The Cooper Companies, Inc. F4Q08 (Qtr End 10/31/08) Earnings Call Transcript

Dec. 9.08 | About: The Cooper (COO)

The Cooper Companies, Inc. (NYSE:COO)

Q4 2008 Earnings Call

December 9, 2008 5:00 pm ET

Executives

Albert White – VP IR

Robert Weiss – CEO

Eugene Midlock – SVP & CFO

Analysts

Joanne Wuensch - BMO Capital Markets

Michael Weinstein – JPMorgan

Steven Willoughby – Cleveland Research

Jared Holt – Thomas Weisel Partners

Peter Bye – Jefferies & Company

Larry Biegelsen - Wachovia

Jeff Johnson – Robert W. Baird

Christopher Cooley - FTN Midwest Securities

Amit Bhalla – Citigroup

Operator

Welcome to the Cooper Companies fourth quarter 2008 and fiscal year 2008 earnings conference call. (Operator Instructions) I would now like to turn the presentation over to Mr. Albert White, Vice President.

Albert White

Good afternoon and welcome to Cooper Companies fourth quarter and full year 2008 earnings conference call. I am Al White, Vice President, Treasurer, and Investor Relations and joining me on today’s call are Robert Weiss, Chief Executive Officer and Eugene Midlock, Chief Financial Officer.

Before we get started I would like to remind you that this conference call will contain forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995, including all revenue and earnings per share guidance and other statements regarding anticipated results of operations, market conditions, and planned product launches.

Forward-looking statements necessarily depend on assumptions, data, or other methods that may be incorrect or imprecise and are subject to risks and uncertainties. Events that could cause our actual results and future actions as a company to differ materially from those described in forward-looking statements are set forth under the caption Forward-Looking Statements in today’s earnings release and are described in our SEC filings including the business section of Cooper’s Annual Report on Form 10-K. These are available publicly and on request from the company’s Investor Relations department.

Before I turn the call over to Robert let me comment on the agenda for the call. Robert will begin by providing some highlights on the quarter then get into specific details including new products, product launches, the market and guidance. Following Robert’s remarks Eugene Midlock will comment on the fourth quarter financial results. We will then open the call for questions.

We will keep the formal presentation to roughly 30 minutes followed by 30 minutes of Q&A, so the call will last one hour in total. We request that anyone asking question please limit yourself to one question so that we may be able to get to as many callers as possible in the allotted time. Should you have any additional questions following the call please call our Investors Relations line at 925-460-3663 and we will get back to you as soon as possible.

As a reminder this call is being recorded and a copy of the press release is available on our web site at www.coopercos.com under Investor Relations.

With that let me turn the call over to Robert for his opening remarks.

Robert Weiss

Thank you Albert and good afternoon ladies and gentlemen. I think probably the real caption here is in spite of the economy, in spite of the financial crisis, and in spite of a strengthening dollar, we had a great quarter.

In keeping with our most recent tradition we’re going to stay focused on trying to deliver a 30-minute presentation and 30 minutes of Q&A as Albert indicated. The key takeaways, the key messages that I hope you walk away from this call with are as follows.

A strong fourth quarter, the market was strong in spite of a dismal October. We continue our best in class rollouts trading up patients that are out there with Proclear 1 Day, with Avaira, and with Biofinity. We grew at 1.4x the market for the 12 months ended September 30 which is the most recent data.

In constant currency the market was up 7% and we were up 10% for the 12 months ended September 30th. Our gross margin hit 60% for the fourth quarter and in fact, CooperVision achieved 61%. Our earnings per share was $0.65 and importantly there were no callouts.

From a liquidity point of view, our liquidity is solid. We have $178 million of capacity and $138 million under our revolver as of October 31. Our fourth quarter operating cash flow was $41 million. Our free cash flow $18 million and we paid down debt of $23 million.

Our CapEx expansion program is winding down and we expect to have it substantially completed by mid-2009, by April.

New products are on track or ahead of schedule. Our Proclear 1 Day, we have approval in Japan and will launching it in calendar first quarter of 2009 which is slightly ahead of schedule. Biofinity toric will launch, its on track for the first calendar quarter of 2009 also.

A solid fourth quarter in spite of a weak October, we reported $269 million in revenue up 6% in actual and in constant currency. CooperVision reported $224 million, up 6% also actual and constant currency. CooperSurgical with revenue of $44.7 million was up 7%; all of that is organic growth.

Our earnings per share GAAP and non-GAAP were both $0.65 and once again we had no callouts. We did have a lower effective tax rate of only 11% which reflects a weak US market and strength outside the US in terms of profitability.

For the year recognizing this is the end of the year results, we broke through the $1 billion revenue barrier with $1.063 billion in revenue, up 12%, 8% in constant currency. For the year we reported GAAP net income of $65.5 million compared to $11 million loss in 2007, also GAAP.

For the year our GAAP earnings per share was $1.43 compared to $0.27 loss last year. On a non-GAAP basis our earnings per share was $2.26 this year compared to $2.12 last year.

As far as new products, in the Proclear family they continue to drive the top line. Biofinity revenue achieved $15 million for the quarter and remains at an annualized rate of $60 million. We today had adequate capacity. We’ve expanded the range of Biofinity to include the pluses and high minuses and we now have extended wear approval which we recently got this past week.

Avaira is gaining some momentum in the US in the two-week space. We will expand its range in Q1 fiscal 2009 with pluses and high minuses also. The production ramp up of Avaira has been excellent. The Puerto Rican high volume production is exceeding two million lenses a month and we continue to rollout fitting sets in excess of 9,000 at year-end so we’re over half the way to our targeted 17,000 fitting sets.

As far as the Proclear family is concerned it remains strong, up 21% in constant currency worldwide and it now accounts for 27% of CooperVision’s revenues.

Proclear 1 Day, Avaira, and Biofinity had aggregate sales of $28 million for the quarter and now accounts for 12% of CooperVision’s revenue. Geographically there were no surprises. We made great strides in the Asia Pac market, up 19% in constant currency.

Europe was up 7%, likewise constant currency. The Americas is impacted by an October decline, softened to only 2%. Importantly the US market reflected a dead October, down 10% for the month of October.

One more important point we are trading up our customer base and by that I mean the new customers that we’re achieving as well as those that we are getting within the silicone hydrogel space are higher revenue per patient. Both the 1 Day and silicone hydrogel represents more profit per patient in terms of our targeted end point and by that I mean is we expect to continue to reduce costs in both of those areas, the 1 Day modality with Proclear as well as in our silk and hydra gel lenses.

Our silk and hydra gel represents today 8% of revenue compared to 2% in the fourth quarter last year and our 1 Day modality represents 20% of revenue compared to only 16% in the prior year. As far as future products, they are on track or slightly ahead of schedule.

Proclear 1 Day once again got approval to launch in Japan. We are now putting the necessary product codes on it and will be launching in the first calendar quarter of 2009. Keep in mind that Japan is a huge market, well in excess of $1.2 billion, 57% of that market is 1 Day so Proclear 1 Day will hit that sweet spot of the market.

Biofinity toric production is proceeding well. We now have product inventory, we produced inventory for over half of the SKUs, stock keeping units, for the launch. We remain on track for our calendar Q109 launch and we are still targeting for the end of calendar 2009 for Avaira toric launch.

With these launches we will have rounded out our offering with silicone hydrogel and non-silicone hydrogel products.

Let’s talk briefly about the market, in calendar 2008 the third quarter ended September 30, surprisingly solid results. The Q3 numbers were the strongest quarter of the year, 6.8% growth in constant currency. During the same period we were up 8.7% so we grew 1.3x the market for the calendar quarter ended September 30.

Note that October did us in if you will with the decline in the market for October. Of course we will not have fourth quarter data for the marketplace well until February so it’s a long way off before we get our next hard market share data in movement.

Q3 by region, the Americas was up 7.3%, Asia Pac 5.2%, and Europe up 7.6% all in constant currency. By product silicone hydrogel was up 25%, 1 Day was up 11%, torics were up 10%, and multifocals a strong up 14%. Silicone hyrdogel now equals 32% of the entire market and 1 Day modality equals 34% of the entire market.

Brief comments about gross margin operating income and callouts, that’s right, there really were no callouts in the fourth quarter. During the quarter we achieved 60% gross margin and I might point out that CooperVision actually had a 61% gross margin.

More importantly our operating income was 18%, our GAAP operating profit was $47.5 million compared to a loss in the prior year. The shift to the 1 Day reflects a profit per patient upgrade. The shift to silicone hydrogel reflects a trading up to a higher revenue per patient.

And once again our products are targeting those patients that are already wearing silicone hydrogel lenses. Those that have been wearing Proclear for years and years, we’re not trying to switch them over and they’re not likely to switch over. They like the non-silicone hydrogel modality.

With 1 Day however while our gross margin goes down our operating income will remain solid. Our focus remains going forward on OI, earnings per share, and free cash flow. Capital expansion and cash flow and liquidity, let’s talk about that briefly.

Cash flow and free cash flow was better then expected for the fourth quarter. Our operating cash flow was $41 million, our free cash flow $18 million. Debt was reduced to $905 million and keep in mind as of the end of April it was $941 million.

So overall there was a decline in debt for the fourth quarter of $23 million. Importantly we are nearing the end of our capital expansion program. Five more lines of [inaudible] and one Avaira line meaning the second Avaira line will be in place by mid fiscal 2009.

As far as, we’ve had $50 million of CapEx representing those projects that will roll out of 2008 into the first half of 2009 and that’s why in fact our CapEx for the fiscal year 2008 was $50 million down from earlier estimates.

Our maintenance CapEx going forward will come in around $30 million and then beyond that it will be mainly expansion cost savings and low volume automation and then we will have some costs going into the IT arena to be determined as far as how aggressive and what timing.

Its true we’ve pushed some CapEx out of this year. We did it because we didn’t need the equipment earlier and we’re more aligning the timing of the receipted equipment in order to maximize interests savings or cash flow as well as align it with our needs in terms of capacity requirements.

We have $178 million of credit available, $138 million under the revolver. Keep in mind that our requirement is we can borrow up to 4x our EBITDA and one of the things about our deleveraging for the quarter is it allowed us to reduce our funded debt to EBITDA which saves us 25 basis points on our line of credit.

So we are financially solid as we move into 2009. Some comments on guidance, guidance is a little trickier issue certainly because of the strengthening of the dollar as well as the recession we’re now in.

As you know the dollar strengthened against the pound, the euro and the Canadian dollar, its strengthened 24% against the pound, 20% against the euro and 18% against the Canadian dollar since really we were talking in mid-June.

So since June its all downhill for foreign currencies. This has an impact on our model excluding hedging of about 1% equaling $0.03, or said another way, a 10% strengthening of the dollar would have a negative impact on us of $0.30.

Now we’ve been able to hedge half of that but built into our guidance is about $0.15 charge for foreign exchange being half of that.

The combination of the FX impact and the recession we’ve given a broader guidance then perhaps in the past, revenue CooperVision $865 million to $925 million, a plus three to a minus three. Surgical $165 million to $175 million, a plus four to a minus 2% growth year-over-year.

All the Cooper Companies, $1.030 billion to $1.1 billion, up three to down three.

Within that the currency impact is overall around 4% to 5% as a negative so backing those out you would see constant currency impact. Our earnings per share guidance range of $2.16 to $2.36 plus four to minus four.

That reflects what I mentioned about the negative impact of foreign exchange and also represents a fair amount of concern for the current softness in the market that has been exhibited in the last two months of October and now into November.

We expect operating income for 2009 to come in around 16% which will be four percentage points above the GAAP this year, about equal with the non-GAAP this year. And we expect to achieve $50 million in free cash flow for 2009.

We are managing 2009 for cash and earnings while gaining share with our new product rollouts. We will use hiring freezes, salary freezes and also have a select reduction in force throughout the year. Nothing compared to many companies out there which have not gone restructuring like we have over the last four years.

But having said that there are still some pockets of reduction in force that we will plan on.

Looking at CooperSurgical, our women’s healthcare franchise it came in with a solid 7% growth for the quarter, all organic. We continue to go slow with mergers and acquisition activity reflecting our desire to preserve cash. CSI continues to contribute solidly to operating ratios with gross margin of 59% for the quarter compared to 58% last year and an operating margin of 22% for the quarter compared to the prior year.

For the fiscal year CooperSurgical’s EBITDA was $40 million and its free cash flow $20 million so it is a major contributor to our cash that we generate in the company. The hospital strategy continues to perform well. Hospital product sales remain up a strong 18% for the quarter and hospital product sales now account for 30% of CooperSurgical.

In summary before I turn it over to Eugene, remember the key takeaways, a strong fourth quarter. The market has been strong in spite of a dismal October. We continue our best of product rollouts Proclear 1 Day, Avaira, and Biofinity.

CVI gained share and was 1.4x the growth of the market for the 12 months ended September 30, the last reported data point where we grew 10% compared to the market of 7% in constant currency.

We achieved gross margin of 60% for the quarter and our earnings per share did exclude callouts and achieved $0.65. Our liquidity is solid with $138 million available under our revolver. We had operating cash flow and strong free cash flow for the quarter and paid down $23 million of debt.

Our CapEx expansion program is winding down and will be essentially completed by April 30 and we remain on track and slightly ahead in the case of Proclear 1 Day for our new product rollouts.

And with that I’ll turn it over to Eugene on the financial side.

Eugene Midlock

Thank you Robert and good afternoon everyone and thank you for joining our Q4 earnings call. As Robert indicated we had a really solid quarter and especially in light of the adverse economic conditions as well as the unprecedented increase in the strength of the US dollar.

I’d like to briefly review some of our financial results. I think Robert covered most of them and I’ll just highlight a few but before I start that I wanted to talk a little bit about our liquidity. There were some rumors floating around a few weeks ago in the market that we were in danger of violating our debt covenants and so forth.

I’d just like to set the record straight; that’s not true. I’ll reiterate, Q4 we had $18.4 million of free cash flow, we reduced debt by $23 million. We only drew $511 million of our $650 million revolving line of credit. We are comfortably within our borrowing limitations and not in danger of violating any debt covenants.

Our credit limitation for 2099 is 4x trailing four quarters EBITDA and the multiple increases to 3.75 in fiscal 2010. Again there was some confusion on that point out in the street as well.

At 10/31/08 we were at a ratio of 3.46 on the debt to EBITDA. This allows us to reduce our borrowing rate by 25 basis points because we’re now at LIBOR plus 1.25 so around 3%. This will allow us to save approximately $325,000 in interest in Q1.

As Robert indicated we have an extreme amount of borrowing capacity, a lot more then we would anticipate using in any particular quarter. Also note that we are proactively managing our business in this recessionary environment.

As Robert indicated we are deferring, postponing and may eliminate all salary increases. We have put a hiring freeze on so we’re not doing any replacement hiring. Expenses are being cut and for example travel is restricted, only that necessary to serve our customers.

We’re looking at cost savings opportunities, minimizing capital expenditures, and we’re also looking at some restructuring which will result in the downsizing of certain positions throughout our global world.

CapEx was reduced in 2008 by roughly $65 million and it will defer a portion of which into 2009. So again in short we’re proactively taking all the steps we believe are necessary to effectively manage the business in these hard economic times and to maintain our positive cash position.

I’d like to go into some of the financial highlights now, again no callouts. We finished with those. They have worked their way through the profit and loss statement so in Q4 there are none. Robert touched on revenue, we had a strong quarter, $268.8 million, an increase of 6% over 2007 in both actual and taxable currency.

For the year we had a record revenue of [$1.63 billion] up 12% over 2007 and 8% in constant currency. Turning to gross margin on a consolidated basis, 60% compared with 46% in Q4 of 2007 versus 61% in Q4 last year on a non-GAAP basis.

For the year it was 57% versus 55% in 2007 on a GAAP, 60% versus 62% on a non-GAAP. CooperVision’s gross margin was actually 61% compared with 44% in the fourth quarter of 2007 and 61% on non-GAAP. This reflects the recognition or the realization of lower manufacturing costs we kept talking about last year that would hit our profit and loss statement as the inventory turned.

So it further emphasizes that I know there was some doubt about these excess manufacturing costs that we identified as callouts but this really serves as the proof of the pudding that they actually were accurate.

We lost a little margin because of a change in mix to single use but again we’re not unhappy about that because those sales fall right all the way to the operating income. For the full year CVI’s full year GAAP gross margin was 57% versus 54% in 2007, 60% versus 63% on non-GAAP.

And I guess one of the major impacts we suffered such that other companies like [Merck] we got a press release on it in fact, we were hit pretty hard by the drop in the currency and hopefully that will stabilize as we go forward.

CooperSurgical’s gross margin was 59% up from 58% in the fourth quarter of 2007, and was 59% for the year unchanged from the prior year. Consolidated SG&A in Q4 decreased by 4% to $101.3 million from Q4 of 2007 and decreased as a percentage of sales to 38% from 41%.

For the full year SG&A increased by 5% on a GAAP basis but decreased to 40% of sales from 43%, non-GAAP SG&A decreased from 405 to 39%. [Selling] expenses decreased by 1.3% from Q4 of 2007 and are 28% of sales versus 30% in 2007.

And this is largely attributable to our enhancement of [factoring] cost and the lower cost of the free lenses and the fitting sets which reflected marketing expense.

For the year, selling expenses increased by 9% over 2007 but decreased as a percentage of sales to 30% from 31%. G&A expenses decreased by 9% to $25.9 million from $28.6 million in Q4 of 2007 and by 5% for the full year, $208.5 million. Again this is attributable to reduced litigation costs and a better levering of our administrative services.

Consolidated R&D in Q4 decreased by 1% from 2008 and was 3% of sales versus 4% in 2007. Year-over-year R&D decreased by 11% and was 3% of revenue versus 4% in 2007 but and I can’t get through one of these without talking about callouts, as you recall CooperSurgical had incurred in 2007 the two acquisitions and had written off some fairly significant amounts of in-process R&D.

The adjust for those are R&D expense on a year-over-year basis increased by 8.5%. The effective tax rate, in our analyst discussion since September we had indicated it would 26.5% subject to fluctuations in geographic earnings of income and so forth and we really saw a massive change in October.

Products made in the US sold in the US, products in EMEA dropped considerably so our profitability in those high tax jurisdictions dropped and accordingly the taxes we incurred also dropped as a percentage.

In addition we updated our global economic transfer pricing analysis in Q4 resulting in more of our profits being shifted to lower tax jurisdictions. So the effective rate was 11.4% in Q4 and 14.1% for the full year.

The operating margin as Robert indicated was 18% versus a negative 2% in 2007 and for the year operating margin was 12% versus 5% last year.

Lastly I did want to mention that there is a fairly significant amount of non-cash expense in our results and that’s mainly amortization and for Q4 it was roughly $4.1 million or $0.09 a share and for the full year it was $16.8 million or $0.36 a share so it really does skew the results considerably.

So with that I’ll conclude and turn the program back over to the operator and take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Joanne Wuensch - BMO Capital Markets

Joanne Wuensch - BMO Capital Markets

Just wanted to start with some more discussion around the tax rate, it was quite a bit lower then we thought it would be, I think I understand the reasons but how are you thinking about that going forward given that we’re still kind of in the same boat with the currency.

Robert Weiss

We have always seen that aside from discrete events that take place throughout the quarter we expect a range of 14% to 16%, ballpark 15% as a effective tax rate run rate. The accounting for taxes now on a quarter by quarter gets pretty jumpy for a variety of reasons with the new accounting.

Eugene made two or three comments that certainly impact it but keep in mind one of the heaviest weighting impacts would be the part of our business that really crashed in October was the US market. The US is of course a US tax payer and so there was a pretty drastic shift that being one of the reasons for the shift of profits between the US and the non-US component.

Eugene Midlock

We’re expecting a run rate next year for the year of 15% approximately but note as I mentioned its going to be lower in Q1 as well as Q4 of next year because of discrete items. Q2, Q3 should be higher but it will average out to that 15% range.

Hopefully things have stabilized and again the big impact was the US market just totally tanked. We did not obviously dial that in our forecast when we gave you the rates earlier.

Joanne Wuensch - BMO Capital Markets

Further to that we’ve talked about the contact lens market being pretty recession resistant can you talk a bit more about what you’ve seen in October and November and how and why maybe it tanked?

Robert Weiss

I used that term kind of liberally but we’ve always said the market is resistant and it really is when you compare it to a lot of what you see going out in the country today, the auto industry, real estate, all the others.

Having said that the US market in fact did decline 10% for the month of October, worldwide our revenue was down in constant currency 2% in October, worldwide our constant currency was down 2% in November.

We are seeing a little move out of that in December but not enough to say a strong trend is developing. What really happened in October I think we all understand people turned numb and they stopped buying in the United States and I think we’re seeing some mind set in dealing with the customer with the practitioner where patients that maybe used to buy 12 months supply are now buying six month supply, very reluctant to buy that extra six.

So there’s some collapsing of the pipeline that’s going to take place. How long it will last, will it last two months, four months, six months, don’t know. Our guidance obviously is, put a degree of conservatism into it but quite frankly we’re in, to some degree unchartered waters in terms of just how bad October was for the US economy in general.

Having said all that I truly believe the combination of all the new products that we’ve recently introduced and expanded and those that we’re introducing will give us some face of a buffer in dealing with it and it won’t really be until February until we get the next meaningful data point on the market be it the HPR data, which is Health Products Research, that we look at domestically or number of other data sources including the contact lens institute that we all belong to.

So that reading won’t really be here until February and between now and February we’re going to do a lot of conjecturing more then having scientific exact information. I think its important to remember that contact lens wearers are not going to go away just because there’s a recession. This is a medical device that they’re suddenly not going to throw away their relatively low cost contact lenses for expensive frames so we expect that it will not be a huge impact, never has been, and its not likely to ever be.

Operator

Your next question comes from the line of Michael Weinstein – JPMorgan

Michael Weinstein – JPMorgan

Obviously the environment you described in October, November is fairly disconcerting as we think about the business as you came up with your guidance for 2009 what was the constant currency growth rate that you were assuming in the EPS guidance.

Robert Weiss

We’ve impacted our revenue by 3% currency. The other portion meaning the market in total is going to take 7% hit for the marketplace worldwide constant currency. So we’re assuming that the market is around 2% to 4% in constant currency.

Michael Weinstein – JPMorgan

So you’re assuming worldwide market growth of 2 to 4% in constant currency in the next fiscal year.

Robert Weiss

Correct, offset by 7% currency hit meaning a declining market in GAAP dollars.

Michael Weinstein – JPMorgan

And that would relative to what you saw in October, that would assume some reacceleration?

Robert Weiss

Make sure I’m clear on that—

Michael Weinstein – JPMorgan

I’m talking constant currency, forget currency.

Robert Weiss

Yes in constant currency we were down 2% in October. I’m not assuming that, that’s the only thing we have. We don’t have data on the marketplace so we’d be conjecturing, did the market go down more or less then that 2% we were down worldwide. We were down 2% in November in constant currency again.

Michael Weinstein – JPMorgan

So that guidance for fiscal 2009 does assume some recovery relatively to obviously October, November.

Robert Weiss

That is correct.

Michael Weinstein – JPMorgan

Help us if you would, one on CapEx spending for 2009 particularly the first half of the year.

Robert Weiss

We have guidance for capital spending next year of $125 to $140 million. We rolled out of this year $50 to $60 million of projects that at one point in time were included in the 2008 projections and we did that working real hard with vendors in pushing those capital projects out particularly for the single use lens which is five [gen 2] lines with a total value of $60 million and the one or the second Avaira line which is $30 million piece of equipment.

So there was $90 million of which we pushed out essentially $50 to $60 million of that $90 million. I’m simplifying it to say it all comes in in one timeframe. These are assembly things so you’re getting in pieces of that equipment some of which arrived in 2008, the balance of which arrives in 2009.

We will complete all of the assembly of those lines by mid 2009 meaning by April 30. We will get the second Avaira line in and paid for by April 30. So when we talk about basically CapEx requirements of around $140 million we will continue to push hard on managing down CapEx, quite frankly since we have a big pot of required expenditure from last year rolling into this year, that keeps the number still where it was six months ago when we talked about targeting a range of $125 to $140, we’re still targeting a range of $125 to $140.

Michael Weinstein – JPMorgan

So the $125 to $140 was prior to the push out of the $50, but the $50 now, do you still think even with the $50 now rolling into 2009 that your total CapEx budget is going to be $140 or are you saying its going to be $125, $140 plus $50?

Robert Weiss

No we’re saying its going to be $125 to $140 which includes the $50. Some of those we basically just cancelled indefinitely. There are certain things we don’t need, partly because of efficiency some of our yields for example in Biofinity are much better since March of this year and so it’s a combination of the push which is an all out push as well as the roll into this year from 2008.

Michael Weinstein – JPMorgan

So you still think you can do in your models, you’re doing $50 million of free cash flow assuming $140 of CapEx spending?

Robert Weiss

That is correct.

Michael Weinstein – JPMorgan

Help us get to your EPS guidance for 2009, because given your top line assumptions and even the 15% tax rate which is lower then we’re assuming, we’re having a tough time getting there.

Eugene Midlock

So let’s start of the range for revenue, we’re saying $1.030 billion to $1.1 billion. We’re saying gross margin of around 58%. We’re saying an operating margin of about 16%. Roughly $49 million of interest and other stuff so pre-tax is the remainder, 15% tax rate, and roughly 45.8 million shares so it’ll get you to 216 to 236.

Operator

Your next question comes from the line of Steven Willoughby – Cleveland Research

Steven Willoughby – Cleveland Research

On the silicone hydrogel products, first Avaira came in lighter then expected, just any comments on that and then secondly you made a comment that with the silicone hydrogel torics products coming out that in your mind you’ll have rounded out the portfolio and I’m just wondering what your thoughts were with J&J working on a multi focal version of the silicone hydrogel potential in the next few months.

Robert Weiss

First of all in Avaira you’re right, we initially came out with guidance of 8 to 10 and then we kind of did an 8 to 12 feeling a little bit more bullish about getting north of 10. We basically Avaira got swept up in the October flatness where the sales were a lot less then we thought across the board with Super Vision.

Two is the uptake which we’re starting to see, the actual utilization of the timing between when we launched the product and got it out there on the shelf to when it got on eyeballs, typically takes a little longer and we’re seeing that doctors are really getting it on patients but the replenishment, you may recall that, we launched with Wal-Mart and there was a large stocking order that took place in May I believe, May or June, that took a little longer to work its way through then we had initially thought.

As far as the other thing is we did plan on a more aggressive rollout with fitting sets targeting at one point in time, we were targeting 10, we then upped it to 12, we came in at nine so we didn’t quite accomplish getting the fitting sets out to the practitioners that we had planned on for a variety of reasons.

Avaira is I think still what we think is a product that is in the two week space going head to head with Oasis and J&J. Biofinity is of course is in a monthly space when you think of where the products play in the two week space is only J&J and Cooper, in the monthly its everyone else but not J&J.

So we think there is a role for both Avaira as well as Biofinity going forward. As far as rounding out the product portfolio, you’re quite right, we will not have multi focal. Today the multi focal market is a $200 million worldwide market only with essentially none of it in silicone hydrogel or a very small piece.

We will as far as priorities go once we complete the toric rollout of Biofinity we will do a multi focal be it a Biofinity or Avaira, can’t say which one will be first, we have manufacturing technology available to do that rollout. It is not compared to a toric a large challenge, it’s a matter of resources. But expect that in 2010 we will come out with multi focal toric.

In the scheme of things since multi focals today are only I think 3% or 4% of the global market its not a big deal yet if J&J or [Vistacon] gets their way, they think they can move the market and make it a bigger market committing that they think they can move it to a billion dollar category, I hope they’re right we would love that.

And we’ll be there not too far behind them.

Steven Willoughby – Cleveland Research

On SG&A you mentioned it benefited by lower litigation expenses, can you quantify that at all and was there anything else that was kind of unusual within SG&A, maybe less stock comp expense or anything else.

Robert Weiss

Well the first thing is we settled the litigation in November of last year with [Sieba]. The total cost was a little north of $3 million, $3.6 or $3.4 million, for that legal cost first month of last year. As far as other things that are in SG&A of the total costs we had in 2008 about $11 or $12 million are callout related that are in operating cost in total which includes that $3 million litigation.

Eugene Midlock

Its in the appendix to the press release and the callout schedule. Last year 2007 12 months it was $10.3 and then for the quarter last year it was $4.7 and this year in 2008 it was zero in Q4.

Operator

Your next question comes from the line of Jared Holt – Thomas Weisel Partners

Jared Holt – Thomas Weisel Partners

Can you just talk about the strategy going forward now with Proclear as just a component of the business here with the silicone hydrogels hopefully picking up. Where do you see Proclear going from here.

Robert Weiss

Proclear, you’ll recall Cooper unlike any other competitor views the market two ways. We don’t believe its all going to silicone hydrogel, didn’t believe it in 2004, still don’t believe it. The market today is 32% silicone hydrogel. The US market is kind of flattened out a little at 50 although there’s been a big jump up in the toric space.

So Proclear which today is a $280 million product growing at 21% annually, we see that as a big player in both the 1 Day market down the road where it has a real story as well as the rest of what we’ll call the conventional hydrogel market that no one else is paying attention to. Proclear, it’s the sweet spot of Proclear.

So we play both in the silicone hydrogel market now that we have Biofinity and Avaira, and soon we’ll have a toric silicone hydrogel and then in 2010 a multi focal silicone hydrogel. But we’re not at all entertaining abandoning the Proclear story and the non-silicone hydrogel part of the market.

We’re very skeptical that the 1 Day market will turn into a silicone hydrogel material for a lot of good reasons part of which is the cost barrier. At some point in time there is a push back and the fact of the matter is silicone hydrogel lenses are more expensive to make then hydrogel lenses and will be for at least the next several years if not beyond that point in time.

Even if you get to the point where you can reduce the cost enough to warrant a big push of a 1 Day silicone hydrogel so then the question is, what’s the story, what are you trying to accomplish. Are you trying to imply that the 1 Day wearer is going to wear their product overnight and that’s certainly is a tangent we don’t think anyone really wants to go down keeping in mind that the 1 Day modality person is really not a person that holds onto lens care products number one.

And they’re really thinking about the health of their eyes as a primary consideration so they’re not going to just suddenly say, okay I can now sleep in my 1 Day lenses and wear them longer. But Proclear as we see it, we’re going to go high price low price, Proclear 1 Day will be our premium priced 1 Day for the indefinite future, for a long time.

Jared Holt – Thomas Weisel Partners

Then Avaira, are you planning on doing a private label through Wal-Mart for Avaira to get the sales up at some point?

Robert Weiss

We will do private label with Wal-Mart or any large retailer but its all about price and economics. Its got to be a win win. Keep in mind some of the private label models we’re a lot different then you would normally expect and the past private label model was priced at a premium to a branded product in many cases.

Whether or not that will happen again, don’t know. It could be that the world has changed enough but I do, we do believe that there is interest in private label and if so we are certainly willing to do it and we know that many others are not.

Jared Holt – Thomas Weisel Partners

You kind of fooled everyone this quarter with gross margins which came in line, and I was just wondering you look at 2009 in your guidance at 58, excluding currency, I know you talked about that having an impact, can you tell us what the adjusted gross margins in your view would look like?

Robert Weiss

The fourth quarter gross margin, the 61% in CooperVision is kind of that’s the way it was, no callouts. The guidance for 2009 the 58% being well below the 61%, there are two major variables. The first one has to do with the fact that we are willfully cutting back on production to manage down inventory and maximize cash flow in 2009 and some of the reduction in force will happen within manufacturing as well as a less absorption caused by less through-put.

So think of that as, any time you know if I make more products, I absorb more overhead, if I manage back I’m going to absorb less overhead so gross margin is taking a hit on that. Gross margin is taking a hit on a reduction in force albeit not a large number but its in there. And then the third thing is the continuation of the shift to the 1 Day modality with Proclear, 1 Day quite frankly not having an optimal gross margin today. We are still concentrating on getting the cost out of that product and we expect to make headway but we’re not there fully yet.

And then Avaira as we roll that out, pending its full commercialization in terms of volumes, it still carries a lower gross margin. We expect to also get improved costs substantially improved cost reductions within the Avaira bucket going forward.

So those are putting some drain on gross margins and the third one has to do with the way we’re doing hedging in 2009 and I’ll only answer that if you’re really curious enough.

Jared Holt – Thomas Weisel Partners

You look at the CapEx spending next year, you have about $2 million worth of cash, is there any potential given the hockey stick component of spending next year that you might have to actually borrow more money in the first half of the year and draw down that revolver before you actually pay it down?

Robert Weiss

There is no doubt our first six months next year are cash negative because of that $50 million of CapEx rolling into the front six months. So absolutely, cash is low because we want it to be low. We work very hard and I would be embarrassed if I had to show you $10 million cash [on my] balance sheet and I would pick on the Treasurer.

So will we tap into the revolver the front six, yes. So when we talk about an aggregate positive free cash flow next year of $50 million, that is its driven and contributed by the back six months.

Operator

Your next question comes from the line of Peter Bye – Jefferies & Company

Peter Bye – Jefferies & Company

So what was the CapEx number in fiscal 2008?

Robert Weiss

I don’t know if we actually had it in the press release, its $124.9 million.

Peter Bye – Jefferies & Company

You talk about the October slowdown, November is in the book, we’re a couple of weeks here, you talked a bit about obviously guidance applies some kind of rebound from October but can you maybe specifically November. I know you don’t want to get too caught up in months, but just given the trend line, what can you tell us.

Robert Weiss

Yes, I think I indicated that November looked like October. October was in constant currency down 2%. November in constant currency was down 2%. So what happened since November is there may be some light at the end of the tunnel meaning we expect to be net positive in December. Some of that decline in October and November are [readive] and quite frankly we don’t have—

Peter Bye – Jefferies & Company

Could you quantify how much you think is patients buying three months instead of six months or 12 months supply versus office visits. What’s office visits like, if you’re going to proportionalize the downtick, how much is fewer inventory from consumers and how much is fewer office visits?

Robert Weiss

The office visits, I’ve seen one survey that was done that suggest they were down 2% in October as office visits, the bigger point of what’s going on because you’ve got two dynamics, even if office visits like they were in the third quarter were up modestly, 2% for the third quarter ended September 30, and if they were in fact down 2% in October and once again that data tends to be US centric, what’s really going on out there is people are not walking out the door with 12 months of inventory for their personal takeaway. They’re by and large walking out the door with six months.

There is a shrinking of the pipeline not only within the practice but also in the distributor network that’s going on. That’s fairly common so the, up and down the pipeline be it, and the pipeline in contact lenses isn’t immense but we do have distributors and we do have doctors that inventory some products.

So it would not be at all unusual to have some shrinkage. The biggest noticeable and the biggest factor will be shrinkage. The second by way of patient traffic whereas its our understanding that for the doctors its not all that bad meaning the traffic they’re now seeing in November and into December as a comp goes keeping in mind that December historically is a shift your money and your resources towards buying gifts then going to your eye care professional.

But the retailer is getting a little bit more impacted then is the independents. So there’s that attribute. Relative to dollars translating visits to dollars, there is still a substantial trading up going on both certainly within the toric theater where there’s been a substantial increase in wearers of silicone hydrogel lenses in the spherical area where there’s been some improvement and in the 1 Day area where there’s trading up.

Keep in mind those visits translate to a lot more revenue per patient. But what’s declining it is more not visits, its more pipeline.

Peter Bye – Jefferies & Company

So what’s the timeline of that works itself out, I mean is it six months, or nine months, we should see a [Bolus] effect then at some point theoretically shouldn’t we?

Robert Weiss

Yes, clearly a patient going out the door getting six months is going to need to come back to get their other six months. We don’t think there is a major, one of the questions out there is how bad is, is compliance going to shift. Quite frankly a 1 Day is a 1 Day, a monthly is a monthly, a two week is a monthly so everyone is already, no one is kidding no one.

When I buy a two week lens I wear it as a monthly, I just bought it at a price point that’s one half of what the monthly guy paid for it and clearly that dynamic is already in place and we don’t see a rapid shift from people switching from the monthly modality into the two week modality in order to buy a two week that they can wear as a monthly.

That is just not the norm. Quite frankly you have people like [Sieba] Vision pushing directly the opposite way where they’re trying to bring their wearer base from buying a product as a two week and then wearing it as a monthly, [Sieba] is basically saying let’s call it what it is. Let’s sell it as a monthly because they really are using it for a month.

J&J there’s no indication that J&J would go that way but quite frankly from our perspective if we sold only Biofinity and didn’t sell that much Avaira, that would not be a bad model for us going forward. We like the growth of Biofinity being more robust.

Peter Bye – Jefferies & Company

I know you don’t give quarterly guidance but one thing on that front, is your guidance assume that this Bolus comes back and its very back end loaded on the top line or are you assuming, hey if the Bolus comes back it comes back, but we’re not assuming it does. You’re saying its predominantly essentially patient inventory and that sort of front and not so much office visits, so this downtick in the market should be somewhat temporary theoretically, right?

Robert Weiss

Yes, I think the downtick is going to be a six month event and that six months is basically people buying six months worth of inventory or a patient takeaway and then they have to go back and get their other six months.

At that point in time it will be somewhat mitigated, the new purchaser is still only buying two months, six months, you’ve kind of lost six months of a pipeline to a degree and I don’t want to, and keep in mind that is, its more maybe US right now, will it ripple through the rest of the world, it will in varying degrees and then come back around.

So it isn’t like one global event all happening in parallel.

Peter Bye – Jefferies & Company

What’s D&A for 2009?

Robert Weiss

I think its around $90 million.

Peter Bye – Jefferies & Company

On that front you gave the guidance, you put in the transactional hedges on it, you say you’re getting $0.105 back, but when you went through with the previous questioner about the operating expense you said net interest expense of $49 million and then tax, I’m assuming then, are you booking $8 million or so in non-Op gains? That gives you about $0.15 for the currency below the Op line or how do I think about that $0.15 coming back.

Robert Weiss

The $0.15 was, I looked at it just the opposite.

Peter Bye – Jefferies & Company

How are you going to report it? It’s a non-Op contract booking right?

Robert Weiss

The foreign exchange hit, the $0.15 out of $0.30 hit is up and down the line. That’s up and down the P&L.

Peter Bye – Jefferies & Company

I thought you said that was just the foreign exchange. What are the contracts that you put in place in May and June then, is that just on the CapEx side? Is that why CapEx isn’t as high next year?

Robert Weiss

No the foreign exchange hedging will show in 2008, they all impacted cost of goods only. In 2009 and this is the one question I kind of said I’d take later, in 2009 they’re going to impact revenue and cost of goods and the impact will be for a slight, if we didn’t hedge our reported 2009 revenue would in fact be lower. Since we did hedge and hedged some revenue and I’m saying this simplistically as opposed to the guys that really can talk about how the contracts work, but we will pick up revenue—

Peter Bye – Jefferies & Company

Don’t you have a guy on the call who can talk about the contracts?

Robert Weiss

Well yes, if you want to bring the conversation to that level of technical, but trust me we’ve taken a lot of people through it and they’ve lost it and we’re better off doing one on one. Call me back on that.

Peter Bye – Jefferies & Company

On the silicone hydrogel toric next year, are you thinking about a launch similar to Biofinity or more similar to Avaira or a hybrid of the two or just, I don’t want to put a number on you, but how should we think about that coming out?

Robert Weiss

The silicone hydrogel toric launch which will start in the end of the calendar quarter will be rolled out nationally. We will have, when you think about the toric market, its much different then a two week Avaira space where you’re dealing with a lot of distribution both on the retail side as well as on the independent side so we’re not going to have a large, fill the pipeline with the retailers—

Peter Bye – Jefferies & Company

I just meant more as Avaira as a percentage of your sphere’s revenue, how much should we think maybe in the range of the silicone hydrogel as a percentage of your toric revenue, not so much the mechanics of which account it goes to, how many fittings, that sort of stuff? Just more how should we think about the silicone hydrogel toric revenue contribution as a percent of your overall toric revenue similar to where Biofinity was in the launch which was pretty minimal out of the chute, versus Avaira which was a little bit better as a percentage of your total spheres so just proportionality, what’s the impact.

Robert Weiss

Assume its not going to go out there and there’s going to be a big pipeline fill and a big percent of your market so don’t get your expectation up for anything north of the $10 million range. I think we need to move on to our next caller.

Operator

Your next question comes from the line of Larry Biegelsen - Wachovia

Larry Biegelsen - Wachovia

I just wanted to make sure I have the numbers right here, for CooperVision your guiding for negative 3% to plus 3% next year, FX of 4% to 5% so the constant currency basis plus 2 to 8%, and for the market on a constant currency basis I think you said 2 to 4% for 2009, is that correct?

Robert Weiss

Yes, constant currency 2 to 4 for the market, correct.

Larry Biegelsen - Wachovia

And for you guys 2 to 8 on a constant currency for CooperVision, is that correct?

Robert Weiss

No, we’re, and GAAP its plus 3 minus 3 in constant currency, its flat to 6%. Currency is only 3% for Cooper compared to a 7% market because we have put in place hedges and the hedges is the difference between the 7 and the 3% currency.

Larry Biegelsen - Wachovia

Earlier I thought you said FX was going to hit your top line by 4 to 5%, did I mishear?

Robert Weiss

Yes, the difference between a 7% hit, a 3% hit is a 4% delta which represents the hedging.

Larry Biegelsen - Wachovia

So flat to 6% constant currency for you and the market 2 to 4%, so it sounds like you don’t think you can do much better then the market in 2010, just curious about the conservatism there.

Robert Weiss

Quite frankly what happened is we’ve noticed there’s a lot of reaction to the economy right now so the 6% is 1.5x the 4, the upper end of the constant currency range. On the downside, given we were in this minus two, minus two October and November we went off the model of 1.5x and quite frankly I think what I would have done if I were readjusting the market is to take the market to flat to 4% constant currency and then said if the market in fact goes flat, then that’s how I got to our flat.

If that’s the case then the market, if the market in fact goes flat then in GAAP it will be negative 7 currency impacting it 7% assuming the dollar stays right where it is. So to answer your question our constant currency zero to six probably should be compared to a market of zero to four.

Operator

Your next question comes from the line of Jeff Johnson – Robert W. Baird

Jeff Johnson – Robert W. Baird

I guess I’m still trying to figure out as of the analyst meeting and I understand world has changed, but why do you now think you cannot outgrow the market by 1.5x as you were talking about at the analyst meeting and prior to the analyst meeting?

Robert Weiss

The answer is we do think we can outgrow the market 1.5x. The only question really is, is what is the market and is the market zero, two or four. But given our product portfolio, given that we are expanding our product range for Avaira and going into the toric market with Biofinity and launching Proclear 1 Day we do expect to gain share in the marketplace.

Jeff Johnson – Robert W. Baird

I’m surprised that you don’t think there’s a push-out in one month where patients may be extending one month to two months or one month to three months where and I’d just like to know your rationale for not thinking that’s happening.

Robert Weiss

Since these are soft lenses as opposed to hard lenses like I’m wearing, the lens does have a natural life wherein it gets gritty and people know, and every eye is different so I’m not going to say there isn’t a guy out there that’s going to take it from a month to a month and a half. You’re always going to find an exception.

By and large a monthly cycle is a very routine part of life and its clearly in contact lenses also.

Jeff Johnson – Robert W. Baird

I guess my question is how confident are you in this Bolus effect that you seem to agree with that six months from now people have to come back in and get their second half of the year order.

Robert Weiss

In other words, I don’t think at all that the model is changing from I buy six months supply and I use them over 12 months. Its six months supply the way I’ve used them in the past is still going to be six months supply.

So when they run through that six months supply, they’re going to come back and get their reuse and I think that’s an [inaudible] if you’ve bought medications and you were used to buying 90 days and it was an expensive medication and you suddenly said, you know I’m only going to buy 45 days or 30 days supply now, I got to come back after 30 days and get my next round of medications.

It’s the exact same thing.

Operator

Your next question comes from the line of Christopher Cooley - FTN Midwest Securities

Christopher Cooley - FTN Midwest Securities

I’m a little bit surprised by the CooperSurgical guidance, your FX doesn’t traditionally hit that line item and in past you’ve highlighted that as about a 4 to 5% plus organic grower, help us understand what’s changed there now we actually see a negative number of CooperSurgical and potential in regards with your year-over-year growth rate.

Robert Weiss

The guidance is negative 2 to a plus 4, and I would just say that was really an abundance of caution. There is no FX impact in that negative 2 to plus 4. We put a wider range on things because quite frankly we’re a little shell shocked by October and November as a marketplace but I don’t think we’re the only company out there that’s broadened the range of things.

The 4% represented what we thought was at the high end, some acknowledgement that patient visits were down over the last quarter something like 6% in the US market. So we’ve factored that into our range and we think that range captures it right now, 165 to 175 compared to this year’s 168.

Christopher Cooley - FTN Midwest Securities

When I think about cash flows next year, are you contemplating any type of one-time step-up or add-in type of payment on the pension plan. If you look at your filings through the year you had a fairly heavy concentration in Cooper stock or company stock. It looked like that performance within negative 30-ish blend, just through the year-to-date. Any thoughts there, should we be contemplating on our cash flow models that you’d be doing any kind of truing up relative to the PBO?

Robert Weiss

You made a comment about Cooper stock, the only stock I’m aware anywhere in the entire portfolio is in our 401-K and I’m the stockholder in that plan and that’s only 5,000 shares. There is none in the retirement income plan.

As far as the implications of, we typically do our plan through the end of August and there will be and has been a look at October, its my understanding any cash flow implication is less then $1 million.

Christopher Cooley - FTN Midwest Securities

Just in regards to when I think about goodwill out there, you re-classed some in the last Q, you put it back up in the beginning balance from the [Ocular] acquisition I think the offset to that is a step-up in book equity, anything that we should be looking for in the K, were there any other adjustments to the prior balance for goodwill?

Robert Weiss

Goodwill moves up and down rapidly with foreign exchange so we took it up earlier in the year I think $30 million as the dollar weakened and there’s been a substantial go the other way now that the dollar has kind of come full circle. By the way, my comment on the cash flow for the retirement income plan was a one-year comment meaning impact on 2009 as opposed to, typically these plans have any major economic change would be spread over seven or eight years, over a longer period of time at any rate.

Eugene Midlock

We took a look at it as of August. The actuaries calculated the funding requirements for 2009 and they haven’t changed that much. They looked at it again now with all the changes in the market and so forth and we’re still pretty consistent for 2009. I don’t know what 2010 will bring.

Operator

Your final question comes from the line of Amit Bhalla – Citigroup

Amit Bhalla – Citigroup

On CooperSurgical I understand your range for fiscal 2009 but I’m curious about the current quarter were you seeing an actual impact on CooperSurgical based on the overall economic weakness and second question any sort of revenue range you can give us for the new products that you’re going to be selling in 2009?

Robert Weiss

The first comment on Surgical, Surgical is in November started off a little softer then let’s say what we had expected back in September. So this range reflects upon our November results and our year-to-date results as where we are today.

As far as the question about sales of new products next year, I think we would say that if we look at the package of silicone hydrogel products, all together, the Biofinity, Avaira, and then a toric, that this year that pot was about $58 million in silicone hydrogel because we’re really talking primarily about silicone hydrogel and how we’re rolling out.

The impact to Proclear 1 Day in Japan I’ll come back around on, but that pot of $58 million is likely to go in the neighborhood of something north of $100 million. Whether or not it doubles I would say it could be up 80% to up 100% type range of expectations all up.

That does include the toric in it but the toric as I indicated earlier, assume that’s less then $10 million. We launch it the of the calendar quarter by March 31 and so we’re left with a seven month kind of a rollout impact.

Amit Bhalla – Citigroup

On the CooperSurgical comment, what exactly were you seeing that was soft, was it patient volumes, was it some surgeries, exactly what was soft?

Robert Weiss

Surgical as reported I think has been out there in some article, I don’t have it available directly, but 6% decline in patient visits and that’s more then, that’s basically over a period of longer then just one month.

A lot of that by the way is the pap smear market. We basically have 50 to 55 million pap smears done in this country annually and there’s some slowing of that leading to slower visits.

Operator

There are no additional questions at this time; I would like to turn it back over to management for any additional or closing comments.

Albert White

Thank you everyone. Keep in mind you’re welcomed to call us and we’ll try to get back to people in a timely fashion at 925-460-3663 which is our Investor Relations number and if you don’t get a live person, leave a message, we’ll get back to you as soon as we can. Thank you very much.

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