酷柏 (COO) 2003 Q2 法說會逐字稿

Good afternoon everyone and welcome to The Cooper Companies second quarter of 2003 earnings results conference call. Today's conference is being recorded. At this time, for opening remarks and introductions I'd like to turn the conference over to Mr. Norris Battin, Vice President of Investor Relations and Communications for the Cooper Companies. Mr. Battin please go ahead.

Thanks, Sylvia and good afternoon and welcome to everyone. Before we begin, I'd like to introduce you to Bob Weiss who is our Executive Vice President and Chief Financial Officer and to 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 remind you this conference call contains forward-looking projections on the company's results. Actual results could differ materially from these 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 companies Investor Relations Department. With that, I will turn the call over to Tom for his opening remarks. Tom?

Thank you, Norris, I want to thank everyone for joining us this afternoon. Before I get on with any comments, let me go over the agenda very quickly, it will be very similar to what we've done in the past. I'll begin by giving you an overview of the highlights of the quarter, review with you the two businesses and the -- quite frankly the more important events from both companies' perspective, that is from CooperSurgical as well as CooperVision. After that, I'll turn it over to Bob who will then review the financial highlights for the quarter for the year, after that, we will then turn it over for some Q&A and after that, I will say good-bye. But with that, let me tell you that it was from our perspective anyway, we believe it was a very, very good quarter for Cooper Companies and I would hope all of you would agree with us.

I think the fact that we have addressed some of the issues of the past quarter, even though some have felt that it might have been more important than others, we certainly did address the cash flow issue as well as the DSO issue. But let me go over some of the more important highlights. The business -- we grew the business 34% in the quarter to 96, a short 96 1/2 million, vision was 38 million-- I'm sorry, 78 million in CooperSurgical was 18.3 million. CooperVision worldwide organic growth was 27%. Certainly more than twice that of the worldwide contact lens markets growth in the first half -- I'm sorry, the first quarter this year. And secondly, I would point out that the soft lens revenue, that is the revenue minus the miscellaneous income, actually grew 29%.

Our earnings per share were 48 cents, it was up 50% from last year's second quarter, net income was up 53%, and our trailing 12 months earnings per share is $1.87. Operating cash flow is $27 million for the quarter, that gives us a, I think, 30 million now, after six months we certainly expect to exceed $60 million for our fiscal 2003. I think as most of you know, we drive more cash in the last six months of the year than we do the first six months. Our DSO's were 71 days from 79 days in the first quarter, and we expect going forward in the next six months to be in the low to mid 70 days. From that, I will go on to guidance and review with you both the third quarter guidance as well as the 2004 guidance. For the next quarter, we're expecting revenue in the range between 102 and 105 million, I would tell you we're looking for between 81 and 83 million from CooperVision, and something between 22 and 23 million from CooperSurgical.

We're also expecting earnings per share to be in the range of between 52 and 54 cents. We're also looking for the full year of 2003 to continue -- we continue to look for revenue between 395 and 405 in earnings between 203 and 207. Now, talking about fiscal 2004, we expect our revenues to be in the range between 450 and 460 million. About 360 to 365 from Vision and between 90 and 95 from CooperSurgical. Of course, this is without any further acquisitions. We're looking for earnings per share in the range of between $2.42 and $2.48 assuming a 24% effective tax rate. Now, what I'd like to do is move into state of the union, if I may, for the contact lens industry. I think everyone knows that the industry enjoyed an absolutely outstanding year in 2002. Growth was certainly something above 10%, certainly in the low teens.

Because we had four of the five companies that own 90 -- or I shouldn't say own, I hate to use that word own, but certainly dominate 99% of the world soft lens market, four of those five companies reported revenue growth in the low teens, only one of the companies reported growth under 10%, and I think that was 6%. We also see that in the first quarter that we have a duplication of that kind of growth in 2003. And we certainly expect to see top line growth between 8 and 11% this year. In the first quarter, we believe that growth in the industry certainly was something in the neighborhood of 10 to 11%. What we know is in North America, where we have good industry data, that we have for the first quarter, and by the way, North America represents 45% of the world soft contact lens market, that we had 7% growth.

We also know that in the rest of the world, the other 55% that all five companies who are all public companies reported revenue growth outside the U.S. of between 18%, as a low number, that was Johnson & Johnson to 29% which was CooperVision. So if you put those two pieces together, we certainly believe that the market continues to be a robust growth market and Cooper is obviously, as you can see with our results, is a big part of that growth. Let me now move to what I would call a worldwide analysis of our soft contact lens business, of CooperVision's business. Worldwide our sales were up 39% or 42% if we want to talk about just soft lens revenue. Organic growth, that is using Biocompatibles business in all sales for all three months of the quarter, was 27%, and in constant currency our sales were up 21%, between 20 and 21%. Outside the U.S., our business grew 29%, and Europe, which was up -- which represents 35% of CooperVision's business, was up 25%. Our Pacific Rim business which only represents about 5% of our business, is still the fastest growing portion of our business, was up 55%. If we look at this on a global basis, our toric business grew 23% in the quarter, and now represents a little over 40% of CooperVision's overall business.

We expect Cooper's toric business on a global basis to end the fiscal year at something above 135 million, and I think that would represent something in the neighborhood of 35% of the worldwide market. Our disposable and plan replacement toric business now represents about 90% of that $135 million business for the full year. If I look at our sphere business, our spheres were up 33% on a worldwide basis, we certainly are the fastest growing company when it comes to spheres. That would be the non-specialty portion of the market. I should say the specialty -- the value-added segment of the sphere market. And our disposable plan replacement spheres grew 41%. If we look at specialty products that Cooper participates in and that would be toric's, cosmetic lenses, bifocal or multifocal lenses, as well as products for patients who have abnormally dry eyes, our business was up 39% in the world on a global basis, and 29% in the U.S.

Let me now move into talking a little bit about the U.S. market and the data we have in how we are competing in that market. Cooper's business in the U.S. was up 24% but in just soft lens revenue, we look at just soft lens revenue alone, it was up 27%. Our miscellaneous income in the U.S. was actually down 42%. In the calendar year, we're expecting our soft contact lens business in the U.S. to exceed 170 million in sales, and with the exception of Johnson & Johnson and Ciba, we certainly are in the Number 3 position in the U.S. We believe the other two companies actually will have sales, soft lens sales something under 130 million. I would also tell you that in the quarter, our business, as I pointed out, in the U.S. grew 24%. The other four companies reported sales increases that were materially a lot lower than that.

Two of the companies reported actually declining sales, and two other of the companies reported growth in the low single digits. So it shouldn't be any surprise to anyone that Cooper is the company that is -- not only on a global basis, but more importantly probably in the U.S., are taking market share away from everyone of our competitors. As we look forward to the next two quarters, we still believe that we will generate sales that will have organic growth in the high teens for CooperVision. Our share gain, by the way, looking at the data, the independent audit data we have, in the quarter indicates that our overall soft contact lens business now has about 12 1/2% share of the market, versus 10 1/2% share this time last year. In toric our -- the market for torics in the U.S. grew 13% in the first quarter. $61 million, to be exact. We are up 19% in our market share gain from 31% in the first quarter of last year, to 33% in the first quarter of this year in the U.S.

Disposable plan replacement market for torics grew 21% in the quarter, in fact, it is 52 million of that 61 million. Coopers disposable plan replacement business was actually up 23% and we now have a 34% share of that market. As an aside, 90% of all of our Toric business -- Toric products that we sell in the U.S. are disposable or planned replacement products. I think the segment where we've made the largest gain in -- and probably have gained even more market share is in the sphere market. The sphere market in the U.S. was up 6% in the quarter. Almost all of it, in fact all of the growth was driven by that segment that we talked about in the last conference call, and that is the monthly disposable spheres. These are products that primarily value-added products. They are growing at the expense of the two-week commodity products.

Those are the products that are basically marketed by Johnson & Johnson and Ocular Science science. Cooper's sphere business in the quarter was up 29% and we now have an 8% market share versus 6 1/2 market share in the year 2002. I'd also point out that the overall market for spheres grew a total of $15 million in the U.S. in the first quarter. The monthly disposables spheres grew 15 million. The disposable, or two-week, I would call them, two-week commodity sphere product lines declined 3 million, and the daily disposable spheres grew 3 million. So you can see that the monthly products that are primarily -- by the way, these monthly disposable spheres are primarily marketed by Cooper and Ciba Vision are gaining at the expense of Johnson & Johnson and ocular science. Specialty lenses for CooperVision in the U.S. was up 29% and now represents more than 70% of our U.S. business in the U.S.

And disposable plan replacement products, that is all disposable plan replacement products now contribute more than 90% of our overall business in the United States. As far as our multifocal is concerned, between Bausch & Lomb, which is doing a very good job with their disposable multifocal and Cooper are both growing very rapidly at the expense of the leader, which is -- which was -- I guess still is, Johnson & Johnson. We still are looking for sales in the neighborhood between six and 8 million, that's very consistent with what we have said in the past. We did 2 million, by the way, last year. And we're expecting to be launching our multifocal disposable multifocal product in Europe sometime later this summer. The color market in the United States was probably the only negative I will talk to you about when we talk about the overall contact lens market, not only on a global basis but certainly here in the U.S.

As I pointed out, the overall North American market was up 7%, the spheres were up 6%, the Torics continued to be the fast-growing segment of the overall market, was up 13%. The bifocal market, which is a very small segment, was up 24 but the color segment was actually down 15%. We also believe that if there's any segment of contact lenses that might be impacted by a sluggish economy, it probably is the color product lenses, because these lenses are, in many patients, are not the primary lens that they use. In many cases, it's a secondary lens. And probably is the better explanation why the color market probably on a global basis, and we don't have all the data from a global standpoint, but it's certainly at best case looks like it's a flat market.

I would also point out that our Proclear product line from Biocompatibles is doing extremely well, I think you saw that in the press release with more than double our sales. By the way, the Proclear product line which includes Proclear spheres and Torics are now our second largest product line thar we have at CooperVision right behind our Frequency product line. It's doing extremely well in our business overall for CooperVision is doing extremely well. Let me now move into CooperSurgical and talk about probably something that might look a little bit disappointing to us on the top line, there's no doubt about it, but I think I would delight to tell you that for the most part, most of the pieces at CooperSurgical met our expectations. What I mean by that is, the disposable consumable part of our business certainly met our expectations for the quarter on the top line, and when we look at our operating margin line, it certainly did hit exactly where we were expecting.

And that is the gross margin -- I should say not only gross margins but the operating margins of our capital equipment business, which did meet our expectations in the quarter, have lower margins and therefore the product mix allowed us to achieve the kind of operating margins that we were expecting. As we go forward, we believe that the problems that we experienced with the colposcope business, which by the way missed our top-line objective by about a million to a million and a half, probably is not going to be fixed overnight. We see that as being fairly sluggish for the rest of the year. On the other side of it, though, we believe our operating margins in this business are going to approach 25% going forward and the kind of acquisition we made with Prism is certainly going to be a bona fide plus for CooperSurgical as we go forward. We also would tell you that we're expecting and would hope that we can make one other acquisition between now and the end of the year. I think with that, before I think I'm finished talking, I've talked enough, I'll turn it over to Bob and let him give you an overview of the financial performance of the company and the quarter.

Thank you, Tom and good afternoon, ladies and gentlemen. I love the headline but it wasn't quite perfectly what I wanted to say, the headline of course said, "Revenue up 34% with revenue at 96.4 million, earnings per share of 48 cents, up 50 cents." And operating cash flow 27 million. Well, quite frankly, I was thinking maybe we should say cash flow, cash flow, cash flow, or cash, cash, cash, because I think we even surprised ourselves with how much cash we could crank out in a quarter. It was truly an awesome quarter for cash flow. And hopefully that responds to a few of those that had a lot fun with us in the first quarter when we reported a meager 3 million operating cash flow, even though that historically is our weakest quarter on a cash flow perspective.

Looking to the operating businesses, CooperVision, which now represents a little over 80% of our business, had its revenue growth 39% and on a pro forma basis, its revenue was up 27% above the prior year, in constant currency, it was up about 20% above the prior year on an organic basis. Once again, it was led, the growth was led by rapid growth of specialty contact lenses which were up 39% above the prior year, on a pro forma basis, and account for more than 60% of our overall product sales. Torics were up holding their own, growing 23% top line organically, and continue to account for about 40% of our overall CooperVision revenue. One of the stars in the product line was the disposable spheres which were up 43% organically, led by our Aspheric lenses as well as the Proclear spherical lens. Geographically, CooperVision U.S. is 52% of our lens business, and was up 24% on a pro forma basis. The rest of the world was up 29% and 14% in constant currency.

And Europe, accounts for 35% of our Vision revenue and was up 25% above the prior year. Looking to CooperSurgical, which had revenue of 18.3 million, it was up 16%, and essentially all of that growth was through acquisitions, particularly our acquisitions within the infertility arena. As Tom indicated, the soft spot was equipment sales and one other soft spot which is primarily equipment, was the non-gynecological equipment sales. Overall Cooper's revenue is up 34% of that 22% was organic growth, and in constant currency, we were up 16% above the prior year. Looking to operating income, at CooperVision had 20.2 million operating income, up 64%, and importantly, it's operating margins improved from 22% in the prior year to 26% this year.

The improvement was led by improvements in gross margin, which was up four percentage points from the prior year, going from 63% to 67%. That's clearly an indication of ongoing manufacturing efficiencies caused as we integrate Biocompatibles with our CooperVision manufacturing know-how, as well as the ongoing shift in product mix towards specialty lenses which have a higher gross margin. Today, Proclear accounts for 60% of Biocompatibles overall revenue, and that compares to 40% at the time we acquired it in March of last year. As Tom indicated, revenue for Proclear product line was up twofold above the prior year during the quarter. Going the other way on cost of goods, was the fact that we sourced a lot of our product from the UK and the pound year to date is up 11% compared to the dollar, and also we have lower gross margins as we sell products into the Asian Pacific market where by and large we do not incur the incremental operating costs.

Overall at CooperVision, SG&A was about 40% of revenue, and it hurdled, reasonably hurdled the impact of strengthening foreign exchange or weakening dollar, if you will, as far as that process, which tends to put some weight on the overall ratios that we report. CooperSurgical saw its operating margin about flat with prior year at $4 million, and achieved a 22% operating margin compared to 26 in the prior year. Since then, of course, we have made several acquisitions that are impacting our ratios particularly in the infertility market and [INAUDIBLE] area. Quite frankly we are making good progress in that arena. CooperSurgical's operating margins sequentially compared to the first quarter is up from 18% to the 22%, and improvement of four percentage points. That is largely due to an improvement in gross margin from 50% to 53%. So we're accomplishing a lot of what we need to and we think we're on track to be approaching 25% by the end of the year.

One area which we haven't had to comment on frequently in the past has been corporate G&A headquarters cost. During the quarter, we saw our headquarters cost increase 78% above the prior year. Included in that growth of about a million three is about a million dollars in tax-related projects. As you have been told in the past, we are intent on having ongoing improving areas in the area of our effective tax rate between now and the year 2007 when we expect to become a U.S. taxpayer and are targeting to have a effective tax rate of at or less than 20% by that point in time. As a result of that goal, we are basically have launched a number of projects designed to make sure we accomplish that as soon as possible. Expect that cost to be - drop a little in the third quarter and then to really tail off as we approach the end of the year.

Going the other way, will be to some degree the impact of Sarbanes Oxley and the upcoming rules 404 so as we look to the future, whereas we like to see the total reduction back to where we were in terms of our run rate down to the 1.7 million, it not going to happen because as we all know, just as the cost of defending this country is an expensive endeavor, the cost of doing everything that's a fallout of the post-Enron era, someone has got to pay for it, and I guess we all as shareholders end up paying for it. As far as below the line -- before I get there, the overall Cooper operating income was $21.2 million up 44%, and our operating ratios improved from 20% last year to 22% this year, a 2% improvement. Quite frankly, almost all of that I'll give credit to the driving force being the successful integration of Biocompatibles with CooperVision. Looking below the operating income line, interest expense of 1.3 million was up 1.7 million was up 17% above the prior year. It reflects the fact that last year we had $136 million that we put into the acquisition area in aggregate.

And it's been somewhat mitigated by positive cash flow as well as overall weighted interest rate that is around 4%. Currently under our revolver, under our line of credit, we're borrowing at Libor plus 150 basis points which quite frankly is below 3%. So money is certainly very attractive and continues to be attractive. As far as income taxes, we have an effective tax rate of 25% in this quarter, as well as the prior year, second quarter, and keep in mind that that's an accounting accrual that we're making, not a cash accrual. We, in fact, have almost $100 million of net operating loss carry-forwards and as such do not really send a check out the door for that provision, it serves to reduce our deferred tax assets. Our deferred tax assets were put on the balance sheet back in 1997 and '98 when we were required to do that by generally accepted accounting principles due to the fact that we anticipated we would have full utilization of our net operating losses.

Going forward between now and the year 2007 we expect our cash out the door tax rate to average less than 5% of pretax profits. When we get to 2007, our objective is to have an effective tax rate of 20% or less and we think we're on track to deliver that. Earnings per share was 48 cents up 50% above the prior year and that brings our trailing 12-month earnings per share to $1.87. Cash flow per share was 73 cents an improvement of 40% above the prior year, bringing our 12-month cash flow to $2.84. We recognize that that is a non-GAAP financial measure and certainly has been given feedback in that arena over the past three months. But quite frankly, we feel we should stick to our guns in terms of the meaningfulness of that as one gauge and not the only gauge in cash flow, certainly operating cash flow in a GAAP sense is a very important gauge, there we had the 27 million this quarter.

But it's also meaningful to try to demonstrate to people and get them to focus in on the fact that we have a strategic advantage compared to our competitors who are taxpayers by utilizing our NOL and that our P&L provision is, in fact, not a cash outflow and that's just another way we have of trying to remind the investor and the public. Looking to the balance sheet and cash flow, as I mentioned, we had 27 million of operating cash flow during the second quarter bringing our year to date operating cash flow to 30 million, free cash flow year to date is 17 million, and we are on target to equal or exceed our $60 million objective for the year, and expect to have in excess of 30 million of free cash flow in the fiscal year. Successfully we brought our days sales outstanding down from 79 days to beyond my expectations down to 71 days and we are assuming that going into the future we will be in the low 70s to mid-70s as we continue to shift our business internationally, that does continue to put a drain on our ratio improving much further there.

Once on hand, in inventory, we had 7.2 months, which approximates the month on hand we've had the last three-quarters and is considerably better than the 7.7 months we've had 12 months ago which was at the time we were busy integrating the Biocompatibles transaction. As far as deleveraging during the quarter, we dropped our debt as a percentage of total of capitalization from 35% down to 32%, and we continue to believe that if we were not to do future acquisitions, we would be looking at ratio that would be in around 20 or less than 20 by the end of 2004, although having said that, we do continue to expect to make acquisitions and, in fact, announced an acquisition shortly following the end of the quarter with the Prism transaction. We continue to have on our balance sheet deferred tax assets of 38 million, which will protect our cash flow from tax point of view, and from a consistency point of view, we think we have continued to be on track for delivering yet another outstanding year.

The past five years we've kept our top line and our ratios growing revenue 28%, compounded growth rate, operating income, 30%, earnings per share 32% and cash flow per share of 27%. On a year to date basis this year, we have top-line at 46%, OI up 47%, earnings per share up 48%, and cash flow per share up 38%. So certainly none of those ratios look like they're going to embarrass our historic track record. We continue to be optimistic about the future, both because of favorable demographics as well as geographic expansion we're now in as we move into Asia Pacific. Low ongoing lowering effective tax rate, tremendous cash flow, a good product line, pipeline, particularly the Proclear product that will move throughout our product line, and things to buy within CooperSurgical. On that note, I'll turn it over to Tom to move into Q&A.

I think we're now ready for some questions, if -- and I'll turn it over to the operator.

Thank you, sir. The question-and-answer session will conducted electronically. If you would like to ask a question, please do so by pressing the star key followed by the digit 1 on your touch tone telephone. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. In the interest of answering as many question as possible, we ask that you please be brief in posing your question. Once again, please press "star 1" on your touch-tone telephone to ask a question. We'll pause for just a moment.

Ted Huber, please?

Can you hear me?

Yeah, I can hear you, Ted.

Great. Thanks, Tom. Two questions. First on the expense side of the equation, Bob, I wanted to know if you could tell us what the 800,000 in other income is, also the increase in SG&A was a little more than at least we had thought. You mentioned currency. Could you be a little more specific about what impact that on the SG&A costs? And then Tom, the second question is clearly this U.S. market in contact lenses is accelerating, I wonder if you can give us a little more color on what is changing here in the last year or so that's causing this acceleration in the market, in your view? Thanks.

Tom, I'll start with mine. Below the line in other income, there's a total of 800,000, and that primarily is the famous foreign exchange. We had a transaction in the UK that led to a - in excess of $500,000 of foreign exchange gains.

So, Bob, to make sure I'm clear on that, effectively the currency hurt the gross profits that you reported. The way you guys account for them is it comes back below the line in these currency hedges, is that fair?

The two are totally unrelated. It has nothing to do with operating results, it has to do with the fact that we had an unhedged balance sheet item that happened to be unhedged the right way. The reason it was unhedged was that we don't know exactly the timing we could pay it off, if you will, and in the interim delay, we ended up making in excess of $500,000 in the delay in trying to take out the transaction.

Okay.

So it has nothing to do with the operating business in and of itself.

All right.

Relative to SG&A, which was up to 41.1% compared to 39.2% in the prior year, the two driving factors, the first was about a million dollars of tax-related costs that is in SG&A, which impacts that ratio about one percentage point, and then the other foreign exchange impacts the overall SG&A about one percentage point. So in aggregate, a little over 2% is those two items.

Just a quick follow-up, Bob, as you project forward, do you foresee any other below the line currency or other gains when you're talking about your guidance going forward?

I hope not. Quite frankly, we've been lucky as opposed to smart and we don't plan for them.

Okay.

One way or the other.

Okay.

Tom, I think then the.

That was it.

The trouble about the U.S. market.

I've answered the.

You answered all of his questions. Okay, good. Ted, I think it's a replay of what we've been saying or certainly I've been saying for the last three or four years, that is this market as well as the global contact lens market is being impacted by favorable demographics remembering that just about all of our brand-new wearers are teenagers. These children have been born, they're -- it's called the baby boomlet, we're well into it this year, so I think that's part of the answer. The other part of the answer is one of product mix. We have a favorable product mix here and it's just beginning to accelerate in Europe. And that is a movement away from commodity products to specialty lenses. I know Ron Serella mentioned it in the B&L, in his B&L conference call, which is absolutely true, you see that today in the U.S., more than 50% of the market is now driven by either specialty or value-added products and not commodities. And back in the late '70s that mix was about 35%. So you're getting more value, so you're getting more profit or let's call it more sales per patient. But in many cases, these are underserved markets. In Torics they were underserved for a long time. People with astigmatism didn't have good choices of lenses. On the other hand, with PRESBIOPIA today, we've been looking for a good multifocals, I think we have a couple out there right now. It's an underserved market, people that ;typically got a little older got out of the market, they dropped out because good soft lenses weren't available to assist them in reading. I just give you a couple examples. But I think it's a combination of both of those things are stimulating both the U.S. market as well as the international mark. I think that's what your question was, or was it specifically about Cooper?

No, that answers it. Thank you very much.

Thanks a lot. Chris Cooley?

Tom, can you hear me OK?

I got you, Chris.

Thanks. Two questions on Vision and maybe kind of tied together, then one on Surgical. On the Vision side, I apologize I may have missed it, did you break out what sales were specifically to Japan or Roto maybe more specifically? Secondly within the U.S., could you peel back one more time for us in the DPR segment and say what the two-week Toric or on core specifically was in the market? Lastly when you look at surgical, admittedly a disappointing quarter there, but what gives you confidence that you can see 13% organic growth without acquisitions at the low end of your guidance to 22 million? What should we look for as a metric that helps you have confidence you can do that after the 2Q?

Let me get to the surgical one because I don't think I every said 13%.

I'm just taking the low end versus --

Well, yeah, but remember that includes an acquisition, it includes Prism, too. So we're really looking at something in the neighborhood of 2, 2 1/2 million of sales from Prism this quarter. And I'm talking about the third quarter. And something around 19 to 20 million from surgical. So that would result in something in the neighborhood of mid to maybe upper single digit organic growth. Because I don't see the -- and let me also respond, for us it wasn't just a disappointing quarter, it was disappointing because we didn't get the kind of colposcope business we wanted but from an operating margin standpoint and from our core business, and remembering that certainly has nothing to do with losing out to competitive issues, we don't -- we're not counting CooperSurgical as disappointing only from the standpoint that we didn't hit 20 million, our objective. We still did pretty darn well on the bottom line. But maybe that will clarify this 13%. But we feel pretty confident that the core CooperSurgical business is going to be between 19 and $20 million this third quarter and we think the Prism acquisition is going to generate certainly something between 2 and $3 million of additional top line. So that's how we get to the 22, 23 million. Going back to -- let me see, you've got a whole bunch of questions in there. Let me get the two-week Toric thing out of way, I think that's what the question is. Our two-week Toric business on a global basis was up 189%. And our -- from a worldwide perspective, and in the U.S., it was up 90%. Remember that when you look at the disposable Toric business outside the U.S., there's no such thing as a two-week market. Those products that are marketed in the U.S. like Encore Toric and others that are marketed as two-week products are marketed in Europe as monthly products. And, therefore, they come under our what we call monthly. So the two-week and the monthly products combined on a worldwide basis grew about 51% from a worldwide perspective, and in the U.S., it grew 47%. In every segment of the market that we compete in, in the Toric market anyway, we're growing faster than the market. There isn't one segment we're not. Was that where you were --

Yeah, thank you, Tom.

Did that answer it? I thought you had three. Japan, oh, yes. The Japanese business, we're still looking at between 4 and 5 million as a guidance for Roto business this year in Japan. Overall, the Far East or I should call it the Pacific Rim Asian business for us is doing very well. It's up 55% over last year. And our distributor business in China and some of the other Asian markets are looking very good. One more thing I should point out that our Australian business, Australia's market is about the size of, oh, God, I guess it's a little smaller than Spain, but about a $35 million market, we have a very, very strong position in Australia. We do almost $7 million in that market. So we have a very strong market position and it's growing over 20%. Did that --

Yes, thank you.

Get all of it? Okay. Suey Wong?

Thanks, Tom. Could you give us your projection for growth with the overall lens market [INAUDIBLE] and then break it down for spheres, Toric and color and talk about the price impact for each?

Is that in the U.S.?

In the U.S. and actually overall, too.

For the world?

Yes, U.S. and for the world.

Okay. We certainly believe from an overall standpoint that the world market is going to grow between 10 and 12%. I just can't see it slowing down any lower than that. And please remember that in the U.S., where we had 5% growth in North America growth at 7%, because Canada grew much faster than the U.S., the U.S. market was impacted by the fact that Pure Vision, the B & L was forced to take Pure Vision off the market. Of course it was on the market last year. That certainly is worth about 2% to them and the fact that Johnson & Johnson introduced in the U.S. market in the first quarter last year their color product line, their Accuvue disposable color products that were -- and they certainly got excellent distribution to support their Olympic television programming -- their campaign, I should say. So we think that overall the market with those two -- looking at those two events in the U.S., that the U.S. market certainly grew the way it did last year, which was about 8%. So I'm saying that the U.S. market is certainly going to grow 8% this year. I can't see the North American market growing much less than 10%, and we don't believe that the rest of the world is going to grow less than 10%. I know I got some good feedback from another one of our peer companies who has quite honestly better data in the Pacific Rim who claims that their projection is something in the neighborhood of 7% growth in Japan, and that's without currency. And something in the mid teens in the rest of the Far East. They're looking for at least 10% growth in the Pacific Rim and Asia and we definitely know that in Europe right now, in the first quarter, we had to have growth somewhere between 12 and 13%. So I'm looking for something between 10 and 11, 12%. I would love to have some better data from Europe. As I think I've told you before, we won't have -- we get data in Europe every six months and we won't get the exact data for Europe until the August time frame, somewhere in the first of August. On the other hand, you can see how all five companies have reported their international business and even with currency, taking currency out, it certainly appears to be at least low teen growth outside the U.S. and Canada. As far as Torics are concerned, Torics are going to grow, we believe, something in the neighborhood of 20% on a worldwide basis, certainly double that of the rest of the world. And the first quarter in the U.S., Torics grew 13% so it was still the dominant grower in the marketplace. Color, I think, is going to remain pretty flat. I don't see it changing an awful lot until maybe some of the economic conditions get better because it is used in many cases as a secondary lens, not as a primary lens. The spheres, we continued to see this movement away from commodity products into value-added. And as you know, I think you know this, there are two companies that are generating almost all of the momentum in this monthly disposable sphere market and that's Cooper and Ciba, Ciba with their 30-day extended wear lens as well as an Aspheric lens and Cooper with their Proclear product line, which is their value added product for patients who have afternoon dryness with their contact lenses, as well as our Aspheric product line which - our Frequency Aspheric product line which does very, very well. I think the other one I'll throw out that I think is going to be -- is going to throw some growth momentum and certainly in the U.S., is the fact that we have two companies now who have good performing multifocals. This has been a very, very underperformed market forever. It's only an $80 million market on a global basis. And we think that there are enough legs there that this can become maybe not the size of Torics but probably has the potential to be the size of the color segment, which is about a 250 to $275 million market segment. Did that give you some flavor?

Yes, did it, Tom. Can I review some of the numbers you threw out? In the U.S., you mentioned roughly 8% growth this year. How much of that are you assuming is price?

Oh, I think hardly any of it is really price. I think it is -- well, I've got to be careful because mix, I guess, can dictate price. You know, you're asking -- this is really off the seat of my pants because we just don't have specific data, but if I had to be -- if I would have had to guess, I would say half the growth is coming from the favorable demographics or more patients, and the other half is from favorable product mix.

Okay.

I don't have a better guess than that. And that's strictly a guess.

Okay. Maybe a better question is a more general question on pricing. In Torics, what kind of pricing trends are you seeing in Torics and colors?

I think from an ARP standpoint for lenses, for Toric lenses, they're declining. But as they decline, you get more -- we're getting more lenses per patient. So you're getting actually more revenue per patient when you talk about specifically what's going on with ARPs per lens. But if you're looking at each segment individually, and that is if we look at the two-week segment, you look at the monthly segment, you look at the quarterly segment or you'll even look at the conventional segment of Torics, you're not seeing any pricing or we're not seeing any pricing of anything, their prices are going up a little bit but not much. It's remained pretty stable for the last two to three years. The going price for two-week products for Torics are in the $20 range, 20 to $21 for a six-pack of lenses. The going price range for monthly products that are used on a monthly basis are anything from about 26 to $30 for a six-pack. But we haven't seen much in the way of pricing and certainly not for Cooper.

How about in the color segment, Tom, how is pricing there?

I haven't seen anything in pricing on color.

Okay.

No change at all.

Then just one last final question. Could you give us your thoughts on just the competitive dynamics in the market year, who do you think is doing well and the top 5 you think are really catching on?

Boy, that's a lead one, isn't it. I've already sort of said, I made my little shot already when I pointed out that we grew our U.S. soft lens business 24%, and really, Suey, if you talk about soft lens revenue, just the revenue itself and forget the miscellaneous stuff, we actually grew 27% in the quarter. And you know we grew 18% in the U.S. in our first fiscal quarter, so we're doing very, very well in the U.S. And the other four companies that reported, two reported declining U.S. business. That was Ocular Science and Bausch and Lomb. But remember B&L didn't have PureVision and I think they discontinued some of their old product line, so they really had something close to 10% growth, at least that's what they said on their conference call. The other two companies reported low single-digit growth, J&J, I think reported up 1%, and I believe Ciba reported 4% top line U.S. growth. What we see is that in the sphere market, that Cooper and Ciba are taking market share away from J&J and Ocular Science, who are the primary marketers of two-week lenses, and that is as this product, this transition continues to move away from two-week into monthly products. In the Toric market, I don't think we're gaining much share from anybody. I think we're just getting -- we're just growing a little faster than other companies as new patients walk into the marketplace. Remember, when you look at the disposable Toric market, Cooper markets a product for just about any product profile, I'm sorry, any customer profile or patient profile a practitioner will see. We'll market five or six products in a category. Or the other companies only market one product, they have, you know one product for everyone. Well, that doesn't work for everyone. So we're much like the automobile industry, where you market a number of different automobiles for people that have different tastes, and it's the same thing the way we have approached the Toric market, one of the reasons we've been successful. Remember, too, in the last 12 months, Cooper was a company that has introduced the only new disposable products in a Toric category. We introduced Frequency XR, which is the only monthly disposable product available for people that have a high amount of astigmatism. In other words, people in the past or patients in the past who would get a made to oratoric lens. On top of that, we now launched a Proclear Toric in the U.S., we did that I want to say back in February or March, I don't want to say exactly what month it was, this is a product for patients who have dryer than normal eyes. So that's what I see. In color, we grew our color business in the U.S. 33% in the quarter and a quarter it was really not a very nice market for the color market in the U.S. We actually gained two market share points and obviously if we're gaining share, we're only gaining share of one company, and that's Ciba. I see also Johnson & Johnson taking a little market share away from them. So what Ciba is doing, they're doing pretty good in starting to gain some market share in the sphere market from other companies with their 30-day lens and their Aspheric lens but also losing because they were basically the only company in the cosmetic side of the market. Does that help a little bit?

That was very helpful. Thank you, Tom. The Ciba number you gave, the 4%, that was an overall number, solution and lenses and everything else?

Ciba, yeah. The only thing they said is that their lens business -- if I remember correctly, they said their lens care, because they don't break it out -- their lens care and their surgical business did very well, whatever that meant. So we come to the conclusion that probably their lens business was up about 4%. We think they're doing pretty well with their 30-day lens and anyway, that's enough.

Great, thank you, Tom. Thanks a lot.

Joanne?

Hi, this is actually Eric Shipley.

Hi Eric.

Two quick questions. Could you give us your thoughts on what you think customized ablation in the laser vision what the impact will be on contact lenses? And then also what are your thoughts on the future for CSI, any plans for a spin-off or does that stay with the company? Thanks.

I'll answer the last one first. Because I've answered that other one so darn many times, even though there's custom ablation, it's still lasic surgery, but it's always a good question to ask. The second one is we certainly have no plan at this point to spin off CSI. CSI as a stand-alone looks very darn good. After all, we think -- we feel pretty confident we're going to get our operating margins around 25% and we increased it from 20% in the first quarter up to 22% this quarter, we still feel very optimistic about the business strategy, or I should say the growth strategy we have for the company. Most of the growth of CooperSurgical continues to come from acquisitions, this is a very fragmented market, lots of opportunities to continue to make very accretive acquisitions and be a consolidator in this space. We still have the objective to have $100 million business by 2004, even though the guidance I gave is 90 to 95 million next year, remember, that didn't include any acquisitions and we certainly have been pretty darn successful in each of the last seven years of making the right kind of acquisitions. And Prism is a good example of the right kind of acquisition. By the way, I didn't say this, but Prism probably about a penny dilutive in this quarter and will be a penny accretive in the fourth quarter. So it's going to be neutral. I think that's consistent with what I've said in the past, it's going to be a neutral acquisition for us in the first six months but it will be accretive for us in the last 12 months. I mean, the next -- 2004. Let me move to our take on customer ablation. First of all, I'm opinionated so I'll give you my opinions. Procedures have been not only flat, they've been declining for the last three to four years, and even in the heyday of lasic surgery, there was certainly no strong indication that it ever had much impact on contact lens market. Because remember the profile of the patients are completely different. The profile of a Lasic patient is usually somebody in their early 40s, remember who are wearers are, the profile of a contact lens wearer is someone under the age of 35, about 75% of all of our wearers, by the way, are under the age of 75 and just about every one of our brand-new wearers are under the age of 20. 35, did I say 35?

You said 75.

Jesus, I would hope. On the other hand, when it comes to lasic surgery, you're talking about a 40-year-old, just about all of them are people that used to wear contact lenses. If they are wearing contact lenses, they're probably getting ready to get rid of them anyway, they're unhappy with them. So that's my first take on it. We don't see much impact. Also, I'll point out, I think some of the pressures that are on the lasic market may or may not be helped so much by custom ablation. We have yet to see -- there's always this story around the economy keeping people out, but I certainly don't buy into it. I'm a firm believer that lasic surgery serves definitely a good purpose for many patients but that the -- most of the patients that were looking to have it done were already in, it's basically for people that have a higher degree of myopia anyway, those without contact or glasses are pretty blind. We think a lot of those people are already gone. And I would tell you, I think there's a lot of probably unnecessary concern about what the media's played on the complications, which I think are -- it's just my opinion again, but I think they've been overstated. I don't think they're that serious and custom ablation supposedly addresses some of those issues. So I think it's just a matter of time to see where custom ablation is going to go, but I will say that no matter if it does act as a stimulus to growing the number of procedures, the impact on our market will be negligible. Does that take care of both of those?

That's great, thanks for your insight.

Seth? Seth Rosen, are you there?

I am here, hey guys. Two quick things. The first on the DSOs I'm assuming the improvement means that the system issues we talked about last quarter are all done?

I wouldn't use the word all done, I would say they're progressing nicely. therefore they certainly seem to be, great job.

They certainly seem to be. Great job.

You look at the operating margins, gross margins, Seth, you can see it.

Right. Okay. And then my other quick question was the cap ex has been running like two times D & A, I'm wondering what the cap ex guidance is for this year for the full year, for next year, kind of just remind us where the biggest areas of spending are?

We're continuing to see a run between 25 and 30 million dollar, and the biggest areas are you'll recall we were shutting down the largest plant that we bought from Biocompatibles, and as a result of that, we're upgrading to the next-generation of technology and because of that, we have capacity issues in our South Hamilton facility, primarily. Really not only there, Proclear is doing so well that we certainly need to keep up with the growth there. The second area in addition to capacity is systems, we are, as you know, we spend a lot of time and energy and money putting in a pretty good system in the United States. We are only partway there in the U.S. and are continuing to expand it into other areas. And we have really just begun outside the U.S. So that is a fairly expensive endeavor. I would assume that the systems cost will be run out over several years, and that some of the capacity issues that we have right now in terms of trying to keep up are fairly weighted in the next one to two years.

Got you. So it ramps down in, I guess, maybe 2006? It sound like it's probably at this level, 2004, 2005.

But I would say that if growth keeps at the rate that you've seen in this quarter, then obviously we're going to be trying to keep ahead of the curve.

Got you. Okay. Great. Nice quarter.

And I would tell you, that's the way I feel, too. I think going beyond 2005, we continue to grow this business, we're always going to have some cap ex that we're going to have to invest in capacity.

Right. High quality problem.

Okay. Thanks a lot, Seth. I'm going to -- we've been on now for over an hour. I know we have a couple people that are still waiting. What I'd like to do is we're going to call this a day. I would like to ask anyone who would like to call us off-line to please, when we hang up, give us a call and we'll talk to you. But I want to thank everybody for joining us today. We'll be having another, at the end of the third quarter, a conference call, I think it is going to be September the 2, I do believe. We're going to look at it right now. Is that a Wednesday? Hold on for a minute. I'm sorry, September 3, missed it by one day. But again I wanted to thank all of you for joining us today. We're looking forward to having another outstanding quarter in the third quarter, and for those couple people that are waiting, please give us a call. We'll answer your calls. Thank you.

And that concludes today's The Cooper Companies conference call. Thank you everyone for your participation.