酷柏 (COO) 2006 Q1 法說會逐字稿

Good day, ladies and gentlemen. Thank you for your patience. And welcome to the first quarter 2006 The Cooper Companies Incorporated earnings conference call. My name is Bill and I will be your conference coordinator for today. At this time, all participants are in a listen-only mode. However, we will be facilitating a question-and-answer session towards the end of today's conference. [OPERATOR INSTRUCTIONS] As a reminder, today's conference is being recorded for replay purposes.

I would now like the turn the conference over to your host for today's presentation, Mr. Norris Battin, Vice President of Investor Relations and Communications. Please proceed, sir.

Thanks a lot, Bill. Good afternoon and welcome to everybody. Before we get started, I would like to remind you that this conference call will contain forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995, including all revenue and earnings per share guidance and other statements regarding anticipated results of operations, market conditions and planned product launches. Forward-looking statements necessarily depend on assumptions, data or methods that may be incorrect or imprecise and are subject to risks and uncertainties.

Events that could cause our actual results and future actions of the Company to differ materially from those described in forward-looking statements are set forth under the caption 'forward-looking statements' in our March 7, 2006 earnings release, and are described in our Securities and Exchange Commission filings, including the business and risk factors sections in Cooper's 2005 annual report on 10-K. These are available publicly and on request from the Company's Investor Relations department.

With that, I will turn the call over to Tom.

Thank you, Norris. Again, welcome to everyone. Thank you for joining us this afternoon. Before I turn this call over to Bob and Steve, I would like to cover a few points that I think are on everybody's mind as it pertains to Cooper, and certainly, our future. First of all, let me discuss the silicone hydrogel projects at Cooper where we are, because I know there was some rumors earlier this week out that we were going to miss our target dates. I think as you can see in the press release that we put out that we are not -- definitely not going to miss our target dates. They stay exactly the way we stated them in the fourth quarter. The Biofinity -- one of the analysts, I will point out, I think accurately had stated about what the impact of Biofinity is going to be on the Company in 2006, which is between $10 and $15 million in sales in our calendar year. In the U.S., I want to point out. the product will be rolled out in the mid-year time frame, as we've stated before. And I think I have stated it very clearly in the past, the silicone hydrogel product from Cooper will not have a major impact on our sales during 2006. It is more of a 2007 type product.

Manufacturing capacity, I think, is important for me to review with all of you. I think as we've stated already, we're ramping up very quickly our capacity level for our silicone hydrogels. By the October time frame we're going to be in the position to be making almost a million and a half lenses, or enough to -- on a steady state, to generate about $40 million in sales. And in fact, in the year 2007 we'll have capacity for Biofinity products, that is the sphere and the toric. And not the two-week silicone, but just the monthly sphere and toric will have enough capacity to support $70 million in sales. As you can see, as we get closer and closer to the end of 2006 and 2007, we're going to be in a much stronger position to effectively compete in the market.

I'll also point out that the -- and I have had a couple questions on how are we positioning our silicone hydrogel product against the competition. I think some of you have already -- probably talked to a number of folks who probably know the advantages that we have in this product. But we do have a high [DK] product. It has a [DK/T] of 160. So, it has a high [DK] product, but it is unlike the other high [DK/T] silicone hydrogels. Our product is a low modulus product -- a soft modulus product versus the more rigid modulus products, as the other high [DK]. What that means is -- to the wearer is, it is a more comfortable lens. It is more wettable. Therefore, we believe the product competes better against those products that currently being marketed for end of the day comfort.

One of the points I was going to get on later on when I talk about Biomedics, but I might as well point it out now, is there certainly is strong indicators that as much as 20% of those folks that are started on silicone hydrogel lenses will come back to their practitioner and complain about comfort or want their old lenses back. You can see that the current marketable -- or marketed silicone hydrogel products don't necessarily answer all of the questions or all of the needs of a typical contact lens wearer.

I think that gets you up to speed on Biofinity. We're still targeting for a mid 2007 launch of our two-week second -- or let's call it a third-generation silicone product. But it is certainly going to be one that we'll be able to manufacture on our Gen 2 manufacturing lines, and be able to also include the benefits of our PC technology. That's still on track, but it's the next level of our silicone hydrogel products.

Let me now move into Biomedics XC update. I want to tell you, we're finding just unbelievable, outstanding demand. In fact, in the latest Contact Lens Spectrum that came out today, there is a great article -- a super article on how it is being positioned. You should know that in the sales of -- I think we did about $176 million for CooperVision in the quarter, we carried over about $1 million of Biomedics XC we couldn't get out the door. The product is doing extremely well.

We are raising our expectations for that product. I think as you recall, we were looking for something in the neighborhood of $10 million of sales this year. We're going to -- we're looking for expectations to be at least twofold for that product this year. If anything, we have to work through -- we do have some manufacturing issues that we have to respond to to be able to have a product available to meet the demand of Biomedics XC.

This product is positioned directly against the two weeks silicone hydrogel products currently on the market. We believe, and the way it's being positioned, is having better end of the day comfort than those products that are currently marketed. It also is being positioned for, as I pointed out earlier, for those patients who come back -- and have been switched to a silicone hydrogel product and are unhappy with it. This product is a wonderful product to put in its position to put in that place. And thirdly, you should note the product is positioned at about 20% less list price than the two-week disposable silicone products. So we get this right, I noticed one report had it 60% less or some ridiculous thing -- the list price for Biomedics XC is $14, O2 Optics, I believe, is $16. I think Acuvue Advance is $17 and Acuvue Oasys is $20. That is another advantage.

I tell you, the other reason we believe the product is doing extremely well. It is a new toy. It is the newest product for doctors to have in their arsenal for their contact lens patients. It is a good trade-up product for the other hydrogel patients that are looking for -- for doctors to be looking for more profits in a practice. That's the way it is going to -- is being positioned currently.

As you might notice in the press release, we now have decided to launch this product, Biomedics XC, on a global basis beginning the end of the year. By that time, we believe we'll have the manufacturing capacity to reach those objectives. At this point, just so you know, and I won't stay in it too long, we have -- currently are moving Proclear manufacturing out of our Virginia operation into Hamble in the U.K. where we used to make the Bio Compatible products -- before we bought Bio Compatibles, we used to make Proclear for Bio Compatibles at that time. That will free up our capacity to make more Biomedics XC in Virginia to meet the current demand for this product.

We're currently trying to do everything we can to manage the inventory of this product. As an example, a very few patients -- or I should say practitioners, will be shipped more than a 56 packs. And generally speaking, you sell banks in this market -- or I should say bulks in this market of 206 packs. That would be the minimum price they would pay. We can't do that. We can only do it for certain customers, most of our customers are only getting 50. It is another way for us to manage the inventory, at this point, so we can get this product in everybody's hands. We believe that in the U.S. we'll be in a position to begin to meet all of our objectives with Biomedics XC by the April time frame.

Let me get you now up to speed a little bit on the single use developments. I think you all know that we have now ramped up capacity this year 60% over last year to meet our objectives. The -- we built capacity, as well as we're doing a transition -- or a conversion of product line from our other packaging for our single use into the new packaging and new product. And that will be taking place throughout 2006. As you can see, single use had a real good quarter. We felt 23%. We couldn't get hardly any of the new product out this quarter, you should know. It is really going out in the second quarter. But if you take a look at that, the fact that we introduced Biomedics and we also introduced Biofinity in Europe -- we did introduce three new products in the first quarter of our fiscal year.

From a priority standpoint, the first product in single use that we'll be marketing is still on target for the middle of this year -- middle of our calendar year, and that is our toric single use in Japan. We believe it is a huge opportunity that really isn't a real -- what I call real daily disposal or single use toric lens in the market today. Ciba does offer one. It has very limited parameters. Our product will not have just limited parameters. We're in a position to do that.

The second newer product that we'll be marketing in under the single use product line will be our Proclear, which goes out at the end of the year. As far as Proclear toric is concerned, as we speak -- certainly by the end of this month, we'll be adding the second base curve to Proclear toric. What that means is, that as a disposal toric, Proclear toric will have almost twice as many parameters for a doctor to choose than any of our competition. We think that's a big plus. In other words, all of the other disposal torics only have one base curve. We have two. It will be the first of its kind. And we believe that will be another big advantage for Proclear toric. It had a wonderful quarter again this year. Bob will go over that later on. This will just add to the benefits that Proclear offers over the other disposal torics on the market.

I will also point out that the -- from a silicone standpoint, competition standpoint, we have -- Acuvue Advance is still on the market, doing very well by the way. As you know, B&L has just introduced PureVision toric. We don't see it impacting our product line much, if it is at all. Of course O2 Optics toric, what we have heard is that it is -- and what they have told customers, certainly in the U.K. and here in the U.S., is they have now delayed the official launch of that product until sometime in '07. I do believe it is in the hands of the 100 to 200 seeding practitioners here in the U.S.

As far as the other toric -- Proclear toric that we will be introducing in the second half of '06, is our -- another first of its kind, the Proclear toric multi-focal disposable product. Nobody currently markets a disposable toric multi-focal, we'll be the first company on the market with that.

Moving to now some marketing updates, I think we've given you quite a bit of marketing update in the press release, and I certainly will leave some of that open for questions. If I don't give you enough, as you know, you can always ask me questions about the data, because the fourth quarter data and the year end data is certainly in. From a silicone market update -- let me give you a couple points. First of all, the market from a global standpoint, silicone represented 14% of the worldwide market in 2005, and 16% in each of the last two quarters. In the U.S., which is two-thirds by the way, of the overall silicone hydrogel market -- two-thirds of all silicones are sold here in the U.S. -- it was 26% of all the market -- representing 26% of all the market in 2005, 27% in the third quarter and 28% in the fourth quarter.

As far as the HPR data, which indicates office visits, those people that are new to contacts -- those are what we call virgin eyes or people who never wore contact lenses, silicone hydrogels get about 30% of all new patient visits. I saw something from some analyst who thought it was 85 to 90% which -- I sort of thought that was funny. It was 30%, and it is 26% for the year. From a standpoint of total office visits, silicone hydrogels represented 25% of all office visits in 2005, 26% of third quarter and 27% in the fourth quarter.

In the overall market -- I thought I would point out a couple things that probably are pretty important. Number one, the worldwide markets grew 10% last year, 8% in constant currency. This is exactly the same growth in cost and currency the market has resulted -- the market resulted in growing in 2002, 2003, 2004. So for the last four years, the market has grown -- each of those four years 8% in constant currency. In the fourth quarter, there was a definite falling off. The market grew 4% in the fourth quarter. And in the U.S. it grew 4% in the fourth quarter. Last year, for the full year in the U.S., the market grew 8%, and by the way, Cooper only grew 1%. Interestingly enough, in the fourth quarter, which is representative of our first quarter, because they overlap -- basically overlap, Cooper grew 4% -- grew our business 4%, and the market grew 4%.

In fact, in Europe is an example, in 2005, where we didn't have the same softness as we did in the U.S., the market was up 5%, but we grew our business 10%. And of course, more than a third -- or about a third of our business now is in Europe, so Europe is a very strong market for us. In the fourth quarter, Europe was actually down 4%. The market was down 4%. Cooper actually grew 8%. So we continue to take market share -- significant market share in the European market.

In Asia Pacific for the year, the market was up between 15 and 16% -- I'd say between 15, 16%. There is a small company that was added to the database in '05, and they didn't include their business in '04, so it sort of screws up the number a little bit -- we think it is about 1%. Cooper was up 29% in the same time frame. For the fourth quarter, again which overlaps into our first quarter, the market was up 11%. Cooper was up 11%. We didn't give up share. As Bob will be quick to point out to me if I don't point it out to you, it was an anomaly quarter for us, in the first quarter. It was a timing issue. We expect very significant growth in the second quarter, in Asia pacific market for us.

I will go to CooperSurgical very quickly. I think I have spoken enough about the market. I left a number of areas that you can ask me questions about. CooperSurgical is interesting. We had a good quarter, obviously. We carried over $1.5 million of sales on orders that we didn't ship, and that's not typical. Typically our orders and our shipments on a quarter-to-quarter basis are pretty much aligned. They may be off $100,000 or $200,000. So we actually had a very, very -- we had actually a better quarter in the first quarter than maybe the numbers signify.

So with that, Bob, I have spoken enough about some of the important things. We got into silicone hydrogel a little bit. We got into the new products from Cooper. Maybe I didn't go enough into the new products -- and also some market updates. I think it is ready for you and Steve to talk about the quarter and some of the questions I am sure everybody will have.

Thank you, Tom, and good afternoon and good evening, everybody. From a market perspective, of course calendar year end data is now in, and as Tom pointed out, the market grew 10%, and in constant currency 8%. Components of that market; single use is up 13%, spheres were up 9%, which is sponsored by the hydrogel products, toric is up 15%, multifocal 9%, and color -- or cosmetic was down 3%, overall. For Cooper, our single use was up 35%, while our torics were up 13%. Multifocal up 48%, and cosmetic was flat, and then our spheres space was down 3%. Of course that is the area where we are addressing it with new products such as Biofinity, as well as the XC product. And that's 50% of our product line in the spherical area, and we're keenly aware of what we need to do to address that issue. Overall, we're clearly gaining market share rapidly in the single use area, as well as multifocal, and pretty much holding our own in the toric space.

On a product basis, for the quarter overall, our sales were up in constant currency pro forma. Keeping in mind that the prior year we did not have the Ocular revenue in for November, December, and the first few days of January. So on a pro forma basis, our revenue and constant currency is up 6% during the quarter. Spheres, which count for 50% -- or specialty, I'm sorry, which accounts for 50% of our business was up 10% -- 5% in the U.S. and 14% outside the U.S. Single use was up 23%, and that accounts for 13% of our overall revenue now. And torics were up 9% worldwide accounting for 34% of our revenues. Multifocal continue to do outstanding, 56% accounting for 5% of our revenue. Proclear, which now accounts for 17% of our worldwide revenue was up 21%. And as Tom pointed out, Proclear toric continues to do outstanding, up 36% worldwide.

Geographically, the Americas was up 3% and accounts for 45% of our revenue. European theater was up 8%, accounts for 38% of our revenue. And Asia Pacific was up 11%, accounting for 17% of our worldwide revenue. From a market share perspective, that puts us in the Americas around 18%, Europe around 20% and Asia Pacific around 10%. Of course, that's the area we feel strongly that will be our catalyst for future market share gains worldwide -- by moving forward, gaining more market share in the Asia Pacific.

As far as other events, integration -- we, as you know, we're targeting $50 million in savings over a three-year period. We're more than halfway there. The two key areas that need to be executed is the integration of distribution centers and the conversion of product lines -- high volume product lines onto Gen 2. Distribution centers in the United States will be consolidated, East Coast/WestCoast over the period of May through July, with a fully integrated by the end of July, and in Europe throughout 2007. Overall, there is $7 or $8 million savings to be had in that -- those consolidations. Keeping in mind that a lot of what we do when we ship contact lenses is, we're shipping largely air, so if you put twice as many contact lenses in the same space, it doesn't cost you any more money to do that.

As far as conversion to Gen 2 of our high volume products, as you can see by our CapEx, we spent $46 million during the quarter. We are keenly aware of capacity being our limitation and there are many areas in single use, in silicone hydrogels, as well as now the XC product, and we are endeavoring to build the capacity to address those three areas. Gen 2 -- obviously, we need to have the equipment to be able to convert over. And in the conversion process, by and large, the ratio is two-thirds of the head count can make -- or one-third of the head count can make the same amount of products, if you will. That's a substantial event.

We still expect in the neighborhood of $18 million of savings in the manufacturing area of plant consolidation and conversion. We are imminently winding down our plant in Albuquerque, New Mexico, and that will be folded into our Rochester, New York plant over the next couple of months. Everything is on track on integration -- from an integration perspective, we reduced about 500 in our head count with the timing of the acquisition. And at the same time we have been growing the top line. So that obviously means more productivity. Short term, we've -- as we're rolling out these new products, we've added a considerable amount of temporary head count that is building the inventory requirements we have for launching these new products. That will be more timing and will streamline down as we get further into the year.

New products -- during the quarter, we launched three new products; the Biofinity product was initiated in terms of the roll-out in Europe, XC in the U.S., and our single use Biomedics sphere also has been rolled out. So there are three new products. Keep in mind that in 2005 we had zero new product introductions. Our estimate is that of our organic constant currency growth this year, we expect around 6% of that growth to come from new products. We're forecasting 9 to 12% constant currency pro forma growth. That tells you we're looking at 3 to 6% in the main -- the existing product line, if you will.

From the perspective of CSI's CooperSurgical -- it had $30.1 million in revenue, which was an organic growth of 6%. And as Tom pointed out, during the quarter, we built up about $1.5 million in backlog. The quarter actually was stronger than that. Inlet is -- which was the acquisition we made in November, targeted for trocar closure system for [inaudible] based surgery had revenue of $2.7 million, above expectations for us. That is doing real well.

NeoSurg, which is a reusable and disposable trocar access system is -- we are testing out that product in certain large hospitals, making some fine tuning of the product, and expect to roll it out in the second half of this year. Our results for the quarter reflect the restructuring we did last year with surgical operating income going from -- going up 5 percent to 18% of revenues. So we're seeing the benefits of that restructuring.

The one area that -- if you've looked at our press release you will notice it is somewhat confusing and it is confusing surrounding the adoption of stock option expensing. Unfortunately, stock option expensing impacts everything from cost of goods to R&D to SG&A to each segment. And you'll recall when we gave guidance in December, we estimated that the overall cost would be $0.15, in terms of dilution of earnings per share. The financials are not restated, so they do lack comparability. Turns out that that $0.15, after the outside professionals we hired got done with everything, turned it into $0.25.

A lot of that has to do with the same group of options, but looking at it from a ten-year perspective. And also good news, bad news; our options are heavily geared towards performance, where in -- if management doesn't perform, the options don't become exercisable. That's the good news. The bad news is that when you do options like that, they are given more value from the perspective of a write-off. And as a result of that, we have a large bank of options that are actually way under water in the $67, $68 range, for which we took a substantial write-off as part of this stock option expensing. Don't ask me for the logic on it, I don't really understand it. I will defer to Steve who maybe can enlighten you further in that area.

Guidance; during the quarter we refreshed our guidance, and in so doing, we also did a with and without stock option expensing. Many of the key variables, in terms of giving guidance, have to do with the extensive amount of new products we're launching this year, and the variables dealing with not only the timing of the roll out's, but capacity challenges along the way. Our new guidance has estimates for CooperVision for '06 of 9 to 12% in organic constant currency. And for '07, recognizing more new product momentum of 10 to 12% organic constant currency. The range of our effective tax rate has -- that we've given a range of 10 to 15% without trying to get scientific about an exact number. CooperSurgical is still on track. And as a result of that, we did not change our previous guidance in that area.

We added '02 -- second quarter guidance. Guidance provided for the second quarter was $185 to $195 million, surgical $30 to $32 million. Overall Cooper $215 to $227 million. Earnings per share with stock option expensing in the range of $0.67 to $0.77 and excluding stock options, $0.73 to $0.83.

For the fiscal year '06, vision at $785 to $810 million, and once again, that's 9 to 12% in constant currency organic growth. Surgical, no change at $123 to $126. Overall, $908 to $936 million, and earnings per share of $3.15 to $3.35 with stock option expensing, and $3.40 to $3.60 without it.

We gave and refreshed out '07 guidance overall at $998 million to $1.050 billion and earnings per share, without stock options expensing of $3.90 to $4.30.

As far as -- before I turn it over to Steve, I will make one other comment on financial results. I mentioned that they were confusing with stock option expensing, but we did have a good solid quarter on the top line, hitting the top end of our range. And had less than a stellar earnings per share quarter, with such things as foreign exchange and the costs for over run of the audit, as well as stock option expensing, being a lot more expensive than we had initially estimated, as well as -- it's quarterly phasing. And lastly, we spent a considerable amount on research and development and marketing in front of the product launches.

In terms of the audit cost over run, which approximated 8,000 hours of added time to put that into perspective, we said we weren't going to jump off the cliff over Sarbanes-Oxley in terms of how much money we would have to spend. But quite frankly, we were all caught by surprise at how extensive that event was. If it meant 8,000 hours of outside audit time, it meant close to ten times that time internally. So that there were a lot of financial resources and other resources being consumed around the world. We've all committed to make '06 better and more efficient. And that's one of Steve's primary agendas, is to manage this event going forward.

With that, I will turn it over to Steve.

Thanks for the present, Bob. Good afternoon, everybody. Sarbanes-Oxley is a way of life. I think everybody around the world is certainly adopting that philosophy, because you really don't have a choice.

Let me go over a few more numbers on the results today, looking first at gross margin. Gross margin, as reported, was 62.8%. And when you exclude the non-recurring items, which are principally manufacturing integration expenses, it was 63%. This is down from 64% in the first quarter last year, predominantly due to product mix and unfavorable currency impact that flowed through cost of goods sold.

Peeling that back a bit and looking at the vision group; when you exclude the non-recurring items, gross margin in the quarter was 63.9%, and that compares to 66% last year. That gross margin decline is due in part to currency, but also to product mix, as a result of the Ocular acquisition. Specialty products declined from 58% in the first quarter last year to 50% of soft lens sales, as Bob indicated. And that's primarily due to the addition of Ocular's sphere products, including the single use lenses which represent 12% of sales versus 5% last year. Currency and product mix having an impact.

For the surgical group, gross margin was 57.5% in the first quarter. And that's an increase from 55.2% last year, again as Bob indicated, reflecting the positive impact from the restructuring activities that we did in 2005.

Looking at SG&A; SG&A was 41% of sales in the first quarter, which was the same percentage as the first quarter last year. When you take out $4.8 million dollars worth of stock option expense in the current period, remember there is none last year, SG&A was 38.7% of sales. And it also reflects spending to support our new product launches. So despite the significant spending in support of that, the actual percentage on a comparable basis went down year-to-year.

Research and development expenses increased 110% in the quarter to $5.9 -- $5.9 million, and that's 2.9% of sales. Again, this is focusing on product development supporting our new product schedules that are due to launch here in 2006, as well as in 2007. Overall, we expect to incur in the range of $18 to $20 million in R&D expenses in 2006.

That sums down to operating margins, excluding nonrecurring items and excluding stock option expense in 2006 of 19.6%, which compares to 20.1% last year. At CVI -- the operating margins, excluding nonrecurring items, declined to 22% versus 25% last year. And again, this is due to product mix, more single use than two week spheres this year than last year, unfavorable currency impact year-to-year, and spending on -- in advance of new product launches. CSI operating margins, as Bob indicated, were 18%. And that's up from 13% last year. Again, indicative of the benefits from the restructuring activities that we executed last year.

On interest expense -- interest expense was $4.8 million over the first quarter last year. It represents 4.1% of sales. And again, this is tied to the debt incurred in the Ocular acquisition. For income taxes -- the effective tax rate for the quarter, excluding nonrecurring, items was 11.6%. And that reflects the impact of expected income by jurisdiction in 2006. You project for the whole year. This compares to 21.3% in the first quarter last year.

Overall net income for the quarter, excluding non-recurring items, was $23 million or $0.49 per share. And when you take out stock option expenses, that would be $0.58 per share. As Bob mentioned, our EPS fell below guidance due to four primary items -- higher than estimated stock option expense, the impact in the quarter was $0.09 versus guidance estimate of $0.03; cost over runs on our external financial and Sarbanes-Oxley 404 internal control audits, that was about 2% impact; currency had an adverse impact of about 2% in the quarter; and then our decision to maintain spending levels in the quarter to support new product launches in advance of their launch. Offsetting these factors was the favorable effective tax rate reflecting beneficial jurisdiction allocation of income, under our global trading arrangement. And again, that's projected on a full year basis, and we update that each quarter based on our projections for the year.

I did want to comment a little bit on stock option expense for just a moment. I think everybody on the call is going to get used to this as folks come out and implement statement 123(R). As reported, our stock option expense for the quarter was $4.9 million, and that's $0.09 per share. This was greater than what we had originally expected. And this was the result of applying ten years of historical data, putting it into a Black-Scholes and Lattice Valuation Model -- two different models -- which resulted in slightly higher volatility and significantly shorter expense amortization periods, primarily for annual director options. Our detailed analysis of historical option activity in accordance with statement 123(R) segmented our options according to employee ranking and underlying performance criteria. And this analysis resulted in annual director option expense being amortizable over only four months, when compared to slightly less than three full years for employee options. As a result, we expect stock option expense for the annual year to be around $0.25 instead of our original estimate of $0.15. It is probably enough detail for you, but I certainly can respond to questions on that.

Taking a quick look at the balance sheet. In Q1, our DSO's were 68 days compared to 65 days last year. Within our expectations, again, given the geographic mix of our sales around the world. We expect to be in the mid 70 -- mid 60's to low 70's in DSOs, consistent pretty much with last year.

Our months of inventory on hand did increase to 7.8 months versus 6.8 months last year. And this is specifically due to building inventory to support our new product launches. Currency had a slight impact, as well, in increasing months on hand. Again, it is predominantly building inventory in advance of our product launches, and certainly was within our expected levels.

Capital expenditures, as Bob mentioned, were $46 million in the quarter. And we expect somewhere between $150 and $160 million for the whole year as we expand capacity for our single use lenses, build capacity for our silicone hydrogel production, and focus on our cost reduction initiatives; conversion over to Gen 2, as well as support for our information technology projects. Overall, our net debt -- that is debt outstanding less cash on hand, increased $67.1 million in the first quarter. And that's predominantly due to funding the CooperSurgical acquisitions of Inlet and NeoSurg, as well as funding our capital expenditures.

With that, it's enough numbers. Why don't I stop here, and we can turn the call over to questions?

Bill, why don't you -- we're ready for the questions, please.

Thank you very much, sir. [OPERATOR INSTRUCTIONS]

Joanne Wuensch, please.

Thank you very much. A couple questions. In your guidance, you lowered your revenue by a bit in '06, a little bit more in '07. Can you walk through what change that led you to this new revenue guidance?

Yes, Joanne. This is Bob Weiss. We really reflected our guidance as looking at the organic constant currency growth in the context of the marketplace. And felt that 9 to 12% was a reasonable estimate for this fiscal year, given the amount of -- where we are, in terms of the new product launches, and the hurdles we need to get through. That, keeping in mind, is 12% -- that is still well above -- one and a half times the expected organic growth of the marketplace or constant currency growth of the marketplace,I should say. Next year, as 10 to 12% -- once again, that's what drove those numbers. So did we reign in a little top end above 12%, well quite frankly, we think that that's a better range. You'll notice that the range got broader when we did that. 9 to 12% presents a broader range than we have historically given, if you will.

And when I take a look at the tax rate, it is moving down significantly to 11, 12%. How low can you go?

Zero.

Well, I think we've given 10 to 15%, and could in theory go to zero. Not likely. I would not expect that there would be any sustained tax rate that could be below the 10%. 10 to 15% -- we have a fair amount of work to do to look at our tax structure and requirements over the next five years. That's kind of where we are in today's world. Whether or not it is sustainable will be a function of balance to profits, U.S. non-U.S. How quickly, surgical if you will, which we're investing in in '06 and '07, which is a domestic investment, and therefore, impacts somewhat that mix.

Okay. Can I add something to it, Joanne? I thought you were going there, Bob, with manufacturing capacity. I think one of the other reasons the guidance is taken down a little bit, Joanne, is giving us some leeway on the conversion with manufacturing capacity, too. It is not an issue of missing any of the target dates for new product introductions. But it is an issue of, are we going to have enough product to sell the and meet all the demand? I guarantee if I had all the product -- if I didn't have manufacturing issues right now, that is, I had all the capacity I want, we wouldn't have changed dates. It would be higher than that.

I think, as we get more into this and more things are becoming more complicated -- more complicated as an example. We thought Biomedics XC was going to be a good product. I don't think we ever thought it would be as good as it looks like it is going to be. That creates another problem for us. Good news, bad news. Bad news is we have to do something about conversion. It is not building capacity. It is conversion. Because we do have excess capacity in the old methifilcon over in Hamble. It gave us an opportunity to move Proclear, as an example, out of Norfolk into that facility so we could build up the Biomedics XC. What does that do? It does make a potential issue of reaching those original numbers we had. So it does give us a little bit of leeway. Maybe that helps a little bit, too.

It does. Excuse me for not being an operations person. How difficult is it to set up a manufacturing line for, specifically a product, let's say -- for specifically, Biomedics XC?

I will let Bob.

Biomedics XC, I think the answer is, it depends. In the case of using an existing manufacturing platform, such as we would be doing with Biomedics XC, it is not that difficult. It is just a matter of -- if you're trying to expand it, it is the lead time of the equipment. Which if it were something like Gen 2, it would be in the 9 to 12 months range. What we are doing with Biomedics XC is we're able to move plant locations to where we make products, because we made product in the U.K. in the past -- the Proclear material or the PC material has been made in the U.K. in the past -- so we do have some latitude to get there quicker. When it comes to silicone hydrogels, where it is a brand new -- entirely new manufacturing platform, it gets very complicated and there you have to really add to the time lines of expectations.

With silicone, you're building a new platform, which means you're talking about 15 months. You order the equipment, you bring the equipment in, and you have to get it validated -- so it is 15 months. You see it with B&L -- with their announcement. We know that Ciba is having issues with capacity, also. Same kind as capacity, but all silicone.

The issue with Biomedics XC is a completely different one. It is a conversion issue. You already have got manufacturing lines, but now you're talking about taking one product off that line and putting in another one. That's a couple months. It doesn't happen over night. Like I said, good news, bad news with Biomedics XC. Some excellent articles out this -- just today, the Contact Lens Spectrum came out. It is a good product. It is a good product. I think we're going to do real well with it. In the meantime, we're going forward with the silicone.

I will get back in queue. Thank you.

Thank you. Michael Weinstein? Michael, are you there?

Hi, it is actually [Kim Gailen] here for Mike. How are you doing?

Real good.

I guess just to follow on with -- I guess one last question on the manufacturing. You kind of referenced your own challenges, specifically getting up your lines for silicone hydrogel, and as pertains to Bausch having similar issues. Can you explain to us what is the biggest challenge, as you work to build out the manufacturing lines? Basically, you said you have the space, and you know roughly how long it takes to build it, so why are you and your competitors consistently having these delays in terms of manufacturing, specifically with hydrogel?

It is a more volatile material. I will start it off that way. It takes a completely different facility. Chris Cooley, who is on this call, I think, can really appreciate it. And I think -- who else, I think Michael Bailey went over there, too, to see it over in the U.K. So you get a first hand look on the difference in those -- that kind of manufacturing. But it is absolutely a different kind of facility you have to build. Bob, maybe you can go on? That's the first one that comes to my mind.

There really are three things. The material you're trying to manufacture, to the extent they vary, act differently. You can't just universally interchange a silicone hydrogel with a PC material with a normal hydrogel material.

Two is the lead time on the equipment. If you are capacity-constrained and we have -- we don't have enough Gen 2 product lines, then there is the lead time and the limitations of the equipment manufacturer that comes into play. When it gets to silicone hydrogel, where you're really talking about break-through manufacturing, then it is not only equipment lead times, it is also how well you can assemble the equipment and make it -- and go from, if you will, a pilot production into mass production. That's kind of the things that Bausch & Lomb has been facing and some of us.

Think a little bit, too, of automobile manufacturing. If you're going from making automobiles on a production line to making SUV's, you can see what the changes would have to be in that facility. That's very similar here. If you take methifilcon, let's say Biomedics -- the old Biomedics product, and now you're talking about Biomedics XC, which is the Proclear material; is that a big difference for the manufacturing? The answer is no. It is not a big deal. It is just some start-up time. With silicone hydrogels, the material is a much different kind of material. It demands a completely new and different manufacturing platforms. I am going to speak for ourselves, probably for Ciba -- I say probably for Ciba, B&L, I am not sure about J&J and if it is such a big issue with them in the type of material -- silicone they have, I don't know. But it is with us, and I am fairly -- I am sure about that with Bausch and Ciba, because they have this plasma -- what is it -- coating kind of technology, which is completely different.

This is Steve Neil, too, just to round out the picture -- not only are we adding capacity, but at the same time, we're looking to lower our unit costs. We're not just adding six of exactly the same lines. Each line will become more sophisticated, takes more time to validate. Cause we're not just adding capacity, we're also driving the costs down. You only have so many engineers to handle integration activities, to validate new lines, et cetera. So from a manufacturing perspective, we want to do what we would call under control. We have to -- good manufacturing practices under the FDA. So it very much is a procedural process, so you can't all of a sudden just add those lines. There is a lot of sophistication that is involved.

Okay. That's helpful. It seems like, in terms of the guidance reduction on the top line that we've seen, we're looking at basically a reduction in expectation for new product launches. So in terms of the products that are expected to come out in '06 -- or have come out in '06; so XC, Biofinity, the dailies, et cetera -- at what point do you think you will be at a good point in terms of manufacturing capacity for those products? And more specifically, would you say that more of the sales guidance reduction in '07 is front-end loaded? Will we be in a better spot as of mid '07?

We're expecting that about twelve months from now we will have adequate capacity, both on the XC for a global roll-out, if you will. In other words, U.S. will be satisfied a lot sooner, by the end of the -- probably by the end of the fiscal year, but it will take longer to satisfy global needs and roll-outs. When it comes to the one day or the single use, likewise, twelve months. By about March of next year, we will have satisfied our capacity needs to -- at least take the next couple products out worldwide. Keeping in mind that we -- if you look at the list of new product launches, there will always be two or three that are just being rolled out. And typically, a roll-out will start in a region and go global over a -- some rational period of time.

What about Biofinity?

Biofinity -- it is the trickiest one. Because that's one where we are endeavoring to put -- over the next two years, eight different manufacturing lines. And I think as Steve was alluding to, each -- if all we did is put eight lines that look like the first line, we won't have a heck of a lot of capacity. Each line has to look more efficient. And that's a two-year roll-out on the Biofinity. And that is -- and I wouldn't confuse that with the other silicone hydrogel with the PC material that will endeavor to move into a Gen 2 type manufacturing environment.

I think -- I thought that I made that pretty clear earlier on the call, so let me state it, Bob. I don't want people to get confused in what you just said. You confused me, quite frankly, a little bit. We are going to be making a 1.5 million lenses by October. That would generate, in city state sales, $40 million. We are going to have enough capacity -- and this is Biofinity. This is not the two-week silicone Proclear product. We will have enough capacity in '07 to generate over $70 million of sales. I would love to say we're going to do $70 million in '07 of silicone. I'm not there yet. That would be a significant increase for -- it would more than fit the kind of guidance we've given to the street for '07.

I personally don't see the -- as far as the single use is concerned, we've increased capacity 60% this year. We did not increase sales 60%. Let's all of us understand that. We're going from $85 to $120 million this year. Therefore, as we roll-out the -- split the surplus -- and replace the old packaging we had, which will take place all of '06, we definitely are going to have the capacity to meet those -- that guidance we've given to the street. And I think, Bob, in '07, we will have enough capacity to go up another 40% for single use, if I am not mistaken. We have plenty of capacity there. And you've already covered Biomedics XC, I think pretty nicely. Does that help?

Very helpful. Thanks for your time.

Steve, Steve Hamill?

Yes, thanks. To start with, I just want to clarify a few things with regard to the current quarter. The $0.10 of non-recurring items on an after-tax basis, is that -- well, I guess, can you go through that and make sure we understand where that is in the income statement?

Yes. This is Steve Neil. It is predominantly in two areas. There is a non-recurring expense line in operating expenses that's related to our integration activities. That is a one-line item. The other -- biggest piece is $4.9 million in stock option expense. That's predominantly in SG&A. There is a small piece in R&D. There is a small piece in cost of goods sold. And there is also a small piece in inventory, because you have to allocate it to the holders of stock option. But the biggest piece of that $0.10 would be in SG&A. There is a very small integration cost, I think it is two-tenths of 1% of sales, that is in cost of goods sold. But the vast majority of it, Steve, is in the operating expense categories.

About -- if you're looking at it from a segment point of view, about $3.4 million of that shows up in G&A at the corporate level.

Right.

And of the audit cost over run, for the most part, shows up in G&A at the corporate level. The foreign exchange is below the line -- below operating income line. There is about $0.02 hit there, also. It is $0.06 stock option expense, which is the $0.09 -- or $0.03 plus $0.02 for the audit over run costs plus foreign exchange of another $0.02.

Okay. So sounds like cost of goods sold was relatively unimpacted by all of this?

That's correct. Slight adverse impact, Steve, but not really that significant.

Okay. And again, it is important because gross margin was really the weak spot, at least versus my model. And at this point, is that being driven predominantly by the challenges of ramping up new products and the dailies? Or is it more from currency? If you could give us more color on that, I would appreciate it.

The biggest impact is actually mix. The percentage of sales that are in single use, which is lower gross margin. Again, in the first quarter last year, they were roughly 5% of sales. This year -- this first quarter, roughly 12% of sales. So mix has a large impact. And then the balance is currency. Strong dollar during the quarter and actually inventory coming out. If you recall last year, significant impact, and so that is now flowing through the P&L. It is mix of product, predominantly, with some currencies. Those are the two pieces.

And then in terms the guidance that you gave -- going back to Joanne's question, you took down '07 revenue guidance. You took down the -- at least the lower end of your earnings guidance for '07 substantially more than that, and now have a very wide range of guidance for '07, earnings wise. And I was wondering if you could explain more about what's happening on the earnings guidance line?

I think the best way to look at that is, we did broaden the top line guidance. And as you broaden that top line guidance, the incremental loss in revenue, if you were to take the top end down to the bottom end, is a lot more substantial on earnings flow-through basis. So one would lead to a broadening of the other. If you, for example assume -- take your model in around 65% and take variable costs of -- in around 20% and run that kind of model, while there is no such thing as perfect fixed or perfect variable, by and large, that will get you close to the thinking, if you will.

Fixed, you said, about 65%?

Gross margin.

Gross margin.

If you're running your model at around 65% gross margin, and then said what if those revenues came in at the low end versus the high-end, and then you assume that about 20% of the costs is variable costs.

Operating.

That -- of the operating costs, yes, variable.

I understand. Okay. Then in terms of the U.S. toric business, if we could focus on that for a moment. That grew 4% year-over-year, which would seem to be below the market growth. And I am wondering if you attribute that mainly to the J&J lens or if you're seeing any other impacts there?

Absolutely outstanding question, Steve, because if you buy HPR, like you did, you would look at it and say, this doesn't make any sense. I can only tell you it makes no sense at all. I don't know if this is a first quarter anomaly, what happened, but you're absolutely right. The disposable part of our toric business, I think, grew like 8%. And looking at the fourth quarter, which is the other data -- not the HPR data, it's the one we don't say exactly what it is, but it is the one all of our manufacturers get. That market grew about 12%, so it grew -- it looks like we absolutely lost some share. That's consistent, I want to point out, to what I said back in the fourth quarter conference call that we think we're going to lose share in the U.S. but not globally. We don't believe in global market we are losing share.

But if I look at the HPR data from fourth quarter it is very, very confusing. It shows us gaining share. Not only in total visits but in new visits, and it is what it is. It is about all I can say at this point. Our people are saying we're doing very well. I guarantee you the Proclear toric second base curve -- having two base curves is going to really help our product in the U.S. But we -- it is what we reported.

And then last quick question, given all the moving parts today, it is tough to nail this down quickly from my standpoint -- but what's a reasonable expectation, in terms of operating margin for guys over the next couple of quarter, given all the changes to your guidance?

I will just throw it out this way. It is easier for me to think about operating margins on a with and without stock option basis. Because stock options, if you look at it this last quarter, it is a pretty high percentage. I think 2.3% or something like that of revenue. And the timing of that is so skewed with the director's option being written off over four months. Obviously, that means if you wrote them off in the first four months, then the last eight months are going to be a lot better, not only for that reason, but also for just normal seasonality. Where our fourth fiscal quarter is, by far, the strongest in the contact lens base because kids are coming back to school in September -- and August and September is when all the families go and get their contact lens refreshed for the kids, if you will.

As we look down the end of the year, I still believe that excluding the stock options, which we'll hold off to the right, that vision is going to show margin improvements year-over-year. There is nothing to say that it won't ultimately get in that 29, 30% level, excluding options. That we will continue to see surgical, once it is done with its investment in the NeoSurg, Inlet area or the hospital space, if you will. It will move its operating margins to the upper 20's. And that overall, Cooper will move into the 25, 26 range, maybe 27 excluding options.

Thank you.

Suey, Suey Wong? Can't hear you. Suey, you've got to speak up. We can't hear you. Hello?

You're not coming through, Suey.

You're going to have to maybe requeue or call back in.

I think he hung up. Benner, are you there?

Thanks, guys.

Good. We'll come back to Suey.

First question, I know you talked a little bit about some of the spend associated with these new product launches, and I assume some of that's on the marketing side. Was wondering if you could give us a sense for how much that incremental spend was in the quarter? And maybe what the pacing of that's going to be, going forward for the rest of the year? I think you said it is going to kind of taper off as we get towards the end of the year.

Without getting into the specific dollar amount, there are two variables there. One is the timing. And for example, rolling out these three new products, we had a -- all of our sales guys got totally schooled on what they were going to do in the first quarter, and that's very up front ended.

Okay.

Our -- some of our compensation in the sales effort has been more smoothed, so as not to end up what has happened historically, where the guy is not earning very much money in the first quarter and he earns all of his money in the fourth quarter. And we're trying to level that somewhat. That did impact the figuring also. R&D is one where you have to put the cart in front of the horse -- or the horse in front of the cart, excuse me. And in that case, you just have to spend the money up front to get the product out the door, so some of that happened. If you look at the year-over-year growth in R&D, you will see that. When you put them altogether, it is easily in the -- probably $0.04 to $0.05 range -- $0.04 to $0.06 range of costs that are weighted towards the front end.

Okay. Okay. That makes sense. And then, just a follow-up question on the top line guidance. I know your comments on the overall market, the 9 to 12% growth, I think that makes a lot of sense. I see where you're coming from there. It seems like, based on the other comments you've made, the reduction in guidance is coming from these new products. But it also sounds like the XC product is obviously performing well in demands there, and in fact, your expectations may be a bit higher for that product than they were when you guided previously. So I am just trying to figure out, is there anything else happening with the base products? Or are you expecting a little less of an impact from the Biofinity lens, either in the U.S. or internationally?

Let me make one comment. I am a little concerned about the European market. Even though I am holding fast that I do believe we're going to see 8% constant currency growth in the market next year, you can't be blind to what's going on in Europe. It just doesn't look very good at all. We're growing pretty darn significantly in Europe, and as I told Bob, I am a little bit concerned. Not that I have anything specific in mind, it is just that I am a little bit concerned about it -- and a better word is cautious, about the European market. That's the only comment I want to make on it. You can --

The only thing --

Let me make one more comment I didn't do on the conference call that I thought I was going to get into and I didn't. This does make some sense to all of you who have been -- who know this market well and who have followed it. Which I find interesting is, that in total office visits, if you look at HPR data, Hooper started the year in the first quarter with 25.1% share of all office visits. We ended the year 25.1%. You would say how in the heck can that be when you guys only grew 1%? Well, think of two things. First of all, remember we did start the year with some excess capacity of inventory. We talked enough about that over the last year.

More importantly, I think, is the fact that in the years, I think Bob pointed out very accurately, is that we did not introduce any -- really new products, certainly what I would call material new products. Yet our competition did; Bausch & Lomb at the end of the year, but certainly Ciba and J&J during the year. You go in and try to sell doctors bulks or banks of products when you have all of this silicone noise going on, you aren't going to sell any.

I don't think Cooper ended the year with nearly the amount of inventory. I say Cooper -- Cooper Ocular combined, as we did going into the year. I think that maybe we'll see it this year, and boy we certainly got it in the first quarter this year. Because remember, our first quarter and the fourth quarter last year are very similar. There is a two-month overlap. And our growth in the U.S. was the growth of the overall market. And it could be that maybe product going on eyes -- maybe the HPR data is very significant here. Maybe we have been working off a lot of inventory during the year in the U.S., and maybe that's part of the answer of this. And why I get a little confused when I look at HPR data and I say, how can that be -- and I am going back to a question that Steve Hamill had asked earlier about torics and everything else. With that, I will turn it over to Bob.

I was just going to say that there are a lot of moving parts. The guidance is somewhat influenced by the capacity limitations that we have short term. Keep in mind, 6% of our growth projected in '06 is new product. We think we'll hit that. In fact, with the XC -- we know that there is upside on the XC side. The question is, can we make all of the other products that we have have planned? So if 6% is new product, we're still forecasting 3 to 6% for the main or the non-new product line. We had 6%, if you will, in the first quarter, back off $1 million for the new product launches in the first quarter. We think that the 12% is a reasonable top end of it. And then obviously, the 9% provides for a little slippage of that.

Thanks. Those comments are helpful. Thanks, guys.

Mike Bailey. Mike, are you there?

Tom, just a couple quick questions for you. Most been answered. But if we can turn to the '06 sales guidance, just wanted to nail down a couple of follow-ups. Thinking about the -- I know you gave line item guidance I think at an investor presentation a couple months ago. One of the questions is, should any of these line items come down, for example, if we were to look at the new 2006 contact lens sales guidance? And maybe one of the items we look at is the daily disposable item, and I think the last guidance you gave was $120 million, and if we take the first quarter of roughly $20 million and annualize that, and gets you to about $80. I am wondering if my of those particular line items might be coming down for '06?

No, the first quarter -- I think we were up 23%, weren't we?

We always start off the first quarter from a seasonal standpoint and because it is Japan, and we always ship a lot in the fourth quarter. I am asking Bob that. I think we're still pretty much in sync with $120 million. Remember, you still have the toric single use launch, and you've got the launch of -- the worldwide launch of the strip packaging. I think we're still pretty good.

We gave you -- in that guidance, we gave a range of 12 to 14%. The numbers that were presented added up to the $810 or 12% growth. I think that -- and that assumes spheres single use around 2% -- single-use going from $74 million last year on a constant currency basis to $120 million this year. We still believe that is achievable number. Toric is up 12%. Multi-focal up 29%. And color, flat. I tend to think there is still realistic numbers, although the range -- instead of saying $810 to $820, we then would back sell and have the $785 to $810, with the schedule still showing how to add up to the $810.

I would say, too, Mike, the one thing in the first quarter if it holds true, where we're going to beat the heck out of the guidance we gave is multifocal. And boy, they got good gross margins. You saw the growth on that. We're just kicking rear end in that market on a global basis as well as the U.S. It is doing extremely, extremely well, as you can see. I think we gave guidance around $40 million or somewhere in that neighborhood for all of this year. And my God, it did almost $10 million in the first quarter, which is always a real light quarter. I would agree with Bob, at this point.

Great. Thanks. If I could turn to the 2006 EPS guidance. Just trying to think of the back half of the year, and if we take your second quarter -- just a mid-range of second quarter guidance and back into what we think is going to be the back half of the year, assuming the mid-range for the full year, we get to about $2.04. That's well above the current street estimate, which I think is $1.86. So just trying to think about -- maybe you can give us some ideas how -- as to what's going to drive some of that growth. I think if we're looking at it right year-over-year, and adjusting for post option for 2005, we're looking for about 24% growth, if it is -- if the EPS comes in at $2.04 for the back half of '06. Help us out. If that's sort of in the right ballpark? And what might be driving that roughly 20, 25% growth? Thanks.

Well, two things. The -- what I would do is normalize the first quarter. And then basically, you look at the growth rate. For example, going from $175 million in revenue at vision, up to the $185 to $195 range -- if you apply the same model I talked about, margins in around 65 and variable costs around 20 -- we're at the stage right now where we don't need to beef up the infrastructure from an operating expense point of view. All it is is variable costs, going forward. The R&D level is not going to get -- run rate any higher than it is. All of those things, as a percentage of sales as you go through the year, are pretty much going to be less and less as each quarter rolls out. I think if you apply that model -- ballpark around 45% of revenue will -- you'll see how you get there.

Hey, guys. It is Milton Hsu here with Mike. One question from our last week visit to the U.K. Hamble facility. Tom, just the 1.5 million in capacity for Biofinity -- you have one production line up and running right now and it looks like you have about about four that are about to come online. Are you assuming that all five come online by year end and that gets you to at that 1.5 million?

Yes. As you know, they ramp up -- each one ramps up a little each month, I would call it. You hit the nail right on the head. By October, all of them will be up and running and we'll be doing more than -- right at 1.5 million. I think it is 1.5 million. Remember one more thing, too, Milton. When I say 1.5 million, you're not selling 1.5 million, remember. Part of that goes into diagnostic lenses. Part that goes into fitting sets. As a rule of thumb, with a new product like that, you would probably have about -- pretty close to between 25 and 28% of that volume will be going into lenses that are not sold.

All right. And okay. Thanks. Just one quick follow-up. For 2007 the capacity that you were talking about, is that also working off of the five lines?

No, no, no. You're going to be adding more lines. Because remember, we're rolling out with the silicone toric in the first half of '07. So you're talking about generating volume that will support $70 million in sales. We just -- the manufacturing guys just gave us that number yesterday.

In other words, we're not going to stop at the five. We're going to -- we will keep rolling out towards 8 or 9 lines as we move out over the two-year period.

This product will always -- this product will -- and I am saying this for sure, but it is probably for sure -- will never be made on Gen 2. This product. The product -- the two-week disposable silicone with PC technology that we talk about will be a Gen 2 product. It will be on the different platform. It will be on a current platform versus the silicone we have that we're talking about today. I don't want to confuse you. It is a different product altogether.

Great. Thanks a lot.

Chris Cooley? Hey, Chris. Chris? Chris, are you still there?

Tom, can you hear me okay?

We got you.

Thanks. Let me -- a couple questions here at the end. Let me just clarify Mike's prior question. On the daily disposables, you had cited about $120 million in sales. Is that all daily disposables, spheres and torics? In your answer you also cited daily disposable -- or is that disposable sphere only and then the daily disposable toric is separate?

It is all the same, Chris. Everything that is called a single use, which of course would be the toric -- this year -- in '07, of course, we'll have a single use multifocal, too -- but it is all single use multi-products.

Okay. As a quick follow-on to that, when I look at my toric number for 12%, in terms of guidance year-over-year, what percentage -- or how do I think about that growth in terms of contribution from the dailey disposable as well as looking at continued growth in Proclear? Basically, what's the old frequency 55 preference Biomedics business doing versus those as I look at 2006?

What's that?

Japan. It is a new market. What's included in single use --

I am comfortable with the daily disposable. I am asking specifically about your -- [inaudible].

He wants to know much of the single use toric is in the 12% toric number increase you gave.

If I could clarify it, really all -- what I am trying to get is kind of the growth drivers, i.e. Proclear toric, daily disposable. And then help me think about what's going on here, maybe off the base business, the frequency yield, preference toric, to the extent that it is out there, and also Biomedics.

About $5 million.

I think I misled you when I said the single use is all up. The single use $120 is only spheres. And the toric single use, which will be Japan, is in that $270 number which is growing 12%. As I recall, it was something like $5 million dollars of that is Japan's single use.

Super. That clarifies it. And then let me go back -- at the outset of the call when you talked about the tax rate. Clearly, you can sustain a 10 to 15% tax rate in the near term. When you think about cash flow longer term, what should we assume? Is it a low 20's tax rate we get out around 2008, 2010?

Why don't you think of it this way -- that if you look at our capital requirements, which this year we're spending $150 to $160 million, and assume that's essentially all offshore. And if you look down the road, where are we likely to put CapEx, it remain offshore. So that will be our offshore user. When we put in place the structure following the Ocular acquisition, that gave us the chance to plan out the next five years quite adequately. To the extent that any cash builds offshore, we're not going to have the Bausch & Lomb problem, as I would call it, where for a number of years, they had the cash offshore with the debt on shore, and they had a difficult time connecting the dots, just because of their maturity level as a business model. This is a young company offshore. We only started it in 1997. And the growth -- the future growth is heavily offshore. So I don't see any of the issues of trying to connect the dots where I need to cash here, but it is over there. At least through the balance of this decade.

One more thing, too, and I thought Chris was going down a different direction. We think the NOL is going to be pretty much protected -- or we're going to be able to use it pretty effectively through 2009, and that's the current --

Maybe I didn't go far enough in the answer. Yes, the NOL's we have that, you may recall, increased partly because of the Ocular acquisition, up to $146 million range. The combination of our tax model and those NOL's will probably be good -- pretty much through the end of the decade also. Meaning we will not be a U.S. taxpayer and we will --our model has been less than 5% of pre-tax profits -- has been the average cash outflow. That model will continue for the next four years.

We're not going to be spending $160 million a year for CapEx either. This is all front loaded. We've talked about that in the back.

And I just call -- Chris, just to round it off from a rate perspective, the rate is dependent on where the income resides. And as we continue to invest offshore, you should be able to sustain your rate in the mid-teens, if that model holds. If that model dramatically changes to one higher tax jurisdiction than the other, which we don't foresee, but if it does, that will have an impact on the rate. Right now, cash flow as well as where we see the income residing -- we don't see a radical departure from that, at least as Bob said, through the decade.

Super. Two quick ones to wrap up. When I think about the gross margin in the quarter, and we see the material increase in terms of daily sales, help me think a little bit about what's going on in the daily disposable margins? I remember the economics of those several years back, you've made material strides in terms of your capacity and your yield. Where should I think about those margins today relative to, maybe say, corporate CVI? And where do they go over the course of the next six to nine -- or six to twelve months, excuse me, with the scale-up in capacity? Because I would assume those products on the fully operational lines right now that we've seen through the years would carry a higher margin.

I am going to let Bob get into that. I think what I want to do is help modeling for everybody on the call. When we look at gross margins -- and I am talking about CooperVision now. When we talked about CooperVision -- we did 64% gross margins, I believe, in the quarter. We still are seeing between 65 and 66% -- really on the high side of 65%, close to 66% gross margins for the full year even -- and I will let Bob get into the daily disposable question in a minute. There is a mix issue with higher growth of new products that have higher gross margins versus the single use, which have lower gross margins.

Secondly, when you look at operating expenses, you will notice the operating expenses at CooperVision, I believe, was 41% of sales. We're still looking for about 36% for the full year, if I am not mistaken. And we believe in the next nine months we can hold that to 35%. We think that is absolutely doable. When you look at it and you do your modeling, I think you can get to that. But I think Chris has asked a good question about the gross margins on single use. But we can't forget that some of the new products, certainly the at the end of the year and going next year with silicone hydrogel as well as Proclear -- our Proclear product line, we have pretty darn good gross margins. And I love to see the multifocals growing the way they are. They have beautiful gross margins.

Chris, once again, there is fair amount of moving parts. And you're correct in focusing in on single use mix, because single use will be growing faster than the overall costs. That is one item that weights against us, if you will. Going forth is -- one of those single use are coming off of new production runs in Puerto Rico, which is on a steep learning curve. Because Ocular Hedge has transferred that production down to Puerto Rico, really the year we bought it -- in June of '04. So their learning curve is steep. If you put it into one big pot -- overall costs, for example, the last six months has been improving at a rate of about 7 to 10%. And if you take that on a 34% cost of goods, you can see that that would mean, on $1.00, about $0.03 savings that's working for us -- that's working against that mix issue of the one day.

The other thing within the mix -- mix within the mix, is the single use. As you get into things like single use toric will have a more respectable gross margin, and the multifocal and toric and the PC material will also shift favorably the mix that will basically serve to offset some of the single use mix.

What's the split, Bob, between [Warrior] and Puerto Rico, at this point?

In terms od -- we now are at a mode where we're capped out at Warrior.

Right.

About 250 million units a year. And that 250 million units a year is contrasted to this year 400 million units that we're talking about.

Okay. That's fine. And I guess last question, and I apologize for asking this, Steve, but want to maybe clear the air on this. When we look at the Ocular acquisition, and the significant amount that was cited as goodwill and we look at the recent Q's that have been filed -- help us have comfort that we shouldn't contemplate any type of impairment to that goodwill overtime, as we look at 2006.

That's an excellent question, and there is a simple answer to that. When goodwill is reviewed by segment -- it is reviewed in aggregate, so it is the going concerned value of the entire segment. We would be -- given the profitability, at the end of the day we may have taken some bumps versus our guidance, but this Company is generating a lot of operating cash flow. It is generating a lot of profits.

If we even came close to debating that -- right now, for example, to put it simply, if you have a market cap of $2.4 billion, and an equity of $1.2 billion, that is the margin of buffer that exists between the two. From -- one of the many tests we do is fair market value, and how that how you split the pot of market cap. That is only one of about three test that is we run. And then cash flow is another, and it is certainly passed hands down. Ocular brought with it a lot of depreciation, because Gen 2 carries a lot of depreciation. When you add that back, you end up with a lot of EBITDA that's being thrown off by these companies. I don't think we're anywhere close to worrying about that. I will pass it over to Mr. Neil.

I will make a quick comment. The politically correct statement is, we review it in detail once a year, and that's at the end of the third quarter. We do obviously review it every quarter, but the computation is at the end of the third quarter. One of the tests -- and this is a mathematical test is, if you can show over lifetime worth of projections $1 positive, non-discounted, then you don't have an impairment issue. There is more than one test. The bottom line is, Chris, we don't anticipate it all an issue with goodwill impairment. And we formally review it at the end off the third quarter.

Super. That's all I got. Thanks, guys.

Suey Wong? Suey, are you back on?

Yes, I am, Tom. Sorry for the technical problem before. One last question here. Giving the market share data is in, could you talk about the winners and losers in the toric area? Can you talk the overall toric? And also in the new and refixed, please?

Okay. Let's see if I can get them all. I will give you some HPR data. That's all the data that we have. Winners and losers -- and you come to your own conclusion on that. If you look at the share of all toric fits -- new fits in 2005, you will notice that Cooper's share went from 46% for all of '04, and we ended the year at 44%. We started in the first quarter of '05 with 46%, and we ended in the fourth quarter with 44%. We lost a couple share points.

Ciba is a big loser. No big surprise going from about 12% in '04 down to -- it looks like 8% in '05 and current quarter they're down to 6%, and they're really not a player any more in the U.S. B&L took a little on the chin. No big surprise. They went from 28% down to 26% from '04 to '05. They started the first quarter with an unusually high number, 31%. But the last quarter they were at 24.5% in the fourth quarter. So they look like they're getting impacted by the big winner. It looks like three were losers all to J&J who started the -- who ended the '04 -- had all of '04 -- they had 13% share of office visits. They ended the year at 21%. More importantly, they started the first quarter of '05 with 13%, but they ended the fourth quarter with a rousing 25%. So they are now number two in total office visits for toric new fits, so they gained quite a bit.

If you look at the disposable part of the business, which is more important --- in the U.S., that's over 90% of the business. But remember for us it is about 78% of our business. We still have a lot of old conventional toric business that's declining. And so does Ciba, don't take too much away from them. They have an awful lot of old conventional toric business that they don't have any control of it. It is declining, too.

There again you have you a very similar situation. You have Cooper losing, going from 46% down to 44.5%. That's from '04 to '05. B&L went from 30% down to 27.5%, it looks like. Ciba went from 9.5% down to 6%. Of course, the big winner of the J&J going from 14 to 22%. Interesting, though, for Cooper, we started the year at 44% and ended the year 44%. I think that's why I made that earlier comment about the -- considering our quarter. Our 4% growth, somebody asked about it, it is certainly not reflecting in HPR data. I am not sure what it means. What was the other question? Is that a help, first of all?

Yes, that does. Actually, Tom, that's good. Thank you.

Okay. Larry, Larry Kuesch, are you there? Larry?

Yes, Tom, I am here. Thank you. I just wanted to circle back to the manufacturing. As I sit here and listen to what you guys have on tap for, really the second half of this year and as you go into '07, obviously you are going driven by a lot of product introduction and at manufacturing capacity up. On the silicone hydrogel, specifically, since you now have one line running and others coming up -- just trying to gauge what the risks are as you bring up those -- the total of those eight or nine lines that you need to do. Is it completely -- can you replicate it completely, now? Do you feel comfortable you understand this process and the yields are good, that the risks are low to now scaling up?

I would answer that by -- two ways. We're not going to attempt to just duplicate the last line. Each line, we have every expectation of upgrading that. And I equated that to the first car that was invented that had rubber tires with no air in it and no steering wheel, you pulled right and left. We're trying to go from that first car and then build the second car next and put air in the tires, and then put a steering wheel on. And then eventually, we'll put in more horsepower in the engine. Each line will look different than the one before.

It will be awhile before all of them then get up -- we'll take lines down and upgrade them as time goes on, but only after we have adequate capacity of this part of the space. Keeping in mind, as Tom pointed out, there are two different silicone hydrogel projects. One is in one plant in the U.K., and the other will actually be started up in Puerto Rico. The two will not trip over themselves with the same engineers as a priority project, if you will.

Okay. Super. Lastly, Tom, just given all the data you cited as it relates to the silicone hydrogel usage in the U.S. and the few fits, et cetera, it certainly feels like that's beginning to level out. And I heard you loud and clear in your comments of people coming back and perhaps swapping out. I am curious on your thoughts, where you think silicone hydrogel as a category can go? And particularly, as you start to bring in your product and the newer generation product?

Well, you almost wonder where it is going to go. Everybody has an opinion about it. You're absolutely right. There is certainly indicators that it is starting to slow down in its growth. I think that makes some sense. There is three categories of price points in this market, and I don't think they're going to go away. Even J&J is doing the same thing. Oasys, as you know, is one price point and Acuvue Advance is another. And they're not walking away from Acuvue II, either.

In the past, we have stated about 50% in the next two to three years. I think that's probably going to happen in the U.S. I don't think it is going to happen globally. I think it is going to be -- not until the end of this decade that you're going to see 50% of the world market in silicone hydrogel lenses, if it ever gets there. As I point out to those that care about it, they should read a lot of the articles that are published in professional journals about the studies being done, and the current silicone hydrogel products are not the overall panacea. You have a still very large single use market. I think it is going to be awhile to see silicone hydrogels there.

I think it is going to be a slower growth in the specialty markets versus the sphere market. And we're also starting to go see it slow down in the sphere market. And I know there are those who have written reports -- research reports, where they go to a meeting and they talk to few doctors and they come away thinking that 80 to 90% of all these people are going to get silicone hydrogels. The facts are, that's not true. We have new data. We have data on what we call virgin eyes. People that are either -- in fact, you get it two different ways, Larry. You get not only with the new to contacts, but also new to contacts plus those who have switched brands. They combine the two of them. Still after, what, three years -- two or three years of two-week disposal spheres being on the market, we're still only in the 30% range of these people getting silicone. We believe the PC technology products compete very nicely, silicones meet another need.

We're going down all these different tracks. We're want going to go down one track. We think J&J has got it right. We think we're a step ahead of J&J because we have both silicone, we have PC technology or the Proclear material, and we have the old methifilcon, which is maybe a step better than what J&J has. I think that's what the market is going to do. Most markets we follow, whether it is medical devices or whether it is automobiles or shirts or pants or anything else we all consumers buy, there is always different price points for different parts of the market. That's where I think it is going to go.

I do believe it is starting to show some indications of slowing down. Remember, you have four companies here, 98% of the overall market, that are all going to be trying to drive silicone hydrogel products. We are, too, because we get a higher price point. We all do. Profits do drive things.

Okay.

Hope that helps.

Great, yes. Thank you very much, Tom.

Larry -- I mean, Steve Hamill, are you still there, Steve?

I just have one quick one and let everybody go. In terms of the hiring of the expanded sales force at CooperSurgical with your two acquisitions, can you give us a little update in terms of how quickly that hiring is going? And when will you will be at a full sales force there?

Hiring of the sales force right now, I mentioned that we're currently taking the NeoSurg products into certain limited amount of institutions and we're fine tuning the business model, if you will. As a result of that, the amount of sales force that we have hired in the first -- that we're planning on hiring the first six months and have hired is somewhat limited. Look for a build in momentum in the latter half of the year, more so than in the first half of the year.

Okay. Thanks.

Thanks, Steve. Bill, I think we're finished for the day. I want to thank everybody for joining us. We've been here almost two hours, which is a little longer than we normally do. I think there is an awful lot of very, very good questions.

With that, we will see you in June, I believe. And I hope with some very, very good information and very good results. We're expecting it. Thank you very much for joining us. Good night.

Thank you very much, sir. Thank you, ladies and gentlemen, for your participation in tonight's conference call. This concludes your presentation. [OPERATOR INSTRUCTIONS] Have a good day.