comps? And any help on how to think about Q3 versus Q4 growth?

Yeah, Craig, thanks. You're right, we do have harder comps. Q3 is a little bit harder even than Q4 in the back half of the year. On the flip side, we have good momentum right now as we enter the back half of the year and we have improving capacity. And as you know one of the things that's held back a little bit is expensive capacity constraints in certain products. So, as some of those challenges start to reduce, right, we're able to put more product out. And I mentioned this before, but we're in a situation where we have demand exceeding supply and we probably will for a while here. So, we know that as we bring these new lines on and produce more product that we're going to sell that product. So, I think it positions us well. So, even in the face of tougher comps, I'm still feeling pretty optimistic about our ability to deliver some strong growth in the back half of the year.

Great. That's helpful. Thanks, Al. And then maybe just on the distribution -- US distribution center for the surgical business, any way that you can quantify what that impact was in the quarter? And then, how should we think about that impact impacting your Q3 and Q4, basically the second half of the year?

Sure. I'm not going to quantify that. I don't like to go into that and say what would have happened if this wouldn't have happened and so forth and speculate around what those numbers are. But they clearly negatively impacted the quarter, right, because medical device, that's a great team, and they put up strong demand again and would have had a decent quarter without the shipping delays. And same with infertility. We grew fertility what 12, 13 quarters in a row at double digits and dipped down to 4% with some of those shipping issues. Having said that, we are proceeding better right now. I mean, we're having a pretty good May. We're working through the backlog and so forth to get ourselves in a better position. So, I'm optimistic as we work through this quarter that we can address most if not all of that and close the year out strong.

Great. Thanks for taking the questions, guys.

Yeah.

Your next question comes from the line of Larry Biegelsen from Wells Fargo. Your line is open.

Hey, Al. Thanks for taking the question. Hey, Al, maybe just talk about the IVF market and your growth. Do you think you can get back to double-digit growth in that business, which we saw for quite a few quarters before this quarter?

Yeah. Kind of following up maybe my commentary to Craig there, I would say the answer to that is yes. As a matter of fact, I think we have a good chance to report a double-digit revenue growth quarter right here in Q3.

Okay. Good to hear. And then, on contact lenses, Al, what are you assuming for price for the market and for your contact lens business this year? Thanks for taking the question.

Sure. For price, I would say we've seen almost everyone take price -- everyone has taken price earlier this year, either earlier this calendar year or for us the beginning of our fiscal year. So, pricing is kind of holding where it's at. I think from a price perspective, the market is still very healthy if you will. When we look at the contact lens market probably growing in mid upper single digits, you're talking about maybe a third of that is coming from price. So, very similar to what we talked about in the last few quarters.

All right. Thanks for taking the questions.

Your next question comes from the line of Issie Kirby from Redburn Atlantic. Your line is open.

Hey, guys. Thanks for taking my question. I, first, just wanted to touch upon the MiSight progress in US and Europe [indiscernible] there this quarter. But wanted to ask about the growth there and whether you're seeing, I guess, a higher number of prescribers or prescribers, essentially, running more revenue per prescriber, basically? And then, your thoughts on potential competition in the soft contact lens market for myopia? And then, I have a follow-up.

Sure. So, on activity, we are seeing both. We're actually seeing more fitters around the world and we're seeing more fitting occurring with those practitioners who are currently fitting MiSight. So, I'm really happy to say that. Now, if I break up those two a little bit, one of the things that's driving more fitters is because we're making progress with a lot of our key accounts. So, some of the bigger names out there, the bigger optical chains and so forth that you would know, are incorporating MySight into their fitting activity. That's maybe moving a little slower than I was hoping because you're going through a lot of training and standardization within those big chains. But that's all moving forward and we're seeing more fit activity out of that. If we look at the doctors who are currently fitting MySight and how active they are fitting MySight, it's essentially universally increased fitting, and we're seeing that throughout the world right now. So, I'm really happy where we are from a fitting perspective on that. We did have a little pull down in channel inventory a little bit here in like the Americas and stuff. No surprise to me in anything that's going on. But I do think we're going to have a pretty strong back half the year. I think Q3 and Q4 are going to be pretty good for MiSight. From a competition standpoint, I mean MiSight is -- it's the first, it's the only product that's approved for myopia control. So there is, as of today, no competition in the market other than people using something off label or people promoting something that doesn't have the clinical data or the approvals of an organization like the FDA.

Okay. That's great. Thank you. And then I just wanted to touch upon some of the areas of organic investment that you focused on, called out heightened R&D investments. Perhaps across both divisions, if you could call out some particular areas you're looking at, anything that's exciting you in the pipeline at the moment?

Sure. Again, I mean, one within CooperVision is probably pretty clear and that's CapEx. We're investing a lot in manufacturing equipment right now to expand capacity. As I was mentioning as you know like we have a lot of demand especially for our MyDay products. We have a lot of things that we want to launch. We want to get out in the market. We want to expand into additional markets. So, there's quite a bit of launch activity that's on hold as we increase our capacity. So, CapEx investments would be a good example. Within CooperSurgical, I could think right off the top of my head on the R&D side of things, we've got some cool R&D things going on within surgical and I won't touch on the specifics behind that, but I look forward to some of those projects coming to fruition. So, between capital expansion and R&D, and R&D within MiSight also we have some good stuff going on, there's definitely some organic investment activity going on as well.

Great. Thanks so much.

Your next question comes from the line of Jeff Johnson from Baird. Your line is open.

Thank you. Good evening, guys. Al, maybe a couple of follow-up questions here. So one, you talked about kind of in your prepared remarks 5% market growth, 7% Cooper growth in the -- I think that would have been calendar 1Q. It's always dangerous to do this, but you put up 11% organic. Does that mean your exit rate in your April month, the month of April, was much stronger than it was the first couple of months of the quarter, number one? And number two, I'm assuming that's GfK data, what's going on maybe sell-in instead of sell-out retail data? Any changes there in inventory? You did talk a little bit about MiSight inventory, but any channel inventory changes or concerns you have US or Rest of World on the channel inventory side? Thanks.

Sure. Yeah, a couple of comments. April was a strong month, no question. I think it was a good month for the industry. May is a good month. I mean, we started the quarter off certainly well. So, I'd say April, May good months in the contact lens industry and certainly our performance shows that. From an inventory perspective, I think you're probably just seeing with the higher interest rates everybody out there who holds inventory trying to reduce inventory levels and take them to kind of the contractual obligated levels. So, if anything maybe inventory is just a little bit tighter as you go through the channels right now. I think you could probably comfortably say that on a global basis.

Okay. Just a follow-up on that. I mean, I'm assuming since you raised CVI guidance, you're not feeling like that's a big risk? And then just on the APAC number being up 7%, we thought MyDay multi going back into Japan, APAC might have been a source of upside this quarter, that obviously didn't happen. Have you just been a little delayed on getting multi – MyDay multi back into Japan, or was there something else underlying in Asia Pac this quarter? Thanks.

Yeah. I would say on the first part of that the risk associated with the inventory contraction, that is not a big deal. We've already had I would say most of our customers reduce their inventory levels. So, I don't see any real risk associated with that right now. We've already kind of worked through a lot of that. If I look at the Asia Pac market, you're exactly right, it's still a capacity issue. That team is a great team. And if we could provide them more MyDay product, they would no question be selling that product. So, right now that's just a capacity issue in terms of where we can get product and ultimately we'll get it there and we'll sell it there. So, yes, that's just a timing thing.

Thank you.

Your next question comes from the line of Jon Block from Stifel. Your line is open.

Great. Thanks, guys. Good afternoon. Maybe just the first one a little bit of a clarification. So, Al, for those distribution center challenges that you called out, you also mentioned the backlog and the thought that you can get that out in subsequent quarters. So, for those challenges, are all those sales calls pushed and not lost? Is it a little bit of a combination of the two? Maybe some clarity there would be helpful. And then, I'll just pivot for the follow-up.

Sure. I would say most of that is pushed. You never really know at the end of the day whether you lose some of those sales or not if somebody's going to change some of their order patterns as they wait for your product. In this case, it was an IT-related upgrade. It's not something that we see going multi quarters. The team has done a really nice job on that. So, I think generally speaking that's more of a push than it is lost sales.

Got it. Helpful. Thanks. And then to pivot to CVI for the second question, you mentioned the good April, arguably good May as well, and we've seen some solid numbers from the market too. So, you did mention the 10% sihy FRP growth, which is a big number, and it seems like it was a little bit of an easier comp, but rarely are you double-digit syhi FRP. If you could just comment on anything to call out with the consumer, modality changes, is there anything there to look into? Thanks.

Yeah, it's a really good question, Jon. And you're right. I mean, that was a really strong quarter for us for Biofinity and for Avaira by the way, which I think was also double digits. Both of those product families did well. I think the one thing that's happening with Biofinity is that we just have such a broad portfolio and there's been a lot of demand on parts of that portfolio as we've expanded the offerings. We've been capacity constrained on a lot of those products for quite a while. We have some new manufacturing lines, some really cool state-of-the-art new manufacturing lines that are producing product right now. So we're able to meet some of the demand that was out there. So, I think you saw some of that in the second quarter. I wouldn't read too much into anything outside of that other than just kind of a broad scope of success within the Biofinity family and Avaira families.

Got it. All right. Thanks, Al.

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

Great. Thanks for taking the question, and congrats on a good quarter. Two for me. Maybe the first one, you showed really nice operating margin and gross margin beats in the quarter despite the warehouse ramp issue. Maybe just speak to some of the specifics of what you're doing? I know it's been a focus for management, but any details on what drove it would be helpful.

Hi, Robbie, yeah, thanks for the question. I'd probably point to -- there's several areas, but one place in particular that we've been talking about a lot over the last couple -- really couple of years is all the investment activity in distribution. And some of that comes with IT and with envision as well. But putting all that together, we're really starting to get leverage from that prior investment activity. We're seeing improvements in our cost of moving product between and among our different sites, but also in shipping out to our customers. Some of this also has to do with kind of influencing some of the customer behaviors around order patterns and so forth. But certainly, our initiatives around trying to drive down our distribution costs and getting more efficient, is one of the really meaningful areas within SG&A that we've seen improvements that have led to operating margin expansion.

Maybe a follow-up for me. I think $0.02 worse currency came in a whole lot better than the fears were -- that I was hearing at least. And I know probably a good part of that was due to, I know you started I think it was fiscal third quarter last year, a hedging program on intercompany loans, which helps limit disruption on the other income line. So just wondering when you look at currency, how much help have you gotten from starting that hedging program? And I'll just leave it there. Thanks a lot.

Yeah. Thanks, Robbie. I'm glad you asked that question, and I put it in my prepared remarks. I think there's a misconception out there that we're not hedging. I mean, we're absolutely hedging. We started last year, but we hedged different FX exposures to mitigate the impact of currency each quarter. And we've been talking about wanting to drive not only top-line beats, but bottom-line beats and part of that is trying to mitigate the impact from currency. And I think we've done a nice job improving on our hedging program. We continue to hedge. And as a result, we've been offsetting the negative impact from currency and we did it again this quarter. So, I'd say more to come, but we're having success there.

Great. Thanks a lot.

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

Hi, there. I'll echo the congrats here on a nice quarter. Al or Brian, I wanted to start on EMEA. The performance there at CVI just continues to be extraordinarily strong. You've been putting up really good growth, covering up what's maybe being held back a little bit in APAC. How sustainable is the run you've got in EMEA? It's because it's been pretty impressive, just like -- we would love to gauge your confidence level in staying up at these low- to mid-teens growth levels. And if you could help us out with what's supporting that with respect to the capacity expansion that's helping, or are these just like just simple wins that you're having with key accounts or other share gains?

Yeah, Jason. I think it's a few of those things. I mean, first off, I mean, Debbie Olive runs that part of our organization and she absolutely kills it. She's fantastic and her team is fantastic. And I couldn't be prouder of what they have been accomplishing over there because the work they have been doing with key accounts and expanding geographically and so forth just been fantastic. So I think when you combine that level of excellence with some of the wins that we're getting in some of the key account activities and some of the new product that's coming into that marketplace as we start to be able to meet some of that demand in the earlier innings of that still, but meeting some of that demand in a better way. You're just seeing all that come together. So, I wouldn't attribute it necessarily to one specific point, but just a lot of really good things happening. It's going to be very difficult to maintain that level of growth certainly quarter after quarter, but I do expect EMEA to continue to put up pretty good numbers moving forward.

Okay. All right. That's helpful. And then, I want to maybe follow-up by with a clarification or a follow-up from Jon Block's question. Just wanted to talk about the pushes and pulls in CSI revenue assumptions for the back half of the year. I know you mentioned clearing some of the backlog. It sounds like you think you're going to get a lot of that back that you lost. Don't want to quantify it just yet, but I think you also said that PARAGARD helped make up some of the losses here in the current quarter. So, I guess just curious how you're thinking about the components of that unchanged or relatively unchanged CSI revenue guide and whether there's any margin implications from those assumptions if like maybe PARAGARD is helping a little bit more in your updated guide?

Sure. PARAGARD, I would expect PARAGARD to be negative here in Q3, probably decently negative. I think I mentioned last quarter, I thought we'd have a strong Q2 for PARAGARD and we did. That will offset itself here in Q3. I would envision fertility, medical device those areas being much stronger in Q3 to offset that. Yeah, PARAGARD has higher margins arguably than some of those areas, but it's not so much that it's going to cause an issue, certainly. And as you can see in the back half guidance that we gave, taking up numbers that we are comfortable. We can work through that.

Okay, great. Thank you.

Your next question comes from the line of Anthony Petrone from Mizuho Group. Your line is open.

Hi, thanks for taking the questions. Congrats on a solid underlying quarter here. Maybe on capacity for contact lenses, just to sort of revisit that, Al or Brian, how far ahead do you think your capacity overall is relative to some of the competitors out there? That will be one question. And then, the follow-up to that would be, just when we look out in terms of this latest CapEx growth cycle here on manufacturing capacity expansion for contact lenses, how long is this investment horizon going to be and when does it actually come to a conclusion? Thanks a lot and congrats on the quarter.

Yeah. Thank you, Anthony. It was a good quarter. Yes, capacity, I think we're probably in similar shape to our competitors frankly right now. We've got capacity. We certainly need more capacity and we have capacity ordered. We have lines ordered and capacity coming in line as we work through this year and through next year. We just have a lot of demand for our products and I think our competitors do too because the marketplace is strong. The overall contact lens marketplace is strong. You're continuing to see a lot of interest and demand around daily products, especially daily silicone hydrogels, and within that, the torics and multifocal category. So, I think that capacity is a little bit of a challenge kind of for everybody to some degree, but I think everyone would say, hey, I'm okay in capacity, and I've got additional lines coming on to meet the demand that certainly seems like it's going to be part of the contact lens industry here for many, many, many years in front of us.

That's helpful. Thanks.

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

Hi. Thank you for taking the question and very nice quarter. I want to spend a little bit of time on operating margins because you're starting to push those up nicely. And I don't know whether it's a new view towards their meaning or new levers that you have to pull or the new FX program that you put into place, but I'd love to get a couple of the factors that are driving that. Thanks.

Yeah, I'll give a high-level answer and Brian certainly has more detail than I do. But I would say that you'll remember over some prior quarters here over the last several years, we've talked about investment activity in our distribution centers and in other areas of the company. And I know we got questions on that why we were discussing it, right? Like, when are we going to see a return out of that? How is that going to play out? Well that's what you're seeing right now. We're in the earlier stages of leveraging those investments that we've done. And those are true within the manufacturing side. Those are true within distribution. And frankly, they're true in some other areas when we talk about some of the IT work that we've been doing and becoming more efficient from an IT perspective. So that investment activity we've been doing over the last number of years, we're starting to see leverage on that and success from those programs. So, I think we're kind of in some of the earlier innings arguably of being able to deliver some leverage through the P&L.

Yeah. I don't have much to add there, Joanne. I think, Al, put it well. I mean, what's nice is that we've got some really, really important initiatives behind us towards the end of last year. So, now we're working on sort of iterating and continuously improving on that activity that we put into service. So, getting that leverage this year has been a little bit easier than obviously it was last year, and we continue to make progress across many fronts.

Excellent. Thank you.

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

Amazing. Thank you so much. Just two quick ones, please. I'd love if you could unpack EMEA and CVI a little bit more, because again, it's another incredibly strong quarter. Just how should we think about the durability given the region growth in general isn't great, but you guys seem to be killing it in that market?

Yeah. I don't know if I'd add too much on top of what I said earlier. Really strong team, great products, well positioned with a lot of the key accounts that we have there. And I think we've got potential for solid growth moving forward. I mean we are running into multiple quarters, years of really strong performance out of that region. So it gets a little bit more difficult to continue to put up that sizable levels of growth. But I'd anticipate we're going to continue to perform well there for all those reasons.

Sure. And then quick second one is, if I can sort of temperature check on capital allocation, because you're obviously running with a relatively unlevered balance sheet. And I know it's challenging to work out like what kind of assets are out there. And I appreciate you did those the Cook assets fairly recently. But how are you thinking about the broader capital allocation landscape going forward?

Well, I would say -- I would answer that by saying number one is organic investments. We touched on that earlier investing on bringing more capital online, investing on creating or expanding products that we have in the marketplace right now. So, I would say there's a lot of focus on that right now, internal investments if you will, which are higher return, lower risk type investment activity. And then paying down some debt. I still don't think there's anything wrong frankly with paying down debt right now. We'll see what happens with interest rates, but we carry a decent amount of debt. Regarding your last point, I mean, if acquisitions come along or we see some smaller tuck-in type deals, like we would evaluate those, and if they make sense, we'd consider doing them.

Sure. Appreciate the color. Thanks for taking the questions.

Your next question comes from the line of Chris Pasquale from Nephron. Your line is open.

Thanks. Al, I wanted to clarify the expectations for PARAGARD. 2Q was a particularly easy comp. You have a pretty tough comp in 3Q. So, it's a little hard to disaggregate the stocking dynamic from just all the lumpiness in FY '23. Do you think sales are going to be down sequentially in 3Q or just down year-over-year? And maybe just frame for us what do you think full year growth looks like at this point?

Yeah. I think full year growth is probably in that flattish to up a little bit. It'd probably be up a little bit depending upon competitor launch or something along those lines. I think we did around $46 million in this quarter. I would sequentially expect that to be lower, Q3 lower than Q2.

Okay. That's helpful. And then, one for Brian on the tax rate. Guidance has walked down from 15% to 14.5% to now 14%, and even getting to 14% would require you to be higher in the back half than the first. So, what's driven it lower? Why should it go back up? And then, is 15% still a good starting point as we look ahead to FY '25?

Hi, Chris. Yeah, thanks for the question. Really, the story behind our effective tax rate going down in the first and in the second quarter is stock option exercises. As you know, we don't -- it's hard to forecast -- you can't forecast when or how much people are going to exercise, but stock option exercises drove the effective tax rate down probably by 1% in the second quarter. So you're right, I think you can model out the rest of the year and getting 14% around there at least incorporates the lower tax rate in Q2 and roughly 15% for the balance of Q3 and Q4. As it relates to our organic tax rate, our underlying organic tax rate, it is hovering somewhere around that 15% to 15.5% or so range. So, I'd expect that's kind of, if we were to start next year, it would be somewhere probably in that ballpark.

Okay. Thank you.

Your next question comes from the line of Brett Fishbin from KeyBanc Capital Markets. Your line is open.

Hey, guys. Thank you so much for taking the questions. Sorry to harp on the PARAGARD question. Just wanted to ask one more clarifying one there just given some of the trends. So I know you kind of called out that you thought the second quarter would remain strong, but just trying to make sense of the 22% growth. Maybe the first part would just be, was pricing still in the mid-single digit range in terms of the contribution? And then maybe if you could just elaborate a little bit on why you're expecting such a sudden change into the back half, if that's more weighted to a market slowdown or really just based off of any potential changes in the competitive landscape? Thank you.

Sure. Yeah, you get lumpiness in PARAGARD. We've always had it. I mean if you go back and look over the years, you've always seen a lot of lumpiness around PARAGARD tied to channel inventory and tied to price. I mean in this case, we did a mid-single digit price increase and customers had a chance to buy in on that at the end of our first fiscal quarter, because it actually helps on that, and then during this second fiscal quarter. So, we saw some buy in activity. And you'll just naturally see that kind of play itself out in Q3 and go in the other direction. Underlying kind of themes if you will in that marketplace from our perspective is the market is still a struggle from a unit perspective. So yeah, you're getting growth from price. It's not coming from units. I mean there's competitive products out there. There's no other non-hormonal IUD in the market today and maybe a competitive product will come. But there's easier access to birth control pills and other birth control related items that are out there that continues to make that challenging market.

All right. Super helpful. And then really quick follow-up. I know you're not giving the exact numbers anymore, but just curious on the 12% organic growth in toric and multifocal category, if directionally one was a lot stronger than the other or more consistent across those two categories? Thanks again.

Yeah, they were pretty similar. They're pretty similar.

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

Great. Hi, Al and Brian, thanks for taking my questions and congrats on the quarter. Wanted to start in CVI ortho-k. It looks like it was down kind of low-single digits. So, how much of that weakness is driven by China still? And how are you thinking about the recovery in that market?

Well that was China because if you go ortho-k outside of China, we grew off the top of my head. It may have been double digits. But it was China. As a matter of fact China is a weak market for us post down our Asia Pac numbers in total. It's one of the reasons that region is probably a little bit less than maybe what some people were expecting or at least what I was hoping it would be. I still believe we have a really strong team in China. So, we just need some stability in that marketplace. I think we'll see ortho-k start growing here in Q3 and be in better footing in the back half of the year.

Okay, got it. And then just a follow-up on margins. So, I mean looking kind of pre-COVID, if you will, your operating margins were closer to the high 20%. So just as a follow-up to a previous question, is there anything structurally limiting you from kind of returning to those levels, or is it more about leveraging some of these investments over time that you were talking about? Thanks so much.

Yes. I'll give a quick one and then let Brian jump in. I know FX has been a negative clearly for us in some of the years. It's been a pretty significant negative to us. Outside of that, I think it's a matter of leveraging the investments. There's nothing fundamentally that has changed and our ability to drive margin improvements for the foreseeable future I think is something that we can accomplish. Let me turn that over to Brian to add.

Yeah. Again, I don't have a whole lot to add. I mean, we're executing really well. It's really just about internal investments, organic growth and execution, and we're demonstrating that right now. We'll continue to demonstrate that in the back half of this year, and I expect that will continue.

Great. Thank you.

Your next question comes from the line of Navann Ty from BNP Paribas. Your line is open.

Hi, good evening. Thanks for taking my question. I have one more on PARAGARD, please. So, when do you expect the low copper IUD by competitor [indiscernible] to be approved? And is there a chance that that approval could be pushed to 2025, impacting your guidance for the year? Thank you.

Sure. No idea. I don't have any guess where that stands. There's a competitive product out there that's going through the FDA approval process, but I don't know where that stands. So, if when they get approval and how they decide to launch that product and so forth, we'll obviously be transparent about our expectations and how we think that will impact our business. But until that point in time, I won't speculate on their approvals.

Fair enough. Thank you.

[Operator Instructions] Your next question comes from the line of Steve Lichtman from Oppenheimer & Company. Your line is open.

Yes. Hi. Thanks, guys. Brian, on gross margin, how should we think about the second half versus the first half overall? And you mentioned on 3Q higher CVI comps. Can you talk a little bit more about that and why it would just be, I guess, so limited to that one quarter?

Sure. Yeah. So, Steve, I mean, I mentioned on the last earnings call and I'll say it again here, I mean, gross margins on an as reported basis really should be pretty similar to last year. So that would indicate then that the second half gross margins on an as reported basis are going to be down on an absolute basis versus the first half. The color I gave in my prepared remarks around Q3 really speak to just higher cost inventory and our production levels in Q1 that roll through six months later into Q3. So we have visibility into that. Know that it's going to be it's going to impact our gross margins there. And then, of course, when we look at the impact of FX to gross profit, we can see that FX in Q3 is worse than in Q2 and frankly and it's also worse than in Q4. So that's driving Q3 a little lower than Q4. But to get to sort of a gross margin that's pretty similar to last year, your second half gross margins are a little bit down versus the first half.

Got it. Thanks. And then just on free cash flow, Brian, I guess the first half was a bit behind prior years. Anything you'd point to there? And so what's your outlook for free cash flow for the year? Thanks a lot.

Sure, Steve. No change in my commentary. I mean, I said, I think the last quarter and maybe the prior quarter that we expect free cash flow to be about $100 million higher than last year. Obviously, taxes, interest, FX, all are at detriment this year and that's providing a bit of a headwind and a limiter to how much higher. So, I'd say we're doing the right things. We're driving free cash flow higher and, obviously, CapEx is a big part of that. I'll talk about the capacity expansion and CapEx is going to be high again this year. So, but it's all for the right reasons and we'll continue to drive better free cash flow as we look forward.

Got it. Thanks, Brian.

That concludes our question-and-answer session. I will now turn the call back over to Al White for closing remarks.

Great. Thank you everyone for taking the time today to join us on our call. I thought we had a really strong quarter and we've got good momentum in the business. So I'm looking forward to Q3 and continuing to give positive updates. So, thank you again, and we'll certainly talk during the quarter. Thanks.

This concludes today's conference call. Thank you for your participation. You may now disconnect.