Perrigo (PRGO)

Q1 2012 Earnings Call

October 27, 2011 10:00 am ET


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


Sumant S. Kulkarni - BofA Merrill Lynch, Research Division

Ami Fadia - UBS Investment Bank, Research Division

Randall Stanicky - Canaccord Genuity, Research Division

Elliot Wilbur - Needham & Company, LLC, Research Division

Jon Andersen - William Blair & Company L.L.C., Research Division

David G. Buck - Buckingham Research Group, Inc.

Frank H. Pinkerton - SunTrust Robinson Humphrey, Inc., Research Division

Louise A. Chen - Collins Stewart LLC, Research Division



Good day, 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 2012 Earnings Conference Call. [Operator Instructions] Thank you. Mr. Shannon, you may begin your conference.

Arthur J. Shannon

Thank you, very much. Welcome to Perrigo's First Quarter 2012 Earnings Conference Call. I hope you all had the chance to review our press release which we issued earlier this morning. A copy of the release is available on our website at 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 21 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 C. Papa

Thank you, Art. And welcome, everyone, to Perrigo's First 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 storebrand market share growth. Then, I'll present an update regarding the ongoing integration of Paddock Laboratories. Next, Judy will go through the details of the quarter and our increased fiscal 2012 earnings guidance. Then, I will provide an in-depth update on the supply agreement we've recently signed in China and our plans for new product launches, plus an overview of our expectations for the full year.

Finally, this will be followed by an opportunity for Q&A.

Now, let's discuss the quarter. It was another great quarter. On Slide 4, you can see we had record first quarter sales of $725 million, plus record adjusted income from continuing operations up 27% from last year on a 13% net sales growth. On top of that, consolidated adjusted operating margin from continuing operation were 21% driven by gross margin expansion and the acquisition of Paddock Labs. We achieved a 21% adjusted operating margin notwithstanding a 31% increase in adjusted R&D investment versus last year.

Turning to Slide 5, you can see the business segment breakdown. Judy will walk you through the detail, but I wanted to touch on a few items. First, our Consumer Healthcare unit had all-time record quarter first quarter sales. The performance was driven by $15 million in new product sales. The highly successful launch of fexofenadine, the store brand of Allegra, helped our new product sales. In fact, store grew in penetration for fexofenadine is ramping into the mid-40% range with Perrigo having the majority share of the store brand market. The base business continues to gain market share as well. However, a delay in shipping our new analgesic suspension product that was converted to a new and improved bottle design slightly depressed the U.S. CHC growth rate, by -- in Q1 by approximately 2 percentage points. Adjusted operating margin, or income was down 9% versus last year. This was driven primarily by competitive pressures in the gastrointestinal category and promotional pre-seasonal and new product spending. We expected these pressures and the costs were factored into our plan. Therefore, we feel confident raising our earnings guidance for the rest of the fiscal year.

Our Nutritional segment was down slightly from last year due to lower sales in the vitamin business. The margins in this segment were impacted by increasing commodity costs, primarily whey protein for infant formulas. We will continue to optimize our pricing and cost -- see cost efficiencies to offset the increased costs through the rest of the year. Judy will outline for you our expected margins for the full year shortly.

Our Rx business had a very strong quarter as it continues to execute ahead of our expectations. The RX net sales increased 84%, and adjusted operating income grew more than 200% primarily as a result of the Paddock the acquisition. Furthermore though, organic net sales grew 28% in the quarter. Our Rx team continues to execute as our competitors continue to work through their manufacturing issues.

Our API segment continues to perform well driven by strong performance from the base business highlighted by robust sales of fluticasone, to new and existing customers and temozolomide in the EU.

Looking at Slide 6, the overall OTC consumer market was up just 1.5% versus last year, with national brands down 2.4%, but store brands gained 11% on the strength of new product launches, national brand recall and increased market share. The analgesic category was obviously impacted by a recall at a brand name competitor. However, all of the individual store brand categories were up.

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