Perrigo Company plc

Good morning ladies and gentlemen and welcome to the Parago second quarter 2021 financial results conference call. All participants will be in a listen-only mode. Should you need assistance please signal 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 and then one. To withdraw your questions you may press star and two. Please also note today's event is being recorded. At this time, I'd like to turn the conference call over to Bradley Joseph, VP of Investor Relations and Communications. Sir, please go ahead.

Thank you and good morning everybody and welcome to Parago's second quarter fiscal 2021 earnings conference call. I hope you all had a chance to review the press release we issued this morning. A copy of the earnings release and presentation for today's earnings discussion are available within the investor section of the cargo.com website. Joining today's call are President and CEO Murray Kessler and CFO Ray Silcott. 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. A few notes before we start. First, unless 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 the second quarter. 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. With that, I'm pleased to turn the call over to Murray.

Thank you, Brad, and good morning, everyone. Self-care continues to be front of mind for our consumers and customers, and now that our portfolio configuration to a pure play consumer company is complete. We believe Parago is in a great position to capitalize on this trend. I'm proud of how the Parago team has successfully adjusted during these challenging times, which have impacted channel dynamics, sales mix, input costs, and consumer behavior. The good news is that the business and markets we're in are normalizing with sharp rebounds and consumer takeaway as the world is slowly and steadily reopening. Barring a broad scale step backwards due to new COVID-19 restrictions, I believe Perigo's broad diversity of product lines and geographies have helped the company weather this unprecedented storm. Let's look at the metrics. Perigo net sales for the second quarter were $981 million, 3.4% higher than a year ago, with organic net sales up 0.5%. Second quarter growth came despite comparison to the prior year demand surge in April and the residual impact of this year's historically weak cough cold season. A couple of big takeaways on net sales. It was a solid quarter for all of our businesses, X the impact of cough cold and customer inventory adjustments, which I'll detail in just a moment. The rest of the portfolio and favorable currency covered the entire negative impact of those two issues and the quarter got stronger and stronger as it progressed, led by a strong consumer takeaway. This top line growth did not translate to earnings growth for three reasons. First, advertising and promotion. As you will recall, our teams pulled almost all A and B spending in last year's second quarter as the world locked down. There was no point advertising to empty shelves in Q2, and in the face of massive uncertainty, we prioritized liquidity. That spending was moved to the fourth quarter last year in order to preserve it. This second quarter, 2021, we deliberately returned that branded advertising and promotional support to its pre-COVID levels, where it has always been and where it is most effective. This along with higher R&D negatively impacted the Q2 earnings by $14 million excluding currency. Second, we had unfavorable plant overhead absorption in the quarter as a consequence of the historically low cough cold season. And third, input costs including freight, distribution, and commodities, to name a few, rose quickly during the quarter. The team did a great job offsetting these inflationary costs with our project momentum cost savings and pricing actions in the quarter, but as a result, the planned savings did not pass through to the bottom line the way we had planned. They will when its input costs normalize. All these factors, in addition to the impact from divested businesses, led to EPS of 50 cents per share, 9 cents below a year ago. While the adjusted EPS was lower than we were looking for, we will get back the A&P impact later in the year, and we believe the COVID-related headwinds are temporary. Most importantly, our business remains strong and is getting stronger. As I said earlier, once we lapped the prior year pantry load and exited the cough cold season, we experienced higher growth and strong sales momentum across our businesses, with organic growth of plus 1.7% in May and organic growth of plus 4.2% in June. We expect this strength to continue into the second half of this year, especially as we compare against weak comps from the prior year second half deload and historically weak cold cough season. This sales momentum that we observed occurred in both CSCA and CSCI. Despite the impact from cough, cold in the quarter and last year's demand surge, CSCI delivered strong growth. Strong performance in our self-care brands that were impacted last year by country lockdowns amid the pandemic outbreak drove the results. CSCA experienced a more pronounced headwind from cough, cold than in CSCI as a result of trade inventory adjustments. which I'll also show you in just a minute. But the sales momentum throughout the quarter was also evident here. As the cough cold headwind from the prior year waned in May and June, performance in CSCA increased. Outside of cough cold, organic net sales in the quarter grew 1.3%. Ending the quarter with organic growth of nearly 4% in June gives us confidence in our top line expectations as we head into the back half of the year. I think it's worth repeating. All of our businesses grew in both the Americas and international compared to last year, except for, as I mentioned, USOTC. As I said, the strong CSCI performance in the quarter was led by our self-care brands, many of which were negatively impacted at the height of the pandemic one year ago. These self-care products, including weight loss, sun and skin care, and oral care, were up 6%, excluding currency. The loosened pandemic-related restrictions across Europe and new product launches, timed with the return of brand advertising and promotion investments, were the big drivers of the performance. Cough cold was still a headwind for CSEI in the quarter, and while the cough cold 7 across Europe will likely be lower than normal as pharmacies take a wait-and-see approach to the season, we expect a strong second half for CSEI. Within CSCA, growth in oral care and nutrition were very strong in the quarter, up 17.9% and 10.7% versus a year ago, respectively. Oral care was driven by POS strength at retail as consumers returned in-store purchases for their oral care needs and sales of travel-related toothbrush kits increased with the return of travel in the US. Nutrition had a great quarter. We launched the first national brand equivalent infant formula for babies with colic. Sales of our electrolyte hydration drinks are increasing due to consumer buying behavior. And our third party infant formula contract partners are taking share from other national brands. The strengthening of our business throughout the quarter reflects a sharp rebound in consumer purchasing in the US and Europe. This was exactly what we were looking to see. As you know, Consumer takeaway is always the leading indicator for factory shipments. The one exception, as I mentioned, was OTC in the USA, where the rebound in consumer takeaway far outpaced shipments. That's unusual, and we attribute this to factors in both this year and last. Last year, there was a significant restocking of retail shelves and inventories that were wiped out earlier due to the pandemic related demand surge that obviously didn't reoccur this year. This year, the opposite actually happened. Retailers had excess inventories of cough cold products due to the low demand this season, and they appear to be a bit more conservative buying in at normal levels going into next cough cold season. So as you see on slide 10, our shipments were outpacing consumer takeaway for the better part of last year. The good news is that this trend reversed itself in the second quarter, and since April 2021, Perigo Consumer Takeaway is now cumulatively outpacing Perigo Factory Shipments. So shipments should begin to realign with Consumer Takeaway. And to be clear, Consumer Takeaway for store brands in the OTC categories we compete in aren't just up, They're up significantly, growing 12.4% over the last 13 weeks versus a year ago. In fact, this is true for each of the individual categories for the latest 13 weeks as shown on the chart on the screen at the moment. So on a year-to-date basis, it once again appears that shipments and consumer takeaway have come into alignment as the 10.7% decline in consumer takeaway aligns with the 11% decline in Perigo OTC shipments. But the fact that we're exiting the quarter growing and growing robustly along with the apparent alignment should translate into strong second half growth. Especially encouraging to see was the sharp rebound that also occurred in cough cold with consumer takeaway of our cough cold products of 34.6%. for the quarter. That's good news and seems to make sense as the incidence of cough cold illnesses continue to trend above the prior year according to the most recent IQVIA data. This also supports a stronger upcoming cough cold season than the prior year, which is essential to our second half projections. Turning to guidance. Through the first half of the year, we are a bit behind. But we have a number of second half tailwinds. Consumer takeaway has rebounded sharply in the U.S. and Europe, including, and this is important, including USOTC. Sales momentum realized through the second quarter is expected to continue into the second half of the year compared to the prior year's second half pantry deload. The upcoming cough cold season is expected to normalize compared to the historically weak prior season a year ago. Retailer inventories have come down and consumer takeaway is now cumulatively above our shipments. While we can't precisely predict retailer inventory behavior, this data suggests the major portion of the inventory headwind should be behind us. We've taken a number of pricing actions. which have been accepted by retailers given the global inflationary environment and those will help as well. And the divestiture of the Latin American businesses, which would have been a $50 million headwind in the second half, is now expected to be offset by sales to our former RX business, which is now a major contract customer. And finally, we expect strong momentum from new products in the second half. All these factors support higher net sales in the second half thus allowing us to reaffirm our revenue guidance. We expect this robust top line performance along with lower variable expenses specifically like the Q4 reduction in A&P I referred to earlier and productivity improvements to generate strong second half adjusted EPS growth. Although for the full year We will be shy of our operating growth income growth target of 5% due to the already realized lower volumes in the first half and higher input costs in the second half. So we expect our adjusted EPS within our original range, but towards the lower end of the 250 to 270 per share. To be clear, this EPS guidance is before we put any of the nearly $2 billion in cash We have at our disposal to work. Now let's turn to the efforts to restore certainty to our business and your investment. Over the last few months, we have made substantial progress on reducing uncertainty in the Irish tax NOAA. For those of you less familiar with this dispute, Perigo received a notice of assessment of 1.65 billion euros at the end of 2018 following an audit of a 2013 tax return for Elan. The company Perigo subsequently merged with. The assessment relates to the tax treatment of Elan's sale of its Tesabri drug. It asserts that intellectual property sales transactions were not part of Elan's trade. As a result, the notice argues that these transactions should have been treated as chargeable gains subject to a 33% capital gains tax rather than the 12.5% applicable to trading income. Perigo maintains that ELAN filed correctly. On July 13th, we filed an 8K saying that after an extensive exchange of information, we received written confirmation from Irish Revenue that based on the information that they have now that they didn't have back in 2018, They would not object if the Tax Appeals Commission adjusted the amount of the assessment to less than 1 billion euros, equating to a reduction of at least 40% from the original 2018 assessed amount. And to be clear, this was agreed to without revenue conceding any point. They use the exact same methodology that they've been using all along with that more current information. So this is not any discussion or settlement. It is just a restatement of the high end of the range. As I said in the interview in the Irish Times, even though we still believe that Elon filed correctly and that ultimately, in a long drawn out battle, we will win, we believe the right thing to do right now is to settle this case at a number that makes sense, that can be accomplished. But the starting point for any negotiation would be from this new lower starting point. And from that point, we will either come to a shareholder-friendly settlement through our ongoing discussions, or we will proceed to the Tax Appeals Commission hearings to be held this November, where we strongly believe in our position. We also completed the sale of our generic RX business this quarter in July. This completed Perigo's transformation to a pure-play consumer self-care leader. We were able to announce and close the sale within four months, a great effort by many in the organization to make this happen so quickly. And as I said, we'll have nearly $2 billion at our disposal to drive shareholder returns and accelerate our growth. Our first priority is to be acquisitive going forward and put this cash to work. This is a big value-enhancing opportunity for Perigo, but it's got to be done with discipline, and it has to be done within our five areas of focus. A North American-based investment would likely center around private or value label. A European-based investment would likely center on branded assets. Ultimately, any acquisition would need to be both revenue and margin accretive and deliver a return above our weighted average cost of capital. We have a strong track record in this area and see it as a huge value creation opportunity. So in summary, we have momentum and a number of tailwinds heading into the second half of the year. We've made significant progress to reduce uncertainty for shareholders and are looking to put our balance sheet to work with accretive acquisitions. Parago's pure play consumer business model is highly defensible. Our self-care solutions are differentiated and on trend. Our portfolio offerings are well diversified across categories and geographies. We have world-class consumer industry talent, and our business fundamentals are extremely durable. With that, I will now turn the call over to our CFO, Ray Selcock, to discuss our financial results in more detail. Ray?