Perrigo Company PLC (PRGO) 2006 Q4 法說會逐字稿

At this time I would like to welcome everyone to your Perrigo fourth quarter year end fiscal 2006 earnings conference call. [OPERATOR INSTRUCTIONS] It is now my pleasure to turn the floor over to your host Mr. Art Shannon. Sir, you may begin your conference.

Thank you very much. Good morning and good afternoon, everyone. Welcome to Perrigo's fourth quarter 2006 earnings conference call. A copy of our earnings announcement press release is available on our website at www.perrigo.com. On today's call are Dave Gibbons, Perrigo's Chairman, President, and CEO; Judy Brown, Executive Vice President and Chief Financial Officer; John Hendrickson, Executive Vice President and General Manager of Consumer Healthcare; and, Maury Arkin, our Vice Chairman and General Manager of Perrigo Global Generics and API.

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 and on an ongoing basis, and have included this discussion on pages 33 to 44 on our Form 10-K for the year ended June 25, 2005, with an update in subsequent SEC filings. Additionally, at 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 assessed from our website at www.perrigo.com. I would like to now turn the call over to Dave Gibbons. Dave.

Thanks, Art. As we all know, fiscal 2006 proved to be a very challenging year for Perrigo particularly in our Consumer Healthcare business. We had to deal with the legislative driven shift of pseudoephedrine based products to behind the pharmacy counter, that resulted in the need for reformulation and development of a large number of new replacement products. At the same time we were managing through uncharacteristic swings in demand as well as lower production volume. The speed and depth of that market shift was a much more difficult operating challenge than we anticipated before the start of the fiscal year. The resulting weak cough and cold product sales and margins were partially offset by the fact that fiscal 2007 was the best year ever for Consumer Healthcare in terms of new product introductions. These new launches contributed $77 million to sales, helping to soften the blow of the pseudoephedrine sales and margin decline.

At the same time the prescription generics and EPI businesses had very good operating results in fiscal '06. We're also pleased with the integration of these new businesses and with the continuing development of this new platform for long-term growth. Looking at the fourth quarter, the fourth quarter was the first time that our comparisons fully reflect Perrigo including the Agis acquisition in both periods. Consolidated sales were up $30 million or 9% to $355 million driven largely by the strong quarter for Consumer Healthcare. Net income in the fourth quarter was $12.3 million or $0.13 per share. Net income was $17.9 million or $0.19 per share before the charges for plant closings.

For the full year, consolidated sales were up $343 million or 33% to $1.367 billion, due mostly to the addition of the Agis sales. Reported net income was $71 million or $0.76 per share. The reported net loss for fiscal 2005 was $353 million or a $4.57 loss per share. Last year's loss was driven by acquisition related charges which Judy Brown will now explain as part of her financial review. Judy.

Thanks, Dave. I hope you've had a chance to review the figures we released this had morning. If you have you'll see they remain a bit complex due to the accounting for last year's acquisition and a few nonrecurring items this year. If you remember, the acquisition of Agis industry was completed on March 17, 2005. The balance sheet of those new business units was consolidated for the first time at the end of the fiscal third quarter on March 26, 2005. Then in the fourth quarter of fiscal 2005 the operating results for these businesses were included in our financials.

When we speak of adjusted results for this quarter and for the year, we are referring to all figures before the acquisition adjustment and is nonrecurring items. You can view the reconciliation from the reported GAAP net income and EPS to these adjusted numbers in table 2 of the appendix to our press release which is available on our website. So before going through the results of our business units for the fourth quarter, I would like to quickly review the charges that are unusual in nature.

In the fourth quarter of fiscal 2006 we announced the closure of two plants in the Consumer Healthcare business resulting in a $9 million restructuring charge, primarily for the impairment of assets. This charge was $5.7 million after tax or $0.06 per share. In the fourth quarter of fiscal 2005 several unusual items were recorded. First, a charge of $18 million after tax or $0.20 per share related to the write off of the step-up of acquired inventory. Second, a charge of $3 million after tax or $0.03 per share related to the settlement of class action lawsuits. Third, a charge of $1 million after tax or $0.01 per share related to legal work and integration support for the acquisition which was included in SG&A. And fourth, an adjustment to the acquisition related IPR&D charge resulting in a $2 million after tax reduction of expense or $0.02 earnings per share.

Now with that behind us I will put aside the GAAP figures and take you through the financial analysis of our fiscal fourth quarter based on adjusted results, i.e., the reported figures before these one-time and nonrecurring charges. As Dave noted, it was a very strong fourth quarter. Consolidated fourth quarter sales of $355 million increased $30 million or 9% from fiscal 2005's $325 million. All of this growth was organic as fourth quarter 2005 included the results of the Agis businesses. Adjusted gross profit was $108 million, an increase of $19 million compared to a year ago. The adjusted gross margin was 30.4%, up 300 basis points from last year's 27.4%. Adjusted operating profit was $30 million or 8.4% of sales, up from $22 million or 6.7% of sales a year ago. The adjusted consolidated net income was $18 million compared with $13 million last year. Earnings per share were $0.19 compared with $0.14 last year.

Now let's move on to the segments of the business focusing first on Consumer Healthcare. The Consumer Healthcare segment had a strong finish to a challenging year. Sales were $258 million versus $234 million last year, up 10% driven by strong volume near the end of the quarter. Vitamins and smoking cessation products sold through well. Analgesics experienced good response to promotions and more of our newly formulated pseudoephedrine replacements products moved out to retailers as we and they geared up for the cough/cold season.

New products contributed $26 million in the fourth quarter securing fiscal 2006 as Consumer Healthcare's strongest new product year ever. Offsetting this surge, fourth quarter sales of pseudoephedrine products declined $21 million versus last year. Adjusted gross profit of $68 million increased from last year's $55 million. Adjusted gross margin increased 300 basis points from 23.4% in 2005 to 26.4% in 2006. The increase in the adjusted gross margin was primarily due to higher sales and production volumes in the quarter offset by the negative impact of the decline in pseudoephedrine sales. Adjusted operating expenses were $46 million in fiscal 2006, up $9 million from fiscal fourth quarter 2005 mainly due to additional research and development spend and higher employee related costs. In total consumer health care had adjusted operating income of $22 million for the fourth quarter of fiscal 2006 or 8.7% of sales versus $18 million or 7.8% of sales in the same period in fiscal 2005.

Looking next at Rx Pharmaceuticals net sales were $33 million and include $5.2 million of non-product revenue. Sales were up 3% or $1 million from last year's fourth quarter. Adjusted gross profit was $15 million, up $3 million from last year's $12 million. Adjusted gross margin increased to 45.3% of sales from last year's 38% of sales due to favorable revenue mix in the quarter. Operating expenses were $12 million, unchanged from fiscal 2005. Adjusted operating income was $3 million versus $400,000 last year.

Next the API segment. Net API sales were $27 million, up $4 million from last year. Adjusted gross profit was $11 million, up $1 million from last year. Adjusted gross margin was 41.6% of net sales, down from 43.4% last year. This decrease of 180 basis points was driven by an unfavorable product mix versus the fourth quarter last year. Operating expenses were $6 million, up $1 million from last year due to higher third party commissions and employee related costs. Adjusted operating income of $5 million was unchanged from 2005.

The other category includes Israeli businesses for consumer, pharmaceutical, and diagnostic products. Fourth quarter net sales in this category were $37 million, up $2 million from last year. Adjusted gross profit of $14 million for the fourth quarter of fiscal 2006 was up $2 million from last year. Adjusted gross margin increased 270 basis points in fiscal 2006 to 37.1% of sales from 34.4% last year due to an improved mix of higher margin products in the consumer product portfolio. Operating expenses were $11 million down from $12 million last year. In the fourth quarter of fiscal 2006 the other category had adjusted operating income of $3 million, up from the fiscal 2005 fourth quarter operating loss of $200,000. Unallocated corporate expenses of $3 million in the quarter are up $1 million versus last year.

Now I would like to walk you briefly through our annual results. Please remember that in the annual results of 2006 we had three items which were unusual in nature. First, the fourth quarter $9 million restructuring charge arising from the closure of the two Consumer Healthcare plants which I mentioned earlier which amounted to $6 million after tax or $0.06 per share. Second, the write off of an inventory step-up charge recorded in the first fiscal quarter which reduced gross profit and operating income by $5 million and net income by $4 million or $0.04 per share. Third, a gain of $5 million, $3 million after tax, or $0.03 per share for the sale of an equity investment in a Canadian distribution business which was recorded in the second fiscal quarter.

I would also like to remind you that in fiscal 2005 there were a number of non-operating charges included in the full year 2005 results totaling $427 million before tax. $416 million or $5.38 earnings per share after tax. This was comprised mainly of acquisition related items. First, a charge of $387 million before and after tax or $5 per share related to the write off of in-process R&D. Second, a write off of $18 million after tax, or $0.24 per share related to the step up of acquired inventory. Third, restructuring charges of $4 million after tax or $0.05 per share within the consumer healthcare business. Fourth, a charge of $3 million after tax or $0.04 per share related to the settlement of class action lawsuits. And fifth, a charge of $4 million after tax or $0.05 per share related to legal work and integration support for the acquisition which was included in SG&A.

Consolidated annual sales were $1 billion, $1.367 billion compared to $1.024 billion in fiscal 2005 an increase of $343 million or 43%. Fiscal 2006 sales included $316 million of incremental revenue from the Agis businesses. Sales of pseudoephedrine containing products declined $90 million year-over-year. However, this was offset by $77 million of new product introductions in Consumer Healthcare. Adjusted gross profit was 403 million, an increase of $119 million compared to a year ago. The adjusted gross margin was 29.4% compared to 27.7% last year. Adjusted operating expenses were $278 million, up $90 million from last year. This full year increase was driven by $70 million of incremental SG&A expenses related to the Agis businesses and corporate services and $14 million of additional R&D spend. The adjusted consolidated net income was $78 million versus $63 million last year. Earnings per share were $0.83 this year versus $0.81 a year ago. The fiscal 2006 reported effective tax rate was 32.6%. This rate reflects the product and geographical mix of a full year's worth of income from the Rx and API businesses which overall, our taxed at rates lower than Perrigo's historical averages.

Now from the P&L on to the cash flow. Cash flow continues to be very strong. Operating cash flow was $127 million versus $78 million last year, an increase of $49 million. Growth on a net income line year-over-year and the incremental add back of acquisition related amortization were the primary drivers of this increase. We were a net user of working capital in the fourth quarter with the strong sales increasing accounts receivable and preparations for seasonal buying increasing inventory. Free cash flow which is operating cash flow less our $36 million investment in CapEx and a $15 million of dividends paid amounted to $75 million for the year. This was up from $39 million last year when we invested $27 million in CapEx and paid $12 million in dividends.

Some of this cash was used to repurchase 1.9 million shares during the full year for approximately $28 million. Over the course of fiscal 2006 we were able to decrease net debt by $51 million to $196 million. Our debt to total capital is now at 27.3%, down from 32.3% last year.

Without a doubt fiscal 2006 was a challenging year. The year-over-year decrease of $90 million in sales of pseudoephedrine containing products at higher than average gross margins and their related obsolescence costs pulled down operating profit. At the same time Consumer Healthcare's attention to development and launch of new products paid off in a record new product year for that business. This definitely helped soften the blow of pseudoephedrine.

The newly acquired Rx, API, and Israeli businesses performed very well adding $51 million in adjusted operating income this year. With operating cash flow up $49 million from last year, and net debt down $51 million, we leave fiscal 2006 in a stronger financial position than when we entered despite the clear challenges of the pseudoephedrine issue. Now let me turn the discussion back over to Dave.

Thanks, Judy. At the time we acquired Agis we said we would pursue opportunities to integrate our businesses, look for ways to make our operations as efficient as possible, and improve or eliminate underperforming assets. Consequently, as Judy noted, we will exit the unprofitable sillium based laxative product line and the effervescent tablet product line and we'll close the two facilities where these products were produced.

Summarizing recent product development announcements, in the past quarter we noted participation with Barr laboratories on their filing for Triamcinolone, which is NASACORT nasal spray equivalent. The patent holder, Aventis, has filed suit to prevent Barr from commercialization of its product and the patent challenge process under Hatch Waxman is now under way. Additionally, we also noted participation with Dexcel Pharma Technologies on their filing for Omeprazole delayed release tablets, Prilosec OTC equivalent. In this case the patent holder, AstraZeneca has filed suit to prevent Dexcel from commercializing its product and our patent challenge is under way here as well.

In June we received FDA approval for coated Nicotine Gum equivalent to OTC Nicorette. We are the first store brand approval and we will begin shipping late calendar year 2006. This is a terrific new addition to our smoking cessation offering. We also announced a tentative approval for amlodipine tablets for the treatment of high blood pressure. This comes through our a partnership with Kali Laboratories. Final approval subject to the expiration of patent protection in September 2007. First shipments are expected shortly after that.

Let's move on now to the outlook for fiscal 2007 and I will go through business by business starting with the consumer healthcare business. Over the past year as we have discussed at length the pseudoephedrine issue deeply impacted our Consumer Healthcare business affecting sales, demand planning, inventory management, service levels, operations, and our margins. It was a significant hit to margins as sales of pseudoephedrine based products dropped from $182 million in 2005 to $92 million in 2006. But now as we look to 2007, we believe that we're past the worst of the market shift due to pseudoephedrine.

While we expect pseudoephedrine behind the counter sales will stabilize in fiscal '07 between 30 to $35 million, we have many reformulations coming to market, and we expect a more predictable sales pattern developing for the 2006/2007 cough, cold, and flu season. Obviously the combined numbers will still be well below where we were in fiscal 2005, probably somewhere between 110 to $120 million range, and life would be better if we were back at those 2005 numbers, but I really think we've done a pretty reasonable job weathering the storm of pseudoephedrine in the past 12 to 18 months, and it is nice to see us coming out of that cloud now. We should also have another good new product year ahead driven by continued growth in our smoking cessation product portfolio of uncoated gum and coated gum, and lozenges. We expect our fiscal 2007 new product sales to exceed $50 million. This new product volume and a stabilization of the cough/cold category will help to drive our margin improvement this year.

These gains will be offset to a degree by a few factors. Higher R&D spending which will be between 3% to 4% of sales higher than our historical investment rates in consumer healthcare, but reflective of the strategic importance of new product development to us. Continued investment in quality systems where we are investing in manpower, training, and technology and finally investments in information technology to improve our infrastructure, planning, and customer service. In Consumer Healthcare we're expecting modest sales growth next year of 3 to 4%. This should allow, though, consumer healthcare to, for the first time exceed $1 billion in sales. Additional high-end margin new products in our portfolio next year should contribute to operating income growing to between 98 and $104 million from fiscal '06 adjusted operating income of $88 million for consumer healthcare.

In our global Rx and API businesses which delivered terrific results in 2006 we see a tougher operating environment ahead. The competitive environment in generic Rx which has been very difficult in oral solid dose is becoming increasingly challenging in our core products as well. We expect to see margin erosion as we defend our market share in our existing topical product portfolio. For the short-term, sales and margin contribution from new products will be much lower as fewer topical products are coming off patent in the next twelve months. At the same time outlays for R&D will increase 25 to 30% as we put more emphasis on the complex, high barrier niche products that we see as key drivers of long-term profitable growth. This will include more concentration on paragraph 4 opportunities such as our previously announced clobetasol foam and triamcinolone products.

We recognize that these types of products take longer to develop and bring to market, but we believe they will drive higher earnings growth longer term. In this more challenging environment next year we look for the Rx, API and other segment sales to grow approximately 6% to nearly $400 million. We forecast operating income to be between 45 and $49 million, a decline from the fiscal 2006 adjusted operating income of $51 million. That decline is driven by the margin pressures and the increased research and development spending that I just talked about. In fact, if research and development spending were held to fiscal '06 levels, we would see a decent increase in profitability from these businesses. But we're comfortable with our decision to invest in what we feel are some very exciting opportunities for the future. We're going to do what we think is the right thing to do for the long-term.

At this time our expectation is for good growth in the other category which is comprised of the Israeli domestic businesses. However, we are very well aware of the fact that results in this category could be impacted if the current conflict in Israel either extends or continues for an extended period of time, and we are of course monitoring these businesses closely. On a consolidated business our 2007 earnings guidance is expected to be in a range of $0.86 to $0.91 per share excluding the $0.02 per share of restructuring costs that we'll take in 2007.

Looking further out, let me wrap up with a few additional comments. First, it sure is nice to see our Consumer Healthcare business get back on a solid footing. Despite the difficulties of the past year, Consumer Healthcare is a strong business that provides a lot of the cash flow for our investment in future growth. Our global generics businesses had a very strong year. We have a good strategy to focus on higher margin niche topical products, and we're employing our scientific and intellectual property assets to develop sophisticated new products that will help drive long-term growth in both the global, generics business and in our API business.

In our first year as a truly global company, I am pleased with our integration process -- progress, and everyone at Perrigo is looking forward to growing together as we continue to invest to meet the need for affordable pharmaceutical products. With that, we'll now take your questions and joining me for the Q&A are Judy Brown, our CFO; John Hendrickson, who is our Executive VP and runs our Consumer Healthcare business; and for the Global Generics and API businesses, Maury Arkin, who is our Vice Chairman and who runs those businesses.

[OPERATOR INSTRUCTIONS] You are first question is from Derek Leckow with Barrington Research.

Good morning, everyone.

Good morning, Derek.

Congratulations on a great quarter and a finish to a tough year. Just wanted to touch on, real quick, the mount of revenue from PFC replacement in Q4?

The exact amount of revenue from those products was -- we were still looking at single digits for the year on our phenylephrine products that we introduced over the course of the year, and as far as the total amount of other PE replacement products, also in single digits.

As I look at the guidance that you talked about, the combined business there being 110 to 120 and just wanted to get to the assumption on existing PSE, I think you said 30 to 35 million behind the counter. Is that going to be the total amount for PSE that you're assuming right now.

That's correct. On a go-forward basis we would expect PSE behind the counter to be in that range.

It drops from 92 to that kind of range?

Correct.

Great. And then looking at the comment you made about the write off of in-process R&D, Judy or Dave, the $5 per share, I wondered if you guys could maybe just touch on that a little bit and talk about what you think you might realize there in terms of value from some of those in-process R&D initiatives?

Just a general comment on that, Derek, is certainly when we made the acquisition of Agis industries, one of the things we were taking was a long-term view of getting into the generic and API businesses. We felt that there was strong value in our -- in the pipeline we would be getting. There's certainly varying time lines there, generics in the Rx side coming out maybe a little bit more midterm and API being much longer term. You start development in the API area and it could be eight or ten years before you start to get your payback. But what we did see was intellectual property and product development opportunities that were under way that we thought really gave us a good opportunity for that future, and I don't know, Judy, if you have any other comments specifically on it, but we can't say anything about the specific products, but I can tell you that we did see a lot of value there, and that's why we made the acquisition. Judy?

Absolutely. Just to add onto that, Dave, the accounting and financial process behind doing that valuation and coming up to a $386 million write off charge is a long-term view of the potential future value of those projects that were in progress at the time of the acquisition. Some of those still moving forward at exactly the same pace, some at a different pace. The portfolio of activities in R&D may have changed in the 15 months since the acquisition, but we still feel that that value of those opportunities is still relevant to the overall long-term value of the Corporation.

Thank you. Commented that really nothing new is coming out in 2007, so as we plot that out over time we should probably start to think about two to three years out for some of those new products that are in that category, right.

That's correct.

And it will vary. That will vary, Derek, but that's a good way to look at it.

Then if I could just touch on the -- in the Consumer Healthcare business, the comments about omeprazole. If I look at my calendar here I come up with a October '07 decision making period for that and I wondered if you could talk about that and maybe when you think you might be able to have a product on the market?

I think the October 2007 time frame is the earliest possible that we would see that opportunity, but I will toss it to John Hendrickson who runs our Consumer Healthcare business to give some further information on omeprazole.

Derek, it is certainly a complicated item. There are a number of patents that cover the product. They expire over the next say ten years even, and so as you go and work through the litigation issues, you've got to get through those, and so that's where -- one of the patents expires during that time period next year, and there are others that you have to work with litigation wise to be able to launch during that time period. We hope to be there as soon as possible.

Okay. I guess just to finish up here in terms of your assumptions in that guidance that you gave, could you give us the number of shares you think you will have and also the tax rate and then, Dave, if you could make any qualitative comments at all about acquisitions because I know that from prior discussions with you that had been an area that you were working on, but certainly with the balance sheet as it was and today with the balance sheet being much stronger and at 27% that debt to capital, what's your appetite and what's the pipeline look like for acquisitions?

Derek, I will take the acquisition part first, and then Judy can take the parts that you directed at her.

Okay.

Just on acquisitions, again, one of the reasons we're so pleased with the cash flow that we're generating is that it has enabled us to pay down a lot of the debt. It has been stronger than we expected, and leaves us in a stronger financial position one year or so after the acquisition was completed than we might have expected we would be in. We recognize that. We do have an appetite for additional acquisitions if they make sense. The best way I can put it on that score is we have an appetite for acquisitions. We are not feeling that we have to do an acquisition. We're not in a rush to do an acquisition. We have a lot of opportunity with what we have, but we are certainly open to doing the right strategic acquisitions that will continue to build on the position that we're establishing in the Rx and API areas or that would enhance our opportunities in Consumer Healthcare, and we are open, not in a rush, and with that I will toss it to Judy for some of other questions you had and then we'll have to take another caller.

Derek, you had two points. Shares and taxes. If you look at the way we ended the year, diluted outstanding shares were approximately 94 million. At the end of this year. If you're looking forward into '07 and trying to make some assumptions about that, we have our 10b5-1 repurchase plan in place. I would assume that that plan is continuing into next year and use this year's buyback as an assumed range of repurchasing next year exclusive of any other activities that Dave referred to strategically in terms of acquisitions, so using that assumption to project forward to '07. In terms of taxes we ended the year at 36.2%, a big piece of change from last year came about because of the geographical and product mix shift that I talked about, a little bit less than half of the income came from overseas which changed that range. The mix of income next year is going to be similar to '06. We are continuing to look at ways to optimized our tax position for looking forward I would assume a decrease of approximately a 0.5 to 1% looking forward for next year.

Great. Thank you very much. Everyone, congratulations and good luck.

Thanks, Derek.

Thank you. Our next question is coming from Randall Stanicky with Goldman Sachs.

Good morning, everybody. Try to stick to two questions here, the first one being if we take the delta, obviously the head wind from PSE and PE from a revenue perspective is going to improve in F '07. If we take that delta of roughly $25 million, and then I think you mentioned 50 million in new, expected new product introductions, can you just calibrate that with the 3% growth rate that your guidance implies or 3 to 4% on the consumer side? And then secondly, just a follow-up on the acquisition question. We're hearing a lot of consolidation talk from the generic calls that we have heard thus far this quarter. Maybe, I guess do you agree that we're likely to see a lot more consolidation from your perspective? And Judy, where are you right now from a comfort perspective when you think about leveraging capital structure? Thanks.

Okay. In terms of the delta, when you talk the OTC or consumer healthcare segment, we're just like -- we may be pharmaceutical end of it, but we are similar to many consumer products companies in that there's -- you're always expecting erosion in your core products. There is always going to be some erosion in those core products, and we look to make up for that erosion by bringing out new products and in this case in this coming year by starting to build back up our product offering in the cough/cold category to get us at least closer back to where we ever a few years ago, and I really think that covered -- that's really where the delta comes, and it is nothing unusual. In fact, the years where we really break that delta wide open are years where we would have say a big new product introduction on a first to file Rx to OTC switch like omeprazole coming up. In the year when we come out with our omeprazole product you're going to see a big surge both in our sales growth and profitability growth because of the revenue contribution and margin contribution from that new product. '07 is going to be probably more typical to most years without one of those great single product hits like that.

In terms of acquisition and consolidation that you're hearing about, I don't think that should be unexpected. We hear the same thing, and it really follows from the increased competitive margin pressures that you're seeing in the generic industry and in the API industry. There is really not much more I can add to that. We see that continuing, and we think that our strategy plays well against what's happening with the margin pressures. We think that the Agis acquisition has positioned us well as our initial entry into generics and API. We think the strategy we have in that for expanding in the niche topical area and looking at new delivery forms such as foams and mousses and gels is a good strategy, and we will look to take part in some of that consolidation where we see acquisition opportunities that will enhance our position in generics and in API. With that I'll turn it over to Judy.

Sure. Randall, I think your question was directed at capital structure and how we see that looking on a go-forward basis. We commented earlier on this year's cash flow. It was strong. It enabled us to be able to improve our net debt position, improve our debt to capital ratio at the end of the year, and to Dave's point earlier, we are at a point where we are able to throw up enough cash to fund our CapEx requirements, fund enhanced R&D investments, continue to pay our dividends at the same level, continue to pay down debt. We are closing in on what is the fixed portion of our debt, at approximately $150 million, so we would not be going and paying into that early. We would keep that debt on our balance sheet and look for ways, then, also to fund future acquisition opportunities to drive growth. I hope that answers your question in terms of uses of cash and changes in that structure.

It does. Thanks. Just to follow-up on the -- when we look at the moving parts of the consumer health business and we look at the guidance you provided from an operating perspective, it looks like we're looking in the same range, maybe even modestly higher from an operating margin perspective. Is that a fair comment?

The operating margins will be double digits.

Right.

In growth because we've worked our way through the great bulk of the operational issues that were caused by the need to reformulate and validate, et cetera, all those new phenylephrine products in the past year.

Operating as well as gross margin.

As well as gross margin. Very helpful. Thanks a lot, guys.

Thank you. Your next question is coming from Linda Bolton Weiser with Oppenheimer.

Thanks. I had a a question. I thought that you had talked about the new API contract that you had received sort of making up for shortfall in new products in consumer healthcare, and yet it seems that the 77 million in new products is very close to I believe it was 80 million originally. Did that all happen as expected and also was the non-product revenue all in the Rx segment or was there some in the API segment as well?

I'm just going to take -- this is Judy. I am going to take your questions in reverse. On the non-product revenue side, there were -- there are $13 million of non-product revenue for Rx and API for the year. If you look in the press release, you will see fourth quarter non-product revenue in Rx of $5 million, and then we have year-to-date non-product revenue of $8 million prior to that. That is comprised of both royalty income as well as income from the supply, purchase, and license agreement that we talked about in more detail at our second quarter conference call. In terms of the ongoing revenue from that supply purchase and license agreement, we expect to see revenues next year, non-product revenues next year continuing in the Rx segment related to that.

Your first question regarding the contribution of API offsetting consumer healthcare, I am not quite sure how those two offset because to your point consumer healthcare, new product sales of 77 million did come in line with our expectations of approximately 80 million, and we were pleased with the contribution that the supply purchase and license agreement components were going to be able to contribute to the bottom line operating income which we felt would help compensate for some of the shortfalls in operating income in consumer healthcare driven by the pseudoephedrine issue that we've talked about throughout the year. So they're not linked in any way between API and Consumer Healthcare.

Okay. Can you remind us when the uncoated gum and the lozenges first shipped?

The lozenges first shipped earlier this calendar year, I believe, but, John, I'll toss it to you.

Under the first shipment of uncoated gum actually began in 2005 right at the end of 2005, really didn't start in earnest until first quarter, later first quarter of 2006. Nicotine lozenge was third quarter of 2006, I believe in the March time frame, right in there, but third quarter 2006 really started hitting in end of Q3 and really hit in Q4.

How cannibalizing of the uncoated gum do you think the coated gum will be?

Yes. We do have as we plan on launching coated gum some cannibalization in our models of what will happen to the uncoated gum. However, from a brand standpoint there is separate consumers for coated and uncoated. You would expect some cannibalization, but not phenomenal amounts given the different consumer who likes each product.

Coated gum will certainly be a good enhancement to that product line and fill it out nicely.

Okay. And just finally, Judy, do you have any projection for just like the quarterly or annual run rate of corporate expense going forward?

On a go-forward basis if we look at this year, we've ended up the year with approximately $14 million in total corporate expenses. That included about 2 to 3 million in integration costs. On a go-forward basis I would expect the run rate to be similar to what you've seen for the full year this year due to the fact that we are also going to be making some enhancements in information technology. So you could expect a rate around where we are today.

Okay. Great. Thanks very much.

Certainly.

I think we have one more question and I know we talked a little more in our presentation today, so we're probably running a little bit later than most of our conference calls, but that is because this is the call on which we give you our annual guidance, so we had a little more to say today, but we will take one more question.

Thank you. Your final question is coming from Steve Wikeol with Landmark Capital.

Hey, guys. Good -- well, actually congratulations on year-over-year improvement in free cash flow. A question regarding--.

We always like to hear that.

Questions regarding some guidance for '07. I know you kind of gave us some broad information, but for modeling purposes, I just want to make sure that I am not too far off here. For '07 depreciation and amortization last year or this past year was 57 million. Is that a good figure to use going forward?

On a go-forward rate, yes, that's reasonable given that we'll now have year-over-year full year on the amortization of intangibles.

Changes in working capital, negative 12 million roughly this past year. Is that a pretty good figure to use going forward?

Well, we would always like to work on making improvements to working capital, so is it reasonable to use negative 12 going forward, yes, although I would tell you that management is focusing on bringing that number down and working, continually working on working capital projects.

It is reasonable to use it but we like it to be better.

Good. That's what I want to hear. Good. CapEx. CapEx last year was about $36 million. Can you give me a sense as to what you think that figure will be in '07?

We're talking 40 to $50 million for '07.

Okay. Great.

Which we will tighten up over the course of the year.

That number is not out of line for -- that I think last year may have been a little light. I feel very comfortable in the range Judy is mentioning of 40 to $50 million range.

Good. Well just kind of eyeballing these numbers here it looks like based on the way I calculate free cash flow that you guys could be looking at again improving again year-over-year. Again, congratulations, and I am really glad you guys are taking a long-term view of the business and not just trying to put up great quarterly numbers.

Well, we appreciate it. We would like to do both, and that will continue to be our goal, but I guess I would end the call thanking all of you for participating, and I also sure want to thank Perrigo's management team and all our businesses for a very good job in a tough challenging environment this past year. The coming year may also be a tough challenging environment in certain ways, but I feel very good about the management talent that we have to work our way through these issues and build a terrific long-term future for our shareholders. Thanks very much, everybody.

Thank you. This does conclude today's Perrigo conference call. You may now disconnect.