Perrigo's CEO Discusses F2Q12 Results - Earnings Call Transcript

Perrigo Company [PRGO]

F2Q12 Earnings Call

February 7, 2012 10:00 a.m. ET

Executives

Judy L. Brown - Chief Financial Officer, Chief Accounting Officer and Executive Vice President

Arthur J. Shannon - Vice President of Investor Relations & Communication

Joseph C. Papa - Chairman, Chief Executive Officer and President

Analysts

Louise A. Chen – Collins Stewart

Linda Bolton-Weiser – Caris & Company

Ami Fadia – UBS

Jami Rubin – Goldman Sachs

Gregg Gilbert – BofA/Merrill Lynch

David Steinberg – Deutsche Bank

Elliot Wilbur – Needham & Company

Randall Stanicky – Canaccord Genuity

David G. Buck – Buckingham Research Group, Inc.

Jon Andersen – William Blair

Chris Schott – JP Morgan

Frank Pinkerton – SunTrust Robinson Humphrey, Inc.

Gregg Gilbert – BofA/Merrill Lynch

Presentation

Operator

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Good morning, my name is Demetre and I will be your conference operator today. At this time, I would like to welcome everyone to the Perrigo's Fiscal 2012 Second Quarter Earnings Results. [Operator Instructions] Thank you. Mr. Shannon, you may begin your conference.

Arthur Shannon

Thank you, very much. Welcome to Perrigo's Second Quarter 2012 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 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 this call are forward-looking statements within the meaning of Section 21E of the Securities and 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 25, 2011. I would now like to turn the call over to Perrigo's Chairman and CEO, Joe Papa. Joe?

Joseph Papa

Thank you, Art, and welcome everyone to Perrigo's Second Quarter Fiscal 2012 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 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, then I will provide additional comments on our plans for new product launches, plus an overview of our expectations for the remainder of fiscal year ’12. Finally, this will be followed by an opportunity for Q&A.

First, the year 2012 represents Perrigo’s 125

th

year anniversary as a company, what a great achievement. I would like to thank all of our past and present employees around the world for the great work allowing us to achieve this milestone.

Now, let’s discuss the quarter. It was another great quarter. As you can see on slide five we had strong year-over-year growth this quarter on a consolidated basis. The net sales trend was driven primarily by the acquisition of Paddock Laboratories and consolidated new product sales of $55 million in fiscal year quarter two. This top line net sales performance translated into expansion of both adjusted gross profit and adjust gross margin. The adjusted operating margin has expanded even further due to continuing operating expense leverage.

Turning to slide 6, you can see the business segment breakdown. Judy will walk you through the detail, but I wanted to touch on a few items. Our consumer healthcare unit had all time record fiscal second quarter sales. The performance was driven by $26 million in new product sales led by the highly successful launch of fexofenadine, the store brand version of Allegra. In fact store brand penetration for fexofenadine is ramping into the mid 50% range at this time with Perrigo having the majority share of its store brand market. That is the fastest store brand market penetration in our history.

To put that in perspective, in 2006, our new product launch goal was to gain a 30% store brand market share penetration in the first 12 to 18 months. In this launch the store brand market share penetration is over 50% in the first six months. Consumers and retailers are even more quickly capturing the value of the store brands.

Adjusted operating income was up versus last year despite competitive pressures in gastrointestinal category and promotional new product spending. We anticipated both this GI pricing pressure and the marketing costs in our plan. As a side note, the gastrointestinal pricing has stabilized during the past four to six months.

Our nutritional segment, net sales were down slightly from last year due to difficult comparables this quarter. Remember that during the fiscal second quarter of last year, a competitor had a recall in the infant formula category which gave us a $12 million in additional sales during the quarter.

Margins in the segment were impacted by increasing commodity costs as well as production variances. I will discuss initiatives we are implementing to mitigate the impact of these challenges after Judy’s comments.

Our RX business segment had a very strong quarter, as it continues to execute ahead of our expectations. RX net sales increased 82% and adjusted operating income grew 125% as a result of the Paddock acquisition, organic net sales growth of 11% and a favorable pricing environment.

The RX team continues to execute very effectively across their entire product portfolio and the Paddock integration continues to go well. Our API segment continues to perform well driven by strong performance from the base business and highlighted by robust sales of fluticasone.

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