Perrigo Company plc

Good day and welcome to the Perigo first quarter 2022 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 a touch-tone phone. 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.

Thank you. Good morning and welcome to Parago's first quarter 2022 earnings conference call. I 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 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 quick items 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 divested RX business, which was accounted for as a 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. 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 focus solely on non-GAAP results. With that, I'm pleased to turn the call over to Murray.

Thank you, Brad, and good morning, everyone.

With our three-year transformation to a consumer self-care company now complete, Parago is moving into a new phase, which we're calling optimizing and accelerating. The Parago team is hyper-focused on optimizing and accelerating our self-care platform through, one, supply chain reinvention to improve efficiency, productivity, and customer service. Two, successful integration of our scale HRA pharma acquisition. And three, gross margin recovery via pricing and portfolio consolidation. I will also note that this will be accomplished as we also continually strengthen our organization and culture and contribute to the world we live in by making our products and facilities more sustainable. With that in mind, I'd like to share a few words on the organizational announcement we issued this morning. First, I'd like to thank Todd Kingma, our general counsel for the last 19 years, who just announced his retirement. and Ray Socock, who I've worked with on and off for the last 30 years and who previously announced his retirement, for incredible contributions to the company and our self-care transformation. While they will be missed, I'm very excited to share who will be filling their roles. First, Kyle Hansen has been hired from Wolverine Worldwide and will serve as our EVP General Counsel and Corporate Secretary. And second, Eduardo Bezerra, most recently from Fresh Del Monte Produce, has been hired as EVP and Chief Financial Officer. They represent the next generation of Parago leaders who will help drive the newly transformed Parago organization. They both have the passion and seasoned, relevant experience that embodies the Parago advantage, and I'm confident that their diverse perspectives and deep experience will make valuable and immediate contributions. to Parago's success. Turning to HRA. I'm also pleased to say that we closed the HRA acquisition nearly two months ahead of schedule and are extremely excited to welcome their team into the Parago family. The final purchase price was approximately $1.9 billion, nearly $200 million lower than originally anticipated, tracing to the recent strength of the U.S. dollars. a good outcome for shareholders. More importantly, the company we bought is performing beautifully. HRA results for 2021 were stellar. This is a business that is growing rapidly, finishing up 26% in 2021 versus a year ago, and achieves a robust gross margin north of 70%. HRA's strong growth continued in the first quarter of 2022, with net sales up versus a year ago, on top of double-digit growth versus the prior year. EBITDA was up an impressive 77% versus a year ago in the first quarter. Strong top-line growth, strong margins, and a number of budgeted expense decreases, including one-time investments included in 2014, and 21 operating income that are not expected to repeat in 2022 supports our estimates of HRA achieving approximately 90 million euros in operating profit in 2022. Since we closed the acquisition early and HRA earnings are historically much stronger in the second half due mainly to the seasonality of Compete, Parago's expecting operating income accretion of around 55 to 65 million euros in 2022. Beyond 2022, HRA business growth is expected to continue through geographic expansion and new product adjacencies. That, along with cost synergies from the deal that are now estimated at 40 million euros versus our original 30 million estimate, leads us to reiterate our expectations for HRA to add about 150 million euros in operating income in 2023, and that excludes any potential short-term impacts associated with capturing the synergies. Turning to slide 11, first quarter results for Perigo were generally in line with our expectations, despite another wave of cost headwinds resulting from the war in Ukraine. Net sales increased 6% versus a year ago, with organic net sales up a very strong 10%. We attribute this strength to a global rebound in cough, cold, and U.S. nutrition infant formula sales. Price also had a positive impact. Gross profit margin was down 140 basis points sequentially versus Q4 due to one-time items we don't expect to repeat. Note additional cost pressure was offset by price increases and higher volume in the quarter, resulting in our EPS finishing at $0.33 per diluted share, in line with our expectations. Currency neutral EPS for the quarter was $0.37, including a $0.02 per share negative impact from the war in Ukraine. While Parago's top line continued to accelerate sequentially, what is more important is that our net sales in Q1 2022 are substantially higher than they were back in 2019 before the ups and downs of COVID. On a three-year basis, our first quarter net sales compound annual growth rate is plus 5.6%, and our organic growth rate on a compounded basis is 2.9%. There can be no doubt that the transformation has a return perigo to revenue growth. Looking at our categories in more detail, strong total net sales growth was driven by strong performance across both CSCA and CSCI, with cold and contract pack sales leading the way. Infant Formula was also a big driver in the USA. Strong shipments are aligned with robust global consumer demand for self-care products. After two years of disconnects between shipments and consumption, the system appears to be back in balance. I think it's worth spending a minute on infant formula. This business has turned around nicely. Top-line growth in our nutrition business was up 38% in the quarter, driven by infant formula. Importantly, Parago gained more than five share points compared to a year ago. These gains came from the launch of new hypoallergenic formula offerings, continued growth in our organic products, and the roll-off of COVID-enhanced benefit programs for formula. Our business also benefited slightly at quarter end from the recall of a competitor's infant formula. While this didn't benefit us in the quarter much, we are now seeing higher demand. And Parago is doing everything it can to run as much infant formula as possible to help fill the shortages created by the recall. Also during the quarter, I'm proud to say the Parago team received U.S. Food and Drug Administration approval for over-the-counter Nasonex, the company's first ever branded RX to OTC switch. The NDA was at first cycle approval, and we expect it We expect the brand to be on shelves at leading retailers in the U.S. this fall, a big win for the Perigo regulatory team.

Turning back to gross margin for the corner.

We're laser focused on recapturing the margin loss due to supply chain disruptions and cost and freight inflation. And we still see a clear path to gross margin expansion in the second half of the year, consistent with the phasing discussed on our last earnings call. Manufacturing productivity, elimination of one-time costs, price increases, and note 90% of expected benefits from price this year are still to come, the sale of the Latin American businesses, and now the addition of 70% gross margin HRA products should allow us to recover 400 to 500 basis points of gross margin by year end. Now on to guidance. We are increasing our organic net sales growth guidance to 8% to 9% compared to prior year, up from 7% to 8%, driven by expected strong performance for the rest of the year, partially offset by a half a percentage point from expected lost business in Ukraine and Russia. We are also increasing our all-in net sales guidance to growth of 8.5% to 9.5%, up from 3.5% to 4.5% versus the prior year. The primary driver is the addition of HRA, which is expected to contribute approximately 5.5 percentage points of growth for this year. This will be partially offset by the impact of unfavorable foreign exchange. We are also increasing our full year adjusted diluted EPS guidance to $2.30 to $2.40 per share. This range includes approximately $0.35 accretion from HRA and a $0.20 headwind stemming from Russia-Ukraine related macro volatility, which led to unfavorable foreign exchange and higher than anticipated refinancing costs. Putting the year together, we are now expecting outsized growth on both the top and bottom line with near double-digit top line growth and approximately 14% diluted EPS growth. In closing, our focus going forward is to optimize and accelerate the business through supply chain reinvention, through successful integration of HRA and through gross margin enhancement, and by continually improving our organization and culture. We are focused on controlling what we can and what remains a very dynamic environment. We have inflation-related pricing actions in place to cover rising costs and expect them to fully take hold in the second half of this year. We are also uniquely positioned in the U.S. consumer self-care market to benefit from an inflationary cycle as evidenced by store brand share gains during the last recession. And with that, I will turn the call over to Ray one last time to discuss the financials in more detail.

Ray?

Thank you, Murray. Good morning, everyone. And yes, this is my last Perigo earnings call as I'm going to be retiring from the company. It has been a privilege to work with the talented Perigo team over the past three-plus years, and I'm excited about the path ahead for the company. Currently, I'm working diligently to ensure a timely and smooth transition to Eduardo, who, with his deep experience, will be a great new CFO for Perigo. Now let's review our first quarter financials. On a consolidated basis, the company reported a gap loss from continuing operations of $1 million for the first quarter of 2022, a loss of one cent per diluted share. On an adjusted basis, consolidated net income from continuing operations was $45 million and adjusted diluted EPS from continuing operations was 33 cents per share versus 50 cents per share in Q1 last year. The decline in adjusted EPS as compared to prior year was primarily due to one-time headwinds in CSCA. These included higher customer service claims related to unfulfilled customer orders and lower profitability on contract manufactured product for the now divested RX business. We also have had higher planned advertising and promotion expenses in CSCI in support of our strong top-line growth there. And as Murray noted, the inflation impacts in cost of goods sold and transportation costs were offset by increased sales volumes and higher prices. Also, unfavorable foreign currency movements hurt adjusted EPS by 4 cents. And we experienced an additional 2 cent EPS impact, half from lost business in Ukraine and Russia and half from product donations we made in Ukraine in line with Perigo's corporate charitable philosophy. Moving on to non-gap adjustments, in the first quarter, pre-tax non-gap adjustments totaled $71 million. Major components included amortization of $49 million, HRA acquisition and integration fees of $11.4 million, plus $3.5 million from HRA purchase price hedge costs and impairment charges writing off a $5 million fixed asset. Folded details of these and other adjustments can be found in the non-GAAP reconciliation table attached to this morning's press release. The non-GAAP tax adjustments are primarily due to a $13.6 million tax expense related to a pre-tax non-GAAP adjustment and the removal of the following reported items. One, 17.2 million tax benefit on dispositions of entities offset by two, $6 million tax expense for non-recurring legal entity restructuring. These led to an adjusted effective tax rate for the quarter of 22.5%, slightly up from the first quarter of 2021, adjusted effective tax rate of 22.2%. From this point forward in this presentation, all dollar numbers, basis points, and margin percentages will be on an adjusted continuing operations basis unless stated otherwise. Since Murray already covered net sales for the quarter, let's move on to gross profit. Consolidated gross profit in Q1 was 8.3% lower than prior year, primarily due to the one-time headwinds I just mentioned including unfavorable foreign currency movements. Gross margin declined 540 basis points versus the prior year, due primarily to these one-time headwinds, which account for nearly half of the decline. Unfavorable product mix from higher proportion of sales coming from store brand compared to branded, and the timing of pricing actions relative to inflation, as well as unfavorable foreign currency. Consolidated operating income for the quarter was $87 million, $32 million below Q1 last year, primarily from unfavorable gross profit flow-through, but also from higher distribution costs and increased advertising and promotion expense, which helped us deliver our strong top-line growth. Turning now to the first quarter segment results, let's start with Consumer Self-Care Americas. CSCA gross profit in the quarter was $178 million, $24 million below last year. Higher sales volumes and positive pricing in the quarter were more than offset by inflation in cost of goods sold and transportation. In addition, in Q1, other cost headwinds, including lower profitability of contract sales to the now divested RX business, customer service claims, and some other headwinds, had a total adverse impact of approximately $24 million. In combination, these factors led to a year-over-year gross margin decline of 640 basis points in Q1. Operating income for Q1 was $87 million, $23 million down from Q1 last year, primarily unfavorable gross profit flow-through and increased distribution expenses partially offset by lower revenues R&D, and admin costs. These factors led to a 500 basis point year-over-year decline in adjusted operating margin. Moving on to Consumer Self-Care International. CSCI gross profit was $182 million, down $9 million, or 4.8%, from the same quarter last year, largely due to unfavorable currency movements. Gross margin for the quarter decreased 100 basis 180 basis points, primarily the impact of product mix, as we had higher growth in both store brand and contract manufactured products as compared to our higher margin branded offerings. In addition, we felt the adverse effect of having carried in high-cost inventory made in Q4 last year but expensed in Q1. Adjusted operating income of $53 million was $7 million below same quarter prior year, including a $7 million adverse currency effect. Excluding currency, gross profit was 4.3% higher than in the same period last year, driven by higher sales volume in the quarter, which came about despite the loss of business as a result of the Russian war in Ukraine. At the operating income line, favorable gross profit flow through excluding currency increased was offset by higher advertising and promotion spend in support of CSCI's strong top-line growth. These factors led to a 130 basis point year-over-year decline in adjusted operating margin, excluding currency effects. Moving on now to the balance sheet. Cash on the balance sheet amounted to $2 billion at the end of the first quarter, up from $1.9 billion as at year-end 2021. After the quarter ended, we closed on a $2.6 billion refinancing comprising a $1.6 billion term loan and an undrawn $1 billion revolver. The term loan was used to refinance an existing term loan maturing in August 2017. as well as to refinance two 2023 bonds and to provide approximately $500 million in incremental borrowings over and above what was already available on our balance sheet to fund the $1.9 billion acquisition of HRA together with cash on hand. Off-rating cash flow for the quarter was $79 million, a strong 176% cash conversion on adjusted net income. As Murray discussed, we continue to operate in a dynamic environment, but remain poised for outsized growth given the contributions from the HRA acquisition and continued strong demand for our consumer products, which is reflected in our updated EPS guidance at $2.30 to $2.40 a share. Operator, can you open the line for questions, please?

We will now begin the question and answer session.

To ask a question, you may press star, then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then 2.

At this time, we will pause momentarily to assemble our roster.

The first question today comes from Chris Schott with J.P. Morgan. Please go ahead.

Hey, guys. Good morning, Chris. Good morning. Just a couple of ones for me here. I guess first on the gross margin front, and it's maybe a couple of different pieces to this. I know you touched on this in the remarks, but I'm still trying to get my hands around the step down in CSCA gross margins when I look at second half 21 to 1Q22. I think they came down about 250 basis points sequentially. Can you provide a little bit more color of how much of this was one-time? What were the one-timers exactly? How much of this is just sticky or supply chain inflation type stuff that you're going to have to work through as the year goes along?

It's 100% one-timers. We got hit with about $4 million of one-timers. Part of it is cleanup. There was a number of things. One, in the system, as cold call business came roaring back, we had a bunch of customer claims, which we're working through and reversing right now. So it may not only be one time, we may actually recover a fair amount of it, but there was about $7 million of claims that are automatically kicked out when we agree to fill a certain level of orders and we don't, they take deductions. And in And there are boundaries that guide it, but it automatically happens in their computer system and ours, and we have to manually go back and challenge those, which we're doing. So we went from, I'm going to give you just an example. If the forecast was for 100, I mean, it's obviously different than that for cold cough. All of a sudden, about the first week of January, it shot up to 10 times that. We were able to fill two or three times that, but not the remaining seven times. And there was then automatically kicked into the system these claims. And it was, like I said, it was worth about $7 million. That number will come down millions, if not completely go away versus the past. So that's one piece of it. Another piece of it, unfortunately, as part of one timers, even though we were short of cold cost inventory this year from a year, almost two years ago, of inventory that you made for the 21 season back in 2020, right, for the inventories for that. And with no cough cold season, we had a little bit of clean off of write offs that needed to take place for that. When Ukraine, Russia came along, we made a number of product donations and charitable donations that were one offs that we believed was the right thing to do. Those are just, and there was, I think, Ray can help me, but I believe it was a $5 or $6 million royalty rate catch up on one of our suppliers that the accruals just needed to be adjusted. None of that's it. That's a couple hundred points. Basically, I am telling you that the gross margin on CSEA absent those one-timers was exactly what it was in the fourth quarter. And I'm actually feeling very optimistic about gross margin this year to our plans. I know you guys had us in at a higher level, but we actually hit our plan despite a couple hundred gross margin points of one-timers. We hit our internal despite currency working against us, despite a new wave of cost increases that we offset with pricing. And most of our remedial actions, like 90% of them are still to come, like pricing and things like that, which we can talk about.

So something based on that answer, I know that you laid out the second half margins for a nice step up. Just I think about just sequentially for 2Q, should we be thinking about kind of 2Q, let's just stick on the America's business, you know, and pre-HRA? kind of more in line with what we were seeing for the second half of 21? Or is this kind of like 25 and a half, you know, 25 level or wherever we are currently, kind of like a good proxy for 2Q? I just want to make sure I'm kind of getting the, this is such a focus on that number, just the gating as we go through the next few quarters.

Yeah, I mean, but HRA is going to factor in. But go back, what was the period you were trying? Sequentially, it's going to increase.

But that's what I was trying to get my hands around. Yeah. So should I look at basically, I think we were at like 27 and a half, second half of 21.

Is that like a reasonable level to think about, like 2Q before HRA? I think it'll be around 20.

Well, you're talking, I'm looking at consolidated. Just give me a second to get down.

Sure, sure.

Yeah, I think that's sort of thinking about it the right way. I mean, if you're doing it pre-

Yeah, well, actually, I've got to go. Give me one more second.

Yeah, I think that's right. Okay, perfect.

I'm kind of sticking my neck out here, but I think we're going to recover almost all of the gross margin loss this year. I'm looking at 400 to 500 gross margin points of recovery by the fourth quarter.

Okay, perfect. The other topic I just wanted to talk a little bit about, HRA, looks like it had a very strong one cue. And I know I think you were playing on talking a bit more about this later this year, about the HRA growth targets. But if I just go back to, I guess, the 2021 results and kind of bridging out to where you're thinking about for 23, I think it assumed something like a mid-20s percent annual growth rate. Can you just again, just remind us of the growth drivers that are enabling that type of step up in HRA growth for the next few years. I know it was a question that came out quite a bit post the proxy, and we'd just love just a bit of a reminder of just, you know, kind of how we think about the drivers of HRA these next kind of two years or so.

Yeah. You know, I'm in a funny location giving this earnings call to you, Chris. I'm actually in Europe. I'm at I've been going back and forth. I'm at HRA integration meetings. I was at HRA headquarters two days ago going through each general manager that leads all the hubs around the world, actually, Europe, export, U.S., where there's an incredible high level of confidence in them saying, this is the best start the company has ever had, that people are traveling again, et cetera. So The first thing you have this year is the numbers that we published out in the 8K. Those were COVID numbers. Compete was hurt dramatically by COVID. Like our Costco business, no one was out traveling, hiking, needing plasters. I mean, they weren't out wearing high heels going to work. You know, those are all the drivers. So you have this ramp up besides the normal growth of them. adding countries, converting on L01. They are continuing to switch different countries around the world from RX to OTC. In future years, you have the entire line. They have their Hanna line, which is the everyday pill that is a birth control pill that is, if you've been reading the articles around the controversy of Roe versus Wade, there's also been articles in Politico about One of the best positioned companies being HRA, who has a solution with an everyday over-the-counter pill that we hope to have in by 2023. We'll be a growth driver and applications are going into additional countries around the world for that. They are broadening the usage of the brand. I've already extended tremendously successful from just, you know, from wounds and heals to adding right now. fever blisters, and there is just a whole wave of ways to build that brand, to build out the product portfolio. Expanding into the United States is a big priority and driver of growth. I mean, I was just blown away by both the competence in that team, the capability, the sophistication of the marketing, and they strongly believe in those numbers. What's that all add up to? I think you're talking about double-digit top-line growth continuing without any revenue synergies, and you're talking about going to $150 million in operating income next year, or 2023, excuse me. So Brad talked to you about operating income. I've gone back and forth because in the deal model we were talking about EBITDA and the European version of EBITDA, but we're converting it back into our operating income numbers. So, I mean, right now it feels like the sky's the limit. And again, we raised the synergy number from 30 million euros to 40 million euros. This is going to come back. This will be the best acquisition I've ever done in my career.

Excellent. I appreciate the color. I'll jump back in queue. Thanks.

The next question comes from Elliot Bulber with Raymond James.

Please go ahead.

Thanks. Good morning. Hey, Elliot. Hey, Marie. How are you? Good. Thanks. Just maybe a high-level question on macro trends in the U.S. store brand market, seeing relatively strong growth metrics, but wondering what you may be seeing in terms of potential consumer trade-downs in the quarter over the last year, just how things have trended from a market share perspective in the categories in which you compete in. And then more specifically on the nutrition business, strong performance in the quarter, obviously a lot of factors behind that, but just wondering if we could sort of maybe tease out the incremental lift from some of the organic initiatives that you talked about over the past couple of quarters versus the benefit from overall supply issues resulting from some developments at one of your competitors?

Yeah. Well, let me do the second one first because that's pretty finished. And it Um, it only, you know, the recall only happened in like last week of March. So it, it, it had a, you know, we had a bigger week that one week, um, you know, whether that was a few million dollars or, or it wasn't massive. It is big in the second quarter though. It just is, you know, we are, um, I could run double what we have. We're running flat out, um, as, as much as, as we can. Um, Will that be sticky? We hope parts of it are sticky given the test, and we don't know how long that situation is going to be in place. It could be a while. It could be a long while, and we're looking at ways to potentially increase capacity at the request of the FDA. We're doing whatever we can. I will tell you part of it that will be sticky is in the face of the cost increases and shortages, Our customers were more than understanding that we needed to adjust the price of this product. No price gouging or any of that, but it had been hard to do in the past few years, and we were able to do that. So that's a positive. So, yeah, I mean, first quarter, barely anything. Second quarter, it'll be meaningful. Turning to the first question, we haven't really seen much trade-off. I believe that is going to be, and I listed it on one of the slides as an upside for Perigo, but the national brands have spent a lot of money in A&P to restart their businesses, to restart their advertising. They clearly had some new products out there ready to go, and they've grown, frankly, a little bit faster than the store brands in the exiting the year and the first quarter. The good news is we dug in pretty hard to that and had our partner from a data source and information resources do all the panel data and switching, and none of it came from store brand. It was just increases in consumption among their existing consumer bases, but not a big trade down. So the big numbers that you've seen in consumption for us has all been just category growth in all boats rising, not a lot of switching. I will tell you they're taking more pricing than we are. We work hard as we can with our partners. They've been beautiful. They understand what the situation is now. We have, boy, I think we have $125 million of pricing in our consolidated P&L for this year and you know for us that's a lot and oh by the way you know I think about 10% or a little more than 10% of that was in the first quarter so you know there's well over 100 million still to come on agreed upon price increases but that's still only about 3% 2 to 3% I think it was 2% in the first quarter where you know if you're looking at other consumer benchmark companies you know the big guys They were talking about volume up 10, 11, five from pricing, five from volume. We were up eight from volume and two from pricing. And I think that sets us up for even more future growth, you know, as the price gaps widen a little bit. So we're working hard, but I think we've got all of the inflation, including a second wave because of the war, implications on inflation. energy prices, other commodities. And all of that is triggering a rise for us of another $45 million of input costs. The input costs we carried in plus that $45 million are all being covered by about $125 million of pricing. So, and some good strong bonds. But I think we finished this year, you know, double digit, certainly on a constant currency basis, top line. near 20% on a constant currency neutral basis for the bottom line, margins growing again, beautiful brands coming in with HRA. I think it's going to feel a whole lot different in the back half of the year, but I do think this was our low this quarter.

Okay. Just following up on that, I think in the text with respect to CSCA, it's mentioned that roughly 34% million dollars of cost headwinds hit the operating profit line, absorption issues and freight costs and the like, which all seem to be more transitory. Just wanted to confirm, in fact, if you believe that pricing actions and procurement actions in and of themselves would be sufficient to offset that drag in the second half of the year.

Yeah, I think it'll be enough to offset the drag for the total year, but there is a lag. We're not like a national brand where I can go in, take a price increase on Friday, and it's up on Monday. We have to negotiate those when the stores are being reset. Many of those price increases are just going into effect now. Many of them went into effect late in the quarter or in the beginning of the the second quarter, but, you know, some were in place, but, you know, call it, if we had roughly 15 cents of material and freight inflation in the first quarter, we probably offset 80% of that, something like that in, um, with pricing alone. And then the rest got offset by, by volume. Um, as we go forward, you're going to offset all of it, or even possibly a touch more. And, You know, listen, the big unknown for us, no one said it, but, you know, we had a big currency impact on the business.

And then I wanted to circle back to the gross margin issue. And we've obviously touched on this many times over the past 12 to 18 months. But, you know, within your prepared comments, This morning, you talk about optimize and accelerate and refer to supply chain reinvention. I mean, that sounds more like a facelift than a Botox injection. So I'm just wondering if you can kind of give us maybe some early insight into terms of what you're thinking. I mean, is this an actual... The alteration of the physical footprint here is just more about just having better processes and procedures in place and material planning strategies so that, you know, we don't kind of see these huge swings in, you know, inventory and we've got just better line of sight into production, you know, just trying to, you exactly what you're kind of thinking, at least at this early stage, when you talk about supply chain reinvention.

Let me also be very clear. When I am talking about that, I am talking about accelerate. I am not talking anything about the 2023 or the 2022 forecast. I do have some assumption in 2023 as I build it. So can I, if you don't mind, may I answer the, I'd like to answer the question for you. this year because i want to hit it over the the head that it's a very clear path to recovery without without that when you add you know the absence of the one-timers in the first quarter sequentially you know you're adding a couple hundred basis points when the absorption issues go away that we carried into the year in the second half you add 120 basis points when you you know you remove mexico that was low gross margin and zero operating margin $100 million in sales, you add a certain amount. When you add a 70% gross margin HRA business that's growing rapidly from a mix, you add 200 gross margin basis points, even if you don't get a single benefit of the pricing. So those are the drivers to get you back the 400 to 600 points and a growing portfolio with the top line growing double digits and the EPS growing significantly. double digits, which is a pretty exciting place for us to be. And oh, by the way, without $3 billion worth of tax risk. Okay, now, optimizing accelerator. I'm starting to tease you with the ideas that I think can be very exciting for Parago going forward. We have done five divestitures, eight acquisitions, completely reconfigured this company to be consumer self-care. You had the Omega acquisition that was done a number of years ago, and the entire supply chain has never been optimized. So the answer is all of the above to what you said. And it will be a five-year project. And we took out $100 million, and people have complimented us on being pretty tough on the operating expense line. But the cost line in this company is dramatically higher. There are four, three to four phases. There's a short term, let's call it a short term, a midterm and a longer term. 12 to 18 months, 18 to 36 months, 36 months plus. Anything that would involve, you know, consolidating distribution centers and optimizing for the portfolio of products we have going forward, that's further out and I will share with you when we get to our investor day, our ideas there. The immediate ones though, are getting our service levels back up coming out of COVID and all the disruption and supply chain disruption that has given us a number of those one-timers, that has resulted in SSSO levels that over the course of the year and obsolete inventories from making it and missed shipments of probably $100 million of profit opportunity in that category alone. But the carrot that I'm starting to tease, that again, it's not in our numbers, is a $100 million to $300 million opportunity. We have a lot of work to do on it. And it is going to be the culmination of three years of putting in, costing down to the SKU level, being able to get demand data for our SKU separate from the entire store brand industry to build better demand models, But a lot of things change when you get your service levels up into the 90s, including your ability to sell more distribution and leave less revenue on the table. So demand planning is a super example of that. Scheduling is a super example of that. Product portfolio is a great example of that. Elliot, we did an analysis and had some help doing it. that every time the national brand launches a big SKU, we have 500 variations we take to market because of years of history of Perigo in the U.S. saying yes to every single variation. The startling part of that is 80% of that is not consumer-facing, and it's just a customer wanting it a little different, a little different, a little different. It slows down, breaks down our lines. So the ability for productivity, increased volumes, almost every single one of our lines is at maximum. capacity running 24 hours a day, which is one of our major service issues. And so that's a huge opportunity. Eliminating, you know, probably, I think I showed this a year ago, though, and we're working on it, but 30% of the line probably represents 90, 95% of the contribution margin. So up front, demand planning, forecasting, getting those service levels up, and portfolio reconfiguration are our are short to midterm goals, but there will be behind that opportunities for consolidation of distribution centers and, you know, plant shop floor metrics, et cetera. So, yeah, we're excited. We have turned ourselves into a consumer self-care company. Now it's time to turn ourselves into a great one. And I got to get this darn margin issue, as you point out behind me, so everybody can get as excited about the business as I am.

Yep, absolutely. Two quick additional ones for you. Given all the external issues that the company has faced on the logistics side and input cost side that have hampered gross margins in the U.S., I guess I find it surprising or relatively impressive in a way that the CSCI margins have held up substantially better, we've really seen very little margin compression there. How much of that is just supply chain related with respect to that business versus the ability to just take higher and more immediate pricing actions to offset whatever incremental cost you are seeing? And then as a closer, given that you now own HRA, The company's been working on a potential OTC switch of a daily oral contraceptive in the U.S. market for some time now. Just wondering if there are any action or regulatory updates that are on the clock for the next six to 12 months. Thanks, Murray.

Okay, well, on the second one and the biggest one, You know, the next step is the official filing, right? You go through all the questions and all those circles, you know, and with the FDA and the U.S. on the, you know, we're with customers, so I'll tell you the name. It's called the OPIL, and the OPIL should be filed here within the next few months. So that would be the next big hurdle, and then the clock starts ticking. But again, I'd encourage you to read the Politico article from earlier this week. This is something this country needs. I mean, there are 6 million abortions a year in the United States, and 30% of women who can't or have difficulty getting access to birth control, and this improves accessibility, which is what our company is all about. And by the way, it won't be the only country that we are applying in. And we continue to apply for also for L01 in numerous countries. And we also have Nasonext that we got done. So, you know, there's a lot of great, great things coming. CSCI, you answered your own question. It's primarily pricing. But I mean, that's the biggest answer I have. I think, you know, in general, I would say I'll give credit to, you know, Sven Anderson who runs that group and team. They've done a lot of the portfolio reconfiguration that I've talked about. Five years ago, there were 15,000 SKUs in our international business. Today, there's about 5,000. Sven would tell me there's still about 1,000 too many. So there's still a further opportunity, but that's helped drive gross margins as well.

This concludes our question and answer session. I would like to turn the conference back over to Murray Kessler for any closing remarks.

You know, like I said earlier in the call, I'm over here in Europe for the first time in over two years to sit in front of a room of our sales force.

And two days ago, I was in Paris in front of the entire HRA team. And I just can't share with you how excited – the people in our organization are about our future, et cetera. You know, bottom line, we said we would start growing this company double digits and earnings double digits this year. And this is the year to do it. We spent a few years brain making it smaller and getting that cash and have reinvested it now. And you'll start to see those numbers show it very soon. It's unfortunate that we got hit with a, the supply chain and some of the other freight costs and others, but those weren't Parago issues. You know that. Our gross margin hits are no worse than ConAgra's gross margin hits, Procter & Gamble's gross margin hits, Clorox's gross margin hits. I mean, everybody, Treehouse's gross margin, I mean, it just hit the entire consumer industry. And I think if you look, you'll see that Parago's probably wasn't as bad because our team's done an incredible job. And I think we will get it recovered with less pricing, which will then, in an inflationary environment, hopefully benefit the company in expedited trade down. Because the last time this happened, we gained about four share points when there was a meaningful inflation and a recessionary period of time. And I think you're going to start seeing volume for those national brands slow down and and not see volume slow down for us, but that's just my prediction. Bottom line, we've kept every single promise we said we would make, or we made three years ago, in order to reconfigure this company. We are at sort of the point where we believe it starts paying off, and you take currency out of the situation, we're well above estimates, and that'll turn around too, I mean, in my opinion, but you know, we'll see over time, but right now we've plugged in, you know, a very aggressive, um, Euro exchange rate and, and that has an impact, but, um, strong organic growth continuing, been growing for three years, lots of effort on margins, lots of great brands and switch potentials, et cetera, going forward. And after that, um, you've got the supply chain reinvention coming behind it. So, you know, I, I like where I sit right now, and it's time for us to prove it. We would have been proving it already, but the world, we didn't expect a war, but we'll get through that too. And I will leave you with one final note. A member of my Ukrainian sales force is at this sales meeting, and she intends, and I almost fell down. I'm like, what are you doing here? And she said, well, we need all the information. We've got to you know, we still think we can deliver 70% of the plan. We're not backing off. So the people at Perigo are fighters.

Thank you for your interest in Perigo.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.