酷柏 (COO) 2003 Q3 法說會逐字稿

Please stand by for realtime transcript. The Cooper Companies conference call will begin momentarily.

You're on hold for today's Cooper Companies third quarter earnings conference call.

At this time, we are admitting additional participants and should be under way shortly. We do thank you for your patience and please continue to hold. Thank you for standing by.

Good afternoon, everyone and welcome to the Cooper Companies Third 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 a lot, Jimmy.

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'd like to tell you that this conference call contains forward-looking projections of 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 company's Investor Relations department.

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

Thank you, Norris.

I want everyone to please excuse my voice. I have one of those horrible summer colds that I get about every three years, but I think you all know there isn't -- all the tea in China isn't going to allow me to miss this conference call. This is, if not the best quarter this company has had since I've been here, I can't recall one that's any better than this. Maybe some of you who followed Cooper can, but I certainly can't. Cannot.

In any event, I'm going to try to keep the disruptions to a minimum. If I start barking around or something, I will get out of the office, but in the meantime, we're going to follow the same format we've used in the past. As I pointed out, I'm probably going to talk a little less this time than I have in the past. Maybe that will be welcome to some of you. But I'm going to do that before I lose my voice and I'm going to let Bob do a lot of talking this time and certainly get on with these wonderful financials.

So, let's get going.

Briefly, as you all know, we had revenue of over $108 million, 20% above our third quarter last year. Earnings, per share, were 58 cents. There are about 2 cents of that is involved in changing the tax rate we use, so we really did closer to 56 cents. I will let Bob get into that. Trailing 12 months is $2.01. Operating cash flow of $18 million this year from operations and that brings us to $49 million year to date.

So, as you recall, we gave guidance of $60 million for the year and I don't think it takes a neurosurgeon to figure out we're going to go well beyond that. For the fourth quarter and looking at guidance, I'm going to get into guidance right now, we're expecting revenue to range now from $110 to $114 million with earnings per share of 61 to 63 cents, assuming a 24% tax rate. I think if we use the old 25% there's about a penny in there, so we are definitely increasing guidance for the -- for the year. Cooper now expects revenue of 409 to 413 for the year and earnings between 210 and 212 using a 24% tax rate. Previous guidance was 395 to 405 and our old guidance for earnings was 203 to 207 using a 25% tax rate. So if we used a 24%, you've probably got about 3 cents, Bob, in there, wouldn't you say?

Right.

So, it is an increase in guidance for the rest of the year.

For fiscal 2004, we expect revenues to range between 460 and 470 and earnings per share between 246 and 251 and that's assuming we're going to use next year a 23% tax rate. Previous guidance, by the way, was 450 to 460, so you can see we've increased our revenue guidance by about $10 million. And earnings of the old guidance of 242 to 248 with a 24% tax rate.

When we get into third quarter, looking at a little bit more closely as I pointed out, we had 20% revenue growth and that was 14% cost in currency. Gross margins improved to 63% from 62% in last year's third quarter, but I would like to point something out.

CooperVision had gross margins of 66%, but if we didn't have the impact of currency where it helps us, obviously, on the top line, our gross margins really would have come in around 68% since we do about 75 to 80% of all of our manufacturing in the U.K.

Our selling and G&A, I think you've seen some tremendous improvement there. It decreased to 38% of revenue from 41% last year. If, in fact, if I recall correctly, CooperVision went from about 40 down to 38% itself. But that, I'd guess the thing to point out, the major highlight there is that there is two -- two highlights, I think -- or three. I guess I ought to talk about three points here.

Number one. At CooperVision you certainly have the integration of biocompatible pretty much done, guys, now. We certainly have gotten the gross margin integration out, but now you see all the SG&A integration of any -- the efficiency of bringing the biocompatible business in within CooperVision.

Secondly, you can see that even in a soft women's healthcare market, CooperSurgical has done a wonderful job in managing their bottom line. We've got our operating margins up to 23% and, in fact, our objective of getting over 25% next year is right on target. I think we're -- they're doing a wonderful job in integrating all their acquisitions within the company.

And thirdly, of course, you can see that corporate headquarters is where any of the increase took place it was up 47%, $3.4 million. Bob can get into some of the specifics on that, but most of that is related to our global trading arrangement and we believe those kind of expenses you saw at headquarters will begin to flatten and actually decline going into 2004.

I think now it's time to get into some things that, quite frankly, I love to talk about and that is the CooperVision's business, which had just an outstanding quarter. In fact, it's a sequential we've had outstanding quarters at CooperVision for a while, but certainly it seems that the business, and you can see it from an organic standpoint, continues to get better as the quarters go by.

Third quarter revenue at CooperVision was almost $88 million, $87.8 million, up 24% and I think consensus guidance -- I'm sorry, consensus was somewhere around $82 million, so we certainly ran up over. Our sales were up 24%. 17% in cost and currency and, of course, that's all organic growth now. And we are up 41% from nine months, 34% in cost and currency. But if we look at this on a year-to-date organic basis, it's -- our business -- at CooperVision after nine months is up 23% and 17% in cost and currency.

If I look at where our -- our significant increases are coming from, from a geographic standpoint, which I will get into in a minute, is certainly the U.S. The U.S. market, we're really taking market share away from everybody. I mean the market is up 5 to 6% after six months and our business is up almost 25%. There isn't another competitor that has their U.S. business growing much more than 5%. So we're hurting everybody and if we want to take a specific shot at where most of it -- or a lot of it is coming from, we think it's from J&J and Ocular Science and the spherical market which I will get to in a moment.

The other side of it, of course, is the specialty lens franchise. If you look from a global standpoint, our rehethoric business, our cosmetic business, our multifocal business and well as our dry eye product line, those are all of our specialty products. All are doing great, doing great all over the world. And lastly, and very importantly in the sphere market, this transition that we're seeing not only in the U.S., but on a global basis, away from the two weak commodity spheres, disposal spheres, now going into more monthly, value-added disposable spheres. We're a leader in that market, as well as Ciba. We're two companies themselves are doing well in taking market share away from the other two companies that were big players in that market, which they still are, and that's J&J and Ocular Science.

At CooperSurgical, I pointed out we did -- had 4% growth. Almost every bit of that has come through acquisitions. We did $20.6 million, missed the target that I put on for CooperVision, uh, CooperSurgical, which was $22 to $23 million. Quite frankly, if we would have gotten our -- our -- our catheter and fertility product out on plan, which is between $1 and $1.5 million of sales, I can we would have gotten right there.

We're still 16% ahead for the nine months and I think I -- as I pointed out, I think our management at CooperSurgical has done a wonderful job in managing the business in a fairly tight market certainly compared to the Vision market. And really making the operating margins come to place. They have done an excellent job in -- in integrating the acquisitions we've made. Operating margins in the quarter was up 23%. I don't think you can use 12% last year as a very good guidance because we took $2 million out of the discontinued product line. We only reported 12% operating margins last year for CooperSurgical. Probably would have been closer to 19 to 20% if we hadn't written off the $2 million.

But year -to-date, we're at 21% operating margins and as I pointed out, we're still very comfortable hitting between $21 and $22 million in the fourth quarter and looking at operating margins to get to our goal of 25% that I said quite a while ago.

So, now let me get into some specifics on the Vision business. As I always try to do, is give you the State of the Union for the contact lens market.

There is no market in all of eye care that is dynamic in growing as rapidly at the contact lens market. It's not up for argument. The facts are there. Anybody can read them, if you want to read them.

All five companies that play in this marketplace are public companies who report their sales and through six months, the market is up about 13% on a global basis. It's probably close to 7 or 8% in cost and currency and that's very close to what it was last year. I think there are two other pieces that I should point out to you.

Number one, we're using a Ciba Vision report that includes all of Ciba Vision. They don't break their lens business out, but I've been told by Ciba management -- I've been assured by Ciba management -- that their lens business is growing faster than their overall business. So I would tell you that 13% is probably a little higher than that.

Secondly, you should know that last year we had Pure Vision from Bausch & Lomb in those numbers for the first six months in the U.S. and we don't have them this year. So, that, again, is a -- not an apple to orange kind of comparison. I think our sales would be higher, or certainly the growth of the market would be higher, if you add pure Vision in for all six months.

And lastly, one that I think is very important to focus on. The only market segment in the overall contact lens market that is under any pressure this year, and certainly it started last year, is the cosmetic market. I don't have the full worldwide business numbers in, but certainly in the U.S. and North America we have very strong data. It's not just strong data, we have the data. The market status around 13% year-to-date. Now, remember of these lenses are not what we'd call primary lenses in patients. There are lenses that are secondary lenses for patients. The profile of the wearer is usually a younger woman, and certainly in a soft economy, we think is having an impact on it.

The interesting thing is if I take that cosmetic piece out and just look at all the other products, here in this worldwide contact lens market, which are products that are used primarily for people, you know, that are -- that are nearsighted and need to see, the growth of the market would be much higher than the 13 or 14%. We think it would be closer to 16%.

So, I would just point out to you that the overall market is very, very healthy, growing certainly as rapidly as it did all of last year. In the U.S. the market is up about 6% if we pull out the Pure Vision thing and as far as taking color out of the market and just looking at the overall U.S. market without the cosmetic piece in, we have a market that's growing double digits in North America.

The drivers of growth, we look at the overall market in the U.S. and I will stick to the U.S. because we have very explicit data. The market is up about $30 million through six months. Torics are up 8% for the quarter. They're up 9% year-to-date. Monthly spheres, and that's all of the value-added products primarily as I pointed out from Cooper and Ciba, are up 30% through 6 months, and $20 million of that $30 million incremental growth of the U.S. market is driven by these products.

The two-week toric segment is up 35%, and that's $15 million of that $30 million. Single-use products are up 10%. It's certainly slowing down, still only less than 10% over their overall market, but they were up $5 million. And lastly, I will point out a segment, it's a small segment but is growing and growing because of Bauch Lomb and Cooper, and that's the multifocal, disposal market, which is up a fat 23%, or $5 million incremental dollars. In fact, it's growing in incremental dollars as fast as the single-use products are.

You add all that up and I think you can see that you're close to $45 million. So, somebody is going to say well, where did the other $15 million go? And the other $15 million went on your commodity, two-week spheres and old conventional products are declining about at that rate.

Hopefully, that gives you a good very much of what's going on in the market.

The big loser, I think overall, are those companies that are continuing to play in a commodity two-week sphere market. It's flat, best case year-to-date.

This market is very rapidly moving to monthly disposable, value-added products. On a worldwide basis, as I pointed out, we think the market ends up between 13 and 14% and that's between 8 and 7% in cost and currency.

Another part of the data that I think supports any position that this is a very strong market and the reason I think I'm going focus upon it because I heard in one conference call, somebody making an excuse that in the U.S. there seems to be a problem in the U.S. market.

Well, we all buy data from a company called Health Products Research, or most of us do. It's been around over 25 years, very valid data. They -- I think the sample size is about 6,000 practices out of about 30,000 in this country. They measure office visits. Total office visits for product lines and they also report data on new product office visits.

Interesting data in the third quarter, certainly year to date, too, in the U.S. office visits are up 8% overall. 8%. And new contact lens office visits are up 13%. That doesn't sound like a very weak market. To me, it sounds like a pretty darn strong market.

And to support some of the data we have on color the only segment that is declining when they segment all of the data out, is the color visits, the visits for cosmetic lenses. They're down, I think they're down about 5% and they only contribute about 8% of the total office visits now. I don't think I'll go into any more data, I think that gives you a pretty good view of what's going on.

When we go forward, I think we're going to see the U.S. market close pretty close to 10% growth for the latter half of the year. I also see that in the worldwide. Don't see any reason why the fundamentals have been driving the accelerated growth in this market for the last couple of years are going to slow down.

The baby boomlet, and as you recall, most of our wearers are all -- new wearers, I should say, brand-new, initial contact lens wearers are all teenagers, primarily young teenagers. And we have the baby boomlet upon us here, in Canada and many of the European countries. So, we have good demographics in this market. The prevalence of myopia decade-to-decade is getting worse, shouldn't be a surprise to anybody. And this company, as much as refractive surgery market, we all depend on myopia. That is what drives our business. No myopia, no business. Lots of myopia, lots of business. So those two factors are going on.

And, of course, lastly, I think all companies focus upon in their own conference calls and their press releases is that there's a definite movement on a global basis away from commodity products to specialty, or value-added contact lenses.

Going on to CooperVision's performance, let's talk about the company a little bit.

Worldwide market, I said, was up 13 to 14%, probably 7 or 8% in cost and currency. Our business was up 24% and our -- in cost and currency we were up 17%. So, we're growing at more than twice the market.

U.S. market was up between 5 and 6%, CooperVision was up 16%. From a toric standpoint, we continue to gain share, if you believe that, folks, that's a fact. Worldwide market was up between 13 to 15%. Cooper -- Cooper was up 21% in year-to-date in the U.S., the market was up for toric's 9%. Cooper was up 12%. So, on a worldwide basis, as well as in the U.S., we continue to gain share in the toric market.

If I look at the disposable torics, and those are two-week and monthly products, the reason we put monthly products in, many of the brands that are sold in the U.S. are marketing as two-week products. In the rest of the world, they're marketed as monthly. So it's the only way you can look at it. Cooper is up for the quarter on a worldwide basis, 48% in this category. 41% year-to-date. This is a market that might be growing 15% to 20%. In the U.S., the market is up 16%.

Year-to-date, Cooper is up 43% in the quarter. We continue to gain share in this disposable toric market and year-to-date, we're up 45%. Torics now represent 40% of the share of Cooper's overall business on a worldwide basis. And 50% of our U.S. business.

From a 2003 calendar basis, we expect sales for our torics to exceed $135 million with a 35% worldwide market share and that would be a gain of 1 share point worldwide. In the U.S., we have about a third of the market right now, we expect to have pretty close to 35% market share at the end of the the year and we're looking at our sales to exceed $85 million for torics in the U.S.

If I look at specialty products, and then define those again, specialty products or -- are torics, products used for cosmetic purposes, multifocals, as well as products that are specifically designed for patients who have dry eyes. We grew our business on a worldwide basis 26% in the quarter. Year-to-date, we're up 30%. It now represents 61% of our overall business.

Our multifocal business continues to exceed our expectations during the quarter. We just expanded our business into Europe. The old guidance was around $6 million. We think we're going to do between $6 and $8 million in 2003 and we expect next year to grow that business at least 50%. Somewhere in the neighborhood of $10 to $12 million.

I think, lastly, I will focus on the sphere market.

As I pointed out, not only in the U.S., but globally, products are moving away from the old commodity disposables to these value-added spheres. Products, by the way, be specific, like our Proclear product line for dry-eyed patients. Our frequency of spheric products and other spheric products for patients who have a very low amount of astigmatism and may not need toric lenses, as well as products for a 30-day wearer, like Ciba's product called Night and Day. Those products are taking market share away from the old Accu-Vue's, Accu-Vue II's and Onocular Science products.

Cooper's disposable spheres were up 39% for the quarter and up -- I'm sorry, 39% worldwide and up 30% in the U.S. Giving you some geographic highlights, as I pointed out, the U.S. business we've already talked about its growth. It's -- it's -- I think it was up 16% in the U.S., and then year-to-date our business is up 19%.

The only thing I would point out to you if I look at just soft lens revenue and not just all soft lens, all sales for CooperVision in the quarter, our business was up closer to 18% in the quarter, and not 16%. In fact, if I look at it on a year-to-date basis, our business would have been up 20%. If you look at just soft lens revenue for the year-to-date in the U.S., versus the 19%.

Outside the U.S., our business grew 33%, 18% cost and currency and for the year-to-date, we're up 28% and 14% in cost and currency. Our Europe business is up 37, which is -- 37% of our revenue, grew at about 28% and is up 22% year-to-date. And in the Asia Pacific, primarily in Japan, our revenues are up 91%. It's doing extremely well. They had 78% for the nine-month period, but now represents more closely to 4 to 5% of our business than we've -- than the 2% that it represented last year.

As far as new products are concerned, I think we have accelerated the one change from what we talked about in the past is we've accelerated the launching of our Proclear multifocal line, which we think is going to be a big product line because as you all recall most people that wear multifocals, thank God, are over the age of 40. Glad they're not younger than that. But most people that are over the age of 40 do have, experience some dry eye problems and, of course, we're going have a pretty good differentiating story to tell around our Proclear multifocal disposable product. Really accelerating and start to sell that product in Europe by the end of this year and we're going to be launching in the U.S. in the first three months of next calendar year.

As far as CooperSurgical is, I will move very quickly and point out a few things.

As I pointed out, even though we did 20.6 and I had guidance of $22 million, I think we would have gotten there if we got our -- our product -- our launched our catheter infertility product, which now we're going to be launching during this quarter. We are -- our operating margins have done very nicely. We've moved them up and, quite frankly, internally it's certainly meeting -- even though the top line is not meeting our expectations, the bottom line is. And I would point out that the integration of Prism, which we purchased the first of May, is ahead of plan.

I think if I look at next year, what we're looking at in the next quarter, we're still looking at something between 22 and $23 million of sales and I would tell you next year -- I think we're going to be -- hopefully by the end of the year, back to the kind of organic growth that will feel more comfortable with and that would be in the middle single digits of where we are today. But I just want to reassure you that we're not losing any sales in CooperSurgical because of competition issues. Primarily has to do with a fairly soft market in women's healthcare, which we think will turn around during some time next year.

Well, Bob, I talked a little longer than I thought I would and my throat is still here and I haven't coughed. So, I will turn it over to you.

Thank you, Tom.

I think I'd like to just reiterate a couple of things Tom said. One is, of course -- we're all ecstatic about the quarter and hope you are all, also. $108 million in revenue, up 20% with earnings per share of 58 cents, bringing our trailing 12-month earnings per share to $2.01 and an outstanding cash flow quarter at $18 million. And cash flow per share being 84 cents, up 22% from the prior year, bringing our trailing 12-month cash flow per share to $2.99.

Looking at the operating businesses, CooperVision saw its operating income -- its revenue increase 24% and then cost and currency, it's up 17% above the prior year's third quarter. Sales of specialty lenses was up 26%, bringing our overall specialty lenses to 61% of overall CooperVision revenue. Torics was up 21% and not -- and continue to account for about 40% of CooperVision's revenue. Disposable spheres is up 39%. This includes both aspheric lenses, which are used for low-light lenses as well as low levels of astigmatism as well as Proclear, used for those people with symptoms of dry eye and -- so that area is -- is really up and doing real well. When I talk about specialty lenses, of course, I'm talking about torics for astigmatism, color products that change the color of the eye, multifocal lenses for presbeopia and dry-eye product, Proclear.

As far as geography, the U.S. is up 16% and accounts for 48% of CooperVision revenue. The rest of the world was up 33% and cost and currency was up 18% above the prior year's third quarter. Europe, which accounts for 37% of Vision revenue, was up 28%. Asia Pacific was up 91% and now accounts for 4% in CooperVision.

Looking at CooperSurgical, we had $20.6 million and increased 4%. All of that was M&A related and overall Cooper had revenue growth of 20% and 4% -- I'm sorry, 14% of that was in cost and currency.

Looking at operating income, CooperVision had $23.9 million in operating income, an increase of 42% above the prior year and its operating margin improved to 27%, compared to 24% in the prior year. A 4% improvement happened in SG&A, reducing SG&A from 41% in the prior year down to 37%. That reflects the ongoing integration of biocompatibles around the world. Our G&A within that component, in fact, was up 3% and that 3% was much less than the overall impact of currency on -- on our operating costs.

Distribution and -- or detailing and selling, our sales force costs was only up 7% worldwide, and likewise, that is equal or less than the current impact and distribution costs were only up 12% compared to the 24% increase on the top line. So, we're making good progress in the area of distributing our product and customer services.

Relative to gross margins, they were 66%, which equals the prior year third quarter. There are offsets, there was favorable impact of manufacturing costs coming down as we integrated the largest plant of biocompatibles into ours. And secondarily, there was favorable product mix as we continue to move towards more and more specialty lens products.

On the other hand it was a negative impact of foreign exchange, we make the majority of our product in the U.K., where the pound was up considerably above the prior year, 11%. And we also had sales into Japan where we have a lower gross margin but in essence make it up the operating margin line.

CooperSurgical had operating income of $4.8 million, increase of 95%. And its operating margin improved from 12% in the prior year to 23%. As Tom pointed out, there was a $2 million write-off in the prior year, the abandonment of product line, which if we adjust for that, would have brought it to a 22% margin.

In spite of, Iet's say in addition, we had a acquisition at the beginning of the quarter, so, the quarter hurdled that integration impact, if you will, so, we're pretty pleased with the 23% and the progress that CooperSurgical has made in integrating its operating units. Gross margin at CooperSurgical increased from 44% in the prior year to 54% in the current year third quarter.

Overall, one important point that sometimes get lost on CooperSurgical when we tend to look at a lower sales level, one of our objectives is return on investment and overall CooperSurgical delivers about a 29% return on invested dollars that we have put into it. So, we're happy with its return on investment, certainly from that perspective.

Corporate G&A, also as Tom pointed out, is up considerably from the prior year, plus 47%. It was about.$1.1 million that was spent on various tax projects that are targeted towards our global trading arrangements. The objective there clearly is to see to it that we accomplish our goal of having an effective tax rate by 2007 of 20% or less. We are making good progress towards that goal and, in fact, as was pointed out, we reduced our effective tax rate from 25% to 24% this quarter.

Looking at various other items, research and development, before I move to below the line was up 25% above the prior year and we have been investing in two projects within CooperVision, one in the area of an extended wear lenses and the other in technology. So we continue to invest in those areas.

Looking below the line, interest expense was $1.7 million, a decrease of 29% from the prior year. Both interest rates impact a reduction of rates due to internal and external factors have favorably impacted us.

We also restructured some debt. Last year we had a $23 million note for 8% that was paid off in December and has the favorable impact and then during the quarter, we affected a $115 million convertible divestiture offering for 2 5/8. The good news there is we've locked in on lower interest rates, a fixed rate for five years at a minimum. So, we're real happy with the -- the impact on interest expense both because of internal and external factors. Operating income net in the prior year we had $3.5 million of gains due to both -- the sale of certain stock as well as -- which was over $2 million as well as a large foreign exchange gain of $1.5 million. So, we've hurdled that during the quarter.

The tax provision as was pointed out was reduced from 25% to 24%. That's favorably impacted third quarter results by 2 cents. Full-year impact for fiscal 2003 is about 3 cents as it impacts our overall guidance and also it impacts next year's guidance by about 3 cents as we are expecting our effective tax rate next year now to be about 23% instead of 24%. That was in our previous guidance.

Earnings per share was 58 cents for the quarter, positive 35%, bringing our trailing 12-month earnings per share to $2.01 and cash flow per share was 84 cents, up 22%, bringing it to $2.99.

Looking at the balance sheet and cash flow, we had an outstanding quarter cash flow, $18 million. Bringing our year-to-date cash flow -- operating cash flow, to $48 million and we continue to expect to equal or exceed $60 million in operating cash flow and to equal or exceed $30 million in free cash flow for the fiscal year.

One of the drivers of outstanding cash flow is then favorable improvement of day sales outstanding, which now have dropped to 66 days, which compares to 70 days as of the end of the second quarter, and 79 days as of the end of the first quarter. That represents the continued emphasis of collecting, it's the squeaky-wheel approach in this economy and likewise, the improvement of our systems, both computer-wise as well as overall structure, which has had a considerable favorable impact.

What's on hand in inventory is now 6.3 months on hand, compared to 7.2 months as to the end of the second quarter and 7 months as of the first quarter. That represents favorable progress in terms of integrating plants. We've now completed the shut down of our largest biocompatibles plant that was in Farnsboro, near London, and moved it into our Southampton facility, primarily. And as a result of that, the buffer stock required for that -- for that transition has now been reduced.

The other key factor to -- to understand it is as our product line shifts more away from conventional lenses, which many cases have high SKUs, such as our toric custom-made product line and moves toward the most two-week and one-month variety, which have less SKUs that are also favorably impacts our overall required months on hand. So, we will see some of the benefits of that going forward.

We continue to expect that day sales outstanding will be in the low 60s -- I'm sorry, the upper 60s, low 70s and months on hand will be in the mid 6.5 toward 7 range as we -- as we go forward.

From a capacity point of view of debt, we reduced our debt to cap from 34% down to 32% as of the end of last quarter. As a result of the acquisition of -- of prism at the beginning of this quarter, it's back up to 34%. Prism added about $23 million in -- in debt. In addition, we -- in doing the convertible offering, added another $15 million since we issued $115 million of convert to ventures and took out $100 million in our revolving credit agreement. As a result of that, we have a lot more cash than we normally have on our balance sheet.

We have $31 million in -- in cash, which compares to about $12 million as of the end of the second quarter and $10 million at year-end, October of last year. From the point of view of operating results, we -- we're certainly not going to embarrass our five-year track record that we had coming into this year, which was compounded annual growth rate of 28% of revenue, operating income up 30%, EPS 32% and cash flow per share of 27% on a five-year basis. This year on a year-to-date basis, our revenue is up 35%, operating income is up about 48%, earnings per share is up about 42%, and cash flow per share is up 32%. So there is nothing embarrassing about those (inaudible) in a non-inflationary environment and hopefully you'll share our enthusiasm over that.

I think I've said about enough and I'll turn it over to Tom and we'll move into Q&A.

Jimmy, uh, we're ready for Q&A now.

Thank you, sir.

If you have a question or a comment, you may signal us by pressing the star key, followed by the digit one on your touch tone telephone. Again, that's star one if you have a question or a comment. We will take your questions in the order that you signal and we will take as many questions as time permits. Again, that's star one. We will pause for just a moment.

Joann. Jimmy, Joanne Winch is on the line. Joanne?

Hi, thank you very much. And I'd like to be the first say great quarter.

How should we think about the effective tax rate? What is driving this down? And at what stage during the quarter and during the year do you get an idea from talking with your ex-outside accountants that this is the trend that it's going in?

I'm certainly going to let Bob address that. Because as I told you, Joanne, we're still looking at about -- when we start paying taxes and become a taxpayer, we're really looking at probably about 20% and you know -- a federal tax rate of about 20% in 2007. So, it will continue to ratchet down, but I want to let Bob address specifically your question.

Joanne, you're correct.

Our offers are very involved on a quarterly review basis of where we stand and the process is to protect the full fiscal year tax rate, which we do on a recurring basis. The -- the money we've been spending in the tax area represents some -- somewhere in the neighborhood of 30 different projects, many of those projects have current day impact and so some of the implications of the reduced tax rate are directly to the millions of dollars we have now spent in G&A.

Unfortunately, I wish the tax costs didn't go up the G&A line, but they do and the benefit of all that work ends up in the effects tax rate down below the line and we're all a little frustrated that Wall Street tends to dislike the -- the value of the reduction in tax rate a little bit more than it does, I guess.

As far as why it continues to improve, it's both -- partly directly a result of some of those projects I didn't get into on a line-by-line basis and won't, but also ongoing shift in product mix. As we continue to make more product offshore and as many of the products we source from offshore are star products, that mix will continue to shift fairly predictably, favorably and therefore we are pretty optimistic, when we talk about expecting to get to 20% by the year 2007, we are pretty confident that all other things being equal, meaning no drastic changes in the world of taxes, globally, that we will move towards that -- towards that objective, just as a natural progression of the business growth that hadn't offshore.

Keep in mind that Cooper has a much larger market share in the U.S. than it does in the rest of the world, be it CooperVision or be it CooperSurgical, that automatically, as we continue to grow faster outside the U.S., will continue the favorable migration of -- of our profits in a more tax-favored domain, if you will.

Okay. Thank you.

And additional question.

Can you sort of pick through a little bit in regards to fall process on gross margin and SG&A impact, maybe, for the fourth quarter? Because in the third quarter, gross margins were lighter an that I expected, as were SG&A expenses.

The -- the foreign exchange plays quite heavily both on the -- of course, we pick up on the revenue line and we picked up the difference between the 24% at CooperVision and the 17% cost and currency so we picked up 7%. Since most of our product comes from the U.K., we get a negative impact there and it has, as Tom pointed out, impacts our gross margin in the neighborhood of 1 to 2% because the pound has increased by about 11% quarter-over-quarter and I think the last two quarters has -- has been somewhat above that on a year-over-year basis. So, that's a pretty strong detriment.

The other strong detriment, of course, is Japan and as we continue to succeed in sales to Japan, that is a low gross margin product. We have never -- gross margin event, if you will. We have never focused so much on gross margin as we have on the bottom line and OI and while it's a negative on the gross margin line, Japan represents a very, very strong plus at both the operating margin line as well as the net income line.

As far as SG&A, some of the -- the value there, the negative is, once again, foreign exchange impacted that quite negatively but conversely, a lot of the integration benefits, of biocompatibles being folded into CooperVision was a very positive event. And the fact that CooperVision's G&A was only up, for example, 3%, is -- is a huge accomplishment. Said another way, is it actually declined substantially in cost and currency.

And one more question.

How much was Japan in the quarter? And what is your current thinking towards that market?

It was a little over $1.5 million in the quarter. I didn't -- I didn't spend a lot of time on that, Joanne, probably I should have, but was I so winded this time and I apologize for that. I got so wrapped up in everything.

It -- the one thing you should know is we have -- or Roto still has not launched a disposable toric, which will happen the end of this calendar year, so, we're going to be getting sales in it in the fourth quarter so, I'm looking at the Japanese business in being in the high end of the past guidance. I gave, I think, between $4 to $5 million. We think we're going to certainly go over $5 million in Japan this year and I'm looking at something in the neighborhood of $8 to $10 million from Japan next year.

The one thing that makes the Far East look -- look good, too, from total revenue, you should know, is our strength in Australia. Australia is a very small market. It's only like a $30, $35 million market. We believe now we're the number one company in Australia. The problem being the only of the top 10 to 12 markets in the world is probably the only market we are number one. But we have about 25 to 27% of that -- of the Australian market and we're doing very well in Australia. But hopefully I answered your -- your Japanese question.

You did. And thank you, I will get back in queue.

Thank you. Ted Huber? Ted?

Yeah, hello. Can you hear me?

Yeah, I can, Ted. How are you?

Fine, thanks.

Just a couple of specific questions here.

Bob, what do you think your currency impact going to be in the fourth quarter? It was kind of 20%, which is 14% here in the third quarter.

What are you modeling in for the third quarter?

We're, our projection, assuming that the currency that existed in the third quarter carries forward to the fourth quarter, so, the same --

A 6% impact on your revenue growth?

Yes, uh-huh.

Okay, great.

And -- and then the confidence -- just moving over to the surgical business for a minute, the confidence that you guys have that you will have a rebound to modest organic growth again in next year it n that business. What gives you that confidence? What's going to change?

I'm going to just answer it the best way I can.

I would just assume that the -- that the -- that the overall economy will get a little bit stronger. The states and county governments will have the kind of budgets to allow them to start repurchasing. Quite frankly, some of these culpascopes they used, that we were selling to the -- to the -- what we call them, the law enforcement agencies for sexual abuse cases, et cetera. As well as the fact that the overall women's healthcare market will get stronger --

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Gentlemen, you're back in conference.

I'm sorry, folks, we had a computer malfunction here. These wonderful things. Whatever happened, everything went off.

Ted, are you still on? Ted? Ted Huber? Hello?

Just one second, sir.

Okay.

Mr. Huber, your line is open again.

Can you hear me now, Tom?

I got you, Ted. I'm sorry.

No problem.

You were telling me about this OB market, I think. Right?

Yeah, I think it's just a sign of everything is cyclical, that things will get back, the business is strong, I think the guys are managing it well. We're still going to continue to do our acquisitions. We're hoping to complete a couple, I hope, by the end of our calendar year, anyway. It's a good place to still, we think, put the financial resources we have here. And we're still feel very strongly about the business.

I guess, obviously this is a business with that you're not -- you don't have a history like you do in contact lenses where you know that like the back of your hand. I guess I just want to be sure that you're confident as a CEO that the data you're getting back from the division -- you know, you're confident that this is a slight slowing of the market. You don't have competitive issues here that things will be more difficult for you to fix and reverse next year?

Not only that, Ted. I think you access to the data just like we are. You can do your own due diligence some a lot of women's healthcare businesses, really your Capital Equipment, like Utah Medical is a good example. All of them having the same issues deal with.

I think the whole medical device arena -- you know, one way I explained it in the past is we have consumables in the contact lens business and we know who the consumables are. They're consumed by consumers. The consumer businesses we have in women's healthcare, if you think about it, remember, we're more of a low-tech business with products that are disposable, hand held instruments are consumables, but the consumables are consumed by the practitioner, not by the consumer, necessarily.

So, as the market, we believe, have opened up more resources, spending resources and feel that they can go back to their historical spending history -- what did I say, historical spending, history, that makes sense, doesn't it? But anyway, we think they are going to go back and be more aggressive at buying the products. At least that's -- that's our view right now. We still feel good about this business, believe me.

Okay, good.

And then one last question, just back in contact lenses, your toric business has now put up two quarters in a row of 20% plus growth. As you know that follows, you know, 10%-type growth you put up in '02, which had been a deceleration. That was one of the concerns of investors out there, is it okay -- Cooper's lost its growth engine. Toric is going away from them. Two quarters in a row of 20%. That's pretty phenomenal.

What is the right way to forecast this toric business going forward? Can you continue to grow at 20%? And what are the one or two things that you think is really driving that --

Let's take a hard look at the strategy that Cooper uses in the toric market versus everybody else.

It's much like General Motors in the way they approach the market and, quite frankly, what Mercedes-Benz or them -- whatever -- the way they approach the market. Where our competitors might have one product in a segment, we don't have four or five. We differentiate the product by patient needs and we profile different patients are, we bring out different products.

As an example, we have Proclear Toric, which is a disposable toric primarily for people that have dry eyes. We have the only monthly disposable toric for people that have a high amount of astigmatism, the old made-to-order contact lens market. So, what we've done is split that market up into four or five different segments and each one of those segments, we bring a unique product to the practitioner.

That's a simple way to put it.

But that is the strategy that we've used. We've used that same strategy, by the way, in the disposable sphere market. We don't have a cookie cutter, one product meets all. We try to define different products to meet different practitioners', I'm sorry, patients' needs. It gives the practitioners certainly more (inaudible) to bring a very unique products for patients that might have unique problems. So, I think that's the issue.

I would point out something to you, though, we've never, ever, under my watch, anyway, and it's been a long watch, Ted, have we ever lost market share in a toric market. You're right, we got to a point where we were not gaining any share, but we are certainly gaining share now. One other thing I will point out. I don't want to make this too long winded, but remember, we are absolutely now a major factor in the European marketplace. It is the second fastest growing segment -- or I should say second largest geographic segment for toric lenses. So, I think it's a combination of all those issues.

Just to bring it home, is that I 20% growth business or 10% growth business for you.

Global basis, 20% growth business for us. We're right at 20% growth on a -- on a global basis.

I mean your -- your forward-looking -- you know, your projection, not what you did --

Well, we are. You want to talk about two-week products, we're up 105% year-to-date. So, you know, yeah, I think it's 20% on a global basis, going forward.

Okay. That's great.

Thank you, gentlemen.

Thank you.

Hope you feel better, Tom.

Well, I am getting there. I feel better on the quarter, that's for sure.

Chris Cooley, are you still there?

I am, Tom. Can you hear me okay?

I can. I'm sorry.

Okay. Congratulations. Just a couple of quickies. You've gone through a lot as always, but if we could, one, readdress the surgical market and maybe kind of look at mix there, when you get to a placement to the (inaudible), does that growth that we see next year in fiscal '04 come more from a fertility orientation to get to that organic 4 to 5% or is it just more of a (inaudible) mix with the culpascopes or kind of a all ship's rising with the tide?

I think it's a mix. We certainly lost the Wallace catheters, you know, the -- the agreement. And that was, you know, between $1 million, $1.5 million a quarter. And that's certainly the reason we have -- we're looking at guidance higher than we had in the third quarter. We're looking for revenue higher in the third -- fourth quarter than we had in the third quarter for CooperSurgical, but when I look from an organic standpoint next year, we're looking for the overall mix to -- to improve.

I guess that answered your question.

Yes. It did.

If I could, one other follow-up.

Just in regards to kind of what do you do for an encore, so to speak. The first $100 million plus quarter, torics, as Ted mentioned, now back up over 20%, good margin expansion in surgical and softer mix.

Where do we really need to focus or where would you have us focus longer term, is it the growth orientation outside the U.S. in contact lenses --

Let me try to make it real simple.

How do you move it forward?

Let me make it real simple, what our objectives are. We really firmly believe this is a 10%, minimum 10%, growth market going forward.

The contact lenses?

Absolutely.

The fundamentals are getting better, for God's sake, not getting worse. That's number one. We're not going to grow less in this market. Not under my watch we aren't.

And remember, we have a very strong position in North America. This is $170, $180 million business this year. We're number 3. Bausch & Lomb and Ocular are $125, $130 million. We're growing quite -- my God, three to four times faster than anybody in this market. This is where we're really getting the vast majority of our market share growth is in the U.S. and it's because of our -- our -- our ability now to move into the biggest market in contact lenses, which is the sphere market and dividing that market up.

In other words, not approaching it as one product for all but trying to define different patient types and profile different patients for practitioners to bring not only value for the practitioner with a differentiated product, but to be able to bring a product that offers real benefits to patients who need something more than just the commodity sphere. That's U.S.

Our objective, for God's sake, is be able to grow as well as everybody else in the U.S. That's a worst case scenario. Worst case scenario in Europe, where we have 37% of our business. And by the way, North America it's 55%, 56%, in Europe, where we have 37%, we're certainly still growing faster in the market. We don't think we're going to grow anything less than what the market is going to grow in Europe.

Our opportunity and why we think we can grow at least 15% going forward in a market that may be growing 10% is our ability to mirror what we've done in Europe and in North America in the Far East. We only do 4% of our business this year. We did 2% last year. We're by far the weakest player in the Far East and in Asia. That's where a lot of our growth is going to come from. Not just Japan. But the overall Pacific Rim as well as the Asian market.

So, from looking out from geographically, that's -- that's going to drive our -- our growth at Vision. The second part, if you look at product lines, my God, we're a leader. We are the leader in -- in the growth in the specialty market and that's where this market is going on a global basis. Everything is moving away from commodity to specialty lenses.

Does that help?

It does.

And if I could, one last kind of housekeeping.

Can you remind us when you expect to be in the U.S. market with extended wear, specifically? Quickly.

Well, I tell you what, if we can get in before 2006 on our own, we would be happy. We're doing everything we can to get into that market. It's a nice market niche. It's -- we think the opportunity in the extended wear is not necessarily capturing share from the overall -- the rest of the market, but it's a beautiful opportunity to expand the contact lens market.

Please remember, Chris, you have probably as many people in this country that are under the age of of 65 who have worn lenses and given them up. We know there are two basic reasons for that. Number one, is patients that have dry eyes and they just don't want to mess with contacts anymore, just can't wear them as long as they could. But the other big reason, it's a huge reason, is people just don't want to mess taking them off and putting them on everyday.

Now, by God, if you've got an opportunity that's safe and cost-effective, that is a lens that you can wear 30 days or God knows even two weeks without removing them, I think you can bring a lot of people into the marketplace. That's Ciba's approach and I think they're absolutely right and I hope to God we can get in n that market because I think it's an opportunity that if more companies would have 30-day lenses, it doesn't mean you're necessarily going to cannibalize patients that are very happy wearing the lenses they are today, but you can open up a brand-new segment of wearers.

Agreed.

Thanks again for a great quarter.

Thanks a lot.

Listen, we've gone for 1 hour and 10 minutes. I want to cut off the Q&A now, but I know there are two or three people waiting. What I want to ask you to do is please call us here in the office. We will be happy to talk to you, but we've kept everybody on for an hour -- looks like an hour and 10 minutes. So, I'd like to wrap this up.

Jimmy, do you want no make a couple of comments?

Certainly, sir. If you have closing comments.

I want to thank everybody for joining us.

Remember, we will be back with you on December the -- (laughter). I think it's December the 11th or 12th. You'd think I would know --

How about December 11.

December the 11th at same time that would be our fourth quarter year-end review, we're looking to have a very good quarter -- again, a very good year. Heck, I'm looking to have a very good history. We love the way we've come for the last seven or eight years and we think that we're not going to disappoint you in the next seven or eight years. Anyway, thank you for joining us and good night.

And that does conclude our conference. We thank everyone for their participation and hope you have a great day.