STAAR Surgical Co (STAA) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to STAAR Surgical first-quarter 2014 financial results conference call. (Operator Instructions) This call is being recorded today, Monday, April 28, 2014.

At this time, I would like to turn the conference over to Leigh Salvo with EVC Group.

Thank you, operator, and good afternoon, everyone. Thank you for joining us for the STAAR Surgical conference call being broadcast live today from the exhibition hall of the American Society of Cataract and Refractive Surgery Symposium.

Our call today will review the Company's financial results for the first quarter, which ended on April 4, 2014. The news release announcing the first quarter results crossed the wire just after 4:00 Eastern time and is now available on STAAR's website at www.staar.com. In addition to the call, a live video webcast and slide presentation are accompanying our remarks.

To access both the video webcast and the presentation slides, go to the Investor Relations section of STAAR's website at www.staar.com. In addition, an archived replay of the event 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.

These 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 2013 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 consolidated expenses, Spain distribution transition expenses, gains or losses on foreign currency, fair market value adjustments for warrants, stock-based compensation expense, and FDA TICL panel expenses.

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. Barry?

Thank you, Leigh. And good afternoon, everyone. Thank you for joining us on the call, on the video, and a special welcome to all of you here, live, in person, at the American Society of Cataract and Refractive Surgery Symposium here in Boston, or better known as ASCRS. Steve Brown, our CFO, will be presenting with me today as well.

I would like to start our agenda this afternoon with some of the highlights of the ASCRS event, which began on Friday and will conclude tomorrow. Then I will provide an overview on the first quarter results against our five key metrics that we established at the beginning of the fiscal year. Steve will then offer a detailed look at the key quarter financial results.

And then I will come back and discuss some the key operating milestones, including a review of the potential for the Toric ICL in the US once we are able to commercialize recent new product developments. And upon a conclusion, we will open the call for your questions.

This has been a very positive ASCRS meeting for STAAR. This slide shows our exhibit booth in 2010 on the left. And on the right is our booth here today in Boston as we stand. Of course, companies can pay for space and big booths, but I would say we have earned this. We have earned it by the progress we have made over the past several years.

We are all very proud of our position today and our future going forward. I applaud our employees who have worked so hard to get us to this position. And some of those employees are right here on the floor today.

We have had a very high level of interest in our booth regarding the TICL and the ICL, the central flow technology, the preloaded ICL, our preloaded acrylic IOLs, and new interest in our work on our V6 ICL products. The recently published MarketScope data of global refractive procedures for last year in 2013 validates what we have been saying for the past few years. The ICL continues to gain share in the refractive market.

In our 12 target markets, as you can see, refractive procedures declined 4.6%, while the Visian ICL reported gains of 25.5% and this is procedure growth. For example, if you look at all 12 of those target markets, there's green behind the ICL. We gained market share in all of those. A couple of examples to pull out: Korea at 12.4% last year; the Middle East at 9.3%; and both Spain and India close to 5% overall.

I will get into more detail on our ICL growth in a minute, but I wanted to highlight this proof point upfront, as I believe this key bed of research best reflects our competitive position in the refractive market today.

These are the five key annual metrics, annual, that we discussed on our fourth quarter call -- revenue growth of 8% to 10%; ICL growth of 20%; gross margin expansion of 300 basis points to end at 72.7% for the year; profitability on a GAAP basis for the year; and to successfully complete our Project Comet, which was our manufacturing consolidation by midyear.

Let's review each one separately. We are already off to a very good start for 2014, with revenue of $20.2 million in the first quarter representing a growth of 12% as reported and 15% growth in constant currency.

Our growth was driven by record Visian ICL sales as well as increased IOL product sales. The revenue growth of 12% during the quarter was higher than our annual growth range metric. In constant currency, the revenue would have been $20.8 million, which would have been 15% growth.

25% of our sales during the quarter were in Japan, where you can see, we had a continued headwind of the weakened yen value. Visian ICL revenue was 60.7% of our total revenue in the quarter as compared to 59.1% in the first quarter of last year. Low-margin other sales increased by 29% and negatively impacted our gross margin in the quarter, as you will hear.

One could argue that this start against our revenue metric -- and it proves that our metric might be a little bit too conservative -- but let me just say we are very pleased where we are after the first quarter. But let's give it another quarter before we consider any changes. Perhaps at that point, we will have additional product approvals, which we can also roll in to that outlook.

Our second target metric for the year is Visian ICL revenue growth of 20%. We achieved our budget number for the first quarter. So we believe we are on track to complete this annual metric throughout the year. Global ICL procedure growth in the fourth quarter was 14%, representing a 15% growth in those 12 target markets. Growth in Europe was 24%. In our Asia Pacific region, 15%, while North America declined 19%.

Global ICL revenue growth in the quarter was 15%, representing 16% growth in our target markets. Revenue growth in Europe was 27%, Asia Pacific 17%, and a 15% decline in North America. Total global revenues for our Visian ICL during the first quarter represented 61% of our total revenues at $12.2 million. Another new quarterly record.

First quarter revenues of the ICL with the CentraFLOW technology represented 62% of total ICL revenue and 85% of all the ICLs in the market in which CentraFLOW is approved. To date, there have been more than 55,000 successful implants of the ICL with the CentraFLOW technology. In the more than 60 markets where we have Toric ICL available, first-quarter revenues grew 14% and represented 46% of total ICL revenues.

Turning to our IOLs, global revenue for the quarter grew 4% to $6.6 million and represented 33% of total sales. The negative impact of foreign exchange on IOLs was $500,000 during the quarter. If not for that, our IOL revenue would have been $7.1 million, representing an increase of 12% year over year. Global IOL units increased 16% during the quarter. IOL growth was driven by the expansion of our KS-IOL products in the European markets and growth of our preloaded silicone IOL sales in Japan.

Increased supply of the KS-IOL products allowed us to grow revenue in our European markets and start to return to consigned account levels in Japan, where we were a year ago from today. We now can say we feel more confident about our supply levels for the rest of the year, which, as you know, was a major headwind for us all of last year. We did begin to rebuild the number of consigned accounts during the first quarter in Japan and we may look to expand to new markets in Europe during the second half of the year.

Though we still ended the quarter with approximately 500,000 in back orders of our preloaded acrylic for Europe, which is slightly down from our number at year end.

Let me drill into regional IOLs just a bit. First of all, IOL revenue in Japan, which is our largest market, represented 54% of our global IOL sales. IOL revenue in local currency increased 15% in Japan during the quarter. IOL units increased 22% and that is after reporting a 16% increase in IOL units in Japan during all of last year.

Sales in Europe, which represented 19% of total IOL sales, increased by 64%, while units increased 59% during the quarter due to our increased supply of product. Europe recorded a 16% unit increase last year, so good back-to-back performance.

Sales in China decreased by 46% as our supply of KS-IOL has not yet been restored. Supply to this market, you may recall, was suspended during the second quarter of last year. Sales -- IOL sales in the US market declined by 6% during the quarter.

Now let's turn to our third key metric -- gross margin expansion by minimum of 300 basis points. Gross profit for the quarter was 68.8% compared to 70.3% in the first quarter of 2013. Our gross margin expansion was limited somewhat during the quarter, primarily by the higher ICL production costs due to the manufacturing transition from Switzerland to the US and a higher mix of low margin injector part sales.

Steve will discuss this in more detail in his remarks and it will also show the pathway to achieve our annual metric for the year.

Our fourth key metric is GAAP profitability for the full year. We were not profitable in the first quarter. We had a GAAP net loss for the first quarter of $1.4 million or $0.04 per share compared with a net income of $471,000 or $0.01 a share in the prior-year first quarter. The net loss was basically driven by the expanded costs for the FDA panel meeting, which was postponed and rescheduled during the quarter. We expect to be profitable for the year and Steve will go into more detail about these expenses.

Our fifth key metric was to complete the consolidation project by mid-2014 and we are on target to do that. Let me share some numbers with you. We plan to close our manufacturing facility, as you know in Switzerland, at the end of June, and we have given official notification to all of our employees there. Manufacturing yields of the ICL and Toric ICL in the US continue to improve during the first quarter.

At the end of first quarter, the Company had approximately 26,500 ICLs and finished good inventory compared to 17,100 at the end of fourth quarter. So you can see, we are purposely increasing that inventory. That is a 55% increase over the end of the year just during the quarter. While approximately 41% of the first-quarter ICL units that ended up being shipped and invoiced were actually manufactured in the US during the quarter.

There is also approximately 18,000 Toric ICLs in inventory at the close of the quarter. A part of this inventory is a build in anticipation of commercial launch in the US. These inventory builds on both products is consistent with management's plan to assure adequate supply and quality of product throughout this consolidation project process.

Overall, I am quite pleased with our performance so far this year. Only one quarter, though. We have successfully continued the execution of our plans and I am encouraged by the sales momentum our products are gaining globally, with another record quarterly sales for ICLs and achieving our gross targets for IOLs.

Customer adoption of the CentraFLOW technology continue to drive growth, with new markets opening up globally, including the approval we received in Japan during the quarter, and the experts meeting, which is scheduled next month by the CFDA in China, for a review of that technology.

Our Toric ICL received a positive vote on the three questions related to safety and effectiveness presented to the FDA Ophthalmic Devices Panel. That was on March 14. A significant amount of our resources went into preparing for this meeting and we are very pleased to have received a favorable outcome.

Finally, we continue to make progress toward completing the manufacturing consolidation by mid-this year and expect to see margins and expense improvement during the second half of the year.

Now, I would like to turn the call over to Steve for a more thorough review of the first quarter financial highlights. Steve?

Thanks, Barry, and good afternoon, everyone. There are several areas on which I will focus my comments: GAAP and non-GAAP P&L results, gross margins, operating expenses, and our tax provision expectations for the year. Let's first review the P&L results.

As Barry said, revenue increased by 12% as reported and increased 15% in constant currency. Gross profit increased by 10%. I will review the gross margin profile in operating expenses in a moment. The GAAP net loss for the quarter of -- first quarter of 2014 was $1.4 million or $0.04 on a per diluted share basis compared with a net income of $471,000 or $0.01 on a per diluted share basis in the first quarter of 2013.

To provide investors with a better basis on which to compare results and understand our business, we are also reporting net income on an adjusted basis, which excludes manufacturing consolidation expense, Spanish distribution transition expense, gains and losses on foreign currency transactions, fair value adjustment on warrants, non-cash stock-based compensation expense, and the FDA Toric ICL panel expenses.

Excluding these items, adjusted net income for the quarter was $1.6 million or $0.04 per diluted share as compared to adjusted net income of $3.2 million or $0.08 per diluted share reported in the first quarter of 2013.

Gross profit margin for the quarter was 68.8% compared to 70.3% in the first quarter of 2013. The additional costs associated with the startup of ICL production in the US, while the Nidau, Switzerland facility remained operating, were approximately 140 basis points of that difference during the quarter. As well, the increase in sales of low margin IOL injectors through our third-party manufacturer of the preloaded acrylic product had a negative impact of 90 basis points.

And the overall average selling prices of IOLs declined due to geographic mix for a negative impact of 77 basis points. Increased average selling prices on ICLs had a positive impact on gross margins and this is expected to continue and expand during the year.

I would like to provide a bit more color on our first-quarter operating expenses. Operating expenses for the first quarter of 2014 were $15.2 million, up 32% from $11.6 million in the prior year. This includes a $2.1 million increase in R&D expenses driven by the costs of the FDA Ophthalmic Devices Panel meeting, which was originally scheduled for February 14 and postponed to March 14. This resulted in higher-than-anticipated expenses in the quarter.

The costs of the panel were approximately $1.4 million, excluding the cost and expenses associated with STAAR employees in the process. Basically, we had to pay for two panel meetings during the quarter.

Investments in sales and marketing increased by $900,000, which includes some costs related to the expansion of the US sales team in anticipation with the potential launch of the Toric ICL and increased promotional selling. Generally -- general and administrative expenses increased $1.4 million, primarily due to compensation and recruiting costs.

The income tax provision was $219,000 during the first quarter of 2014 compared to a provision of $314,000 during the first quarter of 2013. Tax benefits from manufacturing consolidation are being partially realized during the year. The provision for the year is protected on an annual basis and is expected to be approximately 30%. It can be higher or lower during interim periods, but it would average 30% for the year.

Now let me provide some outlook for key financials for the remainder of the year. Our startup cost of goods in the US should continue to improve during the remainder of the year. With increased supply of the KS-IOL products, we also expect to drive sales into the higher gross margin markets.

When approved to commercialize the Toric ICL in the US, this will also contribute to the gross margin expansion. The lower gross margin injector sales will continue and expand during the second half of the year and this will be a drag on gross margin, as it has been.

Our operating expenses are expected to be minimized and the FDA panel cost will not repeat. Our tax provision will be 30% for the year, as I mentioned, though we do see some potential upside during the second half.

This concludes my comments and I would like to turn the call back to Barry. Barry?

Thank you, Steve. We are working with the FDA to finalize the process for the commercialization of the Toric ICL in the US after that favorable vote on March 14. Assuming the launch in the US is similar to that of other markets, we would expect that our ICL sales would double, as in over the 60 markets in which we offer both, approximately 40% of the units and 50% of the dollars are the Toric ICLs.

Surgeons have reported a pent-up demand or a warehousing of procedures here in the US, but we will see how many of those are still interested after approval.

This slide is an interesting slide for me. I periodically, talking with investors, try to explain that these patients, if they wake up in the middle of the night, they have got to grab their glasses or contact lenses in order to do anything. And they can appreciate that, but not as much as this slide. One of our engineers did this for me. This is an illustration of the kind of benefit the patients from the Toric ICL [coheart] and the FDA study experience.

So the picture on the left shows how a normal eye, with 20/20 vision, would see the eye chart. The simulation on the right is how the average eye in the Toric ICL study would see that same eye chart. The amazing part of the story is that after Toric ICL surgery, 82% of those eyes could see the chart without glasses or contact lenses exactly as a 20/20 eye would see it.

And even more amazing that, even better, is that over half could see 20/16 or better. These are life-changing results. It is not likely any of these patients who were on those pent-up lists would find any other technology or find any other option for vision correction.

Technical issues with the Visian ICL preloaded or V5, as we call it in the office, have been resolved and we expect to have CE Mark approval for this product, making it available to our European market (technical difficulty) of the need for reading glasses as these patients approached the age of the onset of presbyopia.

The V6b, which would open up an entirely new market for the ICL platform, this project is to place of multifocal-like optic on the ICL and implant this in patients beyond the current approved age claim. There are 3.6 billion eyes in this category and is often deemed the most exciting segment of vision care or the holy grail of vision care. We expect to have this product for our European markets one year after we launch the V6a product.

During the second half of 2013, we also saw a real tipping point in our social media marketing activities and specifically in our objective to generate quality patient leads for our ICL surgeons. During the second half of last year, 62% of the patient leads generated, which were followed up by a surgeon or their office, resulted in an ICL procedure. Another 10% received LASIK.

So over 70% of the leads we generated ended up in a refractive procedure for our surgeons. These results are very exciting and, as a consequence, we are planning to invest more this year in consumer marketing to pull patients into the office of our ICL surgeons.

We think we do a pretty good job on the push side of marketing the ICL product, which includes promoting to the surgeon through our sales reps and marketing activities, clinical training, clinical research. Now we are going to expand our investment on the consumer side of the ICL product and attempt to pull more patients into our surgeons' office for the ICL procedure.

We are aggressively interviewing candidates with experience in just this on the consumer side and directing our efforts going forward.

There are several catalysts upcoming to help expand our revenue growth. We have the CentraFLOW technology for this full year for Korea, India, and Argentina. You may recall those approvals came during the second half of last year. We gained CentraFLOW approval in Japan during this quarter. There is that planned expert panel meeting in China in May for our CentraFLOW technology.

We expect to be able to commercialization of the preloaded ICL in Europe during this quarter. We anticipate at some point that the favorable panel vote will result in approval to commercialize the Toric ICL in the US. We expect to see gross margin and tax improvements as well as operating expense improvement from the completion of the manufacturing consolidation project at midyear.

We now expect to see an increased supply of the preloaded acrylic IOL, which should result in additional IOL growth. Finally, we expect to launch the V6a ICL in Europe during early 2015.

Before I open the call for your questions, let me review our investor meeting plans for the remainder of this year. You can see there are several conferences we will be attending, including next week, the Deutsche Bank; the following week, Bank of America Healthcare Conference in Las Vegas; the end of May, Benchmark in Minneapolis; the first week of June in New York City, the Jefferies conference. Our annual shareholders meeting will be on June 9 at our Monrovia headquarters. And we expect to report our second quarter results on July 30.

And with that we are ready to take questions from those both on the phone and here on the floor. Operator, would you please over the line for Q&A?

(Operator Instructions) (technical difficulty) Do we have any questions? (technical difficulty)

Yes. (technical difficulty). Yes, go ahead.

Thank you, Barry. Can you hear me?

I can't hear you, but hopefully the audience can.

Okay. It is Chris Cooley with Stephens. I just want to congratulate you, Barry, as well as all the members of your team, on another great quarter. And this booth is clearly a testament of the progress this Company has made over the past three years. Hope you are as big as the guys across the aisle when we come back next year.

Two quick questions for you. First, we have heard a lot here at ASCRS about the challenges in the refractive market globally from a number of providers. Clearly, you are still gaining share by demonstrating positive double-digit growth. Talk to us about why you have confidence that you can continue to either meet or exceed your stated targets, but also pick back up in the US, which was down in the quarter?

And then just as a quick follow-up, can we talk a little bit about the IOL market? Tremendous progress there. Help us think about allocation of that capacity as it scales up and what that could mean to margin at the gross level. Thank you.

Okay, great. Just in case the audience on the phone didn't hear, I am going to repeat question by question. I have got three different segments. Chris spoke about the refractive challenges that he has heard here on the floor from most everyone in the industry, and I will go back to one of the first slides we showed.

In terms of refractive procedures in 2013, in our 12 target markets, they were down almost 5%. We were up 25%. So that gives me a lot of confidence that we can continue to grow. And I will use a few markets as examples, too. And even some of the people here.

We were forced into 2012 to go direct in the Spanish market. If you look at those numbers for Spain, according to MarketScope, refractive procedures were down 21% last year. That is a big dip. We were up 34%. And I think that speaks to two things: the CentraFLOW technology and our people in the field executing.

Take a look at a market like Korea, where we continue to gain market share, though we are between 12% and 13% of the market. And in all 12 of those markets overall, we gained market share, despite 8 out of the 12 being down in total refractive procedures. So those kinds of things give me confidence that we can grow the ICL procedures along with the new technology.

There's a lot of interest here in the preloaded ICL. Obviously, there's a lot of interest here on the Toric in the US. And there's new interest in our V6 projects. So I think all of those give us confidence that we can grow this market despite knowing there have been challenges.

The next question was in the US specifically. We were down first quarter, despite last year our procedures in the US were up 19%. Against the back fall, according to MarketScope, refractive procedures were down 3% in the US market. So we did a very good job last year. And I think some of that is attributable to our social media marketing; some of it is attributable to our people in the field really executing; and some of it even in anticipation of Toric at some point because the news of the panel was there.

During the fourth quarter, we had a very good quarter in the US and some of that was driven by our -- some of our large accounts have procedural volume programs and they need to meet certain margins or do certain procedures -- certain number of procedures to have a discount in the following year.

So we saw some of that. So maybe there was a little bit of pulling forward of procedures, plus we do think, overall, from what we hear, first-quarter procedures were down in the US, though we don't have any data that we can look to, other than anecdotal.

The last question was IOL manufacturing as we get more product available of the KS-IOL line, how are we going to allocate that. Well, the answer is we are going to allocate it to our highest gross margin markets. So first, that would be Japan. That is our highest gross margin market and last year, you know, during this point in time, we started reducing inventories in Japan. Because we could see, going forward through all of last year, that we were going to have problems with supply.

So as we refilled the pipeline, and we're doing that right now in Japan, with consigned accounts, we are expecting to get nice results in Japan second, third, and fourth quarter of this year with our acrylic preloaded. And there may well be some new markets that we open in Europe, but we won't look at that until the second half of the year. So hopefully I answered your questions.

Other questions, operator, are on --

Matthew O'Brien, William Blair.

Good afternoon. Can you guys hear me, okay, we are having a little bit of a hard time hearing you guys.

Fine, thank you.

So I assume you can hear me. Just to ask a little bit more on the US softness in the quarter. I think you started to run through it a little bit, Barry, but is there any way to attribute how much of that was potentially weather-related or more a function of the docs waiting for the Toric or the pull forward of sales last quarter? A sense of the volume trends in the US and then how we should think about coming out of that here in Q1 into Q2 and beyond?

Okay, good. And hopefully, Matt, can you hear me okay?

I can hear you fine now.

Okay, great. Yes, I think, Matt, it is a combination of all those things. Let me repeat it here for people on the floor. Matt's question was in regard to the US softness in the market and how much might be related to weather, which we have certainly heard that in terms of first quarter, not only from refractive surgeons, but other medical device companies. And how much might be related to the pull forward.

There is clearly some of both of that in the softness in the first quarter, Matt, from what we see. But we feel very good with the level of interest in the ICL, particularly driven by the positive Toric vote at the panel meeting. There's a very strong interest.

We had here in the booth on both Saturday and Sunday, we had four panel meetings, which included -- they were an hour long and they included four surgeons in each one of those sessions. They all went over their allotted hour. And we had full audiences for most, if not all, of those presentations. So we saw a lot of interest here on the floor on Saturday and Sunday.

Okay. And then heading over to Japan, that has been an area that has been soft for a while now. There was a pretty quick snapback in China a few quarters ago and that market rolled over a bit. Can you give us any sense for when you think Japan may start to stabilize in terms of the number of refractive cases being performed?

A really good question, Matt, because that market -- and the question is around the Japan refractive market. That market seems to have big bounces, not small bounces. If you look at the MarketScope data, refractive procedures according to them were down 51% last year. Now we were up 4%. We were -- obviously, we are not happy with that, but in that market dropback, it tells us a lot about what is going on.

It wouldn't surprise me if the market doubles this year. Though I can tell you in the first quarter we are not seeing any signs of any rebound yet. But when it does rebound, there will be a nice rebound. So we are trying to educate as many new docs as we can on CentraFLOW now that we have gotten approval.

I was in Japan just two weeks ago and we had an evening symposium and dinner on CentraFLOW and it was a full house. So we are excited about the opportunity there, but you are exactly right in driving to the point -- we are somewhat hindered by what the market does in Japan and it does have big swings. So when it is ready to swing back, I think we will be ready with the CentraFLOW technology there.

Two more if it is okay. Quickly, on China, you mentioned that meeting in May. Can you give us a sense for next steps following that meeting as far as getting CentraFLOW approved? And then should we think about this as a late 2014 event to get that approved?

Good question. Our anticipation, but it would only be ours, a lot will depend on what happens in that meeting, which is scheduled for mid-May, is that very quickly, within 30, 45 days afterwards, we would be able to commercialize in China. But we will have to see how that meeting goes and if any new questions arise or if there is any new data that they need.

But we will be there prepared to present all of the data that we have in all of the other markets regarding CentraFLOW. And that meeting is only scheduled for about two or three hours, I believe.

Okay, and then one more quick one, if that is okay. I was a little bit surprised to hear that the amount of product coming out of the US is about 41% this quarter. Thought it might be a little higher than that, but you are saying you are on plan as far as that transition goes. What are some of the factors that you guys are certainly monitoring closely that could disrupt any kind of that transition period here in a couple of months?

Really good question on Comet and what we are seeing. Matt is saying he is a little bit surprised that only 41% of the ICLs were shipped from US-manufactured product. That is all on schedule with what we had planned. But as you see, to guarantee to ourselves that there's no disruption, we've built our inventory significantly and spent over $1 million in inventory increases during the first quarter to make sure we were ready.

It's very -- we track weekly the trends on the ICL production, the yields, what ends up going to finished goods. So while obviously during the third quarter some of the product will still have been made in Switzerland and we are using a lot of the Swiss capacity right now to build up Toric ICL for potential US launch, we feel very good about where we are.

So much that if we really went ahead -- wanted to push the envelope, I think we could have closed Switzerland at the end of first quarter. There was no need to do that, but I have also got to say hats off to all of our employees. I mean they have just done a tremendous job with this project. It will end up -- we said originally it would cost us $6 million. It is going to cost us $6.4 million. We said it would take three years. It has taken us 3 1/2 years.

The reason the cost was higher than we anticipated is because our employees stayed. When you budget these things, you budget for some attrition, especially when you tell employees two or three years ahead of time their positions are going to go away. So we budgeted for 70% retention. Over 90% of our employees in Japan and Switzerland have stayed through their exit date.

And they have not only stayed, but they have executed. They have been very loyal to the Company and very loyal to the product and a strong interest in making sure the quality of the product has continued.

Thank you.

Jason Mills, Canaccord Genuity.

I wanted to go back to the question on Japan. Wondered if there was any holdback in performing ICL procedures in Japan as folks waited for the next generation product and what you have seen, I guess, thus far in the second quarter. While you are not all the way done with quarter yet, you do have about half of quarter's worth of data. Wondered if you can provide any anecdotal feedback out of Japan.

Really good question, Jason. His question is about CentraFLOW approval in Japan and we got it at the beginning of March and have we seen any impact thus far.

First of all, in Japan, surgeons have the ability to prescribe or use a product that is not yet approved on a named patient basis. And in the major centers in Japan, they have been doing that. So they have been using CentraFLOW. But they have been handicapped because they have to order from Switzerland, wait until the lens gets there, and then call the patient and bring them in.

With approval, those facilities can go ahead and they can actually have inventory in house if they want it or they can get it right away from our facility in Japan.

We are in the training -- that was part of the reason for the symposium, is training and educating the rest of the surgeons in Japan, the other 30% or so of the market. It is really too early to say we see anything yet in Japan, but there is obviously a very strong interest in CentraFLOW there.

Great. My next question, Barry, is around your guidance. And I certainly appreciate one quarter and it is not perhaps the perfect time to change your guidance, but as I look at the metrics that you laid out, and you sound very bullish about your ability to achieve not only your 20% growth target on the ICL side, but your 8% to 10% growth target on the revenue side.

And as I look at how you performed in the first quarter with the IOL business really standing out relative to where we were expecting you to come in. If we look at, say, the run rate in the first quarter dropping by, on average, $0.5 million per quarter on the IOL side and then the ICL business tracking, let's say, 19% growth, and then, lastly, the other revenue line dropping in half for the rest of the year on a quarterly basis. You get to a number sort of 11%, 11.5% year-over-year growth for the full year.

Notwithstanding that you have, perhaps, Toric contributing in the US, the CentraFLOW contributing in Japan. You talked about some of the bullish indicators on the IOL side contributing as well. So I am just wanting to get a sense for if there is anything I am missing in those metrics that would suggest that my tendency to think that your guidance is conservative is incorrect.

Well, I think you raise all good points. And if we are able to execute on everything you said, you are exactly right and I am wrong. And I love to be wrong. And our employees prove me wrong every day of the week. All of those catalysts seem solid and all of those things seem in place to really help drive our growth. So we feel very good about the rest of the year.

But I just want to hold back another quarter. And hopefully you can appreciate that, because if we have one or two new product approvals, then we can roll those into that and give you even better numbers for the year. But I would say, overall, we are very bullish on the year. We are very proud of our start in the first quarter and we believe we can do very well this year. But we just like to hang onto the current metric that we have, at least just one more night or one more quarter, if you would.

Fair enough. I will end with one question, Barry, on the gross margin line. Perhaps for Steve, if you would like to pass it over. But there were obviously several offsets this quarter and last quarter on the gross margin line. Components that hit your gross margin. As we look forward, which offsets to the gross margin will go away and within what timeframe what these negative factors abate?

Yes, I am going to turn it over to Steve for a minute, but just let me make one quick comment and that is overall, with the transition and the lowering of our cost to make ICLs in the US, that is going to have a nice impact as well as some of these other favorable dynamics, including V5 in Europe, including CentraFLOW in additional markets. And then obviously potential Toric launch, that is also going to have a quite positive impact on gross margins. So, Steve?

Sure. As Barry said, the startup costs in the United States and while we are ramping down the facility in Switzerland, that will start to correct in the second quarter as the US production values get up to or get to the Nidau levels. So that is one impact that is going to true up.

The other one is we had lower average selling prices on our IOLs and that had to do with geographic mix of our IOL sales between Japan and Europe. As Japan starts to expand and we fill back the consignment stock there, that ratio of geographic mix will return to what has been normal. And that will represent another improvement in gross margin.

And lastly, we are expressing favorable average selling prices on ICLs. And we expect that to continue and expand through the year.

Super. Thanks, guys. I'll get back in queue.

James Sidoti, Sidoti & Company.

Good afternoon, Barry. First question I have was on the sales force and what your plans are going forward with the pending approval of Toric in the US regarding the US sales force.

Yes, as a matter fact, Thursday morning I participated in the initial sales training for four new sales reps here in the US. I believe we have one or two more to go. I am not sure of the exact number, but that is the level we feel comfortable with for launch of the Toric ICL.

And I think as we have spoken about before, in that US as we begin launch, we are going to focus on our top current 150 ICL users and work with them on the list of pent-up demand that they have as well as further penetrating their accounts with the ICL.

Okay. And what do you expect the next communication with the FDA to be regarding the approval? Do you think that there's another round of questions before you get the approval or do you think the next communication will be actual approval?

Well, really good question. I don't know the answer, but I will give you a little bit of information in between the lines. We came to this meeting with panel booths made for both ways -- approval or not approval. And there is another day, if the FDA is listening, there is another day for this meeting and we do have the ability to change these out overnight.

Jim, it did take them a couple of weeks to get the transcript back from the meeting. And as you would expect, and rightfully so, they want to go through that very closely to make sure there wasn't anything that they missed. We have not gotten any questions from them, though we have had communications with them. We would expect that our labeling is pretty solid.

We could be wrong, but that is what we would expect because we have been discussing labeling with them for the last two or three years as well as the only change between the currently approved labeling for the ICL and the Toric is the astigmatic correction.

Secondly is we did suggest postapproval studies in our submission to the panel and they thought those were good. They had comments. So the FDA would be going through those to see if there's any changes that they would suggest or ask or demand that we make in those postapproval studies. So if they have no questions, we could literally get a fax tomorrow or next week or next month. If they have some questions, then we will proceed with them along the process that they want to go.

Right. Finally, you were breaking up a little bit towards the end of your script. Can you just repeat what you said about launches in Europe? I think you said you were going to launch the preload by the end of this year and what other launches you expect in 2014?

In ,Europe we would expect to launch the V5 -- that is the preloaded ICL -- this quarter, the current quarter that we are in and we would expect the first quarter, first part of 2015 to launch our V6a product, the one that gives two diopters of reading add.

Okay and then how about the V5 in Asia? Do you have any schedule for that?

We do not currently, but what we'll take is the data that we used for CE Mark approval, which our regulatory body has told us is just a technical file, though we will probably do -- we will do some of our own pre-marketing procedures and there may well be some postapproval studies we need to do for them.

But we will take any data that we have to each one of the new markets, as we typically do. And they all run on different timetables, but it is pretty consistent that the cycle starts in Europe and it ends in the US.

Okay. Thank you.

I have a call, operator -- I mean a call -- I have a question here from the floor. Chris?

Chris Cooley with Stephens. Could you remind us on the Project Comet expenses of $168,000, I believe, approximately in the quarter, was that completed in the 2Q? Is there a tail on those expenses into the second half, when we think about our GAAP, non-GAAP reconciliation? And then, additionally, when we think about the tax rate, appreciate, Steve, you talking about 30% for the ETR for the full year.

But help us think a little bit too about the transition again from Switzerland, as that is where the product was manufactured. So I am thinking about the sequential progression of that as it flows through the year. Thanks.

I will take the first part and I will hand the second part over to Steve. Okay, so and I will repeat the question for everyone. Is first, are any Comet calls that will spill into the second half of the year. And the second part is regarding the tax rate, how it will roll out the second half of the year, third quarter and fourth quarter, depending upon where, yes, depending upon the manufacture and where products come from.

For the first part, in terms of Comet costs, we project -- the costs we projected for the year are only in the first half. There shouldn't be any that spill over and we were pretty confident of that overall and I think the plan is on very solid footing that we have to complete all that. And, Steve?

So, as I said, the expected average for the year is 30%. Quarter to quarter, that gets applied and that could result in a different effective tax rate, depending on the gains or losses in your tax jurisdictions. But as the US achieves more profit, we then average down to that 30% tax rate. But it also has to do with the tax restructuring that we've done in Japan, the tax restructuring that we have done in Switzerland.

And we won't achieve the full tax benefits until 2015, when we get an exemption out of our Swiss legal entity. So for this year, our guidance is 30% and then next year we'll go down to 10%. As I have said when it was my turn speaking, we do have some potential upside this year on the tax rate.

Jan Wald, The Benchmark Company.

Good afternoon and congratulations on the quarter. It really looked solid all the way around. A lot of my questions have been asked already, but if you wouldn't mind just going through, maybe in a little bit more detail, providing maybe a bit more color, on what your plans are for the Toric ICL launch?

What kind of (technical difficulty) are you going to go through, what kind of sales training, conditioning of the market, those kinds of things. How are we to understand what you are going to do with the timelines and maybe even some of the costs associated with it?

Sure. Thank you, Jan. And, first of all, in terms of our addition of new sales reps, we are adding five new sales reps, and as I told Jim earlier, we have four now on board, so we have already started the training process for those reps. We currently have about 800 surgeons in that US that have been trained on the ICL. And of those 800, about 500 have already gone through Toric training.

One of the good things here in the US -- there's not too many good things; they have to wait 10 years to get the product. But one of the good things is that surgeons in the US today are very familiar with Toric IOLs versus where they were 10 years ago. So the additional training needed for them is not very high.

But what we are requiring of the 500 that have previously been trained -- it is about a two hour program online. It is kind of a refresher course of what we gave them previously in that some of those surgeons, it may have been two years ago or more that they were trained on Toric.

So and then our sales reps will be focused on those top 150 current ICL users and penetrating those accounts. Now more than half of our sales team have already been trained as full certified ICL specialists and we will have them go in with the surgeons into the OR and make sure surgeons are comfortable with their first few procedures and make sure that they are having success with the technology.

Most important is to make sure that, as we rollout Toric, that there aren't any surprises that we could have otherwise been prepared for and taken care of earlier.

Okay, thank you. Maybe just one more question on the US market. What do you think turns it around? If the procedures are going down, is that something that is going to go on for quite a bit of time or does it stabilize, come back? What are your thoughts on the US market?

Good question. The question is on the US market and do we see it turning around. Since 2007, it has continued to decline. According to MarketScope, it went down 3% last year. But I will say this: though MarketScope's not always exactly right, they are pretty good at looking at the tea leaves and coming up with trends. They are projecting that there will be a return to growth in the next -- over the next three- to four-year period in the US.

We would hope that some of the excitement with the ICL and Toric ICL and then also CentraFLOW eventually in the US that that will also help overall in the refractive market. Along with the consumer social media work and pull marketing that we plan to do. We hope all of those can be factors in helping return the total refractive market to growth.

I guess my last question: what do you think the reasons were for the procedural declines? If patients not available, doctors not interested?

Good question. And the question is what really has led to the procedure declines in the US.

And I will give you my personal opinion. First of all, LASIK is a good procedure. And I would argue, though, that the ICL is a better procedure, but LASIK is a good procedure. It is not a good procedure for the wrong patient. And there are patients that LASIK is not good for. About 8% to 12% of patients that call the office or walk in the door and say I think I need LASIK aren't candidates for LASIK.

And what I see is that surgeons in the economic environment that we have had, they have may be somewhat pushed the limits of LASIK, and maybe gone into that 8% to 12% and done LASIK maybe on patients they shouldn't otherwise have done. And when that happens, there is a higher rate of complications. Though it is not high, but it is higher than the normal LASIK procedure.

And then for whatever reason, media throughout the world seems to love to grab these refractive complications and blow them up. Not blow them up, but just exploit them. And a good example is China in 2012, where the China Post, for two weeks, every day, ran a negative article about LASIK because of one surgeon in Taiwan who complained about the complications. And that type of media exposure, I think, has really put a lid on refractive procedures around the world.

So as an industry, we have to work together to restore confidence in refractive procedures and the results from refractive procedures. Because overall, they are excellent results.

Okay, thank you very much. Again, good quarter.

We have no further phone questions.

No more. Any additional questions from the audience? Great. I want to thank all of you on the floor for all the great hard work the last few days and I want to thank all of you on the phone for your participation today. We look forward to providing you an update on our progress and we have planned to report our second quarter earnings on July 30.

Thank you very much and good night.

That concludes the call.