Perrigo Company plc

Good day and welcome to the Parago fourth quarter and fiscal year 2020 financial results conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Bradley Joseph, Vice President of Global Investor Relations. Please go ahead.

Bradley Joseph, Vice President of Global Investor Relations, Bradley Joseph, Vice President of Global Investor Relations, Bradley Joseph, Vice President of Global Investor Relations, Bradley Joseph, Vice President of Global Investor Relations, Bradley Joseph, Vice President of Global Investor Relations, Bradley Joseph, Vice President of Global Investor Relations, Bradley Joseph, Vice President of Global Investor Relations, Bradley Joseph, Vice President of Global Investor Relations, Bradley Joseph, Vice President of Global Investor Relations, Bradley Joseph, Vice President of Global Investor Relations, Bradley Joseph, Vice President of Global Investor Relations, Bradley Joseph, Vice President of Global Investor Relations, Bradley Joseph, Vice President of Global Investor Relations, Bradley Joseph, Vice President of Global Investor Relations, Bradley Joseph, Vice President of Global Investor Relations, Bradley Joseph, Vice President of Global Investor Relations, Bradley Joseph, Vice President of Global Investor Relations, Bradley Joseph, Vice the divestiture of RX release and presentation for today's discussion are available within the investor section of the perigo.com 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 releases issued earlier this morning. A few items before we get started. When discussing the business, Murray will reference only non-GAAP adjusted numbers for the quarter, fiscal year, and 2021 expectations, unless otherwise noted. As a reminder, all comparisons of operating results against the prior fiscal year period include the previously disclosed third quarter 2019 net sales adjustments for the market withdrawal of renitidine, as well as operating results attributable to the then-held-for-sale animal health business in our consumer self-care Americas segment. Also of note, organic growth excludes acquisitions, divestitures, and currency in both comparable periods. In the appendix for today's call, we have provided reconciliations for all non-GAAP financial measures presented. And with that, I'm pleased to turn the call over to Murray.

Thank you, Brad, and good morning, everyone. 2020 was a year of tremendous change for Perigo. At our May 2019 investor conference, I shared with you a new vision to make lives better by bringing quality affordable self-care products that consumers trust everywhere they are sold. In two short years, we have come a very long way to making that vision a reality. which has required keeping all our major transformation initiatives on track through the COVID-19 pandemic and all of the uncertainty that came with it. So first and foremost, I'd like to thank all of my Perigo teammates around the world for their dedication and a job well done. They have kept all our facilities running without missing a single shift anywhere in the world. They have kept our transformation initiatives moving while working from home. and they have made sure our essential products got to the consumers and patients who needed them. Let's take a look at the progress made on our transformation. With six acquisitions and four business divestitures, including this morning's announcement of the sale of Rx to Altares, we have completed our portfolio reconfiguration. Once the Rx deal closes, Perigo will be a pure play consumer self-care company. We have consistently delivered on our operating plans, have rebuilt a robust new products pipeline, built a robust e-commerce platform, launched business intelligence capabilities, changed 50% plus of the top leaders in the company through both internal promotions and external recruiting. We are delivering on our $100 million project momentum cost savings plan. have made significant investments and are investing more than $300 million in further capacity and IT upgrades. And most importantly, we have energized the culture and reinstilled the sense of pride that respects diversity and inclusion and the positive role our company plays in society. When the Rx deal closes, we expect to have over $2 billion in cash on hand, which can be used to advance our consumer self-care strategy and Fortify Our Balance Sheet. As a result of all these transformation initiatives, strong top line growth and worldwide consumer has been restored. So at this point, all of the commercial pieces are in place and Perigo is poised to create significant value. That is why I have agreed to the board's request to extend my contract by three years to finish the job on Perigo's transformation. With that backdrop, let's now discuss our performance highlights for fiscal 2020 in the fourth quarter. Fiscal 2020 consolidated net sales were $5.1 billion, up a strong plus 5% versus a year ago. Organic net sales grew 1.9%, which included a negative 1.4 percentage point impact from lower cough cold sales in the fourth quarter. The impact from cough cold was much more pronounced in the cough cold high seasonality fourth quarter, resulting in a consolidated net sales decline of 2.5% and organic decline of 4.7%. As I said, the main driver was the unprecedented low levels of cough cold and flu, which dampened cough cold sales in all of our businesses and led to a negative 5 percentage point impact to fourth quarter revenue growth. I'll walk through the details of our sales growth on each of our businesses in a few minutes. Adjusted EPS for the year was $4.02 per diluted share, flat versus a year ago, and within the original guidance provided over a year ago. We delivered this guidance despite headwinds not factored into our original forecast, notably incremental COVID-related costs, the divestiture of Rosemont, and the aforementioned cough cold impact, totaling $0.35 of headwinds, of which $0.28 per share was not included in our guidance. Fourth quarter adjusted EPS was $0.93 per share, down 12% versus prior year. Steeper than projected cough cold sales declines in Q4 had an $0.11 negative impact and divested businesses had a $0.05 negative impact. Aside from cough cold, Consumer Self-Care Americas was in line with our fourth quarter forecast. Consumer Self-Care International had a better than expected top line recovery. as a result of strong advertising and promotional support. And Rx sales were lower overall versus year ago tracing to discontinued products, but mix was favorable as higher margin dermatological products recovered faster than we expected. Given the impact, let me spend a few minutes more on cough cold. On slide 10, you can see the almost nonexistent incidence of flu activity in the US and EU according to leading sources that track the data. We believe this low incidence stemmed from social distancing requirements, stay-at-home orders, and mask measures designed to prevent the spread of COVID-19. For perspective, cough cold net sales account for approximately 10% of total CSCA net sales annually. For CSCI, it's closer to 20% of net sales. Unprecedented low levels of flu incidents had a dramatic impact on consumption, as shown on slide 11. In the US, cough cold consumption was down for Perigo and the entire cough cold category by approximately 35% on a dollar basis compared to prior year. And that's according to Moolo. In the EU, Perigo consumption was also in line with total market cough cold consumption declines. As you may recall from our last conference call, we built a double digit decline in cough cold sales into our fourth quarter projection, but not this severe. So even though Parago held market share overall, these declines were about double what we anticipated. A challenged cough cold season was just one more headwind Parago overcame in delivering record worldwide consumer net sales in 2020 as the business grew plus 6% in total and plus 2.3% on an organic basis. The $63 million negative impact from the non-existent cough cold season in the fourth quarter impacted organic growth negatively by 1.7 percentage points and is an example of what I said back in April, that the impact of COVID-19 is unpredictable and constantly changing. Importantly, we maintain market share in cough cold and this historically weak season will rebound in future years. Fortunately, Perigo has a very broad and diverse portfolio. This, along with our transformation initiatives that enabled 109% growth in e-commerce and strong new products in 2020, allowed us to deliver robust growth overall, which led to record fiscal year worldwide consumer net sales. Let's turn to results by segment. Consumer Self-Care Americas was once again the primary growth engine for Perigo. fiscal 2020 net sales finished the year up 9% versus a year ago, led by OTC, oral self-care, and acquisitions. Organic net sales were up 3.4%, which were partially offset by a negative 1.6 percentage point impact from cough cold. This entire impact from cough cold materialized Late in the fourth quarter, specifically, CSCA cough cold sales declined 39 million in Q4, more than explaining a $10 million or 1.4% decline for total CSCA sales in the quarter. And again, to repeat myself, a 10 million overall decline, but 39 million for cough cold. Oral self-care, pain, and digestive health were the primary growth drivers. within CSCA this year and benefited from consumer switching from national brands to store and value brands, as well as continued robust growth in e-commerce. CSCA's e-commerce sales increased over 150% versus prior year. Oral Care benefited from the Dr. Fresh acquisition, which has been successfully integrated and continued organic growth behind strong sales of the Plackers brand. Payne benefited from continued elevated COVID-related demand and the Voltaren equivalent store brand launch, and Digestive Health benefited from the market relaunch of branded Prevacid and X-Rinitidine users switching to Digestive Health products where Perigo store brands have a higher market share of total store brand. Clearly, CSEA had an outstanding year, finishing above our 3% organic growth goal despite the unprecedented weak cough cold season while at the same time delivering growth in operating income of more than 8%, eclipsing our 5% growth target and doing it a year earlier than expected. Turning to Consumer Self-Care International, reported net sales were 1% higher or flat organically for 2020 versus a year ago. Like CSCA, CSCI was negatively impacted by cough cold which had a negative 1.8 percentage point drag on the annual results. CSCI cough cold sales declined 24 million in Q4, more than explaining the 4 million or 1.1% decline for total CSCI in the quarter. Setting aside cough cold, I'm pleased with the revenue growth in CSCI, especially with the unpredictable consumer behavior surrounding COVID during the year and even more stringent lockdowns in the EU compared to the USA. CSCI net sales growth for the year was driven by one, the VMS category, primarily new products within the divinamen supplement brand. Two, new innovations within our market leading dermatology brand, ACO. Three, sulpidine in the pain category, which likely benefited from COVID related demand. and four strong e-commerce growth of plus 58%. It's worth noting that higher advertising and promotion on the CSCI branded products in Q4 had a negative impact on the operating margin. But this was purposeful as we believe it was important to provide sufficient support to maintain and build long-term brand equity. So I feel good about where we ended on CSCI. The team fought hard under the most difficult of situations and still grew the business. The development of new and unique products was uninterrupted by COVID, putting us in a position where we have a deep pipeline of new innovations and products to launch in 2021. E-commerce will continue to be a growth driver and the higher levels of advertising and promotion in Q4 should bode well for the future. Turning to RX, net sales in fiscal 2020 were up 1% as new products and higher sales in Israel offset negative pricing, lower prescriptions due to patient behavior surrounding COVID, and lower margin discontinued products. Fourth quarter net sales were 20 million or 7.7% lower than the prior year as the team purposely discontinued 13 million in lower margin distribution products. The weak cough cold season also contributed to the fourth quarter Rx decline with a $2 million decrease in prescription liquid cough cold products. The base RX business was down 2.5% in a quarter with minimal new products, and the business still being affected by lower prescriptions. But the good news here, as I mentioned, is that our higher margin dermatological products performed better, resulting in a favorable gross profit mix in the quarter, and the business has a robust pipeline of new products and approvals heading into next year. At this point, I'll turn the call over to our CFO, Ray Silcock. He'll go through Q4 and fiscal 2020 financial results in more detail. After he does that, I'll return to discuss today's announcement of the RX sale and discuss 2021 earnings guidance.