Adverse currency movements and the integration of Sauflon Pharmaceuticals, the U.K.-based contact lens company, acquired last August, led Cooper Companies to report worse results than previously expected for the fourth quarter ended on Oct. 31, especially for its CooperVision (CVI) subsidiary.
Boosted by Sauflon, CVI's sales jumped by 18 percent to $385.4 million in the quarter but grew by only 9 percent on a pro forma basis, assuming that it had owned the British company before and excluding Aime the Japanese firm that is no longer part of the group. On the same basis, sales went up by 12 percent for toric lenses, 20 percent for multifocals and by 11 percent for single-use spheres.
In particular, Sauflon grew by 20 percent on a comparable basis. CVI's new MyDay line of silicon hydrogen lenses, which is currently distributed only in Europe, jumped by 79 percent in constant currencies. CVI's generic line of silicon hydrogel lenses, Avaira, grew by 31 percent.
Geographically, the biggest quarterly growth took place in the Europe, Middle East and Africa (EMEA) region, up by 13 percent, thanks to Sauflon's success with its Clariti line and the roll-out of CVI's MyDay one-day lenses. With a turnover of $152.9 million for the period, it has become the largest region for the group. In the Americas, CVI's sales rose by 5 percent on a pro-forma basis to $152.9 million. They increased by 7 percent in Asia-Pacific to $69.5 million.
On the other hand, CVI's gross margin fell to 59 percent from 64 percent in the same quarter of last year. Excluding the expenses related to Sauflon's integration, it would have declined slightly to 63 percent, due primarily to recent strengthening of the U.S. dollar against the euro and the Japanese yen.
Another factor for the lower margins was a series of temporary logistical problems encountered in the introduction of Sauflon's Clariti line in the U.S., which has led CVI to focus on existing accounts for its initial roll-out, had an effect. Another factor was the management's decision to halt the integration process in the U.K. due to a review of the takeover by anti-trust authorities in that country. The review was ordered on Sept. 19, and it ended favorably on the day when Cooper released its quarterly income statement.
Adding the results of Cooper Surgical, Cooper Companies saw its total revenues rise by 14 percent to $468.0 million for the quarter. The gross margin fell to 60 percent from 64 percent. The operating margin (Ebit) dropped to 8 percent from 15 percent. Excluding extraordinary factors such as the integration costs for Sauflon and related amortization charges, it would have grown to 23 percent from 22 percent.
The $1.1 billion takeover of Sauflon caused Cooper's net debt to swell by $1,034.4 million to $1,382.4 million, in spite of rising cash flow of $152.1 million. The group's net profit declined to $30.8 million from $57.4 million, but it would have risen to $95.8 million without product rationalization costs of $16.1 million, restructuring costs of $19.7 million, and acquisition and integration costs of $17.4 million.
For the full financial year through last Oct. 31, Cooper reported an operating margin of 8 percent on sales of $1,717.8 million, which ended up 8 percent higher than in the previous year. CVI alone raised its revenues by 10 percent to $1,392.6 million, and its gross margin declined slightly to 64.5 percent excluding extraordinary items. Net income declined to $269.8 million from $296.1 million, but would have risen to $357.0 million without extraordinary charges.
With Sauflon now part of the group, about 60 percent of Cooper's revenues come from outside the U.S. The increased value of the dollar has led the management to revise its sales and profit projections for next year downwards from the guidance it had provided to analysts in September.
The group's total revenues are now expected to range between $1,900 million and $1,960 million in 2015, indicating a 9 percent increase for the year on a pro-forma basis, instead of reaching a level of at least $2 billion. CVI alone will be up to a range of $1,575 million to $1,620 million. Net earnings per share should increase by 16 to 22 percent before currency conversions.
Excluding the impact of the stronger dollar, the management guidance for 2015 has improved. Most of the implied currency-neutral sales increase of between 8 and 11 percent should take place in the second half of the year. One of the factors will be the introduction of the MyDay line in the U.S., which is expected to start next March, starting with “key opinion leaders.”
The management noted that Cooper's sales will have grown at a compound average annual rate of 9.7 percent a year since 2011, including the management's new estimate for 2015, with CVI rising at an average rate of 9.3 percent annually. Earnings will have risen at a higher annual rate of 11.7 percent, with the operating margin of the group increasing from 21.1 percent to around 23 percent during the five-year period.
Bob Weiss, chief executive of the group, expressed confidence that the group will be able to generate higher free cash flow and higher profits in the year to come thanks to its acquisition of Sauflon, having discovered new opportunities for synergies. For one thing, Sauflon's manufacturing process, which uses no alcohol in making silicon hydrogel lenses, requires one-third of the cost and half the time that it takes CVI to install a new production line, leading to lower capital expenditures in the future.
CVI is going to use Sauflon's process to make some of its Avaira Toric lenses, which currently generate gross margins of less than 50 percent. Sauflon makes its lenses in the U.K. and at a low-cost facility in Hungary. CVI plans to start up a new low-cost manufacturing facility in Costa Rica at the end of 2015.