Hello and welcome to the Perrigo First Quarter 2021 Financial Results Conference Call. [Operator Instructions] Please note, today’s event is being recorded. I would now like to turn the conference over to Bradley Joseph. Mr. Joseph, please go ahead.

Thank you. Good morning, everyone, and welcome to Perrigo’s first quarter fiscal 2021 earnings conference call. Hope you all had a chance to review the press releases we issued earlier this morning. A copy of the earnings release and presentation for today’s earnings discussion are available within the Investors section of the perrigo.com 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. A few housekeeping items of note before we start. First, unless otherwise stated all financial results discussed and presented are on a continuing operations basis. They do not include any contributions from the Rx business, which is accounted for as discontinued operations. In addition to other non-GAAP adjustments as described in the appendix, adjusted profit measures, including adjusted EPS and adjusted operating income, exclude from both periods, certain costs incurred to support the operations of the Rx business, which are reported in continuing operations. See the appendix for additional details and for reconciliations of all non-GAAP financial measures presented. And second, organic growth, excludes acquisitions, divestitures and currency in both comparable periods. And with that, I’m pleased to turn the call over to Murray.

Thank you, Brad, and good morning, everyone. Let’s start with a recap of the tremendous progress that has been made on the Perrigo transformation by the collective efforts of my Perrigo colleagues all over the world. To be specific, we unveiled the Perrigo transformation plan at our investor conference two years ago – two years ago, almost to the day. At that conference, we shared with you our aggressive plans to transform Perrigo from a healthcare company into a consumer self-care company in order to provide focus, increased certainty, restore growth and ultimately unlock significant value. We also introduced the vision that has guided everyone in the company every day since to make lives better by bringing quality affordable self-care products that consumers trust everywhere they are sold. Two years ago, I shared that plan would take three years to implement. Today only two years later, I’m proud to say that all of the major elements of the plan are now nearly complete about a year ahead of schedule. And while being a global leader in self-care will require continuous improvement, I believe Perrigo is at an inflection point right now. Let’s take a quick look at what has been accomplished. First, we’ve meaningfully reconfigured our portfolio with the most notable action being the divestiture of our non-core generic prescription pharmaceutical businesses in addition to the divestiture of a number of smaller transactions. Proceeds from these divestitures today, along with our strong cash flow generation have been used for consumer bolt-on acquisitions that either broadened our self-care portfolio, notably in oral care with our acquisition of Ranir or accelerated growth within our existing businesses. Once the Rx deal closes, we will have divested three companies generating $2 billion in proceeds and made seven acquisitions at a cost of just over…

Thank you, Murray, and good morning all. Before getting into some of the details of our first quarter financials, I would like to extend a thank you to all our Perrigo colleagues, many of whom are listening to this call today for their hard work and dedication as they continue to deliver great results in spite of the challenges that COVID-19 continues to bring us whether you're working in a manufacturing facility or working from home. Thanks again, everyone. In March, we signed an agreement to sell our generic pharmaceutical or RX business, and we are now accounting for it as a discontinued operation. As a consequence this quarter, we're presenting financial information for continuing operations only, i.e., the CSC America segment, the CSC International segment and corporate’s unallocated. And we're excluding our RX business. We've prepared financial information in this continuing operations/discontinued operations format in accordance with accounting standards code 205, that's because the sale of the RX business, given its key importance to Perrigo is becoming a pure play consumer company, is a strategic shift for our company and also because the size of the RX business relative to the rest of our company. This continuing operations framework also applies to the Q1 2020 figures that you see here today, including tax information and earnings per share. As we already said on our fourth quarter earnings call, all cash generated by the RX business will be retained by Perrigo until the transaction closes. With that, let's take a look at our first quarter results. On a consolidated basis, we reported GAAP earnings from continuing operations of $3 million for the first quarter of 2021, $0.02 per diluted share. On an adjusted basis, consolidated net income from continuing operations was $67 million and diluted earnings per share from continuing…

Yes. Thank you. We will now begin the question-and-answer session. [Operator Instructions] And the first question comes from Chris Schott with JPMorgan.

Great. Thank you so much for the updates and look forward to seeing how the tax discussions go. Just a couple quick ones for me, on gross margins for the Americas business, I know there was a weak cold cough I think impacted results. But just trying to get my hands around what a normalized gross margin looks like for that business and just thoughts for the rest of the year. And I guess more specifically, I think we've been seeing margins in like a 33% range or so the past three quarters, and I'm wondering if that's a decent proxy going forward? Or could your margins remain a bit depressed here in the near term? As I said, one follow-up after that.

Well, as we said last year, in the beginning of the year, you had a lot of pay in and lower margin and gross margin was a priority. I mean, the simple answer is, I think it will progress back towards the 33% as the year goes on.

Yes. We really prioritize lower margin products based on societal needs rather than our profits last year. And then you're seeing some of that in the account to last year.

So the number bounces back going forward as we think about from us in this year. Perfect.

Yes. We sold existing inventory that. The spike last year started in mid-March and we sold existing inventory in the first couple of weeks of the spike, which we've had a very solid effect on our first quarter, but then as we may product to replace the inventories that we drew down at the end of March that was when we changed our pattern of manufacturing, as I mentioned. And that's why I think we're going to see that margins were hurt by that, but they're going to bounce back this year.

Okay. And then can you talk a little bit about on the balance sheet? Just some priorities as we think about capital deployment, post the RX divestitures, I guess it just had a little bit of time since the deal was announced. Should we just be thinking about kind of this being potentially larger deals or maybe just a faster cadence of small transactions and I guess it's part of your thinking about capital deployment due the current settlement discussions, I guess impact your capacity, your scope of what you're thinking about in BD. Thanks very much.

Yes. I mean, the answer to the last part is, no. I mean we have significant cash, we're generating cash and we'll generate a lot more cash and we have a large revolver. So and I'm not thinking about deals of that kind of magnitude having said that, I think you're focusing in on a difference of how I think about it versus year ago, so good for you. We did a big one with Ranir and then we got to some smaller ones in my ideal world, I'd love another Ranir within the realm of the five focus categories. And there's – now I'm not going to just go out there and buy anything. So we're going through a disciplined approach and there are targets out there and we've evaluated a number. And first, I got to get the money. So we got to close the RX deal and that's proceeding on track. But yes, I'm thinking a bit bigger and but we'll remain very disciplined. And hopefully keep up the good track record, we've demonstrated, if anything gets in the way of that, we would then consider some of the other balance sheet activities. But our first priority is disciplined M&A probably second after that would be reducing some debt.

Okay. Perfect. Thanks so much.

Thank you. And the next question comes from Greg Gilbert with Truist Securities.

Good morning, folks. This is Greg Fraser on for Greg Gilbert. On the U.S. private label market, for which categories would you say that private label products still have the most share growth potential? And then I had a follow-up question.

I mean, in the categories that we have products and I'm assuming, right. So our market shares and depending on where we are vary, we have in oral care and in nutrition we have half the level of market share or penetration that we do in OTCs. Within OTC, there are segments that are we're underpenetrated and versus others. And you've heard me say this before and NRT, we're very highly – a very high share and many of the traditional categories and the digestive products, the allergy products were all solid, pay-in products were solid, cough/cold were solid, but there are forms that we are underdeveloped in like, gel tabs and things like that. Gel caps that represent significant opportunities. So and we think over the long-term those segments, even in OTC sale continue to grow. I think I'd have to get Brad to point you back to our presentation. I did not trying to remember which conference that I did, which I outlined sort of what the value of each share point in each of those segments was worth. But as I recall, if you went after it carefully and methodically, there was a couple of billion dollars of revenue opportunity across all of our portfolios by building and increasing penetration.

Got it. Very helpful. On Irish tax situation, I understand you're not commenting on specifics. I just want to make sure that I heard correctly that you submitted a settlement proposal to Irish revenue. And then just a quick one for Ray, when do you plan to issue prior year results for the quarters and years? So folks have correct models for continuing ops. Thank you.

Yes. We don't have plans to do that right now. But they have to be audited and by our auditors each quarter as we go forward. So, but we – I think they're going to stabilize in the second quarter. Our first quarter last year was impacted by not only by COVID, but also by sales of Albuterol. You might recall, we got permission to launch Albuterol in early – in mid-February. And we started in the end of the month, beginning of March. So we had – what this did was it gave us a lot of the income in the first quarter last year, it was RX related. So that's causing us sort of some problems as we try and lay out the tax for each quarter. But I would expect you to stabilize in the second quarter and you will be able to use that second quarter number to see forward into the rest of the year for the last year.

And the answer to the other question is, yes.

Thank you. And the next question comes from David Steinberg with Jefferies.

Okay, thanks. I had three questions. First, on cough cold, you're obviously betting on a better year in the fall. And I was just curious the IQVIA FAN forecast, that obviously could not have forecast this past year, but in previous years, how close to the mark was their forecast. And then I think you said you're expecting sort of the lower end of their range for the outlook. I guess how confident can you be in that outlook, given their outlooks in the past, since it's a rebound is so important. Secondly, are you seeing any increased presence from OTC manufacturers like Dr. Reddy's in the smoking cessation other categories where they've launched products or conversely less competition. And then finally, could you just discuss the e-commerce trends you've been seeing? I know you've had some recent momentum in that area and you up to close to 10% of aggregate sales now in e-commerce. Thanks.

Sure. Let me do one at a time. Cough cold, I think we're being conservative, but just to be clear IQVIA, and their estimates of flu have historically been very accurate and it's sort of the trusted source. The FAN data, the methodology is patient level data, which is HIPAA compliant, and it's the largest longitudinal data set available and tracks over 306 million people in the U.S. The FAN program captures a live feed from healthcare providers on patient visits on actual physician diagnosed symptoms. And the data is projected using the current census data each DMA region, total U.S. by adult and pediatric down to the symptom. So it's our best source. And in the year, I've only been in this business on this side of consumer packaged goods into the healthcare, self-care over the past few years, but it's been right on as far as I've seen predicting the strong 2019 cold cough seasons, the allergy seasons. So I think it's pretty predictive and they're not the only ones. There was article I saw come out over the weekend and from NBC predicting a very high flu season in the upcoming year, because with all of the lockdowns people's immunity levels are down. So some are forecasting, not even just a normal season, but a very strong one, but to be clear, what Perrigo did, right? Like, okay, so we know we can be – we can't be any worse than zero. There was a 99% decline. There were no flus basically around the world this year. So everything has got to be upside. I think you would agree to that. Going all the way to normal would be a big bet. So we had been more conservative that, and I don’t remember the exact number, but…

Murray, you’re right. Overall across the entire business e-comm grew about 52% compared to last year, a little bit higher in Americas and a little bit lower in I, but about 52% overall.

Good. Thanks. I’m not – I know the question was on e-comm, but I do think it’s worth noting and I elaborating a little more than you even asked in the question. But I personally believe that though, at least in the U.S., the program of vaccinating and drug stores and in supermarkets and in Walmarts and targets of all of that has probably been the single biggest factor in bringing people back in stores and recreating in-store traffic. It sort of forced people back into the stores where they looked around and said, oh, I guess, it’s okay, I can come in here and start shopping again. So there’s – I’m pretty upbeat on the business. I know the first quarter was a challenge, but when I look at the second half of cough/cold upside and people starting to live their normal lives again, as they get vaccinated and a lot of pent-up money in their checking accounts and all that I think you’re going to see a roaring second half, not for just Perrigo, but for the entire economy.

Thank you. And the next question comes from Elliot Wilbur with Raymond James.

Thanks. Good morning. Just wanted to get some clarification around the gross margin – excuse me, gross margin profile of the cough/cold line/ Outside, I guess, some of the Mucinex products, I would assume that’s a much lower margin line than the overall average for the consumer segment. Maybe that’s an incorrect assumption. But just some clarification on how that may have impacted margin performance in the quarter? And then just a couple of follow-up financial questions for Ray, specifically on operating cash flow. Could you just give us a sense of what the Rx business contributed to the result in the quarter? And I don’t know if you have the number in front of you, but if there’s any way to break out separately depreciation for that business so that we can model consumer on more of an EBITDA basis going forward, that would be a helpful. Thanks.

Well, Ray is doing that. Just to be clear, our gross margins were up versus a year ago in the first quarter and relative to Chris’ question in the beginning, I think you’ll see them continue to progress and grow from here. But cough/cold, I think you’re right in general. I think they’re a little bit lower of…

I commented in my prepared remarks, we saw some mix favoribility because our – we had lower sales of lower margin products and some of our ibuprofen, acetaminophen products have quite low margins on them, especially those large bottles and so forth. So that’s a fact, I mean, we saw – but I’d say ironic, we saw a favorability from that in the first quarter.

Yes. So it’s really a kind of a split answer. If you’re listening on the call, as gross margin, good or it’s bad, we think it’s progressing. This is the first – one of the first quarters where across the board we saw gross margins increase as a result of programs that we’ve put in place on SKU rationalization, et cetera. And then as the mix progresses through the year, we think you’ll see it grow back up in the U.S. to the levels that Chris had mentioned closer to the 33% range.

On the operating cash flow, you asked about Rx. And I think the answer to the question is around 2019 $20 million. Positive cash flow, which is obviously a lot lower than we would normally see and there was some specific reasons for that and we’re not going to really get into discontinued operations at this point.

Thank you. And the next question comes from David Risinger with Morgan Stanley.

Hi. This is Melina Santoro on for Dave. We have two questions. Can you please add more color on why the operating cash flow was weak in the first quarter? And maybe talk about what the outlook is for the full year for cash flow. And also, can you help us understand where there the $70 million of asset acquisitions in the quarter was revenue contributing? Thank you.

So the answer to the second question is no, not significantly at all. They were – Rx acquisitions, they were pre – they were basically, they had been pre-approved, but they were related to – we’re going to get the cost of them back, but they had no significant impact on our results for the month, apart from that fact. So operating cash flow, I think I went through in my prepared remarks some of the reasons why, we had an impact on the on the balance sheet. I mean, the biggest single item was that we grew our inventories, and that was a lot of that was analgesics. And that related to the poor cough/cold season and related lower sales. We expect to push that through obviously, as we go forward in the year, we would hope that – we’d hope to get those inventories down to them.

Yes. But we’re expecting a normal – pretty well normal cash year. I mean, this first quarter had a number of factors, but just to be clear on that one question you asked about Rx that was when we describe the sale as a part that was cash and other considerations that’s because we knew the timing of these R&D activities at a third-party person that we had to pay were going to occur. We didn’t know whether it before or after we close. Since it’s before we close now the purchase price will be adjusted up for the bulk of those. It’s not exactly, but it’s – I think it’s back to the numbers we talked about when we announced the sale. So it’s now going to be all cash at 15, 50 or whatever, something like that. There’ll probably be some other smaller adjustments.

Yes. And the other reason is that – our first quarter ended into April, I think, the 3rd of April. So we had some – we had to fund our employee bonus program, which was a little over $20 million. So that also hurts our cash flow in the first quarter, but we get that back, obviously the balance of the year.

Thank you. And this concludes our question-and-answer session. I would like to turn the conference back over to the company for any closing comments.

Yes. This has been an interesting journey over the past couple of years, and there’s been some ups and downs. But I do really feel like it’s all coming together at the moment. I feel like the team is in place and engaging and demonstrated how they can manage through adversity last year and is consistent, the new products are flowing outside of the company, we’re doing branded deals, more private label. We’ve got a strong track record in M&A, pulled off the difficult deal with Rx and that will put us purely in the consumer world. And while we – I’m sure there’s still a long way to go, but it’s – we’re finally getting to the point where I think we’ll make major ground this year on the overhang issues as well, which was my hope going into this year. We’ve coupled that with what should be easy comps in the second half of the year, and a strong strategy and a big war chest, I think this is the inflection point for Perrigo. And it’s time for us to start building some meaningful value and I think we’re in the position to do so. So thank you for your interest in Perrigo.

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