Q3 2019 Earnings Call
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I'd now like turn the conference over to Brad Joseph Vice President of Investor Relations. Please go ahead.
Thank you good morning, and welcome everyone to pair those third quarter 2019 earnings conference call.
The chance to review the press release, we issued earlier this morning copies or at least is available on the Parago Dot Com website, joining today's call are present feel Murray Kessler and CFO rate so caught.
I'd like to remind everyone that during this call participants will make certain forward looking statements. Please refer to the important information for shareholders and investors and Safe Harbor language regarding these statements in our press release issued earlier this morning.
Discussing the business Maria will reference only non-GAAP adjusted numbers for the quarter.
Comparisons to prior year will also exclude exited businesses and currency changes.
Raised discussion of financial results. During this call will address both GAAP and non-GAAP results and were noted comparisons to prior year will exclude exited businesses and currency changes.
Located on our website is the appendix for today's call, which provides reconciliations for all non-GAAP financial measures discussed.
Couple of other housekeeping notes to mentioned before we get started.
Excluding exited businesses excludes contributions from the exited animal health and human food businesses from both 2018 and 29 team.
Organic growth Exco is rainier, the exited animal health and infant food businesses.
Currency.
And as a reminder, worldwide consumer encouraged the consumer self care Americas, and consumer self care international segments as well as corporate unallocated.
One final note given rain years global reach the company has finalized operations reporting lines, where the U.S. operations. Our friend here are included in the consumer self care Americas segment and its non U.S. operations are included in the consumer self care International segment.
With that I'd like to turn the call over to Mark.
Good morning, everyone.
I'm pleased with the company's third quarter results and it's worth noting that this is the first time I've said that about a quarter. Even though this is the fourth quarter in a row that our results have met or exceeded expectations.
What differentiates this quarter is that our topline is growing again as many of the initiatives we implemented as part of our strategic plan are beginning to take effect.
And while a meaningful portion of this quarter's double digit growth is due to the bolt on acquisition over the near the organic growth results were also solid really the company had on almost all cylinders from a revenue perspective, with one exception infant nutrition, which was explained last quarter and which will be further detail in a mom.
Yes.
Cost control also benefited the company's results as we enjoyed overhead savings from project momentum.
No I.
I like the direction, we are headed.
We are executing well and I believe we are on track to achieve our stated 357 long term consumer growth objectives.
Let me go into a bit more detail.
Total pair no consolidated net sales grew just over 10% versus year ago.
All segments contributed to this growth, including a 9% increase in consumer self care Americas.
10% increase in consumer self care international and a 13% increase and generic Rx [noise].
See I see a net sales growth of 9% was led by the incremental addition of U.S. were near sales of 54 million.
And an increase of 3% or 13 million of organic net sales growth on ROTC business.
From a consumption based.
Oh Gee see category growth remained strong growing 2% revenue during the third quarter versus year ago.
According to Iraq.
For the same period Storebrand retail dollars grew 2.8% outpacing national bank growth of 1.6%.
Which was up 30 basis point share gain per store brands.
Oh Tc share gains were driven by solid growth in our allergy and smoking cessation categories.
What most excites me here is beyond the growth is the renewed purpose with which parago teams are attacking and winning in our core categories.
So I'll, let organic go Tc growth was partially offset by an 11% decline versus year ago, and our infant nutrition business.
The infant nutrition performance during the quarter was as expected and as explained in last quarters conference call.
Remember the second quarter and pet nutrition results were hurt by a contract packing inventory issue and retail disruption from a product recall.
Importantly, the retail issue is behind us as the U.S. Storebrand infant formula business returned to growth in the third quarter, increasing 4% versus year ago, and while the contract pack sales inventory issue continued in Q3 it was expected.
The good news is we're almost through that issue as well and looking forward. We had a strong pipeline of new infant formula products, many of which are launching as we speak.
And we have gained distribution at a major new customer said another way, we see infant nutrition and total growing again versus year ago.
In the fourth quarter.
Turning to consumer self care international.
Net sales increased 10% versus year ago, while the C.S.C.I. results benefited from over $23 million, an incremental sales Berman there we saw solid organic growth of over 3%.
The 3% organic growth on C.S.C. I was driven by 28 million, a new product launches and good selling activities for the cough cold season in Europe .
I'd also note that France, which I highlighted last quarter is well on its way to being corrected as we now have our salesforce back up to full strength.
We have a solid pipeline of new products ready to launch early next year.
Finally.
Our Rx segment continued to perform well and outperform most generic rx companies growing 13% versus year ago in the corner.
It's worth noting we did have service issues related to supplied it to interruption from several of our key suppliers not meeting their production goal then timeline.
So in summary, I repeat it was a solid quarter. Good quality, we still have a lots to do to be able to consistently report this type of growth, but we're heading in the right direction.
Parago teams across the world are starting to win again in the teams are energized.
And of course, we all believe we're recapturing the paranoid advantage and our certain that wouldn't be well make lives better by bringing in quality affordable self care products that consumers trust everywhere. There. So I'll now turn the call ever to right.
Thank you Mary and good morning, everyone.
Now that Murray has gone through the sales highlights for the quarter I'd like to walk you through the rest of the Q3 piano briefly focused on the balance sheet, who provide some color commentary on our outlook for the rest of 29, saying.
Consolidated reported net income for Q3 was $92 million and reported diluted EPS was 67 cents per share, which included an $18 million or 11 cents charge for our voluntary retail market recall are benefiting the cost of which was removed from our adjusted net income.
For the quarter.
Consolidated adjusted net income for the quarter was $142 million and adjusted EPS was a dollar and four cents per share up 11 cents from Wall Street consensus.
Third sequential quarterly earnings Beach, and our fourth sequential quarter of meeting or exceeding market expectations.
Adjusted net income includes $50 million non-GAAP adjustments.
We are adding back $81 million of amortization $18 million related to the acquisition of linear.
$18 million from number and that's a dean recall and 11 million impairment I've ever missed an Rx brand and $70 million restructuring business separation and unusual litigation.
And then with subtracting the 72 million dollar gain from the sale of the animal health business together with $31 million in tax impacts from all of these adjustments.
Our reported consolidated effective tax rate for the quarter was 5.2% much lower than in recent quarters, primarily as result of the tax loss that arose from the sale of the animal health business. Despite the fact that we had a 72 million dollar book gain.
Since we excluded that game from our adjusted results, we have eliminated the associated tax impact as well. This increased Q3 effective tax rate from a GAAP rate of 5.2% to a non-GAAP effective tax rate of 20.1%.
Details of all these adjustments can be found in the non-GAAP reconciliation table attached to this mornings press release.
From this point for would all my comments and numbers on a non-GAAP basis [laughter] moving now to segment reporting.
I'm going to start by reviewing the results of our worldwide consumer business, which is comprised of the consumer self care Americas segment, the consumer self care International segment and corporate unallocated.
By the results of the two sub segments individually I'll discuss the Rx segment afterwards.
Worldwide consumer adjusted gross profit as compared to last year was up $12 million to 392 million, which amounted to an increase of 9% on a constant currency basis. When exited businesses are excluded from the 2018 comp.
In the Americas segment.
Adjusted gross profit business last year increased by $10 million to 210 million strong performances within the U.S. LTC business and the addition of linear with partially offset by lower infant formula contract business and higher direct labor costs adjusted gross margin improved four.
80 basis points to 34% as favorable LTC product mix in the quarter was partially offset by the impact of the exited animal health business and higher cost of goods sold.
In the international segment adjusted gross profit increased by $1 million to 191 million for the quarter measured in constant currency adjusted gross profit increased by 6.3% primarily due to new products and to the addition of rent is non us business, partially offset by volume <expletive> .
Kleins, including in France.
Third quarter adjusted gross margin was 51.9% 190 basis points lower than last year, primarily due to the addition of Renea, which has a lower gross margin than our overall international portfolio.
It should be noted however that this gross margin impact does not fall through operating margin since really has no operating expenses up incentive sales than the rest of international.
Moving onto adjusted operating income worldwide consumer business adjusted operating income was up $2 million to 153 million as the benefit of adding when there was mainly offset by the cost of restoring employee bonuses as compared to last year's Q3.
Further adjusting for the impacts of currency and exited businesses. It was up 4.3% in the quarter.
In the Americas segment, adjusted operating income was $5 million to 123 million with an adjusted operating margin of 19.8%.
The same as in Q3 last year up 4.8% when exited businesses are excluded.
Increase gross margin and low admin costs were partially offset by higher R&D spending to drive innovation.
In the International segment adjusted operating income was flat to prior year $64 million further adjusted for currency it was 4.4% better than last year.
Adjusted operating margin was down 100 basis points to 18.2% due primarily to higher SGN I.
Turning now to the Rx segment adjusted gross profit decreased by $3 million to 94 million an adjusted gross margin of 40.9% was down from 48.1% in Q3 last year due to adverse pricing higher cost of goods, primarily as a result about the party supplies in there.
Relative to meet our demand and less favorable product mix.
Adjusted operating income was lower by $2 million to 55 million principally due to the gross profit decline and higher SGN, a somewhat offset by lower R&D expenses.
In summary, then consolidated adjusted earnings per share in Q3 was a dollar and four cents up 11 cents from Wall Street expectations, our fourth consecutive quarter of meeting or beating consensus.
Consolidated adjusted operating income was flat to Q3 last year as the benefits from the Rineer acquisition and savings from project momentum our rest DNA cost reduction initiative were offset by the restoration of full employer employee bonus payouts that we expect this year and temporary headwinds our infant nutrition business.
Yes.
With respect to the balance sheet as of September 28, 2019 total cash on the balance sheet was $399 million and total outstanding debt was $3.4 billion.
This quarter, we successfully refinanced our 2020 term loan extending its maturity to 2020 too and lowering the interest rate by 65 basis points.
Q3's cash flow from operations was $140 million, a cash flow conversion of almost 100%, we expect to maintain that cash conversion in the 100% range in the fourth quarter.
I'm now turning to a third quarter Q.
As you will see when you read it we received the draft notice of proposed adjustment a draft NOPA from the IRS covering fiscal year fiscal taxes, ending June 28, 2014 on June 27 2050.
The draft NOPA relates to the deductibility of interest on debt owed by owed to Parago Company plc by Perrigo company, a U.S. sub.
The debts were incurred in connection with the merger with alone in 2013.
The draft NOPA proposes a reduction in gross interest expense that fiscal years 2014 in 2015 details of what you maybe in the Q.
Where the IRS to prevail in this product proposed adjustment, which we intend to contest strongly we estimate thing driving an increase in tax expense of approximately $170 million, excluding interest and penalties.
In addition, we would expect the IRS to seek similar adjustments for the periods from June 28, 2015. So December 30 129 team.
We estimate that those further adjustments based on our preliminary calculations will not likely exceed an additional $200 million excluding potential interest in penalties.
We would not usually disclose that drop Oprah at this stage, but would wait for the final.
Which for this specific note we expect later this month.
However.
Since the IRS as recently made it clear to us that they plan to wish you. The note that without taking into account submission to them in which we requested they make changes prior to issuing the final note.
We decided to include the disclosure of the disclosure already in this quarters Q.
No payment of any amount related to the proposed adjustments is required to be made if a tool until all applicable proceedings have been completed.
Turning now to our outlook for 29 team some of the assumptions incorporated into our guidance include within the Americas segment, our new oral self care category will continue to drive topline growth our infant nutrition business is expected to return to growth in the fourth quarter, mainly due to a large new customer.
ROTC business remains strong and is already shipping costs co product to retailers and we're assuming a normal season.
For International we remain excited about the new product pipeline, which we anticipate will continue to drive topline growth in Q4.
The Rx, while we don't expect to see that trend change, we remind you that we're comparing to a very strong Q4 last year, which included a high margin exclusive product launch in summary, based on these assumptions, we're raising our 29 teen adjusted EPS guidance two three I'd.
Five to four or five a share.
And with that I would like to turn the call back to Marie.
Thanks Ray.
So to sum up my thoughts on the corner on the outlook for the rest there.
Our worldwide consumer businesses continued to gain momentum and I'm excited about the future.
We've raised our 2019 adjusted EPS guidance.
Which reflects the strength of worldwide consumer business is expected to continue in the fourth quarter and earlier than anticipated project momentum savings offsetting mix and supply issues and Rx.
Operator, well now take questions.
I will now begin the question answer session to ask your question you May Press Star then one on your Touchtone phone.
Please pick up your handset before pressing the key to.
With Joy Your question. Please press Star then too.
Our first question comes from Randall Stanicky with RBC capital markets.
Hey, random hi, good morning, this actually Ashley Ryu off Randall.
Right can you talk a little bit about the organic.
Growth rate that you signed feet. This yesterday in the quarter and what your expectation is for the balance of the or add new launches were again fairly light for the quarter. So if you could just talk about your expectations there as well I know for linear I will take some time to ramp up but im talking kind of outside of that and when we should expect to see that pick up.
You don't need to expect to see it picked up its already strong it is and now as I went through in the detail on my comments CR OTN see business, which is the lion share our business was up over 3% in the quarter and I believe it was the same in the last quarter and I shared that consumer takeaway was strong with that and likewise than our retail.
And formula business in the U.S., which is the biggest most important part of that nutrition business was up 4% enough that you only issue that makes it look like order on a growth isn't as strong as the infant formula contract business that I highlighted from a new product standpoint, you should feel very encouraged that with a light pole.
Her in new product sales on C.S.. So yeah, we got those kind of growth rates, which means that we're obviously.
Building, our business and doing a better job with consumer and partnering and.
Getting distribution gains et cetera.
For the fourth quarter, we as I said I expect the total infant nutrition business to be up and be a driver a total growth.
For the quarter.
So we won't be looking at anymore declines on infant nutrition as they have a very strong new products quarter, starting out launches that are in place and already built their eminently shipping. So those are not like promises to happen. That's about the really happened. So I'm I feel very very good about the organic growth across the whole comp.
Tony.
Okay, sorry, just to clarify men.
When should we expect to see new launches pick up not not the business.
And then also.
I know, there's a lot of moving pieces that just on a more housekeeping now can you just touched on the right. There we call and I wish I know you've adjusted out of revenue and gross profit can you just kind of talk about that gross profit adjustment. Thanks.
Well I am I believe what was the number array for that totaled $18 million in covering the U.S. on Europe , right and that 18 million was.
The combination of bringing back inventory from wholesalers, there wasn't a consumer recall and any inventory that we had on hand at any more on ingredients. The materials that were there. So that's that's every bank involved with the recall we didn't adjust for any loss of sales in fact I'm not sure on.
The U.S., we'll see any loss of sales because consumers will gravitate.
The other products, but this was not something unique to 10 parago it was worldwide and industry.
Hi, Dan.
Theres been a lot of clarity provided actually in the last couple of days on that up by the FDA.
Great as far as your products go I'm not going to speak to future new product launch that that's competitive. It's my job that get to then 357 numbers I promise never you and I have many tools and my toolbox to do that and.
New products as a key component of as a company, we actually had a good quarter new product wise. There is more driven by say Sci, but I'm really not going to date dissect it down to by division by brand.
That's for Japan before.
Got it thanks.
Thanks, Ashley next question please.
Our next question comes from.
[noise] Leerink.
Good morning.
And me.
Okay.
No.
Jamie.
Hi, Good morning can you hear me okay.
Yes.
Okay, sorry about that.
Can you talk to just on zantac or other expectation for additional recalls into second quarter and.
Can you talk about any additional impact that you might have baked in in your sort of guidance update in into fourth quarter.
Oh for this year and then I have another question.
Well.
I mean, we don't expect it to I mean, they're looking at the FDA already tested all the other products in that category and so there were clear and this was an as it were not we built a reserved for it. So it's an estimate the only way it would vary ray if there was a into it came in a little more a little less but.
There will be ever there'll be some sort of show up but we estimate is we've been pretty accurately what we want to total NPAC contract.
Got it now with regards to the infant Formula you talked about some of the moving bots this quarter.
As we think about.
The contractual when audio this year and once we sort of stabilize how should we think about the run rate for this business has been maybe exit 2019 and think about 2020.
I expect MPS I mean infant nutrition has been a winner for Parago for years. It had a pickup this summer kind of a couple of things all went wrong on it at the same time, but I expect it to return back to <unk>. Good solid growth this year and next year. It has.
Well I don't want to be real specific I guess I cant on these because they're already launched the customers. We have two major new product launches that have already hit the marketplace.
One of which begins shipping.
Eminently like within days.
That had been worked on for 10 years their major new products for that segment. So.
Im not going to give you specifics on what growth rate I expect our infant formula next year, we'll do that along with all of our sort out the mentality for next year shaping up when I get to the.
Conferences and January I'll give you a.
Scorecard review of Hell, I think we did across the board.
On all of our businesses and all of our initiatives and where I see that the direction going and guidance for the further coming year like normal so.
But I'm bullish on infant Formula was a hiccup I think its corrected.
Thank you.
Thanks any.
Our next question comes from Gilbert with Suntrust.
Thanks, Good morning.
What can you say morning about that.
Good morning, what can you say about the timeline in process.
Separate the Rx business I have another question.
No update from from last quarter I as I told you we continue to.
Prepare for it and we continue to evaluate it but we'll do it when we can maximize value for shareholders I'm not going to be dumb about it and it's still a pretty volatile market what's been going on.
Externally and the environment not whole industry. So right now they're thrilled with the way they've stabilized the business leaderships Super a man.
And that's still we're focused on our consumer mentioned and we're trying to be very transparent with the consumer numbers and given your worldwide consumer numbers that allocate all the overhead all those things to that so you can sort of model underneath that.
The answer is is we continue to prepare and I'll do when it's the right time.
Okay and on the tax front Ray can you talk about the new issue you just raised.
You framed the maximum potential I guess financial.
Outlay should you not prevail, but can you talk about the implications for the tax rate longer term and on the Irish front gentlemen have you have interacted with the authorities over there at all to better understand their side and the story or are we just waiting for the actual process just to move forward with no interaction before then.
Yes.
I don't think is any based on what we see right now there's no implication.
For the longer term tax rate from the new NOPA principally because.
We plan to change the structure because of tax tax changes in Ireland and the US that's taken place in the last 12 months, which went into that particular structure and efficient.
Which is to 67 I, if you're familiar with with tax code in the U.S. So.
The from the most recent know for which we do intend to contest very strongly as a technical difference there is being raised by the IRS. We think we have strong grounds on which to to win that and we feel that the IRS is.
Less strong position than.
And we are so.
I see this having an impact on tax rate going forward as far as the Irish case goes to the update I told it was before there's briefs that.
How are submitted by both sides going back and forth, but April 29th is at that hold is one that judicial review goes on and just to reinforce for everybody on the call. The general through judicial review is about whether Ireland violated our legitimate expectations.
Based on history to that was a company we were buying and Alon was doing things properly, which we believe they did and every advisor that I've had looked at this tells me that they did we're not having a debate yet on the merits of the tax.
Lets ask men at all that's would happen afterwards as it relates to the briefs and all that I don't think there's any surprises that we've seen.
So far so.
With steady as she goes as we head towards April .
Sorry, one last one Maria so I'm pleased with the organic growth of the business and how things are going operationally. So on the M&A front or what's your appetite and flexibility to to do a another vernier like deal.
In the near to intermediate term or should we think smaller thanks.
Well I mean, I think Weve I think you renew years, probably based on sort of the cash flow the company and the data that we're trying to leverage we're trying to get to would be that sort of the high side of where we're going but I do have an appetite for continued bolt on M&A. There were two slides I presented on May nine.
As I've gone to investor meetings around the country, everybody seems to get what it looked like when we were winning what it looked like when we start winning and when it looked like one way, we're winning there was a certain level.
A bolt on M&A that was I don't have the number right and in front of me and there was a certain level of innovation that offset downward pricing pressure and.
We're now in the current quarter exceeding that that's why the total growth is you're saying double digit growth on an apples to apples basis and I expect that to continue as we roll in for an air but on the longer term.
Still holding true to the growth rates that I've said of the 357 and to supplement above and beyond that.
Im going to go after bolt on opportunities like give us repeatable growth platforms. Thank you.
Thanks, Greg.
Our next question comes from David Risinger with Morgan Stanley .
Hi, There institution you here for David Risinger I've a couple of question first could you. Please comment on the updated guidance specifically implications for a fourq consensus modeling and the second is what is the outlook for Rx pipeline Lantis. Thank you.
So while the consensus is the new midpoint is.
Yes, but it's in line is in line on the new midpoint of our.
As adjusted EPS range is basically in line with where consensus. Okay. So there you go you haven't from Brad the new midpoint that we've raised the Nichols in line with consensus as we speak again.
You saw where the we re do tell her that was coming from as it relates to Rx new products I mean other than to tell you that I think we have a robust new product pipeline, excluding pro air for next year.
I'm not going to tell you when and what products, we have coming it's obviously.
Would be I can set of competitive disadvantage to share that.
Well, we have a robust product pipeline coming.
Thanks, You Shan next question please.
Our next question comes from Patrick Trucchio Sternberg capital markets.
Hi, Good morning does is on for Patrick.
Just a question regarding the consolidation of R&D and the impact on new product development.
We noted the focuses on driving new products than we do see this strong growth internationally as was the progress and their type business can you briefly discuss how the consolidation of R&D aiding in development of new products and to extend that you can tell us, which new products or which cat.
You should lead the look for cash contributions of new products over the next year.
Thanks.
Well.
The first half the question I really like because I do believe that the consolidation of R&D is really helping to ramp up our program faster than I thought when I go to do investor.
Like you when I started early following may 9th everyone or before May 9th everybody sort of question, whether we what what self care and could you do bolt on.
And then after may 9th one way or they saw Rineer and then privates I know you must later as I've done further investor calls everybody says Okay. I believe you now on bolt on but how we'll innovation ramp up in innovation is ramping up significantly in a large part of that is that that team is working together and sharing ideas and work that's.
Been accomplished in completed.
Across the world them not only from you know Europe see Sci back to Oh, I'm, sorry, I see a but also from with from region to region in Europe as an example, taking winning.
Skin care products in the Nordic regions, and launching them under existing brand names and in other parts of Western Europe as.
Another example, so you're really seeing like hundreds of ideas I I quoted the number of a half a billion plus a new products that numbers growing and I, you know and I go out in my January call going forward I'm going to spend a lot of time on innovation to share how we see that growing because I think thats. The next question I'd.
No you can do bolt ons can you anticipate and it's already starting to happen. So.
Which is which is great news a lot of it faster than I thought some of it still will take.
A couple of years am I going to give you a specific categories. No answer it's it's almost going to be a mindset across the business you should expect innovation across all of our businesses and the coming here.
What was the second part of your question.
Where the category that any kind of specific categories, where the contribution from new products might come from yeah. That's the I'm not going to go specific other than the one I already told you.
I will expect.
Infant Formula, which has two major launches that they've been working on which is the result of 10 years' worth of work to have a significant contribution.
Outsized contribution from new products and.
In the coming year and the other thing that I would like to do which most good consumer products companies do it start communicating once I have a little bit more data about what all.
Describe an end to end, commonly known and the consumer world as a freshness index, which will not just talked about what kind of new products, we launched in the year, but we'll talk about the percentage of our volume coming from.
Either new products or some form of significant innovation or product improvement within the last three years.
Which you know as a company.
Great companies tend to operate in the 15% to 20% great that will take us a little time to get there.
But that's really good measure of stickiness of new products and whether the company's innovating at the right amount or too much and there's a lot of statistical weren't bye.
Some really good consultants doing industry benchmark into say, that's the right number to target I'll share that more in January when I get there as well, but we're we're gathering all that data as we speak again and again I I like where the company is growing organically I like where we're going on bolt on I like the energy I see and the teams.
This concludes our question answer session I would like to turn the conference back over to Murray Kessler for any closing remarks.
Well I think I just kind of gave you my closing remark on my last little space, there, but I think they noted listen I've been here for for a year now.
We we delivered were getting more consistent with the goal for up that most of US we're pushing on but this was the first quarter I did stand up here and and be proud that.
That that the growth numbers were starting to come as and when we were working toward so.
This was our best quality quarters since I've been here, so so far and I I know we have those other issues an overhang issues and we will work through those.
And we'll manage those onto the best interest of shareholders.
And I am I appreciate your interest.
And paradigm.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.