Perrigo Company PLC (PRGO) 2002 Q3 法說會逐字稿

...Third quarter review conference call. At this time, all participants are in a listen-only mode and later we will conduct a question and answer session. Instructions will be given at that time. But if you should require assistance during the call, please depress zero and then star. As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Mr. David Gibbons, Perrigo's CEO. Please go ahead, sir.

Thanks and good morning everybody.

I'm very pleased to report good operating results for our third quarter and for the nine-month period ending March 30th. I think our team did a good job achieving terrific customer service performance, while at the same time, managing down inventories very effectively which generated some pretty good cash flow during the quarter. Sales were up 198 -- I'm sorry. Sales were $198.5 million, an increase of four percent compared to the $190.9 million a year ago.

Our vitamin sales were up significantly. Antacids and feminine hygiene categories were also up. With the strong first half selling that we had on cough and cold and analgesic categories, they were a little bit weak for us, but we saw that retailers moved their inventories through and are now pretty much where they should be. So, all in all we're very -- feel very good about where we are there.

New products were again a positive with famotidine and Ibuprofen Cold and Sinus leading the way. The organization, I think, really did a good job managing inventories especially in the way we brought down our finished goods inventories during the quarter and also in controlling operating expenses. They executed very well through what proved to be a somewhat different and difficult seasonal cycle.

Our customer service for the quarter set a record, was the highest that most of us can remember, at least, with a 95 percent fill rate during the quarter. So, our folks everybody involved in that did a great job. Our demand, planning and operations people down the line did a good job both in getting the customer service to where it was while at the same time getting inventories down.

Inventories of retail are now in line with where they should be and with our finished goods inventories down actually even below last, where they were this time last year, we're very comfortable with where we sit on inventories. We had a good quarter, good nine months with income from operations up nearly 20 percent compared to last year and I'll turn it over now to Doug to provide you with the sales on the quarter.

Thanks Dave. Before I review the detailed financial results, I would remind you, these conferences include our views of where the business is going. We'll make forward-looking statements we believe to be reasonable, but can give no assurance that those statements will prove to be correct.

We have prepared a detailed discussion of the many factors we believe may have a material effect on our business on an ongoing basis and have included this discussion on pages 24 to 29 in our form 10-K for the year ended June 30th, 2001. With the boilerplate behind, good morning again.

My comments will focus on the third quarter and the nine-month results and for the sake of comparability, I will use last year's results before the $24 million pretax charge for the PPA product withdrawal. You'll remember that that was about 21 cents a share charge. Starting with the third quarter, as Dave mentioned, sales for the quarter were a 198 million, an increase of seven million, up four percent from a year ago's 191 million.

Gains this quarter came from the addition of Wrafton, the strong vitamin sales which were also -- which were offset by declines in the cough/colds and analgesics due to the variations in the cough/cold season year over year. Looking at sales growth by product category for the quarter, our OTC business which includes and Wrafton was up one percent and our nutritional business was up 17 percent for a total net sales increase of four percent for the quarter.

Looking at the trends in our key categories at retail for the period ending March 24th, 2002 and this is the IRI point-of-sale data for the quarter, realizing that our numbers are -- represent our volumes internally, not retail numbers. The cough/cold market was down five percent in the quarter. Store brand was down one percent, Perrigo was down 8 percent, but if you'll remember, last quarter Perrigo was up 16 percent versus the cough/cold market that was down three percent and a store brand market that was down one percent.

We experienced the strong selling in the second quarter as our customers anticipated an early cough/cold season. This caught up with us in the third quarter. However, the late season helped both our customers and Perrigo sell through inventories which were higher than normal at the start of the quarter.

The analgesics market was down two percent, store brand was down four percent and Perrigo was down two percent. Analgesics was down a bit after four up-quarters for Perrigo. The gastrointestinal market which includes antacids and laxatives was up two percent, store brand was up eight percent, and Perrigo was up three percent.

Antacids were up, laxatives were up a bit. The vitamin market continues as a market down, it was down three percent in the quarter. Store brand was down one percent and Perrigo was up 17 percent. We continue to do well in the weak market and we also had increased volume to K-mart compared to a year ago, as they filled their pipeline after their bankruptcy filing.

Moving to gross margin, gross margin of 55 million was an increase of almost $9 million compared to last year and was 27.8 percent of sales compared to 24.3 percent last year.

This increase was due to lower expenses for inventory obsolescence as inventory sold through, and our ability to manage pricing to offset the impact of our higher quality costs. Looking at operating expenses for the quarter excluding the unusual litigation income of $7.8 million this year, and $5 or half a million last year, total operating expenses were down one percent and down 80 basis points on a percent of sales basis which brought that to 17.5 percent this year -- last year -- last year percent of sales for SG&A was 17.5. This year it was 16.7 percent.

Net income, excluding the litigation settlement of $5 million after tax was 14.3 million in the quarter compared to 10.1 million last year. Earnings per share less the settlement was 19 cents versus 14 cents last year. Now, moving to the nine months ended March 30, 2002, sales were 644 million and increased 10 percent from 587 million last year.

The addition of Wrafton plus strong growth in the antacids, cough/cold vitamins and analgesics contributed to this gain. Gross profit increased 21 million or 14 percent and as a percent o f sales, this was 26 percent versus 25 percent last year. A few comments on operating expense. Research and development was $13 million compared to about 12.5 million a year ago. Selling and administrative expenses increased about $3 million or about 5 percent in the first nine months. The majority of the increase relates to the $2 million K-mart bad-debt charge taken in the second quarter.

As a percent of sales, SG&A was 11.1 percent versus 11.7 percent last year. Operating income excluding the litigation settlement was 68 million or 10.6 percent of sales compared with 55 million or 9.4 percent of sales last year. Effective -- the effective tax rate was 36.1 percent and reflects our estimate of the rate for the fiscal year. Net income for the nine months excluding the litigation settlement was $43.9 million compared to $36.8 million last year. Earnings per share was 58 cents compared to 50 cents last year. Including the litigation settlement this year and the PPA charged last year, reported earnings per share was 65 cents this year compared to reported earnings per share of 29 cents last year.

Let's move on to the balance sheet. Working capital excluding cash at quarter end was $134 million versus 166 million last quarter, a decrease of $32 million. Working capital excluding cash is higher than last year end by $4 million. Accounts receivable was $99 million versus $87 million a year ago and although it's up, DSO was 44 days this year versus 43 last year. So it was up due to higher sales at the end of the quarter. Inventories were $145 million, down approximately 16 million from last quarter.

Inventory came down in all categories, raw material, work in process and finished goods. This reduction helped earnings as we're able to reduce our obsolescence reserves accordingly. Operating cash flow was $55 million in the quarter, bringing year-to-date cash flow from operations to $53 million. The strong cash flow in the quarter reflects the seasonal nature of our business and the success of our inventory strategy. We intentionally built inventories preceding the cough-cold-flu season to ensure we improve customer service.

As Dave told you, we achieved a record 95 percent customer service in the quarter. Our ability to bring inventories back down while increasing customer service helped generate the strong cash flow. Year-to-date capital expenditures were $17 million and we anticipate spending 22 to 25 million for the year. During the quarter we've purchased 924,000 thousand shares for about $10.5 million under our common stock re-purchase and through three-quarters, we've repurchased 2.5 million shares for almost $32 million.

In summary, we're pleased with the first nine months of 2002. We remain on a strong financial footing. We have a lot of financial flexibility. We have cash on hand and cash is good. Now, let me turn it back to Dave.

And I agree with you. Cash is good. It's nice to have it. Let's look for a few minutes at new products. We had some products that shipped for the first time in third quarter. Tioconazole, Vagistat-1 is the comparable national brand.

Different -- couple of different ibuprofen suspension flavors and a no-drip nasal spray, comparable to Afrin. We have our first ship of Excedrin Migraine equivalent in April, and in June we expect Monoxidil, Rogaine equivalent, and fiber laxative powder or Citrucel equivalent to start to ship.

Claritin is a product that certainly has a lot of discussion going on about it now. We are following all of those developments obviously very closely. Still I think got a lot of twists and turns to go. We are first to file and we realistically are expecting the Claritin announcement to have little or no impact for fiscal 2003.

Looking forward, we are very pleased with our results this year. Revenue growth is good, new products are coming along. The addition of Wrafton for this year, cost controls are very, very good, and excellent cash flow. We will continue the emphasis we've had on cash flow and working capital management. For the fourth quarter as you know, sales and margins are usually lower sequentially due to seasonality. We don't see anything different happening this year.

And remember that we launched the famotidine on June 1st of last year in the fourth quarter, had very, very good selling during that time period. We will not have anything like that in the fourth quarter of this year. We are looking at earnings of this quarter of 4 to 6 cents per share.

Further out, looking through 2003, we see progress on a lot of our major initiatives, we feel very good about what we see that we're getting done, but we also see some new challenges. Part of that would be increased cost of doing business. We have productivity programs moving forward, but I have the question, are they enough to offset the rising cost that we see in areas like Healthcare, in liability insurance and in continuing increases in regulatory expenses where we are seeing 2003 being a peak year in our quality expenses.

We also obviously operate in a highly competitive environment. It's competitive for our retail customers. It is also very competitive for us then that naturally follows. What are we doing? We are continuing to invest the now in new product screen where we're committed to be first to market wherever possible with national brand equivalences and we look at the eight ANDA approvals we've had over the past 12 months and feel good about that. We'll continue to put that emphasis there, but as we look also to 2003, I would say we don't see any major block busters for 2003 for us.

We continue also to invest for quality in customer service as I mentioned. When we look at cost of quality, we will be putting 2003 versus about three years ago, we'll be spending approximately $17 or $18 million more in both direct and indirect cost of quality. We think it's very worthwhile and we're very happy with the progress we continue to make there.

Customer service, we're very happy to see the peak that we're at. We're doing very well and we'll continue to emphasize getting -- keeping those customer service numbers at a high level. We're also putting a very strong focus on supply chain management. I think we've done a great job in the quality area, that has in certain places held us a little bit on productivity as we implement the quality initiatives, and in 2003, we will be putting a very strong emphasis on building net productivity back in.

We've got great retailer relationships as you know built on our quality and customer service. We see an opportunity now as we go forward to lower costs through effective supply chain management and just three major strategies we're going to execute against the -- in this area in 2003 would be business simplification. We're looking at SKU reduction, packaging rationalization, formula simplification et cetera, overall simplifying what we do.

Secondly, in the area of demand, planning and production planning, we think we see opportunities that can help us manage through our seasonal cycles and as close as we are to our retail customers, we're -- we're moving to do more collaborative forecasting and expand the use of vendor managed inventories.

And the third and final one to mention is a very strong focus on global manufacturing and global procurement. The 2003 will see us try and increase the opportunities to save money by procuring, where possible, on a global basis. We think we have some very good opportunities there. Obviously, quality comes first and we need to make sure that the quality is in place before we expand too fast on that kind of sourcing.

Overall, we feel very, very confident about the things that we're doing and the position we have in the market place. We feel that we're ready to respond to the trends in the market place and to meet the challenges in front of us and I think we're ready to take questions right now.. So, any questions, we'll be happy to answer.

Thank you, sir. Ladies and gentleman, if you wish to ask a question, please depress one on your touch-tone phone. You will hear a tone indicating that you've been placed into queue and you may remove yourself from the queue at any time by depressing the pound key. If you're using a speaker phone, please pick up your hand set before pressing the numbers and one moment please for the first question. Our first question comes from the line of Patrick Forkin with Wunderlich Research. Go ahead, please.

Good morning and congratulations on a well-managed quarter. Doug, the gross margin for the quarter at 27 almost point 8 percent, it looks like it made a pretty substantial impact on the bottom line. What's -- what's your outlook for margins next couple of quarters.

Patrick, if you look at the quarter, it's a little better -- a little different than the outlook. We had a really hard time or we managed our inventory throughout the whole quarter. Our whole goal was to manage inventory down with the lower cough-cold season than we had anticipated.

So we spend an awful lot of time managing inventory down and when you look at the margin increases that were -- that happened in the quarter, about two-thirds of that increase came from the ability to take some obsolescence reserve off the books as we managed the inventory down and that's a normal process in our business and when inventory gets high, the reserves go on.

When it -- when it drops down and the aging becomes more current, the obviously -- the obsolescence comes down. So, that was the main reason for the increase. We also were able to manage our margins through pricing to offset all of the quality initiatives that added costs to the bottom line. So we felt, we were very, very pleased with the results of the quarter and managed it practically monthly.

As we go forward our goals for the year was to have margins grow between a half and a point or between 50 and a 100 basis points year over year. As we look out, we think that that is very, very likely for this year. However, as we look further out, we're looking at a number of costs that our -- we're managing through our planning process right now. I don't know how many companies you talk to about liability insurance as an example, but we are looking at 300 to 400 percent increases in our liability insurance as we go forward.

Dave mentioned that quality will peak out next year so that we are truly going to have more costs from that area and we've got a competitive market place as store brand is, and our intent throughout that period will be to continue to protect our market share while we put the global sourcing in place which is really becoming much more important to our business than it was last year, and will take a while because of the approval process on our ANDAs. A long question, hopefully that answered it.

Yeah, it does. A question for Dave. Dave could you comment on how things are going in Europe, you know, how they did during the quarter and what your outlook is going forward?

Yeah. Actually our Wrafton acquisition is exactly where we had expected it to be when we made the acquisition. We're in a very good shape there. We still have a lot of work to do to take full advantage of the opportunity to build a store brand business in the UK and we are moving in the right direction.

We did not expect dramatic immediate results in that area because you got to go through the process of getting licenses and approvals and everything. But we are -- we are educating Wrafton on the Perrigo way of building store brands. We have just assigned Jeff Needham who was our vice president of marketing here in the US and a member of our top management team as managing director of Wrafton. He is moving over there in June and he is going to lead the way I think in building a strong store brand business there.

So, we're right where we expected it to be. We're doing the things that we feel we need to do to grow that business in the future and eventually be prepared to use that as a launching pad for expansion into Europe when that market is ready for store brand OTC.

OK. Thank you.

You're welcome.

And our next question comes from the line of Chuck Cerankosky of McDonald Investments. Sir, your line is open.

Good morning everyone.

Morning Chuck.

Couple of questions just to clear up a couple of things I missed when you were giving us some data. What was the last category you talked about where you had 17 percent growth, was that vitamins?

Yes sir.

Well, how fast did the market grow?

I think it declined.

It's market actually -- the overall market was down three percent ...

Down three.

And the store brand market within that was down one.

All right. I couldn't -- couldn't keep up with you on that one.

Sorry Chuck.

No problem at all. Can you tell us where the cash was and I get probably next to note that at the end of the quarter, but can you give us the cash and the debt numbers?

Cash was 36 million and debt was zero.

OK.

And if you're -- that's -- I think the cash balance at the beginning of the quarter was virtually zero, so almost all of that cash was generated in the quarter.

And you bought back 924,000 shares of stock?

Yes.

Yeah, OK. And what new product did you introduce in April? Or will be introducing sometime this month. I think you said one when you went through that, and again, I missed that information.

Yeah. We introduced, Tioconazole was a product that we just recently introduced and shipped. We had a couple of new flavors -- this is Dave Gibbons -- couple of new flavors in the ibuprofen suspension and the no-drip nasal and then -- and the new one that's just coming out this month is the equivalent to Excedrin migraine ...

OK.

The formula is ...

That's ...

None of, Chuck, none of these are going to be big, big, big products by themselves at all. So, you know, we're -- we're continuing to do what we're -- what we are good at in getting out there with the new products, but as you know, you have cycles here. We've got a good flow of new products, but none of them by themselves are going to be huge contributors.

OK. No questions then. Thanks for filling in those blanks in my notes. Questions, one on loratadine, Claritin introduction OTC. Could you talk about that from a strategic sense. It's coming over the corner in a different fashion than we've seen other drugs switch in the past. Could you see others doing that? But what does it mean to the way you approach that type of business and secondly, it sounds like you got some price relief in the quarter, were able to pass those things on. What -- how receptive were retailers, was it across the board, or more focused on specific product lines?

OK. The first question on Claritin and what that means for the future, I think, a lot of it is unsettled. I mean you see an awful lot of things happening now that say that things maybe somewhat different and maybe pushed a little bit more in terms of getting some of these products out to the market place. I think there's still a lot to play through on the Claritin issue. It certainly appears that -- that is intending to switch really all dosage forms and formulas to OTC. You've got multiple forms, and they're moving pretty quickly now to do that. I certainly think it will have an impact. You've got the statin products, you've got Prilosec. I just don't want to speculate right now on exactly what will happen with all of those because I think it's too hard to tell, Chuck.

But your sense is that there could be other factors other than the companies themselves getting these things to switch.

You certainly see a lot of pressure coming all along the line here in terms of ways to control Healthcare costs and pushing some of these products to over-the-counter is one way that you're seeing net pressure come to bear, so, it's logical to think there will be more of that.

OK. And on the pricing issues?

The price increase was certainly not across the board. We looked at the profitability of various products and made rational decisions on where we thought we needed to take price increases. We did not go over board on the price increases, but we looked at what are our increases on cost of quality were.

We presented our quality program to our retail customers and reminded them of why Perrigo is best in class, and the commitments we have to remain best in class in the Store Brand markets, and put in really just the price increases that were necessary to offset, you know, it's not an easy environment for price increases, we are not going to be able to put them in all the time on a regular basis. But I think our folks did a good job in reminding retailers of the value of Perrigo in the market place and being able to get some price increases enough to offset this year's jump in cost of quality.

Dave, when you're speaking of quality improvements, you're mainly talking on the -- on the service side?

No. When I'm speaking quality, it's totally different from customer service. Quality means all the different initiatives that we launched about a year-and-a-half ago in response to the FDA warning letter that we had had in the summer of 2001, and if you remember, it required a lot more validation including validation of our computer systems. It has required us to do a lot of things in documentation et cetera, and to put -- bulk up the quality organization.

We've done all that with the addition of VP of quality, and a lot more people in that area, lot more training. We've addressed all those FDA issues. We are really, Chuck, in the process of putting in a true pharmaceutical culture here that I think will make Perrigo second to none, just extend the gap that there is between us and our competitors in terms of quality and we're -- we're just continuing to move down that line.

All right. Thank you.

And just as a reminder. If you do wish to ask a question at this time do press one your touch-tone phone. And we have no further questions in queue at this time gentlemen. Please go ahead.

OK. Thank you very much. We appreciate all of you who took part and look forward to continuing to report to you on how we're doing.

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