STAAR Surgical Co (STAA) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the STARR Surgical First Quarter 2013 Financial Results Conference Call. (Operator Instructions) This call is being recorded today, Wednesday, May 1, 2013. At this time I would like to turn the conference over to Doug Sherk with EVC Group. Please proceed.

Thank you, operator, and good afternoon, everyone. Thank you for joining us for the STAAR Surgical conference call and webcast to review the Company's financial results for the first quarter, which ended on March 29, 2013. The news release announcing the first quarter results crossed the wire about half an hour ago and is available at STAAR's website at www.staar.com. Today's call is also being broadcast live via webcast. In addition, a slide presentation will accompany remarks by management. To access both the webcast and the presentation slides, go to the Investor Relations section of STAAR's website at www.staar.com. If you are listening via telephone to today's call and would like to review the slides that accompany the management's remarks, please navigate to the live webcast as I have just reviewed and choose the no audio-slides only option. In addition an archived replay and slides will be available on 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 remarks about the corporation's projections, expectations, plans, beliefs and prospects. These statements are based on judgment and analysis as of the date of this conference call and are subject to numerous important risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. Those risks and uncertainties associated with the forward-looking statements made in this conference call and webcast are described in the Safe Harbor statement in today's press release, as well as STAAR's public periodic filings with the SEC, including the discussion in the Risk Factors section of our 2011 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.

In addition, to supplement the GAAP numbers, we have provided non-GAAP adjusted net income and diluted net income per share information that excludes manufacturing consolidation expenses, Spain distribution transition expenses, gains or losses on foreign currency, fair market value adjustments for warrants and stock-based compensation expense. We believe that these non-GAAP numbers provide meaningful supplemental information and are helpful in assessing our historical and future performance. A table reconciling the GAAP information to the non-GAAP information is included in our financial release, which is available on our website and in our slide presentation. 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 today for our review of the first quarter 2013 results, as well as an update on how 2013 is progressing. With me today on the call is Deborah Andrews, our CFO. I'll start our call this afternoon with an overview of the first quarter results and how we did versus the metrics we provided during the last conference call. Deborah will then offer a detailed look at key first quarter financial results. In closing, I'll discuss the current competitive landscape and other factors impacting our business, as well as some highlights from our recent attendance at the American Society of Cataract and Refractive Surgeons Symposium, ASCRS, in San Francisco a few weeks ago. Then we'll open the call for your questions.

First, we had a solid overall start to the new year. Revenues for the first quarter were at $18 million and in line with the results we announced on April 9. Throughout the quarter we consistently grew Visian ICL sales in the refractive surgery space in our major focused markets. Operationally, we saw continued success in the execution of our plans and are encouraged by the momentum we have achieved globally. Let me start by reviewing our key operating metrics for the year and results for the first quarter against those objectives one by one.

First, revenue growth. Revenues grew faster than this annual metric during the first quarter, so we can get to check that one off as accomplished. I will present our thinking about this metric going forward later in my remarks. Revenues were negatively impacted by the weakening of the yen. Revenues in Japan represented 26% of our sales during the quarter, as our sales in Japan increased 32% in constant currency though only 23% in US dollars for the quarter. Still not bad. The value of the yen in the first quarter of 2012 was approximately JPY80 to the US dollar, while during this quarter it averaged JPY92. On a constant currency basis, total Company sales grew 21% during the quarter.

Now, let's drill down a little bit into the ICL and IOL sales segments. First, turning to our product portfolio, sales of our Visian ICL product during the first quarter were $10.6 million, which reflects a 24% increase over the same quarter last year and exceeded for the first time the $10 million mark in one quarter in the product's history. The achievement reflects an 18% increase in unit sales and a 5% increase in price, as well as what appears to be continued market share gains in a difficult refractive surgery procedures marketplace.

Regionally, let's take a look. Sales increased in each of our three major regions -- EMEA, APAC and North America. In fact, Visian ICL sales increased in 10 of our 11 targeted markets, with the only exception being the UK, which is our smallest targeted market as of today. Let's look at EMEA.

Heavily contributing to the strong first quarter results was the Visian ICL revenue growth of 59% in the Europe, Middle East, Africa region. A 57% increase in sales was seen in our European markets. Several factors had a positive impact in the markets, including our conversion to a direct sales model in Spain. Sales in Spain grew 156% over prior quarter while units increased 37%.

Additional sales personnel hired in 2012 in Europe also helped to boost our sales. Finally, the introduction of CentraFLOW technology in this region was an important contributor to the growth. Over 16,000 ICLs with the CentraFLOW technology have been successfully implanted and the lens continues to be very well received by surgeons and patients.

Other European markets saw strong growth as well. Italy grew 63%, France 35%, and Germany 23%. Following the introduction of CentraFLOW in the Middle East, sales grew 94% during the quarter, and in Latin America sales increased 25%. We anticipate additional growth of these markets as we obtain ICL approvals at some point during this year. Now let's look at APAC.

In our Asia Pacific region, total sales grew 11% year-over-year, led by a 22% increase in India, where we are preparing to launch our CentraFLOW technology. In Japan, while top line only grew 14%, we grew 34% in terms of units. The two major centers in Japan are currently using the ICL CentraFLOW, though not yet approved in Japan. Approximately 70% of our sales in Japan now are the CentraFLOW technology version.

In Korea, as we discussed in late February, we experienced a fast start to the quarter as compared to a weak first two quarters in the prior year. As you may recall, they purchased inventory late in 2011 for the 2012 start to the year. Their out-the-door sales early in the quarter were strong, but flattened a bit as the quarter progressed. They are back to good growth during April. Sales for Korea will remain lumpy until we gain approval for the CentraFLOW technology, which is expected at midyear.

Finally, sales in China grew 7% as we have continued to see challenges to the overall refractive surgery market, which were noted last year. Market scope originally reported for the year 2012 that the refractive procedure count in China had increased 17% to nearly 1.2 million procedures. However, they have since recast or reprojected those numbers down to 830,000 for the year, or a 21% reduction during 2012. Now, you may recall, our units grew 37% last year, and though I'm still not pleased, the result was not as bad as originally thought. Some of the headwinds, however, on procedures do continue in the China market. Now let's look at North America.

ICL sales in the US grew 12%, while units grew 14%, against what appears to be a declining refractive procedure landscape as well in the US. As we have said in the past, until we get additional product approvals in the US, we do not expect to see much growth. However, I must say we were encouraged by our 10% growth in the second half of last year, and now the first quarter has continued those trends. We believe that our focused marketing efforts with social media and practice development programs are helping to contribute to these positive trends.

LCA Vision announced their LASIK results yesterday for the US market. Their procedures declined 22% and they said they believed the total US refractive procedures declined 12% to 16% during the first quarter. So, we're gaining market share in the US as well.

This evening, live Visian ICL surgery will be webcast by Dr. Rob Rivera over Google Hangouts. It will be broadcast at 6 p.m. Pacific Standard Time. The surgery is actually on an optometrist, and Dr. Greg Parkhurst will also be available for introduction during the webcast. After the surgery there will be a question-and-answer segment hosted by the surgeons. This live stream will be available on www.hoopesvision.com/livesurgery, and Hoopes Vision is H-o-o-p-e-s V-i-s-i-o-n. Goggle has been very active in supporting this webcast, so we expect a good audience this evening. Now let's look at IOLs.

Global IOL sales were $6.3 million, essentially flat year-over-year, and you wonder why I'm pleased. Well, we had a negative impact of foreign exchange, which was $646,000 in just the IOL category alone. So, without that impact of foreign exchange, global IOL revenues grew approximately 10% on a constant currency basis. In addition, we ended the quarter with about 900,000 in backorders from European customers. You may recall, our supplier of acrylic IOLs has been unable to meet the high demand for the new KS IOL products, and we continue to pursue other options to meet the short-term demand for this product. We have evaluated about eight options and have a few remaining options remaining under evaluation. We should complete these evaluations by mid-May.

We are encouraged by our recent trends in the IOL business. As you know, we have expected to see some growth patterns develop. We may now be seeing the beginning of those patterns, at least I hope so. The acceptance of the KS IOL products has escalated nicely, and we introduced our new nanoFLEX Toric IOL for Europe during April. Now let's turn to our second key metric.

Gross margin expansion by a minimum of 250 basis points for the year. That would put our yearly gross margin at 71.9%, while gross margin for the quarter was at 70.3%, which was basically unchanged from the first quarter of a year ago, though it was a 250 basis point improvement over the fourth quarter or 2012. Our gross margin expansion was limited somewhat during the quarter primarily by a temporary factor. Deborah will cover this in detail during her comments, but we're confident that we will achieve this metric for the full year as this becomes less of a factor during the remainder of the year. How about profitability?

Our next metric is to be profitable on a GAAP basis each quarter. Well, we achieved this during the first quarter with $471,000 in net income for the quarter. There were several items which had a negative impact on the P&L, which Deborah will describe. With the multiple investments we're currently making in the business, the non-GAAP adjusted income results, which Deborah will cover, were quite positive. Now to our final metric, manufacturing consolidation.

That final metric is to make progress with our manufacturing consolidation plan, or as we call it, Project Comet, while product quality and supply are maintained. Our team continued to execute to this metric during the first quarter and we continue to expect to meet this metric for the full year. Expenses incurred during the first quarter for the project were somewhat higher than might have been expected, though this is basically how we have budgeted for the year. We expect to meet the anticipated total cost goal and will monitor closely throughout the year.

Now a couple of updates on that consolidation, as we hit some key milestones during the quarter. As we said before, during the first quarter we celebrated the shipment of the first US manufactured ICL out of Monrovia. We have since now started shipping US manufactured ICLs to various markets in which we have approval outside the US. In addition, we expect that the Visian Toric ICL will complete validations during this quarter, and our target is to ship the first Toric ICLs manufactured in the US by the end of June. All nonsterile preloaded silicone IOLs are today being shipped out of our Monrovia manufacturing facility in the US, and we expect sterile silicone IOLs to begin shipping later in this quarter. The first lot of preloaded silicone IOLs have now gone into the sterilization process.

Finally, key regulatory approval has been received to relocate the irradiator used to manufacture Collamer buttons from Aliso Viejo, California to Monrovia. Though a minor piece overall, it is the final piece to our consolidation of four facilities to our Monrovia facility.

With the implementation of Project Comet and the consolidation of manufacturing to Monrovia, we did note we needed additional space to house our finished goods. The building right next-door to our existing facility on Walker Avenue became available and we were able to obtain an eight-year lease with reasonable terms. It adds approximately 26,000 square feet to our current 44,000 square feet. We were able to connect the buildings so it functions as one facility. The additional space has already created a more productive working environment, and we expect to quickly recoup the investments made through increased productivity.

Before I turn the call over to Deborah, I'd like to comment on our current outlook for the remainder of the year. Solid start to the year, but no change to outlook now. Last year we took significant steps to position the Company for growth this year and beyond in our two large markets -- refractive ICL and cataract IOL. Today we have a robust product line in place for new products throughout this year and beyond. By maintaining our strong balance sheet, continuing to invest in focused R&D initiatives, continuing our business development activities, and keeping a close eye on operational efficiencies, I believe we can achieve our growth plans for 2013 and well into the future.

In addition, we're making investments to drive the top and bottom line growth, one, by adding new sales and marketing personnel in key regions, and through manufacturing consolidation. I am confident we are on track to achieve all of our stated metrics this fiscal year.

From a revenue growth perspective, however, we continue to remain cautious due to the ongoing impacts of yen, value of the yen, headwinds, which actually have worsened during the start to the second quarter, as well as the impact of supply constraints in Europe on IOLs. So, at this point we are reiterating our goals to achieve all four metrics that were provided in February, and we will update you in early August on our progress. Now, I'll turn the call over to Deborah for a more thorough review of the first quarter financial highlights. Deborah?

Thanks, Barry. Good afternoon, everyone. There are six areas on which I will focus my comments -- gross margin expansion, operating expenses, impact of foreign currency, income tax for the quarter and the year, non-GAAP adjusted net income, cash, and the impact of manufacturing consolidation on our operating results for the year.

Now, first looking at our gross margin, our gross profit margin for the quarter was 70.3%, consistent with the first quarter of 2012 and a 250 basis point improvement over the fourth quarter of 2012. Gross margin expansion was limited by a large increase in low margin IOL injector system sales to a third-party supplier for buildup of their acrylic preloaded product supply and which appear in our Other Product Sales category. These injector system sales were the driving factor in the increase of other product sales, which increased from $546,000 to $1 million during the quarter, and negatively impacted gross margin by approximately 170 basis points during the quarter. We expect these sales to decrease significantly in Q2 and going forward so the negative impact on margins will become less of an issue. If not for these shipments during the first quarter, our gross margin would have been 72%.

Now, in terms of our operating expenses, our operating expenses for the first quarter, including manufacturing consolidation expenses, increased 9% to $11.6 million. Key contributors to the expense increase include manufacturing consolidation, which were $901,000 for the quarter. This is somewhat higher than we had projected for the quarter, and $346,000 over the expenses reported in Q1 2012, due to increased tax professional fees and Japan wind-down costs. These costs, which will continue to be a factor in Q2, should decrease significantly in the second half of the year.

Sales and marketing expenses, which increased $623,000, driven by the addition to our headcount throughout 2012, as well as $422,000 in payments to our former distributor in Spain for the early transition to a direct distribution model in the market. These payments ended on March 8 and will not impact expenses for the remainder of the year.

We also had a slight increase in our G&A expenses due to increased stock-based compensation and the new medical device tax expense were more than offset by decreased R&D spending during the quarter. Overall, operating expenses were impacted positively by foreign exchange of about $351,000.

There will be some gives and takes in operating expenses for the remainder of the year, but we believe this level of spending during the quarter should provide a good basis from which to project the final three quarters.

In terms of currency transactions, as we maintain cash and receivables in euros, these assets are revalued at the end of the period at the rate of exchange and effective at the end of the period, typically resulting in an unrealized gain or loss on exchange. During the quarter we reported an exchange loss of $341,000 due to a dip in the value of the euro, which on average for most of the quarter was $1.32, but dropped to $1.28 on the last day of the quarter. This resulted in a $408,000 negative swing during Q1 as compared to Q1 in 2012, when we recorded a $67,000 exchange gain. To date the euro has recovered and it has crossed $1.32 again today. The Company does not currently enter into hedging transactions.

Now, in terms of tax, as you may know, we work with our tax advisors at the beginning of each year to determine our estimated effective tax rate for the full year. Based on our budget, which is then the rate we use during the year or until we have better information. Through that process we have determined that our effective tax rate should be approximately 40% for the year, and so that is the rate we used for the first quarter and the rate we expect to use for the remaining quarters of 2013. Is it possible this rate could change during the year? It is possible though not projected at this time. I will add some additional comments on this while discussing our manufacturing consolidation efforts.

Now, moving on to non-GAAP measures, our net income for the first quarter of 2013 calculated in accordance with GAAP was $471,000, or $0.01 per share on a diluted per share basis compared with net income of $232,000, or $0.01 on a per diluted share basis in the first quarter of 2012.

To provide investors with a better basis on which to compare results and understand our business, we also report net income on adjusted basis, which excludes manufacturing consolidation expense, Spanish distribution transition expense, gain or loss on foreign currency transactions, fair value adjustment of warrants, and noncash stock-based compensation expense. Excluding those items, adjusted net income for the quarter was $3.2 million, or $0.08 per diluted share, more than double the adjusted net income of $1.4 million, or $0.04 per diluted share reported in Q1 2012.

Now, in terms of cash, we ended the first quarter with $19.2 million in cash and cash equivalents compared to $21.7 million at the end of the prior quarter. Our cash results during the quarter were impacted by several factors including $442,000 included in cash used for operations, which was not a factor in Q1 2012, which was paid to our former distributor in Spain for early transition to a direct sales model. Those charges ended on March 8.

We also used $1.2 million in cash for investing activities primarily for the manufacturing consolidation and expansion of our Monrovia, California facility, and we also realized $563,000 in negative effect from foreign currency exchange on cash related to the weakening of the Japanese yen.

As we have experienced in the past, the first quarter is the toughest quarter for cash usage since payables are generally at their highest at year end due to facility closures at the end of the year. During the quarter we used $432,000 for operating activities, which was roughly the same as first quarter 2012.

In terms of Project Comet, as Barry mentioned earlier, our manufacturing consolidation expenses were somewhat higher in Q1 than we anticipated. For the remainder of 2013, we currently expect to spend approximately $1.6 million to complete Project Comet and transition all of our manufacturing to California. Once the project is complete, we continue to expect our gross margins to increase to nearly 80%. We estimate our tax rate will go from the current 40% to approximately 10%. We continue to anticipate generating savings of more than $100 million from Project Comet for the aggregate period of approximately 2014 to 2021.

Now, since we started to ship our ICLs manufactured in the US to markets outside the US, as US manufactured product is shipped, we will get closer to reflecting a net profit in the US. And as we move to a profit position, we anticipate starting to utilize some of our more than $120 million of NOL. Though not projected this time, it is possible that we may see some additional tax rebates on tax rates the second half of the year, depending on the rate of progress. This concludes my comments. I'd like to turn the call back over to Barry.

Thank you, Deborah. I'd like to take a few minutes to discuss the competitive landscape we see in the ophthalmic medical device sector, which seems to have changed more the past six months than in previous years. First on the refractive side. LASIK surgery seems to be facing difficult negative pressure and most market data shows that LASIK procedures are declining in most major markets. The Visian ICL is growing, on the other hand, and increasing market share against LASIK in nearly all of those markets. Even some of our larger competitors are seeing new challenges today.

For example, Abbott reported their AMO revenues for the quarter declined with a modest decline in the refractive sales driven by continued soft market conditions. Novartis reported their total ophthalmic surgical business declined during the quarter, while their refractive business grew only 2%. Lenses which attempt to compete for refractive share, which are in the anterior segment of the eye, all seem to be facing some new clinical challenges. Keep in mind, the Visian ICL lens is implanted in the posterior segment of the eye and is not experiencing any of these clinical challenges I'm about to review.

There is mounting clinical evidence that anterior segment phakic IOLs are not in the right place in the eye. Several months ago, Novartis sent out dear doctor letters warning about the necessary precautions needed regarding endothelial cell count and the routine monitoring of patients. We can now count up to 12 markets in which the Novartis Cache lens is no longer available. There is conflicting information on the markets whether the product will return or not. There was also some very challenging clinical data presented at the recent ASCRS meeting regarding high levels of explants of both the Optech and Abbott phakic IOLs due to low endothelial cell count.

In the cataract IOL segment there are also some competitive developments. There is growing long-term concern about the glistening reports in the Novartis IOL called AcrySof. The discussion has been in the European markets for the past several years, but it was quite an active topic at the recent ASCRS meeting. As a matter of fact, Novartis reported their IOL business declined by 1% in the quarter, and their advanced technology IOLs declined by 2%. They also reported that cataract procedures seemed to slow down in some markets including Southern Europe and Japan. Let me remind you, we're seeing increased IOL sales in those markets with our new KS IOL products, and we reported a 25% unit increase in Japan during the first quarter.

There are also new Toric IOLs being approved and introduced in several markets. With the increased use of femtosecond lasers for phaco, there is increased interest in Toric IOLs. STARR has the only family of Toric IOLs on the market, as we have a silicone Toric IOL in the US and have just launched the nanoFLEX Toric IOL in Europe, which is made from Collamer, the same material of which the ICL is made. We see an opportunity for us in this fastest growing segment of IOLs.

Now, from a regulatory perspective, we believe we remain on target to gain approval for the CentraFLOW technology in both Korea and India at midyear. The official launch is scheduled for the first week of July in India and the last week of July in Korea. Also, the new generation Visian ICL Version 5, which will be preloaded and have an enhanced optic design, is expected to receive CE Mark approval during the third quarter. This technology also incorporates the very successful CentraFLOW feature driven by the KS-AquaPORT.

In the US, a few updates. As previously reported, we submitted a newly organized submission for the Visian Toric ICL to the FDA in mid-November. In the past six weeks we have had three sets of multiple questions from the agency. Those questions required substantial work on our part to complete, but we completed each response within the requested time period. Our final response was submitted on March 24, and at this time there are no further pending questions from the agency.

Also as previously reported, we submitted a protocol for an ICL CentraFLOW clinical study on February 14. The FDA has up to 75 days in which to respond. We received a call from the FDA a few weeks ago telling us they were going to be delayed and would not be able to meet the 75-day response time.

During the ASCRS meeting, we had the opportunity to facilitate approximately 50 ophthalmic surgeons from throughout the world in evaluating the new Visian ICL Version 5 with preloaded technology. They were asked to evaluate the technology based upon eight categories around the device ergonomics and ICL delivery results. Their response was very good with virtually all categories receiving an above 8 out of a 1-to-10 rating scale. We believe we will begin to launch this product officially at the upcoming ASCRS meeting during early October.

Now, some additional commercialization investments that we continue to explore opportunities here, and though they weren't planned at the beginning of the year, we made the following decisions on adding resources. We are now planning to add a new sales headcount for China by midyear. We are evaluating whether to add one or two new sales personnel for Spain, to help expand our new direct efforts in that market. And tomorrow a new sales director for Korea starts, who was formerly the president of WooJeon Vision Technology and ICL product manager, so she has a log of experience. With the expected approval of ICL CentraFLOW in Korea, we believe this will increase and help drive the penetration of that new technology more quickly.

Before I open the call for questions, let me review our investor meeting schedule with you. First, our annual shareholder meeting will be here at our Monrovia facility on Monday, May 13 at 8.30 a.m. After the meeting we will provide tours of our expanded facilities for anyone who would like to join. Also, we will be traveling to Denver, Salt Lake City, New York, and Mid-Atlantic, in Boston, for one-on-one meetings in the next few weeks. In late May, we'll be presenting at the Deutsche Bank conference in Boston, and the Benchmark conference in Milwaukee. In early June we'll be at the Jefferies conference in New York City. We hope to see many of you there. If you'd like to set up a time, just call Doug at EVC. And with that, we're ready to take your questions. Operator, could you please open the line?

Thank you. (Operator Instructions) Your first question comes from the line of Matthew O'Brien from William Blair. You may proceed.

Good afternoon. Thank you for taking the questions. Barry, I was hoping we could start with guidance for the year on the top line. First of all, do I understand it correctly, the 8% to 10% is the reported number, and if the yen hadn't gone against you potentially would you have taken that range up a little bit?

That's a good question, Matt, because obviously the yen is an impact in our conservative approach to this. As I said, first quarter the average value was JPY92 and it's up to JPY97 or so now, and it's been up to JPY99. So, that still concerns us. I think we might look at it a little differently. I think you're right, if the yen headwinds were not facing us, it would still look more difficult.

Okay, so it would have been above the 10%, not at the high end of the range.

I think that's fair.

Okay. And then, Deborah, I was curious with your OpEx performance in the quarter and then the thoughts going forward, I know they've been increasing year-over-year, but on an absolute basis compared to Q4, they've come down pretty significantly. Can you help us understand what's going on there? And then specifically on the bottom line, should we annualize this $0.08 number that you delivered in the quarter and even maybe lowered a little bit just because of the yen and use that as a baseline going forward?

I guess that's a fair approach, but it's a conservative approach to take in terms of annualizing the number. In terms of comparison to the fourth quarter OpEx, what we didn't have in the first quarter was a big trade show, which we will have, which we did have in the fourth quarter and we will have in Q2, Q3 and Q4 going forward. So, that's a big difference in the expense, but we also, as we said, have some put-and-takes. The Spain distribution expense is going to go away -- or went away in March of this year and we won't have that going forward, and we had that. So, I think if you just -- I think apples-to-apples would probably be similar in terms of overall dollars.

So, just to be specific, I mean, something north of $0.30 for the year seems reasonable on the bottom line?

On the non-GAAP.

Gotcha, okay. And then with respect to CentraFLOW in India and Korea, I mean, you still put up some pretty good performance there, but do you get any sense that they may be waiting a little bit for that technology to come along?

That's a really good question, Matt, and as we rolled it out in other markets, we've looked at that. It may have a minor impact, but I don't think it's much. Now, I will say this, I was surprised in Korea, actually, our distributor is already advertising the technology to physicians. So, that's the first time that's been tried, so that could have an additional impact. And I think, first of all, our top line guidance is driven by I want to see those two approvals. Once we get those, I do think we're going to penetrate Korea more quickly than we did Europe and Middle East and a few other markets. So, I think it will be very helpful very quickly, but I'd like to get those approvals in and done, and then we can talk a little more aggressively.

Okay, thanks. I'll hope back in queue.

Your next question comes from the line of Raymond Myers from Benchmark. You may proceed.

Thank you. Barry, something you might give us more detail about, the improved economics of the V5 preloaded CentraFLOW versus the V4 that you were selling a year or two ago. The cumulative gains of both the CentraFLOW and preloaded technology would seem to be quite a significant lead in the economics to the physician's practice and to STAAR. Can you lay that out for us?

Yes, I think that is a really good point. We did show an increase of 5% on price during the quarter. As you know the CentraFLOW technology has about a 10% premium. Some of the distributors are passing it on, others are not. But that 10% added, even at an in-customer price, say it's $80, for example, that is well worth it to a surgeon, eliminating that visit, that step, that break in his schedule to have to go do a YAG PI procedure. So, there is value at both ends in terms of that technology.

Now, with the Version 5, we do expect to put about a 5% price increase on that product, and there is surgical savings time with that product, plus reliability in the delivery of the ICL. And these were things that we asked surgeons to judge when they viewed the product at the recent ASCRS meeting.

Now, I think for those who attended the breakfast meeting we had in San Francisco, you heard Dr. Mertens say in his hands -- and he's an experienced surgeon -- in his hands it will save 30% of the procedure time, and time for surgeons is money. Time for ASCs is money. Time for hospitals is money. So, it's well worth, I think, the incremental 5% cost of the product that they'll see. Now, I think that a surgeon that does much less procedures than a Dr. Mertens, for example, the savings and procedure time would even be much more.

Great. Next, could you describe the demand for monovision lenses to aid with presbyopia for the ICL? I think that was mentioned in the presentations at the conference a couple of weeks ago, where Erik Mertens was presenting?

You know, there are a few surgeons and with our Version 6, we are looking at different optics could put on the ICL to help visual results from multiple planes of vision. Whether that's a multifocal type design optic or whether it is an enhanced new type optic that gives multiple levels of visual results. We do think that's a nice opportunity for us going forward to incorporate into our technology and make it much easier for both the surgeon and the patient. And that's in our Version 6, which, as you know, we're still exploring those optical designs.

Okay, sounds intriguing. Finally, could you discuss your experience with transitioning to direct distribution in Spain? I saw that the sales have increased nicely in Spain, and I don't recall their economy doing anything positive. To what do you attribute the improvement and describe that transition to direct?

Right. Well, it is challenging for a company our size with all the different things we have going on in business, particularly to consider Project Comet, and that consolidation effort takes a lot of work from a lot of disciplines within the Company. But it likewise takes a lot of effort to turn a market from being a distributor model to a direct sales model, and we had a team of several members of our executive management team along with a lot of employees throughout multiple functions within the Company working on this. So, it takes a good amount of time and effort.

Now, to the results, I'm pleased with the results so far. That's why we're looking at adding more people more quickly in Spain. It is a challenged market in terms of the economy, no doubt about that. What's more intriguing to me in our first quarter results in Spain is not 156% in revenue, because remember, we're going to get almost a doubling if the units are just the same. What's intriguing to me is the 37% increase in units. That's what's interesting. So, by going direct, if we can drive the ICL units more efficiently, more effectively, that's the test to really see whether it's successful or not. And so far I'd have to say we're pleased, but we're still monitoring it very closely.

Okay. I'll get back in queue and maybe ask some more later. Thank you.

(Operator Instructions) Your next question is from the line of Jim Sidoti from Sidoti & Company. You may proceed.

Good afternoon. Can you hear me?

Hi, Jim, yes we can.

Okay. So, I believe you said on a constant currency basis the IOL sales were up 10% compared to flat on a reported basis, but on ICL it was the same constant currency and reported. Is that because more IOLs are sold in Japan?

There are two factors there. One is, you're right, the high high percent of overall sales in Japan are IOLs, but secondly you may recall in our prepared comments that 70% of the ICLs in Japan now are CentraFLOW technology. Well, since it's not approved in Japan, surgeons have the ability to prescribe it, and we can't ship it from Japan because it's not an approved product. So, they actually order that product from Switzerland and it's shipped in US dollars. So, there's not a yen impact on 70% of the ICL sales in Japan.

Okay. So, even if they are sold in Japan, the currency doesn't affect it.

Yes.

All right. Then the other sales in the quarter are about $1 million, you said. Can you just go over again what that was, and I assume that won't come back in the next couple of quarters?

Yes. Well, the last two quarters we've seen an increase in this Other category, and it's a category that we've expected to continue to decline and we have been driving it down because it's a host of a miscellaneous of unfocused products. However, within this category also falls the injector systems that we sell to the third-party who will then use those injector systems for their product sales of the same product that we market. And this is the KS IOL products of which I am speaking.

So, as you know, we're both way behind in needs for product and, as we said, 900,000 backlogged at the end of first quarter. So, they're trying to build the inventory of these preloaded acrylic IOLs, so they're buying more injector systems from us today than we're getting lenses to sell to offset that. And those gross margins are very low. I want to say they're plus or minus around 20%. Deborah is shaking her head yes. So, you can see the impact that has on the gross margin. As she reported, we would have been 72% gross margin for the quarter if not for that, but that's the biggest driver, Jim, in that other category, are those injector systems we're selling to the third-party supplier.

And you don't expect that to continue for the rest of the year at that rate?

No, we do not. And, as a matter of fact, we already have set the number for second quarter and we'll do so for the rest of the year as we move along. Now, if there's more supply of the product available, then we'll sell more injector systems, but that will mean we'll have more IOLs to sell to offset that diluted gross margin.

All right. And that supply constraint is what you were referring to that might slow down sales in Europe in the back of the year?

Yes, right, right.

So, just for modeling purposes we should probably expect Q1 will be the best quarter, at least for the next two or three quarters?

Well, I would agree with you based on the base of business we have, but let's not forget the nanoFLEX Toric IOL. Now, I don't expect Q2 we're going to see a lot from it, but we're beginning commercialization now. But I think as that product gets out into the market Q3, we'll see a little more in Q4. I'm expecting a nice little bump from the nanoFLEX Toric IOL.

All right. And then my last question was on the R&D spend, it was down in the quarter. Is that a timing issue and should we expect that to come back, or --

Yes, it's more of a timing issue in that we transferred the R&D activities from Japan here, so there are still a couple of people we need to add into the organization. I think if you model that at 10% to 11%, that's going to be pretty close to where we should end up.

Okay. All right. Thank you.

Thank you, Jim.

Your next question is a follow-up from the line of Raymond Myers from Benchmark. You may proceed.

Yes, thanks for letting me follow up. Barry, quite a few products are starting to be shipping from Monrovia either already or expected in the second quarter here. So, my question is, when should we start to anticipate some noticeable contribution from the shipments of these products from the US?

Q4 2014. And, you know, I think I've been pretty consistent in trying to say that, so we've bled into our comments a little bit here today that you might start to see some additional tax benefit as the US turns profitable, but it really -- this year, 2013. What did I say?

'14.

Okay. Yeah, this year, for our comments, we might see a little bit of that, but if I were you and me as putting the budget together, I'm not modeling any of that for this year, but I am expecting it in 2014.

Okay, that's it. Thank you.

Thank you, Ray.

Your next question comes from the line of Larry Hamovitch from HMTC. You may proceed.

Good afternoon. I guess it would be more for Deborah than you, Barry. At the analyst meeting you had at ASCRS, there was talk about a 10% effective tax rate in 2014. I think you will start using up your tax loss carry-forwards. Is that why the tax rate is 10%? And why is not zero, is that because of overseas income?

Exactly. Exactly, Larry. Yes, and like I said, so in the same basis as this year, we estimate our tax rate for the full year would be 10% overall, and so that would begin effective with the first quarter, if that's the case. So, yes, and because it really has to do with the mix of income.

And also you had mentioned in that meeting gross margins ticking up pretty nicely from where we're at. Should we expect that gross margin to tick up progressively each quarter pretty much, maybe not totally evenly, but continue to tick up as the benefits of the manufacturing consolidation come into play? And if the average for the year 2014 was projected, and I realize obviously it's very early to give hard guidance, but if it's 80% for the year, does it mean exiting 2014 it could even be better than 80%? We could start at, let's say, 75% and end up at 85% and average for the year at 80%?

I don't think so, Larry. I think our objective is to get to 80%. I'm not going to commit to 80% for the year.

During the year 2014 we expect to see a quarter at 80%. I don't know exactly when that will be. The other driver besides Comet is continued mix, so that means that ICL is at a higher gross margin, where 59% of our sales during the first quarter, last year it was 55%. So, if we continue on that kind of trend, that's going to continue to contribute 200 or 300 basis points every year just on mix.

So, let me make sure I hear what you're saying. So, I thought when we talked in San Francisco that we were talking about an average gross margin for the year of 80%. Now I think I'm hearing something slightly different.

No, I think what we've said is that in 2014 we'll be nearing 80% gross margin.

Okay. Average for the year?

Well, it's going to be -- yes, the average would be nearing, yes.

Okay. So --

But we expect it will hit 80% at least a quarter during the year. It might be first quarter, it might be fourth quarter.

Well, I would only think, Barry, that the gross margin would be getting better as the benefits of the manufacturing consolidation are experienced.

That's true, Larry.

Right, right.

Okay, that's good. Thanks.

And at this time there are no other questions. I'd like to turn the call back over to management for your closing remarks.

Great. Thank you very much for participating on our call today and if you are able to join us on any of these investor trips we have or our annual shareholders' meeting, we certainly welcome you. We look forward to providing you an update on our progress during our second quarter call. Thank you, and good evening.

And, ladies and gentlemen, this concludes your presentation. You may now disconnect.