酷柏 (COO) 2007 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Cooper Companies announcement of fourth quarter year-end results 2007 conference call. I'll be your coordinator for today. At this time all participants are in a listen only mode. We will conduct a question and answer session toward the end of this conference. (OPERATOR INSTRUCTIONS)

I would now like to turn the presentation over to your host for today's call, Mr. Norris Battin, please proceed.

Thanks a lot, good afternoon and welcome everybody to the fourth quarter call. With me today are Bob Weiss, Cooper Executive Officer and Steve Neil, our Executive Vice President and Chief Financial Officer. 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, planned product launches. Forward-looking statements necessarily depend on assumptions, data, or methods that may be incorrect or imprecise and are subject to risks and uncertainties. Events that could cause our actual results and future actions as a Company to differ materially from those described in forward-looking statements are set fourth under the caption forward-looking statement in today's earnings release and are described in our SEC filings including the business section of Cooper's Annual Report on Form 10-K. These are available publicly and on request from the Company's investor relations department.

I'd also like to give you a phone number if you're interested calling in after the call, as we are Newark today. That number and I'll say it twice, 212-418-7841. That is 212-418-7841. And with that, let me turn the call over to Bob for his opening remarks.

Thank you, Norris, and good evening, ladies and gentlemen. Before I get into the presentation, I want to kind of recap what we're going to try to do today in terms of order. In the past, we've gotten feedback that the conference call has been a little on the long side and had a fair amount of repetition, so our endeavor today will be to try to cut the formal presentation down to around 30 minutes and then follow it by about 30 minutes in Q&A and if we're successful in that, we'll cut what frequently is a two hour phone call in half. In terms of the order, and in order to avoid duplication, I'm going to talk mainly about the market very briefly, our vision and mission as well as our strategy spending a fair amount of time on the how to that we're going to proceed forward, talk briefly about 2007 and its impact going forward, mention some of the progress of CooperSurgical, talk briefly about guidance, and then I'll turn it over to Steve who will talk about the bulk of the operating results at which point in time, we'll come back to Q&A.

Once again, our objective is to try to get it to an hour. As far as the market is concerned, as we know, 85% of the Cooper Companies is in contact lenses and specifically that's an industry that's around $5 billion and growing rapidly. Market has grown 8% compounded annual growth rate this decade. In terms of constant currency, the strength of 2005 when it grew 12% was -- (inaudible) was 6 and a 5% in '07 on a year-to-date basis. Recalls in lens care and basically one competitors product had some impact on the market, it's anecdotal. There's no substantive numbers on that front, but suffice it to say that we still have all the drivers in the market that we've had over this decade that those drivers being increasing rates of myopia, geographic expansion trading up to silicon hydrogel, lenses, Pro-Clear and one day, specialty around the rest of the world as well as favorable U.S. demographics.

Consistent sweet spots have occurred year-to-date consistent with the past. They include the daily disposable market which is 32% of the global market growing, 11% year-to-date, 10% of that in the U.S., 10% of the penetration in the U.S., 45% penetration outside the rest of the world, or outside of the U.S, torics are up 10% year-to-date, accounts 17% of the world market penetrated around 20% in the U.S., 15% in the rest of the world, silicon hydrogels are up 22% year-to-date, accounts were 26% of the worldwide market, and in the U.S. accounts were 44% of the market compared to only 15% of the rest of the world, and lastly, multi-focal, which is up 9% and accounts for 3% of the global market.

As far as what Cooper is about, we basically in 2007 put the vision group together, reestablished ourself with a vision and mission statement and set forth certain objectives that our vision is to enhance each and every contact lens experience. Our mission, we market contact lenses that enhance the experience of eye care providers and wearers alike through the application of technology, expertise, and service. We listen to our customers and we respond to their diverse needs. Our five year objectives, number one objective is to achieve a market share that would put us in a number two position in the contact lens market, below only J&J or Vistacon to remain the largest specialty contact lens Company, to increase our operating margins to the mid to upper 20 percentile range, to be rated number one what our consumers, the eye care provider, and to refresh our product line so that over 70% of it in the year 2011 is new products. Additionally, we want to continue to attract, maintain, and develop exceptional people. Without a good team, without people obviously our franchise is not much.

What's the "How to"? In terms of how do we get to number two and move into the 20s as far as market share from todays 16% market share, new products and new geographic markets, today we are rolling out two important products, Bioinfinity and Proclear 1 Day. Both have huge potential and both have expanded capacity. Bioinfinity is a third generation silicon hydrogel. Sales in 20007 were $10 million, all capacity limited. In October, our output increased to 2 million lenses. That's enough to support revenue in the 60 million to $70 million range.

We will continue to expand capacity and improve efficiency, whereas over we're half way there in as far as targeted efficiency and we believe for good reasons we can achieve targeted output, efficiency, and cost. For example, our R&D line, which was line number five that we dedicated to the R&D people to look at the efficiency, we have been able to achieve our targeted efficiency rates. Importantly, we're ahead of schedule in our two week silicon hydrogel lens, our work horse of the future. It is now anticipated we will launch it in the April, May time zone and possibly even earlier, importantly, unlike Bioinfinity which was on all new manufacturing platforms, using all new materials to mold and to mold with an entirely different material, if you will. Importantly, the two week is on Gen 2 and it is molding with a polypropylene which is the type of material that we're accustomed to molding with as opposed to EVOH which is the Bioinfinity product.

We believe that this means better yields, higher volumes, and much lower cost. Note, since we've been burnt in the past with our Bioinfinity rollout that included in the 2008 guidance is none of the two week silicon hydrogel product; however, we expect the two week to be a major factor to our post-2008 market share gains and are therefore very optimistic about continuing solid double digit growth into 2009 and beyond. We already know many chains have a high degree of interest in this new product. Furthermore, we believe we will be able to produce large volumes on our Gen 2 platform where one line can likely exceed the total capacity of all of the Bioinfinity lines in their current state. Bioinfinity is now in production on six lines or even seven if I count one that was put into production in the last week. As an aside, during the fourth quarter, we decommissioned our first Bioinfinity line writing off its entire value of 7 million. I know Steve will be covering our fourth quarter results, simplistically, however, line number one was our Model T of silicon hydrogel production with about the same amount of, or a greater direct labor, overhead, and depreciation and could only produce one-fifth the amount of lenses as the other lines.

Once we determined it was not capable of being upgraded, the decision to stop wasting our time and money became obvious. Another key area critical to our success is a silicon hydrogel toric and to a lesser extent, silicon hydrogel multifocal. In 2008 we will be working on two silicon hydrogel projects, one using our one month Bioinfinity and one our two week products. While it is unclear which one will be ready to go to market first, we expect to have a silicon hydrogel toric in production by the end of this fiscal year. I might point out that the risk profile of transitioning from a sphere to a toric is much lower than that to develop a new lens. Bioinfinity on a new manufacturing platform with all new materials. So we're a lot more confident that silicon hydrogel torics will be a contributor to our 2009 and beyond results. For the first time we have adequate resources to focus on these critical areas.

Before I transition to a one day disposable modality it let me make one more very important point about our ability to move quickly into the 1.4 billion silicon hydrogel market. Silicon hydrogel is now 27% of the global market and 46% of the U.S. market in the most recent calendar quarter provided by independent market research. Keep in mind our silicon hydrogel materials are third generation hydrogel materials. They are not coated like the first generation silicon hydrogel. They are less rigid or stiff. Our patented Aquaform technology allows water to bond with the silicon hydrogel, unlike competing technologies. This is important since while all lenses work reasonably well, comfort is still number one factor in a decision of what lenses to wear. People have these lenses in half the day, so they must be comfortable. A second factor is unlike the market leader, we will work with the largest chains and let them leverage their branded private labels. We will offer this flexibility with our two week silicon hydrogel, which is in the sweet spot of the market.

Now on to the one day modality. As we suggested throughout this year, the one day or daily disposable market is going to stay a major growth driver globally. Keep in mind the U.S. is only 36% of the worldwide market and is likely to be less five years down the road given the rapid growth in Asia Pacific. This Asia Pacific continues to grow double digit mainly because of daily disposables. During the fourth quarter, we made substantial progress in expanding capacity for one day Proclear daily disposable which is Proclear 1 Day by substantially and I mean by tripling its capacity between July and October. Today, we can achieve annualized rates of 150 million lenses and while we are still capacity constrained we now have enough capacity to help drive the double digit growth we expect in 2008 and going forward.

The market for 1 Day remains double digit and we believe Proclear which is a proven material for late day comfort will be a great product for this global space. It will be our one day work horse.

To digress from new products and to renew our product offering, let me just touch on an extremely important message about 2007. We are emphasizing to our CDI salesforce the message is "Sell what you have, don't try to sell what you don't have". No silicon hydrogel in 2007 in spite of no silicon hydrogel two week product and a limited capacity for Bioinfinity and a start up of Proclear 1 Day, our CDI sales team gained market share and in fact gained share in the U.S. Total fits today are 21.6% and we're in a number two position in the U.S. We accomplished this incredible feat being hugely limited on supply and during a difficult transition period of relative supply while we were consolidating or inadequate supply while we're consolidating the distribution centers around the world. I am immensely proud of our global organization and particularly our sales team which has hung in there through the tough times.

A second important point about our 2007 results that I hope you picked up on is how much market share we continue to gain of the hydrogel or the non-silicon hydrogel market. While this portion of the market is flat worldwide, it still represents 74% of the entire market. Our Proclear family is up 27% in constant currency for the year and an impressive 36% constant currency for our most recent quarter. This growth is all -- this growth of Proclear is in all categories, daily disposables, our conventional spheres, torics as well as multifocals. During the first nine months of the calendar year, Proclear material moved share of the non-silicon hydrogel market worldwide from 4% to 5%. Today, it's 24% of our revenue compared to only 20% in 2006. All this and we still don't have a market for Proclear in Japan, a market almost the size of Europe. In Japan, we expect to be launching Proclear 1 Day at the end of this calendar year or early calendar year 2009 depending on regulatory approval. We talked about new products and capacity and selling what you got.

The other part of our market share gains growth story is Asia Pacific. Here, we've made progress in and we laid the ground work for future growth by adding to several key positions in 2007. For example, we now have a President of Asia Pacific and we're already expanded into China, Malaysia, and Taiwan. In early 2008, we will go direct in Hong Kong. Some of our progress is already apparent in our growth 19% in constant currency in 2008. As we add new products, gain regulatory approval, and with existing products such as Proclear in Japan and expand our footprint, we expect to rapidly increase our market share in high growth theatre from its 8% level today.

And so in summary, we believe we have a great market to participate in and one we expect to continue to see grow 6 to 9 %. We believe we have the right family of new products for the silicon hydrogel market. We believe we have the right family of products for required resources to grow Asia Pacific and we believe we will continue to gain share in the flat hydrogel market where no one but us is effectively addressing the market other than in daily disposables. Excluding daily disposable hydrogels, it still accounts for 40% of the market and Proclear answers the need in that space.

2007 set the stage for how we will proceed going forward. We think that 2007 will allow us to achieve double digit constant currency growth going forward, keeping in mind the key events that took place. Significant progress with Bioinfinity manufacturing, know how, capacity, and output or yields, if you will. The launch of our premium one day disposable Proclear 1 Day and the ramping up of its capacity to 150 million unit mark by the end of 2007. The completion of consolidation of inefficient distribution system in the United States and substantial completion in Europe, solid progress on getting ready to launch into the two week hydrogel market, the U.S. sweet spot, progress in adding to the infrastructure to gain share in Asia Pacific, while very very disruptive, the substantial realignment of our manufacturing plants and locations in order to optimize efficiency going forward, particularly by optimizing the Gen 2 platform acquired during, from the Ocular acquisition.

CooperSurgical just a brief comment about that. Beyond CDI, CooperSurgical had an outstanding year. It achieved $155 million in revenue growing 24%. It has successfully integrated its hospital business which now has a dedicated and productive sales organization that knows how to sell into hospital -- the hospital technique of selling. Sales for the year were 42 million, up 56% from the prior year and now account for 27% of CooperSurgical.

CooperSurgical successfully completed two acquisitions, Wallach Gynecology Devices used primarily in office practices and Loan Star, a retractor system, which places a retractor ring around a surgical incision field. CooperSurgical continues to perform well with 9% organic growth in the fiscal year and in the fourth quarter.

Just to comment briefly about guidance, while 2007 was indeed an integration and start up year, and 2007 was indeed an immensely complex year from our analysts and shareholders perspective, 2008 will see us transition to a new stage, growth with improving profits. Given our huge committment to grow with 70% of our revenue in new products in 2011, we'll remain capital intensive at least until we ramp up the required platform for what we believe will be our two week work horse.

With that, we gave guidance for 2008, which reflects top line growth in the range of $1.040 billion, to 1.090 billion. Drivers, CDI at 875 million to $920 million, and the drivers are Bioinfinity and Proclear 1 Day, noteworthy is not included in that guidance is two week silicon hydrogel lens which as I indicated we expect to get now in the market as early as mid fiscal year. From an, for earnings call-outs or identified costs, will be one-third of where they are in 2007, as we move towards 2008 we will begin to increasingly emphasize our GAAP results, something I know that all of our analysts and our shareholders will be very happy about, and for 2008 our GAAP earnings are expected to be in the range of $1.30 to $1.80 while our non-GAAP targeted earnings, the range of $2.40 to $2.65. With that, I'll turn it over to Steve who will talk about the results.

Thanks, Bob. Good afternoon and evening, everyone. Overall, I want to refer everyone to the Cooper Co. website for product detail, we post the market data as well as our product sales data there, so I don't want to get into too many numbers today. I'm going to be talking as Bob did in revenue mostly in constant currency. Overall, for the quarter, our revenue was $254 million which was up 14% in constant currency, so very strong quarter for both segments especially Vision, which gained share globally as well as in the U.S. during the quarter.

Overall for the Vision Group, there was a 10% soft lens sales growth which followed 7% in the third quarter and that compares to 1 to 2% in the first half. Thus we've have a significant impact realized from new products and additional production capacity as the Vision Group gained global market share in the second half of the year.

Regionally the Americas led the growth where soft lens revenue grew 12% over the fourth quarter last year and 5% over the previous quarter. And what drove the Americas was the U.S. which showed very strong growth growing 16% in the fourth quarter and also 5% over the third quarter. Looking at products, single use product grew 29% and represents 15% of our total sales. Bioinfinity sales were $5 million for the quarter, $10 million for the year, and in the quarter they were led by Europe at $2.5 million and the U.S. at $2.2 million. Overall, spheres were up 12% which compares to being up 5% in the third quarter and flat in the first half. Disposable torics grew 8% and in the U.S. disposable torics were up 10% despite not having a silicon hydrogel toric in the market. Proclear material sales were up 36% in the quarter and at $52 million now represents 25% of soft lens revenue.

Overall, disposable lenses were up 13% and our core lenses were up 16%, core lenses now representing 72% of our total revenue, while the market was up approximately 5% in the quarter. Thus while capacity constrained on Bioinfinity and PC single use, we significantly outperformed last year and the market as supply increases for these products in 2008 and our growth was enhanced focusing for these products for the next year. So certainly setting ourselves up well for a strong growth year in 2008 as that capacity comes in. Looking briefly at the women's healthcare -- sorry about that, technical difficulty here. Let me go again. CSI our women's healthcare business had another solid quarter with revenue growing 25%, 9% organically. Hospital products are now 27% of the revenue and that's up from 22% last year and they grew 51% in the quarter and organically it was a double digit growth rate so again, strong, consistent growth by women's healthcare.

Turning to revenue guidance, we expect revenue growth next year to be driven by single use and silicon hydrogel products as Bob mentioned. CVI should continue to grow much faster than the market, and we should be continuing to see the growth in hospital products from our women's healthcare group which will expand the revenues from its recent acquisitions.

For the first time since introducing single use lenses in 2001, we believe that our manufacturing capacity in the second half of 2008 will catch up to demand and we will be able to aggressively pursue new sales opportunities that we've not been able to bid on previously. Additionally, we expect to continue to substantially increase our production of Bioinfinity lenses, not only through the addition of a few new lines but also through continuing yield improvements, an additional product line was put into service at the end of November as Bob mentioned, significantly ahead of schedule and we expect an additional line to be brought on by the end of the first quarter. Overall we're confident that our product offerings will result in a 10 to 15% revenue growth in markets that today are growing 5 to 7%.

I want to spend a little bit of time on call-outs. I think it's to provide a little bit different perspective than we have in the past. As most of you know we've identified those costs which we feel are not of a recurring nature. A cynic would say we've done this to confuse you and to the point that we have no doubt been successful, so hopefully, I can provide some clarity here and also some guidance as we go into 2008 on these costs. We really group call-outs into four types of costs.

Acquisition and integrated related. Those relate to costs that are primarily the result of acquisition of Ocular Sciences and consist of accelerating depreciation or writing off redundant assets, once more efficient product lines are in place, severance costs for duplicative functions and overlapping costs while new operations are implemented. These costs are both cash and non-cash related. The second category is manufacturing start up costs and these relate to new manufacturing platforms which generate inordinant inefficiencies while we work through the learning curve. These costs are predominantly related to silicon hydrogel manufacturing and they are predominantly cash related.

The third category is litigation expenses. These are costs associated with intellectual property, shareholder and acquisition related litigation and these are also cash related. And then finally, share based compensation expense. These are expenses required by SFAS 123R and are non-cash related. More detail on these costs is included in our earnings release and SEC filings but with these four classifications, we organize our review of the call-outs.

With regards to Q4, we worked diligently to complete virtually all of the integration activities by the end of fiscal 2007 which is one quarter ahead of our planned integration timing and significantly faster than we originally projected. We heard loud and clear from our shareholders that what I call noise from integration activities needs to be culled and we made remarkable progress toward this end in Q4. We consolidated our primary distribution centers. In the U.S. that happened in the fourth quarter and Europe that happened at the end of the third quarter, and that was predominantly in the United Kingdom. We completed the conversion of our high volume processes to newly installed Generation 2 lines. We complete our assessment of production assets that will be utilized in ongoing operations, including our conclusion with regards to the first Bioinfinity line as Bob mentioned, and the resulting charges in the quarter, most of which were non-cash related were higher than we originally estimated and that was due to limited visibility of asset utilization until all production conversion to the new lines was completed.

I want to emphasize this is our intention is to return to normalized operations and we believe that our efforts in Q4 achieve that goal. Looking forward, our operating clarity improves dramatically. Costs that impact 2008 are limited one primary cost and that is manufacturing start up and to two lesser areas, integration related and litigation expenses. Acquisition and integration costs are all the costs that have been incurred during the three year integration and they will not recur in 2008 with the exception of about 1.5 to $2 million of duplicate facility costs associated with three remaining satellite distribution centers on the European continent. They will consolidated into our Liege, Belgium facility in 2008.

Manufacturing start-up costs, they will end in 2008. They carry over from 2007 as a result of inventory and costs inefficiencies that will flow through to the P&L when the product is sold and the start up of several new silicon hydrogel lines. We estimate between 24 million and $35 million to be incurred in 2008 significantly less than 2007 and again, they will end in 2008. And lastly, litigation expenses. With the settlement of our intellectual property litigation with CIBA in November, there are essentially one months worth of legal billings that we'll be identifying in 2008 in a small amount of class action expenses. We estimate between 2.5 million and $3.5 million to be incurred in 2008 and that's primarily in the first quarter. Thus in 2008, we expect identified costs to range from 28 million to 40 million which is $0.50to $0.70 per diluted share. This compares to an EPS impact of $2.31 in 2007 as we have largely completed the integration activities and we're now migrating to new manufacturing platforms.

Lastly, we'll continue to identify share based compensation expenses going forward because they're arbitrary and non-cash related, non-comparable to earlier financials that are in the five year table. We estimate these costs to range from $0.35 to $0.40 per share in 2008. Hopefully, this lengthy clarification is helpful and indicates why the costs were incurred, why we feel they're non-recurring in nature and why they will go away in 2008. Taking a quick look at the operating results I'm not going to repeat the numbers in the release but rather I want to focus on trends and how they impact 2008. First, however, I wanted to address our Q4 results excluding call-outs which were lower than anticipated by approximately $10 million or $0.20 per share and this is due to three factors.

One is the impact of currency which is primarily the impact on our UK based manufacturing. The second is operational inefficiencies and manufacturing and packaging as we completed our integration activities and we have not called these inefficiencies out. We are learning. And third, expenses associated with supporting product launches which were more aggressive in the quarter than planned and thus we incurred distribution and trial lens costs in advance of the revenue generation. Excluding the impact of currency, these Q4 activities put us in a position to effectively drive growth in 2008.

Now, looking at the income statement for the quarter. Gross margin excluding the call-outs declined to 61% versus 63% in the fourth quarter last year and this is due to product mix as lower margin spheres, primarily single use, grew faster than higher margin torics. In general our cost per lens for our major product categories are the same or less than in Q4 last year and pricing is essentially the same, thus product mix is causing a decline in gross margin. In Q4 we also incurred inefficiencies in manufacturing and packaging as we complete our integration effort which adversely impacted gross margin by approximately 3 million to $4 million again which we have not called out and which we do not expect to recur.

Looking into 2008 we expect gross margins to be slightly lower year-over-year due to product mix. Our strong revenue growth in 2008 is expected to come from silicon hydrogel and single use lenses both which will carry lower than average gross margins. I should note, however, that as we go through 2008 we expect our cost per lens for both single use, especially Proclear and silicon hydrogel to decrease and as these manufactured lenses flow through inventory they will positively impact gross margins.

Another significant impact in 2008 is the benefit from the migration of product for more -- to more efficient product lines and that incurred in the second half of 2007 which is expected to favorably impact manufacturing costs by 12 million to $13 million next year and will substantially offset the mix impact. Thus overall, we expect gross margins in the 62 to 63% range in 2008. Looking at operating expenses excluding call outs they were 43% of sales in Q4 compared to 45% last year, as we experienced some leverage from the increased sales. In 2008, we expect to again experience leverage on our operating expenses, however, we anticipate continuing to grow our marketing and R&D investments as we invest in the near term and in product launches and in future product development, and in 2009 we expect even greater leverage on our operating expenses as we transition from the spending associated with Bioinfinity and two week silicon hydrogel sphere launches, the toric launches at the end of the year, and PC single use launches. This new product spending in 2008 fuels revenue growth in 2009 and beyond. Operating margin excluding call-outs was 18%. This is the same as last year and reflects the impact from the changing product mix offset by the lower operating expenses.

Our operating margin was impacted by costs associated with our new product launches and as noted we absorbed manufacturing, packaging, and distribution inefficiencies in the quarter as we completed our integration activities, and when you take the distribution inefficiencies with the manufacturing and packaging it totaled approximately 6 million to $7 million in the quarter which is not being called out, as I noted earlier. We anticipate operating margin in the 19 to 20% range in 2008 as we balance our marketing and R&D spending with total operating expenses growing less than sales. We do expect our clinical expenses to be high in 2008 as we complete the design of our silicon hydrogel toric and as we develop our marketing programs for two week silicon hydrogel sphere and silicon hydrogel toric, and further expand our Bioinfinity and PC Daily marketing. We would expect to realize operating margin expansion of an additional 100 to 200 basis points in 2009 as gross margins improve and we realized improved operating expense leverage. The effective tax rate excluding call-outs for the fiscal year was 17% and we expect the rate in 2008 to reduce to 14 to 16% range which is more normalized from a revenue by jurisdiction perspective.

And let me close it out with a few comments on cash flow. Our operating cash flow was $38 million in Q4 compares to $36 million last year, with our integration activities substantially behind us, we anticipate cash flow improvement in 2008 significantly over 2007. Our as reported or GAAP earnings substantially increased with the completion of the integration activities. We're going to see improvement in profitability and we'll begin to experience sustained reduction in finished goods inventory levels as we complete our distribution center consolidation effort. Thus looking at 2009 we expect operating cash flow to expand further as profit margins expand and global inventory turn over improves further.

In the quarter we had capital or I'm sorry for the year we had capital expenditures of $184 million and that reflects initial progress payments made in the fourth quarter on single use and two week silicon hydrogel production lines that will be built during 2008. We expect CapEx of 160 million to 180 million in 2008 as we add those silicon hydrogel and single use lines and those will support our revenue growth opportunities in late 2008 and 2009. So with that, a lot of data, a lot of numbers so I'm going to turn it over to Bob for Q&A.

Okay, Operator? You can open up the lines for questions.

Sure. (OPERATOR INSTRUCTIONS)

[Jared Holtz].

Just a couple of quick questions and I'll jump off here. Can you just talk about the cannibalization of DK 100, the two week, what it can do because I know you're not including it in your guidance for next year, but if you look at J&J which basically dictates the market at this point, moving over to a two week, could this eventually just blow Bioinfinity away, meaning Bioinfinity goes away and you just go with the two week and then just on the royalty payments, is that going to, are those royalty payments for the silicon hydrogel lenses going to be excluded from your earnings numbers?

I'll take both of those questions. First of all, on cannibalization, certainly the U.S. market is much more about a two week market, whereas the rest of the world is much more about a one month, particularly as it relates to silicon hydrogel. So I don't, while the work horse clearly will be the two week going forward, there is a large niche market as we can see from Pure Vision and night and day and in the 30 day space. So I think Bioinfinity given its reception in the marketplace will have its place. If we look five years down the road there is no doubt that the two week will be the much larger market, but we don't, given the number of lines we have and the amount of capacity, we probably can address the market needs from that perspective. As far as, so the answer is we're a long ways from being able to meet the market needs in both spaces, the one day, the two week and the 30 day marketplace, and it's not one size fits all globally.

As far as the royalty, the royalty is baked into the numbers that are not called out. It's not a call outgoing forward, and from the perspective of expectation down the road if we look down the road at silicon hydrogel space, we will still have attractive gross margins by attractive, I mean if we look two or three years down the road north of 70%, addressing that, so it's a win- win from the Company's perspective and time to move on and stop as you can see from the legal fees, we created in the quarter it was time to move beyond making the lawyers that rich and do more productive things.

Got you, okay, that makes sense. Just one more thing on the royalty. Can you quantify the percentage that you'll have to pay out and then just on the call-outs for next year, you mentioned that you are going to kind of curtail the manufacturing portion of those expenses related to new products but with a couple of new toric lenses potentially coming on, does that mean unlike the spheres, those numbers will not be as significant? Thanks.

Steve, do you want to take that?

Yes, I'll take that. No, we won't disclose the royalty percentage, Jared, but nice try. The torics on silicon hydrogel, once we understand how to work with silicon hydrogel and sphere, while a toric is more complicated because have you to deal with the cylinder and the axis, we do that on hydrogels today. That's a normal recurring operating expense. The start-up to build adequate inventory to do a launch takes longer because you have over three times the skews but as far as in efficient expenses or anything else, there is no call out and that's not considered a non-recurring type expense, it's in the numbers.

All right, thanks a lot.

Sure enough.

[JoAnn] you're the next questioner.

Thank you. You are not including in your numbers the DK 100 product, which tells me that your top line is probably a number that you're fairly comfortable with. Can you confirm, do you think of your guidance is being conservative? Do you think of it as being aggressive and same thing for the bottom line. How much have you plugged in on your expense side?

From the perspective of not banking on the two week, we've learned our lesson with the Bioinfinity and we really don't want to go down that path. It's a product that's out there and in the marketplace and has adequate capacity behind it. So, we obviously are optimistic we will be in the market mid year and so from that perspective, we think at the range we've given on the revenue side is a realistic range and one that we think have a good shot, we have a good shot of being towards the top end of that.

Relative to your second point, earnings per share, I think we approached guidance the same way. I don't want to say -- let's find the bottom for sure but I think what we have is realistic guidance and one that the shot of getting at the top end of the guidance is at least much better than the top, the risk of the bottom end, and I think obviously guidance gets more manageable now that we have, if you will, $100 million of restructuring activity pushed to the background and we're done with that.

The risk on Bioinfinity now that we've been in production, the period of time we have now that we've basically stepped up and can make 2 million plus lenses a month, obviously the predictability has gone way up on that front. Our bottom line/top line are driven by, certainly our bottom line is driven heavily by top line growth and in that sense, we view that having, we feel good about the capacity potential for delivering Bioinfinity and Proclear 1 Day which are going to be the drivers of next year's top line growth and therefore will be contributing to our earnings per share growth.

That's very helpful. If you look throughout the year, do we think of 2008 as a back end loaded year or is it still a year that you're going to build Bioinfinity, you're going to build the 1 Day lens and you're going to decrease your call outs?

It's a little back ended but not skewed perhaps as much as this year was. Bioinfinity and Proclear 1 Day is ramping up as of right now, we are somewhat constrained on both fronts and we will be out of I think a mode of being constrained by mid year, which will then foster even a better growth. We could sell a lot more, for example, Proclear 1 Day in Europe if we could make a lot more this year from the get go , Day 1, but being at 150 million units in capacity is we've made a lot of progress there, so year-over-year, we would expect respectable growth in the first six months

Okay, thank you very much.

Larry Biegelsen.

Good evening and thanks for taking the call. Can you hear me okay?

Yes, we can, Larry.

A couple of questions on the DK 100. First, any hurdles that, what are the major hurdles that are still in place for making a lens? Are they material specific or is it related to adopting them to the Gen 2 lines? Could you talk about the property? I don't know if you've talked about the properties of the lens, specifically the modulist surface treatment, water content and DK/T, the gross margin compared to Bioinfinity? And lastly, if you do launch it next year, what would be the earnings impact? Obviously there's a benefit on the top line, because we saw it in your top line guidance but would you expect it to be positive or negative on earnings next year? Thanks.

Okay, as far as the hurdles of getting to market, there are two ways to look at the production side. It's on Gen 2 and as I indicated, it's being made by polypropylene which we've made throughout our past so that we're very comfortable with. We already are in production on what's known as Fast Track. I think some of you may have seen that in the UK in November so we know we can make the product at least on Fast Track. We are basically well down the line of getting the product PQ'd as we would say, Production Quality in Puerto Rico which is our large Gen 2 line.

There is our regulatory requirement of the 510-K, we are working through the process of approval with the FDA and we are certainly recently optimistic that we will be in the marketplace in the time frame we targeted, the April/May time frame. Obviously no guarantees when you're dealing with the government but from the perspective of this material compared to other materials, there's nothing particularly more challenging relative to what should be from a regulatory point of view. As far as the DK, of this material compared to Bioinfinity, yes, the DK is, Bioinfinity is 128 and this is 100 so it's a little bit less in terms of DK, and more suitable for about a two week space. From the point of view of its stiffness, it is obviously a little more stiff than, a little less stiff than the 100 -- 128 Bioinfinity, and from that perspective, it will do well in the market, measures up well against, if you will will, Oasis.

Bob, are you willing to disclose surface treatment and the modulist, the numbers?

I think that's going to be available out there as far as the 100 from the point of view of its water content will be slightly higher, 52%. Its modulist will be around where, Acuvue, it's a 0.4 modulist which is comparable to Accu Vue Advance if you will as well as O2 optics, so less stiff compared to, if you will, Oasis and the DK 128 are more comparable. It is like Bioinfinity, not a coated material and basically has a lot of the aquaform properties vis-a-vis being or having a higher water content and presumably features that could be comfort.

Lastly then on the profitability, I mean if you launched in '08, does it benefit earnings or is it a drag on earnings?

I would say that given what we think of this product, we're not going to go light in terms of putting it into the marketplace, so for the most part, we will spend to put the muscle behind it if the capacity is robust. There will be some incremental contribution perhaps but it's not going to suddenly shoot our profits way up. We view ourself as a growth Company and a growth Company shouldn't try to milk mode a product out of the shoot, particularly one that we think has the legs that this product does.

I'm sorry it's not in your top line guidance but is it in your earnings guidance though?

It is in neither. It's not in top and it's not in bottom.

You're saying if you launch it next year it will probably have more of a positive impact, slightly positive on earnings as opposed to being a drag on your guidance.

Yes, it will certainly have a more positive impact on the top line and a much less favorable impact on the bottom line, given that we will invest heavily in rolling it out.

And lastly, D&A was high in the quarter at $29 million. Why, and going forward?

Larry, it's like last quarter, and we've disclosed I believe in the release, there's accelerated depreciation on some assets that we were taking out of service and if you identified those assets as having a shorter life than they exist in the standard, you have to accelerate that depreciation until they're thrown away, and so there's, I can't right off the top of my head there, it is in our release as to what impact had to do with that accelerated piece. But I'm sorry, it's in the quarter, $9.4 million of the $28 million was related to accelerated depreciation for those assets and $14.2 million compared to the total $84 million was accelerated depreciation on those assets that were taken out of service, so that will, there's a small less than $1 million rollover that into Q1, so that's virtually done but that's the reason for the increase.

Thank you.

Larry Keusch.

Hi, guys, can you hear me?

Yes, we can.

Great. So, I guess here is what I'm wrestling with. If I think about the low end of your guidance and think about the 19 to 20% op margin that you're talking about, I keep coming up with sort of EPS numbers that would be higher than the guidance you've provided. So I'm wondering if number one, when you talked about operating margin, does it exclude stock based comp and maybe you could also help us think a little bit about how you guys are thinking about interest expense and I think you said the tax rate would be somewhere between 14 and 16% so if you could just set me straight, that would be really helpful.

Steve, do you want to take it?

Yes, I'll give a shot at that, Larry. The interest expense is going to go up a little bit, especially as we go into the first half of the year, you'll notice that from a cash flow perspective, we had negative free cash flow last year, largely due to the integration activities, the cash portion of the integration activities and the $184 million in CapEx. We expect to be positive for the full year but that's more coming out the back end being positive than up front, so we expect some impact from interest expense. You'll also notice that the currency impact in the quarter for us this year or this fourth quarter was $4 million. We think there's currency today a weak dollar against the pound, we buy more product from the UK than we sell to it so we think that's going to have some impact again, Larry, so that's the pressure there. We do think that the taxes are going to be in the 15 to 15.5 range but again that will move around depending on where the cash or the profits stick, so hopefully that helps get you to it.

The real balance is what Bob indicated is how much do you invest in the launching of these products, the marketing and trial lenses, and we will continue to grow R&D in 2008 above the sales growth line, so there's a balance on operating margin but there is a little bit of activity that's going on below the operating margin line which may help you reconcile back to those numbers.

Okay, but the 19 to 20% op margin is inclusive of those marketing expenses that you're talking about; is that right?

That is correct.

So -- well I guess I'm still and we can take this off line.

I'm sorry, it does not include the equity base. You'll see this year and I'm trying to think of the number, I believe it was $0.28 was our equity component, we're thinking it's going to be $0.35 to $0.40 that's probably the difference for you.

Got it so that makes sense so the 19 to 20% is excluding stock based comp?

Right.

Okay, and then I guess the second question is, can you just help me understand coming back to DK 100, I guess there's two questions here. One is you said that you're kind of in this let's see, you're down this year, you're getting the production quality up in Puerto Rico, so I guess technically it's still sort of an R&D line if you will or it's in R&D. Again, how different is that line from what you already have going into the UK? I understand Puerto Rico has Gen 2 on it et cetera, it's a higher volume line, but again, if you got it working in the UK, I guess I'm trying to figure out what are the risks that you can't get that on the timeline that you are looking for down in Puerto Rico, and then the second part of that question is, if you are telling us that you're going to get this on the market earlier than you had anticipated, you're obviously feeling a pretty, you're starting to feel some more conviction for the product, so why not put that in the guidance if you now start to feel like you can get there ahead of your prior expectation?

Good questions. The platform used in the UK compared to Puerto Rico is completely different. One is not, Puerto Rico is Gen 2 and a highly complex piece of equipment that runs into the neighborhood of over $30 million. What we call the Fast Track in the UK, while it uses polypropylene mold is a much more, if you will, labor intensive process, that is not Gen 2. Easier to get through, easier to make product off of. We are in fact in production on that, but that's not the way we're going to have a work horse product and that's not the way long term we will get our costs down. So, yes, we can make enough on that line to have a launch but the launch would not be a robust launch compared to getting through all of them as what we call a PQ, Production Quality in Puerto Rico.

We expect over the next couple months to, if you will, authenticate the line in Puerto Rico. The second piece of the equation is regulatory and so if you put regulatory together with the production side, then we are, are we being cautious? Yes, we are but I'd rather have it as an upside than have egg on my face that we put it in the guidance and then it became nothing.

Okay, got you. Thanks, guys.

Thanks, Larry.

Jeff Johnson.

Good evening, guys. Can you hear me okay?

Yes, we can, Jeff.

Just a couple things here. Qualitatively, can you talk about the DK 100 launch that you're planning in March/April, from what we're hearing it maybe going out to just a few Beta sites and how quickly could you ramp that up or is it something where most of the calendar year, you'd expect it to stay at a limited number of sites?

The answer to that, Jeff, really comes back to if we're rolling out the product based on Fast Track in the UK, it's going to be limited launch. If Puerto Rico line is running the way we think it could run, it has the capability to match the production of as I indicated all of the first six lines of Bioinfinity, so it would be pretty robust. We think the yields, it comes back to a lot of discussions about can you make it and how will the yields be. We think the capability to get respectable yields out of a Gen 2 line using polypropylene is much much much by a factor of I don't want to say 10 but hugely easier event than what we are trying to do with Bioinfinity.

So, what will dictate how robust is the launch is number one getting the FDA approval on the 510 K, and two then would be how well is the line doing in Puerto Rico. If it's doing well and all goes to what we're hoping to happen, we could start having a respectable amount of product go out the door in the April/May time frame. Too early to guarantee anything and that's why it's not in our guidance.

Fair enough, and Bob, maybe I missed this, but how many lines in Puerto Rico eventually would you like to have on the DK 100?

Well, we're going to start with one, we have a second one on order. These things in theory crank out around 35 million units, so if we go to a third line, if three are in production, that is one heck of a lot of silicon hydrogel lenses, keeping in mind that's a little different than a daily disposable in terms of what you get as an ARP, so the lead time is substantial on the equipment, so it's in the neighborhood of approaching 18 months and that's why we already have the second line on order.

Fair enough and then Steve, CapEx in 09? I know you talk about it for '08 but expectations that it could fall off in '09, is that a good expectation to have or an accurate expectation to have, and can you just remind me maybe what normalized CapEx levels should be for you guys eventually?

Yes, we're trying to define normal, but I'll help a little bit. We think that a maintenance level CapEx for us is about $25 million, that's just your existing capacity and replacing things that get old. We think if we grow with market share, we're somewhere around 100 million to $110 million, and then you get above that if you're growing faster than market share. So next year, 160 million to $180 million reflects the investment in the single use lines as well as the second DK 100 line.

In '09, the production lines should go down, even if we're growing above market, but by mid 2010, we think we're going to be out of manufacturing capacity. Today we're actively looking as to where to put that next footprint, so if we have a build a building then the CapEx cost would be quite a bit different, if we have to lease and just retrofit it will be quite a bit less. So what, I think from a guidance perspective in '09 is we expect '09 to be similar in amount to '08. It's just that it will be less production capacity and then made up, the difference made up by a manufacturing facility, but a little bit early right now because we don't know what that footprint looks like in 2010, but hopefully that helps.

All right, and then the last question I guess, going back to the earlier went on operating margins. Just putting your guidance together for '08 and even if you exclude options and that it just seems to me operating margin has to be down next year, assuming some consistency in the interest expense line. Am I just looking at my model wrong? I know you've talked about leveraging top line growth in the faster earnings growth next year. I'm just not seeing it in your guidance or in my model and maybe you could help me out there?

Yes, I'll take a shot at that, Jeff. I mean, we expect the gross profit or gross margin to be slightly down, and that's why we say 62 to 63%, and that's purely mix, and we do expect except for marketing and R&D, to lever off of OpEx. In other words, that will grow less than sales, so the real balance in operating margin that I say is how much are you investing in R&D and how much are you investing in margin. We don't expect to get a huge growth next year. We expect significant growth in '09 because as we go out of the year, a Proclear daily unit cost and a Bioinfinity unit cost and for that matter a DK 100 unit cost is going to be less going out of the year than it is average for the year.

So, we expect to have some margin expansion but not great again because we want to set up '09 and take advantage of that capacity and the new products that we're putting on the -- putting the capacity in for, so it will expand. It's just again 2009 is less constrained from a capacity perspective so that's where you see significant operating margin growth.

All right, and just to make sure I'm not mishearing you Steve or misunderstanding you, you're saying it will expand but then you're also kind of saying everything you're saying is excluding marketing and R&D?

No, no, what I'm saying is it's a balance, Jeff. The marketing and R&D, we're not going to go crazy but we certainly are going to invest to drive the future, and will I invest a couple 100,000 in clinical activities to support a silicon hydrogel toric in fiscal 08? Even if I don't have revenues until as we go out of fiscal 08? You're (expletive) straight I will.

Understood, but if you do that, there is a scenario here where operating margin falls next year?

Correct.

Okay, that's how it worked in my model. I just wanted to make sure I didn't have an error somewhere.

Yes, it's a balance.

Okay, no, that's it. That's all I've got, guys. Thank you, much.

Mike Weinstein.

Yes, can you hear me?

Yes, sir.

All right, let's clear up this operating margin discussion, okay? You're guiding for the year, I'm getting this right off of your release, $2.00 to $2.30, before you add back your stock based comp; is that right?

That's correct.

Okay, and then if I back into that, an operating margin I get 15 to 16% using your other commentary about tax rate and what else? Interest expense.

Yes.

So if I'm right, I get 15 to 16%, it looks to me that what you're excluding, Steve, is your amortization expense. So, when you said 18 to 19%, it looks to me like you're backing out those stock based comp and amortization expense, could that be right?

No.

All right, so where is the disconnect? Because you don't get the $2.00 to $2.30 with the guidance you gave.

I'm going to have to go and take a look at your model and compare it to ours.

Well, I don't need you to see my model. All I'm doing is taking your numbers, I'm taking your revenue guidance and even with the stock based comp which is 190 to 200 basis points which is off of your operating margin commentary, you still wouldn't get down to $2.00 to $2.30. And that's the questions your hearing from everybody. Everybody is doing the same math, they're taking your revenue guidance, taking your operating margin guidance and they're running that through their income statements with the 15% or 14 to 16% tax rate, and they don't get $2.00 to $2.30. So it looks like there's some disconnect there, and my math said that it was probably that you were excluding amortization expense as well. Unless the currency impact is going to be significant, I mean like 15 million, $20 million.

Yes currency is a piece of it but we've also assumed a pretty significant investment in R&D in the $2.00 to $2.30. That's where both my comments on the clinicals go and also my comment on a balance, because we're not going to go crazy and--.

But R&D is in operating margin.

Correct.

SG&A is in operating margin.

Correct.

So that 18 to 19% commentary, right? Which was, which backs out stock based comp, it's still what's everybody on the phone having a disconnect with?

And understood and what we're trying to do is we're trying to put an EPS model down there that we know we're going to beat. That's why we said we're on the high end. We do expect our margin to be 19 to 20% and if that means that we've got to lever off of OpEx, lever off of lower finance IT, et cetera, costs, that's what we'll do to bring in the margin. We aren't going to take the operating margin down but we're not going to put an EPS number out there that we are not going to hit either. So I think it's a balance and what we're going to do is we're going to really manage the business intelligently, so I understand the mathematics of it. We just wanted to be conservative on the EPS side. We understand we're not going to let the margin go south.

Okay, so just to make sure we're all on the same page then, so you're saying and I think I misspoke a minute ago you're saying 19 to 20% operating margin, pre the stock based comp expense, and then if we run that through, with your other commentary that would say that that $2.00 to $2.30 guidance then is too low? Is that what you're trying to say?

We're saying it's conservative and we're putting something out there that we are going to make sure that we perform, manage expectations and don't do what we do when we are talking about Bioinfinity and launching that ahead of time.

Let me ask one last question here. The top line guidance, the 10 to 15%, do you know what that would be on an organic basis? What are you assuming in currency in M&A?

No, that's constant currency.

So the 10 to 15 -- I'm sorry, your 10.40 to 10.90 is--?

No, just on one thing, on the 10.40 to 10.90, it's current rates.

Right.

If you were to, I think the way you asked the question, if you were to compare that to the prior year, is there a currency factor in the growth and the answer is theres probably 2 to 3% that is a currency factor year-over-year.

Okay, and any M&A contribution? You obviously did a couple small deals so far.

Yes, that would be inconsequential. Because they were early in the 2007 year.

Okay, great. Thank you, guys.

All right

Chris Cooley.

Thank you, guys. Maybe just one quick one here, it's been a long call. Help us think about, I hate to belabor the point after Mike just went through it again, but help us think about maybe from this perspective. When we look at your operating margin and you talk about aggression in terms of profitability both for the daily and for silicon hydrogel as you get better utilization, I know you don't want to give us maybe specific OI contributions there but how should we think about the change from say now, starting fiscal '08 to where we see those key products maybe entering second half of fiscal '08 and then exiting fiscal half '08 just in terms of the change in the contribution to the OI line? Thank you.

I think, Chris, on that, expect that obviously the first six months as we're building capacity in both the Proclear 1 Day and the Bioinfinity, we will be, when you talk about things like fitting sets and enrolling that out to new accounts, we certainly will be investing heavily in the marketing area and on the other side or the bottom side of the operating expense category in the area of R&D, we will continue to be investing heavily in terms of the two week or the silicon hydrogel torics, the two projects we're working on as well as getting the DK 100 out the door, if you will. To your question on, will we start seeing the payback of Bioinfinity and the Proclear 1 Day as the year progresses towards the end of the year, the answer is yes. The -- one would expect a much more robust operating result for them next year in 2009. Going slightly the other way will be if we're rolling out the silicon hydrogel torics in 2009 we will certainly invest some money on that but it should be depending on the timing of the two week sphere this year, will dictate how that translates to 2009 results, but I would expect that the floor, if you will, of 18 to 19% operating income exclusive of equity compensation to migrate up year-over-year '09 versus '08 to pick up at least one or two points or 100 or 200 basis points.

If I may, just 1 or 2 basis points in aggregate for the whole Company or for, again just to be clear, really make it simplistic, if I assume a base of 100 going let's say now for those products in terms of profitability, do I exit the year at 1.01? Do I exit the year at 1.10? Help me think about the relative change? I know you don't want to do a specific but if you can just speak to the relative change?

Yes, no, actually, I can do I think pretty specific. Let me take a shot at it, Chris. We expect Bioinfinity to be approximately a gross margin of 50% this year. We expect to go out of year with a gross margin in the mid to upper 60's. So you will see natural progression as you go through the year.

Now, how much of that gets pulled out of inventory et cetera, you're not going to be able to get perfect on it, but we're going to see pretty dramatic, so if I'm averaging 50 and I'm going out at the mid 60's, you can model that out through the year. In other words, we expect as we get one to two years out, Bob, two to three years out, somewhere in that same time frame we have a silicon hydrogel family and specifically Bioinfinity as a premium margin to product.

The counter to that, and again this is all-timing, you expense your distribution costs associated with thinning sets and all that stuff has incurred is when you get down to the operating margin but if you focus purely on gross margin, you are going to see as you go through the year some improvement. The same but to a lesser extent for Proclear Dailies. Again we just started manufacturing Proclear Dailies in February, and so there is still a little bit of a learning curve there versus say a standard biomedics or Clear Site Daily so you are going to see improvement but the dramatic improvement you're going to see is in Bioinfinity. Now does that help better?

That's super thanks and one just last very quickie. How do you think about the NOL in terms of your expectations there? Thank you.

Right. The accounting would dictate that if we didn't think we'll generate enough U.S. taxable income to utilize it, we would have to expense that portion that we aren't going to utilize, as a refresher and my numbers are approximate because I haven't seen the updated, but believe we have something on the order of $6 million worth of NOL that expired this year or that would have expired in '07 and I believe it's around $50 million for '08 and we're comfortable that is in the U.S. predominantly. So we're comfortable that our taxable income in the United States will be adequate to utilize that NOL. What that means and it's a good point, Chris. What that means is if you use an effective tax rate rounded numbers here of 15%, we generally pay in cash less than a third of that effective tax rate, and that's the benefit of the NOL.

Thank you.

And that concludes the call, ladies and gentlemen. Thank you for being with us tonight.

And I think I want to thank everyone, our next scheduled call is for March the 6th, for the results of our first quarter and we look forward to giving you an update on the two week product at that time, and all of the other good things that we expect will be happening in 2008. I want to thank you, and Operator, I guess that's it.

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