Perrigo Company plc

Hello and welcome to the Parago First Quarter 2021 Financial Results Conference Call. All participants will be in listen-only mode. Should you need assistance, please schedule a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star then two. Please note, today's event is being recorded. I would now like to turn the conference over to Bradley Joseph. Mr. Joseph, please go ahead.

Thank you. Good morning, everybody, and welcome to Parago's first quarter fiscal 2021 earnings conference call. Hope you all had a chance to review the press release we issued earlier this morning. A copy of the earnings release and presentation for today's earnings discussion are available within the investor section of the Parago.com website. Joining today's call are President and CEO Murray Kessler and CFO Ray Silcock. I would 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. A few housekeeping items of note before we start. First, unless otherwise stated, all financial results discussed and presented are on a continuing operations basis. They do not include any contributions from the RX business which is accounted for as discontinued operations. In addition to other non-GAAP adjustments as described in the appendix, adjusted profit measures including adjusted EPS and adjusted operating income exclude from both periods certain costs incurred to support the operations of the RX business which are reported in continuing operations. See the appendix for additional details and for reconciliations of all non-GAAP financial measures presented. And second, organic growth excludes acquisitions, divestitures, and currency in both comparable periods. And with that, I'm pleased to turn the call over to Murray.

Thank you, Brad, and good morning, everyone. Let's start with a recap of the tremendous progress that has been made on the Perigo transformation by the collective efforts of my Perigo colleagues all over the world. To be specific, we unveiled the Perigo transformation plan at our investor conference two years ago, two years ago almost to the day. At that conference, we shared with you our aggressive plans to transform Perigo from a healthcare company into a consumer self-care company in order to provide focus, increase certainty, restore growth, and ultimately unlock significant value. We also introduced the vision that has guided everyone in the company every day since to make lives better by bringing quality, affordable self-care products that consumers trust everywhere they are sold. Two years ago, I shared that plan would take three years to implement. Today, only two years later, I'm proud to say that all of the major elements of the plan are now nearly complete. about a year ahead of schedule. And while being a global leader in self-care will require continuous improvement, I believe Perigo is at an inflection point right now. Let's take a quick look at what has been accomplished. First, we've meaningfully reconfigured our portfolio with the most notable action being the divestiture of our non-core generic prescription pharmaceutical businesses. in addition to the divestiture of a number of smaller transactions. Proceeds from these divestitures to date, along with our strong cash flow generation, have been used for consumer bolt-on acquisitions that either broadened our self-care portfolio, notably in oral care with our acquisition of Rainier, or accelerated growth within our existing businesses. Once the Rx deal closes, we will have divested three companies generating $2 billion in proceeds and made seven acquisitions at a cost of just over $1 billion. As a result, Perigo is now a pure play consumer self-care company, comparable to other publicly traded consumer companies, which will soon have over $2 billion available to invest to further build our business. In addition to reconfiguring our portfolio, we identified and executed against many areas in our business that needed to be improved to successfully evolve into a pure play consumer company. We upgraded our new product pipeline, systems, processes, and people. We have added top tier consumer talent to our marketing organizations. We have centralized our R&D organization globally. and we have consistently met our internal goal of developing and then maintaining more than 500 million in our new product pipeline. Hundreds of consumer SKUs have been launched over the past two years and the entire program has been turbocharged by meaningful investments in e-commerce and digital capabilities. We also made investments in infrastructure including increasing U.S. tablet capacity, introduced business intelligence capabilities that have led to industry-first omni-channel market share data reporting and significantly improved customer service levels that has led to increased sales and more favorable customer discussions. Collectively, all of these factors have led to a revitalization of our business and taken Perigo from four years of almost no growth to high single-digit growth over the last two years. The third part of the transformation was to restore certainty to Perigo, and we have come a long way in this regard as well. From years of inconsistency, our forecasts have become much more reliable, and even with all of the challenges of a global pandemic, we have consistently delivered on our financial commitments. The sale of generic RX removes a huge concern over business volatility, and we have strengthened our governance Diversity and Inclusion, Cybersecurity, and Commitment to ESG. We also are making meaningful progress with what currently concerns investors the most, the tax and legal overhang on the business or on the stock. Our third quarter 2020 conference call, we announced that the $843 million U.S. Athena Tax Assessment was accepted by the Mutual Agreement Program under the Irish-U.S. Income Tax Treaty designed to prevent double taxation and we remain optimistic that this matter is on a good path towards resolution. And now today I'd also like to inform you that we're in discussions with Irish Revenue about a potential settlement of the 1.6 billion plus Euro tax assessment. Discussions have been largely of a technical nature and grounded in law and have taken place over the last few months. There has been sufficient progress in these discussions for Parago to submit a board-approved offer to settle the matter. From our perspective, a reasonable resolution grounded in law is preferable to what could be years and years of litigation. But if resolution is not reached, be clear Parago still maintains that its original tax filings were correct and is prepared to vigorously defend its position. But I repeat myself, the two parties have started talking and I believe we are on a path towards a resolution in a shareholder friendly manner, but time will tell. This is all I will discuss on this topic today. So as previously stated, with our transformation activities nearing completion and with certainty significantly improved, Perigo is poised to create meaningful shareholder value. Said simply, Perigo is now a pure play consumer self-care company with a growth algorithm that compares favorably to CPG companies that traded significantly higher multiples. The company will have plenty of dry powder for disciplined M&A, putting Perigo in a unique position to supercharge its growth and create value in a consistent and sustainable manner. Let's now briefly discuss our quarterly performance highlights. By the reported numbers, Perigo net sales for continuing operations in Q1 2021 were $1.01 billion, down 6.8% versus a year ago, and organic net sales were down 10.9% versus prior year. However, reported numbers this quarter don't tell the real story. Q1 results were significantly distorted by COVID-related consumer pantry loading in the year-ago quarter, having a 6.8 percentage point negative impact on comparisons, and an estimated negative 6.4 percentage points impact from lower cough cold sales in this year's quarter. These two distorting factors also impacted the year over year EPS comparison. Adjusted diluted EPS was 50 cents per share, 17 cents below year ago. Pandemic related consumer pantry loading inflated the year ago quarter by an estimated 16 cents per share and pandemic-related weak cough cold sales in Q1 of this year had a negative 14 cents per share impact. I think the most important point to make is that the pantry load and the difficult cold cough season were known and accounted for in our projections and that Q1 results were in line with our expectations. No real surprises. Importantly, our business remains strong. Let me give you some perspective to why I say that. For the first two months of this year, January, February, our sales were up 3.8% on top of last year's January, February, that grew very strong 9.5%. But then came March 2020 and COVID-19, which drove a $73 million demand surge and a 29% increase in Perigo total net sales versus year ago. When compared to that huge month, March this year declined 23%, which pulled down the entire first quarter to the minus 6.8% I referred to. If you do the math, you'll see that absent the impact of the pantry load, our business would have still grown slightly for the quarter, even with this year's historically weak cold cough season. As most of that huge pantry load was reversed in subsequent months last year, it depressed second half 2020 results. This means we should have favorable comps in the back half of this year, which is accounted for in our projections. Another way you can see the real strength of our business unaffected by last year's pantry loading is to compare our 2021 results to 2019. In this comparison, our two-year compound annual growth rate is 4.1% with our organic net sales flat, although up 3.7% when excluding the impact from the historically low global incidence of cough, cold, and flu. Notably, this organic kegger does not include oral care businesses as they were not a part of Perigo in Q1 2019, and they're obviously growing. We accomplished these results by growing market share, investing in e-commerce, and launching successful new products. The dynamics I just explained for total perigo are basically the same for our consumer self-care Americas and consumer self-care international business segments, the specifics of which you can see on slide 10. In both segments, our business is growing versus 2019, plus 4.9% and plus 2.6% respectively, based on two-year TAGRs. In both segments, the Q1 results were negatively impacted by the year-ago pantry load. In both segments, Q1 results were negatively impacted by the current year weak cough cold season. And in both segments, the rest of the portfolio on average is growing. Obviously, the year-ago pantry load and subsequent deload are one-offs that will have no continuing impact. So the real question is, what about cold cough? Is that a one-off, or is that the new normal? Let's take a closer look, starting with slide 11. As you know, the incidence of flu activity in the US and EU throughout the 2021 season was virtually nonexistent. Those were down 98% versus a year ago. This extremely low incidence is attributed by experts to social distancing, mask requirements, stay-at-home orders, and school closings, all a byproduct of COVID-19. The incidence of cough, cold, which is more encompassing than flu and includes cough, cold, flu, fever, earaches, headaches, et cetera, The 2021 season was nearly 40% below the 10-year seasonal average. Now that many restrictions around the world are easing, the incidence of cough and colds are starting to trend up and above the prior year. This is according to the most recent IQVIA data. To be clear, this means that the historically low levels experienced this season are not expected to continue. In fact, according to estimates based on that same fan data from IQVIA, the 2021-22 cough cold season is projected to normalize, which would lead to sizable growth in our worldwide cough cold categories. This is a contributing factor that supports our strong second half 2021 growth outlook, though we have taken a conservative approach and only built a partial recovery on cough cold with respect to our guidance. Our deep new product pipeline also supports our second half growth expectations. New product launches in the second half include insurgent brands such as our co-packing of Bobby Baby formula. Second, white space brand launches such as our new probiotic Probify, which is launching across a number of countries in the EU. And three, new innovation in the store brand market with our launch of hypoallergenic infant formula in the US. And four, today's announcement of our introduction of nature baseline of children's products and infant formula under the Burt's Bees brand name via license. The Burt's Bees Organic Baby Formula has recently launched and we expect the line of nature-based remedies for babies and kids to be on shelves and online at leading retailers and e-tailers later this year. We understand our EPS forecast might look a bit back and loaded to some of you, but I'd remind you in a typical year before COVID, our operating income has always typically been weighted towards the second half of the year and particularly towards the fourth quarter as we sell in cough cold products to customers and illnesses begin to spread. This was not the case in 2020 as consumers loaded pantries earlier in the year and illnesses were at a historic low which led to a more evenly spread phasing of operating income last year than typical or normal. In 2021, we expect this phasing to return to our normal split of approximately 44% of our operating income in the first half and approximately 56% in the second half. Again, factors supporting this beyond history is that there is no pantry load this year, cough cold illnesses are expected to return to their pre-COVID levels, and we have a number of new products launching in the second half. The rescheduling of brand advertising and promotions back to pre-COVID levels and timing also benefits our forecast for the remainder of this year. Again, we believe these factors set the stage for significant growth in the back half of this year as consumption patterns and consumer shopping trips trend back towards pre-COVID levels, which in fact is a trend we are already seeing in our third party consumer offtake data in April. Turning to guidance, So the first quarter numbers were down compared to a year ago. As I said, that was expected. We did a little better in the EU, a little worse in the US, but we fared better than many of our peers. Given the tailwinds mentioned and that we are seeing a continued strength in e-commerce, an increase in store foot traffic, more consumers traveling again, and more children expected to return to schools in the fall, We are reaffirming our guidance to deliver 3% organic revenue growth, 5% operating income growth, and 7% EPS growth in 2021. Our plus 7% EPS commitment remains embedded at the midpoint of our guidance range of $2.50 to $2.70 per share. And also remember this EPS guidance is before we put any of the $2 billion in cash we have at our disposal on the balance sheet to work. So to summarize, we've made tremendous progress already this year by completing the portfolio reconfiguration to a pure play consumer self-care leader with a growth profile in line with CPG peers that trade at much higher multiples. Second, building over $2 billion in cash on our balance sheet, which will be available to drive growth. and three, creating a dialogue that might resolve the Irish tax liability in the coming year. Bottom line, Perigo's business model is highly defensible. Our self-care solutions are differentiated in the marketplace and on trend. Our portfolio offerings are well diversified across categories and geographies. We have world-class consumer talent and our business fundamentals are extremely durable. I'm more excited than ever about the future of Perigo and the potential to create value and I'm grateful to all of our teams around the world who have helped to transform our great company. Rest assured we are passionate about building shareholder value just as we are passionate about making our vision a reality to make lives better by bringing quality affordable self-care products that consumers trust everywhere they are sold. and with that I'll turn the call over to our CFO Ray Silcock to discuss our financial results in more detail.