Good morning and welcome to the Perrigo First Quarter 2020 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Brad Joseph, Perrigo’s Investor Relations. Please go ahead..

Good morning and welcome to Perrigo’s first quarter 2020 earnings conference call. We hope everyone is healthy and safe during these times. As safety is our top priority, we are conducting this call virtually from different locations adhering to social distancing guidelines.

I hope you all had a chance to review the press release we issued earlier this morning. A copy of the release is available on our website. Joining today’s call are President and CEO, Murray Kessler; and CFO, Ray Silcock. I would like to remind everyone that during this call, participants will make certain forward-looking statements.

Please refer to the important information for shareholders and investors and Safe Harbor language regarding these statements in our press release issued earlier this morning. When discussing the business, Murray will reference only non-GAAP adjusted numbers for the quarter unless otherwise stated.

Comparisons to prior periods will also exclude exited businesses and currency changes unless otherwise noted. Ray’s discussion of financial results during this call will address both GAAP and non-GAAP results and when noted, comparisons of prior year will exclude exited businesses and currency changes.

In the appendix for today’s call, we have provided reconciliations for all non-GAAP financial measures presented. A few other logistics to mention before we get started.

First, excluding exited businesses excludes contributions from the exited animal health business, previously included in the Consumer Self-Care Americas segment and the divested Canoderm business previously included in the Consumer Self-Care International segment from Q1 2019.

Second, organic growth excludes Ranir, the exited animal health and Canoderm businesses and currency. And third, as a reminder, Worldwide Consumer, including the Consumer Self-Care Americas and Consumer Self-Care International segments as well as corporate unallocated. And with that, I would like to turn the call now over to Murray..

Good morning, everyone. I want to begin today’s call by recognizing the obvious. We are living in a unprecedented and challenging times.

But I also want to recognize and acknowledge that I feel blessed to be surrounded by such a seasoned leadership team and over 11,000 dedicated employees who are making tremendous sacrifices while giving it their all to keep our essential products flowing to consumers and patients who need them.

These Perrigo employees are making sure that consumers have access to Perrigo’s broad portfolio of old cough medicines analgesics like acetaminophen and electrolytes to treat flu and COVID-19 flu-like symptoms, allergy medicines as we head into the allergy season, infant formula to feed babies, albuterol inhalers to help asthma patients and many other essential products.

In this environment, it has been our first priority to focus on keeping employees safe, while they keep these essential products flowing to market; second, to reward employees on the frontlines whether in production or in the labs for their work and dedication; and third, to support the communities in which we operate during these challenging times.

Here are some examples of how we have accomplished each of these. We restricted access to our facilities worldwide to essential employees only and implemented a multi-step prescreening process before anyone can enter into our facilities. We have prioritized production to essential products.

We eliminated nonessential travel even before the federal travel bands went into place in the U.S. We have regularly communicated with our workforce providing education about social distancing and hand washing and other appropriate measures over and over again. We have doubled frontline production employee first quarter bonuses.

We made over $1 million worth of cash and in-time product donations like hand sanitizer to our communities and much, much more. What is amazing to me is how our employees responded to the unprecedented challenges and delivered a strong first quarter all while making significant progress on our transformation plan.

To all Perrigo employees and especially our frontline colleagues, thank you again for all you are doing for our company and for our society. Now, let’s take a look at what the Perrigo team accomplished during the first quarter.

The team identified five key global investment areas going forward, including core OTC, oral health, science-based naturals, nutrition and smoking cessation and shared them with our global leadership team through our first ever virtual leadership conference.

We acquired Doctor Fresh oral care for $113 million, acquired Steripod early in the quarter and successfully integrated it into Ranir. We transitioned Prevacid from GSK to Perrigo and initiated a supportive advertising campaign.

We received FDA approval of the store brand OTC version of Voltaren Gel, received FDA approval of and successfully launched the first generic albuterol HFA product. We launched a number of new products in Europe prior to COVID-19.

We continued to implement key capability upgrades such as data analytics, enhanced sales and inventory operational systems and central finance to name a few.

We developed and launched a hand sanitizer product from start to finish in 3 weeks, restored our winning culture, protected the company’s liquidity and delivered financial results well ahead of expectations despite the constant set of challenges we faced. Please understand the team pulled it off, but it was a lot of heavy lifting, a lot.

Now, let’s take a closer look at Perrigo’s first quarter 2020 financial results, starting with a quick overview followed by a deeper dive into net sales and business drivers then Ray will walk you through the rest of the P&L. All net sales comparisons are to first quarter a year ago.

Total Perrigo consolidated first quarter reported net sales were $1.34 billion, up 14% with organic revenues up 11%. Adjusted operating income finished at $225 million, up 11% and adjusted diluted EPS was $1.14 versus $1.07 last year.

All segments contributed to the consolidated 18% revenue growth, including a 25% increase in Consumer Self-Care Americas, CSCA; a 14% increase in Consumer Self-Care International, CSCI; and a 6% increase in generic Rx.

We estimate that customer and consumer reactions to COVID-19 added about $90 million to $110 million to consolidated net sales in the quarter with the most prominent benefit about 80% coming from the U.S. consumer and Rx businesses and a smaller benefit from Europe.

At this time, we cannot realistically estimate the amount of product that was bought and used for COVID-19 or flu or allergy symptoms as opposed to consumer pantry loading but we are watching this closely and using our best efforts to ensure our retail and online customers at the proper amount of products on their shelves and/or in their warehouses.

Our worldwide consumer businesses delivered a solid performance with net sales growth of 21%, including Ranir. First quarter organic growth compared to year ago was very strong and more than 12% led by CSCA organic growth of 15% and CSCI organic growth of 8%.

While the balance of the year maybe a bit lumpy due to COVID-19 pantry loading and normalization as well as our product prioritization efforts, we believe we will meet or exceed our stated 3% organic growth objective as long as among other things that we can keep our facilities around the world running.

It reminds me of a saying from a former boss who once said to me you don’t make the plan the way you plan to make a plan. Boy, was he right, this was certainly an example of that. Let’s take a closer look at the drivers within each of our business segments, starting with Consumer Self-Care Americas.

First quarter reported net sales increased 20% or $119 million versus year ago benefiting from strong tailwinds entering the year as described during our last conference call, a surge in consumer demand for our products as a result of the COVID-19 pandemic in March, an accelerated growth in e-commerce, which benefited from the investments we undertook last year.

The quarter also benefited significantly from the addition of Ranir, but was partially offset by the animal health exit. Excluding exited businesses, CSCA grew 25% compared to the year ago quarter. Now, let’s take a closer look at the COVID-19 related impact to CSCA.

As just covered, we exited Q4 last year with tremendous strength having made significant gains and penetration versus national brands, that’s share versus national brands and winning market share from other store brand competitors as a result of new products, distribution gains and other favorable trends.

That momentum continued in Q1 as CSCA grew organically 8% through February versus a year ago. Then came March and we saw a large surge in demand related to COVID-19 which led to year-over-year organic net sales growth, up 28% in that month.

That growth came from the categories you would expect, cold cough, infant formula, analgesics, electrolytes just to name a few examples. We also saw strong results in allergy as a relatively warm winter triggered a higher incidence rate of allergy. Nicotine cessation also showed strength in the quarter.

We hypothesized this as a side effect of COVID-19. This is not a particularly good time to be smoking. In any event, all of this resulted in a market-wide penetration gain versus the year ago, up 60 basis points for store brands versus national brands. The other area worth mentioning is our e-commerce business. Our e-commerce investments are paying off.

CSCA e-commerce net sales grew from 3% of total revenue in Q4 ‘19 to 5% of total revenues in Q1 2020. That was an increase year-over-year of plus 112%. This is being reflected in the marketplace with some pretty meaningful channel shifts from brick-and-mortar through online. So, CSCA net sales were obviously very strong in Q1.

The big question that you and frankly all of us are trying to determine is what does that mean for the balance of the year? That’s a good question. And is it a question that we honestly cannot answer at this time as there are just too many open-ended variables for us to make an important assessment.

For example, we did not know how much of March’s surge in sales was consumed, how much was incrementally purchased by consumers that wouldn’t normally buy store brands or how much was a result of consumer pantry loading.

We also do not know its illnesses associated with COVID-19 have peaked will taper off, will continue in Q2 or spike again later in the year.

So it is certainly possible that we might ultimately experience our short-term sales trough, but conversely, we believe that there is a likelihood that any short-term trough will be offset by retailers restocking their shelves and warehouse inventories, the launch of our recently approved store brand version of Voltaren Gel, which we expect to launch later this year and the fact that store brands historically have done well on a recessionary period, which may well be our new reality going forward, but simply stated, this is still speculation.

At this point, we do not yet have a good handle on what will happen going forward. But on balance, we think CSCA is in pretty good shape at this time. But I again say this cautiously as there are just so many moving pieces. In addition, there is another variable, our ability to continue manufacturing.

As I noted earlier, we have implemented many measures to ensure employee safety and the ongoing manufacturer of our product. As I sit here today or I repeat all of our facilities are running and we have only had a few brief interruptions so far, but despite our precautions, there are no guarantees and that can change on any day.

It is for these reasons including the same around business continuity that all businesses are facing that we did not update our fiscal 2020 guidance. We hope to have a better handle on projections by the end of Q2. Now, turning to CSCI, reported net sales increased 9% versus the year ago or up 14% on a constant currency basis.

Excluding the divested Canoderm product, which impacted the top line by 120 basis points, net sales were driven by strong new product launches, mainly selling efforts in our weight loss and skincare categories and the addition of Ranir.

Just like in CSCA, we experienced a surge in CSCI demand due to COVID-19, primarily in our UK store brand business and our branded cough cold, VMS and pain products.

While almost all CSCA products are consumer healthcare focused, only approximately half of the CSCI portfolio treats ailments, while the other half is Self-Care focused on preventative health and wellness.

These include categories such as weight management, anti-parasites and sun care, while we expect lower pull-through from these products until Europe returns to a more normal way of life. This headwind maybe offset by tailwinds for our pain, upper respiratory and VMS products.

But the same issues I described for CSCA applied here as we are unsure of how much of these products were driven by pantry loading in the first quarter versus COVID-19 related consumption. So again, we will need to see how the next few months play out before making any further comments on the full year.

Turning to Rx, reported net sales grew 6% in the quarter due to the successful launch of generic albuterol which the FDA approved in February.

Because we had anticipated the approval last year, we had products immediately ready to ship with strong demand out of the gate benefiting from COVID-19, Rx shipped almost $44 million of albuterol, which more than offset the expected year-over-year decline in Rx from testosterone 1.62%.

We have included about 75% of these albuterol sales in our $90 million to $110 million COVID-19 impact estimate. Importantly, we believe there is consumer demand for all of the generic albuterol product that Perrigo and its partner, Catalent, can manufacture this year. So to be clear, no de-load is expected here.

Before I offer a final summary of the quarter, I wanted to briefly touch on the status of the Irish tax matter. As you know, we have taken several measures to challenge what we believe to be an unwarranted assessment.

This includes appealing the original assessment and obtaining approval from the Irish High Court to challenge the assessment in a judicial review proceeding.

While the judicial review hearing was scheduled to begin on April 21, the Court postponed that hearing in the interest of public safety and the current restrictions imposed by the Irish government. While no new hearing date has been set, we continue to believe in the strength of our position.

So to summarize, it was the stronger quarter top and bottom line. All three business segments contributed to revenue growth. Fundamentals were solid before the COVID-19 related surge in March and obviously even stronger after.

While OTC Voltaren Gel, Doctor Fresh and albuterol, all offered potential upside, we are taking the prudent approach and not updating our guidance at this time given uncertainties related to COVID-19 which could impact all of our businesses.

Business continuity remains critical, but employee safety comes first and it will be continue to be a balancing act. I will note we have gained experience over the last month or so on how to handle the issues that confront us and we are in much better shape today than we were at the beginning of the crisis.

Our transformation to a consumer focused healthcare company last year could not have come at a better time for us as Perrigo in order to prepare us for what we are facing and the new normal world going forward.

We believe Perrigo is very well positioned for the future leveraging three key drivers in a new normal world, self-care, value and e-commerce bottom line in the quarter with plenty of strong financial results to be proud of I could not be more proud of our team, and I mean everyone at Perrigo, they are delivering on our vision to make lives better by bringing quality affordable self care products that consumers trust everywhere they are sold and they are doing it right now.

I will now turn the call over to Ray to walk us through the rest of the P&L and key balance sheet items then we will open it up to questions.

Ray?.

Thank you, Murray and good morning everyone. Now, that Murray has gone through the revenue and business drivers for the quarter, I would like to walk you through the rest of the P&L.

Consolidated reported GAAP net income for the quarter was a $106 million and reported diluted earnings per share was $0.77 on an adjusted basis consolidated net income for the quarter was $157 million and earnings per share were $1.14, the sixth consecutive quarter in which we have met or exceeding market expectations.

Adjusted net income for the quarter includes $50 million of non-GAAP adjustments primarily Amortization of $71 million which we always add back, partially offset by a $16 million prior period tax benefit as a result of the CARES Act. The GAAP reported consolidated effective tax rate for Q1 was 7.2%.

This was generated from tax expense of $8 million on pretax income of a $115 million.

Tax expense was low this quarter primarily due to $20 million of Q1 tax benefit from the CARES Act $60 million of those tax benefits related to 2019 and we are adjusted out non GAAP purposes leaving $4 million in Q1 and bringing the first quarter adjusted effective tax rate to 19.8% full details of these adjustments can be found in the non GAAP reconciliation table attached to this morning’s press release.

From this point forward all dollar numbers basis points and margin percents will be on an adjusted basis while growth percentage is we will exclude the impact of currency in exited businesses.

The worldwide consumer first quarter net sales growth of 21% versus prior year resulting a gross profit of $460 million up $38 million from last year a 16% increase excluding the impact of currency and exited businesses, gross margin was down 220 basis points from 40.6% to 38.4% primarily due to an increased proportion of store brands including Ranir as well as operational inefficiencies and the impact of exited businesses.

Worldwide consumer operating income improved by $30 million versus prior year primarily due to gross profit flow through offset by higher administrative costs including the impact of a $4 million special bonus paid to our front line employees most of them working in various manufacturing plants around the world who had to physically go into work despite the COVID-19 related lockdowns to continue to provide our essential products for customers and consumers operating margin improved 100 basis points over last year.

As we were able to leverage gross margin from increased sales savings from project momentum together with Ranir’s higher operating margin will partially offset by higher compensation costs, including share-based compensation from our annual incentive plan as well as the special bonus for CSCA gross profit of $220 million was up $30 million from last year, an increase of 23%.

Excluding currency and exited businesses driven by sales growth gross margin of Q1 declined 110 basis points versus last year due to primarily to higher operating costs CSCA operating income for Q1 amounted to a $137 million an increase of $31 million versus prior year up 33% excluding currency and exited businesses as we leveraged sales growth for the quarter and achieved project momentum savings the result was a 130 basis points improvement in operating margins to 19.6% CSCI gross profit was a $197 million an improvement of $7 million over prior year plus 9% excluding currency and exited businesses, driven by increased sales.

Gross margin, however declined 250 basis points to 51.4% primarily due to our higher proportion of store brand sales, including the addition of oral care products, which have relatively lower gross margins although similar operating margins.

CSCI operating income of $64 million was up $10 million, 28% excluding currency and exited businesses, while operating margins improved by 130 basis points to 16.7% due to operating leverage.

Turning now to the Rx segment, we said last quarter that we expected a decline in Rx sales and profits in Q1 similar to the one we saw last quarter primarily due to lower pricing on testosterone 162 as a result of us having lost exclusivity on that product.

However, on February 24, we received FDA approval for generic albuterol and even though the demand was substantially higher than anticipated due to COVID-19 the team did a great job getting this much needed product to our customers.

We were able to achieve $44 million in albuterol sales in Q1 resulting in an overall Rx net sales increase versus prior year at 6%. Moving on to gross profit, in Q1, we sold albuterol which have been produced in 2019, and expensed as pre-commercialization product.

As a result, albuterol gross profit this quarter was modestly higher than it will be in future. Including the additional gross profit from albuterol sales, Rx gross profit decreased by $9 million in Q1. Gross margin of 42.3% was down from 48.6% last year as we felt the impact of adverse pricing.

Operating income declined by $8 million to $74 million also primarily from the same adverse pricing. Consolidated cash flow from operations in Q1 was $172 million, a 110% cash conversion on adjusted net income in line with what we said on our last earnings conference call.

This strong cash conversion was driven by our reduction in inventories due to very high demand in the quarter as well as by strong collections in our Rx business as compared to Q4. Offsetting this were increases in accounts receivables in our Americas business due to the high demand which was most strong at the end of March.

On March 28, at the end of the first quarter, we had $510 million in cash on our balance sheet, including $100 million we drew from our revolving credit facility in March as a precautionary measure. Since then, we paid just over $100 million to the oral care assets of high rich brands on top of $11 million we had paid previously as a deposit.

Total outstanding debt at the end of Q1 was $3.5 billion, including the $100 million drawdown on our revolver. We have an additional $900 million of available capacity on this $1 billion revolving credit facility, which expires in March 2023. We believe our balance sheet continues to be strong.

We are closely watching our cash collections, but to-date have not experienced any disruptions in cash receipts in the U.S. and only a few minor deferrals internationally. We continue to pay our suppliers on a timely basis to ensure continued supply of critical materials and components.

We also closely monitor inventories expecting that our sales mix could be impacted by the lockdown and other measures.

Our cash position in Q2 will also benefit from the CARES Act which legislated an increase in the 2019 and 2020 interest expense deduction thereby reducing the amount of tax due in April as well as deferring payment of 29 taxes through July.

In light of our strong balance sheet, we remain committed to maintaining dividend payments to our valued shareholders. I would now like to talk a little bit about what we see so far as future earnings.

At this time, we do not have sufficient information about the broader economic outlook nor about the impacts of lockdown and other COVID-19 measures to justify updating the 2020 guidance we announced in our last conference earnings – excuse me, our last earnings conference call in February.

The COVID-19 impact on our business in Q1 are difficult to enumerate and for the balance of the year difficult to predict.

Factors that could benefit our results include continued success of generic albuterol, the addition of our recently acquired Doctor Fresh business and the future potential of OTC Voltaren Gel for which we have recently received FDA approval.

We could also benefit from consumers choosing our lower cost same efficacy store brand products during a possible extended recession as well as from potential additional surges in demand later this year.

Conversely, that could be a deterioration of sales in the wake of pantry loading in March, economic impacts from the lockdowns and social distancing measures as well as possible disruptions in our manufacturing facilities, and supply chains around the world. It is simply impossible to estimate these at this time.

There are too many moving pieces that literally change everyday, but we will continue to closely monitor the impacts in and on our businesses and hope to be in a position to provide more clarity next quarter.

In closing, I too want to take this opportunity to thank Perrigo’s wonderful employees for their dedication and continuing to work both in and outside of our facilities as normally as possible during these truly abnormal times.

Operator, please can we now open the line for questions?.

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Louise Chen of Cantor. Please go ahead..

Hi, thanks for taking my questions here. So first….

Good morning, Louise..

Good morning. There seems to be some confusion in the marketplace when you say Perrigo is not updating its guidance at this time. Are you pulling your guidance, what does this mean and it sounds like there could be potential for upside, but it’s just not clear how to put that out there now.

So it would be interesting to hear what you think here? And then second question I had for you was just on the channel shift from brick-and-mortar to e-commerce, do you expect that to continue and do you have the relationship in place to affect that? Thank you..

Okay. First one, we are absolutely not pulling guidance. We changed the word of ups unchanged to not update it for a very clear reason, in my mind unchanged means we are reconfirming what we had on the street in February, which was the best information we had at the time.

But I got to tell you coming out of a very, very strong quarter with albuterol as upside, Doctor Fresh as upside, potential for extended illnesses as upside, a strong allergy season as upside, Voltaren Gel as an upside, the fact that we have to rebuild all of our warehouse customers, warehouse inventories were at – that are weeks below what they normally would be.

If it was any other circumstance, I would be raising guidance right now. But given the business uncertainty out there in the world, it’s just not prudent to be raising guidance at this moment.

So, not updating reflects the fact that I look to add it and say I don’t think the guidance is right at this point, because if you had some kind of significant business interruption, sure it could hurt you, but on the other hand, given all the positives on the business, we will likely be updating and the implication of unchanging says we would have to have a pretty rough balance of the year in order to stay at the existing guidance.

So I had left it unchanged from where we are, I left it at where it was in February. We are not pulling guidance. And there is a lot of good things happening, but it’s a very uncertain world. So, hopefully that clarifies anything for anyone. Perrigo has not pulled guidance.

The second one on channel shift, that one is really interesting, because if you saw and some of the retailers the traditional retailers, they talked about store traffic coming down and our stock reacted a little bit to that in each of those cases.

But the reality is, as our demand was strong, we were more than making that up in the e-commerce channel. I think I highlighted the 112% growth in the U.S. that was even stronger than that in Europe. I think it’s up to 8%.

And when you look at the omni-channel reports which I know some of the sell-side and buy side buys IRI data, you are not seeing the Costcos of the world, you are not seeing Costco online, you are not seeing Target online you are not seeing a lot of those other areas. We saw share point changes.

To me, I think that’s going to be a new normal way of life I am glad we made the significant investments we have made over the past couple of years to put Perrigo at an advantage in the ecommerce area and yes we are taking advantage of that from all angles and that investments have been paying off very quickly.

But, yes I think you are going to see online sales stay strong going forward and continue to grow and it’s obviously one of our strategic areas of focus so hope that answers your questions..

Yes, thank you..

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

Great. Thanks very much for the questions..

Morning, Chris..

Good morning. Just a two here.

First, can you expand on the gross margin performance in the quarter, particularly for the Americas business? I guess, what was this all just mix related or are we also seeing higher manufacturing costs due to the shutdown, I guess what I am trying to get is directionally should we think about the CSCA gross margins kind of rebounding from here as like the remainder of the year or is this kind of a new normal and my second question is kind of a bigger picture on what does a recession mean for Perrigo’s business so I think if I go back to ‘08 and ‘09 I think you saw some fairly meaningful share gains as consumers traded from national brands to store brands I guess the business may be in different place today in terms of market penetration but just as you think about if we do head into recession what does that mean for the portfolio over the next one or two years as we offer this process? Thank you so much..

Well let me start on the first one, then I will turn it to Ray and then Ray you can give it back to me on the recession question.

But gross margin honestly mostly mixed I mean for sure there is a component I don’t think effected the first quarter very much where the greatest demand and listen we are prioritizing our products along with what our customer and consumers and society as a whole need and that means that right now we have been we are more than 50% of the U.S.

supply of acetaminophen and that's a lower gross margin item and we are running that although I don’t think that had a big deal impact on the first quarter I think gross margins in general are mixed but I am pleased with our margins when you take it down to the operating margin line you have got a lot of moving factors than Ray can you go into that in a little bit more detail..

Sure.

Murray is right, you really got to look at operating margin especially with respect to the fact that we saw increases in our store brand business where our gross margins are lower but our operating margins are similar and we saw that in CSCA specially what you have referenced margin this year around operating margin around 19.6% and contrasts positively by about 130 basis points versus what we've got in 2019 first quarter so we are seeing some improvements in our operating margin and the impacts of the dislocation that happened really didn’t have a big impact on Q1 because they happened late in March or in the middle of March early to middle march and we didn’t see all that much impact coming through from that we did see a some impact at the end of the month and we saw our operating leverage from the sharp increase in sales that came in March..

And then going back to the recession question I mean you are right we will see how it plays out but our product category and I already think we are seeing some share shifting now but the fact is our products are equal [indiscernible] and they are 30% to 40% cheaper than the national brand and the other benefit you get in a surge is that a lot of times the national brands are not on sale but besides the longer term benefits that you get of the price issue you will also get people trying you get a much higher level of trial right now there is a lot more people that are pride of store brand who are buying both or we were normally national brand only consumers that are trying to buying our products and think for themselves that they worked as well so listen going into an extended recession period private label always performs well.

And history, I mean, there is no guarantee, but history says we benefit from that and we think that we are well positioned with our self-care focus, our value and also the e-commerce, but yes, I mean, it’s a great point. These are uncertain times and I think the company is in a real good position right now to help society, but also benefit from it..

Thank you..

The next question is from Randall Stanicky of RBC Capital Markets. Please go ahead..

Good morning, Randall..

Hey, Murray. Good morning. Hey, just to put this guidance question to us because there is a lot of questions around it, it sounds like if I am hearing you correctly there has been real estate drivers, you are looking for better clarity around those before addressing guidance.

Are there factors that would pressure that range or is this just while being prudent we are in the first quarter of a pandemic? And then my second question, can you just quantify the e-commerce business and how that – what that margin is relative to the overall CSCA margin that would be helpful? Thanks..

Okay. Let me do the second part of that first. I believe the margins are equal. We are all sitting in different rooms, maybe somebody can send me the absolute number in e-commerce, but either way, the margins are roughly equal or even slightly better in our e-commerce business. So, that shift doesn’t hurt us in anyway.

And listen, I don’t know how to be any clear, what I worry about is business interrupt. My team, like as a crisis committee, Randall, we meet – we were meeting in the beginning everyday. We get better at it, but we have had hits of employees, thanks goodness.

We were ahead of the world on precautionary measures and we have caught most of those, but the vast majority of those we have got to trace and track, we have got all of that. We handle it in a strong manner, but we have had hits and so my fear is business interruption.

I worry – I am at worry, I worry that when the world starts loosening up and states are loosening up that at any given time you could get a plan hit. I think we are more experienced now.

And with the precautionary measures, with the temperature tests, with the questionnaires, with the restrictions we have in place and our experience, I mean hell, we have been able to keep – yes, I am not allowed to say hell on a conference call, but we have been able to keep a facility running in the brunt in New York through all of this and they have had hits.

So – but that’s your biggest downside concern is business interruption. And I believe that what every single company in the world is facing right now.

But for that big concern even with some pantry de-loading and I am not sure there is going to be a huge pantry de-load, but even with some of that, with all the positive things, I normally be raising guidance right now. I would, I mean, we are – we beat the heck out of it. I will – the SEC says to give as much transparency as possible right now.

I will tell you we haven’t seen orders light up in April yet.

So, we are still struggling – we are not filling all the orders that we have, we are prioritizing products with society needs and on a cumulative basis, through the middle of April, the pain category with the last few weeks and I am referring to IRI numbers is up strong double-digits, cough cold up strong double-digits, allergy up strong double-digits.

I mean, topical is up strong double-digits, infant formula up double-digits, nutrition brings up strong double-digits, electrolytes up strong double-digits and consumption all the way through April ‘19. So, we are not pulling guidance.

I think that’s a word unchanged meant we were sure that we were right and I don’t have data to say we were right at the current range. And if it wasn’t for the potential of business interruption I’d probably be raising at the moment..

That’s helpful. Thank you..

Operator?.

I am sorry. The next question is from Ami Fadia of SVB Leerink. Please go ahead..

Good morning..

Hi, congratulations and good morning. Congratulations on the strong quarter..

Thank you..

So I think you have made the point on guidance very clear, so I will not repeat that. I wanted to get some color on just e-commerce channel and your ability to maybe what you are seeing on the ground there has been some discussion around reduction in food traffic adds some fees.

Are you seeing that impacting the demand? It doesn’t sound like it, but is that being sort of taken care of or offset by increase in e-commerce, can you sort of confirm that? With regards to ProAir, what’s your full capacity with regards to how much demand you can fulfill for this year and how should we think about increase in that capacity into next year? Thank you..

Let me just breakdown the second part. So I don’t forget it. In terms of e-commerce, it’s a little bit – the answer is no, we haven’t seen demand slow. I mean, maybe the orders have flowed a little bit in the past couple of weeks, but the backlog of orders is tremendous.

We are not close yet to filling all the orders that we have and yes, kept orders that we have in hand today. But just to be clear, like when we ship through most of our major customers that are getting surges in their e-commerce business, we just ship it to them and then they sell it right.

So from us, it’s an order to Costco as an example or to Wal-Mart and then they fulfill it on a online basis. And it shows up in our regular numbers and we keep those numbers out as we have line of sight. But so far we have been more than offsetting some any slowdown.

I mean, it would be – it’s almost hard for us to see us to slowdown that some of the retailers report in food traffic, but for I guess the IRI numbers and I assume that those have slowed down in certain categories, slowdown in infant formula, you would expect that your baby is not going to eat more.

But on the other hand, pain hasn’t slowed down, acetaminophen and ibuprofen those products haven’t slowed down at all. So bottom line is yes, I think there is channel shifting going on and I on a personal – I don’t have a big data to support that.

I think that there is enough time going by here that people are learning where they might have been reluctant before. They are learning the power of e-commerce and in a more cautious world going forward, I think online will continue to get more and more important. We are working pretty hard on omni-channel report.

So our ability to, let’s not report the shares based on IRI, but on a total mass merge and traditional retailers report and on a e-commerce basis and hopefully we will get to that point. We are confident some of those numbers to share those soon.

On ProAir, the generic ProAir, that one is – that’s a good question, because our ongoing rate from we can’t satisfy at the level that we did initially. We will be well ahead of well, well, well ahead of our projections that we had internally for the year, but it will get back to a normal level.

And if I am not prepared to speak at whether Catalent it was our partner can expand capacity or not or how fast or how big the real demand is on an ongoing basis, there will be more competitors, etcetera. But there will be no, we have pre-built that inventory in anticipation of an approval earlier.

And we had a good amount on hand and we still are working our way through that. It will get to sort of a more normalized level and then we will see how the market shapes out, but there will be no giveback on albuterol and albuterol probably 30% of what we attributed is sort of the spike in demand on COVID.

So you can just subtract that out when you are trying to estimate impact, I look at it and say at about $100 million of COVID impact, we think it subtract out the 30, you got 70 probably, a good portion of that was consumed we have some yield get backs and on the other hand we got to rebuild all those store shelves have to get full again all of the customer warehouses have to get full again and we also have to start we are not making all of our products right now and we have got to reengage and make those when we can make the products that are less important to the society right now as well so I think we will [Technical Difficulty] any manufacturer right now.

And you see it in the news, if you get a hit in a facility of somebody who gets COVID, it scares people and we are very cautious.

So if there is somebody who happened to get into the plant we trace them and if they even modestly come into contact with them and over 12 or 14 people we send them home for two weeks bottom line that results in a meaningfully higher level of absenteeism worldwide than we would normally deal with and despite and that varies alright I mean it may happen for a week or two and then come right back to normal again there are parts of the world where local governments mandate certain people that are in a high risk category not to come to work at all that creates less people in the facilities bottom line though is through this we have been able to keep 38 manufacturing facilities globally running they are all running today and I would say on average of about 80% productivity..

Great thank you..

Our next question is from David Risinger of Morgan Stanley. Please go ahead..

Hey, David..

Hi, Murray.

Congrats on the performance during these difficult times I have a couple of questions please first with respect to costs and just what’s happening with supply could you just help us better understand is the right way to think about Perrigo’s cost structure this year that higher COGS due to COVID are going to be offset by lower SG&A due to less travel and less commercialization costs so I guess that’s the first question at a high level.

Second with respect to supply could you comment on whether there are any API or intermediates supply issues or either the consumer or the Rx business and then third with respect to the dermatology Rx business so obviously derm is a big component of Perrigo’s Rx leadership but stay at home orders have impacted patient visits dramatically I was just hoping you can comment on that as well? Thank you..

Okay.

Ray, I am doing – would you want to do the cost one?.

Sure.

So I think you basically described it to a certain extent David but we are seeing increase in some of our costs as Murray described we got absenteeism in the plants that we still pay people for the most part even when they are absent under COVID-19 so we do see some higher costs there and we are getting operational leverage on all three businesses is quite significant but that is because of the increased sales certainly in the first quarter we are seeing momentum savings continuing and we paid special bonus we talked about which obviously resulted in higher overall compensation costs but I think the unbalance if you look at operating income as a operating margin and operating income as I mentioned earlier in the call if you look through to that our operating expenses are down slightly we would expect that trend to continue and we are also expecting probably less advertising and promotional cost for the time being plus as you mentioned less travel and less of those other expenses.

And we are seeing just a small down in the Q1 on the – on our operating margin, with a big increase obviously in our operating income..

Yes, I mean, thank you, Ray. David, it is – it’s a bit hard to measure, right, because lot of this all happened in the last couple of weeks from March. So, we will get a much better handle. This is a good area of where I would like to tell you we have a good handle on it, but there are so many moving pieces and we will see how it shapes out.

But I don’t think it will be a severe movement one way or the other. We didn’t non-GAAP out employee bonuses. Those were my decision to do those. And I think that was money well spent.

People are not – people are proud at Perrigo right now of what they are doing for society and they know that myself and my leadership team put their safety first and I am proud of that fact. That’s one of the things I am most proud about in my carrier. And we will continue to do that. There are other efficiencies too right.

I mean, we will have some less absorption when we are running more acetaminophen, but on the other hand, you are going to have more efficiencies, because we have partnered. And I wanted to make this point and it’s not really your question, but our customers have been unbelievable through this, right.

John Furner, President, he has been of EVP, Head of North America for Wal-Mart calls me on the phone and says all rules are off right now, how can we help you to do what’s right for society and just focus on your big SKUs and we are doing that with all of our manufacturers.

So, we are doing longer runs of the bigger item than we would normally done and with agreement that we are just going to leave some of the smaller secondary items out of distribution right now. So, we will get efficiencies on that.

So, I need to see all of that, where I need to see how all of that shakes out, but yes, there will be less travel, there will be less advertising, there will be some expenses delayed on clinical trials and things like that. But boy, it’s hard to really to get a real good handle on it, but it will normalize. And Ray talked about the other areas.

ATI, we have been able to work through it pretty well. We never really had any significant interruptions. We were fortunate that we keep strategic inventories, have ATI on hand. So we had sufficient ATI to weather the storm in any places where there were interruptions. For the most part, we work through that.

There was an interruption for a while with India and Paracetamol, but this is another point I guess I would like to make is that for the U.S. which is our biggest business, we mostly have 24 facilities in the U.S. The ATI was in the inventory in the U.S.

So while sometimes that hurts us on the cost side, it was sure good to be primarily a U.S manufacturer of product servicing in the U.S market through this storm and it highlights a Perrigo advantage. But the answer is so far so good on ATI, on Rx on we did have some third-party suppliers we rely on who had some interruption.

They are backup and running again, but yes, we – Rx had a stronger quarter without some of the interruption in their supply. Hopefully that’s back on track.

Now, it appears to be or soon to be and yes, there is a little bit of softness in some of the areas, not just in Rx, but you are not selling a lot of weight loss products or – I mean our sun care products or headlight products and all that in Europe right now until things open backup again, but on the other hand we have surges on the other side.

I mean, there is a lot of moving pieces. But in general, we are not having significant interruption. We have fires everyday. It is a lot of heavy lifting.

It is much more than people understand who aren't living the daily fires, and that's why I made the point to be how proud I am on my team I mean we get a 100 problems a day or 1000 problems a day they work through it and they solve it and it has been remarkable to watch..

That’s great additional color. Much appreciated.

And then on the derm demand?.

I don’t have the exact numbers in front of me Brad may be you can get back to David after that I mean I think we said the we were little bit softer in some of those areas I just have the numbers on my hands David, but we will get back to you..

Okay, thank you and congrats again..

Thank you..

The next question is from David Steinberg of Jefferies. Please go ahead..

Yes, thanks.

I had a question about some recent OTC reform legislation, one of the stimulus bills seemingly buried in it was legislation related to OTCs and monograph OTCs and it sounded like a might benefit the company some of the headlines relating to user fees and encouraging innovations so I was just curious does that legislation benefit Perrigo if so how does it and if so does it shift some of the prioritization of your projects and then secondly on your generics business I know you have been intending for a while to either sell it or divest it or spin it and we haven’t heard much recently so I am just curious given the recent approval for albuterol does that change the dynamics in terms of potential value received or in time lines relating to potential divestures? Thanks..

While the recent approval makes it more expensive, but the bottom line is I have said for almost a year now that our focus is primarily on the consumer business but the Rx business is performing much better and throwing off a lot of cash and I am and our entire management team are towards of shareholder value and the multiples are so depressed in the Rx industry right now I believe it would destroy shareholder value to solve the kind of multiples that are out there right now so our strategic focus remains consumer self care we are proud of what our Rx team is doing there and they are generating a ton of cash and when the opportunity is right we still intend the sellers spin it but nothing is really changed on it but I just don’t see that happening in the short term on the first part of your question there are a number of things but Ray already talked about the CARES Act tax benefit so that’s been covered then there are two other important components of it the OTC Monograph format which finally got passed and something we have been pushing for but just to be and that will be make it easier for us in the future to bring all kinds of products our OTC products to market faster that’s the good news the reality is there is probably three years before the agency gets it up and running so it is an another positive for the long term benefit of Perrigo but it is not going to have it up an immediate impact so that’s great news it is not good news it is great news but it is out there a little away and I think the other one that’s immediate is the restoration of the OTC eligibility the FSA, HSA accounts when the Affordable Care Act assigned in the last 10 years ago and on a intended consequence was no longer allowing OTC products to be eligible for FSA, HSA reimbursements if the CARES Act reverse this decision which is a win for the industry and consumers who like so hope that answered your questions.

Operator, any other questions?.

The next comes from Gregg Gilbert of SunTrust. Please go ahead..

Good morning..

Hey Gregg.

So Murray and Ray I can see certainly the Rx to OTC switch of Voltaren Gel as a long term positive but I was hoping if you could help us understand how much you are selling on the Rx side currently of that product and how that would wind down does that come to an abrupt end and then the OTC that comes in maybe help us envision that what goes away and what comes in.

And Mario, on the bolt-in front, curious what your appetite is now, I imagine you have a long list of things that are potentially actionable, but it’s now the time to take – to hit the pause button in light of the pandemic and putting out fires daily or is it all system to go on the bolt-on front? Thanks..

Well, I mean, good question. I mean, I will tell you we have been at – we closed on the Doctor Fresh deal, but that deal was a done deal prior to the whole COVID issue. And I am being more cautious at the moment and we were – we didn’t how this thing was going to play out or shake out. So we were very conservative with cash.

We drew down $100 million on the revolver and we sit here now 5 or 6 weeks later and we so far knock-on wood have come through it very well. But yes, we have lots of things under evaluation. We slowed it down a little bit, but I am no less committed to bolt-ons than I was.

It’s a key part of our strategy and maybe this will present us even additional opportunities at even a better value going forward. But for the short-term here, we are taking a more cautious stance. So, yes, we have slowed it down a bit right now.

I am not too concerned about that given the strength of the core business however and the fact that we already have Doctor Fresh and Steripod that were already done this year and we are just launching Prevacid. And the second question was on Voltaren, I think it’s a bit early for me to do that.

I know there will be some abrupt halt of the sales within Rx and we will be – we were able to get our application within 72 hours, which was remarkable and get the approval and we will be launching and then I also think there will still be an ORF component of the sales as well.

So we will give you more details as we get closer on the size of the market and how big we think Voltaren is and but I am not prepared to elaborate more than that today..

Okay, thanks..

The next question is from Elliot Wilbur of Raymond James. Please go ahead..

Thanks. Good morning.

Wanted to ask just a question or line of questions directed towards Ray, specifically with respect to cash flow performance and cash flow conversion you caught up a strong performance in the quarter, but as I think about ARs likely moving higher and inventory build increasing over the balance of the year, how do we think about operating cash flow performance over the balance of the year and cash flow conversion is essentially operating cash flow equal to adjusted net income kind of the right metric to think about for the full year or could we actually be expecting something less than given the strong performance in the first quarter? And then just real quickly want to ask two about trade inventory levels just want to get some insight into where those may stand whether or not there is significant differences between Rx and the OTC side there? And if I may want to ask one question of Murray as well and Murray I did check and hell is not one of George Carlin’s 7 words, so you are covered there.

But I wanted to ask specifically you called out increased store brand share versus other store brands in the last two quarters as a source of strength in the business? And just wondering what is driving that and what’s the relative opportunity obviously versus taking share versus national brand, is this just a product issue or is it more of a structural issue? Thanks..

Ray, why don’t you do the first part?.

Okay.

So with respect to the first quarter, we saw the cash flow was strong for two major reasons, one we had very high demand which resulted on inventory being drawn down and two, we recovered – we saw recovery in our Rx AR which was an issue in the fourth quarter of last year where we saw going the wrong way for us, but we would – it was improving as we came into the first quarter and contributed to a strong cash flow conversion that was despite the fact that the surge that resulted from the COVID-19 really occurred from the second and third weeks of march on and was most heavy at the very end of March so that resulted in a buildup of our CSCA and CSCI too with respect to houses cash flow forward through the year clearly we do have capital expenditures that we had planned for that may not happen quite as heavily we are not permitting outsiders in our plants at the moment and we are running flat out as we talked about earlier in the call Murray talked about in the plants of running flat out so the likelihood is that we are going to spend less capital and that will obviously be cash flow positive for the year I don’t think we will see cash flow equal to operating income for the balance of the year we are going to continue to spend on projects we obviously going to continue to pay dividends and that’s very important to us so I would say that we haven’t changed our guidance for the year and we are probably not going to change our cash flow guidance either at this point in time..

Yes I would say that on the share – I went into great detail. And really, there's nothing that's changed in the first quarter and the explanations I gave on the conference call on February 27. It was – we win store branch share either by gaining distribution.

We try not to do it on price right So I had talked about how we had won a big piece of gum business from a major customer because they we have lost that the year earlier and their business fell off because we had a product in blind taste testing, a nicotine gum, that was preferred through the one and that reinstated that product and now their business is growing again then we win share that way and we had a major new customer although we are the bulk of the store brand business and infant formula.

But lots of other new products were driving those.

So it was in the Mucinex like [indiscernible] type products that was an area where we were not as strong we finally got the right products in place and one accounts and one share with that we had done the same thing in the allergy business and we have one share and then we had this odd dynamic which is still continuing to play out very strongly.

And in the discontinuance of ranitidine was a – that was a segment where we had a low share so and that product was pulled from the market even though the total market didn’t grow a lot of it switched to for example omeprazole as one of the areas where it switched to where we had a very high shares so just those consumers changing so those are the kind of the big three drivers consumer products and new products driven and then a beneficial mix shift in the digested area, in the GI area.

Answered your question?.

Yes, thank you..

Okay any others out there.

No there are no other questions I would like to turn it back to Murray Kessler for closing remarks..

I just – I’ll leave you saying one more time I keep hammering it over and over again that something like I have never seen the Perrigo business is strong, the team is incredible they are confident they are – my leadership team is very seasoned they handle everything in a common deliberate manner and they have been able to handle crisis and I am confident that while there could be some shorter term bumps I think the outlook for Perrigo is very strong I have never anticipated this coming into the company but I think price value, store brand products will play a bigger role going forward I think that’s health care will play a bigger role in a new normal world where consumers are a little bit more reluctant to run to the emergency room or hospitals and I certainly think e-commerce will be a bigger role and we are strong in each of those.

We will get through this. We will have some uncertainty. And I know that’s hard for everybody who is trying to cover the socks, but I think if you sort of look where Perrigo stands today versus most companies in the world, I think we are performing pretty darn well.

And so I will just end up one more time thanking all the employees who I know it’s nervous to come into the facilities and – but you are doing good for society and you should be very proud and we are very proud of you. Thank you for your interest in Perrigo..

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect..