酷柏 (COO) 2003 Q1 法說會逐字稿

Good afternoon everyone and welcome to the Cooper Companies first quarter 2003 earnings results conference call. Today's conference is being recorded. At this time for opening remarks and introductions, I would like to turn the conference over to Mr. Norris Batten, vice president of Investor Relations and communications. Please go ahead.

Good afternoon and welcome to everyone. Before we begin I would like to introduce you to Bob Weiss who is our Executive Vice President and Chief Financial Officer, and Tom Bender, our Chief Executive Officer, who will be reviewing the quarter with you this afternoon and taking your questions.

Before we get started I would like to tell you that this conference call contains forward looking projections of the company's results. Actual results could differ materially from the projections. Additional information concerning the factors that could cause material differences can be found in the company's periodic filings with the SEC, and these are available publicly and on request from the company's Investor Relations department.

With that, I'll turn the call over to Tom for some opening remarks. Tom?

Thank you, Norris. Welcome everyone. It is nice to have some good news in the kind of environment we're in today. Certainly not here in the US, but from a global standpoint. We are going to follow the same format that we've done in the past. I will make comments on the state of the business, and I will also give you, which I think is appropriate, a complete review of the state of the contact lens industry, because we certainly have very good data in that marketplace. Then I'll turn it over to Bob to give you a review of the financial highlights for the company. From there, we will go back to Q and A, and so let me get started.

Again, I'll say that we had a outstanding quarter without a doubt. In a environment that is fairly difficult. I would believe that this might have been the best quarter Cooper has had, certainly in the last five to six years. I cannot remember overall a better quarter. We've had strong performances from both of our businesses, both at CooperVision and at CooperSurgical. But especially at CooperVision we're in every part of the world, that is every geographic that we play in, we had extremely strong performance. If I look at sales, we had sales of $94 million, up 62%, 56% in the constant currency and, by the way, that is about $3 million and all of that $3 million was at CooperVision. At CooperVision we had sales of a short $73 million, $72.8 million to be exact, up 73%, 18% of that was organic growth and at CooperSurgical we had sales increase of 33%, 11% was organic growth.

As you'll recall back in the fourth quarter, was the first quarter I think in about six or seven quarters we did not have double digit organic growth at CooperSurgical and as you can see we're back right where we had left off through most of the last two years. We are now reviewing -- I should say increasing guidance for the second quarter. I should say I -- let me review with you guidance for the second quarter. We're looking for revenue between 96 and $99 million in our second quarter. About 75 to $78 million of that is going to come from CooperVision. About 20 to $21 million from CooperSurgical. If we just hit the bottom of the range, I want to point out; that would generate about 23% organic growth at CooperVision. So you can see that our businesses are extremely healthy.

What I'd like to bridge to now is give you a complete overview of the state of the contact lens market. I think it is important because in the past month or two, I've seen some, what I would call, misleading statements that added some confusion to this industry -- industry, because this is a go-go industry, and I certainly didn't appreciate it. There were two comments, and I won't identify who the authors were, but one made a comment in their report that the total contact lens market is in a state of decline. Can you believe that? Another comment was the U.S. market in the fourth quarter was black. Well, my good friends, there isn't anything closer to the truth than those two statements. In fact, I would tell you that our industry is the strongest I have seen since the mid-1990s, maybe the early '90s when we first started to get good concrete data in this industry, and that is about the time that disposable lenses started to take over the overall contact lens market.

Let me give you some firm data. We do now have year-end 2002 data for the U.S., where the overall contact lens market grew 8%, and I'll point out in the fourth quarter, and I've heard some other comments that the fourth quarter was lacking. Can you believe that? The market was up, actually, 9%, the best quarter that I can find going back to 1997. The Canadian market, by the way, was up 16% in the year, 20% for the quarter. And if we look at North America, that is the U.S. and Canada, which represents 50% or a little over $1.4 billion dollars of a $3 billion dollar worldwide soft contact lens market, North America grew about 10%.

We have data from six months, we do not have full year-end data, but we have six months of data from Europe, which is about 24% of the world market, and Europe was up after six months 14%. And we have some data from a larger competitor that I have seen in print; we do not have that firm data, but in Asia and Japan, the market was up 10%. If we look at Europe, North America, Asia, which is Japan, that's about 97% of the world market. It shouldn't take a brain surgeon to figure out that our market is up pretty darn close to 10% this year.

Another way to look at it is we have five companies that dominate the contact lens market, five public companies, publicly traded companies representing about 98 to 99% of the world's soft contact lens market. Four of those companies reported in 2002 revenue in excess of 10%, all the way from the mid-teens to the low teens in growth. Only one of our competitors, that would be CIBA Vision reported revenue growth last year less than 10% and still they had 6% growth. It is another way of looking at the -- at the overall market. So the market looks extremely good.

Now let me get a little bit specific about the U.S. market. Again, I heard another comment from someone else who said that the single-use market was the fastest growing market in the United States. Well, I'm sorry. That is a furtherest thing from the truth. A big surprise, the fastest growing segment of contact lenses in the U.S. are those products that are marketed as monthly spheres.

Driven by, basically, by value-added products, products like espheric products from both Cooper and CIBA Vision, 30-day lenses from, it used to be from Bausch & Lomb and CIBA Vision and of course our Proclear line of products for patients with dry eyes. These products are all marketed as monthly products and as a segment it was a about a$130 million market segment. This year in the U.S., up a robust 50%. In other words it grew from 87 to 130 million and was by far and away the fastest growing segment. It is a neat, interesting transition going on in our marketplace, away from two-week commodity disposable spheres, basically the products marketed by Johnson & Johnson and Ocular Science to these products that are value added products that are designed for specific visual problems and are marketed as monthly products.

The second fastest growing segment, or the driver of the market in the U.S. are those products that are marketed as two-week toric lenses, disposable torics. It is about a $95 million dollar segment. It was up 41% this year.

The third fastest growing segment, which is shared, is the single-use lenses, which were up 20%. It is about a $90 million segment in the U.S., and the disposable cosmetic products which was up 20% and it is about $130 million segment.

So I wanted to clear the air and make it -- be sure that everybody, or certainly communicate to everyone what is going on in the market. I heard the CEO of Bausch & Lomb who was right on when asked the question in their conference call said that the specialty segment is driving the global market, he could not be anywhere -- absolutely he's right on, and that is exactly what is going on. The data does not lie. This market is moving away from commodity products to specialty products, and thank god for that because Cooper is, we believe, the leading company in that segment.

Let me now bridge to performance at CooperVision. I'll talk specifically about what happened. Our sales were, as I pointed out, $72.8 million at CooperVision. 18% in -- 18% organic growth, 13% in constant currency. And I know the question is going to come up, so I'm going to answer it right now. Someone is going to ask me well, break that out, Tom, between CooperVision and the Biocompatible piece. Well the CooperVision products lines, that is without Biocompatibles, was $51 million of that short $73 million. It was up a robust 20%. The Biocompatible product line, which was $22 million dollars was up 13%.

Now, before anyone starts to say, "oh my god, what is going on?" Is this a negative for Biocompatible, please remember what was going on about this time last year, before Cooper owned Biocompatibles. They were dressing up the company for sale. And obviously the sales were a little bit exaggerated in the first quarter for Biocompatibles, because if you take a look at their second quarter or our second fiscal quarter that is coming up, their sales went down to 18 -- eight -- sorry. 18.3. So if I look at the first quarter last year for Biocompatibles, which was $19.5, they went down to $18.3, and that is another strong indicator that they were dressing the company up. So overall the business looks very, very strong.

Our U.S. business overall was up 16%. Now represents 49% of CooperVision's business, the first time ever that our U.S. business had less -- represented less than 50% of overall business, so you can see that CooperVision is truly a global business. Europe was up 18%, now represents 38% of CooperVision's business and the rest of the world, which includes Japan and Latin America, was up a robust 27% and represented 13% of our first quarter sales. Basically driven by our sales to Rohto which was about a million-three, and that was the launching of the products that were sent to them to prepare them to launch the disposable -- CooperVision's disposable products in Japan which is taking place, I believe, this week.

By the way, if we hit the -- I might have said this already, so I'll say it again, if we hit the low end of our new guidance we've just given you, we will hit 23% organic growth in the second quarter.

Let me go into torics, our torics on a worldwide basis were up 12% but the monthly and two week products were up a robust 26% or $15 million. And if we break out, if someone wants to know, we'll break it out between the two week and the monthly product, it was about 50-50, so about $7.5 million of two week product and about $7.5 million of those toric products marketed as monthly. Torics now represent 40% of our worldwide business. In the U.S., toric's represent a little bit over 50% of our business.

Disposable, and that is disposable which are weekly and monthly products in the U.S. were up 39%, and with the weeklies, if I look at just the two-week products, two-week toric products, they were up 135% for the quarter. We're -- certainly are the fastest growing two-week toric product. We expect, by the way, on a global basis, our toric business to be between 120 and $125 million in 2003, which should represent between a third and 35% of what we believe the worldwide toric market will be at the end of 2003.

If I look at our sphere business, it was up 20% worldwide, and now represents 55% of our business. If I look at the monthly and weekly, two-week disposable part of it, part of our spheres, it was up 30 -- 30% in the quarter. And it represents 88% of all of our sphere business. And as you'll recall, the majority of our monthly and two-week spheres are basically marketed as value-added products, not as commodities. If I look at our specialty lens business, which are lenses that are used as torics, cosmetic lenses, multifocal lenses or lenses for dry eye, it represents 61% of our worldwide business and 70% now of our U.S. business.

Worldwide, the specialty business -- specialty lenses were up 24% in the quarter, and in the U.S. it was up 20%.

Our color business is doing very nicely. We are launching our -- a new line, which is our Expression Accents; these are lenses that are not necessarily designed, a disposable lens not necessarily designed to change the color of the eye but to enhance the beauty of the -- of a -- of a person's eye, in other words to make a blue or a brown eye a prettier brown or blue. These products are launching now. This new product line is being launched in the U.S. now and will be launched in the middle of July in the rest of the world.

Our multifocal roll-out is ahead of schedule. We still are expecting sales between 6 and $8 million this year, versus the $2 million that we did last year. We're now more than 3,000 offices versus 1,000 offices at the end of the year. So we are -- we're doing very well. The roll-out in Europe from our multifocal or disposable multifocal will take place in July, and we are currently, right now, as a start up in 100 offices in Europe.

Let me now go to highlights for CooperSurgical. We had revenue of $21.2 million, certainly ahead of our expectations for the quarter. All product lines were either on targets or ahead of target. I think the two areas that need some explanation is gross margins and operating margins in the business.

Gross margins came in about 3 percentage points below what we had done in the fourth quarter, that is 50%, about one to 1.5% of that can be explained with our acquisition of Sage. Sage was about $200,000 -- $200,000 dilutive in the quarter and had -- it affected our gross margin line.

The other part of it had to do a little bit with our -- our manufacturing, part of our manufacturing -- in -- in the -- the strength of the euro, part of our manufacturing is done for the culposcopes in Germany and our med scan business that we picked up a year-and-a-half ago is in Sweden and there was a little bit of product mix. We expect our gross margins to be back into the -- sorry, the 52, 53% range in the next quarter, and in the 55% range by the end of the year.

We also would tell you that the operating margins were 18% for Cooper -- CooperSurgical, without Sage they would have been 20% and without the Sage impact, and we expect operating margins at CooperSurgical to be back around -- in the low 20s this next quarter, that is in our second quarter, and in the mid-20s in the last two quarters of the year.

We also would expect between now and the end of the year our objective is to complete two more acquisitions as we have stated the last time.

Again, going into a little bit more review on gross margins and operating expenses, for the overall business I just discussed, CooperSurgical and CooperVision our gross margins moved down from 69% in the fourth quarter to -- and the 69% from the first quarter last year, before we owned Biocompatibles, to 67% this quarter. The sales to Rohto, our Japanese partner, impacted these margins by -- these gross margins by 1%. We would have had 68% gross margins there. And the -- the strengthening of the pound in -- understanding that a lot of our manufacture something done -- or 70% of our manufacturing is done in the UK, it eroded our margins, we think by about 1% more. So we do believe that going forward, for a number of reasons, one is efficiency, one is better product mix, and the fact that we are just now getting involved in completely integrating our manufacturing integrating with the Biocompatible business, we believe gross margins will be back around 68% in the next quarter from the 67% this quarter at CooperVision.

Expenses were 42 -- all operating expenses were about 42% of sales, exactly what they were in the first quarter last year. And if we look at CooperVision, which I think is a very strong indicator when we say that we're certainly on-line or certainly even ahead of schedule in the integration of Biocompatible and reaching our accretion goals you can see that CooperVision's operating margins in the first quarter of '02 were 42% and they were 42% in the first quarter of 2003 after Biocompatible.

So you can do your own models, you can take a look at the $22 million in sales. You can assume that probably the gross margins on Biocompatibles, the Biocompatible product line was probably in the 63, 64% range this quarter with very similar operating margins of the core CooperVision business. And I think you can come to your own model and come to your own conclusions that we're doing very, very well.

Also, I would tell you that if I looked at expenses as a percent of sales, we're probably looking at a little bit of improvement from a ratio standpoint in the second quarter than we are in the first quarter. I don't want to be very exact here, but it will probably -- it will certainly be below 42%. I don't think it will be much below 41%, so that will help those of you who like the model.

Now, before I turn this over to Bob, again, I will review one more time the guidance that we're giving you for the quarter and for the year. We're looking for revenue between 96 and $99 million, 75 to $78 of that from CooperVision, 20 to $21 from CooperSurgical. We're looking for earnings between 46 and 49 cents in the second quarter. For the year, we're increasing revenue from 380 and 4 -- 380 to $400 to 395 to $405, and that would -- CooperVision would be about 310 to $315 of that, and CooperSurgical would be about 85 to $90 of that. As far as earnings, we're increasing earnings from 198 to $203 which we had before, and we're going from 203 to $207 right now.

So with that, I'll turn it over to Bob.

Thank you, Tom. Good afternoon or good evening, everyone.

As Tom indicated in the highlights, we think it was the best quarter, perhaps ever, with revenues 62% above the prior year at $94 million, operating income up 51% above the prior year and our earnings per share at $0.44, up 47% from the prior year, leaving our trailing 12 month earnings at $1.71. Looking at the components, CooperVision had operating income -- or revenue of $72.8 million, a increase of 73%, and 18% on a pro forma basis, and in constant currency remeasured for the weakening dollar versus the pound and the euro, our organic growth was 13%. Specialty cap ex led the way with a increase of 24% above the prior year on a pro forma basis, now represents north of 60% of our revenue in CooperVision, specialties being torics, color and dry eye products, as well as multifocal products.

The toric business was up about 12% from the prior year. And it comprises 40% of our top lens business. Geographically, CooperVision was up in the United States 16%, and now accounts for 49% of our market worldwide, while international continues to outpace growing 20% and now accounts for 51% of our worldwide revenue in CooperVision. Biocompatibles is now achieving a run rate approximating $90 million and importantly within it Proclear accounted for a 65% increase above the prior year, and now comprises 57% of the Biocompatibles revenue. And, as you recall, that is very important relative to the gross profit mix because Proclear has gross margins approaching -- or exceeding many of the CooperVision products while we're -- whereas hydron had a much lower gross margin. As we go forward, that mix and shift will continue to help our gross margin trend.

CooperSurgical had revenue of $21.2 million, a increase of 33%, 11% of that was organic growth. Overall, Cooper had a revenue of $94 million plus 62% from the prior year, achieving 16% organic growth, and in constant currency 13% growth above the prior year.

Looking to operating income loss -- income, CooperVision had -- had a 62% increase in operating income. The significant factor there, when you're comparing operating ratios this year to the prior years, you'll recall when we bought Biocompatibles, it had near a break-even profile with gross margins in the low 50s, next to 50% operating cost and a near break even operating income. We have been able on a pro forma basis to improve gross margins at CooperVision by 350 basis points and our operating margin has improved by 530 basis points above the prior -- prior year's pro forma numbers. So we're real proud with the progress we've made in the integration.

And whereas the margins CooperVision had pre-acquisition were extremely strong because of the weighting towards the U.S., yes, it is true that the international markets are more complex and are not $100 million companies individually, which leads to less -- some -- some lesser margins, if you will. But we've -- we've made a lot of progress towards achieving our overall objectives. We had set a goal of achieving $0.25 accretion this year. We expect to meet or exceed that, and we expect to have accretion next year to $0.40 and we're on target to meet or exceed that objective also.

Overall, as Tom pointed out, our operating costs were 42% in both years. And we think that is a accomplishment in the context of the -- the fact that foreign exchange also increased our operating expenses, as well as the comment I made about adding in the Biocompatible acquisition.

The -- other points to make, overall gross margins were impacted by foreign exchange and, as Tom pointed out, CooperVision's gross margins were down 2% from the prior year. About a percentage -- approaching a percentage of that is the impact of foreign exchange and the fact that we source products from the UK, or a large percentage from the UK, and about a percentage is the impact of the fact that we have now entered the Japanese market at -- with our two-week product line, and that has negatively impacted CooperVision's margins, close to a percent also. So in both cases there, there's good news and bad news. Certainly the good news is that, while Japan will have a lesser gross margin, it contributed significantly to the operating income and -- and profitability, as well as the net income line. And we're happy with that going forward.

CooperSurgical had operating profits increase of 8% above prior year. It achieved a gross margin of 50 cents, 50% rather compared to 53% in the prior year. As Tom pointed out, some of that has to do with foreign exchange, that they import certain products from Germany and from Sweden. And secondarily that we -- as we've expanded our franchise into the infertility market, we have about -- both the acquisition and the Sage acquisition have had some short-term impact on weighting down our gross margins while we fully integrate and get the benefits of the synergy from the manufacturing area also.

Overall, operating margins at CooperSurgical were 18%, compared to 22% in the prior year. As Tom pointed out, we expect to get into the low 20s in the second quarter and then move back up towards the 20, 23 to 25% range towards the latter part of the year.

Looking at below the line items, interest expense was $1.3 million, which represented an overall increase of 57% above the prior year, reflecting the incremental debt brought about by last year's acquisitions. The good news is that our cost of money continues to drop, overall blended rate was about 4.3% for the quarter, and our current cost of any drawdown to debt is actually below 3%, 2.84% to be exact as of today. You will recall during the quarter we paid off $23 million of expensive debt in the UK from the purchase of our Aspects [ph] business in 1997. That was 8%, $23 million, and replaced by about 3.5% cost of money, which saved us about a million dollars a year and we saw some of those benefits in the quarter, but not the full quarter's impact.

The income tax rate for the quarter was 25%, which equates to last year's fiscal year rates, but it is 4% less than a prior -- first quarter in the prior year. The first quarter of the prior year at 29% was reduced throughout the year as a result of the Biocompatible integration and weighting of our business offshore as a result of that transaction. Look for our rates to continue down over the next six years. We expect to drop it from 25% to 20. And expect that to happen about a percentage -- a percent a year, meaning next year should be in around 24%.

The cash flow tax that we expect to pay will continue to be less than 5% over the next three or four years. That is a function of our net operating loss carry forwards that's still approximate $100 million.

Overall, earnings per share was $0.44, an increase of 47% and, as I mentioned, a trailing 12-month earnings per share of $1.71. Cash flow per share was $0.68 for the quarter, a increase of 39% above the prior year and brought our trailing 12 month cash flow per share to $2.64. You may recall that we define that as pretax earnings, adding back depreciation and amortization. In view of that, that is a good gauge for looking at our cash generation capability.

Looking to the balance sheet, we continue to have a solid balance sheet, our debt to cap ratio is 35% as of the end of January. We continue to have strong operating cash flow. For the quarter, we had $3 million in operating cash flow, keep in mind that in the first quarter we made a payment of our litigation that we settled ten years ago regarding breast implants to Bristol Myers, that was $4.5 million. And also annually we pay our bonus, paid in the first quarter, and if you adjust for the bonus and the payment to Bristol Myers, our operating cash flow would have been $10 million.

Historically our first quarter is always substantially weaker than the other three quarters. We are still projecting cash flow to be in excess of $60 million for the fiscal year and to have capital expenditures below $30 million, meaning our free cash flow should equal or exceed $30 million for the fiscal year.

One of the areas that I know has been frequently talked about in the past is our receivables and day sales outstanding. As you will have observed, and as we indicated in our press release, day sales outstanding increased from 71 days as of October to 79 days as of January. There really are four components that come into play here. Each of which accounts for about two days of the delta.

Number 1, foreign exchange impacted the balance sheet much stronger than it did the P&L given the fact that the dollar semi crashed in January against both the pound and the euro. That cost us about two days in DSO. The ongoing impact of the integration in some of the systems areas, primarily in Europe, and that also included some delayed payments caused by our inability to get certain back orders filled in -- in -- in the European theater, which leads to somewhat a slowing of some of the payments; that's causing us about, overall, two days in our DSOs. We expect to get that fixed in the -- throughout the second quarter. Thirdly, is the international mix. During the quarter, international went from 47% of Visions business to 51%, and that has a much higher day sales outstanding than the domestic business. And, lastly, a increase in the amount of business we have with optical chains compared to the independents or a larger growth in that area, which likewise is weighting our days outstanding.

Two of these will normalize and two of these are ongoing. We expect to get back to the mid-70s, as we progress throughout the year.

Month on hand for inventory was 7.0, equaling the same at year end and pretty much that's what we've been tracking the last several quarters, and that is our objective. We do not plan on inventory cutbacks. As you may recall we have over 500,000 FKU stock keeping units, we are more complex than any competitor which is why our gross margins are much higher than the than the competition and the operating profits are higher but this is one area where we pay the price, in higher inventory levels. We will continue to do so.

Goodwill, I know there has been attention paid to goodwill in the fourth quarter when it increased. We had a ongoing increase in goodwill in the first quarter, about $8 million. There were two primary areas for the increase, the first had to do with a earn-out purchase and a purchase in Australia which accounted for about half of that. And the second had to do with foreign exchange, when you remeasured the balance sheet, goodwill actually goes up as the dollar weakens. Overall we had cumulatively about a $7 million increase in our equity, brought about by the remeasurement process of the balance sheet and the weakening dollar. So goodwill went up because of foreign exchange and the earn-out and the acquisition in Australia.

The last thing, deferred tax assets on the balance sheet are about $40 million. That means that we will continue to not be a cash taxpayer through -- pretty much through the end of 2006. As we also pointed out in the -- in the fourth quarter, we took that out two more years and I think a lot of people missed the point that the cash flow implication really in 2005 and 2006 will mean that we get to preserve the delta pretty much between 5% taxes and 20% taxes, which equates to numbers approaching the 30, $40 million range. So that is a profound cash flow implication to that extension.

I guess the last comment is, we continue to have a very successful track record. Seven years with outstanding results. The first quarter has not embarrassed our five year track record of top line growth of 28%, operating income growth of 30%, earnings per share growth at 32% and cash flow per share of 27%. I think you'll agree all of those milestones we hit in the first quarter, 62% top line, 51% OI, 47% earnings per share and 39% of cash flow per share greatly exceed that five-year track record.

So we're off to a great start to the fiscal year of 2003 and are optimistic about the future. I think I'll turn it back over to Tom.

Stephanie, we're ready to start our Q and A.

The question and answer session will be conducted electronically.

Charlie Olsziewski, please. Charlie? Hello?

I'm here, can you hear me.

I can.

Okay. Let me start off with Bob made a comment about you're seeing a increase in business from optical chains, and it is clear that, you know, Ocular Science has clearly cited you know a reduction in retail traffic for their problems in their fourth quarter. How would you reconcile the difference other than the fact that they maybe a little more exposed than you with what they're seeing and what you're seeing in your business?

Well, first of all, if I think I heard the question right, they did blame some of their weakness, their top line weakness on foot traffic in malls. They also have a different type of product line. They have disposable spheres as basically their core business. And we see that weakening across -- across the whole market, not just with chains. You know, the results are the results.

We had pretty good sales through our optical stores, and you should also remember an awful lot of the optical chain business is not necessarily in malls. The Wal-Marts of the world are not in malls. Obviously a lot of Pearl Vision is not in malls. Costco is not in malls. There is a lot of chain business that does not depend on malls. But with Ocular's business, they do a lot of business with Lens Crafters and maybe some of the chains that are mall driven. I do not know. That is their issue. As far as we're concerned, the -- a couple of -- of analysts who either follow us or follow other companies do channel checks, Charlie, and they did not find the same kind of results in the reports that I have read that business necessarily was down that much. I do not know if that is where you're going with the question.

Yeah. That's a good answer.

I do not know if that is where that -- I guess maybe that's all. That was the question.

My -- I have another question regarding specialty lenses. I mean, I guess obviously that has clearly become a increasing driver of the health of the domestic lens market, for sure. Where does the -- the -- the percentage of revenue of specialty lenses as a total stand in the U.S.? Is it still about 50% and where is that on the international basis?

Good question. We think that is one of the reasons that Europe is so strong. Of course, we have six months of data. But I would not be surprised when we get all the data in that Europe will not be the leading section of the world, the geographic area of the world in growth. The history -- the thing that is going on in Europe, it is a little bit behind the U.S. and Canada in this transition away from commodity to, you know, to specialty or value-added.

If I took a look at Europe's business about three years ago, two or three years ago, only about 10% of their sales were driven by what we call -- or what we have defined, and the industry has defined, as specialty lenses. In the first six months, it's risen to over 25%. In the U.S. it is a little over 40% for specialty, and you put value-added spheres in, and then, you're right, it is over 50%. So this transition continues to grow.

I think you can see that, and it is a little bit of a surprise to us. Because, I'll be honest, I'll be very candid, I was not paying too much attention to this monthly spherics segment too much until I looked at it this year and said, "oh my god, it is up $40 million, incremental dollars. What are the products in here?" These are all these newer products that have been really introduced in the last two years. You know, frequency aspherics from us; the CIBA's aspheric, I forgot what it's called; the 30-day lens from Bauch & Lomb and CIBA; of course B&L's is off the market now, but night and day is still on; and, of course, you can see the robust, absolutely unbelievable robust growth of Proclear, which is a product for patients who have this afternoon dryness, it is a dry product. You look at these monthly spheres and they are growing at the expense of these old traditional two week spheres that were marketed by -- primarily marketed by Johnson & Johnson and Ocular Science, so that is a dynamic in our market and it's -- it's certainly carrying through in Europe.

And by the way, as a future driver, we see the European market mirroring very much what is going on in the U.S., and please remember in Japan it has not even started yet. I mean, you've got a market there where the specialty market it just now starting to blossom.

So this all adds value, overall value to the market. I did not get much into the drivers and why, the question is why is it that the contact lens market is growing so much so rapidly and looks so well in a fairly, you know, depressed economic scenario right now. And that is the fact that contact lenses are not a impulse item, for god's sake. I mean, it is -- you are either, when you are a kid, and you have a visual correction, you are not going to go around and not see anything. You're going to wear something to address the visual impairment that you have, and basically those are contact lenses.

And you have a growth in the number of teenagers, not here but in Europe, let's call it the baby boomlet, we've all heard of that, and on top of that the prevalence of myopia is growing, and that's the other driver. You know, kids today, more kids today need contacts, need a -- something to address their myopia than before. Myopia is, you know, people cannot see things far away, and you develop that when you are young.

So I gave you a long-winded answer here, but it is -- it gives you a idea of what are the kind of dynamics to -- driving the market, and maybe to answer the question why in the heck is this market doing so well?

Now, one -- you mentioned four categories in the U.S. that were the fastest growing, the third one was single use what?

The third fastest growing segment is a tie between disposable cosmetic products.

Right.

And single-use lenses, you know, products that are thrown away every day.

Okay.

The primary user of the products, it is good for our industry, the primary user of the products are people wearing lenses on a occasional basis. They do not wear them all the time. If you did not have those lenses, quite frankly, Charlie, those people would not be in the market. They'd be wearing glasses.

Okay. Thank you.

Thank you. Jason. Jason, Jason Mills.

Yeah, hi, guys. Congratulations on a good quarter. Just following up on Charlie's question a little bit, and your answer on European -- and Japan, you've commented that Rohto was $1.3 million in the quarter. Tom, are you taking up your expectations for Rohto this year, or are you still looking for around mid-$5 million or so.

You know, Jason, to be -- I -- I think to be prudent we're going to leave it between 4 and $5 million until we see what we do. They are just launching these products now as we speak. We are expecting about a million-and-a-half more business this next quarter from them with better margins, I didn't get into that either, by the way. The gross margins on the first shipment was much lower than we're going to get from the next shipment, because it included the trial and disposable -- diagnostic lenses so they obviously are much lower margin. So that's why I say that the Japanese piece of the business this quarter knocked us down about one -- you know, 1%. And probably will not have a tremendous impact on us in the next quarter. But I think right now, to be prudent, we're just going to leave it -- well enough alone. So that had nothing to do with taking the -- the number up.

Okay. So that would be sort of upside, if you're able to do more than that.

You are absolutely right. And the other outside that I did not get into -- I got it into the fourth quarter conference call of course is the multifocal product. I -- I think we have a -- an extremely doable target on that number, and I would not be surprised to see us go well above that.

Could you just remind us then what is in Rohto's hands now, what products are in their hands?

They have the two week spheres that they're launching now, and will be launching the two-week toric very quickly. And then in the -- at the end of the year, going into next year, the plan is for them to be launching the two-week -- or the -- yeah, the two-week multifocal product.

Okay. Tom, I want to know a little bit more about the aspheric business because, you know, our discussions and channel checks are suggesting sort of this coming out of nowhere, and I'm wondering if you could tell me how that went on the sales side in the quarter and sort of help me understand a little bit why that is doing so well.

Well, first of all, let's understand where the aspherics fit as a lens. They fit for patients who, quite frankly are -- where they've been profiled and -- and positioned, it's a product for people that have -- are a little bit older, have a little bit more difficulty seeing in low light conditions, and are higher myopic patients, you can take these lenses put them on one eye and have a patient where they are a commodity disposable and they can see the difference. That is where they belong. And they are also marketed primarily -- primarily as a monthly product, versus a two week product.

So there is some ability for a practitioner to -- to be -- for -- for the lens to be more profitable for the patient, because one of the problems an independent practitioner would have with a two-week product, or let us call it the traditional two-week disposable sphere is that they will -- the patient can go out and find that product in a Wal-Mart or a Costco at a price point not much higher than what they currently are paying the manufacturer for. So it becomes a disincentive to get a patient started on it. Plus, the fact that this if this lens does offer a benefit that a patient can put their arms around, which they can, they can see the difference, the practitioner can ask for a higher price point on it and won't be concerned about it being -- the pricing being jacked around too much. So that basically is the -- the reason for them to choose the product.

Okay. And, Bob, real quick, a question for you. What -- what are your -- you may have mentioned it, I may have missed it, sorry about it, but your operating margin targets for both CVI and CSI for the year?

We continue to expect that -- of course CVI will improve throughout the year. Historically the first quarter is the weakest, it is at 25%, so I would expect that, you know, we'll move to the 27% range. CooperSurgical we started the year at 18%, and I would expect it to be in the -- about the 22 range by the end of the year.

Is that a blended basis or is that what you are expecting in the back half of the year, on a blended basis what are you looking for?

Blended would be 22 for surgical, back half is -- is going to be in the 22 to 24 range.

Okay. I'll get back in queue. Thanks, guys.

Bob Schiff from American Century, please.

Hi, Bob.

Thank you.

I notice your net sales are down about 700,000 sequentially for the quarter but accounts receivable were up about $900,000 to a million. What will you do to get the ARs back to a more meaningful level because this is unacceptable.

Number one, let me tell you that already -- I'll let Bob answer it, but we did not say anything about February collections but our cash flow is extremely good in the month of February, and that's why we believe we're going to be in the mid-70s. You're -- do you want -- do you want to ask that question one more time, if you could, Bob, so -- so Bob Weiss can here it.

I actually got it.

Oh, you did get it. Okay.

I think I -- I think we commented on the fact and we did it from a day sales outstanding. You are correct, our revenue was down sequentially $700,000 and that led to a DSO -- we do it on an exhaustion basis, so we're capturing the last -- most recent sales of 71 going to 79 -- and -- and I think if you heard the first part of the presentation, we talked about -- there is a increase of eight days, and it breaks out into two of those days are foreign exchange. We have to remember that, in January, we convert -- we convert our balance sheet at the spot rate as of the end of the quarter, and in January the dollar tanked. That had the implication of increasing our receivables. It is anomalous. It does not track the sales. By two days.

We also indicated that we do have a systems problem, primarily in our international arena, which has led to some delays in collections. That we expected to have that behind us. It is part of the Biocompatibles integration, it deals with not only the -- the tracking of the receivables on the receivable side in certain countries, and I think I -- even in January -- in December mentioned that we had some challenges we were going through in certain countries like -- like Italy and Spain where we had two companies the same side -- size with different computer systems, one gobbling up the other. There clearly are blips when you do that, and we're working through the systems as we speak. We expect those two areas, the anomaly of the foreign exchange and the impact of the systems to -- to be -- be fixed or smooth out in the case of foreign exchange by the end of the second quarter, meaning we expect to get the to the mid-70s.

We also said there are two things that will not change going forward, the shift from domestic, which pays much quicker than internationals. As our international business grows, so will that weighting, and so will DSO. On the other -- the other area was chains, the optical chains pay slower than do the independents. As our business grows faster in that area, so will our mix. So we are now expecting our DSO to be more in the mid 70s than in the low 70s as that shift occurs.

Bob, are you there?

Yeah, well, all right.

Chris Cooley.

Good afternoon, Tom. Can you hear me?

Yes, I've got you.

Two questions if I could, this afternoon. One, could you address the Japanese market opportunity just in terms of contrasting that market in terms of its points of distribution and the way that products are sold versus the U.S. And then also what metrics are you going to be utilizing to gauge how well Rohto performs in the relationship? And then what would be your metric to -- to discern if maybe other steps would be necessary to push that product longer term on a more aggressive basis?

Okay. Let me answer the first one, get to the first question. The Japanese market is much different than any other market in that, you know, it was a hard lens market for a very long period of time. Most of their wearers by the way or 80% of the wearers supposedly, that have myopia have some degree of astigmatism and therefore the potential as a toric market could be larger than here in the United States. Thirdly, because of the problems that they have had in the past with amerisole [ph] and preservatives, it was a very slow market to accept soft lenses because of the solutions necessary -- necessary to preserve or disinfect lenses. So when J & J came along in the mid-'90s and introduced a disposable that -- you know, a single use disposable lens, it was a perfect market for it, Bob, from the standpoint of -- of health.

These -- these concerns obviously are not shared in the rest of the world, but in Japan they are. These -- these concerns obviously are not shared in the rest of the world, but in one reason why, and I -- I think I'm right on this, about 70 -- at least 70% of the world single-use market is today in Japan, because they like -- they do not like -- they would rather not -- or there is a perceived feeling that using preservatives in storage solutions are bad and therefore the single-use product or the single-use type of lens is preferred. That is changing though.

It is changing because we've seen that -- that solutions that have been introduced, and I'm talking about storage solutions or chemical disinfectants have been introduced by the Alci [ph] and Alergan [ph], or they own Alergan [ph], I guess it's called Advanced Medical Optics now, and Bausch & Lomb in fact are safe and therefore what you are seeing now is a gradual move into two-week products, not necessarily away from single use, single use is holding on, but the growth of the market is being driven more now by the two-week product. And the Japanese practitioner who happens to be in Japan, an ophthalmologist, and not a optometrist, is now accepting the fact that patients -- it is okay for patients to be using these solutions. I hope that helps to explain one dynamic in Japan that is completely different.

The way we're going to measure Rohto, quite frankly, is on results. We're going to look at it over a six-month period of time and see how successful they are in competing against Johnson & Johnson and B and L. Those are the two big players in Japan. I think they own at least 70% of probably the soft lens market in Japan. And -- and then we'll, you know, if we have to take other steps, we will take steps. But we are with part -- we have a lot of faith in Rohto. It is a fairly -- it is a pretty large company, as you know, Chris. It is a $600 million company, it is a Japanese-based company.

They will really be the only Japanese company in the soft lens market to any great extent, the other competitors are all either American companies like B & L and J &J or Ocular Science and CIBA is a little bit in that market, being a Swiss company. So as a Japanese company, we think they're going to do pretty well, and we're going to give them time to be successful. And so I -- that is about all I think I should -- should say about it right now. Did I answer all of your questions, by the way?

You did. If I could ask one brief follow-up as well.

Yes.

When you look at the domestic market, and specifically the cosmetic market, the gross statistic there that you quoted, the other side of the comment, much, much heavier growth than what we've seen in that segment in the last several years.

Yes.

Could you maybe give us some additional insight into how sustainable you think that rate of growth is in the U.S.

I don't think it is. Good question. What we had this year, before this year, you know, for most of certainly last year you only really had one competitor in the market and that was CIBA, they owned the world market in the cosmetic market, certainly in the disposable side of the market, and now all of a sudden 18 months later you have three new competitors, you have Cooper, you now have J &J, who introduced their product in the market, the end of the -- last year, the -- November I want to say of -- of 2002, but they started -- they really filled the -- the channel during 2000 -- I'm sorry, 2001 and they -- a -- they filled the channel during 2002. You had Ocular Science introducing their product in the middle of last year too. So I think a lot of the increase in the cosmetic market that we saw with the -- with the data was some -- some -- certainly some channel filling. And I think you're going to go back to growth that's more in line to 10 to 12%.

Is that okay? I think, by the way, to be very honest about it, I think you saw a little bit -- bit of that in the single use market too, because you had a number of new products in the single use market that were introduced last year too, that probably allowed it to grow a little more quickly than it has in the past two or three years.

Agreed. Thank you. Thank you. That's a great quarter.

Thank you very much. I haven't spoken with Seth, Seth Rosen.

Hi, Tom. Can you hear me?

Yes.

You guys did a great job on the top line.

Okay.

I have a couple of housekeeping questions.

Go ahead.

The first is that you said that the February receivable questions are extremely strong, I'm assuming that that means that the computer system issue is behind us at this point.

You know what? Go ahead. I do not think it is altogether there.

It is not --don't think of this system issue as one issue, think of it as, in this case, multiple countries, and multiple systems. I think we're making progress, but it is not going to be one magic fix that is good for the whole world. I think the solid cash collections that we have in -- in February are an indication of some improvement in that area. But I would not account -- account all of them to that -- to that phenomena alone.

Okay. How long do you think it takes to get it completely behind us.

Well, I think -- the I think the ongoing perfecting of the system is -- is probably going to take more than 12 months, but having said that, following the 80 -- you know the 80/20 rule, if you will, or the 90/10 rule, we'll get 80 or 90% there long before that, and the other 10% will be fine-tuning.

Okay.

So, we expect by the end of the second quarter to have made good progress in collecting our receivables that relate to, let's say the broader terminology of systems issue.

Right. And I guess, in international, if the mix continues to erode toward international, I mean, I guess we should be aware that would be a head wind as well, you know, potentially going out, looking out. Where do you think international will be as a percent of revs, you know, in a year or two?

Well, right now for vision it is 51%.

Right.

And I would tell you that, depending a lot, Seth, on what happens in Japan, because recall that the driver of our future growth, one of the very key drivers of our future growth, it is very simple to understand at CooperVision, we want to, at worst case, worst case, hold share in Europe, hold share in North America, and get a gosh darn fair share in the far east. The far east, or we'll call it Asia and Japan, represents almost 30% of the worldwide contact lens market, yet it only represents a couple of percent of our business. Our strength is in Europe, where we are number three hopefully this year, hopefully this year we think we're going to pass B & L and be number 2 in Europe, we certainly think we are growing much faster than B & L, and in the U.S. we are a strong number 3, and in Canada we are number 1 -- I mean number 2 behind J & J, but we're fairly weak, number 5, in the Pacific Rim.

So if all of this plays out the way we believe it is going to play out, I think you're going to see a 40/60 kind of break. I think you're going to see 60% eventually outside the U. S. I would tell you another reason why I think the mid -- I think we were overly optimistic on where we thought our -- our DSOs would really be. I mean, you guys can take a look at all of our peer group companies and other companies. I can tell you that a number of companies that -- that are in our space, certainly in our -- in the eye space, have DSOs a little higher and when I look at them they are companies that have more of their business offshore than onshore, so -- so that is one thing. I -- I think a slower economy is going to have a impact, you know, a stronger economy is going to have a impact on the DSOs too, so I think that those are two factors. And I do not want to get too defensive on it. It is what it is.

Okay.

And we feel pretty confident we're going to be in the mid 70s, if no other reason, based upon the results in February with our -- with our receivables and the overall strength of the business. You know, one of the things too, I just can hear somebody say, well, you know, the reason that their DSOs are up is because they are driving business out of one quarter into the other quarter. Yeah, I mean that would be about the most stupidest statement that anybody could say. Boy, if that was true, do you think that we would be so naive to be increasing guidance in the second quarter? It does not make any sense at all.

It does not.

That is not what happened. That is what it is. But on the other hand our business is strong, the fundamentals of this company could never be any stronger.

Right. Okay. Sounds good. Thanks Tom.

Thanks, Seth. I'm going to cut it off right now, I think we've been on for almost an hour and fifteen minutes. If there is anybody else that would like to ask questions, as you know, we are very accessible. Please give us a call after this conference call and we'll be able to answer any questions you want.

And with that, be aware, we will be having our next conference call, we'll be -- I'm sorry, we're going to be releasing earnings and having a conference call for the second quarter on June the 4th, and I hope I'll be talking to all of you then. And be looking for some very, very good news. Thank you very much.

And that concludes today's conference call. Thank you, everyone, for your participation.