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.