酷柏 (COO) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2008, The Cooper Companies Incorporated earnings conference call. My name is Sean, and I will be your coordinator for today.

At this time, all participants are in a listen-only mode. We will be facilitating your question-and-answer session toward the end of this conference. (OPERATOR INSTRUCTIONS)

I would now like to turn the presentation over to your host of today's call, Mr. Al White. Please proceed.

Thank you. Good afternoon, everyone, and welcome to The Cooper Companies' first quarter 2008 conference call. I'm Al White, Vice-President of Investor Relations and Treasury. And joining me on today's call are Bob Weiss, Chief Executive Officer and Gene Midlock, 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 and planned product launches.

Forward-looking statements necessarily depend on assumptions, data or methods that may be incorrect or imprecise, and are subject to risks and uncertainties. Events that could cause our actual results and future actions of the Company to differ materially from those described in forward-looking statements are set forth under the caption, "Forward-looking Statements" in 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.

Now before I turn the call over to Bob, let me comment on the agenda for the call. Bob will begin by providing some highlights in the quarter, then getting into specific details including product launches, guidance, and management changes. Following Bob's remarks, Gene will comment on the first quarter financial results and provide some additional commentary in our guidance for 2008. We will then open up the call for questions.

I intended to keep the management presentation to roughly 30 minutes and followed 30 minutes of Q&A, so that the call lasts one hour in total. We request that anyone asking questions, please limit yourself to only one question so that we may get as many calls as possible in the allotted time. Should you have any additional questions following the call, please call Lindy Cady at 925-460-3663, and we will get back to you as soon as possible. As a reminder, this call is being recorded and a copy of the press release is available on our website, www.coopercos.com under investor relations.

With that, let me turn the call over to Bob for his opening remarks.

Al, thank you and good afternoon, everyone. Well, we finally have something I think we can feel real good about. What I will say is a lot of great news. Before I get into the details, I'd like to make a few just brief comments. One is covering some good news on results. Some good news on market share gains. Great news on the launch of Avaira, our two-week silicone hydrogel product. Great news on our manufacturing of Biofinity. Some outstanding news about CapEx and free cash flow. And I know many of you are waiting for and then, just a brief comment on the market, looking robust going forward.

On operating results, we met or actually exceeded our internal targets. And as a result of that, we are highly confident going forward of hitting our revenue and our EPS goals. And as you can see in our release, we actually increased our guidance both as to revenue and as to earnings per share. As far as market gains, if we look back over calendar year 2007, keeping in mind that the industry tracks by and large on the calendar year basis -- in calendar basis, we actually exceeded the growth of the market and that was in spite of the fact that we really weren't a participant in the silicone hydrogel market to any degree. So, that's really good news. If we were able to gain market share even before, we had a robust launch of Biofinity and now the Avaira product line.

As far as manufacturing, some outstanding news on that, Biofinity had a record month in February of 3.8 million lenses. That reflects the fact that we had a plant shut down at the end of the calendar year, converted some of the lines to the new technology we learned from our line [five] as we called it, which was the R&D line. And once we basically validated all those lines, we see that we are getting a much better yield. I'll talk to that a little bit more.

CapEx. Good news on the CapEx side is whereas we're projecting the cash flow that we are this year. As we look down the road, we're expecting much less cash requirements going forward in that area. When it comes to free cash flow, that would be a combination of lowering our CapEx requirements going forward, as well as improving operating margins going forward.

And lastly the market. The other good news is the market, as you may recall from past slow downs in the economy, we are recession-resistant, not recession-proof but clearly resistant. People need contact lenses no matter how good the economy is doing or not doing. As a result of that, we are -- we remain bullish about the future. We foresee 6 to 8% of market growth and we certainly think that we with a new product launches that we have going out, we'll continue to be able gain share and expect to grow one and a half times or greater than the overall market place.

Looking at some of the details for the quarter, revenues reached an all-time high at the first quarter of $245 million, up 12% and constant currency up 7%. CooperVision was up 12%. CooperSurgical 10%. Our overall GAAP earnings per share was $0.15, up 25% or $0.03 from last year and adjusted earnings per share was $0.45, which excludes $14 million of charges. Looking at the details of CooperVision, we have revenue of $206 million up 12% and in constant currency up to 6%.

On the product front, things were really exciting. First, Avaira, which the third generation two-week silicone hydrogel product. It's the newest news that we have certainly going that we now are launching. We have said in the April-May timeframe, we have actually brought that forward to April. The other good news is that this product is now in production, not only on what we called the "fast track" in the U.K. but now on our Gen II manufacturing platform in Puerto Rico. Well, it's only been in production for really 12 days and it would be premature to say that it's totally debugged but we are optimistic.

Not only from the point of view, we now understand the raw materials a lot better than clearly when it was part of the Biofinity platform. But we understand the Gen II platform better. So, we're combining a more proven manufacturing know-how materials with the equipment. So on that front, we are very optimistic as we enter the two-week silicone hydrogel space, which of course, is the largest part of the U.S. market. Where in essence, two-thirds of spheres sitting in that domain.

Biofinity, as I mentioned, we had a record manufacturing but in addition we reported $9.1 million in revenue in the quarter. And that is basically almost as much as it was in the prior year and double what it was in the second quarter of 2007. Capacity as I indicated is approaching 4 million lenses a month and is continuing to grow. With that, we are optimistic that we could get our revenue to the $50 to $70 million range for the fiscal year. And I'd like to point out in the most recent month of January, we had basically over $4.4 million in revenue in the month. So, we're approaching a revenue run rate in excess of $50 million.

Additionally, we've added one additional line since the end of February, which is now up and running. It takes our line count from seven to eight with one more still go. And the other thing over the last two years, we've frequently talked about our frustration on getting our yields up and our efficiency up, our utilization up. I'm happy to report that we have now achieved 50% yield and 70% utilization. And by no means is that we were stopping. We will continue improve the process going forward when we reached that milestone

On Proclear One Day front, we, of course, are launching this product. We've launched it in the U.S. and Europe. [We're] very happy with the market receptivity to it . Capacity continues to ramp up and we are now at a mode where we can roll out globally our availability of that product. And I might come back on Biofinity. There are no more allotments in our marketing organization over Biofinity worldwide. So, anyone that wants the spherical side has that coming their way.

Like I said in summary on the product front, we're excited about all these new products that are available and energized sales force. Morale is obviously very good and they are fairly fully engaged with plenty to talk about.

On the CooperSurgical side, revenues were $39.5 million, up 10%. Although organic growth was only 3%, we actually had orders of $42 million. So, it's a very good quarter for orders and some of those orders will roll into the second quarter and going forward. We had operating margins of 17% and gross margins of 60%. Some of the margins continue to be good. And as I indicated, while our CSI revenue was only $39.5 million, our orders were 42 million, which is good for the run rate of that business going forward.

Let me talk a little about guidance. Gene will get into more detail during his presentation and I'll just highlight them a bit. Revenue guidance was increased to $1.06 billion to $1.1 billion. That's taking the lower end up $20 million and the upper end up $10 [million]. CooperVision as what we moved up, we move CooperVision to $895 million to $930 million, an increase of [20] at the low end and [10] at the upper end. That reflects the fact that included in that revenue is now Avaira. It was not in our prior quarterly guidance. And we have [bulk part] $10 million in that number in the revised guidance. CooperSurgical has revenue of $165 million to [$170] million in its guidance, no change.

On the earnings per share front non-GAAP, we took up to $2.10 to $2.35, an increase of $0.10 at the lower end and $0.05 on the upper end. And for GAAP guidance, we've taken that up to $1.40 to $1.85, increase of $0.10 on the lower end and $0.05 on the upper end.. That reflects not only a strong first quarter and I might point out the non-GAAP guidance we have now moved into consistency with all the analyst. And that non-GAAP guidance does, in fact, include our equity expense in the number.

As far as -- I mentioned that Avaira is $10 million in those numbers and you may recall when we talked about Avaira on -- or the two-week silicone hydrogel product in December, we indicated some of the costs are already built into the guidance number. And as a result of that, the $10 million of added sales from Avaira while their product line itself will not generate profits this year. We are taking our guidance of $0.05 to reflect the fact that we already had some of those costs built into previous guidance. I don't -- I think I'll defer any other specifics on the guidance model to Gene in his presentation.

CapEx, one of the heavy discussion items in the past, has been you, guys, are spending an awful lot of money on CapEx. Will it ever end? And that's translating into your free cash flow if non-existent. I would like to talk briefly about that.

Number one, we had six major projects that are going through the company in 2007 and 2008. Of those six, Biofinity was one which has a large capital spend. The Avaira product line, we had [upfront] the equipment. Another one, three distribution centers that were combining 21 warehouses, yet a third. We put up two buildings, one in the U.K. that we expanded in 2007 and another one that's going up in Puerto Rico with 70,000 added square feet in this year. It will be done by July. We had the expansion of the number of lines that are making one-day product line going from five up to 10. And then, we have a -- we had the conversion on to the Gen II high volume platform that took place in the last year. All total of six projects are run around $400 million in cost. We are two-thirds through that.

Biofinity is done and in fact, Biofinity's capacity can support more than a $200 million product line. Today as you know, we only sold 9 million in 2007. We sold 9 million this quarter. So, that gives you some indication of how much added capacity we have. Likewise on the distribution centers, we put three in place, two in Europe and one in the U.S. We now have the capacity to more than double our throughput in those distribution centers. Likewise on the conversion to Gen II that is done.

So, the three of the six projects are totally done. The ones that are ongoing is the building. We will be wrapping up the second building in the second -- in the third quarter this year by July. And then going forward in to 2009 and beyond, really there'll be the continued expansion of only the DK100 project for Avaira, as well as continued rollout of one day. Also working within this footprint if you will is a lot more things that go on with efficiency that we know we can get out of it. So, (inaudible) our capital requirements going forward will be substantially less than they've been the last two years, 2007 and 2008.

We're looking to drop our range in 2009 to about $125 million to $140 million, compared to $160 to $170 million this year. And beyond 2009, we expect it to drop down more into $100 to $125 million range in [210] through [212].

So, we're looking for the combination of much less capital requirements and improving operating margins to generate significant cash flow. We expect to start to be cash flow positive in the third quarter of this year going forward. So, it's not way down the road. It's short term.

Let me talk briefly about future product launches. We have a couple of that. We have yet to go. One, of course, is the two-week silicone hydrogel toric. As we said in the past, we expect to be in production by the end of this fiscal year. And we continue to expect to launch a silicone hydrogel toric in the first half of the 2009 fiscal year. As far as Proclear One Day, which is not being sold in Japan, we continue to expect to launch Proclear One Day in Japan, which is a very large one-day market. 55% of that market is one day. And Proclear has proved to be a very viable one-day product throughout the world. And as we (inaudible) to that, we are very optimistic about that launch in the first half of next year, fiscal year.

As far as couple comments on the marketplace, overall market for the quarter -- and by the way, all my market numbers will be calendar year and in constant currency, which is the way the data is put together by the company that tracks market share. Overall, market grew 9% in the fourth quarter in constant currency and it's up 5.8% for the calendar year. We grew much faster than the market in the fourth quarter at 12% for the quarter -- calendar quarter and once again, in constant currency. And overall, we grew 6.3% for the calendar year and once again, in spite of the fact that we were not selling a lot of silicone hydrogel. For the calender year, we had $14 million of Biofinity sales in the calendar year by way engaging that.

Single-use lenses -- single-use spheres continue to grow well at 15% for the quarter and now equals 35% at the global market. We continue to grow much faster in the market. Our revenue for singe-use spheres was up 40%in the fourth quarter. And this still only leaves us with 8% market shares. So, we have a long way to go and in essence, we have twice as much market share in total as we yet have in the single-use market. We are very optimistic about the opportunity that presents. There continues to be an expectation of strong growth in the one-day market going forward. By the way, daily disposables now account for 17.5% of the overall business for Cooper. So once again, we in theory should be able to double where we are.

In the fourth quarter, the U.S. market for dailies grew 19% and exited the year with 11% growth. So, there is some indication that even the U.S. market, which has not been a one-day market in the past is starting to move that way. Some rumblings that were at the most recent conference that J&J or Vistakon is starting to make more noise in the one-day market in the U.S., which will play well for migration and expansion that market.

Toric -- our silicone hydrogel growth for the quarter was 27%, and that brought the total calendar year growth to 35%. Although that rapid growth and the size of the silicone hydrogel market is mainly a U.S. phenomenon. The world market today is now 28% silicone hydrogel and the total market worldwide is now $5.1 billion. So, it's basically 28% of that $5.1 billion in calendar year 2007. We had $6.7 million of revenue in the fourth calendar quarter. And as I indicated the -- for the fiscal year, we had $14 million in revenue for Biofinity. Torics, we don't have a silicone hydrogel toric on the market yet. But overall, our toric business was up 4% worldwide with 3% in the U.S. and 6% growth in the rest of the world during the fourth quarter. The market grew 11% in the calendar year fourth quarter. So, we continue to expand or grow our top line for torics, [even].

Couple comments on management changes. As everyone knows, there's been some recent management changes. Steve Neil, who resigned as Chief Financial Officer as I indicated, it certainly was surprised me. I wish him well in his future endeavors at the company he joined. It was not at all an indication that there was a disagreement on accounting issue, any disagreement on direction of the company or guidance that existed between he and myself. The speed at which Gene Midlock was promoted to Chief Financial Officer was really an indication of things that were in the works . For those reading between the lines, Gene was promoted to VP of Finance in November of 2007. He, in fact, ran the year-end audit, from the point of view interfaced with the auditors and the books -- closing in the books. And as a result of that, he was actually -- it was expected he would step into the role of CFO in March of this year. Things happened a little faster than planned. And Steve was targeted to move into an operating role and of course, won't happen.

Recognizing that I then ended up with way to many directory reports, which put in a mode where I was not adequately servicing the CooperVision organization and I was not adequately servicing our Board, as well as the investors and the analysts. I basically had indicated that I needed to fill in the position of CooperVision Inc's President. I really haven't dug deep into the organization over the last 12 months. I was able to see the strength of our bench strength. And I was very comfortable with basically going within the organization for promotion to CooperVision Inc president. John Weber has my full support. I know he will do an outstanding job and that certainly will make my job much easier from the point of view focusing in on strategy and on the direction of the Company, as well as dealing with WallStreet. Both John and Gene have my full support and confidence and I believe that we now have a great team in place to carry the Company to the next level.

To sum it up, we've worked very hard the last three years to get to this point where we now look forward to having a lot of fun. And I think we have the right team in place. I think we have the right products in place. And it's time to reap the benefits of all these hard works.

So with that, I'll turn it over to Gene to talk about some

Thank you, Bob. Good afternoon, everyone. And thank you for joining us today. I'm delighted to be here as the CFO of Cooper. I haven't had an opportunity to meet many of you, so, perhaps for some background information.

While I'm new as the CFO of Cooper, I've been involved with the Company since 1997 in various capacities. First as an auditor and an adviser, and as a consultant, as the VP of Tax and most recently as the Vice President of Finance. Bob and I have worked closely together over this time. We are completely aligned in the Company's strategy and financial outlook. We believe that after our long and difficult integration trek, we are on the right track to deliver positive financial results in 2008 and beyond. Bob provided an fairly comprehensive overview of operational and strategic aspects of our first quarter. I would like to cover briefly some of the financial highlights.

In addition, there was some apparent confusion during the fourth quarter's conference call regarding our full-year guidance for 2008. So, I would like to conclude my remarks by providing an update to the guidance, in some detail.

Now, let me begin by reviewing briefly some product sales and revenue information for the first quarter. This information has been posted to our website and should be noted that it's reflected in constant currency or as in the press release, it's -- the information is provided in actual currency, so there are some differences.

Just the highlights, single-use spheres which is mainly driven by our PC product, Proclear, were up 29% in constant currency. Our torics, which is really the workhorse of Cooper and has historically been one our strong product was up 5% and comprises 34% of our lens revenue. Multifocals outpaced the market and grew by 16%. And Proclear materials are continue to grow strong, growing by 26% and comprise roughly 25% of our total revenue.

On a regional basis for CVI, there was strong performance in each of our geographic areas. Asia-Pac was up 8% in constant currency. Europe was up 6% and Americas were up 5% with the U.S. leading that at 7%. That is really a truly remarkable performance, when you consider that we have done this without the silicone hydrogel products until very late and certainly without the two-week product in United States.

Let's now turn to look at gross margin. In Q1, it was 58% versus 59% in 2007 and it was slight decrease, and that was largely attributable to product mix. The increase in single lenses with lower margins grew 41%, which is now 18% of CVI revenue and that was partially offset by our strong growth in multifocal, Proclear, and Biofinity. [Proclear] is up 34% or 25% of our revenue. If you adjust the margins for the callouts for those costs that are not related to our operating performance -- our core operating performance, our gross margin was 62%, same as it was last year. CSI or CooperSurgical gross margin was 60% in 2008 and also unchanged from 2007. And we expect our gross margin for the year to be around 62%.

Turning to operating margin, on the consolidated basis, it was 8% for 2008, compared to 7% for Q1 of 2007. This is comprised of CVI. It was 11% versus 13% last year and CSI was 17% versus 5% last year. But last year, there was a very large charge in Q1 for in-process research and development, attributable to an acquisition. If you adjust for that, CooperSurgical was 17% in 2007 as well. So, year-on-year, there were essentially at 17%. We would anticipate an operating margin for the year somewhere in the 15.5 to 16.5% range on a non-GAAP basis. There has been some discussion in the past and some questions about our SG&A expenses and the level they have risen to.

They are largely comprised of two components: the selling and the G&A. The selling expenses obviously will be higher as we launch new products in new markets, but we are closely monitoring those. If we turn to our G&A expenses, they increased by 2% over 2007. But if you look at them on a non-GAAP basis, they actually decreased by 6%. That's because there were some one-time litigation expenses included in those charges in 2008. So, we actually had a decrease of 6%, year-on-year, and we're going to continue to monitor those expenses and hopefully reduce them further.

Looking at R&D expense year-on-year, the financials projected somewhat of a misleading result. It indicates that there is a decrease of 27%. For CVI, there was actually an increase year-over-year of 14%. And for CooperSurgical, again if we adjust for that unusual last year Q1 charged, they increase 37%. So, consolidated with that adjustment, there was actually an increase of 18%. And we would expect in the future R&D growth should exceed the growth in revenue and should equal approximately 3 to 4% of sales.

Turning to the beloved subject of callouts, we would expect for the year to be in the range of about $35 million as we indicated. We had $14 million in Q1. So, there's $21 million to be incurred for the remainder of the year and most of those should be incurred in the early part of first two to three quarters. Just as a reminder, we are no longer calling out stock-based compensation.

Turning to effective income tax rate, you'll note that in Q1 for GAAP, it was 27.5% versus 21.2% last year. I would not run off and change your models as yet because we project for the year. The annual GAAP rate will be about 18.6 and the non-GAAP rate about 15.7. You will note as you monitor the quarters, however, that the rate is going to fluctuate considerably more than it has in the past. This is because we adopted FIN 48 in Q1 at Cooper.

If you look through the other companies who adopted last year because of their fiscal year basis, you will note that because of the workings of FIN 48 and the clarity, it has brought to tax uncertainties and accounting for income taxes that the effective rates were no longer predictable on a quarter basis. So, ours too will fluctuate for the first three quarters, but should settle down for the year as I indicated.

I would like now to go through and refresh, at a high level, what we expect our EPS guidance to be for 2008 and again to clarify any of the misunderstandings that might have occurred last year. So, we can start with GAAP earnings. We're predicting revenue -- forecasting revenue of $1.080 billion, which is in the midpoint of the guidance range. Operating margin at 13% which is again as the midpoint that should give us 140M. Interest expense and other expenses will be [46]. Pretax income in 94. 19% tax rate, as I mentioned, is 18. [This leaves us] net income of $76 million. There is $2 million of convertible interest that we need to adjust for under [EITFO4-8]. So, that leads you to net of $78, which is approximately $1.63 earnings per share, which is the midpoint of the range of $1.40 to $1.85. If you turn to the non-GAAP numbers, again revenue is $1.080 billion. Operating margin, as we indicated, was 15.5 to 16.5, so at 16%. That would give us $173 million interest, others 46. So, pretax at $127. 16% rate is 20. This is a net income of $107, again adjusting in the interest on converts of $2 million, leaves us with earnings of $109 and earnings per share of $2.28, which is again in the range that we quoted up [210] to [235]. So with that, I will conclude my remarks and turn the call back over to

Great. Thanks, Gene. Thanks, Bob. And we'll take a few calls. Just let me reiterate perfectly one call per analyst so we can get through the analyst and we'll do the questions in a half an hour. We'll start, operator, if you could patch in Joanne from BMO.

Al, can you hear me?

Is that

Can you hear me now?

Yes. Hi, Joanne.

Can you hear me now? Hi. Sorry about that. Could you walk us through some of the launch steps that you are taking regarding Avaira, in regards to how you are starting to prepare the industry that you've got this new product about to come out?

Yes, briefly, we are targeting for April launch. So, we're a little over about a month away. We will be concentrating on number of the chains that, if you will, have been left behind somewhat with the Biofinity side. We will be rolling out about 10,000 fitting sets, which compared to Biofinity, you may recall we watched and rolled out about 7,500 between June of last year and the end of last year. So, we will be a fairly robust launch. We certainly have the comfort level that at least that level of launch can be supported by fast track, but very much to the extent that we ramp up on the GEN II line, the Puerto Rican line if you will, much faster. That would allow us to expand that rollout. What we do not want to do is get fitting sets out there that we can't support by the continuation of the production of the product. We are, if you will, cautious in our approach and we will enjoy the upside of it if it shows up.

Okay. So I am to assume that most of this is being manufactured in the U.S. and outside the United States or (inaudible) obviously those are your two choices. But where? Is this P.R. or is this U.K, based launched?

The initial fitting sets will be coming out at U.K. as a fast track. And we are in production as I indicated in Puerto Rico. But that production level after 12 days certainly did not support the putting together fitting set at this point in time. So --

Okay.

Short, short-term U.K. supply that we build up, we built up -- we are running at over 600,000 lenses a month on fast track or around 600,000 a month. So, a pretty robust level in and of itself on one fast track line. So, we know we can, with that, support a product line approaching $10 million.

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

Thank you. [Jared Holtz]. Jared, are you there?

Yes. Can you hear me? Hello.

Yes. Go ahead.

We can hear you.

Great. Thanks. You just talked about your use of cash in the quarter. It seems like net debt was increased by $50 million. Can you just help explain from an operational standpoint? What is happening there if you need in order finance more debt in order to run the business going forward? And then secondly, on guidance, it looks like you brought up guidance by $20 million on the top line on both the low and high end but they are attributing about $10 million to the Avaira products. So, what is the other $10 million coming from? Thanks.

Okay. Two comments. First of all, on the cash use during the quarter, of course, there are two things going on. One is heavy CapEx, $40 million plus. Two is still a lot of callouts and restructuring, and things such as the wrapping up of the litigation with CIBA on the IP, which happened in November, and if you see our callout list has like $3.4 million in cash that went out the door just for that litigation in a one month alone if you will. So, there is still a lot of start-up costs and therefore the expansion of Biofinity production.

There is the early, if you will, getting the Puerto Rico GEN II line on Avaira going on. All of those are pretty intent on restructuring and in startup coupled with the CapEx. As I indicated going forward, we will have one more heavy CapEx quarter in the second quarter. We will have improving operating margins as the year progresses. And by the time we get to the third quarter, we will turn cash positive -- free cash flow positive going forward. Also in the first quarter, we typically have a lighter, if you will revenue number than most parts of the year because of the number of holidays that occur during that quarter.

So typically, we look a little lighter on the profitability point of view and some of that translates into cash. As far as the guidance going forward, we added $20 million to the bottom and $10 million to the top, and $10 million of that add is Avaira. We are doing better with our general product launches, be it one day and in fact that we now have an unlimited supply of Biofinity. So, you are seeing a more robust feeling about our expectation, not only on Avaira but other parts of the product line, Proclear One Day and Biofinity.

Okay. Great. Thank you.

Perfect. Mike Weinstein? Mike, are you there?

Yes. Yes, I'm here. Hopefully, Bob, that now we transitioned to you, we can maybe work on the format of this call. This callout system still seems to be antiquated. But it is working, at least. Let me just try to understand a couple of items. I got lost a little on the depth commentary. I understand the increase in the some of the debt level during the course of the quarter. I wanted to better understand, where do you think your debt levels peak at? Sounds like you are saying you think your debt will peak in the third quarter and you will be able to start to work it down. I just want to get some competence around that. Then, I want to just understand a little bit in the quarter, the production start-up cost, which you called out which were a lot more than we had been modeling. I just would like to dive into that a little bit if you could.

Okay. First of all, on when does the debt peak, it peaks at the end of April. So, the third quarter will be cash positive. And we will start shrinking our debt level. As far as the call-up activity or the start-up activity and the callouts during the quarter, some of those start-up costs reflect the -- we really have things going on three fronts. We still had basically a tail end of some of the conversion and start up on Proclear One Day or PC One Day product line, which entailed moving it on to new GEN II line as we rolled that out. But to a bigger extent, it's Biofinity. As Biofinity became a bigger product and more robust lines, up until really the end of the calendar year. It was in a start-up cost mode. And as we converted those lines to -- or upgraded those from what we learned on our R&D line in the end of the calendar year, we now are in a mode where the callouts from Biofinity that are basically more expensive costs that are flowing through the inventory to a certain extent are going actually reverse the other way. With our 50% yield and our 70% utilization, we now have our costs below what we expected for the year.

Got it. Our challenge is we look at you report at this suggested number. It looks like it is in line with generally where people are at. But with the GAAP numbers, $0.11 below what we were modeling, I don't know what person in the street. It's just hard for us to see how you come up with the production start-up cost numbers that you back out every quarter. That is such an arbitrary number.

Mike, to that point, we are sensitive to the fact that people were struggling with the start-up costs. We're putting equal weight on GAAP. Ad quite frankly, we beat the GAAP number substantially internally. And that was partly a frustration with, of course, we give annual guidance and the only thing we say about quarterly is keep in mind that earnings are always, always, always going be weak in the first quarter because we have a lot less billing days. We had three four-day weekends in the first quarter. Thanksgiving, Christmas, and New Years were all four-day weekends. That translates to 5% less billing days in the first quarter and the rest of the year. That coupled with a number of other things. We were trying to say remember this is our weakest quarter and build your models accordingly. Sometimes we succeeded and sometimes we didn't succeed. But internally, we are ahead of what we thought would happen.

Last question and I will let others jump in here. The revenue commentary for the year which you increase, it would seem just based on what happened to the dollar, we are all aware of that, since your December call that the currency benefit to your OUS business would have increased over that time. Shouldn't there be -- shouldn't you be raising guidance by more than you are just because of what has happened with the dollar? And certainly, it seems like in this quarter currency contribution was greater than expected and then, that should model out as we go on to the future and beyond. Thanks.

I know there are someone else with that question out there. But quite frankly, on December 11th when we have the last conference call, I may recall the pound was 2.03 and today it is 1.98. It actually went down from a revenue point of view. The euro was EUR1.47. A couple days ago in late Februaries, it's at EUR1.48. It is now, of course, at the last couple days move up to EUR1.52 if it were to hold there. The yen was JPY111 in December. It's JPY103 today. And Canadian dollar where we, of course, have pretty good franchise in Canada was C$0.99 and now it is C$1. The net movement really has not been all that much since mid December compared to where we are today. So, there is a little more revenue in that number but it's not a material significant.

Okay. Great. Thanks for taking my call for questions. Thanks.

Larry? Larry Biegelsen.

Hi. Can everyone hear me.?

Yes.

Thank you for taking my call. Could you talk about the status of the manufacturing distribution center in Asia that you were considering. When will you make that decision and was that part of the CapEx guidance you gave us?

Great question. The answer is -- it's still on our radar screen. We still are doing homework on looking at Asia-Pac. We are doing it in a -- go slow orderly manner. It will be our next footprint. But it is not something we need over the next couple years. Not only -- not because revenue isn't exceeding expectation but because we are finding a lot more efficiency within our footprint that will allow us to buy forward probably one to two years. So, it is on our radar screen. There's a number of what else going on. From a CapEx point of view, net capital will not really show up in 2008 or 2009 and probably not even in 2010. Maybe towards the latter half. But it is part of that push out if you will of capital requirements.

For the toric silicone hydrogel, it sounds like you're saying you don't expect start-up charges for this lens. And if not, will you absorb some of the -- will you absorb some of the inefficiencies into cogs?

The answer to that is we will be taking the same production know-how. In other words, we know how to make a sphere lens and then we put different steel inserts in and make a toric lens. S, you're -- yes, there will be some start-up costs not much because you don't have to worry about the robustness about the machinery rework and make the lens come out the other end. So, will it go straight to cogs or will it be just the higher cost that goes on the balance sheet and then slows in with the sell of the product? The initial couple of months, there might be some that go to the P&L. It is not going to be anything compared to what we are doing with all new Avaira line, the $30 million piece of equipment in Puerto Rico, as well as the Biofinity with that was about.

And lastly, I was little surprised by the guidance of $10 million for Avaira in 2008 if you are already producing it on the GEN II platform. You sold $10 million Biofinity in 2007. Could you talk about that a little bit and then I will drop? Thanks.

I guess part of it is we're really going to get going in April so we have six months to generate that $10 million. The roll-out number that we have put in guidance is really depict what we know we can make already as far as we can make enough lenses to support $10 million on the fast track in the U.K. We are, as I indicated, we are into production in Puerto Rico, but only 12 days. So, it is too early to say how much will those yields really ramp up. No red flags whatsoever. But having said that, we have learned from [Murphy] in the past to be a little cautious and we're going to stay cautious on that front.

Thank you.

Peter Bye?

Thanks, guys. I appreciate it. A couple questions on the CapEx. We saw you guys for a few years. The CapEx numbers balance around. It always seemed that Bob that you are higher than Tom and Tom was low and then you always came in above you guys and Steve throughout some high numbers and Steve is gone. Now, they're low numbers. Last year, you got it to $150 to $160. It was $184 something. Can you give us some help? I thought a lot of it was about daily disposable production. Not just the Biofinity or silicone hydrogel. Maybe some more clarity there?

Yes. The higher numbers were not only Steve that remind in the past. I really did believe with our push into the one-day side that we would have higher capital requirements. And then, my push into Asia-Pac sooner rather than later would exacerbate capital requirements since that Asia-Pac is pushed out two years heavily because of operating efficiency, which is doing -- Biofinity is way more efficient way quicker than we really thought a year ago, it would be.

So, we got to that magic number. The fact that we now have the capacity within Biofinity production to generate $200 million of revenue. So, we don't have to worry about CapEx there anymore. And I think when we just cut through we had these six projects of which three are done and the fourth will be done in July, and they were all major CapEx requirements.

When we looked at improving efficiency, including the one-day production side on Proclear One Day. Cost are coming down, efficiency is going up. We like what we see. And quite frankly, we've just completed or in the middle of completing, I should say, a very detailed strategic plan that really asked all those questions and really looked out over the next four years, and aligned if you will, market expectations, what we expect to do in the market with what our production plans could deliver. We really felt good about that exercise and it gave us, let's say a better picture of what our CapEx requirements are going forward.

Can you just tell me how that process was different than you've done in the last three years?

Well, I think number one is you have -- our plants over the last two years, not so much 2005 but 2006, 2007 and 2008, starting in 2006.

I will -- just let me interrupt one time. Because that -- we were down in Puerto Rico with you and I remember you had -- there was a little bit of discussion between yourself and Tom about what your fiscal 2007 CapEx is going to be. I believe Tom throughout a number like $75 or $100 million. You said it's going to $125 to $150. And so just in that context, I think you probably remember that discussion on the podium on the front. In that whole context as well. Not just 2005, but -- that was fall of 2006.

Yes. You are right. The context is that $125 to $150. I was right. Tom was wrong, okay? And the second piece was I was low because --

That was about a fiscal 2007. It was $184. So that was about the following year about what it was. You talked about how much you had to go into R&D into the lines and that sort of front. That was not about a fiscal 2006 number. That was Puerto Rico fall 2006 about a fiscal 2007 number.

Yes. I understand. What I was going say is the major thing that happened from that point throughout 2007 was called "foreign exchange." All of our equipment is euro- and pound-based. The dollars crashes a lot. All of that, the cost of that equipment goes up 20% plus. So that was what drove up CapEx. The numbers we are giving you now are where we are today as far as conversion rates. If the dollar -- euro went back down to EUR118, EUR119, whatever it was then, there would be some pickup on less cash requirements. But the fact , what matters we are sensitive to exchange -- heavily sensitive to exchange on that front.

Why are we in spite of that feeling more bullish? It is because of the efficiency factor. I won't get into what is new. All the details of what can happen in the plant, but there is a lot -- we have put a lot of money in people that look at the production side like the line five that went to R&D and they really work hand in hand next to manufacturing and it is amazing what creative thoughts come out of that.

One of the major -- I will give you one of the three major factors would our footprint. We married CooperVision and Cooper and Ocular's footprint together. When it comes to how hide -- we share the product, we are able to substantially reduce the footprint by the Cooper, not the Ocular vertical ovens, which save a lot of space and get a lot more equipment in the same footprint.

So, that's one reason we don't need to expand outside the walls as early. Another has to do with basically a cycle times that were tweaking. Cycle times come down in shorter periods than we can get a lot more throughput out of the same equipment. The other thing is how good are your yields. And if yields go up, we get a lot more out of the same equipment. All of those are coming together with a strong organization that is working hand in hand

Great. Thanks for the specifics on that. That it is actually pretty helpful. Just one last one on Biofinity, it seems like production is up or at least your capacity is up at paramount from the fall. We had always heard a little that there were a lot more orders than capacity. And now capacity is up a lot and you took up revenue a little for Avaira but not this. What are your expectations for Biofinity now that you have so much capacity and just on that in general?

Well, we are really two months into this. And I say that we didn't realize when we came out of the [chute] after the December shut down. All of the sudden, we went from 2 million lenses a month to shut up to 3.5 million in January. So it was like, I think is this real or not real. Then when we made 3.8 million lenses in February and yields went from 40% in January to 50% in February, we said this is really real. So, it is pretty fresh information. This is like we had a buffer stock we were sitting on and really worrying a a lot about that.

What else can we do? And how do we roll out? So the marketing units were not told until about two weeks ago. So, you are not constrained. You want it some place in the world where order proved to be sold. You have it. We are doing things to expand its attractiveness as a product. For example, expanding the range of the parameters is high on the agenda to kind of copycat or match the other product lines that are out there that have been out there for a number of years. So, that's a high priority to expand the demand for that product line as we go forward. As of today, we are ramping up pretty quickly. And as I indicated, we sold $4.4 million in the month of January, which basically is -- I had a $53 million run rate.

Great. The ramp up -- the expanded capacity is not in the guidance, I guess? It was just recent?

There is a little bit in guidance. But, sorry, you know, indicated -- currency is a very small piece, almost non-existent. Biofinity and Proclear and Avaira -- $10 million is Avaira more and the bottom end of the range that we took up $20 million of that other 10, you are really talking about Biofinity and you're talking about Proclear One Day.

All right. Great. Thanks. Well, thank you.

Jeff Johnson?

Good afternoon. Good afternoon. Can you hear me? Hi, can you hear me?

Yes, we can. Yes, Jeff.

All right. Great. So couple things here. Just more clarifying questions than anything. Gene made the comment that the gross margin drag in the quarter was one day then it was offset by Biofinity and some other things, Proclear, multifocal. Does that imply that Biofinity gross margins up into the upper 50% range? And if that is true, then do they go even higher here with these, I guess, February efficiency gains and yield gains that you are talking about, Bob? That is number one.

Number two, you also made the comment in the call, I think Bob you did, about a two-week silicone hydrogel toric. Does that mean a decision obviously has been made between whether or not it would the Avaira material or the Biofinity material? You have decided to go the two-week route I think that was still up in the air. And then, last question. As you push out the timing of the Asia-Pacific efforts, could you at all quantify how much of CapEx coming down over the next couple of years is due to that push out versus making some of these efficiency gains you have talked about?

Jeff, you're violating our one question rule.

That was one question in three parts.

He held his breath. I think it was one breath.

One long question.

Gross margin. The gross margin, you are correct, will be going up rapidly with Biofinity. Once the, if you will the production costs move through inventory, which it does on a plot effect to the P&L. So what we -- the cost we see in January and February will happen not so much in the second quarter more in the third quarter. That is a favorable direction for gross margins, clearly. Going the other way, of course, just to remind, we have very, very rapid growth in one day products and the one-day product has less than a 50% gross margin. Clearly, there are things that we're doing that are improving the gross margins of that family. But Proclear has been, if you will, on a new ramp-up mode a year ago, I want to say we were making less than 2 or 3 million units.

Today, we are making a lot more than 13 million units a month. So, the learning curve is hugely increased over the last six months, which is leading to reducing our costs. So, gross margins, I can't say they will go up or down beyond the 61 to 63% range. It will be a function of product mix. There is nothing that I see that would cause me to back off of saying really two years we will have our silicone hydrogel product family if not in the 70s approaching the 70 percentile. That is still as I see in the cards but it's not necessarily going to translate to a gross margin going way up because of the one day pulling at back down. We are more focused on operating margin improvement which I still believe will move into the 20s from where we are today.

As far as the two week versus the one month excellent question. As I sit here today, that discussion continues robustly on that. What are the tradeoffs? And should we try to do both? Or should we go with one and put a lot more energy behind the one? And if so, which one would it be? Would it be the leaning? Would it clearly be towards the two week? But there are a variety of considerations that go into that. You know, to and including the moderate capacity we now have on the Biofinity side which says there is a lot of capacity there. Do you kind of go with unknown capacity or not? All I can say is stay tune on that debate. It will continue over the next month or two months and we will see where it takes us. Clearly, we are content on getting a silicone hydrogel toric out on the market in the first half of next fiscal year and we are clearly intent on being in production with one and/or two silicone hydrogel by the end of this fiscal year.

The third one on CapEx for Asia-Pac, I would say think of a ballpark, $20 million a year being pushed out. You know, two years. And that would be over multiple years, 20. That was going be in 2009 and 20 that was going to be in 2010, we'd move out -- beyond 2010.

Okay. Great. That is all I have got. Thanks.

Time for one last call. Larry, are you there?

I am. Thank you. I wanted to just touch on two things. I just want to get a little clarity on something that are moving around on the balance sheet. Your other current liabilities are down by about $47 million up. Long-term debt was up by roughly the same amount. And then, your other liabilities were up by $31 million over the last three months. So if you could just point me the direction of what is moving around with those couple items. And lastly on the callout, you have always been speaking, at least Steve had spoke that the callouts would be done for -- done in this year and certainly tailing off in that second half. I want to make sure that is still the way you are thinking about.

I'll take the latter one, first. Then, I'll defer at least one of those to Gene. On the callouts, we are still on track to do way with callouts after this fiscal year. The callouts are very much weighted in the first six months of this year so they will be dropping off in the third quarter and the fourth quarter. Part and parcel, that will start driving, increasing GAAP operating income and cash flow. As far as the liabilities, there are two factors in the liabilities. Gene, do you want to address the probably the tax one?

Certainly, the biggest change was attributable to FIN 48 in the past. Most companies if not all kept their tax uncertainty reserve. They risk reserves and current liabilities and under FIN 48, it must reflect that's a long-term to the extent you don't expect to pay the cash money out in the next 12 months. So, we moved around $19 million plus from short-term other current liabilities to long-term. And the other piece is part of, again, the negative cash flow we experienced in the early part of the year as Bob mentioned that we hopefully turn around in Q4.

Like (inaudible) in the inventory on the negative cash flow. Okay.

I am sorry, Larry, again? Negative cash flow is, yes, off -- basically off the cash flow statement. Our debt has gone up during the quarter.

Yes. Right. Okay. Great. Thanks very much.

Thank you, everyone. That will conclude today's call. We appreciate the phone calls and the interest.

Good-bye.

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