Perrigo Company plc

Good morning and welcome to the Parago fourth quarter and fiscal year 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 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, VP of Investor Relations. Please go ahead.

Bradley Joseph Thank you, Chad. And good morning, everybody, and welcome to Parago's fourth quarter and fiscal 2021 earnings conference call. Hope you all had a chance to review the earnings press release we issued this morning. A copy of the earnings release and presentation for today's 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'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 quick housekeeping notes. Unless stated, all financial results discussed and presented are on a continuing operations basis. They do not include any contributions from the divested RX business, which was accounted for as discontinued operations prior to its sale. In addition to other non-GAAP adjustments as described in the appendix, adjusted profit measures including adjusted EPS and adjusted operating income exclude from the prior year period certain costs incurred to support the operations of the RX business, which were reported in continuing operations. Please see the appendix for additional details and reconciliations of all non-GAAP financial measures presented. Second, organic growth excludes acquisitions, divestitures, and currency in both comparable periods. And third, Murray's discussion will be focused solely on non-GAAP results. And with that, please turn the call over to Murray.

Thank you, Brad, and good morning, everyone. First and foremost, I'd like to start this call by acknowledging and thanking the Perigo team, 10,000 strong, that no matter what COVID-related adversity has been thrown their way over the last two years, from lockdowns to multiple COVID variants to cough cold impact to supply chain disruption, they kept our organization running, providing society with essential products. And they did so without having to shut down a single shift during the last two years in any one of our manufacturing facilities worldwide. Incredible. I also want to take a moment to acknowledge our Ukrainian colleagues that are in the midst of the horrible, unprovoked invasion by Russia. Our hearts and support are with you. They were part of the entire Perigo team that helped us complete our transformation to a consumer self-care company in 2021, despite pandemic disruption by accomplishing are three largest strategic milestones. First, selling the generic RX business for 1.6 billion, which dramatically lowers volatility and places consumer self-care as our sole strategic focus. Two, redeploying the RX sale proceeds by announcing our agreement to acquire HRA Pharma, a rapidly growing consumer self-care company with a portfolio of leading brands for 1.8 billion euros. We estimate HRA will add 400 million euros in revenue and 150 million euros in operating income in 2023. And three, favorably settling the 1.6 billion euro Irish tax NOAA that had been a significant overhang on the company since I joined three years ago. This tax assessment could have cost the company $3 billion or more, including interest and penalties. We settled it for 266 million euros, and this issue is now completely resolved and behind us. And we paid for the settlement using the proceeds from a favorable 355 million euro arbitration award. As a side note, we have some late-breaking news on the $370 million interest rate deductibility notice of proposed assessment, the NOPA, we received from the IRS in May of 2020. After a number of discussions with the IRS, the tax assessment has been lowered from $370 million to $130 million. That doesn't mean it will end up being $130 million, as we will continue to vigorously defend ourselves on the technical merits. But it does mean the risk is dramatically reduced, and this is just another example of our determination and success clearing the decks of all major overhangs while protecting shareholder value. With these major achievements behind us, Perigo is now a pure play consumer self-care company poised for strong growth, unencumbered by major overhangs of the past. Furthermore, Perigo has been returned to a company that is consistently growing its top line. In fact, our consumer businesses have grown 3% on a compound annual basis over the past three years, despite the historically weak 2021 cough cold seasons. Remember, cough-cold-related products represent nearly 20% of our total business. But for that, our carrier would have been even stronger. But plus 3% is still solid growth, especially compared to the prior three-year compound annual growth rate of minus 1% prior to our transformation. While our big three strategic priorities were accomplished and we have returned to consistent top-line growth, Our original 2021 financial objectives were not met, although earnings did finish just above the midpoint of our revised guidance. On a total year basis, adjusted EPS finished at $2.06, down 12% versus a year ago due to last year's historically weak off-cold season and its impact on manufacturing productivity, along with severe material price inflation and supply chain disruption in the second half of the year. These factors, including the step down in margin due to sales to the divested RX business, negatively impacted fourth quarter gross margin by roughly 400 basis points, which is basically the same as most leading CPG companies. I'm encouraged by our fourth quarter metrics and how we exited the year, however. Fourth quarter net sales grew 5 percent, adjusted operating income increased 12 percent, and adjusted diluted EPS increased 28 percent versus a year ago, as higher gross profit, new products, and lower operating expenses overcame industry headwinds. Fourth quarter net sales growth was driven by, one, a return to strong cough-cold demand, evidenced by 28 percent growth in our upper respiratory reporting category, which also includes allergy. Two, 12 percent growth in nutrition, behind share gains in U.S. infant formula and the successful launch of new products in oral electrolytes. In fact, one of our new adult electrolyte drinks won the product of the year award, as voted on by one of the largest customers that we have. And it's a tremendous recognition for the efforts of the Perigo team. And three, lastly, fourth quarter growth was also the result of strong contract pack sales. including sales to the divested RX business. Also encouraging, as shown on slide 10, Parago sales growth accelerated sequentially each quarter of 2021 as COVID-related disruptions either slowed or were addressed by the Parago team. This positive trend has continued into January and February of this year. We entered 2022 with strong top-line momentum and strong global consumer demand. The markets we compete in the USA were up in the fourth quarter 17.5% for OTC, 24.7% for nutrition, and plus 9.1% for oral care. And in Europe, demand for our essential products were plus 33% and plus 2% for our self-care products. We also entered 2022 with most major top-line headwinds behind us. Higher illnesses and the increased spread of the Omicron variant, which tends to cause traditional cold and flu-like symptoms, has contributed to a significant rebound in cough cold sales. Customer inventories, which were a bit heavy in 2021 due to the weak cough cold season, have been worked down to normal levels. And we have taken numerous supply chain and logistics corrective actions, allowing us to ship our products, albeit at a higher cost. And I'm proud to say we entered 2022 with a robust offering of innovative new products, as shown on slide 13. For all of these reasons, we expect strong top-line growth in our business in 2022. And to be clear, that is before any additional net sales from the HRA acquisition. Worth mentioning, HRA sales and earnings growth was robust in 2021 and was in line with our expectations. While the top line should be strong year over year, gross margin pressure will continue to affect the first half of 2022. We expect gross margin pressure to ease in the second half of the year as we start to receive the financial benefit from normalized cough cold sales, certain input costs starting to ease, our pricing actions being fully implemented, and the negative margin-only impact from the Rx divestiture annualizes. To be clear, we expect relatively flat gross margin in 2022, excluding HRA, with the second half stronger than the first. Once the deal closes, HRA will be further accretive to our second-half gross margin, given it is a substantially higher gross margin than our product. All of this leads us to an adjusted EPS guidance range of $2.10 to $2.30 per share, driven by organic net sales growth of an estimated 7 to 8 percent. Assuming the acquisition of HRA closes on June 30th, We expect it would add an additional 170 to 190 million in net sales and approximately 30 cents of adjusted diluted EPS to our base perigo guidance. Please note this guidance does not include any potential impact from the Russian invasion of Ukraine. Our 2022 guidance includes between 10 and $15 million of operating income from these two countries two months of which, though, have already been realized, but it's really too early to estimate the potential full-year impact, and frankly, our top priority right now is on the safety of our colleagues and their families in the region. Looking at the path ahead, we believe we are poised to create significant value, and it is clear what needs to be done to make that happen. First, continue to execute on the self-care strategy and continue to deliver organic growth including recovery of cost cold, strong digital growth, and rapid innovation. Second, successfully close and integrate HRA, which will provide a step-change increase in sales, income, margins, and EPS. And third, stabilize and then aggressively grow gross margins through our global supply chain redesign project, which will occur concurrent with the HRA integration. So in conclusion, we are excited about the opportunities over the next few years and beyond as the company is well positioned for success. At the same time, we are planning pragmatically given the challenges in the current environment. It remains our goal, however, to complete the job and deliver our original objectives from our investor conference three years ago. With that, I'll turn the call over to Ray Selcox to discuss the financials in more detail.