酷柏 (COO) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to the third quarter 2010 the Cooper Companies Incorporated earnings conference call. My name is Nohelia, and 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 end of this conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Ms. Kim Duncan, Director of Investor Relations. Please proceed.

Good afternoon. Welcome to the Cooper Companies third 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'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, manufacturing restructuring plans, acquisitions, and the litigation settlement.

Forward-looking statements necessarily depend on assumptions, data or methods that may be incorrect or imprecise, and are subject to risks and uncertainty. Events that could cause our actual results and future actions of the Company to differ materially from those described in forward-looking statements are set forth under the caption forward-looking statements in today's earnings release and are described in our SEC filings including the business section of Cooper's annual report on Form 10-K. These are publicly available and on request from the Company's Investor Relations department.

Before I turn the call over to Bob, let me comment on the agenda for the call. Bob will begin by providing some highlights on the quarter, followed by Gene who will discuss the third quarter financial results. We will keep the formal presentation to roughly 30 minutes, then open up the call for questions. We expect the call to last approximately one hour. We request that anyone asking questions please limit yourself to one question. Should you have any additional questions, please call our investor line at 925-460-3663, or e-mail ir@coopercos.com. As a reminder, this call is being Webcast and a copy of the Earnings Release is available through the Investor Relations section of our website at coopercos.com. With that I'll turn the call over to Bob for his opening remarks.

Thank you, Kim, and good afternoon, good evening, to everyone. Third quarter results, another great quarter, in fact, an outstanding quarter. Our momentum continues.

For the quarter we had a solid top line growth of 4%, 6% in constant currency, delivering $296 million in revenue. Our non-GAAP earnings per share, with the help of a solid gross profit margin, achieved $0.91, up 69% versus the prior year. GAAP earnings per share, $0.86, was up 79% from the prior year. We delivered yet another solid free cash flow quarter with $58 million, bringing our trailing 12 month free cash flow to $221 million. The key take-aways today, we had another outstanding quarter. We continued to gain market share in the soft contact lens business.

In the calendar year, the market grew 5% in constant currency. We grew 8% in constant currency in the quarter ended June 30th. Our silicon hydrogel continued to drive growth, up 94% for the fiscal quarter, once again, in constant currency. For the fiscal quarter, we delivered $0.91 non-GAAP earnings per share, that excludes Norfolk, the shutdown, as well as any merger and acquisition direct costs.

Our Biofinity multifocal roll-out is essentially on hold, due to a lack of enough capacity for Biofinity. Our Norfolk plant shutdown remains on track for completion near the end of the fiscal year. We still anticipate $14 million improvement in free cash flow and a $15 million P&L pickup from the shutdown, with about $7.5 million starting in the latter half of next year. Our $58 million of free cash flow has allowed us to delever to under 30% debt to total capitalization. The range we like is 20 to 30%. Debt is now down to $646 million or $267 million below where it started a year and-a-half ago when it was $913 million, and debt to cap was 40%. Our product and rapidly expanding capacity, our focus shifts to gaining share in the recession resistant soft contact lens industry.

Our silicon hydrogel family is driving growth which is Avaira and Biofinity. During Q3, they achieved $58.7 million in revenue, that's a 94% constant currency increase versus the prior year. Biofinity remains our star, up 114% in constant currency, Biofinity Toric continues to fuel market share gain, while we are very pleased with our ramp-up, we anticipate manufacturing capacity limits the next 12 to 15 months. As a result, we are limiting our Biofinity multifocal roll-out, our Avaira Toric ramp-up also continues. This is a 12 to 15 month capacity ramp-up. We plan on more aggressive roll-out of both Biofinity multifocal and Avaira Toric in the second half of the 2011 fiscal year.

Geographically, we had an interesting dynamic continue this quarter. The Americas was up 6%, EMEA or Europe was down 1%, Asia-Pac was up 5% and overall our net was up 3%. But in constant currency, Americas was up 7%, Europe was up 10%, and Asia-Pac was down 2% overall, constant currency growth was 6%. Similar to the second quarter, a noticeable flip flop in constant currency between Europe and Asia-Pac. Our drivers geographically remain, Americas is trading up with silicon hydrogel, strong single use growth as well as solid Toric growth. In Europe, silicon hydrogel is doing very well, single use is doing well as is Toric, likewise. And in Asia, silicon hydrogels performed well, Proclear 1 day is doing very well as well as Toric. Overall, worldwide we hit the top end of our 4 to 6% constant currency outlook.

Now, about the market. The market remains solid and hit the top end of our 3% to 5% range in constant currency. Highlights for the quarter ended June 30th, the market was up 5% and provision was up 8%. We grew 1.6 times the market. The market was solid across the board. One days was up 8%, Toric was up 8%, multifocal up 20%, and silicon hydrogel up 21%. Silicon hydrogel now accounts for 40% of the worldwide soft contact lens market.

Regionally the Americas turned in a solid growth at 7%, with the strength of Torics up 9%, multifocals up 26%, and silicon hydrogels up 16%. In Europe, also did well, was up 4% on the strength of Torics, up 6%, multifocals up 13% and silicon hydrogels up 20%. In Asia-Pac, starting to show some life, up 3% in constant currency, the drivers being Torics up 10% and with silicon hydrogel being up 43%.

CooperSurgical, our women's healthcare franchise, had another solid quarter, due to the merger and acquisition impact. Revenue was up 5%, 1% organically. The drivers of this growth continues to be hospital revenue which was up 18%, accounting for 36% of CooperSurgical, and fertility clinics up 5%, all organic growth in now 8% overall CooperSurgical. Business continued to be soft, reflecting a weak economy, and women putting off their checkups with their gynecologists. Overall CooperSurgical had a stellar ratio with an operating income margin of 25% on the strength of 66% gross margin. This included $1.5 million or 3% impact on revenue from a vendor dispute resolution. CooperSurgical continues to integrate its two most recent acquisitions.

Little about CapEx, free cash flow and liquidity. We had another great free cash flow quarter, $58 million. That's six in a row since January 31st of 2009. We delivered from 40% to only 29% debt to total cap. Our debt is now only $646 million, or $267 million below the $913 million just 18 months ago. Our free cash flow was $221 million. Our CapEx was only $17 million for the quarter. Bringing the trailing 12 month CapEx down to $61 million. Our CapEx programs will continue to emphasize production ramp-up of Biofinity line and the Avaira Toric, as well as ongoing cost reduction programs where we have many solid ideas on how to lower our cost of goods over the long term.

As far as guidance goes, we've given you updated 2010 guidance, which reflects the fourth quarter. Given the strength of our gross profit and our operating margins, our earnings per share guidance for the fiscal year has been increased $2.83 to $2.91, for the non-GAAP earnings per share. That's an increase of $0.31 to $0.33 above the previous range of $2.50 to $2.60. That reflects upper end range revenue in constant currency of 6%, a very solid gross profit margin, which drove our operating margins to 20% in Q3, excluding the Norfolk wind down, which remains on track.

Improving outlook, a strong third quarter have resulted in upping our cash flow guidance for the fiscal year. Free cash flow guidance is now $177 million to $187 million, in spite of a $27 million class action settlement payment that was made in the end of August. This is a $27 million improvement from our previous guidance. Operationally, this improvement reflects solid revenue growth sponsored by our silicon hydrogels, improving gross margins and keeping our eye on our capital spend without limiting our need to ramp up our silicon hydrogel production for the Biofinity family, as well as Avaira Toric. We are and will continue to invest in sales and marketing, research and development, as well as geographic expansion.

A reminder of our strategy. We indicated the last couple times, our strategy in women's healthcare continues to leverage the franchise that 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 a dedicated sales force, US customer base. We have manufacturing talent and the infrastructure to leverage these tuck-ins. Our gross margin and our operating margins in Q3 reflect our working model and high margins and low CapEx requirements means solid return on invested capital.

At CooperVision, the strategy is more complex. We are the only participant in the $6 billion-plus soft contact lens industry that promotes silicon hydrogel and non-silicon hydrogel, that is Proclear. Emphasis, we emphasize both branded and nonbranded products. We actively promote and specialize in customizing lenses for high gross margin, of course.

We support all modalities with our eye care professionals. One day, two week, and monthly lenses. And we support all types of lenses, Spheres, Torics and multifocals and I might add, when it comes to specialty lenses like Toric lenses, we do a very good job. We are also very good with multifocals and will be there when we catch up on our demand with Biofinity capacity.

We continue to place a lot of emphasis on being customer-friendly and easy to do business with. While we let larger volume accounts pick their own brand name, that doesn't translate to lower ARPs or prices. Our pricing, like the soft contact lens industry, prices have moved up with our strategy. Our new wearers and existing wearers are targeted for silicon hydrogels. The Proclear family of products and one day or single use lenses. All these are more revenue per patient or wearer. One day modality for example results in three to five times more revenue per patient.

While this strategy [inaudible] the gross margin percent a bit, it generally generates two to four times more profit per patient. Of course, the strategy competes with the lens care industry since we are shifting wearer's cost from lens care to contact lens products. 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 going through, and with Biofinity, Avaira and Proclear, we have a lot to talk about with our eye care professionals all around the world.

Looking forward to 2011, while we're not prepared to give you 2011 guidance, that is, yet, and we are early in our budget cycle, I am prepared to give you some of our thinking about plans for 2011. As you know, in 2010, we are selling all the Biofinity we can make. In 2011, I anticipate we'll start catching up with our production with demand. At least enough of the roll-out of Biofinity multifocal launch and we will invest in this launch. I would also expect by mid-year, as we expand Avaira Toric production, we'll be prepared to invest in creating more demand for the Avaira family. We're not there today in either of these categories.

As our capacity ramps up, we will also increase our efforts to gain market share by sales and marketing efforts. We will also emphasize ongoing geographic expansion efforts and research and development investing, particularly with some clinical work to bring about geographic expansion of some of our promoted products. Net, net, net, while we expect earnings per share growth to be faster than revenue, we do not expect to affect significant operating leverage next year. Earnings per share most likely will grow in the low double-digit zone.

In summary, before I turn it over to Gene, I will wrap up by emphasizing that 2010 continues to be a stellar year, with a solid top line, improving margins and outstanding free cash flow, we delivered in the third quarter. Our silicon hydrogel family is doing great. It is now at an annualized run rate or $235 million, and is growing at a rate of over 90% above prior year. Even our own non-silicon hydrogel, Proclear, continues solid growth and is gaining share in the 60% of the silicon hydrogel -- of the soft contact lens market, that is still non-silicon hydrogel.

Our CooperSurgical tuck-in strategy continues to demonstrate the benefits of critical mass in a very fragmented space. We have over 600 products in 19 different categories. We put up stellar EPS results with our non-GAAP earnings per share being $0.91, up 69% above the prior year in the third quarter. As a result, our non-GAAP earnings per share guidance numbers have been increased by $0.31 to $0.33 for the fiscal year. Finally, we delivered free cash flow of $58 million for the quarter, brings our trailing 12 month free cash flow to $221 million, and as a result we are now deleveraged to below 30% debt to cap. And with that, I'll turn it over to Gene.

Thank you, Bob. Good afternoon everyone. Thank you for joining us today and for your continued interest in Cooper.

Bob summarized our revenue results quite well, so I'll begin by reviewing our gross margins. As Bob indicated, we had a pretty solid quarter. This comment also applies to our gross margin. Consolidated GAAP gross margin was 60%, compared to 51% in Q3 last year. Non-GAAP gross margin was 62% versus 53% last year.

CooperVision reported a gross margin of 58.4%, versus 49% in Q3 last year, and non-GAAP gross margin of 61.1% versus 51% in Q3 last year. This increase was attributable mainly to manufacturing efficiency gains, partially offset by the shutdown of Norfolk, which we discussed previously. CooperSurgical had a GAAP to non-GAAP gross margin of 65.6%, which is higher than the 62% it had last year. This was due to manufacturing efficiencies and a one-time favorable settlement with a vendor. Without this special settlement, gross margin would have been approximately 62.4%.

Turning to SG&A, in Q3 on a GAAP to non-GAAP basis, SG&A expenses increased by approximately 11% from Q3 last year to $111.3 million, and were 38% of revenue versus 35% in Q3 last year. This is generally attributable to increased sales and marketing expenses, commissions, new hires and so forth, associated with higher revenue and new product launches.

Turning to R&D, in Q3 it increased by 11% from Q3 last year to $8.6 million, and was 3% of revenue, the same as last year. This increase is attributable to additional staffing and costs associated with increased clinical trials for a variety of projects. We discussed the restructuring that's going on in Norfolk several times. We incurred in Q3 a total expense of $6.7 million. We expect an additional $3.4 million in Q4, and due to some timing of some closures, we'll have an additional approximately $2.9 million in Q1 of fiscal 2011. As a result of the foregoing, on a GAAP basis, consolidated operating margin was 17% of revenue, up from 12% last year. Non-GAAP operating margin was 20%, up from 13% last year.

CVI had an operating margin of 19% on a GAAP basis, versus 12% last year and 22% on a non-GAAP basis. It increased from 14% last year. CSI's GAAP operating margin was 25%, up from 24% last year, and non-GAAP was 26%, up from 24%. Interest expense decreased by approximately $1 million in Q3 from Q2 to $8.7 million, and was $2.4 million lower than Q3 last year. This generally reflects reduced borrowing levels.

The effective tax rate on a GAAP basis for the quarter was 9% versus 3.4% last year, and non-GAAP basis, 16.2% versus 8% last year. Again, the increase is largely attributable to shift in the legal jurisdictions in which income is earned. The effective tax rate for GAAP on a full year basis is projected to be 8% to 10%, and 16% to 18% on a non-GAAP basis. Depreciation was $19.2 million in the quarter, and amortization was $4.7 million for a combined total of $23.9 million. Full year, we're projecting depreciation of $66.8 million, and amortization of $17.3 million for a total of $84.1 million. As Bob indicated, earnings per share on a GAAP basis, $0.86, and $0.91 on a non-GAAP basis. The main difference as you'll note from the earnings release was $0.05 attributable to the Norfolk restructuring.

It should be noted that we did recognize a foreign exchange gain of approximately $900,000 in the quarter, which favorably impacted EPS. This was in addition to the one-time vendor settlement I mentioned earlier that CSI experienced. Adjusting for those two items would have been approximately $0.04, so the $0.91 non-GAAP EPS is approximately $0.81 on a go-forward basis. Turning to the balance sheet, Bob indicated we had a very strong quarter with $58.4 million of free cash flow, and $220.6 million for the trailing 12 months. Debt was reduced by $66.3 million, and is now 29% of capitalization versus 32% in Q2.

Lastly, Bob did discuss guidance in some detail. I would just mention to you, if you look at the EPS guidance for GAAP and non-GAAP, it looks anomalous because it's exactly the same. The reason for that is in Q4, we expect to have a negative $0.05 impact from Norfolk on a GAAP basis, as well as a pick-up of $0.05, and the effective tax rate associated with the $27 million class action litigation, which we mentioned in the second quarter. Those two offset, so it makes GAAP and non-GAAP earnings per share the same. With that, I'll turn it back over to Bob for the question-and-answer period.

Okay. With that, operator, we'll open up the line to questions.

Thank you. (Operator Instructions). Your first question comes from the line of Larry Keusch from Morgan Keegan.

Good afternoon. Bob, I guess philosophically here as you look at next year, you indicate that your Biofinity production is being constrained by your manufacturing capacity. You're also obviously continuing to invest but the CapEx is certainly running lower than probably we had thought. Why not accelerate some of that investment at this point in an attempt to build more capacity at a faster rate for the silicon hydrogels, since you guys are doing so well?

Well, primarily because these are complicated pieces of equipment with many different vendors. They're only as good as the slowest vendor, and there are limitations on capacity of some of the vendors and long lead times, meaning orders you put in today, if you started an order today for a complete line, it would take, best case, 12 months. So that's our limit. We couldn't and wouldn't spend twice as much money to get there twice as fast, if you would.

Okay. And then just the other question is as we look at the fourth quarter, I guess there's two parts to this. Number one, the $0.91 that you reported, is that inclusive of the $1.5 million settlement that you got from that dispute? And then when we look at the fourth quarter, and you sort of look at the midpoint of the range of your guidance, it's sequentially down. What influences that as you come off of the third quarter numbers?

Yes, there were two things in the third quarter that when Gene backed them out, it was really the pickup, the $1.5 million pickup in surgical and below the line foreign exchange. They both add up to around $0.04, which takes it to $0.87. So $0.87 is kind of our run rate for the quarter, exclusive of those type of items.

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

Great. Hi, guys. It's Kim here for Mike. I guess the first one, just wanted to talk a little bit about market growth. You reported I think on the back page of your press release that the market growth based on CLI and some other independent research is about 5%, but that's on a gross basis. Do you guys have a number on a net basis of what the market grew in terms of actual sales, net of rebates?

There is no such data out there. You could only conjecture it, but by and large, the two run normally fairly comparable. I think the last couple of years, there's probably been some variance between the growth being slightly higher than the net but don't have any hard data to support what that number would be.

Your next question comes from the line of Larry Biegelsen from Wells Fargo.

Good afternoon. Thanks for taking the question. Can you hear me okay?

Yes.

Okay. Kind of a little bit of a complicated question. CooperVision grew 8% constant currency in calendar year Q2, but it was 6% constant currency fiscal year, fiscal year Q3, I think. And so it implies that April was either very strong or July was very weak or both. And maybe if you could comment on that. And also, in the past you've given us a sense of what kind of the first month of the quarter has looked like, so August. And lastly, the reported revenue growth for Q4 2010, your implied guidance is 2% to 6%. What's the FX assumption in that 2 to 6% so we could back into what you're assuming for your constant currency growth in Q4? Thanks.

Okay. Three questions. All good questions. You are correct that April was a very strong month and quite frankly, July was a strong month, but not as strong as April. So that accounts for part of the 8 versus 6. I think the other factor, and if you want to do it roughly, it might be one, one, 1% is -- that 1% is the fact that there is some degree of delta between gross and net that is occurring during the recession period, if you will.

That is more an internal looking than it is what's going on in the industry in total. Your second question about August, August I will say -- we finished a strong July and August, we're very happy with the strong month also. Unlike my cautionary note in May, where we finished a pretty weak month following a strong month, which was April. The third question, on the 2 to 6% ballpark, 4%, 4.5%, in the midpoint, we had 3% currency impact in the third quarter. That will drop down a bit. I would say it's more 2% plus or minus a little. So ballpark, 2% is foreign exchange impact that we will have in the fourth quarter. Next question.

Your next question comes from the line of Jeff Johnson from Robert Baird.

Thank you. Good evening, guys.

Good evening, Jeff.

Couple things here. Just on your comments on August, Bob, can you talk at all how much you might be seeing as a benefit from the J&J recall, if any at all, and also the CIBA distribution issues that seem largely behind them at this point, but how much of that is maybe a transient August benefit that maybe doesn't continue into September, October? And then second question, just being I want to confirm -- you talked about double-digit, low double-digit EPS growth in fiscal 2011. I'm assuming that would be off your non-GAAP kind of the midpoint number at 285, 286, on the non-GAAP basis, low double digits off that; is that correct?

Okay. You are correct, I'll take the last one first, you are correct that the commentary I had was off of the non-GAAP. Obviously, in 2010, we have some pretty large call-out between the litigation settlement as well as the Norfolk shutdown. So you're absolutely correct about that.

As far as the strong August and how much related to J&J's problem with TruEye, it really is insignificant. In the US, there really is not a recall, and primarily their strength was in parts of Asia where they effected a recall of 100,000 boxes, if you will, which ranges from 3 million to 9 million lenses, which are single use lenses. So I don't think there would be much impact of that. Hard to prove that one way or another, other than they have a pretty good pipeline of product out there.

When it comes to CIBA's latest problems with Red Prairie, we've all been there, know that. When you put in a new computer, things burp, no matter how hard you test it. My understanding is right now is that most of the implications of that is on the authorized distributors collapsing the distribution channel and the buffer stock more than anything direct. Once again, that's not something you could easily prove one way or the other, where they have some problems but don't think those problems gone on a long enough period of time to matter that much in the marketplace. Next question?

Your next question comes from the line of Brian Kennedy from Macquarie.

Hi. Thanks, guys. I actually heard the question on earnings growth for next year but didn't hear the answer clearly, so I just wanted to ask perhaps the same question and just get the answer. If I look at the revised non-GAAP number and take the bottom end of the range I can assume at least 10% earnings growth off of the bottom end of that revised range and then if I could ask a second question, just about what do you think of a normal CapEx number, when the two lens types that are now on hold come off hold next year? What effect will that have and how do you think of CapEx, just broadly, for the next year?

I'll take the latter one first. The CapEx this year we're running at $61 million on a trailing 12 month basis. We have put in quite a few orders for Biofinity equipment. So the implication there is we've guided in the past, keeping CapEx below $100 million. There is no doubt there will be a step-up and we haven't fine-tuned it enough to give you guidance, but I feel that it will be higher next year than this year because a lot of that equipment will be arriving. Still believe that that $100 million number that we've given as a kind of a generic year by year cap will work but it could be at the higher end of, if you will, the range of $60 million to $100 million.

The earnings per share growth is off of the non-GAAP number and you're right, we're targeting for in around double-digit but we are investing in several areas that next year, particularly when capacity ramps up for Biofinity as well as the Avaira Toric, we will spend more time, energy and money putting muscle behind those products. We continue to ramp up our sales force and we will get more aggressive in some of our geographic expansion next year. So some of the limiting factors, not that we can't continue the momentum, but we think our money is well spent with the trying to test the limits of some of these good products. Next question?

Your next question comes from the line of Steve Willoughby from Cleveland Research Company.

Hi. Thanks for taking the question. Kind of really just two things. I guess on gross margins, is there any difference in terms of the amount of positive impact you experience from currency on gross margins this quarter, versus last quarter or the quarter before? And then if you could just provide us an update, and maybe I missed it if you have already, in terms of where you're at in terms of CSI acquisitions, anything on the front burner here right now?

On gross margins, currency, I think was not a major factor in the current quarter. Our hedging, for example, did not influence gross margin very much. And most of that improvement was when we guided last quarter, we said we know what our replacement cost is and we'll now start entering the P&L in May and so a lot of the improvement with that, coupled with a strong mix with Biofinity doing well, as well as it's doing, more than doubling year-over-year off of a large base now. It certainly influences gross margin positively.

The impact of that going forward, we still have a lot of good expectations of growth on our silicon hydrogels and particularly Biofinity. As far as surgical acquisitions, we've completed two this year. They are going through the process of integrating those, one of the hospital front, and one of the office front. Typically we give them breathing room to effect the integration. However at any one point of time we have a number of balls in the air.

A deal is only a deal when it's done, so while we're always looking and always kicking the tires, and quite frankly we would not comment on a deal that's imminent or anything like that, anyway, at any juncture, if you will. But we have, as we've indicated in the past, continue to have a desire to do two or three acquisitions a year within the women's healthcare space. Next question?

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

Hi, this is [Valerie Dixon] stepping in for Amit. My first question is just for the surgical unit, can you explain again if that gross margin number including the $1.5 million settlement, when you take that out, what's the total Company gross margin?

The Company gross margin, when you back that out, I believe goes to 61-point -- let's see --

61.3 non-GAAP, 59% GAAP.

Okay. And then just for the next fiscal year, in your guidance, and I hate to harp on it. You're guiding to double-digit EPS growth but you don't assume any additional SG&A leverage for the reasons you state in investing in these new product areas and ramping up your sales force, so what is your expectation for top line growth or do you expect to achieve that double-digit growth from the gross margin line and what is your expectation for that?

We have not yet guided either revenue, range of expectation next year. You are correct, however, there will be little to no overall SG&A leverage. Effective next year, we will continue to invest not only in SG&A but R&D and therefore overall operating costs I would not expect a noticeable, if any improvement whatsoever. Most of the improvement that will be effected in terms of earnings per share grow faster than top line would come from leverage associated with cost of goods reductions like Norfolk.

And then just a follow-up for your 2011 guidance, you expect that Biofinity line will catch up with production. Sorry, the production will catch up with demand. What is the full run rate on that line?

Well, it's not -- when we talk about Biofinity production, it's a lot of lines and they're all interchangeable. So today we have nine lines and one day they could be making a Toric, the next day they could be making a sphere. So we're talking about adding new lines throughout next year and an expectation that within -- by the end of next year, 2011, by the end of the calendar year, our roll-out of added lines will catch up with demand.

Now, having said that, I hope it doesn't, for good reasons. I hope demand for the product is -- continues at the rate it is and we're still playing catch-up. That would suit me fine, as long as on the production side we continue to make production -- the progress we are making by not only adding new units or lines, but also improving yields.

So it's all positive, but so we know the direction we're going. When we see light at the end of the tunnel as far as demand and supply, we will get more aggressive, in particular we will start rolling out aggressively the multifocal lens, which we have not done and are not doing right now. Next question?

Your next question comes from the line of Josh Jennings from Jefferies & Company.

Hi. Good evening. Just to go back to gross margin, the improvement you saw in fiscal Q3, both year-over-year and sequentially, you called out you had had manufacturing efficiencies and also the Biofinity mix improving. Can you just lay out just focusing on manufacturing efficiencies, how much more room there is into fiscal Q4, into fiscal 2011, outside of the mix issue?

Really looking forward into 2011, from an improvement perspective, we continue to expect the improvement out of Norfolk, which is $15 million annualized starting mid next year. And we will start putting into production next year, throughout the year, as the year progresses, a lot of that equipment that is currently being charged as an idle cost this year. So as we do that, we will take out of idle equipment, it will go into inventory production and then come through the P&L.

Now, having said that, I would caution a little that in some cases when that equipment is put into production, in some areas, and I can think like an Avaira Toric expansion, there will be some start-up costs putting it on a more robust platform. So I think some of that type of value would show up towards the end of 2011 and into 2012, but directionally, Norfolk's a big driver and idle equipment was a pretty big number in this year's P&L. So there's a fair amount of to be done. Next question?

And our final question comes from the line of Joanne Wuensch from BMO Capital Markets.

Thank you very much for taking my question. Two-fold. One, what was the Biofinity versus Avaira sales in the quarter?

That we're not splitting out, other than we've given a fair amount of color, that Biofinity was up 114%, and by far the dominant part of our $58.7 million remains to be Biofinity, while Avaira is growing solid double-digits, we're in a go slow mode pending beefing up the Avaira Toric offering.

Okay. Second question is on gross margins. Previously in the last conference call, you talked about gross margins of 58% to 60% in fiscal year 2010. 59% to 61% in fiscal year 2011. Your gross margins today significantly exceeded anything that we're expecting. Could you please comment on the sustainability of it and on that previous guidance, what your current thinking is?

Yes. We gave guidance of 58% to 60% for the year, and year-to-date we're 59.4%. So we're directionally headed towards the upper end of that range, 58% to 60% for the year. We said 59 to 61 next year, and let's say the implications in the fourth quarter being ballpark the same range, 59% to 61%. And we came in at 61.8, less the $1.5 million -- I forget that number again, Gene, but let's say in around 61. So we're in around that top end of that, 59 to 61, and I'd just leave a general fudge factor when you get beyond that as far as accuracy. So we're happy with 59 to 61 range, Q4, and into next year.

Ladies and gentlemen, this concludes your question-and-answer session. I would like to hand the call back over to Mr. Bob Weiss for closing remarks.

Well, once again I want to thank everyone for joining us today. Hopefully you were more than pleasantly surprised with the numbers. We felt real good about the way the quarter came along and particularly the strength of both July and now into August. And look forward to talking to you in December with our year-end results. Thank you very much. Thank you, Operator.

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