Good day and welcome to Perrigo's Second Quarter 2020 Earnings 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 Bradley Joseph, Vice President, Global Investor Relations & Corporate Communications. Please go ahead.

Thank you. Good morning and welcome to Perrigo’s second quarter 2020 earnings conference call. We hope everyone is remaining healthy and safe during these times. I hope you all had a chance to review the press release we issued earlier this morning. A copy of the release and the presentation for today's discussion are available within the Investor sections of the perrigo.com website. Joining today’s call are President and CEO, Murray Kessler and CFO, Ray Silcock. I’d 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 noted. Comparisons to prior periods will also exclude divested businesses and currency changes unless otherwise noted. 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 divested businesses excludes contributions from the divested 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. Second, organic growth excludes the Oral Care portfolio, which includes the acquisition of Ranir, Steripod, and Dr. Fresh, the divested Animal Health business and Canoderm product and currency. And third, as a reminder, Worldwide Consumer includes the Consumer Self-Care Americas and Consumer Self-Care International segments as well as corporate. And with that, I'd like to turn the call over to Murray.

Good morning, everyone. I want to begin today's call by once again thanking our people, both in the manufacturing facilities and those working from home for their incredible efforts in continuing to meet society's needs for our essential products during the COVID-19 pandemic and delivering another superior quarter financially, while at the same time, advancing the company's transformation plans and improving our balance sheet. I'm truly proud of how our team has performed. Here's why I say that. During the second quarter, our team once again maintained uninterrupted operations in all of our 27 manufacturing facilities around the world, most of which have been running 24 hours a day, 7 days a week without missing a single shift due to COVID-19 to meet the self-care and health care needs of society during the pandemic, divested the non-strategic Rosemont Rx business for $195 million at an attractive multiple, provide greater assurance of liquidity by refinancing our 2021 bonds into 2030 bonds at an attractive 3.15% coupon rate. Increased the company's cash position to approximately $850 million, achieved over 200% cash conversion, brought our net leverage down to 2.9 times, close the Dr. Fresh Oral Care acquisition for $113 million, committed $50 million to purchase an approximate 20% stake in stake in stake in Kazmira, a leading supplier of hemp-based THC for CBD products to enter that market in a responsible Perrigo way. Began rolling out our new business intelligence platform to allow more sophisticated decision-making company-wide; and as I said, delivered another quarter of superior financial results, well ahead of expectations despite the constant set of challenges we faced. On our last quarterly earnings call, we did not update our original 2020 adjusted EPS guidance as the uncertainty and numerous moving pieces surrounding the pandemic did not allow us to produce…

Thank you, Murray, and good morning, everyone. Now that Murray has gone through sales and business drivers for the quarter. I'd like to walk you through the rest of the P&L. Our consolidated GAAP net income for the second quarter was $61 million and diluted earnings per share were $0.44. On an adjusted basis, Q2 consolidated net income was $141 million. And earnings per share were $1.03, the seventh quarter in a row in which we met or exceeded market expectations. Non-GAAP adjustments to net income after tax were $80 million, primarily $73 million of amortization, which we added back, and an $18 million loss on the sale of our Rosemont subsidiary, which we excluded. Full details of these and other smaller adjustments can be found in the non-GAAP reconciliation table, attached to this morning's press release. The adjusted consolidated effective tax rate of 16.7% this quarter is lower than in Q2, last year, primarily due to the increased interest expense tax deduction that we received, as a result of the CARES Act. From this point forward, all dollar numbers, basis points and margin percentages in my presentation will be on an adjusted basis, while growth percentages will exclude the impact of currency and divested businesses, unless otherwise described. Worldwide consumer second quarter gross profit was $373 million, an increase of 4.4%. This increase was driven by the addition of the Oral Self-Care businesses, plus growth of our U.S. OTC business, partially offset by adverse margin mix between essential and nonessential products, in our CSCI business. Q2 worldwide consumer gross margin was down, 190 basis points to 39.3%, due primarily to mix in CSCI, with lower sales volumes in higher-margin categories. And the impact of the Oral Self-Care acquisitions, which have a relatively lower gross margin, than our worldwide consumer…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question today will come from Chris Schott of JPMorgan. Please go ahead.

Great. Thanks so much for the question. My first question was just the -- I think in the slide, you talked about performance year-to-date ahead of expectations. And I'm just trying to balance that, I guess, the maintaining topline guidance. Can you just help me bridge that dynamic a little bit, the strong first half performance with the maintenance of guidance for the year? And my second question was kind of a bigger picture question on the growth of e-commerce. Is there a margin difference that we need to think about there versus traditional channel? And how does Perrigo share in that vertical compared with traditional channel? I'm just trying to better understand if Perrigo is a net beneficiary of this e-commerce trend or this is more about sustaining market position? Thanks so much.

Let me do that. Good morning Chris, it's Murray. First things first, there is no margin difference. They're very similar. And second, I believe, that we are a higher share because we have invested and we tend to be the partner of choice in-store brand on our categories because of all the investments we've made. The e-commerce business is more sophisticated than I understood when I first joined the company and the investments were made, and then you would probably expect. It's not just we ship it to the customer and they sell it e-commerce and how do we do at the end of the day. We are a partner in that. We generate the content. We work on the websites. We design the promotion. We do the analytics to say where that is. There's we have dozens of people that are working to do all that to provide the input and the guidance, and that's when you go into an Amazon and all that and you type in the products, for the most part, you see it, and we help develop the brand. So on basic care, Perrigo was the one who developed the brand. And ultimately, over the last year, has sold that to Amazon, but with benefits that come to Perrigo that provide a little bit of a moat around it for a number of years. So that's an easy one, e-commerce growth is a very good thing for Perrigo. Going back to your initial question on, how do I reconcile not changing the guidance. That's a combination of two things. The first is all of -- the initial surge on the essential products happened in the first half, right? So we certainly didn't build that into our plans when we were building the year. And for…

Thank you.

Our next question today will come from Ami Fadia of Leerink. Please go ahead.

Good morning. Thanks for the questions. Maybe a follow-up on…

Good morning.

Good morning -- follow-up on the guidance. I'm surprised that you continue to think about the midpoint of the guidance range. I understand some of the pushes and closes that you talked about. What are your assumptions with regards to the cough and cold season and just the evolution of the businesses in America and in international, just on the topline and gross margin level? And then just separately on albuterol, you posted a pretty strong quarter better than what the script were indicating. So if you can give us color on whether it was benefited from any COVID-related stocking? And how you anticipate market share and availability of inventory to meet demand for the remainder of the year? Thank you.

Hi. Let me -- assumptions on cost coal. I mean, the guidance I think we've walked through a number of times. I just don't see anything in it for Perrigo at this point that has gotten a good handle on the business and with the puts and takes to take an aggressive position on it. I've never in my career managed quarter-to-quarter, and I'm not going to start now. I'm focused and I'd love to raise comment that at the end of how far we've come over the 18 months. This is a completely different company that is in a fantastic position. And I'm great that you would like us to raise guidance, but you get back on to the playing field. This was a good start. We have incremental COVID costs that we -- that weren't built into the original plan, something in that neighborhood of $20 million to $25 million. We sold Rosemont. So in my mind, I did raise guidance. I raised it 20, 26 -- probably $0.2 when you combine those two issues together, because I did it on the -- against the core business with two big things that weren't anticipated when we gave the original guidance. Having said that, I planned it conservatively. So I'm saying the same thing I already said is we plan a normalized level in the second half. We have a little bit of giveback. We're estimating about 50% of the pantry load, not the total consumer effect, of the pantry load that we got in March-April period of time on the businesses in the U.S. on the essential businesses primarily that we would give back that. A good portion of that has already happened, and those businesses have normalized. But one I've built into the plan for further giveback…

No, that was very helpful. Thank you.

All right. Thank you.

And our next question today will come from Randall Stanicky of RBC. Please go ahead.

Great. Thanks, Murray, I want to stay on this implied guidance question because it's an important one. Stock is down 9%. The guidance implies a 10% decline at the midpoint over last year, and that includes sort of bolt-on deals and opportunities in there. So investors are trying to understand what the real growth rate in Perrigo is because to be fair, the company hasn't grown in more than three years. So it's an important question. So on that, can you help us understand with respect to the CSCA business, what are some of the pushes on hold in the back half that could have those numbers higher or lower? And specifically, should we be thinking about the second half outlook as a normalized way to think about the Perrigo earnings base from here? Thanks.

Well, I'm going to answer the last part first, which is absolutely not. We -- and I said that you shouldn't think of the second half as a normalized base that this was on -- I said it in the last conference call, this was going to be a highly unusual year. You were going to have a lot of front-loaded volume and sales pulled forward and taken out of the second half and then add on top of that incremental cost that should come out again. But I mean, you're adding $25 million, $30 million I mean, you have -- the only normalized part is Rosemont will be out going forward, but you're adding $20 million, $25 million of additional expense. You have some volume that was front-loaded into the first half from the second half, and you have businesses that ultimately a lot of benefit. So coming out as you go forward, you want to -- once we get past this virus, shouldn't be paying, which some of it may even be opportunities in the balance of this year, but you shouldn't be paying for air freighting, API in order to try to keep up with surging demand. You won't be operating with 30% absenteeism that forces you on a 24/7 operation to be running and paying overtime on the remaining 70% continuously instead of our normal schedules. Eventually, the security cost audio be getting into place and PPE and everything else, and I won't be paying employee bonuses and all of that. But a good portion of that $20 million, $25 million is second half, right? They started happening, but they fall into the second half of the year. So, there's a lot of things that will make the numbers and not look great in the second…

All right. Thanks Murray.

Our next question today will come from Gregg Gilbert of Trust. Please go ahead.

Thanks. Good morning. Murray, what are your latest thoughts on the dispute with the Irish revenue? And what do you expect in terms of next steps and when? And then my second question is on your CBD announcement. I realize the Kazmira arrangement is certainly a long-term play. But when do you think this product line could be meaningful to Perrigo? And does it rely on proof that CBD actually helps patients in a proven way? Or does it rely simply on the ability for you to differentiate based on purity and consistency? And the other things we already know about Kazmira that probably led you to select them and then to select you? Thank you.

Well, on Kazmira, it is the latter. So I think you've got that just right. As a starting point, we have exclusive rights to private label and all of that. And Kazmira, you've obviously done your homework. And they are -- they pride themselves on being first off, CBD only, THC-free, metal contaminant free, et cetera. But they're relatively small, didn't have the dollars to be able to scale up to be able to put good manufacturing practices. And we will work with them and the FDA to get that part certified, and that's our goal. And to meet all of those same practices. So the investments are on equipment, all the things you would know, in processes and controls. And I don't mean to say they don't do it now, they do. They're noted for that, but they do it on a much smaller scale. Once we get that, we will be comfortable launching products. And when we can -- all of our customers ask for it, but I want to be able to say, it's been done in a Perrigo way. And so, I wouldn't be surprised to see us within the next couple of years, certainly, not the next 12 months of starting to see products from Perrigo. You'll see it before that for Kazmira, because they're -- think of them today as primarily an API, and we own a 20% stake. And they may go faster on some branded products, we'll see, but that's them driving the ship on that. But for us, get the API, the clean CBD that can be relied on, that takes out this thought that it's the Wild, Wild West, that it's controlled and reliable. And when it says it has a level of CBD in it, it does. And that,…

Thanks.

Our next question will come from Elliot Wilbur of Raymond James. Please go ahead.

Thank you. Good morning. First question on the CSCA segment and specifically language in the press release around pricing pressure. Generally, I guess, the language always seems like it's reserved for the Rx segment and not the CSCA segment. I understand it's probably a normal part of the business, but maybe you could just provide a little bit more clarity in terms of the magnitude, what that number looked like this quarter versus recent trends? And then I'm just curious, what drives pricing pressure in the CSCA business? Makes sense, obviously, if there's an incremental competitor on a specific product, but given your dominant share across most SKUs, I would think that, that's somewhat of an anomaly. So, is it just buying more shelf-space or trying to understand the dynamic there that might drive pricing pressure or price erosion kind of outside just a new competitor coming in the market? And then just as a quick follow-up. You guys didn't include any of the metrics for the individual product segments within CSCA or CSCI, anything that perhaps more you could call out in terms of over-performance or underperformance where you saw relative wind losses? Thank you.

Okay. I'm trying to do that, but I'll revisit that. On the first issue, the pricing pressure. The pricing pressure has and I -- we showed that on our May 9 in Investor Day presentation and that's why sometimes I get the question, how is your market share up if your revenues are -- Perrigo's revenues aren't as high. And the answer is that we are a private label supplier for the most part, out of the U.S. So, our volume is always growing faster than our revenues. And it's -- on average, it's been a couple of percent over the past -- the old President of CTI would tell me over the past forever, it's just a normal part of doing the business. But remember, we have to bid for the business, right? I don't get to set the price at shelf. We don't go in and say, take a dime price increase or not bets. That's Walmart or target or CVS, whatever. They're deciding whether to raise the price or not. It has nothing to do with our revenues. Our revenues, we negotiate. They'll try to put products out for bid. And in general, if we end up having a new competitor and it's not a new competitor. So for example, the pricing pressure that we would carry in from last year was we were one of the only private label manufacturers out there for years on omeprazole with the regulatory approval to it with the ANDA, where at the end of the year, a couple more competitors finally got regulatory approval. So now they're able to compete for that and try for them, they'll come in and try to cherry-pick us and underprice us. On the other hand, we go back and we say, yes, but we're…

Thank you.

Our next question today will come from David Risinger of Morgan Stanley. Please go ahead.

Hey, David.

Hey Murray, so congrats on the very strong performance. I have a couple of questions, if I may. So first, regarding your plan to enter the CBD market in a responsible way with good manufacturing controls that makes a lot of sense but given the company's pharmaceutical clinical expertise, does Perrigo see an opportunity to conduct efficacy studies to support any CBD claims? Second, with respect to the consumer launches ahead and I may have missed this, I missed part of the call, but I'm interested in how you would characterize the top three most important consumer new product launches to watch for Perrigo over the next year or so? And then third, as we think about this demand surge in 2020, and obviously, there's the cost surge associated with it, any high-level points that you'd sort of frame for us, as we start to try to model 2021 relative to those comps? Thank you.

Well, your last question was a mouthful, but the first one on the efficacy studies, the answer is, yes. And by the way, there are a lot of clinical trials on efficacy out there. I'm anxious to see the guidance that comes in on CBD on ingested products as well to see the pathway for what they'll be looking for. But yes, we'll go at all those. I view it as a longer-term play, probably we would not wait for the efficacy claims, but to get more aggressive or for the category to get its full potential, I think that's critical. So yes, we'll invest in that within our normal budget levels. On consumer launches, I'm hesitant other than to say, you know about our Voltaren equivalent and Voltaren, too, by the way, in my opinion, a super start on the branded side, which the more successful they are, the more successful we'll be. So that's good. And that's still on track for third quarter. And so that will be here soon. Beyond that, we've been investing in R&D. We have $500 million in our new product pipeline. The only one we gave you a preview on, and I'm still not willing to say what it is, is that one of our five core strategic areas that we're looking for growth on is in the one of the -- make sure, I got my train of thought here on the -- not nicotine as a -- well, on infant formula, we pushed back a couple of new products. So you're going to have some effective new products scheduled in the second half of the year being first. So we had told you about that one. And then the second was a natural based science-based natural products. And on May 9th,…

Thank you.

And our last question today will come from David Hughes of Wells Fargo. Please go ahead.

Hey, thanks so much. Just Murray, could you expand on the gross margin performance in consumer? I think it was down 200 basis points. So there's clearly a mix impact there, but how should we think about that for the second half of the year and 2021? I think consensus has gross margins improving next year? Secondly, the -- could you quantify what the e-commerce sales were in the quarter? I think the press release said they doubled? And then finally, just how you're thinking about bolt-ons than a timing for a sale or spin of Rx? Thanks.

Ray, why don't you do the first two of those, and you can talk about bolt-ons, if you want, and I'll add a little bit to that.

Okay. So, on the first, as you pointed out, on the second quarter, we had a 200 basis point decline in the two major factors that impacted that were the addition of the Oral-Care business, which is about half of the 200 basis points because as we've said on several occasions, the Oral-Care business has a lower average margin, the gross margin line. The other half of the 200 basis points in the second quarter this year was basically the mix of products in CSCI we had, as Murray has already referred to, a loss of some of the high-margin products, specifically our weight loss products and parasite products, both of which high margin, but we saw significant drop in sales. These were sort of nonessential products, if you like, and that came about during the second quarter. In terms of the balance of the year, I think this -- with respect to Oral-Care, we anniversary the acquisition in July, so we anniversary it should say, in July. So going forward into the balance of the year, we don't have that tailwind. In respect to the CSCI business, I think there's still uncertainty. And we tried to reflect that in our conservative approach to guidance that there's still uncertainty in the balance of the year. With respect to -- so I think, did you have any further questions on the margin?

No, I'm just wondering about 2021 in consensus has that modeling an increase year-over-year?

Yes, I mean, given the -- I think there again, I think it's difficult to see that far into the future at the moment. But our -- I think our expectation would be that we would start to -- some of those headwinds that we talked about in Q1 would not be there in 2021, but I think it's very early to really make prognostication about 2021 at this point in time.

Yes, I mean, just to add on to what Ray is saying. But one of the things that made the margin look like it was down further in the company and especially CSCA, which no fundamental change or weakness in the company. It's just you bought Ranir that had a -- which is a big item that had a lower gross margin. And it became -- so it was a mix issue, but not a consumer trading down to lower gross margin items, it was 100% incremental. So -- but that's gone going forward. So you won't have that negative year-over-year comparison as opposed to things like hopefully, COVID get -- the world gets a handle on COVID and vaccines out there and a lot of the costs and spending. I'm sure some of it will go into the beginning of the year. But you get back a good portion of that. And then the other thing we did in the first half of this year, which is, again, should probably reverse itself is, we -- if you remember from the last call, we stopped making products that were higher margin items in favor of what the world needed, and the world needed phentermine and famotidine and things like that, which were -- and we stopped making a bunch of portfolio products, which we're back making again now. And so the comparisons on those ought to be pretty good. So, there are a number of positive factors, but I think you saw a sequential improvement in gross margin on CSCA, and that should improve. So, -- and you won't hopefully have the overtime costs, et cetera. So, it's -- we're focused on it. We hear everybody loud and clear, and we -- it's not an area we're not focused on. But I think some of the big drivers that were the headwinds are going at this point. As e-commerce -- Brad can give you those numbers. I don't have them off the top of my head because we look at them by business. But I want to say it was something like -- Brad help me around 8%…

Up 140% to around $80 million, or call it, 8% across total Perrigo.

All right. But it's actually a much bigger percentage of certain customers and certain businesses. We have -- in our top five customers, we have customers where it's 4% of the business. I'm not going to say them by name, but to other retailers who have really invested in it, outside of Amazon that are -- it's 20% of our business at a couple of our top five customers. So it varies. And by category, within us and segment within it -- pain is a big item. The regimented products tend to do better in e-commerce. In Europe, it's a big number. It's also probably around that same percentage, but it's a much higher percentage because we're not in every country with e-commerce yet, and we're still in the expansion phases, so lots of running room on e-commerce. And the more important thing is it literally offset, it was big enough to offset the entire decline. And for us, it's adding probably in the quarter from what you would see if you're tracking MULO, just the IRI, traditional in-store grocery, drug, consumer takeaway from brick-and-mortar stores. It's probably adding to the total Perrigo business, 320 basis points of additional growth on top of that to the total OTC. What was the third? How you're thinking about bolt-ons and RX? Bolt-ons, kind of, came to a bit of a halt in during the height of this crisis. And frankly, it's still very difficult to due diligence. We, obviously, have built a lot of cash. So we are restarting our process. We had some in the pipeline beforehand. So you may see something sooner than later, but it's not full -- the process isn't fully up in and running again. But we're in a good position. Right now, consumer multiples are holding…

Thanks very much.

Ladies and gentlemen, this will conclude our question-and-answer session. And at this time, I'd like to turn the conference back over to Murray Kessler for any closing remarks.

Yes, I mean, in reflection of the comments and the questions that I got today, I would just reiterate, Ray and I and the management team that was here that we've promoted and several other folks that we bought on are dramatically changing Perrigo. I'm proud of what we've accomplished over the past couple of years. This is an entirely different company than it was a couple of years ago when I joined, and it is now beginning to look a lot like the Perrigo that was a success in winning. But there's work to be done to make sure that's not something that happens over a six-month period of time. And then under delivers and gets back into that pattern again. We are focused on building a great company. We have returned the company to growth. We have built the talent and the management in this organization. We are building and have restored a winning culture to this organization. We have filled our innovation and new product pipeline, and there's probably triple the growth opportunities of what I anticipated coming in, whether it be through e-commerce or bolt-off or new adjacencies going forward. We have work to do on finishing off our capital investments and infrastructure and getting that new product pipeline. And we are doing that while rapidly accelerating the growth of the business, and at the same time, stabilizing operating income for the first time in years to position us to be able to deliver a continuous, sustainable business that delivers on its business objectives, consistently over the long-term, which is the kind of company we want to be and the kind of company with we hope investors want to be a part of. So, I believe, we're right on track. I'm shocked that we are right on track despite the crisis of this company and the world went through in the first half of this year. I get it. It makes the year a bit uneven and lumpy. But basically, it hasn't changed anything. And I'm proud to be leading a company that its people were able to rise through the occasion through this crisis, keep everything on track, helps society, continue to set us up for the long-term and deliver quarter-after-quarter-after-quarter after-quarter, meeting or exceeding expectations. So, thank you for your interest in Perrigo.

Ladies and gentlemen, the conference has now concluded and we thank you for attending today's presentation. You may now disconnect your lines.