Perrigo Company plc

Good morning and welcome to the Parago third quarter 2022 financial results conference call. All participants will be in listen-only mode. Should you need assistance, please signal conference specialists 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 from the question queue, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Brad Joseph, VP of Investor Relations. Please go ahead.

Thank you, Anthony. Good morning, everyone, and welcome to Parago's third 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 Eduardo Becerra. 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 state harbor language regarding these statements in our press release issued earlier this morning. A few quick items 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 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 ARIS business, which were reported in continuing operations. See the appendix for additional details and for reconciliations of all non-GAAP financial measures presented. Second, organic growth excludes acquisitions, divestitures, and currency in both comparable periods. And third, management's discussion will focus solely on non-GAAP results, except as otherwise expressly noted, All comments related to constant currency remove the impact of currency translation versus the prior year by applying the exchange rates used in the comparable measurements in the prior year's financial statements. And with that, I'd like to turn the call over to Murray.

Thank you, Brad, and thank you, everyone, for joining us this morning. On today's call, I will first highlight Parago's double-digit third quarter constant currency top and bottom line growth versus a year ago, and the strong fundamentals on our business that drove that growth. Then I'll dive into the macroeconomic factors that required us to update our adjusted EPS guidance, and finally provide some exciting updates on our strategic initiatives that will keep us basically on track with our 2023 financial goals despite the continued volatility in the macroeconomic environment. Following my comments, Eduardo will walk you through details of our Q3 financials. Third quarter and year-to-date results for Perigo were strong across the board. Constant currency net sales increased 12% in the quarter and 14% year-to-date. Organic net sales growth continued to grow well above our 3% long-term target, growing plus 8% in the quarter and plus 11% year-to-date, And that excludes the organic growth of HRA, which grew double digits during the same periods of time. Third quarter top line growth was driven by the net benefit of the HRA acquisition, less the divestitures of Mexico and Scaraway. Market share gains across all of our U.S. business units and major categories as store brands continue to gain share from national brands. market share gains in our European business, led by the newly acquired Compede brand, strong growth and share gains in e-commerce, and the positive impact of strategic pricing actions across the global portfolio. It's worth pointing out that, once again, consolidated organic growth was driven by a combination of both positive volume and price, 2% and 6%. Gross margin increased 210 basis points versus a year ago. Gross profit flow-through led to constant currency adjusted operating income growth of 32%, despite a $36 million increase in input costs driven by inflation and other macroeconomic factors. Constant currency diluted EPS for the quarter was 65 cents, were up 44% versus a year ago, which included higher year-over-year interest expense and a slightly higher share count. Let's spend a few minutes on the fundamentals of the business. First, the strong top-line growth we are seeing adjusted for currency, whether in total or organically, it's not a one-off. It's been a consistent trend. For perspective, net sales X currency grew 7%, while organic sales grew more than 4%, both on a three-year compound annual growth basis. And that growth came despite the volatility on our business from the COVID pandemic. Taking a closer look at revenue for the quarter, growth was driven by both CSEA and CSCI, in addition to contributions from HRA. Growth was also strong across our major product categories. A few notable highlights are One, women's health grew 100% due mainly to the addition of HRA brands, which benefited from the increased emergency contraception demand spurred by public concerns surrounding the Roe v. Wade decision. Two, a 28% increase in skin care related to the addition of Compede and Mederma and continued growth of Araco brand in Europe. Three, upper respiratory growth of 19% was driven by higher instances of cough cold in Europe and market share gains against national brands and other store brand competitors in the U.S. Our cough cold sales could have even been stronger, but for U.S. labor shortages, that made it difficult for us to keep pace with elevated demand. In allergy, U.S. share gains in the launch of Nasonex 24-hour contributed to growth in the top line, even though the total allergy-affected population was down 11%, compared to the prior year, according to IQVIA fan data. Fourth, an 18% increase in our nutrition business was driven by heightened infant formula demand, resulting from a national brand infant formula shortage. We had been running our facilities at 117% of normal output to do our part, helping to make up for the shortfall. Unfortunately, running this older equipment that hard for that long resulted in an abnormal amount of formula placed on quality hull during Q3, as it does not meet our rigorous standards. To remedy the situation, we paused the Vermont facility for three weeks to do proper maintenance. The facility is back up and running, but Q3 shipments could have been higher without this constraint. By the way, this is one of the main reasons we acquired the gate wave facility from Nestle, and I'll talk about that in just a couple minutes. And lastly, oral care sales were up 8% in the quarter. You may recall that earlier this year, this business was impacted by supply chain disruptions due to ocean freight delays from China, along with a substantial rise in the cost of inbound freight and higher demurrage fees. I'm happy to say that over the last few months, we have received a significant amount of backordered inventory from China, allowing Parago Oral Care to begin shipping unconstrained. As a result, the business gained significant share in the quarter. Also good news here is that ocean freight rates have returned to pre-COVID levels. So while Oral Care took a hit in profitability this year, it appears to be on track and expected to recover substantially. in 2023. Speaking of market share gains, Perigo grew share globally in almost every category or segment we compete in. We gained share of total U.S. OTC. We gained share of U.S. store brand OTC. We gained share of U.S. e-commerce, and we gained share of European e-commerce. We gained share of U.S. oral care, and we gained share of U.S. nutrition, and we gained share of total European OTC. Another positive trend in the quarter included consumers switching from national brands to store brand in USOTC. And this is similar to our experience in previous periods of a looming recession or high inflation. While we are gaining market share, it is worth noting that the total growth rate of the largest category we compete in, total USOTC, has slowed back to more normal pre-COVID levels. For perspective, in the first half of this year, total USOTC grew 13.4%, and total Perigo USOTC grew 9.1%. Looking at the latest 13 weeks, which coincides with Perigo's third quarter, total USOTC omnichannel dollar growth slowed from that 13.4% to 2.3%, despite significant retail price increases. We estimate national brand price increases of approximately 8% to 9% this year, suggesting a 6% volume decline in total OTC. Perigo retail growth also slowed, but outpaced the category and was up 5.8%. Perigo pricing of 6% in the quarter and refers that our volume at retail was relatively flat year over year. We had previously forecasted growth in US OTC to remain at the first half levels, which did not happen in the third quarter. Encouragely, we did see a bump back up again at the end of the quarter with the total OTC category up 7% in the final four-week period of the quarter, and that supports our fourth quarter OTC estimate. Turning to slide 11, like all multinational businesses, the impact of unfavorable currency translation has been a major headwind this year for Parago. We expect the strengthening U.S. dollar to adversely impact full-year 2022 net sales results by approximately $230 million and adjusted operating income by more than $43 million by year-end. In addition, we expect gross inflation to impact our cost of goods solds labor costs and distribution costs by more than $210 million also for the full year. Oral care and nutrition business units in the U.S. were the hardest hit in the quarter. We worked hard to offset the majority of these inflationary costs with strategic pricing actions and other cost savings. However, we will be taking additional pricing to cover significant cost pressures as we need it. Turning to guidance, we have reaffirmed our net sales and organic net sales guidance. Our updated 2022 adjusted EPS outlook range of $2 to $2.10 reflects a negative $0.10 impact from further unfavorable currency movement and a negative $0.15 impact from the rest of our business, including the infant formula purchase versus our prior estimate. All of that is in there. Now let me talk about HRA synergies and two other strategic initiatives that we believe will help us deliver very strong growth in 2023. The integration of HRA remains a cornerstone of our growth strategy, and since the acquisition closed in May, the business has performed beautifully and is growing double digits. We are now raising our total synergy estimate to 50 million euros by the end of 2024, up from 40 million euros previously and up from our original 30 million euro estimate at the time of the deal. Eduardo will go through the details, but we expect an impact to 2023 adjusted EPS of approximately 18 cents or 30 million in operating income for a one-time cost, and let me stress a one-time cost, which would not be included in your current forecast. This cost is related to the inventory sales returns from distributors as we switch HRA from distributors to our direct sales force. This cost has no impact on the strong fundamentals of the HRA business, its underlying trends, other than to facilitate the ongoing cost benefit. Moving to our gross margin expansion plan, in line with our expectations, Parago gross margin has increased throughout the year. And while flat, relatively flat, Q3 versus Q2, we continue to expect to exit the fourth quarter above 37%. Our third strategic initiative is the Supply Chain Reinvention Program, which we expect to deliver $50 to $70 million in incremental operating income next year. The gateway in Good Start brand infant formula acquisition is the primary driver, but our portfolio design and SKU optimization actions will also contribute. So, let me repeat myself. We expect the incremental operating income from these strategic initiatives in 2023 to replace the lost operating income from the second half of 2022. This excludes the one-time cost to achieve the HRA synergy and also excludes any further impact of currency. Now on to infant formula. My nutrition team had been working to solve our infant formula capacity constraints for several years. And you may remember that in 2018, the Perigo Board of Directors authorized and we announced that we would invest up to $300 million to expand our formula capacity with a greenfield project, which did not occur. The acquisition of the Gateway facility finally solved the capacity problem and at nearly half the cost. To recap the details of this transaction, we're making $170 million strategic investment in our infant formula network. We paid $110 million combined for the Gateway manufacturing facility and the US and Canadian Good Start branded businesses. These investments are not only important for Perigo as we harden our existing facilities, but also bolster the infant formula manufacturing industry in the U.S. by expanding industry capacity by 7 million pounds or more than 100 million 8-ounce bottle equivalents within the next 18 months. This purchase is highly accretive, with an expected operating profit contribution in 2023 of more than $50 million, part from the Good Start brand and an equal part From additional volume, we can now run through this network to support our current customers. Pulling all this together, I remain excited about our future. Our fundamentals are solid and getting stronger as we continue to win market share, expand gross margin, and make the strategic investments necessary to drive profitable growth in 2023 and beyond. To be clear, except for the one-time cost to bring HRA distribution in-house and foreign currency translation impact, our 2023 adjusted EPS goal remains unchanged. With that, I'll turn the call over to our CFO to discuss the financials in more detail. Eduardo?