Perrigo Company PLC (PRGO) 2004 Q4 法說會逐字稿

Good morning. My name is Lynn and I will be your conference facilitator. At this time I would like to welcome everyone to the Perrigo Company fourth quarter fiscal year 2004 results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question and answer period. If you would like to ask a question during this time simply press star then the number 1 on your telephone keypad. If you would like to withdraw your question press star then the number 2 on your telephone keypad. Thank you. I would now like to turn the call over to Mr. Schrank Executive Vice President and Chief Financial Officer. Please go ahead, sir,.

Thank you, Lynn. I would like to welcome all of you on the conference call. We are delighted to have you join us. And thank each of you for your interest in wanting to learn more about Perrigo. First let me dispense with the SEC Safe Harbor language.

These conferences include our views of 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 effect on our business on an ongoing based and have included this discussion on pages 25-30 on our form 10-K for the year ended June 28, 2003. Additionally as certain times we will use non-GAAP financial measures that we believe better describe the ongoing 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 a form 8-K that may be accessed through our website at www.perrigo.com. With these formalities completed I will now turn the call over to Dave Gibbons, Perrigo's, Chairman, President and CEO. Dave.

Thanks, Doug. And good morning, everybody. I am very pleased to report the strong fourth quarter results and record earnings for fiscal 2004. Starting with the fourth quarter, sales were up to 12% or $22 million from last year. Our loratadine products continue to sell well. Vitamin sales in the U.S. increased, continuing the rebound from a low start earlier in the year and the new vitamin business in the UK added $9 million to sales in the quarter.

Reported net income for the quarter was $8.1 million or 11cents per share compared with $4.3 million or 6 cents last year. Excluding the expense relating to a settlement with the FTC, net income was $11.5 million or 16 cents per share. For the full year sales exceeded expectations, up 8% to $898 million. The Peter Black acquisition added $16 million in incremental sales but new product introductions were much more significant contributors, adding $70 million. The loratadine allergy products in particular as well as a number of new vitamin supplements and diet aids were significant additions to Perrigo's product line.

Earnings were a record $81 million or $1.11 per share for the full year. The result of nice volume growth and superb operational performance. Excluding exceptional items earnings per share was 98 cents versus 73 cents in 2003 an increase of 34%. Doug will now provide you with additional information for the quarter and for the 12 month period. Doug.

Thanks, Dave. Before reviewing the key financial components of our fourth quarter and full year I've got a couple of overview comments. First of all, the fourth quarter results include a charge of $4.75 million, 3.4 million after-tax or 5 cents per share relating to a monetary settlement with the FTC. Secondly, a full year reported results include the FTC settlement and a 1-time tax benefit of $13.1 million or 18 cents per share that was recognized in the second quarter.

If you add those 2 together, the tax benefit and the FTC charge, it is about 9.7 million or 13 cents per share increase. Last year's - - remember, last year's full year reported results included 3.1 million of income, 2 million after tax or 3 cents per share for the final vitamin litigation settlement. And finally, we have changed the accounting classification for brokerage commissions in fiscal '04 and restated all prior years. Brokage commission is now recognized as a selling expense and not as a deduction from net sales so the net effect is this change increased sales in fiscal '04 and '03 by $8.1 million. It increased gross margin in both years by $8.1 million. And it increased SG&A expense by $8.1 million.

Obviously when you get to operating income, which nets these pluses and minuses, there was no effect on operating income or net income. And a reconciliation of this is posted both current year and historically on our website. Now, looking at the fourth quarter. It was another great quarter. We had strong volume including sales for Peter Black and new products and results also benefited from increased production in our consumer healthcare business as we made a conscious decision to begin our annual inventory build earlier this cycle to improve service levels and drive sales during the peak of the 2004-2005 cough/cold/flu season. Looking at sales as Dave noted, consolidated fourth quarter sales of 206 million increased 22 million or 12% from a year-ago.

Sales were up 6% excluding 8 million from Peter Black and $2 million from currency gains. The consumer healthcare segment accounted for $10 million of the dollar increase as its sales increased 6% from 167 million to $177 million. Sales increased in our cough/cold allergy, analgesics and vitamin products and were offset by a decline in the antacid category. Looking at market data, the IRI dollar sales using point of sales using point of sales data and remember that excludes Wal-Mart for the 12 weeks ending July 11 indicate the following: The cough/cold/allergy market was down 3%, store brand was up 8% and Perrigo was up 20%. Perrigo sales were strong due to loratadine and we had good sales volume from all 3 forms. D24, loratadine syrup and loratadine quick dissolve.

The analgesic market was down 3%, store brand was down 5% and Perrigo was up 7%. The market trended down while Perrigo analgesic sales held up reasonably well and there were no significant new product introductions in this category during the quarter. The gastrointestinal market was up 7% and that includes Prilosec sales. The store brand was down 5% and Perrigo was down 11%. The lower dollar sales for Perrigo reflect the lost of some antacid tablet business and competitive price pressure in H2s and loperamide. The vitamin market was down 2%. Store brand was up 15% and Perrigo was up 15%.

This quarter like last we experienced good gains in the core vitamin product categories. Looking at gross profit in the quarter, gross profit was 63 million an increase of 16 million compared to last year and the gross margin percentage was 30.6% of net sales compared to 25.5% last year. The consumer healthcare segment was the primary driver of the gains. High sales volume in the quarter and higher production volumes coupled with building inventory resulted in approximately $6-$7 million of higher overhead and fixed cost absorption in the quarter. This contributed almost 3.5 percentage points of the gross margin percentage gain.

We will see the benefit of this strategy through higher sales throughout the cough/cold season and especially in the peak season as store brand products will be more available and more heavily promoted. Margins were also enhanced by productivity improvements and good control over shrink, scrap and obsolescence. Operating expenses in total increased 10 million in the quarter. Almost 5 million for the FTC settlement and 2 million for higher R&D expense mainly in the pharmaceutical business.

And reported net income was 8.1 million compared with $4.3 million last year and diluted earnings per share were 11 cents compared to 6 cents last year. Excluding the FTC settlement net income was 11.5 million or 16 cents per share. Moving on to the year. Our consolidated sales were 898 million, up 8% compared to sales of 834 million last year. That is a $64 million increase. Excluding Peter Black sales of 16 and favorable currency of $5 million, comparable sales were up over 5%. The consumer healthcare segment accounted for most of the increase through volume growth as it increased 44 million plus 6% from 757 million to 801 million.

Sales gains were significant in the cough/cold allergy and diet aid categories and were offset by declines in antacids, vitamins and gel coat products. The UK operations sales increased 56% from 47 million to 73 million due mainly to the $16 million addition of Peter Black and currency gains. Mexico sales declined from 31 million - - or from 31 million to $25 million reflecting their strategic move away from small retail sales and the effect of a weaker currency. Gross profit increased 30 million or 13% to $268 million, primarily due to increased sales volume of new products and the higher fourth quarter production.

As a percent of sales gross profit improved 130 basis points from 28.5% to 29.8% in the current year. The major differences in operating expenses year over year were R&D was 27.7 million, compared with 23.3 million last year due mainly to pharmaceutical spending. Selling and administrative expenses increased $5 million due largely to the FTC charge. I would remind you that we recorded 3.1 million of vitamin litigation settlement income in the first quarter of fiscal 2003 and effective tax rate was 24% for the year after 1-time tax benefit adjustment and the FTC charge.

Excluding these adjustments it would have been close to 36%. Reported net income for the year was 80.6 million compared with 54 million last year and earnings per share were $1.11 compared with 76 cents last year. Excluding the 1-time tax benefit of 13.1 million, and the 3.4 million after-tax FTC charge earnings were 70.9 million or 98 cents per share. On an operating basis sales were up 8%. Gross margin was up 13% and operating income before the FTC charge and last year's vitamin litigation was up 31%.

This is the inherent leverage in our business as sales increase. Now, some comments on what continues to be a very strong balance sheet. Working capital excluding cash and investment securities at quarter end was 114 million versus 119 million last quarter and 119 million last year end. Working capital as a percent of sales ended at 12.7% versus 14.1% of sales last year. Our cash increased from 94 million last year to 172 million this year.

Accounts receivable were 86 million compared with 87 million a year ago and DSO was 38 days down from 42 days a year ago. Inventories were 174 million an increase of 14 million from a year ago, about 1/2 of that increase came from the Peter black acquisition and days of inventory onhand dropped from 117 days to 112 days this year. Cash flow from operations for the year was 119 million versus 80 million last year and free cash flow was 90 million versus 48 million a year ago. And capital expenditures ended the year $28 million compared with 32 million last year.

In summary, the results for 2004 we achieved a record net income and a record earnings per share after excluding the tax benefit and the FTC charge. We were very pleased and we have met or exceeded nearly all of our target metrics for the year. So all in all it was a terrific year. Now, let me turn it back to Dave.

Thanks, Doug. We are very pleased with the progress being made today in all of our functional areas. Our financial foundation remains very strong. Working capital managed appropriately, cash flow is strong. We remain virtually debt free and we have got cash of over $170 million at year end. That financial strength helped us to fund $28 million in capital projects, to invest $27 million in R&D, to acquire Peter Black in the UK, and to increase our quarterly dividend.

As we have mentioned, 2004 did benefit from a large number of new product launches. In addition, we also initiated 14 biostudies and received 7 FDA approvals, both the highest ever for Perrigo. Our scientific staff also supported the launch of numerous monograph products and reformulations. In operations we continue to see just excellent performance. We're seeing manufacturing, packaging, and logistics productivity improvements.

We're seeing good cost reduction initiatives bear fruit in supply chain management. And as we go into fiscal 2005, we are focused on lean manufacturing and really indeed, lean operations overall as an initiative for 2005. Last year at this time, we had outlined the logic for our entry into generics. We're disappointed that we had to pull the plug on the potential Lannett acquisition but we continue to look for the right acquisition in the generics area. We also will continue to move forward internally to develop this new business opportunity.

We made $5 million in direct investment, mostly in R&D in fiscal 2004. And we ended up filing 3 ANDAs for generic products and looking to 2005 we plan on filing 8-10 more ANDAs in generics in fiscal 2005. We've put together what I think is really a top-notch team to support our generics entry with executives coming in to head up scientific affairs and sales as well as operations, business development and contract management in the generics area. We'll continue to focus on developing our product line, the future pipeline of generic RX products and in the second half of fiscal 2005 our goal is to see the first sales of generic RX products. Although in fiscal 2005 in that second half they certainly will be small dollars but they will get us started.

Speaking of 2005, fiscal 2005, we see prospects for continued growth in our core store brand business while we invest in the development of our generic RX business. Our expectations for 2005 are revenue growth overall of 4%-5%. Continued earnings expansion in our domestic consumer healthcare business and good profit growth prospects for the UK and Mexico in fiscal 2005. On a consolidated basis, even with the $10-$12 million investment in generics, we expect earnings growth of 3%-5% driven by high single digit earnings growth in our core businesses.

And I'll wrap up my comments here this morning by reaffirming what we have been saying for some time now because it is still relevant and representative of how we see the future. We have a very strong store brand business that provides us the cash to invest for future growth. We have a pharmaceutical culture with significant people and material assets. The entry into - - our entry into generics is timely and a natural extension of our core business. We remain store brand focused but we are preparing our organization to do more.

Our people are excited about the prospects to grow based on making healthcare more affordable. With their track record of solid accomplishments over the past years we are very confident about Perrigo's future. Thanks and Doug and I would now be delighted to take your questions.

At this time, I would like to remind everyone if you would like to ask a question press star then the number 1 on your tell keypad. We will pause for just a moment to compile the Q&A roster. Your first question comes from Derek Leckow of Barrington Research.

Good morning and congratulations on a very outstanding year.

Thanks, David.

Thanks.

I have a question. First of all, on the balance sheet can you update us on your strategies and investment criteria for that significant cash balance that you're building?

This is Dave Gibbons. Yeah, I think it is great that we have the cash balance we have. We sure look at it as a terrific asset to have the kind of cash forward that we have. You know we have been look at merger and acquisition activity as evidenced by the option that we had earlier this year for Lannett. We decided not to go through based on our due diligence. We did pull the plug on the Lannett acquisition and back off, but we still look at acquisition as the primary place where we would like to put that cash. The fact that we now have over $170 million in cash actually makes me feel pretty good as we look out there at M&A opportunities. So that would certainly be the primary driver. But if you look in addition you will see the investments, the $5 million investment we made this year - - this past fiscal year in getting into a whole new area that I think is a great growth opportunity for Perrigo and that is the internal development of products that would get us into the generic space. In fiscal '05 we will be looking at investing another $10-$12 million in getting into that space. Those are the 2 primary areas but we would also be open to stock buybacks if we saw an opportunity there and if we feel that we could use some of the cash for that and still have enough for what we want to do in generating internal growth and looking at outside acquisitions. And those are really the primary drivers for what we want to do with the cash and in addition with the kind of cash we are generating we felt comfortable as you know a little over a year ago granting quarterly dividends to our shareholders.

Just as follow-up to that as we watched your generic strategy unfold here over the last couple of years it appears you are constantly look moe internal in terms of creating your own opportunities internally. You know, hiring people from the industry and so forth. So does it seem - - it seems to me that valuation levels perhaps might be a concern to you as you look out there to acquire perhaps a pipeline of existing - - of a pipeline of drugs that you can quickly start to manufacture and sell.

You're absolutely right. Valuations did run away a little bit in the generic area. They have come down over the past 2 months as you are probably aware somewhat. But they still are particularly for new smaller companies that are building a pipeline have made the investments but haven't necessarily yet generated the sales valuations can be up there pretty good. We understand that. What we are doing with the internal development is nothing different than what we planned from the outset and what we communicated from the outset which was: we would go down a dual path and we would not hesitate to continue to build that internal pipeline while we look for acquisitions. We're not going to sit back and wait and just see what pops up in the acquisition area. But I can also tell you it is neither one is exclusive of the other. We are going down the internal development path. We think that that is going to be a good move for us and will generate products for us, whether we do an acquisition or not. But we still are also very focused in looking for the right acquisition out there.

And just 1 final question on you internal development strategies. You mentioned you have about 8 - - I'm sorry 11-13 total ANDAs So far and you'd mentioned that you would perhaps see some of those come to fruition here this year. What particular areas are you focusing on? Are there a particular class of drugs that you are focused on right now?

No, we are coming in at the entry level without a strong focus on a particular therapeutic area. That will certainly change over time, but now we are looking at basically products that where we can leverage the strength that we have in the marketplace in our R&D in our manufacturing to get to the market over the next couple of years.

And do you anticipate filing an additional you said 8-10 is that right?

8-10 in fiscal '05.

Okay. Thanks very much, appreciate that.

Thank you.

Your next question comes from Doug Lane of AvondalePartners.

Yeah. Good morning, Dave and Doug.

Good morning.

Hey, Doug.

Question on the ANDAs and the generic. 2 points. 1, is why couldn't you do like a generic Motrin or something like that almost immediately? And then the second question is are any of these ANDAs last year or this year coming from that group that you helped fund about a year ago?

We can do generic versions of some of the products like you're talking about and certainly you can - - you could anticipate that at least some of those early products that we would be announcing second half of this fiscal year and then certainly increasing - - an increasing number in fiscal '06 would be products like that. And the early entries that we will have will be very similar to the kind of products that we talked about looking at when we first talked about getting into the marketplace a year ago.

Okay. And are any of these ones that you're talking about coming from that research group that you lent money to about a year ago? Or if anything comes out of that that is over and above?

I'm sorry, Doug, I know what you are - - yes, there will be a number of the products that come out in late fiscal '05 through fiscal '06 that will be a direct result of the investments we made in that contract R&D partnership that we talked about a year ago.

Okay. And finally, can you give us I'm switching back to the OTC business now. On the cough and cold season we had that very strong early start to the season. Can you sort of give us a postmortem on the whole season, how it stacked up versus prior years? And what were the inventory levels like at end of the season? Is some of this early pipeline fill because inventories at the store were less than usual?

The season, as you know, last year like a lot of averages, the average can be average but the compilation of that average is very, very different when you look at it. And basically in the quarter ending in December, that showed 15%-20% increase in cough/cold sales and then it was balanced by the March quarter where we had about a 15% lower cough/cold sales. So what you had was in the end an average season that was just dramatically skewed differently with a very high early peak and then a cliff in what was our third quarter. So a high peak in our second quarter and a cliff in our third quarter. And at the end of the day retail inventories were basically pretty normal. Our decision to increase inventories going into this season is partly because we just don't want to leave any sales on the table. And we think we did last year when that peak hit so early in the season. We are also - - I think we have got some very good new more aggressive promotional programs for when we put that product out there. So we are not just looking at having product to resupply the retail channels, we are looking at being more aggressive promotionally to drive product off the retailers' shelves as we go into the season in mid-November on through December this year.

Okay. Thank you.

Thank you, Doug.

Your next question comes from Joe Norton of Banc of America Securities.

Thanks. Good morning.

Hi, Joe.

Hey, Joe.

I have a couple of questions for you guys. First of all, just to get in a little bit more to the gross margin. Doug, I think you said about 3.5 points to that improvement was due to the inventory build?

Yeah, in the fourth quarter. The inventory build when you get right down to it, Joe, absorbed some where between $6 million and $7 million of overhead costs plus a little bit of labor and that's why you see that big spike in the fourth quarter margin. Typically, in prior years because you wouldn't have that kind of production that would have really dropped to the bottom line as an expense.

And that was in terms of inventory you said that was what, about 3 days, 5 days?

Well, no, we actually, if you look at the inventory build in fiscal '04 in the fourth quarter versus fiscal '03 we built about $20 million of inventory this year. Last year it was fairly flat quarter to quarter. So that inventory build is really what happened. The days in inventory is really a calculation based on sales. It was really the $20 million increase that really caused that to happen.

Okay. So in the - - so the other about 1.5 points in improvement in the quarter you just kind of mentioned shrink, scrap?

Yes, we had very very good performance on our shrink, scrap and sort of obsolescence as we have continued to manage that program. And, you know, as Dave mentioned, we have had a long term program to really improve productivity, increase automation and make the whole factory more productive and a little bit of that comes through in the quarter as it does almost in every quarter now.

And so then as we look into, you know, the next quarter or 2, I mean it sounds like, you know, just in the first quarter it sounds like your production volumes would probably be lower than last year or - -?

No, Joe, they probably will be about the same as the prior year. We have a - - because our business is seasonal, we always ramp up production in the July-August-September period. This year we just simply ramped it up a little earlier because we are trying to sell in inventory, the retailers want to have it, we want to sell it in early so it is there and ready for the cough/cold season. And we also have a number of programs to drive promotions in the - - call it the November-December-January time frame where we noted last year that the share of store brand actually declined in those peak seasons because national brands are out there with such promotion and they're really driving the product. Our sales and margining guys and gals have done a great job this year of getting ahead of that curve and we expect that we will drive more sales and hold our share better during that period. And that is going to require more inventory if you will, or more sell through. So it's really a whole program that we've really instituted. We've consciously trying to drive sale.

Okay. So do you expect the initial sell-in to be higher than it was last year, too?

Yes, we would expect it to be earlier the ultimate sell-in will absolutely depend on the season and that is the unknown. When it starts and how long it is and how high it goes but we would expect the sell in to start earlier.

Okay.

This is Dave. It certainly may not be a dramatic change early on, Joe. But you know, hopefully the retailers will have a little bit more inventory going into the season and then our promotional programs will work and we will drive point of sale and it will cause replenishment but that's - - time will tell.

Right. Okay. And then just a couple of things on the vitamin business. I was wondering if you could just talk, give us any more detail on, you know, kind of what is driving the improvements there? And I assume the numbers you gave us that is that just your domestic business?

Yes.

Plus 15%? So you're gaining some share. You know, can you give us any more details on what is going on? From - -?

Joe, there is into the whole lot. I cannot tell you a great story here that would illustrate anything other than the ups and downs in the business. In the first half our vitamin business struggled and in the second half it came back nicely. We certainly benefited from the starch blocker products that we brought to the market. We have the the Sesame Street Vitamins that are out there that I think is a really nice, creative, new approach that our folks have taken in that area. So just, you know, good old new product introductions. Good old blocking and tackling combined with the ups and downs that we've seen. There seem to be, you know, swings in our vitamin business from quarter to quarter. I honestly don't see anything that would dramatically be a trend or anything that would dramatically fall off a cliff. I just think it is good new products introductions and some good execution from an operational standpoint.

Okay. Fair enough. And then just finally just to follow up a little bit on the acquisition front. Is there anything, I mean I know you can't comment on specifics but can you talk at all generally about, you know, kind of the number of companies that you see available out there? You commented on valuation but I wonder as you go through this process has your approach to valuation changed at all? And, you know, is it - - does it seem more like, you know, you might have to be dilutive to get something done and would you consider that or just any update you could give us there?

I would say that our approach has not changed at all. You know us. We are a little bit conservative maybe and we - - while we enjoy having that cash, we are very willing to spend it but only on the right opportunity. In terms of accretion and dilution, you know, certainly we probably the parameters are we would love to have it be accretive. We don't want it to be very much dilutive. But we don't have any hard and fast rule as to whether we would allow some dilution or whether we, you know, have to have accretion. And part of that would be driven by the pipeline that we feel we would get in whatever company that we would find. You can accept a certain amount of dilution if you think you're getting some very good strategic benefit. And even more so if you think you have got in the relatively near term a good pipeline of new products that would be coming in fairly quickly. So, you know, we basically sift through a lot of opportunities. Versus a year ago, I would say we probably narrowed, funneled down the opportunities that are out there that we can look at. And we will just continue to focus on truly trying to find the right opportunity out there that we can make. And if we find the right opportunity we will move ahead and do everything we can to make it work.

Joe, this is Doug. Just another comment. One of the things that happens when you are looking at buying somebody who has got - - or R&D in place is that you often end up capitalizing certain of those projects and amortizing them over time so accretion/dilution has an effect on reported earnings much more significantly than it would on cash earnings. And as you look at acquiring R&D you really have to focus on the cash earnings side and that is typically accretive versus dilutive even though reported earnings might be slightly dilutive. So the game changes because of some of the accounting.

Okay. That's interesting. Thanks very much.

Thank you.

Your next question comes from Chuck Cerankosky of Key McDonald.

Good morning gentlemen.

Hi, Chuck.

Hi, Chuck.

Looking at this strategy to increase production during the fourth quarter. You have described you're going to step on the pedal with regard to promotions. I'm very interested in that. How does that affect your margin structure on the final sell-through of these products or sell-in to the retailers?

Chuck, typically the promotion dollars end up in SG&A so SG&A probably goes up just a little bit. The selling price really doesn't change -- in some in instances you might give them a 5% price break on a sell-in but typically the selling price remains fairly constant so it is in the store brand business it is not - - it doesn't come through the same way. You basically present the case to the retailer. And we have presented the marketing folks have presented a very strong case that the store brand business loses share during the peak season. And we have some control on that and the retailer has some control on that. And because they make more money on store brand products they're very much engaged in trying to change that trend.

Chuck, we have built into our earnings - - sales and earnings expectations for the year somewhat higher promotional expenditures to make - - to account for that - - any additional costs. And that is all figured in to the numbers we gave you in terms of sales growth and earnings growth.

Okay. Does any of this increased manufacturing overhead absorption of the fourth quarter reduce profitability in the first half fiscal '05?

Would not expect it to.

Okay. That's good to hear. Can you give us an update on your soft gel business and recovery thereof and manufacturing more of that in-house?

Yes, we are moving along in that. We are supplying now and that is coming along. We still have less - - we have not made up all of the loss - - all of the business that we did lose there when we were out for awhile. But we have made up a chunk of that and we are continuing to get product out to market in those areas.

What might be the growth drivers in UK and Mexico?

It really in both places our strategy is to grow the store brand share. We have businesses that where store brand does not make up the bulk of the sales in either case and in both cases, though, the store brand business in the UK and Mexico are growing much faster than the other parts of their businesses are. And that fits right in with our strategy. In the UK, we will continue to work to keep and do a good job with our contract manufacturing business but store brand will be the growth driver. In Mexico, store brand will also be a growth driver. In fact, it grew about 60% on a very small base this past year. And it will continue to grow very well and we will move away from sales to the small independent retailer. Really there is a lot of mom and pop shop business there that has proven quite honestly difficult for us because of the very small volume that any individual store purchases and the difficulty of collecting on your receivables. So we are in both cases in different ways, though, transforming both the businesses in both countries to much more of a store brand model and we are confident we will be successful but it will take time.

Dave, are you as - - I should say is Wal-Mart as significant a customer in your Mexican business as it is in the U.S.?

Wal-Mart is an important customer. Not as significant because we don't have the level of store brand sales to retailers that we have here in the U.S. It as much smaller percentage in Mexico. But no question, Wal-Mart anywhere they are will be an important customer to us, Chuck.

Thank you.

Once again, I would like to remind everyone in order to ask a question press star then the number 1 on your telephone key paid. Your next question comes from Linda Bolton Weiser of Oppenheimer.

Thank you. Congratulations. Great performance.

Thanks, Linda.

Can I ask you about a long time ago you had a long-term operating margin goal for the Company of 10%-12%. And I think you're pretty much there. Is going forward margin expansion more dependent on the rollout of the generic strategy? Or do you see further upside in the core business beyond 12% long-term?

Well, Linda first of all, the strategy is really to drive generics. The core business will - - the growth of operating income will slow down as the cost savings both from operations and purchasing are less incremental year over year and therefore you don't have that driver. But it will continue to grow because there is a fair amount of fixed costs both in cost of sales and in SG&A as sales grow. So as long as sales are growing and the competitive landscape stays relatively the same, you will continue to see a little bit of an increase in that because of fixed costs. But it won't be nearly as dramatic because the cost savings will be less incrementally.

Right, okay. And just also on the working capital front. I believe you had some long-term targets on a working capital ratio and I think you're doing great relative to those targets I think it was 13-18% of sales.

I think we are below the targets.

Right, is your thinking changed there and what might you expect to see for working capital in FY '05?

I would think it has the opportunity to continue to decline depending on how retailers respond and so I think there is more opportunity particularly on the inventory side. The thing you have to be careful of is that the generic business operates a little bit differently than the consumer packaged goods business. And that may slow down the improvement in working capital a bit. But there is still opportunity.

Okay. Okay. And just finally, can you just remind us about the one I think it was one version of the store brand version of Claritin that you had marketing exclusivity and when that exclusivity is to expire if it hasn't already? And then also can you comment if you still expect 10-milligram approval in FY '05?

Well the only one we are still waiting for is the decongestant 12 hour product. Other than that we had the 3 that were out and we are not - - I guess exclusivity is out on all 3 of those. We are coming out with the 10 milligram and we will start shipping that in September. But we are late to market. We are like number 4, I think out there in the marketplace with the 10 milligram. And the only one then we would - - so the 10 milligram will be a relatively small sales or profit contributor. And the only one we are still waiting for is the decongestant 12 hour. And the goal for that is to get it in the second half of the year so it as little later than we would want it and that is due to supply issues. And so unfortunately we are going to be very late on that one as well and it will be a nice product but it will not be a world beater.

Okay. And just one final one, if I may. Your projection for 4%-5% sales growth in FY '05. Maybe I missed it but did you say how much of that growth would be from the generics that you launch in FY '05?

It will be immaterial. I wouldn't expect anything - - I just wouldn't expect much of anything from generics in FY '05. I think the products that we will come out with in FY '05 will be in the second half of the year and will not have a great impact on either sales or earnings. FY '06 will be the year where we will start to see some material impact.

Okay. Very good. Thanks a lot.

Thanks, Linda. We're probably about to the end of our time that we have here. So if there is maybe 1 more question we could take that but that would have to be it.

Your next question comes from Keith Markey of Value Line.

Good morning. I was wondering if you might be able to give us numbers for your fiscal R&D budget and capital expenditures?

Keith, capital expenditures are $25 million to $30 million.

Okay.

And if you look at R&D and if you go back to the press release, I think that is the best place to start, okay. The press release for the year says R&D was at $27.7 million and we talk about 5-7 increase for the generic piece next year. And I think if you add those 2 together you're going to be pretty close to the ballpark.

Great, thank you. And I was wondering since you are developing a generics drug business, are you seeing any movement by the generic drug business, you know, companies to try to get store brand versions of their own products?

Very limited. Really Perrigo is far and away the market leader in store brand. And once in awhile we will see a competitor that does both. But nobody does the RX the switches the way Perrigo does it. And when we move into generics I think that will just reinforce the power of the position that we have in the OTC store brand. So, so far I'm not sure what the future will bring but so far we certainly do not see much of a change or any great movement on the part of some of the generic players to come in to the store brand over-the-counter market. And keep in mind store brand over the counter is high volume, quick changeover. Things like that and lower margins than what they get on the generic prescription products. so they would be a little cautious about diluting their profits by coming in and trying in a broad way other than on an opportunistic product by product basis trying to compete in the store brand over-the-counter area.

Great thanks. And if I could ask one more question. Should we expect to see sales and perhaps a small impact on earnings in the first quarter from that early sell-in?

I would not expect much in the first quarter.

Okay.

You know we might get a little bit more sell-in but I certainly would not think that is going to be a prime driver. The big test will come in the second and third quarter when the products really get out on the retailers' shelves and we see whether the point of sale moves through and retailer replenishment takes place.

Okay. Thank you very much.

Thank you and thank you all.

This concludes today's Perrigo Company fourth quarter fiscal year end 2004 results conference call. You may now disconnect.