酷柏 (COO) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Cooper Companies fourth quarter and fiscal year end conference call. [OPERATOR INSTRUCTIONS] I would now like to turn the over to the Vice President of Investor Relations and Communications, Mr. Norris Battin. Please go ahead, sir.

Thank you very much. And welcome to everybody, this afternoon. Before we get started, I'd 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, including risks related to integration of prior and new acquisitions, risks that new products will be delayed or not occur at all, or that sales will be limited following introduction due to manufacturing constraints, risks related to implementation of information technology systems covering the Company's businesses, and risks with respect to the ultimate validity and enforceability of the Company's patents and patent applications and the possible infringement of intellectual property of others.

These and other 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 latest earnings release and are described in our Securities and Exchange Commission filings including the Business and Risks section in Cooper's annual report on Form 10-K. These are available publicly and on request from the Company's Investor Relations department.

And as a final note, if you'd like to reach us after the call today, we're in New York. So please call us on this number, 212-418-7810. Once more, 212-418-7810. And with that, I'll turn the call over to Tom Bender, our Chairman and Chief Executive Officer, for his opening remarks. Tom?

Thank you, Norris. And welcome, everyone. We're going to follow the same format we always have in the past. Bob Weiss will follow me, as well as Steve Neil, our Chief Financial Officer. I think before I get started we'll talk a little bit about a real difficult quarter for Cooper and a disappointing one. I'll also talk a little bit about some of the things that went well for the Company because I don't want these difficulties that we've had in the fourth quarter to shadow a heck of the lot of the progress we've made during the year.

And let me hit first upon those issues that were disappointing. Number one, the distribution consolidation in the U.S. just, quite frankly, didn't go on as smoothly as planned. In fact, it was somewhat of a disaster for a couple of months. The sales -- there are four or five issues to cover in this distribution consolidation mixup. First of all, the sales impact on the fourth quarter that will impact us in the first quarter was probably about 50% of our shortfall. In other words, we couldn't -- we had a problem where we actually couldn't ship product in the end of the month.

It wasn't products that were necessarily on backorder, we really didn't have a backorder problem. We just had a problem where we couldn't get the products out to our customers. And it caused us a -- it created two specific issues. Number one, we couldn't get the product out and number -- a lot of our product out. And therefor, we had to carry that business into the first quarter of this year. And secondly, because we -- we couldn't get the product out, we couldn't get any kind of what we call distributor load-ins or any kind of letting the sales folks, to build any inventory at the end of the quarter because we knew we couldn't ship. So it came from two different areas.

Secondly, there was costs associated with this because the one thing we didn't want to do was disrupt our relationships with our customers. And obviously, when -- instead of getting product to our customers in one or two days, in many cases, starting the end of September anyway, into October, it was a delay of up to seven days for some of our accounts, getting product to customers. So what we did, we gave free shipping to all of our customers for two months and that added some extra costs, about $1 million of cost to the quarter. Thirdly, I -- the other impact of this disruption was instead of the $6 million cost savings that we expected from the consolidation of our U.S. distributors -- I'm sorry, our distribution centers in 2007, we're probably only going to get about 50% of it in 2007. We won't get the full $6 million until 2008.

I will point out, though, that the other consolidation around the world with our distribution centers are going well on plan. In fact, in Belgium with our European consolidation, it's going ahead of plan. What you need to know now is this problem is behind us. We are now servicing our customers in the one to two days as we were doing before this disruption set in. And that is when we closed the south San Francisco distribution center for ocular science, and moved it all into Rochester. It is behind us but it did cause us a lot of disruption and an impact on our revenue in the fourth quarter.

The second issue is one that is one that I will touch upon. I'm not sure what it means right now but there's a definite market slowdown that had an impact on our business. I'll give you some background on it and it will give you a better view, a better transparency, what's going on. From a nine month period of time -- or through nine months, the overall global soft contacts and lens market is up 3% in reported growth, 5% in costs and currency. The problem, though, is in the third quarter, the market reported only 1% growth and it actually was flat in constant currency.

And if we look at the last three quarters, in the first quarter, the market grew 10%. In the second quarter the market grew 4%. And of course, in the third quarter it was flat. So the trend is not a very good trend. What I think is going on, though, part of it, can be explained that we had a lot of inventory build in 2005 with all the new silicone products that were introduced. And they must have some impact in '06 because I think -- I really firmly believe that the type of growth or the trend growth we've had since 2002 will resume itself in 2007.

That is we'll get back to 8% constant currency kind of growth. Remember, last year it was 10%. It was probably an anomaly because of the inventory growth. And that's what I think is going on. But in any event, it did have an impact on our business in the fourth quarter also.

Thirdly, let me talk about the silicone ramp-up. I think that's what everybody is waiting to hear. You saw what we wrote in the press release. We'll be able to answer any questions. But let me make a couple of comments on it. The silicone ramp-up is more complex than we originally thought. And this has hampered our ability to build the required inventory that we need to do a full global launch until the second half of the fiscal year.

If you'll recall, we were thinking and believing that we could get this inventory build enough that we could be certainly doing a full launch by the AAO meeting in the U.S. in this couple weeks ago. It just didn't happen. And of course this is reflected in our latest guidance. We will continue to launch on a limited basis in the U.S. over the next couple months, though.

Number two, let me talk about some of the good things that happened for us, though, in the year. We did introduce seven new products in 2006. And in fact, in the quarter, we introduced two new products in Japan. We introduced the daily disposable toric and the two week Biomedics sphere in Japan. We also introduced the disposal multifocal EP product in the U.S. in the latter part of October.

By the end of the first quarter of '07, though, we'll have launched three more new products. Two that will strengthen our global toric franchise, and Proclear single-use product, which will be a very important product for our America's business because I think -- I will talk a minute about an initiative that we will be taking, as far as strategic initiative, we'll be taking in the U.S. beginning in January.

Secondly, our Gen II conversion came in ahead of schedule, in fact, for our CooperVision product lines. We actually did it in October. And this should generate between $12 million $18 million of cost savings, certainly, in 2008. We will get in cost savings too in 2007, more than we originally thought.

Thirdly, the conversion of the new packaging for our one-day product is ahead of schedule. We have enough capacity and that's very important right now for Cooper in the U.S. anyway, to have enough capacity to meet our needs in the single-use market on a global basis. And as I said, specifically here in the US.

Fourthly, the equipment. And that is all the equipment that's necessary for our silicone product lines came in ahead of schedule. That is, we have all the equipment in for all of our 10 lines a little bit ahead of schedule. We're in the process of building all out all those 10 lines right now.

And lastly we have direct sales forces or direct businesses, I should say, in Singapore, Malaysia, and Taiwan, that strengthens our Asia-Pacific market where we are the weakest of the four players, and it's the weakest part of our overall business. And we are in a position to begin to direct sales force in China in the second quarter of '07.

Let me talk a little bit about some of the objectives that we have for 2007. Number one, most important and most important to all of you is to hit our guidance. Number two is to have the success in the U.S. and a new initiative. And what I mean by that is, we believe there's an opportunity now in the U.S. to attempt to change the behavior pattern, certainly the prescribed behavior patterns of the spherical contact lens market. Find it very interesting that a lot of the barriers of the single-use market in the U.S. are now -- have now gone away.

In the past, for some of you who have been in this market long enough, remember that contact lens wearers come under three categories. They either wear spherical lenses, they either wear toric lens for astigmatism, or they wear lenses for presbyopic purposes, multifocal lenses. So, you've got three different categories. In that spherical category, you've got a number of different lens categories to compete for that spherical patient. You have your two-week monthly kind of disposal products that are big in the U.S. but not so big in Asia-Pacific or in Europe. And remember, that still is 60% of the world market. And there is no doubt in the rest of the world, the single-use market is growing at the expense of these two-week monthly products.

Number two, you got hard lens products. They also compete for the spherical patients. You have patients who are in cosmetic lenses who these lenses are basically all spherical lenses. You have people on conventional lenses, the old vile products that are dying. And then you have the single-use product. And the single-use product for the patient and for the practitioner, quite frankly, make much more sense than the two-week or the monthly spherical products that are used in this country, when you think about it.

Going into history, the barrier for the single use product in the United States -- and let me back up for a minute. 8% of the market in the U.S. is spherical -- is single-use lenses. In Asia-Pacific, it's almost 60%. It's 58% I believe. In Europe, it is 38%. And market share by the way, growing. Now one would wonder, well, why in the world in the U.S. is it so low? Well, one of the reasons -- two of the reasons in the past has been, number one, the high cost to the patients.

But thank God for silicone hydrogel products. If you look at silicone hydrogel products today and you add in solutions, guess what, folks, there's no difference. There's no difference at retail for a patient on the single-use product and the silicone product. And doctors aren't going to hear from it from J&J or Cooper and B&L, why in the world would they? They have a franchise in silicone hydrogel to protect. We would have been very in the game, in the middle of the year when B&L had all the problems with solutions because now you got all this negative stuff on not only B&L but AMO on their solutions. A great opportunity. But we couldn't. We just didn't have the capacity in this Company to take advantage of that initiative.

But we do today. We have the capacity to do it. And we have two products. We not only have Proclear, which will be introduced in the January-February timeframe, which has a story in itself. But we also have a wonderful biomedics, one-day product that we have clinical data where we compare it against a competitor's where we beat it. So we have the data to go out and do it, we just have to execute. And what you have in the two barriers, if I pointed out, one was cost. That's gone now. Because the cost to the patient is about the same.

Number two, the profit for the practitioner is greater in a single-use product than in a two-week product because, my gosh, you got -- the drug store gets 50% of that profit because they get the solution sales. The second barrier has always been compliance. Oh, my God. You get a single-use product and patients are not going to be compliant. But guess what, there has been a study that was just published in one of the major journals, I think it was "Review of Optometry," I'm not sure which one, where they did a study and found it 92% compliant with one-day product. The one-day patient is the most compliant. The two-week patient is 56% compliant. We all know that. We all know the two-week patient uses lenses on a monthly basis.

So we have an opportunity here. We're going to take advantage of that opportunity. We think potentially, and I'm using the word potentially, we think potentially the single-use initiative could be much more fun if it had a greater financial impact on this Company than Biofinity. And that is the truth. If you could change a market, you can be an innovator, you can win. And there have been a lot of examples of that. I won't go any more into it because you can tell I'm passionate about it.

Number three, develop -- we also developed our able to meet -- what we're going to do next year is develop our ability to meet our potential with silicone hydrogel manufacturing. We have to do that. Obviously, we're slipping behind. We're the last guy in. We know we have a wonderful product. It was presented at the AAO by Dr. Joe [Yeager.] Presented some data that was outstanding on the seating clinicals that we have in the U.S. We know we have a good product. We just have to make enough to sell.

Number four, we want to complete the global distribution -- the distributor consolidation by year end. I think we're definitely going to do that. And number five, and I think this is very important, is whole global market share in the toric market. We have -- we are introducing three new products -- we have introduced three new product to strengthen our franchise in torics. That is the one-day toric in the Japanese market that we will be introducing into the U.S. by the end of 2007. We have introduced the first disposable toric multifocal. We just did that in the month of November. And then we will be, at the end of the month, introducing Proclear XR, which is a custom product for our toric patients.

Secondly, we have good clinical data now comparing Biomedics' two-week toric to the leading silicone toric in both comfort, visual acuity, and lens stability. And we'll be using that this year to attack the silicone toric competitors that we have. Those are our objectives. And with that, I will turn it over to Bob.

Thank you, Tom. And good evening, everyone. Financial highlights for the quarter. Of course we had revenue of $216 million, 2% below the fourth quarter of 2005 and 3% below in constant currency. For the fiscal year, revenue was $859 million or 6% above fiscal 2005, 8% in constant currency. The results for the quarter included $0.37 of callouts or non-GAAP adjustments, and for the year, $1.29 in callouts or non-GAAP adjustments.

As far -- as Tom pointed out, in many respects, 2006 had many outstanding accomplishments. Be it the fact that we launched seven new products during the year, three of which were launched in the fourth quarter. The accelerated conversion of our high-volume product lines at CooperVision onto the ocular manufacturing platform, that's called Gen II, which is moving ahead of schedule. The conversion or the expansion of capacity in the one-day area where we've converted from the card blister to the strip blister. Progress we've made in terms of getting lines of production in for silicone hydrogel manufacturing.

The consolidation that is advancing in terms of moving from 21 plants -- 21 distribution locations down to only five in Europe and the United States. And as well as going direct in certain locations in Asia, including Taiwan, Singapore, and Malaysia. 2006 certainly was with its challenges. And as Tom pointed out, they included the fact that silicone hydrogel ramp-up proved much more complex than we had previously anticipated in term of getting product out the door. But that we -- in the new guidance we have given you, expect to have a global rollout in the latter part of 2007. And that is built into our guidance that we have provided.

As far as distribution center consolidation in the U.S., it did not go totally smooth. It was initiated to go live in September. Of course, it took us until the end of November to have all our customers getting product in a timely basis. And as a result of that, some of the economic savings, which was anticipated to be $6 million in the U.S. this coming fiscal year, we will not achieve. We will get about 50% of that.

In terms of callouts and non-GAAP adjustments, there was a total of $0.37 during the quarter, which included $0.06 for stock option expensing. And about another $0.30, primarily relating to the combination of distribution locations throughout the quarter, which impacted the P&L around $6 million or $0.13, as well as the consolidation of manufacturing locations and restructuring costs, as well as manufacturing startup costs, which impacted the quarter around $8.8 million or $0.19.

The -- looking at surgical. Cooper Surgical had a super year, an outstanding year. With revenue of $124 million for the year, up 15%. And revenue for the quarter at $33.4 million, up 17%. That was organic growth for the year of 6% and for the quarter of 5%. Our gross margin for the year improved 1 percentage point above the prior year at 58%, compared to 57% in the prior year. The Inlet acquisition that we made and announced in November of last year, which moved us into the hospital arena, surgical arena, proved to be a superb acquisition with $3.7 million in revenue in the fourth quarter. You may recall that's trocar closure systems.

We also, launched the NeoSurg product, which is a reusable and disposable trocar access system in November of this year. And that combined with our announced acquisition of lone star, a retractor system, all of these are dedicated or targeted toward the hospital. With that acquisition, we'll add a $9 million product line. And that combination, together with the Cooper Surgical previous product lines, means we'll have about a $40 million hospital product line business within Cooper Surgical. So, we're happy with the progress we're making there.

As far as guidance, the guidance that we have given reflects our assessment of the recent business performance we had, as well as market trends. It calls for $920 million to $960 million in revenue in 2007. With CooperVision contributing $780 million to $810 million, up 6% to 10%, it acknowledges our limits of not being a major participant in the silicone hydrogel business, which is about 23% of the market or a $1.1 billion market right now.

And not really participating in a big way until the latter part of 2007. It also calls for Cooper Surgical to contribute $140 million to $150 million in revenue next year, up 12% to 20% above the current year. And earnings per share, excluding the callouts or the non-GAAP adjustments of $2.90 to $3.05, and stock option expense of $0.30 to $0.35, and the GAAP earnings per share of $1.55 to $1.90.

The last thing I want to comment on before I turn it over to Steve is synergies expected in 2007. We're working on the two primary large areas of the integration, which will complete the three year project of integrating CooperVision with ocular. And that is about $25 million in savings that will result from the completion of the distribution consolidation where we are moving from the 21 locations in the U.S. and Europe down to five by the end of 2007. And we're certainly making good progress there.

And then the conversion onto Gen II, which will save us around $12 million to $15 million. Keep in mind, in the case of that conversion, while we're ahead of schedule with seven to eight months of inventory, it would require that we make the product in the first flow-through inventory before we see the benefits. So most of the benefits of that $25 million of distribution consolidation and conversion will show up in the latter part of 2007 and really move into 2008.

With that, we feel we will have exceeded the $50 million in annualized savings that we had targeted. And in addition, there will be in excess of another $10 million in tax savings brought about by a favorable effective tax rate. And with that, I'll turn it over to Steve.

Thanks, Bob. Good evening and afternoon, everybody. Fourth quarter gross margin as reported was 59%. And as Bob mentioned, it excluded -- if you exclude the $8.7 million of identified items in cost of goods sold, it was 63%. Those identified items are principally production startup costs and acquisition and restructuring expenses. The 63% is the same as the fourth quarter last year on a comparable basis.

Production restructuring expenses and inefficiencies related to the implementation of the ocular integration plan continue into '07. And we'll begin to experience efficiencies in the second half of the year, as we've mentioned earlier, as we flow through the inventory for the products that moved on to the Gen II platforms. Peeling margin back and looking at CVI, our vision business. Excluding the identified items, the gross margin in the quarter was 64% and this is up from 63% in the fourth quarter last year. While the margin is basically comparable with last year, there are product mix changes that we've commented on.

Specifically, our specialty products increased in constant currency from 50% to 52% of our soft lens sales. Toric lenses have increased from 33% to 36%. And single-use lenses have increased to 14% from 11%. The various categories drive different gross margins, so it can have an impact just from mix year to year.

As Tom -- as Bob noted, our CSI business, our surgical unit, reported a gross margin of 58% for the year. 57% last year. In the quarter, it was 58% and 59% last year, again. Again, product mix changes will affect surgical from time to time but good comparable results from year to year.

Looking at SG&A expenses for the Company. Selling general and administrative expenses as a percentage of sales was 44% in the fourth quarter. That compares to 35% in the fourth quarter last year. And then we have to look at the stock option expenses, and those other expenses that are not comparable between years, which also included the corneal health product phaseout costs, distribution center consolidation costs, as well as acquisition and restructuring costs, and litigation expenses associated with intellectual property and securities litigation. This is all articulated in the press release today, in quite a lot of detail.

These items totaled $9.6 million in the quarter. And that represents 4% of sales. And so on a comparable basis, this year was an increase on a percent of sales by about 4 percentage points. That reflects spending on new product development, new launches, not R&D, but new launches, marketing spending, as well as timing differences between period on administrative expenses.

Moving to R&D expenses. This year, they were 4% of sales. And that's an increase from 3% on a comparable basis in the fourth quarter last year. And it reflects our continuing product development activities, as well as clinical trial expense in the current year, which is primarily associated with our new silicone hydrogel products. That sums down to an operating margin for the Company of 10%. And when you add back the specific items that we've gone through, that would add back another 8% to sales. And this adjusted margin of 18% compares to 23% in the fourth quarter last year on a comparable basis.

Looking at the vision business unit from an operating margin perspective, as reported, it was 12%. Specific items impacted operating margin by 9%. And on a comparable basis that adjusted operating margin of 21% compares to 25% last year. Affecting the current year are unfavorable currency movements, manufacturing inefficiencies associated with the integration and spending on new product launches and capacity increases.

If you look at the surgical group, the operating margin was 19%. And before stock option expense it was 20%, which compares to 24% in the fourth quarter last year, after adjusting for last year's restructuring spending that was in the fourth quarter. For the year the margins for the surgical group were 20% and that compares to 18% last year. Again, a very good year for the surgical business.

Looking at interest expense, interest expense at $100,000 from the fourth quarter last year to $8.5 million. And this reflects higher interest rates and higher borrowings, which funded our CSI acquisitions in the year, Inlet and Neosurg. And the increases were substantially offset by a positive impact from our refinancing that we did in the first quarter a year ago.

Looking at income taxes. Income taxes for the quarter was -2%. And that simply reflects the cumulative effect of decreasing from the projected tax rate of 12.3% through nine months to our fiscal year actual rate of 9.7%. The true-up is all in the quarter as you change those rates. The rate decline overall for the year reflects the inclusion of discreet certain tax benefits that are recorded in the quarter on a -- as a period basis, as well as an increase in business and lower tax jurisdictions. Going forward, we predict 2007 tax rate to be in the 13% to 15% range. Net income overall was $13.6 million or $0.30 per share, with the $0.37 added onto that for the special items that we've gone through.

Now let me spend just a bit on the balance sheet. In the fourth quarter, our day sales outstanding were -- was 63, and that compares to 62 last year. And the increase is predominantly due to the foreign exchange swings between years. Overall, we expect the DSO's to stay in the mid 60's on a go-forward basis. Months on hand for inventory was eight, and that compares to 7.7 months on hand the last quarter and 6.5 last year.

And this is consistent with our expectations as we built inventory to support our new product launches and prepare for our distribution center consolidations. We should expect to continue to see that inventory levels consistent around that level through most of the year as we consolidate the distribution centers. And then you'll start to see it come down a bit as we're able to take advantage of the efficiencies of fewer inventory locations.

Capital expenditures were $26 million in the quarter. And for the year, they were $155 million. We additionally financed $23 million of capital equipment through operating leases in the quarter. And those leases related primarily to distribution, as well as some production equipment additions.

Capital expenditures again are primarily related to our capacity expansion for single use in silicone hydrogel lenses and as well as our cost reduction initiatives and some IT projects. Our estimate for next year is to have approximately $150 million of CapEx spending, which is slightly down from this year. Overall in the quarter, our net debt decreased $12 million. And overall for the year, it increased $60 million. The increase was predominantly to fund the Cooper surgical acquisitions and a small amount related to the capital expenditures. Cash flow from operations remained strong at $44 million for the quarter and for the full year it was $163 million. I think that's enough numbers for now. I"ll turn it back over to Tom for some Q&A.

Well operator, we're ready for Q&A.

[OPERATOR INSTRUCTIONS]

Milton? Milton Hsu?

Hi, this is Jared in for Milton today. Just a couple very basic questions for you. Could you break down the daily disposable sales in the quarter on a regional basis, highlighting the United States and then versus Europe and Asia-Pacific, if you could.

If you wait for a second, I think I can do that. I think -- do you have that, Bob?

Yes. The daily disposable sales for, worldwide, of course we have that. For outside the U.S., daily disposables for the quarter were $23.7 million And $86 million for the year. U.S., of course, is a nominal piece of that. Only, currently, $700,000 in the quarter and about $1.9 million for the fiscal year.

Okay. Great. And --

But today the market for the one day is less than 10% of the U.S., about 8%. But about 40% outside the US.

Okay, excellent. And then for the o-U.S. breakdown, what can I assume for Europe and Asia based on that $23.7 million?

The -- Europe, let's say Asia -- let's see if I have it. Europe of that is about $7.4 million for the quarter. And almost $26 million for the year.

Guys, it's Milton actually. Tom, as just one last follow-up here. As the dailies business gets -- becomes a more important part of your overall sales, can just talk about the competitive landscape in Japan 1-Day Moist from J&J, and whether or not you're happy with your distributor there? Thanks.

Well, if we're not happy with a distributor, I'm not happy with my business because we have our own -- our one-day product is sold by our direct sales force in Japan. And of course, Milton, for about six months of the year, we really didn't have a competitive product in that marketplace. On the other hand, Moist, we think it's a pretty good product. It's highly priced. It is a premium priced product over, certainly, our product. I think it's premium of 25%, isn't it? At least 25%. I don't have -- we don't have any comparison data.

I can't help but believe that our product is going to perform very -- is going to look very good to it because we've done clinical studies comparing it to the other J&J product. And we believe we have a more comfortable design than they do. And we certainly believe we have a much better, more comfortable design than the Ciba product. Understand, Milton, that J&J is big in Japan, in Asia-Pacific. But they are not the leader in the U.S. or in Europe, where Ciba is the competitor that we have in both those markets.

And quite frankly, that's not the way that we're looking at it as competitors. We're looking at expanding the market in the U.S. We certainly are going to compete in Asia-Pacific where the market is so highly driven by daily disposables and growing, by the way, versus Europe where it's growing also. It's 38% of the European market. When you look at the northern European markets, it's much higher than that. In the southern part of Europe, daily disposables are not very large. It's not a large part of the business.

In the U.S., our objective is to move a market, not just compete in a market. And so it's a completely different objective. And I think it's going to come down to execution. And convincing doctors that it is the best option for their spherical patient. After all, it doesn't take a brain surgeon to figure out it's more convenient, it's better ocular health, they all know that.

But the barrier -- and by the way, more comfortable because you're replacing a lens every day. You're not taking a lens out, and trying to clean it the next day and hope to God your patient is compliant. So, it is using common sense and quite frankly, showing the practitioner from the patient's standpoint the costs to the patient today, because of the premium that silicone hydrogels get with the added solutions, makes it a push.

And a few years ago, that wasn't the truth. The fact of the matter is a single-use option was almost twice as expensive as a single-use lens. The single-use market, the costs for single-use lenses have come down. The costs for the two-week lens competitors, the silicone lens anyway, have gone up 25%. In the case of J&J, it's more than that. It's 60%. So I think we got a story to tell.

Joanne? Joanne Wuensch?

You said that there are some -- that the silicone hydrogel lens is more difficult to manufacture than you would have originally anticipated. Could you expand on that a little bit, I mean a lot of that actually?

Yes.

Go ahead.

Well, as far as silicone hydrogel lenses are concerned, as we know, this is -- there are a few things. One is, it's a different material. And two, is it's an entirely different manufacturing platform. We've -- we really have been at this for around 12 months now. We initially launched the product in December of last year, Biofinity in Europe. And of course, that's one thing to go on a very limited basis. But another thing to expand it into full commercial production.

So, like anything else, and I think many of us know the history of some of the other companies have had a number of starts/stops. There are days we come in and we're making progress, and another day we'll come in and all of a sudden, the production line will stop and we'll have to analyze why it is. So the long and the short of it is we -- there are three driving factors as to what is going to cause up to ramp-up.

The three include; The fact that we're going from one line to 10 line. And on that we can be highly confident that by the end of 2007 we will have 10 lines in production. That's just a matter of getting equipment in, and we go to the plant you'll see all the equipment is laying there. So that will certainly lead to more capacity as the year progresses.

The other thing has to do with the refining the process, so that the equipment is working a lot more. Right now what happens is one part of the line goes down, and everyone runs over to that -- the equipment stops in total. And that's called the efficiency or the utilization. And then the third piece is yield. So the combination of, as we get better, yields will go up. Meaning the number of beginning units and the number of ending units we come out with. As we get more focused, our efficiency will go up, meaning the percentage of utilization of the equipment will be down less.

And we are doing things such as taking lines -- a line and dedicating it to the R&D people to say go tinker with that line and improve the process. And then we move it over onto the production line. So that process will continue. Yes, it's proved more challenging both because of the material as well as the -- just the normal startup process. We know we're headed the right way. It's just a matter of getting there. I don't know if Tom or Steve --?

Yes, I just want to make one other comment that we certainly are producing enough lenses for our European customers as well as our U.S. and Australian customers. And we are adding some customers as we go along. It's just that we can't allow our sales force to start selling this lens until we build up more inventory. But it's a learning curve. And it's a slower learning curve than we originally thought. And I not the other frustration is, one day or one week, everything is going a lot better. And then all of a sudden a problem creeps in. And the -- as Bob said, we have to shut down the equipment or the line until that is fixed. And that has been a problem in the past. It's not so much a problem right now. But it has been a problem.

So just to clarify, you do know how to manufacture a silicone hydrogel lens and --?

We're selling lenses.

There's a lot of days -- we're good, we know how to manufacture it.

Volume.

And then it doesn't go off.

The volume.

And the other benefit, too Joanne, this is Steve Neil, the other benefit is what Bob mentioned. Now that you have more lines up you can dedicate one full line to R&D. And they're going to not approach it to get a unit out, but approach it to make the line more efficient, better flow-through, etc. And when you only have one production line up or even two, you don't have that luxury. So, it is a learning curve. It's kind of like a sawtooth on a saw. It's up and down, up and down. It is directionally appropriate, it's just taking longer than we would have anticipated. And frankly, we've been on a production volume line now for only three months. So we're making good progress, just not as fast as we would have originally anticipated.

How many lines do you have up now?

Three.

Three lines. We have three lines physically on the floor that are operational. And some of them -- one of them we've had dedicated to R&D. As we've -- as we go from three lines up further over the next three months, R&D will get another line. And we basically will have two facilities, one of which is totally dedicated to manufacturing lenses for inventory and the other which will include an R&D line to tinker with. They'll have that upwards to one year.

Okay. And then a follow-up question on this topic. Previously, you were talking about $40 million in silicone hydrogels next year. What are you thinking in your current items?

Well, I think what we're not going to do is get everyone so locked in on one number. Yes, we've taken our guidance down. And there is considerably -- there is a range and the range is too broad to want to lock in on one number as far as -- the $40 million is conceivable. But we're not betting the ranch we're going to get this $40 million. I don't know if Tom wants to amplify that --?

I think that's accurate.

Yes.

Okay. I'll go back in queue. Thank you.

David Maris?

I've got a few questions. One is, though, just the outlook of the business. Your business isn't that much dramatically different than your competitors. And so what have you done in the last year to and it appears from today's guidance not a lot. But what have you done in the last year to better be able to predict your business? Because everybody's going to do the same thing after tonight and kind of say, well, this new number that you're giving is sort of like the numbers we trusted a month ago, a quarter ago, three quarters ago. What's the difficulty, is your business that much more difficult and if so, why not give wider ranges? Or it comes down to what changes are you making to kind of doing to do one of the core things that management should be doing to do it better?

There are two things. One is if you look at the market the last two years, we would not have predicted the market to have gone from $338 million in silicone hydrogel to an excess of $1 billion in a two-year period. So the market has changed rapidly and dynamically. And of course, we don't have the capacity and the product to fill that market right now or certainly the capacity.

And two is we've always said that ramping up silicone hydrogel is a new manufacturing platform, it's a new material. And like it or not, that's part of the risk of a forecast when you get into a major shift in your product line and that's what we're talking about. Not only to Cooper but to the entire industry. So typically, the industry, if you look at it over a 20-year period, has been a lot more predictable. We don't have major shifts such as a 23% of the world market shift dog new technology.

By the way, I should really point out this is not a world phenomena. It is really a U.S. phenomena or North America because 75% of the silicone hydrogel is mania that exists in the US. Whether or not that will continue, we can all debate that because we know that if health is what we want to talk about, there's nothing better to talk about than the single-use, throw-it-away market. And that's where the Europeans and the Japanese certainly have it way ahead of the American population. Whether or not --.

Well, if I can interrupt for a second. I'm not trying to that it's not -- hasn't changed dramatically. I'm saying is that it should have been slightly more predictable a month or two ago or quarter ago. But I'm more focused on from the quarter-to-quarter base, are things -- that trajectory of the market changing you knew a year ago. So, are you doing anything different or Tom, have you said, "well, look, I need different operations people," or "I need to fund finance more so they can do a better job at this"? Is there anything internally that you're saying, "You know what, we really need to do a better job at forecasting"?

Go ahead.

Let me take a shot at that, David. First of all, it's an excellent question. I think you go back and look at the root causes. In my mind there's two root causes. One is the number of variables that you deal with. In if you go back and look at history, the chang over from the card blister the strip blister, the impact in Japan, the whole silicone hydrogel and the ramp up of the product, the consolidated distribution centers, we can go on, but there was a lot of variables. And the more variables you have looking forward, the greater degree of risk.

Yes, we could have gone really broad in our ranges but I don't think that's really guidance. We did what we best predicted. But there was too many variables. And I don't think all of our competitors have as many variables. Not looking for an excuse. So, that's one.

I think the second thing is really ownership. We bought a company in Ocular. And so, the Cooper Companies today is not Cooper, it's not Ocular, it's a different Company. And so, understanding that, understanding the different markets, understanding the different marketing strategies, and then getting our people, sales and marketing, to drive it with finance, with manufacturing is a process. I believe we have ownership now. I believe we have fewer variables. So yes, it's a long learning curve.

Some of the variables that impacted us surprised us. We wouldn't have put into a model a quarter ago the fact that we would have difficulty in the consolidation and getting orders out. So I think as those variables decline and you have ownership, your accuracy improves. So, I don't know if that helps. But you got to go down to the root cause and what's causing the variables, and then attacking them one at a time. Not simple, but going down and becoming granular.

And I think as a business unit vision, as a business unit surgical, and as a Company, Cooper, that's what we've done.

And then just lastly, for free cash flow for next year, any stab at what you'll spend CapEx?

Yes, we put -- our estimate right now for CapEx is around $150 million. And that's predominantly capacity related. We're finishing off the synergy, the two Gen II lines that we identified for synergy. We're adding to silicone hydrogel capacity. So, our estimate today is in the $150 million neighborhood.

Larry Keusch?

Larry?

Larry? How about Charles [Khan], are you there? Not there. Moving right along, Benner Ulrich?

I'm here, hi guys. A couple of questions to follow-up on prior questions on manufacturing. I know you don't want to give a range for guidance next year for Biofinity but I think -- it sounds like it's safe to assume that this is clearly going to be much more back end loaded. Just wondering if you can give us a little bit of granularity on maybe where yields or power yields are now on the lines that are operational? And where you think they might be in six months? And at what level you really feel comfortable from a profitability standpoint on the lines?

I think that's the one we really don't feel confident we want to start floating yields. Because there are days we would be quoting you numbers that sound real good and days that we'd be quoting you numbers that are horrible. There is too much variability other than to say the things we can predict with a high degree of certainty is the lines coming into the plant being assembled, put into production. And that alone if you will, are going from one contributor last year to 10 by the end of the year. And the potential capacity being considerably greater in the lines as they come on because of the technology we're using. They're easier to predict. Whether or not we'll hear -- hit new roadblocks or get derailed on one thing or another, I think we would rather steer clear of that.

Benner, I would say the same. And I'd add a little bit. Our focus right now is to go out this year with 10 production lines running so we can service a meaningful number at a good profit in '08. And there's going to be a learning curve as we go. So, we're what we're going to learn on one line, it's certainly going to apply another line. So, with only three month worth of history in a production environment, we can give you any number you'd like to hear, but I think it's best for us to focus on getting those 10 lines operational and getting them to go out of the year at the highest level of performance. So I know that sounds a little bit evasive but that's what our focus is. And frankly, we're going to stay that course.

Okay. Fair enough. Just one quick follow-up. Would you -- the issues or the problems that you've run into so far that you may have corrected thus far, would you characterize those largely as engineering problems or issues with some of the raw materials?

I would say they've been both over time. There have been times where we've felt like we've conquered the material and then other days where we haven't. So I'd put a mix on to it. If I were going to say where are we going forward, it's more fine-tuning the engineering than it is the material.

Okay. Okay. Fair enough. And then a last question, as we look out to next year and assuming that we see some growth in this daily business and we're going to see some change in product mixes as new products come on board, how should we think about how those factors will affect gross margin? And what would you think gross margin could look like in the future once you have what you think is a more kind of normalized products mix?

Yes, I'll take that, take a first shot at it. I would encourage you if you're going to look at one margin to look at operating margin. Because clearly as we sell more dailies, generally a daily is in the 45% to 50% margin, and so it's lower. But the operating costs, predominantly the marketing costs and what it takes to service the daily business, are much less than a two-week or monthly lens when you get down to the operating margin. That's the focus that you want to look at.

I would not expect too much improvement in the gross margin this year only because we're going to have more daily product sales. And then on the operating margin, you could see some basis point improvements, 100 basis points plus. But again, it depends on the timing and the product mix. So certainly, as we get the $25 million in synergies, let's put it on a $1 billion base. That's going to file right down to the operating margin line that's coming out of distribution and unit costs. So, there should be certainly this year more back half of this flow-through inventory and we get some consolidation done. But into '08 you should see some significant movement on the operating margin line.

Mike Weinstein.

Hi, guys. It's actually Kim here for Mike. Can you hear me?

Yes.

Good. A couple of questions. The first is just a quick follow-up on the silicone hydrogel manufacturing line of questioning here. You had talked about, prior to today's call, an exit run rate of about $150 million in annual sales. And I know that you don't want to really kind of get pinned to a number. But as we sort of create our forecasts going forward, it would really be helpful to have an idea of what you think is a reasonable target for the year-end timeframe?

I'm not sure what -- the $150 million is --.

I wish to God we could --.

I'm not sure we would relate to that.

And annualized?

Is that lenses or revenue?

Revenue.

Revenue, in what period?

Run rate last month.

Exiting 2007. Maybe I have that number wrong.

Well, the run rate for the 10 lines that are up.

Yes. 10,000 --.

You're talking about when we have 10 lines up and running, the --.

The run rate going out of the year.

And so your question is --?

Well, I'm talking about when you're exiting 2007, you've talked in the past about a run rate for all the 10 lines combined of $150.

Yes.

That's right.

That's not -- that number is not unreasonable.

That's right.

Okay. So are you sticking with that guidance there?

Yes.

In other words, there's nothing we don't think any differently of the lines we're putting in place as far as their potential capacity, if you will.

Okay. And I -- but what I'm asking is, will they be at that point by the end of fiscal '07 still, or is that kind of up in the air at this point?

Each line -- let's put it this way. The from beginning to end, learning curve of a line is going to start off around 12 months, and it will shorten for each new line as we move down the curve. So as we get -- let's say that 10th line will not -- it will need at least six to eight months to fully come up to speed with initial targeted efficiency, if you will.

And that's our current estimate based on three months.

So all 10 lines won't be running at the theoretical objective that we have set for ourselves.

Okay. So what my question is when we do exit fiscal 2007, what would you anticipate that that point in time will be the run rate for the lines at that point in time, at that capacity?

It will not be too far off of that -- the number you've said.

But again, it's based on our experience through the year. I don't think we want -- at least from my perspective, I think it's very difficult as we look out 11 months here, Kim, to say where we are in the process. But certainly, we believe we could be capable at that level, and we just got to update it as we go through the year.

Well, but -- let's get a little specific here. We -- what we think our capabilities will be and what they are going to be are maybe two different things. We expect,and I'll say it again, we expect that we'll be in a run rate of about $60 million. About -- little over 5 million lenses a month at that point. That would generate $150 million of sales. So, that is where we are today and it could change. That help?

That's helpful. I think what you're saying is basically we could still get there but we'll see as we move through the line.

That's right.

And then my other question is actually over on the sphere side. Coming out of the quarter you talked a little bit about slower than expected uptake of new product. And that's an item that as we look into 2007 that we have to think about as we forecast. Can you help us out in terms of your growth expectations for fiscal 2007, and that's excluding the dailies? Are you looking for growth there or is that going to be a more flattish number as we move through?

The question is back out the one day --.

Right. Back out the one day, and would your guidance --?

And what's going to be the growth.

The sphere. The spheres?

Yes.

Spheres would decline.

Okay.

Even with Proclear, thank God for Proclear. Proclear was up 30% for the year, 20% I think in the quarter would have been higher obviously if we would have gotten everything out in the U.S. in the quarter. But the point is that I think the best you can expect is that. The only shining thing that might be going on is there's absolutely a sign that's a silicone transition in the U.S. has really slowed down. And certainly the last two quarters. But I've had this optimistic view before and I'm not going to press it anymore. But it appears that there's a definite slowdown in the offices in moving people away from their older lens into silicone. But we'll see where it goes. But in the meantime, the guidance we've given you assumes that our overall sphere business will best be flat, probably down a little bit. Okay?

Okay. And then just one last one actually, in terms of your overall revenue guidance for fiscal '07. What market growth rate are you assuming? You're assuming 8% there?

We are assuming that we will grow -- we did 738. We think if all of the problems would have happened we would have been closer to --.

Market.

The market growth?

The market growth.

Market growth next year. Yes about 8%. But it's a guess at this point. I don't like what I've seen for the last couple quarters. But frankly, I think a lot of it has to do with inventory adjustments over 2005 with the silicone products. But we'll see.

Chris Cooley?

Three quick questions if I can. First, just in regards to the various new product pipeline -- or timelines that were set forth in the third quarter call, or updated last in the third quarter call. No specific mention of those in the actual press release this time around. I just wanted to -- as we look out into the '07 horizon, has there been any slippage in terms of those expected dates versus what was last provided in the update with the fiscal 3Q call Ex the silicone hydrogels? Maybe it makes it easier to address that way.

Chris, it would be helpful if you could list the ones that you're concerned about.

Just actually, would prefer to know if there's been any change just in general out of the Proclear or the silicone hydrogel side?

The terms of the product launches, of course we have indicated what we're expecting in 2007 and 2008. And the one, of course, big debate we had was on the Biofinity toric. And that, we've indicated, is anticipated toward the end of calendar 2007 or into 2008. So yes, on that, we've decided that we're going to use those lines that were going to be targeted. And by the way, we don't have to, as I think I indicated previously, we don't have to make a final decision. But our current thinking is we're first going to address capacity issues dealing with the sphere, which backburners Biofinity toric and does in fact delay that. As far the other silicone hydrogel that we're working on, we still are working on that two-week variety. And I think we've indicated that in 2007 --.

Yes, near the end of the calendar year.

Near the end of the calendar year, we plan on launching a second family of products if you will in silicone hydrogel lenses.

And there wasn't really any other significant changes at all. And we added, this year, just to comment on Proclear in Japan. It's not an '07 or likely it could be the end of '08, early '09 as we're filing that. And that's subject to regulatory approval. That's the new I would say product that we've put out that wasn't there in the previous quarter.

Okay. Great. And then second question I would have is as we look at your guidance for the total top line, specifically at CooperVision for 2007, it would help if you could give us granularity regarding what your currency assumptions are? And what maybe a ballpark rank you expect to get in aggregate from all new products? Because when I look at your revised guidance, what I'm effectively seeing is about a 5% reduction in top line and about a 15% to 25% reduction in EPS depending upon the range. And at the latest guidance update that you provided us, you actually should be picking up, from our estimates, about 4.5 points to 4 points from currency. And so, even if I back out what in our model was $30 million for silicone hydrogel sales in fiscal '07, I'm just trying to figure out with the additions of the new products, what product offering specifically is getting further erosion relative to what you had thought previously or maybe we are being too bullish on new product contribution assumption in the '07 horizon? Could you maybe just help us back in a little bit on those points?

Let's start off, the currency assumption is -- we don't try to forecast currencies up or down. It is where it is today. So, when we built the guidance model it was predicated on today's exchange rates.

Today, Bob, as in December 12 or as in the last call?

I haven't paid attention to what's happened --.

It's the beginning of November, Chris, and just the -- you get the top line benefit if you have international sales with a weak dollar, but we source quite a bit of product from the pound, which is also almost near $2. Started out a year ago at $1.75. So, you're getting a play off of currency pretty significantly. You might see some growth on the top line. You're going to get hit on costs.

Fair enough. And then to the new product aspect of that question?

Well, part of it is we debate what is a new product and what is a line extension. So --.

Let's just call the products you outlined in the third quarter call as new products versus the line extension. We'll just roll them all up and say those versus the products that were in the market prior to the issuance of that guidance.

And what's your question specifically, Chris?

What portion of our revenues contributed by new products.

New products versus -- when I look at the growth, or the top-line number, when I think about fiscal '07 over '06, if I back out all this -- the new offerings that you had slated for us there after the following third quarter, what is that shall we say base business? What would that have contributed or how would that have declined relative to the contribution from these new offerings? Whether it be a geographic expansion, a line expansion, or an actual new product?

I'll take a shot at that, Chris. We look at it more on a product category basis. So, you can have some overlap of products. Certainly, the biggest impacts of new products in the latter half of the year is going to be silicone hydrogel. You're going from a very, very small base. A lot of the products that we have, if you take a look at Biomedics XC, we got roughly 2.5 quarters worth of that.

So you're going to get some year-to-year growth on some of that product. But we tend to look at it in categories. And the best way to look at it for us, again, is single-use category, we think is going to grow significantly. We think the two-week and monthly sphere is going to be inhibited in its growth.

Certainly, got some back-end growth with the Biofinity product, but because of the dynamics in the marketplace in the U.S., predominantly that's at risk. Toric market is going to grow outside the U.S. certainly and not as great in the U.S. In fact, we would expect to lose some share until we have a Biofinity toric out there. So again you look in categories. I think the growth is fed or the benefit comes out in new product but there is some category erosion in some of those new products, Biomedics XC would be the primary example of that.

And maybe I'd just add a little color by saying to the extent we call a new product -- this is a liberal definition including our strip blister product, that more than 20% of our product sales next year will be so-called new products and/or the one-day thing, which is filling our strategy there. And of course, we will be expanding the one day with Proclear one-day, and we launched the toric one-day in Japan. So there is a fair amount of shifting or refreshing the product line that's ongoing.

And then you talked about the leverage on changing the top line and more of an impact on the bottom line. Remember one of the things we did change is we're not going to realize as much benefit from the distribution center consolidations because of deferring that out. We are going to continue to invest in R&D as we come out with new products. You've got clinicals as well as development costs. So there is some below-the-line spending. So you do have some, I would call, it deleveraging as you go down to the EPS line versus the revenue line. So it's not linear. Then your next question is when you start going the other way, should you get some leveraging? The answer is yes.

Fair enough. And then last question, I'll get back in queue. I just wanted to follow up to Tom, on his comment on the dailies. I probably don't look it, but having been around for quite some time in this space and just flipping through my [Tylers] here tonight, if I look at Oasis and I assume patients are compliant, pricing into the Doc on an out-the-door basis is about $162. If I look at one-day moist, I'm looking at $468. Now I realize retail pricing is different but I'm just trying to -- cutting to the chase --

Whoa. Whoa, whoa.

Let me finish the question. My question is where do you think the tipping point is in terms of profitability for the OD? Not saying that -- from a discretionary spend the consumer says it's more economical or an equal push. But what's the price point for an annual supply of lenses where you think the OD makes more money now in the states on a daily than they would on a silicone hydrogel?

Well, I think, Chris, that about 300 -- we're selling and forget Proclear. Proclear is going to have a different price point obviously. It's going to be like Moist versus Biomedics, our Biomedics one-day. Biomedics one-day will have a price point to the doctor -- just a minute -- of about -- about $27, let's call it $27 to $28 for a 90 day. For 90 lenses, okay?

Okay.

So you multiply that, of course, by 8. You got it?

Yes.

And round it out, call it 30 if you want. That's $240 to the Doc, okay?

All right.

Now if you're buying, if you're buying Oasis, right, and you're going to buy -- that's a two-week products, right?

Right.

So you're going to buy --

Eight boxes a year probably.

Probably eight boxes a year at $20. Okay? So that's $160. Delta's $80, right? Okay? Now go out and try to buy solutions, a compliant solution. You got to buy probably about eight bottles a year, something like that if you're compliant. And you're going to add at least $80. In fact, if you can find a $10 bottle of solution on the shelf for a patient,Complete or any of those, let me know because I've never seen it. It's always more than that. That's what I'm saying. It's about a push to the patient. But from a doctor's standpoint, he's got $160 to play with. Right? He's got $240 to play with on the other side. So, he's going to mark up each -- he can mark them up any way you want, but he'll make more money off marking up $240 obviously. And he's going to mark up $160 because he doesn't get a cut on the solutions. Drug store gets all of that. Right?

Right.

So if you look at it that way just from a cost standpoint, it's pretty close to a push. It wasn't true, a year ago -- two years ago before you had silicone hydrogel products. In fact when Acuvue Advance came out you probably didn't have a big delta either because it was more like $15 or $16. But I think there's a bigger issue here. The reason we're making -- we believe there's an opportunity, is all of the press on solutions. That's not positive. It started with Ciba back a year ago with their plant in Quebec. Then it happens to be to B&L, now it's happened with AMO. Quite frankly, why in heck do you want to even screw around with solutions? And if you get a new lens every day it makes all the sense in the world. If you're J&J and Ciba you're not going to go out promoting your six week lenses. You've got a franchise to protect, I think, in the U.S. And I'm talking strictly in the U.S. Now, how much of that market can we move? Execution is the issue. You've got to change prescribing habits.

Does that --?

And that isn't the easiest thing to do and I'll be the first one to admit that. But it is an opportunity. And I think that's where I'm coming from. It was not an opportunity a couple of years ago for the things that you're bringing up.

The only --?

The other one that I used to hear for many -- 10 years ago, was always the concern about the single-use patient not being very compliant. Well, the data does not prove that out. The data apparently shows that the single-use patient is pretty darn compliant. And we know that the two-week patient is not very compliant.

Does it take a significant DTC spin to convert the patient or can you continue to just focus on the Doc? And then I'll get back in queue, thanks.

We think it's, number one, focusing on the new patient. Because the new patient makes all the sense in the world. That's the easy sell. And secondly, it takes time to sit down in front of a doctor and explain it and get through the barriers. And I think that's where you do it. I think if patients knew that their overall cost is very similar for a single-use lens, a lens they can throw away every day, and so much more convenient. From a doctor's standpoint, there's obvious ocular health, you don't have to sell them on that.

J&J used to try to sell that, anyway, about seven or eight years ago. And in fact you think all the Asians are stupid? You think all the Europeans are stupid? I don't think so. On the other hand, another interesting point. Now, I didn't get into it on the call, is what is going on in the silicone market. I think it's pretty interesting to see the silicone sales literally sales in Europe actually decline in the third quarter over the second quarter.

And the reason I think is the fact that the single-use lenses are continuing to gain momentum in Europe. But you tell a complete story. It's like any other sales. How did the Japanese attack the market with the hybrid cars here? With the price of gas versus the SUV's, everything else. Leaders in this market are ones that try to change markets, be innovators in a market. And you have to test it and see if it will work. And that's why I'm cautious on it. It's not the easiest thing to do in the world but it's the right thing for Cooper to do. And I think you would agree to that.

Thanks. Appreciate it, Tom.

Andrew Swanson, please. Andrew?

We were just wondering why you're basing guidance for next year on 8% market growth in a market that's essentially flat. Is silicone hydrogel inventory reversal enough to explain that discrepancy? And if not, what gives you confidence that this market moves again as we look into next year?

Well, I think that's a good point. Remember, part of our sales this year is impacted in the fourth quarter by sales that obviously went into the first quarter. That's going to be my first answer to that. The second one is, that we have introduced, if it's not the last part of the year, certainly into next year, a heck of a lot of new products. And thirdly, I wouldn't count on a flat market in the quarter dictating what the market is going to do next year. I think somebody's already asked me the question. I think it is an anomaly. It's one to pay attention to. And is there a risk there? You may be absolutely right. It may be a trend. We don't think it is. We think it is an anomaly. But we believe the market will go back to 8% growth. By the way -- go ahead.

Another question that has been asked a number of different ways, I'll another try one. But just if counting lines is not necessarily the best metric to think about as we watch the manufacturing scale up on the silicone hydrogel lens, can you give us some metrics that we should be tracking over the course of the year that are going to help us get comfortable that these learning curves that you're talking about are being met and aren't slipping? What is a metric that we can point to? Is it yields that we should be listening for over the course of 2007 to get comfortable with the fact that you're starting to meet your targets?

I'm going to give two obvious ones and I'll let somebody else speak. The first one is obviously sales. And the second one is going the global launch because you're going to know it right away. Because you're going to see it at meetings. And your own due diligence, you're going to find out that our salespeople are out trying to sell silicone product.

And where in the hell are you going to sell it? You're going to sell it here because that's where the market is. 75% of the market is here. Last quarter, 72%. The quarter before that it was 70%. A year ago it was 66%. This is where the market is for silicone hydrogel. And this is where we're going to spend most of our effort. And you'll see it from us, believe me, you'll hear me screaming and yelling and bragging whether it happens. But let me --.

Yes but the only thing I would add to that is obviously we -- when we report quarterly, this is a hot topic. And if you kind of look at what we've been doing this last year, a lot of it was trial and error and the fact that half of our capacity was sitting over the last two months in an R&D setting where we gave it to the R&D people.

Having a plant that is dedicated to production is going to make it easier for us to tell you, let's say, at the end of the first quarter that we're either headed in the right direction or we're not headed in the right direction with a lot more confidence than we have today. So I think the learning curve that we're going through and would anticipate the next six months will have us a lot more enlightened. And when people were saying, "well gee, there seems to be an awful lot of moving parts. And why is your guidance so far off?" Then I think that will be one of the other factors we can narrow.

On the year-over-year industry growth, I tend to think the third quarter calendar year a year ago was a pretty robust quarter compared to the quarter that preceded it and the two quarters that came after it. So, there may be some degree of anomaly compared to how this market has grown the last four years. With constant currency being 8% for the years prior to last year and last year having been 10% in constant currency. So we've had a pretty solid track record in terms of industry growth. I'm not sure the dynamics have changed so radically that that variable of is the market going to move back toward the 8%; should be that much at risk. While, I would say there was an awful lot of new products coming out over each of the prior two years ago.

And then just on the toric side, you talked about it's now going to be a 2008 launch for Biofinity on the toric side. Silicone hydrogel torics accounting for 35% of fits today. Where do you think that number is in the first half of '08 and what does that trend do to your toric business over the course of 2007?

Of course, silicone hydrogel torics are moving up that curve slower than certainly the spheres did. While it is in the United State moved up to what you quoted. In terms of our growth, our growth has been largely contributed by sales of torics outside the U.S. We indicated 11% growth for the quarter, a 13% growth for the year outside the US. The market for toric growth, aside from is it silicone ride hydrogel or not silicone hydrogel, has a lot more upside potential outside the U.S. since this market is much more mature. It really started in the early 1990's. And then if we look to Asia for example, we're early on in terms of where torics can go --.

Let me give some good data here. The market in Asia-Pacific is less than 7% for toric. So, you've got an upside. But let me give some data here, so we get it all out of the way. Because that is the problem here. We keep looking at the U.S. and there's absolutely no doubt that we have erosion in market share in the U.S. for silicone hydrogels. But we look at on a global basis, that's absolutely not what's going on.

If you look at the worldwide market, year to date, Andrew, the market is up 10% for torics. Okay? In the U.S. it's up 15%. In the rest of the world, it's up 6%. And by the way, the breakout is about 50/50. It's a good -- it's a little different than that. But just put in your mind it's about a 50/50 breakout. In the quarter, in worldwide, the toric market was up 9%. The market in the U.S. was up 10%. The market outside, in the rest of the world, was up 5%.

Now look at Cooper. Cooper in the year, I gave you the year first, our global business was up 6% for the year. Our U.S. business is flat. It would have been up obviously a little more than that if we got everything out into distribution. But the rest of the world, we're up 13% versus the market up 5%. If I look at the quarter, our quarter business total was up 3% in torics. U.S. was down 2%, like I said, it would have been flat, maybe up 1% if we got everything out the door. But the rest of the world was up 11% with the market up 6%.

So, we're doing fine in the rest of the world where there is more opportunity for what I would call toric penetration, than in the U.S. In the U.S. the toric market is more mature. Not an excuse, it's just the way it is. And we're going to be -- with our initiative of having three new products for Proclear in torics, one in Japan, two here in the U.S. and the fact that I think we have a pretty good campaign with Biomedics toric this year over the leading silicone hydrogel, I'll say it that way.

I think we have a pretty good opportunity to hold our market share certainly on a global basis. And in the U.S., I think we can start to have an impact on any kind of erosion that we had last year in our market share. We still own pretty close to 40% of the U.S. toric market anyway. I don't know if that helps.

No, very much so. And as a last follow-up. What do the delays in silicone hydrogel mean in terms of one-time charges? I think -- should we continue to assume a similar level of one-time charges at this point now throughout '07 and into 2008? Or when would you expect those to resolve?

Excellent question. I'm going to let the CFO answer that. He ought to be in a position to --.

I'll give you a shot, Andrew. Certainly, would expect as we go forward on the distribution costs that they'll start to decline. You knock each one of the consolidations off one at a time. We'd expect to incur them as we go through the year but again, on the declining rate. Silicone hydrogel, as you go up the learning curve and the yield curve, your manufacturing costs on silicone hydrogel, as far as being unusual and startup related, will decline.

The one thing that is out there as we complete the transition to the new manufacturing platforms is to assess whether there is any redundant equipment. We continue to look at that. That's a noncash charge. That could be in restructuring charges. So, that's dependent on how we get through the process. But overall, you should see the costs decline. Certainly, there won't be any corneal health product line phaseout costs.

So, you're going to start to -- you're going to see the callouts as we call them throughout the year but they should be on a declining basis as you knock off those variables, as I commented earlier, from a forecast perspective. So again, we'd expect them to decline. Restructuring expenses are still there as we get to the end of the transition and identify what equipment can be absorbed and what can't. The target, though, still is to have nominal if any of these costs to go outside of the year.

Now, clearly we have the litigation expenses, you're going to have the stock compensation expenses. But the integration-related expenses, we still are predicting that they're going to be virtually eliminated as we go out of fiscal '07. The one thing that we've held true on is this truly is a three-year integration and we are going to complete it substantially in three years. Hopefully, that's helpful.

Thank you very much.

The guidance that we've given you, of the callout or the non-GAAP adjustments , $0.30 to $0.35 is stock option expense and $0.85 to $1 is the other callout items, which would include a lot of that effort in not only in the U.S. but also in Europe, as well as rounding out the startup. And the legal portion would be a smaller part of that.

Charlie Olsziewski.

Most of my questions have been answered. Just two questions kind of housekeeping questions regarding Proclear's contribution or percentage of the toric business currently in multifocal?

Let me look it up right away.

Yes.

It's 20% -- Proclear is 20% of our total.

Worldwide. And it's currently --.

That's of the total franchise, though.

Yes. We'll break the other out for you now.

The franchise. And Proclear's contribution is -- Charlie, it was what percentage of our toric business is --?

Is Proclear and what percentage of your multifocal business is Proclear?

Hold on. I can figure that out pretty quickly.

Multifocal, I have that number, Charlie. It's approximately 50% of the multifocal business. Actually, slightly more.

Yes. And of the torics, It's about 14%.

Okay. And just another little housekeeping question on the Lone Star acquisition. Is there any dilution expected from that acquisition in '07?

The transaction will be accretive by the end of 12 months. Within 12 months.

It's accretive.

So it starts being accretive in '08 or 12 months from now would be -- I'm trying to figure if it's dilutive in '07.

It's -- not by the end of -- it's not dilutive in fiscal year '07.

It's not dilutive.

It will not be dilutive. Okay, great. Thanks.

Larry Biegelsen.

First question, are you using a new material for the molds for the Biofinity?

Answer, no.

Okay. And have you changed the formulation of the Biofinity material?

No.

No, no.

Okay. Another -- shifting gears. Asia-Pacific, it seems that the growth there has slowed. Could you give any commentary on that, please?

I will. I think we've got some competitive pressures from J&J in Japan. Not in the rest of Asia-Pacific. We're doing very well. But in Japan, we've -- we really ran up, Larry, into some severe competition from their one-day product. And we're --.

I'm sorry. I wasn't -- I may not have been clear. I was talking about the overall contact lens market.

One more thing, we did about, I think it was $2 million, wasn't it?

Yes, multifocal.

Did a $2 million initial stocking of multifocal with [Roto], our distributor.

In Q4 last year.

Yes, in the fourth quarter.

I think the other factor too, is Japan is such a big percentage of Asia-Pacific. And maybe you didn't want to go there, Larry. But also, what -- the two-week product and the single-use product that in Japan are new products. We just launched the new Midwater content lens in August. And we started shipping the strip blisters in our third quarter. So, they're new products and the uptake while we're growing month on month is a little bit slower uptake. So that and the stocking order from a percentage perspective makes Asia-Pacific look a little bit at what I would call abnormal.

If I understood correctly, I was -- actually I wanted to ask about the growth of the contact lens market in Asia-Pacific. Is that also due to the inventory issue you talked about? The growth there seems to have slowed.

I don't know. I'm sorry. I really don't know what's going on in Asia-Pacific. Because for the last four years, that is an anomaly because we've gotten teen growth in Asia-Pacific over the last four years. And this year, as you can see, we don't have it. Whether it's because of the B&L problem over there that has somehow affecting the growth of the contact lens market, which might be something that's going on, I'm really not sure. You definitely have a growth of one-day products in the -- at the expense of two-week products, so you think it would add revenue growth. But it has been disappointing. What else can I say? It's definitely not silicone. There's no silicone over there to speak of.

Right. And unfortunately our database on the market is not as comprehensive as we have certainly in the States. So I think it certainly -- from my perspective to focus on, yes, we do get data. But --

That's not true.

But not in all the markets. And the point I think I want to make is that it is a market that is largely in daily, and J&J drives it.

Thank you.

Yes, there was a pretty robust growth last year 17%. So, I think just like in the U.S. we had a very strong third quarter a year ago that are part of the calendar year comps. I think that 17% growth last year is probably a big hurdle.

Mark [Mulligan]? You there, Mark? We'd better move on. Larry Keusch, are you back?

I am here. Can you hear me?

Yes.

Terrific. So, the one thing I wanted to explore if I could, going back to the third quarter conference call, you guys obviously made some comments in there about how you felt like you had overcome the challenges associated with silicone hydrogels. And at that point, you were even talking about trying to be conservative with a $40 million estimate for sales for the year. So I'm just trying to reconcile kind of what happened in the last three months. And I understand things sort of go up and down and cycle back and forth here as you try to ramp these up. But did you hit some real unexpected pothole or did you just take your data point three months ago at the -- at unfortunately the wrong time?

We hit a hell of a pothole. But I'll --.

Yes, I think it really comes back to every time you think you have it right you find out that there are new hurdles. The delay or the change in numbers, has nothing to do with the timing of getting equipment in. That is not one of the variables. It's coming in as quick as we ever expected. Really it is all about ramping up.

The one thing we decided we really had to do is take one of those line, and as much we don't want to do it, give it to R&D to improve the process. Because the quicker we improve the process, the better all the other nine lines will be. And so, that's a tradeoff, short-term for long-term benefit. And some of that is a willful decision we made on that. But quite frankly, it -- the best way to describe it is two steps forward and one back. You know the one back is going to keep coming. Just when you think you've had two great days in a row.

Okay. And then just two other questions. I'll just throw them out there. And then you guys can answer. Could you just -- as sort of question one, could you just sort of review again, understanding that the equipment has come in on time and you're giving that up. A, are you going to have the seven lines up and running by the end of January, '07? And included in that, could you also just help us understand how many shifts you're running on this? And then for Steve, as I look at the revised guidance, you went from $3.35 to $4, from $2.90 to $3.05. So you had a massive range prior to this. Now, that's been tightened up quite a bit. What I'm coming back on this one is, what's giving you the confidence to really tighten that up? And where are there elements of conservativism now as we look forward into '07 in that guidance?

We're not going to -- let's see. We're going to not go down the path of line by line, how many are we, other than to say we're headed towards 10. We will get there by the end of fiscal year 2007. We will have 10 operating lines making product. One of them may be still in R&D, probably not. But for now, let's assume R&D has one of those 10 lines. As far as the $2.90 to $3.05 compared to the previous range, of course we're -- number one, we've taken money off the table, as we've refined the top line. And a lot of this is top line driven. And two, we're is three months down the road from where we were. And therefore, we're not trying to forecast 15 months out. It's less than that.

I'll add just one comment on that it gets back to what I called ownership. Clearly, in the fourth quarter when we're planning to put together our annual operating plan. The ownership and the process that you go there, are you doing a bottoms up as well as a tops-down assessment of the year. So, it certainly gives you an opportunity to look at every single initiative that you're doing, etc. Clearly, we have three more months of history under our belts. So, I think it's a combination of things that we narrow down the range because we're more confident in where our execution is. And frankly, for those things that are more variable, we have a better degree of confidence as to our performances. So I think, again, a little bit longer term out you're going to have a wider range as you get closer, you're going to be able to pull that in because the variables are less.

Okay. And then just lastly, and again, I know that you guys don't want to get into all the specifics about silicone hydrogels. But for your internal -- the way you build your plan for next year, two questions here. One, are you -- is silicone hydrogel actually profitable for you in the model? And number two, can you sort of help us think about on a percentage basis, sort of what yield you need to get to where you bring the gross margins up to sort of the corporate average? Again, trying to understand, as you throttle back and forth on the sales how that really impacts the bottom line.

Well, I know the answer to the first one is no. So, what about the second question. And do you want to answer that? On --.

Well, we are -- it would be highly unlikely to launch a new product with the idea you're trying to make money out of the --.

First year.

Unless you don't think much of the product.

Understood.

So suffice it to say '07 and '08 were not -- let's put it this way. We're definitely not going to be making money in '07. And whether or not we were making it in the back half of '08, we'll see.

Thank you. And just again, the kind of the yield that you need to get to start to really bring the margin up?

Well, the yields to bring -- the ARP on this product is a pretty attractive ARP. It's not like a one-day product where you have to really do fine tuning to make a reasonable gross margin. A yield of -- we talked about a 50% yield objective, if you will, in the past. We do not have to get close to that 50% to have reasonably attractive gross margins.

Okay. Super. Thanks very much for the clarifications.

Sure. Right. Mark Mulligan, have you come back yet? Okay, the last question of the evening as we approach 7:00 here on the East Coast, is for Suey Wong.

I'll make it real quick here. I just have a question on the base business. Do you guys see much opportunity to be more aggressive on pricing here or your promotions to try to hold share and keep people from going to competitive silicone hydrogel products?

No. I don't think so. I don't think we've got a lot of movement to move the price up, Suey. And I would say, I thought you were going to ask a different question. No. I thought about that pretty quick. I don't think we do.

It's interesting, the competition in the nonsilicone market in the U.S. is basically Cooper. We are gaining -- you want to look at it that way, we are gaining market share in a declining market, which is better than declining in a declining market. So, that's the way to look at it. And by the way, I think that's why it's important for the two objectives I outlined to make sure that we make them happen. And that is we don't want to see any erosion on our toric business, on a global business, on a global market -- on a global basis, I'm sorry.

And we definitely want to be successful in our single-use initiative here in the U.S. Because it's going to go partner to partner with Biofinity in 2008. We are -- this is not a program that replaces our silicone hydrogel strategy. It's one that will complement it. And if we're successful, we're going to add value to the market, obviously. So we're going to -- anyway, that's all I'm going to say about it.

And Tom, on past calls, you had mentioned with the older Biomedics lines you were considering being maybe a bit more promotional with the chain accounts. Is that not the case?

Well, with the Biomedics toric I think I said that. I don't think I said that with Biomedics sphere. I said we're going to become more aggressive with Biomedics toric. As you know, we spent, and we will continue to spend an awful lot of time promoting the whole Proclear toric franchise. But we think in the chain market, especially, where the two-week torics, the two-week silicone torics are basically used. That's where a big part of the market is, that we have an opportunity with a campaign, a clinical campaign, and an aggressive campaign with Biomedics toric.

And I would say the -- if you split the market in two, the nonsilicone hydrogel market or call it the conventional hydrogel market, we've gained about 1.5% market share worldwide over the last two years from about 18.6% to about 20% now. Proclear has been a big part of that story. And also, keep in mind that in 2006, capacity limitation via the XC product or be it the strip blister were major inhibitors. So, I do think we have some continuing legs on the -- in terms of continuing to gain market share in the nonsilicone hydrogel part of the market.

Great. Thank you.

Well, thanks very much, everyone. We'll talk to you again on March 8. And that concludes our call.

And happy holidays.

Thank you for attending today's conference. This concludes the presentation. You may now disconnect.