Q4 2019 Earnings Call

Dead dead dead dead dead.

off

good day and Welcome To Paradise fourth-quarter and full-year 2019 Financial results conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero after today's presentation. There will be an opportunity to ask questions to ask a question. You may press * then 1 on a touch-tone phone to withdraw your question, please press * then two, please note this event is being recorded. I would now like to turn the conference over to Brad Joseph vice president investor relations, please go ahead. Thank you and good morning everyone and welcome to perrigo's fourth quarter and year-end 2019 earnings conference call. I hope you all had a chance to review the press release we issued earlier this morning copy of the release is available on our website joining today's call our president and CEO Marie Kessler and c f o r a c e

I'd like to remind everyone that during this.

All participants will make certain forward-looking statements. Please refer to the important information for shareholders and investors and safe harbor language regarding these statements and our press release issued earlier this morning when a cussing our business very well reference only non-gaap adjusted numbers unless otherwise stated all comparisons of Prior periods will also exclude currency changes, raise discussion of financial results during this month or just both gaap and non-gaap results in the appendix for today's call. We provided reconciliations for all non-gaap Financial measures presented a couple of other quick items know before we get started with one exited businesses means the exited Animal Health and infant food business to non-gaap net sales excludes the exited businesses from both 2018 and 2019. And for the full year comparison also excludes the voluntary Global Market withdrawal of Ranitidine in a third quarter 2019 and three organic growth excludes Rainier the exited businesses and Thursday.

See changes, we don't.

Not that the company realizes consumer product categories to standardize reporting and evaluation across its website consumer businesses, which you can see in the appendix attached in the mornings in this morning's press release these updates no impact on the company's net sales and are provided by quarter for fiscal 2019 and with that like to turn the call over to Martin.

Good morning, everyone. I'm pleased to share that following a good third-quarter perrigo's business sequentially strengthened in the fourth quarter of two thousand and nineteen months of the year.

We Believe multiple quarters of improving fundamentals demonstrates that paragraph parigot is executing well against our new consumer self-care strategy and that our transformation initiatives are working of course, we're only nine months into a two to three-year transformation and there's still much work to be done but the drivers of growth the quality of growth and the breadth of growth across busy, thank you for providing strong evidence that we are on the right track to deliver our stated 357 long-term growth goals starting with revenues as compared to year-ago off the company hitting on all cylinders in Q4 total parigot Consolidated net sales grew 13.4% all segments contributed to this growth including a 19.4% increase in consumer self-care America's CSEA.

and 11%

Increase in consumer self-care International csci and a 2.2% increase in generic RX total worldwide consumer revenues grew 16.4% including the additional revenues from the renier oral care acquisition, excluding Ranier organic growth in the fourth quarter was very strong with CSEA up 10.6% versus a year ago and csci up 4.3% This brought total consumer organic growth to 4.7% in the second half of fiscal 19 and 2.2% for the full year. This gives us even more confidence that we can deliver on our stated 3% organic growth of directives.

A closer look at the drivers within our business segments should help you understand why we say the quality and breadth of the fourth quarter results. I just referred to were so strong starting with consumer self-care America's csca adjusted Q4 net sales growth of a very strong 19.4% was driven by first month $52 million in incremental domestic Ranier sales representing 45% of your total CSC a year-over-year growth.

242 million and OTC sales growth representing 37% of Q4 total CSEA year-over-year growth all csca. Otce segments enjoyed strong Q for growth including cough Cold Plus 5% allergy plus 19% Digestive Health Plus 5% off pain plus 9% and healthy lifestyle plus 10% when I refer to healthy lifestyle think nicotine cessation in the US.

Four factors contributed to this broad strength and importantly one potential Factor didn't first the product categories we compete in grew at a faster page and Q4 2019 versus Q3 3.3% growth versus 1.8% are almost double in the fourth quarter benefiting a strong cold cough and Allergy Seasons as well as developments in the tobacco industry that we believed encouraged increased attempted quitting by smokers and Vapors.

second

Total Q4 store brand penetration versus National Brands increased 70 basis points and concurrently parigot gainshare from other store brand competitors offers as a result of new product launches and distribution gains on existing products that it's to say parigot got a larger share of a bigger slice of a bigger third. It is noteworthy that perrigo's e-commerce business has gained sufficient scale. So as to become a meaningful growth contributor e-commerce represented a quarter of the forty two million and organic sales growth for the quarter and is generated in incremental Thirty million in sales for the year. We belong perrigo's rapidly developing expertise in e-commerce is quickly becoming another competitive advantage.

The 4th driver of total CSEA strong quarter was our nutrition business unit, which returned to growth as predicted on our last call.

Go nutrition was up 21% versus a year ago and represented about 17% of total CSC a growth the business enjoyed robust growth behind the launch of a great product to a large customer and a return to strong contract back sales as we work through the previously discussed inventory issue some of the strength in Q4 nutrition contract was timing related to production planning in advance of a new retail product launch in q1 meaning we expect to give a bit of the contract pack sales back in q1, but even adjusting this nutrition is still grew double-digits in the quarter.

And V the one factor that importantly did not impact sales for the quarter was increases in trade inventory to be clear trade inventory positions at the end of 2019 were at a lower level than the prior-year which bodes well for the first quarter of 2020 strong Revenue growth and increased adjusted gross and operating margins resulting not a 20% increase in adjusted operating profits for total CSEA.

we enjoy

Solid adjusted operating income increases despite significant transformation investments in the quarter.

Turning to Consumer self-care International Q4 net sales increased 11% versus year-ago csci results benefited from twenty two million dollars an incremental sales from Ranier combined with solid organic growth of 4.3%

organic growth and CSC. I was driven by twenty-three million dollars in new product launches, including the XLS for five and fetus on launches and good selling activities for the cost cold season in Europe.

You markets category consumption for OTC remains solid growing at an attractive three to four percent rate with perigosas portfolio of regional Brands maintaining their Collective market share, finally our UK store brand business realize strong growth this combined with the addition of Ranier means that our store brand business now represents a larger percentage of our total csci portfolio as store brands carry lower gross margins are gross margin for CSC. I was negatively impacted. However, this reversed itself at the operating margin line as store brands carry almost no A and P bottom line.

csci adjusted operating

Increase two hundred basis points here for and the business delivered 16.4% adjusted operating income growth for the quarter finally are generic RX segment continue to outperform most other generic RX companies posting 2.2% net sales growth despite comparison to last year's launch of testosterone 1.62% off RX growth came from higher volumes of existing products and nineteen million dollars in new product sales partially offset by pricing pressure and discontinued products of six months total adjusted operating income for RX was down 26.3% for the quarter due primarily to the tests are on Joe testosterone 1.62% comparison.

On a Consolidated basis Q4 adjusted EPS increased 9.3% versus year-ago adjusted EPS for the year 2019 finished at $5.03 which was above our original May 9th guidance and it included $25 million dollars in transformation Investments.

So

Summary, I am very pleased with the quarter. It's what I like to see the team is executing. Well, which is translating to solid fundamentals on our business. I'm proud of the page teams all across the world. They are energized and winning again all of us believe that we are recapturing the Perrigo advantage and are confident that we will make lives better by bringing down the Affordable Self care products that consumers trust everywhere. They are sold. I'll now turn the call over to raise silcock our Chief Financial Officer to cover the financials in more detail and then I'll return to make a few go forward comments regarding guidance, right? Thank you Marie. Good morning everyone. Now that Mary has gone through the highlights for the quarter. I'd like to walk you through the rest of your life with a brief look at the full year 2019 Consolidated reported gaap. Net income for Q4 was a loss of $19 and reported diluted dead.

Bashar was fourteen cents.

Consolidated adjusted net income for the quarter was 145 million dollars and adjusted earnings per share were a dollar six marking our fifth consecutive quarter of months or exceeding Market expectations adjusted net income includes 164 million dollars of non-gaap adjustments that we added back including non cash and non-cash impairment charges of $142 million dollars primarily driven by a lower valuation of the RX business due principally to Market an industry factors and what's ization of 18 million dollars, which I always add back all partially offset by a fifty million dollar tax adjustment.

The reported Consolidated effective tax rate for the fourth quarter was 44.5% This was generated from a tax benefit of 15 million dollars and a loss for taxes of 34 million dollars. The income tax benefit was due primarily to a valuation allowance release in the US the Lost before taxes was principally due to the $152 million dollars of impairment charges recorded in the quarter which were non deductible for tax purposes after adjusting for these and other non-gaap adjustments are effective tax rate for the quarter was 19.5% full details of all, these adjustments can be found in the non-gaap reconciliation table attached to this morning's press release.

from this point forward

Well, my daughter numbers are on a non-gaap basis while growth percentages will be in constant currency and exclude exited businesses. First. I'm going to review the results of our worldwide consumer business, which is comprised of the consumer self care.

Self-care International segment and corporate and allocated expenses afterwards. I'll discuss the RX segment worldwide consumer sales growth in the fourth quarter was 16.4% from prior-year gross profit increased $51 to $419 or 18% increase excluding the impact of currency and exited businesses the acquisition of Ranier accounted for half of the gross profit increase while strong performances by the and nutrition businesses wage as well as successful new product launches in both the Americas and international segments were responsible for the rest gross margin was at 40 basis points from 38.9% to 39.3% Csca is gross margin was up 190 basis points from the impact of the sales flow through including growth in the allergy and smoking cessation.

categories grow smart

In leverage and operational efficiencies, which more than offset 180 basis point decline in csci primarily due to the addition of Ranier who's stourbridge business has a lower gross margin but a stronger operating margin due to there being almost no advertising and promotion in store brands as well as adverse product mix while gross profit was $51 operating income improved by forty 1 million primarily due to the impact of a twelve million dollar expense to restore employee bonuses home and reflect 2019 performance. Total operating income was a hundred and fifty three million dollars up 36.5% on a non-gaap basis.

Turning now to the RX segment net sales growth in Q4 was 2.2% but gross profit decreased by $11 in Q4 to $111 and gross margin of 43.2% was down from 49% last year. Do you primarily to adverse pricing specifically of testosterone 1.62 co-operating income was lower by 22 million to sixty two million dollars since operating expenses were up eleven million dollars primarily for pre commercialization R&D costs of Janeiro where these were principally units of generic ProAir that were made during 2019, since we now have approval from the FDA. These units will be sold and wage will have a lower cost of goal of goods providing us a benefit in 2020. Now a few quick remarks about our full-year results worldwide consumer net sales were up 6.30.

$0.02 and gross

Of increased versus 2018 by 4.1% This Improvement was driven by the addition of renier from July 2019 on all be it at a lower gross margin profile and by strong performance of the business operating income decreased $47 to $545 million dollars, excluding the impact of currency and exited businesses. Operating income was down 3% despite despite gross margin flow through the year-over-year decline was driven firstly by 25 million dollars of Investments to support Innovation and future sales secondly by the $37 cost of restoring employee bonus programs, which were at a low level in 2018 off and thirdly by a 17 million dollar insurance recovery in 2018. That did not recur in 2019.

For the full-year the RX segment net sales were up 5% but gross margin declined by 600 basis points driven by downward pressuring pricing pressure from competitor approvals operating income was lower by $41 due to pricing and the pre commercialization expense related to Pro are in summary. Our Consolidated earnings per share of 2019 were $4.03 in line with Wall Street expectations with respect to our balance sheet. As of December Thirty One 2019 total cash on the balance for May was $354 and total outstanding debt was three point four billion dollars 2019 cash flow from operations was 388 million as opposed to 1% cash conversion on adjusted. Net income. This lower than anticipated ratio was driven by a higher trade receivable trade accounts receivable primarily in the RX business wage.

Which we expect to return to normal.

In the first half as well as by Israeli withholding tax payments of 32 million dollars made in Q4.

Before I turn the call back to marry for him to talk about our 2020 guidance a brief word on the potential impact of the coronavirus obviously the situation continues to evolve but currently we don't participate you to having more than a modest impact on our results. Most of our manufacturing facilities are in the US and Europe. Although some of our products are manufactured and we saw drawer and other materials from around the world including in China all of the plants in which we manufacture and from which we Source our products are currently running while we have incurred small incremental air freight costs to date a year. We don't expect these to have a material impact on our results in q1 and based on what we know today. We don't expect more than a modest impact on our fiscal year.

With that, I'd like to turn the call back to Marie.

Thanks re looking forward the company has momentum as we enter twenty-twenty and we are encouraged by the transformation results. So far the fundamentals on a worldwide consumer business or solid we have a strong line-up of new products across the portfolio. Our e-commerce business is becoming an increasingly important source of growth and we expect our Revenue accretive bolt-on Acquisitions, including this week's acquisition of doctor fresh to further accelerate future organic growth. We also have finally received approval on generic Pro are we expect these actions to deliver approximately 6 to 7% reported Revenue growth for total parigot in a 20 with Organic growth right around the 3% Target.

you might expect

The strong Revenue growth to translate into higher adjusted EPS than the 395 to $4.15 guidance range provided in this morning's release, which is only slightly higher than a year ago or guidance includes exited businesses and several structural cost increases. And remember we are only just completing the first page of our transformation and there is still much to do to recapture the Perrigo Advantage as planned from the beginning our transformation plan invests fifty million in twenty twenty-five Thirty million incremental split pretty evenly across building out new channel infrastructure, like e-commerce Innovation like Nasonex.

Technology business intelligence systems and project momentum enabling Technologies.

Absent this investment spending. We believe our adjusted operating income growth would be close to the plus 5% We are working towards for 2021 and Beyond.

Worldwide consumer net sales are projected to follow their historic pattern that is spread pretty evenly across quarters with some seasonality increase in Q4 for the beginning of Costco an allergy Seasons. It should look pretty much like this year. I would note that. We do expect a meaningful decline in q1 RX adjusted operating income versus 2019 similar to what we saw in Q4 and for the same reason the expiration of the hundred and eighty day, exclusivity. For testosterone 1.62% off, but with the launch of generic ProAir total generic are operating profit and revenue is expected to be up for 2020 despite the decline in q1.

Parigot Capital spending for 2020 is estimated in the range of $175 billion to $225 billion also reflecting Investments for increased capacity and project momentum enabling Technologies as well as normal maintenance projects importantly, we expect a complete several key transformation projects this year off that are necessary for us to sustainably when in the marketplace and deliver long-term profitable growth.

Final note. I'd like to thank Jeff Needham president of our consumer America's business who announced he will be retiring later this year after 36 years of leadership at Perrigo Jeff an icon in the store brand industry and is loved by his colleagues at para grow and across the industry. He leaves the sca in strong shape with a great team and he will be back in the business too. Rich the CEO of Ranier who will become president of C in March to enable enough transition time prior to Jeff's departure riches experience and fully aligned with our consumer self-care strategy. CSEA is in good hands operator. We will now take questions.

We will now begin the question-and-answer session to ask a question. You may press * then 1 on your touchtone phone. If you're using a speaker phone, please pick up your handset before pressing the keys off at anytime. Your question has been addressed and you would like to withdraw your question, please press * then two and our first question comes from Greg Gilbert with SunTrust.

I good morning. I have a finger a girl ask them right up front for you. Hey Marine first just to follow up for re on the cash flow from I think that number came in over a hundred million below your guidance from you detail a couple items that seem like there are one-time in nature. But can you talk about anything that changes your view on sort of cash cash flow conversion on a more sustainable basis said I was hoping you could provide a little color on the the latest acquisition in terms of the existing growth rates and margins structure that business and lastly Marie. I'm curious about the Voltaren gel opportunity at a product you sell and RX today, but glaxo or is taking it over the counter. I think that's an interesting opportunity longer-term for Perrigo. So maybe you can talk about how an example like that that moves from home ec for you can help or hurt. Thanks.

I like how you position the the last question, but go ahead. We'll come.

Actors that one right? You want to do the first part? Sure. Yeah. No, we were well below that's why I called it out Greg and the big thing was that are an RX business our trade received jumped and it's a structural thing timing and we will get it back the beginning of the of this year. We're getting it back already. In fact it is it'll mainly be back in the first call. I mean the second the other thing was Israeli withholding taxes and that was a one-time payment. We had some cash trapped in Israel. And we the dividend it out and paid the wage a million dollars withholding taxes related to that. Okay Doctor fresh and just so you know, when this this guidance is this all happened this week. So we have a very conservative numbers in for dr. Fresh. We have to make extract the business out there some

TSA Services, we're going to need to pay there's I haven't put in a lot into the projections. There's a there's a little bit there. But we did I think the important part for people that are looking at this transaction Page look at the total transaction costs the bulk of which was paid by us is because dr. Fresch was the healthiest and and strongest and best performing piece of that portfolio and wage. Frankly. The rest of it would have been non-strategic for us. So we we found a partner who's very interested in in in cleaning up in dealing with the issues on the balance of the business, but for us doctor fresh has been a relatively stable business that Ranier tried to buy for significantly more money a couple of years back when you put the two businesses together, we believe that the there are significant not just cost synergies, but given the capabilities of Ranier versus doctor fresh to to broaden that product line relatively quickly. So it's a it's a great business wage.

that important customers that

Is completely incremental a big portion of that business is in the kids segment and they're they're the leader in that segment. But we have the capability of bringing a number of Technologies power and things like that at a much more advanced level to that business. So we there's not much in there right now. Maybe there's some upside on it will see as the year progresses. But but we like the business very much and we got it at a a great price on the Voltaren gel. There's nothing in our our guidance on that right now off, you know, I heard you're loaded part of that that question about the the benefit of having our excellent. It was yeah. I mean it I'm not going to deny Thursday that that gives us a huge leg up and and

I'm not sure today. We're waiting to here and we'll here shortly hopefully over the next couple of months that could be a 2020 opportunity that depends on sort of what the drugs are on exclusivity Etc. But we make it today. We we could be out very very quickly. So we'll watch that one. But it it's a big switch and off. I don't want to derail from your question but a year ago, when when I was talking about our XLT switches, I kind of didn't even plan on any of those in our three four year Horizon month and that whole area, you know Voltaren some of the things talked about by our competitors and some very big categories gives me some excitement that there's another Avenue for growth that I wasn't wasn't planning on so we'll keep you posted on Voltaren but it's a it's a big product we can do it right away depending on how the FDA rules on it and we would wage.

You know in upcoming.

quarter like oh

Thank you next question.

Our next question comes from Louis Chen with Canter.

Morning. Hi. Good morning. Thanks for taking my questions here. So you highlighted the importance of e-commerce a few times in the call this morning. So just curious. Where is that business for you today. Where do you want it to be over the next few years second question here is in addition to Pro are what are some other notable launches that you've included in your guidance for 2020. And then the last thing here is just on m&a how important is it for you this year how much Capital do you have to deploy towards m&a and and any particular areas you're interested in. Thank you.

Let me let me start the the answer by saying, you know as I've been here a year and I honed down on our strength. I've kind of come to the conclusion that we're going to put the pedal down on five product growth priorities nicotine Naturals oral health and nutrition so that that's where I look at we need to build out in order to do that and where our investments have been coming on kind of seven growth enablers building out or e-commerce and digital capability accelerate Innovation adding bolt-ons back into the mix as you saw strengthening our consumer skills and analytics more aggressively going after whitespace opportunities around the world and then minimizing that the negative of price erosion and then the you know, the final one being making investments in capacity et cetera and and project momentum wage.

Sci-fi initiatives to help Drive costs down. So that's kind of the the big picture of cost.

I'm it changes depending on each of those different product segments the role of bolt-ons. We probably evaluated in my first year here 50 bolt-on Acquisitions that ultimately got down to seven or eight that we showed some initial interest in to to do due diligence in that culminated in for transactions so far all in the, you know, the definitions that we talked about in through the course of the year at various presentations and our our priorities and Jeff Jones will continue the impact of bolt on this year versus last year is significant you had, you know, the, you know, basically a hundred fifty million half of of Ranieri get that half added to this year the doctor fresh which again, you know, I'm conservative by Nature so I haven't put a lot in but that gets added in the Prevacid that is launching and a dog

To a good start is gets added into that as well.

And sterile pad that we also just bought well, we'll go in and contribute so I can't give you a direct answer cuz I don't buy it to fill a gap our Innovation program. So Bram significantly in each of those areas and e-commerce represented. It's getting to be real now. It it represented 40% of rotk see growth in the last year and it added in 30,000. So you know now and when I add Europe it's you know, well over, you know, a hundred million dollar business that's you know, growing close to a hundred percent. So it's it's a real driver but it goes against each of those various product categories some more than than others and what I'm pleasantly surprised with is we're not seeing if if I told you we Commerce growth you might sit there in the other end of the life, you're talking Amazon, but Amazon was, you know, a quarter of that that growth it was really spread out among, you know, traditional customers some direct-to-consumer.

And it is an area. We put a lot of emphasis on I believe it's a competitive advantage and it's an area will continue to press and make and it's a meaningful part of that fifty million dollars in in Investments that I talked about with you.

Did I get all your questions you asked a lot? Yeah, I think the other one was new products how much a new product was included in the guidance for this year. Was it total new products or can you give me the question again on your products? Suck? Yeah. Sure. So in addition to Pro are what are some of the notable new launches that you have incorporated into your 2020 guidance.

Well for competitive Reasons, I'm not going to tell you the ones that that haven't launched it's a secret but we we have talked pretty aggressively about that. A Big Driver of nutrition business was to a infant formula new product launch that went to a specific customer. So I won't say that for competitive reasons as long as well. But it's that's a big new item launch and that is baked in it was in the fourth quarter drove a lot of the growth that you saw in the fourth quarter. So you should have nine months of incrementality of that for the month for two thousand and and twenty we have a second infant formula launch, which is the hypoallergenic and that one's already been sold into customers in that is what I was referring to in my comments that we had to make some some of our copac inventory in the end of the fourth quarter because when you run the hypoallergenic product nothing else can run off.

and that's it literally has

To stop shut down clean the whole facility to keep that product hypoallergenic and and that's just our normal scheduling types of things and but you know, our program is loaded. We had a more robust new product Innovation program in 2020 than we did in 2019, which was a major increase versus 2018 so long it's a robust plan in the consumer business. It's different than the the RX type of business depending on what you're used to analyzing because it all gets down to the increment down in the ocean and but we think we properly estimated that and will play a big role. So, you know, I'll show you those as we launched them, but they they tend to be you know, lots of them in different markets through Europe and different categories and they're not like a pro are they're, you know, they're you know like this year when we went into a flute wage.

Phone or we got back.

Back into some Mucinex like products with office. And so it's it's a very very very robust new product plan. You know, I'm coming off as sounding like there's these tough growth opportunities and and I'm holding back but I think six to seven percent Revenue growth from where this company was and if I look back early in life, most of my investor meetings, everybody was disbelieving how we were going to get to 3% organic growth. And now the questions are coming on the the other side of why can't it be higher? So I guess that's a good place to be but for those of you who know me, I'm conservative by Nature.

Thank you. Thanks for these next question, please. Our next question comes from Chris Shaw with JPMorgan.

Gardencrest very much. Good morning. Just two questions here is first on product innovation in consumer. I think you've talked about some of these National brand better or brand different opportunities wage. That's why we schedule more color in terms of how long do you think it's going to take to build out a broad portfolio of those assets and then once they've been developed do we do think about incremental marketing spend to build awareness around those you think there's more shelf placement Etc allows consumers to see some of the advantages of those opportunities. My second question was then on all right. I got it. I was going to say the second one was just on a highlighted in in csca the acceleration of growth in the broader OTC market. I just looking for a little bit more color about how sustainable you think that up to take is so is this a pivot? We're seeing to them growing faster or is this just it was a strong quarter and we see kind of some normal quarter quarter of variability of growth of that kind of broader Market you're competing in. Thanks very much.

Okay.

Let's start with Innovation. You're already starting to see nbb products hitting the market. There were Envy products that hit in nicotine life as an nbb product that in in our GI category that that was a a good contributor this year. So they're they're starting off in the world of where I truly want to get to we still have a fair amount of work to go and I you know, I'm kind of

I'm going to miss Jeff Needham tremendously, but I will also say that coming in Ranier has been very focused on n b b and and Rich and I are aligned with what could be evolution of the sort of almost a hybrid model between a traditional branded company and a and a store brand company. We like to you'll start hearing us use the term consumer 2.0. I'm where we start customizing Brands not just necessarily store brands. And so I I think we're in the infancy of of what it can be but those tend to still be Brands develop a customer so they don't add a lot of incremental spending. However, and we buy a brand like Prevacid part of our our spending this year is that brand needs to be advertised and that's that is incremental. So there are television commercials that are airing as we speak for Prevacid and being shot for for the year and that's part of the the investment as well.

We you know, but as we work towards the the 5%

You know, I've told this organization pretty clearly and the street pretty clearly that there were certain things. I didn't want to just invest, you know, very quickly and then you'll get a one year Wonder of getting operating profit growth and all that. The goal here was to make the real changes and investment levels, but then so it's last year we kind of reset things and lounge or in in initially and got the volume growing by the end of the the year and this year deliver the you know, the three on the 357. I know we're going 6-7, but I'm talking more along side and then from 2021 on 5% So when we think of those Investments and there will be some meaningful ones. We're going to have to do that within the growth of the name of the the business. So I wouldn't look at it and say those will be Inhibitors to our ability to grow everything in this company is being geared to getting the things completed project minimum actions the Technologies

Analytics all in place that you Commerce capabilities the direct-to-consumer capabilities all in place so that in twenty Twenty-One and and on we're delivering, you know, the rest of our business model and that that means on a switch product like Nasonex that you know, you you know from the Branded side or from the national company that takes significant dollars, but we're going to have to figure out a way to do that within and still deliver on our our goals.

And I think you had a second part of this. I know it just spent so much time answering the first part. I forget the second part, but the second part was the total oth I get carried away sometimes so the second part of was the total owed when I when I'm talking we refer to the core OTC vs. Total OTC and I'm going to be talking more about that. We if you know, if you're talking six billion dollars of total OTC our core categories that we compete in or around 3.8 billion of that the penetration levels are are are higher we gained 70 basis points. So we're you know, we we were able to drive up to almost 38% penetration, which means that's a real

The the there are certain things that could have driven a bit of growth that, you know, our our seasonal like it was a good cough cold season and the in the US home this fall, so, you know, we'll see how that seasonality but in general those weren't the big drivers, you know, the big drivers on nicotine were besides getting new products placing and filling consumer needs is you know, that's a tiny category relative to where I came from and you know in with the vaping problems that were out there and the minimum age of tobacco being raised from eighteen to Twenty-One. I would expect that category to to stay at an accelerated rate and you know in a lot of the other categories of new products that are wage are coming in represent growth opportunities, so that the areas that were pushing e-commerce is not even included in that 3% you know, or some of it when something is selling through a massage.

our direct-to-consumer, that's not

And being captured in the traditional Mulo number so it's probably a little bit more accelerated than that, but I would think that most of them, you know, the new products that drove on infant formula that didn't drive the category that Grove drove the Our Brands but they'll be there all year long the new products that we gained in the penetration that we gained. That'll that should be there for the for the long term but categories go up and down over time. But I you know, it's it's a long-term Trend that this category has been growing to to 3% and I don't see health care costs getting any cheaper.

Thanks, Chris. Thank you for calling Franks.

Our next question comes from Randall stanicky with RBC Capital Market. Great. Thanks, Marie. Good morning. You talked about structural cost increases in your prepared remarks. So question is how much of the fifty million in transformational investment is structural or in other words how much of that record going forward and does that fall all in CSEA? And then the the bigger picture question is there's a lot of focus or I think there's going to be focused around the margins going forward if we look at the CSC a margin historically they've been in the 36 that 37% range this year closer to 33% Perhaps a bit lower with some of the the spend. How do we think about the normalized margin for that business over the next couple of years? Thanks. Let me do the first part then I'll talk to you about margins the structural dead.

boss that I was talking about

Have nothing to do with the Investments. So the transformational Investments were twenty twenty-five Million last year and they're roughly fifty million this year 36 in incremental and those are those are investments that you know, if you look at it as 50% against Innovation activities ramping up 25% against momentum enabling Technologies and 25% against e-commerce. That's kind of how we spend the the the 50 the structural ones who you're talking about things like our insurance 15 million dollars, you know, affecting $0.08 of eps and exited businesses, you know, roughly fifteen million somewhere around that area around nine cents a share.

And some you know normal wage and Merit increases but so those are just sort of incremental things that are part of the the business that have a have a negative impact if that makes sense, but those are two different two different thoughts.

You want to talk about margins?

Yeah, so so, you know, I'm on jeans in in the Americas business. Are you talking gross margin or operating? No, gross margins just looking they've they've come down several hundred basis points in recent years, and I'm just wanting to better understand where you think they're going over the next couple of years. Can they get back to where they were? Can you sneak? Can you what can you do to drive margins back up? Yeah. Well, you know if we looked at our gross margin is definitely, you know, hurt a little by the renier a commission and that that's probably you know not going to come come back immediately overall. I think if we looked at the say our gross margins with them down about sixty seventy almost 70 points 19 vs 18 and we do have you know, the continual drumbeat of pricing pressure.

But as we as Maurice.

About the fact that we move our portfolio from National brand equivalent to National brand better, you know, and and and the changes the structural changes. We're making I think we would hope to arrest wage Decline and and hopefully reverse it as we go forward.

Thanks Randall.

Our next question comes from David Risinger with Morgan Stanley.

Good morning, Marie. Sorry I am in transit here. I just need to flip my headset.

Okay, sorry about that. So congrats on turnaround progress.

Thank you. I'm sorry. I can't hear you.

Escape we can't hear you operator. Maybe we can move on to the next question and Dave you can come back sure our next. Thank you for coming from Amy with Silicon Valley Bank.

Hi, good morning. Thanks for taking my question. I have three questions firstly if regards to the the generic provider Market potential. Can you talk about the opportunity there and the ability to penetrate some of the volume of other albuterol products? Secondly just with regards to coronavirus. Um, is there are you seeing in fact on demand for some of your products and do you think you know we could see some benefit on that front? Unfortunately, as we see more and more of such sort of such events in and and just thirdly can you talk about what your expectation is for the evolution of operating margins for the csci business office over the next two three years. Thank you.

okay, I'll do it first to you do the

Rhonda ProAir again, I don't mean to keep beating a conservative drum. But but Pro are we found out about like two days ago I was you know, well, I think last May when I talked about it. I thought you know, it would be roughly $0.10 a quarter and since then there's been three authorized generic life that have have come to the market. So I I I went pretty conservative and what we put in here cuz we are as we speak. You know, we're out selling that product right now and and in about two days will know pricing will know sort of acceptance and we'll no demand but I'm you know, I've hope I put it in a position that it that it represents any upside to the guidance. We're giving not downside men, you know, from what I hear so far so good. It's good to see the product on the today.

Oh yesterday.

Corona is I mean I want to make sure I there's different levels of demand some you know, there's some kind of levels of demand that I worry about and there's some that I don't walk so far and not on a broad level. I worry if certain customers start building inventories cuz they're you know runs on shelves and things like that. We haven't seen a lot of seen a little but from a consumer standpoint. I think you're asking me is is that potentially an increase in demand from you know, as people get the flu shot and you know, do they buy more cough and cold treatments and and things like that. I we're not forecasting any significant change for that. I haven't seen any wage flip for that and it's a hard question to to answer. I know where you're coming from with it, but

So far, I would say I'm in.

Seeing any big spikes or anything.

It was already a high illness season, you know, right, you know on the margin on the csci the marginal the certainly the gross margin is not connected by we saw great strength in our UK store brand business in 2019 and also for half a year the renier which is so acquisition. The European portion is included in csci, and and that's also store-brand at a relatively lower margin without an operating margin some of that comes back because we don't need end up at sizing and promotion dollars on those products. There's also in the year. We we have some of that 2018 twenty million or so that we spend twenty five million that we spent on public investments in that that found its way into csci margin and going forward though, you know where we're focused on a couple of key initiatives. We're putting. Yep.

centralized Finance which will

Which will help us reduce costs, especially in our Administration costs in in in Europe, which are high at the moment because we the Omega acquisition wasn't wasn't well integrated off until recently and so as we focus on that we would expect to see that drive our our operating income part in in in Europe in international. Yeah. Our plans call for margin expansion over two years and and it's a good portion of the project momentum savings is rages highlighted are are coming from there. I mean you do have a negative mix impact, but that's not a bad thing. It's all incremental with football. Yeah. I mean you put in Ranier and that was mostly a branded business with 50% gross margins you put in, you know, a hundred million dollars of net sales and a growing grape, you know, a growing UK store brand business. And again, that's entirely incremental to our product line. It's you know,

has some mix effect but not a

Any kind of countable is this kind of ballistic mix about it, but we expect margin expansion in in CSA.

Thanks next question.

Our next question will come from David Risinger with Morgan Stanley. Welcome back. Thanks very much. Thank you. Sorry about that earlier. So I have two questions back, please first discussed incremental cost reduction opportunities on January 14th, and today are talking about National investment spending. And so could you just juxtaposed the two and help us better understand the net cost Trend Outlook and then second with respect to operating cash flow what we should expect in 2024 operating cash flow relative to 2019. Thanks very much.

Yeah, the third one. Yeah. Yeah that will the first two were kind of a combination question but none of that's changed. It's Thursday it is we have a hundred million dollar cost savings Target on Project momentum. We it was you know, if you look at the guidance we gave back in in May and despite a number of negative things that hit us. We raised guidance, you know several times through the the year and came in at a meaningfully higher number than we went out with in May project momentum had a a a good portion of that and I and I think that's the best example, right we were investing along the way but we're saving so, you know, you've ramped up here to what cumulatively is now around fifty million dollars off of investment, you know good portion of that in our but that's those are designed to generate revenues and and profits on their own right so I I can't just take one a month.

against the

Whether it's you know, if they need to add sales, some of them are if it takes me two years and it's new for us to develop a and switch a product like Nasonex ourself. Yeah, you got a couple years before you get that benefit. But you know you're talking about I mean roughly fifty million dollars of investment and a hundred million dollars over of cost savings. I think we've said, you know, roughly a little bit last year and then split like a third a third a third over the next few years. Some of them are longer-term not because they're they would require things like the Central Finance that Ray talked about and the systems that go in place to help make that accomplished there's equipment and in manufacturing Etc, but it it's all part of God's plan that feeds into the the model of the 357 and it's it it's on track but you know most investors that I talked to David over the course of the last year. Yep.

To know I'm building a great company for the future that has sustained.

Not doing quick fixes, and and that's exactly what we're doing and we have made major progress around here in our capabilities. So you'll see those benefits over time start to have major paybacks just like I went through the example on m&a in the criteria for that. We do the same thing on these Investments. So the investment person in e-commerce are already projecting to be a hundred to two hundred million dollar business for us next year at only a year out the you know, the Investments and there's an extra turn into a a very big piece of business for us a couple of years from now or of innovation pipeline. You know, I went from Thursday. We put five hundred million dollars of new products into the pipeline. I think that's now with some of the more recent things that have come up into the over six hundred million dollars of of, New Jersey.

Sonic so, uh, you know, you'll see that

Those all affect the overall margins if that makes sense.

That's helpful. Thank you.

So, yeah, the last one the cash flow question. I think we would clear in the prepared remarks that we had some some one-time negatives to our cash flow and therefore, we would expect in 2020 that our cash flow conversion rate would exceed 100% because we're going to we're seeing specifically those those accounts receivable that went the wrong way and 2019 are going to come back to us in 2020, and we don't expect to have to pay withholding great. Thank you. Thank you last question, please.

Our last question will come from Elliot will be with Raymond James.

Hey, thanks. Good morning, not surprisingly another line of questioning your round round margins. If you look at the reported number in the quarter, you know, I think it's basically the lowest we've seen from the company in in six or seven years and I understand obviously there's a lot of investment and a lot of you know change taking place where you've talked about a growth phone no more comparable to Consumer companies. But is there anything you could offer up in terms of Benchmark or bogey with respect to overall operating margins for the company as a whole obviously would expect them to improve but at 16.2% of the quarter. I don't know if a good long-term Target is 17 and 1/2 18% or if you think you could actually drive that a little bit higher wage and within the context of that question want to ask specifically about csci margins obviously much higher gross margin business, but operating margins still fall four to five hundred basis points birth.

so the business

I'm just wondering if you think that that business could eventually evolve to the point where you have a cop herbal operating margin profile versus the us or if the level of investment spend is life. Simply simply too high, and that that's not likely to happen. Then just last question infant formula strong quarter benefited from a couple of one-time items, but you also have relatively easy comps now going forward. Just wondering if you think that business is back to the point now where we're going to see positive top-line comps going forward. Thanks.

Well, let me do the second part first. I mean there weren't a couple of one-time items. Well, I guess if you look at a year ago, there was a couple of one-time items, right? So you had a one-time a little bit of extra of contract back inventory that because we needed to get ready for making hypoallergenic and then the year ago you had a plan interruption in the the fourth quarter. So you're right on that couple a couple of items, but bottom line when you you can adjust for all that. It was still a good strong ten to twelve percent growth driven by new products that we expect to continue forward. So I think the cops should be good on nutrition. It's an area. We haven't pushed as hard as I think we can push so as as much as I think it's it's good and it took you to to grow and be a a great contributor for us. I think there's a world of opportunity. I mean that attrition business and we thought too small in the way we invest in that business and my comparison would be dead.

You know sort of oral health here where Ranier we've already added a couple of acquisitions.

You know grow that business 25% pretty quickly. So I I expect nutrition to be an important segment in one of the Five Pillars for us or 1005 growth priorities for the company and I think the cops should be good from this point going forward as it relates to the same rights as it relates to the operating margin of clearly wage. We got a big focus on cost control as well as on growth, but we are spending as we've already talked about an extra fifty million dollars in in cost next year to help offered to drive the business forward. So we wouldn't expect that margin increased to to come in in 2020 but going forward. We've got a hundred we talked to him die last year a hundred million dollars in anticipated site cost savings from momentum the project momentum, which is completely focused on operating expenses. We've also got another part of birth.

project where we're looking at cost of goods sold, which we're in a driving margins that

That way so it's definitely a focus for us as to drive our our margins up and and we would anticipate that would be part of our five percent earnings growth Target as we come into 2001. Yeah. I mean I listen it'll depending on the timing of it et cetera. But you know, I do I talked about the 3 5-7 a consumer that means you know on consumers you got to get into the 18% range of of operating margins over time, and that's you know, what will be targeting and you want to bring your leverage down to below the returns to so, I mean, those are all the targets that we're working against over time, right? Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Marie Kessler for any closing remarks. Yeah, let me just close that. You know, it was optimistic when I took the company at in time is flying by but it's not that long. You know, it's we spent six months getting a strategy. We launched it in May and to see the kind of response from the business office is with real fundamentals changing and great execution and the energy level and this company, you know, I don't know how many what the multiple is but it's exponential of how I feel about future. I'm very excited about paragold. We're making the right decisions to make this a great company so we can sustain profitable growth over the long term wage always be conservative in nature. It's just who I am when I give guidance and as I I'm sure but I don't like the erratic kind of forecasts that were before I got birth.

And we've had five quarters now.

Meeting or beating and and we look forward to to doing the same going forward. So thank you for your interest in paragon.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.