STAAR Surgical Company's CEO Discusses Q1 2013 Results - Earnings Call Transcript

| About: STAAR Surgical (STAA)

STAAR Surgical Company (NASDAQ:STAA)

Q1 2013 Earnings Call

May 1, 2013 4:30 PM ET


Doug Sherk – IR, EVC Group

Barry Caldwell – President and CEO

Deborah Andrews – VP and CFO


Matthew O’Brien – William Blair & Company

Raymond Myers – Benchmark

Jim Sidoti – Sidoti & Company

Larry Hemowich – HMPC.


Good day, ladies and gentlemen. Thank you for standing by. Welcome to the STAAR Surgical First Quarter 2013 Financial Results Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the call will be open for questions. (Operator Instructions) This conference is being recorded today, Wednesday, May, 1, 2013.

At this time, I would like to turn the conference over to Doug Sherk, with the EVC Group. Please proceed.

Doug Sherk

Thank you, operator, and good afternoon, everyone. Thank you for joining us for the STAAR Surgical conference call and webcast to review the company’s financial results for the first quarter which ended on March 29, 2013.

The news release announcing the first quarter results crossed the wire about half an hour ago and is available at STAAR’s website at Today’s call is also being broadcast live via webcast. In addition, a slide presentation will accompany remarks by management. To access both the webcast and the presentation slides, go to the Investor Relations section of STAAR’s website at

If you are listening via telephone to today’s call, I would like to review the slides that accompanying management’s remarks, please navigate to the live webcast as I have just reviewed and choose the no-audio/slides-only option. In addition, an archived replay and slides will be available on the STAAR website.

Before we get started, during the course of this conference call, the company will make forward-looking statements. We caution you that any statement that is not a statement of historical fact is a forward-looking statement. This includes remarks about the corporation’s projections, expectations, plans, beliefs and prospects. These statements are based on judgment and analysis as of the date of this conference call and are subject to numerous important risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements.

Those risks and uncertainties associated with the forward-looking statements made in this conference call and webcast are described in the Safe Harbor statement in today's press release as well as STAAR’s public periodic filings with the SEC including a discussion in the Risk Factors section of our 2012 Annual Report on Form 10-K. Investors or potential investors should read these risks. STAAR assumes no obligation to update these forward-looking statements to reflect future events or actual outcomes and does not intend to do so.

In addition, to supplement the GAAP numbers, we have provided non-GAAP adjusted net income and diluted net income per share information that excludes manufacturing consolidation expenses, Spain distribution and transition expenses, gains or losses on foreign currency, fair market value adjustments for warrants and stock-based compensation expense.

We believe that these non-GAAP numbers provide meaningful supplemental information and are helpful in assessing our historical and future performance. A table reconciling the GAAP information to the non-GAAP information is included in our financial release which is available on our website and in our slide presentation.

Now let’s turn the call over to Barry Caldwell, President and Chief Executive Officer of STAAR Surgical.

Barry Caldwell

Thank you Doug and good afternoon everyone. Thank you for joining us today for our review of the first quarter 2013 results, as well as an update on how 2013 is progressing.

With me today on the call is Deborah Andrews, our CFO. I’ll start our call this afternoon with an overview of the first quarter results and how we did versus the metrics we provided during the last conference call.

Deborah will then offer a detailed look at key first quarter financial results. In closing, I’ll discuss the current competitive landscape and other factors impacting our business as well as some highlights from our recent attendance at the American Society of Cataract and Refractive Surgeons Symposium ASCRS in San Francisco a few weeks ago. Then we will open the call for your questions.

First we had a solid overall start to the New Year. Revenues for the first quarter were at $18 million and in line with the results we announced on April 9. Throughout the quarter, we consistently grew VISIAN ICL sales in the refractive surgery space in our major focus to markets.

Operationally, we saw continued success in the execution of our plans and are encouraged by the momentum we have achieved globally. Let me start by reviewing our key operating metrics for the year and results for the first quarter against those objectives one-by-one.

First, revenue growth. Revenue grew faster than this annual metric during the first quarter, so can get the checks up when all this is accomplished. I will present our thinking about this metric going forward later in my remarks. Revenues were negatively impacted by the weakening of the yen.

Revenues in Japan represented 26% of our sales during the quarter as our sales in Japan increased 32% in constant currency though only 23% in US dollars for the quarter, still not bad. The value of the yen in the first quarter of 2012 was approximately 80 yen to the US dollar, while during this quarter, it averaged 92. On a constant currency basis, total company sales grew 21% during the quarter.

Now let’s drill down a little bit into the ICL and IOL sales segments. First turning to our product portfolio, sales of our VISIAN ICL product during the first quarter were $10.6 million, which reflects a 24% increase over the same quarter last year and exceeded for the first time the $10 million mark in one quarter in the product’s history.

The achievement reflects an 18% increase in unit sales and a 5% increase in price as well as what appears to be continued market share gains in a difficult refractive surgery procedures marketplace.

Regionally let’s take a look. Sales increased in each of our three major regions. EMEA, APAC and North America. In fact, VISIAN ICL sales increased in ten of our eleven targeted markets with the only exception being the UK which is our smallest targeted market as of today.

Let’s look at EMEA. Heavily contributing to the strong first quarter results was the VISIAN ICL revenue growth of 59% in the Europe, Middle East Africa region. A 57% increase in sales was seen in our European markets. Several factors had a positive impact in the markets including our conversion to a direct sales model in Spain.

Sales in Spain grew 156% over the prior quarter, while units increased 37%. Additional sales personnel hired in 2012 in Europe also helped to boost our sales.

Finally the introduction of CentraFLOW technology in this region was an important contributor to the growth. Over 16,000 ICLs with the CentraFLOW technology have been successfully implanted and the lens continues to be very well received by surgeons and patients.

Other European markets saw strong growth as well. Italy grew 63%, France 35% and Germany 232%. Following the introduction of CentraFLOW in the Middle East, sales grew 94% during the quarter. And in Latin America sales increased 25%. We anticipate additional growth in these markets as we obtain ICL approvals at some point during this year.

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

Approximately, 70% of our sales in Japan now are the CentraFLOW technology version. In Korea, as we discussed in late February, we experienced a fast start to the quarter as compared to a weak first two quarters in the prior year as you may recall, they purchased inventory late in 2011 for the 2012 start to the year. Their out the door sales early in the quarter were strong, but flattened a bit as the quarter progressed. They are back to good growth during April.

Sales for Korea will remain lumpy until we gain approval for the CentraFLOW technology which is expected at mid-year. Finally, sales in China grew 7% as we have continued to see challenges to the overall refractive surgery market which were noted last year.

Market scope originally reported for the year 2012 that the refractive procedure count in China has increased 17% to nearly 1.2 million procedures. However, they have sensed recast or re-projected those numbers down to 830,000 for the year or a 21% reduction during 2012.

Now you may recall, our units grew 37% last year and though I am still not pleased the result was not as bad as originally thought. Some of the headwinds however on procedures do continue in the China market.

Now let’s look at North America. ICL’s sales in the US grew 12% while units grew 14% against what appears to be a declining refractive procedure landscape as well in the US. As we have said in the past, until we get additional product approvals in the US, we do not expect to see much growth.

However, I must say we were encouraged by our 10% growth in the second half of last year and now the first quarter has continued those trends. We believe that our focused marketing efforts with social media and practice development programs are helping to contribute to these positive trends.

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

This evening live VISIAN ICL Surgery will be webcast by Dr. Rob Rivera over Google Hangouts. It will be broadcast at 6 PM Pacific Standard Time. The surgery is actually on an optometrist. And Dr. Greg Parkhurst will also be available for introduction during the webcast. After the surgery, there will be a question and answer segment hosted by the surgeons.

This live stream will be available on and Hoopes Vision is HOOPES VISION. Google has been very active in supporting this webcast, so we expect a good audience this evening.

Now let’s look at IOLs. Global IOL sales were $6.3 million, essentially flat year-over-year and you wonder why I am pleased. Well, we had a negative impact of foreign exchange which was $646,000 in just the IOL category alone. So without that impact of foreign exchange, global IOL revenues grew approximately 10% on a constant currency basis.

In addition, we ended the quarter with about 900,000 in back orders from European customers. You may recall, a supplier of acrylic IOLs has been unable to meet the high demand for the new KS IOL products and we continue to pursue other options to meet the short-term demand for this product.

We’ve evaluated about eight options and have a few remaining options remaining under evaluation. We should complete these evaluations by mid-May. We are encouraged by recent trends in the IOL business. As you know, we’ve expected to see some growth patterns develop. We may now be seen the beginning of those patterns, at least I hope so.

The acceptance of the KS IOL products has escalated nicely and we introduced our new nanoFLEX Toric IOL for Europe during April.

Now, let’s turn to our second key metric. Gross margin expansion by a minimum of 250 basis points for the year. That would put our yearly gross margin at 71.9%. While gross margin for the quarter was at 70.3% which was basically unchanged from the first quarter of a year ago, though it was a 250 basis point improvement over the fourth quarter of 2012.

Our gross margin expansion was limited somewhat during the quarter, primarily by a temporary factor. Deborah will cover this in detail during her comments, but we are confident that we will achieve this metric for the full year as this becomes less of factor during the remainder of the year. How about profitability? Our next metric is to be profitable on a GAAP basis each quarter; well we achieved this during the first quarter with 471,000 in net income for the quarter.

There were several items which had a negative impact on the P&L which Deborah will describe. With the multiple investments we’re currently making in the business, the non-GAAP adjusted income results which Deborah will cover were quite positive.

Now to our final metric. Manufacturing consolidation. That final metric is to make progress with our manufacturing consolidation plan or as we call it Project Comet, while product quality and supply are maintained. Our team continued to execute to this metric during the first quarter and we continue to expect to meet this metric for the full year.

Expenses incurred during the first quarter for the project were somewhat higher than might have been expected. So this is basically how we budgeted for the year. We expect to meet the anticipated total cost goal and we will monitor closely throughout the year.

Now a couple of updates on that consolidation. As we had some key milestones during the quarter, as we said before, during the first quarter, we celebrated the shipment of the first US manufactured ICL out of Monrovia. We have since now started shipping US manufactured ICLs to various markets in which we have approval outside the US.

In addition, we expect that the VISIAN Toric ICL will complete validations during this quarter and our target is to ship the first Toric ICLs manufactured in US by the end of June. Our non-sterile preloaded silicon IOLs are today being shipped out of our Monrovia manufacturing facility in the US and we expect sterile silicon IOLs to begin shipping later in this quarter. The first lot of preloaded silicon IOLs have now gone into the sterilization process.

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

With the implementation of Project Comet and the consolidation of manufacturing to Monrovia, we did note we needed additional space to house our finished goods. The building right next door to our existing facility on Walker Avenue became available and we were able to obtain an eight-year lease with reasonable terms.

It adds approximately 26,000 square feet to our current 44,000 square feet. We were able connect the buildings, so it functions as one facility. The additional space has already created a more productive working environment and we expect to quickly recoup the investments made through increased productivity.

Before I turn the call over to Deborah, I’d like to comment on our current outlook for the remainder of the year. Solid start to the year, but no change to outlook now. Last year we took significant steps to position the company for growth this year and beyond in our two large markets, refractive ICL and cataract IOL.

Today, we have a robust product line in place for new products throughout this year and beyond. By maintaining our strong balance sheet, continuing to invest and focus R&D initiatives, continuing our business development activities and keeping a close eye on operational efficiencies, I believe we can achieve our growth plans for 2013 and well into the future.

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

From a revenue growth perspective however, we continue to remain cautious due the ongoing impacts of yen, headwinds, which actually have worsened during the start to the second quarter as well as the impact of supply constraints in Europe on IOLs.

So at this point, we are reiterating our goals to achieve all four metrics that were provided back in February, and we will update you in early August on our progress.

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

Deborah Andrews

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

Now first, looking at our gross margin. Our gross profit margin for the quarter was 70.3% consistent with the first quarter of 2012 and a 250 basis point improvement over the fourth quarter of 2012. Gross margin expansion was limited by a large increase in low margin IOL injector system sales to a third party supplier for build-up of their acrylic pre-loaded product supply and which appear in our other product sales category.

These injector system sales were the driving factor in the increase of other product sales which increased from $546,000 to $1 million during the quarter and negatively impacted gross margins by approximately 170 basis points during the quarter. We expect these sales to decrease significantly in Q2 and going forward, so the negative impacts on margins will become less of an issue.

If not for these shipments during the first quarter, our gross margin would have been 72%. Now in terms of our operating expenses, our operating expenses for the first quarter including manufacturing consolidation expenses increased 9% to 11.6 million.

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

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

We also have a slight increase on our G&A expenses due to increased stock-based compensation and the new medical device tax expense were more than offset by decreased R&D spending during the quarter.

Overall operating expenses were impacted positively by foreign exchange of about 351,000. Now there will be some gives and takes in operating expenses for the remainder of the year, but we believe this level of spending during the quarter should provide a good basis from which to project the final three quarters.

In terms of currency transactions, as we maintain cash and receivables in euros, these assets are revalued at the end of the period at the rate of exchange and effective at the end of the period typically resulting in an unrealized gain or loss on exchange.

During the quarter we recorded an exchange loss of 341,000 due to a dip in the value of the euro which on average for most of the quarter was 132, but dropped to 128 on the last day of the quarter. This resulted in a $408,000 negative swing during Q1 as compared to Q1 in 2012, when we recorded $67,000 exchange gain.

To-date the euro has recovered and it has crossed 132 again today. The company does not currently enter into hedging transaction.

Now in terms of tax, as you may know, we work with our tax filers at the beginning of each year to determine our estimated effective tax rate for the full year, based on our budget which is then the rate we use during the year or until we have better information. Through that process, we’ve determined that our effective tax rate should be approximately 40% for the year and so that’s the rate we use for the first quarter and the rate we expect to use for the remaining quarters of 2013.

Is it possible this rate could change during the year? It is possible so not projected at this time. I will add some additional comments on this while discussing our manufacturing consolidation efforts.

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

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

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

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

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

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

We continue to anticipate generating savings of more than $100 million from Project Comet for the aggregate period of approximately 2014 to 2021. Now since we started to ship our ICL’s manufactured in the US to markets outside the US, as the US manufactured product is shipped, we will get closer to reflecting a net profit in the US.

And as we move to a profit position, we anticipate starting to utilize some of our more than $120 million of NOLs. They were not projected this time, it is possible that we may see some additional tax rebates on tax rates in the second half of the year depending on the rate of progress.

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

Barry Caldwell

Thank you, Deborah. I’d like to take a few minutes to discuss the competitive landscape we see in the ophthalmic medical device sector which seems to have changed more in the past six months than in previous years.

First on the refractive side, LASIK surgery seems to be facing difficult negative pressure and most market data shows that LASIK procedures are declining in most major markets. The VISIAN ICL is growing on the other hand and increasing market share against LASIK in nearly all of those markets.

Even some of our larger competitors are seeing new challenges today. For example, Abbott reported their AML revenues for the quarter declined with a modest decline in the refractive sales driven by continued soft market conditions. Novartis reported their total ophthalmic surgical business declined during the quarter, while their refractive business grew only 2%.

Lenses which attempt to compete for refractive share which are the anterior segment of the eye, all seem to be facing some new clinical challenges. Keep in mind, the VISIAN ICL lens is implanted in the posterior segment of the eye and it’s not experiencing any of these clinical challenges I’m about to review.

There is mounting clinical evidence that anterior segment phakic IOLs are not in the right place in the eye. Several months ago, Novartis sent out dear doctor letters, warning about the necessary precautions needed regarding endothelial cell count and the routine monitoring of patients.

We can now count up the 12 markets in which the Novartis Cache lens is no longer available. There is conflicting information in the markets whether the product will return or not. There was also some very challenging clinical data presented at the recent ASCRS Meeting regarding high levels of ex plants of both the uptick and Abbott phakic IOLs due to low endothelial cell count.

In the cataract IOL segment, there are also some interesting competitive developments. There is growing long-term concern about the glistening reports in the Novartis IOL called Acrasoft. The discussion has been in European markets for the past several years but it was quite an active topic at the recent ASCRS Meeting. As a matter of fact Novartis reported their IOL business declined by 1% in the quarter and their advanced technology IOLS declined by 2% . They also reported that cataract procedures seem to slowdown in some markets including southern Europe and Japan. Let me remind you we are seeing increased IOL sales in those markets with our new KS IOL products and we reported a 25% unit increase in Japan during the first quarter. There are also new Toric IOLs being approved and introduced in several markets with the increased use of FEMTO second lasers for faco there is increased interest in Toric IOLs.

STAAR has the only family of Toric IOLs on the market as we have silicon Toric IOL in the US and have just launched the nanoFLEX Toric IOL in Europe which is made from Collamer the same material of which the ICO is made.

We see an opportunity for us in this fastest growing segment of IOLs. Now from a regulatory perspective we believe we remain on target to gain approval for the CentraFLOW technology in both Korea and India. The official launch is scheduled for the first week of July in India and the last week of July in Korea.

Also the new generation VISIAN ICO version five which will be preloaded and have an enhanced optic design is expected to receive CE mark approval during the third quarter. This technology also incorporates the very successful CentraFLOW feature driven by the KS.

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

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

During the ASCRS Meeting, we had the opportunity to facilitate approximately fifty ophthalmic surgeons from throughout the world in evaluating the new VISIAN ICL version five with preloaded technology. They were asked to evaluate the technology based upon eight categories around the device ergonomics and ICL delivery results. Their response was very good with virtually all categories receiving an above eight out of a one to ten rating scale.

We believe we will begin to launch this product officially at the upcoming ESCRS Meeting during early October. Now some additional commercialization investments that we continue to explore opportunities here and though they weren’t planned at the beginning of the year we made the following decisions on adding resources. We are now planning to add a new sales headcount for China by midyear.

We are evaluating whether to add one or two new sales personnel for Spain to help expand our new direct efforts in that market and tomorrow a new Sales Director for Korea starts who was formerly the President of Busan Vision Technology and ICL Product Manager. So she has a lot of experience.

With the expected approval of ICL CentraFLOW in Korea, we believe this will increase and help drive the penetration of that new technology more quickly. Before I open the call for questions, let me review our Investor Meeting schedule with you.

First, our Annual Shareholders Meeting will be here at our Monrovia facility on Monday May 13 at 8:30 AM. After the meeting, we will provide tours of our expanded facilities for anyone who would like to join. Also will be traveling to Denver Salt Lake City, New York and Mid-Atlantic and Boston for one-on-one meetings in the next few weeks and late May we’ll be presenting at the Deutsche Bank Conference in Boston and the Benchmark Conference in Milwaukee. In Early June, we’ll be at the Jefferies Conference in New York City. We hope to see many of you there. If you’d like to set up a time, just call Doug at EVC. And with that, we are ready to take your question. Operator, could you please open the lines?



(Operator Instructions) The first question comes from the line of Matthew O’Brien from William Blair. You may proceed.

Matthew O’Brien – William Blair & Company

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

Barry Caldwell

That’s a good question Matt, because obviously VIAN has an impact in our conservative approach to this and as I said, first quarter the average value is 92 and it’s up to 97 or so now and it’s been up to 99. So that still concerns us. I think we might look at it little differently. I think you are right if the VIAN headwinds were not facing us and still look more difficult.

Matthew O’Brien – William Blair & Company

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

Barry Caldwell

I think that’s fair.

Matthew O’Brien – William Blair & Company

And then, Deborah, I was curious with your OpEx performance in the quarter and then the thoughts going forward, I noted then increasing year-over-year then on an absolute basis compared to Q4 has down pretty significantly. Can you help us understand what’s going on there and then specifically on the bottom-line should we annualize this $0.08 number that you deliver in the quarter maybe lower to little bit just because the yen and use that as a baseline going forward?

Deborah Andrews

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

Matthew O’Brien – William Blair & Company

Okay, just too specific, I mean something north of $0.30 for the year seems reasonable on the bottom-line?

Deborah Andrews

On the non-GAAP.

Matthew O’Brien – William Blair & Company

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

Barry Caldwell

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

Matthew O’Brien – William Blair & Company

Okay, thanks. I’ll hop back in queue.


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

Raymond Myers – Benchmark

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

Barry Caldwell

Yeah, I think that is a really good point. We did show an increase of 5% on price during the quarter. As you know the CentraFLOW technology has about a 10% premium. Some of the distributors are passing that on others are not. But that 10% added even at and customer price say it’s 80 bucks for example that is well worth it to a surgeon eliminating that visit, that step, that breaking a schedule to have to go to a TI procedure. So there is value at both ends in terms of that technology. Now with the version five, we do expect to put about a 5% price increase on that product and there is surgical savings time with that product plus, reliability in the delivery of the ICL and these were things that we ask surgeons to judge when they view the product at the recent ASCRS Meeting. And I think for those who attended the breakfast meeting we had in San Francisco, you heard Dr. Merton say and his hands, and he is an experienced surgeon, in his hands it will save 30% of the procedure time and time for surgeons is money. Time for ASCs is money, time for hospitals is money. So it’s well worth I think the incremental 5% cost to the product that they’ll see. Now I think in a surgeon that does much less procedures than a Dr. Merton for example, the savings and procedure time will even be much more.

Raymond Myers – Benchmark

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

Barry Caldwell

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

Raymond Myers – Benchmark

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

Barry Caldwell

It is challenging for a company of our size with all the different things we have going on in the business particularly to consider Project Comet and that consolidation effort takes a lot of work from a lot of disciplines within the company but likewise it takes a lot of effort to turn the market from being a distributor model to a direct sales model and we had a team of several members of our executive management team along with a lot employees throughout multiple functions within the company working on this. So it takes a good amount of time and effort. Now to the results, I am pleased with the results so far. That’s why we are looking at adding more people more quickly in Spain. It is a challenged market in terms of the economy, no doubt about that. What’s more intriguing to me in our first quarter results in Spain is not 156% in revenue because remember, we are going to get almost a doubling if the units are just the same. What’s intriguing to me is that 37% increase in units that’s what’s interesting. So by going direct if we can drive the ICL units, more efficiently more effectively that’s the test we really whether it’s successful or not. And so far it had to say, we are pleased, but we are still monitoring it very closely.

Raymond Myers – Benchmark

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

Barry Caldwell

Thank you.


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

Jim Sidoti – Sidoti & Company

Good afternoon, can you hear me?

Barry Caldwell

Hi, Jim, yes we can.

Jim Sidoti – Sidoti & Company

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

Barry Caldwell

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

Jim Sidoti – Sidoti & Company

Okay, so even if they are sold in Japan, the currency doesn’t affect that?

Barry Caldwell


Jim Sidoti – Sidoti & Company

All right. And then the other sales in the quarter about $1 million, you said what, can you just go over again what that was and I assume that it won’t come back in the next couple quarters?

Barry Caldwell

Yes, the last two quarter, we’ve seen an increase in this other category. And it’s a category that we’ve expected to continue to decline and we have been driving it down because it’s a host of a miscellaneous of unfocused products. However within this category also falls the injector systems that we sell to the third party who will then use those injector systems for their product sales of the same product that we market. And this is the KS IOL product of which I am speaking. So, as you know, we are both way behind and needs for product and as we said, 900,000 backlog at the end of first quarter. So they are trying to build the inventory of these preloaded acrylic IOLs. So they are buying more injector systems from us today, then we are getting lenses to sell to offset that. And those gross margins are very low. I want to say they are plus or minus around 20%. Deborah is shaking her head. Yes, so you can see the impact that it has on the gross margin as she reported we would have been 72% gross margin for the quarter if not for that, but that’s the biggest driver Jim, in that other category are those injector systems we are selling to the third-party supplier.

Jim Sidoti – Sidoti & Company

And you expect that to continue for the rest of the year at that rate?

Barry Caldwell

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

Jim Sidoti – Sidoti & Company

All right and that supply constraint is what you are referring to that might slowdown sales in the Europe in the back of the year?

Barry Caldwell

Yes, right.

Jim Sidoti – Sidoti & Company

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

Barry Caldwell

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

Jim Sidoti – Sidoti & Company

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

Barry Caldwell

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

Jim Sidoti – Sidoti & Company

Okay, all right, thank you.

Barry Caldwell

Thank you, Jim.


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

Raymond Myers – Benchmark

Yeah, thanks for letting me follow-up. A very quite a few products are starting to be shipping from Monrovia either already or expected in the second quarter here.

So my question is, when should we start to anticipate some noticeable contribution from the shipments of these products from the US?

Barry Caldwell

Q3, 2014 and I think I’ve been pretty consistent in trying to say that though we blend into our comments a little bit here today that you might start to see some additional tax benefit as the US turns profitable but it really – this year 2013, what I say.

Deborah Andrews

Yeah, 2014

Barry Caldwell

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

Raymond Myers – Benchmark

Okay, that’s it. Thank you.

Barry Caldwell

Thank you, Ray.


Your next question comes from the line of Larry Hemowich from HMPC. You may proceed.

Larry Hemowich – HMPC.

Good afternoon,

Barry Caldwell

Hi, Larry.

Larry Hemowich – HMPC.

I guess it would be more for Deborah than you Barry. At the Analyst Meeting you had at ASCRS, there was talk about a 10% effective tax rate in 2014. I think you are using, you will start using up your net – your tax loss carry forwards, is that why the tax rate is 10% and why isn’t not zero, was that because of overseas income?

Deborah Andrews

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

Larry Hemowich – HMPC.

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

Deborah Andrews

I don’t think so, Larry. I think our objective is to get to 80%. I am not going to get into 80% for the year.

Barry Caldwell

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

Larry Hemowich – HMPC.

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

Barry Caldwell

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

Larry Hemowich – HMPC.

Okay, average for the year?

Barry Caldwell

Well, but then it’s going to be – yeah the average would be nearing.

Larry Hemowich – HMPC.


Barry Caldwell

But we expect it will hit 80% at least a quarter during the year. I don’t know what quarter it might be first quarter, it might be fourth quarter.

Larry Hemowich – HMPC.

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

Deborah Andrews

That’s sure, Larry.

Larry Hemowich – HMPC.

Okay, that’s good. Thanks.


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

Barry Caldwell

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


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

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