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Cooper Companies, Inc. (NYSE:COO)

F4Q07 Earnings Call

December 11, 2007, 05:00 PM ET

Executives

B. Norris Battin - VP of IR and Communications

Robert S. Weiss - EVP, CEO of The Cooper Companies and President of CooperVision

Steven M. Neil - EVP and CFO

Analysts

Joanne Wuensch - BMO Capital Markets

Larry Biegelsen - Wachovia

Lawrence Keusch - Goldman Sachs

Jeff Johnson - Robert W. Baird

Michael Weinstein - JP Morgan

Christopher C. Cooley - Midwest Research

Presentation

Operator

Good day, ladies and gentlemen and welcome to Cooper Companies Announces Fourth Quarter Year-End Results 2007 Conference Call. My name is Shawn and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. [Operator Instructions].

I would now like to turn the presentation over to your host for today's call, Mr. Norris Battin. Please proceed.

B. Norris Battin - Vice President of Investor Relations and Communications

Thanks a lot Shawn. Good afternoon and welcome everybody to the fourth quarter call. With me today are Bob Weiss, Cooper's Executive Officer and Steve Neil, our Executive Vice President and Chief Financial Officer.

Before we get started, I'd 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, 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 methods that may be incorrect and 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 Statement in today's earnings release and are described in our SEC filings, including the business description in Cooper's annual report on Form 10-K. These are available publicly and on request from the company's Investor Relations department.

And I would also like to give you a phone number if you are interested in calling in after the call as we are at work today. That number and I'll say twice, 212-418-7841; that is 212-418-7841. And with that, let me turn the call over to Bob for his opening remarks.

Robert S. Weiss - Executive Vice President, Chief Executive Officer of The Cooper Companies and President of CooperVision

Thank you Norris and good evening ladies and gentlemen. Before I get into the presentation, I wanted to kind of recap what we are going to try to today on... in terms of order. In the past, we've gotten feedback that the conference call has been a little on the long side and had a fair amount of repetition. So our endeavor today will be to try to cut the formal presentation down to around 30 minutes and then follow it by about 30 minutes in Q&A and if we are successful in that, we'll cut which frequently is a two-hour phone call in half.

In terms of the order and in order to avoid duplication, I'm going to talk mainly about the market very briefly, our vision and mission as well as our strategy, spending a fair amount of time on the how to that we are going to proceed forward, talk briefly about 2007 and its impact going forward, mention some of the progress at CooperSurgical, talk briefly about guidance and then I'll turn it over to Steve who will talk about the bulk of the operating results. At which point in time, we'll come back to Q&A. Once again, our objective is to try to get it to an hour.

As far as the market is concerned, as we know 85% of the Cooper Companies is in contact lenses and specifically that's an industry that's around $5 billion and growing rapidly, market is growing 8% compounded annual growth rate this decade. In terms of constant currency, the strength of 2005 when it grew 12% that was '06 and a 5% in '07 on a year-to-date basis.

Recall in lens care, and basically when one competitor's product have had some impact on the market, it's anecdotal; there is no substantive numbers on that front. But suffice to say that we still have all of the drivers in the market that we've had over this decade. That... those drivers being increasing rates of myopia, geographic expansion, trading up to silicone hydrogel, lenses Proclear 1 Day, specialty around the rest of the world as well as favorable U.S. demographics.

Consistent sweet spots have occurred year-to-date consistent with past. They include the daily disposable market, which is 32% of the global market growing 11% year-to-date, 10% of that in the U.S... 10% of the penetration in the U.S., 45% penetration outside the rest of the world or outside the U.S., torics are up 10% year-to-date accounts 17% of the world market, penetrated around 20% in the U.S., 15% in the rest of the world. Silicone hydrogels are up 22% year-to-date, account for 26% at the worldwide market and in the U.S. accounts for 44% of the market compared to only 15% in the rest of the world. And lastly, multifocal, which is up 9% and accounts for 3% of the global market.

As far as what Cooper is about, we basically in 2007 put the Vision Group together, reestablished ourselves with a vision and mission statement and set forth certain objectives. Our vision is to enhance each and every contact lens experience. Our mission, we market contact lenses that enhance the experience of eye care providers and wearers alike, through the application of technology, expertise and service. We listen to our customers and we respond to their diverse needs.

Our five year objectives; number one objective is to achieve a market share that would put us in a number two position in the contact lens market, below only J&J or Vistakon to remain the largest specialty contact lens company, to increase our operating margins to the mid to upper 20% dollar range, to be rated number one with our consumers the eye care provider and to refresh our product line so that over 70% of it in the year 2011 is new products. Additionally, we want to continue to attract, maintain and develop exceptional people. With out a good team, without people, obviously our franchise is not much.

What's the how two? In terms of how do we get to number two and move into the 20s as far as market share from today's 16% market share? New products and new geographic markets, today we are rolling out two important products; Biofinity and Proclear 1 Day. Both have huge potential and both have expanded capacity. Biofinity is a third generation silicone hydrogel. Sales in 2007 were $10 million, all capacity limited. In October, our output increased to 2 million lenses, that's enough to support revenue in the $60 million to $70 million range. We will continue to expand capacity and improve efficiency, whereas over half... we are half way there and as far targeted efficiency and we believe for good reasons, we can achieve targeted output, efficiency and cost.

For example, our R&D line which was line number 5 that we dedicated to the R&D people to look at the efficiency, we have been able to achieve our targeted efficiency rates. Importantly, we are ahead of schedule in our two-week silicone hydrogel lens, our work course of the future. It is now anticipated we will launch it in the April-May time zone and possibly even earlier. Importantly, unlike Biofinity which was on all of... all new manufacturing platform using all new materials to mould and to mould with entirely different material if you will. Importantly, the two-week is on Gen II and it is molding with polypropylene which is the type of material that we are accustomed to molding with as opposed to EtOH, which is the Biofinity product.

We believe that this means better yield, higher volumes and much lower costs. Note, since we've been burnt in the past with our Biofinity rollout that included in the 2008 guidance is none of the two-week silicone hydrogel product. However, we expect the two-week to be a major factor to our post 2008 market share gains and are therefore very optimistic about continuing solid double-digit growth into 2009 and beyond.

We already know many chains have a high degree of interest in this new product. Furthermore, we believe we will be able to produce large volumes on our Gen II platform where one line can likely exceed the total capacity of all of the Biofinity lines in their current state. Biofinity is now in production on six lines or even seven if I count one that was put into production last week.

As an aside, during the fourth quarter we decommissioned our first Biofinity line, writing off its entire value of $7 million. I know Steve will be covering our fourth quarter results; simplistically however, line number one was our model tee of silicone hydrogel production with about the same amount of OR [ph], a greater direct labor overhead and depreciation and could only produce once if the amount of lenses as the other lines. Once we determined it was not capable of being upgraded, the decision to stop wasting our time and money became obvious. Another key area critical to our success is the silicone hydrogel toric and to a lesser extent silicone hydrogel multifocal.

In 2008, we will be working on two silicone hydrogel projects; one using a one-month Biofinity and one our two-week products. While it is unclear which one will be ready to go to market first, we expect to have a silicone hydrogel toric in production by the end of this fiscal year. I might point out that the risk profile transitioning from a sphere to a toric is much lower other than that to develop a new lens, Biofinity on a new manufacturing platform with all the materials. So we are a lot more confident that silicone hydrogel torics will be a contributor to our 2009 and beyond results.

For the first time, we have adequate resource to focus on these critical areas. Before I transition to 1 Day disposable modality, let me make one more very important point about our ability to move quickly into the $1.4 billion silicone hydrogel market. Silicone hydrogel is now 27% of the global market and 46% of U.S. market in the most recent calendar quarter provided by independent market research. Keep in mind, our silicone hydrogel materials are third generation silicone hydrogel material. They are not coated like the first generation silicone hydrogel, they are less rigid or stiff. Our patented Aquaform technology allows water to bond with this silicone hydrogel unlike competing technologies. This is important since, while all lenses worked reasonably well, comfort is still number one factor in a decision of what lenses to wear. People have these lenses in half the day, so they must be comfortable.

A serious... a second factor is unlike the market leader, we will work with the largest chains and let them leverage their branded private labels. We'll offer this flexibility with our two-week silicone hydrogel, which is in the sweet part of the market.

Now on to the 1 Day modality. As we suggested through out this year, the 1 Day or daily disposable market is going to stay a major growth driver globally. Keep in mind, the U.S. is only 36% of the worldwide market and is likely to be less five years down the road, given the rapid growth in Asia Pacific. This Asia Pacific continues to grow double-digit mainly because of daily disposables. During the fourth quarter, we made substantial progress in expanding capacity for our 1 Day Proclear, daily disposable was just Proclear 1 Day by substantially... I mean by tripling its capacity between July and October. Today we can achieve annualized rates of 150 million lenses and while we are still capacity constrained, we now have enough capacity to help drive the double-digit growth we expect in 2008 and going forward.

The market for 1 Day remains double-digit and we believe Proclear, which is a proven material for late day comfort will be a great product for this global space, or be our one day work course.

To diverse from new products and to renew our product offering, let me just touch on an extremely important message about 2007. We are emphasizing to our CVI sales force, the message is sell what you have, don't try to sell what you don't have. No silicone hydrogel for... in 2007 in spite of no silicone hydrogel two-weeks product in limited capacity for Biofinity and a start-up of Proclear 1 Day, our CVI sales team gained market share and in fact, gained share in the U.S.

Total fits today are 21.6% and we are in a number two position in the U.S. They accomplished this incredible fee being hugely limited on supply and during a difficult transition period of relative supply while we were consolidating... or inadequate supply while we are consolidating the distribution centers around the world. I am immensely proud of our global organization and particularly, our sales team which has hung in there through the tough times.

A second important point about our 2007 results that I hope you picked up on is how much market share you continue to gain of the hydrogel or the non-silicone hydrogel market. While this portion of the market is flat worldwide, it still represents 74% of the entire market. Our Proclear family is up 27% in constant currency for the year and an impressive 36% constant currency for our most recent quarter. This growth is all... this growth of Proclear is in all categories; daily disposables, our conventional spheres, torics as well as multifocals.

So in the first nine months of the calendar year, Proclear material moved share of the non-silicone hydrogel market world wide from 4% to 5%. Today its 24% of our revenue compared to only 20% in 2006. All this and we still don't have market for Proclear in Japan, a market almost the size of Europe. In Japan, we expect to be launching Proclear 1 Day at the end of this calendar year or early calendar year 2009 depending on regulatory approval.

We talked about new products and capacity and selling what you got. The other part of the... of our market share gains growth story is Asia Pacific. Here, we've made progress and we laid the groundwork for future growth by adding to several key positions in 2007. For example, we now have a President of Asia Pacific and we are already expanded into China, Malaysia and Taiwan. In early 2008, we will go direct in Hong Kong. Some of our progress is already apparent in our growth, 19% in constant currency in 2008. As we add new products, gain regulatory approval and with existing products such as Proclear in Japan, and expand our footprint, we expect to rapidly increase our market share in a high-growth hitter from its 8% level today.

And so in summary, we believe we have a great market to participate in and one we expect to continue to see grow 6% to 9%. We believe that we have the right family of new products for the silicone hydrogel market. We believe that we have the right family of products or the resources to grow in Asia Pacific and we believe we will continue to gain share in the flat hydrogel market where no one but us is effectively addressing the market other than India on the disposables. Excluding daily disposable hydrogels, they still accounts for 40% of the market and Proclear answers the need in that space.

2007 set the stage for how we will proceed going forward. We think that 2007 will allow us to achieve double-digit constant currency growth going forward, keeping in mind the key event that took place; significant progress with Biofinity manufacturing, know how, capacity and output or yields if you will. The launch of our premium one day disposable, Proclear 1 day and the ramping up of its capacity to 150 million unit mark by the end of 2007. The completion of consolidation of inefficient distribution system in the United States and substantial completion in Europe, solid progress on getting ready to launch into the two-week hydrogel market, the U.S sweets spot, the progress in adding to the infrastructure to gain share in Asia Pacific, while very, very disruptive the substantial realignment of our manufacturing plants and locations, in order to optimize efficiency going forward; particularly by optimizing the Gen II platform fired during the... from the Ocular acquisition.

CooperSurgical, just a brief comment about that. CVI CooperSurgical had an outstanding year. It achieved $155 million in revenue, growing 24%. It has successfully integrated its hospital business, which now has a dedicated and productive sales organization that knows how to sell into hospital, the hospital technique of selling.

Sales for the year were $42 million, up 56% up from the prior year and new... and now account for 25% of CooperSurgical. CooperSurgical successfully completed two acquisitions; Wallach Gynecology Devices used primarily in office practices, and Lone Star Retractor System, which places a retractor ring around a surgical incision field. CooperSurgical continues to perform well with 9% organic growth in the fiscal year and in the fourth quarter.

Just to comment briefly about guidance, while 2007 was indeed an integration and start-up year and 2007 was indeed an immensely complex year from our analysts' and shareholders' perspective, 2008 will see us transition to a new stage, growth with improving profits. Given our huge commitment to grow with 70% of our revenue in new products in 2011, we'll remain capital intensive at least until we ramp up the required platform for what we believe will be our two-week work course.

And with that we gave guidance for 2008, which reflects top line growth in the range of $1.40 billion to $1.90 billion. Drivers; CVI at $875 million to $920 million, the drivers are Biofinity and Proclear 1 Day, noteworthy is not included in that guidance is two-week silicone hydrogel lens which as I indicated we expect now in the market as early as mid-fiscal year.

From an earnings call... for earnings call outs or identified costs will be one-third of where they are in 2007. As we move towards 2008, we will begin to increasingly emphasize our GAAP results, something I know that all of our analyst and our shareholders will be very happy about. And for 2008, our GAAP earnings are expected to be in the range of $1.30 to $1.80, while our non-GAAP targeted earnings in the range of $2.40 to $2.65.

With that, I will turn over to Steve who will talk about the results.

Steven M. Neil - Executive Vice President and Chief Financial Officer

Thanks Bob. Good afternoon and evening everyone. Overall, I want to refer everyone to the Cooper Co. website for product detail. We post the market data as well as our product sales data there. So I don't want to get into too many numbers today. I am going to be talking as Bob did in revenue mostly in constant currency.

Overall for the quarter, our revenue was $254 million, which was up 14% in constant currency, so very strong quarter for both segments, especially Vision, which gained share globally as well as in the U.S. during the quarter. Overall for the Vision Group, there was a 10% soft lens sales growth, which followed 7% in the third quarter and that compares to 1% to 2% in the first half. Thus we've had a significant impact realized from new products and additional production capacity as the Vision Group gained global market share in the second half of the year.

Regionally, the Americas led the growth where soft lens revenue grew 12% over the fourth quarter last year and 5% over the previous quarter. And what drove the Americas was the U.S., which showed very strong growth, growing 16% in the fourth quarter, and also 5% over the third quarter.

Looking at products, single-use product grew 29% and represents 15% of our total sales. Biofinity sales were $5 million for the quarter, $10 million for the year, and in the quarter they were led by Europe at $2.5 million and the U.S. at $2.2 million. Overall, spheres were up 12% which compares to being up 5% in the third quarter and flat in the first half. Disposable torics grew 8% and in the U.S., disposable torics were up 10% despite not having a silicon hydrogel toric in the market. Proclear material sales were up 36% in the quarter, and at $52 million, now represents 25% of soft lens revenue.

Overall disposable lenses were up 13% and our core lenses were up 16%, core lenses now representing 72% of our total revenue, while the market was up approximately 5% in the quarter. Else while our capacity constrained on Biofinity and PC single-use, we significantly outperformed last year and the market as supply increases for these products in 2008 and our growth was enhanced focusing for these products for the next year. So certainly setting ourselves up well for strong growth here in 2008 as that capacity comes in.

Looking briefly at the women's healthcare... sorry about that, technical difficulty here let me go again. CSI, or women's healthcare business had another solid quarter, with revenue growing 25%, 9% organically. Hospital products are now 27% of the revenue and that's up from 22% last year, and they grew 51% in the quarter and organically it was a double-digit growth rate, so again strong, consistent growth by women's healthcare.

Turning to revenue guidance; we expect revenue growth next year to be driven by single use and silicone hydrogel products as Bob mentioned. CVI should continue to grow much far faster than the market and we should be continuing to see the growth in hospital products from our Women's Healthcare Group, which will expand the revenues from its recent acquisitions.

For the first time since introducing single use lenses in 2001, we believe that our manufacturing capacity in the second half of 2008 will catch up to demand and we'll be able to aggressively pursue new sales opportunities that we've not been able to bid on previously. Additionally, we expect to continue to substantially increase our production of Biofinity lenses not only through the addition of a few new lines, but also through continuing yield improvements. An additional product line was put into service at the end of November as Bob mentioned, significantly ahead of schedule and we expect an additional line to be brought on by the end of the first quarter.

Overall, we are confident that our product offerings will result in 10% to 15% revenue growth in markets that today are growing 5% to 7%. I want to spend a little bit of time on call-outs. I think it's to try a little bit different perspective than we have in the past. As most of you know, we've identified those costs which we feel are not of a recurring nature. As cynic would say, we've done this to confuse you and to the point that we have no doubt been successful. So hopefully, I can provide some clarity here and also some guidance as we go into 2008 on these costs.

We really group call-outs into 4 types of costs; acquisition and integrated related. Those relate to costs that are primarily the result of acquisition of Ocular Sciences and consist of accelerating depreciation or writing off redundant assets once more efficient product lines are in place. Severance cost for duplicative functions and overlapping cost, while new operations are implemented. These costs are both cash and non-cash related. The second category is manufacturing start-up costs and these relate to new manufacturing platforms, which generate inordinate inefficiencies while we work through the learning curve. These costs are predominantly related to silicone hydrogel manufacturing and they are predominantly cash-related.

The third category is litigation expenses. These are costs associated with intellectual property; shareholder and acquisition related litigation and these are also cash-related. And then finally, share-based compensation expense. These are expenses required by SFAS 123R and are non-cash related. More detail on these costs is included in our earnings release and SEC filings, but with these four classifications, we organize our review of the call-outs.

With regards to Q4, we worked diligently to complete virtually all of the integration activities by the end of fiscal 2007, which is one quarter ahead of our planned integration timing and significantly faster than we originally projected. We heard loud and clear from our shareholders that what I call, noise [ph] from integration activities needs to be called and we made remarkable progress toward this end in Q4. We consolidated our primary distribution centers in the U.S. that happened in the fourth quarter and Europe that happened at the end of the third quarter, and that was predominantly in the United Kingdom.

We completed the conversion of our high-volume processes to newly installed Generation II lines. We complete our assessment of production assets that will be utilized in ongoing operations, including our conclusion with regards to the first Biofinity line as Bob mentioned. And the resulting charges in the quarter, most of which were non-cash related, were higher than we originally estimated and that was due to limited visibility of asset utilization until all production conversion to the new lines was completed. I want to emphasize this, our intention is to return to normalized operations and we believe that our efforts in Q4 achieved that goal. Looking forward, our operating clarity improves dramatically.

Costs that impact 2008 are limited to one primary cost and that is manufacturing start-up and two lesser areas; integration-related and litigation expenses. Acquisition and integration costs are all the cost that have been incurred during the three-year integration and they will not recur in 2008 with the expectation of about $1.5 million to $2 million of duplicative facility cost associated with three remaining satellite distribution centers on the European continent. They will be consolidated into our Liege, Belgium facility in 2008.

Manufacturing start-up costs, they will end in 2008. They carry over from 2007 as a result of inventory and cost inefficiencies that will flow through to the P&L when a product is sold and the start-up of several new silicone hydrogel lines. We estimate between $24 million and $35 million to be incurred in 2008, significantly less than 2007 and again they will end in 2008.

And lastly, litigation expenses. With the settlement of our Intellectual property litigation received in November, they are essentially one month worth legal billings that will be identified in 2008 in a small amount of class action expenses. We estimate between $2.5 million and $3.5 million to be incurred in 2008 and that's primarily in the first quarter.

Thus in 2008, we expect the identified cost to range from $28 million to $40 million, which is $0.50 to $0.70 per diluted share. This compares to an EPS impact of $2.31 in 2007 as we have largely completed the integration activities and we are now migrating to new manufacturing platform.

Lastly, we will continue to identify share-based compensation expenses going forward because they are arbitrary and non-cash related, non-comparable to earlier financials that are in the five year table. We estimate these costs to range from $0.35 to $0.40 per share in 2008. Hopefully, this lengthy clarification is helpful and indicates why the costs were incurred, why we feel they are non-recurring in nature and why they will go away in 2008.

Taking a quick look at the operating results, I am not going to repeat the numbers that are in the release. But rather I want to focus on trends and how they impact 2008. First however, I wanted to address our Q4 results, excluding call-out, which were lower than anticipated by approximately $10 million or $0.20 per share and this is due to three factors. One is the impact of currency, which is primarily the impact on our U.K based manufacturing; the second is operational inefficiencies in manufacturing and packaging as we completed our integration activities, and we have not called these inefficiencies out, we are learning. And third expense is associated with supporting product launches, which were more aggressive in the quarter than planned and thus we incurred distribution and trial lenses cost in advance of the revenue generation. Excluding the impact of currency, these Q4 activities put us in a position to effectively drive growth in 2008.

Now looking at the income statement for the quarter, gross margin excluding the call-outs declined to 61% versus 63% in the fourth quarter last year, and this is due to product mix as lower margin spheres primarily single-use grew faster than higher margin torics. In general, our cost per lens for our major product categories are the same or less than in Q4 last year and pricing is essentially the same. Thus product mix is causing a decline in gross margin.

In Q4, we also incurred inefficiencies in manufacturing and packaging as we complete our integration effort, which adversely impacted gross margin by approximately $3 million to $4 million, again which we have not called out and which we do not expect to recur.

Looking into 2008, we expect gross margins to be slightly lower year-over-year due to product mix. Our strong revenue growth in 2008 is expected to come from silicon hydrogel and single-use lenses, both which will carry lower than average gross margin. I should note however, that as we go through 2008 we expect our cost per lens for both single-use, especially Proclear and silicon hydrogel to decrease and as these manufactured lenses flow through inventory, they will positively impact gross margins.

Another significant impact in 2008 is the benefit from the migration of product for more... to more efficient product lines and that incurred in the second half of 2007, which is expected to favorably impact manufacturing cost by $12 million to $13 million next year and will substantially offset the mix impact. Thus overall, we expect gross margins in the 62% to 63% range in 2008.

Looking at operating expenses excluding call-outs, they were 43% of sales in Q4 compared to 45% last year, as we experienced some leverage from the increased sales. In 2008, we expect to again experience leverage on our operating expenses. However, we anticipate continuing to grow our marketing and R&D investments as we invest in the near term and in product launches and in future product development.

In 2009, we expect even greater leverage on our operating expenses as we transition from the spending associated with Biofinity and two-week silicone hydrogel sphere launches, the toric launches, at the end of the year and PC single-use launches. This new product spending in 2008 fuels revenue growth in 2009 and beyond.

Operating margin excluding call-outs was 18%. This is the same as last year and reflects the impact from the changing product mix offset by the lower operating expenses. Our operating margin was impacted by costs associated with our new product launches and as noted, we absorbed the manufacturing, packaging and distribution inefficiencies in the quarter as we completed our integration activities. When you take the distribution inefficiencies with the manufacturing and packaging, it totaled approximately $6 million to $7 million in the quarter, which is not being called out, as I noted earlier.

We anticipate operating margin in the 19% to 20% range in 2008 as we balance our marketing and R&D spending with total operating expenses growing less than sales. We do expect our clinical expenses to be high in 2008 as we complete the design of our silicone hydrogel toric as we develop our marketing programs for two-week silicone hydrogel sphere and silicone hydrogel toric and further expand our Biofinity and PC Daily marketing. We would expect to realize operating margin expansion of an additional 100 to 200 basis points in 2009 as gross margins improve and we realize improved operating expense leverage.

The effective tax rate excluding call-outs for the fiscal year was 17% and we expect the rate in 2008 to reduce to 14% to 16% range, which is more normalized from a revenue by jurisdiction perspective. And let me close it out with few comments on cash flow. Our operating cash flow was $38 million in Q4, compares to $36 million last year. With our integration activities substantially behind us, we anticipate cash flow improvement in 2008 significantly over 2007. Our as reported or GAAP earnings substantially increased with the completion of the integration activities, we are going to see improvement in profitability and will begin to experience sustained reduction in finished goods inventory levels as we complete our distribution center consolidation effort.

Thus looking at 2009, we expect operating cash flow to expand further, as profit margins expand and global inventory turnover improves further. In the quarter, we had capital... I am sorry, for the year, we had capital expenditures of $184 million and that reflects initial progress payments made in the fourth quarter on single-use and two-week silicone hydrogel production lines that will be built during 2008.

We expect CapEx of $160 million to $180 million in 2008 as we add those silicone hydrogel and single-use line and those will support our revenue growth opportunities in late 2008 and 2009. So with that, a lot of data lot of numbers, I am going to turn it over to Bob for Q&A.

Question And Answer

Robert S. Weiss - Executive Vice President, Chief Executive Officer of The Cooper Companies and President of CooperVision

Okay. Operator, can you open up the lines for questions?

Operator

Sure. [Operator Instructions].

B. Norris Battin - Vice President of Investor Relations and Communications

Gerard Holtz [ph].

Unidentified Analyst

Just a couple of quick questions and I will jump off here. Can you just talk about the cannibalization of Dk 100 to two week, what it can do? Because I know you are not including in your guidance for next year. But if you look at J&J, which basically dictates the market at this point, moving over to a two-week, could eventually just blow Biofinity away. Meaning, Biofinity goes away and you just go with a two-week? And then just on the royalty payments, is that going to... are those royalty payments for the silicone hydrogel lenses going to be excluded from your earnings numbers?

Robert S. Weiss - Executive Vice President, Chief Executive Officer of The Cooper Companies and President of CooperVision

I will pick both of those questions. First of all on cannibalization, the... certainly the U.S. market is much more about the two-week market whereas the rest of the world is much more about a 1 month particularly as it relates to silicone hydrogel. So I don't... while the work course clearly will be the two-week going forward, there is a large niche market as we can see from pure vision and night and day and in the 30-day space. So I think Biofinity given if perception in the marketplace will have its place, we look five years down the road there is no doubt that the two-week will be the much larger market. But we don't... given the number of alliance we have and amount of capacity, we probably can address the market needs from that perspective.

As far as... so the answer is, well, a long way from being able to meet the market needs in both spaces; the one day... the two-week and the 30-day marketplace and it's not one size to tell globally.

As far as the royalty, the royalty is baked into the numbers that are not called out, its not a call-out going forward and from the perspective of expectation down the road as we look down the road at silicone hydrogel space, we will still have attractive gross margins. By attractive I mean if we look two or three years down the road, north of 70% addressing that. So it was a win-win from the company's prospective and time to move on and stop as you can see from the legal fees we created in the quarter, it was time to move beyond making the lawyers that rich and do more productive things

Unidentified Analyst

Got you, okay. That makes sense. Just one more thing on the royalty, can you quantify the percentage that you will have to payout? And then just on the call-outs for next year, you mentioned that you are going to kind of curtail the manufacturing portion of those expenses related to new products. But with a couple of new toric lenses potentially coming on, does that mean unlike that spheres those numbers will not be as significant? Thanks.

Robert S. Weiss - Executive Vice President, Chief Executive Officer of The Cooper Companies and President of CooperVision

Steve you want to take that?

Steven M. Neil - Executive Vice President and Chief Financial Officer

Yes, I will take that. No, we won't disclose royalty percentage, Gerry, it's a nice try. The torics on silicone hydrogel, once we understand how to work with silicone hydrogel and spheres, while a toric is more complicated because you have to deal with the cylinder and the access, we do that on hydrogels today, that's a normal recurring operating expense. The startup to build adequate inventory, do a launch takes longer because you have over three times the SKUs. But as far as inefficient expenses or anything, there is no call-out and that's not considered a non-recurring type expenses in the numbers.

Unidentified Analyst

All right. Thanks a lot.

Steven M. Neil - Executive Vice President and Chief Financial Officer

Sure enough.

B. Norris Battin - Vice President of Investor Relations and Communications

Joanne, you are the next questioner.

Joanne Wuensch - BMO Capital Markets

Thank you. You are not including in your numbers the Dk 100 product which tells me that your top line is probably a number that you are fairly comfortable with. Can you confirm, do you think if your guidance is being conservative? Do you think if it is being aggressive and same things for the bottom line, how much have you plugged in on your expense side?

Robert S. Weiss - Executive Vice President, Chief Executive Officer of The Cooper Companies and President of CooperVision

From the perspective of not taking on the two-week, we have learned our lesson with the Biofinity and we really don't want to get on that path, a product is a product when it's out there and in the marketplace and has adequate capacity behind it. So we obviously are optimistic, we will be in the market mid year and, so from that perspective we think that the range we've given on the revenue side is a realistic range and one that, that we think have a good shot... we've a good shot of being towards the top end of that.

Relative to your second point, earnings per share, I think we approached the guidance the same way, lets... I don't want to say lets not... lets find the bottom for sure, but I think what we have is realistic guidance and one that the shot of getting us top end of the guidance is, at least much better than the top... the risk of the bottom end and I think obviously, guidance gets more manageable now that we have, if you will, $100 million of restructuring activity pushed to background and we are done with that.

The risk on Biofinity, now that we've been in production, the periods of time we have, now that we've basically stepped up and can make 2 million plus lenses a month. Obviously, the predictability has gone way up on that front. Our bottom line, top line are driven by... certainly our bottom line is driven heavily by top line growth. And in that sense, we view that having... we feel good about the capacity potential for delivering Biofinity and Proclear 1 Day, which are going to be the drivers of next year's top line growth and therefore, will be contributing to our earnings per share growth.

Joanne Wuensch - BMO Capital Markets

That's very helpful. If you look throughout the year, do we think of 2008 as the back end loaded year or is it still a year than you are going to build Biofinity, you are going to build the 1 Day lens and you are going to decrease your call-outs?

Robert S. Weiss - Executive Vice President, Chief Executive Officer of The Cooper Companies and President of CooperVision

It's a little back ended, but not skewed perhaps as much as this year was. Biofinity and Proclear 1 Day is ramping up. As of right now, we're somewhat constrained on both fronts. And we will be out of I think a mode of being constrained by mid year, which will then foster even better growth. We could sell a lot more for example Proclear 1 Day in Europe, if we could make a lot more this year, from the get go day one. But being at 150 million units in capacity is we've made a lot of progress there, so year-over-year we would expect respectable growth in the first six months also.

Joanne Wuensch - BMO Capital Markets

Okay. Thank you very much.

B. Norris Battin - Vice President of Investor Relations and Communications

Larry Biegelsen.

Larry Biegelsen - Wachovia

Good evening and thanks for taking the call. Can you hear me okay?

B. Norris Battin - Vice President of Investor Relations and Communications

Yes we can Larry.

Larry Biegelsen - Wachovia

Couple of questions on the Dk 100. First, any hurdles that... what are the major hurdles that are still in place for making the lens are they material specific or is it related to adopting into the Gen II line? Could you talk about the property, I don't know, if you have talked about the properties of the lens specifically, the modulus surface treatment, water content and dk/t. The gross margin compared to Biofinity and lastly, if you do launch it next year, what would be the earnings impact? Obviously, there is a benefit on the top line because it's not in your top line guidance. But, would you expect it to be positive or negative on earnings next year? Thanks.

Robert S. Weiss - Executive Vice President, Chief Executive Officer of The Cooper Companies and President of CooperVision

As far as the hurdles of getting to market. There are two ways to look at the production side. It's on Gen II and as I indicated, it's being made by polypropylene, which we made throughout our past, so that we are very comfortable with. We already are in production on what's known as fast track, I think some of you have seen that in the U.K. in November. So we know we can make the product at least on fast track, we are basically well down the line of getting the product PQed [ph] as we would say, Production Quality in Puerto Rico which is our large Gen II line. There is a regulatory requirement to file 10-K, we are working to the process of approval with the FDA. And we are certainly reasonably optimistic that we will be in the marketplace in the timeframe we targeted, the April-May timeframe.

Obviously, no guarantees when you are dealing with the government, but we... from the perspective of this material compared to other materials, there is nothing particularly more challenging, relative to what should be, from a regulatory point of view. As far as the Dk of this material compared to Biofinity, yes, the Dk is Biofinity is 128 this is a 100, so it's a little bit less in terms of Dk and more suitable for that two-week space. From the point of view of its stiffness, it is obviously a little more stiff than... a little less stiff than 100... 128 Biofinity, and from that perspective, it will do well in the market, measures up well against if you will, Oasys.

Larry Biegelsen - Wachovia

Bob, are you willing to disclose surface treatment and the modulus, the numbers?

Robert S. Weiss - Executive Vice President, Chief Executive Officer of The Cooper Companies and President of CooperVision

I think that's going to be available out there as far as the 100... from the point of view of its water content will be slightly higher 52%. Its modulus will be around where Acuvue, it is a 0.4 modulus, which is comparable to Acuvue Advance if you will, as well as 02 optics.

So a less stiff compared to if you will Oasys and the Dk 128 are more comparable. It is a... it is like Biofinity, not a coded material and basically has a lot of Aquaform properties vis-á-vis being having a higher water content and presumably features that could be comfort.

Larry Biegelsen - Wachovia

And lastly then on the profitability, I mean if you launch it in '08, does it benefit earnings or is it a drag on earnings?

Robert S. Weiss - Executive Vice President, Chief Executive Officer of The Cooper Companies and President of CooperVision

I would say that given what we think of this product, we are not going to go right in terms of putting it into the marketplace. So for the most part, we will spend to put the muscle behind it if the capacity is robust. There will be some incremental contribution perhaps, but it's not going to suddenly shoot our profits way up. We are going to... we view ourself as a growth company and a growth company shouldn't try to move product out of the shoot particularly one that we think have delays that this products does.

Larry Biegelsen - Wachovia

I am sorry; it's not in your top line guidance, but is it in your earnings guidance so?

Robert S. Weiss - Executive Vice President, Chief Executive Officer of The Cooper Companies and President of CooperVision

It is in neither. It is not in top and it is not in bottom.

Larry Biegelsen - Wachovia

You are saying that, if you launch it next year, it would probably have more of a positive impact, slightly positive on earnings as supposed to be a drag on earnings... on your guidance, is that right?

Robert S. Weiss - Executive Vice President, Chief Executive Officer of The Cooper Companies and President of CooperVision

Yes, it will certainly have a more positive impact on the top line and a much less favorable impact on the bottom line given that we are going to... we will invest heavily in rolling it out.

Larry Biegelsen - Wachovia

And lastly on depreciation... D&A was high in the quarter at $29 million, why and going forward --?

Robert S. Weiss - Executive Vice President, Chief Executive Officer of The Cooper Companies and President of CooperVision

I'll let Steve talk to that.

Steven M. Neil - Executive Vice President and Chief Financial Officer

Yes, Larry its like last quarter and we have disclosed I believe in the release there is accelerated depreciation on some assets that we were taking out of service and if you identify those assets, as having a shorter life and they exist in standard, you have to accelerate that depreciation and tell they are thrown away. And so there is I can't right off the top of my head there, it is in our releases as to what impact had to do with that accelerated piece. But it's yes, I am sorry it is. Its in the quarter, $9.4 million of the $28 million was related to accelerated depreciation for those assets and $14.2 million compared to the total $84 million was accelerated depreciation on those assets that were taken out of service. So that will and there is a small less than $1 million roll over that into Q1. So that's virtually done, but that's the reason for the increase.

Larry Biegelsen - Wachovia

Thank you.

B. Norris Battin - Vice President of Investor Relations and Communications

Larry Keusch.

Lawrence Keusch - Goldman Sachs

Hey guys, can you hear me?

B. Norris Battin - Vice President of Investor Relations and Communications

Yes we can.

Robert S. Weiss - Executive Vice President, Chief Executive Officer of The Cooper Companies and President of CooperVision

Hi Larry.

Lawrence Keusch - Goldman Sachs

That's great. So I guess is what I am wrestling with, if I think about the low end of your guidance and think about the 19% to 20% op margin that you were talking about, I keep coming up with sort of EPS numbers that would be higher than the guidance you provided. So I am wondering if, number one, when you are talking about operating margin, does it exclude stock-based comp? And maybe you can also help us think a little bit about how you guys are thinking about interest expense. And I think your tax rate would be somewhere between 14% to 16%. So if you could just help settling straight, that would be really helpful.

Robert S. Weiss - Executive Vice President, Chief Executive Officer of The Cooper Companies and President of CooperVision

Steve you want to--?

Steven M. Neil - Executive Vice President and Chief Financial Officer

Yes, I'll give a shot at that Larry. The interest expense is going to go up a little bit, especially as we go into the first half of the year, you will notice that from a cash flow perspective, we had negative free cash flow last year, largely due to the integration activities, the cash portion of the integration activities and the $184 million in CapEx. We expect to be positive for the full year, but that's more coming out the back-end, being positive than upfront. So we expect some impact from interest expense.

You will also notice that the currency impact in the quarter for us this year, this fourth quarter was $4 million. We think there is a currency today a weak dollar against the pound, we buy more product from the U.K. than we sell to it. So we think that's going to have some impact again Larry, so that's the pressure there.

We do think that the taxes are going to be in the 15% to 15.5% range, but again that will move around depending on where the cash or the profits stick. So hopefully that helps get you to it. The real balance is what Bob indicated is how much do you invest in the launching of these products, the marketing and trial lenses and we will continue to grow R&D in 2008 above the sales growth line. So there is a balance on operating margin, but there is a little bit of activity that's going on below the operating margin line which may help you reconcile back to those numbers.

Lawrence Keusch - Goldman Sachs

Okay. But the 19% to 20% op margin is inclusive of those marketing and expenses that you're talking about. Is that right?

Steven M. Neil - Executive Vice President and Chief Financial Officer

That is correct.

Lawrence Keusch - Goldman Sachs

So, I guess I am still... and we can take this offline I'm still --

Steven M. Neil - Executive Vice President and Chief Financial Officer

It does... I am sorry; it does not include the equity base. You'll see this year and I'm trying to think, the number I believe it was $0.28 was our equity component, we're thinking it's going to be $0.35 to $0.40, that's probably the difference for you.

Lawrence Keusch - Goldman Sachs

Got it. So that makes sense. So the 19% to 20% is excluding stock-based comp?

Steven M. Neil - Executive Vice President and Chief Financial Officer

Right.

Lawrence Keusch - Goldman Sachs

Okay. And then I guess the second question is, can you just help me understand coming back to Dk 100, I guess there is two questions here. One is; you said that, you're kind of in this, let's say you are down this year, you are looking... you are getting the production quality up in Puerto Rico. So I guess technically, its still sort of an R&D line if you will, or in R&D. Again, how different is that line from what you already have going in the U.K.? I understand Puerto Rico has Gen II etcetera, the higher volume line. But again, if you got it working in the U.K. I guess I am trying to figure out what are the risks that you can't get that on the timeline that you are looking for down in Puerto Rico?

And then the second part of that question is, if you are telling us that you are going to get this on the market earlier than you had anticipated, you're obviously feeling a pretty... you are starting to feel some what conviction for the product. So why not put that in the guidance if you now start to feel like you can get there ahead of your prior expectation?

Robert S. Weiss - Executive Vice President, Chief Executive Officer of The Cooper Companies and President of CooperVision

Okay. Good question Steve. The platform used in the U.K. compared to Puerto Rico is completely different. One is not... Puerto Rico is Gen II and a highly complex piece of equipment that runs into neighborhood of over $30 million. The... what we call the fast track in U.K., while it uses polypropylene mold, is a much more if you will labor intensive process that is not Gen II, easier to get through, easier to make product offer. We are in fact in production on that, but that's not the way we are going to have a work course product and that's not the way a long-term, we will get our cost down.

So, yes, we could... we can make enough on that line to have a launch, but the launch would not be a robust launch compared to getting through all of them as we call it PQ, Production Quality in Puerto Rico. We expect over the next couple of months to if you will, authenticate the line in Puerto Rico.

The second piece of the equation is regulatory and so if you put regulatory together with the production side, then we are... are we being cautious? Yes, we are, but I'd rather have it as an upside than have egg on my face that we put in the guidance and then it became nothing.

Lawrence Keusch - Goldman Sachs

Okay, got you. Thanks guys.

Steven M. Neil - Executive Vice President and Chief Financial Officer

Thanks Larry.

B. Norris Battin - Vice President of Investor Relations and Communications

Jeff Johnson.

Jeff Johnson - Robert W. Baird

Good evening guys. Can you hear me, okay?

B. Norris Battin - Vice President of Investor Relations and Communications

Yes we can Jeff.

Jeff Johnson - Robert W. Baird

All right. Just a couple of things here, qualitatively can you talk about the Dk 100 launch that you are planning in March, April. From what we are hearing maybe going out just a few data sites, and how quickly could you ramp that up or is it something where most of the calendar year you'd expect it to stay at a limited number of sites?

Robert S. Weiss - Executive Vice President, Chief Executive Officer of The Cooper Companies and President of CooperVision

The answer of that Jeff is really comes back to if we are rolling out the product based on fast track in the U.K. it's going to be limited launch. If Puerto Rico line is running the way, we think, it could run, it has the capability to match the production of, as I indicated all of the first six lines of Biofinity, so it would be pretty robust. We think the yield, so it comes back to a lot of discussions about can you make it and how will the yields do? We think the capability to get respectable yields out of Gen II line using polypropylene is much, much, much by a factor of, I don't want to say, 10 but hugely easier event than what we're trying to do with Biofinity. So what will dictate how robust is the launch is number one, getting the approval, the FDA approval on the 5, 10-K, and two then would be, how well is the line doing in Puerto Rico. If its doing well and all goes to what we are hoping to happen, we could start having a respectable amount of product well out of the door in the April-May timeframe, too early to guarantee anything. And that's why it's not in our guidance.

Jeff Johnson - Robert W. Baird

Fair enough. Then and Bob, maybe I missed this, but how many lines in Puerto Rico eventually would you like to have on the Dk 100?

Robert S. Weiss - Executive Vice President, Chief Executive Officer of The Cooper Companies and President of CooperVision

Well, we're going to start with one; we have a second one on order. These things in theory crank out around 35 million units. So it's... if go to a third line, if three are in production that is one heck of a lot of silicon hydrogel lenses, keeping in mind, that's a little different than our daily disposable, in terms of what you get as an ARP. So these... the lead time is substantial on the equipment. So it's in the neighborhood of approaching 18 months and that's why we already have the second line on order.

Jeff Johnson - Robert W. Baird

Fair enough. And then is the steep CapEx in '09, I know you talked about it for '08, but expectations that it could fall off in '09, is that a good expectation ever, an accurate expectation to have? And can you just remind me, maybe what normalized CapEx level should be for you guys eventually?

Steven M. Neil - Executive Vice President and Chief Financial Officer

Yes, we are trying to define normal, but I will help a little bit. We think that a maintenance level CapEx for us is about $25 million, that's just your existing capacity and replacing things that get old. We think if we grow with market share, we are somewhere around the $100 million to $110 million, and then you get above that, if you are growing faster than market share. So next year, $160 million to $180 million reflects the investments in the single-use lines as well as the second Dk 100 line.

In '09, the production line should go down, even if we are growing above market. But by mid 2010, we think we are going to be out of manufacturing capacity. Today, we are actively looking as to where to put that next footprint. So if we have a build of building then the CapEx cost would be quite a bit different. If we have to lease and just retrofit, it will be quite a bit less. So what I think from a guidance perspective in '09 is we expect '09 to be similar in amount to '08, it's just that, it will be less production capacity and then made up... the difference made up by a manufacturing facility. But little bit early right now, because we don't know what that footprint looks like in 2010, but hopefully that helps.

Jeff Johnson - Robert W. Baird

All right. And then last question I guess, going back to the earlier question on operating margins. Just putting your guidance together for '08 and even if you exclude options, it just seems to me operating margin have to be down next year assuming some consistency in the interest expense line. Am I just looking at my model wrong? I know, you've talked about leveraging top line growth in the faster earnings growth next year, I am just not seeing it in your guidance there in my model and maybe you could help me out there?

Steven M. Neil - Executive Vice President and Chief Financial Officer

Yes, I'll take a shot at that Jeff. I mean, we expect the gross profit... the gross margin to be slightly down. And that's why we say 62% to 63% and that's purely mix. And we do expect except for marketing and R&D to lever off of OpEx. In other words, that will grow less than sales. So the real balance on operating margin that I say is how much you are investing in R&D and how much you are investing to margin. We don't expect to get a huge growth next year.

We expect significant growth in '09 because as we go out of the year, a Proclear daily unit cost and a Biofinity unit cost and for that matter a Dk 100 unit cost is going to be less going out of the year than it is average for the year. So we expect to have some margin expansion, but not great again, because we want to set up '09 and take advantage of that capacity and the new products we are putting on... putting the capacity in for. So, it will expand, it's just again 2009 is less constrained from a capacity perspective. So that's where you see significant operating margin growth.

Jeff Johnson - Robert W. Baird

All right. And just to make sure I am not mishearing you, Steve or misunderstanding you, you are saying, it will expand. But then you are also kind of saying, everything you are saying is excluding marketing and R&D?

Steven M. Neil - Executive Vice President and Chief Financial Officer

No, no, what I am saying is, it's a balance Jeff. The marketing and R&D we are not going to go crazy. But we certainly are going to invest to drive the future and will I invest a $200,000 in clinical activities to support a silicon hydrogel toric in fiscal '08 even if I don't have revenues until as we go out of fiscal '08, you are damn straight I will.

Jeff Johnson - Robert W. Baird

Understood. But if you do that, there is a scenario here where operating margin falls next year?

Steven M. Neil - Executive Vice President and Chief Financial Officer

Correct

Jeff Johnson - Robert W. Baird

Okay that's it... I will work in my model, I just wanted to make sure I didn't have an error somewhere.

Steven M. Neil - Executive Vice President and Chief Financial Officer

Yes, it's a balance, it's a balance.

Jeff Johnson - Robert W. Baird

Now, that's it. That is all I got guys, thanks very much.

B. Norris Battin - Vice President of Investor Relations and Communications

Mike Weinstein.

Michael Weinstein - JP Morgan

Thanks. Can you hear me?

B. Norris Battin - Vice President of Investor Relations and Communications

Yes sir

Michael Weinstein - JP Morgan

Hi. Let's clear up this operating margin discussion, okay. Your guidance for the year, some gets right after your release $2 to $2.30 before you add back your stock-based comp, is that right?

Steven M. Neil - Executive Vice President and Chief Financial Officer

That's correct

Michael Weinstein - JP Morgan

Okay. And then if I back into that an operating margin, I get 15% to 16% using your other commentary about tax rate and what else, interest expense?

Steven M. Neil - Executive Vice President and Chief Financial Officer

Yes.

Michael Weinstein - JP Morgan

So, if I am right, I get 15% to 16%, it looks to me that what you are excluding Steve is your amortization expense. So your... when you said 18% to 19%, it looks to me like you're are backing up those stock-based comp and the amortization expense, would that be right?

Steven M. Neil - Executive Vice President and Chief Financial Officer

No.

Michael Weinstein - JP Morgan

Right, so where is the disconnect? Because you don't get $2 to $2.30 with the guidance you gave?

Steven M. Neil - Executive Vice President and Chief Financial Officer

I am going to have to go and take a look at your model and compare it to ours.

Michael Weinstein - JP Morgan

I mean, I am not using my model, I am doing taking your numbers, I am taking your revenue guidance and even with the stock-based comp which is 190 to 200 basis points, which is off of your operating margins commentary, you still wouldn't get down to $2 to $2.30? And that's the question you are hearing from everybody, everybody is doing the same math, they are taking your revenue guidance, taking your operating margin guidance. And they are running that through their income statements, with the 15% or 14% to 15% tax rate and they don't get $2 to $2.30. So it looks like there is some disconnect there and my math says that, it was probably that you are excluding amortization expense as well. Unless the currency impact is going to be significant, I mean like $15 million, $20 million?

Steven M. Neil - Executive Vice President and Chief Financial Officer

Currency is a piece of it. But we have also assumed a pretty significant investment in R&D in the $2 to $2.30 that's where my comments on the clinicals go and also my comment on our balance. Because we are not going to go crazy and --

Michael Weinstein - JP Morgan

But R&D is in operating margin.

Steven M. Neil - Executive Vice President and Chief Financial Officer

Correct.

Michael Weinstein - JP Morgan

SG&A is in operating margin.

Steven M. Neil - Executive Vice President and Chief Financial Officer

Correct.

Michael Weinstein - JP Morgan

So that 18% to 19% commentary right, which was... which backs out stock-based comp, it's still... what's everybody on the phone having a disconnect with?

Steven M. Neil - Executive Vice President and Chief Financial Officer

And understood and what we are trying to do is, we are trying to put an EPS model down there, that we know, we are going to be. That's why we said, we are in the high end. We do expect our margin to be 19% to 20% and if that means that we got a lever off of OpEx, lever off of lower finance IT etcetera cost, that's what we are going to do to bring in that margin.

We are not going to take the operating margin down, but we are not going to put an EPS number out there, that we are not going to hit either. So I think it's a balance and what we are going to do is, we are going to really mange the business intelligently. So I understand the mathematics of it, we just want to be conservative on the EPS side, we understand, we are not going to let the margin go south.

Michael Weinstein - JP Morgan

Okay. So just to make sure we are all on the same page then so, you are saying that I could have misspoken a minute ago. You're saying 19% to 20% operating margin including the stock-based compensation?

Steven M. Neil - Executive Vice President and Chief Financial Officer

Correct.

Michael Weinstein - JP Morgan

And then if we run that through that it with, your other commentary that would say it that $2 to $2.30 guidance then is too low? Is that what you are trying to say?

Steven M. Neil - Executive Vice President and Chief Financial Officer

We're saying its conservative and we're putting something out there at that we're going to make sure that we perform, manage expectations and don't do what we do when we are talking about Biofinity and launching that ahead of time.

Michael Weinstein - JP Morgan

Okay and then let me ask this one last question here. The top line guidance, the 10% to15%, do you know what that would be on an organic basis so what are you assuming our currency and M&A?

Steven M. Neil - Executive Vice President and Chief Financial Officer

No, that's constant currency.

Michael Weinstein - JP Morgan

So the 10 to 15, so the... your 10... sorry, your 10.40 to 10.90 is

Robert S. Weiss - Executive Vice President, Chief Executive Officer of The Cooper Companies and President of CooperVision

Just on one thing on... the 10.40 to 10.90 is current rate.

Michael Weinstein - JP Morgan

Right.

Robert S. Weiss - Executive Vice President, Chief Executive Officer of The Cooper Companies and President of CooperVision

All right, if you were to... I think the way you asked the question, if you were to compare that to the prior year, if there are currency factor in the growth and the answer is probably 2% to 3%. That is our currency factor year-over-year.

Michael Weinstein - JP Morgan

Okay. Any M&A contribution, obviously you did a couple of small deals so far.

Robert S. Weiss - Executive Vice President, Chief Executive Officer of The Cooper Companies and President of CooperVision

Yes, that would be inconsequential.

Michael Weinstein - JP Morgan

Okay.

Robert S. Weiss - Executive Vice President, Chief Executive Officer of The Cooper Companies and President of CooperVision

Because they were early... they were early in the 2007 year.

Michael Weinstein - JP Morgan

Okay, great, thank you guys.

Steven M. Neil - Executive Vice President and Chief Financial Officer

All right.

B. Norris Battin - Vice President of Investor Relations and Communications

Chris Cooley.

Christopher C. Cooley - Midwest Research

Thank you guys. Maybe just one quick one here, it's been a long call. Help us think about and I hate to belier the point after Mike just went through it again, but help us think about maybe from this perspective. When we look at your operating margin and you talk about progression in terms of profitability both for the daily and for silicone hydrogel as you get better utilization, I know you don't want to give us maybe specific a why contributions, but how should we think about the change from say now starting fiscal '08 to where we see those key products may be in second half of fiscal '08 and then exiting fiscal half '08, just in terms of the change in the contribution to the OI line. Thank you.

Robert S. Weiss - Executive Vice President, Chief Executive Officer of The Cooper Companies and President of CooperVision

I think clarify on that expect that, obviously the first six months as we are building capacity and both the Proclear 1 day and Biofinity, we will be... when you talk about things like sitting sets and rolling that out to new accounts, we would certainly be investing heavily in the marketing area. And on the other side or the bottom side of the operating expense category in the area of R&D, we would continued to be investing heavily in terms of the two weeks... the silicone hydrogel torics, the two projects we're working as well as getting the Dk 100 out of the door, if you will.

To your question on will we start seeing the pay back of Biofinity and Proclear 1 Day by the... as the year progresses towards the end of the year? The answer is yes. So one would expect a much more robust operating results then in next year in 2009, going slightly the other way will be if we are rolling out the silicone hydrogel torics in 2009, we will certainly invest some money on that. But it should be depending on the timing of the two-week sphere this year will dictate how that translates to 2009 results. But I would expect that the floor if you will of 18% to 19% operating income exclusive of equity compensation to continue to migrate up year-over-year '09 versus '08 to pick up at least one or two points or 100 or 200 basis points.

Christopher C. Cooley - Midwest Research

If I may, just 1 or 2 basis points and aggregate for the whole company or for again, just to be clear, maybe really make it simplistic, if I assume a base of 100 going let's say now for those products in terms of think about in terms of profitability, do I exit the year at 101, do I exit the year at 102, 110, help me think about the relative change. I know you won't go to the specifics but can you just speak to the relevant change?

Steven M. Neil - Executive Vice President and Chief Financial Officer

Yes, no, actually I can do I think pretty specific; let me take a shot at it Chris. We expect Biofinity to be approximately a gross margin of 50% this year. We expect to go out of the year with a gross margin in the mid to upper 60s. So you will see natural progression as you go through the year. Now, how much of that gets pulled out the inventory etcetera, its... you're not going to be able to get perfect on it, but we're going to see pretty dramatic, so if I am averaging 50 and I'm going out at the mid 60s, you can model that out through the year. In other words, we expect as we get 1 to 2 years out Bob, 2 to 3 years out, somewhere in that same timeframe that we have a silicon hydrogel family and specifically Biofinity as a premium margined product.

The counter to that; and then again this is all timing, your expense, your distribution cost associated with fitting sets and all that stuff has incurred is when you get down to the operating margin. But if you are focused purely on gross margin, you are going to see as you go through the year, some improvement, the same, but to a lesser extent for Proclear dailies. Again, we just started manufacturing Proclear dailies in February and so there is still a little bit of a learning curve there versus say a standard Biomedics or ClearSight daily. So you are going to see some improvement there but the dramatic improvement you are going to see is in Biofinity. Now does that help better?

Christopher C. Cooley - Midwest Research

That's super fine. One just last very quickie, how do you think about the NOL in terms of your expectations there? Thank you.

Steven M. Neil - Executive Vice President and Chief Financial Officer

Right. The accounting would dictate that if we didn't think we'll generate enough U.S. taxable income to utilize it, we would have to expense that portion that we aren't going to utilize. As a refresher and my numbers are approximate because I haven't seen the updated, but believe we had something in the order of $6 million worth of NOL that expired this year or they would have expired in '07 and I believe it's around $50 million for '08 and we are comfortable that in the U.S. predominantly. So we are comfortable that our taxable income in the United States will be adequate to utilize that NOL. What that means and it's a good point Chris, what that means is if you use an effective tax rate rounded numbers here of 15%, we generally pay in cash less than a third of that effective tax rate and that's the benefit of the NOL.

Christopher C. Cooley - Midwest Research

Thank you.

B. Norris Battin - Vice President of Investor Relations and Communications

And that concludes the call, ladies and gentlemen. Thank you for being with us tonight.

Robert S. Weiss - Executive Vice President, Chief Executive Officer of The Cooper Companies and President of CooperVision

Yeah I think I want to thank everyone here. Our next scheduled call is for March the 6th for the results of our first quarter and we look forward to giving you an update on the two-week product at that time and all the other good things that we expect will be happening in 2008. I want to thank you and operator, I guess that's it.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.

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Source: Cooper Companies, Inc. F4Q7 (Qtr End 10/31/07) Earnings Call Transcript
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