Perrigo Company plc

Good morning and welcome to the Parago First Quarter 2023 Financial Results Conference Call. All participants will be in 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 in your touch-tone 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. Vice President of Investor Relations and Corporate Communications. Please go ahead.

Thank you, Anthony. Good morning, everyone, and welcome to Parago's first quarter 2023 earnings conference call. I hope you all had a chance to review our releases 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 Bezerra. 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 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 discontinued operations prior to its sale. Second, organic growth excludes acquisitions, divestitures, and currency in both comparable periods. 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 measurement in the prior year's financial statements. And third, Murray's discussion will focus solely on non-GAAP results, except as otherwise expressly noted. See the appendix for additional details and for reconciliations of all non-GAAP financial measures presented. And lastly, I want to share my deep appreciation for Murray during his tenure at Perigo and a warm felt congratulations on his retirement. Murray, your mentorship and leadership have been invaluable, and you have set this company on a path for long-term success. On behalf of shareholders, thank you. Now, for the last time, it is my pleasure to turn the call over to Murray.

Thank you, Brad, and thank you, everyone, for joining us this morning. Many of you likely attended the virtual investor day we hosted at the end of February, where we provided details of the next phase of our strategy, what we are calling Optimize and Accelerate. This was my second investor day since joining Perigo, and I believe this was a critically important event for our company. My team shared specifics on how we expect to generate a significant amount of value for shareholders, and the feedback we've received has been overwhelmingly positive. Now, after four years of transforming Perigo into a consumer self-care company, the management team is focused squarely on operational execution and consistent delivery of results. To that end, we've made meaningful progress on many of the initiatives discussed at Investor Day during the first quarter of 23. We're on track with the integration for the HRA and Gateway Good Start brand acquisitions and are already realizing significant benefits from both. We are progressing faster than I expected on supply chain reinvention and have seen some exciting results in the early stages. More on this in just a moment. of the OPIL oral contraceptive. Underpinning the progress across our strategic initiatives are strong financial results and business fundamentals. To echo comments from my general managers at our quarterly business reviews, after two years of unprecedented volatility, we are seeing our business become more consistent and predictable again. That predictability manifested itself in the first quarter where Pareto achieved double-digit growth on top and bottom line, meaningful growth margin expansion driven by both the base business and acquisitions, and retain your groomed market share as the global consumer demand and fundamentals remain strong. We also announced within the last two weeks the successful elimination of the largest remaining tax overhang on the company by resolving the entire April 2019 Athena Tax Assessment of $843 million. No payment was required, and this assessment is now completely dismissed. We also just settled the interest rate tax assessment with the IRS and have now cleared the debt and dramatically reduced uncertainty in the Perigo investment thesis. As I just touched on, benefits from recent acquisitions are not only turbocharging our financial results, but are also creating greater leverage across the Perigo portfolio. In HRA, we are delivering on our revised higher synergy targets. We remain on track with the HRA distributor conversion into Perigo's direct sales model, which will deliver significant ongoing cost savings once complete. As I discussed on previous conference calls, there's an approximate $32 million one-time impact operating income in 2023 associated with returning inventory from distributors. Of this annual estimate, $12 million top line and $0.05 an EPS impacted the first quarter, as expected. Importantly, we're realizing greater leverage on our legacy CSCI business, as our sales force is now able to combine strong pan-European brands such as Compete and L01, with Perigo's existing more regional European brand portfolio. The integration of the Gateway infant formula facility and the Good Start brand also are on track. We are progressing on insourcing transition services currently provided by Nestlé, and despite a voluntary recall in the quarter, we're continuing to leverage increased capacity from this facility to provide much-needed supply of value-based infant formulas. More on infant formula in a few minutes. Within our supply chain reinvention initiative, we are on track to remove complexity from our operations through our winning portfolio strategy, which will result in the optimization or standardization of nearly 1,000 SKUs by the beginning of 2024. We had positive conversations with customers at last week's National Association of Chain Drug Stores, NACDS, conference and look forward to partnering with them to increase customer service levels through increased operating efficiencies that will free up much-needed capacity in the Parago manufacturing system. We also completed a pilot program using a system called the Red Zone, which will be an integral part of our enhanced Parago work system. The Red Zone is a cost-effective software solution to provide real-time overall equipment effectiveness, OEE. It provides management and monitoring information at the line operating level. We piloted the system on three manufacturing lines across the globe in Q1. All three achieved increased productivity above our expectations at a lower-than-expected cost. These are truly exciting results. And we've begun the process of rolling Red Zone out across all our global manufacturing sites. As I mentioned earlier, the FDA Advisory Committee meeting begins today to discuss the potential switch of OPIL. This is an important day for all women and people in the US, and it epitomizes our commitment to the women's health space. The FDA's approval of OPIL-OTC would increase While the FDA will be scrutinizing this application, there are over 35 independent organizations voicing support of OPIL. In the year 2023, women should have ready access to oral contraception. As a reminder, the FDA advisory panel vote is non-binding.