酷柏 (COO) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Cooper Companies third quarter 2008 earnings conference call. My name is Chanel, and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's conference, Mr. Albert White. Please proceed.

Thank you, Chanel. Good afternoon and welcome to Cooper Companies Q3 2008 earnings conference call. I'm Al White, Vice President, Treasurer and Investor Relations, and joining me on today's call are Bob Weiss, President and Chief Executive Officer; and Gene Midlock, Chief Financial Officer. Before we get started, I would like to remind you that this conference call will contain forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995, including 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 would cause our actual results and further actions of the company to differ materially from those described in forward-looking statements are set forth 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. Before I turn the call over to Bob, let me comment on the agenda for the call.

Bob will begin by providing some highlights on the quarter, then get into specific details including new products, product launches, the market and guidance. Following Bob's remarks, Gene Midlock will comment on the third quarter financial results. We will then open the call for questions. We keep the formal presentation to roughly 30 minutes of prepared remarks, followed by 30 minutes of Q&A, so the call will last roughly one hour. We request that anyone asking questions, please limit yourself to only one question so that we may to get as many callers as possible in the allotted time. Should you have any questions following the call, please call Lindy Cady at 925-460-3663. That's 925-460-3663, and we'll 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 at www.coopercos.com under Investor Relations. With that, let me turn the call over to Bob for his opening remarks.

Thank you, Al, and good afternoon, everyone. This was a great quarter, and I hope you agree. Following Al's guidelines, we're going to try to keep our commentary to about 30 minutes, and I'm going to do my best to give Gene his time to get through the financials.

The key messages I hope you leave the conference call with by the end of this hour are numbered. Number 1 is, the contact lenses market is recession resistant and that is indicated by the fact that our most recent quarter, worldwide, the market grew 6.5%. We continue our best in class rollout with Proclear One Day in the daily disposable mode, Avaira now in the two week mode and Biofinity in the monthly and beyond mode. So we cover each of the three modalities of contact lenses. We have made great progress in expanding our capacity of Avaira, the two-week product that we launched in April by more than doubling our yields in the last three months. By the end of the quarter, we expanded our Proclear One Day, and Biofinity Power Range to add plus powers as well as higher minus powers, making that a more broad halo effect improvement of that product line. Yes, we were in fact manufacturing a Silicone Hydrogel toric by the end of the third quarter. So Biofinity toric is currently in production.

call-outs, which aggregated $0.28 for the quarter, brought our year to date to $0.83 and I'm happy to say that call-outs have ended. We do not anticipate any in the fourth quarter. Our gross margin should move from 54% in the third quarter to roughly around 60% next quarter, and I'll add some color to that. Third quarter had a tremendous operating cash flow of $44 million, and it brought free cash flow to $19 million, and in fact, we paid down over $13 million of debt. And lastly, CSI delivered another great quarter and continues to be consistent. Third quarter results, $285 million. We're up 14%, 8% in constant currency. CooperVision contributed $243 million in revenue, up 15%, also 8% in constant currency. In CooperSurgical, $42.7 million was up 7%, all organic. Earnings per share was, GAAP-wise $0.39, and excluding call-outs, $0.67, and I'll let Gene elaborate more on the financial results. As far as new products go in the Proclear family, Biofinity revenue reached $15 million and now is annualizing at around $60 million. That's four times the prior year, and up sequentially 18% from the second quarter.

All -- at quarter end, we expanded our power range to include high plus, meaning 0 to 8 plus diaopters as well as high minuses. And as far as Avaira goes, we're off to a great start delivering $4 million in revenue. We are on track with our rollout with 5,000 kits, fitting sets placed by the end of the third quarter. Given a solid ramp up in Puerto Rico of production where we more than doubled yields, we are accelerating our rollout. We had targeted 10,000 fitting sets would be out the door by the end of October, we're now looking at more like 12,500 and we're still targeting a total rollout of 17,000 in the US within the first 12 months. The high-volume production line for Avaira in Puerto Rico is basically putting out about 2 million lenses a month, which is about two thirds of our expectations, so we're very pleased with the progress that we have made there. One Day Proclear lead the way there, we had revenue up 47% and in constant currency, 32%. The Proclear family is performing outstanding, up 35%, and in constant currency, 28%, and that brings its revenue to 28% of our total CooperVision revenue. Geographically, the star was the Americas, up 13%, and Europe also contributed 15% with Asia-Pac off of a -- of course, a smaller base, up 19%. Future products are still on track. We remain to -- on track for our launch in Japan of Proclear One Day in the first half of fiscal year 2009. Biofinity toric production has started and is on track for a launch in the first quarter of calendar year '09. Avaira toric production is still targeted to be launched the end of calendar year '09, and with these launches we will basically have a -- routed out our offering of spheres and torics.

The market for calendar year Q2 '08 ended June 30, showed solid growth, accelerating above the first quarter. First quarter was 6.3%, worldwide constant currency and the second quarter 6.5%. The market growth in '08 looks like it will come in just shy of the 6.8% that it grew in 2007. The Q2 starts continue to be single use spheres, up 11%, torics up 12%, multi-focals up 12%, and silcone hydrogel continues to make progress, up 21% above the prior year and now accounts for 30% of the worldwide market. In the United States, Silicone Hydrogel is now 47% of patient fits and 51% of patient fits -- total new patient fits. For torics, these numbers in the US, 45% total patient fits and 47% for new patient fits. Some real surprises during the quarter, HPR data results show the J&J launch of Oasis toric put in play their Acuvue advance for astigmatism. The result was that Acuvue Advance for stigmatism lost 2.5 share points in new fits while Oasis picked up only 1.9%. Ciba Air Optics for astigmatism did surprisingly well, up -- or achieving 3.4 share points. Also a shocker was that CooperVision gained share in torics in the United States in total.

Overall, quarterly HPR data showed Johnson & Johnson lost 1.1 share points while Cooper for new fits increased 1.6 share points to 23.9, and for total fits, increased 0.5 share points to 22.9. So we're very pleased with our progress there. Takeaways from HPR data is eye care professionals are seeking alternatives to Acuvue Advance for astigmatism. Eye care professionals will experiment with new products such as Air Optics for astigmatism. The market remains healthy and total visits were up 0.8% and new patient visits were up 1.7% above the prior year. And extended wear still is not an accepted modality. It only represents 7% of the entire market. USCLI data, contact lens institute data showed continue growth of the one day modality up 15% above the prior year and one day now accounts for 11% of US market, yet it counts for 46% of the rest of the world. As far as call-outs and gross profit percent, while call-outs for fiscal year 2008 exceeded our $0.70 target, the good news is that we don't anticipate any in Q4 and going forward. Q3 included the remaining portion of our Biofinity startup cost pre the December shutdown, including the modifications we made to the lines in December, and basically, that modification allowed us to double yields by March of '08. So going forward after this quarter, we will see the inventory trends going in to the P&L reflecting that improved yield. For the third quarter, also we had $0.05 for the 100% debenture put to us by the bondholders on July 1. Going forward, we do not have the 2.6 million share overhang, which we used to have from that debenture. Not included in call-outs was the negative effect of foreign exchange contracts, which negatively impacted our gross margin 3 percentage points and excluding call-outs from startup costs now behind us, including high-volume conversion on to Gen II Proclear One Day on to Gen II as well as Biofinity, and excluding the hedging contracts, our gross margin was 60%. This is ballpark where we expect it to be going forward.

Going forward, we believe the one day mix trend, will be offset by improvement on the production side and will lead to gross margin in around that 60%. It will also have favorable impact of the monthly modality, including Biofinity. As far as cash flow and CapEx is concerned, one of our big accomplishments in the third quarter was free cash flow of $19 million. Debt was reduced from $941 million to $928 million, and our operating cash flow equaled $44 million. We continue to focus in on this area, going forward. We believe that next year we should be able to generate from $50 million to $100 million in free cash flow, that we will be slightly cash flow positive in the fourth quarter in spite of the fact we have a semi annual payment of note interest of $12.5 million. And that -- the improving cash flow next year will reflect improving operating margins, lower CapEx requirements, stability in inventory levels and improving top-line growth contribution. By mid-next year, when our second Avaira line goes into production, we will have completed essentially all of our major capital expenditure projects. By the third quarter -- by October of '08, most of the $600 million of CapEx projects are done, three distribution centers, the Biofinity lines, the high-volume Gen II conversion, the one day production ramp up and two building expansions. Going forward, post the first quarter of '09, it's mainly Avaira CapEx requirement and maintenance CapEx requirement, which is around $35 million and then just substantial growth. Anything above double-digit. We believe that this year, we'll come in at about $140 million to $160 million in CapEx and that next year, we'll still projecting $125 million to $140 million and after 2009, it will even be less than $125 million.

Our guidance for 2008. We narrowed the range revenue for the Cooper Companies of $1.80 billion to $1.95 billion, with vision 915 to 925 and surgical $165 million to $170 million. I might point out that there's about a $10 million haircut for foreign exchange given the strengthening of the dollar in that number. Earnings per share GAAP guidance is $1.35 to $1.41 and our non-GAAP guidance of $2.18 to $2.24. Our revenue guidance, as I indicated, reflects a $10 billion haircut for the foreign exchange. It also reflects the fact that we expect continued contributions from Proclear Dailies as well as Biofinity, Avaira, and the rest of the Proclear family going forward. CooperSurgical has been steady state at $165 million to $170 million. And earnings -- EPS, excluding call-outs of -- in the fourth quarter is reflecting $0.58 to $0.64 as guidance and once again, we do not anticipate any call-outs.

CooperSurgical, our women's healthcare franchise continues to execute to plan. For the quarter, we put up 7% organic constant currency growth. We completed the integration of a Canadian operation. Excluding this impact of the integration, which was minimal, gross margin would be 60%, compared to 59% with it, and operating margins of 20%. With minimal CapEx requirements for CooperSurgical, it throws off a substantial amount of free cash flow. The hospital strategy we embarked on three years ago, continues to pay nice dividends through higher revenue and solid gross margins. Revenues for our hospital portion of the business were up 20%, bringing that to $13 million for the quarter, and hospital products now account for 31% of CooperSurgical's revenue.

In summary, before I turn it over to Gene, remember the key take aways. The lens market is great, recession resistant. We are marching to plan with our launch of Avaira, Biofinity, and Proclear Daily, our one day, monthly, and two-week products. Avaira capacity is ramping up nicely. At the end of the third quarter, we expanded our power ranges of both Proclear One Day and Biofinity to high pluses -- to pluses and high minuses. We are in production with Biofinity Silicone Hydrogel torics. Our restructuring and start up period is over. call-outs are over. While startups and hedging contracts surpassed our gross profit percent in the third quarter, we expect approximately 30% gross margins going forward and yes, we generated $19 million of free cash flow. With that, I'll turn it over to Gene to cover the financial results.

Good afternoon everyone, and thank you for joining us again for our third quarter call. I will now briefly review some of the financial results that Bob did not touch upon. If you would like more detail, please note that there is more information in our press release. We'll file our 10-Q tomorrow, so by Monday, that will be available, as well as we'll update our website which also should be available by Monday. As Bob indicated, operationally, we had a solid quarter and most notable, and Bob mentioned it a few times, I'm mention it again, we became free cash flow positive by $18.6 million in the quarter and in addition, we reduced our debt by $13 million. It has been a major focus of the organization, including the finance group and we will continue to put major efforts to generate cash and reducing our debt load. Briefly touching on revenue, we had a strong quarter, revenue of $285.9 million, up 14% above the third quarter of '07, 8% in constant currency. CooperVision had revenue of $243.2 million, 15% above last year, 8% in constant currency. Bob touched on the various details of the product sales and material sales and geographies, and has fairly strong results across the board.

Turning to CooperSurgical, it earned $42.7 million of revenue, an increase of 7% over the prior year, and very strong sales of its surgical business unit, which markets directly to hospitals, which grew 20% over last year and is now 31% of CSI's total revenue, and that's a fairly high margin business for us. Gross margin on a consolidated basis was 54% compared to 58% in last year's third quarter, and excluding our call-outs, our non-GAAP results were gross margin 57% versus 63% in Q3 of last year. CooperVision's gross margin was 53% versus 58% last year, and excluding the call-outs, it was 57% versus 64%. This decrease, as Bob mentioned, was partially attributable to currency, roughly 3 percentage points, as well as a change in product mix, more towards the single use spheres which has a lower gross margin percent. But that particular business increased and represents 19% of our revenue, up from 15% last year. So that's both the good news and the bad news. We expect CBI's gross margins to be around 60% in Q4 and on to next year.

CooperSurgical's gross margin was 59%, which is unchanged from last year. On a non-GAAP basis, it was 60%, which was also the same as last year. Again, consolidated, we're expecting gross margins of around 60% next year and in Q4. Consolidated GAAP SG&A increased by 6% over last year, to $110.6 million, but decreased as a percentage of sales from 41% to 39%. In the components of this, selling expenses increased 11% over '07 and are 30% of revenue,and that's primarily due to cost supporting increased sales levels, obviously higher commissions and so forth, as well as increased lens distribution used in marketing programs for new products. G&A expenses, on the other hand decreased BY 8% last year and are 9% of revenue. The decrease is generally attributable to a reduction in litigation cost and enhanced leveraging of certain of our administrative services. On a non-GAAP basis, SG&A increased by 13% over last year and are 38% of revenue. Selling expenses increased 19%, and G&A decreased by 1%. Looking at R&D expense, in Q3, our GAAP R&D expense decreased by $2.4 million from last year to a little bit over $9 million, which represents 3% of sales. Now within the numbers, CVI's or Vision's R&D actually increased by 10% year-over-year to $7.9 million, which is 3% of sales. And on a GAAP basis, CSI's R&D decreased by $3.2 million from Q3 of last year. But note in there is $3 million of IP R&D, our in process research and development in Q3 of '07 from an acquisition of technology. And if you look at the nine months for CooperSurgical, in '07, it had $10.7 million of R&D included of which was $4.2 million of Q1 IPR, again, an acquisition we made and then the $3 million in Q3. So on an adjusted basis, it had $3.5 million, which -- in '07. '08, it's 3.7, so it's up actually 5%.

Interest expense increased in Q3 to $15.3 million. However, included in there is approximately $3 million of charges related to the repurchase of our converts, as Bob mentioned. In Q4, we expect interest to decrease to $12.3 million, which is a slight increase over the prior quarters, reflecting an increase in borrowing for capital expenditures and use of our revolver to retire the debt. And as I mentioned earlier, our debt actually decreased in Q3 from Q2 by $13 million. Turning to the effective tax rate, which probably looks bit strange in Q3, on a GAAP basis, it's a negative 2%, non-GAAP it's a positive rate of roughly 3%. Again, this is largely attributable to the adoption of FIN 48, as I mentioned last quarter. That particular accounting pronouncement is going to cause major fluctuations in effective rates from quarter-to-quarter. Because of the requirement, the more finely identify and recognize discreet items in the tax provision calculation. However, for the full year, we're expecting a GAAP rate of around 20% to 21%, and a non-GAAP rate of 15% to 16%. Q4 should have a effective rate of 26.5%,so what we gain in Q3, we'll give back in Q4, and come out to the projected rate we gave you for the full year. And again, Cooper is not unique. If you look at other companies, Intel or National Standard, any of the major public companies, you'll see these types of fluctuations.

In '09, we're projecting an effective rate of around 15% to 17%. Again, this could change. It depends on geographic fluctuations where revenue is earned. Bob mentioned our converts, which we repaid on July 1, which was $0.05 dilutive in Q3, but should be around 2% accretive in Q4 because of the overhang of the 2.6 million shares being gone. call-outs were $13.3 million net of tax in Q3, so for the year, they were 38.9, and included is that $3 million of amortized bond issuance cost that we mentioned earlier. Note there will be no call-outs in Q4. There are none. There's some marginal numbers below $100,000, which we will not call out. Getting down to operating margin, consolidated operating margin was 11% versus 9% last year, excluding call-outs it was 15% versus 20%, and the decrease is generally attributable to the various items I mentioned earlier. Q4, we're expecting operating margins of around 17% to 18%, so for the year '08, it will average out to around 12%. That's basically my summary. EPS Bob mentioned, GAAP was 39, non-GAAP was 67. Q4, we're looking at somewhere between $0.58 to $0.64, which would leave us for the year, GAAP at 135 to 141 and non-GAAP 218 to 224. So with that, I'll turn the call back over to Albert White.

Thank you, Gene, and that wraps up our call. We'll go ahead and turn it over to Q&A now. Chanel, if you could get started on the Q&A, it would be fantastic. Thank you.

(OPERATOR INSTRUCTIONS) And we will pause for a moment to compile a list of questions. Your first question comes from the line of Michael Weinstein of JPMorgan.

Good afternoon, gentlemen. Thanks for taking the question.

Hello, Michael.

Hi there.

I'd like to just start on gross margins and if I think back over the conversations we have had on these calls going back the last several quarters, it seems like we keep inching downward on where margins are coming out and expected to come out going forward for CooperVision, and if we just looked at this quarter, obviously, there was the impact from your hedging contracts, but even if we back that out, and think about what you are saying going forward, it just seems like margins keep inching their way lower to what you thought they would be six months ago, 12 months ago for that business. Now part of it would be mix, but in this quarter, what really surprised us versus a couple of months ago about the mix of daily disposables. It seems like it is more than just mix.

Well, this -- certainly, this quarter it is two things. It's the 3% from the hedging as well as mix, as well as the remnants of the call-outs, but excluding the call-outs, the 57 to the 60 is the impact of the hedging on gross margin.

Right. But you're now --

What we're saying is we expect to get to the 60s, you're correct. Our previous range was 61 to 63. We're now saying, in essence, in around the low 60's. Quite frankly, some of that is the -- just the substantial growth in the one day, 47% growth in one day for the quarter is a pretty quick shift. Longer term, will we get into the low 60s? 60 is not an absolute. We're saying roughly 60, and that could mean 60 to 62, 63. The things that push it up, clearly are the same generators. We continue to improve cost of goods and certainly, in all of our Silicone Hydrogel lenses, you double yields like we did with Aveira. That's a very positive impact. But I think we're just being a little cautious on, do we see 63 in the cards? I'm a little reluctant to say we're going to move from 57 to 63 --

So if it's -- I understand, Bob. If it's mix, why aren't you making it up on the SG&A line? If we look at just year-over-year and adjusted for FX hedges, your gross margins are down 300 basis points, but your SG&A line is only down 100 basis points. If it is mix, why aren't you getting more leverage and how much of that is because of call-outs? Because of giveaways, because of handouts is what I meant to say.

I would say we have increased our sales and marketing 3 percentage points year-over-year. So there is some synergy caused by the distribution center integration. There is ongoing leverage of G&A. We are not trying to leverage R&D. We are investing in R&D, we are investing in sales and marketing. So I am -- you are correct that the shift in mix to the one day has a favorable impact on mix of operating cost, and we'll continue to do so in the future, but given that we have three modalities we just launched in the last 13 months from our launch of Biofinity in the US last June, we're reluctant to put it in to a milk mode when we're investing into three viable product portfolios.

Okay. Then last question, and I'll let somebody else jump in here. On the tax rate which came in at 3% this quarter, obviously adjusted, wouldn't you know during the course of a quarter where your tax rate is going to come out? I just want to understand -- how do you have visibility on that? Because obviously -- relative to the 15% to 17% range, got you about $0.09 worth of adjusted earnings? When do you know that? Do you know at the beginning of the quarter? Do you realize that after the quarter? How do you know you are going to have that $0.09?

We know what the discrete items will be well in advance, Michael. Those are mainly credits that reduce the expense for expiration of statute of limitations in various countries and so forth. They are varied, and we're in 38 countries, and they all have their own sets of rules, as you know. But we can pretty well predict that piece. Where we can't predict finitely is where we're going to earn the revenue, in which jurisdictions. Made in the US, sold in the US attracts a higher tax rate than made in the UK and sold in the US for example, or in Puerto Rico. So that piece is based on forecasting, which we have tried to get better at obviously in refining our techniques this year. But we're pretty comfortable, we know -- assuming our Q4 forecast is accurate on revenue by geography, et cetera, what the rate will be?

Michael, I would add to that, that of course we give full-year guidance, and in doing the full year, the way traditionally we have done it in the past, part of this year, you develop a full-year effective tax rate, and you didn't have the crazy gyrations we now go through. Which has been frustrating this year for all of us. I do think, as Gene indicated, we're getting better at the way we think it -- think of effective tax rate by quarter, but in the absence of us moving into the mode of giving quarterly guidance, something we have decided against in the past, where we pretty much gear our guidance to the full year. And I appreciate that. If I'm an analyst, that could drive you crazy, because effective tax rate can go from zero to -- our fourth quarter, our effective tax rate happens to be over 26% in that guidance,and that's just nothing more than if we normalized it, we would end up where Gene indicated for the full year, but quarter-by- quarter, it almost becomes a meaningless number, albeit tough to deal with.

Because it was -- I think it decreased $0.07 this quarter, and it is going to go up $0.09 next quarter. Average amount --

Or the other way around.

Yes, right.

We picked up $0.07, but we give back $0.09 in next quarter's guidance.

Exactly.

Okay, great. I'll let some others jump in. Thank you.

Your next question comes from the line of Larry Biegelsen of Wachovia.

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

Yes, Larry. Well, you can maybe be a little louder. I don't know if you're a little removed from --

All right. I'll speak more loudly. Just to follow up on Mike's question regarding gross margin, Gene, did I hear you correctly when you said you expect the gross margin to be 60% in 2009, or was it about 60% in 2009?

Approximately 60%, as Bob indicated --

Rough -- roughly 60%.

Roughly 60.

Okay. And -- great. And I don't know if you talked about this, Bob, I'm sorry if I missed it. But did you say why CapEx -- why you lowered CapEx for 2008?

I did not, but the primary reasons are threefold. Number 1, a concerted effort to focus in on cash and given that we have adequate capacity in several of our areas, to do what we can to slow up the process where we're a little ahead of ourselves in terms of our needs. So we have made some progress on that. Two is foreign exchange with the dollar strengthening ballpark 5% to 7%, we, in essence, just like CapEx went up when the dollar weakened, CapEx comes down when the dollar strengthens. And then thirdly, there is a project that we are working on for a new ERP system that was in our numbers at one point in time this year, we pushed that project out. We're taking our time working through all of the details of that, and it will probably initiate next year, not this year. So that moves into next year, conversely, we will keep the same push on next year. We haven't taken that up for the three reasons we're focusing in on cash flow, FX, and we will manage our way in a, let's say in a manage mode on the ERP system, that will be over probably a five-year project, not an accelerated project.

The Gen 1 Avaira capacity out of Puerto Rico. I don't know if you can give us an update on that, where you are. Thanks.

Yes, I indicated that -- GenII on Avaira, it -- our yields doubled this quarter, and I also indicated we're approaching 2 million units monthly, which you may recall we said that when -- up to our targeted levels, we would be up to 3 million a month, or 36 million a year. So we're two-thirds there. A lot of good progress in three months.

Thanks a lot.

Your next question comes from the line of Joanne Wuensch of BMO Capital Markets.

Hi, Joanne.

Hi, how are you?

Good.

Can you walk us through all of the different places, the impact of foreign exchange? Because it sounds like it is fairly impactful in a number of places on your income and your balance sheet. How did it impact you in the third quarter? Start there.

It does cover everything from top to bottom, and this year, the impact is a lot more on cost of goods, and you also will notice that we had a $2 million gain below the line on certain inter -- I guess remeasurement of receivables. But cost of goods, since we do manufacture in the UK is taken by far the largest impact, and as we indicated, that was at 3% of revenue. Going forward, there are different ways to do contracts, we just happened this year to do contracts that impacted cost of goods. Next year, we will attempt to make it less wild on the top to bottom of the P&L. But balance sheet basically can have large impacts on the equity section on remeasurement, and can also impact cost of goods as you -- when your currency moves very rapidly it creates some wild gyrations under what is known as FAS 52, or financial accounting standards for number 52, which has been around a long time.

Okay. Taking a slightly different route, what is going on at CSI? The growth rate was a little bit lower than we have been seeing over the last several quarters.

I think we have been at around 8% to 7%. We are -- there's one product line that we've -- we continue to work at getting out that has certainly growth potential, which is NeoSurge in to the hospital market. We actually went -- put it -- relaunched that product. I would say relaunched for maybe the second time -- last quarter, and then went slow one more time to tweak one of the two products that is in that NeoSurge line. We remain optimistic about that, but there was some impact on our revenue line, because of a go-slow on the launch within the hospital product group. Aside from that, the -- with no acquisitions year-over-year, we're expecting upper single-digit, not much more than that out of this group.

Okay. And then finally, when I take a look -- I hate to go back to this, but when I go back to the gross margin questions, is there something that you feel that your 60% level is a floor in your conversation rate as FX turns and you get better manufacturing, you'll see, this is it? Or is this sort of like, each quarter as dailies move into more of the main stream in the market, it's something you are competing -- constantly swimming upstream against?

I must admit I'm a little skittish about gross margins after watching this year in foreign exchange. So so if you see the word rough, it's like -- foreign exchange has proved rougher than -- my crystal ball isn't as good as some people are on foreign exchange, so that's part of the softness in it. I truly believe that we have a lot of things from a manufacturing perspective that will lower cost of goods, which is a huge positive, and that includes all of the Silicone Hydrogel families. Quite frankly, the -- even the one-day story, I believe we will get gross margins well north of 50 as we go forward with some of the things we're doing, so there's a lot of positives, but there is no doubt when you are growing your top line at the rate we are in 47% growth in single use is pretty -- it's big hurdle when that's a lower gross margin, so -- but that -- as -- I think it was Mike that raised the question, well, if you are growing so much with the single use, why don't we see more leverage in operating costs. As we have historically said, operating cost for the single use product is much less with the only exception being that we're putting a lot of marketing dollars behind all three of these product families, one day, two-week, and monthly, and it is happening kind of all at once. We will start seeing leverage at -- as we look over the five-year period, but quite frankly, with the amount of products we're pushing in to the market next year, that's not our first priority to see how much leverage we can get out of SG&A or, particularly, the sales side of that equation.

Okay. Thank you very much.

Your next question comes from the line of Chris Cooley of FTN Midwest Securities.

Hi, Chris.

Hey, good evening, gentlemen. Just two quick questions, if I may. Could you go back and maybe revisit though toric markets, specifically here in the states. You mentioned in your opening comments that you gained share in total toric, but I'm curious. What was your growth rate in the states if you backed out conventional made to order and you're basically just looking at the DPR torics versus the market rate during the calendar quarter? And then I have one follow-up after that. Thank you.

I'm going to have to look that one up, as far as -- excluding the made to order, so you'll have to --

Or, just maybe more simplistically, just back out conventional.

The growth in the US -- let's see what I did with that. Chris, you are going to have to give me a moment.

What was your other question in the meantime? (Laughter).

Thank you, Gene.

This is an easier one here. I'll give you a softball. What are you assuming here for the fourth quarter just in regards to your currency assumptions when you are looking at the top line. You've been kind enough to give that to us the last couple of quarters (inaudible) I'm thinking that -- I'm thinking about --

That's more -- those rates were more where we are today.

Okay.

So we took a $10 million haircut. In fact we would have taken our range, that $1.1 billion would have been, I think $1.5 billion if we left the $10 million in there. If the currency didn't happen.

Okay.

It would have been --

And while you're looking, can I squeeze one more, just quickie, easy one in? Just with regard to J&J, they have launched True Eyes now on a limited basis in Europe, and we have seen that at a fairly high price point. I think it's roughly about 44, 45 pounds right now on the trial side. Just curious what you are hearing anecdotally or you're seeing anecdotally in that market. I realize it's not a full-blown rollout yet, but just kind of your initial thoughts, or if it's too early to call. Thank you.

It's -- we're still looking harder at that product. They launched it at the same price point that their Moist is, which is definitely top end of the range. Example is they sell Moist at $0.65 a lens. We sell Proclear One Day at $0.44 a lens. So there's a huge gap between the two. True Eyes is at the same price point at Moist. So I think the jury is still out on where they are going to go with it. Of course, it's very limited launch in Europe. The US is not a one day market anyway, and what they do in Japan, which is when we get in to Japan and Asia, that would be, maybe a more important launch than their test market, if you will, over there. But there -- they are off the chart on their -- their pricing is even higher than that $0.65 in the US.

Understood.

Coming back to your other question on torics in the US, our toric sales in the US were up 12% during the third quarter, and our conventional, if you will, was down 16%. So all up, our monthly, which is really sponsored by Proclear toric, was up like 28%. So a very solid quarter for torics in the US.

So your reported growth rate was 12% for the total category, and US ex-conventional which has been --

12 was the all up. If I did it without the --

Right. If I look at the US -- if I look at the US ex-conventional, which is the growth rate in the US toric franchise. And then what do you think the domestic growth rate was on --

It would have been -- just roughing it, probably around 15% --

The market rate?

Our growth. Oh, I was giving you our growth.

Okay. So was that above the market rate, do --

Oh, yes. Yes.

For DPR torics.

Yes.

Okay. Fair enough. Thank you very much.

Your next question comes from the line of Peter Bye with Jefferies & Company.

Hi, guys, this is actually Brian here for Peter. How are you?

Good Brian.

I wanted to start with a question about the CapEx guidance. Just, I heard the comments earlier about fiscal '08 and the reason for the change. Obviously, that's very positive from a free cash flow perspective, but if you step back, you have to say that in some sense, this number is moving around a lot. And I'm wondering, your sense of conviction about the fiscal '09 number, given the movement in the fiscal '08 number, and maybe if you could share some methodology about how you feel comfortable with this number, that you can kind of dial this in and expect it?

Yes, it's moving around because we're working hard to make it move, because we did shift our emphasis to cash flow heavily in the third quarter, early in the third quarter. So that's a concerted worldwide effort. The -- we made a discretionary decision on the ERP system not to start yet, because we're not ready to start yet. So I was say that was independent of the cash flow push. And then thirdly, foreign exchange -- since so much of your capital is invested in the UK, foreign exchange does play a big part of it. And of course, the pound not too long ago was 205, and I forget Al, what is it today? It's --

Sub 180.

Sub 180. So that gets back into, foreign exchange in a global market can get tricky. Why didn't we take up next year? If we pushed things out of this year into next year, we didn't take up next year because, number 1, we're going to have that same converted push on -- if we don't need it, let's not rush into it and see what we can do to not accelerate projects. And two is, foreign exchange will continue to ripple through next year's CapEx requirements in the UK. And then the ERP system, we had some -- at one point in time, we were going to do a so-called big bang approach which would have been a two to three-year project. We are not going to do the big bang approach of a two to three-year project. It will be a four to five-year project. So that has a pretty large impact on the process also.

Okay. Shifting gears a bit, can you provide any anecdotal feedback on your Silicone Hydrogel launches in terms of maybe promotion strategies of how Biofinity gets marketed very Avaira? And where the growth is coming from there in terms of, are these new patients? Are these patients switching from competitive lenses? Are they switching from your conventional lenses? Anything on that is helpful.

I think it's -- certainly on Avaira, because we're just rolling that out, and we're a quarter in to it. Other than that what I indicated, we accelerated our rollout because of the progress we made on production.

Right.

And by that I mean we add another 2,500 fitting sets will go out the door by year end. So we're happy about that. So it will be a lot of trust in that emphasis towards the eye care professional. And it's one where we want to make sure it goes in the hands of the guy that writes the RX. So that would be one part of the orientation. There is no doubt that the market is bifurcated into two pieces.

With Biofinity basically being the monthly modality, and J&J not playing in that part of the market, and Biofinity really going head to head with things like Pure Vision, which is a first generation Silicone Hydrogel lens. So we kind of like our hand there. As you can see from Proclear numbers, we're not stumbling with Proclear. It was up in constant currency 28% worldwide. So having said that, there is no doubt that some of our two-week modality that we bought from Ocular Biomedics has been under the gun since really 2005 and as a result of that, that is a non-growth piece of the business that really will be supplemented or filled back in with Avaira once Avaira is really into full rollout in the United States. So that piece of the business, the two-week, we're clearly not in a mode of gaining market share yet. With Biofinity, we're certainly doing a good job of retaining and/or gaining market share and with the monthly modality, worldwide we have about, I think 39% market share worldwide. So we're a huge player in the monthly and beyond modality where J&J doesn't have an entree. They only play in the single-use and in the two-week modality. Oasis and Acuvue Advance are both two-week modality products. And of course there is some ongoing -- when you kind of look at the lay of the land in the marketplace, there's more and more attention to compliance and being compliant as aware for a variety of reasons.

The two-week modality is the least compliant by far, the monthly is the most compliant by far. If you were to make everyone in the two-week modality compliant, that market would literally double in the United States. I don't think that's going to happen. I think there's a price point there, but there's that dynamic. We don't care which of the three markets wins. We don't care if Silicone Hydrogel wins, or if the non-Silicone Hydrogel wins. Proclear still is featured in the 70% of the market that is other than the Silicone Hydrogel markets. And now we have good entrees in the Silicone Hydrogel space. So our attitude is go with the flow. We have best in class entrees in all areas, and we're not going to go into consumer advertising. We're not going to go head to head with J&J on TV, that is for sure. We will continue to leverage, number 1, our relationship with the eye care professional. Number 2, we're willing to private label, and if the right large company wants a private label and the price is right and it's a win-win, we will let them leverage their name, and I don't care what their name is, Wal-Mart, Costco, or whoever. If they can command enough of an order, they'll get a private label of Avaira. That is something J&J is not willing to do and that is a rub with a lot of retailers who had to leave the private label business behind in 2005 when it shifted in to Silicone Hydrogel lens.

Right. Right, okay. I appreciate those comments. And lastly, did I miss this? Did you give a non-GAAP tax rate for the fourth quarter?

We gave a GAAP and non-GAAP, because there is no call-outs --

Got it. Okay. Great. Thanks.

Your next question comes from the line of Charles Chon of Goldman Sachs.

Hi, everybody. Thanks for taking the call.

Hi.

Just a couple of questions, just follow ups if anything. First of all, with respect to CapEx, we saw a nice sequential decline going into the third quarter here at the $25 million dollars level. But despite the lowered expectations in CapEx for the full year, the guidance implies a pickup, back up to roughly $38 million to $58 million in this fiscal fourth quarter. So you spoke about pushing out the ERP spending into next year. What is driving that ramp in planned CapEx spending here?

Right now we have a lot of Gen II equipment on order that each Gen II line is about $12 million, and that's for the single-use product portfolio. We are a little ahead of ourselves. So if we can just turn that off, it wouldn't show up. But the fact of the matter is you have vendors that are making that equipment, an we have agreements with those vendors. So there clearly is a bubble between the fourth quarter and the first quarter will be two high CapEx quarters, resulting from a lot of Gen II equipment.

That's, what an 18-month lead time on that stuff?

Yes, Gen II is 12, the Avaira lines are 18, and quite frankly, some of those -- some of the pieces of Gen II go beyond the 12 months.

So if the CapEx were to come in towards the upper end of that $38 million to $58 million range for the fourth quarter, is there any risk to free cash flow possibly not being positive in the fourth quarter?

I would say there is some.

Okay.

If you assume the worst to worst, yes, I think that's a valid question.

Okay. Great. And then, just a question on Avaira, and I'm sorry if I missed something here, but I was a little intrigued by the Avaira revenue for the quarter, especially when you have been on record for Avaira sales being $2.6 million in the month of May alone. This was implied at the monthly sales in June and July were actually lower than what we saw in May. Can you tell me what was going on there, and maybe give us a little bit more granularity as to how the progression of Avaira sales proceeded through the quarter?

Yes, the -- the May event was nothing more than we launched with a large retailer in the United States that has 3,000 stores. And that large retailer not only got fitting sets in in the month of May, they also bought inventory to be distributed throughout their family of stores. That -- you may recall, we said we were paranoid about going on backlog, and therefore, wouldn't accelerate a launch of fitting sets unless we really were comfortable we could deliver to that large retailer. And as a result of that, what you have is a -- it's a typical launch is where you have a big push, and then it falls off the next two or three months as the lenses find their way into the shelf and then get on eyeballs. Then you have a replenishment order. So that is -- all that means is we didn't have one big launch followed by another big launch of three different large retailers. We stuck with one, and that was it.

Could you frame for us how we should think about Avaira revenues in the fourth quarter? Should we use the implied run rate we saw in June and July, as the monthly revenue run rates for Avaira throughout August, September, and October?

No, we're still -- we haven't backed off on -- we were estimating officially 8 to 10, and I think more 10 to 12. We're not backing off from -- let's say ballpark, a $10 million number. Because part of what happens is you, number 1, we're expanding now that we have the supply. We are expanding and accelerating the launch, and number 2 is that a large retailer among others will be reordering some of which has gone on eyeballs. So you had a big push in May, and then they basically bought nothing in June and July, but they'll be back later because they had a big promotion on back-to-school and things of that nature.

Right. So in the fourth quarter, we could see revenues somewhere in the -- anywhere between the $6 million to $8 million range? Does that sound fair to you, based on your guidance?

Yes.

Okay.

Yes, I would say in the -- that's right. The $6 million to $8 million range.

Okay. Last question is just -- any contribution from the US government rebate checks that trickled through to the market this quarter that you can speak to -- speak of?

I don't -- I -- not that I could notice. That would be pure guess. But contact lenses are recession resistant and people are buying their lenses whether or not there's a recession, whether or not they get the check.

All right. Great. Thank you very much.

I would say none.

Your next question comes from the line of Amit Bhalla of Citi.

Hi, is this is Andy (inaudible) for Amit. We know you said you expect to get to high 60s, low 70s with margins in Silicone Hydrogel. So we were wondering if you could give any insight into where Avaira and Biofinity are now.

Other than to say Biofinity, when it doubled its yields in March, which will be coming in to the P&L in the fourth quarter, is in the 6 -- hopefully in the 60s. Avaira, which doubled its yield in the third quarter is still in a ramp-up mode. In other words, if we're two-thirds of where we need to be, we're more in the 50s than we are in the 60s.

Okay.

And our expectation is to get in the upper 60s, lower 70s all up.

Maybe just an overall outlook for the Silicone Hydrogel market.

The overall outlook for the Silicone Hydrogel market, of course it grew 21% -- you are talking about the market itself, not us?

Yes.

It grew 21% last quarter, and I would expect it to continue to grow certainly upper teens going forward as it goes more global as opposed to how much further it can go in the United States. There is some rumblings out there that single use is starting to catch hold in the United States. But I don't know how much that will drastically influence it. So there's some deceleration of Silicone Hydrogel in the US, but I do think there will be a little bit in pockets like Japan which was -- has a pretty good size non-single use market, meaning 57% of Japan is single use, but that means 43% is primarily a two-week modality, and so I think there will be some sustained growth in Silicone Hydrogels coming from the international effort. As far as the trading up, you now have Cooper moving in to that modality quite aggressively. There is, no doubt, there is a trade up possibility going to -- if we went from a Biomedics to Avaira, and/or we took someone else's lens and traded up, that phenomena of trade up is still going on to a degree. I think when you put Silicone Hydrogel in to the package of single use, and the fact that some single use are now going to move into the -- some Silicone Hydrogels lenses are now going to move into the single-use arena, I would continue to expect it to be a driver of the overall industry growth.

Okay. Thank you very much.

Do we have any other questions?

Yes, and your next question comes from the line of Steven Willoughby of Cleveland Research.

Hi, can you hear me okay?

Yes, Steven.

Hi, just one question regarding Aveira, I know you said you are at 2 million lens a month now, just wondering how much longer you expect it to take to get to 3 million lenses. And then once you get the second Gen II for Aveira, how long do you expect that ramp up to be for that second line? Is it going to take you as long as the first line, or somewhere in between?

First of all, the 2 million lens was just Puerto Rico. So it may not take even a day to get to 3 million. (Laughter) the -- meaning --

That answers that question. (Laughter)

No. There are other lots -- the second Avaira line in Puerto Rico, which will arrive sometime in the second quarter of next year, should ramp up pretty quickly. The -- in other words, we always knew that we knew how to use 90% of that line, and we weren't sure about 10%. We now know we can do a half decent job with that other 10%. So being able to mimic that, I don't see as a major challenge. How quickly we move from being two-thirds there to 100% there, I'm not even going to attempt to make a prediction on that because I've learned from Biofinity, it's sometimes one step back -- forward, and one step back and occasionally it takes a while to get two steps forward and one step back. So I'll hedge on when we move to the full 3 million on that production line in Puerto Rico. My answer on how long to get to 3 million, just reflects the fact that we have other equipment fast track that's used in the UK also to make Avaira product line.

Okay. Great. I'll keep it to one question. Thank you.

Okay, thanks.

And your final question comes from the line of Jared Holz of Thomas Weisel.

Yes, Jared, hi.

Hey, how are you?

Good.

Just --on the gross margin line, if you just go through the products you have, these daily disposals, then you have Avaira, Biofinity and you are starting the production for the Avaira toric, and the Biofinity toric. , So if you compound all of those products, it seems like they are all going to be a drag on gross margins over the next year. So is there any reason to believe that between that and not that much leverage out of your operating margins that earnings for '09 are not going to be flat to just slightly

First of all, lines like -- products like Biofinity, which is now approaching a run rate of $60 million annualized is not going to be a drag on gross margin. It's already in the mid-to upper 60s. So that one, no. Proclear One Day, quite frankly we -- there's a lot of progress we expect to make in terms of cost of goods in that area. So there's cost of goods improvements going on, but having said that, we're acknowledging that the one day mix is a drag on gross profit movement, but if it continues at the same rate it did this year, as far as growth of one day, there would be some benefit on the operating cost as a percent. So we're -- it's true that we're investing to the extent that it gets -- we get way ahead of ourselves on one day compared to other product lines, then you'll see less of a gross margin and less of operating cost definitionally. As far as the Avaira line being two-thirds to where we need to get it, yes, there is a drag if we don't make further improvements, but I wouldn't call that a substantial drag. Net-net we are reasonably confident that we're in around 60, and to answer your question about improvement in '09 versus '08, we're basically expecting to move our margin from 57 to 60, which would add basically 3% to your OI going into next year. So we in the past have indicated our long-term objective is to grow 15% to 20% earnings per share, and we really haven't come off of that objective.

Okay. So I guess implied in that means that there is substantial leverage in other areas of the model? In SG&A, R&D, and interest expense. Is that the right way to look at it?

Yes. Interest expense, if we generate $50 million to $100 million next year, we're assuming that it's quite back ended. So that's about a neutral. As far as G&A, that's correct. But quite frankly, next year, next -- to get to15% growth, that could be mainly gross margin driven next year. We just did not have 60% gross margins this year. With our without call-outs.

Right. I'm just thinking that if you don't call anything out, and there are substantial products that are going to be a drag on gross margins even though you can get, let's say 59%, 60%, 61%, I'm just not sure where the other areas of earnings growth are coming from to get you to 15, but I guess we can talk about that another time. And then just lastly would be, are you satisfied with the product portfolio you have now? You look at J&J and Ciba, they have maybe six, seven core lenses, and they seem to be running pretty efficiently at this point. Are there any plans to de-emphasize or not focus on some of your core products in order to get the mix more towards Proclear and Silicone? The answer is, yes, we're putting our attention on the new products, a lot of the -- the rest of it is clipping coupons. And the way you manage debt of a product line is, for the most part, you increase prices on the product line until the fitter basically says, these things are getting a little rich. I think I'll switch to something else.

And that happens gradually. It's not going to be anything that we force rapidly. But the -- if you think of our portfolio from the point of view of what drives high margins and what drives low margins, think of the one day modality which has ARPs basically double the two week, yet it doesn't have cost double the two week is a high margin piece of the business, and that's 27% of the global market, and J&J doesn't play in that. But that is a high margin, because it is a one month modality price point. Think of basically specialty lenses as having high margins, torics, and we still have 34% of our business in specialty lenses. And yes, the cost of goods are higher, but so are -- the RAPs are much higher. Think of multi-focal as a high gross margin business, and we happen to be a star there, albeit in a small niche, but there's some indicators that J&J is intent on trying to turn that space, they have said publicly, into a billion dollars product category. I sure hope our market category -- I sure hope they are right, because if anyone can move the needle and create a market in that area and do it part -- with a push and a pull, it would be J&J, and we would love for them to put their muscle behind that space, and that clearly would be another opportunity for high gross margin business. The only thing that's non-high gross margin, really when you cut through it is-- a single use is a challenge, and the two-week space is kind of middle of the road. It's neither high nor low. It's more at that 60% point.

Okay. That's excellent. Thanks a lot for getting me in here.

Yes.

There are no further questions. I would now like to turn the call back over to Mr. Albert White.

I think we're all set. Thank you very much to everyone for calling in. I'm sure we'll talk to a lot of you soon. Bye.

Ladies and gentlemen, that concludes the presentation. You may now disconnect. Have an excellent day.