The Cooper Companies, Inc. (COO) Q2 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to The Cooper Companies Second Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference may be recorded. I would now like to introduce your host for today’s conference Ms. Kim Duncan, Vice President, Investor Relations. Ma’am, please go ahead.

Good afternoon, and welcome to The Cooper Companies' Second Quarter 2016 Earnings Conference Call. I'm Kim Duncan, Vice President of Investor Relations; and giving prepared remarks on today’s call are Bob Weiss, Chief Executive Officer; and Greg Matz, Chief Financial 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 or regulatory 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 are described in our SEC filings including the Business section of Cooper's Annual Report on Form 10-K. These are publicly available and on request from the company's Investor Relations department. Now, before I turn the call over to Bob, let me comment on the agenda for the call. Bob will begin by providing highlights on the quarter, followed by Greg who will then discuss second quarter financial results. We will keep the formal presentation to roughly 30 minutes, then open the call for questions. We expect the call to last approximately one hour. We request that anyone asking questions please limit yourself to one question. Should you have any additional questions, please call our investor line at 925-460-3663 or 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. With that, I'll turn the call over to Bob for his opening remarks.

Thank you, Kim, and good afternoon, everyone. Welcome to the second quarter 2016 conference call. Let me start by highlighting three key areas. First, I'm pleased to report strong financial results for our fiscal second quarter. On a consolidated basis, we reported $484 million in revenue and non-GAAP earnings per share of $2.05. Second, CooperVision posted 9% revenue growth on both a constant currency and as-reported basis and strong results in all key areas of the business. Single use silicone hydrogel lenses grew 52% while two week and monthly silicone hydrogel lenses grew a combined 14% both in constant currency. Third, CooperSurgical had another strong quarter posting revenue growth of 23% and pro forma growth of 6%. We also closed several strategic acquisitions since our last earnings calls. Moving on to the details, CooperVision reported second quarter revenues of $391 million, up 9%. This was our strongest quarter, growth quarter since 2014 and really shows the strength of our product portfolio. Regarding revenue by geography, the Americas grew 9% in constant currency showing a nice rebound from last quarter. Strength was seen in multiple categories led by silicone hydrogel products. Our enhanced Clariti lens has been extremely well received and MyDay had another strong quarter. Our toric and multifocals also posted strong growth driven by the Biofinity family. EMEA had another strong quarter and sales grew 5% in constant currency. Growth was driven by our family of silicone hydrogel products Biofinity, Clariti, MyDay and Avaira. We also launched Avaira, Vitality in EMEA during the quarter and it is being well received. Avaira Vitality is our new two week silicone hydrogel lens which is an enhanced replacement for the original Avaira lens. It was developed using improved manufacturing processes resulting in a higher quality product at a lower cost per unit. We expect to launch this lens in the US later this year subject to FDA approval. Asia Pacific had a very strong quarter, up 18% in constant currency. Growth was strong throughout the region and Biofinity and ProClear 1 day stood out in Japan. Also within Japan we began our MyDay launch during the quarter and we're seeing early signs that MyDay to be a very successful premium offering in that market. Turning to our product categories, toric and multifocals grew at a healthy 15% year-over-year in constant currency. We saw very nice rebound in the US which bolstered our strength throughout the rest of world. We remain the global leader in specialty lenses. Looking at silicone hydrogel lenses, these products grew 20% in constant currency and now represent 60% of our total sales. Within the two week and monthly space Biofinity and Avaira combined to grow 14% in constant currency. We remain under-indexed in the two week and monthly silicone hydrogel space at 74% of sales versus the market at 79%. So we anticipate a very nice growth for many years to come. Regarding our silicone hydrogel one day lenses Clariti and MyDay, they combined to grow 52% in constant currency. We remain very optimistic about these products and are committed to our growth strategy which includes a two-tier approach with Clariti positioned as the mass market offering and MyDay as a premium offering. Remember, the biggest driver in the contact lens market is the one day growth and we strongly believe we have the best product offering in the space as the only company with premium and mass-market lenses including a full portfolio of one day silicone hydrogel sphere, toric and multifocal lenses. Before finishing with market data let me make a quick comment on integration matters. We continue to finalize our Sauflon integration activities and we're very close to being done. You will note, CooperVision had a have very small non-GAAP adjustment this quarter or smaller non-GAAP adjustment this quarter of roughly $9 million excluding amortization. We forecast similar charges in Q3 and Q4, mostly within cost of goods, but we should end this fiscal year. Now let me comment on the overall contact lens market and remember this information is on the last page of earnings release. For calendar Q1, we continue taking shares growing 9% with the market up 3%. Geographically, CooperVision grew 9% in the Americas, while the market was flat. In Asia Pacific, CooperVision grew 14% with the market up 5% and in EMEA we grew 6% in line with the market. On a modality basis, single use lenses continued driving growth and with CVI up 14% and the market up 9%. For non-single use lenses we grew 6% while the market declined 1%. We also see - as you can see, our growth remains diverse and strong. On the trailing 12 month basis CooperVision grew 8% and the market grew 5%. Going forward I expect the market to continue growing 4% to 6% over the next five years and most likely closer to 6%. The drivers will continue to be the shift to dailies', geographic expansion and an expansion of the wearer base. We expect to continue taking market share led by our strong silicone hydrogel portfolio. Moving to CooperSurgical, we reported second quarter revenues of $93 million, up 23% year-over-year or up 6% pro forma. Our fertility products led the way up 60% or 8% pro forma and our office and surgical products grew 5%. We continued executing on several initiatives which are driving success including transitioning to a geographic sales model, adding sales representatives in underpenetrated areas and increasing our focus on high-growth areas such as IVF and genetic testing. These moves are clearly gaining traction as we saw growth throughout our business in Q2. Going forward I believe we'll continue to see solid growth as business keeps moving into a more aggressive and efficient business model. Regarding acquisitions, we completed several over the past few months, so let me touch on those and the strategic rationale. At the beginning of April, we added Genesis Genetics, a genetic testing lab company focused on pre-implantation genetic screening and diagnosis using - used during the IVF process. This is a nice addition to our existing genetic testing platform. At the beginning of May we added complementary IVF capital equipment products through the acquisition of K-Systems a small acquisition with roughly $7 million in revenue per year. And finally we added the assets of Recombine last week. Recombine is a genetic testing company specializing in carrier screening which is a great fit within our IVF and genetic testing franchise as it adds the number one carrier screening test sold to the IVF clinics. As you see - as you can see, we are very focused on combining a full service provider within the IVF global market and we truly believe this strategy will yield success for many years to come. These deals are all incorporated into our updated guidance. With that let me touch on our guidance details. We are raising our fiscal 2016 revenue guidance for CooperVision to 5.5% to 7% constant currency growth. Our CooperSurgical revenue guidance is also raised to 6% to 8% pro forma growth or up 24% to 27% on an as-reported basis. We're also raising our non-GAAP EPS guidance to $8.20 to $8.50. In conclusion, I am very pleased with our results and remain optimistic about the underlying fundamentals of our business. I believe we're well positioned to deliver solid results for the remainder of the fiscal year and beyond. With that let me express my appreciation to our employees, our number one asset. Their hard work and dedication to creating value is the backbone of our success. And now I'll turn it over to Greg to cover the financial results.

Thanks, Bob, and good afternoon everyone. I will provide an overall summary of our performance including a review of the market and our revenue picture. I am going to focus primarily on our non-GAAP results for the quarter. For the reconciliation to GAAP numbers please refer to our earnings release. Looking at gross margins, in Q2 the non-GAAP gross margin was 63.2% compared to 63.4% in the prior year. Although CooperVision had positives from currency and strong Biofinity sales, it’s margin was lower than expected. The primary items driving this were a negative margin impact from stronger Asia Pac sales where we have higher one day sales and charges associated with idle equipment and legacy hydrogel inventory. Regarding these last two items, let me cover them separately. We have made a lot of progress improving our manufacturing operations including some very recent successes. For competitive reasons I won't get into specifics, but our production per line has increased materially resulting in lower cost per unit and a lesser need for future CapEx. This has resulted in idling some equipment which hurt us in Q2 and will also negatively impact Q3 and Q4. We anticipate this being a short-term negative as we will grow into this production over time. The other item is our legacy hydrogel inventory where we wrote off more than we planned as our silicone hydrogel sales were very strong and we're forecasting that to continue. This hurts us in Q2 and we expect it will negatively impact Q3 and Q4. To be clear, we're not excluding these items from earnings, so they are negatively impacting our non-GAAP earnings per share. CooperVision on a non-GAAP basis reported gross margin of 62.8% versus 63.3% in Q2 of last year. The factors which impacted margin were the items I just mentioned. CooperSurgical had non-GAAP gross margin of 64.8% which compares to Q2 '15 of 63.5%. Strength in the OB/GYN and IVF product families drove this quarter's margin. SG&A, on a non-GAAP basis, SG&A increased approximately 6% to $171.6 million or 35% of revenue, down from approximately 37% of revenue the prior year. Primary driver behind this leverage was strong SG&A controls. Now looking at R&D, in Q2, R&D on a non-GAAP basis was $16.6 million or 3.4% of revenue, flat in dollars and down from 3.8% of revenue in the prior year. We are seeing investment in CSI offset by synergies from the Sauflon acquisition in CVI. Now, moving to operating margins. For Q2, consolidated GAAP operating income and margin were $89.8 million and 18.6% of revenue versus $71 million and 16.3% of revenue in Q2 last year. Non-GAAP operating income and margin were $117.6 million and 24.3% of revenue versus $96.7 million and 22.2% of revenue for the prior year. Primary difference in operating margin year-over-year is the operating expense leverage. In Q2, CooperVision’s non-GAAP operating income and margin were $102.4 million and 26.2% of revenue versus $88.8 million and 24.7% of revenue in the prior year. CooperSurgical's non-GAAP operating income and margin were $26.6 million and 28.8% of revenue versus Q2 15 of $18.8 million of operating income and 25% of revenue. Moving on to depreciation and amortization, in Q2, depreciation was $33.7 million, up $1.5 million year-over-year. Amortization was $14.3 million, up $2 million, reflecting our recent acquisition activity. Interest expense was $7.6 million for the quarter, up $2.9 million year-over-year, primarily due to higher debt and interest rates associated with acquisitions. Looking at the effective tax rate, in Q2, the non-GAAP effective tax rate was 9.4% versus a non-GAAP effective tax rate of 8.4% in Q2 15. Earnings per share, our Q2 earnings per share on a GAAP and non-GAAP basis was $1.52 and $2.05 respectively versus $1.23 and $1.72 for GAAP and non-GAAP in the prior year. Non-GAAP earnings per share on a pro forma basis, which adjusts for currency and acquisitions, grew approximately 13% in the quarter. Now, looking at FX, net currency impact on earnings per share year-over-year for Q2 was a favorable $0.10. Moving onto the balance sheet. In Q2, we had cash provided by operations of $97.8 million, plus capital expenditures of $41.1 million, resulting in $56.7 million of free cash flow. Excluding integration costs of $9 million, adjusted free cash flow was $65.7 million. Total debt increased within the quarter by $64.1 million to $1,441.4 million, primarily due to higher average cash balances and acquisitions, partially offset by operational cash flow. Inventories increased from last quarter, approximately $2.7 million to $433.6 million. This is entirely driven by CSI acquisitions. In CooperVision, we saw inventories decline as growth in silicon daily inventory to support our product launches was offset by a reduction in our hydrogel inventory. For the quarter, we’re seeing months on hand at seven months. Days sales outstanding is at 54 days, which is down three days from the prior quarter and two days from last year. Now, turning to guidance. For our main currencies, we are using 1.10 for the euro, 1.12 for the yen and 1.46 for the pound. The consolidated revenue range is being raised to $1.929 billion to $1.960 billion or approximately 5.5% to 7% pro forma growth. CooperVision’s revenue range is being raised to $1.545 billion to $1.567 billion or roughly 5.5% to 7% constant currency growth. CooperSurgical's revenue range is being raised to $384 million to $393 million or roughly 6% to 8% pro forma growth. Note that roughly half of the increase in guidance is from currency, while the other half is primarily from acquisitions. We expect non-GAAP gross margin to be around 63% for the year. This is a reduction from the previous guidance of around 64% as it incorporates the CooperVision items I mentioned earlier, along with lower gross margins from CooperSurgical associated with recent acquisitions. Having said that, we still expect improving Q3 and Q4 gross margins of around 64% each quarter. OpEx is expected to be around 39%. Operating margins, still expecting to be around 24%. Interest expense is expected to be around $28 million. Our effective tax rate is expected to be around 8%. Our expected share count will be around 49.1 million shares and our non-GAAP earnings per share is expected to be $0.20 higher on the top and bottom of our range to $8.20 to $8.50, which equates to a pro forma earnings per share of 10% to 14% growth. From our last guidance, currency is roughly a $0.40 positive and we have actually improved our operational performance by roughly $0.10, but we are expecting the idle legacy inventory write-offs to negatively impact this by roughly $0.30. CapEx is expected to be around $200 million as we finish paying for equipment we have ordered over the prior year and thus adjusted free cash flow is still expected to be around $300 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] Our first question comes from the line of Matthew O'Brien with Piper Jaffray. Your line is now open.

Good afternoon. Thanks so much for taking the question. Just one for Bob and then one for Greg. On the increase in CVI, I guess the question is to Bob, increase to CVI’s outlook for the year. Can you just give us a sense for how much of that is coming from improved manufacturing of MyDay, especially launching into Japan or just disruptions in the market that you're seeing? And then how much are you incorporating the J&J launch as far as somewhat of a headwind into your fiscal Q4? And then for Greg, this is typically a really strong free cash flow quarter for you guys, you’re just sticking with the $300 million outlook for the year, so can you just help us reconcile the little bit of a softness that we saw here in Q2 versus that outlook for the year?

Yes. The foreign exchange, as Greg indicated, is a big driver of the topline overall improvement. In terms of the constant currency growth, you are correct, there is a modest - in the guidance, there is a modest deceleration compared to what we had previously forecasted to anticipate if you will some impact of the J&J rollout. Beyond that, it’s pretty much in the same range at the 5.5% to 7%. So modest at both. MyDay impact in Japan is, once again, we just rolled that product out in March of this year, so fairly minimal impact in terms of the overall any update on the guidance if you will. And of course we already knew about MyDay in Japan in our previous March guidance.

Yes. Matt, on the free cash flow, nothing really jumps out. The number isn’t that far off of the prior year and we did have a much stronger Q1. So as you look at kind of halfway through the year, we’re actually probably ahead of where we were last year.

Our next question comes from the line of Jeff Johnson with Robert Baird. Your line is now open.

Sorry about that, guys. Can you hear me, okay?

We can.

All right, great. So Bob, let me ask you one question and then I have a modelling question for Greg as well. But the question for you, just on the Biofinity and Avaira business, obviously that bounced back very nicely this quarter. I think you said 14% constant currency in the quarter year-over-year. 7% last quarter, so kind of averaging right around double digits, is that how we should think about that business going forward? Obviously, you’ve got the launch coming from J&J that was referenced in the prior question. You also have Ultra kind of gaining some traction it sounds like. So just how do you think about that Biofinity and Avaira bucket over the next couple of years?

Yes. I think taking the two quarters, the 7 and 13 being in around low double-digit is the right way to think about it.

Great. That’s helpful. And Greg, a question for you. I think at the very end, you just said $0.20 is the EPS impact of the inventory write-off and that is included in your non-GAAP EPS guidance, is that correct?

Yes.

Okay. So for next year, we should be thinking about adding just kind of building off a base of $0.30 higher, assuming you’re not going to have those kind of write-offs next year. Would that be the fair way to take kind of this year’s EPS, add $0.30 back and build that off as our base assumption going into next year?

Yes, Jeff, it's probably a little early to get into next year's guidance, which we would come out later in the year and discuss.

And keep in mind, Jeff that it’s a balance between - some of that is write-off as Greg indicated, some of it is idle equipment as we grow into it. So we’re growing, given the substantial growth of our one-day modality and our unit growth, we’re anticipating that we’ll start consuming more and more of that as each quarter goes by. But that $30 million overall is both write-off as well as idle.

Yes. And Jeff, just to build on that a little bit, I think without giving guidance, I think we feel comfortable that we would see gross margins improve year-over-year.

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

Hi, can you hear me, okay?

We can.

Wonderful. I think what a couple of people are trying to get at and I know in speaking with investors, the big concern right now is the J&J monthly launch starting at the end of June, beginning of July, how do you think about that product launch and how do we get comfortable that we're not going to see a similar hiccup to what happened last fall?

Well, without knowing exactly what J&J is up to, well, in hindsight, we know what they did is they filled the pipeline a lot and then we sought their negative US results in the most recent quarter. So no one is saying they can't do that again. Having said that, this is a product coming in to the monthly modality. It’s basically coming in with only a fear not at all in multifocal. So it’s not a family of products going against a family of products. And that is a big distinction as contrasted to the pipeline dragging everything in under one umbrella as they did their whole family of products and going after a Sphere. In that case, it was always one day going against total one primarily in that space, but it consumed - it took all the year out of the practitioners office if you will, or filled up all the space and there clearly is no guarantee they wouldn't try sliding the market again. As far as the way we think about it longer term, Biofinity is a very established product, wherein we continue to expand the offerings under that umbrella. It's a very global product and it’s one where, it’s fit in the monthly and we also have a very splashed vitality coming out in the two-week, which is the sweet spot of the market in terms of the number of wares. There are more wares in the two-week part of the market than there are in the monthly. Quite frankly, as some of you know, I always tend to do that, it's a good strategy for J&J if they are intent on treating up and basically migrating the non-compliant ware base they have in the two-week space into a complaint monthly modality that would be a good trade up in modalities, because they are non-compliant where is one who is basically only using 24 lenses a year compared to a monthly using 24 and conversely they are getting the price point of a two-week wear, and that’s pretty big part of that two-week modality. So we think we will continue to see that market growth monthly and we will get our fair share of Biofinity. In the meantime, we will be more active down the road in the two-week space, and we are basically neutralized for the most part.

Our next question comes from the line of Steve Willoughby with Cleveland Research. Your line is now open.

Hey, great, can you hear me okay?

We can, Steve.

Okay, Bob. Just regarding the charge or the idle equipment and inventory write-off that you guys took in the quarter, couple of questions regarding that. I guess first the idle equipment, is that - the idle equipment charge relate to newly purchased equipment that you don’t need quite yet or is that existing equipment that you’re idling for some reason?

Yes, so to qualify as idle, it’s basically been put in production and then is taken out of production. So I will answer the question with a little color. It could be very new equipment that was put in production, example our facility in Hungary where they got real good at making it and all of a sudden, we parked the equipment because some many - so much product was coming off of the other line. So as yields go up and costs are coming down, that’s good news. The bad news is, if you put equipment that you are using and you idle it, it becomes a direct period charge as opposed to moving through with the inventory.

This is sort of what happened with Avaira and then Gen II lines a number of years ago?

Absolutely.

Okay. And --.

So what happened is our manufacturing people got very good at what they were doing. We always knew that if we - that they would deliver. We just didn’t know how well they would deliver. So delivering a lot more units per dollar spent on capital, that’s the good news, but it also turned short-term into the bad news. As I think Greg indicated, we will grow out of that fairly quickly when you look at the rapid unit growth in many of these areas where we have become very efficient, and that includes MyDay, that includes Biofinity, that includes Avaira, that includes Vitality and that includes Clariti in the bucket. All of those products became - the costs are going down through efficiencies and yields by our manufacturing people.

Our next question comes from the line of Lawrence Keusch with Raymond James. Your line is now open.

Hi, this is actually John in for Lawry, good afternoon. I just had a quick question, I guess, what’s the right way to calibrate expectations from MyDay in Japan? You obviously just launched in the quarter, but maybe shorter term and then maybe a little bit longer term in 2016 and 2017?

Well, you can see some of the numbers we’re putting up in the region, and Japan has certainly been stellar within that region also. Right now, we have a good portfolio of three products with MyDay being the third one in, but Biofinity is doing very well, ProClear 1 day is doing very well, as well now MyDay. We will be - we are only a month and a half into the launch if you will through the end of April and very pleased with the progress we are making. It’s the biggest market by far in terms of the 1 day modality over any place in the world, and therefore, MyDay is a very good fit in a very good market, and we think that the combination of MyDay as a silicon hydrogel and ProClear 1 day as a hydrogel will be - is a good entrée into that market. Also in the phase, Japan has been historically pretty lethargic the last I want to say 7, 8 years, it’s showing a little bit more life than it has, and the only reason it’s been lethargic is because it grew so rapidly in the prior decade compared to this decade. It got ahead of itself on the 1 day modality became the first to adopt that because they were very anti-lens care regimens and wanted the lenses to be boiled and therefore everyone migrated into the 1 day modality rather than boiling lenses every day. So I will just say that, we are pretty excited about MyDay there. It’s going to take some work. It’s only a sphere thus far, so there will be other plans relative to how to leverage the MyDay experience.

Our next question comes from the line of Matt Mishan with KeyBanc. Your line is now open.

Good afternoon and thank you for taking my questions. Bob, first on CooperVision, I just want to better understand the sequential improvement in growth this quarter versus the previous several quarters, is it your sense of the impact of the Johnson & Johnson launch has now fully waned or is there something that you have been doing to improve your results and to improve share? I’m just trying to get a sense of whether or not this is Johnson & Johnson or this is you guys doing something?

So I think it’s a combination. I think the air that left the room is now back in the room of the eye care professional, he has room for products and so it’s more normalized in that sense, and that’s obvious from the weak numbers that J&J put up domestically and now Alcon put up numbers worldwide. We relative to our products I think I will make a point in saying that our numbers that we put up is not a function of any pricing or anything to do with channel fill. So it’s a good quarter. The inventory on hand at distributors and the pipeline is very normalized, in fact it’s a little less than it was at the beginning of the period. So it’s a reflection of pretty solid numbers around the world.

Our next question comes the line of Brian Weinstein with William Blair. Your line is now open.

Hey, guys, thanks for taking the question. It’s a little bit of a longer question. But can you talk about what you expect longer term in terms of the split between Clariti and MyDay, and kind of what you think your share longer term is there? And then how do you think about manufacturing - manufacturer pricing levels in the daily silicon hydrogel market longer term? Thanks.

So I think the split between Clariti and MyDay, it’s easier to relate in the US. The US is going to be primarily where Clariti is after the mass market and MyDay is after the premium market. I would have normally said - think of that as like a three - 75% mass market, 25% premium market. And I think that’s the US portion of the model. I think when you get into certain regions in the world, example Japan, where only MyDay is playing then - so if you’re factoring that into the overall global results, you will end up what MyDay outgrowing because it’s coming off of a lower base and it’s just getting into Japan at least for the foreseeable future outgrowing as a percent getting more of its share of the bucket. So instead of saying 75-25, MyDay may move up that spectrum and get a higher portion in the interim. When Clariti is available throughout Asia-Pac and around the world that may come back more into the mass market premium split. But for now, one point is we are not capacity constraint on either of these products. We will continue in the case of MyDay expanding the portfolio offering. So that will help. Right now, with Sphere competing with Clariti, which has a Sphere, a multifocal and a toric and that will weigh more towards the Clariti piece. Relative to margins, we will continue to focus in from a pricing point of view being keenly aware of that two tiered market, the premium market, which we will call the players there as in the US clearly Total1, Oasis and MyDay and TruEye is the other one that’s kind of there in that space, but Oasis will consume more and more of TruEye. And in the mass market then Clariti remains the only game in town relative to a silicon hydrogel in the 1 day mass market. So then it’s a function of watching the migration of hydrogels into the silicon hydrogel space in that mass market arena. Cost of goods, gross margins, we expect - as we have indicated in the past to have our 1 day silicon hydrogel franchise and most notably Clariti, not a drag on our overall gross margin. For the next several years anyway, MyDay is ramping up the learning curve moving very nicely and I would say, the indicator of some of the idling and the indicator of us having enough MyDay capacity is just how well that’s ramping up as it ramps up cost of goods come down to the yields and efficiencies. So we are very pleased with that and we expect more than - currently more than 50% out of MyDay as we get down the road a couple of years.

Our next question comes from the line of David Roman with Goldman Sachs. Your line is now open.

Thank you, and good afternoon everyone. I was hoping you could just touch on in a little bit more detail, firstly the strength in Asia-Pacific, I think last quarter you had kind of said that your ramping capacity in Japan, that wouldn’t be a significant contributor to much later part of the year and into the next fiscal year. But any other regions driving within Asia-Pac that you could call out? And then secondly, on the 6% to 8% pro forma guidance for CSI, that is quite a bit above where those end-markets I think are growing, so maybe you could just speak to the sustainability of that on a go-forward basis.

So relative to Asia-Pac, I would emphasize that the numbers you see are very little to do with MyDay. It’s very early in the game, so it didn’t - so the strength you’re seeing there is just how well some of the geographic expansion is going, how well Japan is going ex-MyDay and then the MyDay launch. But it is not the driver of that 18%, which - and MyDay was only launched mid-March, so really it’s only got a month and a half in Japan in that period, in the quarter. Relative to what to expect in that region, we certainly expect continued robust numbers out of Asia-Pac for the foreseeable future. Number one, we are under-indexed; number two, we are delivering a lot of these new products, Clariti coming into more and more of Asia-Pac and of course MyDay, which we talked about. So we are pretty optimistic that we will see continued strength in that market. Relative to surgical and 6% to 8%, a lot of that growth is a reflection of, number one, the emphasis on really selling the product and the global realignment with the selling effort. We have some obviously even some good products in the surgical side that are driving organic growth there. The acquisitions we made are the expectation there, clearly is double-digit in many of those acquisitions. So we expect to drive a lot of the genetic testing and surround the IVF process so that we are the key player that the IVF centers are engaging with and we're pretty optimistic about that and obviously the last two quarters have indicated, it’s a pretty successful strategy. Going forward, the 6 to 8 reflects some of the more recent acquisitions having more organic topline growth potential than our historic legacy products within CooperSurgical.

Our next question comes from the line of Larry Biegelsen with Wells Fargo. Your line is now open.

Hey, Greg based on the guidance, is the second half implied CooperVision guidance, the midpoint about 5% and should we think about Q3 and Q4 as similar growth or would you expect Q4 to potentially be lower because the J&J launch in July? And Greg can you just tell us what the FX assumption is, it looks like you're assuming about for the year zero impact on EPS is that math right, what is it on sales and is there some conservatism in your FX assumptions right now, thanks for taking the questions guys.

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Our next question comes from the line of Mike Weinstein with JPMorgan. Your line is now open.

Hey, this is Andrew in from Mike, thanks for taking the question. I have two questions, the first being product specific and the second regarding the market. So can you talk about, Bob, the slight design changes to the Clariti lens and what you're seeing in a way of market adoption with this design versus before the change?

Sure, you want to ask the second?

Yes, I could ask the second. The second is around UPP, so the US market growth in the quarter was probably the lowest in a while I believe and I was just wondering whether or not this is a result of some pricing war that’s going on within the market and just your general thoughts around UPP and how you think that might benefit you moving forward? Thanks.

Sure, product relative to the enhancements that we made to Clariti, I think you’ve seen the overall silicon hydrogel sale one-day numbers were 52% growth. So suffice it to say the enhancement as well as of course we had some activity in the fourth quarter regarding our integration process in Europe that caused some bumps then, but suffice it to say we’re running on all cylinders now with Clariti in the marketplace and the enhancement has certainly been beneficial in that process. As far as UPP and the market, 3% growth in the market is much as anything is probably much more influenced by the J&J cycle that they put the market through with a strong market two quarters ago. And that followed by basically a void in the US in this quarter. So we are not for that would be more normalized. The trailing four quarters is a much better gauge that is approaching 5% worldwide. Relative to the US and UPP and whether or not there is any pricing post UPP or a decline in pricing, I would say that certainly I know that some vendors may have or retailers may have altered J&J prices but by and large the market has continued to drive itself the way it has in the past, pricing is not really a factor it's all about trading up and shelf space and first fits and it remains that way. The focus on getting a new fit in the marketplace or where you have a new product, trying to get a conversion onto your products. There is a fair amount stickiness to most of these products, so I would say the real driver of your product doing well is the new fit arena is a big contributor. Pricing to me this market has traded up for 30 years and it continues to do a phenomenal job. And over that 30 years there has been but maybe one or two price skirmishes. UPP was a fairly shallow attempt at a marketing strategy that was obviously beneficial to the independent compared to the retailers whether or not it was worth anything can be continued to be debated, there is obviously a lot of emotion on both sides of the table on that in the marketplace. But if UPP went away tomorrow, it would not be the end of the world, if it stays where it is, it's okay also. So I don't see it as a material catalyst one way or the other in the marketplace.

Our next question comes from the line of Anthony Petrone with Jefferies. Your line is now open.

Thanks and good afternoon, maybe one for Bob on Japan and then one for Greg on margins. On Japan, can you maybe give us a recap of the size of the daily market in Japan and maybe where Cooper share is today and how MyDay can benefit that going forward? And then for Greg, just a quick one of margins, I believe the Ciba royalty does role off internationally toward the end of this year, I just want to confirm if that is the case and what you expect the margin benefit from that will be? Thanks.

Yes, the overall market in Japan is around $1.2 billion at the current exchange rate, would have been a lot bigger than that but obviously the yen kept sliding against the dollar for a number of years. Of that $1.2 billion basically two thirds, over 60% is in the one-day modality. And our share in that market is still very under-indexed in that market, so our overall market share worldwide this most recent quarter 23% worldwide, we are well in the mid-teens at best in Japan in that space.

Anthony, this is Greg, so on the Ciba royalty it did role off within the quarter, we are not really providing any kind of color on the rate itself. Again, we talked about that over the last couple of years that we have obligations in not disclosing that rate and so from that perspective we probably can't share that.

[Operator Instructions] Our next question comes from line of Jon Block with Stifel. Your line is now open.

Maybe first one Bob, just CBI was strong and one of the better results since 2014 but to be fair, if you go back then we were sort of hit after that with a series of quarters were there was inventory drawdown that went against the company. So, I just want to make sure and ask if you would sort of your level of confidence that this sell-in if you would in this particular quarter totaled the sellout and demand.

Yes, I think I mentioned a comment a while ago that relative to the quality of *was pricing or any pricing influencing or was pipeline influencing the answer is no, in fact our pipeline, the inventory on hand was slightly better than at the beginning of the period in both cases kind of where we wanted. So, the drawdown, the inventory drawdown or the pipeline is where we wanted.

Our next question comes from the line of Steven Lichtman with Oppenheimer and Company. Your line is now open.

Thank you. Hi guys, most of my questions have been answered, one follow-up on CSI. Bob, do you anticipate continuing to add to the portfolio through tuck-in M&A or you feeling that the portfolio is where you wanted to be at this point?

Well, we won’t obviously get into a lot of color on what's in the pipeline but suffice it to say we are focused in on rounding out the portfolio in front of the IVF centers, it is a boutique area where there are little things out there to continue to buy up and so don't be surprised if we don’t continue to have some acquisitions on a go-forward basis.

And that concludes today's question-and-answer session; I'd like to turn the call back to Bob Weiss for closing remarks.

Well, I want to thank everyone for joining us, hopefully everyone is excited about our quarterly results as we are pleased about them. Not only are we pleased where we’ve been but very optimistic about where we’re going as I think you would see from the guidance that Greg talked to. Yes, we have some short-term challenges with idle capacity, it’s a silver lining problem because it means that to some degree our capital requirements go on a go-forward basis will be somewhat less certainly than they have been in the past. So we look forward to updating you on our continued progress on our next quarterly call which is September 1 I believe. Thank you that concludes operator.

Ladies and gentlemen thank you for your participation in today's conference. This concludes the program and you may now disconnect. Everyone have a great day.