The Cooper Companies, Inc. (COO) Q2 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Second Quarter 2013 The Cooper Companies Earnings Conference Call. My name is Phillip, and I'll be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Ms. Kim Duncan. Please proceed, ma'am.

Good afternoon, and welcome to The Cooper Companies' Second Quarter 2013 Earnings Conference Call. I'm Kim Duncan, Senior Director of Investor Relations. And joining me on today's call are Bob Weiss, Chief Executive Officer; Greg Matz, Chief Financial Officer; and Al White, Chief Strategy 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 the 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 Cooper Companies' Investor Relations department. 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 second quarter financial results. We will keep the formal presentation to roughly 30 minutes and then open up the call for questions. We expect the call to last approximately 1 hour. [Operator Instructions] Should you have any additional questions, please call our Investor line at (925) 460-3663 or email 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. And with that, I'll turn the call over to Bob for his opening remarks.

Thank you, Kim, and good afternoon, everyone. A few second quarter financial highlights. Another solid quarter. I'm very pleased with the results: top line growth of 11%; GAAP earnings per share of $1.52, up 36% versus the prior year; non-GAAP earnings per share of $1.50 is up $0.38 or 34%; and financial -- or free cash flow was $77.4 million, which means our trailing 12-month free cash flow is $243 million. Some highlights and key events. Our silicone hydrogel family of soft contact lenses continues to show strong growth, and our recently announced launch of MyDay, our branded single-use silicone hydrogel lens, should continue our momentum for many years to come. We recently announced our planned exit from Aime, our noncore lens and lens care business in Japan. Aime came with our purchase of War Wai's [ph] supply control of raw materials for silicone hydrogel family of products and the selling rights for Biofinity in Japan. Biofinity has been a stellar success in Japan, up 2.5x above the prior year's second quarter in constant currency. Overall, our silicone hydrogel family worldwide is up 31% in constant currency and accounts for 43% of CooperVision's revenue. For the most recent calendar quarter, we grew 3x the market growth of 4%. Our gross margin percent for the quarter achieved over 66%, deriving an operating income margin of 21%. Strong free cash flow during the quarter allowed us to delever our debt-to-total-cap to only 12%. On sales results, our second quarter -- during the second quarter, our silicone hydrogel family continued to drive our top line and our bottom line results. Silicone hydrogel revenues were $134 million. The halo effect of Biofinity Toric in Japan continues. In Japan, Biofinity constant currency sales are up over 2.5x the prior year second quarter. The relaunch of Avaira Toric is also continuing its halo effect on Avaira 2-week family of products where during the second quarter, we were -- they were up over 50% versus the prior year in constant currency. Following our successful private label rollout of single-use silicone, we have now recently announced our launch of MyDay, our branded single-use silicone hydrogel lens. We expect this newest addition to our silicone hydrogel family of soft contact lenses to help continue our silicone hydrogel revenue growth momentum for many years to come. Geographically, foreign exchange headwinds continue, reducing our CooperVision revenues by 4% in the quarter. Excluding foreign exchange, CooperVision constant currency growth was 11%. Last year it was the euro and this year it's the yen, which at recent exchange rates is down almost 30% from the high of JPY 77 per dollar. With over $200 million of revenue in Japan, this is not only impacting our revenue but also negatively impacting our gross margin percent as well as our operating income margins. But even with this nuisance on the strength of our product lines, we are putting up solid numbers. From a revenue perspective, regionally, we have put up solid constant currency growth in all locations. America is up 12%, Europe up 8% constant currency and Asia-Pacific up 13%. And overall, as I mentioned, 11%. Our growth drivers are: In the Americas, trading up to the Biofinity -- trading up to Biofinity, including the halo effect of Biofinity Multifocal, with the entire family doing well. Also, while off of a much smaller base, Proclear 1 Day in the Avaira Toric and family are significant contributors. In Europe right now, currency isn't a big factor. During our -- driving our 8% constant currency growth in this region is the entire Biofinity family and 1 Days, including single-use silicone. In Asia-Pac, while foreign exchange took its toll in revenues, our constant currency revenue was up 13%. Drivers: the tremendous success of Biofinity family, in Japan with the halo effect of Biofinity Toric, as well as Proclear 1 Day and single-use torics. The worldwide soft contact lens market in the first quarter of 2013 was up 4% in constant currency, while CooperVision was up 12% during the same time period. For the trailing 12-month ended March 31, the soft contact lens market, now $7.2 billion worldwide, was up 4% in constant currency. CooperVision was up 11% on the strength of Biofinity, Proclear 1 Day and Avaira. For the calendar quarter, the market growth was sponsored by 1 Day. While CLI or Contact Lens has stopped reporting the growth of silicone hydrogel material, most likely this trade-up material remains solid growth material. CooperVision was up 31% in constant currency in the fiscal second quarter of 2013, and that CooperVision silicone hydrogel now represents 43% of our revenues. The soft contact lens market continues to be a trade-up market. This includes 2 premium products: silicone hydrogel lenses, torics and multifocals. A trade up to 1 Day disposables expands patient revenue by 400% to 600%. Even more important, the 1 Day wear generates 300% to 500% more profit. Also, it's important to understand that toric and multifocal have long -- have a long way to go in capturing the market opportunity, especially outside the United States. Geographically, the strength of the Americas' plus 6% and trading up to 1 Days has been driving the market. Overall, the market was up 4% for the quarter and trailing 12 months. Our expectations remain for the market to grow 4% to 6% continuing -- and CooperVision continuing to gain market share. CooperSurgical, our worldwide franchise, turned -- our women's healthcare franchise, turned in $75 million in revenue, up 32% versus the prior year's second quarter, on the strength of a $20 million revenue contribution from Origio, our IVF acquisition of a year ago. We are pleased with our IVF integration activities. Our IVF or global fertility products were up over 10% organically versus the prior year period. Overall, the medical device market, including OB/GYN offices, are in transition, with considerable consolidation of office practices and, in the United States, the new Medical Device Tax. During the quarter, CooperSurgical, on an organic constant currency basis, was essentially flat. Even so, we believe we continue to gain share. Longer term, we expect to continue to leverage our CooperSurgical infrastructure or critical mass, expanding outside the United States by growing IVF and channeling new products through this franchise. Within our women's healthcare franchise, products such as IVF products for fertility present the greatest opportunity for truly global reach. A couple of comments on guidance. We updated our guidance in late December following the amendment of our CIBA-Alcon royalty agreement and again when we released our first quarter earnings results. Given the strength of our second quarter results on the bottom line, we brought about -- it brought about a strong gross margin trend and favorable effective tax rate. We have again upped our new GAAP earnings per share guidance in spite of a worsening trend on foreign exchange rates -- or more specifically, the yen, which is down 8% since our March earnings call. While constant currency revenue is doing great, we have moderated our revenue guidance to reflect yen weakening, given we have over $200 million in revenue or about 17% of our sales at CooperVision that are yen based. Our new guidance on a non-GAAP earnings per share this year of $6.15 to $6.25 versus previous guidance of $5.95 to $6.10 reflects the strength and progress of our product portfolio, including Biofinity, acceleration of market share gains, favorable second quarter results and the lower -- a lower defective tax rate for this fiscal year. In spite of increasing our bottom line results and guidance, we continue to invest in geographic expansion in R&D, with emphasis on D, or product development. This D is what has accelerated our rollout of our new products like MyDay, our new branded 1 Day silicone hydrogel lens. On strategy, we are continuing with our successful strategy, which I frequently have articulated in the past. We believe it is solid and has delivered results. CooperSurgical is putting up solid results and is leveraging its infrastructure. The franchise was built with a solid understanding of the value of critical mass in the women's health care market, targeting OB/GYNs. We follow the profession wherever they go: office, surgery center, hospital or IVF centers. Although the call points are different for each, the leverage is considerable. CooperSurgical's second quarter '13 gross profit was 65%. Operating margins were 17%. And due to minimal capital requirements, CooperSurgical is a significant contributor to free cash flow. We are dedicated to this strategy and will continue tuck-in and non-U.S. acquisitions to leverage the CooperSurgical structure and products. At CooperVision, the strategy is more complex and is much more global in nature. The $7.2 billion soft contact lens industry, because of the uniqueness of our manufacturing platform and product portfolio, we are the only participants that could aggressively promote silicone and non-silicone hydrogel lenses -- that is, the Proclear family -- emphasize branded and nonbranded products. Note, private label does not mean lowering our operating margins. We actively promote and specialize in custom lenses with a high gross profit, of course. We support all modalities that eye care physicians prescribe: 1 Day, 2-week and monthly modalities. And we support all types of lenses: spheres, torics and multifocals. We're close to 30% share in the high-growth specialty categories, torics and multifocals. It is acknowledged by eye care professionals that we're pretty good at specialty contact lenses. Few eye care professions would challenge why the success of Biofinity toric for astigmatism. Put a great design together with a great material, and great things can happen. We have seen similar successes for the same reason with Biofinity Multifocal, which shipped to market in the middle of 2011. 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 1 Day, are all in good capacity shape. Our newest challenge will be to ramp up 1 Day silicone hydrogels, as yet a niche market. 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 1 Day or single-use lenses. Each creates more revenue per patient. A 1 Day modality, for example, results in 4x to 6x more revenue per wearer. While this strategy sacrifices the gross profit margin, or percent, it generally creates 3x to 5x more profit per wear. Of course, this strategy competes head-on with the lens care space since we are shifting away our resources from lens care to contact lenses only. Competing for lens care dollars is more a problem with 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 of talk about with the eye care professionals all 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 are a solid -- we have a solid product portfolio to leverage in all modalities, multiple materials, all lens 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 and/or designs. We have a lot of work to do before we come anywhere close to having exploited our #1 contact lens family, Biofinity. This is particularly true when it comes to geographic expansion and fully developing the lens family of torics and multifocals around the globe. The same applies to Avaira, where the Avaira Sphere has been anxiously awaiting the relaunch of Avaira Toric. The combination has put us in a much better position to exploit the U.S. 2-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 complete elimination of silicone hydrogel royalty through expiration of patents in September 2014 in the United States and March 2016 in the rest of the world; the reduction of our manufacturing cost by, among other things, improving molding cycle times, increasing capacity utilization and improving yields in general. Each of these are key goals for 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 2 businesses. The key requirement, however, is that each must succeed our minimal investment hurdle rates. Each must achieve, over time, a hurdle rate that exceeds 10% return on invested capital. Additionally, the markets for both women's health care and soft contact lenses are much less developed outside the United States, and we generate a considerable amount of cash flow offshore, due in part to our level of manufacturing outside the United States. As such, we will continue to aggressively invest in global expansion opportunities. With over 95% of the people on the planet outside the United States, we believe we will find opportunities to invest in other countries for decades to come, thereby sustaining our low effective tax rate indefinitely. And finally, we again this year demonstrated we are opportunistically willing to buy some of our own stock to maximize total shareholder return. In summary, before I turn it over to Greg, let me say how pleased I am with our ongoing progress. We continue to outperform the marketplace, most recently growing 2x to 3x the market rate of growth. Our top line growth in a skittish global economy remains solid, and I am very pleased at our double-digit organic constant currency growth at CooperVision during the quarter and year-to-date. Our family of products, Biofinity, Avaira, Proclear 1 Day and now 1 Day single-use silicone, as well as, in woman's healthcare, our global fertility products, are all promising growth going forward. We continue to execute well and invest in geographic expansion in the new product pipeline. While we are still early with our expansion program in each of the BRIC countries, and there are challenges in each, I am very pleased with our progress to date. Our women's health care franchise has now become more global with the Origio acquisition made 1 year ago. We remain keenly focused on delivering consistently improving results mindful of our desire to invest and leverage prudently, thereby delivering a respectable total shareholder return. And lastly, as always, a reminder that at Cooper, our #1 asset is our employees. To them, a big thank you for consistently delivering great results. And now, here's Greg.

Thanks, Bob, and good afternoon, everyone. Bob shared with you a pretty thorough review of the market and our revenue picture. Let me start with gross margins. Looking at gross margins in Q2, the consolidated GAAP and non-GAAP gross margins were 66.2% compared with 64% for GAAP and non-GAAP in Q2 last year. We continue to see strong headwinds due to the impact of foreign exchange, predominantly the yen, on our revenue and the related direct impact on gross margins, which had just over a 100 basis point impact on the quarter. In addition, Avaira is successfully relaunching. And as we've discussed in prior quarters, Avaira does have a lower-than-company-average gross margin. Also, our new single-use silicone lens creates some margin pressure as we start to bring it to market. Finally, we also continue to see mix impact due to Origio, which we acquired in July 2012. Despite these headwinds, we continue to run favorable margins well above 60% due to a reduced CIBA royalty, strong product mix led by Biofinity and increased manufacturing efficiencies. CooperVision, on a GAAP and a non-GAAP basis, reported a gross margin of 66.6% versus 63.3% for GAAP and non-GAAP in Q2 last year. As I just mentioned, CooperVision's gross margin was negatively impacted by FX, largely the weakening of the yen, as well as, on a much smaller scale, the success of Avaira as it relaunches into the market. We continue to be excited about Avaira, as it opens up the 2-week silicone market, especially in the U.S., which we were not addressing effectively last year at this time. As Bob mentioned, the Avaira family continued to grow above 50% year-over-year. Factors driving the year-over-year gross margin improvement were the reduction of our royalty expense, product mix and manufacturing efficiencies. CooperSurgical had a gross margin of 64.5%, which compares to Q2 '12 of 68%. Excluding Origio, gross margin would have been 66.7%. CooperSurgical continues to experience the same industry headwinds of lower office visits and fewer procedures being done that other medical device companies have recently reported. Now looking at operating expenses. SG&A in the quarter. SG&A expenses increased by 10% from Q2 last year to $150.7 million and were 39% of revenue versus 40% of revenue in the prior year. The majority of this growth was Origio's, since we had no Origio SG&A in the prior year. We had about $700,000 of medical device excise tax in the quarter that hit SG&A. We expect about $2.6 million in 2013. Our SG&A was basically flat sequentially. Now looking at R&D. In Q2, R&D increased by approximately 11% year-over-year to $14.5 million or up about $1.5 million. Excluding Origio, R&D would have increased approximately 3%. R&D was 3.8% of revenue, comparable to Q2 '12 and up from 3.6% sequentially. As we discussed in the prior quarter, we would expect that R&D will continue to grow slightly faster than sales during the fiscal year. Depreciation, amortization. Q2 depreciation was $23.4 million, up $1.9 million or 9% year-over-year, and amortization was $7.5 million, up $2.2 million or 43% year-over-year, for a total of $30.9 million. Origio amortization for the quarter was approximately $2 million. Moving to operating margins. For Q2, consolidated GAAP and non-GAAP operating income and margin were $81.5 million or 21.2% of revenue versus $65.4 million or 19% of revenue in Q2 '12. This represents a 24.5% increase in operating income over Q2 '12. The increase in operating margin is primarily due to the overall gross margin improvement I mentioned earlier. Interest expense. Interest expense is $2.4 million for the quarter, down 20% year-over-year. Looking at the effective tax rate, in Q2, the GAAP and non-GAAP effective tax rate was 4.4% and 5.5%, respectively, versus Q2 '12 GAAP and non-GAAP effective tax rate of 12.4%. As we've discussed before, the effective tax rate continues to be below the U.S. statutory rate; the majority of our income is earned in foreign jurisdictions with lower tax rates. In Q2, the single biggest factor impacting our effective tax rate was the favorable settlement of a multi-year foreign tax authority audit, which reduced the quarterly rates by about 400 basis points. So our 5.5% non-GAAP rate would have been 9.5% without this. We now expect the full year GAAP effective tax rate to be in the range of 6% to 8% and the non-GAAP effective tax rate to be in the range of 7% to 9%. When thinking about these ranges, our future effective tax rate, remember that there were some nonrecurring items so far this year, including the settlement I just mentioned, and the multiple years of R&D tax credit, which was renewed in Q1. These will amount to roughly a 150 basis points improvement in the effective tax rate this year. The other driver in the lower effective tax rate is a reduction to CIBA royalty, which increased offshore profits, which we will continue to see going forward. Turning to earnings per share. Our Q2 earnings per share on a GAAP and non-GAAP basis was $1.52 and $1.50, respectively, versus $1.12 on a GAAP and non-GAAP basis in Q2 '12. EPS is up 36% and 34% on a GAAP and non-GAAP basis respectively versus the prior year. On share repurchases, there was no share repurchase activity in Q2. Turning to FX. Now while currencies have continued to be volatile, the primary impact to us, as Bob had mentioned, has been the yen movement. We have seen the yen decrease 18% year-over-year and over 5% from our Q1 earnings call. On a year-over-year basis, we absorbed a negative FX impact in Q2 of $0.18. As we look at the remainder of the year, we continue to see headwinds with the yen. Assuming today's rates, we see an additional $5.5 million negative impact on revenues from the last earnings call. Although we have operating expense offsets from our overseas operations and eventually offsets in cost of goods sold for pound-based inventory and, to a much lesser extent, yen-based raw material purchases, we estimate that this negative revenue impact will amount to an approximately $0.07 impact on EPS for the second half. Just FYI, the FX rates we're using, because the yen has been all over the place just today alone, is the euro at $1.32 and the yen at JPY 98. Balance sheet and liquidity items. In Q2, we had cash provided by operations of $114.9 million, capital expenditures of $38.2 million and an insurance recovery at $700,000, resulting in $77.4 million of free cash flow, which included approximately $11 million from the payment for business interruption insurance. Total debt decreased within the quarter by $87.5 million to $320.5 million. Debt as a percent of total capitalization is now 12%. Inventories increased by $13.9 million to $339.3 million from last quarter. For the quarter, we are seeing months on hand at 7.8 months, up from a months on hand of 6.9 months last year and up from 7 months last quarter. The increase is primarily due to the increase in inventory for silicone and daily products as well as the reduction of the CIBA royalty, which reduces cost of goods sold and has the effect of raising months on hand. Accounts receivable continues to be well managed, with DSOs at 54 days up slightly from 53 days last year but down from 58 days at the end of last quarter. Now turning to guidance. As Bob mentioned, we revised fiscal 2013 guidance. Total company revenue is now expected to be in the range of $1.575 billion to $1.605 billion, or a year-over-year growth of 9% 11%. We expect CooperVision revenue in the range of $1.26 billion to $1.28 billion, or year-over-year growth of 6% to 8%. This equates to a constant currency growth of 9% to 11%. For the second half, we would expect CooperVision to grow 7% to 10% on a constant currency basis. We expect CooperSurgical revenue in the range of $315 million to $325 million, with a year-over-year growth of 23% to 27%. And we expect non-GAAP gross margin to be in the range of 65% to 65.5% and non-GAAP operating margin to be in the range of 21% to 22%. We expect interest expense of $9.5 million to $10.5 million and, as previously mentioned, non-GAAP effective tax rate of 7% to 9%. Our GAAP earnings per share is estimated in the range of $6.42 to $6.52 and excludes the impact of the potential Aime transaction. Our new -- our non-GAAP earnings per share is estimated in the range of $6.15 to $6.25, this being based on diluted share count of 49.6 million shares. Finally, we expect capital expenditures for the year of $200 million to $250 million, free cash flow of $170 million to $200 million. With that, let me turn it back to Kim for the Q&A session.

Operator, we're ready to take some questions.

[Operator Instructions] And your first question comes from the line from Kim Gailun from JPMorgan. Kimberly Weeks Gailun - JP Morgan Chase & Co, Research Division: I guess the first question, maybe just on Biofinity. You had another really solid quarter, and you're at a place now where silicone hydrogel as a percentage of CooperVision sales is pretty close to on par with where we think the industry is. I've always thought that Cooper, because you're underindexed in dailies, should actually be able to go higher than the industry. But I think it would be helpful just to kind of walk through what you see as the runway for Biofinity from here and maybe Avaira, so silicone hydrogel as a family, and then as you bring in the daily.

Okay, Kim. As far as we're concerned, Biofinity, which is approaching a $100 million -- $500 million run rate product line with solid double-digit growth, still has a lot of runway left. And as I mentioned in my comments, a lot of that runway still has to do with Japan and the rest of the world, where this product obviously is viewed in a very special league within silicone hydrogel lenses. And I think there's no reason to think that it won't continue to perform very well, albeit off of a much higher base, going forward in the monthly -- particularly in the monthly modality. Avaira, of course, is just really getting going. It took a couple of years to get Avaira Toric aligned so we can see the halo effect of Avaira Toric with the Avaira Sphere line. I mentioned that it grew as a family off of a -- granted, a much smaller base, more than 50% on a year-over-year basis. So we're pleased with the momentum it's starting to develop. So I kind of look at each -- how are they going to do in each modality? We have a good entrée in monthly with Biofinity, and that will continue to do well. Probably the non-growth factor globally or the one that will grow the least is 2-week modality, but it is a huge opportunity where we're underindexed. And then, of course, the real growth right now from the point of view of the overall lens industry is the 1 Day modality, sponsored partly by the U.S., where it's doing extremely well. In that area, revenue has gone in the industry from 11% 3 years ago to well over 20% now. We think between Proclear 1 Day and now MyDay, we have good entrées in that area. But when I think about it, I kind of think of the way we present the CLI data in the back of our release. We're gaining share on all fronts right now. I don't care if you look at modality, I don't care if you look at geographic areas, and I don't care if you look at types of lenses, which unfortunately, we weren't able to present this go-around because the Contact Lens Institute has kind of suppressed some data, which doesn't allow us to be able to tell you what the industry did. But ourselves, we did very well, as you can see. Can't really tell you how, but we think we're covering all fronts pretty effectively, and we'll gain share pretty effectively. And that translates to expecting good growth out of Biofinity in the monthly, Avaira in the 2-week and Proclear 1 Day and MyDay in the 1 Day.

Your next question comes from the line of Jeff Johnson from Robert Baird. Jeffrey D. Johnson - Robert W. Baird & Co. Incorporated, Research Division: Bob, I was wondering if I can start with a couple of margin questions, I guess. First on MyDay, from your press release on MyDay today, it sounds like it's going to have a lower silicone content. It sounds like the Dk is going to be 80 on that lens. Wondering what that means from your ability to reduce the alcohol content, how that might help margins scale a little faster in that product if you can get some of the alcohol out quicker, and just maybe an update on what gross margin for that product is -- has been doing here over the last few months since you last updated.

Well, you're right in your focus on that in gross margins. MyDay, initially, like many of our new-launched products, will have marginal profits. We have moved into a profit mode, but we have a long way to go. We have, as a matter of now being 7 or 8 years into silicone hydrogel production, gotten better and better with even products that include the alcohol in the manufacturing process. While that's not an end point in the sense of we expect someday to have alcohol -- potentially alcohol removed from certain silicone hydrogel products, that may be different families of products. But for now, these products, Biofinity, Avaira and MyDay, do use alcohol in production and are -- will likely do so in the future for at least the indefinite future. As far as expectation, we were able to move the needle real far with Biofinity since we did a startup. And when we started up Biofinity, it in fact had 0 gross margins. Today, it has gross margins well in excess of the top end of our -- let's say, well into the 70s. And that obviously plays well from the point of view of our gross margin mix, given it's growing off of a high base. 1 Day has a long way to go in terms of waiting, being a significant waiting factor. And in our case, the start-up process with lead time on equipment is fairly extensive, 12 to 18 months, and that's not only us, but our competitors that are ramping up over the next several years. So by the time we get to where it's meaningful, we would expect to have improved gross margins for MyDay similar to what we've done with our other 1 Day, which is Proclear 1 Day. Jeffrey D. Johnson - Robert W. Baird & Co. Incorporated, Research Division: Okay. And if I can just ask a quick follow-up on the margin front, Greg, I guess for you. CVI gross margin, it sounds like if I x out the currency, the yen weakness and what have you, gross margins for CVI would have been up 400 to 500 basis points this quarter year-over-year. Obviously, the lower royalty has the biggest contribution there or a big contribution there, I'd assume. But even back of the envelope -- I know you won't tell us what the royalty came down to, but back of the envelope, it seems like, to me, that was maybe 150, 200 basis points. Where is that other 200 to 300 basis points of gross margin improvement coming on a constant currency basis for CVI?

Let me jump on part of that. With Biofinity being the magnitude of product it is in our portfolio and with it having the very attractive gross margins that I mentioned, with or without the royalty, no matter how you view that calculation, it is a driver of our gross margins. Number one, it's a multi-modality, so it's easier to have high gross margins in the monthly modality. It's good to have a product of that caliber that I mentioned is annualizing close to $500 million a year. So by far, it is driving a lot of what we're seeing in CooperVision in terms of gross margins. Incrementally, when you look across all the other lines even -- and even considering mix, we are lowering cost on pretty much all fronts. Whether it's the 1 Day modality, the 2-week modality or the monthly modality, costs are coming down in parallel with that balancing mix, if you will, of products. And now, Greg, by all means, go ahead.

No, I think, Bob, that's a good summary. I mean, Jeff, you obviously know our sensitivity of protecting the confidentiality of the agreement that we have. I think I covered the key factors that are really driving it. One is a strong product mix, as Bob said, led by Biofinity. Manufacturing efficiencies, as you know, Fernando, as our Manufacturing Vice President who handles all our operations, has done a fabulous job over the last 5 years of improving his team, improving the efficiency in the factory, and that has helped drive up margins. And obviously then, the other big piece is the royalty, which we can't really go into more detail on.

Your next question comes from the line of Chris Cooley from Stephens.

Bob, I was just wondering if you could talk to us a little bit about how you see the single-use silicone market evolving going forward, in particular with the company's decision to go with a low -- lower-content -- or I should say, lower-Dk version versus many of the competitive offerings, just how you see the U.S. market shaping up for that over time?

Well, I think I've frequently said that the market today is a niche market. It's probably in the neighborhood of $300 million, $300 million to $350 million, maybe as high as $400 million but certainly not above that worldwide with the dominant portion of that coming out of Japan, where J&J has TruEye. In the U.S., it's been hitting its head somewhat on the ceiling of the type of wares because of the current price points of 1 Day silicone hydrogel lenses. As long as the price points are where they are, there is some limitation in many of the markets around the world. So that's a factor. Having said that, you have all the 3 majors, if you will, spending a lot of energy developing that market. Why? Because number one, trading into a 1 Day is worth 400% to 600% more revenue per patient. U.S. is ripe for that. And so there's a want to solve the 1 Day riddle in the U.S. And concurrently, while you're migrating people into the 1 Day modality, give them the option of a silicone hydrogel since so much of the market today -- I'd say it's about half and half now. Almost half of the market in revenue dollars is silicone hydrogel, half if non-silicone -- is hydrogel. So we've got a market split, and there is a lot of eye care professionals that want a silicone hydrogel 1 Day option, and they'll try to move the mark with that. We going to be there. We're going to be a meaningful player there. And I think with the energy of the industry, the 3 majors in that area, they'll move the needle. And this will not be a niche product, 3 years, 4 years, 5 years down the road.

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

So on guidance, can you help tease out the reduction by $10 million for CooperVision and for CooperSurgical? How much of that was FX? How much of that was operational? And on the gross margin, I heard the guidance for the full year, but you can -- can you talk a bit about what you expect for the third and fourth quarter from here? 66.2%, I think, in the second quarter. I guess, my question is, can you -- do you think it will improve sequentially from here throughout the year? And lastly, Bob, did you see the same effect this quarter as you saw last year where April was soft but May bounced back?

All right. The first one, and I'll let Greg add to anything I miss. On the reduction on the top end of the range by $10 million, the majority, clearly, for Vision was FX. For Surgical, there is, as depicted by the second quarter results, some softness being experienced. I think that's consistent with what we've seen in the industry, be it all the competitors in the space have commented on the softness on the office side of equipment and instruments right now. So there's some of that built the experience of the second quarter rolling into the full year results on the surgical side. As far as gross margins, where they are, do we expect sequential or it's going to go directionally? Generally, ballpark, the same. So that would kind of weed out to the guidance that Greg gave you. As far as the last year event, which you're absolutely correct was a very weak last week, last 2 weeks of April and a lot of that slipping into May, we didn't see that phenomenon develop this year. It's a more normalized cycle, if you will, with May starting out, which is built into our guidance, fine, not having any windfall compared to the prior year, which was kind of a flip-flop between the second and -- the second 2 weeks -- or the last 2 weeks of April slipping somewhat into May. Greg, I don't know if there was anything you wanted to add to that?

No, Bob. I think you...

Your our next question comes from the line of Joanne Wuensch from BMO Capital Markets.

Just for some clarification, does your lower revenue include or exclude Aime at this stage?

Great question. The answer is Aime is built into those revenue numbers.

Built in meaning you've pulled it out or is still included?

No, it's included. It's included.

Okay. I thought you were selling portions of it and therefore, we should be taking that out, no?

I'll let Greg talk to the technical accounting discussion in that area.

So I think right now, our intention is to sell it. We have been -- we have somebody that we've signed an agreement with. There's still some closing conditions that are still to be achieved. And once we have cleared those closing conditions, at that point, we would treat that -- we would treat it as a sale on the accounting side. So at this point, because those closing conditions are still open, we have not -- we're still treating it as usual going forward.

Okay. And my second question is, could you please comment on the price point for the MyDay lens? And remind us, is this a sphere lens coming out, and then when we should expect a toric?

It is -- from a price point, point of view, we're really not going to get into that. Particularly, there's going to be a want for an element of surprise, if you will, on what we're ultimately going to do there in the U.S. market. It is not shortly, near term, going to be in the U.S. market. That's more 2014, sometime, calendar year. As far as when we expect a toric in that space, I think, given the manufacturing constraints that the industry will have in many of the areas, anyway, it's a ways down the road. Nothing imminent. It's initially going to be a sphere for at least the next several years.

Your next question comes from the line of Matthew O'Brien from William Blair. Matthew O'Brien - William Blair & Company L.L.C., Research Division: I was hoping to just tease out gross margin a little bit more. I know you guys don't want to talk about the royalty, but can you just give us a sense for -- you still have some headwinds out there on Avaira. When do you anticipate that headwind will dissipate somewhat? Aime, can you just quantify what the benefit of selling that business would do to the gross margin line? And then, Bob, you made a bunch of comments on manufacturing going forward, some areas that you think you can benefit as well. Just what do you think the opportunity is with those programs? And then, Greg, just to clarify on the tax rate side. I think, historically, you've been around 10% of an effective tax rate. Are you saying that with the royalty lessening, that you think that tax rate may decrease something around 100 basis points going forward, or how should we frame that?

All right. That was a lot. Avaira, going forward, we continue to improve the platform we are manufacturing on. I might say there's somewhat a game of "musical equipment" going on right now in the Avaira family and in the MyDay family, if you will, all of which is kind of pointed in a direction that will improve the end point together with the equipment that is on order that, let's say, similar to Biofinity, where we had first generation of equipment that, in the case of Biofinity, was put in the museum, the first 2 pieces of equipment; we're not going to be there with Avaira, but I would say there are -- we clearly know there are improvements we can make to -- modification to future equipment we're buying that will reduce cost of goods. So both on the Avaira front as well as on the MyDay front, that platform is similar, if you will. In terms of Aime, I would -- I'll defer to Greg on the implications of gross margins will improve without it. I don't know if you have any specifics.

No, it's pretty small. They will improve because it was definitely below our average gross margin. But again, Aime is a relatively small piece of our overall business. So you'll see an uptick. I don't know that it would be that notable.

As far as manufacturing going forward, I mentioned, among other things, cycle times. I mentioned in the past that we do have a desire to get alcohol out of a lot of production in the area of silicone hydrogel lenses. That is a -- when you I talk about R&D, that clearly is D work that we continue to work on in terms of getting alcohol either diminished and/or removed in certain silicone hydrogel products in the future. In the area of other cost reductions over time, we did announce that -- I mentioned last quarter that we are expanding our third site into Costa Rica. Costa Rica is an area where a platform there would allow for lower-cost manufacturing, so certain products would be more conducive to lower labor rates, if you will. Right now, we're in locations that are far from lower labor rates compared to a global perspective. So factors like that as we grow our business will come into play that will help future gross margin trends. Effect of -- is there a comment on taxes, Greg?

Yes. So Matt, we're a little early for guidance, but I think it's a fair question. If you look at the guidance we gave for the rest of this year, we said 7% to 9%, in that range. I'd also mentioned there's probably 150 basis points or a little more of what I'd consider nonrecurring kind of expenses. So we, obviously, don't expect to run next year at the 7% to 9% range. The guidance will be higher than that. But if you take that 150-plus basis points and add it to our guidance range, it probably gives you -- it gets you in the right direction. Again, we'll determine guidance as we get farther in the year. The other big thing we didn't mention, real specifically, is it really does have an impact on your geographic distribution of income, and that changes and revolves over time. So when we go to give guidance for next year, that will be the thing that we'll be looking at to help -- that also will impact the rate for next year.

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

A question on the impact from currency. Greg, I think you said for the back half of the year, you're thinking currency is going to negatively impact EPS by an incremental $0.07. For the second quarter that you just reported, how much of a negative impact was it relative to what you guys were thinking 3 months ago?

3 months ago, it was about $0.035.

So about a $0.10 headwind altogether, then, for the year? Is that right?

I'm sorry. Say that again, Steve? I missed that.

I guess, so you're now expecting an incremental $0.07 from FX?

From the last guidance, yes.

Right. So I guess, how much of a negative impact was there from FX just on the second quarter relative to a your guidance 3 months ago?

Yes, I think since March 8, that would be right. The $0.035 plus the $0.07. Yes, $0.105.

Okay. Got you. And then just my second question was you were able to hold your SG&A dollars relatively flat despite an increase in revenue. How likely are you guys going to be able to do that over the rest of the year?

I think, to some degree, foreign exchange, just like it hit our top line, certainly hits operating cost, minimizes operating cost somewhat. We are continuing in our venture of geographic expansion, so that's kind of a push. Suffice to say that I think in the guidance, we're giving 21% to 22% OI that we're expecting improving -- some improving ratios in the back 6.

And also remember, too, we purchased Origio in July last year. So once you start hitting July, you'll have a more even apples-to-apples comparison year-over-year.

Your next question comes from the line of Lawrence Keusch from Raymond James. Lawrence S. Keusch - Raymond James & Associates, Inc., Research Division: I guess, 2 questions for Greg. First, on the free cash flow. Obviously, you maintained the guidance of $170 million, $200 million, yet you brought up your EPS guidance. So if you could just help me understand why that's -- why that guidance is staying the same. And the second question is you indicated that you did not buy back any stock in the quarter. So if you can remind us again what you got outstanding under the share repurchase authorization and really how you're thinking about how you tackle that share repurchase.

Okay, on the share purchase, let me just -- we have currently outstanding on that is approximately $185 million on the program. And again, I think we will continue to just kind of run that program like we've run it over the last year or so. And there will be opportunities where we believe that it makes sense based on where the stock is at. From a -- the other question you were asking... Lawrence S. Keusch - Raymond James & Associates, Inc., Research Division: Free cash flow.

The free cash flow. Yes. Lawrence S. Keusch - Raymond James & Associates, Inc., Research Division: Yes, why is it just maintained?

I think there's still, from our perspective, a lot happening with the equipment purchases that we're talking about. The CapEx number is a big number. We're looking at the opportunity of moving capital purchases up in order to get the key equipment that we want for our growth in the future. And so, at this point in time, we feel comfortable just leaving the range where it was at as we watch some of that CapEx start to be processed.

Yes, I think the incremental earnings, if you will, in the context of the size of that number, is more rounding. It wouldn't move the needle that much. And some of those items that have caused the incremental earnings, specifically in the tax area, are more noncash events. Lawrence S. Keusch - Raymond James & Associates, Inc., Research Division: Got it. And just so we're calibrated, CapEx for the year, how are we thinking about that?

$200 million to $250 million is the range we're giving.

And next question comes from the line of Amit Bhalla from Citi.

Greg, 2 questions. First, on the gross margin. As you look to the remainder of the year, I think you said -- or Bob may have said that you expect the gross margin to stay kind of at the current level of 66%. Help me understand why that's not improving. I think from what you're saying so far, it does sound like there should be gross margin improvement into -- in the second half of the year. And secondly, on the tax in the quarter, I think if I heard you right, you said there was kind of onetime impact. Why wasn't that excluded? Why didn't you take the benefit, which we calculate at about $0.09, in the quarter?

Let me take both of those. First of all, on the gross margin going forward, the 66.2% that we had on the second quarter, as you look forward, with our expectation of the rollout of MyDay and a more robust Avaira family, those are factors that will, in both cases, work against on mix. So it's as much as anything has to do with mix as opposed to our cost of goods headed down or any other factor. Having said that, we continue to expect Biofinity to be doing well, but there's going to be a lot of growth in, let's say, that 1 Day modality in our estimation. As far as the tax, the reason it's not called out is, quite frankly, if you look at us over the last 10, 15 years, we have had those events fairly routinely. And in our effective tax rate, we continue to set up these reserves. These reserves are coming out of ordinary effective tax rate. They are set up there where we think it's appropriate. And then the ultimate determination is made when either there is a settlement or discussion with a tax jurisdiction or a statute is barred or removed after a period of time. So that play is part of our operating business and our operating model. And we have never quoted, nor would we, the portion of what we're accruing that is in our effective tax rates that we're giving you.

Just to add to that, too. In that settlement, we actually had said 2 years. One thing that was unusual and what caused that number to get bigger than it was is the fact that normally, they would have closed down 1 year last year. And what happened is, at the end of their audit last year, they held the year open and went on to the next year, which was a little unusual. And so they waited to close out both years together, and so we get kind of a double hit, so to speak, in the current year. The other thing on the gross margins also still that would be the yen is still moving against us. We continue to have that. So keeping the margins relatively flat over the next couple of quarters is still absorbing extra yen-based impact.

Ladies and gentlemen, this will conclude our question-and-answer session for today's conference. I would now like to turn the call over to Bob Weiss for closing remarks.

Thank you. And I want to thank everyone for joining us today. Hopefully, you're -- were as pleased with our quarter as I was in delivering the results, and I look forward to updating everyone on the progress we're making on our next call, which is on September 5, right after the Labor Day weekend. So until then, have a pleasant summer. Thank you.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a good day.