Perrigo Company plc (PRGO) Q4 2018 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the Perrigo Fourth Quarter and Calendar Year 2018 Results Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Brad Joseph, Vice President of Global Investor Relations. Please go ahead.

Thank you. Good morning, everyone, and welcome to Perrigo's fourth quarter and calendar year 2018 earnings conference call. Hope you all had a chance to review the press release we issued earlier this afternoon. Copies of this release are available on our website, as is the slide presentation for this call. Joining today's call are Murray Kessler, Perrigo's President and CEO; and Ron Winowiecki, Perrigo's CFO. I'd like to remind everyone that during the 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 earlier this afternoon. In addition, in the appendix for today's presentation, we've provided reconciliations for all non-GAAP financial measures presented. Turning quickly to the agenda on Slide 3. First, Murray will discuss his early observations and progress we've made since he joined Perrigo, followed by his highlights of the commercial results for the quarter. Ron will then review our fourth quarter performance results and walk through the details of our P&L statement and balance sheet. Ron will then review business trends heading into 2019 before turning the call back over to Murray for closing remarks and Q&A. Now, I'd like to turn the call over to Murray.

Good afternoon, everyone. I had one quarter under my belt and I'm learning more and more about the business every day. My early observations of what the key issues facing Perrigo are and what we need to do to fix the business remain largely unchanged and can be summarized as follows: First, the challenges that we face are fixable. The more time I’ve spent with the business the more I’ve become comfortable that we can not only take Perrigo back to its prior strength but that we can build on the platform to be even stronger. Second, new product volume and core brand innovation over the last few years has not been sufficient to offset increased price competition in the USA. Third, increased organizational complexity and lack of sufficient investment and capacity and technology has reduced the company service levels and competitive advantage in an area that has historically been a core competency for Perrigo and which inside the company we rightly call the Perrigo advantage. Four, overhangs of which the recent EUR1.6 billion Irish Notice of Assessment is the most meaningful and which I'll discuss in more detail in a few minutes are a distraction and a resource strain. Fifth, over the last few years Perrigo has not made the type of investments that had driven the company's success for so many years. That is a robust pipeline of new products and smaller bolt-on acquisition. Six, our international consumer business is a good business with attractive upside potential, but has a legacy of having been managed as an amalgamation of many small businesses. Great progress has been made restructuring that business and reducing complexity but there's much more to be done in order to enhance performance and margin. Overall, I liked the business and it is performing better than most investors realize. Seven, our generic RX business is a diversified and highly differentiated pharmaceutical business. But when RX is combined with our consumer businesses both become neglected. I continue to support the Board's decision to separate the companies so they both can reach their full potential. Eight, there is great talent within the company that was waiting to be unleashed and that is being done. There are also some important capability and skill gaps that needed to be addressed in the area of consumer marketing, R&D, innovation and business intelligence. Those voids have been filled with great talent both externally and internally. And nine, the company's recent earnings guidance revisions have frustrated investors. While the fourth quarter results were relatively lackluster and negatively impacted by continued executional issues, we delivered exactly what we said we would despite some pretty significant headwinds, so that's a start. Again, all of these issues are fixable and many are being addressed now with specific actions throughout our company. Most importantly, we have developed a new strategic plan designed to help us deliver our new vision, which is to make lives better by bringing quality affordable self-care products that consumers trust everywhere they are sold. The plan has been approved by our Board and we are now on to the implementation stage. We will share the full plan at our Investor Day which has been scheduled for May 9th at the New York Stock Exchange. At that meeting, we will review how we are transforming Perrigo from a healthcare to a consumer self-care company to take advantage of a massive global consumer trend. We intend to provide detailed plans and actions we have already taken in areas of portfolio reconfiguration, investments in capacity and technology, innovation initiative, cost savings plans to help fuel growth, capital allocation plans, and organizational effectiveness initiatives, including several key external hires. We will also provide calendar year 2019 guidance at that time. Turning to the fourth quarter of 2018, let me give you an overview of how I saw consolidated and segment commercial result. Reported fourth quarter net sales for the company were $1.2 billion, down 5% versus a year-ago on an organic constant currency basis and adjusted diluted EPS was $0.97 as we guided which was down 24% versus year ago. We experienced operating income declines across all three of our segments for different reasons, which I'll detail in a minute, but at the 30,000 foot level, the consumer businesses in the Americas were negatively affected by costs and customer service. In our International segment, we've purposely invested in advertising and in R&D and in RX, we continued to suffer from downward pricing pressure albeit at a lower rate than we had been previously experiencing. In the Consumer Market segment, consumer offtake and store brand market share continued to grow. Underlying revenue trends on our core businesses were relatively unchanged. Importantly, sales volumes on the base over-the-counter healthcare lines were once again solid, except for animal health, which you are aware of it has been discussed on previous calls. Execution in the fourth quarter remained sloppy which depressed revenues and reduced margins. On top of challenged service levels a significant equipment startup issue in the infant nutrition business resulted in a mid sales opportunity of $10 million with a one-time impact to gross profit of approximately $0.08 of adjusted EPS per share. Turning to Consumer International, we continue to simplify and upgrade our offerings during 2018 and the fourth quarter. This purposeful pruning of our product line, which has translated to higher margin, masks our businesses really performing. Our core international OTC brands, representing 70% of consumer international’s net sales grew approximately 2.5% for the year and 1.5% fourth the quarter, holding market share in the European OTC market that grew at roughly the same rate. We are especially pleased with momentum we are observing in the dermatological space with our ACO brand and cough, cold and analgesic with our Solpadeine brand. Fourth quarter advertising and R&D was increased by $13 million or 28% on a constant currency basis versus last year to keep the momentum going. And with the bulk of the product line pruning that has occurred over the last few years behind us, we anticipate top-line growth in 2019 for our total International Consumer segment. I'd also note customer service levels had averaged around 95% for the last year, a testament to this team's focus on keeping our winning brands on the shelf and available to consumers. Moving on to RX, it was a better quarter as we started to see the benefits of a solid pipeline of new products begin to positively impact the business in both revenue and margin. We saw margin improvement in the fourth quarter both sequentially and year-over-year benefiting from the launch of testosterone 1.62% and an easing of downward pricing pressure. Revenues continued to decline year-over-year by approximately 15%, which is half the rate that we experienced in the third quarter. We expect this business segment to improve as its new product pipeline continues to come to market. For perspective, we have 10 tentative approvals awaiting final action and 65 new product projects under development or under FDA review. Also worth noting, customer service levels have been restored to greater than 90%. And as it relates to the separation process, I won't comment on where we are right now on the sale or spin or in the Q&A other than to say it is on track and we remain committed to this strategic initiative. So in summary, 2018 was a challenging year, but overall our consumer business’ market shares were stable in growing market. Executional issues are being addressed. We have restored customer service levels in the RX segment and we received the $250 million Tysabri royalty payment. We have an exciting strategic plan that we believe will transform Perrigo back into a growing company with the bright future as we evolve from a healthcare company to a consumer self-care company. We note that 2019 will be a transformational year that implements the many major changes I have discussed and which we recognize makes it difficult right now to forecast our business. It is our intention to bring significant priority to the strategy and transformation execution, as well as provide full year 2019 guidance on May 9th. One last topic I'd like to cover before I turn the call over to Ron. Two days ago, Perrigo filed the petition within the Irish High Court, because we strongly believe Irish revenues Notice of Assessment was issued in breach of the company's legitimate expectations regarding how it would be treated as a tax payer. As we noticed in our prior disclosure related to the Irish tax assessment, we strongly disagree with the assessment and believe that it is without merit and incorrect as a matter of law. We also said that the company would pursue all available administrative and judicial avenues that may be necessary or appropriate to challenge this assessment. We owe it to our shareholders to take every legitimate step to challenge this assessment and that is why we pursued this action in the Irish court. I will not go into the details of this filing other than to say that: First, we believe that Irish revenues assessment conflicts with revenue’s longstanding tax treatment of Elan Pharma, which was carrying on a trade of intellectual property for over 20 years. As noted in the judicial review proceedings, we believe that Irish revenue breached Elan Pharma’s legitimate expectations based on that tax history when it wrongly recharacterized Elan Pharma’s trade some 20 years later in the amended assessment. And second, the judicial review proceeding is a separate process that must be pursued in the Irish court rather than before the Tax Appeals Commission. The appeal before the Tax Appeals Commission has been stayed until the court makes a decision in this judicial review proceeding. If the court finds that Elan Pharma’s legitimate expectation was breached, the court would set aside the entire assessment. To be clear, this is a challenge of the process, not the assessment itself. If the court does not agree with our assertion, then we will proceed to challenge the tax assessment on its merit and the Tax Appeals Commission. With that, I'll turn the call over to our CFO, Ron Winowiecki to cover more specific financial results for the fourth quarter and year. And while I said that we will not provide full 2019 guidance until our Investor Day meeting, he will give you some rough planning input as you think about your model. Ron?

Thank you, Murray. And good afternoon everyone. I'll now walk you through the financial details of our P&L and balance sheet starting on Slide 9. On a consolidated basis reported net sales were approximately $1.2 billion with reported net income of $82 million and reported EPS of $0.60 per share. A few adjustments to the GAAP P&L this quarter are worth noting. First, we recognized a $170 million gain in our P&L resulting from the achievements and receipts of the $250 million to Tysabri royalty payment. As a reminder, we as a potential for another milestone receipt of $400 million in the event 2022 Tysabri sales exceed $1.95 billion. In addition, as we continue on our plan of separating the RX business we spent $7.3 million which included a combination of clinical accounting, tax work streams and operational actions to segregate the business. GAAP tax expense as a percentage of pre-tax income was 60% in the quarter compared to a non-GAAP tax rate of approximately 20%. The difference was due primarily to the tax effect of the non-GAAP pre-tax adjustments and the effect of valuation allowances against certain deferred tax assets and liabilities consistent with the adjusted pre-tax income. Now turning the Slide 10. Our consolidated net sales were approximately $1.2 billion, 7% lower than the prior year. Unfavorable foreign currency translation impacted net sales by approximately $18 million in the quarter. On an organic constant currency basis, net sales decreased by approximately 5% due to the following: One, RX net sales were down approximately 15% as price erosion and lower volumes impacted the business. RX net sales were slightly above our expectation as we saw year-over-year pricing trends improve in the fourth quarter in our core generic portfolio. As we have discussed previously, our inability to supply certain products has resulted in lower volume. However, it is worth noting the team has been focusing on correcting these issues and service levels have improved from the low to mid 80% range in mid 2018 to approximately 90% as we sit here today. New product sales of $22 million partially offset these declines. Two, net sales in the US animal health business were approximately [58%] lower than the prior year due to the previously disclosed loss of partnered product and channel dynamics. In the fourth quarter, excluding the animal health business on an organic constant currency basis, our worldwide consumer businesses were approximately 1% lower year-over-year. And three, we experienced a temporary disruption caused by an equipment startup issue at one of our infant formula facilities. And as Murray stated, this disruption caused net sales i9n the quarter to be lower by approximately $10 million. I will discuss the startup issue in more detail shortly. Now turning to Slide 11. Adjusted gross profit was approximately $490 million or $75 million lower than the prior year. CHC Americas adjusted gross profit was more than half of the decline down approximately $44 million compared to the prior year due to the following factors: First, lower net sales and unfavorable product mix accounted for approximately $15 million of this variant. Second, our infant formula plan in Ohio had undergone a series of major equipment updates as part of our ongoing investment in capacity to support growth in this business. When restarting production in this facility during the fourth quarter, our quality system identified an equipment variation inconsistent with our quality control standards. Accordingly, inclusive of scrap product and lost sales, gross profit was impacted by approximately $13 million or $0.08 per share. We anticipate production to resume early next month. Finally, as reported in the third quarter, the CHC Americas business continued to experience lower customer service levels, which led to production inefficiencies and operating variances. These factors combined with higher year-over-year input costs, impacted gross profit by approximately $16 million. CHC International adjusted gross profit was unfavorably impacted by approximately $9 million in the fourth quarter due to currency translation movements. In the RX segment our adjusted gross profit was down in the quarter due to lower net sales. Adjusted gross margin was approximately 55%, an increase of 160 basis points compared to the prior year driven by the launch of higher margin new products. Slide 12 outlines the primary operating expense drivers in our businesses. In the fourth quarter, we increased growth investments compared to the prior year on a constant currency basis. In our consumer platforms we prioritized investments to drive long range growth. Specifically in the Consumer International business, planned investments in advertising and R&D were approximately 16.1% as a percentage to net sales compared to 12.5% in the prior year. Likewise, RX R&D investments were approximately 8% in net sales as we continued to invest in our strong pipeline. Selling and administration expenses benefited from favorable foreign currency translation movements of approximately $6 million, lower compensation accruals in the quarter and continued improvement actions and the cost structure of our Consumer International segment. Turning to Slide 13. The major financial drivers I just reviewed resulted in a consolidated adjusted operating income of $195 million compared to $253 million in the prior year and a reduction in margin. A bit of perspective on margins, our overall consolidated operating margin for the quarter was 16.3%, down approximately 350 basis points compared to the prior year, due primarily to: one, the production issues in CHC Americas negatively impacted that segment’s adjusted operating margin by 400 basis points and consolidated Perrigo adjusted margin by 225 basis points; and two, in CHC International, the intentional investments to drive long-term growth in this business impacted the segment’s adjusted operating margin by 350 basis points and consolidated Perrigo adjusted operating margin by 100 basis points. These are partially offset by RX where our adjusted operating margin increased year-over-year from 38.1% to 39.2% as we continued to invest in R&D. Slide 14 illustrates the overall consolidated adjusted operating results for the fourth quarter. Our effective tax rate was consistent with our expectations at approximately 20%. Overall adjusted earnings per share was $0.97 right in the middle of the revised guidance range we provided last call. And despite the negative impact of approximately $0.08 per share from the Ohio facility equipment production issue. Turning now to Slide 15. Our balance sheet and cash flow generation remains strong. Cash flow conversion to adjusted net income was 147% for the quarter, which highlights the powerful cash flow generation of our business model. Of note, the December 31, 2018 balance sheet does not include the $250 million Tysabri royalty payment we received in the first quarter of 2019. Our capital allocation decisions are focused on total shareholder returns within the context of our longstanding commitment to an investment grade financial policy. As Murray highlighted, we're looking forward to our upcoming Investor Day where we will outline our strategic plan and our 2019 guidance framework. In the interim, we're highlighting a few key business trends headed into 2019. Our consumer businesses continued to grow, led by store brand penetration and a healthy new product pipeline in our Consumer International business. And as a reminder, the loss of the partnered product in our animal health business will anniversary mid-year, and will no longer affect year-over-year comparisons starting in Q3 of 2019. Also, given the current weakness of certain currencies to US dollar, translation exposure is expected to negatively impact 2019 growth in our consumer businesses by approximately 190 basis points as we stand here today. From an operating perspective, in our consumer businesses, there are two core macro themes headed into 2019. First, as our service levels in our RX and CHC International business are operating above 90%, our top priority is the resolution of the operating variances and customer service dynamics in the Consumer Americas segment. Actions to improve service in this segment are underway and include: one, adding capacity and our capital value stream. And two, important process, technology and structural improvements to drive and sustain operational performance. As previously indicated, we are now refocused on regaining the Perrigo advantage with customer service as a key pillar. This is a top priority, while we are making progress, it will take time for these actions to be realized in our financial statement. As previously inventory operating variances were rolled through our income statement, in 2019, the inventory is sold in the first half of the year. This means that weakness we saw in the second half of 2018 will depress 2019’s first half results in the form of higher cost of products sold. Second, we have already begun our strategic investments in various aspects of our consumer businesses. As evidenced by the planned increase in advertising within the Consumer International segment in the fourth quarter along with build out of capabilities in R&D, innovation and business intelligence, which will also impact first half results. We will show specific action to help offset these investments at our Investor Day, but they will come later in the year in the form of cost reduction program. Given its operating framework, Consumer adjusted operating margins are expected to be lower in the first half of 2019 compared to the same period in 2018 improving as we march through the year. Finally, within the RX segment, there are two macro themes to consider. First, from a pricing perspective, we saw signs of stabilization in the fourth quarter. And as I sit here today, we expect 2019 price headwinds in our core products to be consistent with our 2018 year-over-year fourth quarter results. And second, expect that we will continue to invest in our pipeline with dollar growth and R&D investments versus 2018. At our Investor Day, we plan to provide more details around each of these trends as we provide 2019 guidance at that time. As you complete your models another important factor to keep in mind is our continued strong operating cash flow profile. In 2018, our adjusted operating cash flow conversion to adjusted net income once again exceeded 100%. Our teams continue to remain confident in our cash flow generation, which will factor into our framework around capital allocation, that will also be outlined at the May 9 Investor Day. Now, I'd like to turn the call back to Murray.

Thanks, Ron. So look the key takeaway should be that the business is challenged, we understand that. We know what the issues are. The plans have been approved to fix it. We are aggressively making the necessary changes and the tough decisions to get back on track. Significant change is underway and I am excited and our leadership team is excited to share those plans with you on May 9th, and not just the plans, but real progress against those plans. So let's open up the line for Q&A.

We will now begin the question-and-answer session. [Operator Instructions]. Our first question comes from Louise Chen with Cantor. Please go ahead

Based on the business trends that you gave for 2019, is there still a possibility for growth on a full year basis in 2019? And then in terms of the pushes and pulls on the earnings, can you talk a little bit more about what the big levers are? And then my last question is just as it pertains to the tax issue, what percentage of the challenges that go through the process that you're going through now actually result in something positive for the company? Thank you.

Well let's break them up into three. Louise it's a little bit hard to answer the question on growth without you seeing the entire plan which is the whole point of the May 9th Investor Day, because there are -- I keep setting the stage for multiple components. So we obviously believe we're going to be, as Ron said, starting the year a little bit slower because of cost but then as we start to bring up a number of these initiatives, which we will give you a real life example of, there's no way for you to be forecasting them in your trend. So I hate to say it, but you're going to have to wait to see the plan on May 9th. So I tried to give you a little bit of a new piece of information that I haven't seen people talking about much which is, that we understand there is dilution from the separation, we understand that there are investments and that -- so that's why you heard us talking about there will be a cost component to this initiative as well, which again is difficult for you to model. But you're going to see some major, major change coming in here May and I think and hope that you will be very excited about where we're going when you see it. And I don't know if you want to add anything to it Ron, because I'm not going to put any percentages against the loss?

Next question comes from Chris Schott with JP Morgan. Please go ahead.

Great. Thanks very much for the questions. The first one I just had is on the CHC International business. If I'm hearing the comments correctly, is this a business that's largely structured how you'd like at this point, so just may be more focused on the Americas side or is there also a significant opportunity on the international side of the business to improve performance and structure, et cetera? That's the first one. The second one is just, turning my hands around with this pending tax liability and you got a very strong view this is something you will prevail ultimately, but how does that pending liability impact your capital deployment priorities and how you think about putting capital to work as you look to reposition the consumer business while you're waiting for some of the organic kind of initiatives to take hold? Thanks very much.

Sure. So on the first issue on the CHCI business, the International business, we outlined a little bit that there's been major restructuring. I think in 2018 alone, there were $55 million of purposely discontinued products. That’s the number really. So, you have to look at that growth within the context of what they've been doing, consolidating markets, they have discontinued thousands of SKUs that were non-profitable, and that's how you're seeing the margin enhancement along with significant organizational changes. They are most of the way through, so you should start seeing the top-line growth that's underlying one of the core business to show itself in 2019, and I think there are plenty of opportunities and they have a very robust new product pipeline they've been working at. Having said all that, International, it has plenty of opportunities, it's not the issue facing like company and it's not in my mind what unlocked significant value for our investors. Right now getting the Americas business right, getting service levels, getting that new product engine going again, revisiting and when it makes sense bolt-on acquisitions and doing all the things that made Perrigo great before it, started focus being distracted internationally and with a number of other things we did is the top priority for this company to create value. So job number one is the Americas. And as it relates to -- give me the second question?

[Indiscernible] How does that impact the capital allocation?

As it relates to our capital allocation plans, that was like one of the first questions that I asked and it's a good question because I wanted to make sure that it wasn't going to inhibit any of our ability to do what we need to do and the answer is for the most part it doesn't. Could it influence the way we allocate capital being a little more conservative to shifting some money towards paying down debt for shares versus dividends et cetera we’ll outline all of that in May 9th as well. So we want to make sure that we remove uncertainly, as you invest in us, you don't have to be worried about that and I've had to deal with that for over a decade in the previous industry I was in but it does not get in the way of doing what we want to do. And you know what I think you think about our capital structure, our balance sheet everything, you should be thinking that we have our eyes clearly set on being a top performing CPG consumer-based company with our evolution from healthcare to self-care. And that means we want to stack up well on all of the benchmarks relative to other top performing consumer companies.

The next question comes from Randall Stanicky with RBC Capital Markets. Please go ahead.

Hey, how you’re doing? So there's been some, I think understandable investor pushback on the differentiation of the new strategy going forward moving the self-care and when we look at the current CHCA business that the new product sales continue to attract under that $50 million level obviously the pressure that you've called that on the core business. So question number one, can you just give some concrete examples in terms of things that you can do to drive the growth higher? Is this going to be a largely a bolt-on strategy or there's things you can do with the core business? And then the second question is, are we going to get an RX announcement on May 9th, and is there a scenario where you guys step back and say, hey, the math or the demand for this asset isn't there, we're going to separate on the platform, but maybe we'll hold on to it for some period longer until things look different? Thanks.

Well as I sit here right now we are full steam ahead on the RX separation and we hope to be able to present very clear plans and believe we're on track to do that. I mean I'm ever going to sit here and make an ultimatum and say nothing could adjust our plans but I don't see it right now. When you talk about the consumer side of the business, that will be a major, major, major portion of May 9th. But if I had to give you an example, and by the way, my answer is it can come from bolt-ons, it can come from innovation on core business, it can come from share building and it all relates to the consumer understanding of how people buy our products and what our relative shares are in different categories. So let's see nicotine cessation as an example, that's the category where we’re the market leader by far, much bigger than the national brand. If you're in that position, that means you need to be the one that's doing a lot of innovation. And you may look at that and say, well, in order to do that, you have to go through FDA long slow processes in that particular category. That's not true. If, there's nothing that stops us from innovating on, forms, packaging, flavors, and alike to drive that business and grow that category, segment itself. As I sit here coming from the industry I came in, we in the company at Perrigo I think we've done a good job and but it's tiny compared to what's going on in the world of, let's give an example of how explosive vapor products have been to switch consumers from smoking to vapor. So, the total tobacco industry starts at $100 billion and we're a tiny fraction of that. So to me, just sort of treading water the way we are, isn't good enough and innovation needs to ramp up with new forms and new ways to satisfy smokers. Pretty much all of them want to quit. So, that would be an example of an area we push for innovation and I think that one, because we've already gone to market with a couple SKUs this year that are not offered by the national brands.

Your next question comes from David Risinger with Morgan Stanley. Please go ahead.

I have a couple questions Murray. First, with respect to reinvestment requirement in order to enhance growth, could you just maybe help us with order of magnitude of thinking about the income statement, so are the greatest reinvested requirement in SG&A or in R&D or in cost of goods sold in order to position the company to grow better in the future? Second, with respect to guidance on May 9th, should we assume that, that will be excluding generics, I know that you are thinking of an operating Perrigo now as a consumer company. So I'm just wondering about that? And then with respect to the purposely discontinued hit to Consumer Healthcare International in 2018, could you just mention that number again? And then how much will that dollar hit be in '19? Thanks very much.

Ron, you do the last one.

You bet. So if you look at our 10-K that will be issued you can look back David on to answer this question. Roughly $35 million of discontinued exited businesses and around $20 million of discontinued products for the total $55 million is the right number. And as Murray referenced that anchor 2018 as we go forward not giving guidance are largely behind us relative to the exiting and discontinuing the portfolio and improving our focused brand strategy. That's largely done through 2018.

Yes, it's a pretty small number and by the way those numbers are -- and we'll outline all of this on May 9th, what's happened over the last three or four years, because I don't think we've told that story very much so far. But I mean, what Svend and the team in International have done, they've done a masterful job of cleaning up this portfolio and getting their hands around a very complex and diversified portfolio with a lot of things that didn't make sense in certain markets and didn't make sense. So you'll see how he is pruned product lines, how he's pruned countries, how he has consolidated markets, how he has changed tone, all of that will become very apparent, but it will not be the same drag that it's been over the past couple of years. As it relates to guidance with or without RX, we hope to provide you -- I mean depends on the progresses but we would like to be able to provide you without and show you the impact and where we are, that's what we're working towards but we'll see how it ultimately progresses. But I don't -- I need you to get a good understanding of what remainco, the core business looks like going forward and by the way that's how I'm going to be incenting the management team and leadership team going forward of driving those consumer businesses going forward. As it relates to the level of investment, there's a number of things, there are some investments that are related to some new products that will spell those kinds of things out but some of them are on longer term plans, et cetera. I said on the last conference call that we had about the right level of R&D in total and about the right level of advertising on in general on our core businesses in total. My concern on the R&D business right now is not that there isn't sufficient money, it's the productivity of the initiatives. If you look at a few years ago and again we'll show you all of these, we were getting bigger hits for our new product development program and higher productivity than we're getting today. We're working on just as many approvals, but we strategically have to identify the right and bigger ideas and that's why I brought in Jim Dillard and consolidated R&D in the last month who is a pro who I -- and you'll love them when you meet him. He's a very aggressive guy and I think, within a very short period of time, you're going to see that, that new product program ramp up pretty aggressively.

The next question comes from David Maris with Wells Fargo. Please go ahead.

Good evening. Just maybe Murray, if you could explain to us what between now and May you need to complete in order to unveil the plan? I know you mentioned a few large hires, I would imagine you have to bring those across the line and then you need to go to King & Co to print up all the presentations. But other than that, what are you still working on between now and then?

I think you'll be surprised how much you see on May 9th, David, and I'll remind you of this question on that day. I think you're going to see a lot more activity than you're expecting to see. And I would like to not just talk about promises for the future. I would like to bring you action.

I appreciate that. I'm just trying to understand what's left to do, what you've put in, have you finalized the plans already or where are you in assessing the situation and putting in place the plan?

We are through the strategic planning process. And so that the sort of a blueprint, right, you want to build a jet plane, you don't start with a jet engine, you have to have the entire plan. And now all the pieces are in a very aggressive plan are being put together and work through on various themes. And I don't really want to be more specific than that. It's a few months away and you'll get to see the whole plan. And I think you'll see a lot of action when you come in May.

The next question comes from Ami Fadia with SVB Leerink. Please go ahead.

Hi, good evening. Thanks for the question. You talked about a couple of headwinds across the business in 2019. Can you quantify that for maybe at the EPS level? And it sounds like you're saying that you may come up with initiatives to do R&D differently or focus of change the prioritization. So can you confirm that you think that the total spending level is unlikely to change meaningfully from wherever it is at right now? And with regards to the Irish tax rate appeal process, could you give us a sense of the timelines around how long it would take for the judiciary process to complete and if they rule favorably then do you win the appeal, and then what is the next step beyond that? Thank you.

Thanks, Ami. This is Ron, I'll start with the answer to your first couple of questions and come back on the tax side. So first of all you asked about headwinds and quantifying those at the EPS level, I tried to give you some good numbers within my commentary, only kind of break it down for you. So first of all, CHC Americas, let’s focus on that segment, so we talked about gross margin effects, there's two items, forget mix, because that doesn’t flow. But the two items are highlighted pretty detailed, was one the Ohio issue, facility issue. We talked about $13 million impact in Q4. I also mentioned in my comments production starts in March, so what we’ll have here some overhangs, I’m not going to give you the dollar amount but you're going to have some overhang as that facility was down for two months, you get it back into production, you recognize the sales, certainly have some overhang in the first half of the year as that converts into production and sales in the first half of 2019. The other one is I think I rather quantified and that was the one around service and production variances. I gave you a number of $16 million. That's a pretty firm number. In other words we have to work through now in Q1 and Q2 of 2019 as we've experienced those, if you will look at the accounting part it goes to your balance sheet, it turns with sales, but you can expect margin on CHC Americas to be in the zone that you saw in Q4 working its way back up to that 20% level as we exit the year. So we've been pretty open about that, it's going to take some time for those service dynamics to manifest themselves and benefit the P&L as we resolve the issues and sell the product that we've already produced. You asked about R&D in a general context, we look at R&D, I'll reiterate Murray's comments which I thought was a good one, we'll see R&D as a percent of sales changing materially in the consumer businesses, we look at productivity. In other words if you look at the percentage of sales you may see a little bit of shift as a percent of sales in consumer. The real focus will be how do we get better value, margin value per R&D dollar on a go forward basis is really the key focus of the team. So you have some percent of sales increase but it won't be material. I did highlight in RX, R&D in RX will be upon a dollar basis, I didn't guide you on a percentage, but assume we take RX dollars in 2018, we are expecting with our strong pipeline to continue investing in that pipeline next year as well. So all that carries forward some color, I should comment and also on CHC International playoff your -- first got your earlier question, listen we're confident high teens margins in this business, I’m assured very clear CHC International we are pointed at those high teens. Now we’ve been messaging for some time we are reinvesting back in the business, now we don't think we're going to go backwards at Ohio margins but you could see us pause, you could see us flatten out for years, we reinvest in business, we invest in advertising and promotion next year and alike but we're still confident in the next couple of years we are pointed at the high-teen adjusted operating margin percent. So hopefully that gives you Ami the answers to your questions on a go forward look. On the tech side, I'll refer you to steer back to Murray on that.

Yes. Just to add and by the way that’s sort of like the ongoing level coming in, has nothing to do with any initiatives that we do going toward. So Ami there are initiatives that will take some investment. We've been very open about that we spent $50 million to buy NASONEX and that product has to be now be bought to market and there's marketing and kinds of investments that go along with that but on -- it's not more R&D dollars that we will be throwing in there. We are making investments in capacity, we are making investments in technology. We will show you why and were on May 9th. As it relates to the timing of the judicial challenge, the full process has been a surprise so far. But if it wasn't, it wouldn't surprise us of that first round, took around a year, could be longer, could be shorter, if it went through kind of a normal process, which we'll find out, if it does. So -- and then depending on how it goes either side would have the ability to appeal that. And then if all of that didn't come out in our favor, and we hope that it does, then it starts over again in the tax appellate process. So it's going to be a while.

The next question comes from Elliot Wilbur with Raymond James. Please go ahead.

Just want to follow-up on some of the commentary around these service issues in the consumer side. And Ron appreciate the detail you've provided there in terms of the actual impact. But just trying to understanding, is this more of an op income earnings issue or is this more of just an actual cash issue? And when you do have this service issues, I mean what actually happens in terms of, from a customer side. Is it just that you're not able to book sales and there's a risk of losing business to another supplier or do you actually have some sort of performance penalties like you have on the RX side? And just a couple follow-up questions here on the RX business. Ron, you mentioned that price erosion in 2019 probably will be similar to 4Q. What was the rate in 4Q? And could you give us a little bit of insight into some of the key expected launches or re-launches in '19 including albuterol HFA. And maybe more importantly to scopolamine? Thanks.

Yes. Let me just do around the first part -- any -- just the rest of the questions. As it relates to the effect of service on customers, the big customer services issue which was a one-time start-up has a meaningful effect, you lose revenues, but we're fortunate that there's not a lot of competition in that particular business. On the ongoing services of course it’s effective. I mean part of your ability to withstand pricing pressure and everything else is your ability to both innovate and service at a higher level than anybody else. So when you don't increase more competition, that has to be this company or this division’s top priority to fix that and it is. So I mean, you felt that and you see is as that the businesses are pressured somewhat due to that. So all of these plans are designed to fix that. But in general the business despite that has held up pretty well, still growing when exclude animal health.

Yes. In that kind of elaborate on that as well Elliot. If you think of a cash effect, you see inventories increase in CHC Americas this last year. You'll see that in our balance sheet and so we've serviced the cash part of it. We don't see inventories increasing next year. And in my comments I commented we are putting capital into our capital value streaming. We have one high class problem here, net volumes are up. We just have not caught up with the volume spike and servicing our customers. So you will see some cash from a capital standpoint come in over the next six to 12 months as well. You come back with RX let me give you some details that you've asked for. So you asked about pricing, we did not call pricing, just assume those in high-single-digits on our core products. We talked about Q3 was above that, right north of 10. So again, we saw some stability, I'd like to have to say no erosion, but we're still seeing erosion at a more stabilized level. You asked about launches going in the next year. Listen right now, you saw one come out acyclovir was an announcement we made most recently, the nice thing I'll call it a doubles, single doubles that you'll see in our portfolio launch next year. ProAir we are still optimistic and we take a look at that product, we're working very closely with the FDA. We're committed to being a bringing a very important product in the marketplace and we're optimistic so the launch that product in the I’ll call it in very near future. But again we have announced the launch and we will keep the market updated as we move forward with that important launch as well.

Scopolamine?

Scopolamine, still working with the FDA. Similar dynamics. Again we're optimistic. That's a little different product. There's a little different issues. We took it off the market. It's a patch. It is complicated relative to I will it called dissolution curves. We have to work with the FDA in a very complicated product -- partnership products. So it's a little bit different but still we are confident. Again as far as timing, it may not have the same timing as ProAir in 2019. ProAir is likely to come earlier than scopolamine to take away there.

The next question comes from Greg Gilbert with SunTrust Robinson Humphrey. Please go ahead.

I have just a two parted. Murray year said you wouldn't comment on the progress of the RX sales process. But can you comment on whether Perrigo is also considering strategic options for other parts of the company or the entire company? That's number one. And number two, I suspect will learn a lot more about what self-care means to you guys on May 9th but are you willing to include things in that definition that are not proven to work by FDA standards or things that may not have high barriers to entry from a regulatory standpoint? Just trying to understand how much you would relax the sort of historical Perrigo lens of FDA regulated sort of higher barrier regulatory types of products that would be launched in the future? So any sneak preview on your thinking on that would be helpful? Thanks.

Okay. On the self-care issue, I'm not sure I would call it relax, because in any product we would launch, we would want to have a unique selling proposition and a highly differentiated product. It may not be a strict FDA and it won't be and we do that all the time. We have products, 40% of our volume internationally is branded products. That number of those are in self-care categories that present opportunities here in the United States as an example and the company has a good track record of expanding. So there is a two part answer because the first part was some of the expansions we've done have been in the areas where there are good barriers to it like infant nutrition or in nicotine cessation. Although one could argue other companies could get into that but we've done it so well with our overall store brand model which is hard to match up again. So there are plenty of opportunities for growth and companies do that all the time. And we will show you how we've done in the past, how we will do it in the future at various levels from incremental opportunities that help just keep the brands fresh and make it harder for competitors to sort of know where we're going next all the way to bigger incremental opportunities to potential bolt-ons that have the kind of barriers that you're talking about. So we'll give you -- I'll tell you that one of the biggest changes I've had from my old job to the new job is just how many opportunities there are. And it's sorting through finding and making sure we're investing in the right ones but there's no shortage of opportunities for growth. It's just doing it the right way and getting to the market with them. Refresh my memory on the first question.

Strategic options for any other parts of the business?

Not the business in total or some massive thing but I'm looking at the entire portfolio and whether it belongs and whether it fits the consumer self-care lens. So, of course, whether that's under the timing of May 9th, we’ll see. But yes, no, we're taking look at the whole company, not the whole company, let’s say, pieces within the whole company.

The next question comes from Patrick Trucchio with Berenberg Capital Markets. Please go ahead.

Thanks. Good evening. So understanding and look many more specifics regarding initiatives in May, can you tell us which metrics you believe are most relevant to compare Perrigo to consumer packaged goods peers, are there metrics where you think you’re currently comparing well, where do you see the opportunity to improve? And then if I may, just on the international business, can you discus how you're evaluating which brands, which countries should get the increased investment in advertising and R&D? How are you evaluating return on those investments and just with regard to the R&D specifically, is the investment focused on improving existing products, or introducing new products? Thanks.

I mean, on international the answer is that they're doing all the traditional metrics that you would expect, right? So when they go through a very traditional -- they're more of a traditional consumer company than we are here in US, which is more of a store brand business. So that means everything from the quantification of the idea to when they're going to do any kind of advertising, they test the advertising in various research services, they have action standards at each of those. That advertising has to hit, they have action standards on product testing, the product once it goes into the market they measure those and they adjust and they look at the returns they're getting and if the returns in market aren't generating the kind of returns and metrics that pay out that advertising then they shift it elsewhere to somewhere that does. They have a priority list of -- this is a very big portfolio of brands and they have split the way they look at the business and sort of their core growth brands, their exit brands, which we already talked about and their sustained that brands and they are -- and again, we'll walk through all of that, but they put the most investment in the ones that meet the criteria to get into that growth category. So -- and markets that may go down and they look at profitability by SKU and all the metrics that you would expect. I'm not sure how to answer the consumer company. We will look at top quartile performance. We want to get to be a top quartile performer. That means we're going to measure and target revenue growth, EPS growth, margin, leverage, all the typical balance sheet metrics that you would look at and that's what we'll be working against over the next couple of years. And then hopefully get the multiples that those consumer companies earn, which is part of the idea here.

We'll take one more question please.

Your next question comes from David Steinberg with Jefferies. Please go ahead.

Yes. Thanks very much, I have three questions. The first one is another one on the Irish tax liability. I want to focus on best case, worst case scenario, so obviously best case is you don't have to pay any money, although you don't know the timing. But in terms of the worst case, if in fact, you’ve determined, however remote the possibility that you do have to pay, an Irish tax expert told us there will be an 8% annual interest charge and I think it was five years ago the transaction happened and then there'll be a penalty on top of that anywhere from 3% to 100%, with 3% being what they call a general penalty and a 100% where there's deliberate willful behavior. So is the calculation of worst case somewhere between no matter how remote it could be $2.3 million and $3.9 million? Does that make sense? Second question -- sorry $1 billion. Second question is a tuck-in, I think Murray, you said, you want to get back to it, made the company great i.e. tuck-ins. How does the outlook appear? Are you close on anything? Are you looking mostly domestically or internationally, private, public and how are valuations shaping up right now? And then thirdly, just to clarify on the input costs you discussed. Is this -- relate to a lot of companies you are seeing now is rising input costs and why is it just a short-term situation versus a longer term impact? Thanks.

Now, I'm going to let, Ron, do the first part, do the input costs. But -- and on the first one, I'm just not going to speculate. I mean, it makes no sense. And this company -- if you look at this, read the challenge, to sit there and have a discussion of willful fraud or something like that is silly. But beyond that, we believe, we went on the merits. We believe that, when you look at the actual legitimate expectations that Elan Pharma had based on 20 years of trading history that this is unjust and we'll see how it plays out. But we have good advisors, a good team working on this and you're going to have to watch it. What you need to hear from me is answering the question that was very early on in the call here, which is that this will not get in our way of our ability to go forward and do the strategic initiatives that we need to get Perrigo growing. And this will play out over the course of years and we will keep you informed. But I'm quite confident and have built a lot of value whether it was a UST, which had a massive -- and I trust overhang on it or on Lorillard that had massive regulatory challenges that were going on, on that business. So the key and my experience with those as we fight them very aggressively and a fight on the behalf of our shareholders especially when you believe you're right, and we do believe we're right. And then make sure that you're building the business. So top priority, top focus is build the business, that's what's going to create value here. On the tuck-in, I mean my answer is almost like yes. It's are we looking at all kinds of things and going through a funnel here and all that we will put, we will scrutinize and make sure that we are making good investments. But there are many opportunities and we will bring clarity to that on May 9th. And I can hear the frustration by a lot of you that you're looking for more answers right now it's not that far. In a couple months here we will be back to you with the full plan.

To answer briefly then, David, the input cost, if you step back and take a look at it. First of all, we have incredible advantages, we have scale, we have purchasing power. We think we've appropriately identified and quantified what those input costs are, you heard our comments today. We also partner for our customers. What does that mean from a channel standpoint? These are industry issues. What makes sense from a partner perspective? I would say probably the biggest disappointment from my chair, traditionally we are very, very good at offsetting input costs with productivity and because some of the supply chain issues we've had at customer service and some of that complexity, we have been able to do that. So to my mind that's the reason I look at these in short-term. And we get that supply chain back to the Perrigo advantage that we can continue the productivity curve that we've been very successful at historically. We can offset these input costs in a productive way. That's the core focus that we have as a company to ensure that we offset these input costs appropriately.

So I think we're done with questions. For now, we appreciate your interest in Perrigo. I can't wait to see you all on May 9th. We hope to answer all your questions in great detail and for you to walk away as excited about the opportunities for the company as I am. So thank you again.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.