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Perrigo (NYSE:PRGO)
Q1 2020 Earnings Call
Apr 30, 2020, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good morning, and welcome to the Perrigo first-quarter 2020 financial results conference call. [Operator instructions] Please note this event is being recorded. I would now like to turn the conference over to Brad Joseph, Perrigo investor relation. Please go ahead.

Brad Joseph -- Investor Relations

Good morning, and welcome to Perrigo's first-quarter 2020 earnings conference call. We hope everyone is healthy and safe during these times. As safety is our top priority, we are conducting this call virtually from different locations adhering to social distancing guidelines. I hope you all had a chance to review the press release we issued earlier this morning.

A copy of the release is available on our website. Joining today's call are President and CEO Murray Kessler and CFO Ray Silcock. I'd like to remind everyone that during this call, participants will make certain forward-looking statements. Please refer to the important information for shareholders and investors and safe harbor language regarding these statements in our press release issued earlier this morning.

When discussing the business, Murray will reference only non-GAAP adjusted numbers for the quarter unless otherwise noted. Comparisons to prior periods will also exclude exited businesses and currency changes, unless otherwise noted. Ray's discussion of financial results during this call will address both GAAP and non-GAAP results and were noted, comparisons to the prior year will exclude exited businesses and currency changes. In the appendix for today's call, we have provided reconciliations for all non-GAAP financial measures presented.

A few other logistics to mention before we get started. First, excluding exited businesses excludes contributions from the exited animal health business previously included in the Consumer Self-Care Americas segment and the divested Canoderm business previously included in the Consumer Self-Care International segment from Q1 2019. Second, organic growth excludes Ranir, the exited animal health and Canoderm businesses and currency. And third, as a reminder, worldwide consumer includes the consumer Self-Care Americas and Consumer Self-Care international segments, as well as corporate unallocated.

And with that, I'd like to turn the call now over to Murray.

Murray Kessler -- President and Chief Executive Officer

Good morning, everyone. I want to begin today's call by recognizing the obvious. We are living in unprecedented and challenging times. But I also want to recognize and acknowledge that I feel blessed to be surrounded by such a seasoned leadership team and over 11,000 dedicated employees who are making tremendous sacrifices while giving it their all to keep our essential products flowing to consumers and patients who need them.

These Perrigo employees are making sure that consumers have access to Perrigo's broad portfolio of cold/cough medicines, analgesics like acetaminophen and electrolytes to treat flu and COVID-19 flu-like symptoms, allergy medicines as we head into the allergy season, infant formula to feed babies, albuterol inhalers to help asthma patients and many other essential products. In this environment, it has been our first priority to focus on keeping employees safe while they keep these essential products flowing to market; second, to reward employees on the frontlines, whether in production or in the labs, for their work and dedication; and third, to support the communities in which we operate during these challenging times. Here are some examples of how we have accomplished each of these. We restricted access to our facilities worldwide to essential employees only and implemented a multistep prescreening process before anyone can enter into our facilities.

We prioritized production to central products. We eliminated nonessential travel even before the federal travel bans went into place in the U.S. We regularly communicated with our workforce, providing education about social distancing and hand washing and other appropriate measures over and over again. We doubled frontline production employee first-quarter bonuses.

We made over $1 million worth of cash and in-kind product donations like hand sanitizer to our communities and much, much more. What is amazing to me is how our employees responded to the unprecedented challenges and delivered a strong first quarter, all while making significant progress on our transformation plan. To all Perrigo employees, and especially our frontline colleagues, thank you again for all you are doing for our company and for society. Now let's take a look at what the Perrigo team accomplished during the first quarter.

The team identified five key global investment areas going forward, including core OTC, oral health, science-based naturals, nutrition and smoking cessation. And shared them with our global leadership team through our first ever virtual leadership conference. We acquired Dr. Fresh Oral Care for $113 million.

Acquired Steripod early in the quarter and successfully integrated it into Ranir. We transitioned Prevacid from GSK to Perrigo and initiated a supportive advertising campaign. We received FDA approval of the store brand OTC version of Voltaren Gel. Received FDA approval of and successfully launched the first generic albuterol HFA product.

We launched a number of new products in Europe prior to COVID-19. We continue to implement key capability upgrades such as data analytics, enhanced sales and inventory operational systems and central finance, to name a few. We developed and launched a hand sanitizer product from start to finish in three weeks, restored our winning culture, protected the company's liquidity and delivered financial results well ahead of expectations despite the constant set of challenges we faced. Please understand, the team pulled it off, but it was a lot of heavy lifting, a lot.

Now let's take a closer look at Perrigo's first-quarter 2020 financial results, starting with a quick overview, followed by a deeper dive into net sales and business drivers. Then Ray will walk you through the rest of the P&L. All net sales comparisons are the first quarter a year ago. Total Perrigo consolidated first-quarter reported net sales were $1.34 billion, up 14%, with organic revenues up 11%.

Adjusted operating income finished at $225 million, up 11%, and adjusted diluted EPS was $1.14 versus $1.07 last year. All segments contributed to the consolidated 18% revenue growth, including a 25% increase in consumer Self-Care Americas, CSCA; a 14% increase in consumer Self-Care International, CSCI, and a 6% increase in generic Rx. We Estimate that customer and consumer reactions to COVID-19 added about $90 million to $110 million to consolidated net sales in the quarter, with the most prominent benefit about 80%, coming from the U.S. consumer and Rx businesses and a smaller benefit from Europe.

At this time, we cannot realistically estimate the amount of product that was bought and used for COVID-19 or flu or allergy symptoms as opposed to consumer pantry loading, but we are watching this closely and using our best efforts to ensure our retail and online customers have the proper amount of product on their shelves and/or in their warehouses. Our worldwide consumer businesses delivered a solid performance with net sales growth of 21%, including Ranir. First-quarter organic growth compared to a year ago was very strong and more than 12%, led by CSCA organic growth of 15%, and CSCI organic growth of 8%. While the balance of the year may be a bit lumpy due to COVID-19 pantry loading and normalization, as well as our product prioritization efforts we believe we will meet or exceed our stated 3% organic growth objective as long as, among other things, that we can keep our facilities around the world running.

It reminds me of a saying from a former boss who once said to me, "You don't make the plan the way you plan to make the plan." So obviously he's right. This is certainly an example of that. Let's take a closer look at the drivers within each of our business segments. Starting with consumer Self-Care Americas.

First-quarter reported net sales increased 20% or $119 million versus a year ago, benefiting from strong tailwinds entering the year as described during our last conference call, a surge in consumer demand for our products as a result of the COVID-19 pandemic in March and accelerated growth in e-commerce, which benefited from the investments we undertook last year. The quarter also benefited significantly from the addition of Ranir but was partially offset by the animal health exit. Excluding exited businesses, CSCA grew 25% compared to the year-ago quarter. Now let's take a closer look at the COVID-19-related impact to CSCA.

As just covered, we exited Q4 last year with tremendous strength, having made significant gains in penetration versus national brands, that's share versus national brands, and winning market share from other store brand competitors as a result of new products, distribution gains and other favorable trends. That momentum continued in Q1 as CSCA grew organically 8% through February versus a year ago. Then came March, and we saw a large surge in demand related to COVID-19, which led to year-over-year organic net sales growth of 28% in that month. That growth came from the categories you'd expect, cold/cough, infant formula, analgesics, electrolytes, just to name a few examples.

We also saw strong results in allergy. As a relatively warm winter triggered a higher incidence rate of allergy. Nicotine cessation also showed strength in the quarter. We hypothesized this as a side effect of COVID-19.

This is not a particularly good time to be smoking. In any event, all of this resulted in a marketwide penetration gain versus a year ago of 60 basis points for store brands versus national brands. The other area worth mentioning is our e-commerce business. Our e-commerce investments are paying off.

CSCA e-commerce net sales grew from 3% of total revenue in Q4 '19 to 5% of total revenues in Q1 2020. That was an increase year over year of plus 112%. This is being reflected in the marketplace with some pretty meaningful channel shifts from brick-and-mortar to online. So CSCA net sales were obviously very strong in Q1.

The big question that you and, frankly, all of us are trying to determine is what does that mean for the balance of the year? That's a good question, and it is a question that we honestly cannot answer at this time as there are just too many open-ended variables for us to make an informed assessment. For example, we do not know how much of March is surge in sales was consumed, how much was incrementally purchased by consumers that wouldn't normally buy store brands or how much was a result of consumer pantry loading. We also do not know if illnesses associated with COVID-19 have peaked, will taper off, will continue in Q2 or spike again later in the year. So it is certainly possible that we might ultimately experience a short-term sales trough.

But conversely, we believe that there is a likelihood that any short-term trough will be offset by retailers restocking their shelves and warehouse inventories, the launch of our recently approved store brand version of Voltaren Gel, which we expect to launch later this year, and the fact that store brands historically have done well in a recessionary period, which may well be our new reality going forward. But simply stated, this is still speculation. At this point, we do not yet have a good handle on what will happen going forward. But on balance, we think CSCA is in pretty good shape at this time.

But I again say this cautiously as there are just so many moving pieces. In addition, there's another variable, our ability to continue manufacture. As I noted earlier, we have implemented many measures to ensure employee safety and the ongoing manufacture of our product. As I sit here today, all, I repeat, all of our facilities are running, and we have only had a few brief interruptions so far.

But despite our precautions, there are no guarantees, and that can change on any day. It is for these reasons, including the same around business continuity that all businesses are facing, that we did not update our fiscal 2020 guidance. We hope to have a better handle on projections by the end of Q2. Now turning to CSCI.

Reported net sales increased 9% versus a year ago or up 14% on a constant-currency basis. Excluding the divested Canoderm product, which impacted the top line by 120 basis points, net sales were driven by strong new product launches, mainly selling efforts in our weight loss and skin care categories and the addition of Ranir. Just like in CSCA, we experienced a surge in CSCI demand due to COVID-19, primarily in our U.K. store brand business and our branded cough/cold, VMS and pain products.

While almost all CSCA's products are consumer healthcare-focused, only approximately half of the CSCI portfolio treats ailments, while the other half is Self-Care, focused on preventative health and wellness. These include categories such as weight management, anti-parasites and sun care. While we expect lower pull-through from these products until Europe returns to a more normal way of life, this headwind may be offset by tailwinds for our pain, upper respiratory and VMS products. But the same issues I described for CSCA apply here as we are unsure of how much of these products were driven by pantry loading in the first quarter versus COVID-19-related consumption.

So again, we'll need to see how the next few months play out before making any further comments on the full year. Turning to Rx. Reported net sales grew 6% in the quarter due to the successful launch of generic albuterol, which the FDA approved in February. Because we had anticipated the approval last year, we had product immediately ready to ship.

With strong demand out of the gate, benefiting from COVID-19, Rx shipped almost $44 million of albuterol, which more than offset the expected year-over-year decline in Rx from testosterone 1.62%. We have included about 75% of these albuterol sales in our $90 million to $110 million COVID-19 impact estimate. Importantly, we believe there is consumer demand for all of the generic albuterol product that Perrigo and its partner, Catalent, can manufacture this year. So to be clear, no deload is expected here.

Before I offer a final summary of the quarter, I wanted to briefly touch on the status of the Irish tax matter. As you know, we have taken several measures to challenge what we believe to be an unwarranted assessment. This includes appealing the original assessment and obtaining approval from the Irish High Court to challenge the assessment in a judicial review proceeding. While the judicial review hearing was scheduled to begin on April 21, the court postponed that hearing in the interest of public safety and the current restrictions imposed by the Irish government.

While no new hearing date has been set, we continue to believe in the strength of our position. So to summarize, it was a strong quarter, top and bottom line. All three business segments contributed to revenue growth. Fundamentals were solid before the COVID-19-related surge in March, and obviously, even stronger after.

While OTC Voltaren Gel, Dr. Fresh and albuterol, all offer potential upside, we are taking the prudent approach and not updating our guidance at this time given uncertainties related to COVID-19, which could impact all of our businesses. Business continuity remains critical, but employee safety comes first, and it will continue to be a balancing act. I will note, we have gained experience over the last month or so on how to handle the issues that confront us.

And we are in much better shape today than we were at the beginning of the crisis. Our transformation to a consumer-focused self-care company last year could not have come at a better time for us at Perrigo in order to prepare us for what we are facing and the new normal world going forward. We believe Perrigo is very well-positioned for the future, leveraging three key drivers in a new normal world: self-care, value and e-commerce. Bottom line, in a quarter with plenty of strong financial results to be proud of, I could not be more proud of our team and, I mean, everyone at Perrigo.

They are delivering on our vision to make lives better by bringing quality, affordable self-care products that consumers trust everywhere they are sold, and they are doing it right now. I'll now turn the call over to Ray to walk us through the rest of the P&L and key balance sheet items, then we'll open it up to questions. Ray?

Ray Silcock -- Chief Financial Officer

Thank you, Murray, and good morning, everyone. Now that Murray has gone through the revenue and business drivers for the quarter, I'd like to walk you through the rest of the P&L. Consolidated reported GAAP net income for the quarter was $106 million, and reported diluted earnings per share was $0.77. On an adjusted basis, consolidated net income for the quarter was $157 million, and earnings per share were $1.14, the sixth consecutive quarter in which we have met or exceeded market expectations.

Adjusted net income for the quarter includes $50 million of non-GAAP adjustments, primarily amortization of $71 million, which we always add back, partially offset by a $16 million prior-period tax benefit as a result of the CARES Act. The GAAP reported consolidated effective tax rate for Q1 was 7.2%. This was generated from tax expense of $8 million on pre-tax income of $115 million. Tax expense was low this quarter primarily due to $20 million of Q1 tax benefit from the CARES Act.

$16 million of those tax benefits related to 2019 and were adjusted out for non-GAAP purposes, leaving $4 million in Q1 and bringing the first-quarter adjusted effective tax rate to 19.8%. Full details of these adjustments can be found in the non-GAAP reconciliation table attached to this morning's press release. From this point forward, all dollar numbers, basis points and margin percents will be on an adjusted basis, while growth percentages will exclude the impact of currency and of exited businesses. The Worldwide Consumer first-quarter net sales growth of 21% versus prior year, resulting in a gross profit of $416 million, up $38 million from last year, a 16% increase, excluding the impact of currency and exited businesses.

Gross margin was down 220 basis points from 40.6% to 38.4% primarily due to an increased proportion of store brands, including Ranir, as well as operational inefficiencies and the impact of exited businesses. Worldwide Consumer operating income improved by $30 million versus prior year primarily due to gross profit flow through, offset by higher administrative costs, including the impact of a $4 million special bonus paid to our frontline employees, most of them working in various manufacturing plants around the world, who had to physically go into work despite the COVID-19-related lockdowns to continue to provide our essential products to customers and consumers. Operating margin improved 100 basis points over last year as we were able to leverage gross margin from increased sales, savings from project momentum, together with Ranir's higher operating margin, all partially offset by higher compensation costs, including share-based compensation from our annual incentive plan, as well as the special bonus. For CSCA, gross profit of $220 million was up $30 million from last year, an increase of 23%, excluding currency and exited businesses, driven by sales growth.

Gross margin for Q1 declined 110 basis points versus last year due primarily to higher operating cost. CSDA operating income for Q1 amounted to $137 million, an increase of $31 million versus prior year, up 33%, excluding currency and exited businesses as we leverage sales growth for the quarter and achieved project momentum savings. The result was a 130-basis point improvement in operating margins to 19.6%. CSCI gross profit was $197 million, an improvement of $7 million over prior year, plus 9%, excluding currency and exited businesses, driven by increased sales.

Gross margin, however, declined 250 basis points to 51.4% primarily due to a higher proportion of store brand sales including the addition of oral care products, which have relatively lower gross margins, although similar operating margins. CSCI operating income of $64 million was up $10 million, 28% excluding currency and exited businesses, while operating margins improved by 130 basis points to 16.7% due to operating leverage. Turning now to the Rx segment. We said last quarter that we expected a decline in Rx sales and profits in Q1, similar to the one we saw last quarter, primarily due to lower pricing on testosterone 1.62% as a result of our having lost exclusivity on that product.

However, on February 24, we received FDA approval for generic albuterol, and even though the demand was substantially higher-than-anticipated due to COVID-19, the team did a great job getting this much needed product to our customers. We were able to achieve $44 million in albuterol sales in Q1, resulting in an overall Rx net sales increase versus prior year of 6%. Moving on to gross profit. In Q1, we sold albuterol, which have been produced in 2019 and expensed as pre-commercialization product.

As a result, albuterol gross profit this quarter was modestly higher than it will be in the future. Including the additional gross profit from albuterol sales, Rx gross profit decreased by $9 million in Q1. Gross margin of 42.3% was down from 48.6% last year as we felt the impact of adverse pricing. Operating income declined by $8 million to $74 million also primarily from the same adverse pricing.

Consolidated cash flow from operations in Q1 was $172 million, a 110% cash conversion on adjusted net income, in line with what we said on our last earnings conference call. This strong cash conversion was driven by a reduction in inventories due to very high demand in the quarter, as well as by strong collections in our Rx business as compared to Q4. Offsetting this were increases in accounts receivable in our Americas business due to the high demand, which was most strong at the end of March. On March 28, at the end of the first quarter, we had $510 million in cash on our balance sheet, including $100 million we drew from our revolving credit facility in March as a precautionary measure.

Since then, we paid just over $100 million for the oral care assets of high reach brands on top of $11 million we had paid previously as a deposit. Total outstanding debt at the end of Q1 was $3.5 billion, including the $100 million drawdown on our revolver. We have an additional $900 million of available capacity on this $1 billion revolving credit facility, which expires in March 2023. We believe our balance sheet continues to be strong.

We are closely watching our cash collections but, to date, have not experienced any disruptions in cash receipts in the U.S. and only a few minor deferrals internationally. We continue to pay our suppliers on a timely basis to ensure continued supply of critical materials and components. We also closely monitor inventories, expecting that our sales mix could be impacted by the lockdown and other measures.

Our cash position in Q2 will also benefit from the CARES Act, which legislated an increase in the 2019 and 2020 interest expense deduction thereby reducing the amount of tax due in April, as well as deferring payment of 29 taxes to July. In light of our strong balance sheet, we remain committed to maintaining dividend payments to our valued shareholders. I'd now like to talk a little bit about what we see so far as future earnings. At this time, we do not have sufficient information about the broader economic outlook nor about the impacts of lockdowns and other COVID-19 measures to justify updating the 2020 guidance we announced in our last conference earnings -- excuse me, our last earnings conference call in February.

The COVID-19 impact on our business in Q1 are difficult to enumerate and, for the balance of the year, difficult to predict. Factors that could benefit our results include continued success of generic albuterol, the addition of our recently acquired Dr. Fresh business and the future potential of OTC Voltaren Gel, for which we recently received FDA approval. We could also benefit from consumers choosing our lower-cost, same-efficacy store brand products during a possible extended recession, as well as from potential additional surges in demand later this year.

Conversely, there could be a deterioration of sales in the wake of pantry loading in March, economic impacts from the lockdowns and social distancing measures, as well as possible disruptions in our manufacturing facilities and supply chains around the world. It is simply impossible to estimate these at this time. There are too many moving pieces that literally change every day, but we will continue to closely monitor the impacts in and on our businesses and hope to be in a position to provide more clarity next quarter. In closing, I, too, want to take this opportunity to thank Perrigo's wonderful employees for their dedication and continuing to work both in and outside of our facilities as normally as possible during these truly abnormal times.

Operator, please, can we now open the line for questions?

Questions & Answers:


Operator

We will now begin the question-and-answer session. [Operator instructions] Our first question from Louise Chen of Cantor. Please go ahead.

Louise Chen -- Cantor Fitzgerald -- Analyst

Hi, thanks for taking my questions here. So first...

Murray Kessler -- President and Chief Executive Officer

Good morning, Louise.

Louise Chen -- Cantor Fitzgerald -- Analyst

Good morning. There seems to be some confusion in the marketplace when you say Perrigo is not updating its guidance at this time. Are you pulling your guidance? What does this mean? And it sounds like there could be potential for upside, but it's just not clear how to put that all out there now. So it would be interesting to hear what you think here.

And then second question I had for you was just on the channel shift. From bricks-and-mortar to e-commerce, do you expect that to continue? And do you have the relationships in place to affect that? Thank you.

Murray Kessler -- President and Chief Executive Officer

OK. First one, we're absolutely not pulling guidance. We changed the word of ups unchanged to not updated for a very clear reason. In my mind, unchanged means we're reconfirming what we had on the street in February, which was the best information that we had at the time.

But I got to tell you, coming out of a very, very strong quarter with albuterol as upside, Dr. Fresh as upside, potential for extended illnesses as upside, a strong allergy season as upside as Voltaren Gel as an upside. The fact that we have to rebuild all of our warehouse, customers' warehouse inventories that are weeks below what they normally would be. If it was any other circumstance, I'd be raising guidance right now.

But given the business uncertainty out there in the world, it's just not prudent to be raising guidance at this moment. So not updating reflects the fact that I look at it and say, I don't think the guidance is right at this point because if you had some kind of significant business interruption, sure, it could hurt you. But on the other hand, given all the positives on the business, we'd likely be updating. And the implication of unchanging says we'd have to have a pretty rough balance of the year in order to stay at the existing guidance.

So I've left it unchanged from where we are. I left it at where it was in February. We're not pulling guidance. And there's a lot of good things happening, but it's a very uncertain world.

So hopefully, that clarifies anything for anyone. Perrigo has not pulled guidance. The second one on channel ship that was really interesting because if you saw some of the retailers, the traditional retailers, they talked about store traffic coming down and our stock reacted a little bit to that in each of those cases. But the reality was, as our demand was strong, we were more than making that up in the e-commerce channel.

I think I highlighted the 112% growth in the U.S. It was even stronger than that in Europe. I think it's up to 8%. And when you look at the omnichannel, reports which -- some of the sell-side and buy side buys IRI data, you're not seeing the Costcos of the world, you're not seeing Costco online, you're not seeing Target online, you're not saying a lot of those other areas.

We saw share point changes. To me, I think that's going to be a new normal way of life. I'm glad we made the significant investments we've made over the past couple of years to put Perrigo at an advantage in the e-commerce area. And yes, we are taking advantage of that from all angles, and that investment has been paying off very quickly.

But yes, I think you're going to see online sales stay strong going forward and continue to grow, and it's obviously one of our strategic areas of focus. So I hope that answers your questions.

Louise Chen -- Cantor Fitzgerald -- Analyst

Yes. Thank you.

Operator

Your next question is from Chris Schott of JP Morgan. Please go ahead.

Chris Schott -- J.P. Morgan -- Analyst

Great. Thanks very much for the questions.

Murray Kessler -- President and Chief Executive Officer

Good morning, Chris.

Chris Schott -- J.P. Morgan -- Analyst

Good morning. Just had two here. First, can you expand on the gross margin performance in the quarter, particularly for the Americas business? I guess was this all just mix-related, or are we also seeing higher manufacturing costs due to the shutdowns? I guess what I'm trying to get is, directionally, should we think about the CSCA gross margins kind of rebounding from here as we look out the remainder of the year, or is this kind of the new normal? And my second question is kind of a bigger-picture one, of what does a recession mean for Perrigo's business. I think if I go back to '08 and '09, I think you saw some fairly meaningful share gains as consumers traded from national brands to store brands.

I guess the business may be in a different place today in terms of market penetration, but just as you think about if we do head into a recession, what does that mean for the portfolio over the next one or two years as we go through this process? Thank you so much.

Murray Kessler -- President and Chief Executive Officer

Well, let me start on the first one, then I'll turn it to Ray. And then Ray, you can give it back to me on the recession question, but gross margins, honestly, mostly, mix. I mean, for sure, there is a component that I don't think affected the first quarter very much where the greatest demand -- and listen, we are prioritizing our products along with what our customers and consumers and society as a whole need. And that means that right now, we have been -- we're more than 50% of the U.S.

supply of acetaminophen, and that's a lower-gross margin item, and we're running that, although I don't think that had a big-deal impact on the first quarter. I think gross margins, in general, are mixed, but I'm pleased with our margins when you take it down to the operating margin line. You've got a lot of moving factors. Then Ray, can you go into that in a little bit more detail?

Ray Silcock -- Chief Financial Officer

Sure. Murray is right. You've really got to look at operating margin, especially with respect to the fact that we saw increases in our store brand business, where our gross margins are lower, but our operating margins are similar. And we saw that in the CSCA specifically, which you referenced, our margin this year at around -- operating margin around 19.6% contrasts positively by about 130 basis points versus what we've got in 2019 first quarter.

So we're seeing -- we are seeing some improvement in our operating margin. And the impact of the dislocations that happened really didn't have a big impact on Q1 because they happened late in March -- or in the middle of March, early to middle-March, and we didn't see all that much impact coming through from that. We did see some, as I say, some impacts at the end of the month but then we saw operating leverage from the sharp increase in sales that came in March.

Murray Kessler -- President and Chief Executive Officer

And then going back to the recession question. I mean you're right, Chris. You know what, we'll see how it plays out, but our product category -- and I already think we're seeing some share shifting now, but the fact is our products are of equal application, and they're 30% to 40% cheaper than the national brand. And the other benefit you'd get in a surge is that a lot of times the national brands are not on shelf.

So besides the longer-term benefit that you get of the price issue, you also get people trying. You get a much higher level of trial right now. There's a lot more people that have tried a store brand who are buying both or who were normally national brand-only consumers that are trying and buying our products and seeing for themselves that they work just as well. So listen, going into an extended risk recession period, private label always performs well.

And history, I mean, there's no guarantees, but history says we'd benefit from that, and we think that we're well-positioned with our self-care focus, our value and also the e-commerce. But yes, I mean, it's a great point. These are uncertain times, and I think the company is in a real good position right now to help society but also benefit from it.

Chris Schott -- J.P. Morgan -- Analyst

Thank you.

Operator

The next question is from Randall Stanicky of RBC Capital Market. Please go ahead.

Murray Kessler -- President and Chief Executive Officer

Good morning, Randall.

Randall Stanicky -- RBC Capital Markets -- Analyst

Hey, Murray. Good morning. Hey, just to put this guidance question to rest because there's a lot of questions around it. It sounds like, if I'm hearing you correctly, there are several upside drivers.

You're looking for better clarity around those before addressing guidance. Are there factors that would pressure that range? Or is this just about being prudent given that we're in the first quarter of a pandemic? And then my second question. Can you just quantify the e-commerce business and what that margin is relative to the overall CSCA margin? That would be helpful. Thanks.

Murray Kessler -- President and Chief Executive Officer

OK. Let me do the second part of that first. I believe the margins are equal. We're all sitting in different rooms and maybe somebody can send me the absolute number in e-commerce.

But either way, the margins are roughly equal or even slightly better in our e-commerce business, so that shift doesn't hurt us in any way. And listen, I don't know how to be any clear. What I worry about is business interrupt. My team, like, as a crisis committee, Randall, we were meeting in the beginning every day.

We get better at it. But we've had hits of employees. Thank goodness. We were ahead of the world on precautionary measures, and we've caught most of those -- the vast majority of those, we've got good trace and track.

We've got all of that. We handle it in a calm manner, but we've had hits. And so my fear is business interruption. I worry.

Yes, I'm at worry. I worry that when the world starts loosening up and states start loosening up, at any given time, you could get a plant hit. I think we're more experienced now. And with the precautionary measures, with the temperature check, with the questionnaires, with the restrictions we have in place and our experience, I mean, hell, we have been able to keep -- I guess I'm allowed to say hell on a conference call.

But we have been able to keep a facility running in the brunt in New York throughout all of this, and they've had hit. Your biggest downside concern is business interruption, and I believe that's what every single company in the world is facing right now. But for that big concern, even with some pantry deloading, and I don't -- I'm not sure there's going to be a huge pantry deload. But even with some of that, with all the positive things, I'd normally be raising guidance right now.

I would. I mean, we're -- we beat the heck out of it. I will -- the SEC says to give as much transparency as possible right now. I'll tell you we haven't seen orders let up in April yet, so we're still struggling.

We are not filling all the orders that we have. We are prioritizing products the society needs. And on a cumulative basis, through the middle of April, the pain category within the last few weeks, and I'm referring to IRI numbers is up strong double digits, cough/cold up strong double digits. Allergy, up strong double digits.

I mean, topicals' up strong double digits; infant formula, up double digit; nutrition drinks, up strong double digits; electrolytes, up strong double digits in consumption all the way through April 19. So we're not pulling guidance. I think that the word unchanged meant we were sure that we were right, and I don't have data to say, we were right at their current range. And if it wasn't for the potential of business interruption, I'd probably be raising at the moment.

Randall Stanicky -- RBC Capital Markets -- Analyst

That's helpful. Thank you.

Murray Kessler -- President and Chief Executive Officer

Operator?

Operator

I'm sorry. The next question is from Ami Fadia of SVB Leerink. Please go ahead.

Murray Kessler -- President and Chief Executive Officer

Good morning.

Ami Fadia -- SVB Leerink -- Analyst

Hi, congratulations and good morning. Congratulations on the strong quarter.

Murray Kessler -- President and Chief Executive Officer

Thank you.

Ami Fadia -- SVB Leerink -- Analyst

So I think you've made the point on guidance very clear, so I will not repeat that. I wanted to get some color on just e-commerce channel and your ability to -- maybe what you're seeing on the ground. There has been some discussion around reduction in foot traffic at pharmacies. Are you seeing that impacting the demand? It doesn't sound like it.

But is that being sort of taken care of or offset by increase in e-commerce? Can you sort of confirm that? And with regards to ProAir, what's your full capacity with regards to how much demand you can fulfill for this year? And how should we think about increasing that capacity into next year? Thank you.

Murray Kessler -- President and Chief Executive Officer

Let me just break down the second part, so I don't forget it. In terms of e-commerce, it's a little bit -- the answer is no, we haven't seen demand slow. I mean, maybe the orders have slowed a little bit in the past couple of weeks, but the backorder of -- the backlog of orders is tremendous. We're not closed yet to filling all the orders that we have and the unshipped orders that we have in hand today.

But just to be clear, like when we ship to most of our major customers that are getting big surges in their e-commerce business, we just ship it to them and then they sell it, right? So from us, it's in order to the Costco as an example or to Walmart, and then they fulfill it on an online basis or -- and it shows up in our regular numbers, and we tease those numbers out because we have line of sight. But so far, we've been more than offsetting any slowdown. I mean, it would be -- it's almost hard for us to see the slowdown that some of the retailers report in foot traffic, but for -- I get the IRI numbers, and I've seen that those have slowed down in certain categories, slowdown in infant formula. You'd expect that your baby is not going to eat more.

But on the other hand, pain hasn't slowed down. Acetaminophen, ibuprofen, those products haven't slowed down at all. So bottom line is, yes, I think there's channel shifting going on. On a personal -- I don't have any data to support that.

I think that there's enough time going by here that people are learning where they might have been reluctant before. They're learning the power of e-commerce, and in a more cautious world going forward, I think online will continue to get more and more important. We're working pretty hard on omnichannel reports. So our ability to -- does not report the shares based on IRI, but on a total mass merch and traditional retailers that report and e-commerce basis.

And hopefully, we'll get to that point, we're confident in those numbers to share those soon. On ProAir, the generic ProAir, that one is -- that's a good question because our ongoing rate, we can't satisfy at the level that we did initially. We'll be well ahead of -- well, well, well ahead of our projections that we had internally for the year, but it will get back to a normal level. And I'm not prepared to speak at whether Catalent, who is our partner, can expand capacity or not or how fast or how big the real demand is on an ongoing basis, there'll be more competitors, etc.

But there'll be no -- we had pre-built that inventory in an anticipation of an approval earlier. And so we had a good amount on hand, and we still are working our way through that. It'll get to sort of a more normalized level, and then we'll see how the market shakes out. But there'll be no giveback on albuterol, and albuterol was probably 30% of what we attributed to sort of the spike in demand on COVID.

So you can just subtract that out when you're trying to estimate impact. I look at it and say, at about $100 million of COVID impact, we think you subtract out the 30%, you got 70%, probably a good portion of that was consumed. You have some you'll give back. But on the other hand, we got to rebuild all those.

All those store shelves have to get full again. All of the customer warehouses have to get full again. And we also have to start -- we're not making all of our products right now, and we've got to reengage and make those -- when we can, make the products that are less important to society right now as well. So I think we'll weather the storm pretty well, barring any massive business interrupt.

Ami Fadia -- SVB Leerink -- Analyst

Got it. And maybe if I could just ask a follow-up. Can you talk about the current capacity utilization at your plan?

Murray Kessler -- President and Chief Executive Officer

Yes. We're not operating our normal levels. Again, that's what I was trying to make a point on, people understanding how much a challenge it is for any manufacturer right now. And you see it in the news, if you get a hit in a facility, if somebody who gets COVID, it scares people.

And we are very cautious. So if there is somebody who happened to get into the plant, we trace them and if they even modestly come into contact with them, and 12 or 14 people, we send them home for two weeks. Bottom line, that results in a meaningfully higher level of absenteeism worldwide than we would normally deal with. And despite -- and that varies, right? I mean -- and it may happen for a week or two and then come right back to normal again.

There's parts of the world where local governments mandate certain people that are in a high-risk category not to come to work at all. That creates less people in the facilities. Bottom line, though, is through this, we'd be unable to keep 38 manufacturing facilities globally running. They're all running today and, I would say, on average, at about 80% productivity.

Ami Fadia -- SVB Leerink -- Analyst

Great. Thank you.

Operator

The next question is from David Risinger of Morgan Stanley. Please go ahead.

Murray Kessler -- President and Chief Executive Officer

Hey, David.

David Risinger -- Morgan Stanley -- Analyst

Hi, Murray. Congrats on the performance during these difficult times. I have a couple of questions, please. First, with respect to cost and just what's happening with supply.

Could you just help us better understand, is the right way to think about Perrigo's cost structure this year that higher COGS due to COVID are going to be offset by lower SG&A due to less travel and less commercialization costs? So I guess that's the first question at a high level. Second, with respect to supply, could you comment on whether there were any API or intermediate supply issues for either the consumer or the Rx business? And then third, with respect to the dermatology Rx business, so obviously, derm is a big component of Perrigo's Rx leadership, but stay-at-home orders have impacted patient visits dramatically. I was just hoping you could comment on that as well. Thank you.

Murray Kessler -- President and Chief Executive Officer

OK. Ray, I'm doing -- would you want to do the cost one?

Ray Silcock -- Chief Financial Officer

Sure. So I think you basically described it to a certain extent, David. But we are seeing increase in some of our costs. As Murray described, we've got absenteeism in the plants that we still pay people for the most part even when they're absent under COVID-19.

So we do see some higher costs there. We are getting operational leverage on all three businesses. It's quite significant, but that's because of the increased sales certainly in the first quarter. We're seeing momentum savings continuing.

And we are paying -- we paid the special bonus we talked about, which obviously resulted in higher overall compensation costs. But I think that on balance, if you look at operating income, operating margin and operating income, as I mentioned earlier in the call, if you look through to that, our operating expenses are down slightly. We would expect that trend to continue. And we're also expecting probably less advertising and promotional cost for the time being, plus, as you mentioned, less travel or less of those other expenses.

And we are seeing just a small down in the Q1 on our operating margin but a big increase, obviously, in our operating income.

Murray Kessler -- President and Chief Executive Officer

Yes. I mean, I -- thank you, Ray. David, it's a bit hard to measure, right? Because a lot of this all happened in the last couple of weeks of March, so we'll get a much better handle. This is a good area of where I'd like to tell you we have a good handle on it, but there are so many moving pieces, and we'll see how it shakes out, but I don't think it will be a severe movement one way or the other.

We didn't non-GAAP out employee bonuses. Those were my decision to do those, and I think that was money well spent. People are proud at Perrigo right now of what they're doing for society, and they know that myself and my leadership team put their safety first. And I'm proud of that fact.

That's one of the things I'm most proud about in my career, and we will continue to do that. There are other efficiencies, too, right? I mean, we'll have some less of absorption when we're running more acetaminophen. But on the other hand, you're going to have more efficiencies because we have partnered and are -- I wanted to make this point, and it's not really your question, but our customers have been unbelievable through this. Like John Furner, President, he's been EVP, Head of North America for Walmart, calls me on the phone and says, "All rules are off right now, how can we help you to do what's right for society?" And just focused on your big SKUs, and we're doing that with all of our manufacturers.

So we're doing longer runs of the bigger items than we would normally done and with agreement that we're just going to leave some of the smaller secondary items out of distribution right now, so we'll get efficiencies on that. So I need to see how all of that -- Ray needs to see how all of that shakes out. But yes, there'll be less travel. There'll be less advertising.

There'll be some expenses delayed on clinical trials and things like that. But boy, it's hard to really to get a real good handle on it, but it will normalize. And Ray talked about the other areas. API, we've been able to work through it pretty well.

We never really had any significant interruptions. We were fortunate that we keep strategic inventories of API on hand. So we had sufficient API to weather the storm in any places where there were interruptions, and for the most part, we worked through that. There was an interruption for a while with India in paracetamol.

But this is -- another point, I guess, I'd like to make is that for the U.S., which is our biggest business, we make -- we have 24 facilities in the U.S. The API was in the inventory in the U.S. So while sometimes that hurts us on that cost side, it was sure good to be primarily a U.S. manufactured product servicing, the U.S.

market through this storm, and it highlights a Perrigo advantage. But the answer is so far, so good on API. On Rx, we did have some third-party suppliers we rely on, who had some interruption. They're back up and running again.

And but yes, Rx could have had a stronger quarter without some of the interruption in their supply. Hopefully, that's back on track. Now it appears to be or soon to be. And yes, there's a little bit of softness in some of the areas, not within Rx.

But you're not selling a lot of weight loss products or I mean -- or sun care products or headlight products and all that in Europe right now until things open back up again. But on the other hand, we have surges on the other side. I mean, there's a lot of moving pieces. But in general, we are not having significant interruption.

We have fires every day. It's a lot of heavy lifting. It's much more than people understand who aren't living the daily fires, and that's why I made the point to be how proud I am on my team. I mean, it's like they -- we get 100 problems a day or 1,000 problems a day, and they work through it, and they solve it.

And it's been remarkable to watch.

David Risinger -- Morgan Stanley -- Analyst

That's great additional color. Much appreciated. And then on the derm demand?

Murray Kessler -- President and Chief Executive Officer

I don't have the exact numbers in front of me. Brad, maybe you can get back to David after that. I mean I think we said we were a little bit softer in some of those areas. I just don't have the numbers in my hands, David, but Brad will get back to you.

David Risinger -- Morgan Stanley -- Analyst

OK. Thank you and congrats again.

Murray Kessler -- President and Chief Executive Officer

Thank you.

Operator

The next question is from David Steinberg of Jefferies. Please go ahead.

David Steinberg -- Jefferies -- Analyst

Yes, thanks. I had a question about some recent OTC reform legislation. One of the stimulus bills seemingly buried in it was some legislation related to OTCs and monograph OTCs. And it sounds like it might benefit the company, some of the headlines relating to user fees and encouraging innovations.

So I was curious, does that legislation benefit Perrigo? If so, how does it? And if so, does it shift some of the prioritization of your projects? And then secondly, on your generics business, I know you've been intending for a while to either sell it or divest it or spin it, and we haven't heard much recently. Just curious given the recent approval for albuterol, does that change the dynamics in terms of potential value received or in time lines relating to potential divestiture? Thanks.

Murray Kessler -- President and Chief Executive Officer

Yes. Well, the recent approval make it more expensive. But the bottom line is, I've said it here for almost a year now, that our focus is primarily on the consumer business, but the Rx business is performing much better, and it's throwing off a lot of cash. And our entire management team are stewards of shareholder value, and the multiples are just so depressed in the Rx industry right now.

I believe it would destroy shareholder value to sell the kind of multiples that are out there right now. So our strategic focus remains consumer self-care. We are proud of what our Rx team is doing there, and they're generating a ton of cash. And when the opportunity is right, we still intend to sell or spin it.

So nothing's really changed on it, but I just don't see that happening in the short term. On the first part of your question, there were a number of things. Ray already talked about the CARES tax benefit, so that's been covered. Then there are two other important components of it.

The OTC Monograph Reform Act, which finally got passed and something we've been pushing for. But just to be -- and that will make it easier for us in the future to bring our kinds of products, our OTC product to market faster. That's the good news. The reality is, as though it's probably three years before the agency gets that up and running.

So it is another positive for the long-term benefit of Perrigo, but it's not going to have an immediate impact. So that's great news. It's not good news. It's great news, but it's out there a little ways.

And then I think the other one that's immediate is the restoration of the OTC eligibility under the FSA, HSA accounts. When the Affordable Care Act was signed in the law 10 years ago, an unintended consequence was no longer allowing OTC products to be eligible for FSA, HSA reimbursements, the CARES Act reversed this decision, which is a win for the industry and consumers alike. So I hope I've answered your questions. Operator, any other questions?

Operator

The next question is from Gregg Gilbert of SunTrust. Please go ahead.

Gregg Gilbert -- SunTrust Robinson Humphrey -- Analyst

Good morning.

Murray Kessler -- President and Chief Executive Officer

Hey, Gregg.

Gregg Gilbert -- SunTrust Robinson Humphrey -- Analyst

So Murray and Ray, I can see, certainly, the Rx OTC switch of Voltaren Gel as a long-term positive, but I was hoping you could help us understand how much you're selling on the Rx side currently of that product and how that would wind down. Does that come to an abrupt end and then the OTC that comes in? Maybe help us envision that-- what goes away and what comes in. And Murray, on the bolt-on front, curious what your appetite is now. I imagine you have a long list of things that are potentially actionable, but it's now the time to take -- to hit the pause button in light of the pandemic and putting out fires daily.

Or is it all systems go on the bolt-on front? Thanks.

Murray Kessler -- President and Chief Executive Officer

Well, I mean, good question. I mean, I will tell you we've been -- we closed on the Dr. Fresh deal, but that deal was a done deal prior to the whole COVID issue. And I am being more cautious at the moment.

And we didn't know how this thing was going to play out or shake out, so we were very conservative with cash. We threw down $100 million on the revolver. And we sit here now five or six weeks later, and we, so far, knock on wood, have come through it very well. But yes, we have lots of things under evaluation.

We slowed it down a little bit, but I'm no less committed to the bolt-ons than I was. It's a key part of our strategy, and maybe this will present us even additional opportunities at even a better value going forward. But for the short term here, we're taking a more cautious stance. So yes, we've slowed it down a bit right now.

I'm not too concerned about that given the strength of the core business, however, and the fact that we already have Dr. Fresh and Steripod that we're already done this year, and we're just launching Prevacid. And the second question was on Voltaren. I think it's a bit early for me to do that.

I know there'll be some abrupt halt of the sales within Rx, and we'll be -- were able to get our application in within 72 hours, which was remarkable and get the approval, and we'll be launching. And then I also think there'll still be an ORx component of the of the sales as well. So we'll give you more details as we get closer on the size of the market and how big we think Voltaren is, but I'm not prepared to elaborate more than that today.

Gregg Gilbert -- SunTrust Robinson Humphrey -- Analyst

OK. Thanks.

Operator

The next question is from Elliot Wilbur of Raymond James. Please go ahead.

Elliot Wilbur -- Raymond James -- Analyst

Thanks. Good morning. I wanted to ask is a question or line of questions directed toward Ray, specifically with respect to cash flow, performance of cash flow conversion. You called out the strong performance in the quarter.

But as I think about ARs likely moving higher and inventory build increasing over the balance of the year. How do we think about operating cash flow performance over the balance of the year and cash flow conversion? Is essentially operating cash flow equal to adjusted net income kind of the right metric to think about for the full year? Or could we actually be expecting something less that given the strong performance in the first quarter? And then just real quickly, I wanted to ask, too, about trade inventory levels. Just wanted to get some insight into where those may stand, whether or not there's significant differences between Rx and the OTC side there. And if I may, I want to ask one question of Murray as well.

And Murray, I did check, and hell is not one of George Carlin's seven words, so you're covered there. But I wanted to ask specifically, you called out increased store brand share versus other store brands in the last two quarters as a source of strength in the business. I'm just wondering what is driving that. And what's the relative opportunity, obviously, versus taking share versus national brand? Is this just a product issue, or is it more of a structural issue? Thanks.

Murray Kessler -- President and Chief Executive Officer

Ray, why don't you do the first part?

Ray Silcock -- Chief Financial Officer

OK. So with respect to the first quarter, we saw the cash flow was strong for two major reasons. One, we had very high demand, which resulted in our inventory being drawn down. And two, we recovered -- we saw a recovery in our Rx AR, which was an issue in the fourth quarter of last year, where we saw going the wrong way for us, but we would -- it was improving as we came into the first quarter and contributed to our strong cash flow conversion.

That was despite the fact that the surge that resulted from the COVID-19 really occurred from the third and -- the second and third weeks of March and was most heavy at the end -- at the very end of March. So that resulted in a buildup of our CSCA AR and CSCI, too. With respect to how do I think cash flow going forward through the year, clearly, we do have capital expenditures that we had planned for that may not happen quite as heavily, and we're not permitting outsiders in our plants at the moment. And we're running flat out.

As we talked about earlier on the call, Murray talked about, in the plants are running flat out. So the likelihood is that we're going to spend less capital, and that will obviously be cash flow positive for the year. I don't think we're seeing cash flow equal to operating income for the balance of the year. We are going to continue to spend on projects.

We obviously are going to continue to pay dividends, and that's very important to us. So I would say that we haven't changed our guidance for the year, and we're probably not going to change our cash flow guidance either at this point in time.

Murray Kessler -- President and Chief Executive Officer

Yes. And I would say that on the share -- I went into great detail. And really, there's nothing that's changed in the first quarter in the explanations I gave on the conference call on February 27. We win store branch share either by gaining distribution.

We try not to do it on price, right? So I had talked about how we had won a big piece of gum business from a major customer because we had lost it the year earlier, and their business fell off because we had a product in blind taste testing, a nicotine gum that was preferred two to one. And they reinstated that product and now their business is growing again, and then we win share that way. And we had a major new customer, although we're the bulk of the store brand business and infant formula. But lots of other new products were driving those.

So it was in the Mucinex like guaifenesin-type products. That was an area where we were not as strong. We finally got the right products in place and won accounts and won share with that. We had done the same thing in the allergy business.

And we had won share and then we had this odd dynamic, which is still continuing to play out very strongly. And then the discontinuance of ranitidine was a -- that was a segment where we had a low share. So when that product was pulled from the market, even though the total market didn't grow, a lot of it switched to, for example, omeprazole as one the areas where it's switched to where we have a very high share. So just those consumers changing.

So those were the kind of the big three drivers: consumer products; new products-driven; and then a beneficial mix shift in the digested area, in the GI area. Answered your question?

Elliot Wilbur -- Raymond James -- Analyst

Yes. Thank you.

Murray Kessler -- President and Chief Executive Officer

OK. Any others, operator?

Operator

No, there are no other questions. I would like to turn it back to Murray Kessler for closing remarks.

Murray Kessler -- President and Chief Executive Officer

I'll leave you saying one more time -- I keep hammering it over and over again. This is something like I've never seen. The Perrigo business is strong. The team is incredible.

They're confident. My leadership team is very seasoned. They handle everything in a calm and deliberate manner, and they've been able to handle crisis. And I'm confident that while there could be some shorter-term bump, I think the outlook for Perrigo is very strong.

I never anticipated this coming into the company, but I think price/value, store brand product will play a bigger role going forward. I think that self-care will play a bigger role in a new normal world where consumers are a little bit more reluctant to run to the emergency room or hospitals. And I certainly think e-commerce will be a bigger role, and we're strong in each of those. We'll get through this.

We'll have some uncertainty, and I know that's hard for everybody who's trying to cover the stocks. But I think if you sort of look where Perrigo stands today versus most companies in the world, I think we're performing pretty darn well. And so I'll just end it one more time thanking all the employees who I know are nervous to come into the facilities, but you're doing good for society. And you should be very proud, and we're very proud of you.

Thank you for your interest in Perrigo.

Operator

[Operator signoff]

Duration: 76 minutes

Call participants:

Brad Joseph -- Investor Relations

Murray Kessler -- President and Chief Executive Officer

Ray Silcock -- Chief Financial Officer

Louise Chen -- Cantor Fitzgerald -- Analyst

Chris Schott -- J.P. Morgan -- Analyst

Randall Stanicky -- RBC Capital Markets -- Analyst

Ami Fadia -- SVB Leerink -- Analyst

David Risinger -- Morgan Stanley -- Analyst

David Steinberg -- Jefferies -- Analyst

Gregg Gilbert -- SunTrust Robinson Humphrey -- Analyst

Elliot Wilbur -- Raymond James -- Analyst

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