Bradley Joseph - Perrigo Co. Plc Ron L. Winowiecki - Perrigo Co. Plc Murray S. Kessler - Perrigo Co. Plc.

David Maris - Wells Fargo Securities LLC Louise Chen - Cantor Fitzgerald Securities Patrick R. Trucchio - Berenberg Capital Markets LLC David R. Risinger - Morgan Stanley & Co. LLC Chris Z. Neyor - JPMorgan Securities LLC David Michael Steinberg - Jefferies LLC Timothy Chiang - BTIG LLC.

Good day, and welcome to the Perrigo Third Quarter 2018 Financial Results Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded.

I would now like to turn the conference over to Brad Joseph, Vice President of Global Investor Relations. Please go ahead..

Thank you. Good morning, everyone, welcome to Perrigo's third quarter 2018 earnings conference call. Hope you all had a chance to review the press release we issued earlier this morning. Copies of the release are available on our website, as is the slide presentation for this call.

Joining today's call are Murray Kessler, Perrigo's new President and CEO; and Ron Winowiecki, Perrigo's CFO. I'd like to remind everyone that during the call, participants may make certain forward-looking statement.

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

First, Ron will share our third quarter performance results and discuss each of the segments in detail. Ron will then review our balance sheet highlights and the company's updated 2018 guidance.

Our new President and CEO, Murray Kessler, with then share his initial thoughts on his first month at Perrigo and lay out his priorities before opening the call for questions. Now, I'd like to turn the call over to Ron..

A lower forecasted adjusted tax rate for the year due to the previously mentioned benefit realized in the third quarter, which is offset by slightly lower consumer net sales and adjusted operating income; a 100 basis point increase in the adjusted operating margin forecast for CHC International to 16.5%, driven by the margin enhancement actions in this segment, was offset by a similar decrease in the adjusted operating margin forecast for CHC Americas to 20%, primarily driven by the underperformance in the animal health business and operating inefficiencies.

Finally, as cash is king, we are currently forecasting annual adjusted operating cash flow to adjusted net income conversion to be approximately 95% to 100% at the midpoint of our adjusted EPS guidance.

In summary, we continue to drive growth in our Consumer businesses, and the team is moving forward with executing on our plan to create two separate, independent platforms to actualize strategic and operating focus and eliminate competing priorities, enhance the value creation potential of each of our respective businesses. Turning to slide 12.

I would like to offer a warm welcome to our new CEO, Murray Kessler, who I am sure you are looking forward to hearing from. As you know, Murray has over 35 years of experience across a broad range of industries, including highly regulated businesses from notable companies like, Clorox, Campbell Soup Company, UST, and Lorillard.

During his tenure as CEO of UST and Lorillard, he competed over $22 billion in shareholder value. In his brief time at Perrigo, Murray has already set a tone of focus, clarity, and prioritization. He has held leadership meetings in both the U.S.

and Europe to quickly assess baseline his views of the core capabilities and market opportunities available to Perrigo. I will now turn the call over to Murray..

First, and most important, focusing on the core with an emphasis on maintaining our competitive advantages; second, pursuing close-in adjacencies to keep the new product pipeline strong; three, making strategic bolt-on acquisitions when they make financial sense; four, strong cost control and elimination of nonproductive costs and bureaucracy; and five, allocating capital to the highest return options that build the business long term, while concurrently returning excess capital to shareholders.

I pride myself in transparency and telling it like I see it. And I never forget that I'm a fiduciary acting in the best interest of our shareholders. So, as I see it, Perrigo is a great company that has gotten off track in the last few years, as once again demonstrated in the quarterly results and projection for the remainder of fiscal 2018.

This was not a surprise to me when I joined. I came in having looked at the company the same way our investors do. And I believe the challenges I see are the same ones you all see.

The challenges I saw confronting Perrigo today are the result of distraction, shifts in leadership, and a rapidly changing external environment that was not properly addressed.

I came on board with the belief that by focusing on the initiatives that matter most, namely, a reallocation of Perrigo's vast resources, the sale or spin of RX, and the upgrade of certain skill sets and investment in technologies, we will be able to return Perrigo to its rich history of strong performance and creating shareholder value.

Having reinvigorated companies before, I know it will take some time to put in place a clear, consumer-based, strategic plan that will generate long-term, sustainable, and reliable growth. While we are doing so, we will remain cognizant of the near term and pursue actionable initiatives to drive meaningful progress.

That was my incoming perspective, and after a month at Perrigo, including reviews of its operations, business units, skill sets and capabilities around the world, my enthusiasm and optimism is even stronger. I am glad to be here and my confidence on this team's ability to deliver is high. Let me share a few of my initial observations.

Share and volume in our core CHCA store brand business is solid but in the current environment of less Rx to OTC switches and increased pricing pressure, the new product pipeline is simply insufficient and lower than in prior years. We are already addressing this.

CHCI is in the midst of a transformation, which is beginning to take hold, but more aggressive top line initiatives are needed there as well. Again, those are being addressed, and I am very excited about the long-term prospects of this business.

I agree with the board's decision to sell or spin RX, as it is a distraction to our core Consumer businesses, even though it is a good and profitable business in its own right. Again, the level of new products being launched in the marketplace is a major issue.

But unlike the Consumer business, the pipeline on RX is robust, and we are just a few FDA approvals away from significantly changing the trajectory of this business. Our regulatory team is optimistic they will come soon. Importantly, we believe it's not a matter of if; it's a matter of when.

Complexity has always been a core strength to Perrigo's global platform, but right now it is working against us, especially on the supply chain, adding cost and putting pressure on margins. This is addressable with more sophisticated planning tools, which are already being put in place. We have made a series of low-return inorganic investments.

The criteria for investments in inorganic growth will be tightened, and you can expect an increase in investment towards organic growth. My only real surprise coming into the company was the precipitous decline this quarter in the animal health business.

But the reasons here, too, are quite clear and are being addressed, even while we assess the role this business plays in our future portfolio. Despite the challenges I've highlighted, I repeat that the core businesses are solid.

There are significant resources to bring to bear on generating growth; the Perrigo workforce is talented and highly motivated; we have the commitment of the Board of Directors; and there are more opportunities for growth than I initially thought.

I'm excited to be leading this great company through transformation, and we will return Perrigo to its winning ways. I'll be out to meet with a number of our investors on the sell side on more of a listening tour over the next month while we are concurrently developing the strategic plan.

We should be in a position to share the full plan in early spring. With that, I'll now open the floor to questions..

We will now open the question-and- answer session. Our first question comes from David Maris with Wells Fargo. Please go ahead..

Good morning. I have a lot of questions, but I'm going to limit it to one, since I'm sure a lot of people have questions. At the time of your appointment, Murray, the company did a number of calls in which your appointment was described as coming in during a -as a move of strength, that things were fine.

I had specifically asked, would guidance be – guidance wasn't reiterated. And in my experience, that when companies don't reiterate guidance, there's a high likelihood that they're going to miss it. And it was indicated that, no, this was being done from a position of strength. But from what you described, you knew that there were challenges coming in.

So, how would you reconcile – I know you weren't part of those initial conversations. Is the situation at Perrigo changing so dramatically and so negatively that from one quarter to the next, things could change this much, or was this a trajectory that the company's been on and should have been expected? Thank you..

Okay. Well I'd break that into a couple different pieces. I am 100% confident that based on my discussions with the board prior to joining that if right now, Ron was telling you from the third quarter that we were raising guidance for the year, they would've still made the same decision.

The entire discussion was not about performance, it was a strategic discussion of how to transform this into a consumer company. And frankly, that evolved over the year. And I had talked to the company a year ago, but I wasn't available for personal reasons to start at that time. And my situation changed, and the strategy of the company evolved.

And I think the board clearly has stated over and over again that was the reason for the change. They want somebody to lead this transformation into being a consumer-driven company. So, I'm positive that it wasn't performance driving that.

I would also say, having gotten here, you heard Ron clearly say that the change was pretty much attributable to one piece of the business, which is very new product-related. And depending on – there's a couple of big, new products in the pipeline there, and the timing of regulatory approval is driving that.

So, no, I don't think that this is a lot of volatility. I took a hard look at the fourth quarter. I wasn't here for the third quarter. But I think we have numbers we believe in and work is well underway to focus this organization, which it needed..

So, as a follow-up, it sounds like what you're saying, or the description so far is that the earnings impact may be primarily related to – in the fourth quarter and for this quarter related to RX, which again had already been lowered a number of times. But we'll ignore that for a second and how fast that's dramatically changed.

But you've mentioned customer service and failures in customer service a number of times, which sounds like a much broader organizational issue. That sounds like something that hadn't been raised before of kind of the stumbles that Perrigo's making.

Maybe if you could just expand a little bit on how that sort of emerges, and what it's showing up as? Is it just missed orders, or out of stock items? How does poor customer service show up?.

It's a couple things. Here's a big difference between a consumer guy leading this company versus sort of in the past. Most of the dialogue that I've seen coming into the company is dollar-revenue-related versus volume-related. Coming out of a CPG company, most of the conversations I've always had are volume-related.

In doing so, the underlying trends on this business are almost completely different in many areas across all of the divisions. I mean, our Consumer businesses volumes were actually up 4% or 5%. We never talk about those kinds of things, which place different demands when an organization focuses on revenues that are kind of flattish.

There's also, in doing so, the other key framework in this company, the metrics that it measured itself against placed a lot of emphasis on keeping inventories low as opposed to maintaining that higher service level that Perrigo was always known for.

And then third, there was a lot of complication that's been added to this business in the last couple of years. The good news is those are all imminently fixable. There's a couple points of margin in the second half that while RX is the big thing that can – I'm not saying it's not hard work; it is.

But we have too much of our volume with single-source suppliers that, in a number of cases, met – even with 5% volume growth in the U.S., we couldn't meet demand, which is unacceptable. There is other areas and planning tools that, I would say, and I'm not criticizing the company.

It's been focusing on a lot of – it's made a lot of acquisitions, but more investment needed to be on organic growth and making sure that we've maintained the Perrigo advantage. This company has always been known for years of being able to handle complexity better than any other company can do.

And given our breath of line, and the thousands of SKUs and all that, that's a strength for this organization. They know how to do it. We just need to refocus them back that, that's the top priority and recapture those margin points, which are easily identifiable..

Thank you..

Our next question comes from Louise Chen with Cantor. Please go ahead..

Hi..

Good morning, Louise..

Hi. Good morning. Thanks for taking my questions here. So, the first question I have is something that we've been getting a lot this morning, which is that if you annualize your fourth quarter 2018 EPS, and you're getting to about $4 in EPS for 2019, that's not assuming any growth on anything or recovery or in any of the businesses.

So, just wondering, is 2019 a growth year for Perrigo, and why or why not? Thank you..

Well, I think you've got to balance a couple things. And I'm here a month, and we're going through the planning phases. And we'll give you guidance in February, like we always give you a guidance. And like I said, shortly after that, we should be in a position to lay down our growth strategies. But the good news is, I'd break it up into two pieces.

And by the way, I'm not going to give you a full answer to that question, because I'm not ready to give you numbers yet. But I will say, I am encouraged by both the short-term opportunities for the company and the long term, because in my comments, I said, job number one is focusing on the core.

So, that means job number one is to get back to full potential CHCA, which means that we have every distribution point, that we have competitive advantage, that every innovation that's being offered by the branded competitors is available, and that we have customer service levels that are back in line with where they've been historically.

So, I think it would be a mistake to straight-line the fourth quarter. I mean, that's where I sit today. But I also have to go through the full planning process. And then, clearly, I need to get the organization to ramp up the new product pipeline..

Our next question comes from Patrick Trucchio with Berenberg Capital Markets. Please go ahead..

Thanks. Good morning. I have some follow-ups on the generic business.

First, do you intend to initiate a restructuring of the business, and should we expect charges associated with that? Secondly, in the absence of a major restructuring, why shouldn't we expect the operating margin of that business to contract and to potentially contract substantially? Third, how concerned should we be with the potential disruption caused by the split of this business? And finally, why should we have confidence you can stabilize the business and execute the split successfully? Thank you..

Okay. Yes. A lot of questions there, so Brad, you're going to need to help me. Let's start with the confidence in the distraction associated with the split, because that is a concern for me, and that is why we made a change in leadership with the most seasoned person we have in the organization to come back and run that business, so that it can.

And I'm doing everything from aligning the incentives, and the goals, and the KPIs in this organization to make sure each group is set up to focus on what they need to. Now, the level of effort that comes is radically different depending on which option we pursue and which one creates the most value for shareholders.

And as the board and has been previously announced, we're committed to this split, because it obviously, over the long term, is not aligned with where we want to take the company and believe we can create the most wealth.

As it relates to the business, I think, depending on when, because we don't believe it's an if, those new products that have been geared up get approved. I mean, they're massive, and they have a significant change in the trajectory of the business.

I'll also say, when I look at the pipelines of all the different businesses, the pipeline on RX is actually quite robust. It's part of the U.S. that because of a slowdown on RX to OT (sic) [OTC] (34:16) switches that I'm most focused on in getting the new product program. I don't see an issue there. So, I think we have a lull period here.

But RX, it's under good leadership now, leadership that can help prevent that distraction you're talking about. And it has a robust pipeline, and we just need to get through that gap period until those approvals start coming in. Give me your first question again..

Yes.

So, just in terms of initiating restructuring, a cost restructuring plan, is that something we should expect? Would there be charges associated with that? And then, in the absence of one, why would the operating margins stabilize? Why wouldn't it keep contracting?.

On the RemainCo, or on the new business?.

No, on the generics..

Well that just depends on the organization, right. I mean, it depends whether it's a sale and it's fitting into something; or it's a spin and it's its own stand-alone company. We'll give you more detail on that as we progress through the process..

Next question, please?.

Our next question comes from Dave Risinger with Morgan Stanley. Please go ahead..

Good morning, Dave..

Good morning, and congrats on your new role. I have three questions. First, you had referred to OTC new product opportunities in the face of diminishing OTC switches. Could you just provide a framework for, at a high level, opportunities that you see for the OTC new product flow in the future? Second....

Sure. Why don't we just take them one at a time..

Okay. Great..

Well let me start by saying that I see the company different than you guys do. You see a healthcare company and I see a self-care company. That change of reference opens this organization up to massive opportunity that you'll see in the transformation detailed in the strategic plans.

But if we are not limiting ourselves through a lens of healthcare, and again, take this self-care reference, there are massive, massive categories, some of which the company has tried before that opened up, again, billions and billions, and billions, and billions of dollars of categories for the company. So, I don't see any shortage of opportunities.

And changing references, what I've done in every company I've gone to. Each and every time, I change reference of, so that I don't look at us as north of 60%, 70% share in the United States of store brands in the OTC category. I changed that reference, so we're a much smaller percentage of all the self-care.

I did it in my previous two roles, and the new product programs start to flow. And by the way, a lot of those categories don't have to go through the long process of FDA approval. Many of them are products that we sell already in Europe. And we are not leveraging the synergies that are possible between our International business and our U.S. business.

And you know as well as I do all the different segments are there. But I think you're going to see a whole different look on Perrigo going forward..

Great. That's helpful. And then, with respect to your comment earlier, I didn't quite follow it. I think you said, 5% volume growth and 0% sales growth.

What were you referring to?.

I don't know if I gave you the exact right net sales growth. There was net sales growth, and Ron spoke about that in the details.

But I'm just talking, if you go underneath that and you look at – which I'm used to as a consumer guy – looking at the unit shares and the units moving through the registers through some of our sources like IRI, and actually our own units that volume is growing faster than revenues because there's a little bit of price contraction.

Not as much in the CHC business, but some. But we gained market share in almost every segment we competed in..

Okay. Got it. And then, the final question is, you had mentioned that you're a few regulatory approvals away from much better RX performance.

Could you just comment on what those products are that you're hoping for, for approval in the next six months or so?.

Ron, do you want to take that?.

Yeah. Sure. Obviously, the two that we've talked very openly about is with ProAir. We had a CRL that was issued this summer. We responded to that CRL. And obviously, we're not going to provide updates consistent with our practice, David, on the FDA process. But our team remains committed and dedicated to launching that product and getting the approvals.

That's obviously one of them. The second one, that's obviously in front of us as well, scopolamine. We pulled it off the market due to a deviation. The team again responded to that with the FDA, continues to move down our improvement plan on that product. I don't want to get into pipeline next year. So, Murray is 100% right.

We like our pipeline going into 2019, but obviously, we'll talk about that in February and give more color on our growth plans in RX at that time..

Got it. Thank you..

Our next question comes from Chris Schott with JPMorgan. Please go ahead..

Good morning, Chris..

Morning. This is Chris Neyor on for Chris Schott..

Hi..

A couple of questions on the RX business.

For the RX separation, you guys are committed, but does the weaker performance year-to-date caused you to rethink the timing of that potential separation for the business unit? And then, secondly, on the recent Androgel launch, could you elaborate on the market dynamics there? Specifically, from a share perspective, does that launch in line with your expectations? Thanks..

Well, on the first part of the question, we're stewards of shareholder value both short term and long term, and always apply a critical lens to any decision I make around any asset. But be clear, it is our intent to sell or spin and to focus this company. As it relates to Androgel, I just think they had a higher expectation.

They anticipated some competition. And Ron, in a second, can help me with this one, too, but I think this is like the first time they've launched in this type of environment with that type of product, where there was that buying consortium. And so, it's sort of all or nothing on a few of these.

And while it's incremental, and it's going to be a big contributor, they didn't hit it, so it did not meet our expectation..

Yeah. I'll just confirm, Chris, what Murray said very well, is we assumed an authorized generic. And it's the first meaningful Paragraph IV we launched since the consortium formation in 2016. And some of the buying patterns became binary, and so we learned from it. But to be clear, the exciting part of this product, it is changing the trajectory.

It's creating momentum that we've been looking for in this business as we launched new products. And we're excited about the contribution it'll make for us in Q4 and heading into 2019..

That's helpful. Thanks..

Our next question comes from David Steinberg with Jefferies. Please go ahead..

Good morning, David..

Morning. Yeah. Thanks very much. Murray, you said in your comments that one of your strategic objectives is bolt-on or tuck-in acquisitions. In the past couple years, the company's made virtually no acquisitions and maybe this is more a question for Ron than you.

But historically, outside the very large Elan and Omega acquisitions, which didn't turn out so well, the company has made a lot of very successful smaller acquisitions, largely, private consumer.

I was curious, why is it that in the last couple years, there have not been any acquisitions? Is it just a dearth of opportunities? Were the prices too high? And then going forward, Murray, what's your philosophy on M&A? Obviously, there's some operational issues you have to deal with.

But one of the good things coming in is the very strong balance sheet. What types of opportunities are you're looking at? And you can extend beyond the generally small consumer tuck-ins that the company's done in the past. Thanks..

Well, I think, initially, it's fair to say I'd be more interested in the, sort of historic level of tuck-ins that – you know, you have very different businesses around the world. Our leaders and the team in International is actually doing a good job of already starting their transformation.

And as you would expect, on a business that was very complicated in 35-something countries with different portfolios, some of those brands are good and some of those brands are weak and probably not a good effort for us to go after.

There are other markets that look really quite opportunistic for us, but tuck-in acquisitions would give us the scale we need in those markets to be successful. So, I'm pretty confident that you'll start seeing some of those come around pretty quickly. As it relates to a big bet for the company, that's the last thing it needs right now.

Right now, the number one job is to focus on the core and bringing CHCA to full potential..

And just a quick follow-up regarding Rx to OTC switches. I know you talked about looking outside healthcare, but within healthcare, there are only three categories that really have switched, and there are many, many more that could be switched. You pretty much run the table on PPIs, cough, cold, allergy.

And I know that we have a relatively new FDA Commissioner that's talked focus on OTCs and lowering healthcare costs. Have you seen any movement recently on FDA's interest to expand into new areas? I know there's been talk historically about statins or Viagra, things like that.

But would you anticipate any major category switching in the near term?.

Look, the company obviously made a $50 million investment in a significant switch that is planned to come in the next couple years, and there's other in the horizon. But I'm just not going to let you take me down that pathway. I don't view that this is a healthcare company. I view this as a self-care company.

And those, along with dozens of opportunities that I see right now that are significant, will all be pursued and shared with you on our plans. So, again, I view it from a different lens than you view it from. And I think we won't have any problems developing a strong pipeline. I'm also not convinced we've fully explored our product.

You see us having run the gamut relative to being a player in the Rx to OTC switches that have already happened. That doesn't mean we've reached full potential on those, not even close..

Our final question comes from Tim Chiang with BTIG. Please go ahead..

Oh. Thank you..

Good morning..

Good morning, Murray. So, I know you're sort of coming in at sort of an inflection point for Perrigo.

But I mean, one, could you just sort of talk about what you think the long-term plan for recovery is for Perrigo here? I mean obviously, other executives have come into specialty pharma companies and have aggressively cut costs, others have gone the organic route in terms of trying to fix companies. And I sort of wanted to get your perspective.

I mean, obviously, there's pros and cons with Perrigo at this point, but it does seem like they're running into some issues, certainly, on the Rx side. The OTC side had a tough time growing over the past couple years. And I just want to get your longer-term perspective on how you think you'll be able to fix Perrigo..

Well, I think that's what all of my comments have been about. I just don't agree that the company is facing challenges with underlying volume growth. It's facing challenges with price competition, because it's given back some of its competitive advantage which has to be reinstated, right.

So, I mean, I have worked on dozens of consumer packaged goods categories, and to have a growing segment like in the businesses we're in today, that our total store brand's growing as a percentage of OTC, and us gaining market share and growing more than that, I think that's a disservice to say that and is part of the just having a sales discussion.

So, that frame of reference also needs to change, that as we're growing volume and market share, do we have enough competitive advantages? When I talk to some of our biggest customers, they tell me that four years ago, they could not go to anybody else but Perrigo, because the advantage was so great.

We still have an advantage, but the gap has narrowed. That gap needs to be widened again. So, you're asking for my strategy without getting specific details. We will first and foremost focus on the core. Someone else asked the question, will we consider bolt-on? I don't see a transformational acquisition in the near term.

Things change, but I don't see it right now. I see bolt-ons helping stabilize or give us scale in certain markets.

And in Europe, and in the U.S some of these new categories that present themselves from a self-care definition versus a healthcare definition require small acquisitions for technology or to give us a certain skill set, that could be on the table. But job one, fix the core, get the core going. The volume is strong. The talent is strong.

There's no resources that have been cut. R&D budgets are intact, which I was glad to see when I got here. All the makings are there. The organization needs to focus and go after those opportunities. We have to fix the service issues on the core business, which are infinitely fixable, and this company knows how to do it.

It's always maintained some of the best service levels despite the fact that it has a portfolio that is way more complex than that. We haven't kept up with technology and the planning tools that are available to make that happen. That'll be very quickly done as well. We'll ramp up the new product program, and that'll fix the midterm and the long term.

And all of this will be shared with you. And by the way, when we fix the service area, we will be able to – we've lost revenues in certain places, meaningful revenues, from not being able to service customers in certain respects.

And there are all kinds of cost implications when that starts to happen relative to over time and customer finds and all kinds of things that can come as a result of that, that can be cleaned back up right back out of the P&L again.

And the company has resisted – even though it's made some very big bets on inorganic growth, it's been actually quite very, very conservative on investing for organic growth to the point that there are capacity constraints on some areas, where our demand is exceeding our capacity, and we're running full out.

So, I mean, again, those can be changed immediately. I recognize that I'm giving you high level. I'm just letting you know after a month here, I'm not seeing a shortage of opportunities at all. And we will go after those. And you will find I'm very transparent. I only need a few months to get that going.

I'll see you in early spring, and we'll unveil the whole plan. The work that had been done with prior CEOs won't be wasted. There's a lot of good stuff that's there as well. And then, we'll have a full plan that brings to life these beginnings of a vision I'm talking about..

So, that, I believe was last question. So, let me just close by saying, I look forward to letting knowing you all, and most importantly, sharing our plans soon to deliver consistent and reliable growth that builds values for our shareholders. Thank you for your interest in Perrigo..

The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect..