The Cooper Companies, Inc. (COO) Q1 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and thank you, all, for joining The Cooper Companies First Quarter 2014 Earnings Conference Call. My name is Ryan, and I'll be the operator in today's call. [Operator Instructions] As a reminder, we are recording this call for replay purposes. And now, I'll hand the call over to your host, Ms. Elizabeth Bremner with Investor Relations.

Good afternoon, and welcome to The Cooper Companies' First Quarter 2014 Earnings Call. I'm Elizabeth Bremner, Investor Relations Analyst. 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 or their failure to achieve anticipated benefits. 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 as described in our SEC filings, including the business section of Cooper's annual report on Form 10-K. They're 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 for the call. Bob will begin by providing highlights of the quarter, followed by Greg, who will then discuss the fourth quarter -- the first quarter and full -- or financial results. We will keep the formal presentation to roughly 30 minutes, and then open 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, Elizabeth, and good afternoon, ladies and gentlemen, and good evening in some cases. Well, a few financial highlights. A solid way to start the new year, top line growth of 7%, 11% in constant currency excluding the divestiture of Aime. GAAP and non-GAAP earnings per share were $1.47 and non-GAAP earnings per share is up 20% versus the prior year's first quarter. Some highlights and key events. During the quarter, we continued to gain market share and grow at 2x the market. Our silicone hydrogels are posting -- posted $154 million in revenue. Were up 30% in constant currency in the fourth quarter or in the full first quarter. Our rollout of MyDay, most notably in Europe, proceeds to plan. Our manufacturing ramp up of MyDay is also proceeding to plan, if not slightly, ahead of plan. The depth of our top line growth is broad-based. All regions, all modalities, all types of lenses, spheres, torics and multifocals, in both hydrogels and silicone hydrogels. We delivered a solid top line, a solid gross profit percent, a solid operating margin and a solid earnings per share. We took the opportunity to continue opportunistically buying our shares -- buying in another 396,000 shares for $50 million. At $326 million, CooperVision revenues put up a solid top line results in the first quarter. Excluding the effects of the divestiture of Aime, our CooperVision sales were up 14% in constant currency versus the prior year. Our silicone hydrogel family continue to drive our top line. With revenues of $154 million, our silicone hydrogels were up 30% in constant currency. Our silicone hydrogel family is now very deep. Monthly which is Biofinity; 2 weeks, Avaira and now, the daily disposable MyDay. All modalities performed well even our non-silicone hydrogel products performed well. Our Proclear family, led by daily disposables was up 12% in constant currency and accounts for 25% of CooperVision's revenues. By lens type, we also kept our momentum with torics accounting for 31% of CooperVision's revenues, up 12% in constant currency. And multifocal is now 10% of CooperVision revenues, up 24%. We continue to lead the market in these more specialized categories. When it comes to the fastest-growing modality, daily disposables or single-use lenses, we put up stellar numbers with single-use spheres, up 14% in constant currency and overall single-use, up 19%. Geographically, CooperVision's foreign exchange headwinds continue reducing our revenues, down 3% in the quarter. Excluding foreign exchange and the Aime divestiture, our CooperVision revenues growth was 14% in constant currency. The biggest headwind is still the year-over-year comps on the yen, which was down 21% versus the prior year. With $200 million of revenue in Japan, this certainly is a drag, but one that should moderate starting in the second quarter. From a revenues perspective, we have put up solid constant currency growth in all regions. Our growth drivers are in the Americas trading up to Biofinity including the ongoing halo effect of Biofinity multifocal with the entire family doing well. Also while much smaller base Proclear 1 Day and the Avaira Toric and Sphere family are significant contributors. In Europe, right now, the euro is helping offset some of the yen, driving our 13% constant currency growth is the -- in this region is the entire Biofinity family, 1 Day is including MyDay and Avaira. In Asia Pacific, while foreign exchange took its toll on revenues in constant currency -- our constant currency revenue was up 17% excluding Aime. The Biofinity family, with strong support both Biofinity Toric and Biofinity Multifocal and single-use led by Proclear 1 Day, are key drivers. In the Asia-Pac, torics and multifocals are key drivers by lens type. Worldwide [indiscernible] -- soft contact lens market in the fourth quarter of 2013 calendar quarter was up 6% in constant currency while CooperVision was up 13%. For the calendar 2013, the soft contact lens market now $7.5 billion worldwide was up 5% in constant currency. CooperVision was up 11% on the strength of Biofinity and Proclear 1 Day and by lens type, torics and multifocals. For the calendar fourth quarter, the market growth was sponsored by 1 Day, now 43% of the soft contact lens revenue dollars worldwide. While industry growth is not currently available on silicone hydrogel material, this trade-up material is most likely the growth driver and we believe silicone hydrogel accounts for about 48% in the soft contact lens revenues worldwide. CooperVision is currently at 47% of silicone hydrogel revenue dollars. Soft contact lens market continues to be a trade up market. This includes the premium products silicone hydrogels, torics and multifocals. The trade up to the 1 Day disposable expands revenue per patient by 400% to 600%. Even more important, the 1 Day wearer generates 300% to 500% more profit. Also it's important to understand that torics and multifocals have a long way to go in terms of capturing the market opportunity, especially outside the United States. Geographically, the Americas divest up 8% in the calendar quarter on the strength of the 1 Day trade up and a strong showing from silicone hydrogel, torics and multifocals. Asia-Pac delivered 6% growth, aided by a strong showing of silicone hydrogel lenses; and in Europe, was up 5% for the same reasons. Looking at CooperSurgical. I want to talk to our franchise. It turned in a slightly positive revenue performance in the quarter. We were pleased with the continued strength of top line growth in fertility, which was up 15% above the prior year. Our fertility business now accounts for 35% of our CSI franchise. With our office in surgical space, we continue to run into industry headwinds caused by the Affordable Care Act or Obamacare, if you will. Having said that, the negative 6% we reported is not truly reflective of that business as we had some orders we typically received in the first quarter get placed in the second quarter. This would have brought our office in surgical sales closer to a flat quarter. For the year, we believe we will see moderate top line growth for CooperSurgical with gross margins similar to last year and operating margins expanding to some operating expense leverage. Overall, CooperSurgical continues to be approximately 20% of our overall local business. Looking at guidance. We continue to increase our earnings per share by raising a lower end and narrowed our revenue guidance initially provided on our year end earnings call. This guidance reflects our successes in the first quarter, including $0.04 benefit of our buying of almost 400,000 of our shares in the open market in the first quarter. MyDay, our new 1 Day silicone hydrogel being rolled out in Europe and in Australia and New Zealand, is marching to plan and we're continuing to expect around $25 million in revenue this fiscal year limited only by capacity constraints. Our strategy, we continue to -- we are continuing with our successful strategy, which I frequently articulated in the past. We believe it's a solid one and it has delivered results. CooperSurgical is putting up solid results and is leveraging its infrastructure. The franchise was built with solid understanding of the value of critical mass in the women's health care market, targeting the OB/GYNs. We follow the professional wherever they go, office, surgery center, hospital or IVF centers. Although the call points are different for each, the leverage is considerable, CooperSurgical's first quarter gross profit percent was 63%, operating margin was 18%. And due to minimal capital requirements, CooperSurgical is a significant contributor to our free cash flow. We are dedicated to this strategy and we'll continue tuck in, in non-U.S. acquisitions to leverage CooperSurgical structure and products. At CooperVision, the strategy is more complex and is much more global in nature. The $7.5 billion soft contact lens industry, because of the uniqueness of our manufacturing platforms, we are the only company that participates with a very broad and very deep product portfolio. Just to crystallize this point. CooperVision aggressively promotes silicone hydrogel and non-silicone hydrogel, which is the Proclear family. CooperVision emphasizes branded and non-branded products, note private label does not mean lower operating margins. Already, we actively promote specialized custom lenses with a high gross profit percent, I might add. We support all modalities. The eye care professional prescribes 1 Day, 2-week and monthly lenses and we support all types of lenses: spheres, torics and multifocals with approximately 30% of our share in the high-growth areas, specialty lens categories: torics and multifocals. It is acknowledged by eye care professionals and we're pretty good at specialty contact lenses. Few eye care professionals 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 that same reason with Biofinity Multifocal, which first hit the market in the middle of calendar year 2011, almost 3 years ago. On the capacity front, we are capable of delivering considerable more product, where we had then previously supplied constraint. The Biofinity family, Proclear 1 Day and our 1 Day toric, and all -- are all in good capacity shape. Our newest endeavor is now ramping up MyDay, our 1 Day silicone hydrogel. On pricing, we, like the rest of the soft contact lens industry, have a trade-up strategy, our new wares and existing wares are targeted for silicone hydrogel and Proclear family and 1 Day or single-use lenses. Each creates more revenue per patient. A 1 Day modality, for example, results in a 4x to 6x more in revenue per wear. While this strategy sacrifices the gross profit margin, that is percent, it generally creates 3x to 5x more profit per wear. Of course, the strategy competes head-on with the lens care space since we are shifting 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 the -- of our competitors are now going through. I might add, with Biofinity, Avaira, Proclear and MyDay, 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 our 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 markets, 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 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 [ph] 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 was anxiously awaiting the launch of Avaira Toric. This combination has now put us in a much better position to exploit the U.S. 2-week space owned by Johnson & Johnson and to exploit our private label strategy more aggressively with this family. While we already have a 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 silicone hydrogel royalty with the expiration of patents, a reduction of our manufacturing cost buy, among other things, improving, molding cycle times, increasing capacity utilization and improving yields in general. Each of these are key goals for us. And as previously mentioned, our expansion plans include a lower cost labor location in Costa Rica that is now being built. This is a multi-year project that will further help us manage down our cost. 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 requirements, however, is that each of the acquisitions must exceed our minimum investment hurdle rates. Each must achieve, over time, a hurdle rate that exceeds 10%. Additionally, the markets for both women's health care and soft contact lenses are much less developed outside the U.S., and we generate a considerable amount of cash offshore to impart to our level of manufacturing outside of the U.S. As such, we will continue to aggressively invest 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, sustaining a low effective tax rate indefinitely. And finally, we again, this year, demonstrated we are opportunistically willing to buy in our stock to maximize total shareholder return. In summary, before I turn it over to Greg, let me say how pleased I am with our progress. We continue to outperform the marketplace more than 2x in -- market growth in 2012 and 2013 and almost 2x over the last 5 years. Our market share gains are deep, covering all geographies, modalities, lens types, lens materials and are both branded and private label. Our family of products like Biofinity, Avaira, Proclear, 1 Day and MyDay, as well as fertility and women's health care have very promising continuing growth potential in the United States and throughout the rest of the world. We believe our optimism is with good reason. Because of our solid gross profit percent performance, we have been able to continue investing in geographic expansion, sales force expansion and R&D the past the 5 years. Our improving operating income margins have been cost -- driven, leaving room to invest. Our balance sheet and our free cash flow are strong and we will continue to fund each of these areas, as well as capital expansion North of $200 million. Being a player in the 1 Day soft contact lens market requires commitment to capital. Not everyone will play. Today, this market is over $3 billion and growing double-digit. Given the 4x to 6x trade up of the 1 Day conversion, we are more than willing to trade off our gross profit percent for the added profits per patient of a 1 Day wearer, but we remain committed to our 2018 objective of 25% operating income and related earnings per share growth impact. We remain keenly focused on delivering improving results, mindful of our desire to invest and leverage prudently, thereby, delivering optimized long-term total shareholder returns. I might add, we purchased cumulatively 2.8 million shares of our stock the past 3 years at an average cost of $103. We have done this opportunistically with our strong balance sheet and free cash flow, so our focus is on delivering bottom line total shareholder returns. Lastly, as always, a reminder that at Cooper, our #1 asset is our employees. To them, I express my appreciation for their dedication to creating value and delivering results. And now, I'll turn it over to Greg to cover some of the financial results.

Thanks, Bob, and good afternoon, everyone. Bob shared with you a pretty thorough review of the market and our revenue picture. Now let me start with gross margins. Looking at gross margins. In Q1, the consolidated GAAP and non-GAAP gross margins were 64.9% compared with 63.3% for GAAP and non-GAAP in Q1 last year. We continue to see strong headwinds year-over-year due to the impact of foreign exchange, predominantly the yen, on our revenue and the related direct impact on gross margins, which had approximately an 80 basis-point impact year-over-year. We are continuing to see an impact to margins for approximately 95 basis points due to MyDay, somewhat equally split between mix, impact and start-up cost. As we discussed in the past, this product will have low to no margins earlier in the year, but will exit the year in a high-single digit margin range, which is normally in a start-up phase where you're building capacity. Helping to offset the headwinds has been favorable product mix, led by the Biofinity family and the CIBA royalty savings, which started in January 2013. At CooperVision, on a GAAP and a non-GAAP basis, we reported a gross margin of 65.4% versus 63.1% for GAAP and non-GAAP in Q1 last year. Factors impacting gross margin in the quarter, as I just mentioned, are the currency headwinds of MyDay, other favorable product mix and the CIBA royalty savings. CooperSurgical had a GAAP and non-GAAP gross margin of 63.1%, which compares to Q1 '13 of 64.1%. Fertility with lower margins will continue to put pressure on our gross margin, as that part of the business continues to become a larger part of their mix. But we still expect CooperSurgical's margins to be around 64% for the year. Now looking at operating expenses. SG&A in the quarter on a GAAP and non-GAAP basis, SG&A expenses increased by approximately 5% from Q1 last year to $158.1 million, and were 39% of revenue, down from 40% in the prior year. SG&A was up less than 1% sequentially. Now looking at R&D. In Q1, R&D increased by approximately 15% year-over-year to $15.7 million, or up $2.1 million. R&D was 3.9% of revenue, up from 3.6% of revenue in Q1 '13 and 3.8% sequentially. We continue to expect R&D to grow faster than sales for fiscal 2014. Depreciation and amortization. In Q1, depreciation was $23.9 million, down $265,000 or 1% year-over-year, and amortization was $7.5 million, up $136,000 or 2% year-over-year, for a total of $31.4 million. Moving to operating margins. For Q1, consolidated GAAP and non-GAAP operating income and margin were $81.6 million and 20.2% of revenue versus $68.8 million and 18.1% of revenue for GAAP and $69.4 million and 18.3% of revenue for non-GAAP in the first quarter last year. This represents almost a 19% increase in operating income over the prior year GAAP numbers. In Q1, CooperVision had GAAP to non-GAAP operating income and margin of $84.1 million and 25.8% of revenue compared, with the GAAP and non-GAAP operating margin in Q1 '13 of 22.3%. This year-over-year improvement comes from a combination of improvement in gross margins and leverage in SG&A. Operating income grew 25.5%. CSI is -- for surgicals, GAAP and non-GAAP operating income and margin were $14.2 million and 18% of revenue, compared to margins of 17.9% for GAAP and 18.7% for non-GAAP in the prior year. Operating income grew approximately 1% year-over-year on a GAAP basis but was down approximately 3.5% on a non-GAAP basis. Interest expense was $1.7 million for the quarter, down 36% year-over-year. As a reminder, included in our Q1 '13 GAAP numbers, under gain on insurance proceeds, is $14.1 million of insurance proceeds for business interruption related to an October 28, 2011 incident in our U.K. facility. In other expenses included in the other income loss categories, approximately $900,000 of FX losses versus roughly $600,000 gain last year. Over the quarter, we experienced relatively sizeable currency moves that resulted in some FX losses associated with our intercompany loan, some of which are in restricted currencies which are difficult and expensive to hedge. 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 see some gains or losses. And looking at the effective tax rate. In Q1, the GAAP and non-GAAP effective tax rate was 9.1% versus Q1 '13 GAAP effective tax rate of 7.5% and non-GAAP effective tax rate of 9.2%. As we've mentioned before, the effective tax rate continues to be below the U.S. statutory rate. And is earned in foreign jurisdictions with lower taxes. We continue to expect the full year GAAP and non-GAAP effective tax rates to be in the 8.5% to 10.5% range. Looking at earnings per share, our Q1 earnings per share on a GAAP and non-GAAP basis was $1.47 versus $1.50 and $1.23 on a GAAP and non-GAAP basis in Q1 '13, respectively. GAAP EPS is down $0.03 over the prior year, largely due to the $0.28 favorable impact due to the business interruption insurance proceeds, which were shown in 2013 GAAP earnings but excluded from non-GAAP earnings. On a non-GAAP basis, EPS is up $0.24 versus the prior year. During Q1, as Bob mentioned, we repurchased approximately 396,000 shares with an average share value of $126.21 per share for a total cost of $50 million. This leaves the remaining $211.5 million available for future share repurchases under the current approved plan. There was no impact on EPS for Q1 due to our Q1 share repurchases, but we expect a $0.04 impact for the year. Looking at FX. Regarding the foreign exchange, currency continues to have an impact on our business. From a year-over-year perspective for Q1, currency negatively impacted us by $0.14 and this was mainly driven by the yen, which was down 21% year-over-year. At the current FX rate, we now expect an approximate $0.22 negative FX impact on EPS in 2014, with the majority of the remaining impact actually hitting in fiscal Q4. This is reflecting the impact of the strengthening of the pound in our U.K. production cost and the impact to our P&L based on our inventory turns as we've discussed in the past. Net-net though, keep in mind, this currency impact is pretty similar to what we hit when we gave our initial annual guidance in December. For today's guidance, we used rates of 1.38 for euro, 1.03 for the yen and 1.67 for the pound. Looking at balance sheet liquidity. In Q1, we had cash provided by operations of $68.6 million, capital expenditures of $61 million and insurance proceeds of $1.4 million, resulting in $9 million of free cash flow. Total debt increases in the quarter by $1.1 million to $345.7 million. We now have approximately $1 billion of total credit available as of January 31. Inventories are basically flat at $339 million from the last quarter. For the quarter, we're seeing months on hand at 7.2 months, up from months on hand of 7 months last year and 6.9 months last quarter. Accounts receivable continues to be well-managed with DSOs at 53 days. Same as the prior quarter and down from 58 days last year. Looking at guidance for the remainder of the year. Bob mentioned that we raised the bottom of the revenue range by $10 million and dropped the top of the range by a similar amounts. The full year revenue range for the company is now $1.685 billion to $1.725 billion. CooperVision's revenue range is $1.365 billion to $1.395 billion. Finally, CSI's revenue range is $320 million to $330 million. Regarding earnings per share guidance, we raised the bottom of our earnings slightly and both GAAP and non-GAAP is now $6.75 to $7. Quickly covering our annual guidance, there are no changes from December. Gross margin percent still expected to be around 65%. OpEx, we're still expecting around 43%. Operating margin around 22% and the effective tax rate in the range of 8.5% to 10.5%. We are expecting the share count to be around 49.5 million shares. In addition, free cash flow and CapEx are still expected to be greater than $200 million. With that, let me turn it back to Elizabeth for the Q&A session.

Operator, we'll now take questions.

[Operator Instructions] And our first question comes from Jeff Johnson from Robert W. Baird. Jeffrey D. Johnson - Robert W. Baird & Co. Incorporated, Research Division: So let me ask 2 quick questions here. One's about -- on competition. A lot of noise out there over the last couple of months on competition, some of us think it's maybe somewhat normal, maybe a little bit higher than normal here, but nothing too egregious. Others maybe thinking it's a bigger year on the competitive front. I would like your take, just not necessarily asking which competitors or anything specific like that, but just how you view the competitive environment going into 2014? And then also on the daily business, just on your daily disposable business, if I back out an assumption on MyDay of a few -- $3 million to $5 million or so, it looks like the rest of your daily business may be growing mid-, slightly above mid-single digits. So is that a sign that MyDay is cannibalizing your Dailies business or just how should we think about MyDay being incremental versus cannibalizing some of your current Daily business?

Well, as far as competition, the concern, I would say, it's, in 2014, looks to be as active as the past. I would say noticeably more or less. We had a lot of good products come out with some of our competitors over the last 5, 6 years and I would speculate the only thing that shifts is who's making the most noise in a given year, and clearly, we have kind of a new entrant, if you will, in the U.S., but one that's been around for really 20 years in Europe. And there's a couple of these products from companies that have been less active in the last 10 years. When you put it all together, I know that it noticeably changes much other than maybe the market upticks a little bit more because I think we're all getting a little better at the trade-up strategy to 1 Day and now, it's the silicone hydrogel 1 Days, which is seen even a bigger trade-up. As far as cannibalization with MyDay, we kind of looked at that, thought about it and we know where the majority of -- by far the majority of the revenue is coming from new fits and competitive products. So very little by way of cannibalization occurring.

Our next question comes from Jon Block with Stifel. Jonathan D. Block - Stifel, Nicolaus & Company, Incorporated, Research Division: It's a little bit of a similar but different question if there is such a thing on Dailies. I was going to ask, in the U.S., Bob, if you feel like the Proclear 1 Days may face, if you can just sort of walk us through, if they may face some modest headwinds over the next several quarters until MyDay is out there. In other words, are you seeing some of the Proclear 1 Days move to a competitive U.S. sight high [ph] lens only because you guys don't have MyDay in the market yet? And then I've got a quick follow-up, if you would.

Yes, I think the niche -- it's still a niche market in the U.S. with TruEye and Total1 and they're at the high end, not where one would expect to find Moist and Proclear 1 Day. Proclear 1 Day, I would say, is more at the top end -- let's say at kind of a spot-on location of Moist and then MyDay would be -- which is not relative to the U.S. market but be more nipping at the top end of the Moist. If we kind of divided that pie in half, the top end, top half of the pie. So no, I don't think there's much of an impact at this juncture with 1 Day silicone hydrogels in the U.S. market on Proclear 1 Day. Jonathan D. Block - Stifel, Nicolaus & Company, Incorporated, Research Division: Okay. Okay and then just as a quick follow-up, you mentioned MyDay and feeling good or maybe a little bit better on the manufacturing side. And can you maybe give us a little bit more detail there? In other words, is that specific to your ability to ramp manufacturing capacity or is it the thought that maybe you're doing something better on the cost side of things in that high-single digit gross margin exiting '14 might inch up? Any kind detail you can give on MyDay manufacturing would be great.

Yes. The rollout of MyDay in 2014, 2015 is totally capacity-driven and that's what capped us off at $25 million in terms of that expectation in 2014 and we're still feeling very good about that number, mainly because it looks like we will be able to deliver on supply side enough to deliver that revenue number and maybe a small bit more, but not enough to take to the bank. So all is going well on the capacity roll-out front. On the yield curve, we talk about entering the year, the first half being in the low singles, and the second half being the upper singles, and then moving into the teens next year. That all is looking very promising. Timeline's getting equipment in, getting it production-quality as we [indiscernible] is going on schedule and the yield learning curve is on schedule and maybe slightly better. So there in our -- my little comment about being maybe a little ahead even on the manufacturing side, which would be good news.

And our next question comes from Larry Biegelsen of Wells Fargo.

Guys, just 2 for me. On MyDay, can you give us any sense of what you think 2015 will look like beyond the $25 million in 2014? I'm just trying to understand if you think you'll have a significant additional capacity by fiscal 2015 if we should assume a ramp? And secondly, we have heard that the weather did have an impact in January and February on the U.S. contact lens market. Can you give us any color around what you're seeing in January and February?

First, Tom, on the question on MyDay ramp-up rollout in 2015. We expect to be able to triple our 2014 number, meaning 25, going up to around 75. Once again capacity limited, but that's a function of number of lines coming on board. And with that, we would then of course enter the U.S. market beyond just in 2014. As you see, the product in the U.S. will be mainly with key opinion leaders, just a handful of them, not much more than that. So it's still restricted to mainly Europe and, to a lesser extent, New Zealand and Australia. As far as the weather, the weather we kind of monitored. I'm sure you're -- -- you're right, we've certainly have heard some limitations caused by the weather and we certainly know, watching the news, that a lot of shops weren't open in the Southeast when Atlanta got shut down a few days, and then it go it again. So there's no doubt that took a modest impact on the contact lenses space, as well as our revenues. Having said that, our numbers were robust enough. I don't think we're really saw the impact of those impact our P&L. So therein we didn't make much of a statement about it.

The next question comes from Larry Keusch with Raymond James. Lawrence S. Keusch - Raymond James & Associates, Inc., Research Division: I guess 2 here. First one, Bob, again just coming back to MyDay. When you went to the change in the manufacturing to go to the higher powers, as you did in the fourth quarter, you sort of went negative margins. I just wanted to confirm that you're back positive margins on the production here. And then secondly, you showed really nice leverage on the SG&A line, certainly growing substantially less than the top line. And I just wanted to get a sense of what's driving that and how sustainable that this through the year.

On the first comment on the gross margin of MyDay is -- has moved into that low single-digits or single-digit arena, aside from the fact that when we did take lines down and ramped them back up, the second lines for example, as we called it, the galactic line, there was idle equipment during that period of time, so there is a charge in the P&L. In addition, let's say, if you were to overlay that into MyDay, MyDay would have a net loss on the gross margin line when considering idle equipment and start-up cost on the second line. When we look to the line-making product and selling product, we are in that single-digit arena. On the SG&A commentary, yes, we're getting some leverage albeit modestly so in terms of ramping up. Greg, I'll kind of defer, if you want to add anything to that.

I think the only thing I would add is that we're aware that as our gross margin improvement has slowed, that we've been talking for the last year that we need to get that in SG&A, and there are focused efforts to look and be mindful of SG&A. So I think we're seeing some of that work.

The next question comes from Anthony Petrone with Jefferies Group.

Just going back to MyDay as well and maybe just to revisit margins there for a bit. Understanding that margins on the product are in that low single-digit range but sort of as you look out and we look into the next 2, 3 years, can you just give maybe a feel of where margins can go on that product over time and sort of when do you see that product eventually becoming margin-accretive to the business?

My expectation is that this is a 3-year rollout of investing first year in Europe, 2014; second year in the U.S., 2015; and the third year in Japan and Asia, 2016. During the period of time, margins will move from single-digit this year into the teens, upper teens next year. The normalized margins, I would expect, post-year 3 and then you'll get in to the 40s, and ultimately, we should get in around that 50% neighborhood on gross margins. Operating margins as we get into year 4, by then you start getting a more normalized operating margin contribution from the 1 Day modality, which still should be in the -- some place in the 20s. But the long-term objective, if we look at the model to 2018, and we have 25% operating margins, the success of the 1 Day strategy should not result in any undue push on the operating margin to 25%. However, we'll certainly influence the gross profit percent and its related mix.

Just a quick follow-up there. Does that CIBA royalty, I mean how much does the CIBA royalty run off by the end -- by 2016 in total to the business, sort of play into those figures?

Well, what we've said on the CIBA royalty runoff is that it's going to certainly be part of the equation going from 21% last year to 25% in 2018. We're going to take some of that and spend it on certain areas, R&D and geographic expansion. But that we, between leveraging the P&L, a favorable shift on the continuing growth of Biofinity, which is a very high gross margin, and will help to keep our gross margins reasonable in this 5-year period, that we have enough strings to pull in terms of operating expense leverage to get to the 25%. The other variable, you have the royalty is one, you have the runoff of the 10-year anniversary of the Ocular acquisition where amortization drops off as a favorable tailwind. And then you also have some depreciation on the initial equivalent we got with the Ocular acquisition, which is now going to anniversary at 10 years also. So not only amortization, but also depreciation on the first line of equipment. Having said that, we're spending a lot of money on capital equipment, so don't expect to see depreciation in total go down, it will go up as we shift into that 1 Day modality. Net-net, we're -- the royalty is a contributor to that 25% objective.

[Operator Instructions] And our next question comes from Steve Willoughby with Cleveland Research.

Actually just two quick ones for you. So I know last quarter, there was some destocking that was a bit of a headwind. Just wondering if you -- there was any restocking this quarter. And then secondly, I saw on the press release when you guys were talking about cash flow, there was about a $1.4 million insurance recovery. And I was just wondering if that impacted the income statement as well anywhere. And if so, where?

I'll let Greg answer the second one. But on the first one, the discussion on the -- I'm sorry, distributors at the end of the fourth quarter, no, there was not a rebuild of inventory so they have the same level in terms of stocking levels essentially that they had at the end of the fiscal year, there was no build during the quarter. On the insurance, the $4 million?

Yes, it was like $1.4 million. That is -- no P&L impact, that's all balance sheet. It was reimbursement for a damaged equipment in that October 2011 U.K. issue where the fire suppression system malfunctioned.

And so you already got that back? Because I thought maybe a year ago, you got some of that got back and it positively impacted the GAAP number.

Yes. The difference was the business interruption insurance. So business interruption insurance hit the P&L on a GAAP basis, and you saw that last year. In fact, in Q1, it was $14.1 million. The reimbursement for the equipment that was damaged, that always went through the balance sheet and there was no P&L impact.

The next question comes from Matt O'Brien with William Blair.

This is Kaila in for Matt. You talked a lot about Biofinity as a growth driver. And so we just wanted to get a better sense and update on the opportunity there as you see it? And particularly in the U.S. with the new competitive launch in the monthly space, I know you touched on the competitive dynamic a bit, but just how you anticipate that will impact your presence here?

Well, Biofinity has been doing well in the U.S. and throughout the rest of the world. And in this last quarter, it add growth, I want to say, in around 20%, 28% or 24% it was right up there, if you will.

28%.

28% constant currency worldwide. Relative to the launch of a monthly fear in the U.S. market, I don't anticipate that we'll see much of a volume, if you will, of that product in 2014. Partly, it's undoubtedly supply limitations on just very much like we have on MyDay where, if you only have 1 line running, it's going to be hard to make a lot of product and your limitations are there. I think the second issue there is, I think there'll be a lot of cannibalization of that product with their franchise products in the same space and that will evolve. And then thirdly, complete lines having a toric and a multifocal, as well as a -- Sphere is an important factor in the monthly modality. Let's just -- on the 1 Day modality, in case you were kind of cherry picking, if you will, but in the monthly space, very important to have the halo effect. And they still don't have that product finalized, let alone in production. So for 2014, maybe into -- close to 2015, I don't think it's a big deal. I'm not convinced from things I've heard from the competitor that's all the money they need to on capital, let alone if they're going to do a two-pronged approach in the monthly, as well as on the daily product group. So I'm not too -- losing too much sleep about it.

That makes sense. And then we also just wanted to focus in on the toric result. I know that over the last several quarters, growth in that business has been in the single digits. And it looks to have accelerated this quarter off of a more difficult comparison. We're just curious if there's anything in particular, that's driving that uptick beyond just continued strength in the market?

No. Torics is doing good particularly outside the U.S. and particularly some of our 1 Day torics has done very well and our Biofinity in Japan as we kind of roll out toric into -- or Biofinity and torics into new areas. So the rest of the world is playing catch-up and I would expect that the toric modality and the multifocal modality are, as a market, doing very well, and we continue to gain share in both of those markets. As far as the one impact in the fourth quarter, we, of course, had a fair amount of Biofinity that went into that authorized distributor, and so that had some impact on the Biofinity family, which would include, to a lesser extent, some torics in that equation. But that would be -- I don't think there's anything unusual year-over-year in terms of our comps on that.

And our next question comes from Joanne Wuensch with BMO Capital Markets.

Can we spend a minute on CSI, please? This business used to be sort a mid-single digit revenue grower with much higher margins. What brings it back?

One more time, what's your question?

Question is about the CSI business. It has to do with the slowdown in the revenue growth rate, as well as the compression in the margins. You touched upon it a little bit in the introduction, but I'm trying to understand what if anything can bring this back?

Oh, okay. I think what can bring it back is you have a settling in with the cloud of the Affordable Care Act and Obamacare. So there's a lot of -- 2 dynamics going on. One is that Act, one is consolidation within the profession of the OB/GYN, meaning more women coming into the profession, more men leaving. The older demographic was men that are retiring. The newer demographic, women coming into the profession. They are more inclined to go into group practices. Therefore, if you needed one of a product for each office you need, there are less office fronts, if you will. I think most of that will have leveled out. I think the Affordable Care Act is going to translate to more companies that have one product and do not have critical mass and cannot deal with buying groups, leaving the marketplace and being gobbled up. So I would anticipate a new round of buying opportunities over the next 10 years caused by the Affordable Care Act and the related effects of it. We are in prime positions to be in front of buying groups and large hospitals making a decision for the main hospital, as well as -- the main campus, as well as all the satellite locations. So I do think that will bring it back. One of the important things for Cooper, and part of that model is refreshing. And quite frankly, we'd had some misses on the check the box on refreshing the portfolio, with some new acquisitions over the last 2 years. It's not because we haven't been kicking tires. We just didn't land the right one yet. But we are certainly active in the area of looking and seeing what opportunities come out of the Obamacare environment, if you will. And I would suggest there will be some. So I do think that will bring it back. We are very leverage-able in that model, as it stands.

Okay. As a follow-up, gross margins came in almost at 65% in the first quarter. Your guidance is still 65% for the year, improving MyDay margins should dictate that you have leveraged throughout the year. Is this just a touch of conservatism as you discuss that?

For that one, I'd take Greg. But I think the pound was the factor in it.

Yes, one of the things that we're going to see especially the third and fourth quarters, we'll start to see the impact of the pound, the fact that it's been strengthening and 40% of our production happen in U.K., as we've mentioned in the past. And so that will have -- that will put some headwinds on our gross margin in the second half.

And we have no other questions in the queue, so I'll hand it back to Bob for any closing remarks.

Well, I want to thank you for all -- joining us on our first call for the new fiscal year. I look forward to updating you on MyDay and other developments for the second quarter on our call that I think it's going to be the 5th of June, if my calendar is correct on a Thursday. So we look forward to updating you at that point in time. And with that, I'll conclude.

Thanks, everyone, for your time and your participation. You may now disconnect, and enjoy the rest of your week.