STAAR Surgical Co (STAA) 2011 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the STARR Surgical Second Quarter Earnings Conference Call. (Operator Instructions) Today's conference is being recorded, August 2, 2011. I would now like to turn the conference over to Doug Sherk of EVC Group. Please go ahead.

Thank you, Operator, and good afternoon, everyone. Thank you for joining us today for the STAAR Surgical conference call to review the Company's financial results for second quarter of 2011, which ended on July 1, 2011. The news release announcing the second quarter results crossed the wire about half an hour ago and is available at STAAR's website at www.staar.com.

Additionally, we have arranged for a taped replay of this call, which may be accessed by phone. A replay will become available approximately one hour after the call's conclusion and will remain available for seven days. In addition, today's call is being broadcast live and along with an archived replay will be available at the STAAR website.

Before we get started, during the course of this conference call the Company will make forward-looking statements. We caution you that any statement that is not a statement of historical fact is a forward-looking statement. This includes any projections of earnings, revenues, cash, or other financial statements; any statements about plans, strategies or objectives of management for future operations; future costs and benefits of manufacturing, consolidation or tax strategies; any statements concerning proposed new products, governmental approval of new products, or the future actions of the FDA or other regulators; any statements regarding expectations for the success of our products in the US and the international market; the outcome of proposed research and development or any clinical study; any statements regarding future economic conditions or performance, statements of beliefs; and any statements of assumptions underlying any of the foregoing.

These statements are based on expectations and assumptions as of the date of this conference call and are subject to numerous risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. Also, any results discussed today that are provided for the third quarter are preliminary, subject to change and not necessarily indicative of final performance for the quarter. These risks are described in the Safe Harbor statement in today's press release, and in the Risk Factors section of our annual report on Form 10-K. Investors or potential investors should read these risks. STAAR assumes no obligation to update these forward-looking statements to reflect future events or actual outcomes and does not intend to do so.

With that, now I would like to turn the call over to Barry Caldwell, President and Chief Executive Officer of STAAR Surgical.

Thank you, Doug, and good afternoon, everyone. Thank you for joining us for our review of the second quarter 2011 results. Deborah Andrews, our CFO, is with me on the call today, and after my opening comments will discuss in more detail the operational and financial results.

First, I'd like to thank the STARR employees who were given some stretch objectives to achieve for both the first half and the second quarter. Your efforts have resulted in a terrific quarter and first half, which should propel us to an even stronger growth in the second half.

Our results for the second quarter may help to explain my comment during our first quarter call when I said I don't know when I felt so good about only achieving 50% of our objectives. That statement was made because of the revenue trends we saw developing in the business during the month of April. Those trends continued through May and June, and now they have continued through the month of July.

During the second quarter we again demonstrated effective execution of our strategy, which is to stay focused on the growth of core Visian ICL and premium IOL product lines. The success of our efforts was reflected across-the-board in our second quarter results, including a 19% increase in revenue, a gross margin of nearly 67%, net income of nearly $900,000, and cash generation of $2.4 million from operations.

Since these are all independently big improvements, let me repeat those numbers again. 19% increase in revenue, gross margins at 67%, net income at $900,000, cash from operations at $2.4 million.

Given the continued global economic environment, which has adversely affected other surgical ophthalmic companies, these numbers reflect exceptional growth, in my mind. Due to our increasing momentum, exceptional execution and the confidence we have in our new product launches planned for the second half, we have increased our outlook regarding our revenue growth for the remainder of the year. As a result, we are increasing or raising three of our four key operating metrics for 2010 -- 2011, sorry. Let's review those metrics, which were established at the beginning of the year.

First metric was to achieve overall double-digit revenue growth. We achieved this during the quarter of course with a 19% increase in revenue, and we're also confident those trends will continue. You will recall at the end of the first quarter we had experienced an 8% growth. At the end of four months it was 10%, and now for the first half it stands at 14%. This demonstrates steady and continuous improving growth rates and not just one outstanding quarter.

The second metric which we achieved, which was to increase Visian ICL sales by 25%. Revenue growth was driven by a 41% increase in the sales of Visian ICLs. For the first half of 2011, our Visian ICL revenue is now up 30%. The first half performance combined with our outlook for the year and the anticipated launch of the V4c in Europe is enabling us to increase this metric from 25% growth to 30% growth in the Visian ICL revenues for the full year.

The c in the V4c I just mentioned, stands for the CentraFLOW technology. CentraFLOW technology utilizes the KS-AquaPORT to restore the natural flow of aqueous within the eye. This eliminates a step that requires an additional procedure today and typically an additional visit to the surgeon's office. Deborah will give an update on our prelaunch for the V4c in her discussion. I will add, though, that during my travels the past few months around the world, I've seen a lot of excitement from surgeons about this new technology enhancement.

One of our biggest challenges during the second quarter will be to meet the expanding supply needs from the increasing sales of ICLs.

The third metric is continuous expansion of our gross margins, so that our gross margin for the year is 66%. We achieved this metric as gross margins for the quarter was 66.8%. That's the highest level since the second quarter of 1998. Originally, we established the metric at 66% overall gross margin for the year, and today we're increasing that target to 66.5% for the year.

Finally, our last metric was to achieve profitability in three of the four quarters. Having also achieved this metric for the quarter and two profitable quarters behind us, we now believe we'll be profitable in all four quarters of 2011. Furthermore, we expect to generate increased profits on a sequential quarter basis throughout the year.

Now I'd like to turn the call over to Deborah for a more in-depth review of the second quarter results and then I'll return with some comments on a couple of key corporate initiatives before we take questions. Deborah?

Thanks, Barry. Good afternoon, everyone. I'll focus my comments today on the key financial highlights of the quarter -- revenue, gross profit margins, operating expenses, and cash. Let me first repeat what Barry said. Revenue grew 19% from the prior year's quarter to $16.3 million. The revenue trends during the second quarter have continued during the month of July. Our strong top line growth was driven by sales of our ICL and premium IOL products which also helped drive our gross margin expansion.

Visian ICL sales established a new quarterly record of $8.3 million, 20% above the old record established in the first quarter of $6.9 million. Sales of the Visian ICL represented over 51% of total sales in the quarter. In our top 10 targeted refractive markets, Visian ICL sales grew 48% with 6 of the 10 markets increasing more than 48%.

In the market where the V4b ICL is available, we experienced a growth of 7% just from sales in the new segments opened by the expanded treatment ranges. The V4b is now approved in 29 markets, and we have totally converted 11 of those markets to the new product. As the V4c with CentraFLOW technology becomes available in these markets, we plan to move directly to this new technology.

The CE Mark approval in April for the V4c design of our Visian ICL was strategically very important for STARR. We are on track with our prelaunch marketing plan to introduce the V4c at eight sites in Europe, Saudi Arabia and Argentina, with a goal of implanting the new technology in 100 eyes.

Surgeon reaction to the new CentraFLOW technology has been very positive. These enhancements allow steps to be eliminated in the current procedure, and we believe this will drive additional usage by current surgeons and drive other surgeons to adopt the technology in their practice.

The Visian V4c will be an additional growth driver the second half of this year and into 2012. The full launch is anticipated to begin in September at ESPRS in the countries that accept the CE Mark. Data gathered from prelaunch activities will be presented at that meeting

We also received approval in Brazil for the V4 ICL design, which will be rolling out in the third quarter. The refractive market in Brazil is estimated by market [studies] to be about 92,000 annual procedures. We are in the process of hiring a new director of sales for Latin American markets, which include Brazil, Argentina, Chile and Mexico. This is one of our top 10 targeted markets.

IOL sales increased by 1% to $7.1 million, which was driven by the favorable effect of exchange on preloaded IOL sales in Japan. The decline in sales of lower margin IOLs was partially offset by a 38% increase in Toric IOL sales, and a 3% increase in global nanoFLEX sales, and a 4% increase in the US.

During the quarter we also received CE Mark approval for the nanoFLEX IOL in Europe and KS-SP preloaded single piece hydrophobic acrylic IOL in Japan. In the coming months we should see the impact of these products and our overall IOL growth trends as well.

Gross margin for the quarter increased to 66.8% from 63.6% in the prior year second quarter, which was at the highest level since the second quarter of 1998, 13-year period. The margin expansion was due to the improved mix of ICL sales in the percentage of total sales.

Our operating expenses increased 2% over the year-ago period, so remember that the expenses in the prior year period included a $700,000 severance charge. The increase during the quarter was largely due growth in G&A expenses, which included incremental spending of over $600,000 for bonus accruals based on our improved performance and the cost associated with the initiative to positively impact future manufacturing and tax strategies to which Barry will speak.

Finally, we reported a net income of $862,000, or $0.02 per share, compared with a net loss in the second quarter last year of $1.6 million, or $0.05 a share. Barry likes to point out that the operating leverage that we have in our P&L from the ongoing investments the Company has made.

For the quarter, revenues increased by $2.6 million, while the net income line improved by $2.5 million. Not bad. We generated $2.4 million in cash from operations and ended the second quarter with $13.1 million in cash, cash equivalents and restricted cash.

Briefly, for the six-month period, revenues grew 14% in 2011 to $31.1 million. The gross margin was 65.8% compared with 63.9% a year ago, and operating expenses increased 5%, reflecting the incremental bonus accruals and initiatives for strategies to improve future profitability.

Income from continuing operations was $1.2 million, an improvement of $3.4 million driven by the $3.7 million of increased revenues. Again, not bad.

That concludes my comments. Now I'll turn the call back over to Barry.

Thank you, Deborah. If you followed our progress the last few years, you would be well aware that we are working on several fronts to further increase our short-term revenue growth. These would include increasing direct marketing efforts in key geographies; experimenting with several direct-to-consumer activities globally; launching four new products in just the second half of this year, gaining additional regulatory approvals, and seeking to maximize a pipeline of new technologies.

We have also at the same time been looking beyond 2011. STARR management has spent this past year evaluating initiatives that will fundamentally improve our gross margins and maximize our earnings potential while keeping all avenues open for enhanced revenue growth both through internal and external technology development and acquisition.

To that end, we have been focused on two key initiatives which we believe will substantially improve our bottom line in the future. The first is regarding our manufacturing strategies and is predominantly focused on reducing our cost of goods, while the second initiative is focused on our global tax strategies.

We are in the process of finalizing some specific details on both of these initiatives, which we expect to complete and announce during the third quarter. Our manufacturing strategic planning actually began in 2009 with the centers of excellence project where we proved that we could successfully transfer the manufacturing of products from one site to another.

As a part of that project, we transferred all silicone IOL productions to Monrovia and key injector and cartridge technology to STARR Japan. This gave us the understanding and the confidence that we could effectively navigate the issues associated with transferring or consolidating production in the heavily regulated industry.

Currently, STARR Surgical has four manufacturing facilities -- two in California, one in Switzerland, and one in Japan. It is our current expectation by the end of 2013, we will have gradually, though quite methodically, consolidated our manufacturing into one site, thus allowing for a significant savings to our cost of goods.

Very much linked with manufacturing strategies is the second initiative, which is focused on our global tax structure. This will push us to build an organization that maximizes the tax benefits available to us by manufacturing in a particular location. The estimated total cost to implement both the manufacturing and the tax strategy initiatives is expected to be approximately $6 million over a three-year period. We have already spent approximately $500,000 of that during the first half of 2011, primarily for consulting fees.

We anticipate spending another $300,000 during the remainder of this year. In 2012 we expect additional cost for this initiative to be about $2 million, and that number going to $3 million in 2013. Additionally, we anticipate approximately $1 million in capital expenditures during this period. We will see some P&L improvements during this time frame which will help to offset these investments.

Once the manufacturing consolidation is fully implemented, we believe we can expand our gross margins to the mid-70% range. The consolidation including the impact from our tax strategies will result in anticipating savings of approximately $100 million for the aggregate period of 2014 to 2021, with additional savings beyond the year 2021.

We are excited about these initiatives and believe that their successful completion will position STARR well for significantly enhanced profitability in the future. Additionally, we want to be in a position to take advantage of unique opportunities to further increase the rate of our revenue growth. In order to have the door open for those opportunities, we filed an S-3 shelf registration with the SEC today. Once declared effective by the SEC, the registration statement will provide for the sale of up to $75 million of securities from time to time at the Company's discretion.

It is important to note, we have no current need to add cash, and no plans to access the capital markets at this time. We believe we can successfully implement all the current operational efforts within the cash flow of the business including the strategies on manufacturing and tax strategies just discussed. Our intention is to have the shelf available in the event of a strategic opportunity to enhance the growth rate of our business or acquire technology associated with our core business and strategic vision, which is a narrow focus -- lenses that are implanted within the eye. Although no such plans are imminent, we will be prepared if and when such an opportunity should arise.

I would hope that this management team has shown that we have guided our financial matters with a steady hand for the past three years, and thus should have established a level of trust in this area.

So, to summarize, we had a terrific quarter with quite strong revenue and financial results and are confident about the outlook for our continued growth and expanded profitability during 2011. With the success, we are also focused on positioning the Company for the next phase of our growth and development through well thought out strategic initiatives. As always, we are committed to enhancing value for our shareholders and look forward to our progress through the remainder of 2011 and beyond.

Before we turn the call over to questions and answers, I would like to once again thank the STARR employees for their continued hard work and dedication. I would also like to express our gratitude to our customers and shareholders for their long-time support of the Company.

We will be presenting at the Canaccord Genuity Growth Conference in Boston next Tuesday, and our finalizing plans for some additional investor meetings around the country during the month of August.

Now that the Company is in this new phase of expanding growth and improved profitability, we are anxious to share our growth story with the investment community. We have good momentum and a solid plan for growth, not just in 2011, but beyond. We look forward to providing those updates on our growth progress throughout the year.

With that, I think we're ready for questions. Operator, can you please open the line?

Thank you, sir. (Operator Instructions) Our first question comes from the line of Joanne Wuensch with BMO Capital Markets. Please go ahead.

Wonderful. Thank you for taking my question, and very nice job, Barry. Two quick questions. One is housekeeping. Foreign exchange, what was that contribution in the quarter?

In terms of revenue or in other foreign exchange transactions?

Revenue and gross margins, please.

Okay. It was $500,000 for the quarter and $1 million for the six months.

Okay. And gross margin impact? Any way to quantify that?

I don't have a gross margin off the top of my head. Boy, I'd say it's about, probably 30% of that.

Okay. And can you give us a little bit of an update on US Visian ICL sales? What do they look like in the quarter and how are they tracking?

Yes. Thank you, Joanne. We have, as you know, first quarter our civilian sales were up about 12%. During the second quarter they were actually up 24%. The side of the business in the US that we have been most affected by this year has been the military and, again, it's because of a couple of leading surgeons who have left the service. First quarter our military sales were down 57%. Second quarter that decreased to being down 34%. Now, we do expect one of our major implanters to be back in service the second half of this year, so we expect to see that growth return.

And, I have to ask -- how are we doing at the FDA with the Toric Visian lens?

We last responded to a question from the FDA on the Toric ICL about four weeks ago, I think, Joanne, and there was a real strong sense of urgency to get that question in on that date. We have not heard anything since.

Wonderful. Thank you very much.

Thank you, Joanne.

Thank you. Our next question comes from the line of Chris Cooley with Stephens. Please go ahead.

Good afternoon, Barry and Deborah. Congratulations to you and your team on yet another great quarter. If I may, just a couple of quick ones. When I look at the back half of the year, clearly you have raised guidance for the Visian ICL after tremendous growth in 2Q. Can you help us think about how much of that step-up in guidance comes from acceleration in the base with the new product flow versus what you might add via new customers or specifically maybe Shinagawa in the back half? And then I have a follow-up. Thanks.

Okay, good. First of all, I would say remember the first half of the year we have been rolling out the V4b, which has the expanded range. And, as Deborah said, in those countries where we have introduced that product, we saw a 7% increase there just from that expanded range treatment area. Now, that has still not been rolled out totally, but the second half of the year in those countries which have not yet had the b, we are going to move them straight to the c, which has the CentraFLOW technology.

We continued to see this month the same kind of growth rate that we've seen the first half of the year in ICLs, so we can only expect that third quarter will be about the same. But fourth quarter I would expect it to be higher given that we'll have a full quarter of the V4c.

As Deborah said, we are implanting 100 eyes in order to get some data for marketing release, and we're going to do that marketing release at the European Society of Cataract and Refractive Surgery Meeting in September, so it will be available in about 27 European countries after that release for the fourth quarter.

Okay, super. And the maybe just kind of shifting gears, when we think about the core IOL business. It's great to see the nanoFLEX up there in line with market rates of growth and building some momentum there. Can you help just kind of think about what you expect in the benefit of that now that you have both the Toric and just the core myopic indication there, when you think about that pairing in Europe and abroad? Thanks.

Right. The second half we do have the nanoFLEX product, which we'll start seeing shipments this month to Europe. We did the training during the second quarter for nanoFLEX. Again, those are probably about seven different key countries that we'll start in. They have not had the nanoFLEX product before and that's why we had to go through the training. But we do see a very good trend in our US business with our Toric IOL and, as you mentioned, our nanoFLEX IOL. In our Japan IOL business, we are seeing continued growth in the preloaded silicone IOL, and that has done quite well.

May I squeeze one other quick one in and then I'll hop back in queue?

Sure.

Just, when you talk about, maybe could you just provide a little bit of color in terms of what you have to do in terms of managing the inventory and the manufacturing build as you are launching these new products, kind of how you're keeping an eye on that? And then similarly, do you feel that you have sufficient direct sales infrastructure right now, because clearly your growth rates are starting to pick up. Any thoughts there to adding to the number of feet on the street, either domestically or abroad, as you start to drive all these new products? And congratulations again on the quarter.

Sure. And, Chris, let me go back. I did not comment about the Shinagawa question you had, and I should update since we talked about that center in Japan before. I was in Japan with Dr. Rob Rivera, and he trained four different surgeons in surgery, and we got that kicked off at the Shinagawa Center about three weeks ago. We are looking -- and this ties right into your question about adding personnel. We're looking to add some sales and marketing additional headcount in Japan just to take care of what we anticipate the opportunities we have at both Shinagawa and Optical Express within Japan.

We have also, as Deborah said, extended an offer and it's been accepted for new sales director in the Latin American area. And you may recall that during the first quarter we hired a sales director in the UK, because we think there is much potential in two or three of the countries under his direction there.

I think in the rest of the world and particularly in the US, until we get some additional approvals or products for our reps to sell, I think we are happy with the level of representation that we have right now. I think that would drive potential increase in more reps at this time. As you know, last year we did increase five new sales reps in the US and we continue to evaluate the progress and the return on that investment to determine how long it does take for that dollar to be returned. And it is looking quite well now.

The first six to nine months it was difficult, but once those reps got their feet planted solidly with our product line, they seem to do quite well.

Super. Congratulations again on a good quarter.

Thank you.

Thank you. Our next question comes from the line of Bruce Jackson with Morgan Joseph. Please go ahead.

Hi. With the gross margin expansion, you mentioned product mix as being one positive factor. Were there any other positive factors in terms of the gross margin expansion?

Well, we've continued to work on our cost of goods and we've done things in the production area that have been helpful, both in Japan, the US, and in Switzerland. Those have lowered some of our cost of goods, but our prices have been holding around the world. And despite, again, the NTIOL expiration in the US, our IOL sales prices continue to hold where they were. So, that combined with -- one of the things Deborah mentioned is the increased Toric IOL sales in the US. Those are higher margin sales for us, so that is quite helpful. The mix and the cost of goods, both areas, Bruce, I think were helpful.

Okay. And then you were also doing some direct-to-consumer advertising tests, and I was wondering if you had any update on those?

Yes, we are, in actually three different areas. We did do the movie theaters in four different cities in the US. We have also taken both the first and second rounds of the 20-second, 30-second videos that we did comparing the ICL to LASIK, and we have translated that into 11 languages now, and we are using that around the world in different websites with both physicians and our distributors.

And then in Korea, this is the second peak season for them, and last month they began a new movie theater campaign centered on the ICL and the benefits that it brings. So, we're still evaluating that movie theater campaign in the US, and we're able to do that because we had consumers register on our website and we are continuing to track the period of time it takes them to make a decision. And when they actually do make a decision to have an ICL implant.

So, we are continuing to work, we are continuing to experiment. We do think we see some benefits coming from what we're doing, and we're just trying to understand it better so we can maximize the potential in the most effective manner.

Okay, that's it for me. Nice quarter.

Thank you, Bruce.

Thank you. Our next question comes from the line of Raymond Myers with Benchmark. Please go ahead.

Thank you for taking the questions and congratulations, Deborah and Barry. Nice work. Can we assume that Korea is back to the normal stocking order pattern of second and fourth quarters?

The demand from Korea is quite high. One of the things Deborah pointed out, I think, in her comments, I think it's very helpful to see that 6 of our top 10 markets in second quarter grew in excess of 48%. So, one of the things I think we're starting to see, Ray, is we're starting to see some other little Koreas pop up, because the demand in some of those countries, like China, India, though on a lower dollar amount at this point, Japan, Germany, those countries are starting to show very strong growth rates. So, it wasn't -- I think we're getting a little bit away from the period of time where it was one country that could impact our sales from quarter-to-quarter. We now see several different countries in which the expansion has just leapfrogged.

One of those countries I was going to ask you about was the progress in Australia. I know you've made some good progress with distributors there. Could you update us on that?

Australia is a smaller market but it's a good, average price-selling market. As you know, we moved from a direct model to a distributor model in Australia, and I would say they are still in the start-up mode. They did have an inventory of product that they got in the ICL line in the transfer, and they are still working off that inventory currently.

And does that contribute to the lower rate of sales and marketing expense that you had in the first half of 2011 versus the second half of last year?

Well, it does in second quarter to some degree, you're exactly right.

Okay, good.

You'll see that more fully in the third and fourth quarters, because we had severance payments and things like that in the second quarter.

So, we'll see even lower sales and marketing in the third and fourth quarters?

Well, yes.

Very good. Next, Deborah, remind us what our tax NOLs are in the United States?

About $128 million.

And we worked hard to get those.

Yes. Great. Let's talk for a minute on Shinagawa. You've trained four surgeons. That might not seem like a lot to people, but can we describe -- describe what Shinagawa is and how many surgeries these four surgeons do, and what kind of revenue potential does that represent, say, on an annualized basis?

Well, first of all, the Shinagawa Eye Center in Japan does over 100,000 refractive procedures a year. Now, any center that is not doing ICLs will be turning certain patients away that just don't qualify for LASIK. Most of those patients do qualify for the ICL. Now, it's -- obviously, with that amount of patients, they have logistical issues with patient flow. They manage their patient flows so well.

We also took with us, in addition to Rob Rivera, we took the CEO from Barnet Dulaney in Arizona, to spend time with them on the business side and on the logistics side. And what we see developing there is that they are likely to focus their ICLs like on Monday, Tuesday, Wednesday of the week, and over the weekend, which is where they have a heavy amount of patient flow, focus on their LASIK patients on the weekend. And that sounds like a real good logistical way to work through patient flow.

We had discussions and very good business discussions with Dr. [Tameda] there. He spent basically three full days with us and his staff. We are clearly talking about converting in the range of anywhere from 10% to 30% of their patient load to the ICL. And I think they also understood from our trip the increased profitability that can bring to the Shinagawa Eye Center.

So, this is partially a product that is better for patients in certain cases, as well as a product that drives more revenue for Shinagawa?

That's correct, though I think I might argue that it's better for all patients.

Yes, sure. So, of the four surgeons that are trained, is that enough, or --

Oh, no, no. That's just the start, sorry, and that's part of the reason that we're looking to hire additional staff in Japan, is to help manage this, to help train more. We will likely use some surgeons both in Japan and maybe even -- we talked to Dr. Rivera. He is certainly open to going back two or three more times not only just train more surgeons, but to continue to improve their efficiencies and how well their procedural knowledge is with the technology.

Thank you. Our next question comes from the line of Joe Munda with Sidoti & Company. Please go ahead.

Good afternoon, guys. Thanks for taking my call and congratulations on a good quarter. Real quick, some piggyback questions on some of the questions that were asked. Barry, can you comment a little bit more on what the ad spend was in Korea for the quarter?

The ad spend?

Yes, the advertising spend?

You said in Korea?

Yes, in Korea.

That is all dollars that are spent by our distributor in Korea, Wu Zhong.

Okay.

And I think I previously said they have a budget of nearly $900,000 for this year regarding the ICL loan.

Right. Also, you guys mentioned the consolidated manufacturing. Can we assume some restructuring charges going forward and are they -- do you know?

Yes, we will over time, over the three-year period have some restructuring charges related -- largely related to severance and probably leases and other things.

But those were all included in the $6 million number I gave to you upfront.

Okay. And that $1 million of CapEx, is that to expand the facility that you're going to move manufacturing to?

Exactly.

Okay. Also, I mean, you guys are building up cash, $13 million. You just filed the shelf for $75 million. What do you see going forward? What are you guys going to do with the cash?

Well, we're going to run a balance here, Joe, between investing to continue to grow our business. I think both Deborah and I are comfortable with our cash level. I think we said before that our level of comfortability was at about the $10 million mark, so obviously we want to balance our results, too, in terms of the bottom line. But we will invest to grow our revenues where we see that it makes sense.

And I think we've shown that, though we didn't originally plan, we are hiring a new sales director in Latin America, and also these new personnel that we're going to hire in sales and marketing in Japan. Those were not in our budget nor did we think about those at the beginning of the year. But as we move along and we have the ability to invest more in our growth, we'll do that.

And just to make it clear, the shelf is reserved for strategic opportunities. This other stuff, the manufacturing consolidation will be done through operating cash flow.

Okay. Any possibility of a dividend?

I don't think we're looking at dividend at this point in time.

Okay. And just touching up on another question that was asked. How should we look at tax rate going forward? I mean, could we use a rate that you guys used in the second quarter and flat line it out for modeling purposes?

Obviously, well, our goal is to get that number down. You'll see as our pretax income increases as a rate, it was 50%, I think, in the first quarter, and you should see that rate decrease as our pretax income increases.

So much of that, Joe, varies by where the business comes from. We are paying most of those taxes in Switzerland, so the more ICL sales we have, then the more vulnerable we are to taxes out of Switzerland.

Thank you. Our next question comes from the line of Larry Haimovitch with HMTC. Please go ahead.

Barry, first of all, congratulations on a tremendous performance.

Thank you, Larry.

You haven't mentioned the CAST study or any of those studies that have been prominent in recent months. Can you give us an update there, please?

Oh, I'm sorry. I thought I did when I said FDA.

Perhaps I missed it. It's possible I missed it.

Oh, no, no, no. I was just kidding.

Okay. You got me. You got me.

Our protocol for that remains with the FDA, like a lot of stuff is. So, we are continuing to work through that. We are also using our blended vision, particularly focused in the US, but we will continue to roll that out in Europe as we start shipping the nanoFLEX in Europe the third quarter. We did train our distributors during the second quarter on blended vision and nanoFLEX, so I think they are ready to go. So, until we can get the CAST up and going, we'll continue to work the blended vision approach.

Barry, can a doctor today in the US for a patient that is going to have a bilateral procedure do one lens for distance and one lens for reading off-label?

Yes, you can.

So, obviously that is delicate for you to market it that way, but doctors can in fact do that, so that could be a positive, couldn't it?

Correct. Absolutely, that is certainly in the surgeon's prerogative to do that.

Are you aware of any of that going on?

Yes, yes.

Okay, great. Next question. I think you mentioned spending $6 million to get up to the planned consolidations and everything else. When you hit 2014, can you estimate what the annual savings is? You did throw a number out of $100 million, I think, during the call, but can you break that down a little bit more?

Well, let me kind of generically say for that period of 2014 to 2021, we're talking about a minimum of $100 million in savings. Now, initially, the majority of those savings come from the consolidation, but then as a tax benefit starts maybe two to three years in, then those start to ramp up. So, we will get to the later years up near to $20 million a year in terms of improvement on net profit line.

Okay. And, Barry, my final question and then I'll jump back in the queue, is on acquisitions. Obviously, it's a little early yet for you to perhaps have completely refined your strategy. These acquisitions that you're looking at could range from what once affectionately called high school science projects, you know, very early on, to potentially acquiring revenue producing, income producing product. Can you give us any guidelines at all on what you might think about in terms of the acquisitions, or is it just too early for you to really talk about it in any detail?

Well, I think I could comment that the answer would be yes and yes, in terms of the wide bandwidth you had in terms of where the technology could be. Obviously, on the lower end, where it's a high school scientific project, the cost of that is going to be very low and on the other end very high. I think what's most important for us, though, is at this point in time in our history, our focus has got to be very narrow, and it has to be limited to technology, to lenses that go inside the eye. We're not going to look beyond that in terms of any potential acquisition that we might consider.

Great. Okay, thanks, Barry.

Thank you, Larry.

Thank you. (Operator Instructions) And our next question comes from the line of Michael Lyons, a private investor. Please go ahead.

Congratulations again.

Thanks, Mike.

Okay. Barry, I've got several questions. Just recently in The New York Times, there was an article about the FDA and medical device companies and the 510(k) process, approval process.

Right.

And it's supposed to be completely revamped because of the problems with the hip replacement surgeries. And aren't we under the 510(k) with the Visian Toric?

Mike, no, we're not. That's a supplement to a PMA on the Toric ICL.

Oh, okay. I thought it was a similar product to the ICL and then --

It is, but the ICL was a PMA, so this is a supplement to that.

Okay. And then next question. I believe it was last February 2, 2010, when we got FDA approval in Japan for the original Visian lens.

Yes.

And at that time, I believe it was said that we should see approval for the Toric about one year later. Wasn't that right?

Well, I think we've updated since then. I don't recall what was said in February of 2010, but we have updated along the line our progress with PMDA. We currently -- they have a clinical audit planned at our facility late August, maybe like the 26th or 27th of August, so we continued to work with PMDA.

I think, Mike, one of the things also that happened in the time frame you're speaking, remember we had so many questions from the FDA on the Toric, we consciously made a decision that some of that had to be put on the back burner while we focused with the FDA. So, that did adversely affect our timeline a little bit. That was our own doing, not PMDA.

But we have been saying this year that we think approval for Toric could come either late this year or early next year in Japan.

Right. Will that approval also be the new one you're talking about, the new CentraFLOW?

It will not. Good question. No, it will not. In some of these more heavily regulated countries, like Japan, like the US, it will take a separate submission and likely separate clinical data in order to get it approved.

Right, which was my next question for Visian in the US, that CentraFLOW, so can we go under a 510(k) for that?

No, we cannot go under a 510(k). There are some other avenues, though, that we are pursuing. We did originally approach the FDA on the CentraFLOW a little bit over a year ago. They gave us some guidelines at that point in time. We do intend to go back to them with some additional data here in the short term, to see what their response might be in terms of basically just a manufacturing change to the current ICL, which would include the KS-AquaPORT in the center.

Right, okay. And then the last question is, how are we doing with the preloaded silicone injector?

That goes back to Larry's question and those three letters, F-D-A. It is still within the FDA, we're still waiting. We have several times been told this was the final question. I think the last time we responded to the questions with the FDA on preloaded silicone was about six weeks ago.

Wow. Well, nonetheless, I think we're coming and doing it, so I'm holding all of mine.

Thanks, Mike. Good talking to you.

Okay now. Bye-bye.

Thank you. At this time I'd like to turn the conference back to management for closing remarks.

Thank you for participating in our call today. We look forward to seeing many of you at the Canaccord Genuity Growth Conference on Tuesday of next week, and to update you on our progress during our third quarter call in November. Good afternoon and thank you for continued support of STAAR Surgical. Doug?

A registration statement relating to the securities that we have discussed on this call has been filed with the SEC but has not yet become effective. These securities may not be sold or made offers to buy be accepted prior to the time that the registrations data becomes effective. This is not an offer to sell or the solicitation of an offer to buy. A copy of the final prospectus and prospectus supplement relating to any offering under the registration statement will be filed with the SEC and can be obtained when available by contacting STAAR Surgical Company, 1911 Walker Avenue, Monrovia, California 91016. Operator, thank you very much, and if you'd read the replay instructions.

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