Perrigo Company PLC

NYSE:PRGO

Earnings Call Transcript 2018-Q1

[Operator]

Good morning. My name is Justin, and I will be your conference operator today. At this time I would like to welcome everyone to the Perrigo First Quarter 2018 Financial Results. Thank you. Mr. Brad Joseph, you may begin your conference.

[Bradley Joseph, Perrigo Co. Plc]

Thank you and good morning everybody, and welcome to Perrigo's first quarter 2018 earnings conference call. 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 as is the slide presentation for this call. Joining today's call are Perrigo, President and CEO Uwe Röhrhoff; and Perrigo CFO, Ron Winowiecki.

I'd like to remind everybody that during this call, participants will make certain forward-looking statements. Please refer to the important information for investors and shareholders and safe harbor language regarding these statements in our press release issued this morning. In addition to the appendix for today's presentation we provided reconciliations for all non-GAAP financial measures presented.

Turning to the agenda on slide three. First, Uwe will briefly discuss the appointment of Perrigo's new Chairman of the Board of Directors, followed by highlights of our first quarter financial results. Next Ron will discuss the financial results in detail, the strength of our balance sheet, and our calendar year 2018 guidance. Finally Uwe will close out the call by highlighting his 2018 priorities after, which we will open the line for questions.

Now I'd like to turn the call over to Uwe.

[Uwe Röhrhoff, Perrigo Co. Plc]

Thank you, Brad. Good morning, everyone. Before discussing our quarterly results, I would first like to congratulate Rolf Classon on his appointment as Chairman of the Perrigo Board of Directors. Rolf's appointment illustrates Perrigo's commitment to good corporate governance by establishing a healthy rotation of right perspective at the board leadership level. I have served with Rolf on the Board of Directors at Catalent and observe firsthand his extensive leadership experience and broad industry knowledge.

The Board and the management look forward to leveraging Rolf's leadership, operating experience, and industry knowledge as we continue to position Perrigo's unique portfolio of businesses to drive long-term shareholder value. Finally, the Board joins me in thanking Laurie for her leadership as Chairman over the past two years and we look forward to her continued contribution both as an independent director and member of the board audit committee.

Now, let us turn to our quarterly results on slide five. I continue to be excited by our ability to provide quality affordable health care solutions around the world. I am very pleased with the progress the team has made on executing against our 2018 priorities I outlined last quarter. As a reminder these priorities are: one, delivering on our plan for the year; two, maintaining focus on operational execution; three, driving growth; and four, progressing on our value creation roadmap.

In challenging end markets, our unique business model delivered consolidated net growth of approximately 2% on an organic constant currency basis with adjusted EPS growth of 21% on a segment level.

In Consumer Healthcare America, I'm pleased that the team delivered net sales growth of 3% year-over-year on a constant currency basis. As a testament of our durable model, the team delivered net sales growth in every major OTC category versus last year. We saw strong performance in our infant nutrition category and the positive impact of relatively strong quality. These benefits were partially offset by a decline in the animal health category. In line with our focus on operational excellence, the team expanded adjusted operating margin 120 basis points versus last year illustrating the continued durability of this unique business.

Turning to our Consumer Healthcare International segment. Net sales growth of 1.4% was in line with our expectations versus the prior year on an organic constant currency basis. Growth in the quarter was driven by the execution of our focused brand strategy where we are continuing to prioritize regional brands that have the greatest opportunity to drive long term value. Growth was led by $20 million of new product sales in the quarter offsetting a relatively soft cough/cold season in Europe.

As a result of continuing actions to drive profitability of this business, the team delivered a strong adjusted operating margin of 17%. In the challenging end markets RX segment net sales were slightly lower than the prior year and adjusted operating margin was 40% which included increased R&D investment over the prior year. Results in the RX segment were below our expectation which Ron will discuss in more detail.

Finally, our durable platform once again delivered excellent cash flow. Cash flow conversion to adjusted net income was nearly 100%. Utilizing our strong free cash flow generation and balance sheet flexibility, we repurchased approximately $108 million of shares in the quarter. Overall, I'm very pleased with the consolidated results delivered by the team in the first quarter.

Our durable consumer facing businesses remain well positioned while the RX team continues to manage more challenging end markets. The updated segment guidance that Ron will provide is grounded in these current business dynamics. We remain focused on delivering our previously stated consolidated net sales and adjusted diluted earnings per share guidance ranges.

Now I would like to turn the call over to Ron.

[Ron L. Winowiecki, Perrigo Co. Plc]

Thanks, Uwe. Let me start by saying that our durable business model continues to perform in dynamic end markets as illustrated by our first quarter financial results. Key performance highlights include: one, store brand continuing to gain share; two, our focused brand strategy and margin improvement program in Europe continuing to deliver improved financial results; and three, our business model continuing to generate strong operating cash flow conversion to adjusted net income. In a few minutes I will discuss the actions the team is taking to deliver our consolidated plan for 2018. But first let's walk through the first quarter results.

Turning to slide seven. You can see our reported results for the first quarter. Reported net sales were $1.2 million and reported net income was $81 million. The primary adjustments to GAAP results are driven by the exclusion of $89 million of non-cash amortization expense, $10 million of change in our financial assets, $4 million from losses on investments and $4 million in acquisition and contingent consideration adjustments.

GAAP tax expense as a percent of pre-tax income was 26.9% in the quarter compared to a non GAAP tax rate of 19.5%. The difference is primarily due to the tax effect of the pre-tax adjustments consistent with the non GAAP pre-tax income.

Turning to CHC Americas result on slide eight. Net sales in the quarter were $602 million compared to $583 million in the prior year or a growth of 3% on a constant currency basis. As highlighted in the appendix of this presentation, store brand continues to gain share. This quarter, we experienced strong factory sales to our customers, driven by increased net sales in the infant nutrition category and strong cough/cold and analgesic category net sales due to a strong cough/cold season. These positive drivers and new product sales of $11 million were partially offset by lower net sales in the animal health category due primarily to a soft start to the flea and tick season.

Adjusted gross margin of 35.1% was 60 basis points higher than the prior year, due primarily to strong production volumes in the quarter. The durability of this segment is illustrated by the adjusted operating margin of 21.4%, which was 120 basis points higher than the prior year driven by greater gross margin flow through and lower operating expenses as a percent to net sales.

Turning to slide nine. You can see that net sales grew 1.4%, primarily by new product sales of $20 million in our Consumer Healthcare International segment. As a reminder, this growth measure excludes both favorable foreign currency movements of $43 million and $22 million in net sales from the exited Russian and unprofitable distribution businesses in 2017.

Partially offsetting these favorable effects were lower net sales in the cough/cold and analgesics categories, due primarily to a relatively soft cough/cold season in Europe, in addition to discontinued products of $6 million.

Adjusted gross margin was a record 54.2%, an increase of 350 basis points over the prior year driven by improved product mix, new product launches and the continued benefit of insourcing initiatives. We are pleased to see the benefits of the actions the team has taken to improve the margin profile of this segment.

Adjusted operating margin was 17%, an increase of 320 basis points over the prior year, due primarily to the gross margin flow through. The adjusted operating margin performance was higher than our expectations in the quarter due to the timing of growth investments that are forecasted to occur later in 2018.

Turning to RX on slide 10. Net sales in the first quarter were $214 million compared to $217 million last year. New product sales of $10 million were offset by lower net sales of existing products of $12 million, due primarily to price erosion which was in line with our expectations. New product net sales were lower than expected due to a supply disruption of a key new product, which I will further discuss in a few minutes.

Adjusted gross margin was 55.3%, an increase of 90 basis points over the prior year due primarily to product mix. Adjusted operating margin for the segment was 39.9%. R&D investments as a percentage to net sales increased compared to the prior year as we continued to invest in our pipeline.

Turning now to slide 11. Our balance sheet and cash flow generation remain strong. As of March 31, 2018, total cash on the balance sheet was $687 million. Total outstanding debt was approximately $3.3 billion.

During the first three months of 2018, we generated $172 million in cash from operations leading to cash flow conversion as a percentage of adjusted net income of nearly 100%. We believe our strong cash flow conversion combined with the strength of our balance sheet differentiates us in the marketplace. Our capital allocation decisions are focused on total shareholder returns within this context of our longstanding commitment to an investment grade financial policy. As part of our disciplined and balanced capital allocation strategy, we completed approximately $108 million of share repurchases and paid $27 million in dividends in the first quarter.

Now let's discuss our segment guidance on slide 12. In CHC Americas, we continue to expect net sales to be approximately $2.44 billion or growth of approximately 1% on a constant currency basis in a soft consumer market. As a quick reminder, our guidance includes growth versus last year in our market leading OTC and infant formula categories. Partially offsetting this growth are lower than expected net sales in our animal health business due primarily to a slower start to the flea and tick season versus last year and the upcoming loss of a partnered product in the second half of 2018.

In addition, our team is proactively addressing recent cost increases in certain commodities. And despite this headwind, we continue to expect CHC Americas adjusted operating margin to be approximately in line with the prior year remaining at record levels. At CHC International, we now expect 2018 net sales of approximately $1.59 billion, an increase from our previous guidance of approximately $1.56 billion due primarily to favorable foreign currency movements.

As a reminder, our 2018 net sales growth is expected to be approximately 2% on organic constant currency basis which excludes $33 million from businesses we exited in 2017. As previously discussed, we're continuing to take action to improve the cost structure of this business including improvements to the gross margin profile as evidenced by the record gross margins in Q1. In line with the actions to improve the margin profile of this business, we are now increasing our adjusted operating margin guidance to approximately mid 15%.

In RX, we're updating our 2018 guidance. Let me discuss these changes. First, during the quarter, we experienced a supply disruption in scopolamine, a key new product which launched in the third quarter of 2017. As a reminder, this is a complex patch product. The team has identified a stability deviation and is working with our partner to remediate the issue. Our updated RX guidance includes a fourth quarter relaunch of this product.

Second, our updated guidance now includes less favorable product mix with our price erosion assumption in line with our expectations. Based on these assumptions, we're updating our net sales growth to approximately 6% for this segment which translates to a net sales guidance of approximately $1.03 billion. Adjusted operating margin guidance for the full year is approximately 40% which includes a low to mid teen percentage increase in R&D investments versus last year.

Now let me discuss how these updated RX guidance assumptions impact our expected phasing for 2018. On our March earnings call, we discussed the expected launch of a generic version of ProAir in the fourth quarter of 2018. As a result of the updates provided today, we now anticipate approximately 35% of 2018 RX net sales will be realized in the fourth quarter. Furthermore, we expect the second and third quarter adjusted operating margin to be in the mid to high 30% range.

On slide 13, you can see that we are reconfirming our 2018 consolidated guidance ranges. We continue to expect consolidated net sales of $5 billion to $5.1 billion led by new product sales of over $300 million and growth across all of our segments as our durable consumer businesses are growing in a soft consumer environment.

Adjusted operating income guidance remains unchanged in the range of $1.03 billion to $1.09 billion. In line with our updated segment guidance, we expect to realize approximately one-third of our adjusted operating income for the year in the fourth quarter.

Our adjusted EPS guidance range for 2018 remains at $5.05 to $5.45 per share. Our 2018 guidance for operational cash flow remains approximately $775 million or greater than 100% conversion at the midpoint of our earnings guidance range. As a reminder, included in this guidance is the working capital to support our strong new product launch forecast, notably the expected fourth quarter launch of generic ProAir.

In summary, our durable business model continues to deliver results as highlighted by our strong consumer performance in the first quarter and our updated CHC International segment guidance for the year. The benefits of our diversified portfolio are evidenced by, one, our new product launch guidance of over $300 million which is driving growth in each of our segments; two, reconfirming our consolidated net sales and adjusted EPS guidance ranges; and three, our free cash flow generation and balance sheet flexibility which we believe differentiates Perrigo.

I will now turn the call back to Uwe.

[Uwe Röhrhoff, Perrigo Co. Plc]

Thanks, Ron. In closing, on slide 15, I would like to reiterate our top priorities for this year, first delivering on our plan. Our consumer facing businesses are on track to meet their goals and we are focused on delivering on our 2018 operating plan.

Second, maintaining focus on operational execution. The core pillar of Perrigo is to focus on operational efficiency and to deliver quality products to our customers. The operational focus in our CHCI segment has led to our improved margin expectations. We continue to execute on our operational priorities across all businesses.

Third, driving growth. We are investing in our businesses to innovate and compete in the market and the products where we have the right to win. The launch of Omeprazole ODT last month is a prime example of how Perrigo can capitalize on opportunities where we see white spaces in the market. We are continuing to increase growth investments for these type of projects and others in all of our segments.

And four, we are working on our value creation road map which is a comprehensive process focused on strategy, growth and capital return. We are taking a holistic look at organic growth opportunities, increasing portfolio efficiencies and prioritizing inorganic opportunities and total shareholder return.

Our mission of providing quality affordable healthcare products is a true benefit to society. Our durable and unique business model enables our global team to deliver affordable healthcare solutions for patients, consumers and families.

I will now turn the call back over to Brad.

[Bradley Joseph, Perrigo Co. Plc]

Thanks, Uwe. Operator, Justin, we'd like to open the call for questions now and ask that all participants please just ask one question. Thank you.

[Operator]

Your first question comes from the line of Chris Schott from JPMorgan. Your line is open. Please ask your question.

[Christopher Schott, JPMorgan Securities LLC]

Thanks very much for the question. My question was really around the operating margins on the consumer business, particularly the international side. I know you touched on this in the script. But could you elaborate a little bit more what's driving that fairly dramatic step up to I think about 17% for CHC International this quarter?

And then the second part of this question, help us just bridge between that number and it's a raised range with that 15.5% range in the guidance. Why is there kind of a step down we should think about from here going forward? Thanks so much.

[Ron L. Winowiecki, Perrigo Co. Plc]

Hey, Chris. Sorry I interrupted your second question. Thanks for the question. If you step back and think about the strategy of the segment, we've clearly outlined since about the last year and half focusing on a core strategy of focused brands and that initiative is focused around ensuring that our capital expenditures are around regional brands where we have the right to win, where we have strong market share and we have strong pull through from a sales and commercial standpoint. So number one.

Number two is we've outlined a margin improvement program that has a number of facets to it. In-sourcing initiative is a key attribute affecting gross margins, improved sales infrastructure and the like. And what we are seeing this quarter, it's interesting, is in the gross margin profile, 54% is a record and so you're seeing a trend from a gross margin standpoint that we've been articulating and discussing. We're going to see some benefits and we are seeing benefits in the gross margin profile this quarter.

From an operating margin standpoint, we highlighted on the call, and to be very clear, is there is always timing of operating expenses in this business. We talked about we're going to see growth in operating expenses from a growth initiative, i.e. R&D and A&P to support the portfolio and again to support our focused brand strategy.

So there's some timing in Q1. It's a little bit lower than our own expectations. Svend and his team are doing a very good job. They have some lower spending on cough/cold season. They're looking at product pull throughs and the seasonal Q2 lifestyle products, weight loss in particular are stronger. So you're going to see a higher spending in Q2, which normalizes out the portfolio.

So if you think of the guidance we gave to you at the mid 15%, actually you should assume that we're going to be on that run rate for the first half of the year. So therefore you're going to have a little stronger pull through in Q1 for the timing and a little offset in Q2, purely due to timing. Again, what we're pleased about and I'll go back to the P&L structure is the pull through of gross margins you're seeing in this particular quarter.

[Bradley Joseph, Perrigo Co. Plc]

Thanks, Chris.

[Operator]

Your next question comes from the line of Randall Stanicky. Your line is open. Please ask your question.

[Randall S. Stanicky, RBC Capital Markets LLC]

Great. Thanks, guys. Can you just comment on the CHCA business? Are you seeing any changing dynamics in the pricing trend there, particularly as you think about your retail customers versus e-commerce? That would be helpful. And the new launch contribution, what can pick that up? And then the part B of the question, Uwe, can you just talk about, is RX actively part of the strategic review, that business being potentially divested or are you now committed to it? Thanks.

[Uwe Röhrhoff, Perrigo Co. Plc]

Thank you. Let me start with the RX question. We are the leader in delivery of diversified extended topical healthcare solutions and leveraging our extensive product development, manufacturing and our regulatory capabilities. So going through the exercise, we are going through to actually look at all of our businesses, at all of our segments and we are focusing on exactly on what I said, what organic growth opportunities do we have, what inorganic opportunities we need to prioritize, what portfolio efficiencies we need to generate and how that all can contribute to increased shareholder return. So from that perspective, clearly any part of our business is part of the review process. And we will keep you updated once we have completed that.

On the second part on the CHCA business, we are the store brand market leader here with an unmatched product breadth combined with fast moving consumer goods and supply chain capabilities. And we serve our consumers through all channels they want to purchase from. So from the perspective of pricing, we have actually seen no changes. The business is extremely durable and we operate obviously in a dynamic environment. But from that perspective, we have seen nothing that's a surprise because it's all in line with past performance.

[Bradley Joseph, Perrigo Co. Plc]

Thanks, Randall. Next question please.

[Operator]

Your next question comes from the line of Esther Rajavelu from Deutsche Bank. Your line is open. Please ask your question.

[Esther Rajavelu, Deutsche Bank Securities, Inc.]

Hi. This is Esther Rajavelu on for Gregg Gilbert. Can you please help us think about how the new product sales of $300 million are split among the three segments?

[Ron L. Winowiecki, Perrigo Co. Plc]

Yeah. I'll take that one. Thanks for the question, Esther. From a new product standpoint, we're very pleased to confirm our guidance, $300 million for the year. As you know we look at this from a portfolio standpoint. On a guidance basis, we don't distribute this within the CHCA, CHCI and RX business. We try to just keep it at a portfolio level.

However we have said the following is, there are key product launches in Q4, most notably in the RX segment. ProAir is a key product that's in our guidance. Our goal is to launch it in Q4. We've given a clear articulation of EPS contribution of $0.09 a share in the period. So you can assume that it's weighted towards RX from a weighting standpoint. But again we don't give the pro rata – a specific pro rata (25:25) for each of our segments. But again because of those strong pull through of (25:27) launches in RX, there is a weighting towards the RX business.

[Esther Rajavelu, Deutsche Bank Securities, Inc.]

Thank you.

[Bradley Joseph, Perrigo Co. Plc]

Thanks.

[Operator]

Your next question comes from the line of Jami Rubin from Goldman Sachs. Your line is open. Please ask your question.

[Jami Rubin, Goldman Sachs & Co. LLC]

Thank you.

[Bradley Joseph, Perrigo Co. Plc]

Operator, we're getting a little bit of background noise. Just saying we're getting a little bit of background noise, and see if you can find out what that is. Sorry Jamie. Go ahead.

[Jami Rubin, Goldman Sachs & Co. LLC]

That's okay. Just, Uwe, a question for you, if you take a step back and you look at the long-term growth drivers of the CHC business in the Americas. This is a business that obviously benefited from tremendous tailwinds a decade ago or five years ago, much of which have diminished. And when you think about the business going forward, clearly the whole industry is facing some headwinds. And I think one of the biggest headwinds for you is just absence of Rx to OTC switches.

So can you talk about what are – you are still conveying optimism in the 2% to 4% of this business going forward. What are the key growth drivers? And to what extent are Rx to OTC switch brands necessary to drive that growth? I know you talked about new line extensions including Omeprazole OTC. That's kind of a new opportunity for you. Maybe you could talk about that. But just really what are going to be the key growth drivers of that business going forward?

And secondly, just on the RX margins which have trended lower. They are still high relative to the industry. What is a reasonable long-term outlook for the generic operating margins? Thanks very much.

[Uwe Röhrhoff, Perrigo Co. Plc]

Yes, from the CHC Americas business, I have to reiterate that we are the market leader here in the store brand business. We have significant market share in all of the categories we provide products on. And store brands provide a significant contribution to retailer, all of our channels earnings from that perspective.

So I think we are very comfortable with where we are from that perspective, because this is more than producing a pill. This is a value proposition we present to those channels. It goes all the way from R&D to the medicine cabinet of a consumer and you have to do a lot of things very, very well to play in this business. So from a growth perspective, to make that connection, obviously in the past, Rx to OTC switches have been a driver. We have seen less recently. But there are opportunities in that business to grow. We are actually, as part of our value creation process, we are looking at the broader opportunities in that business from an organic and from an inorganic perspective that are fairly broad.

And right now, we are pursuing mainly opportunities around the products we have with innovations as we have outlined as the example of Omeprazole ODT which is innovative in a dose form for the consumer. We have I think a very good pipeline of products and we will definitely keep you updated once we finish our value creation road map on an updated long-term perspective on the business. But I feel very comfortable with that business.

[Bradley Joseph, Perrigo Co. Plc]

Then the other part on the RX margin.

[Ron L. Winowiecki, Perrigo Co. Plc]

Yeah thanks, RX margins. I'll take that question. Thanks, Brad. We remain really steadfast and we said this continuously, to the strength of the diversified extended topical platform that our RX business is focused on. That's a core strategy. We've discussed many times, this business is about new products, new products, new products. And you can see from our guidance, we continue to invest in our pipeline. We are increasing R&D investments this year, as we've discussed, low to mid teens on a percentage basis in the RX business. And we feel comfortable relative to our pipeline going forward to offset the pricing dynamics.

Now listen, there's always quarter-by-quarter dynamics in this business. That's something we don't, as you know, get hung up on. There may be some variations based on the timing of new product launch and the like. However, in a long-term basis we like our pipeline. We like the business strategy. We're coming at the business from a position of strength and we like the forward-looking pipeline profile this business has.

[Bradley Joseph, Perrigo Co. Plc]

Great. Thanks, Jami. Next question please.

[Operator]

Your next question comes from the line of Louise Chen from (30:14). Your line is open. Please ask your questions.

[Louise Chen, Cantor Fitzgerald Securities]

Hi. Thanks for taking my question. So wanted to ask on some of the tailwinds in the sector. So do you have any updated views with respect to the Monographs Modernization Act and when that could be passed? And also initiatives that Gottlieb has laid out to increase Rx OTC switches? Thank you.

[Ron L. Winowiecki, Perrigo Co. Plc]

We certainly like the tone at the FDA, so you're highlighting an area that at one level we can say that validates our business model. Perrigo's focus on quality affordable healthcare is wave of the future. And Gottlieb, to your commentary, has been directly focused on expanding access to OTC. That's been a core part of what he's been discussing.

And then you highlighted an interesting new development that we like to highlight as well, is where does the tone become reality. That's always the question. And the Monographs Modernization Act is a good example of regulatory movement you're seeing today which has been sponsored by the CHPA, the Consumer Healthcare Association that Jeff Needham was a President of the last couple of years. And that bill has now passed the Senate committees. So you're starting to see momentum in the Senate.

And remind ourselves, why is that important. Why is the Monograph Modernization Act important from an example point of view? It motivates innovation. So what it's designed to do is take a class of trade in the OTC space and motivate where innovation can take place to get protection. There is still some debates on what that protection window will look like, but assume it's 1.5 to 2 years in duration. And now we have more targets to shoot at for growth.

So we're excited about the regulatory tone. You're seeing some of the tone become reality. I can't comment specifically when certain things will be ratified. It's not fair to do that. But we certainly look at, again our business model on quality affordable healthcare sitting right in the tone that you're seeing from a regulatory standpoint at this time.

[Bradley Joseph, Perrigo Co. Plc]

Thanks for the question, Louise. Next question, please.

[Operator]

Your next question comes from the line of David Maris from Wells Fargo Securities. Your line is open. Please ask your question.

[David Maris, Wells Fargo Securities LLC]

Good morning. As it stands now for capital deployment, where do you think the best opportunities are? And to the extent that it's CHCA, do point of care diagnostics seem to make sense? Or is it more a focused on adding brands? Thank you.

[Uwe Röhrhoff, Perrigo Co. Plc]

Yes. Thank you for your question. We are in the middle of the process looking at our portfolio and growth opportunities as I have laid out, organically and inorganically comprehensively. And it's a little early to comment on individual developments in certain business units. But it is fair to say that CHCA at the core of our company has an extremely high focus and we are looking here definitely as part of our project on all organic opportunities we have, and that also includes white spaces where store brand plays a role and we are not playing a significant role at this point.

The process again, it's going to take a little while. We are moving forward here and we will keep you updated once we have a comprehensive conclusion of all of our business segments and the corporate portfolio strategy and we'll share that information later this fall with you.

[Bradley Joseph, Perrigo Co. Plc]

Thanks, David. Appreciate the question. Next question please.

[Operator]

Your next question comes from the line of Patrick Trucchio from Berenberg Capital. Your line is open. Please ask your question.

[Patrick Trucchio, Berenberg Capital Markets]

Thanks. Good morning. My question is in regard to evolving customer experience at brick-and-mortar stores in your U.S. business. With the potential vertical integration we're seeing in your important retailers, what we're hearing is that these combined entities may seek to bend the healthcare utilization curve by encouraging members to visit clinics in their stores with the additional benefit being that foot traffic to the stores could increase. So can you comment on this potential specifically? And what if anything you've heard regarding the vertical entities perhaps looking to OTC to bend the cost curve on drug utilization.

And finally, what from a technological perspective, either with the use of apps or kiosks that Perrigo can offer to help your retail customers improve both foot traffic and the in-store experience of customers once they are there? Thanks very much.

[Uwe Röhrhoff, Perrigo Co. Plc]

Yes. Thank you for the question. I will try to keep the answer short because I think that is something we can talk about for a long time. Number one is we obviously service all kinds, all channels and the particular channel you mentioned actually has seen a smaller decline compared to the other channels. So we're cautiously watching what everybody is doing to increase foot traffic into those channels. And obviously as we said, our strategy is to meet consumers at their point of purchase and that means any point of purchase, whether it is brick-and-mortar store, whether it is e-commerce or any other type of retailers that we serve in the United States.

In Europe, the situation is a little bit different. And I make here the connection to your e-health (35:52). We for example service in Europe certain countries that have a higher, much higher chain development compared to the U.S. like the UK, so where you have certain channels through which we reach the consumers. And we have for example, like in Germany or France, a lot of independent pharmacies through which we sell our products.

So what we try to do here, particularly to our lifestyle brands actually, we are developing an e-commerce strategy with those type of applications where we increase or where we want to increase the experience of our consumers and help them to stay with those type of products as a true benefit to join them on their way to a healthy life. That is going to be actually one of the avenues we are exploring in our strategy. So hopefully that clears that a little bit up.

[Bradley Joseph, Perrigo Co. Plc]

Thanks, Pat. Next question, please.

[Operator]

Your next question comes from the line of Dave Risinger from Morgan Stanley. Your line is open. Please ask your question.

[David R. Risinger, Morgan Stanley & Co. LLC]

Thanks very much. Congrats on the results. I have two questions. First, at a high level, I just wanted to better understand the drivers in both the U.S. consumer healthcare and international consumer healthcare. So with respect to the U.S., could you talk about new product launch opportunities over the next year or two, what some of the key product launches are that we should be thinking about? And then in the international segment, could you just explain why the operating margin is only targeted to be about 15% for [technical difficulty] (37:48). Sorry about that.

[Bradley Joseph, Perrigo Co. Plc]

Dave, you're trying to get a third question in in the backdoor.

[David R. Risinger, Morgan Stanley & Co. LLC]

I guess we're juggling five calls this morning. Anyway, with respect to the consumer healthcare international, so to repeat, could you just talk about why the operating margin target is only 15% for the remainder of 2018 and how we should think about prospects for margin expansion beyond 2018? Thank you.

[Uwe Röhrhoff, Perrigo Co. Plc]

All right. So on the CHCA business, we obviously have an extensive record on bringing new products to the market. We do that in close conclusion with consumer expectations and the experience on innovations around products that are already in the market with different finished dose forms like again Omeprazole ODT. We have a number of other products in the pipeline that we launch frequently. And generally, our new product launches in this business are around 2% to 3% of revenue.

So there is, as we said, there is not one big product coming this year as a huge Rx to OTC switch. Consider this a by plan of, I would like to say it's like a string of pearls coming to the market and increasing our already large portfolio. We are not that dependent on one product. You remember we have more than 10,000 of SKUs in the market and our strength is really the breadth of our products.

[Ron L. Winowiecki, Perrigo Co. Plc]

Yeah, I'll take your second question, David, on the CHC International margins. I'll start by saying we're very pleased with the margin pull through that you've been seeing kind of consistently now. You kind of look at the sequential and quarterly trends, the operating margin profile of this business continues to remain strong.

In this quarter, again I'm highlighting the gross margin profile because we've had a couple of core strategies. I'm not sure investors have understood the value of those strategies. And we call it the focused brand initiative, which is really focusing on those core brands where we have the right to win. And Svend and his team continue to do a great job improving the portfolio and growing those brands that have a higher gross margin contribution. So number one at the GP level.

The second initiative is in-sourcing, and we've talked about that. We're a little over halfway of our journey at this point, so there's further expansion in the in-sourcing initiative going forward, but we clearly have seen the benefits pull through the last couple quarters and this quarter in particular at the gross margin level for the in-sourcing initiative.

And then there's the OpEx area. So we talk about improved infrastructure. We've talked about from a sales standpoint in particular and we've talked about how we're starting the journey from a back office standpoint. So you asked the question, first of all to correct a data point, we've updated guidance to mid 15% from the old 15%. So we've actually increased the guidance metric for the year at the adjusted operating margin level.

And the reason it's not trending, I'll call it, higher in the short term has been very clear we're reinvesting back in this business. We're putting in infrastructure programs, integrated sales and operational planning systems, a key example. We're investing in the R&D infrastructure in this business. And that's why we're taking the margin expansion. We're reinvesting back in for the longer-term margin growth, which we've given a long-term view that we should be in the upper teens adjusted operating margin profile.

So we're very excited about the trends to be frankly honest. The initiatives we've had in place are gaining traction. We like the plan going forward and we see the high teens adjusted operating margins in the future of this business.

[Bradley Joseph, Perrigo Co. Plc]

Thanks, Dave. Next question please.

[Operator]

Your next question comes from the line of Annabel Samimy from Stifel. Your line is open. Please ask your question.

[Andrew Abriol Santos Ang, Stifel, Nicolaus & Co., Inc.]

Hi, guys. This is Andrew for in Annabel. So my question is with the changes going on in the overall OTC consumer market such as with Proctor, Merck, Teva, how are you thinking about Perrigo's place or overall consumer strategy given your exposure in both private label in the U.S., branded OTC in Europe? And with that, how do you plan on growing from here? Thank you.

[Uwe Röhrhoff, Perrigo Co. Plc]

Yeah. I think that is a question that we have to answer from our position and from our position of strength. We are the market leader on store brands in the United States by far. And we continue to help our customers to generate significantly, significant margins with the products we provide. And that again includes a value chain that is rather complex and where we have to be excellent in all of the segment of the value chain all the way from product development up to the supply chain management and mass customization for those customers.

So it's, as we know, it's a pretty regional business related to North America. I think that nothing here has significantly changed. In that business, we are the dominant player. And I think our performance is a testament to how well we actually manage the value chain that we control.

From the standpoint of our international business, our international business other than some of those operate in Europe very much with local brands that are market leaders or one of the top three brands in their respective areas. And the way we manage our business is absolutely different from what you see from other companies. We actually try to focus on regional value proposition within European market and we leverage our access to more than 200,000 pharmacies with our sales network and we use brand extensions, product extension and regional extensions of our brands into markets as a growth platform. And I think the numbers prove that we are on a very promising way to make this business fairly successful.

[Bradley Joseph, Perrigo Co. Plc]

Thank you. Next question, please.

[Operator]

Your next question comes from the line of Dewey Steadman from Canaccord Genuity. Your line is open. Please ask your question.

[Syed Kareem, Canaccord Genuity, Inc.]

Hi, guys. This is Syed Kareem in for Dewey this morning. Thanks for taking the questions. Just had a couple quick ones for you. First on your Amazon e-commerce initiatives, I know in the past you've said it's a small portion of your business. But I'm curious to know or I'm curious if you could talk about any updates on your strategies there and if the size of that piece today has changed versus where it was 90 days ago. And also my second one, if you could provide a little bit more color on your generic launch flow in the second half of the year outside of ProAir, that would be really great. Thank you.

[Uwe Röhrhoff, Perrigo Co. Plc]

Yes. Let me start with the consumer e-commerce question. Again, our strategy is to meet our consumers wherever they want to purchase products. And obviously e-commerce here is an increasing important channel. That is not actually limited to Amazon, but Amazon is obviously here the player that dominates that market and has a commitment to grow this category. So we continue to work with any of those players levering our unmatched breadth of in our portfolio, of our turnkey solutions and of our ability to mass customize. And that is actually a strategy where all of our e commerce customers benefit from. And yes, it is true that this business model for us is growing but it's still growing from a small scale.

[Ron L. Winowiecki, Perrigo Co. Plc]

Yeah, I'll take your second question regarding the product launch profile for RX. When we gave our original guidance back in March, we talked about key launches in Q4, clearly highlighting the contribution with ProAir, again $0.09 a share is in our guidance model in Q4. And we remain on track for our new products number. We have a $300 million portfolio for the year. Again, we talked about in this call, we clarified a little more detail for your models as for those of you kind of work through the P&L architecture that with those strong product launches in RX and with the scopolamine planned relaunch in Q4, you should be modeling around 35% of your net sales contribution from RX in Q4. So no new major updates and we're continuing on our pathway to achieve our overall new products plan for the year.

[Syed Kareem, Canaccord Genuity, Inc.]

Thank you.

[Bradley Joseph, Perrigo Co. Plc]

Thanks for the question. Operator, I think we have time for one more please.

[Operator]

Your last question comes from the line of David Steinberg from Jefferies. Your line is open. Please ask your question.

[David Michael Steinberg, Jefferies LLC]

My question revolves around store brand market share. In the last 12 months, what's been your basis point gain in share versus national brands? And I know in the past years, you talked about 100% basis point gain on average depending on the economy. So what's your current, what's the current share of all units in terms of store brands? And then finally, what's your aspirational share that you think you can get to over time?

[Ron L. Winowiecki, Perrigo Co. Plc]

Yeah. This is Ron. Thanks for the question. If you think of the store brand share, and we continue to talk about this quarter-by-quarter. In the appendix, you will see the MULO data, which we think is one of the best data points to kind of point at. Store brand continues to gain share. So unlike perhaps some of the other dialogues that previous teams talked about, it is 100 basis point improvement year-over-year, was the target going forward.

The way we look at this is we are just, our business model is designed to meet consumers at their point of purchase, number one. Number two, our goal is to increase store brand share for all our business partners. And so what we do is continue to work with entire channel networks ensuring that we provide our business model the unmatched breadth of our product portfolio, our turnkey fast moving good solutions, our supply chain with for mass customization of our broad portfolio and are continuing to work with them to expand store brand share. So we're not pointed at a share point, but what we're pointed at is making our partners successful to improve their profitability and provide quality affordable healthcare solutions to consumers. That's the way we think about this business.

[Bradley Joseph, Perrigo Co. Plc]

Thanks for the question, Dave, really appreciate it. And thanks everybody for your time today. We look forward to speaking with you over the coming weeks and months. Have a good day. Thank you.

[Operator]

This concludes today's conference call. Thank you for participating. You may now disconnect.