酷柏 (COO) 2004 Q1 法說會逐字稿

Good day, ladies and gentlemen. And welcome to The Cooper Companies, Inc. quarter 1, 2004 earnings conference call. My name is Carol and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session toward the end of today's conference. If at any time during the call you require assistance, please press star followed by 0 and a coordinator will be happy to assist you. As a reminder, ladies and gentlemen, this conference is being recorded. I would now like to turn the presentation over to your host for today's call, Mr. Norris Battin, Vice President of Investor Relations and Communications. Sir, please go ahead.

Thank you, Carol. Good afternoon and welcome to everyone. Before we begin, I would like to introduce you to Bob Weiss, who is our Executive Vice President and Chief Financial Officer and Tom Bender, our Chief Executive Officer, who will be reviewing the quarter with you this afternoon and taking your questions. Before we get started, I would like to tell you that this conference call contains forward-looking projections of the company's results. Actual results could differ materially from 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 will turn the call over to Tom for the opening remarks.

Thank you, Norris. And I want to thank everybody for joining us this afternoon. Certainly this afternoon here in wonderful southern California, it's raining right now. A little bit like the northeast weather, I guess. We are going to follow the same agenda -- or a similar agenda we followed in the past. I will lead on by talking about and reviewing the guidance we've just -- that we have just published, and I will also go into the review of the operating results of our two businesses. From that, I will turn it over to Bob, who will give you a review of our financial results for the quarter. And from that, I will then turn it over for Q & A as we have done in the past. I think all of you can see why we are excited here. We had we believe an outstanding quarter for both businesses, and I think because of that, our optimism with the future of the contact lenses market, the soft contact lens market not only this year but certainly through the next decade, as well as what we think is an improved environment for the women's healthcare business. We have decided to increase the -- the past guidance we have given you for our future results that we're expecting on the revenues side as well as the PC -- the earnings per share side.

If you will recall, our second quarter -- I'm sorry, in the second quarter we have now published a guidance in the revenue side of 114 to $115 million. We are looking for something in the neighborhood of 90 to $93 million from CooperVision and about 24 to $25 million -- somewhere in the 24 to $25 million for CooperSurgical and that would include results in the second quarter for our recent acquisitions. We are looking for earnings between 58 and 61 cents, and I think I will point out to you that in those -- that guidance for earnings, we are expecting to hurdle about an additional 3 cents of dilutions from our recent acquisitions. So we feel pretty darned good about that.

For the -- we are updating and increasing our previous guidance for the full-year 2004. Our old guidance on revenue was 465 to 477. We are now looking for 480 to 490 in our fiscal year. Our old guidance for earnings was 248 to 251. We are now looking for something in the neighborhood of 251 to 254. We are also now publishing our expectations for 2005. Which is new guidance. We are looking for revenue between 535 and 550 million. And earnings between 297 and 305, and that's assuming a 22% tax rate next year.

From that I would like to move into the state as I always do of the soft contact lens market. On a global basis and here in the United States. Again, a very, very great year, a good year for the contact lens market in 2003 that mirrors very much what happened in 2002. The market as reported by the five companies who are all, you know, public companies, and these five companies represent about 99% of the world, $3.5 billion market. Together reported revenue growth of about 14% last year. In fact, every company that reported sales last year reported double-digit growth. And that's about 8% in constant currency.

I would also tell you that if you look at each one of the companies -- I think it is a good way to look at this -- Johnson & Johnson, which is the largest competitor in our sector in the soft contact lens market reported 11% sales growth and 5% in constant currency and in the U.S. they reported 7% sales. Ciba reported, and I would say that CibaVision does not break out their vision business, their contact lens business from their solution business but it represents about 80% of the number reported 15% growth last year, 7% constant currency and about 3% in the U.S. Bausch & Lomb reported 13% for their soft lens revenue growth last year, 6% constant currency, and 5% in the U.S. Cooper reported both fiscal year, by the way, and our calendar year of 23% growth last year. About 16 to -- about 17% in constant currency, and we had growth in the U.S. of 21%. Ocular Science who just reported I think about a week and a half ago reported also double-digit constant currency growth of 10% on 16% reported growth and 2% in the U.S.

Bottom line of all of this is that the -- if you take a look at the worldwide as I pointed out grew 14% from all these companies combined, about 8% constant currency, and the important point in the U.S., which represents over 40% of the world market grew 7%. Cooper grew three times that rate. In fact only Johnson & Johnson grew 7% in the U.S. Nobody else did. This is where we are taking an awful lot of our market share, and when you see our results for our first quarter this year, you will see very similar kind of results than we reported in our fiscal year of 2003. The important things on the U.S. to -- to focus on is the sequential growth in the U.S. market. In the first two quarters, in 2003, the market grew for soft contact lenses 5 and 6% for the first quarter and the second quarter, 5% over the previous year. 6% in the second quarter over the previous year. In the third quarter, it went up to 8%. And in the fourth quarter, our market grew 11% in the U.S. So we see a strengthening, and we believe there is a strengthening of the contact lens market on a global perspective, as well as in the U.S., and we are predicting that this market in constant currency going into 2004 and beyond, certainly in this decade for all of the reasons I have given to you in the past and those are the demographic, positive demographics of our industry, as well as the growth of myopia.

In other words, the increased prevalence of of myopia around the world. The transition away from commodity lenses, or valued products, whether they're specialty lenses or value added spheres. Geographic expansion and the fact that . new technologies as Mr. Huber once pointed out to me two years ago and he was absolutely right, if you look at the new products that the contact lens industry has been introducing in this industry, we believe it has had the result of keeping people in the market longer and having a positive impact on lowering the amount of dropouts. If I look at all of that and put it all together. I would tell that you we really believe that this market is going to grow double digit for the rest of this decade and we are very, very excited about it. I look at the U.S. market, and I guess I've already told you about the sequential strength of the market, the drivers in this market, the drivers of -- the segment drivers that are having a big part of this growth, are very sililar to what we had last year. The overall market grew about $90 million last year in incremental growth. $50 million of that was in monthly spheres which, by the way, were up 43%. And that is a continued transition away from two-week commodity spheres into monthly spheres primarily driven by Cooper and CibaVision.

Number two, the next biggest growth segment are two-week disposable torics which were up 32% and represent 30 million of that 90 million. And by the way Cooper's product in the same period grew 52% in that category. And the third one would be disposable bifocals which were up 28% represent $12 million of the overall growth of the market and the two big drivers of that growth, of course, is Bausch & Lomb, who gets the biggest credit, and ourself, Cooper. We are the two companies that have been successful in introducing new products into the marketplace.

If I go now to -- let's talk about CooperVision itself, and our specific results in this past quarter. Our soft lens revenue worldwide of 86 million grew 24% or 15% in constant currency. Our U.S. soft contact lens business grew 20%, and by the way, that's about twice the growth of the U.S. market. Whereupon our International soft lens revenue grew 31%. If I look at two-week and monthly disposable products that Cooper markets around the world, it was up 41% in 30 -- I am sorry, it was up 41% worldwide in and 37% in the U.S. And in both parts of our business, that is looking at the worldwide soft lens business as well as the U.S., those products, those products that are marketed as two-week or monthly disposable products represent 80% of overall business. Our quarterly plan replacement business, which represents the other -- another 15% of our business was flat and our conventional products, which, of course, are declining across the world and declined 20% for Cooper in the quarter only represents the other 5% of our soft lens business.

Now let's go to another subject I love to talk about and that's torics, because I hear all of the somewhat bragging of some of our competitors about the toric market, but here let me give you our results. In the quarter, our worldwide toric business was up 31%. And I think with the data that we all have available, I say all of our industry people, certainly it looks like the overall market grew about 20%. We continue to gain share in the toric market. Torics represent about 40% of CooperVision's worldwide business, soft lens business, and we believe our sales in 2004 for torics will be north of $150 million. In the U.S., we were up 20% this quarter in a market that had grew about 11%. Again, we continue to gain share in the overall toric market in the U.S., not just on a worldwide basis, and we are looking for revenue in 2004 of about $100 million in toric business.

If we take another -- another sharper look at the toric market, and we talked about the growth segments of torics, that would be two-week and monthly disposable torics. Our business in two-week and monthly torics grew in this quarter 67%. And now represents on a global basis 90% of our worldwide toric business. In the U.S., these products were up 48%, and represents about two-thirds of all of our toric business. And we believe both of worldwide, as well as -- as well in the U.S. that our two-week and monthly toric businesses are growing at least twice that of the market.

To go further, I know some of you would like to know how our Proclear product line is doing. These are products that we dominate in the dry segment, specialty segment of the market. They were up 44% in the quarter, and we are looking at about an $80 million product line this year for our Proclear products. An update on multifocal. We are tracking to more than double our sales of $6 million last year. We launched the -- the new Proclear disposable multifocal in France in December. We believe that product has -- has an advantage over any disposable multifocals in the market. We introduced it in France for the simple reason the French disposable bifocal market is about the size of all the rest of Europe put together. It is the third largest market segment in the world behind the U.S. and Japan for multifocals. We are now in the process of rolling out Proclear disposable multifocals in Europe, and we will begin to launch Proclear multifocals in the U.S. and Canada midyear.

An update on Japan. We have just -- they, Rhoto, Rhoto Pharmaceuticals, our partner in Japan this month is rolling out their two-week toric. We expect revenue from Japan to be in the 10 to $12 million this year, similar to what I have said in the past, and that's about double the $6 million that we did with Rhoto last year. You know another way to look at CooperVision's business and the way I like to look at it is if you take a look at all of our specialty contact lens products and add in our disposable spheres, that represents about 95% of all of CooperVision's business. And that business grew 33% in the quarter.

Now let me move into CooperSurgical and talk about the highlights in this quarter. Number one, there was definite improvement in organic growth. We do believe that the overall business in the environment in the women's healthcare business is getting better. I think as you recall in the past two quarters, I believe we have had fairly flat organic growth but we did get mid single-digit growth this quarter. I would also like to talk to you about the acquisitions that we are excited about, certainly from a strategic standpoint. Not only do they support our core business in women's healthcare, but more importantly I think they support our -- our entry into the female incontinence segment and our attempt to bring more therapy, more incontinence therapy into the gynecologist practice.

We believe it is a smart thing to do, and we will continue to grow -- to attempt to grow in this segment. We now believe that we will exceed $100 million in revenue by CooperSurgical this -- this year. This is consistent with the objective we have had for this business for the last three years. We now also believe that we can achieve at least $200 billion of business from CooperSurgical within four years. That's 2008. Okay. From that I am going to turn it on to Bob and have Bob give you a good -- a good and complete review of our financial results.

Thank you, Tom. And good afternoon, ladies and gentlemen or good evening, if you are on the East Coast. Our highlights for the year are -- for the quarter was revenue of $110 million, an increase of 17% above the prior year, operating income of close to $25 million, up 25% above the first quarter of '03. Earnings Per Share of 55 cents compared to 44 cents in the prior year, up also 25%. Looking at the component, CooperVision had revenue of $87 million up 19%. And showed growth of 11% in constant currency. The soft contact lens revenue was $86 million, up 24%, showing growth of 15% in constant currency. This growth continues to be driven by rapid growth of specialty contact lenses, which, of course, are torics for astigmatism, color products that change the color of one's eyes, multifocal lenses for presbyopia as well as lenses for dry eye conditions.

That part of the business was up 30% for the quarter, and now represents close to two-thirds of our overall revenue. Toric contact lenses were up 31%, which is nearly 50% faster than the growth of the overall toric market worldwide. Toric lenses now represent 41% of our overall revenues. Looking at the total picture of 15% constant currency growth is twice the growth of the market last year, which was about 8%. Daily disposable spheres also did well, up 31%. These were both our Aspheric lenses which are good for low levels of astigmatism and low-light conditions, as well as Proclear Sphere which addresses dry eye issues. Both of those in concert help drive our daily disposable sphere business up 31%.

Geographically our U.S. revenue was for soft lenses was 48% of the total soft lens revenue, and was up 28%. 10% in constant currency. In the U.S. -- I am sorry in the U.S., our business was up 20%. Outside the U.S., which was 52% of our revenue, it was up 28% and 10% in constant currency. And our european business, which represents 37% of our soft contact lens revenue was up 30%, and it was up 13% in constant currency. Asia Pacific, which is 5% of our worldwide soft lens business was up 21%. Shifting to CooperSurgical, it had 22.7 million of revenue up 7% and 3% of this was organic growth. Of course, we recently added over the last 12 months Prism, which is near Yofa Obie (ph), Avalon, which is a Filshie Clip, which is for female sterilization as well SURx which is in the area of urinary incontinence.

These are areas that we expect better growth, than the 3% organic growth we have had in the past. Looking to the totals. Cooper had 17% growth for the quarter, with revenue at $110 million, and that was 16% organic growth year-over-year. Looking at operating income, CooperVision had 20 -- $22 million of operating income. It was up 23% above the prior year operating margins were 23% of revenue. In the current quarter compared to 25% in the prior year. That 1% improvement reflected the fact that we continue to get the economies to scale as we continue to integrate the BioCompatibles transaction which has been emormously successful.

Gross margin was 66% which was down one percentage from the prior year hurdling basically a higher cost of the pound where we basically sourced most of our products from. 60% of our product is sourced from outside the United States. And, of course, the Pound has been up 10%. Operating expenses were 40% of revenue for CooperVision. 2%, an improvement compared to the prior year. Once again, reflecting a lot of the economies that were getting out of the integration of BioCompatibles. CooperSurgical had operating income of $5.4 million up a whopping 40% above the prior year. It had operating margins of 24% of revenue, and that compares to 18% in the prior year. 4% improvement in gross margin from 50% last year to 54% reflected a couple of things, the ongoing benefits of -- of the integration efforts. That's actually hurdling a higher cost of product that is -- some of which is sourced from Europe and from Canada. So CooperSurgical had to hurdle that in getting to its gross margin.

The prior year had a lower margin product which was part of the selloff of a new fertility line that we were a distributor for, and there we had a lower margin, but it generated $2.4 million in revenue in the prior -- prior periods for the first quarter. Overall, CooperSurgical continues to exhibit substantial improvement at the operating expense line as it integrates acquisitions. Our trend line -- if we look at the last several years is CooperSurgical has improved its operating margins from 14% in 2000 to 17% in 2001, 20% in 2002, 22%, 2003, and now 24% operating margin in first-quarter of 2004. So a great track record and one that we believe supports the business model we have, which is basically to target acquisitions that provide a return on investment in excess of 20%.

Corporate G&A remains to be the sore spot on the P&L. Our corporate G&A was $3.1 million, up 31% above a year ago. That reflects higher costs of the -- in the tax side of our global tax arrangement, which -- a lot of that reflects the fact that when we bought BioCompatibles it was a global acquisition with numerous subsidiaries outside the U.S. As a result of that it has been a fairly complex integration effort from not only SG&A or operational point of view but also a tax point of view as we align it with our existing structure.

The other thing that continues to result in spending money is, of course, corporate governance issues and SOX 404. We have done a lot of things in those areas, and unfortunately, they don't come cheaply, so the company has been spending money up-front in anticipation of the new rules that will come out under Sarbanes-Oxley 404. Of course, as we all know, that has been delayed a year, but we still believe it is appropriate to spend that money in anticipation of -- of that day.

Looking at total operating income, we had -- as I mentioned close to $25 million of operating income, an improvement of 25%. We improved our operating margins in total 2 percentage points to 23% of revenue. Looking at below the line, interest expense was about a million and a half dollars for the first quarter of '04 which was down 18% from the prior year, and that reflects not only favorable interest rates but also the fact that we refinanced some debt with much cheaper debt. We had taken out $23 million of notes that were 8% and replaced them with 2 and 5/8 percent. That's looking at the tax line, our effective tax rate for the quarter was 23%, which compares to 25% last year. The trend line on -- on our tax rate has gone from 33% in '99 when we first adopted the global tax arrangement to 24% last year and now down to 23% this year, and, of course, we are forecasting a next-years guidance of 22%.

Looking down the road to when we consume the remainder of our net operating loss carry-forwards, which as of October 31, were $92 million. We are anticipating a -- using them between now and 2007 at which point in time we expect a effective tax rate down to less than 20%. Looking at earnings per share, we had as mentioned 55 cents in earnings per share up 25% from the prior year, bringing our trailing 12-months earnings per share to $2.24. And cash flow per share was 82 cents compared to 68 cents in the prior year up 21% bringing our trailing 12-month cash flow per share to $3.33. Once again, we highlight cash flow per share to emphasize that our P&L provision for taxes is accounting. It is not cash flow. In fact, we spend close to the 5% of our pretax dollars on taxes in terms of cash flow because of the fact that we have the net operating loss carry-forward. So we do want to emphasize that. We also do it as a simple calculation prior to having the data that's available in our 10-Q which would have actual operating cash flow in the number.

Looking at the balance sheet, we continue to strengthen our -- our balance sheet debt -- to total debt to capitalization has been reduced from 34% as of the end of October of '02 down to 31% as of October of '03, down to 28% down to this most recent quarter. Key ratios are day sales outstanding were 69 compared to 79 days a year ago, which reflects the ongoing efforts to stay on top of our receivables, the improvement in our systems, not only in the United States but also in Europe. And so we've -- we continue to target our day sales outstanding in the upper 60s to low 70s. From a months-on-hand point of view, our inventory was up from seven months-on-hand a year ago to seven and a half months. That is an intentional build of our inventories to reflect that last year we had a large problem with capacity, keeping up with the growth of our contact lens franchise, and as a result of that, we made a commitment this year to double our capacity in the UK. We plan on spending close to $45 million for the full fiscal year this year in Cap Ex. And as a result of that, we will be trying to get ahead of the curve from the point of view of inventory on-hand. Part of that reflects new product rollouts including our multifocal product, our Proclear product line, and now our Proclear multifocal, as well as the fact that Japan being the size the market is, we need to make sure we have adequate inventory on hand to support the rollout of our toric contact lenses that are being launched in Japan.

From an operating cash flow point of view, we had about $7 million in operating cash flow for the quarter, which compares to $3 million a year ago, up more than two times. Keep in mind our first quarter of cash flow is always the weakest. We pay our annual payment for breast implants and I am happy to say we have now completed after ten years our last payment that has been made, which has been in aggregate $30 million over the last ten years. $3 million was paid out the door in October -- in December which weighs down our first-quarter cash flow. The other thing we do once a year is pay our bonuses first quarter of each year and they were in aggregate $3.1 million. So that is a payment that isn't made in any of the future quarters. So a combination of those makes our first-quarter cash flow artificially low and we are still forecasting approximately $90 million of operating cash flow for the year and free cash flow in the mid $45 million range. I think I've probably covered enough, and -- and probably time to turn it back over to Tom to elicit your questions.

Operator, we are ready for -- for questions at this point

Thank you, sir. Ladies and gentlemen, if you wish to ask a question, please press star, followed by 1 on your touchtone telephone. If your question has been answered, or you wish to withdraw your question, press star followed by 2. One moment while we give participants an opportunity to queue up.

Ready?

Sir, you may proceed.

Okay, Charlie Olsziewski, Charlie? How are you doing?

Hey Tom how are you?

We are doing fine. We think we did pretty well this--.

--I would say so. I can't dispute that. Question regarding something you didn't talk about.

Yes.

Was CVI surgical.

Right.

I am just curious -- obviously I saw the news regarding the -- the development of this unit. Is -- what's the cost going to be of setting up this unit? Are you looking at hiring additional personnel or redeploying personnel within the organization? And is this going to be kind of as a -- a pay-as-you-go investment. Meaning you may start out with several salespeople and ramp that up over the next 18 months or how does the organization -- how is the organization going to look?

Great -- great question, Charlie, because I think in the past, we weren't very clear what this investment was all about. First of all, it's a fairly inexpensive investment. It is about $2 million to get into a segment where really and truly there really is no real head-to-head competition. It's got a small -- a royalty stream with the two products that we are talking about. And let me explain to you exactly what they are. The segment that we believe was an opportunity to potentially build a surgical business is a market segment for the corneal specialist, a very small niche of Opthamalogy. Their are about 400 corneal specialists in the United States. About 200 of them do about 80% of all the corneal transplant work. And that's where this product is -- is positioned in -- at. It's typically -- well, not typically, but most doctors use today is donor tissue. This product is designed for those patients who have basically multiple failures with -- with donor tissue, and are high-risk patients. So we are really talking about a market that is between 10 and 20% of 35,000 corneal transplants that are done in the U.S. every year or 100,000 worldwide.

The business is profitable when we get to about 3 or $4 million in sales. It is about a million now. We believe the burn on this by the time we hit profitability might be a million two. A million to a million two over the next 18 months. So it's not a high -- you know, it's -- it's not potentially right now -- we are not looking at it to be a big product, but it could be -- it could be much larger, because the second generation of our synthetic cornea is one that we believe will be able to -- to compete for the majority of the corneal market, the corneal transplant market, I should say. The other product that's part of this is a artificial orbit for nucleation and not a huge market but another nice market. The neat thing about these products is they are all patent protected. We are not going head-to-head with the larger ophthalmic companies, that is certainly not our intent. We're going to stay out of that commodity portion of the ophthalmic surgical market.

We will continue to look for nice niches where it allows us the opportunity to utilize the CooperVision name which is well known around the world. In the old days of CooperVision, certainly before I came here, when it was a -- when they had the leading ophthalmic surgical business in the world which by the way today, is Alcon Surgical. They sold that business back in the '80s. So we believe there is some leverage on the name. We believe that the product line that we have bought from, the Australian R&D group which, of course, is Argus, has some legs for us. We'll see where it goes from here. It's certainly not going to defocus us away from our core business, which is our soft contact lens business and our womans healthcare business. And as you can see, we have included in the guidance for the second quarter the fact that we are going to -- we are going to have about 3 cents dilution of all three of these acquisitions that we have made over the last quarter. So we --

So --

We feel pretty good about this entry. I hope that answered your question.

It does to a degree, but what about the -- the infrastructure within Cooper that you are going to need to support this?

Not hardly anything. Again, I thought maybe -- I didn't mean to -- sometimes I assume I make it very clear and I obviously did not. The cost of serving this market is very small. You are talking about a very small number of -- of doctors that you are going to take this to. I think we have four people in the U.S. now. That's probably all you need.

Okay.

-- for the time being because almost all of these -- these practitioners are involved in an academic setting. Anyway so --.

I gotcha. Let me ask you -- let me follow-up, Bob, on the question regarding capacity in the UK. A couple of questions. What percentage of the $45 million in Cap Ex that has been earmarked for this year is going to be directed to the UK facility?

The vast majority I would say probably over 80%.

Okay. And what is the current capacity unit-wise in the UK in Scotsville right now?

Oh -- Oh, Scotsville? Well, Scotsville is (INAUDIBLE) in other words, it is not part of it.

The number of units, in other words.

Okay, let me try to break that down, Charlie. It is about $135 million to $140 million in the UK.

Okay.

At -- in Norfolk where we make BioCompatibles I believe it's about $30 million, but the majority of all of this Cap Ex that we are going to be spending is going to be in the UK. There is a little bit in Norfolk but not much in Norfolk. Nothing in Rochester. And at the end of the buildout, we believe we will have the capacity to do north of 300 million lenses. The whole idea here is with the cost of money as low as it is, this is the time for us to invest, build up the -- our -- our capacity, and the future Cap Ex, we are going to have in 2005 and 2006, and 2007 as you would expect would be tremendous -- would be a lot less than it would have been if we had not had decided to spend the money this year. Does that make some sense?

Absolutely. What's the unit number in Scotsville right now?

Scotsville, about $14 million, $15 million. Not going to get any higher. These are more -- you know, they are not what I would call the task multi-type products. They are more for made-to-order and the quarterly plan replacement product.

Okay. And one quick question. Just an update on your -- your lens manufacturing costs and how that has trended, I am assuming down over the last, let's say, 12 months.

Yes, it has. I will let Bob talk.

It's trended down -- it's been somewhat masked by the fact that we import from the UK and of course the Pound has gone up 10%. We had a hurdle that. But if we stripped it out and looked at it in local currency it has done real well.

Okay. That's it. Thanks guys.

Thanks a lot. Chris Warren. Chris, how are you doing?

Hey, I'm doing well. Thanks so much for taking the question.

Sure.

Couple of specifics. Included in your guidance do you have a 23% tax rate assumption for the second quarter as well as for all of '04.

Yes, Chris, I am sorry we didn't make that clear. 23% for the full year.

Okay. Also --.

And 22% going into next year.

Thank you. Also, on the inventory increase that you had mentioned, how many more quarters do you have of building inventory, and where will that peak.

It's peaked --.

Probably one thing I should have just -- pointed out, that I didn't. There is a (INAUDIBLE) to our inventory planning. In the fourth quarter as we enter the first quarter we will always have the lowest months on hand because you are planning forward -- looking forward, not back. And we are moving into our weakest quarter. As we finish the first quarter, we are planning for the next three quarters which are our three strongest quarters. So it is somewhat anomalous the way you do the calculations using the weakest period to do the calculations. On a look back basis. But suffice it to say that seven and a half months which is billed five months from a year ago reflects building up capacity to try to get ahead of the curve. Part of that reflects the fact that we are in a construction and progress mode. We have integrated the largest BioCompatibles facility outside of London into our facility and that has required a build-up mode. It's not to say that we are predicting a large reduction going forward, but I think we are about as high as we are going to get from a ratio perspective.

Okay. Could you guys comment on where you expect to be in terms of months on-hand at the end of fiscal '04?

I would say last year we were at 7. I would expect us to be someplace between where we are now, the seven and a half and down toward that seven, probably closer to the seven than the seven and a half.

Okay. Perfect. Two other questions. One on the R&D front. You had mentioned in the press release about developing an extended wear lens as well as the improved contact lens technology. Are there any milestones in fiscal '04 that we can point to as you plot your path there?

Other than I will always have an update for you on the conference calls or in the press release, I think not. We are looking for a couple of ways to approach the extended wear market. When I mean extended wear, you know our products are approved for extended wear for one week. Most of our products are anyway. We are really talking about a long-term extended wear product and I will tell you right now I think we have always said it is the end of 2005 or 2006 kind of product because we have to be in a position to file a PMA somewhat some time after -- right after our -- our fiscal 2004, but at the end of calendar 2004. As far as the lens technology, I -- you know we should be in a position to talk about that at the end of this year, early next year. We are sort of from competitive reasons, we really don't want to talk too much about that this time. I think you probably feel the flavor of that.

Sure. One last question on the surgical platform side. I noticed you gave us on -- on the CooperSurgical, the women surgical product a revenue range of $200 million by the end of '07.

Right.

Is there any way you can give us the same type of guidance for surgical --.

For.

Vision surgical?

Vision surgical? No, because we have -- in the 2005 number, I sure didn't put but a couple million, two or three million dollars in for CooperSurgical. I am certainly not assuming any acquisitions right now. And I think it is a little bit too early. I would hope you get the -- the flavor of -- of how we are building the business. It is still a soft lens, a womens healthcare business. This is an attempt to get our feet wet a little bit in ophthalmic surgical business by trying a strategy that is very similar in the way we dealt with women's healthcare business but there's no assurances we can do that. You know, one of the issues, Chris, to remember in this company is we are -- we drive an awful lot of cash in this company and we want to be able to continue to get the kinder internal rate or return that Bob was talking about early -- earlier, and we are looking at into the longer -- you know the longer horizon beyond 2005 and 2006. That's why we are looking at ophthalmic surgery as maybe a way for us to supplement the kind of, you know, incremental -- I should say accretive acquisitions we have made for -- for our women's healthcare business.

Okay, thank you very much. That is very helpful.

Thank you, Chris. Suey Wong.

Thank you, Tom. Congrats on the quarter first. And then second here, you just mentioned that you probably are not assuming acquisitions in the ophthalmic surgical areas. Is that being conservative? Can you talk about your acquisition pipeline there?

Repeat that one more time. I don't think I heard it right.

Sure, Tom, you mentioned that in the ophthalmic surgical area you probably are not assuming acquisitions for fiscal '05.

That's right.

I think you mentioned 2 to $3 million in sales. Is that being conservative? How does the pipeline look there?

Yes. To answer your question, yes. Because, you know the upside to the -- to the AlphaCor acquisition, as well as the Orbit is that -- the big upside to the AlphaCor product is it's a second-generation product and quite frankly you are looking at a 40 - $50 million potential product line, but, you know, that can be perceived as hype, and that's not good, and that's not what we are all about. I think at this point let's stick with the kind of smaller expectations we have, and as we believe the risk of growing that business quicker becomes less of an issue, we will become a little bit more open about it, but at this point in time, it's an early entry, and we have good people that we have dedicated to it. Jim McCollum and Dave Fancher, of course, that I think you know from CooperVision. They know the space very well. I am sure we will be able to screen maybe some other potential acquisitions like this, but if we don't, we don't. Okay?

Okay. Tom, are you anticipating anything in '04 here, in the ophthalmic surgical area for acquisitions?

No, nothing that I have -- none of the guidance I have given you assumes anything -- any activity on the ophthalmic surgery side.

Okay, thanks. You have a lot of significant new product introductions here and also geographic expansions. Tom, which do you think has the highest potential with regard to fiscal '04?

I think the highest potential is going to be the Proclear multifocal rollout on the worldwide basis, without a doubt. I think that this is an untapped market as I have discussed I think with you and others in the past. It's a small segment. This is an $80 million worldwide segment on a market that is a $3.5 billion. We think B & L has done a good job of not only growing that segment but more importantly taking market share away from the one company that was a big leader and by the way that has a little bit of a negative impact on us because it's B & L's and Cooper's growth in the multifocal -- disposable multifocal line is coming from the height of Johnson & Johnson and, of course, they pay us a royalty. So we sort of lose on the royalty side, but we'll take it.

So we believe the Proclear product will -- will help enhance more of the growth of the market, rather than being a head-to-head competitor to a company like B & L. Probably, I think, B & L and Cooper in my mind will continue to take on a global basis market share away from J & J in this segment. But we think the big upside to -- to this segment is going to be its growth, the fact that it's -- that we are going to be able to growth the whole multifocal segment on a global basis. Is that the kind of -- what you were looking for?

Perfect Tom. Thank you.

Thank you, Suey. I think -- I think with that, ladies and gentlemen, we have been on this call a long time. If there is anybody else who would like to call in or would like to talk to us, please give us a call offline. We would love to talk to you. And with that, operator, I would like to turn it back, and I want to thank everybody for joining us today. And we will see you on, I believe, June 2 or -- we will get that out, but the end of our second quarter. I believe it is the second of June. Okay.

Thank you, ladies and gentlemen for your participation in today's conference. This concludes the presentation and you may now disconnect. Have a great day.