Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Q4, 2018 The Cooper Companies’ Earnings Conference Call. At this time, all participants are in a listen-only mode. Following management’s prepared remarks, we will host a question-and-answer session and our instructions will be given at that time. [Operator Instructions] As a reminder, this conference call is being recorded for replay purposes. It is now my pleasure to hand the conference over to Ms. Kim Duncan, Vice President, Investor Relations and Administration. Ma'am, you may begin.

Good afternoon. And welcome to The Cooper Companies’ fourth quarter and full-year 2018 earnings conference call. During today's call, we will discuss the results included in the earnings release, along with our 2019 guidance, and then use the remaining time for Q&A. Our presenters on today's call are Al White, President and Chief Executive Officer; and Brian Andrews, Chief Financial Officer and Treasurer. Before we begin, I'd like to remind you that this conference call contains forward-looking statements, 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 Cooper's Form 10-K, all of which are available on our website at coopercos.com. Should you have any additional questions following the call, please call our investor line at 925-460-3663 or e-mail ir@cooperco.com. And now I'll turn the call over to Al for his opening remarks.

Thank you, Kim and good afternoon everyone. Welcome to our fourth quarter 2018 earnings conference call. This was a year of record revenues, earnings per share and free cash flow. I am proud of our team for everything we accomplished and believe we are extremely well positioned with our growth strategies firmly intact and momentum on our side as we enter fiscal 2019. The fourth quarter was a continuation of what we've been discussing regarding capitalizing on current market conditions through incremental sales and marketing investments to win new fits within CooperVision and driving strong performance of PARAGARD within CooperSurgical. Overall, our strategic investments are paying off and I am happy with our revenue growth rates and momentum. Having said that, gross margins at CooperVision did come in below our expectations this quarter and at a high level, there were two reasons. The first relates to our desire to maintain extremely high customer service shipping levels in the face of our distribution, our significant distribution center upgrade activity. The redundancies we've added to accomplish this have resulted in higher costs, but I strongly believe the importance of maintaining premium customer service is more important than the negative short-term impact. Second, the rapid growth in our daily silicone hydrogels franchise resulted in incremental charges against legacy hydrogel products due to things like product discontinuation, and lower production volumes. Brian will cover this in more detail, but these items reduced EPS this quarter by $0.14. Regarding revenues, we remain focused on driving success by capitalizing on our strong product portfolio and accelerating investments within both businesses. This activity helps support a very strong fourth quarter with consolidated revenues of $652 million, up 16% year-over-year. Within this, CooperVision reported quarterly revenue of $481 million, up 9% or 10% pro forma with a noticeable…

Thank you, Al. Good afternoon everyone. Most of my commentary will be on a non-GAAP basis. So please refer to today's earnings release for a full reconciliation of GAAP to non-GAAP results. Al covered revenues, so I'll focus on the rest of the P&L and guidance. For the quarter, consolidated gross margins improved year-over-year to 66.5%, up from 65.9% last year. Within that CooperVision's gross margin declined 360 basis points to 64.1% from 67.7%, with the primary driver being currency, which was a 210 basis point drag. The remaining 150 basis points was split primarily between two items. First, internal freight and secondary handling costs were higher than normal as we incurred significant costs associated with redundancies we implemented in order to maintain premium service levels while adding, expanding and upgrading our distribution centers. The second item was higher than expected inventory and equipment write-offs associated with older products as the shift to daily silicone hydrogel lenses is accelerating. As our legacy hydrogels decline, we'll continue to assess the speed of that recovery of that activity and the impact on a manufacturing and inventory levels for legacy products. We expect costs in both of these areas to be higher than normal through fiscal 2019 before we start seeing leverage. Having said that, we expect to hurdle a significant portion of these costs, as you will note in our guidance, which meets our prior commentary of low double-digit, constant currency operating income growth. CooperSurgical's gross margin improved significantly to 73.1%, up from 59.6% with the addition of PARAGARD along with improvements in product mix as some of our higher margin medical devices products are now becoming large enough to have a positive impact on our overall gross margins. Regarding expenses, consolidated operating expenses increased 19.2%, driven by the acquisition of PARAGARD,…

Thank you, sir. [Operator Instructions] And our first question will come from the line of Jeff Johnson with Baird. Your line is now open.

Hey. Thanks guys. Good evening. Hope you can hear me okay.

Yes. Hey Jeff.

Hi.

Hi guys. Al, so first question for you. Just on the Asia-Pac numbers, I mean obviously they've been strong for a long time, double-digits I think for – I don't know 3 or 3.5 years at this point. But they have kind of taken an uptick here in the last few quarters. One just – what's the sustainability on the Asia-Pac CVI kind of double-digit and solid double-digit growth? And then I know you've been pointing a lot to some of these key accounts and some of the big retailers in that, we've heard about a couple you won in Europe, some added activity here in the U.S., but kind of talk to me about the retail environment in Asia and where you might be winning some deals or how big of an effort that is there as well?

Yes, good question. Asia-Pac obviously had a really strong quarter and has done really well for a number of quarters. The future remains bright there, and we have a good strong 23% global market share, but we're still under indexed in Asia-Pac, at about a 16% market share. So I envision years of strong growth there, frankly. We have invested heavily on key accounts around the world that includes within the Asia-Pac region there are opportunities there. As a matter fact there's a couple exciting opportunities we're working on right now that I hope we get and will help continue to drive the double-digit growth for many years. So I won't get into those details, but I will say that we are spending money building our key accounts, we're spending money on the advertising, the promotional activity and feed on the street in Asia-Pac and I'd say I feel good that you're going to continue to see double-digit growth in that region.

All right, that's helpful. And then Brian, can you just help us on CVI gross margin, I know you don't guide, margin by segment, but obviously currency is going to have a headwind. It sounds like in the first half of the year, but then the pound starts helping in the back. So it seems to me there's going to be more volatility potentially around CVI gross margin this year than maybe in some of the past years. So any kind of color you can give us just on how to think about the gating of that line item throughout the year?

Yes, I mean, I would expect that it is going to be flat more or less year-over-year and obviously you had a pretty large FX impact this quarter and then some operational things that impacted, but I would say overall flat.

And if you say flat overall is that down in the first half and up in the second half, again just some gating throughout the year color?

No, just really just flat throughout the year.

All right, thank you.

Thank you. And our next question will come from the line of Larry Biegelsen with Wells Fargo. Your line is now open.

Hey, guys. Good afternoon. Thanks for taking the question. So a couple for you, Al. So on the Q3 call, you appear to be comfortable with – let's say $12.05 for fiscal 2019 or low single-digit reported EPS growth. So can you walk through kind of what changed from the Q3 call to today, where you are at about let's call it $11.50 at the midpoint or flat year-over-year? And I had one follow-up.

Yes. You have a couple factors there that we touched on. You have to kind of piece it together from some of Brian's discussions, but obviously currency has moved against us since then and we're now looking at roughly $0.55 negative year-over-year currency impact, so that was a decent amount worth. You look at the effective tax rate, we said 14%, I think we finished the year at 7.7% if I'm remembering right, so a little bit bigger of an amount hurdle there. And I guess the other point I would add is some of what I touched on earlier in the call there, which was some of the costs associated with the activity around the growth in daily silicones and distribution and logistics activity.

That's helpful. And then obviously you finished the year very strong in the second half in CVI, and I heard your commentary on fiscal 2019 and the guidance, obviously you have potentially a couple of new competitors coming. So my question is what makes you so confident in the 7% at the midpoint and hopefully better in fiscal 2019 with new competition coming? Thanks for taking the questions.

Yes. Sure. Yes, I look at the last three years for CooperVision, it's been kind of 7.5%, 7%, a little bit over 8% here this last quarter. I mean we've had good strength and good momentum for a number years. We have the products. We have the ability to sell those products. We're meeting good solid shipping and delivery and logistics. We're putting advertising and promotional dollars there. So there's a lot of positive activity and when I look at the new fit data that makes me feel good about us being able to continue to post strong growth. Fully acknowledging the world is – as its with issues and there could be some recessionary type activity following appreciating. We have competitors who are looking to launch new products and maybe not as fast as what at one point people thought they were going to, but still coming at some point. So there's pluses and minuses, but when I look at our product portfolio and what we have going on today, the momentum we have with key accounts and different spots around the world, I feel pretty good that we should have another strong year this year.

Thanks for taking the questions.

Thank you. And our next question will come from Lawrence Keusch with Raymond James. Your line is now open.

Thank you, guys. This is John Hsu in for Larry. Couple of quick questions, one strategic, one financial, just on the strategic side, obviously your key accounts, it sounds like the strategy is going pretty well. I guess maybe related to that is $5 million per quarter still the right way to think about the incremental spend and maybe also as part of that Al if you could answer, if you signed any new key accounts in the fourth quarter and specifically are there any contracts specific with Clariti?

Sure. Yes, thanks John. I won't get into individual accounts or signing new accounts. I will kind of confirm that. Yes, the key account strategy is going well. Yes, we are making product – we are making progress with relationships that we currently have and looking at some new relationships, so feeling good about that. The $5 million per quarter, yes, that's probably a good way to look at it. The only kind of asterisk I would put on that is the more success we have, the more we would be willing to support those partners that we have in terms of moving incremental new fits to CooperVision. Those costs that get associated with that our upfront cost and the life of that wearer is worth a lot more than that. So I hope that the key account strategy continues to progress as well as it's been progressing, so that that $5 million per quarter holds for a little while here. Obviously, once some of that tails off those cost can tail off too, so we'll see how that plays out.

Excellent. Thanks for that. And then just the financial question, how are you thinking about capital deployment in 2019? Is it still fair to assume that maybe debt pay down is a higher priority with the remainder for tuck-in M&A in share repurchase?

Yes, I would say that's true. We had a strong quarter certainly with respect to cash flow this quarter and the team did a fantastic job, cleaning up some inner company loans and so forth, so we could get some cash move back over and we paid down debt under $2 billion. So a very strong step in the right direction in this quarter and Q3 was strong also. So I would say, hey, we're still raising rate environment. I am certainly fine taking proceeds and paying down debt and keeping a decent eye on smaller tuck-in acquisitions if we can find them and they make sense meaning they provide sufficient returns and at the same time looking at now maybe start to deploy some additional dollars towards share repurchases.

Great. Thanks so much.

Thank you. And our next question will come from the line of Joanne Wuensch with BMO Capital Markets. Your line is now open.

Hi, good evening. A couple of questions. Could you give us an update on your product portfolio, particularly with fresh competition in Torics from Bausch & Lomb and Alcon? And I'm just going to ramble off to two other things quickly. In a rising interest rate environment, how do we think about interest expense next year? And you may have given this and I missed it, but what is your gross margin guidance for next year?

Yes. Let me touch on those and Brian will add some color here if I missed anything or say something wrong. On the product portfolio, we're in great shape obviously with our existing product portfolio kind of across the Board right now, so we're pretty heavily focused on selling the products we have and be that Clariti or MyDay are Biofinity or Avaira Vitality and so forth. We do have products kind of in our back pocket so to speak that we'll be looking at rolling out over time and we'll see how that plays out, but we do have products, we are ready to be in a position of launching products in the near-term. Having said that, we're going to focus with the products we have in the marketplace right now where we're seeing pretty significant growth. On interest expense, we're assuming three interest rate increases this year, which means interest expense will just kind of go down slightly year-over-year and gross margins, even in the face of currency on a consolidated basis, should increase a little bit similar to operating margins.

Thank you.

Thank you. And our next question will come from the line of Matthew Mishan with KeyBanc. Your line is now open.

Great and thank you for taking the questions. Al, how are you thinking about the impact of Brexit, and could you put some conservatism in numbers given that's like smacked out in the middle of your fiscal year?

Yes, great question, Matt. It's a little bit of a tough one for us versus some of these guys who will be at calendar year-end. You could imagine we've been doing a ton of work on Brexit. We might be a little bit better off than some of the other multinationals and that we manufacture product and have distribution centers in the UK and Europe and other spots, so we're fairly diversified. But yes, we did factor in costs associated with Brexit in our guidance. We've done some work around increasing inventory in some locations outside of the UK to minimize any potential disruptions if there is kind of a hard exit if you will. I think there's risk for all of us if they can't come to some sort of decent resolution. So I won't speculate on that. I think we'll get some answers on that fairly soon and I'm kind of keeping my fingers crossed. But short answer being, yes, doing a ton of work on it, yes, included some costs in our guidance for next fiscal year.

And then just a follow-up on the gross margin. How should we think about the timeline of the changes you're making in distribution? When those facilities fully come on line? And also I think you were talking a little bit about the gradual decline of the equipment in inventory charges. Can you just walk through like the timing of both of those through next year?

Absolutely, yes. So if we look at the distribution side, you have two components of that. You have distribution expense, which is going to be higher this year, we're going to see that throughout the year and probably some even into 2020 as we start all these facilities up and complete all this automation kind of activity. And then I think you'll see – my guess is, distribution expenses kind of grow equal with revenues in fiscal 2020 and then we'll start seeing some real leverage out of that. If I look at the impact to us internally, which hits in our cost of goods, you're going to see higher costs here, because we have some duplicative costs and some inefficiencies, because I mean, basically what we're doing here is we're kind of like think of it as the analogy of we're changing the tires on the car while the car is moving. I mean we're continuing to run our business, maintain very high quality shipping standards and so forth, while doing all these upgrades and we decided to do all that while maintaining premier customer service, so that's costing us some. The nice thing about that is we should have higher cost this year, while we take care of all of our customers and so forth, but I would expect to see that starting to decline as we move through this year and probably be gone next year. So we'll see those kind of improvements in fiscal 2020. That would kind of be the piece. Then when I look at the other side, we did have a very strong quarter in Q3 and a very strong quarter in Q4 when it comes to silicone hydrogel sales, all indications are that's going to continue for the market and for us. That puts pressure on our legacy hydrogel products. When we look to discontinue some of the products or when we cut back on manufacturing volume and end up either writing up inventory or writing off some equipment. So I think we're going to have some of that activity, I think we're going to see kind of heightened cost associated with that in fiscal 2019, but then I think all the pluses of the power if you will of the successes around all the daily SiHys moves will allow us to be in a year-over-year improving position in fiscal 2020. So I kind of like our chances for a good fiscal 2020 based on that.

Thank you. And our next question will come from the line of Brian Weinstein with William Blair. Your line is now open.

Hi guys. Thanks for taking the questions. Al, you had mentioned – somebody had mentioned, I think on the call something about recessionary activity, it's one of the things that we were going to ask you about. We haven't really seen a weaker economic environment as you guys have been rolling out daily silicone hydrogel. So can you talk about what you think the U.S. [indiscernible] demand is if we were to see the macro economy start to tip over a little bit in the U.S. and elsewhere?

Yes, I mean I definitely think if you look at history, we're a recession resistant business. We've seen that before where we've hit heavier recessions and the contact lens industry still grows, and I would expect that same thing here. You have the product trade up, you still have geographic expansion, you have expansion of products themselves better towards better multifocals and so forth. So it obviously depends on the extent of the recession and what happens, but I would say that even in a decent recession the contact lens market still going to be flat to growing and I would expect us to be growing faster than the market.

All right. And then speaking about the market, I mean you talked about it being $8.5 billion now with dailies, I think you said 52% of the market and SiHys there on a daily side in about 30%. I think historically you've talked about that eventually getting to 50%. Is there any change in where you see that going? Do you now have confidence that it's potentially above 50% of the daily market and how long do you think it takes before we get to that point?

Yes, I mean I think that what you're seeing right now and you hear from the competitors are people are coming out fully recognizing, acknowledging whether it's the manufacturers or the practitioners themselves that yes daily silicones makes sense, right. Because I mean for a little while as I do silicones make sense in the daily, do you need them or do you just need them in reusable. Well no, you need them in daily that's best for the eyes, best for our patients. We all understand that and the whole market industry is moving in that direction. So to me I think when you look at the percentage of silicones and reusable lenses, which is now like 82% and you look at what's ultimately going to happen within the daily market, and how much of the daily market moves there, I certainly believe that will go over 50%. As a matter of fact, I believe it will go well north of 50%. So we'll see how that plays out in the timing and so forth, but everything from the market perspective is indicating that, that growth is going to continue. That strong growth is going to continue and yes I strongly believe we'll be well north of 50%. Ultimately, we'll see where it goes, but I think it's going to be much, much higher than that.

Thank you, Al.

Thank you. And our next question will come from the line of Jon Block with Stifel. Your line is now open.

Okay. Thanks guys. Maybe two questions. Al, first one for you. If you really could tell daily number, I guess what I'm trying to ask is do you have an estimate of the incremental market share that you believe you are now capturing within the dailies market relative to the 17% share that you cited today? And then maybe just attack on to that? Also just want to ask if there was any benefit this quarter with calling catch up on Energys, which I believe may have had some manufacturing constraints last quarter? And then I've just got a follow-up?

Yes, quickly on Energys, I would say that we have some effort going in there, but – and the product is certainly doing well and growing. I can't remember the number, but well, well, well north of what Biofinity is growing. So I wouldn't say there was a catch up in there, I think the Biofinity number and Avaira combined at 7% was kind of a true number. As I mentioned last quarter, we do have capacity that's come on line in Q2 and Q3 so I think we're in a better position to continue to grow that, but I wouldn't put a lot of emphasis on that. When you look at the daily SiHys side of things, we talked about this in the past, it's a little tough when you get to see a live data growth versus net and everything else, but at the end of the day silicone hydrogel lenses grew about 35% market wise for the third calendar quarter and obviously we're growing well north of that.

Okay. So that 35% just to clarify, is sort of relative to the 50% plus that you cited?

That's right.

Okay, got it. And then just to shift gears over to CSI, so PARAGARD – really strong number 20%, I think you mentioned some channel in there, but I'm just curious from a rep perspective where you think you may top out and it's hard to maybe predict that when you're growing in that sort of rate, but just thinking about tying this back to drop through an OpEx leverage within the PARAGARD franchise you're up to 70% where do we start to see that level off? Thanks for your time.

Yes, I think we're probably getting to that point where that means to level off here fairly soon. I think that if we have a lot of success and things are going really well, could that get up to 100 sales reps I mean, I would say that's possible that would probably be the high point if I had to guess based on that product and the analysis that I've seen and we've done internally. So I would kind of say yes, we're at 70% that includes 20% internal. Do we continue to add people? Maybe. I go again I wouldn't see us going any higher than 100. I do think that that offers kind of that product is a mid single-digit grower this year and next year in the following year we're in a good spot with good momentum on that. So let's see how that plays out. The stronger that is, the more we would look at adding select sales reps in very, very targeted marketing and sales activity in certain cities where we don't cover right now.

Got it. Thank you.

Thank you. And our next question will come from the line of Matthew O'Brien with Piper Jaffray. Your line is now open.

Thanks so much for taking my questions. Just one market question for you Al and then a follow-up. I was a little bit curious to hear you talk about the outlook for the market in 2019. You're coming off of about a 7% growth rate in this market. It sounds like the dealers are going really well. So I'm wondering why you're backing off that ever so slightly, that I don't want to over read it too much. Also within there, are you starting to see fall-out rates or dropout rates come down slightly because of more and more use of dailies?

Yes. Well, quickly on dailies, right, you have to love them, I mean you don't have solutions. So what you end up with is people moving into dailies and they're much more compliant and yes the dropout is not as high. Now having said that a lot of those wearers have spectacles, then they're going to wear glasses and so forth, so it's a little different kind of thing on the reusable space. When I look at the market, yes, I mean you're right I mean the markets, if I look at trailing 12 months has grown around 7% something like that. I think – the market is going to continue to be pretty strong. We've talked for number of years about the market growing 4% to 6%. We were scratching our head for a while as to why it was at 4% – with everything going on. Now you've seen that acceleration, it's moving up into that more consistent 6%, 7% kind of growth each quarter and obviously that moves up and down a little bit. But you see that you see us growing faster than that. I honestly think that's going to continue. I do – I believe the market's going to stay strong. I think J&J is doing a nice job and I think they're going to stay strong trading upwards. Obviously everyone sees what Alcon is doing and trying to come to market and buy shares and you know what where we stand and you know my optimism about where we are. I don't want to get ahead of ourselves, right. We're given initial guidance for the year and we're looking at where we're going on a full-year basis and there's a lot of things that could happen, and a lot of different moving parts around the world. But do I feel good about the market being 4% to 6% and being in the upper part of that or even a little bit above that, yes. And do I feel good about us in the 6% to 8% and being able to push towards middle or upper part of that, yes, I do.

Okay. And then the follow up is a little bit of a strange one on the CSI business. But you worked with Utah Medical on this Filshie Clip sterilization business. They've comment that you're kind of backing off of that business. So are you just more focused on selling PARAGARD at this point or is there a product issue specifically with that you're stepping away from or are you going to shut that business and then focus on the higher margin products going forward?

Yes, I mean, I won't comment on a specific relationship or a product like that's a relatively small product. I will say that, yes, we are heavily focused on PARAGARD. There's no question about that. But when I look at the Filshie Clip, which is part of the rest of our office of the surgical products business, those medical devices, I mean we had another strong quarter at 7%. That's a good business. Mark Valentine runs that business for us, out of trouble, he has done really nice job there driving growth in that business. So we are absolutely focused on our medical devices, our core OB/GYN business there in addition to PARAGARD and we'll continue to be heavily focused on that business in fiscal 2019.

Helpful. Thank you.

Thank you. And our next question will come from the line of Robbie Marcus with JPMorgan. Your line is now open.

Hey. Thanks for taking the question. This is actually Christian on for Robbie. Just have few on CVI, not to deliberate the market outlook plans. But Al, I know you mentioned that you see it growing in the 5% to 6% range. What's kind of your time frame for that outlook? The reason I ask is because, one of your competitors that's been off soon recently mentioned that they see a 4% CAGR in the 2018 to 2023 range. So where just kind of your perspective differ on that? And then – on that as well, do you have anything baked in for 2019 for any kind of different impact for Alcon as the standalone company? And then I have one more. Thanks.

Yes, I believe and you correct me if I'm wrong, but I believe when Alcon was kind of making their comment of 4% growth, that was a broader comment and I believe they were including solutions in that. If that's accurate, that would explain it. Obviously, the solutions market is under pressure, because of the growth of the dailies. So I think when you look at the contact lens market to be saying that it's a 5% plus grower, 5% to 6% or whatever, I believe we probably have five years in front of us because I think the shift, the trade up shift from hydrogen dailies to silicone hydrogels dailies frankly probably has five, six, seven years in front of us. So I think that will drive pretty decent growth for a long time. I think that that shift alone is going to put a lot of pressure on contact lens solutions. We have a contact lens solutions business, it's relatively small, but it actually declined year-over-year for us. So I'm assuming that they included that in there. And then, when you look at the impact from Alcon, it's hard to speculate on that I mean, I think that that would certainly be built into our 6% to 8% guidance that we gave.

Got it. That's helpful. And then just a follow-up, you start to talk more recently about the customized product offerings, which I know is used to be called private label. We're not using the terminology anymore. Could you just help us understand how much of the existing base, maybe not hard numbers, but just at a high level, how much of your existing base is driven from that customized product offerings and then where you kind of see that going forward in the future in terms of becoming a much larger portion of Cooper's business? Thanks.

Sure, yea. And private label being part of customized products, it falls under that umbrella, right. When I look at customized product offerings, we're talking about it could be all the way to specialized lens, product customized packaging, distribution, labeling, shipping of a whole variety of things, right, the store, brand, name and so forth. So it's a broader component than just saying private label. And I think that's key, because when people think of private label or when I think of private label, you could think about going into the grocery store and grabbing a different milk. It goes well, well, well beyond that, this entire kind of customized product offering that we have. And frankly, I believe the market is going to continue to shift in that direction, which it has been. The market is kind of splitting and saying, hey branded is important, there's no question about that, but these customized product offerings are important also. And being able to offer premier shipping and specialized customized services to people is very important. So that's a big part of our business right now. I guess I won't put numbers on it, but I'd say it's a pretty decent part of our business right now and it's growing. I mean we're here to drive new wearers to contact lenses, we're here to help our partners, drive those wearers. So at the end of the day the key thing for us is, there is wearers out there they're going to practitioners offices and we want to help that whether that's a retail chain or buying group or whatever it is, but we want to help that partner grow the category and help them retain their wearers. So all that kind of customization is a big sell point for us in terms of being able to do that.

Great. Thanks for taking the question.

Thank you. [Operator Instructions] And our next question will come from the line of Isaac Ro with Goldman Sachs. Your line is now open.

Good afternoon, guys. Thank you. The first question on CSI, second one on free cash flow. On the CSI side, it seems like your guidance for next year a little conservative when we consider how well PARAGARD is doing and the fact that you're calling for a return to growth in the fertility side. So can you maybe help us reconcile kind of some of the push pulls on what would get you to sort of the higher end of the range versus lower end, just trying to think about where you guys see risk in either direction on that part of the business?

Yes sure, and I hope you're right, I hope that, that range is conservative. We thought about that, a decent amount as we were pulling it together, because I think that the fertility business is going to be mid-upper single-digit grower, including the genomics piece in there. And I do think PARAGARD is going to be mid single-digits and I'd like to think that frankly both of those have some upside. And then I look at the base business that we've always talked about low single-digits and we've had a couple good quarters there and I'd like to think that continues strong. So I feel maybe overly optimistic, but being in the upper part of that range is something we can do. Having said that, the base part of the business for a number of years was relatively flat. A lot of those products are older products, so we've had some success, but if that goes back to kind of being flat, it's a decent size, decent part of our business and if PARAGARD is indeed a mid single-digit grower, I could see us getting towards the bottom end of that range. So I would hope that doesn't happen and I'm optimistic it won't, but I think again, to start the year off that's kind of a good prudent range to provide.

Makes sense. And then on the free cash flow, interested in some of the moving parts between working capital changes and CapEx. And the reason I ask is, it look like you guys are on track for a pretty good uptick year-on-year this year for CapEx. I think last year was just over a $100 million, this year trending closer to $200 million. So if you can give us a sense of, when you – when you mention the investments you're making to serve the customer for next year, what that means for the CapEx trajectory and whether or not there are any other moving parts and working capital that would help derive that free cash number that you guided to? Thanks.

Yes. I wouldn't put too much on working capital. We've a lot of growth outside of the U.S., which puts some pressure on working capital. I think you'll get a little fluctuation, because some of inventory and we discussed Brexit a little earlier, maybe being a little higher and then coming down, but then that I probably wouldn't put too much on that. I think the bigger pressure point is on CapEx related to daily manufacturing lines. At the end of day, I think that's the key point. We have a number of new lines coming in right now that we've ordered. I feel good about all the capacity expansion that we're doing. If we keep going like we're going, we might have to order some additional lines and you're going to have more payments. So I definitely think we're going to be over $200 million of CapEx this year. I mean, we're ordering in anticipation of continued strong growth. So I think you'll see that and that'll be the kind of one thing that holds back CapEx a little bit, otherwise we'd probably get a pretty good pop. This operating cash flow is going to show a nice increase. So I think we'll see how that plays out during the year. I'd say, yes, it feel pretty good about at least being able to put up another strong year approaching 500. And we'll see, I mean as I said earlier on something else, I kind of would like to see all this key account business continue to grow and our revenues continue to grow strong as it is which would mean maybe order in a couple of more lines which should be okay.

Okay. Thanks for all that detail.

Yep.

Thank you. And our next question will come from Anthony Petrone with Jefferies. Your line is now open.

Thanks for taking my question. Just a few on margins and I'll just throw them out there. Maybe can you give us a sense Al of just margins from key accounts, is that a headwind or is that a neutral factor? And then maybe a little bit of color on the British pound, obviously that's down, I'm just wondering when should we expect that benefit to roll through the P&L? And then lastly just on sales force expansion, obviously that was a build in 2018, are those done and is that a neutral factor for next year? Thanks.

Sure. I'll take those backwards. Sales force expansion we are still continuing to add to our sales force, but more in the normal course of business right now adding sales people as we grow make sense, see that in Asia-Pac is a good example. But I wouldn't pull that out as we had in the past and say oh that's a big kind of all this expense or something associated with this year because we're in pretty good shape with the sales force expansion that we've done over the last couple years, so I’d kind of say hey that's normal. With respect to the pound, we'll see what's going to happen with Brexit and that pound can move around a lot obviously. That rolls through our P&L six months later, we still manufacture a decent part of our product in the UK and then those cost could capitalize where that currency rate is and flows through our P&L roughly six months later. So there is a delay in terms of the pound. And if you're trying to model our currency rate, you get the obvious, immediate impact on currency and revenues and operating expenses with the lag in the pound, which I know creates problems now and then when trying to model individual quarters, but that's the easiest way to think about it is a six month lag. With respect to key account margins, I'm going to answer that from an operating margin perspective, which is the way that we have a tendency to look at our business and that we try to make it a win-win. We try to make it a win for our partners who we're working with, who are going to drive revenues and drive profitability and we try to do the same for us. So I'm not going to really get into the specifics around any individual or even key accounts in general, but we've obviously built all that into our guidance and we do expect even in the face of currency operating margins to expand a little bit this year over last year.

Thank you.

Thank you. And our next question will come from the line of Chris Pasquale with Guggenheim Securities. Your line is now open.

Hi, this is Chris Hartstein in for Chris. I have another question on the surgical side of the business, over a year-ago when you announced the PARAGARD deal, you gave accretion guidance of $0.70 to $0.75. If I remember correctly this guidance assumed a 4% interest rate and a 35% U.S. tax rate, both of which look a bit conservative year later. Could you please provide where the accretion shook out for the full-year there? Thanks. I have a follow-up.

Yes, sure. I'm not going to give you specific number on that because honestly I haven't calculated it. I will agree with you that from the time we did that deal, when you look at the tax rate and you look at the success of the business, the revenues, because obviously we gave some initial revenues guidance versus where we came in that is turned out to be a very nice deal and the returns on that are much stronger than we had anticipated they were going to be when they did the deal. Having said that, let's not forget that we did add a lot of sales people, I mean initially we were looking at our existing sales force and medical device products, selling that product we've split that now where we have kind of the two sales forces, one selling medical device products, one selling PARAGARD and we've done a lot of advertising and promotional work there in order to drive success in fiscal 2019. So at some point I believe those sales groups have come back together, maybe that's a couple years out, but we'll pull that together so we're selling as a more one unified front, but I'd say yes a number of more pluses than anything, but a number of investments in that business also.

Okay, great. That's a nice lead in for my next question. In that same vein it's now been three straight quarters or above trend growth in the PARAGARD business, given the investments you've been making there, and a year after there is a news in Journal of Medical study linking hormonal contraceptives to a higher risk breast cancer. While you still view this as a mid single-digit grower as we look ahead into fiscal 2019, especially considering the easy accounting related comp in 1Q? Thanks.

Yes. I'm optimistic about PARAGARD growth and as a matter of fact, we've made some good advancements there. I mean we have a new website if you go to paragard.com, which is much better I think than the old one and we're doing some really targeted marketing activity. The marketing team there has done a really, really nice job, I'm impressed with everything coming out of that group. And it builds on you're right, the New England Journal of Medicine publication and so forth, which is a positive for that product as a non-hormonal IUD option. I would say all that stuff positive, all good, feel good about the momentum, feel good about the opportunity for a multi-year growth strategy. I always try to temper that with this is a product that's been in the market for 30 years. So you are seeing IUDs grow, you're seeing our product actually obviously show better growth in the marketplace there and feel good about it. But it is a product that has been around a long time. So I definitely do not want to get out in front of ourselves there. I'm hoping that we can continue to put up some good numbers there though.

Thank you. And our next question will come from the line of Steve Willoughby with Cleveland Research. Your line is now open.

Hey, good evening. This is actually Rob Cottrell on for Steve. Thanks for squeezing me in here. Two quick questions around longer-term outlook; one, with the trade-up to dailies, can that frequent replacement other line continue to grow in that 2% range over the long-term?

Yes, that's a good question. When you look at that reusable market, it is growing a little bit, it grew just a little bit this quarter, we're obviously growing a little bit faster. I believe that where we're probably settling in right now when you look at the reusable market meeting all the two-week in the monthly market that there is some growth there from products like Biofinity Energys and some of the Torics and some of the Multifocals out there and there are some growth opportunities as you move into more emerging markets, because of the cost point of those. So I do think that we're going to be flat to up slightly there. I think that's probably the way to look at it long-term or at least for many years in front of us. All the growth – real growth will be coming from dailies and especially silicone hydrogels to dailies. But I think the reusable market flat to up a little bit probably is where it holds.

Great. Thanks Al. And then lastly, just you mentioned myopia control leading to increased R&D activities. Have you put any numbers around the opportunity for that either near-term or longer-term?

We have not yet. Stay tuned on that that's something we're excited about. We're definitely excited about that. We're excited about the clinical work we've done. We're excited about the reception that we're seeing from the market, some of our key accounts who are more strategic and kind of looking ahead a little bit more are analyzing that to see how they can properly roll that out. We're trying to work with them on that. So that is an area we're excited about and intrigued about, but it's still early stage. So no, we have not put numbers on that but stay tuned.

Thanks.

Thank you. And our next question will come from the line of Steven Lichtman with Oppenheimer. Your line is now open.

Thank you. Hi guys. Just going back to Asia-Pac, you talked about the strength there earlier in your prepared remarks, Al, I think you specifically talked about a jump in Clariti in Asia-Pac. Is there something in particular that's opened up in the Asia-Pac market specifically for Clariti or nothing really to call out?

Yes, I'm not sure I highlighted anything in particular necessarily other than the region has a little bit lower market share and the size of it is a little bit lower. When you look at Clariti, it's doing well there. We're rolling out in a number of countries there and I'm not sure I'd highlight necessarily anything specific other than, yes, product is doing well on it is actually accelerated off the prior quarter.

Got it. And then Al, as you look at your outlook for the market, is your underlying assumption on price relatively flat? I mean, what's your overall view on price as you think about price increases versus rebates, et cetera?

Yes. Right now it's flat, you’re right. If you look at core pricing maybe going up a little bit, but the rebate activity creating an environment where net it's flat. That's kind of how we're looking at it right now. I probably say this every call, but I'd love to see pricing start to move up. That could be some easy growth for us. We are not forecasting or assuming that right now.

Got it. Thanks Al. End of Q&A

Thank you. And there are no further questions in the queue. So now, it's my pleasure to hand the conference back over to Al White, President and CEO for closing comments or remarks.

Yes. Great. Thank you everyone, I appreciate your time. And we're going to continue to plug away. We're going to continue to work hard. Everything we talked to you guys about, we're going to continue to work hard and continue on and look forward to catching up in roughly 90 days again on our next quarter and hopefully delivering a positive message. So with that we'll sign off and speak with everyone later. Thank you.

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude our program and we may all disconnect. Everybody, have a wonderful day.