Good morning. My name is Andrea, and I will be your conference operator today. At this time, I would like to welcome everyone to the Perrigo's First Quarter Calendar 2017 Financial Results Conference Call. [Operator Instructions] I would like to now turn the call over to your host, Mr. Bradley Joseph, Vice President of Corporate Communications and Investor Relations, you may begin.

Thank you. Good morning, and welcome to Perrigo's First Quarter 2017 Earnings Conference Call. I hope you all had the chance to review the press release we issued yesterday. Copy of this release is available on our website, as is the slide presentation for this call. Leading today's call are John Hendrickson, Perrigo's Chief Executive Officer; and Ron Winowiecki, Perrigo's Acting Chief Financial Officer. I'd like to remind everyone that during this call, participants will make certain forward-looking statements. Please refer to the important information for investors and shareholders and safe harbor language regarding these statements in our press release issued yesterday. In addition, in the appendix for today's presentation, we have provided reconciliations for all non-GAAP financial measures presented. Now I'd like to turn the call over to John Hendrickson.

Thank you, Brad, and welcome everybody to Perrigo's First Quarter 2017 Earnings Call. First, I will discuss the road map to value creation and highlights from our first quarter. Next, Ron, will dive into the details of the Q4 performance on a consolidated and segment basis and then he will provide comments on the balance sheet and wrap up with our guidance. And finally, I'll close off the call with my overarching thoughts on the business, including our anticipated new product launches and operational goals for 2017. And before proceeding, I want to say a very big thank you to the Perrigo finance team as we are now fully up-to-date with our filings with the SEC. I look forward to finally taking your questions at the close of this call and having further conversations with many of you in the weeks to come. Turning to Slide 5. Perrigo maintains a 130-year legacy of being a trusted partner in providing quality, affordable health care products. Our unique over-the-counter prescription and drug portfolios meet the health care needs of consumers across the globe. Today, more than ever, there is increasing need to lower the cost of health care solutions. Our products provide value across the health care system as Perrigo saves consumers in excess of $7 billion each and every year. Consumers, retailers, health care organizations, government programs and families, all benefit from our ability to provide high-quality affordable options for improving and maintaining healthy lives. Perrigo is at the forefront of the quality affordable health care continuum an area of increasing importance to societies around the world. Perrigo's fundamental value proposition remains consistent. Turning to Slide 6. In August of 2016, we presented a number of action items to simplify, focus and execute to drive long-term value. Since that time, the…

Thanks, John. I'll first start on Slide 10, where you can see our reported results for the quarter. Consolidated net sales were $1.2 billion with reported net income of $72 million. Adjusted net income in the first quarter was $150 million. The primary adjustments to GAAP results are driven by the exclusion of $87 million of noncash amortization expense and $39 million of restructuring charges related to our cost improvement program. Partially offsetting these expenses were the exclusion of $22 million of income related in the -- realized in the quarter, associated with the sale of certain Rx, abbreviated new drug applications, and $17 million of noncash other income for the completed sale of Tysabri. GAAP tax expense, as a percentage of pretax income, was 25.3% in the quarter compared to an adjusted tax rate of 17.4%. The difference is due to the jurisdictional mix of tax rates for the pretax income adjustments and the effect of deferred tax assets and liabilities consistent with the adjusted pretax income. Turning to the segment results on Slide 11. CHC Americas' net sales in the quarter were $583 million compared to adjusted net sales of $592 million in the prior year, a decrease of 1% year-over-year on a constant currency basis. Cough and cold category sales were higher in the quarter due to the relatively more severe cough and cold season versus the prior year and new product sales of $25 million, which were primarily driven by the continued strong sales of the store brand version of Flonase. These positive drivers were offset by lower sales of existing products of $28 million, primarily in the antacids, smoking cessation and infant nutrition categories, along with the discontinued products of $5 million. Lower sales in the infant nutrition categories were due primarily to supply constraints…

Thanks, Ron. Appreciate it. Let's talk new products. The team is working hard to execute against our 2017 plan. In big picture wide, we expect to launch over 100 new products in 2017. Total new products sales are expected to be greater than $200 million in 2017. We anticipate launching the store brand version of Nexium in the second half of 2017, which is included in our guidance. While the precise date of the store brand market formation is not certain, we remain confident in our ability to launch this product at the initial market formation date. New product launch expectations for 2017 also include more than 5 new product launches, representing -- for the Rx business, representing branded sales of greater than $800 million with 3 of these new products expected to launch within the second quarter. As new products are a key long-term driver of our business, we remain committed to investing for growth. R&D investments across the organization in 2017 are expected to yield approximately 2 product launches every week. The ability to launch new products in various dosage forms, package configurations and sizes across the broad range of customers is a key core strength of Perrigo. As you can see on Slide 18, market dynamics in our industry-leading private-label business remains favorable as year-over-year store brand growth continues to outpace national brand growth and OTC category overall. Looking at the cough/cold category, store brand growth outpaced the national brand during the first quarter's more severe cough and cold season as consumer acceptance of private-label remained strong. Additionally, the store brand category outpaced national brands in smoking cessation category. And I'd like to note that in the quarter, we launched our store brand White Ice nicotine replacement gum. Overall, the data on this slide are encouraging and…

Thanks, John. Operator, we would now like to open the call for questions. [Operator Instructions]

[Operator Instructions] Your first question comes from the line of Chris Schott with JPMorgan.

Just had a couple of quick questions, a 2-part question on the CHC Americas unit. The first is, can you just walk through a little bit of the price versus volume dynamics for that franchise in the quarter? I guess what I'm kind of looking at is more broadly -- it looks like the business is down about 1% this quarter, I know there were some nutritional headwinds, but you had a favorable year-over-year cold to cough comp. I'm just trying to bridge that kind of 1% erosion we saw this quarter versus the more favorable growth expectations you have for the business in your longer-term plan? And my second question just on CHC while it's a similar question on gross margins to date, you were talking about gross margins flat for the year at this 34.5% range. I guess my question there is just -- help also just understand that step down in gross margins from where you were in 2015 and '16. And is that kind of 34.5% a good range going forward to think about for that business unit?

Thanks, Chris. I think I got most of the questions, but let me work through them and Ron -- and I'll have Ron jump in on a couple of them. First of all, CHC Americas price volume, in my mind, our margins have continued to be very stable. So as we bring value to the business through selling more product, more higher volumes, cost savings, et cetera, we've been able to balance out volume, pricing all of those things with good stable margin performance. And I feel that a stable operating margin what we've done is very good, given the business segment and we're at a good operating place within that CHC Americas segment. I believe the second question was related to CHCI from a margin standpoint. Chris, can you -- if you are still on?

Oh, sure -- no -- I guess my question, so -- let me just simplify them down, so I guess my question, really the core for me is on CHC Americas maybe, if you can bridge the 1% decline, I think you saw this quarter versus I think some of your longer-term kind of paradigm you're talking about growing CHC. I'm trying to understand a little bit about the -- how we go from a business that's under a little bit of pressure today to growing going forward that seems -- maybe elaborate on that point, that would be helpful?

Yes. No problem. Sorry, I missed that. I thought you were talking CHCI high growth.

Sorry, for the complicated questions.

No problem. So again on CHC Americas, you always have certain timing issues in quarters related to products up and down, but the biggest driver in that is line extensions and new products. And so while we continue to look at volume growth, look at ways to be more efficient, launching new products and new product line extensions, which may be various sizes, various bonus configurations, ways to promote that, those are the kind of things that drive our sales growth that we talk about from a long-term perspective. And we're still very confident in our ability to do that within that business.

Your next question comes from the line of Randall Stanicky with RBC Capital.

John, can you just update us where you are on the current Rx review process and when we can expect to get an update there? And just a clarification on ProAir. When you indicated no competition before 1Q 2019, I just want to confirm that you're factoring in that Lupin's file as they have a target action date in September. I just want to make sure that we have visibility that you're going to be alone until that time frame?

So let me -- first of all, I'll talk on the Rx one in general, Randall. So I'd say the board, management, good open dialogues. We remain committed to creating value across all of our businesses, but especially Rx segment as you talked about. And with respect to the review of Rx, we continue to monitor the industry, monitor the dynamics and focus on driving the value. So we have not set a date for must conclude, always keep the business or do something different, we haven't set a date. We're striving to drive the best value to that business that we can. And I'll also add, I think the team is doing a great job given the market dynamics of delivering value there, kind of across the board. So look forward to that. I also look forward to the new product launches there because I think they will help us enhance that business. On ProAir, I can't talk specifically about Lupin or those because I don't know their specifics, but I do know that based on the filings and based on what we know as far as 30-month stays, et cetera, our current expectation is that we would not have competition until mid-2019.

Your next question comes from the line of Annabel Samimy with Stifel.

Just wanted to ask on CHCI. Realized that you exited the business, but performance is still declining, so can you give us a sense of what growth should be of that business in a normalized environment? And are there any specific demographic trends in the EU akin to what we see in the U.S. that you can be benefiting from as a base growth, so maybe you can help us understand how we should think about this business going forward and at what point you might be able to take advantage of those demographic trends?

So let me answer the CHCI. We did exit some distribution businesses. They were not profitable. They were good -- kind of our simplified focused execute stream allowed the business to focus more. That business will -- we expect to continue to grow, they're kind of stabilizing the base, good profit delivery, good, as we talked about operational performance against that business. They are launching new products and getting new things out to the market, line extensions and others that allow that business to grow. Our long-term expectation, when you look at that business, is that it should be able to grow at 1.5x or so the growth of the markets that we compete in there. And I hate what the European growth is, but each country is a little bit different. But in my mind, you grow 1, 1.5, we should be able to grow 2%, 3% kind of ranges over the long-term and in my mind, can bring more of that to the bottom line. Hopefully that answers that part of the question. The second one was CHCA Americas?

No. Actually, you answered the question. I was just trying to understand the demographics in Europe, and you answered that.

You next question comes from the line of Marc Goodman with UBS.

I think there was a question earlier about in the consumer U.S. business, how much was volume versus price. I'm curious how much price impacted that, just as far as that question? And then, I'm curious on cash flow, obviously very strong in the quarter. We know what your guidance is for the full year, so can you just give us a sense of what was special in the quarter and why will we not see the same type of cash flow the rest of the year, such that your guidance is too low?

Sure. So I will answer the first part, and Ron -- I'll talk -- I'll let you grab the cash flow one. So first of all, consumer U.S. price, I'd say, we continue to big picture wise manage the consumer business with new products, cost efficiencies to drive the margin. And so while we always have price dynamics in the business, we're also launching new products with good margins and doing those. So we tend to balance out those price dynamics in the segment because of the savings, and other things that we bring.

But when you provided your long-term guidance for the pricing. I mean, is this kind of within that range in the quarter? Was it at the low-end, the high-end? I was just kind of curious if there was any new trends going on.

I'd say, no new trends. It's in the range that we talked about. No new trends there.

Okay.

Ron, you want to talk cash flow?

You may -- I'll take a second. So again a repeated question, you're talking about cash flow in the quarter of $195 million, 130% conversion, again strong. So there is -- you asked about, is there anything unusual in the quarter? The unusual piece of the quarter is, we do not have any one-time items. So the balance of the year, in our guidance we've called out for is $575 million -- greater than $575 million. That includes 2 one-time items. One is, $60 million, relating to restructuring cash flows, those will be predominantly funded in Q2 and Q3 as those plans have now phased in. So you do not have any major cash flows for restructuring in Q1. You've seen the chart, you've seen $38 million of expense, but the cash effect of that is largely again in Q2 and Q3. The second item, as disclosed in our 10-Q, we do have a one-time tax payment that pixelates in Q2 for $75 million. So our guidance has 2 unusual items. If you take those 2 items off to your question, you would come back to say, okay, wait a minute, $195 million Q1, run rate that out, you start getting in the, call to say, 750-ish kind of range. You take our guidance $575 million, took out the unusual items, you come to the same math. So the unusual part of Q1 is that we're not having any major one-time outflows that we do expect here in Q2.

Your next question comes from the line of Jami Rubin with Goldman Sachs.

Just a couple. John, can you clarify if the $200 million in guidance is gross or net sales? And also, just if I take a step back, I mean, every division did decline organically in the first quarter. I'm just trying to understand what will drive the business to growth next year, given a continued negative pricing outlook and lack of new growth drivers besides Nexium and ProAir?

Yes. So the first one that $200 million of sales is a net number -- greater than $200 million net. The -- let me talk about the organic side. When we talk about what's happening, we only talk about a couple of the new products. As I said, we have over 100 new products that we expect to launch out there between line extensions, others that we don't talk about. So new products is certainly a big driver of that growth. We continue to see gains in share as illustrated by some of the charts that we should earlier and Consumer Americas and the other consumer businesses that also provide for that growth change. And again, in this year between the cost and enhancements that we've done and a lot of those kind of things as well as the new products, they tend to be more back-end loaded.

Just can I ask you a follow-up on that $200 million? What proportion of that is Nexium? And what proportion is line extensions?

Yes. We -- I don't think we disclose that. And so I wouldn't want to get into that detail.

Can you just address longer-term besides Nexium, what will be the new major needle movers in the CHC business as we sort of exit the decade 2018, 2019? What are those big brands that are going from Rx to OTC that we should look for?

Yes. So let me step back real quick and again, I'm glad you're asking these because this is also one as we get and look forward, we want to get in front of you as we meet after the second quarter and try and do some things as we go forward. But if you think big picture wise and looking at the different business segments, so I assume your question is a little bit about the U.S. CHC business, is that correct?

Yes.

Okay. So really the drivers for growth are twofold. One is with the brands back out there, the brands tend to do good innovation, which is good. They bring innovation that allows growth for us. And so we like having good strong brands, good strong people creating innovative products that allows us to grow. So without even launching a switch product, a new product allows room for growth, if you will. When you look at the switches, certainly some of the derm category switches that have been announced are going to be there, some of the additional follow-ons for the nasal sprays, and the antihistamines, will be good continued switches. Beyond that, I think that are other categories that allow opportunities for switch, although nothing there yet. And so we remain...

Like, what for example?

So I think there is migraine categories that are out there, that are open for switch. I think there is other ophthalmic categories that will be open for switch. And our -- we invest in those categories that we think could potentially switch and are open to switch. I think the good thing is the environment that we're in and trying to find cost-effective ways of health care plays into our government and individual companies looking to bring products to a more economical position and switching them. So I think that plays well into what we're trying to do in the CHCA segment.

Your next question comes from the line of Gregg Gilbert with Deutsche Bank.

Back to generics. Great to hear that pricing has been in line for 3 quarters in a row. Can you comment on how pricing has changed, if at all, on the margin after the end of March? And higher level John, what's your latest opinion aside from the environment? What's your opinion on the importance of keeping Rx as a core element of your strategy and pulling it all together over the next several years to maximize growth and value? Haven't heard your specific views for a while on that?

Great, Gregg. Thanks. So first of all, on the generic side, it has been in line with what we expected, which is good. We still expect to hit our plan for the year. So our expectations going forward are the same as they had been. We're still linked within our original expectations to the Rx business. So we have not changed our overall perspective as we look at what we have in our plan and what's expected. In general, in that 9% to 11% range for the year. On the Rx business and so forth. I remain very open and similar to what I've said in the past and I've always said I like certain parts of the business that fit in great, the marketing -- or excuse me, the pricing dynamics over the last few years, I don't care for its volatile nature et cetera. But I do like certain parts of the business given the operating efficiencies it gives us, the cost benefits, the operating side, the way it links into our regulatory and R&D efforts, all of those things are positive. At the same token, it's a different business and a different dynamic that we're facing in that business versus the others. And so as we talk with myself, but as a board very openly, we're looking at all those dynamics. And again, as I said early on, really thinking about what is the best way to create shareholder value, given the dynamics, given the situation that we have within that Rx segment.

Your next question comes from the line of Elliot Wilbur with Raymond James.

Just a follow-up question, John, on the Rx business. I guess, given that it's still on parole and I guess, it's kind of hard to ascertain whether or not you guys are on offense or defense with respect to that business. I mean, how do you think about optimizing the value of that business for the longer-term because it certainly seems like with respect to R&D investment, there is a need for a fairly significant acceleration of the generic pipeline and obviously given the volatility in the space certainly valuations of publicly-traded assets have come down dramatically and there may be a lot of strategic opportunities that could present them -- present themselves in the near term. I'm just trying to figure out, whether or not you guys are committed to aggressive moves to enhance the long-term value of that business or if you're still kind of watching and waiting the current -- for the current environment to moderate or improve?

Yes. You bet. Thanks, Elliot. So I don't know that I care for the term still on parole, so I understand the nature of it, we're there. I would say, the way we look at the business is that, we are investing in it for the long-term organically. We believe we have a good pipeline. We believe we have a reason even with a price decline to grow this business and grow it profitably because of the pipeline and things we've invested in and we continue to invest in R&D to drive that pipeline. So we're not milking it for sale. We're not doing these things. We're investing for long-term in this business. Regarding your second point, I think the market is dynamic. And looking at what are the best ways given that to drive other value and again, I'll say, with the new board, a lot of new members with different angles, having great discussions of, how do we do it? And what would be the best ways to do it? So I think the new board brings good opportunities to have again broader, different perspectives. And certainly, counting on doing that. But I want to be clear, we're driving this business for the long-term, and our team, I think, are doing a great job in executing on new products, and frankly bringing the new products to fruition here.

And your next question comes from the line of Douglas Tsao with Barclays.

Just in terms of the generics business. You noted there was a sale of some ANDAs. I was just curious in terms of the thinking behind that transaction because obviously with your generics business, we would think some new product opportunities would be warranted or desired. And so I'm just curious in terms of what led to the thinking to -- that -- those didn't warrant a fit for your portfolio?

Yes. So I'll do that and Ron, please jump in after that. First of all, I'd say within all of our businesses, we took a step back, this isn't just Rx, this is all of them, and said even though we like this business or we like CHCI International, what else can we do to really focus our portfolio making sure that we're directing all of our investments to the right things? In the Rx segment, we did a couple of things. One, we announced previously, which is, we elected to not have a detailed sales force for some of the branded products that we had within our Rx business. And so we got out of those products. We got out of those -- that selling force and did something different to optimize our cost structure to capitalize on some of the economics of that, but make a change there. The second part was, we had some products that frankly just didn't fit in our portfolio. These were development products that were down the line a little bit, but really weren't strategic products for us or products that had come along with certain things, and we said, we are better off getting the cash for those because they aren't ones that fit within our normal focused strategy that we have. And so elected to move on from those. Ron, do you have any other parts to add to that?

I think, in summary, the only thing I would add to your question is, everything we do is about ROI, so -- and that's how the decision was made, and I only will echo John's point that when we take a look at our portfolio, we're always looking at what's the best way to monetize an asset whether it's through our commercial trade or through in this instance, a party approached us, and we looked at our 5-year plan, and we looked at the value, and it was better in their hands versus ours. So I agree with John 100%. That's what we always do. It's how do we optimize value for investors? In this case it was a very clear ROIC decision for the company.

Your next question comes from the line of Tim Chiang with BTIG.

John, just taking a step look, and you look at the businesses you have here, your Americas, Consumer Health International, and your prescription business, do you think that over the long run, you can continue to grow these 3 segments without having to make any additional acquisitions? I mean, is that basically the plan for this year to delever the balance sheet and then sort of reload the balance sheet such that you can make more acquisitions? Is that sort of the longer-term plan? Or is there a different plan in place?

Thanks, Tim. Great question. So again in my mind, we had to step back. We simplified. We focused. We executed. I know I harp on those, but that's what we said, here is what we're going to do. We wanted to get our balance sheet in a much more flexible position that gave us lots of options. And so that was what we embarked upon to make sure that we were poised to enable the rest of our businesses in our core business segment that we had. When I look at the cash we generate, the balance sheet that once we were through these tenders everything will be sitting, in my mind, at a very good position, to give us optionality, I look at, first, saying, hey, we're going to continue to invest heavily in R&D and internal organic things. I believe we will have optionality to invest in products, segments et cetera, bolt-on things that add into our core businesses. Those are typically good values. We can bring them to the bottom very quickly. They add into the infrastructure that we already have in place. And I believe that with our balance sheet position and our cash generation, we have those opportunities. And of course, the third option and pole status, to say, are there other ways of returning value to shareholders and returning that capital to shareholders above and beyond those kind of acquisitions? But in direct answer to your question, I believe we're better positioned to capitalize on opportunities than we were a year ago, given where we're at, we're much more poised to support the growth of these core businesses that we have.

And maybe just 1 follow-up, John. Now that you've sold the Tysabri royalty stream, you get to delever the balance sheet, but I think know you're going to become more dependent on these 3 key line segments that show more steady growth. How comfortable are you that you can generate that in '17 and '18?

Yes. I remain very confident in all 3 business segments providing growth and returning to that overall growth profile in '18. And as we go forward and I look at the new products and I look at the base underlining fundamentals of the business, I feel good about our prospects going forward, Tim.

Your next question comes from the line of David Steinberg with Jefferies.

I wanted to follow up on the Rx OTC switch discussion, which is lifeblood of your historic growth. So you -- so the allergy drugs have largely been played out, Claritin, Allegra. You've launched most of the cough/cold products, and I think with Nexium, that's the end of the line on your proton pump inhibitors. I know you mentioned derm and maybe migraine, but what about some of the other therapeutic areas that in the recent past you discussed like statins, OAB drugs and Viagra? Are those off the table? And then secondly, just turning to your generic business, how confident can you be that you can accurately forecast price deflation and also the value of the pipeline, particularly with continuing consolidation of your buyers and some of these new consortiums like Claris, VAV and then some of the RFPs that are currently out there with the Walgreens Boots Alliance? How confident could you be in your forecasting, given those dynamics?

Yes. No, a good question. So let me start out with the kind of the growth side Rx OTC switches, and I'll go back, in general, to saying that while the switches are the big movers in the market, we do launch a lot of products within innovative products, once something is switched. It's one of the hallmarks of what we do, and I'll get back to your question. But when a product switches, it switches as a dose. And then very quickly, we turn it into 27 facings -- I picked 27, but different package configurations, different offerings, different combo packs, different things that presents at the consumer in many different ways. And so that's one of the ways we differ from just the peer companies saying, well I switched this tablet, we switch it over and bring a whole program with that as well as again all the line extensions, so those continue. When I look -- we look at some of the current markets that we expect to switch, as you talked about earlier, and I think those give us good near-term opportunities for switches. And you talked about statins, the erectile dysfunction categories, maybe some of the other asthma-type categories, I think those continue to be, in my mind, a little bit further away. But again, given the focus on, how do we reduce health care cost? How do we keep those in consumers' hands? What happened there? I believe that the incentive for industry, government, et cetera, to figure out ways to bring those to more consumer choice type of offerings remains out there. So the incentives are there to drive that. Do we end up somewhere like the U.K. where there is a third class or a pharmacy intervention -- pharmacist's intervention or something? I'm not quite sure, but if I look out over the next 3 to 5 years, I believe that some of those paths will present themselves.

And we have now come to the end of our Q&A session. I would like to now turn the call back over to Mr. John Hendrickson for closing remarks.

Well, thank you very much everyone, for joining us. I'm actually very excited this morning to get a chance to talk, answer some questions, talk about our business again as opposed to the other issues we've been dealing with, and look forward to talking with all of you in the upcoming week or 2. Thank you very much.

Thank you, ladies and gentlemen. This does conclude today's conference. You may now disconnect.