酷柏 (COO) 2004 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your quarter-four 2004 The Cooper Companies earnings conference call. My name is Jeanne. I will be your conference coordinator. (OPERATOR INSTRUCTIONS) At this time I will turn the call over to your host Norris Battin, Vice President of Investor Relations and Communications. Sir, over to you.

Thanks very much. 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 to Tom Bender, our Chief Executive Officer, who will be reviewing the quarter with you this afternoon and taking your questions.

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

With that, I will turn the call over to Tom for his opening remarks.

Thank you, Norris, and welcome, everyone, and thank you for joining us this afternoon.

As Mr. Batten pointed out, we're not only going to be reviewing the quarter, but we're also going to review the year end for us. As you recall we're on a fiscal year that ends on October 31st.

We're going to follow the same basic agenda we've done in the past. I was thinking of moving and changing that a little bit because of the financial pieces that are included in the release, but I think we will follow the same agenda we have done in the past where I will review the results from the operations, then turn it over to Bob to give you an overview and review the financial results, and from there we will go to Q&A.

I think before we get started to that I would like to make a couple of comments about where we believe we are with the expected merger with Ocular Science. We still remain very optimistic that this acquisition will close very shortly. You should know as shareholders that we are ready to go. We've been ready to go since the middle of November. We know exactly what we're going to do. We are ready to execute. And all we are waiting for now is for some word from the FTC that we can go.

Also, you should know that within 30 days after the close of the merger we will have an analyst meeting in New York. There are going to be some clear-cut objectives for this meeting. We've never done an analyst meeting, by the way. But I think it's important to do because we want to make this acquisition very transparent to our shareholders. We want to layout -- we will be laying out guidance by quarter for 2005 after the deal is closed -- or I should say during the analyst meeting, after the meeting is closed. And we will reconfirm our 2006 and 2007 guidance. We're also going to review with you where we believe the market is moving over the next 5 years and where we see our competition moving in those 5 years. We're going to review with you our strategy for growth and allow our pipeline for R&D to become very transparent to you; at least the new products that we will be launching into the market over the next 3 years. At that meeting we will also introduce our CooperVision senior management team to you.

Let me also make a couple of comments about the changes we made in revenue guidance for 2005 in this press release. What we have done, we haven't really changed any of the guidance we've given you in the past, other than we've removed 2 months of ocular sales because we are assuming and hoping that this acquisition will close by the end of December, at least the end of December. And that's how you get to 870 and 883. We haven't changed the CooperSurgical guidance, which was between 115 and 118 million for 2005. But what we did remove is about $60 million or 2 months of Ocular Science.

If I look at the combination in a pro forma basis for what we expect these 2 companies to do -- and I'm talking about the vision companies, Ocular as well as Cooper -- we see the calendar 2004 sales, we think the 2 businesses combined will come in between 740 and 745.

With that now let me talk about the quarter and the year for the Company.

CooperVision for the quarter reported sales of 103.8 million and CooperSurgical of 27 million. CooperVision's business -- or I should say both businesses combined were short 131 million (technical difficulty) percent, 12 percent in constant currency. For the year, CooperVision reported sales of a little over 388, almost 389 million. And CooperSurgical 101.5 million, a little over 490 million combined.

I also would point out that we had some impact of bad weather and hurricanes for both our vision business and a little bit of our CooperSurgical business in the September and October timeframe. I think all of you that follow this industry remember and could see that in the vision business almost all of our vision businesses that reported results in the third quarter had somewhat weak sales or soft sales in the month of -- I'm sorry, in the third quarter.

At CooperVision, let me talk a little bit about the market conditions. The market in the third quarter remains absolutely strong on a global basis. The market, if you look at all 5 companies that are public companies that report their results, sales were reported to have increased 13 percent and 9 percent in constant currency. And again, as I pointed out, just about all of them I either spoke to or reported fairly weak sales in the third quarter in the US. But we believe the market for the full-year will mirror that of 2002 and 2003 where both years we had 8 percent constant currency growth. In 2002 and we had 13 percent reported growth; in 2003, 14 percent. And we're projecting the 2004 year end we will have a market that will have grown about 14 percent and between 8 and 9 percent in constant currency.

We also believe the market in the future -- and we're talking about the next few years -- for all the reasons I've given in the past, and we're not going to spend a lot of time talking about it, but remember those growth drivers are in position. We believe this market will continue to grow at least 8 to 10 percent over the next few years.

We also should tell you that now we are -- all of us that are in this industry have the ability to have a good worldwide data on the overall global market provided by CLI (ph).

In the US, moving to the US, the market for the third quarter was up 9 percent. And I'm sorry, 9 percent year-to-date. And that's through 3 quarters. That compares to 8 percent for the market in 2003 and 6.5 percent growth in 2002. So the market in the US is also very robust and doing extremely well.

If I take a look the pieces that are growing in the business, it's interesting to see that the conventional products, those products that come in vials that are replaced on more on an annual basis, actually represent less than 10 percent of the overall market. In fact, it's pretty close to 5 percent of the market. The drivers of our market continue to be, number 1, the monthly products -- products that are replaced on a monthly basis, both torics as well as spheres, which are up year-to-date 23 percent or $40 million of incremental growth. The next driver would be disposable torics, which are up 21 percent and up 20 percent -- $20 million, I'm sorry, in incremental growth. And lastly would be single-use products which were up 21 percent and 17 million in incremental value.

I think only dark spot in the US and the worldwide business is how color products are doing, which are very weak here in the US. The US represents, by the way, about 75 percent of the cosmetic market. And for the quarter color was down 15 percent and down over 10 percent year-to-date.

If I look at our business, our worldwide business vision business in the fourth quarter grew 14 percent, 10 percent in constant currency. And for the year our worldwide vision business grew 18 percent for the year and 12 percent in constant currency, roughly 1.5 times the growth of the market. In the US for the full-year, we grew 12 percent.

Taking a look at our business by product segments, worldwide our toric business grew 14 percent, up 22 percent for the quarter, 22 percent year-to-date. We definitely know we're growing fast in the worldwide market for torics. If I look at the disposable products, and that's the biggest segment, it represents about 70 percent of all toric sales on a worldwide basis. Our business was up 30 percent in the quarter, 45 percent year-to-date. If I take a look at -- and by the way, torics now represent about 40 percent of worldwide business. Taking a look at torics in the US, for the quarter our disposable torics were up 20 percent. Year-to-date our disposable torics are up 32 percent. If I look at HPR data, indicates for the year-to-date that our toric business in the US is up 1 full share point. The torics now represent about 50 percent of our US business. And we believe on a worldwide basis we now have about 36 percent of the worldwide market where our torics are actually growing at a faster rate outside the US than in the US.

If I look at multifocals, which is a very bright spot for us, we did almost $12 million for the year in multifocals, up 95 percent. We have a run rate, by the way, of about 18 million right now. Our objective in 2005 is to exceed $25 million. And now our Proclear Multifocal is available not only in Europe, but also in North America.

Torics for both Cooper, as well as Bausch & Lomb, are doing extremely well in the United States and are taking market share from the ex-leader, which was Johnson & Johnson.

If I look at our Proclear product line, it's now on a worldwide basis almost an $80 million product line. I think you all remember a couple years ago when we bought the business (indiscernible) business, that product line was a little over a $30 million product line. On a worldwide business, our Proclear products -- all of our Proclear products, and that's our Proclear sphere, toric and multifocal, were up 34 percent. In the quarter it was up -- I'm sorry, for the year-to-date it was up 36 percent. In the US, our Proclear product line in the quarter was up 37 percent and for the year it was up 33 percent. Year-to-date, when we looked at the overall Proclear products we find that our Proclear toric is up almost 100 percent on a worldwide basis. And in the US we have in the fourth quarter introduced Proclear Multifocal for the quarter, which of course has a lot to do with the growth of the business.

If I take another look now at -- a look at our surgical business, our gynecology business, sales were up 27 million for the -- I'm sorry, sales were 27 million for the year, up 22 percent for the quarter and for the year was up our sales were $101.5 million, up 23 percent year-to-date. We have organic growth in the quarter of 4 percent versus 6 percent in our third quarter. And we think our organic growth impact in the fourth quarter would have been a little bit better than our 4 percent that we had, again if it hadn't been for the weather. Because you should remember that most of our surgical business is sold directly into doctors' offices.

The other point I would like to make on our surgical business is that we believe now we are in position to execute our strategy of building our sales force to meet our objective of obtaining at least 10 percent organic growth sometime next year. We now have instead of 35 direct sales people in the field that we had this time last year, we now have over 80 people in the field after the Milex acquisition.

And with that, Bob, I think I would like to turn it over to you.

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

As Tom pointed out, the highlight was an outstanding quarter and outstanding year, with fourth quarter revenue up 15 percent, increasing our revenue to 130.8 million, and fiscal year revenue rising 19 percent to 490.2 million. And after an accounting change and lowering our effective tax rate in the fourth quarter we had earnings per share of 79 cents, which brought our full-year fiscal year earnings per share to $2.59. Really the strong message is operating cash flow reaches 101.2 million. So we broke the $100 million milestone, which certainly pleasantly surprised us. And a lot of that had to do with strong balance sheet management also.

Looking at the components, CooperVision had revenue of $103.8 million, up 14 percent; 10 percent in constant currency. Our specialty lens business, which continues to drive our growth, was up 18 percent worldwide, which now accounts for 62 percent of our worldwide revenue and in the United States 70 percent of our US revenue. Torics were up 14 percent. They now reflect 40 percent of our worldwide business. And disposable spheres, which include dry eye products, were up 16 (ph) percent and continue to grow faster than the marketplace. Proclear, our dry eye product, is up 34 percent and accounts for 21 percent of our overall revenue worldwide, and in fact is well in excess of our total revenue from Biocompatibles at the time we bought it in February of '02.

The United States revenue accounts for 47 percent of our worldwide revenue and was up 6 percent during the quarter. The rest of the world, 53 percent was up 23 percent. Europe, which reflects 36 percent of our revenue in vision, was up 24 percent. Asia-Pacific, which now accounts for 6 percent of our worldwide revenue, was up 22 percent.

And shifting to CooperSurgical, which had revenue of 27 million for the quarter, it was up 22 percent. It now accounts for 21 percent of our total revenue. That's prior of course to the acquisition of Ocular. Overall organic growth at CooperSurgical was 4 percent. And then the balance of the growth was a reflection of the purchases of Milex and SURx, really 2 products focused in on the incontinence contents market, where we believe we have the potential to accelerate our organic growth.

Overall Cooper had revenue of $130.8 million, up 16 percent. And that's 12 percent of that was in constant currency.

Shifting to operating income for the quarter, CooperVision had operating income of 29.2 million, which was 28 percent of revenue and 11 percent above the prior year.

Gross margin at CooperVision was 67 percent, down 1 percent from the prior year, but equal to the prior quarter. That reflects the strengthening of the pound compared to the dollar, which impacted our overall margins by 1 percent at CooperVision. That reflects the pound that has gone from $1.63 to $1.81. Keep in mind that we source more than 60 percent of our product outside the US from the UK. As far as mitigating some of that with lowering local currency manufacturing costs and the continued shift from non-specialty to specialty lenses which are growing faster. And as a result of that our overall gross margins for the year equal that of the prior year at 67 percent.

Operating expenses for the quarter was 39 percent, a strong 39 percent, equal the prior year. And that basically brought our operating margins to 28 percent at vision compared to 29 percent in the prior year.

CooperSurgical had 5.7 million in operating income, up 2 percent from the prior year, which reflects the fact that we have elected to invest in our sales force and reorganize our sales force following the Milex transaction. As a result of that, our operating expenses increased to 35 percent compared to 33 percent in the prior year. And overall sales force cost was up 42 percent. And once again, that is focusing in on our objective to accelerate organic growth, particularly in the area of incontinence, sterility, as well as reproductive therapy.

Corporate G&A was $2.5 million, down 17 percent from the prior year. That reflects the fact that we have -- in the prior year we invested considerable money in the global tax arrangements we have around the world, realigning certain things. And as a result of that we did not have to spend the same level of money this year in the corporate G&A area.

Overall, we had operating income of 32.4 million, an increase of 12 percent. And our operating margins were 25 percent this year compared to 26 percent in the prior year.

Looking at full-year, CooperVision had revenue of $388.7 million, up 18 percent; 12 percent in constant currency. Our specialty business was up 23 percent, toric business up 22 percent, disposable spheres up 20 percent, and Proclear, our dry eye product, was up 36 percent worldwide. The US market, our revenue was up 12 percent above the prior year. The rest of the world was up 24 percent; Europe up 25 percent. And Asia-Pacific achieved revenue of 21.6 million, up 27 percent from the prior year.

Overall, CooperSurgical, which had 101.5 million, was up 23 percent. And 4 percent of that was organic growth and the balance was the acquisitions I mentioned. For the full fiscal year Cooper achieved 90.2 million in revenue, up 19 percent. And 14 percent of that was in constant currency.

Operating income for the year for CooperVision was up 20 percent, achieving operating margin of 27 percent. And once again we were able to hurdle the cost of the weak dollar compared to the pound and achieve operating margins consistent with the prior year. CooperSurgical head 21 percent operating margin compared to 22 percent in the prior year, reflecting the emphasis we have in investing in the sales force restructuring. Overall our operating income was 116 million, up 23 percent from the prior year. And we achieved operating margins of 24 percent this year, up 1 percent from the prior year.

Looking below the line, interest expense was down 13 percent for the quarter and 14 percent for the year. That reflects strong operating cash flow and deleveraging of our balance sheet. Rates actually year-over-year were up slightly, 50 basis points, compared to the prior year, which reflects a 75 basis points increase in LIBOR offset by basically better credit as we deleverage.

Our tax provision was 2.6 million for the quarter and only 8.5 percent for the year, 19.6 million, 17.5 percent. This reflects reinvestment of our earnings offshore and strong progression of our offshore business. And secondarily, we did reverse some reserve in the quarter as well as the year. Had we not reversed those reserves our effective tax rate overall would have been exclusive of reserves about 19.1 percent, which compares to 24 percent in the prior year. So we have made good progress in terms of effecting and executing our global tax arrangements. And certainly what favors this is the growth of the business outside United States.

I would caution, however -- and I don't want to spend too much time on the impact of the Ocular transaction, but our guidance has 21 percent for effective tax rate going forward. And it will certainly take us a while to realign our tax structure integrating Ocular on a global basis. And therefore, we will actually step backwards next year from this year, and then it will take us a couple of years to basically realign everything.

Overall our earnings per share for the quarter was 79 cents compared to 61 cents in the prior year. This reflects a restatement for the early adoption of convertible accounting, or if-converted accounting, for our convertibles which impacted the quarter 4 this year and reduced our prior previously reported earnings per share from 64 cents down to 61 cents in the prior year. Taxes -- a lower effective tax rate impacted earnings favorably for the quarter 11 cents. So the difference between the 79 cents and what we had out there by way of previous guidance and consensus is really 2 items, the taxes and the convertibles. If you take both of those out you would be at 72 cents.

As far as the full-year impact, our earnings per share for the year was $2.59 cents, up 25 percent above prior year's $2.09 as restated for convertibles. The impact of convertibles in the prior year, you may recall we issued them in basically the second quarter -- the third quarter of '03, impacted our prior year earnings per share 4 cents on a restated basis and impacted this year 13 cents. So adjusting for the 13 cents negative impact and 11 cent pickup on taxes, our earnings per share would have been $2.61 cents exclusive of those 2 items.

Looking at really a 5-year snapshot, our compound annual growth rate over the last 5 years is now revenue of 24 percent, operating income of 25 percent, earnings per share 28 percent and cash flow per share of 20 percent. CooperVision has grown 23 percent over the last 5 years, 70 percent plus that of organic. And CooperSurgical, reflecting the success of our acquisition strategy, is grown at 28 percent over the last 5 years, and 80 percent of that reflects our acquisitions.

Looking at the balance sheet and cash flow, as I pointed out, the outstanding cash flow is really to me the highlight of the year of 101 million of operating cash flow. We spent 41 million in capital expenditures, bringing our free cash flow to $61 million.

Our day sales outstanding came in at 65 days compared to 67 days in the prior year. And our months on hand was at 6.9 months compared to 7 months in the prior year. Keeping in mind that because of the complexity of our product line and the fact that we want and demand high service levels, we plan on keeping our months on hand in or around that 7 month range.

CapEx, or capital expenditures, for the year were $41 million, and primarily reflect an increased capacity, as well as continued investment in the area of information technologies, which we continue to roll out new systems around the world and Europe primarily.

Our debt-to-cap, reflecting the speed at which we can deleverage, you may recall when we bought Biocompatibles in February of '02, our debt to cap increased to 39 percent. By the end of the year of '02 it was down to 34 percent. Last year, October of '03 we were down to 31 percent. And we finished this year down to 23 percent. So it shows our capacity because of strong cash flow to deleverage rapidly.

By way of cash flow, 1 of the things we typically report as cash flow per share, which this year was $3.50 and for the quarter was 96 cents. To emphasize why we continue to point that out, our overall taxes that we accrued in the P&L was $19.7 million as a provision, but out actual cash outflow was only $3.9 million, so well below the 5 percent objective we have set for ourselves in terms of the average of cash out the door on taxes over the next several years. So that's one of the major contributors and will continue to be a major contributor.

We have pushed out our expectation of utilization of net operating loss carryforwards another year to 2007. And so we continue to be, let's say, effective at managing our ability to generate cash by leveraging our net operating loss carryforwards.

As far as guidance, Tom mentioned the top-line numbers. The earnings per share we have for 2005 has been adjusted for 2 events -- 15 cents as a result of the impact of the convertibles and 5 cents as a result of the delay in the timing of the expectation of closing. And for 2006 and 2007, 20 cent impact for the impact of convertibles and 25 cents in 2007 for the impact of convertibles.

I think I have said enough. I'll turn it back over to Tom to entertain your questions.

Operator, I think we're ready for some questions please.

(OPERATOR INSTRUCTIONS) Ted Huber.

A lot of details; you did a nice job of explaining it all. I wanted to just focus on some operating factors, though. The 10 percent organic growth, Tom, constant currency for the vision business is the lowest of the year. Can you comment? I know there was some Florida impact there. Can you quantify that at all?

Yes, I can. Ted, I'm glad you asked the question, quite frankly.

We followed the lead of what Liz Adler (ph) did at VizX (ph) to try to put a number to it as best as we could on the impact. Because if you recall, we're not a calendar reporting company; we're a fiscal reporting company. And the impact of the weather in the Southeast was not just in September, it was in October also. So we looked at September and October impact on sales in Florida. We just looked at Florida, and compared it to the rest of the country. And we think in Florida our best estimate is we lost about -- I'm sorry, about $500,000.

Now I don't want to sound too defensive, because we're not that ashamed of the results, quite frankly. But we think between that and the rest of the southeast it could have been $1 million in business that we lost for the quarter. But be aware that you'll pick that business up later on. November was very good month for us, our first month of the quarter. So I'm not going to -- I'm not overly -- too overly concerned about it at this point.

If you recall, just about everybody else in their third quarter, that I recall anyway, certainly B&L, did have some softness in sales in their third quarter. Anyway, I'll let it go at that.

There wasn't any other factors, Tom? There's no (multiple speakers) focus from the merger on the distribution channel or anything like that?

You know, it's real easy for me to use that as an excuse. But quite frankly I checked again this morning. You know we haven't lost a salesperson yet on either side. I'm sure there's some concern. I don't see it that it's anything material to talk about. I don't want this thing to go on forever, for God's sake. I want it to close. But I think the important thing, Ted, that I'm trying to communicate is we're ready.

With the Biocompatibles acquisition, 1 of the benefits, or 1 of the good things that happened quite frankly, is it happened quickly. We announced it in the middle of January. We closed that deal in February. Most of the integration process, if you recall, was mostly in Europe and not in the US. But we didn't have a lot of time to plan for it. But knock on wood we did a pretty darn good job of executing. I think the advantage we're going to have here, if there is any advantage to this thing going on for 4 months, is the fact that we're ready. We know what we're going to do. We're going to execute (multiple speakers)

Just on this topic of timing, what is your confidence level at this point in that 12/31 target close date? And what do we need to see in the next week or 2, I don't know, for you to hit that target in terms of the government?

We're in the hands of God, so to speak, and I don't think particularly with the holidays coming up that it would be prudent to conjecture whether or not the government is ready. Once the government is ready, the only thing we're waiting for is them. We can go expeditiously. So literally we can do it a day later if we had to, if the timing were right.

That's helpful. Lastly, Tom, just on the EBIT line, this is the first I think in 6 quarters if I'm counting right that you guys haven't grown EBIT faster than revenues. And I realize all the numbers are going to change dramatically after the Ocular deal, but in terms of the Cooper franchise, how do we interpret this? Are you reaching kind of the target level of profitability with this business up at 25 percent or are there other factors at play here?

I think you're talking to the total of (multiple speakers)

The whole Cooper Companies EBIT margin, yes.

Keep in mind, we're investing pretty heavily in surgical law (ph). That was a $3 million annualized investment we're putting in, which is probably impacting the quarter about $1 million. There were a couple of minor things we didn't get into that maybe impacted negatively operating costs. But by and large 25. We expect that there is upside to our ratios yet from where we are.

Bob, that 0.5 million in other income, what was that?

Actually it was foreign exchange this quarter.

FX? Okay, great. That's it for me. Thank you guys.

Benner Ulrich, UBS.

Just a quick question and you may have touched on this on the call. But the gross margin in the quarter was I guess about flat with the prior quarter, and I thought historically typically the fourth quarter was a little bit stronger in terms of probability. Is that wrong? Or is there something different that happened in the quarter?

1 of my favorite . I will turn it over to Bob. If you remember the pound --

Understand, I don't think I would respond that there is some cyclicality to our gross margin. You are correct that it is equal what it was the prior quarter. And year-over-year there was a 1 percent impact, negative impact, of the pound on our gross margins at vision. So there's a combination of factors as we (indiscernible) prior to Ocular 1 of the good news messages about Ocular as we develop some of those markets where we do not have direct business such as in Germany and in Japan, Ocular fixes that. But as we have developed them thus far, they are lower gross margin businesses to us, although we have talked in the past that with Japan it's not so bad that we have lower gross margins but we have favorable operating margins in our current business in Japan.

So that 1 percent negative impact from the pound was during this quarter?

Year-over-year. Yes, this quarter versus third quarter, not so. The pound (multiple speakers) but there's still a drifting up of the pound. And as we know, since year end it continues to rise. So that still continues as 1 of the hurdles. And I'd like to hear your crystal ball on when it will all stop.

I don't have the answer to that, but perhaps I could find someone that can answer that for you. I'll see what I can do.

We would like to see -- we don't mind the euro getting weak; we just want to see the pound -- we'd like to see the dollar get stronger against the pound.

I didn't mention it in my commentary, but keep in mind we were -- prior to Ocular we are reasonably balanced. We don't need to get into hedging, if you will, the P&L relative to cross-border buys. So that we pick up a little on the revenue line, it is true we take a hit on the gross margin line. And then some of it we give back up on the operating costs going up the same speed as the revenue line. By the time you get to the operating margin, we take a minor ratio hit, but a breakeven year over -- let's say foreign exchange does not play into our operating income growth year-over-year while it has a negative impact on our ratios.

Fair enough. That make sense. 1 other question on the broader market, and I'm sure this is -- Tom will be glad to answer this. But just from your earlier comments on the call, obviously you still seem to be very optimistic on the outlook for market growth. I think 8 to 10 percent was what you thought over the next couple of years. If something were to go wrong, be it in the US or internationally, what do you think would be risks to those numbers?

That question I am asked all the time, and it's very difficult for me to figure out from a complete market standpoint what in the world could go wrong because this market is so dependent upon demographics, myopia. And everything that's been published indicates that the amount of myopia around the world continues to worsen. Much of it -- my God, you turn on the radios now and they're talking about CVS. I thought it was a new term, but all of a sudden you have got the companies trying to sell contact lenses because of Computer Vision Syndrome.

So I think what you have going today is a definite impact around the world of more myopia that's certainly tied to -- a lot of it tied to close vision that's tied again to using computers. On top of that, in this country I think as we all know we have a baby boom -- and remember what our market is -- most of our new wearers really are young teenagers. So we had -- more babies were born, again as I have pointed out in the past, in the '90s than any decade in our history. I think there was an average of 3.8 million a year. But in this decade, the first 3 years, I think the average is close to 4.1. That compares to the 80's when you had 3.3. But a lot has been written about the baby echo or the baby boomlet. That's a positive for this industry certainly here in the US. I don't think in Europe we necessarily do have a baby boomlet. It's basically neutral. You have baby plus countries and baby boomlet countries.

On the other hand, we have this transition that you see with all the companies in our industry moving products from the old conventional -- I shouldn't say conventional; I should say commodity type to value-added or specially lenses. And that's adding more revenue in the markets. So you have a lot of drivers that are already in place. And I think that's why we feel the way we do.

If I look at the third quarter, it was interesting, we had constant currency growth in the first quarter of 9 percent, second quarter 10 percent. It went down to 7 percent in the third quarter. And every bit of that -- as I told Ted Huber just a minute ago, almost all of it is tied to these companies that reported third quarter America's business that was somewhat soft. And I think there's very definite reason to believe that there was some impact of the weather on the southeast, as well as up the East Coast, that had an impact on our business. Again, I don't want to make it sound defensive. It is what it is. But we believe the market will remain very robust and we're going to participate at a higher level.

Thanks, Tom.

Chris Cooley, are you there?

If I could ask just 2 quick questions. 1, if we look at CVI, or maybe we should say just the broader market, could you comment on how important you think the new hydrogel technologies are going to be or like a melding of the Proclear and maybe oculars to be manufactured; hydrogel going forward in terms of just driving script volumes domestically and abroad? And if I could, just as a quick 1 on surgical, just looking at the Op margin there, I guess really what I am trying to get a feel for here is when do we start to see that transition back up towards the mid-to-upper-20s kind of historical run rate? When do we start to see the leverage from the incremental sales add through the OpEx line?

I will do the CooperSurgical 1 first, because that's 1 I like to get into. The second 1 I am going to give you an opinion.

We believe that you'll start seeing the -- I wouldn't call it traditional; I would say that we were moving our operating margins at CooperSurgical last year up into the mid-20s. We expect to see that happening no earlier than 2006. We're going to be in an investment mode again this year. And I say this year; you know what I mean, because we're in our 2005. And I expect better results, and I expect it to continue to move up. But we're still in an investment mode in this year. And I think it's reflected probably -- I don't say probably, I know -- in the guidance I've given for CooperSurgical in the past.

As far as your first question, it's an excellent question. Remember the criteria. And some of you out there wear contact lenses and you know exactly what I mean. And I will talk to you from both a practitioner perspective, as well as a patient perspective. But from a criteria of choosing a lens and being happy with the contact lens, the first choice is obviously visual acuity. The second choice -- because if you can't see out of the lens you're not going to wear the darn thing. Secondly, it's going to be comfort. You can see very well out of a contact lens, but if it isn't very comfortable you're not going to wear it. The third choice is handling generally speaking from a patient standpoint. From a practitioner's standpoint the first is quality of the product second is service levels that a Company provides. You can have the best products available; if you don't have a good service level you're not going to get the business. And lastly of course is price.

The reason I bring all that up is silicon hydrogel is a nice feature story. It is much like our Proclear product line in 1 way in that they do address a definite need, and that need is there are patients who have developed or will develop what we call afternoon dryness after they have worn lenses for a period of time. That is, they start with their lenses, they wear them very comfortably, and then after a while they become uncomfortable. And Proclear has been a product that has certainly fit that need. The silicones are somewhat positioned in the same place.

They are also positioned for a safe alternative, because they have a higher DK. But DK is a feature. Not sure I've ever seen clinical studies that have shown that people have less real problems with patients who have non-silicon lenses versus silicon lenses. There's certainly a perception that they are safer because they have higher DK, and therefore they have supposedly more oxygen into the cornea. That's fine if you wear your lenses for an extended period of time. But we've also seen with the latest HBR (ph) data that the number of office visits, new patient visits, as well as solo (ph) office visits for extended wear has actually declined, even though we have silicon hydrogels in the market.

I believe it's going to be a niche product line. They're not going to -- there are those that will disagree with me. We'll see where they go. But they're not going to replace the traditional products that have been used in the market. They are going to find a niche. They're going to find a niche when safety is a major concern for people that are not very compliant, who may wear lenses for a longer period of time, longer than they're supposed to wear them. They are more expensive, I will tell you that. They cost a heck of a lot more to make. And we'll just see where it goes.

But we are doing very well, as you can see, with the numbers we've thrown out with Proclear, because we believe Proclear and the silicones basically will compete in the same market. By the way, we call that segment, the specialty segment, premium materials. And basically these products are designed for people that have specific needs. Does that help?

It does, Tom. If I could, just 1 clarification. You mention the 60 million reduction in the CVI sales guidance for '05 being a function of the delay in the Ocular, potential delay in the Ocular closing. Wasn't that scheduled initially for the end of November, so if we do the end of December that would be 1 month that you mention 2 or 60 million? I am just trying to make sure I understand the timing and the calculations being factored in there.

No. I think when we spoke about it we assume a full month of November and. I don't thing so, I know that that was our --

Our previous guidance stated that we -- to give a 12-month picture assumed November 1 for example purposes. Now what we're saying is that's just not a good example. A better 1 would be December 31st, which would be a loss of 2 months. So that guidance this year is 10 months now instead of 12 months.

Okay, super. That's all I have.

Suey, are you there? Suey Wong.

Tom, given that this is the biggest deal ever for Ocular and Cooper, are there any special incentives that you're providing the sales reps to aim their focus and also to keep them in the US and also overseas?

The answer is yes to that. There is -- I shouldn't really get into too much of this, but there are certainly stay bonuses in place to keep people focused. So we have done that.

Is that both on the Cooper side and on the Ocular side?

Mostly on the Ocular side.

Last question here. Given that there is so much new competition in the specialty segment are you seeing any changes in pricing?

The changes in pricing, Suey -- and you're very close to this market and I know you do your own due diligence, just like Chris does -- there's no doubt that the average price for a lens has actually gone up rather than down. It's no secret what J&J is doing. They're moving people out of Acuvue 2 into Acuvue Advantage (ph). And in fact, if you have the office visit data you can actually see it's just a switch. But those lenses are premium priced. I think they're about 25 percent more expensive. On the other hand, you can make a case that there is a real patient benefit built into that product versus the old products that they had, much like our Proclear product which also is more premium priced than our older methaphilcon (ph) products. That's basically all I'm saying. Certainly not seeing any price erosion in the market.

Thank you, Tom.

Charlie Jones. Charlie, are you there?

I apologize. I was hoping you could again break down your '06 and '07 EPS guidance. I believe you said, for example, in '06 you're expecting 20 cents of the decline to be from convertibles. I was just wondering if you guys could fill me in a little bit more there.

We didn't actually didn't really change guidance at all in '06, '07 except for the convert, so I'll let Bob do it. That's all convert change.

All you have to do is take the 15 cents impact of '05, grow it 30 percent for the growth year-over-year, and assume that the converts participate equally with the rest of the common shareholders, if you will. It then would grow to 20 percent -- 20 cents in '06. And then grow that again with earnings per share in '07, you'll get to 25 cents. All it is is really an extrapolation of growth.

Great. And it is just the converts? There's nothing else that's changed in the business (multiple speakers)

That's correct. Other than in '05 where we said 5 cents -- there is a 5 cent reduction in the '05 earnings per share number for the delay, the 2-month delay.

Thanks a lot guys.

Peter Bye. Peter, are you there?

Just to follow up on the convert, I guess, 1, can you explain why they would be growing 20 percent once you convert?

That is a good question, why the convert grew Bob.

Why does the convert grow --

In fiscal '06 and '07. Don't you just convert the 2.6 million shares?

Well the 2.6 million shares are the equivalent of shares outstanding. And if everyone else's earnings per share goes up let's say 30 percent in '06, then likewise these shares, meaning the converts, participate in that growth in earnings per share. So 20 cents -- 15 cents times 1.31 to be exact, will get you to 20 cents, and then if you take that times the year-over-year growth in earnings per share it will then get you to 25 cents.

Yes, but you're just growing the net income, not the share count. So it's -- and then I guess also, I guess the point is I don't get to the 15, 20 cents in the sense that I thought guidance implied that you were going to be using the treasury method throughout and that you were going to -- we were assuming a penny or so dilution from using the treasury method. So I didn't think you would actually see the full dilution of the 15 cents next year since some of it was already implied to be accounted for, since you are already in the money at the end of fiscal Q3 and you had assumed some sort of appreciation of share price throughout the next 12, 18 months. It shouldn't be a brand-new 15 cents either.

You're a little bit right. It's just a function of just how much you want to model in forward stock movement. You are correct that as the stock movement goes up it impacts earnings per share under the treasury stock method. We, quite frankly, did this to keep it simple. And to keep it simple was really to track the if-converted method so you can understand that as an isolated number.

So your original guidance then assumed no shared appreciation for the next 3 years?

In our models we have never sat there and tried to build in projected stock market. We just haven't approached it that way.

So essential you weren't assuming any incremental dilution (multiple speakers)

It would have been modest. It would have been a lot more modest than you're getting into. And also keep in mind what I said -- the way we rolled out this change in number that you have was not to try to get into an esoteric debate on why I think versus (indiscernible) on what the stock price was and then attempt to debate treasury stock versus if-converted, which I think 9 out of 10 people would get quite lost on. I understand you understand it very well, but I would say the average investor may not.

I guess the other question was really why didn't you want to do an exchange? I understand the economic terms. I mean cash flow is not impacted. And I guess you could make the argument from an economic standpoint, offering that perhaps the little bit of date to entice some conversion to a new offering would be justified. Or is it a function of that you didn't want to screw around with the debt (multiple speakers)

We have enough big picture things to worry about than doing banking transactions for a living. That's not our business. So quite frankly, with hindsight I will be the first to say I kind of wish I never did. But we did.

We did it (indiscernible)

I understand. I guess back to -- well, enough on that. On the market, certainly Bausch did put up a weaker US number and Ocular did as well. But relatively Ocular actually grew faster than they had I believe in Q3 than they had earlier in the year.

That's right.

So they didn't actually -- you could actually argue that they did better in Q3 than the first part of the year, so there's no impact on the weather. And Bausch did have a tough comp relative to the first half of the year. And J&J was weak, but they were still up 13 percent. Was J&J mostly all price (ph) then?

That's off price, and I think we all know that. Those that follow it a little bit, very definitely it was a trade, a purposely -- a purpose strategy they had to trade up. A good strategy. I'm not certainly not criticizing their strategy. But there definitely was that, plus the fact that they are still gaining some distribution.

As far as Ocular is concerned, remember Ocular in the first 2 quarters of this year purposely held back on distribution of their Biomedics (ph) so they could manage their inventories down. So that was a little bit manipulating too.

So again, I'm not trying to make excuses. A fact is a fact. And we had to worry -- I'm sorry, we had to hurdle 2 months of that in Florida, not just 1. So we will see what happens in the fourth quarter with some of these calendar reporting companies.

Just on the surgical side with the reinvestment, when would we look for a little -- maybe a little bit of a bump in some of the specific line items on the organic growth with the investment in the past year, the incremental investment?

I would tell you by middle of next year we ought to see that, Peter. We feel pretty good that it is moving along pretty well right now.

Can you just tell me from a quantifiable standpoint until another 6 months how you view that moving along on the feedback level? Is it leads? How do you view it going along?

We broke the sales force into 2 pieces. We have a 48 man direct sales force that basically manages the non -- I don't want to call it capital equipment, but the more sophisticated product lines. We have 24 salespeople that manage that type of a product line. Like SURx is a good example and some of our other capital equipment; the LuMax line for incontinence. And I know in the next quarter we will be giving you some more specific feedback on the kind of growth that we have had in those incontinence product lines, plus the Avalon, the sterilization product line that we purchased about this time last year.

Thanks again, and I'll jump back in queue.

I think with that maybe Bob you might want to say something. And I think we're about ready to wrap (multiple speakers) the phone call with all of you in a very short period of time. Go-ahead.

I would just repeat something Tom said early on, which is we're really optimistic that this transaction is going to close; that we've done everything we can, be it the banking, be it the integration plan. We're ready to go. And the moment we hear, we think we will be able to wrap this up and get on with life and let everyone reshape their lives in these 2 companies. We're excited about the great people we've got in Ocular. And we've been able to pick the best of 2 worlds on a lot of fronts and are really excited that this can be the best deal ever.

So I think I think the next time -- hopefully we will be talking to you very shortly, I hope, and maybe seeing some of you within the next 30 days or so, because as I pointed out we're definitely going to put together an analyst meeting in New York within 30 days after the close of this deal.

With that I want to say good bye. And we will -- if anybody has any other phone calls, as you know, you can always give us a call. Operator, I think we're finished.