Good day, ladies and gentlemen, and welcome to the third quarter 2011 The Cooper Companies Incorporated earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to hand the call over to Ms. Kim Duncan, Director of Investor Relations. Please proceed.

Good afternoon and welcome to The Cooper Companies third quarter 2011 earnings conference call. I'm Kim Duncan, Director of Investor Relations. Joining me on today's call are Bob Weiss, President and Chief Executive Officer; Gene Midlock, Senior 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 necessarily 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, let me comment on the agenda. Bob will begin by providing highlights on the quarter, followed by Gene 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 you have any additional questions, please call our investor line at 925-460-3663 or e-mail IR at coopercos.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. And with that, I'll turn the call over to Bob for his opening remarks.

Thank you, Kim, and good afternoon and evening everyone. Another great quarter the momentum continued. For the third fiscal quarter, we put solid topline growth up 19%, 12% in constant currency. We delivered $351 million in revenue. Excluding the Avaira Toric voluntary limited recall impact, our gross margin was 62%. Strong topline, solid margins, lower interest expense lifted our non-GAAP earnings per share 26% to $1.15. GAAP earnings per share was $0.78 hurtling the recall, a $14 million charge and the acquisition accounting reversal, an entry of $6 million. I'll Gene get into that in a little bit. We had yet another outstanding cash flow quarter paying down $108 million of debt, supported by $68 million of free cash flow. Key takeaways for today's call, we again put up great results with strong revenue growth, good margins, favorable impact of lowering interest expense and a great bottomline. Still early, the impact on revenue of our launch of Biofinity Multifocal in Japan has aided our double-digit growth. Our $68 million of free cash flow was a strong contributor to reducing our debt-to-cap to below 20%. Today, our debt is $445 million. It is less than one-half of what it was two-and-a-half years ago. We've delivered all this, yet we continue to invest in our future, our pipeline, our plans and both valuable of our people. For the quarter, our investment in sales force expansion and R&D saw increases for these expenses of 34% and 37% respectively above the prior year. Without giving away too much proprietary data, our sales force expansion activities are up 33% since the beginning of last year. Our R&D staff has grown 25% during the same period. Our silicone hydrogel family, Biofinity and Avaira, is driving growth. During the third quarter, this family achieved $92 million in…

Thank you Bob, good afternoon everyone, thanks for joining us again. As Bob indicated, I will provide a brief review of the financial statement highlights. Bob covered revenue aspects pretty well, so I will start with gross margin. Consolidated GAAP gross margin was 58% compared to 60% in Q3 last year. Non-GAAP gross margin was 62% same as Q3 last year. The main difference was attributable to the voluntary Avaira Toric limited recall, without the recall gross margin would have been 62%. CooperVision reported a GAAP gross margin of 56% versus 58% in Q3 last year. On a non-GAAP basis gross margin was 61% the same as last year. Again, the difference is generally attributable to the inventory recall previously mentioned and the Norfolk restructuring cost in the prior year. CooperSurgical had GAAP and non-GAAP gross profit margin at 65% was slightly lower than the 66% last year in Q3. This year-over-year decrease was a result of the one-time favorable settlement with a vendor last year, offset by manufacturing efficiencies and favorable product mix, including higher margin products use and surgical procedures. Turning to SG&A, in Q3 GAAP and non-GAAP selling distribution customer service and marketing expenses increased by 23% from Q3 last year, and they were 28% of revenue the same as last year. This was generally attributable to the increased investment in our sales force as mentioned to you in prior quarters. GAAP G&A expenses increased by 12% and non-GAAP by 13% from the prior year, and with 10% of revenue the same as last year. Again, this increase was basically attributable for the acquisitions that we've made during the year which of course brings more general administrative expenses. In Q3, R&D increased by 37% from Q3 last year to approximately $12 million and were 3% of revenue…

Operator we're ready to take some calls.

(Operator Instructions) And the first question comes from the line of Joanne Wuensch with BMO Capital Markets.

It's obvious you're gaining market share who do you think you're taking share from and do you think it's sustainable?

Joanne, I think the way I see it is, historic company that's given up market share in the last couple of years and it has been primarily Bausch & Lomb. There have been periods of time when Johnson & Johnson or Vistakon has given up some share. And then there have been periods where they've gained it back likewise with Ciba Vision, which is going through some integration activities right now. And that's a big share gains are at the expense of Bausch & Lomb. Do we think it's sustainable? I think, given the products that we have just rolled out around the world a lot which were really early in the cycle. And particularly, when I talk about the entry into the $150 million Multifocal market for silicone hydrogel as well as in the $400 million Japanese market, I think we have enough fresh products in the marketplace to continue to gain share going forward.

And the next question comes from the line of Lawrence Keusch with Morgan Keegan.

This is actually Konstantin for Larry. So I was wondering if you guys can elaborate on your strategy in entering silicone hydrogel market in Japan, just given if you're no longer capacity constrained. And I'll put just another question in terms of, if you could comment on as you start to think about 2012, what is the sound of priorities and strategic things that you guys are working on?

As far as entering Japan, now that we're no longer capacity constraint. You may remember, I said we came into this year capable of supporting $200 million product line for Biofinity, entire family. And we would exit this year capable of supporting $400 million. We've now already arrived half that level where we can support a $400 million run rate. So in that sense it really gets down to the mechanics of getting all out the door in the local countries that we're talking about. So there is obliviously a lot of logistics there. But when it comes to in Japan we are two-tiering that. We have both the CBJ, which is our legal entity that we have in place of CooperVision Japan that has been marketing. And there is a large business in Japan and has number two market share in the one-day space, which we've basically been fairly aggressive on in the last three, four, five years. The other thing you may recall, we've bought Aime at the beginning of the year. They had strengthened channels out to the eye care professional whereas our strength in CooperVision Japan was larger chains and a little different than the U.S. model, or exactly the opposite of the U.S. model in some respect. But we now have the capability to go in both directions, the eye care professional as well as the chains, and that's a direction we're taking both organizations, which are at this juncture not fully integrated, and the sales activity are promoting the product. And as I indicated it's so far so good as we go. As far as our strategy for 2012, it's really going to be to continue that execution in rolling out those products. We were also doing a very effective job with Proclear 1…

And the next question comes from the line of Chris Cooley with Stephens Incorporatedorporated.

Bob, could you help us think a little bit about how we should think about CooperSurgical going forward? The franchise continues to deliver very solid growth, robust operating margins. How can you really start to leverage that franchise such that it contributes more than slightly over the double-digit range there to operating profit?

Well, we're excited about what we've put together in CooperSurgical. And as you can see by the comments I made, we just had another acquisition that we will continue to sell-in and round out that franchise, both adds to new products in the U.S. But I think importantly we're at a juncture now, where we're going to be testing the rest of the world a little bit more aggressively. We've started this year in several European markets, very limited, but just testing the water in parallel with our local distributors that we use in those countries. We will continue to do that. We will continue to look at aggressively at acquisitions. In the past we've made more than 30 acquisitions. They will be both small, medium, and you never know if they can be even large. There are things in all levels and we frequently have talked about three sizes of acquisitions that we keep in our radar. As far as other things, they obviously have done a very nice job with their existing portfolio, hitting basically solid growth this quarter double-digit growth. There are a number of products they have that they're doing very well with, turning them into small products moving into the mid-sized products. Of course, at this juncture we don't have any one big product that we spend a lot of time talking about. But once again I'll say that franchise is very leveragable and we will continue to leverage it.

And the next question comes from the line of Jeff Johnson with Robert W. Baird.

Bob, let me ask, I guess, one clarifying question and then I'll get to my officially allocated question I guess. The clarification, number one, just as you talked about SG&A and obviously some impressive adds on both the R&D side and on the sales force side here over the past 12 to 18 months. In the past you've talked about fiscal '12 being the year to kind of leverage those costs. And I think you alluded to it in your answer, a couple questions ago. But is it still fair to think about '12 being a leverage year on both of those line items? And then the official question, I guess just, you eluded to several times in your prepared remarks about Biofinity Multifocal and your entry into Japan being very early stages. Often times in the early stages of a product launch, you get some channel fill, you get some benefits there, but it doesn't sound like you're necessarily saying you saw those this quarter. So is it fair to think about those kinds of activities, plus just the build of those products really having still some real nice growth tailwinds over the next couple of quarters?

I'll take your last question first. On Biofinity multifocal as well as in Japan, suffice it to say pipeline was at minimal impact on this quarter. We've launched really for all practical purposes at the end of June in Japan. And we're very early in that cycle. And the Multifocal is kind of a like toric in the sense of you got to get the fitting sets out there and ramp-up accordingly following the fitting sets. So we're once again very early in a rollout strategy there. I would say the impact on the third quarter is really very minimal. We'll start seeing that impact fourth quarter going forward. As far as leverage, R&D and the sales force expansion, I would expect that next year we will leverage overall SG&A in total. We will continue to invest and grow R&D faster than topline as we are doing this year. And on the sales force, there was a fair amount of ramping in the third quarter. So look for that start to show up year-over-year, basically in the third quarter next year. But we've put in the infrastructure, you'll see a high growth in both the first and second growth on a year-over-year basis, just annualizing if you will what we've recently done. Our expectation is you will start seeing better ratio from operating perspective probably in the back half of next year. And when it comes to the bottomline operating income and net income, we still expect to improve our operating margin year-over-year. I said approaching 1%, probably be a little some 1% next year.

And the next comes from line of Steve Willoughby with Cleveland Research.

I was wondering if you could talk about gross margins in the quarter. Just wondering what the impact from currency was and possibly negatively impacting gross margin? And really, why we didn't see more gross margin expansion show up sequentially?

I'll chip on it and then I'll let Gene add anything he would like. Drivers on the sequential performance of gross margin, think of two primary areas. There is a lot of detail and if you put it altogether it's kind of scrambled egg. But what jumps out quite a bit is we grew our Proclear 1 Day business 43%. And that's the good news that Proclear 1 Day is doing fabulously well in the marketplace. The bad news is some of that was trading our existing 1 Day business, some of which had a higher margin for a lower gross margin. Proclear 1 Day is going through what I would say a ramp-up learning curve. So very much like some of other family's, Biofinity, when we ramped that up, Avaira as we ramped that up, you start off at lower gross margins expecting to reduce cost, and that shows up on a lag basis. We're in that modality, if you will, with Proclear 1 Day wear. We know cost have come down and those cost coming down had yet to get to the P&L, they get there on a six-month lag basis. And we're happy with some of the reductions. But the overall mix heavily on 1 Day is weights our gross margin trends somewhat. The other thing is 50% of our costs are in pound. And as you know, pound is up from the dollar. So there is some of lag factor of the pound coming into the P&L, weighting it a bit. Aside from that I think there is just a whole host of little things, a bunch of little thing. I'm not sure any one of them is worth a lot of airtime. Gene, I don't know if you want add anything to that.

No. I agree. I mean things like fuel prices have gone up, so your freight cost increasing so forth. And there is nothing significant like we had had in prior years, a significant period cost. It's just a whole host for smaller things.

And the next question comes from the line of Larry Biegelsen with Wells Fargo.

Just to clarify, Bob, did you say you expect the operating margin to improve by 1% in 2012? And then, I have my official question.

Okay, I said sub 1, meaning the first half of next year we will get a minimal leverage back half of next year. I think we're still in that range, where this year we're I think 18% to 19% and expect next year will uptick I'd say between 0.5 point and max 1 point.

I guess then I'll use my official question on this. Why wouldn't we see more leverage, given I think you probably get 100 basis points from Norfolk for the gross margin. And then you talked about leveraging SG&A a little bit. So I guess it is a little bit surprising to see less than 1% operating margin improvement next year?

Yes, Larry, I would expect that. If we use the 100 basis points for a moment. This year we're going to have half of that show up, so you're getting the second half next year on the gross margin side. On the operating margin side it's going to pick up more in the back half, because we still are in an investment mode. Our operating cost this quarter were 43% of revenue overall. And therefore, those people we have hired, we're seeing stronger sales uptick. Obviously, growing 20% albeit half of that is currently 11% in constant currency is solid growth. So if we're getting bang for the buck, we will continue to invest. We will invest likewise in geographic expansion and expect some of that built into next year. I would not call next year try to see how much we can make on the operating income line or bottomline approach we will. We continue to see opportunities out there, given the product portfolio we have. We're going to push those products and see how good they are, specifically now that we have added capacity in several of the areas I mentioned, the Biofinity family as well the Avaira Sphere as well as the Proclear 1 Day. We have the capacity, why not push the limit. So we are not hung up to see how much we can improve the ratio of operating income as a percentage of sales. But to answer your question, about half and half, half cost of goods, half operating cost is how you fill out the mosaic of the 1% improvement.

And the next question comes from the line Matthew O'Brien with William Blair.

Just on the R&D side of things, it's a pretty material increase in terms of how much you're spending there. Are you primarily focused on areas that you're already in within the contact lens market or women's health area, or are you looking in other areas of ophthalmology? And then another question for you on the sales and marketing side of things. With the big ramp in terms of number of reps, how long does it typically take a rep to get up to kind of the average rate in terms of revenue per rep?

The first question on where is the R&D going, the focus is not outside of women's healthcare or soft contact lenses. So we're keeping it core and strategic. There is things that are being done with comfort agents that one could say is there a pharmaceutical piece of that that the industry always focuses on and things to improve comfort. I would call that strategic soft contact lens as opposed to we're going to turn on soft contact lens into a drug delivery device for glaucoma or some new area. We are not putting our money there at this juncture. As far as productivity of the reps, typically if you're getting someone new to the trade, new into the industry where they are getting new accounts and they are getting a new product line, that's a six-month process. If you hire someone out of industry and you find them in the same region, they're productive day one pretty much. So the range goes from day one to six with probably closer to the midpoint is the right answer.

And the next question comes from the line of Steve Willoughby with Cleveland Research.

Just had a follow-up question and I'm not sure if you guys have already mentioned this. I was wondering if you could let us know how much revenue Aime did in the quarter so we can calculate internal growth.

$8 million of this is the GAAP number.

Excluding Aime, organic growth was around 16% as reported and 8% in constant currency for CVI, Steve.

So 8% constant currency organic growth for Vision, excluding currency and excluding Aime.

And the next question comes from the line of Amit Bhalla for Citigroup.

This is Adam in for Amit. I just wanted to know if you had anything new on the dailies markets? Especially for patients in Japan, are you seeing any impact from the J&J recalls?

The J&J recall in Japan obviously created an opportunity, and I would say that's one of the reasons Proclear 1 Day worldwide is up 43%. The impact of silicone hydrogels in the 1 Day space, I would say the jury is still out. When I look at what's known as health products research data, quite frankly the new fit actually declined sequentially. So it isn't like it's suddenly up, up in the way at this juncture. There is a lot of muscle being put behind the one-day modality in U.S and worldwide. That modality continues actually to grow worldwide, and a lot of that is sponsored by the movement in the U.S. As I mentioned, we're now up to about 18% in the America for one-day modality. That's broad-based. It's moistened everything in that part as opposed to being driven by the silicone hydrogel share market. The problem is silicone hydrogel share market has, at least short term and probably for the indefinite future, is the cost structure to the consumer. The consumers, unless they have a big budget and don't really have a budget, is cost conscious and this gets priced off the chart. So I think that's going to be the largest part of limitation for the foreseeable future.

And the next question comes from the line of Kim Gailun with JPMorgan.

I wanted to just follow up on this 2012 outlook discussion. Just curious what type of topline growth you think you will need in order to get yourself to that low double digits on the bottomline given the operating margin discussion that we've walked through here. I guess part of the question in there is, is wear silicone hydrogel can go for Cooper as a percentage of sales. It seems like favorable mix shift there should have run room to run in fiscal 2012.

As far as topline growth, we of course haven't given guidance to that level of detail. But I would say we continue to expect the market to grow in that 4% to 6% range, maybe start moving up a little if we ever move out of a soft economy around the world. But for now, I think that 4% to 6% is good guidance. We would continue to expect to gain share, particularly with our portfolio. You're right on that that we have a lot of products that are all about trading up, in some cases our own customer and in some cases given the quality of those products gaining share. We think we will continue to gain wearer's share out there. So you put the two together and a solid growth in 1 Day, a solid growth in silicone hydrogels. I think our ultimate portfolio in terms of mix between silicone hydrogel and non-silicone hydrogel will be weighted more towards hydrogels than the overall market. And I'd say that, because we are actively promoting Proclear material, and that of course is a material that represents I think 27% to 28% of our total sales. So as long as, unlike our competitors which don't really have a Proclear that they are putting a lot of emphasize behind, we're less picky about where the doctor ends up. Having said that, Biofinity and Avaira both cover the monthly space in the case of Biofinity and do it very effectively and Avaira in the two-week space. We like 1 Day, because 1 Day obviously is the biggest trade-up you can get at three to five times revenue. We expect to grow faster than the market. We think the market will do reasonably well. And if we accomplish that and it's leverageable, we would expect double-digit earnings per share growth.

The next question comes from the line of Joanne Wuensch with BMO Capital Markets.

Given your cash flow generation, at a certain stage you're going to face a high-class problem of what to do regarding use of cash. Do you have a target debt to cap in mind and have you thought about other uses of cash other than simply paying down debt and buying women's health companies?

We don't have an absolute target of debt-to-cap in mind. I start getting embarrassed sub-20. We're now sub-20 debt-to-cap. We are not limiting the scope of what we're looking for to women's healthcare. So geographic expansion has always been on our minds in soft contact lenses. Geographic expansion is on our mind in women's healthcare. But we're not necessarily limiting ourselves just to women's healthcare. So it's way too early. It's $445 million of debt for me to worry about running out of ideas. We'll continue to pay down debt in the interim, but don't look for us to go quiet on the acquisition front on a sustained basis anyway.

And the next question comes from the line of Amit Bhalla with Citigroup.

I just wanted to clarify again what your gross margin targets are for next quarter. I know before you said you were targeting around 62%. I wanted to know if that was accurate and then get any idea on 2012 what the gross margin would like.

I think we've guided that the back half will be in the 61% to 62% range. I don't see any reason to come off of that. Hopefully we'll be closer to 62% and 61%, but that's where I think the range will come out next year. That should be moving up about 50 basis points is the target. So probably 61.5% to 62.5% would probably be the right range to think of next year. But we'll see how Japan plays that really.

And the next question comes from the line of Chris Cooley with Stephens Incorporated.

I was curious on two points. One, if you could maybe quantify for us when we think about the fiscal Q4 how much that increase in guidance was actually dated by the recall here. I mean obviously you have to replenish existing field inventory first and then go back out before you can expand into new accounts. Just trying to get a feel for maybe where that number could have been had you not had the recall. And then as another quick follow-up, if I can slide it in, you were taking share and getting a little bit of price at CooperSurgical on the office side during the first half of the fiscal year. Are you still seeing those same trends persisting out here in the back half?

First on the impact of the recall going forward, it's much more about replenishing inventory and trial sets than it is about what it's done in the market. So from a revenue perspective, not a big deal. It is costing us the cash of replacing that inventory and it's certainly not full $14 million, but a portion of that that represents cash out the door. And that's built into our guidance. So I would say the impact is going forward. It's built into our guidance and it's not a material event. Relative to CooperSurgical and are they gaining share in the office space, they continue to gain shares there in a market that's pretty flat. So that growth in that market is representative of primarily continuing to gain share. The hospital market, the fertility market on the other hand, it's a different story where we're doing very handily, very nicely with those. And the space in the case of fertility, it's a great space to be going.

And the next question comes from the line of Larry Biegelsen with Wells Fargo.

Bob, maybe you could expand upon the acquisition strategy given what you said a minute ago. I mean has anything changed regarding doing non-dilutive tuck-in acquisitions? And just maybe you can clarify where you are on a daily disposable silicone hydrogel. Are you guys planning to launch one?

Our acquisition strategy really has not changed and will not change, other than I mentioned that we will do small, mid, large. But relative to we would take solutions. And in some cases, in the first 12 months, most of the tuck-ins are accretive by the end of 12 months. Relative to the daily disposable silicone hydrogel market, we are sitting on the fence, so to speak, watching the market and we are prepared to go within 12 to 24 months I think is what I said on the last call. And obviously we are taking activity that moves that forward three months. So arguably nine months to a year and three quarters. I'm not overly impressed with that market at this point in time, but it's probably one where we should participate ultimately anyway. So you'll probably find it's in it for the next couple of years.

I think we're at the top of the hour. So we'll close it here.

I want to thank everyone for joining us on the call and hopefully you're as excited about the results as we are. And with that, we look forward to getting you another update in the fourth quarter in December. Thank you.

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