酷柏 (COO) 2005 Q4 法說會逐字稿

Good day, ladies and gentlemen, thank you for your patience and welcome to the fourth quarter 2005 Cooper Companies Incorporated earnings conference call. My name is Bill and I'll be your conference coordinator for today. At this time all participants are in as listen-only mode. However, we will be facilitating a question-and=answer session towards the end of today's conference. If at any time during our conference today your require assistance, please key star followed by 0 and an operator will be happy to assist you. As a reminder, today's conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today's presentation, Mr. Norris Battin, Vice President of Investor Relations. Please proceed, sir.

Thank you very much, Bill. Good afternoon and welcome to everyone. Before we begin I would like to introduce you to Tom Bender, our Chairman and Chief Executive Officer; Bob Weiss, who is our Executive Vice President and Chief Operating Officer; and Steve Neil our Vice President and Chief Financial Officer. Also on the call to participate in the question-and-answer session this afternoon we have Nick Pichotta and Paul Remmell, management of CooperSurgical. 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.

Thank you, Norris. I -- what I'd like to do is start off by giving you the agenda what we'll be doing over the next hour or so. First of all I will discuss and go over the contact lens market overview as I normally do. I will also talk to the Cooper's performance during the past year against the market performance. I'll also talk a little about silicone hydrogel lenses, and more importantly, I'm going to spend some time talking about our plans to either defend or grow our market share in the five segments of the soft contact lens market. After I'm finished I'm going to turn it over to Bob and Steve to go over the financial -- the financial highlights as well as the CooperSurgical strategy in the long tern CoopersCur -- CooperSurgical strategy and certainly add some -- some color on what we're attempting to do at CooperSurgical and I think probably was -- was not discussed enough detail the last time we -- we were altogether. And Nick Pichotta, who is our CEO on CooperSurgical, is on this call and will be available to answer questions about CooperSurgical.

So let me get started and talk a little bit about the market. When you look at the contact lens market, basically we look at it the way Bausch & Lomb looks at it, probably the way J&J reports it too, [Feba] doesn't report much, so I don't really know how they report it. But, we look at it in three different regions of the world, the Americas, Europe and the Asia-Pacific. The Americas represent about 40% of the soft lens market. And by the way, after nine months, sales or revenue for the world is about $3.4 billion. So, the Americas represents about 40% of that. Cooper grew their business only 1% in 2005. It's by far the worst performance we've ever had in the Americas. In fact, I think I have to go back to the late 90s to find a year that we didn't outgrow the market in the U.S. And I'll get to that. We certainly know where the -- the problem is and we're certainly going to respond to it in 2006. The market, by the way, for the Americas was up 9%. Up 9% after 9 months.

In Europe, Europe represents 30% of the world market. It -- it grew between 7 and 8% after nine months. Cooper again is growing fast in the market. We're up about 10% -- we are up after -- we are up 10% for the year 2005. And again we have gained share. I -- I -- the Company I think we're the closest to in Europe was Bausch and Lomb. B&L has been reporting 1, 2, 3% kind of growth. We think now there's some distance between us and B&L. We're the number two player behind Ciba. Ciba's by far and away the strongest player in Europe.

Asia-Pacific market represents about 30% of the world market and 23 of that 30, by the way, is Japan. So you can see Japan is a very big part when we talk about the Asia-Pacific market. It's the fastest-growing geographic area in the world for the soft contact lens market. It's up 9 months in constant currency in the high teens. Cooper again grew much faster than the -- than the market in Asia-Pacific. We grew 29% last year. But please be aware that that's the -- the area where we have the least amount of our -- of our business. In fact, the Americas represents about 50% of Cooper's business, as I pointed out for the market it's 40%. Europe represents about 35% of our business and Asia-Pacific is about 15%.

Now, the best way and the only way we really look at this market is to -- to break down soft lenses into the five segments of soft lenses. That is, they all fall into either one of these five segments. They're either single use lenses, they're either spheres, torics, multifocal or cosmetic products. It doesn't matter what kind of a soft lens you talk about it's going to fall into one of these categories. The market grew for single use products 15% on a worldwide basis. After 9 months Cooper grew 38% for our full year. Single use products represents 29% of the world market. So it's a big part of the world market and it only represents 10% of our business. And I think all of you know one of the reasons it only represents 10% of our business is because for the full year, even though we had nice growth, we were still had manufacturing issues to constrain our ability to really compete in the single use market in Europe and the United States. And that has been rectified and during 2006 we're going to be in a position to really aggressively go after the single use market on a global basis, not just in Japan.

In the sphere market where the silicone hydrogel products have been introduced, at least the two-week products have been introduced in the last year and a half, that market was up 9% after nine months. Cooper, no surprise to anybody, was down 2.5%, primarily in the U.S., by the way. And the single use products represent -- I'm sorry, sphere products represents 46% of the world market but 50% of -- of Cooper's business. In the toric segment, after nine months the market is up 16%, Cooper for the year grew their business 14%. Torics represents 15% of the world market. And it represents 34% of our market. So you can see it's a very valuable franchise for our soft lens business.

I think in an aside and probably more important in just looking at torics you should focus on the fact that the disposable products in that segment, which represents about 90% of the world toric market, grew 23%. With Cooper on a global basis we actually grew 26%. So we actually grew faster than the market in the disposable part of the toric market. We have to hurdle a bigger problem than the world market, though, when you look at breaking the market out between disposable lenses and the old conventional lenses. Because the conventional lenses, which only represent 10% of the toric market on a global basis, unfortunately represents about 20% of our business. So that's one reason why our disposable business which is the growth driver on a global basis as well as for -- for Cooper actually grew faster than the market. But on the other hand, when you look at the -- all the torics, we grew almost with the overall market.

Multifocals would be the fourth segment. The market after nine months up 19%. Cooper, which is by far the fastest-growing products, we have the fastest-growing products in that category was up 50% for the full year. Multifocals represent about 3% of the world market. They represent 4% of our business. So we're very strong in the multifocal part. Cosmetic lenses which is the only of the five segments of soft lens -- the only segment that continues to decline -- this is its third year -- is down 1% on a global basis. Cooper grew its -- its cosmetic business, which is a very small part of our business, 2%. Cosmetic lenses represent 6% of the world market. It represents 2% of our business. And by the way, silicone hydrogel as an aside, which is primarily in the sphere category, represents now 13% of the world market. And in the last quarter silicone hydrogels represents 15% of all the material lenses sold. So the non-silicone products represents still a big, big part of the global market.

Moving to the U.S. very quickly, and this is where Cooper's problem exists in --in the soft lens market during last year, and the reason that we grew our business on a global basis 8% and the overall market grew after nine months it's up about 11%. But it's all in the U.S. The single -- in the single use market, the market grew 13% in the U.S. after nine months. Cooper's grown their business 83% but I'm going to point out to you it's only a little over $1 million so it doesn't really exist much for us in the U.S.

In the sphere category, the market grew 8% in the U.S., almost entirely driven by silicone hydrogel lenses. We were down 8% in the U.S. So folks, that's where the problem is. The too weak spherical product in the U.S., we really got hammered in 19 -- in 2005. Torics grew 9.5% thus far after nine months in the U.S., and Cooper's up 9%. But more again more importantly with disposable torics the market is up 18% after nine months, Cooper' is up 21% for the full year. So we're doing very, very well in the overall toric market.

Multifocals were up 17% in the U.S. after nine months. We were up 33%. So we're growing about twice the market in the U.S. In cosmetic lenses were down a full 6% after nine months and we were down 3%.

So if you look at the overall market, I think I gave you a nice clear look. As far as the silicone hydrogels, to give you a quick overview, because I saw some data from an analyst that is not accurate. I think I read today they -- somebody claimed -- one of our competitors claimed that the silicone hydrogels now represent 40% of the new and refits. And that's certainly not the data that we buy at Health Products Research which indicated it was 35%. So I'm not sure where that data came from. But it's still pretty healthy so let's not lose sight of that.

A couple of interesting things are going on, though. On a worldwide basis from the third quarter -- from the second quarter to the third quarter the silicone hydrogel products grew $20 million. Yet the non-silicone products actually grew about $30 million. And in the U.S. we had the same kind of situation where the -- I believe the -- the silicone hydrogels grew 11 million in that same period of time and the non-silicones grew 15%. Whether this is an indicator of a slowdown in that adaptation to silicone hydrogels I think we need a couple more quarters cause I don't think it means a heck of a lot. Because, please remember we're talking about growth from quarter-to-quarter. This is companies reporting their sales into offices and into distribution, not necessarily lenses going on eyes. Because when you look at HPR data, it certainly indicates that silicone hydrogels on a quarter-to-quarter basis continues to grow. And that data is probably more important.

As far as total office visits, silicone hydrogels represented 27% of all office visits in the third quarter versus 25%, I believe, in the quarter before. And that represents about 21% of all office visits for the trailing 12 months. One interesting other point is, if you look at new to contact lenses, and this is virgin eyes, people who have never worn contact lenses, 30% of the -- in the third quarter of all patients who visited doctors and got a silicone hydrogel product, that repres -- that is -- compares to 22% for the trailing 12 months. So I think it gets you up to speed on some pretty good data on what's going on. This is almost all, by the way, data in the spherical market.

Now, what's more important, and I think you want to know, is what the heck are we going to do about all of this? What -- what is our next moves? You've seen our -- what I would call a pretty extensive list of new product offerings we have not only for '06 but also for '07. And if we specifically look at that, in the single use market, the most important thing that's going on is that we've increased the amount of capacity that we have available. So it's tied to the fact that we have also an improved product, improved packaging that this product we -- we -- we think we're going to be able to grow our single use business between 35 and 50% next year, which is a pretty healthy number. The second new product launch that is going to assist us in growing, continue to grow and take a larger share of the single use market will be the introduction of our PC Technology single use lens or Proclear. We will be the first product, we believe in the market, with a premium material product for the single use wearer. This means a more comfortable product than those that are currently available plus the fact better end of the day comfort for these patients.

And then lastly and very important I'll put it in two categories, is the fact that we'll be introducing in the largest single use market in the world, which is Japan, which represents certainly well over 50% of the global single use market we're going to be introducing the middle of the year a single use toric lens for Japan. If I go to the sphere category which is probably the most important thing I should be talking about is what in the world we going to do right now before we have a two-week silicone hydrogel product in the U.S. And we are not going to sit on our -- our fanny. We are going to do something fairly aggressive and we think the introduce -- the introduction of our Biomedics XC, which is a combination of the PC Technology of the Proclear Technology with the optics of the Biomedics mater -- optics -- sorry, the Biomedics lens design, we think we have an absolutely a good competitor to face against the silicone hydrogel products for 19 -- for 2006.

From a clinical standpoint, we see the PC -- we believe the PC Hydrogel material compares pretty nicely to some of the two-week silicone hydrogel two-week spheres that are on the market today. We think we have better comfort, we have a certainly a lower modulus with that -- with that material and we think we have excellent deposit resistance versus most of the silicone hydrogels that are on the market today. And it certainly will take us into the -- into 2007 where we'll also be able to market a two-week silicone hydrogel product to compete against the products from J&J and Ciba today. It's also a product that we're going to have available for the chains -- the optical chains here in the U.S. to be able to offer them a -- a private label product in the premium category which nobody else is doing.

So if you put some of these position points together, hopefully you'll -- you'll see how -- why we're somewhat very optimistic that this product will at least allow us to begin to slow down or really not -- I shouldn't say slow down but to stabilize our overall two-weeks spherical business in the U.S. and possibly even grow it. On top of that, as you know, we've already introduced a monthly silicone product that we believe has a number of -- of advantages over those that are already available in Europe. Europe is not a two-week market. It's a monthly market. And this product we believe will compete very nicely in Europe. It has high oxygen permeability. I think it's -- I think there's only one product that -- that has a higher one. I think that's Night & Day.

Unlike many of the other silicone hydrogel lenses that are available in Europe, it has a low -- very low modulus. It has a higher degree of wearability. And we believe all of this is going to result in a lens versus the competitors that is more comfortable and certainly the clinicals have pointed it out . And I think it also is going to offer better end of the day comfort, too. So if you -- with that product will be available in the U.S. and Canada by middle of year 2 -- the middle of 2006 I should say. So, between those two product launches, we believe we can turn the tide on -- on where we've been with this sphere ca -- with our -- our sphere lenses certainly here in the U.S.

As far as torics are concerned there's a lot of speculation on silicone hydrogel. Torics and what it's going to do to our franchise. I think we'll -- we'll take a look at that. And one of the things I will point out, though, the silicone hydrogel torics have been available in Europe for well over a year now. Europe did very nicely, thank you, this past year. We grew our toric business 23% in Europe. Certainly faster in the European market in torics and on top of that we had 33% growth in our disposable torics even though we had the silicone hydrogel torics available. Here in the U.S., of course, we've -- we've -- as I pointed out we've continued to grow fast in the market in disposable toric category, even though J&J's Acuvue Advance for astigmatism been around I think for about six months, something like that.

We are going to be expanding the -- the franchise for our Proclear toric product during the year. We're going to add a -- a second base curve which doubles the amount of parameters and it'll have almost twice as many parameters as any other product in the disposable toric category. We also are going to be introducing, I pointed out, a single use toric product for Japan which we believe is going to be a big product. And lastly, and very importantly, by the end of this year we'll be introducing the first disposable toric multifocal product that will be available.

As far as our multifocal franchise is concerned where we're growing very nicely, already we'll be introducing a third disposable multifocal that will be geared to and focused upon the emerging press biop. Without going into too many details on it we believe it's going to be a big product and I believe it's going to be introduced in the middle of the year. I've talked a lot, I've tried to give you an overview of our -- of our performance. We -- we believe our performance you can take out that darn two-week spheric out of it we had a darn good year this year. But more importantly, it's what we're going to be doing in 2006 and 2007. I think we're properly positioned to get back into the game, certainly in the two-week spherical category. With that, Mr. Weiss, I'll turn it over to you.

Thank you, Tom. And good afternoon and evening to everyone. Headlines of course, we had a fourth quarter which -- for which revenue ended 69% above the prior year and for the fiscal year revenue is up 65% above the prior year with total revenue at 807 million. Before the final allocation of Ocular Sciences purchase price and non-recurring acquisition and restructuring expenses fourth quarter earnings per share was $0.83 and that brought our fiscal year earnings per share to $3.28. As reported our fourth quarter earnings per share after various accounting adjustments was $0.22 and for the fiscal year was $2.04. One of the real headlines in my -- in my view is cash flow. We had $186 million of operating cash flow during the fiscal year. And that hurdled about 10 million of integration costs on the -- on the vision side. So we were close to $200 million operating cash flow year. Obviously that's one of the things that the banks saw when they amended our agreement which we consummated today. And as a result of that, we will have the economic benefit of about $0.03 a year in -- in -- in saving about $2 million of interest expense. And Steve Neil will be getting into that shortly.

As far as the final purchase price allocation, I won't go into that in much detail other than to say that it did result following the appraisal process in reallocation from goodwill to various intangibles and in process R&D wri -- write off of $100 million. In a -- in a nutshell, without trying to get too CPAish, the -- a lot of the change had to do with the methodology of applying various accounting rules from different techniques of appraisal from the market approach to the income approach. And depending on -- it's kind of like a black -- black shoals arrangement, you press a button, you come up with some numbers after extensive discussions we ended up with this $100 million additive allocation. There -- if I -- if I do a bridge to guidance, we end up as we look into our guidance with about $0.14, which will be the result of amortization of intangibles going forward on an annualized basis, stock option expensing which we will be adopting next year about $0.15 dilution and interest expense of around $0.03 going the other way. So all up, two of those are accounting and one is real -- I'll call it real world economics. That's obviously one of the things that the -- the bank noticed.

Likewise what the bank noticed is the success of our integration efforts. And clearly we are on track to achieve $50 million in savings as we exit 2007. I would say that we expect to beat or exceed that number. During the course of this year we ended up reducing over 500 people in the organization. That's a total of 7% of the entire organization worldwide. And if I compare that to the staffing of the Ocular Sciences head count at the time they were integrated into Cooper, which had 2700 people worldwide, that would be the equivalency of about 20% of that staff. So, there is no doubt that the integration is going well and we are achieving a lot of those real world economics.

I wanted to bridge into strategy. Tom covered a lot of CooperVision and I know there is a lot of open questions on -- on strategy at CooperSurgical. Well, let's start with saying not -- maybe it wasn't clear when we came out in November how -- how much this was an extension and how much of it was a shift in strategy into the hospital segment. The hospital segment is clearly an area where CooperSurgical already has substantial amount of products. It has $16 million of revenue generated in sales to the hospital. That's about 15% of our -- our revenue. And that is a group of products that are by and large there is no direct sales force of CooperSurgical that is promoting those products. We needed to establish some forum to leverage that product line and leverage the fact that the gynecological surg -- surgery market, both hospital and outpatient, was more than three times the size of the in-office gynecology market. And neo-surge is clearly one of those areas that we have decided has the right story of cost savings, it's going to the right market which is a $285 million market for reu -- reusable and disposable trocar access systems or I should say the whole of that market, the trocar access system market is 285 million. So it's a -- a large enough market with a product that's very proprietary with stan -- substantial patents involved and one where the foray is easy where when it comes to basically educating the hospital on how to save up to 60% of the cost in that area.

As far as our objectives, our objectives are as we move into this area or expand into this area surrounding the gynecologists to achieve organic growth of double digit. One of the things we have worked hard in the past to do but the product line that we've had that we've accumulated over 20 plus acquisitions is -- is one that is difficult to achieve double-digit growth in that area only. We also wanted to move our gross margins up into the low to mid 60s and we believe by expanding into this area which has higher margins we will be able to achieve that over the next several years. Operating margins, we wanted to move them up to the vision level in the --basically the upper 20s. And we believe this will allow us to do that.

And lastly, we -- our objective is to leverage our net operating loss carry forwards. We are not a taxpayer in the U.S. and do not expect to be a taxpayer in '06, '07 and probably through 0 -- '08. And in fact our operating -- our -- the cash flow that we pay taxes on is less than 5% of our pre-tax revenue. So that's something we don't perhaps highlight enough.

The other acquisition, we had two acquisitions, NeoSurg and Inlet aggregated $50 million. The Inlet acquisition is basically a cost effective wound closure system that likewise is -- has a lot of patent protection, a lot of story to it. It's a smaller niche market but it's clearly one where it fits well and when combined with NeoSurg and combined with our $16 million of parent product line in the hospital market will allow us to create critical mass to support a sales force in that -- in that location also. We expect to dilute earnings per share as we establish this sales force up to $0.20 this coming year and in 2007 up to $0.15. But as we look down the road several years to 2010, we expect to achieve accretion of 30 -- $0.30. Our objectives are to clearly move our return on investment in this area over a three year period up north of our hurdle rate of 20%, and we are expecting that we will achieve and exceed 30% as we look down the road to 2010.

As far as revenue, revenue for the quarter for CooperVision is up 86% and for CooperSurgical is up 6%. In aggregate 69%. And for the year -- fiscal year, CooperVision is up 80% and CooperSurgical 7%, an aggregate 65% increase over the prior year. CooperSurgical's core product line, which excludes the non-gynecology section, was up 10% both in the year as well as in the quarter. And CooperVision was up 5% on a pro forma basis in the quarter and 8% during the year.

The drivers of CooperVision clearly, as Tom indicated in his commentary, is the single use area which was up 38% for the year. The toric area which was up 14% for the year, and the multifocal which was up 50% for the year. Those three areas clearly drive our top line. Geographically, our top line is being driven by the Asia-Pacific region which was up 29%. And of course, as Tom talked about, our -- our soft spot is the spherical market and particularly the U.S. spherical market excluding the single use product line.

As far as the count -- accounting changes I said I would not really get into that anymore. But just to comment on stock option accounting as we adopt that next year, one of the -- one of the drawbacks of that, of course, is there is some degree of double dipping on the expense. We -- we will take a charge not only in the P&L which of course is non -- non-cash flow oriented but we will likewise have the -- those options outstanding in fully diluted earnings per share. So I've always viewed it's a -- a double charge. But that's the new world. And that's kind of my lead in to you, Steve, to talk about the financial side.

Thanks, Tom. And good afternoon and evening to everybody. First let me highlight a little bit more on the cash flow side. As Bob had indicated we had an excellent ca -- cash flow generation for 2005 with an operating cash flow of 186 million. And that generated free cash flow which is operating cash flow after capital expenditures of 69 million. When you look at the components of our cash flow in the fourth quarter, our day sales outstanding were 62. That compares to 65 last year and -- and 65 actually in the third quarter. And we expect to be somewhere -- average around the mid 60s throughout 2006. Looking at our inventory months on hand for the fourth quarter we are at 6.7 months. That compared to 6.9 last year and -- and 7 in the third quarter. We do expect to increase our months on hand slightly as we build inventory in advance of our many product launches that Tom and Bob were mentioning and as well as making sure we have adequate inventory for customer services purposes -- customer service purposes as we consolidate our warehouses as part of the integration effort during 2006.

Capital expenditures in the quarter were 41 million, and for the year 117 million. In looking forward we expect between 155 and 165 million in capital expenditures in 2006, primarily focused on expanding capacity for our signal use -- single use lenses as Tom mentioned, building capacity for our silicone hydrogel production as well as focusing on cost reduction initiatives. Overall, our net debt, that's debt outstanding minus cash on hand, reduced by 26 million in the fourth quarter and it's gone down by 36 million since the acquisition of Ocular which reflects the favorable working capital management and increasing profits offset by our capital spending. Also as Bob mentioned, we're pleased to announce that today we closed on our amended and restated 750 million syndicated bank credit facility. This activity was led by Key Bank and it extends our maturities, offers us significant borrowing flexibility and lower -- lower overall pricing. We expect to save, as Bob indicated, 2 million or roughly $0.03 a share annually in interest and we've significantly reduced our debt funding requirements in 2006 through 2009.

Turning to the financials and the numbers on gross margin, gross margin as reported was 62.5%. And if you exclude non-recurring items which were principally related to our integration efforts, our gross margin was 63.7. And this compares with 64.5% in the fourth quarter last year. On a year-to-date basis our gross margin as reported was 61.7%. And excluding the non-recurring items, principally inventory step up for the acquired inventories from Ocular, the gross margin for year-to-date was 64.4%, the same percentage as last year.

Looking at the vision group and excluding the integration and acquisition costs, gross margin in the quarter was 64.4%. This compares to 66.7 last year and on a year-to-date basis we're at 65.5%. And this decline similar to prior quarters is primarily due to product mix as a result of the OSI, Ocular acquisition. Specialty products overall last year were 64% of our revenue and -- and they are now 51%. And that's due to the addition to the sphere products and single use products. And overall our -- our single use products represented approximately eleven half -- 11.5% of our sales in Q4.

Looking at CSI, the surgical group reported a gross margin of 58.9% in the fourth quarter. And this was an increase from 55.9 last year. And overall on a year-to-date basis we're at 57.1% for the surgical group. This significant improvement in gross margin reflects the impact of CSI's restructuring activities.

Looking at SG&A, SG&A overall was 35% of our sales in the fourth quarter. And that compares to 38% last year. And on a year-to-date basis, SG&A was 37% compared to 39% last year. We're realizing significant leverage on our higher sales lever -- lev -- level. And frankly, a greater percentage of spherical products in the mix attracts less operating spending. So we are getting a favorable impact on SG&A from our mix change. We expect a similar percentage of sales next year in SG&A as we leverage our sales growth, but we also expect some incremental spending increases to support our new product launches including sales and marketing activity on the products that Tom had mentioned earlier.

Looking at research and development, excluding the write off of acquired in process R&D, our R&D expenses increased 294%. That's almost three times to 7.6 million, which represented 3.4% of sales in the fourth quarter. Obviously focusing on the product development for the launches that we have scheduled in 2006 and 2007. Comparably on a year-to-date basis we're almost up 2.5 times, 252% to 22.9 million and that's 2.8% of -- of sales. So significant spending in R&D driving the top line here as we go forward.

That sums down to overall operating margins of 24.1% in the fourth quarter down slightly from 24.8% last year, and that's primarily due to the spending on R&D and -- and the lower overall gross margins. On a year-to-date basis our operating margin was 23.5% and that compares to 23.8% last year. Interest expense. Interest expense increased 6.9 million in the fourth quarter compared to last year. And it represents 3.8% of our sales. And again that's due to the debt in the Ocular transaction. And on a year-to-date basis interest increased to 22.4 million and is 3.5% of sales.

Looking at taxes, our effective tax rate for the quarter excluding non-recurring items was 16%, similar to what we had in the third quarter. And for the year it was 12.5%. I'm sorry, last year was 12.5%. For the year this year -- for the entire year it was 15.4% and that compares to 17.5% last year. As we look forward in the -- the mix of revenue by jurisdictions we're expecting effective tax rate of 15% in 2006.

Well as we add it all up on an apples to apples basis with our guidance, that is before the non-recurring items and increase in the intangible amortization associated with the final allocation of -- of the purchase price our EPS was up $0.83. This compares to our guidance range of 83 to 86. And it was lower due to a slightly higher effective tax rate when we adjusted our interim tax rate what you do is you know is -- is you have to project fort full year. And so really the impact to be on the lower end of the range was a slightly effective higher tax rate than we had expected.

As reported net income for the quarter was 37.2 million. Excluding the non-recurring items or $0.79 per share. And for the net income for the year excluding the non-recurring items was 145 million or $3.16 per share. On an as reported basis, we had net income for the quarter of -- of 10 point [INAUDIBLE] million -- or $0.22 a share. And that certainly was impacted by the $20 million write-off of acquired in process R&D and overall for the year net income was reported at 91.7 million or $2.04. I think that's enough numbers. You probably be -- have a lot of questions so I'm going to end here and turn the call over to Tom for Q-and-A.

Operator, we are ready for questions, please.

[Operator Instructions] And we will hold one moment to announce our first question.

Steve Hamill, please?

Thanks and good afternoon. First question, I just want to understand this change in the -- in the purchase price allocation a little bit better. Because going from 30 million to 130 million seems like a -- a pretty ma -- dramatic dro -- jump just based on some -- some technical details. Is there anything else you can give us on that, Bob?

Yes. I'll start on that and then I'll let Steve who's kind of lived this is last several weeks. But, simplistically, there is a change in the interpretation of accounting literature that's been around really since the 60s which was initially APB 16 and then it moved into ASR -- or into FAS 141. And in the past, historically, people have allocated purchase price looking to what's known as the cost approach and the market approach looking to what would -- are there market comps. And that -- and that was largely the mechanism we used. There is an evolving and informal accounting which is being authored orally by the SEC most recently on December 6, the -- an SEC staffer gave a lecture where even if there are no contracts with customers, called customer relations, it really doesn't matter from an allocation perspective. And in a case of the way business runs in the contact lens businesses, there are no written contracts. In fact, there are no purchase orders. For the most part a customer has a price list and calls in against that price list.

As -- as this accounting evolves, it really is an attempt by the commission to really move things out of goodwill and into other buckets. And the bucket they're calling now is -- matters not whether or not there's a contract, it's -- it's analagous to shelf space. How much shelf, or said another way, how much market share did the company you buy and if the company you bought has profits then you must allocate as much money as you can of profits into that so called shelf spice.

Now in the case of Cooper where we were going to migrate the product line into a new product line, the -- we -- we certainly viewed that consistent with the past that we would not have a substantial economic value, or fair value, as it is called, associated with that activity. So, be that as it may, the -- the -- the tide is changing and I would suspect in the near future maybe the SEC will issue a staff accounting bull -- bulletin. They're -- they're saying that in their speeches now. But we kind of hit that very fresh with obviously a big acquisition that had a lot to discuss. And I don't know, Steve, if you want to add any color to that. I probably said more than I -- than -- than it's worth already. But, I -- I know there's a lot of interest in that area.

Yes, Steve, I --I would just say that the -- the -- obviously the focus is to value your intangibles and with the assistance of an external valuation firm we -- we went through the process of identifying all -- all of the intangibles and -- and basically you can poke it -- put it into three buckets: technology, pre -- in our case predominantly manufacturing technology, what's called customer relations or what's now going to evolve into shelf space or -- or market share, then in process R&D. Basically the evolving philosophy on in process R&D is if you were spending money's on a project pre-acquisition and you continue spending post-acquisition there must be some value there. And so you go into some highly complex valuation techniques in which you value those intangibles.

And that was a process that we went through clearly in our 30 million we -- we had identified a value of customer relationships, for example in Japan and Germany where we bought feet on the street. We were formally going through distributors. We had identified some manufacturing prostec -- technology, process technology of value. But when you get into the application of the rules of how the -- how it's evolving through the way that the SEC does and influencing through speeches, et cetera, once we got done with valuation process and gone through the valuation model, you ended up with, I think, a little bit different than what a business approach would have been to valuating it but to a evolving GAAP approach. So, again probably too much but that probably gives you a sense of the process that we were going through to arrive at ultimate numbers that we did in accordance with the current accounting principles today.

Okay. Then in terms of the strategic discussion, Tom, it sounded like the dailies business is a key part -- the single use business a key part of our growth plans for next year. And I've got two questions related to that. One, what does that do to your operating margin? It sounds like maybe it's a little depressing on gross margin. But what about overall operating margin as that increases as a percent of mix? And then second, is -- with the Japanese market now at 60% dailies, is there much further for that to go in -- in Japan?

Let me get the last one first because that's the easiest one for me. I'm absolutely astonished to see the trend in Japan continuing to move more to daily. And if you would have asked me two or three years ago, not that I've been right on everything and that's a joke here a little bit now, but, because I have been wrong in a few things, I would never have guessed that. I would have thought the two-week market would grow -- would grow faster. But in fact after nine months, believe it or not, the two week market in Japan is flat as a pancake. No growth at all. And all of the growth in Japan seems to be coming from single use. So the answer the question, I think it's going to continue to grow. And there is some incentives. There is some what I would call practitioner profitability incentives for that that's behind it. There are other -- there are other conditions.

But there -- the one thing that is somewhat surprising to me is that the soft lens -- and I think you get a little bit from the B&L discussion, too, their conference call too, that the conversion to soft lens disposable torics has been a little slower than I think we all thought. Because we've been in that market a couple years and I think B&L has been in that market, Steve, for three years. And it has been slow growth. There still seems to be quite a few hard lenses still being used to mask astigmatism. But it's a gradual from the Japanese are slower than faster. They're more cautious in moving from one to -- one modality to another. So maybe that's what's behind it. We -- I still feel optimistic that eventually -- eventually the toric market -- the soft toric market in Japan will mirror that of the United States. It's a long ways away and longer than I thought.

As far as the profitability of the single use business to us, and that is looking at from operating margins, it's every bit as good as some of the other modalities for this reason: if you recall, one of the big expenses we have in this industry is trial lenses. The amount of trial lenses and trial sets that we have to give doctors. When it comes to single use lenses as a percent of total sales it's much, much smaller. So even though the gross margins are like 50%, we're still looking for like 30% operating margins out of these products. So it's -- it's var -- as you build -- as you build volume, critical mass, it becomes even more -- more profitable. I -- I can tell you I would be absolutely astonished if that wasn't the number one driver of profits right now for Ciba Vision. It be just -- well, I shouldn't say -- they got -- they're in the cosmetic market. That's declining. But I bet they have pretty good overall operating margins for that reason. Do we help a little bit ?

That does. Thanks. I'll jump back in the queue.

Okay. Thanks. Benner Ulrich. Are you there, Benner?

Yes, I'm here. Thanks, Tom.

Thank you.

I just had a -- a couple of questions and -- and this is -- is maybe a bit of a follow-up to what you why just talking about. But on the gross margin in the quarter when you back out from the one-time items here, it looks like obviously profitability was -- was down a little bit sequentially. And I would think that as we see this -- with the weakness in the commodity sphere business and -- and a bit of a mix shift towards more the specialty products that should be improved. I was just wondering if there's anything else going on there? And maybe it is -- the strength in the single vision.

I will let Mr. Weiss answer that because I think I know the answers but I'm going to let him do it.

Well, there's a - the -- there are certainly a number of dynamics. One of the dynamics is now with the strengthening dollar and with the profile we have with a fair amount of product made in -- in Puerto Rico, the strengthening dollar as we export products from Puerto Rico does weight margins somewhat. The mix to the single use also weights that gross margin somewhat. And Steve, I don't know if you want to add anything also to add some light on that.

Yes, I -- I think from a product perspective that's right. Certainly as we have a different jurisdictional area there are different margins for different products. For example, if you -- you peel back the onion a little bit when you look quarter-to-quarter, Japan's margin, even though it's being driven by dailies actually increased from quarter-to-quarter. So there's a lot of different pieces. But the -- the two primary drivers are -- are certainly currency as well as product mix. Our - Benner, from quarter-to-quarter our specialty products as a percentage of total sales didn't really change much at all. So, it's -- it's driven off of mix, currency and then which jurisdictions are a little bit stronger or softer than others from an overall pricing perspective.

Okay. Fair enough. Thanks. And then just one -- one follow-up question. I know you've talked about -- a bit about manufacturing build out in 2006. And much of that's going to be associated with the silicon hydrogel products that you intend to introduce. Could you give us a sense of maybe a level of sales in terms of dollars that you'll be able to support perhaps at -- at-- at the beginning of the year and then where we'll be at the end of the year?

Yes, I'll -- I'll take that first. It's -- it's -- there were two capacity issues this past year. One certainly had to do with the single use. And from a single use perspective as far as building that out we've put a lot of dollars as you can see we spent $117 million in CapEx and an awful lot of that had to do with Gen 2 expansion. We are increasing next year in the neighborhood of our through put, number of units we can produce worldwide 40%. To put that in context. So it's a substantial improvement in overall capacity.

The second area, the silicon hydrogels are entirely new manufacturing platform. So that's kind of start all over if you will. Over the next two years we will be putting in the neighborhood of $80 million into CapEx to give you some idea of just how much is -- is being invested in that area. This coming year our limitation will be probably in the neighborhood of 5 to 7 million units that we'll be able to sell from a capacity point of view. Next year I would expect it to grow 3 to 4 fold in terms of capacity. So I think that would -- if you kind of run out some numbers you'll get some idea of where -- where we might be headed.

So the 5 to 7 million is grow growing 3 to 4 fold during '06.

'07 versus '06.

'07 versus '06.

Will be 3 to 4 fold in capacity.

Thanks a lot, guys.

Mike Bailey. Mike, are you there ?

Yes, I am. Thanks for taking the question. Just want to ask a quick question on earnings for -- for fiscal '06. We're trying to strip out the -- the impact of options expense just to take a look at it sort if preoptions. If we take the first quarter guidance and adjust that for options we get sort of a $0.67 to $0.69 range. I think that's about right based on your -- your options guidance there. I guess the question for us is, based on that and then adjusting that with the full year guidance, it looks like the -- the remaining three quarters of the year need to come in about $0.95 each roughly to get you to about $3.53 for the last three quarters of the year. Now, we know typically sort of the January quarter tends to be a little bit slower seasonally. But, should we expect any other sort of major drivers in the back half of the year that could help drive earnings?

Bob, let me turn it over to you but let me make a comment up front. I -- I probably should have done this earlier, anyway. That's right. I didn't talk about guidance when I think about it. But I got to tell you, Mike, if you're modeling, to model anything more than 45% of our annual -- our fiscal year sales next year in the first six months would -- would not be correct. This is -- your new products are going to generate the momentum at the end of the year. Plus the fact, seasonally, we always do more -- a lot more business in the third and fourth quarter because ours is a fiscal quarter and our first quarter as you accurately pointed out includes November and December and it's always very weak. So it wouldn't be bad to be something like a 42/58 kind of mix when you look at six months to six months. And a lot of that has to do with new products.

I -- I -- I didn't point one more thing out that I think it's important. Because you have done an excellent job, you're -- of looking at the overall market and -- and -- and the dynamics. Be aware that this was a very unusual year from a competitive standpoint. Cooper for the first time in our -- certainly my history, we did not introduce a significant new product this year. Our 8% growth came basically -- that's organic growth, no new products. And the first time I ever can recall the two companies that -- that represent 75% of the world market, and that's J&J and -- and Ciba introduced remarkably significant new products. Lot of new inventory into the market.

So how much of the 11% growth is tied up there I don't know. But I would tell you that J&J introduced three new products. Even I noticed in their conference call they said four, but I -- I can't -- I don't know what the fourth one could have been. And I know Ciba introduced two significant new products. So you have some -- some of these dynamics going on. And I'll leave Bob finish the -- the -- the first part.

Yes, I think I'd response, too, is that how does the first quarter measure up compared to the full year. There is no doubt that the first quarter is -- has negligle -- negligible impact of new products where as by the time we get to the fourth quarter, there sh -- there will be a lot of momentum from products being launched towards the end of the first quarter such as the two-week product. And -- and -- so it's just a roll up. We talk about four -- there's 40 some million of -- of new products in terms of revenue in our '04 -- or I'm sorry, our 2006 outlook. And very much that's in the last six months of the year in terms of weighting.

And -- and I'll just add in if I can, we'll -- we'll hit you all three of us, Mike. As we roll out more capacity which on the single use which is coming out ratably over the year you're going to be getting a much bigger weighting of single use in the second half than you are in the first half. So it's not just the big hockey stick of one product doing it, it's just a culmination of a lot of activities weighing heavier on the second half than in the first half.

And I might add that from a synergy point of view, or integration point of view, there's some major activities happening this year. And we'll of course get some annualized impact of what we're doing right now. But in terms of distribution center arrangements we'll start seeing some benefits in the last half of the year as we integrate for example the U.S. distribution.

Great, thanks, Tom, Bob, and Steve. And, so it sounds like potentially to -- to move to the cost side, could we see a little more R&D and SG&A potentially early in the year and then -- and then that -- would that wind down at all in the back half of the year?

I think the -- I think the -- the run rate on R&D will get up to a level and be -- I don't think it's going to start suddenly coming down. In other words, it's-- it's kind of even -- even spread as we grow that area.

Bob, can I -- can I jump in for a minute and -- and try to put a little color on that? And I think, Mike, and I think all of you who follow Cooper will flash on it very quickly. An awful lot of what I would call development work is going on now. That -- that's very obvious. But in the latter part of the year which we're going to be doing, we're going to continue do is a lot of clinical work. In other words, we do believe our products are better. And I'm sure people at J&J think their products are better and everybody does. But the one thing we need -- we must do to support the positioning of our new products is to have cli -- good clinical data for our sales and marketing people to use.

So we're going to be doing an awful lot of head to head clinical work. We've done -- I think you know already we've done excellent -- we have an excellent clinical work comparing Proclear to both Acuvue Advance and -- and -- 02 Optics is an example we have not finished our clinical comparison with Acuvue -- Oasis I guess it's called, which is we think is a pretty darn good product. So there's going to be a lot of those kind of activities going on.

On top of that, going into '07 you still are developing your silicone products. So I think winding down R&D isn't the -- the now I like to think about. This Company before Ocular Science had a history of buying technology. That's what we did. We didn't spend much on R&D. As you notice now if you want to see a big delta between '05 -- I'm sorry, '04 and '05 from expenses you're looking at 1%. We spent 1% of sales in '04 on R&D. This year we're ending up around 4%. So we have stepped up the R&D.

The days of finding technology are probably done. I recall my days at Allergan when we had to start developing our own R&D back in the -- in the early 80s because you couldn't get the good compounds to develop for topical applications any more from the big companies. They wanted to keep them. So in a -- in a sense we -- we have to do that now at Cooper. With -- when it comes to polymer -- polymer development, we got -- we're going to have to do our own. There just -- you only have four major competitors out there. There isn't a lot of entrepreneurial opportunities to find and buy anymore. So, from a technical standpoint you're going to see us spending pretty close to 4% at least on -- on sales in -- at CooperVision. Does that help?

That's -- that's great. Thanks, Tom. If you could just a couple quick product questions. It looks like on the -- the new Biofinity, the new silicone hydrogel lens, it looks like the -- the launch target sort of sometime in summer of '06. Maybe -- maybe a little bit of a delay there from sort of a June '06 launch previously. Should we expect any type of improved manufacturing capacity at launch if there's -- if the launch is delayed a couple months here?

I hope it's not delayed a couple months. I still think we're -- we're targeting for June. So I don't know where that came from. The -- the -- from a capacity standpoint, we're going to -- we'll keep you abreast. Look it -- we're -- we would like to do a lot more than we're doing. We -- we know in Europe -- and by the way, let's go -- let me go back to that. Monthly -- Europe is a monthly market. Expectations for a monthly silicone product in the sphere category I think is a little bit limited in the U.S. Proclear has done very well because of the way it's positioned as a dry eye product it's -- it is got a wonderful following. I mean, it grew in the U.S. I want to say we grew -- I know we grew our sphere business worldwide -- in the U.S. for the year 27%. In fact in the fourth quarter we grew 34%. It's do doing very well.

But it's in an ar -- you've done your own due diligence. You have your own panel of doctors. You know where they use it. And I think for us to really be in an effective competitor against the other silicone products in case the Biomedics XC does not do as well as we thought we're going to have to wait for that. It's going to have to be a two-week silicone hydrogel product. Does that help?

That -- that's -- that's great. And then just some quick thoughts. Any -- any initial feedback on the Biofinity launch in Europe? I think it's only been a couple of weeks there, possibly.

No. No feedback. Other than I can tell you that the -- the chain that has -- the first chain that it it loves. Because they did, obviously their own pilot on it and compared it to all the other silicones and they choo -- chose it over the other ones. That I can tell you.

Great. Thanks so much, Tom.

Okay. Thank you. Peter Bye? Peter, are you there ? This is Allie wed man here for Peter by.

Hi, this is Alli Widman here for Peter Bye.

Hi -- hi, Allie.

Hi. How are you? Just wanted to ask a couple of questions. Wanted to see what you saw in the last quarter, whether or not you saw -- where you saw J&J gain any share in the toric market. And if so was that the at the expense of Bausch & Lomb and does that give you any pause on the stickiness of toric lenses in general?

Getting a little help from Mr. Battin. So -- no, to answer your question, J&J looked like a big winner in the quarter. And it -- and it allows me to probably bridge in the whole HPR data discussion. Because it gets to a point now that we -- that the numbers are good, you talk about HPR. The numbers are bad you don't talk about HRP on a quarter-quarter basis. And I think we're getting to the point now when I see the kind of fluctuations. And one of them is with one of our competitors that one quarter they look like a winner and the next quarter they -- they fall off the face of the Earth. And we just don't believe it. We don't believe that there's that kind of change on quarter-quarter basis.

So we're going to start looking more at trailing 12 months, which we get from HPR and anybody here, by the way, can buy that data and you can see what's going on. But to answer your question, we do think that J&J's Acuvue Advance for astigmatism is doing pretty darn well. It's a two-week product, it's a better product from their old toric for a standpoint of optics. Forget silicone hydrogel, it's an -- it had a DK of 60 anyway. It -- it -- and they don't, you know, J&J is smart. They -- they -- they really don't talk a lot about silicone hydrogel and oxygen permeability. They really do talk about what's important and that's patient comfort and visual acuity and end of the day comfort. They really focus on that. And we believe this product is a better product.

As far as market share is concerned, we -- we believe it is probably having some impact on B&L but you should ask B&L about that. And if it is it's because they are basically a chain. Their -- most of their business -- or a lot of their business comes from chains. And if you look at the Cooper franchise for torics you'll notice that most of our strength is in a comple -- a lot of different categories. We have five different disposable products compete in the category with one. I gave you the numbers. Obviously if there is any impact on us jet yet, yet, I sure haven't seen it and this product has been on the market for I want to say pretty close to nine months now, aggressively promoted for six months. But you know, time will tell.

We -- we -- we are -- during '06 we're doing things to strengthen our -- our Proclear toric, which I think is important. And from a global standpoint -- and this is a global market -- we're definitely strengthening our position in the Asia-Pacific market by introducing a single use toric. I will say one more thing. In -- in Europe is a good ex -- I did give you they duric -- euric -- Europe numb -- Europe numbers now that I think about it. But there's another example where silicone hydrogel toric's been around and we have done very, very well. So I -- we belie -- I think you know we believe the characteristics of the toric market, the fitting characteristics, the -- the way doctors choose lenses for an astigmatic patient is much different than spheres and we'll find out. But on the other hand, I will say that J&J and B&L go pretty well head to head in that two-week toric market in the -- in the chain category. But I have seen them do pretty well, if you want to believe one quarter of data. Does that help?

That helps. And on the sphere market, maybe you could quantify a little bit how many accounts were lost. I mean, we saw the share data but maybe you could quantify the accounts and then also maybe talk a little bit about the pricing pressure in the -- for the commodity spheres.

Well, let -- let me -- let me -- let me stop you real quick. We don't look at it accounts stopping. It looks like some accounts aren't ordering as much more than anything else. And very definitely, without a doubt, we know where it's at and it's in the chain category. It's in the chain accounts of ours -- I should say of Oculars. We have done numbers with the vom -- I should say the Ocular product line and the CooperVision product line and boy it just pops right out where it's at from a trade standpoint it's with the -- with the optical chains. And they've just gone away, but, which surprises me somewhat, away from their own private label into selling more silicone products. And they do it for a good reason, for profitability. They make pretty good profit out of these silicone products. So, that's what we see. We see less of an impact with the independent practitioner. Now whether that's going to continue to carry forward we'll have to wait and see. But you get that out of HPR., too. If you buy the HPR data you can identify exactly where your strengths and weaknesses are.

Okay. And then two more things. One is did the European launch of the silicone hydrogel happen already? I think I may have missed that. And two, you could talk about your cash flow expectations for next year and what the tax rate on that tax flow will be?

I will give the latter to Mr. Weiss and -- and Steve Neil. As far as the first one is concerned, yes, we did launch. And it's been out, I want to say, at least a couple weeks now. And we're very happy with it thus far. But it's pretty early. But go ahead, Steve and --

Okay, Steve, you can pick it up.

Okay. Can you ask that another way? I'm not sure I understand, Alli, exactly where you were coming from.

Oh, I just wanted to know what you guys are expecting in -- in terms of cash flow next year?

Oh, for next year. Cash flow next year, I think I'll focus more on the free cash flow side with 155 to 165 million in -- in capital spending we expect to generate free cash flow. We do expect to have a small amount of debt reduction, somewhere in the -- the neighborhood of 10 million versus 37 million that came down this year. Of course we're spending roughly 40 million more in -- in CapEx. So, we do expect to have free cash flow, positive free cash flow. We do expect cash flow from operations to increase despite the spending on R&D, et cetera. So, we would say, or at least I would say, that the -- the trends of cash generation continue to be significant. We certainly are focusing on expanding capacity, we said, but we still would expect next year to have some debt reduction and generation of free cash flow.

Okay. Thank you.

Sure.

Chris Cooley, are you there? Chris?

I'm here, Tom. Can you hear me okay?

Yes, I got you. Thank you.

Super. Just three quick questions if I may. First you had mentioned that the silicone hydrogel fits in aggregate where in essence flattening out a little bit there off the HPR data. Could that be a function of the recent eight -- changes at VSP in terms of how they are reimbursing on the side, if there's any color you could provide there? And then secondly, maybe you could have Steve or Bob just remind us again in terms of the build out of capacity how it's allocated across the board and kind of timing for that scale up. And then just third and final question, I was kind of curious about the verbiage you had in your press release, I believe it was page 11 dis -- discussing CooperSurgical. I think it's the first time I I've seen you in about 10 years talk about CooperSurgical in terms of evaluating your strategic alternatives for the business. Just curious about the timing of that and maybe what we should or shouldn't read in to that paragraph.

Okay. That's good. Let me get the first one and then tell you then -- then I -- I -- I wasn't very clear. Because I -- if I said that the silicone hydrogel office visits, certainly for sphere patients, is slowing down, stop me. I -- I -- I'm -- I'm afraid I didn't make that very clear. You're not going to go from 15 to 20%, I don't think, from quarter-to-quarter, I just don't think that's realistic. I -- what I did say, though, I think it went from 25 to 27%, which to me doesn't indicate that it's really slowing down. I do think it's growing. How much? Will it ever get to 50% of new patients? I don't know. I -- I have a -- my -- my gut tells me it will be awhile for that to happen.

Especially since I think if you saw the late -- there was an excellent article in one of the major optometric magazines where they interviewed the four heads of research on what they thought where silicones were going to go. And if you recall, there were two companies. In fact, maybe even a third one might have agreed. But it's certainly Cooper's position and I believe J&J's position is that the issue of DK is becoming a lot less important today than it was ever before when you talk about silicones. Their focus today is more on what ability and surface chemistry is being the primary driver. And it you look at the J&J promotions to practitioners you'll see exactly what they're saying.

Second is modulus. The role of modulus in these lens designs is becoming extremely important because it all ties back to the thing that's important for a contact lens wearer. And that's comfort and end of the day comfort. Thirdly it's lens design. It's design to not only the optics in the lens but more importantly the edge designs of these lens. And then of course the fourth one is water content. So you -- you look at all of this and then DK is the last. The point I think is how much oxygen is -- do you need. Is it 200, 150, 80? This is -- this is becoming less important. You can have a lens that has all the DK over two you want and yet if it doesn't satisfy the needs or the long-term needs of a patient, it's not going to be of any value. And I think that's what three -- I believe three of the four were more focused on. Certainly two were. And -- so that answered that one. Now I'm going to let Bob take the other two. And I hope that answers you a little bit.

Okay. On the -- on the first one on the capacity rollout, that is -- is going to be very back end skewed in terms of moving through '06. We start off with in essence one production line and we look to expand by the end of the year six lines running. But each of those lines -- I guess I would equate it to the first car that was ever invented didn't have air in the tires, didn't have a steering wheel and then we move to the second line and we put air in the tires and the third line we put a steering wheel on and so on and so forth. That's kind of the process we're going through. By the time we get to the end of '06 we start knowing what we're doing, so to speak, and enter '07 with a lot more capacity. Geometrically that continues throughout '07. And by the end of '07 we will have spent in around $83 million in the new lines coming up as we expend to nine lines by the end of -- of '07 we'll have much, much greater capacity than I would say by a factor of maybe almost 8 times compared to the first production lines.

Bob, if I can have you just maybe a little bit, would you remind us the allocation of those lines in terms of dailies in terms of the hydrogel products, silicone hydrogel product, et cetera?

I'm -- I'm sorry. I was -- on -- on the daily capacity, we've invested heavily in '0 -- in '05. So a lot of the capacity issues in terms of getting to single use are -- are behind us. The -- the tricky areas are the different product alignments as we start up single use in different product portfolios. But in terms of production volume we're now probably by the end of '0 -- of the first quarter we will be in pretty good shi -- shape on the single use capacity short of saying there's conversion activity of the various Gen 2 lines. And when we talk about trying to convert, for example, capacity from the CooperVision product line we want to convert over 100 million units on to Gen 2. Well, we are still [INAUDIBLE - loud moise] the queue limited by how many Gen 2 lines we can put in place at any point of time. So in that -- in some sense, there's capacity in the greater things of Gen 2 which is used to make not only single use but also used to make and we eventually want to make some of our Proclear product line on that, for example.

As far as the discussion on -- on surgical, I --I think all we're -- all we're saying there is we continually continue to analyze our options with surgical, and we view that the return on investment in CooperSurgical is from a net cash flow point of view, it rivals CooperVision because we really don't spend any CapEx in CooperSurgical compared to what we talked about the $117 million we spent this year in -- in vision and the 150, 160 next year. That is essentially all CooperVision. So cap -- Cooper Vi --CooperSurgical is very much cash machine. And the one great thing about it is, if we're going to spend the money to develop the sales force in the hospital side of the market, we -- it certainly becomes a lot easier to add to that infrastructure the next line in the -- the next acquisition, the next acquisition, so on and so forth.

As we get critical mass that certainly opens up options that we don't have in $100 million Company that by and large clearly couldn't do something in the world of Sarbanes-Oxley going on in the area of public, for example. I think any company that is not probably $500 million will have a real hard time in the new world being a public company short of heavy investment spending and -- and -- and losing money, which may -- may not make sense in certain profiles.

Okay. Just one final question. Tom, I know you said you wanted to get away from quarterly HPR. But since we've kind of done it all year long, talking to maybe give us the DPR sphere and DPR toric for the 4Q and then we'll in 12 going forward?

DP -- DP --

Plan replacement disposable lenses to two-week segment.

I don't break out -- I don't have it right -- what? I don't have the DP two-week, do I? I don't think I did. I didn't do that. Chris, let me get it for you and call you or call here and I'll get it, because we didn't do -- do that. Torics were about -- trying to think what they are. Hold on for a minute while I flash. We started -- we started the year with 40 -- Cooper started the year with 44. Last quarter we were 42. Hold on for a minute. Ciba started with 10 and ended with 7. And this was a funny number. but that's what HPR reported. Because this is the one I was alluding to I don;t agre -- I just can't believe it. B&L supposedly started with 34, I believe, and now they're at 24, or something like that, maybe. You know, they're selling at 30, that's what it was. And they're down to 24.

You know, can you hold for a minute. Maybe I can get that. It was -- it didn't look right to us, anyway. That the D&L number just didn't look -- look right. Because I know the have the toric. Yes, they start at 31 and went down to 24. I don't buy it. And we started at 40 -- wait a minute. They started at 34, went down to 25. Ciba went -- started at 8.5 down to 5. Cooper started at 44, we're down to 42. And J&J started at thir -- 14, looks like 14 are up to 21. I don't buy the numbers. Like I said, you can talk to B&L about it.

That's why when you look at this quarter-to-quarter stuff, sometimes it just doesn't make any sense. S0, certainly not when your -- your sales look better. And -- and that's why we're starting -- I'm start -- even after been around this -- this industry -- not industry, HPR data since '78, [expletive], I'm starting to look at some of this stuff and what looks at these wild swings from quarter-to-quarter it's -- it's hard to fathom. Because as an example, one -- one quarter -- if I look at this year especially one quarter one company might have -- let's just put a number out -- 25. Next quarter it goes down to 20 and then they're back up to 24 the next quarter. It just typically in the past it's never swung like that. So -- but I -- I don't have the sphere stuff but I -- I can give it to you, okay?

Thank you.

Okay. Thanks. Benner, Benner Ulrich? You've got another question. Are you still there?

Yes, I'm still here. Just one additional question. I know you had talked a bit on the last call about plans for discounting in the -- in the chain market. I was wondering if that's something that -- that you had started and -- and kind of what you were seeing there?

[Expletive] I wish I wouldn't have even brought it up. It was -- it was a small part of our strategy. I think I wanted to indicate that there are about three or four different pieces to the overall strategy and what we're going two to do something about a two-week market. But, no, I -- for certain accounts that are -- are not necessarily bought into premium products, whether it's PC tech -- or our own Biomedics FC or the silicones and they are still price -- what price shops and there are price shops, we're not going to walk away from that business. And if you look at our competitors, even though I did notice that maybe J&J's rethinking their strategy a little bit, the rest of them are walking away from it. It's either silicone or nothing.

In 2007 this Company is going to offer everybody, or anybody, three choices in two-week material products for the spheric category. We are going to have a our non-silicone are not going to go away, period. And especially when you look at -- which I think is significant when I look at the -- the -- the data that indicates it's still 75 to 80% of all products sold not only in the world but in the United States are still non-silicone products, I just can't believe it's all going to go away. So we'll be there. We'll be there with Biomedics XC, which may have a higher positioning than our own two-week silicone product which will be a combination of the -- of our own silicone hydrogel material plus the PC Technology. So it will be what we call a third generation silicone product. So, we're going to have a number of different options. This Company isn't standing still. We may be a little late in this market but we're not going to stand still. Does that help a little bit?

Yes. That helps. So it sounds like what -- what you were going to do with respect to discounting you have done. But it's just not a -- it's not as big a strategy as -- as people may have perceived.

Less than 5% of I want to say of our overall two-week sphere business is going to be impacted by that strategy.

Okay.

Okay? Thank you. Thanks. Mike, you're -- you're back on. Mike Bailey?

Yes. Thank -- thanks for taking the question. I just wanted to circle back on the Biofinity in -- in the U.S., the launch there. Can you help us understand, are there any potential barriers or anything to that launch or is it pretty much green lights, ready to go, just sort of ramping up manufacturing capacity ?

It's absolutely ramping up manufacturing capacity. If you would be a magician you would come to work for me because I'd put you to work on doing something about it. But, we -- we got the same issues that the -- the other guys at B&L talk about. But we'll get there. It's just -- I think Bob hit on it that it's a different platform altogether. It's -- it's -- it just takes time to build out those -- those product lines.

Okay.

Okay?

And -- and are there any milestones or anything if we're sitting here 3 or 4 months down the road where we'll have an indicator that we're -- we're pretty much on track?

One more time. I was --

Sure. Just wondering are there any milestones or sort of benchmarks where over the next 2 or 3, 4 months we can say, okay, we're getting closer to the launch and the launch -- the timing is still on track?

I -- I think if anybody I'm probably too transparent. But I will certainly be talking to the Street about where we are on it. And if there is a hiccup I will let you know there's a hiccup. But right now we -- we will keep you abreast of it, believe me.

Perfect. Thanks very much.

Thank you. Steve, Steve Hamill? You're back on.

Yeah. Just two quick followups. First I was wondering if you have any estimate in terms of the annualized run rate for your synergies with Ocular at this point.

Bob? You want to handle that?

Yeah. We're -- the -- the overall aggregate is 50 million that we're shooting for. And of that, what's still to go is in the neighborhood of about 20 -- 24, 25. What's in the bag is about equal amount. So we're about halfway -- halfway there. The two gaining factors, one is the integration of distribution centers both in Europe and in the U.S. we have yet to see any of the benefits of that. In the case of the U.S. we'll start seeing it in the third quarter of this year. And in the case of Europe it will be towards well into '07. In the case of conversion of product lines, we first need the equipment.

So there is a battle for priorities and -- and our orientation is to do those things that add to the top line first, meaning to enter new markets with new products such as single use and to do conversion second. So until we build up and catch our breath, if you will, with enough capacity to -- to feed the top line, we will not have started the conversion process. That probably will start happening in sometime in early '0 -- '07.

Okay. And then just one other, in terms of some of the market data you gave on the U.S. market, you talked in the press release about the growth in patient visits in the U.S. was up 15.6%. And I was wondering, Tom, given you've seen this data for awhile how that compares to the trend line?

Well, we first saw it, Mr. Battin and I, we about said what the [expletive] is going on here? I will say this, let's not forget what HPR reports. They do report office visits. And many times just because they report office visits doesn't necessarily mean you can relate that to revenue, Steve. So, I think that -- what it -- what I -- what I read into it is that it means that because of the -- I'm going to call it the point -- what they call point of the advertising. The direct to consumer advertising, I think brings -- brought a lot of people into the office that ask questions. And of course, they register that as an office visit. So it is very unusual, extremely unusual. I've never seen a number that high before.

On the other hand, I look more at the -- I can't say but the independent research data that we get for the industry that really indicates what the real sales are. You try to tie that as best you can back to HPR data that gets you a feel for what's going on. That's why I think, too, we're going to be looking more -- I am, anyway -- we're going to be looking more and more at trailing 12 months HPR data as it compares to the previous 12 months. It gives you more of an indicator to what's going on. Not that you should ignore quarterly data because you should never do that, but it does only give you a small picture of what's going on. Does that help?

That does, thanks.

Thank you. I think, operator, we've been on this phone for over a hour and a half. And for those who need to -- who want to ask more questions, Mr. Battin and I and Steve and -- and Bob are here. We'll -- we'll be here to answer any questions you have. So with that I want to thank you for joining us this afternoon. And we will be back with you, I want to say the first week in March, for our first quarter of '06 results. Thank you.

Thank you very much, sir. And thank you, ladies and gentlemen, for your participation in today's conference call. This concludes the presentation. You may now disconnect and have a good day.