酷柏 (COO) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Q2 2010 Cooper Companies Incorporated earnings conference call. I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) I will now turn the conference over to your host for today Ms Kim Duncan, Director of Investor Relations. Please proceed ma'am.

Good afternoon. And welcome to Cooper Companies second quarter 2010 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, Senior Vice President and Chief Financial Officer, and Al White, Vice President Investor Relations and Treasurer.

Before we get started, I would like to remind that you 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, manufacturing restructuring plants, acquisitions and the litigation settlement. Forward-looking statements don't necessarily depend on assumptions, data, or methods, but may be incorrect or imprecise and are subject to risks and uncertainties. Events that is could cause our results and future actions of the Company to differ materially from those described in forward-looking statements are set forth under the caption forward-looking statements in today's earnings release and are described in our SEC filings, including the business section of Cooper's annual report on Form 10-K. These are 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. Then get into specific details including new products, the market, guidance and our strategy. Following Bob's remarks, Gene Midlock will comment on the second quarter financial results and provide some additional guidance. We will then open up the call for questions. We will keep the formal presentation to roughly 30 minutes of prepared remarks, followed by Q&A. So the call will last about approximately one hour.

We request that anyone asking questions please limit yourself to one question so we may get to as many callers as possible. Should you have any additional questions following the call, please call our investor line at 925-460-3363. That's 925-460-3363 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. With that I'll turn the call over to Bob for his opening remarks.

Thank you Kim and good afternoon, good evening to everyone. Second quarter results. Certainly the second quarter, a great quarter in my opinion and trusting you'll agree with that. Our momentum continues on many fronts for the quarter. We grew the top line double digit, delivering $289 million in revenue. Our earnings per share was $0.61 non-GAAP and $0.10 GAAP. GAAP includes the proposed litigation settlement and the plant shut down activities which continue on track for year end. They are primarily those. As planned, we expanded our sales and marketing efforts over $9 million above the prior year. In spite of the investment, we delivered $60 million of free cash flow, bringing our 12 month free cash flow to over $218 million.

Key take aways today. We had an outstanding quarter. We continued to gain market share. In the calendar quarter the market grew 6.2% in constant currency. We grew 11.2% in constant currency in the same period. Our siliconized gels are driving our growth up 139%. For the fiscal quarter we delivered $0.61 earnings per share non-GAAP excluding Norfolk litigation and direct cost of acquisitions. We recently have began to launch Avaira Toric and in test market outside the US are Biofinity multifocal. Norfolk plant shut down remains on track and is targeted to deliver $14 million in free cash flow in 2011 and $15 million in P&L improvement in 2012. Our $60 million of free cash flow has allowed us to delever to 32% debt to total capitalization, with only $713 million of debt versus $913 million in January 2009. When our debt to total capitalization was at 40%.

Our silicon hydrogel family, Biofinity and Avaira, is driving growth. During the second quarter they were $54 million. That's 136% increase versus the prior year. Biofinity is a star with 161% growth. The Biofinity Toric continues to fuel accelerating growth. We have recently started rollout Avaira Toric. It is positioned in the so-called two week market. The two week market is primarily where [Discon] playing in the US, unlike the monthly emphasis of [Tiba] and Bausch & Lomb.

While I wanted to -- while I won't quote any numbers, we have made good progress with our product of choice, selection for both of our silicon hydrogels at Luxottica. Luxottica, you may recall, is LensCrafters Pearle Vision and Sunglass Hut. Retail chains have been an area we have been quite under indexed in in the past and in addition the Avaira Toric launch, we are now marketing the Biofinity multifocal outside the US. We plan US rollout sometime in 2011 after we have assured ourselves that Biofinity multifocal measures up in all aspects to the Biofinity family of products.

Geographically each region is contributing nicely. The fiscal quarter, Americas was up 13%. EMEA or Europe was up 6%. Asia-PAC of 18% and overall we were up 11.2%. There is a noticeable flip flop in constant currency between Asia-PAC and EMEA. In Europe the actual was up 13% in constant currency, while in Asia-PAC it is only 3% growth. Once again this is compared to the prior quarter. Prior years quarter. While still soft, the Asia-PAC market is showing some light. Our drivers geographically include in the Americas trading up to silicon hydrogel lenses, strong performance of single use, as well as Toric. EMEA in Europe is silicon hydrogel that is doing well as well as single use and Toric's. In Asia-PAC silicon hydrogel, Proclear 1 day and Toric's.

The market was solid for the quarter ended March of 2010 with titans at 3% to 5% constant currency the results were good. The market was up in constant currency 6.2% and CBI was up 11.2%. We just grew at 1.8 times the market, or we grew at 1.8 times the market. The market was solid across the board. 1 day it was up 10%. Toric's was up 11%. Multifocals were up 22% and silicon hydrogel was up 21%. Silicon hydrogel now accounts for 39% of the soft contact lens market worldwide. Regionally the strength continues out of Europe. Europe was up 9% in constant currency, with strong support coming from all lens types. Sphere's up 8%, Toric's up 9%, multifocal up 17%, and silicon hydrogel up 32%. In the Americas, it had 7% growth with strong support from Toric up 14%, multifocals up 26%, silicon hydrogel with a strong support from Cooper Biofinity was up 15%. Asia-PAC, as I mentioned, showed some life, up 4% of constant currency, with the drivers being Toric's 9% and silicon hydrogel up 25%.

CooperSurgical, our women's healthcare franchise, had another stellar quarter. Revenue was up double digit at 10% with 5% being organic growth. Hospital revenue was up 19% and now accounts for 36% of CooperSurgical revenue. Operating income was 24% of sales with the strength of a 62% gross margin hurdling investments in sales and marketing and R&D. Our acquisition of JLJ, a smoke evacuation unit and Her Option, an in office endometrial ablation unit used in cryo, are both going well.

From a CapEx, free cash flow and liquidity perspective, we had another solid quarter with free cash flow being $60 million. That's four in a row in terms of delivering strong cash flow with the trailing 12 month free cash flow being $218 million. We delivered -- we deleveraged from 40% debt to cap to only 32% over this period of January a year ago to today. Our debt, which was $913 million in January of 2009, is now only $713 million. CapEx was only $11 million, keeping our run rate well below the $100 million, 12-month cap that we've indicated. CapEx is concentrated on Biofinity expansion, conversion of Toric line to Avaira production, together with cost reduction projects and other new product development activities.

A little bit about guidance. We've given some updated guidance for 2010. While our revenue guidance is unchanged, our non-GAAP EPS and free cash flow has been increased. Our non-GAAP earnings per share has been increased $0.05 to $2.50 to $2.60, reflecting solid topline results and profits for the second quarter. Solid CooperSurgical result and the lower interest expense due to strong free cash flow and debt pay down. Our free cash flow has been revised upwards by $10 million to $140 million to $160 million. This even hurdled the proposed $27 million class action settlement. The GAAP earnings per share number of $1.76 to $1.86 has been revised to reflect the proposed settlement and improved operating cash flow. Operationally, solid top-line growth with contributions mainly from Biofinity and CooperSurgical, great CapEx and inventory management continuing to improve our debt ratios and cash flow, and the timely execution of our plant shutdown and leaving our -- are all leaving us bullish about the outlook. In this context we continue to invest where needed Biofinity equipment, new product expansion and sales force, marketing and R&D expenses.

About our strategy. Just a couple of minutes on that. We believe our strategy is delivering. For example, at CooperSurgical we continue to leverage what we have built with solid tuck-in acquisitions like JLJ, a smoke evacuation system for the hospital setting, and Her Option, an office based product for endometrial ablation. We have the dedicated sales force, customer base, manufacturing talent to leverage each of these acquisitions. Additionally, gross margin exceeding 62%, operating margin exceeding 24% and the business model requiring minimal CapEx, a test to what a great franchise CooperSurgical has become.

Our strategy at CooperVision is more complex. We are the only major player in the $6 billion soft contact lens industry that promotes silicon hydrogel and non-silicon hydrogel products like Proclear. Emphasis -- we emphasize both brand and non-branded products. We actively promote customize lenses for a price. We support all modalities one day, two week, and monthly lenses. We support all lens types, Spheres, Torics, and multifocal, and I might add the Biofinity Toric proves we are very good when it comes to making specialty contact lenses.

We are placing a lot of emphasis on being customer friendly and easy to do business with. When we let someone pick their own brand name that doesn't translate to a lower price. Our pricing in fact, we are generally trading our patient base up. We are collecting more revenue per patient with silicon hydrogel, with Proclear and while the 1 day is a lower ARP pro lens it translates to three to four times more revenue per patient and a lot more operating income, or profit per patient. In my opinion, we continue to be the most focused company in the industry lacking many of the distractions that some of our competitors are faced with, and we have a lot to talk about with our customers around the world.

In summary, before I yield the floor, or should I say speaker phone to Gene, I'll wrap up by saying 2010 continues to be a very solid year. With double digit revenue growth, Q2, our second quarter, delivered the results. Our silicon hydrogels are tracking a run rate exceeding $200 million annualized with a grow rate of 136% this past quarter, accounting for now 22% of CooperVision. The Proclear family, our non-silicon hydrogel continues to grow globally, up 17% worldwide during the quarter and remains 29% of our total revenue.

Our CooperSurgical strategy of tuck-in acquisitions continued to prove it can deliver top line, bottom line and free cash flow results. We put up a solid bottom line -- we put up solid bottom line results with non-GAAP EPS of $0.61, leading our internal targets and leading us to increase our guidance numbers. We continue to prove we can deliver free cash flow delivering $60 million in free cash flow during the quarter, paying down $30 million of our debt even after we paid for $20 million for acquisition of Her Option during the quarter. Bringing our 12 month free cash flow to $218 million. And with that I'll turn it over to Gene.

Thanks Bob. Good afternoon, everyone. Thanks for joining our second quarter earnings call. As Bob indicated, and I think you'll note from the information provided in the press release, we had a pretty solid quarter which we are pleased with and I don't want to keep repeating -- repeating free cash flow, but I will because it came very stellar. We have $71.6 million of operating cash flow and CapEx of $11.2 million, which resulted in $60.4 million of free cash flow. And for the trailing 12 months free cash flow was $218.2 million. We are back to the days that Cooper was historically during well over $200 million of free cash flow per year.

Approximately $30.4 million of the free cash flow was used to reduce total debt to $712.9 million. This leaves us with approximately $354 million of credit availability and the 650 revolver is now around $360 million. At quarter end, the ratio of fund to debt to EBITDA was 3.14, a slight increase from 2.88 in Q1. This was generally a result of the shareholder litigation which we'll talk about in a moment, which significantly reduced EBITDA. As a result, our borrowing rate will go up 25 basis points on the revolver to LIBOR plus 125, but as we'll mention later, we expect interest expense to continue to decrease in Q3 and is Q4. Inventories decreased by $13.1 million from last quarter with months on hand at 5.7, which is down from 6.8 in Q1 and down from 7.8 in Q2 of last year. So we continue to manage inventories very well. We also are watching receivables carefully. Our days outstanding at 54 versus 61 last quarter and the 54 is comparable to Q2 of 2009.

Turning to the profit and loss, Bob covered revenue pretty thoroughly so I won't go over that again. We'll start with gross margin. Consolidated GAAP gross margin was 57%, the same as Q2 last year. Non-GAAP gross margin was 58% versus 57% last year. And we are still comfortable within our range of guidance of 58% to 60%. So in Q1 we note that if you adjust for the out of period cost, gross margin was 60%, but as we indicated in several previous quarters, there is a period cost that arise at various times during the year for things like accelerated depreciation, equipment and plant, inventory write-offs, handset write-offs and so forth. And those will continue on a quarterly basis, but we are still comfortable with our guidance of 58% to 60% for the fiscal year.

SG&A on a GAAP basis increased by 19% from second quarter last year to $111.3 million, and we are 38% of revenue versus 36% in Q2. This is generally attributable to increased sales and marketing expenses, commissions and other types of selling expenses associated with higher revenue and new product launches, as well as increased legal costs. In Q2 R&D decreased by 15% from Q2 last year to $8.6 million, and we are 3% of revenue versus 4% last year. However, last year, as you will recall, we had a one-time charge of $3 million for process, research and development expense associated with an acquisition of non-US distribution rates. Without that one time item, R&D actually increased 22% this year over the second quarter of 2009.

Bob mentioned the restructuring charges at Norfolk and Adelaide, Australia and we are still on plan with our estimate of $24 million, with approximately $10 million to be cash related primarily this year. In Q2 we recognized $3.6 million of these expenses with $700,000 in cash and we are definitely still on plan. As a result of the foregoing, on a GAAP basis, operating margin was 13% of revenue down from 16% last year, and on a non-GAAP basis it was up 15% of revenue down from 16% last year. Interest expense decreased in the quarter by $500,000 from Q1 to $9.7 million. This reflects the reduction in interest rates attributable to maintenance with strong fund to debt EBITDA ratio, as well as reduced borrowings.

On May 4 we announced that we reached an agreement in principle to settle all claims in the pending consolidated shareholder class action suit. As you will note, we took a pre-tax charge for the settlement of $27 million in the second quarter. The settlement is still subject to court approval, which we would hope it would be forthcoming in the near future.

Turning to the effective tax rate, on a GAAP basis the effective rate for the quarter was a negative number of $1.9 million versus a positive 19.5% in Q2 of last year. Again this was generally caused by the settlement of the shareholder litigation with the deductibility of the $27 million. On a non-GAAP basis, the effective tax rate was 15.9% versus 19.5% in last years Q2. This decrease was mainly attributable to the shift of income to lower tax jurisdictions. For the full year, the effective rate on a GAAP basis is projected to be 8% to 10% and 16% to 18% on a non-GAAP basis. This is an increase from 12.4% in 2009, again, mainly attributable to the shift of income amongst the 28 jurisdictions in which we pay tax. Depreciation was $19.5 million in Q2, of which $2.1 million was accelerated depreciation. And amortization was $4.5 million for a total of $24 million.

Bob provided a very good summary of our revised guidance and it is contained in the press release, so I won't repeat that. I would like to just take a moment to close with just -- provide a little bit of the geography in the profit and loss statement where the extra called out type charges reconciled between GAAP and non-GAAP. So in cost of sales, there is a charge for $3.6 million for the CooperVision restructuring plan. SG&A has approximately $500,000 for additional legal expenses generally associated with acquisitions. You'll note in the P&L there's $45,000 in the restructuring line and again that's for the Norfolk closure. That sums up the charges that wind up in operating income, and below operating income you'll see a separate line item for litigation settlement charge of $27 million. With that I'll turn the discussion back over to Kim to start the Q&A session.

Operator?

Yes. (Operator Instructions) Our first question comes from the line of Steve Willoughby from Cleveland Research. Please proceed.

Hi. Good afternoon. I guess two questions. First, if you can just comment on what you've seen out of the Europe since the end of the quarter, what trends have like been so far in May and the first few June. And then a question --

Okay. Steve, I didn't hear your second question, but on the first question on Europe, suffice it to say we are all monitoring Europe and the major event was of course the currency moving down. Too early to give you a lot of color on what is happening country by country within Europe. Although Europe has been a strong performer throughout the entire quarter ended April 30.

When we look at the world you'll notice we are not getting more bullish when it comes to our guidance, even though some might ask coming off a 6.2% quarter for CLI, why don't you up 3% to 5% guidance range. So we are sticking with that. We are sticking with our current numbers there. And when we put together the refresh guidance for earnings quite frankly we had an upside that never quite made it to the P&L. We took that off and it's factored into our guidance. There is some reduction in earnings and results in the last six months caused by changes in currency. From our perspective year-over-year, where the currency is today compared to what hit our P&L because of hedging in the second quarter, it's not a major year-over-year comparison. It's not in its current state a major event to us, 2011 versus 2010 given the rates we have in place.

Second question operator.

Our next question comes from the line of Lawrence Keusch from Morgan Keegan. Please proceed.

Hi. Good evening. For Bob or for Gene. I'm just trying to understand the gross margin and obviously I'm very curious and sort of the underlying trends. I suspect you had higher cost inventory flowing through this quarter just due to where the pound was six months ago. So I want to confirm that is correct, and then I'm wondering if there's anyway if we look at the dollar pound change rate where we are today to give us some feel for what you think the gross margin is actually running at, sort of understanding again that you've got these various charges that run quarter per quarter. I'm trying to understand the FX.

I'll start and let Gene jump in. Relative to the pound, we talked about the Europe on the last question. The pound has moved south at the same rate as the Euro has vis-a-vis what is in our P&L. There is a reduction in value, which is good for us by 3% in the pound and by 3% in the Euro which is bad for us. Those two are working as a natural hedge temporarily. There's no guarantee they always would. So relative to its getting to the P&L, there is a six month delay on the Pound. So you won't see the value in the next six months because inventories turn. We are still at 5.7 months inventory.

There are a lot of moving parts in cost of goods including mix to a lesser extent with favorable trends on the monthly Biofinity high gross margin, and working one way and going the other way is single use in the growth of single use, which is a lower gross margin. Also keep in mind, we gave guidance of 58 to 60 this year migrating to 59 to 61 as we basically complete the integration of Norfolk, which has a $15 million benefit which is about a percent and a half, but we won't see that benefit until mid next year. We'll start seeing it at about $7.5 million, a million and a half, $15 million the following year. So we'll be getting a full point and a half out of that as we look forward over the next 18 months, if you will. That's kind of one factor.

You are right a little about higher cost hitting our P&L and moving to lower cost. We continue to get improvement in cost of goods and cost of manufacturing. So there are a lot of variables and I don't know if there's anything else Gene you want to add what I've covered, but directly we are still happy with the 58 to 60 this year. 59 to 61 next year excluding the Norfolk shutdown cost.

Our next question comes from Jeff Johnson from Robert W Baird. Please proceed.

Thank you. Good afternoon.

Good afternoon.

Gene could you give us adjusted gross margin for both CVI and I'm assuming CSI is about the same as the reported, but to follow up on Larry's question the adjusted gross margin for those two segments would be helpful.

The non-GAAP?

The non-GAAP. Yes, sir.

CooperVision is 57 versus 56 last year and surgical was 62 for GAAP and non-GAAP.

Next question operator.

Our next question comes from the line of Larry Biegelsen from Wells Fargo. Please proceed.

Good afternoon. Thank you for taking my questions. Can you hear me okay.

Yes.

Just let me clarify one question. Your revenue guidance, you are leaving it unchanged at 4% to 6% constant currency growth given that you did 7% constant currency growth in the first half of 2010. You are leaving that unchanged to be conservative because of what we see happening in Europe. Is that how I should interpret your answer to the earlier question?

Partly, yes. It includes Europe. It includes I guess a number of other finicky events going on around the world. I don't care if it's in the US the oil issue in Asia-PAC, Korea, in the Middle East, they have their things going on. There are a number of factors around the world that leave us to thinking prudence is a better path.

And then the 18% Toric growth this quarter, how sustainable is that? Was there any stock in the quarter from Avaira Toric? Thanks.

There is no stocking. Keep in mind we put fitting sets out there, and for the most part this is an Rx -- this is an Rx part of our business. That's the way we rolled out Biofinity throughout. So it's primarily the strength of Biofinity Toric and Avaira Toric almost a non-event relative to revenue, and I emphasize non-event in the second quarter.

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

Hi. Good afternoon. Just wanted to follow up on questions on guidance. With full year top line guidance staying unchanged, can you just walk through again why you are raising the bottom line?

Yes. The bottom line is primarily the strength of free cash flow leading to reduced interest expense. For the most part we are holding our gross margins the same. We are investing, as we indicated we would, in operating cost, and so the biggest driver is below the line.

Our next question comes from Mike Weinstein from JPMorgan. Please proceed.

Hi. It's Kim here for Mike. The first was a follow up on the gross margin. I think, Gene you mentioned an accelerated depreciation cost in the quarter of $2.1 million. Did that go against the gross margin in the quarter, the 2.1?

Yes.

So without that, if we adjust, we would actually have been closer to a blended gross margin of 59% in the quarter? Without that $2.1 million?

That's Norfolk largely. That's the one we called out in the non-GAAP.

For clarity because we did a here is the GAAP and the non-GAAP. You are really talking to the 57%. I don't think it's a factor in the 57% one.

58 -- 57. Yes.

Our next question comes from Josh Jennings from Jefferies and Company. Please proceed.

Good evening. Thanks for taking the questions. Is just on the CooperSurgical business can you make a comment on the trends you are seeing in GYN office visits and procedure volumes, and then secondarily with your acquisition of Her Option, how that trended during the quarter. Looks like you were 4% year-over-year in office business and is that going according to plan, and how is that fairing competitively versus NovaSure? Thanks.

Well, on trends in the office, that's one area where we experienced some reduction of visits during the recession. And so really what we were doing at surgical was gaining share in a -- in an area where office visits were clearly down. As far as I'm aware and I haven't seen any recent data. There is no noticeable change in the office direction right now that comes into play. We are still primarily talking about our growth is more gaining share relative to Her Option, that is the principal part of the growth in the office revenue in the quarter. So if you were to back out Her Option, it would be marginal growth in the office business with solid growth in the IVF area.

Her Option is targeted towards in-office, and it is in our opinion the best product in the marketplace for in-office as opposed to all of endometrial ablation, which is principally still outside the office in the hospital setting. Our belief, to my recollection, is about 85,000 procedures done in the office compared to a total of 300,000. So still the majority by far is happening in the hospital and we just believe directionally with our sales force clout, which numbers close to 100, we will give this more presence in new accounts. So we bought it for what we can do it, recognizing the fact that it was pretty much an abandoned part of the business of the company we purchased it from. So far so good, but it's way too early to say if we can execute to our expectation down the road.

Our next question comes from Joann Wuensch from BMO Capital Markets. Please proceed.

Good morning and thanks for taking the question. If your CapEx was so low during the quarter, which by the way is (inaudible), should we still think of a hundred million for the year?

We are not changing guidance. We are still saying under a hundred million is our expectation. We would expect, and I'll say quite frankly, I'm pushing some CapEx projects. So I would expect to notch it up a little above $11 million run rate, but by and large the cash flow range we have I think has a reasonable expectation of CapEx that is under the hundred million.

Our next question comes from Jeff Johnson from Robert W Baird. Please proceed.

Thanks for taking the follow up. Let me just get them both out here. So in fear of being cut off. On the CSI side, if I am doing math on your office comments, office based comments it looks like the Her Option contribution was about $1 million and I thought there was a $10 million annual run rate product. Trying to see if there's been a change in your annualized expectations for that product here in the first year out of the gate.

And then second, Gene, just wanted to follow up on your gross margin comment. On the $2 million, Kim's question, $2 million on the accelerated depreciation, you've had accelerated depreciation obviously in many of the past quarters just with capacity utilization in the mid 60% range where it is. That $2 million if I'm hearing you correctly was purely Norfolk related or some other things related. Just reconcile that $2 million versus the $3.6 million in Norfolk specific closure costs you had.

I'll start with the Her Option question. You are correct. Ballpark is $10 million run rate. We of course had it for a little over two months in the quarter, and it was, let's say in a mode where that run rate was coming down and we are now are going to be turning that corner back and accelerating the growth.

It is ballpark where you said, a little over $1 million in the quarter, and as far as our expectation right now is we are putting a lot of energy with our sales guys to getting comfortable with the product. So you are not going to see a lot happen in the first transition period where we are picking up the pieces in the first 90 to 120 days. And Gene a question on accelerated depreciation.

I'm not clear I understood the question, but it was up over what it would have been last year. Roughly a million more than we had it last year at this point in the Norfolk restructuring.

Year-over-year comparison, remember we didn't have any accelerated depreciation a year ago. We didn't announce that until August of last year. So it was prospecta from that point in time at least timing on that.

For the quarter basically all accelerated depreciation was in the Norfolk line.

Whereas last year it was in other assets that we were retiring and so forth.

Our next question comes from Steve Willoughby from Cleveland Research. Please proceed.

Two quick follow-ups. First, how much more do you think you can take out in inventory if you are at 5.7 months right now? Where do you think you can take that to? With the Biofinity, up significantly quarter-over-quarter wondering if that is sustainable or still expect Biofinity revenue to keep on climbing here?

I guess I'll take them both. As far as inventory reductions from here, we are assuming we are about there. We've got a lot of cash out of inventory. We've managed it down under six months. While there may be some marginal improvement, it would not be significant. The answer is going forward on a cash flow expectation, we are not expecting freeing up more cash out of inventory.

From a Biofinity point of view, the thing has legs. We have upped the siliconized hydrogel expectation which is primarily being driven by Biofinity from $180 million to in excess of $200 million, with $54 million this last quarter and in aggregate we are feeling pretty good about that and we expect it to continue to drive a lot of our top-line growth going forward as far as the actual organic growth of the Company.

Our next question comes from Amit Bhalla from Citi. Please proceed.

Hi. My follow-up is in terms of the full year guidance, can you also discuss what impact from J&J launch of TruEye in Japan and the US you are factoring into guidance? And then also on gross margin, what kind of period costs are you expecting in fiscal 3Q and 4Q? I'm assuming you are expecting that gross margin to be at the higher end of your 58% to 60% range for the next two quarters. If you can just elaborate. Thanks.

First on how much have we factored in TruEye the US, probably what is worth a dollar. I left the zeros on. Not much. It's early for TruEye. You'll note in their presentation earlier today at their analyst meeting, they even kind of stopped talking about it. I'm sure they are excited about the results.

But it's, number one, a small market in the US, meaning the single use market where we are together with J&J creating some buzz and some movement, and to the extent they get behind 1 Day and really start moving the needle, that's a win win in my opinion. Although quite frankly I'm not hold willing my breath that TruEye is one that is going to move the market rollout in the US at this juncture. Part of it is price point. Part of it is they've been testing that concept outside the US I think with limited, very limited results at this juncture and I don't know why the US market, which has been historically incredibly cheap on the 1 Day modality, by that I mean we pay much less per lens in the 1 Day modality in the US than any other place, I shouldn't say any other place on the planet, but by and large the rest of the world on average.

Our next question comes from Joanne Wuensch from BMO Capital Markets. Please proceed.

Two questions. Can you please give the organic growth rates for the CVI and CSI divisions? And two, based on your comments should I assume we are not doing a one day silicon hydrogel lens at Cooper? Thank you.

Yes, again, the organic growth for CooperVision is basically what you heard, it's 11% all up, 10% constant currency. For Surgical it's 10% all up, 5% organic.

And your second question on single use, don't assume. Don't assume that we are not dabbling in single use. If it were to become a meaningful market, we would be in a position to participate.

Our next question comes from Mike Weinstein from JPMorgan. Please proceed. Morgan.

Great. Thanks. Two follow ups. The first is on the non-GAAP gross margin, just trying to get a sense in the quarter of what impact the period cost had for the 2Q non-GAAP margin. So any asset write-off or inventory write-off in the quarter. And then my follow up is also on gross margin, if you can give us approximately where the silicon hydrogel gross margins are at today. Thanks.

I'll let Gene comment on and maybe you'll have to refresh your question. I think you are asking about the write-off for the quarter both level of accelerated depreciation and and where the gross margin would be without that write-off. The only caution I would make if Gene is answering on that is that some write-offs are always going to be part of the business by their very nature. Some are maybe a little heavier at different periods of time.

On the question on silicon hydrogel gross margins, assume that the silicon hydrogel gross margins, and particularly the monthly product, I'd divide it more into one day, two week, monthly. Your monthly gross margin is outstanding relative to Biofinity because it's a monthly and it is a premium monthly with good cost -- costs of goods trend. By that I mean assume it can only do good things to our gross profit mix and direction. Avaira, to the extent it really takes off, will be more in the mid-point but will not be a meaningful drain on gross margin and as costs come down with increased volumes will be an uptick also, with the major pull on gross margin still being the one day modality to the extent it really would take off. On write-off -- Gene do you want to comment?

The write-offs are about 5/10 of a percent and accelerated depreciation is about 7/10, Kim.

Just for clarity that 0.7 is in the GAAP number not in the non-GAAP.

Correct.

At this time, Mr Weiss, there are no more questions.

Well, I want to thank everyone for participating and I hope you enjoyed the quarter as much as we certainly have reported on it, and have been as impressed with all the cash numbers as we are all kind of doing high fives here. We would like to give credit to Al White, the Treasurer, but really it's the people around the world in the organization that are managing inventory down. I guess with that I will say thank you for participating, join us on September 2 when we have our next earnings release conference call and have a good evening.

Ladies and gentlemen that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.