Bradley Joseph - VP of Global IR and Internal Communications Laurie Brlas - Chairman Uwe Roehrhoff - President and CEO Ron Winowiecki - CFO.

Louise Chen - Cantor Fitzgerald Securities Patrick Trucchio - Berenberg Capital Markets Randall Stanicky - RBC Capital Markets Jamilu Rubin - Goldman Sachs Katie Kerfoot - Wells Fargo Securities Marc Goodman - UBS Securities Gregg Gilbert - Deutsche Bank Securities, Inc. Ami Fadia - Leerink Partners LLC Douglas Tsao - Barclays Capital, Inc.

Annabel Samimy - Stifel, Nicolaus & Co. Elliot Wilbur - Raymond James & Associates, Inc David Steinberg - Jefferies LLC Timothy Chiang - BTIG.

Good morning. My name is Justin, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Perrigo Fourth Quarter and Calendar Year 2017 Results Conference Call. [Operator Instructions] Thank you. It is now my pleasure to turn the call over to our host, Mr.

Brad Joseph, VP of Global Investor Relation and Internal Communications. You may begin your conference..

Thank you. Good morning and welcome everyone to Perrigo's fourth quarter and calendar year 2017 earnings conference call. I hope you all had a chance to review the press release we issued last night. A copy of the release is available on our Web site, as is the slide presentation for this call.

Joining today's call are Perrigo Chairman, Laurie Brlas; Perrigo President and CEO, Uwe Roehrhoff; and Perrigo's CFO, Ron Winowiecki. I would like to remind everyone that during this call participants will make forward-looking statements.

Please refer to the important information for investors and shareholders and Safe Harbor language regarding these statements in our press release issued last night. In addition, in the appendix for today's presentation, we have provided reconciliations for all non-GAAP financial measures presented. Turning to the agenda on Slide 3.

First, Laurie will discuss the CEO search process conducted by the Board of Directors and then introduce Uwe. Uwe will then build on this introduction with insights into his leadership philosophy and how Perrigo is well positioned in the healthcare and consumer industry.

Ron will then discuss our calendar year 2017 performance metrics, before diving into the fourth quarter results. He will then highlight the strength of our balance sheet and discuss our 2018 guidance. Finally, Uwe will close out the call with his 2018 priorities after which we will open the line for questions.

Before I turn the call over to Laurie, I’d like to personally congratulate Uwe and Ron on their appointments. I look forward to working alongside both of you in your new and merited capacities. Now I’d like to turn the call over to Laurie. Now I'd like to turn the call over to Laurie..

Thank you, Brad. Good morning, everyone, and thanks so much for joining us today. I’d like to take a few moments before we get started, discuss the Board's CEO search, selection of Uwe and the CEO transition process that is well underway.

When John Hendrickson announced his decision to step down as CEO last June, the Board launched a thorough search process that included the engagement of leading executive search firms to identify the most appropriate and qualified CEO candidate.

As part of our search criteria, the Board was looking for a very strategic leader with a proven track record of operational excellence, experience in managing a complex global supply chain, and a focus on customer service.

In addition, the Board was searching for a leader who would fit well within Perrigo culture and it would build on the open and transparent leadership approach established by John. I'm pleased to say that Uwe checked all of these boxes.

The Board was particularly, John to his ability to drive growth and operational excellence which resulted in a total shareholder return of approximately 225% during his tenure as CEO at Gerresheimer. Uwe is an experienced customer centric executive focused on value creation.

During his 25 years at Gerresheimer, and especially the seven years he was CEO, he demonstrated his ability to manage a large complex global manufacturing and supply chain operation. Uwe was instrumental in driving the company's strategic focus, transforming and reshaping its corporate portfolio and delivering on operational objective.

This strategic focus was critical to the selection. In addition, he managed global relationship with hundreds of customers including the top 10 global pharmaceutical companies. Appointing Uwe emphasizes the Board's confidence in the Perrigo management team and business unit leaders.

The depth and breadth of their business acumen allow the Board to focus on selecting a strategic reminded CEO who brings experience, complementary to our healthcare and consumer focus. It was a great addition to the team and he has the Board's full support as he designs his strategic vision for the company.

Uwe has already hit the ground running, and we’re quite excited for the next chapter at Perrigo. Finally on behalf of the entire Boar, management team and employees, I want to once again thank John Hendrickson for his nearly 30-yers of commitment to Perrigo.

John was appointed CEO during a challenging period in our history and its leadership, operational focus and strategic company have set the stage for Uwe to leave the company into its next evolution. And now I will turn the call over to Uwe..

Thank you, Laurie, for those very kind words. Good morning, everyone. Before discussing my excitement about Perrigo, I'd like to first address the decision to reschedule our full 2017 earnings release and conference call. Let me first apologize for the delay. We made this decision due to certain text review procedures that were not fully completed.

We simply underestimated the amount of work and time needed to complete these procedures and we’re committed to doing all we need to do to improve and correct our processes.

Now, please turn your attention to Slide 7, where I want to discuss my excitement for the opportunity to serve as CEO of such a great company with a legacy of providing affordable healthcare solution. Perrigo is well positioned in the healthcare and consumer industry.

I look forward to working with experienced management team and the Board of Directors who leverage the company's unique asset base to deliver value for shareholders. As a trusted partner for 130 years, Perrigo has made an impressive reputation within the industry to deliver affordable healthcare solutions for patient, consumer, and family.

Perrigo's mission to provide quality affordable healthcare products, provides a true benefit to society in an environment with an increasing focus on rising healthcare cost. After approximately six weeks as CEO, I want to share with you my first impression and why I’m excited about our business. First, delivering results.

Perrigo has a market leading business unit -- market leading businesses that deliver results in dynamic end markets. Giving our strong performance in 2017, we are entering 2018 from a position of trend across our businesses. The CHC Americas business model is unique. We provide turnkey solutions to world's store brand share.

We are driving new product investments, and are focused on channel expansion opportunity, including ecommerce, and customer service excellence, all of which make Perrigo the store brand partner of choice.

In CHC International, we meet the healthcare needs of consumers by levering our regional branded OTC growth strategies and over 200,000 pharmacy relationships. The Rx business invests in its diversified extended topical strategy and leverages its differentiated product development process.

This business focuses on the categories that are best suited to deliver value for patients and healthcare system. Second, supply chain excellence. Perrigo is a leader in operating an efficient and complex global supply chain that is challenging to replicate. Third, commitment to quality and customer service.

Delivering on customer's high expectations is one of my top priorities. And I’m encouraged by the Perrigo's organization's commitment to quality and customer service. Fourth, dedication to compliance and business integrity. Perrigo has an outstanding reputation and demonstrates a high-level of integrity in all of its business practices.

And fifth, passionate employee. I’ve been energized by the dedication of the Perrigo team. This is an organization with passionate employees and a positive culture that strives to meet the high demand of customer.

My management philosophy is a one team approach, which is crucial in driving meaningful and timely solutions and I’m impressed with -- by the high caliber of talent across the entire team, including John Hendrickson. I’d like to thank John for his guidance and steady leadership during this ongoing transition period.

His focus on the company's core businesses and operational excellence have provided us a greater foundation to drive value for customers and to many stakeholder that rely on us to deliver quality affordable healthcare products. Finally, I’d like to congratulate the Perrigo team on an excellent finish to 2017 and Ron on his appointment as CFO.

Congratulations. I will now turn the call over to Ron..

first, continue to operational execution across all of our segments and strong performance of our new product pipeline, representing an increase of approximately $0.29 per share as compared to 2017. Included in this increase is the expected fourth quarter launch of generic ProAir with an estimated EPS contribution of approximately $0.09 per share.

Second, the completion of our 2017 capital structure actions result in a benefit of approximately $0.27 per share to our 2018 guidance. These combined factors equates to a 2018 adjusted EPS range of $5.05 to $5.45, our growth were approximately 12% from our 2017 pro forma adjusted EPS results at the midpoint.

Now let's pull this altogether in Slide 18. We expect consolidated net sales of $5 billion to $5.1 billion or approximately 2.5% to 3% growth at the midpoint on an organic constant currency basis.

Included in this net sales guidance are expected new product launches of greater than $300 million, which are heavily weighted to the fourth quarter due to the two Rx new product launches I discussed earlier. Adjusted operating income is expected to be in the range of $1.03 billion to $1.09 billion.

This growth in adjusted operating income represents greater than 2x operating leverage to net sales growth on an organic constant currency basis. Regarding growth investments, consolidated R&D investments as a percent of net sales are expected to be approximately 4%.

Taking the two -- fourth quarter Rx new product launches into account, we are expecting approximately 30% of our adjusted operating income to be realized in the fourth quarter of 2018. Operating income is expected to be moderately improved on a sequential basis from Q1 to Q3 due to new product launches.

Our guidance for operational cash flow is to achieve approximately $770 million in 2018. Included in this guidance is working capital to support our new product launch forecast notably the expected fourth quarter launch of generic ProAir.

Before I wrap up, I’d like to point out as part of our commitment to transparency and based on feedback from the investment community, we are now including in the appendix of our quarterly earnings presentation a breakout of segment operating expenses, including advertising and promotional investments in our CHC International business and consolidated depreciation to more easily calculate EBITDA.

You will also see in our appendix a net sales bridge similar to the EPS bridge we discussed earlier. These two charts should provide a framework for modeling 2018 growth versus 2017. In summary, as a testament to the leadership and culture at Perrigo, we executed on our business plan as illustrated by our 2017 results.

I would like to congratulate the team on a great year in which we took a number of actions to set the foundation for delivering on our 2018 operating plan. I will now turn the call back to Uwe..

Thanks, Ron. In closing on Slide 20, I would like to outline our top priorities for the year ahead. Number one, deliver on our plan. We are well positioned to capitalize on our durable platform and the healthcare trends to deliver on our commitment across all of our businesses in challenging end markets. Two, maintain focus on operational execution.

Continue to sharpen operational execution across our businesses with the focus on quality and customer service, supply chain productivity, our ecommerce strategy, and new product launches. Three, drive growth.

Our commitment to future growth is evidenced by the fact that our 2018 guidance assumes an approximate 12% to 15% increase in growth investments to drive long-term organic growth across our businesses. And four, develop a value creation roadmap.

Over the next six months, I will continue to work with management and the Board to develop our long-term strategic vision and capital allocation strategy, after which we will discuss the outcome with the investment community. In closing, Perrigo occupies unique space within the health care and consumer industry.

We provide savings to consumers and families at a critical time as healthcare costs continue to rise. Perrigo's business model meets the needs of consumers and families that want healthcare options that are high quality, effective, and yet affordable. I am energized by my colleagues and the entire Board and management team.

I’m excited by Perrigo's progress over the past year and our opportunities ahead. I look forward to getting to know all of you in the coming weeks and months. I'll now turn the call back over to Brad..

Thanks, Uwe. Operator, we would now like to open the call for questions with Uwe, Ron, and me, and ask that everyone please limit yourself to one question, so we can get everybody -- get every question answered..

[Operator Instructions] Your first question comes from the line of Louise Chen from Cantor. Your line is open. Please ask your questions..

Hi. Thanks for taking my question. So your cash flow is going to be improving meaningfully this year. Could you give us more color on your capital allocation strategy? And then how much of your expected free cash flow is assumed to be deployed in your 2018 guidance? Thanks..

Yes. So let me start, Louise. Thanks for the question. So from an operating cash flow standpoint, listen, we saw very strong operating cash flow in '17 on a reported basis just sort of $70 [ph] million, a 100% conversion to net income, $833 million when you take out some of the neutral items and to your point, $775 million guidance in 2018.

If you look at our capital location policy and process, this is based on two fundamental tenants, right. It's total shareholder returns and it's also an investment grade framework. And you saw act that way in 2017 and you look in the 2018 we don’t have any debt payments material due in for the next three years. We talked about that.

So debt pay down is not a priority for the company given the -- particularly the low interest profile that we have at this point, a nice maturity curve. You know, listen, if the market continues disruption relative to the equity, there's a lot of volatility at this time. We look from time to time, it is not a core part of our policy at this point.

But it will be something we look at if there's something in the market that make sense to us. And you saw our dividend increasing, we’re excited to continue providing a return to shareholders relative to dividends, compounding 15% growth rate. We know the yield is low, we understand that.

But having said that, having a compounded growth rate of 15% shows our confidence in how we’re moving forward to our business model. I will let Uwe speak, and Uwe is engaged with the process on the strategic review and we can talk a little bit about that and how that ultimately plays out going forward. So ….

Yes, thanks, Ron. I think decisions regarding our capital allocation as Ron said we will be focused on shareholder value creation within the context of our commitment to an investment grade profile.

Over the next six months, as I said, we will work altogether management and the Board to develop our long-term strategy and our capital allocation strategy for Perrigo. And then we will discuss the outcome with all of you..

Great. Thank you. Next question please..

Your next question comes from the line of Patrick Trucchio from Berenberg Capital Markets. Your line is open. Please ask your question..

Thanks. Good morning. My questions are on CHCA business. At the CAGNY conference last week, several of the branded OTC players noted that disconnect right now between sell-in and sell-through is dampening organic growth.

And then when we look at Slide 22 in your presentation, we see store brand growth of 3%, your guidance for 2018 at the midpoint calls for about 1% growth. So I’m wondering if this is because of the mismatch between sell-in and sell-through now.

And then what inventory levels look like at retail? And related to this to get to that high-end scenario the plus 3% or so scenario, would this dynamic in sell-in and sell-through have to improve, and what might lead to that scenario? And then, if you could, tell us what might lead to the low-end scenario in your guidance as well? Thanks very much..

That’s a very good five part one question. I like how you phrase it, it's outstanding by the way. So well done. So, listen, if you look at Consumer Healthcare Americas, the segment grew 1.4% last year. And I think the key part of that chart you referenced by the way, is please note store brand is gaining share.

So if you look at what's taking place relative to the brand category, store brand gain share last year, and again as you always know that chart is based on MULO data. There is R factor in your shipments in that 52-week, you’re always going to have some variation, we know that. And we’ve explained that before.

When you think about, I will call it the corridor, I think that’s the way you’ve to ask the question. It's a fair way to think about it. As I think about the corridor, how our asset is positioned as we continue to grow above market. On the low end of the corridor, inventories are abating. We are not seeing it as a material item.

Obviously, when you have an effect like there were some store closings of one of the core customers, listen you got some normalization of inventories. That’s just a natural part of the model as industries play through that rationalization process. So, yes, you have some of that effect. I’m not going to call it a material effect at this point.

I do want to remind you, you talk about the 1% growth into next year, and again that’s actually true. If we look at OTC nutrition, a formula business is growing much faster than that and we are being offset by this loss in the pet help business. I mean that if you take a look at the core, we have market-leading positions.

The growth in those market-leading positions, it is higher than 1% and the reason that has diluted back to that level is because of the loss of the supplier arrangement with the pet help business. So I will say within that core space we're sitting in that middle of that corridor and that’s why I like to answer that question.

I don’t want to worry too much about the lower upper end. If you look at the core part of our segments, where we’ve market-leading positions we're seeing healthy growth going into '18 in a touch consumer market..

Thanks for the question..

Your next question comes from the line of Randall Stanicky from RBC Capital Markets. Your line is open. Please ask your question..

Great. Thanks, guys.

I just wanted to follow-up, is 2% to 4% the right way to think about the U.S consumer business over time or should we be thinking about it as something on top of the overall OTC market? Then the real question I had was, as we think about the shift to online or to Amazon, does that shift help or hurt that CHCA growth rate over time? Thanks..

Again, we really got a three part question in one. The -- which is good by the way. I appreciate the question. So first of all, listen, we talk about relative to market. So 2% to 4% is a good threshold relative to our normalized market.

Now we're not in the normalized market, I mean, you could dispatch that -- we see is that the markets like .5% to 1% growth and we’re growing 1.4%. So we are indexed above market, Randall, and we think our business is very well-positioned to continue moving forward with that market structure.

So I can guide you at 2%, 3% or 4% within that quarter, but what I can't say is our business is positioned, if you look at store brands gaining share, you look at -- we’re the partner of choice within that space that we continue to grow above market. So think it relative to market to be directly to your question. So ecommerce is an interesting one.

Listen, if you look at our business model, we provide end-to-end solutions, right. We talk a lot about that. We provide -- there is a broader scale of products in the U.S marketplace, bar none, number one. Number two, we provide turnkey solutions and it's a core competency.

A lot of persons don’t understand relative to our merchandising capabilities, our regulatory capabilities. We provide those turnkey solutions to our customers. In addition, we manage within the supply chain, a complex supply-chain environment.

So what I say is we’re the partner of choice, so as the channels developed e-commerce being a channel, we’re excited of helping our business partners, our retail partners develop both the retail competencies and e-commerce competencies to be successful. In the intermediate period, short-term, listen it's probably an arbitrage.

I mean, that’s kind of -- you think it through and you see the stats, we all see them, ecommerce is about 1% to 2%, I think of the space today. You’re probably going to get an arbitration where consumer probably would have gone to the store or maybe they’re buying on Walmarts, jet side at this point, that’s an arbitrage over time.

Where we are excited is that you provide the merchandising to the customer. So now the consumer has to walk up to the shelf, look at the branded product, look at Perrigo's product to make the consumer choice on their own kind of own diligence. In the future with e-commerce, you get digital market, you can put in their hands.

You can sell them the value store brand, the efficacy of the product, the quality of the product and over time we do see that’s creating share, but understand that’s over time. That’s not an immediate effect. So, hopefully, I answered your three part question, Randall..

Yup..

Great. Thanks, Ron..

Your next question comes from the line of Jami Rubin from Goldman Sachs. Your line is open. Please ask your question..

Thank you. Just staying along the lines of ecommerce, can you today describe your Amazon partnership? I know that it's about to expand, but what -- is ecommerce as you said, Ron, is a very small proportion of the overall business.

You said 1% to 2%, but where do you expect that to go over the next five years? And I think more importantly what implications will that have for your margins? It's hard to imagine that e-commerce -- is that growth is going to be good for your margins that maybe you can help to describe that? And then also you talked about pricing pressure in certain OTC categories.

Can you describe what that pricing pressure is and is this something that we should just model as a going forward headwind or is this more temporary? Thanks..

So, listen, again a couple part question. Thank you, Jamie. I will let Uwe start on maybe the Amazon component. When he gets down to that, I think you asked about kind of margin profile and pricing pressures, so I can give some color, that’s fair..

Well, thank you, Ron. Let me start with that Perrigo has a long standing history of meeting consumers as a healthcare point of purchase and ecommerce is just one element of that. And we obviously work with all of our retail partners to maximize the value of their store brand offerings, online and in the store.

So this makes us the partner of choice on the OTC healthcare space for both in store and ecommerce solutions. And from a margin profile, it is fair to say, that this is relatively consistent across all of our customers..

Yes, just to echo what Uwe just said, right. If you walk into the pricing pressures, listen, the pressures are predominantly into, I will call legacy categories. So after the long technologies, particularly, in some of the tablet liquid space. Jami, it's the way to think about it. That’s where you have margin pressure.

If you look at some of the great categories at Perrigo, that’s being building out over time, gastrointestinal and nutrition, you have less pressure, but there's pressure in every category. To be clear, this is a multisource competitive marketplace. But if you say where do you start seeing, I will call it bid activity.

It will be in some of the longer commodity type of things, some of the tablets and some of the liquids technologies..

So just to be clear as e-commerce becomes a bigger component of your overall revenue, you would not expect that to have a depressive effect on your margins, presumably because of increased volume, is that the right way to look at it?.

Yes, listen, we don’t think winners or losers, Jamie. It's the way to think about it. So we look at our margin profile cost of all of our customers. Their pricing strategies are their strategies. That’s how they position products in their space, whoever maybe, but our margin profile is consistent across our customer base.

So at this point we’re not seeing any degradation of margins relative to channel changes..

All right. Thank you..

Great. Thanks, Jamie. I appreciate it..

Your next question comes from the line of David Maris. Your line is open. Please ask your question..

Hi. This is Katie Kerfoot on for David. I’m just wondering, because when we heard earlier about your priorities for capital allocation going forward, expanding the business inorganically wasn't a priority.

And so is it fair for us to -- that you mentioned at least and is it fair for us to think that why you’re doing that review with the Board, you might be quiet on the M&A side for at least the first half of this year or throughout this year, as you kind of level those priorities? Thanks..

Yes, thanks for the question. I think, number one, is the -- if it came across that organic growth is not a priority, then I need to correct that, that is obviously a top priority ….

No sir, I meant inorganic. I meant acquisitions..

Yes, obviously, when you and we will go through our value creation roadmap, exercise and that will include holistic approach looking at everything. Looking at opportunities to optimize the business, looking at opportunities to drive growth, but also look at opportunities for inorganic subjects in our portfolio.

And from that perspective, it is fair to say that over the next six months we need to conclude that exercise and then we will announce what we’re going to do on all of those fronts..

Great. Thank you, Katie. Next question please..

Your next question comes from the line of Marc Goodman. Your line is open. Please ask your question..

Yes. First, can you give us a sense of flu season and how much it impacted sales in the quarter, and how we should expect the first quarter of this year to have an impact? And then you mentioned an animal health, there was a product that you were giving back. Can you just give us a sense of how big sales growth for that product? Thanks..

Yes, thanks for the questions, Marc. I will take those to start. So flu season is -- why I’d like to step back and think about it is, first, what is the relative effect of cough/cold kind of products within the portfolio. CHC Americas as you know have done a fantastic job of building out, I’d call it categories that aren't dependent upon "the weather".

So gastrointestinal products, smoking cessation categories, infant nutrition is an example, you really kind of zero in cough/cold at this point. You're talking, 20 percentage of the segment revenues are in that category and frankly if I call, just a strip of pure cough/cold we are talking like 10%.

I mean, to be clear, it’s relatively small on that category. Now having said that, the next thing you look at is shipping patterns in Q4, not a meaningful effect. Really into Q4, our shipping patterns are selling into the season, little tick, but not much, we had a small uptick, but those are very small. If we didn’t mention on the call.

Looking at Q1, we’re seeing an uptick. We are seeing some pull through of sales given the season. However, having said that, built in our guidance, to be very clear, so that’s built into our model at this point. And then we think about the animal health business, I don’t want to disclose the exact sales number.

I think it's appropriate to go after any particular product for category. But suffice it to say, it is a point. You think pet health, it's interesting. Our PetArmor brand is the number one brand in the MULO space. So, it's disappointing, we had a partnership. It was going well. We were notified late December that they showed a different strategy, fine.

Its -- they made a choice, but suffice it to say, again, if our -- if we did not have the effect of this pet health change, our growth would have been, let's call it consistent with last year within the core categories at a minimum. So you can start kind of modeling out the construction of what the relative effect would have been..

Right..

Thanks, Marc..

Your next question comes from the line of Christopher Schott from JPMorgan. Your line is open. Please ask your question..

Good morning. This is Chris on for Chris. In the past you had discussions on the potential for an Rx divestiture. And you turned Perrigo into a pure consumer business.

Is this an area of opportunity? Do you feel get about the current mix of the portfolio?.

Well, first of all, I think I can say that we enter into 2018 from a position of trends, in all of our three businesses. And the next step we’re going to take is to go through our value creation exercise. And within this, we obviously will also challenge the positioning of each business segment and it's growth opportunities.

And we will come back to you again once we have concluded this and share our views on how we take the company forward for all of this year..

Great. Thanks, Chris. Next question please..

Your next question comes from the line of Gregg Gilbert from Deutsche Bank. Your line is open. Please ask your question..

Yes, thank you. Bigger picture question on the industry as large buyer consortia have formed in recent years to more efficiently buy generic drugs. Have you noticed any changes in how those customers or others have approached buying OTC products.

It was once thought that the buyers were very separate and that there was no synergy to a large generic company and a large OTC company coming together. But curious if that’s still the case or is there potential synergy between OTC and generic purchasing with these increasingly important customers? Thank you..

Yes, Gregg. Thanks for the question. I will take that to start. So, first of all, you could think about the business model, right. The business model is really delivering store brand solutions to our end customers.

So when you think about the consortiums and how they play out, remember what will have to play is, is also on Walmart who would want to give up their brand or target their brand or Costco their brand.

So they really say that these consortiums are going to have a big effect in the OTC space in our situation and a store brand situation, that would mean the business of the turnkey solutions, merchandising their brands themselves. They would want it to hand it to somebody else who is going to be a better buyer. So, listen, I don’t want to say, never.

You can never say that it's industry structure and condition. We monitor all emerging trends to be very clear. Jeff Needham and his team are very proactively looking at any types of dynamics in the marketplace or very proactive and addressing any structural things that take place.

But at this time, we’re not anticipating or seeing effects from those consortiums. Again, remember the business model, it's about the brands of the customers that we serve. We are not seeing any immediate effect at this point, Gregg to your question..

Thanks..

Thanks, Gregg..

Your next question comes from the line of Ami Fadia from Leerink. Your line is open. Please ask your question..

Hi, good morning. Could you give me a sense of where you’re with respect to some of the initiatives that were ongoing in consumer international with respect to winning products and how -- we saw a good expansion in the margins this year.

But it doesn't look like you were expecting similar expansion or at least some expansion next year? So wanted some color on where you were with that.

And then, how should we think about margins -- gross margins in the Rx business as you launch some of the larger products like ProAir at the end of the year? And lastly, just tax rate, how should we think about that into next year? Thanks..

All right. Very good. I will try to remember every question asked. The -- so thank you for the questions by the way. So let’s start with CH International. Listen, we are very pleased with the progress in this business. If you remember we’ve got a multi part strategy relative to building out the improved business model.

Number one, is we did some portfolio rationalization. We sold the unprofitables to European distribution businesses. Most importantly is we’re putting a focus brand strategy.

So at this point, Sharon, and his team have a very clear strategic lines relative to their brands and how they’re positioning those in the marketplace, that’s been a big shift for us in the last -- over the course of the last year.

Number two, is we’ve done with that focus brand strategy, a number of sales force rationalization, restructurings as well in certain markets. We’ve consolidated teams to make sure are most effective in the marketplace. Could there be more of that? We’re always looking at efficiency and effectiveness, so you could see more of those changes.

But again that has gone very well for the actions completed at this point. Married to that, the trifactor of that, kind of triangle of improvement is really disappointing A&P.

So really now matching the A&P architecture for how we promote and drive brands in the markets, relative to -- again, the focus brand strategy and the commercial activities that we have. Underpinning that, action has gone very well.

The in-sourcing activities, we talked about that we’re -- we acquired CH International, the branded business back in 2015. They were about 80% outsourced and our goal is to get down in that 50%-ish kind of range and I will call it we’re kind of half way there.

[Indiscernible] and his team have done a fantastic job working through the portfolio, what is the best insource and we’re about halfway through that journey. So it’s going very well from that standpoint. And again, you talked about margin expansion this year. We’ve been pretty clear. We want to reinvest back in this business.

That our goal that we’re very focused and targeted on is upper teens. Upper teens adjusted operating margin, so that is the directive that we’ve been playing towards, we always knew. You think about when you -- it goes through a margin expansion process, you obviously want to fund it with improvements and then fund the next frontier.

And that’s what we’ve done. We’ve made improvements this last year, so now we’re funding the next phase of this by improving our management infrastructure, putting in things like integrated sales and operating planning systems. You’re putting in some R&D systems and architectures that help the team from innovation standpoint.

Now that helps build out the growth profile going forward. So, yes, a pause. So you’re seeing is, give guidance in that 15%-ish kind of range on a year-over-year basis. But if you model out the business, you’re seeing margin expansion of the gross margin level, investing back at a -- from an infrastructure standpoint, margins in '18, in that 15% range.

And then again, growing back to those higher teens on a later point. I think you asked about our Rx. Listen, Rx margins, I’m going to say is, we feel very good about this business. We feel very good about the pipeline, you had a 42% margin last year consistent going into next year.

It's a business that continues to create great value for shareholders and we’re excited about the launch opportunities going into next year..

And then lastly, it was tax rate going into '18..

Oh, tax rate. My apology. I missed that one. Tax rate in '18. So listen our guidance is 20.5%. You saw that in the -- in our discussion. It's Tax Reform, it drives a lot of different elements under the different parts of the -- under the parts of the accounting system for tax. Again from a cash standpoint, we’re not seeing any effect.

That’s the important part of your discounted cash flow or you do perpetuity there in the company, there's no change in the cash tax rate from a 20.5% versus the 17%, it really relates to some of the accounting mechanisms that we have to work with relative to how the balance sheet thinks and operate, so therefore you get some noncash effects on the deferred tax accounting.

And that’s what’s driving the difference. On a long basis, I’m not giving any long guidance on tax rate. Our guidance at this point is 20.5% in '18..

Great. Thanks for the questions, Ami. Next please..

Your next question comes from the line of Douglas Tsao from Barclays. Your line is open. Please ask your question..

Hi. Good morning. Thanks for taking the questions. Just a couple. First, in terms of e-commerce, I mean, how -- it seems to be relatively small part of the business today.

How -- any perspectives on the timelines that you think it will become a much more material part of the business? And then just in terms of generic ProAir, just curious if you have an FDA action day and just any commentary on -- sort of the engagement level of the agency in terms of the review of your application.

Have you been getting information requests, sort of the status there? Thank you..

Yes, so first on your first piece of e-commerce. A small part of the business, it's a small part of the market. So again, it's -- yes, it is a small at Perrigo, but again when I gave the 1% to 2%, that’s not Perrigo, that’s market numbers relative to our space, right. So, listen, growth over time it is going to grow.

I don’t want to give any guidance to that effect, but we do know it’s going to be a growing market. Our teams are very focused on it from a capability standpoint. And again, we’re looking to empower our customers to continue store brand growth. I really don’t want to give any kind of longer term guidance.

And again in the short-term, it's probably an arbitrage. I mean, that’s probably the important way to think about it is you probably have a consumer buy in one channel versus the other. Over time, as expansion takes place that’s where the channel will grow more.

On ProAir, listen, so we’ve been pretty open that the FDA did issue a CRL late in the year in 2017, we responded to that CRL to the FDA, so we’ve given that response back to them. And everything we’re working at this point is consistent with our goal to launch in Q4. And you saw the $0.09 a share that we included in our numbers.

So we’re continuing to drive to that objective..

Thanks. Appreciate the question. Next question please..

Your next question comes from the line of Annabel Samimy from Stifel. Your line is open. Please ask your question..

Hi. Thanks for taking my question. So, I wanted to go back to the 2% to 4% long-term growth rate that you expect for the business. Obviously, underpinning that what is always some tailwinds such as further store brand market penetration or new product categories going from Rx to OTC. We already know that the price erosion component of it.

So can you talk about some of those broader tailwinds within that 2% to 4% growth rate and if those still stand going forward? Because we haven't really heard much about new product categories the way we used to. Thank you..

Yes. So, another way to ask the questions. So, I appreciate the dialogues. So if you take a look at again store brand penetration, store brand market share, this business as I call it three legs on the stool for growth, right.

So you have product line extension, so you had a channel innovation developments and the third is the Rx to OTC -- RX to OTC component that you had talked about. So think like product innovation, yes, we follow national brand in many instances, but we also do our own innovation.

We’ve colors and dosage forms and oral dosing -- dosing technology is an example of that, that extend the product line, that the national brands may not have. So that’s an area of growth that we don’t talk a lot about, but why you see us grow above market. If you take the Rx to OTC, there are -- we don’t have any, what I will call home runs.

There's no omeprazoles or Cetirizines built in the model, but we do have a series of singles and doubles built into our longer range thinking. So that, we continue to see Rx to OTC switches. In addition, what we're pleased by is the current tone of the FDA regarding looking at having more OTC, products in the marketplace is an exciting tone.

A small example, albeit it gives a tangible example of developments is the monograph modernization Act. It's under development, CHPA, Consumer Healthcare Products Association, which is currently Jeff Needham is the President, it's very active and continuing to drive and support regulatory change in the industry.

Are there other categories that can switch? Listen, we’ve talked about those, we’re continuing to monitor them, we don’t want to get over our skis and say they’re in the bottle on date X, that’s not fair to do that.

But listen, products like Xyzal within the allergy area, you're looking at Cialis potentially in erectile dysfunction, there's things where we see being worked on in those categories. But again we’re never going to give at this point, this product, this category at this time. That’s not appropriate at this point..

Thanks, Annabel..

Your next question comes from the line of Elliot Wilbur from Raymond James. Your line is open. Please ask your question..

Thanks. Good morning. Ron, just a follow-up to your commentary around the -- in the consumer healthcare business, you’ve alluded a couple of times to challenges in that business.

But maybe you can elaborate a little bit more detail in terms of what you guys see is the key challenges whether or not you think they’re transitory or structural? And [indiscernible] different from what we’re hearing from some of the branded companies. So just want to get a little bit more color on that? Thanks..

Yes, so I think the question to rephrase it back, it was a little broken up at first. So I’m going to try to rephrase it back is, in the healthcare OTC space, consumer space, there's some challenges on growth. Are they structural or they -- are they items that are just transitory in nature? I think it's the way you phrase the overall question.

Listen, a key part of it is always about innovation, right. So, key part of -- I would see from a branded standpoint is their focus on innovation, bringing new products to the pipeline, whether that’s structural or transitory, I don’t want to represent that.

I think that the brands themselves would have to respond to that nature of what’s taking place in the marketplace. Relative to the channel itself, there are some dynamics. Again, when you see retail stores closing, that’s transitory in our eyes. In other words, the consumers are going to pull through the product.

The demand for the product is still there in our eyes. We're seeing nothing changing from that standpoint, but when you get some of the structural changes that take place in an industry, you do see some dynamics that take place relative to sell-through, right.

You just have the inventory normalizations that take place and although an event may not be material, you get those kind of layering effects that drive some of those changes.

So I don’t want to represent structural or transitory, but again we’re not seeing anything in our business model which I think is a core important takeaway that we continue -- that we will still continue to grow by market. We are still confident in that structural benefits of our business models, the key way we think about it..

Thanks, Elliot..

Your next question comes from the line of David Steinberg from Jefferies. Your line is open. Please ask your question..

Yes, thanks very much. On capital allocation, I know you said you may take a hiatus, this is you develop your external strategy, but the last year you bought almost 3 million shares.

I’m just curious at the current valuation, do you feel like that will be centrally -- capital allocation at this point in time, given the valuation? And then, secondly, if for some reason ProAir is delayed this year, do you still think you can grow your generics business in 2018? Thanks..

Yes, you bet. Great question. Let me start with the latter. Yes, so I will just answer that with an affirmative we’ve been saying for some time our pipeline support gives us a growth in '18 without ProAir. So, the answer is yes. On the capital allocation, listen, I’m never going to represent on a call with you guys, good buy, bad buy.

I’m going to -- I will certainly say and I think Uwe would support that we will continue to look at market disruption will make sense at any point in time. And again, I don’t want to represent any particular price as good or bad. That’s not the way we think. We think long-term relative value.

We want to make sure everything we do is on a long-term basis, not in a short-term thought process..

And Just also to add on the Rx piece of ProAir, we’re talking top and bottom line ex ProAir..

Correct. Thank you, Brad. Yes, I agree. Yes, good call..

Great. Thanks, David. I appreciate it. Last question please..

Your next question comes from the line of Tim Chiang from BTIG. Your line is open. Please ask your question..

Hi. Thanks. Ron, could you just comment a little bit more on just the Rx pharma business? It looks like this is going to be your fastest growing segment in '18 and yet you’re still experiencing price erosion on the base products.

You commented about ProAir, but are there other products that you do expect to get approval across the year and is that what’s driving the growth for 2018 in that segment?.

Yes, so thanks for the question. The -- yes, it is a strong segment, performance going into next year we’re very pleased with the performance guidance we have out there. Now again, at the end of the day, it’s about new products. We don’t want to predisclose any new products. We will certainly, we will give you information updates as the year continues.

Remember, there's two new products in Q4, so there is one product, again, we’re -- based on an agreement, we cannot disclose and discuss, but there's another strong product that will launch in Q4. So in your modeling, please take that into effect in that architecture of how you model it out. So, again, great business, great pipeline.

And the other thing to indicate, I will call it a long-term basis, because that's probably how we like to think and talk about the business. We are increasing R&D next year as 7% of net sales. And that just shows you our confidence in that pipeline in the business.

So with that increase in R&D percent, we’re still circling roughly approximately 42% adjusted operating margin. So we feel very good about the business next year..

Great. Thanks, Tim..

And Ron, let me just one last follow-up.

I mean, would you say your generic business from a pricing or a price erosion perspective that sort of bottomed on the base business or is that sort of a term that’s not the right term for 2018?.

Yes, I don’t want to guide bottom, middle, or top, right. Our guidance is consistent. Listen, the way we think about this and we’ve been very consistent in our approach is what we’re seeing in the market we guide forward. So we’re not going to get ahead of our skis. We are looking at high single digits experience last year in '17.

We are modeling out that same kind of expectation to '18. We will keep you updated quarter-by-quarter as we see performance dynamics, but I don’t want to represent, again, bottom or top. That’s -- we want -- we don’t want to represent that at this point..

Great. Thanks, Tim..

Okay, great..

Thanks everybody. We appreciate your time and look forward to having more discussions here shortly. So thanks everyone. Have a good day..

This concludes today’s conference call. Thank you for participating. You may now disconnect..