酷柏 (COO) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter and full year 2010 The Cooper Companies Incorporated earnings conference call. My name is Caris, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions) At this time, I would now to turn the call over to your host for today, Ms. Kim Duncan, Director of Investor Relations. Please proceed.

Good afternoon, and welcome to the The Cooper Companies first quarter and full year 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 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 uncertainties. Events that could cause our actual results and future actions as a Company to differ materially from those described in the 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 10K. These are publicly available and on request from the Company's investor relations department.

Now, before I turn the call over to Bob, let me comment on the agenda for the call. Bob will begin by the providing highlights on the quarter and the full year followed by Gene, who will then discuss the fourth quarter and full-year 2010 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@coopercompanies.com . As a reminder, this call is being recorded, and a copy of the press release is available through the investor relations section of our website. And with that, I will turn the call over to Bob for

Thank you, Kim, and good evening, everyone. A great finish to a great year. Our momentum continues unabated. For the quarter, we had outstanding top line growth of 11%, 11% in constant currency also. Delivering $313 million in revenue, our non-GAAP earnings per share with the help of a solid operating ratio has achieved $1.09, up 63% compared to the prior year. GAAP earnings per share of $1.03 for the quarter was up 56% versus the prior year.

Earnings -- we delivered another strong free cash flow quarter of $32 million, hurdling the $27 million payment on the class action. Key takeaways for the quarter and for today's call, we had another outstanding quarter, we continue to gain market share in the soft contact lens industry. In the calendar quarter ended September 30, the market grew 5% in constant currency. We grew 10% in constant currency in the same period. Our silicon hydrogel lenses continue to drive growth of 91% in constant currency.

For the fiscal quarter, we delivered $1.09 non-GAAP earnings per share ex-Norfolk shutdown and M&A direct costs. Our Biofinity Multifocal rollout remains on hold due to lack of adequate capacity. We are making good progress, however in continuing to roll up and beef up our capacity. The Norfolk plant ceased operations on schedule in October. We continue to expect $14 million in improved free cash flow and $15 million in P&L improvements starting in the second half of 2011. Our $32 million in free cash flow in spite of the $27 million class action settlement payment has allowed us to delever to under 27% debt to total capitalization. The range we like is 20% to 30%. Debt is now down to $611 million, or more than $300 million below where it was less than two years ago when it was $913 million and our debt to total cap was 40%.

With our product portfolio and ever-expanding capacity, our focus is on balancing demand creation via our sales force efforts on account expansion with product availability select optimize our market share gains. Our silicon hydrogel family, Biofinity and Avaira is driving growth. During the fourth quarter, they achieved $72.7 million in revenues. That's 91% increase in constant currency versus the prior year. And also -- it's also a 24% sequential expansion.

Biofinity remains our star 90% in constant currency growth over the prior-year. Biofinity Toric continues to fuel market share gains. While we are very pleased with this ramp-up, we continue to expect to be capacity constrained the next 12 months. As a result, the Biofinity Multifocal rollout remains on hold. Avaira Toric ramp-up also continues. Here too, we are very much capacity constrained. We have plans to expand Avaira Toric onto a more robust manufacturing platform fast tracked in the near future. We continue to expect a more aggressive rollout of Avaira Toric as well as Biofinity Multifocal rollout in the second half of 2011.

The foreign exchange -- geographically, the foreign exchange dynamics continue as in the past. The Americas was up 20% above the prior year and 20% in constant currency. While Europe was flat with the prior-year, it was up 8% in constant currency. And Asia Pacific was up 6% actual, but down 5% in constant currency. Overall, our net revenue is up 10% actual and 10% in constant currency, similar to the second and third quarter, a noticeable flip-flop between actual and constant currency in both Europe and Asia Pac.

In constant currency, our drivers are, in the Americas, it's trading up to silicon hydrogel, growing our single use spheres and expanding our toric franchise. In Europe, it is developing its silicon hydrogel franchise nicely as well as the expansion of our toric business. In Asia, our absence from the hottest new market in Japan, silicon hydrogels, we will now be entering this in mid-2011 following the acquisition of Aime, which is a Japanese acquisition that was closed last week.

The market was solid and hit the top end of our 3% to 5% range again in constant currency. Highlights for the quarter ended September 30, the market was up 5% and CooperVision was up 10%. We group two times the market. The market was solid across the board. One day was up 10%, toric is up 11%, multifocal up 16% and silicon hydrogels were up 20%. Silicon hydrogels now account for 41% of the worldwide soft contact lens market.

Recently, the Americas turned in a solid 6% growth on the strength of torics up 12%, multifocals up 20% and ongoing silicon hydrogel growth up 14%. In Europe also, it did well, up 6% in constant currency on the strength of torics up 10% , multifocals up 12% and silicon hydrogels up 25%. Asia is now showing modest signs of life. It was up 3%, supported by torics up 10%, and silicon hydrogels up 33% above the prior-year. Silicon hydrogels now make up 24% of the market in Asia Pacific.

Turning to CooperSurgical, our women's healthcare franchise had an outstanding quarter of 14%, 9% organically. Drivers of its growth continue to be surgical procedures, hospital and same-day surgery, up 21% and now accounting for 33% of CooperSurgical. Fertility was up 15% on organic growth and now comprises 7% of CooperSurgical. Office visits remain soft, reflecting the weak economy and women putting off checkups with their gynecologists. In spite of this, CooperSurgical growth comes from taking share in the marketplace. Overall, CooperSurgical put up stellar ratios with an operating margin of 28% on the strength of a 65% gross margin line. The integration of our most recent two acquisitions Her Option and JLJ has done well.

Tuning to capital and free cash flow and liquidity, we had another great free cash flow quarter with $32 million in free cash flow. This is in spite of a $27 million class action payment. Since January 2009, we've delevered from 40% to less than 27% debt to total cap. Our debt has dropped from $913 million to only $611 million, or over $300 million in the last 21 months. Our free cash flow this year was $194 million for the quarter. Our CapEx spend was $33 million, bringing our fiscal year CapEx spend to $74 million. Our CapEx spend next year is likely to be slightly higher as we continue to expand the production ramp-up of Biofinity lines and Avaira Toric. We will also continue our ongoing cost reduction program where we have many solid ideas on how to further lower our cost of goods over the longer term.

Talking a little bit about guidance, we have now given you our first quarter look at 2000 -- our first look at 2011. Given the success and momentum we've seen the last two quarters, we believe the soft contact lens market will grow 4% to 6% next year. We expect to continue to gain share and are projecting CooperVision revenue growth, which includes about $30 million of acquired revenue in the 9% to 11% range which is 6% to 8% organically constant currency. Surgical is expected to achieve revenues in the range of $195 million to $205 million. Certainly, we were pleased with their performance this past quarter.

Overall then, we are looking at a revenue range next year of $1.250 billion to $1.280 billion while there are solid top line and solid profit enhancement anticipated in 2001. We will also be investing in it several key areas. These include sales force expansion to support our franchise product families Biofinity, Avaira and Proclear, geographic expansion, the launch of Biofinity in Japan in mid year as well as several R&D projects. On the other hand, we will see benefits from the Norfolk shutdown reduction in the idle equipment charges as we put equipment back into production as well as ongoing benefits of the reduced manufacturing costs of our silicon hydrogel lenses. Net-net-net then, we anticipate a non-GAAP range of earnings per share of $3.30 and $3.50, which hurdles about $0.05 dilution from the Japanese transaction Aime, which closed this past week, which will bring it to around -- which will bring in around $30 million in revenue of mature products and importantly, will give us silicon hydrogel access in Japan. The Japanese market is approaching $400 million in this space.

Without getting into too much color on the quarterly phasing, let me remind each of you that our first quarter is always the weakest quarter, top line and bottom line due to the large number of holidays between November 1 and January 31. Also, I'd like to point out that $0.05 dilution cost by the Aime acquisition is mainly the first 90 to 120 days following the recent close. Our free cash flow outlook is in the range of $160 million to $190 million and considers the fact that this year's free cash flow, meaning 2010, has several offsetting variables - an inventory reduction program, a class action payment and the shutdown of Norfolk. Next year's CapEx is expected to exceed this year's $74 million, but will stay below $100 million, unless we can't catch up with Biofinity and Avaira Toric demands in which case that would be a nice problem to have.

Just a reminder of our strategy, we believe our strategy is solid and is delivering. CooperSurgical continues to leverage the franchise it has built, solid tuck-in acquisitions like JLJ, a smoke evacuation system in the surgical setting and Her Option, an office-based product for endometrial ablation. We have the dedicated sales force , the US customer base, the manufacturing talent and the infrastructure to leverage these tuck-ins. Our gross margin, 64% -- 65% this past quarter and our operating margins in Q4 reflect our working model, and the high margins and low CapEx requirements means a great return on invested capital.

At CooperSurgical, the strategy is more complex. I'm sorry -- at CooperVision, the strategy is more complex. We are the only participant in the $6 billion soft contact lens industry that promotes silicon hydrogel and non-silicon hydrogel products, which is the Proclear family. We emphasize both branded and non-branded products. We actively promote and specialize in customizing lenses for a high gross margin, of course. We support all modalities the eye care profession requires. One day, two week and monthly. And we support all types of lenses, spheres, torics and multifocals. And I might add, when it comes to specialty lenses like Biofinity Toric for astigmatism, we are very good at what we do. We are also very good multifocal and will be in the hunt with our capacity catches up with demand for our Biofinity products.

We continue to place a lot of emphasis on being customer friendly and easy to do business with. While we will let larger volume accounts pick their own brand names, that does not necessarily translate to lower ARPs or prices. On pricing, like the soft contact lens industry, we are in a trade-up mode. Our new wearers and existing wearers are targeted for silicon hydrogel lenses, the Proclear family and the one day or single use lenses. All these are more revenue per patient or wearer. The one day modality, for example, results in three times to five times more revenue per wearer. While this strategy sacrifices the gross margin a bit, it generally creates two times to four times more profit per patient. Of course, this strategy competes with the lens care industry since we are shifting wearers 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 now experiencing and are going through. And we have Biofinity, Avaira and Proclear. We have a lot to talk about with the eye care professional around the world. In summary then, before I turn it over to Gene, I will wrap up by emphasizing that fourth quarter and all of 2010 saw stellar results. We delivered on the top line, gross margin line, operating income line, earnings per share, free cash flow, deleveraging and value enhancing projects.

Our silicon hydrogel family is now doing great and now accounts for 28% of CooperVision's revenue and has a run rate approaching $300 million and has grown 90% the past quarter. Even our non-silicon hydrogel family Proclear, which also has a run rate approaching $300 million, continues to do well in a declining segment of the soft contact lens market. We executed on our Norfolk shutdown on time professionally and flawlessly. We will start seeing that P&L benefits in the second half of 2011, free cash flow sooner. Our CooperSurgical tuck-in strategy continues to show outstanding results, and CooperSurgical is putting in impressive operating ratios. Our non-GAAP earnings per share at $3.10 is up 35% above the prior-year, our free cash flow closed to $200 million this year, and we delevered to less than 27% dept to total cap. With over $300 million of debt to pay down, or one-third of our debt outstanding the past 21 months, we've demonstrated our cash flow generation abilities. In short, 2010 put us not only one year ahead, but two years ahead on our strategic plans. I'm very pleased our employees are number one -- are our number one asset, who together made this happen and deserve a huge round of thanks. And on that note,

Thanks, Bob. Good afternoon, everyone, thanks for joining us. As Bob indicated, we had an excellent quarter and a truly outstanding year. I think Bob covered revenue in sufficient detail, so I will skip and go right to the gross margin. Consolidated GAAP gross margin was 60% compared to 56% in Q4 last year. Non-GAAP gross margin was 61% versus 56% in Q4 last year. For the full year, GAAP gross margin was 58% versus 55% in '09. Non-GAAP gross margin was 60% versus 56%.

CooperVision had a GAAP gross margin of 59% versus 56% in Q4 last year. On a non-GAAP basis, gross margin was 60% versus 56% last year. This increase was attributable mainly to manufacturing efficiency gains as we mentioned many times in the past quarters. This was partly offset by the shutdown of Norfolk ,as well as the reduction in asset and inventory write-offs and favorable currency. So, we have a lot less asset and inventory write-offs, and currency certainly had a favorable impact this year compared to last year.

CooperSurgical had a GAAP and non-GAAP gross profit margin of 65%, which is higher than the 57% we had last year in Q4. This in turn was also due to manufacturing efficiencies, favorable product mix and the absence of a one time charge incurred last year for a product recall, as well as an inventory adjustment last year. So, all in all, our gross profit on consolidated individual basis is very strong. Turning to SG&A , in Q4 on a GAAP basis, SG&A expenses increased by 7% from Q4 of last year to roughly $110 million, or 35% of revenue, down from 36% in Q4 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, in addition to increased legal costs. For the full-year, SG&A increased by 11% to $433 million and increased to 37% of revenue, up from 36% last year.

Q4, R&D increased by 27% from Q4 last year to $10.5 million and were 3% of revenue, the same as last year. This increase is attributable to additional staffing, costs associated with increased clinical trials for a variety of projects. Bob mentioned Norfolk restructuring, and I can complement our team, our manufacturing folks. That has gone extremely smoothly. We estimated the total cost over the three year period of $24.3 million, and we are on track for that. We expected approximately $10 million of those to be cash related charges, and that looks like it will be a little bit overestimated. So, we should come in with a little smaller cash related number. We recognized $3.5 million of his charges in Q4, and we expect in Q1 to have another $3.1 million. So all in all, again, on track for a great job.

Operating margin on a GAAP basis for Q4 consolidated was 20% of revenue, up from 15% last year and for the full year was 16% of revenue, up from 14%. On a non-GAAP basis, operating margin was 21%, up from 15% in Q4 last year and for the fiscal year, it was 18% versus 14% last year. Interest expense was $8 million in the quarter and was $2.8 million lower than Q4 last year. This reflects the maintenance from the strong funded debt, the EBITDA ratio and reduced borrowings. For the full-year, interest was $36.7 million. That's down $7.4 million from the $44 million in '09.

Effective tax rate on a GAAP basis for the quarter was 10.5% versus 6% in Q4 last year. On a non-GAAP basis, effective tax rate was 14% versus 7% last year. The increase, again, is attributable mainly to shift in jurisdictions where income is earned. Depreciation was $18.6 million in Q4, which included $700,000 of ancillary depreciation. And amortization was $4.6 million for a total of $23.2 million.

For the full-year, depreciation was $75.9 million and amortization $18.1 million for a total of $94.0 million. Stock option comp in the quarter was $2.6 million, which totaled $9.6 million for the fiscal year. As Bob indicated, earnings per share for the quarter on a GAAP basis was $1.03 versus $1.09 on a non-GAAP basis. The difference is mainly $0.04 for the Norfolk restructuring which is in cost of sales, $0.01 in SG&A and $0.01 for income before tax for the legal settlement. For the full year, GAAP EPS was $2.43 versus $3.10. As Bob indicated, an increase of 35%.

Turning to the balance sheet. Bob indicated we had a strong free cash flow in the quarter of $32.8 million -- I'm sorry, $31.8 million which generated $193.9 million for the full year. We reduced debt by $35 million to $611 million in the quarter, and debt to cap is now 27%. So, if you look to the free cash flow we generated of almost $194 million for the year, $170 million was used to reduced debt, or 88%, well within our guidance. As we said, we spent at least 50% of free cash flow to reduce debt. At quarter end, the ratio of funded debt to EBITDA was 2.29. That's down from 2.61 in Q3 and down from 2.93 last year.

Inventories decreased by $6.4 million from last quarter with months on hand at 5.4 down from 5.9 in Q3 and 6.3 in '09. However, note that this will probably increase next year as we build inventory and able to produce more Biofinity lenses and so forth. Accounts receivable were also closely monitored with DSOs at 57 days, the same as last quarter, down from 55 days in '09. I'd like to just provide a little more highlight on our guidance for next year. Bob indicated revenue guidance of $1,250 million to $1,280 million. Gross profit margins should be in the range of 60% to 62%. Operating expenses will be in a range of 43% to 44%, so operating income will be approximately 17% to 18% of revenue. Interest will be around $31 million, and the tax rate is expected to be around 14% to 15%, and that will result in our GAAP and non-GAAP guidance of $3.25 to $3.45, $3.30 to $3.50. And again, the difference for next year will be Norfolk of around $0.04 per share and then some potential expenses as we refinance our bank facilities. So with that, I'll turn it back over to Kim for

Operator?

(Operator Instructions) And your first question comes from the line of Jeff Johnson with Robert Baird, please proceed.

Thank you. Good evening guys, congrats on the quarter.

Thank you.

Bob, I was hoping I could start with you, just on your comments on the Aime deal having closed and all that. I think you also made a comment about getting into the silicon hydrogel market in Japan sooner than you expected, which would be expected from that deal. But did you say on the daily disposable side for silicon hydrogels as well by middle of fiscal 2011? And if you did, does that mean there's a chance one of those big lines and Puerto Rico could be fired up at some point over the next couple quarters to help take away some of those idle equipment costs?

I did not comment on getting into the silicon hydrogel daily market in Japan. The overall market there now is mainly, of course with TruEye coming out of the market in Japan essentially a two-week market, and it's approaching $400 million. So, we are talking about launching Biofinity by mid-fiscal year. Biofinity has been approved in the marketplace. Next question?

And your next question comes to line of Larry Keusch with Morgan Keegan, please proceed.

This is Constantine for Larry. So, as you guys -- you guys have done a good job of deleveraging over the last couple of years. Now that debt levels are more manageable, are priorities for uses of cash beginning to change? Do you plan to return more cash to shareholders or more aggressively pursue acquisitions? Any color be much appreciated.

Yes, we are at 27% debt to total cap and delevered, of course. Took our debt down over $300 million in the last 21 months. We all are still in a -- we still have $600 million plus of debt, number one. Two is we are in our comfort zone, which is 20% to 30% debt to total cap. I would say importantly, we have not run out of growth ideas. We are not what I would call a Company maturing from that perspective where we should start greatly increasing dividend payout as opposed to redeploying the money into the growth of our business. We are intent on being very active in geographic expansion, and we are intent to continue to do tuck-in acquisitions and various acquisitions within CooperSurgical. I might add, it's not that we're not looking outside the US for even acquisitions within the contact lens space. So, too early to want to change our model into something, I think would be premature to do. Next question?

And your next question comes from the line of Amit Bhalla with the Citi, please proceed.

Hi, good evening.

Hi, Amit.

Good afternoon, actually, for you guys. Can you just, in terms of the guidance, can you talk a little about the tax rate for a second? 14% to 15% and how sustainable is that going forward? Also on the guidance, what kind of room do have in receivables and payables to improve terms which could ultimately improve cash flow? And I actually have one follow-up. I'll just ask it right now. What's your latest thinking on Avaira and private label deals? Thanks.

I'm not sure which of those questions is the one question. I think we are pretty couple with the effective tax rate. Could that change? Absolutely. Could there be legislation that changes it? Perhaps. For example, if they grant a one-time reprieve of tax on repatriation, we might take advantage of that, even though it would be a reduced rate of tax, it would increase our overall tax. So, the rate could change. So, it's a sort of wait and see what happens around the world on tax rates. I think receivables and payables, we are pretty comfortable with where they are at. Now, we manage them pretty carefully. Our treasury department has got a really sophisticated software tool that we use globally, and we are pretty couple with them.

On the Avaira private label front and Avaira in total, our emphasis is on rounding out the family. Until we have capacity for the entire family, we are somewhat limited in terms of how effectively we can pitch to a large retailer, if you will, in private label family. So, first things first, in terms of really putting all energy behind it. Having said that, private -- Avaira has done very nicely this quarter. It's up essentially what Biofinity was, around 90% quarter-over-quarter, and it -- we are quite pleased with the reception in the market to the Avaira toric , but as I indicated, we are very capacity constrained there and are making plans to change that over the next several months. We are not there yet, but we could have an all-out effort on the Avaira front. We ultimately we will round of family out to not only a toric, but down the road, a multifocal, but first thing is first. So, we have made some inroads around the world on private label on the limited basis and on -- and not trying to get ahead of

And your next question comes from the line of Steve Willoughby with Cleveland Research. Please proceed.

Hi guys, question for you on gross margins. Down a little bit sequentially. Just wondering what caused that as I thought there might be some more profitable Biofinity revenue flowing through the P&L this quarter. So, if you just talk about gross margin, maybe sequentially?

Yes, I don't think there's anything that jumps off the chart on why it's down slightly. We of course had a very strong gross margin in the third quarter, and we are still in the 60s range. There are idle charges that continue in the quarter which impacted gross margin about one percentage point. Additionally, we took some limited write-offs, nothing highly unusual, that were about 0.4%. So, I think if you take that, we are still in the -- we said we would be in the 59, 61 range this year, and we are still feeling pretty good about the 59, 61. Next question?

And your next question comes the line of Chris Cooley with Stephens Incorporated. Please proceed.

Thank you for taking the question. In the prior quarter, you all had spoken about adding additional lines to catch up with demand on the silicon hydrogel side that could revision by the end of fiscal 2011. Just listening to the commentary tonight, can you maybe tell us a little bit about -- I guess when I think about the Biofinity toric and specifically, how much you are giving up right now by being capacity constrained. I'm trying to get a feel for how close you are to catching up with the demand relative to the capacity that you have here in short run. And then just one quick follow up as well. In terms of the deal related dilution, am I correct in assuming that you said that was all going to be realized in the first half of 2011? Thank you.

On the rollout of Biofinity and specifically, how much -- where we are on the demand curve, quite frankly, I don't know that we have a total handle on that. The kind of put the brakes on a lot of our sales effort in the field and certainly globally, and that's even before we get to Japan with it mid this coming year. Having said that, we are ramping up nicely. We are expecting to exit 2011 capable of supporting close to a $400 million product family. So, the build up this coming year with added lines and the continuation of improving efficiency, it is going to be a pretty robust effort. I don't know if that's adequate capacity or if we'll still be going. It would be a nice problem to have if we are still going over and above that. It's too soon to tell and we, quite frankly, really don't know where that line gets drawn on that. On your second question, Chris, quite frankly, I missed it, so if the operator would let you come back in on that?

He was asking about the Aime dilution, is that in Q1?

Okay. The Aime dilution is going to be heavily weighted towards the first 90 to 120 days. So yes, It is mainly Q1, but a little into Q2. And that's -- once again, that's about $0.05 dilution that we've taken our guidance that you've been given down. Next question?

And your next question comes the line of Mike Weinstein with JPMorgan. Please proceed.

Thanks, guys, it's Kim for Mike. Just two quick ones. The first is on the Aime deal. On a non-GAAP basis, if you could let us know what the approximate EPS impact is for fiscal 2011. And then the follow-up is just on the tax or actually, specifically on the Puerto Rico excise tax, whether or not there's any impact from that proposal in your fiscal 2011 guidance?

I'll do the first one, and then I'll let Gene comment on the second one. The Aime transaction, I think I covered this, but just for clarity, is $0.05 dilutive for the fiscal year. That is built into our guidance that you have been provided. And on the taxes, Gene?

It's built into guidance. It won't be material for us in 2011. It starts in January, so it's only impacting 10 months of the fiscal year. And you need to remember, it's on the transfer price of the goods from Puerto Rico to the non-Puerto Rican affiliate. So, it's not the ultimate sales price of those products to the ultimate customer. So, it has a lot less impact to us, and it's just not material.

And let me add one point Kim, to clarify. The $0.05 dilution is in the non-GAAP number, meaning we do not call out that Aime integration costs. What we call out for non-GAAP purposes is the transaction costs. The integration costs are not called out. So, the non-GAAP at $3.30 to $3.50 is already $0.05 lower or because of Aime.

Thanks, Al. Next question?

And your next question comes from the line of Joanne Wuensch with BMO Capital Markets, please proceed.

Thank you very much. Two questions quickly . One is, can you comment on the changes in the competitive landscape as you are seeing them, particularly Johnson and Johnson, Ciba, why not add (inaudible). And then the second question has to do with, you are still on backorder on your Biofinity product lines, is this sort of something that pops up in the fourth quarter of next year where you have full capacity again? Or how should we think about you bringing those lines

Joanne, on the competitive landscape, some of our competitors have been continuing to help us through things going on in the landscape, if you will. J&J, as you know, has had a series of back orders -- recalls,and the latest recall on TruEyes has been much more robust vis-a-vis the one day modality, if you will, in Japan and the rest of the world, but excluding the United States. And of course, the one day market is a much bigger market outside the US and is very small in the US to begin with, just a little over 12%, 13%. So, that clearly -- that activity is assisting their competitors too and including us marginally. Relative to Ciba, I would say Ciba is the one with their, aside from Cooper, with their act together better than anyone else out there. They have done a number of things right.

The other one that is giving up market share continues to be Bausch & Lomb. They really have not come out with any real breakthrough upgrade of new product line. They came out with an upgrade of PureVision. Is receiving marginal reaction in the field. So, net-net-net, I think we have our act together as good as anyone out in the competitive field. We have the most fresh product line and a long way to go yet in terms of our rollout. And Ciba, of course, is still waiting for the day when Alcon and Ciba merge as part of Novartis. But who knows how long that will take.

There continues to be some activity on the legal front. It's more in the court by way of the appeals process. In France, there was an appeal was rejected in, as I recall, in France. There is some activity in the UK by way of appeals, were J&J, you may recall one in litigation against Ciba. In the US where Ciba won against J&J., that's just going to be a slow process and ongoing process. So net-net-net, Ciba, J&J litigation, as far as I can see, will go on quite a while. On Biofinity, as far as the ramp-up, the ramp-up will be fairly straight line, meaning each quarter will get better. Each quarter new line will be coming aboard that are started up, and those new lines coupled with improving yield, as the year progresses will mean as we exit the year, we will -- we believe we will be approaching a $400 million run rate, and that's the combination of improving yields as well as additional lines. So, that's probably the best way to think about that, is not -- there's no one major step up. It's surely smooth and protracted. Next question?

And your next question comes from the line of Josh Jennings with Jefferies & Co. Please proceed.

Hi, thanks for taking the questions. First, if you could reiterate your GM guidance for fiscal 2011 and maybe give us some more color on how much more expansion you can realize your manufacturing efficiency gains primarily. And also, if you could reiterate what your operating margin outlook is for fiscal 2011, whether you expect that to contract or expand? And on the free cash flow front, with a $27 million class action settlement in Q4, can you just review what's causing your guidance to move down to the 160, 190 range? Thanks a lot.

I'll try taking those on, and then I'll let Gene fill out the mosaic as needed. Gross margin, we will continue to have positive events that will improve our gross margin as the year progresses. Number one is the Norfolk shutdown, which we've indicated is $15 million annualized pickup, effective midyear. The first part of the pickup now that we have shut down the facility will move through inventory over the first six months and start showing up in the latter six months. And there is no change in the signal we've given on that in terms of our expectation of that $15 million. Throughout the year, we will be shifting some of our -- or putting some of our idle equipment back into production.

You may recall, this year we are taking charges of around $3 million a quarter. And therefore, we expect by the end of the year, that will be cut by more than in half. And in fact, we'll probably have a $3 million or $4 million reduction of the idle equipment charge throughout the year. Going the other way, which is very neutral, but I think important is we will be putting -- we have five lines, gen two lines sitting on a shelf. We have one Avaira line sitting on the shelf that have never before been used. Most of those will be put into production this year. When you put them into production, there is no doubt there will be some stepping up of our depreciation into the P&L. You are putting into production close to $100 million in equipment that's not been used before. So, assume that that will go through some level of start up, not major. But one of the mitigating factors this coming year, quite frankly, is as we roll that out, there will be some minimizing, if you will, on gross margin expansion on that front.

The mix of how we sell products, where we sell products, certainly the one-day mix we will continue to have some weight caused by one-day going the other way. Silicon hydrogel lenses and particular the monthly have high gross margins, particularly Biofinity . So, that's a positive mix. You asked about operating margin expectation. We expect marginal expansion of our gross margin next year. But quite frankly, the amount of money we are investing in OpEx, I would expect operating margins -- operating expenses overall to be flat to slightly up next year. And therefore, the operating margin will be about where it is this year, plus or minus a fairly small range, if you will, plus one, minus one at the most.

As far as free cash flow, the free cash flow is down in our guidance from this year. Keep in mind you're right, we had $27 million of class action payments in 2010. But we also took about $33 million out of inventory in 2010 has pretty much bringing our inventory level down to about where we want. Next year, if anything, there will be marginal inventory expansion as we roll out new products, particularly get adequate capacity Avaira toric and Biofinity toric. So, if anything, we are not carrying any inventory of any substance in those two areas or certainly, not at the level we need to adequately buffer -- have the buffer stock we need to support those product lines. So, that's going the other way. The other thing that is likely to go the other way is we are investing more in CapEx next year. This year we invested $74 million. Next year it will be north of that. It will probably not exceed $100 million, but it could easily be another $20 million above where we spent this year. So, the downs are clearly those two

And your next question comes from the line of Larry Biegelsen with Wells Fargo, please proceed.

Good afternoon, thanks for taking the question. A couple quick ones. Any FX assumed in 2010 in the sales guidance? Second, Bob, the gross margin, could you think you can return to the 65% pre-ocular level at some point, and maybe when? How many years do you think it will take to get back there? And just lastly, how did the year start off November? Bob, in the past you've told us how the first month of the quarter went relative your to your guidance. I think the guidance is 6% to 8% organic for CooperVision in 2011. Maybe give us some color on how the year started off? Thanks.

Okay. First question, foreign exchange, I think you meant 2011, not 2010. Impact of foreign exchange next year is pretty modest. We are not assuming a major factor one way or the other in our year-over-year. As far as gross margin, can we get back to 65%? That would be a long shot. Keep in mind, when we were 65%, we were very much weighted toward torics and had minimal two-week sphere products. The two-week modality is a lower gross margin by definition. And the spheres are a lower gross margin by definition, meaning the sphere is much more commodity. The torics have always commanded much higher gross margin in multifocals and even higher gross margin. Now, having said that, 65%, I don't think so. But if we look way down the road, there are -- there will be the continuation of cost cutting that will take place over many years. And then way down the road at some point in time, we will be talking about our royalty, if you will, expiring, at which point in time there will be some benefit of that. None of that, in my opinion, will translate to 65% or higher. But I do think we have many things -- there are more things that will trend positive long-term then trend negative long-term.

As far as November, you are right. I have the last several quarters indicated how the month out of the chute went, and I know I have a couple people kicking me here. But probably the best thing to say about that, we've thought about November as we provided you the guidance mid December, and that's factored into our thinking. I did mention that we are stepping up our expectation to the 6% to 8% for us compared to the market. Excluding the Aime effect, if you will, the acquisition effect. So we are continuing to believe, number one, that the market will continue to perform like it did last year, which was that 4% to 6% range, net 5% in the last two quarters. So no red flags on that as we go forward. Next question?

You have a follow-up question from the line of Chris Cooley with Stephens Incorporated. Please proceed.

Thank you, guys. I appreciate you letting me do a follow-up. Just one final question on operating margin as we think about CooperSurgical. You continue to make some great progress there, 28% on margins in the quarter. Is this a business that could feasibly migrate sustainably to the low 30 percentile range? Just thinking about how your business mix is transitioning and the savings that you are realizing there, ex-acquisitions. Thank you.

I think the answer to that is, whereas it may be conceivable, I would expect we will continue to acquire, integrate and invest. And we will also -- one thing CooperSurgical hasn't done adequately in the past, but maybe it's primed to think a lot a lot more about it in the future is reaching out globally. It has an extensive product line, over 600 products. Many of those have global potential, and -- or some of them have global potential. And I do think that some of the products we pick up along the way in the future will have even greater opportunities globally than perhaps the existing portfolio we have. Along those lines, if we start reaching out globally, I would expect some pressure on how quick we could move much beyond where we are. Quite frankly, we had initially set our target for more around the 25% mark, 24%, 25%. So, we are more than pleasantly surprised with where we are in how fast we got there. But I don't want to put too much of a damper on that. But I would think if we really develop an effective global plan, that will help add to the organic growth on that side of the ledger, whereas it may cost us a little on our operating margins and gross margins. Next question?

Ladies and gentlemen, that concludes our question-and-answer portion for today's call. And I would now like to turn the call back over to Bob Weiss, CEO, for closing remarks.

Well, I want to thank everyone for joining the conference call. I hope you share our enthusiasm for this having been a great year, 2010. I hope you share our optimism for the future. We think we have the right strategy, and we are looking forward to telling you more about it on our next quarterly call in March, I guess it would be. On that, that concludes the call. Thank you, operator.

You are welcome. And ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a wonderful day.