酷柏 (COO) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2009 The Cooper Companies, Inc. earnings conference call. I will be your operator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the ends of today's 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, Ms. Kim Duncan, Director of Investor Relations. Please proceed.

Good afternoon, and welcome to the Cooper Company's second quarter 2009 earnings conference call. I'm Kim Duncan, Director of Investor Relations, and joining me on today's call are Bob Weiss, President and Chief Executive Officer, Gene Midlock, Chief Financial Officer, and Al White, Vice President, Investor Relations and Treasurer. Before we get started I'd like to remind you that this conference call contains 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 launchings.

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 SEC of Cooper's annual report on Form 10K. These are publicly available and on request from the company's Investor Relations department.

Now before I turn the call over to Bob Weiss, let me comment on the agenda for the call. Bob will begin by providing some highlights on the quarter and then get into specific details, including new products, product launches, the market and guidance. Following Bob's remarks, Gene Midlock will comment on the second quarter financial results. We will then open the call up for questions. We will keep the formal presentation to roughly 30 minutes of prepared remarks followed by 30 minutes of Q&A, so the call will last a total one hour. We ask that anyone asking questions limit yourself to only one question so we can get to as many callers as possible. Should you have any additional questions following the call please call our investor line 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 Coopercos.com under Investor Relations. And with that I will turn the call over to Bob for his opening remarks.

Thank you, Kim, and good afternoon, good evening, everyone. Hopefully everyone agrees it was a great or a superb quarter, another solid recession-resistant quarter for the soft contact lens industry and for Cooper also. The key takeaways that I hope everyone leaves the call with today call with today are, among others, solid GAAP topline of 1% growth in the quarter, solid constant currency growth of 4%, as well as the industry continuing to be recession-resistant with growth of 3.7%. CooperVison constant currency growth was 4.3% for the quarter ended April 30. Our new products are delivering to the topline, outstanding bottomline with earnings per share of 54%. This includes $0.07 of earnings from or charge from in process R&D. So excluding that, earnings per share of $0.61 and an outstanding free cash flow quarter with $24 million of free cash flow compared to a near breakeven that we had previously forecast.

First of all, the quarter was solid in its own right. Revenue of $261 million, up 1%, or 4% in constant currency, with CooperVision with revenue of $218 million and zero growth in GAAP dollars, but 4% in constant currency. In the deep recession, CooperVision has had back to back four plus growth quarters in constants currency. CooperSurgical contributed $43 million, up 3%. Earnings per share was $0.54 compared to $0.25 in the prior year. And I might add that's six quarters in a row now that we've either equaled or exceeded consensus expectations. Earnings per share included, as I mentioned, the $0.03 -- the $3 million of in-process R&D or $0.07, and as a result of $24 million of free cash flow we were able to pay our debt down and reduce it and deleverage below $900 million of total debt. We also generated solid free cash flow in the 12 months ended April 30 with $52 million of trailing 12-month free cash flow.

A quick note on gross margins. Without hedges, if we were to exclude the way we presently account for hedges we would have had a 60% gross margin for the quarter compared to the 56% for vision, so there's a 4% impact to that. And quite frankly over the last three quarters CooperVision has had 60% gross margins, excluding the impact of the hedge contracts we put in place.

As far as new products are concerned, they are delivering to the topline. Our new product portfolio did outstanding with silicone hydrogels contributing $23.5 million, up more than double the prior year in constant currency and are tracking $100 million run rate now. There are -- two weeks silicone hydrogel exceeded $5 million, up 70% sequentially. Biofinity posted $18 million in sales in the second quarter. That was up 62% compared the prior year and sequentially up 32%.

With Biofinity toric just getting started, there was minimal implications to our revenue, but so far I can say the feedback has been outstanding. Biofinity toric is a prescription product, Rx, and as a result of that we are currently in the process of getting fitting sets out, and I'm happy to report that we've gotten 2,000 out in the United States towards our 8,200 objective for the fiscal year ended October. And in addition there's another 1,000 that has been distributed throughout Europe with an objective of 2,000 by the end of the fiscal year. We will showcase Biofinity toric as the upcoming American Optometric Association, AOA, in Washington.

And on our third product, Proclear 1 Day is doing very well. It had revenue of $10.7 million, up 86% versus the prior year, And Proclear 1 Day in Japan, where we are rolling it out, is contributing to the broadening of the distribution channels there. That product line is targeted to the independent MDs. So we are pleased with the expansion thus far, but once again that's not a major contributor at this juncture as we open up new accounts.

Geographically pretty equal growth. Americas was up 4%, Europe up 4%, and Asia Pac up 5%, once again all in constant currency. A little bit about the market, in the calendar quarter ended March, the market grew 4%, actually 3.7%. One day, while slow in Asia Pac was strong in the US, up 15% in the US. Overall it was up only 1% above the prior year. Multifocal did very solid up 23%. Once again these are all in constant currency. Toric was solid up 9%, geographically the Americas was very strong up 8%, Europe was up 3% and Asia Pac was a surprise -- actually down 1% in constant currency. The weakness in Asia Pac was Japan down 1% with one day down 3%, and Taiwan and Singapore also were down substantially 18% and 17% respectively.

From an HPR perspective, which is health products research in the US, which is [on I] data, talking about new fits, new fits -- overall silicone hydrogel new fits were 54% of the entire fits for the quarter which is down slightly, 0.7%, and in total silicone hydrogel was 49% of total fits, down slightly also, 0.7%. Happy to say that CooperVision did very well with its -- really sponsored by the silicone hydrogel roll-out, with our overall share increasing 2.7% of new fits to 23.9%, and for total fits up from 1.8% for a total of 22.5%. So still happy that our new fits exceeds our total fits. That's directionally where the business would be headed. As far as CooperVision silicone hydrogel comprised 4.3% of new fits and 3% of total fits, so we're making good headway on getting the lens on eyes for new patients.

As far as capital expenditures, cash flow and liquidity, once again we had substantial strength in our operating cash flow and free cash flow, with operating cash flow equaling $44 million for the quarter while free cash flow was $24 million. And once again our trailing 12-month free cash flow was $52 million. Contributing was the fact that we had strong operating results and our capital expenditures were only $20 million for the quarter. Debt was reduced below $900 million. It included the fact in terms of cost reductions that preserved cash, the fact that we have not put into operation our five gen two lines, that we currently do not need, and our one Avaira line that results in a deferral of about $15 million of cash. And we do not anticipate we will have to put those into production in this fiscal year, therefore that $15 million rolls out of this year into sometime in 2010 and beyond in some cases. In other words, we will not necessarily put all gen two lines in operation at once. We currently have plenty of capacity in both the one day modality in Avaira. Our yields continue to improve which is also enhancing our output through those plants.

Our 2009 outlook for free cash flow now exceeds $70 million. We intend to use about half of our free cash flow to deleverage, and we also intend to pursue our [Loomis] Healthcare acquisition strategy down the road. I would say that this acquisition strategy will most likely start post-2009. Our long-range strategic plan continues to project in excess of $800 million of free cash flow between now and the end of it, which is 2013. We expect to use 50% of this cash flow to deleverage over time.

CooperSurgical, our women's healthcare franchise, continues to deliver. It put up a solid growth number of 3%, an impressive 61% gross margin, 26% operating margin. Our hospital products were up 18% versus the prior year. They now account for one-third of CooperSurgical, and CapEx within CooperSurgical remains minimal. With the solid operating margin, low DSOs, minimal capital expenditures, free cash flow and CooperSurgical is outstanding.

Guidance, just to comment briefly on that, although we had a great quarter we chose once again not to change our guidance. Given the economy and foreign exchange both being very jerky we believe it's prudent to stay the course of where we are. I'm optimistic we should be in the upper half of the range, the $1.030 billion to $1.1 billion reflects the range of zero to 6% in constant currency, and, of course, for the first six months we've delivered 4% in constant currency. So so far so good on that. Need to -- all we need to hit the midpoint of our EPS range of $2.16 to $2.36 is to average $0.56 in Q3 and Q4 and, of course, we hit $0.54 in Q2 and, excluding in-process R&D, $0.61. So I am feeling quite optimistic about being in the top half on that also.

Our strategy and outlook -- we've used the recession to get leaner. It's showing up in our operating ratio improvements. Our reduction in force, which I want to reiterate was not a reduction of our sales force, it was overall targeting the infrastructure G&A and thing of that nature second additional tier as we have in the organization. The reduction in force was affected in the second quarter and it's still -- the implications of it are more prospective than having showed up in the quarter. So I am optimistic that operating costs in spite of increasing revenue will be somewhat minimized by that reduction in operating force.

We will, however, invest where we need to invest. We are investing in Biofinity toric fitting sets. We are investing in geographic expansion. We are investing in streamlining our distribution efforts. The efficiency of our distribution efforts is beginning to take effect. We will be expanding certain parameter offerings of our new products. We will be aggressively pursuing private label where it is warranted. And we will aggressive will be expanding Biofinity and Avaira into the multifocal modality, and in the case of Avaira into the toric modality. We expect to continue to gain share with these and other R&D and sales and marketing efforts and investment activities.

There is obviously a lot of disruption at our competitors. Bausch & Lomb has a lot of restructuring to go through yet as part of its realignment. Cibavision and Vistakon appear to be fighting to the death in the courtroom. Our job is to execute, execute and execute. Our job is to enhance customers' experience. We will continue to invest in improving comfort. In the United States there are 35 million wearers of contact lenses, but there are also 30 million dropouts or former wearers. Each dropout represents an industry failure. The key part of the industry growth will be to address the issue of comfort and late day issues and dryness. Addressing this will help lead the industry expansion to continue to grow in that 5% to 7% range going forward indefinitely.

In CooperSurgical we will leverage what we built. We have a unique women's healthcare company without a competitor. No one competitor overlaps more than 20% of the CooperSurgical business. Our strategy is to enhance shareholder value. Our strategy is to maximize total shareholder return. We are in a great position to do this with our CooperSurgical strategy, our realignment of our CooperVision plants and distribution centers, and our third generation silicone hydrogel materials that we've recently introduced as well as our Proclear family of products, all of which are best in class.

So in summary, before I turn it over to Gene, remember the key takeaways of today. Our business remains strong. Our new products are contributing and delivering. We achieved a solid 4.3% growth topline in constant currency in the second quarter. The soft contact lens industry remains strong, it delivered 3.7% growth in first quarter of 2009 worldwide in constant currency. CooperVision gained share with 7% in the first calendar quarter and 4.3% in the fiscal quarter. Our new products, Biofinity, Avaira and Proclear 1 Day, are delivering. Both the bottomline results were outstanding with $0.54 in earnings per share and, excluding the in process R&D, $0.61 in earnings per share.

Our free cash flow was stellar and well above expectations. We delivered $24 million in free cash flow compared to a near breakeven. And that improvement will carry forward into 2010. We now expect to deliver north of $70 million of free cash flow in 2009. With that I will turn it over to Gene, who will cover in greater detail the financial results.

Thank you, Bob. And good afternoon, everyone. Thanks for joining our second quarter earnings call. I'd like to begin by just briefly touching on liquidity, which seems to be of interest to several people based on the telephone conversations and questions and answers that we have. As Bob indicated, in the second quarter we had almost $24 million of free cash flow, and for the trailing 12 months ending in the second quarter we generated approximately $52 million of free cash flow. And as Bob said, for the year we expect to be in excess of $70 million. As a result, we decreased our debt by $17.5 million to $895.6 million from Q1, which leaves us approximately $174 million of credit availability, and our $650 million revolver is now below $500 million.

So our cash management strategies have been working. As we indicated, our goal is to deleverage in a sensible and timely manner, and everything seems to be falling into place at this point in the year. Bob pretty well summarized revenues so I will move right into gross margin. As he indicated, consolidated gross margin was 57% versus 58% in Q2 last year. CooperVision had a gross margin of 56% versus 58%, and the decrease is attributable probably to three items. First of all, change in product mix with an increase in sales of our single use lenses, which have a lower gross margin, and a decrease in our sales of our toric lenses. But again we are real happy with the increase in single use because a lot of that revenue falls right to the bottom line because the cost is to serve is low on those products. Also in the second quarter we had about $1 million of accelerated depreciation in older technology equipment which is being replaced. And that charge to CVIs gross margin would be increased by about one percentage point.

And then lastly, as Bob mentioned, currency hedging had around a four percentage point impact on gross margin. So without those various items it would have been well in the low 60%. CooperSurgical had a good quarter of 61% versus 59% in Q2 last year. And again, this is partially attributable to product mix. Domestic product sales exceeded international sales and the increase in our high margin surgical business unit, which is sales mainly to hospitals. In addition we increased our reduction and manufacturing costs for expediting with better labor efficiency and lower overtime.

Turning to SG&A, expenses decreased by 13% from the prior year to $94 million and decreased as a percentage of revenue to 36% from 41%. This decrease reflects our cost control procedures that we discussed in our prior earnings calls relating to salaries, travel and so forth. For CooperVision, selling expenses decreased 14% from Q2 of last year and are 28% of revenue down from 31%, and again that's due to careful monitoring of various expenditures, promotional expenses, lower travel and so forth. With CooperVision, G&A expense decreased by 12% from the prior year over 7% of revenue in both periods, and this reflects better cost control in finance, IT, HR and other support functions. With CooperSurgical, selling expenses decreased 4% to 25% of revenue versus 27% last year. And again, this is largely attributable to reduction in certain marketing activities and lower sales commissions.

G&A decreased by 20% from Q2 of last year. Again attributable across the board cost containment activities and are now 6% of revenue from where they were at 7.2% last year. R&D increased from last year to $10.1 million or 4% of sales, which is the same percentage as last year. As Bob indicated, included was a $3 million charge for in process R&D related to the acquisition of some distribution rights in a non-US jurisdiction. The impact was about $0.07 per share.

We continued the implementation of our restructuring plan -- as we indicated, we contemplated that the plan would achieve around $3.8 million of cost over the year. We recorded $3.6 million in Q1 and we expect to incur $200,000 in the remaining portion of the year. Once it's fully implemented in future quarters later in the year, we expect the benefit of approximately $2 million.

We are also continuing to review our cost structure, and we also [made] additional plans as appropriate in the future. As a result of the above, consolidated operating margin increased to 16% of revenues from 11% in Q2 last year. CooperVision increased to 16% from 12%, and CSI had a really excellent quarter increasing to 26% from 19% in 2008. Interest expense decreased by $1.2 million in Q2 from last year. And this is attributable to two items; a reduction in interest rates, attributable to a strong fund to debt to EBITDA ratio, and reduced borrowings.

Our effective tax rate was 19% versus 29% in Q2 last year. This is approximately the same as it was in Q1, as we mentioned in our first quarter call. The Q3 rate should be lower and the Q4 rate will be significantly lower. Basically dependent upon the recognition of discrete items and the determination of the tax provision. The effective rate for the full year will be in the 15% range.

I'd like to make a few comments on the proposed tax legislation, since we are getting a lot of calls on that, and perhaps an update. As everyone is aware, I'm sure, on May 4th President Obama unveiled his proposed overhaul of international taxation; and on May 11th the Treasury Department released the green book, which is its explanation of the administration's plan. The proposals as presented received a mixed reaction in Congress. While the democrats have a strong majority in the House and the Senate, the commentators believe the proposals are expected to face considerable opposition. For example, we noted that the lobbying efforts have intensified, with 59 entities such as PepsiCo, Baxter, [Elkon], Boston Scientific and so forth, filed lobby disclosure forms indicating an interest in the [Levine Dogget] legislation which was first introduced in the 110th Congress and is now reintroduced in the 111th. Obama's proposals contain a lot of the same items. Commentators are being extremely negative, saying if this legislation is passed it will make the US less competitive. And it's hard to imagine, since our US corporate tax rate today because it exceeds all of the companies in the OECD except Japan and it's 50% higher than the OECD average. So the economists will tell us we should be looking at cutting corporate taxation instead of increasing it.

Will the legislation pass this year? That's a good question. On May 28 Ellen Garrett withdrew her name for nomination for the post Assistant Treasury Secretary on Tax Policy. That is a key position in the administration pushing tax legislation forward. There is nobody in the treasury at this point that has that background. Geithner is a brilliant economist as is Larry Summers, the head of the National Economic Council. But neither have tax background. So there is some question if we will even see legislation this year. Bu it should be noted that if we do see it, it would not be effective for Cooper until fiscal 2012. So we have two and a half years to digest it and determine the course of action.

There's a few provisions that will impact us, or could impact us, in the legislation -- proposed legislation. The first of which is deferral of expenses and mainly interest expense. Generally that would not impact or our effective tax rate, that would be a balance sheet item. There's a question with the FASB deal with with the pronouncement of APB 23, where you don't accrue tax in foreign earnings if they are permanently reinvested. As you recall when they enacted section 965 in 2004, which allowed a onetime repatriation of dividends with an 85% dividends receipt deduction, the FASB stepped in and waived the applicability of APB 23. So we would expect to see something down the road in that area as well. The foreign tax credit single pool proposal is not a major factor for Cooper. We don't use former tax credits in the US because of our NOLs.

And finally, to check the box reform, it is generally that not significant to our international structure, but note they tried this in 1998 to repeal the reform, to check the box rules yet the regulations and it was soundly, soundly defeated. So again, whether that passes or not we will have to wait. We are following the proposals closely and we have begun to develop strategies to mitigate any potential negative impact that it could have to Cooper.

Last, just mentioning depreciation was $6.9 million in Q2 with $1 million of accelerated depreciation and amortization was $4.1 million, for a total non-cash of $21 million. With that I will turn the call back over to Al White

Thank you, Gene, we will now take some questions from some callers. As a reminder, we do have several people looking to ask questions, so please limit yourself to a question or two and be cognizant that there are other people trying to get in to ask questions. Operator, could you go ahead and introduce our first caller?

Sure. (Operator Instructions) Your first question comes from the line of Steve Willoughby with Cleveland Research. Please proceed.

Hi. Thanks for taking the call. A question on SG&A going forward. It was kind of flat sequentially here at $94 million. Given that you did the layoffs in the first quarter and had to pay severance out in the second quarter, just to be clear on the different savings you guys are talking about, should we expect to see SG&A decrease from the $94 million quarterly run rate we've seen in the past few quarters over the back half of this year?

Steve, you have a number of factors there. That clearly is one that the full implications on SG&A of the reduction in force did not take effect throughout the entire quarter. So there were -- some of the executions still runs into the, quite frankly, the third quarter where there is more complex integration going on of cross-country boundaries, for example. So that will result in some downward pressure on SG&A. Going the other way, as the dollar weakens certainly against the pound and Euro that push it up and one of the reasons SG&A is down year over year is quite frankly foreign exchange and major contributor outside the US particularly in Europe, a little bit offset by Japan.

As far as going forward there will be upward pressure on operating costs caused by our investment in such things as the roll-out of Biofinity toric as we go out with more and more fitting sets that are being amortized on a go forward basis, as well as those costs that are purely variable with the revenue line, such as free lenses that are utilized by the various doctors. So that as well as shipping costs and things of that nature, commissions, all of which are purely variable revenue. So when you put it all together as a percent, we should have ongoing improvement as a percentage going forward, aside from any short term anomalies that we get from cyclicality such as our first quarter historically.

Okay. And then just a question on the torics real quickly, what are you seeing in the toric, is it like from the industry? I know you are starting to get your Biofinity toric out there, your toric revenue is a little ahead of my expectations this quarter. Can you just comment what you are seeing competitively over the last couple of months with toric?

Well, we are seeing -- I would call it volatility by historic standards. In the past people that were put in at torics pretty much stay there. The doctor left them there because it was so much chair time in getting the patient fit correctly. Shred that thesis, and now there is a fair amount of jumping around. For example, we regained on HBR data, which is [on I] data. We regained a lot of what we lost and that was not -- that was not a result of Biofinity toric. It was partly a result of people trying some other lenses and then they came back and -- in some cases. So it was the big loser in the toric space was Oasis and J&J, which indicate I think that some people tried it and not everyone stuck with it. The impact of Biofinity toric on the quarter is negligible. We only essentially launched it in April. Most of that 2,000 fitting sets that we have out there is a late April roll-out into May, and therefore less than $200,000, $250,000 of our revenue is from Biofinity toric in the quarter. But the overall space is done well. Globally we, of course, had -- I think it was 9% growth in toric for the calendar quarter.

Okay. One quick follow up on the SG&A. Was there any accruing of the management bonuses in the second quarter? And do you expect to accrue any in the third quarter? And that's all I've got. Thanks, guys.

The answer is, and I will look at Gene a little bit when I answer this, I believe we did not accrue for the quarter any of the bonus that relates specifically to the senior management process. We will in the third quarter [dependent] upon an overall probability factor of hitting that magical $2.36, and being able to accrue it. There are two thing you have to get to the $2.36. We certainly are comfortable with the cash flow implication of that, meaning the $50 million objective is we are now saying is north of $70 million. So it's all about the -- to get to that you have to get through the $2.36 and then earn enough to accrue it. So we are monitoring that, but if there is any accrual it would be fairly nominal. Gene, I don't know if you want to add anything.

Yes, there have been accruals at the division levels, well, CooperVision and CooperSurgical. And the accrual at those divisions includes some of the people in the executive program. But the accrual at this point is not that significant, a couple million dollars in total. So again, we are trying to be prudent and follow the accounting rules and wait until we get over the threshold for the recognition of liability, likely in Q3. We will look at it really carefully again.

Next question.

All right. Your next question comes from the line of Jeff Johnson with Robert Baird. Please proceed.

Thank you. Good evening, guys.

Good evening, Jeff.

A couple things here. Guidance, I just want to make sure we are all on the same page. The first half of 2009, the EPS number that you are using to get to your full year guidance, $1.07, it includes the $0.54 this quarter, not the $0.57, is that right -- or the $0.61, I'm sorry?

Jeff, one more time with that question?

So you did $0.53 in the first quarter. The number we should be thinking about as we look at your implied second half guidance is the $0.54 number from this quarter, not the $0.61 adjusted number?

The $0.61.

Okay. Okay. So $0.61 plus the $0.53 is how you are thinking about what's included in your guidance?

Correct. As we -- our objective, that $2.16 to $2.36. Perhaps said another way, that $2.36 is -- basically been reset or excludes the $0.61 -- the $0.07.

It does exclude. Okay. I want to make sure we are all building off the same numbers. That's helpful, thanks Bob.

I must confess the way we ask that question, there is confusion within this room on how to answer it. So at least in my mind, and I think we all have a slightly different way of articulating it, the $2.16 to $2.36, we would get to the $2.36 without the $0.07 included. So that's why I'm answering it that way.

Okay. Fair enough. Or said a much simpler way, $2.36 minus what you did the first half of this year would be $1.22, I think, maybe Gene could take pencil to paper there as we are talking and see if that's right but I think --

[That works.]

All right. Great. A couple other things here, Steve hit on it a little bit but the sustainability of the SG&A, Bob, and the sustainability of the CapEx, you are now under a $100 million run rate on the CapEx, in fact $80 million annualized. Is that what we should be thinking going forward? And on the SG&A line, how much of this year is cost cutting that you get into fiscal 2010 and presumably maybe business picks up SG&A has to rise back up, but on the flip side I would assume you get some gross margin benefits as FX comes out of the model as well? So just talk through that if you could.

Yes, like I said, there are some conflicting trends, we have yet to see all the benefits of the cost cutting in certain areas. So that is going to, going forward, result in more reduction of operating costs. Clearly offsetting that is that the dollar has recently weakened, that's a contributor that will cause operating costs to go up -- those that are Europe and pound denominated, particularly. As far as cost of goods, you are correct. There are ongoing operating efficiencies that have -- that will come into play. Within cost of goods there is also mix that is going to be a major determining factor, and then of course we know from this year that hedging becomes a variable, and that can work two ways. It could cost us like it did this quarter 400 basis points or 4%. It also could have just as easily, when the dollar weakens, slip and go the other way.

So that is a part of our P&L, that is what I would call quite volatile, targeted to stabilize operating income but still playing havoc no matter how we account for it on sales and cost of sales. So hopefully -- as far as operating costs, we expect ongoing leverage and improving ratios all other things being equal, meaning we are going to grow our topline faster than our operating expenses. And we'll continue to get benefits out of the distribution centers that we put up and things of that nature.

All right. Fair enough. And I didn't hear an answer on the CapEx sustainability, maybe you could just touch on that. But also last quarter revenues were up 4% reported and constant currency this quarter, 1% reported, and 4% constant currency. Is the read there that the hedges were not 100% effective this quarter, that's how even though the hedges settle in revenue that's why there is still an impact there?

That's one variable, but there are a number of other variables such as the timing of when you put those hedges in place and what were the prior year comps. So, quite frankly, in the second quarter by far will be the most impacted where had we not hedged currency would have impacted our revenue line over more than 9% had we not hedged.

Okay.

So it serves to mitigate considerably, but the first quarter was year over year comparable partly because the percent we hedged, which was not 100%, and partly because of the timing of those hedges were put in place relative to the prior year's comp. CapEx, just -- I'll answer that. We were at $20 million for the quarter. We continue to believe we will be going forward something below $100 million. So there is a little buffer still in our thinking. And part of that would be a function of when and how aggressive we get with any new ERP system.

Alright. Understandable. Last question, then I'll jump. Gene, have you looked with the proposed tax regs, if everything that could impact Cooper impacted Cooper in those regulations, what your tax rate which I think we are all thinking would be around 20% as discrete items fall out over the next few years, what that 20% potentially -- the risk of that, what it could go up to?

I guess I will address the second thing you said first. The discrete items don't fall out. As some fall out others are created. So that will be continuing process forever, unless they change the accounting rules, that is. So as we accrue a reserve for a risk of an audit adjustment in the UK, when the statute expires on what's on the books for that year we will put a reserve on it for the open years. So it's a rolling type situation. Secondly, I did some calculations on the proposal, and the difficulty you have is I have to guess what our income mix is going to be in 2012. I know in total what's in our long-range plan, but we haven't scaled it down by country, etc.

I have to know exactly what the discrete items will be and what expenses we will have and what the fair value of our assets will be, because the way you have these allocations requires that. So it's really, really rough. So I would hate to commit to a number now. As we get more certainty again we've guide a couple of three years to look at this and then most of what they are proposing is not going to have a significant impact. Check the boxes which everyone is wringing this hands -- it won't affect our structure at all hardly. Somewhat and we are going to mitigate that, if in fact it passes with some changes. So I would be reluctant to put a number out there now, Jeff. Whatever I tell you is going to be wrong.

No. Understood. Even if you don't put a number your gut tells you that it would be closer to the 20% than the 35% range.

Actually they use 39.5% state rates but we won't be close to that. I'm not clear we'll get to 20%.

Keep in mind the run rate we are at this year is not the 15% that we will land at buy the end of the year, ballpark, but our run rate is north of 19%. So if you look at our existing first six months whereas if we're a 19% taxpayer. So if you are comparing, let's just arbitrarily say something in the 20%s, midpoint 25%, you are not going from 15% to 25% relative to our today's effective tax rate in the P&L.

Yes, no, yes, that's the point we've tried to make. Well, thank you, Bob, that's helpful. And, Gene, thanks a lot.

Next question/caller.

(Operator Instructions) And your next caller is Larry Biegelsen with Wachovia. Please proceed.

Hi, Larry. Larry? Hello, Larry?

Hi, sorry about that. You can hear me okay?

Yes.

Thanks for taking the call. Just to be clear on the second half guidance, the $1.22 that was mentioned earlier, which is below the second half of 2008, is that just conservatism to be conservative? And second, does it have also to do with the fact that if you accrue or pay bonuses, that it goes up, there is $0.15 of bonuses that you would pay, so you have to get up to like $1.51 to beat the $2.36?

Yes. The barrier to get above $2.36 is large. It's $0.15. So the -- anything between $2.36 and $2.51 is still $2.36. And therefore still at $1.22 if you will.

So that's part of it.

Yes. As far as looking at it the other way, there is a broad range in the context of where we are year to date and a lot of that is what we believe is prudent in the context of the economy and things of that nature. Now we have also indicated in our prior calls that we will make some decisions, for example, such as idling some equipment which will have some implications on the P&L, such as an Avaira line, and we also said that -- we've indicated that we have yet to accrue any material part of that bonus, so that we need to accrue that going forward if we are going to exceed the $2.36.

And the $0.15 for bonuses, would that be booked in the fourth quarter?

It would get booked sooner -- to the extent we are have arrived at the point where we have a comfortable projection above the $2.36 we would start accruing it at that point. So there is very limited accruals, some of which are outside of that bonus plan that we already have on the books, I think Gene mentioned a couple million dollars. But that $0.15 is particular to that one senior management group of employees.

And lastly, could you just give us a quick update on the litigation status, the timing with Ciba and J&J in the key markets? Thanks.

Yes, the things that have developed so far is Ciba won in the Netherlands, and there is an injunction against Vistikon in the Netherlands. They had to take the product out of the market. Same thing happened in France, where there was an injunction against Oasis effective the 26th of April. What Vistikon did, however, was not necessarily inform its employees. It's probably the best kept secret in Europe. I just came from the British Contact Lens Association meeting in Europe, and talked to many, many professionals, if you will. But they loaded up the channels about nine months. Ciba can, if they still elect, go after the channels, many of which is their distributors and their accounts. So they are not likely to do that. There was backlash against Ciba in the Netherlands.

Other activities in the UK, the trial is concluded. It is expected there will be a ruling sometime between now and I believe the ends of July; various dates have been thrown around. And the trial I believe is concluded in the United States, and it's pending a ruling on that also. So there's a lot of -- it's certainly matured, a lot of activity. Vistikon is acting out like there is no change in their mindset going forward. As far as a discussion about settlements, it does get complicated by the fact that it's not an all-or-nothing in Europe. It's only Oasis that is the subject of the litigation in the United States. It's not only Oasis but also Acuvue advance. So it's a bit more complicated, and that begs the question about [true eye], which is their single use one day, whether or not that also gets brought in. So the battle goes on, and the way I worded it is that it's the two companies looking like they are going to each fight to the death, and we will see when someone blinks.

Okay. Thanks, Bob.

Your next question comes from the line of Libby Joanne Wuensch with BMO Capital Markets. Please proceed.

-- Libby. Hi, I have some clarification questions, please. I hate to sound stupid, but when you were saying before you're counting for the $2.36, that includes the $0.07 or excludes the $0.07?

The range of $2.16 to $2.36 -- and it depends on how you answer the question or who answers the question, I think. My mind, it excludes the $0.07. So our objective is to get to $2.36 excluding that charge.

Okay. So that includes --

To say that another way, which is if I were to take that charge against the $2.36 and thereby reduce the $2.36 to a $2.29 objective, that then would be the objective of management. That's why I'm -- hopefully I'm clear and everyone understands relative to the way you are thinking about it.

Okay. I'll move on. When I take a look at your second quarter 2008 press release, you had $263.451 million in revenue, and yet when I have a press release today it's $259 million. What's changed?

It was a reclassification of the prior year for hedging for what our auditors deemed was appropriate comparability. So last year the impact of hedges was netted in cost of goods. This year it's grossed up on both the revenue line and cost of goods. And it could lead to that large amount of hedging revenue having a negative gross margin, which is the case in the second quarter. There is a substantially negative gross margin on the hedged P&L, if you will, and I skipped the numbers, about $11 million on charge to cost of goods and about maybe seven -- what is it?

$6.6 million.

$6.6 million add to the revenue line. So we pick up revenue of $6.6 million, but we take a charge of over $11 million. Net we have a negative gross margin. Last year's reflection would have been only to record that net amount in cost of goods.

Okay. When I think about SG&A, I know we've talked about this already on the call, it's more downward in terms of expenses, but more upward in terms of hedging impact -- or foreign exchange impact, not hedging, forgive me. So if I was dialing in an SG&A number of, let's say, 37% for the year, is that about right?

Pretty close. 37%, 38%.

37% to 38% of revenue for the year is about right?

Yes. I think we continue to target around 16% operating margin for the year.

Okay. Very helpful. All right. That was it. Thank you.

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

Hi, guys, this is actually Brian here for Peter.

Hi, Brian.

Hi. I apologize if I missed this earlier. I want to go back to the SG&A but I just want to get it from just a pure standpoint of promotional spending. Has there been any change recently in what you are doing? And I guess if I could ask as well simultaneously, are you seeing anything in the marketplace that's different from your competitors? And that's it, thanks.

We clearly are as we roll-out Biofinity toric pushing very hard on fitting sets, however that's pretty over a three-year period of time going forward. I don't think that will materially impact our operating ratios in and of itself. As far as what we are doing compared to our competitors, I would say our competitors continued to do more on rebates and some of that than we do. We tend to minimize some of that in terms of total mix with private label. So where you have private label come into play you have a slightly less gross margin, but you are also not incurring as much dollars. As we shift in weight towards retail in some cases that could alter the mix. As far as what's going on in the marketplace in total, I would say other than a retailer recently announced a more aggressive honoring of coupons if you will policy which may alter the retail percent. We haven't changed per se anything the way we are doing business.

Okay. Great. Thanks, guys.

Your next question comes from the line of Jared Holz with Thomas Weisel. Please proceed.

Thanks a lot. Can you just reconcile in the press release it looks like the first quarter for CooperVision grew 7% in constant currency, the first calendar quarter. But you did 4% in your first fiscal quarter and 4% in the second. So why there such a disparity there?

Good question. The market grew 4% or 3.7% in the first calendar quarter ended March. We grew 6.8% or ballpark 7% in that same time period. That -- and then you are correct, it declined for the three-month period ended April from that 6.8% to 4.3%. That decline reflects two factors. One is that we were quite aggressive in terms of getting distribution with Avaira and Biofinity, both spheres in the period ended March 31 prior to the launch and roll-out of Biofinity toric. So there was a lot of effort in marketing product that I would say some of which is not Rx to get the Avaira distribution and we've seen that in some of those revenue numbers. In April everyone shifted their energy not only in US but also in Europe into rolling out the toric and the fitting set. And that's pretty much the only game in town we were really talking about in most of the globe in April.

We have very little to show for that because it was more an expense endeavor than it was a topline endeavor. But we started seeing some benefit and May of that endeavor as Rx starts increasing. So as a result of that basically we are getting a lot of energy for no revenue, that took a drain on our three months ended April 30 as opposed to three months ended March 31. So the silicone hydrogel, Avaira, Biofinity push in three, through March and then we stopped doing that in April.

Okay. Thanks. Just two quick once here. On the CapEx, $20 million, a lot better than people thought, but again the sustainability of that in the face of losing more toric market share, why not just spend the money now and kind of save face later?

I'm not quite sure, on CapEx would be -- we have plenty of capacity. So from a CapEx point of view there's nothing else to have to spend and each day that goes by we can make more, more units with less people because efficiency goes up on the same equipment. So we don't need to operate that added equipment and we don't need to spend the $15 million that it would take to put all the piping and to validate and all that right now. We will spend that and as we see that we've come up high enough in the capacity requirements. But that is not going to be this fiscal year. So there is nothing we are doing from a CapEx point of view to slow up revenue generation at all. And pretty much we are taking care of quite heavily anything to do with gen two, it's well taken care of. Anything to do with Avaira is well taken care of.

Are you seeing the toric market share pick up in the past month or two since you've gotten Biofinity toric fitting sets out there? I mean has that share increasing here?

Well -- we're out with 2,000 in the US, 1,000 in Europe as of now, so 3,000 sets with a long way to go to totally influence it. We need 17,000 in the US, so we are 2,000 of 17,000, and in Europe we are targeting 2,000 for starter,s but I'm sure that number will be considerably higher next year probably closer to 10,000 than 2,000. So with all that no one is going to set the product until they get the fittings at. So that is going to be a building block endeavor and it unlike Avaira, as you may recall we sold Avaira to Wal-Mart in May and basically we had a large one time pick-up in May of last year and there was avoid as we had to go out there and work it's 3,000 stores of Wal-Mart over the next six to nine months. So there was kind of a revenue avoid and then earning back on getting it eyes.

In Biofinity toric, and toric, it's going to go just the opposite. You are not going to get the revenue before you've done all the work and had all the distribution and they are using it. For the toric the market performs well, but it's going to take a while.

Okay. Just one more for Gene. I just want to get this straight once and for all, the guidance, $2.16 to $2.36, that assumes $0.53 in the first quarter and $0.54 in the second quarter. Is that correct, or is it $0.53 and $0.61?

I think most people here want to say the $0.54, and my concern was the $0.54 is I would also say that I view that in process R&D like many other acquisitions as exclusive. So I think it's cleaner to thinking about it excluding it all together, and therefore the $0.54 is really $0.61 and the in process R&D, let's pretends it was $1, not only $0.07. We would be clearly saying here is our guidance $2.16 to $2.36 and that does not include the $1. I'm saying $2.16 to $2.36 and that does not include the $0.07.

Okay. So just to be clear, that would imply, it would be the $0.54 that you would be looking for.

No, that would imply, it would be the $0.61 my way of thinking.

Figure $1.22 in the next two quarters, in the last six months.

$1.22 in the last two quarters. Okay. Great. Thank you.

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

Hi, good afternoon. Two questions. First is, last quarter you provided us the US OUS breakout for toric and wondered if you could do that again on how toric performed there? And additionally with Avaira can you give us the market penetration rates? And then my second question, I think your press releases have consistently said that your guidance range is on a GAAP basis, $2.16 to $2.36. So that would imply that you are actually including the $0.07 IPR R&D charge. Bob, if you are saying you are excluding why is your range not $2.33 to $2.43?

$2.16 to $2.36 is a GAAP EPS guidance range.

Correct, which means it includes $0.07 IP R&D charge, but Bob consistently keeps saying that that excludes it.

I'm saying it excludes it because if we came in at $2.29 GAAP that would be $2.36 excluding it, and the $2.36 excluding it, I would say we hit the number. If we hit $2.29 we would start accruing and paying the bonus and we would say we got to the $2.36 exclusive of the $0.07.

We can certainly talk about it off-line but you have a GAAP guidance range in the press release and your GAAP EPS for the first two quarters were $0.53 and $0.54. So I think that's where the confusion lies.

Okay.

The other question on the toric and the Avaira .

You want the toric number, US, nonUS?

Yes, last quarter you said toric in the US was down 9% and OUS was up 2%. I want to see what those figures were for this quarter.

You are going to have to bear with me. Did you have one other question while I'm looking?

It was Avaira and if you could help us out on how you were progressing with market penetration rates in terms of total fits and new fits.

All right. The toric outside the US, rest of the world, in the quarter is down 1%. The toric in the US was down 2%. Overall it rounds to down 1%. Okay. So they are both about the same. The market penetration rates for Avaira for the quarter ended March 31 Avaira for total fits was -- new fits was 2.3% and for total fits was 1½%.

They're pretty much the same as they were last quarter, there's no improvement at all on there, any reason for that?

I think as much as anything I mentioned that the real push for broadening distribution was a March event. So we are getting all those setting sets in the push out there, so I would expect in the next quarter to have a pretty noticeable improvement on that and we were also broadening the distribution of Avaira during the quarter into more global areas and outside the US.

Okay. Just to clarify the OUS toric being down 1% after a quarter where it was doing fine kind of plus 2%, is there a specific country that's driving that there's been a change in? Thanks.

I'm sorry, both numbers were down about the same amount. So --

Correct, no, I'm saying OUS down 1% last quarter this was OUS was growing for toric. So can you just explain to me the change what's happening overseas for the toric business? Thanks.

The toric business like in the US is we have a franchise that is waiting for a silicone hydrogel, and therefore it's growth would be somewhat limited pending the conversion over and expansion into silicone hydrogel, which is Biofinity toric. So in Europe they are all excited and waiting and now receiving Biofinity toric, and would have basically slowed up other things that we were doing. So I don't read anything into -- of course we knew we needed the silicone hydrogel in the marketplace, not only in the US but out the US and particularly in Europe.

Thank you.

Your next question comes from the line of Mike Weinstein with JPMorgan. Please proceed.

Great, thanks, guys, it's Kim here. Just two quick once, I guess, the first is on gross margin, you had a couple of item in the quarter where I think earlier on the call you were adjusting your CooperVision gross margin back to below 60% range excluding a couple of one times. I guess what I'm wondering is that how we should thinking about that business on a go forward basis as a low 60% gross margin business. And if that's the case I guess wondering how do we get there given the negative mix shift which I understand isn't necessarily negative mix shift at the operating line, but also the private label impact there. So maybe you could talk in a little detail on that. And I guess the second one is just if could you just help us a little on how the idling of equipment runs through the P&L. So I just want to make sure that we are right that you are saying that you may idle one Avaira line, and I think you said five gen two lines, and that impact has not yet hit the cost of goods line, but might hit in the second half of the year if you decide to do so. Thanks.

Okay. First of all the key driver of the gross margin from a volatility point of view, the last three quarters is, has been the current --

I guess, just on that, I mean on underlying X currency basis should we think about this as --

Right, so we are running around 60% excluding currency, and to thinking about the equipment we have yet to put in service, which is the five gen two lines and one Avaira line they are not in service, they are in suspended animation, which is to say they set on the balance sheet, they no longer accrue anything such as interest that is normally capitalized in a construction of progress. So they are not being charged to the P&L and there is -- Gene -- at some off-line we can get into the accounting determination of why and how that is. Anything that is charged to the P&L that is currently an operating piece of equipment that is then idled, instead of tracking inventory onto the balance sheet we go straight to the P&L.

The Avaira line that is the high volume piece of equipment we have in Puerto Rico, that if that is idled, as it probably will be this coming month, the depreciation will go straight to the P&L and the sample there is, if it's a $30 million piece of equipment that is depreciated over 10 years, that's $3 million a year and if its idled for six months then one half of that $3 million in depreciation will be charged to the P&L over a six-month period. And that's probably the cleanest way to thinking about that, but the five gen two lines and the one Avaira line that have yet to be put in production are not directly impacting the cost of goods.

Okay. That's very clear. Thanks.

Okay.

I believe that's it that you everyone for calling in. We appreciate it. And as Kim mentioned, feel free to call us for any follow-ups, and have a good day.

Thank you, everyone.

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