酷柏 (COO) 2007 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to your Q1 2007 the Cooper Companies earnings conference call. My name is Rob, and I will be your operator today. Throughout this conference, all lines will be on listen-only. [OPERATOR INSTRUCTIONS].

At this time, I would like to turn the conference over to your host today, Mr. Norris Battin, Vice President of Investor Relations & Communications.

Thanks very much, Rob. Good afternoon, everybody. Welcome to the first quarter call. I have got Tom Bender, our CEO, Bob Weiss, our COO, and Steve Neil, our Chief Financial Officer with me today.

And before we get started I would like to remind you that this conference call will contain forward-looking statements, as defined by the Private Securities Litigation Reform Act of 1995, including all revenue and earnings per share guidance, and 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 cause our actual results and future actions of the Company to differ materially from those described in forward-looking statements, are set forth under the caption 'Forward-looking statements' in our March 7th, 2006 Earnings Release, and our described in our Securities and Exchange Commission filings, including the business and risks sections in Cooper's 2006 Annual Report on Form 10-K. These are available publicly and on request from the Company's Investor Relations department.

And with that, I will let Tom give you a little background.

Thank you, Norris, and hello, everyone. It is a much better afternoon than it has been for the last few quarters. Fourth quarter wasn't all that bad in revenue, but it was a much better quarter for us this quarter, as you can see. What I am going to do before I turn the call over to Bob and Steve, I will go over about four or five highlight items, and we will hopefully not take too much time. First of all, a couple comments about revenue.

CooperVision's revenue certainly met our expectations, and just so you know, historically in the first quarter, following a fourth quarter, our revenues typically at CooperVision decline about 10%. I think you can see that that did not happen this year. And I think there is some explanation for that.

Number one, I think you can all see that the silicone transitions that were going on in the North America market has certainly stabilized, and I think that that certainly is a positive for us, because we don't have a silicone entree into the two week spherical market, and won't until the middle of this year, until the summertime. And I will talk about that in a minute.

Secondly, the one-day strategy that we have put in place, and one other competitor, by the way, I think has benefited the Company. Certainly not in a big way in the first quarter, but I think you are going to see that for the rest of the year it will benefit the Company.

Thirdly, if you take a look at the chart and compare Cooper's performance on a global basis versus the fourth quarter, which is an overlapping quarter for the industry, so our first quarter and the industry's fourth quarter overlaps two of the three months, you will see that our toric business remained pretty strong. We were up 8%, and I believe the global market was up 9%. But what is not being seen very clearly is that our disposable toric business was actually up 15%, and we are pretty sure that the global disposable toric market, and of course this is the driving force of the toric market, was only up probably 11 or 12%.

Remember that we, unlike the other competitors in this marketplace, have a liability in the toric market, in that we have a much larger percent of your business in the conventional toric market. The old annual vial business, that is declining, so if you pull that out, our disposable business and our toric market did extremely well.

Secondly, I will talk a little bit about Cooper Surgical. Cooper Surgical as can you see did extremely well, organic growth of over 10%. I don't think we have had that for about three or four years. That has a lot to do with the acquisitions that we have made over the last couple years, which are not just financial acquisitions, but were companies that had really good opportunities to grow their top line with our ability to grow those businesses quicker. That is number one.

Number two, we did announce the Wallach acquisition, which I wanted to mention only because we have been working with Mr. Wallach, or certainly I have for about 10 years, in trying to get that business for Cooper, and he made us a commitment that the day he was going to retire, that he would contact us, and I want to make it very public, make a public statement that I want to thank him, because he was a man to his word. He did contact us, and we did get that. The net result of that, by the way, that is we are definitely now the global leader in the market. So that was an important acquisition for Cooper Surgical.

Secondly, let's talk a little bit about the distribution integration issue that haunted us in the fourth quarter, and where we are today. It is behind us. It ran over into a little bit into November, cost us some money in November, but it is behind us. Our service levels are absolutely up to standard. On top of that, I believe we didn't lose any, or lose any of our major customers. In fact, I don't think we lost hardly any customers over it. They stuck with us on it, and the integration process is still ongoing from an efficiency standpoint, but we believe by the end of April we will have everything completely under control, and begin to get the efficiencies we want.

The most important issue though, is our service levels have not been compromised, and we are getting product into the customer. On top of that, at Delta Park, our U.K. distribution integration has already taken place without a hitch. It went well, and our European integration for distribution in Belgium is ongoing, and at this point we have had no hiccups at all. We will have completed that by the end of this year. So we have that integration process pretty much under control now.

Thirdly, silicone, the silicone issue with Biofinity, you should know what our strategy is right now. We are certainly making progress and I will let Bob and Steve talk more about it. But more importantly, you should know that we have expanded our marketing into Europe and our strategy now in the U.S. is to continue to do what we are doing. And that is to build inventory.

One thing we don't want to do is to create a back order situation with this product, or any kind of a hiccup when we introduce it. There has been certainly this product is perceived and perceived properly, as an outstanding product in performance. There is pent-up demand in the U.S. for this product. So when we roll it out, we are going to roll it out the right way.

We are going to allow our salespeople to go out and just sell it, and we don't want to have any kind of disruption with inventories, so we are in a process of making sure that we can support the launch of that product. And as it is stated, as we have stated in the press release, we are certainly looking for something in early summer to do that.

Market update, the market as you can see is soft. I want to make some comments about that, and try to put to rest maybe some of the concerns about that. Please understand that since 2002, the market has been growing about 8% in constant currency, except for 2005. And I think we all know what happened in 2005. All three of our other major competitors introduced major products into the marketplace, so there was a lot of inventory loading that went on.

The result of that was that we had I think about 11 or 12% compound, or constant currency growth in the market in '05, and that was followed with 2 or 3%, I forgot exactly what the number is, but I think it is 2% for 2006. But if you put them both together and I think that's the best way to look at this, I think we are still growing at the constant currency rate of 7 or 8%. We expect that going forward we will be back to 7 or 8%. I know Vistacon or J&J has made that comment earlier this year, and we still feel that the market will continue to grow.

For a number of reasons, by the way. Not just because of the growth of myopia around the world, the incidence of myopia, certainly. But also the fact that there is still a trade-up fact going on in the market. We continue to talk and be concerned about the material, silicone hydrogel. As you all know, I think that is a North America phenomenon, about 75% of all the sales are here.

But let's all remember that the U.S. represents about 36% of the world market. North America represents 40% of the world market. There is the rest of the world. And the real trend that is going on in this marketplace is not just materials. Quite frankly, folks, it is modality. And anyone that has followed this market can see that.

The market is moving more and more to single use, and away from reusable lenses. It is not only prevalent in Asia where about 60% of the market now is single use, and where the reusable market, whether it is a two-week market or a monthly market is declining, it's also true in Europe where it is almost 40%, and even in the U.S., and I will give you some figures to think about, even in the U.S. we are starting to see that, and I think we will see that at Cooper, we may continue to drive this market more to single use.

So that is a trade-up opportunity in the spherical market. Remember the spherical patients in this country represents about 75% of all wearers. You have a number of different products that they can wear. They have moved from four or five years ago from conventional, I shouldn't say conventional, but the older hydrogel products to silicone hydrogels. That was a trade-up in value.

We believe there is an opportunity to trade-up from silicone hydrogel two-week products, or reusable products into a single-use product, which generates more benefits to the patient, certainly more financial benefits to the doctor, as well as a safer alternative, and certainly it's a benefit to the manufacturers and lastly, to the patients. So we think that that will be another factor that will end, and will drive market growth going forward.

I think with that, I probably have a few other things I could say, I am going to turn it over to Bob and Steve. I have probably spoke long enough.

Thank you, Tom. And good evening, everyone. Highlights for the quarter is the Company had $219 million in revenue, up 7%, and in constant currency we were up 4%. CooperVision contribution was $183.6 million, up 5% above the prior year first quarter, and in constant currency up 1%. Cooper Surgical had revenue of $35.8 million, up 19%. In constant currency we achieved double-digit growth, 10% organic growth, and earnings per share was $0.12, including $0.48 of items that we have identified or called out, if you will.

Major events during the quarter included the $1 billion refinancing of our debt structure, and I will let Steve get into more details on that. And we completed two acquisitions in women's healthcare since year-end. The first one being Lone Star during the quarter, and the latter one Tom just indicated which was the Wallach acquisition. CooperVision results for the quarter our soft lens sales outpaced the market. In constant currency the market was down 1%, while CooperVision was up 2%.

The market reflects the strong prior year push in 2005 of silicone hydrogel new products in the U.S. and outside the U.S. and Asia, a strong push of some new one-day products by J&J a year ago.

CooperVision drivers, in order to beat the market during the quarter includes the one-day single use products being up 22%, we are no longer capacity constrained there. We also had a 31% improvement in our Proclear material, which now accounts for 21% of CooperVision's revenue, and we had an 8% percent improvement in toric, and outside the U.S. that equated to a 22% increase above the prior year's first quarter.

Other drivers, CVI drivers from a geographic perspective, Europe was up 12%, and in constant currency it was up 2%, while the market was down 3. And Asia-Pacific was up 13%, and in constant currency CooperVision was up in Asia-Pacific 12%, compared to a market that actually declined 10%. This growth was achieved without any major silicone hydrogel contributions, which are slated to begin in the latter part of this fiscal year.

Our growth highlights the success of the Proclear family of products. Our 1-day strategy, and also our emphasis and momentum in the Asia-Pacific region. As we recently have expanded into certain areas, such as Singapore and Malaysia, Taiwan, we are looking at in the near future establishing a direct presence in China, and Hong Kong, with emphasis on our 1-day and single use or single-use products.

As far as the roll-out of new products, it continues as we had basically projected over the last several years. Last year you may recall we rolled out six new products, and in the first quarter of this year another three products. Which included the Biomedics EP, or emerging presbyopes, which of course targets the early presbyopes as they evolve out of, if you will, spherical lenses into having other requirements.

We also had the Proclear 1-day, which is at the high end of the single use market, that we launched in the United States, and then we have the Proclear toric multifocal. So we are recognizing the fact that if you have astigmatism you still have needs for, you still get presbyopia, so therefore combining toric and a multifocal, we launched a product that fills that need in the quarter.

All up, if we add the six products from last year together with the three new launches this year, we have basically launched three products of the 1-day or single-use variety, three new torics, and four product that are leveraged in the Proclear material. All up, new products that were not around two years ago accounted for 16% of our revenue in the quarter.

Talking briefly about the silicone hydrogel roll out, as of the end of the quarter, we had four lines operational, which means they were producing inventory. That compares to one line that was in place producing inventory at the end of the fiscal year. We also have a fifth line that is dedicated to the research and development group, to improve the manufacturing process, and I might add that we expect to add another three new lines into production over the next three months, and remain on-track for ten lines of production by the end of the fiscal year.

While our ability to increase capacity and reduce production costs from silicone hydrogel products depends on our continuing to improve the manufacturing process used on this new manufacturing platform, we are optimistic that we are headed the right direction with Biofinity, our silicone hydrogel lenses, and we are, we expect it to be a meaningful contributor to our revenue starting in the later part of the year.

A little bit about the integration. During the first quarter of '07 we continued progress on our three-year integration plan, of combining Ocular and CooperVision. We made good progress in transitioning our two U.S. distribution centers, both in the Rochester area into one location, and as Tom alluded to, we expect pretty much by the end of April or early May to have completed it, and the realized benefit that we expect, remains around $6 million annualized, so we will start seeing more of the benefits towards the end of the second quarter.

We continue to make progress in Europe, where we are transitioning from 18 distribution locations down to four by the end of 2007, and as Tom indicated, we have already pretty much completed the U.K. part of that, and what's known as Delta Park, near the South Hampton area of the U.K.

We continue to expect to see all-up around $10 million of savings through the consolidation of distribution centers, and we have also substantially completed the transition or the conversion of our high volume CooperVision products onto the Gen II platform, which is the platform we bought from Ocular that allows for low cost, high volume manufacturing. We will start seeing the economic benefit of that show up in our gross margins towards the later half of this year, as it flows through our inventory on hand.

So expect to have upwards latitude, in terms of improving gross margin on that front later this year. We remain on-track to realize $50 million annualized synergy run rate by the end of the fiscal year, plus an additional $10 million of lower tax rates, keeping in mind that when we bought Ocular, their production capacity is offshore which favors our tax treatment.

Looking at Cooper Surgical, Surgical as I indicated contributed $35.8 million in revenue during the quarter, up 19% versus the prior year, and very importantly, it achieved double-digit organic growth. It is performing very well in the area of the hospital surgical products, which we introduced at the beginning of last fiscal year, which were overall the laproscopic product line was up 111%. Products for sterilization, such as our Filshie Clip are up 17%, and products in the area of incontinence were up 27% during the quarter.

As you may recall, the acquisition made over the last several years targeted higher organic growth areas, and this is what is stimulating our growth from the mid-single digit range, up towards now the double-digit range, and proved very successful. CSI today, or Cooper Surgical for the quarter, accounted for 16% of our overall revenue and we would expect that as we continue to grow, and accelerate organic growth, coupled with acquisitions, that surgical will be a larger part of our revenue base going forward.

As far as acquisitions, we made early in the quarter the acquisition of Lone Star, which was a $9 million product line, including the Lone Star retractor system, which places a retraction ring around the surgical incision, providing exposure to the surgical field during laparoscopic procedures. This acquisition expanded Cooper Surgical's hospital product line to a $40 million annualized run range. Lone Star contributed $2.5 million in revenue in the first quarter.

In February, after the quarter closed, we completed the acquisition of Wallach, which added about $10 million to our annualized revenue base. Both of these acquisitions, Lone Star and Wallach are accretive in the first 12 months following the acquisition, and importantly they both exceed our expectation of 30% return on investment average over a five-year period.

As far as restructuring and call-out, during the quarter had $0.48 of specifically identified items. It certainly has been a continuation of a busy integration period, and as I indicated, we expect to be seeing those benefits, the remaining benefits show up by the end of this year. During the first quarter, we had $0.48 of call-out or identified items aggregating $23 million, which included acquisition and restructuring costs, manufacturing start-up costs, in-process R&D, IP and Securities litigation, as well as $0.13 of share-based compensation. Several points on this.

Due to the nature of our Director's comp, share-based compensation, essentially all of the costs of, that is in the stock options and shares is written off in the first quarter, and as a result of that, we ended up with $0.13 of share-based compensation. We have not changed our guidance of $0.35 for this fiscal year, but we are very up-front weighted, when it comes to share-based compensation.

During the first quarter, we refinanced the Company with a $1 billion revolving credit agreement and a senior note. 650 million of revolving credit, 350 million of senior notes, and as a result of that, we wrote off certain deferred costs associated with our $250 million term loan facility. The largest portion of our costs that are called out, however, relate to the operational restructuring, and the silicone hydrogel start-up costs, as well as the majority basically representing the completion of the three year plan that we have embarked upon.

Lastly, before I turn it over to Steve, I will just briefly comment on guidance. Our 2007 guidance remains essentially unchanged from what we provided in December with the one exception. We have added $7 million to reflect basically eight months of the Wallach product line in our financials. As a result of that, our overall revenue guidance for the fiscal year is 927 million to 967 million, a range of 8 to 13% growth.

CooperVision remains at 780 million to 810 million, a range of 6 to 10%. Cooper Surgical, 147 million now to 157 million, a range of 18 to 26%. Overall earnings per share guidance has not changed at $2.90 to $3.05 with the identified items called out. Share-based compensation remains in the range of $0.30 to $0.35, and lastly, we have a GAAP range of $1.55 to $1.90, compared to a prior year of $1.44.

With that, I will turn it over to Steve.

Thanks, Bob and good afternoon, good evening. Excuse me. Good evening, everybody.

Just to finish off the discussion that Bob started there on stock compensation expense, with FASB 123(R) and the timing of recognition of the expense, our Directors plan tends to be a first quarter expense item, so we end up having 38 to 40% of our stock compensation expense in the first quarter, and then pretty much smooth for the balance of the year. So the estimate for the year, again was $0.30 to $0.35 for stock compensation expense. We would expect the last three quarters to be in the range of $0.18 to $0.23.

Turning to gross margin, the first quarter gross margin as reported was $0.59, and excluding 6.3 million of identified items and costs of good sold, which are principally the production start-up costs and acquisition and restructuring expenses, as Bob noted. Our gross margin was 62%. On a comparable basis, that compares with 63% in the first quarter last year, and the margin declined between periods is predominantly due to product mix. Production restructuring expenses and inefficiencies incurred in the quarter relate to the implementation of the Ocular integration plan, and again as Bob noted, we should start experiencing efficiencies in the second half of the year, as new production lines have inventory that actually comes out and is sold into the market.

Looking at CVI and the gross margin side, excluding the identified items had a gross margin of 63%, which compares with 64% in the first quarter last year. Product mix changes did dominate the quarter. Single use lenses increased to 14% of our soft lens sales, compared to 12% in the first quarter last year. Our Proclear material lenses increased from 17% of soft lens sales to 21%. And toric lenses increased from 34 to 35% first quarter last year to this year. So some significant movement within our product mix.

Looking at CSI, they reflected a gross margin of 60%, and that compares to 57% last year, and that reflects product mix changes between periods, including favorable impact from our surgical products.

Turning to SG&A, SG&A was 44% of sales in the first quarter, it compares to 41% last year. Excluding the items unrelated to our core operating procedure, our call-out items SG&A was 39%, which compares to 38% last year. The slight increase as a percentage of sales is due to spending in support of our new product launches.

Looking at R&D. R&D expenses in the quarter include 4.2 million of acquired in-process R&D, and 175,000 of stock-based compensation expense. On a comparable basis when you exclude these items, R&D is 3% of sales, which was the same as last year, and reflect our continuing product development activities associated with both of our business units. That sums down to an operating margin as reported of 7%, and excluding the identified items it is 19%, which compares to 20% in the first quarter last year.

CVI had a reported operating margin of 13%. The identified items were 8%, so that results in a 21% operating margin, which compares to 23% last year, and affecting the current year spending in advance of our new product launches, as well as capacity and manufacturing and distribution and efficiencies associated with our integration activities.

Our Surgical, Cooper Surgical unit had an operating margin as reported of 5%. When you exclude the acquired in-process R&D and other identified items, they reflected an operating margin of 20%, which is up from 19% last year. Again benefiting from the surgical product mix increase. Interest expense in the first quarter was 4% of sales. That's excluding deferred financing costs that were written off, and on a comparable basis it was also 4% last year.

Turning to income taxes. Our effective tax rate in the quarter was 21%, but that is 14.5% when you exclude specific items. In fiscal 2007, we expect a significant portion of the integration expenses to impact tax beneficial jurisdictions, and thus we have computed what we believe to be a more meaningful rate, when you exclude these items. We believe this is more indicative of our tax rate when the Ocular integration activities are completed this year.

The 14.5% effective tax rate compares with 11% in the first quarter last year, and we continued to project an effective tax rate of 13 to 15% for the foreseeable future. That all sums down, as Bob indicated, to net income of 5.4 million, or $0.12 per share. Which increases to 28.2 million, or $0.60 per share, when you exclude those specifically identified items.

Now just to touch on the balance sheet, and then we will get to Q&A. In the first quarter our days sales outstanding, our receivables collections were 64, compared to 68 days in the first quarter last year, and overall we expect to be in the mid-60s for our DSOs. Months on hand was 8.3 months, compares to 8 months last quarter, and 7.8 months in the first quarter of last year, and we are building as Bob mentioned, inventory to support our new product launches, as well as to make sure that we do not have service problems as we are consolidating our distribution centers. The inventory is at expected levels and as we complete the DC consolidations in the latter part of this year, and do our initial product launches, we should expect to see that come down quite significantly over the next 1 to 1.5 years.

When you look at earnings before interest, taxes, depreciation, amortization, EBITDA, in the quarter we generated $57.9 million before specified items, and that's up from $54.4 million in the first quarter last year. Capital expenditures in the quarter were $50 million. They are primarily related to expanding the capacity for the silicone hydrogel lenses, as Bob noted, as well as for cost reduction initiatives that we completed in the quarter.

I should note that the capital expenditure amount reflects actual cash payments, excluding commitments and accounts payable that have not yet been paid. Classifying capital expenditures on a cash basis in a cash flow statement has the impact of reducing capital expenditures in 2006 by 10 million, increasing capital expenditures in 2007 by 10 million, reflecting the reclassification between accounts payable and capital expenditures.

We think the cash basis is a more appropriate way to look at cash capital expenditures, and so as a result of this reclassification, we are expecting capital expenditures of $160 million in 2007, but again, when you look at 2007, 2006, this is not an increase from our prior expectations.

As you know during Q1 we restructured or primary debt facilities, and we replaced our $750 million secure credit facility, with a $350 million 8-year bond, and a $650 million 5-year unsecured revolving credit agreement. The new facilities require no amortization, and they reflect more relaxed covenants, and more favorable pricing. Finally, our net debt increased in the quarter by 96 million and this was to fund the capital expenditures, the Cooper Surgical acquisition, as well as reflects the costs incurred for the refinancing.

And with that, that is enough numbers and rambling on a little bit here, so I am going turn the call back over to Tom, and we will go into Q&A. Operator? I am ready for questions, and I am sure that we have some.

Thank you, sir. Ladies and gentlemen [OPERATOR INSTRUCTIONS].

I am sorry. I have a list here. Milton Hsu, are you there?

Yes, hi everyone. Two questions, first one on the daily disposable market. Tom, can you just give us an idea what the market shares look like in Japan and Europe, and if you could just talk us through the manufacturing capacity that you have. Are you exactly where you want to be?

I think I can, in fact, I am glad you eve asked about it because there was a piece of it that I forgot, that I think makes it very transparent what's going on in the transition. And Milton stick with me for a minute, and I will get exactly to your answer. Something to think about.

The lens care market, the lens care market in the world last year declined 11.5%, versus the market that grew 3%. If we look at Asia, which is very interesting, the lens care market declined 30%, with the market for lenses declined 2%. And we know exactly what's going on in Asia.

In Europe, the market declined 15% with the lens market going up 2%. Now in those two parts of the world, we know single use products are growing at the expense of reusable lenses, and you can see it in the lens care sales.

But let's go to the Americas, the U.S. specifically where the Americas grew only 4% in lens care, yet for the full year last year, lenses grew 10%. To be very specific, in the U.S. for the full year, all lenses, all single use lenses grew 7% for the year, but in the quarter, in the fourth quarter, the single use market was up 20% in the U.S. versus a market that grew 6%. And for the full year, the market grew 7.

So the single use market for all of last year in the U.S. grew 7, and the market grew 7. But not in the fourth quarter. So there is a trend going on now in this part of the world. Worldwide, the market for single use lenses grew 7%. I'm sorry, yes, and the market grew 3% and single use lenses on a worldwide basis in the quarter grew 9%, and of course the market was down 1%. Puts a little more color on what is going on in the single use market. Now, let me go back to your questions.

Number one, we think we are #2 in Japan. But let's all not forget, J&J owns more than 2/3 of the Asian market with single use lenses. They have been there a long, long time. They have a very strong position, and we are certainly in the catch-up mode. But we think we are growing and gaining some market share. We believe this year will be a good year for single use business in Asia.

But I think in the U.S. it's going to if be a real good year for us. Talking about capacity, we think we are in good shape, and the only negative that could happen would be a positive, would be with Proclear. Proclear daily disposable may become a much bigger winner than we are expecting. And that could create a capacity issue for that line. I don't think it will be. I think that overall we have certainly plenty of capacity to meet our expectations in the overall single use market.

But if the mix becomes more favorable to Proclear versus our Biomedics toric, which is our methafilcon entry in the market, I think we are fine. I think we are going to be fine. So I don't know if I answered all your questions. I gave you a little bit more than you probably asked for, but I wanted to put more color on this trend that I think shouldn't be ignored, because I think all of you who follow this market should please be aware it's a worldwide market, not just a U.S. market.

Great. Thanks, Tom. That is the answer to my first question. Just have a second one. Just following up and I guess Steve's comments there, I mean, a lot of the promoted and the growth products in the CVI offering, single use, Proclear, Toric, seem to be lower gross margin products, how does that balance over the longer term with your cost savings, should we expect gross margins to be a net wash going forward?

Yes, the torics and your premier products are your higher gross margin products. But you have got to first for example in silicone hydrogel, which will be a premier margin product, we have got to get through the start-up and get some economies of scale. So initially on those products, even premium margined products, you are going to be below average. We would expect to be higher. You look at torics, you look at multifocals, you look at Proclear, those are all premium products that get premium margin.

On the other side of that coin, is single use and single use is well below the average. However, when you look into OpEx, the amount of sales and marketing costs associated with single use is much less, so we tend as you know to focus predominantly on operating margins. We think over time with the $15 million worth of synergies that are going to flow through as a result of the new Gen II lines, that we went operational in Q1, as well as a trade-up into the market, silicone hydrogel on Proclear ultimately our margin is going to increase, our growth margin.

Let me give another flavor on this, so we understand exactly what the opportunity is in single use. And I think all of you who wear contact lenses, or know anything about the market will understand exactly what I am about to say. We do have about 70, maybe even 75% gross margins in the silicone hydrogel product that is a 2-week disposable product. But we may only have 40 or 45% gross margin in the single use product.

But for if you look at gross profit per patient, I make more money in a single-use patient at 40 to 45% gross margin, than I would off of a silicone hydrogel patient that is using a 2-week product. Pretty easy to get to. A couple other things we all know now with enough market research that has been done. The best complying patient in any modality in any lens is a single-use patient. Data clearly indicates that those patients are compliant, 90 to 92% compliant. Where we know that patients that are on 2-week products are only about 55% compliant, and those that are on monthly products are only about 80% compliant.

So it doesn't take a neurosurgeon to figure out that if I can get a patient switched from a 2-week silicone product, or any kind of a 2-week product, or even a monthly product, by the way, into a single use product, that I am going to have more profit per patient, and we believe obviously from a patient standpoint, a much happier patient because you are getting a clean lens every day. You are getting a more comfortable lens. It is certainly more convenient for the patient. You don't have to mess with solutions and all the problems the solution market is offering right now anyway. So it's, I think that one ought to be understood when we talk about gross margin and gross profits.

Helpful?

Yes. Thank you.

Jeff Johnson.

Can you hear me?

Yes.

Thanks for taking the question. Two questions for you I guess. Tom. One, two quarters ago I think we all kind of got excited. You were talking about these number of lines that were going to go up on the silicone hydrogel side, and what have you. Last quarter obviously a set back. You talked about kind of a sawtooth pattern, you are up sometimes, down sometimes on the manufacturing front, and the progress you are making. Now it sounds like you're kind of on the top end of the sawtooth again, if you will, or making some progress. How do we know when we are talking just lines and things like that, what progress you are making here? Any yield data you can give us, or anything at all to help us feel comfortable that we seeing progress on the silicon hydrogel front?

Before I turn it over, think about this, Jeff. Yes, the lines are all coming on line. We have four now going. We have a fifth had line which is the R&D line, which will be on in April, and we have next month two more lines. Think of two elements that drive volume. One is yield. The other one is line utilization.

Our objective with all of our lines is to be able to get to 50/70. 50% yield, 70% line utilization. If you are talking about a hydrogel line, a typical hydrogel line, you are talking about probably something in the 75% yield to 85 to 90% line utilization. It would be wonderful if we can get beyond that.

But our target is 50/70, to meet the kind of volume expectations we have, as well as our cost structure. We could get higher than that. Obviously our cost is going to come down. As we go forward, we are increasing our yields per the line, and we are also having better control of line utilization. Now, what that means is, let's take lines, I am going to give you an example. Line one at 50/70 can do 300,000 lenses a month. It's a different kind of line than line four, which we can get, I am trying to remember. But let's say it 700,000 or 800,000. It's a lot more. To reach the target, remember what I said, 50/70, if I can get beyond 50/70 some day, I can get more than 300,000 lenses off that line one. Maybe 400, 450. We are not, without getting into any specifics, I want you to understand how we are ramping it up, what happens when we ramp is up is not only do we make more lenses, but most importantly, I am starting to bring my costs down, so I can get better gross margins out of this product.

Going out the door, we are not going to have the best gross margins that I want out of this product. It is going to take three or four months beyond that to get that thing down, where I can get my 65 to 70% gross margin. So it's improving as we go along, and I think your comment about sawtooth or whatever it is, things are getting better, yes, it is. I think that is basically all I want to say at this time. Is that okay with you guys?

Yes, the only thing I would say is that there is nothing that has come to light that doesn't make us feel that those objectives of the 50/70 aren't realistic and obtainable, and as you can see from our guidance, we are not backing off from our expectation at the back half of this year, the last two quarters. Silicone hydrogel we will be making enough to have it as a meaningful contributor. But we are not getting into the specific yields.

With each line.

Without specifics, though, I mean, is it fair to say that December 13th or December 12th when you held your call, and things weren't sounding so good and now we definitely have seen progress on the yield or the capacity utilization, or both fronts?

Yes.

Yes, I mean obviously we had one line up at the end of the year. We now have four lines up and a fifth line in R&D, and you are seeing what you normally see in an engineering, manufacturing environment. The new lines that come on start up at a higher yield than the earlier lines that come on, et cetera.

There is a lot of experience that is gained as you go up this process. I think the best thing that we can say, Jeff, is we are certainly within our expectation of where we should be, and continue to move along that path. So nothing, no more specifics than that until we have meaningful numbers that are going to be generated the second half of the year.

And last question I have, guys, and then I will drop here, is Tom you cited the daily disposable numbers there being up 20% in the U.S. this quarter, and what have you. How much of that is being driven do you think by the CIBA's reps according to our sources anyway, or the people we talk to in the field both in the U.S. and Europe are pretty aggressively trying to push patients from O2 Optix, into the focus dailies, just until they can get their manufacturing issues taken care of on the O2 Optix front. How much of the market numbers you cite there, is due to maybe what is going to be just a temporary transition here on the CIBA business, as opposed to truly a market shift?

Well, let me answer that two ways. First of all, the answer to the first one is obviously a zero because the CIBA problem didn't arise until January. So I am giving you fourth quarter data so obviously none of that was going on.

Secondly, I am not so sure that your assumption is correct, that CIBA doesn't see the light that there is more benefit, potentially peace maybe for them, to switch people into single-use, away from O2 Optix. So they want to survive right now. We know what the problems are at CIBA. You know what the problems are at CIBA. It is just a problem.

And they are not going to have their apparently their problem with their silicone problem resolved now until the end of the year or whenever. They are just having all kinds of problems. And you would do exactly what they they are doing. At least I would do it. And I know Michael Kehoe pretty well, he's not a very stupid man. They are going to survive, and they are going to do what it takes.

Remember when you look at it, you are an optometrist. You know. There are three kind of patients that wear soft lenses. Let's not make this thing any more complicated than it is. They either where spheres. They either are people that are stigmatic that need toric, or they are old farts, like some of us, You know, I shouldn't say that publically, but I will be like the guy from Horton, the guy, what did he say, this is going to suck or something, what did that guy say? Anyway, the point is that you are old, and you wear presbyopic lenses. If you are a sphere patient, you have got a couple choices to make here. You make a reusable lens or you make a single-use lens. They want to compete in that market. They can't compete in that disposable category anymore. They really don't have any offerings.

They're not like J&J, or even Cooper, so they, where are they going to go? They are going to go with single use. We think that they are definitely the leader in the United States in single-use. We talked about J&J. They own the Asia-Pacific market, but they do not own it here. CIBA owns probably, 70, 80% last year of the single-use market in the Americas, and in Europe they are by far and away the #1 company in Europe. So they are doing what they need to do to survive. That we don't believe is a negative for us. Because remember what we are trying to do.

We are not trying to take market share in the single-use market. That is not our objective. Our objective is very clear. We want to be an innovator. We want to change the market. We are trying to change behavior. And if we can change behavior in this market, and get more people on what they should be on, and that is a single-use product, something that is very simple for them, it's the safest alternative they have, it gives them better vision.

It is better for the doctors. Better for everybody. It is a home run for everyone. And we are trying to be spearheading that, and if CIBA is going to do the same thing, I think it' is going to help the story, and it will expand the value of the market in U.S. so it will be more mirrored to that of what's going on in Asia, and going on in Europe. Time will tell, Jeff.

Thanks, Tom.

Michael Weinstein. Michael?

Hey, guys, this is Kim for Mike. Can you hear me?

Yes, I got you.

Great. Just to follow-on on some of these Biofinity questions. You were talking about holding off the real roll-out of the product in the U.S. before you have decent inventory.

Can you talk at all about what sorts of inventory levels you need to feel comfortable you can service the initial demand, and I guess the follow-on to that is any updated thoughts on the timing for Biofinity Toric? Does Line six or seven take Toric, or are you going to wait until later in the fiscal year and put toric on line nine and ten, for example?

Well, we haven't changed, I am going to get the toric one out of the way. We haven't changed our timeframe on toric at all. We are still early '08 I think is what our target is. What line exactly it will be done on, I am not quite sure. But that is still the plan. Of course it's pretty good news on two fronts. Number one, can you see what's going on with the toric, the silicone toric market in the U.S., anyway, certainly has stabilized, if anything it took a little bit of a step back last quarter. With CIBA, putting off the launch of their product until the middle of '08, it's probably an advantage.

The toric market is so much different than the sphere market anyway. Breadth of parameters is important. You don't have it with the silicone product. That certainly helps our offering, #1. #2, there is more resistancy to switch a patient from one toric to another, versus a sphere, because in many cases you have to refit the patient, and doctors are just a little bit more cautious about doing it.

As far as inventory levels without telling you how many units, whether it's 72 million or 8 million or 2 million, I would just say we sort of know about what, we want to be able, you are not going to put fitting sets in every doctor's office in one day. Or one week.

It is going to be a roll-out, probably over about I want to say a two, three month period of time, to be able to reach every doctor, to be able to sell a doctor on Biofinity anyway. What we want to make sure is as we roll out these hundreds or thousands of fitting sets, that we have the parameter inventory to be able to service those accounts. And we believe that we will be in a good position to do that by early summer. I think that is the best way I can answer it, without giving you an exact number of lenses. But it's in the millions obviously, but I don't know exactly what you are reaching for. But that is our answer.

That is helpful.

Okay.

And just one follow-up. With regard to the market, what are your expectations for market growth in the first, in the calendar first quarter? Do you think, have we worked through a lot of the comp issues?

I am going to tell you, I think it could be a little bit disappointing, and I am going to tell you why. Because you are looking at comps, year to year comps and with O2 Optix having the problems and no delivery they're having, it's probably going to make the market look worse than it really is.

In other words, the sell-in versus the sell-out is going to be unbalanced I think because of that. I don't know that. I just suspect that. It also will probably show the silicone impact of the market declining, which is going to be a misread, because I don't believe it's going to be that bad.

It just means that a silicone product that was available last year in the first quarter isn't going to be available this year, so you've got to keep that in mind, and I will focus on that in our next phone call, when I talk to everybody about what's going on in the market, and put it in perspective. But I will say I think for the full year next year, I still think we are going to see 7 to 8% constant currency growth.

I am going to stick with our good friends in Jacksonville who feel that way, and I would tell you that I have had discussions with Ron Zarella and Michael Kehoe both, at B&L and at CIBA, to get their feelings on what happened last year, and I think they all have agreed certainly have given me the same kind of feedback. They think it was an anomaly year that was impacted by the unusually high growth we had in the previous year with inventory, and that the basic drivers in the market haven't changed at all.

Does that help?

Great. Thank you.

Thank you.

Mark Mullikin.

Can you hear me?

I haven't met you before.

No, no, good afternoon.

How are you?

Good. I just wanted to touch on the contract with 1-800-contacts that you signed in January.

Right.

First, can you talk a little bit about just qualitatively why you decided to go ahead and sign a contract, and second of all, just more specifically, if there was any sort of stocking activity, related to that in the fiscal first quarter?

Okay. I can get the last part with you. I think we had about $100,000 pick-up is about all we had in the first quarter. I think I am right about that. Hardly anything. And secondly, it quite frankly was a win/win for everybody. As you will recall, we were the primary company that lobbied against 1-800 in their attempt to, I would say, change the fairness of the Contact Lens Consumer Act, or whatever it is.

And part of this agreement, well, the purpose of the agreement I think was to make a win/win for all of us, which it was. For the AOA, or for the certainly for the profession now. There is, the litigation is gone. There is no more litigation. The benefit to the consumer is there. They can get all of our products, all four companies' products I guess now, and we don't have to deal with, for this company we don't have to deal with gray market and some pricing issues, margin issues because of the lenses being out of our control. It is certainly in our control. You should know that 1-800 has certainly agreed I think with all four suppliers, to purchase all of the products directly from the manufacturer.

Also too, I think you know about two years ago we had a counterfeiting issue with our lenses that were involved here, and I think that the potential of that happening is now limited. I think the whole idea behind this agreement was to make everyone pretty happy. We know that the profession is happy with us, because this whole litigation issue is out of the courts, and not proceeding, and like I said, it's good for everyone.

So there was very minor stocking activity. Did any of that occur in the second quarter, then?

No, not a lot. Let me tell you why. They got our products. You know, even though we weren't selling to them, they were getting it. They were getting it from other sources. So I think what it means, sort of like, we believe the net result of all this is going to be a little bit better gross margins more than it is anything else. There will be some stocking, but it's going to be insignificant, considering the size of our Company.

Mark. This is Steve Neil. I like to say what the primary benefit for us is the clarity of the supply chain. Instead of shipping to a distributor, and all of a sudden it finds its way to another retailer to be sold, we have now the opportunity to sell direct. So it's more of a cleansing of the overall industry's logistics channel, than it is anything else.

Okay. Thank you very much.

Joann, are you there?

I am here, how are you?

I am doing fine.

This is a completely different conference call than I heard three months ago.

Aren't you happy? I am.

Yes. If you had to summarize and I know this may be hard, briefly, what has changed in three months?

Oh, if I had to nail down two things, just two, keeping it simple, I think more confidence in silicone, obviously, and number two, a lot of confidence in the single-use strategy.

Okay. That is very helpful. Thank you. The other question I had was you talked about the Asia-Pacific market, if I heard you correctly, being down 10% in the quarter. What is pushing that down so much?

Well, I think, I wish I had J&J on the phone. Because they could really tell you. We believe with our sources that again, what went on in Asia for the last six months of the year, had a lot to do with inventory comparisons, I would say new product comparisons to J&J. Recall that J&J introduced last year in the Asia market two important products for them, two important new products for them. Single-use products.

One was Define, and the other one was Moist. All upgrade products. And when they introduce products into Asia, or any of us introduce products sometimes in Asia, you don't have a lot of what I would call direct sales. You have a lot of sales into chains, or into major distribution points. So you can load a lot of product in. So I think you had, I think there was some of that going on. I asked specifically that from Michael Kehoe at CIBA, and they didn't know exactly what the answer is, but that was what they sort of thought too. Because it is strange.

On the other hand, boy, you can sure look at their lens care business. What a crummy year it was over there. But again, you know, it's sort of explained again by single-use lenses. You got single-use lenses growing at the expense of reusable lenses would, you expect the lens care market to look pretty bad. And it did look very, very bad in Asia.

Okay. And then finally, you are talking about a market which was down a bit in the I think you said the fourth quarter, and yet this year you are saying it is going to grow 7 to 8%. Are we talking about a seriously back-end loaded year for market growth, or how do we think about this?

I think you are thinking right. I mean, I am thinking that way because you are going to have obviously better comparisons. But I think the O2 Optix problem is going to put a little bit of a negative look on the market and it's certainly in the first six, first three to six months of the year.

Okay.

When you do year to year comparisons.

Joann, that product represented around 8.5 to 9% of the U.S. market, and assume that a lot of people have a 6-month supply that are going to bring it right down to zero, waiting for their next supply, and hoping to get it before they run out. So that clearly is going to dry up all on a big chunk of the market a lot of, contraction of supply for the next probably one or two quarters.

We are going after that business, I think you know. But I won't say anything more about it than that. But we are trying to go after that business, and I am sure one other competitor I am aware of is too. So --

I'm sure. Okay. Terrific. Thank you very much.

Okay. Thanks, Joann.

Larry Biegelsen.

Larry?

Hi, guys. Can you hear me okay?

How are you?

Good, thank you. Couple of questions. Just could you confirm that there were no one-time events in the quarter, that helped sales came in a little bit stronger than we expected, just for example, carry-forwards from the delays in the distribution center, et cetera. Thanks.

I think there is some of that. There is probably about two to three, let me get to that one because that is a good one. There are problem by about $3 million of business that was carried over, you would normally not have. But I would point one more thing out.

Typically at the end of a quarter you have some kind of a drive. I wouldn't call it a drive in. Promotional activity goes on. You get 37 to 40% of your business the last month of the quarter. And we didn't do that in January. I want to tell you that.

We have stopped that, and we stopped it not because we wanted to stop it in October. We couldn't do it. So we decided, what the heck, the quarter, the sales look pretty good, there is no reason to give some margin away at the end of January, so we're just not going to do it, and let the business flow wherever it is. I don't know how much of that 3 million would have been offset with that, but typically you could drive 2 or 3 million at the end of the quarter, I would say in the U.S. anyway.

Larry, let me just add one other factor to that, sometimes we forget about it. A year ago in the fourth quarter we had what is known as Hurricane Katrina. That took place and wiped out the southeastern part of the United States, and there were a lot of places that weren't even open, particularly in Florida, there was some distributors we had.

So I would say a year ago fourth quarter we had some U.S. softness in our sales that rolled into the first quarter, when some of those businesses opened up. So I don't know that is a comparison and two other factors is, we a year ago in the total number had our CooperVision Surgical business that we don't have this year, and a year ago we were getting reimbursed for freight.

In the first month of this year, because of the distribution consolidation botch-up in our U.S. distribution center, we didn't bill out freight, so there was a considerable amount of money in the first month that wasn't picked up. So I think when you put them all together, it is a lot more neutral year-over-year than you otherwise might think, focusing in only on the spillover from Q4 to Q1.

That is helpful. Switching gears to Biofinity Toric, just a follow-up, when you roll out the toric in early '08, how would you describe the roll-out? Will it be limited, or will it be to a meaningful percent of customers.

I think it is too early to say. But if you are asking me to take a guess, I'm going to say it's going to be limited. I don't feel the sense of urgency. Maybe I am being too cavalier about it. I don't feel the sense of urgency with that product, like I did once before. And but we are definitely are going to be there, and we are definitely going to get that product in the hands of those practitioners, who have really decided that they want to fit just a silicone product for their astigmatic patients. And there aren't a heck of a lot of those, but there are those.

When do you think we will be at the point where we'll be with sphere this summer with the torics? How far away is that? In other words, where do you expect to be this summer with spheres? How long will it take to get to that point with toric?

It is too soon to tell. I mean, we have to target, right now we have certainly excess demand that we are not able to supply on the sphere side. And as we continue to defend in a sense the toric market share we have, it is too soon to tell. I think you could fairly say by mid-'08 we will have a full roll-out. But those plans are just too far out, Larry.

Keep in mind that toric you have a lot more SKUs, stock keeping units, to manufacture because of the complexity of the line. So it is going to, all other things being equal, it's still a more time-consuming process, and it's a matter of how many machines you want to dedicate.

Let me just want to try to sneak one in here. For 1-800-contacts, they already stock a high level of Proclear lenses. Do you expect that to have any impact? I think they are going to be working down inventory over the coming quarters. Thanks.

No. We don't think that will have an impact at all. I mean, we really think the 1-800 is more of a cleansing of the supply than anything else from a sales perspective.

By the way, a good relationship with them too, and I think like I said before Larry, I think everybody profits by this. Patients. I think our Company will, our Company will certainly, and definitely optometry will.

On the one-time charges, just to be clear, Proclear daily inventory build, there was none of that either in the quarter?

What do you mean by one-time charges?

One-time items, just a kind of for the quarter.

You mean stocking the market with Proclear one day? No, nominal impact. Not an issue.

Thanks, guys.

Larry Keusch.

Just a couple of quick ones here. The 2-week silicone lens looks like in the press release here, you are also talking about 2008. I think you had sort of positioned that at least in the past as perhaps end of '07. I know that is a different manufacturing process. Is anything changed there, or is that just sort of within the sort of range of, sort of expectations you have for the launch of that product?

I'll let Bob get that.

Part of it is priorities. If we go out with a real meaningful roll-out of Biofinity, starting in the summer, couple that with the products we are already pushing which is the Proclear and the 1-day, you have too much of a good story to tell, and you don't want to start focusing everyone on too many products when they already have a lot of momentum. So I think sequencing is just a more balanced sequence instead of trying to rush it all out at once, and handicap the process if you will, if you don't deliver enough of it.

So should we be thinking about that then, I mean is it, when you say '08, should we just be calibrating this more to potentially mid-year '08, as opposed to early '08? I just want to make sure I am thinking about this correctly.

I would. Keep in mind, we didn't put a lot of if you will as we have been articulating where we're going, we hadn't put a lot of if you will, enlightenment on what this product would be, and how big the product might be. So I think it's mid-'08, but we need to digest the product line.

Got it. And then just two other ones, quickly. Tom, you talked about in your comments about the potential if Proclear single-use really does what it might be able to do, you might be in a bit of a capacity constrained environment, which would obviously be a nice thing, if the uptake is that strong on that product.

Just from a manufacturing perspective, because again I don't have a good sense around it, what does it take to either increase your capacity, or move other single-use products into a Proclear manufacturing mode, and then the other just quick question is just for Steve, I think the last conference call you talked about operating margin for the year being up about 100 basis points. I just want to make sure how you guys are thinking about that.

Okay. Let me take the first one. Because that's one I think that, because I think were you in Puerto Rico and you saw the operation. Would you have to shut down a line. Let's call it cleansing them. You would clean the line up to put in a new material, and that's probably a 30-day shutdown on a line to did that.

One line can do 50 million lenses. So that is what you would have to do. So it would be transferring again from your methafilcon material into the Proclear material, and right now we have a line that is dedicated to Proclear. It could be that we may need two.

Now, this thing takes off and we see it going in a quick, in a very quick manner, growing faster than we thought, and a bigger opportunity in Europe, which we may have, we may do that, and certainly if we don't have to compromise capacity, or I shouldn't say capacity, sales for our Biomedics one day, I think we are going to have this thing under control. But you know, it may be a much bigger winner, as I pointed out, than we thought it might be.

We are trying in our manufacturing lines to have 50% of them capable of doing both the Biomedics hydrogel as well as Proclear.

So you will have some flexibility to go back and forth with half the lines. The other lines right now we want to keep running, because you take down your capacity down a little bit to add that flexibility. I think we will be flexible to a degree, and react to that demand. So I think like you indicated it's good news.

I'll jump in also on the margin. The biggest margin increase while there is definitely product mix, and there is going to be some products, the single-use, that are below the average, and some products like torics that are above the average.

The biggest impact on margin you are going to see as we flow through inventory and start realizing the $15 million annualized of synergies on putting the high volume Cooper product under the Gen II line, that is going to be the biggest driver of the margin increase that we can see. You will start seeing that most likely in the fourth quarter. Maybe a little bit of trickle out in the third. As the stuff flows through inventory. That is the biggest focus. Clearly, as you have lines that are now operating not in a start-up mode, I mean today we are not making a margin on a silicone hydrogel lens. Six months from now we will be making a margin on a silicone hydrogel lens.

So you are going to get some as you up that curve from an economy of scale, you are going to start getting some margin improvement as well. So it is not a question of if, it is a question of when. But there are a fair number of moving parts, and they are not all going in the same direction, and that's not all bad on a gross margin line. The big benefactor of course is on the operating margin.

For the year I think you had said last quarter, about 100 basis points of Op margin expansion for the year. So is that -- ?

Yes, it's going to again depend on the timing of the, I would say going out of the year I wouldn't be surprised to see in the fourth quarter 100 basis points difference from this quarter. It is all in the timing of how this rolls out. Directionally, yes, I think that is definitely directionally correct.

As long as we keep focusing on the more successful we are with one day, the more that will mask that gross margin improvement. That is the bad news. The good news is we certainly make more revenue and profit per patient, if people shift to the 1-day product. You will see that in the operating income line, much more so than the gross profit mix.

Got it. That is great. Thanks very much, guys.

Charlie, are you there?

Thomas, how are you?

I'm doing fine. How are you doing?

I'm doing well. Good afternoon, gentlemen. Just a couple questions. One, you pointed out that the toric, your toric lens growth outside the United States was 22% in the quarter. A, was that specifically total toric lenses, or just disposable, and two, how does that contrast to what you did in the U.S.?

That is total.

Okay.

And obviously if we grew more than 50% of our business in toric is now outside the U.S., so obviously that means that in the U.S. we didn't do as robustly.

I am scrambling to see what it is.

I figured that, Bob. I had that kind of -- [laughter]

We are looking for the number.

How about this? The Americas was down in total 4%. But the, some of that keep in mind is the shift, where we have a large presence in the custom made toric business, which is one that is fading away, we call that the conventional side. So our decline in the conventional side, and the quarterly side was quite substantial.

Is the conventional skewed more toward the U.S. than internationally?

Oh, yes, yes.

Very much.

Like 80%?

Not quite that. But he is close. I think it's about 75. I think it is 75%. We can tell you right away.

It's two-thirds.

Two-thirds.

Two-thirds in the U.S.

The toric business in the U.S. was down?

The toric business in the U.S. was down. Disposable torics were up.

In the U.S.?

Correct,.

Oh, yes, our disposable in the U.S. is up. Up in double digits. But the conventional really brought us down pretty much.

Getting back to Proclear for a second, Proclear dailies I mean, Steve, you and I talked about what you were just talking about a few minutes ago, about the flexibility of having half your lines that could do either a hydrogel or a Proclear.

And Tom you were talking about how that could end up being a good problem to have, meaning Proclear doing better than you think. How do you view the mix of your daily's business for '07? What are you thinking that Proclear will contribute as part of that mix?

I think it is going to be, and boy, this is a difference between one I think versus another I think. I believe it will probably be less than 25%. The U.S. marketing group, or quite frankly, the global marketing group believes that the potential could be higher than that. Let me tell you why I am a little bit hesitant on it.

Because this will only take about a couple seconds, and I think it will put some more transparency in this transition to single-use over a 2-week silicon product from the standpoint of practitioner profitability, and patient spending and remember, Proclear is the, the Proclear single-use has got a premium of, let's call it at least $0.10 more a lens than the Biofinity, not Biofinity, the Biomedics 1-day.

If you take a, I will just take Oasis. A doctor will spend about $160 for a year's supply of lenses for a patient. Okay? That is about $20 a wack times 8, and he will sell it for about 240, markup of $80, that's about a 50% markup. So he makes $80. The rest of the cost to the patient, of course, is in solutions.

So if you take the $240 that the patient spend on lenses, and you add probably another well, what is the data, one you you guys put out some data, it's about four bottles a year for a lens cleaner, I mean a lens solution, so you are talking about $10, so call it another 40 to $50 that you have got to spend, so you're about $300. If you use Biofinity or let's say even the CIBA product, Focus, which has the two companies that have the right price point, because J&J does not have the right price point there. They are very expensive here and don't really compete because of their price point. Because remember, one of the barriers of all of this in the past has always been high cost, perceived high cost of single-use versus a product that --

Are you talking about the pricing of Moist?

Yes.

Aren't they 19.

The price of Moist is the same in the U.S. as as it is for their other product. It's $19.50 for a 30-pack. We don't have a 30-pack. We have 90 packs. We sell lenses at about $0.30 a lens. I am getting ready to that right now.

If you buy let's say Cooper or CIBA, you are going to pay about $0.30 a lens. The doctor will. So he will spend about $220 on, I'm sorry, he'll spend, dog gone it. These guys are in front of me while I am trying to give you the data.

Anyway, if you talk about what a doctor would spend, he will spend about $220 for a year's supply of single use lenses, will sell it for about 350, will make $130 of profit. He makes more profit because he is not sharing the profit with a drugstore, who is making money off solutions. So the delta is probably about 40 or $50 more a year for a single-use than a single, you know, the silicone hydrogel lens with solutions, and the doctor, it is more profitable for him.

So the Proclear now, you go to Proclear, you are talking about the delta being a lot more than $50, Charlie. And that is where I at. I think for patients who have end of the day dryness and special needs, we are going to do very well with Proclear. It is a premium product. It is going to do very well. But I don't think, I still think the Biomedics one day, which by the way, clinically the clinical data that our salespeople use, it shows that it's a better performing product than Focus.

You are talking about ClearSight there? Right.

This is all ClearSight. It's Biomedics 1-day.

Just want to make sure I am on the right page here.

You are. You are. That's a U.S. name. In Europe, it's called Biomedics.

And then one more question. Just we were talking before about torics. Is there any kind of sense you are having of what the uptake of the daily disposable toric in Japan, or is that still slow going as you expected it to be?

It is just exactly as I said, slow going as we expect it to be. It's so interesting when you look at Japan, in the United States 25% of the market is driven by specialty lenses. Torics, multifocals, cosmetic lenses. A little bit over 25%.

In Japan and Asia-Pacific it's less than 10%. It's still basically a single-use sphere market, with some 2-week products that are declining, and not a lot of torics or multifocals, or almost no color is sold over there.

Okay.

It's slow growth.

And then just one more thing. Just if you look at the independent data, and you look at new patient visits for silicone hydrogel on the sphere side, and it has been basically flat for three quarters, do you think that is just the market taking a breather, or do you think that maybe it's not going to get to some of the more ambitious levels that surveys or docs or people have speculated in the past?

Our projection is by 2011, five years from now, that between two-thirds and 75% of the sphere market will be silicone hydrogels, you know, that is from today, and but on the other hand, the single-use market will be the size, the same size as the sphere market, so we see the single-use market growing more rapidly than the sphere market, but the sphere market continuing to become more silicone driven.

We see the toric market about 50%, which today is about on a worldwide basis maybe 15, 17% silicone. And we see the multifocal market about 45%, to give you an idea of what kind of modeling we are doing. I think that would be the best case for silicone. I think you are seeing a natural slowing down of this transition like you do in any end market. Any market you can see, with any market you want to follow. It is following the same. I am a little surprised at, especially when you look at the slowdown in the U.S., it didn't slow down as much as it has, but it has slown down.

Okay. Great. Thanks.

Chris, I'm sorry I made you wait so long. Chris Cooley.

I am still here, Tom. I will be brief. Let's give the Surgical guys their due. Can you maybe talk to us a little bit, the great performance they had there in the quarter at Surgical. I guess two questions there. Can you give us some parameters around both Lone Star and Wallach, in terms of the multiple pay. I am assuming it is with in the historical bracket. Maybe can you roughly speak to that? And then secondly, walk us through maybe what else you picked up in addition to another product in the bag? Did you add reps? Help me think about it in that perspective.

First of all, on Lone Star, the purchase price was 27 million on revenue that was 9 million. So three times. That is a company that is in a market that is the largest market with good growth potential. And it certainly fits like a hand-in-glove with our Inlet acquisition and our NeoSurg acquisition. One opens up and creates the abdominal incision. One closes it up, and a third holds it open while the surgeon is doing his thing. So they all fit together.

When it came to Wallach, as Tom indicated, we had been courting Ron Wallach for a lot of years, and that is a more mature product line. It is one where quite frankly the integration or the accretion will happen a lot sooner than that 12-month Mark. And the multiple is more like 2 than it is 3, and what we do get there very much will be a different distribution channel, that we are intent on leveraging, we will take some of their products through our distribution channel with our sales force, and we will take some of our products that Wallach did not have, targeting the gynecologists and their office practices primarily, through the distribution channels he had in place which was pretty effective.

Aside from that a lot of the G&A and the manufacturing and all that, that will be significant integration savings over the next 12 months.

Can I get you maybe one follow-up on that, Bob. Any way you could bracket that from an EBITDA basis? In terms of the multiple for both of those?

Oh, well, yes, it's always a little deceptive to do that on a company that you buy that is a private company, because quite frankly, they don't run them for, they run them for whatever they want to run them for. So the P&L typically that we look at doesn't have very many profits. And then you get into so how would you run the business.

How we run the business would allow us to have return on investment in excess of 30% on average over the first five years. So what we do is simplistically, is take the model for that business, compute the return on investment in each of the first five years, and average that and that is the 30% target that we seek to achieve. Both of these transactions exceed that 30% criteria.

And it's just not a traditional EBITDA multiple acquisition approach.

Understood. And just so I guess final question, and I'll let you guys go through the queue, I may have missed this earlier, did you give a percentage for the Proclear toric as a percentage of the total toric on a global basis in the 1Q?

I can do that.

Proclear toric.

As a percent of the total torics on a global basis.

Oh, okay.

First page. Hold on for a minute, Chris. I have that.

Roughly 40%. Let's see what they come up with here, Chris.

My number has it roughly 40%.

10 million on --

of the entire Proclear?

Of toric. Total toric.

Wait.

You're way wrong. Where did you get that? It's 10 million and 61 million.

I am sorry. 20. 20. A little over 20.

It's about, we did for Proclear toric we did 10 million, out of a little over 61 million.

Oh, with disposable. Correct.

With everything. If you look at just disposables, Chris, which is probably the way you want to look at it, it's 10 of 51 million.

Thank you very much, Tom. Nice quarter.

David Maris has been waiting a long time. David, are you still there?

All of my questions, and more, have been answered, and in the interest of time, I am going to let someone else ask a question.

You can't think of anything to ask me?

Trust me, I have a whole bunch of questions, but I really want to go home.

[LAUGHTER]

We won. We won.

You wore me out, and that is a rare thing. We will talk tomorrow.

Okay. Mark Mullikin you've got another question.

Actually, they've been answered. Thanks.

Okay. Thanks a lot, guys. We are going to let everybody go. Because I think everybody wants to go home. We will be seeing all of you in June. I am trying to remember what date it is. It is the first week in June.

And hope to have a real good message for all of you, and have a good quarter. We think we are going to have a good quarter. With that, I will let all of you go, and thank you for joining us. Good night.

Thank you, sir. Thank you again, ladies and gentlemen. This brings your conference call to a close. Please feel free to disconnect your lines at any time.