Perrigo Company PLC (PRGO) 2013 Q3 法說會逐字稿

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

(Operator Instructions)

Thank you. I would now like to turn the call over to Mr. Art Shannon, Vice President of Investor Relations. Please go ahead, sir.

Thank you very much, Vernell. Welcome to Perrigo's third-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 would 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 third-quarter fiscal 2013 earnings conference call. Joining me today is Judy Brown, Perrigo's Executive Vice President and Chief Financial Officer. For our agenda today I will provide a few comments on the quarter and the continued strength in store brand market share growth. Next, Judy will go through the details of the quarter in our fiscal 2013 earnings guidance. Then, I will provide an update on each business including the transition to plastic containers in our Infant Formula business, our plans for new product launches, plus an overview of our expectations for the rest of the fiscal year. Finally, this will be followed by an opportunity for Q&A.

First let's discuss the quarter. This was another great quarter for Perrigo. On slide 4, you can see we had all time record quarterly net sales of $920 million with 18% net sales growth and 13% organic net sales growth, leading to all time high third-quarter adjusted gross and operating margins. Adjusted operating income grew 21% year over year and the adjusted margin expanded to 22.6%. Turning to slide 5, you can see the business segment breakdown. First, our Consumer Healthcare segment had all-time record quarterly sales, up 20% versus last year. The performance was driven by ongoing execution of our Consumer Healthcare strategies, including one, to expand store brand market share at retail; two, to innovate and launch new products; and three, to further expand into adjacent categories.

This quarter, we had new product sales of $17 million, led by the launch of our Mucinex store brand tablet on March 18. Admittedly, that's a little later than we would have liked but we're still -- it's great to have it out there in the marketplace. The Nicotine Mini Lozenges were also launched on January 22, and the contribution of our dextromethorphan suspension launched in our fiscal first quarter. It was a much more pervasive cough-cold-flu season than last year, which was historically a mild season last year. However, this is offset by a later start to this year's allergy seasons versus last year. Sales in our Nutritional segments were up 13% from last year, with growth in all product categories.

The launch of the plastic containers in the infant formula category continues on schedule and is being heavily promoted by many of our retailers. The Vitamin Mineral Supplement business also improved its sales as a result of additional retail orders for our store brands. Our Rx business had another strong quarter with sales increasing 22%, compared to a record third quarter last year. Adjusted operating income was up 14%, primarily results of new products sales of $18 million. Our API segment had a good quarter with net sales growing over $4 million and with improving margins.

Looking at slide 6, the recent trend of conversion from national brand to store brand continues. The overall OTC consumer market was up nearly 3% versus last year, with national brands flat but with store brands gaining a 8.7% on the strength of new product launches, national brand recalls, and increased consumer acceptance of store brand. In nearly every category, store brands drove the market growth. The Diabetes category experienced tremendous store brand growth of nearly 13%, while the overall category was up less than 3%. Gastrointestinal category was relatively flat, while store brands grew 11.3%. Store brands continued to deliver more value to our consumers and retailers in the marketplace. Now, let me turn the call over to Judy.

Thanks, Joe. Good morning, everyone. As you just heard, it was yet another solid quarter. On a consolidated basis the team continues its strong performance, delivering record quarterly revenue and adjusted earnings. I'll provide consolidated and segment earnings guidance for the remainder of the year in a few minutes. But first, I will give a brief review of our fiscal 2013 third-quarter results.

On slide 7, you can see net sales in the Consumer Healthcare segment grew 20% year over year, due to an increase in sales of existing products of $54 million, primarily in the contract cough/cold and analgesic categories. New product sales of approximately $17 million, primarily in the cough/cold and smoking cessation categories. And $31 million attributable to our entry into the new animal health category, through the acquisition of Sergeant's. According to IMS stand data the percent of the population affected by cough, cold and flu in the quarter ended March 30, was up 13.9% versus the same time last year. This increase, in conjunction with our March 18 launch of Guaifenesin ER 600 milligrams, added to the robust CHC performance for the quarter. These combined increases were partially offset by a decline of $9 million in sales of existing products across a variety of smaller categories, and the discontinuance of some smaller products totaling $4 million.

The increase in adjusted CHC gross margin was due to a few factors. First, favorable dynamics of the strong cough, cold and flu season versus last year's historically mild season, led to favorable absorption of fixed production costs on higher volume output in our manufacturing facility. Second, the contribution of new products. And third, the inclusion of a full quarter of Sergeant's Pet Care, which as mentioned previously, produces a higher-than-corporate average gross margin. The adjusted operating margin increased by a lesser amount than the adjusted gross margin, as dollars spending on DSG&A was higher year over year. The majority of the increase in operating expenses arose from the acquisition of Sergeant's. Please remember that at the time of our acquisition of Sergeant's, we noted that this Company, which was primarily a value brand business, spent a relatively higher percent to net sales on advertising and promotion activity than legacy Perrigo.

On slide 8, you can see that net sales within the Nutritional segment increased 13% year over year. As Joe noted, all product categories within the segment group and net new product sales contributed an additional $5 million. It was a positive story on the top line for the segment. One item we continue to watch closely though, is our products sales to our Chinese distribution partners, which unfortunately, were less than expected for the quarter. And which are now tracking below our internal expectations on a year-to-date basis. Even though there is adequate demand, testing and regulation requirements continue to fluctuate, making it difficult for non-Chinese-based providers of infant formula to get product on the shelves. We are working through these issues diligently and are optimistic that a conclusion could be reached soon.

Adjusted gross margin in the segment decreased 290 basis points due to a combination of two main factors. First, on a relative basis, VMS, which is a lower margin category, grew at a faster rate than infant formula in the quarter. And second, compared to last year, there were relatively higher production inefficiencies, as the infant formula manufacturing facilities continue to work through the conversion from metal cans to the new plastic tubs, which was launched in December. Throughout the fiscal third quarter the primary operational focus was to convert as many retailers to our new tub as possible. However, this came at a cost to our margins, as our operational throughput was not near our optimal run rate. As of today, though, our manufacturing facilities are back in line to pre- conversion run rates. The adjusted Nutritionals operating margin was lower year over year due to the investment in promotional and merchandising aids for the new smart-tub conversion, and other new product launches during the quarter.

On slide 9, you can see that our Rx business continues along the positive growth trajectory we have seen over the last several quarters. Net sales growth was led by new products sales of $18 million, which included two new phones, betamethasone and clobetasol emulsion, followed by $8 million in additional net sales contributions from our Rosemont acquisition, which closed on February 11. And, an increase in existing products sales of $7 million. I'm pleased to note that our Organic Rx business continued to perform well, with year over year revenue growth of 16% even before the inclusion of Rosemont. Rx's adjusted gross margin of 57.9% was again something to be proud of, although you can see it did decrease slightly from last year, due to relative product mix partially offset by the positive impact of acquisition of Cobrek. The adjusted operating margin was impacted by higher distribution selling general and administrative costs, due both to the inclusion of Rosemont and the non-recurrence of some administrative benefit received last year.

Next, on slide 10, you will see that the API segment grew net sales of 11%, primarily on a continued success of our customers' products which was launched in our fourth quarter fiscal 2012. Both adjusted gross and operating profit increased 12% on this top-line growth. This quarter the effective tax rate on adjusted earnings was 29.9%, within the 29% to 31% guidance range we provided for this fiscal year.

Now, some quick highlights on the balance sheet. Excluding cash and cash equivalents, working capital was $723 million at the end of the quarter, up from $607 million at this time last year. Approximately 50% of this increase was due to the additional working capital from the Sergeant's and Rosemont acquisitions, with the remainder from our existing businesses, where working capital grew at a rate slightly below our top-line organic growth rate. Year-to-date cash flow from operations was $380 million as compared to $312 million in the prior year, primarily on the growth of net income. As of March 30, 2013 total 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 the third quarter, fiscal 2013 was 32.6%.

As you know, we've always maintained a philosophy of having a very strong balance sheet and maintaining an investment-grade credit profile. Some of you may have noted that this morning Perrigo filed a form S-3 Registration Statement with the SEC. As you've seen from past actions in both the private placement market and with our bank group, we are continually refining our capital structure to improve our access to markets, to enhance flexibility and provide liquidity to execute our strategies, and to target efficient, low-cost financing options, all while retaining our financial discipline. The filing of this debt shelf registration statement today is just another positive step in support of our stated, long-standing capital structure objectives and corporate strategies. Our business development team has been busy this fiscal year to date, closing four acquisitions worth greater than $770 million, which I'm happy to report, we were able to find entirely with cash on hand. As you've certainly noticed, we've had a rhythmic cadence of strategic acquisitions over the past few quarters, and as such have also been working systematically to integrate these new organizations into the Perrigo infrastructure. As we noted in 2012, we're actively building an internal integration core competence, with a dedicated cross-functional team focused exclusively on integrating these new businesses quickly, efficiently and in a way that retains key talent while finding synergies where possible.

Now, I'd like to discuss our earnings guidance for the fiscal 2013. On slides 11 and 12, you'll notice that we are not making any adjustments to our segment or consolidated P&L guidance for the full fiscal year at this time. While we're not changing our total top-line expectations from the February 11 guidance, we are lowering expectations of the contribution which will come from new products. Specifically, we are lowering our probability weights on the launches of certain new products, particularly within the Rx segment, as it is becoming increasingly difficult to precisely forecast exact approval dates, due to what we believe is a slow-down in regulatory processes. Incorporating this factor into our risk-adjusted model, we now expect fiscal 2013's consolidated new product revenue to be approximately $130 million. Please note that these guidance ranges do include the acquisitions of Rosemont and Velcera, both of which closed subsequent to our last earnings release date.

The only other adjustment you'll note on slide 12 is the slight adjustment downward to our CapEx spending, which is now expected to be in a range of between $110 million and $140 million for the full year. With the very late arrival of spring in Michigan, some of our plant expansion work is only now kicking off, and as such has moved our time line back slightly from our last forecast. Once again, the team delivered on strong operational performance as evidenced by another record quarter for revenue and adjusted earnings per share. While we're disappointed to have to adjust our new products expectations for the remainder of the fiscal year, we are pleased that the rest of our business performance should compensate for this change. As always, we remain committed to investing over the long term internally and through external investments, while we continue to focus on solid execution as the basis for continued growth. Let me turn it back to Joe.

Thank you, Judy. Now, I want to focus on the future. Let me turn your attention to slide number 13. The Mucinex store brand launch went very well and we're now positioned for the current allergy season, and of course we'll gear up for next year's cough, cold, flu season. In January we launched the store brand version of Nicorette Mini Lozenges, with approximately $30 million in branded sales continuing our leadership position in the smoking cessation category. Just last week we launched our second ophthalmic product, the store brand version of Refresh Plus, with brand sales of approximately $12 million. It's great work by the team.

To be clear, our updated new product guidance reflects delays in new product approvals. It is important to note that we do continue to expect these products to launch in the future, which should give us a strong tailwind into next fiscal year and beyond. Our Pet Care business is very well positioned to grow in the future, as we recently closed on the Velcera acquisition. This adds retailers and a strong new product pipeline to our offering. The high-cost market of pet care fits perfectly into our model of making quality pet care more affordable. This category is expected to have $200 million sales in annual sales for us in fiscal year 2014, and we expect to grow this business continuing beyond that.

I'm pleased to announce that recently, PetSmart, the North America's largest pet care specialty retailer, has awarded Sergeant's the pet care, with their coveted Vendor of the Year Award. We're delighted to receive this award. In our Nutritionals business, highlighted on slide 14, we are very excited about the upgrade to what we believe is better-than-national brand style packaging. As mentioned earlier, store brands are growing faster than the national brands. During the quarter, Perrigo received clearance to manufacture three codex-compliant infant formulas for international markets, which underscores the high-quality standards of Perrigo, opening up more international opportunities.

Turning to slide number 15, the Generic Rx business is positioned very well for growth. We've executed strong new-product launches in the quarter, with recently announced launches of the generic versions of Acetadote, Olux-E and Luxiq Foam, and look forward to launching additional undisclosed products. We expect to close the year with strong tailwinds heading into fiscal year '14 for our Rx team. As Judy noted, we executed four deals this year using cash, while maintaining our strong balance sheet.

Our entry into Pet Care is going very well, as we closed Velcera this past month. In Rx we signed and closed the acquisition of Rosemont Pharmaceuticals, which manufactures and markets oral liquid Pharmaceutical dosages in the UK. All of these deals are financially attractive and provide a strong basis for growth in fiscal year '14 and beyond. Even with four deals behind us, the team continues to evaluate additional opportunities in ophthalmics, adult nutrition, diabetes and international markets.

In summary, on slide 16, Perrigo is poised for continued growth. The market continues to shift to store brand offerings from national brands. Rx to OTC switches are expected to continue with $10 billion in branded Rx sales likely to switch in the next five years, with over $5 billion of what is expected in the next three years. Our Nutritionals business's conversion to new plastic tubs is being received positively, and our Rx business continues to perform well. Perrigo is poised to grow adjusted earnings 11% to 15% this year and 16% to 20% without discrete tax items, 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 questions. Operator? Can you open up the call for questions, please?

Thank you.

(Operator Instructions)

We will pause for just a moment to compile the Q&A roster. Randall Stanicky, Canaccord Genuity.

Hi, Randall.

-- on the consumer business.

Randall, I'm sorry we didn't hear the first part.

Just a question, Joe, on the consumer business?

Yes?

Is it tracking in the quarter, did it track, as a result, in line with the way you were thinking or looking for, and I'm just trying to get a sense if there were any timing issues. It sounded like allergy was a moving piece. Cough and cold obviously had some impact. And then Mucinex. If there's any way that you could give some color and perhaps quantify that, that would be helpful.

Sure. While I'd say, Randall, on balance we were very pleased with the quarter. There are obviously always some ups and downs in any quarter that you have, just in terms of a normal distribution. On a positive, January, February was a very strong cough, cold, flu season. It moderated in March, to be clear, so that was one part. January, February were very strong, up 15% to 20% versus last year's season.

On the second part of it, the Guaifenesin launch was a very important launch to us. We're glad to have it behind us. Admittedly as I stated, would I have liked to have gotten it out there a little earlier than March 18? The answer to that is absolutely clear, that would have been preferred. However, importantly, we went through all the appropriate due diligence that we needed to do to ensure that the product was well-validated. We were very confident of that and we now have the product out in the marketplace. And we're delighted with what we're seeing so far, in terms of the response by the retailers.

The only other comment I would make on the quarter, along the lines of what you said, it was clear that this year's allergy season is starting later than last year, albeit last year was a very early start to the allergy season. So, I think on balance, we're absolutely where we want to be with the overall Consumer Healthcare sales growing very significantly, both organically and through the acquisition side.

And if we look at the midpoint, Judy, if I've done my math right, $616 million or so for next quarter, the midpoint of the consumer guidance, the implied fiscal Q4 number, would you say that your visibility in that range or that midpoint, given that we know several of these moving parts now, with respect to allergy and cough and cold, would you say your visibility there is high right now? Or is there other new lunches that are dependent upon hitting that number?

There are not big launches depending on hitting that number in the fourth quarter. There are a variety of smaller products that are flowing through in Q4. We've talked about allergy season and just how dynamic it is or is not in the quarter, but of course as we're in the last several weeks now of the fiscal year, the confidence level is better at this stage in the game. Do not forget though, that the other moving piece in Q4 for us, of course, is the flea and tick season. Now we have a new seasonality to deal with and if you look at our expectations on Q3 to Q4, a part of that is the expected uptick, no pun intended, of the Animal Health business in Q4.

Okay, thanks, guys.

And we're seeing that starting right now.

Operator, let's try to keep it to one question per call, please.

Shibani Malhotra, RBC Capital Markets.

Hello, this is Florence for Shibani. You guys have clearly been busy on the business development front over the last several months. Can you talk about your priorities for use of cash going forward and what we should expect for both the pace and the focus for your potential future business development activity? Thanks.

Sure. I'll start and then I'll turn it to Judy for more comments on this. I would say that really our focus of what the use of the cash is really continuing more of the same. As we stated in the call we've done now four different M&A transactions over the this fiscal year. We continue to look for other ways to extend our portfolio. Obviously the first thing for us always is to look at the organic growth of our Business.

We feel very fortunate that we've got good organic growth. But where we can find additional ROIC accretive opportunities to extend the portfolio, we want to do that and continue to leverage our leading position in the area of quality affordable healthcare products. So, we'll continue to look at new categories, so for example, and I think we have stated these publicly before, the areas of major interest on the M&A side are ophthalmics, adult nutrition, diabetes, and looking to expand to international markets to bring our concept of quality affordable healthcare internationally. So those are really the primary M&A comments. Judy, you may want to say more about other uses of cash.

General uses of cash. I made the comment, just wanted to highlight for everyone, you've noticed that our CapEx spending has been higher in the last two years, as we have been making more investments in our future with planning for future new product launches, getting our own sites up and ready, long-term investments in technologies. Hence the increase in spending on CapEx, even though we're going to be probably about $10 million lower than our original expectation at the beginning of the year, as I commented earlier.

So continuing to make important investments this year, into fiscal '14 and probably into the beginning of fiscal '15, is also an important use cash, but clearly, well below the amount that we're generating in operating cash flow. And we continue with our dividend policy, although as you can see, the dividend yield is a smaller number than a large consumer products Company, but one we where want to continue to return some value to shareholders at a rate equal to the bottom line growth of the P&L annually.

Linda Bolton Weiser, B. Riley.

Hello. I just wanted to clarify. I know you don't want to get into giving specific quarterly guidance and everything, but would it be fair to say, I guess in my mind, I'm thinking that your Consumer Healthcare guidance for the year of 16% to 20% sales growth, I'm seeing that it's most likely at the bottom end of that range. Would that be a fair statement, number one?

And then number two, I had a question in your Rx segment. In terms of the remaining new product launches for the fourth quarter, just reviewing what I have in my model. I have Aplenzin, generic Rx Aplenzin and then, something, Sanctura. And then I'm wondering about Cutivate, if you're thinking that could launch in the fourth quarter or if that's pushed out further? Thank you very much.

Okay. Let me start with your first part of your question, Linda, clarifying the fourth quarter. As you know, we don't give any quarterly guidance. Obviously this is a little unique, in the sense that this quarter is the last quarter our fiscal year. In essence we stick with the growth that we've talked about really for the full part of this year. I think that Judy said it well.

What's unique about this coming quarter, though, for us, is that this is one of the major seasons for pet care, in that this is relatively new to us. It's a little bit hard for us to get too advanced in saying it's going to be at the higher end of the expectation or at the lower end of expectation. I do think the core Consumer Healthcare business is doing well, as evidenced by the growth. But I do feel that we're going to be in that range at this time, and that's really why we stayed with the range.

I really don't want to make too many more comments about being at the low end of that range or the high end of the range. I really do feel, from a revenue point of view, we're just really very happy to get these products out, get them launched into the marketplace, and to continue to look at that strong growth that we expect in the Consumer Healthcare side of our business.

On the Rx side, it is clear that we have a number of additional product launches that we expect, that as we stated. What we're simply, at this point though, finding is that some of these products are going through a slightly longer regulatory review cycle. That is something that we're continuing to work very closely with our R&D organizations, to continue to improve on our filings, get them out there into the marketplace.

But we are seeing an uptick in the length of time for our regulatory review cycle for our products. We're working very closely with our internal organization to continue to try to improve that process, but that is something we see a delay in the time period of getting the products approved. The good news is, we are still expecting these products. We are still expecting them there, just slightly delayed from where we had previously expected, based on this process. I don't think I really want to make many other comments on the specifics of those products that you mentioned, Linda.

Chris Schott, JPMorgan.

Great, thanks very much for the question. Just had a question on Nutritionals. There's obviously been a lot of moving pieces in this division. When I think about longer term gross margins here, is this a division that can get back into the low- to mid-30s that I think we were seeing a few years ago? And the second part of my question on Nutritionals is, I appreciate the comments on the relaunch, Joe, but can you elaborate a little bit more? Is there anything you can share with us in terms of how much uptake we're seeing, or any changes in uptake with the new packaging that you can share? Or is it just too early to get real feedback on that? Thank you.

Sure. Let me just try to address separately your two questions on Nutritional. We do see a continuing opportunity to improve the gross profit margins of our Nutritional business. That we do see as opportunity. I don't want you to get to the 30% next quarter, next year. That's not going to happen that quickly. But there is an opportunity to improve the overall gross profit margins of our Nutritional business. I think the number 30% is a great target for us. Not next year or maybe the year after or at some point in the future, but it is something that we certainly think we could strive for, in terms of a target for improving our gross margins.

On the second part of your question, I do think it is too early to make a definitive comment. The only comments I can offer on are uptake of our plastic container, our ones that I've talked about. Number one, it's been very well received by the retailers and that's always very important. Number two, they are giving us very good promotional opportunities within the category. Whenever I get that promotional opportunity that's a very nice place to be. Admittedly, as we've stated, it is costing us a little more to get some of these promotional displays put together, et cetera, but that's always an important part of how we look to the future for growth opportunities.

But going beyond that, the only other point I can say is that store brand is up more than the national brand at this time. It's something, though, that it is probably too early for me to get in more descriptive in saying that the plastic container has added X% of value to us at this point. I think we're still very favorable on it, in terms of what it means, but I don't really want to get into the data. I think it's a little bit too early for us. I looked at more say about that in the August time frame, after we'll have about six months of data at that point.

David Risinger, Morgan Stanley.

Yes, thanks very much. I was hoping, Joe, that you could paint a picture for us so that we understand the new infant formula product rollout and uptake. I've talked to some investors who have gone to retailers and they still see the brands in metal cans, and if the brand is still in a metal can then, obviously, Perrigo needs to still make the metal cans to copy or mimic the look and feel of the brand. In other cases, the brands have shifted to plastic containers and Perrigo is now catching up.

Could you just frame the transition and help us understand, for example, in six months where Perrigo will be? Will the vast majority of your infant formula revenue be plastic containers? Or will half of it? And how far are we along during the process of transition, so that we can better understand how we should think about your products when we see them at retail?

Okay. Well, a lot of good questions there, David. Let me just start with the difference in why you're getting that feedback from some of your investors and/or concerned shoppers out there. The brands have switched from the metal cans to the plastic containers for the dry powder. They do obviously, though, still have metal containers for the liquid products.

Liquid products are predominantly East Coast-based products, but the majority of the products have switched from the metal or composite can to a plastic container. So, there is no question that we expect to see the majority of products in the plastic containers from the brand, and that's from the Abbotts of the world from the Johnsons of the world, and from the Nestlés of the world. There are there are some specialty smaller products that are not in plastic containers. Those I put into a separate Specialty Care business. And the other one that's in the metal can is the liquid formulation. So, put those aside though, because the majority of infant formula is in a dry powder. That's where the brands have switched, and that is where we are, obviously, following with our plastic container.

Relative to our rollout, as I stated with the earlier call, we are very pleased with the we see so far, in terms of number of promotions, the retailer reception to what we're doing. It's still a little early to talk about it, but we're very pleased. I believe that in our products, we are somewhere around 90% of our volume is out in plastic containers today. So, you still may see some residual metal containers on the shelves for a Perrigo product, but the majority of our products, in the base formulations, the most popular formulations, are out in a plastic container today at about 90% of our volume, so around that level today.

Jamie Rubin, Goldman Sachs.

Thank you. Can you hear me all right?

Yes, Jamie, how are you today?

Okay, great. Good, thank you. Just a couple of questions. Joe, you had mentioned that there are still a large number of Rx OTC switch opportunities that are so important to drive your Consumer Healthcare business. Can you talk about what specific categories you are referring to over the next couple of years? Obviously there's the statins, which I still think is in the uncertain category. But if you would talk about, in terms of what you see for your Business over the next couple of years.

And then a question for Judy. The guidance for the year is still pretty wide, a $0.20 spread and here we are last quarter of the year. What are the key variables that you see driving the top-end, versus the bottom end? Thanks very much.

I'll start and then I'll turn it over to Judy. Let me start with the categories. The Rx OTC switch, I think you said it well. The obviously mixed products that we think are very important to us are the remaining proton pump inhibitors led by Nexium. We think that's obviously a very important product to get out into the marketplace, one which Pfizer has spent $250 million-plus to get out there, with the Nexium opportunity. And in that Nexium opportunity, Pfizer also picked up some additional product categories that they were interested in beyond just the Nexium products. They deal with some of the respiratory products.

Moving, though, from there, I think the other important product, albeit not a large product is Oxytrol. Oxytrol is important we believe, because number one, the FDA has found that that disease category of overactive bladder can move from prescription to OTC. When Oxytrol was approved, that was an important product opportunity. But more importantly I think it opens up the category of overactive bladder, as the FDA has deemed that category one in which consumers can make the decision to self diagnose and treat the overactive bladder indication.

So, I do think overactive bladder is an important one. Oxytrol is important. And then with Oxytrol comes, obviously, a number of potential other future products. Can't comment about whether they will switch or not. But obviously the Detrol, the Detrol LA, the Ditropan, are all other products that fall into overactive bladder. It's too early to make any judgment as to whether that product, any of those products, will switch.

Beyond that, we clearly used some of the pain products, the products that are specifically the non-steroidal, anti-inflammatory gel products, the Voltaren, specifically, gel product is one that we expect a switch opportunity in the future. And then I really probably don't want to make any more comments on statins. I think you know I still believe that's a toss-up, probably a 60/40 probability, 60% probability they could switch, but 40% probability will not switch. And I think that's still one that is undecided at this point. Of course, I forgot the omega-3 fish oil-type products we believe are also candidates for switches in the near future. Judy, I think you are going to take the second part?

Sure. The question was on the range and why we're not narrowing the range more from the $0.20 that has basically been outstanding throughout the fiscal year. If you look at on slide 12, where we started the fiscal year and how we've have progressed across the course of the year, unfortunately as we said earlier, we had to move our new product number. But we've also been able to grow the businesses organically, we've expanded margins organically, we've added acquisitions in there. And we've maintained the size of the range still at $0.20, but on a real basis, that's just slightly over a 3% range.

So, I still feel comfortable keeping a 3% wide range, if you will, for guidance for the remainder of the fiscal year i.e. the fourth quarter, due to the fact that, while we can get more precise in most places with expectations on sales and margins, the reality still is we have the new Flea and Tick businesses as part of our family and that can move the numbers slightly. We have also in there, a moving tax rate. And we've seen the benefits in the negative of the tax even moving slightly in any one quarter because of mix of income. And we don't want to be caught off guard by narrowing the range to accommodate only having one quarter left, and then potentially having moved, moving outside either up or down, just because of the movement in the tax rate. So we just feel it's prudent to maintain the size of the range to be able to encompass those items I just noted.

Operator, next question.

Gregg Gilbert, Bank of America Merrill Lynch.

Thank you, good morning. This is not about the quarter, but as of now are you seeing any signs all of J&J's return on several products that we're not seeing in third party data yet? And then for Joe, a generic question. We saw the generic Zovirax got approved. A bunch of topicals players have viewed that as a tough nut to crack. So I'm curious, do you see FDA's willingness to approve the way they did, as a relevant industry data point that could change the bar for other products? Thanks.

Yes. Let me go to the first question, and then get to Zovirax. Yes, J&J is returning with products. We are going with their best reports. We actually follow each and every product they have in great detail. But we're going with their best commentary that we heard from the recent reports that suggested that they would be coming back and are coming back with products, that is clear. And we are seeing them come back and expect to see them fully back in during the calendar-year 2013 timeframe. So, that is the numbers that we're using, Gregg, for our forecast.

Obviously we take every quarter one at a time based on that, since we don't have any visibility beyond what we hear from J&J as they speak to investors. We do expect them to return with all of their products by the end of calendar 2013, is just a review of our numbers. On the question of Zovirax, I do think it's been an interesting one, and I do think it opens up some other products that are very challenging clinical trials to follow.

And I do think that there's an opportunity there for the entire industry on other more challenging products. I will also say, not exactly the same circumstances, but I think that our product that we filed and got first on ProAir, as an example, was an example of where we worked very hard on ProAir to get that product to an FDA submission once it was accepted to file.

I think we've seen the FDA come out with some additional guidelines based on the filing that we have, and based on their own internal discussions within the FDA. I think that model is something that we're seeing on many products that are what I would call more challenging generic equivalent products. We're delighted to be, certainly in the case of ProAir, at the leadership of the first-to-file opportunity with ProAir. But I do think that's exactly what's happening out there, Gregg, in comment to your question.

Annabel Samimy, Stifel.

Hello, Thanks for taking my question. I had a question on operating margins actually. You've been pretty good at consistent operating margin expansions historically, and going forward, I was just curious what some of the sources of that expansion would be longer-term, and even in the near-term, with regard to Nutritionals? If the operating efficiencies were going to continue into next quarter, as well as in Pet Care, if you launch a Private Label? Is that one of the big sources of operating margin expansion? Thanks.

Sure. Well, I think first and foremost, our improvement in operating margin going back not just for this year but for previous years, it's a great execution by the team in Allegan and around the world for Perrigo. I think the team has executed, continues to execute very strong and so I think it's first and foremost goes there. I do think, to be clear, the other part of the question, which is what you're talking about, is it goes to new products and it also goes to our M&A as we look to find other adjacent categories that have good opportunities for margin, like Pet Care. I do think it's been a couple of different things that have helped us to grow our operating margins, first and foremost execution.

Number two, it's been the new products, the new products classically have a higher gross margin but then ultimately drops into our operating margin. And then the third point, is really the M&A opportunities that we have found. And where that's really important is, we find these adjacent categories, we can add products into our truck that is at Perrigo today and it's going to one of our large retailers. When we do that, it doesn't cost us incremental sales reps or it doesn't cost us incremental account receivable clerks, so really that allows us to bring more dollars from the gross margin right to the operating level for the business. I think that's been an important part of our overall improvement in operating margins.

Okay, and some of the near-term sources, in terms of Nutritionals and Pet Care?

Well it's clearly, that is the Nutritionals are going to be looking at what we do with our plastic containers, is we can get more product out of our facility. We take the fixed costs and we divide over more tons of, or pounds of products that we make in our facility. That's really the way we can get some operating efficiency.

To be clear, Judy mentioned that the plastic container is not as efficient as it was our previous mechanism of operation, but it will get better as we get more experience with the plastic container over time. On the question of the Pet Care, there's no doubt that the pet care products, especially when we get additional store brand pet care products, will help us in our operating margin over time.

And I just want to reiterate in case there was any confusion on the Pet Care front. Our Pet Care business today, the numbers you're going to see coming through for the next several quarters, have a higher than average gross margin and an in-line with CHC average or slightly above, on the operating margin line. What the dynamic today still is, the underlying investment in A&P that's going on in those businesses. To Joe's point, as a transition is underway, as more of the revenue pie comes from, more share of the pie is coming from store brand contribution, you might see a slight easing down of gross margins in Animal Health, offset by lower A&P spend and longer-term, we believe, operating margin expansion from where it is today.

David Buck, Buckingham Research.

Yes, thanks, just a couple of quick questions. For the Pet Care business, Joe, you talked about the $200 million fiscal 2014 run rate. Can you talk about what needs to happen to make that number and what the timing is of the Frontline Flea and Tick store brand launch?

Secondly for Judy, can you just recap what the accretion is for the full year or 2014 accretion from the acquisitions you've made? And then finally for Joe, can you talk about, you said that March quarter was impacted by the weak start to the allergy season. We're now obviously in May. What's the trend now and are we at normal season, slow seasons still, how would you characterize allergy in the second quarter? Thanks.

So let me try to answer you one question here, David. (laughter) So, Pet Care, $200 million business, we view that as having a high single-digit growth rate, but we think we can accelerate that into a double-digit growth rate as we launch the store brand versions of all the flea and tick type products. So that part, in terms of Pet Care high single-digit rates, but growing to double-digits as we get the store brand products out there.

And importantly, store brand Frontline is one that we are working on very hard. We've got some customers already signed up for that. We simply re working on, what I would call, the regulatory labeling requirements, because each of those are statewide regulatory and labeling requirements that we have to work on, which takes time, to be fair, but we're already got customers signed up for it, and we're working hard to get those products to the marketplace.

On the question of the additional products, we now have opportunities not only for Frontline, but other Frontline line extensions. As you may know, there is Frontline out there as Frontline Club, Frontline Tritak. There are other products in the longer-term future that we're excited about in our portfolio, as we bring together both the Sergeant's acquisition, as well as the Velcera acquisition. So, I think I answered that part. Judy, I think you have the next part, accretion?

Sure. Let me just walk you through the press releases that have been done over the last several months related to the four deals that we have closed in this fiscal year. Going in order, Cobrek was first of all, and we expected that to contribute $0.04 in this fiscal year 2013, but we did not quote any additional accretion in fiscal '14. This is all on an adjusted basis, please note, all adjusted non-GAAP numbers.

The Rosemont acquisition, we expected to contribute approximately $0.24 in 2014. The Sergeant's transaction, we expected to contribute approximately $0.20 to fiscal '14. And last but not least, Velcera, $0.10 to $0.11 to fiscal '14. We will, as we go into fiscal '14, we'll talk about that contribution more precisely, if it changes at all, with the seasonality, et cetera. And we will also obviously comment and provide a reconciliation of the GAAP, non-GAAP contribution coming from them in our usual table that we put with our Press Release.

Ami Fadia, UBS.

Hello, good morning. A couple of questions and maybe this is a two-part question. Judy, you commented that some of the players in the Rx new product launches gets offset by other strength within the business, so if you could please elaborate that? And related to that, with the delay, do you see a diminished commercial opportunity from these products?

And then the second question is on the Pet Care side. Could you give us an order of magnitude of how sales have performed in the June quarter versus the March quarter, for the Pet Care business as the tick and flea season kicks up? Maybe, is it one and a half times, two times? That would be helpful. Thanks.

Sure, let me comment on the first part.

The first part was Rx side and the continued strength in the Rx side.

Continued strength of the rest of the business. So, there is not one specific thing that you can point to and say, aha, this one thing suddenly is significantly better in our expectations to offset, but it was across the whole portfolio. So as the team rolled up their end of year forecast and looked at, category by category, retailer by retailer, how other new products are doing, how DMS is doing with its new retailer.

It's across the portfolio. And as a team, we came back and said, even though the new product number realistically has to be adjusted downward, the rest of the business is still standing firm and therefore we're able to go ahead and confirm the overall top-line numbers as you've seen in the guidance, rather than having to make any adjustments relative to just the change in new products. So I would not say it's one specific thing to point to.

And maybe if I just add to what Judy said on the question of the Pet Care side, there is no doubt that the time period of April through October is significantly higher amount of Pet Care business. Really, those six months, if I compare the time period from April through October versus October, let's call it, November through March, the April through October time frame is closer to 70%, 75% of the sales, whereas the time period of November through March is somewhere in the 25% to 30% of the sales. By that factor, it's more than a two to one type of comparison --

I was just going to say, think about it in terms of doubling Q3 to Q4.

Louise Chen, Guggenheim.

Hello, thanks for taking my question. My question is on basically your Sergeant 's business and Velcera and your thoughts on selling generic Animal Health drugs. I've gotten a lot of questions on that. I know it's not an immediate opportunity for you, but when you think you'd become interested in it? And how potentially large is that opportunity to Perrigo?

Sure. Let's say, first and foremost, we are very excited about flea and tick and we think that's a very important OTC opportunity today, and one in which we are moving very quickly to get into that business, as evidenced by the two acquisitions both in what we did with Sergeant's, as well as Velcera. That is our primary focus.

I will say though, to be clear, that we expect the market for Pet Care to evolve over time where it's very similar to the contact lens business, where ten years ago, you got your prescription from an optometrist, he filled the prescription, or she filled the prescription, and then you went on with your glasses or contacts. We view that model which has now changed to a model where you can get a prescription from an optometrist and you can get it filled in a retail setting, whether it be any of the large mass merchandisers and/or specialty ophthalmic players. That's going to change exactly for pet care, in that the vet will write a prescription for products, and you will take that prescription and fill it at a local large retailer, like a Walmart, a CVS, a Walgreens, et cetera.

That market, we do believe, will change very similar to what happened with the ophthalmics market. It will take time, but we do believe that we will be positioned for that in the future. The very simple product categories that we think about today are things like we make Glucosamine Chondroitin today. We make it for humans. Obviously we need to make that product a little different for a Dog or cat or a companion animal. But that is something we certainly have capabilities on. It's certainly not a new formulation. We need to add a little beef flavor to the formulation, but otherwise it's very simple for us to enter into those products.

And obviously, the entire Pet Care business that we've identified as being one that we're really excited about the future, especially as it evolves from only a Vet Distribution business into more of a Retail business. That's really where we will get excited about it, if we see that continuing to develop.

As I would say, it doesn't preclude us from looking at opportunities that when companies have products available that make sense within the type of distribution channel, that Joe just highlighted. But, the foray that we've just made into Animal Health does not in and of itself state that we're moving off of our other adjacencies, interest in other adjacencies to move exclusively into the vet category. It's really focused on where we can add value for our retailers, as Joe was mentioning, at the pharmacy counter at the retail space.

David Steinberg, Deutsche Bank.

Thanks. Just to follow up on your foray into Animal Health a little bit more, Joe, you'd indicated that you're now at a $200 million run rate with Velcera and Sergeant's. I was just curious, you did not mention Animal Health or Pet Care as one of your M&A -- one of the buckets you are looking at for M&A. But given it's such a large market, are there some opportunities out there? Or, do you pretty much have everything you need in the future?

And then just a related question on the strategic on the potential change in consumer behavior over time. Is there a substantial group of Americans that just never go to the vet but would go to Walmart and CVS, and hence if it takes longer than you think to change behavior, is there fairly sizable market that would be purchasing your products at the Walgreen's, et cetera, et cetera, who just never go to the vet?

Sure. You've asked a lot of good questions, there. I will say on the Pet Care, we will still look for that on the M&A side. I would say that we've got two, what we think, are really important opportunities in the area of Pet Care, in the flea and tick area, and what products are going to be available or are available OTC today. So, I think we feel very well-positioned, but I don't want to rule out any other future opportunity in Pet Care if we find something that is ROIC accretive.

We feel very good though, about where we are with Pet Care in terms of our ability to grow it organically with what we now have, especially as we bring out these new store brand offerings of the pet care products. On the question of consumer behavior, there is no doubt, I don't have the exact statistic, but I know that it's about 68% of American households have a companion animal in their household. So, that is a very sizable percentage of American population that have a family pet, and at least as measured by my household, that family that gets treated very well. (laughter) And it's all non-reimbursed business, so it's all cash, so cash payments out there for your pets.

So I clearly think that we think this is a very nice market opportunity. It fits perfectly with quality affordable healthcare. As to whether or not some consumers are going to use our product because they don't go to the vet, I don't know that, as much as I think most people really realize that they know every flea and tick season, they go and get something from the vet and they pay $60 to $100 for that product, and now they can get in a retail setting for far less. And I think that's -- it's the same store brand product or same quality and effectiveness as the national brand, but with the store brand pricing.

That's really the dynamic that -- it's going to take some time to change that behavior, but we believe it will change very similar to what we've done with OTC product. It takes time but it will evolve and we'll be there with a great offering.

I was just going to add one last thing. You made the comment that we -- Joe didn't specifically mention Animal Health anymore in his area as a strategic expansion. Maybe that's just semantics that we can be cognizant of going forward, given the fact that it's now part of the Perrigo family. We consider it adjacency to expand into further Animal Health ideas. So, as we've grown so quickly over the last year, anything that's adjacent to what we're doing is now part of the adjacency tuck-in opportunity.

And maybe the only last point I would add, it reminds me very much of what happened with Zyrtec prescription. Zyrtec prescription products, when it was a prescription-only product, it sold somewhere around 500 million tablets a year. Now that Zyrtec has moved over the counter, what we have seen, J&J did a fabulous job with launching that product over-the-counter, got great acceptance for the product. And today as we sit there in terms of tablets consumed, the total number of tablets of Zyrtec plus store brand now exceeds 1.5 billion, so you've seen a tripling of the product as it moved from prescription to OTC.

That's the kind of data that we look at and say, as you improve access of products for people, you can increase the demand for people, because people are all searching for quality affordable healthcare solutions for, in this case it was a human situation, but certainly as we're thinking about pet care we have that same dynamic issue, improved access. Operator we have time for maybe one more question?

Jon Anderson, William Blair.

Good morning, thanks for taking the question.

Hello, Jon.

I guess it's a two-parter on infant formula. First, just curious, with the promotional activity you talked about in the US, should we be viewing that as more opportunistic, to support the plastic tub launch, or is it maybe something more long-lasting based on competitive conditions? And then second, Joe, I think you mentioned that there are three Codex-compliant products that have been approved for global distribution, and I was hoping you could give out just a brief update on the International business and how big it is today, and what your plans are and expectations going forward?

Let me start with the first part of the infant formula. Did we have to spend and spend some additional funds in the area of promotions and getting ourselves prepared for the plastic container launch? The answer is yes. And that's clearly something we do as we launch any new product that we think has sizable upside for the long-term. There was some incremental spend on that product ar the launch to get ourselves prepared for the appropriate number of displays and other programs to get the product out into the marketplace.

That will, certainly that's just associated with a new product launch, that will minimize overtime but it is something that we think is an important investment for our future, to continue to drive the growth of our store brand infant formula products, private label infant formula products.

On the question of the Codex-compliant, what's important there is we get the FDA approval or FDA permission to go forward with these products. And that's an important marker for us that we get that, so that we can then go out and shift these products to other countries around the world and indeed that is what's happened.

I would say, on balance, we're doing well in our international market with the exception of, as Judy mentioned, China. China has instituted some new, what I would call, regulatory/labeling challenges. We have worked out way through those label challenges now, and we're working through them as we speak. So, we still view there's a lot of opportunity, certainly the demand in China. If you've read the recent reports in the newspapers and journals, demand for infant formula in China continues to go up dramatically. So that's something we're very excited about, demand.

But there are some, what I would call, regulatory hurdles that we are working our way through. We expect to get through those labeling requirements and continue to get product out into the China market. And we think these types of product approvals just simply facilitate even more opportunities for the future. So we're excited about it, but albeit, we have to say that we've had a little bit of a challenge in the latest quarter, just getting product to China. We think that's behind us, or the majority of that's behind us, with the label requirements. We will work our way through that for future quarters. The opportunity is still there, the demand is still there in China for us.

Operator, that concludes our call for today. I'd just like to say, thank you everyone, for your interest in Perrigo and we'll talk to you, I guess in August, will be our next quarter call. Thank you have a great day, everyone.

Ladies and gentlemen, we thank you for your participation in today's conference call. You may now disconnect.