The Cooper Companies' CEO Discusses Q3 2012 Results - Earnings Call Transcript

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 |  About: The Cooper Companies Inc. (COO)
by: SA Transcripts

Operator

Good day, ladies and gentlemen, and welcome to the Third Quarter 2012 The Cooper Companies, Inc. Earnings Conference Call. My name is Keith, and I will be your operator for today.

At this time, all participants are in a listen-only mode. Later on, we will be conducting a question-and-answer session. (Operator Instructions). As a reminder, today's event is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Ms. Kim Duncan, Senior Director of Investor Relations. Please go ahead.

Kim Duncan

Good afternoon, and welcome to The Cooper Companies' third quarter 2012 earnings conference call. I'm Kim Duncan, Senior Director of Investor Relations. Joining me on today's call are Bob Weiss, President and Chief Executive Officer; Greg Matz, Vice President and Chief Financial Officer; and Al White, Vice President, Investor Relations, Treasurer and Chief Strategic Officer.

Before we get started, I'd like to remind you that this conference call contains forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995, including all revenue and earnings per share guidance, and other statements regarding anticipated results of operations, market conditions and integration of any acquisitions.

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

Now, before I turn the call over to Bob, please let me comment on the agenda for the call. Bob will begin by providing highlights on the quarter followed by Greg, who will then discuss the third quarter financial results. We will keep the formal presentation to roughly 30 minutes then open up the call for questions. We expect the call to last approximately one hour.

We request that anyone asking questions please limit yourself to one question. Should we have any additional questions, please call our Investor line at 925-460-3663, or e-mail ir@cooperco.com. As a reminder, this call is being webcast and a copy of the earnings release is available through the Investor Relations section of the Cooper Companies' website.

With that, I'll turn the call over to Bob for his opening remarks.

Bob Weiss

Thank you, Kim, and good afternoon and evening to everyone. Well we're back on track with another great quarter. We're executing our strategy that has been in place for the past five years. We're accomplishing our long-term objectives, taking market share, posting gross margin expansion, delivering double-digit earnings per share growth and delivering free cash flow.

For the quarter, we delivered revenue growth of 8%, 9% organic constant currency. For the quarter, we delivered GAAP earnings per share of $1.36, up 51% versus the prior year. For the quarter, we delivered non-GAAP earnings per share of $1.45, up 26% versus the prior year. Our non-GAAP trailing 12 months, earnings per share is now $5.15. For the quarter, we delivered free cash flow of $63 million and trailing 12-month free cash flow of $225 million.

For the quarter, we accomplished our long-term objective by acquiring Origio an IVF company, reaching out beyond the U.S. for CooperSurgical and achieving the number one position in worldwide IVF marketplace.

Some highlights and key events, during Q3 '12, we amended our credit agreement increasing it to a $1 billion line of credit, lowering our borrowing grid, eliminating our term loans and extending our line of credit to May of 2017 for an additional 16 months.

We closed on the acquisition of Origio, an IVF or in-vitro fertilization company, which adds $60 million-plus in annualized revenue to CooperSurgical. We re-launched Avaira Toric, initiated the limited launch of a one-day silicone hydrogel into Europe and rolled out a novel one-day multifocal Proclear 1 day multifocal.

Our silicone hydrogel continues to take significant share and now accounts for 38% of CooperVision's revenue achieving $118 million in revenue, and up 35% in constant currency versus the prior year.

Leveraging our free cash flow and a weak stock, we took the opportunity and bought 321,000 shares of stock using $25 million. This brought our fiscal year 2012 purchases to 984,000 shares using $71 million of free cash flow.

On sales results, our silicone hydrogel family is driving growth. During the third quarter, our silicone hydrogel family continued on its path of sponsoring our revenue growth. Silicone revenues were $118 million. Our silicone family grew 35% in constant currency. The family now reflects 38% of CooperVision sales, in July we launched Biofinity Multifocal in Japan recording our first sales.

Our Avaira Toric roll out constrained by capacity limitations is taking place over several months. It is progressing nicely. Avaira targets the U.S. so called two-week market owned by Johnson & Johnson's OASYS and ACUVUE ADVANCE. As a result, we expect the product family to be focused on gaining share as opposed to trading up. While we are excited about the re-launch, we are going to be cautious in not overextending our capacity limitations.

Geographically, foreign exchange has become a large headwind. Foreign exchange negatively impacted CooperVision's sales by 5% or approximately $14 million. Excluding the effects of foreign exchange essentially all the euro, our growth at CooperVision would have been 10% in constant currency. Regionally, we delivered solid results in constant currency, Americas was up 11% in constant currency, EMEA 6%, Asia-Pac 16%, overall 10%.

Our growth drivers were in the Americas trading up to Biofinity, including the success of Biofinity Multifocal as well as solid performance in the 1 Day category contributed by Proclear one-day Sphere. EMEA, same as the Americas. Biofinity, its entire line of Spheres, Toric and Multifocal as well as Proclear 1 Day Sphere. In Asia-Pac, primarily Biofinity Sphere, Proclear 1 Day and other 1 Day Spheres and 1 Day Toric.

The worldwide soft contact lens market in the calendar second quarter 2012 was up 5%, while CooperVision was up 9%. On a trailing 12-month basis, the market was up 5%. On a trailing 12-month basis, we were up 9% on the strength of Biofinity and Proclear 1 Day. For the calendar quarter, the market growth was sponsored by torics one-day and multifocal.

While the CLI data or Contact Lens Institute stopped reporting the growth of silicone hydrogel, mostly likely the trade up of material remains a high growth material area. We were up 34% in constant currency for the calendar quarter. The market continues to be a trade up market where geographic expansion is an accelerating contributor.

Trading up includes the premium products; silicone hydrogels, torics and multifocals. The trade up to silicone hydrogel is in the 20% to 40% range. More importantly a trade up to the 1 Day disposable expands per patient revenue by 400% to 600%. Importantly, the 1 Day, where it generates 300%, to 500% more profit.

Also, it's important to understand that torics and multifocals have a long way to go in capturing the market outside the United States. Geographically, the strength of the Americas was up 8% during the calendar quarter, led to an overall 5% market growth worldwide.

CooperSurgical, our women's healthcare franchise, had a solid quarter with $64 million in revenue. Revenue growth of 20% reflected the July acquisition of Origio, which contributed $5.6 million in revenue, excluding acquisitions CooperSurgical grew 6% during the quarter.

In addition to acquisitions, drivers of growth continue to be weighted toward surgical procedures, hospital and same-day surgery, where revenue was up 16%. As a result of the Origio acquisition, we will see a shift in our product mix and a shift in our geographic mix. Product mix will move to about 31%, surgical procedures 27% IVF, and 42% office.

Concurrently, CooperSurgical geographic mix outside the U.S. will about double to 29%. Suffice to say, we are excited to have closed on Origio. This makes us a clear number one in the in-vitro fertilization or IVF market. Origio is a very global business with 73% of its revenue outside the Americas. They have expanded their direct presence into Japan, China, India and Russia among others. The global phenomena of delaying child birthing until the age when pregnancy becomes a challenge makes us a very exiting quality of life add to our women's healthcare franchise.

Back to the quarterly results. CooperSurgical put up solid ratios, excluding a one-time time acquisition cost. On a non-GAAP basis, CooperSurgical's gross profit percent was 67%, while the operating income margin was solid 25%.

On guidance, while we have had to hurdle significant headwinds from foreign exchange or the euro, if you will, we have delivered solid growth numbers. Our original constant currency revenue has remained solid with CooperVision achieving 10% constant currency in the third quarter of 2012.

Our guidance range for CooperVision revenue for fiscal year 2012 has been narrowed and the guidance for CooperSurgical has been increased to reflect the original acquisition. As a result, overall revenue guidance for the fiscal year 2012 is now $1,439,000 to $1,449,000.

Given our strong operating results for the third quarter 2012, we have increased our non-GAAP earnings per share to $5.19 to $5.24. This guidance reflects tempered earnings per share growth in the fourth quarter given tough comps with the prior year for the hurdle of the ongoing euro headwinds for the next six months, increasing costs for the Avaira re-launch as well as the roll out cost of our single-use silicone hydrogel.

While it's a bit early given these factors as well as Origio as an early post-acquisition phase, to put too much color into 2013, we do expect continued momentum going forward with earnings per share growth in the low double-digit range. Keep in mind, in 2013, we also have the hurdle of the 2.3% tax on women's healthcare products in the United States.

Our strategy, we continue with our successful strategy. We believe it is solid and it has delivered results. CooperSurgical is putting up outstanding results and is leveraging its infrastructure. This franchise was built with the solid understanding of the value of critical mass in a women's healthcare market targeting the OB/GYNs. We follow the professional wherever they go; the office, surgery center, hospital or IVF centers.

Although the call points are different for each, the leverage is considerable. CooperSurgical third quarter '12 gross margin was 67%, operating margins 25%. Due to minimal CapEx CooperSurgical is a significant contributor to our free cash flow. We are dedicated to the strategy and we'll continue to tuck into tuck-in acquisitions to leverage the CooperSurgical structure.

At CooperVision, the strategy is more complex and it is much more global in nature. The $7 billion soft contact lens industry, because of the uniqueness of our manufacturing platforms product portfolio, we are the only participant that aggressively promotes silicone hydrogel and non-silicone hydrogel products, that is the Proclear family, emphasis branded and non-branded products. No, private label does not mean lowered price. Actively promotes and specializes in custom lenses with a high gross profit of course, supports all modalities that eye care professionals prescribe one-day, two-week and monthly lenses and supports all types of lenses spheres, torics and multifocals.

With close to 30% share on the high growth specialty lens categories, torics and multifocal, it is acknowledged by eye care professionals that we are pretty good at specialty contact lenses. Few would challenge why the success of Biofinity Toric for astigmatism. Put a great design together with a great material and great things happen. We have seen similar successes for the same reason with Biofinity Multifocal, which hit the market in the middle of last year.

On the capacity front, with the exception of Avaira Toric, we are ahead of plan to deliver considerably more product where we had been previously supply constrained. The Biofinity family, Proclear one-day, our one-day Torics are all ramping up nicely. Our new challenge would be to ramp up one-day silicone hydrogel lenses.

On pricing, we, like the rest of the soft contact lens industry, have a trade up strategy. Our new wearers and existing wearers are targeted for silicone hydrogel lenses, the Proclear family and the one-day or single-use lenses. Each creates more revenue per wear. A one-day modality, for example, results in a four times to six times more revenue per wear.

While this strategy sacrifices the gross profit margin percent, it generates three times to five times more profit. Of course, this strategy competes head on with the lens care space, since we are shifting the wearers' resources from lens care to contact lenses only.

Competing for lens care dollars is more of problem for some of our competitors. In my opinion, we continue to be the most focused company in the industry lacking many of the distractions that some of our competitors are now going through. I might add with Biofinity, Avaira and Proclear, we have a lot to talk about with eye care professionals around the globe.

As we look down the road over the next several years, we expect to continue improving operating margins and delivering above average shareholder returns. We expect to continue to average double-digit earnings per share growth while investing in geographic expansion and new product development.

In today's market, we have a solid product portfolio to leverage in all modalities, multiple materials all men's types and we retain our expertise to emphasize customizing lenses for the 10% to 20% of those lens wearers requiring other than standard lens sizes or designs. We have a lot of work to do before we come anywhere close to having exploited our number one contact lens family Biofinity. This is particularly true when it comes to geographic expansion and fully developing the Biofinity family of torics and multifocals around the globe.

The same applies to Avaira, where the Avaira Sphere has been anxiously awaiting the re-launch of Avaira Toric. The combination will put us in much better position to exploit the U.S. two-week space owned by Johnson & Johnson and to also exploit our private label strategy more aggressively with this family.

While we already have pretty respectable gross profit and operating margins, from a cost perspective, we have considerable upside yet to be fully developed. Upsides include the elimination of the silicone hydrogel royalty with the expiration of patents in September 2014 in the United States and in March 2016 in the rest of the world.

The reduction of our manufacturing costs among other things, improving molding cycle times, increasing capacity utilization and improving yields in general. Each of these are key goals to us. Also, given the considerable amount of free cash flow we generate, we will continue to look for tuck-in acquisitions and geographic expansion opportunities like Origio in our two businesses. The requirements, however, is that they must exceed our minimum investment hurdle rates. Additionally, the market for both, women's healthcare and silicone hydrogel lenses are much less developed outside the U.S.

We generate a considerable amount of cash offshore due in part to our level of manufacturing outside the U.S. As such, we will continue to be aggressively invested in global expansion opportunities. With over 95% of the people on the planet outside the U.S., we believe we will find opportunities to invest in other countries for decades to come, thereby retaining our low effective tax rate indefinitely. Finally, as was the case in the first quarter and again in this quarter, when the stock was suppressed we even demonstrated, we are at times even willing to buy in some of our own stock.

In summary, before I turn it over to Greg, the third quarter of 2012 was another solid quarter. We continue to exceed market growth. Additionally, we put up solid revenue growth, improved our gross profit and operating margins versus the prior year, delivered solid free cash flow and even restructured and extended our now investment grade debt.

We hit some exciting milestones by launching Avaira Toric or re-launching Avaira Toric, and rolling out two new products Proclear 1 Day Mulifocal and 1 Day silicone hydrogel in Europe. CooperSurgical stepped up to about $300 million annualized run rate in revenue with its Origio acquisition and we now have a solid number one position in the $223 million worldwide IVF market, which grew 12% globally last calendar year.

We continue to make inroads in expanding into other geographic markets with good progress in China and its surrounding regions. In spite of an economy that remains sluggish, we remain as an industry recession-resistant and believe, consistent with the past 30-plus years, our industry will remain so into the future. Last, least I forget to remind you, our number one asset is our dedicated employees. They continue to deliver results even in poor economic times. To them, once again a big thank you.

With that, I will turn it over to Greg.

Greg Matz

Thanks, Bob, and good afternoon, everyone. Bob has given you a pretty thorough overview of our revenue picture. As he mentioned, Origio is included in our Q3 results. Looking at gross margins, in Q3 the consolidated GAAP and non-GAAP gross margins were 63.5%, compared with 58% for GAAP and 62% non-GAAP in Q3, last year.

Remember now, last year's third quarter gross margins were impacted by the Avaira Toric recall for $14.2 million, which included $13.7 million in cost of goods sold for inventory reserves and $500,000 for return provisions, which were excluded from the non-GAAP gross profit last year. As you can see, we had a solid gross margin quarter in line with our expectations.

CooperVision on a GAAP and a non-GAAP basis, reported a gross margin just under 63% versus 56% for GAAP, and 61% for non-GAAP in Q3, last year. As I just mentioned, the difference between GAAP and non-GAAP was the impact of the Avaira Toric recall.

CooperSurgical had a gross margin of 67%, which compares to Q3 '11 of 65%. The continued year-over-year improvements were mainly due to manufacturing efficiencies and favorable product mix, especially in the surgical space. Origio had about a negative 60-basis point impact on Q3 gross margins for CooperSurgical. From a guidance perspective, we are not changing our consolidated annual gross margin guidance of 63.5% to 64.5%, or 64%, but we would expect to be at the high end of the range.

Now, looking at operating expenses, our SG&A in Q3 on a GAAP basis, SG&A expenses increased by 8% from Q3 last year to $143.8 million and were 38% of revenue, same as prior year. On a non-GAAP basis after excluding acquisition cost, primarily investment banking and legal fees for the Origio deal, SG&A expenses increased 5% from Q3 last year to $139.8 million or 37% of revenue, down 100 basis points from last year.

Beginning in 2011, we have seen increased selling investment in both, CooperVision as well as CooperSurgical. Last year, we shared with you that we would be investing in this area. That investment resulted in some large year-over-year growth increases in the first half of 2012 due to our ramp up of spending which began in Q2 '11, which resulted in a run rate impact on Q1 and Q2 2012.

Now, in 2013, we start to see those 2011 investments in both years, which as you can see has reduced the year-over-year growth rates. As kind of a follow-on, SG&A on a non-GAAP basis increased only 2%, sequentially.

On the R&D front. In Q3, R&D increased by 12% year-over-year to $13.2 million, or up about 1.4 million and was 3.5% of revenue, up from 3.3% in Q3 '11. This increase is mainly attributable to additional staffing in both businesses as well as a variety of spending on new product development and clinicals. We would expect that R&D will grow faster than sales for the remainder of the year.

Total operating expenses were 43% of revenue, similar to Q3 '11 and grew at about 8%. We are starting to see leveraging in the second half, and we continue to expect operating expenses to finish the year in the range of 43% to 44% of revenue. Our depreciation and amortization in Q3, depreciation was $21.9 million, up $2.1 million or 10% year-over-year and amortization was $5.9 million, up 400 K or 7% year-over-year for total of $27.8 million. The current estimate for the annual impact of Origio on our amortization is approximately $8 million and we took about $643,000 into our Q3 amortization number.

Moving to operating margins, for Q3 consolidated GAAP operating income and margin were $77.3 million, or 20% of revenue versus $52 million, or 15% of revenue in Q3 '11. This represents a 49% increase in operating income over Q3 '11. On a non-GAAP basis, which excludes the Origio acquisition costs in the current year and the $14.2 million impact of the Avaira Toric recall in Q3 '11, operating income and margin were $81.3 million, or 21.5% of revenue versus 19% in the prior year. Interest expense was $2.3 million and we were expecting or are expecting Q4 '12 to be approximately $2.5 million. This should bring in the year on a non-GAAP basis to be about $11.5 million to $12 million for the year.

As we mentioned last quarter, we amended our senior unsecured credit facility. You can read the details in our 8-K filed on May 31st. We took advantage of our S&P credit upgrade to investment grade to strengthen our capital structure. The amended facility is slightly larger, offers better pricing and maturity has been extended to May 31, 2017.

In Q3, on a GAAP basis, we wrote off $1.4 million in unamortized debt issuance costs from the prior refinancing, which can be seen in the loss on extinguishment of debt line. Included in the other expense income line is, approximately $2.3 million of FX losses. As you'll remember from a few months ago, we experienced relatively sizable currency moves especially with the euro. This resulted in some FX losses associated with our intercompany loans. We do our best to minimize these types of losses or gains through our balance sheet hedging program, but we do experience fluctuations every quarter, so we will always have some gains or losses. Last year's third quarter showed a gain of approximately $500,000.

On July 11, we announced that in conjunction with the voluntary public tender offer announced on June 4th of this year, that we completed the purchase of approximately 97% of the issued shares outstanding of Origio, a leading global in-vitro fertilization medical device company for an enterprise value of approximately $197 million, including $147.4 million in cash assumed $45.4 million of net debt, which was repaid shortly after the completion of the deal and approximately $4.5 million yet to be paid as of July 31st for the remaining shares. We are in the process of formally transferring all remaining shares to the company, which should happen by the end of the calendar year. As Bob mentioned, we are excited to strengthen our position in the IVF business. This deal provided an excellent opportunity to expand our women's healthcare franchise while using our significant offshore cash. For more details on this transaction, see our 8-K filed on July 11th.

Looking at our effective tax rate, in Q3, the GAAP and non-GAAP effective tax rate was 6.2% and 6.1%, respectively versus Q3 '11 GAAP and non-GAAP effective tax rate of 10% and 11.2%. As we've discussed before, the effective tax rate continues to be below the U.S. statutory rate as majority of our income is earned in foreign jurisdictions with lower tax rates. We did see significant one-time benefits due to changes in the U.K. tax rate from 25% to 23%, which was enacted on July 17th this year, as well as other positive impacts to our deferred tax liabilities. Without these one-time items the effective tax rate would have been approximately 10% for the quarter.

We are expecting our GAAP and non-GAAP effective tax rate for Q4 in the range of 9.5% to 10.5%, and the year to be in the range of 9% to 10%. For those of you following the stock comp, our stock-option compensation in Q3 was $4.6 million. EPS, as Bob mentioned, our Q3 EPS on a GAAP and a non-GAAP basis was $1.36 and the $1.45, respectively versus $0.90 and $1.15 on a GAAP and non-GAAP basis in Q3 '11.

On December 15, 2011, we announced that the company's board of directors had authorized a share repurchase program of up to 150 million. As of the end of the first quarter, the company purchased approximately 663,000 shares of the company's common stock for $46.1 million at an average purchase price of $69.58 per share.

In July, the company purchased an additional 321,000 shares of the company's stock for $25 million, at an average purchase price of $77.89 per share. This quarter's share repurchase due to the timing had no notable impact on EPS this quarter. The entire program is expected to have about $0.06 impact for the year.

Looking at the balance sheet, in Q3, we had cash provided by operations of $78.1 million. Our capital expenditures $24.1 million, insurance recovery of $1.9 million and excluding professional fees on the Origio acquisition of $7 million results in about $62.9 million of free cash flow.

Total debt increased within the quarter by $161 million to $480.1 million as a result of our purchase of Origio in July. Debt as a percent of the total capitalization is now 19%. This leaves us with approximately $546 million of total credit available at July 31st.

Inventories increased by $15.6 million from last quarter of which $9.3 million is directly related to Origio. For the quarter, we are seeing months on hand at 6.6 months, up from months on hand at 4.9 months in Q3 '11, or if you adjust it for the Avaira recall, it would have been 5.9 months on hand.

Excluding Origio, the majority of the inventory increase is primarily due to our single-use silicone lens ramp-up and our Biofinity Toric product. Accounts receivable continues to be closely monitored with DSOs at 52 days, down from 55 days, last year.

With that let me turn it back to Kim.

Kim Duncan

Operator, I think, we are ready for some questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question today is from the line of Kim Gailun with JPMorgan. Please go ahead.

Kim Gailun - JPMorgan

I guess if I am limited to one question, I'd like to pick up on the 2013 commentary that you made in your prepared comments Bob. You made a comment there expecting another year of low double-digit EPS growth and then you noted the Medtech Tax there for women's health, so I just wanted to clarify that you're talking about double-digit EPS growth despite the tax and currency headwinds.

Bob Weiss

That's correct.

Kim Gailun - JPMorgan

Okay. Great. If I could squeeze in a follow-up, just curious with the new product launches in the quarter, so silicone hydrogel daily and then re-launch of Avaira Toric. Could you guys quantify the impact of those two in the quarter?

Bob Weiss

Yes. New products was fairly de minimis in terms of impacting top line growth. By de minimis, I mean, we got them up. We got products out the door. The impact on our third quarter was less than 1% in aggregate. 1% in the quarter.

Operator

Your next question is from the line of Lawrence Keusch with Raymond James. Please go ahead.

Lawrence Keusch - Raymond James

Hi. Good afternoon, everyone. I guess just quickly here. With the Origio deal now being closed, obviously, good strategic acquisition for you guys, you used OUS cash but I'd love to get any thoughts on how you are thinking about the EPS accretion for next year. Then the other quick one is, just given all the startup expenses for Avaira, getting that out and the one-day silicone, I'm just curious how that impacted your gross margin. I'm just trying to understand what sort of underlying gross margin level you are going at right now.

Bob Weiss

Yes. As far as the impact of the Origio acquisition on 2013, we are still expecting it to be marginally accretive next year and near a breakeven this year as far as its impact on this year. Relative to Avaira Toric re-launch and the single-use silicone given the revenue so small on the quarter had marginal impact our margins for this period of time.

In the fourth quarter guidance as well as in our outlook for next year, assume that the re-launch of Avaira Toric, and the rollout of single-use silicone is going to be more certainly a negative in terms of margins since we are investing behind both, products. Since you may recall that Avaira Toric when we fixed the problem that led to the recall, it did result in a step back of efficiency of making that product ballpark 30%, so we do have to hurdle some of that going forward.

Longer term, we expect like anything else, we'll get more and more efficient yet getting some of those costs back, but short-term meaning over the next year, year-and-a-half, we are going to have some waitings on that which is built into our 2012 guidance and built into the comments I made about expecting a low double-digit growth in earnings per share next year.

Operator

Your next question is from the line of Joanne Wuensch with BMO Capital Markets. Please go ahead.

Joanne Wuensch - BMO Capital Markets

Thanks. Can you please comment on the competitive landscape? There is a lot of noise into quarter regarding some of your competitor product launches?

Bob Weiss

Yes. The competitor product launches, I would say, one of our competitors came out with a non-silicone hydrogel lens that thus far we haven't heard any catching momentum in the marketplace. Silicone hydrogel lenses in the one-day modality still are what I would call [nichey], while they are getting a lot of our noise it is more noise than results in terms of how it's impacting the entire market, so I think we have collectively more going on with the Proclear 1 Day Multifocal, which is getting a fair amount of positive reviews and we certainly can see some of its impact on our multifocal numbers. While it's early with our rollout of Biofinity, I mentioned Biofinity Multifocal, I should have said Biofinity Toric going into the Japanese market, so we have a plenty of new product activity out there more so than any of our competitors.

Joanne Wuensch - BMO Capital Markets

If I can squeeze one in please? Origio, how much did that contributed in the quarter?

Bob Weiss

$5.6 million on the top line and negligible impact on the bottom line.

Operator

Your next question is from the line of Jeff Johnson with Robert Baird. Please go ahead.

Jeff Johnson - Robert Baird

Two quick questions here. One on the Biofinity product line, 35% constant currency growth for this quarter. If I back out the Avaira side of that business, what did Biofinity itself grow, or can you at least ballpark? It's still up in the good 20%-plus range? Two, is the blended margin on that product, on the Biofinity family, if I try to roll all that together, is that north of 65% at this point?

Bob Weiss

Relative to gross margins for Biofinity, which is a monthly and is in the premium category, suffice it to say north of 65%. Relative to the growth of Biofinity, when compared to the overall growth of the silicone hydrogel family which is 35% worldwide, suffice it to say Biofinity's growing a lot faster than 35%.

Jeff Johnson - Robert Baird

Okay. Great. Then, last question just on your daily disposables business was up 13% constant currency this quarter. Obviously, the competitive daily silicone lenses have been out in Europe for at least nine months at this point from CIBA. Obviously, a couple of years for J&J, so that's at least some proxy. I would think, the European daily market, some proxy for what we could expect a year or two from now in the U.S, so what was your daily disposable business in Europe? How did it do this quarter against some of those competitive products?

Bob Weiss

Daily disposables in Europe certainly performed and held there. See, before I jump on that one. We held our own group. Well, I know what I need to do. I was almost going to give you the fact that it was fairly flat year-over-year, but that was only a result of foreign exchange, the euro. In constant currency, we certainly had the same growth rate in, let's say, double-digit growth in Europe in constant currency, so it held its own, meaning Proclear 1 Day is doing well in the one-day market, not only rest of the world but also in Europe.

Operator

Your next question is from the line of Steve Willoughby, Cleveland Research. Please go ahead.

Steve Willoughby - Cleveland Research

Hi, guys. Thanks for taking my question. Given the softer results you saw last quarter, I know you guys made the comments that you are going to tighten up expenses a little bit, which it looks like you guys did a good job of this quarter. I was just wondering what your thoughts were now that the revenue and organic growth came back this quarter. How are you guys are managing and how tight are you managing SG&A expenses?

Bob Weiss

We certainly, as the euro did its thing to our second quarter results, tightened our belt. To some degree, we tightened our belt, because we had been rapidly expanding our operating expenses investing in feet on the street, if you will, investing in R&D and investing in geographic expansion. Some of that we will continue to do.

The things that we went slower on were those that were easier things to do that didn't impact the business such as, instead of always getting on a plane and flying and having a face-to-face meeting, more conference calls. When you have lot of people crisscrossing the globe, if you put a cap on what's crucial to be face-to-face and what's not you can save fair amount of money.

Ultimately, you want people in front of people because they form better bonding and all that, so it is not you don't do forever, but you do that in short-term matters, if you will. I would say the things we did in the quarter by way of holding back expenses were easy to do as opposed to tough decisions in any reduction in force, if you will.

Going forward, there are areas that we clearly are intent on putting resources behind. I would say we are building some momentum in, for example, China, where we've hired a few key critical people to manage that process, so that will lead in more investment opportunity in China as we've started to build the infrastructure. That's been going on all along. We did not slow that up, we in fact hired the key people we needed over the last six months. That will continue to allow us to grow more in that area and invest more in that area.

We didn't want to get the carts in front of the horse and start hiring a bunch of people on feet on the street without having the management oversight. Relative to investment in new products and the re-launch of Avaira Toric, suffice it to say we will be over the next 12, 15 months investing fairly substantially in some of those areas, behind the new products.

Operator

Your next question is from the line of Matthew O'Brien, William Blair. Please go ahead.

Matthew O'Brien - William Blair

Good afternoon. Thank you for taking the question. I was curious on the CVI guidance for Q4. When I look at the high end of the range, it imply the growth rate of around 5.5% which is basically what you just put up in fiscal Q3, even though the comparison gets a little bit easier here in Q4. I'm just curious why the caution into Q4 given the strong momentum you are seeing in the business?

Bob Weiss

Well, in our guidance obviously we had a fair amount of impact of foreign exchange in the third quarter $14 million and we expect substantially the same amount in the fourth quarter given year-over-year comp, so in organic constant currency, I think our guidance fits that range what we just delivered at the top end.

Operator

Your next question is from the line of Larry Biegelsen with Wells Fargo. Please go ahead.

Larry Biegelsen - Wells Fargo

On daily products, can you tell us a little bit about where the margins are? How the manufacturing is going? Is it still a drag on the margin? When you will get to stable margin there, and are you still capacity constrained for one-day. Then just lastly, for the Analyst Meeting next week, Bob, can you talk little bit about whether you give long-term financial goals and any other flavor? What we can expect from the meeting? Thanks.

Bob Weiss

As far as the gross margin of one-day's, in general, we've been doing a pretty good job of getting cost out. Keep in mind that the bulk of one-day product is essentially all non-silicone hydrogel, and that's a lot of Proclear 1 Day as well as some in Japan, for example, some products other than the Proclear material.

In both cases, both materials, Proclear and non-Proclear, we've done a good job of offsetting which has led to what I would call improvingly respectable one-day margins, but keep in mind those margins will still have a hard time of ever achieving that of a two-week or monthly. There is no expectation they'll get that high. There will always be, I think I used 50s, 60s, 70s example. Typically the one-day will be in the 50s, some place and you're doing good if you're in the top half of the 50s. Some of our products there in the two-weeks, you should be in the 60s-some place, and in the monthly you should be in the upper 60s, into the 70s usually.

In our case, Biofinity is the lead product, and we expect it to stay well north of the 70s, so the answer to that one-day, while it's becoming a bigger part of the overall mix, that's a negative on the positive. It is getting a better gross margin. We will step back relative to the rollout of the one-day silicone hydrogel. That is just not going to be a high gross margin product for the near future, if you will.

Analyst Meeting, we will give some flavor where we are going directionally, but we will not get into giving more color on, let's say, guidance on 2013. Directionally, we will talk about why we expect operating ratios to continue to improve into the future and put some color behind that, but a lot of it we will focusing on putting a lot more meat and color behind what we talk about our businesses, what they look like in more greater detail.

Operator

Your next question is from the line of Chris Cooley with Stephens. Please go ahead.

Chris Cooley - Stephens

Thank you and good evening for taking the questions. If you could Bob, could you tell us a little bit about the new product pipeline for Origio, products like EmbryoGen and EmbryoSure. Is that included in your guidance when you are thinking about the modest accretion for next year?

Then just for clarification if I can squeeze two in like everybody else? You said in your prepared comments that you were ahead of plan in terms of your manufacturing capacity on all, but one product now. Could you maybe just remind us again where you are in terms of production capabilities? Thanks so much.

Bob Weiss

Yes. On the Origio, of course, we haven't given revenue guidance for next year. We did indicate that from a accretion point of view it's accretive. There is no change to that and there is, in our underlying assumptions, no major product launches in 2013, but of course Origio is actively working on to have a R&D pipeline, if you will, that anticipate some new products coming through it. We will add a little bit of color to not only Origio, but rest of surgical at the Analyst Presentation, so that may lend some more thoughts in that line of questioning.

As far as the capacity, we are in good shape with capacity relative to most of our one-day line, axe silicone hydrogel. Meaning, the Proclear family as well as the other hydrogel families are not capacity constrained, Biofinity continues to ramp up nicely. We are not capacity constrained with Biofinity and we continue to endeavor to keep up with the growth curve, so when you have a business growing north of 35% constant currency, and you have lead capital requirements of 12 months-plus, then we stay on top of it from a CapEx point of view, which we are doing, so I don't anticipate that would, at this juncture catch us by surprise off of our product line with our silicone hydrogels doing north of $118 million, so now at a run rate of close to $500 million annualized. Assume that is predominately Biofinity gives you some gauge at the capacity we in that arena already.

The products where we are constrained is, the Avaira line not only constrained on the Toric, but somewhat on the sphere side, partly because we stepped back and gave up some productivity when we had the recall episode. Aside from that, we are ramping up in those areas and we are ramping up in the one-day silicone hydrogel modality.

I would assume both, Avaira Toric and the one-day silicone hydrogels will be somewhat constraint for at least the next 12 months in terms of our ability to sell all we can make, would be the case of the one-day silicone hydrogel more than 12 months.

Operator

Your next question is from the line of Anthony Petrone with Jefferies. Please go ahead.

Anthony Petrone - Jefferies

Thanks for taking my question. Just going to sneak a couple in there. One quick for Greg. The 9% to 10% tax rate guided for the fourth quarter. Is that reflective of noticeable benefits from Origio given their overseas revenues, and is that sort of the rate we should be thinking about for '13? I think it's down from 10% to 11%.

Then for Bob, just multifocals is a smaller portion of the overall business, but it's growing double the market based on the latest statistics of your businesses, is that mostly Biofinity related or Proclear related within the multifocal category? Thanks.

Greg Matz

Yes. For the tax rate, one, we're not giving guidance for next year at this point for the effective tax rate. Origio, we obviously just purchased Origio, we are evaluating their structure. They do have a lot offshore, but at this point we don't see a strong difference or strong impact to our tax rate. Again, we still are looking and evaluating that with our tax professionals and their rates to what extent is included in the 9.5% to 10.5% for the fourth quarter guidance that Bob mentioned or I mentioned earlier.

Bob Weiss

As far as the multifocal growth of course the market for the quarter was 11%, in the calendar quarter we were 31%. On a trailing 12-month basis the market growth for multi-focal was 10%. We grew 21%, 2x. The driver clearly is Biofinity Multifocal, and we are just starting to build momentum in our rollout of Proclear 1 Day Multifocal. That would have had insignificant impact given fairly small size in the last quarter on any of those numbers, so assume that essentially the trailing 12-month number is essentially all the Biofinity impact driving.

Operator

Your next question is from the line of Amit Bhalla with Citi. Please go ahead.

Amit Bhalla - Citi

Hi. Bob, I just had two quick ones. First on Origio. With the deal closing on July 11th, you booked $5.6 million in the last two weeks, so can you just explain how you booked that much in just two weeks?

Second on fiscal '13, since you indicated that you probably won't be talking much about guidance at the analyst meeting. Can you at least put some context around how you are thinking about the top line growth for '13, either relative to the market or in absolute terms? Thanks.

Greg Matz

Amit, I'll jump in and take the Origio question. This is Greg. The $5.6 million was booked for the entire month of July. We looked that, because of the fact that we were closing so quickly, their ability to be able to breakout the revenue for from the 11th forward, we ended up taking the whole month.

Now in evaluating, we did an analysis evaluating the amount of difference in that seven business days, because they are more back-end loaded, so the 5.6 even though it's the whole month, we believe that there wasn't a whole lot. In fact, we were thinking of something around $1 million, $1.5 million difference between a whole month and that's the cutoff period.

Bob Weiss

As far as 2013 and going forward, how are we thinking about the market from a conceptual point of view is, we expect the market to continue to grow modestly in that range of 4% to 6%, still in a sluggish economy.

Someday, I clearly expect that to accelerate beyond the recession. While we say we are recession-resistant, we are still somewhat impacted and when the global economy improves, I would expect the 4% to 6% to uptick higher than a midpoint of 5.

In terms of how to think about our performance within the market, we'll continue to expect to gain share with the new products we offer with geographic expansion in our general existing portfolio products such as Biofinity, we will gain share. In the past, we've been gaining at 1.8 to 1.9, the market growth. Essentially all we are saying in the future is, we will gain share. Whether or not we achieve the same level, we're not going to, if you will, refine that thinking other than to say we'll continue to uptick and gain share in our view.

I would emphasize that as a trailing 12-month basis as opposed to where we gain share in each and every quarter. One quarter a trend does not make, so I wouldn't get too hung upon any one quarter. I would get hung up, if we were losing share on a trailing 12-month basis.

As far as surgical, CooperSurgical will be impacted by the annualization of Origio, which brings with it north of $60 million in revenue and we expect that to grow organically as well as contribute from the acquisition. Surgical has been growing axe Origio general in that 6% to 8% range, and we would expect it to continue to be mid to upper single-digit growth going forward.

Operator

With that we'll conclude today's Q&A session, and I would now like to turn the call over to Mr. Bob Weiss for some closing remarks.

Bob Weiss

Well, I want to thank everyone for joining us on this call, and we look forward to seeing many of you in New York, next week, and also reporting in December, on our year-end financial results. The year is certainly flying by. We're excited about the conclusion of the year and the execution this year and looking forward optimistically to 2013, so on that, have a good evening.

Operator

Ladies and gentlemen, that will conclude today's conference. Thank you very much for joining us and you may now disconnect. Everyone, have a great day.

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