Perrigo Company plc

Good day and welcome to Perigo's second quarter 2020 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star and then one on your telephone keypad. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Bradley Joseph, Vice President, Global Investor Relations and Corporate Communications. Please go ahead.

Thank you. Good morning and welcome to Perigo's second quarter 2020 earnings conference call. We hope everyone is remaining healthy and safe during these times. I hope you all had a chance to review the press release we issued earlier this morning. A copy of the release and a presentation for today's discussion are available within the investor section of the perigo.com website. Joining today's call are President and CEO Murray Kessler and CFO Ray Silcock. I'd 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 noted. Comparisons to prior years will also exclude divested businesses and currency changes unless otherwise noted. 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 divested businesses excludes contributions from the divested animal health business and the Divested Cannaderm product previously included in the Consumer Self-Care International segment. Second, organic growth excludes the oral care portfolio, which includes the acquisitions of Rainier, Steropod and Dr. Fresh, the Divested Animal Health Business and Cannaderm product and currency. And third, as a reminder, worldwide consumer includes the Consumer Self-Care America's, and Consumer Self-Care International segments, as well as corporate. And with that, I'd like to turn the call over to Murray.

Good morning, everyone. I want to begin today's call by once again thanking our people, both in the manufacturing facilities and those working from home for their incredible efforts in continuing to meet society's needs for our essential products during the COVID-19 pandemic and delivering another superior quarter financially, while at the same time, advancing the company's transformation plans and improving our balance sheet. I'm truly proud of how our team has performed. Here's why I say that. During the second quarter, our team once again maintained uninterrupted operations in all of our 27 manufacturing facilities around the world, most of which have been running 24 hours a day seven days a week without missing a single shift due to COVID-19 to meet the self-care and health care needs of society during this pandemic. Divested the non-strategic Rosemont RX business for 195 million at an attractive multiple, provided greater assurance of liquidity by refinancing our 2021 bonds into 2030 bonds at an attractive 3.15% coupon rate, increased the company's cash position to approximately $850 million, achieved over 200% cash conversion, brought our net leverage down to 2.9 times, closed the Dr. Fresh oral care acquisition for $113 million, committed $50 million to purchase an approximate 20% stake in Casimira, a leading supplier of hemp-based, PHC-free CBD products to enter that market in a responsible, perigo way, began rolling out our new business intelligence platform to allow more sophisticated decision-making company-wide, and as I said, delivered another quarter of superior financial results well ahead of expectations despite the constant set of challenges we faced. When our last quarterly earnings call, we did not update our original 2020 adjusted EPS guidance as the uncertainty and numerous moving pieces surrounding the pandemic did not allow us to produce an accurate projection. And while there is still significant uncertainty regarding the potential for a second wave of COVID and its implications on supply and demand, We know a lot more now than we did three months ago and have a lot more experience managing through this horrific pandemic. We know that our team has implemented best-in-class protocols and action plans including enhanced cleaning practices and contact tracing procedures to keep our manufacturing facilities running when a colleague tests positive or is presumptive positive with COVID-19. We know that our stay-at-home colleagues can effectively keep almost all of our transformation initiatives moving forward with minimal delay, including project momentum cost savings and new products. We know that most retail and wholesale inventories have been restored, so that shouldn't be a factor going forward. But we also know that we are still playing catch-up on our own depleted inventories, which could limit our potential to meet consumer demand if another pantry load similar to March happened within the next two months. And while we can't forecast the potential for a second wave, nor its potential timing, we can forecast the impact it would have to our business under various scenarios. And we don't think there would be the same pantry load mentality, so this shouldn't be an issue. But to maintain our conservatism, we are not assuming a second major demand increase We know which of our products see increased demand from spikes in COVID-19 infection rates and the extent to which our portfolio is also benefiting from channel shifting from traditional in-store shopping to e-commerce. We know from our experience right now in Florida, Texas, Arizona, and California that when a surge in cases reoccurs, a corresponding spike in consumer demand We also know which of our products were negatively affected by lockdowns, closed doctor's offices, and stay-at-home orders. Some of these products have fully recovered. Some are recovering more slowly and on those we have conservatively forecasted only a modest recovery in the second half. We know that about half of the $18 million in A&P savings we benefited from in the first half versus last year needs to be shifted to the second half of this year to stimulate awareness and remain competitive on products that were negatively impacted by lockdown. We know The incremental costs associated with operating in a lockdown environment, including benefits and bonuses for our people, safety procedures, overtime pay, and it built those unbudgeted expenses into the balance of the year. We expect a P&L impact of $20 to $25 million, or $0.12 to $0.15 per adjusted EPS in 2020. We know how the CARES Act will positively affect our effective tax rates. and have also built it into the balance of the year. And we know that after our divestment of Rosemont, we will have a negative impact of six cents per share in adjusted EPS. Net takeaway from a remarkably strong first half is that when all of the puts and takes we know so far in this uncertain environment are taken into consideration, we now have line of sight to reconfirm our adjusted diluted EPS guidance of $3.95 to $4.15 despite headwinds of 18 to 21 cents from incremental COVID-19 related impacts and the Rosemont divestiture. One could argue that this is a conservative estimate, but there is still significant uncertainty and I believe reaffirming is prudent at this time. Now I'll review each of our businesses in more detail. with a primary focus on revenues and business drivers, after which Ray will walk you through the rest of the P&L. All net sales comparisons I refer to are versus second quarter and first half a year ago. On a consolidated basis, Perigo reported net sales were up 6% for the second quarter and up 10% for the first six months. Adjusted operating income finished up 9% in the quarter and is up 10% for the first half. Adjusted diluted EPS was $1.03, up 20% for the quarter, and up 12% for the first half. All segments contributed to our Q2 plus 10% consolidated revenue growth, excluding divested businesses and currency. Consumer Self-Care Americas, CSCA, increased 13%. Consumer Self-Care International, CSCI, increased 3%. And Generic Rx increased 13%. Our worldwide consumer businesses once again delivered a solid performance with Q2 revenue growth of 9%, which included the benefit of bolt-on acquisitions. Excluding such acquisitions, Perigo organic revenues were up nearly 3% in Q2 and importantly are up 7% for six months. This is well ahead of our 3% organic growth goal for which we continue to base our forecasts and guidance. Equally impressive is our organic growth over the trailing 12 months, which is plus 6% for Consolidated Perigo, plus 7% for CSCA, plus 3% for CSCI, and plus 8% for RX. All are above our 3% goal. Now let's take a closer look at the drivers within each of our business segments for the second quarter, starting with Consumer Self-Care Americas. CSEA remains in good shape through this crisis. Second quarter net sales increased 13% versus a year ago. The big drivers were as follows. First, surge-related consumer demand for our OTC products continued in April and May, You may have noticed this is different than IRI MULO offtake data for May, which was negative compared to last year. Part of the reason for this is that we were still replenishing retailer and wholesaler inventories that were lowered in March and April to below normal safety stock levels as retailers attempted to keep up with surging consumer demand. The other reason was the strength of e-commerce, which is not included in IRI MULO data. I'll speak to that in a moment. Within our strong OTC performance, there were significant differences by product category. Sales on products such as acetaminophen and famotidine never slowed, and orders are still at significantly elevated levels. Other products dropped following the March-April surge, most notably Cold Cough Products. Cold cough began recovering late in the quarter which has continued into July and the category is approaching pre-COVID levels. More regimented categories such as allergy, heartburn relief, and nicotine therapy also troughed but rebounded beginning in early May and have returned to growth versus a year ago, taken in totality Our U.S. OTC portfolio has performed extremely well, is clearly our strongest performing business, and is the biggest driver of the company's organic growth year-to-date, just as it was last year. Second, and as I just mentioned, Parago's OTC strength was also bolstered by the rapid acceleration of our e-commerce business, which more than tripled versus a year ago in the quarter. The dramatic channel shift of traditional brick-and-mortar customers to e-commerce we noted last quarter continued unabated. We're really benefiting from the investments we undertook last year as our e-commerce sales more than offset losses in traditional outlets. Third, the oral care acquisitions of Rainier, Steriprod, and Dr. Fresh incrementally added $63 million to year-ago comparisons Although April and May sales were negatively affected by lower foot traffic and consumers not traveling, travel sizes are a meaningful portion of the oral care portfolio, especially for Dr. Fresh. Thus, the oral care businesses were below our expectations, but importantly, oral care, like our regimented OTC products, appears to have fully recovered and is back on track against our internal growth expectations in June and July. and fourth, Infant Formula gave back much of its March gains in April and early May, but also was back on track mid-quarter, finishing up slightly for the quarter. New products were the key driver here. Turning to Consumer Self-Care International, net sales grew 3% versus a year ago. The SCI consumer offtake was negatively impacted versus our expectations, As approximately 40% of the portfolio, its self-care products focused on preventative health and wellness. These products such as lice treatments, sun care, skin care, and weight loss were directly impacted by stay-at-home orders and school closings. Encouragingly, CSCI maintained or increased its market share in these categories that experienced lower demand market-wide. Consumer demand in Europe is recovering, albeit slower than some of the U.S. categories I previously mentioned and are still below pre-COVID levels. As we have projected the CSCI portfolio to recover more slowly and we will be advertising more heavily in the second half to jumpstart the business, this will have a negative impact on year-over-year margins in the second half. Of note, eCommerce, which grew rapidly, and our store brand business in the UK were both bright spots for CSCI in the quarter. Our RX division grew net sales 13% in the second quarter due to the continued strong performance of generic albuterol. This more than offset year-over-year declines in our base RX portfolio. Our RX portfolio strength in dermatological topicals was particularly sensitive to the inability of patients to get to their doctors in April and May. We did see recovery in June, but not nearly to pre-COVID levels. But I think the important point here is with the performance of Albuterol, our ex-net sales and operating income are still expected to be higher compared to last year, albeit to a lesser extent than would have occurred absent the COVID-19 impact on patient visits and scripts. So to summarize, it was another strong quarter with all three of our business segments contributing top and bottom line growth. The strong demand in CSCA along with new products like albuterol and bolt-on acquisitions significantly exceeded declines in product categories negatively impacted by COVID netting the strong growth we've seen year to date. In the second half, We are focused on getting our U.S. supply chain fully replenished, preparing for the consumer demand and supply chain implications of a potential second wave of COVID cases, launching the Voltaren gel store brand equivalent, integrating Dr. Fresh, launching the partnership process with Casimira, reinvigorating our CSCI branded businesses, and continuing our transformation activities to meet our 357 We have reconfirmed our adjusted EPS guidance range despite absorbing 12 to 15 cents of expected incremental COVID-related expenses and six cents of dilution from the Rosemont RX sale. To repeat, this range prudently assumes no second wave surge in consumer demand for our essential products A slow recovery on negatively impacted products and businesses, and it assumes we spend about half of our first half A&P savings incrementally to our original plan in the second half of the year. One last point. Business continuity still remains critical, but safety for our people comes first. None of the strong results I shared today could have been possible without the dedication of our people who have continued to go above and beyond through the pandemic. They are heroes. Thanks to their efforts, we are more confident than ever that Perigo is very well positioned to capitalize on three important drivers that we believe will be critical in a new normal world, self-care, value, and e-commerce. I'll now turn the call over to Ray who will walk you through the financial details and then we'll come back to answer your questions.

Thank you, Murray, and good morning, everyone. Now that Murray has gone through sales and business drivers for the quarter, I'd like to walk you through the rest of the P&L. Our consolidated gap net income for the second quarter was $61 million and diluted earnings per share were 44 cents. On an adjusted basis, Q2 consolidated net income was $141 million and earnings per share were at $1.03, the seventh quarter in a row in which we met or exceeded market expectations. Non-GAAP adjustments to net income after tax were $80 million, primarily $73 million of amortization which we added back. and an $18 million loss on the sale of our Rosemont subsidiary, which we excluded. Full details of these and other smaller adjustments can be found in the non-GAAP reconciliation table attached to this morning's press release. The adjusted consolidated effective tax rate of 16.7% this quarter is lower than in Q2 last year primarily due to the increased interest expense tax deduction that we receive as a result of the CARES Act. From this point forward, all dollar numbers, basis points, and margin percentages in my presentation will be on an adjusted basis, while growth percentages will exclude the impact of currency and divested businesses unless otherwise described. Worldwide consumer second quarter gross profit was $373 million, an increase of 4.4%. This increase was driven by the addition of the oral self-care businesses plus growth of our US OTC business, partially offset by adverse margin mix between essential and non-essential products in our CSCI business. Q2 worldwide consumer gross margin was down 190 basis points to 39.3% due primarily to mix in CSCI with lower sales volumes in higher margin categories and the impact of the oral self-care acquisitions which have a relatively lower gross margin than our worldwide consumer average. These were partially offset by margin improvements from manufacturing efficiencies in the quarter. Second quarter operating income was $132 million, up 16% versus same quarter last year. This improvement in operating income came in part from reductions in advertising and selling expenses, delayed in response to consumer behavior arising from the COVID disruptions, as well as for approximately $10 million in savings from Project Momentum. These improvements helped offset the gross margin decline and drove a 60 basis point expansion in operating margin this quarter. Year to date, worldwide consumer gross profit was $789 million, an increase of 10%. While gross margin decreased 210 basis points to 38.8%, The addition of the oral self-care acquisitions and lower sales of certain CSCI high margin products plus manufacturing inefficiencies in the first half all combined to negatively impact year-to-date gross margins. Operating income, as compared to prior year, increased $44 million in the first six months of this year, a 24% increase. As in Q2, this increase came from operating leverage, the reduction in advertising and promotional spending, plus $18 million in Project Momentum savings so far this year. Overall, a very solid performance for the worldwide consumer business, both quarter and year to date. Now let's take a look at the consumer segments in a little more detail. U2 CSCA gross profit increased $16 million plus 9% as increased volume in the quarter and the addition of the oral self-care portfolio helped offset price erosion, higher direct labor costs incurred to improve customer service, and incremental COVID-related manufacturing costs. The gross margin of 32.9% declined 110 basis points versus last year due to price erosion and that ongoing investment in additional direct labor. Operating income for the quarter was $124 million, an increase of 9% due primarily to the addition of the oral self-care portfolio as well as from delaying advertising spending to later in the year. The operating margin declined 50 basis points to 19.8%. Year-to-date gross profit of $426 million increased 16%. Increased volume and the addition of oral self-care offset price erosion, higher direct labor costs, and incremental COVID-related costs. Year-to-date gross margin of 32.1% was down 120 basis points driven by the same causes as those in Q2. And year-to-date operating income was $262 million, an increase of 20%, also for the same reasons as we saw the operating income increase in the second quarter. CSCI second quarter gross profit of $166 million declined 1%, while gross margin declined 180 basis points to 51.7% primarily due to adverse margin mix. The margin mix came from reduced branded sales as well as from higher store brand sales in the UK and the addition of oral self-care. Both oral self-care and UK store brand have lower gross margins than the CSCI average. These factors were somewhat offset by manufacturing efficiencies. Q2 operating income was $50 million, up 10% from last year, while adjusted operating margin was up 30 basis points to 15.6%. The impact of lower gross profit was more than offset by reduced advertising spend. Year-to-date CSCI gross profit of $362 million was up 4.3%. while gross margin of 51.5% was down 220 basis points. The addition of the oral self-care portfolio together with adverse mix were primarily responsible for the margin decline. Year-to-date operating income was $114 million, up 19%, while adjusted operating margin was up 80 basis points to 16.2%. The operating margin improvement was due to reduced advertising spend, partially offset by the impact of lower gross margin. Turning now to RX, Q2 gross profit increased by 7% to $107 million, as contributions from generic albuterol more than offset the lower volumes on our base business. Gross margin was 39.5%, Down 220 basis points from last year, primarily due to fewer prescriptions having been written, which caused a volume decline on our higher margin products. Operating income of $68 million was up 4.4%. However, operating margin declined 210 basis points to 25.3% as a result of the already described gross margin decline, together with an increase in R&D spend. Year to date, RX net sales were $528 million, up 9.4%, as gross profit of $216 million was down 1%, and gross margin declined 430 basis points to 40.9%. This decline is due to lower prescription volumes, as well as price erosion on test 162, which occurred in the first quarter. RX operating income was $142 million with an operating margin of 27% down 360 basis points. This was as a result of the gross margin decline together with the impact of continued investments in selling and R&D to drive long-term growth. Moving on to the balance sheet, at quarter end on June 27, We had almost $1.5 billion in cash on our balance sheet, up $1 billion from Q1 after repaying the draw against our revolver that we made at the beginning of the pandemic crisis. This cash balance includes both the $195 million of proceeds from the sale of our Rosemont RX business in late June, as well as the proceeds from our successful $750 million We made the bond offering to take advantage of low interest rates, strong liquidity in the bond markets and to add certainty to our capital structure. Due to timing We did not pay off the 2021 bonds until after the end of Q2. Had we paid the bonds at quarter end, our cash balance would have been $850 million and our net debt $2.7 billion. Additionally, cash flow from operations in the quarter amounted to $291 million, more than 200% of adjusted net income. This strong conversion ratio resulted from the March and April elevated sales collected in Q2, partially reduced by increased inventories as we replenish products sold during the sales surge. Shifting now to 2020 guidance. As Murray told you, we are reconfirming our adjusted EPS in the range of $3.95 to $4.15. despite our divestiture of Rosemont and increased COVID-related costs principally in manufacturing. The divestiture of Rosemont adversely impacts our 2020 adjusted operating income by $11 million, six cents per diluted share, while the increase in COVID-related costs is expected to be $25 to $30 million, of which we anticipate recognizing 20 to 25 million in 2020 or 12 to 15 cents per diluted share. In summary, I'd like to put this in perspective from the CFO chair. We've come a long way here at Perigo over the past 18 months. We are starting to see real improvements in our financial and operational metrics. We are seeing repeatable sales growth and we're reversing the trend on declining operating income We have been able to meet or exceed expectations for the past seven quarters, which underscores our reliability. Our cash flow has been strong, and we've brought added certainty to our balance sheet. And finally, we have continued to do this while successfully weathering the COVID-19 storm. Operator, please can we now open the line for questions?

Thank you. We will now begin the question and answer session. To ask a question, you may press star and then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then two. At this time, we will pause for a moment to assemble our roster. Our first question today will come from Chris Schott of JP Morgan. Please go ahead.

Great. Thanks so much for the questions. My first question was just, I think in the slides you talked about performance year-to-date ahead of expectations. I'm just trying to balance that, I guess, the maintaining top line guidance. Can you just help me bridge that dynamic a little bit, the strong first half performance with the maintenance of guidance for the year? and my second question was kind of a bigger picture question on the growth of e-commerce. Is there a margin difference that we need to think about there versus traditional channel and how does Parago share in that vertical compared with traditional channel? I'm just trying to better understand if Parago's a net beneficiary of this e-commerce trend or this is more about sustaining market position. Thanks so much.

Let me do the, good morning Chris, it's Murray. First things first, There is no margin difference. They're very similar. And second, I believe that we are a higher share because we have invested and we tend to be the partner of choice in store brand on our categories because of all the investments we've made. The e-commerce business is more sophisticated than I understood when I first joined the company and the investments were made and then you would probably expect. It's not just you know we ship it to the customer and they sell it e-commerce and and you know how do we do at the end of the day we are a partner in that we generate the content we work on the websites we we design the promotions we do the analytics to say where that is there's you know we have dozens of people that are working to do all that to provide the input in and the guidance and that's when you go into You know, when Amazon and all that and you type in the products for the most part, you see it and we help develop the brand. So on basic care, Parago was the one who developed the brand and ultimately over the last year has sold that to Amazon, but with benefits that come to Parago that provide a little bit of a moat around it for a number of years. So that's an easy one. E-commerce growth is a very good thing for Parago. Going back to your initial question on how do I reconcile not changing the guidance, that's a combination of two things. The first is all of the, you know, the initial surge on the essential products happened in the first half, right? So we certainly didn't build that into our plans when we were building the year. And for the most part on those kind of positive categories, almost the entire CSCA portfolio, it mostly feels like it's normalized. There'll be some effect, but we haven't planned on any upside for the second half. So you got that benefit in the first half. Then towards the latter half of the first six months on, the products that were negatively affected, they happened right towards the end, or let's call it from May on, because they got a little bit of some coverage in the beginning. until consumer demand showed what was going to be up and what was down. And then we projected that to continue with only modest recovery in the back half. So what you basically hear me saying is we overperformed on our strong essential products and we've kind of gone to a normal level of estimate for the balance of the year kind of pre-COVID in totality. But we have in the second half of the year some give back on The products that were negatively affected because I don't have them going up to normal COVID levels. Now you could argue that's conservative, but I think that's a way, it's a prudent way for us as an organization to plan. And again, you know, it's, I've gone from three months ago when it was crazy and you were trying to get your handle on it. And I hope you heard in my comments that, you know, we do have a good handle on it now to the best we can with whether there's a second waiver or or not and we know what will happen in those cases but I'd like to be sitting here at mid-year with a better handle on the business for you to be able to rely on us and to be still sitting there with more upside than downside. Thank you.

Our next question today will come from Ami Fadia of Lear Inc. Please go ahead.

Good morning. Thanks for the question. Maybe a follow-up on the guidance. I'm surprised that you continue to sort of think about the midpoint of the guidance range. I understand some of the pushes and pulls that you talked about. What are your assumptions with regards to the cough and cold season and just the evolution of the businesses in America and international just on the top line and gross margin level. And then just separately on albuterol, you posted a pretty strong quarter, better than what the script trends were indicating. So if you can give us color on whether it benefited from any COVID-related stocking and how you anticipate market share and availability of inventory to meet demand for the remaining of the year. Thank you.

All right. Let me, well, assumptions on COFCO, I mean, the guidance, I think we've walked through a number of times. I just don't see anything in it for Perigo at this point that has gotten a good handle on the business and with the puts and takes to take an aggressive position on it. You know, I I've never in my career managed quarter to quarter, and I'm not going to start now. I'm focused, and I'd love to raise comment at the end of how far we've come over the 18 months. This is a completely different company that is in a fantastic position, and I'm great that you would like us to raise guidance, but to get back onto the playing field, this is a good start. We have incremental COVID costs. that weren't built into the original plan, something in that neighborhood of 20 to 25 million. We sold Rosemont. So in my mind, I did raise guidance. I raised it 20, 26, probably 20 cents when you combine those two issues together because I did it against the core business with two big things that weren't anticipated when we gave the original guidance. Having said that, I planned it conservatively. I'm saying the same thing I already said. We planned a normalized level in the second half. We have a little bit of give back. We're estimating about 50% of the pantry load, not the total consumer effect, of the pantry load that we got in the March-April period of time on the and the businesses in the US on essential businesses primarily that we would give back that. A good portion of that's already happened and those businesses have normalized. The one I've built into the plan for further give back is cough cold. Cough cold I'm not going to really know and and so again an upside because we planned on a little bit more give back into the cough cold season because I'm not going to really know what that full pantry load effect is until cough cold season and whether someone already has it in their their medicine cabinet or not and whether it's incremental and you know that's probably the most complex area for us to estimate how much of that pantry load came from competitors, branded products not having it, how much was consumed because of illnesses or how much is still sitting there. But the rest of the portfolio, when it's the bulk of it, has already shown itself that it's recovering. Now, I am encouraged, and I don't like to forecast too much, but when we came out of the second quarter, cough cold was still off pretty far. But on our numbers, and we have more line of sight to the total business of E-commerce and POS data of what our top customers are shipping out. That business is coming out nice and strong. So we'll, again, I think I've taken a conservative perspective to it, but I think it's the right position right now and for us to stay focused on the total business. On albuterol, it probably was in the initial, for sure it was upfront, I think we gave you a number. There was no pantry load on albuterol. It was, but we had a lot of inventory that we had built thinking we were going to get the approval a little bit earlier. Part of late, you know, we were expecting it last year and it came early this year. So we had been running. So yeah, you got a nice bump on that. But going forward, it's about capacity on that. And we have, you know, our partner Catalin is going flat out and will sell everything they can make for the year. And if they can make a little bit more, we'll sell a little bit more. But right now we haven't assumed that. So that's going well. I don't have the market share numbers at my fingertips. We'll sell everything we make is my belief right now sitting here. So did I leave anything out that you asked?

No, that was very helpful. Thank you. All right.

Thank you.

And our next question today will come from Randall Stanicki of RBC. Please go ahead.

Great. Thanks, Marie. I want to stay on this implied guidance question because it's an important one. The stock's down 9%. The guidance implies a 10% decline at the midpoint over last year, and that includes several bolt-on deals and opportunities in there. So investors are trying to understand what the real growth rate in Parago is because, to be fair, the company hasn't grown in More than three years, so it's an important question. So on that, can you help us understand with respect to the CSCA business, what are some of the pushes and pulls in the back half that could have those numbers higher or lower? And specifically, should we be thinking about the second half outlook as a normalized way to think about the Parago earnings base from here? Thanks.

Well, I'm going to answer the last part first, which is absolutely not. And I said that you shouldn't think of the second half as a normalized base, that this was going to, I said it in the last conference call, this was going to be a highly unusual year. You were going to have a lot of front-loaded volume and sales pulled forward and taken out of the second half and then add on top of that incremental costs that should come out again. But, you know, I mean, you're adding 25 The only normalized part is Rosemont will be out going forward, but you're adding 20-25 million dollars of additional expense. You have some volume that was front loaded into the first half from the second half, and you have businesses that ultimately ought to benefit. So coming out as you go forward, you ought to, once we get past this virus, shouldn't be paying, which some of it may even be opportunities in the balance of this year, but you shouldn't be paying for air freighting API in order to try to keep up with surging demand. You won't be operating with 30% absenteeism that forces you on a 24-7 operation to be running and paying overtime on the remaining 70% continuously instead of our normal schedules. eventually the security costs ought to be getting into place and PPE and and everything else and I won't be paying employee bonuses and and all of that but a good portion of that 20-25 million is is second half right you know they they they started happening but they they fall into the second half of the year so there's a lot of things that will make the numbers not look great in the the second half of the year but the business is very strong and I I take issue with your comment of the three years. We are doing exactly what we said we would do and nothing is going to shake me from that. I came into a company that wasn't not growing, it was declining and declining pretty significantly and its volume and growth had almost evaporated and we set our first priority was to get revenue growth going again and we grew beautifully last year and will grow beautifully this year. And by the way, I think in the end of the day, COVID will have very little to do with that. For sure, bolt ons are part of it. But we will be delivering our, I believe we'll be delivering our organic growth rate, which people were very skeptical about a year and a half ago. This year again, and and I love the plate of opportunities that we've identified and what we have in our pipelines and that top line is beautifully. The second thing I said I would do with stabilized operating income, which was after more than three years, after four or five years of declining operating income, that that would be our first step because we were still making 50 million dollars of investments which we're doing and that we were setting ourselves up for 2021 going forward to deliver the 357 algorithm nothing's changed the business is as strong as can be i can't help if the market knee jerks reactions to a company that is killing the numbers like we are right now because they wanted us to go up a nickel or a dime it it it We are focused on building a fantastic, great company that will deliver repeatable, sustainable growth top and bottom line for the future and that is all on track.

All right. Thanks, Murray.

Our next question today will come from Greg Gilbert of Truist. Please go ahead.

Thanks. Good morning, Murray. What are your latest thoughts on the dispute with the Irish revenue and what do you expect in terms of next steps and when? And then my second question is on your CBD announcement. I realize the Casimira arrangement is certainly a long-term play, but when do you think this product line could be meaningful to Perigo, and does it rely on proof that CBD actually helps patients in a proven way, or does it rely simply on the ability for you to differentiate based on purity and consistency and the other things we already know about Casimira that probably led you to select them and then to select you? Thank you.

Well, on Casmira, it is the latter. So I think you've got that just right. You know, as a starting point, we have exclusive rights to private label and all of that. And Casmira, you've obviously done your homework. And they pride themselves on being, first off, CBD only, THC free, metal contaminant free, etc. But they're relatively small and didn't have the dollars to be able to scale up, to be able to put good manufacturing practices and we will work with them and the FDA to get that part certified and that's our goal and to meet all of those same practices so the investments are on equipment and all the things you would know and processes and controls and I don't mean to say they don't do it now, they do, they're noted for that but they do it on a much smaller scale. Once we get that, we will be comfortable launching products and when we can you know all of our customers ask for it but I want to be able to say it's been done in a Parago way and so you know I wouldn't be surprised to see us and within the next couple years certainly you know not the next 12 months of starting to see products from Parago. You'll see it before that for Casmira because they you know they're you know think of them today as primarily an API and we own 20% stake and They may go faster on some branded products, we'll see, but that's them driving the ship on that. But for us, get the API, the clean CBD that can be relied on, that takes out this thought that it's the wild, wild west, that it's controlled and reliable, and when it says it has a level of CBD in it, it does. By the way, it doesn't have that through a CBD isolate that limits the potential for efficacy. It has it through a full-spectrum CBD oil as opposed to the dry isolate. When they say it's THC-free, it really is THC-free. I'm excited about it, but you're right, it's a bit of a longer-term play, but think of it that way first. First is getting all the certifications and scale in place. Maybe Kasmira does something branded, maybe not, we'll see. Once that is done, we'll work with the FDA on it. Next step is probably, for us, private label, and that doesn't preclude us internationally from doing some other things, and then The third step would be the efficacy, which will be a few more years out, I think, because that's going to take traditional clinical trials and things like that to give FDA confidence. But there's movement on it, and I think we're expecting some guidance on that, especially on ingestibles in the near future. As it relates to the Irish tax dispute, during the quarter we had the judicial review. It's probably within six months now that we should get some kind of an answer in that regard. We kind of view it as, you know, first off, I think our legal team did an excellent job putting out there why we believe our legitimate expectations and if there was ever going to be a legitimate expectations case to be to be won and upheld under Irish legitimate expectations law. This is the one. And I think you saw that in the judge, by the way. He said, you know, I have a lot to go through. It'll take me some time to get back to you. We'll see if that creates any willingness by the Irish revenue to get reasonable or not. But as it stands right now, it'll be we hear the where the judicial review is if we win it's done if we don't win we start the normal appeals process where we still think all of the calculations and everything else are flawed and and that will ultimately either a win that we were right in tax appeals court that it was a trade versus a capital gain or will dramatically knocked the number down. So assuming if you believe that we're reflecting a lot of that in the stock, which I do, almost any scenario is upside for Perigo. And you see our balance sheet has improved significantly. So we're in a strong position to handle almost any scenario there is.

Thanks.

Our next question will come from Elliott Wilbur of Raymond James. Please go ahead.

Thank you. Good morning. First question on the CSCA segment and specifically language and press release around pricing pressure. Generally, I guess that language always seems like it's reserved for the RX segment and not the CSCA segment. I understand it's probably a normal part of the business, but maybe you could just provide a little bit more clarity in terms of the magnitude What drives pricing pressure in the CSEA business? It makes sense, obviously, if there's an incremental competitor on a specific product, but given your dominant share across most SKUs, I would think that that's somewhat of an anomaly. Is it just buying more shelf space or trying to understand the dynamic there that might drive pricing pressure or price erosion kind of outside just a new competitor coming in the market. And then just a quick follow-up, you guys didn't include any of the metrics for the individual product segments within CSCA or CSCI. Anything that perhaps, Murray, you could call out in terms of overperformance or underperformance where you saw relative wins and losses? Thank you.

Okay. I tried to do that, but I'll revisit that. On the first issue, the pricing pressure, the pricing pressure has, and we showed that on our May 9th Investor Day presentation, and that's why sometimes I get the question, how is your market share up if your revenues are Perigo's revenues aren't as high. And the answer is that we are a private label supplier for the most part out of the US. So our volume is always growing faster than our revenues. And it's on average, it's been a couple percent over the past. The old president of CSA would tell me over the past forever. it's just a normal part of doing the business but remember we have to bid for the business right I don't get to set the price that show we don't go in and say you know take a dime price increase or not that's that's you know Walmart or Target or CVS whatever there's they're deciding whether to raise the price or not and it has nothing to do with with our revenues our revenues we negotiate they'll try to put products out for bid and and in general if we end up having a a new competitor and it's not a new competitor so for example the pricing pressure that we would carry in from last year was with the we were one of the only private label manufacturers out there for years on imeprazole with it with the regulatory approval to do it with the ANDA where at the end of the year a couple more competitors finally got regulatory approval so now they're able to compete for that and try for them they'll you know they'll come in and try to cherry pick us and and under price us on the other hand we go back and we say yeah but we're providing 140 or 150 products to you and if we give you a little bit on this area you got you know add distribution or add in new items or take on new products and Those are the typical negotiations. But bottom line, that wasn't meant as a red alert. In fact, pricing was for CSCA, which is a normal level on the business, was actually a good quarter in the second quarter because of COVID. Most of those bids that would have been the normal part of the business were pushed back to either later in this year or early next year. So it wasn't really wasn't much of an issue at all in the second quarter. It was just the normal things that carried in from the prior year. And I would say on pricing, we have our estimates of the impact of the year. We're ahead of plan on that. Categories that under overperformed, I started to go through that for us. Payne, we're over half the U.S. supply of acetaminophen and we're still multiples of normal That's never let up. So we're at multiples. That affects the mix a little bit on gross margin because it's not as profitable a component. Allergy was fantastic and continues to be very strong. We're doing well in the GI area because the banning of Zantac-like products For us, it sort of hurts the category, but it helps us because we have larger shares in the areas that consumers went to. So our RGI business is strong. Cough Cold started strong, but Cough Cold was probably half of our give back, but is almost all the way recovered here coming out of July and back to growth again. What else did I miss? Nicotine replacement. Nicotine replacement was, again, consumers stocked up. They wanted to make sure they had it. It troughed a bit, but it's a regimented product and it's back to its growth trajectory again. Oral care, you've got a travel component that's off, but we had a couple months when it was very challenged where people weren't buying things like whitening strips and and replacement heads, etc. But that, again, that business has recovered beautifully. So, you know, I feel fantastic about our U.S. business. Infant Formula, you know, that's a challenge having nothing to do with COVID. I've been talking about since I got here that we have major capacity issues and they continue to plague us where we, you know, we can't be as aggressive, we can't promote the way we want to and The system got taxed, so we got a good surge, and then we gave some of it back. We've talked in the past about the significant investments that we're making, but they take time to get that capacity open so we can get that business growing the way we like. But it's not a question of demand. It's a question of our ability on that business to supply. And I think I covered them all. And then you heard what I said about international same thing so you know the products that that people demand that they thought would be helpful you know just what you would expect I think as as much as our CSCI business was hurt by lockdowns and school closings I think we outperformed all the major branded companies in in Europe during the quarter and either maintained or gained market share with the categories that get hurt but like and you know Lice Treatments. If kids aren't in school, you're not going to do it. And Suncare, if people aren't traveling and going to vacations, those businesses get hurt, but they'll return. Did I cover enough of them for you? I left out Rx. Rx is just about dermatological visits were probably one of the areas hurt more than others versus routine maintenance scripts. The patients that buy our products have to go into the doctor to get the script, so we'll see how fast that recovers.

Thank you.

Our next question today will come from David Reisinger of Morgan Stanley. Please go ahead.

Hey, David. Hey, Murray. So congrats on the very strong performance. A couple questions, if I may. So first, regarding your plan to enter the CBD market in a responsible way with good manufacturing controls, that makes a lot of sense. But given the company's pharmaceutical clinical expertise, does Perigo see an opportunity to conduct efficacy studies to support any CBD claims? Second, With respect to the consumer launches ahead, and I may have missed this, I missed part of the call, but I'm interested in how you would characterize the top three most important consumer new product launches to watch for Parago over the next year or so. And then third, as we think about this demand surge, in 2020 and obviously there's the cost surge associated with it any high level points that that you'd sort of frame for us as we start to try to model 2021 relative to those uh those comps thank you well your last question was a mouthful but uh

The first one on the efficacy studies, the answer is yes. And by the way, there are a lot of clinical trials on efficacy out there. I'm anxious to see the guidance that comes in on CBD on ingested products as well to see the pathway for what they'll be looking for. But yeah, we'll go at all those. I view it as a longer-term play. Probably we would not wait for the efficacy claims, but to get more aggressive, or for the category to get its full potential, I think that's critical. So yeah, we'll invest in that within our normal budget levels. On consumer launches, I'm hesitant other than to say you know about our Voltaren equivalent and Voltaren's off to, by the way, in my opinion, a super start on the branded side, which the more successful they are, the more successful we'll be, so that's good. and that's still on track for third quarter and so that'll be there soon. Beyond that, we've been investing in R&D. We have a half a billion dollars in our new product pipeline. The only one we gave you a preview on and I'm still not willing to say what it is is that one of our five core strategic areas that we're looking for growth on is in the One of the, let me make sure I got my train of thought here, on the, not nicotine, as a, well, on infant formula, we pushed back a couple new products, so you're going to have some effective new products scheduled in the second half of the year being first, so we had told you about that one, and then the second was a natural-based, science-based natural products, and on May 9th, I talked about one that would be coming in a line of natural-based products that leverage our expertise in Europe, which we have $400 million worth of sales in the science-based naturals business and basically nothing here. So CBD would fit into that too, but it's a few years out. But we expect it to be launching a consumer line of products like that next year if it remains on track. Prevacid we've bought and we're doing a bunch of test markets on different and many others. I don't want to share them because I haven't spoken about them. That would be putting the company at a disadvantage. Did I get all your questions? Product demand surge and surging costs, how does it translate into the second half? Was that the question? What pushes and pulls I think basically this year is fully on track. Here's what I think about. I think the basic surge you got and a fair amount of that coming out has made the year lopsided so that I don't really believe on an ongoing basis that the 10% first half we've said all along our goal is 3% organic and with Rainier lapping in July, that's what I'll be measuring and gearing because the other bolt-ons we've had so far are small. We'll probably beat that number, but I haven't forecasted it or put it into the guidance this year, depending ultimately how cold cough season does and what remaining give back is. But we're believing we're retaining about half of the positive impact on the products that consumers need so much affecting us. for this year. So you got some givebacks. The incremental costs, they are what they are. When you have that kind of 500% demand on certain products, you're air freighting API. When you have 30% absenteeism, you're paying a lot more overhead. When you treat your people the way we believe is the right way to treat them, you don't lay them off or fire them. You give them bonuses and reward them for being brave and coming into the plants when everybody else is sheltering at home so we gave employee bonuses and we rewarded them and we provided meals for them and we for those who we believed were at high risk we supplemented what they were being paid in in unemployment where that was available and those were incremental costs because we were also paying the overtime of the other 70 75 percent of the people that were coming in work to keep those plants running 24 hours a day seven days a week so How do I think about it? It's a bit early to be talking about it, but I'd expect the reverse. I'd expect it to normalize. I think it's a good thing that we're staying near our original targets rather than getting a one-time bump and having to explain declines on it next year. But I think you should be looking at Perigo based on the strength and the fundamentals of ramping up growth with lots of growth potential. That has project momentum and costs and these COVID costs will come up to get us back on track. So I haven't swayed an inch from my 357 The only thing would be differences for these two years, it'll be a little bit lumpier. So down some, you know, up way up in the first half of this year, the costs and some of the You know, negative impact continuing negative impact until Rx fully recovers at Scripps and doctor's offices fully open up and has a negative impact in the second half of the year that reverses itself next year you probably do better on cost but you don't have that initial surge but then you have the full year hopefully of recovered products on some of these brands that are down so yeah I think it's lumpy but in general I think we're right on track. I was worried about that last question much more three months ago than how I'm seeing it shake out now. We've got our arms around it. Thank you.

And our last question today will come from David Hughes of Wells Fargo. Please go ahead.

Hey, thanks so much. Just, Mario, could you expand on the gross margin performance in work-life consumer? I think it was down 200 basis points. So, you know, there's clearly a mixed impact there. But, you know, how should we think about that for the second half of the year and 21? I think consensus has gross margins improving next year. Secondly, could you quantify what the e-commerce sales were in the quarter? I think the press release said they doubled. And then finally... just how you're thinking about bolt-ons and a timing for a sailor spin of Rx. Thanks.

Ray, why don't you do the first two of those and you can talk about bolt-ons if you want and I'll add a little bit to that.

Okay. So on the first, as you pointed out, on the second quarter we had a 200 basis point decline the two major factors that impacted that were the addition of the oral care business which is about a half of the 200 basis points because as we've said on several occasions the oral care business has a lower average margin the gross margin line the other half of the 200 basis points in the second quarter this year was basically the mix of products in CSDI we had As Mary's already referred to, a loss of some of the high margin products, specifically our weight loss products and our parasite products, both of which are high margin, but we saw significant drop in sales. These were non-essential products, if you like, and that came about during the second quarter. In terms of the balance of the year, I think with respect to oral care, we anniversary the acquisition in July so we anniversary it should say in July so going forward into the balance of the year we don't have that tailwind in respect to the CSCI business I think there's still uncertainty and we try to reflect that in our conservative approach to guidance that there's still uncertainty in the balance of the year with respect to, so I think, did you have any further questions on the margin?

No, I was just wondering about 2021 and the main consensus as a modeling and increase your career.

Yeah, I mean, given that I think, you know, there again, I think it's difficult to see that far into the future at the moment. But our, you know, I think our expectation would be Some of those headwinds that we talked about in Q1 would not be there in 2021, but I think it's very early to really make a prognostication about 21 at this point in time.

Yeah, I mean, just to add on to what Ray is saying, but one of the things that made the margin look like it was down further in the company and especially CSCA was No fundamental change or weakness in the company. It's just you bought Rainier, which is a big item, that had a lower gross margin. And so it was a mix issue, but not a consumer trading down to lower gross margin items. It was 100% incremental. But that's gone going forward. So you won't have that negative year-over-year trend. as opposed to things like hopefully, you know, COVID gets, you know, the world gets a handle on COVID and vaccines get out there and a lot of the costs and spending, I'm sure some of it will go into the beginning of the year, but you get back a good portion of that. And then the other thing we did in the first half of this year, which is, again, should probably reverse itself is if you remember from the last call we stopped making products that were higher margin items in favor of what the world needed and the world needed acetaminophen and famotidine and things like that which were and we stopped making a bunch of the portfolio products which we're back making again now and so the comparisons on those ought to be pretty good so there are a number of positive factors but you know I think you saw a sequential improvement in gross margin on CSCA, and that should improve. And you won't hopefully have the overtime costs, et cetera. So we're focused on it. We hear everybody loud and clear, and it's not an area we're not focused on. But I think some of the big drivers that were the headwinds are are gone at this point. As e-commerce, Brad can give you those numbers. I don't have them off the top of my head because we look at them by business. But I want to say it was something like, you know, Brad helped me around 8%. Exactly.

Up 140% to around 80 million or call it 8% across Total Parago.

All right. But it's actually a much bigger percentage of certain customers and certain businesses we have you know in our top five customers we have customers where it's four percent of the business um i'm not going to say them by name but you know there's other retailers who've really invested in it um outside of amazon that are you know it's 20 of our our business at um a couple of our top five customers so it it varies and by category within us and segment within it you know pain is a big item the regimented products tend to do better in e-commerce In Europe, it's a big number. It's also probably around that same percentage, but it's a much higher percentage because we're not in every country with e-commerce yet and we're still in the expansion phases. So lots of running room on e-commerce. And the more important thing is it literally offset, it was big enough to offset the entire For us, it's adding probably in the quarter from what you would see if you're tracking MULO, just the IRI traditional in-store grocery drug consumer takeaway from brick-and-mortar stores. It's probably adding to the total Perigo business 320 basis points of additional growth on top of that to the total OTC. What was the third one? How are you thinking about bolt-ons and Rx? Bolt-ons kind of came to a bit of a halt during the height of this crisis. And frankly, it's still very difficult to do diligence. We obviously have built a lot of cash. So we are restarting our process. We had some in the pipeline. Beforehand, you may see something sooner than later, but the process isn't fully up and running again. But we're in a good position. Right now, consumer multiples are holding up pretty well through this whole crisis, so I was hoping for some opportunistic value buys here, which may show themselves later here where you know we're still early in it we'll see and we'll um but it's an important part of the strategy especially until that innovation pipeline reliable reliably is giving me that three percent organic growth okay rx separation no change yeah it's uh The only thing that I would say that's changed on RX is it's thrown off a boatload of cash and their performance will be, you know, I believe this will be the second year in a row that our RX business grows top and bottom line. And the volatility has come out of that from our side, yet the industry multiples are so low. When we went out last time, there were no strategic buyers in the mix. Until that resolves itself, we'll manage it and invest in it and take that cash and invest in our priority consumer strategy so um but i think i proved when we can get a multiple on rx with the sale of rosemont which sold it around 10 times kind of double the kind of numbers we were talking about when we were looking at selling the usrx business that we would refine the portfolios and we did so you know it's going slower than we would like and and we will make sure that business isn't neglected and it takes no management time it's under great leadership and they're an important part of the Parago family right now and until they're not and but it'll it'll take some time thanks very much

Ladies and gentlemen, this will conclude our question and answer session. And at this time, I'd like to turn the conference back over to Murray Kessler for any closing remarks.

Murray Kessler Yeah, I mean, in reflection of the comments and the questions that I got today, I would just reiterate, you know, Ray and I and the management team that was here that we've promoted and several other folks that we vote on are dramatically changing Parago. I'm proud of what we've accomplished over the past couple years. This is an entirely different company than it was a couple years ago when I joined and it is now beginning to look a lot like the Parago that was a success and winning. But there's work to be done to make sure that's not something that happens over a six month period of time and then under delivers and gets back into that pattern again. We are focused on building a great company. We have returned the company to growth. We have built the talent and the management in this organization. We are building and have restored a winning culture to this organization. We have filled our innovation and new product pipeline, and there's probably triple the growth opportunities of what I anticipated coming in, whether it be through e-commerce or bolt-off or new adjacencies going forward. We have work to do on finishing off our capital investments and infrastructure and getting that new product pipeline and we are doing that while rapidly accelerating the growth of the business and at the same time stabilizing operating income for the first time in years to position us to be able to deliver a continuous sustainable business that delivers on its business objectives consistently over the long term which is the kind of company we want to be and the kind of company with we hope investors want to be a part of and so you know I believe we're right on track I'm shocked that we are right on track despite the crisis this company and the world went through in the first half of this year I get it, it makes the year a bit uneven and lumpy, but basically it hasn't changed anything. And I'm proud to be leading a company that its people were able to rise to the occasion through this crisis, keep everything on track and help society continue to set us up for the long term and deliver quarter after quarter after quarter after quarter. meeting or exceeding expectations. So thank you for your interest in Peridot.

Ladies and gentlemen, the conference has now concluded and we thank you for attending today's presentation. You may now disconnect your lines.