Q1 2020 Earnings Call
We hope to have a better handle on projections by the end of Q2.
Now turning to c s c i reported net sales increased 9% versus a year ago or up 14% on a constant currency basis, excluding the long-term product which impacted the top line by 120 basis points net sales were driven by strong new product launches. Mainly selling efforts in our weight loss and Skin Care category on the addition of Ranier just like ncsca. We experience the surgeon csci demand due to covid-19 primarily in our UK store brand business and our brakes cost cold VMS and pain products.
Thursday Thursday Thursday
while almost
All csca products are consumer Healthcare Focus only approximately half of the csci portfolio treats ailments while the other half itself can focus on preventive Health and Wellness.
These include categories such as weight management antiparasite and sun care while we expect lower pull through from these products until Europe returns to a more normal way of life. This headwind may be offset by Tailwinds for our pain upper respiratory and BMS products, but the same issues I described for CSEA apply here as long run sure of how much of these products were driven by Pantry loading in the first quarter versus covid-19 related to consumption. So again, we'll need to see how the next few months play out before making any further comments on the full year.
Thursday Thursday
Thursday
Turning to our racks in the quarter due to the successful launch of generic albuterol, which the FDA approved in February month because we had anticipated the approval last year. We had product immediately ready to ship with strong demand out of the gate benefiting from covid-19 RX shipped almost forty thousand or million of Albuterol, which more than offset the expected year-over-year decline in RX from testosterone 1.62% We have included about 75% of these albuterol sales in our ninety million to $110 covid-19 impact estimate importantly we believe there is consumer demand for all of the generic albuterol product that Perrigo and its partner Cadillac can manufacture this year. So to be clear no deload is expected here.
Good morning, and welcome to the Perrigo first quarter 2020 Financial results conference call. All participants will be in listen-only mode. Should you need assistance placing 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 the question. You may press star than one on your telephone keypad should draw from the question to you, please press * then two, please note this event is being recorded. I would now like to turn the conference over to Brad Joseph investor relations office, please go ahead.
Before I offer a final summary of the quarter. I wanted to briefly touch on the status of the Irish tax matter. As you know, we have taken several measures to challenge what we believe to be an unwarranted assessment. This includes appealing the original assessment and it's obtaining approval from the Irish high court to challenge the assessment in a judicial review proceeding while the judicial review hearing was scheduled to begin on April 21st, the court postponed that hearing in the interest of Public Safety and the current restrictions imposed by the Irish government while no new hearing date has been set we continue to believe in the strength of our position.
Good morning, and welcome to perrigo's first quarter 2020 earnings conference call. We hope everyone is healthy and safe during these times as safety is our top priority. We are conducting this call virtually from different locations adhering to social distancing guidelines. I hope you all had a chance to review the press release we issued earlier this morning a copy of the release is available on our website joining today's call our president and Ed Murray Kessler and c f o r a sillcock. 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 investors and safe harbor language regarding these statements in our press release issued earlier this morning when discussing the business Marie, we'll reference only non-gaap adjusted numbers off the quarter unless otherwise noted comparisons are prior periods will also exclude exited businesses and currency changes unless otherwise noted
so to summarize
it was a strong quarter top and bottom line all three business segments contributed to revenue growth fundamentals were solid before the covid-19 related surgeon March and obviously even stronger after while OTC Voltaren gel doctor fresh and albuterol all offer potential. Side. We are taking the prudent approach and not updating our guidance at this time given uncertainties related to covid-19 which could impact all of our businesses wage business continuity remains critical but employee safety comes first and it will continue to be a balancing act. I will note we have gained experience over the last month or so on how long and all the issues that confront us and we are in much better shape today than we were at the beginning of the crisis.
raise discussion of financial
Results during this call will address both gaap and non-gaap results and where noted comparisons to the prior-year will exclude exited businesses and currency changes in the appendix for today's call. We have or reconciliation for all of non-gaap financial measures presented a few other logistics to mention before we get started first, excluding exited businesses, excludes contributions off the exit animal help business previously included in the consumer self-care America segment and the divested Canada and business previously included in the consumer self-care International segment wage 2019. Second organic growth excludes Rainier the exit Animal Health and Canada and businesses and current.
our transformation to a
Consumer-focused self-care company last year could not have come at a better time for us at Perrigo in order to prepare us for what we are facing and The New Normal world going forward, Perrigo is very well positioned for the future leveraging three key drivers in a new normal World self-care value and e-commerce bottom line in 1/4 with plenty of strong financial results to be proud of I could not be more proud of our team and I mean everyone at Perrigo they are delivering on our vision clubs better by bringing quality affordable self care products that consumers trust everywhere. They are sold and they are doing it right now.
I'll now turn the call over to Ray to walk us through the rest of the p&l and key balance sheet items then we'll open it up to questions, right?
Thank you, Marie and good morning everyone. Now that Mary has gone through the revenue and business drivers for the quarter. I'd like to walk you through the rest of the pier now.
Consolidated reported gaap net income for the quarter was a hundred and six million dollars and reported diluted earnings per share was $0.77 on an adjusted basis Consolidated. Net income for the quarter was $157 and earnings per share were a dollar fourteen the sixth consecutive quarter in which we have met or exceeded Market expectations.
Adjusted net income for the quarter includes fifty million dollars of non-gaap adjustments primarily amortization of $71, which were you always add back partially offset by a $16 prior. Tax benefit as a result of the cares Act.
The Gap reported Consolidated effective tax rate for q1 was 7.2% This was generated from tax expensive eight million on pre-tax income a 115 million dollars tax expense was low this quarter primarily due to twenty million dollars of tax benefit from the cares act sixty million dollars of those tax benefits related to 2019 and were adjusted out for non-gaap purposes leaving four million dollars in q1 and bringing the first quarter adjusted effective tax rate to 19.8% full details of these adjustments can be found in the non-gaap reconciliation table attached to this morning's press release.
From this point forward all dollar numbers basis points in margin percents will be on an adjusted basis while growth percentages will exclude the impact of currency and of excellent businesses.
The worldwide consumer first-quarter net sales growth of 21% versus prior year result in a gross profit a 460 million dollars up thirty-eight million dollars from last month. Yeah, a 16% increase excluding the impact of currency and exited businesses gross margin was down 220 basis points from 40.6% to 38.5% primarily due to an increased proportion of store brands including Ranier as well as operational inefficiencies and the impact of exited businesses.
worldwide
Humor operating income improved by Thirty million dollars versus prior year primarily due to gross profit flow-through offset by higher Administrative Office including the impact of a $4000000 special bonus paid to our front-line employees. Most of them working in various manufacturing plants around the world who have to physically go into work. Despite the covid-19 related lockdowns to continue to provide our essential products to customers and consumers operating margin improved one hundred basis points over last year. I should be able to leverage gross margin from increase sales savings from project mentem together with veneers higher operating margin all partially offset by higher compensation package, including share-based compensation from our annual incentive plan as well as the special bonus.
For a gross profit of 220 million was up Thirty million dollars from last year an increase of 23% excluding currency and exited businesses driven by strong growth gross. Margin for q1 declined 110 basis points versus last year. Do you primarily to higher operating cost csca off income for q1 amounted to $137 an increase of thirty 1 million versus prior-year up 33% excluding currency and exited businesses wage leverage sales growth for the quarter and achieved project momentum savings. The result was a 130 basis-point Improvement in operating margins to 19.6%
Csci gross profit was a hundred ninety-seven million dollars and Improvement of seven million over prior-year plus 9% excluding currency and exited businesses driven by wage increase sales gross. Margin, however, declined 250 basis points to 51.4% primarily due to our higher proportion of store-brand sales rep including the addition of Oral Care Products, which have relatively lower gross margins, although similar operating margins operating income of sixty four million dollars was up ten million dollars twenty-eight percent in excluding currency and exit to businesses while operating margins improved by 130 basis points to 16.7% due to operational average.
Turning now to the RX segment. We said last quarter that we expected at a client in RX sales and profits in q1 similar to the one we saw last quarter primarily due to lower pricing on testosterone 162 as a result of our having lost exclusivity on that product. However on February 24th, we received FDA approval for generic album natural and even though the demand was substantially higher than anticipated due to covid-19 the team did a great job getting this much-needed product to our customers. We were able to achieve 454 million dollars an hour before all sales in q1 resulting in an overall RX net sales increase versus prior year of 6%
moving on
Most profit in q1 we sold out this world which have been produced in 2019 and expensed as pre commercialization product as a result albuterol gross profit. This quarter back was modestly higher than it will be in future including the additional gross profit from our beautiful sales RX gross profit decreased by nine million dollars in q1 gross margin of 42.3% was down from 48.6% last year as we felt the impact of adverse pricing operating income declined by 8 million to 74 Million Years also primarily from the same adverse pricing.
Consolidated cash flow from operations in q1 was a hundred and seventy-two million or 110% cash conversion on adjusted. Net income in line with what we said our list last earnings conference call this strong cash conversion was driven by a reduction in inventories due to very high demand in the quarter as well as by strong elections in our RX business as compared to Q4 offsetting. This will increases in accounts receivable in our America's business due to the high demand, which was most strong at the end of March 9th a March 28th at the end of the first quarter. We had five hundred and ten million dollars in cash on our balance sheet, including one hundred million dollars. We drew from our revolving credit app in March as a precautionary measure since then we pay just over one hundred million dollars for the Oral Care assets of High Ridge brands on top of eleven million dollars we had paid off.
I said deposit.
Total outstanding debt at the end of q1 was 3.5 billion including the 100 million draw down on our revolver. We have an additional $900 off of available capacity on this 1 billion dollar revolving credit facility which expires in March 2023. We believe our balance sheet continues to be strong faith are closely watching our cash collections, but the date have not experienced any disruptions in cash receipts in the US and only a few minor deferrals internationally. We continue to pay our suppliers on a Time basis to ensure continued supply of critical materials and components. We also closely monitor inventories expecting that our sales mix could be impacted by the lockdown another measures off.
A cash position in queue to will also benefit from the curve act which legislated an increase in the 2019 and 2020 interest expense deduction. Thereby reducing the amount of tax due in April as well as deferring payment of 29 taxes to July in light of our strong balance sheet. We remain committed to maintaining dividend payments to our value shareholders.
I know like to talk a little bit about what we see so far as future earnings at this time. We do not have sufficient information about the broader economic Outlook know about the impacts of lockdowns and other covid-19 measures to justify updating the 2020 guidance. We announced on our last conference earnings, excuse me, our last earnings conference call in February the Car Fax on our business in q1. I've difficult to enumerate and for the balance of the Year difficult to predict factors that could benefit our results include continued success of generic albuterol with the addition of our recently acquired doctor fresh business and the future potential of OTC Voltaren gel for which we recently received FDA approval. We could also benefit from consumers choosing a lower-cost same efficacy store brand products during a possible extended recession as well as from potential additional searches in demand later this year.
conversely that could be a deterioration of sales in the
To Pantry loading in March economic impacts from the lockdowns and social digit distancing measures as well as possible disruptions in our manufacturing facilities and Supply chains across the world. It is simply impossible to estimate these at this time. There are too many moving pieces that literally change every day, but we will continue to closely monitor the impacts in and on our businesses and not to be in a position to provide more clarity next quarter.
In closing like to want to take this opportunity to thank perrigo's wonderful employees for their dedication and continuing to work both in and outside of our facilities as normally as possible during a truly abnormal times.
operator please give me now open the line for 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 are using a speaker phone please pick up your handset before pressing your keys to withdraw from the question can you please log on to our first question comes from Louis Chen of Cantor please go ahead hi thanks for taking my questions here so first good morning please Monday morning there seems to be some confusion in the marketplace when you say parigot is not updating this guidance at this time are you pulling your guidance what does this mean and it sounds like there could be potential for upside but it's just not clear how to put that all out there now so it would be interesting to hear what you think here and then second question I had for you was just on the channel shift from bricks-and-mortar to e-commerce do you expect that to continue and do you have the relationships in place to affect that thank you
Okay perks first one. We're absolutely not pulling guide. You know, we changed the word unchanged to not updated for a very clear reason in my mind on changed means we're reconfirming what we had on the the street in February which was the best information we had at the time but I got a couple you coming out of a a very very strong quarter with albuterol as upside doctor fresh as upside potential for extended illness is as upside a strong allergy season is upside as Voltaren gel as as an upside the fact that we have to rebuild all of our warehouse customers wage inventories. We're at that are weeks below what they normally would be if it was any other circumstance I'd be raising guidance right now, but given the big dog
Uncertainty out there in the world. It's just not prudent to be raising guidance at this moment. So not updating reflects the fact that I look at it and say well, I don't think the guidance is right at this point because if you had some kind of significant business Interruption sure it could could hurt you but on the other hand given all the positives on the business, we'd likely be updating and the the implication of unchanging says we'd have to have a pretty rough balance of the year in order to stay at the existing guide. So I've left it off saying from where we are I left at where was in February. We're not pulling guidance from and you know, there's a lot of good things happening, but it's a very uncertain world. So hopefully that clarifies anything for anyone. I was not told Guidance the second one on channel ship that was really interesting cuz if you saw them some of the retailers month
the traditional retailers they talk to
App Store traffic coming down in our stock reacted a little bit too that in each of those cases, but the reality is as our demand was strong and we were more than making up in in the e-commerce Channel. I think I highlighted the 112% growth in the US or was even stronger than that in Europe. I think it's up to to 8% off and you know, when you look at the the omni-channel reports which channel you know, some of the the sell side and by side buys data, you're not seeing the Costco's of the world. You're not seeing a Costco online or not saying Target online or not saying a lot of those other areas. We we saw SharePoint changes to me. I think that's going to be your normal way of life. I'm glad we made the significant Investments. We've made over the past couple of years to put parigot at an advantage in the e-commerce area. And yes, we own no.
Taking advantage of that from all angles and that Investments been paying off very quickly. But yeah, I think you're going to see online sales stay strong going forward and continue to grow and it's it's it's obviously one of our strategic areas of focus. So hope that answers your questions. Yes. Thank you.
The next question is from Chris shot of JPMorgan, please go ahead great. Thanks very much. Good morning. Just had to hear first. Can you expand on the Edge performance in the quarter particularly for the Americas business? I guess it was this all just mixed related or we also seen Tire manufacturing costs due to the shutdown say as I'm trying to get as directionally off we think about the the CSC a gross margins kind of rebounding from here is look out the remainder of the year or is this kind of The New Normal and my second question is kind of a bigger picture one of what does a recession mean for Perrigo stage? I think if I go back to O eight no nine, I think you saw some fairly meaningful share gains as consumers traded from National Brands to store brands. I guess the business maybe a different place today in terms of Market penetration. Just as you think about if we do head into recession, what does that mean for the portfolio over the next one or two years as we go through this process? Thanks so much.
Well, let me start on the first one then I'll turn it to Ray and then you can give it back to me on the recession question. But you know gross margins honestly home mostly mixed. I mean for sure there is a component that I don't think affected the first quarter very much where the greatest demand and and listen we are prioritizing our products along with what our customers and consumers and society as a whole needs. And that means that right now we have been we're more than 5% of the US supply of a set of metaphen and that's a lower gross margin item and we're running that although I don't think that had a a big deal impact on on the first quarter. I think gross margins in June alarm Barnett, but I'm I'm pleased with our our margins when you take it down to the operating margin line. You've got a lot of moving factors and rate. Can you you go into birth?
And a little bit more detail.
Sure, you know where he's right. You've really got to look at operating margin, especially with with respect to the fact that we saw increases in our store brand business office where our gross margins are lower. But our operating margins are similar and we saw that in csca specifically would you reference our margin wage? Yeah at around operating margin around 19.6% contrasts positively by it about a hundred and thirty basis points versus what we got in a 2019 first quarter. So we're seeing we are seeing some improvement in our operating margin and the impacts of the dislocations that happen really didn't have a big impact on q1 because they happened, you know late in March or in the middle of March early to Middle March and we didn't see all that much money.
Coming through from that. We did see as I some some impact at the end of the month. Then we saw operating leverage from the sharp increase in sales that came in March month and then going back to the recession question. I I mean, you're right Chris it you know what, you know, we'll see how it plays out. But our product categories. I already think we're seeing some some share shifting now, but you know, the fact is our products are our vehicle application and they're Thirty to forty percent cheaper than the national brand and the other benefit you get in a in a in a surge is that a lot of times the national brands are not on show. So besides the longer-term benefits that you get the price issue. You also get people trying you get a much higher level of trial right now. There's a lot more people that have try to suck.
Store-brand who are buying both or um, we're normally National brand only consumers that are are trying to buying our products and seeing but they they work just as well. So listen, you know going into an extend a risk perception. Private label always performs well and we history I mean, there's no guarantee but history says we benefit from that and we think that you know, we're well-positioned with our our self-care focus our value and also, you know the economist but yeah, it's a great point, you know, it's these are uncertain times and I think the companies in a real good position right now, too.
To help Society, but also benefit from it.
Thank you.
The next question is from Randall Nikki of RBC Capital markets, please. Go ahead. Good morning, Randall Camry morning to put this guy off around it. It sounds like if I'm hearing you correctly, there's several upside driver's you're looking for better Clarity around those before addressing guidance. Um, you know other factors that would pressure that range or is this just about being prudent given that were in the first quarter of a pandemic and then my second question. Can you just quantify the e-commerce business and how that what that margin is wrong to the overall CSEA March, that would be helpful. Thanks.
Okay, let me do the second part of that first.
Need the margins are equal. We're all sitting in different rooms on maybe somebody can send me the the the absolute number and e-commerce. But either way the margins are are roughly equal or even slightly better in our e-commerce business wage, except doesn't hurt us in any way and you know, listen, I don't know how to be any any clearer. What I worry about is business interruptions with my team like the crisis committee Randall we meet we were meeting in the beginning every day. We we get better at it. But we've had hits of of employees thank goodness. We were ahead of the world on precautionary measures and we've caught most of those the vast majority of those we've got good trace and track we've got all of that. We've we handle it in a calm manner, but we've had him
And um, so my my fear is business Interruption, I I worry I'm a worry I worry that when the world starts loosening up and stayed start loosening up with that at any given time. You could get a plan hit. I think we're more experienced now and and with the precautionary measures with the temperature checks with the questionnaires with the the the restrictions we have in place, um and our experience. I mean he'll we've been able to keep a get someone on how to say hello on a conference call, but we we have been able to keep a facility running.
In the Bronx in New York throughout all of this and they've had hit so but that's your biggest your biggest downside concern is business Interruption and and I believe that's what every single company in the world is is facing right now, but but for that big concern even with some Pantry to loading and I don't not sure there's going to be a huge Pantry to load but even even with you know, some of that with all the positive things I normally be raising guidance right now, I would I mean we're we beat the crap out of it. I will the SEC says to give you know as much transparency as possible right now. I'll tell you we haven't seen orders let up in April yet. So, you know, we're still struggling Em are not filling all the orders that we have. We are prioritizing products that Society needs and on a cumulative basis through the middle of April, you know the pain category with the birth.
Few weeks and and I'm referring to iri numbers is up strong double-digits cost cold up strong double-digits allergy strong double-digit. I mean it's topical is up strong wage Simpson formula double-digits nutrition drinks up strong double-digit electrolytes up strong double-digit thing in consumption all the way through April 19th so long
we're not pulling.
and I think that the word unchanged meant we were we were sure that we were right and and I don't have data to say we were right at the the current month and if it wasn't for the potential of business Interruption I'd probably be raising at the moment
that's helpful thank you
operator
I'm sorry. The next question is from Amy of SED lyrics, please go ahead.
Good morning. Hi. Congratulations. Good morning. Congratulations on the strong quarter. So I think you've made the point on guidance very clear off. So I will not repeat that. I wanted to get some color on just ugh Ecommerce Channel and your ability to you know, what you're seeing on the ground. There has been some discussion around reduction in foot traffic at pharmacies. Are you seeing that impacting the demand, it doesn't sound like it but uh, you know, is that being sort of taken care of or or off-set by increasing e-commerce? Can you sort of confirm that and with regards to pro-life? What's your full capacity in regards to how much demand you can pull through for this year? And how should we think about increasing that capacity into next year? Thank you.
And let me just write down the second part. So I don't forget it in terms of e-commerce. It's a little bit, you know, the answer is no we haven't seen wage demands slow it, you know, I mean maybe the orders of slowed a little bit and then in the past couple of weeks, but the back order of the backlog of orders is is tremendous. We're not closed yet. So too filling all the orders that we have in the unshipped orders that we have in hand today, but just to be clear of like when when we ship to most of our major customers that are getting big surges and their eCommerce business. We just ship it to them and then they they sell it right. So for Monday, it's an order to the Costco as an example or the Walmart and then they fulfill it on a on a online basis or and it shows up in a regular job.
For some Wheaties those those numbers out cuz we have of line of sight but you know so far we've been more than offsetting any slowdown. I mean, it would be it's almost time for us to see the slow down that some of the retailers report and foot traffic, but for I get the iri numbers and I seem that goes have slowed down in certain categories, you know, I'm slow down and infant formula you'd expect that here in your baby's not going to eat more but on the other hand pain hasn't slowed down, you know, is that a metaphor and ibuprofen those product having slow down at all. So bottom line is yeah. I think there's there's Channel shifting going on and I and I want a personal I don't have any data to support that. I think that you know, there's enough time going by here that people are are learning from where they might have been reluctant before birth.
Learning the power of the e-commerce and um in a more cautious world.
You going forward I think online will continue to get more and more important. We're working pretty hard on omni-channel reports. So our ability to that's not report the chef based on but on a on a total mass merch and I are you know, traditional retailers that report and e-commerce basis and hopefully, we'll get to that point where confidence in those numbers to share those soon on Pro where the generic Pro where that one is. That's a good question because thoughts are on going rate. We can't satisfy at the level that we did initially we the will be well ahead of well, well well ahead of our projections that we had internally for the year, but it'll get back to a normal level and it and I I'm not prepared to speak at you know, whether Catalan who is our partner.
Can expand capacity or not or how fast or how big the real demand is on an ongoing basis? They'll be more competitors Etc. But there'll be no, you know, we had a pre-built that inventory page anticipation of an approval earlier. And and so we had a good amount on hand and and we still are working our way through that. It'll get sick of a more normalized level and and then we'll see how the the market shakes out, but they'll be no give back on on Albuterol and albuterol was
Probably 30% of what we attributed to sort of the the spike in demand on Courvoisier. You can just subtract that out when you're trying to estimate on a fact, you know, I look at it and say you're not about a hundred million dollars of covered. In fact, we think you subtract out the 30. I got 70 probably a good portion of that was consumed you have some you'll give back but on the other hand, we got to rebuild all those all those store shelves have to get full again. All of the where customer warehouses have to get full exam and
And we also have to start. You know, we're not making all of our products right now, and we've got a
re-engage and make those when we can make the products that are less important to society right now as well. So, you know, I I think we'll weather the storm Thursday. Well barring any massive business interruption.
Got it. Thank you Maria. Maybe if I could just ask a follow-up. Can you talk about the current capacity utilization at your plan?
Thank you. Yeah, we're we're not operating, you know, our normal levels again. That's what I was trying to make a point on people understanding how much a challenge it is for any manufacturer right now and you you see it in the news, you know, if you get a hit in a in a facility of somebody who who gets coded it scares people and off and we're very cautious. So if there is somebody who happened to get into the plant, you know, we Trace them and if they've even modestly come into contact with them and you know, we're 12 or 14 people we came home for for two weeks bottom line that results in a in a meaningfully higher level of absenteeism worldwide than we would normally deal with and dispatch and that varies right? I mean and it'll they may happen for a week or two and then come right back to normal again. There's there's parts of the world where local governments ma'am.
certain
People that are in in a high-risk category not to come to work at all that creates less people in the facilities bottom line though is through Thursday is we be unable to keep 38 manufacturing facilities globally running there all running today, and I would say on average is about 80% productivity.
Great. Thank you.
The next question is from David Sanger of Morgan Stanley, please go ahead.
Hey David, Murray congrats on the performance during these difficult times. I have I have a couple questions please first month with respect to.
Costs and just what's happening with Supply. Could you just help us better understand is the right way to think about paragraph structure this year that fire cogs due to covet or going to be offset by lower sg&a do to you know, less travel and and less commercialization costs. So I guess that's that's uh, uh first question at a high level second with respect to supply. Could you comment on whether there are any API key or intermediate supply issues for either the consumer or the RX business and then third month with respect to the Dermatology RX business. So obviously Durham is a big component of Perrigo RX leadership, but stay home.
At home. My orders have impacted patient visits dramatically. I was just hoping you can come and on on that as well. Thank you.
Okay, I'm doing what you want to do. The the cost one. Sure so long. I think you basically described it to a certain extent David. But the we asked we we we are seeing an increase in some of our costs as Marie described. We've got absenteeism in the plants that we still pay people for the most part when even when they're absent under covid-19. So we do see some higher costs Thursday. We all getting operation operational leverage on all three businesses is quite significant, but that's because of the increased sales certainly in the first quarter off. We're seeing momentum savings continuing and we are paying we paid the special bonus we talked about which obviously resulted in higher overall wage.
compensation costs
We I think that the unbalanced if you look at operating income as a ad operating margin and operating income as I mentioned earlier in the call, if you look back to that are operating expenses are down slightly. Um, we would expect that Trend to continue and we were also expecting probably less advertising and promotional cost for the time being plus as you mentioned less travel or less of those other expenses and we are seeing uh, just a small town in the issue one on the on our operating margin would have been increase obviously in our operating income.
Yeah, I mean, I thank you. Write it in a David it is it's a bit hard to to measure right cuz it's a lot of this all happened in the last couple of weeks of March. So we'll get a much better handle. This is a good area of where I'd like to tell you. We have a a good handle on it, but there's so many moving pieces and we'll see how it shakes out. But I don't think it'll be a severe move one way or or the other we are, you know, we didn't non-gaap out the employee bonuses. Those were my decision to do those. Um, and I think that was money well spent people are not people are proud at Perrigo right now of what they're doing for society and they they know that myself and my leadership team put their safety first and and I'm and I'm proud of that fact, that's one of the things I'm most proud about in my career and and we will continue to do that. There are other birth
Efficiencies to write I mean we'll we'll have some less absorption when we're running more to set of metaphen. But on the other hand, you're going to have more efficiencies because we have partner, you know, I wanted to make this point and it's not really your question. But our customers have been unbelievable through this like, you know, John furner presidents just being out of town ahead of North America for Walmart called me on the phone and says all rules are off right now. How can we help you to do what's right for society and just focus on your big enough to use and and we're doing that with all of our manufacturers. So we're doing longer runs of the bigger items than we would normally done in with agreement that we're just going to leave some of the smaller secondary items come out of distribution right now. So we'll get we'll get efficiencies on that. So I need to see all of that Ray needs to be how all of that that shakes out wage.
But yeah, they'll be less traveled. They'll be less advertising. They'll be some expenses delayed on clinical trials and things like that. Um, but boy, it's hard to read off to get a a real good handle on it, but it'll it'll normalize and it already talked about the other areas API. We've been able to work through it pretty well, you know, we bought we we never really had any significant interruptions. We were fortunate that we keep strategic inventories of the API on Thursday. And so we had sufficient API to weather the storm in any places where there were interruptions for the most part we worked through that there was an interruption for a while back and I'm with India and paracetamol. Um, but you know, this is you know, another point, I guess I I'd like to make is that fog
for the US, which is our biggest business we make you know, most we
Have 24 facilities and the API was in the inventory in the US so, you know.
While sometimes that hurts us on that car side, it was sure good to be primarily a manufactured product servicing the US market through this storm in it and it highlights a parigot it Advantage but the answer is so far so good on API on RX on and we did have some third-party suppliers. We rely on them had some Interruption there. They're back up and running again. And um, but yeah, we are at could have had a stronger quarter without some of the interruption and and and they're supplying a hopefully that's back on track now that it appears to be or or soon-to-be. And yeah, there's there's a little bit of of soften the area it's not just in in RX, but in you know, you're not selling a lot of
Weight loss products or or I mean our sun care products or you know, headlights products and all that and I am in Europe right now until you know things open back up again, but on the other hand we have surges on the other side. I mean, there's a lot of moving pieces but in general, you know, we're both are not having significant Interruption. We we we have fires every day. It's a lot of heavy lifting it's much more than than people under off Dan's who aren't living the the the daily fires and that's why I made the point to be how proud I have on my team. I mean, it's like they you know, we get a hundred problems a day or a thousand problems a dead and they work through it and they solve it and um, and it's been remarkable to watch.
That's great additional color much appreciated and then on the Derm demand.
I don't have the exact numbers in front of me, you know Brad. Maybe you can get back to David after that. I mean, I think we said we were a little bit softer and some of those areas. I just don't know the numbers of my hands David, but Brad will get back to you. Okay? Thank you and congrats again. Thank you.
The next question is from David Steinberg of Jeffries, please go ahead. Yeah. Thanks a question about some recent OTC reform legislation. One of the month bills seemingly buried in it was some legislation related to OTC in monograph otc's and it sounds like it might benefit the company some of the headlines relating to user fees, um and encouraging Innovation. So it's curious does that legislation says in paragraph so often does it and and if so, does it shift some of the prioritization of your projects and then secondly on your generic business, I know you've been intending for a while to either sell it or divest it or spin it and we haven't heard much research just curious given the recent approval for albuterol. Does that change the Dynamics in terms of potential valve?
Received or in time lines relating to to potential divestiture. Thanks.
Comfortable makes it more expensive but the the you know, bottom line is I I've set it here for almost a year now that you know, our focus is primarily on the consumer business, but the RX business is performing much better and it's throwing off a lot of cash and I am a and the entire management team or stewards of shareholder value and the multiples are just so depressed and the RX industry right now. I believe it would destroy shareholder value to sell it to kind of multiples that are are out there right now. So our strategic Focus remains consumer self-care, we we are proud of what our RX team is doing there and they're generating a ton of cash. And when the opportunity came, right we still intend to The Cellar spin it but um, so nothing's really changed on it, but I just don't see that happening in the in the short-term on the first part of your question birth.
There were a number of things already talked about the cares Act tax benefit. So that's been covered. Then there are two other important components of it the OTG monograph perform act which finally got past and something we've been pushing for but just to be and that will be make it easier for us in the future to bring our own kinds of products from ROTC products to Market faster. That's the good news. So the reality is is though it's probably, you know, three years before the agency gets that up and and running. So it is another positive for the long-term benefit of Perrigo, but it's not going to have it up an immediate impact.
So that's great news. That's not good news is great news, but it it's out there a little way and then I think the other one that's immediate is the restoration of the check eligibility under the FSA HSA accounts. You know, when the Affordable Care Act was signed into law ten years ago and unintended consequence was no longer allowing OTC products to be eligible for FSA HSA reimbursement. The cares act reverse this decision, which is a win for the industry and consumers alike. So hope I've answered your questions.
Operator any other questions, the next question is from Greg Gilbert a SunTrust, please go ahead. Good morning. Hey Greg summary. I can see suck the RX switch of Voltaren gel as a long-term positive, but I was hoping you could help us understand how much you're selling on the RX side currently of that product and and how that would wind down. Does that come to an abrupt end and then maybe help us Envision that what goes away and what comes in and Murray on on the bolt on front curious what your appetite is now, I imagine a long list of things that are potentially actionable but is now the time to take to hit the pause button in light of the pandemic and putting out fires daily, or is it all systems go on the bolt on front. Thanks.
Well, I mean, yeah good question.
I mean, I I will tell you we've been asked we closed on the the doctor Freshfield but that would deal was a done deal prior to the issuance and I am being more cautious off at the moment and we were you know, we we didn't know how this thing was going to play out or shake out. So we were very conservative with cash. We threw down a you know, a hundred million on on the revolver and I know we sit here now five or six weeks later and we um so far knock on wood have come through it very well. But yeah, we we have lots of things under evaluation. We slowed down a little bit. But yeah, I'm no less committed to the bolt ons than I was it's a key part of our strategy and maybe this will present us even additional opportunities that even a better value going forward, but for the short-term here, we're we're taking a more cautious stance birth.
Yeah, well the recent.
So yeah, we've slowed it down a bit right now. I'm not too concerned about that given the strength of the core business. However, and the fact that we already have doctor fresh and stare pod that would be done this year and we're just launching per episode and um,
and the second question was on Voltaren. I think it's a bit early for me to to do that. I know they'll be they'll be some abrupt halt the sales within RX and we'll be you know, we were able to get our application in and within 72 hours which was remarkable and get the approval and and we'll be launching and then I also think they'll still be an ORS component of the of the sales as well. So we'll give you more details as we get closer on the size of the market and how big we think Voltaren is and um, but I'm not prepared to elaborate more than that today.
Okay. Thanks.
The next question is from Elliot Wilbur Raymond James, please go ahead good morning and wanted to ask you a question or line of questions directed at birth rate specifically with respect to cash flow performance and cash flow conversion. You caught up a strong performance in the quarter. But as I think about a month likely moving higher and inventory build increasing over the balance of the year, how do we think about operating cash flow performance over the back of the year and cash flow conversion is essentially operating cash flow equal to adjusted net income kind of the right metric to think about for the full year or you know, could we actually be expecting something less than given the strong performance in the first quarter and then just real quickly wanted to ask to about trade inventory.
Four levels. Just wanted to get some.
Insight into you know, where those May stand whether or not there's significant differences between us and the the side there and if I may want to ask one question of Marie is is well, and I I did check and inhale is not one of George Carlin 7 words, so you're covered there, but I wanted to ask specifically you called has increased store brand share versus other store brands in the last two quarters is a source of strength in the business and just wondering what is driving that in in what's the relative opportunity obviously versus taking share of versus National brand is this just a product issue or is it more of a a structural issue? Thanks.
Rayvon it you do the first part. Okay. So, you know with respect to the first quarter. We saw the the the the cash flow is strong for it to put two major reasons why we had very high demand which which resulted in our inventory being drawn down and two we recovered are recovering our RX AR which was a an issue in the fourth quarter of last year where we saw the going the wrong way for us back. We would we would it was improving as we came into the first quarter and contributed to our strong cash flow conversion that was despite the fact that the surge that resulted from the covid-19 really occurred in the from the from the third and and the second and third weeks of March on and was and was most heavy at the end at the very end of month.
So that resulted in A build-up of our csca and and csci to you know with respect to how to think cash flow going forward through the years, you know clearly. Um, we got we do have Capital expenditures that we had planned for that may not happen quite as heavily, you know, we're we're not permitting Outsiders in our plans at the moment and we're running flat out says we push we talked about earlier on the call and Mary talked about in the plans for calling flat out. So the likelihood is that we're going to spend less capital and that will obviously be cash flow positive for the year. I don't think we're sleep a week or two operating income for the balance of the year. We are going to continue to spend on projects. We obviously are going to continue to pay dividends and that's very important to us. So I wage
That we haven't changed our guidance for the year and we're probably not going to change our cash flow guidance either at this point in time.
Yeah, and I would say that on the chair, you know, I went into great detail and really there's nothing that's changed in the first quarter off in the explanations. I gave on The Compass Bowl on on February 27th. It was we went Store Branch are either by gaining distribution. We try not to do it on price. Right? So I talked about how we had one a big piece of gum business from a major Customer because they we had lost it a year earlier and their business fell off because we had a product in blind taste testing and nicotine gum that was preferred 2 to 1 and they reinstated that product and and now their business is growing again and off and then we win share that way and we had a major new customer. Although we're the bulk of the the store brand business and infant formula, but lots of birth.
Our new products were driving those so it was in.
The Mucinex like well office and type product. That was an area where we were not as strong. We finally got the right products in place and and one accounts and one share with that thought. We had done the same thing in the um, the allergy business and um, and we had one share and then we had this odd Dynamic which is still continuing to play out very strongly and in the discontinuance of Ranitidine was a
That was a segment where we had a low share. So when that product was pulled from the market, even though the total Market didn't grow a lot of its own Niche to for example a metrazol as one of the areas where it's switched to where we have a very high chair. So just those consumers changing. So those those are the kind of the big three drivers consumer products new products driven and then a a beneficial mix shift and in in the digestive area and the GI area code
Answer your question.
Yes, thank you. Okay, any other questions know there are no other questions. I would like to turn it back to Marie Kessler for closing off.
I just you know, I'll leave you say, you know one more time, you know, I keep hammering it over and over again. This is something like I I've never seen you know, the Perrigo business is is strong. The team is incredible. They're they're confident there. You know, my leadership team is very seasoned. They took everything at a, and deliberate Manner and they've been able to handle crisis and I'm confident that you know while there could be some shorter-term bonds. I think the Outlook page ago is very strong. I never anticipated this coming into the company, but I think Christ Value store brand products will play a bigger role going forward wage. I think that self-care will play a bigger role in a new normal normal wear world where consumers are a little bit more reluctant to run to the emergency room off.
For hospitals and I certainly think e-commerce will be a bigger role and and we're strong in each of those will get through. This will have some uncertainty and I know that's hard for for everybody was trying to cover this up, but I think if you sort of look repair ago stands today versus most companies in the world. I think we're performing, um, pretty darn well, and I so I'll just send it one more time. Thanking all the employees who I I know it's a nervous to come into the facilities and um, but you're doing a good for society, and you should be very proud and we're very proud of you. Thank you for your interest in Terra.
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