酷柏 (COO) 2006 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Q2, 2006, The Cooper Companies Incorporated conference call.

[OPERATOR INSTRUCTIONS]

I would now like to turn the call over to Mr. Norris Battin, Vice-President Investor Relations and Communications, please proceed.

Thanks very much and good afternoon and welcome to everyone.

With me on the call today are Tom Bender, our Chairman and Chief Executive Officer, Bob Weiss, our Chief Operating Officer, and Steve Neil, our Chief Financial Officer. 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 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 our forward-looking statements are set forth under the caption, Forward-looking Statements in our latest earnings release and are described in our Securities and Exchange Commission filings including the business and risk factors section of Cooper's 2005 annual report on Form 10K.

These are available publicly and on request from the Company's Investor Relations department. For calls following the Q&A session I have a another--a different phone number for you to use. Please call (212) 418-7864, and an operator will help you. And now I would like to turn the call over to Tom for his opening remarks.

That's because we are in New York City today, Mr. Battin.

And anyway I would like to welcome everyone today, this afternoon, and what I am going to do is follow the same format that I've done in the past more than likely. What I will do is turn, after I'm finished, I will turn over the discussion of the quarter and other pertinent information to Mr. Weiss and Mr. Neil.

What I'm going to do is give you an overview of the market with the data we have, and by the way I will tell you it's fairly thin this quarter. And I will then proceed to talk about a focus on revenue and talk about what I believe are some of the key events that happened in the second quarter but more importantly what you can look forward for the second half of the year. As you know we are now finished with the first six months of our FY.

Let me turn immediately over to the market data. As I've pointed out we are lacking good global data this quarter. We just didn't get it, there is one company that's holding up on the data. I'm not sure who it is but there is not any problem with giving data to the source where we get this data from but apparently they're having some internal problems and can't get the data in for the global information.

So what I will do, I'll give you what we have and where our view is and where we think we are. J&J is the only thing I can really back into is because they have released their results for the first quarter and we do have some feedback from of course our own people in around the world so we are getting some kind of an information on where we think the contact lens market is at this point in 2006.

I think we can honestly say it's going to look a lot like the last four years. It looks like the market is growing still between 8% and 10%. Certainly we do have the U.S. data and the U.S. data indicates 10% growth. We don't have anything for Europe but we think Europe is probably a lot like a mirror that is of what happened in the fourth quarter of last year where there was basically very little growth.

We think in constant currency, Europe might have grown in the first three months of this year between 2% and 3%. And Japan and Asia, again this is a guess on our part but we think it's somewhere in the mid-teens. At least that's the best guess we have at this point. As far as HBR data is concerned we do have some darn good data on that. And, of course, this is U.S. data.

From a torics--and I think it's important to look at torics because I think we are under the microscope when it comes to torics in our own franchise, looking at the last three quarters, and the reason I want to look at the last three quarters that's when the silicone hydrogel torics really started to show up with any earnest at all.

And when we look at new fits, for the disposable torics, where the silicones play, it's interesting, you don't see an awful lot of movement certainly in the last two quarters. The market share for torics actually went from 21%, the silicones had 21% share of the toric market and the third quarter went to 24% in the fourth quarter and 25% in the first quarter of '06.

I think this is another indicator when I review our sales, our toric sales in the U. S. on a total basis I think you will probably see why the toric--the silicone products in the toric category didn't grow that rapidly in the first quarter. If I look at just torics, the new fits of torics and forget just looking at the silicones and we look at the companies in the share shifts, again we don't see a tremendous movement one way or the other.

B&L, I think is the one company where they have sort of regained some of their lost market share of the earth that they lost early in 2005 there from the fourth quarter, they went from 25% share up to 29% which was a pretty good movement. Cooper, on the other hand, stayed pretty much the same. We went from 42% in the third quarter and we have 41% in the first quarter. So there really wasn't much change.

J&J on the other hand was the one where it appears that B&L is taking market share away from. If you look From their third quarter they went from 28% down to 25% in the first quarter. So that's basically in a nutshell is what's happened in toric.

If we look at all lenses, all soft contact lenses and using HBR data, again, Cooper from the third quarter to the first quarter basically held share with 23% in the, 23% of all office visits for new patient office visits I should say in the third quarter went to 23% in the first quarter and if we look at the first quarter of '05 and see where Cooper went we went from 26% in the first quarter of '05 to 23%. We lost three share points during all of 2005 when you look at new patient office visits.

Ciba also lost three share points in that time frame. B&L gained two and Johnson & Johnson gained four. B&L went from 13 to 15 and J&J on the other hand went from 30 to 37 and Ciba went from exactly the same as Cooper, from 26 down to 23. So that gives you a pretty good overview of what happened.

Now let me hit the silicone data. I've already giving you the toric data today. If we look at the independent data we get for the U.S., again, I don't have all the global data but we think the silicone hydrogel products probably have about 18% of the total global market, somewhere in that neighborhood.

They had 17% in the fourth quarter of '05. So I figure they have about 18% now. Even though I must point out we don't have that data. In the U.S. I can tell you where we have two-thirds of about the silicone hydrogel sales the shares went like this: Silicones have 30% of the third quarter market, they went to 31% in the fourth quarter and they have 34% in the first quarter of '06.

If we look at HBR data and just measuring new patient office visits with silicon hydrogels, it went from 34 in the third quarter to 34 in the fourth quarter to 36 in the first quarter. So you can see silicones are still gaining share but it's from, if we look back in 2004 and its growth in 2005 it's certainly not ramping up as rapidly as it was before.

Let me now move very quickly into the results in the--and focus on the highlights in the second quarter. We gave guidance for Cooper Vision between 185 and 195. We came in at 182. The entire shortfall was in Japan.

Japan came in around $7 million less than, lower than we had forecasted. It's all wrapped up in the single use lens product line. The Blister single use did not get into Japan as quick as we thought and therefore there was some definite impact on our business in the second quarter. I would tell you that we believe we are going recoup all of that in the third quarter and I will let Bob or Steve talk more about that.

Moving into product lines, looking at product lines, I think we looked at Proclear. This is absolutely an outstanding results that we had in the second quarter. If we looked at the whole Proclear product line on a worldwide basis we grew 31% in the second quarter. In the U.S. we grew 40%. That's in the face of all the silicon hydrogel products.

If I look at the torics that is Proclear torics, Proclear torics on a worldwide base grew 41% in the second quarter, grew 47% in the U.S. I think that had a lot to do with the fact that we introduced a second base curve which increased, actually doubled the amount of parameters now that we offer practitioners for our Proclear and torics.

And in Europe the Proclear torics grew 45%. Now I think this is a remarkable number. I think there's a lot of concern that when we introduced Biomedics XC, which is a two week product using PC technology, that it would cannibalize and have a major impact on our Proclear spherical line.

Well, here are the numbers. Proclear spheres worldwide grew 12% in the second quarter. In the U.S. where we introduced the Biomedics XC, of course in January of this year, we grew our spheres 17% even--and that does not include by the way, I'm not including the Biomedics XC in that number.

If I look at torics, and again I think that's another area that the microscope is on Cooper. If I look at all torics, worldwide we grew 7% in the second quarter. In the U.S. we grew 4%. In Europe we grew 15%.

But if I look at the disposable torics, worldwide we grew 12% in the second quarter. We grew in the U.S. 10% and in Europe we grew 19% where I will point out the silicon hydrogel torics have been a full year longer than they have in the U.S. If I look at also another way of looking at torics, sequential growth of our toric business in the U.S. grew 16% in the second quarter over the first quarter.

And again I point out I think the major reason is the fact that Proclear torics because of the introduction of our second base curve had a heck of a lot to do with that. If I look at multifocals where we now are--we have a firm position on a global basis as the number two player. I think we are breathing down the neck of B&L pretty quickly with these kind of numbers. The global market for multifocals we think are growing around 20%, somewhere in that neighborhood.

Worldwide in the second quarter we grew our multifocals 47%. In the U.S. we grew 61%. And as I pointed out we are now growing more than two times the market growth for multifocals.

If I look at all soft lenses, in the U.S. we grew 4% in the second quarter. But disposables which make up 85% of our business grew 9%. Remember we have a larger than normal position in the conventional soft lens market which has been declining. Our conventional soft lens products declined 14% in the second quarter and represent 15% of our business.

On the total market and that is in the U.S. for soft contact lenses conventional products represent less than 10% of the market. So we do have that hurdle that we have to overcome because those products are declining.

In Europe we grew a little over 3% in constant currency in the second quarter. We are up 6% year to date. Again I point out I think the market in Europe is growing less than that probably 3% to 5%. We don't have a firm feeling--a feel for that yet but we certainly will pretty soon.

I also--I'll point out that our growth even in Europe in the second quarter and certainly the first half of the year have been hindered somewhat by not having the Blister single use product to sell in Europe which of course now we do. We have in the month of May have begun shipping that product into Europe.

In Japan I pointed out that the major impact and the reason that we fell short in Japan had to do with not having the Blister single use product to sell and I think Bob and Steve can talk more on that later.

Now let's talk about what you can expect from Cooper in the second half of the year from Cooper Vision. If we look at the U.S. the pipeline begins to kick in. We are now in the month of July we will begin--because of our capacity for our Blister single use product is now becoming under control.

We are going to be able to introduce that product in the U.S. in July. In August we will be introducing Proclear XR. In September we will be introducing the first disposable toric multifocal, which is--of course will be a Proclear product, it's in September.

And in October we will be introducing two products. One is the Proclear disposable multifocal ET which is another disposable multifocal that is really designed for emerging presbyopes, and also we will be introducing the Proclear daily disposable in October.

On top of that the most important message is that the by I don't Biomedics XC capacity issues are behind us. We have moved capacity from 1 million lenses a month in the month of March to in May we made over 3 million lenses. We have now released that product on a global basis.

So Biomedics XC is going to be marketed worldwide beginning this month, in fact we did ship some product into Germany in April and therefore we've moved up the introduction of that product six months from the time line we gave you the last time we met.

In Europe you can look for accelerated growth because we are going to be rolling out as I said the Biomedics XC, in fact the market after Germany was Italy. We shipped--in May we shipped into Italy and that product will be rolling out all in the next six months in Europe. We will be seeing significant growth of buy Infinity in the second half in Europe of '06 we didn't get a lot of sales in the first half of the year. And then again as I pointed out we'll have the roll-out of the Blister single use product in Europe. Between those three events we are looking for accelerated growth in Europe

In Japan we believe that the Blister single use product is now going to be in the hands of our Japanese accounts not only our own subsidiary but also our OEM partners. We are also going to be introducing a product that was approved in the second quarter by the [Cosecian], that is a two-week aspheric sphere that we will be launching in Japan in the July time frame and then in the July time frame we will also be launching the daily disposable toric in Japan.

Very briefly as far as CSI is concerned, they are doing very well. In fact, the last three months, we've had a run rate of 32 million in sales so CSI is kicking on all cylinders right now. In fact, Inlet which of course was one of our--the latest supply acquisitions is performing 25% better than forecast. Their run rate right now is a little bit over $1 million dollars of sales.

So with that I am going to turn it over to Bob to sort of fill in the gaps that I didn't cover.

Thank you, Tom, and good afternoon or good evening, everyone.

First of all on financial--overall financial highlights for the quarter we had $211 million in revenue which was 1% above the second quarter of 2005 in cost of currency and 2% below the second quarter of '05 in GAAP numbers. Our earnings per share was $0.30 using GAAP data which is generally accepted accounting principles and there was included in that $0.30, $0.37 of various identified items that we have called out.

Within that $0.37 there is about $0.13 that is restructuring, realignment and start up. It's all essentially a part of the continuation of our goal to integrate the various components of the Ocular transaction with Cooper Vision. That really happens in three stages.

Stage one which happened in 2005, which we expected $25 million of synergy out of that and quite frankly, in 2005 we eliminated 500 positions, so that was stage one which was SG&A. And stage two which is happening in 2006 is integration of distribution centers around the world primarily in the U.S. and in Europe where we are going from 21 different distribution locations down to only five.

In the U.S. for example over the next several months we will be going from what was three distribution centers to--up to four as we have now opened a new distribution center in Rochester which is 240,000 square feet and we have staffed that up and began to test shipping products from there. So we really have now four as we speak and by the end of August we expect to be down to one.

For the most part when you are shipping lenses around the United States you are shipping air. For example, all of the lenses that we shipped out of Rochester was all old Cooper Vision product, all the of the lenses shipped out of San Francisco was the old Ocular product and that Ocular had bought a number of years before.

They are all going throughout the entire United States and by and large to the same customers so we are all shipping a bunch of air. Putting them all under one roof we will have substantial savings and we expect close to $9 million in annualized savings. You will start seeing the benefit of that as we complete the integration in the end of August.

As far as other things in the restructuring, realignment activity, we are doing the same thing in Europe, going from 18 locations down to four by the end of 2007. The first waive will happen in the UK by the end of this year and then by the end of 2007 we expect to realize $4 or $5 million of savings.

The last wave of the integration will be the conversion of many of the Cooper Vision product lines on to Gen II high volume production gen to manufacturing which will save around $0.15 on about 100 million lenses which will be about a $15 million savings. We expect that process to begin later this year and be completed towards the end of 2007 and we will start seeing some of the benefits in 2007 but most of them, given the fact that you first make product for inventory will not show up into the P&L into really 2008.

When we complete that process we will have realized north of $50 million of integration savings or synergies and in addition there is about another, there is a north of $10 million of savings in lowering our effective tax rate. But a lot is to lower our effective tax rate is the--just how good Gen II is manufacturing which is done offshore and as our profits migrate offshore if we make product offshore and import it that's favorable.

If we make product offshore and ship it offshore that's favorable. If we make product in the United States and ship it offshore, that's favorable. All three of those events, the only negative one would be we make it in the United States, ship it in the United States, it would be the only one that doesn't enhance our effective tax rate.

So we are on track for that part of the integration and deriving benefits larger than we had anticipated in the past by way of favorable tax results. Looking at--Tom touched upon basically new product launches and the product profile fairly in depth, so I won't repeat really that part.

Coming back to some of the non-recurring items, it included the inprocesses R&D neo-surge which is once you acquire a company of up to 12 months to complete an appraisal and in the process of completing the appraisal one of the things you identify if appropriate is inprocess R&D, that was $7.5 million so we are close to $0.14. I will let Steve get any further into some of the non-recurring items by way of calling those on non-recurring and restructuring activities.

Keep in mind very important is that much of what is ending up in our GAAP P&L is indicative of things we planned on doing as part of the acquisition. While a lot of that doesn't end up on the restructuring line in the technical sense and for example the integration of distribution ends up in SG&A, does not end up as a separate line item and there is very technical reasons that Steve can get into if you want to touch on that or you can follow up with some questions.

Technically it doesn't, even though logically one would say, well, gee, any part of the realignment and integration should be on the restructuring line. It doesn't necessarily work that way in an accounting sense. So we defer to wherever is the deemed appropriate line item and I apologize for fairly complicated financials that derive there from but that's the way it is.

As far as Tom touched upon a lot of new products that are being rolled out. Rather than repeat that I will just emphasize that the new products that we're talking about which are 12 in total are a function of taking the best of Ocular and the best of Cooper and combining the two.

When we do that we end up with five products that are new toric product launches, five new spheres, four of them are one day products, three of them are in the silicon hydrogel space, three of them are multifocal lens and seven of them leverage our PC our Proclear technology which is finding its way throughout the product we're offering. And as Tom indicated with stellar results in terms of our top line growth.

The fact of the matter is some of those 12 new products, we've already launched four of them and they are in a roll-out basis limited by capacity and clearly the first three we came out with the silicon hydrogel lens by the end of October of this year we expect to have ramped up from one line to four lines of production which will allow us to have basically the capacity to make lenses at about 1.5 million lenses a month which would allow us to sell in the neighborhood of $40 million in annualized sales.

We will continue to ramp that up throughout 2007 with the idea that we will probably achieve volumes large enough to sell upwards to $70 million of silicon hydrogel products in 2007. After we complete the fiscal year at four production lines the next two lines that we will add are for toric lenses targeted towards launching our silicon hydrogel toric in March of 2007. That is on plan or ahead of schedule and we expect to be able to achieve that first half of '07 launch.

As far as XC we were able to triple the capacity during the quarter compared to January start point and as a result of that we have been able to accelerate the roll-out of XC which is meeting with great success in the United States. We started now with the launch in Germany and we will be expanding throughout Europe in the second--in the third and fourth quarters as capacity continues to come on line.

The last area which is a trickier capacity challenge was the new Blister pack for the one day product line. When we started the year we expected to be able to make and sell 400 million single use lenses only of which 160 million were the new Blister pack, or 40%. Well, the fact of the matter is the product is very much liked and liked so much that we have to accelerate the conversion of our lines to meet the demand for the one day new strip Blister package.

Today we have five production lines which would give us annualized production capacity of upwards of 250 million and by February of 2007 we expect to be up to capacity of 400 million lenses of the strip Blister and we will have phased down or stop making the card Blister along the way. That is one area where we clearly are accelerating the conversion and in so doing it we had to take a step back because of limitations on the number of production lines we have in the Gen II arena for the single use capacity.

CapEx from a CapEx point of view we expect $86 million year to date, $40 million in this past quarter. We are still intent on spending $150 to $160 million range this year. The idea is we are not going slow on any front when it comes to building up capacity and next year we will probably, meaning 2007, be in that same range and thereafter, after 2007 we expect that capacity or the CapEx requirements to drop off substantially.

By substantially I mean about 30% of our current CapEx is geared towards either integrating distribution centers, converting product lines from one production technique to another, or IP integration that has multi-platforms around the world and we are converting on to the Cooper Vision primary IP. So all that activity will substantially drop off by the end of '07 although IP I'm sure will go on for many years thereafter.

As far as guidance, in our guidance we have a total of 878 million to 911, this year which is a range of 4%to 8% in constant currency going to next year, a total 948 million to 1 billion, or a range of 8% to 10% in constant currency. Earnings per share, we broadened the range slightly from $2.85 to $3.20 of guidance excluding or the non-GAAP payments if you will excluding stock option expensing, stock options we have a range of $0.25 to $0.30 in 2006 and $0.35 to $0.40 in 2007 with guidance for '07 for non-GAAP guidance of $3.35 to $4.00.

As you can see from the range of the non--let's say the called items restructuring cost, the range is so broad that as a result of that we have not given GAAP guidance for next year giving a number of variabilities. There is good news, bad news sometimes when we spend money that it's charged to the P&L.

If we are spending some of that money on restructuring costs that means we are moving to plan or ahead of schedule and sometimes a deferral is a bad event, meaning the cost that we intended on spending for restructuring if it were to be delayed that would be more a negative than a positive.

I think I've covered a lot of, I know Tom touched upon Cooper Surgical, I won't repeat that. Steve, I'll turn it over to you to round out anything I didn't cover in the non-financial area also.

Thanks, Bob.

Good afternoon, good evening, everyone. Let me just go down the numbers side a little bit to provide a little additional color. Looking at gross margin. Gross margins as reported was 62% and excluding the identified items in the release which are principally acquisition and restructuring expenses, gross margin was 63%.

That's down from 65% in the second quarter last year on a comparable basis and that's primarily due to production inefficiencies related to the multiple manufacturing platforms we are working on right now as well as unfavorable currency impact as it flowed through to cost of goods.

Peeling it back a bit and looking at Cooper Vision, excluding the identified items, the gross margin in the quarter was 64% and that compares to 66% last year and that this decline is due again in part to currency as well as production inefficiencies related to the Ocular integration as noted.

Specialty products overall increased from 47% in the second quarter last year to 53% soft lens sales this year. However, this favorable product mix was more than offset by the production inefficiencies. And again we are manufacturing product across multiple manufacturing platforms and we are also increasing staffing in advance of new product capacity coming on line for training purposes. So we are going to have to bear with those inefficiencies for a bit longer until we actually put the Gen II manufacturing platforms in place and ramp up some new products.

CSI, the gross margin was 59% in the second quarter and this is an increase from 56% last year and this is indicative of the restructuring activities that CSI executed in 2005 as well as higher margins realized on the Inlet sale which was acquired as Bob noted in the first quarter. Looking at SG&A for the Company, sales, general and administrative expenses, were 42% of sales in the second quarter, and that compares to 37% in the second quarter of last year.

Included in this years expenses are expenses that are not comparable to last year and those for SG&A were stock option expense, not in last year, certain acquisition, identified acquisition and restructuring costs as well as litigation expenses associated with intellectual property and securities litigation. With these items aggregated to 6.7 million in the quarter or roughly 3% of sales, comparable SG&A as a percentage of sales has actually increased 2% over last year and that reflects spending in support of our new product launches.

Looking at R&D, R&D expenses in the quarter as Bob indicated included a $7.5 million acquired inprocess R&D expense and that's associated with the [Neosurge] acquisition of our surgical unit in the first quarter as well as $1.2 million of Corneal health expenses related to Corneal health product line that we are phasing out and stock option expenses. On a comparable basis the R&D was 2% of sales and that is the same as in the second quarter last year.

This all sums down to the Company an operating margin, to a reporting operating margin of 12% which included specific items that we talked about which had an impact of 9% of sales. So this adjusted operating margin of 21% compares to 24% in the second quarter last year on a comparable basis.

Again looking at CVI our vision group operating margins as reported were 19% and the specific items we identified affected the margin by 4%. So an adjusted margin of 23% and on a comparable basis operating margins in Q2 were 27%. And as noted in the gross margin above, effecting the current year are unfavorable currency movement, manufacturing efficiencies associated with the integration of the Ocular acquisition as well as spending in advance of our new product launches and in support of capacity increases.

CSI operating margins before acquired R&D and stock option expense was 20% and that compares to 16% last year in the second quarter on a comparable basis. This significant improvement again reflects the positive benefits from the restructuring activities at our surgical unit in 2005 and the impact of the Inlet acquisition.

Looking at interest expense, interest expense decreased 200,000 in the second quarter to 7.8 million and this is reflecting the positive impact from refinancing that we executed in the first quarter and this decrease is despite higher borrowing levels in the current year. In operating income we actually had a $900,000 foreign exchange loss in the second quarter this year compared to $400,000 loss last year and then if you recall last year we had a $2.8 million unrecognized gain when the Company's interest rate swaps were marked-to-market for derivative accounting purposes. We had no such gain in the current year.

Income taxes, the effective income tax rate for the quarter is 12.1% reflecting the impact of expected income by jurisdiction for the whole year. This compares to 20.9% in the second quarter last year; reflecting the increased business in lower tax jurisdiction as Bob summarized for you earlier. This comes down to net income of, in the quarter of $13.7 million, or $0.30 per share, which included $17.4 million, or $0.37 of specifically identified items. The results fell approximately $0.06 below our non-GAAP guidance and as Tom had indicated reflecting Japan sales falling below our expectations largely due to product capacity constraints causing us not to meet available demand for the single use product.

Performance in other regions and projected spending levels as well as operating margins were in line with our expectations in the guidance. On a year to date basis reported EPS was $0.69 and non-GAAP EPS adjusting for the specifically identified items was $1.25.

Just a little bit on the balance sheet and cash flow, in the second quarter our DSOs, that's days sales outstanding, the time it takes to collect our receivables was 61 days. That compares to 62 days last year and 68% at the end of the first quarter. The weaker dollar at the end of the quarter actually has an adverse impact on the DSO computation which further emphasizes the sound collection efforts that we had in the quarter.

Overall as we look at the average for the year we expect DSOs in the mid-60s to low-70s but again that's maintaining--or we will continue to maintain significant focus to keep the cash flow coming in there. Months on hand increased to eight times or eight months and that compares to 7.8 months, two-tenths of a month greater than last quarter and 7.1 months last year and this is due to our building inventory to support new product launches in preparation for our distribution center consolidations.

The impact of currency also caused inventory to increase in the quarter. Our inventory does remain at expected levels and our month on hand will continue to be higher than normal as we work through the new product launches and the DC consolidations. As those work their way through we should see the months on hand significantly decrease.

As Bob noted capital expenditures were $40 million in the quarter. We spent $86 million in the first half. And we are targeting $150 to $160 million for the year. Again related to capacity for single use and silicone hydrogel lenses for production capacity there as well as cost reduction initiatives and IT projects.

Overall our net debt decreased $9 million in the quarter and increased $52 million from the beginning of the year, primarily relating to the funding of the Cooper Surgical acquisitions for Inlet and [Neosurge] and despite our increase in borrowings over the last year our interest expense, as I noted declined and again reflecting the benefits of the refinancing.

Overall from a cash flow perspective we generated $45 million in cash flow in the quarter most of which was spent on capital expenditures, as I noted. I guess with that that's probably enough numbers for you right now. I will turn it back over to Tom and he can open the call to Q&A.

Okay, before we get started and we start answering questions, I want to give you the correct phone number to call. I gave you the wrong one or Norris, Mr. Battin gave you the wrong one, or maybe I did, I can't remember who gave it out but here's the correct number. It's (212) 418-7846. Not 7864. 7846. And that's after the conference call is completed. With that I will turn it over to Bob who will facilitate the Q&A.

The first question from Milton Hsu.

Hello.

Hi.

Just a question on the guidance, maybe Steve or Tom, in the past you've talked about trying to just build in a little bit more cushion because in the past the guidance has really been what it is. Does the new guidance reflect some of that more I guess conservative cut on what you guys think you can do?

I think, I will jump on that one, rather than say it's more conservative or not more conservative I think you will notice that what we did is broaden the range and obviously the way we approach it is we try to come up with a number that is in the middle and then you figure out how broad you need to bracket that. Given some of the things that has occurred over the last week we do have a broader range than historically.

Okay. Because when you look at some of the numbers you gave out in the last quarter about maybe the cost savings and what you are talking about now it would seem that some time in '07, those numbers would kick in and the margins would improve more than your guidance suggests.

Well, I'm not going to say that our, let's say that the range for the out year that we've given is a reasonably broad range. And clearly on the upper end of the range assumes not only a lot of that synergy kicking in which we as we've talked about in the past we think we are executing very definitely the synergy plans.

The unknown's are probably two fold. One is tied in with how well we succeed on the top line which is a function of getting these new products out. The starting point is get the product approved.

The next challenge is get it out the door with adequate capacity which is in the transition stage we are in right now and some of those things are going real well and then obviously as we get to '07 it's going to be that as well as execution of the product line roll-out. So there is going to be more risk associated with looking down the road that far compared to where we are in 2006.

Okay, and just a quick question to Tom on the silicone hydrogel lines that should be up and running. Can you just talk about the capacity for, I guess line number four versus line number one how much more it can churn and given the four lines, are you talking about possibly just supplying your highest volume customers and just with spheres only? I mean how limited?

The first line is the biggest challenge before you've got to get that one right before you can do very much with lines two, three and four, we are taking everything we learn from that first line. We expect that by October we will have four lines operational and on average their capacity is about--approaching 400,000 lenses a month when they are fully operational if you will. That's the first four lines.

As we move into lines six and seven or five and six rather, they are a different challenge in the sense that they will be producing torics and therefore the capacity for them will be different. As we continue to get production lines throughout 2007 that are targeting spherical production those lines will have greater capacity. We will be going through about three or four generations of production lines between now and the end of '07 as we continue to improve upon each line that we put in place.

And I would note, Bob, just jumping in here is this process and this progression of new lines taking on added capacity and efficiencies is very, very similar to what we saw in a two-week and monthly production and in our daily production. So this is an (inaudible) pattern that we've been down the road before and as Bob indicated once you get that first line going then you constantly improve and refine going forward.

Thanks.

Joanne Wuensch?

It struck me that as I'm listening to the call you've got a number of new products you are increasing manufacturing, you are talking about more or less the Japanese growth in the second half of the year as being a rebound and yet I think I am on number four or number five times of financial guidance lowering. So where is the mismatch?

Mr. Weiss?

Yeah, I think the mismatch, if you will, is that in 2006 the mismatch, if you will, is that as we go through capacity start-up phases and particularly the strip Blister this year in Japan, the ripple affect into Japan, we have a number of products that we are rapidly converting from one product, the card Blister to a new product, the stripless.

Now there's good news bad news there. The good news is they all really like the strip Blister. The bad news is we took a line, a product line that was $80 million in annualized sales last year and we are now rushing to get into that conversion.

Of course other things that have varied. If you talk about a so-called mismatch is part of it is revenue driven but part of it is accounting driven. Compared to our initial guidance if we were to look at 2007, $0.74 of the changing guidance from the original guidance to where we are is accounting related.

It's accounting for, for example, stock option expensing, $0.35 to $0.40, it's accounting for the change in convertible debt, called co-co's which is about $0.20 to $0.25 which is accounting for allocation of purchase price which led to another $0.14 of three things, all of which are non-cash flow oriented but accounting has played a big part of the equation of what's going on below the sales line.

And then there's the sales line that comes into play which of course has to do with the fact that we had a--had to go through a rapid conversion from the Ocular product line which was the two-week spherical in the U.S. where 70% of Ocular sales were to what we were doing is a rapid conversion over to the Biomedics XC to be responsive to the needs of that market. So silicon hydrogel market and its role against Ocular product line is one of the things we've talked about in the past.

Joanne, this is Steve, I just wanted to say one other thing that's difficult as you are doing guidance and we will focus a little bit more here on Japan. When you go into that market and you tell them, hey, I've got a new product coming, one thing you do not control is the amount of inventory that the customer has and how they are going to utilize that inventory in advance of the new product coming on.

There's no way that we can--that we don't have--there's very few customers we have on line access to what's in their warehouse. In fact I'm only aware of one. And so you really have to gauge how quick is the up take going to be, how much inventory do they have, how much of that inventory is going to go to existing wearers and how are they going to use the new products.

So the formula is less than scientific in how you do that. You make general assumptions. And frankly in the U.S., and in Europe, we've got a lot more experience in launching new products. In Japan, the two primary products that exist there today went in back in the early 2000's and now as we are upgrading that product line the reaction to customers is very difficult to estimate.

So not to offer an excuse but just to say to reach into the minds of a variety of customers in all the countries around the world is not, we don't have the most robust model, and where you actually do get that is with experience and unfortunately our current experience is lower than what we had originally estimated. Hopefully that helps.

It does help but then that sort of makes me ask the next question which is how do we know next quarter when we are having this conversation you are not even smarter than you are now and lowering your guidance again?

The answer is there are no guarantees in life. All we can do is we take the data that we are provided which includes external data such as HPR and CLI data, we look at, as best we can the expected new launch introduction dates and what kind of sales we expect out of them.

And then we do our best to forecast, take that outside data and every piece of information we have, to come up with a--what we deem to be a prudent and reasonable estimate at the time we give it. And there is nothing scientifically exact about it. We've done a great job for ten years of capturing that data and forecasting it.

Silicon hydrogel has done its own series of challenges and we will admit to that as we watch that product line evolve. There's some interesting data that I don't think we commented on but that there's been a lot of conjecture over how far silicon hydrogels will go in the market.

Some of you are probably aware of things going on with the fungal infections if you will and some data that's been published by the FDA that, for example, challenges overnight wear as far as safety if you are going to wear any lens albeit oxygen, oxygen, oxygen or otherwise on an overnight basis. So whether or not that will play into the rapid acceptance of silicon hydrogel lenses is a little early to say.

But let's say it's not going to be a one size fits all market forever. And it's a new toy out there right now. Where you draw the line in its success meaning the product line called silicon hydrogel lenses I would rather be in a position of having three new silicon hydrogel lenses as well as the Proclear product line to march forward beyond '06 than to only have one or the other.

Okay. Thank you.

The next one, Benner Ulrich, Benner?

Can you hear me? Okay. A couple questions, first question, do you have any sense for what the impact would have been on gross margin in the quarter from the shortfall in the single use product line?

Steve, I don't know if you want to comment on that.

Yeah, the overall, Benner, the way that we on an average would say in the market our single use product is around a 50% margin, our monthly and two weeks are in the 60s and torics and multifocals go up into the 70s. Average gross margin is in the mid-60s for the vision group.

So however that roughly 50% margin for single use lenses is a pretty wide range based on pricing differences in various geographies around the world and some of the highest pricing is actually in Japan. So the roughly $7 million worth of shortfall on revenue if we assume that's all and most of it is single use, that entire margin miss which is going to be greater than a 50% margin is going to go right down to the bottom line.

Because obviously any of your fixed expenses, I mean there's very, very little variable, and little bit in distribution. So that might give you an idea as to the impact. There's a lot of things obviously that come into play but that is virtually all of the EPS miss as well as the revenue miss.

Okay, and so then I guess as you move forward here and are able to ramp up capacity and we see that product line grow in the second half of the year, is there anything on the gross margin side that will offset perhaps a little bit lower margin on that single use business that's growing pretty rapidly?

There's a lot of moving parts in this and you have to reflect on when we talk about capacity. We have start up going on and there's not only the start up that we call out as realignment and all that, but the cost that we make a product, be it Biomedics XC as it ramps up, the cost that it takes just to make a silicon hydrogel lens or migrating the Proclear spherical product line out of Norfolk, Virginia, and putting it into the UK, it just doesn't get there, get plugged in and start with the same cost. That is not real world.

And so when you look at all the things we are moving around it is in fact hard to digest other than to say we will get more efficient. Once it gets to where it's going, once Proclear gets on to Gen II, once XC gets ramped up to critical mass, the cost will keep coming down from the point of view of making the next group of products. That's going to our favor.

Going against us as you point out is the mix of more single, single day, throw it away and because that product line will grow faster than the rest of our total product line. Going favorable silicon hydrogel lenses are going to have higher gross margin, the PC technology has high gross margin and the Biomedics Ocular product line that we got that's dropping off was a lower margin.

So put that all together it's going to be tough to be exact on where it lands. When it comes to the one day also you should remember that we don't focus as much on the gross margin because we make more money per patient with the single use and it's a lower--while it's a lower gross margin it's operating margins are as good as the rest of the product line so we are not taking any reduction in operating margins.

We think that's a more important gauge than gross margin. They are both important gauges, it's just important to understand the mix could alter the outcome.

Fair enough. Okay. That makes sense, and then one additional question, on the timing of the consolidation of the distribution facilities in the U.S., I think had you mentioned that you were going from 21 to five ultimately.

21 to five is U.S. and Europe. In the U.S. it's three going up to four and down to one by the end of August.

That's right, I'm sorry. How comfortable are you with that timing? I could be wrong I had thought at some point last year you had suggested that maybe you were a bit ahead of schedule there and we might see distribution consolidated in Rochester by the beginning of '06.

Beginning of '06? No, we were never--

Benner, the original time frame which it goes back to January of '05 was the first of '07. And then, you're right, we moved it up to the middle of, I believe the middle of '06. And we originally thought there was a chance that we would have everything together by June of this year.

We are going to be doing some shipment out of the new facility by June but we won't have everything shut down. That is south San Francisco, everything combined into Rochester and ready to go until, I think it's August the 14th is the date that everything comes on line.

Okay. Thanks, guys.

One other thing, I am going to--I want to make a couple of comments on Joanne's comment, I was listening to Bob and Steve, the one thing that I was hoping would come through loud and clear is the strength of the Proclear product line in the face of silicone hydrogel.

The silicone hydrogel competition for the last two years. It has not slowed down. It has continued to grow. And I think it sends a message that everything in the world is going to be silicone hydrogel in this market. Not everything.

It's not a product that's going to meet everybody's needs and I think what the press release that went out, I guess it was a press release went out from the FDA on Friday concerning the analysis of 30, 28, I guess it was 30 cases of this fungal disease, indicated one thing popped out and that was that nine of the 28 patients that were contact lens patients were extended wear patients. That's a large number.

Let's not forget that the percent of patients that are prescribed extended wear in this country is about 8% between 8% and 9%. And there is a correlation, it appears to be some correlation between not only the product being now sold Moisture Lock, but the fact that so many of these people were extended wear.

Now over the next period of time we are going to find out a lot about the 130 patients here so far because we are going to analyze all of those patients. We are going to find out not only how they were wearing their lenses and it isn't going to surprise me to see a lot of these people were probably mis-using their lenses because I think all of you have known me for a long period of time know how I personally feel, this is not Cooper's position, this is Tom Benders position, and I've been wearing lenses for 40 years, that I think extended wear is baloney, I don't think it's good ocular health and I think a heck of a lot of doctors believe that.

I know one of the problems with silicon hydrogel lenses or the way they are promoted is there's a false sense of security. That is you don't need to worry because you have all this oxygen, you can fall asleep with these lenses and it is okay. I don't think it is okay and I think that's one of the problems we've got to get our arms around.

Now I'm not saying, and there is certainly no indication that silicon hydrogel lenses have anything to do with this current condition at all but it certainly looks like it's extended wear. And I would just point out that I think there will be a market in this country anyway and it certainly is in Europe, it's very strong for the good old hydrogel that's been around for a long time when we didn't have these problems. I didn't want to hone in on your time, Benner, and your question, but I did want to make that comment a little bit.

Okay. Thanks.

Steve Hamill?

Can you hear me, all right?

Okay. My first question is how do you guys decide what's appropriate to put in the bucket of non-GAAP add backs?

And the reason I ask is when I look at kind of this list that comes to 17.4 million, there are things in there that I'm not sure I would have expected to see as an appropriate add back and as a for instance I would point to Cooper Vision production start up costs of $1.9 million. That seems to me to be something that I would have thought you guys would have been anticipating already in your guidance.

Well, the start up costs are realignment and start up costs was how we deemed to be part of we are going to put the two companies together and it is what we would call outside of normal operating production if you will.

For example, in our silicon hydrogel facility we put a--we went out and rented the facility that was going to take on the machines and while we are working through the first production line we are incurring rent and we are, there is x-amount of people staffed there to deal with that which is, we are not the first company in the world to have large projects, be it Ocular, for a number of years called out and told people how much start up cost they were going to have as they evolve Gen II.

In fact I think Steve might correct me but it was something like $75 million that they spent on Gen I in terms of accumulation and then abandoned that and wrote it off and then started some of that again. And they did call out to the investor what it was.

Now in our case it's a little bit more complicated because there's so many moving parts particularly as we get to 2007 we are not comfortable if we did give you the number the range is so broad and as you can see from 2006, it's already very, extremely broad, that it diminishes what you can do with it other than to say it's a very broad range. We think the way we've dealt with that is transparent as we can make it, and we respect that some people will say, well, gee, I think that's operational versus non-operational. The transparency is there to pick and choose as you see fit.

Let me also comment, Bob, it goes beyond GAAP accounting and such to the point where what we've tried to do is identify those costs that we are incurring now in the process of integrating and starting up production, really part of what we called previously non-recurring acquisition and restructuring costs. We just felt it was important to break those costs out.

The key on these costs, the specific costs you asked about Steve is we don't expect those costs to be recurring. As you are going up the ramp up you are going to be highly inefficient once you have a number of units, production lines running, etc, you are going to be efficient. So the desire was to identify what those inefficiencies in the integration process were and clearly articulate them so that you new effectively what we are spending and what we are doing.

Just to make sure I understand then should I assume that these are production start-up costs only associated with merging of product lines, and not new products? I hate to belabor this but when you are talking about adding back $0.37 I think it's appropriate for investors to quibble a little bit in terms of what's in the add back.

Sure. But it does include the start-up of this new production line. So, no, it's not new products in the sense of with the spending associated with product launchings, etc., no, it's not that, it's the inefficiencies of going from a very, very low yield to a--understanding the manufacturing process yield.

In other words, a significant yield fallout at the beginning while you're learning the process becomes a normal production process similar to what we would experience on any of our hydrogel lines.

Okay, and I guess based on your GAAP guidance, it seems like we should anticipate a lot more of this because you've got a lot more, as you said you've got 12 product launchings coming, you've only had four so far.

Yeah, but again you have to be a little bit careful. This is the only new production platform, manufacturing platform that we are starting up. So this particular item is effectively a silicon hydrogel item. As we go from the monthly product to the two-week product there is going to be a little bit of learning there as well. But that's the only product start-up costs that you would have in that bucket so to speak.

Steve Hamill, keep in mind this is an entirely new manufacturing platform not like anything else in Cooper be it Gen to be at Cooper's tips production as it has in Rochester or its molding capacity in the UK. This is different, it's a different material and it acts different.

So we are, as we get silicon hydrogel manufacturing up and rolling this type of learning curve if you will, will diminish. We do have some start-up costs, correct me if I'm wrong, Steve, and there will be some in the new products in, for example, the XC shifting which is really much as anything a realignment of plants as it is start-up costs.

But the blend, the grayness of sometimes as you are starting a new product called XC in Norfolk and pushing out Proclear into a new plant is what we will call realignment costs.

Exactly and not costs that we would expect to recur going forward once the realignment is done.

I would like to get a little more understanding for the Biofinity time line because obviously you reiterated your previous guidance there of having about 1.5 million lenses per month of capacity by October. It seems like a big leap just given the fact that you only manufactured 40,000 in April. And I know you've got several lines coming up but that's a lot to have happen in basically five months time. How do you get comfortable that you are really likely to the hit that target?

These lines have evolved, the first line which is the toughest it's like inventing the first car, it clearly has some attributes to it that are less automated than others. So as we order the equipment to fully automate more pieces of it that has positive impacts on ramping up. Is it a harder thing to project than most other things when you are developing a brand new technology?

Yes, it is. It'd be harder to predict the ramp up of this than it would be the ramp up of the Biomedics XC or the Blister pack because they are using know-how that is within the Company and it's tried and proven.

This one, absolutely it is a more challenging ramp up. It's our best estimate. We think we will get there but there are no guarantees.

And I also just wanted to ask a little bit more on Proclear because, Tom, you obviously made it clear that you are very happy with how that is doing. If I look back with a little more detail, though, it's been kind of stuck here at about 31, 33 million per quarter for four straight quarters, really the big jump was in the April quarter of last year.

Or the last big year-over-year jump. So what gives you the confidence to really say that that product line is really still doing so well? Because at least on a sequential basis it doesn't appear to have that much momentum.

By gosh, I don't know where you get that. Sequentially it grew very nicely from second quarter to--I mean from the first quarter to the second quarter. I don't have that one in front of me to be quite frank about it. But this kind of growth is become the norm, the reported growth on the year to year basis of Proclear.

And, of course, see it's still growing very nicely in Europe which certainly the toric, the toric line as well as the multifocal line I don't know what I can tell you, I can only giving you the numbers. I'm not sure I understand where you are saying that it's not growing.

Well, Proclear is up 9% sequentially from the first quarter, or $2.6 million up above the first quarter. So with the year-over-year is I'm not sure I understand --

I don't see it. I see it growing every quarter. And I --

I am just going by your numbers, from your press releases and if I look at the last four straight quarters, there is always a jump kind of January to April because of January is usually the weakest quarter of the year but --

Let's just take year-over-year if you don't want sequential.

Or look at the six-month to six-month data, too, I have that. I have Proclear on a global basis Proclear is up 22% from six months of '05--'06 to six months of '05.

Constant currency 26%.

Without constant currency, in.

In constant currency we are up 26%. So it's--I don't--I don't see, part of what you might be seeing if you are looking at actual is there is a--an impact of currency, of course, but that's not going to mitigate. Year-over-year is probably the-in cost of currency is the best gauge followed by sequential although I understand that the first quarter, the second quarter is usually better than the first quarter because of billing dates and stuff like that and number of holidays.

And by the way, it looks very, very good in HBR, too, so that's U.S. but it's not global and I don't have any, I don't have any, we don't have HBR global kind of stuff, I only have U.S. But Proclear looks good across the line.

Again, I come back to the hurdles that Proclear spheric had to make in the U.S. with the Biomedics XC. I think there was an expectation and probably a right full expectation that the Proclear sphere would have been impacted more than it was in the second quarter because of that product but it was not.

What's your capacity at this point on Biomedics XC?

Biomedics XC, we tripled the capacity of Biomedics XC to over 3 million units--triple of what it was at the end of January which is a lot to already launch into Germany in the second quarter in April, and that will be rolling it out throughout Europe --

This month.

In the third fiscal quarter. It's ramped up well. The cost of that, of course, was we had to yank everything that was Proclear sphere out of production in Norfolk and put it in the UK.

I have a number of many analysts that have done due diligence and their own panel and find out the kind of feedback they have gotten from Biomedics XC and it's doing extremely well and extremely well against the silicon hydrogel products. But the thing that's held us back in the past has been capacity and we couldn't sell it into distributors as an example. We just didn't have enough volume to do that.

As of the 1st of June we have taken a all the wraps off, the product is being sold everywhere. There is no limitation, none on the size of inventories doctors could by which we put in place. We couldn't execute our changed strategy with the product until last month.

So all the shackles are off, we've released it. We will have capacity by the middle of '07, not that we will sell this many, but we will have capacity to manufacture over 7 million units a month. That kind of volume gets you in the neighborhood of about a $170 million product line.

This product line is not going to be $170 million. So the capacity issues now are behind us with this product and the only thing it's going to limit its success is our own execution.

Allie Widman, Allie?

Hi, guys, thanks for taking my questions, a couple of them here. First, I don't think we've touched on this too much yet but just regarding last weeks' announcement of your reduction in some of the sales force and the employees associated with some of your operations. If you could just give me a little color on the rationale behind reducing the sales force ahead what sounds like it will be a robust cycle of new product launches, it seems like a little bit counterintuitive.

Allie, yeah, this is Bob. We, of course, reduced our overall staff in the U.S. sales and marketing area, 34, about 10% of those, of the feet on the street, if you will, of our sales force was reduced \ten people, so only about less than a third of the reductions were direct selling effort.

That, the logic there was when we initially acquired Ocular and Cooper Vision and integrated it there continued a debate whether or not we went deep enough relative to sizing the organization for our needs. And that debate continued into early this year.

Of the reductions that we made--and we ultimately finalized that decision, the nature of the people that were let go, if you will in terms of the sales force were, of course, those that we were comfortable were not our, let's stay star performers in those locations. I think one of the questions some people have when they say, well, gee, we have all these new products compared to where you are today, why would you be cutting back in order and then staffing back up when you launch all these new products.

Number one is, understand the next facet will be moving from the production or the new product pipeline into the marketing effort and that will require more work in that area initially. About 75% or so of those cut-backs are permanent in nature.

Yes, once all the products are out there in the U.S. market we will staff back up some of those. But for now rather than have people wait six months or eight months for all these products to come down the pipeline, or longer, it was the thing that was right to do as part of the continuation of the integration. I don't know if Tom wants to add comment.

I think that's right, I don't think there's any guarantee we will add those ten people in the U.S., and quite frankly we put the integration together in the U.S. it was in my mind it was always a little bit of overkill because silicon hydrogel products in the marketplace we increased the size of the sales force by 50%.

When you look at globally, we did in France, we did in UK, we did in Canada, Australia. You are talking about 10% or 15% leverage. Here we did 50%. So it was always a larger than typical kind of a sales force considering where we were before.

One thing don't forget, in 2005 the Cooper Vision product line grew in the U.S. 14%. 14% when the market grew 10% we had 50% more salespeople, but Ocular sales product line declined something like 13%. That's why we ended up with 1%, I think 1% or 2% growth, I forgot exactly what it was.

14% decline of Ocular.

So, but it was ten of 37 people. The rest of it was customer service people. There was certainly some, we took out a management, not group, but what you would call it?

Layer.

And flattened the organization and this is something that we've always done, and it's part of the ongoing process of integration of these two company's, so that basically is it.

I just want to add a little bit, Allie, that when we brought the two companies together we did not pair back sales support because we wanted to make sure that we served the customer and as Bob indicated we were actually shipping to the same customer out of two and possibly three sites.

As we're now getting able to consolidate the distribution centers and take one order and ship one shipment we don't need as much sales support, but the last thing we want to do is hurt shipments to the customers that's why we're making sure we have four distribution centers before we go down to one. I think it was just--as we go through this process as Tom indicated we are going to realize some synergies but we are certainly not going to hurt the product getting to the customer.

Steve, we you brought up a good point because we learned something from the merger of Wesley, Justin and Ciba back in I want to say the year 2000 or something, and that was one of the biggest problems talking to the Ciba folks after everything happened.

One of the biggest thing that happened when they put the two together they did it too quickly and there was a real problem with the service levels at Ciba for a period of time and I don't think we ever forgot that. Certainly we were biocombatibles. That was on my mind and another reason that we went a little slow in completing the leveraging of the two sales organizations when we put it together in the United States any way.

Okay, could you guys maybe just remind us of how many reps now you will have in the U.S. and then in the rest of the world?

In the U.S. we now--we'll now have 83 or 84, I believe here. And, of course, that doesn't include management or key account people. As far as the world, I don't have that on the top of my head. But it's got to be somewhere around 400 people in sales if you look at all the European, we have what, 15 subs in Europe alone.

You're right, it's right around 400, Tom.

Somewhere in that neighborhood.

Okay, thanks. And given how many products, 12 new products out there, what you guys do or how you sort of prioritize which ones you want to launch first? How does the timing work? Is it demand based or is it capacity or there any other issues that come up when making those decisions?

I think the starting point is the product has to come through R&D if it's not a completed product, you have no choice. So many of these products we got, there were no delays at the silicon hydrogel obviously, we finally--we bought Ocular in the beginning of '05. By the end of '05 we launched the product line. We put a lot of energy behind that.

We certainly haven't--the XC was cradle to grave a product that moved very rapidly as a response to the two-week Ocular product line that was being challenged by the silicon hydrogel. So that became a very high priority.

Part of it is each location, each manufacturing location has different priorities. So it isn't like one location has to do everything at once. It's one of the big events is in Norfolk, Virginia, one of the big events is in Puerto Rico and I would say two of the big events are in the UK.

One with the silicon hydrogel and one with the taking on the Proclear product line if you will. But I think we multifaceted around the world in terms of what each market needs and what is available. And then the third piece is to see how much capacity you can have and how to prioritize that capacity around the world which is something we have a global marketing organization that certainly discusses that as they figure out where to go.

For example, where to go as Steve touched upon if you can sell a single use disposable lens for 20% or 30% more in the UK than in another country like the U.S. you might prioritize, and give that a higher priority. The silicon hydrogel market is a U.S. mania, not a global mania that two-thirds of the sales of the silicon hydrogel lenses are in the U.S. which accounts for 36% of the global market.

So it is way weighted towards silicon hydrogel lenses compared to the rest of the world. When it comes to the single use, on the other hand, less than 10% of the U.S. market is single use whereas 40% of the market outside the U.S. is one day, and oh by the way in Japan they pay top dollar for single use throw away lenses. So it is all of those that come into play to decide which products where and when.

I will add one more thing, too, Bob, I think you have to be careful in each market not to have too many new products coming in because there's only so many times you get in front of the dock to sell it. So if we had 12 new products coming into any one market that wouldn't be a good thing so we do have the opportunity, I think, as capacity comes on for example in silicon hydrogel to seed it first in Europe, etc. So there is just a whole combination of issues well thought out, driven by the sales and marketing team by country.

Okay, so then on Biomedics XC you did a nice job of explaining the number of lenses you're capable of manufacturing and how that launch is going, but I was just wondering if you could give the level of sales of that product line during this quarter and also confirm if you are still on track for $20 million in sales as I think had you mentioned in the first quarter call?

Happy to do that. We did $3.7 million of sales for the Biomedics XC in the second quarter. You can look for sales in the second half of the year between $16 and $20 million, probably my sense is we are going to be up at the upper end of that number than the lower end of the number because of the fact that manufacturing is well ahead of their plan, they're manufacturing lenses and we have now released it to Europe and the rest of the world but of course without Japan. Japan, we can't do it but everywhere else ahead of schedule. So I think it's an upside to where we thought.

And that compares if you take the first six months it was less than $5 million in revenue. So obviously we are more than tripling the output or equivalent to 4X the output in the last six months.

Okay. Great. I will jump back in line.

Okay. Operator, I don't know if that maybe we can give some instructions if there is anyone that hasn't?

I don't think we gave them instructions in how to get into the queue here.

Sure. [OPERATOR INSTRUCTIONS]

I think that's all the questions, Tom, do you want to--

I just want to thank everybody for calling in today--

Hold on, I'm sorry,.

We have one more?

Chris Cooley?

Hello, can you hear me okay? Thanks for the instructions for the Q&A.

It's been a long call. Let me just ask two quick once if I may. First could you just update us to make sure I'm correct on the new product time line as it pertains to the daily disposable toric in Japan and what we should expect for that in terms of both on the capacity and from a revenue standpoint not only in '06 but more so '07?

And I guess just longer term listening to discussions about capacity in product mix shift, when we get to that great state when everything is really hitting on all six, what type of a gross at CVI should we contemplate in the out years? Can we exceed the old historical 67%, 68% gross margins longer term with the added dailies mix or should I be thinking about that when I look really in the out years and I realize it's truly the land of the hypothetical in '08, 2010 at this point, or is it more the low-60s? Can you help me find that? Thank you.

First of all the single use toric in Japan, I put that as a portfolio of new products that together with our new aspheric 55 water content lens, which is the two week together with the strip Blister which will be clearly the big impact product. The single use toric product, the toric market starts off as a very small market in Japan but one that has a huge opportunity when you think about the fact that the Japanese eye is much more highly astigmatic than Caucasian eye where about 50% of the Caucasian eye has astigmatism about half of which requires a toric lens.

On the other hand the oriental eye, if will you, is about 80% astigmatic and about half of those requiring a toric lens. There is the opportunity to create a very attractive market but that will not happen over night. People in Japan that have had astigmatism in the past wear hard gas lenses and they are not just going to throw them away and convert to soft lenses.

Tom and I would be a good example where we've worn our hard lenses for 25 years or 35 years or so. So it's going to be more grass roots of starting with the young generation, first time wearer, that is teenager and then watching that grow.

Are we looking really for a run rate as we exit the calendar--I mean fiscal '06, of maybe 10% of new fits, should expectations be 20% of NRX? I understand the demographics. I'm trying to get a feel for what the expectations are.

I'm going to tell you the truth, Chris, we don't know, we honestly don't know. Let me go over this whole toric thing in Japan one more time. I thought I had done this in the past. But I think the B&L people will tell you exactly what we will tell you.

I think we are all a little disappointed in the growth and the size of the two-week toric market soft lens toric market in Japan. I think if you ask any of us three years ago or four years ago, certainly three years ago, most of us felt that the toric market in Japan, the soft will lens toric market in Japan should mirror pretty darn close the size of the U.S. market even though it's a smaller business, or I should say it's a smaller market in Japan.

Of course we have more astigmatism in Japan and therefore we thought that it would be much larger. And I can only give you 2005 numbers. But the toric market in Japan in 2005 was a little bit less than $100 million versus over $300 million here and it has not grown nearly as rapidly as we thought it would.

On the other hand I have always been a believe and we believe that a lot of that has to do with the fact that the Japanese market is really not a two-week market any more. It's I should say any more, it never really was completely, but the two-week market did not grow last year in Japan. All the growth was in the single use market.

Single use products dominate the Japanese markets by 55% I think, or a little bit more, of the--represents 55% of the Japanese market and therefore, with a toric product, a one day--a daily disposable toric product could be a huge winner especially one that had a lot of parameters. Remember, Ciba has had their product there for I want to say for at least a year, maybe a little longer but it didn't have hardly any parameters. In fact, it's more like, I don't know, a hybrid of a sphere, it just doesn't have a lot of parameters. This product will have a lot more parameters and therefore it might be a big winner.

The Japanese subsidiary certainly believes it's going to be a bigger product. So I think it's still up in the air how big it's going to be. We are going to launch it. We are going to launch it with a lot of gusto and give them a lot of volume, a lot of capacity to do that, we have been shipping product into Japan, I want to say since April, I think.

We've been certainly manufacturing the product for Japan since April and May and with a target of doing a marketing launch, a marketing launch in the month of July. So I think that's in essence all I can say--will say about it. How big it's going to be, we will keep you abreast on it. It's just an opportunity--again, it's a marketing opportunity.

Chris, as far as your other question is concerned, will the margins get back up into that 67% range, as we indicated the daily is going to take us down one path. I also indicated that our conversion of Proclear onto Gen II will have a very positive, favorable impact in terms of gross margin that in the neighborhood if we talk about approaching $15 million of savings that would equate to about a 1.5% or let's say north of 150 basis points of improvement. So you do have a lot of dynamics.

And we haven't basically given up on saying the 67% range is not achievable but clearly if the single use market really takes off. Right now we have a very small portion of that market. We are not a large player yet but we think we have a lot of tools if you will with Gen II to do a better job of that product group which the more we see the more we sell on a gross margin line but the more we succeed on the operating income line. So it's, I don't want of want to rule it out but I also think there's a lot of integration activity, start-up activity between now and the end of '07 before you see something like that.

Thank you.

Suey Wong?

Thank you. It's been a long call here so I have this one brief question. On past calls you mentioned that you may be using pricing on certain national accounts here a bit more aggressively to maintain, to hold spherical share. Can you talk about that, please?

We haven't done that.

I'm not sure we are relating to the question if will you.

Are you saying, have we used pricing with national accounts to try to keep our--to maintain our market share in the spherical business? And the answer is no, we haven't done that.

Tom, I think you mentioned on the last call that you might look at using pricing more aggressively in certain accounts.

No, we didn't do it.

That's all I'm asking.

No, I think all you are doing is giving away margin--our own margin, quite frankly. And quite frankly probably we didn't do it. I will just say it that way.

Thanks, Tom.

I think that's all the questions. Tom, you want to--

No, I just want to thank everybody for being with us. We will be looking forward to talking to you the first week in September with our third quarter. And giving you any other updates we have as we go along if there's anything else to communicate to the street about. But with that I want to thank everybody for joining us today and we will see you later. Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.