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Edited Transcript of PRGO earnings conference call or presentation 9-May-19 12:00pm GMT

Q1 2019 Perrigo Company PLC Earnings Call and Investor Day 2019

New York City May 22, 2019 (Thomson StreetEvents) -- Edited Transcript of Perrigo Company PLC earnings conference call or presentation Thursday, May 9, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bradley Joseph

Perrigo Company plc - VP of Global IR & Corporate Communications

* James E. Dillard

Perrigo Company plc - Executive VP & Chief Scientific Officer

* Jeffrey R. Needham

Perrigo Company plc - Executive VP & President of Consumer Healthcare Americas

* Murray S. Kessler

Perrigo Company plc - CEO, President & Director

* Raymond P. Silcock

Perrigo Company plc - CFO, Principal Accounting Officer & Executive VP

* Ronald C. Janish

Perrigo Company plc - EVP of Global Operations & Supply Chain

* Svend Andersen

Perrigo Company plc - Executive VP & President of Consumer Healthcare International

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Conference Call Participants

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* Christopher Thomas Schott

JP Morgan Chase & Co, Research Division - Senior Analyst

* David Michael Steinberg

Jefferies LLC, Research Division - Equity Analyst

* David Reed Risinger

Morgan Stanley, Research Division - MD in Equity Research and United States Pharmaceuticals Analyst

* Gregory B. Gilbert

SunTrust Robinson Humphrey, Inc., Research Division - Analyst

* Jane Gilday

* Louise Alesandra Chen

Cantor Fitzgerald & Co., Research Division - Senior Research Analyst & MD

* Patrick Ralph Trucchio

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

* Randall S. Stanicky

RBC Capital Markets, LLC, Research Division - MD of Global Equity Research and Lead Analyst

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Presentation

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Bradley Joseph, Perrigo Company plc - VP of Global IR & Corporate Communications [1]

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Good morning, everybody. Thank you for coming here, and welcome to Perrigo's 2019 Investor Day. The team is very excited to be here and to discuss the transformation of Perrigo into a consumer self-care company. We obviously have a very full agenda here today. Just logistically, we will take a break about halfway through the presentations, after which, at the end, we will take Q&A. And now for kind of the safe harbor statement.

Hope you all had a chance to read and review yesterday's earnings press releases, along with the ones from this morning. Copies of these releases are available on our website and the slide presentations for each presenter will also be posted during today's meeting.

I'd like to remind everyone that during this meeting, participants will make certain forward-looking statements. Please refer to the important information for investors and shareholders and safe harbor language regarding these statements, included in the beginning of today's slide presentation. In addition, this presentation contains non-GAAP financial information. We provided reconciliations for these non-GAAP measures in the appendix for today's presentation, which can also be found on our website.

And with that, I'd like to turn the presentation over to CEO and President, Murray Kessler.

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Murray S. Kessler, Perrigo Company plc - CEO, President & Director [2]

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Good morning. Good morning? Thanks. Here's the way today is going to work. I'm -- we do have about a break, there's -- my leadership team and I will present. I'll be the kind of the first half of the presentation, walking you through a little bit of the history and how we got to where we are today, and reconfiguring and transforming and evolving Perrigo from a health care company to a consumer self-care company.

I'm going to step back a moment after that and do a little bit of a deeper dive in self-care because, as I've gone around talking to various constituents, they want to understand that more and more, so we'll make sure we do that. And then importantly, we'll dig into the lessons learned that informed our future. So there's kind of like of a couple of really key things that we are focused on that we think accelerates growth for Perrigo. We'll take a break after that, and then the team will come up and do a little bit of a deeper dive on each of the individual businesses.

So let's start with where we are at the moment. At the moment, Perrigo is a $4.7 billion revenue company, making just under $900 million of operating income. In that, we have sort of 1/3, 1/3, 1/3, plus or minus, of Rx Pharmaceuticals and the other 2/3 is Consumer, International and Domestic U.S.

The company is grounded as a consumer company and we're really basically founded -- Luther Perrigo founded the over-the-counter category 130 years ago and has been a leader in that ever since. And the way that the company grew, and I'll take a minute on this slide, it has had tailwinds behind the company for years and years and years, and these factors exist today, where for both external and internal factors that all came together.

Externally, an aging population benefits a company that's selling the types of wellness products that we have, as the percentage of the U.S. population over 65 years of age has continued to grow and is still continuing to grow. We have a category that has tripled in size over the past 30 years.

We have penetration of store brand and value, and consumers recognize -- consumers are rational, the more you're in consumer packaged goods, you understand that consumers eventually figure it out. And with our products, they go through the same FDA clearance [then] it's the same product. And penetration levels have grown from 10% to 33% in store brand OTC penetration and there's still room for that to grow.

And for those of you who are not as familiar with Perrigo, in most cases we are way bigger than the national brands. So we sell more ibuprofen than Advil. We sell more acetaminophen than Tylenol. We sell more of practically everything than the national brand.

And then the other key driver for many years has been Rx-to-OTC switches, of which, since 2000, there's been 35 of them. And we'll talk about the current environment in a minute, but that's kind of what helped the company grow externally.

Internally, superior manufacturing and scale. The company has 5 to 10x the SKU count versus national brands, which is really important as we get into the self-care discussion in a few minutes. Because I need you to understand that one of the big advantages of Perrigo is we just want people to live well and be well and make their lives better. We don't care what product they make. National brand people want you to buy that brand. We make everything. So whatever the choice is that'll make you do best, we have a solution for. So we're just focused on making lives better.

The company's been built on excellent customer service, having great talent base with high level of continuity. And then the other issue that's sort of key to our formula as you look at where we grow and which category is in store brand or own brand we get into, it has usually has to cut right into the sweet spot of that we can offer a 30% discount to the national brand, we can make a 30% gross margin and then within that, critically, the retailer has to make more money on us on -- by selling our brand than the national brand. So all 3 have to -- you have to check the box off. Do I have that right, Jeff?

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Jeffrey R. Needham, Perrigo Company plc - Executive VP & President of Consumer Healthcare Americas [3]

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You got that right.

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Murray S. Kessler, Perrigo Company plc - CEO, President & Director [4]

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All right. So when you follow all of that, you grow. And this company grew like lightning for -- from 2000 on from a $750 million revenue company to a $5 billion revenue company. And you can still see the split between RX, up until 2015 growing rapidly every year. And the market rewarded that growth dramatically, outperforming any index you want to compare it to, whether S&P Pharma, S&P Consumer, et cetera. And you see the little bit of a tail-off at the end and the multiple in the -- was the best of any consumer companies at the time.

However, and this is why we're here and the major changes the company is going through, since 2015 the company stopped growing. And it's basically been [atop] an annual growth rate of minus 1%. But for the most part, if you look at those bars, it's flat. And it's been now 3 years of sustained lack of growth and the stock has suffered significantly. Now there are other factors involved. There -- in the base period, there was a takeover offer, et cetera. But bottom line is the company's stock has been -- performed poorly since the company stopped growing.

And if you saw -- we've put out, like I said, 4 releases in the last 12 hours for some of you I was talking to, one of those was our earnings results. And I think we were $0.14 above consensus and that $0.14 included $0.06 of a one-time tax benefit, so let's call it a clean $0.08. Fine, that's good news. And we also beat all our internal plans on every division on revenues and earnings, but it's still nothing to write home about with a flat company and adjusted operating income down. So I'm happy that it was -- we hit the numbers, we'd say we hit or beat them. But bottom line is we want this company vital and growing, and that's what drives value for the people that invest in the company.

So today, we change Perrigo. Today, I was going to use Perrigo 2.0, but somebody else used that. So we'll say we're Recapturing the Perrigo Advantage as is internally used in the company. But this entire presentation and how you see me speak for the next -- the entire tenure that I'm here, you'll see this wheel over and over and over again. And I do it on every business I run, it -- it's what we'll call our virtuous circle for growth.

So it'll start with reconfiguring the portfolio, and I'll talk about that. Then the foundational plans, you'll hear from the presidents of our divisions who will talk about how they're delivering those foundational plans. And then from there, the investments we'll make in repeatable growth platforms. And this is the agenda for today. What was on that agenda, all it is, is working its way around this wheel.

Once we define the work that needs to be done, which the first 3 do, we organize around the work which we've done, and we make a lot of change with that, and we'll show you the organizational changes, the performance alignments, et cetera, that happens. And then once you organize around the work, you need to get people the tools to do the work, and so the investments that are being done there as well. And then we go on to that, sort of how we then turn that into returns.

So there's a significant cost restructuring that will happen as part of this going forward, which we call project momentum. A lot of these activities generate cash, how we're spending that cash and the businesses generate a lot of cash. And then how we're turning that, what are our long-term guidance objectives.

And then once we have all of that, the idea of that circle is to be able to do it again, all with the goal -- and I'll say it over and over again but listen for the first time: To make lives better by bringing quality, affordable self-care products that consumers trust everywhere they're sold. It's what drive us. You'll hear it in every speech I ever give. It's important, okay? That's our purpose.

Our starting point is the 2019 projection for total Perrigo as it exists today, including RX, which is performing beautifully. And different than in the past couple of years, I have not put ProAir into the projection. And by the way, the results for the first quarter had no ProAir in it as well. So I will give you the projection as I see it and as approved today, and then on the next slide, I'll show you some upsides to this. So this is -- and the reason I -- listen, every investor I said, said, "Don't put things in until -- that you're going to disappoint in when you're not sure." We think we are this close on ProAir, but I'm not putting it into the projection until it's approved.

So if you look at where we finished last year, we finished at $4.55. Towards the middle, there's 3 things that are about $0.43 that are headwinds coming into the year. Foreign exchange, $0.06. A tax rate change from 18% to 22.5%, which you can ask our CFO about later in the day. And then, because the company performed poorly, you have about a $0.17 impact of just bringing the comp plans -- they didn't pay less here, bringing them back 100% to at target, which cost you $0.17. So you lose the $0.43 there. Animal health out, positive impact of share buyback, cancels each other.

So now we're at the top 3 lines of the page. Even though we're selling or spinning RX, we are investing. It's a great business. And we want it to be in good stead, so there's $0.05 of investment in R&D and pipeline products. There are $0.29 of EPS impact on consumer investment that we have already made that you'll see throughout the day in marketing and new technologies, et cetera. And then the core normal business based on sort of the way it's been performing over the last, gives you the range. That's your $3.65 to $3.95.

And then on top of that -- and you can do this math yourself depending on what gets approved or doesn't. Generic ProAir, which we are -- still believe has all the opportunity as the first generic. And given the share estimates that we had initially, the market is still there for us -- is $0.10 per quarter. So if you -- if it gets -- starts July 1, add $0.20 to that range. If it's one quarter, it's $0.10. Some of the cost initiatives we're talking about, we'll show you, can affect this year by $0.05. They're more next year. And then depending on when Ranir closes, if it closes during the third quarter, it's about $0.10 as well. So if I take that with our guidance that we're giving you as a starting point, the bracket's $3.75 to $4.30 on -- with these upside activities and the Street's sort of at the -- in the middle of -- we clearly bracket straight estimates with that guidance.

All right. The guidance does not include the impact of net dilution from exiting RX. We are well into the process, but I want to take a minute on this slide. If we sell RX based on what we know now and with a priority, which Ray will explain later, of using those proceeds to pay down debt to consumer levels, but that is -- that would sort of be -- that's what these numbers are based on, it could go differently. It could be an acquisition. It could be debt. But this dilution calculation, so with proceeds it's about $1.05 to $1.15 of dilution from a sale. And if it's a spin, it's about $1.40 to $1.50 of dilution. And that difference, as an investor, you would get in actual equity in the spun company.

Does that makes sense? Am I clear on that? Because people have been asking it. I can't give you timing. It's tricky right now with that. The negotiations are active. There are many alternatives. But let's face it, ProAir isn't approved yet, it's close and our RX business is humming. And the market is changing right now. We believe the change in pricing dynamics and we are not going to let our investors get underpaid for this asset. So we are going through a very, very thorough process and we'll get it done and we're just as committed to this as ever, but we're not going to leave money on the table for our investors.

The reason we remain committed despite the fact that it's my best-performing division, right, at the moment is that this is what I've seen time and time again on other spins that I've been involved in, is these are very different businesses that, in my opinion, don't belong together. So I support what the Board decided in advance. And when you operate businesses like this, each of them suffers to some extent. So in the last few years, we've invested internationally. We invested in RX. But the goose that lays the golden eggs, our consumer Americas business, has been neglected. When you separate these businesses, both can shine and both can succeed. So we're -- they're both super businesses but they're very different businesses.

And we think there's a real benefit to you as an investor in that separation. Because today, we have a blended multiple, a number of you have written about it, but you've got a generic peer average p multiple at 7x and the CPG peer average at 21x, and us blended into the middle. So ultimately, the goal is for a Consumer Perrigo to gravitate and be revalued up to the 21x.

We also sold our animal health. This is clearly a consumer business, but it was hard for me strategically to see how that fit in with our new self-care vision. We got a good price for it, PetIQ I think will do a fantastic job with it. It gives us net cash proceeds of $185 million, which is helping with the cash we have on hand to pay for the Ranir acquisition, which I'll talk about in a few minutes, but basically is an all-cash acquisition.

After portfolio reconfiguration on the exit side, not including Ranir on the entry side, Perrigo will be a $3.7 billion global consumer company with the opportunity for significant growth and value creation. It is a combination of both international -- it will be a combination of both 38% international, 62% Americas, 66% store brand, 34% national brand. Layer on top of that about $300 million in revenues for Ranir, it's a $4 billion revenue company. And Ranir is primarily an own brand company. But I'll talk about that in a more -- minute. And they're also global with these kind of same, similar splits. They have a big international business as well.

The New Perrigo is being built on financially and operationally strong foundation. It's a global consumer company, in 30-plus countries. It's a leader in market share, and the market shares are growing. And I've heard the questions before, "I don't understand, if your business is flat and the OTC end market is growing, and you keep saying in your earnings release, how can you be holding share or growing share if you're not keeping pace with the revenue growth? And the reason for that is simple, is that -- and you'll see it's one of our big challenges is, the retailers aren't passing all of the price on to us. But when you look at our volumes, our volumes are growing faster and the revenues that are being generated with our brands by the retailers are gaining share. So we just have to improve the partnership. Its' a big part of what today is about.

Financial strength. The company is a cash-generating machine, as it always has been. And operationally, we have trusted manufacturing and a reliable supply chain. And we believe that trusted component of who we are gives us the leverage to go into certain categories that seem foreign and may be a little bit shocking when I start talking about CBD and things like that in a minute, but we believe that we have unique credentials with everything here, to go after some of that.

So New Perrigo, $3.7 billion adjusted revenue, just under $600 million adjusted operating income. That does not include this morning's acquisition, so again you're going to add close to 10% on top of that across the board.

If you're listening, you could say, "Well, you're just selling RX, you're still not performing that great. You shouldn't get a multiple." And I agree, you shouldn't. If you're going to get a multiple of a consumer company, you've got to perform like the best of consumer companies and we're not doing that today. The average is 3% growth, we're flat. Our operating profits has been slightly down, adjusted EPS has been declining. The peer average has been sort of, I'll talk 3%, 5% and 7%. And we're more leveraged, they get more multiples.

So we need to look more like the right side of this page going forward, and I'll talk about how we get there. But we have the sort of step one, which is the transformation of the company. And then step 2, which is perform like the peers, which I'm sort of giving you the preview right now, that's the 3%, 5%, 7%. Add the dividend to it, 3%, 5%, 7%, 9%, all right? So that's what we'll be working towards over the next couple of years, and debt targeting around the 2.5x level. But that's the profile. And then when we get there, that should not be good enough, and you should demand of us that once we get there, to be at the very best of them and do better then, but we start here.

So how do we get there? I gave you this notion of the goose that lays the golden eggs. And that goose is, I'm going to call it -- I'm no longer going to refer to our Americas division as CHCA or International CHCI. They are now CSCA, and so it's Consumer Self-Care Americas and Consumer Self-Care International. So that may be new language to some of you who cover us.

But Perrigo's Consumer Americas business, getting that growing and fixed is job number one. It's 70% of our new operating income, it has stopped growing and it has lost margin. So that has to be where we start. So let's take a sort of a before and after look, right? This is pretty -- a couple of pretty critical slides.

From 2009 to 2015, 4 major drivers of this business: bolt-on acquisitions added $590 million of revenues or 63% of the growth; Rx-to-OTC switches were added about 9% of the growth; and innovation added 42% or $395 million of the growth, so that adds up to more than 100%. And it offset some negative pricing pressure that has always been on the business, and there are other factors here, lost share and all that, but that sort of that downward pressure on the business of $135 million has always been there.

But when you had the bolt-ons and you had a high level of innovation, you were able to keep it at a reasonable level and way offset it and keep the company growing to the tune -- it's small, but if you look at the top there. So during that period of time, the company had $1 billion of revenue growth as outlined on this page, okay? $940 million [value] and a 9% compound annual growth rate.

And that led to market share leadership in almost every key category: 65% of cough and cold, 90% of infant formula, 40% of GI, 90% of smoking cessation and 70% of analgesics. So big, strong company.

Then 2015 comes along, and if you look at that same place where the $940 million was, there's a $20 million for the next 3 years. So 0% compound annual growth rate, and when you compare it and you look at the lines, the $500 million of innovation went down to $55 million for a 3-year period of time. So almost disappeared or became 1/10 of the size per year of innovation that had been in the previous 6 or 7 years. Rx-to-OTC switches actually didn't go down. It went up just slightly, but it wasn't the biggest pieces. And bolt-on acquisitions completely vanish, right?

So your big new drivers, the big change was innovation, acquisitions going down to next to nothing and then you actually had a slight tick-up because with -- and in the absence of innovation, customers look across the desk and they say, "You have nothing else to offer, I want more price," right? You lose your leverage. So that is what has happened. I mean it -- you got about 6 months of analysis that gets into that before and after and how we had tackled that, and I'll go into more detail.

But that's the -- the key of it is ramping innovation back up and starting bolt-on acquisitions again. Because I can't emphasize enough, when I go into companies that turn around, I believe that the best way to make that happen is not to try to take tired brands and rejuvenate them, but to take companies that have had structural problems with a great company and get rid or simplify around them and get them going. And Perrigo today remains a great company and growing categories. With all of those factors that I said that existed for growth, with the exception that we've let the innovation engine bleed out on us over the past few years as we've focused on other [places]. But the categories we compete in are still growing.

So this is the compound annual growth rate. And just because I know there's somebody from Goldman here, I had to put this slide in. But there was a report that was just issued that talked about private label, and we don't call it private label, we call it store brand or own brand because that's how our customers talk about it. But in that report, it talked about the biggest it factors driving and impacting the consumer brands and the national brands in the CPG category, and it didn't have OTC, our brands in it. And when you layered in -- and it talked about the opportunity and how those brands were growing and the reasons why, and I just felt the need to say well, if you put in our Consumer category, we are the biggest on that list with -- and the most -- and the biggest profit pool, et cetera.

But despite all that, I'd still say a 29% store brand total share of MULO and that category growing 2.7%, the fundamentals on this category are still positive and they're still strong. So it's not the external factors that are killing us, it's -- we have no one else to look at but ourselves and we need to fix it.

Conversely -- and this is really important because we are going to focus for the next few years on the Consumer Americas business. That is where our primary resources are going to go. Our international business is performing way better than most people realize. We have a $1.4 billion mostly branded portfolio internationally. You can see a lot of the brands. We are market leaders in many areas. Svend will talk to you about it. These are the major categories that we compete in. But we have not done a good job telling you the CSCI story over the past few years. So let me try here a little bit.

It looks like, since we bought it, it's been flat. It hasn't been. What Svend has done and his team has done, is they have gone through and completely reconfigured this thing and cleaned it up in order to improve margins and put this thing in a position to profitably grow. So they started with the brands identified 3 years ago, which is 22% of the portfolio, that has now been exited down to 10%, down to 4% of the portfolio; going from discontinuing or selling off from 15,000 SKUs down to 5,000. So they've sold off 2/3 or exited 2/3 of the SKU count; have reduced [sick] countries, eliminated nonprofitable countries; and basically brought down headcount about 10%. And in doing so, drove the margins from about 11.5% to 16%.

And when you look at the core revenue, the blue bars here, the year we just exited was up 2.5%. And revenue from new products, their innovation engine is operating at a higher level, and the percentage of volume coming from new products each year is growing and they have a full pipeline, as you'll see. This is not the area that we need to focus on.

So the takeaway from this first section is we are committed and we'll exit RX, it will either be the end of this year, beginning of next year, depending on sale or spin. We also exited Animal Health, and we expect that to close in the next 3 to 5 months, something like that. We'll see how that goes through the regulatory process. And our goal is clearly to evolve and be a consumer-focused, self-care company allowing focus and valuation -- value creation for the investors from both.

New Perrigo will be a $3.7 billion -- after this morning's acquisition, $4 billion global consumer company building on our U.S. store brands core. Our goal is to unlock superior shareholder value. And to do that, New Perrigo has got to perform like a high-performing CPG company, which means 3%, 5%, 7%. Add the dividend: 3%, 5%, 7%, 9%. To do this, our first priority is fixing the Consumer Americas. Make sense? Clear? Whether it makes sense or not, you understand where the direction is? Good.

All right, let's talk a little bit about self-care. Listen again: Perrigo will make lives better by bringing quality, affordable, self-care products that consumers trust everywhere they are sold. Let me explain that. "To make lives better" is us giving our employees purpose. Everything we do, when we get up and our feet hit the ground and we can't wait to go to work for Perrigo is because we want to make a positive social impact. "By bringing" emphasizes our superior supply chain performance. "Quality, affordable" links us to our heritage and recognizes that we are the value leader.

"Self-care" gives us the freedom to draw the circle around the growth opportunities of this company with a wider net. "Products" defines us as a consumer products company, not a services company. "That consumers trust" places a huge responsibility on us to deliver safe, effective and socially responsible products. "in everywhere they are sold" plays to expanding global nature of the company and challenges us to capitalize on new and expanding channels.

If an employee in Perrigo cannot see themselves in this vision or what they're doing in that vision, they don't do it going forward. So I can't emphasize enough that great leaders always, and the best companies that you follow, have a simple vision and purpose that everyone in the company understands to keep them on track for growth. And this is ours: To make lives better by bringing quality, affordable self-care products that consumers trust everywhere they are sold. I won't quiz you on the way out. I might. If you're an employee, I definitely would.

Why self-care? A lot of factors. The rising of millennials, new technologies, rising health care costs and the fact that we already are a self-care company once we strip off RX are the primary reasons, but let's dig in. We define self-care as not just treating disease or when somebody is sick and helping them feel better. The biggest portions are to expand. It's about not just their health, but their health and their wellness. To prevent or treat acute or chronic conditions that can be self-managed and monitored, to utilize products that have therapeutic benefits, to actively -- to encourage people to actively pursue a lifestyle that allows individuals to stay free of the disease and to empower them to proactively direct their own care.

A couple statistics. Consumers want to be in charge of their own self-care, 88% -- this is a study in the Selfcare Roadmap, Global Market Development Center -- 88% of individuals see self-care as an important part of their lives. 47% want to direct their own treatment. Some really cool statistics. 33% of consumers have increased self-care behavior in the last year. 250% increase in Google searches for self-care over the past year. And in 2018, Apple's app store named self-care the breakout trend for 2018.

It's driven by millennials that do not want to go to the doctor and are focused on health and fitness, premium bespoke products, vitamins, minerals, supplements, natural products, and at the best value, not just the lowest price. And they have technology like never before to help them be able to manage their own care, and we will play a role in that going forward as well. Some things I'm not willing to talk about today, but you'll see us get involved in technologies that helps consumers pursue self-care. And why? Because I don't care once they get to the store and they start to look at those products, we will have a solution for them in every category. So I don't need to go try to sell a product. I need to sell self-care and wellness and value. And from there, Perrigo will benefit. But there are -- this is just a couple of examples, but there are just tons of technology out of there.

The other major force that's coming is that there's a huge opportunity, for retail to take advantage in self-care. The trust in the health care system is continuing to deteriorate and this is a study done by -- this Global Market Development Center is funded by major manufacturers across pharma and consumer, and it kept coming back with the same answers, 9 out of 10 consumers want retailers to be more involved in their personal wellness. 46% of consumers have visited a retail clinic in the past year.

More and more retailers -- you see the models that are going on in CVS right now and all that in self-care centers. And they look something like this, the MinuteClinics, where there's a whole host of discussions and services that are now available to you that are being expanded. And I promise you, I just came back from National Association of Chain Drug Stores convention last weekend, you couldn't sit in any area of that in any restaurant without people -- hearing people the word self-care and talking about it and where they're going with it.

When I go to Ireland and I sit down with the Chamber of Commerce, there's brochures over there about self-care. When you look at insurance companies, they're starting to try to incent and reimburse for people to -- for OTC types of products. But it is a major -- it's not a trend, it's a megatrend. And it recognizes the fact that every dollar spent on OTC meds saves $7 for the U.S. health care system and the cost of health care isn't slowing down anytime soon.

So is this a big change for Perrigo? No. This is what we do. It's an evolution. It's an evolution from treatment to treatment and wellness. It doesn't sound like a big change, but it opens up huge opportunity for us. It's a commitment to Quality Affordable Healthcare, where we were before, to making lives better by bringing quality, affordable self-care products that consumers trust everywhere they are sold.

New Perrigo is already a self-care company, you can add oral care to this. But these are the categories we already compete in, in self-care. I mean there are none -- there's a couple tiny little places around the world that don't fully fit, and we'll continue to work on our portfolio. But once RX is gone, this is where we play, and we add oral care. And while we're mostly -- I guess the point is if you look at this, while it crosses a large spectrum, it's still today mostly focused on treatment products. And going forward, we have the opportunity to push wellness and prevention a lot harder.

I'm trying to quantify that, IRI published in the fall a self-care study, a massive study where they came back and concluded that it was a $450 billion mega opportunity, and we are focusing on categories that fit us. So self-care adjacencies that are attractive and growing, that fit with our business strategy. And we will only enter where we have the right to win. So speculation on things that are low margin and all that, I've already told you what our right to win is and what we think that is, that will sort of define us because it's got to meet the Perrigo formula just like this morning's acquisition announcement of Ranir does.

The vision, as an example of a couple categories that I expect 3 or 4 years from now will be in all of these. Nutritional drinks, probiotics. Oral care, checked that box this morning. Vitamins, minerals and supplements, I know we did it once before. That's my sort of banned taboo, you're never allowed to walk into my office and tell me we tried that before and it didn't work. You can only walk into my office and tell me we tried that before and here's what we learned from it and here's how we'd do it differently this time, because it obviously makes sense for the company.

And we will be entering CBD as well, but we will be doing it in a very unique and responsible way, and we're working with those partners as well because we think that the FDA in this and in vaping are looking for a responsible partner who that -- they can sort of take on the challenges of the wild, wild West that's out there in a lot of these categories, and we believe we can uniquely be that solution. It's not imminent, but I need you to know we're thinking outside of the box, and you'll hear a lot more about that.

So takeaway there. Self-care is on trend and here to stay, and the opportunity is massive. Perrigo is already a self-care company, and going forward, Perrigo will expand into wellness and prevention. Clear? No one's going to ask me anymore, what's self-care? Promise? All right. Next.

Lessons learned. All right, 4 lessons learned inform our future. Lesson number one, Perrigo will continue to face headwinds. That's not going away. That pricing dynamic that I talk about has been there forever. It's -- you can sort of -- it can be a little less and all that, but it's part of the business we're in. It's not going away. But more emphasis on innovation has in the past, and can, offset that pressure. Second, Perrigo has and can successfully participate in close-in adjacent profit pools through both organic entry and bolt-on acquisitions, to accelerate growth and also to allow us the time to ramp up the innovation program.

The breadth of our product portfolio will continue to be a competitive advantage. We will -- but while that complexity is sort of one of our core competencies, let's call it, organizationally there is truly an opportunity to simplify a lot within this company to help us recapture the Perrigo Advantage. And fourth, in this new environment, there are capabilities needed, investments that must be made, in order to take advantage of the lessons learned.

Let's take them one at a time. Lesson number one, Perrigo has and will continue to face headwinds. There's a couple of key insights, and I'll do this with every one of these and you'll see it in future presentations, too. But the key insights from lesson one is that recent innovation has not sufficiently offset market headwinds. Perrigo is good at this. We know how to innovate. We just took our eye off the ball for a few years. We'll ramp it up and we'll do it quickly. We must and will invest in innovation to drive new growth vectors, both in the Americas and internationally.

So as stated, recent innovation hasn't sufficiently offset market headwinds. It was only a couple of years ago that we were ranked, in 2014 and 2015, as the world's -- one of the World's Most Innovative Companies. And if you look over the past few years -- or during that period of time, excuse me -- the amount of innovation we [hit] covered the downward pressure by 150%. Now it's only covering 30% of the downward pressure. It's a complete inversion. It had 3x -- and no pun intended by inversion. The -- so you went from the 150% conversion to a much smaller number. So it's not a question of whether there's innovation. It's a question of whether there's productivity. And I'll go into more detail on that in a second. But it's clearly dried up. I mean that is a very noticeable difference.

If you look at, though, where we innovate and how innovate, we do it all across the board. Line extensions and value-adds, these are just some samples of them. Within our 2018 revenue from products launched over the past few years as new innovation, line extensions, value adds, were $140 million within our sales last year. From -- again, from a period of time beforehand, if you look at how much of the revenue came from Rx-to-OTC switches, we had $160 million. If you looked at the international brands and the innovation on those, it was $280 million. So we know how to innovate and we know how to innovate across the different things.

But this is -- jump the gun a second on it -- but this is the issue right here, where we have a -- we have the funding, but we're not getting the yield that we were getting. So from 2010 to 2012, about 5% of our volume every year was from new product launches and organic innovation. That dropped down to 2%, it came back up to 3%. But that level is not sufficient. And all the while, along the left-hand side of this chart, our R&D spend did not decline. So we're spending just as much money, which means the amount of new products revenue we're getting per launch has come down like two or threefold. So that is a critical element which says, you've got to identify the bigger ideas and place your bets on the bigger ideas. There's nothing wrong with having a certain level of singles, but you have to have some doubles and triples in there like the company had, had in the past.

So we are working very hard -- and I won't do as good a job as Jim, our Chief Scientific Officer, will do later, to say that the way we're approaching that is to break out new organic ways of growing, new vectors of growth. And that is a big part of this consumer self-care evolution. The old way was very FDA, pharma-driven. It's either a monograph or it's an ANDA, and that's it. Now the additional path -- and by the way, it was primarily driven by a concept, the national brand equivalent. You guys know this industry better than me, many of you. But NBE is the way that's talked about a lot.

The focus going forward will be -- we'll have some national brand equivalents, but we want to be national brand better and we want to be national brand different, which then doesn't require an NDA or an ANDA, but allows us the flexibility to innovate. So we'll talk about a couple examples of that in a minute. But we are adding to our portfolio, as a vector of growth, national brand better. We are adding to our portfolio of growth the opportunity to lead our own Rx-to-OTC switches, which have slowed way down in the last few years.

There is a gap in the Rx-to-OTC switch market right now. We think some very big ones are coming 4 or 5 years from now with ED, with oral contraceptives, but there is a gap in the window today. And with that, we think we can lead the way -- there's a lack of sponsors on some available switches out there, which is why we paid [$15] million to buy the rights to the NASONEX switch. So it'll take us a couple of years, we're not experienced at this. We've already been approached by 6 or 7 other companies to do the same thing because they're -- a lot of these pharma companies have sold off their consumer divisions, so the opportunity exists. And once we prove it out, that can become an additional vector of growth.

We're signing joint ventures and licensing agreements. We will likely joint venture on CBD. We will have already signed a licensing agreement this week in the naturals market with a very big global national brand, and that'll be -- Jeff will talk about that in a few minutes. We have the opportunity. And up until recently, there was no dialogue between our international division and domestic division from an R&D and innovation standpoint. It was all decentralized. It's now all been centralized under Jim. So there's opportunities for a number of those products that you see there and applications on U.S. within our new strategy.

So those are just some examples. We also are making investments in technology. But to achieve this, we maintain our robust $130 million global R&D spend. We just get more bang for the buck. We don't need more there. We do need more money in certain areas of technology and marketing, et cetera, and we've increased marketing support this year, $25 million was in that 2019 plan. The plan has a good level of some of the traditional innovation, starting up some new innovation and investments to win. Again, that will be detailed by the guys.

But for sure -- and I don't want to give you the impression we're all of a sudden go out and be a branded company. That's not the goal. Even on the NASONEX one, the goal isn't to go out in the U.S. and be a branded company. It's to get more switches going. So we can do them both and open up that avenue of growth. But if you're going to do that, it takes a level of investment in advertising and promotion that we haven't had in the past. It doesn't happen day 1. It's probably a couple of years to get that through the switch process, but it's going to have to be launched with advertising. And natural products on a branded basis has advertising behind it. So we're starting a number of those initiatives now, and we also have to have the analytics to be able to do that. So that takes some investments as well.

Move on to lesson number two. Perrigo has and can successfully participate in close-in adjacent profit pools through organic entry and bolt-on acquisitions. So adjacencies have been a growth accelerator in the past and our team -- NiQuitin has been a great platform for us, organically. Infant formula was a great example of bolt-on. Those 2 examples still represent significant growth potential. And Perrigo should and will and did, this morning, pursue additional adjacencies going forward. Adjacencies have been a growth accelerator for us in the past. And we've pursued adjacencies across multiple vectors.

New categories, as I just said, nicotine and infant formula, proprietary products with -- as seen here Omeprazole, new price points with ACO, new technologies like Foams, new channels like Basic Care with Amazon, new geographies like Quifa in Mexico. So we understand adjacencies, and we'll be pushing forward. Adjacencies are a proven and repeatable model. We've been able to enter adjacencies both organically and inorganically. We just stopped doing it in the U.S. and adjacencies can accelerate growth in the core.

Example #1, nicotine. This is -- I'm bipolar on it -- on the one side, I look and I say, "$290 million of revenue, 8.6% compound annual growth from '10 to '18, we have like a 90 share. We're bigger than Nicorette." It's been a great success. On the other hand, I say, "I just came from the tobacco industry where I used to look at this, and it wasn't even a 32nd point -- it didn't even get into my evaluation, it was -- we considered it so small and so insignificant.

And here, you have vaping products and the like that are going out creating multi-billion. JUUL , who the FDA is furious with, is -- gets an investment of $13 billion for 1/3 of the company. So you're valuating it at $40 billion, and it's $2 billion or $3 billion in sales out of the chute, and we're happy with it sort of this level of growth. Not me. I think we have not scratched the surface on nicotine replacement as an industry and left ourselves vulnerable to this competition in a small segment.

So for us, we are -- we've had great success. Jeff, more power to you. You grew it from $50 million to $180 million. That's outstanding. But I just think, going forward, we have to think bigger, and you'll see we signed a letter of intent with a vapor-dosing technology company. Jim will talk about it more in a few minutes of how we can be the responsible solution for the FDA to counter what's going on but giving consumers what they want in a consumer-preferred form, which is an example of the mindset difference that I'm trying to explain today in going -- being a consumer company, right?

Gum, super. Satisfies a lot of people. It did nothing for me. I quit tobacco when I joined Perrigo. It does not work for me. It's not understanding the consumer insight.

A new channel example. We're growing like mad in e-commerce, and Jeff will do a great job talking to you about it. But we've seen significant growth. We're only scratching the surface. All of our customers, again, I came back from NACDS, and it was in every meeting. It was how can you help us. How can you help us customize? How can you help us be there? And if you go on Google anytime, you're going to see our products all over the place in this, and we don't see this as threat. We see this as opportunity for our company.

Next one, infant formula. Again, this was an inorganic bolt-on that's done great for the company, $350 million in revenues, grew at a 6.2% compound annual growth rate, and then we ran out of capacity. And we said that we're not going to invest because it's super -- talk about moat. It is super expensive to invest, to upgrade and add capacity in this category. And we were making investments elsewhere, and this got neglected, and we let shares slip off, and we didn't meet demand.

So going forward, we will be investing and investing, I think with the release this morning we said over the next 3 or 4 years, it'll be about $200 million to upgrade our infant formula to unlock latent consumer demand. In tablets, we're investing another $50 million. You don't see the growth, but we sold 4 billion more tablets last year and are now running 7 days a week, 24 hours a day. So we can meet our projections, but we just can't meet a single surge. When you have -- when you're running flat out all the time, there's no chance to build and handle surge capacity. And that's being -- that's happening very quickly.

But our volumes are growing robustly. It's not a question of whether consumers are buying our product. The demand is there and all that. It's getting enough innovation so that we can capture more of the pricing going forward.

As announced this morning, Perrigo is acquiring Ranir, the leading global supplier of private label oral-care products for $750 million.

When you get to know this company, you're going to fall in love with them the way I've fallen in love with them. They have great leadership. They are 25 miles -- 20 miles down the road from us. It's a number of Perrigo people that were involved in the original starting of this company. It's the world-leading producer of oral-care, store-brand, own-brand products. They are -- everything about -- this leader who runs it, the CEO, which I hope you'll meet in future presentations, it's like he's so aligned with where I want to go in this company, and he's a year or 2 ahead of where we are right now.

But 2 or 3 years ago, he joined the company, and this is a company that's grown 11% a year for 10 or 15 years, but went down this path of national brand -- better national brand, different customization, being real partner, getting away from price discussions, and it has -- and really being a consumer company, and it is not for this acquisition. There is self-care language over -- all through this company, and they get it, and they are completely aligned. So I'm very excited what this does to us besides adding nearly 10% to the consumer business in revenues and earnings. It's under that number, but it's a big play for the next couple of years in impact. '18 was $287 million in sales. Their store brand penetration is still low. Given that, their net sales growth has been 9%, and they're about 30% of the sales outside of the Americas. And Jeff will give it more detail.

But I just can't say enough of that. The alignment, where we're trying to grow and how they see this, but you should start hearing from me now: nicotine, infant formula, oral care, naturals, CBD, as new sectors, vectors, focus areas of growth for the company, of which there's plenty.

Lesson #3, the breadth of our product portfolio continues to be competitive advantage, but we need to simplify, simplify, simplify. The store brand advantage, we offer manager-wide. I mean it's an advantage for us to walk in and say we have everything, right? And we can customize, and we can service it, and you're a one-stop shop, and we're going have supply. And you don't have to worry about that. That's one of our great strengths. So we want to customize. That's -- and retailers -- keep in mind, WalMart's brand Equate is the biggest OTC brand by far in America. It's 3x the size of Mucinex or 5x the -- it is the biggest brand out there, and they view it as a brand and their brand, and they look as us as a partner to help compete and compete against other brands. And they want to be unique and different. They don't view the category as a generic. They view it as a real major source of profit with high margins, and we're their partners to make that happen.

Internationally, we offer a wide array of local heroes as our strategy. So we're not a lot of pan-European brands, we have some. But for the most part, we have in every country we compete in a number of #1 or #2 brands. We'll talk about that. But the ability to handle product complexity, while that's a competitive advantage, it has caused a lot of challenges for this organization. So we want to keep the Perrigo advantage. We're not trying to get rid of the product or streamline -- dramatically streamline the product advantage, it's the company we are. But we have to be very efficient of it. You heard me talk about service. It's a major priority for us. You'll hear about it again later today. It's getting way better as we speak. Our quality has to come -- because these are the pillars of us in the U.S. We've got to be great at distribution and service. We need to be a partner in sales and marketing. We have to have the best quality. We have to leverage our scale in R&D and regulatory. And we've got to be able to source and manufacture more efficiently than anybody else.

Our complexity is enormous. When I walked in the door, I'm like, "Heck, I was at 98%, 99% service," and I'm like -- Jeff looked back at me and he said, "How many SKUs did you have?" I'm like 5. 1 plant, 5 SKUs and he's like, "Okay. Well, we have 26 manufacturing facilities, 49 billion doses a year, 17 billion liquid doses, 3,000 formulations and 13,000 SKUs across a broad range of doses and forms, and that is what builds a moat around this company. Our company -- our customers value it, but every one of them looked at me and said, "As soon as the discussion moved from innovation, there was no discussion of price." They want to innovate. They want to be unique. They want to be different. They want to grow these categories, and you can see it in a variety of comments. But that's what customers are looking for.

And again, just to repeat what I said, we have a wide range of local but whether it's -- we're #1 in personal care with Lactacyd or Physiomer in a number of countries, which is cold -- which is like a saline -- a natural saline solution or NiQuitin, which is a branded nicotine cessation product, et cetera. We have many, many great brands across Europe. And by the way, people are like, "Well, do you have any expertise in the company to be able to do some of these consumer things?" When I sit in Svend's groups, and I ask people where they're from, they're all from P&G, from GSK, from J&J, from all the biggest company -- consumer companies out there. So I mean we have the talent in this organization. We also have a lot of complexity. We have 30 enterprise systems. We're in 37 countries, which up to a few years ago we weren't anywhere near like that. A lot of it was decentralized, and we're trying to make a lot of that change right now.

The tax structure has -- it's all done in -- done well, and it's thorough, and we've had these massive multibillion assessments that we ultimately believe we'd win, and I don't want you to take away from this that everything isn't done proper, but it's complex. So we need to simplify this organization.

Our supply chain, we have -- we're an inverted company. We have people that are sitting in Ireland, where we've centralized a lot of supply chain managing a very complex business. I just sent -- showed you in the U.S., and it's caused issues for us. We've lost in the last year $40 million of business, lost revenue or service-related fines. There are other costs and overheads, I'm sure we're getting our hands on that. And I think we have over -- when I've torn it apart, there is north of $70 million across the world in consultants that are helping to manage all of this complexity. We need to give the systems. We need to simplify things. Those kind of cost need to go out of this company, and it will, and we've set a target. And we have a line of sight to $100 million of cost savings, which will be used to help offset the dissynergy. Those are real numbers. If it only ends up being $100 million, I will be disappointed, but those are the numbers and starting next year that we go and we'll give you updates along the way, and you will measure that by looking at our operating margins because when we separated RX, as you'll see later on in the presentation, with the remaining corporate unallocated overheads, we shrank to a margin level that is well below our consumer peers. So the progress -- this has to be a key driver of how we drive back operating margins to acceptable levels.

I do that okay?

Lesson #4. In this new environment, capabilities will be added and investments will be made in order to take advantage of lessons learned. We need to invest to improve, and we need to make up for delayed investments in key enablers of our business.

So there's actually much more than this but just to give you a general, there are sort of big buckets. A lot of the organization has international -- was added on as -- there were silos that were built within the company. It was very different than the years when Perrigo was really shining. There was siloed R&D, siloed purchasing. We had innovation capabilities, but they weren't shared. There is a lack of consumer business intelligence data, and I'll show you a chart on this which will surprise you a little bit. But it's the same kind of data that I'm used to and the analytics that I was used to in the consumer companies that I have come to before doesn't exist.

Now there's a big reason for that. So before I even show you the numbers, the reason is, is retailers don't release their data to us. So I'm like, if I'm a national brand, I have -- I go to IRI and I buy my brand and all the remaining brands and all that. I can do all analytics. I can do all the causal data. I can do any kind of predictive analytics I want to do. When you're a store brand, and you're one of their suppliers underneath, they don't let us know what -- they won't share the data under -- of anything other than the highest level of store brand. So that makes it very difficult to do those analytics because I'm competing against some of those other store brands for market share, but I can't break it to that level because you can't see it. But we will going forward, even if we do it manually.

So we are -- we have signed contracts, and we are working with the largest -- one of the largest players. Jane, you know who I'm talking about. And in the industry I came from, we will go through and we will do audits, and we will -- we can tell which is ours and all that. And even if in the beginning it's manually, we'll be able to get that level of detail. So we can have all of that level of analytics, and we will ramp up our consumer investment in the U.S. with consumer research insights investments.

All right, I need to have data, so we just won a very big piece of gum business back where a major club customer had kicked us out a year ago and substituted us with -- they wanted to vertically integrate. They wanted to go at -- their business plummeted 15% or 20% because the product that they replaced us with was not good enough. And I came upon this because I started showing our gums when we came, and I'm like, "What the heck's going on?" And Jeff's like, "That's not ours.' And I'm like, "Well, how in the heck would I know that as a consumer?" I went to one place, I bought a store brand from the same company. I go to another place, and it's terrible. I'm just going to go -- if I'm acting like a consumer, I go back to a national brand. We have to have the consumer insight data, the product testing, to go in and say, "Ours is preferred 2:1 and that's why your sales have fallen off." And we have, and we have won the business back and -- but with all of it, we need to come with that level of education.

In order to do that -- another area we've driven a lot of change, and this is a big chart, remember, we're a global company. But basically, what this says in the 6 months since I've been here, you've turned over 40% of the leadership team. I mean this is the global leadership team for the company, including RX. But if it's in blue, that means that we have either brought somebody in. If it's got an asterisk, it's an exit from the outside, or we have moved somebody in the company to put them on the right seat on the bus to be able to have the most impact for us. And so the point is, we're making a lot of change. We are investing in the business intelligence as I just talked about, and I'm not giving a whole lot of detail, but if you -- there are ways to evaluate where we stand analytically versus the CPG peers who I want to be benchmarked against, and we're at about half their level in analytical capability, and you can read the footnotes on it. We're not analytically impaired. We're not 0. And there is no CPG company at analytical Nirvana. That's Google, that's Amazon with all their sophisticated algorithms and all that stuff. But we need to ramp up to -- in order to get the kind of growth that we want. And those investments are also in that 2019, that projection that I showed you.

Joe Nuzzolo is sitting here in the room. He is who I brought in to make this happen. We've worked together before, but we're forming a global master data repository. We're integrating our global ERPs and making massive changes to our SI&OP organizations.

So the takeaways from what you -- I just went if you -- so it's not lost on you. I told you when I was joining the company, that I needed to push off the Investor Day because I needed time to be able to get not only the strategy right, but I didn't want it to be talk, I wanted to come in here with a real set of actions. So while we're still at the beginning of the beginning of really transforming this company, it's not -- the beginning isn't in the future. It's started. It started during this quarter in a meaningful way.

In 2019, we'll spend $1 billion in converting this company from a healthcare company to a consumer self-care company. And it's not hard to get there. It was a $750 million acquisition, $250 million in capital, $50 million in -- you saw the numbers. But it's $1 billion, and it's billion -- almost $1 billion in cash.

Ramping up innovation on the core, expanding adjacency with focus on oral care, nutrition, nicotine, naturals and CBD. The Ranir acquisition does 2 things besides a spectacularly aligned company with growth potential. It also provides a bridge while we ramp up our innovation program because it's of scale, it's adding 8%, 9% over the next year. So it allows the company to show real and meaningful growth. It's accretive immediately to earnings. It's accretive immediately to margins, accretive immediately to everything.

Well, you see us streamlining our organization, and we are investing in capacity technology.

The plan to recapture the Perrigo advantage is in place. So just to recap what I walked you through and the guys will give you details, we will, by the end of the year, beginning of next year, sell or spin RX. Animal health is sold. We need to complete that deal, and we will focus on self-care. We will invest $200 million over the next 3 to 4 years on the base plan in infant nutrition and tablet capacity, plus launching new products within the plan, and you'll see those full base plans after the break.

We've done a significant bolt-on acquisition already, and we'll continue to evaluate more. We're investing in technology. We've signed a major licensing agreement in natural and a letter of intent on technology and invested $25 million in marketing for future brand launches.

We've replaced or promoted or redefined positions for 40% of the global leadership team. We've established a transformation office. We've centralized R&D. We've centralized purchasing and quality and we've created an innovation team.

We have a new $100 million cost savings program in the plan for the next 2, 3 years. We are taking our cash and our animal health and, eventually, our RX proceeds. And we will use that as Jobs 1 and 2, getting our debt to a level in line with consumer peers and making M&A as it sees fit. We'll continue to invest in dividends. We just raised our dividend 11% in the last couple of weeks. And when it's right and it makes sense as a complement to the plan, we'll do share repurchases.

But right now, priority 1 is getting our debt level down.

And ultimately, we need to perform 3, 5, 7, 9, is the goal. The growth has to be outsized in making that happen in the beginning. If you'll sort of walk with me for a second here.

So I'd say this happens at the first of the year. I told you if it was a sale, you're taking out $1.10 to $1.20 off of $4 -- roughly, you're taking roughly 25% of the company's earnings out. The 3 big initiatives I showed you between the M&A, the cost savings plan and normal business growth gets you back over that first 2 to 3 years, back to that same level. We want that to be trading not at 10x. We want that to be trading at 21x. And hence, the value creation and from there going forward, there's 3%, 5%, 7% and your 9% with the dividend.

So that means the growth, I used outsized growth in the release to say for the first couple of years, once you take that out, any of those big massive restructuring programs, to get you back to the $4 you've got about 40% growth in the first couple of years. And then ongoing we align, and then once we've proven to ourselves we can do that, then we'll want to be in the top quartile and all the like, okay? That's the way the whole plan comes together.

Today's just the start. But we didn't walk in this room talking, we walked into this room with action.

Listen one more time. The new Perrigo will make lives better by bringing quality, affordable self-care products that consumers trust everywhere they are sold.

(presentation)

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Murray S. Kessler, Perrigo Company plc - CEO, President & Director [5]

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Let's take a break and come back at 9:30, and my team will take you through some more specific details. Thank you.

(Break)

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Bradley Joseph, Perrigo Company plc - VP of Global IR & Corporate Communications [6]

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All right, everybody, if we can make our way back, please. We'll get started with the second half. Thank you.

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Svend Andersen, Perrigo Company plc - Executive VP & President of Consumer Healthcare International [7]

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Good morning, everyone. I hope you appreciated the video we showed just before. The video really resonates with me because it really represents what the CSCI business is all about. It is a true self-care business, reliable on very, very strong brands.

My name is Svend Andersen. I've been with Perrigo for around 2.5 years. I would like to leave with you with confidence in respect to the CSCI business can deliver solid, profitable growth going forward.

First of all, by leveraging our diversified brand portfolio, both offline and online but also as we're going forward, introducing new brands; and secondly, also by fueling our evidence-based innovation portfolio and all of that through our existing, very strong, pan-European commercial footprints.

We are, by the end of this year, finalizing a 3-year turnaround plan. During this period, we have improved our operating income ratio by 4.5%, and there's more to come.

But that makes us also ready to execute on Murray's 2 to 3 years growth transformation plan as laid out. But initially, I would like to give you a snapshot of our business. It's around $1.35 billion business where 80% of the business is own core brands, which is really brands that relies and has strong IP, either in the form of patents or clinical trials or trademarks.

Those core brands, when you isolate from discontinuous brands and businesses, we're in fact growing by 2.5% from '17 to '18 on a constant-currency basis and also improving market shares at that point of time. And if you take various external sources, the Western European market is predicted going forward to grow at around 2%. But then also if you add the Central Eastern European market, they are predicted to grow approximately at the double of the rate.

We have undergone a significant streamline of our products and brand portfolio, leaving us left with 225 strong brands. We have exited the 4 markets. So we're really focused at around 28 markets. And most of that is really taking place in Europe. We have more than 1,100 competent people in our commercial organization, whether it's pharmacies -- through pharmacy reps or whether it's key account managers, it's marketeers, digital experts or e-commerce experts here.

Normally, in the given markets that we operate in, we are looking at getting at 80%-weighted distribution, which typically is equivalent to getting 50%-numeric distribution here. And that results in productive partnerships with 125,000 pharmacists in Europe out of the universe of 200,000 here.

We do see double-digit growth in our e-commerce channel, one of our biggest growth levers in the future here with more than 5% right now in respect to percentage of net sales here.

And we have above the market norms in respect to new product sales in a given year, and we're actually doing significantly better than 5% indicated on this slide here.

Since 2017 and '18, we have made significant operational investments in the centers of excellence, whether being e-commerce, marketing, digital, sales force effectiveness and key account management and also innovation. All of these, which is fundamental for delivering growth going forward in our 3-year plan here.

We have on this map ranked our positions in Europe, and we occupy many top 5 positions. But you will see the rank we have either is 1 to 10 or 10 to 20. That doesn't mean that you cannot get the same operating profile if you're #15 versus a #5. And we have organized ourselves in larger clusters really associated when there's brand overlap or customer overlap, but we have not yet really pulled out the efficiencies in respect to back office efficiencies as we're going forward. But we are a true pan-European player, and we are positioning ourselves as the preferred partner, both from a customer point of view but also from an innovator/incubator point of view. If you're looking for a development upstream partner and a commercial downstream partner, we want to be the preferred choice here.

You take various sources here but consensus will say that we are a top 10 player, and we are actually the top 3 fastest-growing OTC company in Europe as we speak right now.

Our strategy is built about an operating model that has 3 pillars, and the next 6 to 8 slides, I will cover these various pillars. Our core brand strategy, which is associated by nursing our 20 top brands, which is equivalent to 50% our revenue but the same innovations behind those brands are supporting up to 75% of our total business.

A totally integrated consumer-centric innovation and marketing model that has delivered high profitable return of investment in a very predictable manner here. And lastly, our channel execution strategies, which in my opinion, is a rather unique go-to-market model based on a sellout performance-based operation where you're optimizing distribution, visibility and recommendation also through comprehensive training of the pharmacist. And I will share how that fits, the philosophy also works when you work with key account management, with buying groups where you're not allowed to visit the individual pharmacy but everything is centrally organized but also, likewise, the channel play within e-commerce here.

So on the left side, you will see the strategic categories that we're operating in. So we have the traditional registrated OTC product within cough and cold, allergy and analgesics.

We also have a rather unique category, which is called lifestyle and associated cost to the prevention of lifestyle diseases. That could be weight management, also associated prevention of diabetes and sclerosis. It could be in IT associated with the prevention of certain cancer types. It could be mental health, prevention of stress and even natural remedies in lowering cholesterol levels here. But this is really unique for us, and this plays very well with the e-commerce opportunity going forward here.

Then we have a larger category within personal care and derma-therapeutics, which is really growing fast and doing outstanding here.

And then up top, we have the traditional vitamins and minerals and supplement category. But keep in mind, a large proportion of this is also naturals. Many of them are either registered as herbal medicines or as ordinary supplements here.

And then we actually have a number of really interesting strategic pan-European niches, which are highly profitable alongside with our local brands, which is also in this category. These brands are really appreciated because they are in line with the trends of being local and personalized.

And you see the distribution in the middle of the chart and as I mentioned before, 95% of this business is carried out through Western Europe here.

So Murray showed on the top of the presentation here that we have a number -- either pan-European, regionally or local top 3 brand positions here. But let me just give you a few examples in respect to a brand within cough and cold called Coldrex, where we have the traditional OTC line, but also we have a flanker line of a natural solution here. XLS, the weight management product, is a complete natural solution here. Within derma-cosmetics, we have a sub-brand which is for the prevention of eczema or the relapse of eczema.

We have a number of prevention plays within vitamins and minerals, including also natural solutions. And then we have at the end the pan-European brands here. But 2/3 of our brand portfolio plays well with the self-care agenda, either being wellness-oriented, natural or prevention-oriented here.

And this is just one example where out of a natural product line where we have 5 different product streams, either as decongestants, sore throats, allergy, sinusitis or cleansing products with unique medical devices, rated as medical devices with clinical trials, with detailing materials to health care professionals, including pediatrician, with outstanding in-store materials and also boosted with advertising and promotion.

But from a strategic point of view, the way we bucket our innovation is -- on one instance, plug-and-play where you have a unique hero product that we, with our diverse brand portfolio, can actually launch the same product under 6 other brands, which is highly accretive for us and also solves our complexity issue.

And then also what we're doing is, we are taking strong brands and stretch them as far as possible, from cough to cold to sinusitis or even to prevention here.

And then of course, we are constantly looking at superior technology, with clinical trials and even to get to stronger claims here. We are conducting clinical trials as a key part of our new product development strategy, both for existing and new products but also for existing customer segments and new.

And then constantly, we are looking for new natural alternatives as compared this is also to the classic OTC products here. But even combining it -- and there's 2 examples where you have a sleep aid as a registered OTC product with a flanker natural product and similar on cough and cold.

And then I think we are ready to dream bigger and look at some of the innovation that Jim will talk about later on because our infrastructure after the turnaround is ready.

We see high return on investment of traditional TV advertising. We have with our focus strategy, in fact, reduced our advertising promotion budget by 15% over the last year, whilst our core brand, in fact, have been growing by 2.5%. But the convergence into digital media, of course, is going on fast. But the real trick here is to get a magic balance between traditional TV commercials and the digital media.

If you moved from the brands to the innovation marketing-centric model into the channel play here, this is just another example of a household brand in the Nordics, which is the largest where we are seeing disproportional growth in the younger segment through new product development but also from a complete pure-play e-commerce. This is linked to using influencers and digital marketing.

So to summarize the channel play here, we have 125,000 valuable partner relationships here, giving us the 80% distribution here where we're using the same philosophy of achieving distribution, visibility and recommendation with the buying groups, which is, of course, consolidating more and more in Europe. But similar on the e-commerce side is the same philosophy to optimize search and traffic by creating visibility and recommendation that applies, but with just -- with different techniques.

I would just like to give you a few case studies because we have 12 out of our top 20 brands, which is growing faster than the market, and thereby gaining market share. This is one brand that we acquired that was declining. Now, it's #3 in the nicotine replacement market, where we focus really on a selected product strategy on a clear patch and mini-lozenges, sorting out the in-store fundamentals and then boosting, in this case, with 15 different real testimonials in the various European markets here. And we are seeing 15% compounded annual growth here.

This is the other example that I mentioned before. A French natural product where we see growth of around 9%, really associated with great innovation for the specific category, supported by clinical trials, making sure the health care professionals are in place and also lately supported by TV advertising, which is showing promising growth here.

And just revisiting the household brand out of 1939 where we refurbished all our 250 SKUs, we are expanding in all the categories in the dermatological area, seeing a growth rate of around 17%, strongly supported by retail pharmacy activities but also to the younger audience through influencer marketing.

And then the last example is an acquisition of essentially Eastern European-registered cough and cold play, where we see growth of around 12%. But really understanding consumer insights, looking at various targets and then do smart stretching, ending up in promising results here.

So to sum up, I would like to leave you with the fact that we have a very strong European presence here also with the essential local market knowledge here. That we are combining evidence-based products with strong brand communication and then really having a strong R&D innovation group that are supported by a very strong regulatory -- international regulatory group with strong local regulatory staff here also to secure market access and also stronger claims here.

And then superior sales execution, both to pharmacy, to key account management setup but also through e-commerce here.

This leaves us with an outlook for 2019 with a predicted growth for the first time for the entire business of 1% to 2% versus 2018 here, focusing our A&P investment 90% behind our core brands where we do see that we are growing faster than market, hence, are gaining market share.

We have a record high in the year, new product sales of $80 million, which we are really proud of. And we feel confident in respect to the double-digit growth that we have in e-commerce and how our portfolio is positively biased to e-commerce because they are lifestyle-oriented and also associated repetitive usage.

And then we'll continue in optimizing our targeting and segmentation in the pharmacy segment going for the 80%-weighted distribution here.

So to sum up, CSCI is growing and will grow as a brand of self-care business with solid long-term growth prospects, and we do meet the needs of the consumers by driving our core brands throughout Europe through an existing, very well established partner network here.

And I think we have a powerful strategy in linking innovation to marketing that gives us the right to win, leveraging our innovation and marketing model here. Thank you.

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Jeffrey R. Needham, Perrigo Company plc - Executive VP & President of Consumer Healthcare Americas [8]

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Americas business overall. I'm one of those white boxes that Murray had in his organization chart. I've been with Perrigo for a little bit over 35 years. So I've been around through a lot of those tailwind years that Murray talked about, and I've also been around, obviously, for the last 3 or 4 years, where our businesses has had some headwinds that Murray talked about and framed pretty darn well.

Specifically, Murray talked about the pricing pressure that we have had as a business but additionally, and really probably more importantly, has been the lack of new products that had been driving the business. And the biggest reason, as Murray indicated, is that the business pace -- the pace of new products from national brands, both on the Rx-to-OTC switch side as well as traditional national branding innovation, the pace of that has slowed. And our business model, traditionally, has been to follow those national brands. As Murray talked about, given the pace of innovation having slowed, Perrigo is at the point where we need to reframe how we approach innovation. And Jim Dillard, who is going to talk after me, is going to give a good overview of how we're actually doing that.

But in spite of the headwinds, if I do my job reasonably well here over the next 20 minutes or so, you're going to see that the CSCA business has a lot of reasons for optimism, and you're going to hear that I'm extremely bullish and optimistic about the future of this business because there's a lot of reasons for tailwinds. There's a lot of reasons to be optimistic. And as I regularly say, I, as heading up this business, would not trade places with any other head of a consumer self-care business here in the U.S. I feel like we are in a very, very good spot.

So similar to what Svend did, I want to give you a snapshot, an overview of what CSCA is here at Perrigo. We're a big business, over $2.3 billion in revenue. We have been, as Murray said, growing year-over-year from a volume standpoint. We are growing share in the marketplace. We compete in a number of attractive categories that store brand is outpacing national brand growth in. We are, as I said, a big company. We manage a lot of SKUs, over 7,500 SKUs, over 1,300 different products. It takes a lot of Perrigo associates to manage this business, and we do that across 15 manufacturing sites across the country.

If you look at the extrapolated points of distribution that we have, given all the retailers that we do business with, we have over 80,000 points of distribution at retail around the country. We manage over 120 customer brands. And dissimilar to Svend's business, as you know, as you've been following Perrigo, we are in the U.S. primarily a store brand or own-brand company. We work very, very closely with retailers as strategic partners to help them drive their brands. And as Murray indicated, the brands that we are driving, the brands that we're managing are the most important brands to our retail customers.

I'm going to talk a little bit about e-commerce, still a relatively small part of our business, but a part of the business that's growing very, very nicely and a segment of business that we're extremely optimistic about that will augment our business going forward.

So we bill ourselves as a top 5 company. I think it's probably fairly accurate to say we're probably one of the top 3 companies from an overall size standpoint. We are in a very, very good position to outpace category growth going forward.

With the addition of Ranir, we're in 19 product categories across our U.S. consumer base, across OTC and nutrition. And we are extremely well positioned to continue to own and drive this market share that we have, because we have a unique position as a store brand company with our customers. We have an infrastructure in place that is particularly well-suited to work strategically with our customers to manage their brands.

One of the most important decisions that Perrigo made strategically, historically, is to invest in an infrastructure commercially to work with retailers as a branded partner. And there's really no other company in the store brand business that has mirrored that approach and that effort.

Murray talked about our ability to mass customize. We built our business over the years on the ability to manage a lot of complexity. And there is a tremendous amount of complexity in this business, and it's one of the biggest reasons that we don't have more significant competitors in this space.

I talked about the strategic relationships with customers. We're doing business today in the U.S. with virtually every retail or wholesaler in the retail space today and increasingly from an e-commerce perspective as well. The relationships we have with our customers are very good, very strong and very strategic, because again, the brands that we're making for them, the brands that we're managing are the most important brands that they sell on their shelves. And the market share that we have, market share as a percentage of the store brand business and the business overall, given the size of store brand, really gives us a tremendous advantage to be successful with virtually every new product that we do a good job of developing and launching. So given the market share that we've got, given the ACV, given the distribution that we can get right out of the blocks, we can be successful with virtually every major new product that we pursue.

So as we look at 2019, and the first part of my discussion here this morning is going to be on this 2019 focusing on the base business. Given the relatively modest number in dollar volume in new products, we've got to really focus on driving our core as we invest in the future and invest in future growth going forward this year.

So we're going to expand store brand penetration in key categories, and I've got some data points to give you evidence of what we're going to accomplish there. We're going to continue to drive Perrigo's market share within our competitive base in the store brand business. We are going to increasingly focus and develop innovation that leapfrogs the national brands. As I indicated, we are going to be less focused on following national brands and more focused on developing our own innovation and not waiting for national brands to drive those new products.

We've got some opportunities in some new segments and new channels that I'll touch on, but e-commerce certainly is at the forefront of that. And Murray talked about the investment that we're making, significant investment in making sure that we have the capacity and the infrastructure in place to drive and grow this business.

So I boast about our market share, I talk with a lot of pride about the market share that we've got, but we still have a lot of good runway to grow this business from a share standpoint.

First of all, store brands are regularly quarter-by-quarter outpacing overall category growth. We're beating the national brands from a market share standpoint at retail. And while we've got some categories and some segments that are extremely strong from a market share standpoint, NRT is probably the best example, where store brands have 62% of the NRT category at retail, we've got a number of other categories that are far below that. Cough, cold, allergy and sinus, which is what CCAS stands for, is less than 30% market share. Cough, cold, allergy and sinus combined is our largest OTC category. So with that kind of market share we have a lot of runway, a lot of room to grow that business.

If I look at the infant formula business, the cash-paying infant formula business, we're less than 20% market share. So a lot of key strategic categories with room to grow. And we've got some segments within the store brand business in terms of Perrigo share of store brand, that also represents opportunity to grow. We've taken a look at white space opportunities that we've got, almost $300 million of growth opportunity to fill in the blanks in growing greater market share of Perrigo's share.

We've got $70 million that we're targeting in our plan for 2019 to drive penetration, to drive store brand share growth. And we've got some specific examples and specific initiatives that were going to help accomplish that. Omeprazole is a good example. And Omeprazole is a good example of a success story in the store brand business. We've gotten large enough and are driving enough growth for retailers that in some cases the national brand Prilosec is being removed at retail because of the growth, the size and the heft of store brand Omeprazole.

In the infant formula business, we've got some major new business coming onstream in the back half of this year that's really going to help drive our infant formula business for the balance of the year. So we've got $70 million of market share growth, growing the core I earmarked.

As we look at store brand share growth. Here again, we've got a $40 million target and again with specific initiatives in place where we are winning more business than we are losing from a distribution standpoint. And this is a meaningful opportunity because every point of store brand share growth or -- share of store brand growth that we can achieve represents almost $20 million to Perrigo.

I talked about the fact that 2019 is a relatively modest new product year. But having said that, we've got $45 million of new products -- of revenue generated from new products in the plan. Now admittedly, there's not any real blockbuster new products this year, there's no major Rx-to-OTC switches. But we've got a nice combination of a number of ANDAs, some monograph items and importantly, 2019 represents some evidence and examples of where we are launching new products that don't have a national brand predecessor. Specifically in the nicotine gum and nicotine lozenge area we are introducing new flavors that the national brand, Nicorette, does not have. And again, we talk about our right to win, given the share that we've got in NRT, we feel very comfortable and confident that we can do that and the retailers are responding very nicely and very positively to that.

I talked about new channels. And given the success, given the heft and size that we've got at retail, in traditional retail there's a number of new segments that represent growth opportunities for us. I've got a separate slide here in a second on e-commerce and that's probably the most bold example. But also in the convenience store segment, where we today do very little business, that represents all incremental opportunity. Little bit of a different business approach is required, but we feel again, in convenience, we've got a right to win, and we're going to be putting an increasing amount of focus on that.

And the other area that's a high-volume area, that we do very little bit -- very little in today, is in the reimburse market area. These third-party pay segment of the distribution network. Places like Humana, the government, again, high volume. You can get an individual item in there, it could represent real incremental opportunity and increasingly, that is an area that we think we have another right to win.

E-commerce. If you pay attention to Perrigo at all and are paying attention to our efforts strategically and from an investment perspective, e-commerce is an area that, as Murray said, to us represents an opportunity. It does not represent a threat. Amazon has gotten the most attention here, but increasingly all of the major retailers are putting significant investment and significant strategic attention to growing their digital marketing space in their e-commerce area.

With Amazon, we grew almost 90% last year, we are marketing over 450 products on the Amazon site today. But similarly, our traditional brick-and-click or brick-and-mortar retailers have been growing as well. And so we really, really feel optimistic about this segment of the business and it's a part of the business that we're putting a lot of investment in. And over the course of last 2 years, we have invested in infrastructure, in human resources to build this part of the business. And I feel like we are very well positioned, very well placed. And similar to our traditional retailers, our retailers are looking to Perrigo to be the thought leaders and to be the real investment leaders to help them win in this e-commerce space.

Murray talked about the investments that we're making in capacity. Infant nutrition specifically, we've got both, as I said a few minutes ago, a lot of opportunity to grow infant nutrition in the U.S. from a share perspective. That is still clearly our lowest market share category. We are very well positioned here to win with retailers. Retailers are very, very excited about the opportunity that own brand infant formula represents. And so U.S. store brand share growth is a real tangible opportunity here, as is business outside the U.S. We have very little business in infant nutrition outside the U.S. And strategically, we see a real opportunity to grow. But we've got to have the capacity to do that and that's what this is all about.

Murray also talked about the tablet capacity piece. Our tablet demand has grown very nicely over the last couple of years. This past year, 2018, tablet volume throughout the company grew over 6%. And so we need capacity to surge with our retailers' ability to promote. And we need to be in a position to drive that promotion with retailers.

So as I look at the totality of our base business today, the core business that we're focused on today, we've got some very specific initiatives to drive base business growth in 2019.

While we look at and focus on more strategic, greater initiatives from a new product standpoint, we still have a very meaningful $45 million of revenue being generated from new products this year. E-commerce will continue to be important. E-commerce is going to represent over $60 million of incremental business this year. And we're investing in that capacity to manage that growth.

So now I'm going to take a step back, shift gears a little bit and talk about investments for the future. What I just covered, covered the base, covered the core, where are we going from here? Murray talked a little bit this morning about Ranir, and we have, of course, made that announcement at 7:00 this morning. We are extremely excited about the opportunities that this Ranir bolt-on acquisition represents. We are very, very excited to be able to welcome Ranir into the Perrigo family of business. Murray talked about the similarities of Ranir to us. But importantly, the Ranir business, a little bit less than $300 million in revenue, is in a category and is in a segment that's growing very, very nicely. It's growing faster relative to the category than our core OTC business is.

Importantly, Ranir fits almost to a T the basic model that we have had over the years and have going forward for successful adjacencies. Ranir is in the store brand business. Ranir is a leader in the store brand business. Ranir is in a category that really epitomizes what self-care is going to mean going forward for Perrigo. And they have the similar kinds of customer relationships that Perrigo has, with many of the same retailers. So there's a lot of similarities, there's a lot of just natural synergy between our 2 businesses. And they are the global market leader in the space that they play in, similar to Perrigo. They've got that leadership position. They have a tremendous retailer-focused effort across their sales and marketing organization. They're all about growth, as Murray said. We really think that they have a very, very strong overall platform.

And similar to Perrigo, they have core capabilities that, again, enable that competitive advantage similar to what Perrigo has represented. They're focused on service. They have a 98% customer service level. I daresay, as I've talked to Ron, we might be able to learn some things from [pit] from Ranir as to how they've been able to maintain that. They do a very nice job there. They're focused on quality, similar to Perrigo. They have a great focus on new product development. They've had to build their business operationally to be very flexible. And they've got a good variety and good strategic assortment of segments within the category they compete in.

So we see a lot of opportunity here to bring Ranir and Perrigo together and get a lot of built-in synergy given the nature of our businesses together. So we're really excited about being able to talk about that, begin to bring them onboard. I'm going to be at Ranir first thing in the morning to help welcome Perrigo to Ranir. And we're really excited about all the opportunity that this kind of acquisition represents for us.

Okay. The next area of opportunity, and again, something else that Murray included in his presentation, is a foray, is an effort of Perrigo to move into naturals in the OTC segment, really for the first time. And this is an opportunity that we're going to pursue via a branded route. We're not at liberty to talk about who that particular partner is. But naturals is a part of the consumer self-care business that represents a lot of great growth opportunity. It's become a very, very big segment of the market, at over $20 billion. It's growing very nicely. And it's, from a demographic standpoint, driven by consumers who don't have a problem paying a little bit more at retail for the products that they buy. And so there's a lot of strong data points that point in the right direction to naturals in the OTC and nutrition area being a real attractive segment of the business.

And so we've just signed a licensing agreement within the last month with a major branded company. It's a leading natural personal-care brand. It's got very, very nice brand awareness. And this is a partnership that will enable us to go to market here over the course of the next couple of years with a portfolio of products focused on that natural consumer.

As I said, this is going to be a branded effort. But it represents an example of the kind of branded effort that Perrigo can take that does not represent a conflict or an area of competition to our core business. As we move into brands -- and as Murray said, we're going to be doing this selectively and carefully -- we're going to move into brands that do not directly compete with our core store brand OTC and nutrition business. And we've got to be careful about that because what we want to do is we want to grow our pie. We do not want to compete within the existing pie that we have already in place today. So we're excited about this opportunity. You'll hear more about it in the months to come. But this is something that we are fired up about in terms of representing incremental growth.

Speaking of fired up. Another area of being more innovative and taking a different approach is with the NASONEX launch, as Murray talked about. Rx-to-OTC switches over the years have served Perrigo very well. It's another critical strategic decision that we made as a company a number of years ago that has helped strengthen our leadership position. And for a number of years, frankly, for a number of decades, Rx-to-OTC switches were relatively plentiful and relatively able to be counted on. But over the course of the last several years, the pace of Rx-to-OTC switches has slowed significantly. So what we've decided to do is to take matters more into our own hands and buy the OTC rights to NASONEX. And for the first time, Perrigo will be the driver of a specific branded Rx-to-OTC switch. Now at first blush one might say this is not what Perrigo is all about. But if you think about it a little bit, we have the regulatory expertise to be able to do this. And this is a class of drugs and a segment of the business that has a relatively straightforward regulatory pathway for it. So we're confident from a regulatory perspective we can successfully work with FDA and bring this product to market as an Rx-to-OTC switch. It gives us that branded opportunity to launch a new brand in a very attractive segment of the allergy nasal spray category. And retailers have responded very well to this.

So this will be a branded launch for us here over the course of the next couple of years. 2022 is when we're targeting to be able to bring this product to market, work through the regulatory process. And importantly, it will give us the first-mover advantage, the opportunity to go to market as a store brand product with this NASONEX national brand equivalent. So another innovative new area of opportunity that we think really changes the game for us going forward.

So if I take a step back and recap everything I've said today. These investments that we're making in these growth strategies, we think will do a nice job of augmenting our already strong leadership position that we've got in this own brand space in the U.S. These adjacent category investments that we're going to make are designed to make us more important -- more strategically important to our retail customers.

We are going to look for branded opportunities that will strengthen our position, again with the retailers and expand the pie that we compete in as an overall self-care company in the U.S.

We'll continue to look for opportunities. And Murray talked that there's a number of other opportunities that we've identified of Rx-to-OTC switches that we can invest in and drive switches ourselves and again, strengthen our store brand position with those switches.

And success will be met with a good balanced combination of executing on the fundamentals of our business. Executing of the day-to-day blocking and tackling while increasing our investment and our strategic focus on looking for opportunities to drive our business going forward.

Thanks very much. And I'm going to introduce Jim Dillard, who will talk about our innovation engine going forward. Jim?

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James E. Dillard, Perrigo Company plc - Executive VP & Chief Scientific Officer [9]

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Okay. Good morning, everyone. I see a few familiar faces from some of my last life. How are you? Good, good.

So I'm Jim Dillard. I've been at Perrigo now for about 3 months. I joined as the new Chief Scientific Officer. And in my private -- in my other lives, I have been in CPG in similar roles as well as spent a little time at FDA approving medical devices. So I've a little bit of a diverse background but very happy to be here at Perrigo. And I think Murray and the 2 operating company presidents certainly outlined a lot of what, and I won't repeat it, the specific innovations that are built in the 2019 plan.

What I'd like to tell you a little bit about is the approach that we're going to take, how to think about innovation, how Perrigo is thinking about innovation and how we're actually going to execute this engine as we move to the -- into the future.

Innovation always sounds sexy. I get really excited about innovation because it's about new, it's about moving forward, it's all the things that companies really thrive on. And while that is very important, the process and the way you actually get there, and setting up the right infrastructure, is probably equally as important.

I like to think about innovation as a four-legged stool. Jeff just talked about the first leg in that stool, which I'm not going to talk any more about, but it's about finding those adjacencies that are bolt-on, that can continue to grow your portfolio that you can also innovate off of. So that is one that will be throughout the presentation.

I'd like to talk to you about 3 different ways to look at the other 3 legs on that stool. And then hopefully that will help craft the way in which we're going to approach innovation.

Our first opportunity, when I think really Murray joined, but I joined as well, was taking a look at the way we had innovation structured across the entire enterprise. So we had innovation, a big innovation engine here in the United States that did ANDAs with the FDA very well, had engagements with a lot of the heavy-regulatory agencies. And that was a machine that worked very well for supporting the Americas business.

On the international side, we have a connect and develop kind of organization. We do very well looking at innovations that exist. We bring them inside, we maximize the value in a Perrigo way and we are able to translate that across many countries.

And the third opportunity that we looked at was, we needed an innovation group to take a look at those things looking forward that are going to really take us in a transformational different direction. So in this way, this other 3 opportunities existed to sort of bring these a lot more closely together. I fundamentally believe that when you have all 3 of these clicking very, very well, your innovation engine is able to accelerate the pace at which we can have innovations ready, consumers defined, as well as get through the regulatory process. So that's really my job is to try to bring these together, accelerate the way in which we develop products, get them through the regulatory machinery as quickly as possible, take them from idea to consumer in a much more rapid way.

The other problem that Murray talked about was that we haven't had the incremental innovations that we need, the big ideas. So we need to bring those in through these -- the innovation shop so that we have as many of those as we have supporting the business type of innovations.

Just since January, when I took this job, as I started pulling all of these teams together and thinking about what are the innovations we should be focused on, we've come up with 50 new ideas and about $500 million in new revenue that over the next 1 to 3 years we're likely to be able to bring to the market, and this is just in a 3-month period of time. I think there's many more for us to be able to look at. But we have to look at the right levers and pull the right levers to be able to be strategically aligned, focused and do this in a way that isn't about finding the small innovations, it's about the big innovations.

So I like to use this matrix to think about innovation. And we do very well down here in the left-hand corner. Perrigo has been very good at looking incrementally at their portfolio, coming up with innovations, having them be on time and launching them. And we actually need innovations across the entire spectrum. So the incremental innovations in the core are certainly into the plan. Many of those new $500 million worth of innovations are new innovations close to the core. And a couple of those are transformative innovations. And we need to have a number of these in our portfolio and in our pipeline at all times.

But today, the best way to think about the strategy for us to support the broad-based businesses that we have, is to continue to focus on that which is going to matter in the short term. What is that? We've got to deliver the 2019 innovations, of course. Then we need to take a look at 2020 and beyond and start to ramp up the way in which we look at our portfolio. So today we have this split in our innovation in our research and development organizations. About 70% of our time is focused on the incremental, 20% on close to the core, because we're still very good there. And then 10% on the transformative innovations. And I'll tell you about a couple of those today.

So another sort of way to look at how we innovate is that we've got 3 primary levers within our organization to take a look at how do we build the portfolio.

First is organic innovation. As an example, we've talked a lot about digital services already, both the operating committee -- operating company presidents talked about. They are very important to us just like Nicotine is for us. Large, big portfolio, 90% of the Nicotine category, but there's more to go get. So that organic effort needs to be intense and there's a lot more market share to go get. So that's one area to look at.

The other is this portfolio of 13,000 SKUs that we talked about and the branded portfolio that spend has in the international business and the store brands that we have here in the Americas business. We haven't tapped our entire portfolio well enough yet to bring some products across the pods, across the oceans. So the ACO brand, the XLS brand, these are consumer trends that are happening here today. Weight management, beauty, they don't only happen in Europe, and there's no reason we can't take our portfolio and look for the opportunities in other geographies. That's sort of number 2.

Number 3 is JVs and partnerships. There are technologies that are evolving today and people outside of our own R&D organization that have really good ideas that should be crashed into our portfolio. What do I mean by that? New technologies, new ways to look at new advances that might be happening in maybe not a consumer self-care industry but something that could also be beneficial in the self-care industry. We've got to look for those opportunities, and I'm going to tell you about one here in a minute. But naturals today is a very good example.

So we're putting a lot of big ideas in the pipeline. So in each one of these, it's not only about making incremental, sort of, opportunities work. It's about thinking more broadly in all of these categories, understanding what the consumer pain points are and then figuring out how to build the portfolio in a way that's going to expand all of our category endeavors. So you can see sort of the -- what you would expect here and close to the core.

On the new innovation side, the naturals area is very exciting. We have a very strong naturals business in the international space. How do we build on that?

And then on the transformative side, starting at the bottom and moving up. Chronic pain, we know. Look, we know there's an opioid epidemic worldwide. If we have opportunities to come out with chronic pain medications that are nonaddictive that can build this particular category, the opportunity exists today, we need to go after it.

And then the 2 on the top that I'd actually like to use as my 2 examples today to tell you a little bit more about how we're thinking about it, and that's vaping technology and CBD. Murray set it up for me a little bit, so let me jump right in and tell you about how we're thinking about it.

Today, the vaping technology platforms, they have grown a lot in the last 5 or 10 years. I certainly witnessed it within my last career. So I know what's going on there. And most of it today is focused on nicotine satisfaction in a very user way, not necessarily an FDA cessation way or a Perrigo way but in this enjoyment space. And Murray showed you the numbers. We need to think about this in a Perrigo way. The FDA has been asking now for probably a dozen years for a responsible company to bring a product forward that could be used for cessation management purposes in trying to reduce the amount of tobacco consumed. And there is an opportunity here today for Perrigo to step forward and be that company with the FDA. We have the relationships, we have ANDAs, every week a new one goes in. There is no reason why we can't take this platform, leverage it in a way that can benefit Perrigo in this nicotine cessation space.

CBD, which I'll talk about next, is another. And there are many, many more ways in which this particular platform can be used in a very Perrigo way. So we think about this in a much broader perspective worldwide. This ought to be a technology for self-care that Perrigo should own and win in that technology.

And in fact, we've been out looking for partnerships. And just very recently here we signed a letter of intent on a joint development agreement with Vapor Dosing Technologies, they have a spectacular technology. So think about a situation where you have got your iPhone, which -- everybody is going to have an iPhone. You've got a technology that is a smart technology that interfaces with that iPhone. You're able to understand what the cartridge is that's in that iPhone, and then, as somebody is using a product, in this case for nicotine cessation, actually is a well thought-out learning algorithm that helps somebody move down the nicotine scale until they no longer use nicotine. And at the same time, the data is being uploaded into areas where the data can be really analyzed, looked at, downloaded back on to the device that then is almost a personalized way in which you would use a nicotine cessation device.

It's really fascinating and a technology that needs to be on the market and one that Perrigo is going to work very closely with this exciting new company called Vapor Dosing Technologies.

So let me move to CBD. Look, CBD is a bit of the wild, wild West. We've had retailers in and out thinking about CBD. We certainly have had the FDA weighing in with a lot of policies. We had the Farm Bill change in 2018. So a lot has been swirling about CBD and the clarity with which both on the Americas space and the international space is not completely clear yet. But quite frankly, I'm okay with that. In a Perrigo way, we deal with a lack of clarity on the regulatory side all the time. We have got the regulatory capability and we have got the ability to engage with the right people to get the clarity for us to be able to do CBD again in a Perrigo way. We don't want to be the wild, wild West, we want to be the high-quality, natural, respected and trusted name of CBD on the market. And we know how to do it. And it doesn't hurt that the fact is, is that the environment seems to be getting a little bit better. We've got our major retailers, we've got some of our international retailers who have now said, we're willing to start taking CBD product. So now it's time for Perrigo to do it in a Perrigo way. You don't have to be the first in a market like this. You just have to be the best. That's been proven many, many times over in other categories.

Okay. And why is it a big opportunity? Well, it's certainly -- many analysts have said it's about a $2 billion industry. I actually think the chance is for it to grow even larger if we can get some of the regulatory hurdles behind us, get some additional clarity. And as I said, it aligns very well with Perrigo strengths, we can do this in a Perrigo way. And we can do this either in a branded or in a store brand execution.

Part of the way I like to think about innovation is coming up with those ideas that are going to work no matter what kind of brand, no matter what kind of market you might put it into. It's a consumer desire. It meets the consumer's need. It touches a pain point. It is new brand better. It is new categories and new consumers, and we can do that in a very Perrigo way.

Murray mentioned this already as well. It's about $130 million that we're spending here in 219 (sic) [2019]. This is not incremental to the number that Murray told you. It's the same number. And as Svend and Jeff talked about, this concept of using some of the bolt-on acquisitions to get us through this point so that we can get the innovation machine cranked up again, I think is that leg of the stool that's very important. That's going to help us for 1 year to 1.5 year. But in 1 year to 3 years, we're going to have some of these innovations ready in the market through the regulatory processes. Some are going to take longer than others. And we are going to have a portfolio and a pipeline to be able to look at that.

I usually get the question about this time, can you tell us some of the other innovations? What I would say is, I don't want to reveal our entire portfolio. It's competitively sensitive. I am willing to talk a little bit about CBD and about vaping, but that being said, I think it will be robust and we will unveil it certainly at the right times.

I think we are working very hard to getting all 8 of the cylinders running and then putting a turbocharger on top of it. That's really the way I think about an innovation engine. We've got most of the cylinders chugging along. I think by the end of this year, we're going to have all 8 and then we're going to put a turbocharger on it and we're going to really move this innovation machine over the next 1 to 3 years.

So hopefully, I've left you with a couple of things. One, that one leg of this stool is going to still look at bolt-on acquisitions. It is a way in which we can enhance our innovation portfolio. But certainly with partnerships and the way in which we can enter new categories with people who have already done good thinking, I think is a major part of our innovation agenda. We're going to put disruptive ideas into the pipeline. We have opened it up. It's consumer self-care now. We are allowing ourselves to look at innovation more broadly. And the process is in the discipline I think that we are bringing. We are going to look at high -- more high-value innovation opportunities and we're going to make the transition from 100 $1 million opportunities to 5 $20 million opportunities. It'll be more efficient, more effective and will work better worldwide.

So with that, I will introduce Ron Janish, who is our Chief Transformation Officer.

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Ronald C. Janish, Perrigo Company plc - EVP of Global Operations & Supply Chain [10]

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Perfect. Thanks, Jim. As Jim said, my name is Ron Janish. I've actually been with Perrigo now for going on 16 years. I currently have responsibility for all of our global operations and supply chain, and actually earlier this year took on the additional role as Chief Transformation Officer for the company as well.

Over the next few minutes, I'm actually going to talk you through both items number 4 and number 5 on our virtuous circle. But for the immediate future, I'm going to talk you through some of the actions that we are taking right now, focused specifically on organizational effectiveness and building capabilities within the organization.

As you've heard over the course of the morning, we have a lot of different actions and initiatives underway across the company. You've heard of many of them on this page already. And Murray spoke about some of the changes that we have made at the leadership level within the organization. Jim just finished talking about some of the changes that we've made and improvements that we're making within the global R&D and innovation platform. I'm going to talk to you about a couple of very specific items on this list over the next couple of pages, specifically add a little bit of additional color on the business intelligence and data analytics investments that we're making as an organization. Talk a little bit about what we're doing with sales, inventory and operations planning, the process improvements that we're working on in that space. Talk about the transformation office itself that we've established. And then wrap it up with talking a little bit about some of the changes that we've made to our reward programs to align them more with where we're going as a company.

First, you heard Murray talk about this earlier today, we're investing $5 million in a very robust global business intelligence and data analytics capability to give us much greater insight into the dynamics that are impacting all of the different categories that we operate in on a global basis, okay?

That insight will ultimately then enable us to be much more proactive in the decision-making processes. And ultimately, it will lead to us having a much more robust sales-forecasting process when we get through, okay?

I'm going through this pretty quickly. I apologize for that. We've gone through most of it already in the past.

Sales inventory and operations planning. You heard Murray talk about service. We've talked about the Perrigo advantage and the role that servicing our customers actually plays in us regaining the Perrigo advantage.

The sales inventory and operations planning process for Perrigo was probably the most critical process within the organization for enabling us to actually be able to manage the complexity that you've heard about within the company, okay? Managing that complexity efficiently is what is going to allow us to deliver best-in-class service to our customers going forward.

In addition to the positive impact that we expect to see on our service metrics, we'll also have the added benefit that this will also help us from a working capital perspective. We should be able to rightsize our inventory, optimize our global supply chain because we'll have much greater alignment across the organization between our commercial organizations and our supplier organizations, okay?

You can already see, Murray talked about it, we struggled with service as an organization through all of 2018, particularly in our North American CSCA business. We've already, over the course of the first quarter of this year, made some significant improvements in service in that space. It is not because this process redesign is already done. We're only halfway through the focus on actually redesigning the SI&OP process. This has been primarily done through a lot of brute force heavy lifting within the organization. We're adding cost to the organization. We're carrying a little bit of extra inventory and we're running our facilities 24/7 today.

But that is not sustainable as an organization. Our ability to actually get to the level we need to be at, 95% or above, and sustain that is only going to come once we've got the new process in place.

Next, talk a little bit about the transformation office. You've heard over the course of the morning about several of the different initiatives that we've got underway as an organization. In reality, we have over 40 significant key strategic initiatives underway that are actually forming the overall transformation. And as a result, we've put a dedicated transformation office in place to effectively manage and govern all of those initiatives.

The transformation office is comprised of 8 dedicated individuals that we've pulled from across various functions within the organization. And then we pull in additional resources on an as-needed basis based on the initiative that we're tackling.

Primary responsibility for the transformation office. One, when you've got that level of activity going on across the organization is to just make sure that we've got alignment across all those 40-plus different initiatives. We know that we've got touchpoints across those different initiatives. In some cases, we've got dissynergies in the form of competing for resources. So one of the goals is for the transformation office to make sure that we've got -- we've been proactive and we've got risk mitigation plans in place to make sure that those dissynergies don't actually impact our ability to execute all of these different initiatives.

Next, the transformation office is working very closely with all of these specific initiative leads to make sure the initiatives have all the appropriate resources that they need, whether that be capital, expense dollars, people. Whatever the case may be, we're making sure the initiatives have the right resources. At the same time, we've put a tracking and reporting and more importantly, accountability mechanism in place to ensure that the initiatives are hitting their milestones and ultimately delivering the business impact that they were expected to deliver in the first place.

And then finally, and probably most importantly, as you go through a transformation of this magnitude, we have to make sure that we bring the entire organization along for the ride. So we also need to make sure working with our communications team that we've got an appropriate communication plan in place and that we're -- we've got the appropriate level of change management going on within the organization for a transformation of this magnitude.

Next, I'll talk just real briefly about some of the changes that we've actually made to our reward system to actually align it more closely with where we're going as an organization.

As you can see in the past, we've had a rewards program that was primarily focused on capital efficiency. As we look at where we're going as a company, you can see that we've made a few key changes to our rewards programs going forward.

First and foremost, you'll see, we've aligned it specifically now with the consumer side of the business only. So starting in 2019, we have aligned our rewards programs with just the consumer remainco.

The other 2 changes that you'll notice is, one, we've added a revenue target to the basket of metrics that we're rewarding on. And finally, particularly at the senior leadership level, we now have added a strategic goal component to our rewards program. Examples of something that would be a strategic goal, successful RX separation. I believe that probably every single one of us, as the leadership team, has that as one of our strategic goals for 2019.

So from an organizational effectiveness and capabilities perspective, we're taking action already. We've got a lot of things underway to improve our operating efficiency, including we're investing in some technologies and capabilities within the organization to enable us to ultimately deliver the transformation and ultimately, regain the Perrigo advantage that you heard everybody talk about.

Now I'm going to switch basket -- switch gears and talk about funding growth sustainably. And in this particular case, what I want to talk about is how, through a specific cost initiative that we're undertaking, we're now going to be able to support and fund all of those various growth initiatives that you've heard over the course of the morning, as well as allow us to reshape our P&L to one that more closely aligns with our consumer peers.

So before talking about the cost initiative itself, it's probably important to step back and look at, for many of you that have been following Perrigo for a long time, you understand that actually lean and efficient focus and thinking is not something that is new to our organization.

Our history is firmly rooted in the North American private label space. It is a space that has required us for years to be focused on cost and drive efficiencies through our operation. So we already have an organization that is geared towards and focused on driving cost out of the organization. That will be very helpful as we embark on another cost initiative because we already have an organization that is used to operating in a very efficient environment.

That being said, with that history and legacy, doing what we've been doing is not going to be enough, for a couple of reasons. We are separating our RX business. Our RX business has been a meaningful part of our overall business. And as a result, it has absorbed a significant portion of our overall cost structure. Separating it out introduces a fairly significant dissynergy on the cost side of the equation, okay?

Also you've heard about this over the course of the morning, we've got a number of significant growth investments that we want to make and we've got to be able to fund those growth investments. $250 million in capital for our infant formula capacity expansion and tablet value stream capacity expansion, right? We are investing in some technologies. We talk about the $5 million in the business intelligence and data analytics. We've talked about some of the investments we're going to make in the innovation space. We've got to be able to fund all of that. So we are embarking on a cost initiative across the organization that is going to allow us to, one, offset the dissynergies that the separation of the RX business has introduced to the organization, fund all of the growth investments that we have identified to help drive our transformation, and then ultimately also enable us to reshape our P&L to be something that aligns more closely with our consumer peers.

So that's what we want to get out of the cost initiative. How are we going to get there? This is not just going to simply be a cut cost initiatives because this is going to be much more thoughtful. It's going to take us a couple of years to get there because we're going to have to really look at how we operate as an organization and do things more efficiently. We're going to look at global operating model, make sure that our organizational structure is actually aligned with the strategy and that we've got all of our team members across the globe focused on all of the critical priorities for delivering the transformation.

Second, we are a -- as much -- as many companies are, we are a very process-driven organization. We are going to be relentless in focusing and looking at every single one of the key processes across our organization and looking for ways of eliminating inefficiencies in those processes, up to and including introducing automation and technology to enable us to do more with less. And then finally, some of the capabilities that we've already talked about that we are investing money in, for example a more robust SI&OP process, are also going to help us in this cost initiative.

So what does it mean in terms of actual dollars? Murray talked about this earlier today, right? Project Momentum, which is what we are calling it, we today have actions underway, clear line of sight to a portfolio of opportunities that are going to drive a minimum of $100 million out of our OpEx and our cost of goods sold, okay? The road map to get to those savings is going to take us 2 to 3 years to implement, primarily because in order to get there, we are having to go through some significant process redesigns within our organization. In many cases, those redesigns come with implementation of new technologies that take time, okay? The good news is, is that we also have a basket of quick wins that we are already working on as an organization. We spend over $1 billion today on indirect items across the company that has nothing to do with what actually ultimately goes in the products that go out the door, this is all the other stuff that we spend money on in the organization. We have a portfolio of projects within that space focused on categories such as consulting, travel, temporary labor, you can go on and on, on the list. We've got projects already underway that are going to start delivering value already in 2019. So we're already underway.

So in summary, we've identified a need to take on an additional cost initiative to drive some cost out of our current P&L. For a variety of reasons we've got to be able to offset the dissynergy that the separation of the RX business has introduced. We need to fund all of the different growth initiatives that we've identified that are important to our transformation. And then ultimately, we need to transform our P&L to something that aligns more closely with our consumer peers.

So with that, I'm going to turn it over to Ray Silcock, our Chief Financial Officer, to talk about capital allocation.

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Raymond P. Silcock, Perrigo Company plc - CFO, Principal Accounting Officer & Executive VP [11]

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Thank you, Svend (sic) [Ron]. Good morning, everyone. So as Svend (sic) Ron said, my name is Ray Silcock. I'm the new CFO, and I have been here 35 days. So it's a cliché to talk about the fact that when you join a new company, it's like drinking from a fire hydrant, but I have to say that cliché or no, the last few weeks have been like drinking from a fire hydrant. So you'll have to excuse me if I don't know 100% of the answers to the Q&A.

I'm going to talk about capital allocation and about delivering consistent and sustainable results. But I guess before I get to that, I would like to say how excited I am to be here. It's despite the fact it's been drinking from a fire hose, it's great to be working for Murray again. It's great to be working with the rest of the Perrigo management team. And I'm really looking forward to helping transform Perrigo into a consumer self-care company along the lines that everyone's been talking to you about today.

But first of all, I think it's important to note that Campbell -- I'd say Perrigo -- has a strong cash position. We have over $800 million on hand as of the end of the first quarter, as you saw from our numbers that we released yesterday. And we just sold the Animal Health business for $185 million, and we don't expect any significant tax leakage from that.

On the RX business, we're looking to separate it. We've talked about the fact we're trying to sell it. And if we do sell it, we would hope to get cash up to about $2.5 billion with some tax leakage, but well over $2 billion. However, if we spin the business, although our shareholders will get that value, we would get some smaller value depending on the circumstances of the spin.

And in terms of operating income, with the RX business we're expecting somewhere between $750 million and $800 million of operating cash flow. Without the RX business, that would be more like $500 million. And we plan to use that, as we've talked about today, to grow through M&A, through bolt-on acquisitions and through additional CapEx expenditures, which we've also spoken about today.

In terms of value creation, we're looking to pay our debt down. And we're looking -- and we did it already, increase our dividends.

So the first use of redeploying our cash was the acquisition of Ranir. We -- the transaction terms were $750 million headline price. After the net present value of some step-up tax benefits, we expect to pay around $685 million.

It will accelerate our growth both from the point of view of it's additional to our business and also from the fact that Ranir has had solid growth. I think over the last 16 years, Ranir's compound annual growth rate in sales has amounted to almost 15%. And it'll be 10% accretive -- excuse me, $0.10 accretive to us on an earnings per share basis this year if we close in the third quarter. And as I think several people have said, it's very complementary to our culture, the talent pool, several of them come from Perrigo, and it's right down the road from our corporate headquarters.

In addition to that $750 million, we plan to spend another $250 million in infrastructure spending over the next 4 years, which is on top of our existing base CapEx, which is running around $85 million, roughly in line with our depreciation spend annually. So we plan to increase that by $50 million to $75 million a year for the next 4 years. A couple of the major things we're spending on it, as Jeff went through, was $200 million in infant nutrition capital and $50 million in tablet capacity.

And we already increased our annual dividend at our last Board meeting to $0.84 a share. That's an 11% increase. This year is the 16th consecutive year Perrigo has increased its dividend. And we expect that strong cash generation will continue to support dividend growth in the future. We're paying out, this year, around 22% of our expected net income, which compares to more like 40% approximately for our consumer peers, but is also a nice increase over what we paid out last year. And together with the -- with our EPS growth, we expect to get to around 2% dividend yield. That will be our target.

We also plan to reduce our leverage. This year, without selling RX and based on our projected operating income or EBITDA, probably EBITDA, which is operating income minus $75 million depreciation, we are looking at a 3.5x leverage at the end of 2019. Our target is to get down to 2.5x. If we were to sell the RX business for $2.5 billion, there's some tax leakage and we put the whole $2 billion, $2.1 billion against our debt, paying down debt, our leverage would drop to below 2x.

So the takeaways here. Perrigo has substantial cash-generation potential. We're using some of that immediate cash on hand to acquire Ranir, which is an accretive bolt-on, $0.10 a year of EPS this year. We've increased the dividend by 11% to $0.84 a share. And we're targeting paying down our debt to increase our balance sheet flexibility, both from a point of view of retaining our investment-grade bond rating and also from being able to keep dry powder for future M&A opportunities.

So moving on to consistent and sustainable results. First of all, we have realigned our reporting in line with our self-care strategy, so we have 3 -- the 3 business segments I think we've always had, and they're just slightly altered. We've moved the Israel diagnostics and distribution business into our Rx. Otherwise, the businesses remain the same. So the Self-Care Americas is basically store brands, small amount of branded infant nutrition and a business in Mexico; whereas the International business is basically branded self-care with a smaller amount of store brands.

Guidance for this year. In total, without RX, on the right-hand side, we're talking about $4.6 billion to $4.7 billion in net sales; $750 million to $800 million in operating income; with an adjusted margin, 17%. We're expecting diluted EPS at $3.65 to $3.95. That does not include either Ranir, which is around $0.10; or it also does not include ProAir. ProAir could add as much as $0.10 a quarter depending on when it gets approved. So that upside, which -- of $0.10 to $0.35 also includes, in addition to Ranir and our obtaining the generic ProAir approval from the FDA, includes some cost savings this year from Project Momentum.

Operating cash flows this year are expected to be in the $500 million to $540 million range, and that basically excludes RX on the assumption that even if we own the RX business at the end of the year, we will have additional working capital for the ProAir and other things that will use some of that cash.

So if we sell the ProAir -- excuse me, if we sell the RX business, our estimate is that it will be a reduction in our earnings per share of around $1.10. And that's a combination of the lost earnings per share from the elimination of the business offset by the savings we make by using the money to pay down debt and thereby reduce our interest expense. So we would say the net of that is around $1.05 to $1.15. I'm using $1.10 on this chart.

But we see some outsize opportunities to essentially get that $1.10 back over the next 3 years. The first one is through business growth. Jeff spoke us to about his plans to grow the business. We're looking for a 2% business growth improvement there. And with -- over the 3-year period, that's worth about $0.24 a share in EPS.

In terms of M&A, where we would like -- we just did the Ranir acquisition. We think there are other small opportunities there, out there. But Ranir by itself over the 3-year period, with a combination of the accretion that we talked about already, $0.10 this year for -- if we close in Q3, $10 million in synergy that we're anticipating; and on top of that, growth in the business, which as I said before, has been growing at a pretty good rate over the last few years, that Ranir opportunity will add approximately $0.44 to our EPS.

And finally, in terms of cost savings, Project Momentum, which Ron talked to you about, is worth $100 million a year, we estimate, in cost savings, of which we're going to need some $13 million to offset stranded costs from the RX divestiture. And so that's worth about $0.48 a share. And if you do the math on that, it brings you up to around $3.86 a share, right back into the average of the $3.80 that we're at today. And we see that -- as I say, we see being able to recover that EPS hit from selling the RX business within 2 to 3 years.

Post that period, we're looking to be -- to have revenue growth of around 3%, more like a CPG company. Adjusted operating income growth in the 5% range and diluted EPS growth of 7%, which Murray threw that 9% number out earlier today, adding EPS to that, we said we'll get an adjusted peg number of 9% to add to that. So that's our long-term targets.

So takeaways from this. Guidance for this year, including RX, assuming we don't divest RX, in the $3.65 to $3.95 per share range, with potential upside from Ranir and the generic ProAir business of $0.10 to $0.35 a share.

Cash flow. Operating cash flow this year, a little over $0.5 million. And we expect to recover that dilution from the RX sale in the next 2 to 3 years through base growth, the Ranir acquisition and the Project Momentum.

And with that, I'm going to hand it back to Murray for a summary.

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Murray S. Kessler, Perrigo Company plc - CEO, President & Director [12]

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Thank you, Ray. All right. I know we've shared a lot of information with you. But one time, just to wrap it up again, we have a clear path to achieving our vision of recapturing the Perrigo advantage. I won't walk you through it again. But you'll see this over time. This is how we'll score ourselves. This is how we'll talk about how we're doing in each of these areas over time. There -- a number of you wrote that there were high expectations set. Hopefully, we've met those because we came in today with actions, not just talk.

But to summarize, we have a new vision for the company. We're transforming our business to align with the self-care vision. We are investing to reignite our core growth engine. We're accomplishing this both organically and inorganically. We have organized around the work, and we're giving people the tools to do the work to build our strategic capabilities.

We'll make the tough decisions and are making the tough decisions on cost. We're allocating capital deliberately in a measured way that gives the company flexibility. We're committed to delivering consistent and sustainable growth, in the beginning in line with our consumer peers, and ultimately at the top of that. Let's walk before we run, and we believe that the new Perrigo should be rerated with a consumer multiple.

Listen one more time. New Perrigo will make lives better by bringing Quality, Affordable Self-Care Products that consumers trust everywhere they are sold.

And with that, we are happy to answer questions. So Brad will sort of be our moderator here. And then depending on how we go -- team, is there a microphone for these guys up front? Great.

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Questions and Answers

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Bradley Joseph, Perrigo Company plc - VP of Global IR & Corporate Communications [1]

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So if anybody who does ask a question, please make sure...

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Murray S. Kessler, Perrigo Company plc - CEO, President & Director [2]

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If we can turn the podium on, too.

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Bradley Joseph, Perrigo Company plc - VP of Global IR & Corporate Communications [3]

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Louise, you're sitting in the front row, so might as well ask the first question, please.

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Louise Alesandra Chen, Cantor Fitzgerald & Co., Research Division - Senior Research Analyst & MD [4]

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So my first question is on the margins over this 2- to 3-year transition. How should we think about them during that time period, and where do you think they'll ultimately end up after you accomplish your goals?

Second question I have is that you called out these Rx-OTC switches. You said there were some big one coming up. So could you actually name those specifically, if you're willing to do that today?

And then is there anything on the regulatory or the government front that you can do to push this initiative, because it seems like that would save the health care system a lot of money and you are the leader in this space?

And then the last question here is on the sale of the RX business.

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Murray S. Kessler, Perrigo Company plc - CEO, President & Director [5]

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You think I'm going to remember those 4 of those, right?

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Louise Alesandra Chen, Cantor Fitzgerald & Co., Research Division - Senior Research Analyst & MD [6]

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Do you want me to stop?

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Murray S. Kessler, Perrigo Company plc - CEO, President & Director [7]

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Yes, why don't you -- we'll add them. But the margin question, I've got a few folks here, but you saw on the chart. I think the realization is and I think, first, is the way some people cover it differently. We allocate cost 2 ways. One, we allocate our corporate overheads that are directly attributable to the division and that's when you heard the stranded cost number talked about, but there's still a big corporate unallocated that when you pull out the RX division, and you can call that dissynergy or not dissynergy, it lowers the margins of the company. And that's what gets you to a RemainCo of a 13% margin. So that's what happens day 1, and Ray had that on that last slide.

We want to be -- and we're saying over the 2 years, we're getting back to 14%. Depending on how much of that is debt reduction above the line or below the line, you probably are talking roughly what, 16, yes, 16 is where you get to. You ultimately want to get 18, and that's because you're paying some below the EBIT line and some above, if that makes sense. But as a starting point, you start back at 13 on day one, so you get that outsized growth.

The second one was, Jeff, on some of the upcoming potential switches.

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Jeffrey R. Needham, Perrigo Company plc - Executive VP & President of Consumer Healthcare Americas [8]

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Yes, on the potential switches and Murray referenced...

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Bradley Joseph, Perrigo Company plc - VP of Global IR & Corporate Communications [9]

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You got to use the -- I think he needs the mic. Please?

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Jeffrey R. Needham, Perrigo Company plc - Executive VP & President of Consumer Healthcare Americas [10]

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Okay. Can you hear me? On the prospective switches, Murray referenced erectile dysfunction and contraceptives as possibilities. The way we track and look at prospective switches is we track the clinicals, the studies that innovator companies are doing. And we have reason to believe, based upon that evidence, that ED and contraceptives could very well be future switch categories. So we're monitoring that closely. There's no way in the world right now I can give you specific dates or specific products, but suffice it to say that the national brands, the innovator companies are working in those areas and we have reason to believe that, that could happen.

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Murray S. Kessler, Perrigo Company plc - CEO, President & Director [11]

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But for -- and I said ED because I'm shyer than Jeff, but...

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Jeffrey R. Needham, Perrigo Company plc - Executive VP & President of Consumer Healthcare Americas [12]

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Yes, sure you are.

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Bradley Joseph, Perrigo Company plc - VP of Global IR & Corporate Communications [13]

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And then the third question was on the government?

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Louise Alesandra Chen, Cantor Fitzgerald & Co., Research Division - Senior Research Analyst & MD [14]

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Yes. Well oh, yes, the government, I wanted to ask you that. Is there anything that you could do given that your leadership in store brands to push more initiatives from a legislative front, from a political front?

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Murray S. Kessler, Perrigo Company plc - CEO, President & Director [15]

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Yes, I mean, that's the world I came from, and that's new on a company level. I've already begun to have some big discussions, and you'll hear more to come in the future. I think the answer to that is yes, we can be more active with government with both -- especially at an administration level. But I'm not prepared to talk about any of that today. So let's stop there and give some others and we can come back. Randall?

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Randall S. Stanicky, RBC Capital Markets, LLC, Research Division - MD of Global Equity Research and Lead Analyst [16]

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Randall Stanicky from RBC Capital Markets. I just want to go back to the previous question, the 13% margin. If we look at that from 18%, it's a step down of about $183 million at the midpoint. And initially, the message was dissynergies would be minimal. That's obviously a very big number. So specific question is, of that number, how much is dissynergy versus how much is new reinvestment going forward in the business? And that's just going to help us understand the margin ramp.

And then should we think about that margin in 2020 stepping down further on a full year? Or should we think about margin improvement annually going forward?

And then my last question is just with your 3% and 5%...

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Murray S. Kessler, Perrigo Company plc - CEO, President & Director [17]

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You're testing my memory here, got to remember.

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Randall S. Stanicky, RBC Capital Markets, LLC, Research Division - MD of Global Equity Research and Lead Analyst [18]

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The longer-term growth targets you gave, the 3% revenue and 5% operating margin, can we just -- are those organic numbers and bolt-on deals would be on top of that?

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Murray S. Kessler, Perrigo Company plc - CEO, President & Director [19]

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Yes. Let's answer that one first. Yes, that would sort of be the ongoing rate of the core business. And if we did bolt-ons, it would be on top of that, kind of the way you wrote about it the last time.

The 13% as an initial, and you guys help me out here, I believe when my prior CFO talked about it, he was honestly answering the question but he was just talking about the percentage of the business as we allocated it to that division, how much of that, that we allocated would go when it separated. So when he answered that question at that level, that's the way he was answering that question. But we have a $300 million, whatever, what's the unallocated, size of total unallocated bucket? $150 million never allocated out that remains with the business. And that's the big difference. And then above and beyond that, this year, you do have the numbers that I showed, I don't remember whether it was $30 million to $40 million of investment that went in that affected the margins this year. Next year you'll get a full year of Ranir, you get the Project Momentum hitting, so you should start to grow right out of the chute. And beyond that, Brad and Ray can detail with you. But does that makes sense?

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Randall S. Stanicky, RBC Capital Markets, LLC, Research Division - MD of Global Equity Research and Lead Analyst [20]

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Yes. No, it's helpful.

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Murray S. Kessler, Perrigo Company plc - CEO, President & Director [21]

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Yes. And it's not that there was any -- it's just the way he thought about the business. But the truth is, you can't sell off 1/3 of the company without doing a cost-savings initiative like this or you end up with lower margins, right?

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Bradley Joseph, Perrigo Company plc - VP of Global IR & Corporate Communications [22]

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Patrick?

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Patrick Ralph Trucchio, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [23]

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It's Pat Trucchio, Berenberg. The 2 risks that I'd like your thoughts on. First, in the U.S. business, the second in the International business. So first, in the U.S. business, you discussed entering branded OTC, including naturals and incremental investment necessary to run this type of business. Of course, it's very different from supporting a store brand business. In many respects, they're at odds with one another, from pricing spreads to merchandising to store placement. So the questions are, first, how should we think about the magnitude of costs in terms of SG&A and time necessary to build the expertise to successfully launch branded OTC products in the U.S.?

And then secondly, how do you intend to balance the opportunity with the challenge of managing these 2 businesses under 1 roof? And then a follow-up on International.

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Murray S. Kessler, Perrigo Company plc - CEO, President & Director [24]

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I don't think the strategy is to turn it into a branded business in the U.S. Like the launch of NASONEX is designed to help support the OTC switches. Having said that, we've already, in this, added some cost structure. So the $5 million in the infrastructure on the consumer tools. There's a few million dollars in consumer insight data that needed to be added. There's probably a certain level of staffing. We've already created that. We're out hiring for a Vice President of Consumer Insights to lead that branded, and that'll be done separately. So -- but the goal isn't to have these 2 -- it's not as far as you're thinking. It'll still be a primarily store brand business in the U.S. That's why Ranir was such a great fit.

As it relates to the growth targets that are set up and the couple of percent, if you get innovation, you have to stop the pricing from bleeding to some extent. You can't do that without a higher level of innovation. If you looked at all the things we put on there, we would crush those numbers. And when the guys come to me and they present it, if everything hit exactly right, you would do better than the numbers that we're saying. But the reality is we have new competitors coming at us all the time. I think getting back to where we were, ramping up with a robust $60 million, $70 million a year of new products coming in every year in the U.S. should do it.

Svend's is a different story. Internationally, he did it last year, but you couldn't see it because he was exiting so many businesses and it's basically cleaned up. So now it's time for him to step up and deliver and grow the total business, right? We've let him clean up for the last couple of years. Now I want my growth.

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Patrick Ralph Trucchio, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [25]

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Yes. So -- and that's where I have a follow-up. So in the International business, how do you avoid the mistakes of the past? So specifically, and I'm referring to the number of SKUs and the A&P investment. The level of SKUs have been greatly reduced, and the A&P investment is better focused. How do you avoid the risk of having too many -- too much SKU proliferation in the future and inefficient investment in the future?

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Murray S. Kessler, Perrigo Company plc - CEO, President & Director [26]

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Svend? It's a great question because it's the same guy leading it, he's pruned the heck out of it, but now that you're putting in new products, why should we believe you're not going to just put it all back in?

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Svend Andersen, Perrigo Company plc - Executive VP & President of Consumer Healthcare International [27]

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I think it's really related to our focus strategy. So we're really smart and take the same innovation under the different brands in the same format. Also, we are increasing the multilingual packagings, which means that actually we can serve more markets with the same products. So a constant focus for us is reduced complexity in how we align the value chain.

We also are so fortunate that we can actually control our own pricing, so we can set the price. We are continuously insourcing, so we are improving our margin. We're making multi-languages packages, which also gives margin improvements.

And then fundamentally, from an infrastructural point of view, we have made our investments, so we can add brands, products, acquisitions on top of that, that would be OI accretive going forward.

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Bradley Joseph, Perrigo Company plc - VP of Global IR & Corporate Communications [28]

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Dave?

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David Reed Risinger, Morgan Stanley, Research Division - MD in Equity Research and United States Pharmaceuticals Analyst [29]

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Dave Risinger from Morgan Stanley. So I have a couple of questions. How many am I allowed to ask now?

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Murray S. Kessler, Perrigo Company plc - CEO, President & Director [30]

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As many as I can remember.

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David Reed Risinger, Morgan Stanley, Research Division - MD in Equity Research and United States Pharmaceuticals Analyst [31]

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Seven? So I guess, first, I'd like to follow up on the OTC switches and better understand what's going to change at the FDA. Historically, the FDA has viewed erectile dysfunction drugs as extremely unsafe. And my understanding is the view was that, for example, if they went over the counter, people may take 2 or 3x the dose with nitrates and die. With respect to oral contraceptives, patients can take oral contraceptives and end up with blood clot risk. So what's changing at the FDA to allow them to go over the counter? That's my first question.

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Murray S. Kessler, Perrigo Company plc - CEO, President & Director [32]

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Well, let me just answer them one at a time and we'll do a few. What I basically showed you a plan that said, hey, they may be out there, they are 4 or 5 years from now, so it's almost not relevant. Our plan doesn't rely on it at all. So it is -- we are looking at some of the switches that we can do immediately now for the -- and in my mind, when we said they're sponsors on that, they're working on it and we said it's a 4- to 5-year horizon, this whole presentation's been about how we get growth without that. And if you look at the presentation from 2009 to 2018, the smallest piece was switches. So when we had $1 billion of growth, it was only 10% of that was from switches. 40% was from -- 50% was from innovation and 40% was from bolt-on acquisitions. So good questions, but it has nothing to do with the growth that we're looking for and whether that happens or doesn't happen. It was just a statement I was making. Those are out there. And I hope they happen because they work well for the company. But that's -- we're building a plan that doesn't rely on that. What's the next question?

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David Reed Risinger, Morgan Stanley, Research Division - MD in Equity Research and United States Pharmaceuticals Analyst [33]

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Okay. And then with respect to the next couple of years, so during this 2- to 3-year transition phase, is there any way to provide some color on how we should think about the organic revenue and earnings prospects?

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Murray S. Kessler, Perrigo Company plc - CEO, President & Director [34]

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Yes, well you've got to take -- we basically showed you what -- like, Brad, what were we saying, around 2%?

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Bradley Joseph, Perrigo Company plc - VP of Global IR & Corporate Communications [35]

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It's about 2%.

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Murray S. Kessler, Perrigo Company plc - CEO, President & Director [36]

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2%. And then you're adding on top of that Ranir, which is 300 and growing at a rapid, rapid rate. So that's kind of the balance on the consumer business right now.

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David Reed Risinger, Morgan Stanley, Research Division - MD in Equity Research and United States Pharmaceuticals Analyst [37]

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And -- but then the margins next year, are they going up or down? I mean, obviously, you're doing...

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Murray S. Kessler, Perrigo Company plc - CEO, President & Director [38]

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Depends when we separate RX and how. But at the point of separation, absent that, margins are going up, but you're going to have a onetime reset. If that happened January 1, you'd go bang, right down to 13 and you'd grow as the year went on.

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David Reed Risinger, Morgan Stanley, Research Division - MD in Equity Research and United States Pharmaceuticals Analyst [39]

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But absent that, the margins would go up in 2020?

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Murray S. Kessler, Perrigo Company plc - CEO, President & Director [40]

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Yes.

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David Reed Risinger, Morgan Stanley, Research Division - MD in Equity Research and United States Pharmaceuticals Analyst [41]

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Okay. And then with respect to the disclosures yesterday, sort of get into the nitty-gritty, but the worldwide consumer segment was down 1% year-over-year, excluding foreign exchange. Yet the press release stated that the worldwide consumer market shares remained stable in growing markets. And obviously, worldwide -- the worldwide consumer market is growing. So could you just reconcile the minus 1% versus stable share?

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Murray S. Kessler, Perrigo Company plc - CEO, President & Director [42]

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Yes. The difference is what our partner retailers are passing through to us. So our volumes are up 3% or 4%. And without -- in the absence of price decreases by them, the brands that we're selling through the stores are also up 3%, hence gaining share. Now, they negotiate with us and they put pressure back and press us back on price, we're not getting the full benefit, so you're not seeing it in the revenues. So our volumes up 3% but -- or 2% to 3%, and our revenues are down 1%, that's pricing pressure as a own brand, store brand supplier, you wouldn't see on a national brand. But it's still up what the consumer bought, still up 2% or 3% in a category that didn't grow that fast. So the brands we sell gain share.

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Bradley Joseph, Perrigo Company plc - VP of Global IR & Corporate Communications [43]

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Chris?

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Christopher Thomas Schott, JP Morgan Chase & Co, Research Division - Senior Analyst [44]

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Chris Schott from JP Morgan. Just on that price point, when we think the next few years, should we still think about price pressures at the same rate you've been seeing? Or do you think you can address some of that pressure you're getting from your customers?

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Murray S. Kessler, Perrigo Company plc - CEO, President & Director [45]

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I'd like to think with the innovation we keep -- Jeff does a good job of pointing out, that price pressure 1%, 2% has been there for 20 years or whatever, forever, right? I mean that's what you would say to me. And it went maybe another percentage point. So I think with good innovation and all that, we can get that point back maybe. But it's never going to go away. It's always been there. So that's -- those 2 charts were really important charts where I showed the difference. What didn't -- the pricing part isn't what changed, not like in RX where it changed dramatically. What changed was the innovation well and the bolt-on acquisitions dried up. We already gave you one of those today. We've got to prove it to you on the other, right?

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Christopher Thomas Schott, JP Morgan Chase & Co, Research Division - Senior Analyst [46]

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And the second question was just on the broader market. How much of either the near- or long-term growth is predicated on the overall OTC market kind of reaccelerating, versus stuff that's within your control in terms of innovation, et cetera?

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Murray S. Kessler, Perrigo Company plc - CEO, President & Director [47]

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Yes. I mean, I think the question, Jeff, why don't you talk about it? The question is, and I heard that a few times out in the lobby, do you feel like in -- that some of the consumer takeaway numbers weren't as strong over the past 3 or 4 months? Do you feel like the OTC category is slowing down? Or we can rely on continued growth going forward?

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Jeffrey R. Needham, Perrigo Company plc - Executive VP & President of Consumer Healthcare Americas [48]

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No, I would say the way we're forecasting the business is that we're predicating everything on or counting on relatively stable growth as it has been. We're not counting on any kind of significant increase to the overall business, overall category. So we're working off that 2%-ish base growth perspective.

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Christopher Thomas Schott, JP Morgan Chase & Co, Research Division - Senior Analyst [49]

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Right. And just a final one is on the RX sale. I think you referenced that $2.5 billion in the slides. Is that the number you think is kind of realistic based on the conversations you're having? Or should we think about that as kind of the floor that you'd need a number of that magnitude to be when you sell this versus spin this?

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Murray S. Kessler, Perrigo Company plc - CEO, President & Director [50]

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No, I mean, we gave you what we thought was kind of realistic. What's hard as heck is, right now, you're managing through a period of time when ProAir is on the verge of approval or not and how does somebody value that because they want to see it. And you also have, at least for us, from my 6 months here, the business, and I think [Shiron] who came in and took it over, is doing a brilliant job, but the business is performing dramatically better than 6 months ago when I joined. And we are not -- I've heard different companies say different things. We are not getting that same level of pricing, downward pricing pressure that we were. Again, it's there, but not at the severity that it was. And our products are performing incredibly well. And our -- the whole way the RX business was staged was, 1.5 years ago, ProAir was supposed to get approved by our planning. And the rest of the new product pipeline that had been so successful for so many years with lots of singles and doubles, kind of wasn't there because that was what was supposed -- ProAir and scopolamine were supposed to carry it through that period of time, but they didn't. So the brand -- the company got caught short.

But behind it, because now, there were supposed to be all these other new products and they are coming out so -- when they were supposed to come out. So what changed was that it got -- that gap that was in the middle. And those new products are now all coming to fruition, and that pipeline's working and the business is performing well. And then hopefully, there's a lot of gravy on top because we do believe it's imminent on ProAir and scopolamine is getting all the approvals it's supposed to get, so that's going to happen, so -- but we were selling at a period when it was not.

So what does all that mean? And also then, we had the Irish NoA, and what did that mean in flexibility? Could you spin? Couldn't you spin with those kinds? And we've worked through all of those issues. We want to make sure that the choice we make, because this is the right thing to do, maximizes value for our shareholders, and that's what we're going through a process. We gave you the range. We genuinely believe, as we stand here today, it's either somewhere in that $1.10 range of dilution after we reinvest the capital if we sell it. Or it's $1.40 or $1.50 but you'll get the shares if we spin it and we're aggressively working on that. But it narrows it down enough. It does.

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Bradley Joseph, Perrigo Company plc - VP of Global IR & Corporate Communications [51]

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If you could pass the mic right behind you? Greg?

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Gregory B. Gilbert, SunTrust Robinson Humphrey, Inc., Research Division - Analyst [52]

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It's Greg Gilbert from SunTrust. Murray, your 3/5/7 construct as a goal doesn't speak to what amount of capital needs to be deployed to accomplish that. So what is near and dear to your heart and the Board's heart in terms of measuring returns, and maybe you could use Ranir as an example?

And I'll ask my second question upfront, it's about your e-commerce strategy. Not a ton of talk about it here today. I know you have big retail partners that you're investing alongside and making sure you support them fully. But can you talk more about your e-commerce vision? You talk a lot about millennials, et cetera, as it relates to other aspects of your strategy, but can you talk a bit more about how they're purchasing and where and how you're positioned there?

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Murray S. Kessler, Perrigo Company plc - CEO, President & Director [53]

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Well, from my perspective, and Jeff or Svend, either one of you can jump in, each of the customers -- we look at e-commerce as e-commerce and digital, right? E-commerce is just selling the products, and digital is -- so when I think of our e-commerce strategy, I tend to think of it as much bigger -- I think of the digital aspects of it, everything from developing sites, which we're doing, by the way, where you'll hear about over the year where we'll build a site where Perrigo Self-Care will be out there and helping and adding millions of names and where people can have dialogues about different products and how they work and what their uses are and how to live a well life and we'll direct content. And with -- and that's not a branded selling because again, I said this earlier in the presentation, I get the benefit that most companies don't get, which I don't care which product you buy. I just want you to live a well life. If you -- whether it's -- we have -- if as long as we have something in every one of those categories, you go and you pick it.

Now as it relates to margins on those e-commerce products, they tend to be equal or better to our margins on our existing one. So it's not dilutive. Can you, Jeff, I'm not sure sort of where OTCE fits in terms of how millennials are shop. I think of millennials using apps to -- in self-care and looking at new trends and all that, but are they actually buying on e-commerce?

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Jeffrey R. Needham, Perrigo Company plc - Executive VP & President of Consumer Healthcare Americas [54]

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Well, what I would say is that if you look at OTC nutrition, first of all, the categories that are more regimented categories, daily use or regular use categories, are the categories that are growing the fastest that command the most volume via e-commerce. All in all, OTC nutrition is probably trailing in terms of overall e-commerce from a market share standpoint, from a volume standpoint. You look at our business a couple of years ago, well less than 1% of our sales was e-commerce. Today, it's a little bit over 2%. I don't think there's any question that with the growth of the millennials segment of the marketplace, this business is going to grow across OTC and nutrition.

Our strategy, the simplest, most straightforward way I can describe our strategy with e-commerce, be it an Amazon, a Walmart, a Costco, whoever, is that we want to be the same thing as a partner for them as we've been in traditional brick-and-mortar. And that is that we want to be their strategic partner. We want to focus on developing content, build out the tools so that we can bring added value to them and help them be successful at capturing market share. In a lot of ways, I look at the e-commerce segment like I looked at Walmart back in the late 1980s. It's an emerging segment. It's a growing segment. There's no question about it. But all in all, the overall pie is going to grow.

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Murray S. Kessler, Perrigo Company plc - CEO, President & Director [55]

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Yes. And as it relates to how I -- you wanted me to use Ranir as an example. We're taking cash that's sitting there, earning very little. If I pay down debt, I'd get half the return that I'm getting by the margins that we're getting with Ranir, right? It's immediately accretive. But I mean given the numbers that Ray shared with you, if you just took that same number and you retired $750 million of debt at 4%, you'd have half that level of accretion.

So how do I think about it? I think it was very clear. We would pay down debt to give ourselves flexibility. We would look at bolt-on acquisitions as a significant opportunity. And we would use our leverage and flexibility that we would build in to do that. We want to keep our dividend growing and growing in line with our peers.

So what are my orders of priority right now? I'd like to -- the world-class consumer companies in general, it doesn't scare me, but they're not sitting up at 3.5x debt and I don't want the debt number to keep growing over time. I'd like to get that number down a little bit. Share repurchases are a nice supplement. But right now for us, it doesn't make a big difference whether you're paying it down. So I'd rather have the flexibility on the balance sheet to help keep supporting growth.

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Bradley Joseph, Perrigo Company plc - VP of Global IR & Corporate Communications [56]

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Jane?

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Jane Gilday, [57]

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Jane Gilday with Barrow, Hanley. Addressing the changes in executive compensation and incentives, dropping return on capital and working capital component, is that just because of the divestiture of the RX business and it's impossible to [greet] them? But then from a shareholder standpoint, where are our safeguards with regard to corporate actions that could deteriorate return on capital, working capital, notwithstanding your previous comments about...

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Murray S. Kessler, Perrigo Company plc - CEO, President & Director [58]

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Yes. Listen, I think your safeguards are, we have a multicomponent, but this company never had revenue, right? So I mean the current system rewarded return on invested capital, and our working capital numbers have gone to heck during that period of time, right? Our inventories are up. So it's not like it aligned. I want this company to have a balanced, a great tension on short-term bonus, on revenues and operating income and that natural friction. But you've got relative total shareholder return as a major component to my compensation, right? So that alone is your governor, that if I don't grow the overall returns and we deteriorate some of those things, then I don't get paid. So I mean, that's a starting one. But they're completely -- so you have a big component of that. That started for the first time last year. You have 3-year goals. We have to get through the transformation, so it's very difficult for me to -- so it's based on consumer because that's the new company and where we're going. But you've been involved with me for -- invested with -- behind me in the last 20 years. And I think we've always done that responsibly, so I'll let my track record with you stand behind it.

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Bradley Joseph, Perrigo Company plc - VP of Global IR & Corporate Communications [59]

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David?

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David Michael Steinberg, Jefferies LLC, Research Division - Equity Analyst [60]

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Dave Steinberg from Jefferies. I wanted to ask you a question about something that was not brought up today, but we're talking about potentially very large numbers, and that's your tax liability issues. In the last week or so, I think the IRS notified you of a proposed adjustment for additional tax and penalty, I think of around $840 million. Seems a little bit odd because the transaction of Elan buying Athena was 23 years ago. So had there been any discourse between the company and the IRS about this? Why did this come out of left field? And is it past the statute of limitations?

And linked to that, does this have anything to do with the Notice of Allowance from the Irish government? I think it was $1.9 billion, plus 8% interest would bring it to another $400 million or $500 million. Where are you in the process with the Irish government? And are you considering doing any reserving against these potentially large tax bills? And if you've not done so, why is that?

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Murray S. Kessler, Perrigo Company plc - CEO, President & Director [61]

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Well, we're not reserving against them because we don't believe we're going to lose them. And every person who has opined on it, I mean, all of our advisers opined on it, believes that Elan did it properly. The recent one, and I don't want to go too far on commenting on the specifics of this, but I don't think the market reacted very much to this last one, which was a notice from a few years back and the company thought it answered and the IRS came back as a transfer pricing issue on the same revenue, right? So that complicates things, right, because they're both claiming the same income, and it can't be in both places and there's treaties that govern that. But on transfer pricing, those are hard battles for the IRS to win. It's especially hard to get penalties when it's all been advised properly and everything else. And I think that's why you saw -- and there are significant offsets if all of that was to be true and you ever did come to a rate. So I think there was a reason that you didn't see the market react much to the second one.

As it goes to the first one, the Irish government has still not made it clear, the Revenue Department, of why they -- why Elan was wrong. Now, we believe and we've been very -- we've disclosed this, we believe that the Irish government did not -- that they violated our legitimate expectations to rely on prior audits and 20 years of history and that they did not -- they improperly brought this even to challenge the tax or to put this tax forward. So we are in a judicial fight first to say whether or not it was even legal under the Irish law to assess this tax, not whether the tax is right or not. When that's completed, which will be over the next year or so, then you'll get into the discussion if we were to lose. If we were to win, it's done. If we were to lose, then the tax appeal process begins. So it'll be a long process, but we believe that it's wrong.

As it relates to the U.S. one, I'm not sure -- I mean, my counsel's here and I'm not an expert on it, so I don't want to

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