Good morning and welcome to the Perrigo First Quarter 2020 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Brad Joseph, Perrigo’s Investor Relations. Please go ahead.

Good morning and welcome to Perrigo’s first quarter 2020 earnings conference call. We hope everyone is healthy and safe during these times. As safety is our top priority, we are conducting this call virtually from different locations adhering to social distancing guidelines. I hope you all had a chance to review the press release we issued earlier this morning. A copy of the release is available on our website. Joining today’s call are President and CEO, Murray Kessler; and CFO, Ray Silcock. I would like to remind everyone that during this call, participants will make certain forward-looking statements. Please refer to the important information for shareholders and investors and Safe Harbor language regarding these statements in our press release issued earlier this morning. When discussing the business, Murray will reference only non-GAAP adjusted numbers for the quarter unless otherwise stated. Comparisons to prior periods will also exclude exited businesses and currency changes unless otherwise noted. Ray’s discussion of financial results during this call will address both GAAP and non-GAAP results and when noted, comparisons of prior year will exclude exited businesses and currency changes. In the appendix for today’s call, we have provided reconciliations for all non-GAAP financial measures presented. A few other logistics to mention before we get started. First, excluding exited businesses excludes contributions from the exited animal health business, previously included in the Consumer Self-Care Americas segment and the divested Canoderm business previously included in the Consumer Self-Care International segment from Q1 2019. Second, organic growth excludes Ranir, the exited animal health and Canoderm businesses and currency. And third, as a reminder, Worldwide Consumer, including the Consumer Self-Care Americas and Consumer Self-Care International segments as well as corporate unallocated. And with that, I would like to turn the call now over to Murray.

Good morning, everyone. I want to begin today’s call by recognizing the obvious. We are living in a unprecedented and challenging times. But I also want to recognize and acknowledge that I feel blessed to be surrounded by such a seasoned leadership team and over 11,000 dedicated employees who are making tremendous sacrifices while giving it their all to keep our essential products flowing to consumers and patients who need them. These Perrigo employees are making sure that consumers have access to Perrigo’s broad portfolio of old cough medicines analgesics like acetaminophen and electrolytes to treat flu and COVID-19 flu-like symptoms, allergy medicines as we head into the allergy season, infant formula to feed babies, albuterol inhalers to help asthma patients and many other essential products. In this environment, it has been our first priority to focus on keeping employees safe, while they keep these essential products flowing to market; second, to reward employees on the frontlines whether in production or in the labs for their work and dedication; and third, to support the communities in which we operate during these challenging times. Here are some examples of how we have accomplished each of these. We restricted access to our facilities worldwide to essential employees only and implemented a multi-step prescreening process before anyone can enter into our facilities. We have prioritized production to essential products. We eliminated nonessential travel even before the federal travel bands went into place in the U.S. We have regularly communicated with our workforce providing education about social distancing and hand washing and other appropriate measures over and over again. We have doubled frontline production employee first quarter bonuses. We made over $1 million worth of cash and in-time product donations like hand sanitizer to our communities and much, much more. What is amazing to…

Thank you, Murray and good morning everyone. Now, that Murray has gone through the revenue and business drivers for the quarter, I would like to walk you through the rest of the P&L. Consolidated reported GAAP net income for the quarter was a $106 million and reported diluted earnings per share was $0.77 on an adjusted basis consolidated net income for the quarter was $157 million and earnings per share were $1.14, the sixth consecutive quarter in which we have met or exceeding market expectations. Adjusted net income for the quarter includes $50 million of non-GAAP adjustments primarily Amortization of $71 million which we always add back, partially offset by a $16 million prior period tax benefit as a result of the CARES Act. The GAAP reported consolidated effective tax rate for Q1 was 7.2%. This was generated from tax expense of $8 million on pretax income of a $115 million. Tax expense was low this quarter primarily due to $20 million of Q1 tax benefit from the CARES Act $60 million of those tax benefits related to 2019 and we are adjusted out non GAAP purposes leaving $4 million in Q1 and bringing the first quarter adjusted effective tax rate to 19.8% full details of these adjustments can be found in the non GAAP reconciliation table attached to this morning’s press release. From this point forward all dollar numbers basis points and margin percents will be on an adjusted basis while growth percentage is we will exclude the impact of currency in exited businesses. The worldwide consumer first quarter net sales growth of 21% versus prior year resulting a gross profit of $460 million up $38 million from last year a 16% increase excluding the impact of currency and exited businesses, gross margin was down 220 basis points from…

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

Hi, thanks for taking my questions here. So first…

Good morning, Louise.

Good morning. There seems to be some confusion in the marketplace when you say Perrigo is not updating its guidance at this time. Are you pulling your guidance, what does this mean and it sounds like there could be potential for upside, but it’s just not clear how to put that out there now. So it would be interesting to hear what you think here? And then second question I had for you was just on the channel shift from brick-and-mortar to e-commerce, do you expect that to continue and do you have the relationship in place to affect that? Thank you.

Okay. First one, we are absolutely not pulling guidance. We changed the word of ups unchanged to not update it for a very clear reason, in my mind unchanged means we are reconfirming what we had on the street in February, which was the best information we had at the time. But I got to tell you coming out of a very, very strong quarter with albuterol as upside, Doctor Fresh as upside, potential for extended illnesses as upside, a strong allergy season as upside, Voltaren Gel as an upside, the fact that we have to rebuild all of our warehouse customers, warehouse inventories were at – that are weeks below what they normally would be. If it was any other circumstance, I would be raising guidance right now. But given the business uncertainty out there in the world, it’s just not prudent to be raising guidance at this moment. So, not updating reflects the fact that I look to add it and say I don’t think the guidance is right at this point, because if you had some kind of significant business interruption, sure it could hurt you, but on the other hand, given all the positives on the business, we will likely be updating and the implication of unchanging says we would have to have a pretty rough balance of the year in order to stay at the existing guidance. So I had left it unchanged from where we are, I left it at where it was in February. We are not pulling guidance. And there is a lot of good things happening, but it’s a very uncertain world. So, hopefully that clarifies anything for anyone. Perrigo has not pulled guidance. The second one on channel shift, that one is really interesting, because if you saw and some…

Yes, thank you.

Our next question comes from Chris Schott of JPMorgan. Please go ahead.

Great. Thanks very much for the questions.

Morning, Chris.

Good morning. Just a two here. First, can you expand on the gross margin performance in the quarter, particularly for the Americas business? I guess, what was this all just mix related or are we also seeing higher manufacturing costs due to the shutdown, I guess what I am trying to get is directionally should we think about the CSCA gross margins kind of rebounding from here as like the remainder of the year or is this kind of a new normal and my second question is kind of a bigger picture on what does a recession mean for Perrigo’s business so I think if I go back to ‘08 and ‘09 I think you saw some fairly meaningful share gains as consumers traded from national brands to store brands I guess the business may be in different place today in terms of market penetration but just as you think about if we do head into recession what does that mean for the portfolio over the next one or two years as we offer this process? Thank you so much.

Well let me start on the first one, then I will turn it to Ray and then Ray you can give it back to me on the recession question. But gross margin honestly mostly mixed I mean for sure there is a component I don’t think effected the first quarter very much where the greatest demand and listen we are prioritizing our products along with what our customer and consumers and society as a whole need and that means that right now we have been we are more than 50% of the U.S. supply of acetaminophen and that's a lower gross margin item and we are running that although I don’t think that had a big deal impact on the first quarter I think gross margins in general are mixed but I am pleased with our margins when you take it down to the operating margin line you have got a lot of moving factors than Ray can you go into that in a little bit more detail.

Sure. Murray is right, you really got to look at operating margin especially with respect to the fact that we saw increases in our store brand business where our gross margins are lower but our operating margins are similar and we saw that in CSCA specially what you have referenced margin this year around operating margin around 19.6% and contrasts positively by about 130 basis points versus what we've got in 2019 first quarter so we are seeing some improvements in our operating margin and the impacts of the dislocation that happened really didn’t have a big impact on Q1 because they happened late in March or in the middle of March early to middle march and we didn’t see all that much impact coming through from that we did see a some impact at the end of the month and we saw our operating leverage from the sharp increase in sales that came in March.

And then going back to the recession question I mean you are right we will see how it plays out but our product category and I already think we are seeing some share shifting now but the fact is our products are equal [indiscernible] and they are 30% to 40% cheaper than the national brand and the other benefit you get in a surge is that a lot of times the national brands are not on sale but besides the longer term benefits that you get of the price issue you will also get people trying you get a much higher level of trial right now there is a lot more people that are pride of store brand who are buying both or we were normally national brand only consumers that are trying to buying our products and think for themselves that they worked as well so listen going into an extended recession period private label always performs well. And history, I mean, there is no guarantee, but history says we benefit from that and we think that we are well positioned with our self-care focus, our value and also the e-commerce, but yes, I mean, it’s a great point. These are uncertain times and I think the company is in a real good position right now to help society, but also benefit from it.

Thank you.

The next question is from Randall Stanicky of RBC Capital Markets. Please go ahead.

Good morning, Randall.

Hey, Murray. Good morning. Hey, just to put this guidance question to us because there is a lot of questions around it, it sounds like if I am hearing you correctly there has been real estate drivers, you are looking for better clarity around those before addressing guidance. Are there factors that would pressure that range or is this just while being prudent we are in the first quarter of a pandemic? And then my second question, can you just quantify the e-commerce business and how that – what that margin is relative to the overall CSCA margin that would be helpful? Thanks.

Okay. Let me do the second part of that first. I believe the margins are equal. We are all sitting in different rooms, maybe somebody can send me the absolute number in e-commerce, but either way, the margins are roughly equal or even slightly better in our e-commerce business. So, that shift doesn’t hurt us in anyway. And listen, I don’t know how to be any clear, what I worry about is business interrupt. My team, like as a crisis committee, Randall, we meet – we were meeting in the beginning everyday. We get better at it, but we have had hits of employees, thanks goodness. We were ahead of the world on precautionary measures and we have caught most of those, but the vast majority of those we have got to trace and track, we have got all of that. We handle it in a strong manner, but we have had hits and so my fear is business interruption. I worry – I am at worry, I worry that when the world starts loosening up and states are loosening up that at any given time you could get a plan hit. I think we are more experienced now. And with the precautionary measures, with the temperature tests, with the questionnaires, with the restrictions we have in place and our experience, I mean hell, we have been able to keep – yes, I am not allowed to say hell on a conference call, but we have been able to keep a facility running in the brunt in New York through all of this and they have had hits. So – but that’s your biggest downside concern is business interruption. And I believe that what every single company in the world is facing right now. But for that big concern even…

That’s helpful. Thank you.

Operator?

I am sorry. The next question is from Ami Fadia of SVB Leerink. Please go ahead.

Good morning.

Hi, congratulations and good morning. Congratulations on the strong quarter.

Thank you.

So I think you have made the point on guidance very clear, so I will not repeat that. I wanted to get some color on just e-commerce channel and your ability to maybe what you are seeing on the ground there has been some discussion around reduction in food traffic adds some fees. Are you seeing that impacting the demand? It doesn’t sound like it, but is that being sort of taken care of or offset by increase in e-commerce, can you sort of confirm that? With regards to ProAir, what’s your full capacity with regards to how much demand you can fulfill for this year and how should we think about increase in that capacity into next year? Thank you.

Let me just breakdown the second part. So I don’t forget it. In terms of e-commerce, it’s a little bit – the answer is no, we haven’t seen demand slow. I mean, maybe the orders have flowed a little bit in the past couple of weeks, but the backlog of orders is tremendous. We are not close yet to filling all the orders that we have and yes, kept orders that we have in hand today. But just to be clear, like when we ship through most of our major customers that are getting surges in their e-commerce business, we just ship it to them and then they sell it right. So from us, it’s an order to Costco as an example or to Wal-Mart and then they fulfill it on a online basis. And it shows up in our regular numbers and we keep those numbers out as we have line of sight. But so far we have been more than offsetting some any slowdown. I mean, it would be – it’s almost hard for us to see us to slowdown that some of the retailers report in food traffic, but for I guess the IRI numbers and I assume that those have slowed down in certain categories, slowdown in infant formula, you would expect that your baby is not going to eat more. But on the other hand, pain hasn’t slowed down, acetaminophen and ibuprofen those products haven’t slowed down at all. So bottom line is yes, I think there is channel shifting going on and I on a personal – I don’t have a big data to support that. I think that there is enough time going by here that people are learning where they might have been reluctant before. They are learning the power of e-commerce…

Great thank you.

Our next question is from David Risinger of Morgan Stanley. Please go ahead.

Hey, David.

Hi, Murray. Congrats on the performance during these difficult times I have a couple of questions please first with respect to costs and just what’s happening with supply could you just help us better understand is the right way to think about Perrigo’s cost structure this year that higher COGS due to COVID are going to be offset by lower SG&A due to less travel and less commercialization costs so I guess that’s the first question at a high level. Second with respect to supply could you comment on whether there are any API or intermediates supply issues or either the consumer or the Rx business and then third with respect to the dermatology Rx business so obviously derm is a big component of Perrigo’s Rx leadership but stay at home orders have impacted patient visits dramatically I was just hoping you can comment on that as well? Thank you.

Okay. Ray, I am doing – would you want to do the cost one?

Sure. So I think you basically described it to a certain extent David but we are seeing increase in some of our costs as Murray described we got absenteeism in the plants that we still pay people for the most part even when they are absent under COVID-19 so we do see some higher costs there and we are getting operational leverage on all three businesses is quite significant but that is because of the increased sales certainly in the first quarter we are seeing momentum savings continuing and we paid special bonus we talked about which obviously resulted in higher overall compensation costs but I think the unbalance if you look at operating income as a operating margin and operating income as I mentioned earlier in the call if you look through to that our operating expenses are down slightly we would expect that trend to continue and we are also expecting probably less advertising and promotional cost for the time being plus as you mentioned less travel and less of those other expenses. And we are seeing just a small down in the Q1 on the – on our operating margin, with a big increase obviously in our operating income.

Yes, I mean, thank you, Ray. David, it is – it’s a bit hard to measure, right, because lot of this all happened in the last couple of weeks from March. So, we will get a much better handle. This is a good area of where I would like to tell you we have a good handle on it, but there are so many moving pieces and we will see how it shapes out. But I don’t think it will be a severe movement one way or the other. We didn’t non-GAAP out employee bonuses. Those were my decision to do those. And I think that was money well spent. People are not – people are proud at Perrigo right now of what they are doing for society and they know that myself and my leadership team put their safety first and I am proud of that fact. That’s one of the things I am most proud about in my carrier. And we will continue to do that. There are other efficiencies too right. I mean, we will have some less absorption when we are running more acetaminophen, but on the other hand, you are going to have more efficiencies, because we have partnered. And I wanted to make this point and it’s not really your question, but our customers have been unbelievable through this, right. John Furner, President, he has been of EVP, Head of North America for Wal-Mart calls me on the phone and says all rules are off right now, how can we help you to do what’s right for society and just focus on your big SKUs and we are doing that with all of our manufacturers. So, we are doing longer runs of the bigger item than we would normally done and with agreement that…

That’s great additional color. Much appreciated. And then on the derm demand?

I don’t have the exact numbers in front of me Brad may be you can get back to David after that I mean I think we said the we were little bit softer in some of those areas I just have the numbers on my hands David, but we will get back to you.

Okay, thank you and congrats again.

Thank you.

The next question is from David Steinberg of Jefferies. Please go ahead.

Yes, thanks. I had a question about some recent OTC reform legislation, one of the stimulus bills seemingly buried in it was legislation related to OTCs and monograph OTCs and it sounded like a might benefit the company some of the headlines relating to user fees and encouraging innovations so I was just curious does that legislation benefit Perrigo if so how does it and if so does it shift some of the prioritization of your projects and then secondly on your generics business I know you have been intending for a while to either sell it or divest it or spin it and we haven’t heard much recently so I am just curious given the recent approval for albuterol does that change the dynamics in terms of potential value received or in time lines relating to potential divestures? Thanks.

While the recent approval makes it more expensive, but the bottom line is I have said for almost a year now that our focus is primarily on the consumer business but the Rx business is performing much better and throwing off a lot of cash and I am and our entire management team are towards of shareholder value and the multiples are so depressed in the Rx industry right now I believe it would destroy shareholder value to solve the kind of multiples that are out there right now so our strategic focus remains consumer self care we are proud of what our Rx team is doing there and they are generating a ton of cash and when the opportunity is right we still intend the sellers spin it but nothing is really changed on it but I just don’t see that happening in the short term on the first part of your question there are a number of things but Ray already talked about the CARES Act tax benefit so that’s been covered then there are two other important components of it the OTC Monograph format which finally got passed and something we have been pushing for but just to be and that will be make it easier for us in the future to bring all kinds of products our OTC products to market faster that’s the good news the reality is there is probably three years before the agency gets it up and running so it is an another positive for the long term benefit of Perrigo but it is not going to have it up an immediate impact so that’s great news it is not good news it is great news but it is out there a little away and I think the other one that’s immediate is the restoration of the OTC eligibility the FSA, HSA accounts when the Affordable Care Act assigned in the last 10 years ago and on a intended consequence was no longer allowing OTC products to be eligible for FSA, HSA reimbursements if the CARES Act reverse this decision which is a win for the industry and consumers who like so hope that answered your questions. Operator, any other questions?

The next comes from Gregg Gilbert of SunTrust. Please go ahead.

Good morning.

Hey Gregg

So Murray and Ray I can see certainly the Rx to OTC switch of Voltaren Gel as a long term positive but I was hoping if you could help us understand how much you are selling on the Rx side currently of that product and how that would wind down does that come to an abrupt end and then the OTC that comes in maybe help us envision that what goes away and what comes in. And Mario, on the bolt-in front, curious what your appetite is now, I imagine you have a long list of things that are potentially actionable, but it’s now the time to take – to hit the pause button in light of the pandemic and putting out fires daily or is it all system to go on the bolt-on front? Thanks.

Well, I mean, good question. I mean, I will tell you we have been at – we closed on the Doctor Fresh deal, but that deal was a done deal prior to the whole COVID issue. And I am being more cautious at the moment and we were – we didn’t how this thing was going to play out or shake out. So we were very conservative with cash. We drew down $100 million on the revolver and we sit here now 5 or 6 weeks later and we so far knock-on wood have come through it very well. But yes, we have lots of things under evaluation. We slowed it down a little bit, but I am no less committed to bolt-ons than I was. It’s a key part of our strategy and maybe this will present us even additional opportunities at even a better value going forward. But for the short-term here, we are taking a more cautious stance. So, yes, we have slowed it down a bit right now. I am not too concerned about that given the strength of the core business however and the fact that we already have Doctor Fresh and Steripod that were already done this year and we are just launching Prevacid. And the second question was on Voltaren, I think it’s a bit early for me to do that. I know there will be some abrupt halt of the sales within Rx and we will be – we were able to get our application within 72 hours, which was remarkable and get the approval and we will be launching and then I also think there will still be an ORF component of the sales as well. So we will give you more details as we get closer on the size of the market and how big we think Voltaren is and but I am not prepared to elaborate more than that today.

Okay, thanks.

The next question is from Elliot Wilbur of Raymond James. Please go ahead.

Thanks. Good morning. Wanted to ask just a question or line of questions directed towards Ray, specifically with respect to cash flow performance and cash flow conversion you caught up a strong performance in the quarter, but as I think about ARs likely moving higher and inventory build increasing over the balance of the year, how do we think about operating cash flow performance over the balance of the year and cash flow conversion is essentially operating cash flow equal to adjusted net income kind of the right metric to think about for the full year or could we actually be expecting something less than given the strong performance in the first quarter? And then just real quickly want to ask two about trade inventory levels just want to get some insight into where those may stand whether or not there is significant differences between Rx and the OTC side there? And if I may want to ask one question of Murray as well and Murray I did check and hell is not one of George Carlin’s 7 words, so you are covered there. But I wanted to ask specifically you called out increased store brand share versus other store brands in the last two quarters as a source of strength in the business? And just wondering what is driving that and what’s the relative opportunity obviously versus taking share versus national brand, is this just a product issue or is it more of a structural issue? Thanks.

Ray, why don’t you do the first part?

Okay. So with respect to the first quarter, we saw the cash flow was strong for two major reasons, one we had very high demand which resulted on inventory being drawn down and two, we recovered – we saw recovery in our Rx AR which was an issue in the fourth quarter of last year where we saw going the wrong way for us, but we would – it was improving as we came into the first quarter and contributed to a strong cash flow conversion that was despite the fact that the surge that resulted from the COVID-19 really occurred from the second and third weeks of march on and was most heavy at the very end of March so that resulted in a buildup of our CSCA and CSCI too with respect to houses cash flow forward through the year clearly we do have capital expenditures that we had planned for that may not happen quite as heavily we are not permitting outsiders in our plants at the moment and we are running flat out as we talked about earlier in the call Murray talked about in the plants of running flat out so the likelihood is that we are going to spend less capital and that will obviously be cash flow positive for the year I don’t think we will see cash flow equal to operating income for the balance of the year we are going to continue to spend on projects we obviously going to continue to pay dividends and that’s very important to us so I would say that we haven’t changed our guidance for the year and we are probably not going to change our cash flow guidance either at this point in time.

Yes I would say that on the share – I went into great detail. And really, there's nothing that's changed in the first quarter and the explanations I gave on the conference call on February 27. It was – we win store branch share either by gaining distribution. We try not to do it on price right So I had talked about how we had won a big piece of gum business from a major customer because they we have lost that the year earlier and their business fell off because we had a product in blind taste testing, a nicotine gum, that was preferred through the one and that reinstated that product and now their business is growing again then we win share that way and we had a major new customer although we are the bulk of the store brand business and infant formula. But lots of other new products were driving those. So it was in the Mucinex like [indiscernible] type products that was an area where we were not as strong we finally got the right products in place and one accounts and one share with that we had done the same thing in the allergy business and we have one share and then we had this odd dynamic which is still continuing to play out very strongly. And in the discontinuance of ranitidine was a – that was a segment where we had a low share so and that product was pulled from the market even though the total market didn’t grow a lot of it switched to for example omeprazole as one of the areas where it switched to where we had a very high shares so just those consumers changing so those are the kind of the big three drivers consumer products and new products driven and then a beneficial mix shift in the digested area, in the GI area. Answered your question?

Yes, thank you.

Okay any others out there

No there are no other questions I would like to turn it back to Murray Kessler for closing remarks.

I just – I’ll leave you saying one more time I keep hammering it over and over again that something like I have never seen the Perrigo business is strong, the team is incredible they are confident they are – my leadership team is very seasoned they handle everything in a common deliberate manner and they have been able to handle crisis and I am confident that while there could be some shorter term bumps I think the outlook for Perrigo is very strong I have never anticipated this coming into the company but I think price value, store brand products will play a bigger role going forward I think that’s health care will play a bigger role in a new normal world where consumers are a little bit more reluctant to run to the emergency room or hospitals and I certainly think e-commerce will be a bigger role and we are strong in each of those. We will get through this. We will have some uncertainty. And I know that’s hard for everybody who is trying to cover the socks, but I think if you sort of look where Perrigo stands today versus most companies in the world, I think we are performing pretty darn well. And so I will just end up one more time thanking all the employees who I know it’s nervous to come into the facilities and – but you are doing good for society and you should be very proud and we are very proud of you. Thank you for your interest in Perrigo.

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.