Perrigo Company PLC (PRGO) 2003 Q3 法說會逐字稿

Good morning, my name Toria (ph) and I will be your conference facilitator today, at this time I would like to welcome everyone to the Perrigo third quarter results conference call. All lines have been placed on mute, to prevent any background noise, after the speaker's remarks, there will be question and answer period. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key, if you are on a speakerphone please pick up the handset before asking your question, thank you. Mr. Schrank you may begin your conference.

Thank you Toria. Good morning everyone, I will start the meeting with the SEC required forward Safe Harbor Language and then I'll turn it over to Dave and we'll start the conference on the results.

These conferences include our views on where the business is going, we will 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 affect on our business, on an ongoing basis and have included this discussion on pages 23 to 27 on our form 10-K, for the year ended June 29th 2002.

Additionally at certain times, we will use non-GAAP financial measures that we believe better describe the on going financial results and trends of the business. The required reconciliation of these measures to GAAP measures is included in our press release, which has been filed on form 8-K that may be accessed from our website at www.perrigo.com. With these formalities out of the way I will turn it over to Dave and he'll get us started.

Thank you and good morning everybody. I'm very pleased to report the excellent operating results from our third quarter and for the 9 months ended March 29th 2003. For the quarter sales were $203m, an increase of 2%, compared to $198m a year ago, that's a little bit better than expected. The cough-cold season was weak overall, which is pretty similar to the way it went last year, but we did see some benefit from a late season pickup. We reported net income of $14.1m or 20 cents per share, backing out income from the settlement of a law suit of $5m after tax last year, which show a 9% operating earnings increase from $12.9m, I'm sorry 9% earnings increase from $12.9m for 17 cents per share on an operating basis, the earnings per share increase was 18%.

For 9 months, sales were flat, net income was $49.7m or 70 cents per share, up from $44.9m, or 60 cents per share for last year. Excluding incomes from lawsuit settlements, both this year and last year, net income on an operating basis increased 20%, to $47.7m or 67 cents a share, compared with $39.9m or 53 cents per share last year; that's an earnings per share increase of 26%. Going back to the third quarter, in our core store brand health care business, we experienced higher sales of cough cold products, laxative products and antacid products, offset by lower sales of nutritional and some contract manufacturing products. Sales from our outside US, non-domestic manufacturing businesses Quifa and Wrafton were both up double digits.

Gross margins were up nicely this quarter ahead of our internal targets. For the full year, we now project earnings of 74-75 cents per share, which would be a record year for Perrigo, and I'll now turn it over to Doug to take you through some more details about the excellent results from this quarter.

Thanks Dave. As Dave mentioned, sales for the quarter of $203m were up approximately $4M, or about 2% -- 2 percentage points from a year ago's $198m. The store brand health care segment sales of $184m were flat compared with last year. Within this segment, we recorded quarterly gains in our cough, cold, laxative and antacid categories and experienced declines in sales of vitamins and contract manufacturing categories. Double-digit sales increases, in sales in Mexico and at Wrafton, combine for an increase of 29% in the all other operating segment. Despite Quifa being up double digits, most of the sales dollar increase came from Wrafton. The IRI point of sale data this quarter for sales dollars, indicates the following, and I would remind you that this is without Wal-Mart in this database and remember Wal-Mart is 25% of our business. In the cough cold market, it was up 11%, store brand was up 1% and Perrigo was up 10%. We benefited from the late cough cold flu season and retailer restocking and we did not experience as much impact from the Claritin launch in the quarter on the allergy sinus segment as we anticipated. The analgesic market was down 1%, store brand was up 1% and Perrigo was flat. Basically, we add no significant new products to drive the category in the quarter. And, the gastrointestinal market was up 1%, store brand was up 7% and Perrigo was up 9%. We saw good volume across both the antacid and laxative segments of the GI category.

The vitamin market was up 6%, store brand was up 5% and Perrigo was down 11%. The market is now up for the third consecutive quarter; led by multivitamins and women's products were also strong. Perrigo was down, due largely to a single customer whose volume was down overall, due to recent store closing.

Looking at gross profit. Gross profit of $58.7m was an increase of $2.1m, compared to last year and was 29% of net sales, compared to 28.5% on the same basis in the third quarter last year. The increase in gross margin was due to improvement in operational efficiencies and productivity, offset by higher inventory obsolescence expenses year-over-year, due mainly to the inventory reduction in the third quarter, last year.

Looking at operating expenses, in total, they increased slightly in the quarter, excluding the $7.8m pretax litigation settlement last year. A decline in distribution expenses and R&D expense were offset by an increase of approximately $1.6m in selling and administration expenses, due mainly to rising liability insurance costs.

The effective tax rate for the quarter was 38.3%, compared with last year's 37.3%. Excluding the $5m after tax litigation settlement included in last year's results, net income was $14.1m in this quarter, compared to a comparable net income of $12.9m last year. And again, diluted earnings per share was 20 cents, compared to a 17 cent per share number last year, which excludes the 7 cents vitamin litigation that you'll see in reported results.

Turning to the nine-months, sales were $643m, down $1m, compared to $644m last year. The store brand healthcare segment declined 2% from $595m to $584m. The sales volume decline, included in that number approximated $26m, resulting from lower unit sales of the analgesics, antacids and contract manufactured products, offset by sales of new cough, cold and feminine hygiene products. In addition, we discontinued sales of some of our low volume and low margin products. This sales volume decline was partially offset by a favorable mix of products sold and improved net-realized pricing.

Sales in the all other segment increase 21% or $10m, due to increased volumes at Wrafton, year-over-year. Gross profit of a $185m was an increase of $13m, or 8%. As a percent of sales, this was 28.7%, compared with 26.6% last year; that's a 2.1 percentage point improvement. Approximately 2/3 of the increase in the gross profit percentage was due to improved operating efficiency, including, less obsolescent expense, year over year on a nine-month basis, and 1/3 of the increase was due to favorable mix of products sold and improved net-realized pricing.

The major differences in operating expenses year over year, where R&D was $16.2m, compared with $17.5m last year, -- basically due to the timing of project spending. Selling and administrative expenses, including stock option expense, increased $5.9m, or 8% in the nine-months, reflecting rise in product liability and D&O insurance expenses, and consulting related to the quality strategic initiatives. The effective tax rate was 37.6%, versus 37.7% last year.

Net income for the nine-months was $49.7m, compared with $44.9m last year and earnings per share on a reported basis, fully diluted, was 70 cents compared with 60 cents last year. Consistent with our seasonal pattern, we expect lower sequential sales and margins, compared with the third quarter and projected earnings for the fourth quarter; we would project between 4 and 5 cents per share. That brings our full year results and our expectations to 74 to 75 cents per share.

Now some comments on the balance sheet. Working capital, excluding cash at quarter end, was $109m, versus a$134m last year, a decline of $25m. Despite our stock buy-back of $3.3m shares for $34m for the first nine-months and the payment of our first quarterly dividend in the third quarter, our cash balance increase from $77m at year end last year to $105m at the end of March, an increase of $28m.

This is been driven by a number of things. Accounts receivable were $85m compared with $99m a year ago, reflecting an improvement in DSO, from 44 days to 38 days. Inventories were $156m, flat compared with year-end and an increase of $11m from a year ago. This increase is due to increases in raw materials and work in process mainly for new products and new raw material suppliers. Accounts payables increased from $61m to $73m this year and offset the inventory increase.

Cash flow from operations for the nine-months was $82m, versus $53m last year. And capital expenditures through nine-months were $19m and we anticipate spending between $25m and $27m for the year.

In summary, we're pleased with the third quarter and nine-months results and our strong financial position and I'll turn it back over to Dave.

Thanks Doug. I've been here just about three years now, -- pretty close to exactly three years here at Perrigo, and I am very proud of the team here, the way they have quietly worked in many ways behind the scenes, very hard to improve the business. And when you look at the results you see a balance sheet now with virtually no debt, a very strong cash flow both strong and predictable, terrific quality, just a great improvement in our quality processes; did require investment on our part, but it also was accomplished with a lot of outstanding work on the part of the Perrigo folks and we are clearly unsurpassed in store brand categories in the quality that we provide.

Customer Service. We are clearly exceeding customer expectations, currently running at around a 94% customer service level, which we've never done before. Productivity is driving margin expansion; Doug has touched on some of that. We've also done a great job in product mix management where we dropped on profitable SKU's, also contributing to the improve margins. The result of all of this is a solid and steady earnings improvement, culminating this year as you can -- have heard, in an estimated earnings per share of 74 to 75 cents, verses 60 cents per share last year. We have now meet our beat consensus on an operating basis for eleven consecutive quarters.

In the third quarter, as Doug noted, we paid our first cash dividend. Frankly, I think we've come a lot further a lot faster than we had anticipated; certainly not complaining about that; we couldn't be more pleased with the results and we're not going to stop working on all operational aspects of our business, we still think there's more that we can get there. We will also stay focused on the challenge of meeting our growth goals. I would remind you, that this year we have deliberately given up some volume in order to improve margins.

In the Mexican restructuring in fourth quarter last year, we exited non-core products and markets. Here in the U.S, we've embarked on a business simplification program in order to help gain operational efficiencies and we have reduced SKU's more than 15% from More than 15%, from one year ago, so we now have 15% fewer SKUs than we had a year ago. And we've also elected to take a very selective position with low margin or high cost of doing business customers. We will also see some loss of business, as we've previously talked to you about, from the gelatin coating supply issue that will have some negative impact in the fourth quarter. We are moving ahead well on alternative sources and technology that will keep us in this business and will ultimately put us in a very strong competitive position.

As we look out ahead, we do see the opportunity for some modest sales growth in fiscal 2004. It won't be a break out year by any means, but we will get a boost as we start to shift store brand Laradidine. And again as Doug has mentioned, to date we've not seen much erosion in our allergy-sinus business, keeping in mind we are now entering the peak allergy season and that will be a little more telling. We are currently taking orders on the Claritin 24 hour tablet equivalent and we expect to start shipping in June or July, with other dosage forms to follow. We plan to offer all five dosage forms, and we fully expect to have an excellent position in this highly competitive market.

We are also planning to introduce a number of innovative new diet products that are Ephedra (ph) free into our nutritional line during fiscal 2004. These and other new products combined with implementing new packaging, graphics and consumer messages based on what we're learning from the consumer research that we currently have underway, will allow us to out pace the relatively slow growth rate of the categories that we compete in. All and all, we're very pleased with where we are today and as we have said before, we feel very confident about our future.

Thank you and we will now open it up to your questions.

At this time I would like to remind everyone, in order to ask a question, please press star then the number one on your telephone keypad. And again, if you're on a speakerphone, please pick up the handset before asking your question. Now we'll pause for just a moment to compile the Q&A roster. Your first question comes from Steve Wittio (ph) of Bear Sterns.

Hey guys, great quarter. A couple of questions here, the I guess you kind of answered it already, the impact of OTC Claritin really was minimal because we're in the peak season right now, is that right?

Yeah so far, this is Dave Gibbon --- so far as you can see by our numbers which encompasses allergy products we were up nicely and that's an illustration of the fact that we really have not been hurt yet but that's why I did clarify a little bit there that we are just now entering into the peak season. So we still feel pretty good with what we see so far but we won't still know until we get further into the peak season.

Okay so the increase in guidance for this current quarter then you still being conservative with the potential impact of Claritin.

No I don't think so I think we are just looking at the sales situation that we have and feeling comfortable with the guidance that we are giving.

Okay, a couple of things. I guess there's estimates out there for '04 now, do you care to comment on that at all at this point?

No I am not going to comment today on that. We are in the midst of our planning process which will be completed in June and I would feel more comfortable commenting at that time.

Okay and lastly. Did you pick up any new accounts this past quarter?

We picked up new business, we didn't pick up new accounts that I can think of, but I do know that we picked up some new business where we had not had the business before. But we pretty much recovered an awful lot of customers having 65% market share. We sell to almost all the players out there and there is always an is always an effort on flow and we may have lost a little bit of businesses but I do know there were instances also where we were picking up new business.

Okay and that's it more than all sets the K-Mart situation?

Yes.

Okay great. Thanks a lot.

Your next question comes from Doug Lane of Avondale Partners.

Yes sir, good morning. Just a couple questions on the Claritin. I guess --- two things, one now that we are what four or five months into the switch can you give us your characterization of what you think the impact of the OTC Claritin and its like products is having in the market place? Is it more, less, about as expected, just any anticipation of the store brands coming out later in the year? And then secondly can you give us an update on the timing of your launch of the key SKU which is the 10mg?

Okay first of all on Claritin, I think looking at retail sales I believe they were around --- running around $6m a week for the product category since last December. They recently just in the past couple of weeks have ramped up to the 8 to $9m a week level as we enter the allergy season.

So I guess I can't say whether sharing and the other people are pleased with that or not pleased. I think all along they want us to get a good selling, get good shelf presence which they did and they are now well positioned as the peak allergy season takes off. Probably the next four to six weeks are really going to be telling there. But right now its not far off from what I would have expected.

You know we've been feeling that there could be $500m in sales annually at retail when everybody is out there on the shelf competing and getting their messages to the consumer. Is that going to be a little bit high? I don't know it's probably fairly close.

In terms of our plans as previously mentioned we're already taking orders on the 24-hour tablet, which we have through our deal with Andrex. And we are planning on shipping that as soon as we can get it out there, which will be sometime probably in the latter half of June to the middle of July, we would hope to start shipping, so that's current goal on that. All the other product forms, we have done the work on them, we've done our filings, we're working with potential partners where we think that would help us get the market faster, but as of today I really can't give you dates on which we will be out there with those products, other than to say that sometime following the introduction of the 24-hour, we would be introducing them during fiscal 2004.

the exclusivity on the 10-milligram is up in July right?

I think it's the very end of June, I'm not - -

Okay.

It's somewhere right in there, it's right in that time frame.

So I mean, -- without being specific, is it fair to assume that you'll be out there then, within weeks -- hopefully weeks, of the expiration or do you think it will go into the fiscal second quarter.

I really can't comment because we do not have final approval that would allow us to go out there as of today, and I would -- you're certainly safe in assuming that it's our goal to be out there at the beginning of the next fiscal year. Whether that will happen, I really can't tell you.

I got it. Okay, thanks a lot.

Our next question comes from William Field (ph) of Banc of America Security.

Thanks. Dave, I was wondering about the gross margin performance, which has been really quite stellar. Is it safe to assume that you've got the business performing to the level that you're content with, for lack of a better word?

We're never content, but is it performing to a level that we are really pleased with the results. Yes, absolutely Bill. And that's why I said what I said about how proud I am of the Perrigo team. I just think this group has come together and is doing a superb job, and without going through a long, long laundry list, I did touch on some of the things that have contributed to the gross margin improvement, you know, including when we talked a couple a years ago, we said we're going to spend more money on quality initiatives and we're convinced that they will start to pay back in the years to come. And I think that's what you're seeing, it's - - you know, we plunged ahead, spent the money that we needed to spend to beef up the quality processes. We are now, you know, in great shape in the quality area, but we're also starting to see some productivity benefits from the quality initiatives that are in place. So, just all in all, I think people have done a terrific job and I'm not sure if the sense of what you're getting at is, do we still have as much room to continue growing? If that's part of what you're looking for, I guess I would say, I think we've come a long way, and I think we'll never be content, we'll never be satisfied with where we are and we see room to get even more, but it's -- it's -- you're not going to see the great kinds of leaps that we've had in the last year and half or so.

Thanks Dave. Actually, indirectly, I've been trying to figure out whether or not that 29% gross margin is a sustainable number when revenues are north of $200m.

I think it's challenging to say we hit on an every quarter kind of basis, Bill. I, you know, I don't know any other way to really answer that. I think it will be challenging to say that we're confident we could hit that on a regular basis. But we do have other initiatives we're working on, you know, and so it's certainly -- we expect to keep the margins in good shape, but I'd rather not say that we can be sure we're going to hit 29% on a regular basis.

Okay, we'll work on it. And Doug, I was wondering if you could comment on cash flow from operations targets for '03, you mentioned the CapEx.

Yes, I mean when you look at our balance sheet or you look at the cash flow statement, we have - - because we have controlled both the receivables and inventories the way we have this year, we've had them tightly controlled all year. Typically in the fourth quarter in the past, we would get a much larger bump. This year I don't think you're going to see that bump. In fact, I think on operating cash flow basis at $82m, we're going to - - we may go north of there a little bit but it's not going to go up like it has in the past years, because the balance sheet is in such good shape. As it relates to working cap - - or any other spending that is on that, really CapEx is the variable piece, other than opportunistic stock buy-backs. So I think you've got all of the pieces as you look at this one.

So basically, you know cash flow from OPs in the fourth quarter is it going to be, you know, flat to slightly up?

Exactly, yes, you know, we have tax payments to make and things like that, that use up some of that cash and it depends a bit on where inventory ends and where receivables end, but we are starting from a low base as we go forward.

Sure, alright thank you very much.

Your next question comes from Derrick Lekow(ph) of Barrington and Research.

Oh, thank you and good morning and congratulations on a nice quarter here.

Hey, Derrick.

Just have a question on Raft and that seems like it's really performing well and wondered if you could give us some more color on what's happening in that market?

This is Dave, if you remember, just about a year ago that we sent Jeff Neadham (ph), who was our - had been our Vice President of marketing here at Perrigo and really one of the architects of building the store brand business in the US. We sent him over to Wrafton as Managing Director for our UK business. I think Jeff's done a very good job in handling the business over there this year. We - the ultimate goal is to make that business much more of a store brand business versus the much more contract manufacturing oriented business that it was that we purchased. I would say to date we have not gotten any where near what we want to do in driving the store brand business. But we are managing our capacity there very effectively and have picked up some good new business. And I do think long-term we will continue to grow the business and we will also see the margins continue to improve as we get the product licenses we need that will allow us to get more products into the retailer with their store brands. But so far it's just been a solid management performance over there through the Wrafton team more than any huge surge of store brand growth, to be very candid.

Thanks the new business that you are talking about there is that a new customer? Or are you still with pretty much the same retailers?

It's - well it's some new business but it's not dramatic enough that I would want to make a big thing out of it.

Okay.

That combination of some new retailer business combined with getting additional contract manufacturing business on some products that we can make the profit on.

Okay. In the quarter looks like the tax rate jumped up a bit. Is that some thing that you think will revert back down? Or what do you expect to have happen with your income tax rate?

Derrick, the tax rate really fluctuates year-over-year because of the large vitamin settlement last third quarter. So it shouldn't move very much from where we are nine months year-to-date.

So you are looking at around 38% then is that about right going forward?

Yeah.

Okay and then for next year, you know we talked about gross margin, you have made tremendous improvement on those 800 basis point here in 3 years. And it sounds like the increases will be more modest, but do you still think you can do, you know, 100 basis points improvement next year?

Don't know yet, you know I - the same answer I would have to give you as we had during the - on sales. It's - we are in the midst of the planning process and we will be really digging into it come second part of May and then finalizing in June and I'd have a much better idea of what kind of targets to put out there after that time.

So for modeling purposes then we should probably use some thing that's on pace with the year-over-year improvement right now. Would that be --?

Derrick that's a decision that I think you all have to make.

Okay great thank a lot.

Your next question comes from Linda Bolton-Weiser (ph) of Funds Stock and Company.

Thank you, you mentioned in the press release your big improvement in productivity. Do you measure that and can you give - put some kind of numbers around productivity say this fiscal year to date versus last year?

Linda we don't measure it in a way that would relate to the financial statements. We measure in a number of different ways. But when we think about the pieces that are driving the productivity, there are a number of different projects that we have our there that really drive the productivity. It goes every thing from raw material formulation to how we forecast our demand. We have a lot of automation that's been added both in liquids and in our blister area. And as Dave mentioned we have gotten our selves out of low volume business, low profit business and that all tends - that all helps as you look at the productivity in the plant. We are doing things like consolidating bottles and caps and things like that so our productivity as we measure it, it's basically on a project by project basis where we really look at where the opportunities are and measure how we perform against those. I mean some of the things that we've done are using RFT technology to help with inventory location, and label management and many of these things take labor out a little bit here a little bit there and drive that gross margin up.

And we do measure Linda how many dozens we get out per employee per hour. We measure the percentage of products that get through right the first time that don't have to be sent back for rework and things like that and we see gains in all of those measurements.

Okay and just on the sales growth. I wanted to just try to understand a little bit better where some of the strength is coming from. On the cost cold--- in the cost cold area, just remind me again, when you say you were up 10% is that your shipment or your sell through according to the IRI data in the quarter.

That is our shipments. The dollars we get from our customers.

Okay

And there can be a disconnect between what we are saying we Perrigo were up versus what the market was up. What retail was up

Right, right. So I mean can you kind of--- just taking cost cold as an example, I mean is that coming from growth in a particular channel or is that new products for you or you know, what is that growth coming from?

No, I don't think--- there were no particularly new products that would have driven that growth, Linda. We just had a solid quarter. We -- the retail sell through was good during the quarter. You know, we did have some promotional activity that may have driven some of that volume, but there was nothing that was unusual about what we did in the quarter that drove that growth.

And Linda you also have to ---when you look at that growth you have to sort of guess, and we do also, what happened during the quarter last year and it varies depending on how much inventory the--- our retailers had as they entered last year's third quarter, how much they had when they exited and it has an impact on those number and it's just very difficult to quantify. There's a number of variables that are going on inside those numbers

Okay. And finally I didn't quite catch, did you give the amount spent on share repurchase in the quarter?

We didn't give that specifically, we gave a year to date number.

Yeah. The quarter was very small, it was under a million dollars, I believe.

Okay. Okay well thanks very much good performance.

Thank you

As a final reminder everyone if you would like to ask a question please press star then the number one on your telephone keypad. We have a follow up question coming from Derrick Lekowof Barrington and Research.

Yes thank you. Just had another question on the acquisitions. You know you're looking at some new markets and you're growing nicely over-with Wrafton. Are you seeing any other opportunities here that have come up in the recent--- recently or anything that we might expect in the next year?

There's nothing on the horizon that would be coming that I would think coming up in the near term. We are continually looking at what would be the right opportunities. We recognize what a great cash position we're in that we can make an acquisition if we see the right acquisition. But we are going to stay focused Derrick and our aim is to build our businesses and solidify our positions and grow store brand in the U.K. and in Mexico, to increase our business in Canada, and to look at other emerging markets that might be opportunities, but not to go chasing around to a whole bunch of them. So we'll be very targeted and very focused, but we certainly will look for opportunities to grow our business geographically and you know we previously have mentioned, we're also looking at adjacent categories that might be opportunities for us. Some of the things that we've talked about there would be in the area of diagnostics or test kits and some areas such as heat therapy, the therma-care equivalents etc. We're looking at opportunities in categories like that that we're not in right now. And, they could be either a joint venture or an alliance with someone or what I would think would be a relatively small acquisition moving into those areas, but I can tell you that there's nothing sitting out there right on the horizon that we're going to surprise everybody with in the next few weeks. There's just nothing out there, right there. But we absolutely are looking for opportunities.

On the diagnostic and test kits area could you remind me what type of category that is. Are you talking about pregnancy tests and things like that?

Yeah it's a whole range of things and as you know there's a lot of discussion about much more home people--- testing themselves at home and avoiding going to the doctors to have to do it. And I think it's a category that we think will grow and expand into a lot of areas that its not in today. And so we are looking at those types of opportunities in diagnostic test kits.

It seems to me that store brand hasn't really penetrated this category very much yet has it?

Absolutely it has not.

Okay thank you very much

And at this time gentlemen there are no further questions.

Thanks you all very much.

This now concludes today's conference call. You may disconnect.