The Cooper Companies, Inc. (COO) Q3 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and thank you for standing by. Welcome to The Cooper Companies Third Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to hand the meeting over to Kim Duncan, Vice President of Investor Relations. Please go ahead.

Good afternoon, and welcome to The Cooper Companies third 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 the third 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 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 our third quarter 2016 conference call. Let me start by highlighting three key points. First, I'm pleased to report another strong quarter including first ever quarter with revenues over $500 million. This includes CooperVision reporting revenues over $400 million for the first time and CooperSurgical reporting revenues over $100 million for the first time. This resulted in non-GAAP earnings per share of $2.30 and free cash flow of $98 million. Second, CooperVision posted strong results in all key areas of its business resulting in 6% as reported in constant currency. Single use silicone hydrogel lenses grew 40% while two week and monthly silicone hydrogel lenses grew a combined 11%, both in constant currency. Third, CooperSurgical had another strong quarter posting revenue growth of 38% or 6% pro forma. Fertility was the highlight posting the strongest quarter in many years with growth of 108% or 10% pro forma. Moving into details; CooperVision reported second quarter revenues of $410 million, up 6%. This was another strong quarter, and continues to show the strength of our product portfolio. The Americas grew 6% in constant currency with strength in multiple categories led by Biofinity and our 1-day silicone hydrogel franchise. Our enhanced Clariti lens continues to perform well and MyDay had another strong quarter. During the quarter we received FDA approval for Avaira Vitality and began to launch in the U.S. in late July. You will recall Avaira Vitality is the replacement product for Avaira in the two week silicone hydrogel market. The market reaction has been positive. We remain optimistic about this upgraded product. We also introduced Biofinity Energys at the American Optometric Association Conference in July and began to launch in August. This premium Biofinity product has received excellent reviews and we're confident we will great success in its offering. EMEA posted a solid quarter from 3% year-over-year in constant currency against the tough comp. Growth was driven by Biofinity and the 1-day silicone hydrogel franchise. Asia Pacific had a very strong quarter with 16% constant currency growth; growth was strong throughout the region during Biofinity, and the 1-day silicone hydrogel franchise. Within Japan, our MyDay share launches progressed well and we introduced MyDay toric during the quarter. We believe both, MyDay sphere and toric have the potential to be a very successful premium offering in this market. Turning to our product categories; toric's grew a healthy 10% year-over-year and multifocals grew 5%, both in constant currency. We remained the global leader in specialty lenses and our success with Biofinity and Clariti in both of these categories should continue to drive growth for many years. Looking at silicone hydrogel lenses, these products grew 16% in constant currency and now represent 61% of our total sales. Within the two week and monthly space, Biofinity and Avaira combined to grow 11% in constant currency. We remain under-indexed in the two week and monthly silicone hydrogel space at 75% of revenue versus the market at 79%, so we expect to continue growing faster than the market given our strong product portfolio. Regarding our silicone hydrogel 1-day lenses, Clariti and MyDay, they combined to grow 40% in constant currency. The biggest driver in our contact lens market is 1-day growth and we strongly believe we have the best product portfolio offering in the space as the only company with premium and mass-market lenses including a full portfolio of 1-day silicone hydrogel sphere, toric and multifocal lenses. Now let me comment on the overall contact lens market and remember, this information is on the last page of the earnings release. For the calendar quarter, Q2, we continue taking shares growing 10% with the market up 5%. Geographically, CooperVision grew 8% in the Americas, while the market was up 4%. In Asia Pacific, we grew 20% with the market up 4%. And in EMEA, we grew 9% with the market up 7%. On a modality basis, single use lenses continued driving growth with CooperVision up 18% and the market up 10%. For non-silicone hydrogel -- non-single use lenses, we grew 7% while the market grew 1%. 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 a shift to DAILIES geographic expansion and the expansion of the wearer base. We expect to continue taking market share led by our strong silicone hydrogel portfolio. Moving to CooperSurgical, we reported Q2 revenues of $105 million, up 38% year-over-year driven by strong organic growth and acquisitions. On a pro forma basis, growth was up 6%. Our fertility products led the way up 108% or 10% pro forma. Within fertility, we had growth throughout the business and continue to believe our market leading product portfolio which includes medical devices, genetic testing and capital equipment is the broadest portfolio in the space and should continue to drive growth for many years to come. Within our office and surgical category, our growth moderated slightly from the last few quarters up 3%. We're continuing to execute on several product launches including our disposable stoke NOC [ph], we believe we were well positioned in this segment going forward. Regarding acquisitions, we've been actively working in on integrating the deals we've done over the past year, and the strategic rationale behind these deals remains intact. We are very focused on becoming a full service provider within the global IVF space. Finally on CooperSurgical, we're continuing to execute on several initiatives which should significantly strengthen the business and pay dividends for many years to come. These include transitioning to a geographic sales model adding sales reps and underpenetrated areas, launching products in new markets and increasing our focus on high growth areas such as IVF genetic testing. To some degree, these investments are masking our strong underlying operating performance but it's critical that we lay the ground work to support the business on a long-term growth perspective. Now turning to guidance, I'll let Greg go through the details but let me touch on a few items. For Q4 we're guiding CooperVision to roughly 5.5% to 7% constant currency growth and CooperSurgical roughly to 5% to 8% pro forma growth. So similar growth to Q3 regarding non-GAAP earnings per share for Q4 we're guiding to $2.15 to $2.30. Regarding fiscal 2017, it's too early to provide financial guidance but I will say it should be a strong year, even the momentum in our two businesses as well as recent currency moves. From a longer term perspective, we're still targeting operating margins of 27% or higher in 2020. In conclusion, I want to express my appreciation to our employees for all their hard work and dedication. I also want to say a special thank you to Greg Matz, who has announced his plan of retirement after more than six years of service of our company, including roughly the last five years of our CFO. Greg will be greatly missed and we wish him the best in his future endeavors. With Greg's departure, we have announced Al White, who many of you know really well, will succeed Greg as CFO. Al will assume this role in addition to his current leadership responsibilities with CooperSurgical. I'm very confident that his leadership and abilities will allow us to continue driving long-term shareholder value. From a timing perspective, Greg will remain CFO until the end of the fiscal year and then Al will take over the position. Greg will remain with us through March of next year to ensure a smooth transition. And now I'll turn it over to Greg to cover our financial results.

Thanks, Bob, and good afternoon everyone. Bob provided 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 Q3 the non-GAAP gross margin was 63.6% compared to 62.4% in the prior year. This increase is largely due to a favorable mix by Biofinity and favorable FX offset by recent CSI acquisitions which have lower gross margins. CooperVision on a non-GAAP basis reported gross margins of 64.2% versus 61.8% in Q3 of last year. The factors which impacted margin were the IMs I just mentioned. CooperSurgical had a non-GAAP gross margin of 61.2%, which compares to Q3 '15 of 65.4%. Acquisitions in the genetic testing space were the primary drivers for this reduction. Now looking at operating expenses, on a non-GAAP basis, SG&A increased approximately 8% to $179.7 million or 35% of revenue, down from approximately 36% of revenue in the prior year. Primary driver behind this drop was strong spending controls as we had leverage in both, CooperVision and CooperSurgical. Now looking at R&D in Q3; R&D on a non-GAAP basis decreased 2% to $16 million or 3.1% of revenue, down from 3.5% of revenue in the prior year. The primary driver of the leverage we're seeing from the Sauflon acquisition. Moving to operating margins; for Q3, consolidated GAAP operating income and margin were $102.7 million and 19.9% of revenue versus $50.3 million and 10.9% of revenue in Q3 last year. Non-GAAP operating income and margins were $131.6 million and 25.6% of revenue versus $106.1 million and 23% of revenue for the prior year. The primary difference in the operating margin year-over-year is improved gross margins and operating expense leverage. In Q3, CooperVision's non-GAAP operating income and margin were $119.4 million and 29.1% of revenue versus $97.7 million and 25.3% of revenue in the prior year. CooperSurgical's non-GAAP operating income and margin were $23.5 million and 22.4% of revenue versus Q3 '15 of $19.5 million of operating income and 25.6% of revenue. Looking at depreciation and amortization; in Q3, depreciation was $33.9 million, down $7.5 million year-over-year. Amortization was $15.6 million, up $3.1 million, reflecting our recent acquisition activity. Interest expense was $8 million for the quarter, up $3.3 million year-over-year, primarily due to higher debt and interest rates associated with acquisitions. Looking at the effective tax rate, in Q3, the non-GAAP effective tax rate was 7.7% versus a non-GAAP effective tax rate of 3.1% in Q3 '15. As a reminder, in the prior year, we had a higher dollar amount of Q3 discrete items related to prior years which reversed in that quarter. On earnings per share, our Q3 earnings per share on a GAAP and a non-GAAP basis was $1.79 and $2.30 respectively versus $0.91 and $1.97 for GAAP and non-GAAP in the prior year. Now looking at some balance sheet and liquidity items in Q3, we had cash provided by operations of $128.9 million, plus capital expenditures of $31.1 million, resulting in $97.8 million of free cash flow. Excluding integration costs of $6.5 million, adjusted free cash flow was $104.3 million. Total debt increased slightly within the quarter by $2.7 million to $1,444.1 million, primarily due to higher average cash balances and acquisitions, largely offset by operational cash flow generation. Inventories decreased by approximately $3.3 million to $430.3 million over last quarter. In CooperVision, we saw overall inventory decline as growth in silicon daily inventory to support our product launches was offset by a reduction in our hydrogel inventory. In CooperSurgical we saw small increase largely due to the new acquisitions. For the quarter, we're seeing months on hand at 6.5 months, down from 7 months last quarter. Day sales outstanding is at 54 days, same as last quarter and down one day from the prior year. Now turning to guidance; for our main currencies, we are using 1.10 for the euro, 1.04 for the yen, and 1.30 for the pound. And looking at the full year, the consolidated revenue range is being raised on the low end to reflect our Q3 performance and is now $1.944 billion to $1.957 billion or approximately 6% to 7% pro forma growth, up from the previous 5.5% to 7% range. For the fourth quarter, CooperVision's revenue range is $390 million to $400 million or roughly 5% to 7.5% constant currency growth. And CooperSurgical's revenue range is $106 million to $109 million or roughly 5% to 8% pro forma growth. We expect non-GAAP gross margin for the fourth quarter to be slightly over 64% driven by a strong quarter for CooperVision. This would result in a full year gross margin around 63%. OpEx is expected to be slightly under 39% for the fourth quarter as well as for the full year. Operating margin is expected to be around 26% in Q4 which would result in the full year margin being in the mid-24% range. Interest expense is expected to be a little over $7 million in Q4 or slightly over $28 million for the year. Our effective tax rate guidance is the same as last quarter; a full year rate of around 8% translates to 10.5% to 11% in Q4. Our expected share count is around 49.1 million shares, our non-GAAP earnings per share is expected to be $2.15 to $2.30 from the fourth quarter which equates to $8.32 to $8.47 for the full year. From our last earnings call, currency was a positive in Q3, helping roughly $0.04 but we are expecting a negative impact in Q4, roughly $0.02 from our previous guidance. Unfortunately, some of the positives we experienced in Q3 from currency such as the yen and the euro are now being more than offset by the move in the pound since Brexit occurred in late June. As Bob mentioned, if currency holds, which would see a lot of benefit next year led by cost of goods, as roughly 40% of CooperVision's product as manufactured in pounds with roughly a six months lag to the P&L. To be clear, this is roughly 40% of CooperVision's manufacturing, so on a consolidated basis, this is roughly 30% of our total cost of goods. Also note, the pound move associated with Brexit occurred in late June, so this positive impact starts in January; so more muted positive impact in fiscal Q1 versus the remainder of the year. And the other point to note as I mentioned earlier, is our effective tax rate guidance remains unchanged which means the Q4 tax rate range of about 10.5% to 11%. Regarding cash flow, our CapEx was low this quarter but we do expect around $50 million in Q4, so around $170 million of CapEx for the year now. This should result in free cash flow over $300 million and adjusted free cash flow and excluding integration related activity at well north of $300 million. With that, let me turn it back to Kim for the Q&A session.

Thank you, Greg. Operator, we're ready to take some questions.

[Operator Instructions] Our first question comes from the line of Jeff Johnson from Robert W. Baird.

Thank you. Good evening guys. Can you hear me, okay?

Can hear you fine.

Okay, great. Greg, I just wanted to say, it's been great working for you -- working with you, not for you but working with you for the last few years and best of luck in the future. And Al, plus or minus, we'll see how it goes here over the next few years; that was a joke. And so, Bob, I just want to start with you just on kind of the monthly trend here. It's always tough to read CLI data and try to translate that given the off one-month how you're fiscal quarter closes. But I look -- it looks as if maybe the forward month slowed a little bit looking at CLI data versus your reported number for the quarter. There has been some question of utilization issues out there. So just -- any color you can give us on kind of the monthly gating [ph] of what you've been seeing in the industry here over the last few months?

Good question Jeff, and just kind of jump off the page a little that July must have been soft relatively speaking. There is really primarily but one answer to that and its industry-wide answer with that sort of reason, most people would think. While in the past have we talked about work days in a month but in this case I'll highlight the fact that in July this year there were 19 work days compared to 22 last year because of the way we can sell. That translates to about 17% -- 16% to 17% reduction in revenue if you had the same revenue per day or the orders per day. So pretty profound impact that weighted heavily because of the normally of the way we can sell. Conversely, you get some of that back in August, relative to a full quarter however, probably the best way to look at it is, work days were down 3% this year in the third quarter and they will be up 1.5% in the fourth quarter. So there is one more work day in the fourth quarter, so it's smooth now within the quarter but there is some anomaly between July and August caused by work days.

Thank you. And our next question comes from the line of Brian Weinstein from William Blair.

Thanks for taking the question. Can you guys just talk a little bit about what you're seeing obviously from the competitive launch from J&J? And then also you have a couple of launches in the FRP space, so how are you seeing that kind of two week and monthly space playing out at this point and any color you can talk about with respect to just a competitive launch in general? Thanks.

Yes, the competitive launch -- J&J has been active in taking away since two weeks which was their sweet spot and expanding it into a one day, one week and then a one day and now they are moving with the different package into the monthly modality with Vita. The amount of push they put behind Vita [ph] was nothing compared to a year ago when they launched the OASYS one day modality, so a lot more muted. Having said that they are one of the more active ones in this space, albeit leveraging their OASYS franchise if you will. Interestingly, they still do not call OASYS one day a silicone hydrogel lens but as we all know it is silicone hydrogel lens. As I think I indicated in the past, it was my belief that there would be some swapping off the two week non-compliant into the monthly compliant which in essence is a clever way to think it's a trade-up strategy and I think we're seeing more and more of that as they are trying to continue the deceleration or the negative growth of the two week space which they own 90% of, and migrate it into more profitable buckets. And there is no doubt profitable bucket means the one day modality but quite frankly the strategy is not short-sited. So to speak when it comes to a monthly price point yields more revenue than a two week non-compliant and most of vast majority of the two week wears are non-compliant. As far as our product in the non-one day space, we rolled out initially Biofinity and are just -- it's getting, it's very early in the game but so far so good, there is a lot of excitement about novel wins that really addresses people with iPhone's and being in front of TV screens and computer screens, professionally. So there is lot of interest by the eye care professionals that we have engaged in discussion thus far. We also are have got approval to launch Vitality in the two week space and Vitality is targeted to replace our low gross margin Avaira product in the two week space. That low gross margin came about as a number of years ago when we had a recall and had to change the manufacturing technique which became very cumbersome. So it is a significant step up in gross margin and it's very early in that launch, I think it was late July. And the intent there is, it will probably take two to three years to roll out the entire family of the toric and the sphere worldwide in this migration. The sphere will go faster and the majority of the Avaira product line is the 70% of it or more is the sphere side, so that one will show up quick. But it's an inventory term and when you have toric, it takes longer to transition if you will that. So we're excited about that and then of course we have all the action that's going on in the one day space.

Thank you. Our next question comes from the line of Jon Block from Stifel.

Great guys, thanks and good afternoon. Maybe two, I'll ask them both upfront. The CSI margins Greg were down a decent sequential pull back from fiscal 2Q results, not asking for guidance for the next year but sort of the 61% gross margin, the right place to be looking forward when we think about the recent acquisitions weighing on the margin a bit. And then separately for CVI, Bob can you just talk to the EMEA market? I mean you're gaining a lot of share in APAC and you've seen to be well positioned in the U.S. The game seem to be accelerating, can you talk about what you're seeing in the EMEA market regarding share? Thanks guys.

Jon, on the gross margin, I think what you should expect to see is -- fixed as one of the low point, you should see it to be a little bit higher than that and again the base business will kick in a little bit. The new acquisitions come with a lower gross margin and so that you did see that pressure, especially in Q3.

As far as the EMEA market, we continue to gain shares there and happy to say we're right on the heels of the number one player there which is Alcon in the market. So -- and that happens to be the part of the world where we have the highest market share in EMEA. Our overall market share is 23% but in Europe, it's 33% contrasted to where was weakest share but growing fast in Asia Pac. So the market there remains focused in on the one day modality, Eastern Europe continues to be a robust area. And then the Biofinity continues to charge very nicely there. And then of course the other thing is, U.S. market was the first one to arrive with specialty lenses, torics, and multifocals, and now the rest of the world including EMEA is catching up. So you have a more robust market there which plays to Cooper's strength, recognizing we're number one in the world in the specialty lens area overall.

Thank you. And our next question comes from the line of Matt Mishan from KeyBanc.

Good afternoon and thank you for taking my questions. Bob, could you give us a sense of what is driving the double-digit growth in Asia Pac and with MyDay being a bigger piece over there going into next year, is double-digit growth sustainable for little bit? And then can you talk a little bit about what you see is the opportunity for the MyDay toric in Japan and why you launched there first?

Sure. First of all, double-digit in Asia Pac is somewhat of reflection of our immaturity in that market with a fabulous product portfolio. So we have a great product portfolio, lot of it emanated out of EMEA; so it started in Europe, it came to the U.S. and really Asia Pac is the last to get it all. In addition, we were clearly under index overall in that market. We have invested over the last three or four years heavily in some areas like China and the surrounding geographic area. So we're starting to get momentum there. As far as MyDay in Japan, MyDay is a one day product, there are silicone hydrogel players in the Japanese market. TrueEye I started there selling silicone hydrogel market when we started for all fast flow purposes in Japan. The beauty of having a MyDay toric in Japan, first of all, we have Clariti available in the western world, Clariti has a sphere of toric in the multifocal. In Japan, we only have MyDay at this juncture and having a toric to go along with it, have a halo effect, we will be the only one in the Japanese market with a silicone hydrogel sphere and a toric. While the toric market is not as mature as even the European market, it's certainly in the cycle there. It is a nice halo effect that lot of practioners wanted and particularly more so, some of your independence in Japan, so it's a good story with not only those retailers that exist there but also the independence. So, yes, I do expect that we will put up robust numbers going forward, double-digit numbers certainly in many quarters going forward into Asia Pac marketplace.

Thank you. And our next question comes from the line of Matt O'Brien from Piper Jaffray.

Hi, good afternoon. This is actually Jay [ph] for Matt. Thanks for taking my questions. I just wanted to dig deeper on gross margin, and I know you're not giving guidance for 2017 but you've got a lot going on with -- you've got a weaker British pound which as you said after six months once you work through inventory you'll see a benefit there. And Clariti as it continues to ramp, it should be accretive to differ my gross margin in response to the two week period that has better gross margins as well. So I try to think off, is there any reason why we can't get above 65% next year? And then just a longer term question on gross margin, I mean we needed to be -- the Sauflon acquisition, you kind of gotten the stability of doing silicone hydrogel having the need for alcohol in the manufacturing process, and just trying to think of when you can take that manufacturing ability and start launching your own organic products with that kind of unique process and when we should expect some products like that?

I think on the gross margin, you've covered a lot of the points that there are obviously some tailwinds and where Clariti is coming in at far better than we first thought when we launched the company. The pound as we mentioned that especially the pound at these rates as I mentioned in the earlier comments will have a nice impact going forward. At the same time, again we are -- you saw the acquisitions that CooperSurgical is doing and that will have some impact on the overall gross margins because if you get into more lab-based businesses, they're going to come with lower gross margins. And so as you said, we're not giving guidance for next year, you've seen the gross margin start to edge up throughout the entire year, so you can see that where we're looking at being in the fourth quarter is again higher than we were in the third quarter.

And I think just on the comment on the Sauflon platform, yes, we're static about the alcohol-free nature of it and the fact that it's so full [ph] that we have to see as the toric and the multifocal to leverage. We're static by the fact that we were able to ramp up very quickly and therefore we're not capacity constraint. So that is clearly a tailwind in a high gross margin area. However, I would agree with Greg's point that with the surgical acquisitions that we have made and with surgical now and around 61 -- going up a little bit from there, there is a mix headwind that comes into play. So directionally you're right, there is tremendous amount of tailwinds to help us out and we'll see where that all lands down the road.

Next question?

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

Hi, good afternoon. I hope everybody is well and congratulations to Greg and Al. Multi product questions, first, two multi product questions. FX, we all sort of search in a stock price after the Brexit moment and so I'm sort of curious what you're thinking of the FX impact maybe for 2017 without giving guidance but maybe as a contributor so that we also get our heads around with no surprises when you do give guidance. And the second part of that question has to do with -- what was the FX impact on EPS in the third quarter and the current thinking for the full year? And then my second question, it has to do more big picture, we've all been very worried and very focused about J&J's product launches and while Ciba and Bosch have struggled, is there anything that you see coming down to the pike that we need to be aware of as we look forward? Thank you.

Joanne, I'll jump in on the FX question real quick. So from a third quarter perspective, if you look at the actuals, we had a $0.06 benefit year-over-year and that was about $0.04 above what we had guided to or what was in our guidance in Q3, I'm sorry Q2. If you look for the full year, we're looking at -- FX is about flat, it's about up $0.02 for the full year year-over-year. When you talk about Brexit, one of things to keep in mind and I mentioned that in the script when it hit, so it hit in late June. So we would start to see the benefit of that really coming in in January. So Q1 will be a little bit of benefit and provided the rate stay where they are at, you'll get that benefit throughout the rest of the year. So it's a nice benefit from a CooperVision perspective about 40% of our COGS are in pound-based manufacturing, and that's 30% roughly because of total company. So you will see that flow through again good part of the next year provided the pound stays at about these rates. That's definitely down quite a bit from prior years and that's -- we win more on -- when that happens from a pound perspective, we win more on the manufacturing than we lose in the revenue but in the short-term like Q4, we actually get impacted by the revenue first and the benefit will come out outside of this fiscal year.

As far as some of the product launches of J&J -- when we look at J&J, B&L and Alcon; J&J is the one that already have their act together, the best of the three. And Alcon obviously is still in a remaking mode. B&L is in a remaking mode, changing their structure yet again, I think. And J&J with a fairly weak product portfolio is a good marketing company and so I would complement them on making the best of the product portfolio they have. Some of their programs, the whole disruption they've caused in the marketplace over the last two years with directions going all the way with UPP and then direction going the other way, they've taken some bumps in terms of their messaging. So one day they are saying to you was the friend of the independent with these products and then the next day they are saying, well, we have a different story to tell you but it's going to be UPP. So there is no doubt there is some reaction to that. As far as Vita for example, their new product launch in the monthly space very much -- it's moving into a space where it's going against some franchise products and Biofinity is a franchise product and Biofinity is the product that has a toric and sphere and a multifocal, plus now it has things like Energys which is an enhanced product where people -- like 99% of the people on the planet are using more and more technology. So I don't expect them to get too robust about that. I do think that's a lot different than what they did a year ago with OASYS one day where they basically said, we want to participate into shift so [indiscernible] whereas leaving the two week space and catch some in the one day market with a huge trade-off. So they are playing out that strategy, to a large degree they cannibalize TrueEye in the U.S., not worldwide but in the U.S. and OASYS one day and TrueEye and MyDay are giving a competition in this case Alcon's Total 1 run for their money. Now Alcon got out there first when there was only one competitor in that space which is TrueEye. J&J knew that was a deficient product in the U.S. and I'm not sure why in the U.S. when it actually has done pretty well historically in Japan but for whatever reason, the U.S. it's a week two product. So product roll outs, we hear a lot of noise about B&L on ULTRA which is their answer to trying to refresh the product line for monthly products, monthly silicone hydrogel products. They've gone and expanded now I think from beyond sphere but a lot of what B&L is doing is capturing some of their legacy products, Purevision and SofLens 66. So when you put it all together, B&L has some new products, ULTRA but it's about holding breakeven with the entire product portfolio including the fall-off of their legacy products. So worldwide I think the last quarter there probably 1% to 2% growth. So they would have lost some margins here last quarter. Alcon likewise, came up with 2% numbers in a market growing 5%, so they lost share. So the gainers were Cooper and with the robust 10% in J&J.

Thank you. And our next question comes from the line of Larry Biegelsen from Wells Fargo.

Good afternoon guys, thanks for taking the questions, and congratulations Greg and Al. Just -- for my multi product question here. Bob, is it safe to assume that August bounce back from what sounds like a weak July because of the day count? Second, on 2017, you guys have historically given some color, even last year you did on EPS, is it safe to assume that you're pretty comfortable with concerned to this top and bottom line at this point roughly speaking, otherwise you would -- if there were something out of whack, you would call it out. And lastly, the inventory write-off and the ideal equipment charges we saw in fiscal Q2 which resulted in $0.30 hit, should we -- are those over or do you expect more of those either in the fourth quarter of 2017? Thanks for taking the questions.

All right. First question on August and July, yes, it's safe to assume that the anomalies between the weak July and August have to do with workdays, not anything engrained in the marketplace. Relatively to 2017 where we indicated we're not prepared at this juncture to put specifics on the line. No, we wouldn't comment one way or the other on what consensus is out there. I would highlight however that some of the analyst have more aggressive foreign exchange rates and some analyst's maybe -- I think Greg kind of hit the nail on the head. Some of the models on the impact of the pound etcetera, emphasizing that it's on 30% of our worldwide instead of 40% of our worldwide cost of goods, it is an important attribute. So hopefully, we gave some color for people to sharpen the pencil with their models in some case. So beyond saying there is a lot of tailwinds that we're standing by and happy with, and the foreign exchange rates will be whatever they are and they change literally by the hour. We're not going to add anymore color at this juncture. As far as the 10-10-10 hit, $0.10 in the second quarter, $0.10 in the third quarter and $0.10 in the fourth quarter due to idle equipment and inventory write-offs that were over and above normal, they are in the numbers. There are other write-offs that are routine and they continue throughout 2016 and will continue throughout 2017. Directionally, we indicated that a lot of those call out charges are associated with some of our improving efficiency a lot more than we thought. So that let us to idling some equipment. So directionally you can see the growth numbers in our 1-day silicone hydrogel franchise of 40%; that certainly will go towards improving absorption. And importantly, when something goes from idle to used in productions, it goes from a direct period charge which is what the 10-10-10 is about to certainly it moves on to the balance sheet when it's making the inventory. So that will continue throughout 2017 if you will.

Thank you. And our next question comes from the line of Larry Keusch from Raymond James.

Good afternoon, and also congrats to Greg and to Al. I guess, again, two part financial question here. On the CapEx, I mean if you go back and look, it -- it tends to be cyclical, then you do get into periods where there is investment as you guys bring out the lines and expand capacity. There are also periods of time where you grow into that capacity and in this case you've got some of these ideal equipment sitting around now that will add to that. So I just wanted to get your take on where you think CapEx can go here over the next several years. I think you said 170-ish million is for this year but where does it go and how does that translate to free cash flow generation? And I guess along with that should we expect no additional Sauflon integration charges next year? And then the other part of the question is, I think certainly the odds of an interest rate increase have gone up and we could see something coming in this month and how are you thinking about that and what's built into guidance? Thanks.

Well, few things on that. The cyclicality of the CapEx spend, you're absolutely right, we ramped up Biofinity and Avaira in the last decade. We're very capital intense. We got real efficient, we ramped down and then all of a sudden, particularly with the Sauflon acquisition and with MyDay rollout of silicone hydrogel 1-day, we became very capital intense again over the last several years. And along the hold [ph], we got real efficient and so we are again a little ahead of ourselves in the perfect world. Translation there is, we think we have a pretty long runway on improving efficiencies that will continue over the next several multiple years and that will be somewhat of a cap on CapEx requirements. Look for we've taken the CapEx needs this year from $200 million, down $30 million to $170 million, the outlook for post-2016 will be for less than that. We're thinking in that $150 million range, so year-over-year a reduction of in that $50 million range. When you look at cash flow, we've now taken our -- should get the $300 million to a lot stronger statement about $300 million. So where $300 million headed towards $400 million, no real change in that signal on that going forward. There is, in my opinion, multiple years of runway on some of those efficiencies that we're talking about. As far as Sauflon interest charges, the -- what's built into our thinking is given that we forward cash flow generation, we see that as part of a minimizer. So when you're -- you have $1.4 billion in that worldwide, you're generating $300 million to $400 million in cash flow that will serve to offset. We do expect that probably between now and year end there will be some movement in rates and of course we've only guided through year end. So at this juncture we haven't really guided if treasury goes crazy, then that will obviously influence the guidance we've come out within -- in December. But I think between foreign exchange volatility and interest rates, depending on whose got their mouth open on a given moment, out there it seems like the government is very more proactive and trying to direct economic thinking which is a detriment I think, overall, because it does create uncertainty involved in volatility. But we're still on a low inflationary modality, we can all speculate and pretend we're economist, so stay tuned and we'll refresh -- what our thinking is in December.

Thank you. And our next question comes from the line of Steve Willoughby from Cleveland Research.

Hi, good evening. And congrats Greg and congrats Al. Just first on this year's guidance, Greg, if I heard you correctly, it sounds like FX was an incremental $0.04 positive for you here in the third quarter but an incremental $0.02 headwind versus what you're expecting for the fourth quarter. So I'm just trying to correlate that to your -- the guidance, the full year guidance you've given where you brought down the high end just a little bit. If it looks like net-net, FX is about incremental $0.02 positive to your previous guidance.

Yes. Last time that we gave guidance, we talked it being about a wash and it's net-net, you're right, it's a $0.02 positive for '16 at this point year-over-year.

And so what's the driver to the reduction I guess at the full year guidance then?

The reduction to the full year guidance?

Correct. Yes, I mean you said -- sorry, go ahead Bob.

Yes, let's just say I'm not sure overall against our guidance we raised a midpoint [ph] in our guidance.

Yes, we actually raised midpoint by $0.04, it was the FX that we experienced in the two was related to probably an operational increase.

Okay, thanks very much.

So we took it up in our account.

Thank you. And our next question comes from the line of Andrew [ph] from JP Morgan.

Thanks for taking our question and congrats Greg and Al. I wanted to go back to the fewer and extra selling days in the third quarter and excited in the fourth quarter. And what was the impact on growth in the third quarter and what are -- for the fourth quarter?

If you took work days in the quarter, it would be a 3% headwind in Q3 and 1.5% tailwind in Q4, all other things being [ph].

Thank you. And our next question comes from the line of Steven Lichtman from Oppenheimer.

Thank you. Hi guys, two questions. Bob, within your 1-day silicone hydrogel franchise, in the recent period here last few months, has the incremental contribution from MyDay and Clariti, pretty balanced or has one been contributing more incrementally over the past few months? And where do you see now that the mix going between those two products overtime? And then Greg, that's actually popping up here in the fourth quarter. The reason why are we going to see that move higher -- any changing your thoughts on tax rate beyond '16? Thanks.

So on the mix of MyDay and Clariti, there -- obviously MyDay is with smaller base, so it's percentages are higher and Clariti, which has a big European franchise has a bigger hurdle. Clariti is still the one that is targeting the mass market and therefore we'll always be most likely the bigger product. It's the one with the toric and the multifocal which also will make it the bigger product. So it's still about -- I don't know, 70-30-ish. However, with MyDay off of a lower base and going into Japan you may see it as that rollout occurs, take over somewhat bigger portion of the pie, given Japan is such a huge 1-day market. I guess Greg on the tax rate?

Yes, on the tax rate; since the March guidance we have been guiding to the 8% for the year, around 8%; and so we're still holding to that. And when you look at it, things have been choppy and it also depends a lot of times when discrete relates this year, we had discrete related in Q1 where normally it's Q3. Typically Q4 is a higher quarter, last year was an exception to that and that was based on a lot of work around the integration and restructuring cost which were allowed deductions. So the Q4 rate being in the 10.5% to 11% is probably more typical outside just the last year or so.

Thank you. And that concludes our question-and-answer session for today. I would like to turn the conference back over to Bob Weiss for any closing remarks.

Well, I want to once again thank Greg for six great years and wish him the best going forward. He will be around as we indicated throughout the transition period, throughout the rest of this calendar year. And we look forward to updating you on our year end results in December and I think the date there is December 8 if I'm not mistaken; and a lot of good stuff going on, so we look forward to giving you an update on that. Everyone have a great Labor Day weekend and summer has come and summer has gone already and life goes on. With that, we'll conclude.

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