Good morning, everybody. Thank you for coming here, and welcome to Perrigo's 2019 Investor Day. The team is very excited to be here and to discuss the transformation of Perrigo into a consumer self-care company. We obviously have a very full agenda here today. Just logistically, we will take a break about halfway through the presentations, after which, at the end, we will take Q&A. And now for kind of the safe harbor statement. Hope you all had a chance to read and review yesterday's earnings press releases, along with the ones from this morning. Copies of these releases are available on our website and the slide presentations for each presenter will also be posted during today's meeting. I'd like to remind everyone that during this meeting, participants will make certain forward-looking statements. Please refer to the important information for investors and shareholders and safe harbor language regarding these statements, included in the beginning of today's slide presentation. In addition, this presentation contains non-GAAP financial information. We provided reconciliations for these non-GAAP measures in the appendix for today's presentation, which can also be found on our website. And with that, I'd like to turn the presentation over to CEO and President, Murray Kessler.

Good morning. Good morning? Thanks. Here's the way today is going to work. I'm -- we do have about a break, there's -- my leadership team and I will present. I'll be the kind of the first half of the presentation, walking you through a little bit of the history and how we got to where we are today, and reconfiguring and transforming and evolving Perrigo from a health care company to a consumer self-care company. I'm going to step back a moment after that and do a little bit of a deeper dive in self-care because, as I've gone around talking to various constituents, they want to understand that more and more, so we'll make sure we do that. And then importantly, we'll dig into the lessons learned that informed our future. So there's kind of like of a couple of really key things that we are focused on that we think accelerates growth for Perrigo. We'll take a break after that, and then the team will come up and do a little bit of a deeper dive on each of the individual businesses. So let's start with where we are at the moment. At the moment, Perrigo is a $4.7 billion revenue company, making just under $900 million of operating income. In that, we have sort of 1/3, 1/3, 1/3, plus or minus, of Rx Pharmaceuticals and the other 2/3 is Consumer, International and Domestic U.S. The company is grounded as a consumer company and we're really basically founded -- Luther Perrigo founded the over-the-counter category 130 years ago and has been a leader in that ever since. And the way that the company grew, and I'll take a minute on this slide, it has had tailwinds behind the company for years and years and years, and these…

You got that right.

All right. So when you follow all of that, you grow. And this company grew like lightning for -- from 2000 on from a $750 million revenue company to a $5 billion revenue company. And you can still see the split between RX, up until 2015 growing rapidly every year. And the market rewarded that growth dramatically, outperforming any index you want to compare it to, whether S&P Pharma, S&P Consumer, et cetera. And you see the little bit of a tail-off at the end and the multiple in the -- was the best of any consumer companies at the time. However, and this is why we're here and the major changes the company is going through, since 2015 the company stopped growing. And it's basically been top 10 annual growth rate of minus 1%. But for the most part, if you look at those bars, it's flat. And it's been now 3 years of sustained lack of growth and the stock has suffered significantly. Now there are other factors involved. There -- in the base period, there was a takeover offer, et cetera. But bottom line is the company's stock has been -- performed poorly since the company stopped growing. And if you saw -- we've put out, like I said, 4 releases in the last 12 hours for some of you I was talking to, one of those was our earnings results. And I think we were $0.14 above consensus and that $0.14 included $0.06 of a one-time tax benefit, so let's call it a clean $0.08. Fine, that's good news. And we also beat all our internal plans on every division on revenues and earnings, but it's still nothing to write home about with a flat company and adjusted operating income down. So I'm happy that it…

Let's take a break and come back at 9:30, and my team will take you through some more specific details. Thank you. [Break]

All right, everybody, if we can make our way back, please. We'll get started with the second half. Thank you.

Good morning, everyone. I hope you appreciated the video we showed just before. The video really resonates with me because it really represents what the CSCI business is all about. It is a true self-care business, reliable on very, very strong brands. My name is Svend Andersen. I've been with Perrigo for around 2.5 years. I would like to leave with you with confidence in respect to the CSCI business can deliver solid, profitable growth going forward. First of all, by leveraging our diversified brand portfolio, both offline and online but also as we're going forward, introducing new brands; and secondly, also by fueling our evidence-based innovation portfolio and all of that through our existing, very strong, pan-European commercial footprints. We are, by the end of this year, finalizing a 3-year turnaround plan. During this period, we have improved our operating income ratio by 4.5%, and there's more to come. But that makes us also ready to execute on Murray's 2 to 3 years growth transformation plan as laid out. But initially, I would like to give you a snapshot of our business. It's around $1.35 billion business where 80% of the business is own core brands, which is really brands that relies and has strong IP, either in the form of patents or clinical trials or trademarks. Those core brands, when you isolate from discontinuous brands and businesses, we're in fact growing by 2.5% from '17 to '18 on a constant-currency basis and also improving market shares at that point of time. And if you take various external sources, the Western European market is predicted going forward to grow at around 2%. But then also if you add the Central Eastern European market, they are predicted to grow approximately at the double of the rate. We have undergone a…

Americas business overall. I'm one of those white boxes that Murray had in his organization chart. I've been with Perrigo for a little bit over 35 years. So I've been around through a lot of those tailwind years that Murray talked about, and I've also been around, obviously, for the last 3 or 4 years, where our businesses has had some headwinds that Murray talked about and framed pretty darn well. Specifically, Murray talked about the pricing pressure that we have had as a business but additionally, and really probably more importantly, has been the lack of new products that had been driving the business. And the biggest reason, as Murray indicated, is that the business pace -- the pace of new products from national brands, both on the Rx-to-OTC switch side as well as traditional national branding innovation, the pace of that has slowed. And our business model, traditionally, has been to follow those national brands. As Murray talked about, given the pace of innovation having slowed, Perrigo is at the point where we need to reframe how we approach innovation. And Jim Dillard, who is going to talk after me, is going to give a good overview of how we're actually doing that. But in spite of the headwinds, if I do my job reasonably well here over the next 20 minutes or so, you're going to see that the CSCA business has a lot of reasons for optimism, and you're going to hear that I'm extremely bullish and optimistic about the future of this business because there's a lot of reasons for tailwinds. There's a lot of reasons to be optimistic. And as I regularly say, I, as heading up this business, would not trade places with any other head of a consumer self-care business here in…

Okay. Good morning, everyone. I see a few familiar faces from some of my last life. How are you? Good, good. So I'm Jim Dillard. I've been at Perrigo now for about 3 months. I joined as the new Chief Scientific Officer. And in my private -- in my other lives, I have been in CPG in similar roles as well as spent a little time at FDA approving medical devices. So I've a little bit of a diverse background but very happy to be here at Perrigo. And I think Murray and the 2 operating company presidents certainly outlined a lot of what, and I won't repeat it, the specific innovations that are built in the 2019 plan. What I'd like to tell you a little bit about is the approach that we're going to take, how to think about innovation, how Perrigo is thinking about innovation and how we're actually going to execute this engine as we move to the -- into the future. Innovation always sounds sexy. I get really excited about innovation because it's about new, it's about moving forward, it's all the things that companies really thrive on. And while that is very important, the process and the way you actually get there, and setting up the right infrastructure, is probably equally as important. I like to think about innovation as a four-legged stool. Jeff just talked about the first leg in that stool, which I'm not going to talk any more about, but it's about finding those adjacencies that are bolt-on, that can continue to grow your portfolio that you can also innovate off of. So that is one that will be throughout the presentation. I'd like to talk to you about 3 different ways to look at the other 3 legs on that…

Perfect. Thanks, Jim. As Jim said, my name is Ron Janish. I've actually been with Perrigo now for going on 16 years. I currently have responsibility for all of our global operations and supply chain, and actually earlier this year took on the additional role as Chief Transformation Officer for the company as well. Over the next few minutes, I'm actually going to talk you through both items number 4 and number 5 on our virtuous circle. But for the immediate future, I'm going to talk you through some of the actions that we are taking right now, focused specifically on organizational effectiveness and building capabilities within the organization. As you've heard over the course of the morning, we have a lot of different actions and initiatives underway across the company. You've heard of many of them on this page already. And Murray spoke about some of the changes that we have made at the leadership level within the organization. Jim just finished talking about some of the changes that we've made and improvements that we're making within the global R&D and innovation platform. I'm going to talk to you about a couple of very specific items on this list over the next couple of pages, specifically add a little bit of additional color on the business intelligence and data analytics investments that we're making as an organization. Talk a little bit about what we're doing with sales, inventory and operations planning, the process improvements that we're working on in that space. Talk about the transformation office itself that we've established. And then wrap it up with talking a little bit about some of the changes that we've made to our reward programs to align them more with where we're going as a company. First, you heard Murray talk about…

Thank you, Svend (sic) [ Ron ]. Good morning, everyone. So as Svend (sic) [ Ron ] said, my name is Ray Silcock. I'm the new CFO, and I have been here 35 days. So it's a cliche to talk about the fact that when you join a new company, it's like drinking from a fire hydrant, but I have to say that cliche or no, the last few weeks have been like drinking from a fire hydrant. So you'll have to excuse me if I don't know 100% of the answers to the Q&A. I'm going to talk about capital allocation and about delivering consistent and sustainable results. But I guess before I get to that, I would like to say how excited I am to be here. It's despite the fact it's been drinking from a fire hose, it's great to be working for Murray again. It's great to be working with the rest of the Perrigo management team. And I'm really looking forward to helping transform Perrigo into a consumer self-care company along the lines that everyone's been talking to you about today. But first of all, I think it's important to note that Campbell -- I'd say Perrigo -- has a strong cash position. We have over $800 million on hand as of the end of the first quarter, as you saw from our numbers that we released yesterday. And we just sold the Animal Health business for $185 million, and we don't expect any significant tax leakage from that. On the RX business, we're looking to separate it. We've talked about the fact we're trying to sell it. And if we do sell it, we would hope to get cash up to about $2.5 billion with some tax leakage, but well over $2 billion. However,…

Thank you, Ray. All right. I know we've shared a lot of information with you. But one time, just to wrap it up again, we have a clear path to achieving our vision of recapturing the Perrigo advantage. I won't walk you through it again. But you'll see this over time. This is how we'll score ourselves. This is how we'll talk about how we're doing in each of these areas over time. There -- a number of you wrote that there were high expectations set. Hopefully, we've met those because we came in today with actions, not just talk. But to summarize, we have a new vision for the company. We're transforming our business to align with the self-care vision. We are investing to reignite our core growth engine. We're accomplishing this both organically and inorganically. We have organized around the work, and we're giving people the tools to do the work to build our strategic capabilities. We'll make the tough decisions and are making the tough decisions on cost. We're allocating capital deliberately in a measured way that gives the company flexibility. We're committed to delivering consistent and sustainable growth, in the beginning in line with our consumer peers, and ultimately at the top of that. Let's walk before we run, and we believe that the new Perrigo should be rerated with a consumer multiple. Listen one more time. New Perrigo will make lives better by bringing Quality, Affordable Self-Care Products that consumers trust everywhere they are sold. And with that, we are happy to answer questions. So Brad will sort of be our moderator here. And then depending on how we go -- team, is there a microphone for these guys up front? Great.

So if anybody who does ask a question, please make sure...

If we can turn the podium on, too.

Louise, you're sitting in the front row, so might as well ask the first question, please.

So my first question is on the margins over this 2- to 3-year transition. How should we think about them during that time period, and where do you think they'll ultimately end up after you accomplish your goals? Second question I have is that you called out these Rx-OTC switches. You said there were some big one coming up. So could you actually name those specifically, if you're willing to do that today? And then is there anything on the regulatory or the government front that you can do to push this initiative, because it seems like that would save the health care system a lot of money and you are the leader in this space? And then the last question here is on the sale of the RX business.

You think I'm going to remember those 4 of those, right?

Do you want me to stop?

Yes, why don't you -- we'll add them. But the margin question, I've got a few folks here, but you saw on the chart. I think the realization is and I think, first, is the way some people cover it differently. We allocate cost 2 ways. One, we allocate our corporate overheads that are directly attributable to the division and that's when you heard the stranded cost number talked about, but there's still a big corporate unallocated that when you pull out the RX division, and you can call that dissynergy or not dissynergy, it lowers the margins of the company. And that's what gets you to a remainco of a 13% margin. So that's what happens day 1, and Ray had that on that last slide. We want to be -- and we're saying over the 2 years, we're getting back to 14%. Depending on how much of that is debt reduction above the line or below the line, you probably are talking roughly what, 16, yes, 16 is where you get to. You ultimately want to get 18, and that's because you're paying some below the EBIT line and some above, if that makes sense. But as a starting point, you start back at 13 on day one, so you get that outsized growth. The second one was, Jeff, on some of the upcoming potential switches.

Yes, on the potential switches and Murray referenced...

You got to use the -- I think he needs the mic. Please?

Okay. Can you hear me? On the prospective switches, Murray referenced erectile dysfunction and contraceptives as possibilities. The way we track and look at prospective switches is we track the clinicals, the studies that innovator companies are doing. And we have reason to believe, based upon that evidence, that ED and contraceptives could very well be future switch categories. So we're monitoring that closely. There's no way in the world right now I can give you specific dates or specific products, but suffice it to say that the national brands, the innovator companies are working in those areas and we have reason to believe that, that could happen.

But for -- and I said ED because I'm shyer than Jeff, but...

Yes, sure you are.

And then the third question was on the government?

Yes. Well oh, yes, the government, I wanted to ask you that. Is there anything that you could do given that your leadership in store brands to push more initiatives from a legislative front, from a political front?

Yes, I mean, that's the world I came from, and that's new on a company level. I've already begun to have some big discussions, and you'll hear more to come in the future. I think the answer to that is yes, we can be more active with government with both -- especially at an administration level. But I'm not prepared to talk about any of that today. So let's stop there and give some others and we can come back. Randall?

Randall Stanicky from RBC Capital Markets. I just want to go back to the previous question, the 13% margin. If we look at that from 18%, it's a step down of about $183 million at the midpoint. And initially, the message was dissynergies would be minimal. That's obviously a very big number. So specific question is, of that number, how much is dissynergy versus how much is new reinvestment going forward in the business? And that's just going to help us understand the margin ramp. And then should we think about that margin in 2020 stepping down further on a full year? Or should we think about margin improvement annually going forward? And then my last question is just with your 3% and 5%...

You're testing my memory here, got to remember.

The longer-term growth targets you gave, the 3% revenue and 5% operating margin, can we just -- are those organic numbers and bolt-on deals would be on top of that?

Yes. Let's answer that one first. Yes, that would sort of be the ongoing rate of the core business. And if we did bolt-ons, it would be on top of that, kind of the way you wrote about it the last time. The 13% as an initial, and you guys help me out here, I believe when my prior CFO talked about it, he was honestly answering the question but he was just talking about the percentage of the business as we allocated it to that division, how much of that, that we allocated would go when it separated. So when he answered that question at that level, that's the way he was answering that question. But we have a $300 million, whatever, what's the unallocated, size of total unallocated bucket? $150 million never allocated out that remains with the business. And that's the big difference. And then above and beyond that, this year, you do have the numbers that I showed, I don't remember whether it was $30 million to $40 million of investment that went in that affected the margins this year. Next year you'll get a full year of Ranir, you get the Project Momentum hitting, so you should start to grow right out of the chute. And beyond that, Brad and Ray can detail with you. But does that makes sense?

Yes. No, it's helpful.

Yes. And it's not that there was any -- it's just the way he thought about the business. But the truth is, you can't sell off 1/3 of the company without doing a cost-savings initiative like this or you end up with lower margins, right?

Patrick? Patrick Trucchio;Berenberg: It's Pat Trucchio, Berenberg. The 2 risks that I'd like your thoughts on. First, in the U.S. business, the second in the International business. So first, in the U.S. business, you discussed entering branded OTC, including naturals and incremental investment necessary to run this type of business. Of course, it's very different from supporting a store brand business. In many respects, they're at odds with one another, from pricing spreads to merchandising to store placement. So the questions are, first, how should we think about the magnitude of costs in terms of SG&A and time necessary to build the expertise to successfully launch branded OTC products in the U.S.? And then secondly, how do you intend to balance the opportunity with the challenge of managing these 2 businesses under 1 roof? And then a follow-up on International.

I don't think the strategy is to turn it into a branded business in the U.S. Like the launch of NASONEX is designed to help support the OTC switches. Having said that, we've already, in this, added some cost structure. So the $5 million in the infrastructure on the consumer tools. There's a few million dollars in consumer insight data that needed to be added. There's probably a certain level of staffing. We've already created that. We're out hiring for a Vice President of Consumer Insights to lead that branded, and that'll be done separately. So -- but the goal isn't to have these 2 -- it's not as far as you're thinking. It'll still be a primarily store brand business in the U.S. That's why Ranir was such a great fit. As it relates to the growth targets that are set up and the couple of percent, if you get innovation, you have to stop the pricing from bleeding to some extent. You can't do that without a higher level of innovation. If you looked at all the things we put on there, we would crush those numbers. And when the guys come to me and they present it, if everything hit exactly right, you would do better than the numbers that we're saying. But the reality is we have new competitors coming at us all the time. I think getting back to where we were, ramping up with a robust $60 million, $70 million a year of new products coming in every year in the U.S. should do it. Svend's is a different story. Internationally, he did it last year, but you couldn't see it because he was exiting so many businesses and it's basically cleaned up. So now it's time for him to step up and deliver and grow the total business, right? We've let him clean up for the last couple of years. Now I want my growth. Patrick Trucchio;Berenberg: Yes. So -- and that's where I have a follow-up. So in the International business, how do you avoid the mistakes of the past? So specifically, and I'm referring to the number of SKUs and the A&P investment. The level of SKUs have been greatly reduced, and the A&P investment is better focused. How do you avoid the risk of having too many -- too much SKU proliferation in the future and inefficient investment in the future?

Svend? It's a great question because it's the same guy leading it, he's pruned the heck out of it, but now that you're putting in new products, why should we believe you're not going to just put it all back in?

I think it's really related to our focus strategy. So we're really smart and take the same innovation under the different brands in the same format. Also, we are increasing the multilingual packagings, which means that actually we can serve more markets with the same products. So a constant focus for us is reduced complexity in how we align the value chain. We also are so fortunate that we can actually control our own pricing, so we can set the price. We are continuously insourcing, so we are improving our margin. We're making multi-languages packages, which also gives margin improvements. And then fundamentally, from an infrastructural point of view, we have made our investments, so we can add brands, products, acquisitions on top of that, that would be OI accretive going forward.

Dave?

Dave Risinger from Morgan Stanley. So I have a couple of questions. How many am I allowed to ask now?

As many as I can remember.

Seven? So I guess, first, I'd like to follow up on the OTC switches and better understand what's going to change at the FDA. Historically, the FDA has viewed erectile dysfunction drugs as extremely unsafe. And my understanding is the view was that, for example, if they went over the counter, people may take 2 or 3x the dose with nitrates and die. With respect to oral contraceptives, patients can take oral contraceptives and end up with blood clot risk. So what's changing at the FDA to allow them to go over the counter? That's my first question.

Well, let me just answer them one at a time and we'll do a few. What I basically showed you a plan that said, hey, they may be out there, they are 4 or 5 years from now, so it's almost not relevant. Our plan doesn't rely on it at all. So it is -- we are looking at some of the switches that we can do immediately now for the -- and in my mind, when we said they're sponsors on that, they're working on it and we said it's a 4- to 5-year horizon, this whole presentation's been about how we get growth without that. And if you look at the presentation from 2009 to 2018, the smallest piece was switches. So when we had $1 billion of growth, it was only 10% of that was from switches. 40% was from -- 50% was from innovation and 40% was from bolt-on acquisitions. So good questions, but it has nothing to do with the growth that we're looking for and whether that happens or doesn't happen. It was just a statement I was making. Those are out there. And I hope they happen because they work well for the company. But that's -- we're building a plan that doesn't rely on that. What's the next question?

Okay. And then with respect to the next couple of years, so during this 2- to 3-year transition phase, is there any way to provide some color on how we should think about the organic revenue and earnings prospects?

Yes, well you've got to take -- we basically showed you what -- like, Brad, what were we saying, around 2%?

It's about 2%.

2%. And then you're adding on top of that Ranir, which is 300 and growing at a rapid, rapid rate. So that's kind of the balance on the consumer business right now.

And -- but then the margins next year, are they going up or down? I mean, obviously, you're doing...

Depends when we separate RX and how. But at the point of separation, absent that, margins are going up, but you're going to have a onetime reset. If that happened January 1, you'd go bang, right down to 13 and you'd grow as the year went on.

But absent that, the margins would go up in 2020?

Yes.

Okay. And then with respect to the disclosures yesterday, sort of get into the nitty-gritty, but the worldwide consumer segment was down 1% year-over-year, excluding foreign exchange. Yet the press release stated that the worldwide consumer market shares remained stable in growing markets. And obviously, worldwide -- the worldwide consumer market is growing. So could you just reconcile the minus 1% versus stable share?

Yes. The difference is what our partner retailers are passing through to us. So our volumes are up 3% or 4%. And without -- in the absence of price decreases by them, the brands that we're selling through the stores are also up 3%, hence gaining share. Now, they negotiate with us and they put pressure back and press us back on price, we're not getting the full benefit, so you're not seeing it in the revenues. So our volumes up 3% but -- or 2% to 3%, and our revenues are down 1%, that's pricing pressure as a own brand, store brand supplier, you wouldn't see on a national brand. But it's still up what the consumer bought, still up 2% or 3% in a category that didn't grow that fast. So the brands we sell gain share.

Chris?

Chris Schott from JPMorgan. Just on that price point, when we think the next few years, should we still think about price pressures at the same rate you've been seeing? Or do you think you can address some of that pressure you're getting from your customers?

I'd like to think with the innovation we keep -- Jeff does a good job of pointing out, that price pressure 1%, 2% has been there for 20 years or whatever, forever, right? I mean that's what you would say to me. And it went maybe another percentage point. So I think with good innovation and all that, we can get that point back maybe. But it's never going to go away. It's always been there. So that's -- those 2 charts were really important charts where I showed the difference. What didn't -- the pricing part isn't what changed, not like in RX where it changed dramatically. What changed was the innovation well and the bolt-on acquisitions dried up. We already gave you one of those today. We've got to prove it to you on the other, right?

And the second question was just on the broader market. How much of either the near- or long-term growth is predicated on the overall OTC market kind of reaccelerating, versus stuff that's within your control in terms of innovation, et cetera?

Yes. I mean, I think the question, Jeff, why don't you talk about it? The question is, and I heard that a few times out in the lobby, do you feel like in -- that some of the consumer takeaway numbers weren't as strong over the past 3 or 4 months? Do you feel like the OTC category is slowing down? Or we can rely on continued growth going forward?

No, I would say the way we're forecasting the business is that we're predicating everything on or counting on relatively stable growth as it has been. We're not counting on any kind of significant increase to the overall business, overall category. So we're working off that 2%-ish base growth perspective.

Right. And just a final one is on the RX sale. I think you referenced that $2.5 billion in the slides. Is that the number you think is kind of realistic based on the conversations you're having? Or should we think about that as kind of the floor that you'd need a number of that magnitude to be when you sell this versus spin this?

No, I mean, we gave you what we thought was kind of realistic. What's hard as heck is, right now, you're managing through a period of time when ProAir is on the verge of approval or not and how does somebody value that because they want to see it. And you also have, at least for us, from my 6 months here, the business, and I think Sharon who came in and took it over, is doing a brilliant job, but the business is performing dramatically better than 6 months ago when I joined. And we are not -- I've heard different companies say different things. We are not getting that same level of pricing, downward pricing pressure that we were. Again, it's there, but not at the severity that it was. And our products are performing incredibly well. And our -- the whole way the RX business was staged was, 1.5 years ago, ProAir was supposed to get approved by our planning. And the rest of the new product pipeline that had been so successful for so many years with lots of singles and doubles, kind of wasn't there because that was what was supposed -- ProAir and scopolamine were supposed to carry it through that period of time, but they didn't. So the brand -- the company got caught short. But behind it, because now, there were supposed to be all these other new products and they are coming out so -- when they were supposed to come out. So what changed was that it got -- that gap that was in the middle. And those new products are now all coming to fruition, and that pipeline's working and the business is performing well. And then hopefully, there's a lot of gravy on top because we do believe it's imminent on ProAir and scopolamine is getting all the approvals it's supposed to get, so that's going to happen, so -- but we were selling at a period when it was not. So what does all that mean? And also then, we had the Irish NoA, and what did that mean in flexibility? Could you spin? Couldn't you spin with those kinds? And we've worked through all of those issues. We want to make sure that the choice we make, because this is the right thing to do, maximizes value for our shareholders, and that's what we're going through a process. We gave you the range. We genuinely believe, as we stand here today, it's either somewhere in that $1.10 range of dilution after we reinvest the capital if we sell it. Or it's $1.40 or $1.50 but you'll get the shares if we spin it and we're aggressively working on that. But it narrows it down enough. It does.

If you could pass the mic right behind you? Greg?

It's Greg Gilbert from SunTrust. Murray, your 3/5/7 construct as a goal doesn't speak to what amount of capital needs to be deployed to accomplish that. So what is near and dear to your heart and the Board's heart in terms of measuring returns, and maybe you could use Ranir as an example? And I'll ask my second question upfront, it's about your e-commerce strategy. Not a ton of talk about it here today. I know you have big retail partners that you're investing alongside and making sure you support them fully. But can you talk more about your e-commerce vision? You talk a lot about millennials, et cetera, as it relates to other aspects of your strategy, but can you talk a bit more about how they're purchasing and where and how you're positioned there?

Well, from my perspective, and Jeff or Svend, either one of you can jump in, each of the customers -- we look at e-commerce as e-commerce and digital, right? E-commerce is just selling the products, and digital is -- so when I think of our e-commerce strategy, I tend to think of it as much bigger -- I think of the digital aspects of it, everything from developing sites, which we're doing, by the way, where you'll hear about over the year where we'll build a site where Perrigo Self-Care will be out there and helping and adding millions of names and where people can have dialogues about different products and how they work and what their uses are and how to live a well life and we'll direct content. And with -- and that's not a branded selling because again, I said this earlier in the presentation, I get the benefit that most companies don't get, which I don't care which product you buy. I just want you to live a well life. If you -- whether it's -- we have -- if as long as we have something in every one of those categories, you go and you pick it. Now as it relates to margins on those e-commerce products, they tend to be equal or better to our margins on our existing one. So it's not dilutive. Can you, Jeff, I'm not sure sort of where OTCE fits in terms of how millennials are shop. I think of millennials using apps to -- in self-care and looking at new trends and all that, but are they actually buying on e-commerce?

Well, what I would say is that if you look at OTC nutrition, first of all, the categories that are more regimented categories, daily use or regular use categories, are the categories that are growing the fastest that command the most volume via e-commerce. All in all, OTC nutrition is probably trailing in terms of overall e-commerce from a market share standpoint, from a volume standpoint. You look at our business a couple of years ago, well less than 1% of our sales was e-commerce. Today, it's a little bit over 2%. I don't think there's any question that with the growth of the millennials segment of the marketplace, this business is going to grow across OTC and nutrition. Our strategy, the simplest, most straightforward way I can describe our strategy with e-commerce, be it an Amazon, a Walmart, a Costco, whoever, is that we want to be the same thing as a partner for them as we've been in traditional brick-and-mortar. And that is that we want to be their strategic partner. We want to focus on developing content, build out the tools so that we can bring added value to them and help them be successful at capturing market share. In a lot of ways, I look at the e-commerce segment like I looked at Walmart back in the late 1980s. It's an emerging segment. It's a growing segment. There's no question about it. But all in all, the overall pie is going to grow.

Yes. And as it relates to how I -- you wanted me to use Ranir as an example. We're taking cash that's sitting there, earning very little. If I pay down debt, I'd get half the return that I'm getting by the margins that we're getting with Ranir, right? It's immediately accretive. But I mean given the numbers that Ray shared with you, if you just took that same number and you retired $750 million of debt at 4%, you'd have half that level of accretion. So how do I think about it? I think it was very clear. We would pay down debt to give ourselves flexibility. We would look at bolt-on acquisitions as a significant opportunity. And we would use our leverage and flexibility that we would build in to do that. We want to keep our dividend growing and growing in line with our peers. So what are my orders of priority right now? I'd like to -- the world-class consumer companies in general, it doesn't scare me, but they're not sitting up at 3.5x debt and I don't want the debt number to keep growing over time. I'd like to get that number down a little bit. Share repurchases are a nice supplement. But right now for us, it doesn't make a big difference whether you're paying it down. So I'd rather have the flexibility on the balance sheet to help keep supporting growth.

Jane?

Jane Gilday with Barrow, Hanley. Addressing the changes in executive compensation and incentives, dropping return on capital and working capital component, is that just because of the divestiture of the RX business and it's impossible to greet them? But then from a shareholder standpoint, where are our safeguards with regard to corporate actions that could deteriorate return on capital, working capital, notwithstanding your previous comments about...

Yes. Listen, I think your safeguards are, we have a multicomponent, but this company never had revenue, right? So I mean the current system rewarded return on invested capital, and our working capital numbers have gone to heck during that period of time, right? Our inventories are up. So it's not like it aligned. I want this company to have a balanced, a great tension on short-term bonus, on revenues and operating income and that natural friction. But you've got relative total shareholder return as a major component to my compensation, right? So that alone is your governor, that if I don't grow the overall returns and we deteriorate some of those things, then I don't get paid. So I mean, that's a starting one. But they're completely -- so you have a big component of that. That started for the first time last year. You have 3-year goals. We have to get through the transformation, so it's very difficult for me to -- so it's based on consumer because that's the new company and where we're going. But you've been involved with me for -- invested with -- behind me in the last 20 years. And I think we've always done that responsibly, so I'll let my track record with you stand behind it.

David?

Dave Steinberg from Jefferies. I wanted to ask you a question about something that was not brought up today, but we're talking about potentially very large numbers, and that's your tax liability issues. In the last week or so, I think the IRS notified you of a proposed adjustment for additional tax and penalty, I think of around $840 million. Seems a little bit odd because the transaction of Elan buying Athena was 23 years ago. So had there been any discourse between the company and the IRS about this? Why did this come out of left field? And is it past the statute of limitations? And linked to that, does this have anything to do with the Notice of Allowance from the Irish government? I think it was $1.9 billion, plus 8% interest would bring it to another $400 million or $500 million. Where are you in the process with the Irish government? And are you considering doing any reserving against these potentially large tax bills? And if you've not done so, why is that?

Well, we're not reserving against them because we don't believe we're going to lose them. And every person who has opined on it, I mean, all of our advisers opined on it, believes that Elan did it properly. The recent one, and I don't want to go too far on commenting on the specifics of this, but I don't think the market reacted very much to this last one, which was a notice from a few years back and the company thought it answered and the IRS came back as a transfer pricing issue on the same revenue, right? So that complicates things, right, because they're both claiming the same income, and it can't be in both places and there's treaties that govern that. But on transfer pricing, those are hard battles for the IRS to win. It's especially hard to get penalties when it's all been advised properly and everything else. And I think that's why you saw -- and there are significant offsets if all of that was to be true and you ever did come to a rate. So I think there was a reason that you didn't see the market react much to the second one. As it goes to the first one, the Irish government has still not made it clear, the Revenue Department, of why they -- why Elan was wrong. Now, we believe and we've been very -- we've disclosed this, we believe that the Irish government did not -- that they violated our legitimate expectations to rely on prior audits and 20 years of history and that they did not -- they improperly brought this even to challenge the tax or to put this tax forward. So we are in a judicial fight first to say whether or not it was even…

[ Eli ]?

Just with regards to the deleveraging, so I noticed in the appendix the actual reported growth there is 3.9x, even though you showed 3.5x. So could you just go through some of the reconciliations there? And then with regard to the steady-state deleveraging...

Yes. You're looking at the right guy over there.

And then with regards to the steady-state deleveraging of 2.5x, is the majority of that contingent on this Rx sale? Or is there any kind of puts and takes with regard to EBITDA growth or just absolute gross debt reduction?

I don't know if this -- is this mic working?

Yes, it is.

So without looking at the numbers you're looking at directly, it's hard for me to comment. I think the 3.5x was based on our guidance for the whole of 2019, and it was net of any cash, although there's probably not that much cash on the balance sheet right now since we bought Ranir, but there's still probably cash built up over the balance of the year. So I don't know if you took that into account or not. With respect to the target growth, there again, that was just a target. I said that if we got $2.5 billion, net of some tax leverage -- or some tax leakage rather from the sale of Rx that we would be down around 2x or a little under 2x levered.

I mean it's a range, right? So if it was a flat-out sale, you'd get -- and you took every penny towards that, you'd get below 2x. If it's a spin, depending on the structure of the spend and how much debt you put, on spinco, you'll also get cash back to pay down debt. And those are all -- those were sort of the range you showed.

It wouldn't get us there. It's definitely a range because it depends on performance as well as exactly what we get from the Rx separation.

[indiscernible]

No. But I think the target growth of 2.5x -- or target leverage rather of 2.5x would incorporate potential EBITDA growth in the future, right?

Yes. Of course, it would because you're -- and you're taking cost out and everything else, that affects that. Go ahead, Brad.

Elliot?

[indiscernible] from Bank of America asking on behalf of bondholders here. Appreciate the reiteration of investment-grade credit ratings. Considering you are going to be at 2.5x leverage target and then potentially at 2x, do you expect to get higher ratings -- credit ratings? And how did your conversations go with the agencies? That's one. And the second is understanding and recognizing that the tax liabilities could potentially take a couple of years to actually come through, if you could give your read on, one, the timing, and the second is, how -- again, how the -- how agencies are looking at it?

So we met with both rating -- both major rating agencies yesterday, with S&P and Moody's. And I don't think it's -- I don't think I could comment on whether they would improve standing if we pay the debt down, but I think it's quite likely that they would. I think that with respect to your second question about the payment for the -- with respect to the tax overhang, as Murray said, I mean, this is years away. I mean -- and when we say years, it's not 2 years away, it's 5, 6, 7 years away potentially and is not something that is possible to really speculate on at this point.

Elliot?

Elliot Wilbur with Raymond James. First question, just clarification. I wanted to confirm that, in fact, a return to market of scopolamine is, in fact, incorporated in your guidance for 2019. Sounds that way, but just wanted to confirm.

It is. And I'm trying to remember whether it was summer or September

It's the second half expectation

Do you remember? August, okay. So back half of the year.

Okay. And then early in your presentation, Murray, I think it was Slide 24, you broke down sort of the components of the company's historical growth, roughly $1 billion, I think, from...

Yes, the $940 million, yes.

Really interesting to see that innovation accounted for 40% of that growth. No offense, you don't want to hear it, but don't always think of Perrigo as being an innovative company. So I wonder if we could maybe break that down to find that. I mean I'm thinking line extensions, new packaging configurations and the like as being what that represents. And then, obviously, as you move '15 through '18, dramatic change in terms of what that contributed to overall growth. So I'm just kind of wondering, from your perspective, what changed there? Was it the opportunity set? The company's focus? And then how do we -- I'm just trying to gauge sort of what the risks are to some of the newer targets that you've outlined in terms of innovative growth.

Yes. Jeff, you can help me out here, but I just -- I don't want to speak incorrectly. Was it Omeprazole the -- sort of the biggest new item within that?

Yes. Murray, it had 2 buckets. Rx-to-OTC switches, which is where Omeprazole would have showed up. And the pace of traditional branded line extensions, new products, monograph was a lot faster. So between innovation and Rx-to-OTC switches, it covered the landscape of new products. And that period of time from 2008 to 2013, '14 was probably an unprecedented period of time in terms of new product growth. You had Zyrtec switch in there, you had Omeprazole, you had MiraLAX. So you had a lot of

Our nicotine sensation product.

Yes. Nicotine lozenge was launched within that time frame. So yes, there was a lot going on, both monograph and OTC during that period of time.

But as -- in terms of the redirection, you spent a ton of money abroad. I mean we spent billions, right, to go by Elan to, go buy that. And that -- and things were tight. Like, when I joined the company, it was -- we're -- this discussion on infant formula and investing in it was, oh, no, we -- that's a lot of money. It's expensive. We can't afford that. And I'm like, but we're spending billions over here. So it was a little bit of a mindset shift. So it's -- but it's ramped up now, I mean, and It's coming hard. But you are on the 2 most important slides of the entire presentation, the difference between those two.

Annabel?

Annabel Samimy at Stifel. So I wanted to ask you about the pricing pressure headwind. You stated that, clearly, it was innovation or lack of innovation that was contributing to part of that pricing pressure. So with the lower number of Rx-to-OTC switches, which tended to be higher-margin, higher-barrier products and a mix shift to potentially lower-barrier products, how do you continue to fight that pricing pressure if you could potentially be subject to more competition? And...

I mean I think that's what we -- hopefully, we've communicated all morning. But that's the difference between national brand equivalent, national brand better and national brand different. So I need -- when you walk in the door and I have a nicotine lozenge or I have a nicotine gum and you are my competitor and you walk in the door and you walk into Walmart and you say, I'll give it to you for $0.20 less, the buyer says that's great but Perrigo was just here and they just told me that they've upgraded the entire line, and it's got a new flavor coating or it's got a new packaging and it's got all that. And you say -- and he says, can you give me that? And they say -- and it's all consumer preferred, and they say, no, we'll be back in a year. In a year when they come back, we've already launched the next generation. So innovation is your best insulation, and we were doing that. We need to get back to that. And like I said, our plans assume a certain level of it. It's just ramping up the innovation, which we have a line of sight on. And today, we added 8%, 9% of the company with Ranir that is growing that is doing that exact thing. They don't have FDA protection on those products, but they customize at such an advanced level and they innovate at such rapid speed that they haven't had the same kind of pricing pressure we have, and that's exactly what we're talking about here. So we have the proven. Let's do one more.

Last one question. Ami?

Ami Fadia from SVB Leerink. You've talked a lot about moving towards self-care and into different segments from what you've been in historically. How do you expect to be able to maintain the similar barriers to entry in operating margins as the historical business was able to gain? And then as you invest in new opportunities, what type of metrics are you going to measure every new potential idea or project? Is it return on investment? Or are there other parameters? And then just separately, as a follow-up, with regards to operating margins, by when do you think they can go back to about 18%?

Getting back to 18% is a different question than getting back to 16%. The -- I'm going to stay at the 16% for the next couple of years because that's a pretty aggressive set of moves after the spin. So I'm going to defer on answering the 18%. On the acquisition targets, we have a very strict criteria that it's got to sort of align with the self-care strategy. Do we have the right to win? It's in the presentation where we gave you the full lift. And we will scrutinize these deals hard. But we like fast paybacks. We like returns above our weighted average cost of capital. We like things that make strategic sense that are not just accretive to EPS but are accretive to growth and have running room. I mean the best example of how we evaluate that is Ranir. Now the only thing you can fight me on in Ranir is what multiple goes on a store brand versus a national brand? But I think the margins and the growth rates and the differentiation in that business stand up to any consumer company -- branded company out there right now. So we very much appreciate your interest in Perrigo. We're very excited about the future. I hope we showed you that we mean business and that we're taking a lot of action and that there is a lot more to come in. And thank you for your interest.