Perrigo Company PLC (PRGO) 2013 Q1 法說會逐字稿

Good morning. My name is Cassandra, and I will be your conference operator today. At this time, I would like to welcome everyone to the Perrigo's fiscal-2013 first-quarter earnings results. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

(Operator Instructions)

Thank you. And now, I would like to turn the call over to Art Shannon. You may begin.

Thank you very much, Cassandra. Welcome to Perrigo's first-quarter 2013 earnings conference call. I hope you all had a chance to review our press release, which we issued earlier this morning. A copy of the press release is available on our website at Perrigo.com. Also on our website is a slide presentation for this call.

Before we proceed with the call, I'd like to remind everyone that the Safe Harbor language contained in today's press release also pertains to this conference call. Certain statements in the call are forward-looking statements within the meaning of section 21E of the Securities Exchange Act of 1934 as amended, and are subject to the Safe Harbor created thereby. Please see the cautionary note regarding forward-looking statements on page 1 of the Company's Form 10-K for the year ended June 30, 2012.

I would now like to turn the call over to Perrigo's Chairman and CEO, Joe Papa. Joe?

Thank you, Art, and welcome, everyone, to Perrigo's first-quarter fiscal-2013 earnings conference call. Also joining me today is Judy Brown, Executive Vice President and Chief Financial Officer. First, let me say on behalf of all of the approximately 9,000 employees of Perrigo, that we wish everyone impacted by Hurricane Sandy well, as you work through the recovery from the damage of the storm. We have numerous employees that were impacted by this storm, so we do appreciate the difficulties of working through this challenging time. Our thoughts and prayers are with you.

For our agenda today, I will provide a brief perspective on the quarter and the continued strength in store-brand market-share growth. Next, Judy will go through the details of the quarter and our increased fiscal-2013 earnings guidance. Then, I'll provide an update on the transition to plastic containers in our infant formula business, and our plans for new product launches, plus an overview of expectations for the coming year. And I will present an update regarding the ongoing integration of Sergeant's Pet Care. Finally, this will be followed by an opportunity for Q&A.

Now, let's discuss the quarter. On slide 4, you can see we had record first-quarter sales of $770 million, with record adjusted net income, up 16% from last year on a 6% net sales growth. We're off to a great start, as we have all-time high first-quarter adjusted gross and operating margins. Consolidated adjusted operating margin was a 23%, driven by adjusted gross-margin expansion despite an 18% increase in our adjusted R&D investment compared to last year. To be candid, the top-line growth was not at the level we had planned, due to primarily weakness in our Nutritional segment, which I will explain further in a moment.

Turning to slide 5, you can see the business segment breakdown. Judy will walk you through the details, but I want to just touch a few items. First, our Consumer Healthcare segment had all-time record first-quarter sales. The performance was driven by an increase of $36 million in existing sales, as the base business continues to gain market share, along with $13 million in new product sales due to Loratadine-D 12, Lansoprazole, minoxidil foam, and the recent launch of dextromethorphan extended-release suspension. Consumer Healthcare adjusted operating income was up 14% versus last year.

Our Nutritionals segment was down from last year, due to lower sales in VMS, and the planned conversion to a plastic container in the infant formula business. Remember, we had increased retail shipments of infant formula placed in the fourth quarter of fiscal 2012 in advance of the planned July 1 shut-down of the Company's Vermont facility to perform an SAP conversion, and more importantly, to prepare for the installation of new plastic container packaging line. This, along with unprecedented promotional spending from the national infant formula brands, dampened sales during the quarter.

Our Rx business had another great quarter. Rx net sales increased 28% compared to record first-quarter sales last year, and adjusted operating income grew more than 31% as a result of the Paddock acquisition, new products, and a favorable pricing environment. Furthermore, organic net sales grew 13% in the quarter. The Rx team continues to execute. Our API segment faced some competitive pressures in this base business, leading to lower sales for the quarter.

Looking at slide 6, the overall OTC consumer market was relatively flat versus last year, but the national brand is down 3%, store brands gained 8.5% on the strength of new-product launches, national-brand recalls, and increased market share. Noteworthy, the diabetes category experienced tremendous store-brand growth of nearly 17%, while the category was up 4%. Store brands continue to drive growth in the market.

I'm sure you'll have plenty of questions about our updated fiscal-2013 guidance and our market-share gains, and I'll get into more of that detail shortly, but now let me turn the call over to Judy.

Thanks, Joe. Good morning, everyone. As you just heard from Joe, on a consolidated basis, we had a very solid start to the year. During the next few minutes, I'll provide some color commentary on our fiscal-2013 first-quarter results by segment, and then review our revised expectations for the fiscal year. So, let's move directly into the business segments. On slide 7, you'll note that Consumer Healthcare's first-quarter net sales increased 9% year over year, due to a combination of -- an increase in sales of existing products of $36 million in the contract, cough/cold, and smoking cessation category; new product sales of $13 million in the gastrointestinal, cough/cold, and dermatological categories; and $9 million attributable to the acquisition of CanAm.

Specifically, sales in the GI category, which includes the store-brand versions of Omeprazole and Lansoprazole, among other products, were up 6% year over year. In total, this combined $58 million increase was partially offset by declines of $17 million in sales of existing products in the analgesic and fem hy categories, and $4 million due to discontinued products versus last year.

The 90-basis-point increase in adjusted gross margin was driven by new products, product mix across the broad CHC portfolio, as pricing during the first fiscal quarter was slightly better year over year, and good cost control in our manufacturing plants. We invested more in CHC R&D projects versus the first-quarter last year, and DSG&A spend was controlled to a lower percentage of sales, even with the inclusion of CanAm expenses versus this time last year. As a result, adjusted operating margin increased 70 basis points year over year, slightly less than the adjusted gross margin expansion.

On slide 8, you can see that net sales within the Nutritionals segment declined 14% year over year due to several factors. First, as we noted in August, we fulfilled retail shipments at the end of June in advance of our planned July 1 shut-down of our Vermont plant, when we both executed an SAP conversion and commenced the installation of a new, $29 million, state-of-the-art, consumer-friendly packaging line to allow our infant formula products to look and feel like the national brands. As we noted on our August 16 call, this shut-down shifted over $10 million of sales that would have taken place during the first fiscal quarter of 2013 to the fourth quarter of fiscal 2012.

Second, regulatory changes in one of the Company's main international markets caused a delay in fulfillment of international orders. We expect to resume fulfilling these international orders in the second half of fiscal 2013. Third, VMS sales were lower year over year due to increased competition within the category, and a decline in sales of approximately $1 million due to discontinued products. While new sales are still currently anticipated within this category during the fiscal year, the timing of these new sales is more heavily weighted to the second half of the fiscal year. Therefore, we are still anticipating sales will improve over the coming quarters.

The adjusted gross margin in the Nutritionals segment decreased 160 basis points due to several factors. First, we have been able to maintain the traction made in prior quarters with respect to infant formula pricing, and have seen favorable year-over-year manufacturing progress, even despite the plant shut-down in the first week of July, both of which were positives. However, the relatively lower-volume sales in this category negatively impacted margins, causing approximately one-third of the overall margin decrease. Another one-third of the decrease was a combination of sales declines and increased inventory costs within our VMS product category, with the remaining one-third primarily due to product mix across the smaller product categories in the segment. While our adjusted DSG&A spending was down over $1 million year over year due to good cost control, the adjusted operating margin decline was greater than that of the adjusted gross margin on weaker top-line leverage.

Now, turning to slide 9. You can see that the Rx business has started fiscal 2013 very well, continuing its strong performance. Net sales growth of 28% was due to a combination of an incremental month of sales from the acquisition of Paddock Labs included in this quarter versus a year ago, new product sales of $8 million, and robust gains in our organic Rx business. In fact, Rx sales without the additional month of Paddock grew 13% year over year. Adjusted gross profit for the quarter was strong compared to last year due to the same three reasons. In Rx, spending on adjusted R&D increased approximately $2 million from last year, while DSG&A spend decreased as the team continued its focus on expense management. This allowed the team to translate a slight adjusted gross margin decline into further expansion at the adjusted operating-margin level.

Next, on slide 10, you'll see that API's first-quarter net sales were impacted by approximately $17 million of lower demand for existing products in the portfolio as a result of increased competition. These decreases were partially offset by $7 million related to the launch of a customer's products with 180-day exclusivity status. As we frequently note, sales of API are highly dependent upon the level of competition in the marketplace for specific materials, as well as the variable ordering patterns of customers on a quarter-over-quarter basis, so we expect revenue choppiness to continue on a go-forward basis.

Now, some quick highlights on our balance sheet. Excluding cash and current investments, working capital was $639 million at the end of the quarter, up from $560 million at this time last year, reflecting primarily the impact of our acquisition of the diabetes care business, organic growth, and investments in product-growth initiatives for CHC and nutrition planned for later in the year. As of September 29, 2012, our current and long-term debt on the face of the balance sheet was $1.4 billion, flat sequentially from last quarter. Excluding cash and cash equivalents, our net-debt-to-total-capital at the end of our first-quarter fiscal 2013 was 27.3%. Net cash flow from operations for the first quarter was $45 million, down from first-quarter fiscal 2012, due to growth in operating working capital levels to support the product growth initiatives I just noted, as well as higher payroll and tax payments in the fiscal first quarter versus this time last year.

Now I'd like to turn our attention for a moment to the fiscal-2013 plan, and walk through a few updates to our global cost allocations on slide 11. Over the last several years, we have grown rapidly and added more manufacturing sites to our global supply-chain footprint. Our team has been actively optimizing activities across our whole integrated network, enabling better cost savings and sharing of operational resources across locations and segments. As mentioned last quarter, it's obviously important that costs are charged to the business segments where the benefits are received, and accordingly, we've updated our allocations of these shared costs in this fiscal year to better reflect our more comprehensive global management of the Perrigo supply chain.

In order to ease your analysis, we've updated the past four quarters' adjusted margins to reflect the new allocations. While the adjusted margins change slightly for each segment, please note that there are no changes to the consolidated Perrigo P&L. The result is that Consumer Healthcare's margins are now slightly higher, as this segment was incurring the bulk of the expenses that were used by all of the other segments. Conversely, the margins for the other three segments have moved slightly lower due to this reallocation.

Now, I'd like to discuss our updated earnings outlook for the full-year fiscal 2013. On slide 12, you'll see that we are updating guidance for the Consumer Healthcare segment based upon our October 1 closing of the Sergeant's transaction. We expect Sergeant's to add more than $100 million in net sales during the remaining three quarters of fiscal 2013. Thus, we now expect the Consumer Healthcare segment revenue to grow 16% to 20% over fiscal 2012. Given the higher gross margins for Sergeant's products, we now expect adjusted gross margins for Consumer Healthcare to be in a range of 32% to 36%, and adjusted operating margin in a range of 17% to 21%. We are not making any adjustments to our guidance for the other segments at this time.

Summing these changes back to the consolidated P&L on slide 13, we now expect revenue growth of 12% to 16% year over year, up from the previously stated 10% to 14%. Additionally, we are moving our adjusted operating margin guidance to be between 21% and 24%, tightening the bottom end of the range from last quarter. We expect Sergeant's to add approximately $0.10 of EPS on an adjusted basis in the remaining nine months of fiscal 2013, as sales from our pet healthcare business are more heavily weighted towards our fiscal first and fourth quarters. In total, we now expect fiscal-2013 adjusted earnings per diluted share to be between $5.45 to $5.65, or year-over-year growth of 9% to 13%.

We are increasing our capital expenditure guidance for the year to a range of $120 million to $150 million. This new guidance incorporates our Sergeant's acquisition, as well as investments in capacity to support updated product-pipeline launch assumptions over the next several years. While we realized an $0.08 earnings per share tax benefit in this fiscal quarter due to the resolution of various tax audits and statute expiries, we're not adjusting our full-year effective tax rate expectations, due to the updated forecasted mix of earnings before tax, plus the inclusion of the acquisition of Sergeant's, whose earnings are predominantly US-based.

The Perrigo team is immersed in a very busy start to fiscal 2013. We're in the midst of integrating a new business, launching dozens of new product offerings, and building out our capacity and platforms for the longer-term horizon, all while keeping our eye on the ball of servicing customers with the highest-quality, affordable healthcare products that exceed your expectations. This team is committed to driving continuous improvements to ensure solid execution for this fiscal year, while at the same time seeking the right opportunities for inorganic investment that meet our stringent criteria.

Now I'll turn the call back to Joe.

Thank you, Judy. As Judy just outlined for you, we had a strong quarter despite the weakness in our Nutrition segment, but now I want to focus on the future. This year, we are planning on launching over 60 new products that we expect will translate into approximately $190 million in annual Perrigo sales, as you can see on slide 14. Essentially, we plan to launch more than one new product every week in fiscal 2013. In our Consumer Healthcare business, we are preparing for the launch of the store-brand version of Mucinex 600 milligrams, with annual branded sales of approximately $135 million. We are in the process of validating additional batches of Guaifenesin ER 600 milligrams, and continue to expect the launch of this product during our current fiscal year. While it is too early in the cough/cold flu season to make too many comments, it appears to be tracking along a normal trend.

In our Nutritionals business, highlighted on slide 15, we are excited about the upgrade of our infant formula national-brand-equivalent packaging. As you have seen in our other products, when we closely match the packaging of the national brand, we gain market share. Look for this new packaging on retailers' shelves in December. In the VMS cat business, we have begun shipping to one of the two additional retailers, with the second retailer expected after the new year.

The generic Rx business is growing. Our new product launches are performing well, and we have fully integrated Paddock Laboratories into the Perrigo family. As highlighted on slide 16, we are poised for a strong new product year with the launch of generic versions of Olux-E foam and Luxiq foam, plus other undisclosed products with more than $500 million in branded sales. Add this to the continued growth of our Rx base business, and we expect to have a great year for our Rx team.

Finally, at the beginning of October, we closed our acquisition of Sergeant's Pet Care. The integration of their broad, attractive portfolio of pet care products adds a new category to our Consumer Healthcare segment, and that is all underway. Sergeant's is a leading manufacturer of pet care products, with two FDA/EPA approved manufacturing facilities. We are pleased to add over 1,000 SKUs that Sergeant's has in its broad portfolio of products, bringing Perrigo's total number of SKUs to approximately 15,000 SKUs. Early in the transition, we are focused on building a store-brand version to the Frontline product family, a product category with branded global sales of $1 billion, of which over $500 million was generated in the US. These are expensive products that can truly benefit from the addition of a quality, affordable store-brand offering. The Perrigo team has a strong business-development pipeline, and continues to evaluate opportunities in new categories, technologies, and geographies.

In summary, on slide 17, the continued execution of our base business, the Sergeant's pet care acquisition, and the tax benefit realized this quarter allows us to increase our full-year adjusted EPS guidance range. As we stated on our August call, the team is focused on our new-product pipeline, efficiency gains in our production processes, and integrating the Sergeant's acquisition. We are excited about our future based on the market continuing to shift to store brand, the transition of our Nutritionals business to the new plastic container, and the additional sales to the VMS business for us, and finally, the strength of our Rx business. Perrigo is poised to grow adjusted earnings 9% to 13% over last year's record performance, as we continue to execute on our mission of making quality healthcare more affordable for consumers.

Operator, let's now open up the call for any questions.

(Operator Instructions)

Louise Chen, Guggenheim.

Hi, I have three questions. First one is could you please talk about the sustainability of your gross margin and operating margin expansion and what would drive this going forward? Secondly, what are your strategic objectives and growth expectations for your VMS business? Lastly, with respect to store-brand Nexium, are there any circumstances under which you may be able to launch earlier than the 2017 date? Thanks.

Let me start with the first part of the question, the sustainability of our gross margin/operating margin. We are very pleased with the results that we achieved in both operating margin and gross margin from the total Company relative to the 23% operating margin. That is an all-time record. If I go back to when I joined Perrigo in the fiscal year 2007, I think that operating margin number was somewhere around 9%. So we've made great progress, to be clear. I don't want to get too much ahead of ourselves, though, at this time. I think we continue to suggest the operating margins for the consolidated Company, as we've stated in our earnings, would be somewhere in that 21% to 24%. So I think we stick to that number. I obviously will continue to try to strive to get to the best number for our shareholders possible. But importantly, I think as you see from our numbers, we got to that 23% operating margin and still made significant investments in research and development during the quarter, which that was an important investment for us, being up I think it was 14% for the R&D. So we still made significant investments increasing research and development as we looked to a very positive future.

On the VMS category, I think the second part of your question, we are continuing to develop new products in the category. We are continuing to develop new relationships with retailers in the category, so we still see opportunities for the future. I will say, as we've said over the last year-plus time frame, it is a competitive marketplace. Primarily, we have some competition from companies that are shipping products from overseas. We believe that that's something that the US consumer today is not completely aware of, and there's going to be some opportunities there for us to work on that further. But I think from a point of view of return on invested capital, we are still very pleased with the business, but we will continue to look to assess where we go with the business for the future.

The third part of your question was Nexium. Our expectation is that that's a wonderful opportunity for us as a Company. We have stated that we believe there's over $10 billion of new product that will move from prescription to OTC over the next five years. Obviously, Nexium is one of the largest of those products. The fact that Pfizer has put a additional acquisition of the rights for that product we think is obviously very important step. As to whether or not they will get a three-year exclusivity right now, I would say that the operating assumption is most proton-pump inhibitors have received a three-year exclusivity as they have switched from prescription OTC status. However, in this case, that product, the Nexium product, already has a frequent heartburn indication. So as to whether or not they will get a three-year exclusivity, I really can't comment. That will be up to the FDA to make that decision, but they do already have that frequent heartburn indication. We will have to wait and see what the FDA decides on that question.

Operator, can I ask that they only ask for one question per person? Thank you.

Okay. Jami Rubin, Goldman Sachs.

Hi, I have more than one question, but I will try to limit it to -- I'll make it one question, (laughter) which will be challenging because it really covers several -- we'll talk after this call. But let me ask you a broad question related to your Rx business, which did perform very well this quarter. At the same time, though, we are seeing the competitive landscape change, become more competitive, with some of your key brands, such as Aldara. I'm wondering if that competitive landscape has been reflected in your guidance for the year? And specifically, the 58.4% gross margin is still about 1,000 basis points higher than your competition in the generic industry. I'm just wondering where you see that going? And if competition is accelerating with some of your key brands because some of the competitors are now back on the market putting pressure on price, how are you offsetting that kind of pressure?

It's a very good question, Jami. Let me start with really, is there something happening in the competitive landscape for our Rx business? The answer is yes. We are seeing some players in the Aldara product that you mentioned, the generic Aldara. That is correct. However, I think one of the things that's very important about how we define our Rx business is we talk about it as being extended topicals. And by that definition, it is clearly the dermatology products that you are referencing. However, it is other products that are extended topicals, or absorbed topically, such as the respiratory products, the nasal products, the ophthalmic products, the other categories we are going into.

So as we do see more competition in dermatology, that is correct, no question. We are going to see some of the other extended topical areas with our business, and I think that's the -- the respiratory products with our products that we're looking at, the nasal products, with Nasacort as an example of one of the generics that we've been out there with that product for I think it's going on over 1 year, 1.5 years at this point. And we still do not have any generic competition, nor are we aware of anyone who's even filed for a patent challenge on that product. There's other places that we are going into with the extended topical portfolio, so we do see some dermatology competition, yes, but we're going in some other areas. Judy, you may want to comment as well.

I'd just like to add to that, and this is both Jami and Louise's question referencing gross margin specifically, is another point of -- to keep in mind in all of this. I always talk about the three-legged stool of our business model. The supply-chain work I referenced in my prepared remarks, the global supply-chain footprint and how the team has been working across all of our locations in order to site optimize, lower costs, be more efficient, all of that plays into the question of gross margin sustainability. I have more detail than I'd like to admit about the evolution of our gross margins, and I can see that a lot of the leverage we've gotten over the years has come from the work that's gone on within supply chain. Obviously, you have visibility into new product launches. As an analyst, you have the insight to what new product competition might look like and how we can model the future going forward. I can also see that we get a lot of value by optimizing the large footprint we have globally and being very, very efficient and having gotten much more efficient over the course of the years. And the team, with continuous improvement, does not plan to stop where they are. They plan to continue that momentum going forward.

I think it's a great add, Judy, especially when you think about products like the imiquimod Aldara, where we're vertically integrated. So that by itself is a great example of what Judy is illustrating.

Thank you both.

David Buck, Buckingham Research.

Limit to one question as well. If I look at the -- the question is really on revenue, and it's a two-parter. If you look at revenues for this quarter and the past few quarters, you've seen some negative surprises versus consensus and you admit that you were surprised a little bit on some of [the big] moving parts. So I guess first question is how -- what can you do to better improve your own revenue forecasting? Secondly, the change in revenue guidance is really due to Sergeant's, but you kept the other ranges, particularly for Nutritionals, unchanged. So why the confidence, particularly with the downside in Nutritionals in keeping the revenue guidance at still 8% to 12%, and some of the other ranges as well? Thanks.

First of all, David, we feel very good about our annual revenue guidance. That's what we provide, and we made no changes. However, to be clear, the Nutritional business for the quarter is below what we would have expected. Part of that simply was as we bring on this plastic container line, the packaging line, there's always a time period it takes for certain things to happen. You just never can exactly predict in any product, especially one where quality is so important, like an infant formula product, that you just want to make sure you get everything properly done to the highest-quality standards, and that's just something that takes some time. While that equipment is being installed, and with what was happening with SAP, there's just some part of the process that is not a completely -- you go through a process. You make the changes. You make the improvements.

But there's some things that are going to be a variable you can not go forward with until you get that to the appropriate quality standards. So from the Nutritional part, it was really about our plastic container line, as well as some of the orders that occurred in the previous quarter as a result of the SAP conversion. It was those two big issues for us. But as we look to the future, what are we excited about? We're excited about the fact that our plastic container today, that when we launch that product in the December time frame, will look just like the national brand or national-brand-equivalent. Every time we've had national-brand-equivalent and moved to national-brand-equivalent, our market share goes up, at least based on the Consumer Healthcare model. Therefore, that's what gives us the excitement about the future for the plastic container.

Before you move on, can you talk a little bit about international? You did reference, I'm not sure whether it was China, but some import restrictions in the quarter?

China, wasn't so much import restrictions. What it was is they made some changes in the labeling process for our products that we needed to comply with those labeling change requirements. We have complied with those labeling change requirements, but as a result of that, we had some delays in getting the product shipped. The product was made [in line] from a quality point of view. It just simply was to amend label claims and amend the labeling specifications for the product, so that is behind us. We clearly still do need to get the product shipped and get it to them, but the actual changes in the labeling requirements is completed. Thank you.

(Operator Instructions)

Greg Gilbert, Bank of America.

Thanks, good morning. My one question is for Joe and Judy, and that is other than Nutritionals and putting aside the pet acquisition, is everything tracking according to plan or better on the revenue front so far this year? Thanks.

Greg, I'll start. Judy may want to add some comments. I would say that based on what we've done with our total consolidated Perrigo guidance, we are tracking on plan for our full year. Is there some ups and downs in that plan? The answer to that is clearly yes. Some products will be approved earlier than we expected. Some products will be approved later than we expected, but that's just a normal probability-weighting process that we go through during our quarterly reviews of the business. There's going to be some things go forward faster, some things go slower, but as we looked at or full-year guidance, continue to expect continued strong operational performance of the business. Judy, anything else you want to add to that?

The only thing I'd add to that is we maintain the base guidance. And then obviously, as you know, added Sergeant's into that within the Consumer Healthcare segment. Just to remind everyone, as we said before, and I'll reiterate it again, this is another year where we have a heavier weight to the second half of the year because of new-product timing.

Ami Fadia, UBS.

Good morning. This is Ami. Since you've closed the pet care deal, has there been any shift in your thinking with respect to the growth potential or the margins for that business? And if you could give us anymore detail around the Frontline opportunity, that would be great. Thanks.

I'll start, and again, Judy please feel free to join in. I think we believe everything that we've said. We acquired the Sergeant's business to be comparable to where we are today. The revenue base of $140 million, we expect high single-digit growth rate of that business. We expect once we have the opportunity to launch a store-brand equivalent of the Frontline product, the flea, tick-type products, we expect to accelerate that growth rate into a double-digit growth rate, is really the expectation of what we said. Relative to Frontline specifically, it's a great product. It is a product that though we feel fits exactly with the desires of our retailers, where you can offer a quality product, a Cipramil store-brand product with the same quality as the national brand, with a much better value equation, make it more affordable for the retailers and the consumers. And that's really the excitement of what we see. As I stated during my comments, we look at that as being a $500 million national-brand product with a store-brand opportunity that we can go after. So we're really excited about that kind of opportunity. Judy, anything else you want to add?

The only thing I'd add, I wouldn't say any of our estimations changed at all. The only thing I'd highlight as we now own the business and are rolling up our sleeves and getting into the detail of the ebbs and flows of the season, we, as I commented, unlike cough/cold/flu for humans, is a winter activity, this is a business that's more heavily spring and summer. And I commented that it's a busier business in our fiscal first and fourth quarters. They came off a year that just ended September 30 with approximately $140 million in revenue and we plan to grow off of that base or in excess of $140 million in revenue for a full year. So making sure that you pick up the full season of both our fiscal first and fourth quarters.

Randall Stanicky, Canaccord Genuity.

Great, hi. Thanks, guys. I don't want to harp on Nutritionals, but I'll ask another question here. If we just take the midpoint of your guidance, and obviously adjust that for what you reported this quarter, it implies something in the range of around $150 million a quarter, or 15% to 20% growth. That looks like a really big number. Judy, can you help us quantify specifically what we should be looking for for the remainder of the year that can get us comfortable there? And quantify the amount of revenue that you got delayed internationally? That would be helpful. Thank you.

Thanks, Randall. It's a great question, because obviously, as we looked at the roll-up for the quarter in Nutritionals, we realized it's a challenge. There's no question. You've got the dynamic of the fourth quarter to first quarter shift, and then the VMS weakness without the flow of the new products to the new retailers, et cetera. So it's a challenge, and it's a great question. If we look forward, what are the biggest components? It's new products. It's getting the plastic container out, and they are going to be moving in this fiscal second quarter. That starts to trickle in now in Q2, with the volume going out the door really in Q3 and Q4. You have the sales to new retailers in VMS, with the expectation of stabilizing of the remaining base in VMS.

You have, additionally, the movement of the international product flow that Joe was talking about just a moment ago with respect to the regulatory question. And in answer to your question, when I roll forward sales quarter-over-quarter or year-over-year, the international blitz caused about 1 percentage of that 14 percentage point decline year-over-year. It wasn't a huge number, but it was 1 or 2 percentage of the total decline 14% year-over-year in the segment. And then getting that international flow back out the door are going to be the key drivers. To your point, given the view in Q1, but given, then, our full-year perspective on the full-year year-over-year growth, we have to execute on stabilize the base, move new products, resume shipment of international.

Judy, are those numbers right? Should we be looking for that much of an uptick? I'm trying to get comfortable with the guidance range. Is $140 million to $150 million a run rate in that business realistic?

I think the only other thing I was going to add to what Judy said, Randall, is that clearly, Judy outlined the commentaries on the infant formula, and those were absolutely clear. But it is also the incremental VMS opportunity. Really, what it comes down to, it comes back to restoring the growth into the international market. Most importantly, it is the plastic container as well, and the acceptance that we expect of the plastic container when we get a national-brand-equivalent. And then as that incremental VMS, vitamin mineral supplement, business into the additional retailers is really the three parts of the story that I would say are going to be the key.

Okay, great. Thanks, guys.

Elliot Wilbur, Needham.

Important question, Joe. You have power -- (laughter)

I unfortunately do not have power, so but we'll get there. We'll get there on of these days.

I can relate. Please don't count that as my question. (laughter) Big-picture question for you, Joe. Over the past couple of quarters, some of the drug majors and the PBMs and most recently Express Scripts have talked about unexpected declines in overall drug utilization, which they are attributing to consumer hesitancy, blaming it on the uncertainty in the economy, and you're certainly seeing it in the Rx side. And if you look at volume-growth trends in the store brands, or the OTC market, seen pretty pronounced deceleration in national brands of course, which is an ongoing secular dynamic. But even over the last four to five quarters, you've seen a fair degree of deceleration in terms of the overall rate of growth in store-brand product as well, roughly a 300, 400 basis point decline. I'm wondering obviously, you continue to gain share. I know you've been relatively conservative in your assumptions this year. But are you starting to see an unexpected deceleration in overall utilization rates?

I think it's a fair question on the category growth in the OTC market. It's absolutely -- it's a fair question there in terms of the total category growth is just up to 0.7% over the last 52 weeks, so that is slowing down. I think what we are seeing, though, is the continued acceleration of store brand as being the reason why we're seeing the growth in our OTC category. For us to have a 9.4% growth in our OTC category, we think is a strong indication. I do think, though, that if I go back to the branded-prescription segment of the business, I think part of that is just generally related to the economy. I can't predict what's going to happen in the economy, but we still believe we are in the favorable spot in the environment relative to the movement to store brand, as a general comment on the marketplace.

Longer term, every data point I've seen is that the utilization of pharmaceuticals goes up the older you are. So as people, the baby boomers, get older, as the people live longer, I still believe pharmaceutical utilization will continue to go up. I do accept, though, that there is going to be some variation in any given year. But I think over the long term, we still expect pharmaceutical, both prescription and OTC utilization, to go up over the long term based on the demographics, which people are living longer. And the older you are, the more pharmaceuticals you consume. In general, a review of what my comments would be, we still see the market growing, albeit only 0.7% over the last 52 weeks. The important growth is really being driven by store brand being up 8.5%. But over the long term, our expectation is we'll still see increased demand for pharmaceuticals based on the demographics that people living longer and knowing that older people take more pharmaceuticals, and based on all the data we've seen.

David Risinger, Morgan Stanley.

Yes, thanks very much. Hi, Joe and Judy. I have one question with subparts A through F. (laughter) No, just kidding. With respect to my question, it's on Mucinex. Could you offer some more clarity on the timing of Mucinex 600 milligrams? And can you also update us on the timing of launches of the D and DM formulations, for which Watson may have exclusivity? Thank you.

I'd go back to the statements we made in the comments at the beginning. We are continuing to work on the Mucinex 600 milligram single-entity product. We are in the process of validating additional batches of the Mucinex 600 milligram or guaifenesin 600 milligram extended-release product. Our expectations are we will launch that during our current fiscal year, and really, that's probably as much as I can say on that. I will say in addition, though, the questions of the additional members of the family, as we stated last quarter, we do expect to launch additional members of the family. We just have not gone into the specific products additionally that we will launch of those products, but we do expect the launch additional members of the Mucinex family of products during our fiscal year.

Linda Bolton-Weiser, Caris.

Hi, in the Consumer Healthcare segment, the new product sales that you said was $13 million. That was quite a bit lower than my estimate of $24 million. I'm wondering how the new store-brand Prevacid is doing, because we saw price declines at the shelf at Wal-Mart in the range of 11% to 16% in the various SKUs. In the store we look at, it's actually supplied by Dr. Reddy's in that store. It seems to me that if Dr. Reddy's wants to gain more share and get more of Wal-Mart on Prevacid that they would cut price. We saw that price decrease at the shelf, and we see lower-than-expected new product sales. Store-brand Prevacid and [Deltamine] would be the two main things in your new product sales. Correct me if I'm wrong. Wondering what's going on and what you think the competitive stance of Dr. Reddy's will be going forward? It seems to me if they want to continue to gain share in your area, in your industry, they're just going to keep cutting price and trying to get more. It seems to me there's going to be more examples of the products being shared, supplying part of Wal-Mart for one of you and part for the other. Can you just comment on the general competitive landscape there?

I think the comment that you make, let me just start with the first -- each part. There are other products that we have launched, Loratadine-D 12 is another example, minoxidil foam, are other examples that are in addition to the ones that you've stated. Are there are some other new products that are still new in our categorization to just add to that. But otherwise, Lansoprazole is clearly an important one, and Delsym, or the dextromethorphan extended-release suspension, is very important to us, yes. On the question of competition, we do have competition on the Lansoprazole. That is clear. We do not have competition on minoxidil foam. We do not have competition on the dextromethorphan suspension, and we have limited competition on the Loratadine-D 12. You happen to pick one that there is competition on. That is correct.

Relative to the environment that we face on the marketplace of our store-brand products, I would say that there's really been no major change in the market environment. Dr. Reddy's has a product, that is correct. However, it hasn't really been a major change, and there's not -- it's not a marketplace where we expect 10 or 20 players to show up. I think that's what really differentiates it from the over-the-counter product categories, from the generic Rx, where you may have 10 or 20 players. Really, it's limited number of players. I think for the most part, I can never predict what any of my competitors will do, but I think that they have business. They have something at risk if they go ahead and have a significant pricing decline in the business.

They will obviously have an impact on their own sales, so I think the normal capitalism effects of supply and demand work here. And our expectation is the market will be relatively stable for the Lansoprazole product very much for the future. I can't say, again, that in any individual customer there won't be some ups and downs, but the marketplace is really relatively stable at this time. The only other comment I'd add, Linda, just to give you a sense of the total perspective on pricing at the Company. Our pricing environment at the Company from a total perspective, the pricing environment is at this point flat to up slightly as a Company across our total portfolio, which is very consistent with where it's been over the last four or five years. The pricing environment's relatively similar for us as a Company.

Annabel Samimy, Stifel Nicolaus.

Hi, thanks for taking my question. And didn't really want to harp too much on the growth rates this quarter relative to the guidance, but it's clear that the growth rates for each of the different segments are a little bit inconsistent with the average that you've laid out for the fiscal year. So can you help us understand where the big pushes are going to be? For Consumer Health, we can understand the cough and cold is going to help the growth rates come back up into the range, and obviously, you have the pet care added on. And then with generics, should we assume that growth attenuates for the rest of the year? Is it just 28% this quarter and then it attenuates? Can you help us how we should think about the rest of the year and what some of the pushes and pulls might be?

First and foremost, I think if you think about what we talked about when we gave original guidance in August, one of the things we said was we're making an assumption of a normal cough/cold flu season. That, obviously, would have a -- would be an assumption that last year certainly was a lower cough/cold flu season. That means by definition, you would expect a bigger increase in our -- effectively Perrigo's fiscal quarter two and fiscal quarter three versus last year. That certainly is part of the assumptions we laid out at the beginning of the year. And at this point, that's certainly something we continue to expect a normal cough/cold flu season. But that would have an influence on the projections for the remaining part of the year. I think the only other thing, comment, as I stated before, we don't give out quarterly guidance. We give out annual guidance. And as we looked at the role of our opportunities, we still feel that we have the opportunity to, as we stated before, to grow the guidance of 12% to 16% when you add the effects of bringing the Sergeant's products into our portfolio. I think the other question you asked was Rx, if I recall that?

Yes, the Rx business.

Rx business is strong, continue to expect strong growth in that business. I would say that one of the factors for the growth in the current quarter for Rx was we did pick up one incremental month of Paddock that was not in the previous year. In other words, there was that one-month effect of Paddock that we got this year that was not in last year for the quarter. That is one part of it. But on balance, we still are expecting, as we look at our Rx business, we're still expecting that 15% to 19% growth year-over-year for our Rx business. We haven't made any changes in that, but that obviously -- we outperformed that during the first quarter.

David Steinberg, Deutsche Bank.

My question relates to your Consumer Healthcare business. You've noted that it grew 9% year-over-year, but in the press release, it mentions that this was partially offset by a decline in existing products, namely analgesics and feminine hygiene. With respect to analgesics, I was curious whether this decline had anything to do with Johnson & Johnson's reentry into the market? Secondly, speaking of that, any update -- I may have missed it, but any updated thoughts on how much business you may retain and how much you may lose when J&J fully gets back into the market with Tylenol and related products? Thanks.

David, a couple comments. First, let me start with the last part, the J&J. We have not made any changes in our J&J assumption. Our J&J assumption still expects that they will be returning to the market early 2013, so calendar year 2013. Our expectation is that's when they will return. We feel the right way for us to look at J&J is we'll take it a quarter by a quarter relative to their return to the marketplace. They've had some challenges, to be clear. For us, we think the right way to do it is look at it one quarter at a time. Relative to the operating assumption that we have in our business, it is to continue to expect that as they return to the business, that instead of our normal 91% retention rate when the customer or consumer makes a decision to move from national brand to store brand, we were operating that we would not retain 91%, that we would retain approximately 50% of the consumers that have moved from the national brand to the store brand, because they could not -- there was no access to a national-brand product. And the other part of his question --?

The existing product. Maybe I'll grab that, David. In our uber granularity of our description of the ups and downs business unit by business unit, we always go through and help give color. Here are the categories where sales net went up. Here are the categories where they net went down, and then new products, and FX on top of that. It just so happened that relative to this point in time last year, the analgesic category as a whole and fem hy as a whole were down. Fem hy had a volume change because of supply flow, but that -- it's just a relative point in time that last year versus this year, and the relative analgesic change was not specifically driven by branded competition dynamics.

Thank you.

David Buck.

Wanted to talk a little bit about the timing of the product launches and revenues. I think Judy, you mentioned more weighting to the third and fourth quarters. How does that jive with cough/cold season and what looks like pretty easy comps for cough/cold relative to last year? You seen any changes in ordering patterns, or are you seeing changes in terms of what inventory is being kept on the shelves in Consumer Health in particular?

There's no anomaly, I'd say, at this point in the year of where we are in the season. It -- right now, where we sit here at the beginning of November, it's, I'll call it, normal order flow. As we've said every year, since I've been here at least, you don't start to see order patterns shifting until you get deep into the season. More Christmas-time, January time frame is when you start getting an indication of where the reorder patterns may be. The only exception to that, at least in my tenure, was the year we had the H1N1, but as we all know that was an extraordinary year with an extraordinary health event. So right now, no unusual order patterns.

My comment on new products, of course, being heavily, or more heavily, weighted to the second half of the year is not exclusive to the Consumer Healthcare business. That's across the entire portfolio. When we talk about new product expectations in any year, we talk about a number for the whole Perrigo portfolio, and that stands as such. But the Consumer Healthcare new product expectations for the year are also more second half of the year, also because you're counting products that launch each quarter quote piling up unquote over the course of the year. So you get the volume effect as those products launch, that you get the volume in the second half of the year.

Ladies and gentlemen, we've reached the allotted time for questions. I would now like to turn the call over to Joe Papa.

Thank you, operator. Thank you, everyone, for your interest in Perrigo. I think we have a good start to the year. We have record operating margins, but clearly, we are focused on restoring our Nutritional growth with the plastic container and the VMS product opportunities that we see for the future. Thank you very much for your interest in Perrigo. We'll continue to work towards the execution of that for our shareholders. Have a great day.

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