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

Good afternoon, and welcome to The Cooper Companies' Second Quarter 2016 Earnings Conference Call. I'm Kim Duncan, Vice President of Investor Relations; and giving prepared remarks on today’s call are Bob Weiss, Chief Executive Officer; and Greg Matz, Chief Financial Officer. Before we get started, I'd like to remind you that this conference call contains forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995 including all revenue and earnings per share guidance and other statements regarding anticipated results of operations, market or regulatory conditions and integration of any acquisitions or their failure to achieve anticipated benefits. Forward-looking statements depend on assumptions, data or methods that may be incorrect or imprecise and are subject to risks and uncertainties. Events that could cause our actual results and future actions of the company to differ materially from those described in forward-looking statements are set forth under the caption Forward-Looking Statements in today's earnings release and are described in our SEC filings including the Business section of Cooper's Annual Report on Form 10-K. These are publicly available and on request from the company's Investor Relations department. Now, before I turn the call over to Bob, let me comment on the agenda for the call. Bob will begin by providing highlights on the quarter, followed by Greg who will then discuss second quarter financial results. We will keep the formal presentation to roughly 30 minutes, then open the call for questions. We expect the call to last approximately one hour. We request that anyone asking questions please limit yourself to one question. Should you have any additional questions, please call our investor line at 925-460-3663 or email ir@cooperco.com. As a reminder, this call is being webcast and a copy of the earnings release is available through the Investor Relations section of The Cooper Companies' website. With that, I'll turn the call over to Bob for his opening remarks.

Thank you, Kim, and good afternoon, everyone. Welcome to the second quarter 2016 conference call. Let me start by highlighting three key areas. First, I'm pleased to report strong financial results for our fiscal second quarter. On a consolidated basis, we reported $484 million in revenue and non-GAAP earnings per share of $2.05. Second, CooperVision posted 9% revenue growth on both a constant currency and as-reported basis and strong results in all key areas of the business. Single use silicone hydrogel lenses grew 52% while two week and monthly silicone hydrogel lenses grew a combined 14% both in constant currency. Third, CooperSurgical had another strong quarter posting revenue growth of 23% and pro forma growth of 6%. We also closed several strategic acquisitions since our last earnings calls. Moving on to the details, CooperVision reported second quarter revenues of $391 million, up 9%. This was our strongest quarter, growth quarter since 2014 and really shows the strength of our product portfolio. Regarding revenue by geography, the Americas grew 9% in constant currency showing a nice rebound from last quarter. Strength was seen in multiple categories led by silicone hydrogel products. Our enhanced Clariti lens has been extremely well received and MyDay had another strong quarter. Our toric and multifocals also posted strong growth driven by the Biofinity family. EMEA had another strong quarter and sales grew 5% in constant currency. Growth was driven by our family of silicone hydrogel products Biofinity, Clariti, MyDay and Avaira. We also launched Avaira, Vitality in EMEA during the quarter and it is being well received. Avaira Vitality is our new two week silicone hydrogel lens which is an enhanced replacement for the original Avaira lens. It was developed using improved manufacturing processes resulting in a higher quality product at a lower cost per unit.…

Thanks, Bob, and good afternoon everyone. I will provide an overall summary of our performance including a review of the market and our revenue picture. I am going to focus primarily on our non-GAAP results for the quarter. For the reconciliation to GAAP numbers please refer to our earnings release. Looking at gross margins, in Q2 the non-GAAP gross margin was 63.2% compared to 63.4% in the prior year. Although CooperVision had positives from currency and strong Biofinity sales, it’s margin was lower than expected. The primary items driving this were a negative margin impact from stronger Asia Pac sales where we have higher one day sales and charges associated with idle equipment and legacy hydrogel inventory. Regarding these last two items, let me cover them separately. We have made a lot of progress improving our manufacturing operations including some very recent successes. For competitive reasons I won't get into specifics, but our production per line has increased materially resulting in lower cost per unit and a lesser need for future CapEx. This has resulted in idling some equipment which hurt us in Q2 and will also negatively impact Q3 and Q4. We anticipate this being a short-term negative as we will grow into this production over time. The other item is our legacy hydrogel inventory where we wrote off more than we planned as our silicone hydrogel sales were very strong and we're forecasting that to continue. This hurts us in Q2 and we expect it will negatively impact Q3 and Q4. To be clear, we're not excluding these items from earnings, so they are negatively impacting our non-GAAP earnings per share. CooperVision on a non-GAAP basis reported gross margin of 62.8% versus 63.3% in Q2 of last year. The factors which impacted margin were the items I just…

Operator, we're ready to take some questions.

[Operator Instructions] Our first question comes from the line of Matthew O'Brien with Piper Jaffray. Your line is now open.

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

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

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

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

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

We can.

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

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

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

Yes.

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

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

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

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

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

Hi, can you hear me, okay?

We can.

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

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

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

Hey, great, can you hear me okay?

We can, Steve.

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

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

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

Absolutely.

Okay. And --.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Sure, you want to ask the second?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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