Good evening, and welcome to Perrigo's Third Quarter 2020 Financial Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to hand the conference over to Mr. Bradley Joseph, Vice President, Investor Relations and Corporate Communications. Please go ahead.

Thank you, and welcome everyone to Perrigo's third quarter 2020 earnings conference call. We hope everyone is healthy and safe. I hope that you've had a chance to review the earnings and judicial review press releases we issued earlier today. A copy of the releases and the presentation for today's earnings discussion are available within the Investor section 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 earnings press release. A few items to highlight before we get started. When discussing the business, Murray will reference only non-GAAP adjusted numbers for the quarter unless otherwise noted. All comparisons of operating results against prior year periods includes the previously disclosed third quarter 2019 net sales adjustments for the market withdrawal ranitidine, as well as operating results attributable to the 2019 held-for-sale animal health business previously included in the Consumer Self-Care Americas segment. Comparisons to prior periods also exclude: one, divested businesses, which includes contributions from the divested animal health business and the divested Rosemont business and Canoderm product, both previously included in the Consumer Self-Care International segment; and two, currency. Also, of note, organic growth excludes acquisitions, divestitures and currency in both comparable periods. Lastly, in the appendix for today's call, we have provided reconciliations for all non-GAAP financial measures presented. And with that, I will now turn the call over to Murray.

Thank you, Brad, and good afternoon everyone. I want to begin today's call as I have all year by once again thanking each of our Perrigo colleagues for their continued efforts in delivering products needed by consumers and patients during the COVID-19 pandemic, for driving our Consumer Self-Care transformation, and for once again delivering on our financial commitments, despite a major product discontinuation. Before we dive into earnings, I want to take a moment to discuss today's outcome from the judicial review process in Ireland. The Irish High Court ruled that the issuance of the Notice of Amended Assessment by Irish revenue did not violate the company's legitimate expectations. We are obviously disappointed with the judge's decision that Irish revenue had the legal right to issue the assessment after revenue retrospectively and without warning re-characterized Perrigo's trade of intellectual property to exclude disposals going back to 1997. While the judge did not rule in our favor, I want to remind everyone that today's decision was based on a process argument and the judge was not considering the merits of our case under Irish tax law. We remain confident that Irish revenue is wrong on the merits of the case, and while we now need to assess whether to pursue an appeal of the judicial review decision or to proceed directly to the tax appeals commission, target the merits, we strongly believe Perrigo will ultimately prevail. I also remind you there was only upside to Perrigo today on the process argument and that this decision has no bearing on the actual tax assessment review. Likewise, no payment is due now, and would only be due if Perrigo were to eventually be unsuccessful through any appeal of the judicial review decision and the merits of the case with the tax appeals commission,…

Thank you, Murray, and good afternoon everyone. Now that Murray has gone through the sales and business drivers for the quarter and year-to-date, I would like to walk you through the rest of the P&L starting with Slide 19. On a consolidated basis, the company reported a GAAP net loss of $155 million in the quarter, a loss of the $1.13 per diluted share. On an adjusted basis, consolidated net income for the quarter was $128 million, and adjusted diluted EPS was $0.93 a share. Adjusted net income for the quarter included $283 million of non-GAAP adjustments, the largest of which was the $202 million impairment of goodwill in our prescription Rx business. This was primarily as a consequence of our voluntary recall of albuterol and the fact that the timing of this product returning to market is unclear at this time. In addition, as always, our non-GAAP adjustments included the removal of amortization which this quarter amounted to $75 million and we also removed $20 million from the early debt extinguishment of our 2021 bonds. These bonds were repaid as a result of having issued $750 million of new 10 year bonds at the end of Q2. Additionally, we removed a $22 million increase in the valuation of Tysabri contingent milestone, which we recorded as a result of the strong performance by Biogen Tysabri business in the third quarter. Full details of these and other smaller adjustments can be found in the non-GAAP reconciliation table attached to this afternoon's press release. Moving on to taxes. In our Q3 GAAP results, we reported tax expense for the quarter despite having a pre-tax book loss. This was primarily because the Rx goodwill impairment taken this quarter is non-deductible for tax purposes. We also recorded a non-cash base erosion and anti-abuse or…

Thank you, Ray. Operator, we'll go ahead and open it up to questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Your first question comes from Gregg Gilbert from Truist. Please go ahead.

Thank you. Hey, how are you? I'm going to first get the one out of the way that you probably don't want to discuss but it's inevitable to come up. So about the Irish issue, is there any precedent for Ireland settling with companies? And then, what scenario would you not appeal the first step that didn't go your way, I'm just trying to understand why you wouldn't want to drag it out as long as possible unless a settlement is at least theoretically possible. And then question number two is about your share buyback decision. It seems on the surface to be a bit more symbolic than a major decision on capital allocation vis-a-vis sort of additional bolt-on activity. So hoping you can comment on that as well as your view beyond the 150 and the relative attractiveness of shares versus more bolt-on activity? And I have more, but I'll respect the queue and get back in line. Thanks.

Great. The first question is, they will appeal -- they will decide to appeal the law, it just came in today, Gregg, though. The lawyers are reviewing all the information and if they see laws that are -- that we believe we could overturn it with, then we would appeal it, otherwise, we believe our cases even stronger on the merits of the case from the very beginning. And we thought the judge -- we had a very strong process argument and -- but our goal isn't to try to stall it. Our goal is to resolve it, win it, and do what's in the best interest of shareholders. If that will ultimately was a settlement that we thought was in the best interest, then we would consider that. And yes, there is precedent for doing that. As it relates to the share buyback, it was surgical in nature. I wouldn't say it was done to be symbolic, because we got [ph] our management shares over the past couple of years and we were experiencing some dilution and shareholder shouldn't pay for that. So we went ahead and are sort of leveling that back and resetting that, but I will tell you, when we were talking about this value which we believe is that the shares are very inexpensive, I mean, it was a good time to do it.

Thanks.

I don't know if I answered the last part, but I'll just add to it. My number one priority and capital allocation is both getting the infrastructure, right, which the investments we've made and capital to make this a world class [ph] company and bolt-ons that help become accretive to growth. I'm delighted with what we have been able to do with Oral Care, but the Ranir, Dr. Fresh, Steripod creating up and opening a whole platform of growth for us. So that's still the priority things that will generate long-term returns for the investors.

Thank you.

Thank you. Your next question comes from Chris Schott from JP Morgan. Please go ahead.

Great. Thank you so much for the questions. Just two from me. I guess, first, just taking a step back and thinking about the top line impact from COVID across your business this year. Can you help us think a little bit about what the net impact we should be thinking of there when we look at maybe some of the earlier your benefits you saw in the Americas business versus the headwinds in the international and Rx franchise? And some of those benefits you think you're going to be sustainable, but I just want to get color on just pushes and pulls as we think about how to look forward to 2021 as a reasonable baseline? My second question on…

Yes, I think the -- Chris, if you look at the businesses in totality, coming out of -- going into the fourth quarter on any kind of movement or surge related demand or pantry loading, I think, that's kind of all washed out. No, it hasn't watched out by division, but I think that sort of the pluses you got from CSCA early on in the year or have been offset by CSCI and the Rx base business especially early on when doctors' offices were closed. And there were some albuterol early orders that were during the height of COVID but those have begun to kind of offset or have been entirely offset by the recall. So I don't think there are any like lasting effects of one-time. I mean, we set up this year with plus 3% organic growth target, and I think it's going to come in a little bit better than that. We're at around 4% on the consumer businesses, a little north of 4% now. So maybe we beat our 3% number by a bit, but not a lot. Where I do think there was a meaningful change is the behavior on shifted -- in channel shifting from e-commerce to -- excuse me, from brick and mortar to e-commerce was a very big one. And based on the McKinsey study, I think what's helping our businesses around the world in store brand is a meaningful and accelerated shift of branded to store brand. And those are fundamental and should be sticky going forward. But listen, whether we're lucky or not lucky, we made big investments a few years ago before I haven't got here in e-commerce, and our market shares are much higher and I hope you -- I did a good job of illustrating that in that slide of the difference in omnichannel versus just pure IRI MULO which is your traditional brick and mortar. And you can see how the trends change, not only from negative to positive, but a big shift to Perrigo. I don't see that going away.

Perfect. Very helpful. And maybe just on -- just the topic of investments. I know you've made a lot of investments since you've joined the company, kind of getting it ready for the growth targets you're looking at. Are there any more major investments mean to think that Perrigo has to make at this point or do you think you've got the kind of infrastructure where it needs to be and now it's just kind of execution as you mentioned kind of living in the bolt-ons, et cetera. I'm trying to sense of like, is there another like big push on expenses we need to think about it anytime in the near future? Thanks so much.

The answer to that, if you have sat in all the budgeting sessions that we're going through right now. I've drawn -- I basically have said to the organization. I gave you three years, gave you the investments that added $50 million or $60 million in total to our P&L and that's the cap. Now I'm not saying we won't continue to invest, but those should generate either into brands that generate sales and move out of that area. But that pool there is not going to be a negative P&L hit going forward as a result of further investment on top of that. That's kind of our renovation budget that we will stick with, and at some point, hopefully that goes down. Now I'm not saying and I don't see any big one next year, but I'm not saying a couple of years from now when we launch a Nasonex or something like that that comes with revenue and profit, you could invest in advertising and promotion, because it's a branded launch, but I don't think that's what you are asking. I think you're thinking of it the same way that I am that these investments that you were adding without being tied to choose revenues or operating profit. And so, no, those need to -- as part of my chart there, and I'm not sure we left it on that algorithm chart I showed as a slide, but part of getting margin expansion is holding the line on operating expenses.

Great. Thank you so much.

Thank you. Your next question comes from Ami Fadia from SVB Leerink. Please go ahead.

Great. Thanks for the question. Murray, can you talk about your confidence level in driving 3% top line and 5% op in growth next year. And especially on the top line would be albuterol headwinds, how should we think about some of the contributors to growth on a year-over-year basis? And then just separately, with regards to e-commerce, how much of growth is it contributing this year and how should we think about e-commerce related growth for your entire business as we think about next year? Thanks.

Yes, I'm not ready nor do I want to start providing goals for next year or guidelines. We're in the budgeting season. I'm very confident, you know the whole premise a year ago was to get 357 on the consumer businesses and then exit Rx. We still have Rx. I wasn't able to get value, because at the time based on the multiples in the industry and it throws off cash. So I'm very focused on still delivering the 357, and I'm optimistic on growth of the base business. I have an anomaly, I have to deal with albuterol and I'm not in a position yet to say whether, you know how much we deal with that, it depends on what bolt-ons, et cetera. But on the core premise for the long-term, it's still intact, and I'm quite confident on the consumer businesses. But I can't even tell you with albuterol is back yet in the first quarter or midway through or not at all. They are closing in on the issues and there are shorter term solutions and longer-term solutions, and as all that budget comes back, you guys will be the first to know when I come and present and share the plans for next year.

Thanks. Can you also elaborate on the e-commerce trends that we're seeing here. It looks like Perrigo is taking share from other store brands, because the overall store brand omnichannel declined about 2.8%. How much of this is sustainable and could this be a driver for growth for your overall consumer business?

Yes, I mean, I've seen enough of the plans for next year that it is a significant driver, and I can't give you the specific numbers, I'm not. That's more of an Investor Day type of discussion. But we probably pushed up our plans for a year. We don't see that pulling back. There has been a lot of discussion internally and externally of the surges all and shift will that return to normal levels, and I think given the investments you're seeing with our top customers, and I've been in top to top, they are -- whether it's the Walmarts of the world or Targets, they are making big bets on e-commerce and believe that shopping behavior will continue. And not only is our investment, and it's significant in the amount of people that it takes to run a digital e-commerce group. We don't just ship product. You've heard me say this before. We're doing the analytics, the marketing of it, the comments, promotions -- it's a very big effort, and Perrigo has a unique capability and competitive advantage of that. And we're continuing to do the things to keep us ahead. But besides all that, we have a product line that also lends itself well to it, because it is -- the regimented categories that really seem to be the ones benefiting. So it's less if somebody is -- if they're -- they get sick at the moment. They want to run to the store and get something right now, but when you're buying allergy medicines consistently over time, nicotine replacement consistently over time, it's those kind of regimented digestive health products over time and those are where we have our highest shares. So that's sort of the double benefit for us. But yes, I think, we are counting on e-commerce with the way we're doing it today. Further growth all the way to one day looking at even more advanced opportunities. And there is a -- I always describe e-commerce separately than digital because they're not the same thing. E-commerce is just what you're -- what most people think of today, but digital goes all the way to digital to consumer and a much broader use of technology. So that is -- it will be a driver for sure, but again I'm not going to break out components of 2021 yet, I want to finish 2020 strong first.

Got it. Thank you.

Thank you. Your next question comes from Randall Stanicky from RBC Capital Markets. Please go ahead.

Great. Hey, how you doing? Has Perrigo been involved in any preliminary settlement discussions thus far regarding the Irish tax liabilities? That's the first question. Second question, Voltaren Gel has been a nice new launch opportunity for you in CSCA. As you look at the next call it, three, four years, are there other specific product opportunities or categories that you're watching that could help boost the organic growth in CSCA? Thanks.

Well, on the organic growth has been ahead of schedule and stronger than I thought. So what boosts organic growth? I think, that I'm trying to remember the organic number from last year to the year before, but it was CSCA was up something like, I want to say something like 7%, it was up a relatively big number, but we -- the premise on getting into Oral Care was to buy brands that were accretive to revenue growth and that's just what they were and that we could build on to with Dr. Fresh. We think with the investments we've made there that will be accretive. The entire wave of OTC to Rx, OTC switches, which like Voltaren was not contemplated back a year ago. And notwithstanding out year and a half ago in May, I think, I had a zero in there for Rx OTC switches. Now there is a whole host of them. The Advil, dual combination products, and at least in process a few years out with Cialis and Tamiflu and others, there is a -- that's a big number that can accelerate organic growth. In nutrition, we needed to get quality and service, that's fixed, where we've made big investments and that will take a couple of years to implement, but just getting some capacity expanded with a reliable product that we can service all the time we begin to promote again, as well as new product launches we have next year is another area for growth. Another area for growth is something I've talked about before. And Rick Serotta [ph] who I'm going to get on one of these future call soon, because he is passionate about this and I think you'd enjoy hearing from him is -- has had a lot of success…

All right. Thanks, Murray.

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

Yes, thanks very much. Hi, Murray. So some of my questions have been answered. I just have two please. First, you had briefly touched on the US tax litigation. Could you just provide some more detail on that please? And then second, you also touched on the opportunity to restart growth in Rx. Obviously, the second quarter of this year was impacted by the pandemic, you have an easy comp next year, but any more color on how we should think about Rx prospects? Thanks so much.

Yes, on the Rx prospects, what I'm referring to is something we talked a lot about it, but the new product pipeline had kind of dwindled as so much energy in Rx was focused on albuterol. So I mean and -- so that was kind of the big push for a number of years. When the history of Rx had been that it was many singles and doubles. And what I'm excited about when I see my Rx team present their plans that the number of approvals that they've been getting and the number in the pipeline and expected approvals, which is at a step change from where it's been over the past few years. And I think you'll see it start to play out next year and really even more in the year after that. And next year I do think, you're correct, absent what happens with albuterol, I think, you have some easy comps in the earlier part of the year and they've got some other areas of opportunity that are working on it as well there. We're not pulling back on Rx. I mean, it's an important business that generates a lot of cash and we have not pulled back investment and we have given them the resources to grow the business and it's unfortunate what happened with albuterol, because it colored some really great success they were having. This was going to be a hero year for them, but they will bounce back. First part of your question again. The -- yes, the US tax. The Athena tax of $800 million and however much million dollars it is, we've talked about before that that is basically taxing, it's a different kind of tax but it's addressing the same income that Ireland is and there is an agreement between Ireland and the US that you wouldn't do that -- that you wouldn't double tax. And if there is a dispute between the two, there is this authority that you go to, and Ray mentioned the specific name of it. What's the name of it Ray --

MIP. It is called MIP. Just blanking on [indiscernible] but it is a special commission that judicates disputes of this nature and they've agreed to take the -- they have agreed to take it and review which country would be the one to tax fee income.

Right. So the important -- I think the important part of it is, we submitted it. We believe there was a conflict, but they have to review the criteria and this commission that stands between the US and Ireland that would then negotiate it and debate it out. They accepted it in August. So that's the news there. And from our perspective, it could make it go away or it could make it the overall combined one, might be a deduction against the other, but it should bring the total down significantly. So it's hard for me to quantify, but my belief and I think our lawyers belief is that just took out a chunk of the overhang. I just can't tell you from where, from which authority, but that's a battle between the US and Ireland now.

Understood. Thank you very much.

Thank you. Your next question comes from Elliot Wilbur from Raymond James. Please go ahead.

Yes, thanks, good afternoon. I wanted to go back to some of your commentary around the growth differential in omnichannel versus brick and mortar and just wondering if you could help us with some specifics on the e-commerce and club market relative to the size of the brick and mortar channel? Just trying to get a sense of how big that market is, how important it is currently for Perrigo and whether or not there are categories there that are still significantly underrepresented relative to Perrigo's existing base that might provide for significant immediate growth opportunities outside of just sort of increased usage by consumers of e-commerce means of purchase? And then a question for Ray. I won't profess to have the strongest working capital projection skills on the street, but still struggle with sort of trying to predict your relative cash flow from operations versus adjusted net income and cash conversion metrics. Just wondering if you could provide some help there with respect to fourth quarter? And then how do we think about that longer-term, most CFO always be somewhat higher than adjusted net income or roughly equivalent, just trying to get a little bit better handle on that metric? Thanks.

Moving [ph] to the second one and I'll come back to e-commerce.

Yes, I mean, on the cash conversion, we did have a lower cash conversion rates in the third quarter, and we said that was really due to the timing of the sales spread in the second quarter and the impact of the COVID-19 surge and what that did to our receivables. So I think we do generally achieve a little over 100% cash conversion, and I think that's where we'd like to target. And I think that's where we think we're going on a go-forward basis. But we're not sort of -- we're not doing precise kind of guidance for cash conversion quarter by quarter.

Yes, and I think going back to on a Worldwide Consumer basis, I think, e-commerce is about 8% of our total sales and growing. I think it was -- I said in my comments, 142% in the US and the Americas business, and was up in the high 40s in European business and CSC international. I think the growth opportunities are different. Internationally, when I talk about e-commerce and it's already a meaningful part of our CSCI brand, we think of e-commerce as a very -- I don't know how familiar you are with our portfolio, but we tend to be a string of pearls, a lot of regional brands and to go and try to make those big mega pan-European brands is unlikely, but it gives us an opportunity to address the entire European market as we broaden our e-commerce business and through like the Amazons -- or the Amazon of Europe is a significant opportunity and potential growth accelerator for that business. And even though it's a pretty meaningful number now, it's actually only in -- it's limited in the number of countries. So we're probably still only in a handful of countries with meaningful e-commerce business in CSCI. So that is -- when we look at the strategic plans for CSCI, that's a big growth driver. When you go to the US, we've had tremendous success. And I guess, there's two ways to look at it. You're looking at what other product categories and there are plenty of them. I look at it in the penetration of e-commerce versus branded or store brand versus branded in e-commerce versus what it is in traditional brick and mortar, and it's well below. So I think there is a very significant penetration opportunity. And if you can bear with me…

We lost the line.

Thank you. Your last question comes from David Steinberg from Jefferies. Please go ahead.

I thought we lost the line there for a second. Okay. Hi, David.

Hey, thanks. Thanks. I have two questions. The first one is on acquisitions. Murray, on your last quarterly call, you sort of implied that Perrigo's taking a near pause from bolt-ons. You just completed Dr. Fresh and Steripod and call that the fact that the people in the company had been able to travel to complete due diligence and consumer multiples were high. Has that changed? Are you still in sort of pause mode because you can't travel to complete due diligence and multiples are higher or are you starting to go back on offense? And my second question perhaps is for Ray coming back to the Rx business. Gross margins have declined. I think they are 42% in Q1, 39% last quarter, 37% this quarter, and you called out the fact that the decline -- the 39% to 37% decline was solely due to the recall of ProAir. So I was wondering, is the baseline gross margin really 39% or should we expect continued softness until ProAir resolves itself? Thanks.

Well, the answer to the first question is back on offense. I mean, you said it well, but it wasn't just us that had couldn't travel and do due diligence. But given the state of affairs, there just weren't deals kind of froze up and we were fortunate that we had completed due diligence on a number of deals. We've closed on another one since then, with some assets we bought from Sanofi, right, the skincare products. And now we are evaluating many. I would say, it's loosened up dramatically. There is a number of opportunities. I can't predict when we find one, that's the right value in the right price, but we are clearly digging in again.

Yes, on the Rx gross margin, yhe decline in the third quarter, do I think I said is pretty much all attributable to the albuterol recall. It is kind of a complicating, because we shared a profitability with [indiscernible]. So it didn't have real adverse impact on our COGS. It came into our COGS cost and hit our margin. I'm not ready to guide to the specifics for Q4, but I think we will expect that will -- that particular matter will have any impact on Q4. In other words, the key albuterol recall costs that will be contained into the third quarter.

Great. Thanks.

Thank you. This concludes our question-and-answer session. I would now like to turn the conference back over to Murray for closing remarks.

Yes, as I sit here, I'll just leave you on. I've been doing this for a long team -- a long time. I am proud of the team, and what they've accomplished in 18 months has been remarkable. Perrigo is a very different company with a very different growth profile. We've had a couple of bumps. We'll work our way through those, but yes, we think the stock is a great value. We appreciate those of you who are working with us and sticking with us through it, and we think ultimately that our consistency in delivering on our promises, which we hope we are building credibility because it will ultimately generate the appropriate rewards. And with that, I thank you for your interest in Perrigo.

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