酷柏 (COO) 2002 Q4 法說會逐字稿

Good day everyone and thank you for standing by. Welcome to the Cooper Companies fourth quarter year end 2002 earnings results conference call. Today's conference is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Mr. Norris Batten, VP of Investor Relations. Go ahead, sir.

Thank you very much. Good afternoon, welcome to everybody.

Before we begin, I would like to introduce you to Robert Weiss who is our Executive Vice President and Chief Financial Officer, and Tom Bender who is our Chairman and Chief Executive Officer. These gentlemen will be talking to you today and taking your questions.

Before we get started, I would like to tell you the conference call contains forward-looking projections of the company's results. Actual results could differ materially from these projections. Additional information concerns the factors caused by material differences can be found in the company's periodic filing with the Securities and Exchange Commission. These are [ Indiscernible ] publicly and the request from the company's investor relations department with that, I'll turn the call over to Tom for opening remarks. Tom.

Thank you, Norris and welcome, everyone.

We're pretty happy about this quarter. We're pretty darn happy about the year, I'm going to follow the same format that I followed in the past conference call. That is I'm going to start off with a review of the operations. When I'm finished, I'll turn it over to Bob to get a solid review on the finances of the company. We'll then come back for questions and then, of course, we'll close. But, before I get started, let me talk about what I am going to be, give you an agenda, the agenda that I'm going to follow, in the next few minutes.

Number one, I'm going to talk about revenue. Both at CooperVision and at CooperSurgical. We'll preview where we are from an organic standpoint, not just the reported revenue. We're going to talk about gross margins and the impact of gross margins on the company. Expenses including R&D. I'm going to take you through the categories at CooperVision. I think everyone wants to hear that, on where we stand on Torics, color, and multifocal, to name a couple. I'll give you a quick review on new products pipeline because as you can see in this press release and with what we spoken about this time around, we have a very large, lineup of new product introductions beginning January of 2003 of CooperVision going through 2005. And then I will give you a review of guidance. That might be steeper than that with which we included in the press release.

Let me begin by talking about revenue very strong quarter as you can see, almost a short $95 million. I don't think there was any analysts who projected that. We have had good strong sales across most of the businesses, CooperSurgical came in a short $20 million. We almost did $75 million at CooperVision. Our CooperVision sales for the quarter were up 51%, up 38% year-to-date, from an organic standpoint, that is without the Biocompatible acquisition, our sales were up about 9% for the quarter, 10% year-to-date, but I will point out it was, -- we didn't have one negative impact that's not unique to Cooper. Probably true with anybody doing business in Latin America. We had a very, very poor year in Latin America beginning the second quarter. If I really look at my CooperVision sales without the Latin America act and the fact that the fourth quarter was a quarter where we had a lot of introductory products through Roanoke, our Japanese partner, our sales really increased at CooperVision by about 13%.

We had about almost 8% organic growth at CooperSurgical, and I think that's about the number we have year-to-date.

If I look at the year we -- at CooperVision, we did a short $245 million as I pointed out. Again, that was up about 10% from an organic standpoint. When I mean, that I'm talking about CooperVision as well as Biocompatible together, from, as if we owned Biocompatible in that time frame. Looking at gross margins, you can see that the gross margin numbers should surprise everybody. It's another excellent find that integration with Biocompatible is really working ahead of itself. Came in with gross margins at 69% at CooperVision and 3% higher than we had in the third quarter. All up, we had 66% for CooperSurgical and CooperVision. Very strong versus, I believe, the 63% we had in the third quarter last year. So, from a revenue standpoint, gross margin standpoint, we had absolutely excellent numbers.

From an expense standpoint, we made investment spending, one line. The advertising line at CooperVision, which is about 600,000 more than the third quarter. Almost all of that pertained to something that was included in the press release, maybe some of you picked up on it. And that is that the -- we accelerated the introduction of our disposable multifocal in the U.S., we're now in over 1200 offices versus about three to four hundred about three to four months ago.

This was an excellent quarter, we felt to take this opportunity to do not only that, but to also accelerate the European launch of [ Indiscernible ], so if you look at both of those products, they should be about 600,000 more in expenses at CooperVision than we had in the third quarter. Also I would like to point out the other line-items without forgetting the R&D, keeping the R&D out of it, the other line-items is really of extended sales went down in the fourth quarter versus the third quarter at CooperVision. Another sign the integration is going well ahead of itself. I give you one example, selling, which would include all costs associated with sell, including customer service. The percent of sales went down for 7 1/2% in the third quarter down 7%.

Now, that gives you one piece of the puzzle, but one of the variance. The other variance you will pick up on quickly was the R&D expense. Our R&D expenses in the first quarter at CooperVision were up $500,000 from the quarter before.

And by the way, going into next year, you assume that those expenses will remain pretty much what they were in the fourth quarter, which means they were talking about a short $2 million more of R&D expenses at CooperVision next year than this year. Basically, you're focused on two very important, investments pieces for us, one is the extended wear project, the other one is one that, by the way, the extended wear project should -- expect to have commercialization of that extended wear product somewhere in the neighborhood of 2005.

The other project is one that we, for competitive reasons, really don't want to talk too much about now. We're looking for commercialization of that project, somewhere in the neighborhood of, between 2004, 2005, and as we go forward, we're going to be, exploring -- not exploring, we will be, identifying more clearly what we're spending in that project, what that project is all about.

If we look at the quarter, we had an increase in advertising expenses are [ Indiscernible ] of about 600,000 in the third quarter and about a half a million dollars, $500,000 at CooperVision for R&D.

Now if I get into the categories we talked about Toric lenses for a minute, our Toric lens business was up a solid 10% for the year. What I would like to point out to you quickly is that, if I look, and that's on a global basis. If I look at the, by the way, it was up 11%. The short a hundred million dollar business for us, by the way right now, but I would tell you in the last six months our sales were closer to about $60 million, we were looking for sales of our Toric product line to be somewhere north of $120 million next year. We definitely have a solid 33% of the market and we think we're going to continue to grow faster than the market next year. If you recall, the last couple of years our objective was to try to hold share inventory market because we knew it was on a gain share in the other specialty segments. But, in fact, we have continued to gain share in the Toric market this year, even with almost all of our competitors in the market today.

The strongest drive of our Toric business, continues to be our ability to capture share in the two week segment, in our product that we call here at CooperVision, Encore, Toric in the U.S., and the rest of the world, we call the product Excel Toric. We -- that business now is generating sales somewhat north of $2 million a month, to short, almost $20 million product line this year and sales are up 225%. In the market that is up about 40% of the worldwide basis. If we look at both the disposables, which is where Toric is, that's two week -- they play in the two-week segment, and the plan replacement product, that is our Frequency Toric, and our Frequency Toric product line, which are plan replacement products that replaced them on a monthly and quarterly basis, combine all of that. We have about an $85 million business today that has -- going out the door, running somewhere in the neighborhood of $50 million. So, we have a business that has grown 18% this year and obviously it's being sheared in the marketplace.

If I take a look at our color business we get a short $15 million this year versus about $6 million last year. We believe that business is going to be about a $22 to $23 million business next year. We have about 8% of the worldwide market during next year we're going to be launching a new product into that category, that's our Frequency-enhancement color product, which will be launched in the U.S. in January of this year and then in the rest of the world, in the middle of 2003. These are products that are not necessarily designed to change the color of a patient's eye, but to enhance and to beautify a patient's eye. We believe that we're going to do extremely well in that market. We also vary the year, during next year will be expanding our novelty color product line. We believe now with the successful introduction of 32 NFL lenses in the marketplace that we have now replaced the CIBA Vision as the number one product in the world of novelty color lenses.

As far as the multifocal is concerned, and I think you heard me talk about Japan in the past as being a wild card because in the guidance we have given in the past, which I'm not going to change, by the way right now, is we've only pugged in about $4 or $5 million in sales in the guidance in Japan. Japan, of course, definitely a $700 million business or a marketplace, I should say, and I'm not, not to say that our partners will not be successful, that is other pharmaceuticals will not be successful, but we don't control them and from this standpoint, we're -- from that standpoint, we feel a lot more comfortable in giving guidance on the lower end and hoping that it will be a wild card and that they will be more successful than we are expected.

On the other hand, the multifocal product that we introduced late last year is doing the same thing. We did about $2 million of business this year with that product, but more importantly, we exited the year with a run rate of close to $5 million and we're looking for sales this year between $6 and $7 million. In fact, we believe that in two to three years that our disposable multifocal products will become standard and will replace Johnson & Johnson as the leader.

It's certainly a heck of a lot of -- of professionals in our arena on who feel that way. We will be launching our disposable multifocal product to the rest of the world in the middle of this year. You should also know that we're in the process of developing, speaking of new products and we can bridge for multi new products. Is that including, I would give you a rundown of all the new products we're going to be introducing, the Proclear Toric, which is a disposable toric designed for, specifically for patients who have dryer-than-normal eyes, has already been launched in the rest of the word, but we will be launching that product in the U.S., in mid-January of 2003. We will also be launching our enhancement colors, as I have already stated, in the U.S. in January, and in the rest of the world, by the middle of 2003.

Speaking of multifocal, we'll also be taking our pro clear material and developing a disposable multifocal that we hope to be launching in the U.S. in 2004 and by the end of 2004 and the rest of the world. You can see what we're doing with the Proclear material when we buy Biocompatibles. That is, we're developing a complete third generation line of soft contact lenses around that material. Much like we did with Frequency with the methafilcon material when we bought Aspect Vision back in '98, and the first generation of soft lens products we have were made from tetrafilcon, which of course, is part of CooperVision years ago.

That gives you a quick lineup of new products, I have already spoken about the extended wear product line that we are -- we're not willing to talk about at this point.

Let me now bridge real quickly to guidance. We're looking for about $300 to $400 million in sales next year. About $300 million from CooperVision, and in that were those of you who would ask me the question I'm going to assume you would ask me the question. We're looking for sales of about 85 of that $300 million coming from the Biocompatible business that we bought , we're looking for sales from CooperVision for CooperSurgical between 85 and $100 million. 85 without acquisitions but we honestly believe we can make the type of acquisitions we have made in the last five years. Get two or three acquisitions and get about $100 million. Without it, we'll be around $385 million.

We're looking for earnings between $1.98 and $2.03. It appears to be an increase in guidance, it really isn't. I'll let Bob talk about it. We'll give you guys a 25% tax rate if I put the tax rate in, it really is about the same as we gave you last year. But please be aware that we're also going to be hurtling and that's about -- that's worth about a million-four, by the way, going from 26 to 25%. But we're also going to be hurtling in that, an extra two million of R&D expenses that I spoke about previously.

If I looked at the quarter, we're looking for revenue between $86 and $90 million, about $66 to $70 of that coming from CooperVision. About $20 from CooperSurgical. And I'm looking for earnings between 39 and 42 cents a share.

I think with that, I will turn it over to Mr. Weiss.

Thank you, Tom, and good afternoon ladies and gentlemen.

The highlights certainly, the fourth quarter revenues up 43% and earnings per share plus 37% above the prior year at 52 cents and for the fiscal year, revenue up 34% and, our earnings per share was 29% above the prior year at this year being $1.57. Looking at the operational input or, results CooperVision, with $75 million in revenue for the quarter, was up 51% above the prior period and on a pro forma basis our soft constant lens business is up 9%, but adjusted for the softness and the Latin America market. The fact that the prior year we had an initial stocking order to our Roanoke partner in Japan. Attested to that, our soft lens revenue was up 13% for the quarter.

The drivers continue to be specialty lenses with overall specialty lenses now accounting for 77% of our business and being plus 25% for the quarter. These quarters include color lenses, which were more than doubled the prior year, our Toric contact lenses, we're up 7% for the quarter and accounts for 43% of our business. As well as the multi, the success of the multifocal products and now most recently, the acquisition of Biocompatible, the Proclear product lines for dry eyes.

Overall, the thing to remember is that we did not enter the market in, the marketplaces in the fourth quarter, we will be launching there in the first fiscal quarter for the new fiscal year.

Looking at CooperSurgical, it had revenue of $19.7 million, up 20% with organic gross accounting for more than 1/3 of that growth was 7%. Looking at operating income, CooperVisions operating income was $19.9 million, an increase of 26% above the prior year and 27% of CooperVision's revenue. We're pleased with gross margin at 69%, which is up three percentage points above the prior quarter. You may recall as we bought Biocompatible and integrated it the margins were dilute diluted by the fact that if a problem with the gross margin in the low 50 percentile range, we moved it into the mid-60s over the first eight months our ownership of that franchise.

The operating expenses for the quarter at CooperVision increased from 38% of the prior year to 42% this year, a 4% of -- 4 percentage points of revenue increase. That reflects substantial increases in R&D costs, which were up 77% above the prior year and CooperVision as well as substantial increases in advertising, which includes, samples from the company. Which was all -- up 75% above the prior year.

Overall, operating margins at CooperVision were 27% compared to 32% in the prior year. Biocompatible acquisition as you recall, impacted our overall margins for the year. We expected to add revenue in the 45 to $50 million range. We added $50 million in revenue and, it brought in around 10%, a little north of 10% operating margins, so, it had the impact of weighing down our margins for the year, and we're in the process of turning that around and it's becoming more favorable influence results forward.

CooperSurgical had operating profits of $4 million, an increase of 18% above the prior year. And its operating margin was 20% for the quarter. The surgical business was impacted by acquisitions in the quarter including the Sage acquisition, which diluted its gross margin as well as its, operating margin ratios. We expect that the acquisition of Sage, which has been infertility, will be diluted the first six months of this next fiscal year and thereafter accreted. Our acquisitions that we have done recently have had the impact of diluting our gross profit margins at Surgical. Had we not had improvements this year, for example, the gross margin would have declined from 65% down to 47%. But because of the integration efforts of CooperSurgical, in fact, we ended up with the gross margin at 51% for the fiscal year. And 52% excluding the write-off of the surveillance inventory.

Overall, operating incomes for the quarter was $22.2 million, an increase of 27%. And our operating margins were 23%, compared to 26% in the prior-year period. The impact on the Biocompatible acquisition as well as investments in research and development and advertising, have negatively impacted our operating margin ratio, and once again we expect to see increases next year as part of the guidance that we have given you.

Looking below the operating income line, interest expense for the quarter was $2.2 million, compared to $900,000 in the prior year. Our affected interest rate a year ago, our weighed interest rate was 6% is now down to 5% at the end of the year and since year end, there has been a number of positive events that have taken it much lower. Two include from Mr. Greenspan and some of his efforts as well as the fact that we've paid off $23 million of our debt, which carried an interest rate of 8% and replaced it with an interest rate of three point -- 3 1/2%, which has the implication, the impact of improving our, our -- reducing our interest expense by a million dollars going forward annually.

The tax rate for the quarter was 21%, bringing our year-to-date effective tax rate to 25%, which is two percentage points below previously guidance at 27%. That reflects favorable ongoing mix of international versus U.S., not only the sales performance and growth of that business, but also the mix of products that come into, that factoring into our overall tax rate. So we're very pleased with the progress that we made there, and its implications are that our utilization of our net operating loss carried forwards are now extended out through the year of 2006, which means that from a cash flow point of view, we expect to have an effective tax rate for cash flow purposes that would be 5% or less over this period of time, and quite frankly, we finished this year with a cash flow effective tax rate of 2% for the fiscal year. So, that, too, is obviously preservation cash is very critical for our growth plans and we're happy with that -- those trends in that area.

Earnings per share on a fully diluted basis were 52 cents compared to 38 cents the prior year fourth quarter, and if we adjust the prior year for the impact of the change in accounting for goodwill, which is financial accounting standards number 142, prior years earnings per share would have been 40 cents and our earnings per share would have grown 30% on an adjusted basis and, as I mentioned, was 37% on a year-over-year basis overall. That brought our year-to-date or fiscal year earnings per share to $1.57, an increase of 29% above the prior year. And again, once adjusting for goodwill, our prior year would have been $1.32, and we would have shown an increase of 19%.

Our cash flow per share was 74 cents for the quarter, an improvement of 16% above the prior year and that brought our year-to-date, our fiscal year cash flow per share at dollar $2.45, an increase of 18%.

Looking at the balance sheet and the strength of the balance sheet, we have reduced our debt-to-cap down to 34%. During the periods subsequent to the acquisition of Biocompatible, you may recall after we completed that acquisition, we got it around $100 million in debt, our debt cap increased to 38%, so we making good progress reducing our overall leverage. In the middle of that period, we were able to find two acquisitions, Aspect and Sage. And we have expanded our credit agreement from $75 million to $225 million.

At this point in time, at the end of the year, we have about $80 million in capacity, and as I mentioned our overall interest rate has gone from around 6% a year ago to around 5% as of the end of the year, and quite frankly, our lowest cost of borrowing effected the end of the quarter will be under 3%, under our credit agreement, so, we are, happy with the trends in that area.

From the point of view of day sales outstanding, DSO, we finished the quarter at 71 days outstanding, which we indicated our expectations would be in the low 70s. That compares to the high in January of '86 when we had our information systems challenges and it compares to 75 in day sales outstanding one year ago.

Month on hand is at seven months, which is, as we indicated, where we expect to stay in and around that level. We finished the year with almost $200 million in operating loss. As I mentioned, it will allow you to have protection through 2006, and importantly, our cash flow for the year was around $56 million, which is more than doubled that of a prior year, so we generate a lot of cash, obviously, that gives us an opportunity to continue making an acquisitions in both sectors, primarily womens health care sector, we've making two to three years.

Overall, our return on equity for the year was around 20% and this year completes another outstanding year which allowed us to have compounded growth rate over last five years of revenue up 28%. Property margins up 30%. Earnings per share increasing at 32% and cash flow per share at 27%.

On that note, I will send it back over to Tom.

Before we get to the Q&A, I want to clarify a mistake I gave everyone. On the ratios at CooperVision from third to fourth quarter for G&A, went down 7 1/2 to 7%. In fact, selling and customer service went from 13% down to 10%. So it's a strong indicator that the integration is more or less well behind us. And we've gotten an accretive acquisition now.

I think with that, operator, I would like to turn it over to some questions, please.

Thank you, sir. Today's question-and-answer session will be conducted electronically. If you do have a question, just press star 1 on your touch-tone phone. If you're using a speaker phone, please release the mute function before pressing star 1. I will pause a moment to give everyone a chance to signal.

Once again, that is star one if anyone has a question. And we'll wait just one more moment.

Jason Mills, please.

Thank you, Mr. Mills, your line is open.

Great, thanks. Congratulations on beating the quarter here.

I had a couple of questions. One regarding the P&L specifically, the SG&A expenses, and second being the Torics. Last -- first on the Torics side, last quarter Europe was a very strong quarter for you in addition to other areas. Specifically Europe in the Toric arena. Could you talk to, how you did in Europe and Torics more specifically this quarter, both organically, if you exclude Biocompatibles, and just looking at CVI '02, fourth quarter over '01, fourth quarter, and including as well, where you see that going forward. Because third quarter was just, it looked to be just extremely good and I wondered if that continued in the fourth.

I have -- I really appreciate that question, and I don't think I asked you to ask me that question, so here is the answer to that, my good buddy. We were up 42% a year up in the fourth quarter, and that's organic, by the way. And, for the year in Toric we were up a solid 70%. In -- and by the way the leader of all of that wasn't, believe it or not just the disposable Torics, which were up 330 some odd%. By the way, the European business is running about four million a month right now -- I'm sorry, four million a quarter, but the plan replacement did very well too, it's running about a million. Two of them are running at about a $25 million business right now. Concerning the fact that Europe appears to be about a $65 to $68 million market for torics, and I think as you all know, we get that, that independent audit data, all of the industry folks do, that we believe we have a higher share of the Toric market in Europe, and in some countries, we have as much as 50% of the Toric market than we do in the United States, where we do very, very well also.

We think that the next question, if I would recall, Jason, you said do we -- do we think we can continue at this level. We certainly do, our sales are increasing as a percent, as versus the third quarter. In fact, we grew in the fourth quarter faster than we did in the third quarter in Torics in Europe, so that answers the Europe question.

Did you ask me about the U.S., too?

Yeah, it was specific to the disposable side, you mentioned in the last conference call, I believe, that you were running at $3 million per month on disposable Toric. My guess is that is because the quarter in July is a pretty good month for that, that's why you quoted three million. This quarter quoted two million per month. I was wondering if you could help us reconcile those two?

Hmm, I guess we did have a good quarter in the third quarter. I can recall, too, that we did do some shipments of quarter of Toric, maybe Japan was picked up. I don't recall, I don't recall that. That might have -- in any event, from a global standpoint, the disposable toric business is running, I'm looking at the U.S. number here. The worldwide number is running at about 2 1/2 million a quarter, a month right now for the fourth quarter.

Uh-huh.

So, I guess that answers that question. Looks very strong.

And you want the U.S. numbers?

Sure.

Yeah. U.S. numbers are even, or as strong as Europe, for the, for the quarter we're running at about two million a month. I'm sorry, two million a quarter in the fourth quarter, we're running at about, we're up about 120% for the year we're looking at somewhere in the neighborhood, I think we're looking at somewhere in the neighborhood of 12 to 14 million of sales next year in the U.S. for disposables. But recall we do very well in the planned replacement too, and it's doing about, what we did a little over 55 million in the U.S. in the -- for the year, for the year 2002, for the planned replacement products.

Okay. And my second question, Tom, you obviously on the on the top line came in ahead of expectations and then gross margins were higher. So gross profits seem to be about two, three million dollars higher than what we expected, at least in, given the fact that you, down on the tax rate line, knew during the quarter presumably, that you were going have a lower tax rate. Could you talk about, -- so you're thinking throughout the quarter and knowing these two things as the quarter moved along and --

Well --

And spending and how you were able to plan for the higher spending.

Well, there were three pieces that would impact, let's call it, not entirely expenses some of the gross margins that we knew we were going to have. We bought Sage, we knew that the -- it would be diluted in the quarter that we felt obviously that we could hurdle that dilution, and I think it was about a penny, to be honest with you. It was only about a peppy.

On the other hand, in fact, it was open less than a penny. A little more than a million -- a hundred-thousand. Better to be a hundred-million, but a hundred-thousand.

On the expense side, yes, with all of the disruption going on in the industry with some of our competitors, it was unbelievably a good time for us to accelerate the launch of the multifocal. And any of you who have done your challenge decks, you know how well this product has been perceived. It's perceived right now, I think it's the best product, at least in the professional journals, they indicated, as the best product in the market today, so we took that opportunity to expand the [ Indiscernible ]and more offices quicker than originally planned. At the same time, we did the same thing in five European markets, with the disposable Toric, so, it about had an impact, by the way, of about $600,000.

Okay.

For this quarter versus the third quarter. If you look at each one of the quarters, I'm looking at the second and third quarters, anyway. That line-item, which is called advertising where trial lenses go, was pretty, you know, pretty stable. It was about 2.1 billion, quite frankly, went up to 2.7.

The other piece of this was R&D. We had made this decision and funding these two projects. It's the investment thesis and -- accelerating trial lenses, the investment features, and this was the wonderful quarter for us to take this opportunity. We would do the R&D, anyway, Jason.

Uh-huh.

The $2 million we're going to spend next year is incrementally over what we spent last year, obviously, to the projects and we're going to, I think by lowering the tax rate, I'll let Mr. Weiss respond to that. I think it had an impact of a million four of -- 800,000 and, yet we increased the type of spending we have traditionally always spent in R&D by about $2 million. We feel good about what we have done.

Okay, I'll hop back in queue.

By the way, one more thing. You hit on gross margins. It's important for me, the question that has come up on, how -- what drove that improvement gross margins?

One is -- an absolute indicator that integration and the efficiencies are coming out of the Biocompatible acquisition, but there is the main factor of all of this, or the main element that impacted that is the better mix of our products. Not only within the Biocompatible product line, which is [ Inaudible ] the old products which have very high gross margins, which absolutely took place here in the U.S. But also win the CooperVision product line. We're selling more higher margins, especially in lenses, very simply and less of the lower margin commodity product.

That, by the way I would tell you modelers that if you're looking at our business going forward, we're going to be in this 68, 69 range now from now on. We're not going to be slipping back, so, in fact, we're hoping I can even improve upon it. We're looking for CooperSurgical's gross margins. It gets healthier next year than they are this year. Some projects and manufacturing they have in place. At the same time, I am not assuming that CooperVisions gross margins, which are in the 69 or 69% this quarter, are going to decline at all.

Does that help?

It does, and since you talked in gross margin before, if you don't mind, could you then comment on operating margins, given that you spent, a little bit more than maybe you would have expected going into the year in the fourth quarter of this, the SG&L line, and what are you looking at on that line next year in the percentage of sales?

I am glad you asked that. I was going to talk about it. That's another thing I forgot to even talk about. I think you can assume that at CooperVision where the increase in expenses took place that our expense line, forget R&D for a minute. Our SG&A line is going to grow at a lower rate going forward than our top-line, and I think when you get into the second, third, and fourth quarters, those are the quarters where we had at Biocompatibles, that when you start comparing year-to-year, you're going to be looking at something, certainly not anymore than 10% increase in the SG&A line. In the first quarter, I would tell you that I expect our expenses, our SG&A expenses for both CooperVision and CooperSurgical to be less than what they were in the fourth quarter this year.

That's very helpful. Thanks. I'll hop back in queue.

Thank you. Who is next. Ted?

Thank you, one moment. Mr. Huber. Mr. Huber, your line is open now.

Hi, Ted.

Hello there. First off, I might have missed the number, but can you break off the revenue for Biocompatibles versus CooperVision?

Yeah, I think I wouldn't hold anything back on that. On a worldwide basis, on a worldwide basis, CooperVision grew 10% and Biocompatibles for the year, we're talking about for the year -- .

No, I mean for the quarter. You gave it for the prior quarter. If you can give us exact fourth quarter, that will be great.

For CooperVision, we were up 12%, and Biocompatibles was up 2% for the quarter. For the year, Biocompatibles was up 12%, CooperVision was up 10%.

You know, Tom, we don't have Biocompatible revenues because we didn't have it last year. Can you give us the revenue number, how it split between the two businesses?

Yeah, I guess I can do, that can't I? No reason why not. Biocompatibles for the period we owned them, Ted, we did a short 53 million.

Yeah.

And for CooperVision, we did a little over 178 million.

Okay, all right, good. That's -- that's great. Now just looking at those lines, one of the things that I -- that strikes me in the model is that, looking into '03 and your guidance you just gave, really the growth that you're forecasting from CooperVision accelerates in '03 over '02 in the mid-single digits up into about the 15% range, and even if you take Japan out, it's still a pretty good acceleration. You can try to walk through, Tom, what do you think are the most important sources of that growth acceleration are going to be?

Ted, Ted, remember. When I give you CooperVision, I'm giving you soft lens revenue. I gave you two-piece, the miscellaneous income was about 13 million. So all up, we did about 144, right? Write down -- write down these numbers. 244, right?

Yeah.

Now, put in another about 24 million for Biocompatibles. If we owned them, right, in the four months we didn't own them?

Okay.

Okay, that's about 265 or something like that, right?

Yup.

From 265 to 3 -- a little over 300 million. I don't think you have 15% growth.

All right, I realize you have the third -- you have the first quarter comparison, which -- which isn't apples to apples. I guess I'm try to get a feel of what do you think of the product lines that are going to be most important in driving better growth in '03. Even if you do the adjustments, Tom, there is a little acceleration in organic growth.

The keys are this. Number one, is the continued transition from some of the CooperVision product lines to the Proclear product lines. Very definitely we're trying to drive.

Number two is Japan. And our ability to capture a meaningful share of the Pacific rim market. Right now, we only have about 2% of our sales here in the Pacific rim. Pacific rim represents 30% of the worldwide soft lens market. Europe represents 22% but represents 38% of our business.

Right

In the North America, North America represents 43% of the world market and represents about 57% of our business, so it's, you know, I think you can flash upon that pretty quickly. Secondly from a product line standpoint, our objective is to hold shared Toric market, we believe the market will continue to grow on a worldwide basis about 10%, we believe that worse case, we're going to grow 10%. Please remember, we're introducing a new product into the Toric market. We have in the space where most companies have one product or two products, we have a much broader offering than anyone else. We have six products that compete in the marketplace or in the space, where most companies with the exception of probably Ocular Science and BOSCHE and LOAM only have one product line.

Secondly, in the specialty segment, such as color, which I spoke about, and multifocal, we certainly are expected to gain major market share positions, just increases just like we have in this past year.

Okay, let me just -- one other, two other quick topics. In the Biocompatibles product movement, -- program which has gone from the mid-50s to the mid-60s since you took over, you can talk about how much of that is because of price hikes versus price reduction?

Zero on price.

So it's factory?

We have not done a thing on price. What happened, Ted, with the Biocompatible product line, is the main drive of that improvement really hasn't been efficiency yet. That is being in place right now.

Okay.

What has really driven it is the more favorable product mix that is their, I want to say when we bought the business, and Bob can correct me. I think about 45% of the revenues, which is being driven by Proclear and 55 to [HIBRON], went from that to 60-40 now. You have a higher product gross margins with the Proclear product line, which is in the mid-70s, and that has been a driver of that improvement.

On the other hand, at CooperVision, with the CooperVision product line, we have had a similar situation take place.

Yeah.

Two combined it very, very favorable, that's why I'm somewhat very optimistic that these margins are -- are, at worst case, going to stay about where they're at right now.

Okay, last quick question. I still can't quite figure out the operating expense number for the fourth quarter. You talked a lot about the 600,000 in incremental sampling costs, but by our model, you're about three and a half million north of where where we thought, and, again, the other gentleman talked about the taxes and the gross margin, et cetera. Are there others we're not seeing here, or that you have not talked about yet that contributed to the higher expense level?

I'll let Bob talk about it but, no, I think there have been only three. One is Sage, on is the increase in the trial lenses and last is R&D. And R&D took place in the last month of the third quarter but not a lot.

Right. I'm talking just SG&A. How much was Sage again?

Sage was about 100,000 --

Yes, dilution.

Sage --

No, I meant just SG&A. It's 3 1/2 million north where, you know.

10,000.

Yeah, go ahead and answer it.

Yes, the only other, you know, Tom talked about, really, the marketing, and the R&D, one other variable that, I guess two other variables that impact little. Some is foreign exchange, there was -- is obviously some strengthening of exchange rates the euro and the pound, taking place during the quarter, that impact the size of operating costs somewhat. And the second factor is you'll recall a year ago, we -- when we were changing systems on, -- in vision, we ended up with escalation of our distribution costs during that transition period of one system to another, some of that is going on in our international locations right now as we integrate the operations. And we're making whole basically, we're putting extra effort getting product out the door, so there is some element of operational efficiency, or growing pains, if you will, as we fully integrate the two businesses, that's a part of it, but I think the bigger part is still the, heavy mode of spending we're in, rolling out some of these products, I think, that manages that opportunity.

Okay, gentlemen, thank a lot.

Thank you, Ted. Eric.

Mr. Chiperidge, your line is open now, sir.

Thank you, this is Eric Chiperidge for Joanne Wench. Give us an idea on how we should think about debt paydown going forward?

Our strategy is to pretty much not build cash so as we generate cash, we will continue to paydown debt. When we did the Biocompatible acquisitions, we expect to -- prior to that, we were at 20% debt to cap. We then moved it up to 38% and our objective was within two years to get it down in the low 20s and back to 21% by the end of that fiscal market, if you will, fiscal year, so, failing any other acquisitions, we will continue to generate cash to paydown debt [ Indiscernible ] tap into as we need it, operationally, we generated $55 million in operating cash flow this year, our Cap Ex was $23 million, so we had about $32 million of precash flow, which is either available for acquisitions or paying down debt. And going forward, we would expect in 2003 to, as we continue to get benefits of the integration and Biocompatible to generate more cash and 2003, than we did in 2002.

Great, thanks. That's very helpful.

Seth, are you there?

Yeah, hey, guys.

How are you?

Can you hear me?

Yeah.

Okay all right, I guess I have two questions. The first is, I really don't tonight beat this dead horse but on the operating expenses with -- I guess at the end of the day was Biocompatibles still 11 cents accretive on the old share count or 5 1/2 cent accretive this quarter?

I guess I was surprised that the operating margins were, I was expecting them to be higher. That's the first question.

The answer to that is, yes. As we go forward we lose the visibility of of the numbers because it's so integrated but, we believe that Biocompatible was several cents accretive for this fiscal year and for the quarter was -- and I'm -- for the quarter we had indicated ten cents accretion prior to five cents. So we believe we achieved or actually exceeded those numbers, because it's Biocompatibles allowing our effective tax rate to go from 27% down to 25%.

Right.

But we look at things on an after-tax basis when we talk.

Got you. Okay, and then my last question was on the goodwill, I know it looks like it increased about 20 million or so sequentially, I know you made the Sage acquisition, but I think you said that was only a million. Could you just give us, you know, the big contributors for the 20 million?

Yeah, it really ties back to our acquisition for the year, too, and including Biocompatibles. When we made the acquisition, we did preliminary consolations as we ended up fine tuning it at year end. Yes, we went out and appraised some of the assets that are being worked on throughout the year and got wrapped up in -- in November of this year as were fine-tuning the acquisitions. During the course of that getting the appraisal, we ended up basically writing down more of the plans and equipment, and fine-tuning some of the costs of the shutdowns that are planned for that acquisition, so those contributed quite substantially to the -- [ Indiscernible ]

Okay, you didn't write down any receivables or inventory?

No.

All right, okay.

I thought it was -- the question was, we write down receivables or inventory --

You know, adjust Biocompatibles and receivables or inventory?

No.

Okay, thanks good quarter.

Thank you. Charles Arnold?

Can you hear me okay?

Yes yes, we can.

Charles Arnold sitting in for Chris Coolie. If I could just go back to the Encore Toric, if we look at the disposable toric lenses in the U.S. where do we see, and I apologize if you're repeating yourself, what do you estimate your current revenue run rate on a calendar basis? Where do you end 2002?

We would end 2002 with something just a little south of $8 million in the U.S.

Okay.

And that global basis, you're talking about something around 20 million. Something that in that neighborhood.

Okay, so then again in the U.S., where do you put the needle and calendar '03?

'03, we're looking for global sales of -- from a global standpoint of our fiscal -- disposable toric business. Somewhere north of $30 million.

And, Bob Sit 12 to 14 that is U.S. on the break out there?

We're going to be looking for about 15 from the U.S. Somewhere around 15 next year. It's growing so rapidly. In the U.S., year-to-date, we're up 151%.

Okay.

And in the world -- from the worldwide standpoint, we're up 224%. And the one wild card in all of this is what is what are they're going to do with it in Japan.

Right, and yesterday you look at it on a market basis, say the domestic run rate for the two week disposables, is that at 75, 80 million today?

For the -- for the market, the market on the global basis, I will give you the global number.

Okay.

We believe the toric market. We're getting good date.

Right.

U.S.we get really good European data we have a damn good feel of the markets here because of [BRODO]. We think it's about a $340 million worldwide market right now. And the way to break that into three pieces is about 40% of that is disposable products, products that are marketed as two week products, about 40% is planned replacement products, the products that are marketed as either quarterly or monthly plan replacements and then about 20% for conventional products. These are made or torics, which by the way, in the U.S., on the worldwide basis, 20%. In the U.S., you might be interested to know it's only 10%.

In fact in the U.S. it breaks out 45, 45, 10, and the U.S. piece, by the way, is about 240. So you have about 100 million of the toric market is outside the U.S. and about 70, about 65 million of that somewhere in that neighborhood is in Europe.

Okay, so if I boil all of this down, try to just pin it in a little here, what then would your expectations be for Encore lenses in the forthcoming year against the two-week disposable of the toric market?

Well, we see -- that's a good question I don't want to give it to you right off the top of my head because I'm -- right off the top of my head. I'm not looking at those numbers and I don't think I'm that far off. We think the disposable market will represent at least 50% of the worldwide market next year. We see it the worldwide market going 10%. You can put that number down. I'll have to go and take a look at it. But if I recall correctly, we're looking for something like 50, 40, 10. We're looking for the conventional toric market to decline as it has been. Pretty rapidly on a global basis, just as it has here in the U.S.

Please remember that we are the only company that is currently marketing a monthly planned replacement product for this made to order or custom choice today. We're the only company and we are taking some of our own sales, our customers and moving them out of the convention, which by the way is an annual replacement lens into a disposable or monthly disposable lens, and trading up in in value that market.

Great, that's helpful. Thank you, gentlemen.

Thank you. Next, what do we have here, I forgot my name here. David Snyder from Hoover. David. I know I met you before.

Sir, there is no Mr. Hoover in the question queue.

David.

We have a David Markowitz.

David. I'm sorry. Somebody gave me the wrong name

Hello?

I'm sorry, David.

That's okay. I appreciate the question. I have one question, you partially answered it. That's looking at the balance sheet. Goodwill is up 26 million, PPUs sequentially down six million, and intangibles look like they're down three million. Is that all associated with the Biocompatibles and the adjustments you made?

Essentially yes. The -- as part of the appraisal, our preliminary allocations of intangibles shifted from goodwill and there, as I mentioned with Seth's comment, or question in response to his question, yes, we took right down, of the property plan equipment that we acquired with the Biocompatibles acquisition. Keeping in mind that we took by far the bulk of their production capacity which has been in the UK and we are setting now, rapidly moving it into into our facilities in the southern part of the UK. So, as a result of that and in combination with the appraisal, yes it was a large shift in balance sheet.

And were the principle reductions, PP&E and intangibles were there, any other reductions that were meaningful?

The only other thing would have been -- you're looking at the side that would have been incremental for some of the shutdown costs directly associated with that. So, that would be a contributor to goodwill also. But the the asset side together with the liability side it did -- it did result in a large goodwill increase.

Got you. Okay. Great, listen I appreciate it.

Okay, thank you. John Baxter, please. John?

Your line is open, Mr. Baxter.

Is John still there?

Mr. Baxter, if you have your phone on mute, please pick up the handset.

Hello?

Yeah, hello, John.

Oh, I'm sorry. Am I doing the math correctly on the tax right here. You are at 640 basis points light that you would have only earned 47 1/2 cents per share in the quarter? If you had kept your tax rate at 27%, which is what I was modeling? Am I doing that math right?

If you -- I'm sorry, which effected tax rate? [ Indiscernible ]

Which is what you had indicated in the past.

I suppose you're right. Yeah.

Okay and -- okay, and the DSO, I'm calculating I see that you made a comment in the 10K from last year, which says receivables increased by 21 million in '01, including about 13 million of receivables at CVI. Not collected in the fourth quarter because of delays and billings associated with the implementation of a new accounting system. Most of these amounts are expected to be collected in the first quarter of '02.

What I have done is adjusted last year's receivables by taking out 13 million and what I have got here is a DSO this quarter of 72 days versus 58. Am I doing that math correctly as well?

I can't say I know that you are. I know that you aren't --

Well, I mean you used it -- you used it last quarter --

We used the -- .

You put it in your 10-K, so.

We used the exhaustion method and -- of calculating the receivable DSO. So we cam up with 71 compared to your 72, so I'm sure you're using some other method on --

So ballpark I did the right thing by eliminating 13 million and we can all use our own calculation to come up with the DSO, is that correct?

I don't know, 13 million, I recall 12 million.

I read it, whatever it is, it's still fairly significant.

Yes, we did indicate we had that tied up in our balance sheet at year end and also as of January and -- [ Indiscernible ] in the second quarter.

Got you, and the amortization that was kind of surprising to me because the amortization went down in the quarter from 565,000 in the July quarter to only 212,000 this quarter.

Yes.

What was the reason for that?

Whether we -- it ties in with the discussion we had on the the appraisal that we received and changes in the assets category. One of which was a reduction of the amortizable intangibles. Someone pointed out there was a reduction between the third quarter and the fourth quarter of amortizable and tangible, so on a year-to-date basis, there is a change in the fourth quarter of, I want to say, a couple hundred thousand dollars associated with that.

I see, and on the CooperSurgical last year reported 16.3 million in revenue in the quarter, if I add back Med Scanned, the part of Med Scanned you didn't have, I got 500,000, 2.1 for New Orleans, 1.3 for [ACRIT], is 20.2 million, add another 300,000 million for the Sage acquisition, 20.5 million, so actually you did, let's see, 19.7 this quarter versus 20.5 pro forma, you were down 4% organically? Could you comment on that a little bit?

Yeah, I think we had in the third quarter conference call, we talked about New Orleans at length with some individual and indicated we when we bought New Orleans it, it was 6 -- property and we were --

I'm sorry, I can't -- you can repeat that? There was a lot of mumbling in the background there.

Okay, at the end of the third quarter, we discussed New Orleans extensively with one of the individuals on the line, who -- [ Indiscernible ] the historic sale of the New Orleans as a basis of doing a pro forma of the historic revenue, and we indicated we lost the property. It was pretty much the supply points were abandoned, we're in the mode of putting it back together. So it would be appropriate to take the historic sales of, I think, $8 1/2 million and divide by four and that's the run rate. It's, in fact, not the run rate at all.

Relative to the others points we indicated as a portion of CooperSurgical revenue, it's from nonpathological products which we are de-emphasizing stage -- they're not promoted products. [ Indiscernible ] Declined as we shift the whole focus of -- [ Indiscernible ] so that would be another variable that comes to the play.

Okay, and how much did crude expenses or crude restructuring prices ride due to the pricing allocation? I didn't catch that.

I don't think I quoted or anyone quoted the exact number. I would -- I guess I would say a ballpark, eight to ten million.

Oh. Okay and Biocompatibles, can you give an exact revenue number for Q4, because you said 50 million plus and it screws up -- screws up the model. You can give up the exact number, please?

Screws up what model?

Give screws up my model if I can't get the exact number. Do you have the exact number for Biocompatibles?

I already gave it. I think, John, we're going to leave it open for somebody else to open a question.

Okay, I'm sure Ted is still on the line, maybe Jason. Thank you so much.

That's all the time we have for questioning this day. I will now turn the conference back to Mr. Bender.

I want to thank everybody for tuning in and listening to our fourth quarter, our end-of-the-year. We'll be looking forward to another excellent quarter in the first quarter, we'll have our conference call and we'll be releasing, I want to say, the last week in February. I believe we'll be getting out the exact date to you at that time. And, again, I want to thank you for joining us today. Thank you.

That does conclude today's conference. Thank you all for your participation.