Perrigo Company plc (PRGO) Q3 2013 Earnings Report, Transcript and Summary

Arthur J. Shannon - Vice President of Investor Relations & Communication Joseph C. Papa - Chairman, Chief Executive Officer and President Judy L. Brown - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Randall Stanicky - Canaccord Genuity, Research Division Florence C. Tsang - RBC Capital Markets, LLC, Research Division Linda Bolton-Weiser - B. Riley Caris, Research Division Christopher T. Schott - JP Morgan Chase & Co, Research Division David Risinger - Morgan Stanley, Research Division Jami Rubin - Goldman Sachs Group Inc., Research Division Gregory B. Gilbert - BofA Merrill Lynch, Research Division Annabel Samimy - Stifel, Nicolaus & Co., Inc., Research Division David G. Buck - The Buckingham Research Group Incorporated Ami Fadia - UBS Investment Bank, Research Division Louise Alesandra Chen - Guggenheim Securities, LLC, Research Division David M. Steinberg - Deutsche Bank AG, Research Division Jon Andersen - William Blair & Company L.L.C., Research Division

Good morning. My name is Vernell, and I will be your conference operator today. At this time, I would like to welcome everyone to the Perrigo Fiscal 2013 Third Quarter Earnings Results Conference Call. [Operator Instructions] I'd now like to turn the call over to Mr. Art Shannon, Vice President of Investor Relations. Please go ahead, sir.

Thank you very much, Vernell. Welcome to Perrigo's Third Quarter 2013 Earnings Conference Call. I hope you all had the chance to review our press release, which we issued earlier this morning. A copy of the press release is available on our website at www.perrigo.com. Also on our website is a slide presentation for this call. Before we proceed with the call, I'd like to remind everyone that the Safe Harbor language contained in today's press release also pertains to this conference call. Certain statements in the call are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 as amended and are subject to the Safe Harbor created thereby. Please see the cautionary note regarding forward-looking statements on Page 1 of the company's Form 10-K for the year ended June 30, 2012. I would now like to turn the call over to Perrigo's Chairman and CEO, Joe Papa. Joe?

Thank you, Art, and welcome, everyone, to Perrigo's third quarter fiscal 2013 earnings conference call. Joining me today is Judy Brown, Perrigo's Executive Vice President and Chief Financial Officer. For our agenda today, I will provide a few comments on the quarter and the continued strength in store-brand market share growth. Next, Judy will go through the details of the quarter and our fiscal 2013 earnings guidance. Then I will provide an update on each business, including the transition to plastic containers in our infant formula business, our plans for new product launches, plus an overview of our expectations for the rest of the fiscal year. Finally, this will be followed by an opportunity for Q&A. First, let's discuss the quarter. This was another great quarter for Perrigo. On Slide 4, you can see we had all-time record quarterly net sales of $920 million, with 18% net sales growth and 13% organic net sales growth, leading to all-time high third quarter adjusted gross and operating margins. Adjusted operating income grew 21% year-over-year, and the adjusted margin expanded to 22.6%. Turning to Slide 5, you can see the business segment breakdown. First, our Consumer Healthcare segment had all-time record quarterly sales, up 20% versus last year. The performance was driven by ongoing execution of our Consumer Healthcare strategies including: one, to expand store-brand market share at retail; two, to innovate and launch new products; and three, to further expand into adjacent categories. This quarter, we had new product sales of $17 million, led by the launch of our Mucinex store-brand tablet on March 18. Admittedly, that's a little later than we would have liked, but we're still great -- it's great to have it out there in the marketplace. The nicotine mini lozenges were also launched on January 22, and the contribution of our Dextromethorphan suspension launched in our fiscal first quarter. It was a much more pervasive cough/cold/flu season than last year, which was historically a mild season last year. However, this is offset by a later start to this year's allergy seasons versus last year. Sales in our Nutritionals segment were up 13% from last year, with growth at all product categories. The launch of the plastic containers in the infant formula category continues on schedule and is being heavily promoted by many of our retailers. The vitamin and mineral supplement business also improved its sales as a result of additional retail orders for our store brands. Our Rx business had another strong quarter, with sales increasing 22% compared to a record third quarter last year. Adjusted operating income was up 14%, primarily the result of new product sales of $18 million. Our API segment had a good quarter, with net sales growing over $4 million and with improving margins. Looking at Slide 6, the recent trend of conversion from national brands to store brand continues. The overall OTC consumer market was up nearly 3% versus last year with national brands, flat, but with store brands gaining 8.7% on the strength of new product launches, national brand recalls and increased consumer acceptance of store brands. In nearly every category, store brands drove the market growth. The diabetes category experienced tremendous store brand growth of nearly 13%, while the overall category was up less than 3%. Gastrointestinal category was relatively flat, while store brands grew 11.3%. Store brands continue to deliver more value to our consumers and retailers in the marketplace. Now let me turn the call over to Judy.

Thanks, Joe. Good morning, everyone. As you just heard, it was yet another solid quarter. On a consolidated basis, the team continues its strong performance, delivering record quarterly revenue and adjusted earnings. I'll provide consolidated and segment earnings guidance for the remainder of the year in a few minutes but first, I'll give a brief review of our fiscal 2013 third quarter results. On Slide 7, you can see net sales in the Consumer Healthcare segment grew 20% year-over-year due to an increase in sales of existing products of $54 million, primarily in the contract cough/cold and analgesic categories; new product sales of approximately $17 million, primarily in the cough/cold and smoking cessation categories; and $31 million attributable to our entering into the new animal health category through the acquisition of Sergeant's. According to IMS FAN data, the percent of the population affected by cough, cold and flu in the quarter ended March 30 was up 13.9% versus the same time last year. This increase, in conjunction with our March 18 launch of Guaifenesin ER 600 milligrams, added to the robust CHC performance to the quarter. These combined increases were partially offset by a decline of $9 million in sales of existing products across a variety of smaller categories and the discontinuance of some smaller products totaling $4 million. The increase in adjusted CHC gross margin was due to a few factors: first, favorable dynamics of the strong cough, cold and flu season versus last year's historically mild season led to favorable absorption of fixed production costs on higher volume output in our manufacturing facilities; second, the contribution of new products; and third, the inclusion of a full quarter of Sergeant's Pet Care, which, as mentioned previously, produces a higher corporate average gross margin. The adjusted operating margin increased by a lesser amount than the adjusted gross margin as dollar spending on DSG&A was higher year-over-year. The majority of the increase in operating expenses arose from the acquisition of Sergeant's. Please remember that at the time of our acquisition of Sergeant's, we noted that this company, which was primarily a value-brand business, spends a relatively higher percent to net sales on advertising and promotion activities than legacy Perrigo. On Slide 8, you can see that net sales within the Nutritionals segment increased 13% year-over-year. As Joe noted, all product categories within the segment grew, and net new product sales contributed an additional $5 million. It was a positive story on the top line for the segment. One item we continue to watch closely, though, is our product sales to our Chinese distribution partners, which, unfortunately, were less than expected for the quarter and which are now tracking below our internal expectations on a year-to-date basis. Even though there's adequate demand, testing and regulation requirements continue to fluctuate, making it difficult for non-Chinese-based providers of infant formula to get product on the shelves. We are working through these issues diligently and are optimistic that a conclusion could be reached soon. Adjusted gross margin in the segment decreased 290 basis points due to a combination of 2 main factors. First, on a relative basis, VMS, which is a lower margin category, grew at a faster rate than infant formula in the quarter. And second, compared to last year, there were relatively higher production inefficiencies as the infant formula manufacturing facilities continue to work through the conversion from metal cans to the new plastic tubs, which was launched in December. Throughout the fiscal third quarter, the primary operational focus was to convert as many retailers to our new tub as possible. However, this came at a cost to our margins as our operational throughput was not near our optimal run rate. As of today, though, our manufacturing facilities are back in line to pre-conversion run rates. The adjusted Nutritionals operating margin was lower year-over-year due to the investment in promotional and merchandising aids for the new SmarTub conversion and other new product launches during the quarter. On Slide 9, you can see that our Rx business continues along the positive growth trajectory we have seen over the last several quarters. Net sales growth was led by new product sales of $18 million, which included 2 new foams, betamethasone and clobetasol emulsion, followed by $8 million in additional net sales contribution from our Rosemont acquisition, which closed on February 11, and an increase in existing product sales of $7 million. I'm pleased to note that our organic Rx business continues to perform well, with year-over-year revenue growth of 16% even before the inclusion of Rosemont. Rx's adjusted gross margin of 57.9% was again something to be proud of. Although, as you can see, it did decrease slightly from last year due to relative product mix, partially offset by the positive impact of the acquisition of Cobrek. The adjusted operating margin was impacted by higher distribution, selling, general and administrative costs due both to the inclusion of Rosemont and the non-recurrence of some administrative benefit received last year. Next, on Slide 10, you will see that the API segment grew net sales 11%, primarily on the continued success of our customers' products, which was launched in our fourth quarter fiscal 2012. Both adjusted gross and operating profit increased 12% on this top line growth. This quarter, the effective tax rate on adjusted earnings was 29.9%, within the 29% to 31% guidance range we provided for this fiscal year. Now some quick highlights on the balance sheet. Excluding cash and cash equivalents, working capital was $723 million at the end of the quarter, up from $607 million at this time last year. Approximately half of this increase was due to the additional working capital from the Sergeant's and Rosemont acquisitions, with the remainder from our existing businesses where working capital grew at a rate slightly below our top line organic growth rate. Year-to-date cash flow from operations was $380 million as compared to $312 million in the prior year, primarily on the growth of net income. As of March 30, 2013, total current and long-term debt on the face of the balance sheet was $1.4 billion, flat sequentially from last quarter. Excluding cash and cash equivalents, our net debt to total capital at the end of the third quarter fiscal 2013 was 32.6%. As you know, we've always maintained the philosophy of having a very strong balance sheet and maintaining an investment grade credit profile. Some of you may have noted that this morning, Perrigo filed a Form S-3 registration statement with the SEC. As you've seen from past actions in both the private placement market and with our bank group, we are continually refining our capital structure to improve our access to markets, to enhance flexibility and provide liquidity to execute our strategies and to target efficient, low-cost financing options, all while retaining our financial discipline. The filing of this debt shelf registration statement today is just another positive step in support of our stated long-standing capital structure objectives and corporate strategies. Our business development team has been busy this fiscal year-to-date, closing 4 acquisitions worth greater than $770 million, which, I'm happy to report, we were able to fund entirely with cash on hand. As you certainly noticed, we've had a rhythmic cadence of strategic acquisitions over the past few quarters and as such, we have also been working systematically to integrate these new organizations into the Perrigo infrastructure. As we noted in 2012, we're actively building an internal integration core competence with a dedicated cross-functional team focused exclusively on integrating these new businesses quickly, efficiently and in a way that retains key talent while finding synergies where possible. Now I'd like to discuss our earnings guidance for the fiscal 2013. On Slides 11 and 12, you'll notice that we are not making any adjustments to our segment or consolidated P&L guidance for the full fiscal year at this time. While we're not changing our total top line expectations from the February 11 guidance, we are lowering expectations of the contribution which will come from new products. Specifically, we are lowering our probability waits on the launches of certain new products, particularly within the Rx segment, as it is becoming increasingly difficult to precisely forecast exact approval dates due to what we believe is a slowdown in regulatory processes. Incorporating this factor into our risk-adjusted model, we now expect fiscal 2013 consolidated new product revenue to be approximately $130 million. Please note that these guidance ranges do include the acquisitions of Rosemont and Velcera, both of which closed subsequent to our last earnings release date. The only other adjustment you'll note on Slide 12 is the slight adjustment downward to our CapEx spending, which is now expected to be in a range of between $110 million and $140 million for the full year. With the very late arrival of spring in Michigan, some of our plant expansion work is only now kicking off and as such, has moved our timeline back slightly from our last forecast. Once again, the team delivered on strong operational performance as evidenced by another record quarter for revenue and adjusted earnings per share. While we're disappointed to have to adjust our new product expectations for the remainder of the fiscal year, we are pleased that the rest of our business performance should compensate for this change. As always, we remain committed to investing over the long term internally and through external investments while we continue to focus on solid execution as the basis for continued growth. And let me turn it back to Joe.

Thank you, Judy. Now I want to focus on the future. Let me turn your attention to Slide #13. The Mucinex store-brand launch went very well, and we are now positioned for the current allergy season and, of course, will gear up for next year's cough/cold/flu season. In January, we launched the store-band version of Nicorette Mini Lozenges, with approximately $30 million in branded sales, continuing our leadership position in the smoking cessation category. Just last week, we launched our second ophthalmic product, the store-brand version of Refresh Plus, with brand sales of approximately $12 million. It's great work by the team. To be clear, our updated new product guidance reflect delays in new product approvals. It is important to note that we do continue to expect these products to launch in the future, which should give us a strong tailwind into next fiscal year and beyond. Our pet care business is very well positioned to grow in the future as we recently closed on the Velcera acquisition. This adds retailers and a strong new product pipeline to our offering. The high-cost market of pet care fits perfectly into our model of making quality pet care more affordable. This category is expected to have $200 million sales, in annual sales for us in fiscal year 2014, and we expect to grow this business, continuing beyond that. I'm pleased to announce that recently, PetSmart, North America's largest pet care specialty retailer, has awarded Sergeant's Pet Care with their coveted Vendor of the Year award. We're delighted to receive this award. In our Nutritionals business, highlighted on Slide 14, we are very excited about the upgrade to what we believe is better than national brand style packaging. As mentioned earlier, store brands are growing faster than the national brands. During the quarter, Perrigo received clearance to manufacture 3 CODEX-compliant infant formulas for international markets, which underscores the high-quality standards of Perrigo, opening up more international opportunities. Turning to Slide #15. The generic Rx business is positioned very well for growth. We've executed strong new product launches in the quarter with recently announced launches of the generic versions of Acetadote, Olux-E and Luxiq Foam and look forward to launching additional undisclosed products. We expect to close the year with strong tailwinds heading into fiscal year '14 for our Rx team. As Judy noted, we executed 4 deals this year using cash while maintaining our strong balance sheet. Our entry into pet care is going very well as we closed Velcera this past month. In Rx, we signed and closed the acquisition of Rosemont Pharmaceuticals, which manufactures and markets oral, liquid pharmaceutical dosages in the U.K. All of these deals are financially attractive and provide a strong basis for growth in fiscal year '14 and beyond. Even with 4 deals behind us, the team continues to evaluate additional opportunities in ophthalmics, adult nutrition, diabetes and international markets. In summary, on Slide 16, Perrigo is poised for continued growth. The market continues to shift to store-brand offerings from national brands. Rx OTC switches are expected to continue with $10 billion in branded Rx sales likely to switch in the next 5 years, with over $5 billion of what is expected in the next 3 years. Our Nutritional business's conversion to the new plastic tubs is being received positively, and our Rx business continues to perform well. Perrigo is poised to grow adjusted earnings 11% to 15% this year and 16% to 20% without discrete tax items over last year's record performance as we continue to execute on our mission of making quality health care more affordable for consumers. Operator, let's now open up the call for questions. Operator, can you open up the call for questions, please?

[Operator Instructions] And our first question comes from the line of Randall Stanicky from Canaccord Genuity.

[indiscernible] on the consumer business?

Randall, I'm sorry. You just broke. We didn't hear the first part.

Just a question, Joe, on the consumer business?

Yes.

Is it tracking in the quarter? Did it track, and is the result in line with what you were thinking or looking for? And I'm just trying to get a sense if there were any timing issues. It sounded like allergy was a moving piece. Cough and cold, obviously, had some impact and then Mucinex. If there's any way that you could give us some color and perhaps quantify that, that would be helpful.

Sure. Well, I'd say, Randall, on balance, we were very pleased with the quarter. Well, there obviously has always been some ups and downs in any quarter that you have, just in terms of a normal distribution. On the positive, January and February was a very strong cough/cold/flu season. It moderated in March, to be clear. So that was one part. January, February very strong, up 15% to 20% versus last year's season. On the second part of it, the Guaifenesin launch was a very important launch to us. We're glad to have it behind us. Admittedly, as I stated, would I have liked to have gotten it out there a little earlier than March 18? The answer to that is absolutely clear. That would have been preferred. However, importantly, we went through all the appropriate due diligence that we needed to do to ensure that the product was well validated. We were confident of that, and we now have the product out in the marketplace. And we're delighted with what we're seeing so far in terms of the response by the retailers. The only other comment I would make on the quarter, along the lines of what you said, it was clear that this year's allergy season is starting later than last year, albeit last year was a very early start to the allergy season. I think on balance, we're absolutely where we want to be with the overall Consumer Healthcare sales growing very significantly, both organically and through the acquisition side.

And if we look at the midpoint of, Judy, if I've done my math right, $616 million or so for next quarter, the midpoint of the consumer guidance, the implied 4Q, fiscal 4Q number, would you say that your visibility and stat, that range or that midpoint, given that we know several of these moving parts now with respect to allergy and cough and cold, would you say your visibility there is high right now? Or is there other new launches that are dependent upon hitting that number?

There are not big launches depending on hitting that number in the fourth quarter. There are a variety of smaller products that are flowing through in Q4. We talked about allergy season and just how dynamic it is or is not in the quarter. But of course, as we're in the last several weeks now of the fiscal year, the confidence level is better at this stage in the game. Do not forget, though, that the other moving piece in Q4 for us, of course, is the flea and tick season. Now we have a new seasonality to deal with. And if you look at our expectations on Q3 to Q4, a part of that is the expected uptick, no pun intended, of the animal health business in Q4. And we're seeing that starting right now.

Our next question is from the line of Shibani Malhotra with RBC Capital Markets.

This is Florence for Shibani. You guys have clearly been busy on the business development front over the last several months. Can you talk about your priorities for use of cash going forward and what we should expect for both the pace and the focus for your potential future business development activity?

Sure. I'll start and then I'll turn it to Judy for more comments on this. But I would say that really, there's -- our focus on what we're -- so the cash is really continuing more of the same. As we've stated in the call, we've done now 4 different M&A transactions over the last -- this fiscal year. We continue to look for other ways to extend our portfolio. Obviously, the first thing for us always is to look at the organic growth of our business. We feel very fortunate that we've got good organic growth but where we can find additional ROIC-accretive opportunities to extend the portfolio. We want to do that and continue to leverage our leading position in the area of quality, affordable health care products. So we'll continue to look at new categories. So for example, and I think we've stated these publicly before, the areas of major interest on the M&A side are ophthalmics, adult nutrition, diabetes and looking to expand in international markets to bring our concept of quality, affordable health care internationally. So those are really the primary M&A comments. Judy, you may want to say more about other uses of cash.

Just general uses of cash. I made the comment -- just wanted to highlight for everyone, you'll notice that our CapEx spending has been higher in the last 2 years as we have been making more investments in our future with planning for future new product launches, getting our own sites up and ready, long-term investments in technologies, hence the increase in spending and CapEx even though we're going to be probably about $10 million lower than our original expectation at the beginning of the year as I commented earlier. So continuing to make important investments this year into fiscal '14 and probably into the beginning of fiscal '15 is also an important use of cash, but clearly well below the amount that we're generating in operating cash flow. So -- and we continue with our dividend policy, although, as you can see, the dividend yield is a smaller number than a large consumer products company but one where we want to continue to return some value to shareholders at a rate equal to the bottom line growth of the P&L annually.

Our next question is from the line of Linda Bolton-Weiser with B. Riley.

I wanted to clarify. I know you don't want to get into giving specific quarterly guidance and everything, but would it be fair to say, I guess, in my mind, I'm thinking that your Consumer Healthcare guidance for the year of 16% to 20% sales growth, I'm seeing that it's most likely at the bottom end of that range. Would that be a fair statement, number one? And then number two, I had a question in your Rx segment. In terms of the remaining new product launches for the fourth quarter, I'm just reviewing what I have in my model and I have Aplenzin, generic Rx Aplenzin, and then something Sanctura. And then I'm wondering about Cutivate, if you're thinking that could launch in the fourth quarter or if that's pushed out further?

Okay. Let me start with your first part of your question, Linda, clarifying the fourth quarter. As you know, we don't give any quarterly guidance. Obviously, this is a little unique in the sense that this quarter is the last quarter of our fiscal year. So in essence, we stick with the growth that we've talked about really for the full part of this year. I think Judy that said it well. I mean, what's unique about this coming quarter, though, for us is that this is one of the major seasons for pet care in that this is relatively new to us. It's a little bit hard for us to get too advanced in saying it's going to be at the higher end of the expectation or at the lower end of expectation. I do think the core Consumer Healthcare business is doing well as evidenced by the growth, but I do feel that we're going to be in that range at this time, and that's really why we stayed with the range. I really don't want to make too many more comments about being at the low end of that range or the high end of the range. I really do feel, from a revenue point of view, we're just really very happy to get these products out, get them launched into the marketplace and to continue to look at that strong growth that we expect in the Consumer Healthcare side of our business. On the Rx side, it is clear that we have a number of additional product launches that we expect, as we've stated. What we're simply at this point, though, finding is that some of these products are going through a slightly longer regulatory review cycle. That is something that we're continuing to work very closely with our R&D organization to continue to improve on our filings, get them out there into the marketplace, but we are seeing an uptick in the length of time for our regulatory review cycle for our products. We're working very closely with our internal organization to continue to try and improve that process, but that is something we see, a delay in the time period of getting the products approved. The good news is that we are still expecting these products, we are still expecting them. They're just slightly delayed from where we had previously expected based on this process. I think -- I don't think I really want to make any other comments on the specifics of those products that you mentioned, Linda.

Our next question is from the line of Chris Schott with JPMorgan. Christopher T. Schott - JP Morgan Chase & Co, Research Division: Just had a question on Nutritionals. There's obviously been a lot of moving pieces in this division. When I think about longer-term gross margins here, is this a division that can get back into the low- to mid-30s that I think we were seeing a few years ago? And maybe the second part of my question on Nutritionals is I appreciate the comments on the relaunch, Joe, but can you just elaborate a little bit more? Is there anything you can share with us in terms of how much uptake we're seeing or any changes in uptake with the new packaging that you can share? Or is it just too early to get real feedback on that?

Sure. So let me just try to address separately your 2 questions on Nutritionals. We do see a continuing opportunity to improve the gross profit margins of our Nutritionals business that we do see is opportunity. I don't want you to get to the 30% next quarter, next year. I mean, that's not going to happen that quickly, but there is an opportunity to improve the overall gross profit margins of our Nutritional business. And I think the number 30% is a great target for us. Not next year or maybe the year after or some point in the future, but it is something that we certainly think we can strive for in terms of a target for improving our gross margins. On the second part of your question, I do think it is too early to make a definitive comment. The only comments I can offer on our uptake of our plastic container are ones that I've talked about. Number one, it's been very well received by the retailers, and that's always very important. Number two, they are giving us very good promotional opportunities within the category. So whenever I get that promotional opportunity, that's a very nice place to be. Admittedly, as we've stated, it's costing us a little more to get some of these promotional displays put together, et cetera, but that's always an important part of how we look to the future for growth opportunities. But going beyond that, the only other point I can say is that store brand is up more than the national brand at this time. It's something, though, that -- it is probably too early for me to get more descriptive in saying that the plastic container has added x percent of value to us at this point. I think it's -- we're still very favorable on it in terms of what it means, but I don't really want to get into the data. I think it's a little bit too early for us. I look to have more to say about that, though, in the August time frame after we'll have about 6 months of data at that point.

Our next question is from the line of David Risinger with Morgan Stanley.

I was hoping, Joe, that you could just sort of paint a picture for us so that we understand the new infant formula product rollout and uptake. So I've talked to some investors who have gone to retailers, and they still see the brands in metal cans. And if the brand is still in a metal can, then obviously, Perrigo needs to still make the metal cans to copy or mimic the look and feel of the brand. In other cases, the brands have shifted to plastic containers, and Perrigo is now catching up. But could you just frame the transition and help us understand, for example, in 6 months where Perrigo will be? Will the vast majority of your infant formula revenue be plastic containers? Or will half of it? And how far are we along during the process of transition so that we can better understand how we should think about your products when we see them at retail?

Okay. Well, a lot of good questions there, David. Let me just start with the difference in why you're getting that feedback from some of your investors and/or concerned shoppers, I guess, out there. There is a -- the brands have switched from the metal cans to the plastic containers for the dry powder. They do obviously, though, still have metal containers for the liquid products. Liquid products are predominantly East Coast-based products, but the majority of the products have switched from the metal or composite can to a plastic container. So there is no question that we expect to see the majority of products in the plastic containers from the brand, and that's from the Abbotts of the world, from the Mead Johnsons of the world and from the Nestlés of the world. Now there are some specialty smaller products that are not in plastic containers, but those I put into kind of a separate specialty care business. And the other one that's in the metal can is the liquid formulation. So put those aside, though, because the majority of infant formula is in a dry powder. That's where the brands have switched, and that is where we are obviously following with our plastic container. Relative to our rollout, as I stated with the earlier call, we are very pleased with what we see so far in terms of number of promotions, the retailer reception to what we're doing. It's still a little early to talk about it, but we're very pleased. I believe that in our products, we are somewhere around 90% of our volume is out in plastic containers today. So you still may see some residual metal containers on the shelves for Perrigo products, but the majority of our products, in the base formulations, the most popular formulations are out in a plastic container today at about 90% of our volume. So around that level today.

Our next question is from the line of Jami Rubin with Goldman Sachs.

Just a couple of questions. Joe, you had mentioned that there are still a large number of Rx-to-OTC switch opportunities that are still important to drive your Consumer Healthcare business. Can you talk about what specific categories you're referring to over the next couple of years? Obviously, there's the can switch. I still think it's in the sort of uncertain category, but if you could talk about in terms of what you see for your business over the next couple of years? And then just a question for Judy. The guidance for the year is still pretty wide, a $0.20 spread, and here we are, the last quarter of the year. What are the key variables that you see driving the top end versus the bottom end?

Okay. I'll start and I'll turn it over to Judy. Let me start with the categories. The Rx OTC switch. I think you said it well. I mean, the -- obviously, the next products that we think are very important to us are the remaining proton pump inhibitors led by Nexium. We think that's obviously a very important product to get out into the marketplace and one which Pfizer has spent $250 million-plus to get out there with the Nexium opportunities. And in that Nexium opportunity, Pfizer also picked up some additional product categories that they were interested in beyond just the Nexium products. They deal with some of the respiratory products. Moving though from there, I think the other important product, albeit not a large product, is Oxytrol. Oxytrol is important, we believe, because number one, the FDA has found that, that disease category of overactive bladder can move from prescription to OTC. When Oxytrol was approved, that was an important product opportunity. But more importantly, I think it opens up the category of overactive bladder as the FDA has deemed that category one in which consumers can make the decision to self diagnose and treat the overactive bladder indication. So I do think overactive bladder is an important one. Oxytrol is important. And then with it -- with Oxytrol comes obviously a number of potential other future products, can't comment about whether they will switch or not, but obviously the Detrol, the Detrol LA, the Ditropan are all other products that fall into overactive bladder. It's too early to make any judgment as to whether that product -- any of those products will switch. Beyond that, we clearly view some of the pain products, the products that are specifically the non-steroidal anti-inflammatory gel products, the Voltaren specifically, gel product is one that we expect a switch opportunity in the future. And then I really -- probably don't want to make any more comments on statins, I think you know I still believe that's kind of a toss-up, probably a 60-40 probability, 60% probability it could switch but 40% probability it will not switch, and I think that's still one that is -- it's undecided at this point. Let me -- and then finally, of course, I forgot the Omega-3 fish oil-type products we believe are also candidates for switches in the near future. Judy, I think you want to take the second part of the...

Sure. The question was on the range and why we're not narrowing the range more from a $0.20 that has basically been outstanding throughout the fiscal year. If you look at -- on Slide 12, where we started the fiscal year and how we've progressed across the course of the year, unfortunately, as we said earlier, we had to move our new product number, but we've also been able to grow the businesses organically. We've expanded margins organically. We've added acquisitions in there, and we've maintained the size of the range still at $0.20. But on a real basis, that's just slightly over a 3% range. So I still feel comfortable keeping a 3% wide range, if you will, for guidance for the remainder of the fiscal year, i.e. the fourth quarter, due to the fact that while we can get more precise in most places with expectations on sales and margins, the reality still is we have the new Flea & Tick businesses as part of our family, and that can move the numbers slightly. We have also in there a moving tax rate, and we've seen the benefits and the negative of the tax rate even moving slightly in any one quarter because of mix of income. And we don't want to be caught off guard by narrowing the range to accommodate only having one quarter left and then potentially having moved -- moving outside either up or down just because of the movement in the tax rate. So we just feel it's prudent to maintain the size of the range to be able to encompass those items I just noted.

Our next question is from the line of Greg Gilbert the Bank of America Merrill Lynch.

This is not about the quarter but as of now, are you seeing any signs at all of J&J's return on several products that we're not seeing in third-party data yet? And then for Joe, a generic question. We saw that generic Zovirax got approved, a bunch of topicals players have viewed that as a tough nut to crack. So I'm curious, do you see FDA's willingness to approve that the way they did as a relevant industry data point that could change the bar for other products?

Yes. I -- let me get the first question and then get to Zovirax. Yes, J&J is returning with products. We are going with their best reports. We actually follow each and every product they have in great detail, but we're going with their best commentary that we heard from the recent reports that suggested that they would be coming back and are coming back with products. That is clear. And we are seeing them come back and expect to see them fully back in during the calendar year 2013 time frame. So that is the numbers that we're using, Greg, for our forecast. Obviously, we take every quarter one at a time based on that since we don't have any visibility beyond what we hear from J&J as they speak to investors. We do expect them to return with their -- all of their products by the end of calendar 2013 as just a review of our numbers. On the question of Zovirax, I do think it's been an interesting one, and I do think it opens up some other products that are very challenging clinical trials to follow, and I do think that there's an opportunity there for the entire industry on other more challenging products. I will also say -- not exactly the same circumstances, but I think that our product that we filed and got first to file on Proair, as an example, was an example of where we worked really hard on Proair to get that product to an FDA submission. Once it was accepted to file, I think we've seen the FDA come out with some additional guidelines based on the filing that we have and based on their own internal discussions within the FDA. I think that model is something that we're seeing on many products that are, what I would call, the more challenging generic-equivalent products. And we're delighted to be, certainly in the case of Proair, at the leadership of the first-to-file opportunity with Proair. But I do think that's exactly what's happening out there, Greg, a comment your question.

Our next question is from the line of Annabel Samimy with Stifel. Annabel Samimy - Stifel, Nicolaus & Co., Inc., Research Division: I had a question on operating margins. Actually, you've been pretty good at consistent operating margin expansion historically. And going forward, I was just curious what some of the sources of that expansion would be. Longer term and even in the near term with regard to Nutritionals, if the operating efficiencies were going to continue into the next quarter as well as in pet care, if you launch a private label, is that one of the big sources of operating margin expansion?

Well, I think, first and foremost, our improvements in operating margin going back, not just for this year but for previous years, have been just -- it's been great execution by the team in Allegan and around the world for Perrigo. I mean, I think the team has executed -- continues to execute very strong. And so I think it's -- first and foremost, goes there. But I do think, to be clear, the other part of the question, which is what you're talking about, is it goes to new products and it also goes to our M&A as we look to find other adjacent categories that have good opportunities for margin like pet care. So I do think it's been a couple of different things that have helped us to grow our operating margins. First and foremost, execution. Number two, it's been the new products. The new products classically have a higher gross margin within -- ultimately drops into our operating margin. And then the third point is really the M&A opportunity set we have found. And where that's really important is we find these adjacent categories, we can add products into our truck that's at Perrigo today, and it's going to one of our large retailers. And when we do that, it doesn't cost us incremental sales reps or it doesn't cost us incremental account receivable quirks so really the -- that allows us to bring more dollars from the gross margin right to the operating level for the business. And I think it's been an important part of our overall improvements in operating margins. Annabel Samimy - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And some of the near-term sources in terms of Nutritionals and pet care?

Yes. Well, it's -- clearly, that is the -- the Nutritionals are going to be looking at what we do with our plastic container as we can get more product out of our facility. We take the fixed cost, and we divide over more tons or pounds of products that we make in our facility. I mean, that's really the way we can get some operating efficiency. To be clear, we -- Judy mentioned that the plastic container is not as efficient as it was our previous mechanism of operation, but it will get better as we get more experience with the plastic container over time. On the question of the pet care, there's no doubt that the pet care products, especially when we get additional store brand, pet care products will help us on our operating margin over time.

And I just want to reiterate in case there's any confusion on the pet care product front, our pet care business today, the numbers you're going to see coming through for the next several quarters have a higher-than-average gross margins and in line with CHC average or slightly above on the operating margin line. But the dynamic today still is the underlying investment in A&P that's going on in those businesses. To Joe's point, as the transition is underway, as more of the revenue pie comes from -- more share of the pie is coming from store-brand contributions, you might see a slight easing down of gross margins in animal health, offset by lower A&P spend. And longer-term, we believe operating margin expansion from where it is today.

Our next question is from the line of David Buck with Buckingham Research.

Just a couple of quick questions. For the pet care business, Joe, you talked about the $200 million fiscal 2014 run rate. Can you talk about what needs to happen to make that number and what the timing is of the Frontline Flea & Tick store brand launch? Secondly, for Judy, can you just recap what the accretion is for sort of the full year or 2014 accretion from the acquisitions you've made? And then finally, for Joe, can you talk about -- you said that March quarter was impacted by the weak start to the allergy season. We're now obviously in May. What's the trend now? And are we at normal season, a slow season still? How would you characterize allergy in the second quarter?

Okay. So let me try to answer your "one question" here, David. So pet care, $200 million business. We view that as having a high-single-digit growth rate, but we think we can accelerate that into a double-digit growth rate as we launch the store-brand versions of all the Flea & Tick-type products. So that part concerns the pet care high-single-digit rates but growing to double digits as we get the store-brand products out there. And importantly, store-brand Frontline is one that we are working on very hard. We've got some customers already signed up for that. We simply are working on what I would call the regulatory labeling requirements because each of those are statewide regulatory and labeling requirements that we have to work on, which is -- it takes time, to be fair, but we already got customers signed up for it, and we're working hard to get those products to the marketplace. On the question of the additional products, we now have opportunities not only for Frontline but other Frontline line extensions that -- as you may know, there's Frontline out there as Frontline Plus, Frontline Tritak. There are other products in the longer term future that we're excited about in our portfolio as we bring together both the Sergeant's acquisition, as well as the Velcera acquisition. So I think I answered that part. Judy, can you answer the next part, accretion?

Sure. Let me just walk you through the press releases that have been done over the last several months related to the 4 deals that we have closed in this fiscal year. Going in order, Cobrek was first of all, and we expected that to contribute $0.04 in this fiscal year 2013, but we did not quote any additional accretion in fiscal '14. This is all on an adjusted basis. Please note, all adjusted non-GAAP numbers. The Rosemont acquisition, we expect it to contribute approximately $0.24, 2014. The Sergeant's transaction, we expect it to contribute approximately $0.20 in fiscal '14. And last but not least, Velcera, $0.10, $0.11 to fiscal '14. We will -- as we go into fiscal 14, we'll talk about that contribution more precisely, if it changes at all with seasonality, et cetera. And we will also obviously comment and provide a reconciliation of the GAAP to non-GAAP contributions coming from them in our usual table that we put with our press release.

Our next question is from the line of Ami Fadia with UBS.

A couple of just questions and then maybe just a 2 part question. Judy, you commented that some of the delays in the Rx new product launches gets offset by other strength within the business. So if you could please elaborate that. And related to that, with the delay, do you see a diminished commercial opportunity from these products? And then the second question is just on the pet care side. Could you give us kind of an order of magnitude of how sales have performed in the June quarter versus the March quarter for the pet care business as the tick and flea season kicks up. Maybe is it 1.5x, 2x? That would be helpful.

Sure. Let me comment on the first part.

The first part was -- are Rx side and the continued strength in the Rx side.

The continued strength of the rest of the business. So there is not one specific thing that you can point to and say aha. This one thing suddenly is significantly better in our expectations to offset, but it was across the whole portfolio. So as the team rolled up their end-of-year forecast and looked at category by category, retailer by retailer, how other new products are doing, how VMS is doing with its new retailer, it's across the portfolio. And as a team, we came back and said even though the new product number realistically has to be adjusted downwards, the rest of the business is still standing firm and, therefore, we're able to go ahead and confirm the overall top line numbers that you've seen in the guidance rather than having to make any adjustments relative to just the change in new products. So it's not -- I would not say it's one specific thing to point to.

And maybe if I just add to what Judy said on the question on the pet care side, there is no doubt that the time period of April through October is significantly higher amount of pet care business. Really, those fixed months -- if I compare the time period from April through October versus October -- I'm sorry, let's call it November through March, the April through October time frame is closer to 70%, 75% of the sales, whereas the time period of November through March is somewhere in the 25% to 30% of the sales. So that -- I mean, it's really -- by that factor, it's more than a 2:1 type of comparison, I guess, if you're...

I was just going to say think about it in terms of doubling Q3 to Q4.

Our next question is from the line of Louise Chen from Guggenheim.

My question is on basically your Sergeant's business and Velcera and your thoughts on selling generic animal health drugs. We've got a lot of questions on that. I know it's not an immediate opportunity for you, but when do you think you'd become interested in it? And how potentially large is that opportunity to Perrigo?

Sure. Well, let's say, first and foremost, we are very excited about flea and tick, and we think that's a very important OTC opportunity today and one in which we are moving very quickly to get into that business, as evidenced by the 2 acquisitions, both in what we did with Sergeant's, as well as Velcera. That is our primary focus. I will say, though, to be clear, that we expect the market for pet care to evolve over time where it's very similar to the contact lens business where 10 years ago, you got your prescription from an optometrist, he filled the prescription or she filled the prescription, and then you went on with your glasses or contacts. We view that -- that model, which has now changed to a model where you can get a prescription from an optometrist and you can get it filled in a retail setting, whether it be any of the large mass merchandisers and/or a specialty ophthalmic players, that's going to change exactly for pet care in that the vet will write a prescription for products, and you will take that prescription and fill it at a local large retailer like a Walmart, a CVS, a Walgreens, et cetera. That market, we do believe, will change very similar to what happened with the ophthalmics market. It'll take time, but we do believe that we will be positioned for that in the future. I mean, the very simple product categories that we think about today are things like we make glucose [indiscernible] today. We make it for humans. Obviously, we need to make that product a little different for a dog or cat or companion animal, but that's something we certainly have capabilities on and certainly know how to do formulations. And we need to add a little beef flavor to the formulation but otherwise, it's very simple for us to enter into those products. And obviously, the entire pet care business that we've identified as being one that we're really excited about for the future, especially as it goes -- evolves from only a vet distribution business into more of a retail business, that's really where we will get excited about if we see that continuing to develop.

I would say it doesn't preclude us from looking at opportunities that -- when companies have products available that make sense within the type of distribution channel that Joe just highlighted. But the foray that we've just made into animal health does not in and of itself a state that we're moving off of our other adjacencies -- interest in other adjacencies to move exclusively into that category. It's really focused on where we can add value for our retailers, as Joe was mentioning, at the pharmacy counter at the retail space.

Our next question is from the line of David Steinberg with Deutsche Bank.

Just to follow-up on your foray into animal health a little bit more, Joe, you'd indicated that you had $200 million run rate with Velcera and Sergeant's. Just curious, you did not mention animal health or pet care as one of your M&A -- one of the buckets you're looking at for M&A. But given it's such a large market, are there some opportunities out there? Or do you pretty much have everything you need in the future? And then just a related question on the strategic -- on the potential change in consumer behavior over time, is there a substantial group of Americans that just never go to the vet but would go to Walmart and CVS and hence, if it takes longer and you think the changed behavior -- is there a fairly sizable market that would be purchasing your products at the Walgreens, et cetera, et cetera who just never go to the vet?

Sure. Well, I -- you've asked a lot of good questions there. I will say on the pet care, we will still look for that on the M&A side. I would say that we've got 2 what we think are really important opportunities in the area of pet care in the flea and tick area and what products are going to be available or are available OTC today. So I think we feel very well positioned, but I don't want to rule out any other future opportunity in pet care if we find something that is ROIC accretive. We feel very good, though, about where we are with pet care in terms of our ability to grow it organically with what we now have, especially as we bring out these new store-brand offerings of the pet care products. On the question of consumer behavior, there is no doubt. I don't have the exact statistic, but I know that it's about 68% of American households have a companion animal in their households. So that is a very sizable percentage of American population that has a family pet. And at least, as measured by my household, that family pet gets treated very well and there's -- and it's all non-reimbursed business. So it's all cash. So cash payments out there for your pet. So I clearly think that -- we think this is a very nice market opportunity. It's perfect with quality, affordable health care. As to whether or not some consumers are going to use our product because they don't go to the vet, I don't know that as much as I think most people really realize that they know every flea and tick season, they go and get something from a vet and they pay $60, $100 -- $60 to $100 for that product, and now they can get it in a retail setting for far less. And I think that's -- it's the same store-brand product or same quality and effectiveness as the national brand but with the store-brand pricing. That's really the dynamic that we -- it's going to take some time to change that behavior, but we believe it will change very similar to where -- what we've done with OTC products. It takes time but it will evolve, and we'll be there with a great offering.

I was just going to add one last thing. You made the comment that we -- Joe didn't specifically mention animal health anymore in his areas of strategic expansion. Maybe that's just semantics that we can be cognizant of going forward given the fact that it's now part of the Perrigo family. We consider it adjacency to expand into further animal health ideas. So as we've grown so quickly over the last years, anything that's adjacent to what we're doing is now part of the adjacency tuck-in opportunity.

Yes. And maybe -- the last point I would add is -- because it reminds me very much of what happened with Zyrtec prescription. Zyrtec prescription product, when it was a prescription-only product, it sold somewhere around 500 million tablets a year. Now that Zyrtec has moved over the counter, what we have seen that -- J&J did a fabulous job with launching that product over the counter, got great acceptance for the products. And today, as we sit there in terms of tablets consumed, the total number of tablets of Zyrtec plus store brand now exceed 1.5 billion. So you've seen a tripling of the product as it moves from prescription to OTC. That's the kind of data that we will again say. As you improve access of products for people, you can increase the demand for people because people are all searching for quality, affordable health care solutions for in this case with a human situation, but certainly, as we're thinking about pet care, we have that same dynamic as you improve access.

And your final question is from the line of Jon Andersen with William Blair. Jon Andersen - William Blair & Company L.L.C., Research Division: I guess it's 2-parter on infant formula. First, just curious with the promotional activity you've kind of talked about in the U.S. should we be viewing that as more kind of opportunistic to support the plastic tub launch? Or is it maybe something more long-lasting based on competitive conditions? And the second, Joe, I think you mentioned that there are kind of 3 CODEX-complaint products have been approved for global distribution and I was hoping you could give out just a brief update on kind of the international business and how big it is today and what your plans are and expectations going forward?

Sure. Let me start with the first part of the infant formula. Did we have to spend and spend some additional funds in the area of promotions and getting ourselves prepared for the plastic container launch? The answer is yes, and that's clearly something we do as we launch any new product that we think has sizable upside for the long term. There was some incremental spend on that product at the launch to get ourselves prepared for the appropriate number of displays and other programs to get the product out into the marketplace. That will -- certainly, that's just associated with the new product launch. That will minimize over time, but it is something that we think is an important investment for our future to continue to drive the growth of our store-brand infant formula product, [indiscernible] formula product. On the question of the CODEX-compliant, what's important there is we get the FDA approval or FDA permission to go forward with these products, and that's an important marker for us that we get that so that we can then go out and ship these products to other countries around the world. And indeed, that is what happened. I would say, on balance, we're doing well in our international market with the exception of, as Judy mentioned, China. China has instituted some new, what I would call, regulatory/labeling challenges. We have worked our way through those label challenges now and we're working through them as we speak. So we still view -- there's a lot of opportunities, certainly, demand in China, if you've read recent reports in the newspapers and journals, the demand for infant formula in China continues to go up dramatically, so that's something we're very excited about, demand. But there are some, what I would call, regulatory hurdles that we are working our way through. We expect to get through those labeling requirements and continue to get product out into the China market, and we think these types of product approvals just simply facilitates even more opportunities for the future. So we're excited about it but albeit, we have to say that we've had a little bit of challenge in the latest quarter just getting product to China. We think that's behind us, or a majority of that is behind us with the label requirements. We'll work our way through that for future quarters. The opportunity is still there, the demand is still there in China for us. Operator, that concludes our call for today. I'd just like to say thank you to everyone for your interest in Perrigo, and we'll talk to you on -- I guess August will be our next quarterly call. Thank you. Have a great day, everyone.

Ladies and gentlemen, we thank you for your participation in today's conference call, and you may now disconnect.