Q3 2020 Perrigo Company PLC Earnings Call
Good evening and welcome to Paragon <unk> financial results Conference call all participants will be in a listen only night should you require assistance. Please signal a conference specialist by pressing the star Kate So like I say right.
After todays presentation, there will be an opportunity to watch Christian <unk>.
Oscar Christian you matrices Star then the one on your telephone keypad.
Joel Your question. Please press Star Sentry. Please nice did this event is being recorded.
I would now like to hand, the call since I became Mr. Bradley Joseph Vice.
Hi, Chris.
Good relations and corporate Communications. Please go ahead.
Thank you and welcome everyone to Parago third quarter 2020 earnings Conference call. We hope everyone is healthy and safe.
Hopefully you've had a chance to review the earnings on Judicial review press releases, we issued earlier today.
Yeah. The releases on the presentation for today's earnings discussion are available within the Investor section of the cargo Dot com website joining.
Joining today's call, our president CEO, Murray Kessler, and CFO Ray Silcock.
I'd like to remind everyone that during this call for Christmas will make certain forward looking statements.
Please refer to the important information for shareholders and investors and Safe Harbor language regarding these statements in our earnings press release.
Few items to highlight before we get started.
When discussing the business Maria will reference only non-GAAP adjusted numbers for the quarter unless otherwise noted.
Paris tens of operating results against prior year periods include the previously disclosed third quarter 2019, net sales adjustments to the market, what's relevant editing as well as operating results attributable to the 2019 held for sale animal health business. Previously included in the consumer self care Americas segment.
Comparisons to prior periods also exclude one.
The businesses.
Which includes contributions from the divested animal health business and the diagnostic Rosemont business kind of derm product. Both previously included in that consumer self care International segment.
And to currency.
Also of note organic growth excludes acquisitions divestitures and currency in both comparable periods.
Lastly in the appendix for today's call we.
We have provided reconciliations for all non-GAAP financial measures presented and with that I will now turn the call over to Marie.
Thank you Brad and good afternoon, everyone.
I want to begin today's call is I have all year by once again thanking each of our Parago colleagues for their continued efforts in delivering products needed by consumers and patients during the call, but 19 pandemic for driving our consumer self care transformation and for once again delivering on our financial commitments. Despite a major.
Her product discontinuation.
Before we dive into earnings I want to take a moment to discuss today's outcome from the judicial review process in Ireland.
The Irish high court ruled that the issuance of the notice that amended assessment by Irish revenue did not violate the companys legitimate expectations.
We are obviously disappointed with the judges decision that Irish revenue had the legal right to issue the assessment after running a retrospective blame without warning Recharacterized parago its trade of intellectual property to exploit it exclude disposal going back to 1997.
Well the judge did not rule in our favor I want to remind everyone that today's decision was based on a process argument.
And the judge was not considering the merits of our case under Irish tax law.
We remain confident that Irish revenue was wrong on the merits of the case and while we now need to assess whether to pursue an appeal of the judicial review decision or to proceed directly to the tax Appeals Commission to argue the merits, we strongly believe parago will ultimately prevail.
I also remind you there was only upside to two parago today on the process argument and that this decision has no bearing on the actual tax assessment review like.
Likewise, no payments do now and would only be do parago, where do what beneficially be unsuccessful through any appeal of the judicial review decision.
And the merits of the case with the tax Appeals Commission.
Achieving that final determination is likely to take years.
Notably it wasn't all bad news on the tack on tax uncertainty this quarter, we did make progress on the $843 million U.S. Athena tax assessment, which was accepted by the mutual agreement program under the Irish U.S. income tax treaty.
The Irish and U.S. competent authorities have a history of resolving matters to avoid double taxation and we are optimistic that this matter can be resolved or substantially reduce our overall tax exposures to the U.S. and Ireland.
But ultimately the value of Parago will be determined by the success of our consumer self care transformation not lawsuits.
So I'd like to get back to the business and focus the rest of this call on how the company is performing and how are we progressing against our transformation plan.
Let's start on slide six with a recap of the significant progress we've made over the past 18 months on our transformation.
With intense focus on expanding our consumer portfolio. We have completed six bolt on self care acquisitions that most notably added a new platform for growth oral care.
These purchases were partially funded by divesting two non core businesses we.
We've also made meaningful investments in our go to market strategy, most notably in E. Commerce that are enabling us to recapture the parago advantage our.
Our commercial teams are working round, the clock to provide consumers and customers with a central products through the global pandemic.
And our R&D and innovation teams have created a new product pipeline designed to always have at least $500 million in development to fuel organic growth.
We've also launched our internal business intelligent platform to drive more sophisticated analytics and insights throughout our organization.
And more than half of the leadership positions in the company have been infused from both external talent.
With World class consumer experience and internal promotions of our up and coming stars.
So foster greater collaboration and further enhance our ability to attract talent, we announced last week, a new North American corporate headquarters to be located within the medical mile of downtown Grand Rapids.
Our 100 million dollar project momentum savings initiative is already generating operating expense reductions, which have offset nearly all of the headwinds we faced so far this year.
In total we have invested more than 1 billion through M&A increased the dividend by more than 20% compared to just two years ago.
Significantly increased infrastructure spending to support growth and service while at the same time, accumulating 850 million in cash on the balance sheet.
The team did this all the while predictably meeting or exceeding our financial commitments for eight consecutive quarters.
I am proud of the entire Parago team and what they have accomplished in such a short time.
And while the board of directors and I believe the company's valuation does not yet reflect these achievements. We believe it ultimately will and for that reason the board has authorized to purchase $150 million in paragould start between now and the end of the calendar year.
Turning to slide seven.
We remain confident in our long term growth consumer growth targets, which we have illustrated here.
The 3% net sales organic growth target is achieved through a combination of the initiatives highlighted.
The 5% adjusted operating income growth is expected to come from revenue growth, coupled with margin enhancement via mix cost savings and manufacturing efficiencies.
These add another 2% of leverage as we expect sales in gross margin to grow faster than operating expenses as a result of our technology and capability investments.
No we traded a sizable discount to leading CPG peers are threefive compound annual growth rate targets surpassed peer growth expectations.
On average analysts estimate those appears to grow revenue by 2% and operating income by 4% on.
On a CAGR basis over the next three years, our consumer growth targets remain unchanged.
Now, let's discuss our performance for the next quarter and year to date as shown on the next slide.
Third quarter consolidated net sales grew plus 1.7% and were flat organically at.
At 1.2 billion.
No we established a $31 million net sales reserve related to the albuterol recall.
This negatively affected third quarter revenue growth by about 70 basis points after including Albuterol net sales prior to the recall I'll walk through the sales growth in more detail in just a few moments.
Adjusted EPS was 93 cents per share in the quarter down 11% versus prior year, but remarkably in line with our guidance. Despite the ALP theater all recall in discontinuance we.
We attribute this to strong growth in consumer self care Americas C.S.C.J.
And better than expected recoveries in both the consumer self care International C. S T I and base Rx businesses.
On a year to date basis consolidated net sales.
Were $3.8 billion up a very strong plus 10% versus year ago behind organic revenue growth of more than 4%.
Adjusted EPS is $3.10 year to date, which is up 4% versus a year ago, despite incremental kobin related costs.
Albuterol recall related costs and the divestiture of Rosemont.
We believe this in conjunction with our reaffirmed guidance today validates the underlying strength of Perrigo has diversified and durable business model the importance of our products to consumers. During these difficult times the successful execution of our ongoing transformational activities and the dedication.
And agility of our 11000 team members worldwide.
On slide nine you see the results for the worldwide consumer business, which is the focus of our self care transformation.
Worldwide consumer net sales grew more than 4% in the quarter plus 1.6% organically.
Year to date worldwide consumer revenues are up 11% versus year ago, plus 4.6% organically, which is well above our plus 3% goal.
This compares to a worldwide consumer business that was growing less than 1% for several years prior to the start of the transformation.
It is especially worth noting that worldwide consumer operating profit year to date is up 12%.
It's actually we are achieving our three five consumer growth goals. One year early just as we achieved our 3% revenue growth goal a year early in 2019.
As shown on slide 10, consumer self care Americas performance has remained robust through this pandemic and was once again in the third quarter the company's primary growth engine.
Third quarter net sales increased 8% versus year ago led by O T C with organic net sales up 4%.
Oral care allergy digestive health and pain, where the growth leaders benefiting from consumer switching to E Commerce and these highly regimented part product categories.
For perspective, C.S.C.A. E Commerce revenues grew more than 140% year over year in the quarter, a testament to the investments I discussed earlier.
Pain also benefited from continued kobin related demand and the volt parents store brand equivalent launch digestive health benefited from the market relaunch of branded private that nutrition benefited from the launch of a new product late last year to a major customer and oral care benefited from the Doctor a fresh aquas.
Mission and continued organic growth.
Similar to what you have heard from others are cough cold products were down in the quarter, which we attribute to lower year over year illnesses that we believe are due to social distancing and mask measures designed to prevent the spread of co, but as well as our belief that consumer pantries for cold cough products are still above.
Year ago levels from the March April consumer demand surge.
Importantly, our projections for the balance of the year, assuming overall weaker cough cold season. This assumption is also built into our guidance.
All in all it was another very strong quarter for C.S.C.A. within a very strong year.
There are two other notable trends in the U.S. that are benefiting C.S.C.A. I think are worth mentioning that.
At first as shown on slide 11, which is important data from a recently released the Mckinsey survey.
It shows that there is a consumer shift in shopping behavior to store brand occurring through the pandemic.
According to the study 75% of consumers have tried a new shopping behavior since covert began 20.
25% of consumer survey noted that they have tried to store brand for the very first time with 80% of those reporting they intend to continue buying storebrand that's big.
The other big behavior sewage highlighted in the survey was a huge shift in shopping behavior to digital and E Commerce.
We've seen that ourselves and our omnichannel data as shown in slide 12, let.
Let me take a minute to explain what I mean by our Omnichannel data.
This refers to a broader way of measuring consumer take away than we've done in the past historically see I see a measured and reported sell out data from ire eyes, moolah or multi outlet data.
Wall insightful MULO Underestimates club stores significantly and more importantly, it does not capture sell out through the ecommerce channel.
As consumer buying habits continue to shift from brick and mortar to one line, which was turbo charged by cobot.
E Commerce, it's become a much larger component of our overall sales and as such it is critical to include ecommerce and our market share data to more accurately reflect consumer behavior, we refer to this as omnichannel data for.
For the first time, we can now measure analyze and benchmark omnichannel performance for the entire Oh TC category for total store brand within the O T C category.
And we can also now measure parago share of total store brand and Parago share of the overall O T C category.
Im going to channel data on this slide is compiled from <unk> point of sale data plus I or I panel data and E. Commerce point of sale data provided by Parago those top customers.
The difference in results between Modelo and Omnichannel data is quite dramatic.
More low shows though to see total category revenue was down 4.8% in the third quarter.
With total store brand down, 6.3% and total Parago fairing better down 2.5%.
But now compare this to the Omnichannel data, which includes moolah plus the whole wholesale club channel and E. Commerce sales in this broader dataset. The O T C market was actually up 1.2% in the third quarter Tony.
Total store brand still declining but to a lesser extent at 2.8% and notably Parago grew 3.5%, which is fully aligned with total parago Tc factory shipments for the quarter, which were up 3.4%.
What this clearly demonstrates is that Parago has a very high share of store brand Omnichannel sales, which is the result of its investments in this area over the past few years and is clearly a major driver of let's see I see a business.
Turning to consumer self care international net sales were down 2% versus year ago.
See I see I as a bit of a mixed bag when looking at the impact on our business from Covidien related consumer behavior certain categories benefited from increased usage, while others were negatively impacted by lockdowns across Europe and.
On the positive side sales grew and the pain category driven by the fever reduce or sell but then in the B M. S category, driven by new products within a defeat them on supplement brand.
New innovations to the XL less weight management brand and finally strong ecommerce growth across most of the businesses.
These were more than offset by lower selling of cough cold products for the same reason as the U.S. as well as lice treatments due to school closings.
Importantly, as you see on slide 14.
So yes, the ice branded business in total has outperformed other self care payers in Europe consumption for both Parago and the total market is recovering to near pretty Cove at levels, which explains why the business performed a little better than we anticipated and that's third quarter. However, we're closely.
Monitoring the recent lockdowns, albeit somewhat less restrictive that were put into effect in countries, including France, Germany, Spain, Italy, Belgium, UK and Ireland.
We will adjust our plans as need be in the fourth quarter based on consumer behavior changes, resulting from these lockdowns.
Turning to our EPS.
Net sales in the third quarter were $20 million lower than the prior year as 23 million in albuterol net sales during the first half of the quarter were more than offset by a 31 million dollar reserve established for the early September albuterol recall.
Discontinuance of $9 million in lower margin products.
The underlying Rx business or what I'll refer to as the base, our ECS business, which completely excludes albuterol and discontinued products recovered faster than expected during the quarter, albeit it's still below pre cobot level.
As you can see base Rx sales were down 1.2% versus year ago in Q3, which is a big improvement from Q2's, 14% decline when doctors offices were closed due to lock down and derm topical prescriptions as reported by a caveat.
Reported similar declines.
Notably our most profit profitable derm topicals business return to above pretty covered and year ago levels in the quarter, which is good news so wall halting albuterol sales, it's clearly a hit to our Rx business. We did the right thing for patient safety, we will relaunch when the problem is solved and then.
Meantime, our base business is stabilizing and we have a full pipeline of new products to restart growth on this important cash generating business.
So to summarize.
Consolidated net sales are up 10% year to date highlighted by greater than four <unk> percent organic revenue growth.
And our worldwide consumer business is meeting or exceeding our plus 3% organic revenue and plus 5% adjusted operating income growth targets, a full year earlier than expected.
And plans are in place to restart growth on Rx. So looking to the rest of the 2020, we remain focused on ending the year strong by getting our U.S. supply chain fully replenished keeping up with consumer demand in certain categories and continuing our transformation activities.
Within our reaffirmed adjusted EPS guidance range, we assumed the following.
One continued strength for CSC, a in Q4, driven by E commerce and new products.
Even with a double digit decline in cough cold built in.
Two no new major surge and consumer demand for our essential products between now and the ended the year.
Three.
The Q3 recoveries in C. S T I and the Rx base businesses are sustained.
For Parago is albuterol remains off the market and five there's no accretion impact in Q4 from the share repurchases between now and the end of the year.
So bottom line, it's been a heck of a year Parago is growing again, our consumer self care transformation is working and we remain confident that parago is well positioned to continue to grow by capitalizing a new normal world, where self care value and E commerce are more important than.
Never before and again, we believe we will ultimately prevail on the Irish tax Noah and with that I will turn the call to ray to discuss the financial details right [laughter]. Thank you Mary and good afternoon, everyone. Now that Murray has gone through the sales and business drivers for the quarter and year to date.
I would like to walk you through the rest of the PML.
Starting with slide 19.
On a consolidated basis, the company reported a GAAP net loss of $155 million in the quarter I lost in the dollar 13 per diluted share.
On an adjusted basis consolidated net income for the quarter was $128 million and adjusted diluted EPS was 93 cents a share.
Adjusted net income for the quarter included $283 million of non-GAAP adjustments, the largest of which was the $202 million and goodwill.
Decryption Rx business.
This was primarily as a consequence of our voluntary recall about Israel and the fact that the timing of this product returning to market. It's unclear at this time.
In addition, as always our non-GAAP adjustments included the removal of amortization, which this quarter amounted to $75 million and we also removed $20 million from the early debt extinguishment about 2020 one.
These bonds were repaid as a result of our having issued $750 million a new 10 year bond at the end of Q2.
Additionally, we removed a $22 million an increase in the valuation that sabra contingent milestone, which we recorded as a result of the strong performance by Biogen Sabry business in the third quarter.
Full details of these and other smaller adjustments can be found in the non-GAAP reconciliation table attached to it so often in the press release.
Moving on to taxes in our Q3 GAAP results, we reported tax expense for the quarter. Despite having a pre tax loss. This was primarily because the Rx goodwill impairment taken this quarter that is non deductible for tax purposes. We.
We also recorded a non cash base erosion than NC abuse.
Beats attacks in Q3.
The beep tax arose from the impact of the additional interest expense deductions provided by the Kaz Act as well as from our early adoption of the new tax regulations.
The non-GAAP adjusted tax rate in the quarter was 15.8% tax rate adjustments included the nondeductible Rx goodwill impairments the tax impact of all our non-GAAP adjustments and the big tax we removed the beat tax since it was as a result of regulatory changes.
And we believe that leaving it in our results we didn't hit the comparability of our tax rate.
In future periods.
From this point forward unless otherwise noted all dollar amounts including year over year changes basis point of margin percentage changes as well as year over year margin changes will be on a non-GAAP adjusted basis growth percentages are also based on non-GAAP adjusted numbers and then addition.
Excluding the impact of currency and the divested businesses.
Before moving to the business segment results I would like first to review gross profit and margin performance at the Perrigo consolidated level.
Moving on to Slide 20, Q3 consolidated gross profit for the third quarter was $471 million $14 million lower than the prior year.
Consolidated gross margin for the quarter was 38.8% down 170 basis points compared to prior year.
Principal drivers of these declines with $22 million intro, we called charges that divestiture on June 19, 2020 of our higher margin Rosemont business as well as unfavorable portfolio mix.
The unfavorable mix was as a result of strong store brand sales in the quarter with weaker performance from our branded businesses.
Q3, consolidated operating income was $184 million 24 million lower than the prior year, primarily due to the Rx Albuterol recall, which also resulted in a 150 basis point reduction in operating margin for the quarter.
Consolidated operating margin was 15.2% 220 basis points lower than the prior year.
Addition to the impact from the old mutual recall operating margin was adversely impacted by higher variable compensation costs. The result of strong worldwide consumer business performance. So far this year.
Yes, as I said, our consolidated operating income was $609 million $15 million higher than prior year, driven by the strong performance of our consumer businesses, especially U.S. So Tc.
Moving on to slide 21, I would like to continue with the worldwide can see what business with third quarter gross profit of 393 million was 1.3% higher than previous year, but gross margin was down 120 basis points to 39.2%.
The major cause of this margin reduction in Q3 was mix within our consumer portfolio.
Strong growth in our lower margin CSC, a store brand business, especially U.S. LTC and the addition of the newly acquired dumped a fresh business contrasted with lowest styles in our higher margin Si Es business.
Third quarter worldwide consumer operating income was $141 million $13 million lower than the prior year, while our operating margin was 14% 190 basis points down from prior year. This was primarily as a result of gross margin flow.
And that year over year increase in variable compensation costs.
Year to date worldwide consumer operating income was $423 million $31 million or 12.5% higher than in the prior year.
Gross about you guys see a business much of which came from strong U.S. ODC performance as well as the impact of the oral care acquisitions over the last 15 months and the growth of store brand in the UK were partially offset by increased covidien related expenses and several.
Divestitures.
Now, let's look at the individual consumer segments in more detail moving on to slide 22.
Consumer self care America Americas gross profit increased $12 million versus last year's Q3 up 6% to 222 million.
While gross margin of 33.5% declined 50 basis points successful new product launches. The continued strength of the U.S.. So TZ see business and the acquisition of Dr. fresh were largely offset by our normal pricing pressure despite operating efficiencies in the quarter.
While the gross margin declined 50 basis points this quarter versus prior year, we are making considerable progress improving on gross margin each quarter. This year on a sequential basis. We have increased gross margin 210 basis points from the first quarter 150 basis points from Q1 to Q2.
And 60 more from Q2 to Q3.
Operating income grew $11 million or 9% in the quarter to $134 million and operating margin.
Was 20.1% up 30 basis points as operating leverage on gross margin flow through was partially offset by increased brand investments and by promotion.
Year to date CSC America's operating income was $395 million, an improvement of $52 million compared to prior year up 16%, while our operating margin improved 30 basis points to 19.8% strongly driven by you.
So do you see by our acquisitions as I said earlier.
Moving on to slide 23.
Consumer self Cai International Q3's, gross profit was $171 million, 4.3% lower than the prior year, while gross margin declined 150 basis points to 50.4% primarily from adverse product mix or.
So from increased commodity costs for a specific brand.
CST I operating income in Q3 was $51 million 12 million lower than the prior year, while the operating margin was down 310 basis points to 15.1% due primarily to gross margin flow through as operating expenses remained flat compared to the prior.
Yeah.
Yes, as I see I see international operating income was $165 million down 3 million compared to prior year. Despite strong store brand growth in the UK, but up 7.4% when divested businesses and currency are excluded.
Operating margin year to date was 15.9% down 40 basis points from prior year, principally due the divestment of high margin businesses. This year.
Turning now to the Rx segment on Slide 24, Q3, gross profit decreased by $60 million to $78 million, primarily due to 22 million about future all recall costs in line with our expectations gross margin of 37.1%.
Down 390 basis points entirely due to the recall.
Our ECS operating income was $44 million 12 million lower than the prior year, principally due to the gross profit shortfall.
Partially offset by reduced operating expenses, including lower R&D and administrative expenses.
Year to date operating income was $168 million down 17 million or 8% compared to prior year as the positive impact of our digital sales in the first half was more than offset by the sharp reduction in the number of scripts written by doctors doing the pandemic locked down there.
Cost of the subsequent recall of LP drove this quarter had a further adverse impact the Rx year to date operating income.
Moving now to the balance sheet on slide 25, operating cash flow in the quarter. It was $63 million a conversion ratio of 49%, which was in line with our expectations. This follows a strong conversion rate last quarter with 206% the two.
Timing of sales with in the second quarter as a result of the COVID-19 students was responsible in the change in Q3 versus prior quarter.
Year to date operating cash flow and cash conversion remains strong with a cash conversion ratio year to date of 124% and our elevated cash position, we have $849 million on the balance sheet at the end of Q3 provides optionality for additional bolt on acquisition.
Opportunities to further propel our self care transformation. This.
This cash position will also allow us to go into the market. What we believe is a great discounts to repurchase $150 million in shares that will help offset those used you know in management compensation programs.
Finally, we are reaffirming our original guidance for this year of 6% to 7% net sales growth better than 3% organic net sales growth and adjusted diluted EPS in the range of $3 and 95 to $4.15 per share.
Strong business fundamentals and the lower than expected tax rate to be yet have enabled us enabled us to absorb 12 to 15 cents a share an incremental COVID-19 costs 14 cents a share for the cost of the hour intro recall and the loss of 66 cents per share from Doe.
Vesting the Rosemont Rx business.
In summary year to date business was also very strong and our outlook for the remainder of the year remains positive as the investments we are making in the business continues to take hold with that I would now like to turn the call back to Mary Mary.
Thank you Ray operator, we'll go ahead and open it up to questions.
[noise]. Thank you.
Now begin the question and answer session.
ASCII Christian Christian.
Number one on your telephone keypad.
You can't speak fine please pick up your handset before pressing the case.
Joel Your question. Please press Star then changed.
Your first question comes from Gregg Gilbert from Shirley. Please go ahead.
Thats, Great Hey, how are you first get the one out of the way that you probably don't want to discuss but it's inevitable that come up so about the Irish issue.
Is there any precedent for Ireland settling with companies and then what scenario would you not appeal. The first stuff that didn't go your way I'm I'm just trying to understand why you wouldn't want to drag it out as long as possible unless a settlement is at least theoretically possible and then question number two is about your share buyback decision.
It seems on the surface to be a bit more symbolic event than a major decision on capital allocation be savi sort of additional bolt on activity. So hoping you can comment on that as well as your view beyond the 150 and the relative attractiveness of shares.
Ah versus more bolt on activity and I have more but all respect the queue and get back in line. Thanks.
Well great. The you know the first question is you know they'll appeal they'll decide to appeal. The law. It just came in today, Greg. The lawyers are reviewing all the information and that they see flaws that that are that we believed we could overturn it with them we would appeal it otherwise.
We we believe our cases, even stronger on the merits of the case I'm from the very beginning we.
And then you know we thought the judge up we had a very strong process argument and and but our goal isn't to try to stall at our our goal is to resolve it went out and do what's best in the best interest of shareholders. If that'll ultimately was a settlement that we thought was in the best interest then we would consider that.
And and yes, there is precedent for doing that.
As it relates to the share buyback.
It was in a surgical in nature.
I wouldn't say it was done to be symbolic because we get about management shares over the past couple of years, and we were experiencing them some dilution and shareholder shouldn't pay for that so we went ahead and and our sort of leveling that back then and resetting that but I you know I will tell you when we were talking about it at this.
Well, you're which we believe is that the shares are very inexpensive I'm a it was a good time to do it.
Thanks.
I don't know if I answer the last part, but I'll just add to it my number one priority and capital allocation as is both getting the infrastructure right, which the investments we've made in capital to make this a world class company and bolt ons that help become accretive to growth I am delighted with what we have been able to do with oral care.
But bear river near Dr. fresh steripack, creating up an opening.
A whole platform of growth for us. So you know that that's still up the priority things that will generate long term returns for the investors.
Thank you.
[noise]. Your next question comes from.
Chris Schott from JP Morgan. Please go ahead.
Oh, great. Thanks, so much for the questions. Just two from me I guess first just taking a step back and thinking about the top line impact from Kobe across your business. This year, just help us think a little bit about what the net impact we should be thinking in there when we look at it maybe some of the earlier your benefits you saw in the Americas business versus the headwinds.
In international and Rx franchise, and sounds like somebody Whos benefit you think are going to be sustainable, but trying to get color on just pushes and pulls as we think about how that looked forward to 2021 on what's a reasonable baseline Mike.
My second question, Yeah, I think the you know the Chris but if you look at the businesses in totality coming out of going into the fourth quarter on any kind of movement or or surge related demand or pantry loading I think that's kind of all washed out now it hasn't washed out by division.
But I think that you know sort of the pluses you got from C. S C. A.
Early on in the year or have been offset by C. S. C. I again, and the Rx base business, especially early on when doctors offices workloads and you know there was some albuterol early orders.
That work during the height of covered but there was a gun to kind of offset or have been entirely offset by the the recall. So I don't think there are any like lasting effects of one time I mean, we set up this year with plus 3% organic growth target and I think it's going to come in a little bit better than that.
That were at around four on the consumer business is a little north of four now so maybe we'd beat or 3% number by a bit but not a lot where I do think there was a meaningful change is the behavior on ship W. T and channel shifting from E Commerce, and two or excuse me from brick.
In murder to E Commerce was a very big one and based on the Mckenzie study I think whats, helping our businesses around the world in store brand is a is a meaningful an accelerated shift of branded to store brand and those you know those are fundamental and should be sticky going I'm going for.
Sure, but you know well listen whether we're lucky or not Lucky we made big investments a few years ago before I, even got here in E Commerce and our market shares are much higher and and I Hope you could you know what did a good job of illustrating that and that slide of the difference in omnichannel versus bearish.
It is just pure I arrive moolah, which is your traditional brick and mortar and you can see how the trends change not only from negative to positive, but a big shift of Parago I don't see that going away.
Perfect very helpful and maybe just on on just the topic of investments I know you've made a lot of investments since you joined the company kind of getting it ready for the growth targets you're looking at are there any more major investments me to think that Parago has to meet make at this point or do you think you've got the kind of infrastructure, where it needs to be and now it's just kind of execute.
And then as you mentioned kind of living in the bolt ons et cetera, I'm sure any sense of like is there another like big push on expenses, we need to think about it anytime in the near future. Thanks, So much.
The answer to that if you sat in all the budgeting sessions I'm never going to right now I've I've drawn a nice I basically if that did the organization I gave you a two years gave you the investments that added 50 or $60 million. It came in total two are paying now and that's the cap now I'm not saying.
No we won't continue to invest but those should generate.
Either into brands that generate sales and move out of that area, but that that pool. There is not going to be a negative pannella hit going forward. As a result of further investment on top of that that's kind of our renovation budget that we will stick with and at some point hopefully that goes down.
No I'm, not saying and I don't see any big one next year, but I'm not saying a couple of years from now when we launch a name is an x. or something like that that comes with revenue and profit you could invest in advertising and promotion because it's a brand that launch, but I don't think that's what you're asking I think you're thinking of it.
Same way, but I am that these investments that you were adding without being tied to revenues or operating profit and so no those need to as part on my chart, there and I'm not sure. We left it on they that algorithm chart I showed as the slide but part of getting margin expansion is holding the line on.
On operating expenses.
Thanks, so much.
Thank you. Your next question comes from Amy fatty acids.
Hey, Leerink. Please go ahead.
Great. Thanks for the question, Mike can you talk about your.
Her in driving topline in five different opinc growth next year, and especially on the top line would be ideal trial had been how should we think about the contributors to call. It.
On a year over year basis.
And then just separately that took off to ecommerce.
How much of a role is that contributing this year and how should we think about.
Ecommerce related growth for your entire business.
Think about next year. Thanks.
Yeah I I'm.
I I'm not.
Ready, nor do I want to start providing goals for next year are guidelines were in the budgeting season, I'm very confident I you know the the whole premise a year ago was to get 357 on the consumer businesses.
And and then exit Rx, we still have our x. I wasn't able to get value because it at the at the time based on the multiples in the industry and it throws off cash so I'm very focused on still delivering to the 357 and I'm optimistic on growth at the base business I have an anomaly I have to deal with with albuterol and and I'm not.
In a position yet to say, whether you know how much we deal with that it depends on what bolt ons et cetera, but on the core premise for the long term, it's still intact and and I'm I'm quite confident on that consumer businesses, but I cant even tell you with albuterol is back yet and.
You know the first quarter mid way through or or or not at all they are closing in on the issues and there are shorter term solutions and longer term solution and as all that budget comes back you guys will be the first to know when I come in present, a fan and share the plans for next year.
Thanks can you also elaborate on the E commerce trends that you're seeing here it looks like headwinds taking share from others. So Brian.
Because it because the overall still Brent omni channel declined about 2.8%.
Oh, how much of this is sustainable and could this be a driver for growth overall consumer business.
Yeah, I mean as I've seen enough of the plans for next year that it is a significant driver I and and you know I can't give you the specific numbers I'm not you know that's more of an investor day type of discussion, but it it we probably pushed up our plans for a year, we don't see that.
Pulling back there's been a lot of discussion internally and externally Ah. That's surge. This all on shift will that returned to normal levels and I think given the investments you're saying with our top customers than I've been in top to tops. They are all you know whether it's the walmarts of the world are targets they are making big bets on.
On on E Commerce, and and believe that shopping behavior will continue and not only is our investment and it's significant and the amount of people you know that it takes to run a a digital ecommerce group, we don't drill ship product you've heard me say this before we're doing you know the analytics. The you know the marketing of it though.
Comments the promotions the Reg it it's a it's a very big effort and Parago has a unique capability and competitive advantage of that and we're in you know continuing to do the things that keep US ahead, but besides all that we have a product line that also lends itself well to it 'cause it is.
The regimented categories that really seemed to be the ones benefiting so it's less if somebody is.
If they're there they get sick at the moment they want.
They want to run to the store and get something right now, but when you're buying allergy medicines consistently overtime nicotine replacement consistently over over time. It. It's those kind of regimented digestive health products overtime and those are where we have our our highest shares so that's sort of a double.
The double benefit for us, but yeah, I think were counting on ecommerce with the way we're doing it today further growth all the way to one day, you know looking at even more advanced opportunities and there is a you know I I always describe E. Commerce separately, then then digital because they're not the same thing E. Commerce is just.
You know what your but most people think of today, but digital goes all the way to digital to consumer at a much broader.
Broader use of technology. So that is it will be a driver for sure, but again I'm not going to break out components up 2021, yet I want to finish 2020 strong first.
Got it thank you.
Thank you. Your next question comes from Randall Stanicky from RBC capital markets. Please go ahead Chris.
Great day around overnight, Hey, how you doing.
Has apparently been involved in any preliminary settlement discussions thus far regarding the Irish tax liabilities. That's the first question second question Voltaren gel Dell gel has been a nice new launch opportunity for you in CS Yay as you look at the next call. It three four years are there other specific product opportunities.
Or categories that you're watching that could help boost the organic growth in C.S.J. Thanks.
Well on the organic growth is spin.
Ahead of schedule and stronger than I thought so.
You know what foods organic growth. It I think you know that I'm trying to remember the organic number from last year to the year before but it was see I see I was up something like.
I want to say something like 7% that was up a a relatively big number but you know we the premise on getting into oral care was to buy brands that were that were accretive to revenue growth and that's just what they were and that we could build onto and Dr. fresh. We think are the investments will make their that'll Baird.
Great and then on the entire wave of.
Okay, Theda, Rx Doe Tc switches, which like a Voltaire and was not contemplated back a year ago, when notwithstanding out and you are a year and a half ago and in May I think I had a zero and therefore, our EPS otcs switches now there is a a you know a whole host of them and they you know they add bill do.
Combination products and and at least in process a few years out with the oleson tamiflu at and others. There as you know there's a that's a big number that can accelerate organic growth and nutrition, we needed to get quality and service it affects where we've made big investments.
And that will take a couple of years to implement but just getting.
Couple.
Capacity expanded with a reliable product that we can service all the time and begin to promote again as well as new product launches. We have next year is another area for growth. Another area for growth is something I've talked about before and rich serota, who I'm going to get on one of these future.
Sure.
All soon because he is passionate about that and I think it enjoy hearing from him is has had a lot of success in his history and and were seeing out of the success from others in the whole I'm customize brand solutions for major customers. So it's a trend that's starting to emerge that's almost an evolution of store brands.
So if you think in the world of private label. It was just sort of black and white to own brand to store brand, where they're really marketed and brands like you know Oh equate or some of the biggest brands if not the biggest brands in the United States now you see a trend on customers like target, where they're developing exclusive brands that are that are branded products.
Not the store brand, but only available to them and other major consumer package goods manufacturers are looking at that and we are we think we're uniquely capable to to satisfy that given our ability to handle complexity and unique products all the time and and again that would be an opportunity for for hire more.
And so you know.
Growth isn't the problem here.
<unk> growth isn't the challenge I got to get rid of overtime I got to get rid of the overhang and by the way I'm not even you know I can't comment on your first question, but growth is and isn't my concern on the the business is growing growing profitably we had some margin erosion.
And some of it no big deal some of it <unk> you know what was self inflicted because we put society ahead of our ourselves in and see if Jay just growing so fast that it diluted a little bit of margins, but there's still the gross margin opportunity project momentum, we started with operating expenses.
We're benefiting from that now will benefit more from it next year, but we can do a better job of gross margins and we're deep into it at right now on the street was right to point it out and.
And that's an opportunity as well so you know.
We've had two solid years of growth between that and the bolt ons and there are plenty of bolt ons out there as well between the bolt ons and or the new initiatives and Otcs switches.
We there's just nothing but upside we just have to go after it profitably get our margins up and get rid of this darn overhang on.
Do it responsibly.
All right. Thanks, Brett.
Thank you. Your next question comes from David Rising I spend Morgan Stanley. Please go ahead.
Yeah, Thanks very much.
Oh, Hi, Maria So [laughter]. So some of my questions have been answered I just have two please first you had briefly touched on the U.S. tax litigation could you just provide some more detail on that please.
And then second.
You also touched on the opportunity to restart growth in Rx. Obviously, you know the second quarter of this year was impacted by the pandemic you have an easy comp next year, but any more color on how we should think about Rx prospects. Thanks, so much.
Yeah, so on the Rx.
Prospects, what I'm, referring to is.
Something we talked a lot about is that the new product pipeline had kind of dwindled as so much energy and Rx was focused on.
Albuterol, so I mean, and and so that was kind of a.
The the the big push for a number of years when the history of Rx had been that it was a many singles and doubles and what I'm excited about when I say my Rx team met <unk> present their plans as the number of approvals.
That they've been getting and the number in the in the pipeline and expected approvals, which is at a you know a step change from where its been over the past few years and I think you'll see it start to play out next year and really even more in that in the year. After that so I and next year I do think Youre correct at.
Absent what happens with Albuterol I think you have some easy comps in the earlier part of the year and they've got some other areas of opportunity that are working on as well. There you know we're not pulling back on our X. I mean, it it's an important business. It generates a lot of cash and we have not pulled back investment and we have.
Given them the resources to.
To grow the business and and it's unfortunate what happened this albuterol 'cause it colored some really great success, there where they were having this was going to be a hero year for them, but you know that they'll bounce back.
First part of your question again, I would oh that yeah, the idea about that.
The Athena tax of 800, and however, much million dollars. It as we've talked about before that that is basically taxing it's a different kind of tax but it's addressing the same income that Ireland as and there is an agreement between Ireland and the U.S. that you would.
And do that that you wouldn't double tax and if there is a dispute between the two there is this authority that you go to and Ray mentioned that specific name of it what's the name of Ray that ammo may pay is cool yeah, yeah just.
Blanking on one day and extensible, because special commission that duty rates dispose of this nature and they have agreed to take the they we agreed to take it and review, which which country would be the one taxi income right. So the the important I think the important part of it is.
We submitted it we believe there was a conflict, but they have to review their criteria and this commission that stands between the U.S. and Ireland that would then negotiate it and debate it out.
They accepted it and August so that's that's the news there and I you know from our perspective. It you know it could make it go away or I couldn't make it oh. The overall combined one might be a deduction against the other but it should bring the total down significantly. So it's hard for me to quantify but you know my.
My belief and I think our lawyers belief is that just took out a chunk of the overhang I just can't tell you from where from whence Rd that belt, that's a battle between on the U.S. and and Ireland now.
Understood. Thank you very much.
Thank you. Your next question comes from Elliot Wilder from Raymond James. Please go ahead.
Hey, Thanks, good afternoon.
[noise] [noise] I wanted to go back to some of your commentary around the growth differential in omnichannel versus brick and mortar and just wondering if you could.
Help us with some specifics on me.
E Commerce and club market.
Relative to the size of the brick and mortar channel just trying to get a sense of how big that market is how important. It is currently for parago and whether or not there are categories. There that are still significantly underrepresented.
Relative to pair goes existing base that might provide for significant immediate growth opportunities outside of just sort of increased usage by consumers of ecommerce [laughter].
Means of purchase and then question for Ray I want profess to have the strongest working capital projection skills on on the street, but still struggle with sort of trying to predict your relative cash flow from operations versus adjusted net income and cash conversion metrics. Just wondering if you could uh huh.
Hi, Jim help there with respect to fourth quarter and then how do we think about that longer term, most CFO will always be somewhat higher than than adjusted net income.
Or roughly equivalent just trying to get a little bit better handle on that metric. Thanks.
Okay.
Do you want when you do the second one and I'll come back to the account.
Yeah, I mean on the cash conversion nobody would be as we.
We did have a lower cash conversion rates in the third quarter and we said that was really due to the timing of the of the sales ahead of where they were spread in the second quarter and the impact of the cobot 19th.
What that did to our receivables you know I think we.
We we.
We we do generally achieve a little over 100% cash conversion I think yeah, that's where we'd like to we'd like to target and I think that is.
Well, we think we're going on a go forward basis, but so we're not we're not doing a precise kind of guidance for cash conversion quarter by quarter.
Yeah, and I think going back to <unk> on a worldwide consumer basis, I think think ecommerce is about 8% of our total sales and you know growing.
I think it was out like I said in my comments, a 142% and a and the U.S. on the Americas business anonymous up man in the high Fortys and.
European business and see I see I International I think the growth opportunities are different internationally, when I talk about ecommerce and it's already a meaningful part of our C.S.C.I. brand, we think of ecommerce as a very well if you're I don't know how familiar with our portfolio, but we tend to be a string of pearls a lot of.
Regional brands and to go and try to make those big Mega Pan European brands is unlikely, but it gives us an opportunity to way to address the entire European market as we broaden our E commerce business and through like the Amazons or the Amazon.
Europe is a significant opportunity and potential growth accelerator for that business and even though it's a pretty meaningful number now it's actually only in its a limited in the number of countries. So we're probably still only in a handful of comp EM countries with meaningful ecommerce business and say.
Yes. They are so that is when we look at the strategic plans for CSC I, that's a big growth driver. When you go to the U.S., we've had tremendous success and I <unk>.
I guess, there's two ways to look at it you are looking at what other product categories and there are plenty of them I look at it in the penetration of ecommerce versus branded or store brand versus brand. It in E commerce versus what it is in traditional brick and mortar and its well below so I think there's a very significant.
Penetration opportunity and if you can bear with me for a second I imagine yourself walking into a traditional brick and mortar store. You know you go to buy Euro T C product you're faced with a side by side comparison right. So you can see.
And you said that there is a 30 40, 50, 60, sometimes 70% discount versus the national brand when I'm sitting at home and I go online and I do you know either a click and pick or I, I do and Instacart order or whatever that might be if I type in the brand.
In the beginning you would only get the brand if I typed in ibuprofen I'd see all the options and that's an example of what I'd say, we've invested in E commerce.
So that we can work with our customers to show that when somebody clicks on that and yeah to present, the alternative with the price comparison, what the savings can be so that you build that penetration up overtime. So well you know we're attacking it from from all angles, but I would say as big as big as it's been right now it's.
It's still relatively underdeveloped and it certainly underdeveloped versus store brands I would say the national brands today have a you know a bigger share than we do of their portfolios.
The answer your question.
Are you still there.
Uh huh.
We lost the line. Thank you Sir your line [laughter] comes from [laughter] Steinbeck's from Jefferies. Please go ahead.
I thought we lost the line there for a second Okay Hi, David.
Hey, Thanks, Thanks, I have two questions. The first one is on acquisitions.
The call.
Call you.
Slide at Paragould is taking a near term pause from bolt ons.
Just completed Dr. crashed and Steri pod and called out. The fact that you know the kind of people in the company had been able to travel to complete due diligence and consumer multiples where were high.
Has that changed are you still in sort of pause mode. Because you can't travel to complete due diligence and multiples are high are you starting to go back on offense and my second question, perhaps is for Ray.
Coming back to the Rx business, you know Mark gross margins have declined I think they are 42% Q1's, 39% last quarter's 37% this quarter and you called out. The fact that you know the decline 39% to 37% decline was solely due to the recall the proair. So I was wondering.
Is the baseline gross margin really 39% or should we expect continued softness until proair resolves itself. Thanks.
Well the [noise] they.
To answer the first question is back on off EPS.
I mean, you said it well that but it wasn't just us that had done it couldn't travel and do due diligence, but given the state of affairs there just weren't.
Deals kind of froze up and we were fortunate that we had completed due diligence on a number of deals weve closed on another one.
Since then with some assets we bought from.
Sanofi right is that the skin care products and now we are we are evaluating many I would say, it's it's loosened up dramatically. There's a there's a number of opportunities I can't predict when we find one that's the right value when the right price, but we are clearly digging in again.
[noise] yeah on the on the Rx So gross margin the decline in the third quarter as I think I said is pretty much all attributable to the out Israel recall.
It just kind of a complicated because we share the profitability with capital and so.
Well I've been its impact on our Cogs It came.
Came into our Cogs cost and hit our margin.
[music].
Yeah.
I'm I'm not ready to guide to the specifics for Q4, but I think we.
I would expect that that.
Particular, massa have any impact on people no.
No that was it for a week or cost.
Tying into the quarter.
[laughter].
Great. Thanks.
Thank you. This concludes our question and answer session I would now like to turn the conference back over to Mark for closing remarks.
[music].
Yeah I would.
As a as I sit here I'll just leave you on you know I've been doing this for a long time long time, I am proud of the team and what they've accomplished and in 18 months has been remarkable pair those are very different company with a very different growth profile. We've we've had a <unk>.
A couple of bumps, we'll work our way through those but we.
We think the stock is a great value. We appreciate those of you who are are working with us and sticking with us through it and we think ultimately that our consistency and delivering on our promises which we hope we are building credibility because hub will ultimately generate the appropriate.
Awards and with that I. Thank you for your interest in Parago.
Thank you. The conference has now concluded. Thank you for attending today's presentation you may now.
Now disconnect.
[music].
[noise] [noise].
[music].