STAAR Surgical Co (STAA) 2002 Q2 法說會逐字稿

Welcome the STAAR Surgical conference for the second quarter ended June 30, 2002. On the call will be David Bailey Chairman, President, and Chief Executive Officer of STARR Surgical company who will be joined by John Bily Chief Financial Officer. During the course of this conference call, the company may make projections or other forward-looking remarks regarding future events or the future financial performance of STARR Surgical Company. We wish to caution you that such statements are just predictions and actual events or results may differ materially. We refer you to the document the company files for time to time with the Securities and Exchange Commission including the most recent form 10-K, any subsequent 8-K and the form 10-Q for the 2002-year. These documents can contain important factors that could cause actual results to differ materially from those contained in the company's projections or forward-looking statements. Now, I would like to introduce Mr. David Bailey, Chairman, Chief Executive Officer, and President of STARR Surgical Company.

Thank you operator. I would like to welcome everyone to STAAR Surgical's second quarter conference call. Hopefully, everyone has had a chance to see our three press releases. I would like hand over to John Bily to review the financial results. After which, I will make some comments and then open up for questions and answers. John.

Thank you David. I would also like to welcome the participants on today's conference call. STAAR Surgical has had a challenging second quarter and half year as the company continued to restructure and rebuilt the business. Sales were disappointment, but progress in the core operating activities of the business progress as planned or in many instances better than planned.

[INAUDIBLE] cost structures are inline with expectations and gross profit is improving as evidenced by June results. Operating expenses for the first half of the year excluding restructuring charges were $1.8 million below prior year levels, reflecting the company's prior commitments and focussed on expense control. This reduction was achieved while increasing our investments and commitment to R&D and clinical activities by 17% over the prior year. We continued to manage working capital achieving excellent results with the accounts receivable, inventory, and capital spending. From an operations perspective, R&D and manufacturing launched two new products during the quarter, which would improve sales performance in the coming quarters. I would now like to review the consolidated statements of income. I will start with net sales. Net sales for the quarter were $12.1 million or 6.2% below prior year quarter. This decline was result of volume reduction in the silicon and Collamer IOL product lines, partially offset by ICL sales which achieved a 31% quarter-over-quarter growth, AquaFlow sales which grew a 191% over the prior quarter, and viscoelastic sales which improved 100% over the quarter. For the year to date period, net sales were $23.8 million or 8% below prior year results. Sales declined again in silicon and Collamer IOLs, which declined approximately 25%, were partially offset by ICL sales, which were 55% over a prior year to date. Viscoelastic, which was 870% over prior year to date and AquaFlow of 173% growth over prior year to date. And our [INAUDIBLE] product line was 84% improvement over the first six months of 2001.

Gross profit for the second quarter was 49.8% versus the prior year's gross profit of 57.8%. Now the 57.8% excludes the onetime restructuring charges of $5.6 million [as a] restated number. As mentioned in previous calls, this decline in margin as a result of utilizing during the first six months of 2002 a significantly higher [cost layer] of inventory which was manufactured in the second half of 2001 during a period of manufacturing cutback and reorganization. Year to date gross margins were 49.3% versus 59% in prior year to date period. That also excludes the onetime charge of $5.6 million in 2001. This decline in margin is due to the same factors mentioned in the second quarter analysis. As discussed in previous calls, the company anticipates significant improvement in gross margins during the second half of 2002. This improvement in two folds and relates to managing down the high cost inventory built in the manufacturing cutback and also achieving manufacturing cost reduction goals and internal production cost target. We have accomplished both of these goals in the first half of 2002 and have realized an improvement in gross margin earlier than anticipated. Gross margin result for the month of June increased to 56% versus a 2Q 2002 gross margin of 49.8% and a year to date gross margin in 2002 of 49.3%. Selling, general, and administrative expenses. Total operating expenses for the second quarter excluding non-recurring items related to subsidiary closing was $1.1 million below prior year spending. G&A spending was flat to prior year, sales and marketing was $1.1 million favorable, and R&D was up 40,000. For the year to date period, operating expenses again excluding non-recurring items was $1.8 million below prior year spending. Marketing and selling expenses decreased $2.2 million, while the investment and R&D in clinical activity increased $300,000. This significant reduction in operating expenses as a result of U.S. and international restructuring efforts subsidiary closures and continued critical review of all operating expenses. The $1.2 million that I just mentioned in non-recurring operating expense charge mentioned above primarily relates to accumulated translation adjustments previously included in the equity section of the balance sheet in accordance with FAS 52.

These adjustments resulted from the translation of foreign currency financial statements of STAAR subsidiaries, which have now been closed. There was essentially no cash impact associated with this transaction. On the other expense category, the P&L. Other expenses for the quarter and year to date period was $520,000 and $560,000 over prior year results. These increased expenses were doing most part foreign currency translation losses on Swedish denominated debt and do a much lesser extent reduced interest income. We will talk about the income tax provision next. The company has adopted a more prudent accounting policy relating to domestic tax benefits and deferred tax assets. For the both the quarter and year to date period, no domestic tax benefit has been accrued on U.S. operating losses. Domestic tax benefits recorded during the three and six months period of 2001 were $3 million and $3.4 million respectively. This accounting treatment does not impact STAAR's ability to utilize current and future tax assets or benefits in any matter. The company did record a tax benefit in Q1 2002 inline with legislation enacted which enables the company to carry back losses to 1996, 1997, and 1998. A refund claim for $959,000 was filed in Q2 and is expected to be received in Q3. A net loss for the quarter and year to date period. Net loss for the quarter was $3.9 million or $0.23 cents per share, compared to a net loss of $4.2 million or $0.25 cents per share in 2001. A ProForma net loss for the quarter excluding restructuring and the change in accounting for domestic taxes is $0.10 per share.

Net loss for the year to date period was $4.9 million or $0.29 cents per share compared to a net loss of $4.4 million or $0.26 cents per share in 2001. Again a ProForma net loss for the six months excluding the restructuring and the change in accounting for domestic taxes yields a $0.13 lost per share. Cash flow. Cash flow from operating activities in Q2 was $800,000 negative and for the six months period $300,000 negative. Cash used investing activities primarily to purchase a property, plant, and equipment was $400,000 in Q2 and $600,000 for the year to date period. During the six months period ending June 28, 2002, notes payable decreased by $19,000 and cash decreased by $238,000. Significant cash flow items in Q2 for a full year of [DNO] insurance payments and expenses relating to the renewal of the domestic line of credit. These payments total approximately $519, 000 during Q2.

Our secured revolving line of credit during the quarter, we were not in compliance with certain restrictive covenants. We have negotiated a waver to that particular agreement. We re-negotiated the agreement. There is no change in the terms with the collateral or the pricing. However, certain restricted covenants were eliminated or relaxed. The changes includes the release of restricted cash of $2 million to be applied to the $4.8 million outstanding balance at 06/28/02 which nets a $2.8 net debt position for this line of credit. The loan amount is reduced from $7 to $4.5 million and monthly reductions totalling an addition of $1 million from now to February 2003. At the beginning of the year, the balance of this loan was $5.6 million and at 06/28/02 prior to these changes the balance was $4.8 million for that particular loan. I would now like to turn it over to David Bailey.

Thank you John for that very comprehensive review. I would like to make some remarks. STAAR's principle strategy is to effect its commercialization that ICL in the U.S. represent the next paradigm shift in the refractive surgery. Prior to approval, our goal is being to create a transparent and financially viable business based on the existing core cataract products augmented by the newer emerging AquaFlow technology and the ICL in the international markets. Quarter 2 sales overall 3.2% of booked prior quarter of below expectations. The consistent and negative theme is the continued decline in our IOL stills which is primarily a North American issue. Sales for the first six months of this year were down $2 million versus last year, but there was a significant change in both products and geographic mix. The German region showed real growth to account for over 33% of total STAAR revenues in the first half [was] new products AquaFlow, ICL, and [INAUDIBLE] increased by more than 50% of the prior six months period. There was therefore three real standout issues. Reversing the U.S. decline in our core business ensuring successful FDA approval for ICL and continuing the favorable general sales trend in international and accelerating the rule out of new technologies. I would like to take each of those in turn and make some comments.

Reversing the U.S. decline in our core business. For some time now, I have been engaged in a search for a highly experienced sales and marketing manager whose background was steeped in our industry ophthalmology. The recent hire of Nick Curtis actually exceeds my expectation and I am delighted to welcome Nick on board and we will benefit greatly from his experience. His willingness to join STAAR [though/does] I believe speak volumes about the market's view of the potential for our business. I will talk more about the this appointment a little later. We have also began shipping a new IOL injected, which is proprietary and which makes our foldable package which more competitive for both our silicon and Collamer lenses. We have resumed the manufacture of our 3-piece Collamer lens and this together with the new counter choose should ensure the addition of new accounts and IOL share recovery. If I look at ensuring successful FDA approval for the ICL, once again we have significant progress. Overall the news on the ICL continues to be very positive. I reported on our last conference call that we have gained approval from the FDA for a modular submission and is filed for the first modules, the preclinical and manufacturing section ahead of plan. Against this background I am delighted to announce as highlighted in our press release that the FDA have accepted and closed these two modules without further question. The significance of this result should not be underestimated while we have yet to submit and gain approval for the clinical module. The approval of these two modules will allow us to commercialize more quickly and without on due delay should we receive the favorable panel approval next year.

Item 3 was continuing the favorable general sales trend in international and accelerating the rule out of new technologies. In this regard, during Q2, we successful divested our loss making affiliates in South Africa and Sweden those completing the geographic retrenchment with the exception of Canada announced in our strategic review last July. One of the benefits of this its allowed our excellent German management to focus assets on the major local market and they have achieved impressive results. We have also strengthened our international sales team based in Switzerland and Asia and are seeing steady profitable growth especially from the ICL. Current and future sales issues have been and will continue to be addressed and ultimately a value of the business will be a reflection of top line performance. The lower revenues however we have continued to improve the quality of the overall P&L. In terms of cost of sales as [Jones] said we have used up a considerable amount of high value IOL inventories which had built off during the prior restructuring. This is now being depleted and we are seeing rapidly falling IOL costs. Production of Collamer IOLs and ICLS in the [dove] would have been plagued by low yields. In the first six months of 2002, we have double yields in Switzerland. Product mix will ultimately drive our gross margins because of the pharmaceutical type margins from AquaFlow and IOL. We are already seeing the benefits of these dynamics with gross profit in June at 56.1% versus 48.7% for the whole of Q1. In terms of operating expenses, for the first half total operating expenses excluding the 1.2 non-cash restructuring charge in respective of south Africa which jumped off about our below internal budgets. More significantly our run rate for the first half is $1.8 million below our prior rate and I expect operating expenses for the year to be below initially for [INAUDIBLE].

The other factors impacting quarter 2. In addition to the non-cash charge treatment for South Africa, we also took a prudent approach with respect to income tax and did not recover tax benefits on U.S. losses as we had in prior year. As the company follow the same approach, we would have recorded $1.3 million in tax benefits in Q2 and $2 million in 2001. Furthermore, we recorded a non-budgeted a $341,000 exchange loss in quarter 2. In total South Africa, foreign exchange and income tax treatment accounted for $2.8 million of the $3.9 million loss recorded for the quarter. All I have said the biggest issue continues to be the North America where first half sales declined 9% year on year. As previously stated, this was driven by [back lost] silicon and 1-piece Collamer business and our temporary inability to complete in the 3-piece new two year old segment. It is clear that the promise of the ICL is beginning to be realized in international and our ability to hold on to an indeed [blow] of a cataract based business in international is prudent. Our challenge as I have indicated many times is to replicate these trends in the U.S.. One of the four priorities I said on my last call was to complete the rebound of the U.S. sales force. The introduction of Nick Curtis as Head of sales and marketing for the U.S. and Canada goes a long way to addressing this issue. New leadership which build together sales and marketing under one very experienced individual will lay the foundation for improved U.S. sales. While it took longer than we would have wished to recruit the right person, we would determine to capture the very best candidate for the position. I am delighted to have Nick Curtis join the company. He comes with an exceptionary strong track record of achievement in our industry and with a broad-base knowledge of both the cataract and refractive marketplace. He has the knowledge and experience to manage our independent sales force and increased out sales penetration in the U.S.. Nick will join us in August and will focus his initial efforts in the field working directly with the sales group to drive sales higher over the later part of this year.

What is particularly pleasing that the two new products you will have it is the disposal to gain new business and they are moving ahead well. The new cartridge rollout announced last quarter is roughly one month ahead of schedule and is already allowing to gain [back lost] silicon business. Equally important the new Collamer 3-piece rollout is also ahead of schedule with manufacturing ongoing and product implantation already underway, well ahead of our previously announced August target date. This product will overcome the shortfalls inherent in the earlier products and initial feedback is exceptionally encouraging. Under Nick's leadership, I am very confonidetn the significantly enhanced product offering will deliver increased market share and sales. We have addressed our quality issues strengthen the product offering and added new leadership. Profitable sales grow up within the U.S. and Canada is our no.1 goal. We have addressed the fundamental issues that have prevented U.S. from achieving this goal and expect to see progress made in the second half of 2002 with the awkward trend accelerating in the first half of 2003. Unfortunately, if this will come too late for us to achieve our original goal of $5 million in sales this year. Instead, we are estimating sales around $51 million for this year. Our expected loss for the year with these reduced sales will be $6.2 million or $0.36 per share versus our previously reported $1.5 million or $0.9 per share. We have clearly disappointed with this revision, but I would like to emphasize the following points: $1.2 million of the incremental $4.7 million loss related to the sales of certain European affiliates; this is primarily a non-cash item which is onetime event that is part of our previously announced planned exit loss making affiliate overseas. By selling the business in South Africa, we not only reduced operating expenses and return the expertise of the people, we transferred to the acquiring company that is now our distributor, but avoided any operational or cash shipment to the company. The final affiliate accounted [over] closing quarter fall and we do not expect any significant write down from disclosure. That will complete that restructuring. The anticipated positive trend in gross profit is on track which will significantly reduce the break-even point of the business. As a result of using up our extensive IOL inventory the gross margin for the month of June increased by 7 full points over the prior five-month period. We fully expect this underlying improvement in gross profit to continue over the remainder of the year and to further accelerate as you U.S. sales improved and the mix of higher margin products accelerates. In terms of expenses, all cost standards are ruling [acts] of below budget and the overall cost base has been reduced by an annualized $3.6 million higher than the previously disclosed figure of $2.8 million in annualized savings. As a result of this vigorous and continuous revision of expenses and the fundamental restructuring of our operations of the last 18 months, the break-even point of the business even with the current under performance, the sales has been dramatically reduced. We confidently expect to exit the year profitable our operating level. As I have stated previously, 2002 was always going to be the year of two halves for staff. Overall, we have continued to make significant progress to correct the fundamentals of STAAR.

I would like to make some comments regarding some quality issues, which costs the company huge amounts of money during 2001. I am pleased to report further progress in our efforts to revamp the quality system inline with our vision to be proactive on these issues and procedures. During this quarter, we had a follow-up meeting and ordered by the FDA in our [Monrovia] facility. This ordered took for U.S. exactly one year after the last order, which resulted from the silicon lens field action. At contrast an outcome could not been greater, but the orders are complementing new management on the progress that has been achieved over the last 12 months. While compliance with quality standard, it is often take for granted for investors it is an area, which required thorough and major overhaul at STAAR as last year's events proved. This has been achieved in the very short period of time and the results have been spectacular. I would like to thank the whole quality team for all of their efforts. On a final note in this regard, I am pleased to announce that over the past month all staff sites have undergone re-certification orders by our notified body [Keemer] and as a result, [Keemer] have upgraded our certification to [NX2] as the medical device directive. This allows us to design and develop new products under a self-certification procedure that will accelerate the timeline for introduction to international markets. That has occurred today.

Our renewed relationship with [Kennan] staff the joint venture led to an acceleration of the technology transfer this quarter. Some major milestones were achieved. The joint venture [false] for approval of the Collamer material in Japan and doctors have been trained and [procted] to start Japanese clinicals on both the IOL and Aquaflo device next month. These are tremendous development, which will add significant value to both the joint venture and the start of the above. The joint venture has some excellent injective technology. In June they launched on to the Japanese market, the world's first preloaded injectable cataract lens. It is our intention to file the U.S. approval for this product later this year and expect to launch in May 2003. All of this upside would not have been possible without the establishment of normal relations with our Japanese pharmers last year. During the month of August we will complete the revamp of the Senior Management Team and staff with the introduction of Nick Curtis and also a new plant manager to ahead of our Swiss manufacturing facility.

As this has been accurately reported I have personally being spending much time revamping that facility ahead of the introduction of the new manager who will start in early August. I have talked on many occasions about the need for an operational turnaround [at start]. Having made such changes in Monrovia, I then brought to John Bily on board to continue these efforts and it was obvious to me that we needed similar changes in Switzerland. In the last four months, we have incurred annual expenditure by almost half a million dollars in Switzerland and at that the same time double deals on both the IOL and 1-piece Collamer IOL. This was a critical priority for the company. At the onset as I have said the yields on the both products were extremely low, lower than I have ever experienced in this industry for products under full scale commercialization. Other changes are underway in Switzerland to further reduce the cost base and improve efficiency and strengthen the international sales and marketing in team. All of this will be completed by the end of August with the benefits flowing to the P&L in the fourth quarter. The task of the new manager which you will see from a future press release has an ideal background to complete these tasks will be to build on the success and to establish a full scale Torig IOL manufacturing capability in the facility. The demand for this product is well ahead of our capacity to manufacture. They represents an enormous and immediate opportunity for high margin sales with the IOL. Our reflection in so many ways that turn around STAAR is well on track improved quality systems and reduced cost of goods. Regulatory in quality milestones met or exceeded. Important partnerships in the form of [Kennan] staff beginning to deliver real and quantifiable benefits with the technology transfer ahead of plan. Expenses reduced and well under control, corporate and governance issues addressed, [withdrawment] of the new senior management team completed, closure of loss making affiliates, the strengthening of marketing, R&D reorganized and delivering new product to the marketplace Although, this is not exhaustive, our [a killing feel] as it has been referred to in U.S. sales. There is no doubt that progress in this area is like behind other areas and has been very disappointing and frustrating.

Management has been focused on this critical issue for some time, but needed to ensure we got the best person for the job. That person is Nick Curtis, who will join our team in August. Together, we intend to fix the Achilles heel over the remainder of 2002.

With all of this in place, I have high expectations for the latter part of the year and definitely for 2003.

Thank you for listening. I would now like to hand over for questions.

At this time I would like to inform everyone, in order to ask a question please press *, then the number 1 on your telephone keypad. We'll pause for just a moment to compile the Q&A roster.

Your first question comes from Larry [Hemevic] with HMPC.

Good afternoon, David.

Good afternoon, Larry.

I wanted to just home in a little bit more on the U.S. market. Obviously you are disappointed with it and I'm sure that with the availability of a strong sales and marketing lineup will begin to show progress. It's well known IOL prices have been weak for quite some time. The weakness in the U.S., though, is it more price-related or would you say that market share in STAAR's IOLs continues to be under pressure?

As you said, reimbursement stands a chance in the U.S. and that's certainly put pressure on pricing for procedures and therefore products. The main reduction we see is market share and loss of units. There is price pressure and there is an element there. Price pressure...we had anticipated reductions and budgeted accordingly. We're basically managing that within expectations, it's the volume piece.

And the volume piece obviously relates to a great extent to the Collamer problems and the lack of availability of your best product line?

Yes...two things: one, the lack of competitiveness of the [inject], where we've made major strides - and that's the new cartridges with the new treatment rolling out ahead of schedule as I indicated; and the lack of a 3-piece Collamer new material segment which is the major piece of the market, that's into this. But as I said we forecast to start rolling out in August and we've already done implantation are getting feedback on that. So two issues, both of which we've made significant progress in addressing with both products starting to roll out about a month ahead of original expectations. It remains to be seen if we can use those two things to drive additional market share and improve the [camp base] within the U.S.

Thanks. If I may ask a second question relating to the ICL: as you know, there's an FDA panel meeting next week and it's my understanding that they're going to discuss the followup required for ICLs, and it's my further understanding that they will require three years - which is what you've been saying both on conference calls and to those of us who speak to you during the quarter. So: (a) is that accurate? and (b) if that is accurate when do you think you can get the final submission put to bed?

: I have [Helene Lamille] with us on the call, Larry. I will make a couple of quick comments. We were aware of the three-year requirement and I think I'd indicated on previous calls we were going to go for a three-year data set we would submit. There is a meeting next week, which I believe Helen is going to, so I'll ask her to just make a quick comment on that.

[HELENE LAMILLE]: The meeting next week will be to discuss all the requirements on the ongoing deadlines for package IOLs. The three-year data requirement has been officially communicated to STAAR some months ago and we decided to fulfill this requirement in order to get adequate [full] submission. As far as when we are ready to get all patients reply, we are not in a shape right now to give a date since we are still calling for patients to come back and we have several possibilities [INAUDIBLE] patient replies.

David, safe to say, though, there will be an ICL filing before yearend?

: I think the turn of the year is when in theory, if everything went perfectly and you've lost no patients, etc. to followup, you would end up with a three-year. But I wouldn't want to commit to a filing within that timeframe, because we've gone for the three-year we are a little bit at the mercy of the patients coming back in a timely manner and collecting the data.

Conversely, the good news is that your competitors have three years, which gives you a significant lead over them, doesn't it?

: Right, everybody is now on the same yardstick and certainly we're close to completion of that three-year followup and then submission. And as I said in my remarks, we have got two of the three modules out of the way and signed off without comment, so we're on the final hurdle.

And then one final question on [INAUDIBLE], David. Nice to see the gross margin picking up so nicely in June. I presume you would believe that's sustainable, number 1. Number 2, is that a lot to do with ICLs? Is that a big piece of the puzzle on that gross margin beginning to really come along?

No...I'll ask John to comment, but essentially the ICL is growing significantly as you saw in the numbers and there's a real trend there - 55% and then 33% up in terms of revenue. So there's a real trend on ICL increase, but as yet the proportion of sales from ICL versus total sales is not sufficient to see that driving up the average gross margin; what's driving that improvement is the fact that we are now starting - the first month was June - to sell the lower-price inventory that resulted from our pain of restructuring last year. So it's the lower-cost IOL industry that's driving the margin. John, do you want to...

No, that's essentially it. The driving force behind the gross margin improvement is the fact that we have for many, many of the product lines and offerings and styles eating through that level of inventory and now we're selling inventory that was manufactured in 2002, and that's the vast majority of that improvement.

As ICL picks up and becomes a greater proportion of the sales - and our goal is about 40% of revenues from the two new technologies - it will accelerate that trend. But there's a real trend and it's now pleasing to see that showing off in the numbers and it is reducing our breakeven point.

I've got some other questions, but let me jump back in the queue and let some people go. I'll jump back in later. Thanks, David.

Thank you.

Your next question comes from [Neal Bradsher] with Broadwood Capital.

[NEAL BRADSHER]: Larry actually already some of my questions, but I just want to focus in further on the gross margin issue. Have you exhausted all of the high-cost IOL inventory, or 90% of it, or only a small percentage of it?

I would say, [Neal], it's 90% or so. There are still some buckets of inventory that had a longer fuse on them, so to speak, and we had more inventory, but I would say that at least 90% of the high-cost inventory has been out of door and certainly on our key products we're selling inventory produced in 2002.

I think that's definitively true, [Neal], yet you've got a bell curve on the diopters for each model.

[NEAL BRADSHER]: When you speak of buckets you're talking about categories of specific sizes and shapes, right?

That's correct, and many of those are valued separately, they have separate cost structures, and of course all have different inventory terms on them. So some have used all up and some, there's a few months left, etc. But on balance the majority of that inventory is out the door.

[NEAL BRADSHER]: Okay. Second question relates very much to the first question, and that is how much of it was already out the door by the beginning of June? In other words, did June reflect that 90% depletion or not?

I can't honestly quantify that, I can tell you that the improvement in the June gross profit margin was due to the fundamental fact that we're starting to sell the lower-cost inventory. If I were to look at June, how much was lower-cost and how much was higher-cost I don't know, [Neal], but...

[NEAL BRADSHER]: Could you look at it on a [INAUDIBLE] basis? Are you currently manufacturing at a higher than 56% margin or higher than what you've got for the IOL portion than the 56% margin? I'm just trying to figure out how much we have to go from that source of gross margin improvement, and then we've got the IOL and AquaFlow mix issues that you were discussing with Larry earlier.

What I can say is that the inventory that we're building today is at or below our expectations for cost structure; and so I'm comfortable and confident that the plans that David and I put together surrounding gross profit for the balance of the year, at least in the ratio perspective, will be achieved.

[NEAL BRADSHER]: Okay. Well, but what is that gross margin number, going forward?

Full-year? Full-year gross margin for the year will be somewhere between 50% and 55%.

[NEAL BRADSHER]: But you had 49% year-to-date, so that number...

Yes, we've got that projected by month, [Neal], as we go through to the end of the year.

[NEAL BRADSHER]: Okay...

Yes, for the six-month period we were roughly 49%, that's correct. And for the full-year period we were somewhere between 50% and 55%. So you can see that the second half of the year will be considerably better than the first half.

[NEAL BRADSHER]: Okay, but it sounds as though we shouldn't see any significant improvement further from the 56% June number, is that right?

I would say, given what I know about the inventory and the buckets and the cost structures and where we're going, we should show some small improvement over June for the balance of the year.

[NEAL BRADSHER]: Including the impact of additional ICL and AquaFlow and the mix, or excluding that?

My numbers include the whole data set, [Neal], so it's hard for me to pull out the difference. But certainly as the year goes on we're going to get a favorable impact on gross profit of mix and cost.

[Neal], I've got John [Sanders] in the room, who's managing the whole supply chain now. I think he wants to make a comment, if I may.

The area that we're struggling because of the recent dramatic improvements is the Collamer and ICL manufacturing [investment]. As David mentioned in the comments, we've had huge yield improvement which is causing that cost structure to be much more dynamic than the cost structures in the silicone product offering. So while silicone is underplanned in the cost structure and is driving in the current savings, the recent improvements in Collamer manufacturing will be seen in the later part of this year and early part of 2003. So there's still more good news to come in the gross margin line.

And so will the hard work in Switzerland...

[NEAL BRADSHER]: In terms of CanonSTAAR, that's certainly excellent news on both the likely start of the ICL clinicals and also the new injector technology. It's been a while since I reviewed the Japanese approval process, could you describe how you would expect clinicals to unfold over the next few years and the approval timing on that?

Great question. I'm not an expert on the Japanese regulatory process. I'll ask [Helene] if she'd like to comment.

[HELENE LAMILLE]: We will use [INAUDIBLE] with IOLs that are manufactured and registered here in Monrovia and not already [INAUDIBLE] registered. So it's basically a packaging change and we have definitely a lot of validation to conduct, but it's not what we call a PMA submission with a one-year clinical study, etc.

That's for bringing the product into the U.S.

[HELENE LAMILLE]: Right.

[Neal], that answered the question in terms of bringing it here. Did you want a little more detail on the Japanese timelines for approval?

[NEAL BRADSHER]: Yes, I do.

I would like to get back to you on that in terms of details, but just ballpark, generally the number of patients is a lot less and they will look at U.S. data, but the timeline tends to be equally as long so you would be looking at probably three to four years projection for new material and new product. But I would have to get back to people on the detailed answer to that question following a review with the Japanese, [Neal].

[NEAL BRADSHER]: Okay. And what's the approximate revenue split going to be on that business between you guys and Canon, or isn't that disclosable at this point?

There's no revenue split, it's a consolidation of earnings and dividends.

It'll be a joint venture.

We don't recognize any of the revenue, [Neal], mainly the dividends.

[NEAL BRADSHER]: Okay, so the opportunity there is that the business becomes a lot more profitable than it has been?

Correct. Really, the new approvals would do that, they've had significant interest in the product launched in June so I'm optimistic there. And clearly the first stage of making that more profitable would be to get new products to the market. As I said, the technology transfer...we had one of the key Japanese employees here for a four-month period and that really accelerated the relationship and allowed us to learn what things they had that could help us. And clearly that [preloaded] product is of great interest to the company.

[NEAL BRADSHER]: One last issue and then I'll yield. Coming back to U.S. sales, obviously you've said for some time that U.S. sales were likely to be weak until we got the two new products out - in fact they're even weaker than you feared. But now those two products are out, both have a schedule as you said, and you indicated a lot of optimism. My question is: are you already seeing a turn? We are almost at the end of July at this point; the injector sounds like it's been out for a while, and I think you said you're already shipping the 3-piece. Are you already seeing a turn in the U.S.?

I think it's fair to say we're not seeing a turn yet, [Neal]. We're laying the foundations for that turn, of which management was one of the key foundations - and I would've liked that in place earlier. The pieces are there and the hurdles are slowly being removed, to then drive that turn, but I think it's fair to say we're not seeing it yet although the feedback is improving.

[NEAL BRADSHER]: So what is it that's driving your optimism that we'll see the turn in the next few months? It's basically what the sales force is saying?

I think I would characterize my comments as follows: I think we now have the pieces in place, we've removed the hurdles. My optimism comes from the overall strengthening of the management team, particularly pulling in sales and marketing together, the fact that we've got the new products out there. That has to be a winning combination. Now my optimism is not if it will happen, but when it will happen - and the when almost always boils down to people and our ability to demonstrate the turnaround in STAAR and get the optimism going out there in the field.

[NEAL BRADSHER]: Okay, great. Thanks very much.

Thanks, [Neal].

Your next question comes from Ryan [Welch] with Adam, [Hawkin] & Hill.

Hi, guys. It's actually Carrie. I was just wondering if you can give us an update on how many domestic sales representatives you currently have...

Good question, Carrie. The number's been fluctuating because many of the regional mangers have been strengthening their areas. I think the number's around the high 40s, around 50 - 48-53, around that number. As I said, it's been fluctuating; we've had new people - we just noticed this morning a new person come on board in one of the territories. So it's around the 50 number.

Okay. And do you have a goal that you are trying to get through by yearend for domestic sales reps?

I think the goal we've been working on is around 56.

56, okay. And how much physicians did you train in the quarter on the AquaFlow device?

I would have to come back to you with the absolute number. What I can tell you in terms of AquaFlow is a statistic [INAUDIBLE] previously. Now, Carrie, we're focusing not just on training but actually proctoring the physicians once they've seen the procedure. So our specialist goes in theater with them to use the product. The number of accounts has continued to increase. I'd like it to increase it faster, but one statistic I've quoted previously is the reorder rate of the account, which is a measure of how successful in converting them to reuse the product; and that is now up to the 70% level. Earlier in the year it was around the 53-56% level, and it's gone up to 70%. So of the accounts that have purchased AquaFlow 70% of them have placed repeat orders. I think that's a measure of how well you've trained somebody and they have actually converted within that facility.

And how many accounts did you sell [fewer] in the quarter?

I won't divulge the absolute number, suffice it to say it is constantly increasing. I've tended to focus on the repeat order number.

Okay, great. Thanks a lot, guys.

Thanks, Carrie.

At this time I would like to remind everyone, in order to ask a question please press the * followed by the number 1 on your telephone keypad.

Your next question comes from Larry [Hemevic] of HMPC.

David, a couple of more questions on ICL. What is the approximate average U.S. seller or selling price around the world at this point? I'm guessing it's about $700 or $800?

First off let me segment it, I want to make sure I get the number right: Canada, $750 absolutely; TORIC products, the little we do sell we sell at a higher price than that. In the rest of the world, the current average - we're just looking to confirm, I have a number in my head but I just don't want to state the wrong number and mislead anyone...Larry, it's between $400 and $500.

Really?

Yes, because you're selling through the distributors so you get the enduser price.

In the U.S. I suppose it's fair to assume it's somewhere in the high triple digits - $600, $700, $800, $900 when it gets finally on the U.S. market?

Our business model at the moment has always seen Canada as the kind of model that we would follow, in terms of both a very controlled release where we proctor people with the product and they go through a training course - and that's resulted in excellent results from the Canadian experience. The $750 pricing would be considered as a model for the U.S.

Is it fair to assume, David, that the manufacturing costs in any kind of reasonable volume of the ICL is roughly what an intraocular lens costs, somewhere in that ballpark?

Yes, I think that's a reasonable assumption, Larry; and then you've got to add royalties, etc. on that.

Royalties, what would it be relative to that product?

I wouldn't want to go into those details, Larry. Retail royalties on the technology [INAUDIBLE] long time ago.

When you look at world sales for ICLs is Canada a significant piece of it at this point?

No, because we've purposely gone for this very controlled launch of the product. I stated on previous calls we wanted to re-launch in Europe with the [INAUDIBLE] design and the U.S. clinical experience; and at the same time when we did achieve a new market, of which the first one was Canada, we were going to go with a very controlled, slow release. The same is also true of Asia, where we got the Korean approval, and we're following the same model - slow and controlled release.

But which are the key markets at this point, David, for ICLs in terms of revenue?

Southern Europe, Spain, Italy...Canada picking up, and Korea starting to pick up as well...I should have also said Latin America, obviously.

Assuming the sales come in at the new revised guidance you just gave us, David, what kind of percentage of that number would be ICLs? Is it as much as 5% of sales this year for STAAR?

That's not beyond the realms of possibility, if I can characterize it that way without giving actual numbers.

I understand it may not be comfortable to give complete numbers, but that's the kind of magnitude we're looking at. And I would assume that since you're talking about a very late this year or very early next year filing we shouldn't assume a whole lot from the U.S. in 2003, but that the rest of the world could come on nicely; I suppose you're planning right now for ICLs for next year and a doubling or tripling in volume wouldn't be out of the question?

I don't think it would given the trend we're seeing in international - and the trend is accelerating. We'd be expecting those kind of percentages, yes.

And all to the good of the gross margin obviously, because that's a much above average gross margin.

Absolutely right, we're achieving very high margins even at the selling price I indicated earlier, the $500 kind of average. So it's an increasing percentage of revenues with an accelerating trend in international, with obviously a big kick with the U.S. approval.

You may have mentioned AquaFlow during the call, I was distracted a couple of times and may have missed the specific comments. I know it's been a little slow at the start but it sounded like at the [ASTRS] meeting when we had [INAUDIBLE] that things seemed to be...a little momentum pickup - is that how you'd characterize it at this point? Is it still continuing to show good momentum?

Yes, I'd like it to be growing faster, I think the clinical results were very good. I think the user meeting we had at [ASTRS] demonstrated that, we are getting more people on board with the product. But, like the U.S. in general, I'd like to see that rate increase. We're still training new physicians, we're still gaining new accounts. The repeat order rate has increased but the absolute dollar figure, even though it's a very high margin product, is disappointing, as with the other points I made on the U.S. So I'd like to see that accelerating more and we'll be putting more effort behind that.

And the slowness there is related to the technical challenge or procedure, or lack of franchise with glaucoma [doctors] or competitive issues, or...

I think it's taking the doctors through the learning curve rather than competitive issues. The nonpenetrating deep sclerectomy based on the user group meeting we had really results in less complications. AquaFlow goes hand in hand with that procedure. But it is the steep learning curve; the more I look at it the more I see it as a comparison between extracap to phaco surgery. We are positioning AquaFlow as the product that fits the transfer. So it's the skills transfer and getting, maybe, 10 cases under the doctor's belt where he's had success so he's through the learning curve. As the people at the meeting with [ASTRS] saw with Dr. [Balzman's] presentation, he showed his learning curve on the product; and once you get over the 10-15, then they do get very comfortable and you see them continuing to use the product and it becoming the standard of care. But to get them, it's a challenge to bring people up to that point and we have limited resources as we move forward. So we continue to work hard on that.

Okay, thank you very much. I'll look forward to seeing you in Boston, David.

At this time there are no further questions. Mr. Bailey, are there are any closing remarks?

No, I would just like to thank everybody for joining the call and will refer you to the three press releases which I think clearly demonstrate that there's lots of things happening at STAAR. Some of those things at STAAR need to show up in the financials. Our Achilles heel is the sales issue, particularly in the U.S. I think management has put the steps in place to address that, and I am optimistic for the future. Thank you for all your support.

This concludes today's STAAR Surgical conference call. You may now disconnect.