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spk02: 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.
spk04: 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.
spk07: 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.
spk05: We expect the agency to render a decision on approval later this year.
spk07: Looking at our Q1 financial results, we had a tremendous quarter as constant currency net sales grew 13 percent. Organic net sales grew 6.4 percent, despite unfavorable impacts of 2.7 and 1.3 percentage points from two voluntary recalls and portfolio optimization initiatives in CSCA, respectively. Pricing in the quarter was 5.5%, and importantly, volume grew 1%. Rose margin improved by 400 basis points, with nearly half driven by the legacy Parago business, and the other half attributed to higher margin acquisitions. Year-over-year adjusted diluted EPS grew an impressive 36%, or plus 47% on a constant currency basis. Success in the quarter was broad-based. While global consumer demand remains solid, European consumption is robust and is at a four-year high, driven in part by a very strong cold season. Our Compete brand continues to see strong demand and share gains, with consumer takeaway up 19% versus a year ago in the quarter. Other areas, such as antiparasites and insect repellent, are gaining market share in growing categories, and we're positive drivers of CSCI growth. In the U.S., our oral care business is continuing to recover from the logistics and supply chain dynamics experienced last year, and sales and consumption trends are very positive. Oral care consumption grew a robust 20% in the quarter, and Perigo recaptured the number two share position in the categories we compete in. And in U.S. OTC, we gained share in higher margin digestive health and NRT categories driven by new products and distribution gains. Of note, U.S. OTC organic growth in the quarter was up 7.3% versus a year ago, and U.S. OTC gross margin was 30% up 450 basis points. Looking at our top line in a bit more detail, we achieved strong growth in both segments and nearly every product category. Many of our investors are U.S.-based, so they gravitate toward the U.S. business, but CSDI, which is nearly 40% of revenues, is really hitting its stride. The business grew 24% constant currency in the quarter, 11% organically. The strong EU consumption I just noted was due to high incidences of cough, cold, and flu, strong brands, share gains, the stickiness of our strategic price increases, and the greater leverage from the HRA pan-European brands. The CSEI business has really come together beautifully. We also once again experienced solid consumer demand in the U.S. especially when you adjust for purposely discontinued low margin products from our SKU rationalization program and from divestitures. Our OTC business grew 9% in the quarter in total, including a 200 basis point unfavorable impact from SKU rationalization. It's worth noting shipments to customers were greater than consumption during Q1 in the US. As customers replenished inventories, that were reduced below normal levels as they exited 2022. That's something we see often in the fourth quarter, and it's not unusual. Other notable category movements in the quarter included women's health, which benefited from the addition of L01 and other brands from the acquisition of HRA, skin care, which benefited from the addition of the Compete and Moderma brands, and increased manufacturing capacity, for our minoxidil hair regrowth products in the U.S. and oral care, which I just discussed. Let's spend a minute on our CSCA nutrition business. Net sales grew 10 percent in the quarter, driven by strong growth in the contract infant formula business and an additional 36 million in sales from the Good Start acquisition. As a reminder, This growth is compared against a very strong year-ago period that benefited from the infant formula shortage. The $36 million sales benefited from the Good Start acquisition includes an unfavorable impact of $9 million due to a voluntary recall of certain lots of the Gerber Good Start Sooth Pro infant formula. Let me go into a little more detail here. In March 2023, FDA released a national strategy and issued a letter to members of the infant formula industry to assist in improving the microbiological safety of powdered infant formula. This letter has a significant impact on our manufacturing and cost to produce infant formula. Of course, Perigo supports FDA in its mission to ensure food safety and promote nutrition for babies. So in response to FDA's new strategy and evolving regulatory expectations, we are, one, making significant investments to further modernize our infant formula infrastructure, and two, modifying and evaluating further adjustments to our manufacturing processes and procedures, including refinements to sanitation procedures, quality hold times, and more. As I said, these actions will negatively impact supply and significantly raise the cost of producing infant formula. The substantial cost of these new regulatory requirements will be offset with a price increase. But even after the price increase, we anticipate that Perigo store brand products will deliver consumers an approximate 40% savings per ounce as compared to the national average. Let me pull this all together. I can't say enough how much Perigo has transformed over the past few years and how excited I am about our future. Our fundamentals are strong and getting stronger as we continue to win market share, our strategic acquisitions are having a big accretive impact, our gross margin is expanding, and we continue to optimize our operations and accelerate our strategic investments to drive outsized growth over the next three years. With that, I'll turn the call over to our CFO to discuss financials in more detail, and I'll come back in the end to wrap up before Q&A. Eduardo?
spk03: Thank you, Murray, and good morning, everyone. For this morning's call, I will provide some color on our Q1 financial results, walk through the drivers of our gross margin expansion, highlight our cash flow, and balance sheet metrics, and then wrap up with our 2023 guidance. Starting with our gap to non-gap summary, the company reported a gap loss of $1 million for the first quarter, or a loss of one cent per diluted share. Adjusted net income was $61 million, and adjusted diluted earnings per share was 45 cents per share, versus 33 cents per share in the prior year quarter. A few adjustments to the quarter pre-tax non-GAAP P&L totaling $71 million were amortization expenses of $66 million, acquisition and integration related expenses of $4 billion, mainly related to the HRA and Gateway facility, and restructuring charges of $3 million, primarily related to our supply chain reinvention program. Full details can be found in the non-GAAP reconciliation table attached to this morning's press release. From this point forward, all dollar numbers, basis points, and margin percentages will be on an adjusted basis unless stated otherwise. Since Murray already provided details for our top line results, I will begin my comments at consolidated gross profit, which grew $84 million, or 23.3% in the quarter, with our gross profit margins expanding 400 basis points versus the previous year quarter. Growth was driven by acquisitions, strategic pricing actions, and favorable volume mix, which were partially offset by inflation, two voluntary recalls, the impact from the HRA distribution transition, and the unfavorable impact of currency translation. Operating income increased $33 million, or 38%, driven by favorable gross profit flow-through, which was partially offset by higher operating expenses due to the inclusion of HRA and the gateway facility net of divested business. Interest and other expenses increased $15 million due to last year's debt refinancing associated with the HRA acquisition, which both closed in Q2. We also saw a benefit in our income tax rate of 300 basis points versus previous year due to changes in jurisdictional mix of earnings. Looking at the bottom line, these factors translated into an adjusted EPS of $0.45 in the first quarter, an impressive 36% increase compared to last year, or 47% improvement on a constant currency basis. Looking at slide 16, first quarter gross margin improvement of 400 basis points was driven by both business segments. This was achieved through an equal split between the legacy Perigo business and the HRA and Gateway acquisitions. Within CSCA, gross margin in our OTC business grew an impressive 450 basis points, driven by favorable mix on existing products, benefits from new products and acquisitions, and strategic pricing actions that offset inflation. As Murray mentioned earlier, Our U.S. oral care business is rebounding from the supply chain and logistics dynamics experienced last year and accomplished a 360 basis points increase in gross margin, driven by strategic pricing actions, improved service levels, and favorable customer needs. These factors led to a 310 basis points expansion in CSEA gross profit margin, including an including an unfavorable impact of 150 basis points from two voluntary recalls in the court. The FCI gross margin expansion of 470 basis points versus broad year was driven by contributions from the HRA acquisition and strategic price increases, which more than offset the impact of inflation in the courts. The gross margin expansion included unfavorable 90 basis points impact from the HRA distribution transitions. Bringing this together for total perigo, gross margin expanded 400 basis points versus last year, including a combined 130 basis points headwind from the two voluntary recalls and the impact of the HRA distribution transitions. We also achieved operating margin expansion across both segments in the portal. Parag operating margin expanded to 100 basis points compared to the prior year as gross profit flow through, due to the factors I just discussed, were partially offset by higher operating expenses, mainly related to the acquisitions of HRA and the Gateway facility, and advertising and promotion investments in our core brand. Now moving on to the cash flow. Cash on hand was $553 million at the end of the first quarter, down from $601 million at the end of the fourth quarter last year. We haven't been impacted by recent financial institutions' instability in the U.S. and Europe, and we have proactively taken actions to diversify our cash flow management amongst low-risk financial institutions. We will continue to monitor these developments closely. Operating cash flow for the quarter was $19 million, a conversion of 32% in line with our phasing for the year, which we expect to be similar to last year. As a reminder, we typically experience the heaviest cash outflows in the first quarter, driven primarily by annual employee incentives. In the quarter, operating cash flow included outflows of $10 billion from acquisition-related and restructuring expenses. We also invested $23 billion in capital expenditures and returned $36 million to our shareholders through dividends in the first quarter. Looking ahead, we're still projecting 100% operating cash flow conversion to adjusted net income for the full year. Also, our net leverage over the trailing 12 months was 5.3 times adjusted EBITDA, down from 5.5 times at the end of 2022. To continue the strong momentum in our business through Q1, we are reaffirming our 2023 guidance, which includes, as Murray discussed, higher costs coming in our CSEA infant formula business, with pricing actions to offset these costs. Additionally, timing has shifted slightly in the distribution transitions from HRA to Perigo, and we now expect the unfavorable impact from HRA sales returns in Q2 and Q3 to be similar to the five cents impact, EPS impact in Q1 and minimal in Q4. This is good news that it means as it means our transition from distributor to direct sales is going faster than originally planned and does not change the total estimated earnings per share impact of 16 to 18 cents only the time. And we continue to provide updates, and we will continue to provide updates each quarter on the progress we are making with these transitions. Summing this up, we now expect our second half EPS weighting to be slightly higher than discussed at our February investor day. As a reminder, we anniversary the Latin America and Scaraway divestitures at the end of Q1, and we will anniversary the HRA acquisition during the second quarter. Since joining the company last year, I have been repeatedly impressed by our team's ability to adapt and overcome in the face of numerous challenges. From record inflation to logistics and supply chain issues, our team continues to navigate in a dynamic environment. This quarter is no different. On top of a solid financial performance, we also eliminated almost all of the remaining tax overhangs on the company, nearly $1 billion with only a minor cash impact to the company. These overhangs drew my attention when I first joined Perigo, and I'm now extremely pleased to say that these are behind us. I look forward to carrying this momentum forward through the rest of the year as we continue to make progress toward delivering on our strategic initiatives, strengthening our business, and delivering substantial growth in a dynamic environment. Before I turn the call over, On behalf of the entire operating committee, I would just like to say that it has been a pleasure working with you. The transformation that you have led during your tenure here has truly set Perigo on a path for success, and we could not be more excited to drive our strategy forward. We wish you all the best in your retirement, and thank you for your tremendous efforts over the past five years. Now, Back to you, Maurice, for your closing remarks.
spk07: Thank you, Eduardo. That's really kind. A few comments on my retirement announcement before we move on to Q&A. As you know, I joined Perigo almost five years ago to lead the transformation of the company from a healthcare company to a consumer self-care company. Leading that transformation has been one of the most exciting assignments of my career. From 14 M&A transactions to reconfigure the company's portfolio, the near complete elimination of the company's $4 billion tax and legal overhang to the strategic path put in place to create value for the future, I am proud of what my team, the board support, has accomplished. The fact that this all happened in the face of a global pandemic, global supply chain disruption, the Russian invasion of Ukraine, and the highest input cost inflation in decades makes the transformation that much sweeter. All the pieces are now in place. Perigo is growing its top line robustly. We've added over $1.5 billion in revenues to our consumer businesses since the beginning of the transformation. Perigo is growing and expanding its margins and is set up to continue to do that going forward. And it's growing its bottom line. In the first quarter, I think we were right at the top or nearly at the top of our consumer peer group. It has a strong plan in place to produce leverage, and the company has a clear strategic path for sustained long-term growth. Now is the right time for someone else to take the reins at Parago and relentlessly drive the execution of our strategic plan for years to come. I truly believe that we collectively have set up Parago for a bright future and to create tremendous value for investors. Remember, despite strong results, Parago continues to trade at almost a 50% discount versus its peer group. And that's why, even though I'll be retiring and I will sell a portion of my Parago holdings to diversify, I intend to remain a large individual shareholder of Parago and will continue to be very tied to the success of the company. I've set a target retirement date of the end of July. and I'm working with the board on identifying a successor and ensuring a smooth transition. Lastly, and most importantly, I'd like to thank the Perigo employees who have supported me through the transformation. You are truly amazing, and it's been an honor to lead you. And with that, operator will now take questions.
spk02: We will now begin the question and answer session. To ask a question, you may press star then when you're touched on phone. If using a speakerphone, please pick up your handset before pressing the keys. To withdraw from the question queue, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question will come from Susan Anderson with Canaccord Genuity. You may now go ahead.
spk01: Hi, good morning. Thanks for taking my question. Murray, congratulations on your retirement. You've done a great job setting the company up for future success.
spk05: Thank you, Susan, and good morning.
spk01: Yeah, so maybe just I wanted to drill down a little bit first on the gross margin, the 400 basis points. I think you said 130 BIPs from the recalls with the HRA distributor. I guess how much of that was the infant formula, and then also if you could maybe just give a little bit more color on the rest of the drivers there between pricing, mix, maybe currency, et cetera.
spk07: Okay. Why don't I take, Medora, the first part, which I just want to sort of talk relative to the gross margin across the businesses, and then you can break up the individual drivers. So, yeah, the gross margin from last year to this year was up – on CSCA, 310 gross margin points. I think if you look at it, the important parts are, excuse me, it was up more than I had, 310. OTC was up 450, so it went from 25.5 last year to a 30 percent gross margin. Oral care went from 25.3 to 28.9, up 360. But nutrition had a significant decline, and it had even a bigger decline from the fourth quarter to the first quarter. and that was related to the recall. I mean, you had a big hit on that. CSCI actually had a 480 basis point increase. So every part of our business expanded significantly from a gross margin standpoint, and it's progressing just as we expected, but you had hits, and Eduardo can quantify these on, you know, purposefully with the HRA, not recall, of moving from distributor to our own sales force. And then you had two recalls that hit $17 million or roughly 10 cents, but the business was so strong it covered it. But I want to be very clear. Our margin programs are working beautifully. They're not pricing driven. There's some in recovery, but they're all the kind of things that you want that will continue to expand and grow over time, especially as we have our highest margin businesses are growing the fastest in the company. Now, Eduardo will get to your specifics on the drivers.
spk03: Yeah, so talking specifically there, Susan, so between the good start, you know, impact, you know, as compared to last year, we had about 50 basis points there. and also on the inventory transition on HRA, about 40 basis points. And we also had around 40 basis points related to the OTC recall that we announced there. And so on the flip side, you know, pricing had a positive impact of about 300 basis points and volume and mix about 160 basis points And those combined more than offset the impact we had on inflation and input cost that was about 230 basis points.
spk01: Okay, great. That was really helpful. Thanks for all those details. And then on the infant formula business, I guess do you expect there to be a sales impact? It sounds like the rest of the year too with the changes from the FDA. And then also, how much will the pressure be on sales and margin and how long will it take you to get back in stock? And just in terms of raising prices, do you guys have an idea of what that will be and the timing? And then I guess, you know, pricing does increase across the category. I would assume this is actually helpful to your private label business, correct?
spk05: Yeah, it is.
spk07: Those were a lot of questions. So let me make sure I cover them. If I don't get to every piece of it, just ask it again. But let's just go back here a little bit. I think it's really important to say that this letter was sort of a shock to the system. It's very well intended. I'm not sure whoever wrote it fully understands the, you know, the impact of manufacturing and output for the industry. especially during a period of time when there are shortages. But I want to be very clear that the Perigo quality control system did not break down during the first quarter. If it had been three weeks earlier, prior to this letter coming out, there would have been no recall. So, the quality control measures that were in place of how much product to throw away, et cetera, if you get anything, any variation, that had been in place for decades, there would not have been a recall, okay? The FDA, given what happened last year, and pressure from Congress and others, have tried to raise safety up to another level. Very admirable, but it has an impact, and that's what you're talking about now. So we, full plant sanitizations and shutdowns, there'll be more of them. It'll have a negative input on product, but all of that, including the sales, will be offset by the pricing. Okay, so what you lose in a little bit of volume, you're going to gain in additional pricing and cost, and we still see it as making our original plan on the infant formula business. It'll just be a little bit more back-loaded. Now, you know, pricing here, you know, we're not pricing relative to the competition. We're pricing to offset this higher cost and lower productivity. But it just so happens that after the pricing that is necessary to do that will be about 25% on our price value business. Store brand business will be about 25% cheaper on an absolute unit. We give away a couple more ounces. So on a cost per ounce basis, we'll actually be at a 40% discount after the pricing. Customers hate price increases. I just spent five days at the NACDS, our biggest conference. They all understood this. They understood that there was a change and that we have to be able to produce and make a margin. And they understood that we weren't expanding margins on this. We were just literally addressing this regulatory change. So I think it'll be very well supported. Nobody likes pricing when you're a value competitor, but in this case, it's absolutely necessary and we'll sell that through. I'm not worried about that. So, yeah, I think I've answered all your questions.
spk01: Yeah, that's great. Thanks. And then just really quick on your inventory levels and then also at retail, I guess are there certain categories you wish you had more of and How has your ability been to get back in stock quickly?
spk07: Depends on the category. We're making progress, but, you know, I've heard of, and I heard at NACDS too, I've heard of a lot of categories out there where they're fully back in inventory or even inventories could be a little high. That's not the case for us yet. We're, we shipped a little bit more, you know, than we, than was consumed during the first quarter. But we're still a week, week and a half on average of low in inventories out at the retail level. And that's before we begin to build our own safety stocks. So, listen, it's really right now for the company, our productivity is doing beautifully in the manufacturing facilities. We are running at record levels. We have two issues in terms of getting our inventories back off colds. And that's because, again, last year we had an elevated cost cold season right through the summer, which is supposed to be our down season where we build inventories. We're running, again, at record levels, especially on liquids, and pediatric liquids was an area of concern over the past four or five months. Based on the way the illness trackers are going and trending, we should be back in business with safety stocks for the fall cough and cold season next year. The other business, as I said, is nutrition. And on a nutrition basis, there's going to be some working through this new regulatory guidance. It is with additional full plant sanitizations and and longer quality holds in order to comply, it'll take some time before we can get inventories back. So what's been a challenge for the last 18 months has probably been, you know, now extended. I can't put a time on it, but I don't see an end in sight yet to when we are fully back in a safety stock position on nutrition. But the good news is we did buy the other facility, so we have a lot more product to work with. And we are making those investments. We're not backing off those investments. And within another year, we should have an additional 7 million pounds of capacity. So, you know, and on the rest of the business, we're back up to service levels. Service levels are not a concern in Europe. We're in the 90s in the U.S. Other than nutrition and cough cold, I think we're back in – in the most recent weeks back into the 90s again too. So everything's going in the right direction.
spk01: Okay, great. And if I could just ask one more on this week's adcom on Opel. I'm curious just any thoughts you could give around that on how they're going to think about this. And then also if it is approved, your thoughts around just the market opportunity in the U.S., Is this going to basically add to the market or will it take some of that share? And then any color you could give on the timeline to launch and impact to the P&L. Thanks.
spk07: Well, I think I read in your note, but it is not, and I think everybody knows that at Investor Day, it's not in our current modeling. It's not in any of the guidance we've given over the next few years because it's You know, you're talking birth control, and this is a big change. So it's only upside, and I think we've been giving a year one estimate of roughly $100 million in revenues. And by the time, you know, the FDA got into a position, you know, I think that, you know, next two or three months for them to make a decision once they review all the data and what the advisory panel has to say about it. And you're talking the very end of the year or beginning of next year. I don't think we have a a set date yet. It depends how the FDA, when they come to their decisions and any implications of those. But, you know, like philosophically, though, this is a product that has been on the market since the 1960s. There is reams and reams and reams of safety data on this. And when taken in a whole, we believe the FDA should approve this application. Period. You know, there's lots of pushback in there, which is their job, and that's what they're supposed to do. And many extroverts will be testifying, and we'll see how it comes out. Ultimately, we believe this will get approved, and hopefully it gets approved this time through. But, again, it's not in our numbers this year, next year. It's all upside. But this is a big idea for the company, and we're real excited about it.
spk01: Great. Thanks so much. Good luck the rest of the year.
spk06: Thank you.
spk02: Our next question will come from Fred Schott with JP Morgan. You may now go ahead.
spk09: Hi. This is Ethan Brown on for Chris Schott. Thanks for taking my questions. I guess first off, we already talked about this a bit, but on the nutritional segment, just how do you think about sales growth for the rest of the year? as we move past the infant formula shortages, the disruption this quarter, and then with the FDA update as well?
spk07: Okay, well, let's start with, remember last year, the way our business flowed, we, you know, stripped our safety stocks last March and April. Little bit of February, but March and April were huge spikes, and then after that, Well, once we had no safety socks and we actually had challenges as the year progressed on our base business, keeping up and running what was, you know, we have on our Vermont facility, older equipment, you know, it really pushed that and we struggled in the back half of the year. So I think it just is going to be a bit lumpy, but I think this will be a growth year. And, you know, it's not like we're going to be giving back a ton. When we went into buying Nestle, we had estimates of, you know, tens of millions of pounds of unmet demand. Even with the Nestle facility in here, it's not a demand question. It's a question of how much can we make and how much can we make under the new regulatory guidance and the dollar. So I don't have the forecast in front of me right now. Brad can give you those numbers later. But we are not backing off plant. But from a flow standpoint, The pricing will hit sort of the middle of the year. The back half will get bumped up because of it. It was depressed in the back half of last year. So you're going to have some big growth rates, you know, from we'll call it May, June, July onward until the end of the year in infant formula, which is driving our nutrition numbers.
spk09: Thank you. That's great. And then on pricing outside of the nutritional segment, do 1Q results reflect most of the planned pricing actions, or can we think about some further price opportunities as we move through the year?
spk07: Well, it's a two-part answer, right? The second is, first is that it took us almost to mid-year We were a touch, you know, when you look at the traditional CPG companies on national brands in the U.S., and I'm only talking the U.S. here, our international business is similar to any branded company. But in the U.S., you have to negotiate with customers on store brands. And we lagged in the beginning because most of our price increases didn't go into the mid-year. So you're going to still get a pretty strong benefit, I would suspect, in the in the second quarter of this year on most of ours, and then you'll start to lap some of those. The great news is we have learned through this whole crisis when we need to to price for cost, we can get that done. So, you know, I'm not going to answer your question right now. You pay me as CEO. I have a toolbox and sometimes I go to pricing and sometimes I go to cost and sometimes I go to new products and innovation and sometimes I go to M&A and sometimes I go to supply chain reinvention and sometimes I go to capital structure. But we'll continue to look at which opportunities make the most sense to deliver on the guidance. I truly believe that Parago sitting at you know, where it is in terms of its metrics at a 50% discount on valuation is all about credibility right now and delivering on the numbers. So we'll use any lever we have to to try to consistently perform and deliver the promises we made for the year. And then I think, you know, everybody's going to benefit from that, including me and my lovely retirement.
spk09: And then maybe one last one for me. Can you just talk about the trends you're seeing on the private label versus national brands given the current macroeconomic environment and anything notable to keep in mind there? Thank you.
spk07: Yeah, I, you know, Eduardo or Brad, feel free to jump in here. But what I see is our volumes growing and their volumes declining. you don't see the dollar swing of down trading as much because they're more aggressive on pricing. I don't want to price if I don't have to. That's our competitive advantage. We want to have a good discount versus the national brand and with good gross margins and then grow market share over the long haul as partnership with our customers. So you see, you know, clearly most national brands, et cetera, have priced more aggressively than us. But on the other hand, we used to be in a situation where we were giving price concessions. Now we've gotten first to stabilization and now our ability to price for growth when necessary. As a result of all of that, we are gaining market share in volume, meaning consumers are down trading.
spk06: Thank you, Ethan.
spk02: Again, if you have a question, please press star then 1. Our next question will come from Daniel Bilesi with Hedge I. You may now go ahead.
spk08: Thank you. Murray, on your well-earned retirement, I take it you're also retiring from the board?
spk07: Correct. That automatically happens, yeah.
spk08: Okay. And then I was wondering if you could quantify the product shortage impact on the CSCA upper respiratory segment, what that was, and if it was lost sales or you consider it just delayed?
spk05: No, they're lost sales.
spk07: Right now, we were trying to read if you have a number list. I just saw this. We had A forecast of, I think, about $25 million for the first quarter. We shipped about 25% more than that, but we had orders that we could have doubled that again. So, you know, I don't want to be too specific, but it could have been $25 or $30 million additional in cough colds. And I'm being really back of the envelope here. But the point is, is We had elevated levels, and as much as we could have made, we could have shipped. Now, you know, people buy it for the cough cold season, so they had to buy something. So, again, our cough cold numbers were up, and our production in the factories was up significantly. They did a brilliant job, but there was still more demand than even that. That's why I'm so excited. We haven't really talked about it this morning, but that's why I'm so excited about this supply chain reinvention and what I talked about on the call of the simplification of over 1,000 and standardization of over 1,000 SKUs because what that does in combination with red zone is it increases capacity because it wasn't, you know, we can continue to grow and build market share, but But we're mindful of our return on invested capital. And we don't want to, you know, to be just adding equipment and, you know, and lowering prices and getting no return for that. So this is, you know, sort of an elegant solution to be able to, where we see a path to, you know, 25 to 50% more capacity in our cold-cough business through this supply chain reinvention and standardization and simplification and left-line changeovers and better operational effectiveness, a lower throwaway, and all those good things that are part of this program. And I'm excited to say in those three test lines we did in the first quarter, we got that increase in operational effectiveness. So that's what we're pushing for. So do we get it back? We can get it back next cold season when we blight it out. It shows the potential is there, but it's not like it got pushed for a quarter.
spk08: All right. Thank you, Murray. And then just following up on that, what have your initial conversations been with your customers about reducing some of the SKUs? Has it been what you'd expected, or has there been some pushback?
spk07: No, no, it's better than expected. But, you know, we're going for the low-hanging fruit first. And if you've listened to Eduardo speak on this, the low-hanging fruit is the part that is not consumer-facing. So in the complexity between customers, it will be a more difficult decision when you're talking about what consumers actually see in terms of the number of pills in the bottle or the size of the bottle, et cetera. But 80% of the complexity we have now, believe it or not, is not consumer-facing. So it is one customer whose label is an eighth of an inch bigger than another one But you have to, you know, and it's not even perceivable to the eye, but we have to stop the line and do a major changeover for the new label size. Or it could be, you know, a slightly different bottle size, or where it really matters is corrugated. You know, you've got the outer corrugated, the thickness of it, the dimensions of it might be a quarter inch, an eighth inch, a half an inch. Inside, it could be packed in three sections. shrink wrap together, six shrink wrap together, nine shrink wrap together, 12 shrink wrap together, where the national brands only give two variations. And over time, Perigo, being a specialist in complexity and customization, built all this complexity into its system, working with customers, but sort of no one realized how much complexity it added. So again, I gave this example at Investor Day, but because of that complexity, we can't use automatic case packers. And It's the year 2023. That's nuts. And everybody agrees they can get to like a standardized outer carton and at least that I've been in front of. And same thing with label sizes and all that. And they're like, wow, you know, we didn't even know we were different on those kinds of things. So that first thousand SKUs is easier. It'll be years. We'll be doing this for the next two or three years where then we go back and say, listen, everybody ought to be in 225 count a set of Metaphene, not some of you 200, some of you 250. You know, we can still shrink wrap together and do bigger sizes, but we need to standardize as much as possible. And because we are a branded company, whether it's store brand or national brand, at the heart of when we get to the consumer facing is a massive consumer study that we did that will guide us and what consumers want when they go to the shelf, which is, frankly, not to have to get out a calculator and do math. They want to look at and see the product, know it's comparable to the national brand, that it'll work as well, be just as safe, and cost less.
spk06: Thank you.
spk02: That's all we have time for and marks the conclusion of our question and answer session. I would like to turn the conference back over to Murray Kessler, President and CEO, for any closing remarks.
spk07: Yeah, just once again, thank you for your interest in Parago. Thank you for support and investing in the business and believing in me, whether it was here at Parago or Laurelard or UST. It's been a heck of a run, and I hope to see as many of you as I can before I actually say my final goodbyes. But I've worked hard for you, and I can tell you that everybody at Perigo will continue to work hard for you and, you know, make your trust in us pay off over the, you know, the medium, short, long term, all of it.
spk06: So thank you again for your interest in Perigo. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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