PRGO
#Thanks, <UNK>, and good morning everyone
Bear with me with my – as you listen to my raspy voice this morning
I helped kick off the 2017 and 2018 cough/cold season this week
Last quarter, the theme I used to describe our business performance was converting opportunities into bottom line results
We are pleased that this theme continues, which is reflected in our performance again this quarter
Each of our businesses have developed a keen focus on execution, action, and capitalizing on opportunities, all of which have provided the foundation of our financial results in the first nine months of the year
These results were achieved again against a challenging and dynamic market backdrop for each of our segments
Now let's turn to slide 10, where you can see our GAAP reporting results for the third quarter
Please reference the appendix for a more detailed reconciliation from reported to adjusted results
I would like to take a moment to outline the effect of the favorable adjusted effective tax rate, or ETR, in the quarter
As you can see in this slide, our adjusted ETR is approximately 12% in the quarter, which contributed approximately $0.09 of upside to our previous guidance
Year to date, our adjusted ETR is approximately 17%, which is lower than our previous guidance
Our ETR guidance has improved primarily first to the utilization of tax attributes supported by the improved business performance in the CHC International segment, and second, improved jurisdictional mix of income across the company
For the third quarter, recall that accounting principles require what is commonly known as annualization of the expected decrease or increase of the annual tax rate to be recorded in the current quarter
Accordingly, the third quarter tax rate is below the expected annual tax rate of 17%, due to this cumulative benefit for the first nine months of the year
Turning to the CHC America results on slide 11. You can see that the net sales in the quarter were $599 million, compared to adjusted net sales of $590 million in the prior year, or growth of over 1% on a constant currency basis
This increase is primarily driven by higher net sales in the GI category, in addition to strong performance in our Animal Health and Mexico businesses as compared to the prior year
New product sales in the quarter were $13 million, driven by the store brand launch of Nexium, which launched late in the quarter
Offsetting these positive effects were lower sales primarily in the smoking cessation and contract categories, in addition to pricing pressure in certain OTC categories
Discontinued products were $3 million in the quarter
For the quarter adjusted gross profit margin was 36.4%, an increase of 100 basis points compared to the prior year
Sell through of higher margin products, specifically in the Animal Health and Dermatology categories, in addition to positive contributions from supply chain efficiencies, offset price erosion in certain categories versus last year
Adjusted operating margin was above 20% for the seventh quarter in a row, driven by gross margin flow through and lower selling and administrative costs due to restructuring actions and timing of R&D investments
The durability of this business is evidenced by the strong operating margin and continued consumer acceptance of store brand products
Turning to slide 12. Net sales grew by approximately 5%, excluding $42 million from the exited unprofitable European distribution businesses and favorable foreign currency movements of $12 million
This increase was primarily driven by higher net sales in the cough/cold, allergy, analgesics, and lifestyle categories, in addition to new product sales of $11 million
Adjusted gross profit margin in the quarter was 51.4% or a 570 basis point increase over the prior year, primarily due to the cancellation of the unprofitable distribution businesses
This segment also benefited from our strategy to insource more production of our branded OTC products, which helped to offset unfavorable effects from foreign currency purchases and a mix of lower margin products sold in the quarter
Adjusted operating margining of 16.4% was driven primarily by gross margin flow through and lower operating expenses, primarily due to the improved sales infrastructure
The year-over-year adjusted operating margin improvement included advertising and promotion, or A&P, investments in line with the prior year
Year-to-date adjusted operating margin was approximately 14.9%
Quarter by quarter, operating margin may vary by an estimated plus or minus 150 basis points from this run rate due to the timing of investments in innovation, A&P, or expenses to build out our back office systems in this segment, as I will discuss in more detail shortly
As an example, the third quarter adjusted operating margin was clearly in the upper end of this range due to seasonally lower A&P spending as a percent of net sales
Saying it differently, if A&P spending in Q3 was the same as the quarterly average percent of net sales in the first half of 2017, adjusting operating margin in Q3 would have been consistent with the lower end of our guidance range of 14% to 15%
Turning now to RX on slide 13. Net sales in this segment were relatively flat compared to the prior year
Excluding the $10 million year-over-year impact of Entocort, net sales in RX grew approximately 4% compared to the prior year
New product sales in the quarter were $31 million, driven by the generic launch of Axiron, among other new product launches, which are offset partially by price erosion at the lower end of our previous guidance of 9% to 11%
Adjusted gross margin was 54.9%, as price erosion in Entocort competition offset new product contributions versus the prior year
Adjusted operating margin for the segment was 42.4%, consistent with the same quarter in the prior year due to lower selling expenses driven by the restructuring of the specialty pharma salesforce and timing of R&D investments
Excluding Entocort, adjusted operating income grew an impressive 10% in the quarter to $103 million
The strategy in this segment of driving new product launches and proactively managing our cost base in the difficult to manufacture extended topicals market delivered solid results again this quarter
Now turning to slide 14. I will provide an update on our cash flow from operations and balance sheet
In the first nine months of the year we generated $482 million in cash from operations
Excluding an unusual tax payment of $74 million and cash restructuring payments of approximately $48 million, year-to-date cash from operations would total $604 million
Our team continues to focus on cash flow generation, as operational cash flow conversion as a percentage of adjusted net income for first nine months of the year was 116% excluding these two items
As of September 30, 2017, total cash on the balance sheet was $776 million, and total outstanding debt was approximately $3.7 million (sic) [$3.7 billion]
As a reminder, we intend to repay approximately $370 million of debt due in December of this year
Including this repayment, our total debt is expected to be reduced by approximately $2.6 billion in 2017. Our debt pay down actions this year continue to increase our financial flexibility, enabling the majority of free cash flow to be available for inorganic growth opportunities and/or returning capital to shareholders
Our combined total debt maturities for the years 2018, 2019, and 2020 are approximately $550 million
We believe that this balance sheet flexibility, coupled with our cash flow conversion, makes us unique in this space
Our capital allocation decisions are focused on total shareholder returns within the context of our long standing commitment to an investment grade financial policy
As part of our disciplined and balanced capital allocation strategy, we completed approximately $192 million of share repurchases year to date
Perrigo's strategic priorities remain focused on driving organic investment and organic pipeline, targeting inorganic opportunities in our Consumer and RX businesses to achieve measurable shareholder value creation, supplemented by shareholder return programs
On slide 15 you can see the bridge that walks from our adjusted EPS guidance provided on August 10 to the upgraded adjusted EPS guide provided this morning
The increase in guidance is primarily driven by three factors
First, given strong execution across all of our segments in the third quarter and a lower adjusted effective tax rate, we are upgrading our midpoint adjusted EPS guidance range by approximately $0.25 per share
Second, we used our balance sheet flexibility and strong cash flow position to repurchase $133 million, or approximately 1.9 million shares in the quarter, which represents a benefit of approximately $0.02 per share in 2017. This action in our – this action is reflected in our 2017 share count guidance of 143 million shares
Third, accounting for favorable currency movements compared to the forecast provided against August 10, we are updating our adjusted EPS guidance range by approximately $0.03 per share
The result of these combined factors is a 30% increase in our midpoint adjusted EPS guidance to a range of $4.80 to $4.95 per share
Our continued emphasis on operational execution and actions to focus and simplify our business model continue to strengthen our performance outlook
On slide 16 you can see our 2017 segment guidance
In CHC Americas we continue to expect approximately $2.4 billion in net sales
This guidance has remained consistent since February 28, 2017, when we initially announced guidance for the segment
Our adjusted operating margin guidance is expected to be within the range of 21% to 22%
At CHC International, given the actions we have taken in this business and the corresponding strong performance of net sales along with currency movements, we now expect approximately $1.485 billion in net sales
This quarter we are also upgrading our adjusted operating margin guidance for 2017 to approximately 14% to 15% of net sales
This is driven by continued execution of our focused business strategy
Included in this updated range are seasonally higher fourth quarter A&P investments, which were consistent with the 2016 spending levels
The CHC International team continues to look for ways to improve the portfolio with targeted streamlining and business development actions, executing on our insourcing strategy, and improving the cost structure of this segment
In RX, given the continued strong performance of new product launches and execution of our diversified extended topicals portfolio, we now expect approximately $965 million in net sales
This forecast also includes an updated price erosion assumption
We are now anticipating to be in the high single digits for 2017. RX adjusted operating margin is forecasted between 41% to 42% for the year
We have continued to upgrade both top line and bottom line guidance during the year for this segment, based on execution of our strong pipeline and our differentiated generics platform
On slide 17 you can see our increased consolidated 2017 guidance metrics
Driven by the upgrades just discussed for our CHC International and RX segments, we now expect consolidated adjusted net sales of approximately $4.8 billion to $4.9 billion and adjusted operating income in the range of $990 million to $1.01 billion for 2017. Regarding growth investments, third quarter consolidated R&D investments as a percentage of net sales were 3%, which is lower than our expected run rate of nearly 4% of net sales for the year, partially due to the timing of clinical studies and milestone payments
This shift of approximately $10 million to $12 million is expected to be invested in Q4. Our expected adjusted tax rate is now forecasted at approximately 17% to pre-tax income due to the factors outlined earlier
Our full year adjusted EPS range has been updated to $4.80 to $4.95, a $0.30 midpoint improvement from the range provided on August 10. This range includes the updated share count to reflect the buyback executed during the third quarter
The quality of business execution that we have seen through the third quarter not only provides increased confidence in our full year guidance, as illustrated by today's upgrade, but it also enables us to execute longer term strategic investments
While we are pleased to be on track to achieve the benefits from our cost savings program, we plan to invest a portion of these savings back into the business in 2018. These investments will be in such areas as continuing to improve the business capabilities in CHC International, including the IT infrastructure, and regulatory and compliance programs such as the new global data privacy regulation
To give a tangible example of reinvestment back into the business, we are currently in the process of implementing a pan-European integrated sales and operating technology platform that will continue to improve our forecast accuracy, reduce inventory obsolescence and returns, and support our sales effectiveness programs
Our guidance for operational cash flow has been increased to $620 million, consistent with the upgrade in earnings guidance for the year
Excluding the unusual tax payment for $74 million, cash restructuring payments of approximately $60 million, 2017 cash from operations would total approximately $750 million
Despite dynamic end markets, our guidance reflects the benefits of our ability to focus, simplify, and execute our business model
On a constant currency basis, excluding divested and exited businesses, our CHCA, our CHCI segments year to date net sales growth for 2017 are approximately 1% and 2% respectively
Excluding the year-over-year effect of Entocort, RX growth is trending above 2% in the second half of the year, driven by new product launches
These are overarching business trends are expected to continue as we enter 2018. I would like to thank the entire Perrigo team for the quality of business execution that we have seen through the third quarter, which has played a large part in our ability to again upgrade our 2017 guidance
I will now turn the call back over to <UNK>
This is Ron, but now I could just add, sometimes we focus on pricing, but at the end of the day it's about new products
Right? So take a look at that business, and essentially in the evolution of this business this year, we had $217 million of sales in Q1, $240 million in Q2, $251 million in Q3, and you'll see a sequential growth again in Q4. So when we're focused on pricing, what I think we've asked you to do is looking at the quality of the business and how this business is growing with net pricing pressure
So although we're – and <UNK> has mentioned – experiencing the high single digits with new products – example, $30 million of new products contribution in Q3. We grew 4%
That to me is the story
So pricing, you bet
But it comes back to, how do you offset new pricing? Is through pipeline, it's through new products
And we're proving our capability to show net growth in this business
And as we've talked, we expect net growth in the circa 2% in the second half of this year
So that to me is the ultimate metric of where the business trends are
Yeah, thanks, <UNK>, for the question
Obviously, a very relevant and important topic for every company at this point
To start, Perrigo has always talked about we believe that tax reform is necessary
Modernizing what you could argue is an outdated United States tax code for competitiveness for the U.S
in jobs and investment is critical for the U.S
economy over the longer term
You step back and think about Perrigo, kind of going to your question, we have over 10,000 employees
Our largest manufacturing footprint is here in the U.S
And our goal and our priority is to enable and deliver quality affordable healthcare to consumers around the world
So that's the business of Perrigo
I think, <UNK>, we can agree to kind of three things to start with
Number one, we're very early in the process
The first H-1 bill was issued just a week ago
It still remains very dynamic
And I think we probably can agree the final reform to the extent it's achieved will not be like the first bill that was provided
So that's probably the first thing
Number two, it's very complex
It's a very complicated process
And this goes to some of the amendments we're seeing already in the process relative to some of the architecture of the current bill
Tax reform is not simple
The third part is every multinational company, of which Perrigo obviously is in that umbrella, will likely be affected by tax reform
And the question, kind of going a little bit to your question is, what's often asked, is this good or bad for you? In my mind, that not – it's not a binary question
I think the issue we're all faced with is looking at what I call the building blocks and the systematic changes of the entire reform package
And then coming back and saying, what does that mean for Perrigo, our investors, and our customers? So again, we applaud the U.S
government for being serious about tax reform
<UNK>, we're taking a very thoughtful process
We do see the House bill as what I'll call the opening bid
And we continue to monitor and evaluate again what I call the building blocks and systemic changes
But for us to provide a good/bad systemic indication at this point would not provide a very steady hand, thoughtful process
So we're looking for what final reform is
Where does the final delivery of the legislative process come forth to? And we'll be very proactive in communicating and addressing Perrigo's situation at that time
So product mix was normal this quarter
We've kind of talked to investors across the board that if you look at a average gross profit margin, adjusted gross profit margin as the indicator, it's around 55%
This quarter, 55%
Now again, quarter by quarter we may vary off that 150 basis points plus or minus
But a standardized margin in this business right now, it's about that window
And we are right there this last quarter
I, yeah, I can take that one
But yeah, kind of a two-part question there
So first of all, we have talked about insourcing for some time, so hopefully that message has been clear, <UNK>, at least in my mind
We provided systematic commentary that that strategy started about a year and a half ago and we're starting to see the benefits
If you look at the gross profit margin in this business, it's been running pretty much like clockwork at 51%, 52% adjusted GPs to sales
So pretty consistent performance
So we are seeing the phasing in
And as we've talked about before, just to put kind of an overarching metric on it, we acquired the assets of Omega, the branded business
They were about 80% outsourced
Now our goal is to get that down to under 60% outsourced
And again we've said we're just about halfway through that journey, not quite
So figure a third to halfway through that journey at this point
So it's phasing into our performance as we speak
On the A&P piece, it's seasonal
I mean if you look at the metrics, <UNK>, and trend backwards, this business, yeah, Q1, Q2, Q4, usually runs 12%
Q4 is a great example
You're spending into the cough/cold season
You're spending into lifestyle
We have lifestyle weight loss products
You want to advertise and promote into "the January renewal cycle
" And Q3 is always running around that 10% of sales
So there's nothing I'll call out that we've done dynamically different
It is A&P aligned with our sales strategy is one of the key things Svend [Andersen] has done is ensuring our sales management model is aligned with our promotional programs
So we are making sure in a disciplined way that that A&P ties to our top line execution
And you're just seeing that in Q3. Nothing unusual other than business discipline and again some seasonally lower attribution, just given the product portfolio in Q3.
Yeah, so certainly I'll kind of go through a couple things
So first of all, again to your question, we did grow last year Q3, roughly 4% in Q3, 5%
Just to kind of put the comps out there that we're growing off of
So again, still good performance against those relative comps, number one
The cough/cold dynamic, we've moderated – or I shouldn't say moderated
We put in a normalized cough/cold season
If you look at normal business patterns, it's usually a little higher in Q4 just due to some seasonality
If you look at our guidance model for this year, you're going to see in the 2.5%-ish to 3% uptick from Q3. But that's pretty traditional
There's not a lot of difference from what we've seen in our historical patterns
So again, we're modeling on a normalized cough/cold season
We're not looking at any other kind of product – any kind of product dynamics other than the Nexium new product penetration that we see in Q4. And again on a sequential basis if you model out in that 2% to 3% zone – that's what our guidance tells you to do – you'll come out what we expect in the Q4 sales line
